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ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,016	1	2016Q1	2015Q4	2016-02-10	1.448	1.45	1.38	1.37	null	17.73	17.07	Executives: Dinos Iordanou - Chairman and Chief Executive Officer Marc Grandisson - President and Chief Operating Officer Mark Lyons - Executive Vice President, Chief Financial Officer and Treasurer Analysts : Sarah DeWitt - JPMorgan Vinay Misquith - Sterne Agee Amit Kumar - Macquarie Capital Charles Sebaski - BMO Capital Markets Michael Nannizzi - Goldman Sachs Josh Shanker - Deutsche Bank Meyer Shields - KBW Matt Carletti - JMP Securities Operator : Good day, ladies and gentlemen and welcome to the Arch Capital Group Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company get started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the Federal Securities laws. These statements are based upon management’s current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management will also make reference to some non-GAAP measures of the financial performance, the reconciliation to GAAP and the definition of operating income can be found on the company’s current report on Form 8-K furnished to the SEC yesterday, which contains the company’s earnings press release and is available on the company’s website. I would now like to introduce your host for today’s conference, Mr. Dinos Iordanou. You may begin. Dinos Iordanou : Thank you, Abigail. Good morning, everyone and thank you for joining us today. We would like to begin our call by first welcoming Marc Grandisson who has joined us this morning and he will be part of our future presentations to you. For those of you who may have missed our recent release announcing Marc’s promotion to President and Chief Operating Officer, let me remind you that all of our operating businesses now report directly to Marc. Many of you already know him as he was an integral part of the original reinsurance team with Paul Ingrey and others that helped establish Arch Reinsurance Group as the best-in-class global reinsurer. In addition, Marc played a prominent role in establishing our mortgage business, which has become a significant contributor to our group results. You will hear more about the business environment from Marc in a few minutes, but let me very briefly describe how we see the operating conditions in the markets we participate in. To invoke a bit of a sailing analogy, we are facing headwinds in our reinsurance group, overcapacity, pressure on ceding commissions, more excess of loss purchasing at inadequate pricing. So, that describes a bit the reinsurance market conditions. We see reasonably calm conditions in our insurance group, some sectors under pressure from a pricing point of view, but other sectors offering good opportunities, especially in small customer segments. And of course, there are tailwinds in our mortgage segments. The underwriting is very strong in this particular sector and the macroeconomic conditions affecting the housing market, they are very favorable. Turning to our operating results. Our fourth quarter earnings were driven by solid reported underwriting results, while investment returns were challenging, continue to be affected by yields available in the markets. Group-wide and on a constant dollar basis, our gross written premium decreased by 3.6% in the fourth quarter over the same period in 2014, while net written premiums were down 8.2% as underwriting actions in our insurance and in reinsurance business were only partially offset by growth in our mortgage business. We continue and I know Marc will emphasize this, to emphasize underwriting discipline with all of our operating units. On an operating basis, we earned $143.6 million or $1.15 per share for the fourth quarter, which produced an annualized return on equity of just shy of 10%, 9.8% for the 2015 fourth quarter and as it compares to a 9.7% return on average common equity for the year ending December 31, 2015. Net income movements on a quarterly basis can be more volatile as these earnings are influenced by changes in foreign exchange rates and realized gains and losses in our investment portfolio. Investment volatility during the fourth quarter and for the full year 2015 caused net income to fall below operating returns. This is I believe for the first time in the last 5 years that our operating returns were below net income returns. On a net income basis, Arch earned $4.09 for all of 2015, which equates to a return on equity of 8.8% for the year. While operating return on equity generally produces a more stable stream of earnings in the short-term, we believe that net income provides a better view of value creation and book value growth over time. Over the past 5 years, on average, net income ROE has added 230 basis points to our operating return. Our reported underwriting results remain acceptable in the fourth quarter as reflected by a strong combined ratio of 86.8 and were aided by low level of catastrophe losses and continued favorable loss reserve development. Group-wide, we believe that on an expected basis, the present value ROE on the business written in the 2016 underwriting year will produce ROEs in the range of 10% to 12% on allocated capital. Net investment income per share for the quarter was $0.53 per share, down $0.01 sequentially from the third quarter of 2015. Positive returns on equities in the quarter were not enough to offset negative returns on fixed income as total return on a constant dollar basis on our investment portfolio was a negative 10 basis points in the fourth quarter of 2015. The strengthening of the U.S. dollar also impacted total return which was negative 33 basis points for the quarter on a reported basis. Our operating cash flow, excluding Watford, was approximately $100 million in the fourth quarter as compared to approximately $225 million in the same period last year. Mark Lyons will discuss the changes in cash flow in a few minutes, but approximately one-third of the decline in cash flow reflects the timing of premiums paid to Watford. Our book value per common share at December 31, 2015 was $47.95 per share, a slight increase from the third quarter of 2015 and a 5.2% increase from December 31, 2014. With respect to capital management, we continue to have capital in excess of our targeted levels. However, we did not find any opportunities to purchase shares in the fourth quarter that will meet our previously stated criteria for share repurchases. We have found some of those opportunities to purchase shares in the first quarter of 2016. Through February 5, 2016, 1,050,000 shares under our 10b5 program at a cost of $69 million, with those purchases, we have approximately $450 million remaining on our board authorization. We will review that in our board meeting in May 2016. Before I turn over the call to Marc Grandisson, I would like to discuss our PMLs, which continue to decline from underwriting actions we have taken in our cat portfolios. As usual, I would like to point out that our cat PML aggregates reflect business balance through January 1, while premium numbers included in our financials are through December 31 and that the PMLs are reflected net of all reinsurance and retrocessions we purchased. As of January 1, 2016, our largest 2015 year PML for a single event remains the Northeast at $489 million or approximately 8% of common shareholders equity. I believe that’s the lowest level on a percentage basis in our history. Our Gulf of Mexico PML decreased to $444 million at January 1 and our Florida Tri-County PML decreased to a low $362 million. I will now turn it over to Marc Grandisson to comment on market conditions as he sees them before Mark Lyons discusses our financial results. And after Mark Lyons, we will take your questions. So Marc, welcome and go at it. Marc Grandisson : Thank you, Dinos. It’s great to be here. I already know many of you and I look forward to know you better as I move into my new role. As we look across our three segments insurance, reinsurance and mortgage, we see not only the challenges of competitive conditions as Dinos mentioned in stock pricing, but we also see opportunities in each of our three business segments. While macro events and the interest rate environment have brought down total ROE expectations to a new normal level, we are positioning ourselves in all of our underwriting units, focusing on specialty niches that have some inherent competitive protection and for which we believe we will achieve our 15% ROE target over the cycle. As far as the overall insurance markets are concerned, commercial pricing remains under pressure, especially in the more commoditized product lines. Primary P&C rates are declining in the mid to low single-digit range, although there are pockets of rate strengthening. Terms and condition in general are stable. Turning first to our insurance operations in United States, we saw 140 basis points effective rate decrease this quarter, but a rate decrease of only 20 bps for the full 2015 policy year versus 2014. Expected ROE on allocated capital in many lines are still comfortably in the double digits. Those lines of business include construction, national account programs, some areas of low capacity, executive assurance and professional liability. Together, these lines represent over 70% of our 2015 volume. In contrast, we have seen worsening, as mentioned by Dinos of the rate levels in property also in healthcare and higher capacity executive assurance. As a result, we are writing left in those lines. Our insurance group’s premium written decreased 2.5% in the fourth quarter 2015 versus 2014 on a gross basis, but 6% down on a net basis. The changes in our gross versus net reflects the change in our underlying mix as well as our ability to buy reinsurance on more favorable terms. Ceded written premium increased 6.1% in our insurance group this quarter over the same period last year. Our international insurance operations, which are based in the UK and underwriters risk globally are under heavier pressure from a rate level perspective. Rate changes there were minus 7% across all of our product lines. Needless to say, we are continuing to actively underwrite and manage this portfolio and are trying to move into areas such as accident and health where competition we believe is less intense. Turning to our reinsurance group now, we continued to develop and allocate our resources for specialty markets and products that are somewhat more zealous from competition. Business lines such as property, including catastrophe, excess of loss and marine are yet again experiencing rate declines in the 10% range. At the same time, some segments like UK motor and U.S. professional liability have experienced small rate increases and that has created some opportunities for Arch Re. We find it challenging, if not impossible to uncover opportunities in the broader U.S. casualty, global aviation and medical malpractice reinsurance markets. The returns there are just not satisfactory. In our view, capacity is plentiful. In short, the lines of business where we are focusing our efforts still provide us with expected ROEs on allocate capital in excess of 10%, but the days of low hanging fruit are gone. Our reinsurance group net premium written has declined 26% in the fourth quarter of 2015 versus fourth quarter of 2014, led by decreased writings in our short-tailed segment. Our property cat portfolio for the full 2015 year is now over 30% over prior year 2014 on a net basis. In addition, we have seen and reacted to rate erosion by writing left in many other product segments such as international credits and surety, focused on Class and French motor third-party liability business. Cheaper retrocessional protection has also led us to lower retention in the reinsurance group on a shorter-tail line. Switching now to our mortgage insurance segment, which includes – to remind you our primary operations in the U.S., our mortgage reinsurance on a global basis as well as the GSE risk-sharing transactions business, we had another solid quarter of growth in written premiums growing this quarter by 30% over the third quarter of 2015 and 65% over the same quarter last year. The growth came mostly from the U.S. GSE risk-sharing programs and from the reinsurance contract with one of the major Australian lenders. We continue to make progress in the expansion of our U.S. market share. Arch MI has approved – our U.S. MI has approved 904 master policy applications, 460 of these clients have submitted loans to Arch MI. In addition, we are capturing additional share of the U.S. MI market through our GSE risk-sharing programs. At December 31, 2015, our total mortgage segment risk in force is $11.5 billion, which includes $6.8 billion from our U.S. mortgage insurance operation, $3.5 billion through worldwide reinsurance operation and approximately $1.2 billion from the GSE risk sharing transactions. Our primary U.S. mortgage operation has $2.6 billion of new insurance written during the fourth quarter of 2015, which was approximately 60% through the bank channel and 40% via a credit union client. Our credit union channel continues to perform exceptionally well as our bank channel business develop – development efforts gain traction. Our lender paid mortgage insurance singles net insurance written was only 80% of the total production as Arch MI responded to competitive conditions and lower returns as we see on this business. Last quarter, we introduced our new risk-based pricing model, RateStar, and have rate filings approved in 46 states. Through December 31, 2015, 783 customers have elected to use RateStar and the technological transition has gone smoothly. We believe that RateStar enables us to improve our assessment of risk and will help Arch MI create better risk adjusted ROEs. We are very pleased with the initial response and the applications that we are receiving through RateStar at this point. We estimate the overall mortgage markets NIW that was down actually for the fourth quarter versus third quarter by 20%. Most of the drop occurring in November and December as both purchase and mortgage refi volume declined as one of the newer player in the mortgage insurance market, we are well positioned to take market share with our innovative approach to MI and the high credit rating that our diversified business platform allows. With that, I will hand it over to Mr. Lyons to cover the detailed financial results. Mark Lyons : Great. Thank you, Marc and welcome aboard. It’s good to have two Marks and one Dino. I think I am – so let me just begin by saying what I have said in the last few quarters that terminology wise, while I use the term core, I refer to our aggregate results excluding Watford Re when I use the term consolidated, as the term is results inclusive of Watford Re. Since we are here, I will talk about year end results. I would like to take a minute and put our changing mix of business into perspective. On a full year net written premium basis, the insurance segment reduced by approximately 6%, as Marc just mentioned. The reinsurance segment declined by about 25%, there is an asterisk on that I will get to later. And the mortgage segment increased substantially by 65%. More importantly, though this results in a mix change on a core basis as follows. Insurance segment changed from 59% to 61% of total core net written premiums, the reinsurance segment shrunk from 35% to 31% and the mortgage segment increased from 5.7% to 8% of the core net written premium. The mortgage segment’s total contribution is actually larger though since some risk-sharing – GSE risk-sharing transactions received derivative accounting treatment and therefore contributed no net written premium. And as we shall discuss shortly, the mortgage segment and its growth load combined ratio on an accident year basis, which also has an asterisk that I will get into in a bit decreased by 530 basis points over that of 2014. So, you can see we are growing and shifting in areas of improved profitability. Okay. Moving to this quarter’s results, the core combined ratio for this quarter was 86.8%, with 1.9 points of current accident year cat-related events compared to the 2014 fourth quarter combined ratio of 87.5%, which reflected 2.3 points of cat-related events. Losses recorded in the fourth quarter from these catastrophic events of this year, net of reinsurance recoverables and reinstatement premiums, totaled just shy of $16 million, primarily stemming from UK storms and other global events emanating mostly within our reinsurance operations. The 2015 fourth quarter core combined ratio reflects 8.6 points of favorable prior year development, net of reinsurance and related acquisition expenses compared to 8.3 points on the same basis in the 2014 fourth quarter. This results in a 93.5% current core accident quarter combined ratio excluding cats for the fourth quarter of this year compared to an identical 93.5% accident quarter combined ratio in the fourth quarter of last year. In the insurance segment, the 2015 accident quarter combined ratio excluding cats was 96.3%, essentially unchanged from the accident quarter combined ratio of 96.4% a year ago. The reinsurance segment 2015 accident quarter combined ratio ex-cats was 90.1% compared to 87.3% in last year’s fourth quarter. As noted in prior quarters, the reinsurance segment’s results reflect changes in mix of premium earned, including a much lower contribution from property catastrophe business as Marc has alluded to. The mortgage segment 2015 accident quarter combined ratio was 83.1% compared to 98.9% for the fourth quarter of 2014. It’s important to recall that the concept of accident year is more of a P&C concept and not directly analogous to the mortgage business due to their accounting convention. Theirs is much more of a reported year convention. The full year now, the full accident year 2015 core combined ratio, excluding cats, was 94.5% versus 94% even for the full 2014 accident year. By segment, insurance groups full accident year ex-cats was 96.1% versus 96.3% in the 2014 year and the reinsurance group’s full 2015 accident year was 93.3% versus 90.7% for the 2014 full accident year. Mortgage segment on a same basis was 84.1% versus 89.4% of a full year from 2014, that’s the 530 basis points improvement I referenced earlier. The insurance group – insurance segment accounts for roughly 14% of the total net favorable development in the quarter. This was primarily driven by shorter tailed lines from the 2010 to 2013 accident years and longer tailed lines from the 2003 to 2011 accident years. The reinsurance segment accounts for approximately 80% of the total net favorable development in the quarter, excluding associated impacts on acquisition expenses with approximately half of that due to net favorable development on short tailed lines concentrated in the more recent underwriting years and the remaining half due to net favorable development on longer tailed lines, primarily from the 2005 to 2011 underwriting years. The mortgage segment accounted for roughly 6% of the net favorable development this quarter, which translates to an 8.1% beneficial impact on the loss ratio, resulting from continued lower claim rates from the CMG business we acquired in 2014, along with excellent credit experience to-date on business written since the acquisition. Some of this favorable development is offset by the contingent consideration or earn-out mechanism negotiated within the purchase agreement. This contingent consideration impacts however in the geography sense is reflected in realized gains and losses and not within underwriting income. Our core operations across the full 2015 calendar year experienced $272 million of net favorable development, again, net of reinsurance and reinstatement premiums and related acquisition expenses, which represents 8.2 combined ratio points versus $307 million on the same basis in 2014, which represented 8.8 combined ratio points. The full calendar year net favorable development was approximately 15% in the insurance segment, 80% in the reinsurance segment and 5% in the mortgage segment. Approximately, 68% of our core $7 billion of total net reserves for losses and loss adjustment expenses are IBNR and additional case reserves, which continues to be consistent across the insurance and reinsurance segments. The core expense ratio for the fourth quarter of this year was 35.6% versus the prior year’s comparative quarter of 34.7%, driven by the U.S. mortgage insurance operations, which is operating at a higher expense ratio until this business hits a steady state as well as the effect of an overall 5.2% smaller core net earned premium base quarter-over-quarter. The insurance segment maintained a 32.4% expense ratio for the quarter compared to an identical 32.4% ratio a year ago, reflecting a lower net acquisition ratio, offset by an increase in operating expense ratio. However, we continue to focus on the total expense ratio as mentioned in previous calls, since the slotting of costs and benefits within the net acquisition and operating expense ratios is somewhat artificial and ceding commissions are fully booked in the net acquisition line and not allocated to every operating expense category that they represent. The reinsurance segment expense ratio increased from 32.5% in the fourth quarter of last year to 36% this quarter, primarily reflecting a 14% lower net earned premium base. The reinsurance segment expense ratio was also weighted though by a reimbursement reflecting a favorable tax ruling affecting federal excise taxes. The ratio of net premium to gross premium for our core operations in the quarter was 71.6% versus 75% a year ago. The insurance segment had a lower 66.4% ratio compared to 69.1% a year earlier driven by increased sessions on a larger alternative markets book that we have commented on in the past, increased sessions on capacity-driven product lines and a reduction in our P&C program business, which is kept predominantly net. It is important to note that on a written basis, the front-end gross commission ratio decreased by 110 basis points and the average quota share commission ratio improved by 260 basis points in the U.S. operation. These joint improvements will continue to be felt as they are earned over the next few quarters. In the reinsurance segment, the net to gross ratio was 76.2% in the quarter compared to 85.5% a year ago, primarily reflecting sessions to Watford Re. Also as commented on during the last quarter’s call – last year’s fourth quarter call, there was a one-time $50.2 million unearned premium reserve transfer associated with Gulf Re, which correspondently required a $50.2 million written premium to be recorded as well. This distorts the quarter-over-quarter comparison and can be seen in the financial supplement within the property other than property cat line of business. Adjusting for this, our premium reserve distortion results and the net written premiums for the total reinsurance segment this quarter declining by 8.7% quarter-over-quarter. The mortgage segment, in addition to the premium growth that Marc mentioned earlier, had approximately $3.5 million of other underwriting income in the quarter from risk-sharing transactions receiving derivative accounting treatment and $4.6 million of underwriting profit associated with risk-sharing transactions receiving insurance accounting treatment. Over time, it is expected that more income will emanate from transactions receiving insurance accounting treatment than derivative accounting treatment. The other segment, being wholly Watford Re at this point, reported a 103.8% combined ratio for the quarter, $96.2 million of net written premium and $119 million of net earned premiums. As a reminder, these premiums reflect 100% of the business assumed rather than simply Arch’s approximate 11% common share interest. As for business sourcing, approximately 37% of the gross written premium this quarter was written directly on Watford paper with the remainder ceded by Arch affiliates. It should be noted that this sourcing can vary materially quarter-by-quarter. The total return on investment portfolio on a local currency basis was reported negative 10 bps in the quarter, as Dinos mentioned, reflecting positive returns of our equity sector that were more than offset by negative returns in both investment-grade and non-investment grade fixed income as well as the alternative investment portfolio. Even with our shift into a greater equity and alternative allocation over time, 80% of the portfolio is still comprised of fixed income security. On a U.S. dollar basis, total return for the quarter was a negative 33 bps. On a full 2015 calendar year basis, total return on local constant currency basis was a positive 162 bps. And on the U.S. dollar basis, the return was a positive 41 bps in the quarter led for the year, led by the equity and investment grade fixed income sectors. The embedded pre-tax book yield before expenses was 2.16% as of year end and duration remains fairly consistent at 3.43 years. Fixed income duration, as we said in the past, can fluctuate due to tactical decisions as opposed to long-term strategic shifts and the current duration continues to reflect our conservative position on interest rates in the current yield environment. Reported net investment income in the quarter was $67 million or $0.53 per share versus $67.3 million in the 2015 third quarter or $0.54 per share and $72 million or 56% share in the fourth quarter a year ago. As always, we evaluate investment performance on a total return basis and not merely by the geography of net investment income. Core cash flow from operations, as Dinos mentioned was approximately $100 million in the quarter versus $227 million in the fourth quarter of last year. This reduction primarily reflects higher ceded reinsurance payments in total across all reinsurance and retrocessions areas, as well as some timing differences associated with Watford Re ceded payments. It also reflects lower gross premium collections reflecting the drop in volume, particularly from the loss of a large MGA acquired by a competitor within our insurance group as has been discussed in previous calls. And a lower level of paid reinsurance recoveries received due merely the timing differences. The full calendar year 2015 core cash flow from operations was $705 million versus $998 million – $705 billion versus – or versus by $998 million in this full – I think I misspoke that. The full calendar year 2015 core cash flow from operations was $705 million versus $998 million in the full 2014 calendar year. Core interest expense for the quarter was $12.8 million, which is consistent with our longer term run rate. Consolidated, therefore inclusive of Watford, interest expense was $15.8 million and since because we consolidate Watford, approximately $3 million of interest expense is associated with the use of leverage within Watford’s investor portfolio. And as you recall, roughly 11% of Watford’s results impacted Arch’s financial statements. Our effective tax rate, our pretax operating income available to shareholders for the fourth quarter was an expense of 6.9% compared to an expense of 1.7% in the fourth quarter of last year. The full year effective tax rate on pretax operating income was 5.1% versus 2.4% for 2014 calendar year. This reflects $2.9 million or 26% of this quarter’s total tax being a true-up of the first three quarters of the year to this 5.1% annual tax rate. Fluctuations in the effective tax rate can result from variability in the relative mix of income or loss reported by jurisdiction as was the case in this quarter. Our total capital was $7.1 billion at the end of this quarter, up 0.6% relative to September 30 and up 1.1% relative to 2014. Our debt to capital ratio remains low at 12.6% and debt plus hybrids represents only 17.1% of our total capital which continues to give us significant financial flexibility. We also continued to estimate having capital in excess of our targeted position. During the full 2015 calendar year, we repurchased shares at an aggregate cost of $365 million versus 2014 share repurchase aggregate cost of $454 million. These represent 71% of net income during 2015 and 56% of net income during 2014. Book value per share was $47.95 at year end, up $0.06 of a point and up 5.2% relative to a year ago. This change in book value per share this quarter primarily reflects the company’s continued strong underwriting performance virtually offset by the challenging quarter in the financial markets. So with these introductory comments, we are now pleased to take your call – your questions. Operator : Thank you. [Operator Instructions] Our first question comes from the line of Sarah DeWitt with JPMorgan. Your line is open. Sarah DeWitt : Hi, good morning… Dinos Iordanou : Good morning. Sarah DeWitt : First on the mortgage insurance business, I just want to get your latest thoughts on the growth opportunities there. You have probably seen some of the mortgage stocks are down 40% in the past six months, some concerns about growth, pricing and competition, so I would be interested in your latest thoughts on that sector. Dinos Iordanou : Well, as I said in my prepared remarks, the – we like the environment in the sector. The underwriting quality of these mortgages is very high. The macroeconomic conditions, the positive. You will get fluctuations on a quarter-to-quarter basis on demand. There is nothing we can do about the demand. However, let me point out to you that the GSEs are through the bulk transactions. They are transferring a much more significant portion of the risk to the private market. So there is ample opportunity on these risk-sharing transactions to expand the demand for transferring risk to the private markets, which we participate. So that is the environment. As far as pricing, yes there have been spots of competition, especially on the lender single premium sector. But we have seen that easing in the first quarter on the basis that with P. Myers [ph] and the capital requirements from P. Myers coming into effect, there is a higher capital charge on discounted LPMI business. So in essence, we have seen not only us doing a lot less in that sector, but some of our competitors doing less. So I still – we are very, very bullish on that. But I am going to turn it over to Marc Grandisson, to give a little bit of the color because he is embedded in that business and he has been since the beginning. So he probably knows more detail than I do. Marc Grandisson : Yes. At a high level, I think the U.S. MI, I will break it down in two pieces, the two areas is the credit union channel that we have. We had already a very significant market share. We are maintaining and actually growing it somewhat. So the growth there is going to follow the overall market growth in MI origination and MI purchases. The bank channel is going through a tremendous growth over the last year and most of the growth is on the MI or in fact 90% of the growth comes from the bank channel. We are still in the early stages of establishing our presence, establishing our relationships and contacting our clients and growing that and establishing the pipes, if you will, to deal with this. At the same time, we have this as you know, established RateStar. And RateStar is initial, as Dinos and I know, so we see the numbers, it’s been a very initial – very good response from the market. And that I think will lead to hopefully get – giving us more penetration in the bank channel for the next 12 months. And that’s not even counting the U.S. risk-sharing that Dinos mentioned. The new mandates, the new scorecard, the new – and evaluation that FHFA will do for the GSEs, they have to – from our expectations right now, the GSEs will have to, in the risk-sharing transactions, probably buy 50%, possibly more over 2016 versus 2015. So that’s actually a very bullish statement that private market is going to get a bigger place at the table. Dinos Iordanou : Yes. Let me add also one more point. It’s more subtle point, but I think it’s important based on where the financial markets are today. At the end of the day, we won two or three of the highest rated MI companies. And I believe that a lot of the originators, I don’t care if it’s commercial banks or mortgage originators, etcetera, they are going to stop paying more attention to where they are placing their business. Even though they are not the counterparty, Fannie and Freddie are the counterparty I think it’s prudent to be placing your business with more highly rated financial companies. So we are bullish about that because I think you are starting to be recognized, especially by the small banks that, hey we would rather do business with people that they have a better – a stronger financial rating than others who don’t. Sarah DeWitt : Okay, great. Thank you. And then on the excess capital, I know it’s a high-class problem, but given the stock back above the level where you repurchase stock, how would you think about deploying that and how long would you sit on the excess capital if the valuation stays at these levels? Dinos Iordanou : Well, we don’t try to sit on excess capital. I mean, at the end of the day, we look at opportunities to deploy as much of our excess capital. Our first choice is to deploy it in the business. As we can see now, most of our opportunities they are coming on the mortgage side and when we get dips in the market as we have seen in the first quarter, they are all – yes, stock got punished unfairly as far as we are concerned, but at the end, it gave us the opportunity for us to buy some of our shares back. If people don’t like them at certain price, we like it. And that’s the opportunities we take advantage of it. It was in the close window by the way. And I did put a 10b5 plan that it worked for us and it gave us the opportunity to purchase 1 million shares at reasonable pricing as far we are concerned. So, we are going to continue with that philosophy. And I believe we are going to get opportunities as the market is starting now with some of our competitors to be putting pressure on their financials that we can deploy more capital in the business, because at some point in time, it’s going to improve. Now, if you look at it quarter-to-quarter, you might be too anxious. We have a more longer term view. We look at it year-over-year and I don’t mind carrying a certain amount of excess capital for the next year or so in order for me to have my powder dry case, I get opportunities to deploy. Sarah DeWitt : Okay, great. Thank you for the answers. Dinos Iordanou : You are welcome. Operator : Thank you. Our next question comes from the line of Vinay Misquith with Sterne Agee. Your line is open. Vinay Misquith : Hi, good morning. First question is on RateStar, I believe you mentioned 783 players have signed up for RateStar, if I am correct. How many of them are the large players? Are you getting any of the large mortgage insurers? I mean, are there large banks signing up for this program? Dinos Iordanou : In general, we – the smaller banks and smaller in size originators, they embrace RateStar more than the larger banks. But as you know, we give the opportunity to all of our customers to choose either RateStar and/or the rate card. We haven’t abandoned the rate card. What the RateStar does, it tries to evaluate [Technical Difficulty] ROE expectations for the entire book of business. We are pricing the business – as a matter of fact, we believe RateStar will give us even better ROEs than the old rate card, but that has been the environment. The incredible thing about RateStar is that we have the ability live to see every single originator who is using the system. So independent if that mortgage is going to be placed with us, that – the mortgage insurance are going to be placed with us or not, we see every single originator, every mortgage officer who is live on our system instantaneously. So, we monitor the volumes, we see who is using it and which territories they are using, etcetera, which for us is an incredible thing especially also from a marketing point of view, because to tell you the truth, we find some banks maybe 3, 4 or 5 of their loan officers use RateStar significantly and the other 3, 4 and we know all of them by name, don’t use it at all and then it gives us an opportunity to go and have proper conversations as to why, why not. So Marc, you want to add anything on the RateStar? Marc Grandisson : No. The only thing I will concur and further confirm that there is the highest level of application that we received are coming through the regional and commercial credit union channel. The banks are bigger, a bit longer to go over and make the change and adopt the RateStar application, but it’s going to take time, but we are going to get there. Dinos Iordanou : Yes. We have approvals on RateStar, I believe, on 46 states. Correct? Marc Grandisson : Yes. Vinay Misquith : Right. And have you seen a pickup in business from RateStar? And I believe one of your large competitors are not doing it, have you seen some more competitors trying to do something similar to what you are doing? Dinos Iordanou : Well, early signs is a little bit of pickup, where we see – we see more of a pickup in utilization. And – but like I said, we only released this about 2 months ago. It was early December. Now, we are in February. Sometimes the process takes 6 to 8 weeks for a mortgage to be placed. So – but clearly, there is an uptick, a noticeable uptick in the utilization of the system and the applications that they go through with the RateStar and they get a quotation for that mortgage insurance. Now, if that loan is going to be made and if they are going to place it with us, because I am sure they are comparing what our price is versus the rate card from some competitor, it’s too early to tell. But I am optimistic. Vinay Misquith : Sure. And are you seeing other competitors also do something similar to your RateStar? Dinos Iordanou : Marc, you are closer to it. Marc Grandisson : Yes. You heard the call on Radian and MGIC, I mean you can go through that and hear what they have to say. And there is trying – there is definitely a trend in the industry to go in that direction to actually try and address the inefficiencies, frankly, that resides within the rate card pricing to better address and better assess you the risk within a portfolio. But I want – I need to remind you, as Dinos and Mark did on last call, that, that endeavor of ours to create RateStar took over a year to put together. This is no small feat. It included having an amazing dedication and a big group of our people to really put it together. So I will not be surprised, I know I can’t speak to that, but I wouldn’t be surprised that our competitors feel compelled to have to react to this as well. Dinos Iordanou : It’s predictive analytics, independent if it’s in the auto insurance business or in the mortgage insurance business, etcetera. It’s the norm now. And if you are not willing to assess risk appropriately and price it appropriately, at the end of the day, you might be subject to adverse selection over time and we don’t want to be in that category. So, we do challenge our people to create that innovation independent of the workup for that symbol. Believe me, it’s a five-quarter effort. I was involved in it. Marc Grandisson was involved in it. And all of our senior guys from Andrew Rippert to David Gansberg and his team in Walnut Creek, we have put a big effort to do this. This is not something that as one of our competitors says it’s just some black box that spits out. It’s a lot of effort, a lot of analytics, a lot of historical data that we have used both from within the old PMI books that we are running off on behalf of the regulator, but also with external databases that deal with mortgage risk and we are proud of what we have achieved. And believe me, it’s still a work in progress. We will continue to improve it and improve it and improve it because it’s not something that is static. As we learn about the predictability of the model, then we will adjust. And it’s no different what we have done on the cat business, right? And you have seen our performance on the cat business. I think we have fared well over the years taking catastrophic risk, because at the end, we – let’s face it, I am the only non-actuary in the senior management team. I think they are ready to expel me from the group. Everyone we have is a quant here, except me. But I keep up with them. Everyone is performing. Marc Grandisson : Yes, exactly. Vinay Misquith : Just one follow-up, just numbers question primarily quick. So first is the on the expense ratio, so just on the operating expenses, those were higher this year versus last year, just wondering if you plan to keep them flat next year. And the second piece is on the P&C insurance, on the acquisition expense ratio, do you expect that to decline this year because of higher ceding commissions? Dinos Iordanou : Well, Mark, do you want to address this? Mark Lyons : Yes. Let me do it and this is Mark Lyons. Dinos Iordanou : Because I have got 2 Marks, I have got Mark square now. So it’s hopefully, not a third one called question mark. Mark Lyons : So let’s take in reverse order. I think this is the third quarter I have commented on the quota share improvement on the pre-ceding commissions. And it’s been about 260 bps. It fluctuates a little bit, 260 bps. I think the proportion getting that is increasing, so you get more of a gearing factor, firstly. Secondly, I am quoting those on a written basis. So you asked the semi-forward question and we don’t give guidance. But I think it’s fairly straightforward that if you are getting those kinds of benefits on a written basis, they are going to eat their way in over the next three or four quarters. So I think it’s reasonable to expect improvement and then likely flattening at that point. However, there is continued improvement in the gross commission ratio, mostly as a function of mix and that was 110 bps. And that’s a big part of it – the reason for it as well. On the OpEx side, let’s say we like to look at these things in total. We – on the insurance group side, you had some specials in there that were related I think to our UK operation. We had some compliance things we dealt with. We had some Lloyds cost. We had some overlap of some IT, which I view as non-recurrent, shifting from exchanging to an internal facility we have in the Philippines actually, which I view those as non-recurrent. The reinsurance, the mortgage stuff side we know about. It hasn’t come up the scale. On the – I think on the reinsurance side, that was dominated by the reduction in the net earned premium. There is a little accounting going on when we brought Gulf Re in, Vinay that – but roughly an additional $2 million of costs that come in more explicitly because Gulf Re is now a profit center in the reinsurance group versus before with more equity accounting, so a little of that sleight of hand. So to make a long story short, I would expect continued improvements on the cede commissions in insurance group and I would expect increasing management and flattening on the OpEx side. Vinay Misquith : Thank you. Dinos Iordanou : Let me give you also a little bit of the strategic view that we have when it comes to expenses. I said many, many times in many calls we are not willing to par with our underwriting capability. So we are going to maintain underwriters even if the market might cause us to reduce writings because we are going to maintain – there are two things we – the two religions [ph] we have is underwriting is discipline and complete commitment to our good people, especially on the underwriting side. Having said that, we expect our managers to chew gum and walk at the same time. And as a company, we have a very good turnover ratio, but still we have a turnover ratio which is around 11% on an annualized basis. So within that parameter, you try our non – what I would call our non-critical underwriting jobs to make adjustments on your expenses through natural attrition. And that’s been our philosophy from day one. A well-managed company plays with those parameters and makes the right judgments. And our people are very good and very flexible and they accept reassignments and we move them from one operating unit to another where the opportunities are plentiful, especially if we have the work in – we have to reduce volume. So we do a lot in the mix, I think Mark and you got into the minutia. You got into the nitty-gritty on the financials. But I want you to get the flavor of our philosophy and how we are going to operate the company. Vinay Misquith : Sure, that’s helpful. Thank you. Operator : Thank you. Our next question comes from the line of Amit Kumar with Macquarie Capital. Your line is open. Amit Kumar : Thanks and good morning to two Marks and one Dinos. Just very quickly going back to the realized losses line, did you talk about what exactly was going on in the Watford segment and why it had a realized loss? Mark Lyons : No. I have not talked about that, but I think I will take that as a gas pedal. I guess a couple of things. First off as you know, we kind of report Watford’s results. We don’t drive Watford’s investment results. We are minority owners. But as far as the accounting world of it, they have elected the fair value option on investments. So in their line of realized gains or losses, it’s actually the sum of realized and unrealized gains embedded in there. So hopefully, you will find that helpful. Amit Kumar : Got it. And then, for the ex-other segment, what did those realized losses stem from? Mark Lyons : Well, that’s I would call harvesting or reverse harvesting, but it’s just your standard churn of fixed income and other investments that would have occurred throughout the course of the quarter. Amit Kumar : Okay. I was just trying to figure out if there anything more going on, that’s helpful. The other question I had, going back to the – obviously, you have spent a lot of time discussing RateStar and you are correct, other competitors are talking about it and it’s similar to auto insurance where there is an early adopter advantage. Do you – how should we think about sort of the timeline here where you still have that early adopter’s advantage for some time before others catch up, is it fairly easy for them to sort of get up to speed as to what you are doing because it has been done before and it sort of puts you at parity at some point of time or is there so much of a separation that it will take a long period of time for the [indiscernible] or others to really catch up with you, how should we think about that? Dinos Iordanou : The way you think about it, if you remain standing still, they are going to catch up to you. But we keep walking. I think as a matter of fact, we are – I hope our guys, they keep running because – and improving it. At the end of the day, it’s the – it’s good as your thought process, what kind of algorithms that you build into it, how much of empirical data and whatever database is that they give you predictive analytics you are incorporating. And this is not nuclear physics, we are not putting the next man in the moon, but it requires a lot of effort. I don’t know how quickly they can catch up. It depends on what kind of resources they throw at it. But I can tell you, it was not a small effort on our part. But we are behind it, we incurred the expense. We had a lot of our very senior guys working on it because both me and Marc Grandisson and Andrew and David Gansberg, we were very committed that, that’s still win for the future. So we made it a very senior priority within the group to do this. Then this is five quarters ago. This is not today. So Marc? Marc Grandisson : Yes. I think from our perspective, it is a competitive advantage. I want to say we were a first mover because you rightly pointed out that some others have done it, again no other competitors in fact. But clearly, this is creating, we think some breathing air or some headroom for us and at least know because of the fact that we are already have installed it. It’s being used by our clients. And we are actually going to be dynamic like Dinos said, going through the portfolio, analyze it and modify and adjust it as we go forward. So we feel pretty good where we are. Amit Kumar : Got it. And then final question related to that, does the ratings downgrade of Genworth from S&P and Moody’s, does that create a meaningful opportunity for the marketplace, how should we think about that? Dinos Iordanou : It’s too early to tell. So far, to my surprise Amit, hopefully a financial executive with average intelligence, I would have thought that credit on a credit business will have more of an effect as to who gets the business. But to my unpleasant surprise, it seems that a lot of the mortgage originators sometimes don’t care as to where they place the business, because at the end, they are not the counterparty, Fannie and Freddie is. But I don’t think that’s the wise choice for them to do. Over time I believe, that will have to have some effect, because why would you continue doing business with somebody with financially challenged and – but I leave that up to the market to determine. Amit Kumar : Got it. Thanks for all the answers and good luck for the future. Operator : Thank you. Our next question comes from the line of Charles Sebaski with BMO Capital Markets. Your line is open. Charles Sebaski : Good afternoon. Dinos Iordanou : Hi, good afternoon. Charles Sebaski : Double question on mortgage, how much of your business in 2015 was refi versus purchase? Dinos Iordanou : Marc will give you that number in a minute. I think he can dig it up. Charles Sebaski : I guess I just wonder on the U.S. side, if there is a potential slowdown on refis just due to how long interest rates have been down at this level if that’s at all a headwind for you guys in that business? And I guess... Dinos Iordanou : I mean, refi creates more opportunities to write more insurance especially – and if you are penetrating the market will have an effect on us, because at the end of the day we like more refis along with new originations, but I don’t know. Well, Mark, do you have the number? We can always offline. Don Watson will give you the percentages. I don’t have all the books in front of me right now. Charles Sebaski : Okay. Well, as – and then looking at that is the mortgage insurance part of the driver in the change of the effective tax rate this year? If you kind of look at 2015, a bit over 5%, is that a reasonable expectation for 2016 or going forward or does the growth in U.S. mortgage have a lifting effect on overall consolidated tax rate? Dinos Iordanou : Lyons will give you the answer to that. Mark Lyons : Yes, I love taxing questions. So Chuck, it’s a good point to bring up. It’s partially contributory. There is a lot of areas that in higher tax jurisdictions like that, that had very good results in the year, mortgage being one of them, our Arch Re facultative group, our Morristown Arch Re Co. operation and the core insurance operation. So a lot of that kind of skewed it. So as mortgage becomes a higher proportion of total and if we continue to have these margins, it will only creep up the effective tax rate keeping everything else constant. We don’t know what’s going to happen in the P&C dynamics. Charles Sebaski : Okay. I guess and then finally, on the P&C side, on the programs, I think you said you had a large non-renewal of a program this quarter. And I wanted to kind of get your take on is there – is that a competitive reason? Is there – was that just an absolute result? I guess I am trying to get some insight on what’s going on, on the smaller account risk side of the insurance business, because a lot of competitors keep talking about that as a means to deal with the pricing in the large account space? Mark Lyons : Right. Well, it’s good to be in a position where we have had it for years and years rather than trying to gain it. So, there is more renewals to us than new business to others. And in a tough market environment getting – to get on a new basis is a little tougher. Chuck, it was a program that was bought by a competitor. It was fairly large. It was, on an annualized basis, north of $80 million, hence $20 million in the quarter, roughly flat on it. And – but yes and we talked about action and other ones, but they – for calendar 2015, they were immaterial and this is one program that really affected it. Charles Sebaski : Okay. I guess your competitors as well, what you guys unfortunately haven’t seen is some adverse development that in some of the lines. I was wondering if there is any comment on loss cost trend going on, on some of the longer tail liability lines. Have you seen any changes coming up or things kind of just status quo as they have been in the last few quarters? Marc Grandisson : We have got very favorable loss cost ran across before. We do an analysis every year, which we had not anything in the data that makes us to change our expectation of loss cost trend. It’s still pretty low, but it’s very stable for last couple of years. Mark Lyons : I mean, Chuck, as we talked about in the past, it really – it’s a different story by area, but Marc is right, across the board, weighted. We don’t see anything material happening. You probably saw that series class action suits, for example, that’s kind of returned to a long-term normal. It had been below normal, things like that. But luckily, we don’t seem to get hit by a lot of the SCAs. So, we will make them someone else’s problem. Marc Grandisson : Yes. Charles Sebaski : Thank you. Dinos Iordanou : Well, you’ve got the number? Charles, while I have you in, so I want to make sure I got the numbers right before I quote it. It was a market where it was mostly a purchase market, 75% purchase, 25% refi. The mortgage rates went up and it became more of a purchase market in the fourth quarter. Charles Sebaski : Excellent. Thank you very much for the answers guys. Dinos Iordanou : You are welcome. Charles Sebaski : Thanks. Operator : Thank you. Our next question comes from the line of Michael Nannizzi with Goldman Sachs. Your line is open. Michael Nannizzi : Thanks. Just a couple of numbers ones, if I could. In the mortgage – or I am sorry, in the reinsurance segment, Mark, could you quantify the impact of that tax item that you talked about in your script? Mark Lyons : Yes. Well, that wasn’t really in the reinsurance segment. That was overall. That was $2.9 million, which I said was 26% of the total tax on pre-tax operating income. That’s because the effective tax rate is 5.1% for the year, it was less than that as of third quarter. We have to true it up. We have to bring them up to the same level. Michael Nannizzi : Maybe we are getting our signals crossed. I think – I thought you said in the script that there was some settlements of some tax matter. Mark Lyons : I am sorry. That’s – and we are not alone in this. So, you probably heard it on some other calls. It’s of the favorable tax ruling with regard to cascading FET where we had paid it in the past and then the favorable ruling came down, so there was a reimbursement associated with the prior cost expenditure. Michael Nannizzi : Got it. And has that rolled up into the other operating or in the acquisition? Mark Lyons : Well, there is some in insurance, there is some in reinsurance. It’s mostly in acquisition. Michael Nannizzi : Okay, okay. And then just trying to figure out like what we should be thinking about on the forward anyway we could sort of get some quantification of that? Mark Lyons : Well, it was about $3 million and one-time. Michael Nannizzi : Got it, okay. And then sticking to reinsurance for a sec, the other operating expense there, I mean, how should we be thinking about that on the forward? I think – Dinos, I think you might have mentioned talking about redeploying folks from one place to another. You – if we continue to see the business there kind of recede just given a lack of opportunities there to invest, do you see that – is that an area where you would – where we would see that coming down or do you expect to maintain your infrastructure there? Dinos Iordanou : You got to break it into components, right? You got to break it into components. So how much is internal expense and how much is commissions, ceding commissions, etcetera? You don’t write the business, you don’t have the ceding commission expense. Our intention is, and I have said it many times, and I know Marc Grandisson and I we see eye to eye to it, we have no intention for eliminating underwriting capabilities we have. I am not going to give my underwriters to the competition. So, we are going to maintain that, because our view of the market is more long-term than short-term. These are the same underwriters that generated significant profits for us when the market was good for reinsurance and that market will come back again to supply and demand and at some point in time, it will readjust. So from that perspective for you, when you are looking at your numbers, look at the operating expense, break it down into what’s internal versus external meaning ceding commissions and all that and the internal run-rate we are going to maintain, because I don’t expect us to reduce our underwriting capability. Michael Nannizzi : Okay. And then just sort of thinking about the underlying loss ratio there in reinsurance, I mean, you saw year-over-year improvement despite some mix shift away from what I would guess are higher profitability property lines at least relative to the rest of the book. How should we think about that? I mean, was there anything sort of happened either in the quarter or the year just top of your mind, maybe Mark, just to help to support that result or do you feel like 2015 was sort of what it was and that’s a good starting point to think about for the future? Mark Lyons : Well, there is always seasonality in the business firstly. So, you got to watch the serial comparison. But there is some of the mix differences. I mean, the facultative unit performed well as it generally does and the degree by which it varies quarter-by-quarter. But as Marc said, the property cat being deemphasized and if it continues where the margins are not, we are likely to continue in that way. So the third party businesses and the other opportunities that they have been getting, they are I will call out of the mainstream opportunities continue to be in the pipeline. So it’s a little hard because that it’s probably only half of the business. It’s probably what I would call standard business at this point. But I think fourth quarter is more of a reasonable go-forward. Marc Grandisson : Yes. I think to further add to this, we are focusing on returns and always we have very, very agile underwriting teams across the platform in reinsurance enable to maneuver in and out of markets as they see the returns get better or worse. A great example, as I have mentioned in my notes, is the UK motor. It has a higher loss ratio component by virtue of being a quarter share. You’re not going to get a 20% loss ratio in that business under – unless there is under extreme circumstances. So we are expecting to have higher loss ratio. But in the end, we don’t really worry so much about the components of the loss or expense. We worry about the margin that we can derive from the business. And as I – I will echo with what Dinos has said, I mean we have a pretty decent agile team that’s able to seek and source and seek and capitalize on opportunities. And we have more, always. Michael Nannizzi : Great. And then just maybe one last quick one if I could on the MI, can you breakdown how much of the action in your underwriting profitability has come from U.S. MI versus whether it’s reinsurance for the other business? Mark Lyons : No. We generally don’t talk about that. We do it and we manage it in a total segment basis. So the whole strategy that Marc and his team, Andrew and his team has is they balance the mixture of that, but they have a common macroeconomic view and everything else. So we tend to look at it in totality and report it in totality. Michael Nannizzi : Okay, got it. Thank you so much. Operator : Thank you. Our next question comes from the line of Josh Shanker with Deutsche Bank. Your line is open. Josh Shanker : Yes. Good morning, good afternoon. Thanks for taking my question. And long hour. Dinos Iordanou : No, go ahead, we got plenty of time. Josh Shanker : I am done. The Australian business, how should we think about revenue going forward for the Australian business? Marc Grandisson : It’s hard for me to tell what’s going to happen. It’s an ongoing – the relationship that we have established as we mentioned for last year has been very fruitful – the quarter share agreements that we have with one of the major lenders down under. We have – it’s ongoing. There are things going on down under as you know, various options that we are looking at. So it’s really hard for me to tell you how it’s going to go for the next year. Dinos Iordanou : It won’t be any less, but we can – we don’t know, hard to say what the new opportunities are, because we are engaged in a lot of discussions that sometimes they bear fruit and sometimes they don’t. Josh Shanker : Is it going to be lumpy by necessity? Dinos Iordanou : No. It will be steady. Lumpy on the upside if we get – if we do other transactions, but – and if we interrupt a relationship, it can be lumpy on the downside, but we don’t anticipate that. Marc Grandisson : I think I will – Josh, I will say it’s going to be lumpy on the written base because the business in Australia has written all upfront. The earnings is going to take years to go, so a bit more stability on the earnings over time, but the written yes rightfully could be very lumpy. Mark Lyons : And just to reemphasize and clarify that Josh, because I think it’s easy to get some confusion. That deal is not a single upfront premium like in the totality to the exposure. Instead, it’s a single premium market in Australia. So you are going to have – there is no monthlies really. So it’s going to be a series of singles that come out through month by month by month that come in and we will record accordingly. It’s not an upfront number. Dinos Iordanou : It’s quite mortgage by mortgage by mortgage by mortgage. And you are earning that over the duration of that. And it’s a long duration, 7 years, 8 years, 9 years. Josh Shanker : Very good. And on Watford – and I don’t know enough about the investment strategy at Watford, it look like the investments had a good quarter last quarter, now we are in this bumpy market right now, how should market volatility affect investment results at Watford? Dinos Iordanou : Well, I mean we don’t make those decisions, Highbridge makes that. But in essence, their approach hasn’t changed. I know when the spreads have widened they are going to take marks. But they feel comfortable with the quality of the portfolio and the embedded yield, which is in the 7% and higher. And now it will be a question as to where the economy goes and would they have any defaults in it, but we don’t see – based on our reviews that we get on a quarterly basis as 11% owners, we don’t see a significant risk to that. They analyze every investment one by one and they put probabilities of default and recoveries. And it depends on where the economy goes. But if they can’t – if we don’t have a recession, I think they are in good shape. Josh Shanker : Okay. Thank you very much. Operator : Thank you. Our next question comes from the line of Meyer Shields with KBW. Your line is open. Meyer Shields : Great. Thanks. Two quick mortgage questions, if I can. First, if you look over, I don’t know fourth quarter conference call, a lot of Bermudans are talking about mortgage reinsurance, are we seeing – are you seeing a more competitive market in general for that? Dinos Iordanou : A little bit more, but I don’t think it’s the competition. It’s more participation and a lot of that we see in the bulk transactions, the GSEs. They are purchasing now for the 20% to 40% down payment. This is the 60 to 80 LTV business that the GSEs buy through the [indiscernible] and Connecticut Avenue Security transactions in the market. And you have a broader participation there by other reinsurance. And of course, some of the MIs that they needed to comply with the PMIER capital requirements, they might have done some transactions in order for them to come up to the capital standards that they need to prove to the GSEs that they are complying. But I don’t see a major change of that going forward. I think most of that participation is going to happen on the bulk transactions. Marc, anything else you want to add to it? Marc Grandisson : I agree with you, agreed. Dinos Iordanou : Yes. Well said. Meyer Shields : Okay. And then second, as I get that mortgage LE’s written premium growth is going to be lumpy, but as we see better market conditions there than in insurance and reinsurance, does that have an impact on the investment portfolio, does that give you even more room for longer term investing philosophy? Mark Lyons : Yes. I would say Meyer, that it’s a function of the duration of the aggregate portfolio at that point in time. So I would say as it becomes a higher proportion of total, it’s going to inch up the duration that – on it and therefore have it matching on it on the investment side. Meyer Shields : Okay, perfect. Dinos Iordanou : Our investment philosophy is basically on the liability side of the business, we match durations with those liabilities. And on the shareholder capital, we have a view that it can be very short is a zero duration all the way up to 5 years duration depending how our investment committee and the Board believes the market conditions dictate. And right now, on the shareholder capital, we are about neutral. So our duration is what, 3.6, Marc? Marc Grandisson : 3.4. Dinos Iordanou : 3.4 and our duration of our liabilities is not that different from that. So we are kind of neutral where we are today. But we can elongate that or go short on that depending what we do with the shareholders’ equity capital. Operator : Thank you. Our next question comes from the line of Matt Carletti with JMP Securities. Your line is open. Matt Carletti : Hi. Thanks. Good morning. I just had a follow-up on Amit’s question on the realized losses in the quarter. Mark, that’s really helpful, the kind of color on the other segment and how Watford treats it, but I guess my question is on the subtotal of the operating segments. It’s still a pretty big number in the quarter relative to history at least, particularly in a quarter where equities are up, so I am just wondering is there any OTTI to note there or performance of alternatives or was it just kind of more very run-of-the-mill? Dinos Iordanou : No, our OTTI was very small for the quarter. It was in the single millions of dollars. It’s – we have a total return philosophy. And our portfolio trades quite a bit and sometimes you are going to see realized losses coming through, because they might be repositioning the portfolio from one security to another and we take those marks, where other companies when they buy in whole, they might have more unrealized marks where we might have more realized. Mark Lyons : There has also been a purposeful repositioning of the portfolio. You probably noticed that – not just the movement into U.S. corporates and municipals, but a de-emphasis of mortgage-backed securities and commercial mortgage-backed securities and so forth. So, we just compare it year-over-year. So, Dinos’ point is right. As you know, as you make these decisions in insurance, you are moving them into the bucket of just marks that will be unrealized, but that’s done with the thought of the future view of the portfolio returns. Matt Carletti : Yes, that makes sense. That makes perfect sense. Thanks for the color. Operator : Thank you. I am showing no further questions at this time. I would like to turn the call back to Dinos Iordanou for closing remarks. Dinos Iordanou : Well, thank you all for listening to us. And we are looking forward to talking with you in the next quarter. Have a wonderful afternoon. Operator : Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,016	2	2016Q2	2016Q1	2016-04-28	1.461	1.465	1.383	1.395	null	16.44	16.63	Executives: Dinos Iordanou - Chairman and CEO Marc Grandisson - President and COO Mark Lyons - EVP and CFO Analysts : Vinay Misquith - Sterne Agee Amit Kumar - Macquarie Jay Gelb - Barclays Michael Nannizzi - Goldman Sachs Kai Pan - Morgan Stanley Jay Cohen - Bank of America Merrill Lynch Charles Sebaski - BMO Capital Markets Meyer Shields - KBW Ian Gutterman - Balyasny Mark Dwelle - RBC Capital Markets Operator : Good day, ladies and gentlemen and welcome to the Arch Capital Group First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the Federal Securities laws. These statements are based upon management’s current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management will also make reference to some non-GAAP measures of the financial performance, the reconciliation to GAAP and the definition of operating income can be found in the company’s current report on Form 8-K furnished to the SEC yesterday, which contains the company’s earnings press release and is available on the company’s website. I would now like to introduce your host for today’s conference, Mr. Dinos Iordanou, Mr. Marc Grandisson and Mr. Mark Lyons. Mr. Iordanou, you may begin. Dinos Iordanou : Thank you, Abigail. Good morning, everyone and thank you for joining us today for our first quarter earnings call. We are staring the year on a good note, our first quarter, it was terrific from virtually all perspectives. Our reported combined ratio was excellent at 87.1, which was aided by low level of catastrophe losses and continued favorable loss reserve development in each of our segments. Investment returns were also very good as our fixed income portfolio benefited from the interest rate declines we saw in the first quarter. There are no significant changes in the property, casualty operating environment from last quarter, although there are some signs that reinsurance terms, especially ceding commissions maybe bottoming out. Within the insurance sector, we saw slight deterioration in terms and conditions while the mortgage insurance in this remains quite healthy. We are in a market where the importance of cycle management, not only in preserving capital, but also maintaining balance sheet integrity is paramount. Navigating through this phase of the cycle requires that our underwriters remain disciplined, opportunistic and laser-focused in execution. Within the reinsurance segment, we are focusing more on special situations that utilize our underwriting expertise and capital strength and our ability to respond quickly. In our insurance segment, we continue to focus less volatile, smaller accounts, both in term of limits, but also account size and with reinsurance purchases helping us to reduce the volatility on large accounts and on high capacity business. The operating environment in the mortgage insurance space remains healthy and we are generating excellent returns and continue to make significant progress in this segment. Marc Grandisson will give you more details in all of our segment in a few minutes. On an operating basis, Arch earned $145.7 million or $1.17 per share for the first quarter of 2016, which produced an annualized return on equity of 9.7%. On a net income basis, we earned $149 million or a $1.20 per share for the 2016 quarter, which results in a return of equity of 6.4% on a trailing 12-month basis. Remember that net income movements can be more volatile on a quarterly basis as these earnings are influenced by changes in foreign exchange rates and realized gains and losses in our investment portfolio. Group wide, our gross written premium increased by 6% to $1.39 billion in the first quarter over the same period in 2015, while net written premium rose 3.7% to $977 million driven primarily by growth in our mortgage segment along with modest growth in our construction and alternative market business within the insurance segment. Our investment results were excellent on a relative basis and acceptable on an absolute basis given financial market conditions. Net investment income per share for the quarter was $0.57 per share, up $0.04 sequentially from the fourth quarter of 2015. Despite volatility in the investment and foreign exchange markets in the first quarter of 2016, on a local currency basis, total return on our investment portfolio was a positive 1.48% as returns on our fixed income investments were partially offset by declines in our alternative investment portfolio. Including the effects of foreign exchange the total return was 1.82 in the quarter, a healthy result. Our operating cash flow as $257 million in the first quarter as compared to $16 million in the first quarter of 2015. Mark Lyons will discuss the cash flows in more detail in a few minutes. Our book value per common share at March 31, 2016 was $49.87 per share, a 40% increase sequentially from the fourth quarter of 2015. While some segments of our business have become more competitive, we believe that group wide on an expected basis, due to our mix the present value ROE on the business written in the 2016 underwriting year should produce ROEs in the range of 10% to 12% on allocated capital. Before I turn the call over to Marc Grandisson, I would like to discuss our PMLs, which remain essentially unchanged from January 1. As usual, I would like to remind and point to everybody that our cat PML aggregates reflect business balance through April 1, while the premium numbers included in our financial statements are through March 31 and that the PMLs are reflected net of reinsurance and all retrocessions. As of April 1, 2016, our largest 250 year PML for a single event remains the Northeast at $494 million or about 8% of common shareholders equity. Our Gulf of Mexico PML decreased slightly to $438 million and our Florida Tri-County PML increased slightly to $385 million. I will now turn it over to Marc Grandisson for comments on market conditions, before Mark Lyons discuss our financial results. And after their comments, we will take your questions. With that, Marc? Marc Grandisson : Thank you, Dinos. Good morning to all. We continue to face challenges of softer pricing as the property and casualty industry continues to report favorable prior-year loss development and benefiting from below average cat losses, which obscure as we believe the adequacy of risk adjusted rates in the property market. However, in every market, there are some dislocations present and we remain vigilant in our efforts to seize those opportunities that become available. On the positive side, as Dinos mentioned, recent actions by a large participants in the marketplace may help to usher in a more disciplined environment in the casualty area in the near future. P&C rates are declining in a mid-to-low single-digit range, but there are pockets of rates strengthening. Our challenge is to be confident that current rate levels are sufficient on an absolute basis. On the other hand in mortgage insurance, which I will refer to as MI from hereon, rates remain very healthy despite indications that they appear to be declining in light of the new rate cards filed by some of our competitors. Despite the headlines, we believe that on a risk-adjusted basis, the aggregate effective grade levels of MI providers are actually higher due to a shift in the quality of the risks assumed. Staying with our MI segment, which as you may recall, includes primary operations in the US and mortgage reinsurance globally as well as GSE risk sharing transactions portfolio. We estimate that the market’s MI new insurance written or NIW was down about 10% in the first quarter of 2016 versus the fourth quarter of 2015. In spite of this Arch continues to increase its presence in the sector. Overall, our Arch MI segment grew its gross written premium this quarter by 21% over the fourth quarter of 2015 and 84% over the same quarter last year. The growth came primarily from new GSE risk sharing transactions as well as from reinsurance contract with one of the major Australian lenders that we discussed last quarter. Our US MI unit continues to increase the share of the market. Excluding the GSE transactions, we estimate that we continue to gain market share at a pace of approximately 2 percentage points per year since our acquisition of the US MI platform. At March 31, 2016, our total MI segment risk in force was $12.8 billion, which includes $7.2 billion from our US MI operation, $4 billion from worldwide reinsurance operations and approximately $1.6 billion from the GSE risk sharing transactions we wrote. Our primary US MI operation increased its NIW $2.9 billion during the first quarter of 2016, of which approximately 69% came through the bank channel and 31% via our credit union clients. Seasonally, the first quarter 2016 for credit union production typically runs lower than the other three calendar quarters. The amount of NIW from credit union this quarter is consistent with what we have recorded in the first quarter of 2015. Our bank channel business continues to pick up steam and is becoming a larger contributor to our production and RateStar is the primary driver of this growth. We introduced RateStar less than five months ago and to-date, we have rate filings approved in all, but three states. Through March 31, 2016, 1,142 customers have elected to use RateStar. Over 50% of our commitment in the first quarter were obtained through RateStar. We have seen many positive signs since its launch. The increase in our application volume is very encouraging and points to our clients seeing value in our differentiated pricing framework. RateStar is proving to be an effective tool in differentiating Arch relative to its competition while maintaining or exceeding our targeted average return of 15% ROE. We believe that our combination of high ratings, superior customer service and product innovation will allow us to continue growing. I will turn now to our Primary P&C insurance operations in United States, which current represents approximately 80% of our global insurance operation. We saw a more stable rate level change at 10 basis points effective rate increase this quarter versus 140 basis points decrease last quarter, excluding the effective ceded reinsurance. However, that 10 bps increase is somewhat misleading since it is queued by one large professional liability program that renewed at a plus 7% rate increase in the quarter. Without the benefit of this program, our overall rate change would be a rate decrease of 80 bps. We believe that we were able to recapture some of that rate erosion, once we considered the purchase of our reinsurance coverages. Our insurance operations in the UK, which represents around 17% of the insurance segment is still pressured from a rate perspective. Rate decreases across all our product lines were 4.6% this quarter. We continue to actively manage this portfolio towards the more attractively priced lines. On a Group wide basis, our insurance unit premium written increased 4% in the 2016 first quarter versus 2015 on a gross basis, while they increased 1% from a net basis. We continue to adjust our mix of business and are generally able to buy reinsurance on more favorable terms. Ceded premium increased 11% in our insurance group this quarter over the same period last year. Mark Lyons will provide more perspective on this in his commentary. Areas of opportunity for growth in the insurance sector, in the first quarter were in our - as Dinos mentioned, construction, national accounts, travel and alternative market lines. The vast majority of our growth came as a result of our ability to take advantage of the current dislocation in those areas where some major players are being challenged. In contrast, our executive assurance property and programs businesses are areas where rate levels lead us to a more defensive strategy. Finally, let’s turn to our reinsurance group. Our teams are being reactive and selective consistent with our long-stated strategy of cycle management. Most lines of business, especially the ones with good results continue to see rate decreases in a 5% to 10% range. There are however several lines that are experiencing some level of rate increases. A recurring question our team faces when looking at such areas is whether that positive rates change is enough to allow us to achieve an adequate return. As an example of this, we continue to struggle with large US casualty placements. There is increased demand by buyers in the market for quota shares, but we have been unable to write a significant new transaction at an appropriate return. Our reinsurance gross premium written declined by 1% for the first quarter of 2016 versus 2015, while on a net basis we were down 8%. Our property cat gross written premium for 2016 first quarter was down over 10% as we continue to exercise underwriting discipline and benefit from improved terms on retrocessional treaties. Most of our efforts in underwriting areas are currently directed to UK motor, specialty liability products and niche areas such as professional lines, excess motor and cycle data. With that I will hand this over to Mark to cover the detailed financial results. Mark? Mark Lyons : Thank you, Marc and good morning to all. As was true on previous calls, my comments to follow will be on a pure Arch basis, which excludes the other segment that being Watford Re, and I will continue to use the term core to denote results without Watford Re and consolidated when referring to results including Watford Re. This quarter our core business mix based on net written premium changed as follows, are relative to the first quarter of 2015. The insurance segment reduced from 58% to 56% of the total. The reinsurance segment shrunk from 37% to 33% and the mortgage segment grew from 5% to 11% of the total. This shift in mix continues to reflect our view of the market and the relative return expectation each segment provides. As far a longer term view of our mix changes, I would point out that four years ago, in the first quarter of 2012, within the reinsurance segment, the property cat line represented 26% at net earned premiums, whereas this quarter it is down to only 6.9% of earned premiums and this was accomplished through 71% reduction in net earned premiums over the four-year period. Yes, 71%. The insurance segment similarly reduced its property of marine net earned premiums by 38% over that same time period. Both actions reflect our view of sever margin compression in the property cat space. Okay. Moving on to this quarter’s financial results, the core combined ratio for the quarter was 87.1%, with 0.5 point of current accident year cat-related events compared to last quarter in 2015 of 87.5% combined ratio, which reflected 0.6 point cat-related events. Losses recorded in the first quarter in 2016 from cat events totaled only $4.2 million, stemming mostly from within our reinsurance operation. The 2016 first quarter core combined ratio reflects 6.4 points of prior-year net favorable development, which is net of reinsurance and related acquisition expenses compared to 7.8 points of prior period’s favorable development on the same basis in the 2015 first quarter. This results in a 93% even current core accident quarter combined ratio excluding cats for the first quarter of 2016 compared to 94.7% in the comparable quarter last year. In the insurance segment, the 2016 accident quarter combined ratio, excluding cats was 95% even, essentially unchanged from the accident quarter combined ratio of 95.1% a year ago. The reinsurance segment 2016 accident quarter, ex-cats was 94.3%, similarly comparable to the 94% even ratio in the 2015 first quarter. Moving over to mortgage, there accident quarter combined ratio was 71.9% in the quarter compared to 94.1% in the first quarter of last year. As I have said in the prior calls, it’s important to remember though, that the concept of accident year is more of a P&C concept and not a mortgage insurance concept due to their accounting conventions. Now, as previously stated, the ACGL core accident quarter combined ratio dropped 170 basis points quarter-over-quarter, yet insurance and reinsurance segment ratios were virtually flat with last year’s respective quarter. This is driven by the mortgage segment as its inherent strong level of profitability is becoming a higher proportion - proportional contributor to our overall results. The insurance segment accounted for roughly 11% of the total net favorable development in the quarter, net of associated acquisition expenses and this was primarily driven by shorter tailed lines from the 2012 to 2014 accident years and longer tailed lines from the 2003, 2004, 2008 and 2012 accident years. The reinsurance segment accounted for 84% of the total net favorable development in the quarter, with approximately three quarters of that due to net favorable development on short tailed lines concentrated in the more recent underwriting years. And our remaining portion due to net favorable development on longer tailed lines, primarily from the 2003 through 2011 underwriting years. The mortgage segment accounted for approximately 5% of the favorable development, which translates to 4.4% beneficial impact on the loss ratio this quarter, resulting primarily from continued lower claim rates from the CMG business we acquired in 2014 and from the PMI quote share we assumed within that transaction covering the 2009 to 2011 book years. As was the case last quarter, some of this favorable development benefit is offset by the contingent consideration earnout mechanism negotiated within the purchase agreement. And as a reminder this contingent consideration impact is reflected in realized gains and losses and not been underwriting income. The core 34% even expense ratio for the first quarter of this year was 50 basis point lower than last year comparative quarter of 34.5%. Overall, the expense ratio though was aided this quarter by roughly 75 basis points to the release of an overestimated year-end 2015 bonus accrual. The insurance segment expense ratio improved 90 basis points for the first quarter of 2016 reflecting both a lower net acquisition and operating expense ratio. When one adjusts however for the aforementioned bonus accrual benefit, the expense ratio would be nearly 50 bps higher, however still an improvement over last year's comparative quarter. We as managers continue to focus on the total expense ratios though as mentioned previously since the sliding of costs and benefits within that acquisition and operating expense ratios can be somewhat artificial and ceding commissions are recorded in the net acquisition line and not allocated to every operating expense category that they represent. The reinsurance segment expense ratio increased 120 basis points this quarter primarily reflecting a 6.6% lower net earned premium base. I will note though that the reinsurance segment’s expense ratio this quarter was 100 basis points lower than sequentially in the fourth quarter of 2015. The ratio of net premiums to gross premiums for our core operations in the quarter was 70.2% which is a decline from 71.8% a year ago. The insurance segment had a lower 68.8% ratio compared to 70.7% a year ago driven mostly as was the case last quarter by increased sessions on a larger alternative markets book, increased session on capacity driven product lines as Dinos mentioned and a reduction in our CNC program business which had been kept overwhelmingly net and still is kept overwhelmingly net. The associated average fee commission ratio on quota share treaties improved another 200 basis points in the US. In fact quota share treaty decommissions have improved from 2012 to now by over 500 basis points in total and the improvement ranges from the plus 600 to plus 1000 basis points for some product lines. Someone was this net acquisition improvement however is masked by the growth of businesses using captive reinsurance arrangements. Many of these carry no or marginal front-end commissions. So the associated ceding commissions are lower since they are generally no front-end commissions to be reimbursed. Moving to the reinsurance segment, the net to gross ratio was 66.6% in the quarter compared to approximately 72% a year ago, primarily reflecting sessions to Watford Re another third-party record session. The mortgage segment in addition to premium growth as Marc mentioned earlier had approximately 4 million of other underwriting income in the quarter from risk sharing transactions receiving derivative accounting treatment and $7 million of underwriting profits associated with risk sharing transactions receiving insurance accounting treatment. Over time as expected that more income will continue to emanate from transactions receiving insurance accounting treatment. The total return on our investment portfolio on a local currency basis was a reported positive 148 bps in the quarter reflecting positive returns in fixed income investments both investment and non-investment grade, partially offset by negative returns from the equity and alternative investment portfolios. On US dollar basis, total return was a positive 182 bps in the quarter. Over 80% of the portfolio is comprised of fixed income investments; the embedded pre-tax book yield before expenses was 2.07% as of the end of the quarter and duration remained fairly consistent at 3.56 years versus 3.35 years at the end of 2015 first quarter. Dinos already mentioned reported investment income per share, so I won't go into that, other than as a reminder that we evaluate investment performance on a total return basis and not nearly by the geography of net investment income. Core cash flow from operations was $257 million in the quarter versus approximately $16 million in the first quarter of 2015. Last quarter as you may recall had cash flow operations being affected by a reduction in gross premiums collected, timing shifts of reinsurance premiums sessions, and paid and deductible recoveries. Core interest expense for the quarter was $12.6 million which is consistent with our longer term run rate. Our effective tax rate on pre-tax operating income available to our shareholders for the first quarter was an expense of 6.6% compared to an expense of 3.9% in the first quarter of 2015. This quarter’s 6.6% effective tax rate has approximately 100 basis points of a non-recurrent discrete item out of our European operation. Fluctuations in the effective tax rate can result from variability in the relative mix of income or loss reported by jurisdiction. Our total capital was $7.3 billion at the end of this quarter, up 2.9% relative to December 31 of 2015. Our debt to capital ratio this quarter remains low at 12.2% and debt plus hybrid represents only 16.7% of our total capital which continues to give us significant financial flexibility. We also continue to estimate having capital in excess of our targeted positions. Book value per share was $49.87 which is 4% increase over year-end and 4.3% relative to one-year ago. This change in book value per share primarily reflects the Company's continued strong underwriting performance from all segments and improved investment returns. With these introductory comments we are now pleased to take your questions. Operator : [Operator Instructions] Our first question comes from Vinay Misquith with Sterne Agee. Your line is open. Vinay Misquith : Congratulations on beating numbers, one of the few companies to do so. The first question is on the new opportunities because of market dislocation. If you could discuss that that would be helpful? Thanks. Dinos Iordanou : Well, Mark talked about some unusual transactions that we see on the return side, doesn't mean we’re going to do any but we see more request so that means there is clients out there that they have special needs. From the insurance side, we continue to focus on small medium sized accounts I believe we have built the infrastructure around the country, we recently in our binding authority business we also opened another new office in Scottsdale, Arizona. So we're putting a lot of focus in trying to find this profitable segment for us. But let me reemphasize, we always look for bottom line results first and we look at premium growth second. At the end of the day, you can't focus just on premium growth, of course that's not the case with our mortgage business that business we like a lot and we try to grow it as fast as we can. So Marc, you want to add to it or -? Marc Grandisson : Yeah, absolutely. On the insurance side I believe that we've seen an increase in submissions over the last quarter or so because some of our competitors have decided to exit the lines of business, there have been some mergers and acquisition. So we are seeing some movement, it is not widespread but it is certainly starting to occur and we are seizing the opportunity whenever we can and whenever we think it’s appropriate. Dinos Iordanou : One area we are not participating and I want to - it seems that the flavor of the month now - the year is broker line slips here and there so they can have control over the pan et cetera. That doesn't fit well with us, we have not participated in any of these. Because at the end of the day you can't have the title underwriter and give it to somebody else, neither you're going to underwrite or you're not and with our troops, I want us to have the ability to underwrite ourselves. Vinay Misquith : The second question on mortgage insurance, if you could give us a metrics about how well RateStar is doing, I think it's at 50% of the submission were coming through RateStar. But do you think it's actually driving more submissions to Arch because of that and any anecdotal evidence would be great? Dinos Iordanou : If you look at it from a submission point of view, let me give you - our first quarter it was 50-50, if I look at April is up to 68-32. So it's been trending like this, so RateStar is only been out there for five months. So I don't know where it’s going to go but it's more significant when I look at our submission activity from the bank channel. The bank channel is predominately RateStar now maybe eight of ten submissions in April that was coming from that. On the credit union channels, it’s still in the 50-50 range. So that's where the trajectory is going. They NIW, it was 44%, 45% I think in the first quarter out of RateStar price business but it was - in April it was 61%. So, that tells you that it's more and more of that business is moving to the place that we wanted to move because we have a lot of faith in the way we price the business. Marc? Marc Grandisson : Vinay, potentially there is a huge increase in submission; we believe it's in the order of 50%, 60%. If you look last quarter of ‘15 versus this first quarter. And the vast majority of the pick-up was through the bank channel, so just to give you an overall sense in the quarter. Vinay Misquith : Want to clarify about rates, I mean I think you mentioned that the risk adjusted rates are actually higher now for this rather than lower? Dinos Iordanou : We expect that ROE on the business is higher than our rate cost. Vinay Misquith : And even from a competitive standpoint you've not seen the competitors sort of step in and do something similar? Dinos Iordanou : Right now the rate card had seems to have stabilized, there are rumors, the only thing we can comment to you Vinay is our rumors that some people will be expanding their rate card or doing the risk-based pricing approach that we have but we have no way of knowing what's going to happen right now. But right now it seems that the rate card has been stabilized where it is right now. Marc Grandisson : Our future Vinay is going to be RateStar, we like this respace approach to it, looking at many characteristics of a particular mortgage and trying to get the right price to have and we continue to refine our approach with that. I have a lot of resources committed to that effort, which is no different then what we do on the PMC side to begin with. Operator : Thank you. Our next question comes from Amit Kumar with Macquarie. Your line is open. Amit Kumar : Two quick questions on MI and thanks for being patient with us and explaining the finer nuances of the MI market. The first question probably ties back to the next question on the broader space. Recently the National Association of Realtors wrote a letter to FHA asking them to cut their premiums. If FHA cuts their premiums does that change the entire sort of the private MI market or is that a different kind of, it's obviously a different risk so it does not impact you that much? Dinos Iordanou : It depends on what sectors, you’re correct, a lot of what they like is the private MI companies do not. They like the low credit score high LTV type of business. So depending what they do, it might or might not affect the broader market. It’s tough when you have the government competing with you but entirely totally different capital requirements. None of us, none of us or our competitors in the space would be allowed to operate with the capital ratios that they have. I don't know, it depends what they do and then we’ll see the effect that it will have on the marketplace. And by the way thank you for the compliment of being patient, my guys here they say otherwise. Amit Kumar : The other question I have was in regards to the excess capital that you mentioned. There has been chatter in the marketplace obviously regarding the disposition of a large MI asset, one of the largest companies. At this stage of the cycle, Dinos how do you look at growing organically and I'm talking about the MI pace versus looking at this obviously very large and game changing property out there? Dinos Iordanou : All I can say is we look at all avenues, right now our focus is being to grow organically, but given other opportunities we will evaluate them. If they get presented to us, we’ll evaluate them. At the end of the day, we get paid to put capital to work at an effective returns and that's where our entire team is focused on and it's no secret that we do want to grow the exposure we have in the MI business. Operator : Thank you. Our next question comes from Jay Gelb with Barclays. Your line is open. Jay Gelb : On the core reinsurance segment, I was somewhat surprised to see the gross written premiums were essentially flat. You mentioned some specialty opportunities, I was hoping to get a better perspective on whether you think that overall business might be flat from a premium volume perspective or maybe even grow this year? Marc Grandisson : I don't know but the rest of the year it depends where we are going to be offered with. But the first quarter certainly seized opportunity in the few larger transactions that Dinos alluded to at the beginning. And also a couple of opportunities which I highlighted in my comments which are the UK Motor and some specialty liability although not being very big but it is more niche, more specialty in nature. But we would just say it’s a reflection of and UK Motor for instance, if you have a large quota share, you will have a lot more throughput in the quarter. So that's a great examples what premium would actually be stable year-on-year. Jay Gelb : The other point I wanted to touch based on in reinsurance is the high level of persistent reserve releases. Can you give us some perspective on what continues to drive that favorable result? Dinos Iordanou : Let me give it an attempt and then I'll give it, I’m being surrounded by actuaries here. Marc and Mark they are both actuaries but we have a methodology, we haven’t changed our methodology for the 14 years. To simplify, we try to pack the accident year based on what we believe we price the business at. And then the other thing we do is on longtail lines if we see unfavorable we recognize that early on, any unusual event where we ignore favorable at least for 3 or 4 years. So that has been our methodology, recognize bad news early; don't celebrate too early on you wins and we follow that. So whatever the data tells us quarter after quarter and that’s what we report. Now that was a guy who doesn't have an actuarial degree, so I'll turn it over to Marc or Mark, Mark Lyons to give you the more scientific answer. Mark Lyons : My scientific answer as a reformed actuary is I have nothing more to add. Jay Gelb : The final question I have was on mortgage reinsurance. Clearly there was a big benefit in 1Q from the Australian deal. I'm trying to think about on organic, I guess organic is not the right word but on a normalized basis, what do you think the growth rate could be in mortgage insurance, and it could just be $500 million gross written premium business within a year or so? Dinos Iordanou : Well we don't know, in Australia is a market that dominated by 2 or 3 players or 4 banks, so we have a major relationship with one of the top four. It’s kind of hard to see where if any, if we’re able to grow relationships in other banks. But currently right now we have a stable very strong relationship there and what you're seeing right now is a production. Even though we call it reinsurance, it's really slow business that we assume 100% basis. So it's really like insurance if you will. For the rest of the world, we are exploring all other geographical areas. Dinos and I are spending a lot of times trying to figure out what we could do in Europe or we could do, I mean we are already are in Europe, Canada and other countries. And this is sort of an ongoing trying to grow and use and take advantage of our expertise and strong knowledge and deep knowledge in the MI space to do more of it. It’s really hard to see what it would be in two, three years’ time but for the Australian business I think we’ll get pretty much a good picture of our quality production. Mark Lyons : Hey Jay, it’s Mark Lyons. Let me just add the difference between binding the business and expanding it versus accounting recognition of it. The Australian market is a single premium market. So if you got to really contrast that with the US which is dominantly monthly so it builds up and it’s recognized slowly. And by single it's not like it’s a single program writing a big bullet single, it's not the case. The underlying business, the business that is reinsuring is a series of every homeowner having a single premium as they put it to play. So the recognition will be accelerated relative to the US, so you can't extrapolate that into something that may appear ultimately to be larger. Operator : Thank you. Your next question comes from Michael Nannizzi with Goldman Sachs. Your line is open. Michael Nannizzi : Just a couple here I think most of mine have been answered, but the ceded level that we saw in the first quarter that lifted from the first quarter of last year, I mean just you guys expect it to be ceding back to Watford or whoever in that sort of 30% range from here or was there anything unusual in the quarter? Dinos Iordanou : Okay. You say the 30%, because the 70% that’s the growth. Michael Nannizzi : Yeah. Mark Lyons : Remember those session are dominated by the insurance group ceding overwhelming to third-party, unrelated third-party. You have increased retrocession on the property in Marine that the reinsurance group will do. You have minor bits in the mortgage sector really as a function of the deal that was cut on originally on the transaction. So the movement, yes, there is Watford sessions, but the level of Watford session is fairly consistent over the last couple of quarters. The biggest lever is what the insurance group does and Dinos as pointed out, they were just shy of 70% this quarter, but the growth in low volatility businesses that kept overwhelmingly net and the high-capacity business that Dinos talked about and the high capacity we mean $25 million limits, things like that, those are going to be reinsured more because we can get more favorable terms. So we cut the aggregate net volatility of the total book as a result. But just keep in mind Michael, it is the insurance group that drives that ratio. Michael Nannizzi : Okay, got it. And then other income primarily in reinsurance, I guess a little bit in insurance as well, that step-down in the quarter was - did that - those dollars just moved to a different line item maybe somewhere as geography or was there a change in the - Mark Lyons : No, it’s a great question. On the - think of it this way, quarter-to-quarter that other underwriting income in reinsurance was virtually flat. It's coming from the GSE transactions mostly. Last year there was what we call catch-up premium on the difference between when the capital markets piece went out, that’s done earlier and then the reinsurance segment was done later and had to catch up because of the time gap between them. So that was roughly $3.5 million catch up. That’s the first thing. The first thing would be occasionally we call it periodically, we reevaluate that ethnicky loss portfolio transfer and in that year's quarter there was an adjustment whereas this year's quarter that was not. Michael Nannizzi : I see, okay. So but now that we're all caught up then we should be reverting back to the pattern that we were experiencing previously? Mark Lyons : For the derivative oriented transactions, for the GSEs in reinsurer - in the mortgage, the answer would be yes. Ethnicky, it depends when we deem a change is need. Dinos Iordanou : Derivate accounting for those transactions will be deescalating and going to zero over seven years, right. So every quarter there will be slightly a little less, a little less until it gets extinguished seven years out or so. Michael Nannizzi : Got it. The main point being that other than this timing change you mentioned in the first quarter nothing has really changed as far as that’s concerned. Dinos Iordanou : No, that’s correct. Yeah. Michael Nannizzi : All right. And then in reinsurance, so the expense dollars and other operating expense declined in the quarter sequentially. I was just curious if the transaction or the item that you mentioned in insurance was relevant in reinsurance as well Mark or was there something else there? Marc Grandisson : I am sorry, was that an operating expense question or acquisition expense question? Michael Nannizzi : Operating, other operating Mark Lyons : I think the quarter and then the segments in total was kind of affected by the bonus accrual take down that I mentioned. So I would expect the run rate to be a little marginally higher on a ratio basis. Michael Nannizzi : Okay. So the order of magnitude similar to what you mentioned on the insurance side in terms of Mark Lyons : Within spitting distance, yeah. Michael Nannizzi : Okay, that’s fair enough. Okay, great. Thank you so much. Mark Lyons : Which is as good as I guess. Michael Nannizzi : As a reformed actuary. Mark Lyons : Yeah, thank you. Operator : Thank you. Our next question comes from Kai Pan with Morgan Stanley. Your line is open. Kai Pan : Thank you and good morning. Dinos Iordanou : Good morning. Kai Pan : Do you see any potential impact for the second quarter cats? Marc Grandisson : The second quarter’s cats, yeah, I mean we have some reported losses. I don’t know how big the impact is going to be. Mark, you have more of a feel for that? Mark Lyons : Right, as you know a lot of the stuff is pretty fresh. It just happened. And it is a series of events, it is not a single event. So you can appreciate that we're still accumulating some of that. I think from a 10,000 foot view down it's more likely that there is insurance exposures, then reinsurance exposure out of our UK operations we think. But our view at this point Kai is that across all of those aggregated together, it will still be contained within our cat loan. So we don’t see anything unusual in that regard emanating from it. Kai Pan : Okay. What's your sort of cat loans assumptions. Mark Lyons : Our cat loan would be just shy of 40. Marc Grandisson : 40 a quarter, 40 million a quarter. Kai Pan : Okay, that’s great. And then stepping back on the mortgage insurance, couple of years ago, Dinos, you mentioned that these could be coming in the third of leg of the stool, but looking back at the premiums it is only less than10% of your overall premium, but if you look at the underwriting results it is more than 20% now, so it’s very meaningful. I just wonder were the growth in these markets faster than your other two segments or even sort of like exaggerate or basically both your underlying margin as well as ROE will be growing faster than it has been? Dinos Iordanou : You got to look at it from a lot of different perspectives, even though premium is not the right measure for mortgage insurance, because the accounting model is totally different the way the business comes in is totally different. I write a mortgage today and I'm going to be receiving premium over the duration of that mortgage usually seven years or so. So you got to look at it from capital consumption and you got to also look at it from the return point of view and yes I think we're on pace based on what we wanted to create a third revenue stream for the company and a third earning stream for us. And I wouldn’t be surprised that depending what happens on the P&C reinsurance that from an earnings point of view they might be even more than one-third. They might go to 40%, 45%. On the other hand, P&C concern in a couple of years and it will be - we don’t - we do look at it from a risk management point of view as to how much exposure we have in each one of the sectors and do we feel comfortable with that vis-à-vis our balance sheet or do we need to buy reinsurance behind it or bring our capital providers into it. We know we are close to any of those decisions. We believe that we still have a lot of room to grow on the mortgage business. Mark, you want to add something. Mark Lyons : The only thing I would say in terms of creating a third leg in the sense of very sustainable and profitable return on a return basis I think we have accomplished that and we're really looking towards more of that in the future. From that perspective we are not really getting into the discussions as to how much it could be, would be. In the end we're writing and looking at what see every day and we are very pleased right now and I think we've achieved at least establishing has taken a ground and creating that third flow diversifying flow I would add to our core P&C reinsurance and insurance. So we're pleased with that. Dinos Iordanou : Look, I think Mark went on to how little cat we write today versus what we wrote four or five years ago. Things might change, but we always have - sometimes we shrink in areas that I don't like to shrink, but if there is no return why be in it. Other times you got to limit what you write because you are exceeding your tolerance from a risk management point of view. I can tell you right now on the leverage, on the cat business, I wish the market was better for us to write a lot more in the cat area and maybe one day will be again and we will be up utilizing quite a bit of capacity in that area. So that’s the kind of thinking that goes through our heads. First if it profitable let’s write more until - we got a guy called Chief Risk Officer. He is another actuary, Francois, who rings the bell sometimes and he says - he is nowhere ringing any bells yet because our risk tolerance in every sector is well within what like to have. Mark Lyons : Kai, I would just like to tie it together that commentary with on managing the cycle and exposure with. The fact we had $4 million of cats in the first quarter if we hadn’t reduced our volumes, 71% since 2012, we probably would not be able to report $4 million, so it’s got income statement aspects, price return aspects and balance sheet risk management. Kai Pan : Just to follow up on the risk management, this might be a high class problem for you guys. If the mortgage become a meaningful portion of your overall profit pool because of different accounting like a treatment basically you cannot smooth it out for example booking reserves, do you worry about sort of volatility to the earnings. Dinos Iordanou : There is still things that bring volatility to any book of business including mortgage. One is what I would call my core decision, that’s the underwriting decision that we control is within our hands, so we - and then the other volatility is macroeconomic changes, very high unemployment, which we monitor and see which direction. I would assign two-thirds on the micro and one-third on the macro and at the end of the day in our quarterly risk management evaluations and everything we do, we will look at those parameters to make sure that our compass is pointing us in the right direction. Mark Lyons : Kai, lastly because I want to make sure even though you phrased the question. The accounting model as much as we criticize it, has nothing to do with our risk management evaluation. We project that to ultimately - I think there are PC lines, so we make persistency assumptions, claims, emanating from possible future delinquencies that are performing loans now and so forth. So just because of the accounting model flaws it doesn’t mean we follow that in our risk management evaluation. Dinos Iordanou : And have a stress test model we want assuming certain economic conditions where the housing market might go, where unemployment might go et cetera and where interest rates are going to go. And then based on that, we see where we are we with our book and where our book is going to be. Kai Pan : That’s great. Lastly on the buybacks now trading at - you bought back around 1.3 times for the first quarter of book value now trading at more than 1.4 times, is that out of your comfort zone? Dinos Iordanou : Well, I mean if you ask me if I am trading well, with your assumption no, I still think I am cheap, but that’s a CEO talking his own account, but having said that we are very disciplined into when we put capital to work, independently we are going to buy our own shares or we are going to buy something else. It’s got to be within that three year or so of tolerance that we got to recover anything we pay above book value and that’s what’s been guiding us both in - we try to invest in third parties or we are trying to invest around stock. So in the - that’s basically what we are. Mark Lyons : And Kai I applaud your five-part question. Kai Pan : Thank you so much. Operator : Thank you. Our next question comes from Jay Cohen with Bank of America Merrill Lynch. Your line is open. Jay Cohen : Thank you. Just a couple of questions. The first is, Mark, maybe just to make our lives a little bit easier the reversal of these bonus accruals, can you actually give us the dollar number and where the location? Mark Lyons : It was roughly 6 and change distributed all over actually. Dinos Iordanou : It was all three units and corporate, it was, call it, $7 million. Jay Cohen : Okay. Next question I guess I'm looking for a little bit of guidance or help here. There is some line items within the - Dinos Iordanou : We don’t give guidance. Jay Cohen : Call it help then, not guidance. Dinos Iordanou : Okay, all right. Jay Cohen : For a non-actuary, not even reformed how is that? Certain line items within mortgage insurance will jump around pretty dramatically quarter to quarter and you are looking specifically at the acquisition expense ratio. It’s ranged from 33% to 13% just in the last six quarters. Any sort of range that you can put that in that we should be thinking about? Dinos Iordanou : Well, on the traditional mortgage insurance what we do in Arch MI and Walnut Creek is steady. It’s your salesforce every quarter et cetera. Those number fluctuate on reinsurance transactions and on risk-sharing transactions. The course with risk sharing is it's very, very small because we have a small unit, a couple of people that we review those transactions in the home office and then they - and Mark and I when we and Andrew Rippert who got approve all those we don’t allocate our stuff into it. It’s at a corporate level. Marc Grandisson : The early business we had in mortgage were largely mortgage reinsurance contracts and transactions and we migrated towards more of a mortgage insurance profile and that explains the ceding commission on reinsurance treaties right now on mortgage base are in the 28% to 35% range and we are not doing many of those or any of - at least not new as we speak, right. Jay Cohen : Got it. So in quarters where you have a big reinsurance transaction, the acquisition expense ratio will look a little lower? Mark Lyons : This is assumed, not ceded. Marc Grandisson : Correct, yeah assumed. Jay Cohen : Because I am looking at like this quarter the acquisition expense ratio within mortgage segment was quite low and you did a large deal, maybe I will take it offline with Don after? Dinos Iordanou : No, we did another big reinsurance deal. Marc Grandisson : No. Exactly, I am not sure what you are talking about. Jay Cohen : I thought you guys did a sizable deal in Australia on mortgage reinsurance. Dinos Iordanou : So that's not a reinsurance transaction. As Mark said it’s really - it’s reinsurance in the legal sense of a terms, but we are doing 100% of really flow business. And as Mark alluded to that premium is earned over a very long period of time and the earned premium is actually very small as we speak. Even though the acquisition there would be high it doesn’t really flow through the balance sheet or the income statement as we speak. It will take time to get there. Jay Cohen : Okay, got it. And those are my two questions, so thanks for the information. Dinos Iordanou : Okay. Operator : Thank you. Our next question comes from Charles Sebaski with BMO Capital Markets. Your line is open. Charles Sebaski : Good afternoon. Thanks for getting me in. I guess one follow-up on that Australian transaction. You say it's going to earn in over a long period of time, so despite the $43 million, we shouldn't see much effect on earned premium from that going forward for the next four or five, six quarters? Mark Lyons : Yeah, it's exactly right. I mean just picture to just make things in perspective. Picture every month being $1 million single and then those singles, each of those $1 million has to be earned over six, seven years. So it’s - the written recognition is going to be a lot faster than the earned recognition. Charles Sebaski : Okay. Also on mortgage, has there been any activity on GSE risk-sharing over the quarters, is there a pipeline or anything or is it kind of stagnant until something pops? Just curious what the outlook looks like for that? Dinos Iordanou : No, there is activity and there is a list of transactions that are coming down the pike. Marc, you have the detail on that or. Marc Grandisson : Actually in a quarter there were I believe three transactions I believe. There were three transactions in the quarter. It is actually a calendar Charles that they are going to - there is a projection for the year that the GSE share with us. We are not sure we are supposed to say anything but you could track that they have - they are on the pace to do from our perspective now two to three a quarter for the remainder of the year. So we've done three this first quarter and are working on some as we speak as well. Charles Sebaski : Excellent. And then finally on the reinsurance, would appreciate your guys take some commentary in the market that the changing landscape in reinsurers means that a smaller panels of reinsurers mean you have to stay at the table, maintain business. You guys are being contracting. Do you believe that there is risk that over time you need to maintain some particular level of profile with cedents or can you keep contracting and still get back in opportunistically. I guess I'm trying to understand the - Dinos Iordanou : Listen, it is a great question. At the end of the day we have good ratings, good paper, we can be good partners, but I am not there to do it on a just relationship basis and not have a return. My responsibility is to have returns for my shareholders. I am not going to put that capital to work out of disadvantage on the hope that some future I am going to make some money. If the deals make sense for us and our cedents will do them, if they don’t, we don't and we will look for something else. This is a big market and we are still writing over $1 billion worth of reinsurance, maybe not all of it is what I would call the traditional quarter shares for large clients et cetera, but we find little things here and there, mixed things here and there and we do it. Our people - believe me, they are working harder today than in a good market, because to find these small little nuggets, they got to process a lot of ore, so they are shoveling a lot. At the end of the day, that's our approach. We don't believe that we have to give our pen away through just purely, we ought to be making relationship only decisions. Yes. Relationships are very important. We try to be as service-oriented as anybody else with our clients, give them our perspective about the market and pricing, we do underwriting audits, et cetera, we share all that information, but we got to do a transaction that it has adequate returns for us, otherwise, we won't do it. You run the reinsurance. I shouldn't be speaking on your behalf. Marc Grandisson : The one thing I will tell you about our reinsurance portfolio is it is not really the same as Mark alluded to, the same portfolio that we had and when we started. I think a lot of what we've been able to create in the reinsurance side, which sort of mirrors what has been done on the insurance side is we try to get as the - not controllable, but as somewhat protected or the line of business that has a little bit of stickiness to it, more stickiness to it, because it needs more knowledge or more expertise. Property facultative is a great example of that and in that segment, I think we are still very active, finding ways to grow and actually do more and be more relevant for our clients. So we’re not behold into the large placements as Dinos mentioned, which is a good place to be. Operator : Thank you. Our next question comes from Meyer Shields with KBW. Your line is open. Meyer Shields : Thanks and good afternoon, everyone. Really quickly, the mortgage insurance operating expense number went up sequentially. I wasn't expecting that. Everything else was phenomenal, but is that the new rent rate? Mark Lyons : No. As Dinos mentioned, it's a segment, the segment made up of pretty disparate operating expense contributors. Clearly, until we hit scale on the US MI acquired piece, that’s putting pressure on it. The mixture of that with GSEs where the OpEx is marginal at best. And the reinsurance, again depending on the structure of it, it really comes down to mix, I would not read in anything to an incremental change quarter-over-quarter. Meyer Shields : Okay. Are you discussing the dollar amount or the percentage? Mark Lyons : Specifically, both, but mostly the ratio. Meyer Shields : Okay. Thanks. And then on the insurance segment. I guess you've talked a lot about a shift towards smaller account low volatility, is that going to have an observable impact on either of the acquisition expense ratio or the loss ratio, that mix shift? Dinos Iordanou : Well, I mean this shift has been happening now for five, six years. We didn't divert to that. The largest initiative we have was just about $160 million worth of business is our binding authority business and that has a little higher expense component. It comes from binding authority wholesale agents and in essence, they do a lot of the work. It's all electronic, they use our systems, they price, pricing algorithms, et cetera, but they do all the input and they issue the policies. Our system is so good that you can bind and issue a policy within 24 hours in the agent's office. So it has a little bit of a higher expense. Marc Grandisson : Yeah. I would also say, yes, we have seen some marginal improvements, just in the past quarter, 30 bps down on the net acquisition ratio, just remember premium taxes are in there too, and when you go from a harder to a softer market, it tends to become more admitted than non-admitted, you get a little bump there, everything else being constant, but the biggest thing that you should keep in your mind is as we move to lower and have moved to lower volatility businesses, they come with a higher acquisition cost and a lower loss ratio. So the fact that we have a higher proportion of higher commission oriented businesses, ye the net aq is continuing to go down shows you the leverage power of our reinsurance sessions with increased ceding commissions. It's offsetting and sometimes more than offsetting that shift, mix shift towards higher aq businesses. Does that make sense? Meyer Shields : It does. I'm not contesting it, it was interesting a lot of competitors have talked about lower volatility business having a higher loss ratio. Mark Lyons : Well, remember we are after volatility containment. You can cede a lot, what's left is still - especially if it is quota share, it’s still highly volatile on its own, you're getting ceding commission overwrites and you're putting gain into your income statement right away, but what you still have left is volatile. We’ve moved more towards, as Dinos said, smaller accounts and small policy limits to deal with those, but we keep 100% of that. Meyer Shields : Okay. Now that helps. Are the ceding commissions that you are seeing in reinsurance the same as you’re benefiting from on the insurance side? Marc Grandisson : Yes. The answer is yes. Mark Lyons : It's pain on the one side and there is gain on the other side. The market is phenomenal. Operator : Thank you. Our next question comes from Ian Gutterman with Balyasny. Your line is open. Ian Gutterman : Hi. Thank you. I guess first, Marc, you talked earlier about growth in UK motor and I think a number of others have talked about that. Can you just talk a little bit more about sort of what exactly that business is and what's appealing about it? I guess I have ancient bad memories of that causing trouble from time to time? Marc Grandisson : Yes. And you're quite right, it is very interesting and very volatile if you're not careful, but we have a good relationship with one big originator in the UK and they’ve been a partner of us for a little while and we have been able to maneuver through the cycle with them - alongside with them and we were seeing rate increases over the last three or four quarters I would say and we were able to seize on the opportunity and give them what we think are appropriate reinsurance terms to be partners with them on a going forward basis. In addition to this, the excess of loss in the UK has also gone through a tough time in terms of a lot of changes in the rate level and we were also able to take advantage of that. So it really is a reaction to echo what you just mentioned to the fact that rates have been increasing and improving, and as I said in my comments, and they’ve have increased enough so that we believe that returns are there for now for us to take advantage of it. Ian Gutterman : Got it. And so, you're doing XOL then? Marc Grandisson : As well. We are doing both. Ian Gutterman : Got it. And are there loss caps on those to protect you or is it just, you can… Mark Lyons : [indiscernible] and I'm not sure I'm comfortable sharing that with you. Ian Gutterman : That’s fair. Okay. I guess maybe what I was going to ask is, I always see that being a long-tail business and just are there ways if you see it deteriorating is just you won’t renew it the next year, are there other things that you can do to protect yourself five years down the road, it goes bad? Dinos Iordanou : Are you talking about the motor business or the XOL loss? Ian Gutterman : I guess that's probably more on the quarter, right, but I mean, I guess it could be either. Dinos Iordanou : Well, I mean, no. The quota share, you can adjust very quickly based on your underwriting audits and how you’re monitoring rates, don't forget. We do a lot of underwriting audits and we continue to watch the pricing on a quarterly basis. Now, the biggest bet is the excess of loss bet, because you get that wrong and it's not as easy to correct, you can get out later on, but sometimes it might take you a couple of years, or three years before you recognize that you didn't get the pricing right, that's more. But that's not from a premium revenue point of view is not as big as the quota share. So we want both, believe me. Ian Gutterman : Okay, understood. I was just curious because I was asking a lot of people adding to it. On the MI, I guess a couple of things on rates, one is not that everyone has lowered their rate cards for your non-RateStar business or is this from rate card I think in certain sales looks half market, do you feel you need to adjust your rate card to match everybody or for those customers who want to keep that business? Marc Grandisson : We actually - we just issued our new rate card in April 7, but we are not matching everyone. So there is no plan right now to do anything else. Ian Gutterman : Got it, okay. I missed that. Okay. And then on the RateStar business, my sense is and again, obviously, I don't know exactly what your rates are, but it feels like conceptually a lot of what the competitors did to change your rate cards felt like it was trying to get closer to where you and UGC are, is that fair that maybe the advantage of RateStar is a little diminished? Dinos Iordanou : I don't know what drove the actions because you’re mixing apples and oranges, right. At the end of the day, if you have a pool of risks that on average gives you a good return ROE and now through a selection process, maybe one or two competitors, they might be taking out of the pool certain mortgages for a slightly less price, but much better risk characteristics. That means the remaining part of the pool needs to be priced a little higher than the past, not a little lower. So adjusting the rate cards and not going to look at exactly what adjustments they make, you might be getting into adverse selection, so to speak. At the end of the day, the problem with the rate card is a simplistic way to price. Just credit score and LTV alone is not the only thing that is going to tell you as to how that mortgage is going to behave, there are other parameters around and I think that's where our advantage is. Our advantage is we introduce other factors to allow us to more appropriately price that business. Marc Grandisson : But clearly Ian to your questions more directly, I believe that going to a more refined rate card is sort of one step for most of them to get to that direction. There is recognition to Dinos’ point that the rate card has been historically too generic in nature. Dinos Iordanou : And it might die within a year or two and it might get into more as to what we do in all of our other business, on the P&C, I don't care if it’s auto or homeowners or lawyers and accountants, et cetera. We don't have one or two rating parameters, we have multiples and then you look at it from many different perspectives to put a price. So I think the mortgage insurance business is moving in the right direction in our view. Ian Gutterman : For sure. And then just last one on that topic is if you were to look at a sizeable acquisition in that space that would take you over the one-third mix, can you just talk about sort of how you evaluate metrics, meaning obviously, we can all look at EPS accretion, but what are the different things you look at in addition to just EPS and is it ROE, is it your PE, I mean, I think one of the concerns that people might have is those companies trade at lower multiples, so if it becomes too big a part of your mix, it might hurt your evaluation. Just how do you think about sort of the combination of accretion versus valuation versus risk returns? Dinos Iordanou : You know that old saying, in the short-term, the equity market is a beauty contest and in the long-term is a weighing machine. That's Buffett's analogy. As long as I’m producing good profits and I’m adding, I don't worry about what the Street valuations might be because how do you explain one competitor we have who is trading at 1.7 times book, right, in the MI space versus another competitor we have, who is trading at 1.1. Well, maybe one has legacy business and the other one doesn’t, et cetera. So I'm not worried about that because the mortgage insurance business produces very good ROEs to demand at higher multiple than the P&C will right now. And we only have one marker out of the seven who has the purity in only having post crisis business and the market is rewarding them with 1.7 multiple. So I don't know, our actions is not as to - about the market multiples. Our actions is, we’re producing a good return for the capital that we are committing to a particular sector and is the ROE acceptable, that's what drives us, that's the key driver in what we do. Marc Grandisson : Ian, for an insightful guy like you and the others, it would wind up being that ACGL would bring up the mortgage multiple rather than the mortgage brings down ACGL. Ian Gutterman : The reason I asked is because if it's something big, I assumed you’d have to use some stock, so that was sort of the context I was thinking about, maybe a better way to say is what things do you historically haven't done anything as required in this stock, is it sort of what are the things you evaluate and deciding whether stock makes sense in a merger? Mark Lyons : Well, let me just on that one, is I mean, we’ve talked about this before on tangible book value hit, that's not new as to how - when we’ve repurchased our shares, does that hit, what's the recovery period, that is still an in force principle that we will look at. And that’s one of the criteria, not the only criteria, but that is certainly one of them, but don't lose sight of the prior discussion, which is on the risk management side. So EPS is a no-brainer. That's impact. We don't want to impair the balance sheet, number one. So what's the recovery of it and the risk management aspect, we wouldn't go into it if there weren’t higher ROEs to begin with, but defensively we don't want to put any dents in the balance sheet. Ian Gutterman : Got to make sense. What's for lunch today, Dinos? Dinos Iordanou : That's your best question. Operator : Thank you. Our next question comes from Mark Dwelle with RBC Capital Markets. Your line is open. Mark Dwelle : Yeah. Hello, thanks. Just one follow-up question, something that was discussed on the Australian mortgage transaction, kind of what you said kind of confused me, is this a recurring revenue transaction which is to say, we’ll see another one of 40 million or whatever the number will be next quarter and then continuing thereafter? Or was this a one-off one shot deal? Marc Grandisson : No. Like I said, we’re sorry for - I just want to make sure it’s clear to everyone. This is really like business that was produced in that quarter, that relationship is still existing, it’s been around since last year. So yes, I would expect depending on the level of production that our partner will do in Australia, we could be around that same level as we continue producing at same level. Dinos Iordanou : If they originate the same level of mortgages, they will flow through us and it continues and it will continue as such until they can - there is a termination by either party on the relationship. Mark Dwelle : So this puts in place really a fairly, I’m going to use the word permanent or at least hopefully long term kind of full flow of premiums that should last for at least on an earned basis for quite a long time? Dinos Iordanou : Yes. That is correct. Yes. Operator : Thank you. Our next question comes from Michael Nannizzi with Goldman Sachs. Your line is open. Michael Nannizzi : Sorry for the follow up. Just one last one here, back to the MI and Marc maybe your comments on the expenses, I mean I’m looking at premiums doubled year over year, acquisition ratio is in half dollars or down notionally, other operating expense, the ratio is flat, and I understand there was a reinsurance transaction that may be obscuring some of that trend, but I would generally think that the ratio of dollars, it would seem to be more of fixed in nature, the operating expenses, that ratio would improve and that the acquisition ratio would remain relatively flat, again absent, some adjustments, I’m just trying to get some understanding of what that should look like and I understand they’re like three different businesses, they all operate differently, the stackers, expenses are low and things like that, but I mean would the line that’s growing this quickly, I feel like just missing the mark on how to think about, should we be looking at expense dollars relative to written premium dollars as opposed to earned during this growth phase, just any guidance or help, not guidance, but any help in how to think about would be great. Marc Grandisson : Well, I think written is a better way. It’s more of a statutory view, but it’s - it still makes more sense. We talked about hitting critical mass in steady state at some point, but also Michael think about how market share is measured, it’s measured on NIW, which is effective new premium. But that’s new exposure, the premium is comes in at a slow build up rate overtime. So if we get to a reasonably larger market share in two, three years, that doesn’t mean that overnight, the whole in force book is where it needs to be. That means the marginal amount in 2017 that we hit market share of X is additive to the portfolio. In PC world, we have new business and renewal business. Here, you have our new business. You have new business and in force. So all you’re doing is adding on to the heap with a new NIW that you’re getting. So this is a long-winded answer to say, you got to be patient, the OpEx dollars are really not going to grow as much. You got to wait for the revenue to catch up with that and it will. Michael Nannizzi : Okay. So OpEx doesn’t grow as much. And the acquisition expense, I am guessing that was impacted somewhat by this Australia transaction and the lack of reinsurance transaction you mentioned that you have in the prior year, but is this sort of teens level of acquisition expense, I mean is that given the mix of business you have, is there anything in there that we need to peel out in order to think about the forward. Marc Grandisson : No. I think it is the mix. The mix will change by quarter. It’s by the way, it changes in the reinsurance segment, it changes in the insurance segment. By mix, the changes, the reported acquisition expense. OpEx is - the questions you asked are applicable to any of our business segments, but acquisition can fluctuate. So I’d say, no, it’s a mixed bag quarter by quarter. Operator : Thank you. I’m showing no further questions. I’d like to turn the call back to Mr. Dinos Iordanou for closing remarks. Dinos Iordanou : Well, thank you all. A little late lunch today but I’m going to enjoy the keftethes along with the team. We are looking forward to seeing you next quarter. Operator : Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,016	3	2016Q3	2016Q2	2016-07-28	1.456	1.447	1.408	1.415	null	16.67	16.21	Executives: Constantine Iordanou - Chairman and Chief Executive Officer Marc Grandisson - President and Chief Operating Officer Mark Lyons - Executive Vice President, Chief Financial Officer Analysts : Kai Pan - Morgan Stanley Jay Gelb - Barclays Capital Michael Nannizzi - Goldman Sachs Quentin McMillan - Keefe, Bruyette & Woods, Inc. Josh Shanker - Deutsche Bank Securities Amit Kumar - Macquarie Group Jay Cohen - BankAmerica Merrill Lynch Brian Meredith - UBS Ian Gutterman - Balyasny Operator : Good day, ladies and gentlemen, and welcome to the Arch Capital Group Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the Federal Securities laws. These statements are based upon management’s current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company’s current report on Form 8-K furnished to the SEC yesterday, which contains the company’s earnings press release and is available on the company’s website. I would now like to introduce your host for today’s conference, Mr. Dinos Iordanou. Sir, you may begin. Constantine Iordanou : Thanks, Abigail. Good morning, everyone, and thank you for joining us today for our second quarter earnings call. We had a good quarter on a relative basis, and I might say it was very acceptable quarter also on an absolute basis. In today’s market, we are emphasizing to our troops underwriting discipline, execution, and risk management in order to preserve capital and maintain balance sheet integrity. We continue to believe that our strategies of diversifying revenue streams and actively managing the allocation of capital will allow us to better navigate in this environment, which is challenging for all of us. As reinsurance returns have narrowed and as you can see in our second quarter financial statements, we are fortunate to have our other business segments, the primary property casualty segment and the mortgage segment contribute more meaningfully to our operating results. Our reported combined ratio moved to a bit under 90% for the second quarter, as catastrophe losses are at 4.1 points to our combined ratio. Loss reserve development remained favorable in each of our segments, which in the aggregate have reduced our combined ratio by nearly 9 points. There were no noticeable changes in the property casual operating environment from last quarter. There are some signs that reinsurance terms, especially ceding commissions may have bottomed out. In our insurance segment, we saw a slight deterioration in rates across some sectors, particularly in the excess capacity layers and short tail areas. But grades were generally stable in most of the lines, while the mortgage insurance environment remains very healthy. Marc Grandisson will give you more details on the segments in a few minutes. On an operating basis, we produced an annualized return on equity of 9%, while on a net income basis, we earned an annualized return on equity of 13.2% for the quarter and a 7.9% on a trailing 12 month basis, which is a better measure to see a long-term profitability. Remember that net income movements can be more volatile on a quarterly basis as these earnings are influenced by changes in foreign exchange rates and realized gains and losses in our investment portfolio. Net investment income per share for the quarter was $0.57 per share, flat sequentially from the first quarter of 2016. Despite volatility in the investment and foreign exchange markets in the second quarter of 2016, on a local currency basis, total return on our investment portfolio was a positive 163 basis points. Once we include the effects of foreign exchange, total return was a 127 basis points in the quarter, in dollar terms. Our operating cash flow was $153 million in the second quarter as compared to $232 million in the second quarter of a year ago. Mark Lyons will discuss the cash flow and other financial details in a few minutes. Our book value per common share as of June 30, 2016 was $52.04 per share, a 4.4% increase from the first quarter of 2016. While some segments of our business have become more competitive, we believe that group-wide and on an expected basis, the present value ROE on the business written in the 2016 underwriting year should continue to produce ROEs in the range of 10% to 12% on allocated capital. Before I turn the call over to Marc Grandisson, I would like to discuss our P&Ls, which is essentially unchanged from April 1. As usual, I’d like to point out to you that our cat P&Ls aggregates reflect business bound through July 1, while the premium numbers included in our financial statement are through June 30, and that the P&Ls reflect a net of all reinsurance and retrocessions. As of July 1, 2016, our largest 250-year P&L for a single event remains in the northeast at $495 million, or about 8% of common shareholders equity. Our Gulf of Mexico P&L at $434 million and our Florida Broward County P&L increased very slightly to $392 million. I kept my promise to be brief, and I will now turn it over to Marc Grandisson to comment on market conditions before Mark Lyons discusses our financial results. Marc? Marc Grandisson : Thank you Dinos. Good morning to all. The insurance industry returned to an average net hole of cash losses in the second quarter with insured claims estimated in a $13 billion to $15 billion range worldwide. As you know, Arch underwrites globally and we will pay a portion of these losses. However, previous underwriting actions taken in both our insurance and reinsurance segments help minimize Arch’s exposure to these events. You may have heard us discuss cycle management in previous calls, but I feel its worth repeating today that our appetite for assuming risk is directly related to our ability to earn an appropriate margin. In our view, it’s not prudent to grow lines of business, where the expected margins are not adequate relative to the risk assumed. The reinsurance industry continues to face dual headwinds from low investment returns available in the market and underwriting margin compression as rates failed to keep up with loss trends in many lines of business. Our focus remains on deploying capital judiciously and carefully in the B and C space, but we are continuing to redeploy aggressively in our mortgage or MI segments, where returns are very attractive and above our long term goals. We remain bullish on this sector and believe that returns will remain above our hurdle rates for the next several years. Within the U.S. mortgage MI sector, we estimate that our market share of the primary new insurance written or NIW in the U.S. was in a 9% to 10% range in the second quarter, up from 6.4% in Q1, as Arch MI continues to gain traction in the bank channel. The acceptance of RateStar, our risk-based pricing module, is a primary driver of this growth, and we believe it will allow us to earn better risk-adjusted returns. In addition, we continued our market leadership in underwriting new US GSE risk-sharing transactions and continued to see good volume from our Australian primary insurance relationships. Our US MI operation increased its NIW to $6.4 billion during the second quarter of 2016, of which approximately 76% came through the bank channel. Over 80% of our bank channel borrower paid MI commitments by the end of the second quarter were obtained through RateStar. Our current return on expectations across our MI segment is in excess of our long-term ROE target of 15%. Let me turn now to our primary P&C insurance operation in the United States. Overall, we saw rate changes of negative 180 basis points this quarter versus a positive 20 basis points last quarter. We believe that we have mitigated some of that rate of erosion after consideration of our ceded reinsurance coverage. Most of our controlled or low volatility segments had great changes at zero to positive territory, while our cycle managed segments experienced single to double digit rate decreases. As I noted – as we noted, frequently our cycle managed segments are more heavily reinsured. Our UK operation is still pressured from a rate level perspective with an overall rate decrease across all our product lines of 4.6% this quarter. Our cycle management culture is a key factor in our strategy, and we are reacting accordingly to market conditions. Our net written premium was essentially flat, but we continued to realign the portfolio to work the more attractive opportunities in the UK. Globally, our insurance group continues to adjust its mix of business on a gross basis and also on a net basis, as we are able to buy reinsurance on favorable terms. Ceded premiums increased 5% in our insurance group this quarter over the same period last year. Areas of opportunity for growth in the insurance sector in the second quarter are in our construction national accounts, travel and alternative market lines. The vast majority of our growth came as a result of our ability to take advantage of the current dislocation in areas, where major players are challenged. In contrast, our executive assurance excess property and program businesses are areas where rate levels lead us to a more defensive strategy. Turning to our reinsurance group, which continues its strong performance, our teams are increasingly more selective, given conditions in their markets. Underwriting year returns in many of the traditional reinsurance lines are in the low single digits and some are even negative on an expected basis. Adjusting for one large loss portfolio transfer and the impact of the Gulf re-acquisition last year, our reinsurance net premium written declined by 2% for the second quarter of 2016 versus 2015. And with that, I will hand it over to Mark to cover the detailed financial results. Mark Lyons : Thank you Marc, and good morning, all. As – getting into the financial information, I guess, I will be the most verbose out of the three of us. So as was true on my previous calls, the comments that follow are on a pure Arch basis, which excludes the Other segment that being Watford Re, unless otherwise noted. I will continue to use the term core to denote results without Watford Re and the term consolidated when discussing results, including Watford Re. However, due to an all industries clarification issued recently by the SEC regarding non-GAAP measures, our earnings release now emphasizes GAAP measures as some previous tables and commentary that used to be in the earnings release have been shifted into the financial supplement. So please read them together. Various examples are, on page 7 of the earnings release we now show the reconciliation from net income to after-tax operating income, where previously it was reversed. The point being is that, you start with the GAAP measure and not the non-GAAP measure. We also on page 1 of the earnings release now present consolidated underwriting results that includes Watford Re rather than the core underwriting results that previously had excluded it. Lastly, the schedule showing prior period development and cat losses by segment, along with the schedule displaying the components of net investment income and investment total return are now on pages 21 and 23 of the financial supplement, respectively. So hopefully that provides a little bit of a roadmap. Okay, with that said, the core combined ratio for this quarter was 89.9% with 4.1 points of current year cat-related events, which are net of reinsurance or reinstatement premiums, compared to the 2015 second quarter combined ratio of 87.9%, which reflected only 1.9 points of cat-related events. Losses recorded in the second quarter from 2016 catastrophic events that of reinsurance recoverables and reinstatement premiums totaled $36.3 million versus $15.9 in the corresponding quarter last year, primarily emanating from US-Texas hailstorms and floods, Fort McMurray, Canada wildfires and earthquake events in Japan and Ecuador. This was a quarter that experienced a high frequency of cat events, yet the largest of these had less than an $8 million net impact to Arch. This result evidences our continued emphasis on proper line setting and the overall focus towards reducing our cat P&L exposure, given that in our view, current pricing does not adequately compensated for the exposure assumed in many cases. The 2016 second quarter core combined ratio reflected 8.9 points of prior-year net favorable development, net of reinsurance related acquisition expenses compared to the nearly identical 9.2 points of prior period development on the same basis in the second quarter of last year. This results in a core accident – a quarter combined ratio, excluding cats for the capital second quarter of 94.7% compared to 95.2% in the corresponding quarter last year. This quarter the reinsurance segment had two unique transactions that impacted the financial statement in different ways, both related to loss portfolio transfers. The first reflects the commutation of a pre-existing contract that resulted in recognizing $19.1 million of other underwriting income. However, this contract had been accreting approximately $1.5 million of gain a quarter. So the incremental impact is approximately $17.5 million for the quarter. This contract had been receiving deposit accounting treatment since inception since it did not pass risk transfer under GAAP. Since this gain shows up in other underwriting income, it is outside of the combined ratio. The second transaction involves a newly bound loss portfolio transfer with a long-term client, where we had familiarity with the underlying exposures This contract has sufficient risk transfer under GAAP and therefore received insurance accounting treatment. As a result, we booked this contract at approximately a 100% combined ratio and its impact has felt directly in the combined ratio. Furthermore, it covers the cedents net after all reinsurances thereby making this a frequency contract. That said, the reported calendar quarter of reinsurance segment combined ratio of 82.1% would actually be 79.4% without the impact of this new loss portfolio transfer. In addition, it results in a 7.7 point increase in the calendar quarter loss ratio with a five-point benefit to the expense ratio. Therefore totaling a 2.7 point worsening of the calendar quarter combined ratio over what it would have otherwise been. Now, getting back to our results for the quarter, the reinsurance segment 2016 accident quarter combined ratio, excluding cat was 98.4%, compared to 94% even in the 2015 second quarter. This quarter’s combined ratio reflected the impact of the loss portfolio transfer we just discussed, that contributed approximately $40 million of net written and net earned premiums, as well as the impact of a large marine attritional loss that had no equivalent in the second quarter of last year. Without the impact of these items, the accident quarter loss ratio was nearly flat over last year’s quarter. In the insurance segment, the 2016 accident quarter combined ratio, excluding cat was 96.3%, compared to an accident quarter combined ratio of 97.6% a year ago. This 130 basis point decrease was driven by a 100 bps in the loss ratio and 30 bps in the expense ratio with the loss ratio decrease reflecting a lack of the large attritional losses that we experienced during the second quarter of 2015. When one adjusts for this, the non-cat non-large attritional loss ratio was essentially flat quarter-over-quarter. The mortgage segment 2016 accident quarter combined ratio was 66.1% compared to 77.4% in the second quarter of last year. This decrease is predominantly driven by the continued expense ratio improvement in our U.S. primary MI book, due mostly to growth, along with beneficial mix changes towards DSE transactions receiving insurance accounting treatment in lieu of derivative accounting treatment. Regarding prior periods’ reserve development, the insurance segment accounted for roughly 6% of the total net favorable development in the quarter, and this was primarily driven by shorter tailed lines from the 2012 through 2014 accident years. With some contributions from longer tailed lines spread primarily across accident years 2003 through 2012 and partially offset by a large energy in casualty claim in the 2015 accident year after our Bermuda insurance operation. The reinsurance segment accounted for approximately 81% of the total net favorable development in the quarter, with approximately 70% of that due to net favorable development on short tailed lines concentrated in the more recent underwriting years and the balance due to net favorable development on longer tailed lines primarily from the 2002 through 2013 underwriting years. The mortgage segment contributed the balance of 13% of the total net favorable development in the quarter, which translated to a near 17 point beneficial impact to the mortgage segment loss ratio, primarily resulting from continued lower than expected claim rates from our U.S. primary mortgage insurance operation and from the quota share treaty covering the 2009 through 2011 book years as part of their original PMI and CMG purchase transaction. As discussed in previous quarters, almost all of this favorable development benefit is offset by the contingent consideration earn-out mechanism negotiated within the purchase agreement. This contingent consideration impact, however, is reflected in realized gains and losses and not within underwriting income. This quarter, the nominal payout cap within the contingent consideration mechanism was reached, which is 150% of the transaction closing book value. Effects will still be felt in future quarters, though, as we continue to accrete to the contractual payment date and the discount rate employed to account for increased certainty decreases over time. The overall core expense ratio improved by 180 basis points, but this was affected by the loss portfolio transfer referenced earlier. Controlling for this transaction, the core expense ratio improved by 20 basis points, driven by the continued improvement in the mortgage segment, expense ratio, and continued marginal improvement in the insurance segment expense ratio. On a written basis, ceding commissions achieved within the insurance segment quota share cessions improved 210 basis points over the second quarter of 2015. As stated last quarter, the growth in alternative markets business reduces this benefit somewhat due to the associated capital cessions. Core cash flow from operations was $153 million, as Dinos mentioned in the quarter versus $231 million in the second quarter of 2015. This reduction was caused primarily by higher losses paid, net of recoveries, and the timing of outflows associated with ceding more premiums this quarter versus a year ago. Core interest expense for the quarter was $12.4 million compared to $12.6 million in the first quarter and $4 million in the prior year’s quarter. The prior year quarter amount included a favorable adjustments for a deposit accounting transaction, which resulted in an $8.4 million reduction in interest expense in that quarter. As mentioned earlier, this deposit contract was commuted during the quarter. Our effective tax rate on pre-tax operating income available to our shareholders for the second quarter of 2016 was an expense of 5.9% compared to an expense of 3.9% in the second quarter of last year. This quarter’s 5.9% effective tax rate includes approximately 20 basis points, or $250,000 related to a true-up of the prior year’s tax provision to the estimated annual effective rate as of June 30. As always, fluctuations in the effective tax rate can result from variability in the relative mix of income or loss reported by jurisdiction. Our total capital was $7.6 billion at the end of this quarter, up 4% relative to March 30 – March 31. Our debt to capital ratio this quarter remains low at 11.7% and debt plus high represent only 16% of our total capital, which continues to give us ongoing financial flexibility. We continue to estimate having capital in excess of our targeted position. We did not purchase any shares in this quarter under our authorized share buyback program and a remaining authorization is approximately $446 million as of June 30. With these introductory comments, we are now pleased to take your questions. Constantine Iordanou : Abigail, we’re ready for questions. Operator : Thank you ladies and gentlemen. [Operator Instructions] Our first question comes from Kai Pan with Morgan Stanley. Your line is open. Kai Pan : Good morning and thank you. Constantine Iordanou : Hi, Kai. Kai Pan : Hi. These two loss portfolio transfer – transactions, can you give me more details about it for the one you commuted, what was the reason for that, and for the one you just booked? And so, how do – what attracted to you and deduce the other opportunities – similar opportunities? Constantine Iordanou : Well, the first one we commuted, we always try to keep very good relationships with our clients. It was a client request, they wanted. And we felt the terms of commutation were attractive to us so we accepted it. The second is, in the normal course of business, we always look for transactions and this was a transaction presented to us. We liked economics, so we did it. Mark, you want to add to it? Marc Grandisson : I would add on the second one, it was really as a result of being intimately very familiar with the book of business. It’s a client that we have known for many years and years under which the LPT is – the year it’s covering, we actually had underwriting risk alongside with that party as well. That came as a result of a, again, a request by the client to seek and improve their capital ratios, and that’s really a – this is why it’s driven – that’s why it’s driven by. Constantine Iordanou : Yes, it’s a capital relief situation here. Kai Pan : Do you see more similar opportunities? Constantine Iordanou : Yes, we see activity in that sector as a matter of fact. But – we don’t make predictions as to, are we going to do any or not, because I haven’t the faintest idea if they are going to happen. The instruction to our guys is, you look at them, you like the economics, we do them, we got the capital. If you don’t like the economics we pass. Marc Grandisson : Yes, and Kai, it’s always tough – it’s a long runway on those. Hit ratios are low, but we continue to see them and entertain them. Kai Pan : Okay, that’s good. On the MI side, the Australian reinsurance transaction, is that considered like a one-off, or is it a continual relationship, in fact, could recur? Marc Grandisson : This is an actual ongoing relationship. It’s a quota share of a primary insurance book of business. Constantine Iordanou : And it will continue until it gets cancelled. Kai Pan : Okay. Marc Grandisson : And it will continue until we gets cancelled. Constantine Iordanou : Until we both cancel – both parties agreed to, kai. Kai Pan : Okay. Are there additional like growth opportunity with that client? Constantine Iordanou : At this point we don’t perceive it. We have a very significant portion of their portfolio and we are sort of happy and very comfortable with that position. Kai Pan : Okay. Lastly, is on the – your REIT commentary in the insurance sector. It seems like it’s down like decelerates interim pricing decline. Could you give a little more color on the pricing dynamics there? And in this environment, how do you sort of manage your portfolio? It looks like your like core combined ratio actually improved in the insurance segment that you said mostly due to mix change? Will that be enough to keep the margin? Constantine Iordanou : Well, it’s a complicated question. Let me give you the strata. We don’t give you the granular performance on each one of the sectors for obvious reasons. You listen, but so are competitors, et cetera, so we are not going to tell them everything that we do. But it’s true in our comments that the aggregate rate reduction across the entire renewal group was about 1.8%, that’s a 180 bps. And then, you factor in some loss claims trends. I mean, that’s not a good market to operate. Having said that, we have sectors that were very defensive, because that’s where we are seeing the significant rate of reductions. I mentioned in my remarks property lines, excess both in our P&L, professional and liability lines with the capacity players and at the end, there’s no- it’s fewer supply and demand. There is no differentiation in the product, et cetera, and it’s under pricing pressure. We try to manage those down. And we try to put more emphasis on a small to medium size business that we have more control on the rating and also the quality of the risk, et cetera. Now, I’m going to turn it over to Mark Grandisson, because he runs the insurance group now. He runs all of our operations. And he is more granular in growth with these decisions as he does the reviews with the profit terms, et cetera, to give you a little more flavor. Marc Grandisson : Yes, the flavor of actually given in the remarks. I did mention specifically the controlled and low volatility business, which is a small to medium size, where we have more intimacy and more influence over what’s happening in the firm in pricing. We are getting flat to single-digit rate increases in many instances. The ones that are more cycle managed, more open market, a lot more competitive, a lot more commoditized, this one had the single-digit 5% to 7% rate decrease. So – and as I mentioned also in my comments, the cycle managed one is the one where we get a little bit more willing and working harder to buy reinsurance to actually mitigate those rate decreases. Mark Lyons : And I would just add on top, because Marc nailed it is the additional layer that we talked about the ceding commissions. So on the commoditized product lines, you manage your mix through increased reinsurance, and this is the environment you are getting – continuing those overrides that drops the bottom line and really help protect net income. Kai Pan : This is great. Okay. Thank you so much, guys. Constantine Iordanou : Thank you. Mark Lyons : Thank you. Operator : Thank you. Our next question comes from Jay Gelb with Barclays. Your line is open. Jay Gelb : We’ve heard some other reinsurers and perhaps even some of the brokers say that they view the reinsurance market as bottoming? Would you agree with that? Constantine Iordanou : In general I do. Marc, do you want to add? Marc Grandisson : Yes, my comments on this is – I will be careful, because we don’t know again the future. There are certainly signs that reinsurance markets are pushing back on markets like property cap for instance. There is some layer that had to be repriced in the second quarter, because there was some – too much aggressiveness in trying to get the price down. So there is some pushback, it’s still going down, but not to the same level. In addition we have – we also have pushbacks from the market on getting increased ceding commissions. We are successful in getting a couple of points which Mark and Dinos mentioned before. But this is layering around 1% to 2% increase, but there is a lot of push to get more than that, so there’s still a lot of pushback from market at this point in time. What I tell our troops is, again, we are going to react to whatever we see in the marketplace. It could be a bottom. It could be a plateau before more damage is being done. It’s really too early to tell. Constantine Iordanou : Yes, but you see shortfalls, that’s an indication that there is a pushback. If you can’t fill the placement and you have to go back with filling a shortfall. So there is signs that we are hitting the bottom. Listen, where interest rates are, where investment income is, you better make it on the underwriting. And if you are not making it in on the underwriting, you better pack it in and go and open a Greek diner, you make more money doing that. Jay Gelb : Okay. The next topic I want to touch on is the mortgage insurance business. And based on our model looks like the underwriting profits from that could double this year compared to 2015, driven by the strong top line growth and improving margins? How big of a business can you envision this being over time? Constantine Iordanou : First, you’ve two questions. One is you are projecting earnings. I don’t think your comment is actually totally correct. You have to understand that in our MI book, we have US MI, we have the Australian MI, which is more steady. We have GSEs, which is more steady. And then we have some early transactions. We had a couple of reinsurance transactions that did declining, because they are maturing. They are vintage 2012 and the duration is six or seven years, so towards the end of those. So I would say, yes, the contribution of earnings is going to grow, but it’s not going to be exponential the way that you put it. Having said that, the second part of your question is, do we like the sector? And, yes we do, and we are willing to contribute more of our capital, but we don’t want it to be totally the dominant exposure that we have. In the way we think about it, we want to have a balance over time between reinsurance, insurance, and mortgage. Having said that, in different parts of cycles, depending on which segment is the most attractive, the earnings may be coming heavier in one area and lighter in another area. But that’s the beauty of allowing us to navigate and allocate capital into our three businesses. At the end of the day, we will not be a 100% mortgage company. We won’t be a 100% reinsurance company, and we won’t be a 100% P&C company. But the market will determine, which sector is a little bigger or a little smaller for us, because at the end, we are only chasing margins. And if you are chasing earnings, you’ve to go where the earnings are. Jay Gelb : Of course. On a mortgage insurance front, do you envision it being organic growth that drives this going forward, or is our attention in acquisitions in that space? Constantine Iordanou : We are interested in everything. I mean, if we like a sector – but our history has been, let’s make sure that we have the right strategies that we can always grow organically and depend on that, because acquisitions, sometimes they happen, sometimes they don’t. And at the end of the day you don’t have – we don’t have a strategy that’s focusing on acquisitions for growth. Our strategy is focusing on, let’s see, if we can build it organically. But we are not excluding anything that – it might be thrown our way and is attractive to us. Marc, do you agree? Marc Grandisson : I do, yes. Jay Gelb : Thank you. Constantine Iordanou : Okay. Operator : Thank you. Our next question comes from Michael Nannizzi with Goldman Sachs. Your line is open. Michael Nannizzi : Thank you so much. One question Mark, just on the reinsurance business or the LPT specifically is, it seems like all of that was earned in the second quarter? Should we assume that there really isn’t a durable impact for the remainder of the year either in terms of top line or losses? And then secondly, should we assume that it renews again in the second quarter next year and we should see that lift in premiums again when that happens? Thanks. Mark Lyons : Good question. To both of those, I used to view them as unique special events. Not recurrent and really not earnings that was fully – virtually fully earned right away. So, consider it a quarterly outlier. Michael Nannizzi : Okay, so no –not expected to recur again? Constantine Iordanou : There is no underwriting gain or loss. We booked it out at 100 combined. Michael Nannizzi : Yes. Constantine Iordanou : And at the end of the – that’s more an incremental on the flow, that is going to – it’s going to be there. But there’s – for all intensive purpose and for your model, ignore both of them. Michael Nannizzi : Yes. Mark Lyons : I mean, Michael, is it possible that a year from today we reevaluate the ultimate as favorable or what have you? Sure. Don’t think of it as a quarter by quarter impact. Michael Nannizzi : Got it. Okay, great. Thanks. And then it looks like Watford premiums were down year-over-year? I was just curious, because it looked like cessions in the segments were up? So does that just mean that you’re ceding business to non-Watford entities or how should we think about that? Mark Lyons : Well, I think, you’ve got – Marc already talked about it. If you’re looking at overall cessions, you have the insurance group continuing to cede a little bit more. Michael Nannizzi : Yes. Mark Lyons : I think in totality, it was roughly the same nested gross at an ACGL level. But the mixture between – you still got reinsurance guys are doing some retrocessions, but I think it’s mostly leveraging reinsurance in the – from the insurance sector side. Marc Grandisson : There’s not much change in the buying as well as on the reinsurance side as well, it’s very consistent. Michael Nannizzi : Got it, okay. Just the net, like the dollar amount of cessions in the businesses was higher whereas the net premiums in your Other segment, which I assume is all Watford were down? So I was just curious if your strategy in terms of how much business you are placing with Watford was changing, or there’s some other distortion in there? Constantine Iordanou : Let me take you back and then I will turn it over to Marc. At the end of the day, independently we are shipping premium out to third-party reinsurance or to Watford, it’s got to make economic sense. So we are not going to – if I can get it cheaper in the open market, I’m not going to give it to Watford just to maintain volume. I’m going to go and buy it from where is the most attractive place for me. Having said that, I don’t think we have changed anything strategically as to what we would do with what. Our responsibility with Watford is to be the underwriting managers and underwrite business that at the end of the day it’s going to give them flow as close to zero as possible. And when we find those opportunities, we do it and we will give it to them. And even the business produces returns that are acceptable to us, we won’t see it. We will keep it at Arch. So our philosophy and strategy has not changed. Michael Nannizzi : Okay. Got it. Thank you. And just lastly, just back to mortgage for just a second, written premiums, both gross and net have increased nicely, guessing a lot of that is the GSE business, I mean, all of the business, but GSE seems to be growing more – earned premium has lagged that growth. So I’m just, I guess, I’m just try to figure out, how – yep. Marc Grandisson : I can answer some of that. Constantine Iordanou : Go ahead, Marc. Marc Grandisson : The premium written – a lot of that – half of the growth actually comes from Australia and it’s a result of being the product single – legal premium upfront. You get all of the premium upfront and the earning pattern is extremely – it drags along. And also in the written premium for the rest of the units, there will be a lag in earnings, because we have to write the business and it takes a long time to write. And we have some singles as well on the Arch US MI. We did write some singles there. Not as much as the other guys in the world, but we did some. So there is definitely going to be a lag between the written by virtue of being single upfront, mostly from the Australian business. Constantine Iordanou : The way that I think about is that, first, the mortgage business has a six or seven years earning pattern, right. The Australian market, a lot of it is single upfront, but it was still earned over six to seven years. So you have a lag in the earnings and lag on the income that is going to come over time. In the U.S., you see our numbers. We do about 20% to singles, 80% is the month. In the month that is booked and earned on a month by month. The singles that are written up front but they’re earned over six or seven years. So, as long as you monitor those two, it will give you a good ability to put both the earnings stream as it is going to come in and also the net income stream that is delayed. That’s why some people try – like to talk about embedded value in the mortgage sector, which is some of you might have models predicting what’s going to happen in the future. Mark Lyons : And, Michael, just – I think you’re probably going to go back and you are thinking about how you’re going to protect this stuff on a go forward basis. I just want to clarify both Marc and Dinos talked about Australia being a singles market. I just wanted to make sure that you realize that the contract itself is not a big bullet single. It’s a contract over a whole set of singles that they accept one day after the other – after the other I think. So it is a book of business that has singles and something throughout the turn, not a big bullet single upfront. Marc Grandisson : We’re getting it every month. Mark Lyons : It’s not a bulk transaction. Michael Nannizzi : Yes. Marc Grandisson : But we’re not getting a little components month-by-month over seven years. We get it all up front. Michael Nannizzi : Right, I got it. It’s not bulk. Marc Grandisson : So it is going to be one in one year – the premium is going to be booked in that particular year, but it is going to be booked month-by-month. Michael Nannizzi : Yes, I understood. Its flow business and not both business, it just happens to be sold. Marc Grandisson : Yes. Michael Nannizzi : Okay, got it. Great, thanks so much. Marc Grandisson : You’re welcome. Operator : Thank you. Our next question comes from Clinton McMillan with KBW. Your line is open. Quentin McMillan : Hi, good morning guys. Thanks very much. Mark, you had a lot of information in there. Thanks for walking us through everything with a little bit of a more complicated quarter with a couple of those one-off things. But one thing that I wanted to understand just a little better is you mentioned the reserve development in the mortgage that had an offset in the contingent consideration reaching the nominal pay out cap? Can you explain that a little bit better for us sort of how the reserving works there and why you had this big – relatively bigger $11 million reserve development and it sounds like it’s an offset somewhere else in the balance sheet of it is not really a gain? Is that the right way to think about it? Mark Lyons : Think of that more as an offset in the income statement. You got prior period development, in rough numbers is $10 million or $11 million, I think in totality. So it was $10 million or $11 million on a realized loss, is how it goes through – and then you’ve got the standard prior period development. So it has to be coming from the same sources, kind of like a profit commission sometimes does, with a loss ratio increase that might decrease the profit commission. Similarly here, you got the subject years of what we purchased. So it was continually lower delinquency rates and claim rates associated with those that dictates and indicates the reduction, because on the CMG transaction, we bought – with a provision, there was a stock purchase. So we initially paid 80% of book with an earn-out mechanism. And depending upon the actual performance, which is exactly what this is indicative of, we could pay out more up to 150% of the closing book value. We hit that nominally in our present value, but nominally this quarter, but it is directly related. So I’d say, it continues to have good performance as mostly shown through improved loss reserve development. You get an increase in the contingent consideration. Constantine Iordanou : And from now, on anything that is positive, it continue, it sticks to our ribs. They have eight other that is done, yes. Quentin McMillan : Okay, that’s great. It’s very clear and really helpful. Thanks very much. Secondly, on the MI side as well, you mentioned 80% of the 75% of the bank channel – I’m sorry 76% of the bank channel came through RateStar? Obviously that’s having great success for you guys? Can you just talk to us about what you’re seeing the competitors now do in response to RateStar or maybe sort of what you expect the competitive environment to look like because of that? Constantine Iordanou : Well, I don’t know what they’re going to do. And as far as we’re concerned at the end of the day, RateStar is the proper way in our view to price mortgages. There’s no different in the auto sector when you introduce many different variables to price risk appropriately and that’s what we’ve been doing. We’re pretty happy with not only the performance from a production point of view, but also when we go and back test what RateStar gives us versus rate card. So we still have the rate card. Our clients some 20% of our business and 50% of our business in the credit union channel is coming through the rate card. But we test both and what we like a lot about the RateStar is that first and foremost, the auto – variability around the mean is very narrow, and we like that. It gives you stability and more predictable earnings where the rate card has a much bigger variability. And now how competitors – they’re going to respond? I don’t know. I think the best way for them to respond is just – and I don’t want to give my competitors advice is go to a rate space pricing tool and make sure that they are pricing risk appropriately. I mean that’s – that’s the proper response. If they try to just cut rates on the rate card and all that is like somebody in the quicksand and they keep moving their feet. Marc Grandisson : The one thing I will add to this is the other one that’s a big competitor of ours is the FHA as you guys know, so that one is a government agency. That’s also even a harder for us to even figure what they’re going to do with the prices. I just want to make sure that I put it out there. Quentin McMillan : So the government is tricky to figure out. That’s unusual. Marc Grandisson : Exactly. Quentin McMillan : And if I could sneak just one more in – I’m sorry the valuation of a stock obviously is a high-quality problem to have. It has been up there and above what your three year return threshold would be for buybacks and I’m kind of assuming that’s why buybacks were limited in the quarter? Just assuming that we stay in this sort of heightened evaluation for the stock in the near-term over the long-term, how do you guys sort of expect to deploy capital or what might you do? Constantine Iordanou : Well, I think you’re reaching a conclusion that it might be right or it might not be. It wasn’t as much the valuation of our stock, but it was more where we see opportunities in the marketplace and let’s face it. We’ve seen most of the opportunities in the MI space. So basically, we kept the powder dry for the reason that we can deploy more capital in the MI space and that was the main reason behind it. Mark Lyons : And as Dinos alluded throughout the – it is the combination of things. We never have a bright line as you know on that. It’s more of guidance. And for most of the quarter, we traded, I’d say, little south of 1.4 to book value. So it’s kind of a little clear than that given the combination of things. Quentin McMillan : Okay, perfect. Thanks very much guys. Constantine Iordanou : Thank you. Operator : Thank you. Our next question comes from Josh Shanker with Deutsche Bank. Your line is open. Josh Shanker : Thank you very much everyone. I want to look at the favorable development in the mortgage insurance segment? And understand I mean I realize that this is very low loss content business, but only in a short period of time, it almost took all losses out for the quarter? I mean what’s going on there? Is that one-time in nature? Is the business so good that it’s not showing any losses? Mark Lyons : Josh, it’s been a continual march downward on the delinquency rates. And the associated claim rates as that come out of that. But remember this is really 2011 and prior. So there is vintage seasoning associated with this. So it’s not like the PC and it is really – you have to think of it as more of a report year view of the triangle. Constantine Iordanou : This is CMG mostly, which is the credit union business. And we bought that company and we bought the reserves and we brought all of the assets and the liabilities that come along with it. We had that pricing mechanism, the adjustment that we talked about. And – but at the end of the day, you’ve got to watch the performance and performance was better than we even expected ourselves. Otherwise in the dumbest guy on two legs because what I negotiated didn’t work for me. It worked for them, because I’m paying a lot more for that company than if I would have taken 100% at book value at that time. In retrospect, if I knew what I know today, I would have negotiated better. Mark Lyons : You cannot see us nodding here, Josh. Josh Shanker : So if I look at the mortgage loss reserve, what percentage of it in broad terms is legacy business versus Arch MI business? Mark Lyons : I don’t have that at my fingertips, but I would say, substantially. Constantine Iordanou : Yes. Mark Lyons : The vast majority is old stuff. Josh Shanker : Okay. So the fact that the enough favorable development to negate your current accident year losses, so if we comparing apples-and-oranges, you have a huge back reserve and a small new go reserve? Constantine Iordanou : That’s correct. Marc Grandisson : That’s right. Mark Lyons : And remember Josh, we kind of alluded to it, I think of the prepared remarks that part of the original transaction was a quarter share on 2009 through 2011, I’ll call it back book. And so that is also experiencing some of the same aspects, so that wasn’t CMT, though that was PMI. Constantine Iordanou : Right. Josh Shanker : And do you have any reason to believe that business – that you can detect RateStar underwritten business as a better loss ratio than rate card business? Constantine Iordanou : We price RateStar and rate card to give us the same ROE. So we have the same target. Now as we’re back testing both, because every month, I ask the guys and we back test – based on the volume that comes in and we underwrite. The only difference between the two – it’s not on expected return of equity. I think both of them are on an expected basis is they’re about the same and we did price both at about 15% ROE. The difference is that RateStar is – the RateStar produced business is very narrow – narrower around – it’s three to four ROE points up and down of the mean, where rate card is much wider. I’ll give you an example, if you had just used credit score is one variable that you’re going to test for. You’re testing the 750s in the rate card versus RateStar. The rate card even though the mean might be 15%. It may be as some business all the way up to 20%, 22%, and some other way to 70% or 80%, RateStar is more like 12% to 13% all the way up to 70% or 80%. Josh Shanker : Okay. That makes sense. I appreciate the answers. If I’m right maybe I’ll be feeding the microphone to Ian right now. Let’s see what happens. Constantine Iordanou : You are right on the write-up except you couldn’t predict our one-off transactions, and when you’re ready to predict our one-off transactions, I want you to call me because you and I are going to go to Vegas together. Josh Shanker : I’ll make sure that I do that. Take care. Constantine Iordanou : Thanks. Take care. Operator : Thank you. Our next question comes from Amit Kumar with Macquarie. Amit Kumar : Oh, man, this [indiscernible],. Ian – I’ll try to ask some intelligent questions now. This is a big thing for me. So very quickly these are more – most of my questions have been answered, but sort of big picture question. One is sort of tying in the comments in response to other questions. If returns were stable in reinsurance and insurance and if your MI business is growing rapidly, should we expect a slow trend up in the A line ROE, and if that is the case, does your book value grow at a faster clip than the industry all has been kept equal? Constantine Iordanou : No, because your assumptions, I don’t think you’re totally listening to us correctly. We said that reinsurance is deteriorating, I mean still very good results, don’t get me wrong. But that is under pressure. So we’re losing ground there and we’re losing lesser ground in the insurance side. But in both of those sectors, we’re losing ground. So in essence, from a profitability point of view, they’re not going to have the same ROEs as before. And that the reason I didn’t change the $10 million to $12 million on an underwriting basis is because I’m offsetting what I’m losing on those two sectors by what I’m gaining through mix change on the MI sector and that’s the way that you have to think about it. Amit Kumar : Yes, that’s a fair comment. I’m sure that Ian is already disappointed in me. The next question that I have is again on MI? With the Barron story coming out on Sunday and there’s been a lot of focus – a lot of – set of new investor feedback as well as some traditional investors? One question, which I was getting and this is sort of interesting, is the traditional P&C investors were asking, if things go south, wouldn’t ours be locked in? Unlike traditional P&C where you can cut back underwritings, pull back on the capital and then wait for the cycle to turn? It seemed that there was some fear on that thought process, where if Arch becomes bigger and bigger in MI, maybe a different class of investors cycle in and the traditional investors cycle out? But would you say to that in terms of if the cycle does turn, how easily can you sort of pullback or pullout or change your strategy? Constantine Iordanou : Well, let me – it’s a very complicated question, but it’s a very good question because it talks about what you need to do from a risk management point of view from capital allocation, and also what the history has taught us in this particular sector. Let me start by pointing out to you that the performance on the bank channel versus the credit union channel was even – the worst year for the credit union channel through the financial crisis was 152 loss ratio. Nothing to write home about, but not catastrophic, right and what I’m sharing with you is information we have through the PMI transaction, right. On the bank channel, we have an excess of 300, 2X. When we examine that and we’ve done a lot of analysis on it, most of it wasn’t just economic conditions. Yes, economic conditions will have an influence and that’s the event that you have to plan for and make sure that from an aggregation point of view, you’re comfortable with how much risk that you take. It also tells you that if you don’t violate your underwriting guidelines, your performance either in down economic conditions – unemployment going to 15% and prices coming down by 25%, you can withstand all that, as long as you discipline on your underwriting side, because most of the delinquencies they came from fraudulent loans. Loans that there was very little verification the underwriting information was very suspect and on top of it very, very loose underwriting, people writing risk that they shouldn’t be taking that risk. Having said that is no different when you write long tail liability lines in the P&C world. If you’re pricing your workers’ comp at 20% or 30% below independent, if you stop writing tomorrow, you’re going to have that tail that is going to continue hitting regardless loss of elements year-after-year year, because the duration of those liabilities is probably even longer than the duration that you have on the MI space. The key to this business in my view and in all of our underwriters is to maintain discipline in accepting risk. The beauty of it is that even when you stop underwriting, let’s say your pricing is – and with risk-based pricing, maybe the market will reject your pricing and they’re going to find it cheaper from a set of competitors. You continue to have streams of revenue coming from what you underwrote properly in the prior year. And then the only thing that you need to worry about is the broad economic downturn. Increase in unemployment and price reduction in the housing market et cetera, and we test for that and we have cat loads and also that determines as to what size we want MI to be as part of the overall Arch family. So that’s where we are. Marc? Marc Grandisson : One thing different, I would say with casualty, and I totally agree with the analogy, is that we have a lot of tools that our – at our disposal that we can use to really assess and evaluate the origination at any given time. So we know what’s that we’ve been originated at any one point in time we can assess what the risk is in that portfolio and I would argue that an MI book of business has a lot more changes in a casualty book of business across all lines of business. Much more homogeneous much more stable and lot more predictive in terms of what you bring to the table by virtue of the variable you used to price. So it’s always a factor. Things can change after you’ve underwritten them. But certainly when you underwrite it, you have a very good sense with the quality what you’ve underwritten. Mark Lyons : Yes, and then I’ll just add one more thing. Your premise is that all PC business can be decisions on an annual basis. As the market softens, you get an increased proportion of multiyear contracts, and this is an industry statement. And this is a differentiator between carriers. It’s a difference between having multi-years with legitimate re-underwriting abilities versus one where you’re locked in. And that’s becoming increasingly common and as that grows in proportion. It’s not as quite of a stark difference as you think. Amit Kumar : Got it, that is actually very, very helpful. Thanks for the answers and good luck for the future. Constantine Iordanou : Thank you. Marc Grandisson : Thanks, Amit. Operator : Thank you. Our next question comes from Jay Cohen with Bank of America Merrill Lynch. Your line is open. Jay Cohen : Great, thanks for that last answer. That was actually helpful. And question on mortgage insurance – shocking. When I look at the results for the quarter and I take out the favorable development, and I come to this kind of accident year of losses ratio, first of all, is that a reasonable concept in mortgage insurance? Mark Lyons : Sorry to interrupt, you halfway through, Jay. Jay Cohen : That’s helpful. Mark Lyons : You’ve got to think of it as – it report here closer to a claims made view of business then in the current view. Accident year and claims made business really is report year and this is really the same thing. Constantine Iordanou : You can reserve as long as you have a delinquency. And that’s – we don’t like the accounting model. We’ve talked about it in other calls. But at the end of the day, I’m not setting up the rules. I just play by the rules. Jay Cohen : The trend I have seen in this ratio, which has kind of steadily come down. That’s not necessarily is kind of the – stepping to look at going forward? Constantine Iordanou : Do you mean the delinquency rate or? Jay Cohen : The loss ratio, excluding whatever you want to call it, the loss ratio that you’re reporting, excluding the prior-year development, which has gone from 30 down to 17, makes it hard for us to forecast that number. Is the more recent year – recent quarter is that a reasonable number to use? Mark Lyons : It’s really – there is more mixture going on here than you think, Marc and Dinos talked before about the glide path difference on some of the old reinsurance contracts that are now running out. The insurance accounting treatment on a lot of the GSEs have a different loss expectation than does some of the primary U.S., so I hate to say it, but it does come down to a lot of mixture. Constantine Iordanou : If we were pure primary MI, it would be easier for you because then you will see what the average claim cost is, which doesn’t move very much in the mid $40,000 range. And then you look at the delinquency and that is improving bit by bit, but because we have the Australian business, we have the GSE business and those depends what block it is getting it gets a lot more complicated Jay Cohen : Got it. A bit of a modeling challenge for us certainly. Constantine Iordanou : It’s all right. I mean listen, you got to have some challenges. Marc Grandisson : Jay, a high level to help you – the way we think about the run rate basis, the expenses is about 25% to 30% in a run rate, and then I think about it globally in the industry, a mature book of business and currently the loss ratio is anywhere, you see them report at 20% to 30%. It sort of gives you a range that is kind of hard to – it could be obviously if nothing happens. It could be significant below this, but trying to get a long-term average. Jay Cohen : Okay. Constantine Iordanou : That’s a way that we think about ultimate, yes. Marc Grandisson : Looking at the long-term average, exactly. Jay Cohen : Got it. That’s helpful. The second question was on the contingent consideration? Mark, what was the cap that – what was up with the $159 million you said? Mark Lyons : No, no, 150% of the stated value at closing. Jay Cohen : Okay. Got it. Constantine Iordanou : But it would have been unknown provision. Basically we will continue to be recalculating the book value based on the actual performance of the loan portfolio from the date of closing in prior. Jay Cohen : So up until now, that basically has – helps your operating earnings and it was offset in the kind of the net income to some extent? Mark Lyons : Yes, you have net income versus the realized. Jay Cohen : Right. Mark Lyons : So it’s operating versus net income. Jay Cohen : Yes, but going forward it sounds like that offset on the unrealized loss, or realized loss, won’t be there to the same degree anyway. And therefore it’s just to flow through more right to net income? Mark Lyons : You will as I commented, because the financial statements reflect more of the present value of it. So it increased over time like any interest unwinding. Jay Cohen : Right. Mark Lyons : Especially now if we capped out nominally, we’ll accrete towards the payment date. Plus we are required through GAAP accounting to – as it becomes more certain we have to drop the discount rate used in that present value cap. You get both forces causing additional effects in future calendar quarters. Constantine Iordanou : They’re going to be small, so don’t get too overexcited. Jay Cohen : No, but that makes sense. And then lastly, just on the political environment, you’re a fairly global company and it seems both parties have some issues with free trade. Are you, one, concerned about this? Two, are you doing anything to prepare for maybe a change from the trade environment? Constantine Iordanou : Not specifically, because at the end of the day – listen free trade will affect that global GDP and global GDP will affect the revenue for the insurance sector. But having said that, because we are a highly regulated business, a lot of what we do is global, but it’s local from the regulation point of view. You operate and you need local licenses and you participate in the local market, et cetera. So I don’t see significant change in the way the insurance business is done, if there’s barriers that they put up. At the end of the day though, if GDP growth is very low, it will affect our ability to get revenue. It’s been always like that. You can track the growth on the P&C world of insurance and reinsurance with GDP and there’s a very, very good correlation there. Jay Cohen : Great. As usual, helpful comments. Thank you. Constantine Iordanou : Thank you. Operator : Thank you. Our next question comes from Brian Meredith with UBS. Your line is open. Brian Meredith : Thanks, I will be quick here. Just back on the MI business, just curious does the Australian reinsurance business have better economics than the US MI business? As that kind of comes in is that contributing to maybe the improved loss ratios and stuff we’re seeing? And then as an addendum to that, any other opportunities that you are seeing in the Australian markets? Marc Grandisson : So on the Australian market, right now the Australian transaction that we have is really like an insurance, a flow business that we’ve done with that partner of ours down under. That has not gotten a lot of earned premiums, so I wouldn’t describe a lot of pickup from that sector really. We’ve done in the past some reinsurance transactions that we – to go back to your point about the second question about opportunities, there were opportunities in the past, that’s also what got us to really focus more intently on Australia. We had quota share reinsurance transactions with a couple of players down there. But those – but since we have struck this significance, we believe relationship with that bank, we don’t need – we don’t feel like we have the need to do anything more in the segment. Brian Meredith : Gotcha. So your tapped out in Australia and you wouldn’t do anything else? Constantine Iordanou : For now the answer is we’re comfortable where we are right now. Brian Meredith : Great. That’s helpful. And I’m just curious on the LPT transaction, just try to understand it, what kind of interest rate or return assumptions are you using when you’re doing a transaction like that to get the returns that you need? Constantine Iordanou : Right now our units are doing pricing the – transactions or portfolios using a treasury free rate, by and large. That’s what we’re using, that’s how they compensate on when they calculate the ROEs. Brian Meredith : So if you are doing 100 combined ratio, it means there is it virtually zero capital assigned to it? Okay. Constantine Iordanou : No, capital no, there is no return. No return. The capital is allocated based – no underwriting return, right. The duration of liabilities of, let’s say, five years, there will be – take that five-year and that’s 1% or 5% pickup on the flow. Now when you look at the contract that we assigned capital to it and got to see what’s the upside, downside, and how much capital it goes, and you make those calculations. Don’t forget, some of these transactions, they have a limited risk transfer. Some of them have more risk transfer and that’s when we got to go through a test if this is going to be a deposit accounting or a reinsurance accounting. This one has enough risk transfer. But we are happy with it because of our familiarity of the book of business and our participation on the book of business as the quota share participant in prior years. Having said that, don’t misconstrue 100 combined that that might be the expected value of the contract over time. At the end of the day, you’re reserve conservatively, and if you are wrong, nobody is taking the money out of your pocket, you – the sale that we get it eventually. Brian Meredith : Gotcha. And then last question, is there any update on your ability to kind of take advantage of opportunities from AIG and some of the other companies that have been doing reunderwriting? I know we have talked about that in the past? Constantine Iordanou : We don’t target specifically any company. I mean, there is reunderwriting being done by many companies, including AIG and others. All I have to say is that, we’ve seen some increased opportunities in sectors that we believe we have good underwriting expertise. And we’re getting into the batter’s box so to speak. We haven’t been hitting a lot of doubles, triples, or home runs, maybe a single here and there, which tells you that the market hasn’t come up to our liking yet. But we have increased – the opportunities that we see have increased noticeable. Brian Meredith : Great. Thank you. Constantine Iordanou : Welcome. Operator : Thank you. Our next question comes from Ian Gutterman with Balyasny. Your line is open. Constantine Iordanou : It’s not Keftedes, is likely on the lunch menu today. Ian Gutterman - Balyasny: My first question was going to be about great diners, but given the call is getting long, I thought I hold off. Constantine Iordanou : Are you ready to invest with me as I’m getting closer to retirement, I got to think of things to do. So are you ready? Ian Gutterman : Exactly. I would be open to a kind an offer, call my attorney. So I won’t ask about anything about MI, I want to stick to the other two legs of the stool. And probably a lot of these are number questions, this late. In insurance you talked about in the release of some of the adverse development from an energy casualty claim? Any color on that? Mark Lyons : Yes. It’s Sempra Energy. It’s out of our Bermuda operation, where when you have a claim down there given the towers and the attachments and where we play, they are Wall Street Journal front page events. This was a gas leak explosion. The estimate is $660 million industry loss. We are on two layers, the lowest of which is excess of $265 million, and then we are on the – a piece of another layer above it. So we fully reserved it on a net basis, so it can’t move any more than where it is. Ian Gutterman : Yes, got it. Constantine Iordanou : But it was a big loss for us. It’s a man-made disaster cat, we’ll call it that. Ian Gutterman : Exactly. Constantine Iordanou : That’s I think you saw cat losses in the insurance group. Mark Lyons : That’s what the Bermuda insurance market is. That’s exactly the kind of complex risk it attracts. Constantine Iordanou : Right. Ian Gutterman : The next thing I was going to ask you is, did you – I thought this was an adverse development, it was a cat as well? Mark Lyons : No, it’s not a cat. Constantine Iordanou : It’s not in the accumulation of natural catastrophe was 60, but it was on the adverse of element. Ian Gutterman : Okay, that’s what I thought. Mark Lyons,: It would be a 14-year, 15-year. Constantine Iordanou : And it just takes a while until those things are known, especially attachment points like that. Ian Gutterman : Sure. So my question on the cats and the insurance segment, I guess that was higher than I thought, and I just look back, I think the first time in a long time that cats and insurance having greater than reinsurance. I guess, I was just curious if there was anything unusual that caused that? Constantine Iordanou : Nothing unusual. But – listen on the insurance side, you get on two buildings and you’ve $5 million or $10 million and then all of a sudden you kind of have $15 million. And we got an operation up in Canada. So I don’t know exactly the specific accounts, but it wasn’t a significant number of claims. It was a few claims. And don’t forget, we do not like personal lines. So for us to get hit, we got to hit on apartment buildings or a school, or something of that sort, and it’s very easy to get quote with $5 million on a couple of them. And all of a sudden, we’re not reporting tens of millions of dollars. I mean, at the end of the day, yes, you are slightly higher than reinsurance. But it was nothing unusual for us. Marc Grandisson : Those losses, Ian, we had in the second quarter were mostly insurance losses. So it was heavily – some of the reinsurance in Canada, but a lot of it outside was insurance more than reinsurance. And I will echo with what Dinos said. Having a small loss of cat load of about $10 million in insurance group is not having a variability of about $10 million is not a big deal for us. Ian Gutterman : Understood. I was just curious to know. Marc Grandisson : …within the variability. Constantine Iordanou : It can happen. If you are in the wrong hospital or in the wrong apartment building and the wrong and you put $10 million up, you’re going to get hit. You get hit. Ian Gutterman : Yes. And just to relate to that just overall for the combined insurance and reinsurance business, just looking at the cats for the quarter was that basically line with the cat load you talked about, I think even a hair below.? A lot of the calls people are talking about this being an active cat quarter making it seem like this is much above average. Is that your view that this was an above the average quarter and you came in average or just an average quarter and people are kind of talking about making, seem like a bigger issue than it really was? Constantine Iordanou : When you have a $13 billion to $15 billion worldwide, I would say slightly above average. Ian Gutterman : Okay. Constantine Iordanou : I don’t – if you are up $10 million and you say $40 billion annual cat load worldwide as maybe the expected number. But I haven’t spent a lot of time. Maybe Marc, you have. I know there is a lot of statistics and we look at that. But I would characterize it as slightly above average. But not – this is not something that is not going to happen again. Marc Grandisson : It’s definitely is slightly, Ian, above average in the U.S. with the PCS numbers, they are not totally outside. The one thing that I would tell you in Canada is really, really outside of the norm. That’s really what [Multiple Speakers] most of our guys and it’s not really reflected in the cat load of anything that people right in general around the world. Mark Lyons : Ian, I would offer that the perspective varies depending on whether your results were three times your cat load versus inside your cat load. Ian Gutterman : That’s kind of what I was getting at a little bit, okay. So my last one is just, Mark, if you could help me on the LPT math, I just want to make sure I’m doing this right? The 2.7% that you talked about was on the overall combined? But on the accident year, because the accident year is higher than the calendar year, the accident year was getting maybe 30 bps or so, so it was not that much of an impact, is that right? Constantine Iordanou : Well, I would say, we did it on a calendar year basis. Ian Gutterman : But your accident year was a 98 something, so 100 verses a 98 doesn’t really change it too much? Marc Grandisson : Yes, that’s correct. [Multiple speakers] Ian Gutterman : Okay. So the question is, so when I get into the accident year, when I pull it out was still pretty close to a 98 may be a high 97s, that was up about three or four points, or even running, kind of curious what happened there, I know you mentioned some large losses, but was it just that or…? Mark Lyons : No, I mean, when you take – yes, when you take there was a – we had a marine loss with a vessel that – it does Jubilee loss. So, we take that large attritional. That was pushing 300 bps I believe. So and there is a couple of other noise, but that really accounts for it. Ian Gutterman : Make sense, perfect. All right enjoy the cat events, talk to you next quarter. Constantine Iordanou : Okay. All right. Thank you. Mark Lyons : Thank you. Operator : I’m showing no further questions. I would like to turn the call – conference back over to Mr. Dinos Iordanou for closing remarks. Constantine Iordanou : Thank you all. Enjoy your lunch and we will talk to next quarter. Operator : Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a good day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,016	4	2016Q4	2016Q3	2016-10-27	1.442	1.453	1.45	1.537	null	17.21	17.48	Executives: Constantine Iordanou - Chairman and CEO Marc Grandisson - President and COO Mark Lyons - EVP and CFO Analysts : Kai Pan - Morgan Stanley Quentin McMillan - Keefe, Bruyette & Woods, Inc. Michael Nannizzi - Goldman Sachs Ryan Byrnes - Janney Brian Meredith - UBS Josh Shanker - Deutsche Bank Securities Jay Cohen - BankAmerica Merrill Lynch Ian Gutterman - Balyasny Operator : Good day, ladies and gentlemen, and welcome to the Arch Capital Group Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the Federal Securities laws. These statements are based upon management’s current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company’s current report on Form 8-K furnished to the SEC yesterday, which contains the company’s earnings press release and is available on the company’s website. I would now like to introduce your hosts for today’s conference, Mr. Dinos Iordanou, Mr. Marc Grandisson and Mr. Mark Lyons. Sirs, you may begin. Constantine Iordanou : Thank you, Andrew. Good morning, everyone, and thank you for joining us today for our third quarter earnings call. Before I comment on the quarter’s results, I wanted to note two items. First, this October represents the 15th year anniversary and I would like to express my gratitude to our employees, whose dedication and commitment has built this successful company over the last 15 years. Our employees are not just our most important asset; they are critical to producing the market-leading performance that we have seen these past 15 years. And I would like to say thank you to all of them. Second item I want to comment on is about our pending acquisition of United Guaranty Corporation, as you know Arch has agreed to purchase United Guaranty for approximately $3.42 billion. Early indications from the GSE’s and regulators have been positive and we are hoping that the acquisition will close late in the fourth quarter of this year, which will minimize the disruption to our distribution partners in the mortgage lending space, as well as the employees of United Guaranty who will benefit from this timing as they transfer to Arch benefits and healthcare coverages as of January 1, so they don’t have to deal with a split year deductibles and all the other complications that at different date might produce. Now turning to these quarter results, we have a good quarter. Our reported combined ratio on a core basis, which Mark Lyons will define in a moment improved to 86.5% for the third quarter, as catastrophe losses were light [ph] at $10.7 million. Loss reserve development continues to remain at favorable in each of our segments, which in the aggregate reduce our combined ratio by 8.8 points in the quarter. There were no significant changes that we see in the property, casualty, operating environment in the last quarter. In our insurance segment, we saw a slight deterioration in rates across some sectors, particularly in the high access and short tail areas. But rates were generally stable in most of the lines, while the mortgage insurance environment remains both stable and healthy. Marc Grandisson will give you more details on what we see in each of the markets in a few minutes. On an operating basis, we produce an annualized return on equity of 8.8% while on a net income basis, we earn an annualized return of equity of 15.3% for the quarter. As we have told you in previous quarters, net income movements can be more volatile on a quarterly basis as these earnings are influenced by changes in foreign exchange rates and realized gains and losses, other investment portfolio. Net investment income per share for the quarter was $0.53 per share down forced us [ph] sequentially from the second quarter of 2016. Despite volatility in the investment and foreign exchange markets this year on a local currency basis, total return on our investment portfolio was a positive 88 basis points and 91 basis points if we include the effects of foreign exchange in the quarter. Our operating cash flow was very strong at $421 million in the third quarter, as compared to $359 million in the third quarter of 2015. Our book value per common share at September 30, 2016 was $53.62 per share at 3% increase sequentially from the second quarter of 2016 and 12.5% increase from the third quarter over a year ago. While some segments of our business have become more competitive, we believe that group-wide on an expected basis, the present value ROE on the business written in the 2016 underwriting year should produce ROEs in the range of 10% to 12% on allocated capital. Before I turn the call over to Marc Grandisson, I would like to discuss our PMLs, which are essentially unchanged from July 1. As usual, I would like to point out that our cat PMLs aggregates reflect business bound through October 1st, while the premium numbers indicated in our financial statement are through September 30th, and then the PMLs are reflected net off of reinsurance and retrocessional covers. As of our largest 250 PML for a single event remains in the northeast at $488 million, or 7.4% of common shareholder’s equity. I think this is the lowest percentage ever for us. Our Gulf of Mexico PML was at $418 million and our Florida Tri-County PML increased slightly to $405 million. I will now turn it over to Marc Grandisson to comment on the operating units and market conditions and after that I think Mark Lyons will share the financial results in detail before we come back to take your questions. Marc? Marc Grandisson : Thank you, Dinos. Good morning to all. In the third quarter, we saw a continued softening of rates in positions across the P&C world. Particularly in the more commoditized lines and as Dinos mentioned, a stable MI marketplace. Our P&C units both insurance and reinsurance produced acceptable combined ratios as our underwriters focused on specialty lines, where knowledge and expertise differentiated to this selection. As you are all aware, we continue to build out of our MI segment in the third quarter, our returns are attractive. Turning first to our primary P&C insurance operations, which represents about 60% of our total premiums. Rate changes in our U.S. operations were relatively stable in the third quarter at a negative of 110 basis points versus a negative of 120 basis points last quarter. As in previous quarters, most of what we at Arch call, our controlling low volatility segments which includes travel, A&H, contract binding, construction and program business had rate changes that were in a slightly positive range 50bps, while our cycle managed segments, which includes property in marine, energy and casualty experienced single to double-digit rate decreases. Unfortunately, rate decreases are becoming widespread across more business units than have been building over the last few quarters, increasingly our business mix is moving towards smaller specialty risks, which had historically performed better in submarkets given that they are less exposed to the competitive pressures of the broad commercial liability and short tail markets. Globally P&C market remains also under pressure from a rate level perspective. In the UK, rate changes across all our product lines average negative 5% this quarter leading us to shift further towards portfolios of smaller risks with lower volatility. Areas of opportunity within the insurance sectors were limited with modest growth recorded in the third quarter in our construction and national accounts, travel an alternative market line. Most of the growth came because we took advantage of this location in those areas, yet our executive insurance property and marine businesses are areas where we level [ph] leaders to a continuing defensive strategy of reducing risks. Market conditions in our reinsurance group, which is 30% of our premium volume remain competitive. Our teams have to be very selective given conditions in their operating environments, but Arch’s history is that our underwriters have been able to find opportunities that still meet our target returns. This quarter specialty areas such as agriculture and motor grew well short tailed segments such as property, cat and marine experienced significant rate decreases and we accordingly decreased our writings in those segments. Our strategy at Arch has been to focus on niche areas of opportunities, where as I said earlier, we believe that knowledge and experience gives us an edge, for that reason and given the tough market conditions in any one quarter, our premium mix changes sometimes significantly. Turning to our third leg, our MI segment, which is this quarter 9% of our premium, but a growing percentage of our premium earned. We estimate that our market share of primary NIW in the U.S. rose to about 10% or 11% in the third quarter from 9% market share in Q2. In addition, we continued our market leadership in underwriting new U.S. GSE risk sharing transactions, which stood at $2 billion of notional limits enforce and we continue to see good volume from our Australian primary insurance relationship. Notably this quarter, we elected to purchase a quarter share on our Australian business to help manage the risk profile of our global MI exposure, while returns on this business remain attractive, we believe it is prudent to manage what potential adverse results and we expect this risk much like we do in our other lines of business in the P&C sector, where we typically purchased protection to limit our aggregate exposures. Our U.S. MI operation increases its NIW 36% to $8.75 billion during the third quarter of 2016, of which approximately 79% came through the bank channel. It should be noted that there is seasonality in the level of mortgage origination. Historically, the second and third quarter have significant higher production than the first and fourth quarters. Our return expectation across our MI segment remains in excess of our long-term ROE target and we expect that for the foreseeable future. And with that, I'll hand this over to Mark to cover the detailed financial results. Mark? Mark Lyons : Right. Thank you, Marc and good morning, all. As was took on previous calls, my comments to follow today are on a pure Arch basis, which excludes the other segment that being Watford Re unless otherwise noted. I will continue to use the term core as Dinos mentioned in his notes to denote results without Watford Re and the term consolidated, when discussing results, including Watford Re. As Dinos commented, we announced UGC acquisition in August for a consideration of approximately $3.4 billion subject to a potential dollar-for-dollar reduction from any pre-closing dividend by UGC to AIG and subject to potential fluctuations due to the color structure around our common equivalent preferred component. Financing and integration activities are proceeding smoothly as we push for a year-end closing. Before I review our financial results, so let me update you on our recent financing activities during the third quarter. The first is the issuance of $18 million, 5.25% series A non-cumulative for preference shares in late September, which raised net proceeds of approximately $435 million, which will be used primarily towards funding the UGC acquisition. Secondly, we negotiated a syndicated bridge loan facility in support of the UGC acquisition of $1.375 billion. The potential use of which has been commensurately reduced for the aforementioned preferred stock issuance. Thirdly, we began efforts to renew our existing credit facility towards increasing the capacity to $850 million, which includes a $500 million unsecured revolving credit tranche and a $350 million secured letter of credit tranche. The new facility has been signed this week expires in five years and gives us access to additional capital for the UGC acquisition and for general corporate purposes. Please refer to our publicly available SEC filings for more detail. Okay, with that said, the core combined ratio for this quarter was 86.5% with 1.3 points of current accident year cat-related events net of insurance to reinsurance - reinstatement premium, compared to the 2015 third quarter combined ratio of 89.7%, which reflected 2.3 points of cat-related events. Losses from 2016 cat events recorded in the third quarter, net of recoverables at reinstatement premiums totaled $10.7 million versus $18.8 million in the third quarter of 2015. These third quarter cat losses stem mostly from within our reinsurance operation and reflect the series of small events around the globe with no single event concentration. The 2016 third quarter core combined ratio reflects 8.8 points of prior year net favorable development compared to 7.1 points of prior period favorable development on the same basis in the 2015 third quarter. This resulted a core accident quarter combined ratio excluding cat for the third quarter of 94% even as compared to 94.5% active quarter combined ratio in the third quarter of 2015. In the insurance segment, the 2016 accident quarter combined ratio excluding cats was 97.9% compared to an accident quarter combined ratio of 95.8% a year ago and 96.3% similarly last quarter. This 210-basis point increase between the third quarter of 2016 versus 2015 was driven by a 130 basis points in the loss ratio and 80 basis points in the expense ratio. The loss ratio would increase; it was primarily attributable to certain large attritional losses emanating from our U.S. operations. After adjusting for the incremental difference in large attritional losses, the accident quarter loss ratio this quarter is virtually flat with the prior year's quarter. The reinsurance segment, 2016 accident quarter combined ratio exclusive of cat was 96.5% compared to 94.6% in the third quarter of last year and versus 98.4% yearly last quarter. The combined ratio reflected the impact of several excess property facultative losses that occurred during the quarter. The mortgage segment 2016, accident quarter combined ratio was 60.7% compared to 82.5% for the third quarter of last year. This decrease is predominantly driven by favorable trends related to claim rates and claim sizes and the continued expense ratio improvement in our U.S. primary MI book due mostly to growth along with beneficial mix changes towards GSE credit risk sharing transaction. There was however one transaction in this quarter in the mortgage segment, which distorts the quarter-over-quarter comparison. Retrocessional coverage was purchased on certain Australian LMI business with loan to values greater than 90% that extended back to the inception of the underlying agreement, which was May of 2015. As a result, premiums this quarter contained an additional $34 million of catch-up sessions, which served to commensurately understate net written premiums for the quarter. Regarding prior period development, the insurance segment accounted for roughly 18% of the total net favorable development in the quarter and this was primarily driven by longer and medium tailed lines in the 2007, 2012 accident years partially offset by some accident year of 2015 property loss development from our UK operations. The reinsurance segment accounted for approximately 79% of the total favorable development in the quarter with roughly 45% of that due to net favorable development on short tailed lines concentrated in 2012 through 2015 underwriting years, and the balance due to net favorable development on longer tailed lines emanating across most underwriting years prior to 2013. The mortgage segment contributed out 3% of the total net favorable developments, which translates to a 3.2 point beneficial impact to the mortgage segment loss ratio, again resulting from continued lower than expected claim rates. The overall core expense ratios for the quarter was 33.4% compared to the prior year’s comparative quarter of 34.2%. This 80-point basis point improvement is driven mostly from improved acquisition expense in the reinsurance and mortgage segment with the latter benefit largely being aided by a higher proportion of GSE business receiving insurance accounting treatment, which has lower acquisition expense. Additionally, corporate expenses included approximately $6.8 million or about $5.5 a share of nonrecurring cost associated with the UGC transaction. These costs reflect investment banker fees, bridge loan facility fees along with related legal accounting rating and SEC fees. Core cash flow from operations was approximately $421 million in the quarter versus approximately $359 million in the third quarter of 2015, this was primarily due to a lower level of net paid losses this quarter versus last year’s quarter. Core pre-tax investment income in the 2016 as Dinos mentioned was $66.3 million or $0.53 per share versus $67 million or $0.54 per share quarter-over-quarter and sequentially versus $70.4 million or $0.57 per share. The decrease on the sequential basis was primarily due to the effective low interest rates on fixed income securities available in the market and unfavorable inflation just on U.S. tip securities. As always, we evaluate investment performance on a total return basis and not nearly by the geography of net investment income as exemplified by the $96 million of core realized gains in the quarter. That being said, total returns as a positive 88 basis points this quarter, which reflects the impact of foreign exchange and a positive 91 basis points on a local currency basis. This return was led by strong equity, non-investment grade fixed income and alternative investment results. Our effective tax rate on pre-tax operating income available to our shareholders for this quarter with an expense of 6.5% compared to an expense of 5.7% in the corresponding quarter 2015, driven by an increased proportion of U.S. based income. This quarter, 6.5% effective tax rate includes 50 basis points or roughly $800,000 relating to a true-up of the prior two quarters tax provision to the estimated annual effective tax rate reflected here. As always, fluctuations in the effective tax rate can resolve from variability in the relative mix of income or loss reported by jurisdiction. Our total capital was $8.24 billion at the end of 2016 third quarter, up 8.5% relative to last quarter, and up 2.6%, when excluding the recent $450 million preferred stock issuance discussed earlier. Our debt-to-capital ratio this quarter remains low at 10.8% and debt plus hybrids represents 20.2% of our total capital, which continues to give us significant financial flexibility. We continue to estimate having capital in excess of our targeted position. We did not purchase any shares this quarter under our authorized share buyback program, which has remaining authorization of $446 million at quarter’s end. Dinos mentioned book value, so I will not. And with these introductory comments, we are now pleased to take your questions. Operator : [Operator Instructions] Our first question comes from the line of Alice Green [ph] from Wells Fargo. Your line is open. Unidentified Analyst : Hi, good morning. You have just any kind of initial insight into what your potential fourth quarter losses would be from Hurricane Matthew? Constantine Iordanou : Yeah. Early estimates and is quite early - is that it would be within our cat mode and remind everybody our cat mode is about $40 million a quarter. So, what we see on a model base is, we get a number close to the cat or when we see the actual claim reporting activity is much lower, so it's too early for us to narrow that number, but it looks to us like it's within the cat mode. Unidentified Analyst : Okay. And then would that be more of an insurance versus reinsurance or is that too early to say? Constantine Iordanou : Right now, it looks it's a 50-50 allocation between the two, excess and then reshaping the portfolio, we still have an average that somewhat in more stable with the PML could change dramatically. So, the shape of our curve last change as we have gotten away from the high-risk excess area specifically on the cat reinsurance. Unidentified Analyst : Okay. And then one question, in terms of the UGC finances that you guys disposed with the deal on the accretion double-digits in the first-year and then 35% about or so in 2017, are you guys planning on taking of the intangible amortizations through earnings, so are those accretion figures excluding intangibles? Mark Lyons : That reflects, yeah, that reflected an estimate of the mix between goodwill and intangibles at the time, as we work through towards closing and getting much more clarity on what goodwill versus amortizable intangibles that will modify it. In fact, I think, you can see some of that in the respected supplement that we had for the preferred offering, you know, some accounting rules around it, but there was more refinance on the intangibles and whenever we go to the markets next and that will have close-up you might see an adjustment there, what matters is what if there is a closing and we’re working with our auditors to fine tune that. Unidentified Analyst : Okay. Great. And then one last question, we're a couple of weeks away from the Presidential Election, Dino I was just hoping if you could just give some high-level views on potential impact of the election overall just on the insurance industry. Thank you very much. Constantine Iordanou : I don’t know, I guess, it depends on what happens with the - President is going to be Congress and are they friendly to the business environment or unfriendly you know without knowing that it’s - the big issue for the insurance business is going to be on appointment of judges, how the Supreme Court, it will be and it’s a slow process but if we continue in the path over the last eight years, I can tell you that the future is going to be more challenging for the business and we've got to adjust to it, because at the end of the day that’s what our words get determined you know not only in the cases that they get litigated, but also in the cases that they get settled, because the settlement values go up based on the attitude of the courts. So, not knowing what’s going to happen hard to predict. Unidentified Analyst : Okay. Thank you very much and good luck with the getting the UGC deal closed. Constantine Iordanou : Thank you. Operator : Thank you. Our next question comes from Kai Pan from Morgan Stanley. Your line is open. Kai Pan : Thank you and good morning. Constantine Iordanou : Good morning, Kai. Kai Pan : First question. Good morning. First question on UGC. Now you have like two minds after deal announcements speak with sort of external clients in the banks. And is there any indication term of a potential mark share loss, because the concentration issue. How that compare with your initial thought? And any other - any offsetting factor internally on the expense saving side, you can offset some of those? Constantine Iordanou : Well, let me answer the first one. I’ll get Marc Grandisson to get on the second part of your question. But on the first one, first and foremost, you got to understand that we’re running independent of each other. We're still two independent companies, we want to come together after closing. So, our discussions with the market and the clients is separate from the UGC discussions with the market and the client. No indications yet, that there is any discomfort, you know about what they do with us or they do with that. Once we close and we become one company will revisit that issue, but nothing so forth that indicates any significant overlap that it might be problematic. Marc Grandisson : Actually, yeah this is Marc now. Actually, part of the division so the highlight to us that, there is not as much overlap as we might think. But again, the proof I mean putting after we close the books, then we go and represent some of those that are - that have that we may have overlap on, story to tell right now. In terms of the expense savings or working through the operations. We have teams that are dedicating working very, very diligently to try to assess and first and foremost try to understand what both sides have in terms of system and operations and structure. to how we can make something that would be unique and cohesive as we go forward after the closing. We’re making good progress in that direction. At that point in time, we’re not so focused on to address your questions specifically on the expense savings or whatnot if they are there and we are as we said in August, not doing that transaction for that reason. First and foremost, we think there will be some we don’t know how much it’s going to be. Our team also going through that process. And the savings might come necessarily on a linear basis and then we'll have to integrate and get things together. So, it’s very hard for us to tell you anything more than this at this point in time. Mark Lyons : And Kai, it's Mark Lyons. Let me just add that when we are doing our economic analysis of this deal, and when we and we communicated on our call-in August, about this transaction. We actually anticipate some fall off of the market share. So, to the extent that there is some marginal fall off, it wouldn't surprise us and it's the fact that it contemplates. Kai Pan : Okay. Mark any estimates, and sort of like additional interest expenses for the first quarter? Mark Lyons : Well, I think you can, what you call interest expense, you can take your five and the quarter times the 450 and add that in. As far as we’re really not in the position yet to discuss the timing or expense of any additional offering. But we are striving towards closing at year-end. So, there is two months to accomplish. Kai Pan : That’s good. And then my second question is really on the core loss ratio, the deterioration year-over-year. You expand that with some higher level of attrition losses in both insurance and reinsurance segments. I just wonder, did you consider this year’s large attrition losses subnormal and or just higher than sort of like exceptionally sort of good results from last year? Constantine Iordanou : Well, no. On the insurance growth, it was a shorty loans that we have accounted for it to its full extent. Surety it's a line of business by nature. Occasionally, it will give you that volatility. One quarter you have a big lowest than two, three quarters loan losses. So, I don’t, you know we look at the book and the composition of the book and the long-term performance in making you know judgments as to how healthy or unhealthy that book is. So, one quarter event doesn’t really give you a trend so to speak. On similar case with the reinsurance. This is you know, excessive loss property - transactions and you know occasionally that’s where you’re in business. You will - you take in the volatility from your clients, so when it happens you know it comes to the books. But that particular unit has been a big, big money maker for us and it continues to be, so I don’t attribute that as a trend. Marc Grandisson : In fact, we looked at the last - the trailing 12 months’ accident year combined ratio adjusted for all these large losses and it’s actually very, very stable, which is what we care for like Dinos' point one quarter does not make a trend and where we’re right now, we’re very comfortable and very happy with the stability actually of the accident year combined ratio. Mark Lyons : Kai, just one more thing as Dinos has noted about the reinsurance side that facultative group has been enormously profitable by its nature short tailed excess position, it’s going to be volatile any given quarter could be volatile. And our view there was roughly 2.5 a little more of long-term loss ratio points that may have been excess of what you normally would see which translates, if you go back and do the arithmetic, it pushes to go about a 60 or a 59 on the adjustment for the loss ratio for the reinsurance group totality versus 59 the prior year, so it's 90 basis point movement. Kai Pan : Great. Well, thank you so much for the answers. Marc Grandisson : Welcome. Operator : Thank you. Our next question comes from the line of Quentin McMillan from KBW. Your line is open. Quentin McMillan : Hi. Good morning, guys. Thanks very much. I just wanted to touch on the UGC acquisition, you have a footnote in here that it’s dependent on closing the execution of an excess of loss agreement between AIG and UGC. I just wanted to ask if you guys have any clarity at this point on that reinsurance transaction sort of maybe what it will be protecting you guys against in the future, this is not the Valemid [ph] 3:1 or Valemid 3 :2, I'm talking about the third excess of loss agreement what it’s going to protect in the future and maybe if you’ve gotten that in place at this point? Marc Grandisson : A couple of layers there. First layer of answer is that between AIG and Arch, we have agreed on terms and conditions of it, it is not yet signed because we need approval of the GSE’s that’s a requirement and that’s part of our discussion with them now. So, that's the first point. So, I would say significant progress on that aspect. Secondly, it’s an aggregate excess of loss that is a couple of layers involved, but it’s effectively 2009 through year end of 2016 coverages, there is an out of the money cover that in the aggregate provides quite a bit of capital release from the viewpoint of S&P. Quentin McMillan : And who is going to bear the original cost for that, is that going to be paid for by Arch, by AIG or a combination? Marc Grandisson : It’s effectively paid by UGC at closing, so it's an applied book value reduction for the premium. Quentin McMillan : Okay, great. And then can you help us in terms of the investment yield of the portfolio when UGC has added in maybe what is sort of the current yield and or duration of the UGC portfolio and how much uplift might that have on the overall Arch portfolio and will you be using the extended duration of the UGC premiums to extend your own duration or change anything in the overall investment portfolio going forward maybe starting in Q1 ‘17? Mark Lyons : Let me start and ask Dinos to say a few words too. First off, once the closing occurs the management of that will transfer of course to AIM which is our internal Arch Investment Management. The coupons on that book is higher it’s about 3, I think maybe 3 :5 is the average coupon, it’s a lot of credit book in there, which could be reshaped. So, I think some of that is timing, I would expect it to conform more towards Arch’s approach of total return and Arch is getting lost on the source of coupon income, so that will more for overtime probably throughout the course of 2017. Constantine Iordanou : Yeah, it will probably take at least two or three quarters for our investment professionals to make whatever changes we feel that are appropriate, but at the end of the day, it’s going to be - it’s going to look more like the Arch duration and credit quality than what exist today. Quentin McMillan : Okay. And just a quick follow-up, the coupon in the UGC book it says about 3.3 average, what is the Arch current kind of average coupon? Marc Grandisson : Closer to 2. Quentin McMillan : Okay. Thank you so much guys. Operator : Thank you. Our next question comes from the line of Michael Nannizzi from Goldman Sachs. Your line is open. Michael Nannizzi : Thanks so much. Just a couple quick ones, Mark maybe on the investment portfolio just the yield or the investment incomes are ticked down sequentially look like there was some seasonality last year sort of consistent with that, is there anything that we should think about that’s not sort of run rate from third quarter maybe some mortgage backed security payouts or something on along those lines that would talk not to be consistent. Mark Lyons : Every quarter, there is - it's always a new story, so I wouldn’t look at in a trend sense. Back to my total return comments, I mean clearly that's a group harvested some gains hence the approximate of $100 million of realized gains I noted, so again based upon our total return approach, so you get those gains and you put some of that back in to the extent to which you put back into fixed income, you got new money rates there. Michael Nannizzi : Got it. Okay. So, you've got some harvesting there. Okay, that helps. Thanks. And then, how should we be thinking about the tax rate, it looks like, so guessing the MI impact is caused to lift here over the last few quarters, how should we be thinking about that longer-term once you integrate UGC? Mark Lyons : Okay. Good question. First, a slight correction to what you said, mortgage was contributory to that, but remember our mortgage segment is very broadened some of that is that of Bermuda [ph] and other jurisdictions and the U.S. semi operation clearly was contributing positive underwriting gain at this point, so they were contributory, but let's not overlook, the facultative unit we talked about on the property side, the insurance group and the onshore reinsurance group all were profitable and contributing income. So, it's really the composite of those of Michael that actually inched up the effective tax rate The second part of your question with UGC, we talked about it on our call about UGC, we plan on having a subject to improvable course with GSEs, a core share facility in place, so only - roughly half of those exposures and gains will be resident in the U.S. jurisdictions, so it’s going to have an uplift, but probably not the slope of uplift that you might be contemplating. Michael Nannizzi : Okay. How did you say that I was contemplating you - did you look inside my… Mark Lyons : I reversed engineer the first part. Michael Nannizzi : I saw that. That’s invasive. Yes, thanks. And then last really a quick one the Australia core share, can you talk about, sort of just how you’re thinking about like that on the four word, is that sort of notionally the right amount, that we should be covering in, I just love to get a little bit more color on the thought process there, is that possible? Constantine Iordanou : Yeah. The thought process is more important than the actual specific transactions when - with everything we do we have an overlay of the risk management, we look at our capital, we need - how much risk is putting for us to carry and at the end of the day, we look for ways to manage that and reinsurance is one way to do it. So, we’ll look at it from a global perspective, how much MI business we have, how much we will attain that to our books and then the rest of it we ensure. And that’s the attitude with everything that we do, it’s not only on the MI side, it's also on the PMC side both reinsurance and insurance and as we said in prior calls going forward as per the acquisition is completed with United Guaranty, we will be looking at the MI book including the U.S. book and buying the appropriate aggregate protection to make sure that we have from a risk management point of view, the profit parameters. We always think about PML, we think about PMLs also not on the PMC side only, but also on the mortgage side and that will drive a lot of our decisions doing a Valemid [ph] 3 and doing aggregate excess of loss for different years. As Mark told you the transaction we have with AIG will have in 2016 and prior 2009 to 2016. So, all those years are taking care of, so to speak. And then for us is what we do for 2017, 2018, 2019 ad as we go forward. But that's the philosophy and is no different than what - how we run the group for the last 15 years. Measure approach to pricing properly and then making sure we don't take too much of the meal independent how profitable that meal is. Michael Nannizzi : Right before lunchtime comment, I think that's totally fair. Constantine Iordanou : As you can tell from my voice I'm a little bit under the weather. So, the meal for today is - Avgolemono [ph], which in Greek means Lemon soup. That's the only thing that cures common cold. Michael Nannizzi : I won't try to pronounce that. Thank you so much. Operator : Thank you. Our next question comes from the line of Sara Dovish [ph] from JP Morgan. Your line is open. Unidentified Analyst : Hi, good morning. Wanted to get your latest outlook for mortgage insurance market conditions. One area of concern I hear sometimes that were late in the credit and economic cycles. So, how much longer do you think mortgage insurance returns will be good for? Constantine Iordanou : We don't see anything that clouds the horizon. I think it's pretty clear, all the indications is that it's a stable market, pricing has been stable, the environment is good. We're projecting housing prices to be going up somewhere between 3% and 5% next year. Yes, there is certain states especially the energy states that there might be some issues but that's what rates starts is all about. We look at an adjusting pricing on the basis of what the risk components are. But long-term, we view the market to be very healthy and there is no indication for us that it's going to change in the next few years. Unidentified Analyst : Okay great. And additionally, do you expect any FHA rate cut before the election and what would be the implications of that for you? Constantine Iordanou : I have no idea what the FHA will do. And I don't like to guess. At the end of the day, a lot will depend on the actuarial work that is going to be done to see what their capital requirements, if they're meeting the minimum standard that report usually comes out in mid-November and so for so. But we don't anticipate it before the election, but you never know after the election. Once they take an action then we can gauge what that might mean. But without them doing something is very hard to predict. Unidentified Analyst : Okay, great. Thank you. Constantine Iordanou : You're welcome. Operator : Thank you. Our next question comes from the line of Charles Sibaski [ph] from BMO Capital Markets. Your line is open. Unidentified Analyst : Hello. Thank you. First is on, there is a report recently regarding the GSE and some of the risk sharing and regarding some bondholders that are raising issue regarding credit quality from the reinsurance and the GSEs offloading that. If any thoughts or you had any conversations with the GSE, is there any real legitimacy to the amount of risk transfer change going on, appreciate your thoughts. Constantine Iordanou : We don't basically the GSEs they're interested in having two avenues, the cash market and also the reinsurance market. Their allocation has been pretty constant so to speak about 25% to 35% depending on the quarter to the reinsurance market. And then the rest of it 65% to 75% in the cash market and they're being consistent with that approach. Now, I don't believe they have any concerns about the creditworthiness of the reinsurers. Because at the end of the day, they make the selection as to whom they're going to allocate these transactions to show. As the matter of fact for the GSEs is terrific by looking at the credit quality of the reinsurance and allocate what portion of the deal they want to allocate to any particular individual. Unidentified Analyst : All right. And then, I guess on the insurance business on the low vol, you guys had pretty nice growth and some of the travel and accident and some of the other products and it seems to be market place, is that there is lots of interest in the low vol business today. Is curious if you've seen any additional increase in competition and whether or not your growth is coming from some new programs coming out or just kind of branding out, doing good work with the existing business and any color on it? Constantine Iordanou : These are product lines and don’t forget, when we build Arch we got into product lines that nobody wanted to do back in 2002, 2003, 2004, because some of them they can be slow growth unless you make a major purchase. These things require patience and perseverance to make them meaningful all the time. Yes, depending on the cycle, there is more competition or less competition, but more importantly with these kind of products, you have to have a long-term view and a long-term commitment, and it will take time to build volume. It doesn’t fit with the thesis of instant creditification, you know you don’t get that with these kinds of product. So, we will be very patience and we have grown some businesses from nothing to a reasonable size, I mean our lenders business grew over the years from some $20 million to over a $100 million in premium. And we try to find these little nuggets that we work all the time to give us more control of our portfolio. And as Marc Grandisson said, and I’ll turn it over to you for his comment. That low volatility business is what we like to build most of our insurance group, not abandoning the other segments, because the other segments even though they - in certain market conditions, you can make a lot of month, if the market is very hot, we're right, a lot of the coverage that we are not willing to do today, it's not that business, it's just by prices business. When the price improves, it's a good business. Marc Grandisson : On travel side, I think I would echo what Dinos just said obviously, but in addition we have a couple of new transactions that we’ve entered into programs and have been very, very nice now going so far. We are also investing and it’s also a very intense technology play and we are always and on the look to build that aspect to the book of business, because to your point it's low volatility, it's also - it derives sticky, a lot stickier than other business could be. So, we are definitely focusing evermore and this I think the reflection of the premium and this is sort of reflection of our efforts in this space and I think you should expect more in the future. Unidentified Analyst : Okay. Thanks a lot for your answer guys. Marc Grandisson : Sure. Operator : Thank you. The next question comes from the line of Ryan Byrnes from Janney. Your line is open. Ryan Byrnes : Thanks for taking my question. Just to add one question, I guess post-UGC deal, does your PML tolerance change at all essentially are you still willing to risk 25% of the total capital or is that just of the property capital. Sorry, property, casualty, capital going forward Constantine Iordanou : No, no its total capital, it hasn’t change. Marc Grandisson : No change. Ryan Byrnes : No change. Great, that’s all I had, thanks. Constantine Iordanou : Thank you. Operator : Thank you. Our next question comes from the line of Brian Meredith from UBS. Your line is open. Brian Meredith : Yeah, thanks. A couple of quick questions here for you. First one, I am just curious there was a big transaction that was announced another MI company, what do you think the possibilities are kind of market share shifts as a result of that could that be a positive for you all? Constantine Iordanou : I don’t know the - you're talking about a transaction with a Chinese ownership. So, I think that’s an appropriate question to us to the distributors of the product. I mean this is for banks to determine if they want to continue to do business or not, but not for us so I would know, I have no, I have the faintest idea if their reaction will be positive or negative. Brian Meredith : Okay. Great. And then this is my second question in the news there has been a couple of articles that you guys hired some pretty high profile people in the legacy business, you guys talk to me about your views on the legacy business and opportunities? Marc Grandisson : I think that we have a sort of one individual that joined us that was obviously publicly discussed. We’re exploring at this point we’re really looking around and try to see whether there’s something to be done there, whether it’s Arch or not I mean we have all the things on the table, we’re exploring what is out there, but certainly we did an LPT last quarter as you remember. We do think that space has an ended self to a level of high interest at this point in time. I think we’re certainly in the place where rates have been going down in certain sectors and some clients may have, may be running out of patience and tolerance for some books of business and certainly we are always, Dinos and I always looking forward to provide services and products to the market place that would help the industry that’s certainly one area. But we’re still working through it and when we have something we’ll obviously let you know, we’ll announce it -. Marc Grandisson : But listen the theme here is every time you come out of a soft market I know surely we’ll come out of a soft market there was repair work that needs to be done and we want to participate in the repair. Brian Meredith : Makes sense. And then just lastly I know you talked a fair amount about the retro you put on the Australia but I know you guys have great analytics stuff was there anything behind it that you’re going to look at the housing prices in Australia and there was a lot of talk about people think they’re going to really picking out here any concern there? Constantine Iordanou : No concern with whoever, this is more from an aggregation point of view how much you want to have from an overall MI book of business because there are the reinsurance that they participate on the deal they got pretty good return characteristics, they’re going to make some good money on it. At the end of the day either you’ll add a lot of capital to new balance sheet and you may have maybe a little over commitment to one line of business versus other or you try to keep the balance and this was more balancing from our perspective. Brian Meredith : Great, thanks Dinos, feel better. Constantine Iordanou : I'm going to try. Operator : Thank you. Our next question comes from the line of Josh Shanker from Deutsche. Your line is open. Josh Shanker : Yup it’s almost not the morning anymore so I'll try and be quick. You mentioned that UK pricing down 5% service those, UK lot of specialty markets is that experience leading the market down or is that lagging the market? And do we need to be worried about another sort of step downward on pricing for the market in general, most of your competitors have not been so grim about pricing conditions? Marc Grandisson : The UK market is extremely competitive and has been for a long time especially the traditional Lloyds placement and international business and open broker, so that’s going on, that’s been going on for a little while so it’s not new Josh, but in terms of leading where it’s going to go unfortunately we, I'm afraid that we’ll have to experience further rate decreases going forward into the lot of competition ahead in the London market and the UK market more broadly. So, but again things may change on some of that happen and they change things overnight. But there certainly is a lot of competition out there, we don’t see anything at being at this point. Constantine Iordanou : If you don’t measure correctly, you can’t make good pricing arguments going forward and we rather say what we see and you guys make the judgment if others are not willing to talk about it. Mark Lyons : And Josh, I would add and that’s probably available information. By their own accounts Lloyds has about a 3% on the current underwriting here about a 3% to 4% return expectation return on capacity, so that tells you something about the absolute rate level. Josh Shanker : If we - 97 to half, how hard is it to keep the team together on the soft market and how do you keep everybody content when you can’t make money in the business? Marc Grandisson : I think the shifting in our book of business I mean people are working extremely hard to transform or to just gradually over the cycle as we try to do, as we’ve been working on for the last 10 years to shift towards low volume controllable business, it takes a lot of work and lot of efforts. So, I would just say that it’s just a shifting and realigning our expertise and assets for our people towards different lines of business. Things are transportable across lines of business not like an excess D&O, you can only do excess D&O and there’s a lot of stuff that that person can enhance the culture and the understanding as to how recycle management. So, we try and very hard to keep those people, and keep them busy doing other things. It’s only reinsurance and on the reinsurance, across the P&C units. Josh Shanker : And so there is still lot of deferred comp to have to earn that they would lose if they left, I would imagine. Constantine Iordanou : Yeah, there is a big component of that. But understanding of that, but that’s only that is you know. At the end of the day they know over their career with us. They're going to have good years and they're going to have some not so good years. But overall, if they produce for our shareholders, they're going to make very good money. And for those who have been and we have a pretty stable management, they have done extremely well. Josh Shanker : Good luck in hard times. Constantine Iordanou : Thank you. Mark Lyons : Thank you. Operator : Thank you. Our next question comes from line of Jay Cohen from BankAmerica Merrill Lynch. Your line I open. Jay Cohen : Let’s be quick, my questions are answered, thanks for the call. Constantine Iordanou : Thanks, Jay. Marc Grandisson : Thank you. Operator : Thank you. Our next question comes from the line of Ian Gutterman from Balyasny. Your line is open. Ian Gutterman : I heard my question was taken, I had to think something else have to. Does [indiscernible] help or no? Constantine Iordanou : Yeah, I mean it's Greek penicillin, you have lemon soup it's Greek oats in it. Ian Gutterman : Yes, so I actually want to follow-up on Ryan's question about the PML limits and obviously, you're so far away, it’s not really an issue, but if the market to get better, I guess I am surprise you would say 25% of the whole balance sheet, because that essentially would suggest you are using 25% of PML capital to write cat, if you ever got to that point. Constantine Iordanou : You're talking about a PMLs in the MI business, or the PMLs on the property cat business. Ian Gutterman : On the property cat... Constantine Iordanou : Well, no, the 25% is board allows us to risk. You know assuming we like the pricing and risk relationships, right. The fact that we’re at 7.4% today is an underwriting judgment, the management is making, it’s not a restriction by book. If rates quadrupled tomorrow, I can go to 50% of capital exposure on PML without going back to my board and says, hey that 25 is too low and you've got to change it, and if we change it, we are going to come and tell you, because I think shareholders need to know what kind of exposure you take. You know, don’t forget, and I don’t know what other of my companies do. But we do PML calculations on the MI business also. You know, and it’s a requirement, but our risk committee of the board, you know that every quarter will talk about you know how much is our PML you know, on our MI business, and that’s the reason we have all these discussions about, you know how much reinsurance both you know total share or aggregate excess of loss or transactions like Valemi 1, Valemi 2 [ph] or similar type of transactions which I might do in the future. You know so all of that is around understanding that we have one simple principle that drives our risk management philosophy, that independent of what event happens. We have to not injure the balance sheet to the point that we not in a very strong competitive position the day after. Ian Gutterman : Exactly, that's what I was trying to get at. I guess when I heard 25% of everything as a limit I guess I thought that that's essentially the P&C capital whatever that would be 35 or 40 or something like that. So, see what I was getting at? Constantine Iordanou : Not quite. I mean 25% of equity capital it's a limit, it’s a pretty safe limit. You know for adverse conditions. You're talking about in one in a 250 type of events. So, the PML calculations that we do for our MI business, it’s somewhat even worse than the recent financial crisis we have passed. We have gone by all the way to the depression and factor in a lot of available and skimpy available statistical information to come up with some reasonable assumptions as to what how things might look like if we have events of that nature and we still want this company not only to survive but to be in a strong competitive position the day after. Ian Gutterman : Fair enough. So, the other thing I was going to ask you I think you mentioned some maturity losses is part of the attritional, can you just remind me sort of how you approach that business is it sort of a vanilla construction bonds or is it tend to be some commercial maturity? Constantine Iordanou : It was a construction bond, it was maturity, one of our contractors messed up and we have to step in and you saw a lot of prices some steady in Connecticut deal. Ian Gutterman : Got it, got it and is it residential or commercial? Constantine Iordanou : It’s commercial, commercial. Ian Gutterman : Okay so…. Constantine Iordanou : It’s building of the baseball stadium. Mark Lyons : It’s contractor of a commercial -. Ian Gutterman : Where I was going with it was how do you think about clash with MI, I know there’s not direct clash, but something… Constantine Iordanou : Surely at MI there is no clash there, because these are all… Ian Gutterman : These are all back credit - all right? Constantine Iordanou : Yes. I think - the investment portfolio in that and that’s why we don’t do - our MBS will clash with what we - and we consider that, in part of our mix how we manage the company. Ian Gutterman : Got it. All right, I think that’s all I had. Thanks. Constantine Iordanou : Thank you. Operator : Thank you. Ladies and gentlemen, this now concludes our question-and-answer session. I’d like to turn the call back over to management for closing remarks. Constantine Iordanou : Well, thank you for listening to us and we’re looking forward to talking to you next quarter. Have a wonderful afternoon. Operator : Ladies and gentlemen, thank you again for your participation in today’s conference call. This now concludes the program and you may all now disconnect at this time. Everyone have a great day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,017	1	2017Q1	2016Q4	2017-02-14	1.456	1.47	1.643	1.73	null	16.47	16.66	Operator : Good day, ladies and gentlemen, and welcome to the Arch Capital Group Q4 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on the call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risk and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends -- the forward-looking statements in the call are subject to the safe harbor created thereby. Management also will make -- management will also make reference to some non-GAAP measures on the financial performance. The reconciliation to GAAP and definition of the operating income can be found in the company's current reports on the Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like introduce your host for today's conference call, Mr. Dinos Iordanou, Mr. Marc Grandisson and Mr. Mark Lyons. Sirs, you may begin. Constantine Iordanou : Well, thank you, Kevin. Good morning, everyone, and thank you for joining us today for our fourth quarter and year-end 2016 earnings call. We have a lot to talk about today. So let's begin with our completing the purchase of United Guaranty Corporation at the end of 2016. The combination of Arch MI and United Guaranty Corporation not only creates the world's largest mortgage insurer but, equally importantly, brings a culture of both leadership and innovation to the mortgage insurance industry that we believe will benefit our shareholders and customers for years to come. Merging 2 companies is no small task, but I'm pleased to say that the integration of Arch MI and United Guaranty Corporation is progressing smoothly. Across our companies, our employees are working hard to ensure that there will be no disruption to our customer base in both the bank and credit union channels. Now let me turn to year-end results. We had a good quarter despite noise from acquisition-related expenses and a few other items which we will discuss in a few minutes. Our reported combined ratio on a core basis -- Mark Lyons will define in a moment what core means -- increased by 2 points over the fourth quarter of 2015 to 88.8% as cat losses added 4 points to our accident year results for the quarter. For the year ended 2016, our combined ratio was essentially flat at 88.2% compared to 88% for the full year in 2015. The full 2016 accident year, excluding cats, improved to 93.4% on a core basis versus 94.4% for the 2015 accident year. Accident year results were roughly flat in both our insurance and reinsurance segments despite a softening market, while our mortgage segment improved its accident year combined ratio year-over-year to 64% from 84.2% in 2015 year due primarily to improving profitability at Arch MI. Even before considering the acquisition, our mortgage segment went from representing 6.4% of net earned premiums on a core basis in full year 2015 to 8.4% for full year 2016. In the future, this will continue to increase based on our own growth in the business and the acquisition of United Guaranty Corporation. Loss reserve development remained favorable in each of our segments, which, in the aggregate, reduced our combined ratio by 6.4 points for the fourth quarter and 7.7 points for the year ending 2016. There were no significant changes that we see in the property casualty operating environment for the quarter. Marc Grandisson will elaborate on what we see in each of the markets in a few minutes. On an operating basis, we produced a return on equity of 9.4% while, on a net income basis, we earned a return on equity of nearly 11% for the full year 2016. Net investment income per share for the fourth quarter was $0.56 per share, up $0.03 sequentially from the third quarter of 2016. On a local currency basis, the total return on our investment portfolio for the quarter was a negative 166 basis points, primarily due to the significant increase in interest rates on our very large bond portfolio. For the full year 2016, again, on a local currency basis, our total return was a positive 235 basis points. Our core operating cash flow was $279 million in the fourth quarter as compared to $99 million in the fourth quarter of 2015. Our book value per common share at December 31, 2016, stands at $55.19 per share, a 3.5% increase sequentially from the third quarter of 2016 and 15.8% increase from the fourth quarter of 2015. Mark Lyons will give more details on the components of the change in book value per share in just a few minutes. Before I turn the call over to Marc Grandisson, I would like to discuss our PMLs, which are essentially unchanged from October 1, 2016. As usual, I would like to point out that our cat PML aggregates reflect business bound through January 1 while the premium numbers included in our financial statements are through December 31 and that the PMLs also are reflected net of all reinsurance and retrocessions we purchased. As of January 1, 2017, our largest 250-year PML for a single event remains the Northeast at $492 million or 6.6% of common shareholders equity. Our Gulf of Mexico PML stands at $427 million, and our Florida Tri-County PML decreased slightly to $394 million. I will now turn the call over to Marc Grandisson to comment on our operating units and make some remarks on market conditions. Marc? Marc Grandisson : Thank you, Dinos. Good morning to all. First, on this 14th day of February, I would like to wish my wife and daughters a happy Valentine's Day. Constantine Iordanou : Such a great father. Marc Grandisson : Thank you. As Dinos mentioned, the integration of UG into Arch is going very well. Culturally, we are finding that the UG team is basically cut from the same cloth as the Arch team. They have been creative with capital solutions, and we share a pricing philosophy based on risk assessment and also a dedication to analytics and technology development. The combined entities' abilities provide us with a strong and, we believe, sustainable platform in the U.S. private mortgage insurance space. For the fourth quarter of 2016, Arch U.S. MI, excluding UG, had new insurance written, or NIW, of $8.8 billion, about the same level as the third quarter's. On a combined basis, we estimate our primary U.S. market share at approximately 25% to 26% for the fourth quarter, including UG, and -- which is in line with the third quarter of 2016. In addition, we continued to lead in the U.S. GSE risk-sharing transactions with approximately $2.2 billion of risk in force at year-end 2016. Our Australian mortgage insurance relationship continues to generate good volume. However, we have increased the level of our Australian quota share retrocession to 37.5% from 25% for those of you keeping track, which explains a healthy amount of premiums ceded in the segment this quarter. With the acquisition of UG, we have multiplied our U.S. primary risk in force by more than 5x, with over 87% of the exposure written up to 2008, a period in which the underwriting quality of the insurance written has been at its peak. The MI's data contained in the quarterly supplement reflects the quality of the combined primary portfolios with average FICO scores of 743 and a low 90s loan-to-value ratio. We continue to see favorable reserve development from both legacy MI portfolios. And at the end of the first quarter, we will provide you with more clarity on the progress we're making with the integration process and fully combined U.S. MI statistics. Switching over to the P&C insurance world. The level of rate decrease has slowed somewhat, but it's still broadly negative. This is especially true for the larger accounts. For that reason, both our insurance and reinsurance groups continue to move towards less competitive, smaller accounts and more specialized areas of the market. We continue to move away from lines such as excess liability, E&S property and property cat while focusing our efforts in less volatile and specialized lines such as travel, differentiated programs or reinsurance of agricultural business. In our primary U.S. P&C insurance operations, we had margin erosion of 40 basis points for all lines in the fourth quarter and above 100 bps for the full year 2016. For the full year 2016, our controlling and low volatility segment, which represents about 70% of our primary insurance portfolio, had rate increases of 210 bps while our cycle-managed business, the remaining 30%, experienced 410% -- 410 basis points of rate decrease. Our U.K. insurance operation has experienced similar pressures from a rate-level perspective. Rate decreases across all our product lines were 7.6% this quarter. And just as we have discussed in the U.S., we continue to shift to smaller accounts. On a group-wide basis, we had modest growth in the quarter in our insurance segment's construction, national accounts, travel and alternative markets lines. Our executive assurance, E&S property and casualty businesses are areas where current rate levels lead us to a more defensive strategy. Turning over to reinsurance. It's a similar story to our insurance group in that we continue to focus on opportunities with relative rate strength and more favorable returns such as facultative, agriculture and motor, while the more commoditized segments, such as property cat, excess liability and marine, continue to experience rate decreases, and we, accordingly, are shrinking in those lines. Overall, we estimate single-digit rate decreases across our reinsurance portfolio. At the heart of the Arch's long-term success are 2 factors. First, we focus on seeking favorable returns across industry cycles, and then we practice prudent capital and risk management towards maximizing risk-adjusted returns. As we enter into 2017, we continue to do just that. Within our P&C units, we are defensive and shifting our risk exposures to a relatively more attractive area. With MI, we have made a strong commitment to one of the best return opportunities available in this specialty area, and we have also improved the diversification of our risk portfolio. Our corporate culture and platform of specialty businesses, we believe, allow us to pivot or to move towards markets where we can earn appropriate returns while shying away from markets or business lines where the volatility around expected returns requires a more cautious approach. And with that, I'll hand this over to Mark Lyons. Mark? Mark Lyons : Great. Thank you, Marc. And as Dinos alluded to, we have a lot of ground to cover this quarter. So on today's call, I'm going to depart from the usual commentary structure and focus more on the unusual accounting impacts driven largely by the UGC transaction. First, I will highlight just a few items about this quarter. But as a reminder, the usual quarterly topics that we usually talk about and comment on can be found in the earnings release and the associated financial supplement. Okay. So now for some summary comments on the fourth quarter all on a core basis and as refresher and as Dinos alluded to earlier, the term core corresponds to Arch Capital's financial results excluding the other segments, which is Watford Re; whereas the term consolidated includes Watford Re. Okay. So losses recorded in the fourth quarter from 2016 catastrophic events, net of reinsurance recoverable from reinstatement premiums, was $34.1 million or 4 loss ratio points compared to 1.9 loss ratio points in the fourth quarter of 2015 on the same basis. The activity was primarily driven by Hurricane Matthew, the New Zealand earthquake and the Tennessee wildfire. We believe this continues to highlight our property cat underwriting discipline as actual reported losses on cat events continue to correlate with the exposure reductions that have been implemented over the last several years. As for prior-period development, approximately $55 million of favorable development or 6.5 loss ratio points was reported in the fourth quarter, led by the reinsurance segment with approximately $42 million of favorable development, insurance segment with about $8 million and the mortgage segment providing nearly $5 million of favorable development. The calendar quarter combined ratio on a core basis was 88.8%. And when adjusting for cats and prior-period development, the core accident quarter combined ratio was 91.2% compared with 93.5% in the fourth quarter of 2015. The reinsurance segment accident quarter combined ratio, again excluding cats, of 91.2% showed modest deterioration of 110 basis points compared to the fourth quarter of 2015, while the insurance segment's accident quarter combined ratio, excluding cats, remained flat at 96.3% but saw an accident quarter loss ratio increase of 90 basis points, offset by a corresponding expense ratio reduction of 90 basis points. These competitive conditions were more than offset by the continued improving profitability of the mortgage segment, amplified with their net earned premium being a larger proportion of the total. The mortgage segment's accident quarter combined ratio improved to 59.5% from 83.1% in the fourth quarter of last year, and their net earned premiums represented nearly 10% of the total core net earned premium compared to only 6.9% in the corresponding quarter of 2015. Now moving on to some of the unusual financial statement impacts this quarter. I'd like the focus on the UGC transaction as it affected, among other things, reported corporate expenses, financing expense, book value and our capital structure. The transaction closed at 11 :59 p.m. on December 31, so UGC is reflected in our year-end balance sheet but not on our income statement. As for nonrecurring expenses, the company incurred $25.2 million of such expenses related to the UGC transaction in the quarter, arising primarily from investment banking, bridge financing and credit facility fees, along with the usual legal rating agency accounting and consulting fees with such banks. Given the nonrecurring nature of these expenses, we have excluded them from operating income as they are not relevant to our true underlying performance. However, I would like to provide some alternative insight into our operating income per share by providing results on 3 basis, which we feel is important to distinguish : the official reported operating income per share and then 2 alternative pro forma views, which I will define now. First, we view the official reporting of operating income per share as -- in the earnings release as being a hybrid. And by that, we mean it excludes the nonrecurring UGC transaction expenses but includes the UGC financing costs since we did raise that additional capital and are obligated to incur interest expense and pay additional preferred dividends per the terms of those instruments. The first alternative pro forma view of earnings that I'll get into is as if the UGC transaction did not occur. This view provides a clear comparative picture to last year's fourth quarter and the third quarter of 2016 and is likely most representative of views in the street. This first alternative pro forma view excludes the UGC transaction expense and excludes the debt and preferred stock financing expenses and excludes the incremental investment income gained as a result of raising that additional capital. The second alternative view provides -- for this quarter's operating income would include all recurrent -- or, sorry, all nonrecurring expenses and the financing costs and the additional investment income associated with the transaction. So the official operating earnings per share to common shareholders as reported in our earnings release is $1.13 per share. The first alternative pro forma view, which completely excludes the UGC transaction as respects transactional expenses, financing costs and additional investment income, is $1.16 per share. The second pro forma alternative view, which reflects, as discussed above, all UGC transactional expenses, [ph] cost and investment income, is $0.96 per share. Hopefully, these 3 views will provide useful information for your analyses of this busy quarter on the different bases as defined. Okay. So rather than going through the mind-numbing annual and incremental fourth quarter tax rates on a pretax operating income for each of the 3 views discussed, I will instead provide a 2017 forward-looking tax rate since the fourth quarter reflects so many unusual impacts and is not indicative of what could be expected on a run rate basis. As we have previously discussed, 2017 should provide, on an expected basis, higher mortgage segment income and a different taxable income mix by jurisdiction. As a result, we anticipate that the expected tax rate for pretax operating income in 2017 to be in the low to mid-teens range without giving any consideration to evolving tax changes potentially emanating from the Trump administration. This preliminary range is primarily driven by varying jurisdictional profit assumptions, cat loss assumptions and varying loss ratios. Having said all this, the annual tax rate on pretax operating income for 2016, as reflected in our official earnings of $1.13 per share, was 5.2%, which caused a fourth quarter incremental tax rate of pretax operating income of 2.1%. This reflects an approximate $5 million true-up tax benefit for the first 3 quarters of the year or nearly $0.04 per share to achieve this 5.2% annual tax rate. Since the 2016 fourth quarter results only partially reflect the additional effects of the UGC financing transactions, it makes sense to provide a run rate for interest expense as well as for preferred dividends. Total interest expense for 2017 is expected to be $24.9 million per quarter. This reflects new and prior debt issuances as well as borrowings under our credit facility. Similarly, the run rate for quarterly preferred dividends, also from new and prior issuances, is expected to be $11.4 million per quarter. This does not contemplate any potential action being taken on our $325 million of Series C preferred that becomes redeemable beginning in April of 2017. Lastly, as a result of the UGC acquisition, we took the opportunity to conform accounting standards between the segments as respects deferred acquisition expenses. As a result, book value was negatively impacted by $0.31 a share due to the charging off of previously capitalized deferred underwriting-related expenses, largely through shareholders equity with a small portion through the income statement. As respects our capital structure, in connection with the UGC transaction, we raised capital in 2016, as reported on last quarter, by issuing a $450 million of 5.25% noncumulative perpetual preferred. And in December, we raised $950 million of debt by issuing 10-year and 30-year vintages. We also tapped our credit facility for $400 million and utilized roughly $384 million of internal cash resources. We also issued Series D convertible preferred common equivalent shares to AIG at a fair market value of approximately $1.1 billion. Before I get into our updated capital structure ratios, it's important to understand how we've accounted for the new equity issuance. There are no restrictions to ownership of these shares by AIG, except for the passage of time, as respects certain lock-up provisions, and these shares rank equally in all material respects to our existing common shares. The Series D convertible preferred common equivalent shares are being treated in our calculation of book value as if they are common shares. Therefore, the approximate 12.8 million common equivalent shares issued to AIG are added into our common share count to determine book value per share, now totaling 135.6 million shares. GAAP common equity at 12/31/2016 is approximately $7.5 billion, and total GAAP capital is approximately $10.5 billion. On a GAAP basis, our total debt to total capital ratio is 21.3%, and total debt plus preferred to total capital is 28.7%. Accordingly, December 31, 2016, book value, as Dinos has mentioned, per share is $55.19, which represents 3.5% increase over the prior quarter and nearly 16% over year-end 2015. Book value per share primarily grew as a result of the $1.1 billion of Series D common equivalent shares issued to AIG, as mentioned earlier. We issued those shares at a price-to-book multiple of approximately 1.61x, and accordingly, our book value gained an immediate accretive benefit of our approximately $417 million at issuance. Now since we made commentary today about operating income per share, excluding the impact of the UGC transaction, it's only fitting to provide the corresponding impact on book value per share as well. That excludes the Series D common equivalent issuance at AIG, eliminates the debt and preferred financing costs, the UGC nonrecurrent transactions, investment income differences and other conforming adjustments. So basically, as if UGC hadn't occurred. Book value per share, excluding the UGC transaction, would have fallen by 2.1% or $1.12 per share. We did not repurchase any shares during the fourth quarter of 2016 and don't anticipate repurchasing any during 2017. Our remaining authorization, which was due to expire on December 31, has been extended to 12/31/2019, but the amount remains the same at $446.5 million. Additionally, as respects the acquisition, we recorded approximately $189 million of goodwill on the books or 100 -- $1.39 per share and have established an additional $507 million of intangible assets as of December 31, 2016, $480 million of which are subject to amortization. We anticipate that this associated amortization to be the highest in calendar year 2017 at approximately $110 million and then decline thereafter such that approximately 75% of the amortization will be recognized within 5 years. I refer you to Page 7 of the earnings release to see more information about these intangible assets. So with these exhausting introductory comments out of the way, we're now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from Sarah DeWitt with JPMorgan. Sarah DeWitt : Now that the United Guaranty acquisition has closed, I want to get your thoughts on the potential for any additional expense savings or upside on the earnings accretion. I know the accretion of over 35% included some expense savings. But if you could provide any more exact numbers on that, that would be very helpful. Constantine Iordanou : Well, we -- first and foremost, let me remind everybody that we didn't make the acquisition on the basis of expense savings. As you probably will know that with any merger of 2 companies, there is significant redundancies which we're going to experience over the next 2 years as we put the companies together. Our focus is mostly on making sure that our customers don't get disturbed. So we continue to provide the service together, bringing the 2 companies together with an eye that if we can improve the expense ratio by saving, we will do it, and we will continue reporting to you on a quarterly basis what those savings are. It's -- I don't like to make projections because sometimes when you make projections, you might make your predictions come true and make your own management decisions. I'd rather have our people free to make the right decisions as we bring the companies together on a week-by-week basis. And that's the basis we're going to run the integration. Marc, do you want to add to it? Or... Marc Grandisson : No. All set. Sarah DeWitt : Okay. That's fair. And then also, how should we be thinking about the size of the combined premium base for the company, taking -- for United Guaranty and AIG's mortgage business, taking into account how much will be nonrenewed as well as the AIG quota share? Constantine Iordanou : Okay. Well, there's 2 points here. One, there will be some actions on our part. Mostly, what we said in the past that I think -- probably our participation in singles will probably get reduced a bit over time. Having said that, there might be some action by our customers because they might feel that the combination of the 2 companies might create some overlay of significant exposure. Based on our analysis, the latter doesn't seem to be a problem. It seems that there wasn't a lot of overlap between us and United Guaranty. So I don't expect that to be much. And then I believe that long term, as we said before, we expect our market share to come down in the low 20s. It can be anywhere from 22% to 24% or at maybe 25%, 26% today. I don't see significant change in that it will be dramatic quarter-over-quarter. It's implementing our pricing strategies that we're going through now in combining the risk-based pricing of the 2 companies together. And don't forget, our mortgage business is more global in nature. You're only focusing on the MI in the U.S. So we take what -- how much we're going to write in mortgage from a global point of view, including the bulk transactions, our Australian business and our European business. So Marc, do you want to elaborate a little bit further? Marc Grandisson : I think I would echo on this is also that 2016 was a bit higher than the last half of the year because of the refinancing slew that we got. So the market overall -- expect a slower market in 2017. That's something you need to keep in mind. So generally, the way we look -- the high-level look at the premium that can be generated by the portfolio, you take the insurance in force, which we provide in our supplement, and you can ascribe a 50 bps, roughly, rate to it. And you can -- that sort of gives you the run rate as to what kind of premium you'd get for the year. And you could put some persistence here, I think, which you've heard on other calls as well, 75%, 76%. And then this is how you sort of get to the runoff of the portfolio, and then you ascribe to some new written for this year based on your view of the market, which really, at this point in time, is very, very difficult to see or have any clarity on. Operator : Our next question comes from Quentin McMillan with KBW. Quentin McMillan : I just wanted to talk about the mortgage business and the Australian contract that you had ceded. It looks like the net to gross in that portfolio dropped down the last 2 quarters in kind of the 60% to 70% range. And I'm kind of just curious whether that was sort of one-off because of the Australian contract. Or do you expect to sort of retain a little bit less of that business as UGC earns in? And potentially, would you look to maybe retain a little bit more of the Australian when it comes back up for renewal if the terms look attractive again next year? Constantine Iordanou : Well, I mean, the terms, they're attractive in our Australian business; otherwise, we wouldn't be there. But our attitude is we look at all of our business. I don't care if it's its insurance, reinsurance, mortgage insurance. And we have a risk management perspective about aggregations, how much we want to have, either in a particular territory, et cetera, et cetera. The -- our desire or ability to reinsure a part of the book, it comes out of that process. When we sit down internally at the senior management level and we -- with our Chief Risk Officer and his team and we look at all of our aggregations, we make those determinations. So we've purchase, as Marc said, 37.5% quota share going back to inception for our Australian book. And that was the judgment that we made. That judgment might change in the future, but it's a decision we make on a lot of stuff here, including how much retrocession we'll buy on our reinsurance book, on our cat book, et cetera. It's part of our risk management methodology. So Marc, elaborate a little further. Marc Grandisson : Yes. The quota share goes back to May of '15 and is on for 3 years. So the panel has been set. And the reason we had more sessions this quarter was because of the catch-up. We went from 25 sessions to 37.5. So that's 12.5 additional premiums ceded to be retroactively ceded back to our partners. And this is exactly what we did this quarter. We have also good partners with us bringing some value in terms of knowledge of the market and capital, helping us, as Dinos said, just rightsize the overall risk on the balance sheet. At this point in time, there is no plan to change. If somebody else would want to take more of it or help us provide some structure, we are, as usual, always interested in entertaining such things. But right now, there's no plan to change. Mark Lyons : And Quentin, let me -- just for clarity, given what Dinos and Marc have said, neither the third nor the fourth quarter of this year are indicative in a run rate basis. Both of them had the retroactive cumulative catch-up, as Marc alluded to. So on a go-forward basis, assuming there's no changes to that in the multiyear nature, any new premiums arising in 2017's first quarter, you should expect a 62.5% net arising from those out of Australia at 37.5% ceded. Quentin McMillan : It's very helpful. And then moving to the investment portfolio, I asked this last quarter as well. But you guys last quarter had about a 2% yield and were expecting the UGC portfolio to earn in at about a 3.5% yield. Is the assumption sort of similar now? And how much impact might that have? And what are your sort of expectations of what you'll do with the portfolio over the next couple of quarters as that higher-yielding book earns in? Mark Lyons : Well, I think -- a couple of things. First off is the composition of that portfolio is markedly different than what Arch had natively. It was longer duration in nature. It was made up much more heavily of municipals and corporate credits and lower-rated corporate credits. And that will be changed over time. It's going to be a little bit -- in fact, some of that's already occurred in the beginning of this year. And that will take a little while to do because a lot of it's onshore. So there's tax consequences to everything, so you got to be mindful on how it's done. But I think over time, it will conform a lot more closely to the Arch portfolio in that regard. Dinos? Constantine Iordanou : Yes. The only thing I will add is there is a tax component that we have to be mindful of it, especially having more income emanating from the U.S., which is taxable at a very high rate, depending what happens with the tax law. And we might not change the municipal component, which is giving us some tax relief. So all line is being considered. We have our teams in the investment department and our finance and tax people looking at restructuring the portfolio. But over time, it's going to look more like the Arch portfolio : high credit quality, probably shorter duration. But having said that, we got to take also into consideration the tax considerations. Quentin McMillan : If I could just sneak one more modeling thing in just to -- you gave a lot of guidance there. In terms of integration cost, do you have any updated estimate of what that might be for 2017? Constantine Iordanou : Let me read what I just said before. Integration costs -- you have costs up-front, and then you have significant savings later on. We didn't do this transaction because we had some spreadsheet that says this is going to be wonderful and you're going to have all these kind of savings. We did it because it makes a lot of sense going forward buying a business that has tremendous potential for earnings. It fits the -- it's a specialized product that, I think, we can create value with it. Having said that, our teams, they're going to look at maximizing synergies, like I said, without affecting customers and volume as we go. So depending how much we do, we will have an expense up-front and then the savings that come commensurate to that. But I want our teams to have freedom to make the right management decisions, and we'll let the accounting take care of itself. Marc Grandisson : At a high level though, it's a timing issue really. As Dinos pointed out, we will hear some synergies that we'll be able to extract some costs from. But I think the best thing I can tell you is, depending on the glide path that you think we'll be able to execute on, the long-term rate -- ratio of rates of expense of a typical MI company is 25% to 30%. So that's probably what I will use as an endpoint depending on where that endpoint is for -- in your mind as to how well -- quickly we connect it to. But again, the speed of execution is not going to come at a cost of losing customers and losing culture and losing the spirit of our companies. Operator : Our next question comes from Kai Pan with Morgan Stanley. Kai Pan : Thank you so much for providing these 2 alternatives to operating EPS estimates. I would add another one or ask what the third one is actually. What would be your -- sort of pro forma earnings would be if you're including both the financing cost as well as UGC earnings in the quarter? Mark Lyons : I don't have that because we did not have UGC's earnings in the quarter. So that's stuff that we don't have readily available, Kai. Constantine Iordanou : So it didn't report to us. I mean, we don't have the United Guaranty numbers. Kai Pan : Okay. Just want to give a try to see what's ongoing sort of going forward run rate earnings for you guys. Constantine Iordanou : Yes. Be patient. First quarter, we'll give you a lot of disclosure. We'll try to make your jobs as easy as possible and -- be patient. Another 3 months, and we'll be there. Kai Pan : Okay. And then on capital management, you said no buyback in 2017. So I was assuming the priority would pay down some of the debt and. Also I have seen -- like, what's your comfort level in terms of debt-to-capital ratio? As well as if you go into 2018 when buybacks come, would you prefer to do the buyback in sort of the common preferred or more in the open market? Constantine Iordanou : Well, let me start with '17. '17, we did say to the market and to the rating agencies, we will not buy back shares. So '17, it will be a year for us -- we're going to take the earnings, we're going to retain those earnings, and basically, we're going to start rebuilding some firepower on our balance sheet. Having said that, I don't know where '18 is going to be. When I see the year-end '17 numbers, we'll make some decisions. We want to maintain very good relationships with the rating agencies. They have been very fair with us in analyzing not only the transaction with us but the future plans and what we will need to do over the next 3 years. From our past history, you will know that we try to maintain a conservative balance sheet without a lot of debt on it, so we can have firepower in case markets change so we can take advantage of it. So that's the overall strategy now. With that, I'll turn you over to Mark Lyons who has more of the details. He does that analysis for all of us on a day-to-day basis. So Mark, go ahead. Mark Lyons : Sure. I think, Kai, on an overall basis, we said this publicly, is that over a 3-year period, we expect to be south of 20% on Moody's adjusted leverage ratio, which is, as you may recall, our preferred capacity treatments of 50% equity credit. So when you go back and noodle it, you can see how we're thinking. But that's going to be accomplished by a shrinking numerator and an increasing denominator. So both of those are going to go. And because we pulled $400 million out of the credit facility, which has more flexibility, that's likely the target area that if we're going to differ and have the ability to pay back sooner than planned, it will go to that area. Kai Pan : Okay, great. Lastly if I may is on the U.S. tax reform and just want to get your guys' perspective on [indiscernible] corporate tax rate and the border adjustability and also the Neal Bills in the Congress. What -- how would that impact your business going forward? Constantine Iordanou : Well, I mean, it's -- first, let me start with the first one, the -- a lower tax rate, it's good for business. I mean, we -- at the end of the day, I'm in the minority here, but I strongly believe that the corporations should pay 0 tax and let their shareholders pay the tax when, eventually, corporation has to distribute it through dividends or through shares, funds to their shareholders, and they're all full taxpayers, so let them collect the tax on that basis. But put that aside, a reduction in the corporate tax rate is positive. Especially with the United Guaranty Corporation acquisition, we're just going to increase our domestic or U.S.-earned income. So that's a positive. The other 2 hypothetical -- the border adjustment tax, I don't know what's going to happen and if you will influence transactions between reinsurers. To me, a reinsurance transaction cross-border is more exporting risk rather than importing capital. So at the end of the day, without knowing the details, it's very, very, very hard to project as to what the effect is going to be. But the Neal Bill has been around for a long time. I don't know what's going to happen, but we have alternatives to that. We're multifaceted, and we're global in nature. So at the end of the day, I -- depending on this hypothetical, we'll react to it if and if it happens. Operator : Our next question comes from Charles Sebaski with BMO Capital Markets. Charles Sebaski : So just like some thoughts on -- you talked about risk management. I think in the past, you guys have talked about mortgage now really filling up kind of 3 legs of a stool. But mortgage has got a different risk profile than us, P&C people, who are used to thinking about what PML and maybe greater exposure to economic risks. As we think about the mortgage business here, what's your -- how do you think about it from a risk perspective on what's the ability to grow, be it globally, be it from GSE transactions, is there still capacity to expand it? Or do the other legs of the stool need to expand some further? Just how the relativeness between the 3 divisions and the relative size on a risk basis on how you guys are thinking about that. Constantine Iordanou : Well, let me start with the premise that our brains work in a fashion that I don't care what you do, you have to understand what your PML is, and you got to be comfortable on the basis of the balance sheet you have and are you comfortable with the setting of how much PML you can take within the balance sheet. The fact that historically, MI companies might have not looked at it from that perspective is not relevant to us. We -- so the tasks that I have assigned all of our teams, and I personally work with them because that's a significant bet we're making in another line of business, we should have a methodology of calculating PML, and we do -- we're in the third iteration of the model that calculates the aggregation of risk, including both underwriting risk within a mortgage business and also macroeconomic risk, change in unemployment, housing prices, et cetera, et cetera. And we stress that to see as to what kind of outcomes we have and how much of that we are willing to take within our balance sheet. Now we have also brought other tools that they were not traditional, and some of the other in my company, they're starting to use them as well. You don't have to retain all the risks on your balance sheet. There is reinsurance transactions you can bring. There is capital market transactions you can bring to bear to manage the risk. So that's the concept that we have. We use it with our cat business. We use it with our P&C and our reinsurance business. We [ph] in different segments. It could be marine. It could be aviation. It could be -- so we use the same approach because that's our DNA. Our DNA is bring in the risk, understand how much you're taking, risk-manage it to the point of comfort and see if you have more than what you want than either reinsure it out or use capital market transactions to bring it down to an acceptable level. It's the old saying. I used the expression my father taught me. He said, "Son, I don't care how good the meal is. Don't eat too much because you'll get indigestion." So we're not a company that is going to over line on risk to the point that I can't sleep at night or Mark and Marc cannot sleep at night. We sleep like babies. Charles Sebaski : Will you guys be willing to provide -- so in your traditional P&C businesses, you talked about Tri-County; you talked about Northeast. We think about wind exposure and PMLs on 1 in 250 or 1 in 100. Will there be some kind of basis for you to explain to us how these metrics are if it is unemployment or on GDP or on interest rates so that we can have comparability on risks? Constantine Iordanou : Yes, we might do that in the future. The reason I'm hesitant is not because we don't like to disclose to you guys a lot of stuff. We do, but we don't want to wake up our competitors to understand what we're doing either. And to tell you the truth, we're still in the process of -- with the rating agencies of going back and forth in them understanding all of our methodologies and all the good work we have done. So -- and we haven't come to a complete agreement with them as of yet in those discussions. So we're hoping this year, maybe sooner than later, we will get to some understandings in sharing our thoughts and our methodologies. And some of the methodologies, actually, we're using, we've taken from them, right? We look at how they look at mortgage risk, and we try to bring it in. But the basis of our PML analyses, it goes to both : one, things that we can control, meaning underwriting quality of the mortgages we insure and the pricing we apply to them and what those potential outcomes are; and second, macroeconomic factors that what if the unemployment rate goes to 15%, what if housing prices collapse by 25%, by 30%, and how rapidly they collapse. And we model all that, and then we come up. And there is a lot of other factors. We might share with you maybe some of our methodologies at our investor conference. This way, you'll know our deep thinking into these issues. But I'm not ready yet to be stopped putting our PMLs out for our competition to know. Charles Sebaski : That's fair. I guess, just a follow-up on the mortgage. I guess, any thoughts on new Treasury Secretary commentary about getting Fannie and Freddie out of government ownership? Would the expectation for you guys be that the speed of GSE derisking would accelerate for those companies to come out? Is that how you guys think about that? Or... Constantine Iordanou : Well, there is 2 constants that I think -- and our thinking is, first and foremost, there is pressure by Congress to put mortgage risk to the private markets. So that's a constant. The other constant is I think there is a recognition by our elected officials that securitization without the ultimate guarantee of the federal government is not possible. So those things we don't believe they're going to change. Now are the GSEs privately owned and/or controlled by -- I don't think those 2 factors, they're going to change. So at the end of the day, it -- for everybody who is involved in the mortgage guarantee business, it's positive because there is -- independent if you're Republican or Democrat, there is a movement to put more risks into the private hands and eliminate the taxpayer who have being the guarantor of these mortgages. The exception to that is the FHA who -- still, I want to remind you guys, there has probably between the FHA and the VA, they got more than, what, 55%, 57% of the market. So in essence, we do have the taxpayer-funded facilities competing in the private market. So that, to me, is more of a concern than what we do on the private side. But I think the future is pretty bright. Marc? Marc Grandisson : The indication that we get from talking to both the GSEs, and certainly, there's various projects and various products that you've heard that were initiated this year, and there's more on the horizon, clearly, the mandate from the GSEs is to be utilizing more of the private market actions. We've heard that the new world order in the GSEs for 5 or 6 years now, I guess, we'll get to a landing at some point. But I echo what Dinos has said, there's clearly no stopping them trying to leverage their new positioning and utilizing the third-party private capital to help make that a vibrant market. That's clearly pointing in that direction. Mark Lyons : And Chuck, I would just say it on the GSE because you were asking a pretty broad question. On the GSE credit risk transfer side, when you look at the balanced scorecards that are out there and what the Congress expects of the GSEs, there's no dropping off of that. It's a good signal of continued transfer. Operator : Our next question comes from Jay Cohen with Bank of America. Jay Cohen : Two questions. The first is on the tax rate. That was very helpful to give the 2017 number. I know you're not giving an '18 number. But directionally, okay, let's assume for a second that the corporate tax rate doesn't change. So kind of on as-if basis, as you get into '18 and '19, would you expect the tax rate to come down because of things you will be doing internally? Mark Lyons : Well, that's loaded. If I could forecast the P&C underwriting cycle, I'd be a gazillionaire. But keeping everything constant, if there is no change at all, there should be minor drift in the aggregate effective tax rate because there should be incrementally more mortgage income associated with it. But that is a very rough and lack-of-confidence number. To the extent that there is changes in any submarket, we're going to allocate [ph] capital there, and that won't change our effective tax rate. And if it's cat, for example, it's going to be very Bermudacentric, which is going to drive it down. So that's the best I can say. Jay Cohen : That's helpful. I just didn't know if there are things you will be doing internally to affect that tax rate just structurally, internal reinsurance or something. Constantine Iordanou : It's the -- there might be a few things we do on the investment side. I mean, it's all -- it's part of the restructuring of the portfolio. Maybe there is little more municipal exposure on the investment side because it eliminates some of U.S. tax. But that doesn't move the needle that much. You're probably talking about a point or so. It's different between '11 and '12 or '12 and '13, so... Jay Cohen : Got it. And the other question was -- one of the things the new administration did was they suspended the price cut on the FHA premium. This wasn't a big deal when they were proposing cutting it. But how do you see that affecting you? Constantine Iordanou : Well, it affects the market in general, right? The FHA is -- and the VA is competing with the private markets. And don't forget, they have a tremendous advantage. Their capital requirement is 2%. So in essence, they're writing 50 :1 where we're at 15 :1 or less. So it's very, very tough sometimes to compete with Uncle Sam. But to us, that's positive because that reduction, in our view, we would have put more pressure on eventually the taxpayer and -- by, yes, reducing the cost to the consumer, but also, I'm not so sure that those rates for those kind of risks, it was sufficient to cover the exposure. Marc Grandisson : There is some movements here right now that the GSEs are sort -- the FHA's purpose is really to give home ownership to people that otherwise wouldn't have access to. So there's clearly a response in the GSE with Home Possible. There's a couple of programs that they're putting in place and are starting to implement that will hopefully try and attract and address that specific segment. So a little bit away from the FHA trying to get into that segment as well, which is again good news for us because it would be -- most of it would be conforming and needing private MI attached to it. So overall, that -- to echo again what Dinos just said, that moves was seen possitively by us. But again, we want to caution everyone that we're always one decision away from one of these directors to yet again put some other rate decrease. But that's the nature of the business that we're in. Operator : Our next question comes from Ian Gutterman with Balyasny. Ian Gutterman : So my first question for Mark is as much as a comment actually is I think you need to come up with a better term than alternative income because I worry, if you stick with that word, Melissa McCarthy is going to be reading your script next quarter. Mark Lyons : Well, as long as you're an English major, Ian, I'll listen to you. Ian Gutterman : So first, just a couple. Number one is the other underwriting income was higher than normal this quarter, mostly in the reinsurance. What was driving that? Mark Lyons : Yes. It's -- as we kind of talked about in the past with Watford Re, underwriting and investment fees are put together into a pot and they're shared equally, and it was just a reflection of better performance. Ian Gutterman : Okay. So is that like a year-end true-up? Or is that just a good quarter? Constantine Iordanou : No, it was a quarter... Mark Lyons : No, it's a quarter performance. Ian Gutterman : Got it. Okay. And then the amortization, you said, $110 million for, I guess, this year grading down. Can you just give us some sort of sense of the slope of that? Mark Lyons : Well, I gave -- did give you 2 data points. Ian Gutterman : You did. You did, and I try -- it's just that -- can I linearly do it? Or is there -- or is that parabolic? Constantine Iordanou : I remember, it's exponential. Mark Lyons : Just do a downslope exponential, and you'll be good. I think you can get $480 million -- $480 million of it, at the beginning, that's amortizable, right? As long as you're $110 million in the first year, 75% out of year 5... Constantine Iordanou : You can figure out. You're a math major. Mark Lyons : I can get my junior high school daughter do... Ian Gutterman : So I took a shot. I just want to make sure there wasn't some curvature to that rather than a slope, but the... Mark Lyons : No, there is some curvature. There is some curvature. It -- think of it as -- it actually varies by which intangible asset [indiscernible] versus the other. But as I said, after 5 years out, it becomes insignificant. I'll give you one more data point. At year 6 is pushing $20 million area. So that gives the greater falloff, so... Constantine Iordanou : It's becoming a math exam for you. Mark Lyons : Yes. Ian Gutterman : That's okay. I can handle it. I'll compare notes with you next time. You can see how good my guess is. You can grade me on it. I do sit in the back of the room, but I take good notes. The -- just on that topic we're talking about disclosures for UG. Would it be possible to give us sometime before next quarter's earnings, say, a 4-quarter trailing pro forma mortgage insurance segment? I know it's possible. I guess I'm asking, is it realistic? We could discuss offline if you like, but that's... Mark Lyons : Well, clearly, it's the starting point because of debt and the preferred that we had to issue the -- for the prospectus has the actual UGC information that you can use as a baseline because, as you know, the segment on the prior owner reporting was beyond UGC. You took the tape out, [ph] the share. So that, I think, is a useful starting point. Yes. Ian Gutterman : Okay. And then just lastly on the comment on the tax of low to mid-teens, should I assume that -- does that assume that you will have a 50% quota share on the entire U.S. MI business, including UG? Mark Lyons : It does. Constantine Iordanou : It does. Ian Gutterman : Okay. And so... Mark Lyons : Forward. Constantine Iordanou : The forward. Ian Gutterman : Okay. And I guess, this is an issue for '17, but if you want to go out to '18 or '19 or whatever. If there were a change in U.S. tax rules, where something like the Neal Bill happened, any sort of sense of what the sensitivity of that tax rate is? Constantine Iordanou : Well, without knowing what the bill is going to say, I can't model it for you. But tell me what the bill is going to say, and then I'll model it. Ian Gutterman : Fair enough. Fair enough. Okay. I guess, I wanted to -- are there the same opportunities that I think you printed out with the P&C business? Could they be applied to the MI business as well? Or was that really something that only would work on the P&C business? Constantine Iordanou : I don't totally understand the question. What do you mean? It's sessions from P&C versus MI? Ian Gutterman : Right. I mean, are there other places you can send stuff to, I guess? Other balance sheets you could use, things like that. Constantine Iordanou : Believe me, believe me, my door is broken down by people. They want to get a piece of our MI businesses, reinsurance. Depends how -- what kind of terms you negotiate. Do you share on the profit or not? It's a lot of alternatives. So without me knowing exactly, we react to what the actual law is, and we abide by the law, and then we maximize for our shareholders the potential outcome. So not knowing that is so very hard, but there is alternatives. Yes. Operator : Our next question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : Just a couple quick questions. First off, the intangibles that we were just talking about, the $110 million, are those going into net or operating earnings? Mark Lyons : Well, since that's a 2017 item, in all honesty, we are debating the alternatives. But I believe you can count on us being more transparent as more likely having it itemized in a way to let you flip it however you choose to look at it. Elyse Greenspan : So when you guys talked about the deal like as the accretion, 35%, was that including or excluding the amortization? Mark Lyons : It was including. Elyse Greenspan : Okay. And then in terms of the PMLs. I know Dinos you had mentioned how you guys are talking about kind of calculating the aggregate risk, including the mortgage exposure. So as we think about, potentially, a harder market on the cat side, obviously, it doesn't seem like that's anything you guys are expecting. I guess, the right assumption would be that we would never really see 25% of your capital going to cat business because now we have this greater mortgage exposure that you're also counterbalancing against your capital. How are you guys kind of, I guess, thinking about how that kind of all comes together? Constantine Iordanou : Well, my authority as -- and the senior management authority from the board is we can't expose more than 25% of our equity capital on any line of business that will include MI. So that's the maximum we can take on a PML basis. If we want to take more, we have the opportunity, but it will be, I bet you, a very, very long discussion with our board. And then jointly, we'll make a decision. And if we make a decision to be something different, we will tell the market about it. So right now, that's what we are operating under. Elyse Greenspan : Okay. And then one last question on, I guess, the pricing side. As we think about higher inflation just overall for the industry, I mean, kind of where you guys point it to, it seems like it's still kind of deteriorating on the primary insurance side. Do you see people starting to think about pushing for more price as we think about higher inflationary levels? Or thinking it will kind of be like what we've seen in prior cycles where we get companies pushing for price after inflation shows up within our margins? Constantine Iordanou : Yes. Unfortunately, we don't see price increases. I'll give it to Marc for more color, but I think there is a time delay. Then basically, I think it's the other metrics that usually cause us to bill the industry. I'm not talking specifically, but the industry [ph] change. It's when loss cost inflation, which does not always correlate with the economic inflation, starts showing up in the numbers. How well the reserves are behaving? Those are the kind of things that cause adjustment to pricing. For now, I'm not sensing any adjustments to pricing. You saw we reported that. For some of our business, we're getting some price increases, but for a lot of them, we get decreases. So -- and in the aggregate we're negative, not positive. So Marc? Marc Grandisson : I think that the difficulty that we're running right now is most people are looking at our portfolio, and we've had a very benign trend for the last 5 or 6 years. And a lot of your projections or the way you will price your business going forward is dependent on the historical, not on the forward looking. It's very, very hard to predict what the future inflation will be. The tendency for an underwriting unit or an underwriting company to sort of assume the same old trend will carry on for a little while. That explains why it has a delay in the lag in recognizing trends. And it's especially acute if you are on the excess of loss, if you are excess of a certain threshold, say, $3 million, $4 million, $5 million or $10 million, is where we further delay. So unfortunately, we're seeing -- we're not seeing no big reactions to this. I would also add that a lot of people are expecting yields to pick up and interest rates to increase and more -- possibly more investment income in the future. So there is sort of buttressing a little bit that rate deterioration that we're seeing in the moment. Mark Lyons : At a least, I'll just throw something in as well. We're more concerned with loss cost trend. Sometimes that's frequency driven; sometimes that's severity driven. Your question was more severity driven. And if you can say that, that cross-rated business is in primary, frequency tends to drive it, and you can sharpen your pencil a lot more and start with the competitors. What is the long-tailed, long-duration excess in Mark's example, rationalization takes over, and it's not necessarily correlated as much. Constantine Iordanou : And don't forget, don't forget, traditionally, the markets don't turn on these technical analyses and evaluation. The market turns when you have more fear than greed. It's the 2 emotions that determine the market. We have excess capital. There's a lot of people accepting mid-single-digit returns. They view that as acceptable for the risk business, which I think is insanity in my view. And at the end of the day, I don't see fear in the market yet. When you start seeing fear in the market, that's when you're going to see rates moving up, and we don't see it yet. Elyse Greenspan : Okay, great. And congrats getting the deal done at $11.59. Constantine Iordanou : We appreciate that. I had a glass of champagne celebrating the new year and the closing. So I was -- it was very economical. I paid for one glass, and I celebrated 2 things. Operator : And I'm not showing any further questions at this time. I'd like to turn the call back over to Dinos Iordanou. Constantine Iordanou : Well, thank you all. We're looking forward to the next quarter. Have a good afternoon. Operator : Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,017	2	2017Q2	2017Q1	2017-04-26	1.539	1.607	1.807	1.85	null	16.73	17.23	Executives: Constantine Iordanou - Chairman and CEO Marc Grandisson - President and COO Mark Lyons - EVP and CFO Analysts : Geoffrey Dunn - Dowling & Partners Kai Pan - Morgan Stanley Elyse Greenspan - Wells Fargo Sarah DeWitt - J.P. Morgan Nicholas Mezick - KBW Josh Shanker - Deutsche Bank Securities Brian Meredith - UBS Ian Gutterman - Balyasny Jay Cohen - BankAmerica Merrill Lynch Operator : Good day, ladies and gentlemen, and welcome to the Arch Capital Group First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the Federal Securities laws. These statements are based upon management’s current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will like -- will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company’s current report on Form 8-K furnished to the SEC yesterday, which contains the company’s earnings press release and is available on the company’s website. I would now like to introduce your hosts for today’s conference, Mr. Dinos Iordanou, Mr. Marc Grandisson, and Mr. Mark Lyons. Sirs, you may begin. Constantine Iordanou : Thank you, Chanel. Good morning, everyone, and thank you for joining us today. This is our first quarter to include the combined results of our Arch MI and United Guaranty and we are very pleased with the early days of our integration process. Marc will discuss the integration and more details in a few minutes, but let me say that we are happy with the progress achieved in the first quarter. Although, it is still early, we are very pleased with the resilience of the United Guaranty Corporation's customers as they make the transition to our systems and platform maintaining the strong relationship they achieve with the United Guaranty over the years. As we discussed last quarter, our guiding principles for the integration of these companies is to find and deploy the best parts of each organization on a going forward basis. I am referring not only to our most important resource, the people who come to work for us every single day, but I'm also including the operating systems, pricing approach, and algorithms, along with all back office functions that they provide customer service. Our number one task is to create a high quality experience for our customers as we continue to enhance Arch MI's position as a market leader that should earn good returns through this cycle and for many years to come. One additional benefit or opportunity that comes to our results of the acquisition of United Guaranty is the opportunity for us to move our headquarters of our Global Services Group to North Carolina. A Global Services Group manages a lot of the back office work for our insurance, reinsurance, and mortgage businesses. And consolidating the operations over time in one location increases our flexibility to fill jobs that are lost through attrition in other parts of the country to a lower cost environment. Now, turning to first quarter results, our reported combined ratio on a core basis, Mark will define that in a moment, improved by 7.7 points from the first quarter of 2016, led by excellent results in the mortgage segment offset by the effects of higher attritional and catastrophe losses in our property and casualty segments. Accident year results decline in both our insurance and reinsurance segments, reflecting soft market conditions. Our mortgage segment improved its accident year combined ratio quarter-over-quarter to 50.4% from 65.8%, 15.4 points of improvement in the first quarter of 2016 year as the tailwinds of better credit quality and scale drove excellent profitability at Arch MI U.S. Tellingly, our mortgage segment went from representing only seven point percent of net earned premiums on a core basis in the first quarter last year to 24.6% for the first quarter of this year, nearly identical to the earned premium for our reinsurance segment in the first quarter of 2017. Loss reserve development remained favorable in each of our segments which is -- which in the aggregate; reduce our combined ratio by 8.5 points. There were no significant changes in the property-casualty operating environment from last quarter. Marc Grandisson will elaborate on what we see in each of these markets in a few minutes. On an operating basis, we produce an annual return on equity of 10.3 % while on a net income basis, we earn a return on equity of 12.6% for the first quarter of 2017. Net investment income per share for the first quarter was $0.69 per share, up $0.13 sequentially from the fourth quarter of 2016, primarily through the assets that came over with the acquisition of United Guaranty. Our annualized pretax investment income yield was 2.13% for the first quarter of 2017 just slightly above the level observed in the fourth quarter of 2016. As you know, we manage our investment portfolio on a total return basis which on a local currency basis was up 170 basis points for the quarter and 164 basis points, if we exclude the effects of foreign exchange. Our book value per common share at March 31, 2017 was $57.69 per share, a 4.5% increase from the fourth quarter of 2016 and at 16.4% increase from the first quarter of last year. Mark Lyons will give more details on the components of their change in book value per share in a few minutes. Before I turn the call over to Marc Grandisson, I would like to discuss our PML which decline modestly from January 1st as of April 1st 2017 our largest 250 year PML for a single event in the Northeast was down to 473 million or 6% of common shareholders' equity. This is the lowest we ever had in our history. Our Gulf of Mexico PML was at 383 million and Florida Tri-County PML decreased to 386 million. I will now turn it over to Marc Grandisson to comment on our operating units and market conditions. Marc, over to you? Marc Grandisson : Thank you, Dinos and good morning to you all. Before I review market conditions across our segments, I am pleased as Dinos also alluded to earlier to report that the integration of UG and Arch MI is going very well with our focus on high customer service to maintain and improve our relationships. While the strength of the combined entity is already apparent, we are working diligently to unify the U.S. MI operations and most notably, we have decided to base our U.S. mortgage insurance headquarters in North Carolina. We believe that there will be opportunities and additional opportunities to realize efficiencies without jeopardizing our customer relationships and we will keep you informed as those efforts materialize for the next several quarters. At the end of our first quarter, as a combined global MI company, our expense ratio for this segment declined to 29%. Over the next few years, we are targeting a mid-20s expense ratio in the segment as the business matures. Our new insurance written or NIW was 12.7 billion for the first quarter, an increase of 8% over the same quarter in 2016 on an average combined basis. We estimate that Arch U.S. MI market shares remained in the mid-20s for the first quarter of 2017 consistent on a pro forma basis with a 26% market share indicated last quarter. The current premium yield was essentially unchanged with the last quarter's level, over 75% of our and NIW came through our risk based pricing platform. Rising interest rates in the fourth quarter reduced the volume of refinance activity and accordingly led to an improved level of persistency which came in at 77%, purchase market accounted for 85% of our volume this quarter. The overall quality of the risk return is still very strong and stable. With average FICO scores of 743 in our monthly singles mix at 82% and 18% respectively meeting our post acquisition objectives in the quarter. Arch also continued to build on its position in the U.S. GSE de-risking transaction with approximately 2.2 billion of risk in force at the end of the first quarter 2017. Arch remained lead market for this type of risk transfer execution. Finally, our Australian mortgage insurance relationship continues to generate a good flow of business and contributed roughly $4 million of profit for the quarter. As this business is all single payment upfront its contribution to profits should grow with time as premiums are earned over the life of the mortgages. Moving onto the P&C insurance world which represents 50% of our earned premium. As we have indicated on prior calls, market condition remains challenging. Rate decreases have slowed somewhat, but are still broadly less than last trend. This is especially true for larger access accounts which tend to be more commoditized. The rate change differential between our segment is wide reaching for 410 bps in the U.S. for the first quarter. A positive 140 bps rate change for the lower volatility line in a negative 270 bps for our cycle managed business. As a result of that market economy, all of our P&C segments continue to move toward -- towards smaller account and more specialized areas of the market and are walking away from accounts when returns are not acceptable. In our primary U.S. P&C insurance operations, we had margin erosion of 70 basis points for all lines in the first quarter. To borrow an expression from Dinos, we have seen what's cooking in the kitchen before and we don't like the taste of that meal. Turning to re-insurance which represents about 25 % of our earned premium this quarter, it's a similar story and that we continue to focus on the few opportunities that we have relative strength and more favorable returns while we are deemphasizing the more commodified segments as rate and loss trends continue to erode margin, affecting on the current trends in a broader reinsurance market. I am reminded of the old adage that I heard often from Paul Ingrey volume is vanity, profit is sanity. Allocating capital judiciously is a cornerstone of our corporate mandate. As we sit here today, mortgages represent one-third of our allocated capital 25% of our net earned premium and 70% of our underwriting gain at a mid-to-high teens ROE. We're happy to have the flexibility to allocate capital across our three platforms to the markets which are generating good returns and we believe that this flexibility allows Arch to generate alpha with more stable returns for its shareholders. And with that I'll hand this over to Mark to cover the detail financial results. Mark Lyons : Thank you, Marc and good morning everyone. Given that this is the first full quarter after the UGC acquisition, I am going to provide more focus on the associated impact on the call today. First of all, I’ll highlight just a few items about this quarter. But as a reminder the usual quarterly topics can be found in the earnings release and the associated financial supplement. Okay, now I'll make some summary comments for the first quarter on a core basis as Dinos referenced earlier. The term core corresponds to Arch’s financial results excluding Watford Re, whereas the term consolidated includes Watford Re. So claims recorded in the first quarter of 2017 catastrophic events that have reinsurance recoverable reinstatement premiums were 12.3 million or 1.2 loss ratio points compared to 0.5% in the first quarter of 2016 on the same basis, mostly emanating from within our reinsurance segment. The activity was primarily driven by Australian cyclone Debbie and various other smaller events around the globe. Again, we believe that this result continues to highlight our property cat underwriting discipline as actual reported losses on cat events continue to correlate with the exposure reductions that have been implemented over the last several years. As for prior period, pure net loss reserve development, approximately $83 million of favorable development, was reported in the first quarter led by the reinsurance segment with approximately $57 million favorable, the insurance segment of about $2 million favorable and the mortgage segment providing nearly $24 million of favorable development. Nearly all of the mortgage segment favorable development emanated from the U.S. portfolio and a meaningful portion or $8.2 million, stem from favorable development resulting from segregation recoveries on mostly second-lien and other portfolios that came over as part of the UGC acquisition and that are, in fact, runoff operations. These segregation recoveries have been reflected in UGC's historical results over time and could continue this year and in future years, depending upon the associated management of the files. The reinsurance segment, net favorable development, was across most underwriting years for short and medium tailed lines and predominantly from the 2003 to 2013 underwriting years for long-tailed lines. The calendar quarter combined ratio on a core non [Indiscernible] basis was 78.8% and when adjusting for cats in prior period development, the core accident quarter combined ratio was 86.1% compared to 92.4% in the first quarter of 2016. The reinsurance segment, accident quarter combined ratio, excluding cats of 97.6% compared to the first quarter of 2016 94.2%, while the insurance segment's accident quarter combined ratio excluding cats is 97.8% compared to 94.9% in the first quarter of 2016. Both results reflect higher loss specs due to current difficult market conditions. The reported insurance group accident quarter excluding cat loss ratio increased approximately 150 basis points quarter-over-quarter. And after controlling for larger additional losses and mix changes, increased approximately 70 bps, which Marc Grandisson referred to earlier. Competitive conditions in the PC markets, however, were more than offset by the continued improved profitability of the mortgage segment, amplified with their net earned premium of being a larger proportion of the total. The mortgage segment's accident quarter combined ratio improved 14.4 points, as Dinos referenced, quarter-over-quarter and their net earned premium represented nearly 25% of the total core net earned premium compared to only 7.4% in the corresponding quarter of 2016. Remember that in the mortgage segment, accident quarter has a different connotation than in PC and it is more similar in concept the claims made businesses in PC space since the notice of default defines the assignment to be appropriate in the quarter. Similar to last quarter, there were some expense costs in the first quarter resulting from the UGC acquisition. You may recall that since the acquisition occurred at year end 2016, only the balance sheet was impacted in the fourth quarter, not the income statement. This quarter, we have a full income statement reflection of the combined portfolios. As for the reference expenses, the company incurred $15.6 million of such pretax expenses related to the UGC transaction in the quarter as compared to $25.2 million incurred serially [ph] in the fourth quarter of 2016. The sources of cost were different, however, as this quarter, the cost emanated from UGC acquisition-specific bonuses, severance and replacement costs and trailing UGC transaction legal costs. More specifically, the UGC specific bonuses and transition compensation costs totaled $6.8 million pretax and severance and outplacement costs totaled to $8.2 million resulting from reduction in force actions taken on January 31st and March 31st, affecting approximately 205 employee positions and 60 contractors. The actual salary compensation recognized in the first quarter associated with these employees involved in the risk-in-force efforts was $4.1 million. Given that the January 31st reduction in force only had one month of salary expense reflected in the quarter and the March 31st reduction in force had a full quarter of salary expense reflected, a $5.7 million quarterly run rate savings of salary expense is anticipated. We will comment in future quarters about any other actions taken and their financial impact, but these figures reflect only the impact of reductions in force that have already been implemented. Given the nature of these expenses, we have excluded them from operating income as they are not indicative for our true underlying performance. I'd also like to remind everyone that we issued $12.8 million approximately, 4.8 million common equivalent shares to AIG as part of the UGC purchase price. They had an insignificant impact last quarter on average common shares outstanding, given the 12/31 closing date, but had a material impact this quarter as the diluted weighted average common shares outstanding increased to approximately 139 million shares this quarter versus 125.4 billion in the fourth quarter of last year. I bring this up because I still see analyst reports and conversations still utilizing pre-common share equivalent numbers. We're using that in all our statistics and we recommend you do too. As a respect to the effective tax rate with our changing portfolio and geographic mix, I provided full year 2017 indications on the last call that the expected tax rate on pretax operating income would likely be in the low to mid-teens range. In the first quarter of 2017, our tax rate on pretax operating income was 14.4% with 100 basis points additional reductions of 13.4% stemming from a change in GAAP accounting affecting stock compensation. I'd like to point out that we expanded our U.S. primary mortgage insurance disclosure in the financial supplement to provide enhanced information by book year or underwriting year for the PC analyst. For loss reserves, insurance in forced, risk-in-force and delinquency rates as well as aggregate NIW splits between monthly and single premium policies, as well as providing our P. Meyer efficiency ratios on a consolidated U.S. MI entity basis. I also want to highlight the difference between the U.S. primary mortgage division's gross versus net risk-in-force. At the end of the quarter, the gross risk-in-force is $60.6 billion, whereas the net risk-in-force was 28% lower at $43.6 billion. As we have consistently implemented in all our segments, our ongoing mortgage strategy is to maximize profitability while simultaneously protecting the balance sheet. The existing quarter shares that are in place, along with the existing and ongoing excess of loss and capital market protections provide this aggregate and tail risk balance sheet protection we see. As for after-tax operating income EPS accretion realized in the first quarter of 2017 from the UGC acquisition, we examined our results with this and without the impact of the UGC acquisition, giving due consideration to associated debt finance interest cost, preferred stock dividend charges and intangible amortization. The realized beneficial accretion from the transaction was nearly 25% on a reported basis. And just to remind everyone, we have previously provided long-term operating income per share run rate accretion indications over a multiyear period of being in the 35% area. It is important to reemphasize that this long-term reportable accretion is expected to accelerate, as the 2017 and later book years become more impactful on a net basis in future quarters and as the benefits for reduction in force and other actions such as duplicative system eliminations overtime are also realized in future quarters. On a GAAP basis, at March 31st, our total debt to total capital ratio was 20.6% and total debt plus preferred to total capital is 27.7%, which is down 100 basis points from year end 2016. This leverage reduction was due to our growth in common equity as our debt preferred levels were unchanged from year end. Consolidated operating cash flows were down $111 million relative to the first quarter of 2016. The first quarter operating cash flow was generally lower on a seasonal basis and the timings of higher retrocession and reinsurance premiums from our reinsurance and mortgage groups, respectively, drove a majority of that change. We did not purchase any shares during the first quarter of 2017 and don't anticipate repurchasing any during the balance of 2017. As a reminder, our remaining authorization is $446.5 million, which has been extended through year end 2019. Dinos mentioned our growth to book value per share of 4.5% from last quarter. It's important to note that this stemmed from both strong underwriting and strong investment performance. And with these introductory comments, we're now pleased to take your questions. Constantine Iordanou : Operator, we're ready for questions. Operator : Thank you. [Operator Instructions] And our first question comes from Geoffrey Dunn of Dowling & Partners. Your line is now open. Geoffrey Dunn : Thank you. Good morning. I was hoping I could get a little bit more color on the incurred loss development in the MI side this quarter. First, can you give a better idea in terms of the improving claim rates, are you seeing that from your late stage bucket or more of the mid and early stage delinquencies? Constantine Iordanou : I think on the U.S. side, you're going to see that never that kind of a report quarter view and we're not seeing that well we're not recognizing it as much in the more recent report quarters as it would be for once a little more aged. But I think just part of what we might want to discuss given the size of it is that and I've mentioned that most is coming from the U.S. business, about 1 million came from the reinsurance side, so it's kind of insignificant. But there was on subrogation, on a cash receipt basis, on the establishment that normalized our accounting policies between the two consolidated entities now. So subrogation reserves put up, these are normal course, but they were scattered between first lien and secondly lien and other portfolios that were there and they've been there historically that are now. The fact that they're most of it is in one-off doesn't mean that they're going to dissipate; they'll fall off a lot more slowly over time. So hopefully that answers your question. Geoffrey Dunn : So your comment about the favorable rates is more on the key lock exposure, not necessarily the primary book? Mark Lyons : No. Well the primary book, yes you're still seeing some improvement, but they're not coming from the 2016 report quarter. I believe it's 2015 and a little bit backwards. Geoffrey Dunn : Okay. So the 12 plus, right. And then on the current period provision, can you give us an idea the incidence assumption for the new notices and how that compares to maybe the pro forma result a year ago? Mark Lyons : Actually, I don't have that in front of me, but -- so you're talking about the claim rate? Geoffrey Dunn : Yes, the initial claim rate assumption on the new notices? Mark Lyons : Jeff, I think that's going to have to be something we channel back through [Indiscernible]. Sorry I simply don't have that in front of me. Geoffrey Dunn : Okay, great. Thank you. Operator : Thank you. And our next question comes from the line of Kai Pan of Morgan Stanley. Your line is now open. Kai Pan : Thank you and good morning. So the MI expense saving opportunities it looks like if you look at legacy Arch as well UGC the other operating expenses add up to about $60 million and this quarter is down to 40, is that run really going forward or there's say other opportunities or the other way to ask it is that you're targeting at 25% expense ratio overtime now it’s 29%, you think that improvements more coming from the absolute dollar amount of reduction were up more from the topline premium growth? Dinos Iordanou : Let me give it a shot and I’ll give it to Mark to get into the details. But we don't want -- we didn't make projections even though internally we have certain things in mind because I want our teams as they integrate to play in a passion that improves our long-term opportunities to be as efficient and as effective without affecting customer service with our competitors. Having said that, okay, so a lot of it is going to come from redundancy in personnel that it will get eliminated overtime. Mark gave you a number in the first quarter we have eliminated approximately 270 positions, on April 1st there was an additional 97. We’re just going to be as part of our report card, we're going to share with you in the second quarter not knowing what else is going to happen in there in the second quarter because I'm not putting undue pressure on how people to hit certain numbers. Our instructions Mark and I is do the right thing with the idea that if we don't need certain individuals see if we can re-assignment into other jobs, low guest as we lose in attrition in other parts of the organization. And that's one of the reasons we even move of our Global Services headquarters down there because it allows us to manage the workforce in a much more efficient bases and we're not just focusing on United Guaranty, we're looking at every operation and we do that as a matter of course independent if we made an acquisition or not. That's a prudent way of managing. In addition to that, you've got to get into systems and back rooms and not just headcounts, but where does that headcount reside and is of course differential. For example, the New York job is much more expensive than a North Carolina job and a job in the Philippines is even less expensive than a job in North Carolina and we look at that as a global organization. So there will be additional savings. It's not that we don't know how to push the pencil and make calculations, but we don't like to promise things to influence good judgment. We rather report after we take the actions that trying to hit a particular number. Mark Lyons : And I think what I would add in terms of the questions, the top line is not going to change significantly just by virtue of being MI portfolio. It's very sticky, it’s very straightforward, a lot of monthly coming in -- depending on our market share. But for the remainder of the year, for the foreseeable future, we don't see much change. So it's really to answer your question more directly which Dinos did it that’s going to be really as a result of absolute dollar reduction as opposed to premium related ratio. Dinos Iordanou : We are -- Kai as Mark and we wouldn't be felt as much in 2017 which is probably the model question you are asking. For a longer term basis, as the impact of the AIG quota share, 50% quota share on 2014, 2015, 2016 underwriting years starts to lessen and we're writing 2017, 2018 towards 100% without the quota share coming in that will start to flip and you'll see an increasing growth on a net basis for your denominator. Mark Lyons : Without change in the personnel Dinos Iordanou : Correct. Mark Lyons : And the quarter has at 30% seat, so at some point in time that it will revert to a benefit. Kai Pan : Okay. That's very clear. Dinos Iordanou : If we -- and that 25 is not -- we think we are going to be overtime below that number, but at some point in time, we say 25 is something that we're trying to achieve 25% expense ratio, but you can even be better than that overtime. All I want is efficient operations with good customer service. And at the end of the day, we want to not have an un-level playing field with our competition so we monitor that. How do they do things and they are better than us? What things we need to do to improve? And I don't want to have a structural disadvantage. And traditionally, over the last 15 years we didn't allow that in our operations and we won't allow within the MI space either. Kai Pan : Okay. And is there a restatement in terms of the legacy like Arch’s MI like expenses. Mark Lyons : I guess there's two things I would say there's a reclass associated with the intangible amortization where in the mortgage space, others we had more above the line. Now we have below the line. So because with our goal to be very, very transparent on the UGC tangible amortization. It only makes sense to make that a corporate wide approach. So yes, would have been a reclass and that's why some of the prior year may look a tiny bit different than it was when we look at the numbers last year, so it's a good catch. Kai Pan : Okay. Lastly, just remind us what's the lockup period for the AIG preferred shares and like do you have a capsule flexibility or first write to repurchase that shares? Mark Lyons : It is identical to when the SBA was signed which is a 36 months, two-third cumulatively at 12 months and 100% cumulatively at 18 months. Kai Pan : And do you guys have the capital flexibility to participate? Mark Lyons : Yes, we do. Kai Pan : All right. Thank you so much. Operator : Thank you. And our next question comes from the line of Elyse Greenspan of Wells Fargo. Your line is now open. Elyse Greenspan : Hi. Good morning. When you guys announced this deal with UGC in August, you guys had said about 50% of earnings would come from P&C and mortgage and all of the underwriting income which shifts to about 70% in mortgage. Would you say that the mortgage market has gotten better or the P&C market has gotten worse than the view that you had. I guess when you announced this deal and laid out those metrics to us in August. Constantine Iordanou : Well, you look at it in a very short time. Let me -- in the short time, your question is -- and your conclusion is correct. I think the P&C, both insurance and reinsurance, has deteriorated because we're not getting rate increases to keep up with trends. So, in essence, it's eroding, so that means you're going to write a little less than what you wanted to and the profitability may not be a little less than what you want to. Having said that, I think every indication on the MI space is that things are better. Delinquencies, the better, and in essence, the credit box has not deteriorated, is as good as it was at that time. So -- but you got to take our comments from the long-term because we -- in everything that we do, we have a long-term view and we make judgments as to where we're going to play, how much capital and resources we're going to allocate on the long-term view. And right now, I can tell you, greenlight is on MI, amber, not red, but amber lights on the P&C, both insurance and reinsurance. Having said that, I can't predict the future. I don't know if the P&C cycle changes and at what time it's going to change. But I can tell you, don't forget, our rules to the P&C and it doesn't mean we're not going to do a lot on the P&C space, given the right market opportunity. We're not reducing the group capability from an underwriting perspective. As a matter of fact, I think it's fair to say we have a bit of overcapacity in underwriting talent, which we're going to maintain. The course associated with that is insignificant when you weigh it versus the opportunity when the markets change. Is it going to turn three years from today, three years, I don't know. But I can tell you, when it does, we're going to know it, we're going to take advantage of it and we will have the people, we're not going to be chasing people to take advantage of it. Anything you want to add, guys? Mark Lyons : Just one quick thing. I think it's easy to get lost in the sauce. It's a good observation. That's the underwriting gain or loss, but each of those businesses have a little different duration. So, reinsurance group may have more property and cat, so the insurance group may have longer tailed lines, every portion to bring in more assets and so forth. So you look at on the writings, you brought interest income and, it'll be skewed to a bit, differently away from mortgage. Elyse Greenspan : Okay, great. And then Dinos, following up on your comments, you mentioned loss trends on the property casualty side, do you think if we start to see a higher level inflation, which it seems like you and some of your peers are pointing to, do you think the industry will take price to combat higher inflationary levels? Constantine Iordanou : I don't -- no, you're thinking very logically and that's a mistake in our business. Although more interested very markets is fear and greed. And right now, I don't see greed out there, I see some concern, but I don't see fear. Yes, there is some concern. As a matter of fact, I think that [Indiscernible] in the coal mine is being commercial auto liability, who has a short tail, and is starting to percolate and bubble up in a lot of places. You see it on the riders of commercial auto, you see it in penetrations on the umbrellas which is part of the mix when you write excess liability umbrella. You're covering that portion of the risk, too. And you're seeing a reaction in the reinsurance market. It's not easy to find auto carve outs anymore or the pricing is going up. So, it's not an early indication that maybe GL might be a problem in the next year or two, and then Worker's Comp maybe later on and Mike that create a verb the people they say, we've got to adjust pricing in all three lines going forward. I don't know. We can't predict the future, but I can tell you, there is stress in the system because it requires more rate increases than we're getting. And we're not keeping up with the trend and it sounds to me like 1998, 1999 all over again that the frogs in the happy water, but the temperature is going up. Marc Grandisson : I think in addition I would just add to what Dinos has said, the other dimension of fear and greed is that underwriter of companies underwrite also with some kind with the assumption of what interest rates are going to be in the future. So, the inflation goes up and interest rate goes up accordingly, if not more, you might generate all kinds of different behaviors. I would argue with that even in this day and age, in the last two, three quarters, there is probably an expectation of rate increases in the future that might explain why some of the pricing is still soft as we speak. So, there's a lot of stuff, a lot of things moving the marketplace. So, there's more than one number that drives everything. Elyse Greenspan : Okay, great. Do you guys have a forecast for mortgage industry NIW for 2017 and what share that would be for Arch? Marc Grandisson : We have expectations and we do follow the MDA and the Freddie and Fannie and we look at what they do, what they produce. So we would stop the same data that you're looking at. In terms of NIW, we don't have -- we have, of course, projections. And we're accomplishing that we're not at liberty to share that. And frankly, we're going to be reacting to whatever market situation present itself in the next year or so. So, we don't spend much time, if you will, projecting what NIW is going to be in the market. We have a good place and good positioning with our clients and we try to do the best. And as we said before, our market share over time, we expect might decrease in the low to mid-20s. So, that's also could be something that happens by attrition. It's not moving. Constantine Iordanou : It's a pleasant surprise for us. I don't know if was basically, we didn't seem much overlap between Arch MI and United Guaranty. There was only one major customer that we both of us will significant participants and they reduced our combined share just slightly in the first quarter. There was no other change any other major customer and that's why I talk about the resilience of the customer base of United Guaranty. And basically, we are trying to do the best job possible to not only to maintain the service at a very, very high quality, but also improve on it and that's what I've been emphasizing to our staff. That's why I said let's not focus on integration of cost savings upfront at the expense of customers. We're going to focus on excellent customer service. And over time, we're going to get very efficient in how we provide that. And I think you can do both if you're a well-managed company. Constantine Iordanou : Thank you. Elyse Greenspan : Okay. Thanks so much. And congrats on a great start to the year. Operator : Thank you. And our next question comes from the line of Sarah DeWitt of J.P. Morgan. Your line is now open. Sarah DeWitt : Hi, good morning. Just first of a follow-up on the share buyback, I think you said you wouldn't buy back any stock in 2017. So, just to clarify, if AIG did sell, you would not participate? Mark Lyons : Well, there's optionality in there. It's a decision tree, basically. So -- but it's as I stated, but we're not going to be buying overtly. Other than those possibilities, we're not going out and buy back shares. Constantine Iordanou : Yes, our team there Sarah is, we always want have flexibility of the balance sheet. Right now, our debt and hybrid is at about 27 point something percent, of which about 4.5% or so is short-term revolving facility. That doesn't give us a lot of capital credit with the rating agency. So, at some point in time, my first action with access -- with excess capital, maybe I can reduce that down and then we'll revisit this year and purchase in 2018 and beyond. Don't forget, I don't know when AIG is going to decide to sell, and so I can't answer that question. If the selling and 2017 will probably would likely we will not participate, but if it's all 2018, it's an open question. Sarah DeWitt : Okay, great. Thank you. And then separately, I wanted to get your thoughts on some of the practices of the insurance brokers. I'm sure it was critical some of their practices, particularly in London and so there could be regulatory our customer backlash and now they're being investigated by the FCA. So, just trying to get your thoughts on the practices and GT&E [ph] regulatory risk with your current distribution channel? Constantine Iordanou : Listen. At the end of the day, distribution cost is part of the business, been always part of the business. Some people view it as a transactional. I think it's more than that. Some of it is transactional, some of it is advised and counseled, et cetera and it's all very into some number. The ultimate arbiter of if that's fair or unfair or sustainable is the customers themselves. They know that both our revenue and the broker's revenue comes from only one source, it's out of premium they pay. So, if they don't like what's going on, they have ways to change that. But at the end, that's a customer decision. Now you ask the regulatory question. We believe, at the end of the day, that the insurance and reinsurance business is highly competitive and we're strong believers in the free market. So, at the end of the day, if the customer is satisfied and nobody is doing anything that is illegal with the regulator have a say in it, let the market decide if it's fair compensation or unfair compensation and the buyer of the product is the person who counts the most. Sarah DeWitt : Okay, great. Thank you. Operator : Thank you. And our next question comes from the line of Nicholas Mezick of KBW. Your line is now open. Nicholas Mezick : Hi, good morning guys. Constantine Iordanou : Good morning. Nicholas Mezick : Last year, you discussed the way to think about mortgage, earnings volatility as the micro or underwriting decision and the macro changes. Now you assigned two-thirds of the volatility of the micro and one-third on the macro. Given that different composition of the book today with UGC acquisition, how would you expect a change in either of those sensitivity? Constantine Iordanou : Actually, what I said last year was 70/30, not 66 and two-thirds and 33 and one-thirds. And I'm sticking to that 70/30 theory because we did analyze a lot of that data through the financial crises as to what was causing defaults and we compare it with other environments. For example, what happened in Canada where all day no verification loans, et cetera, they were not allowed and there was a minimum of 5% down payment requirement and illegal historically and you see the performance of the Canadian book of business, it was much different even with the same economic conditions not only affecting the U.S., but affecting Canada and what the outcome of that business. So, the 70/30 hasn't changed and what I'm saying -- what we're seeing, I think, the ability of MI companies to go back to the very lose underwriting standards that were common during the financial crisis in 2007 -- 2006, 2007, 2008. In the future, that would be much more difficult. First of all, management, they saw companies [Indiscernible], so they're more resilient on the risk management side of the business. And more importantly, I think the technology is much better today in analyzing individual mortgages and attributes that affect that. And also, more importantly, the GSEs, both Fannie and Freddie, with the P. Meyer approach and as regulators of the MI companies, they're a lot more resilient in their approach on maintaining stability on the balance sheets of the companies that they provide them the counterparty risk. Marc Grandisson : But right now, exactly what's going on. There's no change from last year, because clearly what drives the losses than we've seen historically is the products that were offered in the marketplace. And we've seen no change in the products offering and to echo what Dinos has said about the GSEs being really wary or at least very attentive to what's happening in the marketplace, had an increase in the sort of discounted LPMI business over last years, recognizing that that might represent a bit more risk to the system. So there's really a heightened level and still high level of scrutiny and attention paid to the product that our deliberate in the business. So no change from last year. Nicholas Mezick : Okay. Thank you both and Dinos apologies for escorting [ph] you. Constantine Iordanou : Well, no, I just like -- it's my test as I'm getting old -- I'm 67 that I'm still saying. Nicholas Mezick : Just one follow-up, last quarter, you referenced your door being broken by people wanting to get a piece of your business through reinsurance. Just want to check on the status of the door and in turns demands for the reinsurance of your portfolio, in particular the MI book? Constantine Iordanou : It hasn't changed, but like I said, we're here to feed our shareholders first. And then if we have extra, we can reach out level to others. This is a good business. Within our risk management limitations, we will continue to have our shareholders in mind first and then our reinsurance partners and other segments. Nicholas Mezick : Okay. Thanks. And enjoy lunch. Constantine Iordanou : Thank you. Operator : Thank you. And our next question comes from the line of Josh Shanker of Deutsche Bank. Your line is now open. Josh Shanker : Yes, good morning everybody or almost end of the morning. Constantine Iordanou : Hi Josh. Josh Shanker : Following up on the last question, I wonder why it does or does that make sense to think about MI the same way we think about cat. Is there a PML that you have and maybe you're not going to tell us what it is, but did you calculate something like that? Constantine Iordanou : Yes, we do. We have -- you've got to lean on the concept of what is [Indiscernible] event, right? A severe recession, housing prices collapsing, et cetera. And we build these models that we model and then we calculate what based on the book that we have what the macroeconomic effect of those events. They don't happen like the hurricane that happens in one day and the next day, it's going to be more gradual. But at the end of the day, if you're writing the business, you got to be cognizant of that. But we model that and we have a tolerance and the tolerance is no different that we don't want to comment on these, what I will call catastrophic events more than a probability of us losing 25% of our common equity capital. So that limitation is still there. It's a book limitation. I mean, myself and the rest of the management team in our discussions with our Board, they say we want to know what is the maximum loss that you're willing to have on a stress scenario. And we want to understand what that stress scenario is all about. And that's how we build our model around it. Marc, you can elaborate? Marc Grandisson : The only thing I want to add, Josh, is not exactly as a cat book of business because you're going to have future income in so you have to factor in an S&P type of PML, so this is what Dinos has been alluded to. We have to factor that in because it's part and parcel of what we're assuming as part of the policies. The policies, those that done default continue paying premium for the future and we have credit for that as well. So, just want to make sure it's not one event, one of them and like Dinos said, it happens overnight. It's an over two or three-year period development and we take an S&P type of approach. Mark Lyons : And just, and I think this one other thing. It's a good question, just given the relative size of its organization. But thinking wise, you got to learn from the past. I mean anything that erupts that can cut across underwriting years. We learned from asbestos and GL, we learned from environmental and the GL, we learn from -- anything that could signal it, we can break it down his lines have a lease component of cats. I think more so in the mortgage space, but we think about that in every line of business. Josh Shanker : So, let's just take a scenario. I look at the business right now not only well underwritten but also well priced. And even if pricing works, the clients still might be well underwritten on the mortgage-by-mortgage level, therefore, avoiding the risk of "catastrophe". To what extent--? Constantine Iordanou : You're not avoiding the risk totally, the risk of catastrophe. Because even well underwritten business, if you have a higher unemployment, you're going to have hardships, your default rate is going to go up. If you could have house prices collapse, that means the claims that you're going to have, they're going to cost you more. So, at the end of the day, those you can avoid. That's a part -- and I put that a round number of 30% on the problem and the past crisis was macroeconomic events. With [Indiscernible], for example, the Canadian book of business but it didn't cost companies their profitability suffer, but there were still profitable and didn't go out of business. What caused collapses in the U.S.; it was all of these crazy stuffs like how do you underwrite an old verification law. You don't know the information you getting is correct. How do you factor in these old days? Or 110 LPV stuff and there was a lot of craziness that it went to the mortgage space at that time. Josh Shanker : So, when the cat market gets irrational, Arch can say, look, someone else can underwrite this business, there's 100 other companies who know how to write property cat let them chase the market down. When you're only-- Constantine Iordanou : Exactly right. Josh Shanker : When you're only [Indiscernible] participants, what does that mean when the markets gets irrational? Constantine Iordanou : When the market gets irrational, that means you got to maintain your discipline. Our hallmark as a company is that we have been disciplined underwriters. And as long as I breathe, this team which I have 1000% confidence is, they're going to be disciplined underwriters. It's our DNA. For better or worse, it's our DNA. The Arch DNA is disciplined underwriting. Be patient, disciplined and at the end of it. And thank God, we got a Board who understand that. I never, never had a discussion with my Board that says, your volume is suffering or -- they never talk about volume. They do talk about profit and margin and are you taking undue risk. That we talk all the time. Marc Grandisson : Josh, it's unfair to really compare to cat, because a cat and generally, for us to achieve to be hurricane in September that hits Florida. But it's underwriting mortgage and we have indeed in our company have the proper early warning systems in terms of risk quality, we're going to actually take actions way ahead of things percolating up. If the decision as to where we put the redline or the yellow line as to when we start deemphasizing it, we do have access the information. And frankly, and Dinos said this in prior calls, if the people that we're in business in 2006, 2007, 2008 had heeded those calls and those points and those clear indication signals the marketplace, it wouldn't have put themselves in the position. So, it's not like you wake up one day and the risk quality was as good as it gets and overnight everything goes down by 20% and the unemployment goes from 5% to 25%. I mean you have a lot of products and you have time to react. Constantine Iordanou : PMI was recognizing segments of their business into what we will call the red line, all the way back in 2004. And they did not take action. As a matter of fact, they increase their participation in everything that they are monitoring systems were showing red. Meaning all -- loans became 28% of their book of business because a lot of the customers, especially, countrywide, et cetera, it was threatening them. You don't right, you're not indicated that good. Well, I said this before, you give me three glasses of Kool-Aid and one has cyanide in it, I'm not drinking it. So, even though the other two they are very refreshing and I'm very thirsty, I'm not drinking it. And basically, that's what the industry did. They were given three glasses, one had cyanide in it, and they down all three of them. Josh Shanker : I appreciate the [Indiscernible]. Constantine Iordanou : I don't want to be graphic, but I tell you, when you're running a company and you got your shareholders capital and you've got 3,500 employees in your hands, you got to feel like I feel. You got to be the responsible, not only for the capital, but also for the welfare of the employees. Mark Lyons : And Josh, that was three Kool-Aids, not three Bourbon. Josh Shanker : The Bourbon will neutralize it, I'm sure. Mark Lyons : But one other thing, if I could, Josh, Dinos and Marc have talked about this before, but the history was that the MIs took the risk on the balance sheet, 100% in, 100% retained. That's clearly not part of our strategy, that's the strength of the PC side. We can't think any other way than simultaneously manage balance sheet and maybe Dinos take it to you, but the benefit of going to capital markets and reinsurance as a leading indicator unto itself. Constantine Iordanou : You always have to have a loop to the market. So, by purchasing reinsurance and capital markets products, you always have a compass as to how other people think about the product, are you pricing that will enough. If you can shed risk in an effective way that tells you you're the patsy. So, you better start shutting the doors because you're not doing the right thing. Josh Shanker : Thank you for all the answers. I'm unfair to Ian. So, [Indiscernible]. Operator : Thank you. And our next question comes from the line of Brian Meredith of UBS. Your line is now open. Brian Meredith : Yes, thanks. A couple of quick ones here. First, Mark, can you tell us what was the impact of the AIG quota share on your premium this quarter? And just kind of figure out kind of going forward how that's kind of way out? Mark Lyons : Okay, hang on. Constantine Iordanou : Well you want to know the session to the AIG? Brian Meredith : Yes, the session today on quota share. Anything unusual this quarter that would have elevated it versus what it would look like going forward? Constantine Iordanou : No. Brian Meredith : Okay. Mark Lyons : I'm trying to give you a ratio, if I think if that's what you're after. So, bear with me. Constantine Iordanou : You don't want to give him the amount? Brian Meredith : Could you give me the dollar? Mark Lyons : All right, that's okay. Constantine Iordanou : He doesn't want to give you the amount; he has it in front of him. Mark Lyons : About 20%. Let me go up here. Yes, it's about 70% of the ceded premium. I was going to give it to you of the net, but that's easier. Brian Meredith : So, 70% is ceded premium with AIG. Okay. I'm trying to figure that looks going forward. So, that's kind of -- generally think about kind of gradually trending downwards over the next-- Mark Lyons : No, I would think that would, over the next three to five quarters, can be trending up and then trail down because of the nature of the monthly and-- Constantine Iordanou : Don't forget, the quota shares covers 2015 -- 2014, 2015 and 2016. So, the United Guaranty book goes all the way to 2007, 2008. We have -- we still have mortgages all the way back from the 2007, 2008. They're still paying premium. So, it's not as easy to calculate it, but a lot of the old stuff becoming more of the newest stuff. There is not going to be a lot of -- depends on the persistency of those years, the 2014, 2015 and 2016. We think that calculation is going to probably increase it a little bit and then it will come down later. Brian Meredith : Got you. Okay, helpful. And then secondly, just curious, when you talked about the expense savings, could we expect some in some of the other areas, reinsurance, insurance, also just given the relocation of the services of business operation? Constantine Iordanou : Well, the relocation, it's not that -- we're not to just going to take a lot of people and relocate. We have attrition, right? Attrition usually is around 10% in our operations worldwide. So, basically, we lose roughly about 300 positions every year. We decided that North Carolina is a better place for some of these back rooms that premium audit, some clearance system, some booking things, et cetera. So, gradually, we'll be moving -- we lose a job here, instead of replacing it in, I don't know, high cost environment, we go into a lower cost environment. And that process is being with us all along. I mean, we have operations and Nebraska. We have operations overseas in other parts of the world. So that's ongoing. The reason I mentioned it is because North Carolina, based on our statistics, is about -- has about 30% cost advantage over other -- from New York, New Jersey, California, let's say. So, over time -- and we're not trying to displace people, but as we lose people, we'll be moving back. So gradually, you're going to see that benefit coming through. But we do that as -- on our day-to-day operations, as a matter of course, we do that all the time. I mean that's what our managers are getting paid to do, make sure that we're cost effective. Brian Meredith : Got you. And then the last question. I wonder if you can give us your perspective right now on the political landscape with respect to mortgage insurance business and particularly related to the FHA. And if you get some changes going on there, what do you think the potential is for market share kind of shift back to the private MI and what do you think UGC or Arch could get? Constantine Iordanou : Well, it's very hard to predict, very hard to predict. Clearly, the FHA has more market share that they need. So, I mean, you're not going to hear that only for me, for everyone, MI CEO say that. It should be in the private sector not on the taxpayer. Having said that, I don't know what they're going to do. The share of VA, FHA in combination is probably a little north of 55%. So, that's way too much, in my view, to be on the public back. Marc Grandisson : I think what I would add to this is there a lot of things that we also have available to us in terms of providing MI insurance, only the primary, but there's clearly still an ongoing focus on deleveraging the GSEs and the MI to the third-party to private capital. That is not stopping. It's actually most likely going to be accelerating over the next year or two. The one thing that we're picking about collectively is we're agnostic as to, in general, how we would allocate the capital in terms of primary MI or CRTs to the extent that it shifts to that direction. But we're essentially more than willing to provide the risk on a private basis, either which way the FHA decided to go. But right now, we don't see any cost to be concerned in terms of the existence of the MI industry as it is. And we believe that the CRTs that we've been participating on are only going to grow in size. And it's not going to be most likely instead of the MI primary is going to be in addition to the MI market. Brian Meredith : Got you. Great. Thank you. Operator : Thank you. And our next question comes from the line of Ian Gutterman of Balyasny. Your line is now open. Ian Gutterman : So Dinos, my first question is when you're planning these-- Constantine Iordanou : What's the lunch let me know. It's at the request of Marc Grandisson, he will be grilled [Indiscernible] cheese from Cyprus with tomato, cucumber on pita bread and that's the lunch, the sandwich for today and he's salivating already. So, get to your question so he can go and eat. Ian Gutterman : Well, my first question was when you made the decision to move all these people in North Carolina, did you make sure there was a great restaurant in the neighborhood for them? Constantine Iordanou : I have a few cousins who might be interested in going down to open a Greek diner down there, but I'll leave it up to them. Ian Gutterman : Okay. I actually had a couple questions on the P&C business, but just on MI quickly first to maybe ask a little bit of a take up on Josh's question and your response about the crazy conditions in the U.S. 10 years ago. Surely, it sounds given to the point and I know you've obviously bought some reinsurance to help manager exposure there, but how concerned are you about the Australian market right now and just the HPA does seems crazy and you hear of those anecdotes about things going on to get loans to get house and so forth. Constantine Iordanou : Well, let me -- I'm not -- you're always concerned of everything you do. So -- but I'm not fearful of the Australian business for two reasons. First and foremost, there seems to be a little frothy housing prices in two major cities, right? Having said that, the frothiness is on loans that they're larger than what we ensure. These are in the million -- 0.75 million and up market. So, when you look at it from an exposure point of view, the things that we sure, the more on the lower size of homes. And the Australian market is also a full recourse market, which is different than the U.S. So, in essence, the individual is responsible for repaying the loan beyond the ability of the residual value of the house to make up for the loan over time. So, it's a different characteristic to the market. In addition to that, I think, the -- [Indiscernible] the regulator, who regulates both insurance and also the banks, they have some strict rules about what loans get approved and the stress test they put them to be able to qualify for the loan. It’s a 200 basis points stress test on every loan on interest rates movement because a lot of the loans in Australia, they're adjustable, so they're not -- they don't have these 15 and [Indiscernible] fixed rate mortgages. So Marc, you want to elaborate further on it? Marc Grandisson : I would agree with that protecting the portfolio as a result as well, are looking at the same process we have an economist who spend a lot of time reviewing and he confirms exactly what Dinos said, which is a couple of areas frothiness, but it's confined to the larger dwellings or larger condominiums and also a lot of investors coming from outside, which is-- Constantine Iordanou : They pay cash, they don't buy insurance. Marc Grandisson : Exactly. And even if they -- what we tend to focus on the lower risk and we don't do the investors loan as much. So, we curtailed and shifted the portfolio towards the more single dwelling, owner-occupied house down under. And to your point, we feel, despite all this went on about a quarter share and we have partners there to help us and in case we were a bit too optimistic, we don't think we are but just to be prudent in terms of rightsizing the old portfolio. So, we're cautiously optimistic, comfortable. Ian Gutterman : Got it. That makes a lot of sense. On the P&C business, Marc, the insurance segment, the reserve releases were pretty de minimis this quarter. Was that we sort of gross releases or is it normal matter of releases and there were some adverse impacts offsetting it? Marc Grandisson : I think the latter. I think what we are seeing, as I said in my comments and as Dinos and Mark both alluded to, the market we're seeing pickup and severity in the markets across lines of business and certainly, it started in commercial auto and story more than once. Constantine Iordanou : And the auto component in umbrellas as well. Marc Grandisson : So, there's a lot more coming. We're of the mind that it's going to get a bit more, a bit worse before it gets better again. So, we tend to take, as usual, a prudent approach to reserving. So, we might take a bit more long to recognize what looks like good news. Because frankly, a lot of people around our clients, we've seen that some of them have -- we believe, recognize too early good news in a position to having we direct or redirect that and we would like them to avoid that all cost. So, there's a little bit of some activity and severity, selectivity and causes coming through but certainly realistically, corporately, more prudent view on the ultimate reserve development. Mark Lyons : And Ian that's a direct benefit from the multiplatform we have and the holding company that you can see. So, you can see others ceding companies fear the insurance that way. Ian Gutterman : Understand. Then sort of similar to that is the higher accident years in both insurance and reinsurance. Other than, I guess, probably the elevated losses, is this sort of a reasonable run rate given where rate mix is, also some mix changes pretty dramatically? Constantine Iordanou : As of the best guess for the current accident year. I mean -- listen, the first year is a self-grading exam and we try to do the best we can. And I can tell you, things are not they good as they were a year ago and I think the reason you got to recognize them on the current accident year. Marc Grandisson : Ian, again, that what I just talked about the reserve development and what transpired over the last quarter informs us in going for as to what we think the ultimate underlying fundamentals of the business. And as you heard, we're losing margin and this thing erode as we speak. So, it moves us to do the right thing, which is to be, again, that much more prudent on the current accident year. That's what you see right now. Ian Gutterman : And then just finally on that, Dinos, I think you mentioned earlier, some may be running with parts of the late 1990s and the one thing I guess, to this looking at the reserves across the industry, I'm assuming you guys look at sort of this trends. Looks like there's the initial IBNR has been coming down every year for the past three, four, five years and it's not getting to a pretty low point. Do you agree with that trend? Does that concern you that even the low stress of a benign the last five years; it seems to be now reflected an in IBNR? I'm asking from an industry-- Constantine Iordanou : Give me another month or two. I'm going to finish our study. I do this macro study with Don Watson, about the industry reserve levels and all that; I look at cash flows -- underwriting cash flows, et cetera. Give me a little time and then we'll share that study with you. Maybe that might be might five minute in Investor Day because the guys want me to only have five minutes with you guys. They want to put me with the chef, so I'll be growing, but at the end of the day, I think it's an interesting question. Yes, it feels to me, from other indications. Let me give you an example. I won't mention names because it's embarrassing. But we lost an account, right? That it was a high deductible account that, in essence, it was about $10 million in premium and we lost it to a competitor for $3 million. To me, it's the definition of insanity. I mean, either a totally naive, you don't know what you're doing or you can beat me by going to $9 million. You don't have to go from $10 million to $3 million to get the account. So, that means [Indiscernible] don't understand what they're doing and the brokers are taking advantage of them because I can tell you, they knew that the expiring premium was probably $10 million. Mark Lyons : And the other thing Ian on that that will be in the renewal pricing monitor next year, in the basis for 33% increase. Ian Gutterman : Exactly. Funny how that works out. Thank you guys. Appreciate it. Constantine Iordanou : Thank you. Operator : Thank you. And our next question comes from the line of Jay Cohen of Bank of America Merrill Lynch. Your line is now open. Jay Cohen : Actually my questions were answered. I tried to hit the right button to remove myself, but I failed. So, thanks for the information. Great call, guys. Constantine Iordanou : Thank you, Jay. We'll continue to try to perform for the shareholder. Operator : Thank you. And now I'd now like to turn the conference over to Mr. Dinos Iordanou. Constantine Iordanou : Well, thank you all for your attention and looking forward to talking with you next quarter. Have a wonderful afternoon. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,017	3	2017Q3	2017Q2	2017-07-29	1.644	1.677	1.88	1.91	null	16.83	16.45	Executives: Constantine Iordanou - Chairman and CEO Marc Grandisson - President and COO Mark Lyons - EVP and CFO Analysts : Kai Pan - Morgan Stanley Elyse Greenspan - Wells Fargo Meyer Shields - KBW Brian Meredith - UBS Ryan Tunis - Crédit Suisse Operator : Good day, ladies and gentlemen and welcome to the Second Quarter 2017 Arch Capital Group Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the Federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your hosts for today's conference, Mr. Dinos Iordanou, Mr. Marc Grandisson and Mr. Mark Lyons. Sir, you may begin. Constantine Iordanou : Thank you, Liz. Good morning, everyone and thank you for joining us today for our second quarter earnings call. Our performance for the second quarter was satisfactory as strong performance in the mortgage segment was partially offset by higher attritional losses in our Property Casualty business. On an operating basis, we produced an annualized return on equity of 8.5% for the second quarter of 2017 and 9.1% on a trailing 12-month basis. Return on equity based on net income was a little higher at 8.7% annualized for the second quarter and 10% on a trailing 12-month basis at June 30, 2017. Our book value per common share at June 30, 2017 grew to $59.60 per share, a 3.3% increase from March 31, 2017 and a 15.2% increase from a year ago. Now turning to second quarter results. Our reported combined ratio on a core basis, Mark Lyons will define in a moment what that means, improved to 7.2 points from the second quarter 2016, led by excellent results in the mortgage segment. Our mortgage segment improved its combined ratio quarter-over-quarter to 30% from 44% in the second quarter of 2016, primarily due to increased scale resulting from the United Guaranty acquisition and consolidation activities at Arch MI U.S. Integration of the U.S. primary mortgage operations continue to progress very well and is on or slightly ahead of targets that we have set. The combined sales force is fully integrated and is working well with all of our customers. With the exception of a few customers we discussed in our last quarter call we have not experienced any material changes in our bank or credit union relations in the quarter. There were no significant changes in the Property and Casualty operating environment from last quarter as weaker market conditions continue to pressure margins. As we noted on an 8-K last month, our reinsurance segment experienced unusually high loss activity on a small number of contracts in our property facultative unit in the second quarter, which contributed to an 11 point increase to the segment's combined ratio to 94% for the quarter from the same period in 2016. The property facultative unit has produced significant underwriting profits over time and we view these losses on this quarter as an aberration. Our insurance group combined ratio also rose in the quarter to 100.8% due to effects of margin compression and an increase in attritional losses. Loss reserve development remained favorable in each of our segments, which in the aggregate reduced our combined ratio by 6.4 points. Marc Grandisson will elaborate on what we see in each of the markets in a few minutes. Net investment income per share for the second quarter was $0.66 per share, down $0.03 sequentially from the first quarter, due in part to lower returns on one of our alternative asset investments in the quarter. As you know, we manage our investment portfolio on a total return basis which on a U.S. dollar basis was 163 basis points for the quarter and 129 basis on a local currency basis. Before I turn the call over to Marc Grandisson, I would like to discuss our PMLs. For many years now we have reported our exposure to a 250-year probable maximum loss from a single catastrophic event because we believe it is easier to manage exposure by measuring risk and then limiting the amount of risk you're willing to take. This quarter, we are also reporting to you our exposure to mortgage risk from a systemic stress event or what we call internally a realistic disaster scenario or RDS. And in future, we'll be referring to that term, RDS, so it will be good for you to get familiar with it. Although mortgage risk is different from property catastrophe risk, the mortgage sector is exposed to economic events like the Great Recession which occur in 2008 and 2009. Our RDS approach models various assumptions that are outlined on our website and we encourage you to review, so please visit our website. The most current version produces losses that are about one-third more severe than what actually occur in the Great Recession of 2008. Overall, we believe it produces a reasonable estimate of downside risk. Although, as with all of our modeling, we will continue to refine and improve them as we go forward. As of the end of the second quarter 2017, our RDS generates an indicative exposure that is consistent with what we share with you at our Investor Day last month of about $1.1 billion or about 13% of our shareholders' equity at June 30, 2017. This level is well below our maximum risk tolerance of 25% of equity. Our property cat exposure are substantially the same as last quarter, with our peak zone in the Northeast representing approximately 6% of equity. We will report the rest of our property cat PMLs in the 10-Q when it's going to be filed shortly. The models for property cat and now mortgage are constantly evolving and we will update you on our assessment of risk as we view changes. Before I go over to Marc Grandisson, also I want to note that we continue to make progress with the rating agencies. As you know, following the acquisition of United Guaranty last -- all rating agencies put us on credit watch. Last night, Fitch affirmed our ratings at A+ with a stable outlook. We're very pleased with that outcome. And with that, I will turn it over to Marc Grandisson for his comments. Marc Grandisson : Thank you, Dinos, and good morning to you all. The earnings contribution for mortgage is improving to be an offset to softening conditions we see in the property casualty sector. As Dinos has mentioned, integration of the U.S. MI companies are going well as the expense ratio for the MI segment improved to 22.5% at the end of the second quarter. Our new insurance written or NIW was $17.3 billion for the second quarter, a decrease of 11% over the same quarter in 2016 on a like-for-like basis, largely due to our decreased writings of single premium business. We continue to deemphasize single premium business in our U.S. MI primary sector because we are not satisfied with the current return profile. For the second quarter of 2017, single premium comprised just 14% of NIW versus 18% last quarter. While market share is important, Arch's focus is on producing the best risk adjusted returns for our shareholders. Since not all MI companies have reported their writings as of today so far, we estimate that Arch U.S. MI's market share remains in the mid-20s for the second quarter of 2017. More importantly to Arch, 80% of our NIW came through our risk-based pricing platform, which we believe generates better risk-adjusted returns than a simple rate card. Our expected ROEs for U.S. MI is still above our long-term target of 15%. The overall quality of the risks written remains very strong. A higher level of mortgage rates in Q2 has led to an improved level of persistency, which now comes in at 78%. We continued to experience favorable development in the U.S. MI reserves, consistent with what you have heard from our competitors. The trend of cured delinquencies outpacing new notices of delinquency is continuing. Arch wrote five new U.S. GSE, the government-sponsored enterprises, credit risk-sharing transactions or as we called them the CRT, bringing our total risk-in-force from them to approximately $2.2 billion at the end of the second quarter of 2017. Average yields in the CRTs remain healthy and ROEs are above our long-term targets. We remain very committed to the GSE's ongoing efforts to develop private credit risk transfer solutions. Finally, our Australian mortgage insurance relationship continues to generate a good flow of business, although it has slowed down as we tighten underwriting standards for new originations. These efforts are contributing to a reduction in written premium of 50% sequentially in the quarter. Moving now to P&C insurance. Market conditions remain challenging, with rate decreases stabilizing somewhat. The rate change differential in the U.S. by size of account is significant. For smaller or what we call controllable accounts, also those driven by lines with auto exposure, we saw a positive 250 bps rate change in the quarter. However, for our cycle-managed businesses we saw a negative rate change of 330 bps. After factoring in these rate changes and an estimated loss trend of 210 bps, we had margin erosion of roughly 40 basis points for all lines in the second quarter for our U.S. P&C insurance operations. In addition, we have observed further broadening of terms and conditions. In this environment, the trend is not our friend. We are prudent, as always in our underwriting and reserving as we observe the insurance cycle weakening. In general, we believe that in many areas of Property Casualty insurance, the risks of too much variability around the expected returns to grow our writings. Turning to reinsurance now. We continue to focus on the few opportunities that have relative rate strength and more favorable returns, while we are deemphasizing the more commoditized segments as rates and loss trends also continue to erode margins. Our net written premium increased largely due to a specific loss portfolio transfer contract. Excluding the effect of that transaction, our growth was more modest and as a result of our continuing focus on seizing opportunities. Our property cat and property writings are still decreasing due to market conditions, as our reinsurance group focuses on margins and not just the premiums. Our ability to deploy capital to MI at mid-teens ROE and deemphasizing the traditionally commoditized overcrowded P&C market at single-digit ROEs is a testament to our flexibility. And with that, I'll hand this over to Mark to cover the detailed financial results. Mark Lyons : Great, thank you, Marc and good morning to everyone. Given that my colleagues are a little long winded today, I'm going to try to talk like a New Yorker and blast through what I have to add. In so doing, first, I'll make some summary comments for the quarter all on a core basis and as a refresher the term core corresponds to Arch's financial results excluding Watford Re, whereas the term consolidated includes Watford Re. But I'd also like to point out that we've altered the chart on Page one of the earnings release. So that now, it provides income statement and combined ratio information for the quarter on both a consolidated basis and excluding Watford Re's results, all in one place for convenience purposes. I believe that there is still some confusion about how Watford's financial results really impact Arch, given that we consolidate them and this helps to provide more transparency. For additional clarity, if only the 11% ownership of Watford Re was reflected at our underwriting results, the resulting combined ratio for the quarter would be only 30 basis points higher than our core 82.2% combined ratio. Okay, so moving forward. Claims recorded in the second quarter of 2017 from catastrophic events net of reinsurance recoverables and related acquisition expenses was 2.3 loss ratio points compared to 4.1 loss ratio points in the second quarter of last year, on the same basis, mostly emanating from within our reinsurance segment. The activity was primarily driven by Australian Cyclone Debbie at our property facultative unit and various other events around the globe. As for prior period pure net loss reserve favorable development, 6.5 loss ratio points were reported in the quarter, led by the reinsurance segment with approximately $40 million of favorable prior period development, the mortgage segment providing nearly $30 million of favorable development and the insurance segment with approximately $2 million of favorable development. Approximately 80% of the mortgage segment favorable development emanated from the U.S. primary first lien portfolio and a meaningful portion for $6.8 million stemmed from net favorable development resulting from subrogation recoveries as discussed on last quarter's call, and ULAE led by the second lien portfolio that came over as part of the UGC acquisition and that is, in fact, a runoff operation. The reinsurance segment, net favorable development was across most underwriting years for short and medium-tailed lines and predominantly from the 2002 to 2004 and 2008 to 2012 underwriting years for longer-tailed lines. The overall calendar quarter combined ratio on a core non-Watford basis was 82.8 -- 82.2% and when adjusting for cats in prior period development, the core accident quarter combined ratio was 86.3% compared to 94.2% in the second quarter of 2016. The reinsurance segment accident quarter combined ratio, excluding cats of 101.1% compares to second quarters of 2016's 98.3%. While the insurance segment's accident quarter combined ratio excluding cats was 99.4% compared to 96.1% in the second quarter of 2016. Both results reflect higher loss specs due to increasingly difficult market conditions. However, the reinsurance segment was impacted by an abnormally high claim frequency as Dinos mentioned, reported during the quarter, emanating from the property facultative units, as previously disclosed in an 8-K released in June. The property facultative unit has historically been one of the most profitable within Arch and only in one other quarter over the last 10 years has their quarterly combined ratio been over 100%, giving more support and stock to Dinos' comments of it being an outlier. The reinsurance segment also booked a retroactive reinsurance transaction for an existing client that contains sufficient risk transfer for insurance accounting treatment. Although the reinsurance segment calendar quarter combined ratio does not vary materially, when looking at results inclusive or exclusive of these transactions, the components of the combined ratio do vary. Accordingly, the calendar quarter loss ratio excluding this transaction would be 6.5 points lower, whereas the expense ratio would 5.6 points higher excluding this transaction. This should be considered when examining the components of the quarter combined ratio. Lastly, for the reinsurance segment, the second quarter of 2016 contained an unusually large gain in the other underwriting income line of $19 million, stemming from the commutation of a large deposit accounted contract with no corresponding impact this quarter. The reported insurance group accident quarter, excluding cat loss ratio, increased approximately 230 basis points quarter-over-quarter and after controlling for large attritional losses and mix changes, increased approximately 160 basis points. As a result of the ongoing competitive conditions in the P&C markets, we continue our approach of prudent current accident year loss picks. However, these difficult conditions in the insurance and reinsurance markets were more than offset by the continued improving profitability of the mortgage segment, also amplified with their net earned premiums being a larger proportion of total. The mortgage segment's accident quarter combined ratio improved to 42% even, from 60.6% in the second quarter of last year. And their net earned premium represented similar to the fourth quarter of 2017, nearly 25% of the total core net earned premium compared to only 7.5% in the corresponding quarter of 2016. Although I said this last quarter, I think it's still worth repeating that in the mortgage segment, accident quarter has a different connotation than in the PC world and is more similar in concept to claims made businesses in the PC space, since the notice of default defines the assignment of the appropriate quarter. Similar to last quarter, there were some non-recurring costs in the second quarter resulting from the UGC acquisition. This quarter, such non-recurring cost totaled $2.7 million, in contrast to the first quarter of 2017's $15.6 million. So they're trailing off, as you might expect. The sources of cost emanated from severance outplacement and trailing related UGC transaction cost. Now there were additional reduction-in-force actions taken in the quarter, but the implementation was slightly different than in the first quarter of 2017. The first quarter had 2 actions. One effective on January 31 and another effective on March 31. Therefore the first quarter saw some salary expense reflected for employees who were terminated by that quarter end. This quarter, however, the effective date of the reduction in force was actually effective on July 1. However, the 63 affected employees were noticed in May, so related severance costs were accrued, totaling $2.6 million. The salary compensation recognized in the second quarter associated with employees involved in the July 1 reduction in force was $1.4 million, which also equals the quarterly run rate salary savings because the action was effective July 1. When combined with the actions taken in the first quarter of 2017, the cumulative quarterly run rate salary savings are $7.1 million, and this would be $28.4 million on an annualized basis. We will continue to comment in future quarters about any other actions taken and their financial impact. We'll report them as they occur. Given the nature of these expenses and consistent with last quarter, we have excluded this $2.7 million of cost from operating income as they are not indicative for our true underlying performance. Through 6 months, 265 employees and 85 contractors have been subject to reduction-in-force actions. It is also worth noting that operating earnings per share this quarter included a $1.7 million equity accounting charge due to our proportional ownership interest in Premier Re due to their startup nature. As most of you are aware, we worked with AIG in June to alter the common equivalent stock lockup provisions contained within our UGC acquisition purchase agreement and completed a secondary offering in which approximately 56% of such shares were sold, thereby increasing our stocks float. Irrespective of that sale, however, the earnings per share calculation continues to employ the full approximate 130 million shares that reflects the full issuance of such stock that were part of the UGC acquisition purchase price. Moving on to tax, as respect to the effective tax rate, with our changing portfolio and geographic mix, the second quarter of 2017 tax rate on pre-operating income of 14.4% represents an updated 15.3% effective annual tax rate, along with 190 basis point reduction stemming from a change in GAAP accounting affecting stock compensation, as mentioned last quarter and 100 basis point addition of roughly $2 million, reflecting a year-to-date catch up for the now higher effective annual tax rate just mentioned. As always, the tax rate is affected by varying mixes of income by geographical distribution and any associated changes in local tax rates. Turning now to the mortgage segment, I want to point out the difference between the U.S. primary mortgage division's gross versus net risk-in-force. At the end of the second quarter, the gross risk-in-force was $62.4 billion, whereas the net of external reinsurance risk-in-force was 27% lower at $45.8 billion, as we have consistently implemented, in all of our segments, our ongoing mortgage strategy is to maximize profitability while simultaneously protecting the balance sheet. The existing quarter shares that are in place, along with existing and ongoing excess of loss reinsurance and capital markets protections, provide the aggregate end-tail risk balance sheet protection that we seek. I'll also point out that the U.S. primary MI gross risk-in-force as of June 30 contained only 8.4% emanating from 2007 and prior. As for after-tax operating income earnings per share accretion realized in the second quarter of 2017 from the UGC acquisition, we examined our results with and without the impact of the UGC acquisition, giving due consideration to associated debt financing interest costs, preferred stock dividend charges, associated transaction costs and intangible amortization. The accretion from the transaction for the quarter was approximately 29% on an adjusted reported basis. Now I use the term adjusted, because the heretofore mentioned property facultative losses abnormally depressed the reinsurance segment's underwriting income, making the apparent operating earnings per share accretion for the quarter artificially high. Instead, substituting the property facultative units' long-term quarterly financial results provides the more realistic 29% earnings per share accretion just referenced earlier. In a similar vein, I'd also like to clarify some aspects to the profitability contributions from our three underwriting segments : insurance, reinsurance and mortgage business. As stated earlier, when discussing the earnings per share accretion stemming from the UGC transaction, the relative underwriting income contribution is also distorted by the property facultative unit's abnormal loss activity in the quarter. Adjusting for this, along with making allocations of intangible assets, incremental interest and dividend costs from acquisition financing, as well as allocating net investment income to the three segments, which has not been historically done within our earnings releases or financial supplements, yields the following pretax operating income contribution mix for 2017 on a 6-month year-to-date basis. Mortgage segment contributed 55% with that definition, reinsurance segment, 25% and the insurance segment, 20%. Management continues to evaluate performance for the operating segments primarily by underwriting income and views and manages the investment function on a total return basis across all segments. This alternative view though may provide additional insight into our sources of profitability. On a GAAP basis, at June 30 versus year-end 2016, our total debt-to-capital ratio was 20.1% and total debt plus preferred the total capital ratio was 27% even, down 170 basis points from year-end 2016. This leverage reduction was due to our growth in common equity as our debt and preferred levels were unchanged from year-end. Arch core operating cash flows were $274 million, up $121 million relative to the second quarter of 2016. And this increase was primarily driven by premiums collected net of reinsurance sessions and related acquisition expenses. As Dinos mentioned, book value per share increased 3.3% sequentially this quarter. But tangible book value increased 4.2% sequentially, driven primarily by intangible asset amortization, along with a small refinement to goodwill emanating from the UGC transaction. Once again, we did not purchase, repurchase any shares and do not anticipate repurchasing any during the balance of 2017. With these introductory comments, we're now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from Kai Pan of Morgan Stanley. Kai Pan : Well done Mark, and I timed you. You cut prepared remarks by 5 minutes. Mark Lyons : Thank you. Glad I could do that for you. Kai Pan : First question is on the mortgage expense ratio. Is 22% a good run rate going forward, or there are more to come, given that some of these expense saving was still to come? Marc Grandisson : It's still early in the game. We've been there, we've been at it for 6 months. We're pleased like Dinos said, we're running on or slightly ahead of target. It's hard to see where it's going to end up in the long run, I think we'll be able to have a clear view of where we are probably by middle of next year. But if you look at our comparisons in industry, I think that anywhere from 18%, 19%, to 24% seems to be where everybody is landing. we certainly are ongoing. As, you know us, focusing on extracting as much scale as we can out of the operations. So we'll have a much better, good sense of the run rate by middle of next year. Mark Lyons : And Kai, I would just add, this is a mortgage segment. Combined ratio, so it'll also depend on a relative mix of the GSE transactions, which attract just very low marginal cost to it. Kai Pan : Is that the 32, the $32 million of other operating expense in the quarter, is that the good run rate going forward or there's going to be sort of like a further improvement or reduction there? Mark Lyons : Well if you look, are you talking MI specifically? Kai Pan : Yes. Mark Lyons : Well, that's a little tougher. You wind up good, remember it's a ratio. So you've got, you're asking a numerator question. I think Marc answered the denominator answer when it was growing scale. Given some of the activities that are in place, I think it's likely to creep lower. But I don't have, I don't think it's appropriate to have a forecast going forward. Constantine Iordanou : We try to manage the company as well as we can, lean and mean. We don't try to, we didn't do the transaction because some investment banker put on a spreadsheet some synergies that we have to achieve, et cetera. We believe that the activity so far is better-than-expected and there will continue to be some additional savings. Now, not knowing how much volume of business we're going to have, you don't know the ratio. But I think you will see, on just pure dollars, a little bit of improvement as we go back. Marc Grandisson : The one thing I would add finally to this is there's a lot of things going on at GSEs as you guys know, in Washington, a lot of things can be changing, which would mean having to beef up or increasing the amount of resources we have to allocate there or it could be a lot less. So there's a lot of moving parts as we speak. That's why we're trying to be as careful in answering that question to you. Kai Pan : Great. My second question on the reinsurance reserve release is that this quarter has been meaningfully lower than a year ago quarter. I just wonder is there anything on any trend that we should read into that? Marc Grandisson : My comments, I mentioned about comments on the ongoing trends and condition. We have seen, and I think you've heard from some other calls as well, that the loss trend is picking up in general in the marketplace. So we have seen some changes in development but not -- that significant. We're just trying to be more prudent in the way we're recognizing history and the actual experience. It has also helped us inform our current action year picks. So we're trying to be more prudent because there are a lot of things that, in addition to the loss trend, I did mention terms and conditions. So we're trying to do -- be appropriately prudent and careful in the way we're going about this. Mark Lyons : And Kai, I would also add that the relative mix of the reinsurance reserves these days, because of our reduction in the PML, purposeful reduction, we don't have as much short-tailed release, it's longer-tailed lines and longer-tailed lines have more complexity to it and emergence, so for a data-driven company, as Marc alluded to and I will release it when it shows. But you got to be more prudent when you're dealing with longer-term lines. Constantine Iordanou : And we talked last quarter, Kai, to remind you that also there was the Ogden 75 negative bps change and that has to be included in the data, which it affects a lot of our long-tail reserves. Kai Pan : Okay, great. And last one if I may. Your PML as well as RDS, when you consider your 25% shareholders' equity limit, do you simply add them up or you consider them separately given they're uncorrelated? Constantine Iordanou : Well, they're uncorrelated. And we -- don't forget, we don't add them up because you got to -- there is a probability that they might happen the same year. But the different -- the property cat is usually an annual event, it happens immediately. The mortgage is not going to happen in one year. It's going to -- it will drift, it will be three or four years. It will be the recessional period that's going to affect us. So we don't quite add them up, but we're cognizant of where we are in either segment and we do an aggregate probability estimation and if we feel comfortable we continue to add exposure. And we don't, we reduce exposure. Where we are today is not an issue. Even if you add them up together is well within our tolerance, so we're not spending a lot of time thinking about that right now. Kai Pan : Great. Thank you so much. Marc Grandisson : Right. Operator : Our next question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : Good morning. My first question, we've heard some companies kind of point to maybe a bit of a stabilization in the market, just from some of your introductory comments, it doesn't seem like you guys are seeing that. When you kind of look out towards the end of this year and even into next year, do you expect that we'll see any kind of change in the property casualty market, whether in insurance or reinsurance? With the caveat, obviously, we are still in the middle of one season. Constantine Iordanou : When you look at it in the aggregate and if you look at it purely by rate, so to speak, it's fine as long as you ignore some sort of trend, right? I mean, there is always, if you think trend is zero negative that comment holds water, our competitors' comment. We don't believe in that. We believe that between the slight rate increases we get in a few segments and the rate decreases we get in other segments, when you look at trend, we're losing ground. Clearly, we're losing ground. And you saw it in the way we choose to publish our accident year numbers. So we tried to factor all that in. And we booked, our insurance grew about over 100 I think on the accident year for the first time in quite a few quarters. And it is our anticipation that the market is not giving up enough rate to overcome loss trend and improve margins. So the margins I think they're slightly deteriorating. Marc Grandisson : I think the market behavior, I think if you look at it in broad terms, it is still very, very competitive. There's a lot of appetite to grow books of business and new ventures and new approaches and new teams being moving around. So as we speak, we're not seeing that competition going away. We are also, as you're well aware, in the environment of excess capital globally and specifically in the P&C marketplace. So where we are right now, it's hard to see the future. But from where we sit, we are expecting a continuation of this for the foreseeable future. Mark Lyons : And a lethal follow-up to Dinos' comments there, as a quip, you could equate that to Midas mufflers, pay me now, or pay me later. So a specialty business has a range, it depends where you are in that range. If you're on the upper end of it, there's less chance of adverse development down the road. If you're on the lower end of it, you have an increased chance of adverse development down the road, and different managers have different views of how they report. Constantine Iordanou : The accident year numbers are self-grading exams, so you write the paper, you grade it and the professor comes 3, 4 years down the line, which is going to give you a real grade. So bear that in mind. Elyse Greenspan : That's helpful color. On the property facultative reinsurance loss, how much of that went through the underlying number and how much hit your catastrophe losses? Constantine Iordanou : There was 1 claim that it was from the cat. The rest of it, it was individual fire losses. And like I said, it was very unusual quarter for us, and we view that as an aberration. It's not, anything we look, either from an underwriting point of view, selection of risk, et cetera, or what has happened in the 10-year that we have been running that group, this was a surprise to us and an aberration. But no need for us to make any changes, either on underwriting guidelines and/or any concern that we have with the existing book of... Marc Grandisson : And Elyse, it is an excessive loss portfolio, so bear that in mind that it actually has given us way below longer-term expected losses for so many quarters. So once in a while, you'll have that volatile result. So that's something that we should expect. I think they've just been unusually favorable for such a long time it happens once in a while, excessive loss portfolio. Constantine Iordanou : On average, we take around $10 million lines, and 3 for losses can get you $40 million quickly. Having said that, it's highly unusual on a single quarter to have four or five losses. We usually get one, we get two, sometimes we get none. Mark Lyons : And the other color on that, Elyse, it's a little less than half that's cat related. Marc Grandisson : That's right. Elyse Greenspan : I was just thinking about the underlying margin. And one last question, you guys called out international motor growth in the quarter. Was that in response to some rate increases following on Ogden was that just a material number? Just a little bit more color there. Marc Grandisson : A little bit of Ogden at least, absolutely so you can geographically sort of circle into where we are focusing in some of the efforts. But there are also other countries mainly in Europe that have had rate increases, or rate and terms and condition changes that are we believe favorable at this point in time, because so we are partnering up with companies out there and supporting them and providing them expertise and capacity to seize on the opportunity. So it's not only isolated to one area, but certainly the areas you mention about the Ogden rate is certainly a catalyst and one of the larger participation increase that we've seen in the last quarter. Mark Lyons : But to your point, Elyse, the quota shares are unbounded but internal -- there's protective XOL, so it keeps that bounded. So quota shares are less impacted by Ogden and therefore, until we get clarity around what Ogden does, there's more of a slant towards the quota share business. Elyse Greenspan : Okay. That's great color. Thank you very much. Operator : Our next question comes from Meyer Shields with KBW. Meyer Shields : I wanted to get in a little bit with the loss portfolio transfer that you mentioned. First of all, is there any sort of limitation on how conservatively you can set initial reserves for that relative to your typical practice? Mark Lyons : Well it's, I'm sure everybody'll kick in here, but it depends on the, somewhat to the accounting and the accounting is driven by what kind of risk transfer there is. There's underwriting risk and timing risk. That is effectively internally a decision tree on the accounting treatment, depending upon those characteristics. So to the extent that there's not material underwriting risk, we don't put that through insurance accounting. It gets deposit accounting treatment. To the extent that it does get -- there's sufficient risk transfer and it does get insurance accounting treatment, we generally will, depending upon the deal, but as a broad statement, we'll book it very close to a breakeven and any margin associated with it gets accreted over the exposure period. Constantine Iordanou : Meyer, a typical LPT to add to this, you'll have to have mirror accounting between all parties. Typically, whatever is transferred will be assumed by the other party and it will have to be recognized by both parties. It's not really any difference in booking the reserve, if you will. Over time, it might change, it might evolve, which might raise other questions. But certainly, at the beginning of it, there has to be a commonality of agreement as to where we think the loss reserves are to be. And whatever, if you are seeding more premium, then you are seeding also reserve the addition will be described as an expense for the over-the-top and you'll have to take it as a seeding company. So we're -- it's a very, very straightforward way to look at things. They used to be all the way in the past, 30 years ago, things you could do, but those days are over and it's very, very transparent. Meyer Shields : Okay, that's very helpful, thanks. The second question, Marc, I guess, you talked about the spread of rate changes being pretty dramatic. Is there a similar spread in trend or is it just where those various product lines are performing now that's dictating the various rate changes? Marc Grandisson : There's a spread in trend absolutely, just by virtue and the 330 bps that I mentioned about the rate decreases, it's actually focused on the excess portfolio, which by definition, if you have a ground up 2% trend will have a leverage inflation ratio into it. So there is definitely, which is counterintuitive, Meyer, because you would expect rates to not go down as much when a trend has that much impact, but that's the nature of our business, we tend to have unfortunately sometimes doubling up on the negative impact against the loss ratio. That's what we've seen so far. Constantine Iordanou : And let me add to what Mark said. At least in our shop, sometimes when there is negative trend, less losses being filed, whatever, we tend to ignore it. We kind of, I guess, we have difficult time accepting negative interest rates, I think we have a difficult time accepting negative trend. Some others, they, and believe me, smart people can argue this point and they can, they might be right. They say, well listen, look at the data, there is certain segments that indicate that we have a negative trend. And it's a philosophical point of view. I think our entire management team here, including our Chief Actuary, our senior program center managers, we don't allow negative trend to get into our pricing or reserving or anything of that sort. We don't like that. We don't like that concept. Marc Grandisson : And one of our tenets, Meyer, that's very important is as the trend changes, and we think it is somewhat changing in the underlying business, the uncertainty as to what impact it will have in the excess layer is magnified going forward, so we tend to be, as you know, a lot more careful, and we will tend to migrate towards more primary where there's a little bit more clarity into where that claim trend is going. And this is I think one of those situations in the market where trend is picking up a little bit somewhat, terms and conditions are also weakening, so we try to be a bit more careful in where we write the business. Operator : [Operator Instructions]. Our next question comes from Brian Meredith with UBS. Brian Meredith : Couple of questions here for you. First one, just back on the reinsurance and kind of a follow-on to Elyse's question about the underlying combined ratios there. It looks like if you strip out the facultative, or at least the additional facultative losses, your actually underlying combined ratio has improved on a year-over-year basis. Constantine Iordanou : That's correct. Mark Lyons : That's true. Constantine Iordanou : That's great, that's better. Mark Lyons : On the underlying basis, given the mixes because you've got the facultative unit, you've got the U.S. reinsurance unit and you got the Bermuda-based reinsurance unit, so a lot of that is mixture. Brian Meredith : Got it, just wanted to clarify that. And then second question was on the deterioration you're seeing in your higher loss mix that you've got in your insurance segment, wondering, is it possible to quantify how much of that is related to terms and conditions loosening up? I think that's something that's just kind of hard to quantify. Marc Grandisson : It's hard to quantify at this point. Constantine Iordanou : I mean there is a portion of it that is terms and conditions, there's more a portion of it that is actually the rate. I mean, what the indication is, what our actuaries believe the rate increase we need to get to maintain a certain loss ratio and if we're not getting that, you got to factor it with a higher accident year loss ratio. So I think it's a combination of both. But the terms and conditions is subjective, very, very, very hard for both underwriters and actuaries, even when I ask these questions to our claims people, they throw their hands up. Because they say, well, we're going to tell you when we see it. Well, the time they see this when there is a lawsuit and say you didn't have that clause, you wouldn't be able to -- we would have been able to defend ourselves. And with that clause, we can. So there is a loss that we got to pay because of language on the contract. So how do you factor that in mathematically is very difficult. But we take it into consideration. If you ask me, is a wild guess is what it is, but we factor some of it when the conditions go down. And you have to. If you're not looking for at-risk developments in future years you'd better try to get your accident year as close to what you believe it is today. Marc Grandisson : My experience on the contribution from terms and conditions is that as we get a weakening and softening market, the terms and conditions overwhelm the pure loss trend that you would have seen. So we're -- it's still not -- we believe, I believe the majority of the rate, the rate decrease as we see it, as we speak. But again to Dinos' comment, it's a judgment call at the end of the day. It's very difficult to quantify most of it. Mark Lyons : And Bryan before you move on, I'd like to backtrack to your first question. You talked about the reinsurance mix and what the underlying is. From what you said, it sounded like you are leaning towards excluding all of the property facultative large attritionals when in fact, there's always a piece of that, that will be in there at all times. We tend to think of it, not only in a load basis, remember they're not a cat load driven unit, but it's always going to be something, so subtracting it all is too much. Brian Meredith : I was actually just looking year-over-year, I was assuming the 2.7 points that you referred to in the second quarter 2016 is what you had. So the delta, that's all I was doing. Mark Lyons : Yes. Brian Meredith : And last one, Mark, I'm just curious, going back to Kai's question on the mortgage insurance unit, the decline in other underwriting expense you saw from the first quarter, is that inclusive of the $7.1 million of quarterly kind of salaries and benefits reduction? And what other kind of stuff went into that reduction in other underwriting expenses? Mark Lyons : You have to be careful there because that -- the $7.1 million is the run rate as if we took UGC into our operation and did nothing. Brought them in and kept everyone and kept all the systems in place. You have to have a baseline. It's relative to that, it's forward-looking. So we will reap those $7.1 million on an ongoing basis if we hadn't -- versus having done nothing. So it's only a partial. So in the quarter, on salaries, it was $1.4 million of impact. I'm trying with that statement, Brian, I'm trying to give you a little bit of a run rate because you guys are always interested in that in your modeling. Brian Meredith : Right, so it's $1.4 million. So I guess I'll go back to what was the difference between the 42 or 41.9 in the first quarter and the 32.2 in the second quarter, it's a big drop. Mark Lyons : Okay. Hang on a second. Let me make sure I know where you're talking from. Brian Meredith : Because you exclude the reseverancing stuff in those numbers, right? Mark Lyons : Well, severance yes. Well, be careful. It's in the OpEx. So it's there. It's, we exclude it only in our definition of after-tax operating income per share, but it's reflected in the OpEx line in what you're referring to. Brian Meredith : So it is in there? Okay. Operator : Our next question comes from Ryan Tunis with Crédit Suisse. Ryan Tunis : Just following up on some of the increase in loss trend in insurance. I guess, what I'm trying to figure out is in some lines, we've clearly recognized the trend is a little bit elevated and that's being reflected in loss mix. Are you leaving room for, like if trend gets a little bit worse from here, is that in the loss pick or are we at a point where to the extent it deteriorates further from what you've already seen, we'll see further increases? Marc Grandisson : So I think currently, the answer to your question is yes, we would reflect a little bit more cushion and margin of safety if you will, loss ratio pick. In addition to this, it will make us be a lot more careful in writing more, and actually will make us deemphasize and walk away from a deal that we think are no longer providing us with that margin of safety. And that will be, this is an ongoing process, Ryan, right? It's back and forth as you go through the quarters. Constantine Iordanou : Ryan, the point that Marc makes is very, very critical to our underwriting DNA here. If you're not willing to truthfully reflect, based on all the information you have, what the current profitability is on a particular line of business or a particular product line, you're bound to continue making mistakes going forward by not being truthful to yourself. If there is positive margin, negative margin, how big the margin is, et cetera. Because at the end of the day, these profit centers, they're going to determine if they're going to defend the book, if they're going to write more, if they're going to shrink the book. And all those determinations are done in our profitability review meetings that we do with every one of our profit centers and we're very, very religious in doing those. And you can do that and have 1 opinion, and when it comes to reserving, have a different opinion. So we, it's all intertwined and we speak from the same set of numbers and the same page, and it's all integrated between our pricing actuaries, our reserving actuaries, the profit center managers and our underwriters to make sure that we know where we're going. Do we always get it right, no. Nobody is perfect. But we try to be as truthful to ourselves as possible because that determines what is going to happen to us in '17 and '18 and '19. Ryan Tunis : Understood. And then I guess, just a follow-up for Dinos, I guess, in insurance, I mean you booked above 100 combined, in terms of what you're seeing from a trend standpoint, I mean, that feels like that could be a reality where things are going, going forward. I'm just curious, I mean, is that something you're willing to accept writing over a longer-term basis at worse than a 100 combined in the insurance segment? Constantine Iordanou : It's not a question of accepting it. At the end of the day, listen, you can't shrink the company to zero. You're going to look for opportunities. Not every one of our product lines is at 100. Don't forget, we're not shooting for that number. We're recognizing that that's the outcome of the market. We're not happy about it. I'm not saying we're satisfied with that result. And we're taking actions to try to improve it. But go back to the comments that Marc Grandisson, it's very, very difficult in the market environment we have to go and get a four, five, six loss ratio points improvement. I mean, if you have underwriters who can do that, just send me names because I like to hire them. It's very, very, very difficult. You can't ignore. Now given a market change and I think if pain continues to push people to be more realistic about the actual results that are available in the marketplace today, you might see improvements. And between us, I don't think we're many years away from that. I think you're starting to see people to start recognizing that we're at the bottom, but at the bottom doesn't mean you need to grow at the bottom. You've got to see improvement and it has to go the other way before you can start opportunities to grow. That's the way we see the market, but it's a difficult market that you got to manage it, we're managing personnel expectations, expenses, customer relationships, broker relationships. It's not as simple as, well, let's cut the book in half because 100 is not an acceptable number. Operator : And I'm not showing any further questions at this time. I would now like to turn the conference over to Mr. Dinos Iordanou for closing remarks. Constantine Iordanou : Well, thank you, Liz. It's exactly 12, so it's lunchtime. So on the menu today is dolmades. So thank you, all, for listening. I'll see you next quarter. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,017	4	2017Q4	2017Q3	2017-10-28	1.688	1.691	1.93	1.95	null	16.7	16.75	Executives: Constantine Iordanou - Chairman and Chief Executive Officer Marc Grandisson - President and Chief Operating Officer Mark Lyons - EVP and CFO Analysts : Elyse Greenspan - Wells Fargo Josh Shanker - Deutsche Bank Amit Kumar - Buckingham Research Brian Meredith - UBS Jay Cohen - Bank of America Meyer Shields - KBW Kai Pan - Morgan Stanley Ian Gutterman – Balyasny Operator : Good day, ladies and gentlemen, and welcome to the Q3 2017 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your hosts for today's conference, Mr. Dinos Iordanou, Mr. Marc Grandisson and Mr. Mark Lyons. You may begin. Constantine Iordanou : Thank you, Crystal. Good morning, everyone, and thank you for joining us today. This past quarter, natural catastrophe significantly impacted the industry with three major hurricanes, large earthquakes in Mexico, and other ongoing events that are likely to make 2017 one of the costliest, if not the costliest for the insurers in history. Although we were impacted by these losses, our diversified platform and good investment performance made this quarter an earnings event for us and I'm pleased to note that our book value per share increased by a $0.01 in the quarter to $59.61. Based on expected industry catastrophe losses in the range of $80 billion to $100 billion, our guesstimates after-tax net losses of $320 million from all events in the third quarter. We have arrived at this estimate through a combination of top-down model industry loss estimates and a bottom-up review of reported losses from our insurers. I'm sure many of you are puzzled as I am that by aggregating all the reported losses so far and adding an estimate for those companies and markets that have not yet reported, we cannot get anywhere close to the bottom-end of the model range. While those losses are significant, this quarter again demonstrated core principle of large risk management philosophy. As expected, returns from property and property cat risk have declined over the past several years, our underwriters were focused on risk adjusted returns, and accordingly, significantly reduced their writings. Implementing this approach is not easy, as competitors in both the traditional and alternative markets have accepted business at margins we deem inadequate. However, the weakness of these margins are only exposed in a volatile catastrophe year, like 2017. As a result of these catastrophe losses in the third quarter, we're reporting a net loss of $52 million, or $0.39 per share, and on an operating basis, a net loss of $107 million, or $0.79 per share. Arch remains in positive territory for the nine months, with net income of $363 million and operating income of $260 million for the nine months ending September 30, 2017. And we expect a positive year by year-end. Now turning to third quarter results, our reported combined ratio was 110% in the quarter on a core basis. Mark Lyons usually defines that, and in a moment, he will give you the definition, and includes 30.7 points of catastrophe losses, partially offset by 5 points of favorable prior year development from all three segments in the quarter. Catastrophe losses pushed our reinsurance segment combined ratio to 127.4% combined ratio in the third quarter. Although excluding catastrophe activity and prior year development, the combined ratio improved to 96.9% sequentially in the third quarter of 2017, as large attritional loss activity in a property fac unit moderated. Catastrophe losses also increased our insurance group's combined ratio in the quarter, which rose to a 138.7% combined ratio. Excluding catastrophes and prior year development, the combined ratio was 98.9% in the third quarter, compared to 99.4% in the second quarter of 2017. This quarter's catastrophe events also demonstrates one benefit of a diversification into a mortgage insurance business, with earnings from mortgage substantially offsetting losses in our other two segments. While we expect a temporary increase in delinquency notices to occur from this natural catastrophes, we believe the language of master policies generally preclude liability for the mortgage insurer when a home has suffered extensive physical damage, and historically, actual losses from catastrophic events, such as Hurricane Katrina, have had minor effect in the MI industry. Our mortgage segment, excluding prior year development, improved its combined ratio slightly to 42.2% from last quarter. The integration of the U.S. primary mortgage operations continue to progress very well and it remains on or slightly ahead of our target. Marc Grandisson and Lyons will give you more flavor on that. Net investment income for the third quarter of 2017 was $94.1 million, or $0.70 a share, and increased marginally from the second quarter. As you know, we manage our investment portfolio on a total return basis, which, on a U.S. dollar basis, was a positive 160 basis points for the quarter and 126 basis points on a local currency basis. Our equity and alternative portfolios were the principal drivers of the quarter's returns. Before I turn the call over to Marc Grandisson, I would like to discuss our PMLs. As we mentioned last quarter, we are also reporting to you our exposure to mortgage risk from a systemic stress event, or what we call a realistic disaster scenario, or RDS, which at the end of the quarter is stood at 15.7% of tangible common equity. We have begun using tangible rather than stated equity as a result of the United Guaranty Corporation acquisition as we believe that this is a more prudent risk management base. Our property cat exposures are substantially the same as last quarter with our 1-in-250 year peak zone, which continues to be the Northeast PML, which is at 6.6% of tangible common equity. You will see additional PML numbers in our 10-K, which is being filed. I will now turn over the call to Marc Grandisson to comment on our operating units and market conditions before we go to Mark Lyons for financial reporting, and then, we'll take your questions. Marc? Marc Grandisson : Thank you, Dinos, and good morning to you all. This was an eventful quarter for the millions of people directly affected by catastrophes as well as the insurance industry and for those of us at Arch. Before discussing the events of the quarter, it's worth commenting on some of the recent management changes that have occurred here. One of our senior executives and an important member of our management team, David McElroy decided to retire. Fortunately, our deep bench included our highly regarded colleague, Nicolas Papadopoulo, who agreed to take on the insurance leaders role. In turn, this allowed Maamoun Rajeh to step up to lead the reinsurance group. Both have been with us since 2001 and are terrific executives with a proven track record. We thank Dave for his leadership and are pleased that he has agreed to continue making his contributions to Arch as a respected senior advisor to the company. I'm also looking forward to Nicolas and Maamoun flourishing in their new roles. Turning now to the third quarter cat events, I would like to add my thanks to our underwriting teams, who have demonstrated discipline as reflected by the decrease in our property writings over the last five years in response to declining premium rates. In cat exposed business lines on a gross basis, Arch wrote over $800 million of property and marine premiums in 2017, and at the right risk-adjusted price, we have available capacity for additional property risk. To put again our capacity in perspective, our 1-in-250 single event PML is still very low at 6.6% of tangible common equity, which allows us to increase property writings should pricing improve materially. We believe that the third quarter cat events will prove difficult to assess, especially on the insurance side. The potential issues with flood and business interruption coverages as well as the assignment of benefit issue in Florida creates uncertainty in the estimation process. As a result, we estimate a greater share of our aggregate loss will come from the insurance group. Turning to current property market conditions, we are still evaluating our tactics as the market remains in flux. If 2005 is any guide, and we have some reason to believe that it could be, it will take several months for the market to find an equilibrium. However, for cat exposed business, we believe that substantial rate increases are required to achieve an acceptable risk-adjusted return. Focusing on the P&C insurance market conditions, they remain challenging, although we have seen some rates stabilized towards the end of the third quarter, particularly in the property sector. Most other areas had continuing adequacy erosion. After factoring in rate changes of a positive 190 basis points and an overall loss trend year-on-year of approximately 200 basis points, we had small margin erosion of 10 basis points for all lines in the third quarter in our U.S. P&C insurance operations. Our low volatility businesses continue to achieve rate increases, while the more complex, high capacity, more commodity driven lines of business continue to see rate decreases. Our third quarter view consistent with the last several quarters was that most areas of the P&C insurance had expected returns that are below our threshold to grow our writings in these lines. Turning now to reinsurance, we continue to focus on the opportunities that have relative rates strength. We are hopeful that more favorable returns will be available in property, but, as always, we will have to see how the January 1st renewal settle before we have a clearer view of the opportunity. Our reinsurance net written premium increased by 35%, largely due to a specific loss portfolio transfer transaction as well as some reinstatement premiums from the cat events. Excluding the effect of these distortions, our growth was more modest at 8%. This growth is due to our seizing niche opportunities, such as motor and some specialty reinsurance. Our property writings decreased due to market conditions as our reinsurance group continued to focus on margins. Now switching gears to mortgage insurance, or MI, as stated in prior quarters, the earnings contribution from our MI segment is again proving to be a diversifying offset to difficult conditions in our P&C operations. Our MI segment expense ratio improved to 20.6% at the end of the third quarter, while our new insurance written, or NIW, in the U.S. was $17.7 billion for the third quarter, a slight increase of 2% over the second quarter, largely due to our targeted decrease in single premium business. Although not all MI companies have reported yet, we estimate that Arch U.S. MI's market share may have dipped slightly below 24% in the third quarter of 2017. This is consistent with our expectations as we focus on improving the risk adjusted returns of our mortgage portfolio. In the third quarter, 80% of our U.S. NIW came through our risk-based pricing platform, which, as of last week, is fully integrated into a single RateStar module. We are writing primary U.S. MI business, with an expected ROE still above our long-term target of 15%. The overall quality of the risks written remain very strong and we continue to experience favorable developments in our U.S. MI reserves consistent with what you may have heard from others. Arch wrote five new U.S. GSE credit risk sharing transactions, or CRTs, bringing our total risk in-force from them to approximately $2.5 billion at the end of the third quarter of 2017. Average yield in the CRTs remain healthy and ROEs are above our long-term targets. However, competition in this space is heating up and this could affect our risk appetite for new writings in coming quarters. We executed our first mortgage capital markets transaction this week, Bellemeade Re, which is the risk management tool and helping manage our capital. We view the market's growing acceptance of these securities as confirmation that the mortgage market is originating products of very high credit quality with low risk of default. In summary, we will be preparing for opportunities that the market allows, but, as always, we will be disciplined and opportunistic. Now, here is Mark with the more detailed financial analysis. Mark? Mark Lyons : Great. Thank you, Marc, and good morning, all. First, I'll make some summary comments for the third quarter, all on a core basis. And as a refresher, the term core corresponds Arch's financial results, excluding Watford Re or the other segment, whereas the term consolidated includes Watford Re. I did notice that a lot of the analyst reports, the preliminary analyst reports, were pulling combined ratios that are – the consolidated combined ratios, which is really not accurate. That's a 180 basis points more than core. If you take the 11%, rather than the 100% of Watford, it only moves up 20 basis points to 110.2% and that's the proper way to look at it. It's worth noting that operating earnings per share for the quarter reflects, in accordance with GAAP, the use of basic shares rather than fully diluted shares since the company incurred an operating loss. This translated to nearly a $0.03 increase to the operating loss per share since approximately 4.4 million fewer shares were utilized in the operating EPS calculation. However, on a year-to-date nine-month basis, fully diluted shares are utilized since the company has positive operating income also per GAAP. Claims estimates recorded in the third quarter from 2017 catastrophic events net of reinsurance recoverable and reinstatement premiums, as Dinos mentioned, were 30.7 loss ratio points compared to 1.3 loss ratio points in the third quarter of last year on the same basis. Approximately $348 million of pre-tax losses and nearly $320 million of after-tax losses emanated from Hurricanes Harvey, Irma and Maria, along with the Mexican earthquakes with the balance reflecting minor adjustments to estimates like catastrophic events that occurred in the first half of the year. Approximately 62% of the quarter's catastrophic loss estimates stemmed from the insurance segment and 38% from the reinsurance segment. In total, Hurricane Harvey accounted for 37% of the quarter's cat losses, Hurricane Irma accounted for 45% and Hurricane Maria 16% and 2% in total for the balance. As for the California wildfires that occurred during the fourth quarter, our early read is that it will be about $25 million to $30 million, which is roughly equal to our quarterly cat load. As per prior period, pure net loss reserve favorable development, 5.4 loss ratio points was reported in the quarter, led by the reinsurance segment with approximately 60% of the total, the mortgage segment accounting for approximately 35% of that favorable development and the insurance segment was about 5%. Approximately 70% of the mortgage segment favorable development emanated from the U.S. primary first-lien portfolio and about 22% stemmed from net favorable development resulting mostly from subrogation recoveries by the second-lien portfolio that came over as part of the UGC acquisition and that is a runoff operation. The reinsurance segment net favorable development was across short, medium and long-tail lines and was scattered throughout the 2002 to 2014 underwriting years. The overall calendar quarter combined ratio on a core basis was a 110% and when adjusting for cats and prior period development, the core accident quarter combined ratio was 84.4% compared to 93.4% in the third quarter of 2016, driven mostly by the mortgage segment's accident quarter combined ratio of 41.2%. The reinsurance segment accident quarter combined ratio, excluding cats, of 96.9% compares to the third quarter of 2016's 96.4%, while the insurance segment's accident quarter combined ratio, excluding cats, was 98.9%, as Dinos mentioned, compared to 97.7% in the third quarter of 2016. The reinsurance segment also participated in a $45 million premium size, retroactive reinsurance transaction, as Marc Grandisson noted, that contains sufficient risk transfer under GAAP for insurance accounting treatment. The reinsurance segment calendar combined ratio is 4.5 points lower this quarter, due to the inclusion of this transaction. Without this transaction, the reinsurance segment calendar quarter loss ratio would be 40 basis points higher and the expense ratio would be 4.1 points higher. And this should be considered when examining the risk combined ratio. Now, this transaction also created distortions on a current accident quarter basis. When adjusted, the reported current accident quarter loss ratio and combined ratio of 63.5% and 96.9%, respectively, becomes a lower 58% accident quarter loss ratio and 96.4% combined ratio, thereby revealing stronger underlying fundamentals. The reported insurance group accident quarter, excluding cat, loss ratio increased approximately 30 basis points quarter-over-quarter and after controlling for large attritional losses, actually increased by approximately 80 basis points, due to the lower level of such losses this quarter versus the third quarter of 2016. As a result of the ongoing competitive conditions in the P&C markets, we continue our conservative approach towards current accident year loss picks. However, the typical conditions in the insurance and reinsurance markets were more than offset by the continued improving profitability of the mortgage segment amplified with their net earned premiums being a larger proportion of the total. The mortgage segment's accident quarter combined ratio, as stated earlier, improved to 41.2% from 55.8% in the third quarter of last year and their net earned premiums represented similar to last few quarters about 25% of the core net earned premium, compared to only 9.1% in the third quarter of 2016. Remember that in the mortgage segment, accident quarter has the different connotation than in the P&C world and is more similar in concept to claims made businesses in the P&C space since the notice of default defines the assignments to the appropriate quarter. Earlier Marc Grandisson had commented on Bellemeade Re mortgage-linked note that was executed this week. The cost associated with this 10-year term cover will be approximately $11 million as ceded premium for the first fiscal year, and will then reduce as the underlying unpaid principal balances amortized through the securities. Similar to last quarter, there were some non-recurring costs in the third quarter resulting from the UGC acquisition. This quarter such non-recurring costs totaled $3 million, even in contrast to last quarter's $2.7 million and the first quarter of 2017's $15.6 million. The sources of cost emanated from severance outplacement and trailing UGC transaction costs. During the third quarter, there were 56 mortgage employees that were noticed for an October 1st termination date. In accordance with GAAP similar to last quarter, the severance costs associated with these employees were accrued. This brings the year-to-date employee reduction total to 338 and additionally 28 contractors have been eliminated in the quarter, bringing that year-to-date total to 87. When combined with the actions taken in the first and second quarters of 2017, the cumulative quarterly run rate employee salary savings are $8.3 million per quarter, which will be $33.2 million on an annual basis. We will continue to comment in future quarters about any other actions that are taken and their associated financial impact. Pure severance costs for the first nine months of 2017 totaled $13.2 million, and given the nature of these expenses and consistent with last quarter, we have excluded this $3 million from operating income as they are not part of our true operating performance. As respect to the effective tax rate with our changing portfolio and geographic mix, the third quarter of 2017 tax rate on pre-tax operating income of minus 7.4% requires some clarification. The U.S. property and casualty companies within the U.S. tax group, although incurring material underwriting losses due to the catastrophic events discussed previously, had these losses overshadowed by gains emanating from our U.S. mortgage unit. This put the U.S. tax group in a tax paying position, even though the company overall sustained operating losses. The underlying effective annual tax rate grew to 19% even, for the year, for the same basic reason which is a lower level of estimated full year operating income that was forecast as of last quarter. The increase in the estimated effective annual tax rate causes the first two quarters of 2017 to be revaluated at this now higher rate, and this impact reduced earnings by $0.20 per share. Therefore, this tax adjustment is directly derivative from the catastrophic loss estimates. And as a reminder, our tax rate is affected by varying mixes of income by geographical distribution and any associated changes in local tax rates. As for after-tax operating income earnings per share accretion realized in the third quarter from the UGC acquisition, we examined our results with and without the impact of the acquisition and the accretion remains consistent with past quarters and continues to move towards the initial 35% target. In a similar vein, I'd also like to clarify as I did last quarter, some aspects of the profitability contributions for our three underwriting segments : insurance, reinsurance and mortgage. As stated earlier, when discussing the earnings per share accretion, the relative underwriting income is distorted by the catastrophic events this quarter. So if you adjust for long-term cat load as well as allocating intangible asset accretion and debt servicing costs and dividends and so forth by unit, on a year-to-date basis, the mortgage segment accounted for 60% of pre-tax operating income and the balance being 40% split with the reinsurance segment being 23% and insurance segment 17%. Management, however, continues to evaluate performance for the operating segments primarily by underwriting income and views and manages the investment function at a total return basis across all three segments. This alternative view that we just provided may provide you additional insight into our sources of overall profitability. It should also be stated that the increased additional profit streams provided by the mortgage segment permitted our after-tax catastrophe losses to only represent less than two quarters of operating earnings using the previous four quarters as the reference baseline. On a GAAP basis, at September 30 versus year end 2016, our debt to total cap ratio was 19.3% and total debt plus preferred to total capital ratio is 26.3%, down 240 basis points from year end 2016. This leverage reduction was due to a combination of paying down $100 million of our revolver facility debt this quarter and the growing common equity over the last nine months driven by retained earnings. During the third quarter, we partially redeemed $230 million of our Series C preferred shares. These shares carried a dividend rate of 6.75% and were replaced with a new Series F that achieved 5.45% annual dividend. This amounts to a $3 million annual savings. There was an associated charge of $6.7 million to net income, not to operating income or book value, to recognize the original costs associated with the Series C issuance as a result of the redemption. Core operating cash flows were $440 million, up $90 million relative to the third quarter of 2016, and this increase was primarily driven by growth in net premiums collected, primarily in the mortgage segment, partially offset by higher level of net paid losses in the P&C operations. Book value per share increased that mighty $0.01 per share and tangible book value increased as 0.4% sequentially this quarter. Tangible book value growth outstripped book value per share growth due primarily to intangible asset amortization. So with these introductory comments, we're now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo. Your line is open. Elyse Greenspan : Hi, good morning. Constantine Iordanou : Good morning. Marc Grandisson : Hi. Elyse Greenspan : My first question, just going back to some of your initial commentary on the conference – on the market outlook. Dinos in the past and Marc as well, you guys have mentioned you kind of told your underwriters, put your pens down, let's wait for the market to turn. Are you thinking about telling them to get more excited and get ready to write more business at January 1? And then, I guess, or is it your expectation if rates are more and I guess this is more a reinsurance question, more in the impacted lines? Would that be something that we wouldn't really get more firmer pricing until some of the U.S. renewals later on in the year? Constantine Iordanou : Well, it's a good question, but it's a complicated question. Let me say this. We look for moments like this as a company. By being patient in the years that pricing is not good, we get excited when prices might get much better. We don't know yet as to where this thing is going to go. Let me share some facts with you. If you add the reported losses so far is $31 billion, plus a number of major facilities haven't reported, meaning the retro or alternative market, Liberty Mutual, Berkshire Hathaway, State Farm, et cetera. Even if you come up with some good estimates for those losses, we might get to $45 billion, maybe we get to $50 billion, it's a long way from $80 billion to $100 billion. So I believe that either the models, they are predicting much bigger losses, which nobody seems to have the point of view because everybody is agreeing that this is an $80 billion to $100 billion aggregate event for the industry or maybe even more. So, stay tuned in further development. If we go back and we look at historically, Wilma developed by 68%, Sandy developed by 70% for the industry, and Katrina, we got it almost right, it only developed by about 20%. So I anticipate upward development to happen. I believe that we were very prudent in establishing our numbers, because you have to do bottom-up and a top-down approach and we actually waited more the top-down approach, which is how big is this, what is our market share, where do we have exposure. And as Marc said, we were cautious with our insurance group and we put what we believe is reasonable numbers for us. But depending what happens in the next quarter and depending what happens to pricing, I think we'd be ready to do quite a bit more, if the returns that would be acceptable to us. So with that, I'm going to turn it over to Marc because he works with the units more day-to-day and he will give his comments too. Marc Grandisson : Yes. I think to more practically, what's happening right now is, we're in the planning process, right. We have a portfolio, which I mentioned, a substantial portfolio of property, that's going to be renewed over the next 12 months, hopefully renew over the next 12 months. And right now, both our insurance teams and our reinsurance teams are actually going through the portfolio and assessing which one we need to get the rate, further rate increase or higher rate increase and so we're planning ahead as to how we're going to react. The problem that we're seeing right now is there aren't that many renewals as you pointed out for the reinsurance up until the 1st of January. So, we have a lot of time and have a lot of discussion and as you can appreciate, there is a lot of positioning by the various players in that market. So, we'll probably not know realistically how the reinsurance market plays out until very late in December. But we're going to have all the things laid on in front of us, knowing exactly how to react. On the insurance side, we've seen a couple of things emerge, couple of rate changes, we've seen, the first thing we started hearing is there is no more rate decrease which is a good place to be. But the rate increases are sedate for now. They are a little bit – they are coming up single to double-digit, but it's very sparse, there aren't that many things renewing right now. Again, we're very much on the reactive mode right now, evaluating on a weekly basis, I know Nicolas and Maamoun and their respective teams are talking constantly as to what's going to happen. Constantine Iordanou : Yeah. One more comment about the available capacity in the marketplace is very, very hard to be estimated, because some players, they have significant capacity only because they believe that they have good support from the alternative markets and direct from market. So, the underpinning of their capacity on a gross basis is because that market was significant and it was at reasonable pricing. As a matter of fact, we were buyers in that market. We have no view yet, that's what is still in our minds, we have no view as to what's going to happen to the market, and then what will be the reaction of companies that they said, hey, I can do more on a gross basis because I got all these protection behind me. So, I can be a little more aggressive in the marketplace and maintain customer relationships, et cetera. So, it's all inter-related and as Marc said, our teams are there, we're willing and able, we have capacity, but it will depend all on expected returns based on pricing. Elyse Greenspan : Okay, great. I appreciate all the color. A couple of other numbers question. In terms of the tax rate, I guess, should we just expect to go back to around 14% in the fourth quarter and onward? Mark Lyons : Well, think of it this way Elyse, the 19% contemplates a full year view. So as if the fourth quarter is more average with a normal cat load than we talked a little bit about California wildfires, the 19% should hold. Elyse Greenspan : Okay. And then in terms of the mortgage segment, can you tell us just kind of what the delta in terms of some of your additional severance cost? What expenses we could expect to come out in the fourth quarter versus the third quarter in terms of your operating expenses? Mark Lyons : Well, in terms of – I quoted salary expenses to you, so that's run rate of 8.3% per quarter. To the extent that there is any other actions contemplated there, we only talk about that once they happen for a lot of employee morale and other aspects or reasons. There are associated additional costs with other kinds of compensation, employee benefits and so forth. But we really don't comment on that. But there is a lot of ongoing work with IT down over the next couple of years when redundant systems start to be peeled away, although savings and associated license costs will come to fruition. Elyse Greenspan : And then in terms of the acquisition cost ratio itself also came down in the quarter, how should we think about that in terms of the mortgage business going forward? Mark Lyons : Well, first off, you should think about them in total between DAC and OpEx because there's always – you may think back to what we did at the end of the year, last year, because there's some – it's not like a direct sales force, so some of that goes into acquisition. And remember, say, as a result of the purchase, all the DAC got really written off. So, it's really buried within the intangible assets. So as one more and then subsequent, as we write more business, that's on a single basis, it creates a UPR, that PR grows, DAC grows and that has to be created over time. So, you should be seeing an increase in the acquisition ratio. Elyse Greenspan : Okay, that's great. Thank you very much. Constantine Iordanou : You're welcome. Operator : Thank you. Our next question comes from Josh Shanker from Deutsche Bank. Your line is open. Josh Shanker : Yes. Thank you. I was wondering if you guys could help me out a little bit and think about the move to getting less exposed to property cat over the last, call it, five years, even longer maybe. How much of that is relying on the retro markets to be affordable? And how much of that is in the gross premiums of the company? Constantine Iordanou : Well, I'll give you my comments and Marc might add to it. Listen, independent of the retro market, we always look what is the pricing and what is the market accepting as a expected return on that business. When that business starting going to single-digits expected returns, we are starting to lose a lot of interest. And having said that, we do have a customer base that we want to maintain and continue to service. So then, that's when you look around and you say, maybe I combine more protection if that protection is available, and you will allow us to maintain relationship. But the reduction, clearly the reduction in our writings, it was driven by our view that the pricing of that business was not adequate for us. And for that reason, you can't go to zero and as a matter of fact, it's more difficult on the insurance side to cut as much back than on the reinsurance side, because you got brokers, agents, relationships or customers. So in essence, you know sometimes you do hedge your bet by buying more protection. And we've done all of those things. If the market improves significantly, you might see a different approach, we might keep a lot more net and we have capacity to do it. And also, you may see us expanding our exposure base because we like the pricing. Don't forget, we'll understand, we're in the business to deploy capital and make money for shareholders and we're not unwilling to take risk, we're just – we're not unwilling to take risk at inadequate price. Marc Grandisson : Josh, the way we look at the reinsurance purchasing, specific on the reinsurance side, they're still partners of ours and we fully expect them to be there if no going forward next year and a year after, if the market were to present itself. But I would say that, it's certainly helped us managing the net exposure because the market was indeed getting softer for last five years, as you know. We actually – I would say that between our gross – our appetite to the market and relying on our partners, I mean, probably a 50-50 split between our management of the exposure. So, that's probably allowed us to stay a bit longer, while not the overly reliant if you will on the retro placement. So because at the end, they were nice to have. I think that our partners will still be there for the long haul, but we're not relying on this to write the business going forward. Josh Shanker : Well, thank you very much. And one other unrelated question. In terms of the amount of earnings being suppressed in the UGC transaction due to your reinsurance relationships, sort of two questions. One, I think at the Investor Day, you spoke about the potential that you might think about doing that for a longer period in terms of reinsurance relationship with AIG. I just want to hear an update about that? And two, AIG provides data about how much that relationship is helping their P&L, but it seems to jump around a lot. Is that revenue steadier in your books or can we use AIG's numbers about UGC to understand the degree to which Arch's currently under earnings potential? Mark Lyons : Good questions. I think I'm going to turn it around a little because I think you actually – your statement actually answered your question. Now, they don't have exact mirror accounting to us, they come up with their own views and estimates. But I think from an EP or earned premium, net earned premiums, ceded earned premiums to them assumed earned premium, I think that's a reasonable way to look at it. But clearly, when it's starting the downside of the effect of the AIG for this year diminishing each quarter. Josh Shanker : And whether you would renew it or is there any talk about doing that? Mark Lyons : No, there is not a renewing of that. That was 2014 through 2016... Josh Shanker : You wouldn't do anything on the 2018 here with AIG or anything like that. Mark Lyons : Well, if we did it, it wouldn't bound yet and I wouldn't be speaking about it. Josh Shanker : Of course. Constantine Iordanou : Everything is possible, Josh. Josh Shanker : Thank you very much. Constantine Iordanou : Okay. Operator : Thank you. Our next question comes from Amit Kumar from Buckingham Research. Your line is open. Q - Amit Kumar : Thanks, and good morning, and thanks for taking my questions. Marc Grandisson : Speak up. Constantine Iordanou : Amit, speak up, because we can barely hear you. Q - Amit Kumar : Is this better now? Constantine Iordanou : Yes. Q - Amit Kumar : Well, thank you. So two quick follow-up questions. Number one is just going back to the discussion on industry losses, and I want to be clear that I understand this. Do you feel based on your statements that the industry loss will eventually get to the model's numbers we are hearing about? Or do you have a feeling that these models, and there was a lot of divergence between the numbers, overestimated the numbers. I guess I want to understand if we are overestimating it, then clearly the market does not turn, any optimism is a bit overdone. Constantine Iordanou : Yeah. First and foremost, all I am saying is that everybody seems to congregate against the $80 billion to $100 billion. Both the modeling agencies, if you take their average or point estimates for reach of the storms and also a lot of competitors including us, so I think the models, probably they're projecting the right number. Now, I don't know every company's book, I am just making aggregate comments. But something doesn't add up, either that number is going to come down and your hypothesis is correct, if it comes down, people, they are not going to feel it is much on their P&L. So in essence, they might not, the market correction might be toned down. On the other hand, if you go to historical performance, model has never overestimated losses in the past and usually, our early estimates as an industry, they were below what they ended up. So, I will leave you the judge of where do you think is going to happen. I think we are going to have an effect that is not going to be felt totally for another two or three quarters before we know where these things are going to end up. Marc Grandisson : Moving away from modeling for one second, Amit, I think if you move – if you park aside Maria, because this one has probably the most uncertainty in terms of modeling an alternative protection, it's really hard for us internally based on the modeling and based on what we know in terms of damage what happened is very hard to even consider that both Harvey and Irma are less than $25 billion each. So, that already takes us to the $50 billion. So before even considering Maria and the other event that happened, so that's why we are sort of building from there to – it's not a far reach to get to $70 billion, $80 billion, $90 billion, but I guess only time will tell. But I think it's very hard in isolation to just look at these two losses and think that they are going to like $15 billion each. It's very difficult for us, and that the implications of the industry losses that we have seen reported so far that these two losses would be a lot less than they seem at this point. Q - Amit Kumar : Got it. That's actually helpful. The only other question I had was I guess going back to what Elyse and maybe Josh were asking, if you look at the subsegments in the reinsurance segment, they interplay between different segments. Even based on the market opportunities, should we be rethinking about, I guess, the total top-line and the returns differently, is that premature or how should we think about I guess the capital allocation between the different segments at this juncture? Constantine Iordanou : It's very difficult because I can't answer you, because I don't know myself. What guide us is market pricing. At the end of the day, if you tell me what is going to be in January 1, maybe I can give you some projection. But not knowing that, I really don't know what we gear our people to do is to look for every opportunity available, we'll evaluate it and if we needed to be very agile and move capacity to one area versus another, we are there to do it. And if this is, we get another big event in fourth quarter with another catastrophe and the whole world take upside down for January 1, I can tell you there is a lot of actions we are going to take, including looking for additional capital and be in the business for our shareholders. That's what we get paid to do and we are willing to do it. Marc, right now, we are evaluating exactly this because back in 2005, it was pretty clear that the rewards – risk rewards was much more advantageous to the reinsurance team. We, at that time, allocated 80% of the cat capacity to the reinsurance team, and 20% therefore for the insurance group. This time around, it's different, right, because again, we don't know where the reinsurance market is going to go, a lot of these loses are retained within the company, so there may be a different outcome on the insurance side. So, right now as we speak, the two guys leading our reinsurance and insurance are going through it to see what kind of return they will be expecting next year, and therefore, giving us a plan of action as to what they are going to do. But they still have to collect information as we speak. The big question mark here, especially on the insurance side, is how much capacity has existed through these MGA facilities, that is somebody having the plan for somebody else and at the end of the day, their compensation is I got to write more, I got to write more, I got to write more, because they are commission-based compensation. And will these facilities survive the event and get renewed, and that capacity is available, or they go by their wayside, or they get terms that they move the market upwards. So we don't know that, because some of these facilities as is toning down what's happening in the market, they haven't expired, or they might require a six-month notice. So they're going to be used until they can be used. And if they are in place now and you don't think is going to be renewed, you're going to use it up to the last minute. So we don't know, there is a lot of things up in the air, we have our heads to the ground and we're looking at all these opportunities. But, it's not a clear picture yet. Q - Amit Kumar : Okay. I got it. I'll stop here. Thanks for the answers, and good luck for the future. Constantine Iordanou : Thank you. Operator : Thank you. And our next question comes from Brian Meredith from UBS. Your line is open. Brian Meredith : Yes, thanks. A couple of questions for you all. The first one, just curious and maybe I missed it. Did the RDS, which you provided in the mortgage, include the recent Bellemeade transaction or not, and if not, what that looks like with the recent Bellemeade transaction? Constantine Iordanou : It does include it, what will be the number without it? Do you have the number, Mark? Mark Lyons : Well, it's – did you quote what it was percentage? Constantine Iordanou : 15.7%. Mark Lyons : 15.7%, it's not much of a movement on it. The benefit from that is a couple hundred. Constantine Iordanou : It's $200 million. Mark Lyons : Yeah. Brian Meredith : Okay, great. And then I'm just curious, you guys have Watford Re out there which is more kind of a liability facility. Are there any thoughts of creating facility that's more dedicated to severity or cat, if indeed the market doesn't rise enough to maybe be acceptable to you on a kind of a net basis putting a lot more cat risk on your balance sheet? Are there opportunities potentially to do something more from a gross perspective or in case fee income? Constantine Iordanou : Well, we have two considerations there. One is, if the market improved significantly, we'll use a lot of our own capacity, but also we'll be very much interested in managing third-party capital, because we don't want to change our risk profile. We've done that after Katrina with Flatiron. On the other hand, if the market doesn't move, and there is people that they will be willing to get our underwriting skills and they're willing to accept may be a little less return than we will, we're not opposed to managing money in that fashion either. But that's not our preferred outcome. We like the market to get hard, so we can write more on our balance sheet and maybe write for our partners also. Marc Grandisson : And Brian, I mean, I just appreciate you allow me to put the plug out there in the marketplace, if anybody's looking to deploy capital in this space, we'd love to talk to them. Yeah. Thank you for that. Brian Meredith : Okay. And then just question, I guess you kind of alluded, kind of I was asking, maybe you can put specifics on, how much more rate do you kind of need in property cat to kind of take more on a net basis, do you think? Marc Grandisson : Well, if the rates – right now the returns in the space are in the mid-to-high single-digits. So, it's not expected return and not extraordinary. Brian Meredith : Right. Marc Grandisson : So we've actually asked our team is what we are going through right now. We think that to get to a 15-plus return, we would need roughly 30% to 35% rate increase. So, we need a substantial increase in rate. What people forget is we have to be careful with looking at a rate that changed in isolation, I think it's been mentioned on other calls is that we are at a pretty low level compared to history for the last five or six years. So this is why – in 2005, when rates went up 10%, 15%, 20% we were in a very different market, pricing was a lot better, where it comes from, now it's not as good by any stretch of the imagination. So, we will need substantial rate increase to really fully deploy it and even then, Brian, as you know, we are very careful with our capital management, we will have to see it and have a good clarity of it before we commit fully to this. And I think it's going to take a gradual price increase and will take time, it's going to be a dynamic process for us to evaluate as we go forward. But, if you close your eyes and you roll the tape and you see the rates have gone up 50%, 60%, then I think we would have a lot more appetite to take on a net basis. But we will sort of have to work our way towards this, as we see if the market allows us. Mark Lyons : And Brian that would be a composite because you have to take into account the underlying ceding company rate changes as well as what it might be on the cat rate itself. Marc Grandisson : Yeah, sure. Brian Meredith : Right, right. And I guess adding on to that, I mean what do you think the possibility of something like that happening given it doesn't seem like there has been a change in the perception of risk with these events? I mean, the last time we had that type of rate increase, you had massive changes in the models. Constantine Iordanou : Well, I won't be too quick to make that judgment, yeah, if there is. I think smart people, they are going to step back and look at the events, and say, should we change our mind about how risky this business is and what kind of returns we should expect. Marc Grandisson : I think there is a recognition right now, Brian, as we speak when we hear from our producers and from even the buyers of insurance or reinsurance for that matter, and the recognition that rates need to go up. So I think this consensus is building slowly but surely. But the question is how much if it does go up. I think to answer your question, we need to know will there be some creep, some increase in loss reserve – in loss estimation in a few players, will there be some change to rating agency perception of risk, will there some change to the modeling, there are a lot of things unfortunately, Brian, that need to happens for everything to converge to one area which was more the case in 2005 if you remember. We had a two or three things converging at the same time, which really helped it. And also frankly, we might be sitting in the next call, talking to you guys about this and still not know fully where it's going. In 2005, it took another four, it took really between June – May or June, March to June of 2006 to really see the market take hold and really find its footing, so it takes a little while longer than we would expect unfortunately. Brian Meredith : Right, right. Yeah, yeah. There is also the release that the new, the models came out right around that time, right? Constantine Iordanou : You got it. You got it. Brian Meredith : Yeah. Great, thanks. Constantine Iordanou : Sure. Operator : Thank you. Our next question comes from Jay Cohen from Bank of America. Your line is open. Jay Cohen : Yeah. Most of my questions are answered. Just I guess one follow-up. On the Bellemeade transaction, do you see this as the first of others given that this is a unique thing and you got it through. The next one might be a little easier. Mark Lyons : Yeah, Jay. It's a good question. We do see that as an ongoing piece of our repertoire to manage risk management in the balance sheet, so yes. Constantine Iordanou : And it's not the first one, it's the third one. Because United Guaranty, they too before us and then we've done the third one. And we're going to use that as a risk management tool, as we might use also a traditional reinsurance as a risk management tool. Jay Cohen : Got it. Thanks. Mark Lyons : You're welcome. Constantine Iordanou : Welcome, Jay. Operator : Thank you. Our next question comes from Meyer Shields from KBW. Your line is open. Meyer Shields : Thanks. Two questions on Bellemeade, is the ceded written premium a one quarter event or is that going to play out over the... Mark Lyons : Meyer, we can't hear you. Constantine Iordanou : Hey, Meyer, could you please speak up? Meyer Shields : Sorry. Constantine Iordanou : You're not coming through. Go ahead. Meyer Shields : Is it better? Constantine Iordanou : Yeah. Much better, much better, yes. Meyer Shields : Okay, great. Sorry about that. I wanted to know whether the ceded written premium for Bellemeade is going to just impact, I guess, the fourth quarter or will it endure over the life of the contract? Mark Lyons : No. That goes over time. You are going to see sessions associated with that every quarter. Constantine Iordanou : Every quarter. The first year is the $11 million... Mark Lyons : Yeah. That's right. Constantine Iordanou : And then, it cascades down as... Mark Lyons : Correct, which will be the case on every, think of it as a laddering. We do another Bellemeade, its first payment will be higher and decremented. And then if we do another one in 2018, there'll be a first payment that's higher and it will decrement. Marc Grandisson : Yeah, Meyer, the way it works is that you have the – it's on a – if you look at quarterly, the amortization of the limit is amortized overtime. It's a 5% of risk-in-force and if there's persistency of 80% per year, you would expect 80% of premium to be paid the next year and then a, 64% or the $11 million in the third year and so on and so forth. That's how the bond works, the $368 million, you know, will amortize over time. Meyer Shields : Okay, perfect. That's very helpful. And then just going to retroactive reinsurance transaction that's a second in two quarters, is there a – like a building market for that, that would align with broadly trading reserve redundancies across the industry? Marc Grandisson : You're talking about the – talking about the - Mark Lyons : Meyer? Constantine Iordanou : No, no. He is talking about the reinsurance transaction, Marc. The retroactive reinsurance – yeah. Marc Grandisson : Oh, the loss portfolio transfer. Meyer Shields : Yes. Marc Grandisson : We're seeing that market getting very active. And then we're very happy, very pleased with premium. Premium is a way ahead of its initial plan. And that's testament to our team's efforts in working very diligently. I think that there's a – like we said before I mean there's a lot of books of business specifically on the liability – this is a liability transaction, that's why it's booked in the casualty unit. There's a lot of books of business who have issues and worked, and people are trying to and I can't blame them, trying to find a new home for it to just move away from it and just put it behind them. This one is really meant to bring finality to that client. So I think we're going to see more of these, I think in terms of – sense of capital management and earnings management, you can expect more companies to look at it. There's a very, very healthy flow of offers in the book for our premium folks. Meyer Shields : Okay. That's perfect. Thanks so much. Marc Grandisson : Thank you. Operator : Thank you. Our next question comes from Kai Pan from Morgan Stanley. Your line is open. Kai Pan : Thank you and good afternoon now. And so my first question is on the casualty line. I just wonder, do you think these increasing the property lines would spread out to the casualty lines. And do you see any sort of changing term underlying loss cost trends? Constantine Iordanou : You've got multiple questions. First, we hope, but we don't see it. Second, it's needed, but we don't see it. And your third question, yes, loss cost, even though we're getting slight rate increases on average, we're having difficulty in – including us – we're sure pretty conservative in our underwriting, maintaining the same level of profitability. As a matter of fact, we lost another 20 bps of margin between what we believe the loss cost escalation was versus what kind of rate increases we got on average. Marc, you want to - Marc Grandisson : No, we're not seeing it right now. We think it should happen, but actually it might actually be – have a perverse reaction as a result of property lines having losses, people might look at casualty and professional lines. For us casualty got to be clear, encompasses more – especially on the reinsurance, more than just GL, it also encompasses professional lines, it could have a perverse reaction that people use it as an excuse to get price decreases for accounts that haven't had a casualty loss in a while because – while look at the property accounts. They're giving you losses, we're not giving you account. So everybody will, I shouldn't probably be using these arguments on a call to give it to our clients. But I'm sure they'll be using them so. Kai Pan : All right. And second question on capital management and you've paused buyback for the UGC transaction. And like, do you think you will return to buyback in 2018 in light of potential of the market pricing environment to get maybe better, you may find other place to deploy your capital? Mark Lyons : I think, if I could just start. I think Kai, it's completely derivative to the other discussions we're having on property cat and the opportunity. The opportunity is strong then there was clearly a decreased likelihood of doing that on a return. So they're totally in balance with each other, we need to see where the market is, before we can really answer that. Constantine Iordanou : Kai, if I have to guess, I think they're going to be the price movements that it will cause us to have more opportunities in the market. So but we don't know, stay tuned, ask same question in the fourth quarter. Kai Pan : I will, thank you. Constantine Iordanou : Yeah, thank you. Marc Grandisson : Nice shot. Operator : Thank you. And our next question comes from Ian Gutterman from Balyasny. Your line is open. Constantine Iordanou : We're not telling you what's for lunch yet. Ian Gutterman : That's okay. I actually really had a question for you. Are you familiar with the game Where's Waldo? Dinos? Constantine Iordanou : No, no, no. My kids are certainly. Ian Gutterman : Okay, that's okay. So we'll go with that. So what I found out, I know where the missing losses are. Constantine Iordanou : Yeah. Ian Gutterman : Waldo took your profits from selling all his book and he you wrote a bunch of reinsurance. So when you find Waldo, you're going to find $50 billion. Constantine Iordanou : Okay. Ian Gutterman : But it could be in London, it could be in Bermuda, it could be in Germany, Waldo likes to hide in lots of places, so. Constantine Iordanou : Yeah. Ian Gutterman : If you keep an eye out for Waldo, and you'll find the losses. Constantine Iordanou : So when you find it, just call us, because then we might – help us with our strategy going forward. Ian Gutterman : Yeah, you can look too, he could be anywhere so. Marc Grandisson : Oh, we're looking. Ian Gutterman : He might be delivering lunch today you never know. So my first question is, what – I'm sure you listen to some of these calls, and everyone is strident that they've learned from 2011, they've learned from 2005 and they're not going to late report this time. Where do you think the issues are? I mean a lot of the primary companies are even saying, we've closed most of our claims already like it's so obvious, we know what our inventory is, there's nothing that can surprise us. You mentioned program, outside of that are there other reasons we should see late reporting on what the primary companies are calling simple storms, at least outside Maria. Constantine Iordanou : Listen, there is – I can go into a lot of directions. Flood always has been a big problem. Look at Sandy and how long did it take et cetera. Second, if you go to Florida there's a lot of snowbirds that haven't even gone down yet to start looking repairing their homes. And this assignment of benefits issue in Florida, it's going to have escalation of losses. So if they know they're closing and all that is news to me. At the end of the day, I'm only going by history and history has told us, there has always been an underestimation and we have more positive escalations than negative. People instead of taking reserves down they add it to overtime. So listen, if it's less it's less, and then maybe my number is too high. But how do I know? Marc Grandisson : Ian, I think that the other thing you have to keep in mind, Ian, is if you have a portfolio of homeowners, very straightforward plain vanilla, and you had a lesser amount of risk, it's probably more likely that you'll be to close that file a bit quicker. The area where we think there's a lot more variability is on the E&S and on unoccupied buildings and the sort and that's going to take a while for everybody to really figure out what the coverages are going to be. And you have insurers who are – possibly been more sophisticated than a bit more better equipped to fight with the insurance companies. And surely we're seeing it as with the AOB phenomenon in Florida that surely doesn't help the matter. So I guess you have to put things in perspective and it depends who you talk about. But I would echo what Dinos just said, a lot of the insured population will not probably have anything settled or finalized in terms of loss estimation and indemnity paid for another six to nine months. It takes a while. Constantine Iordanou : You're going to see real losses. A restaurant who had no real damage to the restaurant, but the parking lot was flooded and as customers couldn't have access to the parking lot. And he was going to claim business interruption because of the flooding. It's – and he was in a Zone 5 which is not considered a flood zone, so he had no exclusion on the policy and his deductable was pretty low. All these things are going to take a long time to get resolved and like I said, it's our view and usually not a lot of people agree with our views but more often than not, we are right. Ian Gutterman : I agree with you, Dinos. I think we're in the minority but I agree with you. So related to that the one that surprises me the most so far is that most people have Maria as their lowest loss storm and that's the one where I would think the greatest risk is of BI because in Houston, like you said, there were some issues with getting back on your feet. It's not that hard, right? In Puerto Rico, I mean who knows how long, right? Why isn't every BI limit on the island for loss? Marc Grandisson : Yes. This is very uncertain. I've asked our underwriters that right in the area this week actually, and again it's still extremely opaque, there's still a lot of – no information, lot of areas don't have power yet and things are not just back into an order and it's going to be a long time before, we figure out. So this is where a cat – even a cat event, Ian, could be in long-tail event, a long-tail phenomenon, which is again, things that we forget as an industry sometimes. Ian Gutterman : Fair enough. And so the other comment you made earlier, Dinos, about the gross – first net line underwriting the companies who were relying on retro. So they didn't have to shrink their gross. Again, I don't know how many calls you've listen to this week, but pretty much everyone who's been doing that has said on their calls, I'm simplifying here, we're going to keep our net lines, where we are. We're going to look for grow our gross. So it feels like people want to double down on that strategy, which – if that's the case a, I'm not sure where they think they are getting all this extra incremental capacity. But if so doesn't that suggest it's harder to get pricing, if – and so to Brian's question right, where's the pain no one wants to shrink? Constantine Iordanou : Well. But it's on the premise that – the net to gross can work, meaning that there is a robust retro market or quota share market, that is going to reduce their net exposure. We haven't heard from that market yet. We knew it was in that $20 billion range and some people that might be estimating maybe 50% or even maybe 75% of it might be gone. Marc Grandisson : And Ian, I think you're exactly right. I think not only on the loss estimates from the size, what the ultimate loss is going to be at the industry. But to add matter – to add even more complexity then you're quite right, and we talk about all the time, this alternative capital, it's a relatively newer phenomenon to our segment. And it brings a little bit more – quite a bit more actually uncertainty, as to what's going to happen. And would add that it might increase the volatility of what could happen, which could be good for us in a way as well. So it's remains to be seen. Ian Gutterman : Absolutely, yep. Marc Grandisson : Yep. Ian Gutterman : Absolutely. All right. So couple of Arch-specific things. First, the retroactive contract should I guess that that was you took a share of the deal Premia wrote? Marc Grandisson : Yeah, 25% of it, yep. Ian Gutterman : Okay. Got it. Looking at your recoverable on the balance sheet, should I assume most of that growth was from the hurricane. So that your gross was about twice your net. Mark Lyons : Bingo. Marc Grandisson : Yes. Ian Gutterman : Okay, good. Constantine Iordanou : You do your homework, good. Marc Grandisson : It's pretty good, Ian, yeah. Ian Gutterman : I try, so it was a late night, last night. But I try. Mark Lyons : Hey, Ian, for the record, I'll state, you weren't one of the guys that went to the 111.8% combined ratio so. Ian Gutterman : Exactly. And then what was I going to say was the – so one part that's surprising on your losses, was just the composition and I think I know why, but I just wanted to hear to make sure. I am surprised that the amount of the insurance, just, you know, like a simple thing I looked at right, is your insurance loss from these events were basically equal to your 2011 plus Sandy. Right, so it seems that I don't know, is that just because of the geography of things, is because you're in certain businesses that have more property now than you did then. Does that – I guess I was just surprised, the reinsurance isn't surprising at all. But the insurance is a little higher than I thought? Constantine Iordanou : We're an E&S writer. And we believe the flat losses, they're going to have all these questions that I have raised. The business interruption et cetera, so we being cautious of estimating a loss. And same thing in Florida, we believe that this assignment of benefits is going to have an escalation of maybe up to 30% on the cost of repair. So we factor all that in and that's why you see more on the our reinsurance book. Marc Grandisson : And Ian just to add further. So if we go through the losses that are reported and we look on the reinsurance side right. You see even if there was some creep up or some factoring, the AOB, the flood or the business interruption, it's hard to see a lot more creeping up into the reinsurance layers. But it's a more, it's a provider effect on the reinsurance side. So we had to do a more prudent selecting the losses reflecting those uncertainty between the insurance and the reinsurance. I think it's a lot more uncertainty on the insurance side at this point of time. Mark Lyons : And Ian, just to marry Marc's comments with some of the ones earlier on that proportional aspect, to the extent that the market losses, the industry losses start to decrease because of the proportionality on the insurance side that will be shared. Whereas some programs on reinsurance or retro markets and some companies might be – think of it as event aggregate excesses. And you're really saving for the reinsurer more than just saving for your net. Ian Gutterman : Yep, that makes sense. Okay, got it. Very good, thank you, enjoy lunch. Marc Grandisson : Thank you. Constantine Iordanou : Thanks and take care. Operator : Thank you and I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Dinos Iordanou for closing remarks. Constantine Iordanou : Well. Thank you all and looking forward to talking to you next quarter. Have a wonderful day. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,018	1	2018Q1	2017Q4	2018-02-13	1.274	1.08	1.957	2.05	null	16.52	14.72	Executives: Dinos Iordanou – Chairman and Chief Executive Officer Marc Grandisson – President and Chief Operating Officer Mark Lyons – Chief Financial Officer Analysts : Elyse Greenspan – Wells Fargo Kai Pan – Morgan Stanley Meyer Shields – KBW Brian Meredith – UBS Amit Kumar – Buckingham Research Geoffrey Dunn – Dowling & Partners Jay Cohen – Bank of America Merrill Lynch Ian Gutterman – Balyasny Operator : Good day, ladies and gentlemen, and welcome to the Q4 2017 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the Federal Securities Laws. These statements are based upon management’s current assessment and assumption and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company’s current report on Form 8-K furnished to the SEC yesterday, which contains the Company’s earnings press release and is available on the Company’s website. I would now like to introduce your hosts for today’s conference, Mr. Dinos Iordanou; Mr. Marc Grandisson; and Mr. Mark Lyons. You may begin. Dinos Iordanou : Thank you, Crystal. Good morning, everyone, and thank you for joining us today for our fourth quarter earnings call. As many of you know, this is my last earnings call as CEO of Arch Capital, and I could not be more proud of the team and organization that we have built over the past 16 years. We announced our CEO transition plan two years ago, and I’m very pleased with the work Mark and the entire executive team have done to position Arch for the challenges they will face in the future. In our 16 years as a company, we have come a long way. We have taken an idea to build from Scrooge a specialty insurance and reinsurance platform that can generate superior risk-adjusted returns and we have done that. We also saw an opportunity after the financial crises to add a new segment, mortgage, that profitably diversifies our company, and we have achieved that also. Through the PNC cycle, Arch has produced average annual returns of 16% and book value per shareholder average returns of 16% and book value per share was growing 10 times from $6.03 a share in March of 2002 to $60.91 per share at December 31, 2017. And a share price of $87 before this call from a split adjusted $8.84 back in 2002. On my own, I cannot have accomplished these results, but with the help of many people, much has been accomplished. The challenge for all of us was to improve the intellectual capability of the company and its ability to manufacture, as I always say, profitable decisions. Most companies do not pay enough attention to the most important asset they possess, their employees. Here at Arch, it’s the foundation of our success. For Arch, the question has been how do you create a culture in a cyclical business that not only empowers, but also helps our employees to make the best decision that they can. You have to care for them, you have to share knowledge, you have to teach, you have to reward them. You have to provide an opportunity for employees to constantly learn and transfer knowledge up and down the organization as well as across segments and channels. The more knowledge your employees possess, the better decision-makers they are and that is what produces outstanding results. You have to believe in the success of the team over the success of the individual, and you have to be willing to challenge and be challenged. Collaboration is the secret sauce that enables crisp execution and achieving extraordinary results. For the past 16 years, I’ve had the honor and privilege to help lead Arch and to have a hand in its formation, and success is one of my greatest personal achievements. I’m now passing the baton over to Marc, and I’m confident that we will see not only a continuation of the culture that has made Arch successful, but that also I expect the future of Arch will be enhanced under his leadership. To take an analogy out of car racing, which I’m a fan of, Mark, here are the keys baby. The Ferraris are in the starting position; the fuel, ready to go. Achieve greatness, my friend. Marc Grandisson : Thank you, Dinos. Wow. You’ll see me on my Vespa in Bermuda. Stay with the Italian team. But good morning to you all. I’ve had the privilege of working with Dinos for more than 16 years, and I feel it’s appropriate to pause on this earnings call. Dinos’ 59th consecutive earnings call and to express a big thank you from all of us at ACGL. Thank you for your leadership, for the values and culture that you’ve helped to establish here at Arch. Enjoy your family with the two newest additions, Marielle and Evelyn, Mr. Grandpa. Turning to the quarter and year-end review, 2017 brought catastrophe losses of about $135 billion to the industry and caused Arch shareholders about $386 million. For the year ended December 31, 2017, Arch produced after-tax operating income of $427 million or $3.21 per share or 5.7% operating return on equity. On a net income basis, the results are slightly better as the company reported $566 million or $4.07 per share for the year ending December 31, 2017, producing a net return equity of 7.2%. Our investment returns were good this quarter. As you probably know, we manage our investment portfolio on a total return basis, which in U.S. dollar basis was a positive 79 basis points for the quarter, 71 bps on a local currency basis. Our book value per share in the quarter rose, as Dinos mentioned, to $60.91, an increase of 10.4% for the full year. And our risk management structure and diversified business platforms performed as designed in the face of challenging P&C market conditions and significant cat activities. One year into our acquisition of UGC, we are pleased with the contribution that our mortgage segment makes to our returns and value creation. Our group wide insurance in force or IIF grew to $352 billion at year-end 2017 from nearly $360 billion the prior year. Helped by the UGC, acquisition grows written premium grew 142% to $335 million for the fourth quarter of 2017 versus fourth quarter of 2016 for the entire mortgage segment. Reinsurance sessions to our Bellemeade Re insurance link securities and other third-party reinsurers as well as targets reductions in U.S. single business and Australian reinsurance led to a sequential decrease of 6% in net premiums written to $272 million for the fourth quarter of 2017. Earned premium worldwide grew 2% in the fourth quarter to $280 million as a result of growth in our insurance in force. For our primary U.S. mortgage business, NIW of $14.4 billion in the fourth quarter of 2017 was down from $17.7 billion in the third quarter. Part of this decline is due to normal seasonality in the fourth quarter, but it also reflects our efforts to manage growth in the higher loan-to-value above 95 mortgages and our ongoing conservative approach to the pricing of singles. We estimate that our market share of NIW in the U.S. for the fourth quarter of 2017 was just below 21%, which is consistent with our expectations we discussed since completing the acquisition of UGC. Mortgage market conditions remained favorable in the U.S., however, competition is increasing in the CRT space as well as in the primary mortgage insurance market. While we are being marginally more selective in our underwriting, the overall quality of the risks written are strong, and the mortgage segment should continue to generate risk-adjusted returns above our long-term target of 15%. Next, turning to our property casualty operations in our reinsurance segment, specifically. As you have already heard on a number of calls this quarter, rate increases in the property cat lines were not nearly as robust as many of us hoped, given the significant cat in 2017. We saw a few opportunities to put capital to work at the January 1 renewals, but not enough rate movement to warrant a material increase in our writings. Rates across our reinsurance portfolio were up 2.5%, including 5% to 7.5% for our cat book. As you can see, it’s a positive, albeit tepid starting point for the year. Returns for cat business are low by historical standards and in our view, do not fully capture risk volatility in this line of business. For the fourth quarter of 2017, gross premiums written rose about 5% in our reinsurance segment over the same quarter in 2016 and 2% on a net basis. The growth came primarily from our specialty businesses, including international motor treaties, while other lines, such as our property x cats were reduced. Our reported combined ratio for the reinsurance segment was 94.5 in the fourth quarter on a core basis, excluding Watford Re. Turning to our insurance segment. Gross premiums written of $768 million in the 2017 fourth quarter were 8.5% higher in 2016 fourth quarter, while net premium in insurance were 10.1% higher at $513 million. The higher level of net premiums written reflected increases in national accounts, travel and growth in two of our newest programs, areas where we currently see opportunities in U.S. insurance. Focusing on P&C insurance market overall conditions, they remain challenging, although we have seen rates stabilize and improving in some lines in the fourth quarter, particularly in property, commercial auto and some casualty lines. Our current view of the market is cautiously optimistic. We are seeing a slight upward movement on the pricing side with some margin expansion. However, after considering changes in terms and conditions and other factors that can influence claims trends on an absolute basis, rate levels are not sufficient to support the allocation of more capital to our insurance segment, especially given our opportunities in the MI segment. Next, I would like to discuss our PMLs. As we mentioned last quarter, we’re also reporting to you our exposure to mortgage risk from a systemic stress event what we call a realistic disaster scenario, or RDS, it stood at 17% of tangible common equity at the end of the fourth quarter. We have begun using tangible rather than stated equity as a result of the UGC acquisition, as we believe that is a more appropriate and prudent risk management yardstick. Our net property cat exposures are substantially the same as last quarter with our 1 in 250 year PML for the peak zone, the U.S. Northeast, at 6.5% of tangible common equity. In summary, we are always preparing for opportunities as the market presents, but we remain disciplined in allocating capital to the various units to maximize risk-adjusted returns for our shareholders. Now here’s Mark with a more detailed financial analysis of the quarter, Mark. Mark Lyons : Great. Thank you, Marc, and good morning to all. On today’s call, I’m going to comment on the fourth quarter results as usual. I’m also going to focus on some unusual accounting impacts and one-off charges, driven by U.S. tax reform and other items in this busy, busy quarter. Okay. So now into some summary comments for the fourth quarter, all on a core basis, and just as a refresher, the term core corresponds to Arch’s financial results, excluding Watford Re, whereas the term consolidated includes Watford Re. So core losses recorded in the fourth quarter from 2017 catastrophic events net of reinsurance recoverable and reinstatement premiums were $800,000 or nearly 1/10 of the loss ratio points compared to 4 loss ratio points in the fourth quarter of last year on the same basis. The activity was primarily driven by the California wildfires, pretax estimate of $68.4 million, along with approximately $69.1 million of reductions associated with the third quarter Hurricanes, Harvey, Irma and Maria. The reductions in the third quarter hurricane estimates resulted from lower industry loss estimates from outside vendors in conjunction with our own lower than expected reported claims volumes. Most of the reduction emanated from the reinsurance group, both of facultative and treaty and overall, estimates for Harvey and Maria were reduced whereas Irma remained relatively flat. As for the California wildfires, we see more exposure from the Northern California fires versus Southern California roughly 3 :1 and see this primarily as a reinsurance event for us. With respect to net pure loss prior period favorable development, approximately 54 million or 4.9 loss ratio points was recognized in the quarter compared to 6.5 loss ratio points in the fourth quarter of last year. This net favorable development was led by the reinsurance segment with approximately $32 million favorable, while the mortgage segment provided approximately $20 million of favorable development. The calendar quarter combined ratio on a core basis was 82.5% compared to the fourth quarter of 2016 is 88.3%. The core accident quarter combined ratio, excluding cats, was 87% even compared to 90.7% for last year’s fourth quarter. The reinsurance segment accident quarter combined ratio, excluding cats of 103.2%, includes two unusual items and the comparison to the fourth quarter of 2016 needs one unusual item comment. The two items impacting the 2017 accident quarter are one. The non-recurring 1% federal excise tax or FET, associated with the fourth quarter intercompany loss portfolio transfers previously announced, which resulted in a 5.3 point increase to the reinsurance segment expense ratio through the acquisition line. And second, the reinsurance group incurred approximately 2 combined ratio points of negative impact associated with the former Gulf Re operation over the prior year’s comparable quarter. The item affecting the fourth quarter of last year, was a large retrocessional recoverable of approximately $11.5 million that had no counterpart in the fourth quarter of 2017 and represents a 4.6% combined ratio point impact. Taking all of these items into account, results in a 95.9% fourth quarter, accident quarter combined ratio, which therefore, represents only a 20 basis points increase over the adjusted fourth quarter from last year. Moving on to the insurance segment. The accident quarter combined ratio, excluding cats, was 99.7%, which included 2.2 loss ratio points of large attritional losses relative and higher than the fourth quarter of 2016, along with the flat expense ratio. This is approximately 130 basis points higher than the comparable accident quarter in 2016. This is a loss ratio increase and primarily represents higher loss mix due to our view of competitive marketplace conditions on an earned basis. The competitive conditions experienced in the insurance and reinsurance segments were more than offset by the continued strong profitability on the mortgage segment, amplified by their net earned premiums being the larger proportion of the total. The mortgage segment’s accident quarter combined ratio have improved to 47.1% from 54.8% quarter-over-quarter, and their net earned premiums represented nearly 26% of the total core net earned premium compared to only 9.6% in the fourth quarter of 2016. The accident quarter loss ratio of 25% was negatively impacted by approximately $10.4 million of charges primarily associated with higher delinquency stemming from the third quarter hurricane events, a catch up of 2017 reported losses from one lender and a small adjustment of a loss reserves on parity between our East and West operations. The accident quarter loss ratio after taking these items into account would have been 21.3%. I’d also like to point out that subsequent to the UGC acquisition, which closed at the end of last year, the 2017 accident quarter loss ratios for the mortgage segment has sequentially been as follows from first to fourth quarter : 21.5%, 19.5%, 20.6% and this quarter’s 21.3% on an adjusted basis. The expense ratio improved from 37.9% in the fourth of last year to 22.1% this quarter. On a sequential basis, for the third quarter of 2017, however, the expense will ratio increased by 150 basis points from 20.6%. This was primarily driven by an increase in the amortization of deferred acquisition expenses. Remember, that is the closing of the UGC transaction at last year end, all deferred acquisition expense were written off to zero. They are now rebuilding and being amortized into income. Moving on to other unusual financial statements in this busy quarter. Let me begin by discussing three items that have been included as reflected within operating income. First, as I noted earlier, we executed a onetime intercompany loss portfolio transfer this quarter and incurred to $13.6 million of federal excise taxes or approximately $0.10 per share. Second, we established a $10 million valuation allowance against our UK insurance syndicate deferred tax asset this quarter were $0.07 per share. Third, as discussed earlier, the mortgage segment recognized approximately $10 million plus of pre-tax charge and $6.8 million after-tax charges, representing $0.05 a share. All in, these one-off items with an operating income as described totaled $0.22 per share. Shifting to an update on integration cost associated with the UGC transaction. The original combined workforce has been reduced by approximately 30% as of year-end 2017 along with 120 contractors. There was $1 million of severance-related cost in the quarter, totaling $14 million for the full year. And the run rate of quarterly pure salary savings is $9.5 million or $38 million on the annual basis. The vast majority of employee-related savings has now been realized with any additional future benefits likely being a system integration-oriented. As for the beneficial accretion, stemming from the acquisition of UGC, on an EPS basis, we examined the full year performance in the overall company, the mortgage segment and UGC incremental vision. And adjusting for normal level of cat losses shows the earnings accretion projected to reach 35% within three year period has been nearly 75% achieved just one year later. Total investment returns for the quarter was a positive 79 bps on a U.S. basis, as Marc mentioned, and 71 basis points on a local currency basis. Returns on equities, alternatives and non-investment rate fixed income primarily drove the return. The full 2017 year total return was 5.87% on a U.S. dollar basis. Investment duration was 2.83 years at the end of this year, down sequentially from 3.14 years in anticipation of inflationary pressures. Operating cash flow on a core basis was a negative $32 million, primarily due to an increase in net paid losses spending mostly from third quarter cat activity, the return of cash collateral associated with a large longtime customer and the timing of tax payments between both the quarters. As for taxes, we incurred a $21.5 million charge this quarter that results from the change in the U.S. corporate tax rate from 35% to 21% on our deferred tax asset. This has been excluded from operating income since this is not reflected of operational performance. The effective tax rate in the quarter or pretax operating income was 15.4%, excluding the impact of the changing U.S. tax rate I just commented about and 17.6% for the full 2017 year on the same basis. Now we don’t like to give guidance, but there has been so much havoc in the third and fourth quarter of this year. We’d like to provide our view. The 2018 tax rate, our pretax operating income is expected to between 11% and 14%. Although this range results from various scenarios tested, actual results could still fall outside this range, depending on the level and location of income or loss, the level and location of catastrophic activity and varying tax rates in each jurisdiction. As respects financial leverage, we repaid another $25 million down on the revolving credit facility this quarter. And that, combined with strong earnings, continue to improve our leverage ratios. During the quarter, we also issued 100 million of Series A preferred at 5.45% and redeemed all of the remaining $92.6 million of Series C 6.75% preferred, but with the clearing date of January 2, 2018. As a result, there was a two day overlap of having both Series C and Series F outstanding. So we just for that overlap results in a GAAP, debt plus preferred ratio of 25.8% at year-end 2017 versus 28.7% at year-end 2016, which is a 290 basis improvement in that leverage. The ongoing preferred dividend amount is $10.4 million a quarter, which will result in $4.4 million of lower dividend amounts in 2018 than in 2017. We did not repurchase any shares during the quarter, and our board authorization remains at $446 million plus. On a personal note, Dinos, we have been working together now for about 35 years, and I’m still waiting for you to get something right. I’m kidding. But seriously, because of your leadership, the company is smarter, our families are happier and each one of us is a whole lot more wealthy. So thanks very much for your leadership, Dinos. Dinos Iordanou : You’re welcome, Mark. Mark Lyons : Now with that, we are happy to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo. Your line is open. Elyse Greenspan : Hi, good morning. First off, congratulations Dinos on your retirement. It’s obviously been a great job for all of us working with you through the years. To the quarter, my first question, is either of your two segments, was there any kind of current accident in your catch up in terms of the margin specifically, the loss ratios and how do we think about, just given the market commentary that you’ve provided still being pretty defensive, I would say, in both insurance and reinsurance. How do you think about the margin profile in both of those businesses, as we look out to 2018? Dinos Iordanou : Elyse, its a good question. I think we’re prepared for that one, obviously. I think there was somewhat of a small margin expansion in the fourth quarter of this year. It’s clearly that we’ve seen it. We think it’s about 30 bps in our portfolio, maybe its 50 bps. It’s a positive – it’s small, but it’s a positive and it’s also in the heels of 2.5 years of margin compression. So that you have to keep that in mind that a one quarter change does not repair 2.5 years of margin depression. That’s what we are cautiously optimistic. It’s holding in January, our initial discussion with our team is that – the market is holding of the right level, the same as it was in last quarter. Essentially if you talk to our team, they’ll tell you that 2017, the last quarter of REIT changes pretty much meant that 2017 was a wash. So we sort of have a stable year versus 2016. And this is what’s behind our commentary about the market. So it’s holding, slightly improving. And clearly, there has been the recent improvement at that level, but it’s also an improvement in ROEs and returns in margins. And a lot of it – that’s not have a whole lot to do with the REIT level themselves. A lot of it has to do with the tax rate changes, specifically in the U.S. and as well as their interest rate environment that we see all around us, right. So those two together account for about 200 basis points of pickup in return. So historically, we told you we have about a 7% to 9% ROE. This was middle of 2017. So I think we’re probably moving towards the higher end of that range, but the one thing that I mentioned that I really want to impress upon you, these are all quantifiable changes, risk changes in trend and losses. There’s a lot of stuff out there that’s called terms and conditions, and a lot of it has been given away over the last 2.5 years to 3 years. And we don’t necessarily factor that very well into our calculations. And the trend has been going up. The trend was 1.5% at closing and on 2% for this year. So that’s why we’re cautious because, yes, we’re seeing some compression and margin expansion. The last quarter, it seems to be holding up at the January level – the January 1 renewal, but there’s a lot of uncertainty as to where are we starting from and what it will it mean for the next – for the remainder of 2018. Mark Lyons : I will just add Elyse, we talked about that as a management team. When you look backwards, the actual risk it takes never works in a soft market. It’s always worse than you think, and its terms and conditions as Mark highlighted. So that’s where our gray hair comes from. We’ve been through a wealth of these things that you have to be thinking more conservatively. Dinos Iordanou : It’s prudent. From an old guy, it’s always prudent when you can calculate something. Then I think in my 42 years in the business, the effect of the change in terms and conditions never really mathematically can get factor. It’s prudent to be a bit more cautious, and I think what Mark and the team have done for determining the accident year is prudent, in my view. Marc Grandisson : And Elyse, again, this is just one quarter worth of information and we’ll have to wait another three to four years to see whether that – these numbers are holding up to what we think there holding up. And that also means that we fit 2013 through 2017 at the right level, which one could argue that’s not everything is probably as rosy as people might think. The proverbial bond maybe a little bit out of the bond, as Dinos would like to say. Elyse Greenspan : Okay, great. And then my second question, in terms of on capital, when you guys announced that you do see deal on, you effectively said that you weren’t going to be buying back stock for 2017. As we think about 2018 and just capital, obviously, there’s some potential few minor changes related to your mortgage business. You also, with the laps, the AIG quarter share, only runs for 2014 to 2016. So you are holding on to more mortgage business. How do you guys think about that holistically? And could we see Arch buying back some stock in 2018? Marc Grandisson : So right now, the best – as best we can tell is we would return capital to shareholders if we didn’t see opportunities. And frankly we’re seeing opportunities and clearly MIS is one glaring area where we think the returns are appropriate. So right now where we stand is we have opportunities that may develop or may not develop, and it behoove us to keep the capital at least hold it behind so that we can maybe able to deploy it in this year and in the subsequent years. That’s really what I would – Mark, you want to add something? Mark Lyons : Yes. I would just add Elyse. This was six months ago. The idea of retraining if we could and deploy it would have been tougher. Now it’s – we’re training about 142% of book. I think as of this morning, over three years, that’s 12%-plus, getting closer. Not at, but closer to where we are. So it’s not impossible, but we’re looking to deploy our businesses, first and foremost. Marc Grandisson : Exactly. On the PMIER note, that’s a good question you’re asking. It’s going to be asked. Currently, we don’t see any change in our capital plan. We’re totally everything is in line. It’s going to be some changes. We can’t talk about it, but totally within the planning budget. So it’s nothing to talk about. Elyse Greenspan : Okay. Thanks so much. I appreciate the color. Marc Grandisson : Thanks. Operator : Thank you. Our next question comes from Kai Pan from Morgan Stanley. Your line is open. Kai Pan : Thank you and good morning. I would congratulate Dinos on the retirement and I think a long-term shareholders owe you a deep debt of gratitude and you leave the company in good hands and I’ll miss your commentary on the souvlaki, gyros as we approach the lunch time. Dinos Iordanou : Yes. They’re going to bring me back just to pick up the menu every quarter. Because I don’t think they’re expert on Greek food, but I am. Kai Pan : Right. So that might add in 1 bps point 0 expense ratio, I guess. So my question is on the pricing outlook. It looks like the January renewals have been sort of modest increase. Given what you know today, what’s your outlook for May renewals? And how much rate increase you would need for you to get back in the property cat reinsurance business or increase riding on that? Marc Grandisson : Yes. We talked about last quarter, I think, the number I put in the ground for it to make its valuable. In terms of to get back to historical returns, we wouldn’t want from a property cat perspective. Not perspective because of the volatility around it, we would have won about 30% of increase. And now where we are, we probably gained anywhere between 5% to 10%. So we would need not in a significant amount of REIT increases though. So one thing I tell you about the middle of the year, this is property cat exposure business insurance or reinsurance. They are very, very similarly in terms of REIT needs. It’s too early to tell. I think there’s a lot of adjusting for position in the marketplace. One thing that surprised us, I’ll tell you for January 1. And it might be another reason why we’re a bit conservative in our comments is that capital does not seem to go away at all. If anything, I think capital has been increased at the 1/1 renewal, and its – the capital has committed for one year. So maybe we would expect a very similar round of REIT change by midyear. We think it should be much bigger than this, much higher than this, but we may not be able to get this because of the microeconomic forces of supplying demand of capital, essentially. Kai Pan : Okay. That’s great. And then switch to MI. Just I have a couple of questions there. One is a delinquency going up for the quarter sequentially because you think the impact from hurricanes will be one time rather than long-term trends in terms of delinquency trends. And then the second, what’s your run rate do you think on your like expense ratio as well as the acquisition ratio? It’s like 2017 will be a good run rate going forward? Marc Grandisson : Yes. Delinquencies are getting better, and we have our delinquency – the case of delinquency that we have on our portfolio, if you exclude to your point the recent storm, it’s still decreasing. And sequentially, as is with everybody else in the sector, we have seen a blip about 3,200 new claims. We think it’s kind of hard to see through all the claims specifically, but we estimate about 3,200 claims from the storms. You acquired right, it’s a blip. It went up from one quarter. We expect the cure rate for those claims, as you heard from other people to be very, very high. A typical delinquency now that we see that’s non-hurricane related probably cures to the tune of 87% to 92%. The ones on the storms are going to be – we expect north of 95%, but you’re right. So blip, we have to recognize it. There were some reserves put aside for this as a result of that event. But we are expecting this to be a blip and go away. As of the recent, I think, Mark, we have already decreasing claims. We have 3,200 at the end of the year. At the end of January, I believe, we already had 400 accrued. So we expect it to be fully curing. Also, we should know, you probably heard about some other call, that Fannie and Freddie had put programs to stay any delinquency to give people credit and give some leniency on their payment of the storm. To recognize, the duress under which they are for the storms. So anything that we hear and see indicates that it certainly will repeat itself and that will be a blip that goes away in the large part. Mark Lyons : And Kai, if Marc didn’t mentioned, I apologize if you did, when you adjust for those hurricane-related without the delinquency rate, it’s 1.97. It’s virtually flat with the prior quarter. So that really accounts for it. As far as your second question on the expenses, for the quarter, the segment was 20 little over 22. We have to keep in mind, is yes, we’re growing on premium and you got the AIG quota share session starting to wane marginally a bit. But as I commented on in the prepared comments, the deferred acquisition costs were written to zero on the UGC transaction. So they’re building backup and being amortized. So I would not to get crazy guidance, but I would say as best, it would marginally improve from the 22.1%. So best I can do for it. Kai Pan : Okay, great. Thank you so much. Operator : Thank you. Our next question comes from Meyer Shields from KBW. Your line is open. Meyer Shields : Good morning. Congratulations to Dinos on phenomenal career and well deserved retirement. Dinos Iordanou : Thank you. Meyer Shields : One quick question, just in terms of modeling. Do we have sense as to how much the acquisition expense ratios have been impacted not counting the fourth quarter LPT for excise taxes? Mark Lyons : The only real impact you’re really seeing of significance is in mortgages as we talked about. I mean, there is some growth in NWP as Marc delineated on a written basis, but the PC side is really not to date, has not really impacted it’s really the mortgage side. Meyer Shields : Okay. And can you – I’m not sure how to ask this, but can you talk about the… Mark Lyons : I’m sorry, Meyer, yes, you did have a second point, as now I can just point out to me. The FET on the $13.6 million was reflected in the reinsurance groups acquisition ratio, and it was all expense. Marc Grandisson : So it’s 5 points plus. Meyer Shields : Right. Okay, I got that. Thank you. I was wondering if you could talk about the analog to trend in the mortgage insurance business whether that’s changing. You talk a little bit about pricing getting more competitive. Marc Grandisson : Yes. The trend in loss trend really the equivalent for the MI is the trend in credit riskiness of the underlying policy holder or mortgage insurance policy. And so this one, we’re not seeing a significant amount of changes in the regular – to the average lender, borrower. But having said this, if you look at the overall MI portfolio, there is an increase, for instance, a 95 and above LTV. So you do have an underlying riskiness of the portfolio that has changed over the last two years. So the singles were already there. They’re not necessarily more risky. They’re just different their economic discussion, in which we have lowered, as you know. But the two elements are not getting riskier in the marketplace or the 95 plus LTV, which I mentioned, which I’ll supported by the GSEs. And the second one is the DTI above 43, which is another one that is encouraged by the duty to serve aspect of the overall mortgage risk providers. So these two elements are not actually not insignificant, right? I think the DTI over 43 is about 20% of the NIW for the MI industry, and the 95% plus LTV has grown to 12.5%. So the overall riskiness of the portfolio is increasing as a result of that specific phenomenon. But if you look at – it’s actually buffered to some extent by house prices appreciation going up and affordability still being at the very healthy level. The DTI for the average borrower is still below 30%, which is lower than historical values. So I think at the margin, the volatility around the expected, I guess, has been increasing a little bit. You don’t have necessarily an average risk are going up significantly. Does that make sense? Meyer Shields : It does. It’s very helpful. Thank you so much and good luck. Dinos Iordanou : Let me just a little color. What Mark said is absolutely correct, but I want you to understand that a risk price methodology adjust for the riskiness. And for that reason, a reduction in exposure has been mostly in the 95 LTV and above and, of course, singles that we have been mentioning for the last three quarters. Just a little more color. Meyer Shields : Thank you, Dinos. Operator : Thank you. Our next question comes from Brian Meredith from UBS. Your line is open. Brian Meredith : Yes, thanks and also congratulations Dinos on retirement and just as an outstanding career. My question first is on the MI business, I’m just curious your thoughts on the competition that you kind of highlighted. Do you anticipate the tax reform will have any incremental pressures with respect to pricing in the MI business? Marc Grandisson : I think, at high level, Brian, I think once – investors look at returns after tax. Most of the U.S. MI provider of capital of U.S. MI business are U.S. based, therefore, U.S. taxpayers. So I would expect, in general, so that should means, everything else being equal, which is never is, that the returns would increase for the U.S. MI provider. Therefore, the question is, is that – will they be okay with this? Will investor expect a higher return? Or did the risk change in any significant way? So I think all else being equal, I would expect the market has been such not only in MI specific, it’s also P&C in any market, for that matter, phenomenon that if there’s more money left after you pay the tax, man that there was an adjustment for returns. So we would expect to have some kind of effect. I don’t think we’re seeing it quite yet, because as we all know, collectively, there’s PMIERs 2.0 on the horizon. And done my taper somewhat what happens over the next six or seven quarters. We don’t have a crystal ball, as you know, but all else being equal, when tax rate goes down, when there’s more money available for shareholders, and everything else being equal, which would expect price to go down slightly. Yes, we would. Brian Meredith : And I’m just curious, Marc, on your 15% kind of return assumption is based on minimum that you’re looking in the MI business. What is the tax rate that you’re assuming on that? Marc Grandisson : Mark, you mean, just pretty [indiscernible] It hasn’t changed… Mark Lyons : Yes. We would expect that incremental benefit now, Brian, of course, the 35% to 21% that we have, it’s all U.S. we have a U.S. tax group that goes beyond mortgage, of course, it’s all very – everybody talks about the other U.S. stock companies benefiting enormously. If you have other U.S. based income you are benefiting too, just as we are. Marc Grandisson : And Brian, we said we are meeting the 15% return, which means my implication is above that. Brian Meredith : Right, right. I was just thinking it’s 35% with the tax rate you were using and I guess it will 21% not kind of your blended tax rate with the quarter share offshore. Marc Grandisson : Well, before we were paying 35%, there was a quarter share to ARL for capital management purposes, so that would blend into 17.5% absent FET on the other side. Now I’d say, 25% for what’s in the U.S. and then there is a quarter share although we have to weigh that with the B tax that comes into play as well. So we’re somewhat similar – in a similar position after tax then we were before if not improved slightly as Mark mentioned. Brian Meredith : Perfect. And then another one, just curious your Watford, looking the results you continue to have fairly high combined ratio this year. What is the kind of outlook right now for Watford as we think about it? Mark Lyons : I think it’s purpose, it still very much alive, I mean, we have other guys coming up with total return reinsurance still as of yesterday I believe it was announced in the marketplace. So I think that one thing that happen to Watford is that they were essentially participating on the property cat portfolio and so to happen to run into the 2017 cat as well. So the question is, was this appropriate then we can look back and be money, money quarter back. But at the core of what Watford is doing, we are – there is no much change for it purpose and it’s still very much alive and what it’s doing. The reinsurance play as you guys remember what initially what we are trying to do get Watford into there is been a shift over the last six quarters, as I mentioned the reinsurance market terms and conditions got progressively worse since we established Watford Re. There is a push for Watford to become more of an insurance provider in the U.S. And that will certainly help those kinds of combined ratio and volatility specifically around their results. Marc Grandisson : I think another variety. A good characteristic to keep in mind is, they are north of 50% – I think they have 55% in the quarter direct on their own paper rather than being [indiscernible] Brian Meredith : Got it, helpful. And then last just quick one here, in the MI business, Marc, is it possible to give us what the kind of reduction you see on AIG quarter share kind of look like in 2018 versus 2017? Mark Lyons : In a premium sense. Brian Meredith : Yes, the premium, just like most of the growth in that obviously right is the AIG… Mark Lyons : It’s not a big follow up as you think. Brian Meredith : Okay. Mark Lyons : Brian, overall annually, it’s only in the tens of millions. Brian Meredith : Got it. Thank you. Mark Lyons : Welcome. Operator : Thank you. Our next question comes from Amit Kumar from Buckingham Research. Your line is open. Amit Kumar : Thanks and good morning and I’d also like to echo my congrats to Dinos for being leading one of the top value creator franchises out there. Two questions, the first question is going back to the discussion on the insurance AYLR and I think you mentioned there was some movement from the attritional losses. Can you just maybe just flush that out a bit more in terms of how we should think about the underlying LR trend going forward. And does it drop off or there is some volatility continue going forward? Mark Lyons : Let me start it. I think the ongoing movement over the last few years and Marc has highlighted in the past of smaller policies lower limits continues to constrict the volatility, which is part of the game plan. And large attritional losses you still occasionally get we got it from the fourth quarter of last year, you got it again this year. It seem to be a common theme on insurance and reinsurance on the onshore energy being the exposure that’s generating that, which is requiring different actions associated with it because you have to have a common view of that across. So I think the corrections for that are going to go – take a long way for stabilizing. And you could never say never, but that’s a high capacity business that can hit you with large pops. Amit Kumar : And just to be clear, there wasn’t any adverse movement netting out against favorable movement in reserves? Mark Lyons : No, insurance was basically flat. Dinos Iordanou : Yes, it was basically flat. But some plus or minus but overall it’s not. Amit Kumar : Not so material, okay. I guess the only other question I have is, maybe a broader question. And this is for Marc, based on the transition I was curious, this obviously has been in the pipeline for sometime in terms of the overall. Have there been times when you thought differently then Dinos and strategically how do you think about Arch from here going on forward. Marc Grandisson : The best question, the best way to answer that, I’ll ask Dinos to chime in to confirm what I’m going to say. But I think the Mark Lyons, myself and Dinos work together for over 16 years. We’ve had our differences and our agreements and disagreements, but by and large, I think over time we find ourselves a lot more agreeing on things and not. I think we’re both – and three of us come from the very rational – very economically rational way to analysis businesses and make decisions. And I think that’s something that is sometimes missed or that you should appreciate that. And I think Dinos would echo this, the strategic visions or the strategic play that we have did and we did over the 16 years were not – Dinos was certainly the proponent and the one publically advocating and talking about them. But all these things were really done and claim to as we talk together jumble our results were very instrumental on this as well. So I think that we all grew together in that environment and had more success then failures, I mean, we don’t do everything right. But I think the overall – I think we grew to agree more together not because I came to his view or he came to my view is because if you look for the truth and look for the right rational thing to do, we sort of come up to the same or very often the very similar conclusion. That’s what I have noticed over the last 16 years. Dinos Iordanou : Let me give you my two cents on it. What Marc says absolutely correct. First and foremast with a very collaborative management team and beyond that we’re very collaborative with our Board of Directors. So, the alignment is to where we are going to, yes, we do the groundwork, the management team does the groundwork. And Marc mentioned himself and Mark Lyons and me, but there were others. There is Nicolas and there is Maamoun and I can go on and on and on and there is Pres and on and on and on. So there is collaboration in examining what the opportunities and where we are going to go. And the good thing about it, is that when we arrive at a decision then beyond is about execution is not about – if I step back and I look at the past 16 years, I would put a 95% plus agreement between the senior management team and the board ratification of where we wanted to go. The other 5% I don’t – I will never call it as a major disagreement, but directionally maybe a little more to the right and a little more to the left. And then at the end we agree as to how we’re going to do it. And I expect the future to be pretty much in the same direction. Having said that, let me also address the other aspect of what we are as a company. We’re opportunistic. So I don’t know what opportunities will be detected in two years from now, three years from now, four years from now. But I can say me – my duties as a Director and being on the board – and the management team operationally, which occasionally bring ideas up to the board as to what we’re going to do. That collaboration is going to continue, but I can tell you what the future is going to say, if there is a change in strategy. If there was a change, is because based on our opportunistic approach to the business, we see an opportunity in the future that it wasn’t present today or in the past as we’ve done with the mortgage. None of us thought we’re going to be in the mortgage insurance business when we started in 2002 all the way until the financial crisis. And then after that, we saw the opportunity. We worked on it first as a reinsurer and then later on, we said, there’s more value to be a primary insurer and we took and the acquisition to get us there. So I don’t – I mean, it’s a very important question, but I think we’ve done a great job in not only transitioning leadership and building from within, which basically it’s another one of our foundations – a lot of senior managers, they grow within the Arch culture, and we like to promote from within. And we don’t rely significantly ongoing and bringing outside talent, but it makes it easier later on to execute the strategy because everybody’s in alignment. And I believe because we do have that collaborative culture. Listen, John Vollaro officially retire in 2009, right? I don’t think anybody here thinks he ever retired. Like I said, yes, you do retire, you don’t in our operational, John was never operational. I will never be operational. The management team’s responsibility is to be operational and make all those decision, but they’re for consultation. People they’re going to call, we’re going to discuss things. We’re going to discuss them at the board. And at the end, I don’t anticipate major changes unless the market dictates this because there is an opportunity that none of us is seeing today, but we might see the future. Marc? Marc Grandisson : Great. I agree with you. Mark Lyons : I’m interest. There are the bunch of shrinking violates on the measurement. Amit Kumar : I will stop here. Thanks, again. And I’m sure Lyons is following. So I will stop it. Operator : Thank you. Our next question comes from Geoffrey Dunn from Dowling & Partners. Your line is open. Geoffrey Dunn : Thank you, good morning. I wanted to dig into the credit development on the MI front a little bit more. Stripping out some of the things you’ve highlighted, it looks like you’re still running and incidents maybe up around 12%. Can you confirm where you are in your incident assumptions on new core notices? And if it is still above 10%, what does it take to get you down there? Marc Grandisson : Actually we – the reason ones are getting below 10%, but we were about 12.5% over the last two, three quarters. So we’ve crossed it, but it’s a one quarter, Geoff. So who knows if it’s holds up there. Geoffrey Dunn : So you have touched down on your assumption to 10%? Marc Grandisson : No. Mark Lyons : It’s just for the cats. Marc Grandisson : Yes. For cat – yes, I make point on the cat for the – lower than 5% of what we expect right now. It’s still early to tell that… Geoffrey Dunn : See, I’m talking on the core number. Marc Grandisson : The regular stuff. Yes. We’re slightly below 10%. For the recent, last few quarters of delinquencies that’s what we expect ultimately. Geoffrey Dunn : Great. And then with respect to the PMIERs cushion. How much of a drag on the cushion whether there’s quarter from the hurricane notices? Mark Lyons : Well, the hurricanes pretax load was really not that large, so you can kind to deduce that is not a big deal. It was south of $5 million. Geoffrey Dunn : South of a $5 million capital drag? Mark Lyons : No. South of $5 million cat reserve provision. Geoffrey Dunn : No, no. I’m talking about capital drag on the PMIERs ratio. Mark Lyons : The PMIER is $72.5 million of drag. We had to put a sign for the new notices. That’s the question. Sorry, Geoff, we didn’t get that. Geoffrey Dunn : All right. And then my last question is obviously, you’re running the highest cushion in the industry right now with respect to PMIERs. It’s going to go even higher to get these notices out of the inventory. Post PMIERs 2.0, what type of cushion do you expect to run? Marc Grandisson : We can’t be talking about this. You know we’re under an NDA. You of all people should know this. Geoffrey Dunn : I’m not looking for the capital level. I’m looking for the relative cushion. Is it the 10% or the 20% cushion or whatever Post PMIERs 2.0 says? Marc Grandisson : We’re unable to tell you this, but we can tell you this, Geoff. We’ll have to get there. When you finalize – it’s going to be $5 million this year. We’re going to have the final thing. This will be more like a second quarter call discussion. Geoffrey Dunn : All right. Thanks. Operator : Thank you. Our next question comes from Jay Cohen from Bank of America Merrill Lynch. Your line is open. Jay Cohen : Thank you. My questions were answered. I feel like I should make a comment about Dinos. So I was involved – I worked on the IPO of Arch, so it just goes back many years. At that point, many of you remember there was a lot of companies come in public and being formed, and they all sounded reasonably good. Good risk management, good underwriting, good management teams, and the question would often come up, well, which ones are the best. And I would tell people like ask me about 15 years and I’ll have a good answer. Well, I think we have our answer now. Congratulations, Dinos. Thank you. Dinos Iordanou : My eyes are getting watttery now. Operator : Thank you. Our next question comes from Ian Gutterman from Balyasny. Your line is open. Ian Gutterman : Thank you. I’ll just follow up with there, which is, as I recall, around that same time Dinos, you and John will remember these meetings well. Everyone giving you a hard time about Zurich and questioning your ability to be successful at Arch, I think a lot of people regret they haven’t given a board on sooner or so. Dinos Iordanou : Listen, I make pleasure on making – proving people wrong. Ian Gutterman : That’s – it’s a get motivator. My first tenancy question is Kai kind of stole my thunder here a little bit, Marc. But my first question is, will the menu change next quarter? Dinos Iordanou : Well, I don’t know. My duties going forward is – board duties, choosing the menu for the calls. I won’t participate on the calls, but I’m going to be talking to the chefs as they’re going to offer for lunch. And, of course, I’ll be available for golf games and dinners, especially if I don’t have to pick up the tab. So you know my number, so if it’s the golf games with good dinners, and I’m always available. Ian Gutterman : My follow-up question for you on that, Dinos, is in your prepared remarks where you talked about Arch’s secret sauce, I thought that was just tzatziki. Dinos Iordanou : Tzatiki’s too – this is my mother’s secret sausage – I mean, secret sauce, which is a lot better than tzatziki. Tzatziki, every Greek restaurant has it. Ian Gutterman : That’s good. So series questions, last quarter we had a discussion about cats. I’m sure you recall about the so-called missing losses and the modern agencies never being right in the first time and all ways being too low and how it will play out. And it seems that the way is played out is actually the modeling estimates were too high for once, and everyone is releasing reserves just three months out. So I’m curious now that you had some more time to assess, what do you think – what are the implications for that? I mean, is there a reason to believe there’s some – there was a flaw in the models and we might see them be high in the future again like this? And we need to reassess how we think about hurricane risk? Or it’s just – this was an anomaly in every once in a while, they’re going to be way too high? Marc Grandisson : Yes. So if you look at that loss, Ian, we thought about it, and most of the uncertainty and change in our ultimate were in the reinsurance segment. So if you look at our loss, the difficulty in analyzing this loss was how widespread it was among many primary companies. And then soon – clearly, it was not as concentrated as we thought it was. So this became clear to us after repeated discussion what our clients on the reinsurance side, I’m talking. Insurance side, we haven’t changed much of our view. It’s still the losses are the losses. We have them and it’s not going away in the sense that there were – there’s less in that estimate. But on the reinsurance side, I’m going to say that collectively as an industry, that might explain some of the exuberance that we’ve seen on other calls or in the January 1 renewal that loss is largely an insurance loss. So that made it a lot harder. We are insurance with most of our capacity on the cat is allocated to their reinsurance. So it was very hard at the end of last quarter to re-evaluate what loss have are coming from. So I’ve asked our team in Bermuda to see what kind of return period that are we looking at for those kinds of losses. And we’re in the one to 20, one to 30 years, so it’s not as unusual as you might think it is. So, I guess, I would just describe it to the fact that the losses spread out, and the losses in California, which could have been more concentrated, actually didn’t know it’s a significant loss. But is not significant enough that it will have that much of an impact on certainly under reinsurance segment and on the broader marketplace. So I think it’s still possibly also too early. There might be some losses that develop afterwards. There might be some creep of the policy language that may change things. These are things that we’ll level have to see how they develop. But so far, you’re right. I think that missing losses are not missing. They were probably not there to begin with, specifically on the reinsurance side. Dinos, you want something to add? Dinos Iordanou : Yes, I will pick up on what Mark said. I mean, yes, the losses in the aggregate, I mean, it’s three losses and then you have the California fires and all that. It’s still over $100 billion – It’s still over $100 billion. So this is not what I would call a small event. But as Mark said, most of the absorption of these losses came by the primary riders. And for that reason, the reinsurance market and especially some of the – what you will call alternative capital did not get hurt as much as potentially could have been hurt. And for that reason, that capacity remain in the marketplace and it got easily reloaded, et cetera. And that has an effect as to how you’re going forward to with the rate. I don’t know if Mark and in his comments was more specific. In the primary property arena, we’ve seen gradually improvement on the pricing that is not diminishing. It’s happened in December and it’s continuing in January. And at the end of the day, I anticipate – he’s going to continue because that’s where they heard is. Most of the losses they’re getting paid by the primary companies. Now it didn’t affect to reinsurance as much and for that reason, I think there’s capacity is plentiful. And rates have not escalated based on what we were anticipating. Mark mentioned 5% to 10%, which is not – what we want. If you was 30%, you would have met our threshold. You would have seen us writing a lot more cat business than… Marc Grandisson : The only chapter we haven’t seen I think the last is Maria loss in Puerto Rico. That’s the only one I would say we throw back that you, Ian, and saying it’s still not too early, but we still have to see how that one develops. I think Harvey and Irma are pretty much pin down right now. Mark Lyons : Let me just throw in once again. I know you asked an industry question, as it relates to Arch, especially with Dinos and Marc’s comments about the primary side. In the prepared remarks, they’ve comment that the reinsurance releases treaty and facultative. As facultative is the sister process, rest by portfolio similar to insurance. But attachment point saves you there. And the primary guys are ground up whereas the facultative unit is very skilled where to attach. Ian Gutterman : First, I guess, I was trying to ask something a little bit different, I guess more than sort of the pricing impact or there temper is the more about – it seems like damageability across the events, across all three events was a lot less than we all would have thought. And to be honest, Marc, it’s not just the reinsurance that’s a primary, it’s been Harper release, Allstate release, Travelers release in big dollars, right? So everyone seems like just damageability per claim there’s been a lot less in the miles expect, I’m wondering if there’s some – is that an anomaly? Or do we think there’s something meaningful on their that might make us reassess how we about cat risk? Marc Grandisson : Well, the only think I would tell you Ian is, I live in Florida, I mean Marco Island and the eye hit right over my house et cetera. My house had very little damage maybe $20,000 because is build with a new standard. So it’s a Cat 5 type of a home. And for that reason, the damage I had it was by new. But I can tell you when I drive around Marco Island, most of the roof damage has not been repaired yet. There are still tarps and believe me, there is price escalation. I have a neighbor that he lost 30 tiles in his roof and the cheapest price it got to repaired it was $4000 that’s over $100 a tile, I mean he says, I’m not getting water in the house, so I’m going to repair it, because I’m going to wait for prices to come down, but there is – there’s still – there might be a little creep that we haven’t seen yet. Ian Gutterman : Got it. Thank you guys. Marc Grandisson : Thank you, Ian. Operator : Thank you. And I’m showing no further questions from our phone lines. I would now like to turn the conference back over to Mr. Dinos Iordanou for any closing remarks. Dinos Iordanou : My only closing remarks thank you all it’s being a pleasure work with you over the years. And remember I’m available for golf games and I’m available for dinners. So I’ll see you around. Thank you very much. Operator : Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may all disconnect, and have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,018	2	2018Q2	2018Q1	2018-05-02	1.179	1.325	2.095	2.14	null	14.23	13.15	Executives: Marc Grandisson – President and Chief Executive Officer Mark Lyons – Executive Vice President and Chief Financial Officer Analysts : Kai Pan – Morgan Stanley Elyse Greenspan – Wells Fargo Amit Kumar – Buckingham Research Group Josh Shanker – Deutsche Bank Geoffrey Dunn – Dowling & Partners Jay Cohen – Bank of America Meyer Shields – KBW Ian Gutterman – Balyasny Ryan Tunis – Autonomous Research Michael Zaremski – Credit Suisse Operator : Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Arch Capital Group Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the Federal Securities laws. These statements are based upon management's current assessment and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on the historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your hosts for today's conference, Mr. Marc Grandisson; and Mr. Mark Lyons. Sir, you may begin. Marc Grandisson : Thank you, Crystal, and good morning to you all. Overall, our first quarter results were excellent and demonstrate the value of our diversified specialty insurance platforms. Before commenting on market conditions, I would review the core tenant that successfully guide us at Arch. Our primary goal is to produce superior risk adjusted returns in order to drive long-term growth and book value per share, while providing customers with quality insurance products. To support this goal, we hold dear a few core principles such as cycle and capital management as well as being intellectually honest about the probability of achieving the risk adjusted returns offered by the marketplace. Our shareholders, policyholders and employees all gained from this approach. Currently market conditions are stable to slightly improving in the P&C arena. Operating margins expanded slightly in insurance in the first quarter while the interest rate environment had lifted expected returns. Despite growth in some niche areas, we remain cautious and do not see a broad based market turn in the near-term given abundant capital across the market. It's important to keep in mind that lost trend is picking and is at best a guess. We will not know for another five years what the recent changes in trend will mean for our P&C businesses. Even though there may appear to be an increase in ROEs, the uncertainty of the impact on – of inflation as well as some of the negative effects of changes in terms of conditions of late hampers our enthusiasm. In our insurance group, underlying the growth in our gross written premium we continue to deemphasize some lines such as casualty, excess D&O and some London market business, all owing to an overly competitive marketplace. Our insurance growth is coming from travel and small to medium enterprise professional lines. In addition premiums increased and loss impacted property lines where rates and returns are improving. In reinsurance, our growth in our European auto quota share in excess of loss as well as property is balanced out by decreases in casualty and D&O. As you can see, our insurance and reinsurance operations are in sync as to where capital needs not to be deployed. Lastly keep in mind that the reported growth in premium was magnified by foreign exchange impact this quarter to the tune of one third of growth in both insurance and reinsurance. Turning briefly to capital management, we entered into a loss portfolio transfer on certain discontinued liability line and program businesses predominately from years prior to 2012. We are no stranger to the run up market and we value what this product can offer. The transaction also included reserve development protection above the carried reserves. We did that transaction with two main objectives in mind. First it will reduce the volatility of future reserve development narrowing the ultimate payments around the level currently expected and second it will enable Nicolas Papadopoulo, who is our new Insurance Group CEO and his team to focus on ongoing projects without being distracted from running of a business no longer core to Arch. Mark will further address this and additional capital management actions in his own comments. Turning now to our other specialty segment, mortgage insurance, it was an active quarter in the press to say the least. We had a great quarter and we are even more convinced that our risk-based pricing framework RateStar is the best way to approach this marketplace. Our new insurance written for the first quarter was $11.4 billion of which 82% was through our RateStar platform. The pricing outlook was looking fairly stable until recently when competitors announced a cut to their rate cards. You will remember our comment on last quarter's call that we expected this reaction. However like you, we did not think it would occur this quickly especially in light of the uncertainty surrounding PMIERs 2.0. We are – as everyone currently evaluating the competitions rate cards and we will decide whether to take action soon. Bear in mind that our production from rate card is less than 20% of our NIW and we believe that RateStar will still attract the better risk even after the rate cuts announced by some in the industry are put into effect. As I mentioned a minute ago, RateStar has proven to be a great way for Arch to enhance risk selection. One example of this is that RateStar steered Arch away from originations in ILTV high DTI products over the last few quarters. Along with single premium products we purposely remain underway in these higher risk areas. Our expected returns on all U.S. MI business are still in excess of 15%. Of note, we closed another Bellemeade transaction for the second half of 2017 production at tighter spread than the one we did in last year's third quarter. Bellemeade structures provide capital market protection for Arch for deterioration in the mortgage market. Think of it as an aggregate excess of loss covering a cover attaching excess of a 23% loss ratio. Turning now to IMAGIN, the Freddie Mac product announced last month. We believe that this product was an evolution of GSE credit risk transfer and not a revolution. This pilot is still very much in its infancy and we believe it has the potential to do two positive things for us. First it establishes Arch as the go-to innovator in mortgage insurance and second it leverages our underwriting expertise through managing insurance platforms and their-party capital. IMAGIN targets the discounted single LPMI product and it's kept at $2.5 billion of NIW, which is projected to be less than 1% of the expected MI industry production in 2018. In addition this new structure fits our core principle to cycle management and allows us to be a low cost provider in a highly commoditized business environment. Once you factor in the fees and the expense savings, the expected returns are appropriate relative to the risk that we're assuming. Last but not least the new CRT advisory relationship that we have agreed to with Munich Re is yet another example of our ability to leverage our experience and expertise in executing various types of MI risk transfer. On the investment side, we continue to position our portfolio to be flexible and poised to recover quickly from an increase in rate and yet remain liquid enough to allow additional longer-term alternative investments. Our property cat exposures are substantially the same as last quarter with our 1 :250 year peak zone to Northeast PML, the largest at 6.2% of tangible common equity. Our RDS for our mortgage instruments driven largely by the U.S. primary exposure is stable at 16.4% of tangible common equity as a result of the growth in insurance in force and the increase in persistency in U.S. primary MI largely offset by the new Bellemeade transaction. We are continuing to refine the RDS for our non-U.S. businesses and we'll report any changes to the current view as they evolve. In closing, book value per share grows to $61.24 at March 31st; strong operating results were partially offsets by the effects of volatility in the financial market. In summary, a good quarter with some very early positive signs in our P&C operations in a continuing well performing MI on the back of conservative, proactive capital and investment management. And now I will turn it to Mark. Mark Lyons : Great, thank you Mark and good morning to all. I will make some summary comments for the first quarter of 2018 on a core basis and as I say every quarter the term core corresponds to Arch financial results excluding Watford Re or as the term consolidated includes Watford Re. So from a big picture perspective after tax operating earnings for the quarter were $235 million, which translates to an annualized 11.3% operating return on average common equity and $1.69 per share. Book value per share was as Marc just said was $61.24 at the end of the quarter, which represents a 0.5% increase from last quarter and 6.2% increase from one year ago, despite a negative total investment return for the quarter. The diversification of our operating platform and within our investment portfolio, proved invaluable towards increasing book value per share in a very challenging economic and insurance environment. Moving out to operations, core losses recorded in the first quarter from 2018 catastrophic events net of reinsurance recoverable and reinstatement premiums were $2 million or 0.2 loss ratio point compared to 1.2 percentage points in the first quarter of 2017 on the same basis, approximately evenly split between our insurance and reinsurance segments. As for prior period, pure net loss reserve development approximately $52 million, a favorable development of 4.7 loss ratio points was reported in the first couple of quarters compared to 8.3 loss ratio points in the corresponding quarter of 2017. This was led by the reinsurance segment with approximately $37 million favorable, the mortgage segment at approximately $13 million favorable and the insurance segment contributing $2 million favorable. The reduction in net favorable pure loss development relative to a year ago was driven by a lower level of reinsurance casualty releases and a lesser amount of U.S. mortgage second lien subrogation recoveries and fewer acts in the years contributing to U.S. mortgage’s second lien releases. Net favorable development associated with prior year catastrophic events totaled approximately $12 million this quarter predominantly driven by releases on hurricane Harvey. Before I comment on our individual segment results, I'd like to update you on capital management actions we've taken through the first quarter of 2018. As you recall in the fourth quarter of 2017, we executed roughly $1.4 billion of internal loss portfolio transactions between our U.S. property casualty insurance subsidiaries and our Bermuda operating company. Additionally effective January 1st of 2018, we canceled all internal property casualty insurance and reinsurance in force quota share treaty on a cut-off basis, the net effect of which was to approve the risk-based capital ratios of our relevant U.S. subsidiaries. In future quarters, we will provide updates on any further actions taken. And I will comment on share repurchases later in these comments. On a related topic, as Mark just referenced, it was announced on latter part of April that Arch Re Limited entered into a transaction with Catalina General Insurance Limited inception approximately $400 million of subject reserves were transferred accompanied by an approximate $200 million adverse development cover. Catalina will assume all claims handling responsibilities and the transaction is heavily collateralized to secure Catalina’s obligations with a meaningful margin above 100% of all transferred reserves throughout the life of the contract. It should be noted that although this was a transaction between our Bermuda operating company and Catalina, the underlying exposures emanated from the U.S. Insurance Group. Moving now to more so into operations, the calendar quarter combined ratio on a core basis was 78.8% identical with the first quarter of 2017 and lower compared to the 82.5% purely for the fourth quarter of 2017. The core accident quarter combined ratio, excluding cats, improved to 83.2% compared to 86.1% for 2017’s first quarter. The reinsurance segment accident quarter combined ratio, excluding cats, of 93.4%, showed 420 basis points of improvement to the first quarter of 2017’s 97.6% combined ratio. This was driven by expense ratio reductions with a corresponding flat accident quarter loss ratio quarter-over-quarter. The reinsurance segment expense ratio benefited from reductions of operating expenses in a dollar cents combined with larger net earned premium base. In addition, a reduction in federal excise taxes of $2.5 million or 90 basis points due to a reduction from the cancellation of certain intercompany property casualty core share agreements that I've referenced earlier. This benefit will continue to accrue for the remainder of 2018. The insurance segment’s accident quarter combined ratio excluding cats was 98.7%, up slightly from the 97.8% in the first quarter of 2017 due to higher acquisition expenses resulting from mix of business changes with also a corresponding flat accident quarter loss ratio. However on a sequential basis, this quarter's accident quarter combined ratio improved 100 basis points over the fourth quarter of 2017 largely due to a lower level of reported large attritional losses relative to recent quarters. Moving to the mortgage segment, their accident quarter combined ratio improved to 43.4% from 50.4% in the first quarter of last year as net earned premiums were relatively flat as a percentage of total being approximately 25% to 26% in both quarters. The accident quarter loss ratio of 20.1% in the first quarter of 2018 compares favorably against both the 21.5% ratio in the same quarter of 2017 and 25% ratio in the fourth quarter of 2017. The expense ratio also improved from the 28.9% in the first quarter of 2017 to 23.3% this quarter reflecting the benefit of a full year of integration efforts following the acquisition of United Guaranty Corp. However on a sequential basis, the expense ratio increased to 120 basis points from 22.1%. As we've previously discussed this is driven by an increase in the amortization of deferred acquisition costs remember as at the closing of UGC transaction at prior year end, all deferred acquisition expenses were written off to zero and they're now rebuilding themselves of being amortized into income. Total investment return for the quarter was a negative 32 basis points on the U.S. dollar basis and a negative 40 basis points on a local currency basis. These returns were impacted by the effects of higher interest rates on invested rate fixed income securities and the overall equity market decline, partially offset by positive returns on alternative investments and non-investment grade fixed income. The investment duration was 2.6 years at the end of the quarter down sequentially from 2.83 years at December 31 and down from 3.36 years a year ago, in anticipation of rising interest rates. Also during the quarter, fixed income investments which represent approximately 76% of investable assets saw a tactical shift away from municipal bonds which were reduced by 28% in the quarter and into corporates at AAA backed asset securities – asset backed securities due to improved relative valuations. During the quarter, the company incurred $111 million of pretax net realized losses primarily as a result of the already referenced investment mix shift and included within that realized loss was $18.4 million of unrealized losses in equities under a new accounting principle that requires a recognition in net income of changes in the market value of equities rather than in other comprehensive income. As you know our investment profile continues to be managed on a total return basis and not by component of total returns. The corporate effective tax rate in the quarter on pretax operating income was 9.9% and reflects the benefit of the lower U.S. tax rate. The geographic mix of our pretax income and a 0.5% benefit from discrete items in the quarter mostly stock related. As a result, the pure effective tax rate of pretax operating income excluding these discrete items is 10.4%. As always the actual full year effective tax rate could vary depending on the level and location of income or loss, the level of location of catastrophic activity and varying tax rates in each jurisdiction. On a GAAP basis, at March 31, our total debt to total capital ratio was 18.7% and total debt plus preferred to total capital was 25.7% down 70 basis points from year end 2017 and down a nice even 300 basis points from year end 2016 when we acquired United Guaranty. This leverage reduction was due to our growth in common equity and the redemption of the remaining $92.6 million of the Series C 6.75% preferred shares that took place. Associated with this redemption was a $2.7 million non-operating charge to expense the original issue cost of the remaining Series C, which had been held as additional paid-in capital. As for share repurchases at the end of the first quarter under a Rule 10b5 plan, we implemented our share repurchase program during our closed window period and repurchased nearly 40,000 shares at an aggregate cost of $3.3 million. Additional share repurchases have continued into the second quarter and cumulatively totaled $80 million with an average price to March 31st book value of 1.33 x. Our remaining authorization, which expires in December at 2019 at the end of March was $443 million and considering the share repurchases made through April 30th now stands at $366.5 million. Also during the quarter, AIG completed the conversion of all their remaining convertible preferred shares issued as part of the UGC acquisition resulting in the issuance of approximately 5.7 million common shares. You may recall that these shares were considered common stock equivalents in 2017, so the conversion in the quarter had no impact on earnings per share or book value. Operating cash flow on a core basis increased to $370 in the first quarter of 2018 compared to $122 million for the same period in 2017, reflecting the growth in premiums written in 2018, a smaller level of operating expenses in UGC transaction costs and a $52 million tax refund received. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] And our first question comes from Kai Pan from Morgan Stanley. Your line is open. Kai Pan : Thank you. Good morning. My first question is on the MI business that’s given the competitive pricing cut as well as with new pilot program, what do you think about the return of the best says going forward versus your prior expectations? Marc Grandisson : So the current returns are in excess of about 15% which we indicated in the past and are still believe that is the case. After we look at the price – the price cuts that were announced by one of the major competitors, and they actually sent around a sheet that explains how they get to – how they’re factoring the tax changes. The returns are still in that area, still about 15% despite those rates and that’s what we would expect it to be. Having said all of this, not everything is created equally. We are going to be looking very carefully at our RateStar framework and see whether we need to make a few changes and as well as looking at a rate card changes that took place. It's still a very, very good marketplace. Overall, the credit quality is still very, very high. So we are not changing fundamentally the level of returns, especially risk adjusted return as it compares to other lines of business that we would have in our portfolio. Mark Lyons : In fact, I would just add Marc’s comments that we really look at this as a segment not as just the U.S. which is why our competitors are kind of vertically focused on. So our view of CRT transactions, our other businesses that we have, the fact that we lay off, we have reinsurance structures and Bellemeade structures that all are very additive towards the net ROE. Kai Pan : Okay, that’s great. My second question is on the P&C side. What's your pricing outlook for June 1 renewals, at mid year renewals? We heard some commentary that pricing actually would not be as strong as January renewals and do you see the same thing and how do you position your portfolio? Marc Grandisson : Yeah, so we have heard – when we have – we went through internationally renewal of a Japanese for instance of April 1st, I am sure you heard on the other call that pricing was kept at very stable to slightly down or slightly out depending on the layer of the other types of risk. So we were expecting sort of that reaction, but the most important piece I think you’re asking is what will the U.S. reinsurance market look like at mid year. And the initial indications are that it's not going to be as good as a rate increases were at January 1. A lot of it is also posturing. There is a lot of early – still pretty early. June first and July first is a lot of renewals taking place. So people are jousting for positioning and arguing their case as we speak, but the early signs are that the price increase is going it somewhat go down. So the second derivative is negative to the rate change. It might be still a rate change, but it’s not going to be as good as healthy as it was at 1/1. Kai Pan : Okay, that's great. Last one if I may, I am just wondering what kind of launch do you know is ordering for us before you guys? Marc Grandisson : I don't know we – I think we're going to have a surprise. We’re going to have a special delivery after the call, I'm sure. Mark Lyons : I'm sure I will have a French Canadian… Marc Grandisson : Bent… Mark Lyons : Accent to it… Kai Pan : Right, thank you guys. Mark Lyons : One other think Kai on the underlying businesses to which the property cat attaches, we’re certainly seeing some uplift in our insurance group. And we believe those uplifts are happening on the quota shares and the XOLs that Arch Re attaches on top of them. Kai Pan : Okay, thanks. Operator : Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open. Elyse Greenspan : Hi, good morning. To start a couple of questions on mortgage and then I do have a P&C question as well. In terms of mortgage did you say about how much of earnings it was in the quarter? Is it still about that 60% level you had provided us with in the past? Mark Lyons : I think that's well – yes, that's with the allocation of investment income that we show in the corporate segment. If you allocate that back I think it's roughly about that. It might be a couple of points north. Elyse Greenspan : Okay, perfect. And then in terms of a lot you know change in the quarter in terms of the mortgage environment, with IMAGIN, the CRT deal in relationship with Munich as well as the price cuts in the industry. And you guys say you still see this business is generating a 15% ROE, but what about – how about do you think about it in terms of the overall earnings because obviously some of these different components can either increase or decrease the forward earnings that you can generate from mortgage. Can you kind of help us think through the moving pieces and how the profile has changed on with these new developments whether obviously it's not just this year, but more thinking about the earnings a couple years out? Marc Grandisson : It's a very good question. I think – and it speaks very well to our ability to pick and choose where we're going to allocate capital, depending on a return characteristics on the CRT for instance or is it IMAGIN. If that program takes off and it becomes bigger even in the future that will also allow us to participate there. We also have U.S. primary in mind, as we have mentioned that’s also a good leaver for us to utilize. It’s very – the way we look at the MI business is very similar to the way we look at any other business. You have to tell what the marketplace looks like as we speak and then we will tell you what we – how we will be reacting. So depending on the relative returns between the CRT, the IMAGIN or other types of structure of its sort and/or primary MI, we'll be allocating capital as we see the returns to get better. For instance this quarter, a good example is we have allocated less capital to the CRT transactions, we saw the spreads tightening to a level that we believe is not as acceptable as we would want and not meeting our threshold return. And but it doesn’t mean that we need to deploy capital in some other areas to cannibalize the other segments. It’s really just a deal by deal area by area looking at transactions making sure we’re maximizing the returns. It’s really hard I guess the short answer is I do not know until we get to what the market is going to give us in the future. Elyse Greenspan : Okay. Mark Lyons : And Elyse, I just like to – regarding your next question, just to also caution, this is a pilot. It's extremely early. We don't even have a lot of visibility yet into how it's going, so – which we'll certainly talk about in future quarters. But also, just be cognizant that IMAGIN is towards U.S. MI, whereas the relationship with Munich is more towards the CRT transactions. So when you picture Marc's comments about cycle management levers this creates between using working capital versus risk capital, this innovation that the mortgage guys came up with allows that cycle management to really take effect. Elyse Greenspan : Okay, thank you. That’s helpful. And then you know my last question in terms of you guys returned to buying back stock in the quarter and subsequent to the quarter. Can you help us think through your excess capital position, how you would kind of balance other – continuing to return capital with your shares at this kind of 1.3x book value level? Or if M&A – potentially, a deal on the P&C side might be something that you would want to conserve capital for? How are you thinking through that decision-making right now? Mark Lyons : Yeah, great, great question. And it is kind of the [indiscernible] lot of the things that you just mentioned. When we did the 10b5-1, we didn't expect certain things to happen from our competitors that kind of weighed in depth and down on our stock. But what we've done historically with that wavy, not quite straight, lines for your paybacks that we've talked about, that's an ingredient into the mixture. A view of the off-balance sheet embedded value is a – helps inform but doesn't drive some of the decisions. But there's other things that we have going on. There's always things in the pipeline that we're entertaining, firstly. Secondly, we still are steadfast towards reducing our financial leverage that emanated from the UGC transaction for a couple of reasons. One, the more we do that, it gives us dry powder for other things in the future. We have made commitments and in discussions with rating agencies. And it's also an aspect of our GSE relationship that will be helpful to us as we delever. So there's a lot of usages for cash, some of which might go towards – depending on what is the highest return and value that we see outside of some of the benefits that might accrue from the deleveraging. Marc Grandisson : Yeah, I would also add that you know this is the competition on the allocation of capital and how we deploy it, and certainly, we felt, when we did the 10b5-1, that this was an appropriate relative allocation of capital. And to Mark's point, there was no insight on our part as to what the markets – how it developed. We're going to have a board meeting next week, and we're going to have all units sitting around and discussing through what projects or what it is they're working on, and we're going to have a more detailed discussion next week and determine what we're going to do going forward. Mark Lyons : And one other thing that I could add is compared to if it was three years ago, with the volatility of PC and so forth, we have a lot more clear visibility down the next couple of years of mortgage earnings and the quality and strength of them because of the way it operates with the some our fleets and the persistency attached to it and so forth. So that also helps inform our decisions by the way. Elyse Greenspan : Okay, thank you very much. I appreciate the color. Marc Grandisson : Thank you. Mark Lyons : Sure. Operator : Thank you. And our next question comes from Amit Kumar from Buckingham Research Group. Your line is open. Amit Kumar : Thanks and good morning and congrats on the quarter. Marc Grandisson : Thank you. Amit Kumar : A few quick questions. Just first of all, going back to the opening remarks, I think you mentioned rate card serves 20% of the business. Is it fair to say that the competitors – for the competitors it's close to 100% or so? Or what is probably the number? Marc Grandisson : The competitors are not doing any rate cards as far as… Amit Kumar : No, rate card… Marc Grandisson : Sorry, the rate card, yeah, it’s 100% for everyone. We’re about 18% rate card for the production in first quarter of 2018. Yes, that's the answer, yes. Amit Kumar : Got it. Now that's what I wanted to be sure. So clearly, the stock overreacted on the news last month. The second question I had was on the time line. So you mentioned that you're looking at what to do following the pricing discussion. Do we have any idea – I mean, is this going to be disclosed very shortly? Or does it take a few months? And then I guess you are heading to the PMIERs capital discussion. I just wanted to be clear on the timing of your decision. Marc Grandisson : I think it’s going to be like – the way we look at the pricing and the way we deliver products to our clients having RateStar as well as the rate card and having, I would add, different distribution, community banks and credit union, for instance, we need to be very careful and thoughtful as to how we homogenize, if you will, the way we're delivering the pricing and the product to our clients. Right now, what’s happening is that there are discussions as we speak, and the discussions started two weeks ago in Greensboro about how we're going to juggle or put together in a cohesive way our reactions to the – on the rate card and what it means for RateStar, if it means anything at all. So I would – the June 4 or thereabouts, the first day that the pricing will be in line for the Magee and, I believe, Genworth as well. So we will have to come to conclusion with the rate card in shorter order. The RateStar changes may take a little bit longer to implement because, as we have mentioned before, it's over 1.3 million different sales in decision-making. It's not as easy at it looks. It's a lot sturdier, but also being as granular as it is, it's probably less impetus to draw very quick conclusions to it. We can let this work itself even as we speak and even after June 4. But we'll definitely be proactive in making that determinations. I would fully expect by early June, we'll have full – total, complete picture as to what we're going to do on both rate card and RateStar, if any. Amit Kumar : Got it. That's actually very helpful. The only other question I have is going back to the insurance segment. And if I look at Page 12 of the supplement and you look at the reserve development number, it's very close to sort of 100%. And I'm trying to think, is there something deeper going on in terms of there is a moment in terms of certain lines which might be seeing adverse, and hence, the net number is just modestly positive? Maybe just help us better understand what's going on and why is it hovering so close to 100%. Thanks. Marc Grandisson : So it's really – the way the reserve are developing any one quarter, it's haphazard. It could be some negative in one area, some positive and some other area. A quarter change is very hard to pin down. And sometimes, you may wait 1 or 2 or 3 quarters before we take action in certain lines of business. You may want to catch up on some area. So the short answer is the sum total is the sum total and is really a result of individual business unit where we have 14 of, where we go through each individual one of them and we say, okay, this one needs a little bit more adverse development because some losses were reported, we're going to expect some other goes down, so it’s really just a – what you see on our financial result is really the bottom-up approach of our serving analysis at the individual line level. And it's really a quarterly exercise that you go through. And sometimes you tend to be more proactive in certain areas because you might think that it's the trend is going to go against you a little bit future down the road and some others. You’re going to wait and see whether this is only a one-time off thing. I think the short answer to you unfortunately, there is no real – Grandisson is really a bottom up approach to reserving. And I would say in some lines showed us negative or adverse developments, some showed positive development depending on the quarter. Amit Kumar : And I guess what I was trying to ask is, where does the combined ratio eventually settle based on the performance of this business? Marc Grandisson : I think our accident year combined ratio that I've mentioned, that Mark mentioned, 98%, 99% is roughly in the range of what we would expect the mix of business to be. And again, I would just caveat that by saying there are some trends happening in the marketplace. Some rate changes we see or we hear have happened, will they find their way to the bottom line over time has yet – remains to be seen. Mark Lyons : And I would say Marc, I think, was pretty clear on his prepared comments. The consistency between insurance and reinsurance is where capital is and is not deployed. And that's the function of the rates and relative to loss trend. So there's absolute returns and then what are the market conditions doing. Is it helping or hurting that absolute return? And that's how capital gets deployed. That's how the business mix shifts. And if that's successful in the shift, it could have an even more beneficial impact. Marc Grandisson : And I would even add – to add more complexities to this, if you have the same book of business this year that you renew, what, a 2.75, five year treasury versus last year, 1.8, you could have a very similar accident year combined ratio but a higher return in equity. So just to add this to the mix, if it's not configured enough for you. Amit Kumar : Okay, fine. And we will probably get more color later today on that. I will stop thanks for the answers and good luck for the future. Marc Grandisson : Thanks, Amit. Operator : Thank you. Our next question comes from Josh Shanker from Deutsche Bank. Your line is open. Josh Shanker : Yeah, good morning everybody or maybe it’s already noon there. Marc Grandisson : Hi… Josh Shanker : The travel, Accident & Health business, is that growth based on the company getting in place the right infrastructure to be able to handle that business? Or is that business seeing a difference in terms of its profitability, which makes you more hungry for it? And I guess, third on that, where is that business coming from? Is the pie getting bigger? Or are you taking that from competitors? Marc Grandisson : Okay, so – okay, I am trying to get the answer. So it’s coming from – yeah, we have a couple of programs that we won over the last 24 months, which helped us – and we had the relationships that we had developed for a long time internationally as well as in the U.S. So it's really growing with new relationships that – one of them is actually growing, it's the large reason why we've grown in travel over the last 12 months. The first question, yes, we have an integrated model, we have claims, we have pricing, we have portal. We also have RoamRight. As you know, we have business-to-consumer bent with business-to-business as well, which would be more wholesale or retail – through a retail network actually, a little bit like having a program – no, not a program but sort of a relationship with a couple of producers to really be their go-to-market in that segment. In terms of returns, this is not a very – a super high-margin business. I think you'll see other people talk about it in terms of combined ratio. But in terms of capital usage, it is very, very effective in terms of capital usage. So we are trying to get into that segment. It's also very, very sticky. As you know, as you might expect, Josh, if you get the relationship going with the pipe and work with the product development with the guys who sell the product, it could be beneficial for a long time. So this has been going on for at least four or five years of growth. Josh Shanker : That’s very thorough. And then on the UGC 2014 to 2015 premium, I've been sort of guessing that the decay on older accident years lose about 20% of its premium annually. I don't know if that's right. But maybe how much of a net premium written growth tailwind is the UGC quota share years going into the past giving you? Mark Lyons : Josh, I'd say you're in the ballpark. I think you're a little heavy on the degree of decay. Marc Grandisson : Little bit lower. Josh Shanker : Okay, thank you. Mark Lyons : Yes. Operator : Thank you. And our next question comes from Geoffrey Dunn from Dowling & Partners. Your line is open. Geoffrey Dunn : Thanks, good morning. Mark Lyons : Hi, Geoff. Geoffrey Dunn : Like yourselves, it seems like a number of the MIs continue to evaluate the recent BT monthly changes. But there's – in the context… Mark Lyons : Geoff, I’m sorry, we can’t hear you. Geoffrey Dunn : Yes. Is that any better? Mark Lyons : Much better, thanks. Geoffrey Dunn : All right. So again, like yourselves, it looks like a number of the MIs are evaluating the recent BT monthly changes. But in some of the commentary, it suggests maybe there is some evolution going on in terms of how some companies are thinking about approaching pricing. What are your thoughts on the competitive environment if the industry started shifting to your approach where the rate card was available for the lenders that want it but a shift to more granular or even black box pricing for those that are looking for that? Marc Grandisson : So in a way, for us, it's music to our ears. It means that our model is the right model. And if you start having a 75 cell, you develop now a multiple of 200, 300 cells, as we see some of our guys developing, sort of refine, sort of rebuild, if you will, their risk-based pricing within the rate cards phenomenon. You're going to start multiplying these cells very dramatically. It might create issues for their – the same issues that I think – the large bank, for instance, who said they are not really willing to entertain at this point, which is the ability to cater to all these various permutations of pricing. So as much as people are finding RateStar, it seems like it's evolving into that direction. So to us, it's a little bit music to our ears. It sort of confirms that our model – and a couple of our competitors made comments as such over the last week or so that this is probably more longer-term beneficial. There'll be some disruptions in the short term. I think that is probably your point that you're trying to make, and I think, yes, that is possible. But we do believe that it doesn't – the more you multiply the number of cells, the more complexities you introduce in the delivery and pricing of the product at the loan origination, the desk level, so. Mark Lyons : And I would just add on the boring side of it, but an important operational aspect, is the response time of something this complicated to return to the lenders in the manner in which they expect it and kind of shield this from that. But the response time has to be fast. So there was major investments that the guys did in that regard. So there's just – it's as just important to have the eight knives of the iceberg under the water as the one knife that you see above the water. Geoffrey Dunn : Okay. And then you've had an interesting approach on some of the innovations that are effectively introducing a capital-light model with your Bellemeade deals, with the MRT, the Munich CRT. How much – do you view your capital allocations independently of all those? Or do you view the return on a segment basis where maybe those capital-light opportunities give you more leeway on the capital-heavy opportunities? Marc Grandisson : So to us, it's really – I mean, we – for reasons that are – the unit that's called MI, which is a global MI company, so their bonus plan and calculations of their performance is based on the overall segment's result. So they are – they can fish in broader MI market whether it's insurance, CRTs, utilizing more Bellemeade transactions today. So true, if it makes sense from a return perspective, it could diversify. We're in different areas around the world. And at the end, they're all internally making sure that they're optimizing their returns. So we're really looking at it, Geoff, from a totality at the unit level and making sure that they – having said all this, we have self-imposed guidance. There's so much capital waiting to expose for the shareholders' perspective to MI. But within the confines of those, that constrained, they have a vested interest in maximizing, optimizing their returns. We look at it holistically, if you will. Mark Lyons : Which we don't view any differently than how the reinsurance group does it and how the insurance group does it. Marc Grandisson : That’s right. Geoffrey Dunn : Okay, thanks. Marc Grandisson : Thanks, Geoff. Operator : Thank you. And our next question comes from Jay Cohen from Bank of America. Your line is open. Jay Cohen : Yes, just maybe a small question on the MI. With the amortization of DAC now being part of the expenses, can you give us a sense of where you think the expense ratio will end up by the end of this year. Mark Lyons : Well, one other ingredient that I didn’t put in the prepared remarks was that there was some bonus catch-ups. I mean this is highly profitable. So to the extent that bonus throughout the year was under accrued and had to be made whole with the more recent year-end calculations, that gets reflected in the first quarter. And that’s what happened. I mean, not only the profitability of the business but the excellent execution on the integration that they’ve done all filters into that. So rough – it’s going to be marginally better, and it could be lumpy on 2Q, 3Q, 4Q. But I would say on the balance of the nine months, it’s going to be marginally better. Jay Cohen : Got it. That’s helpful. Thanks, Mark. Mark Lyons : Sure, Jay. Operator : Thank you. And our next question comes from Meyer Shields from KBW. Your line is open. Meyer Shields : Thanks. I think we’ve had a couple of quarters now where you’ve been more cautious or sounded more cautious on loss trends. I was hoping you could dig a little bit more into what’s driving the increase in service, if that’s the right way of phrasing it. Marc Grandisson : I think, well, we are looking at trend – I’m an actuary by training, I’m a recovering actuary, I’d like to say. If you look back at loss trend historically, it’s a historical phenomenon, right? You have not developed data, tried to make an adjustment for what you think the overall CPI and, unfortunately, the insurance trend and inflation typically lacks CPI pickup. And to the extent that we’ve seen some inflation pick over the last two, three years, they will not find its way through the projection of lost trends for a little while. And we’ve had a combination of things, right, audit premium on most of our segments that are datable. Pretty much we’re always up on the upside, so there’s more activity in the industry. So whatever you think your pricing, and whatever is happening in the industry, there’s always been a mismatch. It’s ongoing. It’s subsiding a little bit, but we’ve had sort of a pickup in activity in the broad economy in the U.S. So the more there’s activity, the more there’s friction, the more I believe there is a possibility that lost trend could go and develop adversely against you. It’s probably more of a prudent phenomenon. I think that the problem that we have in our business, mostly casualty, is that you’re pricing on a forward looking, looking back at loss trend. And I think we’ve had undue benign loss experience over the last eight years or nine years. I think it’s larger as a result of the economy slowing down so much as a result of the great financial crisis. So it’s just – we’re not saying it’s going to go crazy. We’re just saying that the likelihood of this being above what we believe and what we are coming out of our actual model, I think these are more likely than not. We tend to be more prudent when we factor in the loss trend. Mark, anything else? Mark Lyons : Yes, I would just kind of echo what Marc again said where capital isn’t going, where it’s being allocated on D&O and, say, to excess casualty. There’s loss trend in the actuarial arithmetic, and then there’s trend not explained by actuarial arithmetic. D&O, for example, is incredibly lumpy year-to-year. There’s no real projection about it, it’s – each – and we don’t always have a primary excess book. On casualty excess, actuarial arithmetic never works. Never works. It’s always terms and conditions that really drive it. So when we say loss trend, we’re also recognizing the slippage in terms of conditions. Marc Grandisson : Correct, yes. Meyer Shields : Okay. That’s very helpful. And I guess, a second unrelated question. At AFA, I think we talked a little bit more about – I’m trying to think of the right way to phrase it. Pursuing individual opportunities in the insurance segment a little bit more rapidly than in the past, I was hoping you could update us on how those opportunities are bubbling up? Marc Grandisson : There’s always possibilities around. I’m not here to tell you what we’re going to do next month. I don’t think it’s fair on the call of that nature, Meyer. But I think that – I think our comments at AFA also had to do with we’re also going to be a bit more proactive in reacting to either adverse or positive reactions. For instance, property was a great example, right? Property rights increased a little bit. And I think we – Nicolas took it upon himself when he took over in October, he said, listen, even though the rates, as I was saying in the third, fourth quarter, you need rates of 30% to 40% to really start pushing the envelope and do, make a significant commitment in capital to property. We still have some rate increases, and Nicolas said, well, we need to be a bit more proactive in positioning ourselves in that marketplace. I think that would have been not necessarily the way – it's not necessarily the way a traditional insurance company would think all the time. And I think we're trying to bring – which is more of an opportunistic way of thinking, which, I think is brought upon largely as a result Nicolas is bent on what he's done so well on the reinsurance. And our insurance group has taken up to it like fish and water. Meyer Shields : Okay, perfect. Thank you so much. Marc Grandisson : Thanks Meyer. Operator : Thank you. Our next question comes from Ian Gutterman from Balyasny. Your line is open. Ian Gutterman : Thank you. Marc I was thinking of going through the front of the queue this time. But some traditions are triggered to change so. Marc Grandisson : Hey, good. Mark Lyons : You're still not last of course. Marc Grandisson : We have working with Ian. Mark Lyons : You could always hang up and redial in to be last. Ian Gutterman : Exactly. My time is little of, I guess. So I had one – well, why don't I follow-up real quickly on Meyer's question before I get to my main question. This is maybe as much of an observation as a question. Marc, how is it that some of these lines where we're seeing adverse development, every year, most of the companies seem to take them to a 65 every year in mid- to long-tail casualty? Mark Lyons : Boy, asking the question is – that's a very, very, deep question. I think that if you overlay what happened – and we were on the receiving end of this, and Mark can attest to that as well when he was running insurance. When you were looking at results in 2012, 2013, 2014, pricing that ongoing business, sort of looking at the results over the years, you would look at 2008, 2009, 2010 and even 2005, 2006, you would have lesser development than the actuaries. Who are they kidding? So we do a loss reserve analysis. Pretty much everything comes down below the expectation. And this has been going on for a while. Actuaries or loss reserves specialists lose a little bit of their credibility after a while because it's kind of hard to deviate from anchoring yourself at a long-term level. It's very hard for people reserving to think that this is really a 30% loss ratio. And it's also the same way, very difficult to say it's not running 65%, it's running 80%. But since we're looking back and then you look back after five or six years, if you're an actuary right now or if you look at loss reserve development, you'll say, well, I think it's really at 75%. These are the same people that we're saying, it should be booked at 65%, 68% five or six years ago, and things have developed to be 56%, 57%, 58%. So there's a little bit of a mismatch. It's not easy for people to reconcile the way the reserving is made. Most people, and I think we can be guilty of it ourselves as well, people tend to think of insurance as being not cycle-affected. But there is such a thing as cycle-affected. It's not a linear plus or minus two or three points, especially if you're specialty insurance companies like ourselves. So many moving parts, it's really hard to pin it down. And you have history as a guide. And the loss ratio around the long-term expected varies wildly. Unfortunately or fortunately, I think I like it because it creates opportunities for us in the future because people keep on booking 65% or 66%. When it turns out 85%, 88%, you have to recognize it. We'll be able to seize the opportunity of people, deemphasizing that line of business precisely. But it's going to take a while. It’s going to take a while. Ian Gutterman : Yes I agree, and that's helpful. It's how I remember things from the early days when we were first meeting on the island when you guys are being formed. This just feels like a similar story. But so my main couple of questions, one on the mortgages. I get obviously the advantage of having RateStar versus the card when other people are cutting rates. But how should I think about – and I'll try to call out an example, it's probably not the best and – but you can hopefully get the spirit of it. If there is a cell under RateStar that maybe was priced – tended to – because you looked at it in a better way, maybe it was a 20% discount to most people's rate card. And maybe you had, I don't know, a 50% hit rate or something on that cell. If everyone else is cutting rates, does that hit rate go from 50% to 25% even if you don't change anything? So even though you're not using the rate card, you become less competitive and need to maybe reconsider some of your pricing in the RateStar cells. Mark Lyons : Yes. So we've been thinking about this. And I think the best way – let me try to make an analogy from property cat exposure. Most of our analysts are P&C people. So let's think about types of risk : hurricane in Florida and California quake. If you think about writing a line of business or pricing – you price yourself at $20 [ph] online for a layer in Florida, attaching a $10 billion market loss for the overall event. This 20% is the current pricing. You have an excess of $60 billion quake exposure in California. And that current pricing is 10%, right? RateStar might say that the current pricing for Florida, I should be getting 22%, but the RateStar is saying 20%. So I'm going to not necessarily get – win a lot of that business. At the same time because of inefficiencies in overall card, I can tell you that our RateStar pricing for that California risk, which is much higher, much as likely to be hit is 10%, when rate card is 13%. So right now what I'm going to be doing is focusing more on my capital on the one that is up 10%. Two things will be evident to you is that I'm adding a lower rate than the average the person I write the thing in Florida. So that’s why for us the average rate is a very, very misleading way to think about it. Now the rate card is 20 in Florida and it’s 13 in California. Next year somebody cut the rate card by 10%. That 20% goes to 18%, that 13% goes to 11% and change. What am I going to be able to write next year? My RateStar hasn't changed, I’m still at 10% in California and I’m still at 23% in Florida. So what's going to happen? I'm going to get even less of the Florida business and presumably the same or if not a bit more of the business in California. So that's sort of what RateStar does for us. Does that makes sense for you Ian? Ian Gutterman : Absolutely, that makes perfect sense. I totally agree with that. I was trying to think there were sort of cells in the middle where you would've gone from maybe something that was a 20% and you were at 19% and you’re getting business, and now you're over at – now you're 19% versus 18%. Mark Lyons : Yes, and answer to that… Ian Gutterman : I don’t know how big of a book that is, maybe that's just on the margin, it's not that big of a deal. Mark Lyons : Yes, well to your point I made one extreme example about two different…. Ian Gutterman : Sure, sure. Marc Grandisson : But you're right there’s a lot between the spectrum that grows. And that we have David Gansberg team Allen and then John Gaines, spending an amazing amount of time dynamically connecting with clients, and looking at production on daily basis and try to figure out what will work. RateStar is sort of a floor of sort and we sort of over and – we put the pricing that we think will sell the marketplace that give us a return obviously. But we’re not trying to leave money on the table, but are trying to be competitive and take the best risk. As in the example I just mentioned. It has a lot more going on. You're quite right, there’s million three sells, 17-ish different – it's a very arduous process. Marc Grandisson : I would just say you probably heard some of the other questions. Geoff Dunn talked about what if others have RateStar’s and have fine pricing? Then I think your question is a lot more relevant. Ian Gutterman : Okay. Marc Grandisson : I think right now it's like we got a old buckshot, they have a the old buckshot and musket and they're trying to hit an ant. Where they hit is scalpel. And over time I think your question is going to have a lot more relevance. Ian Gutterman : Got it. And if I can ask quickly on the Catalina transaction just can you give a little color on what U.S. lines of business were in there? I guess I don't really think of you guys having run off book. A little confused what exactly you mean and what went into this transaction? Marc Grandisson : Sure. Well actually we kind of view this as our third action because some of these programs, as we talked about, we took terminated, we talked about in past calls, past years of terminating programs and you are stuck with the run off. We terminated because we didn't like the results, or we didn't like the emergence of claims or the underlying coverage and allow that to happen. And similarly, on the specialty casualty runoff, it's predominantly old New York labor law issues, California residential contractor business where you get, you think you're done in 10 years but then they do repair clock structure over again, those kinds of things. So that’s really it. So there's no ongoing customer continuity issues, things of that nature. So given that those decisions were made, and I think they were the correct ones, and then we still wound up, you see it in our 10-Ks, still having some issues where we said let’s – looking across the Board on capital management let's just try to solve it once and for all. Ian Gutterman : Okay. And then even though it back dated to 1/1, any – since the deal was written in April is there any financial impacting going to show up in Q2? Or is it already up and accounted for in Q1? Marc Grandisson : Well, what you wind up happening, it's going to be Q2. Ian Gutterman : Okay. Marc Grandisson : But remember, ultimately, there's a difference between statutory and GAAP if they're – if the adverse development cover has ever hit low terms, if it will be. But it gives us life insurance but except that is statutorily that you get one hundred percent of the recoverable immediately. So on a GAAP basis it’s kind of amortized. And think of it similar to the Berkshire, AIG ADC and the way works. Mark Lyons : But we don't expect much change in quarters. So not much of that. Ian Gutterman : Okay good that’s what I was curious about. Okay thank you. Mark Lyons : Thank you. Operator : Thank you. And our next question comes from Ryan Tunis from Autonomous Research. Your line is open. Ryan Tunis : Thanks. I guess just following-up on the ADC, could you give us some idea of the amount of adverse development? I guess maybe like last year you’ve take in the past few years in the lines that were subject to that? Mark Lyons : I think I have that on my fingertips. Programs, I would say – I can tell you this on programs for the last couple of years, I believe the majority of the adverse is associated with these terminated programs. So I think that's the best color. Marc Grandisson : And it’s the same on casualty. If there were any adverse developments the same with specialty casualty book of business market for it too. Ryan Tunis : So that’s a pretty chunk, that’s a pretty good slice of adverse I think from looking at the 10-K you’re right. So now that’s a lack of a headwind going forward. Marc Grandisson : Yes that correct, right. Ryan Tunis : Okay. And then I guess there’s – I had a couple of bigger picture ones I guess on the MRI conversations. And I guess the first one is the whole discussion about mid-teens ROEs. At what return level would you guys proactively start writing less? Mark Lyons : I think that you've seen it as we speak, I think, we have a threshold risk adjusted I mean like I said all this, not everything out is created equally, but you saw some changes already in the two quarters where we bought – first, we deemphasize singles for a little while because we don't think returns are there, it was low-teens now unfortunately going a little below 10% which is not acceptable to us. It is also what you were thinking right you've got to think about it right in terms portfolios not every transaction these be could accretive, they could bring diversification credibly even within the portfolio of SMI. But having said all of this you heard about the singles and the two other riskier areas that we've looked at the high-LTVs the and the high-VTIs we have tended to go away because those returns went below the threshold that what we have in RateStar, knowing better than RateStar. So for now we don't see any reason to start thinking about other than these three areas I mentioned in terms of riskiness. I think it's a very ongoing, on a quarterly basis, on a weekly basis, actually, just reviewing what pricing is out there, what kind of risk is going on. And the other thing that I would tell you is now as everything else being equal no different products could come at some point down the road in the future, so we'll be reacting to it when we see it. But that’s the best I can tell you. Marc Grandisson : And Ryan I’ll just add that the – and Mark referenced that in the CML discussion he talked about the property cat and he talked about the RDS, which I’ll emphasize again we’re the only one with an RDS. But that is an important, heavy Board focus and our executive management focus, over 16.4% of tangible. So it could be a combination of things. It could be a combination of front end, which we think we sculpt pretty well for RateStar it's a risk management tool on the frontend. But because of, I think, the excellent way BMI Group has integrated their frontend pricing, the backend, the already yes on the risk management side they all inform each other, they’re all on integrated basis. So if Bellemeade, on that programmatic session, winds up becoming too expensive and you can't sell what does that pay us? The outside world is having a different view of mortgage credit risk. And therefore our net could go up more, even though the front end hasn’t reacted yet. So it's a combination of all those factors that and referred his team taken into account. Ryan Tunis : Got it. I guess my follow-up is just absolutely you guys have started out this, but just trying to think about the four on pricing with MI in general I guess the analog I’m brining on is the fact that real property cat used to be in mid-teens ROE business and you have alternative capital and capital-lite models and that feels sort familiar here and all the sudden you get several years where all you’re talking about is negative pricing, almost hitting your back to pre-Katrina levels. And that's obviously not really much fun. So I’m hoping you guys can talk me off the ledge a little bit on that analog. And is there anything that I guess is sort of the structure of the market or anything like that that makes it this you think less susceptible which I guess lower cost capital earning or are you over time, competitors accepting some 10% ROEs. Marc Grandisson : So unlike property cat right you've written business for the last five years at a rate level that is pretty healthy. And that business continues producing returns and results for you as we go forward on the basis. And on the back of I would argue very healthy increase in house prices, we have LTVs our currnt LTVs on origination but currently or our portfolio way south of 80 so it's what we saw south of 80 overall. So it’s pretty healthy, lot of equities, lot of collateral in front of us. So we're actually in a very – we still have win in our sales if you will. So if we play the tape going forward, right, the rates are probably 2 to 2.5 times what they were pre-crisis. I mean there's been a significant amount of price increase and I'm not even talking about that kind or the types of product. So the kind of – and the property cat it's a 12-month, it’s one 12-month commitment. It's a lot easier to change price. To change price on the fly for the whole 100% of your portfolio every single year. On mortgage, you always have, you always have this portfolio as it unwinds through time. So if I overlay this healthy house prices index lack of products, the bad product that took place in mid-2000 have really created a lot of the issues. I look at a borrower if I quote as an all time as high as it’s ever gotten, there is a lot of room to give overtime. But the question that you're asking which we’re – we’re really asking ourselves because we're going to live it to – we're going to live it together with our units. It's going to take awhile to erode that huge increase in quality and pricing that we went through after the crisis of 2009. So we're not as – so news of our deficits are greatly exaggerated. It's not going to go a little while before we get to a threshold of being too dangerous for us to stick around if you will. But it will come, I just don't know when. Mark Lyons : And my end one other thing, back to your analogy if it was – this is longer duration, right. I mean on property cat capital comes in because pretty quickly you can know how to exit. If longer tailed liability streams was that comfortable for alternative capital will be tons of casualty vehicles out there but there's not. So this has a mortgage as you know has a lot of duration outflow and duration inflows that are varied interest rate and macro economically sensitive. So I think that's quite a ways off. So I’ll open that window and get back in the room. Ryan Tunis : Alright, that’s help. Thank you guys. Marc Grandisson : Great. Operator : Thank you. And our next question comes from Michael Zaremski from Credit Suisse. Your line is open. Michael Zaremski : Thanks, I'll try to be fast given its past launch hour. Could you elaborate on what type of economics Arch receives from running Imagine? Marc Grandisson : We're not in a position to do those. I mean we have strong NDAs and there’s a lot of communications that we need to keep to for ourselves. But the returns are comparable to what we would get in the general business sense after we factor in our managing, and operating and risk management and bring oversight to this side. Michael Zaremski : Okay so maybe we can follow-up that in a future quarter. Marc Grandisson : Yes. Michael Zaremski : And can you remind me staying on MI have combined ratios from the rate card generate business been materially different from RateStar business? Marc Grandisson : That is one great question. And the answer is no as of yet, right. We believe that the risk adjusted pricing frame what your RateStar gives is going to be tremendous in a more of a stressed scenario. And we have not really – we have about some localized stress scenarios, but we haven't really gone through that exercise of analyzing it. And I think if you look at loss ratio, wind doesn't blow or when the quake doesn’t shake everybody has zero loss ratio. So we're sort of in this relatively benign claims environment, and it's really hard to see it. And that's probably one of our biggest frustrations, like I said, as managers at Arch is that the fact that we're looking at the way we at cat pricing and we – for instance in the way we structure our portfolio, when there are no losses we don't look very good because we looked at we should have done more. But the way we think about this and then we talk about it internally all the time is we are very honest about analyzing the underlying economics and risk characteristics, probably recognizing that we could be wrong for awhile. And MI is pretty much like a cat line of business in a lot of ways. But the short answer is no. We haven't done it, we don't expect it to be very much of a difference on reported loss ratio. Michael Zaremski : Okay that’s helpful. And lastly, follow-up to Josh's question earlier on travel and A&H, given it's – it continues to grow at a nice clip. So I felt like you guys were alluding to it being driven by a few relationships. I'm just kind of curious, are these relationships longer? If that's correct, is this – are these relationships sticky, longer term nature or whether this be kind of a line that's classic Arch, which will ebb and flow over time depending on the return profile? Like, I guess, is this a – I know it's a short-tail liability, but is the distribution stickier? Mark Lyons : We believe it is stickier. These are smaller items, there is more connectivity to the pricing, claims adjustment. And because a lot of travel is claims adjustment, right, you need to be able to pay the person that cannot go through their place or repatriate some of them. There's a lot of stuff you need to be able to do. So we believe it is sticker. But having said this, everything is stickier. But in the long run, everybody is there, right? I mean, in the long run everything is variable on cost, if you remember your microeconomics. So at some point, if the pricing gets too out of whack, I'm sure everything is fixable. But it's relatively sticky in the short term, short to medium term. Michael Zaremski : Okay, thank you very much. Operator : Thank you. And we do have a follow-up from Jay Cohen from Bank of America. Your line is open. Jay Cohen : Yes sorry to delay lunch further. Mark Lyons : Jay you couldn’t get enough. Jay Cohen : I know right. On Catalina, can you talk about the assets that get transferred over? I'm trying to get a sense of the impact on investment income. Mark Lyons : I’ll tell you what. Let me answer the question more broadly than you asked it because I think you're trying to update your model, right? So look at it this way, we did an LPT at year-end, which was a bullet, I mean, the quota share has quarterly cash payments, right? So this is a bullet cash payment to our Bermuda operating company. We did the cancellation of the quarter shares, which bring UPR back onshore with associated cash transfer. And then there's the Catalina which, in the scale of things, is not large. So it's effectively close to a wash between the investment income that you might get onshore or offshore because of all those flows back and forth. So Catalina, the reason I did that, of the three, Catalina ranks third in size compared to the LPT, first; the UPR cancellation, second; Catalina, third. Jay Cohen : Thanks for the clarification Mark. I appreciate that. Mark Lyons : Sure. Marc Grandisson : Thanks Jay. Operator : Thank you. And I’m showing no further questions from our phone lines. I would now like to turn the conference back over to Marc Grandisson for any closing remarks. Marc Grandisson : Thank you very much everyone. Happy quarter and on to lunch now. We’ll see you next quarter. Thanks. Operator : Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,018	3	2018Q3	2018Q2	2018-08-01	1.458	1.6	2.176	2.215	null	12.43	12.42	Executives: Marc Grandisson - President and CEO François Morin - CFO Analysts : Mike Zaremski - Credit Suisse Elyse Greenspan - Wells Fargo Michael Phillips - Morgan Stanley Josh Shanker - Deutsche Bank Geoffrey Dunn - Dowling & Partners Bob Glasspiegel - Janney Montgomery Scott Meyer Shields - KBW Brian Meredith - UBS Ian Gutterman - Balyasny Operator : Good day, ladies and gentlemen, and welcome to the Q2 2018 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the Federal Securities Laws. These statements are based upon management's current assessment and assumption and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's Web site. I would now like to introduce your hosts for today's conference, Mr. Marc Grandisson; and Mr. François Morin. Sirs, you may begin. Marc Grandisson : Thank you, Crystal, and good morning, to you all. We were pleased with the results across our platform this quarter as our MI segment continued to produce outstanding results while slightly improving conditions in our P&C operations and higher investment yield helped to produce an annualized operating ROE of 11.6% and an increase in book value per share to $20.68. As you may know we believe that an opportunistic approach to underwriting and active capital and risk management will produce higher risk adjusted returns over time. As a result of this dynamic allocation of capital, we may be underweight or overweight in certain segments or areas of the markets at any point in time. Our MI focus right now is exhibit A of the strategy and we believe that the current level of returns available in the MI space justifies the deployment of additional capital there. In our P&C businesses, market conditions seem to be improving modestly. In most of our insurance lines, rate increases appear to be outpacing claim trends. However, in assessing how this will ultimately impact margins, there are several issues with estimating insurance margins that temper our current market view. First, the calculation of trend is based on past experience while actual trend is dependant on future circumstances, which in many lines means looking several years out. Second, at the center of rate adequacy projections is an implied perfect knowledge of the current loss estimates. As we all know, loss reserving in our industry is a cumulative result of self-graded exams and it can take several years for the truth to emerge. Third, rate changes as reported do not capture new business return or the effects of most changes in terms and conditions. Due to these uncertainties and factoring in the record level of capacity currently in the business, we remain cautious in our underlying posture. With that said, let me provide some color on our P&C premium volume for the second quarter. First, bear in mind that the increase in P&C net premium written was magnified by FX movements, which represent about 30% of the increase in net written premium. In our insurance segment, more than 60% of the growth in net written premium was due to rate increases and the balance was from exposure growth. On the line of business basis, the increase was the result of our ongoing efforts in travel, programs, as well as from recent market opportunities in property. We decreased premium again this quarter in the more commoditized lines such as general liability and D&O due to the highly competitive environment. In our reinsurance segment, net premium growth was generated primarily from property other than property cap growing slightly consistent with our view of conditions in our primary insurance. Of note, net property cap writings were down as most rate levels were below our risk adjusted return requirements. With respect to our P&C underwriting results on which Francois will provide additional details in a moment, there is one topic, which I think is particularly noteworthy. Large attritional losses affected the results of both insurance and reinsurance, but in the opposite directions. The insurance group benefited from a below average level of such losses while our reinsurance operations were impacted by a higher than normal level, mainly in a facultative area. This demonstrates that the randomness - that there is randomness and lumpiness of when these type of losses occur. You rarely, if ever, get an even distribution of expected losses in a given quarter or year. But over time, specialty businesses such as ourselves can generate good risk adjusted returns if managed properly. Turning now to MI, I'm going to focus on our U.S. primary business, which represents over 80% of that segment. Our U.S. MI production for the second quarter was strong at $19.9 billion a 15% increase over the same quarter last year. About 80% of our primary MI was still written through our RateStar platform. As respects growth from a sequential basis, keep in mind that there are substantial seasonal effects between Q1 and Q2 when home purchases typically peak. Our U.S. New Insurance Written or NIW increase was due to a few additional key factors. First, it's clear to us that MI returns fundamentals are excellent. House price appreciation has been broad and stronger than expected, the quality of credit remains high and our ability to price more finely for many parameters is truly an advantage. Given the strong market conditions, we turn to have been better than anticipated and remain very attractive. Second, we have been successful in our efforts to expand our distribution and producer relationships with both existing and new customers and in a few cases; we were able to close some large transactions that was attractive from a return standpoint to bring some lumpiness to our NIW in the quarter. Third, the capital and risk management tools that we have put in place namely the Bellemeade transactions provide additional downside protection and reduce the volatility of our expected returns in MI. For the second quarter, RateStar again directed our production away from lower return products such as singles to borrow monthly's as singles production declined from to 6% from 9% in the first quarter. Higher loan to value and debt to income products represented a slightly larger share of our NIW in Q2 but we remain underweight in those areas relative to the market. This growth was opportunistic and occurred partly due to the response by our competition to the rapid shift in mix that occurred in the first quarter. Market pricing at this point appears to have stabilized after the activity of the last few months. Before I move on from MI, I want to update you on recent developments regarding the pilot programs with the GSEs imagine an EPMI, they are still in their infancy and there was no significant NIW in the second quarter. We will keep you posted as to their progress on future calls. Briefly with respect to our investment operations, we increased our duration slightly as we moved money out of cash equivalents to predominantly two to five year treasury instruments. In addition the current interest rate environment has and will improve net investment income for the next several quarters. Finally, a few words on capital and risk management, we repurchased a significant number of shares in the second quarter, Francois will give you the details but it is worth repeating that share repurchase is yet another way for us to manage and allocate capital. Now to risk management, our property cat exposures remain at historically low levels with our one and 250 year peak zone at only 5% of tangible common equity at the end of second quarter. For our mortgage segment as of June 30, 2018 exposures under our realistic disaster scenario declined last quarter as growth in insurance in force was more than offset primarily by the capital relief from the Bellemeade transaction and a run up of the pre-2009 business. Perspectively, we believe that regulatory capital as defined by the PMIERs represent a more conservative capital requirement as of June 30, 2018 Arch MI was up 134% of the current PMIERs and although we are unable to discuss the proposed changes to PMIER 1 that will create PMIERs 2.0, we do not believe that the proposed changes will have a material impact on our capital position and that our estimated available assets will continue to exceed the required assets as proposed on the PMIERs 2.0. With that, I will turn it over to Francois. François Morin : Thank you, Marc, and good morning to all. I'm pleased to join the earnings call this morning and to provide more color on our second quarter earnings. As I stated during our recent Investor Day, one of my objectives in this new role will be to keep providing the same level of clarity and visibility, the investment community has come to expect from us when analyzing our financials and public disclosures. This practice will remain a key principle of ours. On that note, I will make some summary comments for the second quarter "core basis" which corresponds to Arch's financial results excluding the other segment i.e. the operations of Watford Re whereas the term consolidated includes Watford Re. As you know we affected a three for one stock split on June 20 which impacts per share metrics and comparisons to prior periods. My comments will reflect the latest number of shares after the split which currently stands at approximately 405 million outstanding shares. After tax, operating earnings for the quarter were $242.6 million which translates to an annualized 11.6% operating return on average common equity and $0.59 per share. On a year-to-date basis, our annualized operating ROE increased by 200 basis points since last year that highlighting the improved performance of our operations. Book value per share was $20.68 at June 30 a 1.3% increase from last quarter and a 4.1% increase from one year ago despite the impact of higher interest rates on total returns for the quarter and on a year-to-date basis. Moving on to operations, losses from 2018 catastrophic events, net of reinsurance recoverables and the reinstatement premiums were $14.9 million or 1.3 combined ratio points evenly split between our insurance and the reinsurance segments from a few small events across the globe. As the prior period net losses or development we recognized approximately $60 million of favorable development in the second quarter or 5.1 combined ratio points compared to 6.4 combined ratio points in the second quarter of 2017. This was led by the reinsurance segment with approximately $32 million favorable. The mortgage segment had about $23 million also favorable and the insurance segment contributing $5 million. This level is generally consistent with the recent periods on an aggregate basis and across segments. The calendar quarter combined ratio on a core basis was down 200 basis points from the second quarter of 2017. While the core acts in that quarter combined ratio executing caps improved 84% down 230 basis points from last year second quarter. The insurance segment excellent quarter combined ratio excluding caps was 98.5% down slightly from the comparable 2017 level mostly due to an improvement in the current year loss ratio of 150 basis points slightly offset by higher acquisition expenses resulting primarily from a mix of business changes. We are pleased with these results but note that a significant portion of the improvement approximately 90 basis points is due to a lower frequency of large non-cat claims which as Marc indicated are by nature are subject to variability from one quarter to the other. The reinsurance segment excellent quarter combined ratio excluding GAAPs stood at 100% even slightly better than the 101.1% on a comparable basis one year ago. In a similar vein to the corresponding period last year our results were impacted by non-cat large property claims. This result serves as a reminder of the volatility some of our businesses can experience from time-to-time. The expense ratio benefited from reductions of operating expenses combined with a larger net on premium base. In addition a reduction in federal excise taxes of $2.6 million or 0.8 points resulted from the cancellation of certain intercompany property casualty quarter share agreements effective January 1 as discussed last quarter. This item will continue to recur for comparisons of 2018 to 2017 results. The mortgage segments excellent quarter combined ratio improved by 380 basis points from the second quarter of last year, mostly as a result of improving trends in the underlying performance of the book particularly within our U.S. primary and my operations. The excellent quarter loss ratio of 15.4% in the second quarter of 2018 compares favorably against the 19.5% in the same order of 2017 due to lower delinquency rates. 3.1 basis points of the difference or $9 million is attributable to favorable development on first quarter of 2018 delinquencies due to very strong cure activity in 2018. The expense ratio was at 22.8% slightly higher than prior period as a result of higher incentive compensation costs. These figures highlight the contribution to our pretax underwriting income from the mortgage segment which remains strong this quarter, however, after allocating corporate items such as investment income, interest expense and income taxes to each segment. The mortgage segments contribution to were 2018 year-to-date net income decreases to approximately 65% of the total. Total investment return for the quarter was a negative 19 basis points on a U.S. dollar basis but was a positive 33 basis points on a local currency basis. These returns were impacted by the effects of higher interest rates on investment grade fixed income securities, partially offset by positive returns on alternative investments and non-investment grade fixed income. The investment duration was 2.89 years as at June 30, up sequentially from 2.6 years at March 31, as a result of the shift in our portfolio from short-term commercial paper primarily into treasury where we saw more attractive investment opportunities. Also, during the quarter we continue to shift our position from municipal bonds into corporate due to improved relative evaluations. Corporate expenses $6.6 million lower than in the prior year as a result of retirements and departures of senior executives. The corporate effective tax rate in the quarter on pre-tax operating income was 9.8% and reflects the benefit of the lower U.S. tax rate, the geographic mix of our pre-tax income and a 60 basis point benefit from discrete items in the quarter. As a result, the pure effective tax rate on pre-tax operating income excluding discrete items was 10.4% this quarter, identical to last quarter's rate. As we look ahead to year-end 2018, we currently believe it's reasonable to expect that the effective tax rate on operating income will be in the range of 9% to 12%. As always, the actual full-year effective tax rate could vary depending on the level and location of income or loss, and varying tax rates in each jurisdiction. With respect to capital management, our debt to total capital ratio was 16.9% at June 30, and debt plus preferred to total capital ratio was 23.0%, down 250 basis points from year-end 2017 and the 480 basis points from year-end 2016 when we closed the UGC acquisition. This leverage reduction is driven mostly by the redemption of $250 million from our revolving credit facility in the quarter. As for share repurchases, we repurchased 6.4 million shares during the second quarter at an average price of $26.59 per share and an aggregate cost of 170.2 million under both open market purchases and a Rule 10B5 plan we implemented during our window period. Since the start of the third quarter, we have purchased an incremental 414,000 shares at a cost of $10.9 million. The remaining authorization which expires in December 2019 now stands at 262 million after consideration of their share repurchases through July 30. Operating cash flow on a core basis was 34 million in the second quarter of 2018 down on a sequential basis primarily reflecting the premiums seated for the reinsurance transaction with Catalina General Insurance Limited which we discussed during the last quarter's call. With these introductory comments, we are now prepared to take your questions. Operator : Thank you [Operator Instructions] And our first question comes Mike Zaremski from Credit Suisse. Your line is open. Please check that your line is not on mute. Mike Zaremski : Hi. Thanks. Marc Grandisson : Hi, Mike. François Morin : Hi, Mike. Mike Zaremski : My first question is regarding the mortgage insurance volumes. It looks like you guys took market share. And you mentioned some lumpiness in the prepared remarks. So I'm just kind of hoping to maybe understand you feel that the market share will be sustained or we should assume a material amount of lumpiness as you said in the comments? Marc Grandisson : Thank you for the question, Mike. I think first and foremost we do not look at market share as an operating principle. We are just looking at the opportunities as we see them in the marketplace. So what I can tell you is what we saw in the second quarter, which generated those - that production. But I think that the pricing situation in the industry was different as we have gone to the second quarter, and it's changed since then, and it's a lot more stable. So whatever opportunities we have to do what we did in the second quarter may not - keeping being there for the remainder for the year. So it's a really hard question to answer, because I don't know the answer to that. Mike Zaremski : Does it imply that risk-based pricing is causing more - is part of the reason you are winning some of these deals, or it's separate? Marc Grandisson : Yes. A large part of our wins was through the RateStar, its ability to more finally price for the risk, and the ability we have to shape the portfolio the way we would want. As I mentioned, we did that more monthly. So it's clearly an advantage, and we think the advantage could probably sustain itself going forward, specifically in light of the loan originators, margin being squeezed. So it represents most likely an ongoing advantage. But their advantage is that we - RateStar has been there for a long time. So yes, we do believe it provides us some advantage. Mike Zaremski : Okay. And lastly, sticking with mortgage insurance; thanks for the comments about PMIERs 2.0 not having that material of an impact. I'm curious, is that because you will get a number of quarters to let the impact, you know - sorry; it's a few quarters before the impact takes place or if it happens today, it wouldn't have a material impact? Marc Grandisson : Okay. So we are under an NDA, we cannot really talk about the various parameters, but being at 134% and if we tell you that we think we are comfortable, that sort of gives us a rough idea to where we think it's going to land. That's a good change. They will lay their final determination between now and I believe the end of the third quarter, which will be implemented in 2019. And those comments, Mike, I would tell you have been echoed by our competitors as well. And I think it speaks to the health of the results and the returns, and the profit that have been generated by the platforms in the MI industry. Mike Zaremski : Thank you. Marc Grandisson : Operator : Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open. Elyse Greenspan : Hi, good morning. Marc Grandisson : Hi, Elyse. Elyse Greenspan : My first question, François, you said the tax rate was going to be 9% to 12% this year. Is that the right level that we should use in 2019 and onward as well? François Morin : It's a good question. Thank you for that. I would say we don't have the answer right now. Certainly as you know, we can't sell some intercompany quota share agreements at the start of 2018. We are re-evaluating those on an ongoing basis. Certainly as we get into a 2019 planning exercise, which is underway now, we will have more clarity on that throughout - internally in the third and fourth quarter. So at this point, it's a bit - and we don't know certainly the B tax as you know, goes up from 5% to 10% next year, so that will have potentially some impact, but we have certainly a couple of things we can look at that we will look at a couple of tools in our toolbox that hopefully will, you know, we will try to obviously minimize our tax liability, but we really don't really have a view at this point of what 2019 is going to look like. Elyse Greenspan : Okay, thank you. And then, on capital return, you guys - the share repurchase picked up in the quarter, obviously at the start of the quarter your stock was trading at a cheaper evaluation and where it sits today, I know you guys have your metric and you look at the payback period as you think about share repurchase. So how does the higher evaluation today change your philosophy around share repurchase in conjunction with the fact that we are now also approaching Peak 1 season? François Morin : Yes. Couple of points on that, I don't think it really changes how we think about things. Historically, as we said - we said in the past week, we typically don't buy back stock in the third quarter, although we are not really a big cap player anymore. So that's really not something that worries us as much as it might have as a percent of equity going years back. And we have said it many times, we are always looking at opportunities that comes to us in terms of potential small transactions and that's a factor in how we look at share repurchases and buybacks. And there is couple of things we are working on right now. So we don't really have a definitive view on how the rest of the year is going to look for share repurchases, but to answer your main question, I think is that I don't think it really changes our view even in light of the slightly higher share price that we are currently experiencing. Elyse Greenspan : Okay, thank you. And then my last question, going back to mortgage, and maybe this ties some of the questions that Mike was asking as well, but do you think part of the reason that maybe the NIW did grow so much sequentially, were you guys able to lower the pricing variables in your RateStar engine ahead of some of the other changes made by the other primary MIs and their pricing grids and you think maybe that led to higher NIW that might not be sustained, are you able to kind of pinpoint any kind of impact on specifically to your RateStar engine that might have had on the NIW? Marc Grandisson : I think your assessment is a very fair assessment. Elyse Greenspan : Okay, thank you very much. Operator : Thank you. And our next question comes from Michael Phillips from Morgan Stanley. Your line is open. Michael Phillips : Thanks, good morning everybody. I want to drill little bit more down on the expense ratio for the two segments insurance and reinsurance, kind of going in different directions, higher acquisition expenses in insurance from exchanges and then if you back out the excise taxing and reinsurance, it's still pretty good improvement in reinsurance, so kind of if you take those two separately kind of just what do you see leveling off continued improvements in reinsurance here 25, 26 low, I don't know if that's going to continue and then insurance kind of what is that peak? François Morin : Yes, thanks for the question. Let me start and sort of Marc will chime in. The way we certainly look at in totality, so the geography of loss ratio versus expense ratio, we look at it but it's not the primary factor we look at, we look at the totality of the combined ratio, if we focus on the Insurance segment certainly in the quarter, we grew into some areas that have are expected while we will have little loss ratios at the expense of a higher acquisition expense ratio. So there's a bit of a trade-off here we're seeing a lower loss ratio against and counted it out as higher expense ratio and it's a similar story in the reinsurance although re-insureds is a bit more opportunistic, we have fluctuation from one quarter to the next on what kind of deals we write, what actually ends up coming to financials but certainly in the few instances, we have some agreements and share agreements where there's a sliding scale commission where you wills see that the loss ratio is a bit lower or if it's high mean vice versa but it's lower we will have the higher slightly higher expense ratio. So it's a similar story that we look at it in totality and there is going to be movement between the components, correct. Michael Phillips : Okay, great, thank you. That's good, I guess if I could drill a little bit further down from your commentary in the press release on the reinsurance development, you talk about short term business and the recent accident years or recent underwriting years and then the longer term, the longer term piece of that, longer term business from earlier years, can you talk about kind of where that is not just in years but I mean the sub-segments, the lines of business that we're driving that longer tail business favorable development? François Morin : It's mostly all on the casualty sub segment of the reinsurance certain lines of business in the reinsurance segment, as you know we had a fairly sizable part of our business or market proportion of our production was in casualty businesses, casualty business and the early years of ours going back from 2002 all the way to 2008 and 2009 let's say where we reduced our writings on that particular line, so you're still seeing some favorable development coming through from those years and casualty in particular? Marc Grandisson : I would add to what Francois just said is in the earlier years, it was more we included in the casualty segment, general liability and professional lines. In the early years, we wrote a lot more GL in proportion than we've written recently, so I would think that the more recent releases would come from professional lines in all treaties that we've done and early years still giving us some release from the casualty, the traditional GL portfolio that we wrote as far back as 12 to 15 years from now. We are, obviously we have deemphasized that line of business very heavily over the last 10 years. Michael Phillips : Great, okay, good. Thank you very much for the comments. Marc Grandisson : Sure. Operator : Thank you. Our next question comes from Josh Shanker from Deutsche Bank. Your line is open. Josh Shanker : Hey, good morning, everybody. Marc Grandisson : Hi Josh. Josh Shanker : Can we talk about production in MI and how much capital that required on the margin from where you were year ago and so when we consider the share repurchase and everything and may be a little bit stagnancy in P&C, how much excess capital are you guys generating per quarter given the consumption elsewhere? Marc Grandisson : I think that, we see our earnings coming through right and the one thing I will tell you, I don't want to tell so much because of couple of things moving in production the way flow through the portfolio, the Bellemeade transaction that we've put together and we're putting together in program average basis. The roll off of the capital from that we are experiencing and benefiting from predevelopment, the claims that are actually rolling off even in Francois mentioned in the curing and delinquency and frankly Josh they all pointing in the right direction which is we are and that party help to inform, it will help us inform our view about how good and how much of fundamentals, how good the fundamentals are in the business. And I think that we have, we made decision in the past we certainly have committed to embark on that Bellemeade transaction, they're very, very good for us in protecting the downside, they're allowing us to deploy capital in future periods and hopefully we get more excess capital as a result. But we are not running out of ideas in the MI segment, so if anything we're very happy with our production and happy where we are and the effort is to keep on being the same as we see now, we're going to keep on deploying capital there. François Morin : The one thing I will add to that just as a counter to excess capital is actually persistency is actually trending up and with higher interest rates as you know, we would expect it would have a bigger book, the book sticking longer on the balance sheet which doesn't require the capital. So it's hard for us to know when to say exactly how much excess capital we're producing on a quarterly basis certainly something we look at, I want to say after the fact not before the quarter starts but that's certainly an important part that we have to be aware of as it is we think the book will stick around for a bit longer and that that just triggers capital requirements that we need to be aware of. Josh Shanker : Well let me ask the question another way then and I'm not complaining about $170 million share repurchase but what tells you okay let's stop but how do you know that, how did you are filling the side that you've done enough or I mean was just like you closed out, what was the trigger that you knew how much you want to purchase at what time, I guess is what I'm asking. François Morin : Well some of it's the price, I mean some of it is the closed window, so certainly bought back some stock in the quarter. From June 15, we have to implement 10-b5 plan, we set some guidelines in place, we passed them on to the broker and we have to just watch on the sidelines and see what they were going to execute on that, so we gave them the authorization, they filled that, they worked with the parameters of the 10b-5 plan but I don't think, I know it's black and white line on when we stop and when we keep going and the other thing you got to remember is we also wanted to reduce our leverage. So we paid down $250 million of the revolving credit facility which is one of our objectives as well, we want to bring down the leverage, we want to regain the flexibility we had before the UGC acquisition and so those are really two things that go hand in hand that we want to manage through and we think we're on the right path. Josh Shanker : Okay. Well, thanks for the answers, and I look forward to the remainder of the year. François Morin : Thanks Josh. Operator : Thank you. Our next question comes from Nick [indiscernible] from Dowling & Partners. Your line is open. Geoffrey Dunn : Hi, it's actually Geoff Dunn. François Morin : Hi, Geoff. Geoffrey Dunn : I want to revisit the MI capital question, your position is by far the biggest in the industry right now and given your comfort with 2.0, what is the prospect for a dividend out of that platform in the back half of the year? François Morin : It's something we look at, no question that we did declare ordinary dividends in the first half of the year which helped us again to reduce the leverage, pay down the revolving credit facility. We are also, there is restrictions as you know with the state regulators that there's only so much we can dividend out, so if and when we get to a place where we have to, we want to extract more capital, we may have to go down the route of extraordinary dividends and or return of capital which as you know will require regulatory approval. So it's certainly part of the equation but and the other thing I'll add to that which is a bit of influx is we're still realigning our legal entities with the merger of UGC and Arch MI, there is a bit of more actions we need to take plate, we need to put through there just to have a bit more optimal capital structure within our U.S. regulated entities in the mortgage space. So it's all being considered, we don't have a hard number at this point but we're actually something we look at quarterly with the local board, the local management team and it's part of the overall capital plan at ACGL. Geoffrey Dunn : Have you submitted a special dividend request to your state regulator? François Morin : Earlier this year we did and it was approved and something again there's a frequency of interactions you want to have with the regulator, we can't go to them, we got to manage through that but it's certainly something we want to have a fairly systematic way of going in reaching out to them with definitive I want to say views on how the capital requirements what they see as capital requirements. From their own the state regulators versus PMI, there's also differences in how much credit we get for the Bellamy transactions that come into play so there's a lot of factors that, we're working through but you know we don't have a definitive plan of action. I'd say for the remainder of 2018 to go to them at this point. Geoffrey Dunn : Okay. And then two questions on production first your 97 mix has been coming up a little bit fourth quarter first quarter and then more materially this quarter is there anything that's changing on the underwriting basis in that segment that's making you more comfortable or was that you particularly this quarter's gain more due to the unusual pricing that you highlighted before? Marc Grandisson : So from our perspective, our belief is that we didn't change right if the our view of pricing and risk, appreciation of those risk is probably because the rest of it competition probably put some more extra layers on this enough probably mean that we won a little bit more in that segment, so we increased our share but Jeff as we are still on the way versus the rest of the marketplace and as well I mean to tell you that the production of LTV above 95 grown in the industry, so we're also are on the receiving of this and it's hitting one as a production increase and that segment is probably more and more ability to charge a price to take on the risk. Geoffrey Dunn : Okay and then lastly you mentioned a couple large deals in the quarter are you referring to kind of these pull deals where you're quoting on a pool of whole loans in the aggregate? Marc Grandisson : Yes, I'm pre-agreeing as the forward commitment. Yes. Geoffrey Dunn : Okay, thanks. Marc Grandisson : Thank you. Operator : Thank you. And our next question comes from Bob Glasspiegel from Janney Montgomery Scott. Your line is open. Bob Glasspiegel : Hello, I just want to do dig into the insurance segment you've now had three quarters where you, a small underwriting profit in if you just even if you just for the look, you are hitting the tougher Cat the third quarter but you talk pretty optimistically both sort of the environmental changes, do you think the work you've done in the environment are sufficient to that you can actually get to an underwriting profit look out forward in and start to approach your targeted returns in that segment? Marc Grandisson : We're certainly working heavily towards that Bob I mean I think you know us we're trying to work towards that, I think we've always worked towards that level. I think that we're probably not I just want to put a little caveat what you said and I think we're cautiously optimistic as to what we've seen terms of margins improving and I think that it will take us some time, we have some improvement I think some of it in their loss ratio but that's from some mention some of it due to mix. In terms of return receipt from improving our returns but we're not declaring for victory yet with global take as a while to really see the results coming through but suffice it to say that there's been an active shift between the businesses that have been going on and it's not of late, so what you see right now on insurance as Bob it is really the sum total of things you've done over the last year and half to two years not up with being right now in allocation to higher return lines of business and we're hopeful that this is the level that will continue and even improve in the future but the future only the future will help us, what happens. Bob Glasspiegel : Thank you. For it, what you have a handy there in new money rate for the quarter or current new money rate that you're investing it? Marc Grandisson : Well, we actually new money rates on the corporate actually exceeded 3% in the last few weeks, so that's good news that's that will help investment income going forward but we're right about like 3.1% in the last 20 days or so. Bob Glasspiegel : That's well above your embedded yield to investment income as you should continue to accelerate? Marc Grandisson : Yep. Bob Glasspiegel : And last question it was the tax rate guidance full-year or second? Marc Grandisson : Full-year. Bob Glasspiegel : Thank you. Marc Grandisson : You're welcome. Operator : Thank You. And our next question comes from Meyer Shields from KBW. Your line is open. Meyer Shields : Great, thank you. Marc, when you started your comments you mentioned that rates are little bit above loss trends I was hoping to see whether that's the loss trends that you're currently observing or the longer term loss trends that you have been making enterprising and reserving? Marc Grandisson : Yes, okay so it's a bit of both. That whatever we use in our last run is informed by the data obviously in our future expectations. The Delta I think significant is a 150 or 125 but Meyer it's been only that margin has only been is a quarter or two with fact hasn't been a consistent no pickup in trend or in rate over the last trend, that we would expect to really start growing book of business. And so it's a very it's an art more than science at this point I'm specifically for the more recent accent year, takes a really long time to have a clear view of what's happening and frankly we will know until five or 10 years from now and what we're looking for more is margin of safety between the last trend and the rate change. And this clearly is not we don't believe it's deficient enough at this point in time in most lines of business in someone like property were really getting way about trend and that helps inform our position in allocating capital and getting a more known better assurance that ROE expectations is going to be there and we're able to meet it. Meyer Shields : Okay, thanks. Related question on the casualty lines are this I guess different views from different executives right now but whether there is an uptick in claim frequency in lot of casualty lines I was hoping you tell us what you're saying? Marc Grandisson : But we're seeing frequency not increasing dramatically but we're not seeing decreasingly and the problem with frequency Meyer that you're an, that as well as I do is that the frequency to look back estimate takes a long time for the true losses to emerge, so we have seen some rate frequency decreases. I would be of the mind and most of us are to be of the mind that some of it is due to looking back at to a lower economic environment, lower activity over the last 10 years and carrying on doing a projection in the future. I'm reminded that the workers' comp years in 93, 94, 95 when things were being extracted frequency going down very heavily and there was just a matter of time before top picking up again and another line of business of more recent experiences is auto liability, it was looking pretty good in frequency and a frequency shut up over an 18 months to 24 month period, so I'm worried about the small sense of security of ongoing frequency be decreased especially in light of an economy that has a lot of friction, a lot of pickup in it and lot of steam in it. Meyer Shields : Okay, that's very helpful. Thank you. Marc Grandisson : Thank you, Meyer. Operator : Thank you and our next question comes from Brian Meredith from UBS. Your line is open. Brian Meredith : Yes, Thanks a couple questions. First one just curious pickup in property business you're seeing on your insurance side. I know you talk about some of that's rate but then also adding some new business there, what do you see as the attraction right now on the property business that is that area you think that it rates well in excess of trend, What's going on there? Marc Grandisson : So rate, yes, we believe rate is an excess of trend. There's also the rate on our ENS portfolio which is more to ENS portfolio player it's not the global property side over the small commercial that we see some of that in certain areas but buying large the ones that have ENS in nature including the London business. We're seeing rate increases because of dislocation in the marketplace, some players have been to hurdle that been some question as to where the viable book of business, so the opportunities to slide in and able to seek opportunity. On the reasons because I want to mention on this world-wide it doesn't matter there are also opportunities that arise because of some placements not being finalized and we're able to pick and choose some faculty replacement that are to just complete the quilt of coverage that no larger risk would have to do to play, so there's a little bit of a shrinking of capacity in the space specifically on the ENS have property it's an 8% trend, 8% to 9% rate increase but it is one long area where we have, we think some terms and conditions getting better, actually working towards as the nation's carriers and as I say in my notes. We like to see rate increases going up one way in terms of conditions following soon meaning giving us an extra kick up and we believe this is what's going on in the property although it's not widespread, we have to pick and bought but it's certainly what we've seen in the business that we write. Brian Meredith : Right. And then next question, Marc, at Investor Day it was talk a little bit about maybe some initiatives to try to get the combined ratio down that insurance segment be at expenses be at risk selection and stuff, just maybe an elaborate a little bit on what you're doing to try to consistently maybe improved access. I can't think the return to business that creates when you're sitting here kind of 100 combined ratios of 99 to 100? Marc Grandisson : Correct. So it's we're really identified it as an area of opportunity but I will take years to develop and the initial things that we've done and we're doing currently right now is there's a little more integration going on for some things such as IT for instance that we think we need to do and then can be done even though we have no multiple platform. So it's a couple of things, integrating services, leveraging some of the overseas employees that we have that are in lower cost jurisdiction and there are some initiatives that we are talking that will be we will be working on going forward to try and decrease it. But I will tell you what happens when they happen and we are give it to - give us ourselves some time to get there. Brian Meredith : Okay, great. Thank you. Marc Grandisson : Welcome, welcome. Operator : Thank you. And our next question comes from Ian Gutterman from Balyasny. Your line is open. Ian Gutterman : Hi, thanks. So we are early, is it? I can't even ask you for lunch is yet. Marc Grandisson : Hi, Ian. Ian Gutterman : So first, François, thank you for doing the script in a slower cadence that we are used to. That was helpful. So my first question is to follow-up on the tax. Can you talk specifically about why it's coming lower than you expected for the year? François Morin : Well, thinking about the gone by. I mean no question that when we started the year, there was a lot of uncertainty after the tax reform, trying to figure out. It was all based on plan. So when we gave you the estimates back in February, it was all related to where we saw the profitability of the units and what local jurisdiction they come from. Six months have gone by and now we have a bit more clarity on the actuals and that's what we are just updating. So I can't pinpoint any one particular thing on why it's come down a couple points let's say. It's really more just the fact that we replaced forecast to plan with actuals. Ian Gutterman : Okay. I guess I would have thought - I guess I can turn to my model. It's not your internal model obviously. But I would have thought that the upside in earnings has come more from MI which obviously would be more in the U.S. So I would have thought if anything like the geographic mix would have advised you higher if anything. So I don't know if there were other actions you were taking trying to offset that or… Marc Grandisson : I mean it's not a big difference. The 21% the tax rate, we get a 50% quarter share on the mortgage book so that brings it down to 10.5 right there. There is - we can do it offline. There is a couple of other things that I think one offs that can move it in different directions. So it's really hard to kind of give you a lot more clarity over this range at this point. François Morin : And this is the primary U.S. business, Ian. Just for your benefit some of it in the U.S. segment is also with Bermuda which would have a different tax. Ian Gutterman : For sure, for sure. François Morin : So, yes. Ian Gutterman : Okay. And then you can give us color on the fac [ph] losses? I mean the dollar amount was about somewhere to last year [indiscernible] is it coming from the same parts of the book bill or is it different parts of the book, or different geographies? Any color you give us on what happened there? Marc Grandisson : It's different. It's one off. It's a one class of business that we unfortunate - well, I mean one major event that came in for the quarter. We don't see any trend in it. It's really - I mean yes, it's coincidence that is it's happening in the exact same quarter or 12 months later, but other than that, again that we have been very happy with our performance of that book over the years. No question that we are going to look into it some more as we move forward. And does that force us to re-evaluate some underwriting decisions? But at this point, we don't see anything that's really problematic. François Morin : No, and that loss versus last year they are different in nature. I mean… Ian Gutterman : Yes. François Morin : Exactly. It's very different in nature. I mean it's a fire loss, but it is different types of risk, different types of characteristics, different coverage - like a very - different occupancy. And that - yes, it's a very lumpy book of business. As you Ian, we are sitting here having Q on Q loss. We could have five quarters with no losses. Ian Gutterman : Okay. Was this the fire that I maybe read about in the press somewhere that happened call it in an island near Europe? François Morin : No, that was not that one. Ian Gutterman : Okay, okay. And maybe just - but I think about see the full-year '17, in fact, I mean obviously there was a bad Q2, but I am just trying to see like what's normal over the course of the year. Well, last year [indiscernible] have normal year or worse than average year, just how should I think about that? Marc Grandisson : Last year has been a worse than average. I am not - I am not comfortable giving you what we think long term pricing and then returns are that we want to keep it proprietary, but it's shown a very healthy, very profitable book of business. But last year, yes, for - in the 11 years it's been running business for us we are together. It is the one year that sticks out. Everything has been actually below the than long term expected when all years except for that one last year. Ian Gutterman : Okay. I am trying to think about volatility like given this Qs in a row with eight bad quarter, would it be normal to have a quarter like this once every - probably not once every four quarters, once every eight quarters, once every five years? I am trying to get a sense of sort of how unusual the last two Q2 are. Marc Grandisson : It's a very good question, Ian. I don't know the answer to that. Ian Gutterman : Okay. Fair enough. Fair enough. Okay, and then just quickly on mortgage. Marc Grandisson : Sure. Ian Gutterman : You talked about the environment being healthy. And obviously - I mean that seems fairly obvious. But I guess sort of the incremental news maybe over the last month feels like there is a bit of softness emerging. I know that's maybe more the high end which wouldn't have MI than the broader market. But are you seeing any signs of that? It feels like that may be price has just gone up a little too fast in certain geographies where affordability become an issue? Marc Grandisson : I won't describe the market as being soft. I would tell you though that the types of risks that find their way to the MI purchase market have a little bit of credit you know, wider than it was possibly three or four years ago. And it's just the nature of the business and the business that we are in. The rates are increasing. That's refinancing. There is more first time home buyers. And there is house price appreciation. So that tends to be higher LTVs and there are more first time homebuyers. And that's - but it's just the nature of what they are, but I would believe - and I think the market and certainly from our perspective with RateStar we believe the pricing is appropriate for those risks. Ian Gutterman : For sure, I was just wondering - yes, margin affordability was impacting credit at all. So, it doesn't sound like… Marc Grandisson : Affordability is actually 15% above the long-term trend. So affordability is still decent. It's not all created equally in all cities like San Francisco and other country, but certainly affordability it's still there. The DTI equivalent is about 26. So, it's not that bad. Ian Gutterman : Okay, perfect, it sounds good. Thank you. Marc Grandisson : Welcome. Operator : Thank you. And our next question comes from [indiscernible] from Goldman Sachs. Your line is open. Marc Grandisson : Hi, Ian. Operator : Please check that your line is not on mute. Again, Sir, please check that your line is not on mute. And I am showing no further questions from our phone line. I would now like to turn the conference back over to Mr. Grandisson for any closing remarks. Marc Grandisson : Thank you, guys. Welcome Francois to the call, and we look forward to talking to you after the wind season. Thank you. Operator : Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,018	4	2018Q4	2018Q3	2018-10-31	1.768	1.955	2.281	2.34	null	12.84	12.88	Executives: Marc Grandisson - CEO, President & Director François Morin - EVP, CFO & Treasurer Analysts : Geoffrey Dunn - Dowling & Partners Securities Kai Pan - Morgan Stanley Michael Zaremski - Crédit Suisse Elyse Greenspan - Wells Fargo Securities Joshua Shanker - Deutsche Bank Meyer Shields - KBW Operator : Good day, ladies and gentlemen, and welcome to the Q3 2018 Arch Capital Group Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. François Morin. Sirs, you may begin. Marc Grandisson : Thank you, operator, and good morning to you all. Happy Halloween to all, and best wishes to you, you little ghosts, goblins and princesses. While the stock market has been providing some scares this past week, here at Arch, we had another good quarter despite higher cat activity around the world, as our operating strategy of diversification, cycle management and focus on risk-adjusted returns produced an annualized operating return on equity of 11.4%, and 2.3% increase in book value per share at September 30, 2018. François will provide more commentary on our financial results in a moment, but it's worth noting that our modest exposure to property losses this quarter is not just the result of our good risk selection. It also reflects our ability to remain disciplined in a market where risk-adjusted returns do not meet our return hurdles. The 2017 and 2018 catastrophes are a reminder that margins in cat-exposed property lines remain thin, and in many cases, are inadequate relative to the severity and frequency of catastrophe events. With respect to market conditions in our property casualty operations, outside of property, there are just a few specialty areas such as travel accident and European motor, where current market conditions provide opportunities to deploy additional capital. In most of our insurance lines, rate changes are positive and appear to be outpacing claim trends. But as we have discussed in prior quarters, the spread between rate changes and loss trend, claims inflation, if you will, is small, and we remain cautious in establishing our loss mix. In addition, specialty lines such as those that we write are volatile by their nature, and it is necessary to use a longer assessment period in order to evaluate the ultimate margins. In summary, overall market conditions in our P&C businesses seem relatively unchanged from last quarter, and we continue to believe that additional rate increases are needed to provide a more adequate margin of safety and broader growth opportunities. Turning now to MI, where the operating environment remains attractive. I will focus my comments on our U.S. primary business, which represents over 80% of that segment. MI pricing appears to have stabilized in the third quarter after the rate changes announced in the first half of this year. The credit quality of loans insured remained strong, and our key risk barometers are still at benign level relative to historical norms. If you have a chance, visit our Arch MI website for a full housing and mortgage market report, called the HaMMR report. It will give you a good idea of why we remain confident of the health of the U.S. housing market. In short, due to the factors I just discussed, we like the visibility in the future performance of our U.S. mortgage insurance business. Our U.S. MI new insurance written or NIW was strong again at $21.4 billion, a 21% increase over the same quarter last year. In the third quarter, higher loan-to-value or LTV mortgages with greater than 95 LTVs grew slightly as a percentage of our NIW to about 15%. Credit quality, as indicated by FICO, remains high across our risk in force with an average score of 743. We remain underweight relative to the market in the greater than 95 LTV and the higher DTI products. Our single premium policies remain low at 7% of NIW this quarter versus the industry average of roughly 15%. In the current rising interest rate environment, monthly premium products should continue to produce better risk-adjusted returns over time. The persistency of our monthly policy has increased to 82% in the third quarter and supports the allocation of more capital to the monthly products. In addition, to maintain a credit quality of our in-force book, we increased our protection for mortgage tail risk by completing our second and third Bellemeade risk transfers to the capital market this year, where we have become a regular issuer. Insurance-linked notes enhanced the level and the predictability of our expected returns. As far as the new MRT programs with the GSE, the IMAGIN and EPMI facilities, they have begun to generate business. Momentum is building slowly as banks develop new systems to handle the programs. More on that later. Now briefly with respect to our investment operations. Higher yields available in the financial markets and growth in invested assets led to a 21% increase in net investment income in the third quarter. We remain underweight, both credit and interest-rate risk, given the rising rate environment. Finally, a few words on capital and risk management. Share repurchases by Arch are typically light in the third quarter, and this quarter was no different. While we repurchased some shares this past quarter, we have been working on a few opportunities to deploy our capital into our businesses, and we will let you know if and when these opportunities come to fruition. As to risk management, for the reasons I mentioned earlier, our property cat exposures remain at historically low level with our 1-in-250-year peak zone at 5% of tangible common equity at the end of the third quarter. For our mortgage segment, as of September 30, our realistic disaster scenario declined, as growth in the insurance in-force was more than offset by the capital relief from the Bellemeade transactions and the continuing runoff of pre-2019 business. With regards to PMIERs, which applies to our primary U.S. mortgage insurance business as of September 30, 2018, Arch was -- Arch MI was at 151% of the current GSE capital requirements. Arch required assets exceed both the current sufficiency ratio known as PMIER 1.0, and the revised GSE required asset as proposed under PMIERs 2.0, which is to be effective on March 31, 2019. With that, I will turn it over to François. François Morin : Thank you, Marc, and good morning to all. Let me jump right in and give you, all, some comments and observations on our results for the third quarter. Consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e., the operations of Watford Re. In our filings, the term consolidated includes Watford Re. After-tax operating earnings for the quarter were $242.3 million, which translates to an annualized 11.4% operating return on average common equity and $0.59 per share. On a year-to-date basis, our annualized operating ROE also stands at 11.4%, a solid result in light of challenging conditions in the P&C sector. Book value per share was $21.15 at September 30, a 2.3% increase from last quarter and a 6.4% increase from 1 year ago, despite the impact of higher interest rates on total returns for the quarter and on a year-to-date basis. Moving on to operations. Losses from 2018 catastrophic events, net of reinsurance recoverables and reinstatement premiums were $58.2 million or 5 combined ratio points. While these losses were predominantly the result of Hurricane Florence hitting the Carolinas, we were also impacted by other events across the globe, including in Typhoon Jebi in Japan. As for Hurricane Michael, while we are still early in the process of reassessing our exposure to this event, we believe the impact to our insurance and reinsurance operations will be in the range of $40 million to $60 million on a pretax basis, given the information available at this time. As for prior period, net losses are a development. We recognized approximately $77.6 million of favorable development in the third quarter or 6.7 combined ratio points compared to 5.1 combined ratio points in the third quarter of 2017. All segments were favorable, led by the mortgage segment with approximately $38 million favorable, the reinsurance segment at $33 million favorable and the insurance segment contributing $7 million. This level is higher than in recent periods, primarily as a result of the significant favorable development observed in our first lien portfolio in the mortgage segment, where cure rates this year continue to be materially higher than long-term averages and expectations. The calendar quarter combined ratio on a core basis was 80.1%, while the core accident quarter combined ratio, excluding cats, improved to 81.8%, down 260 basis points from last year's third quarter. The insurance segment's accident quarter combined ratio, excluding cats, was 100% -- 100.2%, slightly higher than the comparable 2017 level as a result of elevated attritional claim activity across a small number of lines, slightly offset by lower operating expenses, resulting primarily from lower compensation costs. In comparing the quarterly acts of the year results, it should be noted that the reported results can be subject to noise due to random occurrences of that can take place in the lines of business we operate in. Just as we reported that our results last quarter were enhanced by the lower frequency of large non-cat claims, the opposite result materialized this quarter. In order to detect trends in the performance of our units, we tend to focus on trailing 12-month analyses to remove some of the noise that we see from quarter-to-quarter. The reinsurance segment accident quarter combined ratio, excluding cats, stood at 92.5% compared to 96.9% on the same basis 1 year ago. As we discussed in the prior call, the combined ratio in the quarter 1 year ago was impacted by a large retroactive reinsurance contract. Given the nature of our book and the impact certain large transactions may have, fluctuations of quarterly results are not unusual and should be expected. The expense ratio benefited from the reduction in federal excise taxes of $2.3 million or 0.8 points, as a result of the cancellation of certain intercompany property casualty quarter share agreements effective January 1, as discussed in prior calls. This item will continue to impact comparisons of 2018 to 2017 results. The mortgage segment's accident quarter combined ratio improved by 410 basis points from the third quarter of last year as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 3.2% in the third quarter of '18 compares favorably against the 12.8% in the same quarter of 2017 due to substantially lower delinquency rates. 570 basis points of the difference or $17.1 million, is attributable to increased favorable prior development, while an additional 280 basis points of the difference or $8.3 million is attributable to favorable development on 2018 delinquencies, due to very strong cure activity in the period. The expense ratio was at 21.4%, slightly higher than in the same period 1 year ago as a result of a higher level of acquisition expenses due to increased amortization of deferred acquisition costs. These figures highlight the contribution to our pretax underwriting income from the mortgage segment, which remains strong this quarter. After allocating corporate items such as investment income, interest expense and income taxes to each segment, the mortgage segment's contribution to our 2018 year-to-date net income decreases to approximately 70% of the total after normalizing our results for catastrophic activity. Total investment returns for the quarter was a positive 31 basis points on a U.S. dollar basis and a positive 37 basis points on a local currency basis. These returns were impacted by the effects of higher interest rates on investment-grade fixed income securities, with marginally higher returns on alternative investments and non-investment grade fixed income. During the quarter, we continued to shift our allocations away from municipal bonds and into corporates due to relative valuations. The investment duration was substantially unchanged on a sequential basis at 2.94 years. Operating cash flow on a core basis was a strong $543 million in the quarter, reflecting the solid performance of our units. Lower levels of claim payments and higher levels of investment income received explained most of the increase over the same quarter 1 year ago. The corporate effective tax rate in the quarter on pretax operating income was 11.8%, and reflects the benefit of the lower U.S. tax rate, the geographic mix of our pretax income and a 190 basis point expense from discrete tax items in the quarter. As a result, the effective tax rate on pretax operating income, excluding discrete items, was 9.9% this quarter, slightly lower than the 10.4% last -- late last quarter. As we look ahead to year-end 2018, we currently believe it's reasonable to expect that the effective tax rate on operating income will be in the range of 9% to 12%. As always, the effective tax rate could vary, depending on the level and location of income or loss and varying tax rates in each jurisdiction. With respect to capital management, our debt to total capital ratio was 16.6% at September 30, and debt plus preferred to total capital ratio was 23.5%, down 290 basis points from year-end 2017 and 520 basis points from year-end 2016 when we closed the UGC acquisition. As for share repurchases, we repurchased 414,000 shares during the third quarter at an average price of $26.48 per share and an aggregate cost of $11 million under our Rule 10b-5 plan that we implemented during our closed window period. Since the start of the fourth quarter, we have purchased an incremental 575,000 shares at a cost of $15.3 million. Our remaining -- our revision, which expires in December 2019, now stands at $247 million after consideration of the share repurchases made through October 30. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions]. Our first question comes from Geoffrey Dunn from Dowling & Partners. Geoffrey Dunn : I guess, first, could you update the RDS number for the MI business? And specifically, can you give us what the gross RDS is, and then the net RDS after all the ILN benefits? François Morin : Well, I mean, we don't -- I mean, we do the gross and -- we just -- we focus on the net, because there's a lot of moments there and there's a lot of reinsurance protection, as you know, that comes into play. The court number is just at about $1 billion, net of all the protections we have. Marc Grandisson : So, it's 13%, Geoff. Geoffrey Dunn : And is there any way for us to try to back into gross number? Marc Grandisson : Not really. From just talking to you, I guess, at some point, we might want to talk to it through it, but it's not very easy manageable, I guess, on a call like this. Geoffrey Dunn : Okay. And then with respect to managing capital on the MI platform, as you consider both regulatory limitations on dividends and just overall surplus until contingency starts releasing, is it possible to manage to an efficient cushion on a proforma 2.0 basis, as a recurring ILN assure? François Morin : I just want to make sure -- I mean, the question, in a sense -- a cushion, yes, I mean, just typically, we certainly want to have a question above PMIERs 1.0 or 2.0. We don't think it's prudent to run a business right at PMIERs, whatever that is. So no question that, yes, as you saw, the PMIERs ratio did go up this quarter, driven by the new Bellemeade transaction we closed on in the third quarter. We're in the middle of discussions and planning around how we can extract some of that excess capital from the regulated entity, regulated mortgage entities and see what we can do with that. Marc Grandisson : Two things to add to this. Geoff, I think that the Bellemeade transaction, as you know, are, by and large, so far, been backward looking. So you really only know after you've accomplished, so you realize them. So your question assumes that you're going to have the same level of execution in the market going forward on a guarantee, or somewhat guarantee basis, which we don't look as the case. But having said all of this, you also have opportunities that may develop, over time, in the marketplace that might mean more need for capital. And that also will cause, sometimes, delay or it's not a very immediate release of capital, as you know, with the regulatory entities in the U.S., we have to be careful and it takes a lot of wild to go through the capital management because of all these constituencies out there. Geoffrey Dunn : It sounds like maybe it's a little too early to ask the question. François Morin : Well, I mean, we're working on it. The answer is, it's a fact, we closed on the transactions and as you know, it takes time to get approvals. That's what I've done, and that's really what we're -- the first thing we need to do for an annual -- once -- if and when we get those, then we'll be -- we'll have more flexibility in what we can do with it. Operator : Our next version comes from Kai Pan from Morgan Stanley. Kai Pan : My first question, just to follow up with Jeff on the MI business. It looks like last 2 quarters, your underlying combined ratio is running at high 30s, given the strong credit environment, and that's compared with last year, probably in the mid-40s. I just wonder if the credit environment remain stable, will that be a sort of a reasonable run rate for that business or other sort of like a minus/plus, like it could impact that core combined ratio going forward? Marc Grandisson : So Kai, all moving parts that are very -- there's a lot of things going on. If anything else change, you're quite right that we should expect to have a very similar combined ratio. That's on a -- just based on the credit quality of the borrowers, it's still extremely good out there. So yes, that we would expect, if everything else being equal, which is never is, right, we still need house price to go up, with still unemployment remaining low and mortgage rates not increasing dramatically or in a significant way. So there's a lot of things that need to happen for this to be -- for the shorter term, yes, we would expect this to be a sustainable combined ratio. Kai Pan : Okay, that's great. And then switch to the reinsurance side. We have heard a lot of sort of new demand in the marketplace since the cash [indiscernible], as well as this year's cat activity is not quite. It's not like as large last year, but we have some adverse development from last year's expense as well. So what's your outlook for January renewals? If you can talk both on the property cat side and as well as ongoing, sort of, like pricing on the casualty side as well. Marc Grandisson : So let me take the property cat. I mean, it's still early, right? We're a couple of months before the renewal of the January 1s. The market is still flushed with capital. So there's a couple of things going on there that brings a lot of dynamic as we get towards 1/1. Based on our results, the losses that we've seen over the last 2, 3 years, we would expect it to be at least -- there should be at least some price increase to recognize the fact that the long-term average -- the short-term average is probably not going in the favor of the insurance companies and the reinsurance companies. So we would expect that to have an influence on the renewals but however capacity is plentiful and there's a lot of alternative capital that could come and change it. So we'll have to wait and see what happens. It's not a clear-cut answer from that perspective. On the casualty side, it's a very tough place to be. The result from the casualty, we're not a big casualty reinsurance player. What we see -- what you see in our casualty segment is not at all the GL, the general liability or the traditional casualty reinsurance. We still feel this is too competitive for our own case. The fact that people want to buy more reinsurance might indicate to me that there's a lot -- there are -- there's a willingness and a desire to share or at least to deemphasize the risk that is inherent in that portfolio. So we'll be very cautious in the way we are going about running that business. We're not as optimistic about the casualty market as people would be out there. Kai Pan : Okay. Last one you made the primary insurance side. So you mentioned attrition loss is higher. Could you quantify that for the quarter? And also, you mentioned, the business results have been close to breakeven, and you have mentioned about 95% long-term outlook, and how quickly we can get there? Marc Grandisson : Not soon enough, right? I mean, that will be the right answer. I think that we've seen the trailing 12-month combined ratio, hovering around 99% this quarter, yet did have large attritional losses. I think it's 2 to 2.5 points impact on the quarter, which would have put this quarter in line with the other ones. But on a trailing 12 months, we're pretty much at the 99% number. And this is the one that we tend to focus on. Any one quarter does not make a trend. And as you'll remember, we had large losses on reinsurance last quarter that we didn't have in this quarter. We had it in insurance. So there's a lot of volatility going around those -- given the specialty lines that we write. I think that we also look at this in the sense of the overall market being softer and conditions not strengthening any better, with some rate increase. It just makes us be that much more prudent. When there's a large loss that comes in, most of the time, ID&R would be made up -- would be there to make up for that loss, but we tend to take a more conservative approach to this and maybe not fully take a -- may not take the full impact on the ID&R and remain the -- leave the ID&R at the same level and take the large loss as it comes because we're not sure that the fundamentals are improving as much as we would hope they would be. Operator : Our next question comes from Mike Zaremski from Crédit Suisse. Michael Zaremski : Starting with mortgage insurance. In the prepared remarks, you mentioned that momentum is building for, I think, you said some of the bigger banks to handle some of the adjustable mortgage insurance pricing. Is that, you think, helping you maintain your market share position? Because I think your market share jumped up a lot in 2Q, and I think it still stayed higher than expectations, which is a good thing, this past quarter. Marc Grandisson : I'm not sure what part of my remarks you mentioned -- you referred to, but the thing about our ability to increase market share and being that relevant to our clients is most of the clients that embraced risk-based pricing are actually the ones who are getting market share in the industry. And that's been a phenomena that's been going on for several quarters. So yes, by virtue of us being -- there's much more nimbleness, if you will, the more in the nonbank loan originators than there are in the larger banks out there, and I think that for the first -- for the recent quarters, I think there's been a recognition that the larger banks might be losing market share to those nonbank loan originators and RateStar actually works much better for those loan originator and actually helps them win business. So that's actually helping us grow market share or maintain our market share, at the very least. Michael Zaremski : Okay, that's a good nuance to know. Sticking with mortgage insurance, I know this is probably difficult, but is there any way to -- that we could maybe try to size up how to measure how much could be left in terms of like a pace of reserve releases if the cure rates continue to be definitely lower than historically? I mean, I guess, I don't know if you're using a 2-year average or 3-year or a 10-year historical average. I'm assuming you're not just assuming the rates that we've seen in 2017, '18, kind of overlay on the entire portfolio. But just kind of a curse, if there's anything we can look at to better understand and size up how that could trend, if things do stay good for the foreseeable future, as you kind of mentioned in your prepared remarks in terms of your outlook for MI? Marc Grandisson : Yes, I'll say a couple of things on that. First, I mean, yes, delinquency rates are at very low levels. So we don't think they're going to go much lower than that. But the reality is the performance has been very, very good. As you know, the reserving methodology in the mortgage segment is very much more of a mechanical prescribed exercise. There's a lot less flexibility in the mortgage segment than there might be in the P&C side. So if the delinquencies are there, yes, we can put up reserves for it. And if they're no longer there or they cure, the reserves come down. So it's -- there's no in between. Is it delinquent? Is all delinquent? Yes or no. And from there, the models we've built produced the estimates we carry or the reserves we have in the books. So to answer your question, I think maybe there's a bit more to go, but I think to be honest, it's been -- the level that we saw in this quarter have been extremely high and probably higher than any of us here expected. So if it happens again next quarter, well, I'd be surprised. I'm not saying it can't happen, but it would be a, again, a continuation of very favorable trends that the whole industry is seeing. We're not the only ones, as you know, that are seeing these trends and -- but again, I don't think they'll be -- they're sustainable for an extended period. Michael Zaremski : Okay, great. And then lastly, just on capital. You mentioned that, looking on -- looking at some new opportunities, I know you guys are always opportunistic and looking at things. Just curious if you can give us a flavor, whether it's primary insurance or reinsurance, or MI, or all of the above, that you're kind of looking at? Marc Grandisson : It's pretty much all of the above that are possibilities. And I think -- and we'll be communicating with the market as and when we find out, if they do find out and come up to fruition. So yes, the answer is all of them. Operator : Our next question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan : My first question is going back to the discussion on your insurance business. So, obviously, the higher non-cat losses drove the increase in the quarter. But I'm just trying, as we think about going forward, and you guys getting to kind of that 95% target, can you just give us a little bit more color on what you're seeing on the -- with inflation? Anything that you guys are watching out for as you think about setting your picks and as we think about the margin outlook for the business for 2019? Marc Grandisson : Yes. So the trend is a very interesting and important discussion. The problem is nobody will really know what it looks like until 5 or 6 years from now. Historically, trends in the insurance industry has been outpacing the core CPI increase, and we've seen the CPI at about 1.7% to 1.8% over the last 4 or 5 years. And -- which would mean to me that's a trend -- and if you look at the spread over that historically, it was 100 bps above that. So the inflation on claims, for insurance claims is always higher than CPI. I just want to make sure it's clear here. We've seen 250 bps above this over the last 4 or 5 years. So there's a lot of uncertainty on this. We're trying to do two things, right? And one of them is portfolio construction. We try to focus on more primary policies because we think that the excess portfolios will have a lot more uncertainty in terms -- if we turn out to be wrong on the trend in the pricing, the trend is going to impact the excess insurance market a lot more than the primary market. And second, are pricing for those kinds of -- those kinds of trends will give us a range around those trend and putting a cushion that would not wrong -- on the wrong side of the decimals when we actually produce the returns -- the results. There's also other things, at least, that help us. We could buy reinsurance to help us shape around the expected -- the margin. But by and large, it's a give and take and through with the marketplace. And with portfolio construction, and also focusing on the line of business where -- you heard us talk about travel and property, right? Those 2 lines of business would be lines where inflation is a lot less relevant. Because you're going to tend to find out inflation into a year is much quicker than, let's say, an E&S casualty or high excess workers comp. Elyse Greenspan : Okay, great. And then in terms of the tax rate, I know there's potential for some changes as we get closer to the end of this year. Do you still think your weight will kind of stay in that 9% to 12% range as we think about 2018? François Morin : Too early to tell. We think it's not a bad place to start. We're in the middle of planning for 2019, and all I can say is we'll give you more color in -- with the year-end call, I'd say. Once we are into '19, we'll have more visibility on how things are shaping up and the mix of business and what jurisdictions and how we think that'll play out. Elyse Greenspan : Okay, great. And then one last question on mortgage. Your market share seems like it might have grown a little bit this quarter. Could you -- maybe, slightly around 25% or a little bit higher. You had been taking that down after the deal, and then it started to come back up earlier this year. I thought you guys kind of got ahead with RateStar than some of the others in just getting your pricing. And so others probably kind of caught up this quarter. So I just want to get a full sense of what's really -- do you see kind of that 25% or so as a share that you would expect to maintain? And how should we think about that going forward? Marc Grandisson : So first, we don't run the business. As you guys know, on a market share basis, we just provide our rate -- our best foot forward with our rates in our approach to risk-based pricing and try to give good service to our clients and provide them with good products. And at the end of quarter, we count, then we look at where the ships fell, and we just -- then share it what it is. We have no design for market share. We had -- when we do a UG acquisition, we have thought about, we had indicated, we might be lower 20s, fiber to -- some of it was fiber to the singles being less of a relevance -- relevant product, and we have delivered on this. And we like the monthlies. I guess, there's no answer, basically. I don't know where we're going to be. I just know that what we've done this quarter generated x market share, and we're happy with that. I don't know what the future holds. Operator : Our next question comes from Josh Shanker from Deutsche Bank. Joshua Shanker : There was an earlier call from Genworth who said that they lost a major U.S. customer. I'm wondering how that shapes up in the market, and whether you'll get the same share of a large customer that the rest of the group cater as your market share in such a way that's harder for you to take a big chunk out of that new opportunity, per se? Marc Grandisson : I think we're in the same market as Genworth from that perspective, right? I mean, there are large customers, and that happens all the time, and that might decide to reallocate between provider of -- providers of mortgage insurance for various reasons. There's no grand design here. I think that this -- it could happen to us, it's happened to them, and we could -- we might be gaining what they lost and vice versa. There's nothing really magical there, Josh. I can't read much into it, much more than this. Joshua Shanker : Okay. And I saw there's decent amount of growth in property, marine, aviation, that's a pretty big catch all for a lot of things in insurance. What's going on exactly? Marc Grandisson : It's really property. A lot of it came out of the, mostly London, cat-exposed business that went through substantial rate changes, rate increases as a result of the 2017 cat events in areas like Texas and the Caribbean. So this is most of where the increase came from on the insurance side. On the reinsurance side, very seamless story. You'll see that the property also grew dramatically. We have some growth in marine, but it's largely driven by property. And for the record, it's not aviation, just want to make sure we're clear, it's not aviation. Joshua Shanker : Does this business have a lower normalized combined ratio than the aggregate book? And what I'm getting at is, is this going to cause, 1 year from today, the combined ratio, all things equal, to lower than it is now? Marc Grandisson : Everything else being equal, it should. I think that, that property cat-exposed insurance or reinsurance business will have a combined ratio of probably 60 to 70, 75, whereas a more or less cat exposed. This is absent in any cat, right? If there's a cat, of course, it be a lot worse, right? So yes, you're right, it will depend on the cat activity in the year. But, all things being equal, your assumption is right. Operator : Our next question comes from Meyer Shields from KBW. Meyer Shields : You talked a little bit about lower other expenses, I guess, you saw that in reinsurance mortgage and corporate. I was hoping you could provide a little bit more color, really, in terms of the sustainability of the third quarter versus prior 12 months run rate? François Morin : Well, yes. No question that we look at our expenses. I mean, that's something that we watch very closely. And this quarter just turned out, there's always going to be movements from quarter-to-quarter. So on corporate side, yes, a little bit lower, but I wouldn't read too much into it. Sometimes, it's just timing of some cash payments or what-have-you, some expenses that we have throughout the year, so I wouldn't read too much into that. Some -- the reality on the reinsurance side is -- lower compensation, which is the direct result of the performance of the units. No question that as we accrue bonuses throughout the year, they're based on unexpected ROE, which this year turns out may not be as good as it has been in prior years, and we're adjusting for that. So certainly, you would -- you think that the operating expenses should adjust over time based on the profitability of the units. And there's, the reality is there's also a couple of miscellaneous payments here and there that will move the needle. But again, the message is, yes, we keep looking at it. We're trying to be as diligent and do as good a job, making sure that we're spending in the money in the right places and making the right investments in our people, in our technology, in our systems. But there's no question, there's going to be some movements from quarter-to-quarter. Meyer Shields : Okay. In terms of mortgage, I guess, where he underlying seems to be getting better? Marc Grandisson : Say it again, Meyer, please. I didn't catch that? Meyer Shields : I'm sorry. So the other expenses in mortgage insurance declined, I don't know, seems significantly a lot, like $7 million, $7.5 million from the second quarter to the third, and I would maybe expect the better cure rate to drive more incentive comps rather than last year? Marc Grandisson : That was -- second quarter, we have accrual for a lot of equity-based compensation. François Morin : Yes, there's a timing of the second to third quarter. Second quarter, historically, what we've done are equity grants and there's a spike there across the board for all units. There's also, depending on whether it is retirement-age people are not, there's a different way of accounting for the grants, but that's really why comparing second quarter to third quarter is something that you got to be careful with. And just to give you a bit of a heads-up, as you plan ahead and maybe on a year overall 12-month period, doesn't make a huge difference, but we're contemplating moving the equity-based awards from the second quarter to the first quarter, so -- next year. So that might -- again, we'll give you more color when and if we get there, but that's a possibility we're exploring right now to make those all in the first quarter. Meyer Shields : Okay, that's very helpful. And then bigger picture question, I guess, for Mark. If you would isolate insurance segment casualty pricing, I guess, what are you seeing in terms of rate increase accelerating, if at all? Marc Grandisson : Whether they do or not -- most of the rate increases we've seen in casualty over the last 2 or 3 years were led by commercial auto. And it's still very hard to get significant rate increases outside of that. I think, as you know, Meyer, that is slowing down. I'm not judging whether it should or not. But I think that we're seeing that the rate increases are slowing down. And because they're going through 2 or 3 years of significant rate increase, we still are able to push rate increase in some of the E&S casualty. There are some auto exposure. But if you don't have auto exposure, it's still not clear that you can get those rate change accelerate or getting higher. And again, I think the rate on the E&S casualty will react and will start to accelerate when and if we see losses emerging. We believe we will, but we've been wrong before so -- but since the downside of being wrong is too painful, we'd rather take a pause and take a step back and just wait for that [indiscernible]. Operator : And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Marc Grandisson for any closing remarks. Marc Grandisson : Yes. We understand that there were some technical problems at the start of our webcast, and we apologize for that inconvenience. There'll be a complete replay of the call available on our website within 2 hours by 2 :00 p.m. Eastern. Again, happy Halloween. Thank you very much for listening and we'll talk to you next quarter. Operator : Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,019	1	2019Q1	2018Q4	2019-02-13	2.083	2.22	2.381	2.43	null	11.85	10.87	Operator : Good day, ladies and gentlemen, and welcome to the Arch Capital Group Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the Company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's Current Report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. François Morin. Sirs, you may begin. Marc Grandisson : Thank you, Shannon, and good morning to you all. Once again, this quarter strong earnings from our Mortgage segment offset the effects of catastrophe losses in our Property Casualty segments, as Arch produced an annualized operating return on equity of 8.8% and 10.7% for the 2018 fourth quarter and full-year respectively. Given the level of catastrophe losses across the globe in 2018, our results demonstrate again the value of our core principles of diversification, sound risk, selection, underwriting, discipline, and cycle management. François will provide more commentary on our financial results in a moment, but it's worth pausing for a minute to thank all employees at Arch who are committed to meeting the needs of our clients while producing superior returns. Given the notable catastrophe events for the past two years, we will begin our discussion of market conditions with the January 1 renewal market and property cat reinsurance. As you may have heard on other earnings call this quarter, on average, property cat rate increases at Jan 1 are positive, but below expectations given the record level of insured cat losses that were reported in the past two years. Across the industry, loss affected property accounts are rate increases of 10% or more, while some property accounts in Europe were flat to down 5%. Hidden within the underlying property cat industry average rate changes. There are some signs of tightening capacity within the retro and facultative markets, but in many case rate levels relative at to risk remain in adequate to deploy additional capital from our perspective. At Arch, we believe that we enhance our odds of doing better than the industry average by allocating capital dynamically to areas where the better risk reward trade-off and that disciplined underwriting and risk selection will remain at the core of what makes us - it has made us successful. There is reason to believe that some rate improvements may occur throughout the year as the market absorbs the recent history of large capital losses. However, uncertainty with respect to both the expected amount of capital and return on capital within the property cap markets make it difficult to predict where cat rates will be by year-end 2019. In the interest of time, I'm not going to review market conditions line by line. As I'm sure you have already heard about that on the calls this quarter, but I will list and address the underwriting environment in general. In our P&C segments in some of our insurance lines rate increases appear to be outpacing claim trends. But as we have discussed in prior quarters, we continue to believe that the risk of claim inflation rising above its long-term trend is high and we remain cautious in our allocation of capital and in setting our loss picks. The modest improvements in rates are concentrated primarily in the short tailed cat exposed business in the U.S. commercial auto and some areas of casualty. As always, we focus on the absolute level of risk adjusted returns, not just relative rate changes. Turning now to our Mortgage segment. The underwriting environment remains very attractive with ongoing growth in our insurance in-force producing strong increases in earned premium and will contribute to a future stream of earnings that is both stable and predictable. For the fourth quarter, our U.S. MI new insurance written or NIW was $16.7 billion, a 16% increase over the same quarter last year and the proportion of single premium business remain low at about 9% of NIW this quarter. Within our U.S. primary business, the credit quality of loans insured remains excellent, and our key risk barometers are still at very healthy levels. To put this in historical context, our risk indices tell us that the current borrowers credit characteristics are still substantially higher, in fact, by roughly a factor of two relative to the borrowers of the late 90s and early 2000. We have seen mortgages with greater than 95 loan-to-value grow slightly as a percentage of our NIW to about 16% in the fourth quarter. While credit quality as indicated by FICO scores, remained high across our in-force book with a weighted average score of 743. As far as the new mortgage risk transfer programs with the GSE, so named IMAGIN and EPMI facilities, we believe that these programs will continue to grow within our expectations, roughly at a modest 2% of total NIW for the market on an annualized basis. Briefly, with respect to our investment operations. Higher yields available in the financial markets and growth in invested assets, led to a 16% increase in net investment income in the fourth quarter over the same period a year ago. We remain underweight credit in interest-rate, reflecting our cautious outlook. Moving to capital management. Despite our exposure to property cat in 2018, we were able to deploy some of our capital towards expanding our distribution capabilities, deleveraging our debt and repurchasing our shares. As you know, we recently closed on acquisitions in the U.S. and the UK that are expected to expand our distribution base. Volatility in the equity markets also gave us opportunities to repurchase approximately $100 million of our common shares in the quarters at attractive prices. As in all of our capital allocation processes, we employ a rigorous and disciplined assessment of available opportunities to deploy capital in order to generate long-term returns for our shareholders across all phases of the cycle. Turning now briefly to risk management. For the past few years and continuing into 2019, our property cat exposures remained at historically low levels with our 1-in-250 year peak zone at about 4.5% of tangible common equity at January 1. We have the ability and the capacity to deploy more capital to the sector if available returns improve to acceptable levels this year. For Arch clients and investors, our ability to increase our support in times of need is a significant benefit to the marketplace and a source, we believe, of long-term value creation for our shareholders. In our Mortgage segment, our issuance of insurance linked notes, know as Bellemeade Securities have significantly reduced our shareholders' exposure to the tail effects on our business from economic recessions, and that paved the way for a significant reduction into our risk profile despite growth in our insurance in-force. With regards to PMIERs, as of December 2018, Arch MI’s sufficiency ratio was 141% of the GSE capital requirements, known as PMIER, as I mentioned. It also exceeds the proposed GSE revisions under PMIERs 2.0, which is to be effective on March 31, 2019. With that, I will turn it over to François. François? François Morin : Thank you, Marc, and good morning to all. I would like to give you some comments and observations on our results for the fourth quarter. Consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e., the operations of Watford Re. In our filings, the term consolidated includes Watford Re. After-tax operating income for the quarter was $189.2 million, which translates to an annualized 8.8% operating return on average common equity and $0.46 per share. For the full-year, our operating ROE stands at 10.7%, a solid result in light of the elevated catastrophe activity in the second half of 2018, and a pricing environment in the P&C sector that remains competitive. Book value per share was $21.52 at December 31, a 1.7% increase from last quarter and a 6% increase from one-year ago, despite the impact of higher interest rates on total returns for the quarter and the year. Moving on to underwriting results, losses from 2018 catastrophic events in the fourth quarter, net of reinsurance recoverables and reinstatement premiums were $118.2 million or 9.7 combined ratio points. These losses were predominantly the result of Hurricane Michael hitting the Florida Panhandle and the California wildfires, but we also felt the impact of other minor events across the globe. As for prior period, net loss reserve development, we recognized approximately $74.4 million of favorable development in the fourth quarter, net of related adjustments or 6.1 combined ratio points compared to 4.6 combined ratio points in the fourth quarter of 2017. All segments were favorable led by the Reinsurance segment with approximately $33 million favorable, the mortgage segment also at $33 million favorable and the Insurance segment contributing $8 million. This level is consistent with a third quarter 2018 results as we continue to benefit from significant favorable development in our first-lean portfolio in the mortgage segment where cure rates this year are continued to be materially higher than long-term averages and expectations. The Insurance segments accident quarter combined ratio excluding cats was 98.3% slightly lower than for the same period one year-ago. Most of the improvement came from lower levels of attritional losses and acquisition expenses. The Reinsurance segment accident quarter combined ratio excluding cats stood at 96.2% compared to 103.2% on the same basis one year-ago. As we mentioned on prior calls, we tend to look at trailing 12 month analyses in order to assess the ongoing performance of our segments, given the inherent volatility in the business that can emerge from quarter-to-quarter. The year-over-year comparison for the Reinsurance segment is affected by a few notable items. First, as we mentioned on a previous call, our acquisition expense ratio last year, reflected the federal excise tax is associated with a large internal loss portfolio transfer. Second, our loss experience this quarter was impacted by a large attritional casualty loss arising from the California wildfires and third, we had a noticeable amount of reinstatement premiums and premium adjustments this quarter that benefited our combined ratio. Once we adjust for these variations, the underlying performance of our Reinsurance segment remains strong this quarter. The mortgage segment's accident quarter combined ratio improved by 1,410 basis points from the fourth quarter of last year as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 2.1% in the fourth quarter of 2018 compares favorably against the 17.8% in the same quarter of 2017 due to substantially lower delinquency rates. Part of the difference is attributable to increased favorable prior development, which was approximately 320 basis points higher than last year. In addition, there was approximately $13 million or 410 basis points of favorable development on 2018 delinquencies due to very strong cure activity in the period. The expense ratio was 20.5% lower by 160 basis points than in the same period one year-ago as a result of expense savings achieved. I'd like to remind everyone that due to the nuances of purchase accounting, the amortization of our debt asset should continue to increase in 2019 by an amount that is approximately $8 million higher on an annual basis than 2018 levels increasing acquisition expenses acquisition expenses. These results highlight the contribution to our pre-tax underwriting income from the mortgage segment, which remains strong this quarter. After allocating corporate items such as investment income, interest expense and income taxes to each segment, the mortgage segment's contribution toward 2018 net income decreases to approximately 75% of the total after normalizing our results for catastrophic activity. Total investment returns for the quarter was positive 51 basis points on a U.S. dollar basis and a positive 83 basis points on a local currency basis. These returns high light the defensive high-quality position of our fixed-income portfolio and solid result in our alternatives portfolio in light of a volatile quarter across global financial markets. During the quarter, we continued to move away from municipal bonds and into corporate and government bonds due to relative valuations. The repositioning of our portfolio during 2018 combined with the reinvestment of shorter maturity bonds and other swab activity at higher yields generated higher investment income year-over-year. We extended the duration of our investment portfolio in the quarter to 3.38 years, up from 2.94 years on a sequential basis as global economies weekend. Operating cash flow on a core basis was a strong $384 million in the quarter, reflecting the solid performance of our units. The corporate effective tax rate in the quarter on pretax operating income was 16.8%, and reflects the benefit of the lower U.S. tax rate, the geographic mix of our pretax income and a 210 basis point expense from discrete tax items in the quarter. As a result, the effective tax rate on pretax operating income, excluding discrete items, was 14.7% this quarter, higher than the 9.9% late last quarter. The difference from this rate to the numbers noted in our recent prerelease is primarily attributable to discrete items in a higher level of U.S. based income, which triggered a true up of tax accruals for the first three quarters of the year. As we look ahead to 2018, we currently believe it's reasonable to expect that the effective tax rate on operating income will be in the range of 11% to 14%. As always, the effective tax rate could vary, depending on the level and location of income or loss and varying tax rates in each jurisdiction. With respect to capital management, we paid down the remaining $125 million of our revolving credit facility during the quarter and we also repurchase 3.6 million shares at an average price of $27.11 per share and an aggregate cost of $98.2 million under our Rule 10b-5 plan that we implemented during this quarter’s closed window period. Our remaining authorization which expires in December 2019 stood at $164 million of December 31, 2018. Our debt to total capital ratio was stood at 15.5% at year-end and debt plus preferred to total capital ratio was 22.5% down 390 basis points from year-end 2017 and a full 620 basis points from year-end 2016 when we closed a UGC acquisition. Finally, I would like to bring to your attention a change we are introducing in 2019 regarding or incentive compensation practices. As you know, equity grants made to employees had historically been awarded in May of each year. Starting this year, equity grants are expected to be awarded in the first quarter subject to Board approval. As a result, we would expect a small distortion in the timing of our operating expenses. The impact of this change based on 2018 equity grants is an expected shift of approximately $11 million to $13 million in operating expenses from the second quarter to the first quarter of 2019. Two-thirds of that expense is expected to be reflected within or operating segments with the remainder in corporate expenses and investment expenses. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Kai Pan with Morgan Stanley. Kai Pan : Thank you. Good morning. MI segments continue to show very strong results, is the 16%, the underlying loss ratio, a good run rate going forward? Or you see continued improvements from there? Marc Grandisson : The loss ratio has been very good and actually, better than we had anticipated, probably a year, a year and a half ago. So we have ongoing improvement in notice of default and cure rates. So right now, everything we're pointing to is much less than the long-term average, which will be 20%, I would think, overall cycle. So yes, you could pick your number, Kai, it's very hard to predict the future, but certainly, we are in a very benign loss environment. Kai Pan : That’s great. If you take out, I mean, that large amount of reserve releases, the reported loss ratio below 10%. Had it been around 10% or less for the last several years, at what points the regulator, would you say, the results is too good? And would be more focused on either pricing or competition could start to come in? Marc Grandisson : Well, I think, I'm not sure whether regulars would do, but from our perspective, this is still a risky insurance product like everything else is out there, and what matters is, where are you about the return. And I would argue that even if you have a little bit higher than average return in the current environment, that’s probably more than makes up for some of the bad year that have occurred to the industry. So we're not losing sleep over this. There was no commentary to the effect that the loss ratio is too high or too low. In fact, I would even argue that the new capital framework from the GSEs are leading us to a directive – in a direction of still appropriate level of capital and return in the industry to make sure it’s a solid framework for housing finance. Kai Pan : That’s great. Hopefully, the industry have a lot of memory. So on the reinsurance side, the topline growth is very strong even without the reinstatement premiums for the quarter. Could you talk a little bit about what do you see growth opportunity and what kind of return you're getting from those businesses? Are they higher than your existing business? Marc Grandisson : Yes. So the growth year-on-year is a little bit of the story. If you look at the last four quarters, it's more consistent. The growth that we've seen over the last 12 months is continues to be areas that we've talked about before, international motor quota share. Actually some commercial auto, we have some opportunities in there and some workers comp opportunities of all things. So there's a lot – and some property specific, property cat related exposure in the reinsurance group as well. So the growth that we're seeing in reinsurance is consistent with our fishing and looking around in the world for good returns, better risk adjusted return if we can. No way from them, probably the more traditional commoditized reinsurance business. So it’s a little bit more bespoke than the rest of the things you would hear about in the marketplace. Kai Pan : Okay. Last one, if I may, on California, you have losses both from the property side as well as the liability side. So how do you think the market going forward, in terms of pricing, in terms of like any sort of like your risk appetite in the market on both the property side as well as the liability side for the utilities? Marc Grandisson : Yes. So on the liability side, it’s a little bit easier to answer it because these things almost – a lot of question mark in the industry as to whether these are insurable and at what level and at what price. And as you know, it's not a big market. And currently the player that's been tagged or had been identified as being liable for that loss is going through a lot of difficult times, but we'll see how that develops, which currently developing as we speak. This is still a very small market, right, in a broader scheme of things. As far as the property is concerned, it's really uncertain. As I said in my opening remarks, the capital supply is still plentiful. There were talks at the beginning Kai, maybe that's what you alluded to the fact that there might be some changes to the modeling of California wildfires, but it's still very early. People are still trying to figure out what they have and what it means in their modeling. And as you know, it's a little bit isolated in fact, right. It's isolated to one area of the country and people will have a way to manage a portfolio and deploy capital in other areas. So it's a very hard question to answer because we don't know what the supply of capital is going to be by midyear. But largely, it would dictate, it should go up to some extent, but we'll see what happens. Kai Pan : Great. Thank you so much and good luck. Marc Grandisson : Thanks Kai. François Morin : Thank you. Operator : Our next question comes from Geoffrey Dunn with Dowling & Partners. Your line is open. Geoffrey Dunn : Thanks. Good morning. Marc Grandisson : Hey, Geoff. Geoffrey Dunn : I was hoping you could comment a little on the ILN market. Now that all the – just about all the MIs are using that market and indicating that they plan to use it on recurring basis, are you seeing any change in terms, conditions, appetite? Or is it as steady as it was over the last few years? Marc Grandisson : No, what we've seen that there's actually no indication that it's weakening. We see tremendous investor appetite for the product. As you know, that the GC's really started that we were in there as well as the soul MI that was accessing that market in the last year, most of the others have jumped into, I call it, the bandwagon. And it just makes it for, I mean, investors now have the ability that when they do their research, they do the analysis, they feel it's something that's repeatable. They can access that type of product not only through us, but also through some of our competitors. So as far as we can tell, there's still tremendous appetite for the product and it's expanding a little bit, getting some of our instruments rated has also helped, but we see that as something that there's nothing on the horizon that suggests that we will be able to execute on it. François Morin : And to add to this, Geoff, I would also argue that the spreads are not widening, we don't see any indications of spreads widening. So this appears to be a stability of pricing expectations in the product as well. Marc Grandisson : Volatility here and there, but in the long-term, we said, yes. Spreads have been very stable. Yes. Geoffrey Dunn : It looks like you took another dividend this quarter, should we take that to assume that the regulators are also comfortable with this market and view it as true capital relief? François Morin : Absolutely. Geoffrey Dunn : Okay. François Morin : I mean, we argue, it's even better than traditional reinsurance because we have the cash on hand, so it's collateralized from that point of view, they… Marc Grandisson : If they were to accept it, they should be happier than just other forms of capital. I mean, aside from just the traditional equity. Geoffrey Dunn : Okay. And then a follow-up on new notice development, is the Company's book reaching at an inflection point where even though the new vantages are very high quality and outperforming, but book size is obviously, in the season is going to drive this new notice levels. Are the more recent vintage is now exiting the benefit of the runoff of the 2008 mean that we should see on average new notice growth going forward? Marc Grandisson : We I think we will at some point. I'm not sure that we've crossed it yet. It's very hard for us to see and put to predict that. But you're right, over time, we would expect at the 2009 in prior – the 2008 in prior, is it going up. Yes, we would expect that. I'm not sure that we are there yet. Geoffrey Dunn : Okay, great. Thank you. Marc Grandisson : Thanks, Geoff. Operator : Our next question comes from Josh Shanker with Deutsche Bank. Joshua Shanker : Good morning, everybody. Marc Grandisson : Good morning. Joshua Shanker : So I was noticing the trend and it's not so surprising that the proportion of new policies being renewed on the mortgage segment that are coming from refi’s get smaller and smaller all the time, now down to 5%. Is there any difference ultimately you think, in the quality of a refi mortgage versus a new mortgage? I guess you know of the refi mortgages is better. At least the market knows them better? How should we think about that? Marc Grandisson : Yes, clearly, there tends to be at the margins, quality for the finest market. It's clearly not a target market for the MI market, right? So broadly you are right, but in terms of what pertained to the MI market, our penetration for origination of MI, of mortgages in the refinance is 5% to 6%, so it's very, very small. The market that we are targeting that is really our bread-and-butter, if you will is a purchase market, and that's still pretty healthy, and that's really what we've been focusing on. So having said all this, if you look at it historically, the brand of the cycle with the brand of the DTI has been fairly consistent and I think that speaks to that there's not much of a difference between the credit requirements, whether you will be financed or whether you purchase. Joshua Shanker : And not too much on the refi but typically, if you are what your MI on the refi mortgage, were you the MI on the mortgage that's replacing? Marc Grandisson : Not necessarily because you be refinancing with a different financial institutions and at the end, that institution may have a different agreement with a different MI, not necessarily. Joshua Shanker : Okay. And switching gears, on the wildfire liability – look obviously that was a difficult loss two years in a row. But the pricing might have been adequate to take that. A lot of times though in certain markets, the market really isn't a big enough to give you a payback, no matter how good the pricing is. Do you think you'll get a chance to write wildfire liability this year, and as a market sizable and attractive enough to make it a worthwhile business to write on a multi-year basis? Marc Grandisson : Yes, the answer is yes to all of those. I think in general, we don't think of either being in the market or not, be based on size. I think what it means to us is we would put in Malaysian to the market size, our commitment to that marketplace. And you have to – the interesting in Reinsurance, Josh, is you have to forget last year and look forward, because if you look back to what the losses you had, you don't have to make the money that you’ve lost. That’s clearly one thing that we always live by everyday. But certainly every time the proposition comes to us, provided we have the right information and the right perspective on the loss, if there's a profitable thing, we would do it regardless of the start of the market. Only thing that we would do is right size, our commitment to that specific market based on its size relative to the broad capital base of the company. Joshua Shanker : And is that a midyear renewal? Marc Grandisson : I believe so. Yes, everyone has multiyear, yes. Correct. Joshua Shanker : Okay, thank you. Marc Grandisson : Thanks Josh. Operator : Our next question comes from Michael Zaremski with Credit Suisse. Your line is open. Michael Zaremski : Hi, good morning. Marc Grandisson : Good morning. Michael Zaremski : First off, François, in the prepared remarks, you made comments about actions you take on the expense side to improve the ratio and that the trend has been improvement over the last year or so. This quarter came in, I think better than expected is any one-time in there is that improvement? Somewhat sustainable. Marc Grandisson : Well are you referring specifically to mortgage? Michael Zaremski : Yes. François Morin : Yes. Well mortgage, right, we acknowledge internally that it's been two years since the acquisition and we're basically completed with the integration and we told hopefully we – you guys will remember that we told you it'd be a journey. We'll take a couple of years to fully integrate the two operations. And we're at the stage now when you compare obviously, year-over-year Q4 2017 to Q4 2018, we just realize more savings and technology and people et cetera. So I think we're kind of there. There's also a bit of seasonality that comes into play, but that we're truly in a good spot in terms of where we want to, where we think our expense base and especially operating expenses will be going forward. Michael Zaremski : Okay. Got it. And sticking with the Mortgage segment. Marc, you made a interesting stat you made in the prepared remarks about mortgage credit quality being approximately, I think you said 2x better than prices levels. Maybe you can further elaborate on what's behind that viewpoint? Marc Grandisson : We have internal proprietary credit analysis evaluation and you could also look at some things that are published by outfits of [Fairview Urban Institute]. And you will look at the relative you credit quality, based on an index, looking at a 90s early 2000 factoring income, credit score and all these various aspects of a credit worthiness of the borrower. And when you, run it through the grinder if you will, and you've come up with a number at the end, that number is half of what – half of what it was back in the late 90s in 2000. So this may on a comparable basis long stay it to be as apples-to-apples that's can be, Michael Zaremski : Okay. It's interesting because we know qualitatively there's lot of reasons why credit qualities most likely better. So it's interesting that you're trying to quantify that’s helpful? Marc Grandisson : Yes. Very, very much off. Yes. Michael Zaremski : And so I just follow-up on that and maybe I am missing this from the supplement. I can get it offline, but at what percentage of the mortgage insurance portfolio has reinsurance protection and what's the average duration of that reinsurance protection? Marc Grandisson : That's a good question. I mean I don't have the numbers right in front of me, but it's… François Morin : A couple of things about 50% quarter share with AIG… Marc Grandisson : In years 2014 through 2016. Then you have Bellemeade. We have about $1.1 billion of outstanding limits. On the Bellemeade that covers about two-thirds. Two-thirds of our portfolio has reinsurance against it. Thank you. Michael Zaremski : Okay. And the duration of the Bellemeade transactions roughly? François Morin : Well, there are 10-year transactions, right? So they're all different, some have features where we try to have the coverage be enforced for a bit longer, but I would say, about five years is probably something where we – as we keep rolling off, we're adding new ones. So I think that should remain pretty stable as we move forward. Michael Zaremski : Okay. Thank you very much. François Morin : Thank you. Operator : Our next comes from Elyse Greenspan with Wells Fargo Securities. Your line is open. Elyse Greenspan : Hi, it's my first question. So you guys said, if you normalize for cats that you're seeing mortgage, I think you said about 75% of earnings, I guess, what do you view as your normal cat load since your P&Ls have come down, right. But we're coming off of two years of pretty high cat losses? François Morin : Well, the cat load roughly in is about 30 million a quarter, 30 million to 35 million a quarter that scan of where we've been – what we've been running at the last couple of years. And in these numbers that I quoted really all we do is replace effectively the actual cats with the expected or the cat load. So that's, hopefully that answers your question. Elyse Greenspan : Okay. And then, so when you give us the tax rate guidance for the coming year. You're also assuming that cat's fall within that normal level, correct? François Morin : Correct. Yes. That's full-year forecast. Expect with an unexpected GAAP year, which as you know as usually not the case. It's either lower or higher, but yes. Elyse Greenspan : Okay. And then on reinsurance, you guys seem to kind of be cautious and balanced in terms of what might happen at the midyear renewals. Marc how much would you say you need rates to go up for Arch to, one materially write more cat business, if you want to talk separately about what you might want to see at April 1 versus 6/1 and 7/1 in Florida? Marc Grandisson : I guess I could tell you a lot more, but that's not going to get you what you want. So I think if you go back at least to one of my comments about six quarters ago, looking back at the characteristic at the time the numbers were 35% to 40%, to really start getting us to the risk-adjusted return that we believe is appropriate. We've had since maybe 10% to 12% rate increase, so that tells you we’re probably 25% to 30% still short of rate change to really get there. And again, I want to caution everyone that's listening to this saying that, that 20%, 25% is not going to come across the board all at once. There's some pockets that need a bit more than this, some that need a little bit less than this. But that gives you a flavor for how much more we believe we need to get us to start going the path of deploying more capital. Elyse Greenspan : Okay. Thank you. That’s helpful. And then on the mortgage side, as some of your competitors have adopted risk-based pricing models as well, have you seen started to observe a broader impact on the market? Kind of anything changing there? Marc Grandisson : Nothing yet. It's still very, very early. So we'll have to wait and see how it's rolled out, how it's actually developing in the marketplace. And I would say that for everybody's benefit that our risk-based pricing was created back in 2011. This is our UG – well, now our U.S. MI operation, and there is a lot of things that need to happen to have the run rate. So we're going to have most likely some bumps along the way. Our competitors are going to be trying things and figuring out things that work and don’t work out as well. So we're bracing for it. But the key thing from our perspective is we're keeping steady in our grid and our risk-based pricing and we're going to take, you know, whatever market, however they react, we'll be the beneficiary or we'll lose some business because it's mispriced based on our own. But it's too early to tell, Elyse. It's going to take a while. Elyse Greenspan : Okay. Great. And then now there's some concerns on the outside in terms of recession and impact on credit and how that might play out, late this year, maybe into 2020, as you guys, obviously alluded to credit being really strong relative to past cycles, but what would you be paying attention to, to see the potential turn in the credit cycle? Marc Grandisson : Right now, I think if you look historically at what went wrong, it really did not – I mean, certainly the credit quality or the credit worthiness of the borrower is extremely important, right. But what happened historically that really created the issue is a product development. If the product I'll be – like low DAC, no DAC, I'll say all this stuff comes back to the market. This is what would be worried about. Of course, the macro things that could impact everything is the housing price depreciation across the economy. The one thing that we're not worried about – the reason why we're not so worried about right now is because there is a shortfall on housing supply and has been there for quite a while. So everybody is predicting smaller price increase in house prices, but still positive for the next two or three years. So recession could probably put a bump on this. So if you look at it historically on some recessions in the past, we had times when house price increased by 1%. The only time it went down guys for your benefit and that's actually very useful to know, is only in the 2007, 2008 crisis. For the last 45 years, it never – the house price index, despite having gone through five, I think, different recessions, only came down once. The price index came down once. So the product is really the problem, Elyse, and we don’t see anything yet. Elyse Greenspan : Okay. Thank you very much. I appreciate all the color. Marc Grandisson : Thank you, Elyse. Operator : Thank you. Our next question comes from Meyer Shields with KBW. Your line is open. Meyer Shields : Great, thanks. Marc in your introductory comments, you noted not just that loss tends to get worse, but they could resume sort of above-average levels. So I was hoping you could sort of clarify why that is a concern right now? Marc Grandisson : Because we’re seeing some changes in some of our submissions and some of our data, it's still very early signs and it's really anecdotal, sometimes anecdotal, sometimes it’s actually real. So we're seeing loss trend picking up in certain areas and we believe it's only a matter of time before it starts spreading to other lines of business. And Meyer, as you know, we're students as well of the industry, and the CPI is about 1.8%, 1.7%, as I've mentioned that in prior calls. The inflation – or the insurance inflation is typically running ahead of it by 1.50% to 2.50%. So I would expect the trend that could be recapturing, having a very vibrant economy exposure growth and more friction in the marketplace, we would expect those to generate more losses. And the reason we're putting that out, Meyer, is because I want to put that into perspective of the price increase that we talk about on average, being 200 or 250 or 300 bps. It just doesn't make for a lot of margin of safety as you go about in analyzing how you allocate capital between lines of business. And as you know, more probably than I do is when you write a business in insurance policy, it takes years for you to really find out how bad or how good it's going to be. So we tend to take a more cautious approach to it. Meyer Shields : Okay. That’s very helpful. Thank you. Quick modeling question, with the recent U.S. and UK acquisitions, are those going to produce any appreciable change in the expense ratio? François Morin : Well, I mean both acquisitions were in the mortgage segment. So I would say that the expense ratio, yes, no question that in one of our acquisition in the UK, maybe a bit of integration expenses that will have – that will be reflected. But all-in-all, that you've given that the U.S. one was something that we – it's a partner as a business that we've done business with many, many years. That should not really impact the expense ratio. And the final thing, which you'll see in the 10-K is that we'll certainly trigger a bit slightly higher intangible amortization expenses that start coming through in 2019. Meyer Shields : Okay. And that’s segment or corporate? François Morin : Well the intangibles is all one number altogether. So – when we finish up our analysis and we published a 10-K in a couple weeks, you'll see that the slight changes in – from what we published year-ago which was primarily UGC related. Meyer Shields : Okay, fantastic. Thank you. François Morin : Thank you. Operator : Thank you. Our next question comes from Brian Meredith with UBS. Your line is open. Seth Rosenberg : Hey, guys. Seth Rosenberg here for Brian, thanks for taking my questions, I’ve got one for you. So if you look at the Insurance segment, large losses improved versus last year, but if you look back at last year, I think you had called out 2.2 points, which was elevated at time. So if you kind of just take this quarter in a vacuum and not the comparison. Will you say that large losses were better or worse in line with expectations and as because so many companies are calling at a higher frequency and severity of large losses? So just trying to get a feel if there something in loss cost there that concerns you? Marc Grandisson : Right. So our insurance group had some lumpiness to it, right. Not as much as reinsurance for obvious reasons, but there's still some quarters that are above average or below average. This quarter was sort of an average quarter for us in terms of large risk loss or non-attritional loss, as they call it. We have a hard time for everybody's benefit, slicing and dicing the losses in so many different sections. At the end of the day, we are providing insurance coverage for all kinds of losses. So this is what you're seeing right now is sort of what is a loss speaking to instead of all the things that could happen in our portfolio. Seth Rosenberg : Got it. So nothing particular to construction cost or labor that really stuck out in terms of severity? Marc Grandisson : No. If anything would've happened there, it would be already factored in our loss ratio effect. Seth Rosenberg : Got it, thank you. And then switching over to mortgage, last year the delinquency rate kind of spiked up due to the storms in the third quarter. No reason to believe that it would be a similar dynamic in the first quarter from Michael and the wildfires? François Morin : No. We looked at this and we also thought about the government shutdown, which was on the horizon, but there's certainly GSE rulings that prevent us from these potential delinquencies developing into claims. And going back to the hurricanes, 2017 was different in the sense that both – in particular Harvey, where flooding was persistent for a number of weeks and is more damaging than Michael that came in and through that really have an allocated timeframe to the event. So at this time, we don’t think there will be any spike in our delinquency just from the cats. Marc Grandisson : As far as the government shutdown, Trump signed up something at the end of January, so it's releasing that base. So that should be a long way to alleviate any of our concerns there. Seth Rosenberg : Great. That makes lot of sense. Thanks guys. Operator : Our next question comes from Amit Kumar with Buckingham Research. Your line is open. Amit Kumar : Thanks and good morning. Just two quick follow-up if I may. The first question goes back to the discussion on wildfire casualty losses. I just wanted to understand a bit better, if the utilities numbers change or if there is any other development, does your current number remains static or how was that reserve, maybe just help me just explain that a bit more? François Morin : Well, from our point of view it was a – it's fully reserved. So there's no adverse development that we can see on this particular claim. Yes. It might with bankruptcy court and things could change, but if they change, we think they'll be in our favor. They'll reduce the number. But we’ve taken the most conservative view that we can think of at this point and we'll see how things play out. Amit Kumar : And what is the size of this book for you in terms of percentages? Or any would sort of think about it? François Morin : Well, it's really a one-off, right? It’s not a book per se. We have a small unit that focuses on these kind of the bespoke transactions. Typically there's a lot of them that are property type deals. This one was a casualty deal as well. And as you know, these, these deals come to the market infrequently that you don't know when they're coming. You look at the opportunity, you assessed the risk, you make a decision on the pricing and if the risk adjusted returns are there, we try to participate. So at this point, I mean it's really not – it's not really a book in itself. It's an emigrant, an amalgamation of policies that we write down in the ad-hoc basis. Marc Grandisson : And Amit, the one thing that's interesting with this one because it's such in a high price to get out of breath. You don't hear about the [98] others that are actually that worked out to our favor, but let’s leave it with that. Amit Kumar : That's a very fair point. I guess the only other question I had was going back to the discussion on buyback. And I think in your opening remarks you talked about the volatility in the market is going to giving you an opportunity, the buyback, obviously, was higher than my numbers and discrete numbers. In the past, we used to talk about a matrix and in – there used to be a matrix on your website, which I was having trouble finding. Are we still utilizing that payback matrix? Or how should we think about future buybacks? François Morin : Well, yes. The matrix that you're referring to is still the starting point of our analysis. And the question that comes up often from many – many of you on the phone is, is with the growth in the mortgage segment. Does that matrix or that view change? And the answer is, is does, but it's not black and white. What we like and we told everyone before about the mortgage segment is that we liked the visibility and the predictability of the earning stream that it gives us. So the three-year payback that we've targeted in the past, we have a view that yes, maybe we'd be willing to extend it to four years to five years, who knows. But that's always considering all the options that are available to us. We talk about acquisitions, we talk about reducing your leverage. So there's all these aspects of capital managers when they come into play and yes, I mean, so hopefully that answers your question. So that the grid is still there, but it had – we have some flexibility around it. Amit Kumar : Got it. That's what I was looking for. That's all I have. Thanks for the answers and good luck for the future. Marc Grandisson : Thanks. Amit. Appreciate it. Thank you. Operator : Our next question comes from Yaron Kinar with Goldman Sachs. Your line is open. Yaron Kinar : Hi, good morning. Just one quick one. Can you recap the cat losses by event? François Morin : Well, we typically haven't done that. So that's the number you have in front of you is both for wildfires and Michael Bright, predominantly with a few, a small others along as well. Yaron Kinar : Okay. And maybe one follow-up and as you look at the market into 2019? Would you expect opportunistically to grow the property cat book and the property cat exposure? François Morin : Like I said, if we get the rates that we think are warranting an increase, we will increase. And we have increased some property exposure in the last quarter. So there were some opportunities to do it. As we said, it's just not a broad-based market opportunity, but we always look out for specific transactions or relationships to really take advantage of that. So we have – we're present on front street, we're open for business as you know, and we will do it, if it's there. Yaron Kinar : Okay. Thank you very much. Marc Grandisson : Thanks Yaron. Operator : I'm not showing any further questions. So I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you very much, everyone. It was a good year. Appreciate your time, and happy Valentines to all of you guys. François Morin : Love you all. Marc Grandisson : Thank you. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,019	2	2019Q2	2019Q1	2019-05-01	2.22	2.29	2.509	2.61	null	11.83	12.42	Operator : Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Arch Capital Group Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call may be recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thank you, Crystal, and good morning to you all. We have had a good start to the year as Arch grew book value per share by 7.4% to $23.12 at March 31, and generated operating earnings of $0.67 per share due to strong underwriting and investment results in the first quarter of 2019. As mentioned on our call last quarter, we continue to see modest upward rate movement in property and select casualty lines, along with reductions in ceding commissions paid by our reinsurance units. Our mortgage insurance or MI Group continues to operate in a market characterized by historically strong credit conditions and conservative lending standards. For Arch, this is an underwriting market where selection and segmentation remain key to generating favorable results. It is not a one size fits all market by any means. On the one hand, we believe that the modest improvement in the property and casualty markets reflect broader economic growth particularly in the United States, while on the other hand we see inconsistent evidence of increased discipline by underwriters. We can sum up our view of current market conditions with two key virtues that describes how we operate at Arch, prudence and patience. Prudence has been a good advisor to us. In our P&C segments, rate changes in the quarter for our Insurance Group has been positive, but ranging in any one line from minus 5% to plus 8% averaging about plus 2.3%. Considering that insurance lost trend or claim inflation typically runs about 200 bps above the CPI, we remain prudent in setting our loss picks and allocating additional capital in any single line given the uncertainty of future loss costs. Prudence in our reserving process dictates that we maintain an appropriate margin for error, because reserving errors can lead to pricing errors. We saw modest growth in the first quarter of 2019 in our Insurance Group as net written premium increased 8% due in part to the UK acquisition we mentioned last quarter. The balance of the growth was from a combination of rate and new opportunities in short and medium tail lines. In typical Arch fashion, we remain focused on risk adjusted returns and patience means that we seek evidence of acceptable margin improvement even as the market experiences some pullback in capacity, such as in the larger commoditized lines and also within some E&S markets that you have heard about on other calls. Within our Reinsurance Group, property cat exposed rate are moving up after absorbing severe industry wide catastrophe losses these past two years. These losses have caused some dislocation in capacity across the industry and have paved the way for new opportunities which our underwriting teams were able to participate in. However, we remain focused on the absolute level of risk adjusted rates and selective in our approach to cat exposed business. Now turning to our MI segment, overall the underwriting environment remains very attractive. Growth in our insurance in-force is producing increases in earned premium and contributing to a future stream of earnings that is strong and predictable. In MI, the key underwriting characteristics that drive earnings are credit quality and the economy, with which more than pricing drive ultimate performance. Therefore, even as pricing has become more competitive, credit quality remains excellent and key macro-economic factors are very good which has resulted in very strong risk adjusted returns. As you may know in MI from an accounting standpoint these returns will be reflected in earnings over several years. For the first quarter of 2019 our U.S. MI new insurance written or NIW was $11.2 billion down about 2% from the same quarter a year ago. While NIW reflects business written in the quarter, the more relevant indicator of insurance earnings is insurance in-force which Arch MI U.S. grew to $277 billion at the end of March of 2019. As with all our business units, in MI, we are focused on returns rather than market share and we intend to remain disciplined and agile. We believe that our long experience with RateStar and our insurance linked notes known as Bellemeade Securities provide Arch a competitive advantage with respect to risk management, our interface with lenders and our upfront risk selection. As I alluded to earlier, our key risk parameters are at very healthy level -- levels. Credit quality as indicated by FICO scores, remain strong across our enforced book with a weighted average score of 743. Our combined ratio in our MI segment remains exceptional at 25.6% in the first quarter which is substantially better than the long-term industry average of the mid to high '40s. With respect to our investment operations, higher yields available in the financial markets produced excellent results on both a yield and total return basis. Turning briefly now to risk management. For the past few years and continuing into 2019 our property cat exposures remain at historically low levels with a 1-in-250-year peak zone at about 4% of tangible common equity at April 1. In our MI segment, our issuance of Bellemeade Securities continued the pace with our second issue this year that closed yesterday and provides $620 million of reinsurance indemnity on more than $35 billion of insurance in-force. We have issued $3.5 billion of Bellemeade Securities over the past four years which remains an important part of our risk management capabilities. As of today, Bellemeade Securities provide protection on more than 90% of our existing insurance in-force. With regards to PMIERs, as of March 31 2019, Arch MI's U.S. sufficiency ratio was 146% of the GSE capital requirements known as the PMIERs as I mentioned. With that in mind, and with that, I will turn it over to Francois Morin to provide you more specifics on our quarterly results. Francois? Francois Morin : Thank you Marc, and good morning to all. Before I give you some comments on observations on our results for the first quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis which corresponds to Arch's financial results excluding the other segment, i.e., the operations of Watford Holdings Limited. In our filings the term consolidated includes Watford. As you know Watford;s common shares began trading on the NASDAQ Global Select Market on March 28, 2019. While this event now provides a market price on the value of our ownership in Watford, it does not impact the presentation of our financial statements or any of our disclosures which have remained unchanged since Watford's formation in 2014. After-tax operating income for the quarter was $275.9 million which translates to an annualized 12.3% operating return on average common equity and $0.67 per share. Book value per share was $23.12 at March 31st, a 7.4% increase from last quarter and a 13.3% increase from one year ago. This result reflects the effect of strong contributions from both our underwriting operations and our investment portfolio. Moving on to underwriting results, losses from 2019 catastrophic events in the first quarter, net the reinsurance recoverables and reinstatement premiums stood at $7.9 million or 0.6 combined ratio points. These losses were nearly all observed in the results of our Reinsurance segment which were impacted by a handful of minor events across the globe. As for prior period, net loss reserve development, we recognized approximately $36.7 million of favorable development in the first quarter net of related adjustments or 3.0 combined ratio points compared to 4.6 combined ratio points in the first quarter of 2018. Both the Insurance and the Mortgage segments experienced favorable development at $1.7 million and $36.6 million respectively. The Reinsurance segment experienced the minor amount of approximately $1.6 million of adverse development, including $16 million related to Typhoon Jebi. The increase for this event reflects updated loss information received from SINS [ph] and additional industry data. The mortgage segment benefited from significant favorable development in our first lien portfolio or cure rates observed in recent quarters continued to be materially better than long term averages and expectations. The insurance segments accident quarter combined ratio excluding cats was 100.2%, 150 basis points higher than for the same period one year ago. The year-over-year comparison for the insurance segment is affected by two notable items. First, as we mentioned on our previous call, our operating expense ratio was impacted by the shift in the timing of share based compensation from the second quarter to the first quarter. This shift increased the first quarter expense ratio for this segment by approximately 94 basis points relative to one year ago. Second, we continue to invest in our insurance operations including the integration of recent acquisitions in the U.S. and the UK. The most notable impact to our expense ratio this quarter relates to our U.K. regional book, whose operating expenses added 110 basis points to our overall expense ratio for this segment. As mentioned in the earnings release, we did not acquire an unearned premium portfolio with this acquisition and as a result the expense ratio will remain higher than the long-term run rate until the associated earned premium reaches a steady state. Overall, the underlying performance of our Insurance segment showed improvements in the quarter mostly due to lower levels of attritional losses and acquisition expenses. The Reinsurance segment accident quarter combined ratio excluding cat stood at 92.4% compared to 93.4% on the same basis one year ago. As we mentioned on prior calls we tend to look at trailing 12 month analysis in order to assess the ongoing performance of our segments given the inherent volatility in the business that can emerge from quarter-to-quarter. The year-over-year comparison for the Reinsurance segment is affected by the presence of a $10.2 million premium retroactive reinsurance transaction we entered into this quarter, which contains sufficient risk transfer for insurance accounting treatment under GAAP. While the overall combined ratio for this segment was basically unaffected, the impact of the transaction to each of the loss and expense ratio components was more observable, with the resulting increase of 90 basis points to the loss ratio and a decrease of 80 basis points to the expense ratio. Overall we were able to reduce our expense ratio by approximately 400 basis points, mostly as a result of the growth and earned premium since the same quarter one year ago, the retroactive reinsurance transaction just mentioned and the shift in business mix. Once we adjust for these variations the underlying performance of our reinsurance segment will remain stable this quarter. The Mortgage segments accident quarter combined ratio improved by 650 basis points from the first quarter of last year. As a result of continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 3.5% compares favorably to the 15.5% in the same quarter of 2018, due to substantially lower delinquency rates. Part of the difference is also attributable to increased favorable prior development which was approximately 670 basis points higher than last year. The expense ratio was 22.1% lower by 120 basis points than in the same period one year ago, as a result of a higher level of earned premiums. Total investment return for the quarter was a positive 270 basis points on a US dollar basis and a positive 348 basis points on a local currency basis. Contributing to this result was our decision to extend our portfolio duration slightly during the second half of 2018 combined with the defensive high quality position of our fixed income portfolio and the solid performance of our equity portfolio consistent with the recovery in global financial markets. The repositioning of our portfolio during 2018 combined with the reinvestment of shorter maturity bonds of higher yields generated higher investment income year-over-year. We also benefited from higher than usual investment income from investment funds in the quarter. The corporate effective tax rate in the quarter on pre-tax operating income was 13.1% and reflects the geographic mix of our pre-tax income and a 50 basis point benefit from discrete tax items in the quarter. As a result, the effective tax rate on pre-tax operating income excluding discrete items was 13.6% this quarter, higher than the 10.4% rate from the same quarter last year. At this time, we believe it's still reasonable to expect that the effective tax rate on operating income will be in the range of 11% to 14% for the full year. As always the effective tax rate could vary depending on the level and location of income or loss, and varying tax rates in each jurisdiction. With respect to capital management, we repurchased approximately 111,000 shares at an average price of $25.96 per share, and an aggregate cost of $2.9 million under our Rule 10b5 plan that we implemented during this quarter's closed window period. Our remaining authorization which expires in December 2019 stood at $161 million at March 31. Our debt to capital ratio stood at 14.6% at quarter end and debt plus preferred to total capital ratio was 21.2% down 130 basis points from year-end 2018. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Josh Shanker from Deutsche Bank. Your line is open. Joshua Shanker : Yes. Thank you very much. Marc, I appreciate your comments about CPI and lost cost trend, look I think that at the very time you make a change in your outlook it might be the wrong time. But if you look at the past few years, what has been the lost cost trend and what year you're comfortable making that statement about what year is two green and what years can you say yes, we know where the lost cost front wasn't say 2015? Marc Grandisson : I think yes. So you have to -- it takes about three to four years to redevelop and we're talking about primary business to really get a good sense of the CPI. So, I think, if you look at the CPI, I mean we know what it is 1.8%, 1.7%, 1.9% that range has been consistent for the last two to three years. The pickup in the delta that I talked about the claim inflation spread above that CPI takes two to three years. So we have some good sense for probably 2015, 2014, 2016, we still have things developing for more reason underwriting years. And I would add that it's even more problematic or more difficult to fully assess when you in a specialty line of business and when you have of course excess policies. Joshua Shanker : Generally speaking was '15, '16 about 200 basis points above the lost cost -- above CPI? Marc Grandisson : It was a bit above that I believe. If I -- last time I checked the numbers about six months ago, we had a 150 bps above the CPI in trend inflation from '09 to about 2012, and I think it's since then picked up. So I'm trying to look at a long-term average. It's very hard to pin down the exact numbers. Joshua Shanker : And I hope I can get two and a half questions in but there's some related. Marc Grandisson : Okay. Joshua Shanker : I want to understand the structure of your Jebi exposure. I don't know how much you initially fixed for it, but you're not a big Japan player and you're not a huge property cat player. So I'm just trying to figure out what happened in the contract that you paid more, obviously the picks went up there and two, to what extent are higher reinsurance costs particularly on the Japan rule [ph] that just passed, and then when you get to Florida, and the Gulf in the mid-year to what extent are the pricing increases we're seeing in property going to get somewhat swallowed by higher reinsurance costs. Marc Grandisson : Okay. So that's about 3.5 questions. But I'll sort of take one at a time. The first one on Jebi, you're quite right. Our exposure has been on the weight for quite a while. We had actually increased our exposure to quake after Tohoku earthquake. But on the wind side you're right we had been more careful. And this one is having a small amount of limits up there, mostly on the excess of loss basis and as you know, Japan also buys somewhat on a combined business, but most of our win exposure is on the wind and flood only still to this day. And really the initial numbers came in at $3 billion as you know developed to about $12.5 billion to $13 billion we believe as we speak. What was missed by our ceding company not only by the reinsurance community was the business interruption and contingent via loss exposures that we're inherent in, exactly the location where Jebi hit. And a lot of it had to do with semiconductor that carry a lot of issues a lot more issues from the BI and CBI perspective which was not properly reflected when you went through the path of the storm and modeled it through the -- your existing portfolio exposure. And the ceding companies had done the same thing did not see happen, did not see this developing and it just so happened that it created -- it was not fully appreciated by most people by the whole market frankly. So this is sort of where we are right now with Jebi. So you talked about price increase, we've had -- we've seen some price increase in April 1st as you know in Japan, but we -- but the price increase that we saw brought us back to about 20 -- the grade level in 2014. So with a lot more subdued and a lot more attained than we would have hoped for based on those, that indicator Josh knowing us that we've increased somewhat but did not go significant increase. We are still trying to be patient in seeing further rate changes. As we talk about Florida, the initial discussions are that the demand is going to be stable, but the supply of reinsurance is taken a pause. We don't know yet where it's going to go, but the initial signs is that it's taken a pause which should mean an interesting renewal from a reinsurance provider perspective. Joshua Shanker : I was more interested in your outwards costs more than inwards opportunity. As you pay more for Reinsurance, does that limit the extent of these rate increases we're seeing in property lines? Marc Grandisson : Well, no. Because the big reinsurance purchase that we would do, would be on the insurance side. And we don't -- we do not have a significant Florida or these kind of exposures that would have created the loss into our layer. So we have a very different exposure from our cat perspective. So it doesn't really factor itself into pricing and it's not a significant change. Joshua Shanker : That's perfect. Thank you very much. Marc Grandisson : Thank you. Operator : Thank you. Our next question comes from Amit Kumar from Buckingham Research. Your line is open. Amit Kumar : Thanks and good morning. Maybe two questions. The first one is a follow-up on the Jebi question. Can you also talk about, I guess, what's your -- what was your [indiscernible] exposure and also talk about if there were any aviation losses in the attritional loss ratio? Marc Grandisson : Well, first of all our [indiscernible] exposure is de minimis, we have basically none. And the question in aviation is not something we're a big participant in. So it's also de minimis in terms of aviation losses part of the attritional loss. Amit Kumar : Got it. That's helpful. The other question, I guess the only other question I have is going back to Joshua's question. There is this sort of debate emerging between E&S pricing and commercial pricing and you haven't talked about this a lot earlier today. Can you maybe just spend some time, you gave us a range of minus 5% to plus 8% and then that came out to plus 2.3%. Can you just talk about how you're feeling about pricing versus loss cost trends in some of those lines? And what would be the lines where we're still trying to get rate increases? And how should we think about 2019 or is it time to sort of sharpen our pencils and think about margin expansion from here? Or would that be premature? Thanks. Marc Grandisson : So I think the best answer I can give you on what we think of where the margins are is, if you look at where we grew premium in this quarter. That will give you a great indication so as to what our teams think in terms of absolute margin. Margin expansion is one thing, but it doesn't mean it's necessarily enough to get the return. So we've seen enough margin expansion in a few lines that we grew our exposure. What is the second part of the question again? Amit Kumar : In terms of some of those lines and the rate adequacy in those lines versus loss cost trends? Marc Grandisson : The ones that we grew on a shorter tail of sign mostly -- most of the growth has been in a shorter tail lines. And the reason it's a little bit more -- it is a bit easier to do so is because the lost costs are a little bit easier to pin down. You have loss less uncertainty about ultimate loss costs on the shorter tail lines. So that means that if you think you are perceived -- you're preceding a margin safety of rate above loss trend of X, you're more certain you're going to get this. In other lines of business such as E&S casualty, we like others have seen some pick up in pricing there, but there's a lot more uncertainty there in terms of what the gap between lost cost and end rate increase is, and I would argue with some of them in some lines of business even though we would look to have like a 300 pickup let's say in margin, they probably need a bit more than that to really make a big allocation of capital from our perspective. So it's really a transition and really an incremental marketplace. Francois Morin : Yes. One thing I'll add to that. Just quickly on -- I mean the London market as you know is going through a period of dislocation. We benefit from that. We're not huge players in London, but we have a meaningful participation and -- both on the syndicate and the company side. Who knows whether that is going to be sustainable for the rest of 2019 and into 2020. But certainly as Marc alluded to some of the growth we saw in the premiums we wrote in Q1 are specifically related to opportunities in London in particular. Amit Kumar : Got it. I will stop here for the moment, and I'll reach you. Thanks so much for the answers. Marc Grandisson : Thanks Amit. Francois Morin : Thank you. Operator : Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open. Elyse Greenspan : Hi, thanks. My first question on the reinsurance side, Marc, in response to an earlier question you said that supply is taking a pause. So now when we think about supply of capital in Florida, is that a comment that you would make to overall capital, to alternative capital to traditional capital, I guess as you think about the buckets of the capital sources for the upcoming part of renewals if you could give us a little bit more color on how you think this will play out? Marc Grandisson : Well I don't know how it's going to play out. I'll just talk about the early signs. But in terms of where it's coming from the supply the pause has been taken by all participants because, implicitly in some of the traditional players some of it is relying on alternative capital and is also alternative capital standalone as well. So it's really a taking a step back. There are lot of moving parts in Florida. The summary [ph] benefits, the early adjustments and whatever else, the department asking for buying more limit. I mean there is a lot of moving parts right now, so people are still and people are waiting to see more up to date numbers, they've been developing as we all know for several quarters now. So everybody's taken a part. I think it's a collective -- it's not obviously a consensus that's developed by talking to one another obviously but it seems to be this taking a pause, positioning from the supply. But we've seen as before these, I want to be open. Sometimes you see this and at the end people sort of roll over and do -- act differently than you would have thought they would behave. But I'm just telling you as we speak, last information that I received this morning about the current state of the overall feeling in the marketplace. Elyse Greenspan : Okay, thanks. And then back to some comments you guys have been making throughout the call on the primary insurance market, so it sounds like you guys are finding more opportunity in the shorter tail lines as opposed to some long tail lines. Just given on some concerns about loss cost. Another company earlier today pointed to this being a casualty driven market upturn. Would you agree with that statement and maybe there's just you guys are holding off on really pushing for growth on the casualty side, just given -- waiting to see how loss translates out? Marc Grandisson : So, I don't know if it's casualty led before. We have seen in terms of where we've allocated our efforts. Our efforts in capital such as that Francois mentioned, a lot of it is led by cat exposure and marine exposure and short tail exposure. So this is where we've been more allocating capital for the last six quarters, for three to four quarters and still continue on as we speak this quarter. On the liability side for us to have a casualty led we would still need to see some pain in the marketplace. We're not seeing broad pain yet at least emerging on the insurance portfolios. What I would tell you and that might probably sort of size or is in line with what you -- the comment that was made earlier on some calls is that, the reinsurance market is actually being a bit more disciplined, a bit more reactive to the casualty placements. And that tells us indirectly that there's probably a bit more negative perception about the ultimate results in those numbers but I'm not sure that these results have been published. Yes. Elyse Greenspan : Okay. And then, you see sorry, one last question. Are you seeing more business come from the standard market to the E&S market? Marc Grandisson : Yes. Most of what we see is through the E&S market. Most of the growth except for the UK regional obviously which is the specific focus. But yes, the Lloyd's market, the Lloyd's business and the E&S market is where we are seeing more opportunities. Yes. Elyse Greenspan : And then sorry, one last question. On the intangible what were a little bit higher than I'd have thought this quarter I think that's due to your two newer acquisitions, is that Q1 level kind of a good run rate for this year and can you give us a sense of where the intangibles amortization expense might come in in out years? Francois Morin : Yes. Well certainly yes the part one, our practice for the amortization of the intangibles is linear throughout the year. So you should expect the remainder of 2019 to be at very much close to the same level that we had in Q1. In terms of outer years, we had given direction on specifically on the UGC transaction how it was going to wind down in 2020 and beyond. So we'd happy to recirculate that and give you an update on that. But that's very much scheduled and we know where it's going to be. I don't have the numbers in front of me for 2020, but we can certainly, yes, give you that. Elyse Greenspan : Okay. So the UGC numbers aren't changed and it's just up a little bit due to two recent deals? Francois Morin : Exactly. That's correct. Yes. UGC numbers were locked in at the time of the closing. Yes. Elyse Greenspan : Okay. Thanks so much. I appreciate the color. Francois Morin : Thank you Elyse. Operator : Thank you. Our next question comes from Mike Zaremski from Credit Suisse. Your line is open. Michael Zaremski : Hey good morning. First question is on mortgage insurance. I believe in -- Marc in the prepared remarks, you mentioned even as pricing has become more competitive we use that term. Is pricing currently becoming more competitive? I know that a lot of it's within these dynamic pricing models. So it's not as transparent and maybe you could comment on -- is that maybe why your market share -- I know you don't focus on market share but maybe that's why your market share seems to like you've fallen quarter-over-quarter? Marc Grandisson : Yes, I think that, yes, I think it's true that there's -- well, it's hard to see if it's a broad competition, but certainly there's a lot of dislocation occurring in the pricing -- in the marketplace as a result of all these new risk based pricing. It's very hard to see what it means. And to even evaluate whether it's down or up or sideways. So we'll reserve ourselves some more time to evaluate and come to terms to what it means in this quarter. But certainly we haven't changed our pricing. We held the line and stayed the course on our risk-based pricing and at the end we just harvest what we put out there and what's stuck to the marketplace and but it's going to take a while. Markets are going through establishing their systems, educating the loan originators how it's used and fixing some of the bugs. So it's going to take several quarters for us to really see if there is truly that much more price competition. But I think the price competition that I mentioned in my remarks has been over the several last quarters. I was not specifically talking about this quarter. Michael Zaremski : Okay. That's helpful. And lastly, moving to kind of leverage levels on excess capital. If you could remind us, leverage is down to 21%ish historically for UGC. It was in the teens. Can you remind us is there a level that you've kind of soft promised the rating agencies and then also kind of curious whether holding dry powder is more or less important today versus in the past? Francois Morin : Yes. Part one to your question, yes, 20% was roughly the number that we were -- the leverage level, the leverage level that we were targeting at the time of the acquisition and we are there today. So I think we're -- we accomplished what we set out to do and that's good news. And yes, part B, to your question absolutely dry powder is something that we always have been firm believers in. Whether it's deploying the capital in a potential other opportunities, whether they're acquisitions or if this rate environment picks up steam and gives us the opportunity to put more of capital at work in the business in any of our three segments, we want to have that ability to do so. So the answer to your question is yes. Having the flexibility is something that we've always believed in and thankfully I think we're there right now. Michael Zaremski : Okay. Thank you. Marc Grandisson : Okay, Mike. Operator : Thank you. Our next question comes from Yaron Kinar from Goldman Sachs. Your line is open. Yaron Kinar : Hi. Good morning. I want to circle back on the reinsurance part of your development. So even if I exclude the Jebi adverse evolvement I think net you see a bit of a decrease year-over-year. Can you maybe talk about the moving pieces there? Francois Morin : Yes. A couple of things that I'd say more minor. I mean there has been some timing of some claims that came through that yes impacted favorable or the level of favorable developments in our reinsurance segment reserves. No question that we didn't -- we've had a healthy level of reserve releases over the years that were not -- we never planned for it. We always observe the data and we always react to the data. It turns out this quarter, the level of favorable wasn't as high as it has been in prior quarters. Does it revert back to a higher level next quarter? We don't know we'll find out in three months. But no question that Jebi was a big part of it. There's a couple of other small moving parts that are just I think a bit more noise and somewhat idiosyncratic in terms of the timing of the events that affected the aggregate level of PYD on the reinsurance segment. Marc Grandisson : And I think our lost cost trend discussion Yaron is certainly key into our being prudent and careful and the way we sort preserves, because things could be shifting and so that is already part of the -- part of informing our decisions currently, is not recent but it's certainly part of that as well. Yaron Kinar : Understood. I guess what I'm trying to get to that is always as the year-over-year change again excluding Jebi, coming more from short tail lines, more from longer two lines? Francois Morin : It's a mixed bag. It's a bit of both. Yaron Kinar : Okay. And then with regards to the UK block that you acquired. Should we expect it to be fully earned in within roughly 12 months period until January of 2020. Francois Morin : Yes, pretty much. I mean right. So the premium it's a ramp up. So it's effectively a startup. And we -- it won't be 50% earned by -- in 2019 but you're right Q1 into next year like to think that the run rate of earned premium is going to be a pretty steady. And there's nothing specific -- nothing special about their annual policies and that should -- the accounting should follow pretty easily from there. Yaron Kinar : Great. Thanks. Marc Grandisson : Thanks, Yaron. Operator : Thank you. And our next question comes from Meyer Shields from KBW. Your line is open. Meyer Shields : Thanks. I also wanted to ask about the U.K. acquisition. Once you get past the steady run rate for earned premiums, is there any difference in its loss ratio, expense ratio breakdown and the legacy Arch Insurance segment? Marc Grandisson : Well it should. I mean there's a lot of moving parts in the expense ratio. What we're trying to improve on that point in the U.K. in particular and you guys all know about the realities of the London market and that's generally an expensive place to do business in. So that was always one of our objectives here is try to reduce our expense ratio specifically from the U.K. side and this acquisition helps us achieve that given it's a more -- it's a better business model for us and more efficient on that sense. But the counter to that I will say is we're very -- there's other opportunities, other investments that we're making within our Insurance segment that may offset some of that. So I -- we don't have complete visibility on everything we're going to do in 2019. But if you're looking for some view on what the expense ratio may look like for the insurance segment for the remainder of the year, I would say, no question that Q1 was elevated because again the lack of our premium on the UK book and the timing of the share based expenses or competition expenses by the end of the year we'd like to think that we could bring it down between 100 and 200 basis points from where it was in Q1. But my overall the business that we've acquired is retail business as you know it's not cheap necessarily, it is still there's a lot of commissions as I have to go through. But the problem which means the loss ratio would hopefully be lowered and then comparative E&S portfolio. Having said all this I think with -- by virtue of the critical math that Francois just talked about, I think that it should improve the overall expense ratio. But I wouldn't expect it to go to be a significant improvement. Meyer Shields : Okay. No, that's great. Very helpful, I appreciate it. Looking at mortgage I think Marc you talked earlier about the benefits of the current economy. I don't know how to ask this without being too politically charged. But do you see that as being vulnerable to next year's [indiscernible]? Marc Grandisson : Well, politics are part and parcels of what we have to deal with all the time. Now we're on the receiving on what's happening out there. The one thing I'll tell you about the politics we've been worrying about this, we've been -- we've had -- we've been asked that question for a long time. But the consistent answer on any kind of -- any administration that was in place and anybody that runs the FHA, there's clearly a recognition that private market has a place in delivering the product to the homeowners and providing insurance and protection. So we don't see any major change there. We also don't see any change to the GST, mandate and the way that MI is one of the collateral that's used to bring the LTV down. So none of those core essence, things that are really essential for -- to make sure that the market exists has been under siege or will be under siege. I mean there might be some changes to the delivery of the product, and we certainly have been participating in some of those new innovations and we'll continue to do so for the future. But the way we think about politics and as it regards to MI is, we are agnostic as to what happens. We'll react and are able and willing to help in any way that we can to deliver the product to the homeowners and to the banking system. Meyer Shields : Okay. No understood. Thank you so much. Marc Grandisson : Thank you. Operator : Thank you. And I am showing no further questions from our phone lines. I now like to turn the conference back over to Mr. Marc Grandisson for any closing remarks. Marc Grandisson : So from Francois and I have a good day and we'll talk to you in the next quarter. Thank you much. Operator : Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,019	3	2019Q3	2019Q2	2019-07-31	2.351	2.425	2.676	2.745	null	12.52	13.15	Operator : Good day, ladies and gentlemen, and welcome to the Q2 2019 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.Before the Company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time-to-time.Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created, thereby.Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website.I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. François Morin. Sirs, you may begin. Marc Grandisson : Thank you, Crystal, and good morning to you all. Our operating results were very good this quarter and were driven by solid underwriting performance, like catastrophe losses, which together with higher bond and equity prices in financial markets led to a 6.6% increase in our book value per share this quarter. Our operating ROE for the second quarter at 13.1% remains satisfactory.Market conditions in our Property Casualty segments continue to improve and as a result, we selectively increased our writings. While we hope that the market firming has legs, we will continue to focus on allocating capital to those lines with the best risk/reward characteristics. In our view, this is a market which favors those companies who are nimble and who focus on expected returns, risk selection and risk selection and segmentation in building their book of business.Across the property and casualty industry, we have seen several market opportunities where we have increased our capital deployment, notably in London and in E&S lines in the U.S. It is worth noting that because we have kept our powder dry in the recent soft markets, we are better positioned today to flex into these markets as rates improve. Despite these tailwinds, the firming is not occurring across the board. One factor that makes us cautious is the uncertainty surrounding the margin of safety.In some cases, rates are increasing on a relative basis but are not adequate on an absolute basis. Across all lines in the second quarter, our Insurance Group's rate changes, as measured on renewals only, averaged around plus 3.5%. However, there is strong anecdotal evidence that the majority of our new business came in at better levels than the renewal business. This is a sign of a transitioning market.Overall, we estimate that roughly 20% of our increased premium writings in insurance came from rate and the balance from exposure growth. There are a number of well-known factors driving today's P&C environment. Number one, derisking by some of our competitors; two, significant cat losses sustained by the industry in recent years; three, current interest rate levels support the need for further firming in premium rates; and most significantly, fourth, a lack of margin in pricing that exacerbates volatility in quality results and the attendant implicit recognition that reserve levels could be inadequate.Reinsurance markets tend to follow the fortunes of primary insurance and when you peel back the numbers, as Francois will in a minute, we also see good also see good opportunities in our Reinsurance segment. Catastrophe losses of the past two years and difficulties of some alternative capital providers had led to improved rates in property and marine lines with the floor to specific renewals experiencing market increases of 15% to 20% at midyear.As you can see in our financial supplement, we were able to grow our property writings on a gross basis, but we still need additional rate to commit more significant capital to our peak zones. We also saw strong demand in the international direct and frac markets, and one of the tails in this transitioning market is in our U.S. property facultative units, where submission activity increased substantially for the first time in several quarters.Taking a step back, the P&C environment kind of reminds me of a summer vacation with your kids in the back of the car asking, "Are we there yet?" In our view, not quite yet. But the path to better underwriting profit – the path to better underwriting profitability is becoming clearer.Turning now to our mortgage insurance segment. Arch MI continues to perform well, given the high-quality characteristics of our risk-in-force portfolio and the favorable economic conditions. As you may know, growth in insurance in force produces increases in our earned premium, which together with credit quality drive mortgage insurance results.NIW in the second quarter was $17.2 billion, a decrease of 14% from the same period a year ago and we believe, primarily reflects the early stages of the rest of the MI industry adopting and learning to use risk-based pricing, which could lead to greater volatility in quarterly market shares for the next several quarters.As we have said before, at Arch our focus is on returns rather than market share. What matters to us is that we write business at or above our targeted returns, and that we are realistic and diligent in our assessment of risk.Today, every key risk barometer in our U.S. MI portfolio remains at favorable levels. The second quarter combined ratio of our U.S. mortgage was excellent at 28%. Credit quality, as indicated by FICO scores, remained strong across our in-force book with a weighted-average score of 743.Our in-house measure of portfolio risk, our loan risk score or LRS, indicates that the relative ability of borrowers to repay their loans remains excellent and significantly better than what it was in the pre-crisis period.With respect to our investment in operations, we have repositioned the portfolio over the last 12 months to a slightly longer duration. And as a result of the recent declines in interest rates, we recorded a substantial increase in our book value per share.And with that, I'll hand over the call to Francois. Francois? Francois Morin : Thank you, Marc, and good morning to all. Before I give you some comments and observations on our results for the second quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e., the operations of Watford Holdings Ltd.In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $317.4 million, which translates to an annualized 13.1% operating return on average common equity and $0.77 per share.Book value per share grew to $24.64 at June 30, a 6.6% increase from last quarter and a 19.2% increase from one year-ago. This result reflects the effect of strong contributions from both our underwriting operations in our investment portfolio.Starting with underwriting results. Losses from 2019 catastrophic events in the second quarter net of reinsurance recoverables and reinstatement premiums stood at $7.2 million or 0.5 combined ratio points. These losses flow through both our insurance and reinsurance segments and were primarily due to convective storm activity in the U.S.As for prior period net loss reserve development, we recognized approximately $35.5 million of favorable development in the second quarter, net of related adjustments or 2.7 combined ratio points compared to 5.1 combined ratio points in the second quarter of 2018. All three of our segments experienced favorable development at $1.5 million, $11.3 million and $22.8 million for the insurance, reinsurance and mortgage segments, respectively.The insurance segment's accident quarter combined ratio excluding cabs was 99.4%, 90 basis points higher than for the same period one year-ago. The year-over-year comparison for the insurance segment is affected by two notable items. First, we experienced a relatively higher level of current accident year attritional loss activity this quarter across a few lines of business in the U.K; second, as discussed last quarter, the integration of our UK regional book is ongoing and increased our overall expense ratio for this segment this quarter by approximately 90 basis points.We continue to expect that the expense ratio for this segment will remain higher than the long-term run rate until the earned premium from the acquired business reaches a steady state. We had solid growth this quarter in the reinsurance segment that was partially muted due to the renewal of a large transaction that required less capacity this year. Adjusting for the effect of this renewal, net written premium would have grown by 14.3% this quarter over the same quarter one-year ago.The segment's accident quarter combined ratio excluding cats stood at 92.2% compared to 100% on the same basis one-year ago. The year-over-year movement is primarily driven by an elevated level of property facultative losses for the same quarter last year, which explains approximately 580 basis points of the difference year-over-year and the impact of the renewal just mentioned, which contributed approximately 170 basis points. Most of the remaining difference is explained by operating expense ratio improvements resulting from the growth in earned premiums since the same quarter one-year ago.The mortgage segment's accident quarter combined ratio improved by 370 basis points on the second quarter of last year, as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 7.4% is identical to the result observed in the same quarter of 2018, although last year's loss ratio was helped by favorable prior development that was approximately 150 basis points higher than what was observed this quarter. The expense ratio was 20.6%, lower by 220 basis points than in the same period one-year ago as a result of a higher level of earned premiums.As mentioned in the earnings release, we novated a ceded reinsurance transaction during the quarter that increased net written and net earned premium by approximately $17.1 million for the segment. If not for the effect of this novation, net written premium would have grown by 8.7% this quarter over the same quarter one-year ago, and the mortgage segment's loss and expense ratio would have been 30 and 100 basis points higher, respectively.In addition, the transaction improved the group-wide annualized operating return on average equity by 60 basis points and increased the per share operating income by $0.04.Total investment return for the quarter was a positive 237 basis points on a U.S. dollar basis, as our high-quality portfolio continued to perform well. Our portfolio duration was up slightly during the quarter to 3.52 years. The corporate effective tax rate in the quarter on pretax operating income was 10.1% and reflects the geographic mix of our pretax income and a 70 basis point benefit from discrete tax items in the quarter. As a result, the effective tax rate on pretax operating income excluding discrete items was 10.8% this quarter, higher than the 10.4% rate from the same quarter last year.At this time, we believe it's still reasonable to expect that the effective tax rate on operating income will be in the range of 11% to 14% for the full-year. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction.Turning briefly to risk management. Despite the recent increases in catastrophe pricing, our natural cat exposures on a net basis remain at historically low levels at July 1 with the Northeast still representing our peak zone at slightly more than 4% of tangible common equity at the 1-in-250-year return level. As we have mentioned on prior calls, if cat rates and expected returns improve over time, we have meaningful available capacity to increase our participation in this segment.In our MI segment, last week we closed our third issuance of Bellemeade securities this year that provided $701 million of reinsurance indemnity on nearly $50 billion of insurance in force. In total, Arch has completed 9 Bellemeade transactions since the inception of the program in 2016, which, as of July 30, 2019, provides aggregate reinsurance coverage of over $3.3 billion.With respect to capital management, we did not repurchase shares this quarter. Our remaining authorization, which expires in December 2019 stood at $161 million at June 30 and our debt-to-cap - total capital ratio stood at 13.9% at quarter end and debt plus preferred to total capital ratio was 20.1% down 240 basis points from year-end 2018.With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] And our first question is Josh Shanker from Deutsche Bank. Your line is open. Joshua Shanker : Yes. Thank you very much. Marc, you said that in your prepared remarks that you thought because you weren't writing so much business during the slumping years of pricing that you were better positioned than others. Brokers and customers like to know that there is a consistent market regardless of pricing available to them and companies that come in and out in a mercenary sort of way tend not to get the business. How can Arch come in and be competitive in these markets compared with the companies that have been willing to write policies at less margin? Marc Grandisson : Well, as in – hi, Josh. As in every market, I think that when there's a – sort of a shift in capacity some incumbents who have been providing continuity of coverage actually take a pause and they look around and say, well, maybe we don't want to do that risk or do that risk at very different terms and conditions. And we did not move away from all the markets. Actually, we're still very much present.I think that our growth or would I say, we weren't as involved in the market for the last three or four years. I think you have to look at our trend rate of growth, which was less than what you would have expected the market to grow. So we tend to be below the long-term average. I think right now you see us be above the long-term average. And brokers, I like everything else, when they need capacity, they have to look for capacity for good quality outfits.And we actually are growing in areas where we already are present. There's some risk that we did not see before, did not have a chance to quote or participate on or frankly, we found the price to be inadequate for our liking, and now they're coming back to us and say, well, what about that risk, Mr. Arch? You didn't write it before and that's what happens.So the relationship is not solely client insured by insurer, it has to do – as you know, we're a broker market company, so the relationship is through the broker channels across multiple lines of business. A company that writes over $3 billion a year premium is not a maverick or – I'm not sure what word you use, but we're not a mercenary company. Joshua Shanker : I didn't mean to use that word in a pejorative way. Marc Grandisson : You did. But you did. Joshua Shanker : And in terms of – I know that – so Nicolas has come in to run the insurance business. And I guess there's a non-time specific goal of getting combined ratio down to a 95%. As I look at the people you had running the insurance business over the last 20 years or not quite 20 years. You had some incremental talent running that business. And a 95% combined ratio has been a rare moment of success for that segment. What can Nicolas bring to the market that's going to help you get to those goals? Marc Grandisson : So the first thing that Nicolas is bringing to the insurance group is this little bit more proaction in terms of when the market transitions or shifts. And that's something that you could feel and experience when you talk to our underwriting team. That's number one. Number two is, gross have different tools and than we had available to ourselves, say 10 years. Predictive analytics isn't – comes to mind. This is really something that is relatively new when we see the benefits of it on a daily basis.And Arch are embarked as you know Josh on the across-the-board project to get everybody to predictive analytics. And that speaks to the segmentation and underwriting selection that we've talked about. In addition, you see this through some of the numbers. On the IT we do have healthy amount of investment. We took a guy from our MI group, which was superb and best-of-breed in terms of IT development, and we sort of brought that there as well. So it's a combination of culture and really giving more tools and having access to more tools. So I'm not sure that it's really people specific. Joshua Shanker : And do you have a – I know you didn't give a time, but when you say but when you say we're hoping to get to a 95%, is that a 3-year plan? Or is that – is there no time behind this? Is there any way of like sort of getting a little more specific. Marc Grandisson : Like I said on earlier calls, I'd like. This to be yesterday, but I think we have to go through it in steps. I think that, Josh, I'm very encouraged by the development and the improvements that we've made in insurance. And certainly, the tailwind we have in the market is going a long way to get there quicker. Joshua Shanker : Okay. Thank you very much. Operator : Thank you. Operator : Our next question comes for Elyse Greenspan from Wells Fargo. Please your line is open. Elyse Greenspan : Hi, good morning. My first question I guess tying in to Josh's last question on the 95%. You guys have always been a bit more tempered on where you see loss trend within the insurance market. Obviously, you gave us – in your prepared remarks, Marc, you said, rates up about 3.5%? Can you give us a sense of where you see loss trend today and kind of how that's changed over kind of how that's changed over kind of the past last three to six months, if it has? Marc Grandisson : It hasn't changed a whole lot. We actually are going through a very deep dive in loss trend. I do think that we still have uncertainty around this. We have very recent years, a different kind of economy, last three or four years. It's going to take us – take a while for us to finally determine what the trend is. I would just only tell you that it's not an exact science. So we try to look at discernible pattern. I think you've heard on other calls that there is a recognition that there is something afoot on the severity side of things, more specifically.And the frequency remains to be seen, if that is going to compound for the pre-opinion. But for now the severity is definitely picking up. So that's what has taken us –we still are very, very careful. So when I talk about the 3.5% lease, it's made up of a range, right, from minus one in certain lines of business to plus 12%, 13%.So those who are clearing plus 10%, plus 15% obviously are clearing anything above what could be in terms of range of expectations on the loss trend, right? If you think the loss trend is an expectation between 2% to 4%, even at the higher end, if you clear 10% rate increase and if it's a second year of 10% increase, it gives you that much more comfort. That's how we think about it. Elyse Greenspan : Okay. And then could you also – in terms of pricing, could you give us a sense of what you're seeing within the E&S market? Are more risks going to the E&S market? How's the price there compared to the standard market? And what does your trajectory look like on the E&S side of things? Marc Grandisson : So, yes, on E&S side I think it's sort of – if you look in terms of steps, a lot of things were written in Lloyd's and other admitted market. A lot of business is thrown back into the U.S. E&S market, which we're a participant of as you know. And so it's coming to us. It's coming to other E&S carriers around the country. We're not solely benefiting from this. But clearly, the rate coming in were as expiring, they were lower than what we would've liked to have, otherwise we would've written those deals.And it's mostly property, I would say at this point in time, because of the – certainly not helped by the recent cat losses. So if you look at it from the sum total position, clearly E&S is getting traction, it's coming back to us. We're looking at it and we're able – as I said in my remarks, some of them are getting substantial rate increases and they need to, but they need to get those rate increases to get to the level of returns that we are seeking.So – and we think that this is – specifically in the property side, our team is seeing some legs to it. They're really seeing an increased amount of – in the number of submissions. And we see some legs through it for the next couple of quarters, which is encouraging, which is the first time I could really say that to you. Elyse Greenspan : Okay, great. And then on – there were some potential regulation out last week in terms of the potential for the Patch rule to go away. I was just wondering, I know that, that would be kind of a 2021 event, but could you just comment on Arch's exposure on the MI side if there was a change? And just give us a little bit of an understanding on how that could impact your mortgage insurance business. Marc Grandisson : Well, it could definitely impact not only ours but the overall MI segment, right about a 30% share of the GSE Patch is a big deal. I think we're communicating with them. We're talking to the GSEs and CFPB and trying to give them our comments and our view on this.At a high level, it could go multiple ways, but the best ways for us would be and this is something what we would advocate is that that business could also find its way onto the private market, right. I mean there's clearly a path for this to be more on a private placement as well.Going the way of the FHA, I mean it's certainly something that they can decide to do, but that would be sort of assured that they have to do politically. I think at this point in time at least, it's too early. We definitely are involved in this. The encouraging words from the CFPB were that trying to leveling the playing field across all participants, which means the GSEs and the private capital markets, this is how we want to and wish to interpret this.So we'll be in touch with them and we are hopeful that there will be a transition or there will be some very thoughtful and deliberate way to resolve that. So we're not overly excited at this point in time, but we certainly are looking it intently. Elyse Greenspan : Okay. Thank you. I appreciate all the color. Marc Grandisson : Great. Thanks, Elyse. Operator : Thank you. Our next question is from Daniel Baldini from Oberon. Your line is open. Daniel Baldini : Hi. Good morning. Thanks for taking my call. It seems like it's increasingly likely that there will be a hard Brexit at the end of October. And I was wondering if you could talk about the effects on your business. And specifically, your ability to do business from London, where you mentioned earlier you've increased activity, the ease of moving your London-based people around the continent to do business. And what exposure do you have to a further weakening in the domestic economy there? Marc Grandisson : Okay. So let me take the Brexit question. We already – as is everybody else in the industry, we have repositioned our European operation into Dublin. So this is where we are currently doing non-UK business as of the end of March, I believe is the timeframe. And we also have through Lloyd's, our Brussels – and Brussels is the establishment for Lloyd's within the EU. So we're also a participant in that marketplace.And we carry on with the UK business. And actually we are – to answer your last question, we're very keen on developing more of the retail, and we did the acquisition last year – end of last year of the Ardonagh Retail Network so that's actually going very, very well. So it creates some barriers to entry for possibly other participants, but I think everybody has been pretty good, including ourselves in establish – setting ourselves up for being able to write the business whatever happens, whether it's hard Brexit or negotiated Brexit.So we are already well ahead of whatever could happen, so little bit more expensive because you tend to have a bit less, right, concentration of back-office and then underwriting support, but by and large it's not a – hopefully that will presumably find its way through pricing anyway. And so we're very relaxed with Brexit. Daniel Baldini : Okay. Well, thanks very much. Marc Grandisson : Thank you. Operator : Thank you. And our next question comes from Geoffrey Dunn from Dowling & Partners. Your line is open. Geoffrey Dunn : Thanks. Good morning. Marc Grandisson : Good morning. Geoffrey Dunn : Just a couple of number questions first. Can you disclose the aggregate ILN cost running through your premium line this quarter? Francois Morin : It’s about $18 million. Geoffrey Dunn : $18 million, okay. And with respect to the 19-3, what was it about the 2016 book that you didn't do it back then, you went back and did it now. Obviously, it was the one piece of the back book not covered, but I guess what was behind just the delay in covering it? Francois Morin : Well, I mean couple of things. One is, as you know we've been trying to get protection on the whole book. So yes, no question that 2016 was the only year that had not – did not had coverage on it. And the timing of it is really – I'd say a big reason is the fact that it's a seasoned book. I mean if you – we saw it last year when we placed the 2018-2 issuance, where that was covering the 2013 to 15 years.Once the book is seasoned a little bit, I mean investors have a lot more visibility in the performance and the spreads just are that much tighter. So we saw the exact same kind of behavior for this recent issuance and just wanted to wait until the book was seasoned enough until we went to the market with it. Geoffrey Dunn : Okay. And then with respect to the new notice growth, I think we're seeing all the legacy players go through a transition now, where the 2009 and after seasoning is offsetting the improvement on the 2008 and prior. Can you provide a little bit more color on the two different books there in terms of the impact on the 9% growth this quarter? What are your 2009 and afters growing their notices at versus the decline in the 2008 and prior? Marc Grandisson : I'm going to look at these numbers now. I don't have them handy. But what I could tell you is 6% of our book is prior to 2009. 94% is post 2008. So most of our growth will come from those years. And it's pretty much coming from the 2015, 2017, Geoff. So it's not really signaled different than anybody else around. I think these years have some seasoning and sort of finding a two, three years' mark right where they tend to get to default, so… Francois Morin : So all I'll add is this was the first quarter really where we saw more than half of the delinquencies are from 2009 and subsequent. So up until recently it was obviously trending up, but now it's really above 50%. Marc Grandisson : One last thing I'd add, Geoff, that this is all expected. There is nothing really to read more into it than just a natural phenomenon of growing the book of business, the insurance in force, and over time, the seasoning. Even the most recent year, we all tend to get some NODs. But as we remind ourselves, as you know, Geoff, these NODs, the ultimate claim rate on those is much smaller than anything we had seen for pre 2008, right. We're still below 10% ultimate claim rate. Geoffrey Dunn : Okay. Helpful. Thank you. Marc Grandisson : Thanks Geoff. Operator : Thank you. And our next question comes from Sean Reitenbach from KBW. Your line is open. Sean Reitenbach : Hello. I just heard some adverse development on order accident years related to binding [volatility] book. What are you seeing in that book of business now? Francois Morin : Well, I think it's something that we've identified, no question. We had some issues within the performance of that book. We've made some corrections along the way. We've shrunk to our volume, we've reunderwritten the book to some extent. Right now we think the reserve development is contained so we don't expect a whole lot of – I think we're in a good spot and don't think there will be more to come in a material way. But it's certainly a book that we know has underperformed and we've corrected it to some extent and we're keeping an eye on it. Sean Reitenbach : Okay. That's helpful. And then also we've see some property and casualty competitors lose share in third-party capital assets under management and some are gaining share. What's happening at Arch? Marc Grandisson : We're gaining share. Francois Morin : Yes, I think there's a – we've seen – I think the quality of the operator we'd like to think has maybe a bit more – people put more value on that. So we have a good track record in underwriting on the property side. And I think there's more capital that's looking to find a home with a solid underwriting team and that's what we think we've demonstrated over time, and I'd like to think we can keep doing it. Sean Reitenbach : Okay. Thank you very much. That’s all I have. Francois Morin : Thanks, Sean. Operator : Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Mr. Marc Grandisson for any closing remarks. Marc Grandisson : Thank you, everyone. We'll see you next quarter. Operator : Well, ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,019	4	2019Q4	2019Q3	2019-10-30	2.536	2.658	2.836	2.908	null	13.45	14.07	Operator : Good day, ladies and gentlemen, and welcome to the Q3 2019 Arch Capital Group Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. Before the company gets starts with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call, that are not based on historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available in the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. François Morin. Sirs, you may begin. Marc Grandisson : Thank you, Crystal, and good morning to you. Our diversified business model of specialty insurance, reinsurance and mortgage lines of business have produced good growth and acceptable risk-adjusted returns for shareholders in the third quarter. Operating earnings generated an annualized return on common equity of 10% for the third quarter as our book value per share grew 3.9% and more than 21% on a trailing 12-month basis. Before I discuss market conditions in a broader P&C sector, I would like to address the topic that is currently getting a lot of attention, namely the increased claims inflation or loss trend. In this part of the cycle, we are not surprised to hear about adverse claims development that some in the P&C industry are experiencing. We have discussed our view of loss trends on these calls over the past several years. And I'd like to remind our shareholders that at Arch, we approach pricing, our products and establishing a reserves with a bias towards conservative loss trend estimates. As I mentioned before, history teaches us that on average the P&C industry experiences claim inflation rate about 200 basis points above the CPI, although this can fluctuate over time. It seems to us that the premium rate declines seen by the industry over the past several years should have led to higher current loss picks. It is important to bear in mind that in many lines of business, it takes 3 to 5 years before an adequate level of trend can be confirmed. We believe that this gap between the estimated and actual loss trend has contributed to the uncertainty in reserve development. This uncertainty helps fuel both disruption and dislocation in several areas of insurance, which we have been and are capitalizing on. This location is evident in arise -- in our submission activity this year and it is also reflected by the fact that we are achieving higher rate levels on new business than on renewal business in several segments. To give you some sense of the data, our submission activity in the third quarter was up more than 20% in E&S property and 15% each of E&S casualty and professional lines, specifically P&L. However, to date, we believe that these descriptions are more indicative of the transitional market than a traditional hard market as we have not yet seen rate increases in hardening across the board. Risks selection is still paramount. Across all lines in our insurance group, renewal rate changes average a positive 3.5% for the quarter as net premium grew 22% in the third quarter above the same period in 2018. About 30% of that growth came out of an acquisition we completed earlier this year in the U.K. small commercial lines space. Rate increases contributed a quarter of the overall segment growth, while new business opportunities generated the balance. It is worth reminding you that we expect to close on our acquisition of the Barbican Group in the fourth quarter, and we believe that the enhanced presence and scalability of our Lloyd's operation will provide us with further opportunities. Now turning to the reinsurance market. Reinsurance price intends to follow that are the primary insurance industry, but with a few twists. Catastrophe and larger attritional losses can disproportionately affect reinsurance results, creating the localized opportunities in areas of the reinsurance business. Property fact and Marine are examples of improving markets. Over the past several years, we have significantly reduced our net exposure to property cat risk in response to the declining level of risk-adjusted rates. The occurrence of Japanese typhoons in both the third and fourth quarter of this year has impacted global reinsurance industry result, and should support the ongoing need for additional rate improvement. Turning to our mortgage insurance segment. Arch MI continues to perform well, and market conditions continue to be characterized by strong credit quality in a healthy housing environment. In terms of new production, our third quarter and new insurance written or NIW grew 18% over the same period a year ago. That production was driven by growth in a mortgage insurance market due to a broad increase in mortgage originations combined with an increase in the level of mortgage insurance purchased from private mortgage insurance. Overall, insurance and force grew about 2% sequentially in the quarter at Arch U.S. MI as higher prepayment activity was more than offset by new MI originations. We continue to be pleased with the credit quality of our insurance and forced as key metrics in our U.S. MI portfolio remain at historically favorable levels. Notwithstanding the good market conditions in the MI sectors, we continue to mitigate our downside risk from an economic cat event through the purchase of insurance linked notes. With respect to our investment operations, we have maintained our focus on important return and continuously repositioned the portfolio to our just to financial markets conditions, which contributed significantly to our growth in book value per share this quarter. And with that, I'll hand the call over to François. François Morin : Thank you, Marc, and good morning to all. Before I give you some comments on observations on our results for the third quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e, the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $261 million, which translates to an annualized 10.3% operating return on average common equity and $0.63 per share. Book value per share grew to $25.61 at September 30, a 3.9% increase from last quarter and a 21.1% increase from 1 year ago. This result reflects the effect of strong contributions from both our underwriting and investment operations. Starting with underwriting results. Losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $68 million or 5.2 combined ratio points. These losses impacted both our insurance and reinsurance segments and were primarily due to hurricane Dorian and Typhoon Jebi. As for prior period net loss reserve development, we recognized approximately $51.7 million of favorable development in the third quarter, net of related adjustments are 3.9 combined ratio points compared to 6.7 combined ratio points in the third quarter of 2018. All 3 of our segments experienced favorable development at $3.9 million, $14.7 million and $33 million for the insurance, reinsurance and mortgage segments, respectively. We had solid net written premium growth in the insurance segment, 22% over the same quarter 1 year ago. While approximately 30% of that growth comes from the U.K. regional book of business we acquired earlier this year, we also had a strong quarter of new business and an improving renewal rate environment in most of our lines of business. The insurance segment's accident quarter combined ratio, excluding cats, was 100.3%, essentially unchanged from the same period 1 year ago. Some of the pricing and underwriting actions we have taken over the last several years have begun to filter through the loss ratio, while our expense ratio remains slightly elevated, primarily as a result of investments we are making in the business. In particular, as discussed on prior calls, the integration of our U.K. regional book and other smaller acquisitions is ongoing and increase the overall insurance segment expense ratio of this quarter by approximately 130 basis points. Investments in our underwriting claims and IT operations explained most of the remainder of the increase in the expense ratio. We continue to expect that the expense ratio for this segment will remain higher than the long-term run rate, until the growth in net written premium we achieved over the last few quarters, both organically and from acquired businesses, is fully earned. Now moving to on our reinsurance operations, where also had solid growth this quarter, with net written premium up 40% over the same quarter 1 year ago. Over 60% of the growth came from the casualty segment, where we were able to write select new opportunities and distress sectors of the market, including a multiyear treaty that represented approximately 65% of the growth for this line of business. As we have said in the past, some of these opportunities can be lumpy and distort quarter-over-quarter comparisons. Property, excluding property cat and property cat make up most of the rest of the increase in net-written premiums. The reinsurance segments accident quarter combined ratio, excluding cats stood at 92.8% compared to 92.5% on the same basis 1 year ago. Parts of the large attritional loss activity we experienced this quarter includes some exposure to the Thomas scope collapse. Our expense ratio remains satisfactory at 26%, down 140 basis points since the same quarter 1 year ago. The mortgage segment's accident quarter combined ratio improved by 290 basis points from the third quarter of last year as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 3.8% is higher by 60 basis points than the result observed in the same quarter 1 year ago, although last year's loss ratio benefited from favorable prior development that was approximately 320 basis points higher than what was observed this quarter. The expense ratio was 20.8%, lower by 60 basis points than in the same period 1 year ago. Total investment return for the quarter was a positive 100 basis points on a U.S. dollar basis points as our high-quality portfolio continued to perform well. Our investment portfolio duration is overrated relative to our fact target allocation, up slightly to 3.64 years at quarter end, as we continue to expect a continued slowdown in economic growth and a lower for longer global interest rate environment. The corporate effective tax rate in the quarter on pretax operating income was 11.7%, and reflects the geographic mix of our pretax income and a 40 basis point benefit from discrete tax items in the quarter. Excluding this benefit, the effective tax rate on pretax operating income was 12.1% this quarter. This time, we believe it's still reasonable to expect that the effective tax rate on operating income will be in the range of 11% to 14% for the full year. As always, the effective tax rate could vary, depending on the level and location of income or loss and varying tax rates in each jurisdiction. Turning briefly to risk management. Despite the recent increases in catastrophe pricing, our natural cat exposures on a net basis remain at historically low levels at October 1, with the Northeast still representing our peak zone at slightly more than 4% of tangible common equity at the one and 250-year return level. We remain committed to deploy more capacity in this segments, if rates and expected returns on catastrophe exposure counts continue to improve over time. In our mortgage segment, we recently completed our 10th Bellemeade transaction earlier this month, with coverage of $577 million. Currently, the enforced Bellemeade structures provide aggregate reinsurance coverage of over $3.7 billion. With respect to capital management, we did not repurchase any shares this quarter. Our remaining authorization, which expires in December 2019 stood at $161 million at September 30, 2019. Our debt to capital -- our debt to total capital ratio stood at 13.5% at quarter end, and debt plus preferred to total capital ratio was 19.5%, down 300 basis points from year-end 2018. In terms of fourth quarter activity, we expect to use resources on hand to fund the Barbican acquisition at closing, once we receive regulatory approval. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions]. And our first question comes from Mike Zaremski from Crédit Suisse. Michael Zaremski : In the prepared remarks, I think you talked about some stress in the marketplace. And it's my understanding that in the primary insurance pace, it could be wrong in this reinsurance, it feels like the greatest locations in the mega sized account space where capacity is very constrained. Is -- just curious if there is there an opportunity that Arch Capital can gravitate? Or that's not your sandbox? Maybe you can talk to where you see the greatest dislocations in the marketplace and which could benefit you? Marc Grandisson : I think your assessment is right on. I think that you'll here on other calls that from the marketplace that the record are larger carry more limits are going to more dislocation because compared -- competitors are reevaluating their risk appetite, which is where the most deployment was, shall I say, overextended in the last several years. And this is where most mediation is taking place. And you'll find that mostly in the E&F and the large commercial, risk is this is where we've seen most of the increase in submission activity. We had been historically been who we are on the defensive for those risk, and we are very well positioned to take advantage of that. I think we are on a receiving end of looking at more of those opportunities as we speak, and this is where we're able to flex more of our muscle. Michael Zaremski : Okay. So just want to confirm. So you obviously have a great rating from the rating agencies and you have a relatively large balance sheet, but the primary insurance balance sheet is smaller. So you -- in terms of counterparties and the brokers, they -- do they see you as like they look at the total Arch entity at balance sheet, when kind of assessing whether you guys can take a big piece of the larger account space? Marc Grandisson : Yes, they are. And I think there are also looking at us from a perspective commercial -- some commercial anecdote for you that we are one of the few that have heightened up the appetite for risk for our price appropriately. And I think community -- the book community and client community is very open to that and very willing to engage with us. Michael Zaremski : Okay. That's helpful. And switching gears to mortgage insurance. There is a recent agreement with the FHA and Department of Justice earlier this week. And there's been some talk about maybe it's shifts mortgage insurance volumes, things coming back kind of to the FHA and maybe out of the private marketplace. I don't know if you have any thoughts there from barking up something that could take place? Marc Grandisson : I always have thought about everything. So my initial comment to you Mike is that, it's very early, right? It was announced last week. It's not early this week. And I think it's an attempt to, I guess, decriminalize being FHA as the result of banking -- the banking system sector sort of being reluctant to provide FHA part to its channel. But we'll see how that goes and where it ends up. There also uncertainty as to whether a different administration would have a different view. And the agreement would like to say and you do. It's too early I will say to tell you. In general, what we here in Washington, though is that the private sector is still most favored area where the government wants the mortgage insurance to be deployed. We have seen this for many years. We'll see where that takes us. But we're watching it, and we'll have more sense for where it goes and it's going to take a long time over the next several years. Michael Zaremski : And just one last one on mortgage insurance volumes. Do you -- I believe in past quarters you kind of alluded to me be given that some market share as competitors all have their own proprietary systems. It feels like probably didn't give up market share this quarter, but it's too early to tell. is that because -- is your view still kind of you might over the next year or so move down a little bit one-off market share still strong obviously on absolute basis? Marc Grandisson : We don't manage the company on a market share basis, as you know, we just put out there are pricing and see where the market gives us in the quarter. But you're right with the new blackbox environment, it's a lot harder to see where everything falls out. And I think we're the only one that most of our competitors will feel the same way. And we're still in the early innings of how they deploy their pricing modules, how we -- how the client react to their versus ours. So I would just see that we put our pricing up there with our return and it so happens that we receive and we're able to write the amount of business that we wrote in this quarter. I would not describe any market share target from what we said. Operator : Our next question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan : My first question -- hey, Marc, how are you? My first question is on your pricing commentary. So insurance, you said 3.5% price in the quarter. And so I'm trying to get a sense, I know there's a lot going on with net book and some new businesses as well as your question. But how do you guys view loss trend, I guess, if you're getting 3.5 points of price, I would assume trying an aggregate probably in excess of that? And can you just help us think that a little bit better? Marc Grandisson : Yes, 3.5% for our portfolio, as you're pointingout rightfully is that it's a very, very diversed book and business. Some lines of business are still, as I said, it's not because of the board housing market. Some lines of business are flattish and some are actually getting way in excess on a 10% and 12% rate increase. And so new business are getting quite a bit of even 5% or 6%, even if you're in the middle-of-the-road. So I would just how you're thinking about your -- the starting point is still pretty important. So it's not -- the 3.5% is the one number at having Capture Rate everything, and it works well when you have a very monolithic marketplace or very monolithic book of business. But as you pointed, our market -- our business is very diverse. So I think that where you see growth is either because we're seeing good opportunities in terms of return -- to the returns regardless of the rate change if we have a rate change in a growing opportunity because than the rate changes clearly beating the loss trend [indiscernible] were always look for margin of safety. We're looking at rate change and claims loss pick it's not a game of decimal. Elyse Greenspan : Okay. And then a lot of new business, right, I think you guys said 3 quarters of the insurance book or some new business quarter. So I guess, as we think about that you're getting good price on that, you said, better than renewal. But I would assume you're probably saying the loss picks a little bit higher than where the legacy Arch business would be? So how do we about the ongoing margin profile of the insurance book, right, and like bringing on this business to get down towards that mid-90s underline margin? Marc Grandisson : Yes my to, if we -- if you look at the way we reacted to the marketplace acquiring business that gives us good return, good margin because it did not have to be because of rate change. It just may because we want to find a new home because of this operative report going of the players are set that business rate our balance sheet. And just add one aspect or whether the rate is going up. I think that we have a very, very straightforward actual method to look at where we were, assuming the loss trend and the rate change and we booked that appropriately and I would argue considerably so that we don't have surprises or we actually have enough room to maneuver going forward. But broadly speaking, margin has -- is expanding as we speak on business in this segment -- in this point of time. Elyse Greenspan : Okay. That's helpful. And then my last [indiscernible] number question. I think the last time you guys updated us mortgage earnings within the ballpark, I think, like 75%. Is that still kind of about the right level or maybe it's gone a little bit higher this year? Marc Grandisson : Well, yes, it's definitely higher this year because mortgage has done phenomenally well and we've got some cap on the P&C side. As the P&C market I think is improving slightly over the last few quarters, and hopefully, there is more room to grow. We'd like to think that the P&C earnings are going to start growing as a proportion of the total, and mortgage will be a bit less so. I mean, mortgage, we still think has a lot of runway in it as well. But just I think we can see more earnings coming from the P&C segments and that should help balance it out a little bit more. Operator : Our next question comes from Josh Shanker from Deutsche Bank. Joshua Shanker : Two questions. One, P&C related and one mortgage related. On the P&C side, obviously, the growth is very strong the quarter. Can we foresee and when can we foresee it a reduction in the expense ratio based on amortizing a larger premium based across a similarly sized cost structure? Marc Grandisson : Yes, Josh, I think, we don't like to have -- mere forecast, but I think it's realistic to see or think that sometime in 2020 as we earn some of the premium that we've, again, the U.K., regional book that we'll shouldering and second half of 2020, like to think that maybe we should see some improvement. Everything else being equal, I think that's kind of we're thinking about. You guys have heard it, we've said before, we're still -- we started target, achieve a 95 combined ratio. That we're not committed to win whether it is at one year, two years or five years down the road. We're making the right improvements along their way, but we certainly -- at least in over the next 12 to 15 to 18 months, like I think that we're going to see some improvement coming through in the combined ratio. Joshua Shanker : Great. And then typically expense ratio, obviously, the loss ratio is up to the underwriting of course? Marc Grandisson : Correct. Joshua Shanker : And then on the mortgage side, obviously, a lot of new insurance written in the quarter, but a very high proportion came from refi's and contracts with LTV lower than 85%. Can you talk a little but about that new business whether this has persistency to it, whether the housing appreciation somebody takes that business off of your book? How should we think about the growth in the core specifically and how it differs from prior quarters? Marc Grandisson : Well, the growth -- the overall market is getting better and you're quite right. Deferred system is actually growing despite the, if you look at of the NBA for the next couple of years to growth and mortgage and origination, it's still there in the purchase market. The refinancing was not a surprise, but it's a reaction to the drop in mortgage rate by 110 bps over the last 12 months. And that's to be expected. So we have this -- I would say flurry, but we had this heightened activity of refinancing that is occurring. And the reason we -- the reason that the refinancing is still the biggest -- I would say the bigger portion with MI attached to it, a lot of it was originated recently, and they still haven't across the LTV blow 80%. So it allows us actually to go back again to the same client and re-up our mortgage insurance offering to them. That's it. Joshua Shanker : Is that refi business more profitable on a risk-adjusted basis because it's closer to getting to a point where there is a low-risk that needs MI, or is it low-risk because of the lower persistency because this is close to getting below 80%? I mean how should we think about that business versus the rest of the... Marc Grandisson : So risk wise it's a little bit -- it's above the same risk wise. It's the same goes for the same price as you are evaluating. I think there is -- pricing is a little bit less pricing and a lot of it has to do with -- it's sort of rolling forward the same book of business. It's like a renewal book of business. So we're saying slightly less. But I think of risk-adjusted is very, very similar after you factor everything in. Joshua Shanker : Are these customers likely the same customers you had before or -- because of your procurement skills or is it -- does the mix change that depends on who picks it up or it's a crapshoot, you get that refi from a previous customer? Marc Grandisson : I think you can make some action points to try and protect our book of business, but the latter is more likely if you don't do anything. I think it just goes through it back. It's thrown back to the pool. It may be refinanced by a different mortgage originator to begin with. So that will have different relationships going along with that. So... Operator : Our next question comes from Geoff Dunn from Dowling & Partners. Geoffrey Dunn : First off, could you provide the net ILM cost in the results this quarter? Marc Grandisson : Well, the way we look at it, it varies obviously by layer or some of the old Bellamy's of advertised. But big picture, Geoff, you should think about roughly 3% of the outstanding balance as the cost. So we told you we about $3.7 billion of outstanding Bellamy limits in place, a 3%. And I will let you do the rest of the math. Geoffrey Dunn : Okay. And then, can you talk by the trend this year in terms of detachment points? It looks like the new business deals we've seen this year have moved beyond just our mask cover and now we're looking at mass plus cap cover. Can you talk about the decision to do that? Market reception for continuing to do that going forward? And how you weight the risk benefit versus cost? Marc Grandisson : Right. Well, certainly initially the attach and detach structures were very much focused on PMI or coverage and capital requirements. I want to say in the last few weeks we moved a little bit, like you said beyond that, there's a bit more focused with rating agencies that have slightly different views on capital requirements. So we're always interested in the trade-off and making sure that, yes, maybe we can get some additional protection at a rate -- at a cost that is efficient for us, and that's part of our capital management decision. So it's -- that's how we look at it. And I think part of your question, there is tremendous appetite in the investment community for such products. As you know, and the fact that we're expanding the programs a little bit and going up a bit more in to the, like you said, pass the [indiscernible] we've had tremendous success in placing those instruments. And we think they are hopefully there for us down the road. Geoffrey Dunn : Okay. And there's a quick last follow-up. The other IIF was basically flat sequentially. Are you -- is that just lapse rate experience or are you seeing any change in the attractiveness of the GSE, CRT market? Marc Grandisson : It's just a normal rolloff, Geoff, or -- as you know, we've been added since 2014 so you would have a sort of a seasoning and still getting sort of a run rate in terms of appetite and having frankly our allocation did more stabilizing for the last 2, 3 years. Operator : And our next question comes from Yaron Kinar from Goldman Sachs. Yaron Kinar : My main question is just around the premium growth and insurance and reinsurance. Seems some growth have longer tail lines, and I think you explicitly talked about a multiyear program that you signed or multiyear treaty signed in the casualty reinsurance. Just given the options that we're hearing about and just kind of increased concerns around deterioration thereof. Can you maybe tell us or talk us through how you gain comfort in growing of those lines here? Marc Grandisson : Yes, that transaction is very unusual. And I would call -- I would put in the camp of a bit more opportunistic in nature. We don't want to renew it for the foreseeable future but, you know, this came to us with a lot of these changes to the pricing, detachment point, and whatnot. So it's not that we renewed the same structure that you're necessarily on. So there's a lot of moving parts to that transaction. That one would be squarely in the camp of -- tremendous distress, which you said in your comments, François, differently at the heightened level of return that we believe more than covers any of the range of outcome of potential outcome on the loss trend going forward. That's about safety here. Yaron Kinar : Okay. And that's specific transition. And then more broadly, be the other program construction that's a surplus casualty? Marc Grandisson : Very similar. I mean the construction in national accounts would have -- workers comp so we have a good more view on the loss trend in there that helps taking our loss picks. On the E&S casualty, I think you would a very similar phenomenon not to the same distress level, that I just mentioned in the reinsurance transaction, but certainly you have similar overtones of distress being pushed into a different marketplace than having to be a repriced. And at price level that we believe far make up for any uncertainty we had in terms of really loss trends. Yaron Kinar : Got it. And then may be more broadly as you are looking at deploying capital into insurance or reinsurance, where you think of something this year reinsurance you are getting the benefit of improving underlying conditions then may be additional improvement on the reinsurance side. Does that become more attractive than the insurance book? Marc Grandisson : I think the reinsurance playbook is a little bit different. I think you have, you can buy Steckler pen, embarked on a significant partnership with a leading company and reinsurance and really move the needle quickly as we saw on the transaction just mentioned on the insurance slower build. But I think, if you look back at our 2002, 2003 history, the reinsurance team is a lot quicker because I had the ability to be much more quicker and get access to business that's going through rate change and improvement rather much quicker than our insurance group well. But the insurance group is not far behind as you seen in the numbers in this quarter. SO more from the same playbook, Yaron. Operator : Our next question comes from Brian Meredith from UBS. Brian Meredith : A couple of questions here. First, I'm just curious on the big transaction, reinsurance transaction. Did it distort any of the ratios? And also was there any under premium portfolio that came in to what intuitive may be the unpaid premium? Marc Grandisson : No. It's early. So I mean, there is no LBD, there is no incoming port in. So it's a great multiyear deal. And then in terms of ratio is not really. So there is normal level of loss ratio, expense ratio, it's been a whole lot has been hard it is. So it really in the big picture for the segment. There's no impact at this point. Brian Meredith : Great. And then just curious in the insurance segment, some of the investments that you're making that you highlighted claims, et cetera, et cetera. How long are those expected to continue here for? And another way to think about it if I look at your underwriting expenses growth that you're seeing, how much of that is due to the acquisition versus just investment you are making? Marc Grandisson : I'd say, roughly speaking, there is probably a good, I mean, more than half, may be 2/3 is from the acquisition that we've made. So we brought on a fair amount of people with the acquisition, and as I said before, beyond the premium as to earn and we think that by early 2020 that portfolio would've been fully with us for a full year. And then, on top of that, there is still a few more adjustments or investments we've made in terms of staff. We brought in some other underwriters to help supplement some of the lines of the business where we see opportunities and other small areas, like I mentioned, claims and IT where there are still investment that we think are making that are appropriate than at the right time for us to make them. I don't think those will keep growing as much. So once the premium that we're putting on the books now turns out or earns over the next 12 months, it should stabilize and level out and may be even kind of go down a little bit. Brian Meredith : Great. Great. And another question, if I look at some of the growth that you guys are putting on, excluding this multiyear trade agreement, why is it more heading towards property, kind of property cat? Businesses tend to be a little bit more volatile, is that something we should expect perhaps going forward a little more volatility in the results but maybe lower underlying combined ratio is kind of shift mix of business? Marc Grandisson : The property that we are growing leaves some balance is not necessarily -- some of it is getting exposed on the insurance side, but there is a cat cover reinsurance protection against the volatilities as a result. On the reinsurance side, I think most of that probably growth is not necessarily cat exposed. So it's a bit of a different growth. Some of the cat exposed, some of the grant cat growing, although we wouldn't say we are relatively underweight very small compared to what you would expect to be on our side. So no we don't expect much more volatility as a result of that. Brian Meredith : Great. And my last question, just curious, as we look at this kind of terrific growth you guys are putting on in the insurance in the reinsurance area, I'm just curious how fundable is the capital between your mortgage insurance business and your insurance and reinsurance businesses? Is it easy to take money out of MI operations, maybe fund growth in the insurance or reinsurance? How's it all work? Marc Grandisson : Well, it's not, 100% comfortable. But maybe you noted in our numbers this quarter the PMI ratio went down in the third quarter as a result of a fairly substantial evidence that was upstream from the U.S. and MI operations to the group. So that is money that was -- that is available to find growth in both insurance and all their other lines of business segments. So how easy is it to do? It's a process. It's not certainly can't do it on a whim or, just overnight. But once we get the regulatory approvals and we sit down with them and show them scenarios and stress scenarios and forecasts and certainly figuring out also conditions he reserves, so there's a lot of sad stories we have to abide with, but picture, we have the ability to use some of that capital and move it around and used in other areas. Operator : Our next question comes from Meyer Shields from KBW. Meyer Shields : I only had one question. Marc, I was hoping you could give -- understand how to think about the expenses associated with these submission flow contingency? Marc Grandisson : Yes, it's more expensive. And I think that more one of the investments that we talk about is to get much more efficient in dealing with those submissions and being more proactive using tools, such as [indiscernible] to really get to the one that we have a higher chance of hitting. So that is certainly part of, yes, absolutely, to the point that we are investing to be able to augment the throughput on the platform. That's one of them. Meyer Shields : Okay. In general to the distribution -- I would ask this. Are the [indiscernible] as the percentages more adequately now or is there enough description in the marketplace that you're seeing or agents are e pitching that doesn't make sense to you to our Arch right now? Marc Grandisson : So right now, we're seeing more submission coming to us. Our hit ratio is not -- it's still in its early stages of finding its footing. Is also reactive to the marketplace price. So -- but clearly, we are finding, and the new business, similar and possibly in a growing modes -- more of our liking as to what's being proposed, can the marketplace. By virtue of the fact that that business did not put out in the EMS market for pricing or for consideration, tells you that it will be most likely repriced. The problem that we have with this, as you could appreciate it, it doesn't mean it's repriced. It's repriced adequately. Right? You could come in come out of a place where it needs probably a 30% increase to get to this E&S marketplace and only command at 10%, to 15%, that's not enough for us to do. It's still very important to be selective in what you do and maintain as we have our underwriting discipline. Operator : Our next question comes from Ronald Bobman from capital returns. Ronald Bobman : I had a question about Watford. It's obviously treating at a huge discount to book. And it's sort of indicates sort of disbelief from my view, a disbelief in the underwriting quality or the investment portfolio or strategy. And not that I subscribe to it, but at least the market seems to describe -- subscribe to sort of one of those 2 justifications. What are Arch's thoughts about where it sits stock-based wise and the plan and may be the use the capital at Arch to remitted it if you're so motivated? Obviously, there are some personal investments, sizable in the last few months by Arch executives. But beyond that, would you comment please? Marc Grandisson : Yes, I'll start. And then something will join in. At a high level, certainly, there's only so much we can say but we're still very committed to the Watford platform. It's been good for us. I think it gives us the ability to access business in a different way that we couldn't be able to do. So just with Arch. Third, the stock price, who knows what the market is thinking. I would argue that maybe there's overreaction in -- based on some of the others hedge fund reinsurers and platform. So I would expect late or think that words can ago but I -- my personal believe that it's probably a bit -- some of the reaction going on. So, Marc, anything you want to we make anything you want to add to this, Ron, I'm still in and I feel like the company's perspective and I would even argue that it's even better this point time I think that marketplace is getting better and watch for is uniquely positioned to sit side-by-side with us and as we underwrite in right could business from the books. So I'm actually more positive if anything today or 6 months ago, which I was already positive to begin with. There you go. Operator : Our next question comes from Ryan Tunis from Autonomous Research. Crystal Lu : This actually Crystal Lu from one question I had was just on elevated losses on reinsurance, you mentioned there's impact from Thomas Cook collapsing. Could you may be give a breakdown of how much of an impact the large losses had on the underlying results there? Marc Grandisson : Yes, I mean, it's not major. I think I just made the point to what, have you guys think about it so that, it can happen. These things happen. This quarter was Thomas Cook, this could have been something else. So right, it's not out of the norm. It's. Right now it's around at 3% impact on the loss ratio this quarter. That's right we are in the business of doing. We ensure. We are in the risk business, and we're not making excuses. We just letting you know, very consistent that what we've seen the something and highlighting it. So that's -- that's all I want to see no. Crystal Lu : Okay. That's helpful. And then one more question on just getting the insurance profitability down to your 95% target eventually. How is the changing pricing environment changed your view on your internal timeline and strategy in terms of business mix there? Marc Grandisson : I think it's not changing where we are going. I think that the market is most likely helping us getting there quicker and sooner. What I would tell you. Operator : And I am showing no further questions from our phone lines. And I'd like to turn the conference back over to Marc Grandisson for any closing remarks. Marc Grandisson : To everyone there, happy Halloween. Thank you, and see you next quarter. Operator : Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,020	1	2020Q1	2019Q4	2020-02-12	2.704	2.75	2.929	2.95	null	14.1	14.35	Operator : Good day, ladies and gentlemen, and welcome to the Q4 2019 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the Company gets starts with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available in the Company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thank you, Crystal, and good morning to you. Arch completed 2019 on strong footing as the mortgage insurance market remains healthy and our property and casualty operations are well positioned for the pricing improvements taking place in many areas of the market. Our operating income produced an annualized return on common equity of 11.7% for the fourth quarter and 12% for the full year while book value per share grew 3.2% for the quarter and nearly 23% for the year. While property and casualty rates are increasing in several lines of business, we believe the market remains in a transitioning phase between soft and harder conditions. Given the uncertainty of current claim trends, we believe our industry needs further rate increases to provide a more clear risk reward propositions. In this transitional environment, risk selection and thoughtful capital allocation remain critical to generating superior returns. As we discussed last quarter, strengthening market conditions are evident to us from both the rise in our submission activity and our ability to achieve significant rate increases. This location is ongoing at some industry participants de-risk by tightening underwriting standards and by actively managing down their exposures. We believe that these conditions are likely to continue in the foreseeable future due to the continuing uncertainty regarding losses from the recent soft policy years. While there are some lines of business where the rise and loss costs can be tied to social inflation, in our review, a large component of the stress on the P&C industry's performance is due to prolong soft market conditions and optimistic loss picks over the last 3 to 4 policy years. But reported capital levels are still high, combined ratios are still below 100. Therefore, the duration of the transition or hardening market is unpredictable. Within our insurance segments, conditions for growth improve throughout the year, as indicated by 29% growth in our fourth quarter 2019 net written premiums. About one quarter of our premium growth came from recent acquisitions, while 50% was created organically through new opportunities and the rest coming from rate improvements. Following three years of elevated property losses in both the U.S. and internationally, property rate increases particularly E&S risks in cat exposed area in the U.S. are up more than 25%. We have also seen rate increases ranging from 10% to 20% in large commercial general liability and public company D&O policies. But as we discussed previously, rates are not rising in all lines and in some areas rates are not rising enough. Switching now to our reinsurance business, pricing in that segment tends to follow primary insurance and we have observed some signs of discipline returning to the reinsurance market. In our facultative reinsurance business, we are seeing increasing submission levels and much improved pricing. Fac reinsurance has been a leading indicator of three market conditions historically and we liked the positive signal fac is giving us at this point. On the treaty side, we are beginning to see modest improvements in terms and conditions including declines in ceding commissions ranging from 1 to 3 percentage points. Ceding commissions remain elevated however and are 500 bps above the level seen in the last hard market. Focusing on the January 1st reinsurance renewals for a minute, rate increases in what is primarily a property cap reinsurance renewal period created a few opportunities for our reinsurance group, but we remain underweight cap risk. As a reminder, our self-imposed internal risk limitation is 25% of equity capital. At this point, our 1 and 2.50-year P&L stand up only 6% of equity capital. Turning now to our mortgage insurance segment, Arch MI continues to perform well. As I mentioned earlier, the operating environment is characterized by strong credit quality and a healthy housing environment. In addition, lower interest rates led to strong new mortgage originations in the quarter. Accordingly, our new insurance written at Arch MI U.S. was strong at roughly 24 billion in the quarter. Overall, our U.S. insurance in force was 287 billion at quarter end and the underwriting quality of recent originations remained very high. On a macro basis, lower interest rates and high employment have made housing more affordable. At the same time, demographic forces in the U.S. are creating a tailwind as millennials move into their prime household formation years. Lower interest rates also led to greater refinancing activity in a quarter which explains the decline in our persistency rate in the fourth quarter down to 76%. From a historical perspective, this level remains high and along with good mortgage origination activity, supported growth in our insurance enforce in the quarter. With respect to our investment operations, interest rates have returned to historically low levels as in our underwriting approach, we have maintained our focus on risk adjusted total return which contributed to our growth in book value per share in this quarter and the year. In summary, Arch is positioned following years or deemphasizing the most commoditized and soft business lines in property casualty market is favorable. We have the human and financial capital to grow should the market continue its favorable trajectory into 2020. And with that, I'll hand over the call to Francois. François Morin : Thank you, Mark, and good morning to all. Before I give you some comments and observations on our results for the fourth quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results executing the other segments, i.e. the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $308.4 million, which translates to an annualized 11.7% operating return on average common equity and $0.74 per share. Book value per share grew to $26.42 at December 31st, a 3.2% increase from last quarter and a 22.8% increase from one year ago. This result reflects the effective strong contributions from both our underwriting and investment operations. Starting with underwriting results, losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $30.4 million or 2.2 combined ratio points, compared to 9.7 combined ratio points in the fourth quarter of 2018. These losses impacted both our insurance and reinsurance segments and were primarily due to typhoon Hagibis and a series of smaller events. As for prior period net loss reserves development, we recognized $54.7 million of favorable developments in the fourth quarter, net of related adjustments, or 4.0 combined ratio points, compared to 6.1 combined ratio points in the fourth quarter of 2018. All three of our segments experienced favorable developments at $2.8 million, $19.1 million and $32.8 million for the insurance, reinsurance and mortgage segments respectively. We had solid net written premium growth in the insurance segment of 28.7% over the same quarter one year ago. The insurance segments accident quarter combined ratio excluding cabs was 101.6% higher by 330 basis points from the same period one year ago. Approximately 220 basis points of the difference is due to an elevated level of large attritional claims in the quarter, primarily from our surety units, which can experience some volatility from quarter-to-quarter. The balance is primarily due to a higher expense ratio, driven by the investments we are making in the business and the integration of our UK regional book and other smaller acquisitions. Now moving onto our reinsurance operations where we had a relatively stable quarter. Net premium growth was at 4.3% from the same quarter one year ago, and the accident quarter combined ratio excluding caps stood at 92.3% compared to 96.2% on the same basis one year ago. The different is mostly attributable to the presence of a large attritional casualty loss arising from the California wildfires in the same quarter one year ago. Our expense ratio remained essentially unchanged at 26.9%. The mortgage segments accident quarter combined ratio improved by 200 basis points from the fourth quarter of last year, as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 0.9% is lowered by 120 basis points than the result recorded in the same quarter one year ago, mostly as a result of better than expected claim experience. The benefit of the loss ratio from current year favorable development was 510 basis points in addition to the 940 basis points related to prior years. The expense ratio was 20.7% consistent within the results in the same period one year ago. Total investment return for the quarter was a positive 177 basis points on a U.S. dollar basis as our high quality portfolio continue to perform well. For the 12-month period, our portfolio returns 7.3% an excellent result driven by particularly strong returns across our fixed income and equity investments. The duration of our investment portfolio December 31st, was down slightly to 3.40 years from 3.64 years at September 30th, it was overweight relative to our target allocation, as we continue to expect a lower for longer global interest rate environment. The corporate effective tax rate in the quarter on pre-tax operating income was 6.9% and reflects the geography mix of our pre-tax income and a 30 basis point benefit from discrete tax items in the quarter. The 2019 fourth quarter effective tax rate on operating income includes an adjustment to interim period taxes recorded at an annualized rate. This adjustments increase the Company's after tax results on pre-tax operating income available to Arch common shareholders by 12.4 million or $0.03 per share. As always, the effective tax rates could vary depending on the level and location of loss or income and varying tax rates in each jurisdiction. Joining briefly to risk management with the recent improvements in catastrophe pricing, we have increased our natural cap PML to 612 million as of January 1, which at slightly more than 6% of tangible common equity on the net basis remains well below our internal limits at the single event 1 and 2.50-year return levels. This change demonstrates our ability to deploy incrementally more capital in an improving market to opportunities that offer adequate returns on an expected basis. In our mortgage segments, as mentioned on our prior earnings call, we completed our 10th Bellemeade transaction in the fourth quarter, with covers of 577 million. As of year-end 2019, the enforced Bellemeade structures provide aggregate reinsurance coverage of approximately 3.3 billion. With respect to capital management, we did not repurchase shares this quarter. Our remaining authorization which expires in December 2021 stood at 1 billion at December 31st. Our debt to total capital ratio stood at 13.1% at quarter end and debt plus preferred to total capital ratio was 19%, down 350 basis points from year-end 2018. Finally, as you know, we closed on the Barbican acquisition in November of last year. The integration of their platform is well underway. For the 2020 calendar year, we expect to incur approximately 65 million of intangible amortization across all acquisitions we have made prior to December 31, 2019. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] And our first question comes from Yaron Kinar from Goldman Sachs. Your line is open. Yaron Kinar : So my first question just goes to growth in the insurance segment, if I heard your comments correctly, it sounds like you're so lukewarm in terms of the market opportunities and the rate environment and rate adequacy. And yet, I think even excluding the acquisitions, you grew at a good 20% clip or so. I guess where are you seeing the opportunities? And if you were to become more constructive on market conditions, where do you see that growth of gapping? Marc Grandisson : The first part is, I think, we're lukewarm in the sense of saying, it is a full on hard markets. We just want to impress upon everyone that, when the early stages that really changes then we don't know how long that's going to last. And I also make comments about the fact of the industry has an all time capital high, and still printing very reasonable combined ratio numbers. So I just want to make the point that it's not across all lines of business. Having said this, there is a growth, as you see us experience and go through for the year and certainly in the fourth quarter are even the areas where market coming back to our pricing levels and return expectations. So, we had deemphasized those lines of business for quite a while actually as a softer year. We're eating into our on production. And I think of late, we've seen a resurgence of submissions, and we're able to hit and get our pricing and return. So in the areas where we're growing, I would say that it is definitely an improving market and improving such that we believe we're clearing some of the lost trend or loss cost trend concerns that one may have. So, I also want to remind that we had not grown as much as the market would have, probably would have indicated over the last year. So, this is hyper -- no, this is good group on a lower number. For instance on the D&O side, our premium written was about half of what it was last year versus five years ago. So, you don't need much of an increase to really make a dent in the overall price increase. And the second question is. We can grow a lot. And as we saw, you asked, Yaron, whether we can grow based on the conditions. If conditions continue on and we're seeing right now still getting something very, very good, I think we can still grow a fair amount. I think we have been -- our guys, our people have been very busy even in those softer years, but I do believe that we have extra capacity and an appetite to write more, quite a bit more, if it happens. How much will depend and be dictated like overall rate level in 2020. Yaron Kinar : It sounds like that premium growth could accelerate in the right market conditions. Marc Grandisson : That is a fair statement. Yaron Kinar : Okay. And do you have any sense where you're booking the current, the new business coming on relative to the overall portfolio in insurance, like with the adequacy of returns there is? Marc Grandisson : Yes, so we haven't changed much of a lost pick. Now, I want to put things in perspective as well is that, the rate changes that have taken place that we're talking about really started to be, we believe enough above the lost cost trend since the middle of 2019. So, it's a bit early and premature to make any changes to your booking of loss ratio. You look at on an accident year basis. Plus, things could develop on historic, history, all the action years prior to 2019. So, it's premature to make any comment and to lost pick as we speak. Frankly, lost pick, if they ought to improve and we believe everything else being equal, they should improve over the next couple of years. They will take 6 or 7 quarters to really see good tractions and see some movement there. Operator : And our next question comes from Jimmy Bhullar from JP Morgan. Your line is open. Jimmy Bhullar : First, I just had a question on the tax rate. It improved the lost '18 to '19 and I think it was lower than what you had expected as well. What's driven that? Is it just the geographic make ups of income? And what's your expectation or sort of likely range for 2020? François Morin : Well, yes, a couple of points here. I think, it was a bit lower than what we had, I guess, given as a range earlier in 2019. There was a couple of discrete items that played out throughout the year, which helped out in terms of publishing the final tax rates. So when I just -- I took some of those, I look back and without these adjustments which is really how we think about when we give you a range, the 2018 tax rate was 11.2. This year, it was 10.9. So, very close. Ultimately, we had some additional benefits that brought it down to 10.4 for the year. So, yes, I mean, as you know, tax rate is very much a -- it's hard to have a lot of precision on the tax rate because we just don't know where the losses are going to be before they happen. So whether there's a gap favorable or unfavorable developments on prior year was et cetera. So looking at 2020, I'd say, we're very comfortable saying that we're going to probably be in the same range, maybe, if you want to expand, maybe to try to make sure we're in the range, maybe 10 to 14. Last year, we had 11 to 14, so, maybe there's potentially could be a bit lower, but I think it's a bit early again, I mean they were early days of 2020 and hopefully that that's enough for you to update the models. Jimmy Bhullar : And then on the MI business, obviously, your overall margins have been very strong and same goes for peers as well. And a lot of that strong results on the legacy block, but if you look at new business ROE, are those in the sort of double-digit range? Or is this more sort of a single-digit ROE type business in terms of new sales? And I realized, it will take a while for your overall leadership towards your business ROE. François Morin : I am almost choked out now. We're solidly well in the double-digit returns still in the market. It's still very good quality. I would even argue to the risk of the later, last half of the year, actually improved so much for the industry, not only for us. And I think that has to do with Fannie and Freddie so putting bit more constraints on the risk layering in the business, so no, still very, very healthy returns, very healthy. Jimmy Bhullar : And then just lastly on any comments on the 1-1 renewals and specifically what they better worse than your expectations? And anything, any sort of views on the sort of upcoming 4-1 renewals in midyear? François Morin : The 1-1 renewals were in continuation might you have some rate increase in the third quarter, broadly in industry. Fourth quarter was a bit better. The first quarter lined up to be, yet better yet, so yes, better rate environment at 1-1 clearly for the first quarter. We don't know what it means for 4-1. I am done prognosticating what the future will hold. It's the low of supply demand and perception of relative risk is a market based thing. So, sometimes, I think markets should go up and if it doesn't and sometimes it goes on, it's all over the place. So, it's too early to tell where 4-1 and 7-1 will end up, but clearly if the momentum that 1-1 continues, no, it's going to be -- it's an improving market, clearly. Operator : Our next question comes from Elyse Greenspan from Wells Fargo. You line is open. Elyse Greenspan : My first question is, I guess on 1-1 a little bit. We've heard about the retrocessional market being pretty strong this year. Has Arch written more of that business? And just how did you observe on what went on in the retro market at 1-1? Is that a sign of potentially better things to come? Or would you think it would be for some of the 4-1 and 6-1 renewals? François Morin : Yes, I mean, you see that a little bit in our cap P&L. They went up in large portion because of additional retro business that we wrote that I would say was very much opportunistic. So whether that sticks and whether that means tells us something about 4-1s or 6-1s, we just don't know. But for sure, we saw some definite, some good opportunities in the specifically in the retro space at 1-1 that we were happy capital to be able to deploy and take advantage of the opportunities. Elyse Greenspan : And then, with the insurance book, I know you guys in the past have talking about that expense ratio being elevated just due to the accounting and earn in from some of the more recent deals you have done. I'm assuming that there was still somewhat of an impact on that in the fourth quarter. And can you just kind of give us a sense to think about, if you have far between coming on how we should think about the expense ratio within the insurance book in 2020? François Morin : So, as I said in my remarks, I think the expense ratio was roughly call it, a 130 bps or so was, in this quarter was the result of the effectively bringing on online, the UK regional book. So, we're now a year into it. So everything else being equal 2020, we should see the premium being earned out and the expense ratio coming down. The new twist is Barbican and as Lloyd market in particular has a slightly higher elevated expense ratio, which we think is. There's an offsetting benefits and the loss ratio, but I mean, to give you a bit of directionally a bit more we think it's only 2020 expense ratio is going to be pressures, we think it should be right around where it was for 2019. It's not going to improve materially, I don't think it's going to get worse, because we're going to see some benefits, but I think it should be about at the same level. Elyse Greenspan : And then lastly on the insurance pricing, Marc, you seem to be pretty positive especially relative to where your comments have been for most of 2019. And it's a developing market and I guess every market seems to be different and no capital, obviously, a lot more robust. And if you don't back past up turns. Is there any running market, like, if you think back to or just history? Does this compared to the early 2000s, this compared to kind of 2013? Is there a market that this feels similar to when we can kind of think about pricing improvement? Or does it feel because of the social inflation issue may be different than any of these past markets? Marc Grandisson : It's different in terms of the health of the industry and the combined ratio as I mentioned us for sure. So that makes it a very unique opportunity. But I do believe we have major players pulling capacity out. So even though it's printed capacity, effectively used capacity is definitely lower. In the overall market specifically in the larger risk and some of the players and we've talking about them being clearly one of them. I think I would tend to think it looks as field -- and more of the 2005 after Katrina, Rita and Wilma because capital were still plenty, people pay that claims, a couple of companies have some issues but by and large, the pricing went up and this was larger as a result of perceived risk. And I think this is what's going on. I think people as an industry, this uncertainty about around socialization is creating a lot of uneasiness and pushes us to want to charge more to make sure we cover as much of the eventuality as we can. So that's sort of what I would say the proceeds. The heightened risk perceived is higher, it's not a bankruptcy driven, reinsurance driven, necessarily market term. So, it's a blend of a few of those. It's hard every month, I guess you live and learn and experience new things as you go. But that's what I would summarize it to be. Operator : Thank you. And our next question comes from Mike Zaremski from Credit Suisse. Your line is open. Mike Zaremski : First question on U.S. MI, one of your competitors this morning spoke to decline in -- expected decline in premium yields in 2020. Any color there whether you expect similar dynamic given on pricing on a new business might be a little tighter versus using risk-based pricing? Marc Grandisson : I think that the phenomenon that's going on as a result of refinancing, clearly points you to our lower price and lower premium rate and that's because the risk is less. A lot of the refinancing we saw in the last two quarters and accelerated in the fourth quarter is people sort of refinancing because the interest rates are just that much better and it makes sense for them to refinance. By doing so, the LTV that was originally put on a book of business, two or three years ago, is actually lower, which is lowering the risk. And everything else being equal, it also has a knock on effect on the DTI right on the debt-to-service, to income servicing and improves them as well. So that risk that you -- the same people, same house, same environment, but -- and there's also there was also some house price appreciation. So you get all these things going on. This is a not as risky proposition now as I just said it was two or three years ago. So would lend itself to the pricing should be indicate the lower pricing because of all these various moving parts. But it doesn't either return does change. And that's really the key that we want to share with you guys, is top-line in MI I is really, really hard to pin down or singles as cancellations. And it's very hard to see how it all evolved. But in the what we care about and what we've seen is a return characteristics and the things that will be financed which one could say is underlying as somewhat decrease in price and premium rate is actually just top-line phenomenon is not a return phenomenon. The returns are still very healthy. And that's what we're actually focusing on. Mike Zaremski : Okay, that's, that's helpful. Next, just kind of broad question about the reinsurance segments. If I kind a look at the combined ratio, the last couple years has been the mid-90s. I think that translates into a single digit ROE, but you can please correct me, if that's not right? And I guess catastrophe levels don't appear to have been materially higher than expected, either. So, just kind of thinking about the future, is it largely reflective of just simply the competitive operating environments? And I guess hopefully there's continued momentum it's doesn't 20 to improve the ROE profile of the segment? Marc Grandisson : So, first, you're wrong, it's not in single-digit. So let me clear. I think this is much burden here. I think that the -- our reinforced portfolio is not a, is a different one and then just a mix shift over the last two or three years. We were a lot more -- we're a lot more property cat on probably 10 to 12 years ago. So, there's always moving part in the reinsurance platform. And I would say that our play for instance in motor in Europe will by definition lead us to a higher carbon ratio, but the returns are feel pretty, you know, very well in excess or well in the range of where we would want them to be to write that business. So, I think your combined ratio in reinsurance is just a reflection of this constant calling, pulling, pushing through realigning capital within the various lines of business. And I think what you're seeing is a combined ratio that is just reflective of what we see in terms of opportunities in terms of returns I can tell you for certain that our reinsurance group has a very, very ambitious return on equity expectation when you would like the business and that's what every underwriting decision is based upon not to not a combined ratio. Mike Zaremski : Okay, got it. I was wrong that there's your portfolio that host probably less capital than I was assuming then again versus some peers. Marc Grandisson : But the one thing I'll add to that, Mike, just quickly on the returns and that's really, it's all about our cycle management where our premium volumes went down quite a lot over the last number of years on the reinsurance segment. If the market gets healthier, which it's showing some signs of that, I think I don't think our returns will necessarily get that much better, but I think we'll be able to have a bit more growth on the top line, expand the platform and see more opportunities. Operator : And our next question comes from Brian Meredith from UBS. Your line is open. Brian Meredith : First, just on the insurance segment, you talked about how Barbican is going to impact your expense ratio. Will it have any impact in underlying loss ratio? And I guess just to add to that, is it going to prevent you from maybe achieving an underlying combined ratio below 100 in that the insurance area in 2020? François Morin : Well, Barbican is in the big picture doesn't really move the needle, it's brings a lot of nice trace with it. It has some key businesses that we like. It has also gives us -- it makes us more relevant in London. But the one thing that you should be aware of is, a lot of the capacity that Barbican is deploying is actually third-party capital. So that doesn't stick to our ribs. In terms of the combined ratio, yes, we'll have some benefits on the fees and et cetera. But, big picture, Barbican on a net basis wrote about $125 million of premium last year in 2019, split roughly 50-50 between insurance and reinsurance, whether that business, we're certainly going to shut down some lines, we're going to do some re-underwriting along the way. So, once you do a bit of math on it, you'll quickly hopefully appreciate that, for these are segment on its own, I mean, Barbican is not going to be a big factor in how 2020 plays out in to the combined ratio. Marc Grandisson : On that note, to François point, realistically, Brian, we need to focus on and as we are right now growing and seizing the opportunities as it presented into our insurance segments. And if anything that will bring us to the combined ratio that will lead us to 12-ish our return on equity, I think it's going to come through to the current opportunity that we see in our ability to see upon it, which is no plenty. Brian Meredith : So I guess what you're saying is that it could be the underlying combined ratio kind of dropping below 100 and getting to those returns. We may not see it here in 2020 but it's 2021 or whatever is the opportunities for you to come in? Marc Grandisson : That's right. If you look, Brian, the rates really move starting middle of last year and a lot of stuff is being renewed still in the new "rate environment". So, we have to write the business first, you have to earn it. So, 2020 and 21, you're exactly right, you're exactly where we are. That's why it takes a while to see the good deeds being reflected. The same way takes a long time for bad deeds to get reflected, may I add. Brian Meredith : And then other the reinsurance, Marc, I'm just curious. I know a lot of the businesses you write is quota share type business. How much is your reinsurance businesses, political those 2 areas where you're seeing a significant amount of price increase be it E&S, certain property lines and then you might see a good benefit from the subject premium pricing coming through? Marc Grandisson : I think the beautiful thing about our friends on the reinsurance group is that they go anywhere kind of company. They can do anything, go anywhere, do anything. So, in general, they have access and are able to see the deals that are E&S, casualty property, whatever. So there, we have it. We've been around for 18 years. We've written a lot of reinsurance, we're still a billion and a half plus. We're not as smaller the grand scheme of things, but we still have a lot of selling points in London and Zurich, in the U.S. and Bermuda. So, we're able to grow, if a growth opportunities are there. There's no issue in whatsoever. Brian Meredith : But what about your subject premium basis that are already in the books. So are you seeing kind of growth there? Marc Grandisson : I think by virtue of the improvement used for point, we don't give guidance, obviously, as you know. Nice try. If rates keep on increasing and keep at the level they are at the healthy, no positive rate. And if it keeps into 2020, 2021, we will have a more premium, clearly. I'm not sure it's what you asking for not the answer the right question. So I'm trying to give them the right issue. Brian Meredith : I think I'm just, what I trying to get at is that I get the premium growth situation, right. And then it's more the underlying obviously business, is obviously seeing improved price too in write and rate. Just like you're seeing in your own business and just would impact that could potentially have on your reinsurance margins? Marc Grandisson : Of course, yes, you're right. We're seeing through the full year share. The newer phenomenon is anecdotal. It just seems to be starting. Even the excess of loss pricing now is taking up in speed. So that's also encouraging. So we may have some, at your point, you're right. We're not a huge excess of loss at least in a traditional, general liability lines and professional lines. You're right. We're benefiting from our quarter share participants and company. Yes, we are. Operator : And our next question comes from Meyer Shields from KBW. Your line is open. Meyer Shields : I had a couple of small questions to start off with. First, are there any plans to change the amount of mortgage insurance that's retained on U.S. paper versus ceded to Bermuda in 2020 versus 2019? François Morin : No plans at this point. I mean, as you know, it's all about we try to have as much capital as we came in offshore just because it's a better domicile, gives us more flexibility. But at this point and as you know, there's tax implications, we don't want to trip the BTAX issue. So, at this point, no plans to change anything. Meyer Shields : Okay, perfect. Second, I know in the past, you've talked about capital deployment opportunities that ended up at Barbican and in the UK. And I was wondering, if you could give us a sense as to what you're seeing now in the pipeline and some other potential opportunities? François Morin : I think we're seeing a bit less. I think people are busy more looking at their stuff and trying to improve their book of business. I think there's really a more of an inward focus. I think, M&A, we see all of them or we believe we see most of the transactions that have been talked about. I think we were a bit more open and we're able to strike some transactions over the last year because the pricing was right and the opportunity was there. But yes -- no, we don't see acceleration or somewhere to decreased activity. But I think just as a result of this current marketplace being a bit more dislocated, that's really what I would say. Meyer Shields : Okay, and then that brings me to third question. I'm wondering whether you talked about how combined ratios are still being reported as profitable but there's also the soft market impact, which at least I would interpret as suggesting that maybe the real from our initial aren't as good. Does that delta look any different now than it is before past hard or hardening market? Marc Grandisson : That's a really good question, Meyer. I don't know the answer this. I haven't looked at the numbers of the end of '99-2000. It doesn't seem -- I'll tell you my gut feeling, right now, it doesn't feel to be as much of a delta. And also in terms of what impact it could have on a capital market, if we were more levered as an industry '99-2000. We're running a 1.3-1.4 premium to surplus. Now we're point 0.7-0.65-0.8, whatever. So a lot less than ever, so probably more absorbable but at the same time, there's this investment income. So if you look at if you think that the market changes as a result of being cash flow negative or having to not having recurring income then I think that it's we're probably in a similar position, meaning that the loss -- the losses or if you combine the underwriting income with the negative at the end of 99with the investment income, which was very positive I think we're probably in combination in a similar place. We have higher capital, so more cushion to absorb it. Operator : Thank you. Our next question comes from Ryan Tunis from Autonomous Research. Your line is open. Ryan Tunis : Hey thanks. I just had a couple. I guess first one, thinking about 2020 is a potential year, given what's happening from a pricing standpoint for margin improvements for the industry. I understand why that could be challenging for some, but I think when I look at our relative to competitors. There is more of a short tail mix, whether it's in primary insurance also facultative re. So, I guess, Marc, if you just comment on why isn't there more constructors near-term outlook for margin improvement, given you're clearly getting rate, in some case, rate on rate in some these property lines where there does seem to be kind of a layup argument for margin expansion? Marc Grandisson : So let me collect you quickly, Ryan, on insurance side. We're 70% 75% liability, in terms of premium written. So that was sort of sort of dampens if you will, the acceleration or the recognition of the improvements in terms and conditions. So make us a bit more cautious. So that's something you need to bear in mind. This is only insurance segment. And again, on the insurance segment, even speaking to the short tail is still does take a while to get through, again, like I said, significant improvement rate should we took place starting middle-ish of 2019, so it does still take a while to recognize and really see the earning coming through the earned premium. It's a combination of for other underwriting years. On the reinsurance side, I'm trying to think of it, I think it's also -- there's a fair amount of liability as well in there, right, François? There is also a fair amount of property, although property, as you, as we mentioned, is also deleverage on the property cap, we did increase the other property. We're running a lot more on the non-cap itself. This is more opportunistic and that you're right. We should probably see whether we were, what margin expansion that was and we needed there, we should see it, but again, it was written last third or fourth quarter so will come again over the next 12 months. So it takes a while, you have to be patience is a virtue in our industry. Ryan Tunis : Understood. And then my second one is just around I think we've, it seems like we've heard the last from the reinsurers about the casualty environment and loan losses coming in and maybe you could just talk about your expense ratio, what do you seeing on the reinsurance while compare to the claims activity on the casualty side versus primary? This is a real lag of the claims starting to happen or is that's probably still on the comment any theory as to whether this how we might see more paid losses I guess in the reinsurance side? Marc Grandisson : It's a very, very good question. I think when we do have a tale of two cities here. I think that our insurance, our senior claims, of course, we have the advantage or the luxury to have an insurance company that's on top of claims and no, and participants the marketplace. When we look at what information our reinsurance folks are getting, there is clearly a lack. I'm not saying this nothing is informed or whatnot, but there was clearly a lag. And it's been there forever. This is not a new phenomenon online, this has been going on for years and for as long as we've been I've been in the business, it's been there and it was there before my time. So, there's always information in symmetry and information delay. By the time it gets to the insurance company, they have to look at this evaluate, book or reserve or not book the reserve and then they in turn, inform their reinsurance partners. On the quarter share, it's a little bit easier because you're able to do more claims review and beyond to be side-by-side with them. You can also compare whether we have other of our clients from similar risks and whatnot on excess of loss, as you could expect, it's a little bit more difficult. There is a further lag on that one as well. So, we clearly have a lag in recognition and our reinsurance company has been really, really adamant and proactive and try to recognize some of the losses that may not be enough, enough reported. And that's also what made us be a bit more careful in our current ratings or lack thereof in the liability space, but there's clearly a lag on the reinsurance side. Operator : And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Marc Grandisson for any closing remarks. Marc Grandisson : Thank you, everyone. Happy Valentine's Day. Make it a Happy Valentine's weekend, if you have a chance. Talk to you next quarter. Operator : Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,020	2	2020Q2	2020Q1	2020-05-05	2.802	2.85	2.976	2.992	null	14.36	9.19	Operator : Good day, ladies and gentlemen, and welcome to the Arch Capital Group First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference Mr. Marc Grandisson and Mr. François Morin. Sirs you may begin. Marc Grandisson : Thank you, Shannon, and good morning to you. It would not be an understatement to say that, the coronavirus has changed the world since our last call with you just three months ago. Fortunately, at Arch we are entering this period with the investments we have made in our P&C business beginning to pay off, while our mortgage group navigates through the current turbulence. If you work long enough in the insurance business, like I have, you are bound to experience the industry cycle its highs and its lows. As management, we have to keep our eye on the goal which for Arch is generating sustainable growth in book value per share. The current stress in the financial and insurance markets reminds us of changes that can occur to which we need to adapt. While we are still early in the assessment of our direct and indirect claims exposure to the coronavirus, it is clear that this event will be a significant industry loss and will result in profound changes. However, dislocation often leads to opportunity. As you know, one of Arch's strategic principles from inception has been cycle management. We are embarking in this new market environment, with both a strong financial foundation and the creative ability of our more than 4,200 employees that position us for the opportunities that will emerge. Turning to the quarter. We saw improving conditions in our P&C businesses, while our mortgage operations continued to produce good results. Strengthening P&C market conditions remain evident, even as the economy contracts. We have seen a rise in our submission activity along with accelerating rate increases, across multiple lines of business in Q1 and it is continuing here in Q2. Our belief in the continuing hardening of the P&C market is due to the need our industry has to address the accumulation of risk factors over the last five years of soft market conditions. These risk elements are; one, future claims and covered litigation related to COVID-19; two, a heightened perception of risk in general; three, economic uncertainty; four, a continuation of low interest rates and the dampening effect on investment returns; five, a potential for shortfalls in casualty reserves; and six, reduced availability of retro and alternative capital in general. These risk elements are all in play today and are likely to lead insurance companies to be more cautious in allocating capital to risk. In our insurance group, our strategy remains to be selective and pick our spots in this improving market. The rising rates environment and dislocation in the markets have allowed us to grow profitably in the past two years in many sectors, such as, E&S property, D&O and E&S casualty. On a reported basis, we saw our margins improve this current quarter as our accident combined ratio ex-cat of COVID and PYD improved to 97%. In our reinsurance business, pricing is also improving and we continue to observe tightening of terms and conditions in many lines. The value of reinsurance as a capital protection tool has been enhanced by the recent events. The hallmark of our reinsurance group remains the dynamic allocation of capital to contracts that will provide appropriate risk-adjusted returns, while helping clients with solutions that are tailored to their needs and was a large factor in our growth this quarter. Switching now to our mortgage insurance segment, the industry is facing its first significant test, since the fundamental reforms and product improvements that were adopted following the global financial crisis or GFC. As you know, Arch MI is a data and analytics-driven company and our investment in the sector was predicated on a new and better MI operating model than the industry employed prior to 2008. Now, pricing is more precise, products and documentation are better and the MI industry buys protection against downside. In addition, another change in the industry can be; seen in the aggressive government actions taken in the early stages of the pandemic directed at helping borrowers stay in their homes. The GSE's forbearance program and the unemployment benefits programs provide unprecedented support that should enable borrowers to cure delinquent – delinquencies as the economy improves and will result in fewer losses. As noted in our quarterly HaMMR report, the MI industry is far better positioned for a recession than they were in 2008. At that time, mortgage insurance portfolios were facing a housing market that was significantly overbuilt, risky mortgage products and less creditworthy borrowers. More than two-thirds of mortgage insurance written in 2007 would have been uninsurable during the last 10 years. And finally, there was a speculative bubble in home prices. Mortgages filed under the FHFA's forbearance programs, were estimated at 5.85% of the GSE mortgages as of April 26. This program allows homeowners to suspend mortgage payment for six months, which can then be extended for up to another six months. While initially recorded as delinquencies under GAAP, our data on forbearance programs utilized in recent natural catastrophes indicates that almost all of these loans cure by providing borrowers time to return to work. Over the next few quarters, rising delinquency rates under GAAP, should lead to elevated loss ratios in the MI segment. Furthermore, once the forbearance programs expire, the GSEs have instituted a sturdy list of remedial solutions that once again will enable loans to be back-performing. We realize that this pandemic-led recession will be different than a GFC. But based on what we can see today, our view is this is an earnings not a capital event for Arch. It is worth noting again, that even if this recession is worse than we currently expect, we hold significant reinsurance protection on our risk in force that would moderate our net losses even in a more severe recession. While some of our reinsurers' quota share attaches at first-dollar loss that index-linked know that from our Bellemeade securitization, we’ll provide up to an additional $3 billion of excess and loss protection, if this becomes a recession worse than what the industry experienced in a GFC. Lastly, turning to our investment operations. We believe that interest rates are likely to stay at historically low levels for the foreseeable future and that will over time require insurers to improve their underwriting margins through price increases. In our investment strategy, as in our underwriting approach, we have maintained our focus on risk-adjusted total return while enabled us -- which enabled us to avoid much of the negative impact of the pandemic on our investments this quarter. As perception of risk increases, so does the cost of capital and underwriting discipline becomes important. Again, recent world events reminds us that risk is always present, that insurance premiums must include an adequate margin of safety and that reinsurance plays an important role in protecting capital and returns. In summary, through to Arch's cycle and risk management principles and fortified by our conservative balance sheet, Arch is prepared for this crisis and is well-positioned to continue to build on its track record of book value growth. In closing, I want to thank all of our employees around the world, as they are responsible for the success of Arch, and are working tirelessly throughout the world to meet the needs of our insurers. Thank you. With that, I'll turn the call over to François. François Morin : Thank you, Marc, and good morning to all. We, at Arch, hope that you are in good health in these difficult and uncertain times. This quarter, in anticipation of some of the questions you may have, I will try to elaborate in more detail on some notable items in addition to the regular discussion of financial items. I recognize this may take a bit longer than usual, so please bear with me. Now on to the first quarter results. As a reminder and consistent with prior practice, the following comments are on a core basis which corresponds to Arch's financial results, excluding the other segment i.e. the operations of Watford Holdings Ltd. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $189.8 million, which translates to an annualized 7.1% operating return on average common equity and $0.46 per share. Book value per share decreased to $26.10 at March 31, a slight reduction of 1.2% from last quarter and a 12.9% increase from one year ago. The defensive posture of our investment portfolio ahead of the COVID-19 crisis served us extremely well in preserving our capital base relatively intact during the stressed economic environment of recent months. I will elaborate on this in more detail later on. Outside of the losses related to the COVID-19 pandemic, which impacted on our first quarter results, our underwriting groups fared very well this quarter with strong growth and generally improving underwriting results through our property casualty insurance and reinsurance operations. Given the unusual circumstances and breadth of the pandemic, we have classified COVID-19 losses as a catastrophe. However, as you saw in the financial supplement, we have also provided the segment level detail of our current estimates to assist with the analysis of the underlying performance of our book of business. We expect to follow this approach until the end of 2020 at a minimum. Losses from 2020 catastrophic events in the quarter, not including COVID-19, net of reinsurance recoverables and reinstatement premiums stood at $31.8 million or 2.0 combined ratio points compared to 0.6 combined ratio points in the first quarter of 2019. The losses impacted both our insurance and reinsurance segments and were primarily due to various U.S. severe convective storms, U.K. storms and floods, and Australian bushfires. We recorded approximately $87 million of COVID-19 losses across our P&C operations, split 41% to insurance and 59% to reinsurance. While it is still very early and we have extremely limited information to accurately quantify our potential exposure to the pandemic, we believe that it was prudent to establish a certain level of IBNR reserves for occurrences through March 31, based on policy terms and conditions including limits, sublimits and deductibles. These reserves were recorded across a limited number of lines of business, such as property, where we have a very small number of policies that do not contain a specific pandemic exclusion and/or explicitly afford business interruption coverage under a pandemic and trade credit. As regards the potential impact of COVID-19 on our mortgage segment and our estimation process at this time we believe it's important to make a distinction between our U.S. primary mortgage insurance unit which we refer to as USMI and the rest of this segment which includes our international book and our portfolio of GSE credit risk transfer policies. For USMI pursuant to GAAP our estimates are based only on reported delinquencies as of March 31 2020. However, given the potential effect of the pandemic, we elected to book reserves at a higher level of confidence within our range of reserve estimates for such known delinquencies. The financial impact of this increased level of conservatism was approximately 5.2 loss ratio points across the segment. For the rest of this segment the loss-reserving approach we use is more consistent with traditional property casualty techniques where loss ratio picks are set at the policy level and are able to consider future delinquencies on business already earned. This quarter in response to the potential impact from the pandemic across our portfolio, we adjusted our loss-ratio picks for some policies, which resulted in an increase of 6.8 loss-ratio points to the overall segment results. Based on the information known to date and economic forecast, we believe the adjustment across the non-USMI book is prudent and consistent with a moderately severe stress level. As we look towards the remainder of 2020 for our USMI unit, we are expecting the delinquency rate to increase progressively from the current level as more borrowers request forbearance on their mortgage loans under the CARES Act. As mandated by GAAP, we expect to record loss reserves on these delinquencies which will most likely translate into an increase in our levels of incurred losses over the coming quarters. Over time, we would expect many of these delinquencies to cure and revert back to performing loans as the economy returns to a more normal state. At this time, we do not have enough visibility to predictably forecast the rate at which forbearance delinquencies will be reported to us. Cure are ultimately turned into claims on an annual let alone a quarterly basis. That said, based on our current analysis which tells us that the pandemic will represent an earnings event for our mortgage segment and not a capital event, our current expectation is that our pretax underwriting income for the entire mortgage segment will be minimal for the remainder of 2020, i.e. from the second through the fourth quarter of 2020. However, there is likely to be variability in underwriting income between quarters based on the timing of receipt of notice of defaults. Turning to prior period net loss reserve development, we recognized $17.8 million of favorable development in the first quarter net of related adjustments or 1.1 combined ratio points compared to three combined ratio points in the first quarter of 2019. All three of our segments experienced favorable development at $0.8 million $11 million and $6.1 million for the insurance, reinsurance, and mortgage segments respectively. We had excellent net written premium growth in the insurance segment of 33.4% over the same quarter one year ago. The insurance segment's accident quarter combined ratio excluding cats which as a reminder include COVID-19 losses was 97.1% lower by 310 basis points from the same period one year ago. Approximately 190 basis points of the difference is due to a lower expense ratio, primarily from the growth in the premium base over one year ago. The lower ex-cat accident quarter loss ratio primarily reflects the benefits of rate increases achieved throughout most of 2019 and the first quarter of 2020. As for our reinsurance operations, we had a significant transaction in the quarter which affected the comparability of our underwriting results an $88 million loss portfolio transfer written and fully earned in the period in the other specialty line of business. Absent this transaction, net premiums written would have been 57.2% higher than the same quarter one year ago. This net written premium growth was observed around -- sorry across most of our lines and includes a combination of new business opportunities, rate increases, and the integration of the Barbican reinsurance business. While the loss portfolio transfer had a minimal impact on the overall combined ratio for this segment, a decrease of approximately 50 basis points, its impact on each of the loss and expense ratio components was more observable with a resulting increase of 400 basis points to the loss ratio and a decrease of 450 basis points to the expense ratio. Overall, the growth and underlying performance of our reinsurance segment was very good this quarter. The mortgage segment's combined ratio was at 44.1% including the 12-point loss ratio -- loss ratio impact resulting from the increased level of conservatism in our overall segment reserve estimates discussed earlier. The expense ratio was higher by 240 basis points over the same quarter one year ago reflecting reductions in profit commissions on ceded business and higher compensation costs and employee benefits. Total investment return for the quarter was negative 80 basis points on a U.S. dollar basis as the defensive positioning of our portfolio served us extremely well in this difficult period. Given some of our fund investments are reported on a lag typically three months, their first quarter performance will be included in our second quarter financials. The duration of our investment portfolio was slightly lower than last quarter at 3.19 years compared to 3.40 years at December 31st, but remain overweight relative to our target allocation by approximately 0.35 years. Most financial markets had a positive return in April which should help reverse some of the results we're -- we observed in the first quarter. The effective tax rate in the quarter on pretax operating income was 10.5% and reflects the geographic mix of our pretax income and a 110 basis point benefit from discrete tax items in the quarter. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction. Turning briefly to risk management. Our natural cat PML on a net basis increased to $680 million as of April 1, which had approximately 7% of tangible common equity remains well below our internal limits at the single event 1-in-250-year return level. With respect to capital management, we remain committed to maintaining a strong and liquid balance sheet. During the quarter, we repurchased approximately 2.6 million shares at an aggregate cost of $75.5 million. While we have a meaningful remaining share authorization under our current program, we do not expect to repurchase shares for the remainder of 2020. At USMI, our capital position remained strong with our PMIERs sufficiency ratio at 165% at the end of March 31, 2020, which reflects the coverage afforded by a Bellemeade mortgage insurance link notes. These structures provide approximately $3.1 billion of aggregate reinsurance coverage as of March 31, 2020. Finally, to echo Marc's comments, I'd like to give a special shout out to our more than 4,000 colleagues around the world that have demonstrated a tremendous amount of creativity, patience, resilience and compassion with clients and business partners, the communities they live in, their families and loved ones and each other over the last seven-plus weeks. They are the essence of what Arch is all about and I couldn't be prouder to be part of such a great team of individuals. Thank you. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Your line is open. Elyse Greenspan : Thanks. Good morning. My first question is on the mortgage segment. So, I heard you guys say that kind of still difficulty -- difficult to put your hands around what the total loss could be within MI. But you did say that you expect no underwriting income for the next three quarters. So, if I look at what you guys might have been expecting, it seems like -- and look at what you've generated right in the back few quarters of 2019 and that translates maybe into about an $800 million of vicinity loss. Now the reason why I go there is your RDS that you guys disclosed at the end of last year for that business was around 8% of your tangible equity. So the numbers seem within the same ballpark of each other. So, am I triangulating correct that you're assuming that this loss could be equivalent to your RDS, or am I missing something in putting those thoughts together? Marc Grandisson : Yes. I think -- thanks Elyse for the question. I think that the two numbers appear to be the same level, but they're actually coming from a different source. The $800 million that you referred to that could be let's say, it's a great number for the next three quarters will be incurred losses. And against that you have to put premium. And if you look at our RDS scenario, we actually look at the rollout of all the claims paid in the future and we offset it by all the premiums that we would receive and this is what constitutes the PML. So they're very different. One is a net P&L impact. The other one is the incurred loss of the $800 million you mentioned the first time around. Elyse Greenspan : So the $800 million is the losses that you expect over the balance of the next three quarters not the -- I thought you had said it wouldn't generate any underwriting income? François Morin : Yes. I mean just to clarify I think, it's really a difference between the next nine months versus the full runoff of the in-force portfolio. As we think of the remainder of 2020 what -- the comment I made was really underwriting income meaning premiums minus losses minus expenses. And we're saying, we don't expect a whole lot of underwriting income for the remainder of 2020. When we think about the RDS, fundamentally to get to a similar let's say an $800 million number that you quote of RDS. What that would mean was really -- would be a much larger incurred loss because we expect to have material premium flows or premium income coming to us in future calendar years which may be five, seven, 10 years. So, it's just -- the RDS is really a full comprehensive premium and gain/loss -- underwriting income across the full runoff of the in-force portfolio. Elyse Greenspan : Okay. And then within the RDS, can you remind us what are the assumptions for delinquency rates as well as like housing price depreciation and how we think about you guys coming to that 8% loss figure? Marc Grandisson : Yes. There are many assumptions, but at a high level decrease in-house price 25% below fundamental, so 25% from now going down and staying there for two to three years. Interest rates shooting up 7% or 8% that these are major -- the two major ones that unemployment of course lasting longer. The length of time that our RDS is stressing our portfolio when we go through it is a much longer period than even the 2007 crisis would have generated. To the delinquency equivalent, it's something more like 9% ultimate claims rate. It's hard for me to parse out what is delinquency versus conversion to claims. So, at a high level we prefer to think in terms of claims rate. So, the portfolio as it stands right now, if you run it off and 9% of it were to default that will be equivalent to the RDS net that we have which is significantly above what we expect right now just to -- just for your benefit which is significantly above what we expect to happen for the next 12 months. Elyse Greenspan : And then one last one on the guide for the lack of underwriting income for the year-end mortgage, does -- and you -- do you guys -- are you guys assuming that you're going to have to use some of your ILS the Bellemeade securities, or at this point you do not think you might attach into any of those covers? François Morin : Well, two things that just for -- I think good points of clarification for you guys. First of all, the Bellemeade protections as you probably do know amortize over time. But there's a trigger on them that basically once you exceed a certain level of delinquencies, they stop amortizing. And that we think we expect will happen most likely sometime in 2020, and maybe in the second quarter maybe in the third quarter maybe later. And that will basically freeze at least for some period the amount of covereds that is available to us, and would remain most likely for the duration of each of those structures. But to answer I think more directly to your question, we do not expect under most scenarios that we would trigger the coverage of the provided by the Bellemeade protection. So the $3 billion of excess of loss cover that we talk about, we know is available, we know it's there. But at this time under most scenarios, we don't expect to pierce the attachment that we would -- where we would actually fully -- well, we'd start to receive coverage or cede some of our exposures. Elyse Greenspan : Okay. Thank you for all the color. François Morin : You’re welcome. Marc Grandisson : Welcome. Operator : Thank you. Our next question comes from Jimmy Bhullar with JPMorgan. Your line is open. Jimmy Bhullar : Thanks. Good morning. So just first a question on the MI business. Your assumption of no underwriting income for the rest of the year, does that reflect primarily you having to reserve at the level that reflects sort of delinquencies given GAAP rules, or does it also -- and not -- and you -- from your comments, it seems like you think ultimate defaults will be lower than that given that people are taking advantage of forbearance and stuff and then the cure rates will be higher. But it's more because of just you having to reserve at a higher -- at the level that reflects delinquencies, or is it also a reflection of your views on ultimate defaults? François Morin : Yes. It's certainly more of the former. So right we do expect the reality given the forbearance programs that have been in place we expect a higher than normal flow of delinquencies to be reported to us. Some people are just taking advantage of the programs just to be safe and they'd rather just play safe and not take the risk of falling behind on their mortgage payments. So what we expect will happen, we haven't seen much of it yet but we do expect -- I mean, that will pick up in Q2 and Q3 is that we will have to -- we will receive these delinquencies. When we come to the end of Q2, we'll have to assess what kind of reserves, we'll set on those delinquencies. We'll make determinations on the probability that those will actually cure based on the information, we'll have in front of us at that time. It's too early today to tell you what that will look like. But certainly based on the fact that we expect just an elevated number of delinquencies to be reported to us that will just by nature trigger us. We will reserve for those delinquencies and we'll incur some losses. Whether those will translate into claims paid ultimately, we don't know. Time will tell, but that's really just how we think that the accounting will work at least in the year -- I mean, certainly for the next few quarters. Jimmy Bhullar : And then on business interruption you mentioned provisions in most of your contracts that actually exclude losses, because of pandemics or viruses. I'm assuming you're talking about primary contracts. On the reinsurance side, should we assume that if your clients are paying either, because there wasn't a provision or because they lose a case and then -- and a lawsuit then you would have to be on the hook to the extent you provided coverage as well? Marc Grandisson : Yes. I think – yes, the comment had to do with insurance, which as you can appreciate the vast majority or more than the vast majority of what we do has an exclusion for viral -- it is a virus exclusion. On the reinsurance, it's still early, right? We still have to figure out what the BI losses are going to be if they come to fruition for our clients. And then they'll have to go through and say, whether there's protection on the risk or quota share or for that matter excess of loss on a cat basis. So this is going to play out over the next several quarters. A lot of contracts have hours clause for those kinds of events. There'll be a lot of discussions back and forth as to when do we start counting, how do we count them. So there's a lot more uncertainty and some other folks in the industry, I've echoed the same comments that it's going to be a little bit longer to figure out what it means, because in general, the contracts are not written to cater for those kinds of event. There's not a specific virus protection. It's really meant primarily to be a property coverage by and large from -- I'm talking from cat-excessive loss perspective. So people will have to sift through the language and see what it means to each and every one of them. Jimmy Bhullar : Okay. And then just lastly on the acceleration of growth in your insurance and reinsurance premiums, how much of this is pricing versus you potentially gaining share or just increased demand for some of the lines that you're in? Marc Grandisson : Yes. At a high level about 15%, 1-5 of the increase in premium came through acquisition. Barbican is definitely one of them. We also had acquired a team on credit and surety from Aspen towards the second half of last year. That's about 1-5, 15%. 25% is due to rate. The rate increase this quarter across our P&C was between 5% and 10%. So it's actually better than the fourth quarter of 2019, and the rest 60% is truly growth in exposure new business one-offs or unique situations or opportunities one of which François mentioned in his comments. Jimmy Bhullar : Okay. Thank you. Marc Grandisson : Sure. You’re welcome. Operator : Thank you. Our next question comes from Mike Zaremski with Credit Suisse. Your line is open. Mike Zaremski : Hey, good afternoon. Sticking moving back to MI. Can we talk about capital requirements? Capital charges for loans and non-payment are usually materially higher than for performing loans. I know I saw it in the prepared remarks, you said that the PMIERs efficiency ratio is well in excess of 100%. Is the FEMA designation kicked in? It means that it will allow Arch and other MIs to potentially hold less capital, or just kind of how should we as investors think about the capital requirements and how that could play out over the next three to 12 months as nonperforming loan levels or deferred loan levels increase? François Morin : Yes. I mean to answer your question, the answer is yes the -- it's actually in the wording in PMIERs that when there's a FEMA-designated zone, the capital requirements of -- for delinquencies are reduced by 70%. So -- and given that all 50 states have actually declared -- have been declared a FEMA disaster zone. Currently, we are adjusting at the end -- starting at the end of March and going forward, we're adjusting the PMIERs capital requirements to reflect that haircut I'd say on the capital charges for delinquent loans. There's a bit of a discussion going on with FHFA around how long that will be available. I think the industry and FHFA are working together on that and the GSEs to come up to clarify everything. I think there's a bit of some technicalities and maybe it wasn't I'd say perfectly considered or awarded in the wording of the PMIERs, but still we think that they'll -- we expect that the call it the haircut on the capital charges will remain in place until we're -- we have a bit more visibility on how some of those loans will cure and go back to performing. Mike Zaremski : And just the final part François that you mentioned in terms of the clarification on how long, does that play into why Arch has decided to most likely not repurchase stock for the remaining of the year? I guess maybe this is a broader question. I -- it feels like prior to COVID, you guys were playing kind of more I'd call it offense than most carriers. Does COVID change the playbook? I know this is a broader question. And is the lack of MI earnings and maybe some of the clarification of capital kind of why you're not purchasing stock, when it's trading below book value? François Morin : Yes. Well I'd flip it a little bit on you. I'd like to think we played a fair amount of offense in Q1 on the P&C side. So I think our view is that we -- again we said it before we like optionality. And the fact that we have a strong balance sheet, we want to keep it that way. We want to be able to take advantage of opportunities that may surface. So does COVID change the playbook? Not per se, but we think there will be probably a fair amount of disruption that's going to emerge in -- through the end of 2020 and maybe beyond. So that's really -- that's the Arch playbook and Marc can chime in, but that's really how we think about having the opportunity or the ability to execute on those opportunities. Marc Grandisson : Yes. Clearly, we had played the MI market. We still are in the market very involved. We were by and large a lot more allocation of capital to the MI always with the lookout as you guys know us, but it's something were to develop and get better on the other side and more the very important piece of what we do every day the P&C that we would shift and allocate more capital there. And I think as we look through the first quarter and the perspectives, we have business reviews with everyone and understanding and hearing even after COVID-19. Even though there might be a little bit of a dip in premium in the second and third quarter, it's clear that opportunities are there. And our first mission as François mentioned is to deploy capital. This is what I believe our shareholders want us to do is to deploy capital towards insurance underwriting. And I think we have an increased level of opportunities that wasn't there six months or nine months ago. So capital. And as I said, capital becomes very important as we go through the next year or so. So we'll be able to deploy it and make hopefully great returns for our shareholders. Mike Zaremski : So I guess Marc what you would then -- we should continue to expect the non-MI operations to continue playing offense and growing at a fairly fast pace? Marc Grandisson : Well right now based on what we see in terms and conditions and opportunities, the answer is, yes, we should expect that to happen. Absent as I said, the market getting a bit softer in terms of GDP, because of exposure stagnating for a while. But yes by and large, our focus is to play more offense on the P&C side both insurance and reinsurance. Mike Zaremski : Thank you. Operator : Thank you. Our next question comes from Yaron Kinar with Goldman Sachs. Your line is open. Yaron, your line is open. Please shut the mute button. Our next question from Ron Bobman with Capital Returns. Your line is open. Ron Bobman : Don't worry Yaron they will circle you back in I am sure. Thanks to hear you. And I hope everyone's well of course. I had a couple of questions. The mortgage business and the reinsurance purchases and in particular the Bellemeade notes. I'm wondering prospectively, do you think that the capacity will be there to sort of continue to be put in place? And is the game plan to sort of continue to as best you can buy sort of like-sized and like-structured protections for the mortgage book and in effect put that through into primary pricing on the mortgage book? Marc Grandisson : So the first question is, I don't know when it's going to come back. We expect this to come back. I think there was a healthy market, a healthy level of interest before COVID-19. So we would expect that to come back when things gone back to some more normalcy of sort. But time is ahead of us. We don't know when that's going to happen. And if it were to come back, I guess the question will be an economic decision, right? If it does fit within our return and risk profile, we would continue doing those transactions the way we did. We might do more, we might do a bit less. So it will be depending on our view of the pricing and what kind of recovery we get from this. I do believe as a general rule that our risk management mantra is still important. We like to have some downside protection. And I think this proves very useful in these events of late that they would come in and play a big part in supporting us if things were to go a little bit worse than we would expect them to do so. So I would argue that there's definitely a price, at which things or conditions, at which things are a bit difficult to do but I would expect us to still do them within reason for this reason I just mentioned. Ron Bobman : Thanks. I have a cat reinsurance, sort of, market question. Are there going to be a lot of instances -- in the context of COVID and losses and ceded losses, are there going to be a lot of instances where primaries have cat towers and cat protections that are peril-defined as being natural catastrophes, or is this a narrow peril listings in the reinsurance treaties that -- because the pandemic isn't I guess deemed or classified as a natural cat there would not be stated coverage in a reinsurance treaty? Marc Grandisson : Yeah. I mean, just sorting the case. What I would add to this though Ron is you have followed the fortunes in many contracts on a quota share and risk excess. So -- and on natural perils, I don't think it's a majority of the coverage that are purchased right now. I think it's a little bit different. I think the -- it's also different in the U.S. versus international. But I think that we'll expect a lot of discussions, because I'm not sure it's as natural peril specific as you think it could be. It was a softer reinsurance market for a while. So when that happens, conditions tend to be a bit broader than one would expect. Ron Bobman : Okay. Thanks a lot. Good luck, gentlemen. All the best. Marc Grandisson : Thank you. Operator : Thank you. Our next question is from Yaron Kinar with Goldman Sachs. Your line is open. Yaron Kinar : Thank you. Hopefully, you can hear me now? Marc Grandisson : Yes, we can. François Morin : Yes. Yaron Kinar : Great. Good morning everybody. First question on MI. Have you been able to book the U.S. MI using a consistent methodology that was used by the rest of the MI book? What would the loss ratio look like this quarter? François Morin : Well, I mean roughly speaking if we -- I mean if we extrapolate for the year for the -- we're saying the remainder of the year is going to be call it 100 combined ratio just to be on the safe. So if you annualize the minus 25% expense ratio ballpark, it gets you a 75% loss ratio plus or minus. Yaron Kinar : Okay. And maybe that also answers my next question, which was -- would the GAAP accounting basically make the results in the MI business progressively worse quarter-over-quarter, or do you expect it to be flattish in the breakeven range through the rest of the year? François Morin : Very hard to know. I mean we -- I mean, it depends on how quickly the delinquencies are going to show up. If all the delinquencies show up in Q2 when they start right -- you could see a scenario where people missed their first mortgage payment on April 1. They missed their second payment on May 1. And along the way they told their servicer that they want to take advantage of the forbearance program, we could expect a significant amount of delinquencies to show up in Q2 not as much as Q3. It might be a flip-flop. People might try to keep making payments and call their servicer in July. I don't know. So it's very much a function of how quickly we think the delinquencies are going to show up that will dictate a bit more the volatility from quarter-to-quarter in 2020 on how the call it the calendar quarter loss ratios are going to look like. Yaron Kinar : Okay, okay. And if I turn to insurance, can you maybe talk about the programs business how you'd expect that to perform both from top line and margin perspective in the face of COVID? Marc Grandisson : Well, yeah, that's a good question. It's not really workers comp exposed. So that piece we can take off. It doesn't really have maturity of credit lines. The lines that we could think it's -- it would be exposed to is property. And almost the totality of all the policies exclude -- have a viral -- virus exclusion. So that should not be a significant contributor to the loss experience on the programs business. Yaron Kinar : Okay. Thank you very much. Marc Grandisson : Welcome. Operator : Thank you. Our next question comes from Phil Stefano with Deutsche Bank. Your line is open. Phil Stefano : Yes. I was hoping you could give some commentary on your thoughts around the flow of new business for MI this year. How does this feel like purchase originations versus refi originations are going to shake out? And maybe within that you can embed a commentary around what you see with pricing. I guess in my mind the risk-based pricing and rates are -- would react in real time to the extent that there were changes in the economic environment. And this might be one of those instances where you could actually flex pricing up. Does it feel like we're starting to see that come through as the flow of business… Marc Grandisson : Three questions in there. That's pretty cool. I'm trying to keep it up, so you tell me if I'm wrong on this one. The number one had to do with the origination going forward, right? So the -- what we can tell you is the industry, we don't know, but the industry consensus seems to be 20% less production this year. What that means for us and the market I mean we follow along. We have about one-third -- if you look at the MBA, 35% penetration of mortgage insurance, 45% private MI so you can follow through, so about 18% to 20% decrease, so if all else being equal, we should expect lesser production from that perspective. And you're right, I think we are still continuing -- we're continuing to see a lot of refinancing, although there's a glut and there's a lot of movement and a lot of things that are blocked actually at the origination of the mortgage originators, because there's so much demand for that, due to the historically very low mortgage rates. But we do actually see some purchasing happening. But I think it's going to be -- it's going to be probably more along the lines of the last -- rolling rate over the last three quarters. I think is what we should expect. So again, it's hard to tell if the purchase market is going to come back, in wild fashion. But certainly there is a lot of pent-up demand out there, which also helps the house price index. We believe the house prices are going to go down, not as much as you might think maybe in a single-digit percentage over this year because of all the pent-up demand, so, which talks to the purchasing market being still there, its not gone altogether. I think the article this morning in Wall Street Journal, that there's a lot of -- there's a good pricing sustained, as a result of higher demand for housing. That's the second part. The third part which was about the pricing, of course right we look at -- I mean, the things have changed. We look at things in a different light with the risk -- different risk characteristics. We went through more than once through our portfolio, on our risk-based pricing and our various assumptions and parameters. And we're making adjustments, as we see it appropriate, across the industry. I do want to think that the MI industry sees it as a, hey! There's a bit more risk. There's a bit more losses. So maybe we should do something about it. And I do expect them to follow suit in general. We do have indication that people are -- have increased their expected loss in their pricing. Phil Stefano : When we think about the expected returns that you're seeing in MI, have they changed materially? And maybe insurance is a better place or a better lever to be exercising at this point to put capital to use, can you just -- any thoughts around that? Marc Grandisson : No. It's very, very well put. I think this is exactly -- I mean, I think, two years ago, I would have said to you that, except for a few spots on the -- on P&C insurance and reinsurance that, the MI provided by far superior return. So when we rank order things, François and I go through it. And our executive team go through it. We rank order the three businesses, the investment, in repurchasing shares MI was up there. And it has been there for quite a while. And I think, it's -- our loss expectation is probably not as low. It's probably modified somewhat. So, depending on the pricing going forward, we'll see how that falls out. But clearly, the returns from the P&C unit has been inflating and then, putting them higher in the positioning -- the relative positioning for capital allocation, without a doubt. Phil Stefano : Got it. Thank you. And be well. Marc Grandisson : Thank you. François Morin : You too, thanks, Phil. Operator : Thank you. Our next question is from Meyer Shields with KBW. Your line is open. Meyer Shields : Great thanks. I do feel like I'm beating a dead horse here. But does your first quarter COVID reserve, in P&C, does that assume that FDA policy requires direct physical damage but doesn't have a virus occlusion? Does that assume that, that's an absolute Defense? François Morin : Well, I'll start. And I'm sure Marc will chime in. As you know it's – again, we said it's very early, but where we have taken some books and reserves on -- particularly I mean on property right is there are certainly a very small subset of our policies that, don't have an exclusion. So, for those we felt it's prudent to -- we expect losses to come through and we booked the ID&R to go against those policies. And those are generally outside of the U.S. I mean they are outside of the U.S. So, it's in the U.K., it's in Canada, on the insurance side. And we also have a small amount in some property fact deals that may specifically cover pandemic. And we expect that some of these -- some of the certificates will have to respond. So, it's a bit -- mostly in insurance a little bit in reinsurance. But that's where we -- that's kind of how we thought about booking the reserves on BI. Yes, I mean in the U.S. no question that you need property damage to have the BI respond. That's a fact. Yeah. There’s a proposal out there that people want to make it retroactive and challenge that. We'll see how far -- how that goes, but for the time being we don't have reserves on those. We don't think it's correct. We want to think, its right. So we've relied on the policy wording to make our assessments of reserves on those policies. Marc Grandisson : And the other piece I would add to this, François is that, there are other lines of business Meyer we have these three data that we can point to and say this is what we think we would expect this to develop to. And one example is trade credit. We have a small portfolio but we did actually do proactively, reflect the fact that we might -- we're expecting an increased level of claims for the -- based on what we write this year. So that's something that we pick our loss ratio, specifically. So most of them on the property side I agree absolutely, what François said we did more granularly at a level the claims level the portfolio level. And I think we've taken a loss ratio approach to the other lines of business where we've seen historically losses emerge as a result of events, such as this one. Meyer Shields : Okay. That's very helpful. The second related question, I'm just trying getting my arms around, what sort of events would constitute second quarter COVID-related P&C losses. François Morin : I think the development of BI losses will – firstly, we have to go through the insurance business, the insurance companies telling their losses evaluating every claim. I mean this is not an easy thing to do from a 30,000 feet position. Meyer you have to go through the claims process evaluates things talk to clients’ brokers and whatnot. So, it's going to take a while before things get sorted out. A couple of things on presumption of workers comp, coverage that's also part of that. I think -- it was lot of things developing. So, I'm not even sure second quarter, we're going to have the ultimate picture. That's for sure. It's going to take a bit longer to go through all these losses, how they accumulate. And also in line with the question I just had earlier, in how it -- if it does, and how and if it does accumulate towards a reinsurance recovery. So that also might happen towards the end of this year. So this is going to take a little while to sort out. And that's not even talking about potential litigation and whatever else could happen out there. So it's going to be a while. Marc Grandisson : This is going to be a slow developing cat loss. Meyer Shields : Absolutely. Thank you so much guys. That’s very helpful. Marc Grandisson : Thanks, Meyer. Operator : Thank you. Our next question comes from Brian Meredith with UBS. Your line is open. Brian Meredith : Yes. Thanks. So one or two quick questions here. First, Marc, can you tell us, what is the status of the Coface investment? And if indeed, the transaction goes through, should we anticipate some type of impairment charge on close, given where Coface stock is relative to your agreed investment? Marc Grandisson : So, everything is a lot too early at this point in time, right? They themselves are going through evaluating and looking at this and our -- as you know, we made that investment with a long-term strategic vision. We also know that they are -- they have been proactive in many things. And we also know that the credit -- that the credit quality of what they had underwritten through the end of last year was -- is also different as well than what it was in 2008. So we're trying to triangulate all these things. We still have a lot of process to go through from a regulatory perspective. We expect to receive this towards the end of the year. So that's all I'm going to say about Coface, is we are sort of monitoring staying close to it and see what we're going to do about it if we do anything about it. Brian Meredith : Got you. And then my second one, just going back to the MI. If I think about the lawsuits you guys are seeing, potentially for the rest of this year that you're going to have. What does that mean for 2021, as far as the MI results? How far are we into the deductible on the Bellemeade transactions? How much additional could there potentially be in 2021? François Morin : Well, again, it's very premature. I think the answer to that question, again, will very much depend on the level of delinquencies and how quickly they get -- come to us. And now we see the economy going back, opening up a little bit. So the people will go back to work. And by fourth quarter of 2020, we see already some people carrying -- going back to having current loans, et cetera. But, yes, I would think that a reasonable expectation for 2021 is that, yes, we should do better than 2020. The loss ratio should be coming down. I don't think to the level it was in 2019, but as -- because let's -- we would think that no question that some people will -- there'll be some jobs lost and there may be some actual claims that actually convert to actually -- or delinquencies that convert to real claims and pay claims, that may be late in 2021, as you know, with a 12-month forbearance program and then the time to really go through all the process, to go to -- to paying the claim will take quite some time. So, I would -- at a high level, I would think that, the 2021 loss ratio would be better or lower than 2020, but not at the same level as low as it has been in -- as it was in 2019, for sure. Brian Meredith : Got you. That makes sense. And so I think what I'm trying to do is, just scale this like, how much additional loss could we potentially have here in the MI book before you hit the Bellemeade deductibles, right? Just what's kind of a worst-case there? François Morin : Well, let me try this and maybe Marc will chime in. We've looked at a bunch of -- a variety of economic scenarios. Some are based on our own internal analysis, like the RDS stress test that we run through our portfolio. Some are based on external economic scenarios, such as the Moody's -- what's published by Moody's, the severe -- the S3 and S4 economic scenario. And under most scenarios, again, we don't expect to -- we get close, but we don't expect to attach with the Bellemeade transactions. And those are in particular like the S4, where we get very close. We might start attaching a few years down the road, but it's -- those are severe stresses. So, how we think about it is, does it even impact 2021? The answer is probably not. It probably starts to really -- we really start to recover a few years down the road. And, I mean, to us, it's a -- I don't want to say necessarily sleep-at-night insurance or coverage, but it's really, there to say, we think we've run some very severe stresses. They don't seem to attach with the Bellemeade, but we're often -- they get to be worse -- a little bit worse than what we're thinking, what the scenarios could look like. We tell ourselves, well, we got $3 billion of coverage that is available to us, if things get much worse. Marc Grandisson : At a very high level, Brian, if you think of the Bellemeade retention and we talk about this amongst ourselves is that, we have about $1.5 billion to $1.6 billion of retention. So that sort of gives you a sense for how many -- how much losses we would need to go through to start to get some recovery. So that -- I think, that should give you $1 billion a year premium earned. So that gives you some kind of benchmark. I think we're trying to figure a way -- we'll talk to Don, obviously, and François. We'll try to find a way to make it a bit more clear to everyone, because it's not an easy thing to explain. But, I think, at a high level, what we just said to you is true, that the level of retention is high enough that we don't expect it in the next couple of years. Yes. Brian Meredith : Great. Thank you. Marc Grandisson : Sure. Thanks. Operator : Thank you. Our next question comes from Mark Dwelle with RBC Capital Markets. Your line is open. Mark Dwelle : Yes. Good morning. Just to continue with the MI discussion. As you're contemplating within the guidance of no earnings for the balance of the year, are you assuming a case average per reserve similar to what you've been reserving at, or something more similar to the -- like, after hurricanes or something of that nature? Marc Grandisson : We're just assuming -- we apply a forbearance rate and then we apply conversion from forbearance to claims that we would do. And the severity is pretty close to 100% on most of those cases. So it's really more binary than you might think it is. So there's not much -- I mean the two big variables are really the forbearance and our view of the conversion from forbearance to claim, ultimately, which is very uncertain at that point in time. Mark Dwelle : Within that, then, are these being evaluated on literally a case-by-case basis, or is it the -- or are you applying just, sort of, a formula to all of the losses that whatever some particular bank presents you over some period of time? François Morin : Well, I think, it's a bit early to know exactly how everything is going to play out. I mean no question that -- as I said earlier we're -- we expect more delinquencies to come through. No question that we would expect a higher cure rate on those than we would see from a typical delinquency in a call it normal economic environment. So -- but we don't know yet how we're going to book our reserves at the end of the second quarter and let alone third and fourth quarter. So the answer is yes, probably I mean if you compare a regular delinquency to what we're -- we expect the delinquencies we get through forbearance programs there's no question that there's a higher cure rate. And then associated with that the severity et cetera. So I mean it's the product of those gives you the total incurred loss in the quarter. But it's – if we will look at them a bit differently for sure than we would otherwise in a call it a regular quarter. Marc Grandisson : But -- Mark just to make sure it's clear to you because you did ask specifically how do we develop our scenario. And we have -- we do go at the individual loan level with the risk characteristics and applying assumptions and shock on the unemployment and whatever else you have around house price index. And we go through the lifetime of that loan and see what's going to result. You can think of it as the ladders series -- series of ladders going forward decision tree of sort. And then at the end we come up with the ultimate projection of the claims based on the assumption that we had. So that was a bottom-up approach we did. And we verified this at least try to get some perspective from a top-down approach which François mentioned the Moody's S3 and S4. So -- and those seem to converge very nicely and by coincidence I would add to a similar number for ultimate claims. Mark Dwelle : And then just the last question and again this is another, sort of process question. But I mean, suppose I'm an individual and I default beginning in April and May as François described before. And then I get recorded as a delinquency in forbearance, let's say, sometime in June. And I take advantage of the 6 month requirement. You'll put up some type of reserve for me in probably the second quarter. Will you be able to release that reserve back then as quickly as, let's say, October which would be the end of the 6 months, which would then provide offset against any additional adds that you would otherwise be taking in say the fourth quarter for people who are newly delinquent or further delinquent? François Morin : Correct. I mean, if the borrower cures and I think there's a little bit of work that has to be done exactly on how borrowers are going to exit the program. I mean, initially there's I wouldn't say confusion, but people thought well they have to make a balloon payment, do I just defer my payments et cetera. I think the government is stepping in to make sure that there is no -- I mean the expectations are clear on both sides. But correct if somebody after six months in October or November December they -- everybody's back. I mean for that particular borrower, they're back to work and they go back to current and they strike a -- they reach an agreement with their borrower to just effectively, let's say, they missed four or five payments and they agreed to just add those on at the end of their mortgage period they would -- whatever reserves we had put up on that particular loan would get eliminated reduced to zero and they would be available if we think there's new coming in that we -- yes so it's a reduction… Mark Dwelle : Just to clarify second and third quarter, you would think of kind of as reserve accumulation and then beginning in perhaps the fourth quarter, you would start to see offsets develop assuming people follow that type of a pattern. François Morin : Assuming – yes, but again what we don't know yet is everybody or is the vast majority of people are going to use the forbearance programs in Q2 or are they going to try to make a couple of payments and then -- maybe there'll be more in Q2 and -- Q3 and Q4. I mean the timing of it is uncertain. But assuming -- I think which is what -- I mean, assuming, I think what you were assuming is for somebody who starts on the forbearance program earlier and then let's say it's just temporary where they do go back to work and they go back to current. They cure their delinquency in the fourth quarter, correct. I mean there would be -- we would be see -- potentially see a reversal of the accumulation of reserves that we saw in Q2 and Q3. Marc Grandisson : Yes. So Mark, I would add to this to be cautious -- to be very cautious when we compare the development of the GSEs versus now again having more of a front-loading of reported delinquencies that could -- from there to your point go plus or minus, but a lot more front-loading of delinquencies recognized at the beginning than it was in 2007 and 2008 where it took a while for the claim -- took like two, three years for real delinquencies to really pick up and peak. So it takes a while to get there. I don't think we're going to see that this time around. I think we should expect more of a front-loading, which means a little bit more activity from a loss perspective in the first -- in the next couple of quarters. Mark Dwelle : Understood. Thank you. Very helpful Marc Grandisson : Yeah, sure. Operator : Thank you. Our next question comes from Geoff Dunn with Dowling & Partners. Your line is open. Geoff Dunn : Thanks. Good morning. Marc Grandisson : Good morning, Geoff. Geoff Dunn : First a technical question on PMIERs. Are forbearance loans treated the same way from an aging standpoint meaning that you'll get that asset charge progression as well, or is it just that initial point in time asset charge? It seems there's kind of confusing interpretations out there on that front. François Morin : Sorry, Geoff I -- we couldn't quite hear. I mean you're not coming through very loudly so. Geoff Dunn : Is that any better? François Morin : A little bit. Marc Grandisson : Little bit. Geoff Dunn : What I was asking is are forbearance loans subject to the aging asset charges on the PMIERs or are they just held at a point in time that initial charge? It seems like some of the language out there has been confusing and up to interpretation. Marc Grandisson : Yes true. I think that it's unchartered territories as well for the GSEs. I think there are a lot of discussions between the MIs and the GSEs and the FHFA to try to figure out. So I don't have an answer to this one Geoff. Geoff Dunn : Okay. And then I'm still trying to piece together your underwriting outlook for the remainder of the year. It sounds clear that incidents assumptions will be below a normalized level because of the potential for cure activity. And it seems like the implication is that your forbearance expectation is a lot higher than the near 6% number we've seen from April 26. It's not maybe two or three times that if I'm looking at the math right. So obviously, you have a cumulative loss expectation for the year maybe not all the pieces that generated. But what are some of the higher level assumptions that get you to that kind of level of loss activity whether it be unemployment home – what are some of your macro assumptions that support the cumulative loss outlook for the remainder of the year? Marc Grandisson : Yes I think – yes that's a good question. I think you were right on the forbearance comment. I don't think – we don't think it's going to 5% or 6%. I think if you ask us we're – our modeling is pretty much like 15%. That's sort of what we would expect forbearance to peak at. And then the question remains to your point about the conversion which is the one that is so hard as you know to pin down. But we can use something between one in seven to one in 10. There's no real reason to that other than it seems to be in the ballpark of what we would expect. If we look at the current annuities or the current delinquencies as you know Geoff, the ultimate claims rate that we ascribed as an industry is closer to 7% or 8%. So to go to a 14% or 15% does not seem too crazy right now. The biggest one – so we – the sort of what we use I think if you look at the S3 that's sort of where our assumption sort of would converge to, if you will. You all know that model. So this is pretty much where we are. I think the biggest thing that we'll have to debate for the next several quarters is how do we convert from forbearance to claim. That's going to be as you know the biggest question mark that we'll have to go through. Geoff Dunn : I'm sorry. And are you suggesting the – you said 14% or 15%, are you suggesting that the incident assumption will be higher than normal or lower than normal? Marc Grandisson : I'm sorry I can't hear you. Can you repeat it please, Geoff? Geoff Dunn : Are you suggesting that the incident assumption will be higher than normal or lower than normal? You're saying 14%... Marc Grandisson : Higher, higher than normal. If normal is 7% of one in 14, right now one in 13 on new delinquencies, I would expect it to be one in seven or one in six, one in eight. That's what sort of what the model implies. I'm not saying this is what's going to happen but you're asking about the parameters of the deal and this is what – of the modeling. Geoff Dunn : Okay. Well, all right. And then my last question has to do with your reinsurance strategy. Obviously, the ILN market is hot right now. Does that create any interest with the company of looking at a traditional QSR to supplement your ILN strategy longer term? Marc Grandisson : We haven't really looked at it. François Morin : I mean we have – I mean everything is on the table, right? I mean, it's all based on the economics. No question that in the last couple of years to us the Bellemeade transactions were very efficient, provide a lot of capital relief and we thought it was a good protection to get for a variety of reasons. Again we expect them to come back but assuming that they're not back for let's say the end of the – until the end of the year or maybe beyond, no question that we will probably think of other ways to protect the portfolio. And a traditional reinsurance agreement is something that would be on the table for sure. Geoff Dunn : Okay. Thank you. Marc Grandisson : Geoff, I think you've asked about MSRs as well. So I think we're starting to evaluate all these things. Nothing is -- but everything again is on the table. We're looking at everything. François Morin : Goeff, said QSR, right? Marc Grandisson : I mean is that correct, Geoff? I mean I heard QSR. Did we answer your question Geoff? I just want to make sure we answered it correctly. Geoff Dunn : You did. Thank you. Marc Grandisson : Okay, great. François Morin : Good luck. Operator : Thank you. Our next question comes from Ryan Tunis with Autonomous Research. Your line is open. Ryan Tunis : Hey, thanks. So yeah, I guess I'm trying to unpack that the answer to the last question on the forbearance to claims rate being higher than -- if I heard that correctly, your modeling that gets to breakeven is assuming that that's actually higher than, say, a random notice that you have received in December. François Morin : Yes. That's true. Marc Grandisson : This is the model. You're stress testing it while you stress -- you're pushing for the scenarios, because it's so uncertain. But who knows, right? It's an opinion. Ryan Tunis : Right. It's certainly not quite how I think most people are thinking about it. But yeah, that does sound somewhat conservative. And I guess in terms of thinking about the rest of the year, like one thing I noticed that gave you [Indiscernible] is you've got these three buckets like -- I think, it's like three or four months delinquent and it's I think five to 11 months and 12 plus. Is there expected pressure as these delinquencies age? Like is there -- like do you kind of recondition what the expected loss might be? Is that potentially a source of pressure later on in the year? Marc Grandisson : Well, it's not a high number of claims, so that's not a massive amount. We have about $250 million of reserves or something like this. And François will correct me, if I'm wrong on this one. But I do believe that there is -- a lot of them also are older vintage so have been in and out of delinquency. Some of them are coming back in and out of cure. So, we're -- if there is pressure going forward, typically it will impact not only the more recent bookings. It will -- it would impact all prior book years that you have. And specifically, those are currently in delinquency, because it does -- they may not be the ones that can avail themselves of the forbearance program. They may have been in default before that event occurred. And they might be in a worse position than most borrowers, if they're currently -- they were delinquent at the end of 2019. So, yes, it would tend to ascribe a higher possible incidents to those claims. Ryan Tunis : Understood. And then, I guess the last one is kind of housekeeping. But on the premium yield number, first of all, how much was that helped this quarter by any of the single premium stuff? And then, has the outlook for that changed at all just given the -- I guess elevated refinancing activity? I'm not sure the composition of book changes. Marc Grandisson : It felt about 10% to 15% of premium for the quarter, because of the refinancing. Ryan Tunis : Okay. Thank you. Marc Grandisson : Welcome. François Morin : You’re welcome. Operator : Thank you. I'm not showing any further questions at this time. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you very much everyone. Stay safe out there. We're looking forward to have more to report and talk about at the second quarter. In the meantime be good. Thank you. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,020	3	2020Q3	2020Q2	2020-08-02	2.394	1.805	2.196	1.655	null	12.23	18.56	Operator : Good day, ladies and gentlemen, and welcome to the Second Quarter 2020 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sirs you may begin. Marc Grandisson : Thanks, Liz. Good morning and welcome to our second quarter earnings call. On a reported basis, Arch had an acceptable quarter despite COVID-19 related economic disruptions. Our operating results were good from the underlying accident year ex-cat combined ratio perspective as each segment that benefited from the recent rate improvements. All three segments are poised to see the opportunities to grow based on the underwriting returns outlook. Consequently this quarter, rate improvements continue to enable us to expand our writings in our property casualty units as we increasingly achieve acceptable risk-adjusted returns. We know from experience that this environment is an appropriate time to raise additional capital so that we can more significantly take advantage of this hardening P&C market. As we have discussed in previous earnings calls, we continuously rank order our capital allocation opportunities among and within the units. And today P&C insurance and reinsurance prospects have moved up the scale even as MI returns improved at the same time. To be sure, we are experiencing unprecedented times across our world and the insurance industry. There is still much uncertainty from the pandemic and its ultimate impact. The P&C industry faces emerging claims trends the possibility of long-lasting lower investment returns and a strain from on-model cat losses and chronic underpricing from the soft market years. This new reality points to the need for further premium rate increases for the foreseeable future. While not all lines are fully attractive on an absolute basis, the positive momentum is evident and has accelerated through the second quarter. Turning to our operating segments, I'd like to begin with the mortgage insurance segment. Reported delinquencies were 5.1% at June 30, 2020 and came in better than our expectation last quarter, which was at the early onset of the COVID-19 pandemic. As you may recall from our call last quarter given the uncertainty surrounding COVID-19, we were forecasting more pressure on the housing market and a more pessimistic view of the economy that is -- than is indicated by the latest delinquency data. As we stand today, we believe that the U.S. MI industry has been benefiting from a combination of solid credit quality of the post-2008 crisis originations; two, favorable supply and demand imbalance in housing inventory as well as; three, strong and swift government intervention to help homeowners. As a result we're seeing better than expected delinquency rates emerging this quarter even as rates are at elevated levels reflecting the recessionary environment. Our current incurred loss view equates to a claim rate slightly above 5% on newly reported delinquencies. While this claim rate is significantly higher than what we have seen from claim rates on the previous hurricane forbearance programs, it is also significantly lower than what the industry experienced in the GFC and reflects the better underlying conditions I mentioned earlier. Because of the current economic conditions, the credit quality of our new insurance written business as measured by average FICO scores and loan to value is stronger than a year ago. Mortgage lenders have tightened underwriting standards and a higher quality of loans originated is a direct benefit to us. We saw record mortgage originations fueled by the historically low mortgage rate and that has created surges in both refinancing and purchase activity. This favorable financing environment is supporting home prices. We see prices rising around 5% on an annual basis across the U.S. Despite the weakened economy, we estimate that the mark-to-market homeowners' equity and the vast majority of our policies is in excess of 10%. The level of equity as a reminder has proven to be a strong indicator of a borrower's propensity to default, i.e. the higher the equity, the less likely a default will happen and turn into a claim. Turning now to our P&C businesses. First let's talk about COVID-19, which is affecting many lines at the same time and developing much more slowly than a natural catastrophe. Adding to the uncertainty is the fact that many coverage issues have yet to be resolved all of this informed how we approached our reserving for COVID-19 within our P&C segment based on a bottom-up approach to develop our view of ultimate losses. François will cover this in more detail in a few minutes. Moving on to the P&C business environment starting with insurance. We see a growing number of opportunities as net premium written grew 7% in the quarter for the unit despite the fact that our travel premiums decreased materially due to the pandemic. Excluding travel, our insurance NPW growth would have been approximately 17%. Most of our growth was generated in the E&S casualty, E&S property, professional lines and the specialty lines written out of London, about two-thirds of that increase came from exposure growth and the balance from rate. Our overall insurance renewal rate change was plus 8.5%. up significantly from plus 5.5% in the first quarter. Earned premium that we wrote at higher rate levels over the last several quarters helped lower our quarterly accident year combined ratio ex-cat to 96.1% from 99.4% for the same quarter in 2019. In summary, our insurance group's main mission right now is to grow in those lines where conditions improve enough to allow for an appropriate risk-adjusted return and the market is allowing this ever more. Over to the reinsurance segment now. We had very strong premiums growth at plus 50%, reflecting ongoing dislocations and improvements in the marketplace. Growth opportunities presented themselves across a vast majority of our business lines. Property cat NPW was up 153%, other properties was up 70% and casualty was up 35%. Partially offsetting this growth were declines in our motor quota share net premium written due to the impacts of COVID-19 exposure decreases. Generally, our reinsurance segment is able to seize on opportunities earlier than our insurance segment. We're also incrementally increasing our capital allocation to our property cat sector. However, our PML usage is still substantially below what we could deploy if return expectations were to get to the levels we saw in 2006. Our reinsurance accident quarter combined ratio ex-cat improved to 87.5% from 92.2% over the same period in 2019. This partly reflects our opportunistic underwriting strategy and capital allocation over the last two years, but also is a reflection of the benign attritional loss experience relative to the prior year's quarter. To summarize, for our P&C operations after several years of cycle managing our portfolio, we are well positioned to deploy more capital at attractive returns. With respect to our investment returns, our outlook remains cautious as we believe the economic recovery could be slow and take several quarters to develop. Accordingly, underwriting performance should be the driver of earnings for the industry in the near term, which we believe should help sustain the momentum of increasing premium rates. From a capital standpoint, we are in a strong position and we have room to grow with our clients after many years of playing defense. In other words, our core principle again of active cycle management exercised by our team has positioned us to move much more aggressively into a growing number of improving lines. Last, but not least we want our shareholders to know that our employees' hard work and our clients' strong relationships over the last three months were critical in getting us through these tough times. And for that, a huge thanks to all of them. With that, François will take you through the financials. François Morin : Thank you, Mark and good morning to all. We at Arch hope that you are in good health. On to the second quarter results. As a reminder and consistent with prior practice, the following comments are on a core basis, which corresponds to Arch's financial results excluding the other segment i.e. the operations of Watford Holdings Ltd. In our filings the term consolidated includes Watford. After-tax operating income for the quarter was $16.6 million which translates to an annualized 0.6% operating return on average common equity and $0.04 per share. Book value per share increased to $27.62 at June 30, up 5.8% from last quarter and 12.1% from one year ago. The increase in the quarter was fueled by the strong recovery in the capital markets. Outside of the losses related to the COVID-19 pandemic, our underwriting groups continued on their path of solid growth and improving results, as we benefited from the generally improving property casualty markets. Losses from 2020 catastrophic events in the quarter including COVID-19, net of reinsurance recoverables and reinstatement premiums stood at $207.2 million or 13.5 combined ratio points compared to 0.5 combined ratio points in the second quarter of 2019. The losses impacted both our insurance and reinsurance segments and include $173.1 million from the COVID-19 pandemic as well as $34.1 million for other catastrophic events, including losses related to civil unrest claims across the U.S. The losses we recorded in the quarter for COVID-19 across our P&C operations were split 45% insurance and 55% reinsurance. These loss estimates incorporate additional information that became available during the quarter and represent our current assessment and best estimate of the ultimate losses for occurrences through June 30, based on policy terms and conditions including limits, sublimits and deductibles. We are confident that the approach we took to develop these estimates is conservative and are comfortable with our estimates as they currently stand, but needless to say, we continue to monitor the pandemic in its effects as they play out and we will adjust our estimates as necessary in the coming quarters. As of June 30, the vast majority of our COVID-19 claims are yet to be settled or paid, as approximately 90% of the incurred loss amount has been recorded as IBNR incurred, but not reported reserves or as additional case reserves within our insurance and reinsurance segments. In the insurance segment, the loss reserves we recorded this quarter for the pandemic were primarily attributable to exposures in our North American unit across the national accounts, programs and travel lines of business. In the reinsurance segment, the majority of the losses came from the property catastrophe, accident and health and trade credit lines of business. As regards the potential impact of COVID-19 on our mortgage segment, it is important to mention that our estimates for our U.S. primary mortgage insurance book are based only on reported delinquencies as of June 30, 2020 as mandated by GAAP. As we discussed on the last call, our expectation at the end of the first quarter was for the delinquency rate to progressively increase throughout the remainder of the year with a resulting expectation that underwriting income for the overall segment would be minimal for the remainder of 2020. While we did see such an increase in reported delinquencies in the second quarter, the current delinquency rate of 5.14% is approximately 30% to 40% lower than what we expected it would be when we developed our forecast at the end of the first quarter. While that is a positive sign for the ultimate performance of the book, we are also aware that many uncertainties remain, including the rate of conversion from delinquency to cure or claim, which we expect to be different than under more normal conditions. In addition, it is extremely difficult to predict how reported delinquencies and forbearance which represent approximately two-thirds of total current delinquencies will behave over time, given the lack of historical data that is directly applicable to the current economic reality, which includes elevated unemployment rates, historically low interest rates, solid home price levels and unprecedented government intervention. As we look towards the remainder of 2020 for our U.S. MI business, in light of the developments we have observed during the second quarter, our current expectation is that pretax underwriting income for the remainder of 2020 for the entire mortgage segment will remain positive with a combined ratio in the 70% to 80% range, slightly better than the result we reported this quarter. In summary, while we are still faced with significant economic uncertainty, our expectations for the mortgage segment are definitely more positive than what we thought only a few weeks back. In the insurance segment, net written premium grew 7.1% over the same quarter one year ago, a strong result given the material impact COVID-19 has had on some of our businesses, such as our travel and accident unit. As Mark said, if we exclude this line the year-over-year growth in net written premium would have been 16.9%. The insurance segment's accident quarter combined ratio excluding cat's was 96.1%, lower by 330 basis points from the same period one year ago. Approximately 90 basis points of the difference is due to our lower expense ratio, primarily from the growth in the premium base from one year ago and reduced levels of travel and entertainment expenses this quarter. The lower ex-cat accident quarter loss ratio primarily reflects the benefits of rate increases achieved over the last 12 months. Prior period net loss reserve development, net of related adjustments was favorable at $2.1 million, generally consistent with the level recorded in the second quarter of 2019. As for our reinsurance operations, we had strong growth of 50.3% in net written premiums on a year-over-year basis, which was observed across most of our lines and includes a combination of new business opportunities, rate increases and the integration of the Barbican reinsurance business. The segment's accident quarter combined ratio excluding cats stood at 87.5% compared to 92.2% on the same basis one year ago, a 470 basis point reduction. The year-over-year movement is primarily driven by a more normal level of large attritional losses compared to a year ago, which explains approximately 330 basis points of the difference and the impact of the non-renewal of a large transaction from a year ago, which contributed approximately 50 basis points. Most of the remaining difference is explained by operating expense ratio improvements resulting from the growth in earned premium. Favorable prior period net loss reserve development, net of related adjustments was strong at $28.9 million or six combined ratio points compared to 3.1 combined ratio points in the second quarter of 2019. The benefit was mostly in short-tail lines. The mortgage segment's combined ratio was 80.9%, reflecting the increased level of reported delinquencies in the quarter as mentioned earlier. The loss ratio in the quarter is based on an assumed claim rate of – on newly reported delinquencies for our U.S. MI book of slightly above 5%, combined with an average expected future claim value for severity that is approximately 50% higher than claims we settled and paid in the quarter. This difference is explained by the fact that the distribution of the newly reported delinquencies carry a higher average outstanding loan balance as a higher proportion is for mortgages from the more recent origination years and from states that have higher loan values such as California, Florida and New York. The expense ratio was lower by 100 basis points over the same quarter one year ago reflecting lower operating costs including reduced levels of travel and entertainment expenses. Prior period net loss reserve development was minimal this quarter at $0.2 million favorable. Total investment return for the quarter was positive 372 basis points on a U.S. dollar basis, as the strong recovery in the capital markets produced healthy returns across our entire portfolio. The duration of our investment portfolio remained basically unchanged from the prior quarter at 3.18 years. The effective tax rate on pre-tax operating income resulted in a benefit of 0.9% in the quarter, reflecting a change in the full year estimated tax rate the geographic mix of our pretax income and 110 basis point expense from discrete tax items in the quarter. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction. We currently estimate the full year tax rate to be in the 9% to 12% range for 2020. Turning briefly to risk management. Our natural cat PML on a net basis increased to $832 million as of July 1, which had approximately 8% of tangible common equity remains well below our internal limits at the single event 1-in-250-year return level. The growth in the PML this quarter is attributable to both E&S property within our insurance segment and property lines within the reinsurance segment, reflecting our ability to deploy more capacity to opportunities that safely exceeded our return thresholds, some of which were slightly tempered by additional reinsurance purchases. As you know, we issued $1 billion of 30-year senior notes at the end of the second quarter, enhancing our capital base and furthering our objective of maintaining a strong and liquid balance sheet. Our debt plus preferred leverage ratio of 23.8% remains within a reasonable range. As discussed on the prior call, we paused our share repurchase activity since the start of the pandemic and we do not expect to repurchase shares for the remainder of 2020. At USMI, our capital position remains strong with our PMIERs sufficiency ratio at 161% at the end of June, which reflects the coverage afforded by our Bellemeade mortgage insurance-linked notes. In late June, we were able to obtain $528 million of coverage on our in-force book for the second half of 2019. Our ability to execute this transaction highlights the credit quality of our in-force book and further protects our balance sheet should an extreme tail event materialize. The Bellemeade structures provide approximately $3.1 billion of aggregate reinsurance coverage at June 30, 2020. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : Hi, thanks. Good morning. My first question on the property casualty side, you guys seem pretty optimistic and started to see – saw a continuation of pretty good growth in the quarter. And so you guys don't disclose the capital supporting, your property casualty versus the mortgage business, but if we're sitting outside the company and we just want to get a sense of the opportunity at hand and the capital that you have given the recent debt raise could you potentially if it really is a strong market double the size of your insurance book of business on your current capital base? Marc Grandisson : I think it's a fair assessment. I think in general you could think of capital allocation on premium from the P&C as a 1 :1 that sort of, gives you a range for capital usage but certainly the ability is there. And I would say that is also informed by how you develop it right? Elyse if you -- property care is a different and capital requirements and then other lines of business such as quota share, let's say, on the reinsurance side on liability. So there's a lot -- there's plenty of room for us to grow. Elyse Greenspan : Great. And then on the mortgage side of things, you guys see some pretty helpful color that the current delinquency rate is about 30% to 40% lower than where you thought it would have been. So as you set the new guide for the outlook for the underwriting -- positive underwriting mortgage income for the rest of the year in that 70% to 80% combined ratio can you give us a sense of where you expect delinquency rates to trend in the third and the fourth quarter? François Morin : Well we don't really -- we had -- the quarterly movements are a bit harder to predict. But I mean we had forecasted last quarter somewhere around a 10% or so delinquency rate by the end of the year. We think -- right now we're thinking that it will be more like around 8%. So obviously, we're monitoring weekly and we get data that comes in from all our servicers et cetera, but that's kind of where we're at. There's about 8% delinquency rate by the end of the year. Marc Grandisson : Yes. I think to add to this Elyse. I would -- just to add to this Elyse, I would say that this is it's a one quarter data point so it will take us we still take a longer-term view and are not fully all reflecting the decrease or the lesser delinquency that we had. We had reported versus what we expected where you get 30% to 40% and then François told you a 20% increase. That tells you sort of a level where we're thoughtful and measured in the way we want to recognize any immediate improvement. Elyse Greenspan : That's helpful. And then my last question. You guys have pointed to the severity per claim. I believe you said it was about 50% higher than some of the claims you settled in the quarter just given the higher housing values, I believe. If I look in your supplement on the mortgage page, the average case reserve per default went down to 6,900 in the quarter and it has been 14,400. Why would that number have gone down if you're actually setting up more for the current claims? I'm just trying to reconcile those numbers. François Morin : Yes. The average is very much a function of the percentage of the delinquencies that are effectively in early stages of delinquency. So if you think of all these newly reported delinquencies in the quarter they carry again effectively a 5-or-so percent claim rate versus the older-stage delinquencies and the percentages go up as the more mature the later-stage mature delinquencies we have. So it's really -- there's no changes in assumptions. I'd say it's really just the way the mix of the portfolio or the mix of the delinquencies that we currently have changes over time. And this was really as you know the first quarter where we had a large surge of delinquencies coming from the pandemic. Elyse Greenspan : Okay. Thanks. I appreciate all the color. François Morin : Thanks, Elyse. Marc Grandisson : You’re welcome. Operator : Our next question comes from Mike Zaremski with Crédit Suisse. Mike Zaremski : Hey, good morning. I guess sticking with MI so clearly there -- feels like there's some conservatism kind of built in that you expect the delinquency rate to continue moving north. Is the government stimulus kind of a big x factor in terms of like the -- how the $600 weekly unemployment insurance subsidy whether that continues or not? Just trying to think about -- or I mean you can just should we just probably be looking at unemployment levels as well? Just trying to think about how to gauge because clearly results have been good so far much better than expected which is great. Marc Grandisson : So Mike, I think, the easy question is unemployment matters it is a contributing factor that would precipitate if you will in delinquency and in claims ultimately. The number one, the leading indicators as I said in my notes that will tell you whether there's a heightened increased risk of delinquencies is really the house price in there. So to the extent that the house prices are stable or keep on going up or that there is -- which is another way to say as long as there's reasonable amount of equity in the house, we have found that borrowers do not tend to walk away from their obligation to mortgages. I know. So if you saw the great financial crisis what happened is we had a combination of house price decreases and unemployment so it sort of contributed to the acceleration and a more of an acute delinquency rate that we saw in the great financial crisis which we are not seeing right now. So what we're focusing on -- of course we look at what the government is doing that's going to be helpful. And I think we'll see more of this impact at the end of the forbearance period. But for now the house price index is extremely encouraging to us and really is a leading indicator on the propensity for homeowners to default. Mike Zaremski : Okay. That makes sense and that's helpful. Then in terms of -- we get a number of questions about the court cases in the United Kingdom the FCA has kind of been writing about that. Is that contemplated in your COVID IBNR whether those court cases go for or against the industry? Marc Grandisson : Yes. We've taken a conservative approach and we actually had reserves for it as the end of March. So we have reserved for it appropriately with fairly good level of reinsurance against it so we're pretty much reserved there. If things -- it could presumably could be good news going forward for us there. Mike Zaremski : Okay. And just lastly quickly I'm sure other people will ask about kind of the segments. Any thoughts on new capital entering the broader insurance and reinsurance marketplaces? Do you feel that capital will continue then or is it having an impact on your ability to play offense at this point or is it still just a drop in the bucket? Any color would be helpful. Thanks. Marc Grandisson : So Mike, it's a little bit of everything you mentioned. I would say that the capital needs that are out there that we see in terms of client trying to find solutions and towers of coverage is meaning a place, a new place, a new home. We would need a significant amount of capital to neutralize that impact if you will. So we're seeing actually acceleration even though there are -- there's more capital being raised and new entrants as we speak thinking about coming in. We're not seeing any ebbing of the rate pressure that we see right now. And I think the demand for capital are pretty high. There's a couple of large players that were really providing a lot of capacity acute capacity in very, very high capacity mongers in the industry have pulled out significantly, so that means that there's a lot of other capital that needs to find its way around to support it. So I would say that, we are not seeing -- we hear what's out there, what's happening. We're encouraged by -- we raised some more capital and there's other folks such as ourselves who have access to the business, access to the clients and relationships. We're able to raise capital. It bodes well for the health of those companies. But any new entrants, it will take them a while to get ramped up and I don't think it's impossible. I think it's totally doable, but it's certainly not something that we're losing sleep over. Mike Zaremski : Thank you. Operator : Our next question comes from Yaron Kinar with Goldman Sachs. Yaron Kinar : Hi, everybody. First question on MI and then a couple on the COVID losses. So in MI, I haven't really seen any significant pullback from that market. So I guess should I take that to mean that even with all the COVID economic uncertainty you still view it as a pretty attractive business? Marc Grandisson : Yes, it is still very attractive. I would even argue on that the production in the second quarter and as we speak is actually better than it was six months or a year ago where the rates that's -- rate pressures and also quality of underwriting quality of the originations is a lot better than it was even a year ago. So yes there is a lot more activity. The activity Yaron to be fair is also driven by the refinancing market which was not there and by -- dropping the mortgage rate below 3% that does create more business back into the market. As a result of that there's a lot of prepay, right? There's a higher level of the lower level of persistency which means that there's more churn, if you will in the portfolio of business. So I think it's just a reflection of people coming out of their current -- they're coming out of their higher mortgage rate and it's just refinancing at a low level which still makes economic sense. Now we're on the receiving end to grow. That's what we have such we believe much higher NIWs than otherwise would have been in a more stable marketplace. Yaron Kinar : Got it. That's helpful. And then with regards to the COVID losses maybe a couple of questions there. One when you talk about IBNR, do you include only events or losses from events that have already occurred or do you also include events in the future that are probable very probable to occur? François Morin : Well I mean that's a -- I mean a good question which as you know people are -- I think companies are may be answering that, I don't want to say, differently. But I think the words - we have to be careful with how we use the words, right? So I'd say, no question that we can only reserve for incidents or occurrences that have happened before June 30. I mean that's under GAAP. And anybody that tells you they're reserving for occurrences that are going to happen in the third or fourth quarter, I just don't know how you can do that. What we have done is, set again a high level I think a prudent level of IBNR on both insurance and reinsurance on things that we know happened or think have happened right? I mean the whole concept of IBNR. So we have certain claims that have been reported. We don't know. And certainly when you get into structures or when you're in an excess position, you're somewhat making a judgment on whether the claim will attach in your layer etcetera and that's where there's a bit more -- there's a bit of art that goes on and not necessarily tons of data or science around it. So I think the answer to us is, we've reserved for everything through June 30 and we would say there's an ultimate right? So the truly our best estimate of what we think the exposure is and that's where we are. I mean we can't really do more than that at this point given the accounting rules and guidelines. Yaron Kinar : Got it. And then final question also with regards to COVID, between first quarter and second quarter the increase in loss and COVID losses is some of that coming from IBNRs that you had already set up in 1Q, but then took a second look and realized they need to be higher or is that from really new lines of business and new areas that had not been not previously reserved for? François Morin : Well I'd say it's a bit of both. I mean I would say on the insurance side for example at Q1 we had reserved primarily in set IBNR primarily in our international book because again back to the in the U.K. in particular property book or regional property book there we were of the opinion that there was exposure there. We took action and we booked IBNR on that. I'd say in the second quarter for example we booked and I mentioned it on national accounts that's where we have workers' comp exposure. Again if you want to be very technical at one point, I mean the deaths or the occurrences hadn't happened at the end of March they started to take place especially with health care workers as an example in April and May. So that's when we -- that's what we reserved for in the second quarter. I'd say on the reinsurance side, it's a bit murkier. It's not -- we're somewhat at the mercy or have to have discussions with our scenes and on the property cat book for example. We had booked a little bit of IBNR at the end of Q1. But through additional discussions and investigations and file reviews in the second quarter we booked a bit more on that front and the same is true in trade credit. So hopefully that answers, it but it's a bit of both I'd say. Yaron Kinar : That is helpful. And maybe one other one if I could sneak it in. On the BI front in reinsurance, the increases in COVID losses that you're reserving for today are those coming more from international accounts or more from the U.S.? François Morin : Correct more international. Absolutely. As you know we have exposure. I mean -- Continental Europe in particular there's France here there's certain countries where the BI coverage is more implicit and provided by the primary policies so those are some of the examples that we -- or policies that we -- or treaties that we're reserving for at this point. Yaron Kinar : Thank you very much. Operator : Our next question comes from Josh Shanker with Bank of America. Josh Shanker : Can we talk a little bit about July and how it compared with -- noticing for mortgage defaults? Marc Grandisson : Can you repeat the question please Josh? Josh Shanker : Yes. Can we talk about -- compare May June July -- of you receiving notices for forbearance and defaults? Marc Grandisson : Yes. I think we -- I think the one place the one thing that we could say I mean it's -- the data is probably lagging a little bit from our perspective. But the good one to look at is the -- there's information back now I think and the MBA is providing information as to what is their estimate surveying the market and their clients as to who -- what's the forbearance percentage. I think it was pretty much plateauing as we got into May -- towards the end of May into June and through the second - first or second week of July and it's gotten down since then. So we're about 6.1% based on that metric in percent of forbearance from the GSE portfolio from the industry data and now it's at 5.49% as of July 13, I believe this last week. So we've seen a decrease right now Josh. Whether it continues that way or goes back up again. As you know a lot of people pay on the first of the month, but we'll probably have more information and a better clear picture as to what August look -- July looks like in the middle of August. Josh Shanker : Okay. Thank you. And do you have any evidence one way or the other what RateStar has had any discernible difference in claim behavior -- I should say, claim-noticing behavior compared to how a lot of your competitors were pricing risk prior to your -- to adopting your methods? Marc Grandisson : Yes, I think, it does. It has had an impact. I think when we talk about cycle management. We also were doing it possibly a little bit more under the radar screen and MI. I think that our RateStar approach with all the parameters actually took us away from a higher than 95 LTV, higher DTIs in certain geographical areas. So yes, we do believe if we adjust for all the variation. I mean, it's not a huge differential, but there is a slight improvement or a slight difference going to our advantage in terms of our delinquencies based on our portfolio and the risk that we underwrote for the last four, five years. Josh Shanker : All right. And one last one. I think you mentioned the change in AML. I don't think you mentioned the RDS change or maybe I missed it. Where is RDS as a percent of -- directly as of the end of the quarter? François Morin : Still right at 8% pretty flat. We've -- a couple of movements across the kind of contributions, but yes 8% of tangible book. Josh Shanker : Thank you for all the answers. François Morin : You’re welcome. Marc Grandisson : Thanks, Josh. Operator : Our next question comes from Ryan Tunis with Autonomous Research. Ryan Tunis : Hey, Thanks. Appreciate the MI guidance, I realize all this is like literally impossible to nail down, but I'll go ahead and I'll push on it a little bit more, because it is interesting. So when you think about the full year delinquency rate in your mind what are you thinking the percentage of forbearances are going to be of I think you said what was it 8%? How much of that is forbearance versus what you think of as like a real delinquency? Marc Grandisson : Well, the forbearance that we will declare -- that we will report that we're reporting to you are delinquencies by definition, right? So it's very hard to see I know what you're asking. And I think the one thing that we will tell you about projecting forbearance rates and delinquency rates in this forbearance world is that data is very, very hard to get and it's lagging a fair amount, so very difficult for us to tell you. Ryan Tunis : And, I guess, my follow-up too is, how are you planning on treating these delinquencies as they age? Like you're obviously using a pretty conservative incidence rate of 5%. I mean, as those move into the -- as those age to six months or whatever like are you going to keep it at 5% or are you going to assume something bigger than that? Marc Grandisson : I think it's -- there are two moving parts of that 5% Ryan. One is the -- it comes up really as our pre-COVID NODs to ultimate, which was 7.9% and we gave a discount about 33% haircut by virtue of being a forbearance. So as we move forward that 7.9%, which is a claim that's aged three months versus a claim that's aged two years or nine months even though it's a forbearance, we might have to increase those rates. But at the same time if the forbearance programs are getting better we might give a bit more discount or less discount. So it's a really, really -- and you're right you just pointed at the beginning of your comments. I think I should have probably let you answer your own question, which is it's pretty much impossible to answer at this point in time. But right -- and we have -- all we have is a 7.9% pre-COVID ultimate NODs, which was starting point getting some discount, recognizing that the regular forbearance program on hurricanes, which it is not right now -- is as low as 2%. So we're try to find our way around that environment, also recognizing that the delinquencies out of this crisis this COVID-19 will be longer to resolve, because the forbearance program as we all know will last for 12 months. So it's going to be -- it's going to take us a while to really understand the underlying fundamental characteristics of those risks. And to add all this -- to all of this if that wasn't enough, we'll have remediation programs put in place by the GSEs, which presumably should help a tremendous amount. But again, it remains very early to see -- to say. Ryan Tunis : Understood. And then lastly, Mark, this is purely hypothetical, but if you had $1 of capital for the next year or two years and you can only allocate it to reinsurance or primary insurance, is there a clear preference for which one you allocate it to? Marc Grandisson : How many years? Ryan Tunis : Two years. Marc Grandisson : Man, so to me you're asking me to choose among my kids. I got three kids, I love dearly. Ryan Tunis : I would split it in three -- three ways or I mean, which way I would like to know… Marc Grandisson : I mean, to me it's not an all or nothing. But I do believe right now at this point in time, which is I think what you're getting into, which I mentioned in my comments the returns on the reinsurance are quicker to a high level get quicker. But in terms of value creation over the longer time insurance will get there and get traction. It just takes a longer time to accumulate business at a higher level so -- but the problem with the reinsurance it's great for a couple of years but then you might lose that business. So it's not an all or nothing kind of situation. I wouldn't want to go, let's say, all-in in reinsurance even though they have higher ROEs sooner at the cost of losing long-term value creation from the insurance unit. Ryan Tunis : Thanks for the color. Appreciate it. Marc Grandisson : Yes. Operator : Our next question comes from Meyer Shields with KBW. Meyer Shields : Thank you. I wanted to follow-up on that question, but in a different direction. You talked about reinsurance maybe recovering faster than insurance. How is the current hardening cycle playing out in terms of speed relative to past cycles? Is there any observable difference? Marc Grandisson : Not really. I would say that we -- Meyer we may have that discussion before. A hard market never happens overnight. It takes five signal – two, three quarters. Losses have to develop. Management team have to figure out what they want to do and put pressure on their underwriting team. So it's no -- it's not unlike others that we've seen before. I would say that we were going to a strengthening of the market conditions even before COVID-19, I think that COVID is probably accelerating the reaction and the willingness and the boldness that we see in the underwriting teams around the industry. But there are still pockets Meyer where people seem to be a little bit aloof in what's going around. And these are the areas we're not growing as much as we should. But I know every cycle turn is different, but I'm not seeing significant difference. It does take-up -- and well one last thing, I will tell you. The one thing about this one is that, we have yet to see is the 1/1 renewal on reinsurance is a really important renewal date, so we'll have a lot more sense as to how quickly and how reactive the market will be as we head into this one. Meyer Shields : Okay. No. That's very helpful. Thank you. In the past, we've been, I guess, targeting improvements within insurance that would get to a 95% combined. And when we look to the lens of current pricing, is there an update in terms of what that 95% can become? Marc Grandisson : I hope it's lower. But all kidding aside Meyer, I think that the 95% was put in place as an aspirational number two, three years ago. Now, two years ago now in an interest environment that was different. So, I think right now what we're processing it through -- this was sort of an aspirational as a guiding sort of target for our insurance group. I think right now what we're seeing is we're going through every different line of business and business units and attributing capital and return on investment and we're pitching everything to get to the right level. So, 95% is an over-simplistic way of looking at this. But all things being equal I think I would expect it to be lower right for the industry and that's also why you'll probably see a bit more pressure on the pricing around us in the industry. Meyer Shields : Okay, perfect. And then final question if I can just in terms of whether you've had to take into account whether it's COVID or something like that that's so remote or other pressures whether you've dialed up your overall last year numbers in insurance or reinsurance? François Morin : Not in a meaningful way. I think -- I mean we've been pretty cautious. And I think I've been I'd say realistic about what the loss trends have been and what we expect them to be going forward. As you know we haven't relied exclusively on kind of the last five or 10 years of data. We superimposed our own views on what a more normalized view of loss trends is or should be. And I think we're still very comfortable with where we were at and recognizing that yes COVID is a bit of an outlier. But at this point, haven't really factored in any material changes in our loss trends in how we price the business. Meyer Shields : Okay, fantastic. Thank you so much. Operator : Our next question comes from Brian Meredith with UBS. Brian Meredith : Yes, thanks. A couple here for you. First one, I don't think you mentioned it, but was there any benefit at all in the quarter from just lower frequency of economic activity kind of from a claims perspective in any lines of business? François Morin : I mean there are some indications that in some places yes, there's lower economic activity which will translate to lower losses or claims. We really haven't reflected that yet. I mean we want to take a cautious approach on that, so I'd like to think that maybe there's some to come down the road but for now we haven't factored that in anywhere in our numbers. Brian Meredith : Great. And then second question I'm just curious Marc as you look at I guess the HEALS Act here there's a component into it of kind of liability call it indemnification. As you think about it if that doesn't go through is that a potential issue here for you and the insurance industry? And how do you kind of think about it from an underwriting perspective here going forward? Marc Grandisson : I missed the word you said Brian. Could you repeat the early part of your question? Brian Meredith : Well, it's -- basically curious about protection or what you think about as far as the economy reopening here and potential liability associated with kind of COVID-19. The current I think it's called the HEALS Act or the CARES 2 Act has got some language in there trying to grant businesses and immunity for it right? I'm just curious of your thoughts around that. And if you're interested for insurance? Marc Grandisson : Well, it's not good. They're going to allocate more liability to us or presumption to us is not good. But I think in this sense these laws are always there. There's always things that are happening. We're going to have to react to what we see when we see it. That's all I can tell you Brian. It's very hard to sit here and go through what impact it is. If we were to react and do this full drill about everything that goes and a bill that's proposed it would take a lot of our time. So, we'll react to it when we'll react to it, right? Brian Meredith : Yes. And Marc I think you get it wrong. I think you mistake my question. My question more is from your insurance policies perspective as you look going forward as the economy reopens up there's clearly EPLI exposures or GL exposures all sorts of exposures to potentially present themselves as benefits. How do you -- how are you thinking about that from an underwriting perspective? Marc Grandisson : Well, we have written policies that have EPLI exposure, we have GL exposures but we are not a large risk writer. We don't write the large insurers so that's certainly something that would be helpful to us. We would argue that a lot of the larger claims a lot of the focus from the low risk plaintiff bar would be focused on the larger deeper pocket insurer, so that's one thing we have for us. We also have a fairly amount -- a good healthy amount of reinsurance, so we're not overly concerned with the sideways change. Brian Meredith : Yes. Got you. Okay. And then another just quick one here. Your travel insurance I'm just curious how big of a book is that? And obviously we're probably going to see some continued pressures there for the rest of the year. Marc Grandisson : Yes, it was originally about a couple of hundred million dollars of premium and now it's down -- I mean you could see the numbers you can multiply by four. I don't need to -- 250 actually for the year. So that's -- it's been -- it's taken a big dent and that also explains why the growth was more tested this quarter than otherwise could have been. Brian Meredith : Great. And then one other just quick one here for you. I know you guys launched the sidecar guesses in the first quarter. Any thoughts about additional kind of alternative capacity here to potentially capture some of the good attractive opportunities in reinsurance? Marc Grandisson : It's a good question Brian. You're trying to get us to say something we don't want to say we can't say and we won't say. We don't mention about we certainly are always on the lookout to raise capital to deploy it with third party a lot of discussions are happening all over. We'll have probably more update as we see it happen and we'll be communicating to you to the extent it's appropriate but how much more it is clearly -- yes. Brian Meredith : Great. Great. Great. And last one just quickly any updates on Coface? Marc Grandisson : Coface strategically is still something we really very much think is valuable for the shareholders. There's a lot going on. We're still going through the process of approval process and we're keeping a keen eye on what's happening. I think they reported results yesterday which were better than The Street expected. So, hopefully if that goes. It's also there as well a developing situation with them. Brian Meredith : Great. Thank you. Operator : Our next question comes from Phil Stefano with Deutsche Bank. Phil Stefano : Yes, thanks. Just a quick one on the Bellemeade transaction. I'm thinking about the potential for these moving forward. I guess it seems like the Bellemeade deal that was done in the past quarter just given its attachment was probably more for S&P capital credit than PMIERs. When we saw an MI pure play come out with their own ILN transaction which is in my mind more of a traditional attachment point in the low single digits but the spreads on that and the pricing was significantly higher. How are you thinking about the managing of tail risk that Bellemeade provides versus just the capital credit that could be from playing I would think something that could be considered well above the working layers for the MI reinsurance coverage and the capital relief that something like that might provide? Marc Grandisson : Yes, it's a good question. I think it's always something we evaluate when and if we place or look at options that are in front of us. You're correct this one attaches -- the last one attaches above the PMIERs credit, but we're still very much in -- we have a healthy PMIERs ratio so that didn't really concern us too much. At this point not to say that next time or down the road, we may not go back to a lower attachment point. But yes, the focus was really -- yes it's an available source of capital. From a rating agency point of view, S&P you're correct it covers that. It provides us coverage there. And also we felt as being the first one out of the gate even before the GSEs to go back and access the capital markets was we thought a very strong message demonstrated. Again ,I touched on it the quality the book and the investor base is still very has a lot of interest and appetite for the product, so I think we were happy with the placement. No question it's always too expensive. We'd like to see the price to come down. We hope they do down the road. But for the time being given the economics in front of us we were -- I think it was a good move on our part. Phil Stefano : Got it. And to the extent that you guys have a disclosure wish list that you keep in the background, I think it might be helpful to see the USMI disaggregated from the international and the mortgage reinsurance book just been the significant differences in how those businesses are reserved for? Thanks for appreciating. François Morin : See you, back. Thank you. Operator : Our next question comes from Geoffrey Dunn with Dowling & Partners. Geoffrey Dunn : Thanks. Good morning. I guess first just a quick number question. Can you quantify the impact of the accelerated singles in the quarter? Marc Grandisson : Did we do that? I think it's about $50 million. Geoffrey Dunn : $50 million, okay. And then let's think forward past the end of new forbearance so early next year, so given what you know about the economy now obviously very different from a couple of months ago. How would you think about claim rates on new notices without forbearance? Because again you pointed out it's very different with home prices remains to be seen if we're going into a recession or not. And I think Marc last quarter you suggested, we might be looking at 13%, 14% given what you knew then. So what do you think about that type of number as you get into early 2021 based on what you know today? Marc Grandisson : I think the 5% is probably -- this is like on NODs or you're talking about ultimate claims rate for the portfolio? Geoffrey Dunn : On NODs. So new notices coming in forbearance goes away. Marc Grandisson : NODs, yes. Right. I think we were at 7.9% pre-COVID. I think that the forbearance should be pretty helpful and to bring it up -- not bring up to the 13%, 14% you just mentioned, I mentioned first quarter. That's probably -- my gut would tell me a slight increase for a little while until we see things shake out and things came back to more normalcy. And I think reverting back to some kind of level. I think the forbearance program were to play out to the way it should play out. It's still very uncertain as you know Geoff. I think that we should get back to -- it might stay elevated for a while maybe 12%, 13% for a little while but it should go back down at some point for next year I would say. Geoffrey Dunn : Okay. Alright. So you do think given what you know about the economy and built-up equity that you could still see 12% type of incidence assumption? Marc Grandisson : Yes. Yes on NODs, right? On new NODs for regular piece not for the forbearance piece? The forbearance piece we gave -- we did give a discount, right? There's a discount to that. So yes then just got it from – right. Congrats, yes. Geoffrey Dunn : All right. Thank you. François Morin : Quick, I mean before you go on to the next one, Geoff quick update for you. The actual impact of the singles was $27 million in the quarter. Just correction to Marc $50 million. Geoffrey Dunn : Thanks, again. Marc Grandisson : Okay. Go with $51 million. François Morin : You’re welcome. Operator : Our next question comes from Jimmy Bhullar with JPMorgan. Jimmy Bhullar : Hi. I just had a question on pricing and just how you think about the interplay between the decline in exposures if the economy remains weak and how that could affect demand and pricing? And relatedly what else is out there that you think could potentially derail the momentum that you've seen in pricing both in insurance and reinsurance? Marc Grandisson : I mean it's hard to predict the future. As you know -- my God! I think if everything resolves, I mean even if things resolved for the better, I think the momentum that we've seen in the first quarter, late 2019, early 2020 I think we would still see some momentum. I think it would be just a matter of degree how much higher the rates could go. But I do believe the momentum was there for a turnover market way before pre-COVID-19. COVID-19 like I said before exacerbated the need for rate and accelerate the need for rate. Jimmy Bhullar : And then there's been a lot of talk about sort of ILS and trapped capacity and what do you think about when either some of the capacity gets relieved or potentially gets absorbed? And once there's clarity on that do you think by this time next year like a lot of the trapped capital would actually be out? Marc Grandisson : It's a possibility. I mean that's also assuming there's no more cat occurring this year. But this is a long-lasting cat event so it's not as clear as having a quake let's say in March. And I guess in a year out it's still developing but you have a better sense for wanting to or would be willing to release capital. This one will take a bit longer to process through, right? For instance, you could have arguments in courts and new ways and new push back on the insurance industry to pay claims in a property cycle. And that would take -- that could take another 1.5 years or two years to resolve. So, there's a lot more uncertainty in terms of timing finding resolution of the ultimate prices. So, it's a lot less certain that it will take only a year to get through it. Jimmy Bhullar : Thank you. Marc Grandisson : Sure. Operator : Our next question comes from Jamie Inglis with Philo Smith. James Inglis : Hi. Good afternoon. I wanted to follow-up on the conversation we've been having about forbearance programs and to what extent delinquencies get cured get claims -- turn into claims sort of, et cetera. And I appreciate that we don't know what's going to happen going forward, but I'm wondering if you could speak to what you learned in previous forbearance programs and how that affects your thinking about your current book? And if -- and what you learned in there? Was it -- did you learn anything about LTVs geographies sort of, et cetera? And how does that apply to your existing book today? Marc Grandisson : I think we have done reserving in the past, considering all the dimensions you just talked about, I think that we had the -- the beautiful thing about the prior hurricanes or the beautiful thing in a way is that we have prior hurricanes and prior events that we can go back to and look at the experience. This definitely help us put I guess, boundaries around what could happen, but this one is very unusual in the length of the forbearance program and the breadth and how widely spread it is. And I think we also have to throw in there the $600 per week unemployment benefits and the distribution that we talked about. Some regions are more heavily affected than others. So I think everything gets in the mix Jimmy -- Jamie. It's not just one dimension. And I think what we've learned is that, we sort of can use the historical forbearance experience as sort of as a range of possible outcome. But, we actually are digging heavily, heavily into developing a much more refined view of a forbearance-specific programs, such as the one we're facing right now. And we may never use it again, but at least we're in the process of readjusting our development claims model called ARMOR that we have internally. So, we're -- it's still very much developing and we're learning on the fly. François Morin : Yeah. Two things I'll add quickly to that. As Mark mentioned, the historically forbearance delinquencies most of them cure. I mean -- and we made comment that the 2% kind of claim rate. So that's obviously a very positive sign, but that's again more localized and it's a short-term issue. So, I mean understandable that these delinquencies most of them would cure. So that would be one extreme that would be a very good result in this situation. Maybe a little counter to that, as you may know, many of the claims or the mortgages or loans and forbearance up to 40% were actually still current, up until recently. So, in the early days of the second quarter, many loans had accessed the forbearance programs, but remained current and made their mortgage payments. The data now suggests that that percentage has come down. So the reality is, now we'll get a few more loans that have turned delinquent that were historically current or had been current in forbearance, but now have turned delinquent. So, that's a bit of a data point that we're monitoring, but that kind of gives us a bit of -- not necessarily concerned, but we have to understand better so that we can refine our estimates as we move forward, because the 2% ultimate claim rate may not be achievable or probably won't be what we end up with in this current situation. James Inglis : Okay. Thank you. Appreciate it. Good luck in future. François Morin : Thank you, Jamie. Operator : I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thanks for joining us this quarter. Please stay safe. Have a nice rest of the summer, and we'll talk to you in the fall again. Thank you. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,020	4	2020Q4	2020Q3	2020-10-30	1.654	1.537	1.939	2.265	null	16.04	13.51	Operator : Good day, ladies and gentlemen, and welcome to the Third Quarter 2020 Arch Capital Group Earnings Call. [Operator Instructions]. Before the company gets started with its update, management wants to remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your hosts for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sir, you may begin. Marc Grandisson : Good morning, Liz. And welcome to our third quarter earnings call on Halloween Eve. You are in for a treat. In our results, you can see tangible evidence of the advantages of the Arch model. By protecting our capital during the soft market years, we are well positioned as each of our segments leans into improving market conditions. Our underwriters are making the most of the hardening property and casualty market, while our mortgage insure segment is benefiting from record mortgage origination activity this quarter. This year, for the first time in nearly a decade, we've been able to grow significantly and deploy more capital in our P&C businesses that provides acceptable expected returns. And due to our strong financial position, we have accomplished this while maintaining a strong presence in MI, which continues to deliver meaningful returns. Our ability to continually rebalance capital amongst our diverse businesses enhances our total underwriting returns. It also should decrease earnings volatility over time. Since our inception, we have believed in cycle management, and this strategy brings an added margin safety to our collective underwriting activity. Allow me to elaborate on our third quarter results by touching on 3 key themes : one, growth; two, margin improvement; and three, capital allocation. First, let's talk about growth. In this quarter, net written premiums in our P&C units grew 25% in total, 17% in insurance and 38% in reinsurance over the same period a year ago. This growth was driven by rate improvements, but also reflects our ability to increase our participations where clients needed additional capacity. In the insurance segment, we continued to obtain strong rate increases in areas like property, D&O and casualty. Group-wide, our rate increase for the third quarter averaged over 11%, and we believe this trend of increasing rates should continue through 2021. At Arch, we have always followed a simple rule : our participation in the business should follow the direction of premium rates. As rates improve, we write more business. When rate decrease, as they did over the past several years, we write less. This strategy takes courage. It will often appear an outlier to the market, but being intellectually honest, disciplined and applying our cycle management techniques is what we're all about at Arch. Obviously, the P&C market is broad, and all opportunities are not created equal. There are areas such as workers' comp where premium rate or conditions are not improving to the levels we believe are needed for an adequate return, and in those instances we manage our appetite accordingly. Despite headwinds from the pandemic, our growth in insurance lines are E&S property, casualty and professional lines are a great example of our platform's ability to flex into improved underwriting conditions. Our reinsurance unit has been able to lean into this hardening market both earlier and with more vigor than our primary operations. There are two main reasons for this. First, when the market transitions, needed rate increases compound up the insurance supply chain. Reinsurance is often a leading indicator of what's to come more broadly. Second, reinsurance can provide capacity quicker and in larger amounts, since it can put capital to work through clients' platforms. Of course, share growth is only one part of the equation of growing returns. Let's turn now to margin improvement. We all know that mathematically, rate increases in excess of loss trends lead to margin improvement. The marketplace seems to be supporting the momentum of continued rate increases. We are in the early stages of seeing the benefit of rate-on-rate increases in our operating results. Simply stated, adding the 2 parts, growth and margin will lead to better returns. Many factors are driving today's P&C markets. These include elevated natural cat loss activity in each of the past 4 years, weakened reserve positions from soft market years, lower investment yield and a rising claim inflation. Add in a global pandemic that is still ongoing, it's not surprising that market conditions are changing. Now pivoting to MI. Our $33 billion of NIW in the U.S. in the quarter was a record for Arch. Low interest rates are producing huge refinance activity and unsurprisingly, some churn in our in-force business. However, MI premium rates remain above pre-COVID levels, and the continued high credit quality of borrowers is generally better than it was pre-pandemic. We continue to face uncertainties such as the economy's health and how the pandemic may ultimately affect individual borrowers. However, we are optimistic that, among other positive factors, recent trends in the U.S. housing market will mitigate the effects of the pandemic. Finally, Arch's ability and willingness to allocate and manage capital remains a key competitive advantage. We always think about balancing our capital deployment over 5 pillars : into the insurance, reinsurance, MI, into our investment portfolio, and lastly into our stock repurchase. Our job is to optimize risk-adjusted returns through capital allocation across these pillars. We see managing the 5 pillars being similar to coaching a basketball team. We're constantly looking at how we can distribute the ball, i.e., our capital to the right players. For the past several years, we've been able to feed the big 7'7" MI guy down low and rely on him to get easy dunks. Now as a playing field, i.e., the market changes, we've adjusted our tactics slightly and are increasingly relying on our two hot shooters, reinsurance and insurance. MI will still score its fair share of points, but the P&C players are getting more open 3-point looks and layups. In short, our game is becoming more complete and diversified. Our ability to adapt the new conditions is what makes us stronger as a team. The market dynamics take me back in time. We have talked about Paul Ingrey's underwriting clock that helps track and measure the phases of the insurance cycle. It's been central to our management philosophy since the beginning and is a helpful reference to understand the underwriting life cycle and assist us in gauging our risk appetite. I recently asked our underwriting teams where we were on the Ingrey clock, and the most common response was around 8 :00. If you take a look at the clock in our most recent annual report, you'll see that it's a very nice time to be at Arch. There's a buzz among our underwriters because we've become the first call for so many of our clients, that we have the capacity, the expertise and the desire to serve them. Now I'll turn the coach's whistle over to François, as he goes into more detail on our quarterly results. And I look forward to responding to your questions afterwards. François? François Morin : Thank you, Marc, and good morning to all. We at Arch hope that you are in good health. On to the third quarter results. As a reminder and consistent with prior practice, the following comments are on a core basis, which corresponds to Arch's financial results excluding the other segment, i.e. the operations of Watford Holdings Limited. In our filings, the term Consolidated includes Watford. After-tax operating income for the quarter was $120.3 million, which translates to an annualized 4.2% operating return on average common equity and $0.29 per share. Book value per share increased to $28.75 at September 30, up 4.1% from last quarter and 12.2% from 1 year ago. The increase in the quarter was yield by the continued strong performance of our investment portfolio and good underwriting results, taking into consideration the elevated catastrophe activity in the quarter and the uncertainty surrounding the current pandemic. Our property casualty teams continued on their path of solid growth and improved performance as we continue to see strong positive pricing momentum in their markets. Losses from 2020 catastrophic events in the quarter including COVID-19, net of reinsurance recoverables and reinstatement premiums, stood at $203.3 million or 12.5 combined ratio points compared to 5.2 combined ratio points in the third quarter of 2019. The losses impacted both our insurance and reinsurance segments and include $191.4 million from a series of natural catastrophes in the quarter including Hurricanes Isaias, Laura and Sally, the Midwestern Tornado, California wildfires and other smaller events, as well as $11.9 million for losses related to the COVID-19 pandemic. The COVID-19 losses we recorded in the quarter were small, reflecting additional information that became available during the quarter and represent our current assessment and best estimate of the ultimate losses for occurrences through September 30 based on policy terms and conditions including limits, sub-limits and deductibles. As of September 30, the vast majority of our COVID-19 claims are yet to be settled or paid, with close to 80% of the inception-to-date incurred loss amount recorded as incurred but not reported, i.e. IBNR reserves, or as additional case reserves within our insurance and reinsurance segments. As regards the potential impact of COVID-19 on our mortgage segment, we note that the delinquency rate at the end of the quarter was 4.69%, down from 5.14% at June 30. Our current expectation is that the delinquency rate should be in the 5% to 5.5% range at year-end 2020. While we have seen many positive signs over the last few months that point us to a more favorable view of the ultimate performance of the U.S. MI book, many of the uncertainties we identified on our last call remain, in particular, the potential impact from a second wave of infections, potential lockdowns and the lack of an additional fiscal stimulus package or risk factors that we continue to monitor and evaluate on an ongoing basis. For these reasons, and consistent with our corporate reserving philosophy, we believe it is prudent to take a cautious approach in setting loss reserves across our MI book. In the insurance segment, net written premium grew 17.1% over the same quarter 1 year ago, a strong result demonstrating our ability to achieve profitable growth in this environment. Adjusting for the net written premium decrease observed in our travel, accident and health unit, the year-over-year growth in net written premium would have been 26.5%. The insurance segment's accident quarter combined ratio excluding cats was 94.1%, lower by 620 basis points from the same period 1 year ago. Approximately 300 basis points of the difference is due to a lower expense ratio, primarily from the growth in the premium base from 1 year ago and reduced levels of travel and entertainment expenses this quarter. The lower ex-cat accident quarter loss ratio reflects mix change and the benefits of rate increases achieved over the last 12 months. Prior period net loss reserve development net of related adjustments was favorable at $1.1 million, generally consistent with the level recorded in the third quarter of 2019. As for our reinsurance operations, we had strong growth of 38.4% in net written premiums on a year-over-year basis, which was observed across most of our lines and includes a combination of new business opportunities rate increases and the integration of the Barbican reinsurance business. The segment's accident quarter combined ratio excluding cats stood at 83.1% and compared to 92.8% on the same basis 1 year ago. The year-over-year movement is primarily driven by a more normal level of large attritional losses compared to a year ago and rate change activity over the last 12 months. Most of the remaining difference is explained by operating expense ratio improvements, primarily resulting from the growth in earned premium. Favorable prior period net loss reserve development, net of related adjustments, was $40.8 million or 7.4 combined ratio points compared to 4.0 combined ratio points in the third quarter of 2019. The development was mostly in short-tail lines. The mortgage industry had a record-breaking quarter in terms of NIW, and we certainly followed suit with this quarter's NIW of 38 -- $32.8 billion, a full 30% higher than our prior high-water mark. Offsetting this record level of production was the high level of refinancing activity across our portfolio, with the net result being a slight reduction in our insurance in force. The combined ratio was 64.2%, reflecting the lower delinquency rate observed during the quarter. The trends we saw this quarter were favorable relative to last quarter, but the game is far from over. The expense ratio was slightly lower over the same quarter 1 year ago. And prior period net loss reserve development was favorable at $4.5 million this quarter. Total investment return for the quarter was positive 230 basis points on a U.S. dollar basis as the strong recovery in the capital market produced healthy returns across our entire portfolio. Returns in our equity and alternative investments contributed approximately 40% of the total return for the quarter. The duration of our investment portfolio remained basically unchanged from the prior quarter at 3.21 years. The effective tax rate on pretax operating income was 4.8% in the quarter, reflecting a change in the full year estimated tax rate, the geographic mix of our pretax income, and a 10 basis point benefit from discrete tax items in the quarter. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction. We currently estimate the full year tax rate to be in the 8% to 10% range for 2020. Turning briefly to risk management. Our natural cat P&L on a net basis increased to $918 million as of October 1 which, at approximately 8.4% of tangible common equity, remains well below our internal limits at the single event 1-in-250-year return level. The growth in the P&L this quarter is attributable to our E&S property unit within the insurance segment, which increased its writings in an improving marketplace. On the capital front, the increase in interest expense this quarter was mainly the result of the issuance of the $1 billion senior notes we issued in June 2020. So far, we have been able to fund our recent growth with our existing capital base. And our balance sheet remains strong, with a debt plus preferred leverage ratio of 23.1% that remains well within a reasonable range. As for our U.S. MI operations, the mortgage insurance-linked notes market has recovered to a great extent from the lows we saw at the onset of the pandemic. Earlier this week, we priced our third Bellemeade transaction of the year at terms that are getting closer to what we saw in 2019, both in structure and price. Our latest transaction will provide 6.5% of coverage in excess of a 2.5% attachment point, both expressed as a percentage of the risk in force. Including this transaction, the Bellemeade structures currently provide approximately $3.9 billion of aggregate reinsurance coverage -- coverage. The fact that this market has recovered as extensively as it has in just over 7 months, with investors more and more comfortable with the exposure they are assuming, is quite telling and provide support to our current assessment of the health of the using the U.S. housing market. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions]. First question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : My first question is on the capital allocation, so what you laid out, 5 pillars. I just want to confirm, I guess, based off of how you were talking. It sounds like share repurchase is left kind of on the chain right now. And I guess because it seems like you have such good growth opportunities that you could put your capital to use just basically to incrementally add to your insurance and reinsurance writings? Am I understanding that correct? Marc Grandisson : So yes. I didn't mean to put them in ranking order. I think that they are probably all very equally attractive at this point in time. I think that we're investigating, as you know, on a quarterly basis as to what the opportunities are in various signs of business. I didn't mean to name stock purchase as the last one as a rank ordering mechanism. I think that is also part and parcel of the discussion. I think that for the first time in a while, I would argue that the 5 players actually are actively making the point for receiving ball, the ball and play and be part of the game. So I would definitely say that. And we're evaluating. But certainly, our game number one, our focus number one is to allocate capital to the underwriting units. If the returns are there. And that certainly is a relatively easier place to deploy and easier what you see at this point in time. But everything is up, everything is -- every guy -- everybody is playing on the field, on the court. Elyse Greenspan : Okay. That's helpful. And then my second question on your insurance underlying margin, 94% in the quarter. Arch had targeted to get to kind of a mid-90s. Yet you guys are kind of there, but there's more -- you mentioned a lot of rate, I think, 11% that you're getting in your book of business, which means you haven't even earned that in yet. So as we think about the earning in of the rate you're getting today, plus what seems like incremental rate you could get into 2021, do you have a new target for that business? Or is there a way that we can think about the margin profile there, especially since you've kind of hit that target that you laid out for the Street? Marc Grandisson : Yes. So let me go back to the 95% combined, which I mentioned, I think, 3 years ago now. I think that was meant to be there as an aspirational target and to shoot for at that point in time, based on the mix of business and the opportunities that we had in the marketplace. I think this has changed, right? I think that now that we're obviously going in that direction and very nicely, and the market is certainly helping us, I think we still look very heavily into line by line and ROE by line of business. And I would argue, Elyse, that some lines of business would be less than a 95% combined and some might be still okay at above 95%. But certainly, what I would tell you is the combined ratio was aspirational. We have to keep in mind that there's still -- COVID-19 is still ongoing. And secondly, interest rates have also been decreased -- have decreased significantly since 3 years ago. So rate increases might be needed beyond the combined ratio, just to make the returns equivalent to what they should be, or would have been at the 95% historically. So it's really an ongoing process of reflecting current investment yield. So there are no targets on the combined ratio. But certainly target on a return basis. And I would agree with the 140 to 150 -- 150 bps decrease in interest rate, that the combined ratio would presumably mathematically need to go down to make an equivalent return. Elyse Greenspan : Okay. That's helpful. And then last question, you mentioned taking a cautious approach to reserving within your mortgage book. And then I think you also laid out that default rate to get to 5% to 5.5 by the end of the year. And so I'm just trying to understand like as the default rate, I guess, your expectation is it will go up a little bit from where it sits today. And I'm assuming that you'll continue with the same conservative approach that we saw in the third quarter. So how should we think about kind of the combined ratio? You've been giving some metrics for how that business could trend. And you've obviously come in better than expected in the second and the third quarter. Do you have an expectation for how that could ultimately trend into Q4? And I imagine if you want to provide initial color on 2021. François Morin : Yes. I'll take that, Elyse. I mean just to be pretty clear, I think I -- as you guys all know, I'll take the blame. I did a pretty poor job of forecasting combined ratios or delinquency rates over the last 2 calls. So I think we're trying to minimize the kind of bad forecasts. But listen, there's -- as we know, there's a lot of uncertainty out there. Yes, we're extremely pleased that the delinquency rates have come down, right? We had talked about even just last quarter, we had said like somewhere around 8% by the end of the year. It doesn't look like we're going to -- it's going to be as bad as that, based on what we know today. Still a few months to go, but definitely saw some encouraging signs this quarter. So that's all well and good. Does it translate to -- what kind of combined ratio does it translate to? I mean it's hard to know because again what we're facing is really -- we just don't know how long this pandemic is going to last. The fact that the forbearance programs are at this point scheduled to end, but who knows if they get extended or not? And how do people convert from forbearance to a regular delinquency? There's a lot of unknowns at this point that we feel are extremely hard to predict and estimate. So listen, we're taking it one quarter at a time. We're happy with where things are at right now. Again, it's reassuring, but we're not -- as I said, we're -- the game's far from over. And who knows, maybe hopefully even my 5% to 5.5% forecast or expectation for delinquency ends up being a bit high. But we'll find out in a few months, and we'll reassess at that point. Operator : Our next question comes from Jimmy Bhullar with JPMorgan. Jamminder Bhullar : First, I just had a question on how you're thinking about pricing, reinsurance pricing as a buyer of reinsurance? And how should we think about your sort of overall exposure, especially to cats as you're entering 2021? Are you, given better pricing, you can hold more exposure? Or maybe should we assume that you'll keep your retention sort of similar and be a buyer of record regardless of prices? François Morin : Short answer is we don't know yet, right? I think we'll have to see what the 1 1 brings to our reinsurance folks on the inward side and certainly on our E&S property. We'll have to evaluate and assess what kind of exposure and what kind of margins we're getting there, and then look back and say, okay now, what is the -- because buying reinsurance, as you know, is like raising, it's like using capital. It's like we have to pay for that. So we're going to go through a very straightforward analysis of capital usage and what we pay for it. And we take a very, very first economic view of the whole world, and specifically as it relates to the insurance exposure we take on a property cat exposure specifically. But having said all this, we also have -- balancing it or adding to that information process is that we also are careful and not overstretching the capital. So we'll always be buying reinsurance to some extent. The question is what level and how much and at what price. But clearly we are -- we like stability, and we're always trading stability for sometimes lesser margin, and that's going to be part of the mix. But clearly both markets where we can be on the advantage, we can gain both sides, but we can actually get rate increases on the insurance side, find a way to buy reinsurance in a good way. And on the assumed basis, we actually are benefiting from the improvement in the market there as well. So it's really a holistic view of the cat exposure. Too early to tell what exactly is going to transpire, but everything is always up for discussion. Jamminder Bhullar : Okay. And then on Watford, you raised the price. There's pressure on yield to raise it again. And at what point does the deal become sort of uneconomic? And -- or are you already there? Or any comments on how you're thinking about that situation? Marc Grandisson : Well, I mean we didn't -- we did not raise the price, right? We have an agreement, we have a signed agreement with Watford that we're starting the process to get regulatory approvals, et cetera. But yes, I mean there's another party that has come in that Watford feels they have to look into their potential offer and what it means to them. But at this point, what's been announced is what is still valid. Depending on what they end up deciding, we may choose to do something different. But at this point, we can't really say much more than that. Operator : Our next question comes from Mike Zaremski with Crédit Suisse. Michael Zaremski : Yes. Focusing on the reinsurance segment, robust growth. Thanks for the commentary, bullish commentary. If we look at the underlying accident year loss ratio, I mean actually expense ratio too, so just a lot of improvement. Anything we should be thinking about? Anything to call out? Or are this just market conditions and operating leverage that you're benefiting from? Marc Grandisson : Yes. So then the reinsurance group has grown tremendously. So the expense ratio going down, or what it did certainly is explained by that in large part. I think in terms of the loss ratio, what I would like -- and we said it on prior calls as well is we tend to look at reinsurance performance on a 12- to 18-month basis. There's a lot more volatility in that segment, in that sector. There's also a lot of shift in the mix over time. Our reinsurance folks do not tend to have a -- they have stable relationships obviously, but there's a lot of things moving on in terms of taking cede and the opportunities in the marketplace. So what I would look at the loss ratio is more like this is -- some quarters is much better than others. And it's really due to the volatility in the reinsurance results, I would say. Michael Zaremski : Okay. Okay. Got it. So the expense ratio, some of that's going to roll in. Okay. A follow-up on the mortgage side, I think I heard you say earlier that ILN pricing kind of had improved a lot. I guess I'm looking at -- we're trying to -- we've been trying to track overall ILN pricing. And maybe kind of still double what it was pre-pandemic, but maybe I'm just looking. Maybe Arch's pricing is better, or maybe I'm just incorrect? François Morin : Yes. I mean there's two parts there, right? Is the structure, meaning in particular attachment points, and then the pricing. So right, so this is our third one, our first one of the year. Really, we were the first ones out of the gate after the pandemic. The reality at that point is appetite from the investors was not as good as it was in the past when our attachment point was much higher. Second one, attachment point came down with slightly better pricing. With this new latest one, we're effectively back to the same -- the 2.5% attachment point that we had seen pre-COVID. So that's certainly by design. Pricing, if you risk adjust for everything, it's still up, no question. It's not the same level that it was pre-COVID, but it's not double for sure. So it's much better than that, much lower than that [indiscernible] quality of the book is better. So how does that get factored in? And so there's a couple of other things. It's hard to make it perfectly apples-to-apples. But directionally and on an absolute basis as well, we're very happy with where things are going. Michael Zaremski : Okay. Got it. That's helpful because I think you're describing it better than what we thought. Okay. And lastly, sticking on mortgage, hopefully -- you said you -- the delinquency rate doesn't pick up as much as you thought. But are you -- it's almost November. Have you seen, over the last 2 weeks, the delinquency rate tick up? François Morin : So last few weeks, it's been actually keeping in the same general direction that we saw in the third quarter. So it hasn't picked up. Flattish, I'd call it. We got a couple of months to go. We'll see how things play out, but that's kind of what we're seeing. Operator : Our next question comes from Josh Shanker with Bank of America. Joshua Shanker : Two questions, one just to understand accounting and the other one is about Watford. On the accounting, you had a decline in delinquencies due to cures of 6,000 approximately, but you took up reserves. I know you can't really reserve for loss that hasn't happened yet, but it looks like you're reserving for these new claims at about $12,000, $13,000 per claim compared to a historical average of $4,000 to $5,000 per claim. Am I doing the math correctly? And can you explain sort of how you think about that in the books? I think in the first quarter, you also took up reserves more than typical because you can only take them up when you have claims. But can you walk through that a little bit? François Morin : Yes. No question that we bumped up reserves this quarter on effectively the delinquencies that we saw in the second quarter. So your math is correct. I mean that's -- I mean the reserves per delinquency, you did the math, right? But what you need to adjust for, I would say, is call it a reserve-strengthening exercise that we went through just to reassess where we were -- took a hard -- every quarter, we take a hard look. And our view is that might as well not -- be cautious, knowing what we know and knowing what we don't know. So think of about a $45 million adjustment on reserves in the third quarter for effectively Q2 delinquencies. So once you adjust for that, I think you get back to claim levels or severities that you would be -- would be more in line with what maybe you would have expected. Joshua Shanker : So along those lines, is there a reason to believe that the severity of the losses are going to be different than historical severities? I can understand because there's not frequencies and you can't really take frequencies until you get a claim. But is there reason to be more cautious surrounding severity in this pandemic? François Morin : We don't see it. The only adjustment obviously that what we're reporting in our supplement in terms of paid severities is lower than what we're seeing from the new delinquencies, right? New delinquencies, we mentioned it last quarter at about a $65,000 or so or per NOD. This quarter, it's right around $60,000. So I mean it's certainly higher because it's more recent loans that are going delinquent versus what the loans we paid on in the quarter. So that's the only adjustment. But in terms of percentage of the insured value or the insurance in force or the risk in force, we don't at this point, don't have a reason to think that it's going to be materially different than what it's been in the past. Joshua Shanker : Okay. And then on Watford, we don't know how it's going to turn out. But your own stock trades around book value. The offers for Watford are around 0.8x book. I'm not sure, and maybe you've some thoughts on whether Watford is a better investment at 0.8x book than Arch is that 1x book. But if you don't buy in Watford, it would suggest that you have a chunk of excess capital that you were already allocating towards financial uses. Can we expect that your interest in buying business you already know is attractive, even given the market opportunities here? Marc Grandisson : I think we made the point clear by putting our offer up there, and that's pretty much what we'll leave it as, Josh. I think we're we still think that Watford is a good platform, a valuable platform. And we-- Joshua Shanker : But clearly Arch is a more valuable platform than Watford. If you're willing to buy in Watford stock, shouldn't you be willing to buy in Arch stock as well? Marc Grandisson : I think the answer is always yes. We're always looking at the possibility of buying our stock. And certainly like I said before, 5 players on the court, I think that the share repurchase is really -- is attractive, as you would expect me to say as the CEO of the company. Joshua Shanker : All right. We'll keep watching. Operator : Our next question comes from Yaron Kinar with Goldman Sachs. Yaron Kinar : I do want to start by thanking you for giving a basketball analogy, so I can actually understand what's going on. I was worried you'd give a hockey analogy. And my first question goes to the slight increase in COVID losses in the quarter. Can you maybe talk about what drove that specifically? I guess specifically, what I want to get at is does it have anything to do with the FCA court cases over in the U.K. and how you're thinking about your overseas business interruption exposures? François Morin : Yes. I mean it's really in two parts. I think in the -- on the insurance side, it's very much -- it's all basically related to our travel book in the U.S. So no connection to the FCA ruling. And the little bit we added in the reinsurance side is around property exposures, mostly out of Europe. So it's a little bit of a BI angle to it, but that's pretty much it. So I mean it's -- I mean I call it a bit of just new information coming in, nothing -- no, nothing kind of -- no material new information that came through that would have caused us to revisit our picks. And the FCA, as we said, we didn't change it. And the ruling where it stands, it's -- we're still very much -- we had fully reserved for it. And there's -- again, the ruling doesn't change our position on that. Marc Grandisson : The rest of the portfolio, Yaron, for what it's worth, and we mentioned that on prior calls, is that we have the vast majority, almost totality of our parties have the exclusions that would protect us somewhat from a deviation. So this is nothing in there to really think about. Yaron Kinar : Okay. That's very helpful. And then my second question, when you talked about the improvement in the ACI loss ratio for insurance, you didn't talk about total frequency. So is it because you didn't see that? Or is it because you didn't book that? François Morin : It's a little bit of both actually. We saw some of it -- some improvement on the frequency of claims possibly in the second quarter. That was definitely a difference. But if you neutralize for the obvious lines of business where claims would actually naturally go down, such has travel for instance where we have the a lot less exposure or go up. Then if you neutralize all of this, we didn't see a discernible change through the 9 months of this year. It's hard to see what the natural rate would be, but we don't see a discernible change in the frequency to speak of. And really, we put our reserve pick and our loss pick based on long-term trend -- long-term averages. We're not looking at specifically one quarter at a time and one year, accident year at a time. We do get in the mix of multiple years and project out much more longer term expected. So it will take a little while before we would recognize any significant improvement in frequency of claims, if at all. Yaron Kinar : Got it. And then maybe one final very quick one on Watford, if the deal does go through, I just want to confirm that the company wouldn't lose the fee income if Watford is consolidated, right? François Morin : Correct. Operator : Our next question comes from Ryan Tunis with Autonomous Research. Ryan Tunis : The one I had was just on NII and thinking about low rate headwinds. It looks like you guys have almost 30% of your assets in essentially government bonds. Looks your portfolio yield is sub 2. We just heard another Bermuda competitor today say that their new money yield is 2%. It would seem to me, given how you're allocated, given your current portfolio yield, that there actually wouldn't be that much incremental yield headwind moving forward actually. Arguably if you're going to move out of some of the govies and take some credit risk will actually seem that maybe you could expand your portfolio yield? It doesn't sound like that's right, given your commentary. But I'm just kind of trying to understand like why does Arch continue to be incrementally exposed to this low rate environment, given the fact that you guys have already really take it on the trend in terms of where your yields are now. François Morin : Yes. I mean we -- no question, we've been defensive on credit. So yes, we have a bit more on the treasury side that you're right, I mean -- unless rate going down, but they seem to have stabilized, I guess, for the time being. Our play in the last few quarters has been trying to, as many others I'm sure have done the same, is try to find other opportunities that are more in the alternative space that provide us still some level of investment income without taking on too much risk. So something we keep looking at, but it's a bit of a challenge. There's not a ton of opportunities out there. We're not -- we're worried a little bit. We're defensive on credit still, and that's something that we look at carefully. We don't want to over-source ourselves there yet. Ryan Tunis : Do you guys have a new money investment yield you'd call out handy that you did in the third quarter. François Morin : Well, the last, call it in the last month, we've been, call it putting our money to work. It's just above 2%. So that's kind of where the latest informational gap that we get from our investment guys. Operator : Our next question comes from Geoff Dunn with Dowling & Partners. Geoffrey Dunn : First question, and I appreciate the added color around the MI reserving. If we make the adjustment, is the math correct that you changed your incidence assumption up to about 9%? François Morin : Close enough. 8% to 9%, yes. Yes. And our view on that is that we feel like that the more recent NODs are -- may be prone to a bit more stress. So the fact that these people took a bit longer to go into delinquency may tell us that there may be again subject to more stress, but again time will tell. Geoffrey Dunn : And is that 9%, is that a -- just an overall number? Or is it a blend of just as an example, 6% on forbearance and 13% on non-forbearance notices? Do you delineate between the 2? Or is it just more of a holistic approach? François Morin : It's more of an aggregate approach that we take. Yes. We don't separate the 2 as cleanly as you're suggesting, yes. Marc Grandisson : We do look at all... François Morin : Geoff, I want to make sure you understand that we also do look at prior events, prior cat events, prior programs of the sort. So -- but it's -- as you could appreciate, it's probably more art than science at this point in time. Geoffrey Dunn : Right. With the new ILN, a little confusing in the documentation. It looks like it applies for policies after Jan 19, but it looks primarily more recent loans over the last 3, 4 months. What is it designed to do? Is it really the last quarter or so? François Morin : Yes. Geoffrey Dunn : Or is it part of the design to come underneath the 20-1? François Morin : No. It's the latest, the 20-3 is very much -- the vast majority is covering June, July and August, so that's 3 months of production. There's a little bit of kind of spillage of the 20-2 that -- and also some 2019 loans that had kind of been late being processed, whatever. It's just -- we're a little bit of a catch-up on a few small things, but think of it as really June, July, August production. Operator : Our next question comes from Meyer Shields with KBW. Meyer Shields : Marc, I'm a little confused by something that you said. You were talking about the five capital deployment opportunities. And you cited the investment portfolio. And I guess I would have thought that if you're going to be writing more P&C or mortgage insurance, then the supporting capital will be in the investment portfolio anyway? Marc Grandisson : Yes. So you're saying that we should -- just repeat the question, Meyer, please. Meyer Shields : So I'm trying to figure out how capital deployment in the investment portfolio is distinct from capital deployment to either P&C mortgage. Marc Grandisson : Okay. No I see what you mean. So the way we look at the underwriting returns is we attribute to the units the treasury return or the risk-free return. And we try and separate church and state is what we call it internally. We actually credit the float on the insurance on the underwriting piece at the treasury rate level. And then we allocate the capital for the excess over that to the investment portfolio. So this is how we separate the capital usage between those -- between the underwriting units and the investment unit. Meyer Shields : Okay. That makes sense. Got it. Marc Grandisson : Yes. Meyer Shields : I'm trying to get a general sense of how you see either profitability in property casualty in metro? Or your view as to whether the vendor catastrophe models are conservative enough, based on recent years' cat activity and the underlying trends? Marc Grandisson : Yes, it's a good question, Meyer. I think that our position on this, we have weather scientists upstairs and --who have a lot of lengthy experience and information to look at. Listen, we actually augment and modify the vendor models as we see fit. So the vendor model represents to us a solid starting point. From where we can -- there's definitely had a lot of science into this one. So we've been historically using them as a starting point and augmenting it and modifying it with our own view of the world. But I would caution everyone by saying that, yes, we do have a view of various perils and various exposure around the world. And we also try to factor in shorter term versus longer term, possibly modification of what could happen out there. But it's hard to predict those things. So what we tend to do is to hold ourselves to a higher return for those risks that are inherent in the way we underwrite the business. That also helps explain why where we've taken possibly somewhat of a more conservative approach to property cat exposure over the last 4, 5 years as you've seen our numbers. So I think -- and it's a year-on-year analysis, so we would look at it. And we'll evaluate, I think, in some of our discussion with El Nino, La Nina and all these various discussions happening all the time. And we're not the largest rider property cat, but we do have a very solid team looking into this. But I think we make it up -- try to make it up with holding ourselves up to a higher level of returns. Operator : Our next question comes from Phil Stefano with Deutsche Bank. Philip Stefano : Just one -- most have been asked and answered. One follow-up on the MI piece and thinking about the increase in the default rate. I guess in my mind, there are 3 mechanisms to get there. It's either new defaults are increasing, cures are slowing down, or the denominator policies in force is shrinking. I'm just curious how you're contemplating which of those levers is contributing to the increase in the default rate. I think it helps us think about does this come through as losses or premiums or maybe development if the cures are right. François Morin : Okay. So Phil, let me try and take this. There's a lot of -- it's a big question, a lot of parts. So first and foremost, the denominator is not changing a whole lot, right? It's about a [indiscernible] what it is in terms of policy. The DQ rate has decreased this quarter, right? It went from 5.1 to about 4.7 this quarter. So this is like what's the number of policies at the numerator that are in default. And you divide by a similar number. So it did go down. I think what we're saying in terms of reserving, you reserve for the new notices that you received in the quarter, right? We received 58,000 in the second quarter. We received 20,000 this quarter. And what we're telling you is we take that, the book of these 20,000 new notices. The cures are the cure. They go away from the overall balance, if you will, that we just mentioned, which is the 4.7. But the new notices, we reserve for those in the quarter. So we have to reserve in the quarter on those that were newly notified. This is what typically you would do on reserving. What we did in addition to this is we modified our view of what we should have booked for the second quarter for the new notices in that quarter. So I'm not sure -- I'm trying to help give you a picture a whole -- bigger picture hopefully that helps you understand how we did all this. Philip Stefano : No, I understand -- that makes sense from the reserving side. But the default rate is loans in default, that population over policies in force. François Morin : Right. Philip Stefano : And if the policies in force isn't changing and the default rate is going up, then presumably there's an expectation that new default is going to increase this quarter. And I guess I just wanted to make sure that I was thinking about it correctly because I -- to get to 4.7 to 5, 5.5, there must be an acceleration in new default, or cures is slowing down. I don't know. That's kind of the question. François Morin : I mean that's -- listen, it's a big -- I mean kind of top-down view. It's hard to know. We don't have -- we can't predict. We don't have the crystal ball on whether cures are going to accelerate or not or slow down. And same thing with new notices. Again, we're trying to, I think, just provide a bit of color that we think the -- obviously or knock on wood, we're not going to be at 8% delinquency rate by the end of the year. We're certainly well below 5%. Does it go back to above 5% by the end of the year? That's what we think could happen, but again we don't know. So I think if everything stays the same, the odds are probably that it won't be at 5%. But we -- that's... Marc Grandisson : But Phil, you're right. You're right on your assessment. If we go from 4.7, and we tell you it's going to be 5.5 in the end, that we'll have to have an increase in NODs or lesser cure. I'm not sure we have made enough assessment as to which is which. I would argue that we have tended to -- since May, we have tended to -- at least the last two quarters, we've overstated the amount, the number of new NODs that we received. And that probably is what would drive the potential. We just still don't know. François has said that we haven't been as good as we would have liked to be predicting. So I think the new NODs would be more the place to look at. Having said this, Phil, you also know that we had 2 things going on, less new NODs and higher cure rate. So they both actually helped to manage on. And they helped accelerate and actually go -- no, help explain why we had a projection of about 10% earlier in the year to much less right now. They are two moving parts. Philip Stefano : Yes. No, understood. I guess in my mind, this default rate might continue to come down. But as you said... Marc Grandisson : Yes, it very well could do. Yes. Philip Stefano : The crystal ball is very cloudy at this point. Operator : Our next question comes from Brian Meredith with UBS. Brian Meredith : I have a couple for you just quickly. So just curious, given that you're getting 2% new money yields and your book yield is below that, should we just expect that your book yield on your investment portfolio fixed income to kind of be stable here going forward? François Morin : I think in the short term, I think it's reasonable, yes. Brian Meredith : Okay. Good. That's helpful. Second question on the reinsurance business, I'm just curious. Your property mix is definitely increasing as a percentage of your overall book. How much of the underlying combined ratio improvement that you're seeing there is actually driven by that mix shift versus just better loss specs? François Morin : Well, boy, I don't think we parse out this way. It's still early in the game to see what it's going to look like. I would say that it's probably more mixed at this point in time because our growth is largely in property other than cat, cat XL. So we have a lot of play in that sector right now. It's more and more mix, I would say, Brian. Brian Meredith : Yes. So it's not so much the rate activity that we're seeing, it's the mix shift that's driving it? François Morin : Well, the way we are, you know us, Brian, for all these years is we'll tend to go where the rates are the better -- we have a better increase in margin. So that sort of goes hand in hand. Brian Meredith : Got you. That makes sense. Another one just quickly on Watford, I'm just curious. Is it your guys' intentions to significantly increase your ownership in that ultimately? Or are you going to buy the whole thing in? Just because the volatility of the investment portfolio is kind of just a different strategy. Marc Grandisson : Well, what we said publicly is that we are certainly talking to other parties to bring into the fold to support us in this vehicle, if it moves forward, if we close on the acquisition. So the answer is we would most likely increase our participation, but not to 100%, and be much less than that. So increase little bit, but recognize that we -- it's a different model that we -- others would want to participate on with us as well. Brian Meredith : Got you. So the net capital outlay for the transaction wouldn't be this big as it could? Okay. That makes sense. Marc Grandisson : Correct. Correct. Brian Meredith : Got you. And then last question, I'm just curious. Any updates with respect to the Coface investment, where that stands? Are regulators going to ultimately make a decision on this? Marc Grandisson : Yes. I think it's in process. We're going through the regular process. It's in -- It's on track. We're hopeful that we could get something done potentially in the first quarter, second quarter of next year. It takes a while, as you know, in this COVID environment. Government and regulators take a little while longer than otherwise. But yes, it's on track. And they produced, as you know, their results I believe earlier this week or early or late last week. So it's also looking much better for them, which is good for us. Operator : Our next question comes from Jimmy Bhullar with JPMorgan. Jamminder Bhullar : I just wanted to clarify your comments on not losing the fee income on Watford. Is that just because of the 5 years remaining on the contract, and so there's sort of finite life to it? Or was there something else that was behind that comment? François Morin : Well, I mean the question was asked, if we buy the vehicle, do we still retain the fees? The answer is yes. Jamminder Bhullar : Yes, it's an internal allocation then. But in case it goes to somebody else, then that fee arrangement stays intact through the [indiscernible], which is [indiscernible] François Morin : Yes. Correct. Jamminder Bhullar : Okay. And then does your approach to underwriting overall and how much sort of capacity you have and take on [indiscernible] change if you own Watford versus maybe if it does end up being bought by a third party at a higher offer? François Morin : I think in a third-party environment, Jim, I think it's pretty clear that we need to take care of our brethren as well as we could take of ourselves. So our view is always to do the similar underwriting. Watford had a different investment profile, which allowed us to do slightly different things. But at a high level, the underwriting is very, very similar. And I would remind everyone that whatever we do on Watford, we take 15% of it on a quarter share basis in the back. We also are participating on the capital. We had like we're up about 13%, I believe, in our shareholding. So we collectively own 20% of the underwriting. So we do eat our own cooking there as well, and it's really important to us. Operator : I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you, everyone. Looking forward to the last remaining couple of months in the year, and I hope you have a good one. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,021	1	2021Q1	2020Q4	2021-02-11	1.394	1.27	2.525	2.79	null	12.93	12.69	Operator : Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2020 Arch Capital Group Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's Web site. I would now like to introduce your hosts for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sir, you may begin. Marc Grandisson : Good morning, Liz. Good Morning and welcome to our fourth quarter earnings call. Overall, we are pleased with the current market conditions and the opportunities available to Arch as we close out 2020 and spring into 2021. One of our fundamental principles is that achieving growth and book value per share above the cost of capital over the long run is the best way to create and sustain shareholder value. We believe we delivered on that front in 2020. Our disciplined underwriting and diversified business model enabled Arch to grow its year-end book value per share by 5.4% over the third quarter and by 14.7% for the last 12 months. We've responded to broadly hardening market conditions and as a result, all three of our segments grew their premium writings in the quarter. In particular, the hardening markets allowed for significant growth within our P&C units, increasing our net premium written for the P&C by 32% for the full year. On the whole for 2020 we achieved an operating profit of $557 million and grew book value to $30.31 per share. Now, as most of you know, cycle management is core to who we are. Arch lean strongly into improving markets because history has shown that times like these are when superior risk adjusted returns gradually compound and accelerate book value growth and Arch is positioned to significantly expand as others derisk, rethink their underwriting strategies or even retrench. As we look at the opportunities ahead for Arch. I'm reminded of a situation in hockey that is exciting for any fan. In hockey, you get a one player advantage, if the other team takes a penalty. It's called a power play. When that happens, a few things need to be kept in mind as you deploy your specialty power play unit to try and improve the odds of scoring. You need to have a clear five on four strategy you need to be defensively savvy enough to not forget to protect your own zone and you need to have a sense of urgency because the clock will stick done and you will soon be back to even strength. These are the few moments that make a difference in a hockey game. The advantages position we find ourselves in is similar to that hockey power play where the odds are in our favor. I'm proud of how our team performed last year during the challenges of 2020. Now after spending a good portion of their last several years in a defensive position, we're embracing a more offensive mindset. Here's what that looked like in the fourth quarter. Let's begin with our insurance segment. Across our worldwide Insurance Group, renewal rate change has increased approximately 12% up to 200 bps from the prior quarters rate changes. Our fourth quarter growth occurred in many lines, with D&O, property, energy and marine all exhibiting strong advances. E&S casualty and our alternative markets business also grew this quarter. We believe that rate momentum in these lines is healthy and we also see it building in other lines albeit at a slower pace. Increasing margins helped improve our insurance accident year x cat loss ratio which decreased by 4.6 percentage points in the fourth quarter. As you may know, the full effects of increased rate levels can take approximately five quarters to become 40 reflected in underwriting margins. So today, we are earning the higher rates from the past year. In addition, our operating expense ratio has benefited from rising production this past year. We are pleased with the continuing progress achieved by our Insurance Group in the last two years. Turning next to our reinsurance segment, underwriting results were significantly better than the fourth quarter of 2019 despite the impact of $94 million worth of cap losses, while market conditions are not uniformly strong in the reinsurance sector, dislocation from other carriers that are reducing their positions is creating pockets with heartening rates that Arch is well positioned to capitalize on. Reinsurance also benefits from the underlying insurance market rate increases through its clients. For 2020, we grew reinsurance net written premium by 53% with the two main areas of growth being non-cap property and specialty. At the January 2021 renewals, we saw continued rate increases in most areas. However, we agree with the market consensus that property cap pricing moves were more subdued than expected or hoped, as capacity for that risk still remains strong. Accordingly, we maintain a cautious approach to this business. Our mortgage segment delivered good returns in both the fourth quarter and for the entire year despite the economic headwinds. We are confident in the continued earnings strength of this segment and frankly, the uncertainty we were facing during the early stages of COVID has been largely mitigated. Both premium rates and the credit quality of the new insurance written improved in 2020 and accordingly, the return on capital for our new U.S. MI business is essentially back to 2018 level, which was a strong year. Here's why MI is unwell this past year. First, housing markets have remained strong despite the difficult economic conditions. Second, the government forbearance program achieved largely what it was intended to do, which was to provide financial respite to many homeowners; and third credit criteria in the mortgage sector tightened in 2020 and as you know, credit quality is a critical factor in determining underwriting profitability. On a side note, just yesterday, the FHFA announced that a forbearance program has been extended an additional three months, which should help further mitigate the risk in our delinquency inventory. The delinquency rate of our portfolio decreased by 50 bps sequentially in the fourth quarter and year-end roughly two-thirds of our delinquent loans were in the government sponsored forbearance program. We currently estimate that 89% of delinquent borrowers in our portfolio at year end have at least 10% equity in their homes and as we have discussed on prior calls, the amount of equity in a home is a single most important factor in determining MI losses, as it plays a significant role in mitigating claim activity. We are cautiously optimistic that delinquencies will continue to cure as vaccines enable the economies to reopen. Importantly, record home purchases in the U.S. in 2020, supported a 5% price appreciation nationwide, while historically low interest rates, accelerated housing and refinance demand. This enabled Arch U.S. to report record NIW of 38 billion in the fourth quarter of 2020, up nearly 60% from the same period in 2019. Our outlook for continued growth in 2021 remains positive. Turning back to the current fate of the P&C cycle, there are three conditions that we believe will persist and help sustain the improved underwriting environment. One, social inflation and reserving problems and are starting to apply pressure for companies that haven't been prudent enough; two, anemic investment yields require a sharper focus on underwriting profit; and three, a return to a post-COVID world should accelerate economic activity and increase the demand for insurance. Each of these conditions will put pressure on results for the industry. Our conservative approach to reserving over the past several years means that we are well positioned to drive results in P&C going forward since we expect, our future returns to better reflect current and forward pricing. Finally, with better visibility into the overall economic conditions and with more clarity on the mortgage and P&C prospects, along with our strong capital generation, we see a compelling opportunity to invest in our shares at very attractive returns, François will talk to it in a moment. This recent share repurchase is a testament to our capital strategy and designed to enhance shareholder value over the long-term. We still have ample resources to deploy towards new growth and feel confident in our team's ability to be creative in order to capitalize on the opportunities before us. This is a time in the game where our cycle management strategy allows us to play offense and deploy capital dynamically to generate above average returns. And now I'll turn the game commentary over to François. François Morin : Thank you, Marc, and good morning to all. We at Arch hope that you are in good health and that 2021 is off to a good start. On to the fourth quarter results, as a reminder and consistent with prior practice, the following comments are on a core basis which corresponds to Arch's financial results excluding the other segment, i.e., the operations of Watford Holdings Limited, in our filings the term consolidated includes Watford. After tax operating income for the quarter was $230.4 million which translates to an annualized 7.7% operating return on average common equity and $0.56 per share. For the year, our operating return on average common equity stood at 4.8%, while the return on average common equity stood at 11.8%. Book value per share increased to $30.31 at December 31, up 5.4% from last quarter and 14.7% from one year ago, again, an excellent result despite the strong headwinds from catastrophe losses this year, which is a testament to the resilience of our operations and our superior diversification strategy. Losses from 2020 catastrophic events in the quarter including COVID-19 net of reinsurance recoverables and reinstatement premiums stood at $156.4 million, or 9.4 combined ratio points, compared to 2.2 combined ratio points in the fourth quarter of 2019. The losses impacted both our insurance and reinsurance segments, primarily as a result of a series of natural catastrophes in the quarter, including Hurricanes Delta and Zeta and other smaller events, as well as adjustments to our estimates for events that occurred earlier in 2020. Our best estimate of ultimate losses for COVID-19, for occurrences through December 31, remained essentially unchanged from prior estimates. As of December 31, the vast majority of our COVID-19 claims are yet to be settled or paid, with approximately two-thirds of the inception to-date incurred loss amount recorded as incurred, but not reported IBNR reserves or as additional case reserves within our insurance and reinsurance segments. As regards to the potential impact of COVID-19 on our mortgage segment, as Marc alluded to, the delinquency rate at the end of the quarter was 4.19%, down from 4.69% at September 30. We are encouraged with a downward trend and delinquency rates over the last few quarters, which continue to come in significantly better than our earlier forecasts. Our latest assessment of the situation assumes a progressively improving economy in 2021, which should bode well for the housing sector and the performance of our book as we move forward. In the insurance segment, net written premium grew 21.6% over the same quarter one year ago, 29.6% if we exclude the impact of the pandemic on our travel, accident and health unit. The insurance segment's accident in the quarter combined ratio excluding cats was 93.6%, lower by 800 basis points over the same period one year ago. Approximately 360 basis points of the difference is due to our lower expense ratio, primarily from the growth in the premium base from one year ago and continued lower levels of travel and entertainment expenses. The lower ex-cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business, prior period net loss reserve development net of related adjustments was favorable at 1.2 million. As for our reinsurance operations, we had strong growth of 44.9% in net written premiums on a year-over-year basis, which was observed across most of our lines and includes a combination of new business opportunities, rate increases and the integration of the Barbican reinsurance business. The segment's accident quarter combined ratio excluding cats stood at 82.1% compared to 92.3% on the same basis 1 year ago. The year-over-year movement is primarily driven by rate change activity over the last 12 months, in a more normal level of large attritional losses compared to a year ago. Most of the remaining difference is explained by operating expense ratio improvements, primarily resulting from the growth and earned premium. Favorable prior period net losses reserve development, net of related adjustments was $40.5 million, or 6.9 combined ratio points, compared to 4.9 combined ratio points in the fourth quarter of 2019. The development was mostly in short-tail lines. The mortgage industry had a second consecutive record breaking quarter in terms of mortgage originations, which allowed Arch MI to produce 38 billion of NIW in the fourth quarter, a full 15.9% higher than our prior high watermark. With refinance activity leveling off from prior peaks, we saw our insurance in force increase by 2.5% across the mortgage segment. The combined ratio was 45.1% reflecting the lower level of new delinquencies reporting during the quarter. The expense ratio was slightly lower over the same quarter over one year ago and prior period net loss reserve development was favorable at 8.2 million this quarter, mostly from our second lien runoff portfolios. Improving investor sentiment enabled Arch to issue two Bellemeade transactions during the fourth quarter at terms that are getting closer to pre-pandemic levels. You will recall that we discussed our 2020-3 transaction on the last call and on the run deal covering our production from June through August of 2020. Our latest transaction Bellemeade 2020-4 provides additional protection on mortgages we insured in the second half of 2019 and already covered by our 2020-1 Bellemeade transaction by effectively reducing the original retention from 7.5% to 1.85% of the risk in force. At the year end, the Bellemeade structure has provided approximately $4 billion of aggregate reinsurance coverage. Total investment return for the quarter was positive 246 basis points on a U.S. dollar basis. And we ended the year with our investment portfolio producing a 7.77% total return. While our fixed income portfolio generated an excellent return of 188 bps in the quarter, contributions from our equity and alternative investments were also significant and represented approximately 40% of the total return for the quarter. The duration of our investment portfolio would decrease modestly to 3.01 years at year end, reflecting our ongoing positioning of the portfolio towards shorter term maturities. The effective tax rate on pre-tax operating income was 6.8% in the quarter, reflecting changes in the full year estimated tax rate, the geographic mix of our pre-tax income and a benefit from discrete tax items in the quarter. We currently estimate the full year tax rate to be in the 10% to 12% range for 2021. Turning briefly to risk management, our natural cat PML on a net basis decreased slightly to 860 million as of January 1 which at approximately 7.4% of tangible common equity remains well below our internal limits at the single event 1-in-250 year return level. The decrease in our Peak Zone PML this quarter is mostly attributable to our E&S property unit within the insurance segment where we reduced property aggregates in the Florida, Tri-County Peak Zone and made selective additions to our reinsurance purchases. Our balance sheet remains strong and our debt plus preferred leverage ratio stood at 22.1% at year end well within a reasonable range. Finally, on the capital front, we repurchased approximately 251,000 shares at an aggregate cost of $8 million in the fourth quarter of 2020. It is worth noting that we have since repurchased an additional 2.6 million shares at an aggregate cost of 83.6 million in the first quarter of 2021 under a rule 10b5 plan that we implemented during this quarter's close window period. Our remaining share authorization currently stands at 833 million. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] Your first question comes from Elyse Greenspan, Wells Fargo. Elyse Greenspan : My first question is related to your returns, Marc, I think in the prepared remarks you associated with mortgage business going back to return on capital levels from 2018. And I'm hoping since for all three businesses insurance, reinsurance, mortgage, can you give us a sense of the return profile, the business you're writing today versus, what you would have said, if I'd asked the same question 12 months ago? Marc Grandisson : I think the high level of 2018, sort of long-term expected return on MI was roughly in the mid teens. So we're not going back to that level, which is really a good place for us to be. On the insurance, I think that we had a bit of a decrease in expected returns, even though the combined ratio did not, get that much better for the industry. But right now, if you factor in all the rate changes and everything, we think we're in the double-digit in insurance return. And we think that reinsurance is a little bit in between those two. So we have a really, really different, risk adjusted return profile in our portfolio that has improved and largerly as a result of the price increase, not as a result of the investment return as you know Elyse. Elyse Greenspan : And then my second question on, I think you alluded to this a little bit in your prepared remarks, Marc, when you were mentioning a few issues that would help from the pricing momentum side, like persisting from here. A big question, that I get is, does this momentum persist through 2021 and perhaps beyond and can you obviously, different dynamics in the insurance and reinsurance P&C markets. But, can you just give us a sense, based off of what you know, today, do you think that the pricing momentum can persist through 2021 in insurance and also reinsurance. Marc Grandisson : We expect it to be the case, Elyse, because of all the factors I mentioned, the social inflation, there's a lot of uncertainty in terms of loss ratio picks, for years, specifically 2015, through '19, as we all know. It sort of makes for correcting some of the ongoing pricing so that's definitely sustainable, we do not have as much, protection from the investment returns so that puts a lot of pressure on the returns for the industry. And uncertainty and lack of people coverage and we also had a fair amount of cat losses in the last three or four years. So, there's a lot going on, a lot more risk out there. So I think, overall, collectively as an industry, we all collectively think and know and believe that we need to get better rate and better pricing, because the risk is not being rewarded accordingly. As in every hardening market, what the length is like, how long is the piece of string, but I think that our hardening market does not only last four or five quarters, I think as you have this initial stages of the initial reaction of rate increases, then you get momentum building in the underwriters mentality, the brokers are sort of accepting as being sort of a new way to deal and do the business. And eventually that builds upon itself, I would fully expect to be lasting to 2021 and into 2022. This is what we believe at this point in time. Elyse Greenspan : Okay. One last numbers question. You guys mentioned the PML going up a little bit but in terms of your cat load, I think in the past aren't used to talk to like 40 million of quarterly cats, obviously, we've seen growth in cat reinsurance and other property related lines like you mentioned, how should we think about the cat load from here? Marc Grandisson : Yes. I mean, no question that we've written a lot more property premium in the last, I want to say four to six quarters we've really ramped up our property exposures. I mean, there's a lot of -- in different areas, as you know, different lines of business, U.S. International, et cetera. Yes, so the cat load, I think on a quarterly basis has definitely gone up from what we were -- in the old days, thinking about, like, 40 million a quarter. It's still evolving, but I'd say it's probably more than $60 million to $70 million range right now. Operator : Our next question comes from Mike Zaremski with Credit Suisse. Mike Zaremski : Follow up on mortgage insurance and Elyse's question. If you're talking about, you're encouraged about the downward delinquency rates and assuming the economy progressively improves and you think you mentioned mortgage biz can throw off return some of 2018 levels? So are you saying kind of directionally, we should be thinking about a combined ratio that continues to move south that kind of towards 2018 levels or the capital assumptions changed since then? Marc Grandisson : No, Mike. Talking about combined ratio, capital is a different story, because it's a bit of a lagging indicator based on the delinquencies we have. But if you look at the combined ratio, yes, we think that we're tending to go towards more -- so the run rate that we had in 2018, we're just caveat that there was some prior development -- favorable development in 2018. So that will probably adjust for that. But certainly the long-term range of 35 to 45 is not something that is out of the realm of no real possibility if you look at 2018. And I think, depending on what, how the economy recovers that could be in the lower end of that and it's a couple things still develop in a different direction, it might be a bit on the higher side, but you're right, it should be getting closer to where we were in 2018, in terms of combined ratio. Mike Zaremski : Switching gears to the -- the non-MI insurance segments, the expense ratio has been better than expected for a number of quarters and you guys have called out some items, maybe you can kind of remind us and talk to kind of watch what you think is kind of cyclical. And what's kind of structural in terms of the expense ratio improvements? Marc Grandisson : Yes. I think this is more structural, I would say, Mike, because right now, you have to factor in the fact that our platform grew both sides, both in the sense of growing the top-line for organic lines of business. And we also had the acquisition in London and really pushed to be much more relevant, much more bigger in London. So our international operations also gained scale. So if you now look at the overall structure or the way the company is laid out in terms of top-line and the way the expenses is constructed between the unit, I think it's much more of a structural change. I would say that it's probably 50 :50. But the growth is certainly something that's really important in terms of helping that grow. So that could also get, presumably a bit better over time. But I would also tell you that the growth in our operating expense on the insurance side has lagged the growth in our top-line, which is what we should expect because a lot of the increase if not more work, even though we are writing more business, a lot of the increase in premium is just rate in and of itself. So I think that the company is flexing itself in terms of top-line growth and expense, deployment very, very nicely so a bit more structural than I would have told you probably two years ago. Operator : Our next question comes from Yaron Kinar with Goldman Sachs. Yaron Kinar : I guess my first question revolves around MI. Do you have any comments or thoughts around potential changes to FHA fees and its potential -- their potential impact on MI business? François Morin : Yes. Listen it's still early on. It is a new administration change, couple of things going on all over the place, Washington, I'm sure they're very busy right now trying to changing things. We hear the same things that you guys hear about 25 bps, potential price cut that FHA could put in there. And as a reminder for everyone if you take a step back, the FHA was a large market share provider of MI insurance and all in the years where the PMI, private mortgage insurance were not in great of a shape. And, frankly, that was needed to fill the gap and fill the void if you will, of the need for the homeowners and mortgage providers. So this has changed, I think that the FHA, also ultimate role and core role is to provide, mortgage insurance for the ones those are probably could be perceived as this more risky for the private sector. And so we've done the analysis, which means that if you look at our portfolio on, we're high FICO, very high quality, most of the borrowers that we have on our portfolio do not really need to consider FHA. So, from our perspective, we'll react obviously to whatever's out there. But we, we believe that this if it comes to fruition at 25 bps rate cut in FHA will help to lower FICO and high LTV borrower, which is really not the ones affecting and the ones that we're currently having success with, because our pricing is actually better, if you compare our pricing versus the FHA in that sector, our pricing is better and execution is cheaper for the borrower, so we're not losing sleep over that. Yaron Kinar : And then, my second question, you previously talked, I think about shifting capital deployment from MI more into P&C, I think last call you used more of a basketball analogy that was easier for me to follow. Thank you for explaining. But I guess as market conditions, your views on market conditions change a bit, seems like reinsurance may be a little less exciting then maybe a quarter or two, the outlook was a quarter two ago and MI maybe a little better than the outlook was a quarter or two ago? Does your appetite for capital deployment between the three segments, has that shifted, or will it shift into 2021? Marc Grandisson : I wouldn't say it shifts in any major way. I think we see all three segments with very good opportunities in front of them. And maybe, we'd argue somewhere overdue, especially on the P&C side. So we're bullish there. Mortgage has always been and basketball, 7.6 guy down low and ready for dunks and that hasn't really changed in our view. So yeah, I mean, we got certainly have more visibility into what the ultimate or what the current market conditions are -- especially in mortgage, given what we -- the second half of the year how things progress. And that's good. I mean, that's something that we take -- I think it works in our favor. So, but in a big picture, we don't see major changes in how we deploy capital. And Yaron, one thing I wouldn't mention to you that it's always -- it's hard for people not to see us being in Bermuda as being a property cat writer on the reinsurance side, but I would argue that, yes, on property cat side is not as good and you've heard it from other people. And we certainly agree with that. But we're still growing in areas that are non-property cat right exposed. So we're seeing a lot of other lines to be honest, between United are actually better now or the prospects for '21 better than they were in 2020. We're not growing necessarily in the one that get a better headline, if you will, from your perspective, but by and large, I think that our prospects is very, very good on the reinsurance side, very much so. Operator : Our next question comes from Jammi Bhullar with JPMorgan. Jammi Bhullar : I had a couple of questions. First, if you could just talk about your sort of comfort level with the RBI reserves given that the developments in the U.S. seem to be favoring the industry for the most part. So do you feel like you're overly conservative on your reserves? And obviously, internationally, things haven't gone as well. And then I have another one as well. Marc Grandisson : We never would say that we're overly conservative. We want to be prudent and conservative for sure in how we set reserves. I'd say starting again with international which maybe has gotten a bit more a headlight -- made the headlines a bit more. Our position hasn't changed in the U.K., again, the book we have as a small regional book. We're well protected by reinsurance protection. So we feel that the reserves we have there, even after the call it slightly adverse rulings from the courts in the U.K. are going to affect our bottom-line, so no changes from our point of view there. And in the U.S., for the most part, as you said, all the rulings have kind of been in favor of the industry, a couple of places where there is maybe some that didn't go as expected, but on those items, our view is that the policies that were being challenged were manuscript policy. So not the standard ISO form that we typically use without necessarily the strong wording around virus exclusions and property damage, the trigger coverage. So on both those fronts, we get, as we said, before, vast majority of our policies well north of 90%, across the book that has these -- both of these call it protections. So we're very confident that our results -- our reserves at this point won't develop adversely and we will keep looking at it but we're in a good spot. Jammi Bhullar : And I think you said about two thirds or three fourths were IBNR as of last quarter, what's that number now? Marc Grandisson : Two-thirds, went down a little bit. So roughly from 75 to 67, roughly and it hasn't changed much. And some of that is around as you can expect mostly on the reinsurance side, right, a lot of our reserves are still on the reinsurance side with significant IBNR and ACRS on that book. Jammi Bhullar : And then on buybacks, you did a decent amount in, you've done a lot of this year. So what's driving your sort of action there? Is it the stock price, is it I'm assuming there's decent opportunity to deploy capital in your businesses given pricing? But what drove the big up tick in buybacks versus what you've done in the last few quarters? Marc Grandisson : Yes, certainly more visibility. I think that we said that from the start, at the end of the first quarter of last year, we said, listen, we're going to take a little bit of a pause, because we need to know where things are going to play out and mortgage being a major driver in that performance. You've seen the results. So we were a lot more confident where the economy is going, vaccines are rolling out. So there's a lot of things that yes, we'll take some time. But, as we look forward, I think that gives us a lot more comfort that the worst is behind us and that gives us a more clarity on how do we deploy capital, we're still in an online world, we are fully capable of doing both, we want to grow the book and also buy back shares. There's no reason why they have to be exclusive. We think our growth is still very strong, we expect to keep growing in '21 and across the book. But we also see a good opportunity at the current level, pricing levels for the stock to buy back at this point. Marc Grandisson : So before we get to the next one, I think I have to stop the broadcast, I think I believe we have a breaking news just hit the wire. So I think we have to go to François for some commentary that he wants to share with us. François Morin : Long overdue Marc, but just wanted to take advantage of the opportunity to fill everybody on the call on the latest developments with our proposed acquisition of a 29.5% ownership stake in Coface, the global trade credit insurer. To confirm what some of you may have seen across the business wire over the last few minutes, if they weren't paying attention to what we were saying but we closed on this transaction within Texas earlier today. And the reason for the timing is that we have to wait for their markets to close which they have so the consideration paid by Arch was €9.95 per share for an aggregate 453 million euros in aggregate including related fees. In connection with our minority stake in the company Arch now has four representatives on the Coface Board of Directors. As we stated before, we continue to view this transaction as an investment and we currently do not intend to increase our ownership position in Coface. From a financial reporting perspective, you should all expect us to include our proportionate share of Coface's results in our financials starting next quarter. We intend to report the contribution in a new separate line titled equity method earnings from operating affiliates, which will be included in our definition of operating earnings. This line will also include the contributions from other non-consolidated affiliates, such as premier holdings. So that's the breaking news, Marc. Marc Grandisson : Thank you, François for the update. And Liz, if we can go back to Mr. Dunn who is waiting in line I believe. Operator : Geoff Dunn with Dowling & Partners. Q - Geoff Dunn : Couple of questions on MI. First of all, what was the incidence assumption for the current period provision as well as the average severity factor this quarter. A - Marc Grandisson : So 9.4% for the new annuities in the quarter and the average reserve for the Q was a little bit over 5000, pretty much in line with the third quarter, Geoff, because the risk that came in were a little bit less coverage in this quarter. So that would explain the average thing a bit lower, or bit more in line. Q - Geoff Dunn : Okay. And so as you think about '20, or the first part of '21, there, to my knowledge, they extended the forbearance period of 15 months, but you can't enter new forbearance activity. So what did your provision for non-forbearance loans? Are your incidence assumption for non-forbearance loans look like in the fourth quarter? A - Marc Grandisson : Yes. I don't think we did not -- the way we reserve it, we sort of tried to make an overall all encompassing assessment and put that in that number. So I think that's what you might have said, might have thought in the past, our number could have been a bit higher. So we think that we have enough in the reserving in totality, based on the number of factors we've used. Q - Geoff Dunn : Okay, but with forbearance options going away fair to assume that instance assumption will probably climb in the first half? A - Marc Grandisson : Yes, Geoff, we might, but we'll have to evaluate when we get there. I think you're right. I mean, so you have to till February 28, to actually ask for this -- be under the forbearance program. So we'll see how that develops. We have a surge in a couple of weeks of people asking for forbearance that might help. Again, more, we'll have to readjust Geoff, as we see the end of the quarter, we'll have another month of non-forbearance, effective new, not new forbearance. So we'll have to reevaluate when we get there. Q - Geoff Dunn : Okay. And then, within the PML, can you talk a little bit about what drove the pretty notable sequential drop in earned premium, as well as some of the movement on both the expense lines? Was there any reallocation on the expense stuff? A - Marc Grandisson : Specific to any segments or I mean… Q - Geoff Dunn : Premium line was down 15 million sequentially. And then you had some just -- looks like a little bit of abnormal movement, particularly in the acquisition expense line fell to the third quarter, but just a little bit more volatility than what we tend to see. A - Marc Grandisson : Yes. The first one, I'd say, a) was a -- I call it an accounting catch up or true up on our Australian business, how we on the written side. So that I'd say that's more of a one-off kind of blip that we had to adjust for, or was actually was present last quarter and more than this quarter. So that's how that explains that movement. On the acquisition, there's -- we entered into a quota share agreement, starting last, at the middle of the year, covering our U.S. MI book and that actually gives us, a benefit in terms of the acquisition, it's a reduction towards the acquisition during the seeding commission. So that is what is starting to flow through in our numbers. Operator : Our next question comes from Philip Stefano with Deutsche Bank. Q - Philip Stefano : So you had mentioned that roughly two thirds of the defaults are in forbearance, I was hoping you could give us a flavor for how many people are nearing the end of their forbearance window and how many people in forbearance does it feel like are apparent on their mortgages? A - Marc Grandisson : Yes. The numbers we report to you are that are in forbearance and who have skipped two payments at least. So we have a few more, as you could appreciate, that are in forbearance and are still current. The data is coming in very, very haphazardly. So it's very -- I wish that we are constantly asking and prodding for that kind of information. I think that most of the forbearance that are still there are lower in the year, most of the forbearance that were declared early in April, May June, the vast majority of them have cured by now. So it seems to be the pattern of getting to forbearance and sort of thing in there for four, five months, and then eventually things get back to normalcy. So that's what we would expect it to be the case going forward. Q - Philip Stefano : I think the one question that we're trying to get to and I get a lot of questions about is, you had mentioned 89% of the delinquents have at least 10% in equity in the home. And you had talked about the visibility allowing you to repurchase shares. I mean, what point do we get visibility that maybe the MI reserves are a little more redundant and we can start to see a release there? How do we think about what you are looking for in the visibility to adjust that. A - Marc Grandisson : So from your lips to God's ear, I hope you're right, that it's going to be redundant, we'll see, only time will tell for us. I think the way we look at reserve, Phil is very simple, it's just -- we have to wait to get the data that we feel confident that we're going to get there. And as you know, you've seen us do the reserving on MI and P&C for a long time. You tell me when a forbearance program is done, and when the unemployment rate goes down to three or four and the economy picks up again, then I'll have a better sense for what it is. So we hope -- having said all this, I hope that by the summer after the vaccines have been rolled out that we'll have much, much better visibility as to what, if any, the reserve needs to be released or is not necessary to pick links. Q - Philip Stefano : Understood. Okay and switching gears on the reinsurance business, I appreciate the remarks you made in response to an earlier question. Is there any way you can help frame for us what the opportunity is for premium volume? So maybe, how their one one's go versus last year? Or how should we thinking about the growth potential in 2021? A - Marc Grandisson : I think the growth in 2021 should be more in line at least, what we have seen last year. I think the opportunities on the reinsurance side -- I think the reinsurance opportunities are still very, very solid, very strong. They're not necessary as I mentioned earlier, in a traditional property cat arena, but we're definitely looking at a lot of transactions and a lot of them will have to do with what you would expect a reinsurance company to be providing, which is capital, as we get into harder market, a lot of people -- some of our clients are looking for capital at least looking for validation of their plan going forward and want to make sure that they -- they reunderwrite and repurpose their book of business that we're there to help them. And we're able in that case to help them get through that transition period. So the opportunity in reinsurance was great last year and I think it's actually very, very good again, as we go this year. One interesting fact for everyone that one of the key leading indicator to us, to me, at least personally, based on my history, as to what is a leading indicator of the treaty reinsurance conditions are, the facultative industry is still really, really strong. And you typically have a hard market or hardening market for as long as the fact market goes, you'll have a treaty market, no staying strong, well beyond that a year to two years beyond that. So we expect that to be yet again, a strong leading indicator and we are facultative team is telling us that it's a really good market for them at this point in time, which is encouraging. Operator : Our next question comes from Meyer Shields with KB W. Q - Meyer Shields : Great, thanks. So two questions on the P&C side. First, Arch's confidence in the pricing cycle is clearly borne itself out. But is it safe to say that maybe this is as good as it gets on the property cat side because there is this level of capital available? So that cycle will play out along historical lines? A - Marc Grandisson : Yes. I will tell you Meyer is my experience, we did a lot of property cat writing in 01 in 02 and if you remember, at Arch, we were not heavily focused on property cat XL at the time, we were more on the liability side and the market was going down in 04 and well in 05. And we thought we had seen the last of the hard market for a little while and Katrina Rita and Wilma happened it change the whole thing. So my answer to you is, I don't know. I don't know is the short answer. I think that there's clearly a lot of capital that, again, found its way over the last four or five years. And once capital found its way to a niche, it gets sticky, it wants to stay there for a while and we will sort of justify itself for a while longer, perhaps than it should. But I think we're always hopefully it doesn't happen but we could be one major event away from changing the perception of risk in that area. And that I think will mean actually probably a much harder market you would expect Meyer because the volatility and the knee jerk reaction would be like an elastic like when this happens. I think you'll have a -- you may have a massive excessive capital out of the door. And that might create more opportunities for us. I'm not saying it will happen Meyer but I could see a scenario where your premise does not actually hold true. So there's always a chance. Q - Meyer Shields : Okay. No, I just want to understand what you're thinking about. Second, you talk, I think on the insurance segment about market dislocation. And I think maybe the sense is out there that that has been a major factor or was a major factor in 2020. But now most companies are kind of settling down and are comfortable with their books of business. Are you still seeing like today, that level of market dislocation? A - Marc Grandisson : Dislocation is, you're right, there's some realignment, there is a couple of people, going back to the market, this is truly happening. But it's not across the board. And there are still, we believe bad news that needs to come find their way through the system. And that might make somewhat of a difference as we go forward. But again, if you had a 20% rate increase on one transaction on the insurance side this year and you had, this is on top of a 10% last year, if you get rate on, rate on rate perhaps three times it's not a bad place to be and plus, I think what we hear Meyer for what it's worth, and it's actually not insignificant, we're hearing terms and conditions funny changing and moving in the right direction. So rates will move first and terms and conditions sort of follow right behind them, we're hearing that this is what's happening in marketplace. So even though we may not have a headline, going as high in terms of reaching it as much as it was over last two, three years. I think underlying conditions in their policies, could actually help improve it way beyond the number that we see on -- as the headline number. Operator : Our next question comes from Brian Meredith with UBS. Q - Brian Meredith : Couple of them for you here. The first one, Marc, first, I wonder if you could just confirm it used to be that your determination on whether you buy back your stock or not is that if you could actually recoup the premium you paid relative to book value over a three year period? Is that still the case? And if it is, does that basically mean that you could just continue to be pretty aggressive with your share buyback given where your stocks trading right now? A - Marc Grandisson : Yes. I think that rule of thumb is still in place. I mean, obviously, it's not a black and white. I mean, there's always factors we consider around deploying, whether there's business opportunities and et cetera. But, yes, we still think in those terms of the buyback, the premium we bake and we want to earn it back over -- no more than three years. And you're right, I mean, I think the fact that the stock price is not as, is below that level, suggest that maybe we'll be up there buying more stock as we go through the year. Well, we'll assess, obviously, as we every day, every quarter, we will look at what's in front of us but for the time being, I think we're certainly something we're considering and we probably will do more of. Q - Brian Meredith : And then just on that topic. So just maybe a little bit on uses of capital or cash kind of here going forward in the next 12 months, it sounds like you've got 453 million that's going out here, we've got Watford that I think is yet to get the close, is that it's all going to be constraining to your ability to actually buy back stock, given you also capital you need to fund your growth in your business and particularly as Marc just said on the reinsurance business is going to be very capital kind of generated type transactions. A - François Morin : No, because we I mean, we raised a billion dollars of capital as you know last summer, we didn't deploy fully until, there was all part of that kind of on1/1 looking ahead as to what the 1/1 we were doing all these transactions, we're on the horizon. And we have a lot of faith in our ability to generate earnings moving forward on our own, I mean, self-funding the growth. I think is something that is part of the plan. And we don't really have, a whole lot of constraints other than that. A - Marc Grandisson : And Brian, both of these acquisitions, as you mentioned will actually be accretive and grow book value for us. So they're capital positive for us. Q - Brian Meredith : And then last question, I guess, now that is closed Coface, maybe you can give us a little bit of color and what the title insurance market looks like in Europe kind of return profile. What should we expect here? A - François Morin : It's been about what, 20 minutes that we announced this, so you're going to have to give me a couple of more quarters. Q - Brian Meredith : [Is that] [ph] challenging? A - François Morin : No. We have it but listen we got -- we have to think it through, we are going to have a directors on there to -- are going to be working very closely hand in hand with Coface and we're very excited as you know, Brian. I think there's more than meets the eye in this one. I think strategically, it's going to be a very, very valuable thing for us, way beyond just know the initial investment. I think it's a formidable, established company across so many countries with so many client contacts where we're really excited about that. End of Q&A: Operator : I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you very much, everyone. Have a nice several months ahead. We're heading for the first quarter returns. It is an exciting time to be at Arch and we're very pleased that you are there with us to enjoy. Thank you. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,021	2	2021Q2	2021Q1	2021-04-28	1.532	1.775	2.99	3.183	null	12	11.81	Operator : Good day, ladies and gentlemen, and welcome to the first quarter 2021 Arch Capital Group Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also, will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thanks, Liz. Good morning, and thank you for joining our earnings call for the first quarter of 2021. The power of Arch's diversified strategy is evident again this quarter as we have strong underlying earnings across our 3 operating divisions and a 7.8% operating ROE despite the cat events. Pricing is attractive in almost all of our insurance markets and more than meets our cost of capital thresholds. As a result, we expect the next several quarters to continue to show improved underwriting margins, partially due to the compounding of rate-on-rate increases and the rebalancing of our mix. Importantly, the market is showing discipline in maintaining its momentum and the recent cat losses are likely to keep upward pressure on rates. Our 3 primary areas of focus for 2021 are : one, continuing our growth in the sectors where rates allow for returns that are substantially more than our cost of capital; two, optimize our MI mortgage insurance book as it transitions from forbearance to recovery on its way back to normalcy in the next few quarters, our notices of default are leveling and the quality of recent production is excellent; three, actively managing our investments and capital to enhance our returns over the longer run. The past quarter, P&C premium renewal rates increased across a broader spectrum of lines, including several that did not show movement as recently as the third quarter of 2020. We also expect to see exposure growth as the economy recovers more fully, which, in turn, should further spur increased revenues and profit. On the MI front, housing has emerged as one of the stronger economic sectors due to a combination of positive house price appreciation with good affordability for homeowners. Although mortgage interest rates have increased modestly, they remain low compared to historic levels and continue to fuel strong demand for the purchase market. Finally, it's worth noting, and Francois will cover in more detail, that there's also some good news on the investment side as yields have increased slightly in 2021. For Arch, every 25 basis points increase in yield should've result in about a 50 basis point increase in our return on equity. Now let's dive into the businesses a bit more. Turning first to P&C insurance. We are very optimistic about the prospects across our specialty insurance group for 2021. This past quarter, the higher level of premium earned from the post-2019 written period is one of the main reasons why our underlying combined ratio continued to improve. About 2/3 of the improvement was due to lower loss ratios as a result of the impact of rate increases as well as to underwriting actions we have taken over the past several years. The other 1/3 of the improvement was driven by a lower expense ratio. In Q1, we observed a plus 11% rate increase on a global basis, solidifying the momentum for improving margins in P&C. We are now in the fifth consecutive quarter of rate increase in excess of loss cost as evidenced by our current underlying combined ratio of 93.3% versus 97.1% in the same quarter last year. Adding to the rate improvement already mentioned, we've seen lower claims activity over the last 4 quarters. Nevertheless, we continue to be prudent by maintaining what we believe to be an appropriate safety margin in our reserving approach. One of our key principles is that we are cautious when recognizing favorable news but react quickly to adverse signs in the data. Next, on to our reinsurance segment. We had another quarter of improving profitability fundamentals. Our trailing 12-month accident year combined ratio ex cat has improved significantly from a year ago. We again had a meaningful increase in net premium written of 25%. In the first quarter, we estimate that our effective rate change or rate over trend was roughly plus 8%. As with insurance, we expect these rate improvements to continue to be reflected in our underwriting results for the next several quarters. As you can see from our total premium growth in property over the last year, we continue to believe that risk-adjusted returns are more favorable in a non-cat XL property arena. Our reinsurance group incurred $146 million of cat losses in the quarter, which was within our expectations given the type of event and where we have historically positioned our property cat exposures. Let me explain a bit more. Strategically, we allocate more catastrophe capital towards homeowners and smaller commercial portfolios because we believe, one, they have homogeneous risk characteristics; two, the data used to model their exposure is of better quality; and three, policy language tends to have less variability than with larger commercial exposures. We believe that there is less uncertainty in the expected cat load of homeowners and smaller commercial portfolios. As a consequence of this portfolio construction bias, on a medium-sized storm such as Uri, at between $14 billion and $16 billion in losses that affects personal lines more markedly, we would expect our market share to be around 1%. And last, but certainly not least, mortgage. Overall, our mortgage group is very well positioned to produce good earnings as a reinvigorated U.S. housing market is promising in 2021 and beyond. In the first quarter, Arch MI U.S. new insurance written was $27 billion, around 60% above the same period last year and new loan originations are tracking towards another very strong year. As you know, last year saw a refinancing boom, which meant significant turnover in our insurance in force. Our first quarter annualized persistency was up from the 54% we experienced over the last 12 months as interest rates rose earlier this year. If mortgage rates continue to rise, we would expect persistency to gradually return to the longer-term range of 75%, which will be a net positive as we would hold more of the recent higher credit quality, higher risk-adjusted return portfolio on our books for longer. Looking next at our delinquency inventory, we still expect a large portion to cure based on many factors, including the strong equity position of our current DQ inventory. 94% of delinquent policies have over 20% of equity. We also had good news in March as the run rate for new notices of default was nearly back to 2019 levels at about 10,000 new annuities per quarter. Outside of the U.S., we increased our writings in Australia as the housing market remains strong there. We like the long-term opportunity in Australia as demonstrated by our announcement to acquire Westpac's LMI business in March. The agreement allows us to free up capital even as we build our Australian presence and diversify our earning streams at attractive risk-adjusted returns. To borrow a sports analogy for this quarter, with a nod to our friends at Coface, this market feels a little like the last legs of the Tour de France. We just went through the muteness section, came out among the leaders and a lot of writers struggle to keep pace. Now as we roll towards Paris, we can continue to build on our lead while remaining mindful of protecting our position and energy. We can go all out and be reckless at several stages as several stages of the race remain. However, our team is in great shape. We have many great writers working together to ensure we're ultimately smiling in that beautiful yellow jersey on the [indiscernible]. As usual, our focus is on finishing the race with grace and winning for our sponsors, our shareholders. Now I'll turn it over to Francois. Francois Morin : Thank you, Marc, and good morning to all. Thanks for joining us today. On to the first quarter results. As a reminder, and consistent with prior practice, the following comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e., the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford. On the transaction, we announced late last year to acquire Watford in partnership with Warburg Pincus and Kelso. To use Marc's cycling analogy, our team has been peddling hard in anticipation of the closing, and we are down to the last few kilometers before we reach our final destination. I will provide a bit more color on its status in a few minutes. As you will have seen by now, we had a very solid quarter despite the severe winter storms with after-tax operating income for the quarter of $239.8 million, or $0.59 per share, and an annualized 7.8% operating return on average common equity. Book value per share increased to $30.54 at March 31, up 0.8% from last quarter. In the insurance segment, net written premium grew 20% over the same quarter 1 year ago, 28.4% if we exclude the impact of the pandemic on our travel, accident and health units. The insurance segment's accident quarter combined ratio, excluding cats, was 93.3%, lower by 380 basis points from the same period 1 year ago. The improvement in the ex cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business. In Addition, the expense ratio was lower by approximately 80 basis points since the same quarter 1 year ago, primarily due to the growth in the premium base. As for our reinsurance operations, we also had strong growth of 25.3% in net written premium over -- on a year-over-year basis, 40.8% if we adjust for an $88 million loss portfolio transfer that was recorded in the first quarter of 2020. The growth was observed across most of our lines, but especially in our property, other than property catastrophe line, where strong rate increases and a few new accounts helped increase the top line by 84.3%. The segment's accident quarter combined ratio, excluding cats, stood at 84% compared to 91.3% on the same basis 1 year ago. Once we normalize for the onetime impact of the loss portfolio transfer, the improvement in the ex cat accident year combined ratio was 590 basis points, which is almost entirely attributable to a corresponding improvement in the loss ratio. The overall expense ratio remained relatively unchanged, again after adjusting for the LPT. Losses from 2021 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $188.3 million, or 10.5 combined ratio points, compared to 7.4 combined ratio points in the first quarter of 2020. These were primarily as a result of the North American winter storms Uri and Viola in February and consistent with our earnings pre-announcement 2 weeks ago, close to 80% of the losses came from our reinsurance segment with the rest attributable to the insurance segment. We remain comfortable with our level of loss reserves for COVID-19 claims, which remained essentially unchanged from prior estimates. Approximately 65% of the inception-to-date incurring loss amount sits within our incurred but not reported IBNR reserves or as additional case reserves within our insurance and reinsurance segments. The key performance indicators we track to help us assess the ultimate impact of COVID-19 on our mortgage segment keep trending in a favorable direction. Chief, of course, being the delinquency rate, which came in at 3.86% at the end of the quarter. Arch MI had another excellent quarter in terms of production. And with refinance activity leveling off from prior peaks, we saw our insurance inform remain relatively stable with an increase from our international book, offset by a small decrease in our U.S. MI book. The combined ratio for this segment was 42.4%, reflecting the lower level of new delinquencies reported during the quarter. Both the loss and expense ratio were slightly lower than the pre-pandemic levels experienced in the same quarter 1 year ago. As a reminder, I wanted to remind everyone of the seasonality that exists in the reporting of operating expenses across our underwriting segments, investment expenses and at the corporate level. Given all incentive compensation decisions, including share-based awards get approved by our Board of Directors in February of each year, the first quarter has generally been the quarter with the highest level of operating expenses, and we do expect the current year to follow this pattern. Overall, with the underlying improvements in both of our P&C segments, and mortgage segment fundamentals returning to pre-pandemic levels, we are excited by the prospects for each of the 3 legs of our stool. Our objective to deliver a well-balanced return to our shareholders with meaningful contributions from each of our underwriting segments should become more and more apparent as we move forward. I've kept my segment-level comments a bit shorter than usual in order to give a bit more color on the performance of our investment portfolio this quarter and on the new line in our income statement titled, income loss From operating affiliates. As regards to the investment portfolio, total investment return for the quarter was a negative 18 basis points on a U.S. dollar basis. Our defensive positioning with a short duration and limited credit exposure relative to our benchmark helped us withstand headwinds we experienced on the heels of an 80 basis point increase in the 10-year treasury rate during the quarter, which was a main factor in the negative 56 basis point price return on our portfolio during the quarter. Net investment income was $78.7 million during the quarter, down 9.3% on a sequential basis. This decrease, while certainly affected by lower available interest rates and higher investment expenses due to incentive compensation payments and investment management fees, is also very much the result of deliberate portfolio actions taken over the last few quarters. Specifically, we continue to maintain a short duration on our portfolio, 2.71 years at the end of the quarter, based on our internal view of the risk and return trade-offs in the fixed income markets. We also continue to deploy additional capital to an alternative investments, the returns from which are generally not reflected in investment income. Finally, we also transformed some short-term investments this quarter into our 29.5% equity ownership in Coface as well as an investment in corporate-owned life insurance policies. Again, both items whose returns are included in operating income, but are not reflected in net investment income. Equity and net income of investment funds using the -- accounted for using the equity method, and realized gains from nonfixed income investments returned approximately $154 million during the quarter and were key contributors to the growth in our book value. Now on to income from operating affiliates, which we are including in our definition of operating income. This quarter, in addition to our share of the quarterly results of investments we have made in operating affiliates, being primarily those from Premia Holdings at this time, we also benefited from an initial nonrecurring gain we made at closing of our acquisition of a 29.5% ownership stake in Coface for approximately $74.5 million. Consistent with our accounting policy under equity method accounting, we will report our investment in Coface on a quarter lag. As regards to Watford transaction, shareholder approval was obtained in late March, and we are awaiting a few final regulatory approvals before we can close the transaction, hopefully, over the next few weeks. As we disclosed earlier, we expect our ownership of Watford to increase to 40% at closing. The effective tax rate on pretax operating income was 10.6% in the quarter, reflecting changes in the full year estimated tax rate, the geographic mix of our pretax income, and a benefit from discrete tax items in the quarter. We currently estimate the full year tax rate to be in the 10% to 12% range for 2021. Turning briefly to risk management. Our natural cat PML on a net basis decreased to $778 million as of April 1, which had approximately 6.7% of tangible common equity remains well below our internal limits at the single event 1-in-250-year return level. Our peak zone across the group changed from the Florida tri-county area to the northeast, reflecting our view of better opportunities given the current rate environment. Our balance sheet remains strong. And our debt plus preferred leverage stood at 22.1% at quarter end, well within the reasonable range. On the capital front, we repurchased approximately 5.3 million shares at an aggregate cost of $179.3 million in the first quarter. Our remaining share repurchase authorization currently stands at $737.3 million. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from Phil Stefano, Deutsche Bank. Phil Stefano : So the idea of rate adequacy is something that's gotten a lot of airtime with people focusing on the second derivative of the pricing move. I was hoping you could just talk about how you see rate adequacy from your perspective. Primarily, it's an insurance question, but reinsurance would be appreciated as well. In my mind, it feels like the messaging is that exposure growth will help to carry the baton, I don't know how to put that into a biking analogy. But move to the front from the tailwinds of pricing that we've seen and push forward to the next leg. Marc Grandisson : Yes. It's a good question. I'll try not to steer away from the cycling analogy myself. I think very -- at a very high level, the rates keep on being really, really healthy. 11% is above the loss cost trend, as we mentioned earlier. We started seeing this last year in the first quarter. So we're in the second round, if you will, of round of rate increases. While we had some rate increases last year and those policies that are currently being renewed and whirring in the first quarter, had another set of rate increases. So I think where we are right now, the market is really -- psychologically, the market is in rate increases minded and being careful in the way to deploy capital. And I think if you look back at where we came out 18, 19 years, where combined ratio was in the way it's been developing and trending for the last 6 quarters, I think, the story tells itself. The fact that we are indeed getting rate-above-loss cost trend, and that also finds its way into our combined ratio on a quarterly basis. There's more to go. We put our first quarter prime last year. There's another -- the first coat of paint this year. We'd be surprised that we have another coat to paint given over the next several quarters. It remains to be seen how much more it will be. But certainly, anything we have at this point in time is -- helps improving the margins. Phil Stefano : Okay. And switching gears a bit to look at mortgage. The incident rate assumptions were high single digits, something like 8%, 9%, as we talked through the second half 2020 results. Can you just let us know where about you're looking at booking that now? And maybe weave in some of the -- some additional color commentary around what exactly it means optimizing our MI book as we kind of migrate from the forbearance world to a more traditional operating environment. Marc Grandisson : Absolutely. I think we have -- first, on the optimizing, we have a very substantial market share in the U.S., and we'll very soon have a very decent one in Australia as well. I think it's early to go towards the area where the better returns are. As we -- and we grew a little bit in the last half of 2020. We see the opportunity. The market is coming back to some more normalcy. So I think our game plan will be to -- as we were doing in 2019, as we were heading into 2020, to be -- rely on our best base pricing to make sure we pick the best area of the marketplace to make sure we are enhancing the returns as we go forward. In terms of NODs, our roll rate for the new NODs this quarter -- if you remember, last quarter, it was 9.4%. This quarter, we booked it for the U.S. MI at 9.1%. So it's slightly better than the last quarter. We did not -- we are sort of out of the predicting business of where it's going to end up at the end of the year in terms of the delinquency rate. But you see it going to 3.86% this quarter, which is way, way, way better than we would have anticipated sitting here a year ago. Phil Stefano : Okay. Hopefully, a quick follow-up on the MI. Is there any clarity on the GSE limitations on dividends out of the operating entities? Any sense on when this will be lifted? Francois Morin : Well, great question, Phil. There is a moratorium that's in place till the end of June. We are certainly hopeful that the moratorium will expire and not be extended. Nothing definitive. There's discussions going on, but the -- certainly, from our side, the hope is that in the second half of the year, we would be able to start dividending some of the capital from our U.S. MI operation. Operator : Our next question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : My first question, on last quarter's call, you guys had alluded to, I believe, your property casualty businesses generating returns in the double digits and mortgage kind of getting back to the 15% level. Obviously, some noise in the quarter with cats and some of the investment items -- investment income items you pointed to. But do you guys broadly see your businesses generating returns on -- in the double digits and mortgage kind of around that 15% level? Marc Grandisson : Yes. Our view has not changed in terms of expectations of what we've written from what we said last quarter, at least, very much in line. Elyse Greenspan : Okay. That's helpful. And then on the underlying side, in your prepared remarks, right, you alluded to continuing to get underlying margin improvement. I mean you guys have done a really good job over the past few years of rejiggering the business mix, and we're seeing that come through in both insurance and reinsurance. So would that comment imply that the back 3 quarters of the year from an underlying basis would be better relative to the Q1? Was it a year-over-year comment? Just directionally, how should we think about the margins in insurance and reinsurance? Marc Grandisson : Yes. It's all relating to the price increase that the market will push through, right, over the next several quarters. But certainly, the earnings that we are seeing currently in the first quarter, right, Elyse, some of it was at lower pricing last year. I know in the first half of the year and in the third quarter, and that kept on getting better as we went towards the end of 2020 and into 2021. So we should all, everything else being equal, expect -- and expect the margins to be expanding. And if there is more rate increases, then we should hopefully see this and -- well, nothing will -- we'll see them in the numbers right away. But certainly, the feeling and the momentum is building to get more margin improvements, yes. Elyse Greenspan : And then in terms of mortgage, right, you guys had pointed to kind of getting back to the 35% to 45% combined ratio, 42%, [44%] in the quarter, right? So currently, within that range, based off of what you know today and the fact that you mentioned, right, the level of new notices is slowing, would you expect that the combined ratio for that business would continue to trend better during the next 3 quarters relative to what you reported in the Q1? Francois Morin : Well, a couple of points on that. I think just to clarify the comment that I think I made was the, call it, the 35% to 45% range was meant to be more of a, call it, over the cycle, kind of a steady state, not in a stress environment kind of reasonable combined ratio. Do we feel we're kind of in that environment? Yes. Delinquencies, new notices, Marc touched on it. They're back to being roughly 10,000 orders. So that's a good sign. Could the combined ratio in the last 3 quarters of the year be lower than it was in first quarter? It could. We were not -- we don't know. I think some of it would certainly be a function of reserve releases, if there's any. We just -- again, that's -- we'll have more clarity on that once forbearance programs expire or get people come out of that. So I think at a high level, we're -- we -- the range that we put out there is -- we're still very comfortable with. Could we beat that or could we come in a bit lower? I guess we'll see when the data shows up. But certainly, yes, it's not inconceivable. Elyse Greenspan : Okay. And then one last one on the FHFA this morning announced on new refi options for low-income families. Could you just help us think about how that could impact your -- the back book within your mortgage insurance portfolio? Marc Grandisson : Yes. I think the -- to me, all the questions about the FHA, the FHFA and all the various government policy that could be put out there. I think we're only receiving it and react to it. And what we have at heart is a -- our risk-based pricing is really making sure that we're allocating capital and supporting the policies that meet our threshold, return thresholds. I think that we still believe that the -- even though there are some push to become -- get more affordable housing available to folks, which we're encouraging, there's still a very healthy level of appreciation for the risk in Washington. So we're not overly concerned with that. And most of the targeted markets that are towards -- that these policies are geared towards would be the lower FICO and most likely the higher LTVs, which is not typically where we are more -- most competitive and most focused on at this point in time. So we're not losing sleep over this, Elyse. Operator : Our next question comes from Jimmy Bhullar with JPMorgan. Jimmy Bhullar : I had a couple of questions. First, on the MI business. I think my speaker's on, let me see if I could turn it off. So first on the MI business. Can you talk about -- delinquencies, obviously, have improved a little bit, but they're still fairly elevated. And it seems like a lot of this has to do with this government forbearance programs versus actual hardship on the part of the borrower. But if you could just talk about what your view is, and you addressed a little bit of that in your comments about equity and homes and stuff. And then secondly, on your COVID-related reserves. I think last quarter, you gave a number that around 70% or so were still in IBNR, and you haven't had much in the way of additional losses recently. So just wondering what the likelihood is that, that number might be overly conservative now given the economy is opening up and the chances of reserve release is related to those. Marc Grandisson : Yes. On the forbearance, clearly, well, I would have a different spin on you than you would have, obviously, on the delinquency rate. At 3.86%, I think, it's a pretty good place to be. We're not still out of the COVID, so the potential issues that could develop. Now it's looking very, very good, obviously, but we're still not out of it completely. Of the 3.86%, right, 2/3 of our delinquencies are actually in the forbearance program. And of those who are in those forbearance programs delinquency, 90% -- 94% of them actually have more than 10% of equity. So yes, there is -- this counts, the delinquency count staying in the inventory. We still have an extension of the forbearance moratorium until the end of June extended to -- for -- potentially could be extended. And that's all with the idea that the GSEs and sort of the government agencies want the homeowners to get back on their feet. So it's helping. It's maintaining a little bit higher level of uncertainty because the forbearance is still there. You still don't know 100% how they're going to turn out. But we still have many cures that had -- that occurred out of the forbearances that were put in there back in April or May of last year, right? 2/3 of them or fewer are now back into current being current. So on one hand, yes, it shows as a higher number in terms of delinquency. But when you look at being 2/3 forbearance program, which is very helpful for the homeowners on the heels of a high level of equity, this is, all things considered, a very reasonable place for us to be. And we think it's going to get -- most likely get better throughout the end of the year and go back to way we saw core delinquency, which is at 1.4% or 1.35%, which is more like what we have historically seen, at least, as of late as of the end of 2019. I'll ask Francois to answer the COVID question. Francois Morin : Yes. And Jimmy, on the COVID, yes, I mentioned it quickly, I think, we're still at 65% in IBNR and ACRs through the end of the quarter. Are we redundant? I mean, again, it's early for us to have a view. I mean whether that mean what we accrued on our reserves is going to hold up. I think we're -- again, we're very comfortable that we've got a prudent provision for COVID-related claims, but it's going to take a while for everything to settle out. And from that point of view, I would think that a lot of our reserves will probably stay in IBNR for quite some time, and we'll see from there. Operator : Our next question comes from Josh Shanker with Bank of America. Josh Shanker : A quickie and a longer one. The quickie is, so I understand that the expenses are elevated in the first quarter. But first quarter '20 didn't have the same elevated expenses. Can you talk about what was exceptional in that quarter? And why maybe, I'm thinking going forward, we should -- how we should think about 1Q expenses? Francois Morin : Well, two things I'd say. One is, I encourage everyone to compare the first quarter 2020 expense ratio and operating expenses compared to the last 3 quarters of 2020. And there's a quite -- there's a good differential there. So that, I think, is -- that's what I was trying to refer to and recognize that there's -- what we saw in Q1 is -- '21, we don't expect is going to reoccur or is going to be the going forward rate. This quarter, a little bit more -- I mean, I don't want to get too much in the weeds, but there's a couple of things that, I think, impacted this quarter's results. One is, call it, short-term bonus-related compensation where we have a process where we accrue bonuses throughout the year and what we think is going to happen and when they get finalized in February, the following year, then there's a true up. And last year, based on where we were in the first -- certainly the first 6 to 9 months of the year, we slowed down our accruals a little bit because we didn't think that the performance would be there, and it turned out to be actually not as bad as we had thought at the time. So there's -- effectively, this quarter, there's a bit of a catch-up on the, call it, the bonus accrual that came through. So I call that a bit -- a one-off. And second, there's -- on the equity side, there's -- and performance shares that were introduced 3 years ago. Last year was the first time that -- or this year their first time they actually vested. And there's a final calculation that came through this quarter. And while we accrued for it, it's never quite perfect and we do our best. But it's a bit of a catch-up going on this quarter as well here. So I'd say those are the kind of two things I'd point you to. I think it's OpEx, we manage those. We track them very carefully. And unfortunately, there's a bit of noise from quarter-to-quarter. But as we look forward for the rest of the year, I think, we're very confident that they're going to trend down from the current level. Josh Shanker : Okay. Great. And that's -- the second question is -- this is the back of the envelope calculation. Maybe I'm not exactly right. But it looks to me that you're carrying right now about $20,000 worth of reserves per mortgage default -- mortgage and default. And if I look back before the pandemic, you were like a little bit higher, maybe '21, but kind of your back to the same reserve per notice that you were before the pandemic. When I think about the pool of mortgage and default that you have right now, my thoughts would be that a higher probability of those are going to cure than in run rate conditions when people go into default. Am I wrong to think that? Do you think that when you think of the pool that the percentage that are going to cure is normal to history? Or do you think a higher percent will cure or higher will go into claim given the amount you're carrying for reserves? I guess there's a lot in there, but maybe give us some thoughts. Marc Grandisson : Yes. I think, Josh, I think, to that probably a shorter answer than you might expect, actually. The fact is that it's very uncertain, and we took -- we did take -- we believe we've taken conservative, at least prudent numbers to put the reserve because of -- due to the tremendous uncertainty surrounding what was going to happen, however long the forbearance would take place, what would be in place, what would the economy turn around? How long would COVID last? And frankly, we're still -- again, like we said to you, Josh, we're still not out of the wood. So we have taken -- not only us, I think, as an industry, people have taken a somewhat prudent approach to reserving. You're right. We should expect, everything else being equal, and forbearance programs in the past have showed us that when you had an 8% ultimate claims rate on a regular delinquency. When you compare to the forbearance through a cat event, for instance, that is -- that would be sort of a 1% to 2% ultimate claims rate, but we decided to be a bit more careful and prudent in establishing reserve. And I would say that we haven't really changed our mind quite yet. I think we've also put a moratorium on our revising our prior reserves, and we'll see where the data takes us for the next several quarters. And I hope that your assumption on the back of the envelope is right. And I hope that we prove to ourselves that it was, yes, indeed, a regular -- a more of a regular forbearance phenomenon in terms of curing than more of a regular DQ phenomenon. Josh Shanker : Is there a time line for when that moratorium ends? Or is that a subjective item? Marc Grandisson : On our reserving, we -- I think -- I actually looked at the CFO, I think, they're pretty difficult. And I think we just have to take several more quarters. I don't think we're quite ready yet for that. I would expect, Josh, over the next 2, 3 quarters, it's certainly inflecting a lot quicker than we would have anticipated back in third quarter of 2020. So we're like you seeing things well, at some point, we'll need to be as we are, typically, well, when we have solid data to back it, we'll take action at that point in time. And I'm hoping that it's over the next 3 to 4 quarters. Operator : Our next question comes from John Collins with Dowling & Partners. Geoff Dunn : It's actually Geoff Dunn. Two questions. One, just back on the provision this quarter from MI. Can you share the average severity assumption that went along with the 9/1 incidents? I think it was about $54,000 last quarter. Marc Grandisson : $4,800. Geoff Dunn : What was the total severity factor? Marc Grandisson : 9.1%? Is that the one you're looking at? Geoff Dunn : I'm sorry. So $4,800 was the actual vision and then [indiscernible] Marc Grandisson : Have a reserve for annually. Yes. Yes. Geoff Dunn : Okay. Perfect. And then secondly, Francois, you mentioned looking for dividends in the back half of the year from MI. How do you think about the capacity there, given that the surplus levels at both the primaries are down to about $200 million at year-end? Francois Morin : Well, we've got room. That's for sure. The one thing that is a factor for us, and I'm sure many of the peers is contingency reserves. So there is a -- right? So it's not purely, I'd say, PMIs driven. There is an EIC constraints around the amount of dividends that we can declare based on contingency reserves and the 10-year time of that. So while -- on the face of it, you might say, "Oh, 190% PMI ratio, there's tons of capacity." We have some, and we're happy with it. But no question that we'll have to go through a bit more modeling and figure out how much we could move out. And then there's other sources for the -- for those funds. But ballpark, a couple of hundred million, I think, is easily -- assuming we get the approval from both the FHFA, the GSEs and the right -- the state regulators. And then if we can get more, we'll certainly try and do so. Geoff Dunn : So when you say a couple of hundred million, does that assume that you can convince the regulators to let you release contingencies earlier? Or do you think you can bleed surplus down below $100 million at each of the operating companies? Francois Morin : Well, no, we think, we -- it's -- we would be within -- we wouldn't do anything, any special dividends from the regulators. It'd be very much within what's allowed from the regulatory point of view. Operator : Our next question comes from Brian Meredith with UBS. Brian Meredith : A couple of questions here for you. First, Marc, I'm just curious, now that Watford is going to be -- I guess, you own 40% of it. If you look at kind of the model there, it's a little different in the model you typically deploy in your traditional business. Combined ratio is well above 100%. Is there any thoughts to maybe changing the strategy there a little bit? Or are you going to keep the same one? And then as you book those numbers, are you going to assume those realized gains are kind of going through your operating results? Marc Grandisson : Yes. I'll let the second question to Francois. But the first part, Brian, is, I think, that, first, we have 40%, so we're not majority, so there's a Board of Directors. But I do believe that at heart, this is a harder market. This is a good market on the underwriting side. And I think that collectively, we believe that there is an opportunity to maybe focus more the risk or the effort of the capital towards the underwriting as opposed to the investment side of things, but this will have to take place over time, right? We'll have to also talk to our -- to the partners that are currently in Watford and see what expectations they have in the return. So this is an ongoing discussion. But at a high level, right, I think, that we should expect Watford to become a little bit more strategic from an opportunistic positioning right now at this point in the cycle based on the opportunities that we have right now. I think that the reliance on investment income was probably more in favor back in 2014, 2015. Francois Morin : And quickly on part 2 of your question, Brian. The -- listen, with the acquisition, it opens up, I call it, a little window for us to take a harder look at accounting policies. And what you mentioned around realized gains is something that we'll look at as well in the -- at closing. I mean we were already looking at it. I mean it's just a matter of -- we got a few documents and agreements that need to get finalized. But we'll be -- we'll make sure we communicate to you exactly how -- if things are going to change, how they're going to impact our financials. Brian Meredith : Great. And then, Marc, my second question is, some of the, I guess, calls we've heard so far from the insurance brokers this quarter, have highlighted the fact that new business has gotten competitive. Renewals, companies still try to raise prices, but new business is getting much more competitive. I'm just curious, are you seeing that. And what does that potentially mean for the kind of length and duration of the cycle? Are we getting towards the end when that happens? Marc Grandisson : No, I don't think so. I think that the -- some comments were made as well, Brian, about the E&S market, so they've been vibrant, which is a good sign of not dislocation, but really a renewed or a new underwriting appetite by the Main Street writers. That's not going away. In new business, it's normal to be expected, right? I think we went through the first year from underwriting, shuffling and readjusting to the new underwriting policy to now, well, let's say, what do we have and what do we want to focus on in terms of new business and maybe seek and grow that. And frankly, all of us here, right, Brian, talk about how the good the market is. So I think it probably makes them a little bit more willing to take on those policies. But I think it's a hardening market. I will add that new business could be more competitive, but the rates are not going down. I mean it's not like somebody is coming to undercut, which is really the important factor here. I do believe that the new business, typically -- we were once, way, way, way back when a new player in the marketplace. And I do believe that we had pretty lofty expectation in terms of pricing, we would need to get on that piece of business. And I'm expecting -- and that's what we're saying. We're not seeing a softening from that positioning from the external world. And frankly, Brian, I mean, the existing players are not growing so significantly that it's creating a lot of competition necessary, right? The new business is probably -- probably needs to find a new home with new players. So that's not that surprising. So I wouldn't lose -- I'm not losing sleep over this. Hard market does not last forever as you can appreciate. But we're already in the second round of this. I wouldn't be surprised we have another round to go. And even after that, Brian, it takes a bit longer for things to get softer yet again to the point of not getting the returns. So we have win our sales for a little while here. Brian Meredith : Great. And then one just last quick one here. I noticed your construction and national accounts business finally started to grow, again, in the first quarter. Is there anything unusual there? Or is that something that we should see picking up growth as the economy improves? Marc Grandisson : I think a couple of things. I think seeking quality accounts. There's still some shuffling of accounts around. Some people are debating what to do, stay with clients. We're able -- we have a very good product offering both on these instances. And this is -- these are 2 areas actually where -- I referred to in my comments where that didn't seem to be moving a whole lot. And then we're seeing, finally, for the first time and on rates moving in the right direction. As you can appreciate, right, a lot of it is work is comp-driven, but it's still -- we can still see clients working with us as we evidence the lack of interest in investment income, some COVID exposure. So I think we're seeing some good traction there and still offering good product. But we have to be careful obviously. We're here of the long haul. This is a franchise positioning for us. It's a little bit of everything. It's a really good story for us, and I'm glad you picked that up, Brian. Operator : Our next question comes from Derek Han with KBW. Derek Han : So my first question is, you talked about strong pricing and new accounts driving growth in the property business line within reinsurance. How are you thinking about the loss trends in that line of business, both in reinsurance and insurance? Marc Grandisson : Yes. So very much with the same way we would the other lines of business, Derek, where we would look at the history of the loss cost and modeling out in terms of specifically talking about cat loss specifically. Just looking at the cat history of these accounts that are similar. If it's a reinsurance portfolio then it's the experience on the portfolio. And build in some modeling magic, I would call it, based on our own expectations of demand surge or maybe some on-model perspective. And we just price it this way to make sure we have a healthy level of margin. And it's really nothing new from what we've had historically. I think on property, the one beautiful thing about property is the feedback loop is a lot quicker as opposed to a GL portfolio where it may take you 4, 5, 6, 10 years sometimes to really figure out whether you did the right thing and you price your goods at the right level, property allows us to do a lot of repricing. And right now, our ability to grow in that lines of business is because we're also willing and able to go anywhere on the reinsurance side for that matter in terms of core share or risk access where some of the other players out there could be a little bit more reluctant to go. And just one thing you have to keep in mind when you price for business and property, you can't just take the last data point and say, this is going to be the recurring one. You have to take a small -- a longer-term period with the proper caveat on the margin for safety to price. So I'm trying to give you a 25-year knowledge base in 5 minutes, I'm not sure I'll be doing that great. But I think, hopefully, it gives you a good flavor for it. Francois Morin : Yes. And -- but the only thing I'd add to that, I think, there's certainly been a lot of press in the last few weeks and months around building materials, costs going through the roof in some areas. So that's certainly something that our underwriters are fully aware of and fully engaged in adjusting their view of price as they trend. And so that's part of the underwriting decision when you're in some parts of the country where cost of materials, whether through shortage or just a lot of significant demand, I think, that is impacting the trends or the pricing that we're trying to get on the product. So I'd say that's maybe a bit more on the insurance side, more direct, but I think it's a bit of a something that is more top of mind currently. Derek Han : That's really helpful. And then I have a quick second question. There was a sequential increase in the MI G&A ratio. Was that all incentive comp? Francois Morin : Well, there's a couple of things. I mean, sequential, there's always -- Q1 is, yes, there's current, but there's also -- and it gets very granular around payroll taxes. And there's other things that we're just -- we pick up more of those expenses in the first quarter, and they do decrease over time throughout the year. So I'd say, yes, for the most part, is -- incentive comp is a big part of it, but there's also a few other things that just enhance that or make it stand out a bit more. But again, from our point of view or your point of view, you should fully expect a return back to a lower level and starting in the second quarter. Operator : I'm not showing any further questions. I'd now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you for joining us this morning, and we're looking forward for better news, hopefully, in the second quarter. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,021	3	2021Q3	2021Q2	2021-08-01	1.967	2.175	3.292	3.43	null	12.03	11.48	Operator : Good day, ladies and gentlemen, and welcome to the second quarter 2021 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also, will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thanks, Liz. Good morning, and thank you for joining our second quarter 2021 earnings call. At Arch our playbook remains simple yet effective. We protect our capital through soft markets and unleash our underwriters during hard market. We believe that this time tested strategy gives us the best chance to generate superior risk-adjusted returns over time. You should expect then from us at this stage of the cycle comes straight from that playbook. As long as rate increases support returns above our threshold, we will continue to grow our writings. We have seen this video before in the hard market of 2002 through 2005, when P&C results generated a sustainable stream of earnings for several years after market prices peaked and were fully earned. And so again this quarter, the power of Arch's diversified platform is evident in the strong underlying earnings in each of our operating segments. We delivered a 13% annualized operating ROE and aided by good investment returns, an annualized net income ROE of 21% this quarter. One item that stands out this quarter was our strong P&C underwriting activity. Our P&C insurance results demonstrate significant improvement in underwriting performance. Better market conditions allowed our teams to expand their overall positioning and grow net written premiums substantially over the same quarter last year. We are now in the sixth consecutive quarter of rate increases at plus 10% this quarter comfortably in excess of loss cost trend estimates. The higher level of premium earned from the post 2019 policy years is a primary driver of our improving underlying accident year combined ratio. About two-third of the combined ratio improvement was due to lower loss ratios, attributable to rate increases and underwriting actions, we have taken over the past several years. The balance of the improvement was driven by a lower expense ratio. Production increased across most lines of business and geography areas as pricing improvements spread. While rate increases have tapered off from previous highs in some lines, we're seeing increases in lines that had been immune to meaningful change. And in lines where price increases have eased, we're still getting rate on rate increases on an improving margins. We estimate that approximately 30% of our insurance premium growth reflects rate increases. About 15% is from higher net retention level and the remaining growth comes from new business and exposure growth with existing clients. Both our international and US insurance platforms continue to excel in the current market with substantial growth in professional lines, programs, property and travel and A&H writings. Our reinsurance group also had a quarter of strong growth while producing strong underwriting results. A large portion of this growth results from our ability to leverage our expertise and historical experience as a writer of quota share business. When markets dislocate our clients need capacity and capital as they seek to reshape their portfolio. That's why since 2019, we have been increasing our participation in side-by-side quota share arrangements. This has always been part of our reinsurance playbook and based on historical patterns, we believe a good place to deploy our capital for the next few years. As you may have heard, this market is notable as rate increases in traditional XOL reinsurance lag the insurance rate increases. So our current preference is to be closer to the primary rate increases through quota share with our clients. Property cat XL is one of the few areas where we have reduced premium writings. They are down 26%, as we are not finding enough opportunities that meet our return expectations. However, as you can see in our supplement, premium writings grew substantially in property other than cat and specialty segments. Casualty and marine also produced excellent levels of growth. As with insurance, we expect the ongoing rate improvements to be reflected in our underwriting results over the next several quarters. The Arch reinsurance story is one of providing creative capital solutions during hard markets that enables us to leverage our growth faster than in our primary insurance markets. We have considered this a core capability throughout our history. Our reaction to this market is no exception. All in all, it was a very satisfactory job of seizing hard market opportunities by our team. Carpe diem as they say. From a strategic standpoint, it's worth noting that we, along with our business partners successfully completed the purchase of Watford at the beginning of the third quarter and are focused on working to build a sustainable reinsurance franchise. Allow me now to switch to inflation fears which continues to be a hot topic for our industry. I want to reiterate our perspective on how we view inflation at Arch. As underwriters, we study inflation on a line-by-line basis to price the business and establish reserves. In some lines like workers' comp inflation remains low at this stage, I'd say 0% to 1%. However in other lines like high excess general liability, we're estimating inflation to be in the 8% to 12% range. As a point of comparison, loss cost inflation from the ground-up has been in a 3% to 5% range for around five years, broadly across our portfolio. It's important to consider line of business specifics when we discuss claims inflation. Second, it's worth noting that in every line of business the inflation rate increases as you move up attachment points. The key in pricing or reserving for an excess policy is to start with the proper ground-up trend and then apply the best curve to select a range for the trend in the upper layers. As is often the case in insurance, we are estimating and there is a lot of uncertainty around the correct number. Our philosophy is to keep this methodology consistent, through the cycle. Third, we also supplement our analysis with some subjectivity. In the current environment and in certain lines, we had to try and account for the increased uncertainty, including the possibility of the so-called social inflation. We are typically more willing to adjust the trend above our indications, than we are to reduce it, all with creating a margin of safety in mind. This is not a new concept at Arch, but a time-tested philosophy that has allowed us to navigate both, soft and hard markets, through our opportunistic cycle management approach. Let's turn now to our mortgage group, which continues to operate as a well-oiled machine, generating $250 million of operating earnings in the quarter. Our insurance in force remained steady at roughly $278 billion for US primary MI. Refinance activity has slowed and we expect improving persistency throughout the remainder of the year and into 2022. Delinquency rates are decreasing across our portfolio and we still expect a large portion of delinquencies to cure, based on many factors, including the strong equity position of our current inventory where more than 95% of delinquent policies have over 10% of equity. New notices of default, continues to decline and at 7,400 in the second quarter are better than pre-COVID levels. Outside of the US, we increased our writings in Australia as the housing market remains strong. We like the long-term opportunity in Australia as demonstrated by our announcement to acquire Westpac's LMI business, which we now expect to close later this quarter. Pricing remains competitive, but rational across the MI industry has rated our back to 2019 levels. However, the credit quality of borrowers remains strong, similar to 2016, supporting our confidence in the continued earnings from our mortgage insurance portfolio. As I close my prepared remarks, this quarter I'll borrow from cricket, which is top of mind because, this weekend marks Cup Match here in Bermuda, when the entire island goes cricket crazy for a four-day holiday weekend. I think of the current P&C market like being the first team to bat during a cricket test match. Test cricket is one of the few sports that isn't governed by a clock. Unlike games that must be completed in 60 or 90 minutes, test cricket is about scoring as any runs as possible, as long as you are getting favorable balls or pitches for baseball fans, and for as long as it takes for all of your batsmen to be out. The details are not critical, but the idea is that similar to this market, we're waiting for the right ball and scoring as many runs as possible, while we can. Rather than swinging aimlessly, we'll do what we always do, play defensively when we have to, but become aggressive and score as many runs as possible, when the opportunity arises. We're not worried about the clock running out. We'll just keep scoring runs. Now, I'll ball it over to Francois to run through the financials. Francois Morin : Thank you, Marc and good morning to all on this first day of the Bermuda Cup Match Classic. Thanks for joining us today. Before I provide more color on our excellent second quarter results, I should remind you that, consistent with prior practice, the following comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e. the operations of Watford Holdings Ltd. In our filings, the term consolidated includes Watford. As you know, we closed earlier this month on the transaction we announced late last year to acquire Watford in partnership with Warburg, Pincus and Kelso. Concurrent with the closing, we will be making changes going forward in how we report our equity interest in Watford results, which I will share with you in a few minutes. As Marc shared earlier, we had an excellent quarter with each of the three legs of our stool performing very well and our investment portfolio also producing solid results. After-tax operating income for the quarter was $407.2 million or $1 per share, resulting in an annualized 13% operating return on average common equity. Book value per share increased to $32.02 at June 30, up 4.8% in the quarter. In the insurance segment, net written premium grew 43.3% over the same quarter one year ago, 38.5% if we exclude the growth due to the COVID-related recovery in our travel, accident and health unit from the same quarter one year ago. The insured segment's accident quarter combined ratio excluding cats was 91.4%, lower by 470 basis points from the same period one year ago. The improvement in the ex-cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business. In addition, the expense ratio was lower by approximately 180 basis points since the same quarter one year ago, primarily due to the growth in the premium base. As for our reinsurance operations, we had strong growth of 63.6% in net written premiums on a year-over-year basis. The growth was observed across most of our lines, but especially in our casualty and other specialty lines, where strong rate increases and growth in new accounts helped increase the topline. The segment's accident quarter combined ratio excluding cats, stood at 87.1% compared to 87.5% on the same basis one year ago. As we have discussed in the past, we believe the underlying performance of our reinsurance segment is better analyzed on a rolling 12-month basis, which typically smooths out the impact of certain large transactions and/or claims that can have an impact on quarterly results. On that basis, the ex-cat accident year combined ratio stood at 84.3% over the last 12 months, lower by 660 basis points from the prior 12 months, where the improvement almost entirely reflected on the loss side, as a result of the rate increases we have observed over the last six-plus quarters. Losses from 2021 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums, stood at $46.5 million or 2.4 combined ratio points, compared to 13.5 combined ratio points in the second quarter of 2020. The activity in the quarter was the result of a series of small events across the globe and some late reported claim activity from the North American winter storms Uri and Viola in February. Following up on the trends we have seen in the last few quarters, the ultimate impact of COVID-19 on our mortgage segment remains very manageable. In particular, the delinquency rate, which came in at 3.11% at the end of the quarter, is now close to 40% lower than it was when it reached its peak during the pandemic at the end of the second quarter one year ago. We had another solid quarter in terms of production. And with refinance activity coming down from prior levels, we saw the insurance in force for our U.S. MI book remained relatively stable. Of note, this quarter was the exercise of call features by the GSEs on certain vintage credit risk transfer contracts, reducing the insurance in force for our non-U.S. MI portfolio. The overall impact of these calls was an approximate one-time $31 million benefit to our underwriting income, approximately two-thirds of which came from the release of prior year loss reserves and the rest from the call premiums received. The combined ratio for this segment was 26.5%, reflecting the lower level of new delinquencies reported during the quarter. Income from operating affiliates was strong at $24.5 million, mostly driven by an excellent first quarter at Coface. As a reminder, we report our ownership interest in Coface's results on a quarter lag into our financial statements. As regards to Watford, the closing of the transaction on July 1 gave rise to a reconsideration event. And as a result, we revisited our VIE analysis. Based on the new governing documents of the entity, we have concluded that while we will attain significant influence, we will not control the entity going forward. Accordingly, we will no longer consolidate the results of Watford in our financial results, starting with our third quarter financials. And our 40% share of Watford's results will be reported in the income from operating affiliates line, along with our proportionate share of other operating affiliates, such as Coface and Premia. As a result of the closing of the transaction, we also expect to report a one-time nonrecurring gain of approximately $65 million in the third quarter. Total investment return for our investment portfolio was positive 150 basis points on a U.S. dollar basis for the quarter. Net investment income was $89.4 million during the quarter, up $10.7 million on a sequential basis, driven by lower investment expenses and interest received on funds withheld transactions. The duration of our portfolio remains at one of its lowest levels in our history, 2.31 years at the end of the quarter, reflecting our internal view of the risk and return trade-offs in the fixed income markets. Equity and net income of investment funds accounting for using the equity method returned approximately $122 million during the quarter, a key contributor to the growth in our book value. The effective tax rate on pretax operating income was 7.6% in the quarter, reflecting changes in the full year estimated tax rate, the geographic mix of our pretax income and a benefit from discrete tax items in the quarter. Turning briefly to risk management. Our natural cat PML on a net basis decreased to $676 million as of July 1 for the Northeast peak zone down to approximately 5.6% of tangible common equity and well below our internal limits at the single event 1-in-250-year return level. On the capital front, we issued $500 million of 4.55% perpetual fixed rate preferred shares in June. We expect to use the proceeds to redeem all or a portion of our outstanding Series E non-cumulative preferred shares in September 2021 and to use any remaining amounts for general corporate purposes. Separately, we repurchased approximately 7.8 million shares at an aggregate cost of $306 million in the second quarter, bringing our year-to-date share repurchases to over $485 million, or approximately 45% of our year-to-date net income, all while growing our book value and top line. As we have said since our formation 20 years ago, we are strong proponents of active cycle and capital management. We believe this quarter's results demonstrates our ability to execute on this philosophy and leads us to invest in opportunities where we believe the returns are most attractive. At current prices and with the prospect of improving returns we believe buying back our shares represent another compelling value proposition for our shareholders without compromising our capital flexibility. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : Hi. Thanks. Good morning. My first question was on capital. Do you guys -- Francois, you just said, right, you bought back less than half of your earnings to start this year. And I believe going into the year you guys thought you had more than enough capital to support your growth -- the growth that you thought you would see. So should we think about a pickup in potentially capital return if that statement is true in the back half of the year? And can you just update us? Would you be willing to be active buying back your stock during wind season, just given that it seems like you have a good level of excess capital? Francois Morin : Sure. On the second question, Elyse, yes. We're -- while in our early days and I'd say pre-mortgage years, we were somewhat more careful with share buybacks during the wind season. We're not -- we're now, as you know, a lot more diversified. So I think that constraint or that reality is maybe less applicable than it used to be. But, yes, certainly, as we think about share repurchases or capital deployment throughout the second half of the year, we certainly think that we could be buying back more shares. I mean our top priority is still to invest in the business and grow the business as best we can. But as you saw this quarter, I mean, we were able to do both and then some and like to think that, if things stay where they are or within reason, we'd be doing the same in the second half of the year. Elyse Greenspan : Okay. And then, in terms of your insurance segment, so you guys still seem pretty positive, right? 30% of the growth came from rate increases in the quarter, positive on pricing, a little bit concern of that inflation, which we've heard throughout the industry. So, broadly, as you guys are thinking about the pricing environment as well as, just what's going on with inflation, do you have a sense of for how long you think pricing should continue to exceed loss trend, just broadly across insurance recognizing, obviously, its many different lines that comes together? Marc Grandisson : There's a question that will lead all of us, if you get the right answer to riches, Elyse. But I think it's fair to say that the market momentum is clearly there. I think you heard on other calls that, that push for rate and increase in the rate adequacy and getting to a better level getting to a better level is shared among most in the industry. I think there's recognition between some of the losses that have occurred in the past and cat losses included some uncertainty in such inflation cyber risk as well as no property cat events. Obviously, that have occurred, I think there's a -- and the interest rates being lower, I think there's a recognition that the prices need to go up. I think I will just give you a quick anecdote. Some of our folks are doing file audits, on the reinsurance side, that is with some of our clients, who are competitors of ours as well. And the common thread or theme that seems to come through the audit is that the underwriting community is recognizing that more needs to be done. And you can see this evidenced in the discussion that they have with brokers. So we're very secure. I think there's going to be quite a bit more run way to this pricing improvement. Elyse Greenspan : And then one last one on the reinsurance side, it sounds like, Francois from your comments that the deterioration in the quarter was more just kind of one-off. I guess, as we think about going forward, my question more is, as we've seen the shift to more, longer tail lines within that book and away from property, would you expect the underlying loss ratio to deteriorate, or was it just that there was just some one-off factors in the quarter, we could still see improvement in that on a go-forward basis? Francois Morin : Yeah. If you're -- in terms of modeling I think it's going to go up and down, right? And I would say, the numbers we quoted in terms of the rolling 12 months is probably as good a -- it's a good starting point. The business mix, yeah, there'll be some fluctuations here and there. But -- yeah, we wrote more casualty but we wrote also a lot more other specialty which is -- maybe combined ratios there a bit better. So it's hard to pinpoint exactly, where everything -- I mean, what's going to happen obviously in the next few quarters. But I'd steer you to the kind of the rolling 12-month number that I quoted to be -- that should be a good starting point. Marc Grandisson : Elyse, if I may add to that point. I mean, also bear in mind, at Arch, we tend to be prudent in reflecting all the margin improvement early on. So we'll have to wait and see where the data takes us. I just want to make sure we keep that in mind, as we go forward. Elyse Greenspan : Okay. That's helpful. Thanks for the color. Marc Grandisson : Thank you. Francois Morin : Thank you. Operator : Our next question comes from Jimmy Bhullar with JPMorgan. Jimmy Bhullar : Hi. Good morning. So first just had a question … Francois Morin : Good morning. Jimmy Bhullar : …on pricing and -- obviously your comments are pretty positive. But can you sort of compare and contrast what you're seeing on the primary side versus what you're seeing in reinsurance broadly? Marc Grandisson : Yeah. So on the insurance side, there's a lot more activity, more price pickup on the insurance side. And that's why on a quota share basis, even though the seeding commissions have not decreased as much as they would have, otherwise in other hard markets. I think that if you're on a quota share basis, you've essentially taken -- you're participating alongside your clients in terms of rate increases. So whatever rate increase I would have included in my remarks on the insurance you could ascribe, to the quota share reinsurance participation. On the excess of loss, it tends to always lag a little bit behind. There's some benefit from the underlying rate, because the excess of loss pricing typically is a percentage of the underlying portfolio. So to the extent that, some rate increase at the primary level, the excess of loss would get presumably a bigger percentage. But I think that, it would be safe to say, that the softer markets probably gave a little bit less adequacy or probably more of a need for price pickup in the excess of loss, in general. And we're probably expecting this to start to happen soon. I think there will be some recognition that is sort of a second derivative of typically of a hardening market. I hope that helps. Jimmy Bhullar : And are you equally optimistic, or are there signs because you mentioned, property cat may be slowing down a little bit? But are you equally optimistic about the sustainability of the trend on pricing in both reinsurance and in insurance? Marc Grandisson : Yes on the excess of loss. Because like I said, if I go back to 2002, 2005 market, I think that, the excess of loss market got probably a lot better. It took to like 2004 to get there. So you need a couple of years of primary rate increases to start to find its way or their way onto the reinsurance excess pricing. It's a very normal hardening market. So I'm very encouraged actually. Jimmy Bhullar : Okay. And then just lastly you mentioned, credit quality on the MI side being strong. How are you, -- and obviously the labor market is very good as well. But how are you thinking about high property prices and just inflated values for homes? And how that factors into your view of the business that you're writing now? Marc Grandisson : If you were in an equilibrium in terms of supply and demand or the supply was plentiful, we'd be worried. That would take us back to the 2006 and 2007 period. But the supply and demand on the housing is such that, it should help maintain the pricing for quite a while. We have 1.5 million to two million homes missing in the marketplace. It takes a while to find their way to the market. There's also under built, as you know as we all read in the press. So, from our perspective, the house price appreciation is there. We look at over or undervaluation. We also have these metrics from our economist. And we're not seeing significant national overvaluations. So that's not another -- yet another -- not a concern. And the interest rates are still pretty low at 3% -- the mortgage rate that is at 3%. So the affordability is still pretty high, compared to historical metrics. So all of these, put together, it's never one dimension, right? And Jimmy, I mean, if you look at, I think overall if you across everything it tends in a positive direction. Jimmy Bhullar : Okay. Thank you. Marc Grandisson : You're welcome. Operator : Our next question comes from Josh Shanker with Bank of America. Josh Shanker : So I think I've asked the same question like from the last two conference calls. I'm going to ask it again. I look at the reserve releases in mortgage. And I look at the reserves per new case, in the 2Q 2021 numbers. And you're reserving more than ever for new defaults or delinquencies, as you're releasing the reserves. Yet the housing prices are appreciating. I'm trying to figure out, what the math is, about why the potential claim per loss keeps getting worse? Francois Morin : Well, you're asking a very good question, Josh. I think big picture, as you know, we're still -- there's still a lot that has to happen before we have more visibility until - in how the forbearance loans are going to pan out? How they're going to -- whether they're going to cure or whether they're going to turn to claim? And as you know, those are -- I mean, that's an 18-month process. So we -- if we look at the peak months of April and May of last year, their 18-month period will expire -- unless things change should expire in the fourth quarter this year. So that's when we'll certainly have again more visibility. And have a more definitive view on how to -- I mean whether reserves were too high or not. And so that's where we sit on that at this point. We're reacting a little bit to the data. But again we still feel there's quite a need -- a lot that needs to be settled before we take I'd say action on the current reserve levels. In terms of the new delinquencies, there's always tweaks that happen every quarter. You look at the average, the incidence rate and how severities and frequency assumptions that we put on the new delinquencies that get reported this quarter Again it's a smaller inventory of new delinquencies. So I wouldn't -- there's a bit more leverage in how those numbers play out. But big picture, I think we're still very comfortable with our reserve levels. Yes, I think you're implying maybe that we got too much. That's a possibility. But again we'll know more in the second half of the year. Josh Shanker : So when I look at the reserves, I guess the $55 million in reserves for current accident year period put up in the fourth quarter, is that a strengthening of average claim for the entire portfolio, or is that a new -- we think the new claims being put on 2Q, 2021 have the potential to be worse in terms of severity than the average claim currently on the book? Francois Morin : Yeah. I think it's the latter. We didn't really make any adjustments in terms of prior notices, so notices that were on the books before the quarter started. The thinking on the new notices is that the fact that they became delinquent this late in the game I'd say given that forbearance programs have been available for some time over a year, we think that there's a possibility that they could turn out worse than the ones that we got earlier. So there's a bit of a mindset or a philosophy that and time will tell. But given that they might have gone through all their savings and they might have tried a lot of things and now they finally turned delinquent. So that's a little bit of the -- I think the rationale behind these numbers. Josh Shanker : Okay. Thank you very much for the update. Operator : Our next question comes from Ryan Tunis with Autonomous Research. Ryan Tunis : Hey, thanks. Good afternoon guys. Marc, I guess my first question. Can you hear me? Francois Morin : Yes we can. Go ahead. Ryan Tunis : Sorry about that. So I had a cycle management question in with property cat. And I'm not being critical. I'm just curious. So a year ago, it looks like you wrote $118 million of premium. And this year you wrote $88 million. So you wrote less. I get the property cat is not the best place to be, but it feels like the rate environment was incrementally a little bit better. So I'm just I guess a little bit curious like what goes into the decision to as conditions improve actually decide that 2Q of 2021, we don't want to write as much as we did in 2Q of 2020? Marc Grandisson : It's a really, really good question. So I think a couple of things happen, right? Number one, we probably like everyone else have a different perception on the riskiness of the cat book, right? There's a -- we just had a wind storm in January. So that will definitely make you take a different look at the non-model losses, right? There's a lot of non-model losses that seem to have percolated way more than we expected over the last two, three years. So there's an element of loss cost expectancy and also as a result of that needing a higher margin of safety for your return. That's clearly the number one consideration. And as a second one that is not to be forgotten is also -- it's an allocation of capital. They're saying well where is a better use of capital? Is a risk-adjusted of X in cat worth as much as a Y in other property for instance or in casualty? And those decisions are made on a quarterly basis, I would almost say almost daily. So as you get a broader range of opportunities on the reinsurance side specifically, you're able to manage your portfolio and reoptimize the portfolio as you go at least maybe in a quarter or two quarters ahead. So that's sort of a thinking beyond the stock management with a view of optimizing your return, not necessarily betting all out, right? I mean, that's a one thing that Paul [ph] told me way back when is that you don't want to be unlucky. Property cat, if you have all these great opportunities and not excluding out of the cat realm, it probably be who is your manager to taper it down a little bit also provided because it's not as juicy perhaps as the other lines are appearing at this point in time. So it's a bit of a window we think. Ryan Tunis : Yeah, that makes sense. That's interesting. And then I guess just in mortgage insurance, seeing the attritional loss ratio, I mean yeah pretty much at pre-pandemic levels. I guess I was a little bit surprising just given there are some new notices and I felt like back in 2019 they're almost none. So is this sustainable, kind of, the 15% to 20% attritional, or is it something this quarter that was an unusual tailwind? Francois Morin : Well, I mean attritional excluding PYD that's how we think about it. Again I think I mentioned it in prior quarters where a 20% loss ratio is plus or minus that should be what you should get over the cycle. And there's a bit of noise with the CRT transaction. So I mean, there's moving parts within that. But yes 20% is absolutely sustainable. Ryan Tunis : Got it. And then just lastly just out of curiosity, I was wondering if you guys would be willing to share like an internal view of what your excess capital position is? Francois Morin : Well, that's not something we've made public in the past. And I think we're -- because it's a daily a moving target right? I mean there's -- we don't know what the market is going to give us. So we could give you a number, but then next tomorrow will be different. So it's just -- we rather want to keep the flexibility there. And that's… Ryan Tunis : I hear you. I thought I'd try. Francois Morin : Yeah. Ryan Tunis : Okay. Thanks guys. Operator : Our next question comes from Meyer Shields with KBW. Meyer Shields : Thank you. Two I think basic questions. First, I know there's a lot of commentary at Arch and elsewhere about if that was like prudent reserves, because of current uncertainties with regard to inflation. Is that -- let me phrase it differently. Are you releasing reserves more slowly now than you would have in the past because of that issue, or is that a current accident year issue? Marc Grandisson : I think, Meyer you're an actuary as I am. So you know that inflation impacts current accident year and prior accident year, right? So clearly we are -- it's part of the recipe if you will of establishing reserves. So we're trying to peg the historical trend as you know in a triangle is the best we can to the extent it's not captured within a loss development factors. So I think it's on both sides. Does that mean that we are releasing? Yes, I think that probably means that we historically have been a bit more careful in establishing our loss pick. If you look back at our history of combined ratio in the insurance group specifically, you'll see that we were much higher than what most people were in the industry. So I think that tells you that we were reserving at that point with a view of loss inflation that was more in the 3% to 5%, and we haven't changed our view really at this point in time except for, like I said in my comments certain lines, where it's probably appropriate to do a bit more. Meyer Shields : Okay. No I think that's the right call and it makes a lot of sense. Second question, in reinsurance. How should we think about the catastrophe exposure in the non-property cat, property book? Marc Grandisson : Well, it's part of the $676 million that Francois, mentioned. We're accounting for that but it's definitely less of a cat exposure. There is some in there but it's definitely not the driver of the exposure at all. So it depends on what kind of business you look at. The cat load on these premium, is anywhere from 5% to 10% sometimes a bit higher depending on the quota share you're writing. But in a lot of our other specialty quota share you had some but again much, much smaller. So I would say that, still the larger contributor to our PML is through the cat XL portfolio. Meyer Shields : Okay. Thanks, Marc. Thank you so much Marc Grandisson : You’re welcome, Meyer. Thank you. Operator : Our next question comes from Phil Stefano with Deutsche Bank. Phil Stefano : Yes. Thanks and good morning. Marc Grandisson : Good morning. Phil Stefano : One or two focused on the MI business. So of the $44 million in favorable development it seems like just shy of half of that was due to the GSEs and the cancellation of the CRT deal. The other $24 million give or take can you give us a sense of the vintage years associated with that, or what's driving that development? Francois Morin : Well, I'll be -- yes I'll give you a bit more specifics. So yes you're right just about half of the -- under half -- just slightly under half of the total was from the GSE call deals. And about a third I'd say is little tweaks again in call it COVID assumptions that we've kind of brought down a little bit. And that's across -- it's across all our books. So it's like a US -- primary US MI. It's across some CRT deal that are still around that we've made some adjustments on those reserves and also on the international book. So that gives you a perspective. And then there's just -- call it just under 20% of favorable development on runoff businesses or second lien and student loan businesses that have been in runoff for quite some time. So hopefully, that gives you the split Phil, and answers your question. Phil Stefano : Yes, that's great. That's great. Thanks. And I think, the PMIER's efficiency ratio -- sorry go ahead. Francois Morin : No, you go. Marc Grandisson : No. We're good. Phil Stefano : Yes. So the PMIER's efficiency ratio is pushing up near 200%. Maybe, you could talk to us about the ability to upstream capital? When the GSEs might let you do that, or do you go to the state regulators and contemplate getting permission for a special of some sort? Francois Morin : Yes. That -- as we discussed last quarter that's in the works. Second half of the year we are -- we've begun the process already to upstream. As you mentioned the dividend from our regulated entities to the holding company in the US It's -- some of it will have to be extraordinary and some of it is ordinary dividends. So there's -- we'll have to have some discussions with the regulators on that. I'd like to think that we can get them comfortable that with our current levels of total capital and some of it as you know a lot of it being trapped in within the contingency reserves I think they'll -- I think we'll be able to get them comfortable that the levels of dividend that we're talking about will be -- will meet their needs and ours. So stay tuned but I'd like to think that we'll be able to extract some dividends in the second half of the year. Marc Grandisson : If I can address for one second fill the GSE. The GSEs are allowing you to do a dividend without any approval at 150% or above right now PMIER. So at the end of the year it's going to go down to 115%. So we think we have flexibility even from that perspective even if you consider them as another gatekeeper of that dividend payout. Phil Stefano : Okay, Marc. Thank you. Marc Grandisson : Sure. Operator : Our next question comes from Brian Meredith with UBS. Brian Meredith : Yes, thanks. A couple of quick questions here. First, the decline you saw in your property cat reinsurance I'm assuming that was just reduction in Florida exposure. And I guess, on that question what does your Southeastern kind of Gulf exposure look like today versus last year? Marc Grandisson : It's down versus last year. But the first question on Florida we had some decrease in flow. But if you look at premium it's not as -- it's not a one-to-one thing Brian. I think that the reduction was also as a result of buying a few things to if you will round of the portfolio. So it's not necessarily all like, because if we get into this market trying to get our net exposure to a different level because of returns we use also some reinsurance buying to take care. So it's not only Florida decrease. Brian Meredith : Got you. Got you. And then my second question, is now that the Watford deal is closed. It is in some private hands no longer a public company. Any material or any meaningful changes in strategy here that you're anticipating with Watford here going forward different types of business they could write et cetera et cetera? Francois Morin : Yes, I'd say at a high level I mean still early days but at a high level I think you should think more of Watford, as a closer clone to Arch Re business or underwriting than what Watford was. Watford was -- didn't necessarily do all the same classes of business was very much focused more on the longer-tail stuff because of the additional pick up the assumptions that were in terms of investment returns that we're going to get. So, the call it the 2.0 business model of Watford makes it more similar to what the Arch Re portfolio or book looks like. Brian Meredith : Got you. So, results should actually trend towards ultimately trend towards what Arch Re looks like? Francois Morin : Much more so correct. Yes. Brian Meredith : Got you. And then I'm just curious on Watford, is there ability or any contemplation of maybe kicking on some of your mortgage insurance exposure going forward? Marc Grandisson : We actually write some mortgage on Watford. Yes there is some already existing. It's actually been one of the things they've done for quite a while. That's also something that the Watford shareholders were very pleased with giving them the opportunity to participate. Francois Morin : The only -- I mean that's an issue with ratings too like Brian. So, that's something that the ratings do matter for in terms of getting GSE and regulators comfortable. So, that's something that they're going to look into as well. Brian Meredith : Great. Thank you. Marc Grandisson : Thank you. Operator : I'm not showing any further questions. I'd now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thanks for everyone to be here and listen to our call and we're off to Cup Match and we'll talk to you next quarter. Thank you. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,021	4	2021Q4	2021Q3	2021-10-28	2.478	2.762	3.654	3.837	null	10.81	10.25	Operator : Good day ladies and gentlemen, and welcome to the third quarter 2021 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management’s current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also, will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company’s current report on Form 8-K furnished to the SEC yesterday, which contains the company’s earnings press release and is available on the company’s website. I would now like to introduce your host for today’s conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thank you, Liz. Good morning and welcome to our third quarter earnings call. We are pleased to have delivered solid results this quarter as our operating units generated a 9.3% annualized operating return on equity and a 12.5% annualized net income ROE despite an active catastrophic quarter. Premium writings and rate growth remains strong in our P&C unit, driving solid fundamental earnings while our mortgage insurance unit again produced excellent results. The current market condition allow us to demonstrate the value of our diversified platform and underwriting strength as they provide us with plenty of opportunities to deploy capital and generate an expected return on equity in the mid teens. In the broader P&C arena, we continue to see the market hardening along with ample evidence that our industry is addressing the adequacy of pricing across most sectors. The trajectory and market acceptance of rate increases reinforce why we remain optimistic that improved economics in the P&C market will be sustainable for some time. As you know, the P&C industry is facing many degrees of uncertainty; heightened care activity in four of the last five years, rising inflation, COVID ongoing influence on a global economy and enduring low interest rates. When faced with escalating risk, underwriters need both rate increases and conservative loss estimates in order to build adequate margins of safety into premium levels. With our agile underwriting, established teams and strong capital position, we are well equipped to grow into this improving market. Turning now to our operating units. We’ll begin with insurance, where our early focus on strengthening our underwriting capabilities and seizing recent market opportunities is working. Gross written premiums continued to grow substantially up 32% over the same quarter in 2020 and our accident year combined ratio ex-cats improved to 90.5%. This is another indication of the progress we have made in our specialty insurance business. We have been leaning into this hardening market for two years now as rate increases remain well above the long term loss cost trends and have spread to more lines than last year. Overall 2021 rates are up around 10% compared to 2020 and we expect that the benefit of higher premium levels will be realized well into 2023 enhancing our expected returns for that period. This quarter had many bright spots including positive rate increases have accelerated and lower limits account. These lines have previously lagged the increases in larger accounts that is no longer the case. Two, our early focus on Lloyds and business in the UK has improved our scale and our economics in this market. Three, some of our business lines that were most impacted by COVID, like travel are recapturing some of the lost volume, as both business and consumer travel increases. In summary, our specialty insurance group is making the most of the current opportunities. Pivoting now to our reinsurance group. It delivered strong growth in the quarter with gross written premiums up nearly 25% over the same period in 2020. On a net basis reported growth was only a modest 3% versus the same quarter in 2020 due to a catch up in sessions to Watford following the purchase of the company with our partners at July 1. Francois will provide more detail during his comments. But absent this one-off transaction, reinsurance net return premium growth was still very strong at 30% and our outlook remains favorable as similar to instruments, we’re experiencing broad rate increases in our specialty and casualty reinsurance lines. In the quarter our reinsurance segments reported a combined ratio of 106%, reflecting the effects of the third quarter caps, primarily Ida and the Central European floods. But reinsurance accident year combined ratio ex-cat is excellent at 83.2%. There are signs that property market rates could adjust higher due to cat fatigue, as you’ve likely heard on other calls this quarter. The recent five year period of elevated losses from catastrophes proves an important insurance adage. Losses don’t know the level of the premium. There are also early indications that retro sessional and aggregate excess of loss protections are becoming increasingly hard to come by and we believe that this will be reflected in higher property rates broadly. As you know, we were and remain judicious in the deployment of our cat PML, which was effectively flat in the third quarter. At less than 6% of our tangible equity, we remained under weighed in net property cat exposure and we will deploy more capital to the line as expected returns improve above our target. It’s too early to make a call on a January 1 renewal process, but pricing in this sector is heavily influenced at the margins and if ILS or other capacity phase, there is a possibility for significant rate corrections and increased engagement on our part. In the meantime, our reinsurance teams are demonstrating their agility and like insurance are leaning hard into the markets where returns are most attractive. Thirdly, our mortgage group continues to deliver exceptional returns. It generated $234 million of underwriting profit in the third quarter and continues its impressive rebound from last concerns associated with the pandemic. At September 30, insurance in force of $457 billion for the segment was up modestly. Further good news is that notices of default have declined to pre-pandemic levels at September 30, which is a good indicator of improved conditions. Additionally, loans in forbearance continue to decline as federal programs conclude and we remain cautiously optimistic that most of these loans will ultimately cure. Rising home prices have broadly increased homeowner equity and you will recall our position that equity levels are the best indication of whether a delinquency will ultimately result in a loss. We estimate that 98% of our loans in forbearance today have at least 10% equity, providing significant protection against potential losses. Overall, the MI market remains competitive but rational and our business continues to generate returns on capital in the mid teens. Mortgage originations continue to pay similar to last year’s record origination volume and credit quality remains excellent. As you know in all of our operations, we actively manage capital to enhance shareholder returns. The strong result in our mortgage segments have enabled us to optimize our capital structure via increased reinsurance sessions through our Bellemeade mortgage insurance-linked notes as well as traditional reinsurance. Additional reinsurance purchases enable us to reallocate capital towards faster growing areas and specialty property and casualty lines while enhancing our return profile and MI by reducing required capital. MI remains a very attractive business for us. Now a point of pride and interest to us and perhaps to you all is that last Saturday, October 23 Arch celebrated its 20 year anniversary. So I want to say to our investors, thank you for believing in us and to our employees past and present, thank you for your contributions to Arch for last 20 years and our client for showing support and conviction in our capacity to provide products to you. Finally, the PGA Tour is in Bermuda this weekend, so golf is top of mind. A golf tournament is interesting in that it takes place over several days and therefore consistency is critical. You have to be sure to pick your spot and lower your score. But if you want to make the cut, you have to limit the bogeys early so that you can play more aggressively in the stretch. And then once you get to the weekend, you can play with a bit more freedom and really try for the birdies and eagles. At this point in the cycle, we feel we’ve made the cut and now we focus on really taking advantage of our positioning to make sure we end up at the top of the leader board. Francois? Francois Morin : Thank you, Marc. And good morning to you all on this first day of the Butterfield Bermuda championship here in Bermuda. Thanks for joining us today. Before providing more color on our solid third quarter results, you will have observed that while our earnings release still makes a distinction between core and consolidated for purposes of comparison to prior periods, there is no difference between the two presentations this quarter. As we discussed on the last call the closing of the Watford transaction on July 1 gave rise to a reconsideration event and as a result of our updated VIE analysis, we no longer consolidate the results of Watford in our financial results. Our 40% share of Watford results is now reported in the income from operating affiliates line and there is no longer a need to make a distinction between core and consolidated results in our financials. As Marc shared earlier, our after tax operating income for the quarter was $294.7 million or $0.74 per share, resulting in an annualized 9.3% operating return on average common equity and book value per share increase to $32.43 at September 30, up 1.3% in the quarter, a very solid result in light of the catastrophe activity that was much higher than the long term average for this quarter, which we estimate that over $45 billion uninsured losses for the P&C industry approximately three times the average third quarter cat losses observed over the last 10 years. This quarter, I wanted to first give you some additional detail on the results of our reinsurance operations which were impacted by the Watford acquisition especially on the top line. As part of the agreement signed at the beginning of the year with our co-investors in Watford we committed to ceding varying percentages of the premium written by our Bermuda and U.S. treaty reinsurance operations to Watford effectively enhancing the existing business model to also serve as a sidecar for Arch. While their retrocession agreements were effective as of the start of the year, their signing was contingent on the transaction closing which delayed their recognition in our income statement until this quarter. As a result, the third quarter ceded written premium reflects a catch up of approximately 161.2 million from the first half of the year. The impact of the premium catch up adjustment on underwriting income for the reinsurance segment was minimal. Growth in gross written premium remained strong at 24.6% on a quarter-over-quarter basis, and growth in net written premium would have come in at 29.5% adjusting for the Watford catch up. The growth was observed across most of our lines but especially in our casualty, other specialty and property other than property catastrophe lines or strong rate increases and growth in new accounts helped increase the top line. The segment’s accident quarter combined ratio excluding cats stood at 83.2% compared to 83.1% on the same basis one year ago. On a year-to-date basis, the ex-cat accident year combined ratio has improved by approximately 250 basis points over the same period last year reflecting the improving underwriting results and most of the lines in which we write. In the insurance segment, net written premium grew 40% over the same quarter one year ago and the segments accident quarter combined ratio excluding cats was 90.5% lower by approximately 360 basis points from the same period one year ago; excellent results across the board, which demonstrate the progress or insurance segment has made over the last three plus years and improving its performance and provide us with optimism on the underlying quality of our franchise going forward. Losses from 2021 catastrophic events in the quarter net of reinsurance recoverable and reinstatement premiums stood at $335.9 million, or 17.4 combined ratio points compared to 12.5 combined ratio points in the third quarter of 2020. As noted in our pre-release, our P&C operations were impacted by Hurricane Ida, the European flooding events of July as well as a series of other events across the globe. Our mortgage segment had an excellent quarter with a combined ratio of 26.2% reflecting favorable prior development of $48.4 million about half of which came from U.S. MI from better than expected cure activity in pre-pandemic delinquencies and recoveries on second lien loans. And the other half from our CRT portfolio and international MI. The decrease in net premiums on a sequential basis was primarily attributable to lower levels of single premium terminations in the quarter for U.S. MI business and to a lower level of call to CRT transaction than what was observed in the second quarter. Recall the second quarter benefited from higher earned premiums due to an unusually high number of CRT transactions being called which we highlighted as effectively being a non-recurring event. The delinquency rate for U.S. MI book came in at 2.67% at the end of the quarter, a material reduction from the peak we observed at the end of the second quarter one year ago. We had another solid quarter in terms of production, mostly from the purchase market and with refinance activity coming down from prior levels the insurance in force for our U.S. MI book grew slightly. The increase from last quarter in the insurance in force of our international mortgage unit is mostly the result of the acquisition of Westpac Lenders Mortgage Insurance Limited in early August. Although income from operating affiliates grew significantly to $124.1 million it is worth noting that approximately $95.7 million of the total is attributable to a one time operating gains resulting from the acquisition of a 40% stake in Watford which was offset in part by a realized loss upon deconsolidation with a resulting net income gain of $62.5 million. The remainder of the operating income from affiliates represents our share of the net income generated this quarter by our operating affiliates, which consists primarily of Watford, Coface and Premia. Total investment return for our investment portfolio was de-minimis on a U.S. dollar basis for the quarter. Net investment income was $88.2 million during the quarter down by $1.2 million on a sequential basis, driven by lower coupons on fixed maturities and lower income on consolidated funds. The duration of our portfolio remains low at 2.68 years at the end of the quarter, reflecting our internal view of the risk and return tradeoffs in the fixed income markets. Equity and net income of investment funds accounted for using the equity method produced $105.4 million during the quarter, more than half of the total income generated by our investment portfolio and a key contributor to the growth in our book value. As we discussed on prior calls, we have increased our allocation to alternative investments in the last few years and these funds now represent approximately 12% of our total portfolio at the end of the quarter. We are also very pleased with their performance so far this year which stands at 13% year-to-date. Of note, had we included income from funds using the equity method in our definition of operating income, our reported operating ROE would have increased by 3.2% on a year-to-date basis to 13.3%. While these funds returns are potentially more volatile than core fixed income strategies, we believe the incremental returns they provide more than compensate for the liquidity constraints and volatility that are usually associated with them. The effective tax rate on pre-tax operating income was a benefit of 0.7% in the quarter reflecting changes in the full year estimated tax rate, the geography mix of our pre-tax income and an 8.2% benefit from discrete tax items in the quarter. The discrete tax items in the quarter primarily relate to partial release in the valuation allowance on certain U.K. deferred tax assets. Now a quick comment on the two acquisitions that we closed on this quarter, Westpac and Somerset Bridge. You will have seen that in accordance with purchase gap we established approximately 337.4 million of intangibles and goodwill this quarter most of which will be amortized through our income statement going forward. To help with your modeling efforts, we now expect our amortization expense to be approximately $25 million in the fourth quarter of this year and $21 million quarterly throughout 2022. On the capital front we redeemed all of our outstanding series e-non cumulative preferred shares for $450 million on September 30. Separately we repurchased approximately 9.7 million common shares at an aggregate cost of $386.9 million in the third quarter. If we include the additional common shares we have purchased in the fourth quarter the year-to-date totals are now approximately 24 million shares or 5.9% of the common shares outstanding at the beginning of the year for $917.7 million. Some of the additional share repurchases in the fourth quarter were effectuated under the new share repurchase authorization of 1.5 billion approved by our Board of Directors earlier this month. As we have said since our formation 20 years ago, our core operating principles are anchored in active cycle and capital management. We believe this quarter results demonstrates our ability to execute on this philosophy and leads us to invest in opportunities where we believe the returns are most attractive. At recent prices and with the prospect of improving returns, we believe buying back our shares continues to represent another compelling value proposition for our shareholders without compromising or capital flexibility nor lessening the quality and strength of our balance sheet. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : My first question Marc, you’re talking about the mortgage business you talked about buying more reinsurance. So there was more capital for growth on the P&C side, which I found interesting. In the past you spoken about mortgage running at around a 15 plus return and P&C kind of 10 to 12. Has the dynamics changed that that caused you to buy some more reinsurance to pursue more growth on the property casualty side? Marc Grandisson : Yes, I think all opportunities on the P&C side just have improved right over the last couple of years and I think we’re even more convinced of the length and that has legs for the foreseeable future. So that makes us be more proactive to balance, if you will, the capital allocation between more than one year. I mean, we did rely heavily on a capital deployed in MI for quite a while because the returns in P&C as release weren’t as attractive. But now that we have a new attractive and increase and improve returns in the P&C, it behooves us to balance the risk profile in the portfolio. That’s one of the reasons why we would do some more reinsurance and again, the reinsurance also helps our return on the net basis as well which is also another benefit. Elyse Greenspan : But are the returned numbers I gave still kind of where you see the three businesses. So 50% plus and then 10 to 12. Marc Grandisson : Yes. I would say on the P&C side, at least I would say it’s getting up is north of that now. I think we have our prospects closing, the gap is closing between MI and P&C if you will. Elyse Greenspan : So north of a higher than 12%. Marc Grandisson : I would agree. Yes, I would think it’s the case, yes. Elyse Greenspan : And then, in terms of capital, you guys put in place a 1.5 billion authorization. It sounds like you’ve bought back a little bit under that so far this quarter going through the end of next year. I know obviously, what you buyback depends upon the market also for your shares and the trading over the course of the next year. But when you put that in place was that designed to set a mark of what you will buyback, or either just other factors that could cause you to either fully buyback that level, or maybe come in lower, just help us kind of think through that as we think about capital return through 2022? Marc Grandisson : Well, I mean, two things. I mean, we bought, we’re close to a billion dollars this year. So we don’t want to go back to the Board every three months and ask for more. So we thought, okay, what may we need, could we need by the end of 2022, over the next 15 months effectively, 1.5 billion that’s just a number that nice round number, nothing special about it. But are we committed to that number? The answer is absolutely not. If the market keeps improving and we have the ability to deploy your capital, all the capital and then some in the business, we may not end up buying anything back. So it’s really, again, a function of the market conditions and vice versa. If the market doesn’t really generate give us a lot of opportunities to grow, we might be in a position where we buyback more than not. So it’s really, again, it’ll be a function of what we see in front of us over the next 15 months. And if we end up going through the billion and a half sooner than next year, then we’ll do something else. So again, it’s very dynamic, very real time I’d say and we’ll see where things take us. Elyse Greenspan : Thanks for the color. Operator : Our next question comes from Jimmy Bhullar with JPMorgan. Jimmy Bhullar : So first, I’ve question on just what you’re seeing in terms of pricing both on the insurance and reinsurance side. And to what extent do you think price increases are going to hold versus may be especially on the reinsurance market? Seems like things have been getting a little bit softer over through the course of the year. But how do recently high catastrophes affect your view of what one knows? Marc Grandisson : Right Jimmy. If we bifurcate the market into property cat you agree, I would tend to agree with you that the property cat raise did not increase as much as we had hoped collectively as an industry I would say not only at Arch, it’s not a single Arch phenomenon. Therefore, that’s why you saw us right less property cat over the last nine months as a reaction to those rate levels. It’s still early, like I said in my commentary, but I think we should have a re-pricing, definitely re-pricing in Europe and in the U.S. even for the layers that have been impacted, that’s for sure. And I think it would start to spill out even on to those that have not sustained a loss because I think there’s a recognition of heightened cat activity. And I think that the market is sort of bracing for that as we go forward. It’s going to be a matter of degree. On the rest of the marketplace I think that overall since if you look at the liability lines in general, overall you can think of in terms of a quarter share if you’ve got quarter share of casualty or liability lines you’re benefiting from the rate increases in the business and I think the ceding commissions which were held high through 2020 are starting to come down a little bit. So there’s a recognition that so there’s a bit of an improvement from that perspective and a quarter share on the excess of loss in general for liability, the ratio is stable to somewhat and is more stable, but again, you apply those rate against a base that is increasing in premium level. So they are also getting some price uplift. And I think that big as soon I mean, the reinsurance market, Jimmy feeds off of the insurance market, right in a positive way, I want to make sure it’s a positive message. We actually, we on the receiving end of a portion of what the insurance market writes and to the extent that interest market writes premium at a higher level, we are benefiting from those rate increases. Jimmy Bhullar : And then can you quantify how much you’ve got in terms of COVID reserves, especially for business interruption and I’m assuming they’re mostly still IBNR as you’d been quantifying last year and just discuss what the process would be and the timeline would be for releasing these given that for the most part, it seems like the courts have been siding with the insurance companies at least thus far in the U.S.? Marc Grandisson : Yes, I would say, I mean, we’re still very much, a lot of IBNR and our COVID reserves more than half, 60% or so I’d say, call it COVID reserves on the P&C side are still IBNR. So and how quickly do we, well, we know or not know whether we’ll need those reserves time will tell. I think it’s where we said yes I don’t disagree that so far there have been a couple of positive developments from the cores, but it's going to take a while. I truly think this is a very complicated and issue that will take years to resolve. So I wouldn't expect us to really take dramatic action on the level of COVID reserves on the P&C side for some time. Francois Morin : And Jimmy in our industry and insurance you could win 95 lawsuits and lose 96 and it changes everything. So there's a lot of uncertainty in our space, even though we've been a good streak one change could change everything. Jimmy Bhullar : And what is the rough number of or rough dollar amount of reserves? Francois Morin : That's a good question. I don't have it in front of me. We can circle back with you. I know we booked a few 100 million dollars last year and we paid some of that. I don't have the current figure, but we can give you that. Marc Grandisson : We haven't changed ultimate Jimmy over the last three quarters. Jimmy Bhullar : But it's not something like that's more maybe 2023/ 24 as opposed to 22 in terms of potential releases on these? Marc Grandisson : There are releases. I will say yes it will probably take another year, year and a half and we might hold a little bit more longer for the reasons I just mentioned in terms of the court decisions. Operator : Our next question comes from Mike Zaremski with Wolf Research. Mike Zaremski : Great morning, afternoon. I guess some of the prepared remarks, when you guys were talking about the primary insurance segment, talked about kind of seeing rate acceleration actually in the lower limits kind of the smaller commercial space. Any theories on why that's happening? Is it due to loss cost trend increasing, because we're kind of you're seeing a fading of rate a little bit or deceleration in the large account space. So kind of curious if, if you guys have any views, maybe broadly to, on kind of loss cost trend given all the uncertainty during the pandemic on the primary insurance side? Marc Grandisson : Well, the loss cost trend as we observe it, and it might change is still roughly 3% to 5% it depends on lines of business. But we have already changed our view on this at this point. And we had a loss reserve review, I believe, a couple of months ago. So then it's not changing, although we are putting in a loss ratio pick an extra level of margin of safety to make sure we wouldn't be missing because it could be higher as you know inflation is certainly another concern that we all have collectively as underwriters. In terms of my theory about why the smaller accounts get those rates right now, it's just, the market is a human psychology market. And pricing gets more acutely needed in a larger capacity play. This is where the market starts focusing its first efforts as the market hardens. And this is not unusual. This is a very, very normal phenomenon and hardening markets. You'll tend to try and fix those are more important, meaning you can put a 10 million to 15 million to 25 million limit, these are the ones you're going to try to fix right away, because presumably those will have caused you a bit more pain over the last two to three years, you were expecting more pains coming from that portfolio. And it's just a matter of time before people start looking sideways as to what other lines of business need rate. And then you start dipping down into your overall portfolio and seeing where the liability trends for instance, might also be impacted. And this is sort of a second round sort of a rippling effect from the main capacity providing players into the ones who have lower players and at the same time, to be fair, and to be I mean, to be truthful, you also have development ongoing happening on the smaller account at the same time. It's just not as acute and as glaring and as obvious early as a larger capacity play. That's why. Mike Zaremski : That's interesting. It's helpful. Let me switching gears to mortgage segment. Just curious I know the forbearance levels continue to decrease. If you could remind us I believe there's some extensions to the forbearance program or maybe even new kind of enhanced programs where the P&I could be reduced if the payment can be reduced by up to 25%. Is that correct? And if so, are you seeing your borrowers utilize those options? Marc Grandisson : Yes. So right now the program is done expires at 930, expired at 930 in terms of foreclosure but, the forbearance I'm sorry. The foreclosure, it's still unclear because they could also come back and extend it further if things were to change and the CFPB is also involved with the FHFA saying that we don't want to have any more, there's a moratorium on the foreclosure process as well. So I think both federal entities are trying to push to go back to your last point of the question, push the mortgage loan or the mortgage originator and provider of providing solutions to the borrowers who are still in forbearance or not current on their payments. And to your point a lot of it is going to be continuous same payment, most of it is going to be continuing the same payment as prior to the COVID forbearance program and is attaching towards the end the lack of what wasn't paid, or what was accrued as unpaid at the end of the loan. So this is roughly what it's going to look like. But it's going to be another three quarters before we have more visibility because even though the forbearance programs stopped in 930, and people should come now to the banks, and to the mortgage originator and trying to remediate their position from a forbearance perspective, it's still going to take another six to nine months, and I think the agencies are watching carefully. So everything is heading towards a happy resolution, if you will, of the overall forbearance programs like everybody is focusing on this as of this point in time. Mike Zaremski : And one last one sticking to mortgage and I could take this offline with, but just to want to the increased premium ceded as percentage of gross, is that due to Bellemeade and I guess if it is, can you guys continue to upsize the reinsurance usage in the segment, if you thought opportunistically you wanted to ship more growth towards other lines of business? Francois Morin : Yes. That's very much in that vein, I think Marc made the point earlier. We're always looking to optimize the portfolio and certainly a lot of that is focused on capital deployment. We I think, made the point, last call that we had increased our quarter share percentages on the U.S. MI book at 71. So that's starting to play through basically and that is reflected. We are still very active in the Bellemeade space. So we're purchasing quite a lot there as well and I'd say those two things combined really explained why we have more ceded premium starting this quarter. Mike Zaremski : Got it and there is more appetite, if you decided to do more, either quota or Bellemeade or both in the future? Are you kind of reaching kind of a max? Marc Grandisson : I mean I'd say we certainly do a lot of Bellemeade as it is. So I don't want to say we wouldn't do more, but it's I mean, we already are very active in that space and made big placements. So I wouldn't expect us to necessarily increase that vehicle, that mechanism to transfer risk a whole lot. And on the quota share, yes we see more we could, but then it's a risk return trade off and whether the economics work are reasonable or work in our favor, too. So right now we're happy where we're at. But if things change in the market gives us better opportunities we could conceivably see a bit more. Yes. Operator : Our next question comes from Josh Shanker with Bank of America. Josh Shanker : Yes, good morning, everyone. This may not be the best math, but it's rough. I think you guys had the inventory of COVID era Moore's claims, about 120,000, you had about 90,000 cures. I'm estimating that you guys have about $20,000 up or notice right now in the portfolio, may not be exact. Historically, you've had about an average of $5,000 up for notice. It seems like the reserves are stuffed particularly if you tell us that 90%, 98% of the claims have at least $10,000 in equity. So, I mean, I'm trying to rectify all this like, can you explain to me I feel so I've asked this question before I just don't understand what's going on there? Marc Grandisson : Yes. I think the answer is going to be very similar. So very good question. Hope you are -- by the police in back here. If you look at the average case reserved for annuities it's exactly 23,500 I believe it's in the supplement, you can look into it. And you're right. It was it went up from last year. The run rate pre-COVID was roughly 10,000, 11,000, 12,000, so it did increase. And was about 110,000 for claims that we got as well a COVID in the forbearance and about 78% of them have cured so far, so we’ve about 20,500. So [Indiscernible] we have about 31,770, I think is a number in terms of an NOD outstanding. When you multiply by 23, you’re right it would look on the high side, a couple things I will say here, number one is the average severity of the policies that are facing the COVID-19 are starting from 1819, we'd have a higher phase than the one we had as an NOD back in 2019. Those in 2019, were largely pre-2008. So you have to adjust for the level of coverage that has increased over the last 10-12 years. So that explains one why the 23 would be higher than 1113 historically. The second part of your question, which was where should it go, and this is where it's more art than science. Josh. We hear you. We are cautiously optimistic that it may not come to pass in terms of needing the reserves, and hopefully some of it will cure better than we anticipated. But I just want to remind everyone on call and as we remind ourselves all the time, it's that this is a political positioning. Things could change very quickly from the FHFA, the GSEs, or the housing department. So we need to be really careful and we've never been through that kind of event. So we are Arch as you know, and we will take a cautious, prudent approach to reserving. And if we happen not to need those reserves, as we do, typically, we'll be taking them by the hand from the liability side down to the capital side. We're not going to have let them stranded for a long time. But again, so much so many uncertainties Josh. We understand your puzzling. This is a very unusual situation for the industry. Therefore we have to and that's what we appear probably to be a little bit unusual in that we're reserving it. Josh Shanker : And my second question unrelated. Can you talk about the differential, I guess the new business penalty, between a new business you're putting on the book, and legacy customers who you have a deep sense of their risk factors on those accounts? Is there a gap? Is the business that you're renewing, at better margins at least the way you're booking it to new business, given that more about the business you already have? Marc Grandisson : I believe Josh, you're talking about P&C right. Josh Shanker : Yes. This is totally primary P&C not more. Marc Grandisson : Right. That makes sense to me. So it's a really very astute question Josh because we're keeping track of the renewal rate versus a new business rate level. And symptomatic or as a representation of the hardening market, the pricing of the new business is coming higher than the renewal business and that's sort of speaks to the fact that they need a new home and they need to be re-priced, and people sort of get tired of that relationship and that goes back through them back into either the ENS or the mid market. So right now, we're still seeing, on average, the new business price better than renewal business. Operator : Our next question comes from Tracy Benguigui with Barclays. Tracy Benguigui : Thank you. Just a big picture question. I’ve seen this quarter with you and your closer peer group is that the insurance growth is outpacing the more primary market focus players without reinsurance arm. Are you seeing a lot of market dislocation where you feel like you just do a better job assuming displaced risks that still meet your risk adjusted return hurdle? Marc Grandisson : I would like to think we're better than the average guy out there. But the truth I think, overall, the dislocation was much larger in 2020. I think you're still seeing some dislocation right now. It's certainly not, there is still some repositioning of limits provided the market by a lot of players still as we speak. And I think what explains our ability to grow is, first we have a really well established presence and we were very underweight Tracy, historically. We are really, really a good market for people that want a good security for products such as DNO for instance, right. We're really good home for someone to take on new as an insurer, and we're sort of better we're definitely benefiting from that as an incumbent with a good quality, good reputation as we do. And also, I think the other thing that I want to mention, we had said that last year, we were suffering a little bit from, from a travel, lack of traveling that impacted our travel portfolio. That certainly helps right Tracy, the fact that economy is reopening and people traveling a bit more. That also helps explain why we're able to grow a bit more than probably meet the average than the average would. Lastly, I would say that beyond just new business funding new homes I think they are programs were also going in programs, as you see this is very specialty, smaller risk. I think that again another example of programs, finding a new home going away from the existing incumbent, possibly because of our results in finding a new home and we're definitely on the receiving end of that relationship. Francois Morin : Yes. And one thing I'll add quickly, I think, both depending on the mix of business of what you call the more established and the traditional insurers I mean workers comp and commercial auto typically will make up bigger shares of their portfolio. Auto is moving up nicely, but I would say that certainly comp is and had a really good period of excellent results. So rate increases on the comp side have been pretty flattish. So again that's probably worth adjusting for comp because it's such a big line for some of these carriers. Tracy Benguigui : And I'm wondering how much of that is structural in nature like, are others raising attachment points, and you're lowering attachment points or offering lower deductible? Marc Grandisson : No. We don't do that. No, we don't play that game. I think we would just be replacing most of our play typically on specialty lines Tracy is mid access versus second access is sort of what we play a lot of times and high access, of course, in certain our areas. So for the record Tracy we're not seeing any of the deductible being played out in the marketplace. And that's been fact, there are deductible increases, if anything else. We just see a lot of shortening of limit toward in the stacking. We saw that in 2020. It's ongoing as we speak, instead of adding stretch of 25. I'm talking about a larger placements. You'll have stretches of 10 or 5 or 5 or 10, really in 15, perhaps till saying but there's a lot more players needed to fill up the towers. That's definitely happening more so. It's still continuing to some extent less sort of in 2020. Tracy Benguigui : And then just shifting to reinsurance where are you seeing your favorable reserve development coming from? Marc Grandisson : Yes, I mean, the vast majority, and we'll talk to it obviously in the Q1 the vast majority is in short tail lines, I mean, I'd say probably 80% in short tail lines. Mostly property other than cat where we've grown a lot in the last couple of years, and while the tail is always a bit longer than we think it should be, it's still we have a pretty good idea to three years out after writing the policy or the account and we're seeing a lot of that coming through in this quarter, a bit of favorable development on prior year cats as well. And a bit on trade credit and surety from a few years ago where we had some reserves that proved out to be a bit more required. So we released those this quarter. Operator : Our next question comes from Meyer Shields with KBW. Meyer Shields : Thanks. This is a cycle management question, I guess for Marc. When if ever do we decide that there's never going to be an appropriate hard market and property patent just get out of the line? Marc Grandisson : I think that by virtue of well, first, I'm an optimist. I've always been an optimist. I've heard so many times over the last 27 years from some of our own underwriters that there will never be a hard market again. And when I hear this it's music to my ears because that means we're cruising for bruises. So I think that things will get better and get at some point. It may not be this quarter, but might at some point. Numbers speak for themselves. If you lose money every year people just get disenchanted and just walk away from. It's happened early storms in Europe, 92 Andrews earthquake in California 94, terrorist attack Katrina, Rita and Wilma. I mean there's always changes and it's not I rattled by five or six of them. And you got to believe that the world is a dangerous place Meyer. So I think something will happen and again losses don't necessarily change the market pricing, but perception of risk will and would. So maybe we're on this place where people say, you know what, why bother? And if that's the case, then that's in the demand for cat as protection is inelastic. So if supply shrinks then the demand will stay as is and pricing will therefore increase. So I'm an optimist. I'm not sure when it's going to happen, but I believe it will happen at some point. Meyer Shields : No, I understand. That's exactly what I'm looking for. Thank you. Operator : Our next question comes from Brian Meredith with UBS. Brian Meredith : Yes, thanks. A couple quick questions here for you. First, just want to follow up on the comment about new business pricing better than renewal pricing. And I've heard that from other carriers. I'm just curious, when you actually go to book the margin on that new piece of business are you booking a better margin than perhaps that renewal piece of business? Or do you have to build in some level of cushion because it is new? Marc Grandisson : Well, it's that's a very good. I think the latter part is what we would do. But even we would also take a higher level of cushion margin of safety, if you will now reserving even in our renewal business. I think that we're reserving wise and loss ratio pick wise at Arch we tend to be more conservative and hope for the best. And hopefully, good news come down later. We're trying to figure out a way to have as much cushion as we can early on so that we're not surprised down the road. That's not changing. We say the same approach renewal or new business, right? Not much of a change. Brian Meredith : Not much of a change. Got you. Second, just quick question here. Are we still seeing admitted market shed business to the ENS market? Or is that slowed? Marc Grandisson : That's slowed down a little bit, but it's still happening. We're not seeing a return back to the market quite yet. It's going to take a little bit longer, we think. Brian Meredith : Got you. And then one kind of bigger, I guess, philosophical question for you. I think with MI business clearly you've demonstrated that it is not a big of a volatility businesses maybe some perceived just given the results we've seen through this recent crisis. If that is indeed the case, in the amount of cash that business throws off, because it's not a growth business I guess I see you guys using share buyback as your means of capital management, and I completely get that where your stocks trading now. But what about a dividend? In the end, maybe remind us about your philosophy with respect to a dividend? Francois Morin : Well, I mean, I'll take that, Brian, I think it's something we talked about with a board and between ourselves all the time. We had a pretty long discussion at our last board meeting on that. It's always on the table. I'd say right now I mean I think it's, I mean, the share buybacks that we went through this quarter were very attractive towards economics. We were very much I think they're easy to justify, justify sorry. But could we ever introduced a dividend? Certainly that's on the table. Not saying it's imminent, but it's something that we evaluate pretty much definitely regularity. And we'll keep looking at it. Operator : Our next question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : Hi, thanks. Just one additional question. You guys spend time highlighting that session to Watford in the quarter, given that that transaction close. So my sense is, they're going to become more arched like in terms of the business that you're receiving to them versus prior to this transaction. So as we think about your 40% stake, can you just help us think about the earning stream there? Because I would think that as we go through next year that that could become a meaningful contributor to your earnings as the underwriting income of Watford pick up from what we're used to? Marc Grandisson : Yes. I think the 40% share would grow at an average sort of reinsurance market results. Why? Because we are writing business on the balance sheet of Watford. So you would expect that. I think that what you would also see is our collecting fees or for our efforts, a compensation for our efforts for Watford's that would be for the 100%. So I think that the overall return would be slightly better even though at least as you can appreciate with the accounting rules it might not show us such but I think that our results will be as good I would hope for if not better than our overall results. So it's definitely an a creative return generator for reinsurance platform. It's going to be hard to see. Elyse Greenspan : And that should pick up within that other income line as we move through next year? Marc Grandisson : Yes, so a couple yes so 40%. Correct. The other income line is well, the fees are picked up by the reinsurance sector because it's for the underwriting services they provide to Watford. But you're correct in saying that the net equity picked up of the 40% that we own in Watford if you're modeling and what kind of combined ratio is it going to operate at, what kind of premium are you going to see in terms in the volume I would you're right. I mean, it's probably more and more over time, it's going to look more and more like archery, the reinsurance segment. The percentages we seed to Watford are not uniform across all our divisions, but directionally, I think that's a good way to think about it. And the other thing, too, which has somewhat been an issue with Watford is the performance of the investments. And that has, that's being a little bit as being addressed as we speak. I think there's a process underway to reduce the volatility from the investment portfolio of investment strategy at Watford. So think of it more as that, yes, a more less volatile stream of income with more reliance on underwriting income and less on investment income. And hopefully that gets you in a good place to start modeling out how Watford is going to play out for us or the 40% for Arch going forward. Elyse Greenspan : And then maybe I'll squeeze one last and I'm not sure if you provided an updated tax guidance. And so I missed it, if you can just let us know that. And then we've heard about some potential tax changes whether in the U.S. and also abroad in relation to Bermuda, any kind of prospective tax loss and just some of what we're hearing in the market and how that could impact Arch? Marc Grandisson : Yes. I'd say first of all that question your fourth quarter, we're still in the 9% to 11% kind of tax rate for Arch in the fourth quarter. For 2022 and beyond and Marc will chime in its way too early. Unfortunately, we track it we look at all developments very carefully we're on top of things. And the reality is they change daily. So it's very hard for us at this point, to give you any kind of guidance or any expectations and what we think 2022 is going to look like. We will be more than happy to have a good discussion on the next call. But for now, it's we feel it's just premature to because we really don't know. Francois Morin : At least just to make the point about daily, literally last night our tax director, or this morning just sent us like there's a new proposal on the Hill that brings back shield and then corrects other things and then dispenses of other areas of the tax proposal in [OECD]. So, again, a moving target. It's politics. We will react to it when we do, when we see it. Operator : Our next question comes from Matthew Carletti with JMP Securities. Matthew Carletti : Thanks. Good morning. I just wanted to circle back on the discussion about kind of pandemic reserves and Marc, you're pretty clear on the P&C side in terms of get 95 good outcomes, but the 96 can change everything. How about MI? I mean it kind of follow up to Josh's line of questioning, like things look pretty conservative there. Can you help us with a little bit the timeline by which things can kind of continue to unfold well the timing by which we might see things unwind? Francois Morin : Well, let me start, I'd say we may see a little in the fourth quarter, but that will be, I don't think everything will be resolved. But I truly think that the first half of 22 is when you'll see most of the movement or the corrections and our assumptions and the link cure rates and mediation so I'd say we're going to start seeing some data as early as this month internally and the number of cures and people moving out of forbearance, but the way it's going to flow through our numbers, again, given some of the uncertainties that Marc talked about, I think will be first half of 22. And the reason also Matt has to be said and understood that they had 18 months of forbearance worth when you get into forbearance earlier in 2020. And some of them went into forbearance, came out of forbearance and went back in again, but they still get to get to do to benefit from 18 months was forbearance. That's why some of them will coming out of there 18 months in fourth quarter, and many of them in the first and second quarter next. So it seems like some of them were able to get back current for four or five months and went back to forbearance program. That's what we have this lengthy adjustment period. Matthew Carletti : Alright. Thank you. That's very helpful. Thanks. Operator : I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you so much for being here. We're going to be, going from watching some golf, Francois and I and happy 20 years and have a good weekend everyone. Thank you. Operator : Ladies and gentlemen thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,022	1	2022Q1	2021Q4	2022-02-10	2.942	3.28	4.093	4.34	null	10.26	10.12	Operator : Good day ladies and gentlemen, and welcome to Arch Capital Group's Fourth Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please [Operator Instruction] on your touchtone telephone. As a reminder, this conference call is being recorded. Before the company get started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call, may constitute forward-looking statements under the federal securities. So federal securities laws, these statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also, will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished by the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference. Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thanks. Atif. Good morning and welcome to our fourth quarter earnings call. We ended a good year. Here with a great quarter on the year Arch generated a return on net income of 16.7%. And importantly, book value per common share grew by 10.7% with net earnings per share of $5.23. We accomplished these results despite elevated CAT activity, and a short-term effect, that substantial share repurchases had on our book value per share. Our ability to effectively allocate capital also contributed to our 2021 results. Whether opportunistically investing more resources into the most profitable pockets of our business or buying back $1.2 billion worth of our common shares fully, 7.7% of the shares outstanding at the start of the year. We remain committed to a capital management strategy that creates value for shareholders. I'd like to begin by sharing some highlights from our operating units. In our P&C insurance segment, net written premium grew 24% and earned premium grew 34% over the fourth quarter of 2020 as we earned in the rate increases of the past several quarters. Growth occurred across many lines with profession lines and travel exhibiting the strongest advances. Overall submission activity and rate momentum remained healthy and rate increases were above loss trend. A change in business mix led to a slightly higher acquisition expense in the quarter. However, we believe that this increase belies the underlying return potential of the segment. More accurately, it is a reflection of the insurance group's outstanding job or positioning itself to act on the better opportunities available in today's market. Turning now to reinsurance, our shareholders continue to benefit from the extraordinary talents of this group, which grew gross written premium by 88% and net written premium by nearly 45% from a year-ago. On haul, the reinsurance group grew in nearly every line, a reflection of our diversified specialty mix of business and our larger participation in quota share reinsurance, which allows us to participate in the improved premium rates of [Indiscernible] more directly. Briefly on renewals at January 1st, while property cut raise were up broadly, the increases were not enough for us to deploy more capital into our peak zones. However, we found many opportunities to grow in the other 93% of our reinsurance business, that its specialty in nature, including property ex-cat. Finally, onto the mortgage segment, which again delivered excellent underwriting results, even as written premiums declined in the quarter. Seasonally, the fourth quarter, as you know, it's lower for mortgage originations and rising interest rates further depressed refinance activity reducing new insurance rhythm. However, our insurance in fourth, the ultimate driver of earnings, still grew modestly in the quarter mainly due to the lower refinancing activity. Credit conditions remain excellent in the U.S. with a strong housing market and demand for housing continuing to exceed supply. As most of you already know, home price appreciation remains robust across most of the country. This is a net positive for mortgage insurers as increasing borrower equity ultimately leads to a lower risk of default. Competition in this sector remains robust but stable, and we believe that the better credit quality of our recent originations compensates for marginally lower premium yields. We continue to focus on a more stable returns available in higher credit quality business, instead of broadly chasing top-line growth, a luxury afforded to us by our diversified model. Turning to the fourth leg of our stool, investment income contributions were up materially for the year, primarily due to alternative investments accounted under the equity method. These investments are primarily fixed income in nature, but because of the structure of our investments, their contributions are excluded from net investment income and our definition of operating income. Notwithstanding, these investments contributed $366 million or $0.92 per share for the full year. Over the past five-years below the line investment returns have added between 75 to 125 bps to our net ROE. But taking a step back to get more of a big picture view, we like the way our businesses are currently positioned. Within our P&C segments, we believe that P&C pricing and returns have more room to grow in this part of the cycle, and in the mortgage segment, insurance in force is benefiting from both solid credit conditions and good house price appreciation. Underwriting income for our P&C insurance and reinsurance segments expanded significantly in the fourth quarter. It's worth noting that if we were to include components of investment income that relate to the flow-generation farm underwriting. P&C [Indiscernible] contribution to arches earnings were roughly in balance. We believe that this balance improves the risk adjusted returns for our shareholders. Our corporate culture of being patient in soft markets while maintaining an agile mindset is a key to our success and allows us to seize opportunity when the odds for success are more in our favor because different sectors have their own cycles, our disciplined, defensive underwriting during the softer parts of the cycles is what has enabled us to grow faster than many of our peers in the current environment. We have begun to read the benefits of the strong defensive posture we maintained from 2016 through 2019. The Winter Olympics are underway, and I found an analogy to our business in a somewhat unexpected place. The most exquisite and exciting game of Curling. You may or may not be aware that Curling has been dubbed, chess on ice. And like insurance, it's much more strategic than the uninformed may realize. Curling is played over ten long ENS or rounds. A defensive strategy is most common, patiently waiting for an opening to pivot to offense. Unfortunately, defending is not exciting. It's about minimizing your opponent scoring opportunities and avoiding mistakes. But like insurance, patience is often handsomely rewarded because when her opponent makes an error, the SKIP knows that now is the time to pounce and all of a sudden, patient is out-the-door and action is in. Most games are won in that one crucial reversal of fortune. That's how we play the insurance cycle. One year at a time, patiently waiting for the market to give us that opening. And once we see it, we're all-in, just like the last 2.5 years and counting. Don't ever let anyone tell you that curling or insurance are not exciting. For 20 years, we've been committed to taking the long-term view of the insurance cycle being thoughtful and balanced with our capital management strategy and differentiating ourselves by being committed to a specialty model, all with the aim of enhancing shareholder value over the long term. Although every year is different and markets aren't always predictable, we've demonstrated that we can succeed in any market. So we're looking forward to what 2022 has in store for us. Francois? Francois Morin : Thank you Marc. And good morning to all. Thanks for joining us today. As Marc shared earlier, our after-tax operating income for the quarter was $493.3 million or $1.27 per share, resulting in an annualized 15.6% operating return on average, common equity. Book value per share increase to $33.56 at December 31 up 3.5% in the quarter. For the year, our operating return on equity stood at 11.5% while our net return on equity was 16.7%, excellent results in deed. In the insurance segment, net written premium grew 23.7% over the same quarter one year ago. And the accident quarter combined ratio excluding [Indiscernible] was 91.2%, lower by approximately 240 basis points from the same period one year ago. The growth was particularly strong in North America, where a combination of new business opportunities and rate increases supported this profitable growth. One item to note this quarter for the insurance segment relates to the acquisition expense ratio, which was higher than in both the prior quarter and the same quarter one year ago. As we mentioned in the earnings release, some of this increase is related to premium growth in lines of business with higher acquisition costs such as travel. But it also reflects increased contingent commission accruals on profitable business, as well as lower ceded premiums in lines with higher ceding commission offsets. As we have said before, our focus remains on the returns we are able to generate from all our businesses, and we remain positive on the current pricing environment and the opportunities that should be available to us in 2022. For the reinsurance segment, growth in net written premium remain strong at 44.5% on a quarter-over-quarter basis. The gross [Indiscernible] the growth was driven by increases in our casualty property other than property catastrophe and other specialty lines where new business opportunities, strong rate increases, and growth in new accounts helped increase the top line. For the full 2021 year, the ex-cat accident year combined ratio was 84.4%, improving by approximately 160 basis points over the 2020 year, a reflection of the underwriting conditions we have seen in most of the lines we write. Losses from 2021 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $72.3 million or 3.5 combined ratio points compared to 9.4 combined ratio points in the fourth quarter of 2020. The losses came from a combination of fourth-quarter events including the December U.S. tornadoes, and other minor global events, as well as some development on events that occurred earlier in the year. Our estimate of our ultimate exposure to COVID related claims decreased by approximately $3 million during the quarter. We currently hold approximately $195 million in reserves for this exposure. Two-thirds of which are recorded either as ACRS are IBNR. Our mortgage segment had an excellent quarter with combined ratio of 11.7%, due in part to favorable prior-year development of $72.9 million. The decrease in net premiums earned on a sequential basis was attributable to a combination of higher levels of premium ceded, a lower level of earnings from single premium policy terminations, and lower U.S. primary mortgage insurance monthly premiums, due to lower premium yields from recent originations, which were of excellent credit quality. While approximately two-thirds of the favorable clean development came from [Indiscernible], related to better than expected cure activity and recoveries on second lien loans. We also saw favorable prior year development across our other mortgage units includes our CRT portfolio and our international MI operations. Consistent with historical practice, we maintain a prudent approach and setting loss reserves, especially in light of the uncertainty we are facing with borrowers exiting forbearance programs and moratoriums on foreclosures. The delinquency rate for our US MI book came in at 2.36% at the end of the quarter, more than 50% lower than the peak we observed at the end of the second quarter of 2020. Production levels were down from last quarter, certainly a typical outcome given the seasonality in new purchases, and also partially, as a result of the lower level of refinance activity due to higher interest rates. Offsetting lower origination activity in the quarter is the improving persistency rate now at 62.4%. We expect persistency to keep improving throughout 2022 on the heels of lower refinance activity. This goes well for our insurance in force portfolio. And accordingly, the returns we can generate on our mortgage business. Income from operating affiliates stood at 40.6 million. Again, an excellent result primarily as a result of contributions from Coface and summer's reef. We are pleased with the returns these investments have generated for us so far. Total investment return for our investment portfolio was 39 basis points on a US dollar basis for the quarter. And net investment income was $90.5 million this quarter up slightly, in part due to slightly higher dividends on equity investments. The duration of our portfolio remains low at 2.7 years at the end of the quarter, basically unchanged from last quarter and reflecting our internal view of the risk and return trade-offs in the fixed income markets. Alternative investments representing just under 15% of our total portfolio performed well this year, returning 12.6%. The portfolio we have constructed has a slightly heavier bent towards debt strategies and should produce we believe, returns that are relatively less volatile over time given the level of diversification across sectors and geographies. Amortization of intangibles was $33.1 million up sequentially as a result of the acquisition of Westpac LMI and Somerset Bridge Group Limited which were completed in the third quarter. For your modeling purposes, we are currently forecasting an amortization expense of $110 million for the full 2022 year which is expected to be recognized evenly throughout the year. The effective tax rate on pre -tax operating income was 4.7% in the quarter, reflecting the geography mix of our pre -tax income and a 2% benefit from discrete tax items in the quarter. That discrete tax items in the quarter primarily relate to a partial release in evaluation allowance on certain international deferred tax assets. For 2022, we would expect our tax rate on pre -tax operating income to be in the 8% to 10% range based on current tax laws. Turning briefly to risk management, our natural account PML on a net basis stood at $748 million as of January 1 or 5.9% of tangible common equity which remains well below our internal limit at the single event 1250 year return level. Our peak zone PML is currently in the Northeast U.S. On the capital front, we repurchased approximately 8.7 million common shares at an aggregate cost of $362.1 million in the fourth quarter. And as Mark mentioned, we repurchased almost 31.5 million shares at an average price of $39.20 in 2021. Our remaining share repurchase authorization currently stands at $1.18 billion. Finally, I wanted to take a quick moment to thank over our over 5,000 colleagues around the globe in what has certainly been a challenging period. Without their ongoing commitment to Arch and its constituents, we certainly won't have been able to generate and report record earnings today as we closed the books on our 20th year. Your efforts and dedication are truly appreciated. With these introductory comments, we are now prepared to take your questions. Operator : Thank you if you have a question at this time, [Operator instructions]. Our first question comes from the line of Elyse Greenspan of Wells Fargo. Your line is open. Elyse Greenspan : Thanks. Good morning. My first question follows up on just some of Francois concluding comments going to capital management. Recognizing where your stock is today, can we just get some updated thoughts at how you guys think about share repurchase at these levels? And if at some point the valuation continues to expand, would you consider the use of a dividend to return capital to shareholders? Marc Grandisson : Well, as you know, the top of mine and top priority for us, is to put the capital to work in the business. And we're seeing plenty of opportunities to continue in our growth trajectory, so I'd say that remains the key focus. But as you saw last year, you had no question that we've accumulated a bit of capital that we didn't have the options to deploy and put to work, so yeah, we did return a fair amount to shareholders last year. What ends up happening in 2022 is a bit of an unknown. We'll keep looking at our opportunities. Certainly, if you have the 1.3 times book multiple is something that we've looked at, and we talked about a three-year payback and how we look at share repurchases. But the business is doing very well, so I'd say that the current prices are maybe a little bit above where the three-year payback might come into play. But there's also other things, all other factors we consider and I'd say, that to your final question, like, would we think about a dividend, that's something we discuss with the Board regularly. And right now, as you know, we haven't declared a dividend, but things could change down the road. Elyse Greenspan : And then Mark, I think you said that the earnings mix to allocate investment income between the segments is around [Indiscernible] was around 50-50. Sorry. If you think about them, that can for 2022. Would that sway more in the direction of P&C or mortgage? Or how do you see that earnings mix playing out over the coming year? Marc Grandisson : Yes, I think it will slightly go towards P&C. I mean, absent cats and everything else, obviously at least, as you know. But overall I would expect to be seen at 50. Maybe a bit more towards the P&C as we go forward. Okay. And then one last one at the [Indiscernible] the process of rolling out some capital changes. And I know we're in the middle of the comment per year, but I wasn't sure if you guys can just share with us just some high level thoughts just on what they put out there at how could potentially impact our Arch. Thank you Elyse Greenspan : Sure. Marc Grandisson : Yeah. Listen, it's comprehensive. We obviously are studying it pretty deeply. We've got a large team internally that's focused on [Indiscernible] because it touches everything, right? It touches mortgage, it touches cat losses, and it touches reserve risk, so all the risk charges investments. There's a lot of things that are being suggested by S&B as to how they want to move forward and we'll be ready and we'll certainly most likely respond to their RFC in the coming weeks. And we'll see how that plays out. But big picture, I'd say its [Indiscernible] there's pluses and minuses as you'd expect. There are things that we think are [Indiscernible] we've been working with them over the last few years and trying to address, and looks like there are some changes coming through potentially, and some that we, I'd say didn't expect and maybe a bit more punitive and we'll adjust as time goes on. But still a bit of a ways to go before we have finality, and have the clear picture on what this all will mean for everybody. Elyse Greenspan : Thank you. Marc Grandisson : You are welcome. Operator : Thank you. Our next question comes from Josh Shanker of Bank of America. Please go ahead. Josh Shanker : Thank you. I was hoping you might help us think about other going forward. We have summers, we have Coface. What's sort of thoughts can you give us about the run rate goals for that unusual line and even the P&L and what sort of volatility should we expect from it? Marc Grandisson : Well, certainly I'd say, that this quarter maybe the first [Indiscernible] it is the first quarter where we, let's say, there's no I call it noise, right? It's more recurring business as usual for both of them and also premier and all the other smaller investments that we haven't had operating affiliates. We as you know, in the balance sheet, we've got over call it a billion dollars of investments or equity in those vehicles. There's a reason why we made the investments, we think they can generate good returns for us. And that's how I would think about it. On your side, I'd say what kind of ROE should I expect from those businesses over the last [Indiscernible] over the 2022 period, given there's a billion dollars invested? I will let you can make your decisions on that are model it out, but that's how we would suggest maybe you think about it, as an ROE basis given there's a billion dollars or so [Indiscernible]. Francois Morin : And Josh you actually have one that's coming from Coface, obviously, was a public company that's helpful to you guys and also in the rear. So you had a good sense of where we're going the next quarter. On the summers, which is the old walk through it I think, it's fair to say that it would track a P&C return. It would tend to stand at this looking like a P&C insurance company. So I will describe those return just to help you give you a sense of the magnitude and the relative magnitude between the two. Josh Shanker : And then in a little bit of shrinkage on the mortgage side of things, if you can talk about your rankings, mortgage reinsurance, insurance, share buyback. They're all attractive I know, where are the best returns right now? Marc Grandisson : I think from a cut-down I would say that mortgage is still just currency, right? Because longer-term they might have different, that's also why I'd explained a couple of quarters back that you maybe positioning yourself in areas where the returns maybe not as high comparatively but there's a longer-term reason for this. For the high level right now, Josh, mortgage is number one, number two, I would say is reinsurance and three is insurance but [Indiscernible] and the investment income potentials in the future improving will again bring up the insurance and reinsurance. But they're not very much different from one another. I mean, there used to be a lot wider difference between them three or four years ago as you know, but now the market the hardening market on the P&C side has made them all very, very favorable and very attractive. On the share repurchase you heard Francois say so, where [Indiscernible] what we bought it at, and what we think of it. So it's still always a possibility and I would say on the capital management, as Francois mentioned, [Indiscernible] only returns specific in [Indiscernible] in terms of returning it, if we don't [Indiscernible] if we can't find anything more interesting to work with, a higher return. But I think right now we have a lot of opportunity. Josh Shanker : Thank you very much. Marc Grandisson : You're welcome. Operator : Our next question comes from Tracy Benguigui with Barclays. Your line is open. Tracy Benguigui : I would like to touch on the expense ratio. Francois, you mentioned increased contingent commission accruals on profitable business. And I'm assuming you mean with MGU maybe you could just walk us through how that structure works. I think there's a multiyear look-back period and where I'm going with it is essential, if there's a lot of in calculating that profit sharing component, should we expect this profit sharing components sticking around for a while to catch up with all the good work you've done on underwriting profitability? Francois Morin : Well, as you can imagine, there is lots of different types of agreements with all our producers, U.S. international. And so going into the specifics would take a lot of time, but I'd say at a high level, no question that if we book a lower loss ratio on business in some situations that does trigger a higher contingent commission and that has to go hand-in-hand and how we accrue it, how we book it in the quarter. As long as the business is performing well and then yes, it gets [Indiscernible] the settlements take place over a period of time with true-ups, etc. But at a higher level, no question that, as long as the business performs well and the loss ratio has remained half the level they are at right now, we would expect commensurate levels of contingent commission to be there in place over time. Tracy Benguigui : Got it. And then, on the same topic. I mean, basically, I'm just curious, what are you writing that cost you more besides maybe travel business? So I was looking at the changes in our business mix, basically something that pops up, maybe it's professional lines in insurance and (Re)insurance, it bounces around more quarter-to-quarter. So if you could just provide more context about the business mix changes that we're really driving at, as well as the direction of ceding commissions. Marc Grandisson : Yeah, absolutely. It's a very good question. I think that if you look at the structure on [Indiscernible] starting with the insurance group, it's [Indiscernible] similar phenomenon but different reasons on the reinsurance side. On the insurance side, programs is also something that we are growing, we also smolder risk. In the professional lines, we do a lot of private DNO and not-for-profit DNO, for instance, that comes with a much higher expense ratio than you would have normally with a larger commercial enterprises, so that's one example. We also are increasing our footprint in the UK, which also carries a higher acquisition cost. So I would tend to think on the insurance side is a size of risks, the fact that we trapped absent travel. There is risk that we write some cyber as well, primarily small risks that's also carrying [Indiscernible] because it's primary and small accounts will have a higher acquisition expense ratio. So the size of the risk is what makes it on the insurance on the insurance side, accident, travel, which is also a small risk to be fair. On the reinsurance side, Tracy, as you know, it's a lot, a quota share is a big, big difference. You could have an expense ratio and acquisition ratio on the excess of loss, which is 10 to 15. It could be 30, 33 on the quota share basis. So that really will [Indiscernible] we've been growing both on the insurance side for the small risks and on the reinsurance side on our quarter share participation. So that is just the price of getting access to the business that we have to pay for. Tracy Benguigui : So we're on the [Indiscernible] commission? Marc Grandisson : Say it again? Tracy Benguigui : And if you could comment on the ceding commission. Marc Grandisson : The ceding commissions are [Indiscernible] have been stable to slightly up on the reinsurance but not significantly. They are a bit more stable for the last year and a half than they have been in other harder markets, that's one thing that's really intriguing, but I guess it makes sense in terms of the economic returns in the pricing that's coming through on the primary side. But the increase itself in ceding commission is not what's driving the acquisition expense ratio, it's truly the type of business in the mix that we are writing. Tracy Benguigui : Thank you. Marc Grandisson : Thank you Operator : Our next question comes from Mike Zaremski of Wolfe Research. Please go ahead. Mike Zaremski : Hey, great. Thanks. A follow-up on the maybe I'm reading too much into this, but on the increase in the expense ratio specifically, I believe probably the acquisition expense ratio, but maybe also the other portion of the expense ratio in the primary insurance segment. So I believe you said some of it was due to increased profitability or contingent commissions, but I guess if I'm looking at the overall combined ratio for that segment for the year, it was 96 and changed. And for the quarter was 93, I thought we were shooting for overall profitably being better than that in other years, or maybe even this year. So I didn't think profitability was much better than expected. Any thoughts there? Marc Grandisson : Well, obviously, you got a slice it down by the lines and by line of business. So the agreements, they're not on the overall profitability. So sometimes we have [Indiscernible] we do have some books of business that are doing extremely well and commissions go up with that. The other thing that I mentioned and I think is not insignificant, is the fact that we are retaining a bit more in some lines of business, and that moves the economics, I'd say, right? So you're going to get a bit less sitting commissions that are maybe higher in some places. And you retain more net than that at a better loss ratio going forward. So that's something to [Indiscernible] that also impacts the overall acquisition. I'd say at a high level, there's no question that there's a bit of noise this quarter, but it's not something that has us extremely worried at this point. I think it's very much a quarterly kind of a bit of noise. There's a bit of again, recovery from COVID like last year, quarter-over-quarter, we are still in the [Indiscernible] very deep into the COVID crisis with no travel, etc. So there's other reasons that impact all the our expense ratio in total, I'd say at a high level, we think it's a bit elevated this quarter, but not really a costs are concerned. And like you're quoting numbers that include cat events like actual cat events. If you do it ex-cat, which is probably a better reflection on the unloading margins, it's really going down from 95 to 91 for the year. So we are getting improved margin. One could argue whether it's will be more or less, but it's pretty much an improvement that we saw the last 12 months. So it's [Indiscernible] your numbers was cute somewhat with a cat events, I believe. Mike Zaremski : No. You're right. I probably should have quoted maybe ex-cat too, but although the cats matter, but and also good point on the [Indiscernible] your net to gross is keeping. Marc Grandisson : Yeah. Mike Zaremski : Okay. And that's helpful. And maybe just switching gears to capital and inorganic growth, I guess one of the MIs hit the tape that they are potentially exploring a sale. If another MI buys another mortgage insurer is one plus one still less than two, or have come dynamics you think maybe changed over recent years? Marc Grandisson : It's a good question because our understanding was that the GSEs and it's really [Indiscernible] you know, we have to talk to the people in Washington and Virginia to understand what they think about this, was that there was a preference to have more [Indiscernible] no, not lesser amount that they might provide us more diversification, so we'll see what happens. There's not much gain and benefit and scale in combining two MI companies, I mean, you still [Indiscernible] all the capital models and whatnot are linear. So there's not really a saving of capital. I think there will probably be some net loss on a market share. I think we saw ourselves some of it from the [Indiscernible] when we acquired UG. So it's not one plus one is not equal to 1.5, but it was a little bit of a loss on the market share. So that's probably not 1 plus 1 equals 2 or plus. So I don't know what's going to happen. I don't know what people have in mind. I think to me, our core principle about MI and the way we've operated stays which is it's always better in a multi-line diversified platform, and that's not going away. I would say that some of the S&P new modeling is appreciating and recognizing that. So that's my view, at least. I think the more sensible thing would be for these MI to find another home somewhere else outside of the MI arena. But I'm not a predictor of this, Mike. Mike Zaremski : So that's helping. So you mentioned the S&P capital model will the diversification get an increased benefits? So [Indiscernible] Marc Grandisson : In general only MI, in general there's better diversity and credit, the more diversified you are, which again speaks to our model, which makes sense to us. Mike Zaremski : Thank you. Marc Grandisson : Thanks. Operator : Thank you. Our next question comes from Mark Dwelle of RBC. Your line is open. Mark Dwelle : Yeah. Good morning. Couple of questions related to MI. First in the quarter, it looked like the average paid claim [Indiscernible] average paid cost per claim was around 51,000, it's been lying more in the 30s. Is there anything in particular that accounts for the uptick, maybe some large claims or something. It's a one-off really, it's a settlement with a servicer that took place this quarter that was for pre -crisis claims. So definitely a one-off here. And then a second question related to MI, just really a clarification. The reserve releases that you did in the quarter are we don't understand that those related to the reserves set up when COVID began, or maybe where these reserves related to other time periods or other classes of reserve? Marc Grandisson : We made the point in the past that we have a hard time to some extent isolating COVID from non-COVID claims, but still more than half is for reserves that we had set up before COVID. So I mean, the vast majority or the majority is if you want to go and just appear as a when they were set up is pre first-quarter 2020. Mark Dwelle : Okay thank you. And the last question I had was really more of a general market kind of question. Maybe for Mark. Are you seeing any signs in the insurance or Reinsurance businesses of competitors taking more aggressive pricing stances? I mean, basically getting at is the insurance clock getting towards 12 o'clock or are we still firmly at 11 o'clock? Marc Grandisson : Probably like the longest 11 o'clock that we'll see in our lifetime. I think that if you look at the risks that are ahead of us, you still have climate to deal with, you still have inflation concerns, which I guess leads to reserve, potential reserve questioning or analysis, cyber risk, and COVID reopening. There's a lot of stuff going on right now that sort of leads the whole market to be a lot more careful and thoughtful. So the market is always competitive, right? There's always competition out there. But right now what we are, it's a very disciplined market and we're not seeing anything. We haven't seen anything and we're not seeing anything percolating that would indicate that this would change for 2022. Mark Dwelle : Thank you. That's all my questions. Operator : Your next question comes from Meyer Shields of KBW. Your line is open. Meyer Shields : Thanks. If I go back to the contingent commission question, I guess it's clear that underlying profitability is getting better? So we expect that smoother recognition of contingent commission accruals in 2022? Marc Grandisson : Not necessarily, because Meyer, the release of profit commission or contingent commissions is dependent on loss fix, so we tend to take our beautiful time to make sure we have all the data available to make those contingent commission so can be spotty. But we can make a decision to look at two or three underwriting years and have that adjustment made. And we accrue for some of it, but we don't always accrue to the full extent of the ultimate. The losses actually drive these contingent commissions. So this is [Indiscernible] so it's really spotty, it's very hard to predict. Meyer Shields : Okay. So that's fair. I just want to understand the process. Second question, I think Francois had talked about maybe reducing the sessions on some quota share contracts in insurance, so less of an offset. Does that outpace or trail the loss ratio improvements that you should anticipate from keeping that business? Marc Grandisson : Let me [Indiscernible] I make sure, so, are you saying that? Repeat your question differently, I'm not sure I got exactly where you want to get to Meyer. I apologize. Meyer Shields : Okay. Let me try again. So [Indiscernible] is going up because you're ceding less business that has high ceding commissions. Marc Grandisson : Yeah. Meyer Shields : Just hoping that you can frame that relative to the last ratio improvements that we should expect because you're keeping more profitable business. Marc Grandisson : Yes. So if we're keeping more profitable business, the loss ratio would [Indiscernible] everything else being equal go down. Meyer Shields : Right. By more than the increase in acquisition expense. Marc Grandisson : Possibly. It's hard to say right [Indiscernible] Meyer Shields : Okay. Marc Grandisson : [Indiscernible] from the get-go. I think we made these economic decisions, it's kind of a hard one to pin down. Sometimes the [Indiscernible] what you see that's capital, capital with return, that's different than the pure combined ratio. So there's a lot of things going on. It's more [Indiscernible] it's not only about the pure combined ratio. The return is improving, that's what matters to us. Francois Morin : Directionally, I think we're [Indiscernible] we don't disagree with what you're saying. I think the precision or the timing at which everything happens is less [Indiscernible] it's not precise, I would say [Indiscernible] I would assume. Directionally, I think its right, yeah. Marc Grandisson : Better return. Meyer Shields : Okay. I completely understand. And one big picture question if I can. Anything [Indiscernible] everything that you're saying Mark about the cycle lasting longer. Because of concerns on the loss trend side. I guess why rates are going up. Why do you think rates are still going up more than loss trends? Marc Grandisson : Well, that's definitely question Meyer. That's one that we should probably have the BARDA corn and all kidding aside, I think that it's probably a recognition that this uncertainty is what creates the need for more margin safety. I think that when you're faced with uncertain pick-up in inflation, I mean, we had a 7% roughly inflation print this morning. When you have a high number that comes like this, it comes as the shocker. So I think that people are being preempting, preempting in making sure that they cover as much of the base as they can. I think the insurance industry for what it's worth has been very disciplined and is acting in a very profitable way and I think over the last 2 years, it recognizes that the risk is building up and need to price better, price higher because there's more risk of sliding a bit slide sideways. So I think it's an appropriate and very welcome change. A very [Indiscernible] if this is in the market is pretty good from that perspective. Meyer Shields : Thanks [Indiscernible]. Marc Grandisson : Sure. Operator : Thank you. Our next question comes from Brian Meredith of UBS. Please go ahead. Brian Meredith : Yes. Thanks. I got two questions for you guys. First one, I'm just curious, I know there was a block of stock of [Indiscernible] to trade and you all didn't bite. Was there any regulatory reasons you couldn't do it? Or is that just a capital allocation decision that, you don't want to own the whole thing? Francois Morin : Well, not at all. I think the existing shareholder wanted to sell and very much [Indiscernible] very [Indiscernible] much easier for them to do it the way they did it. Then, to come to us and at which point, yes, we would've had to go to the regulators and that would take them weeks if not months. And the whole approval process would have maybe dragged on. So I think they wanted speed over maybe better execution and that's what they got deal in doing it the way they did. Brian Meredith : So is that profit state less strategic for you than going forward? Francois Morin : Not at all. To be candid, I mean, they even come to us offering it up to, I mean, they just went ahead on their own instead of coming to us and saying, would you be interested in buying the 10% or 12% we want to get rid of or we don't want anymore. They just went through their own process because again, they knew that we trip the requirements that we'd have to do a tender and all of that, which would have taken again longer. So that was their decision and we respect it. But going forward strategically, I mean, we still look at profiles and it's been very good to us so far, and we keep thinking about how we, if and when, or how we do things differently going forward. Brian Meredith : Great. And then, first of all, let me just clarify one comment you made earlier in talking about kind of repurchasing your stock and I understand that you want that 3 year payback period, which is the other considerations and I understand that. But does that mean that with your stock trading just a little over one for book value right now, that you would not be buying back stock right now? It's your return profile doesn't fit that. Francois Morin : Well. It's never black and white but I'd say that the forward-looking returns that we see for how we think about the business and better profitability over three years, it's higher than 10%, right? So you could kind of stretch it a bit more than 1.3 times book. And so it's [Indiscernible] I'll stop here. I'd say we could consider going above 1.3 times book, very much as a function of how we think about the business and what kind of profitability we see coming our way. Marc Grandisson : I think Brian, I would say, you know this as well, right. I mean, there are a couple of things happening for instance, on the MI side that might change that what we perceive to be the real book value of the company. So these are also considerations that could be way outside of the return possibility going forward. That's one exemplary. Brian Meredith : Got you. Thank you. Marc Grandisson : Thank you. Operator : I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Well, thank you everyone want to thank our employees, as Francois mentioned as well, and sometimes they run the corners so make sure you take care of your loved one this weekend. On to the next quarter. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,022	2	2022Q2	2022Q1	2022-04-28	3.553	3.81	4.503	4.655	null	10.26	10.02	Disclaimer : This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.: Operator : 00:04 Good day, ladies and gentlemen, and welcome to the First Quarter 2022 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. 00:29 Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. 01:03 Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. 01:19 Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. 01:37 I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : 01:45 Thank you very much. Good morning, and welcome to Arch's earnings call for the first quarter of 2022. Arch delivered a strong first quarter, as our dynamic capital allocation and cycle management strategy combined with strong underwriting skills delivered a 13.6% annualized operating ROE. This past quarter provided yet another reminder that we live in a world of uncertainty. The war in Ukraine has affected countless lives and initiated a humanitarian crisis that is still unfolding and the pandemic continues now into year three. 02:23 In addition to the war in Ukraine, global inflation and supply chain issues pushed interest rates up, which in turn led to investment markdowns in the quarter. In spite of these headwinds for our industry, we demonstrated the effectiveness of our diversified platform as : one, we grew premium above market average again. Two, repurchased 5.6 million shares; and three, generated a strong operating ROE. Our objective remains as always to deliver long-term value for our shareholders using all the levers available to us. 03:06 The underlying fundamentals of our businesses continue to improve as we benefit from better market conditions in the P&C industry and execute our cycle management strategy where we actively allocate capital to the most attractive sectors of our business. Our P&C operations generated $2.3 billion of net written premium in the quarter, which represents an increase of 18% from the same quarter in 2021 and speaks to our confidence in the improving underwriting conditions in our P&C operations. 03:44 Mortgage insurance contributed substantial underwriting profit in the quarter and insurance in force grew modestly again highlighting that mortgage remains a positive differentiator of our business model. Now, inflation is top of mind for everyone in the P&C industry, which to its credit has historically been adequately respond to inflation trends. Inflation is not a new phenomenon and in fact it permeates discussions in evaluating claims all the time in an insurance company. 04:21 As such, our focus is always on proactively incorporating new data into our reserving and pricing. We believe that this focus in addition to increased future investment returns and reserving prudently will help mitigate inflation's impact. As far as our mortgage business is concerned, inflation mainly has a positive effect, as it increases homeowner equity, which again mitigates potential losses. 04:51 I'll now share a few highlights from our segments. Across most lines our P&C units remained in a growth phase of the underwriting cycle according to falling rates insurance clock. In the quarter, our P&C net premiums earned grew by 25% over the first quarter of 2021, as we continue to earn in the rate increases of the past 24-months. Our data indicates that we are still experiencing average rate increases in excess of expected loss cost. 05:25 In Specialty Insurance, underwriting conditions remain very good, as pricing discipline, terms and conditions and limits management are stable across most markets. This stability combined with the uncertainties, I mentioned at the beginning of this call should help keep the market discipline and sustain rate increases. 05:46 Our specialty business in Lloyds and our UK regional business delivered strong growth in the quarter as our European insurance operations now represent 30% of Arch insurances total net written premium, up from 20% pre-pandemic. We are pleased to see the positive results of the investments we made into this platform prior to 2020. 06:11 We also created meaningful growth across our U.S. operations in the quarter, primarily in professional liability, including cyber, as well as travel where we believe relative returns are attractive. On the reinsurance side of our business, the emphasis remains on quarter share treaties over excess of loss reinsurance. This allows Arch to participate in the rate increases on primary insurance, while improving the balance between the risk and the return. 06:42 Overall in our Reinsurance Group, growth opportunities remains strong. Since it's been a talking point on prior calls, it’s worth noting that although property cat rates have improved in response to elevated loss activity in the past few years, we have remained disciplined and have not allocated material additional capital to this line as we maintain our view that other lines of business have better risk-adjusted returns. 07:10 Turning now to the mortgage segment, which once again delivered excellent underwriting results as we continue to benefit from strong housing demand and excellent credit conditions. Delinquency rates on our MI portfolio continue to trend to a historically low levels and cures on delinquent mortgages in our portfolio resulted in favorable prior development in the quarter. 07:35 The increase in mortgage interest rates currently at 5% for 30-year fixed-rate mortgages is a steeper rise, then we have seen in decades. These higher rates have dramatically curtailed refinancing. However, our MI business is far more geared to the purchase market, which continues to benefit from strong demand and limited housing supply. Of note, the decline in refinancing activity improves persistency which in turn should improve returns on our in-force portfolio. 08:07 While the rise in mortgage rates may ultimately cool demand and slow the rapid home price appreciation of the last year. So far, we have yet to see demand weaken and we expect home prices to continue to rise, albeit at a slower pace. Again, as mentioned earlier, rising home prices increase equity for homeowners, which ultimately reduces the risk of claim in mortgage insurance. So our perspective is that this expected future equity buildup and the strong credit profiles of borrowers should strengthen the resilience of our in-force mortgage portfolio. 08:44 Moving forward, our diversified platform and cycle management philosophy, will enable our MI team to continue to make measured responsible decisions with our capital. Our MI Group has the flexibility to grow or moderate the business they choose to right based on their view of market conditions. 09:02 A few brief notes on investments, were net investment income was down from last quarter, as we reduced risk positions primarily equities given increasing market volatility. Rising interest rates also caused mark-to-market losses in the quarter. However, the relatively short duration of our investment portfolio, as well as our healthy cash flow will naturally allow us to reinvest at higher interest rates, which should be reflected in future quarters. 09:30 In closing even with current uncertainties, opportunities exist. In the quarter, Arch was able to deliver strong results with positive growth across its businesses and we're well-positioned to sustain our growth trajectory in this favorable P&C market. We've consistently demonstrated our ability to allocate capital effectively to the areas of our business with the most attractive returns. As you know, with Arch, we are constantly looking for and seizing the opportunities that offer the best returns for our shareholders. Francois? Francois Morin : 10:06 Thank you, Marc, and good morning to all. Thanks for joining us today. As Marc shared earlier our P&C units remained on their path of underlying margin improvement, while the Mortgage Group delivered another quarter of strong underlying performance, which was supplemented by solid cure activity in their insured loan portfolio. Overall our results translated into an after-tax operating income of $1.10 per share for the quarter and an annualized operating return on average common equity of 13.6%. 10:42 In the insurance segment net written premium grew 21.3% over the same quarter one year ago. Growth was particularly strong within our professional liability and travel business units and was achieved both in North America and internationally. Underwriting performance was excellent with an accident quarter combined ratio, excluding cats of 90.8%, a 250 basis point improvement over the same quarter one year ago. 11:12 Similar to last quarter, a change in our business mix as a result of more pronounced growth in lines of business with lower loss ratios helps explain some of the 470 basis point improvement we observed in our underlying loss ratio. This benefit was slightly offset by a higher acquisition expense ratio. Increased contingent commission accruals on profitable business and lower levels of ceded business for lines with higher ceding commission offsets also slightly increased the expense ratio. 11:46 As we have said before, our focus remains on improving our expected returns through a variety of levers. And we are encouraged to see that our efforts are paying off for our shareholders. In the reinsurance segment, it's worth mentioning that reinsurance agreements that were put in place at the time of the closing of the Somers acquisition in the third quarter of last year made comparisons from the current to prior periods imperfect. For example, while our reported growth in net written premium remained solid at 14% on a quarter-over-quarter basis, it would have been 26.6% after adjusting for the Somers session. The growth came primarily in our casualty and other specialty lines where rate increases, new business opportunities and growth in existing accounts help increase the top line. 12:40 The segment produced an ex-cat accident year combined ratio of 82.7%, an excellent result, as we continue to enjoy healthy underwriting conditions in most of the lines we write. Losses from first quarter catastrophic events, net of reinsurance to recoverables and reinstatement premiums stood at $85.8 million or 4.0 combined ratio points, compared to 10.5 combined ratio points in the first quarter of 2021. Approximately two-thirds of the estimated losses came from the Russia invasion of Ukraine with the rest coming from other global natural catastrophe events including the Australian floods. 13:26 Our mortgage segment had an excellent quarter with a combined ratio of 3.1%, due in large part to favorable prior year development of $105.6 million. In line with last quarter's results net premiums earned decreased on a sequential basis, due to a combination of higher levels of ceded premiums a lower level of earnings from single premium policy terminations and reduced US primary mortgage insurance monthly premiums, primarily from recent originations, which remain of excellent credit quality. 14:04 Production levels were down slightly from last quarter, but certainly in line with seasonal trends and new purchases and diminishing refinancing opportunities for borrowers. As we have discussed on prior calls, one of the benefits of higher interest rates as an improving persistency rate, which now stands at 66.9% and should continue to increase throughout 2022. Ultimately, higher persistency benefits our insurance in-force and should result in a stable base of premium income to help drive underwriting income for the rest of the year and beyond. 14:40 With respect to claim activity, approximately three quarters of the favorable claims development came from our first lien insured portfolio at USMI as we benefited from better than expected cure activity mostly related to the 2020 accident year. The remainder of the favorable development came from recoveries on second lien loans and better-than-expected claim development in our CRT portfolio in our International MI operations. 15:08 We maintain a prudent approach in setting loss reserves in light of the uncertainty we are facing with borrowers exiting forbearance programs and moratoriums on foreclosures. Income from operating affiliates stood at $24.5 million and was generated from good results across our various investments, including Coface, Somers Re and Premium. 15:32 Total investment return for our investment portfolio was a negative 3.07% on a U.S. dollar basis for the quarter, which explains the decrease in our book value per share to $32.18 at March 31st down 4.1% in the quarter. The decrease was primarily due to the mark-to-market impact for our available for sale fixed maturities portfolio, resulting in a $1.55 hit to our book value per share. 16:02 This quarter, the meaningful increase in interest rates and negative returns in the equity markets contributed to the negative total return. As you know, we are maintaining a relatively short duration in our investment portfolio for some time and this strategy help temper the mark-to-market hit to book value in the first quarter. While still relatively short, we have extended our duration slightly to 2.93 years at the end of the quarter in order to get closer to our duration target. 16:31 The change in net investment income this quarter on a sequential basis was mostly due to a lower level of dividends as we shifted out of some equity positions and higher investment expenses related to incentive compensation payments as is normal for us in the first quarter of the year. 16:49 Going forward, we would expect net investment income to increase over the next few quarters as our portfolio gets reinvested at higher yields. At the end of the quarter, new money yields were approximately 145 basis points higher than the embedded book yield in our fixed income portfolio. Alternative investments representing approximately 15% of our total portfolio return to 1.4% in the quarter. The performance of our alternative investments is generally reported on a one quarter lag. 17:24 I wanted to spend a brief moment on corporate expenses and what you should expect for the rest of the year. As you know, the first quarter is always elevated relative to the other quarters due to the timing of incentive compensation accruals. This year you should also expect a slightly higher amount in the second quarter, again due to our accounting policy for non-cash compensation for retirement eligible employees. As a result, we expect corporate expenses to be approximately $25 million in the second quarter before coming down to a level closer to the 2021 amounts for the third and fourth quarters. 18:04 Turning briefly to risk management, our natural cat PML on a net basis stood at $768 million as of April 1 or 6.4% of tangible shareholders' equity. Again well below our internal limits at the single event, one in 250 year return level. Our peak zone PML is currently the Florida Tri-County region. 18:27 On the capital front, we repurchased approximately 5.6 million common shares at an aggregate cost of $255 million in the first quarter. Our remaining share repurchase authorization, currently stands at $927.2 million. With these introductory comments, we are now prepared to take your questions. Operator : 18:49 Thank you. [Operator Instructions] Our first question comes from Jimmy Bhullar with J.P. Morgan. Jimmy Bhullar : 19:14 Hey, good morning. So I had a question first just on the expense ratio. And I guess if you could discuss a little bit more how much of it is just, because of a mix shift in the business where some of the lines that entail a higher loss ratio or lower loss ratio, but higher expense ratios are growing faster versus incentive comp or other expenses that might sustain through the rest of the year. Francois Morin : 19:39 Well, I think to me, it's -- the way to think about it is to -- I mean, if you want to focus on operating expenses is where all the incentive comp payments or expenses will come through. So that, that you can easily see that our track record the last 12-months where you see in Q1, there is higher and then it levels off of the second through the fourth quarters. So that should give you a good idea of how to project that out. The rest, I would say, I'd like to think of it in combination. In loss and acquisition to me or -- we can't think of them separately. They have -- they go together, there's offsets, they -- we think about it when we write the business. So ultimately, the way we certainly think about the whole kind of underwriting performance is the combined ratio. And that's how I suggest you maybe think about it. Marc Grandisson : 20:34 I think from a perspective of acquisition expense, I think that the mix has shifted over the last couple of years. So I think I would probably look at the last one quarter or two quarters as an indication for the future, because our mix is shifting in that direction. So it's clearly -- and as a result of that, you see the loss ratio expectations actually coming down, which makes sense based on what Francois mentioned. Jimmy Bhullar : 20:57 And then on your cat losses, I think you mentioned that the majority of the cat losses that were booked this quarter were Russia-related, and I'm assuming most of those are IBNR. But if you could give some color on that? And then relatedly you've in the past indicated what you had in terms of COVID reserves, and I think most of those were IBNR as well. But if you can talk about what you would need to see to be able to start releasing some of those reserves related to COVID? Francois Morin : 21:28 Yes. I'll start with Ukraine. I think Ukraine, again, very early to me. It's somewhat similar to COVID two-years ago when -- it's still ongoing, right? So we took a fairly -- we think, a prudent approach at this point based on what we know. We think we're going to have some losses, but it's all IBNR, right? So the question really, we don't have any claims yet that our certain or we have to set up case reserves for. It's highly preliminary at this point, and it's based on kind of some assessment of what we think the overall exposure might be. So we think we're in a good place right now, but we're going to have to monitor it and see how it goes in future quarters. Marc Grandisson : 22:13 And I believe our COVID losses, we're about 70% IBNR at this point in time. So it's still not finalized by any means. Jimmy Bhullar : 22:20 And what's the magnitude? Francois Morin : 22:24 Well. Our numbers haven't changed, so total reserves, right? So with total reserves for COVID is about $160 million and 70% of that is COVID. Sorry, not COVID. Marc Grandisson : 22:34 IBNR. Francois Morin : 22:35 IBNR. Jimmy Bhullar : 22:36 Thank you. Francois Morin : 22:37 You’re welcome. Operator : 22:40 Our next question comes from Tracy Benguigui with Barclays. Tracy Benguigui : 22:45 Hello, everyone. I recognize that the 10-year anniversary for mortgage insurers setting up their contingency reserves is approaching where these reserves will be released on a first-in first-out basis into unassigned statutory funds. And I believe Arch has about $3.1 billion of such contingency MI reserves. I'm just wondering, if this anniversary is of any significance for Arch, like does this orderly reserve relief improve your ordinary statutory dividend capacity or improve your view of capital allocation in any way? Francois Morin : 23:23 First of all, I mean, the fact -- the contingency reserves, no question or a statutory requirement. They're part of our overall way of operating, but I would say they haven't really been a constraint in the sense of how we deploy capital, where we deploy it, their ability to come in and out of market. So I think it's certainly something we watch and are aware of, but I wanted to make sure that everybody understood that it's not -- it hasn't been really -- it caused a major issue for us at this point. 23:55 You're correct. The 10-years, though we're going to start getting closer to our ability to release contiguity reserves. And yes, no question that, that effectively shifts the money from contingent reserves that available surplus to -- and it gives us more ability to declare dividends upstream from the MI companies. That said, we are always looking -- and it’s -- and we've been able to do a little bit of that with the regulators in the last few years though -- on an exception basis and have kind of submitted some plans to them to make it so that we can actually access some of those funds maybe a bit earlier than would have been, I guess, officially the case with the contingency reserves, but we're still -- something that we're constantly working on. Tracy Benguigui : 24:48 Got it. I'd also like to touch on the negative marks in your investment portfolio. So I noticed in your proxy, your key KPIs like growth in book value per share or ROE, these are metrics that Arch doesn't adjust for unrealized gains or losses will from your peers do. So my question basically is do these negative marks change review deployable capital in any way? Marc Grandisson : 25:12 No, not really. I think that the operating income -- the way we look at the operating ROE, it's more of like a run rate as to how our business is performing. Fully recognizing that a lot of the mark-to-markets will eventually recover, so it's really the way we've chosen way back in our history to get a better reflection for and how we're performing from a core business perspective, letting the bigger of the market volatility find their way over time. That's really our way to be a bit more forward thinking and looking at how we present our returns and our performance. Tracy Benguigui : 25:47 Got it. Thank you. Marc Grandisson : 25:49 Thanks. Francois Morin : 25:50 Welcome. Operator : 25:51 Our next question comes from Josh Shanker with Bank of America. Josh Shanker : 25:57 Yes. Thank you. If I go back in time about nine months ago, when I asked you about opportunities you have to deploy capital, we look at it as mortgage insurance, reinsurance, share buybacks, acquisitions. The mortgage issuing pace was hot, and reinsurance is attractive. It still is, but ceding commissions are up now and maybe with where rates are going, mortgage issuance is going to be declining? Does that make insurance and buybacks more attractive on the relative slate of things you can do right now? And what's changed about the ROI in mortgage and reinsurance over the last six months? Marc Grandisson : 26:42 Yes. I think over the last year, Josh, good question. In terms of the rank ordering our opportunities right now, I think you’ve -- that the growth in premium speaks for itself. It's really an indication of where we think the value proposition is for our shareholders. I think that clearly, reinsurance and insurance are close to one another. Our reinsurance team would argue that they have a better return perspective. We'd like to have these discussions internally, but certainly, the P&C has moved up in the rank in terms of top return. 27:13 I think MI is a close second and as you saw on the share repurchase, I mean, it's clearly another way for us to deploy capital that's very attractive for our shareholders. So we have a lot of levers that we can deploy at that point in time. But having said this, our focus right now is really to grow the business, because we have so many good opportunities ahead of us. Josh Shanker : 27:34 And the Ukraine crisis has caused a skepticism about the value of trade credit, which has hurt the valuation of Coface in terms of your view of the attractiveness of that asset post Ukraine and whether the diminished pricing opportunity. Do you have any thoughts there? Marc Grandisson : 27:57 Well. I think, first, the Ukraine and Russia area is not a big portion of what companies such as Coface, would be playing into. So that certainly is a smaller footprint. And a lot of the losses that could have emerged or are emerging, they'll be short tail by and large, right? It's definitely a shorter term, even though we're not out of the woods yet in terms of developing losses broadly, I think on trade credit, I'm confident that our Coface team has a good handle as to what their exposure is. 28:26 And I think if I take COVID as an example for how resilient they are, even absence on the government scheme, I think that we like the resilience and the diversification even within Coface themselves, what they provided to the shareholders. So let's just say we're not overly concerned. I mean, I think the numbers are going to come today or very recently. I think they'll have way more and more insight into this. But at this point in time, our expectation is that it's -- it will have an impact on their result, but not the extent that, as always, it seems that the market expects way more downside than actually meets the eye. Because it's a line of business that I believe is largely misunderstood. And the way that Xavier and his team has developed and deployed risk management is underappreciated. I think Coface, they do a very, very good job in risk managing the portfolio. Josh Shanker : 29:17 And if I can sneak one more in. You said that 75% of COVID reserves are still in IBNR. Is COVID a long tail or a short tail risk? And what would you be waiting for to get better comfort on the use or lack of the IBNR reserves? Marc Grandisson : 29:39 I think on a short and long tail, I would say, yes. So it's both, right? I mean, there's a lot of things going on. And I think we certainly saw some of the BI losses, right, Josh, last year or even early, in middle of 2020. I think some of them are being resolved as we speak. I think we're of the mind that this is a big event, things have happened, people are still trying to figure out as they recover into this new market, this new environment. And it's still being thrown into it some inflation and more -- it seems more dislocation. So I think that we may have things coming through potentially on the liability side of things, eventually. It's hard to know what it's going to look like. But it's clearly, clearly, a lot that we've never faced before. So that's why we will tend to be more prudent at Arch, as you know us. There's a lot more uncertainty than the average loss that we've seen so far in our history. Francois Morin : 30:31 And even the short tail that you would think a short tail coverage’s are going to be litigated, then that will take time to resolve itself. So I mean, we're keeping an eye on it, but we think it's going to be with us for quite a bit longer. Josh Shanker : 30:47 Thank you for all the answers. Marc Grandisson : 30:48 Thanks, Josh. Operator : 30:51 Our next question comes from Ryan Tunis with Autonomous. Ryan Tunis : 30:57 Hey, thanks. Good afternoon -- Marc Grandisson : 31:01 Ryan. Are you still there, Ryan? We can't hear you. Operator : 31:12 Ryan, you may be on mute. Marc Grandisson : 31:14 Yes. Yes, I think Ryan just came out somehow. Ryan Tunis : 31:23 Can you hear me? Marc Grandisson : 31:25 Ryan? Ryan Tunis : 31:26 Yes. Yes guys got me? Marc Grandisson : 31:28 Yes, we got you now. Great, we got to you, we got you and we got you. Ryan Tunis : 31:31 Really Sorry about that. So yes, I had a MI reserve question. It's not as deep MI as the last one, I don't think. But -- what I was curious about is just like trying to get a feel for how 2020 that year has developed. Obviously, you guys released a lot of reserves from that year this quarter, and maybe it's something I can calculate myself. But yes, what have been the total number of reserve releases on the 20-years since you initially booked it? Marc Grandisson : 32:01 But I don't have that number handy with me. It's most of it -- well, on the ones we just did, there will be most of it. Because most of the delinquencies and there was the largest cohort in April and May of 2020 second quarter. And those are the ones that are obviously coming out of delinquencies and being settled, so most of it is from the 2020 year. Ryan Tunis : 32:26 But do you have a sense, I guess, Marc, for like -- I mean if we were to compare what that ultimate is now relative to kind of the years headed into 2020? Are we getting to a point where on a fully developed basis that year looks like -- some of the years? I'm just trying to understand like how much more reserve potential there could be? Marc Grandisson : 32:49 Yes. Well, I have to be careful the way I answer it. I think I would say to you that 2020, '21 may turn out to be more like an average year. There's a good possibility for that to happen. It's still uncertain, because we're still going through the forbearance exiting as we speak. It's accelerating really as we speak literally. So I think 2020, 2021 will turn out to be much more of average years than we had maybe feared when we talked about it in the second quarter of 2020. Ryan Tunis : 33:22 Got it. And then on the P&C side, I guess, I might be wrong on this. But I don't remember there being quite this much volatility with the acquisition cost. It just seems like something that is kind of ramping, like as you said in the past two, three quarters. Could you just give us like maybe a little bit of a better understanding of why are we seeing more of that now? Is it because of the amount of loss ratio improvement that's going through the business? Is it the way you've structured reinsurance. I'm just kind of trying to kind of lately understand what might have changed. Marc Grandisson : 33:56 It's a good question, and I would just welcome you to Arch's way of cycle management, which is moving and pivoting to where the opportunities are. So it will be probably surprising to you as Francois and I don't really know what kind of acquisition expense we'll have in one quarter, because our team just make the best evaluation possible as to what's ahead of them. And I think on the reinsurance side, right, we mentioned in our commentary, is that quota share focus, definitely over time, will increase the acquisition expense ratio. 34:26 And on the insurance side, the travel, for instance, right, was really went down in premium written as you remember, Ryan, in 2020. It's coming back up and that has historically a high expense ratio. We also have some programs, new programs that we've entertained on the insurance side. And those will naturally come up with higher acquisitions. So I think that it's a really dynamic market. I don't think we've seen that kind of market where we can shuffle around and really pivot and make capital allocation or decision to write more of one or the other. I think you had more of a -- to your point about not having more volatility this quarter than ever before is because we had a very stable, frankly, doll market for about five or six years, we were defensive. There was really no need for us to shift and we're sort of across the board shifting down our involvement on the P&C side. Now I think its way more dynamic, and that's why you have this shift around. 35:22 So -- but to your question about the loss ratio, the loss ratio itself will find its way naturally, whether we write quota share or excess of loss. So the higher the expense ratio, frankly, the lower you should expect the loss ratio to be. Because it's really a combined ratio gain, as we said before. So I understand that it's not easy to pin down, we understand. But it's really due to the cycle management and where we are in this marketplace. Ryan Tunis : 35:50 Understood, that makes sense. Thanks guys. Marc Grandisson : 35:52 Thanks. Operator : 35:54 Our next question comes from Meyer Shields with KBW. Meyer Shields : 35:59 Thanks. I want to start with one underwriting question, and maybe it pertains to what you were just talking about, Marc. We've seen year-over-year written premiums and programs actually go down after some very solid growth in the first three quarters of 2021. And I was hoping you could talk us through what's going on there? Francois Morin : 36:18 Yes. [Matt] (ph), there's a bit of noise. I think it's really related to the timing of a renewal of a program and when we onboard one. So I wouldn't kind of read too much into that, Meyer. I think it's very -- it's a one-off. Marc Grandisson : 36:33 I think the earned premium is a better indicator of the trajectory of where we're going here. Meyer Shields : 36:38 Okay, perfect. That's very helpful. The second question, I'm sorry. Marc Grandisson : 36:43 Go ahead, Meyer. Meyer Shields : 36:44 Okay, so you talked a lot and very helpful in terms of the guidance for corporate expenses. Is there the same sort of accrual trend in the individual segments, because I'm asking because of the year-over-year growth in other operating expenses? Francois Morin : 37:02 Well, I mean it's the same general -- I mean the timing is the same. It's just that, obviously, the corporate -- in the corporate segment or what you see in corporate expenses, it's -- I mean, it's a very -- I mean it's, A, there is, some more non-cash comp that comes into play, right? And that is, again, more tilted to the first quarter. And it's just -- that's basically all it is. I mean, for the most part, it's just comp and benefits versus the OpEx in the segments has a lot more to it, right? There's systems, there's IT, there's a lot more things that -- so you'll never have that much impact or more -- as much volatility in the segment. 37:49 But the rules are the same though. I mean, when we have people that become retirement age eligible, it triggers that different kind of accounting or immediate expensing of the non-cash comp, and that's part of it. Related, I think, just the growth in the OpEx dollars, no question that went up. We stay -- I mean, and we look at that. We certainly -- I want to make sure that premium is growing faster. So I think the ratio, as you saw in all the segments, certainly, insurance arrangements went down. 38:26 And I think the important message here is that we've been performing well, and we need to pay our people. And our people is basically all we have, we need to retain that talent and that came through in Q1 as we kind of made incentive comp decisions. Marc Grandisson : 38:44 Meyer, what I would add to this is you can look at that line item either as an expense or as an investment item. So I think from our perspective, we also are investing in our people, as you heard from Francois. And investing in other things, right, that will improve the results over time. And that's -- this is a good time to invest. We have -- it's a growing platform, money is coming in. So it's a good time to invest. So we're really also spending some money to make it more sustainable as a platform. Meyer Shields : 39:12 Okay, perfect. Thank you so much. Marc Grandisson : 39:14 Welcome. Operator : 39:17 Our next question comes from Mark Dwelle with RBC Capital Markets. Mark Dwelle : 39:22 Hey, good morning. Just a couple of questions, you've already covered a lot of ground. On the Russia-Ukraine losses, what lines of business or products were impacted there? Was it your own trade credit or war or marine whatever? Marc Grandisson : 39:40 Yes. It's the traditional lines you would expect. I think that most of our losses come from our exposure at Lloyd's, either through from the insurance platform, the reinsurance platform. And that's what you would expect, right, because this is where the specialty lines have been underwritten. So either through the Lloyd's of the London really operations. So this is where we're expecting it from. One the trade credit is part of the considerations. Again, like I said, so it's also part of that as well. So we look across our lines of business. But I would think London, Lloyd's, aviation, marine war, the classic Lloyd's exposure. Mark Dwelle : 40:17 Okay. And then building on that, you -- I'm just trying to make sure I understand it correctly. To the extent that Coface incurs losses, you're picking those up effectively on a one quarter lag basis. So whatever they have, you'll get your proportional share of how those run through in the second quarter and so on going forward, correct? Francois Morin : 40:42 100% correct, yes. Mark Dwelle : 40:45 Okay. And then the last question, I just wanted to clarify, you made a number of comments related to the investment portfolio. Am I understanding correctly, so you're both extending the duration and getting a higher new money yield on both the reinvestment, as well as, I guess, any new money that you're generating? Francois Morin : 41:08 Yes. New on yield, no question. I mean I mentioned the 145 basis points. That is comparing your embedded book yield on the portfolio at the end of the quarter or two what we're currently seeing in the market. And we extend the duration is really a bit more of a strategic thing. I mean we were short -- I mean, relative to our benchmark, we got a bit closer to the benchmark, just being a bit more of a defensive move, we want to make sure we weren't too far off from the target. Mark Dwelle : 41:39 In terms of thinking forward, which will have the greater impact on rising investment income, it will be the -- I would assume it would probably be the higher new money rate more so than the duration extension. Francois Morin : 41:52 Totally. Yes, we -- listen, we don't know how quickly the portfolio will turn over. But certainly, as Marc mentioned, the free cash flow coming in and also how quickly the portfolio will churn or either mature and/or will trade in and out of certain securities, we'll be able to reinvest that. So it will take certainly a few quarters. But as I mentioned, I think we'll start seeing some benefits starting next quarter and by the end of the year, it should be hopefully somewhat measurable and meaningful. Mark Dwelle : 42:28 Okay, thank you. I appreciate the thoughts. Francois Morin : 42:30 Sure, welcome. Operator : 42:33 Our next question comes from Yaron Kinar with Jefferies. Yaron Kinar : 42:37 Hey, good morning everybody. My first question, and maybe it's more of just me rephrasing and making sure I'm thinking about it correctly. Am I to understand that really your focus or your myopic focus is on getting the loss ratio better, and you're kind of agnostic as to whether the expense ratio goes up or down as long as the combined ratio comes down because the loss ratio improves more? Marc Grandisson : 43:04 Yes, I think you're right. I think the combined ratio, which leads to return on equity is what we're focusing on. Yes. Yaron Kinar : 43:10 Okay. And I should probably be careful with how I phrase this, we talk industry here. At some stage, you expect -- in the cycle, you expect to see some adverse reserve development and then probably followed by some favorable development. I guess where do you see the industry at today? And maybe at what point do you start seeing the reported combined ratio improve and coming more from favorable development as opposed to the accident year loss ratio improving? Marc Grandisson : 43:42 Yes. I can't speak really to the level of reserve in the industry. I mean everybody -- it's like beauty is in the eye of the beholder, right? It's kind of difficult for me to opine on this. I think in terms of earnings versus pricing cycles, I think it's true that the pricing cycle peaks and then the earnings cycle peaks probably a couple two to three years after. So I think that, that historically has been the case. So I would expect earnings to -- if pricing is -- I don't -- I'm not saying it's peaking, but once it peaked, we should probably have earnings still getting better for a couple of years after that. So we're still very much in the margin improvement still in the market. So it's a tough question to ask as opposed to what right, Yaron, where it's going to come from, prior development or current accident years. So that's a different -- it's probably different also for every company. Yaron Kinar : 44:35 Fair. I'd be happy for you to opine on Arch specifically, if you want. Marc Grandisson : 44:40 We're doing pretty good. Yaron Kinar : 44:42 Okay. If I could sneak one last one in. So two-thirds of cat losses are related to Russia. Is that true for both the insurance and reinsurance segments? Francois Morin : 44:56 It's a good question. It's -- I mean, directionally, it's about that. Yes, I mean we might have had a bit more -- the non-Ukraine cat losses were mostly reinsurance, so Australian floods is where we can -- that we picked that up a bit more from the reinsurance side. But it's -- directionally, it's about -- not a big difference. Yaron Kinar : 45:17 Got it. Thanks so much. Francois Morin : 45:18 Thanks. Operator : 45:21 Our next question comes from Brian Meredith with UBS. Brian Meredith : 45:26 Hey, thanks. A couple of one’s here for you. First, Marc, can you talk a little bit about what you think about the opportunities maybe in Florida with the renewal season, a lot of turmoil and stuff going on down there. Marc Grandisson : 45:37 Yes, I can only tell you right now what we hear from our team. And what we hear from our teams, and including our colleagues and brokers and friendly brokers out there, is this is going to be a tough renewal. There's a lot of question marks, a lot of decision that needs to be made. It's too early, Brian, to call what it's going to look like. But people are expecting, I think you may have heard this on other call, a difficult renewal. There's a lot of things that need to be fixed between the recognition of the litigation that hasn't really stopped as much as we would have wanted. Some of the companies are struggling to even survive, do you get paid your reinstatement. And I understand that the state is also trying to find solution. We probably have an impending discussion from the Department of Insurance as to what they want to do or the direction, what they want to do in Florida. So we're like you, Brian, we're in a wait and see kind of mode. We have -- the one thing I would tell you, which all our shareholders should hear is if there's an opportunity, we have capital to deploy there. We're very bullish. Brian Meredith : 46:38 That's what I wanted to know. So you've got the company. And then, Marc, another one, so a couple of stories out last night and this morning about companies looking potentially sell themselves. I'm just curious what your thoughts are on M&A, kind of Arch's view with respect to the M&A environment? Is the organic growth opportunity is just too good right now to distract yourself from potential M&A opportunities? Marc Grandisson : 47:03 Listen, we're a broadly equal opportunity kind of company, right? We'll look at what can be done and what should be done and what makes sense for the shareholders. We're not looking for transactions necessarily. But our history show that when a transaction come that's accretive to our shareholders, we'll entertain and look at it. We certainly have look at what's out there, what has been discussed, as you would expect, Brian. So I think we have probably the best position possible, which is we don't have to do anything. We have plenty of opportunity. And we are in a seat where we can just like wait for the pitch to come to us. So I feel very, very fortunate to be where we are at Arch Capital Group. So we'll look at it. We'll look at it, pitch, if we like it, we'll swing, if not we'll just go back. Brian Meredith : 47:47 Great, thank you. Marc Grandisson : 47:48 Yes, sure. Operator : 47:52 Our next question comes from Elyse Greenspan with Wells Fargo. Elyse Greenspan : 47:57 Hi, thanks. My first question, if I look at your insurance segment, it's been six quarters in a row where you guys have grown by more than 20%. It seems from your comments you guys are still pretty bullish about opportunities there, even with perhaps a little bit less price. So Marc, does this feel like an environment where you can continue to see pretty robust levels of growth within your insurance segment for this year and beyond? Marc Grandisson : 48:26 The answer is yes, Elyse. I wonder where you were for the call. The answer is yes. Broadly, it was probably more of a broad market opportunity probably two years ago. Now it's refining itself and turn more certain lines of business. As we mentioned before, some of the programs, we're seeing a better pickup in pricing and property as we speak right now, it's getting hard again on the heels of failing to get the value right as an industry. So listen, I think that it's a bit more of an opportunistic. I think we still have the ability and the willingness to lean in hard if we see opportunities, and we are seeing opportunities, so yes. It's just not as broadly based perhaps as it would have been two years ago. Elyse Greenspan : 49:08 And then as we think about some stuff that's come up throughout the call, right, we're dealing with higher inflation, also higher interest rates that you guys mentioned could be a tailwind on the investment income side. So where would you put the ROE within the P&C business? Where do you think that's running at today when you think about how 2022 could come in? I know you've talked about, right, kind of targeting the -digits in the past. Where do you think things are now? Marc Grandisson : 49:38 I think we can speak for our book of business. I think we expect our ROE on a policy year basis, but we write currently to be close to the mid-teens. I mean, we're really getting there inching every -- possibly every quarter since the end of 2019. So yes, this is sort of where we are, Elyse. Yes, pretty much. Was there another part of your question? I want to make sure I think you had something else. No? Elyse Greenspan : 50:04 No. That was the event. And then another one just on buybacks and I think this came up a little bit earlier when you guys were talking about ROEs in general. I know in the past, we've used some rule of thumbs with book value, right? But you guys, it seems like bought back your stock, right within range of one-fourth of book in the Q1. I know the shares are a little bit higher today, right. Partially, that's a function of the mark-to-market in the quarter. So obviously, would -- buybacks would depend upon the growth opportunities, but it seems like you guys would still be willing to buy back your stock given the valuation today? Francois Morin : 50:44 I think that's fair. I think -- listen, I mean, again, the multiple is not something we focus when we look at it. But again, I think on the heels of Marc's answer to your earlier question, I think we like our prospects. I mean we think the forward-looking ROEs that we have in front of us are very attractive. We think the stock is priced relatively attractively for us. And depending on what opportunities come our way and how we can deploy the capital, share buybacks are always part of the solution or part of the -- how we deploy our capital. Elyse Greenspan : 51:19 Thanks for the color. Marc Grandisson : 51:21 Thanks. Operator : 51:23 Our next question comes from Tracy Benguigui with Barclays. Tracy Benguigui : 51:29 Thank you so much for it takes me on again, I noticed that you increased your reinsurance prop cat writings by 10% this quarter, and I recognize you're underweight on PMLs relative to peers. But still, can you break down how meaningful -- is this growth driven by exposure increases versus rate increases? And if you could just comment about your overall risk appetite or prop cat risk, you are balancing pricing inflation and your exposure management. Francois Morin : 51:56 Yes. In terms of -- I mean, appetite, we've been relatively neutral for the recent last few quarters. I mean we haven't grown. I mean this -- again, this is a bit of a slight one-off in terms of the -- you saw the growth in the premium, just the timing of a renewal. We have like a 14-month premium that program that fell in different quarters. So again, I wouldn't read too much into the dollars of growth in the quarter. But we still -- we're still players in the space. We still say and believe that we need to get a bit more to really put the pedal to the metal. And we'll see where it goes. Marc Grandisson : 52:35 Yes. On the cat exposure, Tracy, I think that we look at how we deploy it, right? We could deploy it through cat Excel or you could do it through [indiscernible] quota shares or some marine. It's coming from many lines of business. And I think that for the last 18-months or 24-months, because of the significant increases in TMC changes, improvements on the property, in large property segment in general, that our deployment of capital from the cat perspective has been more towards quota share reinsurance. And I think the cat Excel has been lagging, frankly, in terms of pricing. And we've said that more than one. So I think that -- and again, that's another one that -- the similar answer to the program that I answered to Meyer earlier, which is the earned premium is probably a better indicator of our relative growth or non-growth, in this case, in the property cat space. Tracy Benguigui : 53:28 Okay. Great. And just one real quick follow-up on actually Elyse's question. I felt like last quarter, you kind of alluded that you could buybacks talk above the 1.3 times, just given your view of intrinsic value of your MI business. I don't know if those comments were fully appreciated. I don't know if it's possible, you could flesh out your view of what you think the intrinsic value of your MI book is and how that plays in. Francois Morin : 53:54 Well, it's part of the -- I mean, forward-looking ROE. So no question that we -- there is significant embedded value that's built into the MI book, and we have good visibility on that. We're very bullish on it, and that gives us even more comfort that there's significant value in the stock. So as we think about buybacks, I mean, no question that from our side, it's fully factored in. Tracy Benguigui : 54:19 Thank you. Marc Grandisson : 54:20 Thanks Tracy. Operator : 54:23 Our next question comes from Michael Phillips with Morgan Stanley. Michael Phillips : 54:29 Hey, thanks. Just one follow-up for me, and it's back to MI for a second. Trying to marry your earlier comments on the rank order of capital allocation, and you put MI second behind P&C, which obviously makes sense given the fundamentals in the P&C book right now. But if we take that and then look at earlier comments and opening comments, which were pretty positive on the MI space. I'm trying to figure out how to think about -- any help you can give us on thinking about, I guess, growth for the MI business, given what we saw this quarter growth over the next year. Marc Grandisson : 55:01 Well, I think we -- I mean, it's hard to see from the way we report, but I think the growth, we have a fair amount of growth through the CRT. We also have a very healthy CRT, which is the credit risk transfer program from the GSEs. We also have, as you know, taken on the mortgage -- the mortgage company that was owned by Westpac in Australia, so that's also seeing some growth. In the U.S., I mean, we expect -- I mean we have to remember the production was record for 2020 and 2021. 55:32 So it's kind of hard to grow from there significantly. So the market itself probably will -- might be decreasing a little bit, so we'll see where it shakes up. Definitely, the refinancing is very, very much, you know, pretty much behind us, because of the mortgage rate increases for the that six months. So I wouldn't say that new production is -- because by virtue of the size of the market, on the U.S. MI sort of shrinking somewhat from the refinancing perspective, but what is happening, because of this mortgage rates increasing, the premium written will be much more stable and actually could increase because of the lack of refinancing precisely, which means the insurance in force will increase, which will give some lift into our ongoing written premium. So even though we may not have a similar production from an NIW perspective, I think that the existing portfolio, I would expect the written premium to go up on a gross basis, definitely at some point, starting probably in the second half of the year, Francois, possibly, yes. Michael Phillips : 56:39 Okay, well thank you, Marc, thanks for the color. Marc Grandisson : 56:42 Thank, Mike. Operator : 56:46 I'm not showing any further questions. I'd now like to turn the conference back over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : 56:53 Yes, thanks everyone for being here today. Great questions and we look forward to see and talk to you again in July. Thank you. Operator *: 57:02 Ladies and gentlemen, thank you for participating in today's conference, this concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,022	3	2022Q3	2022Q2	2022-07-28	3.893	3.975	4.7	4.76	null	9.88	9.24	Operator : Good day, ladies and gentlemen, and welcome to the Second Quarter 2022 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found on the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thanks Elizabeth. Good morning, and welcome to our earnings call. Arch delivered strong results this quarter headlined by an operating return on equity of 17%. Our results were driven by excellent underwriting performance across all three operating segments as we continued our focus on growth opportunities during this hard market, as demonstrated by the 27% increase in P&C net premium written over the same quarter one year ago. These results demonstrate how our company is positioned to capitalize on market opportunities across the many lines that we underwrite. We've said it before, but it bears repeating. We are committed to agile cycle management predicated by a focus on risk adjusted returns. And it has enabled us to accelerate our growth through the deployment of meaningful capacity to our clients. Because we invested in capabilities and reserved capital during the soft market years, we are in the enviable position of being able to maximize to these opportunity. Increasingly Arch is seen as a provider of choice by our distribution partners and clients, which allows us to take on leadership positions, some in the industry retrench. P&C rate hardening continues in many lines. It's important to keep in mind that for the vast majority of the P&C lines, we've been able to achieve compounded rate increases meaningfully above last cost trends for the last two or three annual renewals and as such healthy margins of safety have been created. We believe this attractive level of expected returns should remain in place for the next few years. I will now offer a few highlights on our business units. In the quarter, our insurance and reinsurance segments both had excellent operating results, largely because of how we leaned hard into the improving market early on. We also have invested in improving our data analytics while broadening our market presence. In our North American insurance operations, premium growth was broad based with net premium written up 29% from the same period in 2021. Some of the most significant growth came from our E&S lines, both property and casualty, professional lines, including cyber and a resurgent travel and accident sector. All our lines of business where we believe risk adjusted returns are most attractive. Our specialty international insurance business, which includes our Lloyds and UK regional businesses, also delivered strong growth in the quarter with net premium written up 23% from the same period last year driven primarily by specialty, casualty and property. Our investment in building the UK regional small business is gaining traction as well. When looking at the improved results of our insurance business, it's apparent that the work of our teams over the past several years is paying off. We have developed a platform that responds swiftly to opportunities presented by the hard markets while at the same time building more sustainable positions in lines that are less cyclical. We have the capital, the people and the desire to lead in today's environment, as long as attractive opportunities are available, Arch will be there to write them. Our reinsurance segment continued to deliver excellent top line growth and bottom line earnings this quarter because of the diversified and specialty focus of our reinsurance business. The strong growth reflects our increased writings of quarter share treaties which allow us to participate in the rate increases experienced by our [indiscernible]. The 61 and 71 renewals showed a property [cap] market in transition and while I hesitate to make predictions, we are cautiously optimistic that this momentum will continue in January 1, 2023. The general psychology of the market appears to have shifted to requiring substantial rate increases to accept cat exposure. As an example, in Florida, where capacity remains constrained, property cap rates were up in excess of 30% and our P&L in a one and a 250 year events increased as we selectively expanded our writings. Rate pressure was evident also beyond Florida. However, we will need a few more quarters to confirm we are facing a hard property cap marketplace. Turning to our mortgage segment. The group continues to deliver the consistent underwriting results we projected when we began building our EMI business a decade ago. Our embedded book of high credit quality risks as well as continued on price increases have been key elements to our exceptional return this quarter. All the rising mortgage interest rates have slowed the volume of new originations, the purchase market remains strong, as housing demand continues to outstrip new supply. Rising rates also mean that persistency is increasing which allowed Arch to grow its U.S. primary mortgage insurance in force to $292 billion and all time high. The forbearance programs continue to roll off and cures have brought our delinquency rate down to 1.77%, which is consistent with what we experienced before COVID. Last and perhaps most important, the credit quality of homebuyers remains excellent. And we believe our portfolio is well-positioned for a variety of economic scenarios. We will continue to be deliberate in managing our mortgage portfolio, benefiting from a diversified business model that gives us the flexibility to focus on credit quality and profitability, not on volume. Briefly on investments, where rising interest rates and market volatility are setting the stage for additional investment income contributions over the next several quarters. We're seeing the benefits of not chasing yield during the past several years as well as the work done to reposition our portfolio in response to the changing interest rate environment. Earlier this year our investment team reduced our equity exposure in our fixed income portfolios shorter duration has allowed us to quickly move our investments into higher rate securities that provides further cushion against potential inflation impacts. This year surge of inflation has been a call to arms to underwriting teams across the industry. And by and large the industry has proactively incorporated higher trends into its models. We believe that the uncertainty surrounding future inflation should keep upward pressure on rates. At Arch, we manage inflation by business segments as we said before. We believe inflation is a net benefit to our MIS portfolios performance while our P&C exposure to inflation is mitigated by many tools available to us. Overall, we're very pleased with our underwriting results and returns in a quarter. And we are optimistic about the rest of '22 and into '23. As always, our objective remains to generate profitable growth and deliver long term value for our shareholders and this quarter's results are another example of our ability to do just that. I want to thank the Arch team for everything they've done this past quarter and over the last several years. Our people have made Arch into an employer and insurer of choice and have us well-positioned to sustain our growth trajectory into '23 and beyond. Francois? Francois Morin : Thank you, Marc. And good morning to all. Thanks for joining us today. As you will have seen by now we had a very strong quarter and with very few unusual items to discuss or highlight to you. I have kept my prepared remarks relatively brief to allow for more time for the Q&A session. So here we go. For the quarter we reported after tax operating income of $1.34 per share, resulting in an annualized operating return on average common equity of 17.1%, two excellent results. In the insurance segment net written premium growth of 27.5% over the same quarter one year ago, combined with excellent underwriting performance resulted in an excellent year combined ratio exploiting cats of 90% a 140 basis point improvement over the same quarter one year ago. Like last quarter, a change in our business mix resulted in a slightly different split between the loss and expense ratios, compared to the same quarter one year ago. In the reinsurance segment, net written premium grew by 25.7% over the same quarter one year ago. The segment produced ex-cat accident year combined ratio of 82.8%, 430 basis points lower than the same quarter one year ago. Here also a reduction in the accident year ex-cat loss ratio was partially offset by a slight increase in the expense ratio due to growth in areas with slightly higher acquisition expenses, and targeted personnel expansion to support our growth. Losses from 2022 catastrophic events net of reinsurance recoverable and reinstatement premiums stood at $82.4 million, or 3.5 combined ratio points compared to 2.4 combined ratio points in the second quarter of 2021. The losses were split approximately 80% to reinsurance and 20% to our insurance segment. It's worth noting that approximately two thirds of the estimated losses came from events outside the U.S. including Australian floods, South African floods, a directional storm in Canada, and other miscellaneous natural catastrophe events. Our mortgage segment had an excellent quarter with a combined ratio excluding prior development of 39.2%. Net premiums earned increased on sequential basis due to increased persistency of our enforce insurance, which now stands at 71.3% at the end of the quarter, and growth in our CRT portfolio. Production levels also increased from last quarter consistent with the seasonality of the business. We recognized $118.1 million of favorable prior year development across a segment this quarter. A meaningful benefit to our bottom line, as delinquencies cured at a higher rate than expected. Close to 80% of the favorable claim development came from our first lien insured portfolio at USMI mostly related to the 2020 accident year. The remainder of the favorable development came from recoveries on second lien loans, and better than expected claim development in our CRT portfolio in our international MI operations. In all our segments, we maintain a prudent approach and setting loss reserves considering the uncertainty we face in a variety of factors, such as macroeconomic conditions, inflation, both monetary and social, and lags and settling longer tail liabilities as COVID related delays get worked through the legal systems. Income from operating affiliates stood at $4.6 million. It was generated from good results at Coface mostly offset by the negative mark to market impacts on the summer's portfolio for those securities that are accounted under the fair value option method. Gross investment income before investment expenses increased 20% from the first quarter of 2022 to $123.6 million driven by the reinvestment that higher yields of proceeds from the maturities and sales of investments and securities and the presence of floating rates investment floating rate investments in our portfolio. Total investment return for our investment portfolio was a negative 3.02% on a U.S. dollar basis for the quarter hurt by mark-to-market losses due to rising interest rates and weak equity markets. As you know, it is worth remembering that while mark-to-market impacts are fully reflected in our financials, a significant portion of this decrease hasn't been crystallized through the selling of securities and has the potential to reverse itself over time, in particular for our fixed maturity investments as they mature. As we discussed on the first quarter call that defensive investment strategy we have employed for a number of quarters with high quality investments and a short portfolio duration has helped minimize the impact of rising interest rates and the mark to market hit to book value. Our investment duration remains slightly below three years at the end of the quarter and slightly underweight and relative to our liability duration target. The performance of our alternative investments remained very solid this quarter, as we benefited from the returns generated by a number of funds that outperformed broad market indices. Turning briefly to risk management. Our natural cap P&L on a net basis stood at $888 million as of July one, or 7.7% of tangible shareholders equity. Again, well below our internal limits at the single event one and 250 year return level. Our peak zone P&L is currently the Florida Tri county region. On the capital front, we repurchased approximately 7.1 million common shares at an aggregate cost of 320.7 million in the second quarter. Our remaining share authorization currently stands at $600.6 million. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Your line is now open. Elyse Greenspan : Hi, my first question is on the rate versus trend discussion which we've had a lot so far this earnings season. Marc, you started off your conversation by saying you continue to see hardening and many lines. Where would you place when you think about your insurance business where you place price and loss trend? And how do you think that could go from here as we think about higher inflation levels? Marc Grandisson : Yes, I think the pricing, nice hearing from you Elyse, I think the pricing in the market is definitely clearing the last round. You've heard us on some of the calls that we would concur with that conclusion. Elyse Greenspan : And you think as you're thinking out the next year, do you think that remain as especially right to your comments when we've heard about weight on top of weight on top of rate. Or do you see dynamics? They will keep talking about that for the next year or so? Marc Grandisson : I see what you mean. So I think I would answer by saying the perceived risk in the marketplace has actually increased. So there's all this on the property categories. I mentioned briefly, my comments. And also on the liability side as well. I think that the uncertainty about the social inflation, and what it could mean and also geopolitical risks, just a lot of stuff going on in the world, I would expect this to continue well into 2023. But I've been wrong before. So I have to be careful the way I tell you this. Elyse Greenspan : And then on the investment side, where are you putting new fixed income money to work in terms of rates and then how much of the portfolio is turning over the next 12 months? Francois Morin : Good question. I think we don't plan specifically how much of it we're going to turn over. But we've been less than that. Our investment team has been pretty active trying to make sure that a first of all, we did take a lot of investments. So offer risk in the first half of the year. And then it'll all be about how much of what kind of opportunities we see as with the environment we're in, but we certainly with a short duration that we're at three years, you could certainly think that a meaningful amount of it, there's going to turn over the next 12 months. Elyse Greenspan : And then what's the new rate today? Marc Grandisson : Well, new rate want to be a little bit careful here. Certainly corporates you've heard it we're calling for approaching 4.5% in some places and the corporates investments on and corporate securities that we made in the month of July. With the Fed announcement yesterday, I mean, the risk for you the treasuries I think everything is going to move up a little bit from there. So that's kind of where what we're seeing today, it's going to evolve as we move forward. And that compares to an embedded book yield of 2.2% or so at the end of the quarter. So it's meaningfully higher than what we're the portfolio has been at. Elyse Greenspan : Okay, thanks for the color. Marc Grandisson : Yes. Operator : Thank you. Our next question comes from Jimmy Bhullar with J.P. Morgan. Your line is now open. Jimmy Bhullarn : Hi, good morning. So first just had a question on the mortgage insurance business. How are you, what's your view on the operating environment in the business, but just as the threat of a potential recession and then its impact on margins, and then just with the higher interest rates, and how that's going to affect top line growth in the business? Marc Grandisson : Yes, and I think it's quite answered a bit more specifically, I think that as I mentioned in my comments that we mentioned more than once on the calls, you're going to hear some of the other I believe, competitors is that the credit quality of the borrowers that we see right now is exceptional. By and large, the credit quality has actually improved through the pandemic. So we're very, very pleased with this. And I'm saying this, because the biggest driver of default in distress is a credit quality of the borrower. It's by far and it overwhelms the risk possibility. We also are in position where we have substantial equity buildup in the housing stock. So that's also helpful. So we're very comfortable with the way the portfolio is position. And I think it's, we're not recession proof. But I think we have a lot going for us if there were to be a recession. Now, the top line, as you know, if there's less production, there's some indication that the third quarter might be a bit slower than usual, then that would mean no production that's less than positive for the industry in that quarter. But the impact on your premium will take a little bit longer to be felt because as you know, monthly premiums are written through a longer period of time and most of what we write and earn at this point in time comes from prior underwriting years 2020, 2021 and 2019. So we're not going to see a huge impact immediate impact. It's not like a property casualty portfolio. So, again, it's a somewhat of a tempered impact on top line, we believe. Jimmy Bhullarn : Okay. And then on share buybacks, you've spent, I think it was $321 million this quarter, $255 million last quarter. And if I look over the past year and a half, they've averaged almost $300 million a quarter. Do you expect to be at the same pace going forward? Or should we assume a slowdown? Marc Grandisson : That's a good question. I think, yes, we've been active. I think we, it's part of our evaluation of all the alternatives in front of us when we buy back stock compared to how we deploy the capital in the business. The one thing that I want to make sure as you're aware, I mean, realizes and we're bullish on the market, right, we think the market that we see today is strong and has some potential for even getting better. Time will tell. We certainly need to put odds on that. But the reality is, if it gets better, and we have the ability to deploy more capital in the business at one-one, will certainly want to do that. So the -- we'll reevaluate that daily and weekly, like we always do, but I could see a scenario where we have to pull back a little bit on the share buybacks really just to have the capital base that we need to fully execute on deploying the capital in the business and the three segments which are, as you see all humming and growing at a very good clip, make sure that we can execute on that opportunity in '23 and beyond. Jimmy Bhullarn : Okay. Thank you. Marc Grandisson : You're welcome. Operator : Thank you. Our next question comes from Tracy Benguigui with Barclays. Your line is now open. Tracy Benguigui : Good morning. I also had a loss turn question. Marc you've said in the past that your view of last trends, your book is roughly 250 basis points above CPI. And for access layers, it could be even higher. Can you just share your latest take on that? Because I think when you talked about these levels, CPI was below 2%? Francois Morin : Yes, I think it's on a long term basis, right. These surge and inflation may create distortion in that spread over this but over the long haul. I still maintain this and seen another statistics recently that concurs with that sort of analysis. I think that the CPI we've fitting it right now in the shorter lines of business, shorter pay lines of business and property specifically, as you know, we've had all collectively a lot of labor and cost material that went through hire, very significantly. I think in some lines of business, we're not seeing evidence of yet of trend above the CPI significantly above the CPI. So I think our position has been to maintain, as we said before, Tracy, a longer term view of the loss trend. And when we had indication, perhaps zero to 1% in certain years, we probably have higher from a longer term perspective. So that helps on a cumulative basis when you buy the business not having to do as much catch up. It keeps you a little bit more balanced through to changes in inflation sometimes we see right now. Tracy Benguigui : Okay, so it's more of a view, not what you're seeing today. Marc Grandisson : Correct. Tracy Benguigui : Okay. Also started a conversation yesterday on the intersection of investment yields and combined ratio targets typically combined ratio targets we share with underwriters is informed by ROE. And I believe you guys, when you come up with these targets, you're actually looking at new money yields on a risk free duration match basis. So not your portfolio yield. Are those the right clicks and takes of your pricing model? I guess, ultimately, could hire new money yield risk free in your case change your indicated rate need? Marc Grandisson : Yes, it's a great question Tracy. And I like the way we've built our compensation scheme for our underwriting team. It's actually self correcting and self adjusting as we go forward. Number one, when the prize the business, this is our underwriting underwriters. They actually look, they used to look in the Wall Street Journal at a three to five year equivalent treasury rate. And that's what they would ascribe to the cash flow in terms of investment income, that he could earn on the premium that we could earn on the premium. So it's really a treasury return. This is what you get credit for their compensation plan. So as interest rates go up their interest yield go up on their on the floor that they create, or help generate for Arch from the insurance perspective, but as a counterpart to that our targets is also in flux and actually moves in lockstep with that treasury equivalent. We have actually set a target that 950 bips above treasury for the target. So while at the same time they're getting more investment income, you can see a higher margin, they're going to have a higher threshold on the target that they're that they're looking at. And we do this continuously. I know our reinsurance folks, because it's portfolio based, it's almost a daily occurrence, they actually look it up every day, on their own insurance, on the insurance basis, we actually look at it through a portfolio on a quarterly basis. Unless there's a big change that we just saw, then they'll be like immediate changes made to the pricing model. So everything is linked together. So interest rates go up. Yes, you get more investment income, but hey, guess what, we need to have a higher return. Tracy Benguigui : Okay, that was excellent color. If I could just speak and this was really quick. What is your new insurance rate in MI go up this quarter sequentially? Marc Grandisson : Can you repeat the question again please? Tracy Benguigui : Sequentially, yes, sequentially what is your new insurance written for mortgage insurance went up? Marc Grandisson : Yes. Okay. Yes. [indiscernible] it's $23.5 billion versus $20 billion in the first quarter. And largely, as you know, Tracy, it's a very seasonal marketplace. A lot more origination takes place in the second quarter. The school year finishes, people move, the size of summer gets around. That's why there's other people moving and buying houses and refinancing even, not so much these days, but certainly purchasing houses in the second quarter. So historically, the first and fourth quarter are about the same. They're lower than the middle two quarters. So that's sort of a, it's just a by virtue of the market origination. There's nothing in our pricing or appetite has changed in the border. Tracy Benguigui : Thank you. Marc Grandisson : Okay. Operator : Thank you. Our next question comes from Brian Meredith with UBS. Your line is now open. Brian Meredith : Yes, thanks. A couple of them here for you. First Marc just curious. Big growth in Florida property cat. How do you get comfortable reinsuring some of the less credit worthy companies down in Florida? Marc Grandisson : Yes, we have a very good question, Brian. I think probably like other competitors of ours. We have a very, very extensive list of clients and we've done auditing of all of them even if they're not our clients throughout the years. Two aspects that we will look at the claims paying ability how good they are adjusting claims because as you can appreciate, Brian is very important. And secondly, we're looking at the financial situation. So we have rank order them in two or three buckets. And we actually tend to focus our limit in the ones that are healthier, and the ones that we believe have better claims adjustment processes and teams and expertise. So but having said this does mean that we won't do a business with someone who's a bit more fragile from a financial perspective, but you probably heard it already that there are conditions that put in a contract such as prepaying reinstatement premium to make sure that we don't have to run after two credit risk. So there's a lot of things you can bells and whistles. So we treat, different clients different way based on our assessment of claims, paying ability, and then expertise and credit worthiness. Brian Meredith : Got you. Thanks. And then second question, just curious, professional liability premium insurance still really strong growth. That's the one area we've actually been hearing some concern from some companies may not concern to the right word for it, but are you seeing some competitive pressures in the public market DNO area? Maybe talk a little bit about what's in that professional liability line for you all and are you seeing the same type of trends? Marc Grandisson : Yes, the excess DNO I think is a little bit more stable, more sideways, some go down, some go up, but it's clearly not as -- as heated as it was three or four years ago. But one thing I want to mention, Brian, that people forget, race and excess DNO are two, three, four times what they were three or four years ago. So it's extremely, still a very, very healthy marketplace. I think we would argue that capacity is stable. There's not much -- no longer any dislocations. I just think that for the right company, for the ride experience, no claims or very good quality, there's a tendency that there's a willingness on the marketplace to give more credit to those companies, which is sort of normal. And given where we are in the market after four years of extreme rate pressure. I think on the second question, with our growth a lot of our growth isn't a cyber products. We actually have put cyber in a professional line. And that's one area which we said before, we're very keen to develop and grow as we're seeing really great opportunities there as well. And much needed. Capacity is much needed in that in that marketplace actually. Brian Meredith : Makes sense. Thank you. Marc Grandisson : Sure. Operator : Thank you. Our next question comes from Josh Shanker with Bank of America. Your line is now open. Josh Shanker : Thank you. I'm understanding your answer to Tracy correctly, you have a long term view of inflation and the changes in inflation wouldn't cause you to change your the inflationary outlook embedded in your in your reserves. Now, if that's correct, does that mean some years you're going to run a little hot because inflation will be higher than you expect? And in some years lower. And would you need would you or any other insurer need to take a charge in order to shore up higher inflation for an extended period? Marc Grandisson : No. I think that what I say is when there's lower interest rates, lower inflation rates loss trend, we tend to take a longer term view. And as you know, Josh, we had multiple years of, I would argue depress loss cost trend, which was great for the industry, but we still maintain a healthy skepticism as to how we can last and over the long haul. So that makes us maintain a pricing actually higher, during times of, I would argue softer times. What I think it means is that our bright line as to where we think we can make a great return or a good return is doesn't move as much around as we go forward. Right. Because we have a property, we believe we want to have a healthier or more conservative, if you will view of the loss cost trend as we price the business going forward. Josh Shanker : So your loss cross trend assumptions are already higher and inflation [indiscernible] has been meeting the loss trends you already assumed? Francois Morin : Yes. I think that's fair. Let me add a bit more on your question. I think Josh, specifically on reserves, I mean that's where the feedback loop comes into play where we do start with more long term assumptions around trend. And as Marc said, we've been through a period where inflation has been pretty benign. So we effectively over time, because we've been pretty, I guess we're slow to react. The good news has been that that's been an Arch kind of philosophy for a number of years forever, really. We effectively end up building a little bit of a cushion that may come in handy if things do pick up again. If there's a bit of a spike in inflation, which depending on the lines of business and some lines of business property, short tail, no question that we're seeing a little bit of higher inflation on labor and goods and materials. In some other lines of business, we're just not seeing it. So it doesn't mean it's not there, it doesn't mean that it won't happen. But for the time being, we have built up this again, buffer that we would call or a little bit of cushion in the reserve base, which would prevent us or what actually, we use up first before ever having to take a charge which in our 20 year history, we've never had to take charges. And we certainly hope to keep it that way. Josh Shanker : That makes sense. I'm trying to understand mechanics. So you have a high, I don't mean to repair it, but you have you have a high assumption going in, nothing has changed that assumption. If something were to happen, that would change the assumption, by definition, it would mean you need to carry more reserves. But you have a buffer in there. And so you don't need to? Marc Grandisson : On the old years. On the new years, we right. So the new business that we priced today, we will increase, we have increased. And again, it varies by line. But in some lines of business, no question that we've raised our assumptions, our pricing assumptions and loss cost trends so implicitly that when we reserve those new business, those new years '22 and moving forward they will start at a higher level reflecting the inflation assumptions that we put in place today. When we worry about reserves on the older, [in force] the old years, right '21 and prior, the fact that we priced them with more conservative assumptions on loss cost trends gives us that buffer that we think will be a mechanism to absorb some of the volatility. Josh Shanker : And in terms of buffers, could you update us on your IBNR reserve for COVID? Marc Grandisson : Our total reserves for COVID are still at $160 million, 75% of which are either IBNR or ACR within a reinsurance segment. Josh Shanker : That's very complete. Thank you. Marc Grandisson : You're welcome. Operator : Thank you. Our next question comes from Ryan Tunis with Autonomous Research. Your line is now open. Ryan Tuniss : Hey, good afternoon. Just one question from me. Can you talk a little bit about the impact that global minimum tax would have on the MI tax rate? Marc Grandisson : It's pretty mature Ryan to analyze all this. There are so many moving parts of these global minimum tax right now whether it's going to take place, whether it's going to happen, which country is going to enact it? So way too premature. I mean, of course, our tax folks are working always every week, there's a new notion, something new coming from all the various governments and agencies and treasuries around the world. But right now, it's still a moving target. Too early, too premature to say what it would mean for us. Ryan Tuniss : Understood. Thank you. Marc Grandisson : Thanks. Operator : Thank you. Our next question comes from Meyer Shields with KBW. Meyer Shields : Good. Thanks. First, I want to follow up on Brian's questions if I can. Nothing much in terms of the quality companies in Florida. But given the sort of bizarre litigation environment there, how do you get comfortable that even the good companies are with reinsurance? Marc Grandisson : It's a very good question. I think that in general, that's why we actually ask and want a higher margin of safety in Florida. So I think if you look at our expected pricing in Florida reflects all of these. And we need a healthier margin and you will find that the margin in Florida is higher than most other jurisdictions around and I think we've increased a little bit in Florida. We know we didn't go as Francois mentioned the P&L went up slightly in the Florida Tricounty area. But these prices, the prices that we saw as well Myers at some point, they're not necessarily sort of settled market, they might be sort of harder to place or a layer that needs to be fun finalized. So the pricing will be quite a bit better than you would expect than the average market would be. Again, Meyer there is no guarantee in this slide specifically an insurance as you know. I think we tend to think about having a higher margin of safety in Florida and several deals gave us that opportunity this year. Meyer Shields : Okay, no, that makes perfect sense. Second question, if I can look over your shoulder on the reinsurance side. You talked a little bit about the industry recognizing faster rates of inflation. How much does that vary when you look at potential feedings? Marc Grandisson : Wildly, it varies wildly. I think now we probably have more consensus building in the industry. But it does vary wildly, because to be fair to our clients, they have different books of business, they have different lines, they have different focus geographically or line size. So it does vary a lot. But there's clearly among our clients that we can see and sense that there is development coming, there is some of that inflation taking up a little bit, which they have, by and large, already understood and appreciated would come. But I think like, it's, I would say it's varies by [sitting] company, the level but I think the general direction of pricing for more and recognizing more is there than [sitting] company clearly. They've been very, very proactive, most of them if not all of them. Meyer Shields : Okay, no, excellent. Thank you very much. Operator : I am not showing any further questions. I'd now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you very much, everyone. We're looking forward for the second half of this year and there we'll talk to you soon. Operator : Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,022	4	2022Q4	2022Q3	2022-10-27	4.174	4.405	4.952	5.153	null	9.23	9.13	Operator : Good day, ladies and gentlemen. And welcome to the Third Quarter 2022 Arch Soft Capital Group Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session. And instructions will be given at that time. As a reminder, this call may be recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sir, you may begin. Marc Grandisson : Thank you, Michelle. Good morning, and welcome to Arch's third quarter earnings call. Our investors know that with Arch, you're getting a diversified time-tested active capital allocator. Are we on now? Operator : Yes. Marc Grandisson : Okay. Let me start again, guys. Sorry about this. Our investors know that with Arch, you're getting a diversified, time-tested active capital allocator that understands that how you navigate cycles is crucial for long-term success. Hurricane Ian gave us a stark reminder of the importance of insurance. And our hearts go first to all those lives or property. As we turn to 2023, our agility is never more important. As an insurer, we provide protection for our clients during times of uncertainty. The reality for our industry is that big events like Ian almost always result in opportunities for the company that actively manage their capital and have the ability and the decisiveness to act when markets need their capacity. Arch is one of those companies. The current environment presents Arch with the opportunity to enhance its relationships with clients as they seek out insurance and reinsurance solutions in these uncertain times. The cat activity in the third quarter has significantly increased pressure on property cat market, which could have ripple effects across all property and as we approach the 2023 renewals. Over the last several years, we've maintained that property cat rates have been inadequate. Now the market recognizes this as well. The events of the past 18 months significant interest rate hikes, repricing of investments, ongoing general inflation concerns and the increasing cost of capital, all point to the need for a higher margin safety in the premium with property being the poster job. We're pleased that the underwriting discipline of our insurance and reinsurance segments limited Ian's impact to a quarterly earnings event. As we have said before, our proactive approach to cycle management enables us to protect our capital over the long term. From Arch standpoint, as other insurers are reducing their overall participation, we have an opportunity to showcase our outstanding team, strong balance sheet, underwriting acumen and creative things. Our positioning should reward our shareholders with superior risk adjusted return in. I want to take a few minutes to call your attention to areas in each operating segment where we continue to make positive strides. In the third quarter, our insurance and reinsurance segments continued to grow premium and delivered solid current accident year ex cat combined ratios. 89.5 for insurance and 85.5 for reinsurance. In our insurance operations, we continue to see strong net premium written growth in the third quarter, up approximately 19% in the same period in 2021. Some of the most significant growth came from professional liability, including cyber as well as a strong increase in travel lines. Our excess and surplus lines business, both property and casualty, also continued to achieve rate increases of trend, and we are optimistic about the opportunity for further growth in 2023. Competition in P&C is robust, but rational, and the markets are taking a more technical approach to pricing and a project suits Arch's underwriting commodity. Cyber insurance has become increasingly important to our insurers globally, and we have substantially increased our support because quite simply, we believe that today's cyber market has changed for the better. The most important development over the past several quarters is that the alignment between clients and insurance companies have significantly improved as insurers have become more vigilant in their efforts to mitigate cyber risk. Additionally, insurance terms and conditions have sufficiently tightened, retentions have increased and rates have reached a level where we believe we have an opportunity to earn an appropriate return for the assumption of risk. Next, our reinsurance segment once again delivered excellent top line growth of the specialty businesses, including property, property cat and other specialty lines. Since inception, a hallmark of our reinsurance group has been its ability to quickly adapt to changing market and reallocate capital to earn better risk-adjusted returns. Excellent market conditions and the likelihood of capacity constraints were to likely create an eventful January 1 renewal period, and our teams are actively planning to meet the demands of our clients. Now to the mortgage group or, as I call it, our beautiful business. They once again provided proof of their sustainable earnings model by delivering $299 million of underwriting income that is essentially uncorrelated with our P&C operations. Although higher interest rates affected new origination volume, they also improve the persistency of our portfolio, which rose 4% in the quarter to 75.4% and allowed us to grow our U.S. primary mortgage insurance imports to nearly $295 million. Our embedded book is in great shape. Credit quality remains excellent. Unemployment is still at the historical low and the average borrower had a superior FICO score of 748. Homeowners equity, a key factor in protecting against claims is very high with 90% of policies having at least 15% equity in the home. In addition, the MI market is being proactive, increasing rates to adjust to the evolving environment. We continue to be thoughtful in how we manage our mortgage portfolio and because of our diversified model, we have the ability to take a measured view of the business as just one component of our diversified enterprise. In the near term, better returns will most likely come from our property and casual segment and we would expect that our capital allocation will bear this out. Although investment returns were challenged again in the third quarter, it's important to note that rising investment yields even after adjusting for claims inflation should help boost our return on equity. Obviously, with the Fed attempting to inflation, when we continue to see negative investment markdowns, a significant amount of which we would expect to recover as our fixed income securities mature over the next several years. Ultimately, the relatively high quality and short duration of our portfolio, combined with strong cash flows provide an opportunity for us to reinvest in new money yields that are substantially higher than our current book yields. In conclusion, outperforming in the P&C insurance market is always a challenge and the most recent paradigm where the property cat market was supported by cheaper alternative capital had increased the level of difficulty. However, many of the investors in ILS funds have recently seen their becomes underperformed and are beginning to leave the market. Without an obvious source of cheaper capital, our industry is nearing an inflection point. There appears to be a shortage of players with the capacity and willingness to participate, creating possible supply shortfall. Fortunately, for our shareholders, we have both the capacity and the willingness to deploy more capital in that space for as long as the reward justifies the risk. We're optimistic with regards to the opportunities ahead of us in the fourth quarter and into 2022. We talk about our principles of set cycle management and capital allocation at almost every opportunity because they're truly part of our DNA. We have remained disciplined over time and kept our focus on fundamentals when it came to underwriting. The market needs companies like us to rise to meet their needs. And as I like to say to our team, Arch is open for business. With that said, I'll turn it over to Francois to go through some of our financial details before returning to answer your questions. Francois? Francois Morin : Thank you, Marc, and good morning to all. Thanks for joining us today. As we communicated in our release earlier last week, our third quarter results were adversely impacted by the effects of Hurricane Ian and other global catastrophe events. in spite of the severe nature of Ian, which we believe will end up being the largest single loss in our history, we reported after-tax operating income of $0.28 per share resulting in an annualized operating return on average common equity of 3.8%. Year-to-date, our annualized operating ROE is 11.6%. This result demonstrates once again the value and the resilience of our diversified platform. Now on to catastrophe and losses, where we wanted to provide a bit more color on our assessment of Hurricane Ian. We all know it's still very early in the claim adjusting process, and the final determination of our ultimate loss exposure will likely not be known for quite some time. Our initial estimate of the ultimate losses is based on an industry loss of $50 billion to $60 billion. We believe this range is appropriate at this time given the unknown impacts of inflationary trends, potential supply and demand imbalances and labor and material costs. The newly introduced Florida Property Insurance Reforms and the extent to which storm search claims may end up being covered by insurers, among others. Overall, we believe our estimated market share of the event will be comparable to prior or large events of a similar nature. In the insurance segment, net written premium grew 18.6% over the same quarter one year ago as our underwriting teams continue to find new business that meets our return expectations. Overall, underwriting performance was excellent with an excellent year combined ratio excluding cat of 89.5%, a 100 basis point improvement over the third quarter of 2021. In line with the last few quarters commentary, an ongoing shift in our business mix and structure of our reinsurance programs resulted in a slightly different split between the loss and expense ratios compared to the same quarter one year ago. In the reinsurance segment, net written premium grew by 73.6% over the same quarter last year. It's worth pointing out that in the third quarter of 2021, we had a cat up in seeded premium the Somers REIT, significantly reducing our net written premium. Absent this impact, the year-over-year increase in net written premium would have been 37.9% and much like the insurance group reflects an environment where we are better able to write business that meets our return thresholds. The segment produced a next cat accident year combined ratio of 85.5%, 230 basis points higher than the same quarter one year ago as a result of an elevated number of large attritional claims in our property other than property catastrophe book and also an increase in our expense ratio due to an ongoing shift from excess allowance to more proportional business. We believe this movement in the loss ratio is well within our expectations of the inherent variability of the underlying claims activity in our book of business. Our mortgage segment had an other excellent quarter with a combined ratio excluding prior year development of 39.9%. Net premiums earned decreased on a sequential basis as we continue to see the effects of higher recessions on our U.S. MI book and lower levels of single premium policy terminations. Persistency of our in-force insurance now stands at 75.4% at the end of the quarter. It has continued to increase due to the rising mortgage rates which considerably reduces the attractiveness of mortgage refinancing for most borrowers. We recognized $126 million of favorable prior year development across the mortgage segment this quarter as delinquencies continue to cure at a higher rate than expected. Over 80% of the favorable claim development came from our first lien insured portfolio at U.S. MI mostly related to the 2020 and 2021 accident years. The remainder of the favorable development came from recoveries on second lien loans and better-than-expected claim development in our Australian operations and our CRT portfolio. Income from operating affiliates stood at $8.5 million and was generated from consistent results of offset in part by underwriting losses at Somers Hurricane Ian. Net investment income was $0.34 per share, up 21% from the second quarter of 2022 and 55% from the third quarter of 2021 on a per share basis. The strong positive cash flow from operations over $2.8 billion year-to-date, combined with the proceeds from maturities and sales of securities, deployed in a rapidly rising yield environment underpinned this improving results. Going forward, with new money rates above 5% and a growing base of invested assets, we should have a good opportunity to further enhance our operating income through solid investment income results. Total investment return for the investment portfolio was negative 3.01% on a U.S. dollar basis for the quarter in a challenging environment of rising interest rates and weak equity markets. We remain cautious relative to our duration, credit and equity risk with our investment portfolio, and this defensive strategy helped minimize the mark-to-market hit to book value. Our investment duration remains relatively unchanged compared to one year ago and is slightly underway relative to our liability duration. Turning to risk management. Our natural cat PML on a net basis stood at $851 million as of October 1 or 7.7% of tangible shareholders' equity, again, well below our internal limits at the single event 1-in-250-year return level. Our peak zone PML is currently the Florida Tri-County region. On the capital front, we repurchased a minimal amount of share this quarter, approximately 236,000 common shares at an aggregate cost of $10.1 million. As our prospects of seeing meaningful opportunities in the business remain very good for the remainder of the year and into 2022. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from Jamminder Bhullar with JPMorgan. Your line is open. Jamminder Bhullar : Hey. Good morning. So first, I just had a question on -- obviously, on pricing in the reinsurance market. Obviously, cat pricing hardening a lot with after Ian, how do you think it will affect pricing in non-cat lines? And where do you see the best opportunities for growth for Arch? Marc Grandisson : So thanks for the question. I think it's still early. I think the Ian is one part of the equation. This is what I think we should probably see an impact on other lines of business because aside from Ian, we also have the markdowns and inflation concerns and whatever else is out there. So it would be reasonable to expect dripping effect through the other lines of business. I also want to remind everyone that the market has gone through a hardening outside of cat for the last three to four years. So I'm not sure we would see a similar or furthering or hardening the same level that we saw. But we're at a really, really good level right now. So anything that is incremental above that is hugely accretive to us on an industry certainly in Arch. Jamminder Bhullar : And then how do you think about capital? Because a lot of companies, total equity has come down a lot because it marks on AOCI. And I noticed you bought back very little stock this quarter. Not sure if that has anything to do with capital or just preserving capital ahead of cat season. But how do you think about capital overall for the industry as well as for you guys and specifically, how that's affected by declining total book values? Marc Grandisson : Yeah, I'll start with the overall industry, and I'll turn to Francois for specifics for Arch. I think that the capital going out in the industry is a big deal. We are an industry that rights against the surplus. And unlike 2008, when the markdown has recovered pretty quickly. We don't seem to be right now at this point in time, at least in a position where it will recover soon. So there's pressure on the capital in terms of how you write the business and how much you're allowed to write or the rating agencies or the regulatory agencies. So I think we'll refresh that pressure is not going to be short term. We think it's going to last for a while. And as an underwriter, capital is one of the main ingredients you have to create underwriting decisions and provide service to your clients. So it's a big deal. And we're talking some companies using 20% to 30%, 35% except these are big changes. And I would add, as you know, Jammie, that in initiatives, we have an environment where there are a lot of uncertainties, inflation, recession and whatever else is out there. So -- and I think we're all collectively bracing for interesting several quarters ahead of us. Francois? Francois Morin : Yeah. The one thing, Jimmy, I'll add to specific to our Trey, and that's really part of our history. We've always operated with the principle that we wanted to have a strong and conservative balance sheet, right? And why have we done that? Why are we thinking that route? It was always with a mindset that we wanted to have optionality. We wanted to be able to take advantage of improving market conditions when and if they come around, right? . And what I mean consistent and strong and conservative balance sheet, it's, a, the investment portfolio, you saw that in our markdowns, we got some like everybody else, but I think we're probably more on the low side. And also in terms of leverage, we don't have a very levered balance sheet. Even today at 9/30, we're below 25% the right at 25% on a just-to-capital basis. So those are the reasons why we feel like that's -- again, that's been our strategy. And this may be a moment in our history that tells us that and we'll be able to enjoy the benefits or reap the rewards of maintaining such a strategy. So I think we're in a really, really good position. We're positive. We're optimistic about the market going forward. We're still not there yet, and we'll see what happens at one to one, but at least from the balance sheet point of view, we're in a really good position. Jamminder Bhullar : And any color on the sort of minimal buybacks this quarter? Francois Morin : Well, again, it's twofold. I'd say, a, we typically don't do a whole lot in the third quarter ahead of the hurricane season. So that's very consistent with our history. There's always -- the stock price matters, always, as you know, in the short and stock buybacks. So going into the quarter, we just wanted to see how things played out. And also with the expectation that we would -- the hard market, even before Ian, we still thought that the hard market would be -- go well into 2023. And that was one of the reasons why we felt maintaining the capital base that give us the ability to write on that business in '23 was critical to us. Jamminder Bhullar : Thank you. Operator : Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open. Elyse Greenspan : Yeah, thanks. Given your expectations for pretty strong price increases at January 1. Obviously, we have some time right until Florida and other business renews later next year. But where would you think -- based on the growth you think you could see in reinsurance? What do you think your PML will shake out next year? Marc Grandisson : At a really good question, Elyse. And I think it's obviously dependent on the risk-adjusted return that we would see in there. Like I just want to remind everyone that we're underweight at 7.7%. So we have room to grow if we see the opportunity. We did grow a little bit in 2022, seeing opportunities. We would do the same thing if we were to be presented with the same situation. I think we have the capital, the appetite and the expertise to really participate in the upcoming market hardening. I think at least the -- if it continues to shape up the way it's designing itself, we're going to be part of a solution. We're going to be part of creating new solutions and providing meaningful capacity to our clients. What I like about what we are is we have a diversified platform. As you know, it is a lot of flexibility and as Francois Morin mentioned, we're in a very good position. What I could say is, if you tell me what the returns were, I would tell you how much we would be willing to take. But you would expect to hear from Arch that the way we think about building up the risk in the tower is incrementally as we would go up on the PML, we would the expected return to increasingly improve over that period. So it will be really, really highly depend on how much the rates go. And you might -- I think it's too early to tell. What it's going to be, right now, what we think it could change, but it should be significant. Elyse Greenspan : So based on what you think could transpire and you think about putting your capital to use next year, insurance, reinsurance, mortgage, I mean it sounds like more will be on the P&C side. And then do you see more going to reinsurance versus insurance, because it sounds like you guys are still seeing some good opportunities on the insurance side as well. Marc Grandisson : Yes. Well, I'll tell you, Elyse, if you look at this is the beauty of our platform, right? When you had a reinsurance company and an insurance company, was to participate in the upswing of the market that is reinsurance is a really, really quick and proactive way to do. So we think in the early stages of this hard market gets there, that we would be deploying more capital more quickly into our reinsurance unit because it's also what I think most of the need is going to do, right, on the insurance portfolio, at least as you know, fiscal year to turn over our portfolio, whereas a reinsurance portfolio could be done much quicker. So I think it's going to be in steps like it always has been. It's the same in 2002 when we were formed. We were really, really reactive and very quick to market on the reinsurance side as we saw our insurance business building up and getting traction and take via a hard market. So I think over time, we then where does it land in 2024 and beyond if we have this opportunity, again, as I mentioned, then it will be relative returns. It will depends who gets a better risk-adjusted return. They will have to go in front of Francois and I and argue their case. These are our prospective units. And this is what we're going to go through. We go through this on a quarterly basis to make sure we're keeping all the returns in the same -- the most optimal as possible. Elyse Greenspan : And then 1 number is one. Francois, you pointed 230 basis points in the reinsurance segment, I think from elevated property claims. So if we're thinking about that kind of the run rate, I'm assuming we should ex out that $230 million and then assume as the business shifts more towards property and property cat that there would be underlying loss ratio improvement driven off of mix and rate in that business? Francois Morin : Yeah. I think that's the third way to think about it. I mean, we've said before, I think looking at loss ratios on a quarterly basis is not something. It's not how we think about it. We like to take more rolling 12 months or even maybe longer periods to have a view of the long-term performance of the book. Again, I was just making a point that just to let everybody know that we're not worried about this little blip in our quarter, very much part of the normal volatility of our business. But going forward, if the market ends up being very constructive, let's say, on the short-term lines. Specifically, yes, the loss ratio presumably could come down a little bit. Elyse Greenspan : Thank you. Operator : Our next question comes from Michael Zaremski with BMO. Your line is open. Michael Zaremski : Good morning. I guess just sticking with capital. Is the -- I know we don't -- I don't want to spend too much time about this S&P capital model. But I remember checking my notes from the spring when they were all using them as a punching bag or at least I was. And they were supposed to release a new version soon before year end, I thought. And there was always the issue of kind of the Bermuda senior debt, maybe not getting credits. I don't know. Any thoughts? Is that something you guys are thinking about? Or does that issue kind of not a tail risk we should -- or anything we should be thinking about? Francois Morin : Yes. I mean I think we -- many of us thought we haven't answered all those questions by now. The model proposals that they perform were substantial and broad. So I think it impacted most -- I mean most types of companies, Europeans, North Americans, life B&T, et cetera. They did get a lot of feedback. So the current thinking and what they just let the world know recently that there -- call it, their second version of their proposal will be out in the first quarter. So there's a little bit of uncertainty there as to what changes they may make to what they suggested initially. We've had discussions with them. Many others have as well, specifically in the Bermuda debt issue. We'd like to think that's going to get resolved reasonably well. We don't have finality on that. But we're somewhat positive that we'll get a good resolution there. So from that point of view, I'd say our capital base is strong, and we don't see a need to make any changes to it at this point. Marc Grandisson : If I may add, Mike, one of our key things on capital and we allocate capital on an economic basis, S&P is definitely an important piece of the puzzle, but it's not the only thing that drives us. So we're carefully paying attention to it. And we'll see what happens. Michael Zaremski : Okay. Understood. Appreciate it. Maybe switching to your primary insurance operations, which I know are diversified among a number of businesses. But I guess a lot of good commentary in the prepared remarks. Could you give us an update on kind of where pricing has been trending? And maybe just a broad question on the primary insurance marketplace and maybe it's just -- maybe it's tough to put a paint with a broad brush. But if we thought about the angry insurance life cycle clock. Just kind of curious where you -- what time you think it is? Marc Grandisson : It's a great question. I look at the clock many times a year and looked at it last week, we're about 12 noon, 11:30, 12 known on the P&C side, I would say. And probably 8 :00-ish on the property cat space. But the clock can be turned back. So I'm not sure that 11 :30 is going to stick. So that will be my comment and sort of alludes to the first question -- the first question I answered. I think that overall, most lines are getting rate over trend. We're still seeing plant. The fact that this is a broad statement, right, you're rightfully point that were specialty product company were many different products and every one, every one of these products has different characteristics, different exposure base, different attachment points, different geographies. Broadly speaking, most lines are clearing rate over trend. I think some others have said that in other calls this week. But I think that as an every hard market, this is what we're sort of observing in a few areas. We've -- there's been a lot of -- they have been for the last 3 years, almost over correction in some certain pockets. And I think that appropriately and rationally, people are looking at the history and the experience and they're seeing the difference is much improved. One example is [indiscernible]. I think it's a line of two here and there that have smaller rate increase or smaller rate decreases. The thing is it gets recorded broadly, gets a lot of headlines in the papers, but it's just not really a true reflection of the wider market. I think that by virtue, if you look at the way we operate on the insurance and reinsurance on the P&C and mortgage for that matter, we're really focused on risk-adjusted returns. And if we -- if you see us grow, it's because the risk-adjusted return is and the profit is there. So I think overall, the market is still very, very -- is presenting us with a lot of opportunity, both on insurance, P&C and reinsurance. Michael Zaremski : And maybe -- I think you brought up the excess in surplus lines marketplace. Any maybe you can remind us how large of a business that is for you all? And is that -- is that -- are the dynamics different in that marketplace versus kind of the picture you painted in terms of the primary insurance marketplace clock? Marc Grandisson : No, I think that -- no, actually not. It's actually an area that is still very, very active and very interesting for us. A lot of our growth actually comes from those E&S property and business. But to be selective, not all one line and all one monolithic subline as you can appreciate,. But certainly, we're participating in the ones where we like the risk return. Our E&S premium right now in the U.S. because it's hard to decipher what's in London. But in the U. S., it's about 28% of our premium that we write at E&S is almost double from what it was three or four years ago. So we have really leaned heavily into that marketplace and continue to do so. I think that what's happening with Ian and the acute need for capacity, specific kind of property should mean more E& S property opportunity and potentially some E&S casualty opportunities as well. I want to remind everyone this is a beautiful business to have as a specialty insurance company because you have a little bit more freedom of form, freedom of great -- and I think this is where really our underwriting acumen and underwriting expertise could showcase itself. Michael Zaremski : Thank you. Best of luck. Operator : Our next question comes from Yaron Kinar with Jefferies. Your line is open. Yaron Kinar : Good morning. My first question is with regards to the changing reinsurance market. do you see that leading to changing retention rates in both insurance and reinsurance? And if so, what impact do you see that having not only on the top line but also on potentially lowering the attritional loss ratio and increasing the acquisition costs? Marc Grandisson : That's a broad question, Yaron. It's a great question. And I think we're all incurring intently observing. I think -- maybe the best way to -- if I could allow me for 1 second to sort of draw a parallel with Katrina and the way it evolved back in. It's not exactly the , but let's go there for 12th and we'll back and come again turning back the insurance level. The insurance company took a long time, took 1.5 years to really repurpose and re-underwrite and reform, reshape their insurance portfolio to make sure that it was better. So risk -- not risk off, but readjusting the risk that issuance companies are taking is something that I believe they will be doing for the next 12 to 18 months. But as I said before, it takes a long time to do so. In the meantime, you still have the exposure. So typically, what happens is the reinsurance companies come in, say, well, we're going to need more returns for the capital capacity that we're providing to you the portfolio hasn't changed last two months is going to take a little while. We want to see what impact, what you're going to do in the portfolio. That was '05, right? So -- and then what happened, as you get into the New Year, as a buyer, of where our interest group is no exception, you still need to buy reinsurance and cat reinsurance. It's still a volatility that it's appropriate and prudent to purchase. So the purchasing still occurs. There might be some push and pull on the retention. Presumably, your retention would have to go up somewhat, maybe constraints and have a constraint on what limit is available. So I think if you put it all back together, there'll be shifting and changes in the reinsurance side, more likely at 1/1, as I mentioned. And as we go towards the Florida renewal of the year, the insurance portfolio will sort of be reacting to what the reinsurance market is telling them, that it's more costly from a cat perspective. So might take a long time to develop. I mean, it's not like a one renewal and done. Yaron Kinar : Right, but do you think, I guess if we focus on the entrance segment for a second, so ultimately, I would think with maybe lower or higher retentions maybe you actually see some improvement in the attritional loss ratio, but at the same time, some headed to the acquisition ratio. Marc Grandisson : Sorry, that's your question apologize. So there the answer is the second viewpoint. As you see the reinsure side gets more expensive, it's a change so perhaps you can buy reinsurance. The insurance team now know that they need to charge more to make up for what they lost or to get the protection because the reinsurance market is also telling them something very, very, very informative as to what is the price of cat chart and you need to chart for cat with. So you are right. So overall, we'll have pricing increase on the primary insurance portfolios, which to your point will lead to -- should lead to a lower attrition or loss ratio, because it's the same kind of losses from an attritional perspective with our agreement. So yes, that is a fair assessment for verifications. Yaron Kinar : Okay. And then a follow-up statement you made earlier on the marks, I had always thought of rating agencies as largely looking through interest rate related marks, maybe with some exception with S&P. And I also thought that stat accounting doesn't really account for interest part. So why would that led or become an industry capital issue? Marc Grandisson : Well, I think it's -- there's the official pronouncement or what -- the official view of how people look at certain things. But let's be honest here. I don't think anybody totally puts it to the side and doesn't consider it at all. There's companies that have lost, 20% plus of their capital base so far this year. If rates go up another 100, or 200 basis points over the next 12 plus months, at some point, there's -- you can't write a diversified book of P&C business at three or four or five to one. I mean, that's just -- people are going to push back and you got to have a plan to either remediate or have a view on when those markets are going to revert back. So rating agencies are, I think, in that camp. I think they'll give us and others some latitude, but it's not infinite. It's not like they don't consider it at all. So that's really our point here is that, it like it or not, some capital has evaporated, not permanently, but for the time being. It's something we need to work through. Yaron Kinar : Got it? Thank you. Operator : Our next question comes from Tracy Benguigui with Barclays. Your line is open. Tracy Benguigui : Thank you. I have follow-up questions on your ability to grow prop cat risk and capitalization. So I feel like your 25% target of 1 and 250 PML at tangible equity is an easy way to communicate your appetite to the Street. But I realized a large consideration is allocating capital on a risk-adjusted basis. So can you remind us, how do you view diversification credit or covariance between MI and catastrophes? Or said another way, does your risk adjusted capital consumption from MI restrict your ability to take on prop cat risks even if there is diversification credit? Marc Grandisson : Also Tracy. Very good question. But we won't divulge what I already know what economic model is. But if you look at an economic model, there is a large amount of lack of correlation between MI and P&C doesn't mean that they can go back and there's not really some non-correlation between the two. There's also a lot of correlation benefits that we derive from the multitude of stuff going on around the world. So we have a very, very diversified portfolio. I think the way that we look about this is, you know, the way you look at the curve, your economic curve, you know, again, we have to be careful, it's a mathematical exercise. We're not beholden to only mathematics. But if you look at the way you flex the P&L, if you put the pressure on an increase in currency and see what could happen if, do what if scenarios, and -- but you always have the eye on the maximum downside that you're going to take, combining both of these, or two or three of these really like 45 curves that we have. That's -- I'm going to leave it at that for now. I think that this is an exercise that we do all the time. We're going through it right now, and it's ever changing because pricing is moving. And it's one thing that is, I want to remind everyone is that we all only look at the loss itself. If you look at what premium you charge for the risk, and what really is working, the combined ratio and the profit level is very, very important. And every time you have a line of business that provides more profits, when margins improve or increase, it helps the overall balance sheet, the overall portfolio that you have on the reinsurance. Having said all this, with having a proper hard stop on the downside potential, we don't want to get a suspension of the balance sheet because we still want to be able to take advantage of the next market, if and when it does present itself. On the mortgage side, I will remind everyone that we buy a fair amount of quota shares that sort of protects a lot of downside. It's also part of our considerations. We buy quota share, we also buy excess of lots. So we have some protection. That's also a good example of how we manage the risk even if we like, we still very much like the MI risk, but we also are very prudent. And making sure some of the downside is somewhat protected, again, for the same reasons that as I mentioned earlier on the call. Thank you. Tracy Benguigui : Yes, thank you for reviewing the process. I was just trying to get at, do you think that gives you an advantage to grow property CAT risk given the diversification credits? Marc Grandisson : Absolutely. There's no doubt in my mind. But it's not -- again, it's not the worst application this diversity. We always are conscious, as I mentioned to make sure the process is improving. And I guess on the property cat the one thing that should be clear, I mean we it's reviewed. So now the charges, that's what we talked about, having an higher need -- higher charge need to take a commensurate or similar risk that we would take let's say in [indiscernible]. We need to be cognizant of those things. And I think yes, it is. It is really a fact that, in addition, our earnings power to your point, I mean, that's what you are sort of alluding to the fact that we have earnings coming from MI, definitely help us as we redeploy capital into the other opportunities that we see ahead of us. Tracy Benguigui : Okay, and also want to go back to the conversation on negative mark and capital in a way, why does it matter? I know, S&P would penalize you for that. But don't you have access of up to $1.3 billion line of credit, so you shouldn't actually crystallize any unrealized losses by being a forced seller? Is that fair? I'm just wondering if investors should pay more attention to liquidity. Marc Grandisson : Well, I mean, it's a fair point. We again, we're not constrained. I think that's the most important thing. Leverage ratio is down, but we also have access to other forms of capital or line of credit is one that you mentioned. There are others. So if the opportunity is there for an additional growth in our P&C lines, and maybe mortgage, whatever we'll see them as we move forward, I think, my view is that it's hard to write on, on call it, you know, capital, that's just not on the balance sheet. Right. So it's got to be in the balance sheet somehow. And our view is, yes, we see recovery in the unwinding of that mark to market hit so far. But the capital base, has to show that it's real and solid to get credit, and write on it. Francois Morin : And Tracy, the argument, that you're pushing us, I mean, you could take it to the extreme, right, because the way they handled was up by 80%. But at some point, it starts to matter. It's not as important as 5% or 10%. It's more important at 30% and becomes progressively more important, because in the end we have to pay our policyholders. And then once we're out of reserves did a cat loss, we need to take care of our capital. And it does matter in the big world. So I think it's --I'm not saying it shouldn't matter 100% now, because at some mark and it's still capital available. But it has to make a difference somehow over time, because the argument would fall, right, at what point do you think it starts to matter, 50, 60, 80? I think it's matters just a different degree through the capital stack. Tracy Benguigui : Okay, just one last one really quickly, given the higher reinvestment rates. How long will it take Arches market to creep back to book value? Marc Grandisson : Well, I mean, there's -- we've done some rough math. I mean, you can kind of look at it like portfolio, turning over in the following two years on average. So let's call it eight quarters. And you can do get a rough now by that. But the reality is, we're going to also I think we're going to get -- we do have plenty of free cash flow coming through. And that's going to be reinvested at pretty significant levels. So we think that overall, the book value should start growing pretty quickly beyond just the recovery of the markets. Tracy Benguigui : Thank you. Marc Grandisson : You are welcome. Operator : Our next question comes from Josh Shanker with Bank of America. Your line is open. Josh Shanker : Yes, thank you. I wonder if you can give a little outlook on the mortgage insurance sector? Are we at the bottom of the issuance cycle here for opportunities? Does this last for a little while? Are there even fewer mortgages that are going to be purchasing insurance over the next year? Where do we stand right now? Marc Grandisson : Sorry, Josh. In what sense -- on the primary side of MI or are you…? Josh Shanker : Yes, primary, MI. I'm clearly like new home sales are down. And so obviously, we're going to expect less flow. Is it going to continue to decline from here? Or is this kind of what a -- I guess a holiday from mortgage issuance looks like for the MI business? Francois Morin : Well, we've said it before. I think, and it still holds. I mean, the in-force book is where we're going to generate most of our underwriting income for the foreseeable future, right for the next two to three years. Doesn't matter really materially whether production is stable, declining increases, increasing the in-force books, is going to drive the underwriting income for the next three years or so. And we are very comfortable with the level the performance of that book right now, because as we know, and as we've said before, depreciation is a big part of that, refinancing refinance activities coming down. And so persistency is up, etc. So there's a lot of things pointing us in the direction of saying yes. That in-force book is doing well and will keep doing well, we think. Over time, no question that if new production kind of keeps declining to levels, very low levels for an extended period, then a maybe starts to show on the numbers, but we don't think that's anytime soon. Marc Grandisson : And on the INW, which Francois just mentioned about new production, if you look at the NBA numbers, the purchase market, which is by far the most important one, for the MI business, is a lot more stable, there's not as much of a decrease. So we're still fairly positive, that we're still going to get some nice production from our team over the next several quarters. And again, I remind everyone that as you know mortgages is up north of 7%. So it does make it a bit hard to get into a home. But fact is, there's still pent up demand for housing if the purchase market should stay pretty active for the next several quarters, which bodes well for our INW, just forward-looking. Josh Shanker : And if premium yield declines on insurance in force. I mean, is there a bottom that we should be expecting? Or does it continue to tick down in the coming years? Francois Morin : Yeah, I think I just mentioned it in my comments, the industry always like everyone else here on the call talking about what's happening around the world, some uncertainties, discussions, whatever else. The potential thing that could happen and the industry is raising rates is right, is raising premium rate as we speak on the mortgage, the mortgage sector, which is good news, which speaks I believe, volume for the new environment, that we have in MI, an industry that, is a lot more disciplined and deliberate in what it's doing. It's something we would have expected, but it's good to see it happen in life, in real life case like that we are seeing right now. Josh Shanker : Pending what happens at 1/1 is mortgage insurance still the highest ROIC of your opportunity? Francois Morin : Right now we have a lot of discussions about this. Right now. We believe that our P&C operations are slightly gaining and getting ahead of it, don't tell our MI group that. But it seems that the ENC units are squarely taking the lead. Josh Shanker : Thank you very much. Francois Morin : You are welcome. Operator : Our next question comes from Michael Phillips with Morgan Stanley. Your line is open. Michael Phillips : Thanks, good morning, everybody. Just looking -- the questions on the no discount in the current times we're in with property, cat and massive hurricane on the heels of what's going on with interest rate environment and everything else and mark to markets. But and even lots of movements around property cat pricing, obviously. But to what extent do you think we're in a period, very early innings of more respect for property cat, and this will continue actually, over the long term, which clearly has not happened in a very long time? Marc Grandisson : Well, the answer is we don't know, right? I mean, this is protecting the future. I mean, there's a lot of modeling out there that is trying to address it. We certainly are on the cutting edge ourselves with neurologists and everyone else we have on staff to make sure we're on top of it. But again, it's like everything else it's a prediction. And we try to put as much cushion or a little bit of extra level of conservativeness, to make sure that you're on the right side of the equation. And if things keep on going, and you're getting worse, getting better than you adjust and you're fighting the last data point into your next year's expectation. I think that if you take a step back, I talked about it on my comment, what is also -- what's also going on is that we sort of disregarded the true expected cat -- expected cat losses, if you were to just allocate without putting a lot of weight or a lot of increase into some of the factors that that go with cat pricing, we as an industry should have priced more, for which we are charged more for the cat risk and we didn't. And I'm always reminded of the law of large numbers which says, over the long run, you get what you deserve, in results. So it's not far from my mind to think that perhaps, just perhaps not a necessarily a change, a climate change but that could be the case but it could also be just by virtue of not charging enough over time that you sort of get -- you reap the reward of that mispricing. Michael Phillips : Yeah, that's kind of what I was alluding to. But okay, perfect. Thank you. That's all I had. Marc Grandisson : Thank you. Operator : Our next question comes from Yaron Kinar with Jefferies. Your line is open. Yaron Kinar : Thanks. Yeah, I thought I'd take this opportunity to follow-up on something you mentioned in the script, cyber. So maybe two questions there. First, on the attritional side, my understanding is that it's really about active management. So not just the annual questionnaire at the time of renewal, but really identifying and managing wheel time vulnerabilities. As a traditional insurer, what capabilities do you have on that front from a tech angle? Are you partnering with third party vendors to achieve this? Marc Grandisson : Yeah, so the answer the great question, yeah, I think number one is we're partnering up with guys who are cutting edge really, on top of the latest technology, and latest forensic work for our clients. And that's a really good place to be. We also have a team. But funny enough, a lot of our teams were on the tech side for cyber risk are not part of the underwriting team. So we have a lot of people within the underwriting units who are actually more IT people than cyber specialists, and they themselves also contract with other third party vendors as well to make sure that we're on top of it. In addition to other third party vendor that we have ourselves within the company, so we also want to look out and understand it more and more. It's a big investment. Yaron Kinar : Got it? And then the other question I had on cyber. Actually one of your competitors was talking about this today as well, the need to get more comfortable with the tail, before really pursuing more significant growth in this line. So how are you thinking about the tail? And how are you --are there actions you're taking in order to manage it and allow yourself to pick up the comfort to grow? Marc Grandisson : That's a very good question. This is harder to manage at a technical level as you can appreciate, right? Because it's really the cloud and other systems. I think what we do right now is listen, instead of in lieu of adding this technical structure infrastructure, which we think at some point, should come [indiscernible], is that's the shortfall I'm realistic about what a worst case downside scenario can be. And we have various scenarios that we run every quarter to make sure that we're on top of it. And again, there's the downside to everything we do in life. But again, we're weighing it with the returns that we're seeing. And we think the risk reward is fairly in our favor. We like the odds of that business. Francois Morin : And one thing I'll add to that Yaron is to us, we think of it as an earnings event, not a capital event. So we -- some of these kind of, we think pretty severe, widespread events would not hurt our capital base. Yaron Kinar : That's probably also because the book is still relatively small and the overall portfolio if it does grow tech could become a capital unless you have proper exclusions or risk protection, and so on. Marc Grandisson : Yeah, we'll also have reinsurance that we buy and other things that we can do there as well. So yes. Yaron Kinar : Okay. Okay. Thank you. Best of luck. Marc Grandisson : Yes, thank you. Operator : I'm not showing any further questions. I'd like turn the call back over to Marc Grandisson for closing remarks. Marc Grandisson : Thank you very much for your listening to our call. Looking forward to talk to you again in the New Year with perhaps more exciting news. We'll see what the market gives us. Thank you very much. Operator : In today's conference, this concludes the program. You may now all disconnect. Everyone have a great day.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,023	1	2023Q1	2022Q4	2023-02-14	4.024	4.02	5.259	5.51	null	10.04	10.95	Operator : Good day, ladies and gentlemen. And welcome to Arch Capital Group Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed in the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in this call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report or Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's Web site. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sir, you may begin. Marc Grandisson : Thank you, Towanda. Good morning, and welcome to the fourth quarter earnings call for Arch Capital Group. Happy Valentine's Day to all. I'm pleased to share that for the fourth quarter of 2022, each of our three underwriting segments produced exceptional results. Our quarter's results were buoyed by a lower than average cat loss experience, a significant favorable development in mortgage reserves and a higher level of profitable earned premiums from our recent growth. This quarter demonstrates the power of our strategy, namely our management of the underwriting cycle across the diversified specialty portfolio with a prudent reserving and underwriting stance. Our P&C insurance underwriting teams continued to lean into hard market conditions and our mortgage team delivered record underwriting income, which is again a direct result of our years as the established market leader there. For the full year of 2022, Arch generated over $1.8 billion of operating income with an operating return on equity of 14.8%. 2022 was our third consecutive year of sustained premium and revenue growth, supporting stronger and more stable earnings power for the near term. The net premium written growth from our P&C unit was exceptional. Reinsurance segment NPW grew 51% for 2022 as the team seized on market dislocations, while our insurance segment grew a robust 21% on the year. We continue to see a broad array of opportunities to allocate capital where rates and terms and conditions allow for growth and attractive returns. Taking stock of where we are in the current market cycle, it's important to note that we have recorded premium growth significantly above the long term industry average. Over the last four years, we've grown property and casualty net premium written threefold to nearly $10 billion from less than $3.6 billion in 2018, while overall rates increased cumulatively by over 40%. As we have stated previously, our cycle management strategy dictates that we maximize premium volume when rates are rising, which is precisely what we've done. While we expect to continue to allocate more capital to the P&C segments for the next several years, I wish to remind our shareholders that we capitalize on the attractive return opportunities in our MI segment to the tune of $5.4 billion of underwriting income since 2017. These profits allowed us to redeploy capital into more accretive uses, including $2 billion worth of share repurchases since 2018 and the substantial growth in profitable P&C premium. MI has been vital to our ability to propel our P&C underwriting growth. Underwriting cycle management is core to our culture, and I want to take a brief detour into how we think about the underwriting cycle here at Arch. Here within simplification of falling grade insurance clock split into four stages. Stage one, at the onset of the hard market, we see rates increase dramatically and capacity withdrawn. Results on the previous soft market results only begin to show up in claims activity. Stage two. This is the beginning of the restoration phase, which is indicated by second and sometimes third round of rate increases along with some improvements for the insurers in the terms and conditions as the industry adjusts its appetite and underwriting policies. Much of the focus during this stage is also geared to filling guests in and replenishing reserve shortfalls from the soft years while showing rapid improvements. Stage 3. That next period is where rates gradually decrease often as a result of overreaction in Stage 2. Underwriting profits from the hard market years gradually show up in the results. This period can be lengthy and it usually allows for still profitable growth, especially for the disciplined underwriters. And finally, Stage 4. Famous Stage 4 is where the industry foresakes underwriting discipline and overly focuses on topline growth even as rate decreases accelerate. This is where Arch's culture of underwriting discipline is most apparent as we cut exposure and prepare for the return of Stage 1. Right now, we are at Stage two in most lines. Some, for instance property, are back to Stage one since the fourth quarter. Understanding where you are at each point of the cycle for every product line and the nuances within each stage is critical to the timely allocation of capital to the areas of greatest opportunity. One of Arch's key sustainable advantages is the breadth of its capabilities across many specialty insurance lines, enhancing greatly our cycle management capabilities. A core strategic tenant of Arch is that underwriting acumen and discipline through the cycle drive superior risk adjusted returns. Now I'd like to share some highlights from our underwriting units. We'll kick it off with reinsurance. For the fourth quarter, net premium written in the reinsurance segment was $1.5 billion, that's more than double the same quarter one year ago. Francois will cover the details. But much of this growth is because we were well positioned to capitalize on broad market opportunities as well as several one off opportunities resulting from market dislocations emerging in the fourth quarter. It is worth noting that the fourth quarter growth does not include the January 1 property and property cat renewals, which will be reflected in our next quarter's results. As you've heard, pricing for the January 1 renewals were strong. Cat pricing and terms both improved, leading to effective rate changes in the plus 30% to plus 50% range. We anticipate these trends will continue as the midyear property cat renewal and should translate to strong property cat premium growth in 2023 for Arch. Moving now to our Insurance segment. where we continue to reap the benefits of the investments we've made in enhancing our specialty businesses in the UK and in the US. On the year, we wrote over $5 billion of NPW, net premium written, compared to $4.1 billion in '21, with growth coming from a diverse mix of business. Underwriting performance continues to be excellent with an ex-cat accident year commodity ratio of 89.6%. Rate increases with a few exceptions remain above loss cost trend and we expect this strong momentum to continue for 2023. The insurance market remains rational and disciplined. We expect also continued opportunities due to the ongoing global uncertainties and remain optimistic that this disciplined behavior that we saw in the P&C industry for the last three years will persist as we move through Stage two of the cycles. Next, our mortgage team, again, had an acceptable quarter, capping off an excellent year. As we benefited from earnings from our embedded book as well as from favorable reserve development as cures on delinquencies exceeded our expectations. The mortgage segment delivered $374 million of underwriting income in the quarter and $1.3 billion for the year, an excellent contribution in a year where higher mortgage interest rates slowed new originations. Our insurance in force, the earnings foundation of the mortgage segment, grew to $513 billion at year end '22 as persistency increased due to higher mortgage rates. As expected, higher mortgage rates led to reduced [NRW] as mortgage rates touched 7%, the highest rates in 20 years. Looking broadly at the MI industry's health, we have borrower credit quality which is outstanding and excess housing demand above supply, the US unemployment rate is near historic lows and the borrowers' equity in their homes remain at very healthy levels. One thing worthy of mention is that the MI industry is acting in a disciplined and responsible manner. In the face of these economic uncertainties, premium rates are increasing while underwriting quality remains strong. Finally, the interest rate increases we've seen in the last 12 plus months should help fuel our net investment income through 2023. We are poised to benefit from higher reinvestment rates coupled with the growth in invested assets. I've got auto racing on my mind lately, and when I look at our industry, I can't help but think that Arch is one of the best cars on the track. We know that winning the raise comes down to more than having a great driver or the fastest car. There is much preparation, analysis and looking at the conditions on the track as well as monitoring the other drivers. By recognizing the soft market conditions in '17 and '18, we avoided the mistakes others made early in the race when they might have burned tires or overheated their engines. The pricing began to improve in 2019, we're able to take advantage of some of our competition basket stuff and engine problems, and we took the opportunity to take more of a lead on the track by increasing substantially our writings. And then once we saw some clear track ahead of us, we were able to accelerate even faster. Today, we're firing on all cylinders and I know we've got the right crew to bring in home. Let's hand the wheel over to Francois before coming back to and answer your questions. Francois? Francois Morin : Thank you, Marc, and good morning to all. Thanks for joining us today. I'm very pleased to share that once again, Arch had an excellent quarter on virtually every front. The year concluded with fourth quarter aftertax operating income of $2.14 per share for an annualized operating return on average common equity of 28%. Book value per share was up 9.9% in the quarter to $32.62 and down only 2.8% on the year, a great result considering the impact raising interest rates had on our fixed income portfolio with a difficult year in equity markets and the elevated catastrophe activity we experienced this year. Turning to the operating segments. Net premium written by our reinsurance segment grew by an exceptional 118% over same quarter last year. Although this quarter, we had a few large one off transactions that impacted our results and contributed $407 million to our net written premium. Adjusting for these transactions, our net premium written growth was still elevated at 61% for the quarter. These transactions are yet another example of the dislocated state of the uninsurance market where our strong balance sheet provides a significant advantage as we look to deploy meaningful capital to support ceding companies at terms that meet our target return expectations. More importantly, the underlying performance of the segment this quarter was very good with an ex-cat accident year combined ratio of 82.9% and a de minimis impact from current accident year capacity losses. Reflecting ongoing hard market conditions, the insurance segment also closed the year on a very good note with fourth quarter net premium written growth of 17.4% over the same quarter one year ago in an accident quarter combined ratio, excluding caps of 89.6%. Most of our lines of business still benefit from excellent market conditions, both in the US and internationally, and our expectations for the coming year remain very positive. Our mortgage segment continued its run of quarters with results better than long term averages as claim activity for the business remain low. While production volumes were down due to the lower level of originations in the market, we remain positive on the return prospects for this business. Net premiums earned were up slightly on a sequential basis as the persistency of our in-force insurance at 79.5% at the end of the quarter continued to increase. The combined ratio, excluding prior year development, was 45% for the quarter and reflects our prudent approach to loss reserving, one of our key operating principles. Our underwriting income reflected $270 million of favorable prior year development on a pretax basis across all segments this quarter, which represents approximately $0.66 per share after tax. While most of this favorable prior year development, $211 million, came from the mortgage segment, mostly on claim reserves set up for COVID related delinquencies in the 2020 and 2021 accident years at US MI, it is worth pointing out that our P&C reserves also contributed to the overall results. Of note, both our insurance and reinsurance segments had another quarter of favorable reserve development, and the 2022 calendar year phase two incurred ratio for our P&C operations was 58.7%, its lowest level in more than five years. Both these metrics provide some insight into the adequacy of our loss reserves, which constitute an important element in the quality of our balance sheet. Quarterly income from operating affiliates stood at $36 million and was generated from good results [indiscernible] in summers. Pretax net investment income was $0.48 per share, up 41% from the third quarter of 2022. Cash flow from operations, over $3.8 billion for the year, was strong and when combined with the proceeds from maturities and sales of securities in a rapidly rising yield environment, and hence, the underlying contribution from our investment portfolio. Going forward, with new money rates in our fixed income portfolio in the 4.5% to 5% range and a growing base of invested assets, we are well positioned to deliver an increasing level of investment income to help fuel our bottom line. Total return for our investment portfolio was 2.6% on a US dollar basis for the quarter with all of our strategies delivering positive returns. The contribution to the overall result was primarily led by our fixed income portfolio, which benefited from relatively stable interest rates and tightening credit spreads. The overall position of our investment portfolio remains relatively unchanged as we remain cautious relative to duration, credit and equity risk. Turning to risk management. Our natural cat PML on a net basis stood at $970 million as of January 1 or 8% of tangible shareholders' equity. Again, well below our internal limits at the single event one in 250 year return level. Our peak zone PML remains at Florida Tri-County region. And as Marc mentioned, the PMLs we report represent a point in time estimate of the exposure from our in-force portfolio and the premium associated with the January 1 renewals will get reported in our financials starting next quarter. On the capital front, we did not repurchase any shares this quarter as our assessment of the market opportunity in 2023 remains very positive, one where we should be able to deploy meaningful capital into our business at attractive returns for the benefit of our shareholders. Finally, as Marc mentioned in his remarks, the results we enjoyed this year across our operations were achieved through a thoughtful and deliberate execution of our cycle management strategy and a strong culture of allocating capital to the most profitable markets and opportunities. These results, which were an important contributor to us joining the S&P 500, were only made possible by the ongoing hard work and dedication of our over 5,000 employees across the globe. They deserve a tremendous amount of credit for making us who we are today, an industry leader with a stellar 20 plus year track record that is ready for the opportunities and challenges ahead of us. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from the line of Tracy Benguigui with Barclays. Tracy Benguigui : Your one in 250 PML to tangible equity of 8% as of 1/1 wasn't too dissimilar to your 7.7% as of September 30th. So I'm wondering what made you pause to incrementally take more exposure? Did that have anything to do with less retro capacity or your view of ROEs based on pricing for that incremental cat exposure? Marc Grandisson : I think this number -- interesting, this number is one region, one area, one sub zone. What is not seen in the numbers, and we'll have a more thorough discussion at the Q1 call is that we've increased cat exposure across a wider range of sub zones, and that doesn't really come across through that Tri-County. And I remind you, Tracy that the Tri-County renewal is going to be more important and more apparent at the June 1 renewal. So it's also one first step into it. So we have grown a European exposure because the race course look pretty good there. Significantly, it would not show up into that one single number, right? This is sort of a -- it relies sort of the true increase in allocated capital to catastrophe. If you look at the aggregate number, which is a better reflection there is [indiscernible] increase, that will be commensurate, it actually would -- you'll see the premium increase and the cap allocation increase are -- it will make sense to you. Tracy Benguigui : So as you look through the year, even though 25% is your maximum threshold, where do you think you could realistically land based on your risk appetite? Marc Grandisson : Tracy, our typical answer is, you tell me what the rate levels are like, and we'll tell you what we think we can do. We have a plan based on certain various levels of rate changes in terms of condition changes by zone by region. And our team, as you can appreciate, is willing and able to operate on that basis. If you take a step back, I think the overall capital position of the company is, we have plenty of opportunities to deploy, it's hard for us right now to see going all the way to '25. But certainly, we have room to grow and we have the capital and the relationships to do so. Tracy Benguigui : And also really quickly on the reinsurance side, in recent times, you focused more on quota share over XOL. So with hard pricing, where do you see the best opportunities? I'm thinking about lower ceding commissions on quota shares and the higher rate online on the XOL side? Marc Grandisson : So I think it's across the board. You just mentioned that we have improved economics both on the quota share in excess of loss. I think that the numbers you see in Q4, a lot of it has to do with our recent growth in the quota share that we've written. I think by virtue of the cat XL, as we just talked about a few months ago, increasing, I think that we would be in a position to increase our excess of loss contribution to the bottom line. But when the hard market is around, which we still see on the reinsurance side and the insurance and the P&C side, we have a tendency to migrate towards a quota share. There's a few reasons for that. Number one, one of the big reasons that we like to talk about is, you inherit some diversification within that portfolio that you otherwise would not necessarily get from a net excess of loss perspective. And we really, really like this and we like to be closer to the rate change, right? When you're on a quota share basis, you’re side by side with a client as opposed to in excess of loss, you need to be relying on your sole pricing to make it work. So over time when the market gets harder, I think you will expect us and as part of the cycle management to underwrite more quota share versus excess of loss. This year, they're both pretty good. Operator : Our next question comes from the line of Michael Zaremski with BMO. Michael Zaremski : I'll stick with the primary insurance segment, given I feel like most of the questions will probably be on reinsurance. The growth has been decelerating there a bit. Marc, we heard your prepared remarks, sounds like you're still excited, but maybe you can kind of talk about what's driving the deceleration, what are you guys seeing? I don't know if it's worth bifurcating between kind of E&S excess surplus lines versus non-E&S. I'm just curious if the discipline there is dissipating a bit more versus reinsurance? Marc Grandisson : I think we're just experiencing, in the fourth quarter, that will probably change in '23, I think opportunities are going to resurface more broadly than we even had in the fourth quarter, right? I think it took a little bit to the market to digest in and to what it means for the overall market. I think another market, it's clearly in the camp up making -- doing what it needs to do to improve the return on the pricing on the property, which I think also you heard in other calls, I think will impact broader set of line business beyond the property exposure. But if we’re to go back, so if you look at the 70% growth, I mean 70% growth over, premium is about 3 times the size three, four years ago, we did have a lot of growth in the beginning of our market. So as you get into the late stages, I think 70% could be equivalent to another 50% increase in 2021 or 2020, when we started to lean into the market. So I think this is a natural phenomenon that after a while, you have -- now that you mined everything, but you really have pushed as hard as you could, and we're still pushing hard. Even 70% to me is about 3 times the average growth in the premium in the industry, that tells me that we're still seeing a lot of opportunities. But again, like I said, we're later in the stage of the [indiscernible]. And I think that we'll see a rejuvenation, if you will, of that growth possibly because the insurance companies are going to have to increase, as we all know, their pricing. One is the property cap and the higher retention why they have more risk retaining. And we're participating like the other guys on the insurance market, so we expect market to sort of getting a second bite of the apple, if you will, of a hardening market. Michael Zaremski : And as a follow-up, sticking with the primary insurance segment. So it sounds like the opportunities might fall within the property space, if I'm interpreting your comments correctly. And when we're thinking about the segment's combined ratio, I feel like looking at my older notes, it was kind of mid-90s. Was the goal -- is that still what you're thinking, or as time has been so good in terms of the market cycle that we should be thinking lower 90s is the more near term goal? Marc Grandisson : I think we said a few things about the combined ratio. The 95% was meant as a target back in '16, '17 when interest rates were quite a bit lower, and it went down further. As you know, that meant that we needed to have a lower combined ratio targets, which we targeted over last two, three years, that's where you see the impact to us. I think from our perspective, low 90s is still what -- or high 80s is sort of what we're still pushing for because within the interest rates, they may revert back and come down after a while in a year, year and half from now. So you don't want to be rushing to recognize all the various interest rates, although we are currently -- we are pricing into our business, but we tend to take a longer view like we do on the trend on our inflation. And we're thinking the rates might come back down. So I think we would still target a lower 90s to high 80s to get the returns that we think we deserve. Operator : Our next question comes from the line of Jamminder Bhullar with JPMorgan. Jamminder Bhullar : First, I had a question on the reinsurance business. If you look at your premium growth, even excluding the sort of large transactions, onetime transactions, you mentioned the number is extremely strong and obviously, doesn't have the impact of 1/1 renewals in it. So what's really driving that and do you expect some of those factors that drove the strong growth to continue into '23 as well? Marc Grandisson : I mean the one thing that right from the get go, I think, you need to appreciate the quota share business is something that we might have written a deal in January 1 of '22, and the premium gets written over the four quarters. So we're benefiting from that, that's showing up in each of the four quarters. If the underlying rate increases also from the ceding companies are higher than what we might have expected at the start that gets adjusted throughout the year. So a couple of factors were, basically, we're just following effectively the fortunes of the companies. But still, I think our teams deserve a lot of credit for going after these opportunities, being responsive to the client needs, being -- providing good capacity with good ratings. Does that continue on in '23? We think so. We think the market is there and the [Technical Difficulty] growth was not only in [Technical Difficulty] business, it's pretty much in [Technical Difficulty] business. And property and properties [Technical Difficulty] a lot of attention in the last few weeks, but still, I mean all lines of business, other specialty, casualty, marine, aviation, remain -- I think all lines are, I think, in a position to really keep growing at a good cliff in ‘23. Jamminder Bhullar : And then just shifting on to MI. Your loss ratio is obviously very good, but I think the loss pick did pick up a little bit in the fourth quarter. So is that more sort of national driven or is it more regional to where you're starting to see some maybe softening in the market in certain regions or states? Francois Morin : Well, we've navigated through the regional differences in our pricing. So I think we have constructed our portfolio that we're very happy with, stayed away from what we perceive to be the more dangerous areas and underpriced areas. So I think that's kind of showing up in our performance over time. In terms of reserving, I'd say, two things. One, the delinquency rates are still very low. So it's not like we're really seeing pressure at this point in terms of the higher level of delinquencies being reported, and the loss ratio pick is really more a function of us being a bit more prudent. I think there's a little bit of uncertainty with -- whole prices, are they about to come down, does that create some potential pressure? We think we're very aware of that, whether there's a recession, et cetera. But we're still very, very positive on the segments. It's just a realization that this is maybe a likely riskier environment than we were in like a year or two years ago, and our reserves are going to reflect that. Operator : Our next question comes from the line of Brian Meredith with UBS. Brian Meredith : A couple of them here for me. First, Marc, Francois, you guys typically provide in your 10-Qs the one in 250 for the other regions well, Northeast and Gulf of Mexico, UK. I'm wondering if you could give -- have those statistics so we can get a better sense of what type of growth you're going to see at 1/1 renewals? And maybe focus also on Europe, because I know Europe was -- you got a good operation there and a lot of opportunities there. Francois Morin : I mean the ones we reported really a couple more regions. We don't have -- I don't have those handy. I think the most of my -- to Marc's point, I think a lot of the growth that we saw, at least at 1/1, will come through in regions that were, I'd say, we were probably a little bit underweight in the past. So that's going to show up in Q1 premium and for the rest of the year, but in terms of P&L, it really doesn't have an impact. Brian Meredith : And then second question. I'm just curious, Marc, if I take a look back -- and I'm going to date myself a little bit here. If I look back at which your underlying kind of combined ratios looks like back in 2003, 2004 after the last hard market, you're getting pretty close there in the reinsurance business. Are we getting to the point where we're kind of seeing max margins in that business, maybe you get a little bit more in 2023, but how much more do you think you really get here? Marc Grandisson : I don't know the answer to that. I like the comparison to ‘02 or ‘03. I would actually like to compare probably more like a combination of ‘02, ‘03, maybe ‘04 in liability and maybe ‘06 or ‘07 on the property side. So I don't know what that means. We haven't blended growing the combined ratio that we had in this year, but that probably would be close to what we can do. I mean, look, there's a lot of things that are different this time around. The interest rates are lower than they were before internationally. More specifically, we're an international diversified reinsurance company. Hard to tell, but it's certainly going in a way of getting above our long term ROE targets that's for sure, and that's really what, in the end, what really drives us, as you know. Operator : Our next question comes from the line of Yaron Kinar with Jefferies. Yaron Kinar : My first question, just looking at the ROE profile of the company, clearly, there's upwards momentum here. Can you maybe talk about, A, what the target would be and B, if you'd see it coming more from -- or the expansion from here on coming more from NII or more from underwriting? Francois Morin : I'd like to think we got room to grow. But you're right, I think the biggest probably opportunity is NII, just with the leverage and the correction or the increase in interest rates we saw last year. I think that's going to take still a little bit of time to show up in the numbers. But as we look forward over the next 12 to 24 months, I'd like to think that, that will -- there's leverage there that we can show up in the numbers. In terms of the segment’s results, I think they can all -- mortgages, again, the reported results, I mean significant reserve releases, which certainly helped the bottom line and the ROEs that are reported. But we think the segments, the fundamentals underlying each of the three segments are still very good and they can actually still deliver very healthy results. Yaron Kinar : And then my second question, just looking at the insurance business, it sounds like you think that there maybe some inflection to accelerating growth again in '23. Can you maybe help us think about the impact of the reinsurance market, kind of available capacity, cost of reinsurance, how that plays into the potential growth that you see for net premiums written in '23 in insurance? Marc Grandisson : Great question, Yaron, because I think what we're going to see through '23 is a recognition. I mean it's already there but it's probably really coming home and the rules for us as a saving company right on the insurance line and our clients and ceding companies that more needs to be charged to the insurers that they can in turn pay the reinsurer they need to buy. Even if they went there, right, we heard that a lot of increasing retention, there’s still more volatility that's absorbed by those insurance carriers, which should lead to, again, needing a higher rate, everything else being equal. So I think what we're seeing is -- what we'll see is gradually -- and again, on the reinsurance sectors, Yaron, you can just renew business 1/1 and everything changes on a dime, right, on one stroke of the pen. On the insurance side, it take 12 month period to transition and transform and then reprice the whole business. So that's what I think we're going to be seeing, that's why I'm also fairly optimistic is because we're going to have that repricing occurring throughout 2023 and beyond. And alongside with those, between all of us here, the terms and conditions are also going to be on the table, right, on the docket for companies to present to find a way to not curtail but find a way to have a better risk sharing with their insurers when it comes down to other policy. So I guess for that reason that's what underlies is that sticker shock, not sticker shock, but good increase in reinsurance at the beginning of the year that we'll have to filter through all the plans and budgeting for all the insurance companies, including ourselves as we go forward in '23. So it's going to be a slow motion but it's going to happen, that's why I'm optimistic. Yaron Kinar : And I apologize, I'm going to try and sneak one more in here. A clarification, when you talked about kind of targeting low 90s, high 80s combined ratio, was that a reported combined ratio in the insurance segment? Marc Grandisson : That's policy year target effective [Technical Difficulty] it’s just expected, right, plus or minus, as you know, in our space, is volatility around the expected numbers, but this is long term expected. Yaron Kinar : Because I think you've been running at kind of mid-90s. So where is that improvement coming from, is it mostly just better rates and in risk selection? Marc Grandisson : Well, we're running -- we're running about 90 now, and I think that we still continue to see improvement in pricing. So that should help us get there somehow. Operator : Our next question comes from the line of Ryan Tunis with Autonomous. Ryan Tunis : First question, I guess following up on Tracy. Could you give us some indication of, I guess, how you're viewing your overall cat budget this year relative to '21 based on what you saw with 1/1 renewals? Should we expect to kind of the expected cat ratio to be higher? Francois Morin : The cat ratio or cat? I mean, in terms of… Marc Grandisson : Cat load. Francois Morin : Dollars of cap, yes, we think will go up. No question. We've been targeting, we’re targeting -- I mean our cat load in '22 was, call it, $80 million a quarter. Now it's probably between $100 million and $120 million for the first quarter of '23 based on what we wrote, right? And we'll see how that develops for the rest of the year. I mean, depending on how the 41, 61, 71 renewals, how those kind of materialize, there is, I'd say, a good probability that it will keep going up throughout the year. But based on the in-force portfolio that we have currently for the first quarter, I mean, that's kind of how we see the exposure to cat losses. Ryan Tunis : And then I’d one for Marc, I guess, on the man-made cat side, which isn't something we've talked about too much. But I would think that's one of the better markets right now on the reinsurance side. And I guess just trying to size that, whether or not maybe some of the rate increases post Ukraine, if that can move the needle relative to property capital, just looking at your marine and aviation premium, it's actually pretty chunky relative to property cat. So if you could just give us some indication of can that move the needle, is that something that we should be paying more attention to in terms of the markets you're seeing that are getting incremental firming that could help Arch? Marc Grandisson : I think the one thing with an event such as Ukraine, which is a war event, there's actually a specific market for those kinds of risks. So it's not like it's included part of the overall coverages for cat or whatever else out there. There was some -- there definitely is a result of that event in attempt to exclude a lot of these war events and bring them back into the proper -- aviation war, on marine war market, for instance. So yes, there is a lot of -- obviously, a lot of activity there, a lot of rate increases there. We're participating in there, but those markets are to begin with pretty small. So that's why I think you'll see some improvement, but it may not be necessarily enough to move the needle for the industry, even though it's a very, very healthy proposition that rates have gone through the roof as you can appreciate for the right reasons in those types of business. Ryan Tunis : And then just lastly, the acquisition expense ratio has been kind of hard to pin down at Arch over the past few years, but it's gone up. Obviously, it sounds like there were some changes in terms of ceding commission structures, things like that at 1/1. Is there anything directional you can say about maybe how the acquisition expense ratios could move in '23 versus '22, or do we just kind of expect something relatively similar? Francois Morin : I don't think it's going to move a whole lot from where it's been. I think there's been a lot of shifts in the mix of business over the years, right, as particularly as our insurance book in the UK has grown, that's a bit higher acquisition ratio, different kind of that reinsurance purchasing decision. So there's a long list of reasons or explanations as to why it is where it is now. And obviously, what we focus about -- what we're focused on is the bottom line returns whether -- if we're going to pay a bit more acquisition, we certainly think we're going to get a lower loss ratio and that has been the case. But for your modeling, we kind of, I think, exercise. I assume something pretty similar to '22 as a starting point, and we'll keep you updated as the year goes on. Operator : Our next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan : My first question, I guess, is going back to the reinsurance margin discussion that came up earlier. So you guys have a flat PML and you guys are seeing 30% to 50% rate increases in cat. Wouldn't that triangulate into margin improvement coming through in the reinsurance book in 2023? Marc Grandisson : Well, if I could just isolate. First, we wonder where you were, so good to see you there. Second, I think if you look at the property characters, I think the returns have dramatically improved. But as you know, for us, it's going to be incrementally, of course, accretive to our bottom line, but we're not -- it's not the biggest line of business for us. So that's what allows us, we believe, the opportunity and room to grow the way we think we could grow in 2023. So it's hard to say how much more, but the property cat itself, the market itself, has significant margin improvement. Elyse Greenspan : Would you say, building on that, Marc, would you say that of all your business lines as you sit here today, the line with the best expected return in '23 would be catastrophe reinsurance? Marc Grandisson : It's up there, but there are others that we don't advertise too much that are really, really healthy and getting better, as we speak. And as big, if not has been -- probably, some of them are as big as a property cat -- property cat writing. So we have quite a few who are giving us pretty high returns, but it is up there, you heard on the call, this is a good time to write property cat excel, a really good time. Elyse Greenspan : And then you said, on the PML discussion, you had mentioned, right, that we need to kind of see how things come together at June 1 that, that could also be a good opportunity. What could derail this, is it just alternative capital and more capital coming into the reinsurance space as you think leading up to June 1? And even when we think beyond that, what are you guys concerned about that could derail the uplift that we've seen in the catastrophe reinsurance market? Marc Grandisson : I mean it's hard to imagine, Elyse. I think the third party capital you mentioned, there’s still -- we're in a wait and see attitude. The US renewal, as we all know, is a small portion of the overall cat writing in the year, so more has to happen and as we all know. And in line with what -- our Tri-County was up, Florida exposure -- Florida is the biggest exposure. So it's hard to tell what could derail it. I'm trying to think out loud, the third-party coming in, I don't see it being a case. No cat in the first half of the year. While we better have no -- it would be great for an industry to take advantage of the less cat activity. No, it's hard to see anything at least, because I think that the psychology of the market is quarry of the kind of remediating what needs to be remediated in a property cat space at all levels. And from the C-suite all the way down to the underwriting system desk, I think it's clearly a recognition that we need more. I think the only thing I could say is, the one thing that I could say just to help you out here, I think that will make sense to you that we may have a bit less than perhaps some people have budgeted or maybe a bit more than budgeted price increase when we have a delta around what we see. But in terms of core capital needs and supply and demand, I don't see a major shift. I mean that was a long question, because I was thinking out loud here, but there you go. Operator : Our next question comes from the line of Meyer Shields with KBW. Meyer Shields : I hope this one covered. I missed about a minute of the call. But I was hoping it would be dig into the nonrecurring transactions in reinsurance, I'm assuming this was a retroactive reinsurance. And I was hoping you could talk about specifically the sort of risks or the lines of business that you're assuming, and maybe give us an update on what that market looks like now? Francois Morin : I mean to keep it at a fairly high level, those are general -- I mean, I consider them to be kind of capital relief, capital support transactions for a variety of reasons. Companies that have grown a lot under some rating agency pressures, aiming capital relief, companies trying to put some exposures behind them, et cetera. But just to clarify those are not retroactive so they're all insurance accounted transactions, insurance or reinsurance accounting, so that flows through our premium. They are across -- you saw it in our line of business, they did hit multiple of our lines of business. Some were other specialties, some were casualty, some are a little bit of property. So it's a spread. But it's all in a vibrant market. I mean there's a lot of pain that some companies are experiencing right now, and they're working for solutions. And again, we think we have strong balance sheet and capital to support them. So I think -- we don't know if they're going to happen again, those are lumpy. But if and when they are presented to us, we're happy to consider them and once in a while, we end up writing a few of them. Meyer Shields : Second question on mortgage insurance, and I don't even know how to phrase this, but you put up very conservative reserves for mortgage insurance over the course of COVID. And I'm wondering how much of that unusual reserve is still there because clearly, speaking at least for myself, we haven't done a great job of forecasting reserve releases in that unit. Francois Morin : Well, it's a great question, which is becoming harder and harder to answer, because in the early days, no question that we had adjusted our -- because so many loan, the delinquencies that were in our inventory were in forbearance and trying to make the distinction between kind of forbearance and non-forbearance delinquencies and how much of that worth was -- a new concept or new kind of reality we were basing. Over time, I mean it's been three years now. I think the reality is like the inventory is somewhat kind of commingled. So we don't really think of loans and forbearance kind of that differently than we look at the other loans, even though we know there's still a few of them in the inventory. So I mean long story to say that it's not something we tend to quantify directly every quarter anymore, but we still perceive that there's a bit of risk with COVID related reserves, and that's why we've been holding on to the reserves up to the point where we think we just don't need them. And right now, this quarter was an example where I think the data kind of suggested that we were -- it is the right time to really that there are no other reserves that were set up in those years. Marc Grandisson : And Meyer, quickly, I think what Francois is saying is true for all lines of business and historically, while we'll try to take a prudent stance on reserve to ensure we have enough and will let data speak for itself. And this one is very unusual, Meyer, right, the dynamic [indiscernible] something unlike anything else. It's when we have another one, we'll have a better playbook to use, but we just didn't know. And we still don't know, it’s still not over [indiscernible] are forbearance. So it's still coming back in the -- it's not totally gone yet. So that's what leads us to be that much more. From the outside it looks like we're conservative, but we think we’re being prudent and the data speak for itself. And mostly, if it happens that we don't need it then we'll adjust it based on the data we see. Operator : We have a follow-up question from the line of Tracy Benguigui with Barclays. Tracy Benguigui : I'm wondering what your outlook is on professional lines within your insurance segment? And particularly, what stage you would classify that business in when you went through your stages? Marc Grandisson : Tracy, would you -- do you include D&O there, or you just wanted the ex-D&O, which lines specifically -- professional lines is a really broad market… Tracy Benguigui : So my focus is more on D&O. Marc Grandisson : D&O, okay. So D&O, we expect similar trends that we saw in the last fourth quarter, it may change a little bit as a result of the overall thing that's happening in the marketplace. But the trend in the large commercial, for instance, have been neutral to negative, actually, for the last three, four years. So I would say that even though we may hear -- you hear, I know rate decreases on our D&O for large commercial, there's rationality behind it. So we expect rationality specific to this. It’s not -- there's a lot of data that points to -- that validates what kind of price points we're seeing on the D&O side. On the smaller D&O side, which we do a fair amount of -- to remind you, we do fair amount of D&O. We still see a very, very stable, very good marketplace. But again, the smaller D&Os are not the big ticket items that you would expect, but a lot of them are going to be not for profit small policy. So minimum premium is really -- a lot of times what happens and that 5% increase might be $50, right? So these are the kind of things that we do [indiscernible] and we have grown dramatically over the last four or five years, it's becoming a big section of what we do. That market is healthy from a [change] perspective, right, to go back where it said about the large commercial, the SCAs are down 25%, 30% over the last four years. So it's a pretty good market to be there. The IPO market has stabilized. It was pretty hot for a while, pricing got crazy. We took advantage of a lot of opportunity that's not crazy, but it was a very acute needing capacity. We expect this to sort of renormalize again. So I think I would say, D&O is normalizing for the large commercial, sort of a Stage four. I meant Stage 3 we’re recognizing some of the overreaction, but the smaller D&O is probably early stage or Stage 3, which is still very profitable and a little bit of decrease here and there or a slight increase. Operator : I'm not showing any further questions in the queue. I would now like to turn the conference back over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Well, spend a good day with your loved ones, and we will see you in the next quarter. Thanks for listening, guys. Operator : Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,023	2	2023Q2	2023Q1	2023-04-27	4.589	5.127	5.816	6.128	null	11.03	10.24	Operator : Good day, ladies and gentlemen, and welcome to the Q1 2023 Arch Capital Group Earnings Conference Call. [Operator Instructions]. Before the company gets started with this update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed on the company -- excuse me, filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also may make reference to certain non-GAAP measures of financial performance. The reconciliation to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished on the SEC yesterday, which contains the company's earnings press release and is available on the company's website and on the SEC's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson : Thank you, Lisa. Good morning, and welcome to Arch's earnings call for the first quarter of 2023. I'm pleased to report that as a direct result of our premium growth momentum from the past few hard market years, we reported an excellent start to the year. Financial highlights include book value per share growth of 8.4% in the quarter and an annualized operating ROE of 20.7%. Our P&C underwriting teams continue to lean into attractive market conditions were excellent risk-adjusted returns remain available, growing net premiums written by 35% over the same period last year. A key element of cycle management is to respond aggressively when you see conditions change. Since 2019, we have seen the market psychology pivot to underwriting discipline and our underwriting teams were prepared to become a more willing provider of capacity. The current property cat dislocation has resulted in us targeting growth in property lines and this should further improve our returns as we continue to benefit on the cumulative effect of improved rates, terms and conditions. The $327 million of underwriting income generated from our 2 P&C segments this quarter is a testament to our commitment in the improved market. Our mortgage segment operates on a different cycle than the P&C, but it remains a significant contributor to earnings, generating a healthy $243 million of underwriting income in the quarter as our high-quality insurance in force portfolio remained stable at $513 million. And in our P&C growth, I want to emphasize that Arch is first and foremost, an underwriting company. Being an effective underwriting cycle manager means that our underwriters know that they have degrees of freedom in choosing to deploy capital across our diversified specialty focused platform. Because we have a wider range of choices to allocate underwriting capital at any time, we can generate more consistent and stable underwriting income over the long run. Our growth in this hard market would not exist without our unwavering underwriting integrity. Our focus on underwriting leads through profit stability and better reserving visibility. And over time, these more stable results lead to greater balance sheet strength which in turn enables us to more aggressively deploy capital when we see market conditions change in our favor. At Arch, we're deeply committed to the art and science of underwriting because we know that underwriting integrity over time solidified our conviction and agility to proactively respond to changing market positions. I'll now share a few highlights from our segments. First with P&C. Overall, the P&C environment continues to offer plenty of opportunities as evidenced by our growth. As you see in our premium numbers, the reinsurance market, in particular, is very attractive right now. Reinsurance typically react more quickly to the changing environment and primary insurance, and we are witnessing this phenomenon in these early stages of improvement in the property market. In our insurance segment, we continue to take advantage of favorable market conditions. For the past few quarters, property has seen significant rate escalation, which supported our 37% net premium written growth in that line of business during the first quarter of '23. The property market is still broadly dislocated, and we believe it will take further rate improvement before it finds equilibrium. Elsewhere, general liability rates have pick up again and large account D&O is on a very few P&C lines that has decelerating rates. Overall, the market remains disciplined in its behavior, and we continue to obtain rate above trend. On our last earnings call, we noted property cat reinsurance dislocation at the 1/1 renewals, which led to significant effective rate increases. For the first quarter, reinsurance cat net premiums written roughly doubled over the last -- over the same period in '22. From our perspective, the improved conditions at 1/1 are a positive leading indicator as we prepare for the midyear renewals, where peak zone capacity remains tight. We are well positioned to take advantage of this opportunity. Arch is an increasingly prominent provider of choice in the property and casualty space. This is to be expected over time because of our differentiated cycle management strategy. To execute our strategy, we continuously invest in improving our capabilities. We hire and retain tough tier talent and teams, and we seek to enhance our tools and technology with the aim of becoming a more intelligent, stable and able provider of insurance products for our clients. Finally, our compensation structure rewards underwriting performance first and foremost. This is a powerful glue that aligns strategy with execution. Now let me move to mortgage. Our mortgage segment continued to generate solid underwriting income and risk-adjusted returns, largely because our portfolio was shaped with a focus on credit quality and data-driven risk selection. Credit quality in our mortgage portfolio is excellent, as demonstrated by our 1.65% delinquency rate, the lowest since March of 2020. Our disciplined underwriting approach has produced a portfolio with a more favorable risk profile, including higher fiber scores and both lower loan-to-value and debt-to-income ratios than our peers in the sector. Typical seasonality and tempered demand for housing in the first quarter affected new insurance written. However, production was in line with our expectations given the healthy market conditions. We're seeing pricing discipline across the MI industry as rates have increased over the past year. The MI industry's underwriting discipline is encouraging and allows us to maintain our focus on risk selection to achieve adequate risk-adjusted return. The MI industry is competitive, but faced with the current risk factors in the broader economy is acting rationally. As a result, our MI team continues to have opportunities to deploy capital. It isn't a football season yet, but with the NFL draft beginning tonight, football was on my mind. Back in the 1960s, a football team from a small Wisconsin town dominated the sport winning 5 championships in a decade. The team, as you all know, was the Green Bay Packers and their coach was Vince Lombardi, widely regarded as one of the greatest coach of all time in any sport. One thing that made Lombardi a great leader was his obsession with excellence and execution. During their dominance, a key part of their offense was a very simple play called the Power Sweep. The quarter back would hand the ball to the running back, we ran the ball to one side of the offensive line and then defensive line acted at blockers, allowing the running back to [indiscernible] it. No frills, no surprises. Opponents knew what was coming, but [indiscernible] and nobody could sell it. We talk a lot about cycle management and underwriting discipline on these calls and for good reason. It's hardwired into how we operate the company. They are not novel concepts. They're actually quite simplistic. The key, like with Lombardi Green Bay Packers is conviction and execution excellence. So day after day and year after year, we line up and essentially run the same play, write a lot of business when rates are high and a lot less when rates are well. Francois? Francois Morin : Thank you, Marc, and good morning to all, and thanks for joining us today. As Marc highlighted, we kicked off 2023 with excellent underwriting results across all the segments, and our investment income continued its upward path, benefiting from a higher interest rate environment and strong operating cash flows. For the quarter, we reported after-tax operating income of $1.73 per share for an annualized operating return on average common equity of 20.7%. Book value per share was up 8.4% in the quarter to $35.35, reflecting not only our strong results, but also the unwinding of approximately $350 million of unrealized losses on our fixed income portfolio net of taxes. Turning to the operating segments. Net premium written by our reinsurance segment remained on its strong trajectory and grew by 51.5% over the same quarter last year. This growth occurred across most of our lines of business with a particular emphasis on property lines, marine and aviation and other specialties. The overall bottom line of the segment will also very good with a combined ratio of 84.3% and a relatively small impact of $59 million from current accident year capacity lawsuits. It's worth mentioning that our top line reflects the impact of some larger transactions which are not uncommon during periods of significant market dislocation. We cannot tell whether the frequency and size of these transactions will recur in future periods, but we are optimistic that market conditions will remain attractive for this foreseeable future. The Insurance segment also performed well with first quarter net premium revenue growth of 19.1% over the same quarter 1 year ago and an [indiscernible] quarter combined ratio, excluding cat of 89.8%. There were a handful of items affecting our top line marked significantly this quarter, such as a large transaction in the lenders and the warranty line of business and very strong market conditions in the property, energy and marine lines business, both positives, which were partially offset by the headwinds of weaker foreign currencies against the U.S. dollar compared to a year ago. We estimate that on a constant dollar basis, our net written premium growth would have been approximately 230 basis points higher than reported in our financials. Most of our lines of business still benefit from excellent market conditions both in the U.S. and internationally, and we remain positive about our ability to grow and write business at expected returns that meet our [indiscernible] as we approach the second half of the year. Our Mortgage segment had another excellent quarter with a combined ratio of 20% from strong performance across all our units. Net premiums earned were up slightly on a sequential basis reflecting the increased persistency of our insurance in force during the quarter at U.S. MI and good growth in our units outside of U.S. MI. We recorded approximately $73 million of favorable prior reserve development in the quarter, with approximately 2/3 coming from U.S. MI and the rest spread across our other units. [indiscernible] activity this quarter in U.S. MI was particularly strong as we benefited from the highest first quarter cure rate we have seen in the past 6 years, excluding 2020. At the end of the quarter, over 80% of our net reserves at U.S. MI are from post-COVID accident periods. Overall, our underwriting income reflected $126 million of favorable prior year reserve development on a pretax basis or 4.3 points on the combined ratio and was observed across all 3 segments. Quarterly income from operating affiliates stood at $39 million and was generated from good results at Coface, Somers and Premia. As you may already know, Coface recently declared a dividend of EUR 1.52 per share, which should result in a EUR 68 million dividend to Arch and link May, subject to Coface shareholder approval. Although this amount will not benefit our income statement next quarter, we believe it reflects very well on Coface's results and prospects for the periods ahead. Pretax net investment income was $0.53 per share, up 10% from the fourth quarter of 2022 as our pretax investment income yield exceeded 3% for the first quarter since 2011. With new money rates in our fixed income portfolio holding relatively flat in the 4.5% to 5% range, we should see further improvement in our net investment income returns in the coming quarters. Total return for our investment portfolio was 2.54% on a U.S. dollar basis for the quarter with all our strategies delivering positive returns. The contribution to the overall result was primarily led by our fixed income portfolio, which benefited from slight downward pressure on interest rates during the quarter. While fixed income market volatility was elevated intra-quarter because of the stress in the U.S. and Swiss banking systems and the implications for monetary policies of central banks, spreads at quarter end were generally consistent with those at year-end 2022. The overall position of our investment portfolio remains neutral relative to our target allocation and we are well positioned to capitalize should there be further dislocation in the capital markets. Of interest, our commercial real estate exposure is distributed across a variety of strategies. Accounts are only 6% of Arch's investment portfolio is highly rated as a low loan-to-value ratio and is more concentrated in multifamily housing investments with minimal positions in the office properties. [indiscernible] the acquisitions are concentrated with large money central banks with no significant exposure to U.S. regional banks. Turning to risk management. Our natural cat PML on a net basis stood at $1.69 billion as of April 1 or 8.1% of tangible shareholders' equity, again, well below our internal limits at the single event 1 in 250-year return level. Our peak zone PML is currently the U.S. Northeast and reflects some pockets of increased capacity we deployed at April 1 in response to good market opportunities ahead of the more active renewal period at June 1 and July 1. In summary, we remain very positive on the current market and the opportunities ahead of us across all the segments. As the current expected returns, we believe deploying meaningful capacity in our businesses currently represents our best option to maximize returns for the benefit of our shareholders. Our commitment to being active yet disciplined capital allocators, remain a core principle of ours that should lead to long-term value creation and success. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions]. The first question comes from Elyse Greenspan of Wells Fargo. Elyse Greenspan : My first question, Marc, in your introductory comments, you said that we're in the early stages of improvement in the property market, right? We've seen strong rates at January 1 that have persisted into April 1. And my sense is could persist through the midyear. So could you just comment on what you mean by early stages and how you could see this playing out in -- during the rest of 2023 and into 2024. Marc Grandisson : Very good question, Elyse. I think the -- when we have a dislocation such as the one we sort of realized and experienced after Ian in the fourth quarter of last year, the renewals took place on the reinsurance place at much higher rates by 30%, 50%, 60% price and the rate increases. Obviously, you have heard that on other calls. We had the same experience. The reason [indiscernible] the first to move reacting to deploying capacity and they should because they have to commit the capital for a 12-month period. Now we have a lot of portfolio from the insurance side. This is what I think is going to be leading the market and continue to underscore and support the market is the insurance portfolios hours included at the interest level, they're going through a reoptimization, realigning of capacity, realigning our pricing terms and positions, and this is widely spread across the industry. But an insurance product does not get all renewed at 1/1, right? The renewal takes place over a 12-month deal. So what we're seeing and hearing right now is the market psychology is squarely in the camp of getting improved terms and positions on the primary side. Which will then lead to obviously further improvement from the distance as a reinsurer. Now this will take 12 to 18 months to really take hold, and we believe, which is actually a little bit positive from our perspective. We should see that improvement carrying on and staying around for more than this year. We expect the underlying property improvements to be there for 2, maybe 2.5, maybe 3 years, which is a great, great leading position to be on insurance. So first, the reinsurance react. The interest is reacting, it takes a longer time to modify and correct itself as momentum being built and creating a better equilibrium on the insurance level the region will get renewed again at . We most likely have more things to improve on the portfolio. I think this is how hard market takes place over time, how it developed and unfolds over time. what we mean. We think that we have a little bit quite some nice runway ahead of us because of that reason. Elyse Greenspan : That's helpful. Then could you give us a sense if in your margins in both insurance and reinsurance, did social inflation or financial inflation that impact on how you booked the current accident year in both insurance and reinsurance? Marc Grandisson : Yes. So the way we operate and the way we put our reserving or loss ratio you won't be surprised to hear from us is we tend to take a prudent stance. That's the first step that you need to understand and we could all realize, and I know we saw that historically is one of the key things that we need to -- that we work on. Our game plan is to look at the trend and look at the rate level on a quarterly basis, modified if we have a good reason to modify it. And book it to a [indiscernible] 60th percentile confidence interval, not playing too close to the average because we want to have some protections because who knows what the future will hold. So if you look at the reserving overall in our company, we look line by line, we look at inflation in financial, social, bilayer by attachment point by region, and we correspondingly loss ratio for the overall portfolio. And what you see in our results in our numbers is a sum total of the aggregation of all of these very decisions within our insurance or reinsurance units. And I think that -- and then at the end of the day, as when I look at it to make sure that we have -- we feel more comfortable than possibly the average bear out there, and we make sure that it's on a trajectory that is responsible and prudent as well. So our tendency will not depict all the good news right away. We will probably wait and see and we've grown as well, at least, as you know. So it means that we have to be [indiscernible] careful and thoughtful in the way the [indiscernible], which we would recognize some of these improvements. Elyse Greenspan : And maybe just one more, sticking there, Marc, right? In the reinsurance segment, right, the -- the growth, exceptional really strong, but the underlying loss ratio, right, was did tick up from last year. And I think part of that, there's always noise in each quarter, and it does take time to earn in this business for January 1. But can you help us kind of put that all together and just give us a sense of the margin profile of the reinsurance business over the balance of the year. Francois Morin : Yes. I'll take that one, Elyse. I think a lot of interest people obviously look at the quarterly numbers. Our view is we -- we look at it, but we don't lose sleep over it. I think we look at long-term trends. We look at the quality of the business and how it prices and what the expected returns are. And when we find the deals. But specific to this quarter, as I mentioned, didn't give you really a whole lot specifics, but there's 2 transactions that really distorted a little bit our ratios with basically higher loss ratios and lower acquisition. So yes, you saw a little bit of movement on both the loss ratio and the combined ratio impact on the ex cat accident year loss ratio was 2.2 points. So it's -- if there -- we know it's there. We don't -- again, I wouldn't make that a trend. I mean it's just the reality of the business we've had this quarter. That's why I mentioned that we these are nonrecurring items. But in this market, we know there could be more in the coming quarters. So that's kind of how we -- that's the result of the business we have this quarter. Operator : And the next question is coming from Jimmy Bhullar of JPMorgan. Jamminder Bhullar : So first, I had a question on your comments on pricing, obviously very positive, both in reinsurance and insurance. But can you distinguish between pricing in both reinsurance and insurance on property and more of the cat-exposed business versus the casualty lines? Marc Grandisson : Yes. So the last numbers we heard is a good question. Last number we heard on the primary side, we're looking at pricing depending on the cat exposed, obviously, is more acute, but rate increases 40% to 50% plus, definitely, and a little bit less if you're intercoastal, if you win in land, it's many 10% to 15% increase. But it's clearly, clearly a push for rate increase. But what's not really fully reflected and you should hear there are other things going on underneath the terms and conditions, deductibles are going up. That's also a really important factor also helps if you're a reinsurer of this portfolio. There's a statement of value, which pretty much states that any company now providing coverage needs to have an up-to-date valuation of the property you're trying to ensure. And that is a big deal because the industry has been frankly lacked in updating these numbers. And once you have the right exposure, it actually makes the pricing that much more effective and accurate. So this is the whole market is moving in that direction. And thirdly, I think that's also important, which creates more dislocation there is a shrinking of capacity at the individual players. So when people were putting $25 million, $30 million worth of capacity on even a cat exposed. So these are [indiscernible] going down $2.5 million to -- $2.5 million, maybe $10 million on an exceptional basis. So I think that the -- so the insurance portfolio, the rates are going up for a lot of reflection, echo back to questions about an inflation on the property side that is reflected the statement of value. So we're definitely clearing that one. So depending on where you are in working , lesser get exposed to , cat exposed. On the reinsurance side, it's a little bit similar, although it's a bit more of a monolithic marketplace. The rates are going in a more slower narrow range. It's almost like more commoditized, if you will. It's a little bit between to 50 pretty much broadly across. Of course, there will be differences. We'll see what the doing reserve for us. But the more acute the cat need, the more acute in the key zones of capacity demand the higher the pricing. But the general -- the overall general pricing is in sync. The insurance one will be able to grab those increased rates and improve time on condition over the next 12 months. The reinsurance or were able to get there quicker. Jamminder Bhullar : And then just on the MI business. You had very high cues. I'm assuming most of these are just on reserves you put on around COVID when there were forbearance programs. And if that is the case, how much more of these such reserves do you have that will most likely I'm assuming it will be released over the course of this year? Francois Morin : Well, we still have -- we definitely do have still some delinquencies that are in forbearance programs. I quote 80% of our loss reserves are from post COVID periods. We don't have all the detail around how much or by year, et cetera. But just hopefully, that gives you a flavor of like what maybe could potentially be down coming down the pike in terms of more releases if able to secure. I think the fact that unemployment levels are still performing very well. I think that's a good sign, right? I mean that's there's some pressure on home prices, et cetera. But for the in-force book, we think, again, the credit quality has been excellent, and we think there is performing well. And when we go to cure those delinquencies over time, hopefully, that should help the bottom line. Operator : The next question is coming from Tracy Benguigui of Barclays. Tracy Benguigui : I'm trying to understand mechanically why an LPT type of transaction could add noise to your underlying loss ratio on the reinsurance side. Is it that you're not imposing a loss corridor and you're assuming losses would attach at inception? Or is it accounting on the premium recognition? If you could explain the mechanics, that would be helpful. Francois Morin : Sure. I mean at a high level what these transactions typically look like is the limited. So in terms of, a, the acquisition expenses is hero, if not very, very small. So if you think in a traditional quota share deal where the -- I assume the acquisition ratio could be 30%, well, that goes away. And then you're effectively just picking up losses and the investment income on the float is effectively part of the overall return of the transaction. So it changes the dynamic, and that's what we're trying to convey here is that -- on the underwriting side, it's usually book closer to 100% combined within that kind of range. But the investment income that you pick up is significant. So that impacts the overall bottom line return on the business. Tracy Benguigui : Okay. Also, and maybe a little bit early, but can you discuss how June 1 and July 1 renewals are shaping up at this point? Like how would you compare pricing to what you saw in January? Marc Grandisson : We heard from our team, we've been talking to them quite a bit of late, and the -- I can talk about all specifics, but at a high level, the continuation of the hard market that we saw at 1/1. We're seeing continuing partnering or continuing on the same level as 1/1 if not that better. But I want treatment to tell you, 6/1 and 7/1 are not done yet, like people are still very actively for ended. But is the momentum is there, clearly. Tracy Benguigui : So how would that compare and you see momentum the same or better since January? Marc Grandisson : It's early. I think it's early right now. I don't want to venture because also rather we all want to collect the veto keep in mind is 7/1 of '22 was also pretty good renewal floor, for instance, right? So it may not need as much of a pricing because we believe we're specifically in Europe, that we're -- we believe, not as well priced as ought to be based on the risk that you're taking. So it's still going to be return-wise, better, most likely better return than possibility, most likely the 1/1 that we sell because it such peaks up if everybody source of capital or use of capital. Operator : The next question is coming from Yaron Kinar of Jefferies. Yaron Kinar : I want to go back to the margins in reinsurance, the underlying margins. And I think that even with the LPTs, the accident year loss ratio ex cats, still deteriorated a bit. And I just want to understand kind of the context of why that would be if we are seeing business mix shifting more to kind of inherently lower loss ratio lines on an underlying basis and with the rate environment? Francois Morin : Yes, 3 things I'd say, a, is I mean we focus on return. And while the obviously, what's in front of you is just the underwriting part of it. We focus on overall returns, which is the first thing. Second thing I'd say is you've got to give us a little bit of a chance to earn the premium. I mean, the market was solid in '22 and get better at 1/1/23. We're a quarter into the year. I think there's more benefit or more improvements that come, but it doesn't all sell up initially. And third thing, as Marc said earlier, I think we'll be proven. I mean, the math may suggest that, a, if you did this on that, that the combined ratio of losses should be yes. But we are proven in how we look at things. And when the data tells us that maybe we were a bit high, we'll be more than happy to release those reserves. But we're not going to declare victory quite yet. Yaron Kinar : Okay. And then a second question just on cat. Can you maybe offer some color on the distribution between the various sources, whether it's Turkey or New Zealand floods, the European stores and so on in both reinsurance and insurance? Francois Morin : Yes. I mean it's small ticket items. I think the biggest one for us was we had $25 million loss in Turkey, which is kind of what we do. It's not a huge deal, but that was the biggest item. Yes, we had some kind of participations in New Zealand with the cyclone and also some floods. And in the U.S., kind of the normal[indiscernible] tornados, [indiscernible] storms that hit -- that was mostly insurance, but a little bit of noise there as well in reinsurance so it's -- call it a hunch punch of small things, but the biggest one was -- for us this quarter was a Turkey. Yaron Kinar : And was Turkey and New Zealand were those mostly reinsurance? Francois Morin : Yes. Yes. Turkey was only reinsurance. Yes. Okay. And so -- I mean both of them are only reinsurances.. Operator : Next question will be coming from Josh Shanker of Bank of America. Joshua Shanker : Yes. I was looking at the investment return. I mean, there's a lot of ways to measure yield. Let me just take the investment income divided by the float. I'm getting about 2.76% for the quarter, which makes Arch the lowest burner on its float in your peer group. I know you guys have a more conservative portfolio that's also allowed you to redeploy pretty quickly, but with new money yields maybe in the 5% range without taking any equity risk or whatnot, you have an opportunity to increase that yield of are you still seeing some powder drive? You still think it's time to be fairly conservative in seeking yield less points? Francois Morin : I think it's something we obviously realized that there's -- new money yields are higher. And for us, it becomes a question of like crystallizing losses, there's implications around statutory versus GAAP accounting, we have restrictions in some places. So I think for us, we do the analysis very carefully in trying to make sure that we're doing what's best for the -- ultimately the shareholders. Sometimes we're better off kind of holding some investments to majority until and not kind of taking on the loss and reinvesting the money faster. But in terms of opportunities, whether we see more or want to think on more risk, it's something that we are thinking about. And we have grown our presence in alternative in the last few years, and that's something that -- and for us alternatives is, call it, more right structure kind of investments, and that's where we see the better opportunity and we've been pretty aggressive in growing the money there. But obviously, the returns there don't show up in investment income. They show up in equity method funds for the most part and that's where we expect to see a little bit of pickup as well going forward. Marc Grandisson : We're also just thinking about the overall risk, right, about the enterprise, right? So we have a lot of underwriting push and growth. So that's also factored in our risk -- now that we're -- sorry, but just it's all one of the other part of the equation that we have to factor in as well. Joshua Shanker : And what's the new money yield right now for you? Francois Morin : We're to. Joshua Shanker : Okay. And then, look, I know that you do listen to your competitors' conference calls and think about what they're saying. It looks like the pricing environment is pretty attractive. I think that's universally viewed few of your competitors have said as much. And then when we look at their premium growth in the quarter, it's kind of tepid, especially on the insurance side. You guys are growing your net premium in about 20% right now. It's been going that way for a little while. Is business hard to capture? Is it hard to get the business you want, and you've been silly successful outmaneuvering your competitors? I guess there's 2 things. One is, why are you so successful growing when others have not been able to do so. And two, can you give comfort on the fact that maybe some question, maybe the market is not as good as we think it is, and maybe there should be more concerned. So how can you give a comment with the rate adequacy? And why are you successful where others have failed? Marc Grandisson : So from a rate acuity perspective, I mean, this is sort of a system that's well establishing our company. I don't know how many kind of reverify the assumptions and projections beat the individual underwriter level, group level in segment level corporate between the holding company, including the Board. I mean there's a lot of vetting going on comparing to and triangulating. So we're pretty confident. We wouldn't be growing that level if we didn't think that the returns were in our favor. Does that mean that we're going to get all the returns that we expect precisely to the decimal, most likely enough, Josh, we're in uncertain world, and we're making a bet on the longer term expected and that's the best thing that we can do right now. We are a fans of thinking about the rate as being by far the most important place to start to make sure that you have enough -- you put the odds in your favor and the rates going up, a lot of lines -- rates go up 60%, 80%, 70%, even some of them went to 2x and even if there's some of it decrease goes to 1.9x. While we also look at the history of the industry and the industry was printing 5 or 6 years ago, 60%, 65% loss ratio, even if they were on a reserving level grows to 80% and you put all the factor in the trend and you put a cumulative rate impact, I think that there's no certainty, but there's certainly a level of margin safety that you build within the price and that's what makes us feel that much more comfortable. Now in terms of our reduction in the marketplace, how we're able to lean in and see that business. First, we were early in the 2019 to really lean into it. A lot of people were pulling back, and that creates void and vacuum for our clients. And we were the ones the beacon in the storm, if you will, able to give them capacity. And that goodwill for lack of a better word, really builds upon itself. So it really creates more relationship build relationships that, frankly, has been a little bit less strong because of our defensive mode prior to 2019, but we rebuilt it very, very nicely. We're always there, but we rebuild, we kindle them in a much major way because I talk to our producers, they'll tell you that we're a great partner of theirs, and that makes a big difference. So when the next piece of business comes in, you look at the people who could write that business, and we've heard this from insurance group. Well, we can look at kind of markets. The market that wants the business right now was on 4 years ago, they'll probably not have the first bit at it. We probably has to first look at it because we were there for 4 or 5 years. Also, I would add that we're an E&S player. And as you heard, the E&S market is growing. So the market is also going towards the tailwind going from our perspective on that note. And we're pretty good security, Josh. We're a pretty good company. People want to deal with us, we're good for their money. We have a good expertise and good teams that really can't buy the client. I think we spent a lot of time not only providing coverage and policies but finding clients and being a good market leader right now. And certainly, that growth for the last 3 or 4 years have created its own momentum and inertia. So the gravity, if you will, that it's increasing has been pretty nice. It helps. It helps grow further even in that marketplace. And even the market gets a bit more competitive. I would argue that we'll be able to hold on to a lot of good business that we've written for the last 4, 5 years. Joshua Shanker : Well, thank for the fulsome answers. And congratulations to everyone on graduating from rounding to the nearest thousand surrounding to the nearest million from bunch of new people. Operator : Next question is coming from Brian Meredith of UBS. Brian Meredith : A couple with me for you. Just quickly. Francois, you gave us loss ratio impact of the LPT. Can you give us what the combined ratio, maybe the premium impact just for modeling reason purposes? Francois Morin : Combined ratio was 1.1 point. 2.2 in the loss ratio and all that cap, and the premium was $118 million. Brian Meredith : Brilliant. Second question, Marc, looking at the 6/1 renewals, Florida, I guess, one, what is the impact of the legislation that was recently enacted having, you think, on that marketplace? Will it have an impact on renewals, pricing capacity coming into the market? And then, how do you typically think about Florida from a reinsurance perspective. Is it a market you'd like to play cat? Do you like to play quota share? How do you kind of think about it when you look at the Florida market? Marc Grandisson : But the second part -- Brian, the second part of your question is easier. I think we're much more of a excess of loss in the library floor. We believe it's a better play for us at this point in time. And that seems to be sort of well also where the market is slowly migrating towards at least from the first indication. The second part -- the first part of your question which is the most interesting one is we're in Florida, we might well be in Missouri. You did show me state, but we stole to see and as evidence that those to reform will take hold. It's going to take a while. As we all know, we've got through a claims when before the 1st of April, 1st of May [indiscernible] of claims to make sure that we -- that they take advantage of the last resonance of the weaker toward area there. But that's going to take a while to work through. It also might mean that some of the losses from prior years are developing adversely, which is not necessarily useful and helpful for those who try to renew for on an ongoing basis, why if you have more losses from that on the prior years, the acceleration of losses you may have to make up for a lot of that or some of that, it's not a lot of it is pure value of reinsurance. So I think overall, I think the market will take sort of a view that it's not there at 100% and they'll probably sort of factor in who is more -- is more or less exposed to those, but they get credit those more or less exposed. But you're not going to get -- like everything else, we'll need to see it through to get full credit. I think the market will get some credit, but not the full extent of it. There's no way at least not at this time. Maybe in 2 years or next year or 2 years time, but don't take a while because we need to show and see what's happening for. Operator : And the next question comes from Meyer Shields of KBW. Meyer Shields : I have one, I guess, a technical question on the LPT side of things. Is it fair to assume that this is 100% combined ratio business as you write it? Or does the fact that it pertains to -- well, let me stop there. Francois Morin : Well, that's typically where we book it. I mean plus or minus those types of transactions, that's kind of where they -- yes, that's where the combined ratio is on those. Marc Grandisson : Because the contribution to profit and margin is square a lot more on the investment income side than it is on the pure rating income side. Meyer Shields : Okay. And then speaking -- I don't know if you want to talk about the transactions or the demand that you're seeing. You talked about that, I guess, understand that we being a function of distress in the marketplace. Is this -- is the market right now focusing on the, let's say, 2019 and earlier accident years where pricing was soft or to say and/or is there interest in even more recent years because of loss trends? Marc Grandisson : Yes. I think the market is focusing on it because I think that -- and also if you add on top of it the reopening of the court post-COVID, there's a lot of uncertainty. We've heard about inflation, financial inflation and social inflation. So there's a lot of scrutiny. And the rates were much lower then. So there is definitely less banked for those years to get the right number, the right loss ratio pick. So yes, definitely, people are looking as we are as well and where we -- on the reinsurance side, if you're treated we can see not anything or some companies have development that adverse in those periods. Some of them don't. But yes, it's definitely a point of discussion, which I think [indiscernible] helps explain why we had the -- we continue to have this price increase in the GL, for instance. I do believe that people are realizing it and understanding that for their recasting, right, the long-term trend and long-term loss ratio projection on a level basis how that works. So I think really that people are reflecting. And that's also why we have this. We don't have massive combined ratio above across the industry. We do have still a healthy level of price increase because of that [indiscernible]. Meyer Shields : Okay. That's helpful. And if I can just pick up on that because in your prepared comments also you talked about GL rate increases ticking up a little bit. I haven't heard a lot of that. We've heard a lot on the property side. I was hoping to get a little more color. Marc Grandisson : Yes, the liability lines are -- of course, a lot of it has been historically led by auto, specifically on the umbrella. But the GL is clearly picking up again and it's late it's also international. And we have a low book of business as well as our insurance portfolio in the U.S. I think that there's also a dislocation going on the GL side, people are reevaluating the lines of business, the areas and the industry that they're providing coverage for. So this is happening probably a bit more -- it sort of slowed down a little bit towards the second half of 2022. And I think that's reoptimizing or re-underwriting or refocus on the underwriting and price for the GL and it also led, as you can appreciate, might some increase in trend, specifically in the excess layers because it's levered. So I think that's what we're seeing some of that prior year coming through. We're having to recast the pricing, which you wouldn't have had or would have seen necessarily in 2020, '21 because those years '16 to '19 were probably too young to really get the development coming out. So you probably can see that the duration of development of GL coming through and people reacting to it. Operator : Next question comes from Mike Zaremski of BMO. Michael Zaremski : Maybe a question or 2 on the catastrophe levels this quarter. I mean, Marc, you brought up terms and conditions changes. I think it probably blows certain people's minds that the valuations on property are just getting up to date and it seems kind of antiquated, but that's just, I guess, the way that the reinsurance maybe -- or sorry, the overall marketplace works. But just curious to the piece, yes, cat loss levels for the industry in the U.S. were way above a normal 1Q. I know you guys aren't right? That's not the best guy for Arch. But it looks like Arch's cat levels were normal-ish, but you can correct me if I'm wrong. Any read-throughs on the terms and conditions changes that have taken place that are -- is there any read through there that there are some good things coming through? Marc Grandisson : I think on our results, I don't think you would describe the improvement in terms of conditions. I think it's probably just a function of how we book -- where our exposures are, right? We didn't have as much exposure in the areas where the losses occurred. That's -- I guess I would say the miss that could happen, that happens sometimes. That's really all we can see right now. We haven't seen the impact of the things I mentioned already because they're starting to pay holding. So it's going to take a lot of them to see. So that loss of these losses next year would presumably be because of all the conditions in terms that I told you are changing. It would be reasonable to expect that the losses will be less than they are right now, but we have yet to see whether the portfolios go through these changes. So nothing other than our exposure was not where the losses occurred. Michael Zaremski : And as a follow-up, when we're hearing about the substantial rate increases, especially in property, does that take into account the terms and condition changes? Or is that -- are these kind of risk-adjusted rate increases that you're speaking to on some industry participants are speaking to? Marc Grandisson : Yes. They're not fully risk adjusted, -- it's a really good question because it's a factor of a harder market or a softer market that when you see a rate -- the things that you can measure, you all incorporate into your calculation, but there are things that you cannot calculate or specifically isolate for input in your formula, right? So there's some core insurance wallets in there that are finally going to be put back in the marketplace. But really prevent some of the collections and that could otherwise happen. That's not factored in the pricing. There's -- adding the venue for litigation or mitigation of the losses to be in a different environment, one that's, for instance, more than its 2 or 1 that's left at it, that's not unable to factor that in the pricing. So I would say to the extent that you factor in the deductibles, the sub-living and you can run the cat losses based on the layers where you attach, if you attach higher. I think that is reflected in the pricing that we mentioned. The other things that are also going in the same direction, that's the trademark of a hard market, that is not fully reflected the extra backup that takes a brave that we don't see that we know collectively is there. So it also helps us feel a bit more -- we have more conviction on running more of that business. Michael Zaremski : Got it. And maybe lastly, switching gears a bit. I believe Arch write a decent amount of professional lines. That's one marketplace that we've seen some stats pointing it to being more of a softer marketplace. Maybe you can comment if that's the case for Arch as well. And I don't know if you gave commentary also just on overall kind of rate increases on your primary insurance book this quarter. Marc Grandisson : No. So thank you. Good question. So on the first part, for the D&O, we -- our portfolio has been going down a bit further than the rate increase that we saw the professional lines that we have on our financial supplement includes more than this, obviously. But suffice it to say that we're, like everybody else, are seeing a little bit more aggressiveness in that segment. But the one thing that we're -- that makes us being still want to be in there and not declare that this is over by any [indiscernible] is that the trends have been favorable to the OSC claims were down for the last 2 years. And a lot of clients got more broadbrushed rate increase -- rate increase and personally did not fully deserve it. So there's a lot of pushback on this as we speak right now. So again, talk about underwriting and risk selection. There are ways and there are areas where you'll keep getting a 10% rate. There are the areas where you're not okay getting a plus 5%. So I think our team is extremely experienced. I've been doing this for almost 30 years. So there, they're pretty good at picking and choosing their spot in that basis. The overall rate change on that -- we don't record it because the overall rate change is not a good indicator, especially when you have so many varied line of business going up and down. I think that the delta between the rate and -- but you heard with other people and also our book of business, the average is not really a good indicator. But I think the pickup between the trend and the rate is anywhere between to depending on the line of business. So we're still getting some pickup. And those that we may not be getting pickup in margin, at least from the appearance the jury is not as to whether the losses -- the loss trend is truly positive. So it's still not certain where these lines will to be specific D&O. Operator : We have a follow-up question from Jimmy. Jamminder Bhullar : On your PMLs, they've obviously gone up because you've written a lot more business and you're retaining a lot more. The 8.1% number that you mentioned, it's still lower than peers. Where would you feel comfortable taking it if the market environment remains favorable? Francois Morin : Well, we think -- yes, just a quick reminder, I think zones for us right now, we're kind of Northeast [indiscernible], we also have like Florida Tri-County, which is kind of at the same level. The 1/1 renewals were more international, more national. So national accounts, not really Southeast specific where we expect to see more activity at 6/1 and 7/1. So no question that we think it will go up. I mean if the market stays as it is right now, could it go up 10%, 12%, we think so, and I think it's a reasonable scenario. But obviously, we'll have to wait and see and figure out and see how the renewals -- how everything gets lined up, but then directionally, I think that's kind of where we think we might be at July 1. Operator : I'm not seeing any further questions. Would you like to have closing remarks? Marc Grandisson : Thank you, everyone, for listening to our story. It's a great one, and we are looking forward to get even more good news in the July call. So thank you for everything then. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,023	3	2023Q3	2023Q2	2023-07-27	5.32	5.56	6.309	6.56	null	11.13	10.68	Operator : Good day, ladies and gentlemen, and welcome to the Q2 2023 Arch Capital Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends to be forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website and on the SEC's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sir, you may begin. Marc Grandisson : Thank you, Josh. Good morning, and welcome to our second quarter earnings call. We're more than half way through 2023 and through our commitment to underwriting acumen, prudent reserving and cycle focused capital allocation, we were able to deliver another quarter of profitable growth. In the second quarter, our results were primarily driven by our willingness and ability to deploy capital into lines with superior risk-adjusted returns. Our operating results in the quarter were stellar with an annualized operating return on average common equity of 21.5% that drove a 4.8% increase in Arch's book value of common share for the quarter. As you know, book value per share growth is our primary focus on our road to creating long-term value for our shareholders. Each segment generated over $100 million of underwriting income in the quarter. These outstanding returns reflect our ability to effectively execute in each segment. We're really operating in our sweet spot. I also want to commend our employees for the continued exceptional growth they've delivered in the quarter, most notably a 32% increase in property and casualty net premium written compared to the same quarter a year ago. This hard P&C market is proving to be one of the longest we've experienced and we are in an enviable position as we look to 2024 and beyond. We often refer to the insurance clock developed by to help illustrate the insurance cycle. You can find the clock on the download cap for this webcast or on our corporate website. If you can't do the clock right now, just picture a traditional clock dial. For some time, we've been hovering at 11 :00, which is one we expect most companies in the market to show good results as rate adequacy improves and loss trends stabilize. Last year, a popular topic on earnings calls was whether rate increases were slowing or what the rates were even decreasing. These are classic signs of the clock hitting 12 when returns are still very good, but conditions begin to soften. Yet here we are in mid-2023 and conditions in most markets remain at 11 :00. We've even checked the batteries in the clock and they're just fine. The clock isn't broken. It's just that the current environment dictates an extended period of rate hardening. So what's sustaining this hard market? Well, I believe it's a relatively simple combination. Heightened uncertainty is driving an imbalance of supply and demand for insurance coverage. Since this hard market inception in 2019, we've had COVID to war in Ukraine, increased cat activity and rising inflation, all of which create significant economic uncertainty. Underwriters have had to account for more unknowns. Beyond those macro factors, industry dynamics also play a role in sustaining the hard market. Generally, in adequate pricing and overly optimistic loss trend assumptions during the soft market years of 2016 through 2019 have led to inadequate returns for the industry. The impact of these factors should cause insurers to raise rates and purchase more reinsurance in a capacity-constrained market with limited new capital formation. Put it all together, and it may be a while before the clock strikes 12 and we begin to move beyond this hard market. I'll now share a few highlights from our segments. First, P&C. In the second quarter, the reinsurance group was successful again at seizing growth opportunities. In particular, the media property and property cat renewals saw a significant improvement in rate adequacy and our underwriters are already willing and able to provide valuable capacity to our clients. Our PML or exposure to a single event in a 1-in-250-year return period went up in the quarter while our premium income grew substantially. At July 1, our peak zone exposure rose to 10.5% of tangible equity. Overall exposure to property cat risk remain well within our threshold and because of our diversified portfolio and broad set of opportunities, we retain the flexibility to pursue the most attractive returns across lines and geographies. Although there are lines where pricing has declined, large public comes to mind. P&C markets continue to see rate changes above loss trends. Even with those fee lines with weakening rates, the compounded rate increases over the past several years continue to be earned and are generating attractive returns. Overall, we like the range of opportunities in front of us, and we continue to lean into the current market. Next is mortgage, which keeps generating meaningful underwriting income and risk-adjusted returns. Housing and credit conditions remain favorable, although high mortgage interest rates tempered demand for mortgage originations and limit refinancing options. The lack of refinancing has led to a historically high persistency rate of 83%. High persistency stabilizes our insurance in force, which, as many of you know, drives mortgage insurance earnings. Our disciplined underwriting process and risk-based pricing model have helped us to build a healthy risk-reward profile for the business we write. The composition of the overall book with high FICO scores and low loan-to-value and debt-to-income ratios remains one of the best risk profiles in the industry. International growth, along with our GSE credit risk transfer of business, enabled us to profitably manage risk better than more online U.S.-only companies, a key differentiator of our MI global platform. Mortgage insurance plays a valuable role in our diversified business model and continues to generate capital that is and can be deployed into the most attractive opportunities across the enterprise. Moving on to investments now. Since our second quarter on the call last year, the Federal Reserve has increased, as we all know, the rates 8x for a total of 375 basis points. Given our short duration portfolio, these hikes have positively affected our net investment income, which is up approximately 22% over the first quarter of '23. New money rates exceed our book yield, which, along with our strong cash flow, sets the stage for further growth and book value creation. Have a on the brain after watching the incredible Wimbledon final couple of weeks ago, it was an epic match-up 20-year-old sensation, Carlos Alcaraz, taking on all-time Novak Djokovic, was a back and forth match that lasted nearly 5 hours before Alcaraz emerged victorious. There was one pivotal moment that will be remembered for years. In the third set, a single game, something that usually takes about 3 to 5 minutes, instead lasted 26 minutes. The game included 13 deuces and 7 breakpoints. It was an incredible display of tenacity and athleticism. Not to mention the mental strength required to remain focused. It was insane. But what really struck with me was that kind of like this hard market, the game simply refused to end where many times where a single winning shot would have ended the game, but it just kept going. About 15 minutes in, it became clear that we just needed to enjoy what we were watching and not focus on the end point. So that's what we're doing with this hard market, returning what the market serves us with gusto. As always, our goal remains to generate strong risk-adjusted returns in order to create long-term value for our shareholders at lower volatility. The exceptional profitable growth over the last several years has fortified our market presence and helped us achieve one of the most profitable quarters in our company's history. This is a type of well around the quarter we've always envisioned. The sweet spot, if you will, and we look forward to building on this momentum in upcoming quarters. I'll the court now to Francois, and then we'll return to answer your questions. Francois Morin : Thank you, Marc, and good morning to all. Thanks for joining us today on this gorgeous day in Bermuda. As Marc highlighted, our underwriting and investment teams delivered excellent results across their respective areas in the second quarter, which resulted in a performance that exceeded that from our very strong first quarter. For the quarter, we reported after-tax operating income of $1.92 per share for an annualized operating return on average common equity of 21.5%. Book value per share was $37.04 as of June 30, up 4.8% in the quarter and 13.5% on a year-to-date basis. Turning to the operating segments. Net premium written by our Reinsurance segment grew by 47% over the same quarter last year, and this growth was observed in most lines of business. Growth was particularly strong in the property catastrophe and property other than catastrophe lines with net written premium being 205% and 53% higher, respectively, than the same quarter 1 year ago, a reflection of the fact that market conditions in these lines remain very attractive. As a result, the quarterly bottom line for the segment was excellent, with a combined ratio of 81.9%, producing an underwriting profit of $245 million. The accident year ex cat combined ratio was 77.4%. The Insurance segment also performed well, with second quarter net premium written growth of 18% over the same quarter 1 year ago and an accident quarter combined ratio, excluding cats of 89.8%. Except for professional lines, which saw a slight decrease in net written premium in our public directors and officers business due to a more competitive market, all our underwriting units in insurance, both in the U.S. and internationally, saw good growth in the quarter as market conditions remain excellent. Our Mortgage segment had another excellent quarter with strong performance across all units, leading to a combined ratio of 15%. Net premiums earned were in line with the past few quarters, reflecting a high level of persistency in our insurance in force during the quarter at U.S. MI, partially offset by lower levels of terminations in Australia and higher levels of premium. Benefitting results was approximately $84 million in favorable prior year reserve development in the quarter, net of acquisition expenses, with over 75% of that amount coming from U.S. MI and the rest spread across our other underwriting units. [Indiscernible] activity at U.S. MI was again very strong this quarter, and our delinquency rate stood at 1.61%, its lowest level since the onset of the COVID pandemic. At the end of the quarter, over 80% of our net reserves at U.S. MI are from post-COVID accident periods. Overall, our underwriting income reflected $116 million of favorable prior year development on a pretax basis or 3.9 points on the combined ratio and was observed across all 3 segments mainly in short-term lines. Current accident year catastrophe losses across the group were $119 million, over half of which are related to U.S. severe convective storms that have occurred so far this year. Pretax net investment income was $0.64 per share, up 21% from the first quarter of 2023 as our pretax investment income yield was almost up 50 basis points since last quarter. Total return for our investment portfolio was 0.56% on a U.S. dollar basis for the quarter with most of our strategies delivering positive returns. Our interest rate positioning with a slightly shorter duration helped minimize the impact of the increase in interest rates during the quarter. We remain comfortable with our commercial real estate and bank exposure, which is a high quality and short duration. Net cash flow from operating activities was strong in excess of $1.1 billion this quarter and continues to provide our investment team with additional resources to deploy into the higher interest rate environment. With new money rates in our fixed income portfolio is still in the 4.5% to 5% range, we should see further improvement in our net investment income in the coming quarters, arising primarily from positive cash flows and the rollover of maturing lower-yielding assets. Turning to risk management. Our natural cat PML on a net basis of the single event 1-in-250-year return level stood at $1.46 billion as of July 1 or 10.5% of tangible shareholders' equity, again, well below our internal limits. In light of the improved market conditions in the property market, we were able to deploy more capacity, which resulted in a significant premium growth for property lines in both our Insurance and Reinsurance segments. This growth was well diversified across multiple zones. Our view is that the current in-force portfolio with a broader spread of risk across many zones is well positioned to deliver attractive returns. Our capital base remains very strong with $17.4 billion in capital and a debt plus preferred to capital ratio of 20.5%. Even though the results of the past quarter set the high watermark for us on many fronts. We believe the continued hard work and dedication from our teams, serving the needs of our clients every single day, along with our steadfast commitment as disciplined and dynamic capital allocators, sets us up very well for future success. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions]. Our first question comes from Elyse Greenspan with Wells Fargo.. Elyse Greenspan : My first question, Marc, can you quantify the supply-demand imbalance that you're seeing within the reinsurance market? And how much of that do you think could transpire from an additional pickup in demand potentially at 1/1 2024? Marc Grandisson : Good question, Elyse. I think the numbers we've seen for around $50 billion to $70 billion is not a crazy number. So I think that where we still have this imbalance occurring. I think that market has found a way to do the reinsurance transaction and buy coverage. But indeed, there was also a -- there could have been more to be had from a reinsurance perspective. But we believe and you heard on the call that insurance companies also had to -- a shock at sort into evaluate what they can buy and how much they could afford based on where the pricing level was. So I think that just in balance right there of reinsurance. There's also, I believe, we also believe it's in balance in the terms and conditions in the overall broad industry that needs to be more of a function. On one hand, you could create capacity for cat exposure through third-party capital or reinsurance protection. But at the same time, we could also do it through improve in terms of condition on the insurance level. And I think that's also something that will help bridge a gap. And we believe that's going to be more of the key element as well for the next 18 to 24 months. Elyse Greenspan : And then the , Francois, the accident year underlying combined ratio within reinsurance. Is that a good run rate level or maybe you could get better as we think about some rate earning into the . Is there anything one-off in that number in the quarter? Francois Morin : Well, I wouldn't say there's anything one-off. It is certainly a very good quarter. I think our view, as we said in the past, when we had some quarters where there's a little bit more activity as we think it's better to look at it on a on a 12-month kind of forward-looking view. So is this quarter going to repeat in the future? Maybe, we just don't know. I mean, but I'll say it's certainly good. There's room for further improvement. But again, recognizing that there's going to be volatility in the reinsurance segment from quarter-to-quarter, I'd say it's -- I'll let you make your pick from there. Elyse Greenspan : And then, Marc, one more for you. I mean your stock has done really well. So you have a problem, a good problem that any CEO would want in that you have an extremely valuable currency. We sit here with the hard market. You guys obviously have a lot of organic growth opportunities. What would you need to see from an M&A perspective to consider using your stock as currency to enter into any type of transaction? Marc Grandisson : Well, many things are needed. Obviously, you need -- it takes the time goes -- is going to appreciate in this world. But I think at a high level, at least we're not focused on M&A at this point in time. We're really focusing on growing the book organically. We're also maintaining pretty well EMI as well as other nonproperty exposure. So we do -- we are seeing a lot of opportunities broadly. And this is where -- what our shareholders are paying us to do and this is what we're doing. And this is -- this represents really a once in a little while opportunity to really deploy and really get access to the market in a bigger way to provide more capacity to our clients. And we don't want to miss that. I mean an M&A would have to strategically fit for us beyond the money I think right now, our efforts and time is better focused on organic growth, though at this point in time. And this is where -- I think we have plenty of opportunities on our own. Operator : Our next question comes from Tracy Benguigui with Barclays. Tracy Benguigui : You mentioned that your 1-in-250 PML intangible equity was 10.5% at 7/1 which was up from 8.1% at 4/1 and I recognize your upper tolerance of 25%, it almost feels to me like you have a supplement below the 25%. Is it fair to assume that getting closer to 25% requires an even higher ROE hurdle rate or pricing? Like could we just be theoretical, what would you need to see in order to get more comfortable taking on more volatility in your book where you can get closer over time to that 25%? Marc Grandisson : Well, I think the -- we're -- first, the one thing about the PML, which is so interesting to us is that we're in the early innings of where it's going to go. So we have to be careful that when we talk about this even internally ourselves, these are the early innings of our market getting much better. And as I mentioned, terms and conditions, we believe, also improving and really helping to manage cat and the cat-related risk better as an industry. So we'll see how that develops over time, Tracy. I think that we're also a different animal than we were way back when. We've grown up our capital faster than the growth in exposure and needed. So the 25% before is probably a lesser number. I think you're quite right. And we also have to balance the overall portfolio risk profile. But having said all this, there's plenty of room to go from 10.5% to wherever we're going to end up. We don't know where that's going to be, assuming conditions say as they are or even improve further, it certainly will mean more PML growth. I think that it would have to be substantially better. We actually have a very, very solid construct within our overall capital allocation that will dictate what kind of market share we would have of the market. And all I would say is there's always a place to go to the numbers you talk about, but we'll see if we get there. And I will also remind everyone that it's not a bad to start the index of one of the major brokers, as you all know, it shows us that the pricing for the cat is the highest it's ever been since 1990, even before Andrew. There's a lot of room, and we're excited to see where that takes us. And one final thing I will take is if you look back at the '05, '06, '07, '08, if you go back on this, if you have enough of a memory or a good document retention policy or a bad one in your company, you'll see that our PML grew in '06, '07, '08, '09. So we kept on accumulating and growing the PML. So it's just a start. Francois Morin : I'll add on that. Just going back to Marc's earlier point about supply and demand and balance. In is obviously a big market. It was a big renewal in 6/1. And the reality is, even if we wanted to deploy more capital, I think, or more capacity, I mean, the buyers or the companies just don't have the resources or the money to buy the coverage that we think they should be buying. So there's a little bit of wait and see whether it will take -- it will be a full year before the they reprice their product and then it gives them more money potentially to spend on resource protection, which we, again, assuming the pricing stays at the current levels, we would deploy more capital. But certainly, the demand is a big factor in our ability to grow PML. Tracy Benguigui : Got it. I would say that if you do change your threshold and I get it's very fluid and the demand equation is also different, that you would provide an update to the market on that. Real quick, do you have a house view on how this year's hurricane season will shape up. There was talk about average hurricane season and now people are talking about above average. How do you see that playing out this year? Marc Grandisson : Well, we don't have a view on the view. What we have a view with [indiscernible], we have a mineralogists who evaluate the sea surface temperature, which I'm sure everybody is in those numbers. We expect average, maybe slightly above average last time you gave us a presentation. But as you know, Tracy, it moves week to weeks, and we'll see when we get there. We're a little bit almost starting this season, so we'll see how that develops. But we tend to take a longer-term view, Tracy, of the frequency and the severity of the hurricane season. So we believe that the pricing as it is right now accounts for a lot of deviation from the long-term expected that even if you had a little bit above average, I think that the market will be in a really, really good place. Not only us as a part in the market is on the reinsurance side has priced the business with that long-term expected, which has, as we all know, a little bit of that increased frequency in of late. So that is reflected in the marketing that all companies are using. Operator : Our next question comes from Jimmy Bhullar with JPMorgan. Jamminder Bhullar : First, just a question on your comments on supply/demand. And besides the absolute price, obviously, terms and conditions have improved as well. And where we can see the data, it seems like most of the primary insurers are absorbing more of the first dollar loss. But obviously, we don't see the data from all of them. But how broad-based is this and do you think there's sort of been a little bit of a transfer of risk, cat risk from the reinsurers to the primary companies given changes in terms and conditions. Marc Grandisson : I think the last part is a true statement. I think the Q2 numbers you saw for some of the other -- some of our clients actually and competitors demonstrate that that's a little bit more retained. And these are the kind of question. I mean if you get quite a coverage, you have to retain it yourself. The terms and conditions change, this is what fastening for this market, it is not only a property cat terms and condition change. It is a very broad-based property terms and conditions and price improvement that is sought by a lot of companies. I think the market globally has the like I said last quarter's scoring the camp, but having to mend and optimize and reshape and re-underwrite the portfolio. And one of the key things that we see that evidence is that, is that a facultative team in our property have an increased amount of submission this first half of the year. And what's interesting, the E&S property on the insurance obviously has some kind of exposure, a fair amount of it, but it's not only that. Our [indiscernible] data book of business is not necessarily. It's actually not cat-heavy portfolio, which is an indication as fact that it is typically in any market is a good indication for where the market psychology is. So beyond the cat when they provide fire protection, the pricing and the conditions are improving there as well. In very much a broad base and in the early stages. And I will say and remind everyone, and we have to remind ourselves of this is that this is a second or third year of property rates in terms of consumer loan approval. So it's not the first shot at it. It's an ongoing process. And I think that it just got -- we position in top of mind to and certainly in the second quarter. This year, we believe will help maintain a bit of that going forward. Jamminder Bhullar : And then on the MI business, you've had obviously very sizable reserve releases over the past couple of years. How much of the forbearance related reserves that you put up. Are those mostly released? Or is there more room to go there? Francois Morin : I mean they're mostly gone. I think we've released a fair amount of the reserves that we put up in the early, in 2020, effectively during the early days of the pandemic. As I mentioned, like a lot of the cures that we're seeing now are from '21 and '22. So that's good news. And as you know, the reserve base has shrunk quite substantially from the peak of 2020 or late 2020. So we were still very prudent. We still look at the data every single month as the new delinquencies come in and how quickly we cure and all of that, but we're so very comfortable with our reserve position there. Jamminder Bhullar : And if I could just ask one more on -- in the past, when the market has been really good, we've seen some companies go out and raise equity, try to take advantage of that. And a couple of your peers have done that as well, obviously, not to a very large extent. But what do you think about your sort of desire to do that if the demand really picks up and your business continues to grow? Francois Morin : Well, it will be a function of the market. I mean it's -- we've been able to grow quite substantially in the last few years without raising any additional capital. As I've told many people over the last few months, we have the luxury of having a mortgage unit that provides a source of capital that we have been able to redeploy in the P&C space. So assuming similar conditions where P&C start stays very hard and mortgage still does very well, but isn't growing substantially, we still think there'll be -- we'll be able to generate capital internally. But again, hard to have the crystal ball on what 2024 will look like. So we're -- as I mentioned, we got plenty of capacity. We have low leverage, so that we got a lot of tools in the toolbox, and we'll react to the market as it presents itself. Operator : Our next question comes from Michael Zaremski with BMO. Michael Zaremski : Great. Maybe just wanted to learn more about market conditions in the primary insurance segments. I definitely heard your comments about rate change both loss trend and pieces of where overall we are in the underwriting lifestyle clock. But just curious, we're seeing kind of different data points from companies on pricing power levels. Some are showing flattish pricing power, some are showing deceleration. I know you guys operate in a lot of different pockets. But would you say overall pricing in the primary insurance segment is accelerating? Or maybe it's worth bifurcating between casualty versus property as well? Marc Grandisson : Yes, you have to bifurcate the market to your question. I think the overall statement, I will say is that from our perspective, we look at our portfolio, as you just mentioned, by all the specialty lines and most of them still getting rate increases that actually get a bit more pickup in rate increase on the last quarter or 2, which was a good thing to see and the right thing to see, obviously. But I think the workers' comp is a good example for rates not going up still, and there's a reason for it. It's been historically well performing, performing better than all the initial picks from all the folks out there. So I can see why there is some validity or at least reason behind that. This is what I would tell you the word we use for the industry right now in the U.S. specifically is rationality. It's a very rational market. That's a reason for things to happen. The reason for example, are economically based and not grow the market share or making it flash or marketing driven. Companies are really doing the best they can to underwrite the best and being appropriate, like in getting price increase a certain degree to line that needed more than others. I think the market is fairly rationalize for future. Michael Zaremski : Okay. Switching gears a bit to the reinsurance side of the marketplace. Would you say there's been a lot of terms and conditions changes and just even changes too, especially in Florida. Would you say that if there is a major event, should we be looking at historical market shares that the reinsurers in Arch have had and then care cutting it? Would that be like the right exercise to do given we're or kind of in hurricane season? Marc Grandisson : I think we've grown our portfolio, right? I mean, you can see that the exposure of growth. I think the proxy for market share is probably better to use the delta and the PML, even though that's only one zone. But as Francois mentioned in his remarks, we do have -- we have an increased participation in a much more wider set of property cat exposure that we used than before. But the market share that we said anywhere from historically from 0.5 to 0.8 is going up a little bit. And I think I will use the PML as a proxy. That's the best thing to tell you right now. [indiscernible] zone. Operator : Our next question comes from Josh Shanker with Bank of America. Joshua Shanker : I've read the reinsurance clock, but it doesn't really relate to something that [indiscernible] knew about, which I don't, which is having make money in the late 1970s in the insurance industry. Given where you see loss trends are and given that pricing is going up over a extended period of time, is there an element that we just don't know really what the loss cost trend is and we need an extra padding in there compared with our historical appraisals? And is it possible to put a supplemental ambiguous loss trend on top of what you think the loss trends currently and still get new business attractively? Marc Grandisson : Yes. So a very good question. I think this may break it in parts. I think that, yes, we do, as you know, as a reserving practice, we're very keen on the reserving being prudent. We do reserve to a higher level of trend that is embedded in the pricing or what we even observed in the data to make sure that we're accounting for this. I think as a result of that uncertainty and the need to get a bit more cushion and the uncertainty that it generates. I mean, you heard us on the other call, I think it does generate that need to get higher price for that reason. But there's a -- there's a recognition in the industry that we need to be a little bit on this side of the decimal, create some kind of margin of safety. So I do believe that companies are pricing for a higher inflation ratio going forward and also adding a little bit, and that's what helps and sustain the hard market as we speak. Joshua Shanker : Is Arch padding more now than it has as a company standard practice in the past? Marc Grandisson : Not really. I think we've -- like we talked about this, Josh on calls for the last 2, 3 years. I think we've been consistent. We -- it is a little bit of art , it's not only science, not as granular as you might think it is. You do the reserving process, you do the reserving process and then you look at what your expectations are versus what the actual is emerging and you adjust your loss ratio. These 2 things are right now has a tendency to sort of take a higher loss ratio than otherwise will be indicated because we have to still see through that underwriting year developed, and it's been very consistent. And if you look at our IBNR ratios and that we book the business on our insurance portfolio, it's been consistent for the last 3 years. So we tend to want to make sure that we still emerge that allows us to reduce some of that before we do. So we have not changed a whole lot. And it's not -- so it's quite a bit a way above you expected there will be actual emergent or losses. But inflation developed in the future. So it's an appropriate thing to do. I think, at the early stages, Francois? Francois Morin : Yes. I'd add like COVID certainly through a wrench in the whole process, right? I'd say it's -- the way we think about the business today, the way that the environment is today is different than it was 5 years ago, it was different than it was 10 years ago. So great question, Josh. But it's -- no 2 periods are alike. And right now, back to Marc's point, I'd say the reaction or how do we think about court closing and courts reopening and coverages and everything that came with COVID, I think, I mean we're still kind of working through that. So that's why I think it would suggest that we're -- we like to be prudent and maybe even more so in this environment. Joshua Shanker : And then on Tracy's PML question, you kind of ripped into Francois down on this a little bit. But the corporate charter says you're willing to put 25% of the company's equity capital at risk for a 1-in-250-year event. You're nowhere near that, and I don't really expect there's any market where Arch at this point, given how big it is, would really put 25% of its equity capital at risk for a 1-in-250-year event. How -- what's the reasonable feeling on how much cat risk you'd be willing to take in the best cat market ever? Francois Morin : I'd say -- I mean, we think we're in a good market. We know we're in a good market, but we don't know what tomorrow holds. So I mean rates could go up again by a factor of quite substantially next year. Again, I don't want to speculate, but there could be some markets kind of pulling back. And then I think -- I agree that in what we know today, it's unlikely that we would hit 25%, but we just don't know what the future holds. So I think we're cognizant that there could be better opportunities at some point down the road. Operator : Our next question comes from Ryan Tunis with Autonomous Research. Ryan Tunis : I guess my first question is in MI. It's kind of a follow-up on Jimmy's but on Page 21 of the supplement, it looks like you guys give reserves, loss reserves like by vintage year. And the dollar amount of reserves in '21, '22 looks pretty similar to what it was at the end of last year. Instead, you continue to release quite a few, over $100 million. So I guess I was just trying to square that a bit, like where exactly have these release has been coming from? Francois Morin : Well, just to clarify, I'd say, Ryan, that the reserves, we don't disclose the reserves by year. We show the risk in force. We give you the total dollar amount of reserves as of -- $403 million at the end of the quarter and the same at the end of the year, but there are some shifts between what was at year-end versus now. I will say that most of the reserves that we've -- the releases in the first 6 months of the year, have been coming primarily from the '21 to '22 years, I mean, and a little bit of '20 as well. Marc Grandisson : In mind what you're saying also recognition by the MI group, there were more uncertainties and potential recession figures of things going on. So the assumptions when you do reserving in the long term at that time, you'll tend to increase because of the increased level of risk. So I think that also could explain why well after 2, 3 quarters, we don't need them well is because things are also wise we now changing for the better as we speak on the MI. So that could explain a little bit why it's a bit higher this quarter. Ryan Tunis : Got it. And maybe just some perspective on kind of where the ultimate loss ratios on those years are now trending at? Francois Morin : Well, they are -- I mean, they turned out to be really, really good. I mean the reality is with -- even with COVID and kind of what transpired after that and the forbearance, et cetera, I'd say, again, we've talked historically about, call it, a long-term average loss ratio in the 20% to 25% range, we're certainly going to be below that. Still a little bit more than -- yes. But I mean there still has to be -- we need more clarity on how the remaining delinquencies are going to settle or whether they're going to cure or not. But where we're at today, I'd say we're going to be below the long-term average. Ryan Tunis : Got it. And then just a follow-up -- go ahead, sorry. Marc Grandisson : Just to let you know, in terms of loss emergence in MI, it takes a little while, right? It takes 2 or 3 years for losses to start emerging. So it takes a little while to get to know what the ultimate is going to be. So I just want to make sure you know it's not like a one and done. It's -- you generate an underwriting year, takes 2 or 3 years for losses starting to emerge, right? Situations, situation, economic situation and the borrowers evolve over time. So I just want to make sure you know that it's not -- just because nothing has happened. Ryan Tunis : Yes. I'm still trying to figure this business out, so I appreciate it. A follow-up, I guess, for Marc, just on P&C. I'm not sure there's ever been a cycle where like when rates started to decelerate, they reaccelerated? Why hasn't that happened before in your... Marc Grandisson : It's happened before. From '99 to 2001, we had 2002, 2003, 2004, actually, we had a hardening market and liability side in the U.S. We have new lines of business such as and aviation going through the ringer. So we have that going. And I remember a period of time when Arch was underweight cat for the first 2, 3 years of its existence, and we were sold the going against the grain. Most people were shying away from casualty and doing more property. And then we ran into and then we had a hard market as well in property. And I think it helped maintain even the business on the liability line is a bit longer. If you look back the year '06, '07, '08 were still very, very good and the price decrease were not as probably as high as they could have been otherwise. I think the one factor with these kinds of hard market and properties had is us competing is competition for capital. And I think it also helps buffer or paying down the rate decrease that would have otherwise have happened. And that's an important or rate stabilizing more than just going out for. So we've had this before. We've had this before. Ryan Tunis : And then so after Katrina, correct me if I'm wrong, there was like 1 year of really good rate. There's quite a bit of supply that came in, and now it's kind of [indiscernible]. I'm just kind of trying to contrast from a reinsurance standpoint, how the supply-demand balance looks today sort of a year after in versus how it did a year after Katrina. Marc Grandisson : It hasn't changed the hold up. We hear from our third-party capital team and in the market. I mean, you hear from other markets, I think that there's a general more leveling off of capacity that's been deployed than we would have expected from the existing incumbent, which helps explain a lot of the price increase that we've seen in our ability to flex in incidents. We're not seeing or hearing supply increasing for a while. I think that there's still a very much -- the money that was there before that Brazil was requiring lower returns has not returned back to the table. And even if they were to come back to the table, what we hear is their return expectations, like ours have increased dramatically. So we'll see what that ends up. Ryan Tunis : What are you paying the purest attention to thinking like looking forward into 1/1, kind of what might drive pricing when you get to the end of the year? Marc Grandisson : Well, activity, cat activity, of course, and demand increasing, demand people, like we said before, needing to buy more or having to buy the bullet and do the right thing at the same time as they are improving on insurance portfolio. That's a big tell for us. Operator : Our next question comes from Brian Meredith with UBS. Brian Meredith : A couple of questions here for you. First, just on your PML, what is your peak zone right now? Is it still Northeast? Francois Morin : [Indiscernible], Florida. Brian Meredith : Where is it, pardon me? Francois Morin : Florida. Miami Day. Brian Meredith : Okay. And then on the PML question, I'm just curious, you gave us 1-in-250 but how is your kind of 1-in-50 and 1-in-100 kind of increased over -- since, call at the beginning of the year? Is it -- as they increased more or less about the same amount? I'm just trying to get a sense of where you're playing in programs. Marc Grandisson : Yes. So from a big zone perspective, it's gone up similarly in terms of percentage. It's a very similar increase. Brian Meredith : Got you. That's helpful. And then Marc, I'm just curious, I know there was a lot of one-off type transactions, top-up programs that happened in the second quarter. Can you give maybe some perspective on how much of that contributed to your growth here in the second quarter? And how much is kind of continuing here going forward, just so we can get a sense of how is this growth sustainable here for the remainder of the year, maybe in the '24. Marc Grandisson : We've had a couple of -- we've had a couple of programs, for instance, in the Asia that we won, and we've had a couple of big but I don't think this quarter is necessarily a large transaction quarter right to where you make it sound. I think it was more regular growth. A couple of transactions here and there, but nothing to the extent that when we talk on the call as Francois mentioned in his remarks, that it has to highlight it specifically before. I don't think there's nothing really to highlight in this quarter, actually. Brian Meredith : Good. And then I guess last one, just quickly here. One of your competitors talked about reducing market share in the MI business because there's some concerns about recession or going forward. Maybe give us your kind of perspective on what you're seeing right now in your MI and kind of outlook and potential for some higher loss ratios there if we do go into recession or look in the '24? Marc Grandisson : Yes. I think pricing has improved over the last 2 years and credit quality stays really beautiful. And it's why among the best, I think we go back to 2013, 2012 in terms of quality of origination. So it's -- as you know, credit is not readily available. The availability of credit is still pretty tight out there. So from a credit quality perspective, Brian, it's as good. It's a really, really solid marketplace. I think the market share question, which we never -- we don't lose sleep with this, as you know, Brian. I think -- I'll -- couple of things in the market share that we're trying to do in terms of shaping the portfolio in the MI is trying to get the higher quality, like I mentioned in my remarks, lower FICO -- higher FICO, lower LTV and also geographically go to the places where there's less perceived inflation or overvaluation and also, there's some different programs that have different returns, meaning they are less than we would have hoped for them to be and they just don't [indiscernible] threshold and especially, Brian, if you overlay the opportunity set that we have on the property side, it just makes for our fellow folks and MI willing to take the earnings that they generate and give it to us on the P&C side to generate even better returns. So really good return business, Brian, it's just also for us a matter of comparative ROEs as well as absolute. Operator : Our next question comes from Meyer Shields with Keefe, Bruyette & Wood. Meyer Shields : A quick question to start. The level of reserve releases in reinsurance was lower than it's been in recent quarters. I was hoping you can give us some color. Is that because you're assuming higher loss trends? Or are there other factors that may have played into the quarter's results? Francois Morin : No, I'd say it's -- I mean we will look at the data, right? So I think some quarters, there's evidence that we can release a bit more this quarter, maybe not as much. It's a process that we go through every quarter. So I think our underwriters and our actuaries kind of sit down and take a look at the respective treaties and come up with a point of view on whether there's enough evidence to release reserves. So I wouldn't read too much into it right now. I think it's a -- just another quarter still, we think, healthy reserves, healthy reserve releases, but not as much as you said in prior quarters. Meyer Shields : Okay. No, that's fair. Second question, and I'm really not sure how to ask this, but there's a lot of chaos right now in U.S. personal lines and [indiscernible] always been really opportunistic. I was wondering if there's a way that in a line of business that's so dominated by major players, but you do have this level of instability. Is there an opportunity for Arch? Marc Grandisson : I think it's a hard one, Meyer. I think that our shareholders -- I mean, we could always see what we could do there. But from our perspective, I think we're more of a B2B and more of a commercial provider of insurance and specialty provider of insurance. Certainly, on the reinsurance side, we're helpful. Our companies -- a lot of companies are homeowners, homeowners are writers, and we do -- we do provide significant capacity for them, be it on a quarter share basis or excess of loss and also be on property. So I think our game plan on homeowners is more to support the clients that we have because I think on a long-term basis, it has a set of characteristics, as we all know, and focus that is not necessarily core to what we do every day, great filing and everything else in between. It's a bit of a different animal for us. Operator : Our next question comes from Yaron Kinar with Jefferies. Yaron Kinar : With most of my questions already asked and answered, I figured I'd maybe focus on a couple of more items. So first, on ad covers, can you maybe talk about how much you're still writing in '23 versus '22? Marc Grandisson : We've cut our ad book significantly over the last 12 months. You see even in 2022, we started cut already as we saw this. And again, it's a matter of opportunity, right? I mean we do some but we've cut the book heavily because of the better -- frankly, better opportunities on the excess of loss occurrence, much better, yes. Yaron Kinar : And is the client base there? Has that changed at all? Can you maybe talk about the mix between large global, smaller regionals? Marc Grandisson : We -- well, we had a -- when we grew at in Florida was, as you know, is a different kind of animal because of all the [indiscernible] small companies out there. But in general, I would say that our portfolio will opportunistically grow into the larger global companies. We tend to think that relatively not as the transparency of visibility into what they write. So our tendency is to be more of a super regional businesses and more ones that have a lesser footprint in terms of stake. We think we can better allocate capital. This is sort of a high-level philosophy that we've had for years. That hasn't really changed our one. I think that we prefer to grow with these clients over time. But having that all this opportunistically, being on a core share basis of excess of if it's a large corporate, we definitely were able to provide more capacity, but they needed. As we speak and the price, we believe, reflected the higher level of risk that they have. So I think I would say same as before, we're a little bit opportunistically on larger companies. Yaron Kinar : Got it. And then if I put this together then and we look at the very large cat activity that has really been incurred much more by the primaries here. With the changes in terms of conditions and maybe tighter, more limited cover per peril. Ultimately, how does that impact ad covers later in the year, if, let's say, the primaries had a lot of cat losses on perils, secondary perils that are now no longer covered by reinsurers at least not per event, ultimately, does that also flow into the ad covers that will not be breached on a reinsurance level because of that? Marc Grandisson : Yes. So I think that excess of loss is very similar to the current, if you do change terms and positions and cut the coverage at the underlying portfolio level, it will have a leverage impact into your aggregate excess or occurrence, meaning it will definitely cut down the loss expectations heavily into these layers. But what I would tell you on is we're not there yet, right? This is the early innings like I mentioned to you before on the call is that we're going to have -- the phenomenon just talked about will have a much better perspective and view on this and the impact it's going to have on the losses next year and through '25. I think right now, we still have a portfolio that hasn't gone through quite 100%, right, of all these [indiscernible] that you and I expect to happen, I think, in the marketplace. So the aggregate of losses for that reason, probably still bad bet in 2023, right? So we probably need to see this underlying change in terms of conditions on the insurance portfolio before we can see this being a potential viable product. Operator : Thank you. And I'm not showing any further questions at this time. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : So from Pembroke, Bermuda, I want to wish everybody a good month of August, and we'll see you in the fall. Thanks for your support. Operator : Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,023	4	2023Q4	2023Q3	2023-10-31	5.919	6.293	6.891	7.182	9.33	11.16	10.91	Operator : Good day, ladies and gentlemen, and welcome to the Q3 2023 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the Company gets started with this update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These states are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filled by the Company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website and on the SEC's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sirs, you may begin. Marc Grandisson : Thank you, Gigi. Good morning, and thank you for joining our third quarter earnings call. I hope everybody is safe and well. Yesterday, we reported another excellent quarter, highlighted by strong performances from each of our three operating segments that resulted in an annualized operating return of 25% and a 4% increase in book value per share. Overall, our teams capitalized on good underwriting conditions and relatively light catastrophe losses to produce an outstanding $721 million of underwriting income in the quarter. Our property and casualty teams continued to lean into favorable market conditions to drive $3 billion of net premium, up 26% from one year ago. Mortgage insurance once again delivered impressive high-quality underwriting earnings that we redeployed into our P&C segments where opportunities abound. Broadly, we continue to achieve rate increases above loss trend in most sectors of the P&C market. Although rate increases are slowing in some lines, they are reaccelerating, which is a good reminder that there is not a single insurance cycle with May. As always, Arch is well positioned to navigate across these many cycles by reallocating capital to the segment with the best risk-adjusted returns. One of our core differentiating principle is that our underwriters are aligned with our shareholders through our unique compensation structure. Our underwriting teams are always seeking to maximize opportunities as long as they need our shareholders' targets. As we near the end of 2023 and look ahead to 2024, I believe that although the dynamics may shift, this hard market will continue to support profitable growth. Let's take a moment to recap the current state of the market and where we are likely headed. I see it as a play in three acts. The first act, the current hard market started in primary liability insurance in 2019 and then has a unique circumstance of a two-year pause in claims activity due to a global pandemic. The second act introduced Hurricane Ian as a main character where property reinsurers had to adjust both their pricing and risk appetite. In addition, capital got more expensive and the industry has to respond to meet new expectations from investors. While property has been the most recent driver of this market as we move into act three. We are faced with increasing evidence at casualty rates widely underpriced and oversold during the last submarket need to increase. We expect this third act of the extended hard market already one of the longest in memory to persist until the industry's reserving issues are resolved and until capital rates generate positive results. Arch is well positioned to capitalize on this operating environment. As new hard market underwriting opportunities arise, our incredibly nimble reinsurance group allows us to grow more quickly and significantly than in our insurance group and is therefore where we are most likely to deploy capital first. Today, market trends point to a reinsurance-driven GL hard market, and we stand ready to act. The third act has very started, but things are very promising for Arch. Now some color on our operating segments. Our reinsurance group has once again driven our growth with third quarter net premium written of $1.6 billion, up 45% from the same quarter in 2022 and 60% over the last 12 months. Underwriting performance in the reinsurance group was excellent with a combined ratio of 80% for the quarter. Our expectation is that we will continue to see hard property market conditions to next year's renewal cycle as uncertainty and loss activity remains elevated. As noted above, we expect increased opportunities in liability as well. Our insurance group also remains in growth mode in both our North American and international units, while net premium written in the Insurance segment, up 16% over the last -- over the past 12 months, are more modest than in reinsurance, they are more broad-based because of our focus on small- and medium-sized specialty accounts. Underwriting income continues to build with increased earned premium and a strong combined ratio of 90.9%. Today, there are still plenty of opportunities to grow profitably in insurance. Property and short-dated lines pricing in terms and conditions remained very strong with rate increases in excess of 15%. The then casualty pricing is increasing in response to overall casualty trends in the market and our programs unit continues to achieve rate increases above trend. Professional liability rates softened in the quarter, with net premiums written down 9% in the third quarter of '22. We share the marketplace sentiment about the D&O segment where both IPO and M&A activity decreased, at the same time as rig pressures from competition and security class action activity increased. However, returns in that segment are still strong. In the same vein, we maintained a positive outlook on cyber pricing on an absolute basis despite rate decreases in the 15% range. Our outstanding mortgage group continues to deliver quality earnings for our shareholders anda higher persistency of our in-force portfolio helped offset the slight decrease in NIW which has been affected by lower mortgage originations. Although we tend to focus our comments on the U.S. primary MI market, it is worth noting that nearly 40% of our mortgage segment underwriting profit this quarter came from non-U.S. operations compared to just over 10% in 2017. International business represents a significant growth opportunity for the mortgage group at Arch and our strategic decision to diversify our mortgage operations is yielding positive results that further differentiate Arch from our competitors. We are currently in a positive cycle on the investment side of our business, where increasing cash flows from growth are being invested into today's higher yield environment. New money rates are well in excess of our book yield which should continue to boost our investment income over time and provide us with an additional ongoing tailwind. In late October, which for baseball fans, mean it's fine for the world series, baseball is somewhat unique in that it's one of the few team sports that isn't limited to a specific length of time. You can score as many runs as possible until the other team gets three outs. To me, the current hard market feels like a baseball game. We know there's only nine innings to be placed, but we have no idea how long those innings will take. We've got a great lineup, we're happy to keep paying our singles, doubles and occasional home runs until the beginning is over. At Arch, we remain committed to being good stewards that are capital entrusted to us. We do that by following a tried and true data-driven approach that maximizes the capability of our diversified platform, diligently adheres to a cycle management philosophy and is centered around superior risk selection and prudent reserving. All the while, our underwriters are fully aligned with our shareholders. This principles are foundational to our playbook and underscore our long-term commitment to superior value creation. As we close out 2023, we have significant momentum in all three of our businesses and a reliable and high-quality earnings engine in our mortgage group that are helping fuel our growing investment base. All the pieces are fitting together nicely, and we're well positioned for the future. Now I'll call François up on an on-deck circle, and we'll return to answer your questions shortly. François? François Morin : Thank you, Marc, and good morning to all. Thanks for joining us today. To add to the baseball team, I would also emphasize that while this long winning streak has certainly been fueled by a timely and dynamic offense, we're also very much aware that team defense has played an important role in our success. We've been working hard not to waste any offensive production with careless errors and by executing well actively and on the field. We produced exceptional third quarter results from high-quality earnings across all our lines. The highlights of this team effort are numerous and include after-tax operating income of $2.31 per share for an annualized operating return on average common equity of 24.8% and a book value per share of $38.62 as of September 30, up 4.3% in the quarter and 18.4% on a year-to-date basis. Similar to the quarterly results, our reinsurance segment grew net written premium by 45% over the same quarter last year, led by the property other than catastrophe line which was 73% higher than the same quarter one year ago. As for our property catastrophe business, it's worth mentioning that the net written premium in the third quarter one year ago included approximately $34 million of reinstatement premiums, mostly as a result of Hurricane Ian. If we adjust for the impact of reinstatement premiums, our growth in net written premium for this line would have been approximately 64% year-over-year. The quarterly bottom line for the segment was excellent with a combined ratio of 80%, 73.5% on an accident year ex cat basis, producing an underwriting profit of $310 million. The Insurance segment had another very strong quarter, with third quarter net premium roving growth of 11% over the same quarter one year ago. Similar to last quarter's results, we experienced good growth in most lines of business with the main exception being professional lines where the market remains competitive, particularly in public directors and officers liability. If we exclude professional lines, net written premium would have been 20% higher this quarter compared to the same quarter one year ago. Overall, market conditions for our insurance and reinsurance segment remained attractive and we expect the returns on the business underwritten this year to exceed our long-term targets by a solid margin for some business units. Profitable growth during periods of favorable market conditions is one of the hallmarks of our cycle management strategy and the current hard market is definitely giving us the opportunity to deploy meaningful capital in many areas. Our Mortgage segment's banning average has consistently been a league leader, and this quarter was no different with a 4.7% combined ratio. Net premiums earned were in line with the past few quarters across each of our lines of business. Included in our results was approximately $98 million of favorable prior year reserve development in the quarter, net of acquisition expenses with over 75% of that amount coming from U.S. MI and the rest from other underwriting units. Our delinquency rate at U.S. MI remains low based on historical averages and close to 85% of our net reserves at U.S. MI are from post-COVID accident periods at the end of the quarter. Across our three segments, our underwriting income reflected $152 million of favorable prior year development on a pretax basis or 4.7 points on the combined ratio was observed across all three segments, driven by short cat lines. Current accident year catastrophe losses across the group were $180 million, approximately half of which are related to U.S. severe convective storms with the rest coming from the Lahaina wildfire, Hurricane Idaliaand other global events. Pretax net investment income was $0.71 per share, up 11% from last quarter as our pretax investment income yield was up by approximately 18 basis points since last quarter. Total return for our investment portfolio was a negative 40 bps on a U.S. dollar basis for the quarter as our fixed income portfolio was impacted by the increase in interest rates during the quarter and most other asset classes and negative returns in line with broader financial market indices, such as the S&P 500, which was approximately 3.7% in the quarter. Net cash flow from operating activities has been very strong so far this year in excess of $4 billion, which has helped grow our invested asset base by approximately 20% in the last 12 months with new money rates in our fixed income portfolio comfortably above 5%, we should see continued meaningful tailwinds in our net investment income. Turning to risk management. As of October 1, on a net basis, our peak zone natural cat PML for a single event 1- to 250-year return level remain basically unchanged on a dollar basis from July 1 and now stands at 10.1% of tangible shareholders' equity well below our internal earnings. Our capital base grew and got stronger during the quarter and now stands at $18 billion. Our leverage ratio represented as debt plus preferred shares to total capital is currently under 20%, which provides us with significant flexibility as we look to deploy capital as opportunities arise. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from the line of Elyse Greenspan from Wells Fargo. Elyse Greenspan : My first question was, hoping to get some thoughts on the January 1 property cat renewals on the reinsurance side. So where do you think rates end up next year on a risk-adjusted basis? Marc Grandisson : Well, I think the -- it's still early. We have a lot of movement in the marketplace and capital and people are, as you can appreciate, positioning at all the conferences. But our general consensus in the team when we talk to underwriters is that we'll still have improvements in 1/1/24, not as big as 1/1/23, we're still going to get some slight improvement on the reinsurance side of things. What is also -- I mentioned before, this is not really fully reflecting what we believe has been the re-underwriting and reallocating of capacity by our clients, and that remains to be seen how it's going to be reflected and it will depend on the clients frankly. But overall, we still expect a very healthy, very robust 1/1/24 renewal on property. Elyse Greenspan : And then on your casualty comments, Marc, right, you alluded to that being the third act and really leaning in there on the reinsurance side. I was hoping you could just give us a sense of timing on how that will play out. And if that's a '24 event, do you see the reinsurance book shifting more to casualty? Or do you think it's an environment where they both on property and casualty offer good growth opportunities for the Company? Marc Grandisson : It's a great question. I think the -- we have a big play in property, as you saw between the property cat on the region side that is and the property other than have core shares and thing in between. So I think we're still very much keen on that line of the business. Liability is a bit harder to evaluate right now because I think the first order is going to have to be looking at our plan for 2024, looking at the reserve or development of the area, the just talking about our clients. So it's going to take a little bit more time for people to figure out what it is they have and what they want to do with it going forward '24. So we'll have probably some of us think that we may have a renewal that is a bit more not as stable as it once was. So I think we'll probably see the early innings to go back to my baseball analogy of that liability possibly at 1/1. The one beautiful thing about GL or the one bad thing depending on the cyber market you're in, it's a longer-term development on a softening and on the hardening the GL can -- it will take a little bit longer to get to where it needs to get to because it takes time for you to get the losses, reflect them in the reserving, and we have a good sense of where the ultimate results are from the prior year to adjust and help inform the pricing you're going to have over there. So this is going to be a lot -- much more protracted third act than the second net was. Operator : Our next question comes from the line of Jimmy Bhullar from JPMorgan. Jimmy Bhullar : So first, just staying on casualty, there's been a lot of concern about reserves. And obviously, casualty is a fairly broad market category, but what are your thoughts on overall industry reserves in casualty, your reserves? And then maybe any color on the lines within casualty where you think there might be inadequacies and sort of the drivers of that or what's driven the reserve issues? François Morin : That's a great question, Jimmy. I think there's -- as you said, it's a broad market. Certainly, we've seen some pressure in our own results. I think we see -- so you see both on insurance and reinsurance. On the reinsurance side, we see some of our clients recognizing adverse and the latency of some clients being reported to us, I think is coming through. We like to think we've been proactive in addressing those issues, but you never quite know for sure until everything comes through. But some of the subsets, definitely umbrella is an area that it's something that we're watching carefully. The good thing, I think, with our book is, again, we are big players in that space in the soft market years. So we're seeing some pain but not to the same level we think that may be other as well. And -- but it's a hot topic, and we're going to keep looking at it. Marc Grandisson : The one thing I would add, Jimmy, to what François just mentioned, is that we are you're hearing from the call that it's going to be more acute, more of a pressure point on the larger accounts than the smaller accounts. I think that the limits deployed there and the uncertainty and the combination of all these years developing is a little bit more probably more a bit more of an urgency in that sector. So we expect the larger accounts, which we don't do a lot of on the insurance side to be the first one to really feel the pressure. Jimmy Bhullar : Okay. And then on mortgage insurance, I would have thought, and I think most investors thought that at some point, you would see sort of a step down in your results, still strong earnings, but maybe not as strong as they had been the years following COVID because of the release of COVID related reserves. Just wondering how we can sort of get an idea on how much of the COVID-related reserves are still on your books and could be released versus maybe an ongoing benefit from that in the next few quarters? François Morin : Well, I made the comment close to 85% of our reserves as U.S. MI are from post-COVID years. So that would mean '20 and after. But let's remember that when we were coming out of COVID, we saw just a lot of changes in home prices, home price appreciation and potential over valuation, right? So when we were sending reserves in the last few years, '21, '22, even up until early '23, that was a concern of ours. So we were somewhat -- as you would expect us to do somewhat more prudent I'd say in setting our reserves. how that plays out when delinquencies cure, we don't know. Could there be further favorable development maybe. But I'd say, for the most part, what's really been happening in the last couple of years is just I'd say very much again a function of the housing market, which has been just exploded and then created a different set of kind of data points that we're trying to analyze, and that's how -- what we based our reserves on. So hopefully, that gives you a bit of color on the question. Marc Grandisson : I'll just add one thing to me on the industry. The industry is extremely disciplined again, a very nice thing to see around us. So from an ongoing perspective, putting the reserve for one second, if I can talk to the -- our expectations. And we think that there's still risk on the horizon, but the credit quality of our portfolio the housing supply imbalance that you hear fromFrançois and the fact that we have a lot of healthy equity into a policies in force is it looks really, really good. And when we say that our mortgage growth is also doing very well, and that's what we mean. It's in a really good place. Operator : Our next question comes from the line of Tracy Benguigui from Barclays. Tracy Benguigui : While you posted double-digit insurance premium growth this quarter, the pace has decelerated a bit over the last two years. It looks like peak insurance premium growth was in mid-'21, and that might be a tough benchmark given you've grown a ton and professional ability and you are shrinking error, as you pointed out. Could we expect insurance premium growth at double digits to be sustainable going forward? Or should we see it fall to high single digits because of the professional lines headwind? And I'm just wondering if it's fair to assume that you prefer deploying capital into reinsurance now, all else being equal? Marc Grandisson : Yes. In terms of return expectations, I think your instinct is right on. I think reinsurance is providing right now very, very healthy returns. We expect this to continue into '24 and '25, to be honest. But the insurance group, I think it's one quarter, there's couple of moving parts due to some accounting thing, timing and stuff here and there sometimes. But as François mentioned, the growth in the line that we like to see growth into I'm very pleased to see because this is where I would expect the team to grow it but the market conditions are great there. And I would expect even some of those nonprofessional lines to actually maybe carry the day bit more going forward. I wouldn't be surprised that we could go back above 10% next quarter and into 2024. So I'm not -- I don't see one quarter of the trend, to be honest. Tracy Benguigui : Right very helpful. You slightly shortened the duration of your asset portfolio in September to 2-point, nine, seven years from 3.03 years in June. It feels like you're taking durational asset mismatch because the MI liabilities are much longer dated. Given the shape of the yield curve is beginning to show signs of steepening, I mean to tad bit less inverted. Going forward, would you consider lengthening your asset duration? Or you feel comfortable with the sub-3-year duration level? François Morin : Good point. I think the duration is probably the lower it's been in a long, long time, and that's just our investment professionals here again make the decisions, and there's obviously a little bit of tax expats involved and kind of where they want to play at a certain point in time. But for sure, absolutely. If interest rates, we think the longer the curve ends up being a bit more attractive. I mean, we certainly consider extending the duration a little bit. And we've got a bit of room there anyway just to match with the liabilities to make sure that we're not mismatch there. So that's certainly something that we'll look at in the coming months and quarters, yes. Operator : Our next question comes from the line of Yaron Kinar from Jefferies. Yaron Kinar : First question, it sounds like you are pretty constructive looking into 1/24. Can you maybe talk about your prioritization of capital? And maybe give us a way to think about maybe potential available capital you have to deploy into the insurance and reinsurance markets? François Morin : Well, yes, we are constructive on 1/1. I think we -- Marc and I said it, I think it's a really good market in totality. There's some pockets that are certainly better than others. We think that the internal capital generation, we've been able to generate in the last few quarters gives us the ability to really grow and take advantage of the opportunities that we think have a good chance of being there. Again, we don't make the market. We participate in the market. So if the market is as positive as we think it can be, then we'll be happy to step in and take a bigger share of it. But I think the fact that we've got capital flexibility has always been one of the -- and on a onetime things and our strategy all along is we want to make sure that we have plenty of capital to deploy when the market is right. And so far, we've been able to do that. Marc Grandisson : So Yaron, if I look at the high level, the way we think about -- we think about it, it's different perhaps than even our underwriting units, meaning that they don't really, they were doubting how much capital is allocated to them at the beginning of the period. I want to remind everyone that people write the business or underwriting fee write the business. And then we -- after that, charge them with the capital they've been using. And based on the planning and all the expectations that we have, our message there has been -- there is no capital constraint or issue concerns that, that pertains to you guys. If you see the market being a better and even get better than we saw, feel free to deploy more capital if you wish to do so. So there's definitely there's all hands on deck go forward if we can invite the business. That's one thing that's really nice and we'll then attribute the capital after we have written the business. That's what we do every year. On the property cat side, which is probably a more interesting one for is worth to you, we're about 85% allocated to the reinsurance group in terms of PML thatFrançois mentioned. And I think it's because the returns there are a little bit more favorable on the reinsurance side. And then we had the discussion at the group level. That's one exception. So when we have an acute or a specific area of the capital, we'll sit down with the Insurance Group and Reinsurance Group with Nicolas facilitating the whole discussion, and we'll sort of decide to roughly broadly where we want to allocate capital. Yaron Kinar : I appreciate that. And then certainly, I think the capital availability and the appetite to deploy is a very important part of the or story. And I guess from that perspective, is there anything you can offer us in terms of an attempt to quantify the available capacity? Or is that something that we'll just have to watch and see? François Morin : Yes. I mean, we -- certainly, we have some capital -- we have plenty of capital available. We just don't know what the market will look like at 1/01. So that's why I'd say you're right, probably have to -- what you see a little bit, see how 1/1 play out and then we'll have the ability to do something with the excess capital in. Yaron Kinar : Okay. And then my other question, just on public D&O and cyber, where we're clearly seeing a little bit of pressure and competitive pressure there. Do you still view rates as adequate there? And are they clearing the loss cost trends? Marc Grandisson : Yes, our return expectation on both these lines, cyber and D&O, is still very, very healthy. Operator : Our next question comes from the line of Joshua Shanker from Bank of America. Joshua Shanker : Yes. With the high retentions, this quarter in terms of premium ceded. Can you go maybe line by line or dig in a little bit about which lines of business you're retaining more? And is that a signal that you've gotten to the point where you have enough information that you love the profitability more and want to keep it yourself? Or is your you're looking at your capital thing, we have the capital deployed. So let's eat a bigger plates the pie. How did that all come together? Marc Grandisson : I think you answered the question beautifully. I mean by asking a question to give the answer, I think that all those things you said are true. I'll get to the lines in a second. But to your point is exactly right. We're going to this hard market and we make -- we still value reinsurance. You cannot go without a reinterest. You still need for various reasons, limits management, risk management and also information, right? Reinsurers are providing us on the insurance side with valuable information about what the market is and the state of the market. So we don't want to be an outlier out there. So it's always good to have this as an additional value proposition from the reinsurance companies. In terms of what we decided to do over three years, you're quite right, we have been building, asFrançois mentioned, a significant amount of capital through our mortgage earnings. So that's certainly something that was helpful and available to deploy in other areas, and that also helps being able to maintain and retain more net. I think if you at a high level, I think that the patterns of buying, we're buying a fair amount of less on the liability lines, specifically those that went through the first act and really had a lot of good uplift. So we definitely saw that happening on the property, even though the property is very hard, as we all know, since last year, this is a much more volatile line of business, so we still maintain our loss on the cat side and still by a quota share, a significant quota share on that business as well. So I think overall, it's meant to be the balancing act between providing relief or volatility protection to some extent and information. But you're quite right, having more capital definitely helped us take more net on our balance sheet. Joshua Shanker : And switching gears a little bit. When you have a 25% ROE quarter, you're making a lot of money and you have a large team that has contributed to that result. I assume they'd like to be paid for their good work. How should we think -- we've not seen a quarter like this in a long time in a year like this. How should we think about the pattern and the cost of discretionary comp where it hits the P&L and how it should compare with prior years? François Morin : Great question, sorry. We -- just again, in terms of timing, right, our incentive compensation decisions are made in the first quarter will be made in February of next year. But no question that throughout the year, we accrue expected bonuses based on what we think that our performance might look like, and there's effectively a true-up that takes place in the first quarter when the final amounts are determined. Something we're keeping an eye on. So I don't know if there'll be an early adjustment in the fourth quarter or not something we'll be looking at carefully, so that we don't go to distort too much the first quarter next year. Obviously, the Board has final say in how much money will be available to pay our troop. So that's -- it's a little bit of -- we don't want to front run it. We want to be reasonable and not introduce too much volatility in the numbers on the OpEx side. But that's certainly something that we'll take a look at in the fourth quarter to make sure we're not missing anything here. Operator : Our next question comes from the line of Alex Scott from Goldman Sachs. Alex Scott : First one I had is on the attritional loss ratio in the reinsurance segment. I was just thinking if you could give us a little more color around just what's driving this year, favorable performance year-over-year? And if there's anything new as we should be thinking about or if it's just the pricing environment being as strong as it is? François Morin : Two quick things there. One is -- and we said it before, and it goes both ways. We think of reinsurance as a line of business or a segment that we think is better analyzed on a trailing 12 month basis. We think looking at a quarterly there'll be some good, it will be some bad. And we've said in past quarters where we have elevated the traditional claim activity. We said don't panic, don't overthink it in the same way here, I think. So we would certainly encourage everybody here to look at a trailing 12-month basis to have a better view of the long-term kind of prospects of the segment. The other thing I'd say is also, obviously, we've grown a bit more in property than relative to get align. So by nature, right, our ex cat combined ratio should probably come down and it has as a result of, again, the growth -- the significant growth we've had both in property cat and property other than cat. Alex Scott : Got it. Very helpful. I wanted to ask a follow-up on the comments you made on casualty reinsurance. And I'm just interested in what is changing that's causing more of this commentary to sort of bubble to the surface? I mean, we've heard it from some of the European reinsurers as well. Is it I mean, is it truly just that they're starting to see reserves develop in a poor way for some companies? Or is there something that's changed about the social inflation environment? I mean what do you think is the underlying driver or drivers? Marc Grandisson : Yes. I think the industry is -- there's a couple of things going on at the same time, and they unfortunately don't go in the right direction for both for all our industry if you have written casualty. First, we have -- as I mentioned in my comments, we had a bit of a slowdown in activity including core activity, settlement activity. And we also have, as we all know, there's a lot of litigation funding, it's a bit more aggressive is coming from the platelet bar, and that's certainly something that you could describe to be social inflation, but that's not really something new. But there was sort of a lull in this market. It was sort of a spike, if you will, between 2020, '21 to really middle of this year, early this year. So, I think right now, we have sort of a refresh reupdating all the information about the losses of where we are and what could happen with the demand being updated and made more current. At the same time, we have price that business as an industry in 1,519 with inflation at 2%. Now inflation is north of 5, 6, 7, depending on where you look at. So at the same time, of course, we open things are being adjudicated reanalyzed, you have to account for a higher inflation number. And that is a classic case of having a couple of things going against you, nothing that the industry did on its own. It's just the economy and the environment and the risk in it and the environment. So I think that we're facing all collectively as an industry, that phenomenon. And what I like about the industry's capability is, it's reacting and that's what you hear. That's something that we should be very, very happy for collective as an industry. The other calls that you heard this quarter recognize it, and once you recognize an issue and a problem, people are very good and very adept at addressing it. And I think that's what's going on there are couple combination coming in very, very short order because of the surrounding environment. I think this is what largely drives what's going on right now. Operator : Our next question comes from the line of Michael Zaremski from BMO Capital Markets. Michael Zaremski : Switching gears to the to the investment portfolio. So the net realized losses were somewhat outsized again this quarter. I know they run below the line, but any color -- are those -- are you actually crystalizing to take advantage of the higher rates? Or is there noise in there from unrealized stuff or maybe the LPT transactions in the past? François Morin : Yes. I mean it's mostly around kind of crystallizing some losses. I think it's a process we go through for each security on the fixed income side, where we make the determination. Is it appropriate to sell some of those and redeploy the proceeds and higher yields and our investment team does that. So yes, there are going to be some realized losses coming through the fixed income. Obviously, the equity portfolio, which is not huge, but still there's FBO securities like fair value option securities, including equities that are effectively mark to market, and that comes through the realized gains of losses line in the income statement. So those are the two big items. There's a little bit of other stuff going on that is a little bit of the wheat. So, I wouldn't want to go there, but that's directionally hopefully that's just normal course of action. Michael Zaremski : Okay. And lastly, on -- is my understanding for me to put out there a second comment letter, maybe it's different, they call something else. But on the potential tax changes that will take place. Are -- any way you could offer us some color on what's -- how things are going to play out base case over the coming year two or? Or does the step-up -- if everything goes as planned, does the step-up in tax rate happen in '24? Or is it a '25 event or both? François Morin : Yes. It's, again, very early. So too early, unfortunately, to give clear or kind of views on what we think could happen or because they're still developing the laws and we expect more progress on that before the end of the year. But at a high level, it doesn't start at one start if it goes through until 2025. So, there's no impact for 2024 and we will be evaluating the and may publish some target tax rate that they will try to get to. But again, more to come, I think we'll do our best to keep you apprised of how we think about it probably on the next call. But until we have work to now any more clarity on where it's going to land, I think it's a bit premature to give you too much do any details here. Operator : Our next question comes from the line of Meyer Shields from Keefe, Bruyette & Woods. Meyer Shields : First question on, I guess, casualty reinsurance. This year, like January 2023, we saw not only significant increases in property capital. We saw changes in program structures with higher attachment points. Is there anything analogous to that, that we should see on the casualty reside in 2024? Or is it just going to be a great story? Marc Grandisson : Probably more of a great story. The buying pattern on GL is mostly on a quota share. There's a lot of quota share being purchased in that segment. That's also certainly something we prefer to focus our capacity on those of you who followed us for years, this is where we prefer to focus on capacity. On the excess of loss, my people don't really buy a lot. People don't put out is like $60 million, $80 million, $100 million limit. So, we don't have a similar kind of risk -- the risk vertical is not as big. And in terms of events, like a cat portfolio, you could see where things are accumulating can generate hundreds and hundreds million dollars of exposure. In the liability side, it's not the same. You already have a necessarily one or two events that could really impact such a wide area of your GL. So, I think we'll see a lot more filters more on a quota share basis and some of the excess of look here and there. It's not very similar -- it's not at all similar to the property market. Meyer Shields : Okay. That's very helpful. And second question, and hopefully, I can ask this in a way that makes sense. When we talk about reserve problems from older accident years, ultimately driving casualty rate increases to accelerate. Is that the industry can over earn in 2024 and backfill? Or is it because the recalculated full year's losses mean that current rates are actually not as adequate as we thought? Marc Grandisson : I think it's the latter. I mean it's a bit of the former, to be honest with you, people have to recognize those losses if they have them. I do believe -- as we talk about Meyer, you know that as well as we do, you're going to enter yourself, the reserving process feeds the pricing process. And clearly, if we have a reserving that's a bit higher than you would have expected, it will help inform your loss ratio historically. You have to put a trend on them, to the on-level analysis that helps get you to the price increase that you're looking at. So the past as it's developing, will inevitably lead you to having to charge more. And the reason we'll do a whole lot of large GL for that matter is precisely because of your second point, which has been historically a little bit wanting on the rate level and the rate level side. Meyer Shields : Okay. That's worrisome about recent years for the industry, but that's very helpful. Operator : Our next question comes from the line of Bob Huang from Morgan Stanley. Bob Huang : Congratulations on the quarter. Just a quick question on your insurance segment's loss ratio year-on-year loss ratio improved for about 30 bps. But just given just the strong E&S pricing environment, shouldn't we expect a little bit better improvement in loss ratio. Is there anything in the loss trends that probably differed from how you thought about your loss picks in the past, just see if there are any comments around that? François Morin : Maybe -- I mean I think the answer is really around like us being proof and initial loss picks. We don't want to get into the game of being overly optimistic. There's still a lot of risk out there. There's still a lot of uncertainty when we price the business, whether, again, we just been talking about casualty loss trends in particular, that's an area that we're watching carefully. So, we'd rather -- and it's been our model for many, many years is pick a realistic kind of a bit more conservative initial loss pick on -- when we book the business and then react to the data when it comes in. So, we're hopeful there could be good news down the road. But for the time being, we're very happy with our loss picks. Bob Huang : Okay. My second question is a follow-up on the reinsurance core combined ratio. Obviously, it was very strong and I think you mentioned that a lot of it is due to business mix shift, right, shifting towards property and then because of that and then you naturally have an improving combined rate -- loss ratio there. Just curious if we were to think about going forward, the run rate combined ratio for your reinsurance segment, based on the comments so far, is it fair to sort of assume that it's going to be closer to what you printed over the last two quarters and probably better than the prior quarters. Is that a fair way to think about it just from a modeling perspective? François Morin : Again, I mentioned like the thinking around trailing 12 months, which is where I would start -- to help you kind of with assumptions, I would -- if you're going to -- we think about it in totality around the combined ratio, but if you're breaking down the loss and the expense ratio, yes, maybe there's a -- given the growth, maybe there's potentially the latest quarter of OpEx is probably more sustainable given we've been able to generate that premium, that growth with the same level of resources. But on the loss ratio side, I think it's just -- I would be careful not to over I mean give too much weight to the latest quarter. Operator : Our next question comes from the line of Brian Meredith from UBS. Brian Meredith : A couple of questions here, first on the MI segment. I know there's clearly some market pressures, but NIW definitely down year-over-year. And it looks like just looking at some of the stats you all have been losing some market share in the MI segment. Is that intentional? Are you any concerns about the outlook here on the MI as far as delinquencies? Or is it more related to perhaps just better use of capital elsewhere? Marc Grandisson : It's more the latter than the former. I would actually say tell you, right, that the market is better this year than it was in last year. So, I would argue that we might change the way we intent the market over the next 12 to 24 months. But certainly, at heart, we have been saying that to you historically it hasn't changed last quarter, which in terms of relative returns based on the three segments on the underwriting segments. MI is a third one, but a very strong one, I would say, at this point in time. But again, it's more a reflection of the relative opportunity between the units than anything else. In the market, Brian, I'll tell you the market is very, very disciplined. We're very impressed by the industry or the MI industry. Brian Meredith : Good to hear. And then I guess my second question, Marc, as I think about if this next leg is coming through the third act on the casualty reinsurance side. I guess that probably comes through a lot on the ceding commission side, if you get you get better ceding commissions, should we continue to see kind of the acquisition kind of expense ratios on the reinsurance side kind of moving down here as we head through 2024, given was going on with the casualty reinsurance part, particularly since you play quota share? Marc Grandisson : Well, yes, I think the ceding commissions about store three right now we'll see what that ends up. There might be a slight change or we'll see how -- it's also going to be dependent on how the underlying market is improving as a reinsurance player. But I think what's our acquisition comes right now reinsurance is mid-low, low 20s. So, I think if you have more of a portfolio even if that's argued, it's a 30% ceding commission. So you might see actually, the acquisition going up a little bit. But again, as Franco mentioned, all the time talk about when we have these questions about the expense ratio and loss ration but not restarted the return and whether the combined ratio lends ourselves to return when it comes from losses of expenses we have already losing sleep here. So, I think this is… Brian Meredith : And I was going to say that I guess maybe the right way to think about it is that if you're leaning more into the GL, the underlying combined ratios may actually move up some here as you look forward because we have a different return profile. Operator : Our next question comes from the line of Scott Heleniak from RBC Capital Markets. Scott Heleniak : Just on the MI. I wondering if you could expand on the growth opportunity internationally, you referenced in your commentary. I know Australia is a big market for you, but we're also are you focused outside of the U.S.? Or is it mostly just Australia you're referring to? Marc Grandisson : Great question. I think in non-U.S. base is also the CRT, which is granted exposed to the U.S. MI, the excess of loss program that the GSEs have developed over that and we have developed over the last 11, 12 years. Internationally -- so that's a piece of it, you see it in our financial supplement. Internationally, we have Australia. As you know, we have a good size, great relationship and a great presence there. We're very pleased with it. We're also getting a little bit more market share there even though the mortgage origination is a slowdown there as well. The other is really in development is the international with European specifically, SRT, which are 90% mortgage-backed credit risk transfer, they look a lot like the CRT business that we have in the U.S. Most of it is done because banks need to release capital that Basel III led the transactions. And we've been doing it for a little while, and we've partnered up, we actually with another European company who's very steep in that area. So that's a growing area right now because I think the -- there's a lot more need for capital. As you know, Scott, not only in the U.S. [indiscernible] has a similar consideration. So, it helps us be there for them to provide more capital relief and it's certainly something that we're focusing more efforts on. Scott Heleniak : Okay. That's helpful. And then the -- just the risk profile and the credit quality and the default ratios on those, I would assume those are very favorable. But how does that all compare to outside of the U.S. and internationally versus the U.S. book? Marc Grandisson : I don't want to say too much because you're going to get more competition in the segment. High level of comparable and sometimes better than the CRT we see, but we still a little bit more work to be done there, those who are trying to get in the business. I think you should talk to us, first of all, help you hit in the business. Operator : Thank you. At this time, I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you so much, everyone, for listening to our commentary this quarter. Looking forward to the end of the year. Happy Halloween. See you next time. Operator : Ladies and gentlemen, thank you for your participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,024	1	2024Q1	2023Q4	2024-02-15	7.12	7.88	7.558	7.83	null	10.85	10.01	Operator : Good day, ladies and gentlemen, and welcome to the Q4 2023 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with this update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filled by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management will also make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sirs, you may begin. Marc Grandisson : Thank you, Gigi. Good morning and thank you for joining our earnings call. Our fourth quarter results conclude another record year as we continued to lean into broadly favorable underwriting conditions in the property and casualty sectors. Our full year financial performance was excellent with an annual operating return on average common equity of 21.6% and an exceptional 43.9% increase in book value per share, which remains an impressive 34.2% if we exclude the one-time benefit from the deferred tax asset we booked in the fourth quarter. The $3.2 billion of operating income reported in 2023 made it Arch's most profitable year-to-date. Growth was strong all year as we allocated capital to our property and casualty teams, we short over $17 billion of gross premium and over $12.4 billion of net premium. And while most current growth opportunities are in the P&C sector, it's important to recognize the steady quality underwriting performance of our mortgage group. Although, mortgage market conditions meant fewer opportunities for top-line MI growth, the business unit continued to generate significant profits totaling nearly $1.1 billion of underwriting income for the year. As we have mentioned on previous calls, those earnings have helped fund growth opportunities in the segments with the best risk adjusted returns, demonstrating that the disciplined underwriting approach and active capital allocation are essential throughout the cycle. Our ability to deploy capital early in the hard market cycle is paying dividends as we own the renewals, a phrase I learned from Paul Ingrey, a personal mentor and foundational leader of Arch. What Paul meant was quite simple. When markets turn hard, you should aggressively write business early in the cycle. This puts your underwriters in a strong position to fully capitalize on the market opportunity. By making decisive early moves, you won become an [indiscernible] then want to do more business with you. In some ways, the growth becomes self-sustaining, which explains part of our success throughout this hard market. At Arch, our primary focus has always been on rate adequacy, regardless of market conditions. Our underwriting culture dictates that we include a meaningful margin of safety in our pricing, especially in softer conditions. And we also take a longer view of inflation and rates. For these reasons, Arch was underweight in casualty premium from 2016 to 2019, when cumulative rates were cut by as much as 50%. I thought I'd borrow a soccer analogy to help explain the current casualty market. In soccer, players who commit a deliberate foul are often given a yellow card. Two yellow cards mean the player is ejected from the remainder of the match and their team continues with a one player disadvantage. Today's casualty market feels as though some market participants took to the field with a yellow card from a prior game. They're playing in match but cautiously, not wanting to make an error that will put their entire team at a disadvantage. So whilst Arch sometimes plays aggressively, we've remained disciplined and avoided drawing a yellow card. At a high level, we must remember that casualty lines take longer to remediate than property. So if insurers are being cautious and adding to their margin of safety, we could experience profitable underwriting opportunities in an improving casualty market for the next several years. Now, I'll provide some additional color about the performance of our operating units, starting with reinsurance. The performance of our reinsurance segment last year was nothing short of stellar. For the year, reinsurance net premium written were $6.6 billion, an increase of over $1.6 billion from 2022. Underwriting income of nearly $1.1 billion is a record for this segment and a significant improvement from the cat heavy 2022. Reinsurance underwriting results remain excellent as we ended the year with an 81.4% combined ratio overall in a 77.4% combined ratio ex-cat and prior year development both significant improvements over 2022. Turning now to our insurance segment, which continued its growth trajectory by writing nearly $5.9 billion of net premium in 2023, a 17% increase from the prior year. While the business model for primary insurance means that shifts may not appear as dramatic as our reinsurance groups, a look at where we've allocated capital year-over-year provides meaningful insight into our view of the market opportunities. In 2023, the most notable gains came in from property, marine, construction, and national accounts. The $450 million of underwriting income generated by the insurance segment in 2023 doubled our 2022 output as we continue to earn in premium from our deliberate growth during the early years of this hard market. Underwriting results remained solid on the year as the insurance segment delivered a combined ratio of 91.7% and a healthy 89.6% excluding cat and prior year development. Now on to mortgage, our industry-leading mortgage segment continued to deliver profitable results, despite a significant industry-wide reduction in mortgage originations last year. The high persistency of our insurance in-force portfolio, which carries its own unique version of owning the renewals, enables a segment to consistently serve as an earnings engine for our shareholders. The credit profile of our U.S. primary MI portfolio remains excellent and the overall MI market continues to be disciplined and returned focus. These conditions should help to ensure that our mortgage segment remains a valuable source of earnings diversification for Arch. Onto investments, net investment income grew to over $1 billion for the year due to rising interest rates that enhanced earnings from the float generated by our increasing cash flows from underwriting. The significant increases to our asset base provide a tailwind for our creative investment group to further increase its contributions to Arch's earnings. Over the past several years, Arch has leaned into both the hard market and our role as a market leader in the specialty insurance space. We have successfully deployed capital into our diversified operating segments to fuel growth, while also making substantial operational enhancements to our platform, including entering new lines, expanding into new geographies and making investments into new underwriting teams, technology and data analytics. Finally, as we bid adieu to 2023, I want to take a moment to thank our more than 6,500 employees around the world who help deliver so much value to our customers and shareholders. Our people are our competitive advantage and without their creativity, dedication and integrity, none of this would be possible. So thank you to team Arch. François? François Morin : Thank you, Marc, and good morning to all. Thanks for joining us today. As Marc mentioned, we closed the year on a high note with after-tax operating income of $2.49 per share for the quarter for an annualized operating return on average common equity of 23.7%. Book value per share was $46.94 as of December 31, up 21.5% for the quarter and 43.9% for the year aided by the establishment of a net deferred tax asset related to the recently introduced Bermuda Corporate Income Tax, which I will expand on in a moment. Our excellent performance resulted from an outstanding quarter across our three business segments highlighted by $715 million in underwriting income. We delivered strong net premium written growth across our insurance and reinsurance segments, a 22% increase over the fourth quarter of 2022 after adjusting for large non-recurring reinsurance transactions we discussed last year, and an excellent combined ratio of 78.9% for the Group. Our underwriting income reflected $135 million of favorable prior year development on a pretax basis or 4.1 points on the combined ratio across our three segments. We observed favorable development across many units, but primarily in short day lines in our property and casualty segments and in mortgage due to strong cure activity. While there were no major catastrophe industry events this quarter, a series of smaller events that occurred across the globe throughout the year resulted in current accident year catastrophe losses of $137 million for the Group in the quarter. Overall, the catastrophe losses we recognize were below our expected catastrophe load. As of January 1, our peak zone natural cat PML for a single event, one in 250-year return level on a net basis increased 11% from October 1 but has declined relative to our capital and now stands at 9.2% of tangible shareholders equity, well below our internal limits. On the investment front, we earned $415 million combined from net investment income and income from funds accounted using the equity method, up 27% from last quarter. This amount represents $1.09 per share. With an investable asset base approaching $35 billion, supported by a record $5.7 billion of cash flow from operating activities in 2023 and new money rates near 5%, we should see continued positive momentum in our investment returns. Our capital base grew to $21.1 billion with a low leverage ratio of 16.9%, represented as debt plus preferred shares to total capital. Overall, our balance sheet remains extremely strong and we retain significant financial flexibility to pursue any opportunities that arise. Moving to the recently introduced corporate -- Bermuda Corporate Income Tax. As mentioned in our earnings release and in connection with the law change, we recognized a net deferred tax asset of $1.18 billion this quarter, which we have excluded from operating income due to its non-recurring nature. This asset will amortize mostly over a 10-year period in our financials, reducing our cash tax payments in those years. All things equal, we expect our effective tax rate to be in the 9% to 11% range for 2024, with a higher expected rate starting in 2025. As regards our income from operating affiliates, it's worth mentioning that approximately 40% of this quarter's income is attributable to non-recurring items such as Coface adoption of IFRS 17 and the establishment of a deferred tax asset at summers in connection with the Bermuda Corporate Income Tax. With these introductory comments, we are now prepared to take your questions. Operator : Thank you. [Operator Instructions] Our first question comes from the line of Elyse Greenspan from Wells Fargo. Elyse Greenspan : Thanks. Marc, my first question, I wanted to expand on some of your introductory comments just on the casualty side, right? We've started to see some reserve additions this quarter, and I think you alluded to that last quarter as being what was going to drive the market turn. So how do you see it playing out from here? I know you said it should play out over the next several years. Could you just give us a little bit of a roadmap in how you think about this opportunity emerging for Arch? Marc Grandisson : Yes. Great question. I think that we're observing our own book of business. We also look at all the information around; I think from an actuaries perspective both François and I have maybe dusting off our actuarial diplomas. You rely on data that's historically stable, or at least has some kind of predictability. I think what we've seen over the last two, three years, as a result of the pandemic, largely in the courts being closed and everything else in between all the uncertainty and then the bout of inflation, there's a lot of data that's really hard to pin down and get comfortable with to make your prediction for what you should be pricing the business. As we all know, reserving leads to the pricing, right, by virtue of reserving and having the right number for the reserving, you then feed that into your pricing. So we're in a situation where people have lesser visibility or about what the reserving will ultimately develop to. So I can totally understand our clients and our competitors having to adjust on the fly, or having to adjust a little bit progressively and cumulatively. The issue with casualty, at least as you know, is even if you have that information and you make some correction of corrective actions, it still takes a while to evaluate whether what you did was enough or whether what you needed to do. So I think right now, we have -- we already had a couple of rate increases in casualty starting in 2020. But I think that now we're realizing that maybe it's a little bit worse collectively as an industry than we thought. And there's a lot more uncertainty, a lot more inflation, certainly, as we all know, is a big factor. So what I would expect right now is people will start refining their book of business. They will try to re-underwrite away from the social inflation impact lines. They'll probably push for rates. Some of them might kick some business to E&S until such time as we have more stability in the reserving now the loss emerges as it relates to what your initial pricing assumptions was. And in casualty, that's why it takes several years and its history is any indication. If you look back at the -- even the [indiscernible] market and then the yo tutors the 90s -- 1999 or 2000 to 2003, it took three to four years from the start of that, even in the middle of it, to really get clarity. And the market got much harder, in fact, in 2004 or 2005 than it was in 2002. Just because you have to do the action and see what the actions did, what you thought. And I think that's what we're going to collectively as an industry are going through and we're seeing it with our clients and that's really what's happening. Elyse Greenspan : Thanks. And then, my second question, second quarter in a row, right, we've seen the underlying loss ratio within your reinsurance business come in sub-50, and you guys are obviously earning in like cat business written at strong rates last year. How should we think about the sustainability of a sub-50 underlying loss ratio within your reinsurance book? François Morin : Well, sustainability is a great question. I think you're absolutely right that we have more property premium that is more short tail and should have a lower loss ratio ex cat than not, right, compared to other lines. It's a good market. So obviously profitability embedded in the business should be strong. But we send you back to kind of quarterly volatility, where you are -- sometimes we have a better than, call it normal quarter, even as a function of the book and sometimes not. There's going to volatility. We said it before; we said again the 12-month kind of rolling average is to us a better way to look at it and that's how we see it. But certainly we like the profitability in the book and it should be -- it should remain strong. One thing I will tell you Elyse, by heard on the other calls is that the markets -- reinsurance market is continuing to improve somewhat into the one, one renewal. So it is still a very good marketplace. So what it means for the loss ratio, I don't know. But certainly, we're seeing improvement. Elyse Greenspan : And then, just one last one on capital, right? I believe on there was some pushes and pulls from the S&P capital changes on your capital but should be positive relative to your mortgage business. Can you just help us think through your capital position and relative to just organic growth opportunities you see at hand over the next year. François Morin : Well, certainly, I mean S&P is one thing that we look at. We look at many different way -- I mean, we have different looks at capital adequacy. We have our own internal view which drives really how we make our decisions. Rating agencies are an important factor but I think more importantly is how we think about it. But you're right. I mean no question that from the S&P point of view, I mean the change of their model was a net benefit and that's reduced kind, you know give us, I say a bit more excess capital. But we -- and we look at it very carefully. We want to make sure that we're able to seize the opportunities that will be in front of us and we see plenty for 2024. So right now our very -- our main focus is growing the business and kind of deploying that capital into what's in front of us and then we'll see how the rest of the year plays out. Operator : Thank you. One moment for our next question. Our next question comes from the line of Andrew Kligerman from TD Cowen. Andrew Kligerman : First question -- good morning. First question would be around M&A, we've seen a lot in the media about other specialty players that could be acquired. Arch has been mentioned along with other companies. And I know you can't comment on specific transactions and that you've talked a lot about 15% return on capital over time. But when you do transactions, could you give us a little color on what the parameters might be, what's really important to Arch when you do deals? Marc Grandisson : Yes. On the M&A front, we're very prudent and careful when we do -- if we do anything. And I think historically, our historical track record is probably the best way to look at this. We'll look for something where our opportunities to earn a return is with a proper margin of safety is fairly healthy. We're not -- there's no desire to grow for growth sake in this company. It really has to do with the return on capital. And as François mentioned, the fact that we have opportunities to above 15% opportunities in this marketplace certainly makes it a little more harder. Having said all this, we might make not exceptions, but there might be some other considerations as it relates to maybe a strategic, maybe a different kind of product, maybe a geography, or maybe -- and we prefer that, maybe a new team that can really bring the expertise on an underwriting basis. So it's a very, very disciplined approach to M&A that we take. And we have the luxury because we have plenty of organic growth available to us. So something has to be very compelling for us to engage in those and also other risks, as you all know, that we don't want to take on necessarily the number one is the culture. Now we're very, very adamant about keeping top culture the way it is, and that's really something. And that quite oftentimes the thing that makes the most, and then -- probably the one that makes the most difference in whether or not we'll entertain an M&A or not. Andrew Kligerman : That makes a lot of sense. You mentioned on the favorable developments that short tail property was a big driver. So looking at insurance at $21 million favorable, reinsurance at seven favorable. Just trying to understand, were there any large casualty offsets that might have played in and if so, what would they be? François Morin : Yes, well, there's no, I'd say offsets. I mean, we look at each line on its own. There's always going to be pluses and minuses on that every single quarter. We look at the data, we react to the data. I think, as you can imagine, or I mean, very much a function of the type of business that we've written the last few years we -- in reinsurance in particular, we've grown a lot in property. We've taken our usual -- used our same methodology, same approach to reserve, and that generated a little bit of redundancies or releases this quarter on the short tail side. There's always a little bit of noise on any line of business. Yes. Did we have a couple of sublines or kind of sales in casualty where we had a little bit of adverse? Absolutely, but it's not -- I wouldn't call it an offset. I mean, we booked every single line on its own. We reacted to data, and then when numbers come up is what we end up with. Marc Grandisson : One thing I would add to this, our reserving approach at a high level is to typically recognize bad news quickly and good news over time. So again, our philosophy hasn't changed at all in all those years. Andrew Kligerman : Maybe if I could sneak one quick one in. You mentioned during the call that one of the growth areas in insurance was national accounts. What type of limits do you write on national accounts? Marc Grandisson : Well, it's statutory, right? So -- and it's on an excessive loss basis. And these are loss. There's a lot of sharing of experience, plus or minus business with clients. They tend to be larger clients. The national account is 95% plus workers comp. It's really a self-insured sort of structure that of sort, we provide the paper and actually the document to allow people to operate in their state because you need the required thing to be able to demonstrate the workers comp insurance as a protection. This is statutory, so it's unlimited by definition. We have some reinsurance that protect some of the capping. That's really what it is. Operator : Thank you. One moment for our next question. Our next question comes from the line of Jimmy Bhullar from JPMorgan. Jimmy Bhullar : Hey, good morning. So, first, just a question on the casualty business. We've seen significant growth in your property exposures with the hard -- since the hardening of the market, or significant hardening the market since early last year. What are your views on just overall market trends on the casualty side, and are you comfortable enough with pricing in terms to increase volumes in that area? Marc Grandisson : Yes, I think our comfort -- great question. Our comfort on the casualty, on liability in general, more general liability, right, if you exclude professional lines, I think we're -- the market is turning or has more pressure on the primary side. So I think that our focus right now is really on the primary, as you can see on our reinsurance, what we did in reinsurance for the last year, we think the reinsurance market is a little bit delayed in reacting to what happened, as in some of the development that we see and some of the increase in inflation. And of course, for your point that we mentioned. So I think that we'll probably see first an insurance market that really takes it to hard, like I mentioned, all the remediation that they need to do. And I think the reinsurance market will probably follow suit with their own -- possibly their own way to look at this, if the prior hard markets are any indication. On the reinsurance side, one thing that's a little bit beneficial at this point in time, and there's a reason why reinsurers are not reacting possibly as abruptly as they probably should as in regards to city and commission is that we collectively understand as an industry that our clients are trying to make those changes, so we're trying to go along with them and help them, support them in their efforts. We'll see whether that's enough. Our team is a little bit waiting to see whether that develops, but I do expect this to also come around and also provide another opportunity for us to grow. Jimmy Bhullar : And then on mortgage insurance, I would have assumed that reserve releases would moderate over time, and they've actually become even more favorable. And I think there's a shift in what's driving that. It used to be COVID reserves last year, and now it's stuff written post-COVID. As you think about, just want to get an idea on what are you assuming in your reserves that you're putting on the book right now? Are you assuming experience commensurate with what you're seeing in the market or is it reasonable to assume that if the environment stays the way it is, there's more room to go in terms of reserve releases? Marc Grandisson : Great question. I say reserve releases this year in general were somewhat driven by our -- the views we had on the housing market at the start of the year, right? So if you rolled back the tape a year, we were more concerned about home prices dropping fairly rapidly, recession, no soft landing, et cetera. So those reserves we set, call it a year ago were very much a function of those assumptions, and they just didn't materialize throughout the year. So throughout the year, we saw very strong or very well performing housing market. People are hearing their delinquencies much higher than we'd actually forecasted. Home prices are holding up. Unemployment remains relatively low. So you put it all together, I mean it's really, what transpired in 2023 is very much a function of the reserve releases reflect kind of how things -- how much better they played out relative to what we thought a year ago. Where we are today at the start of 2024 is certainly a bit more, I wouldn't call it optimistic in the sense that we see good home prices and a solid housing market for 2024. So on a relative basis, the reserves that we're holding today are not as high as they were a year ago. So if you extrapolate from that, is there room for as much in reserve releases going forward? Probably not, but we just don't know. I mean, the data will again play out as it does and we'll react to it, but hopefully that helps you kind of compare and understand how, where we sit today versus a year ago. Jimmy Bhullar : Okay. Thanks. And just lastly, your comfort with the reserves in your casualty book, despite all the industry-wide issues, does that apply to the business that came over from Watford as well? Because that company obviously had a decent amount of exposure to casualty. Marc Grandisson : That's an easy one. Watford, really the underwriting is managed by our team here. So the reserving and approach [Technical Difficulty] okay. Jimmy Bhullar : Thanks. Operator : Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO. Michael Zaremski : Hey, good morning. First question for François on capital in regards to mortgage specifically. So my understanding of the mortgage reserving rules is that after a decade or so, you can start releasing a material amount of reserves. And mortgage obviously isn't growing now, so -- but you also have a Bermuda, I think some captives there too. So just curious, is there a material amount of capital coming or expected to come from releasing from the legacy mortgage or old mortgage business? François Morin : Well, I'd say the short answer is yes, in the sense that the contingency reserves. You're right, we will start releasing a bit more progressively, starting in 2024 and 2025. That will be -- and we already had some of that in the fourth quarter this year. So if you look at our PMI's ratio, why it dropped in the quarter, the fourth quarter was very much a function of a dividend that we were able to extract from our regulated USMI Company to the Group. So that we think, well, should the plan and is scheduled to keep, we should keep having dividends in 2024 and beyond. But the one point I want to touch on is, and we touched on it in the past is while on a regulatory basis, yes, it's released, we would argue that capital is already somewhat being deployed in the business. So it's not -- that it's just sitting there not being deployed in the business. It's already been used to other sources because the regulators and the rating agencies look at the aggregate Arch Cap Group kind of level of capital. So yes, on the statutory basis, the goal here is to put the capital in the better location. But overall, it's somewhat not as big an impact as you might imagine. Michael Zaremski : Okay. That's helpful. And sticking with capital, when Elyse asked about you mentioned the S&P Capital model, but I don't think you actually gave any quantitative or answers on the benefit, because when we -- on paper we see that Arch appears to be one of if not the most diversified. Any help there on how much of a benefit or how to think about how much of a benefit the model offers Arch? François Morin : Yes, you're right. I didn't put a number, and we're not going to start putting a number, but it's a net positive. No question that, yes, mortgage charges, diversification benefit were reductions in capital requirements, but we also -- the final rulings on debt was not as favorable, right? So S&P and their new rules, they no longer treat $1.75 billion of our debt as being capital. So that's a significant offset. But all things considered, all in, it's a positive. But again, what I want to remind everyone is it's not the only thing we look at, it's just one thing among many and other rating agencies matter. And more importantly, again, is how we think about the capital we need to run the business. Michael Zaremski : Okay. And lastly, since everyone else is sneaking in a lot more questions, based on the remarks you've made it, unless I'm understanding it incorrectly, it sounds like the growth might be you're more excited about the primary insurance segment. Can primary insurance potentially grow just as much in 2024 as it did in 2023? Marc Grandisson : It's a great question. I mean, again, the way we talk, we don't provide guidance because I don't know, we don't know what the market conditions will be this year. But in terms of capabilities and capital and talent and everything else in between, absolutely, we have -- we could do more. Yes, we could. If the opportunities are there, we'll do more, both on insurance or reinsurance for that matter. Operator : Thank you. One moment for our next question. Our next question comes from the line of Josh Shanker from Bank of America. Josh Shanker : Hey, everyone, I think there might be a problem with the phones. We heard Jimmy and Mike just fine, but we couldn't hear your answers to the questions. I don't know. So -- and I hear you. I don't know if anyone can hear me. Let me ask my team. Can you guys hear me on the phone? They hear me. So somehow it's been corrected. Okay, so I don't know what -- Marc Grandisson : Yes, Josh, we can hear you. So hopefully, it's been recorded. I don't know if it's been recorded. Josh Shanker : Okay, very good. Marc Grandisson : Yes. Josh Shanker : So yes, I’ve got a couple of quick ones. So it's the lowest quarter of new insurance written in the mortgage insurance business since acquiring UGC. And yet it looks like the capital utilization went up, at least the risk to capital, and the premiers capital ratio went up. Can you sort of talk about the moving pieces that are driving that? Marc Grandisson : Well, our PMIers, -- well, very much a function of a Bellemeade transactions that we called Josh, I think there's significant amounts of capital protection that we exercised on and no longer give us capital credit. Josh Shanker : Yes, that's obviously what it is. Yes, definitely that makes sense. Marc Grandisson : Yes. Josh Shanker : And another easy one, it looks to me from quarter end 2000, September 30 to year-end, Coface stock was about flat, although it round tripped through the quarter. And yet you had very strong other income in the quarter. There's some summers in that. There's other things in there. Can you talk about the moving pieces? François Morin : Well, Coface, I mean, the stock price is one thing, but obviously for us, we booked the income, right. And they declared pretty much. I don't know the exact numbers, but their dividend, their annual dividend has been close to their full net income, 100% kind of payout ratio. So that ends up being what we book in our financials. So yes, the stock price is going to move up and down over the year, but it doesn't directly, I'd say factor in or end up in their financials. Josh Shanker : Okay. And just so I'm getting a lot of inbound call volume or e-mails from people right now. Nobody can hear these answers that you're giving me. It may be being recorded. They hear me, but they don't hear you. Marc Grandisson : Hold on a second, Josh. Are we being recorded? Let's work a little bit through this quickly. Maybe we can fix it. François Morin : What's happening now? Marc Grandisson : Yes. Josh Shanker : Okay. So just so that I don't know. Anyway, they're addressing it. People can't hear the Arch team. But for people who are emailing you right now saying they can't hear the Arch team, they're working on addressing it. Operator : Thank you. One moment for our next question. Please note everyone that this call has been recorded and it will be available after the call is over. Our next question comes from the line of Yaron Kinar from Jefferies. Yaron Kinar : Hey, good morning, everybody. Should I ask the questions or should we wait till this issue is fixed? Marc Grandisson : I think we should continue on. Just ask your question. It's recorded. Hopefully people can -- François Morin : There will be a replay. Marc Grandisson : Yes, it'll be a replay for everyone, hopefully. We apologize for this, but we'll try to figure it out afterwards. Let's go for it in line, yes. Yaron Kinar : Yes. No problem. So I guess first question, when you set loss fix into a year, do you update those other than for bad news or frequency? And what I'm trying to get at here is when we look at the reinsurance loss ratios, are they already incorporating the step change in the reinsurance market that we saw in 2023, or were those losses or the loss ratio essentially a reflection of your expectations heading into 2023 and we should therefore see another step up in margins over the course of 2024? Marc Grandisson : Yes, I think our tendency when we do loss ratio of fixed; you're on, especially on the long tail line. Remember François mentioned that earlier, we're much more of a short tail player than we were in proportion, right? So property is a bit easier to understand, right? It is what it is. You get the loss, you don't get the loss. So you do pick the loss ratio at the end of the year for what you think the attritional will be and there's no cap, then you can't really book the cap, right? There's a couple of things you need to address. On the liability and then we'll see over the next 12 months how it develops. And there are cadences of releasing or decreasing the IDNR on property, that's a bit shorter tail as you can appreciate. On the liability side, our tendency as an insurance or reinsurer on both sides of the equation of the aisle is to actually pick a loss ratio that has a little bit of a margin of safety at the beginning, not 100%, recognizing all potential benefits that we've seen, and we let it season for a while before we go in and make a change to them. And what we look at is obviously how the emergence, which I mentioned about, you may not have heard this one, but I mentioned about the emergence of the losses, how they are emerging versus what we expected. And you do this throughout the lifecycle of the deal, but that's a longer-term phenomenon. Yaron Kinar : Got it. And then my second question Marc, I think in your prepared comments you'd said that casualty may be collectively worse than expected for the industry. And I'm curious that comment, is that really referencing kind of the soft market years of 2013 through 2018 or 2019? Or do you think there could also be some of that emerging for the more recent accident years, where market conditions were clearly good, but maybe the expectations of inflationary trends were still a bit lower than what they ended up being? Marc Grandisson : It's a really good question, Yaron. My -- our -- we look at the actual as expected and we see it much more in the softer years, to be honest with you. The recent ones, it's here or there, plus or minuses as François mentioned, but it's all well, as far as we can tell, our portfolio is well within a range of reasonable expectations. It's nothing really that's surprising because your honestly, remember starting 2019, there were improvements in the marketplace, there were price increases already. So I think that those years are not as soft, clearly not as soft as 2016 to 2019 were. Yaron Kinar : Right. But I guess the question would be, even if they weren't as soft and you were getting a lot of piece, the industry was getting a lot of rate at that point, if the expectation was for a inflationary trend of five and it ended up being seven, you could still see some deterioration of very profitable years nonetheless. Marc Grandisson : You could, but we do reserving with the rate level in mind. So when we were writing the bids in 2021, we tend to look at a longer-term loss ratio and not the more recent years that before the stock market, for instance. So when you factor it all that in, we will tend to take higher loss ratio pick initial loss ratio, pick ourselves on the liability side. So you don't have a similar. One of the things that happened in 2016, 2019, and it was mentioned before is that people probably were more aggressive than they should have been on the loss ratio pick that they did in those years. I think by the time we get to 2021, I think already there was recognition and we saw through the rate increases that the market was trying to get to. I think the loss ratios lifted up a little bit, and I don't think we have a similar kind of deviation from initial loss ratio in those years. Yaron Kinar : Got it. I'll just end by saying I think you disappointed a lot of swifty fans, including my daughter, by referencing rest of world football instead of U.S. football this quarter. Marc Grandisson : We'll do better its looks like. Operator : Thank you. One moment for our next question. Our next question comes from the line of Bob Jian Huang from Morgan Stanley. Bob Jian Huang : Hey, good morning. Just two quick ones. First, I think two quarters ago on the earnings call, you said when we look at the insurance underwriting cycle, we were at about 11 o'clock. That’s kind of where we were implying improved rates and also lost trend stabilization. Just curious, in your view, what time is it right now? Is it 11 :30 or is it 11 :59, 2:00 p.m.? Just kind of curious is it where you think. Marc Grandisson : It’s the longest 11 o'clock I’ve ever seen in my life is what I’m going to tell you. So I think we’re still roughly around the 11 o'clock , which again, that clock is never like a one year after the other, right? You can stay 11 :00. Unfortunately, you can stay into the 3 o'clock and 4 o'clock or where that you would want. So I think that it’s still roughly around that level the 11 o'clock , 11:30, perhaps in some cases, but, yes, roughly in that range. Bob Jian Huang : Okay. That’s helpful. 11:00 to 11 :30, that's very helpful. Thank you. Marc Grandisson : Yes. Bob Jian Huang : My second question regarding MGA and capacity in general, there has been some concern that MGAs have been increasingly aggressive. Is this something you're seeing? Is this concern rightfully placed? Does it have any impact on how you think about your underwriting cycle management? Are you becoming more cautious, especially within your reinsurance? Not sure if you answered that before, so apologies. Marc Grandisson : That's a great question. I think I mean the MGAs emerge, as we all know, when there’s a dislocation where there's need for capacity. And I think we see it more acutely in the professional lines and some of them in property. But again, between the supply and demand on the professional lines, I think now that the capacity is probably more plentiful than. It's not more probably, it is more plentiful than it was. So I think it has some impact at the margin. Of course it does. I think the answer to your second part of the question, which is, how do we react? Well, we do it, the same way we always do it, which is if the pricing is going down and the returns are not as good. We will tend to deemphasize or pick or select the better clients that we have in our portfolio and still react the same way we would do in cycle management. On the property side, we also have similar MGAs and MGUs, right? But I think these guys, there’s an acute need for property coverage and capacity. And I think it sort of feels that we need all the capacity we can get our hands on a property at this point in time. So we're not seeing that much of as much of an impact. The property market is still very strong. Bob Jian Huang : Okay. So property side, not enough capacity, professional line, plentiful capacity. That's the way we should think about it. Thank you. Marc Grandisson : Yes, that's right. Operator : Thank you. One moment for our next question. Our next question comes from the line of Meyer Shields from Keefe, Bruyette & Woods. Meyer Shields : Hi, I think we're in the same situation where people can only hear the answers to their specific questions. So I'm hoping that comes through here as well. Similar question to Bob, we've seen, obviously, a number of companies report some reserve problems in the fourth quarter. And I'm wondering, when you look at the book of sedans that you have within reinsurance, is what we're seeing in the public companies a good representation of overall trends, or is it something different in the non-public world? Marc Grandisson : Well, I think when you price -- Meyer, good question. But for the record, this will be recorded, right? So we'll be able to -- so this will be recorded. So we'll be able to share, you’ll be able to hear the other questions and the other answers. Sorry, is that okay? Meyer Shields : Yes, that's perfect. Thank you. Marc Grandisson : So I think the issue with casualty reserving, and you’re an actuary as well as I am, the actual number is in the high of whoever is doing the work. So I think it's like everything else. Our teams may have different views about the loss ratio pick for some of the things that we’re looking at than they would have themselves. So I wouldn't say that it's a one to one. Some of them will not renew, or some of them we may not be able to participate on because we have a different view of the ultimate loss ratio. So I think it's really each individual underwriter and each individual company or sitting company come up with their own number and you have to make your own decision and your own opinion as to where it is. Meyer Shields : Okay. I'm sorry, go ahead. Marc Grandisson : No, no, go ahead. I was wondering whether you were still there, so carry on, please. Meyer Shields : Yes, no, I'm still here. Similar question, I guess, obviously what we've seen here is a lot of domestic concerns over liability lines on the international casualty side, is that concern worsening as well, or should we think of that as just a domestic concern? Marc Grandisson : It's a similar issue. It's not to the same acuteness in some kind of level, but the world has similarly closed down in a courts. It's not as litigious internationally as you would expect, but we're still seeing some hardening in international casualty as well. We saw this for the last two, three years. So it’s a very similar hardening of the market, may not be as acute in terms of reserving potential issues. And I'm not talking now to the globals that are internationally underwriting internationally, that's a different story, right? If they write in the U.S., they will have similar issue, but there is similar issues all around, but it's not to the same level internationally we’d see in the U.S. Operator : Thank you. One moment for our next question. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Elyse Greenspan : Hi, thanks for taking the follow-up. I will say I think you have a lot of folks wondering who's writing the coverage for your conference call provider. But my follow-up is on casualty insurance. Can you give us a sense of the loss trend that you're booking your casualty insurance book to and what rate you're getting in casualty insurance as well? Marc Grandisson : Well, it depends on line of business, Elyse, but I think the numbers you hear around 7, 8, 9, 10, sometimes it's 5. It depends on line of business, depends on the attachment point, it depends on the limit that you provide, depends on the size of risk. But the numbers you hear -- the numbers that are heard around the marketplaces, we see the similar phenomenon. I think we've said it historically, it's coming -- it's happening as we speak, that the insurance trend in liability generally will out pay the CPI increase. And we're seeing this coming back, so with 200, 300 basis points above. So we’re largely consistent with those kinds of pick. Elyse Greenspan : So loss trends, you said 7, 8, 9, 10, but can vary by line and sometimes be 5%. Where would you put the price increase? Marc Grandisson : Oh, again, depending on line of business, but we're low to mid-teens, I would say right now. Elyse Greenspan : Okay. Low to mid-teens. I'm just also repeating. So folks listening? Marc Grandisson : Yes, I appreciate. I appreciate, Elyse. Thank you. Yes. Elyse Greenspan : Can't hear the answer. So low to mid-teens. Yes, I think that's one, I guess on your, one last one, your cat, you said your PML went a little bit higher, right? But the percent of equity is lower, given the equity rise in the quarter, where would you put your cat load at the start of 2024? François Morin : Well, certainly up from 2023, right. I'd say for the year, we’re looking at somewhere loss ratio points, right? Call it 7% or so of like 6% to 8% of like our premium would be kind of like the cat load. Elyse Greenspan : Okay. 6% to 8% cat load. Thank you for taking the follow-up. Marc Grandisson : Thanks, Elyse. François Morin : You're welcome. Operator : Thank you. One moment for our next question. Our next question comes from the line of Cave Montazeri from Deutsche Bank. Cave Montazeri : Good morning, guys, it's Cave. Marc Grandisson : Good morning. Cave Montazeri : Hey, I have a question on reinsurance terms and conditions and attachment points. Does feel like overall the industry probably took on more high frequency, low severity risk than they should have over the past couple of years. And now maybe on aggregate reinsures are probably more willing to negotiate on price than on attachment points or terms and conditions. Just tell me what your view is on that topic. François Morin : Are you talking about property? Cave Montazeri : Yes, property. François Morin : Yes. I think -- well, I think what we’ve seen is we continue to see is that a lot of lower layers historically for the last four or five years turn out to be just swapping money, trading dollars back and forth. And there was a lot more activity, perhaps of frequency, as you mentioned, and the reinsurance market was willing to take on. So there was a natural tendency to try to increase a premium at those level but then at some point it breaks down in a sense that the client is buying the reinsurance protection, is paying more for things than they actually realize they should be retaining. That's why you've seen retention go up. Now in a sense, by virtue of having a higher retention, then they have to turn on and then that's what we've seen, they’re turning onto their own portfolio and try to manage and make it better and improving the aggregate loss that they have there. I'm sorry about this. I think that what we're seeing on the cat excessive loss right now is that people are buying more on top because they also are appreciating and evaluating the total level of exposure capacity needed in PML. So I think what people -- what we're seeing is people trading away the bottom layers and buying more on top. And I think we're going to see that a bit more as we go into 2024, which totally makes sense. Cave Montazeri : Okay. My follow-up question is on mortgage insurance. Now you had been kind of pulling back even before activity came to a halt. But if the fed rate cuts, if they do come lead to a pickup in the U.S. activity in the housing market, would you be happy to grow in line with the market or should we expect you to kind of grow maybe less stuff in the market? Marc Grandisson : Yes, mortgage, absolutely, we would be. I think that -- yes, the answer is we would be more than happy. We have capacity, capital to be able to deploy and I think we would be very, very pleased to do more. Absolutely. François Morin : And as you know it's been a very good market, very rationale market. So obviously, the rates were able to charge for the risk will matter and where we -- how we position the book. But in terms of our ability to grow, when we get originations go up, we're absolutely capable and willing to do that. Operator : Thank you. One more for our next question. Our next question comes from the line of David Motemaden from Evercore. David Motemaden : Hi, thanks. Good morning, and apologies, I haven't been hearing the answers, so not sure if you've answered any of these already. But just Marc, you spoke a little bit at the beginning of the call about the need or the strategy to lean in at the early part of a hard market. I guess how do you manage that with potential false starts? It sounds like casualty market on the reinsurance side hasn't hardened as quickly as you've expected. But how do you manage that just internally between writing business that might be hardening, but not totally to where you think it should go and the potential for false starts? Marc Grandisson : It's a very, very good question. And I think this is where the Arch comes into play; right, in experience and knowing some of the markings of a hardening market, a lot of it also has to do with things you won't hear, right, is our underwriting team sitting down with clients, potential clients, and try to understand, how do you think about the risk? I've talked about reinsurance now specifically, and we also have a very healthy database like everyone else, but we also have our own, and we have our own view of claims and how it develops. And we have, again, experience over 20 years of data and information. And this is what we use to hopefully get the compass in the right order. But if I can't be sitting here and tell you and pretend that we're going to get everything right 100%, it's a little bit more art and science. And I would think that as I'm getting older, the psychology of the market is becoming way more important, feels to me, than even the numbers. And that's probably what compelled me or what made me ask the team to lean into 2019. And you don't know for a fact until it's done, but there are markings or signs in the overall market that help you and support your decision to lean into it heavily. That's all I can tell you, because it's really not a one for one. There’s no like one number one spreadsheet I can point to that will tell you the answer. François Morin : And the one thing I'll add quickly, David, is the reverse is true as well. When the market goes soft, sometimes you pull back and you might go back too early. But that's the game we play. That's the business we're in, and we do our best. Again, we're never going to time it perfectly, but what matters more is the direction of it. And then over the cycle, we think we should come out ahead. David Motemaden : Yes, no, understood. That makes sense. And then Marc, you had mentioned that at 1/1 the property market continued to improve, property cat reinsurance market. I guess as we sit here today and sort of looking forward at the sustainability of that as we move through 2024, what's your view now on that and the growth opportunities in property cat? Marc Grandisson : First, we have no growth constraints per se. We can grow. As you know, François mentioned, the value of our PML is 9.2%, so we have room to grow there. I think the question about where it's going to go is so difficult to answer because it's dependent on what happens and what kind of activity we see this year. But if I would probably point to you to the 2006 turn of the market in 2007, that's probably a better way to think about it. 2006, or 2007, 2007 was a better year than 2006. And 2008, 2009, and 2010 were really, really good years in property because the market, as we all know, goes up really, really quickly but does not go down in one fell swoop. You've got a lot of sustainability in the returns for a little while. It takes a while before things get too close to the line or below the line of what we want to adjust. So we have some runway in front of us. David Motemaden : Got it. Understood. And I know in the past you've said alternative capital, or ILS can -- has the ability to swing the market one way or the other. What exactly are you seeing there? Marc Grandisson : What we hear is there’s still a very high demand for returns which prevents or high demand for returns and also still some level of skepticism that might change, but we'll see where that goes. But clearly, right now, at the margin, some increases, but it's not the wave that we saw probably in 2014, 2015, 2016, nowhere near that. Operator : Thank you. Arch Capital Group answers have been captured and will be available in the replay. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : First of all, I want to apologize thoroughly for the call quality and the dropping in and out. There will be a recording available for replay, and you know, our two esteemed colleagues, Don and Vinay will be available to follow-up obviously. I want to thank you for listening to our call and I'm looking forward to speak to you again in April. Thank you very much. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,024	2	2024Q2	2024Q1	2024-04-30	8.138	8.337	7.957	8.128	null	10.4	11.2	Operator : Good day, ladies and gentlemen, and welcome to the Q1 2024 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management will also make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K, furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin. Marc Grandisson Thank you. Good morning, and welcome to Arch's First Quarter Earnings Call. We are pleased to report a terrific start to the year. In the first quarter, we posted $736 million in underwriting income and a 5.2% increase in book value per share as we realized the benefits from several years of strong and profitable premium growth. Underwriters in our P&C units continued to lean into hard market conditions, writing $5.6 billion of gross premium in the quarter, a 26% increase from the same quarter last year. Overall, rate changes are exceeding loss trends, and absolute returns remain above our long-term targets, positive indicators in our continued efforts to deliver superior results to our shareholders. Broadly, we are seeing incremental signs of increased underwriting appetite in the market, but this is not surprising, given the favorable conditions that exist. It is still an underwriter's market where Arch can thrive. At the beginning of this hard market, as other providers pull back, Arch sought to establish itself as a key trading partner, aiming to solidify relationships and remain top of mind when it comes to addressing our clients' increased needs. Our success in establishing deeper client connections continues to pay dividends in this extended, yet increasingly competitive hard market. The first quarter served as a reminder of our risky world when an active catastrophe quarter concluded with a major industry loss, as the Dali cargo ship collided with the Francis Scott Key Bridge in Baltimore. Although we recognized a loss related to this event, the virtue of having multiple lines of business with improved and positive expected margins, made this event manageable for Arch. Incidents like this reinforce the importance of our core tenants. One, we practice disciplined underwriting that builds a meaningful margin of safety into our pricing. Two, we take a long-term view of risk and a conservative approach to reserving. And three, we operate a diversified global business that we believe maximizes our total return by mitigating volatility in any one line of business. Capital management has been a key differentiator for Arch and is integral to how we operate our company. Effective capital management requires that we allocate resources to the most profitable underwriting opportunities, while retaining the flexibility to invest in our platform when we find attractive opportunities. One of those prospects came to fruition earlier this month, when we announced our intent to acquire Allianz's US. middle market and entertainment businesses. We see this as a unique opportunity to quickly build scale in the $100 billion-plus US. middle market, a long-term strategic area of underwriting interest for us. Increasing our middle market presence will further diversify our North American insurance platform by adding stable businesses with recurring premiums that can generate attractive returns over the cycle. As a cycle manager, we like having many ponds to fish in, and this acquisition will significantly expand our opportunities in the middle market pond for years to come. I'll now share a few highlights from our segments. As you know, The Property and Casualty market cycle is evolving, but still offers attractive growth opportunities at good returns, particularly for our skilled specialty underwriters, who can use their expertise and experience to differentiate Arch. The first quarter results from our Reinsurance segment were outstanding. Underwriting income for the segment was $379 million, while gross premium written grew by 41% over the same quarter last year. While there is some developing competition, we're observing an increased flight to quality and fully expect to capitalize on that trend as the cycle ages. Our Reinsurance segment is in an enviable position. The in-force book constructed over the last several years is strong and allows us to exercise our underwriting acumen. When opportunities emerge, whether from dislocation in the casualty market or by offering value that others cannot, Arch is there to provide solutions and financial strength to its clients. In our Insurance segment, growth tapered from the highs of the past few years as rate increases slowed and some of the dislocations were met by additional capacity. Overall, conditions remained strong and the market is behaving rationally, two important factors that continue to support growth and strong profit. In the first quarter, we fund growth opportunities in several lines, including Property and Casualty E&S and other specialty lines. Across most of our specialty lines, pricing remains very healthy, and we are able to deploy capital in order to deliver attractive returns above our long-term target of 15%. Like Reinsurance, our Insurance segment has made strong efforts to establish itself as a first-choice provider for its clients, and that manifests in seeing more opportunities. In life, you have to play to win, and in insurance, if you don't see the business, you can't write it. And now let's pivot from P&C to Mortgage, which to borrow from a famous ad campaign just keeps on going and going and going. Our Mortgage segment continues to generate solid underwriting income and risk-adjusted returns from its high-quality portfolio. While Mortgage originations remain tempered by high mortgage interest rates, the persistency of our in-force book remains a healthy 83.6%, while the delinquency rate is near all-time lows. New insurance written is in line with our appetite given market conditions. When the mortgage market picks up again, we're prepared to increase our production. However, if the status quo persists, we're content with our current situation that has extended the duration over which we earn mortgage insurance premium. Competition within the MI industry remains disciplined, which means we are in a good place. Finally, our Investments portfolio grew to $35.9 billion, generating $327 million of net investment income in the quarter. The extraordinary premium growth from our P&C segments continues to increase our float, which provides a significant tailwind to our overall earnings through the next several quarters. In the US, the NFL conducted its annual draft this past weekend. Traditionally, the team that finished last season with the worst record gets the first pick, a chance to select the best college player, while the champions pick last. The player selected with the top picks are expected to be immediate difference makers, even though they are typically selected by a team with multiple deficiencies, making success far from guaranteed. If you're a talented quarterback has nobody to throw the ball to, it can ruin the player's confidence, and the pressure can quickly sabotage a career. Compare this with teams drafting at the end of the round coming off successful seasons with talented rosters in place. They often have the luxury of selecting an excellent player who doesn't need to contribute right away. Instead, these teams select players who can fill a specific short-term role and be given time to grow into a difference maker. Our acquisition of the Allianz MidCorp business is like adding a solid player to a winning team. We already have established all-stars, a winning talent-dense culture in a favorable schedule in the years ahead. Adding the MidCorp team to our diversified franchise makes us better today and tomorrow, and that's a winning proposition. I'll now turn it over to Francois to provide some more color on our financial results from the quarter, and then we'll return to take your questions. Francois? François Morin : Thank you, Marc, and good morning to all. As you will have seen, we started out 2024 on a very strong note, with after-tax operating income of $2.45 per share for the quarter for an annualized operating return on average common equity of 20.7%. Book value per share was $49.36 as of March 31, up 5.2% for the quarter. Our excellent performance was again the result of outstanding results across our three business segments, highlighted by $736 million in underwriting income. We delivered exceptional net premium written growth across our Reinsurance segment, a 31% increase over the first quarter of 2023, driven by strong business flow in all our lines of business. Growth was also solid for our Insurance segment, 12% after adjusting for the impact of a large nonrecurring transaction we underwrote in the first quarter last year in our warranty and lenders business unit. Overall, the combined ratio from the group came in at an excellent 78.8%. Our underwriting income reflected $126 million of favorable prior year development on a pretax basis or 3.7 points on the combined ratio across our three segments. We observed favorable development across many units, but primarily in short-tail lines in our Property and Casualty segments and in Mortgage due to strong cure activity. The collapse of the Francis Scott Key Bridge in Baltimore last month, has the potential to become the largest insured marine event in history. Both our Insurance and Reinsurance segments were exposed to this disaster, and our current estimates represent an impact of 2.1 and 3.0 points, respectively, on the combined ratio in these segments results this quarter. We note that the losses for this event were reported as non-catastrophe losses in our ratios. Catastrophe loss activity was relatively subdued and below our expectations across our portfolio, with a series of smaller events generating current accident year catastrophe losses of $58 million for the group in the quarter. Overall, our underlying ex cat combined ratio remained excellent with the increase this quarter relative to the last few quarters, mostly due to the Baltimore Bridge collapse. Despite the impact of this event, our current quarter ex cat combined ratio still improved by 1.4 points from a year ago, as a result of earned rate changes above our loss trend in our P&C businesses and lower expense ratios mostly from the growth in our premium base. These benefits were slightly offset by investments we continue to make in people, data and analytics and technology to improve the quality and resilience of our platform going forward. From a modeling perspective, I'd also like to remind everyone that our operating expense ratios are typically at their highest in the first quarter of the year due to seasonality and compensation expenses, including equity-based grants for retirement eligible employees that were made in March. As of April 1, our peak zone natural cat PML for a single event, one in 250-year return level on a net basis remained basically flat from January 1, but declined relative to our capital to 9.0% of tangible shareholders' equity, well below our internal limits. On the Investment front, we earned a combined $426 million pretax from net Investment income and income from funds accounted using the equity method or $1.12 per share. Total return for the portfolio came in at 0.8% for the quarter, reflecting the unrealized losses on the company's fixed income securities, driven by higher interest rates. Our growing Investment portfolio keeps providing meaningful tailwinds to our bottom line and remains of high quality and short duration. We have grown our investable asset base significantly over the last few years, primarily to significant cash flow from operations. This positive result, combined with new money rates near 5%, should support further growth in our Investment income for the foreseeable future. Income from operating affiliates was strong at $55 million. Of note, approximately $14 million of this quarter's income is attributable to the true-up of the deferred tax asset at our operating affiliate Somers in connection with the Bermuda corporate income tax, a nonrecurring item. Our effective tax rate on pretax operating income was an expense of 8.5% for the 2024 first quarter, slightly below our current expected range of 9% to 11% for the full year, mostly as a result of the timing of tax benefits related to equity-based compensation. As regard to our announcement to acquire the US. MidCorp and Entertainment insurance businesses from Allianz, we are making progress in obtaining the necessary regulatory approvals and are targeting a third quarter close for the transaction. At a high level, the agreement is structured around two related contracts. A loss portfolio transfer of loss reserves for years 2016 to 2023 and a new business agreement for business written in 2024 and after. Overall, we expect to deploy approximately $1.4 billion in internal capital resources to support both contracts, in addition to the cash consideration of $450 million. The overall transaction is expected to be moderately accretive to earnings per share and return on equity, starting in 2025. It is important to note that even when reflecting the capital to be deployed for this transaction, our capital base remains strong with a leverage ratio in the mid-teen range. We maintain ample financial resources and remain committed in allocating our capital in the most optimal way for the long-term benefit of our shareholders. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions] Our first question comes from the line of Elyse Greenspan from Wells Fargo. Elyse Greenspan : Hi, thanks. Good morning. My first question is on the reinsurance market. Marc, I think in your opening comments, you mentioned something about potential dislocation in the casualty market. Are you starting to see casualty market, just opportunities emerge there? I know you've highlighted this, I think, starting in the third quarter of last year. Or is this something that you still think might take a couple of quarters to kind of fully present an opportunity to Arch? Marc Grandisson : Yes. The casualty market is going through, I wouldn't say repricing, but not re-underwriting as thorough because it has been already getting -- was hard, getting harder for the last several years. We may have some respite in terms of price increase middle of last year. But I think that the development of the prior year, as we all know, has created a little bit more uncertainties, and inflation is not ebbing. So right now, what we're seeing is people still being very, very careful and disciplined in how they underwrite the business, which leads Arch and gives us opportunity to lean into this even more so. We have grown our casualty book of business on the insurance side quite a bit. Our casualty book is E&S, as we all know, and very specialized in specialty. But sorry, I thought there was some technical difficulties here. Elyse, are you still there? I just want to make sure you can hear me. Elyse Greenspan : Yes, we can hear you. Marc Grandisson : Okay. Thank you, you. Thank you, you're a trooper. So the casualty market on the insurance side, we're growing, but I think now we're having more opportunities to grow. I think that there's some kind of -- not repricing, but definitely a focus on that line of business on the Insurance side. On the Reinsurance side, I think we're starting to see some of the renewals that came through and anecdotally it's creating a little bit more friction in terms of renewal of the casualty quota share, for instance. So what we expect right now is the early stages. We don't know how long it's going to last and where it's going to go, but there's clearly a psychological belief within the human system and the human interaction in the casualty that people need and know that we need to get more rate to make up for all the risks and potentially some of the misses that we had in the past. Elyse Greenspan : And then you guys mentioned the middle market opportunity you saw with this Allianz deal. After this transaction, are there other things on the list like when you think about Insurance, Reinsurance, now middle market and Mortgage. Are there other things that you guys think that maybe down the road, you would need or want to potentially add to the platform? Marc Grandisson : Yes. We have a long list of things we'd like to acquire or have part of our arsenal. We talk about Allianz as an acquisition, and that's an important one and a significant one and a very good one for us. We're very pleased with that one. But what we also would want to tell our shareholders is, as you know, Elyse, we've also added teams along the way. So acquisition, a pure acquisition of a company is not the only thing that we're able to do. We've acquired some teams to do contingency, some more terror and everything in between. So we're always on the lookout. Again, as a cycle manager, Elyse, what you want is as many areas to deploy your capital, depending on the market conditions, creates a much more stable enterprise, much less volatility to the bottom line. And again, the more -- the market cycles are not monolithic, they are in multi phases and multi places. So we also have a little bit of an inside baseball. We -- our executive team is always -- almost every other month -- we have a list, a wish list that I will not share with you on this call, but it's a wish list of things that we know for a fact would be accretive and additive to our diversification of our portfolio, and we're always on the lookout for those. Mid market was on the list. And this is what -- so opportunities met the willingness to do it, and this is where we are. Operator : Our next question comes from the line of Jimmy Bhullar from JPMorgan Securities, LLC. Jamminder Bhullar : Hi, good morning. So, just a question on the Baltimore bridge loss that you reported in Insurance and Reinsurance. And I recognize your results were pretty strong overall. But the number seems fairly high that you reported relative to what some of your peers have talked about and also what the industry losses seem to be? So I'm just wondering, I'm assuming most of this is IBNR, but just wondering sort of -- is this because of how much conservatism there was baked into the number? Or maybe the market is underestimating what the losses from the event are eventually going to end up being? Marc Grandisson : Well, Jimmy, just at a high level, I'll let Francois talk about the reserving level. But we have been a participant in marine liability for quite a while. I used to underwrite the IGA in the Reinsurance group, way back in '02 or '03. This is nothing new to us. We also acquired Barbican in 2019. So we have -- and we have a stronger presence than we ever had in the London market, which, again, is another marine market positioning. So we do also, we do Insurance, Reinsurance and some retro actually. So it's nothing new to us. We like that business quite a bit, made money over the years. The rates and the returns were and are still acceptable. I mean but sometimes a loss occurs. I'm not sure about what the other ones are thinking about. But we definitely think that this is pretty much in line with what we would have expected the market share to be or what we think our presence in the marketplace would be. I'll let Francois talk about... François Morin : Yes. I mean again, we can't speculate or comment on how others may or may not be reserving for this event. For us, it's not unusual. And I'd say that we've taken a very conservative view of the loss and still a lot to be determined, obviously, in terms of who's going to end up paying for it. But -- and the last point you asked last question is, yes, for us right now, it's all IBNR, I mean we don't really have all the specifics to establish case reserves. So we booked it as IBNR and we'll see how things develop. Jamminder Bhullar : And then on casualty reserves, your overall development was favorable, but was there any pockets of unfavorable within the overall number? And then if you could talk specifically about how your casualty reserves trended for pre-COVID and post-COVID years? François Morin : Well, part one of your question, there was really no material development on long-tail casualty lines of business across all years. So both pre-2015 to '19 years and '21 to '23. So we're very comfortable with that. I think our reserves are holding up nicely. And I know there's been some concerns around the more recent years where there's been some signs of adverse in the industry. We're not seeing that. Actually, our metrics or our actuaries are commenting that our actual development is coming in more favorable than expected. Again, very early to declare victory, but that's certainly for us a positive sign, and we'll keep monitoring and see how things develop for the rest of the year. Operator : Our next question comes from the line of Andrew Kligerman from TD Cowen. Andrew Kligerman : Hey, thank you and good morning. Marc, you mentioned that the MI market is going and going and going. How do you think about the favorable prior year developments? I mean last year in the first quarter, it was 25 points this year. In the first quarter, it's another 25 points. I mean does that still continue going forward as well? Marc Grandisson : Well, I don't have a crystal ball for the future. But we're -- like everybody else, we're just on the receiving end of a market that's curing better. The borrower is in good conditions. There are programs on the GSEs that help the borrower staying in their homes. Most of those that even would have a delinquency, as we speak, would have a much lower mortgage rate. So they have a lot of incentive to stay in the home and not having to do anything with it, plus there's a lot of equity being built up in the home. So people have -- are sitting on because, as you know, there's been a significant increase in property valuation over three to 4 years. So everything is really indicating that we have a lot of the alignment between starting from the borrower, all the way to the mortgage insurer and the mortgage origination of the mortgage companies to make sure that the borrowers can make the payment, you can refinance, delay or attach it to a lot of things, a lot of tools and toolbox that weren't there, frankly, in '07 and '08 when the crisis happened. So -- but what does that mean in terms of development, we'll have to see what happens. But again, it's been more favorable than we would have said probably 2, three years ago, and we're just -- when we see the data, we just react to it. Andrew Kligerman : Pretty amazing stuff. And then my follow-up question is around the Allianz acquisition. And I love your analogy about the NFL draft and picking the high-quality players. Some have criticized Allianz as maybe I'll say they weren't a first round draft choice. So with that, what will Arch be able to do to kind of turn them into a first round type player? I mean I know I've heard about data and analytics, but can that help overnight? So I'd like to know what you're going to do there to really enhance that operation? Marc Grandisson : Well, there's a lot of things going on. There's a thorough and very complete plan by our unit to first integrate them, making part of our company and our culture. And we'll have to look at everything that we can do to help them out It's an okay, it's okay business, very decent business, but we'll have to make it more of an Arch business, but recognizing some of the cultural differences in the distribution, it's a little bit of a different business. Data analytics is certainly one of them. We also bring to bear. We believe Allianz is a big company and they did a lot of work on this, where we have a strong presence in the US. as well. We also already do some middle market business. So we already have experience in that space. And so we have a -- we have a couple of things, a couple of tricks up our sleeve, if you will, to make it better. I won't go into all the details, obviously, but I think we're pretty excited about what we can do with the asset. And I think like I say all the time, and this is not a comparison with Allianz or us, but truthfully, it adds to the same thing to the Mortgage through UG, they're relatively a bigger piece of our overall enterprise and perhaps they would be in some other company. So that makes it a little bit more exciting and a bit more -- and the willingness from our part, obviously, to invest, right? I'll remind everyone that some of the earnings that we make, we put aside to invest for the future. So we have a lot of things going on, and we're pretty excited. Operator : Our next question comes from the line of Michael Zaremski from BMO. Michael Zaremski : Hey, thanks. Good morning. On the Insurance segment, the underlying loss ratio of 57.5%, I know I'm probably just nitpicking. But I heard the commentary about the impact from the Baltimore bridge. But just curious, you've grown into property, which has a lower loss ratio, attritional loss ratio, I believe. So is there anything going on in the mix, that maybe you're putting in more conservatism on the casualty growth or anything we should be thinking about there? François Morin : Mike, I'd say it's just the nature of the business we're in. I think there's going to be some ebbs and flows. There are going to be some -- I wouldn't call them unusual or unexpected developments. There could be 1 or two claims that surfaced in the quarter. We booked them, we recognized adverse or bad news early on and see how things play out. So there's really nothing to say that we want -- that needs to be highlighted. It's really part of the course. And yes, absolutely, this quarter, it turns out that the ex GAAP kind of underlying loss ratio was up, I'd say, 30 bps. And that's just the reality of the world we're in, and we think it's still an excellent result. Michael Zaremski : Okay. Got it. Second question is probably a quick one, but you all are kind enough to give us guidance on the cat load in the last quarter. I think you said it was in the 6% to 7% range for -- I believe it's just the premiums ex Mortgage segment. Is that expected to change or maybe be towards the high end of that range on a base case scenario as you kind of continue to lean into the hard market conditions as we think about '24? François Morin : Well, the comment I made last quarter was -- yes, for the full year on the overall ACGL premium, 6% to 8%. We don't see that changing at this point. I think that was based on our view of how the year had a chance to play out. That's why we gave you a range. We were very happy with the 1/1 renewals. 401s went pretty much as expected and 6/1 so far are holding up nicely. I mean still a little bit of time to go before that gets finalized. But big picture, again, that's the 6% to 8% range for the year in terms of cat load is holding up nicely. Michael Zaremski : Sorry, is that 6% to 8% on all insurance premiums ex mortgage or just with total company... François Morin : Total company-wide, ACGL total. Operator : Our next question comes from the line of Dean Criscitiello from KBW. Dean Criscitiello : My first question was on the net to gross ratio in reinsurance. I saw that it ticked down about 5 points year-over-year. I was wondering, is that a function of buying more reinsurance? Or is there anything else going on there? Marc Grandisson : No. I think if you look at the -- it's a good question. If you look at the last 4 or 5 years in the first quarter, you'll see that our net to gross ratio hovers between 65% to 70%. Last quarter last year, it was 70% because we had a larger transaction that came through that was not seated. So it's really just a comparison that's not -- just 1 period comparison is not reflective of what's going on. If you look at the longer term, you look at the 65% to 70%, so nothing changed there. Dean Criscitiello : Okay. And then the next thing, shifting back to the insurance business, I was a bit surprised to see solid growth within Professional lines given the rate environment there. So can you maybe talk about the market dynamics or the opportunities that you're seeing in that? And is that growth coming from D&O? Or is that within other professional lines? Marc Grandisson : Yes. So the -- it's -- the thing -- our professional liability has many things into it. It's got a large company, large public company D&O, it's got some smaller private, also has cyber in it and some professional liability like agents and stuff like this, that's more E&O based. I think that the growth is largely attributed to the cyber. Our teams are leaning a little bit more into it, and we've also acquired a couple of more team or developing a team in Europe, there's a big need for what we realize as a need for cyber in Europe, and that's something that we're starting to grow and see more of. And the reason it's grown in cyber is because even though some of the rates, as we all heard, went down slightly, it's still a very, very favorable, we believe, very favorable proposition for us to underwrite. Also it helps us doing other lines of business because it creates value for our clients. It's still a little bit harder to get in terms of coverage. On the D&O, we would have decreases and increases depending on where the rates are or where we see the relative valuation or the profitability of our portfolio. On that note, the rates in D&O went down about 8% in this quarter, not as bad as it was 1.5 years ago. You heard the comments that the SEAs are down. So there's there's still -- we believe there's still a lot of favorable opportunities in that segment as well. We just have to be a little bit more circumspect when we do this. Operator : Our next question comes from the line of David Motemaden from Evercore ISI. David Motemaden : Marc, you mentioned in your prepared remarks that you're seeing increased underwriting appetite and developing competition, specifically within Reinsurance. Could you just talk about where you're seeing that, elaborate on that a little bit? And what specific lines you're seeing that in and how you guys are responding to that? Marc Grandisson : Yes. I think right now, what we're seeing is more a higher appetite, cyber is one of them. That's for sure, Insurance and Reinsurance, that would also -- I mean, can run the gamut, there are many of them. Typically, right now, what we are the lines that are more short-tail in nature. You can see a little bit more willingness to take some more risk from the competition. And how we react to it is, we have many things we do. We typically will tend to first look at the overall [indiscernible] if the rates go down or if the rates stay as is, with the new conditions, you actually price the business as if it's a new piece of business and what kind of return it will get to you. And if it's a little bit not as much -- or not too close for comfort, we might just decrease our participation. And we also might just stay on the clients that we believe have a better chance to really maneuver through that a little bit sideways market, if you will. It's really an underwriters' market at this time. David Motemaden : Got it. And just within Reinsurance, the underlying margins there were strong and even better, if I exclude the bridge loss. Can you talk about if there is anything in there that would flatter the results? Or is it more just sort of the earn-in of the property, more short-tail lines and these results are fairly sustainable? I guess how should I think about the sustainability of the results on the Reinsurance side? François Morin : Yes. I mean it's a great market, right? And we've been saying that for a few quarters. I think and we've said it before, I think we encourage you all to look at results on a trailing 12-month basis. I think it's a bit more reliable, I think, less prone to volatility that is sometimes hard to predict. But yes. I mean, we -- and Marc said it. I think the quality of the book that's in force right now is excellent, and we're going to earn that in. But whether how -- was this quarter a little bit better than maybe the long-term run rate? Maybe, we don't know. But again, as you try to look ahead, I'd say more of a trailing 12 month, again, view is probably a bit more reliable. Operator : Our next question comes from the line of Josh Shanker from Bank of America. Joshua Shanker : On the other income which doesn't get enough attention, that's Somers and Coface. It was a weak quarter for Coface stock return in 4Q '23, yet the other was quite strong and maybe I'm misunderstanding how to model this, but I bring this up because Coface had an excellent quarter this past 1Q '24. And I'm wondering if that presages a very, very strong other income return for the company as we head into 2Q '24? François Morin : Yes. So just to be -- make sure we're on the same page, there's a lag, right? So Coface is booked on a one lag -- one quarter lag basis. So what they just reported for Q1 will show up in our Q2 numbers. Somers is on a real-time basis. And as we know, Somers should follow relatively closely the performance of our Reinsurance book because it's effectively [indiscernible] there's some nuances to it. But big picture, that is booked on a real-time basis and should mirror fairly closely our Reinsurance book. But to your point, yes. I mean if Coface reported out a strong Q1, you should see the benefits of that to flow through in our second quarter. Joshua Shanker : In theory, there should be -- I guess, if you're saying some correlation between Reinsurance segment underwriting income and Somers, which appears in that other line? François Morin : Correct. Yes. It's not perfectly correlated because it's not the whole segment. It's mostly the Bermuda Reinsurance unit that we -- that they follow. Not the entire business, but big picture is still -- I mean, if the market conditions are good and Reinsurance, the Somers will benefit from that on a similar basis. Joshua Shanker : And if one other numbers question post the S&P Model, the change from a few months ago, is there any way to think smartly about how much excess capital you think you're sitting on or the possibility if you find other interesting M&A items, the ability to quickly deploy? François Morin : Yes. I mean that's always an evolving topic, right? I think we are always focused on putting the capital to work in the business where we can. I think we've done a fair amount of that, obviously, this quarter with the Reinsurance growth that we saw. The $1.8 billion that will support the Allianz transaction is another example. We will see how the year plays out. No question that, we're generating significant earnings so that goes to the bottom line. And we'll be patient with it until we can't really find other ways to deploy it. But for the time being, it's -- we're in a really good place in terms of capital and gives us a lot of flexibility. Operator : Our next question comes from the line of Brian Meredith from UBS. Brian Meredith : A couple of quick numbers and one big-picture question for you all. The first one, just quickly, on the Allianz deal, is it possible to give us how much cash you're expecting to come in from the, I guess, [indiscernible] net cash position you're expecting... François Morin : Yes, big picture, it's a $2 billion [indiscernible] with dollar for dollar, right? So we get $2 billion in cash, and we were spending $450 million that goes out back to them for the cash consideration. So net-net, it's $1.5 billion of incremental cash that we will get. And the rest on the new business, then it's, call it, it's the premium flow with as we write that business, that's the overall -- over time, that will be the incremental investment income or invested assets that we will get. Brian Meredith : That's helpful. Second quick question here. You referenced in your commentary higher contingent commissions on ceded business in your Reinsurance. What exactly is that? François Morin : A lot of it is third-party capital, right? We -- last year was a very light or a good year for the performance of that book. So some of those agreements, many of them actually pay us a commission that is -- there's a base and then there's a variable aspect to it, then that was kind of a lot -- a large part of that. So that's effectively performance-based commissions on property cat or property business. Brian Meredith : Makes sense. And then one bigger-picture question here. I'm just curious, on your Reinsurance business, Obviously, during the first quarter, you're getting a lot of [indiscernible] coming in from clients. What are you seeing with respect to reserve development at your clients, right? And how you kind of protect against that and not potentially seeing some of that adverse development that your clients are seeing on your cut of casualty quota share business? Marc Grandisson : Yes. So I think the -- Francois mentioned the actual is expected, which is sort of consistent in both insurance and reinsurance on the more recent policy or accident year, which having the right starting point means that you don't really have to correct frequently. So I would say that we're not surprised on the Reinsurance about what we see. But as I said earlier, I think there is anecdotally and some heavy -- a lot of more friction, I would say, between Insurance and Reinsurance companies to make sure that people get an agreement as to what the ultimate book is going to be. So we're hearing this going in the marketplace. Of course, we participate in that, but we're not seeing this as being a big issue for us. And the other years that would have been pre-2020 and 2021, I want to remind everyone that we were very defensive. We do not have a whole lot of those premium and those harder-in-developing areas that people are talking about. So I will say that we see opportunities to write more of those, and we expect to see more opportunities to write more of those types of deals this year, but I wouldn't say that we are the most present in those worst years, if you will. Operator : Our next question comes from the line of Cave Montazeri from Deutsche Bank. Cave Montazeri : I only have one question today on the Florida market. The total reform implemented over a year ago seems to have had some positive impact on the primary carriers, and Reinsurance capital seems to be coming back. This is a market that you guys know very well. Do you have any color you can share with us on the state of the market in Florida? Marc Grandisson : No, I think it's -- to your point, some of the adjustments are coming through, but inflation is also picking up. And there's also, as we all hear, there's potentially more activity in the Southeast of the US. in terms of activities and storms. So I think that people are trying to sort out what they will do at this point in time. I think we have already existing relationships that we think will get us a little bit ahead of the game in terms of participating and getting a participation in the marketplace. But bottom line is we expect the Florida market to be well priced and very good from a risk-adjusted basis. Nothing indicates anything else other than that. Even, of course, the -- everything that's been done to take care [indiscernible] and whatever else in between, I think, is helpful. But it's still the largest property cat exposure for everybody around the world. So even if you make some corrections and they have made some corrections, I think we still have a couple of years before we start thinking about having a heavy softening in the market. There might be some here and there, but we still believe the market will be healthy as a reinsurer. Operator : Our next question comes from the line of Bob Huang from Morgan Stanley. Bob Jian Huang : Quick question on M&A side. Obviously, you have historically generated very durable underwriting returns, mainly because of cycle management, in my view. Just curious as you move into M&A and diversify your business mix, does that impact your cycle management ability for retention levels when we think about M&A or potential M&A down the road? Marc Grandisson : No, it doesn't change. I mean cycle management is a core principle of ours. And if anything, we'd like to be able to do -- it's going to be a matter of degree perhaps. Some lines of business have more acute cycle management because they're probably more heavily commoditized. I would expect the cycle management to be much softer in the Allianz and the US. MidCorp business. And that's also what's attractive about it, right, because it creates more stability for the portfolio. Bob Jian Huang : Got it. No, that's very helpful. And then in that case, when we think about M&A or future M&A, is it the first preference to use the excess capital or excess cash you're generating from this business to do the M&A deals? Or is it more preferable to use some of the stocks given where the valuation is and things of that nature? François Morin : I mean there's no one answer to that. I think there's always -- I mean, and we talk about M&A, but M&A doesn't happen that often. So there's a size that matters, how much could we need -- would we need to raise in terms of using our own stock? Certainly, in terms of dilution, it's always, we think better to kind of use our cash. But there's many considerations we look at, trying to optimize as best we can all the options. We've got plenty of capacity in raising debt too, if need be. So it's very much a function of each specific circumstance, each specific opportunity. We look at it on its own and go from there. Bob Jian Huang : Sorry, if I can just have a little bit of clarification on it. Is it fair to say that in that case, cash and debt is more preferable and then equity may be a little bit less or I'm [indiscernible]? So sorry, just maybe a little bit clarification on that. François Morin : I mean that's been the preference historically. But I mean, again, it's hard to speculate on what could be the next thing. So yes, historically, but things change over time, too. Operator : Our next question comes from the line of Michael Zaremski from BMO. Michael Zaremski : Just a quick follow-up. You mentioned fee income earlier. Arch has a lot of diversified sources of income. Is there a way you can update us on kind of what percentage of your earnings maybe last year was derived from these kind of fee income type arrangements at a high level? François Morin : I mean it's grown over the years, for sure. I think that the difficulty or the reality we face is some of these fees are somewhat -- with the expense -- the revenue we get that has some expenses that go with it, and those are kind of co-mingled with our own internal expenses. So isolating, call it, the margin on those contracts is a little bit kind of cloudy. But yes, it's grown. It's part of what we do. It's part of the leveraging our platform, leveraging our underwriting capabilities, in all our segments, right? All three segments have some fee income that comes into the errors. Obviously, Somers is part of that as well. But yes, it's become a bit more sizable for us. Operator : Thank you. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Marc Grandisson : Thank you very much for hearing our earnings. Great start of the year. We look forward to seeing you all in July. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,024	3	2024Q3	2024Q2	2024-07-31	8.406	8.5	8.435	8.73	null	11.21	11.55	Operator : Good day, ladies and gentlemen, and welcome to the Q2 2024 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the Company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the Company's current report on Form 8-K, furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may now begin. Marc Grandisson : Thank you, Jericho. Good morning, and welcome to Arch's second quarter earnings call. We are pleased to report another highly profitable quarter due to significant contributions from all three underwriting segments and strong investment results. Our ability to successfully deploy capital into this extended hard market has fueled excellent risk-adjusted returns. Coupling our cycle management strategy with an emphasis on returns and consistent disciplined execution throughout the enterprise resulted in a record $762 million of underwriting income and an annualized operating ROE of 20.5%. Our results are thanks to our teams that work diligently with deep capability and a long track record of experience to earn these results. Broadly speaking, the P&C environment remains excellent, and opportunities for attractive returns are plentiful even as competition normalizes. The duration and breadth of the current hard market over the last several years has been exceptional, and while rate increases are broadly above trend, disciplined underwriting requires that we keep our eye on the primary goal, shareholder returns. An overly aggressive appetite for growth could come at a cost of eroding underwriting margins. The art of underwriting in this part of the cycle rests on one's ability to know how hard to push and when to pull back. At Arch, we strive to be an active yet disciplined market participant, practicing restraint and patience. We believe that capital allocation is one of our most powerful differentiators. Our priority is to deploy capital into our underwriting units first, where we have the knowledge and experience to better price risk. However, we are always assessing other value-creating opportunities. One example is our previously announced intent to acquire Allianz's U.S. MidCorp and Entertainment businesses. With regulatory approval on MidCorp secured, I'm able to share a few thoughts about the strategic acquisition. The addition of the talented team and their client relationships gives us a greater presence in the U.S. primary middle market while expanding our cycle management toolkit. We will have more to say about the opportunities in the middle market as we integrate our teams. I'll now take a few moments to highlight the performance of our underwriting units this past quarter. Second quarter results from our Property and Casualty segments demonstrate the benefits of our strong leadership throughout the ongoing hard market. The Reinsurance and Insurance segments combined to deliver $475 million of underwriting income and just over $5 billion of gross premium. Reinsurance generated $366 million of underwriting income, despite higher frequency of catastrophic events from secondary perils, both in the U.S. and internationally. Higher premium rates in our diversified book of business enabled us to report excellent underwriting results for the segment, which has built a resilient, stable platform. Due to our view of heightened overall storm risk this year, we chose not to grow our property cat writings at the midyear renewal. We've grown property cat meaningfully over the last few years. But as we learned during the 2002 to 2005 hard market, when there are so many good things happening across the underwriting platform, [why chase] returns and cat exposure at the risk of being unlucky. Property in general is very well priced. We just want to have the right balance across our portfolio. As you have heard from others, casualty lines remain an area of interest that we will continue to monitor as we observe rate increases and ongoing reserve strengthening taking place across the industry. Our Insurance segment contributed $109 million of underwriting income in the quarter. Net written premium growth was 7% this quarter compared to the second quarter a year ago. We meaningfully grew premiums in our programs business and in E&S casualty where rates are improving. In a more competitive market, it's important to be able to quickly reallocate capital to the best relative return opportunities as we have done in the past and remain well equipped to do in future quarters. Our international insurance unit continues to benefit from its position as a lead underwriter at Lloyd's, where a disciplined market is providing attractive growth opportunities in specialty lines. Moving on to P&C and into our Mortgage business. At the risk of repeating myself, the consistently excellent underwriting income delivered by our Mortgage segment quarter-over-quarter provides significant value for our shareholders by producing a solid base of sustained earnings. MI underwriting has been solid across the industry since 2009, and the current environment is one that rewards the MI companies underwriting the risk. This quarter, the Mortgage segment generated $287 million of underwriting income while increasing new insurance written at the U.S. by 12% from the same quarter a year ago. The delinquency rate at U.S. MI remains low compared to historical norms and the credit quality of our portfolio remains high with policyholders and strong equity positions. We are pleased to have successfully closed our acquisition of RMIC in the second quarter. Although no new business comes with this run-up block is emblematic of our ongoing pursuit of finding profitable opportunities in which we can deploy capital. Primarily due to strong cash flows generated by our underwriting operations, our investments portfolio increased to $37.8 billion, generating $364 million of net investment income in the quarter as higher yields continue to move through our portfolio. The eyes of the world are focused on Paris this week as the Olympics get into full swing. One of the toughest events in the decathlon and all around athletic tests featuring 10 events over a range of disciplines, spread over two days. The decathlon is an incredible physical and mental test that requires maximum performance in every event. At the end of the two days, points for all 10 events are totaled up and the individual with the most points is the winner. Similar to a decathlon, in the dynamic insurance market, the ability to perform at a consistently high level across the enterprise is crucial for long-term success, and Arch is built to excel across a multi-disciplined market. Our capital allocation helps ensure that we can focus on the lines that give us the best chance to score points. The first event in the decathlon is 100-meter sprint, and our ability to get out of the gates quickly at the beginning of this hard market position us to score early. Since then, our P&C and Mortgage teams have been racking up lots of points, adding our investments team clearing the bar in the pole vault, and we have an all-around performance that puts us in serious contention for the gold medal, as you would expect from a world-class leadership team. Before I hand it over to Francois, I need to mention the passing of our friend, Dinos, this past June. Dinos was not only an industry legend, he was also a mentor and tremendous leader who steered this company for over 15 years. Dinos led these earnings calls with his keen insights, principle beliefs and trademark humor. He was truly one of a kind. So tonight, please raise a glass, be it Ouzo or Retsina or anything of your choosing to Dinos. You are missed my friend. Francois? Francois Morin : Thank you, Marc, and good morning to all. As you know by now, we reported excellent second quarter results last night with after-tax operating income of $2.57 per share, up 34% from the second quarter of 2023 for an annualized operating return on average common equity of 20.5%. Book value per share was $52.75 as of June 30, up 6.9% for the quarter and 12.4% on a year-to-date basis. Once again, our three business segments delivered outstanding results, highlighted by $762 million in underwriting income and a 78.7% combined ratio, 76.7% on an underlying ex cat accident year basis. We continue to benefit from strong market conditions across our businesses as the pricing environment remains disciplined, giving us confidence in our ability to generate solid returns over the coming quarters. Our underwriting income reflected $124 million of favorable prior development on a pretax basis or 3.5 points on the combined ratio across our three segments. We recognize favorable development across many lines of business, but primarily in short tail lines in our Property and Casualty segments and in Mortgage due to strong cure activity. Catastrophe loss activity was in line with our expectations as we were impacted by a series of events across the globe, generating current accident year catastrophe losses of $196 million for the group in the quarter. Approximately 70% of our catastrophe losses this quarter are related to U.S. secondary perils with the rest coming from a series of international events. As of July 1, our peak zone natural cat PML for a single event one-in-250-year return level on a net basis declined slightly and now stands at 7.9% of tangible shareholders' equity, well below our internal limits. For the Mortgage segment, since this is the first quarter end since we acquired RMIC Companies, Inc. and the subsidiaries that together comprised a runoff mortgage insurance business of Old Republic, there are certain items that I'd like to highlight. First, the acquired book of business represented $3.6 billion or a 1.2% increase to our U.S. primary mortgage insurance in force at the end of the quarter. Second, given the risk and forces from older vintages and has been in runoff since 2011, its makeup resulted in an incremental 19 basis points to our reported delinquency rate at U.S. MI. Absent this transaction, our reported delinquency rate would have improved slightly since last quarter. On the investment front, we earned a combined $531 million pretax from net investment income and income from funds accounted using the equity method or $1.39 per share. Total return for the portfolio came in at 1.33% for the quarter. Cash flow from operations remained strong. And a $3.1 billion on a year-to-date basis, we have seen material growth in our investable asset base, which should result in an increasing level of investment income. Our effective tax rate on a pretax operating income was an expense of 9.5% for the second quarter, with our current expected range of 9% to 11% for the full-year 2024. As disclosed last week, we now expect an August 1 close of the transaction to acquire the U.S. MidCorp and Entertainment insurance businesses from Allianz. At this time, we do not have new information to share on the estimated financial impact of the transaction beyond what we provided in early April. Starting next quarter, we expect to update this information to help in developing a forward-looking view of the insurance segment's results, including this new business. All in, our balance sheet is in excellent health with our common shareholders' equity approaching $20 billion, a net debt plus preferred to capital ratio was slightly above 15%. We are well positioned to take advantage of opportunities that may arise as we move forward. Before I conclude my remarks, I also wanted to take a moment to build on Marc's comments and share a word of sincere appreciation for the impact Dinos had on Arch, its employees and many others across the industry. While he will certainly be remembered for his energetic personality and his ability to captivate an audience, we are truly grateful for his guidance, vision and leadership during his career at Arch. Thank you, Dinos. Marc? Marc Grandisson : Now, so we don't keep anyone from their lunch, which we know is very important to Dinos. Onto your questions. Operator : Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan : Hi, thanks. Good morning. My first question, I guess, is on the insurance side, right? Marc, I think it's been since probably late October of last year with Q3 earnings, you were kind of leading the industry in terms of talking about this casualty market turn. And it's been slow to evolve, maybe it's in line with your expectations, but it just seems it's been slow to get price through those lines. How do you see that transpiring from here relative to price increases in casualty lines? Marc Grandisson : Well, like I said – well, good morning, Elyse. I think the point we made last quarter, the quarter before is that the casualty turn and realizing actually how much well or bad you're doing in casualty line takes a while. It has a tail to it. It could take five or six years. So I think we're seeing the – we start to see the early signs of more recent years being a bit more impacted by the inflation that we saw of late. And I think that it will take a while. People are trying to adjust. We're trying to look at the numbers in the triangles that are actually not as good as they used to be. So there's a lot of uncertainty in the space. And I think it will take us several quarters to come to a more stable or a better view of the industry. So the last hard market in casualty started to turn in 2000. And it took until about 2004 to really see the impact and sort of running out of – having to price and rate increase after that point. So it takes several years. Unlike the property cat right at least 2022 something happened at the bottom in the fall, will right away that people are adjusting because the cost of goods sold or losses are known. So this is not surprising to me. I'm expecting a bit more – we're expecting a bit more. We're seeing it through our reinsurance emissions. I think people are slowly, but surely recognizing some of these bad years, but it takes a while. Elyse Greenspan : And then in terms of just on the insurance side, as you think the underlying, I guess, margin, right, kind of low 90s in the quarter, given your views about price and loss trend, does that feel like kind of the run rate level from here? Marc Grandisson : Well, as you know, Elyse, we report the numbers as we see it based on the data that we see. That sort of seems to be the emerging sort of rough average over the last couple of years. There's also a mix going on, Elyse. So things are shifting, as you know, from time to time. So it's hard to compare combined ratio. But right now, based on where we are, it's well within the expectation of getting the returns. And our returns on insurance, we believe are in excess of our long-term target. Elyse Greenspan : And then the mortgage releases have held steady, Q2 was above the Q1 level. Can you just provide, Francois, maybe a little bit more color on what's going on there and how we could kind of think about run rate level of potential releases within the MI book? Francois Morin : Great question. I think – I mean, I and many others have been wrong about taking a forward-looking view of releases on – or favorable development on mortgage in general. I think, right, stepping back, I'd say that early in 2020 – late 2022, early 2023, we are more cautious about the state of the economy and took a view about new notices and average reserves that we are attaching to these notices that was a bit more that didn't turn out to be the case, right? They turnout to be better than what we had expected at that time. The fact that we just had another quarter of more – better cure activity. I don't think a lot of these cures this quarter were related to the 2023 accident year. So we're more positive, I think, I'd say in general about the housing market. So the level of reserving that we're attaching to the new delinquencies is a bit lower than it was a year ago. So maybe directionally, we would not expect to have the same level of reserve releases going forward. But again, not knowing for sure how quickly people are going to cure unemployment, et cetera, I mean, that will be – that will have an impact on the level of reserve releases. Elyse Greenspan : Thanks for the color. Francois Morin : Welcome. Operator : Our next question comes from the line of Jimmy Bhullar from JPMorgan. Jamminder Bhullar : Hi. So first, just a question on reserves. You had favorable development overall, and so did many of your peers. But a lot of the competitors had adverse development in casualty for both older and recent years. It doesn't seem like you had that, but maybe you could go into detail a little bit on the development in the second quarter. And then also, why do you feel that you're not as susceptible as some of the competitors do all the casualty issues, either in your book or maybe in the Watford block that you inherited? Francois Morin : Yes. Let me take a stab on that. I'm sure Marc will have something to add. I'd say on the part two your question, Jimmy, I'd say the book of business that we have is – I wouldn't call it a standard commercial general liability book of business that some other competitors have. We don't write a whole lot of commercial auto, for example. So that's another line of business that's been a difficult line to get a good handle on the trends and how inflation has picked up in there. So the books that we have in general liability, a, I think, are smaller. Certainly, we think, underweight in those lines of business. Roughly speaking, our insurance book is like, call it, less than 15% what we consider to be of our overall premium, what we consider to be traditional casualty in the GL lines of business. So the mix matters. Certainly, the areas where we write, the business matters. I mean we have an international book within that. So it's not only U.S. where I think we've seen more pain. And then in terms of the favorable – the movements in the quarter, I think, yes, in aggregate, we were favorable, mostly in the short-tail lines. On the longer tail lines, which is primarily GL, I think we were pretty flat. I think it's something we look at carefully. Some noise here and there. But collectively, in aggregate, we're very comfortable with the level of reserves. And so far, our numbers are holding up pretty well. Marc Grandisson : And what I would add to what Francois just said, and as you know, Jimmy, we're a cycle manager. We also didn't write as much in even the year that we believe are now still very soft year. So that also prevents you from having to – to having outsized no surprise. Jamminder Bhullar : Okay. And then on a different topic, your capital is building up pretty nicely, and I'm assuming it's enough to fund your growth. And you have done a couple of acquisitions. But how do you think about buybacks or potentially instituting a dividend, given the capital levels that you have? Francois Morin : Yes. I mean that – the philosophy has not changed, right? I'd say, certainly, we are on track to close the Allianz acquisition tomorrow, so that will certainly be a draw on that capital base that we have. We are also entering the active wind season, so we'll want to take a look at what – how that develops. But absolutely, going forward, the fact that we historically have been very – I think, very good stewards of capital, we like to deploy it in the business where we can. But if there are no opportunities beyond what we – what's in front of us, in the coming months, we'll do what we've always done is return that capital, and it could be in the form of share buybacks or dividends or any other method. Jamminder Bhullar : Thank you. Operator : Our next question comes from Josh Shanker from Bank of America. Joshua Shanker : Yes, thank you very much. So Marc, sometime in the past, I think one thing you said to me was that the big surprise was from the hard market of 2024 that pricing stayed good for a lot longer than we thought it would, and we pulled back too early. I mean, clearly, you're not pulling back here, but the growth has decelerated a great deal. Given that you have that 2020 hindsight, how are you looking at this market opportunity and how long it might last compared with what you know from the past? Marc Grandisson : Yes. Well, first, Josh, is I'd probably raised my memory what we did wrong in 2004 and 2005, but thanks for reminding me. What I would tell you, Josh, is we talk about this at underwriting meetings. Our underwriters and our underwriting executives are acutely aware of that phenomenon. We also have to remind ourselves that pricing is going up as we talked about, specifically non-casualty, which seems to be the more acute area. I think it will take a longer time to go down or it takes longer to take down, right. It goes up in an elevator and goes on an escalator. So that's probably why we would expect the market to be. I think we're aware of this. Now we have more data, we have more experience, we have an existing platform, underwriters. Many of them have been there through those years. So very confident that we will be more judicious, if you will, in terms of holding the line when the market gets a little bit softer. In terms of growth, we still have like close to 11% growth in P&C, which is a big feat. It's still – it's a very, very good growth. But as I said in my comments, and you probably heard already, Josh, the market is a little bit more reaching equilibrium in terms of supply and demand for the risk. So the question that we have to ask ourselves all the time is, if we push too hard, we might dilute the broader margin and return expectations in the marketplace. So we take this. And not only us, by the way, I think the market is broadly very, very widely behaving the same way. People want to make sure that they get it right and nobody wants to be the first one running out and doing something that will probably jeopardize or not jeopardize, but maybe take down the returns expectations. So it's just that kind of the market, Josh. The equilibrium on the supply and demand for capacity is just coming back more to a more normal level. It's still on the side of the underwriters, but it's clearly moving in a more equilibrium state. Joshua Shanker : And then continuing on the thought [indiscernible] Jimmy asked. I have a very crude capital model, and I wouldn't recommend anyone else use it. But it does seem like at the pace that the premium is decelerating, you're going to be sitting on some sizable excess capital in a fairly short order. Can you – I guess, talk a little bit about how the Allianz transaction uses capital that might be incorrect? My assumption that it may be – that may be a source that's really causing capital plug there. Or additionally, am I correct that you have at the kind of trajectory, a real capital buildup that's going to need to be utilized in short order? Francois Morin : Well, I mean, first, on the Allianz transaction, we disclosed that we were – the rough numbers of capital that we were going to deploy in that transaction is $1.8 billion, which is the premium we're paying to acquire the asset and also the capital that we need to deploy to support the LPT that's coming our way immediately and then the ramp-up of the new business or the renewals that will end up on our balance sheet. So sizable number. And that is so far – I mean, as far as we know, I mean, there's – things are on track to be kind of at that level. To your point, yes, we – I mean, returns have been excellent, and we're very – we're proud of that. But we're not going to accumulate capital just that we can't deploy forever. So the reality is if you give us another couple of quarters maybe, but I mean, we'll definitely have a better view of where things stand by later this year. And then Marc has been talking about the casualty can pick up potentially. So if that accelerates in the third and fourth quarters and early next year, then we want to have the capital ready to deploy there. So that's certainly how we think about a big picture, but it's an ongoing discussion we have here. Joshua Shanker : All right. Thank you for the answers. Have a good day. Marc Grandisson : Thanks, you too. Operator : Our next question comes from Michael Zaremski from BMO. Michael Zaremski : Thanks. I'll keep with the theme on casualty and social inflation, especially since we do value your thoughts on this. I guess, can you remind us, two part, I believe you've said in the past that Arch's casualty reserve reviews are more geared towards the summer months. And related, now that you've been studying your book and the industry a little bit more. I recall last year, not just – and Marc, you had said, but others have said too that they thought that the casualty pressures would be more large accounts kind of than small accounts. But the data we see so far appears to be that the small account players have really added to the reserves more so. So I don't know if there's any thoughts there? Thanks. Marc Grandisson : I'll start with the second part of your question. You're exactly right. I think that I said that the large accounts, there are at the ground zero for pressure points on the losses because they're deeper pockets, right? They are larger limits, bigger enterprises, more complex cases and more attractive to the plaintiff lawyers. But you're right, we've seen, as well as everyone else, pressure building commercial auto as well, even of all sizes also going through a similar process. And it impacts, obviously, the umbrella portfolio. But you're quite right. We're sort of a second round sort of the rippling effect starting in ground zero, which is always a larger account, and it's sort of slowly, but surely ripples through the market, and we're starting to see this impact on the smaller packages as well. Smaller policies as well have lower limits. So it's probably easier – well, it seems to be currently in the space, you heard this too, I'm sure, the $1 million limit is what it used to be. So there's probably more of a pressure to pay the full limit as opposed to before maybe the industry was more willing to fight or push back. But again, the $1 million because of all the inflation has changed. In terms of reserve review, I'll say it, but we do a quarterly review of our reserving of every line of business that we do. Our actuaries review it every single time. And we have a change of loss ratio that we get reported on every line of business and sub-line quarterly for all the units that we look at. The one thing that we have as an added benefit at Arch is we have also – we have the insurance group and the reinsurance company, so we're able to compare at the high level of the holding company, Francois and I, as to what the trends are developing and what they're looking like. So it's a constant – I think what we used – what we may have said to you is we used to do an annual trend analysis. Now it's becoming a twice-a-year analysis, and it might accelerate as well. And I would assume that most people are using the same frequency because as we talk about all the time, reserving feed into pricing. Francois Morin : Yes. The one quick thing just to add on reserving, we monitor actual versus expected experience quarterly. That's a big part of the process. And not only do we do it against our own expectations but we monitor against our external actuaries expectations. So we got two views of how independent groups of actuaries think business or the reserves should develop over time. And that certainly informs the action we take every quarter. And to Marc's point, that's done in all the business units regularly. Michael Zaremski : Okay. That's helpful. Understood. And just last quickly on catastrophe levels. I think you guys are more open than others on "normal." The Reinsurance segment cat ratio – the load ratio this quarter, is that kind of normal-ish since you guys have grown into property over the years? Marc Grandisson : I think – yes. No, I think – no, again, repeating what we said before, and it's always hard to appreciate from your perspective, I'm sure, is that the Reinsurance has more volatility into it. So we tend to look at this on a longer-term average. So sometimes, we have a quarter – I remind everyone here, sometimes we have a quarter where the combined – the current accident year, ex-cap combined ratio and reinsurance goes up a little bit and people say it's a trend, but it's very hard to see this in Reinsurance. Sometimes it's above, sometimes it's below. I think this quarter, frankly, we had no lower attritional losses across the Reinsurance portfolio. And this is what – this what explains that. But if you look on a 12-month basis, it's not as drastic of a move. Francois Morin : Yes. I'd add to that also, the cat load that we reported or we kind of quoted earlier this year, I mean, we have a view on seasonality when these losses may or may not hit. I mean it's imprecise. Does it happen second quarter? Does it happen third quarter? It's a little bit of a – there's historical data to support that. But big picture, again, what we experienced this quarter was not unexpected. Was not – it was very much within what we thought was reasonable given the growth in the size of the book, the fact that it's broader, it's not only U.S., a lot of international and the different types of exposures that we reinsure primarily, yes. Michael Zaremski : Okay. That's helpful. And I'll sneak one last quickly on Mortgage just on a macro perspective. Would – if home price appreciation continues at a healthy pace or I guess, resumes at healthy pace with that, is that any factor in kind of the reserve release as maybe it was unexpected? Is there anything there from a very high level we can think about? Marc Grandisson : Yes, it would, right? Because by virtue of having house price appreciation, you therefore increase your equity in your home. And the equity in the home is by far the lag thereof is a leading indicator as to whether you're going to have a foreclosure or a loss in your policy. And most of the policies, even if you had another 3% to 4%, whatever we're expecting, next year maybe 4.5% of HPA appreciation, the equity were built. And what happens – and it's very simple, right? The reason why equity matters is because, well, if you're running into trouble, the divorce, you're losing your job, you don't want to lose the equity in the home, you can just turn around and sell it to somebody else and then recapture at least a portion, if not all of the equity that you've built into it that something that people will do in and that the healthy market supply and demand market is such that you'll be able to sell your home with – and capture that equity even after some expenses. So that's what happens on HPA. If it goes too wild like it did in 2007, 2008, but it got into trouble for different reasons altogether. I think the credit space and the weighted mortgages have been originated over the last several years. HPA going up right now would be helpful. It's definitely helpful for us as an MI provider. Michael Zaremski : Thank you. Marc Grandisson : Sure. Operator : Our next question comes from David Motemaden from Evercore. David Motemaden : Good morning. I had a question on the underlying loss ratio in the insurance business. It was up a little bit year-over-year. That's despite having a higher mix of short tail business within the earned premium mix. Could you maybe talk about what was driving the loss ratio up year-on-year? And was that conservatism you guys are baking in on the casualty lines? Or a little bit of color there would be helpful? Marc Grandisson : Yes. It's a pretty small increase. And this is – we don't want to ascribe any more precision to those numbers. They're judgment call quite often times. I think it's just a reflection of the mix and perhaps one on the business, the actuaries may take a little bit more of a conservative or a prudent stance and put a bit more – increase the loss ratio for a certain year or certain line of business or product line. That's really all there is to it. I think the variability around this even on an insurance level, we're a specialty writer. So there's a lot of things going on all at once in our portfolio. It's not very – it's not as predictive, I guess, as we wish we could be. But this is also why we believe we can attract higher returns because there's a lot more uncertainty in selecting the loss ratio pick. I would just attribute it to noise that happens from time to time as well as mix. Francois, anything to add? Francois Morin : Good. Yes. David Motemaden : Great. Thanks. And then Francois, you had mentioned the actual to expected. Wondering if we could just get a little bit more color on that for the quarter? And then if you guys have changed your view of expected losses, just given it appears like claims payment patterns have been extending. So I'm wondering if that's been reflected as well in your expected – expectations? Francois Morin : Yes. I think the A versus C work, it's done by line, by year. So yes, there's pockets where – I mean, it's puts and takes, right. There's some that we run favorable, some that there could be a year for when claim shows up and it's going to show adverse. But both quarter-to-date and year-to-date, in aggregate, both by segment, we are running ahead of expectations, which we didn't take the full credit for that. Some of that favorable experience is showing up in their actually favorable prior year development. But the indications are giving us a lot of comfort that our reserve base and our reserve levels are adequate to pay the claims. Absolutely, your question on patterns, that is – I mean, there's a good attempt – good-faith attempt to adjust the patterns with the experience that we have. Again, both internally and the advice or the opinions we get from external actuaries. So that's factored into the expectations that claims may be – may take longer to develop. And we understand that it's an evolving situation. I mean that seems that the patterns are changing over time, but that is fully kind of considered in those numbers. David Motemaden : Great. Thank you. Marc Grandisson : Welcome. Operator : Our next question comes from Charlie Lederer with Citigroup. Charles Lederer : Hey. Thanks. Good morning. Definitely, I heard Marc's comments on the reasons for the flattening out of property cat growth. Would you say the weather forecast had an impact on that? And could you – could we see you reverse course and reaccelerate if pricing is still good in 1/1 and you have a better view of how much of the MidCorp business you're keeping? Marc Grandisson : I'm going to say this is one of the easiest answer, yes and yes to both of your questions, yes and yes. Yes, yes, we believe we took a conviction that there was a heightened – higher likelihood of frequency of events. And you're right, and it could change. This will be a short-term perspective, and this will help inform whatever new vision or new projection and new belief we have will help us make a decision as we get into 1/1 2025 after the wind season is over. Mind you, the business is still very good even with our increased frequency. So it's still a very, very good book of business. We just wanted to have the right balance. Charles Lederer : Got it. Thank you. And then, I guess, I'm wondering if you guys have your arms wrapped around the CrowdStrike cyber event yet. And if you can help us frame what the losses might be? And if you see any impact on the cyber pricing environment coming out of it? Marc Grandisson : Yes, well, on the CrowdStrike, I mean we're still gathering information on our units, want to figure out what's out there and it's not only the – necessarily the cyber, but there might be some other lines of business. So we're just going through it as we speak. It's still kind of hard to disentangle. I mean some people are claiming some losses. They're not insured. So there's a lot of things going on. I think we tend to agree broadly with the market view that $500 million, $600 million to $1.2 billion. That's sort of – it's still a wide range at this point in time. It's going to take a while to know how it develops. I think I would want to – I mean it's not a big number in terms of loss ratio points for all the premium worldwide for cyber, but it's certainly a reminder that there's risk in the portfolio. And it's early now, we haven't seen them any renewals, but I would expect rates could still go down a little bit, but probably not as fast as they were going down. And people are going to probably take a bit of a more of a pause, if you will, to evaluate what it looks like. It can go either way, right? If CrowdStrike does not create a big loss, that might reinforce to believe that it's not as risky. Although, having that event, which was not malicious, happened out of nowhere, and we were all like out of – unable to work for a day, I think it's a good reminder of people that there's still uncertainty and there's some loss potential there. Charles Lederer : Thank you. Marc Grandisson : Welcome. Operator : Our next question comes from Andrew Kligerman from TD Securities. Andrew Kligerman : Hey. Thank you. Good morning. Marc Grandisson : Good morning. Andrew Kligerman : So I was interested in the net written premium there in professional lines. It looked like you were pretty much flattish this quarter year-over-year at $345 million. Could you share some of the puts and takes? Was public D&O awful lot? Did you see a pickup or a decrease in cyber? What were some of the big lines? And how do they move? Marc Grandisson : Yes, there's a lot of things in the professional lines. It's kind of hard to disentangle from your perspective. But at a high level, D&O, we're reacting to what's out there. We're still maintaining our positioning. Cyber, we're still making exposure. Rates still go down, so that would go the other way. Health care, we like a lot. So we've grown that book of business. This is within the professional lines. And there's been some re-underwriting of some areas, if you will, at a high level that were not performing as well. So there's a lot of things going on all at once. I think what you're seeing, it was not the 300 – the flattish number is really a sum total of many decisions that were independent from one another. That's really what you can read into this. Andrew Kligerman : Got it. And along the same lines in reinsurance, property ex catastrophe, it was up quite a bit at $585 million versus $457 million last year. What did you like in the property area in reinsurance? Marc Grandisson : Well, it's – in there, there's a lot of different lines, but there's a lot of quota share, some risk excess. We also have a facultative book in there as well. And all these units are taking advantage of the hard market still to this day and picking their spots. And we think the return expectations is not as cat exposed within – there is some cat exposure there, obviously. But we believe the returns are just very, very accretive and very, very favorable. Some of them are opportunistic by nature, right? We might be doing a specific deal in some specific payroll because we think the market is hard as we speak. So some of that was also factored in our writing. So it's a really broad line of business. As you can see, we love that line. We love the opportunities there. It's a little bit more complicated, I would say, to underwrite than a property cat – pure property cat book of business, but we've had the expertise and the knowledge and the willingness to do this for a long time, and we're – we really like to – we'd like to be exposed and do more of that line of business in that current return expectations. Francois Morin : Yes. And I'll add to that quickly. Just on the accounting side, it's important to remember that the property cat line of business is mostly on an XOL basis where we write all the premium on day one versus this property other than property cat line where the component that is on a quota share basis, the premium is written evenly throughout the exposure period. So they could very well be – there's accounts that we wrote at 1/1, for example, that the ramp-up of that premium is taking place over the four quarters of 2024 as we write the premium. So a little bit of a different kind of accounting policy on those types of reinsurance agreements, and that certainly has an impact on how it shows up in the quarterly numbers. Andrew Kligerman : Got it. And if I could just sneak one quick one in on the insurance line, the expense ratio picked up by 70 basis points. Should we be thinking about the expense ratio being slightly more elevated as you take on the Allianz book and invest there? Francois Morin : Well, the investments that we made through this quarter are not related to that, right? So they are other opportunities, other efforts that we have underway that were predictive analytics, some tech companies that we've invested in. So we feel it's the right time for us to make those investments given how strong the returns are. And we'll see how those develop over time, maybe they slow down the road. But for now, we're very comfortable with the level of investments we're making. In terms of Allianz, just we'll give you more information as we move forward, but there will certainly be some integration expenses that will come through in the insurance segment, specifically going forward. Some of those expenses that will be kind of onetime, and we'll probably report those as part of a transaction cost and others. So that will clarify that for everybody once we close and after we have a time to – some time to digest it. But yes, the investments so far this quarter are for other initiatives. Andrew Kligerman : Got it. Thank you. Marc Grandisson : Welcome. Operator : Our next question comes from Brian Meredith from UBS. Brian Meredith : Yes. Thanks. A couple of them for you guys. The first, I'm just curious, do you all still stand by the three-year payback period for share buyback when it comes to book value dilution? Francois Morin : That has been our practice. It's not a hard and fast rule. I think it's been the practice historically. But again, that's part of the framework of how we evaluate kind of various alternatives. Could we think about extending the payback at some point? And the answer is maybe. Brian Meredith : Got you. That's helpful. Thank you. And then, I guess, my next question, thinking about M&A here, it looks like you probably have the financial capacity to still do a reasonable amount of M&A. But do you have the kind of, call it, management and strategic – or call it, management capacity at this point as you're integrating the Allianz business or Fireman's Fund business over the next, call it, six to 12 months to do anything? You're going to kind of take a pause here for a while? Marc Grandisson : Well, I think, Brian, it's also dependent on the opportunity that we have ahead of us, and we can certainly attract people to help us do any other integration. We have a team between us leading the effort on Allianz also were instrumental in integrating guaranteed way back in 2017, 2018. So we have already some good experience there. So I think we have enough bandwidth for what we're doing now quickly. And if something were to happen right, Francois, was really accretive and interesting, we would find a way to do this. I think that we're not there to work at the time. If something is very favorable to us, we'll expand the effort and the work that needs to get this done. Francois Morin : I mean these opportunities were – I mean, actually geography-specific and segment specific. So the Allianz acquisition is purely insurance North America. So that absolutely has taken center stage. But if we were to do some other M&A in other parts of the world in the reinsurance segment, that could be a different team most likely that would contribute. Brian Meredith : Makes sense. And then one other just quick one. I know you don't give us some numbers on the Allianz thing. But is there any color you can give us with respect to how does it add to your PMLs as we think about it going forward? Just looking at the map you provided us, it looks like there's a decent amount of business in kind of cat-exposed areas? Francois Morin : Not materially because it's not as much in our peak zone. The book is more diversified, more Midwest, more California, less Florida, which is our peak zone. So in terms of the 1-in-250, marginal impact. Brian Meredith : Great. Thank you. Appreciate it. Operator : Our next question comes from Meyer Shields from KBW. Meyer Shields : Great. Thanks so much. Two quick questions. First, Marc, I think you and Francois both mentioned the elevated frequency predictions for not growing cat premium. Was there any reshaping of the portfolio to move further away from frequency events? Marc Grandisson : No, I think that if you look at a high level, I think our exposure was – is more stable. It may have grown a little bit even on a gross basis, but what happened is we just shaped it through retrocession purchases. That's really what we did. And that's how we got back to a more reasonable and more acceptable level of PML. Meyer Shields : Okay. That's helpful. And second, just sort of for the most recent or up-to-date events, as we've seen more capital markets activity comes back – come back and we've seen that being blamed for pressure on public D&O pricing. Are you seeing any inflection that coincides with recovering activity? Marc Grandisson : Not really. I mean the third-party capital that we hear – again, even those third parties, there's a healthy level of rationality in the behavior. So we haven't seen, like I said before, crazy players or mavericks in the marketplace. It's a pretty well-behaved marketplace. Meyer Shields : Okay. Thank you very much. Marc Grandisson : Sure, Meyer. Operator : I'm not showing any further questions. Would you like to proceed with any further remarks? Marc Grandisson : Thank you very much, everyone. We'll talk to you again in October. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	2,024	4	2024Q4	2024Q3	2024-10-31	8.678	8.878	8.922	9.095	null	11.37	12.43	Operator : Good day, ladies and gentlemen, and welcome to the Q3 2024 Arch Capital Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2023 fiscal year. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management will also make references to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Nicolas Papadopoulo, and Mr. Francois Morin. Sirs, you may begin. Nicolas Papadopoulo : Good morning, and welcome to our third quarter earnings call. I'd like to begin by wishing the best to my friend and my business partners of 23 years, Marc Grandisson, who retired earlier this month, after the fantastic road under Marc's leadership. While we will miss him, I'm very excited about the opportunities before us. My message to our shareholders, employees, brokers, clients and business partners is that it is business as usual at Arch. Our core objective remains unchanged to be the best-in-class specialty lines insurer in the market. We will continue to execute on the key pillars of our strategy, which are build a diversified mix of businesses, actively manage the underwriting cycle, remain prudent stewards of capital be dynamic managers of a data-driven enterprise and foster a culture that attracts best-in-class talent. Back to the quarter, where Arch generated strong top and bottom line results with an annualized operating return on equity of 14.8% and an 8.1% increase in book value per share. Our third quarter results included $450 million of cat losses across multiple levers, including Hurricane Evan. It's worth noting that this cat loss is within our third quarter seasonally adjusted cap load. Overall, the P&C environment remains very favorable despite increasing competition in many lines of business, making underwriting and risk mitigation increasingly important. Underwriting strategies empower our businesses to respond quickly to their trading environment. This has been and remains a competitive advantage as we pursue those opportunities with the best risk-adjusted return. Industry cat losses have once again exceeded $100 billion for the third quarter. We should continue to support increasing demand for property insurance and reinsurance. Even with this increased cat activity, we believe the property market remains attractive and one in which disciplined underwriters can produce attractive return on capital. [indiscernible] rates continue to outpace trend which is consistent with our hypothesis of a hardening casualty market. We have selectively increased our casualty riding in both insurance and reinsurance as the markets respond to claim inflation and uncertainty around loss trend with higher prices. Turning now to underwriting segments. Our insurance segment was $1.8 billion of net premium and delivered $120 million of underwriting income in the third quarter. Acquisition of the MidCorp and entertainment business from Valiance in August help drive a 20% growth over the same quarter a year ago. We are confident that the mid-core team will be an important part of our growth story as we further enhance our capabilities in the middle market. Excluding MidCorp insurance growth was mid-single digits as we continue to find attractive growth opportunity in casualty programs and our London market specialty business. premiums competitive in E&S property and professional lines. Reinsurance had another excellent growth quarter with net premium return up more than 24% to over $1.9 billion, along with underwriting income of $149 million as our team continued to benefit from a more robust relationship with our brokers and cedents. Growth was driven by property ex cat, including facultative business, casualty and other specialty. Our industry-leading mortgage segment again contributed significantly to our earnings with $269 million of underwriting income for the quarter. Underlying fundamentals remain excellent for the mortgage insurance industry, including strong credit conditions and continued favorable house price appreciation. Mortgage origination activities remains light that new insurance return of $13.5 billion was in line with our expectation as relatively high mortgage rates and continued house price acquisition have kept most buyers on the side mines. Finally, the contribution from our investment portfolio were substantial. In the quarter, Arch Investment Management generated $399 million of net investment income. Significant operating cash flows from our underwriting units should support continued growth of our assets under management, setting us up for strong investment contribution in the years to come. Looking ahead, we like our position and the market opportunities. This is true as we enter a responsible growth part of the P&C cycle where disciplined underwriting and thoughtful rate collection are essential to success. A few final comments in closing. Arch has proven to be an exceptional company defined by a culture of underwriting excellence, underpinned by our core strategies of cycle management and thoughtful capital allocation. That was true yesterday, it is true today and it will be true tomorrow. I'm very excited and proud to lead this company and work with our leadership team as we continue to strive to deliver the greatest value to our clients and shareholders over the long term. I'll now turn it over to Francois to provide some more color on our financial results in the quarter. and then we will return to take your questions. Francois? Francois Morin : Thank you, Nicolas, and good morning to all. As you know by now, we reported third quarter after-tax operating income of $1.99 per share for annualized operating return on average common equity of 14.8%. Book value per share was $57 as of September 30 of 8.1% for the quarter and 21.4% on a year-to-date basis. Once again, our three business segments delivered excellent underlying results highlighted by $538 million in underwriting income and an 86.6% combined ratio, which was slightly elevated from an active catastrophe quarter. Our combined ratio was 78.3% on an underlying ex-cat accident year basis. Overall, current accident year catastrophe losses were $450 million for the group in the quarter, split roughly 80%, 20% between the reinsurance and insurance segments. Approximately 45% of our catastrophe losses this quarter are due to Hurricane Helene with the rest coming from a series of events, including Canadian events, smaller named hurricanes, U.S. severe convective storms, flooding in Europe and other events across the globe. As of October 1, our peak zone natural cap probable maximum loss for a single event 1-in-200-year return level on a net basis increased slightly and now stands at 8.1% of tangible shareholders' equity as we incorporated exposures from the MidCorp acquisition on August 1. Our PML remains well below our internal limits. Our underwriting income included $119 million of favorable prior year development on a pretax basis in the quarter, or three points on the combined ratio across our three segments. We recognize favorable development across many lines of business, but primarily in short tail lines in our Property and Casualty segments and in mortgage, due to strong cure activity. As you know, we closed on our purchase of the U.S. MidCorp and entertainment insurance businesses from Allianz on August 1, and I would like to expand on a few items that impacted our financials this quarter. First, the net written premium coming from the acquired businesses was $209 million for the 2-month period, contributing to the reported year-over-year premium growth for our Insurance segment. Second, in accordance with U.S. GAAP, the fair value of the acquired balance sheet does not include an asset for deferred acquisition costs. Therefore, since there is no amortization of deferred acquisition costs associated with the in-force business at the time of the acquisition, the current quarter's acquisition expense ratio is lower than in the third quarter of 2023. This item resulted in a benefit this quarter of approximately 1.9 points in the Insurance segment's acquisition expense ratio. Although we would expect this benefit to become less significant over the next three quarters to four quarters as a larger proportion of our earned premium relates to premium written after the closing date. Operating expenses in the new business were also somewhat lower than ultimately expected as we ramp up operations contributing to a 60-basis point benefit in the quarter. Third, as is required with business combinations, we recorded goodwill and intangibles in connection with the transaction, primarily from the value of the business acquired, distribution relationships, and the present value adjustment related to the reserves for losses and loss adjustment expenses. This quarter, we incurred an expense for the amortization of intangibles of $88 million, $63 million of which was for the MidCorp and entertainment acquisition. We expect our overall amortization expense across the group to be approximately $100 million in the fourth quarter of this year and $195 million in 2025, spread evenly throughout the four quarters. While still early, the mid-core business is performing as expected or even maybe slightly better, and we are satisfied with the progress we are making in our integration activities. Turning to our reinsurance group. The team delivered a very solid 92.3% combined ratio in an active catastrophe quarter. Of note, the reported net written premium growth of 24.5% in the quarter was augmented by reinstatement premiums. Adjusting for this item, the growth rate would have been approximately 22.4%. The mortgage segment reported an excellent 14.8% combined ratio as cure activity on delinquent mortgages is strong and the underlying credit quality of the book remains very high. the reported delinquency rate that USMI inched up slightly this quarter and was impacted primarily by seasonal factors. On the investment front, we earned a combined $570 million pretax from net investment income and income from funds accounted using the equity or $1.49 per share. Our investment income reflects approximately $20 million earned during the 2-month period from the assets we've received in connection with the MidCorp acquisition. Total return for the portfolio came in at 3.97% for the quarter, as there was significant price appreciation on our fixed-income portfolio due to lower interest rates. The appreciation of our available-for-sale investment portfolio resulted in a book value increase of $1.56 per share net of tax. Cash flow from operations remained strong and exceeds $5 billion on a year-to-date basis. Our effective tax rate on a pretax operating income was an expense of 8% for the third quarter in our annualized effective tax rate remains in the 9% to 11% range for the full year 2024. In closing, our balance sheet is strong with common shareholders' equity of $21.4 billion and a debt plus preferred to capital ratio of 14.2%. This level of financial resources gives us flexibility to deploy capital as needed. And continue delivering outstanding results for the benefit of our shareholders. With these introductory comments, we are now prepared to take your questions. Operator : [Operator Instructions]. Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead. Elyse Greenspan : Thanks. Good morning. I guess my first question is on the Allianz deal. You gave us some good color on the expenses. But anyway, could you give us a sense of just the impact on the underlying loss ratio within the insurance segment in the quarter? Francois Morin : Yes, sure. I mean, just to give you a bit more details on that, the -- call it, the normalized meaning ex cat accident year loss ratio for the segment was $57.6 million. right? And the stand-alone for the mid-core business was 62% in the quarter. So that's how came up. So effectively, kind of increased, call it by 70 basis points and increased the reported loss ratio for the ex-cat loss ratio. Elyse Greenspan : Okay. And then in reinsurance, the margin sometimes does fluctuate quarter-to-quarter but the underlying loss ratio did trend up in the Q3. Was there anything business mix in there that might have impacted that in the quarter? Francois Morin : Nothing specific. Again, we will -- we'll go back to our trailing 12 months way of looking at things. I mean I took another look this morning and there's nothing unusual in the quarter. I mean the trends are very consistent. Trailing 12 months are doing very well. So, the answer is nothing to report. I mean there's just kind of some claims happen, some don't. And over the last 12 months, we're very comfortable with the loss picks and how things are behaving. Elyse Greenspan : And then my last question is on capital, right? You guys have left the Doral ban, just given your excess capital position to doing something to return to shareholders, be that right a quarterly dividend, a special or even a return to repurchase. So, what's the timing there? I thought maybe it was post the end of wind season. Does that still apply? And how are you thinking about how you might look to return capital to shareholders? Francois Morin : I mean you hit all the good points. I think it's very much a conversation and it's not a new conversation. It's a conversation we have all the time. And yes, we had certainly mentioned that we wanted to wait till the end of the wind season, which is coming close to an end. And as we get ready for 2025, certainly part of the outlook for 2025 growth opportunities, how -- where we may be able to deploy the capital is something we'll consider as well. But Yes, no question that this is an area that we're focused on. And I'll say you should -- we're not sleeping on it, and we'll report back when there's more to say on that. Elyse Greenspan : Okay. Thank you. Operator : Our next question comes from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman : Good morning. Maybe following up on the insurance division and MidCorp. And I think France Swap, I heard correctly the MidCorp impact on the underlying loss ratio was about 60 basis points to 70 basis points, and if that's the case, it kind of moved up a fair amount, like 250 bps year-over-year. So, I'm trying to get a sense of should we be thinking that this is kind of a good run rate underlying number for the loss ratio? How should we think about it going forward? Francois Morin : Well, I mean, we indicated that we thought initially, I mean, we have to get, call it, under the hood, we have to understand the business. But we certainly have said that in the first year, we thought this business was going to be breakeven for us. So yes, we should expect a little increase in the loss ratio and the combined ratio for the segment. No question. In terms of run rate, I'd be a little bit hesitant to commit to anything beyond, call it, the first year. I think we're already making adjustments, taking underwriting actions in terms of we like, what we don't like as much. I think there is good traction, good opportunities in terms of the casualty business that they write. The rates right environment is very strong. So that will help, we think, -- so that's -- again, the short-term answer is yes. I think the combined ratio will probably inch up a little bit, but we have very -- definitive ideas and plans on how to bring that down as we move forward. Nicolas Papadopoulo : Yes. And I think -- it's dynamic. I mean, again, we I mean if you look at the insurance group overall, it's heavy non-property lines, so the property line attract lower loss ratio. So, we were growing in the property line in the last couple of years and the market now it makes it more difficult. And we have a large component of professional lines where rates have been challenging, so that probably incur Carlos ratio. And then we have casualty where I think we think there is opportunities potentially to grow more with higher margin, but it may come also with a higher switcher than property. So that's a playbook that we are facing. Andrew Kligerman : Interesting. And maybe breaking down some of the lines of business in insurance what kind of rate are you seeing? And is this rate exceeding loss costs? I suspect it's not in property, but maybe you could talk a little bit about some of the key lines in insurance? Nicolas Papadopoulo : So, I mean let's talk about casualty, which is talk of the time. I think in casualty, we're definitely seeing rates on the trend -- but there are really good reasons for that. I think the market is going through some pain. And so, I think we are underweight in casualty. We historically underwrite casualty. So now I think based on our own analysis of the pocket of casualty business that we like. We are selectively growing both from the insurance and the reinsurance side. So there, I expect margin to expand. I think if you mention property, if you talk about reinsurance versus insurance, we're mostly focusing on insurance. On E&S property, we think the profitability is actually very attractive. I think over the last few years and post the Hurricane Helene, I think the business has reacted with a lot of rate increase and a lot of change in terms and conditions, which make the business really attractive. So there, I think after year without losses, people have really short. We see a lot more competition coming from Lloyd's, coming from NGS, coming from new entrants that want to have a piece of that business. So, I think we -- our rates are pretty flat, but I think we'd expect that margin on the business will be depend on the reaction to the catastrophes that just happened. So, I think with Milton and Eli, we price expectation with things would stabilize, but ultimate the supply and the demand, there's more supply. We think there's more demand. I think the demand has been constrained by the high price and high deductibles and high retention on the reinsurance side. So, I think we're close to an equitable year -- I think the business will remain attractive for a while. Operator : Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Michael Zaremski : First question is on catastrophes. So, I don't know if you disclosed what you're assuming for Hurricane Helene. I know you're I think the cats were a bit higher than the consensus, but you guys have done a good job of giving us disclosure that you've been taking more risk in Florida specifically and just overall? And then also, should we be thinking about Milton as well. I think there's some conflicting numbers out there on open sure PCS is only a $5 billion so far, but there's some much bigger numbers out there? Francois Morin : Yes, sure. On Helene, our view is that it's going to be the type of event that probably will have a bit more leakage than you would otherwise expect. I mean it's just multiple states, and it's a lot of flooding. So, we are currently assuming, call it, a $12 billion to $14 billion industry loss. Which is maybe higher than others? And -- but that's how we see it today. I mean things could change, but that hopefully informs how we thought about the event initially and is reflected in our third quarter numbers. As it relates to Milton, we need to do a bit more work, but we will certainly give you our initial thoughts on that, I think, in the coming weeks in terms of what a loss -- what a range of estimates could be for us. But no question that what we -- what people thought might have been a really scary and large events doesn't seem to have materialized. I think industry estimates are coming down as we speak. So, call it the $30 billion plus or minus market loss seems to be about right, given what we know today. And in terms of our own loss related to that, I mean, again, more to come, but you shouldn't expect anything unusual from us. I think from what we can tell at this point, it should be in a relatively consistent kind of market share for us for an event of that size. Michael Zaremski : Okay. That's helpful. And -- my last question for Nicolas. Is there any context or color you can add to the -- what -- why the CEO change took place at the number 1 question I'm sure you all have received, and we have two people wondering if it's performance related versus just some other events or anything else? Any color you'd be able to add? Nicolas Papadopoulo : I didn't understand the deal? Francois Morin : The CEO Marc's departure. Nicolas Papadopoulo : Should know that. No. I mean, again, it was a personal decision that is, I think as I said, Marc and I were a good trend. It's a bit bittersweet for me, but based on this decision, I'm actually very excited about the opportunity in front of us. I think Marc is, I think Arch is bigger than any one of us, and I think we have a lot to do, and we have not an exciting thing to continue to do in the coming years. And I think we have a really good management team. We have 7,000 employees that are really engaged. And as I said, I think Arch is an exceptional company, and I'm really looking forward to continue this journey and, certainly, I think Marc departure is not performance related that the guy under his leadership, and I said the company has performed amazingly well. Michael Zaremski : And I guess, Nicolas is helpful. Obviously, you put your own stamp on the company over time and you're a different type of leader and we're all excited to -- about your position. But I'm just curious, is there now that you are at the Boss, are there certain things we should kind of stay tuned for that have kind of been on your wish list that you'll be able to kind of push through? Or do you kind of expect just more of the same directionally? Nicolas Papadopoulo : No, not a message to -- it's really business as usual. I think I've been with the company for 23 years, have worked very closely with Marc in the last 5 years or 6 years in setting up strategies, looking at operation changes, looking at culture. So, I think we -- him and I were extremely aligned. So, I think I would not expect any changes in the way we operate. Operator : Our next question comes from the line of Jimmy Bhullar with JPMorgan. Jamminder Bhullar : Good morning. So first, I just had a question on your views on 1/1 renewal and what do you think about the sort of supply-demand imbalance? And has that sort of shifted given losses from Milton -- or is your view consistent with how you would have thought before? Nicolas Papadopoulo : So, is the question on property cat I assume? Jamminder Bhullar : Yes, yes. Nicolas Papadopoulo : Yes. So, I think on property cat, I think, as you've seen, we've grown the book quite a bit in the last 2 years or 3 years. So, we think the returns are really attractive. The Yes. I think the we have vet of midterm and Helene in my view, what we hear is that you stabilize the market. And I think there was a lot some supply, as I said earlier, is there from nodes or from MGAs or from our competitors. After 1 year without losses really wanting to get back in the business and realizing that they may have missed out on a profitable line of business. So, what I would expect, and we see it on the insurance side that things have stabilized. And I think my guess is at this stage is that we will do the same on the cat reinsurance side. Jamminder Bhullar : And more specifically, are you expecting pricing to be down, flat or -- and to whatever extent you're able to qualify quantify would be helpful? Nicolas Papadopoulo : Yes. I don't have a crystal ball. I would say, again, it's always the same with programs that are being impacted by losses. I would expect prices to go up. in regions that had no losses, you could see in the bottom of the programs, I think people are still really scared about frequency. So, I'd expect the bottom to middle side of the program to perform well. The upper layers where people seem to be more comfortable to play where competition is coming because you are away from the midsize also, it could be a little bit of weakness, but not really have a strong conviction in a way. But I think mostly stable. Jamminder Bhullar : And then on casualty reserves, a lot of companies have had adverse development, some on recent years, some money even some on peak over the years as well. Can you talk about your own comfort with your casualty reserves on your legacy book as well as the Watford business? Francois Morin : Sure. I mean, reserves is something we looked at. We look at regularly, quarterly, right? So, it's nothing new here. I think we're -- to answer your question, we're very comfortable with our reserve levels. I think from couple of reasons. One is we were -- as Nicolas said, we have been underweighting casualty for a number of years. So as much as, yes, we do feel and see some of the impacts of social inflation and pressures on loss trends on casualty business in general. I mean the fact that we're underweight in those lines has been very helpful. So yes, we are monitoring casualty reserves. There, we have experienced some adverse development, but it's been overall very manageable. And that explains, in our mind, is a big reason as to why rates are moving up because the industry is seeing the pressure and a way to correct for those results is really by getting more rate. Operator : Our next question comes from the line of Cave Montazeri with Deutsche Bank. Cave Montazeri : First question is on growth. I guess, Francois, you've already explained the growth in primary insurance I guess, underlying once you exclude MidCorp, is about 5%. In reinsurance, you also mentioned the impact of reinstatement premium. I think you said it was still 22% growth even adjusting for that, still a big number. Could you give us a bit more color on like what drove that in terms of how much of that was pricing? How much of those like unit growth? How much of that was maybe writing more casualty business. Any type of color on that would be quite helpful, please. Nicolas Papadopoulo : Yes. I think for the quarter, I think the driver of the growth was a bit of casualty return mostly our U.S. company, where I think we selectively are trying to -- are getting on programs that we haven't been as rates get better, we think there's opportunities for us to write attractive casualty business. And on the other side of the business that grew is the specialty business, the return. And that's more of business that we wrote 1/1 that is coming in on quarter shares, and some of it is we have a decent size book of business that support Lloyd's [indiscernible] where called Ponat where we get quarter share of what they write net of their protection. So that business is growing. Lloyd's is growing, and we think it's a profitable business. So, we benefit from that. And the second aspect is we have a decent size book of motor United Kingdom motor and that business is really dislocated, it's been dislocated, and we've been playing in that field for a while. And as rates are continuing to go up, and I think they added a 1/1 additional relationship be benefiting of this in the quarter. But it's not any action that we actually took during this specific quarter. So -- the last piece is our facultative operation that has an amazing track record and is one of the leading accusative operation, property operation in North America and -- they also have shown some excellent growth. Cave Montazeri : Perfect. My follow-up is on the mortgage insurance business. I guess two parts to that question. The first one is the growth in the quarter, was that primarily driven by the Fed cuts that just boosted demand. And I guess linked to that is the pickup in delinquency in mortgage insurance, is that also just linked to more activity? I know you mentioned some seasonal factors. I don't know what those were. If there's any details we can have on that, please? Francois Morin : Yes. I'll start with that. I think the delinquency, again, yes, itself, but it's absolutely very much within our expectations. The one thing maybe for people to remember or appreciate is given we've refinanced a significant part of the book in 2020 and 2021. We're now entering call it, the prime years of when delinquencies get recorded. So that's very much part of the -- again, within our expectations, right? So as new loans get on the books. Usually, it takes 3 years, 4 years for them to show a bit of, just call it, really predictable and normal delinquencies. So that explains why in aggregate or delinquency rate is trending up a little bit. And more specifically on the seasonal aspect, I mean, every year, there's fairly predictable behaviors that we see from the borrowers, whether they get their tax refunds and in the first quarter and then they catch up on their mortgages and whether they borrow more to buy holiday presence. So that happens. And then the third quarter is typically expected and seen as we -- I mean, we've seen that in the recent history that the delinquency rate just goes up in the third quarter without any more just seasonal. So again, we're very comfortable with the overall rate. And again, there's a little bit -- the same differential that I mentioned last quarter related to the -- RMIC acquisition is still there. So, it's a pre-financial crisis book that is -- has its own set of characteristics. So, we're, again, overall, very happy, very comfortable with the delinquency rate -- and in terms of the premium, your first part of the question, there's a couple of accounting differences or nuances this quarter. So, I wouldn't read too much, I think, in the growth that we saw this quarter. There's a little bit of a catch-up on premium that was related to old -- or related to Bellemeade transactions on the seed aside. So generally speaking, I'd say the mortgage segment is relatively flat in terms of growth opportunities. Operator : Our next question comes from the line of David Motemaden with Evercore ISI. David Motemaden : Thanks Francois, thanks. So much for all the detail you gave on the insurance underlying loss ratio, both including and excluding the mid-corp acquisition. So, I guess just sort of running through those numbers there, it looks like if I take out mid-corp, it was about a 57% underlying loss ratio for the sort of core Arch insurance business. And so that picked up a little over 100 basis points versus last quarter and also on a year-over-year basis. So, I'm just wondering if you could help me think through some of the drivers of that increase? Francois Morin : Yes. I'd say, again, it's -- Nicolas touched on it, it's growth related in mix, right, in the sense that where you saw us grow this quarter. And I don't think if you have the time to look at in the supplement, how we report the lines of business, which is we have changed this quarter relative to the past, more growth in casualty and other liability lines of business, both -- I mean, primarily on an occurrence basis, claims made, which is more professional lines book and cyber or that has come down. But that business typically carries a higher accident year loss ratio than property business once we remove the cat load. So that is really the big driver of the pickup is really mix as we have grown in the last little while more in casualty and remain relatively flat on property. David Motemaden : Got it. Okay. That's helpful. I appreciate that. And then maybe a follow-up on the reserves just within insurance and reinsurance. I was wondering if there's any way you could size those moving pieces for us between the short tail and the long tail development? Francois Morin : Well, I mean, we -- in total, I mean -- and that will be in the queue, but yes, we definitely very favorable on short tail lines of business, a little bit of adverse on long tail lines. So that's consistent with recent trends. I mean, as I mentioned earlier, we are -- we're seeing a little bit of pressure on casualty, longer-tail lines of business. There's been some favorable in workers' comp, as you've seen, I'm sure, with many of our competitors. I think that's been a consistent story for quite some time. But again, the bottom line in aggregate is we're able to -- we're observing kind of favorable development, lower actual than expected, and that is coming through in our numbers. David Motemaden : Understood. Thank you. Operator : Our next question comes from the line of Yaron Kinar with Jefferies. Francois Morin : I think he might have dropped. We're not hearing anything. Operator : Our next question comes from the line of Meyer Shields with KBW. Meyer Shields : Great. I think we've talked about this in the past, but I wanted to get Nicolas' thoughts on cycle management. Specifically, I guess, with retail distribution and in particular, the mid-core business, is that less amenable to cycle management? Nicolas Papadopoulo : So, I mean, my view is it's a different type of cycle management. I mean the -- what's attractive with the mid-core business is it's more stable. So, which means that the cycle are more muted. You don't see the same price going up and down like excess D&O public excess D&O. You got 40 and you make up 20 or 10. So, I think in the middle market business, I think you have more -- it's going up slower, and it's going down much lower. So, I think that that provide -- I think we like that provides a much balance to our insurance book that has a large component of larger corporate risk that are more subject to large situations in rates. And the thing that's attractive to us is the value proposition of a carrier in the MidCorp segment is better because usually the distribution partner, the broker rely on the carrier to provide more than one kind of business like -- so you're more important to him. The interaction with the carrier is more valued. So, you create the stickiness that really help -- you're not competing solely on price, where when you deal with a large account and a risk manager price is an important component of the value proposition. But here, I think -- so it's less subject to in my view price competition, which make it more stable and more attractive. And I think the thing that's interesting to us with the MidCorp aquisition is that the timing is pretty good because we've seen price increases on the property side because this book is more exposed to secondary period and the liability component of the book is subject to the discussion that we talked about before. So, I think we -- our timing is really good. I think the book looks to be performing well enough. And so, we're pretty excited to be able to find like a decent chunk of that business and to be at scale and being able to expand our footprint in what we think is a very attractive part of the market. Meyer Shields : Okay. That's very helpful. And then if I can switch gears a little bit I know it's early on the January 1 discussions for property cat. Is there anything you can share with regard to expectations for seating commission trends in casualty reinsurance? Nicolas Papadopoulo : So, I'm going to be the wise person here. I think as we insure and including ourselves in see more bad news coming from the past. I think the -- there will be pressure on seating commission. You would expect that -- the question is the supply. I mean the pressure on the seating commission will be muted by the supplier, because if there's more people wanting the business and there's a limited amount of business being placed I think the brokers is going to -- is going to play a big role in minimizing I mean, the directions of where the seating commission are going to be. So, it's going to be some sort of conflict between what the reinsurance wants and what the seating companies are willing to do. And -- but the driver would be the supply versus the demand. And I think -- and what I'm hearing is that there is ample supply in the marketplace. Operator : Our next question comes from the line of Yaron Kinar with Jefferies. Yaron Kinar : Good morning. I apologize for dropping earlier. I wanted to dive a little bit deeper into the other liability occurrence growth in insurance. How much of that came from MC versus just organic or legacy growth? Francois Morin : It's a good question. There was a fair amount of E&S casualty business on our kind of like is just organic, right? So that is an area of maybe the most exciting area for us. I mean, where rates are well into the double digits in terms of rate increases. So that is a very, very attractive area the MC book is split. There's some commercial multi-peril -- there's some occurrence of the liability occurrence, so it's a mixed bag. But I'd say I don't have the exact numbers in front of me, but I think you should -- the takeaway is that the rate environment in that particular line of business is very, very good right now. Yaron Kinar : Okay. And what is it about the third quarter where the environment it seems to have accelerated significantly or at least the opportunity set in other liability occurrence accelerated significantly? Nicolas Papadopoulo : I think it's just a function of people realizing that the way they were looking at the reserves in the last few years is not exactly playing out. I think COVID for a while muted the claims. So, people kind of in my view, sitting out there to make sure they were not making their own reason. And since COVID, I think we -- we've seen some severity larger world, planted jewelry world, and we've seen -- and we've seen more places where those jewelry awards are taking place larger Europe. So, I think you have like social inflation that's driving much more severity and you have -- so frequency of places used to be County, self-test mixing border, but now you have Georgia, you have some place in Nevada, where certain juries actually, if you get code in one of these journeys, you're going to get a significantly larger work. So, I think it's a combination of frequency and severity and people realizing that they have to -- they have to stay ahead of those. And the normal reaction, which I think is the right reaction for the market has been to cut limits because if you're caught up in one of those difficult juries, you want to have small limits. And typically, when you had, I don't know, $200 million placement with 10 players and suddenly, you have 40 players to complete the placement, some of those layers going to the NS market, you're starting to see some taste increases. And that's what we're witnessing right now. Yaron Kinar : But if I could maybe flesh this out a little more. What you're describing is not new. I mean, if we go back to previous management meetings, conferences, calls. We have been hearing management talk about this for several quarters, if not years, even in some cases. So, what's happened in this third quarter that seems to have triggered some significant change? Nicolas Papadopoulo : I think it's just the accumulation in that people took actions, but when actuaries or management look at the chance for the business they're writing today to be profitable, they ask themselves, they need more safety margin. I think it's I think there was some rate increase double-digit trade increases 2 years or 3 years ago. Then we -- for a little while, we went to single digit, and suddenly, we are back in double digit. It tells you that there is paying in the back years of people that have written that business in the early years and in the last few years. And usually, the reaction -- it's not unusual that the reactions are more broad because at some point, management lose faith in the story they've being told, so they require more drastic actions. That's the usual playbook of how market happens. Operator : Our next question comes from the line of Brian Meredith with UBS Financial. Brian Meredith : Nicolas, I want to follow up on that a little, just a little bit. So, I understand what you're saying about your opportunities for growth here in some of the casualty lines. But maybe I can get your perspective a little bit more on what do you think casualty trend is? And where is it going, just because you must be pretty confident in kind of having good grasp on where casualty trend is, given that you're growing and some other are shrinking? Nicolas Papadopoulo : Yes. So, I think, I mean, yes, it's a tale of several stories. I think -- at the bottom of the program, I think people can have a pretty good idea what your casualty trend is, whether it's mid-single digit. The issue is when you go excess. If you go in excess of $50 million, if you got excess of $100 million, that's where the trend get to multiply OpEx. And you are certainly in double digits. I think ourselves, in a way, we were lucky we didn't have a huge footprint on the casualty business, but we have enough footprint to be able to do our own analysis. And again, it’s selective. The thing to treat different class of business, different you have to be able to do really selective price increases, analysis to get comfortable that in certain jurisdictions, with certain parts of business, you think the business based on your own actual experience, the business makes sense to be returned. So, it's not -- I would not say it's a sea change that suddenly any pieces of business that come across your desk is going to be profitable. You have to be you have to be selective and have a thoughtful approach to what you want to underwrite. That's a market we are in. Brian Meredith : Got you. And the same question, I guess, for reinsurance, right? Reinsurance you're kind of relying on the seeds? Nicolas Papadopoulo : Yes. So again, I mean, the job of the reinsurer is still back the right companies. So, I think we are -- for a while, I think we've been really underweight on the casualty U.S. quota shares and excess of loss. And I think this dislocation in the marketplace has allowed us to get on program that we wanted to get on 2 years or 3 years ago because we like the underwriting. We like the limit discipline. We like the class of business they're right, but we couldn't get on because nobody was exceeding. So, I think we -- and I think there is some sort of a flight into quality of who is here for the long term and who is not. And I think we're benefiting from that. Brian Meredith : Makes sense. And then, Francois, one quick one here for you on the investment portfolio. I guess, one, where are we looking at new money yields versus current book yields? And where are you deploying the assets you got out of MidCorp. Is there some more potential book yield to come out going forward? Francois Morin : Yes. I mean, part of the transaction was certainly some of the -- a good chunk of the assets came in cash. So, our investment team has been very disciplined and thoughtful on where to put that money to work and -- but the good thing is just on money market or cash, we're still getting a decent yield. But yes, I'd say, call it, 4.5% on new money yield, I mean, as you see, the book yield and the new money yields are kind of pretty close to each other right now. We're still very short duration, very high-quality fixed income book, so that's not changing. But yes, there's certainly been, call it, the $2 billion in assets that we got we are putting that to work and trying to fit that into the portfolio as best we can. Operator : Our next question comes from the line of Joshua Shanker with Bank of America. Joshua Shanker : So, I get it, there's less meaty sports talk than ever. But I was wondering, in the past, we've talked about the ROIC on the different legs of the Arch stool reinsurance, insurance mortgage. Could you review right now sort of state of the union on what the return on new capital is for the various businesses? Francois Morin : We like all our businesses. That has not changed. The one thing that I'd say right now is -- I mean, fourth quarter, we're a little bit kind of dependent on where the market goes at 1/1. So that is Certainly, reinsurance has been just a really, really good environment for 2024, how does it play out in '25. It's still a little bit early to know for sure. We think it's going to be still a very good market. Is it going to get better to the point where we have the ability to deploy that much more capital in reinsurance, we don't know quite yet. So -- that's kind of the answer. I mean, there were a little bit wait-and-see approach in terms of how the market plays out. But again, what we talked about this morning, the growth opportunities in casualty, in particular, I think are exciting to us. So, both insurance and reinsurance, I think we're ready to play. And mortgage is -- don't want to forget about mortgage. I mean this has been a terrific engine for us. No question that the origination market is not as large as we'd like it to be, but that's okay. I mean we've got terrific earnings coming from the in-force book and we're finding other opportunities outside of primary MI in the U.S., and we're deploying the capital in the right way. So, we're very comfortable with the mix right now. Joshua Shanker : Would it be wrong to paraphrase that reinsurance is better than insurance and mortgage, but that's pending what happens on 1/1? Francois Morin : It's not wrong. I think it's a fair statement. It's better right now. We like to think it's going to stay better, but just don't know quite yet. Nicolas Papadopoulo : It's a higher component -- reinsurance is a higher component of property business. So, you have to think on the half of the business is property. So, you -- it's high risk, high reward. So, I think we have -- we get better high the high return, but it's also high risk as we saw this quarter. I think the insurance work is much more heavily geared towards casualty and professional lines. So, I think it's an environment that is [indiscernible] but it's a different set of return. I think you have to balance those two. So -- and sometimes, the E in the ROE doesn't do enough of that, I think. Joshua Shanker : And Francois, you made the comment of the origination market in mortgage isn't quite as strong as you'd like it to be. but also, Arch has lowered its market share of new business compared to where it was 3 years ago or so. If Arch wanted to ramp it up -- is there a possibility of growing that business without improvements in the origination market? Or would that cause pricing and margins to weaken in that business? Francois Morin : Yes. It's becoming a more kind of homogeneous market, right? So, I think the risk of trying to grow market share is just as you said, I think you have to cut prices I think we've built a very resilient, very high-quality book through picking different types of loans to ensure different geographies. I think we -- I mean, we are very comfortable with what we've done. But for us to move from the, call it, 16%, 17% market share and say we want to be at 18%, 19%, 20%. Right now, we just don't see that happening because the market, I think, will just react with us, and it will just push prices down. So, I think right now, I mean, I just be surprising for us to grow our market share that significantly in the near term. Nicolas Papadopoulo : Yes, we've asked this question all the time. And the answer is that we ended up in the worst place. I think status quo, the current status quo based on the Remember, we're dealing with monoline business. That's all what they have. So, I think, ultimately, they're going to defend their book and we'll end up in a worse place. That has been the analysis that we carried. Joshua Shanker : Well, thank you very much for all the answers, and I'll let you go to lunch. Operator : Our next question comes from Elyse Greenspan with Wells Fargo? Elyse Greenspan : I'll just shove a few more in before lunch. But my first question is on Hurricane Helene, right? I think you guys said it was 45% of cats. So, I calculate that at just over $200 million, so that's like 1.5% to 1.7% market share, given your 12 to 14 -- is that about what you would expect, I guess, for these large type events? And does that share a good frame of reference when thinking about Milton? Francois Morin : I mean, your math is about right, but the Helene is a bit unusual for us. I mean it's a little bit on the elevated side in terms of market share based on some of the accounts we wrote Again, Milton is different because it's Florida only. So, it's -- we have a different mix of business there, a different type of accounts we write. So, I would not draw a correlation or an analogy from the lean, call it, implied market share to what Milton could look like. Elyse Greenspan : Okay. That's helpful. And then my second one, I guess, is a follow-up on reserves, right? We had another company this morning that kind of flagged they're kind of going to take an in-depth review and there might be some movement with their fourth quarter review. It sounds like from earlier questions that you guys really haven't seen like change in loss trends or actual versus expected in the third quarter versus later in the year. But is there anything, I guess, that you're concerned about or anything that's come up with the quarterly reviews that you guys are paying particular attention to will be going to the end of your review? Francois Morin : There's nothing unusual. I mean it's something we look at all the time. The trends are relatively stable. I mean we have views going way back that the loss trends that we were seeing in the market were a bit optimistic. So, we've always taken a longer-term view of trends and we review those annually at a minimum, sometimes some twice a year. But yes, really nothing that stands out, that's, I'd say, unusual or that we're overly concerned with. I mean that's the standard kind of themes that we've been talking about for quite some time. Elyse Greenspan : And then I might just shove one last one in there. You guys have an upcoming Investor Day in a couple of weeks. Is this -- are you going to expecting to use this to lay out bigger strategy, financial targets something on capital, I guess. Can you just give us a little bit of a preview of what you expect to talk to us about in a few weeks? Francois Morin : We're just missing you guys in person. So that's why we schedule this. But no, I wouldn't expect anything really unusual from the upcoming Investor Day. We you've known this for a while, the strategy remains the same. Nicolas will obviously be focal point. So, we'll make sure everybody gets to hear a bit more from how we want to shape the company going forward, but I would not message or think that there's anything unusual or kind of a new regulation that you should expect to hear from us in a couple of weeks. Operator : I would now like to turn the conference over to Mr. Nicolas Papadopoulo, for closing remarks. Nicolas Papadopoulo : Yes. So, there's not any more questions. So, this will conclude our presentation today. And thank you for your questions, and we see you next quarter. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
ACGL	Arch Capital Group	947,484	Financials	Property & Casualty Insurance	Hamilton, Bermuda	1995	2022-11-01	null	null	null	2024Q4	null	8.911	8.86	9.058	9.002	null	11.43	9.86	Operator : Good day, ladies and gentlemen, and welcome to the Q4 2024 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2023 fiscal year. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make a reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. And now I would like to introduce your host for today's conference, Mr. Nicolas Papadopoulo and Mr. Francois Morin. Please go ahead. Nicolas Papadopoulo : Good morning, and welcome to our fourth quarter earnings call. I'll begin by offering our thoughts and sympathies to all of those affected by the California wildfires. This is a terrible event that will require the effort of many, including insurance companies, to help the affected communities recover and rebuild. At last, we will, of course, fulfill our role in these efforts. As noted in yesterday's press release, we expect the wildfires to result in a net loss between $450 million and $550 million based on an industry loss estimate of $35 billion to $45 billion. Turning now to our results, Arch had a solid top quarter writing $3.8 billion of net premium, which is a 17% increase over the same quarter last year. The $625 million of underwriting income in the quarter is down 13% from last year, primarily due to losses related to cat activities in the second half of 2024. Our full-year results were excellent, with $3.5 billion of after-tax operating income and an operating return on average common equity of 18.9%. Despite an increased level of natural catastrophes, book value per share, a preferred measure of value creation, ended 2024 at $53.11, representing a 13% increase for the year and nearly 24% increase after adjusting for the impact of the $5 per share special dividend we paid in December. The decision to pay a special dividend was the result of Arch's strong financial performance and excellent capital position and represented an effective means of returning excess capital to our shareholders. We also repurchased shares worth $24 million in the fourth quarter. Both the dividend and the share repurchase reflect our ongoing commitment to effective and active capital management. Market conditions within our segments remain favorable with a number of select growth opportunities ahead of us. As you may have heard from our peers this quarter, rate and loss trends vary by line of business. Broadly offset each other. All hands do not point to the same underwriting clock. For example, we are selectively deploying capital to the areas producing attractive risk-adjusted returns such as insurance and reinsurance liability lines, specialty business at Lloyds, and property charter insurance. Alternatively, lines of business where competitive pressures have eroded margins to levels below adequate, our underwriting teams are focused on improving our business mix within each of those lines to ensure our minimum profitability targets are met. Effective cycle management, the key to our strategy, requires empowering underwriters to execute on both sourcing and retaining attractive business without the constraint of production targets. In classes and subclasses where returns do not meet our minimum threshold, we have the agility and the incentives to reallocate capital to more profitable opportunities across our diversified portfolio. And as we have demonstrated throughout our history, we will not hesitate to return excess capital to our shareholders when appropriate. Now I will offer a few highlights about the performance of our underwriting segments starting with reinsurance, which finished the year with a strong fourth quarter delivering $328 million of underwriting income. The full-year results for the reinsurance group were excellent. The segment delivered a record $1.2 billion of underwriting income while writing over $7.7 billion of net premium. At the January first renewal, we grew the reinsurance business by selectively increasing our writings in property liability and specialty lines. Arch's status as a leading global reinsurer is a result of its focus on addressing broker and clients' needs, combined with its underwriting vigilance and high degree of scrutiny on the performance of its business. Throughout the whole market, Arch has had the conviction to increase its support and relevance with brokers and clients, making Arch a more valuable collaborative partner when other reinsurers wavered and in some cases, even withdrew capacity. Now moving to insurance, which also sees some strong growth opportunities in 2024. Overall, Arch and Helene and Milton limited fourth quarter underwriting income to $30 million. For the full year, the insurance group wrote $6.9 billion of net premium, a 17% increase from 2023, and delivered $345 million of underwriting income. Growth was enhanced by the acquisition of the US Midcorp and Entertainment business. Although it's still early, the performance and integration of the Midcorp and Entertainment business are consistent with our expectations and objectives. Organic growth in North America came from our casualty business unit, which more than offset premium decreases in professional lines. International insurance remained a bright spot, writing over $2 billion of net premium in 2024, primarily in specialty lines out of our large platform. Overall, rate increases remained slightly above loss trends, keeping return margins relatively flat in the fourth quarter. The outlook for both North America and international insurance growth is favorable for 2025. Looking ahead, we expect primary market conditions to remain competitive given the attractive underlying margins. However, we have experienced a slowdown in new business volumes as competition for premium volumes has increased. The mortgage segment contributed $267 million of underwriting income in the fourth quarter, resulting in the first consecutive years of delivering over $1 billion in underwriting income. Fundamentals remained positive, including strong persistency of our $500 billion-plus insurance in force portfolio, while the overall credit quality of the book remains excellent. The delinquency rate in our US MI business increased modestly to just over 2% at the end of December but remained near historic lows. Increased delinquency can be attributed to expected defaults in areas hit by natural catastrophes and the seasoning of the insurance in force. Overall, the US mortgage insurance industry remained disciplined despite suppressed mortgage origination due to low housing supply and high mortgage rates. Finally, to the investment group, which delivered nearly $1.5 billion of annual net investment income from an asset base that increased to over $40 billion after accounting for the special dividend. Rising investment yields and the growth of our investable assets from strong operating cash flows provide additional tailwinds for our earnings and book value growth. Overall, 2024 was another excellent year for Arch. Looking ahead, our primary goal is to maintain attractive margins despite expected heightened competition. Our strong underwriting culture, proven track record of cycle management, dynamic capital management capabilities, and progress to date in becoming a data-driven enterprise give me confidence in our ability to navigate ever-changing market dynamics with a clear objective of maximizing shareholder return over the long term. As we officially turn the page to 2025, I want to recognize the hard work and dedication of Arch's nearly 7,000 employees who share in our entrepreneurial culture that demands and rewards excellence to the benefit of our clients and stakeholders. Now I will turn it to Francois to provide more detail on the financials before returning to answer your questions. Francois? Francois Morin : Thank you, Nicolas, and good morning to all. As you know by now, we closed 2024 with fourth-quarter after-tax operating income of $2.26 per share, for an annualized operating return on average common equity of 16.4%. For the year, our net income return on average common equity was an excellent 22.8%. Once again, our three business segments delivered a combined ratio of 78.6% for the year. Current accident year catastrophe losses were $393 million for the group in the quarter, split roughly 60% and 40% between the reinsurance and insurance segments respectively. Most of our catastrophe losses this quarter are due to Hurricane Milton, a fourth-quarter event, with an additional contribution from Hurricane Helene, where we saw some delayed emergence of claims given the late occurrence date in the third quarter. As of January 1, our peak zone natural catastrophe probable maximum loss for a single event at a one-in-250-year return level on a net basis increased slightly and now stands at 9.2% of tangible shareholders' equity. Our PML remains well below our internal limits. As we look forward to 2025, with the recent addition of the Midcorp and Entertainment business, and current market conditions in property, we expect our cat load to represent approximately 7% to 8% of our full-year group-wide net earned premium. Our underwriting income in the quarter included $146 million of favorable prior development on a pre-tax basis, or 3.5 points on the combined ratio across our three segments. We recognized favorable development across many lines of business but primarily in short-tail lines in our reinsurance segment, and in mortgage due to strong cure activity. As we discussed last quarter, the acquisition of the mid-corporate entertainment insurance businesses has impacted some key performance metrics for our insurance segment. First, the net written premium coming from the acquired businesses was $393 million for the quarter, contributing 27.1 points to the reported quarter-over-quarter premium growth for our insurance segment. Second, the acquired business lowered the insurance segment's accident year ex-cat combined ratio by 1.6 points this quarter. This result was due to the current quarter's acquisition expense ratio that was lowered by 2.1 points due to the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP, and an operating expense ratio that was lowered by 0.8 points as our Midcorp operations aren't fully ramped up yet. Partially offsetting these benefits was an increase in the accident year cat loss ratio of 1.2 points, reflecting the underlying results of the acquired business. On a related note, we expensed $99 million this quarter through intangible amortization, more than 75% of which was for the mid-corporate entertainment acquisition. This expense was in line with our expectations as we communicated last quarter. On the investment front, we earned a combined $548 million pre-tax from net investment income and income from funds accounted for using the equity method, or $1.43 per share. Our net investment income this quarter was partially impacted by a $1.9 billion dividend paid in December, which entailed that we liquidate a portion of our investment portfolio. Cash flow from operations remained strong. It was approximately $6.7 billion for the full year, up 16% from 2023. Our effective tax rate on pre-tax operating income was an expense of 6.7% for the quarter and 8.2% for the full year. As we look ahead, we would expect our annualized effective tax rate to be in the 16% to 18% range for the full year 2025, reflecting the introduction of a 15% corporate income tax in Bermuda. On a cash basis, we will start recognizing this with the establishment of the $1.2 billion deferred tax asset at the end of 2023. As you may have heard on other calls, the recent OECD guidance may partially impact the realizable value of the DTA. We will keep you apprised as additional information becomes available. In closing, our balance sheet remains extremely strong with common shareholders' equity of $20 billion after recognition of the $1.9 billion common dividend that was paid in December. Our debt plus preferred to capital ratio remains low at 15.1%. With these introductory comments, we are now prepared to take your questions. Sylvie? Operator : Thank you, Mr. Morin. If you would like to ask a question, please press 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And your first question will be from Elyse Greenspan at Wells Fargo. Please go ahead. Elyse Greenspan : Hi. Thanks. Good morning. My first question is on the insurance underlying loss ratio. I mean, I recognize, right, Francois, you highlighted, you know, some of the impact right, from the Allianz deal coming in right a little bit over one point calculated kind of Arch standalone, running at just under fifty seven, which is close to the Q3. Is it right way to think about it that that's about where Arch is and then kind of blend in, write this a little bit over one point from Midcorp so that insurance underlying is somewhere in the range of fifty eight on an ongoing basis, something like that. Francois Morin : Yeah. That's about right. I think the yeah, the the impact of MC is, call it, know, on the loss ratio, about one point. So whatever the assumption you have around the, you know, pre-MC kinda run rate loss ratio, which is pretty stable has been pretty stable. There's some movements up and down from quarter to quarter, but generally speaking, it's been it's been stable. And introducing the MC maybe adds about a one one point to to that. Elyse Greenspan : And then my second question is on reinsurance. Right? You guys you know, pulled back a little bit at midyear twenty four. Now the PML went back up, right, but it's flat. You know, one one twenty five with one one twenty four. Did you see conditions get incrementally better at January one. I'm just trying to understand the thought process around, you know, bringing the PMLs back up a little bit. Nicolas Papadopoulo : No. I think I think what's happening is that we we like the business. So I think, you know, absent the the competitive nature and other people liking the business too, I think we we're looking to write more of this business. We think the the the returns are quite attractive. And I think at one one, we we had we had some opportunity to do so based on our positioning. So I think we we were pleased by that, I think. Elyse Greenspan : And then I guess the the follow-up to that is, right, the California fire is pretty big loss. Do you see that know, being able to impact other cat renewal seasons in twenty five. Some of it, I guess, might bleed one one twenty six. How do you see the market impact from the California fires? And is this something, you know, where you guys would expect your PML and and cat ridings to go up during the year? Nicolas Papadopoulo : So I think, you know, the as I mentioned in my remarks, I mean, this is a significant loss for the market. I mean, we pitch it between thirty thirty five and and forty five billion. We believe that a significant part of that losses will go to the reinsurance market. I think it will I think most reinsurer, including ourselves, we we start the year with a loss ratio. You know, in the twenties or the thirties or depending of your luck, maybe higher than that. So I think it would it should, you know, dump all the enthusiasm of you know, many market trying to be heroes and and and and and writing the business. So I would I would think that it it will have a an effect on on on on on the rates at at you know, for the rest of the year. So Thank you. And that's Thank you. Operator : Next question will be from Michael Zaremski at BMO. Please go ahead. Michael Zaremski : Hey. Thanks. I guess, first question, I'll just go back to the the catastrophe load guidance. Seven to eight it Probably just obvious, but that so that includes right. It's higher than the historical six day mostly because of the the one q California losses is that correct? Francois Morin : A little bit, but also the MCU acquisition adds, you know, on a relative basis, kind of adds a little bit of you know, of load to, you know, to the, you know, to to increase the cat load. Because it's it's it's a heavier property book than people in this know, realize it. It didn't really Impact or PMLs because it's in different zones, it's more distributed. But when we think about you know, the contribution to the to the cat load throughout the year. It it has a meaningful impact. Michael Zaremski : Okay. I would have actually plugging in the Cali losses. I actually would have thought to lower would have been a little bit higher, but but okay. Good good color. Switching gears just to the I guess one of the elephants in the rooms for for lots of insurers is going back to the kind of the casualty GL umbrella environment. In some of the prepared remarks, was, you know, said that overall rate increases remain slightly above loss trend. I think that was the primary insurance marketplace. Any comments on whether you know, what you're seeing And you're GL book. I know that, you know, you guys are one of the more honest ones. In my humble opinion. And at the investor day, you know, you said you'd probably be adding small amounts to your your GL reserves, but, you know, nothing that that's really too out of out of trend line with what you've you've been doing for a while now and better than the industry. But any updated commentary on what you're seeing there? Francois Morin : Yeah. And so I think I'll answer in two parts. One on the position, we didn't add to our reserves. We're very comfortable with the reserve position both both in insurance and reinsurance. You know, our actual versus expected analysis or year end analysis all are supporting that that view that our reserves for prior accident years are are very adequate. So no no concern there. But as we look at, you know, second half of twenty four and into twenty five, you know, yes, we are seeing rate changes keeping up with loss trends, so we're not and even exceeding in some places. So we're comfortable with the the environment there. But we also recognize that there's a lot of uncertainty there. So we are being cautious, prudent. We are in some specific very targeted areas increased our initial loss picks. But it's not I think I wanna make it clear here. It's not as a reflect it's not a reflection of adverse development or, you know, signals or data telling us that we missed a mark on the old years, It's very much a function of the current rate environment and how we perceive the risk around our initial loss picks. And for that reason, we're choosing to be a bit more prudent. Michael Zaremski : Okay. Got it. And just lastly, real quick. Thanks for the tax rate guidance. Is the DTA that was established is I think some of some peers have said that they're could be tweaks to to the DTA due to guidance from from Bermuda. Is that something that's influx or any way you could kind of a a handicap whether, you know, if it if a DTA was influx, would it change materially or just a little bit? Francois Morin : Yeah. I mean, the guidance right now and that's an important thing, it's it's guidance that's not the law, which you know, we do follow, obviously, Bermuda law, which allows us or instruct us really to carry the DTA. The recent guidance from the OECD suggests that you know, we may only be able to realize up to twenty percent of that amount. That is still again, that that's the light of guidance. I mean, things change pretty quick in this when we start talking about taxes, but if know, I I'd say you know, from your perspective, maybe worst case, that's kinda what may happen is that we end up only realizing twenty percent of this amount and the rest we might have to write off at some point you know, in twenty six or late twenty six or twenty seven, But for the time being, Bermuda law has not changed, and that, you know, that's what we're following. Michael Zaremski : Appreciate the color. Operator : Thank you. Next question will be from Jimmy Bhullar at JPMorgan. Please go ahead. Jimmy Bhullar : Hey. Good morning. So just had a question. A different topic. On MI reserve releases, can you go through the details on what's driving those and how much of that is from the last one to two years versus maybe a few years back? And just your overall expectations for margins in that business? Francois Morin : Yeah. I mean, the reserve release has come, you know, from both I mean, from all three of our segments. Right? There there's a meaning again, that's a little bit of of the same story that we've we've been talking about the last few quarters where you know, we based on conditions at the time, I wanna say twenty two and twenty three, we had set up initial reserves on the delinquencies that were reported at the time and turns out that people have been curing and and severity has not been to the level that we thought. So that's just a normal, I'd say, kinda You know, process that the reserving, you know, we go through with our reserves at USMI at say for the other pieces, a little bit of the same, I say, in the CRT business where you know, it's a slightly different methodology, but we have initial loss picks on that business and that has proven out to be a little bit kinda in excess of what we need today. So there's been some releases there, and finally, the international book, a little bit of the same too where you know, there there's different methodologies in place, but the the the long story or the, you know, the short of it maybe is that you know, all three books or all three pieces of our mortgage segments are performing really, really well. So we like the margins. We think the margins are are healthy. We don't see any deterioration in how we think about, you know, the business and the returns we're writing today. So if we're very very excited about it. Jimmy Bhullar : And then on share buybacks, I'm assuming part of the reason you did a little bit of buybacks this quarter versus none before was just the decline in the stock price. So assuming the stock's stays around here, Reasonable to assume that you'd be active throughout twenty five as well? Francois Morin : For sure. I mean, it's something we look at, you know, regularly. I mean, every time all the time. No. I mean, in this particular situation, yes, there's old kinda, you know, opportunity in late in the fourth quarter. But, you know, our capital position remains strong even with, you know, the California California wildfires. I mean, that's part of the volatility we may see from time to time, but, you know, whether again, we we will not sit on a level of excess capital that we don't think we can deploy in the business. So if the if we don't you know, we stink we still think we can grow. We we are bullish about twenty twenty five. The market conditions are still really good. Jimmy Bhullar : But Francois Morin : You know, can we deploy all the capital we have or that we generate, maybe not? And at that point, we'll return it then if the price is right, we think share buybacks are a great way to do that. Nicolas Papadopoulo : Yeah. I think the the order of play is that we want to look at where we can deploy capital attractively in the business. I think that we do that all the time, I think. And, yeah, after a while, when, you know, periodically, when we assess our capital position. And if we see that know, the opportunities may not be there to deploy all the excess capital. That's when we consider the the most effective way, I would say, at the time to to return capital to our shareholders. So Jimmy Bhullar : Thank you. Nicolas Papadopoulo : Thank you. Operator : Next question will be from Wes Carmichael at Autonomous. Please go ahead. Wes Carmichael : Hey. Good morning. Thank you. A question on favorable development quarter, particularly in reinsurance. Can you just give us a little bit of color on what drove most of that release and maybe if you had any strengthening. I think you mentioned short tail lines in prepared remarks, but any more color will Okay. Francois Morin : Yeah. The vast, vast majority is on property cat and property other than cat. So that's what we consider to be short line a short tail. We were flat on casualty. So across the reinsurance segment, so no no development on casualty and, you know, a couple of moves up and down marine, other small lines, other small items, but that's the that's the bulk of it. It's really property. Some is, you know, I'd say prior caps, meaning kinda large events that we had reserved for that are developing a bit favorably. Some of it is just you know, the IBNR we hold for, you know, miscellaneous kinda traditional losses that has proven out to be in excess of what we needed. So that's kinda how we we recognize it this quarter through through those lines of business. Wes Carmichael : Got it. Thanks. In in prepared remarks, I think maybe a broader comment, but you mentioned some competitive pressure where that's eroded margins in certain lines of business. Can you just talk a little bit about where that might be more pronounced? Nicolas Papadopoulo : Yeah. So I think was thinking this question was gonna come up. So so I think, you know, it's it's mainly in in two areas. I would say the most feasible one is you know, I would say public public DNO where, you know, I think we we've seen significant decrease in the last in the last two years. In double digits. That seems to be tempering, but the the you know, it's richer level that you you really have to ask yourself you know, account by account. You know? Is is the overall line, you know, still profitable? And second area that we we are watching is in the is the cyber area where, you know, also on the excess side, we've seen, you know, double digit rate decreases and and and the supply of capacity in both know, public DNO and cyber that that don't seem to be wanting to to to to reduce. I think Operator : Did you have any further questions, Mr. McCarmichael? Nicolas Papadopoulo : Yeah. I guess, I'll I'll follow-up with one more. But just on on MI and the delinquency pickup, I I think you mentioned that can be impacted by cat exposed areas and you obviously had a couple sizable storms last year, but just hoping you could unpack a little bit with what you saw in the tick up there. Francois Morin : Yeah. I mean, it's very much part of the natural process. As you'd expect, some people were affected by these events. And, you know, once they, you know, missed two consecutive mortgage payments, they they turned delinquent and, you know, that's what we fully expected would happen in the fourth quarter. About half of the increase in the delinquency rate is is directly attributable to these cap affected areas. I mean, it's it's, you know, that that's our best estimate at this point. The historical cure rate on these types of delinquencies driven by natural events is extremely high. So that's why we think the the financial impact ultimately will be minimal but currently that's, you know, that's how the the process works. They show up in the delinquency rate, and we reserve for those. But Typically, those to get resolved or cured at a high level. Over time. Wes Carmichael : Thank you. Francois Morin : And and just quickly, I'll add I mean, just I'll add quickly on the California wildfires, slightly different different type of exposures we expect minimal again, very early, too early to know, but get given the the the types of mortgages that exist in these areas, we would not expect to be impacted at all or very mean, certainly not significantly at all in In the due to the California wildfires. Wes Carmichael : Understood. Thank you. Yep. Operator : Thank you. Next question will be from David Motemaden at Evercore. Please go ahead. David Motemaden : Hey. Thanks. Good morning. I had a question, and I saw the solid casualty reinsurance growth in the fourth quarter as well as twenty twenty four, and it sounded like that continued at one one twenty five. Yeah. I guess I'm wondering if you could just talk a little bit about the rate adequacy specifically within the casualty reinsurance line. I know it it's a it's a broad line, Right. Little surprising to see you guys lean in there. It sounds like others have been more critical on just the rate adequacy there. So I wonder if you could elaborate a little bit on that. Nicolas Papadopoulo : Yes. I I think, you know, the we started from a position that we were really, I think, underweight on the on the casualty treaty or insurance. And I think our view and it's true, by the way, on the insurance side is that we You know, we we've tried over the years to You know, to to get to get into program that are more, I would say, specialty, casualty. If you think of it as more with an ENS flavor. So Similar to what we would be riding, you know, growing on the on the insurance side, I think it's it's been it's been a while, but I think based on the you know, the the additional cloud that's you know, the value of the brand on the reinsurance side, I think we've been and and and our ceiling companies, you know, forecasting some wavering from the from from maybe some of the reinsurance or less appetite for the casualty, I think we've been able finally get onto probe you know, programs or insurance programs that we we think are backing the the the right people to take advantage of the of the opportunity. So that has been really the the engine behind behind the growth. It's not you know, we're not underwriting the market. We're just underwriting selective underwriters that we think have the the know how and the and the expertise to to be able to to to deliver attractive return for for us. So David Motemaden : Great. Yep. Understood. I yep. Definitely, you guys are are underway there, so that makes sense. And and so maybe just switching gears to the insurance segment. And just wanted to get a little bit more color on the current accident year loss pick increases that you noted. It sounded like it was minor. But wanted to just get a little bit more detail on what lines it was And it didn't sound like that had any impact on the prior year reserve. Any prior year reserve impact. I just wanted to understand, how that's how that happened. Francois Morin : Yeah. I mean, again, I you know, roughly, if we we break it down, call it a third of the increase is is due to the mid mid corporate entertainment inclusion or addition to the segment. There may another third I'd say it's lines of business where we just you know, reacting to the rate environment and example of that would be professional lines like both cyber and d and o where you know, you guys have seen it, we've seen it, you've heard it. Mean, rates have been coming down over the last couple of years pretty significantly and that's a big part of our book. So naturally, I think you'd expect us and we are booking a higher loss ratio this year than we did a year ago, and that's just a function of the rate environment. So that's an example. Another example is some of our auto warranty product, our gap product, where you know, due to, you know, the, you know, different market conditions, different economic realities with the the value of used cars and and what we insure and what we cover, know, loss ratio inched up a little bit there. So nothing that was surprising to us, but, again, we're reflecting or reacting to the data And, you know, that that's and, you know, obviously, there's always mix a little bit at the end, but those I'd say are some examples of kinda minor, kinda small adjustments that contributed to the overall increase. David Motemaden : Got it. Okay. That is yeah. So it doesn't sound like that was any GL or umbrella related pick increases. It was it was more in other lines. Francois Morin : Correct. David Motemaden : Great. You. Francois Morin : You're welcome. Operator : Next question will be from Andrew Kligerman at TD Securities. Please go ahead. Andrew Kligerman : Hey. Thanks a lot. First question, maybe you could drill down a little more into the casualty lines the E and S areas of casualty. Where you'd like to grow or where you are growing in both insurance and reinsurance, respectively. And then with that, could you give us a sense of the rate changes in those areas in both reinsurance and insurance, respectively. Nicolas Papadopoulo : Yes. So those are, I would say, for the large part, similar book of business. So it's really e E and S what we call ENS liability, and it's it's more middle to, you know, high excess layers where we've seen the market know, reacting to the propensity of larger losses in the last last few years. So what's happening in that market is people used to have on the retail side, first, you know, big limits. So once once the once the once the admitted market know, decide that You know, they're not gonna be able to offer those limits anymore. You know, by definition, if you had a two hundred million dollar program with Maybe five or or seven players. You know, now that, you know, the admitted players decide to reduce their limit to ten million, you're gonna need twenty people to And so the the way the market work is and that has been going on for a while, a lot of that business now is getting repriced into the ENS market, not only on the pricing side, but also on the terms and condition. You're able to get exclusion that you will not be able to get on the on the on the on the admitted retail side. So we We like, you know, that that business. We've been riding that business. We've been underway that business for years. You know? And we we have experience We've been riding the business for over twenty years, and we have you know, really specific line of business. I'm not gonna go over it over the the the call, but that we actually have experience in it. We have you know, we know the venues where to ride it. We know, you know, the the the type of severity of claims. We we know we know the exposure to, you know, cover order that's embedded in those in those risk. And so we we're able to selectively And good good companies do that. Effectively pick a subset of the market and we're still getting, you know, very decent rate increases. I think double digits. You know? And I think it has been the weight increase have been going on for a while. They were know, in the twenties, they were in the double digit, then they went to the single digit, then we're back in the double digits of late. And so we we think we're getting rates of a trend. I think we think the business underwritten properly with the right limit think, could be very attractive. But You have to pick and choose. You know, it's it's it's not it's not, again, the the cost of the ball that we make. Andrew Kligerman : You know, that's very, very helpful answers. I I I guess as I think about it, you know, a lot of your competitors are running scared. On on on the high layer excess of loss casualty just just given the inflationary environment. So so maybe just a little color on and and and you kinda gave some of it just in terms of your experience in the market, but but maybe a little color why you don't fear that that that could get out of hand and, you know, we could wake up one day and just see Arch Arch get hit with with a lot of these things. You know, kind of jumping into the high layers, you know, Nicolas Papadopoulo : So this is this is not this is this is what market do. When when you when you have a lot of severity losses, whether it's property or whether it's it's, you know, liability, reaction of the market is to cut limit. So I think if you think think of it. If you have a let's say, fifty million dollar limit. You're writing a hundred million dollar portfolio two short loss, and your loss ratio is a hundred percent. I think what we've seen is people cutting their limit dramatically to fives and tens. So now you know, when we get the full tower losses, the contribution to your portfolio is five or ten million. So it makes you know, the the beauty of diversification, it makes it makes the the your loss ratio a lot more stable. And I think when this happens, because I what what I said earlier, before to do, like, a two hundred million dollar tower, for a program, you needed five seven market because now you need twenty. You know, by definition, it costs a lot more. And so the the the the price adequacy is is is a lot better. So that's what we're seeing. Andrew Kligerman : Got it. Thanks a lot. Operator : Thank you. Next question will be from Cave Montazeri at Deutsche Bank. Please go ahead. Cave Montazeri : Thank you. Another question on cash proceeds, that's why you see good growth opportunities. Seeing good rate increases on the primary side. Because she's also helping quota share of reinsurance. But the city and commissions didn't change much at one one. Despite the adverse development. Carriers continue to face, My question is, what's the incremental supply of casualty reinsurance at one one? Higher than what you would have expected? I know you're writing both, and, yes, we do found the specific line. But it is currently more attractive to write new casualty business on the primary side rather than on the reinsurance side. Nicolas Papadopoulo : Yes. So, you know, as as soon as I'll answer the first question, I think the supply casualty, treasury reinsurance, I think we're hearing bubbles of people on on the call saying that they don't think it's effective. So hopefully hopefully, they withdraw. But right now, I think it's there's plenty of people willing to to ride the business. So I think it's you know, it's a lot of the supplies and demand. I mean, Sydney commission will go down the day where people are putting their food on the ground and on the and say, listen. I'm not gonna ride it unless the commission is down two or three percent. So we haven't seen that. Even on the business that we place, we are you know, ourselves, that we we haven't seen that. So I think that so for sure, I think the you know, the math for the reinsurer you know, they get the rate increase. They get a lower commission. It helps you know, justifying why you would write those those those business. So but I think for us, I think we yeah. We are I think we are more bullish on the primary side today on the ENS side because I think that we have a true expertise there. We underwrite the business one by one. And I think we have we that that would say that's I put it on the list. I would say that goes number one. Being able to you know, there there is good companies out of ours before we we admire or we hire on the right of from I mean, being able to To to support those people on the through our reinsurance team, I think next sense to me. So I think, yeah, I think the the commission may be a little high, but I think if you you pick people that can outperform on on the loss ratio, you you you you may still be alright. Cave Montazeri : Good. And then my second question is still on growth on the primary side this time. Early days, but can you give us an update on how the integration of Medcorp is going? And if the growth prospects how that's evolving versus your expectations prior to the deal? Nicolas Papadopoulo : Yes. So I think you know, I think we're pretty much on plan, to be honest. I think the integration is is it's it's it's a it's a big lift, but I think we we are pretty comfortable so far that things are pretty much on plan. In term of the business itself, it's it's already too bad, but, you know, the the business is pretty much what we expected. I don't think it's Okay. It's better or or worse. I think it's pretty much what what what we had planned for. So Just And I think on the the good news for us on the mid cop aspect is that you know, we're seeing some double digit trade increases on the property side. And And is and it's and also the liability side. So I think on the property side, it's really driven by the secondary periods that have you know, that that you know, not only for us, but for others on the on the market side that have been a problem in the past. So people are you know, we're underwriting around it, but also getting rate increase. And we're seeing the same you know, some of the same rate increase on the total liability in the GL. Cave Montazeri : Thanks. Operator : Thank you. Next question will be from Alex Scott at Barclays. Please go ahead. Alex Scott : Hi. Good morning. First one I have is on the PMLs. And I just wanted to understand, you know, to what degree you all have exposure to aggregate reinsurance treaties and and just when we think about it pro forma for some of the wildfire losses, would that you know, cause any upward pressure of note to the PMLs as we, you know, think about heading into when season. Nicolas Papadopoulo : So we we we we do some, but we have very little exposure to aggregate aggregate release. I think it's as a as a general Undividing philosophy. It's hard enough to price the severity. You know, the frequency is is is really, really hard to to price. So I think we we do it but, you know, when we we really feel that we have because of the line of business and the exposure, a good we could have a good grab on the on the frequency or, you know, the the the we get enough away from the from the frequency that, you know, maybe providing and I gotta get cover makes sense. Francois Morin : So we have very limited exposure to aggregate covers. Nicolas Papadopoulo : Terms of the the PML, can you repeat the same question? I'm I'm I'm I just forgot. Alex Scott : Well, I it it was long the same. I was just trying to understand it. If you had you know, exposure to aggregate treaties, then to what extent would it potentially increase your PMLs? Just thinking through, like, You know, for example, a you know, a primary this morning announced a wildfire number that know, when you look at their baseline cap budget, I think it would know, potentially cause them to to pierce the aggregate. Francois Morin : Yeah. My guess is immaterial for us. Alex Scott : Got it. Okay. And then just as a separate follow-up, on on Midcorp, I just wanted to to probe there. Now that you have Look, it sounds like things are going to plan, but could you could you talk about, like, what portion of those premiums that you've gotten in are going through the heavier remediation and and just how we should think about the trajectory of premiums considering that, you know, there's still some remediation work going on in the background. Nicolas Papadopoulo : I think it's mainly around I would say, the program book of business. When we when we bought Miccoop, memory, again, I think there was a five hundred million dollar book of programs, and this is not what we bought mid corp, and I think we have ourself a significant, I think, I mean, something like you know, in the book of business. I think that's where we try to integrate their teams with our teams and have a very defined risk appetite for, you know, the the the type of under IT manager that we do business with, the the the type of back office integration that we require to get the information very quickly. So I think we we are going through the their book of business to make sure which which one qualify and which one which one doesn't. So Francois Morin : Yeah. To add to that, I mean, we have already kinda taken action on a number of programs, but, you know, given the the period to to notice, I mean, it it will start to show more in the second half of twenty twenty five. The impact of those actions. On the top line at least. And certainly we think the bottom line, you know, the loss ratios will follow as well. Alex Scott : Got you. Okay. Thank you. Francois Morin : You're welcome. Operator : Next question will be from Andrew Anderson at Jefferies. Please go ahead. Andrew Anderson : Hey. Good morning. You'd mentioned deploying capital into London specialty markets. I would have thought that scenario where perhaps a bit more competition has come in and maybe rate is decelerating, but perhaps you'll add a inadequate level. Could you just maybe talk about the growth environment there? Nicolas Papadopoulo : No. So I think we, you know, we I'm personally and we I think we are bullish in the in the lender market. I think the thing that yeah. There is more competition. I think rates have You know, have flattened in in certain of our certain of our business, but I think the the thing that help us in the London market is that we've grown from being a substandard sub scale business to business today that's right close to, you know, in the London market, probably a a billion five or more of of premium. So we are one of the and the market is consolidating around a fewer number of carriers. So we are we are one of the beneficiary of that consolidation. We're not the only one, but I think we're beneficiary, and we we build the team has done an amazing job building leading capabilities in a in a in a number of lines of business, and that makes a huge difference. So I think you know, we get to pick first, which, you know, business is is a huge advantage. Andrew Anderson : Thank you. And then maybe just within reinsurance, it sounds like still kinda positive on PropCat. The the other specialty line, I realize there's probably a number of different businesses in here, but it declined in the quarter. Can you maybe just touch on the drivers of the the decrease year over year? Nicolas Papadopoulo : Yeah. So I think I think, you know, the first first is the fourth quarter is really smaller so smaller of the fourth quarter. So and, you know, we the thing I want people to to understand on reinsurance, it's true in the insurance as well. It's that we are extremely dynamic, you know, We don't you know, if something, you know, doesn't fit or a city company decide to If I sense happened if a senior company decide to change from proportional to to excess, Premium in itself is never our target. We're not trying to replace the premium. We're actually looking for profitable premiums. Those are two different concepts. So I think, you know, in the fourth quarter, what happened is I think we you know, we're starting to have a negative bias on on cyber be honest. I think we we are a big provider of quota share in the cyber side. So a couple of our contracts you know, we either the Citi company retain more, I think is more or we may have cut back on on on the number one based on the the new terms and condition. That explained most of it. So Thank you. Operator : Thank you. Next question will be from Meyer Shields at KBW. Please go ahead. Meyer Shields : Great. Thank you very much. I guess one question for twenty twenty five on the insurance segment. You talk about how reinsurance purchase is your reinsurance outward reinsurance. Has I don't know whether that's a market question or a mid score question or both. Nicolas Papadopoulo : Sure. Meyer Shields : I I think, you know, the may may maybe I understand this, how did it change? Or what what's the outcome? I think the the the one change The one change that we had to do is we had to you know Allianz was buying our insurance to to cover the mid core portfolio, a lot of it being properties, some of it being casualty. So so I think we at one one, I think we on the property side, I think we had to and and and they buy they bought large limit. You know, limits of up to seven hundred or eight hundred million dollars. So I think we had to that was one thing we bought. I mean, so we had to transfer that reinsurance onto, you know, onto an arch you know, managed framework. So outside of the the Allianz CID CID department. So and and within the RCD department. So that happened at one one. I think the team did a You did a great job, you know. And we we kept the capacity, which is a huge part of the the value proposition that the mid corp offer. You know? It's like to be able to compete in the in the middle market, you need large capacity you know, up to seven up to a billion dollars on anyone, you know, account or or or location. So I think we by by being able to do that, I think we secured, you know, a lot of the a lot of the brand or a lot of the value that we we bought I think that was a very satisfactory outcome for us. Meyer Shields : Okay. Great. Thank you. And then, Francois, you mentioned that there's a lot of property and therefore cat risk within the empty portfolio. Right now, obviously, the underlying loss ratio is elevated. Once all of that is done, should Etsy have a lower attritional loss ratio than the legacy arch side of things because of that cat exposure? Nicolas Papadopoulo : So I think the yeah. The the the cat exposure of the mid core business is more around the secondary period than it is around the primary period of hurricane and and so I think we that was something attractive for us because he was very complementary to to to the footprint that we that that we that that we had. So I think you know, The going forward, I think, you know, those secondary barriers you know, attritional catalyst ratio, they they remain. That part of the I mean, we we we we oh, we underwrite, you know, we underwrite the flood. We underwrite the the tornadoes, we underwrite the but, ultimately, the so I don't I I really don't expect you know, the attritional loss ratio coming from the mid corp to to a really churns going forward. Francois Morin : Yeah. That's yeah. I have yeah. Exactly that. I mean, I think pre and post and see after call it, we we fully integrated the business. You know, I would not expect a significant change to you know, the the ex cat loss ratio. Meyer Shields : Okay. Perfect. That's what I needed done. Operator : Thank you. Next question will be from Brian Meredith at UBS. Please go ahead. Brian Meredith : Yeah. Thanks. First, Nicolas DeFranco. I'm just curious. How are you thinking about the potential impact of tariffs on your business? Francois Morin : Nothing significant for us at this point. You know, as you know I mean, the businesses are transacted locally, you know, between local carriers and each of the Jurisdictions in which we operate and You know, so so from that point of view, that that's that's don't think there's an issue there or any concern. Does it you know, does it slow down trade in in the broader sense? Maybe. I think that's you know, I could see a potential impact on a, you know, our coal fast investment, for example. I mean, you could see some some reductions in in world trade and and that how that might have an impact. But I think too early to tell would be our answer. But, you know, that's something, obviously, we're we're We're watching. Brian Meredith : Great. Thanks. And then second question, think you've kinda answered this around that way, but what are you assuming right now in your reserving and pricing with respect to GL, call it, loss trend? Francois Morin : I mean, it varies by sell, but, you know, certainly, it's for the excess business, it's double digits. It's like twelve percent to fourteen percent on the primary E and kinda low limit casualties probably around five. Brian Meredith : That's Francois Morin : Five zero six. Yep. Brian Meredith : Five zero six Mullen County. And then one other one and then quickly switch within here. Y'all have typically done a reasonable amount of structured in your reinsurance. You're you're good at that surplus fleet, that kind of stuff. Are you seeing how much opportunity here in twenty five and twenty six on that? Nicolas Papadopoulo : We don't you know, we we We don't think so. I think there there there has been a few. Again, it's it's really you know, we are in that business. You know, we need the the margin to make sense for us to write it and I think for a while, we were successful because it seems that some of the traditional players were you know, pulling back. So we got a couple of opportunities to participate at our terms in in a couple of transactions. It looks like the maybe some capacity is coming back, so it's it's it's hard to tell. So it's not Something we we we target, I think, is we we are, you know, we are in that business, and we when when something fits, we do it. And if it doesn't, we just don't. Francois Morin : Yeah. We're a a not not a typical arch thing, but a little bit more reactive on that type of business. We we don't drive the the demand for it. Sometimes you have a company that may be into may have some capital issues because of cats or any other some other you know, kinda result or could be reserve development. Who knows? So that's where the you know, it's hard to predict whether the demand will be there these products, but we're we're open for business. Nicolas Papadopoulo : Think we benefit there, Yan, of the the the support we offer to some of our precedents. I think we today, especially in the in the US, we have we are multilingual insurer. So we just don't do the CAT. We do the CAT. We do the risk. We do the quarter share. So know, right now, the the the opportunity that we got one one one of those silly companies, the other problem, they think of us as one of the partners. So they so that's how, you know, some of those opportunities opportunities came to us. It's more like because of all the all the things we were doing for them, they're like, listen, we have this problem in March. Could you help us doing this? And then, you know, the the the they looked at it together. So I think that that that probably puts a bit more tailwind in our ability to do this, but, again, they asked to be the right structure or it has to be the right price. Francois Morin : Great. Appreciate it. Thank you. Operator : You're welcome. Next question will be from Elyse Greenspan at Wells Fargo. Please go ahead. Elyse Greenspan : Hi. Thanks. Just a couple follow ups. First one, Francois, was on the the seven to eight point cat load. I just wanna understand that correctly. That does include the fire. So then would would that also be the cat load for twenty six, or are you assuming in that that the fires kinda take the place of another large loss that you might have seen this year. Francois Morin : Yeah. With that x it it it it does not include the buyers in a a direct way in the January first. This is what we thought the cat losses or cat load was for the year. Now if it turns out that you know, the wildfires, which so far may end up being higher than what our cat load specifically for wildfires for the year would have been, then yeah, there's a chance that we exceed, you know, the total that that total of load, but by the same token, hurricanes end up could end up being lower. So that's truly a a start of the year without any kinda additional knowledge, you know, reflected in that number. Elyse Greenspan : Okay. And then the my second question, on Midcorp, right, when you guys announced the transaction, you said post integration, right, it would run at a low nineties combined ratio. It sounds like from everything you were saying, it's running in track with Plan? So that would still be the target. If you guys said when Like, you know, when when we might see that loan IDs number, like, what year would be considered post integration. Nicolas Papadopoulo : You didn't say when? It's gonna take some time. You know, I think, you know, those things take always longer. I think, you know, the the goal, I think from what we know today, we I think I'm I'm still very comfortable that we get there Again, we have to finish the integration. There's you know, we we for people, we still operating the the business on Allianz systems. So you can see that there's limit to what we can do you know, in terms of insight. And so we we we're preparing for, you know, a lift over ops that we should happen sometime next year. So I think it's gonna take a bit of time. Elyse Greenspan : And then just one follow-up, Francois. I think someone asked a question. Anyone I bet Midcorp would maybe one at the same loss ratio once integrated with Meaning, run at the same loss ratio as legacy arch. Is that what you were saying there? Francois Morin : Yeah. I mean I mean, I haven't done the math recently, but my my expectation would be that, you know, the, you know, again, the ex cap, accident year loss ratio pre MCE, your legacy arch, and, you know, that same metric once you include MCE after the integration's completed, meaning a little bit of remediation on some of the business we acquired, I don't think would be that different. So I think those would be pretty much in line. Elyse Greenspan : Okay. It. Thank you. Francois Morin : You're welcome. Operator : Thank you. I'm not showing any further questions. I would like to turn the conference over to Mr. Nicolas Papadopoulo for closing remarks. Nicolas Papadopoulo : So thank you for your time today, and I yes. We'll see you next quarter. Thank you. Operator *: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. We once again, thank you for attending. At this time, we do ask that you please disconnect your lines.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,013	4	2013Q4	2014Q1	2013-12-19	4.344	4.385	4.687	4.743	null	17.55	17.42	Executives: KC McClure Pierre Nanterme - Chairman and Chief Executive Officer David P. Rowland - Chief Financial Officer Analysts : Bryan Keane - Deutsche Bank AG, Research Division Tien-tsin Huang - JP Morgan Chase & Co, Research Division David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division Kathryn L. Huberty - Morgan Stanley, Research Division Darrin D. Peller - Barclays Capital, Research Division Sara Gubins - BofA Merrill Lynch, Research Division James E. Friedman - Susquehanna Financial Group, LLLP, Research Division Jason Kupferberg - Jefferies LLC, Research Division Operator : Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the Accenture's First Quarter Fiscal 2014 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Managing Director of Investor Relations, Ms. KC McClure. Please go ahead. KC McClure : Thank you, Tom, and thanks, everyone, for joining us today on our first quarter fiscal 2014 earnings announcement. As Tom just mentioned, I'm KC McClure, Managing Director 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 the first quarter. Pierre will then provide a brief update on our market positioning. David will then provide our business outlook for the second quarter and full fiscal year 2014, and then we will take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements or net revenues. Some of the matters we'll discuss on this call are forward-looking, including the business outlook. You should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements and that such statements are not a guarantee of our future performance. Such risks and uncertainties include, but are not limited to, general economic conditions and those factors set forth in today's news release and discussed under the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of these measures, where appropriate, to GAAP in our news release or on 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. Pierre Nanterme : Thank you, KC, and thanks, everyone, for joining us today. We are pleased with our results for the first quarter, which were in line with our expectations. We again delivered profitable growth and returned substantial cash to our shareholders. I'm particularly pleased with our new bookings, which demonstrate that we continue to provide differentiated and highly relevant services to our clients and which position us well for the rest of the fiscal year. Here are a few highlights for the quarter. We did a good, very strong new bookings of $8.7 billion, including consulting bookings of more than $4 billion. We generated revenues of $7.4 billion, a 3% increase in local currency and at the top of our guided range. We delivered earnings per share of $1.15, an 8% increase. We expanded operating margin 30 basis points to 14.8%. We generated free cash flow of $122 million, and we continued to have a very strong balance sheet, ending the quarter with a cash balance of $4.5 billion. And we continue to return substantial cash to shareholders through a significant increase in our share repurchases this quarter versus Q1 last year and the payment of a semi-annual dividend of $0.93 per share, which is a 15% increase over our prior dividend. So we are off to a good start in fiscal year '14 with our business developing in a way that makes us confident in our ability to deliver our business outlook for the year. Now let me hand over to David, who will review the numbers in greater detail. David? David P. Rowland: Thank you. Thank you, Pierre. Happy holidays to all of you, and thanks for joining us today. As I review the results on this morning's call, you'll see that we delivered very good results in quarter 1 as compared to the business outlook that we provided for both the quarter and the full fiscal year. Our results continue to reflect good profitability and cash flow, and our result -- and our revenues landed at the top end of our guided range for the quarter with signs of positive momentum in several areas of our business. So overall, I was pleased with our quarter 1 results, which came in as expected and represent a solid start to the new fiscal year. Now let's get to the numbers, starting with new bookings. New bookings for the quarter were $8.7 billion, the third highest quarter on record as we saw strong demand for our services across many dimensions of our business. Consulting bookings were stronger than expected at $4.3 billion with a book to bill of 1.1. Outsourcing bookings were very good as well at $4.4 billion, following a very strong quarter 4 with a book to bill of 1.3. Taking a closer look at our new bookings, there are several additional points worth noting. Consulting bookings were the second highest quarter on record and exceeded $4 billion for the first time since quarter 2 fiscal '13, reflecting good demand across the 3 components of our consulting business. In particular, systems integration bookings were the strongest in 3 quarters, reflecting double-digit sequential growth and a book to bill at the upper end of our target range. Outsourcing bookings reflected good demand in technology outsourcing with strong sequential growth and a book to bill of 1.3. BPO bookings were solid this quarter, following very strong bookings in quarter 4, and the overall demand environment remains robust. Bookings in Financial Services and H&PS both reflected double-digit sequential growth, providing a solid foundation for the remainder of the year. And lastly, we continued to see strong demand for helping our clients tackle their largest, most complex projects, resulting in 13 clients with bookings over $100 million. Turning now to revenues. Net revenues for the quarter were $7.4 billion, an increase of 2% in U.S. dollars and 3% in local currency, reflecting negative 1% FX impact as compared to the approximately negative 2% impact provided in our business outlook last quarter. Adjusting for FX, we were at the top end of our guided range for the quarter. Consulting revenues for the quarter were $3.9 billion, down 1% in U.S. dollars and flat in local currency. Outsourcing revenues were $3.4 billion, up 5% in U.S. dollars and down (sic) [up] 6% in local currency. Taking a closer look at our operating groups, the results were also very consistent with our expectations. So let me share some of the highlights. Products in H&PS led the way with both operating groups posting 6% growth. Products, our largest operating group, continued their track record of driving a very consistent level of growth, and once again, the results were characterized by broad-based growth across the dimensions of the business, meaning they delivered positive growth in both consulting and outsourcing in all 3 geographic areas and in the majority of industry segments. As expected, H&PS did see some moderation following 9 straight quarters of double-digit growth. Our Health business grew double digits driven by the Americas. Public service growth was also positive for the quarter with very strong growth in the Americas offset by a decline in EMEA. For H&PS overall, we expect some further moderation in the growth in the second quarter before building in the second half of the year. Financial Services grew 3% in local currency, very consistent with what I signaled last quarter. The transformational agenda continues to be a central theme with our clients, which fueled strong outsourcing growth in the quarter across most industries and geographic areas, offset by a modest decline in consulting. Also, it's important to note that we saw overall positive momentum in both EMEA and Asia Pacific with low single-digit growth in EMEA and very significant double-digit growth in Asia Pacific. Resources showed improvement with 1% local currency growth as the business continues to stabilize and position itself for positive growth this year. We continue to focus on repositioning the business in North America and EMEA. That said, we're seeing pockets of strength emerging in certain areas of our resources business, most notably in both our global energy business and Asia Pacific. CMT posted negative 2% growth in the quarter, but we continue to feel good about the actions underway to position the business for sustained, positive growth this year. Our efforts to diversify our CMT business are taking hold, and we see strong demand for transformation-led, value-driven projects where we are uniquely positioned. We continue to be pleased with our progress in the Americas, including very significant growth in electronics and high tech. Moving down the income statement. Gross margin for the quarter was 33.3% compared with 32.8% for the same period last year, up approximately 50 basis points. Sales and marketing expense for the quarter was 12.6% in net revenues compared with 12% of net revenues for the first quarter last year, up approximately 60 basis points. General and administrative expense was 6.1% of net revenues compared with 6.2% of net revenues for the first quarter last year. Operating income was $1.1 billion in the first quarter, reflecting a 14.8% operating margin compared with 14.5% for the same period last year. This 30-basis-point increase reflects a benefit of approximately 20 basis points from a reduction and reorganization liabilities. Our effective tax rate for the quarter was 25.1% compared with 26.8% for the first quarter last year. Net income was $812 million for the first quarter, and it was $766 million for the same quarter last year, an increase of 6%. Diluted earnings per share were $1.15 compared with $1.06 in the first quarter last year, an increase of $0.09. Turning to DSOs. Our days services outstanding continue to be industry leading. They were 34 days, up from 31 days last quarter. Free cash flow for the quarter was $122 million, resulting from cash generated by operating activities of $181 million, net of property and equipment additions of $59 million. Moving to our level of cash. Our cash balance at November 30 was $4.5 billion compared with $5.6 billion at August 31 last year and reflects our share repurchases this quarter in addition to the higher dividends we paid in November. Moving to some other operational metrics. We ended the quarter with a global headcount of about 281,000 people, and we now have approximately 186,000 people in our Global Delivery Network. In quarter 1, our utilization was 87% compared with 88% in quarter 4 last year. Attrition, which excludes involuntary terminations, was 11%, down from quarter 4 and in line with quarter 1 last year. Lastly, we now expect that at least 60,000 people will join our company in fiscal '14. As it relates to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed approximately 9.7 million shares for $722 million at an average price of $74.27 per share. At November 30, we had approximately $6.3 billion of share repurchase authority remaining. Also in November, we paid a semi-annual cash dividend of $0.93 per share for a total of $630 million. This represented a $0.12 or 15% increase over the dividend we paid in May. So in summary, in a market that offered many opportunities but also many challenges, our results came in as expected and gave us a good foundation to build on as we progressed throughout the year. With that, let me turn it back to Pierre. Pierre Nanterme : Thank you, David. At our investor and analyst conference in October, I shared with many of you how we are investing across the board to further differentiate Accenture and capture new ways of growth. Today, I'm going to provide a brief update on some of the steps we are taking to drive further innovation and to continue to build differentiated capabilities and solutions for our clients. Earlier this month, we launched 2 new growth platforms : Accenture Digital and Accenture Strategy. We continue to invest in strategic acquisitions to enhance our capabilities in key growth areas, and we remain focused on positioning Accenture as the partner of choice for large-scale transformation. Let me bring this to life with a bit more detail. Starting with Accenture Digital. Over the last few years, we have made significant investments in building our digital capabilities through Accenture Interactive, Accenture Analytics and Accenture Mobility. With Accenture Digital, we are bringing all of these together to create what we believe is the world's largest end-to-end digital capability. Accenture Digital includes 23,000 professionals working across the entire digital landscape, including developing, implementing and running digital solutions. It leverages the breadth and scale of Accenture's cloud, systems integration and enterprise application capabilities, as well as our Global Delivery Network. Combined with our industry expertise and broad local footprint, we are very well positioned to help clients transform their businesses to compete in a digital world. For Unilever, we built a digital social platform in 12 weeks to connect its marketers, brand managers and partners in 190 countries. We helped BT Sport reach millions of broadband customers by delivering their end-to-end video solution that spans live streaming video-on-demand mobile apps and cloud services. And for a leading European automaker, we are leveraging our mobility capabilities and our connected vehicle business service to bring customers new innovations inside their cars from real-time traffic information to voice-controlled entertainment. We also launched Accenture Strategy, a unique capability focused on strategy at the intersection of business, technology and operations. This new growth platform is all about helping C-suite executives shape and execute their transformation agendas, focusing on issues relative to growth and innovation, industry convergence, geographic expansion and enterprise transformation. In short, we helped them define and implement industry-specific strategies that are enabled by technology. This is our sweet spot, and we truly believe Accenture Strategy will be highly differentiated capability in the marketplace. For example, we are helping a global consumer products company increase its competitiveness and reestablish its leadership position across key product categories. Leveraging our strategy, technology and industry-specific operations expertise, we are helping the company deliver more than $1 billion in bottom line impact. At the same time, we continue to invest in strategic acquisitions to further differentiate our capabilities in key growth areas. Earlier this month, we finalized the acquisition of Procurian, making Accenture the clear leader in procurement BPO. The combination of Procurian's strategic sourcing expertise and our industry expertise will significantly enhance Accenture's end-to-end sourcing and procurement capabilities. We also continue to invest in differentiated industry-based business services. In manufacturing, we are expanding our product life cycle management services through the acquisition of PRION Group and PCO Innovation, which will enhance our ability to help automotive and industry equipment companies deliver products more quickly and efficiently. And finally, we remain the partner of choice for our clients' large-scale transformation programs. We continue to see strong demand for this type of work as demonstrated by our 13 bookings over $100 million in Q1, which David mentioned. We have a long-standing relationship with Dow Chemical and are now helping Dow with 1 of their most strategic transformation initiatives, positioning the company for cost savings and value creation of about $2.5 billion over 5 years. And we helped Ducati, the Italian motorcycle company, transform the way it interacts with dealers and customers. The new global dealer communication system is accessible through mobile devices across 88 countries, helping Ducati analyze sales and services activity to respond in real-time to customer demands. Now let me turn to the geographic dimension of our business. In the Americas, we grew even 4% in local currency with high single-digit growth in the United States, which is our largest market. However, we are facing challenges in both Brazil and Canada. In EMEA, revenues were up 1% in local currency, driven by growth in Switzerland, France, the Netherlands, Germany and Belgium. And in Asia Pacific, we grew revenues 5% in local currency driven primarily by growth in Australia, ASEAN and Japan. That is the strongest growth we have had in Asia Pacific since the first quarter last year. In a global economic environment that is characterized as more or less sluggish, we are managing our business with discipline to increase our competitiveness while continuing to invest to drive further differentiation. I feel confident that we are well positioned to drive more growth in the second half of the year where we will benefit from the return on our investments in launching new growth platforms, building new business services and acquiring new capabilities. With that, I will turn it back to David, who will provide our business outlook for Q2 and the full fiscal year. David P. Rowland: Thank you, Pierre. Before I get into the business outlook, I was told that I may have misspoken on a key metric, so let me just clarify that right now. Our outsourcing revenues were $3.4 billion. They were up 5% in U.S. dollars and up 6% in local currency. So let me now just turn to the business outlook, and let me start by providing some brief context for how we see the remainder of the year before I get into the numbers. From a revenue standpoint, as we've said, the first half of the year is shaping up very consistent with our -- with the expectations we had when we provided our initial business outlook. At the same time, we're seeing signs of momentum in certain areas of our business, and that is reflected in our strong quarter 1 bookings, as well as a very healthy pipeline as we move into the second quarter. Given that, as Pierre said, we're even more encouraged about our ability to drop higher growth rates in the second half of the year. So let's now turn to our business outlook. For the second quarter of fiscal '14, we expect revenues to be in the range of $6.95 billion to $7.25 billion. This assumes a foreign exchange impact of approximately negative 1.5% compared to the second quarter of fiscal '13. For the full fiscal year '14, based upon how the rates have been trending over the last few weeks, we now assume the impact of foreign exchange on our results in U.S. dollars to be negative 0.5% compared to fiscal '13. For the full fiscal '14, we continue to expect net revenue to be in the range of 2% to 6% growth in local currency over fiscal '13. For the full fiscal year '14, we continue to expect new bookings to be in the range of $32 billion to $35 billion. For operating margin, we continue to expect fiscal '14 to be in the range of 14.3% to 14.5%, a 10- to 30-basis-point expansion over adjusted fiscal '13 results. We continue to expect our annual effective tax rate to be in the range of 26.5% to 27.5%. For earnings per share, we now expect full year diluted EPS for fiscal '14 to be in the range of $4.44 to $4.56, or 5% to 8% growth over adjusted fiscal '13 results. Now turning to cash flow. For the full fiscal '14, we continue to expect operating cash flow to be in the range of $3.6 billion to $3.9 billion, property and equipment additions to be approximately $400 million, and free cash flow to be in the range of $3.2 billion to $3.5 billion. Finally, we continue to expect to return at least $3.7 billion through dividends and share repurchases and also expect to reduce the weighted average diluted shares 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 we can take your questions. KC? KC McClure : Thanks, David. [Operator Instructions] Tom, would you provide instructions for those on the call? Operator : [Operator Instructions] Our first question today comes from the line of Bryan Keane representing Deutsche Bank. Bryan Keane - Deutsche Bank AG, Research Division : Just want to ask about consulting. What can we expect for second quarter '13? I guess it came in about flat in revenue in the first quarter. It was about as expected. Should it be another flat? Or should we see a little bit of improvement as we move into 2Q? And then I assume the back half of the year gets a little stronger in consulting. Just looking for some color. David P. Rowland: Yes. If you just -- in terms of time to the overall range that we gave, we think consulting could be flat to low single digit positive. We are encouraged by the bookings that we saw in the first quarter. We're also encouraged by the pipeline that we see going forward in our business but in the second quarter, flat to low single digit positive. And we see the potential for building momentum in consulting as we go through the year. Bryan Keane - Deutsche Bank AG, Research Division : Okay, that's helpful. And then just a follow-up. I guess, I saw you guys increase headcount, just your thoughts around that. And then secondly, on SI bookings year-over-year, is there a growth rate we can think about? I know sequentially, they were up double digits, but I'm just kind of curious how they're trending year-over-year. David P. Rowland: Yes. The headcount, frankly, just reflects -- we're 90 days further into the year. We're that much further with our supply-demand management, our recruiting, planning. We certainly have the visibility of the bookings that we just had in quarter 1. So it really just reflects we're further up the curve, if you will, within the year in terms of our supply-demand management. So that's why we increased the number to at least 60,000 to give you the best possible view of how we see it at this point in time. The SI bookings, I did anchor to the sequential growth, really, to -- because I was trying to give you an indication of current momentum. I actually don't have the number in front of me, but I believe the year-over-year growth in SI was healthy as well. Operator : Next, we'll go to the line on Tien-tsin Huang representing JPMorgan. Tien-tsin Huang - JP Morgan Chase & Co, Research Division : Just similar questions to what just Bryan just asked. Just on the consulting front, it's the first time we've seen book to bill in the first quarter sequentially in quite a while, looks like since '09, if I'm right. So I guess my question here is, is the timing of bookings conversion, has it changed at all in terms of what you've observed in the last several quarters because it sounds like second quarter should be at least flat based on your prior answer? Just trying to gauge what that could -- how that could fill out the rest of the year based on the book to bill. David P. Rowland: Yes, I don't know so much, Tien-tsin, about the timing point. As much as it is, I think last quarter, I mentioned that we felt good about our consulting pipeline, but it was a little bit less mature. And what we had in the first quarter was we were just very successful moving deals at pace through the pipeline and getting work contracted. But it does -- it was broad-based improvement when you look across the 3 components of consulting that we talked about. We were particularly pleased with the consulting activity -- bookings activity in North America, but within North America, we saw good activity across most of our industry segments. And so it was fairly broad based in that sense, both in terms of the type of consulting work that we do, as well as the North America where we saw the strength across many of our industry segments. Tien-tsin Huang - JP Morgan Chase & Co, Research Division : All right, good. And then in just in systems integration, you said the bookings were strong. But can you be a little more specific? I mean, what type of integration work is being demanded? I know that this is a hot topic, obviously. David P. Rowland: Yes. I don't know that I could characterize a common theme if you look to the bookings. It's the mix as you would expect. I think it crosses the platform of services that we provide. Certainly, you -- we also have in there situations where we have application maintenance type contracts where we are also doing development work, new development work within those longer-term contracts that would be in the mix as well. And certainly, digital would be a component of that as well as we continue to be very encouraged by the activity that we see in the digital space and how our capabilities are lining up against those opportunities with our clients. Operator : Next, we'll go to the line of David Grossman with Stifel. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division : I was wondering if I could just kind of follow on to Tien-tsin's question. I mean, obviously, there's been a lot of speculation about how tightly your growth is correlated with some traditional lines of business, like ERP license growth. And I'm wondering just how much work really remains in the installed base independent of license growth and how does the migration of the ERP [ph] vendors, as well as how these other cloud-based applications impact your model. Pierre Nanterme : Yes. I mean, I will take this one and I mean, provide a context of this question, especially around ERP. And let's start with the question around ERP. I mean, first, ERP remains an important part of our business, and it's still an important part of the bookings David alluded to. We are still selling, implementing ERP. And by ERP, I mean mainly finance and accounting application solution, human resources application solution and supply chain application solution. I think this is definition given to the core ERP business. As you know, there've been very significant ERP program 2 or 3 years ago where all the giants been investing and creating their backbone solution to organize their operations, especially on a global basis. These last couple of years, there have been a cycle of lower growth in ERP, but it's still a good business for Accenture. That being said, the vast majority of what we do at Accenture is not falling in that category of application packages, if you will, around finance and accounting, HR and supply chain. We have a much more diverse portfolio of business. David is mentioning digital, where we're enjoying double-digit growth in that category of our business. I'm thinking, of course, about the BPO. I'm thinking about all the -- which is not system integration, of course, about digital. I'm thinking about all the custom solution we're still developing with some clients. And as you know, there are industries out there which are not so much ERP heavy but more custom-made heavy. I'm thinking about financial services. If you take banking and insurance, the core banking system and the core insurance system are still more custom made or packaged but are not ERP per se in the definition of ERP. If you take communication, media and technology, all what we're calling the OSS, the BSS, the system, the billing system, the customer systems are not ERP related in the strict sense of the definition, and we're doing a lot of this as well. So ERP, important at Accenture but not at all the vast majority of what we do. So we are not that dependent on ERP as you might imagine. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division : Very good. That's helpful. And if I could just ask a little bit about the flow of the year, I mean, obviously, we've gotten off to a very good start in bookings, but the guidance, as I think you mentioned your prepared remarks still remains back-end loaded, if you will, on the revenue side. Can you help us better understand what are the dynamics that give you that confidence that revenue growth does accelerate in the back half of the year? David P. Rowland: Yes, there's -- I mean, there are several things that we look at. First of all, as you said, the strong bookings in the first quarter give us a great foundation to build on as we move forward. The second thing is that we do feel very good about our pipeline and how it is shaped up during the quarter even with the very high bookings we had. And we see the opportunity for another good bookings quarter in the second quarter. But beyond that, there's really 3 things that I think I would point to that give us confidence in building growth. The first is that you've heard us talk quite a bit over the last several quarters about our success in selling large-scale transformation programs. We've been very transparent with those numbers each quarter. For example, this quarter, I said we had 13 deals over $100 million. Well, we can now see specific instances, specific contracts where those contracts are building to generate meaningful sources of incremental revenue as we turn the page to the second half of the year. So one element of our confidence ties to the uptick in those large transformation programs starting to impact revenue. The second thing is the investments that you've heard us talk about in creating these new business services, these end-to-end solutions from consulting to BPO such as Accenture post-trade services where we announced the pilot deal, I think it would have been in the fourth quarter of last year. I think I specifically commented at a point that the interesting thing about that opportunity, one of the interesting things was that the revenue ramp occurred after we had been in the program for several months. And so that's another example where some of these new business services, we believe, will start to drive incremental revenue as we turn the page to the second half of the year. And then of course, the third thing would be the investments that we have made in acquisitions as an engine for organic growth. And so Procurian is the one that is the most noteworthy that we closed earlier this month. And so if you look at how -- take Procurian as an example and as we fold that into our Accenture BPO business and we look at the revenue accretion that we'll get from that, that is our third source of confidence as we look at the back half of the year. And so we look at those things in combination, and that, again, gives us reason to be optimistic in terms of our revenue trajectory as we move past the second quarter into the back half. Hopefully, that's helpful. Operator : And our next question comes from the line of Rod Bourgeois with Bernstein. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division : So you posted 3% revenue growth in constant currency in the quarter, and your Q2 guidance implies revenue growth in constant currency. It may not show acceleration, and clearly, your fiscal year guidance implies that acceleration is in the cards. Is your February quarter guidance embedding an extra layer of conservatism due to uncertainty about clients' upcoming budget decisions in the new calendar year? Or are you seeing certain parts of the business that will show added struggle in the February quarter? You had a little bit of that in the November quarter where a couple of the verticals took a step back because of timing. Do you have any of that going on in the February quarter? Or is this just, say, you're being careful with guidance as the new calendar year turns the corner? David P. Rowland: Rod, thanks for the question. The upper end of our range is 4%. If you were to take it out a decimal, maybe a 4 point x percent growth. And so the upper end of the range does show momentum over the 3% that we just delivered this quarter. And of course, our range is established to reflect the possibilities of what could happen in the quarter, but we work very hard to try to drive the business as high in the range as we possibly can. There are a number of things about the second quarter that are just structural aspects of the second quarter. You have holidays in there around the world, including the New Year holiday. You do have the page turn to the calendar year, which you alluded to, and we don't have any particular concerns about client budgets based on what we see now. We don't have any evidence that client budgets would be under pressure per se. But we have seen years where even if the client budgets are expanding in a year, you can have some slower ramp-up in certain instances. We've seen that in the month of January. And so the second quarter is always a more tricky quarter to predict revenue momentum. And so I think the guidance reflects some of that as well. But again, the guidance that we provided is consistent with how we really saw the year building up in the first half of the year, and it's pretty much as we expected and very much in line when we communicated our original guidance 90 days ago. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division : All right. And just the follow-up us to that is, can you quantify how much sequential revenue growth you'll get in Q2 from new acquisitions, particularly the ones that you've done since your last earnings report? How much sequential and year-over-year revenue growth do you expect in the February quarter? And it would be helpful then to see if the -- if your guidance implies revenue growth acceleration at the upper end even after accounting for the newly added acquisitions. David P. Rowland: Yes. Rod, what I would tell you is that 90 days ago on the earnings call, as well as I -- we said that our inorganic contribution would be around 1%, plus or minus. Since then, we've closed Procurian, and so I would tell you that the inorganic would be -- may be a tad higher for the year in the plus or minus 1.5% range, and that reflects Procurian and some of the deals -- other deals that we've closed. That will vary quarter-to-quarter. And I really -- I'm cautious about getting too much in the weeds on the inorganic each and every quarter because, again, you have to remember, in our case, the inorganic is really just an engine for organic growth. We fold these businesses in a very quickly, and they, in many ways, become indistinguishable from our organic business in a very short period of time. So let me just stick with, for the full year, it's going to be in that 1.5% range, and that will vary by quarter. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division : And just to clarify on that, I mean, is that 1.5% range for the year for inorganic growth, is that pretty secure? Or could that number get to 2% before the year ends? David P. Rowland: Well, certainly, it depends on to the extent we do other deals as we progress through the year that are outside of what we assume in that 1.5%. But that 1.5%, plus or minus, right, is the ballpark that we think it's in. I'll remind you as well not to get too much in the weeds on this, but I will remind you of something that I've shared at IA Day. The way we think about inorganic is we look at deals that we have done on a rolling 4-quarter basis. So that is the way we will describe inorganic. That's the way we do the calculation. And again, we do that logically because when we get to the 1-year anniversary on these deals, they are very much embedded in our core -- in our organic business. Operator : Our next question comes from the line of Katy Huberty with Morgan Stanley. Kathryn L. Huberty - Morgan Stanley, Research Division : You talked about Brazil and Canada weighing on America's growth, but I think you said U.S. grew high single digits, and that number was double digits all of next year. So can you just talk about what you think is driving that modest deceleration in the U.S. market? Pierre Nanterme : As you said -- this is Pierre -- it's a modest deceleration for that quarter. I mean, personally, I continue to be externally pleased with our activity in the U.S. U.S. is very important. So we were double digit. I guess, last time, we announced something around 10, even when we said double digit, kind of 10. So high single digits is in the grand scheme of being close enough to where we are expecting to be. For us, what is very important is we grew more than the market. And I guess that this is what is happening in the U.S. as well. We continue to gain market share. And this quarter, it's high single digit, but I have absolutely no concerns that we continue to develop very well in the U.S. It's interesting to see that U.S. performed very well, both consulting and in outsourcing. So it was a very balanced growth across the different dimension of our business. Kathryn L. Huberty - Morgan Stanley, Research Division : And then just as a follow-up, as you know, some of your technology partners are talking about weakness in China due to spy gate or whatever you want to call it. Have you seen an impact on your business in China as it relates to that weakness at some of your partners? Pierre Nanterme : If you look at -- I mean, China, what happened last year, indeed, you have the change in the government. It was in the first half of the -- of 2013 if I remember well. And it's very typical when you're in China that indeed not only the government is changing but all the leaders in the state-owned enterprise, the famous SOEs, are all changing as well. And inevitably, it's creating a kind of pose in China around the major investments scene, if you will, until the new teams and the new leaders will establish themselves with the program and relaunch projects. So again, very pleased with what we delivered this last years in China. Indeed, a couple of -- a form of pose due to this leadership changing in China. But again, on the long term, we continue to be extremely positive with the prospect in China. Operator : And we'll go to the line of Darrin Peller with Barclays. Darrin D. Peller - Barclays Capital, Research Division : Just want to touch on Europe, a little more detail if you don't mind. It's -- it obviously showed at least a very mild acceleration versus last quarter, but maybe more specifics as to what actually is going on from a regional standpoint within Europe, as well as more in the industry vertical and how sustainable is the acceleration. Obviously, that's been a driver for, I think, a lot of investors recently. Pierre Nanterme : I guess it's for me, David, here, the specialist of Europe. I guess, we might start to see the light at the end of the tunnel in Europe. So let me explain. I mean, first, the macro in Europe are not -- I mean, fundamentally better. So I would characterize it's stable, which is probably an improvement compared of all the uncertainties Europe faced these last probably couple of years. Second, you can, indeed, see some signs, to paraphrase David, of positive improvement. I'm thinking about the U.K. You can see the U.K. economy coming back. I'm thinking about France slowly getting out of the recession. I'm thinking about even Spain starting to rebuild competitiveness and better position. We know that all of this is going to be incredibly slow for also a couple of reasons. So there are not going to be any dramatic improvement, but we have some sign of stabilization, plus. And I'm pleased to see that it's starting to reflect in the progress we are making with some of our large markets in Europe. And I mentioned Germany. I mentioned France. I've mentioned the Netherlands, and I've mentioned Belgium, to mention a few, which are doing very well despite economic environments. Still complex, but I would characterize a slight incremental progress but progress. Darrin D. Peller - Barclays Capital, Research Division : When we look -- that's helpful. When we look at your -- the second half of the year acceleration, I mean, is Europe part of that? In other words, do we expect Europe to pick up steam further into the year as well? Pierre Nanterme : Yes. Darrin D. Peller - Barclays Capital, Research Division : All right. That's great. And then just a quick question. A couple of years ago at your investor day, you -- I think you gave a good overview of how large to smash that [ph] was or different areas, whether it was mobility or analytics in terms of revenue size. You had mentioned $1 billion here, $2 billion there. You gave us a good idea as to what percentage your revenue was. Is there a way to update that either now or maybe in another near-term layer [ph] ? Maybe just give us some color now if you can. Pierre Nanterme : I mean, this is -- as you know, we're launching Accenture Digital, and we're going to think on how we would provide more information in due course when we will have, finally, cleaning all the data, all the information in Accenture. We want to be extremely accurate and to define a very strict protocol in the way we communicate the information, so you have a base to measure and a base to evaluate the progress. But indeed, you remember very well that many cross the billion when we announced. So without saying too much, it's a multi-billion-dollar business we're talking about. David P. Rowland: And growing very well. Pierre Nanterme : Multibillions. David P. Rowland: Yes, yes. Darrin D. Peller - Barclays Capital, Research Division : [indiscernible] talking about. If I could just sneak one quick one and now just on the industry verticals. There were some weak pockets in resources, obviously, and communications had a contract also. It seems like that's been resolved, David, is that -- are we on the other side of that now? Pierre Nanterme : I'm going to jump on this one, David. David P. Rowland: He's in a talking mood. Pierre Nanterme : Let me talk to you about the business. I can't explain my instinct. But looking at industry, and I were commenting more specifically [ph], we are covering it with just looking 19 industry segments in Accenture. This is the way we are measuring our different industries, such as banking, capital market, insurance, that -- all that industry segments. 17 out of 19 posted positive growth. And just to give you a flavor first of the depth and breadth of the portfolio of business we're doing, the diversity of what we do across the board, 17 out of 19 in Q1, positive growth. With a few, I'm thinking about life science, health, energy, EHT, electronic and high tech, capital market, high single digit, if not, double digit for some. Now fact of the matter is and you spotted this one, too, on the 19, yet, I have to turn the corner, communications and natural resources. But David will explain. David P. Rowland: Yes, in the case of communications, we have talked, Darrin, several times about the ongoing transformation of the communications sector. We've talked about the challenges of some of the incumbent telcos as their business evolves. And then we've also talked about the headwind we had with the large CMT client in Europe. That headwind will essentially go away in the second half of this year. There is some residual headwind that we continue to have in the first and second quarter of this year. Frankly, as it turned out, not too different than many of the quarters last year. But once we get past the second quarter, I can say definitively that that year-over-year compare dynamic goes away for CMT. So that is still in the mix of CMT's results this quarter and will be in the mix next quarter. In the case of resources, we've also talked -- that was a business that, for many, many quarters, for an extended period enjoyed very strong growth, and it was driven by a very strong consulting business in particular. And we had several of those contracts that wound down as we turned the page from fiscal '12 to '13, and that was right about the same time that natural resources, as a sector, came under significant pressure, including in several markets around the world, Brazil being one. And so -- but with resources, we've done a very, very nice job kind of repositioning the business, moving into new business services areas, new assets offerings, kind of focusing on the new world around digital, et cetera, and we feel very good about the momentum that's building there. Operator : Our next question comes from the line of Sara Gubins with Bank of America. Sara Gubins - BofA Merrill Lynch, Research Division : It looks like you grew your non-GDN staff. It's been over a year since you've done that, and I'm wondering what drove it, if it should continue and if you think that we're now at a more of a steady state of GDN versus non-GDN in terms of employee ratios. David P. Rowland: Well, we had -- we did see some expansion in our headcount in some of our larger, more established geographies. I think, the United States in particular, we saw growth in headcount, and that simply reflects what we're doing on the supply side to have the skills that we need to match the type of work that we're doing as we go forward. In terms of the balance between GDN and non-GDN, I think that continues to -- that will continue to evolve and be fluid. And ultimately, the market will dictate what that mix is. But you are correct in pointing out that we did have growth in our non-GDN headcount. Pierre Nanterme : And I think it's reflecting as well the nature of the services of the businesses we are investing in. And I'm thinking about the Digital. If you look at this Digital business, at least as a starter, it is more onshore driven than offshore driven. I think all the time, before we're going to follow the same path, as we've seen historically from onshore to offshore, that the skills required to be competitive in Analytics, in Mobility, in Digital Marketing are still more onshore, which might as well reflect this take-up if you will. Sara Gubins - BofA Merrill Lynch, Research Division : That makes sense. Second question, to hit the bookings guidance for the year, it looks like the rest of the year bookings would have to be down quite significantly to maybe up very slightly. But given the first quarter strength in your commentary around the second quarter, I'm wondering if you're really expecting weakness in the second half. Or is this more just a function of being conservative since it's early in the year? David P. Rowland: Well, Sara, as you know, bookings can be lumpy from quarter-to-quarter, so I'll just remind you of that. But I'll also say that bookings is like every other metric. We're working as hard as we can to be as far up in the range as we can. And we don't -- there's -- I mean, we just finished one quarter, right? And so we -- as much as we see some reason to be encouraged after one quarter, I don't -- I guess, I don't remember a fiscal year where we've changed annual guidance after a quarter. And all the possibilities and scenarios that we evaluated when we started the year are still in play. Operator : The next question comes from the line of Jamie Friedman representing SIG. James E. Friedman - Susquehanna Financial Group, LLLP, Research Division : Pierre, did your bookings growth on a regional level support your expectation that Europe will accelerate in the second half? Pierre Nanterme : Yes, absolutely. It's -- I mean, the nature and the construct of the booking by region supporting the fact that Europe should accelerate in the second part of the year. James E. Friedman - Susquehanna Financial Group, LLLP, Research Division : Okay. And then with regard to digital, I just wanted to go back to a previous question about sizing that market. And without getting too specific, though, I was just wondering about how you're defining digital. Is that the Brian Whipple group, which is Accenture Interactive? That seems much larger than that seeing that you're saying there's 25,000 people there. So what do you mean when you're saying digital these days? Pierre Nanterme : Yes, it is. What we're putting in it, you would find Accenture Interactive, which is the organization dedicated to end-to-end digital marketing capabilities. We are adding Accenture Mobility, which is all about developing, implementing and potentially running mobile solutions. And three, it's Accenture Analytics, which is all about, I mean, mining and doing all the analytic information, including the most advanced analytic and predictive analytics. So it's all the 3 from design to implementation, including the run. That's why we have 23,000 people because, of course, part of our people in the current GDN, Global Delivery Network, are providing the services as well for the execution. James E. Friedman - Susquehanna Financial Group, LLLP, Research Division : And then last question, at the IA Day on October 8, you had previewed movement in some of the operating groups. I was just looking for some update from this vantage point about 2. You had said, I think, accurately, that HPS (sic) [H&PS] would decelerate. And then resources, you had a cautious view for the full year. So looking forward at the dynamic of growth of both of those, should we continue to that sequence to play out for the rest of the year? David P. Rowland: Yes, we had -- we see some potential for further moderation in H&PS in the second quarter, which I said in the prepared comments. But to be clear, we feel very good about our H&PS business, and we think we're very well positioned as we then progress through the rest of the year. On resources, we do think that resources will be positive this year. And as I commented earlier, we see good momentum in certain parts of the resources business to give us reason to believe that. So we are pleased with the progress. There's still work to do in resources, but we do think that we'll be positive for year. Operator : Our final question today will come from the line of Jason Kupferberg representing Jefferies. Jason Kupferberg - Jefferies LLC, Research Division : I just wanted to circle back on the back half a little bit just to make sure that we're in full command of the numbers here. So I guess, if you come in at the midpoint of your Q2 revenue range, it looks like that would put you through the first half of year, at roughly 2.5-ish percent, in terms of constant currency growth. And so what I'm really trying to get at here is, is it prudent for us collectively to be thinking about the lower half of your full year range as being more likely than the upper half? I mean, obviously, you aspire to do better than the midpoint, but just based on where you'll be through the midpoint of the year and given that conversion of consulting bookings to revenue over time has been a little bit unpredictable, can you just comment on whether or not the lower half looks more likely at this juncture in time? David P. Rowland: Jason, it was a noble attempt, but I'm not going to color within the range after just one quarter of results. We set the range to represent the range of possibilities that we see. And if we didn't think that there was a possibility of being in the upper half of the range, we would have narrowed the range. And so as we progress through the year, we'll get more specific, and the second quarter will be important in terms of how that plays out. Jason Kupferberg - Jefferies LLC, Research Division : And just lastly, a bigger picture question around Europe. We've been picking up more data points, seems to be suggesting more willingness among European clients on the continent to use more low-cost delivery, if you will. And obviously, that kind of offshore market is quite underpenetrated. Are you guys seeing that? Do you see that as being purely additive? Has some of it kind of will stick to your traditional onshore work in Europe? We'd just love your thoughts on how that might play out. Pierre Nanterme : No, we believe -- I mean, first, indeed, there is, for all sorts of competitiveness reason, appetite for the -- our clients in Europe to leverage more outsourcing fueled by offshore. That's a fact. This trend started more, as you know, in the U.K., in the Nordic countries, and now it's going south in more Continental Europe and touching France, and Netherlands and other markets. That's our point of view [ph] . Again, so it's yes, this one is there. It's playing, we believe, in our favor. A few data points on this is, first, our outsourcing business in Europe is developing very well. If you look these last couple of years, outsourcing been doing -- has been our strong growth point in Europe. And from a cost standpoint, we believe that with our network of delivery centers and with our GDN, we have, indeed, the right cost response -- cost-effective response to this market as we invested earlier in the GDN, if I may say, compared to more local players. All right. It's probably time now to wrap up. And thanks again for joining us on today's call. With the first quarter behind us and looking at how the business is shaping up for the rest of the year, I feel confident that we have made the right choices, that we are making the right investments and that we are moving at the right pace to capture new waves of growth and position Accenture for the future. Of course, I want to take this opportunity to wish all of you, our investors, analysts and of course, our Accenture people who are listening to the call a very happy holiday season and 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 KC. Happy holiday season, and all the best. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 a.m. this morning, Eastern Time and running through March 27, 2014, at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1 (800) 475-6701 and entering the access code of 311250. International participants may dial (320) 365-3844. That does conclude our conference for today. We thank you for your participation and using the AT&T Executive TeleConference service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,014	1	2014Q1	2014Q2	2014-03-27	4.435	4.477	4.803	4.855	null	16.68	17.03	Executives: KC McClure - Director of IR Pierre Nanterme - Chairman and CEO David P. Rowland - CFO Analysts: Tien-Tsin Huang - JPMorgan Chase & Co. Joseph D. Foresi - Janney Montgomery Scott LLC Keith Bachman - BMO Capital Markets Jason Kupferberg - Jefferies & Co. Edward Caso - Wells Fargo Securities James Friedman - SIG Bryan Keane - Deutsche Bank Kathryn L. Huberty - Morgan Stanley Darrin Peller - Barclays Capital Ashwin Shirvaikar - Citigroup Inc. Operator : Ladies and gentlemen, good morning. Thank you for standing by, and welcome to Accenture's Second Quarter Fiscal 2014 Earnings Conference Call. At this time, all lines are in listen-only mode. Later there will be an opportunity for your question and instructions will be given at that time. (Operator instructions) And as a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Managing Director of Investor Relations, Ms. KC McClure. Please go ahead. KC McClure : Thank you, Tom. And thanks everyone for joining us today on our second quarter fiscal 2014 earnings announcement. As Tom just mentioned, I'm KC McClure, Managing Director 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 then take you through the financial details including income statement and balance sheet along with some key operational metrics for the second quarter. Pierre will then provide a brief update on our market positioning. David will then provide our business outlook for the third quarter and full fiscal year 2014. And then we will 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 are forward-looking including the business outlook. You should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements and that such statements are not a guarantee of our future performance. Such risks and uncertainties include, but are not limited to, general economic conditions and those factors set forth in today's news release and discussed on the risk factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. During our call today, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. As a reminder, in Q2 of last year our results included benefits from final determinations of prior year U.S. Federal tax liabilities and a reduction in reorganization liabilities. 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 www.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. Pierre Nanterme : Thank you, KC. And thanks everyone for joining us today. Our results for the second quarter were pretty much in line with our expectations. We achieved record new bookings, delivered revenues within our guided range and grew earnings per share while continuing to return substantial cash to our shareholders. Here are a few highlights. We delivered outstanding new bookings of more than $10 billion, including record consulting bookings of $4.6 billion and record outsourcing bookings of $5.5 billion. We generated revenues of $7.1 billion, a 3% increase in local currency and above the midpoint of our guided range. Earnings per share were $1.03, compared to $1 on an adjusted basis in the second quarter last year. Operating margin was 13.3%, which is flat compared to the second quarter last year on an adjusted basis. Our balance sheet remains very strong ending the quarter with a cash balance of $3.7 billion. And we continued to return cash to shareholders through share repurchases and dividends. Today, we announced a semiannual cash dividend of $0.93 per share which will bring total dividend payments for the year to $1.86 per share, a 15% increase over last year. So, overall, we're pleased with our results for the first half of fiscal year 2014 and are encouraged by our very strong bookings of nearly $19 billion year-to-date, which position us well for the second half. We have updated our business outlook for the full fiscal year and David will cover it later in the call. Over to you, David. Dave P. Rowland: Thanks, Pierre. And as always, it's great to have the opportunity to talk with you about our financial results and how we're positioned for the full year. Before I get into the detailed results for the quarter, let me start by providing a few overall highlights. Our second quarter results reflected some clear areas of strength, but also some areas where we expect to perform better in the second half of the year. The bright spot was clearly in our new bookings where we posted $10.1 billion, setting new records in several areas of our business and providing further indication of how our differentiated capabilities are resonating with the market. Net revenues landed in the general zone that we expected, with 3% local currency growth, slightly above the midpoint of our guided range. On the profitability front, our operating margin for quarter two was flat with last year, resulting in 20 basis points of expansion for the first half of the year, solidly in our annual guidance range, but does reflect pricing and cost pressures in certain areas of our business which we're working hard to address. At the same time, we continued to invest at higher levels in our business and return a significant portion of our cash to our shareholders. So, all in all, quarter two was a solid quarter. With that, let's get to the numbers, starting with new bookings. New bookings for the quarter were extremely strong at $10.1 billion, representing an all-time high. Consulting bookings were $4.6 billion, with a book-to-bill of $1.2 billion. Outsourcing bookings were $5.5 billion, with a book-to-bill of $1.6 billion. Looking further at our new bookings, there are several additional insights worth noting. Consulting new bookings were the highest quarter on record, building on our strong consulting bookings performance in quarter one. We saw good demand in both systems integration and management consulting, with both posting book-to-bills above the upper end of our target range. Outsourcing bookings were also at an all-time high, driven by extremely strong record bookings in BPO, where the demand environment remains robust and where we saw particularly high demand for our finance and accounting offerings. Technology outsourcing bookings were a little lighter this quarter; following strong bookings performance in quarter one. From an operating group perspective, CMT and Financial Services were the primary drivers to our strong bookings performance, which further strengthens their position for higher growth in the second half of the year. And finally, our results include 10 clients with bookings in excess of $100 million, as we continue to be the business partner of choice for helping our clients tackle their largest, most complex projects. Turning now to revenues. Net revenues for the quarter were $7.13 billion, an increase of 1% in U.S. dollars and 3% in local currency, reflecting a negative 1.5% FX impact, consistent with the assumption we provided in December. Consulting revenues for the quarter were $3.7 billion, down 1% in U.S. dollars and flat in low local currency. Outsourcing revenues were $3.4 billion, up 4% in U.S. dollars and 5% in local currency. Let me give you some highlights from the operating groups this quarter. Financial Services grew 5% in local currency with broad based double-digit growth in capital markets as well as continued strength in outsourcing overall. We're very pleased with growth rates in both EMEA and Asia-Pacific, and continue to be focused on driving improved growth rates in North America. Once again, our Products operating group delivered a very consistent level of growth, well above the Accenture average growth rate, at 5% growth in quarter two. The revenue drivers were similar to last quarter, meaning we continued to see broad based growth with positive growth in both consulting and outsourcing in all three geographic areas and in the majority of our industry segments. CMT returned to growth at 2% this quarter and we continue to see signs of positive momentum driven by demand for transformation-led value-driven projects. Our efforts to focus the business on new growth areas continue and we're seeing the impact in strong consulting growth across all of our geographic regions. The Americas region continues to be the primary driver of growth, especially in electronics and high tech. H&PS growth for the quarter was 1%. And while we did signal some moderation in growth from quarter one, growth in the quarter was a little lower than we expected. Our Health business continued to have strong growth, particularly in the Americas. Our Public Service business had a modest decline in the quarter as the environment in Europe continues to be challenging. Looking ahead, we expect a ramp-up in H&PS growth in the second half of the year, beginning with a significant uptick in quarter three. Resources growth was flat in quarter two. The energy business continues to be the real bright spot globally with double-digit growth. But cyclical challenges in natural resources continue to negatively impact the overall growth rate of our Resources business. Having said that, we do still expect to have positive growth for the year. Before moving down the income statement, let me provide some overall context on the factors impacting our profitability this quarter. Specifically, our operating results for the quarter reflect lower contract profitability, primarily driven by pricing pressures and our challenge in absorbing higher payroll cost and to a lesser extent, lower margins in the early stages of a few large contracts. At the same time, our results also reflect a higher level of investment in the quarter to build new capabilities, including strategic acquisitions aimed at enhancing our capabilities in key growth areas. And while we have accrued a significant amount of variable compensation this year, we did accrue a lower amount in quarter two compared to the second quarter last year, which offset the factors previously mentioned. This lower variable compensation expense reduced accrued payroll in the balance sheet and is the primary driver for the reduction in our free cash flow guidance for the year, which I'll cover later. To be clear, our profitability does vary quarter-to-quarter and it's normal for us to have certain periods where we have areas of cost pressure which require intervention. And as always, we understand the areas that need attention and we're taking action at speed and with the rigor and discipline that our investors have come to expect. Now to the numbers. Gross margin for the quarter was 31.3% compared with 31.6% for the same period last year, down approximately 30 basis points. Sales and marketing expense for the quarter was 11.7% of net revenues compared with 11.8% of net revenues for the second quarter last year, down about 10 basis points. General and administrative expense was 6.2% of net revenues compared with 6.5% of net revenues for the second quarter last year, down approximately 30 basis points. As a reminder, we had two unusual items that impacted certain metrics in quarter two of last year. The following comparisons exclude the impact and reflect adjusted results. Operating incomes was $951 million in the second quarter, reflecting a 13.3% operating margin, equal to the adjusted operating margin for the same period last year. Our effective tax rate for the quarter was 24% compared with an adjusted tax rate of 24.8% for the second quarter last year. Net income was $722 million for the second quarter compared with adjusted net income of $720 million for the same quarter last year. Diluted earnings per share were $1.03, compared with adjusted EPS of $1 in the second quarter last year, an increase of $0.03. Turning to DSOs, our days services outstanding continued to be industry leading. They were 33 days, down slightly from 34 days last quarter. Free cash flow for the quarter was $216 million resulting from cash generated by operating activities of $292 million, net of property and equipment additions of $76 million. Cash flows for the quarter and year-to-date have also been impacted by lower accrued variable compensation expense, which I previously noted. Moving to our level of cash. Our cash balance at February 28 was $3.7 billion compared to $5.6 billion at August 31 last year. The current levels reflects the cash returned to shareholders through repurchases and dividends as well as the higher level of acquisitions we've made in the first half of this year. Moving to some other key operational metrics. We ended the quarter with a global headcount of about 289,000 people and we now have approximately 192,000 people in our global delivery network. In quarter two, our utilization was 87%, consistent with last quarter and slightly down from quarter two last year. Attrition which excludes involuntary terminations was 12%, up approximately 1% from both quarter one in the same period last year. And lastly, we continue to expect that at least 60,000 people will join our company in fiscal 2014. Turning to our ongoing objective to return cash to shareholders. In the second quarter, we repurchased or redeemed approximately 9.2 million shares for $739 million at an average price of $80.40 per share. Year-to-date, we have purchased 18.9 million shares for approximately $1.5 billion at an average price of $77.25 per share. At February 28, we had approximately $5.8 billion of share repurchase authority remaining. As Pierre mentioned, our Board of Directors declared a dividend of $0.93 per share, representing a 15% increase over the dividend we paid in May last year and this dividend will be paid on May 15th, 2014. So, in summary, with the first half of the year behind us, we're generally where we expected to be at this point in time. We see definite signs of building momentum in the market and in many areas of our business, yet the environment continues to be challenging and we're focused on what we need to do to deliver the year. Our focus, as always, is to leverage our strong position in the marketplace to capture the growth potential we see and to proactively manage the operations of our business to maximize profit, cash generations, and our overall return to our shareholders. With that, let me turn it back to Pierre. Pierre Nanterme : Thank you, David. At Accenture, we're extremely focused on executing our growth strategy. And our record new bookings for the second quarter and for the first half of the year demonstrate that our services remain highly differentiated and are clearly resonating with the needs of our clients. One of the things that truly sets Accenture apart is that we combine our capabilities across consulting, digital, technology and business process outsourcing to deliver tangible results for our clients. Let me bring this to life with some key wins in the second quarter. We were selected by a global communications equipment company to provide HR, IT and finance and accounting services as part of a multi-year business transformation that is expected to deliver cost savings of more than $1 billion. We signed a long-term agreement with Monte dei Paschi di Siena, a large Italian bank, to provide finance and accounting, administration and other back office services as part of a strategic restructuring plan to enhance the bank's competitiveness in the marketplace. We were also selected by a high tech leader in security systems to support the company's transformation across more than 90 countries. We will provide HR, finance and accounting and procurement services, leveraging our recent Procurian acquisition to reduce costs and improve operational efficiency. And I'm personally very pleased that a few weeks ago, we announced a unique new business model with SAP that we believe is a true game-changer in the industry. Through the newly formed Accenture and SAP Business Solutions Group, which includes dedicated experts from both companies, will jointly develop integrated, industry-specific and cloud-based solutions. Our broad industry and technology capabilities have enabled us to build long and enduring client relationships with the world's leading companies. We continue to operate at the heart of our clients' businesses, especially when it comes to executing large scale, mission-critical programs that deliver tangible outcomes. For China Electric, we designed, implemented, and deployed a salesforce.com solution to more than 26,000 users in 100 countries, the largest sales force implementation in Europe. The new cloud-based solution has already delivered value by increasing cross-selling and account coverage by 20%. For Endesa, one of the world's largest electric power companies, we're supporting the rollout of more than 13 million smart meters in Spain. Through a multi-year business process outsourcing agreement, we're facilitating the expansion of smart metering operations and integrating existing billing systems and business processes. And for a global pharmaceutical company, we're arming sales reps with a variety of digital technologies across tablets, smartphones and PCs, to deliver a personalized user experience to doctors in more than 200 countries. These new digital promotion and sales program has already delivered $15 million in savings. Turning now to the geographic dimension of our business. In the Americas, we grew revenues 4% in local currency, which is consistent with Q1. Growth was driven by the United States and we're pleased that our business in Brazil is starting to turn the corner. In EMEA, revenues were flat in local currency compared to the second quarter last year. We're starting to see good pickup in growth in important countries such as Switzerland, the U.K., Italy, Germany and France. And in Asia-Pacific, we grew revenues 4% in local currency, driven by continued strong growth in Japan. Before I close, I want to share something I'm personally very proud of. You have often heard me speak about our diamond clients, which are our largest client relationships and increasing the number of diamond clients is clearly a priority for us to drive more growth. I am pleased that we added 16 new diamond clients in the first half of the fiscal year, which brings us to a net total of 138 diamond clients, an all-time high. Before I hand back to David, I want to comment on the global economic environment which, frankly, continues to be challenging especially in the emerging markets. As you would expect, we're carefully monitoring the recent geopolitical developments in Eastern Europe, which are introducing an additional level of uncertainty in the marketplace. That said, given our strong bookings year-to-date and the level of activity we're seeing, I continue to feel confident that we're well-positioned to drive more growth in the second half of the year. With that, I will turn it back to David who will provide our business outlook for Q3 and the full fiscal year. Dave P. Rowland: Thanks, Pierre. Let me now turn to our business outlook and let me start by saying based on where we are for the first half of the year, we've of updated most of the metrics in our business outlook. For the third quarter of fiscal 2014, we expect revenues to be in the range of $7.4 billion to $7.65 billion, this assumes the impact of FX will be flat compared to the third quarter of fiscal 2013. For the full fiscal year 2014, based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollars will be negative 0.5% compared to fiscal 2013. With strong bookings in the first half of the year, balanced with 3% revenue growth year-to-date, we now expect net revenue for the full fiscal 2014 to be in the range of 3% to 6% growth in local currency. For the full fiscal year 2014, we now expect new bookings to be in the range of $33 billion to $36 billion. For operating margin, we continue to expect fiscal 2014 to be in the range of 14.3% to 14.5%, a 10 to 30 basis point expansion over adjusted fiscal 2013 results. We now expect our annual effective tax rate to be in the range of 25.5% to 26.5%. For earnings per share, we now expect full year diluted EPS for fiscal 2014 to be in the range of $4.50 to $4.62 or 7% to 10% growth over adjusted fiscal 2013 results. Turning to cash flow. We now expect operating cash flow to be in the range of $3.3 billion to $3.6 billion, with property and equipment additions remaining at approximately $400 million, and free cash flow now in the range of $2.9 billion to $3.2 billion. We've lowered our cash flow guidance to reflect our updated assumption that we will accrue lower variable compensation due to higher current year operational spending as compared to what we assumed in our original guidance range. Finally, we continue to expect to return at least $3.7 billion through dividends and share repurchases and also now expected to reduce the weighted average diluted shares outstanding by approximately 3%, as we remain committed to returning a substantial portion of cash to our shareholders. With that, let's open it up, so that we can take your questions. KC? KC McClure : 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 on the call, please? Operator : (Operator Instructions) Our first question today comes from the line of Tien-Tsin Huang representing JPMorgan. Please go ahead. Tien-Tsin Huang - JPMorgan Chase & Co.: Great. Thanks so much. I want to first ask on the comment that you made on contract productivity and pricing pressure, can you elaborate there? Are you -- sounds like you're unable to pass along higher payroll costs or maybe you're seeing outright pricing pressure, can you elaborate in what areas? Thanks. Dave P. Rowland: Yeah I would say, Tien-Tsin, by the way, hello, good to talk to you this morning, I would say that the dial is probably turned up a little bit since last quarter in terms of the pricing environment and there's a couple of factors that are worth noting. One is that the ongoing trend in vendor consolidation is influencing the pricing environment. And then secondly, we have seen more pricing pressure, if you will, in certain areas, and in particular in the application services area where the environment competitive characteristics are such that price is becoming very prominent in the bidding process. So, that's what we see on the pricing front. We also have seen some pricing pressures on our existing book of business and what that means specifically as you alluded to is we're a little further behind where we had expected to be and able -- in terms of being able to pass cost rates through on our existing contracts. And so those are the two dynamics that we saw in our second quarter results. Tien-Tsin Huang - JPMorgan Chase & Co.: Understood, makes sense. Just my follow up then just -- obviously the bookings were very strong, high book-to-bills in consulting which is great. Just curious though on the revenue productivity or the revenue production, I guess, that came in the middle of guidance after beating the last couple of quarters, if I'm remembering that correctly. So, what are the biggest factors that changed in terms of revenue production this quarter? Dave P. Rowland: Well, I would -- Tien by the way, I think last quarter we were at the upper end of the range. But I think one factor clearly is what we just talked about, is the pricing both on new work and existing work and then how that ultimately impacts the conversion to revenue. We do see a situation in consulting in particular where from a volume standpoint we're actually seeing very strong growth, and in fact, I would say that our volume growth is where we expected, if not better. The pricing environment is impacting that such that we're getting the net result in our revenue growth in consulting in particular. Tien-Tsin Huang - JPMorgan Chase & Co.: That's helpful. I appreciate it. Dave P. Rowland: Thank you. Operator : Our next question is from the line of Joseph Foresi with Janney. Please go ahead. Joseph D. Foresi - Janney Montgomery Scott LLC : Hi, just going back to pricing, could you help us reconcile -- and usually pricing competition is an indication of either a slowdown or a maturity, yet the bookings are really strong. Can you help us reconcile those two pieces? Dave P. Rowland: Well, let me make a comment and then Pierre may have a few comments as well. I would say in this case to the contrary the environment is actually quite strong. We feel very good about our pipeline, even with the conversion of such a large portion of our pipeline to bookings last quarter. So, the level of client discussions that are taking place and clients' willingness to contract work is actually quite strong. Having said that, if there is a common theme and we've talked about this for several quarters now, clients are by and large focused on cost optimization. I think that is a trend that we see almost in every industry and every market around the world. And so clients are moving forward, driving the business forward, looking at investments that they need to make, but they're doing it with an eye towards being very cost conscious in the contracting investments they're making in their business. Pierre Nanterme : Yeah, without piling on David, this is exactly right. We see demand in the marketplace. Definitely reflecting result, very strong bookings both in consulting and outsourcing and we have excellent win rates as well. So, the main issue -- and we're working on it, or challenge if you will more than an issue, because we're working on it, is more in application services. This business is highly competitive and clients continue to be very mindful, thoughtful, good negotiators with procurement and so it's putting some very specific pressure in that part of the business. Now, that being said, we have other parts of the business and I'm thinking about digital, for instance and consulting, where the price is stable or even we can pass the price. So, it's always the same pattern, if you will. When you can differentiate and provide differentiated innovative solutions, you can keep your price stable or even improve your price. But in the market which is more like application services, less around innovation, if you will, even if we're working hard on it to differentiate, there is some price pressure because the competition is quite intense. Dave P. Rowland: And I'll just -- without piling on, there's probably one other nugget which is worth noting, is that the success that we've had with the larger transformational deals, we've actually seen very stable pricing on those large contracts that as a portfolio has met our expectations. We have seen, as I called out in my prepared comments, that on many of these contracts, the way they are structured, the profitability is a little lower in the earlier term of the contract. But overall, the pricing for these larger contracts where we are highly differentiated has held up very well as well. Joseph D. Foresi - Janney Montgomery Scott LLC : Okay, that's helpful. And then my follow-up obviously guidance is backend loaded in your fiscal year. Maybe you could give us some color as to where the confidence is coming from that that's going to be the progression throughout the year. Obviously the bookings are strong, but we've seen quarters in the past where there's been a slower conversion rate of those bookings. So, are these large deals that are going to hit in the back half of the year, how should we think about the ramp? Dave P. Rowland: I think there's probably four things I would call out. The first thing I would say is that first of all, we've got the foundation generally that we expected to be at the halfway point and so there's no real surprises -- excuse me, from that perspective. The second thing is the fact that we do have strong -- very strong bookings and in fact, if you look at the bookings we've had over the last two quarters, it is as strong as any two quarter period we've ever had. The third thing I would say is that -- excuse me, the three themes that we called out last quarter, which you may remember, we talked about the impact that the transformational deals that we've sold over the last several quarters, the revenue ramp that we see in those contracts. We talked about the investment that we have made in business services and how that would begin to impact our revenue in the second half of the year. And then we also talked about the return that we would get from the investment that we have made in several acquisitions and the impact that that would have. Excuse me; I actually have a frog in my throat. But those are the main things I would call out in terms of the reasons for our confidence in the back half of the year. Joseph D. Foresi - Janney Montgomery Scott LLC : Thank you. Pierre Nanterme : Sorry for the frog, David. Hopefully, nothing to do with the (indiscernible). Joseph D. Foresi - Janney Montgomery Scott LLC : Water could probably help right there. Pierre Nanterme : Yeah, yeah, nothing personal between David. But -- no you're exactly right; I think we feel confident with the second part of the year, exactly that we are where we expected to be. And the large scale transformation program together with the return on the investments we're making and good pipeline, good book-to-bill, and good contracted revenues as well. If you combine all of these factors, they represent a strong basis for confidence for the second part of the year. Joseph D. Foresi - Janney Montgomery Scott LLC : Thank you. Operator : Our next question comes from the line of Keith Bachman with Bank of Montreal. Please go ahead sir. Keith Bachman - BMO Capital Markets : Hi, I had two questions also if I could. The first is on the consulting side. Your book-to-bill was very strong this quarter. If I look back over the last six or plus quarters, it's been over 1, yet it hasn't translated into positive revenue growth. So, in the February quarter, it was a relatively easy compare, it still came in zero. Could you comment on how you see the growth over the next couple quarters in consulting specifically, please? Dave P. Rowland: Yeah. For the full year, we still see consulting being flattish to low single-digit positive. With our outsourcing, by the way, being mid-to high single-digit positive, so our view of consulting really hasn't changed from where it was when we started the year. Again, a little bit of connecting the dots between the bookings and the translation to revenue is what I referenced earlier, is that we actually are seeing quite a bit of growth from a volume standpoint. What we've seen is in the application services area especially is that we've seen a higher ramp-up or a reacceleration, if you will, in using our global delivery network. And so we have -- if you looked at the work that we're delivering to our clients in volume terms in consulting overall, it's actually up quite nicely. But again, we've got the dynamic of the revenue yield per hour as we're using our GDN capability at a higher level compared to the same periods last year. This is a dynamic that we've seen before. It's part of the ebb and flow of our business. We've managed through it before and we're in the process of managing through it now. Keith Bachman - BMO Capital Markets : Okay. Well, then my follow-up relates to the cash flow. You mentioned that cash flow guidance is coming down. I think you said, health is lower variable comp, but I heard is operational investments. And I was wondering if you could elaborate on what those operational investments are? Thank you. Dave P. Rowland: Yeah, to be clear, it was not operational investments, it was operational spending. So, if you think about it -- so we started the year with an assumption in our cash flow guidance for what our accrued variable comp would be. Keith Bachman - BMO Capital Markets : Right. Dave P. Rowland: As that -- as our assumption has come down for the year on that now, by about $300 million, that assumption for accrued variable comp has been replaced by operational spending, if you will, that has cash out the door as compared to the accrued variable comp which has no cash out the door this year, would have cash out the door next year. And so that dynamic is what has impacted our cash flow, which you could say is as much as anything else a timing issue, because to the extent has an unfavorable impact on us this year, it will have a favorable impact next year if the scenario plays out because we would obviously have less cash out the door next year. Keith Bachman - BMO Capital Markets : But David what are those operational investments incremental? Dave P. Rowland: It would primarily be higher base payroll, as an example. With the volume growth -- in fact, as you look at our headcount statistics, you'll see that our headcount growth over the last couple of quarters has been meaningful and so we have more heads, more payroll, base pay comp. We also have slightly lower utilization on the margin as we've been building bench in certain areas in anticipation of revenue ramping and so all of those dynamics come into play. Keith Bachman - BMO Capital Markets : All right, fair enough. Thank you. Dave P. Rowland: All right. Thank you. Operator : Next we'll go to line of Jason Kupferberg with Jefferies. Please go ahead. Jason Kupferberg - Jefferies & Co.: Hey, thanks guys. So, I want to get your views on this pricing and mix shift to offshore, as far as how much of this you think is structural and kind of a new normal going forward. I know you're obviously talking about the application services piece, or do you see this as being more of a one-off? Pierre Nanterme : Yeah, I -- both, if you will. I think what we've seen is there is a structural shift, if you will, from offshore -- onshore to offshore, especially in application services and something at Accenture, we embraced a long time ago and we have every year more resources offshore participating to the application services and that will not change. We will continue to have global delivery network and we will continue to try to find the right mix between the offshore and the onshore. So, this thing is more like, if you will, a secular trend. Now, for all the reasons mentioned by David, at some point in time, different factors are combining and impacting our pricing situation. We mentioned some renegotiation in the context of vendor consolidation. It has happened more in this quarter than other quarters. David mentioned that when you're selling large scale transformation program, typically the first year from a pricing standpoint are more dilutive and then in terms of margin and then you're recovering at the backend of the program. So, I think we had a combination of factors in Q2 that has put pressure on the pricing. But the offshoring trend, this one is no change and is structural. Jason Kupferberg - Jefferies & Co.: Okay. And then just for my follow-up, coming back to the point on reducing the accrued comp by $300 million or so this year, can you give us a sense of what percent cut in the total accrued comp is the $300 million? And then do you have any concerns about the downstream impacts on attrition potentially? Dave P. Rowland: Yeah, and it is important to have a little bit of context on this, so that it is not misinterpreted. The first thing I would say is that the -- this particular program that we're referencing is one program as part of a much bigger set of variable comp programs that we have in the firm. And if you look at our variable comp accruals overall, as I said in my prepared remarks, we accrued a significant amount of variable compensation. In this one particular program, which is targeted at our managers and above, it's not the only variable program targeted at them, but for this one program that is targeted to the managers and above where the determination of what we accrue in a quarter is based on a formula tied to specific financial metrics. In this particular program we have accrued less. And for the full year, we expect that it could be in the $300 million range based on our current scenarios, although we are working hard in the back half of the year to improve that. But you have to look at that $300 million in the context of a payroll structure that is roughly $20 billion overall. So it's meaningful in the context of our cash flow guidance, which is why we called it out so that you could understand the change to cash flow. In the context of our overall payroll structure its $300 million on a total base of roughly $20 billion. Jason Kupferberg - Jefferies & Co.: Right. But the vast majority of the $20 billion is just base pay, right? Dave P. Rowland: Well, you say -- well, vast majority would be a true statement. We do have significant variable comp in our plan, but it would be true to say that more of the comp is fixed than variable. Pierre Nanterme : Indeed. And so, to answer your second question, whether we are concerned or not? I'm not pleased, but I'm not concerned. I'm not pleased because it's always better to accrue all the valuable comp incurred. Now, I'm not concerned because first, its mid-year, and I guess we have time to recover in the second part of the year, especially as we see the business shaping for the second part of the year. As David mentioned, this piece is more targeted to our executive and leaders. So I'm taking that as a strong incentive for them to perform in the second part of the year, so they will receive their valuable comp. Jason Kupferberg - Jefferies & Co.: Very good. All right. Thank you for the comments. Operator : Next question today comes from the line of Edward Caso representing Wells Fargo. Please go ahead. Edward Caso - Wells Fargo Securities : Hi. Good morning. Can you talk a little bit about Accenture Digital Services? You didn't really mention that. I was sort of surprised. Pierre Nanterme : Couldn't be more pleased with Accenture Digital, and you're right. Frankly, thanks a lot for your question because we -- of course, we had to explain a part of the business where we have either not issues, but challenges of thing we want to be very transparent with you and talk where we are. Now, the vast majority of our business is doing just extremely well. That's why I wanted to share with you couple of programs including what we are doing for this pharmaceutical company, which is quite a large scale digital business. So we set up Accenture Digital January 1. In Accenture Digital we have now 23,000 people plus. So we have probably established in January one of the largest digital organizations in the world. We're combining all is related to digital marketing with Accenture Interactive, Accenture Mobility around mobility and Accenture Analytics. And we're very pleased with the result of this unit which is continue to grow, I would say, with strong double-digit. So very, very pleased, the level of demand is extremely high. But more important, I truly believe that Accenture is differentiated in the marketplace. We are more end-to-end than anyone else in digital marketing. Our Mobility organization is just on fire. And, as you know, there is great demand for analytics. And, of course, through the creation of Accenture Digital, we have the unique ability now to create synergies among these three capabilities and be even more end-to-end. So we're extremely pleased with Digital. Edward Caso - Wells Fargo Securities : Got it. Can you break out the components of the health and public services that help the European government, the U.S. government? Give us a sense where strengths and weakness are. Pierre Nanterme : I could. I mean, let me start, because indeed in HPS you have the H and the PS. We commented a lot on heath which continue to be an industry we're very pleased, we're very proud. We made significant investment three years ago and now we're getting a strong return. If you're looking on a year-to-date basis, its one of the industry where we're still growing double-digits, so its part of our top performing, specially in the U.S., but as well in other part of the world, in Asia-Pacific to name a few. PS is indeed a different story. And it has been this last years. We continue to be very pleased with what we are doing in the public sector, probably more in the U.S. standpoint. Europe continued to be a challenge from a public sector spending which is probably not a big new news. Edward Caso - Wells Fargo Securities : Great. Thank you. Pierre Nanterme : Thank you, Ed. Operator : And next we'll go to line of James Friedman with SIG. Please go ahead. James Friedman - SIG: Hi. Thank you. Pierre, could you elaborate on your comments regarding Brazil and share some context through that? Pierre Nanterme : Yes, of course. Probably -- exactly a year ago we've been taken by surprise, to be honest, with what happened in Brazil. Brazil been performing extremely well for years. At Accenture we made right investments, we have the right leadership and it's still a country where we probably have one of the highest market share at Accenture. So all of this is not gone, but indeed 12 months ago we probably didn't anticipate what happened in Brazil from an economic standpoint, from a geopolitical standpoint and indeed, Brazil didn’t deliver what we expected. We've been working with the leadership of Accenture and the leadership of Brazil very hard this last four quarters to reposition Brazil for new growth. And I'm pleased to report that indeed in Q2 we feel that we are turning the corner with Brazil coming back flattened, hopefully positive for the reminder of the year. This is what I mentioned by turning the corner. So we worked hard for four quarters and I guess Brazil will be back with growth. James Friedman - SIG: Thank you. I appreciate the context. Pierre Nanterme : Thank you. Operator : And we have a question from Bryan Keane's line with Deutsche Bank. Please go ahead. Bryan Keane - Deutsche Bank : Yeah, hi guys. Just a couple of follow-ups. Just on the Application Services area, I guess, I'm kind of wondering why now? I would have thought the move from onshore to offshore has already happened, so why in that particular area is it happening and kind of surprising? Pierre Nanterme : This market is -- it's a very large market. If you look at the Application Services, it's probably one of the largest IT market in the world. So it's a market that's going to remain extremely competitive for long time. You have many providers, all extremely competitive and they all want to grow, they all want to take market share including us. So I don't think it's the end of the prior era, if you will. It's just the continuation of what's happening. And you see many of our competitors, of course, you have the Indian pure players who are already very offshore-centric, if you will, but many of our more classic competitors are accelerating their move to offshore as well. And what we see which may be, let's put that in the new-new, is Europe is moving now offshore in a more robust way. So if you look at this offshoring waves, first U.S. probably 10 years ago. Then they moved toward, what I like to call, the Anglo-Saxon corridor for whatever it means for you; U.S., U.K., Nordic, probably all the countries not speaking the same language like mine. And here you have also the reason earlier offshoring pickup. Now, and I'm taking that as a good news for Accenture, continental Europe and I'm thinking about Germany, France, Italy, Spain, we see this offshoring picking up. So it's a good news for us because we've been able to leverage our Global Delivery Network, but it's creating a very competitive market as well in these four or five countries I mentioned. Bryan Keane - Deutsche Bank : And the pricing and cost pressures, I assume it's going to continue for the back half of the year. What are the offsets you guys are planning to do so that it -- you can still grow margin? Dave P. Rowland: Well, we are working in the areas where the environment is more competitive. First of all, we're working very hard on aligning the cost to serve or our delivery cost with the pricing realities, and that is ongoing. The second thing that we're doing is that we are managing all of the levers of our payroll structure which we always do, but let's say we're doing it with an even higher level of intensity to make sure that we optimize the efficiency of our payroll structure against the revenue profile that we see. We're also focused, as you would expect, on discretionary elements of our operating expenses. And then, we continue our journey in terms of our focus on our infrastructure cost and our business management function cost, if you will, and so, none of those things are new. As I said, we go through periods like this. This is a normal ebb and flow in our business, and so the actions that we're taking they aren't new bullets in the gun. We're doing the things we always do to manage and optimize our profitability as the business ebbs and flows. And we feel good about the actions we have on the table. Pierre Nanterme : Yeah. And at the end of the day, again, we feel confident in our ability to grow our revenues more in the second half of the year based on very clear facts. And as we will ramp up our organic growth in the second part of the year, we will be able to absorb more cost. Bryan Keane - Deutsche Bank : Okay. Very helpful. Last question for me. David, you said you're not expecting much improvement. It doesn’t sound like in the constant currency consulting growth rate. I guess, with the bookings being where they are, they've been stronger. What's preventing that increase or acceleration in the consulting side? Dave P. Rowland: Yeah. Flat to low single-digit positive. And again, I don't want to be redundant with what I've said earlier, but one of the things we're navigating right now in the consulting growth equation is this -- is the acceleration, if you will, of higher utilization of GDN for Application Services. But yet we see very strong growth in Digital. We see growth in other areas of our consulting business as well, but the mix of all of that together is what leads us to the flat to low single-digit positive. Bryan Keane - Deutsche Bank : Okay. I got you. Thanks so much. Dave P. Rowland: Thank you. Operator : And we have a question from the line of Katy Huberty with Morgan Stanley. Please go ahead. Kathryn L. Huberty - Morgan Stanley : Yeah, thanks. Any update on the average deal compression you're seeing in SaaS deals? Is that where you're seeing any of the pricing pressure? And then, progress on driving new partnerships like the extended SAP relationship you talked about in order to offset that impact from SaaS? Pierre Nanterme : Yes. I'm going to take that one. And I'm very pleased to answer and very excited with what we are doing. If you look at the Consulting market, the ERP market, the Digital market; yes, this software or the added service world is evolving and is evolving quite rapidly. As you've seen, for instance, we are very pleased with the business we're doing with the salesforce.com. I highlighted one of the largest European implementation of sales force. We did with Schneider Electric a few months ago. So very pleased with the progress we are making on the software-as-a-service. We are investing, especially in the context of Accenture Digital, but as well in the context of our cloud activities to be much more relevant on this. And we are looking at critical partnerships to continue being differentiated in the marketplace. I absolutely wanted to signal what we are doing with SAP, with this Accenture and SAP business Solutions Group where indeed we are going co-invest with SAP in quite a meaningful way to create very industry-specific and cloud-based and SaaS-delivered solutions. And we believe it’s a true game changer. So I'm very excited with that. And what we are doing is very -- is so far unique in the marketplace. Kathryn L. Huberty - Morgan Stanley : And the average deal compression; is that still in the 15% to 20% range for SaaS deals? Pierre Nanterme : Yeah. On the SI, on the pure SI, you're right. We are monitoring that very carefully. So if you look at the -- when you look at a program, you have the specification, you have the design, you have the change management, you have the integration, you have the testing and you have the integration in the company. The system integration piece, which is part of this overall program, yes, we've seen this 20% to 30% less effort. What we've seen as well in this large program on SaaS a significant level of reinvestment of these savings in the other part of the program. So, all in all, as David mentioned, it's interesting to see that from a volume's standpoint the business is going up and is not going down. Now, we need to manage, indeed, the equation around the pricing relative to the offshoring. But it's not the volume issue; it's more, as in this program we have higher level of offshore, it's putting some pressure on the pricing. So it's not a volume issue. It's how you're managing the new economics, if you will, and I'm extremely comfortable that we will manage that very well. Kathryn L. Huberty - Morgan Stanley : Got it. And then just a follow-up on bookings. As you know, you enjoyed strong bookings growth in 2012 that didn't convert to the same strong revenue growth last year. What's different about the recent double-digit bookings growth? Is contract duration changing or something else impacting your confidence that we'll see the revenue conversion this time around? Dave P. Rowland: Well, again, I think what is different when you look at where we are this year to last year is that last year we are in a situation that we expected a broad uptick in the market that did not materialized. This year we're not expecting any change in market conditions. Last year we had some concentrated areas of weakness that, as Pierre said using Brazil as an example, which were unexpected. But it wasn't just Brazil. There were a few other areas where we had concentrated areas of weakens. We don't see that this year. And, in fact, the areas where we had concentrated weakness have generally improved. The third thing that we had last year is that we did have several large contracts that we're winding down. Where we had an assumption of our ability to replace those revenue streams and then grow on top of it that did not happen as expected, this year in the back half of the year we don't have that same dynamic. And that actually benefits probably four of our five operating groups as they turn to the second half of the year. And then again, this year we've got we believe more line of site to sources of incremental revenue. And so, we have our eyes focused on the things that we have to do to deliver this uptick in revenue that we see. But we do think the circumstances, as we see it, are different than they were last year. Kathryn L. Huberty - Morgan Stanley : Okay. That's very helpful, David. Thanks. Dave P. Rowland: Thank you. Operator : We have a question from the line of Darrin Peller representing Barclays. Your line is open. Darrin Peller - Barclays Capital : Thanks. Just to follow-up on that question around the sort of book-to-bill timing. Is there a different in percentage of what's actually contract renewals here versus new business? And just in terms of the size of these contracts and how long they really take to accrue to revenue, for the outsourcing sides given how strong the growth has been there, can you give us a little more color on the characteristics and the profile of those contracts today versus maybe what they used to look like a couple years back in terms of size as well as, again, how long you'd expect them to turn into revenue? Dave P. Rowland: I guess if I just talk specifically about this quarter, I mean every quarter is different and any single quarter doesn’t necessarily indicate a trend. But if I just look at this quarter, as an example, we did have several very large contracts. And if you look at the average size of these large contracts on balance they are higher than what we've seen, let's say, over the last four to five to six quarters. And because of that the duration of those contracts, or the contract term in this particular quarter has ticked up a little bit. But again, I don't know that I -- well, I do know that I would not declare that a trend. I mean, this -- the composition of next quarter's bookings, mega-bookings will probably be a little big different. Darrin Peller - Barclays Capital : Right. Dave P. Rowland: But for this quarter, we did see the average deal size go up and we saw the duration lengthened and that does have for the contracts we signed does have a dynamics in terms of how those convert to revenue with longer duration contracts. Darrin Peller - Barclays Capital : And you see these going up here? Pierre Nanterme : Yeah. It is interesting to see, if you look at '13 and now the beginning of '14 that indeed we've seen the average for Accenture and probably because of our positioning, successful positioning in transformation in these critical programs that the size of the deal has been going up and the duration as well is a little bit longer. And this, of course, giving us the positive, it is giving us more visibility in our business on the long term basis. And, of course, we are monitoring carefully, as you might imagine, the rate of conversion from the bookings to revenue. But from a visibility standpoint, we couldn't be more pleased that with our level of bookings and the size of the deal. And again, you mentioned David; we have 10 transactions over $100 million this quarter. And if you add Q1 and Q2, I guess we should be around $24 million. Darrin Peller - Barclays Capital : Very good. Pierre Nanterme : And if you compare -- which is a very big number. If you contrast to last year at the same period in time we were I guess around $21 million. So we are just slightly higher, but it's the demonstration that if you take '13 and '14 we are in the $20 million plus, if you will, transaction over $100 million, which is for me the confirmation of our positioning in terms of large scale transformation and that we are highly differentiated in that segment. Darrin Peller - Barclays Capital : All right. No, that is positive. And it's not like we're seeing more renewals as a percentage of the mix than prior years, right? Dave P. Rowland: No. There's not anything notable in that regard. Darrin Peller - Barclays Capital : Okay. All right. Just one quick follow-up on the organic. If you look at the quarter, what actually was the organic revenue growth rate versus -- I know there were just a couple of small tuck-ins, but… Dave P. Rowland: You know, as we shared before, we're really just not going to get into specifics on the organic and inorganic. Because again, our inorganic is really an engine for organic growth, and these businesses really within the first year, in most cases, become indistinguishable from our organic business because they get integrated very rapidly and Procurian would be the latest example of that where we will quickly -- are in the process of quickly integrating that with our existing procurement business and it's hard to tell one from the other. Darrin Peller - Barclays Capital : Got it. Pierre Nanterme : Okay. Darrin Peller - Barclays Capital : All right. Thank you, guys. KC McClure : Tom, we have time for one more question then Pierre will wrap up the call. Operator : Thank you. Our final question today will come from the line of Ashwin Shirvaikar representing Citi. Please go ahead. Ashwin Shirvaikar - Citigroup Inc.: Thank you. So I guess the question I had was with regards to the ramping of the App Services business. Most of your competitors operate their GDN at a higher level of profitability. My understanding is that you guys had normalized the cost equation there. So I'm trying to bridge the disconnect between App Services growing and your comments on profitability. How much of that is related to, Pierre, your comments that it was in the five countries that you mentioned which might have tougher labor laws and what's the timeframe then? Dave P. Rowland: I mean what I would say is that our cost rates -- our GDN cost rates are extremely market competitive. And so, we don't segment our profitability by Application Services versus BPO versus Digital, etcetera. But I think just, Ashwin, just to may be correct the misperception that you might have is that our GDN cost structure is very competitive, which is why we are able to compete very effectively in the Application Services space. So that we should be clear on. Ashwin Shirvaikar - Citigroup Inc.: No, no. That part I was clear and I was asking not less -- less about cost structure, more about the profitability, but we could take that offline. I guess my quick follow-up on a different segment is or different area is do you expect the relationship between your net income and conversion to cash flow to be different than before, not just this year, but going forward? Dave P. Rowland: Well, Ashwin, what I would say is that all of the factors that have made us a strong cash flow generation business, those factors remain intact. We have a relatively capital-light business. We are very good at managing our billing and collections. And, as you know, we are focused on growing our business, gaining market share and having modest margin expansion. And when you look at all of those things, we have to deliver on all those things, but if we do, fundamentally the structure that allows us to generate cash flow going forward should not be different than what its been in the past. Ashwin Shirvaikar - Citigroup Inc.: The 1.2 times is a good… Dave P. Rowland: I didn't say 1.2 times, I've said that if you look at -- if you think about what would represent a strong cash flow generation, really cash flow equal to net income, would be indicative of a very healthy company. And we expect to be a very healthy company. Ashwin Shirvaikar - Citigroup Inc.: Got it. Dave P. Rowland: Thank you. Ashwin Shirvaikar - Citigroup Inc.: Thank you. Pierre Nanterme : It's five past. Thanks a lot for staying with us. I'm taking this as a strong confidence you're putting in Accenture and a strong interest in our company. So thanks again for joining us on today's call. With the first half of the year behind us, frankly, I feel very confident that we are well-positioned to deliver our business outlook for the year; and of course, the updated business outlook David mentioned. We continue to execute a strategy that I believe is differentiating us in the marketplace. With the opportunity to strengthened our leadership position in large scale transformation program we talked a lot about it in digitally-enabled solution, a very strong market for us, and a new and innovative business services. At the same time, we have a relentless focus on developing the skills and capabilities of our talented men and women around the world, more than 289,000 people around the world. So we can deliver the best of Accenture everyday and everywhere in the world. We look forward to talking with you again next quarter. In the meantime, if you have any questions please feel free to call KC. Thanks a lot for paying attention to us. All the best. Operator : Ladies and gentlemen, this conference will be available for replay starting at 10 :30 a.m. this morning and running through June 26 at midnight. You may access the AT&T Executive Playback Service at any time by dialling 1800-475-6701 and entering the access code 320421. International participants may dial 320-365-3844. Those numbers again are 1800-475-6701, international participants dial 320-365-3844, and again the access code is 320421. And that does conclude our conference for today. We thank you for your participation and using the AT&T executive teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,014	2	2014Q2	2014Q3	2014-06-26	4.517	4.563	4.909	4.953	null	16.29	16.09	Executives: KC McClure - Director of IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts: Darrin Peller - Barclays Capital Tien-Tsin Huang - JPMorgan Chase & Co. David Grossman - Stifel Nicolaus & Company, Inc. Bryan Keane - Deutsche Bank Securities Keith Bachman - Bank of Montreal Daniel Perlin - RBC Capital Markets Steve Milunovich - UBS David Togut - Evercore Partners David Koning - Robert W. Baird Co. Sara Gubins - Bank of America Merrill Lynch Operator : Ladies and gentlemen, thank you for standing by, and welcome to the Accenture's Third Quarter Fiscal 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. KC McClure, Managing Director of Investor Relations. Please go ahead. KC McClure : Thank you, Katie. And thanks everyone for joining us today on our third quarter fiscal 2014 earnings announcement. As Katie just mentioned, I'm KC McClure, Managing Director 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 the third quarter. Pierre will then provide a brief update on our market positioning. David will then provide our business outlook for the fourth quarter and full fiscal year 2014 and then we will 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. As a reminder, in Q3 of last year, our results included benefits from a reduction in reorganization liabilities. 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 www.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. Pierre Nanterme : Thank you, KC. And thanks everyone for joining us today. We are very pleased with our financial results for the first quarter. We generated strong revenue growth and earnings per share, grew operating income, returned substantial cash to our shareholders and delivered another quarter of very strong year bookings. Here are a few highlights. New bookings were $8.8 billion, bringing us to $27.6 billion for the first three quarters of the year. We generated revenues of $7.7 billion, a 7% increase and above our guiding range. We delivered earnings per share of $1.26, up 11% from adjusted EPS in the third quarter last year. Operating margin was 15.2%, consistent with the third quarter last year. We generated solid free cash flow and our balance sheet remains very strong and in the quarter with a cash balance of $4 billion and we returned approximately $1.1 billion in cash to shareholders through share repurchases and dividends. With Q3 behind us, the second half of the year is shaping up as expected with stronger revenue growth and we are well positioned to continue the momentum into the first quarter. Now let me hand over to David, who will review the numbers for the quarter in greater detail. David, over to you. David Rowland : Thank you, Pierre and thanks all of you for joining us today. As I review the results on this morning's call, you'll see that we delivered very good results in the third quarter, highlighted by a significant uptick in net revenues with growth of 7% in local currency. Net revenues were higher than expected, well above the top end of our guidance range and driven by improved growth rates across essentially every dimension of our business, meaning the majority of our operating groups, the three geographic regions and in both consulting and outsourcing. The higher revenue growth was underpinned by yet another strong new bookings quarter, which is indicative of the high degree of relevance our offerings and capabilities have in the marketplace. We delivered double-digit EPS growth and while our focus on pricing and overall cost efficiency is ongoing, our third quarter reflects progress with the challenges highlighted last quarter. We generated strong cash flow and of course we continue to return a substantial portion of cash to shareholders. So we're very pleased with the quarter. With that, let's get to the numbers starting with new bookings. New bookings for the quarter were strong at $8.8 billion. Consulting bookings were $4.3 billion with a book-to-bill of $1.1 billion. Outsourcing bookings were $4.5 billion with a book-to-bill of $1.2 billion. Year-to-date bookings were $27.6 billion, reflecting 12% growth in local currency. Taking a closer look at our new bookings, there are several additional points that are worth noting. Coming off the record bookings last quarter, consulting bookings continue to reflect healthy demand for both systems integration and technology consulting. Additionally, management consulting bookings were solid and within our target book-to-bill range. We were also pleased with another quarter of solid outsourcing bookings, which included an uptick in technology outsourcing from the second quarter, driven by higher demand for application outsourcing. Strong demand for our BPO services continued, driven by finance and accounting and procurement offerings, even after the extremely strong record BPO bookings we had in quarter two. From an operating group perspective, CMT and products were key drivers of our strong bookings performance, which positions both for continued strong growth rates. Finally, we continue to be the partner of choice on complex transformational projects with seven clients with bookings in excess of $100 million. Turning now to revenues, net revenues for the quarter were $7.7 billion, an increase of 7% in U.S. dollars and local currency, reflecting a flat FX impact, consistent with the assumption we provided in March. Consulting revenues for the quarter were $4.1 billion, up 6% in USD and 5% in local currency. Outsourcing revenues were $3.6 billion, up 10% in USD and 9% in local currency. Again, revenues came in even higher than expected, driven by strong performance in H&PS, products and CMT. So let me give you some additional highlights from the operating group this quarter. H&PS grew 11%, delivering the significant improvement in growth we had signaled in quarter two. Growth rates improved across all three geographic regions, but a strong uptick in the Americas was the primary driver in the quarter. Within the Americas, our health business and public service was very strong including the recent acquisition of ASM Research, which expands our capabilities within the military and federal health businesses. And within our state and local practice, both our human services eligibility and ERP offerings made a strong contribution. In products, the 10% growth demonstrated a continuation of broad-based demand with strong growth in both the Americas and EMEA. We saw good demand for BPO, specifically for our procurement offerings. Overall, our clients are focused on four main themes, the digital customer, efficiency in cost optimization, industry specific solutions and advancing the technology agenda, including new technologies, extending ERP and network optimization. Communications, media and technology growth was 7%. In an overall environment, it continues to be in a cycle of rapid change. CMT's growth was primarily driven by very strong performance in the Americas and we continue to be very pleased with our performance in electronics and high tech. The revenue growth also reflects the ramp-up of several of the large transformational deals that we signed in recent quarters. More broadly, we continue to focus on extending our footprint in E&HT, working with our communications clients to drive their cost optimization agenda and increasing our penetration in certain areas such as media and entertainment, cable and social media and internet. Financial services grew 5% consistent with last quarter. We're particularly pleased with the significant growth in banking and capital markets in EMEA and Asia Pacific. Americas growth was negatively impacted by a slowdown in a few clients as large scale transformation programs are going through their natural cycle as well as reduced demand in our mortgage business. Overall we see good opportunities in the FS market, driven by our client's focus on cost efficiency, which resulted in strong demand for our BPO offerings and also driven by risk in regulatory and increased investments in digital, primarily in distribution and marketing. As expected, we saw moderate improvement in resources with 2% growth. Energy continues to generate strong growth globally, but we did see some moderation from previous quarters, particularly in North America. While we are pleased with the modern improvement in the quarter, we still have work to do to position the business for sustained positive growth and North America and natural resources globally continue to be our most challenged markets. Moving down the income statement. Gross margin for the quarter was 32.8% compared with 33.9% for the same period last year, down 110 basis points. Sales and marketing expense for the quarter was 11.6% of net revenue compared with 12.3% of net revenues for the third quarter last year, down 70 basis points. General administrative expense was 5.9% of net revenues compared with 6.4% of net revenues for the third quarter last year, down 50 basis points. As a reminder, in quarter three of last year, we had a reduction in the reorganization liabilities that impacted certain metrics. The following comparisons exclude the impact and reflect adjusted results. Operating income was $1.2 billion in the third quarter, reflecting a 15.2% operating margin, roughly equal to the adjusted operating margin for the same period last year. Our effective tax rate for the quarter was 25% compared with an adjusted tax rate of 24.8% for the third quarter last year. Net income was $882 million for the third quarter compared with adjusted net income of $824 million for the same quarter last year. And diluted earnings per share were $1.26, compared with the adjusted EPS of $1.14 in the third quarter last year, an increase of $0.12. Turning to DSOs, our day services outstanding continue to be industry leading. They were 35 days, up from 33 days last quarter. Free cash flow for the quarter was $1.3 billion resulting from cash generated by operating activities of $1.4 billion, net of property and equipment additions of $85 million. Moving to our level of cash. Our cash balance at May 31 was $4 billion, compared with $5.6 billion at August 31 last year. The current level reflects the cash returned to shareholders through repurchases and dividends as well as the acquisitions we've made year-to-date. Moving to some other key operational metrics. We ended the quarter with a global headcount of more than 293,000 people and we now have approximately 194,000 people in our global delivery network. In quarter three, our utilization was 88%, up from last quarter and consistent with quarter three last year. Our attrition, which excludes involuntary terminations was 14%, up 2% from both quarter two in the same period last year and lastly, we now expect that at least 65,000 people will join our company in fiscal 2014. So turning to our ongoing objective to return cash to shareholders. In the third quarter we repurchased or redeemed approximately 5.5 million shares for $441 million at an average price of $80.13 per share. Year to date we purchased 24.4 million shares for $1.9 billion at an average price of $77.90 per share. At May 31, we had approximately 5.3 billion of share repurchase authority remaining. Finally as Pierre mentioned, on May 15, 2014, we made our second semi-annual dividend payment for fiscal 2014 in the amount of $0.93 per share, brining total dividend payments for the fiscal year to approximately $1.3 billion. So in summary, quarter three was an important quarter for us as we delivered the uptick in revenue that we had signaled at the beginning of the year. While we delivered good profitability, our focus on cost efficiency will continue to be a priority for several quarters to come. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our strong results for the quarter demonstrate that we continue to executive very well against our growth strategy. We are leveraging the investments we've made in assets and solutions, in strategic acquisitions and in building the skills and capabilities of our people. Our services are highly differentiated in the marketplace and are clearly originating with the needs of our clients as demonstrated by our records bookings year to date. Our growth strategy is all about first, operating at the heart of our client's businesses then capturing new opportunities in key growth areas especially in digital and across the different geographic markets where we operate and finally investing to further differentiate our capabilities and services. Let me bring each of these areas to life. Starting with how we leverage our unit, global end-to-end capabilities to drive value for clients and help them with their large scale transformation programs. We are helping Baker Hughes a leading oil field services company transform its finance and accounting operations across 90 countries, delivering more than $50 million in annual cost saving so far. For large European banks, we are providing application development and management services to support the bank's repositioning to a new digital platform. This is a major strategic IT transformation designed to increase productivity by up to 20%. And we are working with the leading global software company leveraging our analytics and technology capabilities in finance and accounting to deliver cost savings of more than $150 million over the next seven years. We are executing very well in capturing in new opportunities in key growth areas. I am particularly pleased with the momentum we are seeing in Accenture Digital. We are bringing together our capabilities in Accenture Interactive and Accenture Analytics to help Telefónica Spain significantly increase its online sales. In just six months Telefónica drove more than 50% higher sales a year ahead of schedule. We are levering the assets and capabilities from our recent digital acquisitions to help the leading global fashion retailer launch a new online store based on the innovative eCommerce platform. The new channel, which is going to be rolled out to 50 countries is already driving higher than expected revenues. To me what is truly distinctive about Digital at Accenture is our ability to deliver Digital at scale and to help our clients create even greater value and business results. We continue to benefit from the return on the investments we have made to enhance our capabilities and services. A great example is our Accenture Duck Creek software solution for property and casualty insurers, which was recently selected by both Zurich insurance and Berkshire Hathaway. Berkshire Hathaway Specialty Insurance is deploying our software through an innovative software-as-a-service model posted on the Accenture cloud platform, which will reduce IT costs, improve business agility and support growth. In life sciences through our accelerating R&D business service, we have developed a new cloud-based platform, which is now being used by five major Pharma companies. This unique solution accelerates the clinical development process by collecting and analyzing data from across studies, helping our clients conduct clinical trials in a more efficient and cost effective way. And we also continue to make targeted acquisitions. In Accenture Strategy, we just completed the acquisition of PureApps, a U.K. based company that specializes in enterprise performance management, helping CFOs to analyze their businesses and improve their cost management. In Accenture Digital we required i4C Analytics, an advanced analytic software provider based in Italy. i4C specializes in tailored industry and function specific applications to speed up the delivery of new insights and business outcome. Now turning to the geographic dimension of our business. Our growth in Q3 was broad based and I am particularly pleased that we delivered stronger results in Europe. In the Americas, we grew revenue 7% in local currency driven by high single digit growth in both the United States and Brazil. In EMEA revenues increased 7% in local currency with double digit growth in France and Italy, high single digit growth in Germany and solid single digit growth in the United Kingdom and in Asia Pacific we grew revenue 6% in local currency, driven primarily by strong double digit growth in Japan. So overall we are performing well in the context of a market environment that remains very demanding. We continue to improve our competitiveness through a relentless focus on operational investments, applying rigor and discipline across the Board to improve our efficiency, so we continue to build and position our business for sustainable long term profitable growth. With that, I will turn the call back to David for our business outlook. David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the fourth quarter of fiscal 2014, we expect revenues to be in the range of $7.45 billion to $7.70 billion. This is since the impact of FX will be a positive 1.5% compared to the fourth quarter of fiscal 2013. For the full fiscal year 2014 based upon how the rates have been trending over the last few weeks we continue to assume the impact of FX on our results in U.S. Dollars will be negative 0.5% compared to fiscal 2013. Based on our year-to-date results of 4% revenue growth in local currency and the outlook just provided for quarter four, we now expect our net revenues for the full fiscal 2014 to be in the range of 4% to 5% growth in local currency. For the full fiscal year 2014, we now expect new bookings to be at the upper end of our previously guided range of $33 billion to $36 billion. For operating margin, we now expect fiscal year 2014 to be 14.3%, an approximate 10 basis point expansion over adjusted fiscal 2013 results. We continue to expect our annual effective tax rate to be in the range of 25.5% to 26.5%. For earning per share, we now expect full year deluded EPS for fiscal 2014 to be in the range of $4.50 to $4.54 or 7% to 8% growth over adjusted fiscal 2013 results. Turning to cash flow, we continue to expect our operating cash flow to be in the range of $3.3 billion to $3.6 billion with property and equipment additions remaining at approximately $400 million and free cash flow in the range of $2.9 to $3.2 billion. Finally we continue to expect to return at least $3.7 billion through dividends and share repurchases and also expect to reduce the weighted average diluted shares outstanding by approximately 3% as we remain committed to returning a substantial portion of cash to our shareholders. So all in all, I am pleased with how we are positioned to close out the year and as we have in the past, we will provide you with our fiscal 2015 outlook at the quarter four earnings call in September. With that, let's open it up, so we can take your questions. KC? KC McClure : 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. Katie, would you provide instructions for those on the call please. Operator : [Operator instructions] And our first question comes from the line of Darrin Peller with Barclays. Darrin Peller - Barclays Capital : Yes thanks guys. Nice job on the bookings. I just want to hone in a little bit on the bookings trends we're seeing. You gave some good color on what types of business you are gaining, just with respect to the types of book-to-bill conversions we should expect to see and how long it takes for the conversion to occur? And then maybe really just give us a profile of the kind of profitability in terms of the margin impact on the business given that obviously last quarter we saw a little bit of a slower trend on the margin side and you talked about Europe, but I think here, we're looking to see what these bookings really mean for the next year or so, so a little more color on those two variables will be great. David Rowland : Okay. Well first of all, let me give you a couple of comments and perhaps Pierre will add some thoughts as well, but in terms of our book-to-bill, on the consulting side, we continue to target overall a book-to-bill of $1.0 billion to $1.1 billion. I think what we've commented on in previous calls is that given the conversion trends that we started to experience in the third quarter or so of last year, we felt that it was important to be more toward the upper end of the range, but nonetheless that range continues to be what we're focused on. Darrin Peller - Barclays Capital : Sure. David Rowland : From an outsourcing standpoint, again the range continues to be $1.2 billion as kind of let's say the sweet spot for us and of course anything north of that is all the better. When you think about it, the whole translation of bookings to revenue, I think the thing that this quarter indicates is really what we've been pointing to for a while and that is that the strength of our new bookings we felt like would ultimately convert to revenue growth at higher levels, starting in the second half of this year and I think what you see is that obviously happening with our 7% growth. The last comment quickly from a profitability standpoint, we really focus on operating margin and our model since we've been a public company is then that we expect to manage the ebb and flow of the mix of work across the consulting components of our business and the outsourcing components of our business. It is true that not all of them have the same level of profitability, let's say the contract level or if you wanted to loosely say in gross margin terms, but they also all have very different cost structures in terms of selling cost, investment requirements, investments in people etcetera and what we are cast with doing is managing those cost, so that if the ebb and flow of our business occurs as it will across the portfolio, we meet our bottom line objectives and that's what we've been very successful doing as a public company so far. Darrin Peller - Barclays Capital : That's very helpful. Just one quick follow-up and then I'll turn it back to the queue. Last quarter obviously there were some comments made around pricing and around some -- obviously the implications on that on margins and I think you did a good job explaining the types of bookings you're looking at and the conversions are obviously showing much better this quarter, but are we still seeing any pricing pressures at all in the business or is it really just, was it more of a blip in the quarter or in the year last quarter, and it's calmed down? David Rowland : Well just -- as it relates to quarter three specifically, the environment is very much stable with what we saw last quarter, meaning we haven’t seen any further deterioration and the pattern is stable. We did see in fact some pockets of improvement in the third quarter, but it's too early to call those a trend. So I think the overwriting theme is that it's stable relative to what we said last quarter. Darrin Peller - Barclays Capital : Okay. That's good to hear. All right. Nice job guys, thanks. David Rowland : Thank you very much, Darrin. Operator : Our next question comes from the line from Tien-Tsin Huang from JPMorgan. Please go ahead. Tien-Tsin Huang - JPMorgan Chase & Co.: Good morning. Glad to see the revenue come through. Just a follow-up I guess on what Darrin asked. Did anything change specifically this quarter that allowed you to covert revenue faster this quarter and just as a follow through, has visibility on revenue realization improved from the first half of the year? David Rowland : Hey Tien-Tsin. Again, I don't think anything changed or it happened as we anticipated and as we had signaled. When you look at why did we have stronger revenue growth, I'll anchor you back to what Pierre and I've said consistently starting with the first earnings call this year. We said that there were several things that we were encouraged by. The first thing was our pattern of strong new bookings. The second thing was the fact that the large transformational deals would start to kick in revenue growth in the second half of the year and we talked about the fact that we could -- we could point to individual contracts that gave us confidence that would occur. The third thing we talked about was business services, the investments we've made in business services starting to materialize and then finally we anchored to the investments that we've made in inorganic. You wrap around all of that in the third quarter, we were really pleased with our BPO business in particular, which we've talked about consistently and we're also very pleased with the activity that we see in the digital space. So there is a lot of things that came together, but very consistent Tien-Tsin with what we've been trying to signal for a couple of quarters. Tien-Tsin Huang - JPMorgan Chase & Co.: All right. No, that's great. That makes sense Dave. So just to my follow-up I'll ask on the margin side. So the revenue did come out and cost a little bit if you look at it on a gross margin front, I guess that we should look at it on operating margins, but I am just curious, was there anything unusual in that gross margin line in this quarter and should we expect gross margin contraction to continue here in the near term, thanks? David Rowland : Yes, thank you, Tien-Tsin. Just starting -- let me answer the question on operating margin first. The thing that I guess I'll remind you and others is that last year the third quarter was an all-time high level of profitability for Accenture. So in absolute terms, last year's profitability was outstanding and it reflected 40 basis points growth over the prior year quarter three. So when we look at the third quarter this year, we feel very good about the absolute profitability because in fact it is equal to the highest level of profitability we've ever had in any quarter. Having said that, what's different, we have worked hard on dealing with some of the points that we highlighted last quarter. A reference in my script that we made progress on those points, but yet we still have work to do going forward and especially as it relates to overall payroll efficiency, which will continue to be a focus area for us moving forward, but again we feel very good about the absolute profitability in the third quarter. Tien-Tsin Huang - JPMorgan Chase & Co.: All right. That's great. Thanks so much. David Rowland : Thank you. Operator : Next question comes from the line of David Grossman with Stifel. Please go ahead. David Grossman - Stifel Nicolaus & Company, Inc.: All right. Thank you. So David it looks like you had growth accelerated in the third quarter as you had thought and you delivered a very strong revenue result; however it appears you left the midpoint for the yearend change. You sound very confident in the outlook, so perhaps you can help us better understand whether there are any specific headwinds in the fourth quarter, maybe just the ordinary flow of revenue and whether the conversion rates that you saw in the third quarter is something that you see as sustainable at least as far as I can see for now. David Rowland : Yes, again I think there is a couple of points of context that are worth mentioning. If you look at the way our revenue progressed in quarter three and quarter four of last year, quarter four of last year was a point and half higher than quarter three. So underneath the fourth quarter, we're comparing to fourth quarter last year that was point and half higher than quarter three last year. The other thing that I would point out is that with the range that we provided for the fourth quarter, the upper end of that range reflects continued strong healthy growth equal to what we just delivered in the third quarter and so we certainly see that as a possibility because we included it in the range. And as we always say, although we provide a range, which reflects a range of potential outcomes, we're always working to be as high up in the range as we possibly can. So we do feel good about our business. We had again yet another strong bookings quarter. We feel good about our visibility as we move forward and in the business, but yet as Pierre highlighted in his script, is that we have an environment that has an abundance of opportunities, but it also is one that has ongoing -- I am talking about the macro environment has ongoing challenges and uncertainty. Operator : The next question then comes from the line of Bryan Keane with Deutsche Bank. Please go ahead. David Rowland : Hello Bryan. Bryan Keane - Deutsche Bank Securities : Hi guys. Good morning. So just looking on a full year guidance, I guess it's a little bit unusual that the revenues are coming in ahead of expectations, but EPS is moving to the low end, just what's causing that dynamic? David Rowland : Well there's really two simple things. The first thing is that the guidance range that we had last quarter was based on a revenue range that included 5% to 6% growth for the full year and it was based on an operating margin range that included 20 basis points to 30 basis points of expansion. And so what we have done is by the way, which is what we always do after the third quarter is we've narrowed the range for the year now and the reason it has narrowed to the range that it did is because the -- we've narrowed the revenue range for the full year to 4% to 5%. So the 5% to 6% is not within the range and we are on a trajectory to deliver 10 basis points of expansion. So if you look at those things in combination, that's the resulting range that you get for EPS, which again it is a -- it's a growth rate above revenue and that's one of the things that we talked about in our Investor Analyst Day as an important objective. Bryan Keane - Deutsche Bank Securities : Okay. And just as a follow-up then, the cause for the operating margin to fall in at the low end of the range as opposed to the high end and then any risk to that, the model that Accenture always has of 10 basis points to 30 basis points of margin expansion won't be continuing on an annual basis, thanks so much. David Rowland : I think the -- the fact that our trajectory is at 10 basis points, frankly I think it anchors back to some of the things we talked about last quarter, playing it simple. Having said that, we started the year guiding to a range of 10 to 30 and the 10 to 30 represents what we generally defined as modest margin expansion, 10 basis points as met our definition of margin -- modest margin expansion. And we feel like if we're moving the margins up year-over-year in that 10 to 30 basis points range, that's very consistent with what our objectives have been and we think that's a reasonable place for us to land and we're balancing many things within that including investments in our business, which include the impact of acquisitions just to name that as one. But -- so those are the things that we're managing a mix of variables, but we feel very good about the 10 basis points of expansion. Bryan Keane - Deutsche Bank Securities : Okay. Great. Thanks so much. David Rowland : Thank you. Operator : And our next question comes from the line of Keith Bachman with Bank of Montreal. Please go ahead. Keith Bachman - Bank of Montreal : Hi. Thank you very much. I wanted to ask about the inorganic contribution this quarter. You said it played a role and if I look at your cash flow, it looks like your acquisitions this year for the first nine months in terms of cash out is about two times of what it was last year. I was just wondering if you could talk about what the inorganic contribution to year-over-year was this quarter versus last quarter. David Rowland : Yes, the inorganic growth varies by quarter. It can be lumpy and frankly we really don't want to get in the position of given a specific breakdown each and every quarter, but would rather talk in terms of the annual contribution. I will tell you that quarter three reflected an acceleration in both organic and inorganic growth and we were pleased with both to be clear, but there was an important acceleration in organic that drove the $7.1 billion overall. For the full year, if this will help you Keith, we think we're tracking to the 1.5% to may be up as high as 2% range in inorganic contribution, which is I think consistent with what I said last quarter or the quarter before, but again just to remind you is that the inorganic for us is really all about a strategy to ultimately drop organic growth. So our inorganic is an engine for organic growth and when you look at these businesses that we're acquiring, they are essentially indistinguishable from our organic business at least within a year and Procurian, which is the most significant acquisition we've made this year in the BPO procurement space, is a great example of that. So we feel great about the mix of our business. We're very pleased with what we've done with acquisitions really for the last four to six quarters. So hopefully that helped. Keith Bachman - Bank of Montreal : Yeah. It does. Thanks very much. For my follow-up, I would like to just try to probe a little bit more around Bryan's question on targeted operating margins. I understand it's still within the range of plus 10 basis points call it. I was hoping to dig a little bit deeper on the causes why it's coming down. I know you highlighted M&A as one of the causes. Also, wage rates -- it sounds like it's continuing to play a role. If I look at the detail, it also looks like financial services, even on a non-GAAP basis, the operating margins were down a little bit more in those areas. Is there something specific in financial services or products, which looks like they had the most of the year-over-year decline that you'd call out, or any other forces to illustrate what's going on with operating margins would be helpful. Thank you. David Rowland : Yes, products and financial services are both situations where the contract profitability is lower than it was last year. I'll remind you that we do have under any circumstances we have ebb and flow or operating margin across our operating groups as their portfolio mix just evolves right. And so a swing of a point or two in either direction shouldn’t be over read at that level because sometimes it's just the ebb and flow of the portfolio and then the time of kind of balance the overall expenses associated with that. In terms of the 10 basis points, again I guess to be blunt I am not -- I don't want to defend 10 basis points in the sense that it's very consistent, it's within the range that's been very consistent with the range we had communicated for several years now and in certain years there are circumstances where we are at the upper end of that range and other years there are circumstances where we are at the lower end of the range. The circumstances this year I think we covered quite well on last quarter's call and again we're making improvement. We've seen progress in the third quarter in dealing with those points that we raised, but yet they are in the mix nonetheless for how we're positioned for the full year. Keith Bachman - Bank of Montreal : So philosophically investors should be thinking about next couple of years, 10 to 30 basis points operating margin improvement is still the right way to think about it. David Rowland : Yes, I am not going to -- I am not going to comment explicitly on forward-looking guidance. I'll just say that our overwriting objectives as an organization haven’t changed. Keith Bachman - Bank of Montreal : Fair enough, many thanks. David Rowland : Great. Thank you. Operator : And our next question comes from Dan Perlin with RBC Capital Markets. Please go ahead. Daniel Perlin - RBC Capital Markets : Thanks. So, I'm not going to ask you to defend the 10 basis points, but I do just want to follow up on the margin concept, which is, if we were to -- if we were disaggregating what is a function of mix, that is shifting to what would ultimately be considered lower dollar profit, relative to, let's say, wage inflation cost, how would you have us parse that? As we think about this quarter, the combination of what you talked about last quarter, and then thinking about what is ultimately embedded in your bookings? Thank you. David Rowland : Yes, frankly that is such -- that there are so many new nuances and so much kind of detail in trying to answer that question, it's just even if that was information that we wanted to share that level of detail it's just I can't really do it in three minutes on an earnings call to be frank. Again what I would say is that in general terms what I would say is that job number one for us in driving our profitability objective going forward is to get payroll efficiency right. And that is something that we've traditionally done very, very well and that is something that is we are extremely focused on in particular in the next several quarters given some of the things we highlighted last week. Job number two in optimizing our profitability is to manage the mix across our portfolio. So finding the right mix where the opportunities are in the marketplace and then as the mix shifts across the different offerings that we provide to then job number three is to align our underlying cost structure to make sure that it's consistent with the realities of our portfolio of work. And I mean at a very simple level those are the things that we've always had to focus on and that's what we'll continue to focus on going forward. Daniel Perlin - RBC Capital Markets : Okay. And then just quickly : How important, ultimately, is the correlated rebound in EMEA to your consulting business, because we're seeing some trends in both of those and I'm just wondering, from a sustainability perspective, how important is that for you to have both trending in the right direction? Or do you think consulting can actually throttle up, even in the face of EMEA maybe having problems in the future? Thanks. Pierre Nanterme : We're definitely very pleased to see the rebound we had in EMEA, which is something we've been watching very carefully this last quarter. And we invested a lot in EMEA around client opportunities, especially around large-scale transformations program combining consulting outsourcing and BPO across the Board and as we expected, starting in Q3, we see EMEA coming back. And what I am particularly pleased with is when you look at the countries contributing to EMEA growth both from a consulting and outsourcing standpoint, we have quite largest markets in the country and countries in Europe and think about France, Italy, Germany the U.K. And it is very encouraging to see that with the slow recovery of Europe that seems to show some sustained ability on this slow recovery in Europe is creating more confidence with investors and this is what's explaining the pickup of our business in Europe plus the execution of the strategy we mentioned before. Large scale transformation, operating at the heart of our clients operation, investing in the new -- by the new I am thinking a lot around the digital and the excellent contribution of BPO. So it's quite well balanced across the Board, but again it's probably more on the outsourcings and the consulting, but anyway pleased with both results. Daniel Perlin - RBC Capital Markets : Excellent. Thank you. David Rowland : Thank you. Operator : And your next question comes from the line of Steve Milunovich with UBS. Please go ahead. Steve Milunovich - UBS: Thank you. Could you characterize how much of your business comes from emerging markets and maybe discuss what's going on in some of those particularly China and Brazil? Pierre Nanterme : Yes, so if you look at the way we now -- look at the markets, you have North America, you have Europe and you have what we might call the gross market, which is a little bit different from what you have in Americas, EMEA and APAC. So clearly the vast majority of the business we're doing is concentrated in North America and Europe. Now we're pleased with what we are doing in APAC in Africa and in Latin America. So let me give you some insights, which are noteworthy. Starting with Latin America as you know and we signaled that in the prior quarters, we were watching carefully what was happening in Brazil. We had excellent performance for many years and we had a kind of pause almost a year ago literally. So again it's very encouraging to see that through all the efforts made by our Brazilian leadership, Brazil is back with high single digit growth this quarter. So again, we're going to watch that carefully, but it's very encouraging signals. Moving to APAC, very consistent and very important for us because it's a large country for Accenture. Japan is sustaining a very strong double-digit growth and it's not the story of a quarter. It's been true this last quarter. So we're building a stronger practice in one the largest market as well in APAC to a smaller scale, but very interesting. We had very good performance in India as well, which has continued to growing very well and I can mention even Middle East in new places where we see good prospects. And may be finally getting to Africa, this is probably a place where we need to put more attention especially in South Africa as you know which is a country, which is very dependent on natural resources and very consistent what David mentioned previously natural resources, very cyclical challenging industry. South Africa very dependent on natural resources and it's a country where we are most challenged. All in all we're pleased with the progress we are making in all emerging markets. Steve Milunovich - UBS: That's great. Thank you. And I was curious what role you're playing in helping companies think through their adoption of cloud, and if your cloud brokering business is doing well and could become significant. Pierre Nanterme : We couldn’t be more cloud friendly at that venture. We embrace the cloud. We promote the cloud. And the cloud is developing very well because it's bringing to our clients a true and compelling value proposition in the way to improve the efficiency and effectiveness of the operations. You’ve seen in a couple of cases I shared with you that cloud was quite prominent either in the way we're proposing application package as a service. I am very pleased with what we are doing with our own solution called Duck Creek, delivered at Berkshire Hathaway as a service, and operated in Accenture Cloud. And I think these days is probably a piece of art, if you will in the way we are delivering a package in a new and compelling way as a service and we are operating this service in Accenture Cloud platform. So we are a big fan of this. Steve Milunovich - UBS: Thank you. Pierre Nanterme : Thank you. Operator : And our next question comes from Joe Foresi with Janney. Please go ahead. Joe Foresi - Janney Montgomery Scott LLC : Hi. I just want to go back to profitability really quickly. Where are you seeing the biggest impact on profitability? Is that new or old work? And what does that imply going forward? I'm just wondering if its renewals or the new work that you were seeing the pricing issues that you mentioned last quarter? David Rowland : Yes, I would say that I guess in answering the question maybe I will start with saying that we were very pleased with the work that we contracted in the third quarter from a profitability standpoint overall. Again I think that some of the things we talked about last quarter I mean, I would just be redundant with those -- with those messages, we had last quarter declared some pricing pressure. We related that to some pressure on profitability, but yet we've said this quarter that it's been stable. We highlighted last quarter some pressure in contract profitability, but yet we actually were pleased with our contract profitability this quarter and saw some positive progression from where we were last quarter. So that's kind of our existing book of business and maybe I could just be concise in answer it that way in that we are always focused on improving contract profitability. We did see some improvement from last quarter to this quarter sequentially and again we were very pleased with the economics of the deals that we contracted in the third quarter. Joe Foresi - Janney Montgomery Scott LLC : That's very helpful and just my follow-up, consulting looked like it up-ticked a little bit going, what was the driver of that and how sustainable is that driver going forward? What should we be looking for to see what the trends in consulting can look like? Pierre Nanterme : On the consulting if you look and it's not the old story, but clearly all what we are doing in digital is a big contributor and is getting a stronger and stronger contributor if you will to our consulting business. You will find in this consulting all the work we are doing through Accenture Interactive with all the capabilities from a management consulting standpoint to a system integration standpoint, solutions we're providing to enable the digital consumer. I am thinking about all the work we're doing through Accenture Mobility, again a good combination of management consulting and system integration work to enable mobility. Couldn’t be more pleased that recently Fiat accepted to communicate around the UConnect Solution we've been putting in place, which is absolutely cutting and leading-edge in mobility and of course very pleased with the momentum of Accenture Analytics, which again is a good mix of MC and system integration to what we are calling consulting and all of this is now becoming a stronger driver for our consulting growth. Joe Foresi - Janney Montgomery Scott LLC : Thank you. Operator : And our next question comes from the line of David Togut with Evercore Partners. Please go ahead. Pierre Nanterme : Hey David. David Togut - Evercore Partners : Hello David. Employee attrition moved up two points in the quarter to 14% from 12%, what was the key reason for that? David Rowland : It's -- I don't think that there was anything in particular underneath that. It's -- that 14% is well within our tolerant zone and there is ebb and flow and so just frankly there really isn’t a story behind that. It's just kind of the normal flow of how attrition goes. David Togut - Evercore Partners : Just as a key follow-up, you mentioned a target of 65,000 gross employee adds for this year, is that an uptick from what you indicated in Q2? David Rowland : It is. I think KC can correct me, but I think we said 60,000 last quarter and we said -- and then 65,000 this quarter. David Togut - Evercore Partners : And which practice areas are you adding more employees versus previous plan. David Rowland : It's across our practice. There is not a particular area of concentration. There is clearly a mix of GDN in there obviously, but beyond that, we are, we're doing some level of hiring probably in most of the markets around the globe and some of it relates to many of the things Pierre has commented on where we have these new exciting areas that are growth engines for us going forward and we're always bringing skills and talent on Board. David Togut - Evercore Partners : Understood. Thank you very much. David Rowland : Thank you. Operator : A question comes from the line of Dave Koning with Baird. Please go ahead. David Koning - Robert W. Baird Co.: Yes, hey guys. Good morning. Great job. David Rowland : Good morning. David Koning - Robert W. Baird Co.: And so I guess just a couple of kind of cash flow items, this is the first year in a while we've talked about this before that free cash flow was kind of going to be in line maybe even a little below income and just wondering if over time, you kind of expect that to exceed earnings. Just kind of wondering kind of your long term expectations around that. David Rowland : Yes, I think I've said last quarter that we feel very good about our -- the structural drivers if you will of our cash flow and so we expect to be a business that continues to focus on cash flow as part of our economic model. We continue to have industry leading DSOs. We have a capital like business. We don't anticipate that that's going to change. So -- and we are always focused on managing our profitability, which gets to our cash operating expense outflow in a particular year. So this year is what it is, but we think that the structural underpinnings of our business from that standpoint remain unchanged. David Koning - Robert W. Baird Co.: Good. And just because there haven’t been quite enough questions on margins yet, one small item with last quarter, last quarter you talked a little bit about the bonus accruals being brought down a few hundred million just to manage cost and given how good revenue trends are now, I knew that that's very encouraging, I am just wondering if that has been undone a little bit and may be that part of the reason that margins are a little lower. David Rowland : Yes, not to disappoint you with the answer, but I'll just remind you David and you and the others who remember that we really have had a practice, I am not talking about variable comp and the only time when we'll talk about it is when it is important to understanding the story in a particular quarter, which is not the normal scenario. We commented on it last quarter because it was relevant to understanding the story. That is not the case this quarter, and so the expectation is going to be that we are not going to do a root canal on variable comp each and every quarter. I appreciate the question. I appreciate why you asked it. We kind of served it up with what we said last quarter that that's our position on it. David Koning - Robert W. Baird Co.: Got you. Well, great progress. David Rowland : Thank you. Appreciate it. KC McClure : Katie, we have time for one more question and then Pierre will wrap up the call. Operator : And the last question comes from Sara Gubins with Bank of America Merrill Lynch. Please go ahead. Sara Gubins - Bank of America Merrill Lynch : Thanks for sneaking me in. Is application outsourcing growing faster or it pans above or below overall outsourcing segment and if you could just talk about how you are responding to the market pressures in this offering? Pierre Nanterme : Yes, again we're very pleased with all the application outsourcing, overall the outsourcing part of our business, especially pleased with the application outsourcing business, which has been growing nicely. It's clearly responding to a strong demand from our clients in rationalizing their IT operation. It is a very competitive market. It's a very competitive environment and it's a very large market as well. So no doubt Accenture will want to compete in that very large market and being extremely competitive in this marketplace and we are of course benefitted from all our global delivering work and we talked about now the 190,000 people we have in our different delivery network supporting not only application outsourcing and BPO. So, we believe today that despite the fact that it's a highly demanding and competitive environment, we are equipped to fight and win in that particular segment and this has reflected in the excellent growth we had in Q3. Sara Gubins - Bank of America Merrill Lynch : Thank you. David Rowland : Thank you, Sara. Pierre Nanterme : All right. It's time to close the call and thanks again for joining us on today's call. In closing, very briefly let me share a few thoughts. As we entered the first quarter, we feel good about our business and are confident that we're well positioned to deliver our business outlook for the year. We're focused on executing our growth strategy, which again is all about delivering transformational change for clients at the core of their operations, capturing the opportunities in key growth areas, especially around digital and BPO and investing to further strengthen our capabilities and each and every day, everywhere around the world, our Accenture people bring their unique passion and energy to drive value for both our clients and our shareholders. We look forward to talking with you again next quarter. In the mean time, if you have any questions, feel free to call KC. All the best. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 today through September 24 at midnight. You may access the AT&T replay system at any time by dialing 1800-475-6701 and entering the access code 328224. International participants dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844, access code is 328224. That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,014	3	2014Q3	2014Q4	2014-09-24	4.585	4.613	4.931	4.943	null	16.28	17.26	Executives: KC McClure - Director of IR Pierre Nanterme - Chairman and CEO David P. Rowland - CFO Analysts : Bryan Keane - Deutsche Bank Securities David Grossman - Stifel Nicolaus & Company Darrin Peller - Barclays Capital Tien-Tsin Huang - JPMorgan James Friedman - Susquehanna Financial Group Lisa Ellis - Sanford C. Bernstein & Co. David Togut - Evercore Partners Operator : Ladies and gentlemen, we would like to thank you for standing by and welcome to the Accenture Fourth Quarter Fiscal 2014 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). And as a reminder today's conference call will be recorded. I would now like to turn the conference over to your host as well as your facilitators as well as our Managing Director, Head of Investor Relations, KC McClure. Please go ahead. KC McClure : Thank you, Steve, and thanks everyone for joining us today on our fourth quarter and full year fiscal 2014 earnings announcement. As Steve 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 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 fourth quarter and the full fiscal year. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the first 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. As a reminder our results last year included benefits from final determinations of prior year U.S. Federal tax liabilities and a reduction in reorganization liabilities. 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. Pierre Nanterme : Thank you, KC. And thanks everyone for joining us today. We are very pleased with our results for both the fourth quarter and the full fiscal year. Starting with the quarter our strong revenue growth of 8% was broad-based across the different dimensions of our business and coming on top of our strong growth in Q3, enabled us to deliver an excellent second half of the year. For the full year we increased market share, generated record revenues and new bookings, grew EPS faster than revenues and generated strong cash flow, all while continuing to invest to further differentiate our business and delivering significant value for our clients and shareholders. David will provide more detail in a moment but here are a few highlights for the year. We delivered record new bookings of $35.9 billion. We grew revenues 5% for the year; we delivered earning per share of $4.52, a 7% increase. We expanded operating margin 10 basis points to 13.3% -- 14.3%. We generated free cash flow of $3.2 billion and we continue to have a very strong balance sheet, ending the year with a cash balance of $4.9 billion. We returned $3.8 billion in cash to shareholders through share repurchases and dividends and we just announced our semi-annual cash dividend of $1.02 per share, which is a 10% increase over our prior dividend. Our performance in fiscal ’14 clearly demonstrate that we are executing very well against our strategy and given our strong growth in the second half of the year I am pleased with the momentum in our business as we enter the new fiscal year. Now let me hand over to David. David, over to you. David P. Rowland: Thank you, Pierre and thanks all of you for joining us on today’s call. Let me start by saying that we were very pleased with our overall results in quarter four as they continue to reflect positive momentum in many areas of our business and clearly illustrate the relevance of our growth strategy and the yield we are getting from important investments we have made over the past two years. Before I get into the details I’d to highlight three aspects of our quarter four results which are particularly noteworthy. First, the most distinguishing aspect of our results was clearly the strong top line growth of 8%, exceeding our expectations and landing above the top end of our guided range for the quarter. Our revenue growth is underpinned by continued improved growth rates in many areas of our business, building further on the improvements we delivered in quarter three. And overall net revenue growth was at the highest levels we have seen since quarter four of fiscal ’12. Second, our profitability in quarter four came in as expected, yielding 10 basis points of expansion for the full year. It’s noteworthy that we achieved this result while taking actions to continue to align our headcount and labor cost in certain parts of our business. We are pleased with the progress we are making to better position our profitability going forward. Third, we generated strong cash flow of $1.5 billion in the quarter, putting us at the upper end of our previously guided annual range and of course we continue to return significant cash to shareholders while at the same time investing in our business. So we are very pleased with the quarter and in fact more broadly with our strong performance in the second half of the year. With that said let’s now turn to some of the details starting with new bookings. New bookings for the quarter were $8.3 billion resulting in $35.9 billion in new bookings for the full fiscal year which was at the very top of the business outlook range provided in June and represents an all-time high in annual new bookings. Consulting bookings were $3.9 billion, with a book-to-bill of 1.0. Outsourcing bookings were $4.4 billion with a book-to-bill of 1.2. Taking a closer look at our new bookings there are several additional points worth nothing. For the fourth consecutive quarter consulting bookings landed within our target book-to-bill range and reflected good demand for systems integration and management consulting. For the year consulting bookings of $17.1 billion were the highest ever with management consulting and systems integration both achieving a strong 1.1 book to bill and technology consulting also delivering a solid year at 1.0. We continue to be pleased with another quarter of solid outsourcing bookings. Results in technology outsourcing reflected an uptick compared to quarter three and BPO bookings continue to reflect healthy demand. Also there were a number of record highs with our new bookings results in fiscal ’14, in both consulting and outsourcing and in outsourcing, particularly in BPO which had a 1.7 book to bill, CMT Financial Services and H&PS set record highs as well. And finally we continued our track record of winning large transformational projects with nine clients with bookings in access of $100 million bringing the total for the year to 39. Turning now to revenues, net revenues for the quarter were $7.8 billion, an increase of 10% in U.S. dollars and 8% in local currency, reflecting a positive 1.5% FX impact, consistent with the assumption provided in June. Consulting revenues for the quarter were $4 billion, up 6% in USD and 4% in local currency. Outsourcing revenues were $3.8 billion, up 15% in USD and 13% in local currency. Looking broadly at the major drivers of growth in the quarter outsourcing was a highlight coming in even stronger than we expected driven by strength in both BPO and technology outsourcing. In addition, we continued to be pleased with the strong contribution of our digital-related services to our overall growth. Turning to the operating groups, the momentum in communications, media and technology continued with 12% growth, the highest in ten quarters. Broad-based growth was driven by three notable areas, E&HT, outsourcing in the Americas. In Products, the 12% growth was broad-based across all industries and in both consulting and outsourcing. H&PS grew 9% in the quarter, coming from both public service and more notably Health, where we continue to deliver double digit growth in consulting and outsourcing. Financial Services grew 8%, up from last quarter led by very strong growth in outsourcing and within our banking and capital markets industries. Resources was flat in quarter four and while we still have some work to do we were encouraged by progress in several areas. We had growth in three of the four industries while natural resources continues to be challenged globally. Moving down the income statement gross margin for the quarter was 31.7% compared with 33.2% for the same period last year, down a 150 basis points. Sales and marketing expense for the quarter was 11.8% of net revenue compared with 12.6% of net revenues for the fourth quarter last year, down 80 basis points. G&A expense was 6.1% of net revenues, compared with 6.7% of net revenues for the fourth quarter last year, down 60 basis points. Operating income was $1.1 billion in the fourth quarter reflecting a 13.9% operating margin equal to the operating margin for the same period last year. Our effective tax rate for the quarter was 30.1% compared with 24.6% for the fourth quarter last year. The higher rate in the fourth quarter was primarily due to lower benefits related to the final determinations of prior year tax -- of prior year liabilities and a higher level of reserve additions. Net income was $760 million for the fourth quarter compared with $727 million for the same quarter last year. Diluted earnings per share were a $1.08 compared with EPS of a $1.01 in the fourth quarter last year. This reflects a 7% year-over-year increase and includes a negative impact of $0.09 from a higher tax rate this quarter. Turning to DSOs our days services outstanding continue to be industry leading. They were 36 days, up from 35 days last quarter. Free cash flow for the quarter was $1.5 billion resulting from cash generated by operating activities of $1.6 billion, net of property and equipment additions of a $101 million. Moving to our level of cash, our cash balance at August 31 was $4.9 billion compared with $5.6 billion at August 31 last year. The current level reflects the cash returned to shareholders through repurchase and dividends as well as the acquisitions we made in fiscal ’14. Moving to some other key operational metrics we hired approximately 80,000 people in fiscal ’14 ending the year with a global headcount of more than 305,000 and we now have over 205,000 people in our global delivery network. In quarter four our utilization was 88% consistent with last quarter, Attrition, which excludes involuntary terminations was 15%, up from both quarter three and the same period last year. Now turning to our ongoing objective to return cash to shareholders; in the fourth quarter we repurchased or redeemed approximately 8.2 million shares for $658 million at an average price of $80.36 per share. For the full year we repurchased or redeemed 32.6 million for $2.6 billion at an average price of $78.52 per share. Finally, as Pierre mentioned our Board of Directors declared a semi-annual cash dividend of a $1.02 per share. This dividend will be paid on November 17 and represents a $0.09 per share or 10% increase over the previous semi-annual dividend we declared in March. So before I turn things back over to Pierre let me just briefly reflect on where we landed for the full year across the key elements of our business outlook. Again new bookings were $35.9 billion at the top end of our guided range. Net revenues grew 5% in local currency for the full year, at the top end of our most recent guided range and in the upper end of the range provided at the beginning of the year. As a reminder fiscal '13 we had two unusual items that impacted certain metrics. The following year-over-year comparisons exclude those impacts and use fiscal '13 adjusted results. Operating margin was 14.3%, within the guided range we provided at the beginning of the year and spot on the guidance we provided most recently. EPS was $4.52 at the midpoint of our most recent guided range and at the upper end of the range provided at the beginning of the year and reflects 7% growth over fiscal '13, consistent with our objective of growing EPS faster than revenue. Free cash flow was a rounded $3.2 billion, at the upper end of our previously guided range and at the low end of the range provided at the beginning of the year. And then finally we've returned approximately $3.8 billion of cash to shareholders, more than $100 million above our initial objective through $2.6 billion in repurchases and $1.3 billion in dividend payments. In addition we reduced our weighted average diluted shares outstanding by about 3%. So, reflecting on the business outlook we provided at the beginning of the year we successfully managed our business and delivered on each metric with several of the metrics landing in the upper end of the range. We're pleased with the overall improvement we saw in our results in the second half of the year, especially the acceleration in growth we signaled one year ago. Now let me turn it back over to Pierre. Pierre Nanterme : Thank you, David. Our performance for the fiscal year, especially the strong revenue growth in the fourth quarter and second half of the year demonstrates that we are executing the right growth strategy. We are providing relevant and highly differentiated services that are clearly resonating with the needs of our clients. And we are gaining market share in an environment that continues to be very demanding and highly competitive. In fiscal year '14 we made significant investments in our business, including $740 million in acquisition and we aligned our organization to be even more relevant, differentiated and competitive in the marketplace. We've created Accenture Strategy, a unique capability and the first in the market to bring together business strategy and technology strategy equally and at scale. We created Accenture Digital by combining our market leading capabilities in Accenture Interactive, Accenture Analytics and Accenture Mobility. We now have more than 28,000 professionals working in Accenture Digital, making it the world's largest end-to-end digital capability. We formed Accenture operations by bringing together our market leading business process capabilities with our infrastructure and cloud services, to offer our clients an even more compelling value proposition, running key operations as a service and at scale. In Accenture Technology we further enhanced our global delivery network, recruiting significant talent and investing to build intelligent tools to increase efficiency and productivity. We continued to harness innovation through our technology labs and to play a leading role in the technology ecosystem. And we infused even more talent into our five operating groups which together serve clients in more than 40 industries, further strengthening our management and technology consulting capabilities. Our people in the operating groups orchestrate and bring together the very best of Accenture across the entire organization to serve our clients, helping us to continue to build long and enduring relationships with the world's leading companies. These investments have positioned us very well to capture new growth opportunities as our clients and the industries in which they operate continue to be transformed and reinvented everyday. In this fast changing environment we see the market becoming more and more polarized around two major things; Digitization to create competitive advantage and drive new sources of value, and rationalization to create productivity and efficiency gains. At the same time we continue to see demand for large scale transformation programs which has always been Accenture's sweet spot. Let me bring this to light with a few examples that demonstrate our unique position in the marketplace and the value we deliver to our clients. Today all of our clients are facing the imperative to transform their businesses to compete in the digital world and we are partnering with them on this journey. A great example is our work with a global media and entertaining company, where we are leveraging the full range of Accenture’s capabilities, especially in mobility, [supervision] and analytics to fundamentally transform the customer experience, by implementing a broad set of digital tools. The centerpiece of this technology is a wearable device that allows customers to access their hotel room and pay for goods and services. Through our work we are helping our clients engage millions of customers each year with a truly integrated and personalized experience. At the same time our clients are looking to drive more efficiency and to increase productivity in their operations. At a leading commodity trading and mining company we are providing finance and accounting and procurement services to help improve business operations. We are leveraging our end-to-end sourcing, procurement and analytics capabilities, together with the full power of the global delivery network to deliver over $500 million in bottom line savings, while also providing flexibility for future growth. The acquisition we made last year of Procurian, combined with our own sourcing and procurement capabilities make Accenture the clear market leader in procurement BPO and has been instrumental in positioning us for many recent wins in the market. Finally our clients continue to focus on large scale transformation programs. With our extensive industry expertise and broad global footprint as well as our skills in strategy, digital, technology and operations we have built an end-to-end capability that is second to none and as demonstrated by our strong new bookings for the year including 39 quarterly bookings over $100 million Accenture remains the partner of choice for our clients. A key example is our work in Texas, where we are leading the state’s effort to build a more efficient and effective Medicaid program. We are leveraging our healthcare expertise as well as our long track record of delivering claims processing systems to support 3.6 million Texas Medicaid participants and 45,000 healthcare providers while processing more than 12.5 million claims each month. Turning to the geographic dimension of our business we are very pleased with the strong revenue growth we’re seeing in many of the largest countries in which we operate. Taken together these countries represent a very significant part of Accenture business. Let me start with the United States, our largest single market where I'm particularly pleased with our 10% revenue growth for the fourth quarter and 8% revenue growth for the full year. I am even more pleased with our sustained performance in the U.S. over the last past four years, where we have consistently delivered high single digit or double digit revenue growth, clearly gaining market share in the largest economy in the world. In Europe, despite an economic environment that continues to be difficult we are performing very well in many of our largest countries, including France, Italy, Germany and United Kingdom. And in Asia Pacific our growth in Japan has just been outstanding. Japan delivered very strong double digit growth for both the fourth quarter and the full year. So we ended fiscal year ’14 strong and we have clearly benefited from the investments we have made to build and launch highly differentiated capabilities, both organically and through acquisitions, to recruit and develop new talent with highly specialized skills, including hiring more than 80,000 people and to further strengthen Accenture’s marketplace positioning and our brand which is among the top 50 brands in the world. At the end of the day the real measure of our success and relevance comes from our clients and for me, increasing the number of diamond clients, our largest client relationships is key. I'm delighted that we added 28 new diamond clients during the fiscal year which brings us to a net total of 141 diamond clients, an all-time high. And of course we continue to apply rigor and discipline in everything we do at Accenture to increase our efficiency and enhance our competitiveness so that we can continue to achieve our ultimate goal of delivering sustainable profitable growth over the long term. With that I will turn the call over to David to provide our business outlook for fiscal year ’15. David, over to you. David P. Rowland: Thank you, Pierre. Let me now turn to our business outlook. For the first quarter of fiscal ‘15, we expect revenues to be in the range of $7.55 billion to $7.80 billion. This assumes the impact of FX will be negative 2% compared to the first quarter of fiscal ‘14. For the full fiscal year ’15 based upon how the rates have been trending over the last few weeks we currently assume the impact of FX on our results in U.S. dollars will be negative 2% compared to fiscal ‘14. For the full fiscal ’15 we expect our net revenue to be in the range of 4% to 7% growth in local currency. For the full fiscal year ‘15 we are targeting new bookings to be in the range of $34 billion to 36 billion. We expect bookings to be a little lighter in the first quarter and build throughout the year. For operating margin we expect fiscal year ‘15 to be 14.4% to 14.6%, a 10 to 30 basis point expansion over fiscal ‘14 results. We expect our annual effective tax rate to be in the range of 26% to 27%. For earnings per share we expect full year diluted EPS for fiscal ’15 to be in the range of $4.74 to $4.88 or 5% to 8% growth over fiscal ’14 results. Now turning to cash flow, for the full fiscal ’15 we 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 expect to return at least $3.8 billion through dividends and share repurchases and also expect to reduce the weighted average diluted shares outstanding by approximately 2% as we remain committed to returning a substantial portion of our cash to shareholders. With that let's open it up so we can take your questions. KC? KC McClure : Thanks David. I would ask that you each stick to one question and a follow-up to allow as many participants as possible to ask a question. Steve, would you provide instructions for those on the call please. Operator : (Operator Instructions). Question one will come from Bryan Keane, Deutsche Bank. Please go ahead. Bryan Keane - Deutsche Bank Securities : Hi, guys, good morning. Just want to ask you about the acceleration in revenue growth. I think last quarter it was 7% in constant currency, this quarter 8% in constant currency in revenue growth. But you are guiding to 4% to 7% which is a little bit of modest downtick from the 8%. Just wanted to get your thoughts on the outlook compared to where we have been here in the last two quarters? David P. Rowland: Yeah, I think it’s important to look at -- maybe just to step back -- by the way hello, Bryan thanks for the question, by the way. I think it’s important to maybe look at that in a broader context and reflect from where we have been and where we are going, let’s say over a three year period. So two years ago in fiscal ’13 we had growth at about 4%. This year, the year we just completed we had growth at 5% and while the 4% to 7% reflects what we think is a full range of reasonable outcomes, as I have always said clearly, we are working hard to be as high in that range as we possibly can. So if you take the upper half of the range and assuming that the market conditions and our own efforts allow us to land in that space then you start to see the progression of our building business momentum from ’13 to ’14 to ’15 if we can deliver in the upper -- into that range which is 5.5% to 7%. And while 4% to 7% is our range it reflects what we think are possible outcomes depending on what happens with market growth. Everything that we do every day is to drive profitable growth and to work to be as high in the range as we can. So you are right but if we deliver, if we execute at the upper end of the -- at the upper half of the range then that is indicative of the momentum that I think you got from Pierre’s comments and from my comments. Bryan Keane - Deutsche Bank Securities : Okay and just maybe a break out between consulting and outsourcing in that outlook. And then just want to ask on the bookings. They’re essentially kind of flattish, just wanted to -- flattish to slightly down, I think on the guidance. I just want to get a sense of how you guys see the market going forward? Thanks so much and congrats. David P. Rowland: Thank you, Bryan. On the bookings, Bryan we follow the -- really this is the approach we've taken, really since we've been a public company, where we peg our bookings range to our revenue range at our book-to-bill target and it's very simply that math. And we're much more focused on year in and year out delivering against our book-to-bill objective in the year then we are on the year-over-year growth in new bookings because bookings can be lumpy, not only quarter-to-quarter but they can be lumpy year-to-year. And as we planned it out we just had an exceptional year in fiscal '14 with roughly $36 billion in bookings. And if we land in the $34 billion to $36 billion range as we're guiding to, that would imply that we will be within our book-to-bill targets that supports our revenue ambition for the year and that's a result which we would feel good about based on the book-to-bill objective. So that's the logic there. On the revenue growth, by type of work, outsourcing we're thinking in our guidance in the high single digit to low double digit range. And in consulting, probably relatively consistent with this year, could be a click lower but also be a click higher, so in that kind of general range. Operator : David Grossman, Stifel Financial. David Grossman - Stifel Nicolaus & Company: Hi, thank you. I wonder if you could just go back, David to some of the commentary early in the year, I guess given on the call about the margin pressure resulting from the need to remix some of the labor content and while we recognize that's clearly an ongoing process, can you help us better understand when you would expect to reach a more favorable balance at least based on where you are right now? David P. Rowland: Yeah, we -- as you would expect we took -- we began taking actions on that, really as we transitioned into the second half of the year in both quarter three and quarter four. David, as you mentioned it is an ongoing process. So we're always focused on tuning the supply side of the equation but within the supply side tuning the payroll efficiency in our P&L. As I referenced in my comments we did have actions that were noteworthy, which is why I called them out in the fourth quarter, reflecting what we're doing on the supply side and payroll efficiency side in the fourth quarter and that was accounted for, if you will in the results that we delivered. What I would say is that while this is an ongoing process we have seen a number of important areas of improvement in our profitability as we progress into the second half of the year. We have seen good progression in payroll efficiency but yet more work to do. We have seen very good progression in contract profitability which has gotten -- which has been sequentially better in quarter three as compared to quarter two and then again in quarter four as compared to quarter three. We have seen improvements in our business operations cost and so when you peel back the P&L and you look at the underpinning, if you will, of our operating expense structure against our revenues we have had some good improvement in the second half of the year which we will build from further as we move into fiscal '15. David Grossman - Stifel Nicolaus & Company: Thank you for that. And then just on the cash flow, if my math is right, it looks like your fiscal '15 guidance for free cash flow may actually exceed net income and again recognizing there are going to be several moving pieces in a given year, can you help us understand the various puts and takes this year other than the lower bonus accrual last year? David P. Rowland: Yeah, David, the free cash flow to net income metric is 1.1, that within the range it's 1.1 which puts us back in the same territory as where we have been in many years in the past. When you really step back, I mean at a high level when you really step back and look at our cash flow there is a number of things which drive it. One is the efficiency of our cash operating expenses in the year. So our cash operating expense efficiency in relation to the revenue. The second thing that would be a driver would be the year-over-year change in DSO and I’ll point out that while we’re very pleased with our DSO, even when the day increase that we had in the fourth quarter we have allowed in our free cash flow guidance the possibility of a continued uptick of a day, to day and a half in that range. Certainly we’ll work hard to try to make sure that doesn’t happen but we’ve allowed for that, so that’s a factor. The other factor would be large cash outflows. You mentioned what we payout in variable comp is one, but another big swing factor is tax cash payments. Tax cash payments are a significant cash outflow for a company of our size and they can vary significantly year-to-year and they will be higher next year than they were this year. David Grossman - Stifel Nicolaus & Company: Thank you. David P. Rowland: Hopefully that helps. David Grossman - Stifel Nicolaus & Company: No, it does, thank you very much. David P. Rowland: All right, thank you. Operator : Darrin Peller, Barclays. Darrin Peller - Barclays Capital : Thanks, I just want to talk a little bit about the cash strategy and the capital structure strategy for a moment, because I mean you are in a year now where clearly you’re showing some pretty good trends on the key revenue segments, you have. I mean financials are going, as you guys said very well, the Healthcare segment’s growing well again and you had some very good growth in constant currency in the quarter relative to the beginning of the year. When we look at that and we look at your underlying EPS growth it’s still less than 10% just given the dynamic of margin expansion being 10 to 30 basis points. And what I'm trying to figure out here is your cash use, you said 2% is going to -- the share counts have come down by about 2%, can you just give us your thoughts, maybe Pierre. on sort of how the company thinks about EPS growth in the framework of the long-term strategy, what kind of target are you really looking at over the long haul because you definitely have more cash flow that could be put to work especially if you think about using your balance sheet? Pierre Nanterme : Yeah I mean let me start and David will give more comments on this. Our capital allocation strategy and cash allocation strategy have always been very clear and very straightforward as you know. The different buckets where we’re using the cash would be internally to fund our capital expenditure. The second bucket will be around acquisitions and what we’ve seen these last three years as we’ve been ramping up the acquisition and we will continue to do so as long as we could find the right opportunities. But this is our expectation that we will continue to deploy capital to acquisition. We set in our mental model something around 15% of the operating free cash flow, if I'm right, and it might be anything between 15% to 20% because we believe, based on our results, that we’ve demonstrated we can make the right acquisition in order to create new capabilities and boost organic growth on top of that. And then the rest, our strategy has always been to return a very significant portion of our cash to our shareholders through share repurchases and dividend. What you’ve seen from a dividend standpoint, very consistent to what we said is the kind of, I would say evolution on the way we are delivering our dividend with some, what I would quantify solid, even robust increase year-over-year and then we continue on our share repurchase strategy to make sure and this is what we communicated in an IR Day a couple of years ago that we will continue to make sure there are not going to be any dilution between the shares we are issuing as well the share repurchase. So we are on that strategy very clearly and it’s still the strategy we’re planning to execute moving forward but maybe David you can give more color. David P. Rowland: Yeah, in fact you summarized it very well. When you look at… Pierre Nanterme : I am applying to be the next CFO. David P. Rowland: I think that was a good one really, Pierre. In terms of the 2% which you referenced, that’s in the range of really what we’ve done on average since we’ve been a public company. I think that I haven’t looked at the calculated number lately but I think it’s probably like 3% and probably the average, that reflects what we did in the earlier years of being a public company but 2% to 3% is the range that we’ve been in. When you look at our EPS range this year which is a 5% to 8% growth in USD terms, this was a year where we do have two headwinds that you don’t necessarily have in every year, one is the 2% FX drag and then the other is we do have, you know a higher expected tax rate. And so, you look at the 5% to 8% in the context of covering an FX drag and in this particular year a higher tax rate and then you can start to extrapolate what you think is possible in years when we don’t have those. And so that kind of gives you the, maybe a way to think about our EPS. Darrin Peller - Barclays Capital : All right, that’s very helpful. Just one quick follow-up, last, through the year margins were a little below what you expected, you are now calling back once again for 10 to 30 basis points of margin expansion in line with how you guys like to deliver? So I mean, can we say, is it fair to say that the pricing pressure or the outsourcing questions that we had seen that may have affected that has been steady or potentially abating now, it’s getting better? David P. Rowland: I would say that the inflection point that we saw in the first half of the year is more stable but yeah, the trend continues. I think what we saw in the first half of the year was an inflection point where there was a period of acceleration, which I had pointed out at the time as not unusual. We’ve had to manage through inflection points previously and so that’s what we are doing now. On the pricing overall and if I talk about pricing in the context of the margin quality, on the deal -- on our bookings, our pricing I will say now has improved in the second half of the year. I was hesitant to say that in the third quarter because we don’t want to kind of jerk back and forth on pricing, we want to see a trend. Darrin Peller - Barclays Capital : Right, right. David P. Rowland: But now that I have seen the two quarter strung together our pricing as defined as the margin quality of the work we put on the books was better in the second half of the year then it was in the first half of the year. So in that sense we have seen improved pricing in the second half of the year. Darrin Peller - Barclays Capital : That’s good to hear, thanks guys. David P. Rowland: All right, thank you. Operator : Tien-Tsin Huang, JPMorgan. Please go ahead. Tien-Tsin Huang - JPMorgan: Great, thanks good morning. Just I wanted to ask -- I just want to ask about the visibility into the 10 to 30 as well on the operating margin. I am especially curious about gross margin because I heard the comments on taking actions on improving profitability. Is that action, it sounds like also work to do, so is that subject to market conditions in terms of what you are going to do or is there something that’s in flight today, just trying to get a better appreciation of again the visibility into that 10 to 30. David P. Rowland: Yeah, I mean it’s really, if you think about it Tien-Tsin there is -- maybe I’d call out four things that we are focused on to deliver the 10 to 30 and some of these are things that you’ll understand very well. The first thing at the core of what we are focused on is overall payroll efficiency. And we’ve referenced that in certain parts of our business as we had this inflection point there were some payroll inefficiencies that had resulted from that which we would address beginning in the second half of the year and we have done just that. That is ongoing but yet what we have done so far has some benefit in to next year but job number one would -- margin expansion for us is payroll efficiency. And I think we’ve proven that if you look at it over a period of time we are very good at doing that but we are certainly not immune to having a quarter or two where business conditions change where you can’t just turn the dial at the moment. The second thing we are focused on is our overall contract profitability and that means for each dimension of work we do we are working to optimize the profitability in the context of that market. So if you take what we do in Digital or Application Services or Accenture Strategy as an example. But then the other part of that is that we have a diverse set of businesses within Accenture now and so the other dial is making sure that we have the right mix across the different offerings, businesses that we have so that at the portfolio level we’re optimizing the overall contract profitability. The third thing that we are focused on is business operations efficiency, which is you know the cost of us just running and managing our business which is an ongoing objective and so maybe I’ll just stop there. Those are the three big things and we have our sights set on actions around each of those areas. Now it's too -- it's on us to deliver. But there isn't anything that happened in this year, even reflecting on our second quarter call, there is not anything that's happened this year that has taken our eyes off of our focus on modest margin expansion which we've defined as 10 to 30 basis points. Tien-Tsin Huang - JPMorgan: Okay, now that's helpful. So can you just quickly elaborate on, I don’t if you gave on headcount growth targets this year and as my, not a real follow-up just the acquisition contribution in fiscal '15. I'm curious how overall acquisitions are performing and we've seen some larger acquisitions in this space and I am curious if your appetite to do deals has changed in anyway? That's all I have, thanks. David P. Rowland: Let me comment first on the inorganic '14 to '15 and then may be Pierre would want to comment just on our acquisition philosophy and strategy. So Tien-Tsin you will remember that on the last call I said that the inorganic contribution would in the 1.5% to 2% range, in '14 to be clear. I'll just remind everyone that we measure inorganic on a rolling four quarter basis. So from the time an acquisition comes on the books for four quarters we include in our inorganic number, after that it becomes part of our organic engine if you will. So where we landed the year is that the inorganic contribution was, which we felt very good about was closer to 2% than 1.5%. And we do expect next year that part of this is just the timing of -- we had our most significant acquisition activity in the first half of this year. So the timing is such that the inorganic contribution next year will be closer to the 1% range. And so when you think about organic growth in '15 that's all in the mix of the 4% to 7% as well. We feel very good about what we see in our organic business and hence we've got the range of 4% to 7% even with the lower contribution of the inorganic. Pierre Nanterme : Yes, on acquisition I mean what you've seen this last couple of years is all the efforts we made and yielding results now to position our portfolio of businesses for growth in this new environment of mainly digital computing world. And so we've been working hard on this and we've been using acquisition to accelerate this repositioning, especially in two areas of our business. One is at what we are calling now Accenture Digital and the other one being Accenture Operations. We have really channeled significantly our investment in these two areas to answer -- to provide the right response to the market which is quite keen to buy on digitalization and on the other end on rationalization. We deployed, if I remember well, around $800 million in fiscal year '15. $740 million in fiscal year '14, so it’s giving you a sense about the kind of level of cash we might deploy in the context of the strategy, which doesn’t mean that if we have the opportunity we can’t do more. If we believe there is an opportunity we need to capture that would significantly enhance our capabilities, both in the digital world or in the operations world or in some of our markets around the world and we will be prepared to step in. Again we're not changing the overarching philosophy. We are making acquisition to grow on top of these acquisitions and to acquire unique and differentiated capability. We can grow then organically. And this is exactly what we did with Procurian and this is exactly what we did in past with acquisition of [Richfield], avVenta and [Acceria]. So this is the mental model, capabilities deploying in the range of $800 million plus the opportunity to deploy more, if it is necessary with always the perspective to scale and to scale rapidly to take a market leading position. Operator : James Friedman, Susquehanna. Please go ahead. James Friedman - Susquehanna Financial Group : Hi, thank you. Pierre in the fiscal Q2 conference call you had suggested that Accenture Digital, I think the language used was growing solid double digit. I was wondering if you would be comfortable giving us an update as to the growth rate as of the end of the year. Pierre Nanterme : Regarding Digital? James Friedman - Susquehanna Financial Group : Digital, yeah. Pierre Nanterme : I am taking this opportunity to -- I was very pleased to read and very impressed with the note you communicated on us and I liked especially the call to action, a good offense is a good defense and I think this is exactly what we do at Accenture. We’re always playing offense. And indeed for us playing offense is to take some very significant steps in the digital because this is the segment of the market which is growing well. We anticipated that few years ago and we definitely accelerated our growth strategy regarding digital. If you will today and probably for the first time we’re going to communicate this number outside but we feel very confident that we can communicate that number of our digital business because it’s extremely analytical based and the scope is very precise. Today what we’re doing with Accenture Digital is around 17% of our business growing in the double digit. So around $5 billion revenue in fiscal year ’14 at Accenture and I'm indeed very pleased with that because this is a business which is growing fast double digit, which is extremely relevant for clients and which is now meaningful in the business of Accenture when you’re starting to hit the 17%, trending certainly to the 20% of the business it is a meaningful business and I'm extraordinarily pleased with repositioning we’ve been undertaking. James Friedman - Susquehanna Financial Group : I’ll need to pay more attention to my titles now that I know you’re reading them. I wanted to ask in that same regard, do you have any observations, Pierre about which operating groups it’s more prevalent in or which geographies it’s more prevalent in, those would be my follow-ups, thank you. Pierre Nanterme : Yeah, sure. I mean what’s good, if you will or impressive is Digital is pervasive across the patch. So it’s clearly a set of technologies and I'm talking about of course the digital consumer, the digital enterprise, the digital operations all related to analytics, of course cloud enabling technologies, usually known as SMAC in the past or [mobile] and each cloud is absolutely pervasive across the board. So we’re starting to see good traction of course with more the B2C kind of industries if you will, I'm thinking about retail, I'm thinking about consumer good, financial services, telecom, good appetite for that but certainly we see the second wave of digital impacting now more the B2C businesses, I could have mentioned Healthcare. So Healthcare is probably an hybrid because it’s B2C as well as B2B and then you move in to more the manufacturing kind of organization with what we know we call it the famous IOT, the Internet of things and we are taking step as well to move from the B2C to do B2B2C and from the B2B and from the digital consumer to the Internet of things. So the early adopters we are very pleased with them. They are the usual suspects but now we see good traction in all the parts of the business. And I'm thinking even about the resources where we’re starting to put digital in what we are calling digital plant and digital operations and things we’re doing with some of our partners and we’ve recently created joint ventures as you might have seen with General Electric around aircraft maintenance as well as intelligent pipeline, which is the new launch we made with General Electric. And on the other side of the spectrum with Siemens around the SmartGrid. So extremely pleased to answer that question, I guess you see my excitement playing the offense. Operator : Lisa Ellis, Sanford Bernstein. Lisa Ellis - Sanford C. Bernstein & Co.: Good morning guys, happy to be joining these calls. I wanted to ask a couple of questions about the labor market and get your take on how you’re seeing trends in the labor market, if I just look at -- your attrition picked up again this quarter, gross profit has ticked down and looks like your accrued payroll is down year-on-year. So you could read into that, that you’re seeing some labor pressure in service delivery, especially given your GDN mix has been constant now for six or seven quarters. So just want to see if that’s kind of consistent with what you’re seeing and in that context how you see that trending going into next year? David P. Rowland: Yes I would -- maybe let me just pick up on the last thing you said if the read through, if you read through is that we’re seeing in, in service delivery -- by the way, Lisa welcome to the call. I’ll just go back and point out again that our contract profitability which is our service delivery has actually improved sequentially the last two quarters. So that is on an upward trend. Lisa, you also referenced gross margin and there is a lot of things that go into gross margin beyond just the contract delivery cost. You have for example things like training and recruiting and we typically bring a lot of people on broad in the fourth quarter and this year that was especially true as our revenue is growing, as an example. You have other things that would impact, for example I referenced supply side actions that we have taken in those parts of our business where we are dealing aggressively with fine tuning the overall payroll efficiency and when we do that those costs can go through gross margin. And then there can be the normal ebb and flow whereas in one quarter we can have a lot of business development activity and in other quarter just even beyond new hires you might have a heavy training quarter and the overall payroll efficiency isn’t changing just where people charge their time as. That’s why we repeatedly say that to understand our business you really have to focus on operating margin. And that’s really the bottom line. Lisa you also referenced the attrition number going up, which I called out. It did go up but at the 15% level that’s well within our range and really frankly well within the norm of services companies like ours. We focus everyday on our people, on market relevant compensation, on employee engagement, which we measure regularly, on polled surveys et cetera that is a core part of our culture and that will always be taking care of our people and our clients first is really what we focus on. Lisa Ellis - Sanford C. Bernstein & Co.: Terrific. And then my follow-up is actually on the BPO side. You highlighted that or called that out as one area of particular strength. Can you just elaborate a little bit on what service lines in particular and is the service mix in there evolving as you are seeing increased demand on BPO? Pierre Nanterme : Yes, absolutely. So BPO which is now part of what we are calling Accenture Operations where we put together our infrastructure services and business process services, if you will, to create what we believe is going to be a unique value proposition in the marketplace, in the context of moving more and more BPO, provide more and more BPO as a service on platforms and all of these cloud enabled. So all of this -- this is the essence of the creation of Accenture Operations and again I think we are making in the market very significant steps because as far as I know we are the only one today, are proposing this opportunity. So BPO is an excellent answer to what I called before the renationalization agenda of our clients to get more efficiency and more productivity. Again BPO is pretty hot across the board when you are looking at our results and especially around what we are calling the [original] tools, Finance and Accounting, HR Administration and of course procurement where we are clearly now the market leader. We are selling these three capabilities for reduced input across all the industries. I am thinking about recent win in financial services with a European Bank where we are now driving all their finance and accounting operation. Of course from an F&A we’ve communicated around this big win with this oil and gas company in Europe, a giant as well, we are doing all the HR, Administration of one of the largest consumer good company in the world and I can mention this and extremely recently in electronic equipment we’ve been selected to be clearly their backbone in running their Finance and Accounting, their HR, their IT and part of their sourcing operation to support them in one of their largest scale transformation program today in the industry. So it is pretty hot and again I am coming back at the heart of our -- at what I call repositioning or what I think our business is if you will from what we were and we are still famous for the more classic ERP and technology business. We continue and of course to be competitive in that space but we added two big engines for growth at scale, double-digit extra meaningful for Accenture, Accenture Digital on one hand. I mentioned this $5 billion business and Accenture Operations on the other hand which is another formidable machine for growth. KC McClure : Steve we have time for one more question then Pierre is going to wrap up the call. Operator : Due to time constraints, our last question will come from the line of David Togut of Evercore. Please go ahead. David Togut - Evercore Partners : Thank you. Good morning Pierre and David. David P. Rowland: Hey good morning David. David Togut - Evercore Partners : Good morning, could you quantify for us the 2015 average wage increase and also the average price increase for 2015? David P. Rowland: David, the answer -- I guess the short answer is no. The reason is that when we quote a number like that on the wage side it just potentially creates a lot of confusion within our employee base, where it varies so much country-to-country and to have an overall average number sometimes just creates confusion. Maybe I'll just stop there. We really can't comment on either one of those, sorry about that but… David Togut - Evercore Partners : But for context, David we see attrition going up for the last two quarters and that would suggest for an environment of rising wages. Can you just bracket for us possible ranges, so we can understand the gross margin question a little better? David P. Rowland: I mean what I can say is there is nothing unusual with respect to our wage increases in '15. They are -- so there is -- I guess I could say there is nothing unusual. There is nothing, there is no -- while there is nothing unusual in response to what you perceive to be perhaps a building issue, I think that certainly their markets and skills were -- that are in higher demand and when we see those we respond very proactively with what we do with our comp. But there are also a lot of markets around the world where there is deflation and deflationary trends for compensation and so -- what we always do is we're market relevant. And so if you're trying to understand is there anything unusual that we anticipate in '15 with respect to wage increases, the answer to that is no. David Togut - Evercore Partners : Thank you. That's very helpful. David P. Rowland: Okay, thank you. Pierre Nanterme : Thank you everybody and thanks a lot for all your good questions this morning. Just in closing the call and reflecting on what might happen moving forward and as we enter fiscal year '15, I am confident in our ability to drive profitable growth and to deliver our business outlook for the year. We have momentum in our business. We are investing in new capabilities to be even more relevant, differentiated and competitive. And with our highly diverse portfolio of business combined with the disciplined management of our operations we are well positioned to deliver sustainable long term profitable growth. I want to take this opportunity to thank the men and women of Accenture who everyday and everywhere around the world work side-by-side with our clients to bring their unique skill to bear through passion and their amazing commitment to deliver value. Thanks to all of them. And I would like to thank you, our investors for your continued support and your confidence in Accenture. We look forward to talking with you again next quarter and also to seeing many of you in person at our Investor and Analyst conference in New York on October 7th. In the meantime if you have any questions, please feel free to call KC. All the best. Operator : Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,014	4	2014Q4	2015Q1	2014-12-18	4.64	4.666	4.981	5.027	null	17.82	18.09	Executives: KC McClure - Managing Director, Head of IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : 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 Operator : 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. KC McClure : 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. Pierre Nanterme : 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. David Rowland : 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. Pierre Nanterme : 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. David Rowland : 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. KC McClure : 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. Operator : Thank you. [Operator Instructions]. Our first question today comes from Tien-Tsin Huang representing JPMorgan. Tien- Tsin Huang : 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? David Rowland : 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. Tien- Tsin Huang : 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. David Rowland : 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. Tien- Tsin Huang : Thanks. Operator : We’ll go to line of Edward Caso with Wells Fargo Securities. Please go ahead. Edward Caso : 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. Pierre Nanterme : 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. Edward Caso : 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? Pierre Nanterme : 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. Edward Caso : Thank you. Operator : We’ll go to line of Brian Essex with Morgan Stanley. Please go ahead. Brian Essex : 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? David Rowland : 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. Brian Essex : 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? Pierre Nanterme : 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. Operator : We have a question from Lisa Ellis with Sanford Bernstein. Please go ahead. Lisa Ellis : 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? David Rowland : 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. Lisa Ellis : 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? David Rowland : 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. Operator : And we will go to the line of Ashwin Shirvaikar. Please go ahead. Ashwin Shirvaikar : 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. David Rowland : 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%. Ashwin Shirvaikar : 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. David Rowland : So that was a statement or question? Ashwin Shirvaikar : The last five words were a question. David Rowland : 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. Ashwin Shirvaikar : Okay, any color on this start-up cost turn some of the BPO things you signed? I mean any other color? David Rowland : Not really and nothing to add beyond what I’ve said there is. Operator : Our next question is from Moshe Katri with Cowen and Company. Please go ahead. Moshe Katri : 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. David Rowland : 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. Moshe Katri : 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? KC McClure : Moshe, this is KC, I'm sorry, we’re having a tough time hearing you, you’re breaking up a little bit. David Rowland : Which vertical were you asking about? Moshe Katri : FS, financial services. KC McClure : Did you just want a little color on financial services? Moshe Katri : 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. Pierre Nanterme : 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. Operator : Our next question is from the line of Dan Perlin with RBC Capital Markets. Dan Perlin : 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. Pierre Nanterme : 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. Dan Perlin : 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. Pierre Nanterme : 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. Operator : Our next question is from Jason Kupferberg with Jefferies. Please go ahead. Jason Kupferberg : 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. David Rowland : 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. Jason Kupferberg : 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. David Rowland : 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. KC McClure : Tom we have time for one more question and then Pierre will wrap up the call. Operator : Our final question today will come from the line of Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : 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? David Rowland : 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. Pierre Nanterme : 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. Bryan Keane : 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. David Rowland : 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. Pierre Nanterme : 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. Operator : Ladies and gentlemen, this conference will be available for replay starting at 10.30 AM this morning and running through March 26 at midnight. You may access the AT&T executive playback service at any time by dialing 1800-475-6701 and entering the access code of 34557, that number again is 800-475-6701 please enter the access code of 34557. International participants may dial 320-365-3844 and again the access code is 34557. And that does conclude our conference for today. We thank you for your participation and using the AT&T executive teleconference service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,015	1	2015Q1	2015Q2	2015-03-26	4.679	4.703	5.038	5.082	null	18.77	19.07	Executives: KC McClure - MD and Head of IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Joseph Foresi - Janney Montgomery Scott Tien-Tsin Huang - JPMorgan Bryan Keane - Deutsche Bank Dave Koning - Dave Koning Jim Schneider - Goldman Sachs David Grossman - Stifel Nicolaus Charlie Brennan - Credit Suisse David Togut - Evercore ISI Sara Gubins - Bank of America Merrill Lynch Edward Caso - Wells Fargo Securities Darrin Peller - Barclays Capital Operator : Ladies and gentlemen, thank you for standing by and welcome to the Accenture’s Second Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. And I would now like to turn the conference over to our host Managing Director and Head of Investor Relations, KC McClure. Please go ahead. KC McClure : Thank you, Brad and thanks everyone for joining us today on our second quarter fiscal 2015 earnings announcement. As Brad 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 the second quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the third quarter and full fiscal year 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. Pierre Nanterme : Thank you, KC and thanks everyone for joining us today. We are extremely pleased with our financial results for the second quarter, continuing our momentum from the first quarter. Our strong performance in the second quarter was again broad-based across the different dimensions of our business and we gained significant market-share. Here are a few highlights, let me start with our new bookings of $9.4 billion, our second highest quarterly bookings ever. This brings us to 17 billion for the first half and positions us well for the year. We delivered very strong revenue growth of 12% in local currency with double-digit growth in both consulting and outsourcing. Earnings per share were $1.08, a 5% increase. We expanded operating margin 30 basis points to 13.6%. Our balance sheet remained very strong ending the quarter with a cash balance of $4.1 billion and we continue to return a substantial amount of cash to shareholders through share repurchases and dividends. Today we announced a semi-annual cash dividend of $1.02 per share which will bring total dividend payments for the year to $2.04 per share, a 10% increase over last year. So with the first half of the year behind us, I feel very good about our results and the momentum we’re creating in our business and we’ve again raised our revenue outlook for the full fiscal year, over to you David. David Rowland : Thank you, Pierre and thanks all of you for joining us on today’s call. As you heard in Pierre’s comments, we delivered a very strong second quarter. This is the fourth consecutive quarter of strong and building momentum in our business as we continue to execute a growth strategy that’s clearly resonating in the marketplace. During this period, we’ve gained significant market share by being relevant and responsive to the needs of our clients. Looking more specifically at the second quarter, following a strong start for the year in quarter one, we again delivered on all three imperatives for driving shareholder value. Our 12% growth which continued to be broad-based across almost every dimension of our business reflects the durability of our revenue growth model as we drive growth at scale. Our operating margin of 13.6%, 30 basis points higher than last year demonstrates the success of the actions underway to improve profitability and reflects our ability to manage our business to drive sustainable margin expansions and our free cash flow of 220 million was consistent with our expectations and keeps us on a trajectory to deliver free cash flow and excess net income for the full year while returning significant cash to shareholders. So, we were extremely pleased with the second quarter, very strong growth, strong margin expansion and cash flow consistent with our expectations. With that said, let's now turn to some of the details starting with new bookings. New bookings were 9.4 billion for the quarter as Pierre said representing the second highest quarter in our history. Consulting bookings were 4.2 billion with a book-to-bill of 1.1, outsourcing bookings were 5.1 billion with a book-to-bill of 1.4. On a year-to-date basis bookings are now just over 17 billion, a very healthy level especially when considering the FX impact and puts us within our target book-to-bill range for both consulting and outsourcing. Taking a closer look at our quarter two bookings, an important theme was the continued strong demand for both digital related services and operations. At the same time we saw very good demand for both application services and consulting related services. Another important characteristic was the broad-based nature of the uptick in new bookings with sequential improvement in bookings across all operating groups and all three geographic areas. Finally, we were pleased that we had a record 15 clients with bookings in excess of 100 million which points to the strength of our client relationships and their trust in our ability to drive the most important initiatives on their agenda. Turning now to revenues, net revenues for the quarter were 7.49 billion, an increase of 5% U.S. dollars and 12% local currency reflecting a negative 6.5% foreign exchange impact compared to the negative 5% impact provided in our business outlook last quarter. Adjusting for the additional FX headwind we came in well above the top-end of our guided range. Consulting revenues for the quarter were 3.8 billion, up 4% in USD and 11% in local currency. Outsourcing revenues were 3.7 billion, up 6% in USD and 13% in local currency. Looking broadly at the major drivers of revenue growth in the quarter, we saw consistent trends with our most recent quarters. The dominant drivers were strong double-digit growth in digital related services, operations and application services, and it’s also noteworthy that our results reflected an uptick in growth rates in both strategy and consulting services which are now growing at mid single-digits. Turning to the operating groups, Communications, Media and Technology delivered another quarter of 15% growth, which continue to be broad-based with almost all dimensions growing double-digits. The strongest growth drivers continue to be digital related services, cost rationalization and several large transformational projects, as well as increasing demand for network related services. H&PS also grew 15% in the quarter and the drivers continue to be very significant growth in our health business, particularly in the public sector, driven by our health exchange and Medicaid related projects at U.S. federal and state clients. Digital related services and operations, particularly in BPO, continue to be very significant drivers of growth as well. Products growth of 13% continued to reflect strong and balanced growth across all three geographic regions and most industries. Digital and cost optimization were significant areas of focus for clients in this operating group as well, application services was also a driver as well as very strong overall growth in consulting. Financial services grew 9% led by strong growth in Europe and across all three industries particularly in capital markets and insurance. Digital related services continue to be a major theme as our clients are looking for new and innovative ways to connect with their customers and serve their needs. Additionally cost optimization and risk and regulatory work continue to be significant areas of focus. Resources grew 6% with growth in all three geographic regions and all industries except energy. Revenues were driven by growth in outsourcing across all industries including energy as clients focus on operational efficiency and cost rationalization. Moving down the income statement, gross margin for the quarter was 29.9% compared with 31.3% for the same period last year down 140 basis points. Sales and marketing expense for the quarter was 10.7% of net revenues compared with 11.7% of net revenues for the second quarter last year down 100 basis points. General administrative expense was 5.6% of net revenues compared with 6.2% of net revenues for the second quarter last year down 60 basis points. Operating income was $1 billion in the second quarter reflecting a 13.6% operating margin up 30 basis points compared with quarter two last year. Our effective tax rate for the quarter was 26% compared with an effective tax rate of 24% in the second quarter last year. Net income was 743 million for the second quarter compared with net income of 722 million for the same quarter last year. Our diluted earnings per share were $1.08 compared with EPS of $1.03 in the second quarter last year. This reflects a 5% year-over-year increase. Turning to DSOs, our days services outstanding continue to be industry leading, they were 35 days down from 37 days last quarter. Free cash flow for the quarter was 220 million resulting from cash generated by operating activities of 301 million net of property and equipment additions of 82 million. As I mentioned in quarter one, we shifted the timing of a portion of our compensation payments from quarter one to quarter two. While this shift negatively impacted the second quarter there is no impact to full year cash flow. Moving to our level of cash, our cash balance at February 28th was 4.1 billion compared with 4.9 billion at August 31st last year down 800 million as we’ve returned 1.9 billion to shareholders through repurchases and dividends in the first half of fiscal ’15. Moving to some other key operational metrics, we ended the quarter with a global headcount of about 323,000 people, we now have approximately 226,000 people in our global delivery network. In quarter two, our utilization was 91% consistent with last quarter, attrition which excludes involuntary terminations was 14%, compared to 13% quarter one and 12% in the same period last year. Lastly, we continue to expect at least 90,000 people will join our company in fiscal ’15. Turning to our ongoing objective to return cash to shareholders, in the second quarter we repurchased or redeemed approximately 6.8 million shares for $601 million, in an average price of $87.72 per share. Year-to-date, we purchased 15.2 million for approximately $1.3 billion, at an average price of 83.62 per share. As of February 28, we had approximately 3.7 billion of share repurchase authority remaining. Finally as Pierre mentioned, our Board of Directors declared a dividend of $1.02 per share representing a 10% increase over the dividend we paid in May of last year. The dividend will be paid on May 15, 2015. So with two quarters in the books, we’ve delivered very strong results and feel positive about how we’re positioned for the remainder of the year. That said, we don’t take anything for granted, we continue to drive our business with rigor and discipline doing everything possible to deliver strong second half for the year. With that I’ll turn it back to Pierre. Pierre Nanterme : Thank you, David. We are adjusting very well against our growth strategies and taking a leadership position in each of the businesses in our portfolio. The investment we’ve made in assets and solutions, in strategic acquisitions, in attracting talent and in building the skills and capabilities of our people has positioned us very well to capture new growth opportunities. We are driving innovation across Accenture to grow capabilities that are both highly relevant to our clients and highly differentiated in the marketplace. You have heard me mention two important trends, digitization and rationalization that are driving demand for our services and contributing to our growth. We invested ahead of the curve to build a capability that will help our clients respond to these trends. Digitization is all about helping our clients tap into new sources of value and new sources of revenue to create competitive advantage. We are helping clients capitalize on these trends to become the disrupters in the new digital world, not the disruptive. A great example is to what we are doing with a leading retailer helping them on vision on finding new ways to attract customers and achieve that goal of quadrupling revenue. We are bringing innovative digital technology to help them move beyond the traditional store model to a multichannel digital strategy. For a global telecommunications provider, we developed a digital strategy underpinned by analytics to significantly upgrade their customer service, while delivering cost savings of almost $100 million. We are also walking with our clients to develop innovative products and services based on the Internet-of-things. We are helping Visa explore the future of mobile payments to make their traffic more convenient even inside a car, leveraging our expertise in digital commerce we build a proof-of-concept to show our consumers in a Connected Car, you can order and pay for it securely. Digital services represent about 20% of our total revenues and were more than 20% in local currency in the first half of the year. We are seeing demand for digital across all dimensions of the business in every industry and around the world and we’re clearly benefitting from the investment we have made in this space. In January, we acquired Structure a Houston based firm that will further enhance our smart grid operations, energy trading and rich management services for utilities and energy clients. In February, we announced the acquisition of Agilex Technologies, a provider of digital solutions for the U.S. federal government. The acquisition enhances our digital capabilities in analytics, cloud and mobility for federal agencies. And earlier this month, we completed the acquisition of Gapso, a Brazilian analytics firm that will expand our advanced analytics capabilities in the supply chain and logistic areas. The second thing rationalization continues to be top of mind for clients as they look for opportunities to increase productivity and efficiency across their organizations. We have invested to take a leadership position in this space with Accenture operations. And we are the first company to combine business process services with infrastructure and cloud services at scale. We’re working with a leading global airline on a major transformation of its procurement function, including a cloud-based supplier portal. The alliance expects to realize significant cost savings as well as increased standardization and transparency. We are helping a global beverage company to create a global operating hub for finance and accounting, HR, procurement, supply chain and marketing operations. Our multi tower BPO services will streamline processes, minimize risk and provide new analytical insights. And we are working with a leading European manufacturer to transform its IT infrastructure. We will migrate existing applications and data services across more than 60 operating companies into a single hybrid cloud environment. We expect to deliver improved services and flexibility, increased automation and a 30% reduction in operating costs. Now turning to the geographic dimension of our business, in the second quarter we again delivered very strong growth across all three of our geographic regions. In North America, we delivered revenue growth of 13% in local currency driven by double-digit growth in the United States where we continue to perform extremely well. In Europe we grew revenues 9% in local currency driven by double-digit growth in many of our largest markets including France, Germany, Spain and the Netherlands. And in our growth markets, we grew revenues 12% in local currency with again strong double-digit growth in three of our largest markets, Japan, Australia and Brazil. So, as you can see, we have delivered an excellent first half of this fiscal year. Our diverse portfolio of business together with our geographic diversity and our unique ability to integrate our capabilities end-to-end positions us very well to bring innovative services to market leading companies both globally and locally. Looking ahead, based on the successful execution of our growth strategy, I feel confident in our ability to deliver sustainable profitable growth over the long-term providing value to our clients, our people and our shareholders. With that, I will turn the call over to David to provide our updated business outlook for fiscal year ’15, David over to you. David Rowland : Thank you, Pierre. Let me turn now to our business outlook. For the third quarter of fiscal ’15, we expect revenues to be in the range of 7.35 billion to 7.6 billion. This assumes the impact of foreign exchange will be a negative 11% compared to the third 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 8% compared to fiscal ’14. For the full fiscal ’15, we now expect our net revenues to be in the range of 8% to 10% growth in local currency over fiscal ’14. For the full fiscal year ’15, we now expect new bookings to be in the range of 33 billion to 35 billion reflecting our revised FX assumptions. Before I continue with our business outlook, I’d like to comment briefly on a non-cash item that will be recorded in the third quarter. In May, we expect to record a non-cash settlement charge estimated to be approximately $60 million as a result of a current offer to former employees to receive a voluntary lump sum cash payment from our U.S. pension plan. This will reduce future risk and administrative cost to Accenture. On a GAAP basis for fiscal ’15, the estimated impact of this settlement charge is approximately 20 basis points to operating margin and approximately $0.05 in EPS. We will provide both GAAP and adjusted results for quarter three and year-to-date results. For operating margin on an adjusted basis, we continue to expect fiscal ’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 on an adjusted basis, we now expect EPS for fiscal ’15 to be in the range of $4.66 to $4.76 or 3% to 5% growth over fiscal ’14 results. Absent the higher FX headwind which impacts EPS by $0.14 our EPS range would have increased $0.10 to $0.14 driven by high revenue growth. Turning to cash flow for the full fiscal ’15, we now expect operating cash flow to be in the range of 3.85 billion to 4.15 billion reflecting our revised FX assumption. Property and equipment additions continue to be approximately 450 million and free cash flow now to be in the range of 3.4 billion to 3.7 billion. Finally, we continue to expect to return at least 3.8 billion through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by approximately 2% as we remain committed to returning substantial portion of our cash to our shareholders. With that, let’s open it up so that we can take your questions, KC? KC McClure : 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. Brad, would you provide instructions for those on the call please? Operator : Of course. [Operator Instructions] And our first question today comes from the line of Joseph Foresi from Janney. Please go ahead. Joseph Foresi : I was wondering could you provide a little more color on your exposure to digital just give us some sense of what you expect the growth rates to be there and how should we think about that as it relates to bookings as far as the size of the deals and the market contribution? Thanks. Pierre Nanterme : I will take the first part of it and indeed as we’ve communicated recently and even this last year, we earn back in rotating more of our business to what we are calling now digital related services. Digital is positive across the board, this is something we anticipated frankly few years ago probably in the range of 29 and we invested a lot ahead of the curve. If you remember around what we are calling interactive analytics, cloud and mobility and now indeed we are significantly benefitted from this wave which is very important that’s why I was very pleased and proud to report our position in term of digital related services. Now at 20% of Accenture revenues in that short period in time and as important and even more important well above 20% local currency growth for the first half of the year. So needless to say that we have a great momentum in that business and indeed its covering a large value of opportunities small, medium, large covering consulting or outsourcing type of work. So digital is positive across a different dimension of our businesses, consulting outsourcing across all industries there are more or less around the 20% some above, a few slightly below and on balance I guess David will comment good pricing. David Rowland : Yes and I think, I mean just as it relates to the bookings question and a peer alluded to this is that, the digital bills do span all sizes. We have larger digital projects and obviously we have a high volume of medium size to smaller project. And I guess what I would say is that you might think about it in the context of the quarter we just delivered, where we delivered 9.4 billion in bookings with a heavy component of digital. And so, I don’t think that this necessarily changes anything in terms of that dynamic overall. Pierre Nanterme : Yes, just to add piece of information on this, as you know we created as well Accenture Digital where we have organized our Accenture interactive, Accenture mobility and Accenture analytics work and what we are aiming at through Accenture way is to create more and more synergies integration end-to-end of the three capabilities and that’s a unique differentiator in the marketplace. Operator : And we do have a question from the line of Tien-Tsin Huang from JP Morgan. Please go ahead. Tien- Tsin Huang : I wanted to ask on the bookings side, just the 15 clients that did bookings over $100 million. That was a big number obviously. Can you comment on the types of deals, geographies, maybe pricing any common theme there and does this in any way pull forward bookings for the third and fourth quarter just wondering if the big deal pipeline has been impacted now that you've signed these deals? Thanks. David Rowland : No it’s I'll tell you, I'll just kind of work backwards. We feel good about our pipeline. I mean obviously, when you have a big bookings quarter you convert a lot of pipeline to bookings. That's a factor. But even with that, we feel very good about our pipeline. We actually feel good about recent movement that we've seen in the larger deal category within our pipeline. Tien-Tsin, I would say just in terms of color on the bookings, I don't know if there are really any dominant themes. It crosses the spectrum of operations including BPO type contracts. There's a flavor of application services in there. And I guess stating the obvious, there's a flavor of Digital in there as well. The thing about our bookings that we were especially pleased with and generally this would apply to the 15 clients is the pervasiveness of the strength of the bookings. And I mentioned that we had sequential growth across all five of our operating groups and all three geographic areas. And so I would say that there's not anything unique about the 15. And again, we feel good about our pipeline going forward. Pierre Nanterme : I mean what I appreciate with our results is they are broad-based and so bookings exactly the same pattern. If you're looking from an operating group standpoint, if you're looking from a geographic standpoint as well, you will see they are extremely well-balanced across the board. So we don't specially benefit this quarter of any outstanding performance of one part of the business compared to the others. It's very well-balanced with of course a lot of Digital across the board and this is the kind of balanced growth we appreciate. Operator : And we have a question from the line of Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Just hoping to get some color on the breakout of consulting and outsourcing and how to think about those on a constant currency basis in the second half of the year? And then my second question is just on gross margins. I know we're solving for operating margins but on the gross margins they were down 140 basis points, I think it's a little more than usual maybe you can just give us some color on the gross margins? Thanks. David Rowland : Yes. I would say first on your first question in terms of the second half of the year, I would think in terms of mid to high single-digit positive growth for consulting and let's say probably high single digit positive for outsourcing. So that puts us on a track for the full year of probably mid to high single for consulting again and low double-digit for outsourcing. In terms of the profitability point, at the risk of being redundant, I guess let me just share a few things with you beyond what I said in the script. First of all, we're very pleased with the 30 basis points of expansion. That’s obviously is at the upper-end of the range what we target and it does reflect a lot of the hard work that our organization has been doing over the last four quarters. What I really focus on when I looked at our profitability are few things. The first thing I focus on is the progression of our contract profitability. And I can tell you that our contract profitability was up compared to the same quarter last year and we continue to be pleased with the progression of contract profitability. The second thing that I look at is the progression of the overall efficiency of our labor cost, both our Accenture personnel and our subcontractors. And we have made really good improvement in our labor cost efficiency for several quarters now and that's in the mix as well when you look at our second quarter results. The third thing I’ll look at is how our organization is doing in managing every dime we spend as if it's our own individually, related to non-payroll expenses. And we've done a very good job with that. And then finally, although this is certainly not last on the list, at the end of the day we are seeking to create head room in our P&L so that we can invest at sufficient levels to really drive our business growth going forward. And we have a good mix of investments in our results as well. And so we always are talking about in this forum at least we get the questions on the gross margin and the SG&A but those are the things that I really focus on and all of those things were in the right zone relative to my expectations, creating the 30 basis points of expansion. The last thing I'll say is gross margin again includes a lot of things. It's not just contract profitability. It includes recruiting, training, integration of acquisitions, on-boarding costs for new hires, et cetera. So, there is a lot that goes in there that ebbs and flows quarter-over-quarter. Operator : And we do have a question from the line of Dave Koning with Baird. Please go ahead. David Koning : And I guess first of all just high level if we think back the last four quarters have been very good and the prior six quarters before that have been kind of low to mid single-digit growth. And I guess I am wondering is this just kind of a natural ebbs and flows of the business that have kind of a nice acceleration after a period of slowdown and really behind the question is can this higher level of growth now that we’ve seen it for a full year kind of stay sustainable or have that kind of been one off of it that allowed revenue to kind of ebb higher that starts to I guess anniversary and starts to slow down a bit just kind of high level just wondering how that plays out overtime? Pierre Nanterme : And commenting on the, I mean the first part of your question and what happened at this last three quarters compared to what happened before. I guess as you know the world has changed significantly and we have put a lot of thought at Accenture on what it takes to be relevant in this new world and to respond to the current needs of our clients and the needs are much more around how we deal with uncertainty, how we deal with volatility, how we bring more flexible solution, how we provide more productivity and efficiency. And that’s why we come with this and it’s obviously like quite simple but this really vision around at the end of the day it’s all going to be digitization of the business for clients on behalf of our clients and the rationalization of their operations. And then we significantly align the Accenture strategic agenda and our investments towards these two main trends. And as you know and you’ve seen that recently and we communicated to a lot, we invested in new skills, we invested in new organization with the creation Accenture Consulting, Accenture Strategy, Accenture Digital, Accenture Technology and Accenture Operations. We made several strategic acquisitions specially focusing on digital and operation we’re quite very deep skills, we have more than 1,000 PSD doing algorithm in analytics at Accenture. So this is what we did this last couple of years and I guess that now we are getting the return on the strategy we set and on the investment we’ve made we are absolutely not complaisant with that but to a great extent we have seen the way of pass through to be relevant to our client, we have committed to it and now we are executing seamlessly. David Rowland : Yes and I would I know that I couldn’t really add anything to that frankly, it's -- I mean you in your question is there anything unusual or like one-time of that nature and the answer is absolutely not and again I think that the thing that you would have to just look at is the broad-based nature of the growth which speaks to the durability and one of the things at Investor Analyst Day David if you remember, is I really talked quite a bit about our growth model and why we believe it is durable overtime and again our enduring objective is to grow faster than the market. Now the market growth rates change overtime and our growth rates will change with it, but our enduring objective is to grow faster than the market and we’re working hard to have durability in our growth model to allow us to do that. David Koning : And I guess just one short follow-up just this quarter the resources margin was 12.8% it hasn’t been under 15% in about six years and just on that line item specifically if something changed a little bit? David Rowland : Yes the operating group margins can be lumpy quarter-over-quarter. As you know, we have been working hard to position our resources business for growth and congratulations to our team for doing that. I also called out if you extracted this from the comments I made on resources, the growth in resources right now is coming really exclusively from our outsourcing related services, operations and application services. And so, you see a little bit of mix there as well. But we’re not -- I am not particularly concerned about the profitability in a single quarter. We have good profit potential in resources going forward and overtime we will tune the levers to get it back to the right level. Operator : And we do have a question from the line of Jim Schneider with Goldman Sachs. Please go ahead. Jim Schneider : I was wondering if you could maybe give us a little bit of color on some of the transactional short duration business and how those bookings are tracking and more importantly going forward what inning do you think we’re in cyclically in terms of that improvement? David Rowland : Well, we’ve definitely seen a increasing volume of the smaller short-term type projects and of course that’s reflected in our consulting growth. And I would say that the drivers of that broadly anchor back to the themes Pierre has talked about so often. You look at the digital space and the nature of the digital work is that it really lends itself to this agile quick turn development and deployment of capability. But also on the cost rationalization agenda, that drives a lot of demand for our strategy practice, for our consulting practice like in the past we’ve referred to as management consulting as an example working with our companies to develop a strategic cost map for cost rationalization and then getting into the implementation of that. And we see some of that in shorter smaller projects which are contracted in phases over a period of time. So those are the kinds of things that are in the mix, Pierre may add some additional flavor to that. Pierre Nanterme : Yes indeed, I think what is interesting to see in the mix of work we are telling is we have at the same time as you know we are quite famous for this large scale transformation program and again this year as mentioned by David we have a few large scale opportunities at times. And at the same time especially with the rise of digital, you have more what I would call higher velocity projects. So I think what we have now in our portfolio of bookings is this large scale transaction which are clearly the kind of unique that will favor Accenture is kind of end-to-end combining all our capabilities to deliver transformation plus the higher velocity programs more digital related services driven and this is this mix which I think has impacted on balance the average duration of our bookings. David Rowland : Yes, does that help Jim? Jim Schneider : And then maybe as a follow-up, but just you're doing well on the cost control side with both sales and marketing and G&A dollars down in absolute terms on a year-over-year basis, any color on how much of that is FX versus organic? And then some of the initiatives you're doing to kind of keep those expenses under control? David Rowland : Yes, I think the -- it's a real cost savings I mean one big area is we’ve talked about for years as you’ll know. But we are always focused on continuing to look for improvements in our sales efficiency and our channel costs and so we have made improvements in that area under the leadership of our COO Jo Deblaere. We also have an ongoing really it’s ongoing transformation agenda for each of our corporate functions. And we very much due to our ourselves I should say we leveraged that the same kind of capabilities that we sell to our clients internally and so we use BPO concepts for example across HR and finance and we have more room to go. It’s an ongoing journey for us just as it is for our clients and we’ve made improvements in our what we call our corporate function cost as well and those are real savings not FX related. And we’ll continue to focus on that going forward. So those are a couple of examples. Operator : And we do have a question for the line of David Grossman with Stifel Financial. Please go ahead. David Grossman : So this was the second consecutive quarter that you beat your revenue guidance and you’ve reached the year. Can you help us understand whether that was again relative to your guidance was faster backlog conversion or some of the smaller higher velocity projects that you just mentioned? And again I know you said that strength was broad based-across the geographies and verticals. But I am just wondering again relative to kind of where you started the year whether that’s more relevant to a particular vertical or a particular geography? David Rowland : Yes it’s interesting because we look quite a bit at where did we come-in better than we expected and not to be too simplistic but the answer is that all five of our operating groups every single one of them came in stronger than what we and they expected when we provided guidance in December. And again I think it gets to -- part of the deal was that when you’re on a revenue ramp it can be a little bit more difficult to predict the slope of the ramp because for example we can be quite confident in the work activity but yet we have to also think about our operating groups too, the availability, to the resources, the timing the projects to get started et cetera. And so at the end of the day all five of our operating groups exceeded so again it was broad-based. And I would say that it was more in our consulting related services than our outsourcing so consulting came in stronger and part of that again goes back to the digital theme that we talk about as a driver of consulting but also we see more activity across our other consulting type services both strategy and our core consulting business management consulting et cetera. So it’s really consulting came in better and all five operating groups came in better those were really the drivers. And I do think that the higher volume of smaller contracts is in the mix of everything I’ve said really across the board. David Grossman : And then just secondly I think you mentioned the EPS impact of currency at the end of your prepared remarks. Could you just repeat what the impact your expectation for the EPS impact is for the year? David Rowland : So what I said specifically is that there were really two factors that we use to adjust the range, one is the higher revenue which we increase revenue and we narrow to a 2 point range so therefore we narrowed the EPS range. And the second factor was the FX, plain and simply those two factors and what I’ve said is that absent the FX headwind which impacted our EPS by 14 pennies so FX impacted by 14 pennies, our revenue would have increased $0.10 to $0.14 absent the impact of -- I am sorry our EPS would have increased $0.10 to $0.14 absent the $0.14 FX headwind. David Grossman : And does that include the first quarter impact as well or is that just from the second quarter on? David Rowland : That’s from the second quarter on the revised full year guidance. David Grossman : Okay, because you had a fairly significant FX impact in the first quarter as well, right? David Rowland : If you look I mean if you look at where we started the year versus so if you take our initial guidance with where we are now absent the FX headwind we’ve increased our guidance $0.16 to $0.20. David Grossman : Okay, got it, great. David Rowland : And then the difference is all FX. Operator : And we do have a question from the line of Charlie Brennan from Credit Suisse. Please go ahead. Charlie Brennan : Thanks so I’ve got two questions if that’s possible the first is just on… David Rowland : I was going to say. We’ll judge whether we give you a second question based on the first. Go ahead. Charlie Brennan : Okay, I’ll go easy then a couple of the companies that I’ve been speaking to in Europe have been suggesting there is incremental pressure from clients from more favorable DSO terms I was wondering if you can just put that in context with the two day move we’ve seen in this results and maybe can you give us some medium-term expectations of where you would like to see DSOs in two to three years time? David Rowland : Yes I mean there's no doubt that the environment is tougher on commercial terms and conditions and billing and collections are really right in the mix of that. So we've seen that trend certainly. We had always signaled, by the way that the DSO levels that we've had at some point in the recent years past when they have gotten down in the low 30s, that we had always signaled that, that was likely not sustainable overtime and that our DSOs would creep back up to the mid to even high 30 range. And so that pattern has played out exactly as we had expected and anticipated. So we're very comfortable with where we are. I think that by and large if you look at the last few quarters, our DSO has been relatively stable. It was up a little. Now it's down a couple of days. So we're in the range that we expect to be, in the range that we expect to be let's say for the rest of this year. And it's an area that we are always focused on and have been very good at managing our billing and collections. So I would just say that at least for this year, we're in the range of what we expect. Charlie Brennan : And if you look out two or three years, does the high 30s feel like the right number or is it the type of situation you are just taking every year as it comes? David Rowland : I mean it's hard to say, I mean I am not going to look out a few years really, I think what we’ve said again is that we could certainly see DSOs creeping up to the mid to upper 30s and that’s where we’re at. Operator : And we do have a question from the line of David Togut with Evercore ISI. Please go ahead. David Togut : Could you update us David on pricing across consulting and outsourcing and in particular perhaps application, maintenance and development where I think you called out perhaps a year and a half ago some increasing pricing pressure, where do you stand today? David Rowland : I would say overall we’re pleased with the way our pricing has progressed since the same time last year. We saw actually improvement in our pricing in the second quarter, I would be clear though that the environment continues to be a competitive environment, no doubt. But we have seen some progression in pricing in certain parts of our business and overall we were very pleased with the margin quality of the 9.4 bookings. I would say that in application services again to be clear David, when we talk about pricing, we’re talking about the margin percentage on the contracts that we sign and in application services we’ve also seen positive progression in the last six months. David Togut : When you talk about improved pricing and I think Pierre mentioned good pricing in digital, are you seeing material pricing increases in digital services currently? David Rowland : I would say that we see differentiated pricing in digital relative to other parts of our business and I think I’d leave at that, unless Pierre you have any… Pierre Nanterme : Yes no, no I think digital related services as long as you can bring differentiated solutions especially the one we invested a lot around is commanding a better price compared to the rest of the portfolio, I mean this is what it is. David Rowland : Yes, I mean it's all about in areas where we have a leading capability, leading differentiated capabilities and typically we give good pricing and we are in a very strong position in digital with our offerings, our skills, capabilities et cetera. Operator : And we do have a question from the line of Sara Gubins with Bank of America. Please go ahead. Sara Gubins : You mentioned in your prepared remarks that you're gaining significant market share, could you talk about where you think that’s coming from? Pierre Nanterme : I guess we are gaining market share certainly in all the three regions where we are operating. So this is again quite well balanced growth given our strong double-digit growth now for almost four years in a row in the U.S. This is probably a place where we are accelerating our gain and I guess we are probably gaining against clearly the more traditional player of our basket of competitors, I mean you know all of them and you know their results and we are growing par with the best of the peer players in each of the businesses we’re operating in. But so far indeed market share gains are quite broad-based again I mean if you look at the -- we have 10 of our industries out of 19 growing double-digit. So I guess and another four with high single-digit growth. So I guess that we are gaining market share in many of our industries I mentioned in Europe as an illustration that we have double-digit growth in Germany, in the Netherland and again I am sure we are gaining significant market share given the market over there when you grow in double-digit. So it’s quite wide spread in many again double-digit growth in Japan, in Brazil, in Australia, so in all places where we have double-digit growth we are gaining market share technically so we are pleased with that. Sara Gubins : And then could you give us an update on the estimated contribution of acquisitions to fiscal ’15 revenue? I think you were talking about, about 1% to 1.5%, contribution? Thanks. David Rowland : Yes, and really no change from what I said last quarter on that. Operator : And we do have a question from the line of Edward Caso with Wells Fargo. Please go ahead. Edward Caso : My question revolves around sort of non-linear growth, headcount 323,000 you're going to add 90 fresh bodies this year. Where do you stand with creating B-pass opportunities and other sort of volume or outcome based contracts? Thanks. Pierre Nanterme : We continue working on this to create more bifurcation between headcount and revenues. I think we may continue some good progress even if we or we feel at the beginning of this journey if you will. But I've been recently in India as an illustration visiting our BPO practice and looking at all the innovations we are bringing especially around automation, especially around robotics and especially around cognitive computing. And if you bring these three capabilities all together we have indeed a unique opportunity it's happening as we speak in our operations in India to bring a level of productivity and efficiency in our business process operations where we start seeing this bifurcation between headcount growth and revenue growth and we might expect some acceleration in ’16 and beyond. So it's still early days regarding the leading edge characteristics of these technologies. But I'm feeling extremely positive and even more important Mike Salvino is leading our Accenture Operations business, is feeling extremely confident that we have the tools and techniques to move to the next level of productivity. Edward Caso : And my other question is now that you’re seeing improved local currency growth and everything seems to be clicking. Will you dial back your M&A investments that you had stepped up in recent years? Pierre Nanterme : No. Edward Caso : Thank you. Pierre Nanterme : I mean I could elaborate but I think the answer is that. I will elaborate that I mean we will continue to invest to acquire, build and develop differentiated skills and capabilities especially around digital and operations. And we’ve been very successful to do it from now and we will continue with that agenda. KC McClure : Brad we have time for one more question and Pierre will wrap up the call. Operator : Thank you. And that last question comes from the line of Darrin Peller with Barclays. Please go ahead. Darrin Peller : Look I want to just start off quickly on the resources and then follow-up on Europe on resources again I know you said that obviously there was some timing around margins. But really the growth rate just, even though it's only 6%, it's accelerating a pretty big headwind for you guys. Number one, do you see enough bookings or contracts there to actually continue that acceleration despite oil prices and everything we're seeing in the industry so that could become more and more of may be a tailwind? And then secondly on Europe, I just wanted to ask about the offshore labor arbitrage opportunity there. I mean for a while you guys have been a lot more onshore outsourcing orbiting Europe as the -- that was really the way to operate there. We know now there's a lot of real demand there for more offshoring and I know you have the GDN to do so. Just curious what you're seeing on that front. That could be a I think a long, multi-year opportunity. David Rowland : Yes I’ll comment on resources and maybe let Pierre comment on Europe. On resources we do feel good about how the business has been repositioned for sustained growth now going forward. The bookings have been very good in terms of their book-to-bill on a year-to-date basis and that speaks well to the growth opportunities going forward. I think I have mentioned that when you look at resources that had growth in all three geographic areas and in all of the industries except energy but even in energy we actually had very strong double-digit growth in our outsourcing related services, so operations and application services. And so what we’re finding is that even with the pressures in energy, we really are helping our clients with our application services and operations services as they were from their cost optimization cost rationalization agenda and so we think that we are positioned for sustained positive growth in resources even with the recent challenges in energy. Darrin Peller : That’s great, thank you. Pierre Nanterme : Yes and to add the color on this resources recovering many industries, if you take chemical which is a very important industry for us, we’re growing more than 20%. So when you look at it from a portfolio standpoint, from a European standpoint I mean you're absolutely right to mention that the outsourcing market is vibrant again our clients in Europe are looking for more efficiency and more productivity. And if I look at digital versus digitization versus rationalization probably U.S. would be a bit more on digitization, where Europe would be a bit more on rationalization which is offering a good space for the outsourcing work. And again we benefit from the diversity of our global delivery network and we can come with our clients and we’d like to mention that you need to be sometime a little bit more balanced and subtle in the way you're driving outsourcing in Europe. With respect to the different nationalities labor market and environment and so the mix it's more that the right sourcing and the smart sourcing with the good mix of onshore, offshore and with benefit of Accenture providing a very diverse global delivery and what will of course resources on an offshore standpoint especially in India and the Philippine, but as well a network of near shore centers which is helping us to get to what we believe is the right sourcing approach for our clients. So, I am feeling extremely confident and based on the result of outsourcing business in Europe is doing well. Pierre Nanterme : Thank you to all of you. Thanks a lot for taking the time and participating to our call today. As you’ve seen with half of the fiscal year been it's clear that we have built strong momentum in our business and it's clear as well that we’re gaining significant market share. We are seeing clearly the return on the investments we’ve made, particularly in digital and operations and we will continue to execute our growth strategy to bring innovative and differentiated services to the marketplace. In closing, I want to thank the 323,000 women and men of Accenture for their dedication, their passion and their commitment to delivering value for our clients each and every day in the marketplace. Thank you to all of you. 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 to all of you. Operator : And ladies and gentlemen, this conference will be available for a replay after 10.30 today through June 25th. You may access the AT&T Teleconference Replay System at any time by dialing 1800-475-6701 and entering the access code 353090. International participants may dial 320-365-3844 and those numbers again are 1800-475-6701 and 320-365-3844 again entering the access code is 353090. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,015	2	2015Q2	2015Q3	2015-06-25	4.765	4.817	5.186	5.262	null	19.32	18.8	Executives: KC McClure - Managing Director, Head, Investor Relations Pierre Nanterme - Chairman and CEO David Rowland - Chief Financial Officer Analysts : Bryan Keane - Deutsche Bank Tien-Tsin Huang - JPMorgan Brian Essex - Morgan Stanley Lou Miscioscia - CLSA Lisa Ellis - Bernstein James Schneider - Goldman Sachs Dan Perlin - RBC Capital Markets James Friedman - Susquehanna Jason Kupferberg - Jeffries Operator : Ladies and gentlemen, thank you for standing by. And welcome to the Accenture’s Third Quarter Fiscal 2015 Earnings Call. At this time, all parties are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the call over to our host, Ms. KC McClure. Please go ahead. KC McClure : Thank you, Brad. And thanks everyone for joining us today on our third quarter fiscal 2015 earnings announcement. As Brad 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 the third quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the fourth 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 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. Pierre Nanterme : Thank you, KC, and thanks everyone for joining us today. We delivered excellent results for the third quarter, building on the momentum we created in the first half of the year. I am particularly pleased that our strong third quarter performance was again broad-based across the different dimensions of our business. We gained substantial market share and accelerated our growth in digital-related services. Here are the few highlights. We delivered strong new bookings of $8.5 billion, bringing us to $25.5 billion year-to-date. We generated very strong revenue growth of 10% in local currency, with growth across all five operating groups and all three geographic regions. We delivered earnings per share of $1.30 on an adjusted basis, a 3% increase. We expanded operating margin 20 basis points to 15.4% on an adjusted basis. We generated solid free cash flow of $1.3 billion and our balance sheets remained very strong ending the quarter with a cash balance of $4 billion. And we returned $1.2 billion in cash to shareholders through share repurchases and dividends. So we have delivered very strong performance for the third quarter and as we enter the fourth quarter, I feel very good about where we are and what we have achieved for the year-to-date. Now, let me hand over to David for more details. Over to you, David? David Rowland : Thanks, Pierre, and thanks to all of you for joining us on today’s call. As you heard in Pierre’s comment, the strong momentum that we established in our business continued in the third quarter as we delivered excellent financial results. We are very pleased with the ongoing execution of our growth strategy underpinned by strong operational discipline. The underlying business drivers and key themes in the third quarter were very consistent with the past two quarters. And importantly, we again delivered on all three imperatives for driving shareholder value. Starting with durable revenue growth, even with the tougher compare this quarter, we delivered 10% growth in local currency, which represents the third consecutive quarter of double-digit growth. Once again, our broad-based growth demonstrates the strength of our diversified business and our ability to drive growth above the market resulting in increased market share. With respect to sustainable operating margin expansion, we continue to drive value from our strong growth by expanding operating margin 20 basis points, while continuing to invest in our business and our people. And finally, regarding strong cash flow and discipline capital allocation, we generated $1.3 billion in free cash flow and returned roughly $1.2 billion to shareholders through repurchases and dividends. We are on track to deliver free cash flow in excess of net income for the full year and while we continue our disciplined approach of returning cash to shareholders, we also remain focused on investing in our business to acquire scaling capabilities in key growth areas. So we're very pleased with the third quarter, as our results continue to demonstrate the durability of our growth, profitability and cash flows. With that said, let's now turn to some of the details starting with new bookings. New bookings were $8.5 billion for the quarter. Consulting bookings were the second highest ever at $4.5 billion, reflecting a book-to-bill of 1.1. Outsourcing bookings were $4 billion also with a book-to-bill of 1.1. We were pleased with the volume of bookings for the quarter, especially when you consider the significant headwind due to foreign exchange impacts. The major themes in our new bookings were consistent with last quarter. We saw continued strong demand for both digital-related services and operations, and new bookings for application services and consulting related services landed within our book-to-bill target range. Finally, we had 12 clients with bookings in excess of $100 million, giving us 33 year-to-date, which signifies the unique and trusted relationship that we have with many of the largest companies in the world. Turning now to revenues, net revenues for the quarter were $7.8 billion, slightly positive growth in U.S. dollars and an increase of 10% in local currency, reflecting a negative 10% foreign exchange impact, compared to the negative 11% impact provided in our business outlook last quarter. Adjusting for the lower FX headwind, we still came in well above the top-end of our guided range. Consulting revenues for the quarter were $4.1 billion, up 1% in USD and 11% in local currency. Outsourcing revenues were $3.7 billion, flat in USD and an increase of 10% in local currency. Looking broadly at the major drivers of revenue growth in the quarter, the trends we’ve seen in recent quarters remain very consistent. The dominant drivers were very strong double-digit growth in digital-related services and operations, application services continue to grow in the range consistent with our overall rate of growth and strategy and consulting services combined continued to grow in mid-single digits. Turning to the operating groups, Communications, Media and Technology continued to lead all operating groups with 17% growth in the quarter. While growth continued to be broad-based, it was most significant in North America, the growth markets and communications globally. The drivers across CMT continued to be digital-related services, cost rationalization, several large transformational projects and demand for network-related services. H&PS grew 10% in the quarter. We again saw significant growth in our Health business, particularly in the public sector at U.S. Federal clients and our Medicaid-related projects at state clients. Digital-related services and operations, particularly BPO, were also strong growth drivers. Financial Services also grew 10%, with significant growth in both capital markets and insurance. Clients continue to be focused on three main areas, risk and regulatory, cost optimization and digital-related services, especially in distribution and marketing. Products grew by 8%, led by very strong growth in consumer goods and services, life sciences and automotive. Clients continue to be focused on digital-related services and operational effectiveness as they position themselves to be more competitive in the marketplace. Resources grew 6%, continuing the recent trend of positive growth in all three geographic regions and all industries except energy, with particularly strong growth in utilities. The pattern of broad-based growth for outsourcing-related services continued as clients remain focused on operational efficiency and cost rationalization. Moving down the income statement, gross margin for the quarter was 32.5%, compared with 32.8% for the same period last year, down 30 basis points. Sales and marketing expense for the quarter was 11.3% of net revenues, compared with 11.6% of net revenues for the third quarter last year, down 30 basis points. General and administrative expense was 5.8% of net revenues, compared with 5.9% of net revenues for the third quarter last year, down 10 basis points. As I mentioned in quarter two, this quarter we recorded a non-cash settlement charge as a result of an offer to former employees to receive a voluntary lump sum cash payment from our U.S. Pension plan. This $64 million charge impacted quarter three operating margin by 80 basis points and diluted earnings per share by $0.06. The following comparisons exclude this impact and reflect adjusted results. Operating income on an adjusted basis was $1.2 billion in the third quarter, reflecting a 15.4% operating margin, up 20 basis points compared with quarter three last year. Our adjusted effective tax rate for the quarter was 25.7%, compared with an effective tax rate of 25% for the third quarter last year. Net income on an adjusted basis was $889 million for the third quarter, compared with net income of $882 million for the same quarter last year. Our diluted earnings per share on an adjusted basis were $1.30, compared with EPS of $1.26 in the third quarter last year. This reflects a 3% year-over-year increase. Turning to DSO, our day services outstanding continue to be industry leading. They were 37 days, up from 35 days last quarter. Free cash flow for the quarter was $1.3 billion resulting from cash generated by operating activities of $1.4 billion, net of property and equipment additions of $114 million. Moving to our level of cash, our cash balance at May 31st was $4 billion compared with $4.9 billion at August 31 last year, down $900 million as we’ve returned over $3.1 billion to shareholders through repurchases and dividends year-to-date. Moving to some other key operational metrics, we ended the quarter with a global headcount of about 336,000 people, and we now have approximately 237,000 people in our global delivery network. In quarter three, our utilization was 90%, down from 91% last quarter, attrition which excludes involuntary terminations was 15%, compared to 14% in both quarter two in the same period last year. Lastly, we now expect that approximately 95,000 people will join our company in fiscal ‘15. So turning to our ongoing objective to return cash to shareholders, in the third quarter, we repurchased or redeemed approximately 5.6 million shares for $518 million, at an average price of $93.11 per share. Year-to-date, we purchased 20.8 million shares for approximately $1.8 billion, at an average price of $86.16 per share. At May 31st, we had approximately $3.2 billion of share repurchase authority remaining. Finally as Pierre mentioned, on May 15, 2015, we made our second semi-annual dividend payment for fiscal ‘15 in the amount of a $1.02 per share bringing total dividend payments for the fiscal year to approximately $1.4 billion. So with three quarters in the books, we’re extremely pleased with our results and are now focused on quarter four and closing on a strong year. As always, we’re working hard to continue to manage our business with a high degree of rigor and discipline which enables us to deliver on our near-term objectives while also investing that scale for long-term market leadership. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our strong results for the quarter and year-to-date demonstrate that we’re benefiting from the investment we've made in key growth areas such as digital. And I'm very pleased with the leadership position we are establishing in this important part of our business. In the third quarter, we delivered more than 30% growth in local currency in digital-related services which now account for more than 20% of our total revenues. Demand for digital is pervasive across the entire business. And we’re leveraging our digital capabilities in the services we provide to clients in every industry around the world. Here are few examples. We are helping Pizza Hut, build and operate the new club-based digital platform to draw some of the customer experience and boost online sales. The new platform will also enable Pizza Hut to expand its digital marketing capabilities through enhanced customer segmentation, analytics and mobility. We are working with a leading global shipbuilding company to deploy an Internet of Things connected platform to enable real-time monitoring of its shipping fleet. We will use over 100 different kinds of sensors to provide predictive maintenance and spare parts optimization. And we are helping Rio Tinto, the global mining company, accelerate its journey to become a digital business by migrating its enterprise IT systems to an as-a-service solution on the Accenture Cloud platform. Rio Tinto expects to realize significant cost savings, as well as increased agility, from the consumption-based pricing model. At the same time, we continue to invest to further differentiate Accenture and to scale our capabilities in order to capture new growth opportunities in the marketplace. In Accenture Strategy, we announced two acquisitions in the third quarter that further enhanced our capabilities. We acquired Axia Limited, a U.S. based strategy services provider with expertise in life sciences, health and consumer goods industries. And in May, we announced the acquisition of Javelin Group, a U.K. based strategy consulting provider with significant digital expertise in the retail industry. In Accenture Digital, we are rapidly scaling our capabilities to bring innovative solutions to clients to enable digital transformation. Just last week, we announced that we are joining forces with the Fast Retailing in Japan to develop digitally enabled consumer services across the retailer’s seven global brands including UNIQLO. Through this joint initiative, we are developing new digital business models to drive transformation in the retail industry and beyond. We opened the Accenture Interactive Innovation Center at our technology lab in Sophia Antipolis in France. This is all about providing clients with an immersive experience that brings to life the latest digital technologies for engaging with customers in new and innovative ways. We are expanding Fjord, the leading design and innovation group within Accenture Interactive. We recently opened new design studios in Sao Paulo, Milan and Sydney and now we are 15 Fjord design studios around the world. And with Accenture Mobility, it is now one of the world's leading developers of mobile apps, leveraging the capabilities of our global delivery center. We have now developed over 1000 apps across nearly all industries. Turning to the geographic dimension of our business, in the third quarter, we delivered strong growth in local currency and gained significant market share across all three of our geographic regions. In North America, we delivered very strong 12% revenue growth in local currency, driven by continued double-digit growth in the United States, where we are strengthening our position as the market leader. In Europe, I'm very pleased with our growth of 7% in local currency, driven primarily by Spain, the United Kingdom, Germany and the Netherlands. And in gross markets, we delivered very strong revenue growth of 13% in local currency driven by double-digit growth in Japan, Australia and Brazil, our largest markets in this region. So with the first three quarters of the year behind us, I'm extremely pleased with our results. We have accelerated momentum in our business and I feel confident that we are well positioned to deliver a very strong fiscal year ‘15. In the market environment that remain uncertain and fast changing; innovation, agility and flexibility are more than ever the name of the game. And we remain extraordinarily focused on executing our strategy to deliver sustainable profitable growth. With that, I will turn the call over to David to provide our updated business outlook for fiscal year ‘15. David, over to you. David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the fourth quarter of fiscal ‘15, we expect revenues to be in the range of $7.45 billion to $7.70 billion. This assumes the impact that foreign exchange will be a negative 10% compared to the fourth quarter of fiscal ‘14. For the full fiscal ‘15, based upon how 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 7.5% compared to fiscal ‘14. For the full fiscal ‘15, we now expect our net revenue to be in the range of 9% to 10% growth in local currency over fiscal ‘14. For the full fiscal ‘15, we continue to expect new bookings to be in the range of $33 billion to $35 billion. As I mentioned previously in May, we recorded a non-cash settlement charge of $64 million, which will impact full year ‘15 operating margin by 20 basis points and diluted earnings per share by $0.06. Our guidance for full year fiscal ‘15 excludes this impact. For operating margin, on an adjusted basis, we continue to expect fiscal ‘15 to be 14.4% to 14.6%, a 10 to 30 basis point expansion over fiscal ‘14 results. On an adjusted basis, we continue to expect our annual effective tax rate to be in the range of 26% to 27%. For earnings per share on an adjusted basis, we now expect EPS for fiscal ‘15 to be in the range of $4.73 to $4.78 or 5% to 6% growth over fiscal ‘14 results. This EPS range includes $0.02 increase due to the lower FX headwind and a $0.05 increase to the lower end of the range as a result of narrowing the revenue growth range. Turning to cash flow for the full fiscal ‘15, we now expect operating cash flow to be in the range of $3.8 billion to $4.1 billion, property and equipment additions to now be approximately $400 million. And we continue to expect free cash flow to be in the range of $3.4 billion to $3.7 billion. Finally, we continue to expect to return at least $3.8 billion through dividends and share repurchases, and also continue to expect to reduce the weighted average diluted shares 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 we can take your questions. KC? KC McClure : Thanks, David. I’d ask that you each keep to one question and a follow-up to allow as many participants as possible to ask a question. Brad, would you provide instructions for those on the call please? Operator : Thank you. [Operator Instructions] And our first question will come from line of Bryan Keane with Deutsche Bank. Bryan Keane : Hi, guys. Good morning. Pretty good results here, looks very similar to last quarter. I saw that digital accelerated though up towards 30% on a constant currency basis, I think, that was up from 20%? Just curious if that offset anything that slowed or anything that was weaker than last quarter? David Rowland : No. It’s -- I don’t think it’s indicative of a weakness in another area. Last quarter we said digital growth was over 20%. And we did see an uptick and I think, some of the drivers behind that were pretty evident in Pierre’s comments, as he described our Digital business and how it continues to evolve in a very positive way. Pierre Nanterme : Yeah. And when we talk about digital-related services, we’re talking about all the digital activities we have across our five businesses, Accenture Strategy, Accenture Consulting, Accenture Digital, Accenture Technology and Accenture Operations. So all of our five businesses are growing across the board with an accelerated growth with digital-related services. Bryan Keane : Okay. And just as a follow-up, I saw the operating cash flow adjustment for the full year, just curious what caused that? And then how much did acquisitions contribute to the revenue growth? Thanks. David Rowland : The acquisition growth continues to be in the range of what we’ve talked about before, so in that 1% to 1.5% range. On the cash flow, there's really not anything notable. There is some puts and takes in there, but really not anything significant to note. Bryan Keane : Okay. Thanks so much. Operator : And our next question comes from Tien-Tsin Huang with JPMorgan. Tien- Tsin Huang : Good morning. Great results. I’ll ask on the gross margin, if that's okay, it was definitely better than we expected. I’m just curious if that’s -- this trend is sustainable, if we could go back to what we saw in the first half? I guess, ultimately, just trying to gauge if some of these drivers like contract profitability and use of subcontractors are performing better? David Rowland : Yeah. Hi. Good morning, Tien-Tsin. Tien- Tsin Huang : Hi. David Rowland : Again, when I look at profitability and I don't mean to be redundant on this, but let me just restate the things that I focus on in the context of our quarter three results. So the first thing that I look at is the trend in our contract profitability and we were pleased with our contract profitability. It was up year-over-year for both consulting and outsourcing, and it was up year-over-year in total. And that has an influencing factor on gross margin but it's certainly not the only influencing factor. The second thing that I look at for our overall profitability is the evolution of our labor cost in relation to our revenue growth, and that pattern continued as we've seen in the first half of this year, where we are very pleased with being able to manage our labor cost efficiently. But I should add by the -- at the same time investing in our people through actions that we took -- have taken through the year including in the third quarter with respect to promotions and salary increases. And then, I really look at those two things primarily in the context of, are those things progressing to the point that we’re creating head room, so that we can invest in our business, while at the same time drive the profitability, our GAAP margin expansion, in this quarter our adjusted margin expansion to support the objectives that we communicate externally and all of those things happened as planned in the third quarter. So, in terms of evolution of gross margin, Tien-Tsin, we -- as you know, we don’t -- I don’t really guide or make forward-looking statements on gross margin, because we focus on operating margin. It does ebb and flow in different quarters across the year. But if we have the right evolution of contract profitability and the right evolution of our payroll efficiency then frankly that's everything is clicking from a profitability standpoint and that's what we focus on. Tien- Tsin Huang : All right. Great and that’s perfect. That’s helpful context. As my follow-up, I know, Bryan, asked on acquisitions, but I wanted to ask just your philosophy if there is – if we should expect more of the same here as sort of buying or tucking in some of these smaller businesses, I'm curious and the culture is very important? Any surprises in terms of retention of some of the people that you brought in with some of these deals? So just trying to understand the retention and how the culture is meshing? And then also if the philosophy could change you, could you do larger deals, given sort of the big appetite on acquisitions? Thanks. David Rowland : Yeah. Good question. We have -- overall we have been very pleased with our experience with companies that we've acquired really over the last two to three years. I'll remind you that at this point we have acquired roughly 45 companies or so. So we’re not novices at, I’m talking about over, let say, over the last two and a half to three years. So we have become very experienced in executing our inorganic strategy and an important part of that is the approach that we take to integrating and assimilating the companies that we buy. And we’re fundamentally a people-based business, so we’re specially tuned into that with respect to integrating and assimilating the people in these companies that we acquire. And our experience has been positive in terms of the retention and assimilating them into our culture very quickly. And again, as we’ve mentioned before, the financial returns have been certainly in line with our expectations and in many cases better. Pierre Nanterme : Yeah. No. Absolutely. I mean, we all have been very clear on our acquisition strategy. Do we want to leverage our cash to make acquisition in order to further enhance our capabilities and get more differentiation, the answer is, yes. We are looking in acquisition in some very specific areas as you know, from deep expertise in consulting and strategy from an industry standpoint to digital native organization to companies with a deep footprint in operations, I’m thinking about Procurian as an illustration and we will continue to do so, and look at the kind of acquisition we believe we could get an excellent return and they’re going to further improve our differentiation, our competitiveness and our relevance in the business. And so far, frankly, I'm very pleased. I found even David a bit neutral on this, less neutral, I think we have an excellent return on the investment we made. It is making an impact in the marketplace. I’m thinking about Fjord, I'm thinking about Acquity, I’m thinking about Procurian, where clearly we are taking leading position in these different areas, not only we have a good retention, but we’re scaling further the acquisition we made. We announced in this call that we are significantly and rapidly scaling Fjord, our design and innovation studio in Accenture Interactive and we are now 15 design studio around the world and more to come. So we will continue executing the strategy against the parameters we set and we will continue to further improve Accenture. David Rowland : Thanks, Tien-Tsin. Tien- Tsin Huang : Okay. Thanks. Operator : And our next question comes from Brian Essex with Morgan Stanley. Please go ahead. David Rowland : Good morning, Brian. Brian Essex : Good morning and thank you taking the question. I was wondering if I could dig in a little bit on Health and Public Services. And given the contract wins you have there, particularly some of the material ones in the state and federal business, what impact do those wins have on your profitability, particularly as we hear some of your competitors, as they bring on some of these larger contracts are less profitable upfront, how do you manage those and how can we expect that segment to kind of grow in contribution to profitability going forward? David Rowland : Yeah. We’ve been very pleased with the progression of our profitability in H&PS broadly and in Health specifically. We -- when you're talking about some of the recent wins, of course, we don’t talk about contract specifically, but as a general philosophy, we’re in the business of driving profitable growth and we look at every client and contract opportunity against that objective. And so we don't you put business on the books that doesn't support our near-term and really mid and long-term financial objectives. So we're quite pleased with the health of our Health and Public Service business. We are actually very excited about the opportunities that we see in Health, which is growing strong double digits as an industry and are very encouraged about what the opportunities in the future hold for us. Pierre Nanterme : Oh! Yeah. I am very pleased with H&PS. It’s certainly an area where we invested, I guess, wisely in getting the return. As mentioned by David, Health segment has been growing double-digital for many years now, many quarters in the row. And if I am looking at our business in both federal or in local and state, it’s exactly moving in the right direction and growing, and all this H&PS business is accretive to Accenture. So we are pleased with that. And again, it's all a question of how you differentiate the type of services you are providing. In Healthcare, we decided to be extremely digital rich by being among the first to deliver digital health we call, connected healthcare, and a very significant differentiation in healthcare; if you look in terms of Public sector, we have been among the first to launch the local exchange insurance centers and you know how much it’s important now. In federal, we recently invested in Agilex to bring more digital rich services in the context of our Federal business. So, again, for us the name of the game is always the same is to avoid commoditization and low value services in each and every industry, and to relentlessly focus on where we could bring innovation and differentiation in each and every industry at Accenture. Brian Essex : Okay. That’s very helpful. Maybe if I could follow up on some of the previous M&A comments. Are you seeing a change in the competitive environment with smaller, maybe more specialized firms as a result of all the recent M&A activities that we have seen in the market recently? And in particular as you kind of -- as you maybe competing with them in certain contracts, are your win rates changing at all? Pierre Nanterme : No. I don’t think we see any significant change in old landscape from an acquisition standpoint. Everybody is trying to find the right nugget and the right company. So far David mentioned that we acquired between 40 and 50 companies this last three years. We are in the range of 45 and we are pleased with the company we integrated and it’s a very competitive market, because everybody is looking to buy company who are going to bring differentiation. I think we are differentiating ourselves in this acquisition market with our brand. I tend to believe without being arrogant at all that our brand is serving us very well as a magnet for talent. We have a very strong brand, highly recognized companies we are contacting, are recognizing that Accenture is a good company to work with, with a good culture, with a good client service DNA and always trying to do the right thing. And in the acquisition environment I think an excellent reputation of strong brand and being recognized for performance culture and operating with seriousness is a competitive advantage. Brian Essex : Okay. Helpful. Thank you. David Rowland : Thank you for the question. Operator : And our next question comes from Lou Miscioscia with CLSA. Please go ahead. David Rowland : Good morning, Lou. Lou Miscioscia : Hey. Good quarter guys. Maybe going to app services, you guys mentioned that that was an area of strength. So, one, just curious as to how much app services did you see still hidden within companies that you could pull out approximately driving a multiyear growth rate there? And then, secondarily, Pierre, that that you start to get more competitive and going after business against the Indian outsourcers, is that the case and is that a bit of a change of strategy? Pierre Nanterme : Yes. I am very pleased you are asking a question with what we are calling now at Accenture Application Services, because indeed it's a very important business for Accenture. It's a very significant part of the technology and market and we have set a very specific strategy to compete in application services on both ends of this market. On one hand of application services, you have application development and maintenance and in Accenture, we are extremely competitive with our global delivery network. In this market, which is more market where you need to rationalize the technology operations of clients. And then on the other hand of this application services market you have the capability building, solution building and Accenture as well is very well-positioned to capture the opportunity to build a new solution in application services. So all our jobs with our clients is to look at this application services and to make sure that the money if you will they are saving in application maintenance and development through leveraging offshore, through productivity, through automation, which we provide a lot will be reinvested in capability building and new technology solution. And Accenture operating on both side and as both end of this spectrum is a very good position to be the partner of our clients in making this reinvestment possible. And that’s why I am very pleased to see that all-in-all application services at Accenture being growing very well again this quarter. Lou Miscioscia : Right. Absolutely. Okay. And the quick follow-up is on the Consulting side, any change or maybe, let me ask it this way, who do you see the most from the Consulting side, especially in the U.S. Thank you. Pierre Nanterme : Competition -- when competition is remaining extremely, I would say, traditional, we doesn’t see much change. In Consulting we would compete typically against what everybody is calling the Big Four. I mean, the Deloitte, [indiscernible], the KPMG, probably, Deloitte and [indiscernible], if you want me to set to would be the companies we are typically competing against and we love that. Lou Miscioscia : Have you seen companies in anymore than in the past? Pierre Nanterme : In Consulting? Lou Miscioscia : Yes. Pierre Nanterme : Not really. Lou Miscioscia : Okay. Thank you. Operator : And our next question comes from Lisa Ellis with Bernstein. Please go ahead. Pierre Nanterme : Good morning, Lisa. Lisa Ellis : Hey, guys. Good morning. Hey, can you do a quick update on the four cost-related initiatives that you had laid out at your Investor Day last fall? Particularly in light I guess to kind of, I'm looking at the headcount growth numbers, which have been running ahead of constant currency revenue growth for four quarters or so, which I think implies some pyramid mix shifting, so just could you give us a bit of an update on that front? David Rowland : Yeah. So, for the benefit of other listeners, there were four areas of focus for expanding our margins both near-term and over a longer term horizon. The first thing that I called out was our focus on managing each of the five dimensions. Pierre mentioned those earlier, I mentioned them in my script in a fit for purpose way, recognizing that each of those dimensions has a different economic profile from the price points in the marketplace to the cost-to-serve points to how much we invest management and overhead, et cetera. And on that front we have made very good progress this year as we continue to take our organization up, the maturity curve or the adoption curve for our new growth strategy and really reorienting how we manage and drive our business fundamentally around those five dimensions. And I see evidence of that, for example, in the way we approach pricing for our Strategy Services and our Consulting Services in a much more differentiated way than we would have been doing certainly a year ago, 18 months ago, 24 months ago as one example. So I think we are making good progress. The other thing I called out was leveraging our talent-based model, which is also aligned with these five dimensions as a way to manage our workforce, our talent in the associated market relevant, labor cost in a more fit for purpose more granular way. And everything we're doing to evolve how we manage our talent, how we develop careers and also how we do compensation management and planning is progressing nicely against that objective and that certainly has been one of the contributing factors to our profitability so far. I’d mentioned portfolio optimization is the third area. Again, very -- we are making progress on that front in terms of raising the game of all of the P&L runners around Accenture. So that they look at our business across the portfolio and are turning dials to optimize the total by looking more discreetly at the individual pieces. And then underpinning all of that was our ongoing efforts in operational efficiency, the cost of running the organization. That includes, for example, our business management functions, finance, HR, marketing and we have made very good progress this year across all of those functions in the efficiency of those organizations. So Lisa, we’re very pleased, lot of work to do, it’s ongoing but we're very pleased with the progress we've made so far. Lisa Ellis : Terrific. Thanks. David Rowland : Thank you. Lisa Ellis : And then on my follow-up, can you give a bit of an update on Accenture Operations? And I think of Accenture operations as typically more outsourcing related work. You’ve had some makeshift here into the shorter duration consulting work, heavily digital driven, I imagine. So can you just give some highlights on the operation side? Pierre Nanterme : Yes. Sure. And thanks to hear it from you, Lisa. I hope you are doing well. Lisa Ellis : Yeah. Pierre Nanterme : On operations, indeed, we created something very special. And I’m pleased to have a couple of minutes to mention the good progress and the positioning we’re taking on operation. As you know, in Accenture, we’re not using any more or much more the terminology of consulting and outsourcing and that’s something especially in the IA Day, we will continue to comment on how we seek the market in professional or in business services evolving. And when we created Accenture Operations, we created a very unique capability in the marketplace. I don't believe that anyone else has been building a similar capability with two major capabilities in it, one, which is around infrastructure services, where you will find as much consulting and outsourcing in it. So it's a combination of services from cloud-related services leveraging the Accenture Cloud platform from high value services in security and from indeed infrastructure outsourcing. And the other significant capability is going to be around business process management, if you will, where again, we are providing business process more and more as a service platform based in the cloud as an illustration and think about what we are doing which is extremely leading edge with procurement where we’re probably the first in the industry to provide procurement as-a-service platform based with an economic model on the consumption and on the pure transaction. So operation is indeed already a combination of consulting and outsourcing. And this is what you’re going to see more and more in Accenture is the richness of the service we’re providing will come from the integration of consulting and outsourcing services in a new economic model only against platforms. David Rowland : Thank you, Lisa. Lisa Ellis : Thank you, guys. Operator : And our next question will come from James Schneider with Goldman Sachs. Please go ahead. James Schneider : Good morning. Thanks for taking my question. I just want to ask about consulting versus outsourcing for a moment. Consulting continues to get momentum, maybe accelerating but outsourcing seems to be decelerating somewhat. So I was wondering, what you put that down to, is that mainly clients trimming on sort of maintenance to fund strategic initiatives or is there something else and do you see a way to where outsourcing can actually start to inflate higher again? David Rowland : Yeah, Jim, thanks for the question. Again, let met direct you back to because I think it is important to just reinforce the dot connecting between the consulting and outsourcing and the five dimensions of our business. And again, as we introduced the five dimensions of our business at IA Day, the reason we’re moving in this direction is because this is reflective of where the market is moving. And so again when you look at our five dimensions of strategy consulting app services and operations with digital across all four, if you relate that back to consulting as a type of work, which we’ve talked about the historically, that includes strategy consulting and a part of application services to be clear. And if you look at outsourcing that includes a part of application services in most of operations. And so we really think that it’s more helpful to talk about our business in the new dimensions. And so again if you look at strategy and consulting as more of the traditionally consulting centric part of our business that grew at mid single-digits, again which is a very good growth rate relative to the market. If you look at application services, which has components of consulting and outsourcing, using our historical binocular, systems integration and application outsourcing, that grew mid-single-digit. And the thing that's unique about Accenture in that space as Pierre explained very clearly is our ability to play across the spectrum of services within application services, from the application maintenance side which has a one set of buyer values and economic profile to the deployment of technology, which is part of the application services market space which has a different set of buyer values and economic profile, that grew again roughly at the average of Accenture. So in that 10% plus or minus range and then when you look at operations of the strong double digit. And so really when you think about our business and what's driving the growth, think about it in those terms because I think you’ll find that to be most helpful. James Schneider : That's helpful. Thanks. And then as a follow-up, just want to ask a question about some color on short-term versus longer dated bookings. Can you maybe give us a sense of what’s the short-term bookings continue to be a dominant source of the growth and can you maybe talk about roughly or if you can quantify, what percentage of revenue was both booked and billed in the quarter versus what that was, say a year ago? David Rowland : Yeah. Can’t really comment on the latter, what I will say is that we had signaled I think maybe the latter half of last year and even earlier this year that we were seeing a characteristic of our bookings where a higher percentage of our bookings was converting to revenue within a four quarter period. And what I would say is that trend has remained pretty consistent. We continue to see a nice chunk of our bookings. So the bookings in the quarter, a nice chunk of that will convert to revenue in the next four quarters and of course, that has been part of the story for our strong growth rates over the last -- really not on the last three quarters but really quarter three and quarter four of last year. James Schneider : Great. That's helpful. Thank you. David Rowland : Thank you, Jim. Operator : And our next question comes from Dan Perlin with RBC Capital Markets. Please go ahead. Dan Perlin : Thanks. So Digital clearly, pretty impressive, it looks like it accounted for roughly 60% of your growth in the quarter. The question that I have more specifically around your labor pool is the cost of the digital labor pool is clearly a lot more expensive. I know, you're talking about this pillars managing it but I'm thinking more specifically like what is it in terms of differential as we think about that? And then what specifically are you able to do to manage that talent pool cost because if it's accounting for 60% of growth, I am also wondering is there a headcount correlation that’s starting to decouple a longer term with that pool and that’s going to help it? That’s my first question. Pierre Nanterme : On this labor cost, I mean, what we are doing in Accenture and it’s not different in Digital, is to make sure that we have the right mix of skills and the right locations for our skills. If you look in this digital space, we have now roughly 28,000 people working in that environment. And this 28 is very interesting because you will see as you might suspect extraordinary, I would call them high calibers. I'm thinking about the business scientist we are hiring. I'm thinking about the PhDs we are hiring to drive algorithm in Accenture Analytics. And I'm thinking as well about some leading edge designers, we all hiring for Fjord, our design group, at Accenture. And on the other side of this spectrum, you will see that we are now one of the largest apps, enterprise apps developer in the world. All this apps development is done in our centers from India as an illustration. And they are marvelous app developer from India and we are leveraging part of the global deliver network for digital to deliver apps services. I'm thinking about Analytics we have as well very strong people in our delivery centers, who are everyday doing analytic work from the GDN and from a lower cost location. So it’s not different in Digital from the rest of Accenture where we are always looking to put the right people at the right place with the right cost. So we make sure that we have the right skills that we are cost competitive. It’s exactly the same with Digital. Dan Perlin : Okay. And then shifting gears for a second, I want to ask an M&A question but not pertaining to the businesses that you want to acquire. It’s more a function of all the businesses globally that have been doing M&A. And I’m just wondering to what extent are you seeing that driving business and maybe let’s just say into your consulting business as I would think you'd be a top of the list company to be thinking about in terms of helping the integration of those companies? David Rowland : Yeah. You’re talking about Accenture working with our clients, helping them with the integration of companies they’re buying. Certainly, I think we do that and essentially all of our industries. That is a space that we operate in and it plays very well to really the full spectrum of our service offerings. From the strategic aspects of that to the consulting thought of that where we’re integrating the business, the business processes, the organization et cetera, rationalizing the systems from the acquired company and then also driving the cost efficiency agenda, introducing and extending our operations capability as part of those transactions. And so, it certainly -- it’s a typical type of work that we see where our large clients engages to do that so. Dan Perlin : But is the pace of play on that increasing or similar to what we see in the past? Thanks. Pierre Nanterme : Yeah. Now I think, consolidation been everywhere. You have some ways in some industry. I’m thinking about we have the very significant way in banking across ‘08, ‘09, ‘10 and we’ve been one of the leading organization in doing post-merger integration, lot in communication, when you just reading the papers and see what’s going on in communication. And we might expect more to come in the energy industry for good and valid reasons. Dan Perlin : Thank you very much. David Rowland : Thank you. Operator : And our next question comes from James Friedman with Susquehanna. David Rowland : Good morning, Jamie. James Friedman : Hey, good morning guys. I was hoping to drill in a bit if I could on the 11 $100 million, 33 $100 million plus deals that you’ve signed in the quarter and year-to-date. If you would had look at those with the lens of the operating groups, is there anything to call out there? Are they’re more populated in one or the other or did they roughly parallel the growth of the OGs themselves? Pierre Nanterme : I guess, when we are -- we are checking a bit but if I’m looking back on these last two quarters. And I don’t believe that this quarter is untypical compared to all the quarters. The number of this transaction across is about to $100 million which is the threshold we’re communicating every quarter. It’s quite well as spread across all our operating groups and potentially as well from a geographic standpoint. And I’m pleased it’s giving me the opportunity to refer the message about being very pleased that our growth is very well balanced across the different dimension of our business, industries and geographies. David Rowland : Yeah. Now if you look at the quarter for example and you look at the 12 as I’m glancing at the list, for example, all five operating groups were represented on the list. And so I guess it really reflects as broad-based kind of theme that we've been talking about is that all of the operating groups have as a part of their portfolio, these larger transformational type relationships. And the pattern is really as you would expect. Okay. James Friedman : Okay. Thank you. And then… David Rowland : Thank you. James Friedman : If I could ask one follow-up? David Rowland : Sure. James Friedman : So it’s great to see Brazil coming back. I want to ask about the growth markets in general. But specifically, the Brazil, is that hard one to predict. But do you see that as sustainable? Is Brazil on track to continue in this acceleration? Pierre Nanterme : I will comment on the past more than on the future. But I’m pleased, you asking the question because I'm not doing that often during call but I would like to recognize one of our greatest leader at Accenture namely, Gianfranco Casati. We appointed Gianfranco Casati, who has been one of our best leader at Accenture, leading products for many years and leading the gross markets. Gianfranco Casati is now located in Singapore to lead the gross market. And you have a natural correlation between putting a great leader and the results in the gross markets. So I’m not surprised at all with the return we have made on Gianfranco investments if you will. And we have growth in Japan, Australia and Brazil. Part of the growth in Brazil, of course is the recovery is probably a kind of catch-up but now we are beyond the catch-up mode. And I guess what we see in Brazil, likewise the other markets is our strategy of rotating the Accenture business to be more digital rich and cloud services rich what we turn now to call the new if you will is paying off. So again, all the markets that have a potential issue if you find the right entry point. And today the right entry point around the world is this unique combination of digital-related services and cloud-enabled services. So if you’re digital rich and cloud rich then you have probably the right formula to drive more growth in each and every market. James Friedman : Thank you. KC McClure : Brad, we have time for one more quick question, then Pierre will wrap up the call. Operator : Thank you. And that will come from Jason Kupferberg with Jeffries. Please go ahead. David Rowland : Good morning, Jason. Jason Kupferberg : Good morning. I’ll make it quick and try and wrap two into one because they’re short. First one is just margins and rough GDN mix of digital versus the corporate average. And then what categories of competitors, do you think you're taking share from in general around the globe? David Rowland : The GDN mix for digital versus the rest would be very similar. It’s not a -- I mean, overall on average because you have to remember digital is reflected in application services. It’s reflected in operations, consulting and strategy, so it would be roughly reflective of the average. Pierre Nanterme : Yeah. From a competition standpoint, of course, we respect all our competitors and we love all of them. If I’m looking at the dynamic -- I would say, the fierce competition is more on balance coming from the name I mentioned before, among the big four and the Indian pure players. So by contrast you will see against who we are less competing now. Jason Kupferberg : Okay. Pierre Nanterme : All right. I think it’s time for closing KC, Right? KC McClure : Yeah. Pierre Nanterme : Okay. Thank you. So thanks again for joining us on today’s call. Given our performance year-to-date and the strong momentum in our business, I feel confident in our ability to deliver our revised business outlook. The investments we've made in strategic acquisitions in assets and solutions and in the skills of our people have produced strong results so far. And we will continue executing our strategy to seize the opportunities in the marketplace and deliver value for our clients, for our people and for our shareholders. We look forward to talking with you again next quarter. In the meantime, if you have any question, please feel free to call KC. All the best. Operator : Thank you. Ladies and gentlemen, this conference will be available for replay after 10 :30 this morning and running through Thursday, September 24th at midnight. You can access the AT&T playback service at anytime by dialing 1 (800) 475-6701 and entering the access code 360639. International parties may dial 1 (320) 365-3844. Again those numbers, 1 (800) 475-6701 or 1 (320) 365-3844 with the access code 360639. That does conclude the conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,015	3	2015Q3	2015Q4	2015-09-24	4.895	4.95	5.314	5.377	null	19.69	20.29	Executives: KC McClure - Managing Director, Head of IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Tien-tsin Huang - JPMorgan Ashwin Shirvaikar - Citi Darrin Peller - Barclays Keith Bachman - Bank of Montreal Edward Caso - Wells Fargo Lisa Ellis - Bernstein Sara Gubins - Bank of America Bryan Keane - Deutsche Bank Brian Essex - Morgan Stanley Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture’s Fourth Quarter Fiscal 2015 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] As a reminder, this conference is being recorded. I’d now like to turn the conference over to our host, Managing Director, Head of Investor Relations Ms. KC McClure. Please go ahead. KC McClure : Thank you Greg and thanks everyone for joining us today on our fourth quarter and full-year fiscal 2015 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, along with some key operational metrics for both the fourth quarter and the full fiscal year. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the first quarter and full fiscal year 2016. We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements or net revenues. Some of the matters we'll discuss on 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 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. Pierre Nanterme : Thank you, KC, and thanks everyone for joining us today. We are extremely pleased with our strong financial results for both the fourth quarter and the full fiscal year. Our excellent fourth quarter performance continues the momentum we have been building in our business all year. For the full year, we delivered strong new bookings, generated record revenues, grew EPS faster than revenues and generated strong free cash flow, all while continuing to invest in our business and delivering significant value for clients and shareholders. Here are a few highlights for the year. We delivered very strong new bookings of $34.4 billion, we grew revenues 11% in local currency to a record $31 billion, our growth was broad-based across the business including double-digit growth in four of our five operating groups and all three geographic regions. We delivered earnings per share of $4.82 on an adjusted basis, a 7% increase. We expanded operating margin 20 basis points to 14.5% on an adjusted basis; we generated free cash flow of $3.7 billion. We returned $3.8 billion in cash to shareholders through share repurchases and dividends. And we just announced a semiannual cash dividend of $1.10 per share, an 8% increase over our prior dividend. So, I feel very good about what we delivered in fiscal year 2015. Our outstanding performance clearly demonstrates that we continue to provide highly relevant and differentiated services to all clients. Now, let me hand over to David. David, over to you. David Rowland : Thank you Pierre and thanks all of you for joining us on today’s call. Let me start by saying that we were very pleased with our overall results in quarter four which culminated an extremely strong year for Accenture. Once again, our results reflect our unique position in the marketplace, the relevance of our growth strategy and our ability to drive our business to produce value for our clients, our people, and our shareholders. As you listened to our prepared remarks, you’ll hear continued consistency in the key business drivers and three overriding themes; durability of revenue growth, sustainable margin expansion, and strong cash flow with disciplined capital allocation. Before getting into the details, I'd like to emphasize a few highlights in each of these areas. Revenue momentum continued with very strong local currency growth of 12% even against our toughest quarterly compare of the year. A key characteristic was our balanced growth across our operating groups, our geographic regions, and our five businesses which speak of the durability of our growth strategy. Our rate of growth continued to outpace the market as we gained share in most dimensions of our business. Driving profitable growth with sustainable margin expansion continues to be our focus. And in the fourth quarter, our operating margin came in as expected and consistent with last year. For the full year, we delivered 20 basis points of margin expansion on an adjusted basis, while investing significantly to position our business for long-term market leadership. And finally, we delivered another quarter of strong cash flow, $1.4 billion in free cash flow to be specific. In terms of capital allocation, it's noteworthy that we closed 11 acquisitions in the quarter. Given us 18 acquisitions for the full year, we’ve invested capital of $800 million providing us with scale and capabilities in key growth areas. So we finished the year much like we started with strong broad-based growth underpinned by very good profitability and cash flows. With those summary comments, let me now turn to some of the details starting with new bookings. New bookings were $8.8 billion for the quarter. Consulting bookings were $4.1 billion reflecting a book-a-bill of 1.0. Outsourcing bookings were $4.7 billion with a book-to-bill of 1.3. We're very pleased with the volume of bookings for the quarter, especially considering the FX headwind which we estimate to be 13% in the quarter. The overall demand for our services remains robust, with the strongest quarterly bookings growth coming from operations, products, Europe and the growth markets. Across the board, digital-related services continued to be an important driver of our new bookings. We also had 10 clients with bookings in excess of $100 million, bringing the total for the year to 43, which again signifies the unique relationship that we have with many of the largest companies in the world. Turning to revenues, net revenues for the quarter were $7.9 billion, 1% increase in USD and 12% in local currency reflecting a negative 10% foreign exchange impact consistent with the assumption we provided in June. Consulting revenues for the quarter were $4.2 billion, up 4% in USD and 14% in local currency. Outsourcing revenues were $3.7 billion, down 1% in USD and an increase of 9% in local currency. The overriding theme in quarter four continued to be broad-based and balanced growth across our operating groups and geographic regions, more pleased with revenue performance across all of our business dimensions with the dominant drivers continuing to be strong double-digit growth in digital-related services and operations. But we were also very pleased with our growth in application services and the combined growth for strategy and consulting. Taking a closer look at our operating groups, Communications, Media & Technology led all operating groups with 16% growth, the fifth consecutive quarter of double-digit growth, broad-based growth continued with double-digit growth across all three industries and in all three geographic areas. Financial Services delivered their strongest growth of the year at 14% fueled by double-digit growth in all three industries, and in both Europe and the growth markets. H&PS continued their trend of double-digit growth posting 13% in the quarter. The strength of our H&PS business continues to be very strong growth in both health and public service in North America. Products grew by 10%, led by consumer goods and services, life sciences and automotive, with very strong growth in Europe and the growth markets. And finally, resources continue to deliver very consistent growth of 6% in the quarter with positive growth in all three geographic regions and in all industries except energy. Moving down the income statement, gross margin for the quarter was 31.7% consistent with the same period last year. So the marketing expense for the quarter was 11.7% of net revenues, down 10 basis points. General and administrative expense was 6.2% of net revenues, up 10 basis points. Operating margin (sic) [income] was 1.1 billion in the fourth quarter reflecting a 13.9% operating margin consistent with quarter four last year. Our effective tax rate for the quarter was 27.1% compared with an effective tax rate of 30.1% in the fourth quarter of last year. Net income was $788 million for the fourth quarter compared with net income of $760 million for the same quarter last year. Diluted earnings per share were $1.15 compared with EPS of $1.08 in the fourth quarter of last year. This reflects a 6% year-over-year increase. Turning to DSOs, our days services outstanding continued to be industry leading. There were 37 days consistent with last quarter. Our free cash flow for the quarter was $1.4 billion resulting from cash generated by operating activities of $1.5 billion, net of property and equipment additions of $148 million. Moving to our level of cash, our cash balance at August 31st was $4.4 billion compared with $4.9 billion at August 31st last year, down roughly $500 million as we returned $3.8 billion to shareholders through repurchases and dividends in fiscal ’15. Turning to some other key operational metrics, we continue to attract significant talent, hiring more than 100,000 people in fiscal '15, ending the year with a global headcount of over 358,000 people. We now have approximately 257,000 people in our global delivery network. In quarter four, our utilization was 90%, consistent with last quarter. Attrition which excludes involuntary terminations was 14% compared to 15% in quarter three and in the same period last year. With regards to our ongoing objective to return cash to shareholders, in the fourth quarter, we repurchased or redeemed 6.6 million shares for $664 million at an average price of $100.03 per share. For the full year, we repurchased or redeemed 27.4 million shares for approximately $2.5 billion at a average price of $89.52 per share. This week, our Board of Directors approved $5 billion of additional share repurchase authority bringing the total to $7.6 billion. And as Pierre mentioned, our Board of Directors declared a semiannual cash dividend of $1.10 per share. This dividend will be paid on November 13 and represents an $0.08 per share or 8% increase over the previous semiannual dividend we declared in March. So before I turn it back over to Pierre, let me just briefly summarize where we landed for the full year across the key elements of our original business outlook provided last September. I'm pleased to say that we successfully managed our business and delivered on every metric in our original outlook. New bookings for the full year landed at $34.4 billion, which was just above the upper end of our guided range when adjusted for the actual FX impact. Net revenues grew 11% for the year in local currency, above the top end of the guided range that we provided at the beginning of the year. Operating margin on an adjusted basis was 14.5% reflecting 20 basis points of expansion, the midpoint of our guided range. Diluted earnings per share on an adjusted basis were $4.82, which was above the upper end of our original guided range when adjusted for the actual FX impact. Free cash flow was $3.7 billion, in the middle of our original guided range even with a much higher FX headwind. And finally, we returned $3.8 billion of cash to shareholders right at our initial objective through $1.4 billion in dividends and $2.5 billion in share repurchases. In addition, we reduced our weighted average diluted shares outstanding by 2%. So, again, we had an extremely strong year by any measure. We're very pleased with the progress we've made in executing our growth strategy and especially as it relates to the accelerated rotation of our business to digital-related services. Overall, our results demonstrate the durability of our growth, profitability and cash flows and our ability to manage our business to deliver value for all of our stakeholders With that, let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our excellent results for the year reflect the successful execution of our strategy across the different dimensions of our business. We are making focused investments in high growth areas including more than $2.5 billion in acquisitions over the last three years. These investments are all about building new capabilities to further differentiate Accenture in the marketplace. At the same time, we have aligned our organization around five businesses; Accenture Strategy, Accenture Consulting, Accenture Digital, Accenture Technology and Accenture Operations, all highly competitive in their own rights and synergistic in delivering end-to-end outcomes for clients. In particular, the new innovative services we have created in Accenture Digital and Accenture Operations have contributed significantly to our growth. In Accenture Digital, we are working with our clients to help them create competitive advantage and tap into new sources of value. In Accenture Analytics, we are using our new Accenture Insights Platform to help Thames Water in the UK embrace the Internet of Things to transform decision-making. Our new cloud-based solution monitors and analyses data in real-time from more than 20,000 centers and with data visualization tools, managers can proactively respond to risk on the network. And we are helping one of the largest banks in the Euro zone implement a major digital transformation. We are combining our design capabilities from Fjord which we acquired two years ago with our analytics capabilities to create a new and seamless multichannel customer experience, while also driving significant operating efficiencies. In Accenture Operations, we have strong momentum across our infrastructure, business process, security and cloud services. In procurement, we continue to lead the market building on the capabilities we acquired with Procurian. Let me share two examples. We are helping Glencore Queensland, a division of the global mining company to enhance its competitiveness. With our category management expertise and cloud-based sourcing, we expect to achieve total cost savings of more than $300 million. And we are helping TNT, the express delivery company to reduce cost and focus on its core business. Leveraging our procurement and finance and accounting capabilities, we expect to drive annual cost savings of more than $100 million. And when you look across our own five businesses, only Accenture has the full range of capabilities to integrate and deliver end-to-end services in an industry context to drive transformation and mission-critical outcomes for our clients. A great example is the work we are doing with Mondelez, the global food and beverage company to drive growth, increase profitability and reduce costs. We started this program with Accenture Strategy and our zero-based budgeting approach and are now leveraging our business process capabilities in Accenture Operations. We expect to deliver total savings of more than $1 billion over three years. And we continue to invest to further differentiate our capabilities taking the first-mover position and investing ahead of the curve in fast-growing areas such as cloud and security. Last week, we announced the acquisition of the Cloud Sherpas, a global leader in cloud advisory and technology services specializing in Salesforce, ServiceNow and Google. The addition of 1,100 professionals from Cloud Sherpas will further strengthen our position as the leading enterprise cloud services provider. And last month we acquired FusionX, a leader in the emerging field of cyber security. FusionX’s elite team of cyber security experts works at the C-Suite level to help clients test security and see their vulnerabilities through actual replica attacks. This acquisition brings to Accenture the critical ability to help our clients assess and respond to sophisticated cyber-attacks. Turning to the geographic dimension of our business, I am delighted that in fiscal year ‘15 we delivered double-digit revenue growth in local currency in each of our three geographic regions and we achieved these results despite the global economic environment that remains sluggish and the geopolitical environment that is quite concerning. In North America, we delivered 13% [ph] revenue growth for the year in the United States where we have now delivered double digit growth in four of the last five years. We have gained significant market share in the US and are now positioned as the market leader. In Europe, we grow revenues 10% in local currency for the year driven primarily by Germany, the United Kingdom, Spain, the Netherlands, Italy and France and in growth markets, we delivered revenue growth of 11% in local currency for the year, driven primarily by strong double-digit growth in both Japan and Brazil with high single-digit growth in Australia. So, in closing, we created very strong momentum in our business in fiscal year ‘15 by leveraging the investments we’ve made and by accelerating our rotation to new high growth areas. And I am especially pleased with our performance in digital-related services which grew approximately 35% for the year to more than $7 billion. With the relevant and differentiated capabilities we have built, along with the continued disciplined the management of our business, I am confident in our ability to continue to deliver sustainable profitable growth. With that, I will turn the call over to David to provide our business outlook for fiscal year ‘16. David? David Rowland : Thank you, Pierre. Let me now turn to our business outlook. Starting with the first quarter of fiscal ’16, we expect revenues to be in the range of $7.7 billion to $7.95 billion. This assumes the impact of FX will be a negative 8.5% compared to the first quarter of fiscal '15 and reflects an estimated 6% to 9% growth in local currency. For the full fiscal year '16, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in USD will be negative 4% compared to fiscal ’15. For the full fiscal '16, we expect our net revenues to be in the range of 5% to 8% growth in local currency over fiscal ’15. For operating margin, we expect the fiscal year '16 to be 14.6% to 14.8%, a 10 to 30 basis point expansion over adjusted fiscal '15 results. We expect our annual effective tax rate to be in the range of 25% to 26%. For earnings per share, we expect full year diluted earnings per share for fiscal '16 to be in the range of $5.09 to $5.24 or 6%$ to 9% growth over adjusted fiscal ’15 results. Turning to cash flow, for the full fiscal '16, we expect operating cash flow to be in the range of $4.1 billion to $4.4 billion, property and equipment additions to be approximately $500 million and free cash flow to be in the range of $3.6 billion to $3.9 billion. We expect to return at least $4 billion through dividends and share repurchases and also expect to reduce the weighted average diluted shares outstanding by just under 2% as we remain committed to returning a substantial portion of our cash to shareholders. Finally, you may have noticed that I did not provide new bookings guidance for fiscal 2016. Each year we evaluate our guidance approach to ensure that we're providing appropriate visibility to our expected results. Starting this year we will no longer provide new bookings guidance as we believe that it is not the best indicator of future revenue performance and has created confusion in recent years. We will continue to report actual new bookings results each quarter. With that, let's open it up so that we can take your questions. KC? KC McClure : 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 : Thank you. [Operator Instructions] Your first question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Thanks. Good morning. Good revenue growth yet again, just wanted to ask I guess just in the hindsight here, probably you guys did 11% revenue growth in fiscal '15, I think your initial expectations was 4% to 7%. So what drove the upside versus initial expectations, just trying to gauge what was strong versus conservatism and sort of how that may reflect in this year's guidance? David Rowland : Yeah, I mean I think just reflecting on ’15 and, Pierre, I’m sure we will have some reflections as well. I mean the first thing I would start off with is the fact that while we were confident that we were well-positioned for a very attractive market in the digital space, frankly, it’s hard and I'm sure you are going to appreciate this Tien-Tsin. It would have been hard to bank on and predict 35% growth in our digital-related services business. So that clearly was part of the driver. I think secondly, while we also felt very confident in our operations business, which is truly distinctive in the marketplace, no doubt about that, the growth rate was higher. We knew it would be strong, but it came in even stronger than we expected. When I reflect on the operating groups and you may remember and I won’t recount what I’ve said or recap what I’ve said when we started the year, but I had laid out a view of how we thought the operating groups would emerge. I mean, clearly when you look at CMT’s growth for the year, as proud as we are of that growth, it frankly would have been tough to predict that level of growth, double-digit growth in all industries and in all three geographic markets. I mean, that is kind of a trifecta of stars aligning. On the other end of the spectrum, not to go through every operating group, we were comfortable with our turn to growth in resources but yet there were still some risk as we highlighted and at the end of the day, congratulations to our resources team again that they’ve reconnected with growth and sustained very solid growth. And then I think across the patch, when we talk about consulting in our traditional type of work way, which in our new way of looking at the business includes strategy, consulting and part of application services related to application development within app services, that part of our business was very strong in ’15 and exceeded our expectations. Pierre Nanterme : Yeah, I mean, not much to add. I think it clearly, I mean, to summarize, we’re overachieving three areas mainly; CMT, digital business and operations. When it comes to operations, more -- significantly more than we accepted. Tien- tsin Huang : Now that’s helpful. I guess as my follow-up, I’ll ask just on this year’s guidance. Just how much is coming from acquisitions? I know, you have got Navitaire coming up as well and can you give us any sort of range on what digital growth might look like in ’16? Thank you. David Rowland : Yes. Just working backwards, Tien-Tsin, I’ll give you a view on digital growth as well as our dimensional growth. I’m going to give that view at I-Day, as we’re still working through our view on that. And just to your other question, I’ll start with ’15. Our inorganic contribution I signaled last quarter was in the range of 1% to 1.5%. Our actual inorganic came in roughly at the midpoint of that range. The point being that when you look at our 11% growth for the year, the organic growth was obviously substantial. As we look forward to ’16, we are very proud of the success that we’ve had in the market with our acquisition activity in the last two quarters in particular. We also have four acquisitions, Pierre mentioned Cloud Sherpas, which had been announced, but not yet closed, but if you take what we closed and the four that have been announced, not yet closed, then we would estimate that our inorganic would be, let’s say, approaching the range, in the range of about 2% and of course that can change depending on the timing of when these four deals, Cloud Sherpas, in particular, ultimately gets closed. But we would be in that range. So, would be a click up. Tien- tsin Huang : That’s great. See you at I-Day. Thanks. David Rowland : All right. Thank you, Tien-Tsin. Operator : Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Hi, thanks. David Rowland : Hi, good morning, Ashwin. Ashwin Shirvaikar : Good morning. How are you guys? So, I guess my first question is clearly we appreciate the acquisitions that you made over the last few years. We actually wrote about it recently. But is there a flip side to it? I mean, can you talk about the growth rate that you are seeing on your traditional businesses? What sort of impact are you seeing from ERP slowdown, from the flip side of cloud, things like that? Because clearly, we have a portion of revenues growing really fast digital. You are handling that transition very well but the flip side is bringing down your overall growth rate, right. So -- David Rowland : Ashwin, let me just mention two things and then Pierre will want to round this out just in terms of kind of the factual context. Again, I want to point out that the year we just closed, our organic growth would have been about 9.5% roughly and so, the organic part of our business, that machine, was hitting on all cylinders in ’15 and was a real testament to the power of our growth strategy and this evolution of Accenture to focusing on our five businesses that we talked about leveraging the very distinctive channel that we have through our operating groups in our largest geographic market. So, just that factual point, our organic growth machine is hitting on all cylinders. You mentioned ERP, I’ll go ahead and put this out there that the ERP business, we’ve always said that ERP goes through cycles and -- but yet, at the end of the day, it’s an attractive business. Our ERP business did stabilize in ’15, it actually grew slightly. Now, as a percentage of our total revenue, it’s actually gotten -- it’s come down a click in terms of what it represents of Accenture’s business because the non-ERP is growing significantly but nonetheless, the ERP story is not a bad story. I’ll just pass it over to Pierre. Pierre Nanterme : Yeah, just to -- probably just only reconfirm the element of our acquisition strategy, we are doing acquisitions for three reasons. I mean, the first one is to accelerate access to capabilities in the new and what we’re calling the new at Accenture is now the combination of digital services, cloud services, security services, all new technologies, if you will, such as cognitive computing, automation, or artificial intelligence. Second is to have access to very deep industry expertise, especially in consulting that is the rational for acquisition of Axia, Javelin, companies consulting deep structure iTRAK, either deep industry expertise in upstream energy in retail. That’s the reason -- that’s number two. And the number three would be to scale faster to take the leadership position in the marketplace and by leadership, we mean the Number 1. I’m thinking about Procurian, I’m thinking about Cloud Sherpas. I would put in that category, scale to lead putting more distance between Accenture and the competition. Three reasons why we’re doing acquisition and then we grew organic on top of this acquisition. Probably, one of the best case coming in my mind would be Procurian. We may yet consider Procurian, we became the Number 1 in procurement services and since we made this acquisition, we’ve been scaling faster, and now we are the market leader and the organic growth of our procurement services is even higher than the business days we built [ph]. Ashwin Shirvaikar : Absolutely. Now I understand it and we’re actually fairly consistent with what we’ve predicting recently. The second question is just I want to ask about free cash flow growth in terms of the guidance looking at the lower end is negative, the upper end is 5% at the upper end, which is a ted slower than an EPS growth. And can you kind of go through the puts and takes with regards to free cash flow growth going forward? How you think about it? Clearly, it’s at an impressive absolute level, but I just want to understand how you’re thinking of sort of the cancellation from revenues to profits to cash? David Rowland : Yeah, I mean, first of all I would encourage you and others to look at the absolute amount because the absolute amount as you referenced, I’ll use my word, but your thought I hope is that it’s outstanding. Our operating cash flow or free cash flow exceeds net income, which I think is a standard for any company which is indicative of outstanding cash flow and we’re in the range -- across our range, we’re in the range of let’s say around 1.1 of free cash flow to net income. And so, the absolute number is very, very strong. As we talked about before, there are many puts and takes in our cash flow in any particular year. Changes in DSO as an example, we have allowed for the possibility not that this is our -- what we’re trying to drive our teams to but we’ve allowed for the possibility of slight uptick in DSOs. You also noticed that we have allowed for further CapEx spending, which is part of the increase and then beyond that, there are differences in timings, for example, tax cash payments can be very different on one year -- from one year to the next. And so, there are many swings but what I would encourage you to focus on is the absolute cash flow, which exceeds net income and is great indicator of a strong cash generating company. Ashwin Shirvaikar : Okay. Thank you. Operator : Your next question comes from the line of Darrin Peller from Barclays. Please go ahead. Darrin Peller : Thanks guys. It’s interesting, we heard some commentary around Brazil and some of the emerging markets growing well. I guess when we think of your guidance and obviously, there is a deceleration partly due to just tougher comps, but I imagine some conservatism as well but I guess on top of that, I mean, how much is your expectation for Brazil or China or maybe even Russia or some of the other emerging markets that we’ve seen slower trends and having an impact on your model? I guess, I’m not quite sure we’ve heard contribution to your revenue from China or Brazil to be honest. Pierre Nanterme : Yes, so, if you look at it indeed, we had a good year in some of these markets, overall growth markets, I mean, double-digit growth if you look at all the growth markets. But again, you will see in these growth markets, some of mature market names, I’m saying about Japan and Australia. Now, indeed, we had a very good performance of Brazil last year on back of some very good program in Accenture operations and our business as well in launching innovative services, especially around mortgage as a service on back of a small acquisition we made few years ago called Avere [ph] and our digital rotation as well which is happening in Brazil likewise it’s happening in other places. That being said, we’re looking at the market as you do. We understand that the global economic conditions in Brazil are deteriorating at some pace and it has been factored in our plan. Darrin Peller : Okay. Have you ever given any disclosure on how much of a contribution Brazil or China might be to your business? David Rowland : Yeah, we have given that disclosure. I guess, we showed the revenue number for Brazil. Pierre Nanterme : I mean, Brazil is about a $1 billion. It’s about a $1 billion for Accenture. So again, it’s – Darrin Peller : And China? Okay. Pierre Nanterme : It’s not something that will be always significant. And in China, we are around half a billion. Darrin Peller : Okay. That’s helpful guys. And just last follow-up question on the digital side, again, growth of 35% obviously very impressive. Pierre Nanterme : Both trending to – David Rowland : Yeah, China, we are about – we are less – we are about in the range of $300 million in that range, so about 1% of Accenture. Pierre Nanterme : You know, he is always optimistic. Darrin Peller : Okay, very helpful. Just one quick follow-up on the digital side again. The 35% growth rate, again very impressive. It seems like there is enough demand out there, for even of a larger base that kind of trend to continue. I know you said to Tien-Tsin before that, weight for IA Day, but I mean, I think it seems like could it be fair to assume that you can have at least something similar or very, very strong double-digit growth once again this year? David Rowland : I think that – we think in terms of continued strong double-digit growth, 35% is a big number. And for planning purposes, we considered the scale of the business, but 35% is a big number and I don’t know that we would assume that for planning purposes, not that we wouldn’t strive forward. Darrin Peller : Understood. Pierre Nanterme : We got plan for double-digits. David Rowland : Yeah, certainly for double-digit. Darrin Peller : Nice. Okay, guys thanks. Pierre Nanterme : Thank you very much. Operator : Your next question comes from the line of Keith Bachman from Bank of Montreal. Please go ahead. Pierre Nanterme : Good morning. Keith Bachman : Hi, thank you very much. I wanted to ask about pricing. Recently Cognizant called out, what was normally a fairly deliberate and conservative company that pricing pressure has increased in part of their business in a while. I understand that there isn’t perfect overlap in competitive areas between yourself and an Indian-based player Cognizant. I did want to hear what you’re seeing in the pricing environment across the breadth of the business that’s particularly in the allocation maintenance and application development world specifically? David Rowland : Yeah, I would say that, you may remember, it was in the second – it was our second quarter’s call, I mentioned that we were pleased with the progress that we have made in pricing relative to where we were in the previous year. And I would say that relative to those comments, our pricing has remained very stable and so we’ve – I would characterize the environment – it’s tough to paint with a broad brush, because it really is different depending on which part of our business that you look at. But certainly overall, the environment continues to be competitive. If I had to give an overall characterization, I would say stable at the levels that we indicated that in the second quarter. You know, if you look back, I would – you asked specifically about application services that continues to be a very competitive market, but our pricing is stable. We see other parts of our business where we see some pricing power and when I say that I think about Accenture strategy and Accenture consulting. Keith Bachman : Okay, fair enough. And my follow-up question if I could is, your Global Delivery Network continues to tick-up, which I think is part of the reason why you’re able to move your margins, almost 72% of employment basis in the global network now. Is there a natural resistance point that will add some level? Can you – if we look out over the next couple of years, can that continue to move up where you move say over 80% of employment basis in the GDN? If you can just talk about any natural resistance point, particularly as you think about digital forming a greater percent of revenue, which I would think would be more local headcount? Would like to hear your characterization. Thanks very much. David Rowland : We don’t think in terms of a natural resistance point. I mean, we think that we’ve got a lot of flexibility for how our Global Delivery Network can continue to evolve. But we certainly don’t think in terms of any natural resistance point. We drive it as the market evolves and as I said, we’ve got flexibility still in front of us. Pierre Nanterme : Yes, and when you look from a skill standpoint, I mean, you’re right to mention that part of the work we are doing in digital related services could be onshore. However, we are probably the largest – one of the largest application, perhaps enterprise apps developer in the world. All these developments are being made via our Global Delivery Network and it’s definitely part of digital related services. I am thinking about as significant part of our business in analytics as well being done with our resources, especially in India and other places. When I think about strong innovations in term of automation, robotics, cognitive computing and artificial intelligence, they are coming a lot from the Philippines and from India as well. So I guess, it would be a bit simplistic to see our GDN as a kind of a low-cost, low-value kind of capability. It is a right cost, very high value workforce. Keith Bachman : Okay, great. Thank you guys. Pierre Nanterme : Thank you. Operator : Your next question comes from the line of Edward Caso from Wells Fargo. Please go ahead. Pierre Nanterme : Good morning, Ed. Edward Caso : Good morning. Congrats on the quarter. I was curious if how much of a drag that the acquisitions have become to your margin and is it this rapid growth in the GDN that was just mentioned, is that providing adequate offset? David Rowland : Well, first of all, Ed, I would say that if you look at the performance of our portfolio overall, we are quite pleased with the performance of our portfolio of acquisitions from revenue through profitability and cash flow, and that’s something we track very carefully. We review certainly ourselves, but with our Board as well each quarter. And we believe we have some pretty half hurdles, financial hurdles for the transactions that we do. Having said that, as you know, it certainly wouldn’t be unusual for an acquisition to be dilutive in the first year or two possibly. But we do -- one of our hurdles is the pace of which a deal becomes on par and then accretive, but certainly in the first couple of years that can be dilutive. I’d also point out that whereas many other companies in our sector tend to adjust for certain types of acquisition related costs, the amortization of intangibles, things like performance retention payments at the time of closure, third party fees et cetera, we’ve chosen not to do that. And we report our margin all in. To-date our margin expansion commitment has been based on our philosophy that we absorb those as part of our investments and we drive the business forward. And of course that’s just one part of our investment. We have investments that go well beyond that. The impressive thing about our profit model to-date is that when you look at that 20 basis points of expansion underneath that, we are driving significant efficiency across our business to absorb the investments acquisition and otherwise, and that's an important story to understand, so I am glad you asked that question. Edward Caso : My other question is on clarification on pricing. When you talk about stable pricing, sort of what does that mean? I mean, we hear that clients are more focused on reducing total cost of ownership. So you and your competitors may be able to sustain margin, but it’s your – you’re giving back some volume. Help us understand better what you mean by pricing? Thanks. David Rowland : So to remind you and the other listeners, when we talk about price and we’ve always said very clearly that we are talking about the profit or margin percentage on the work that we sell. And it’s in that context -- when I say pricing is stable, it’s in that context that I make that statement. And so when you look at application services as an example, when you look at our margin on work that we are contracting, that is stable. I mentioned other areas where we have sources of some pricing power, I mentioned strategy and consulting. I also say that in the context of the margin, but I will also add that if you were to look at in that part of our business, people might talk about things like average daily rates, we’re also pleased with average daily rate progression in that part of our business as well. Edward Caso : Thank you. Pierre Nanterme : Thank you. Operator : Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead. Pierre Nanterme : Good morning, Lisa. Lisa Ellis : Hi, guys. Good morning. First I guess, I will ask directly the question I think many are wondering, which is, what is it are you seeing in the numbers that’s causing the implied kind of sharp quarter-on-quarter deceleration in the guide for Q1? David Rowland : Yeah, so if you look at our guides for quarter one, the range is 6% to 9% in local currency growth. I mean, when I look at quarter one or the full year, maybe, Lisa, if you will, I’ll just – let me just expand my comments a little bit. I mean, when you look at our guidance, you first of all have to understand what is our assumption on market growth. And we assume that the market will continue to grow plus or minus in the 4% range. And so when you look at our guidance for the year, certainly if you look at our guidance for quarter one, the same would apply across that range, but certainly at the upper end of that range, it reflects taking significant market share, continuing to take significant market share, which is our strategic objective. The other thing that you have to consider goes back to some of the discussion that Pierre had I believe with Darrin on the growth markets and the risk profile. But also I think, when we look at the macro environment in general, relative to where we were 90 days ago, I would say, relative to where we were at this time last year, the volatility and risk in the macro environment has clicked up a notch or two, and so that’s a factor then. The other thing that we think about when we look at our guidance is that it’s as important if not more important to look at the absolute dollars as it is the percentage, whether it be the first quarter or the full year. And if you just look at the full year, before you adjust for the FX headwind, just taking that out, look at the underlying growth, at the upper end of our range, we will be adding about $2.5 billion of revenue, excluding the impact of FX in fiscal 2016, which is a pretty health number. And so we work hard to drive to the upper end of the range, although the range reflects what we think are the range of possibilities. And as it relates to the full year, we’re early in the year and as we did last year, we’ll adjust as we go. That was more of an answer than your question, but it gave me an opportunity to share some of those thoughts. Lisa Ellis : Terrific. Thank you. And then a little broader question, taking a step back and just reviewing FY15, how has the competitive set that you guys are competing against in deals changed? Pierre Nanterme : We’ve not seen much change in the competitive environment. I think the competition is quite well established in the different businesses we’re operating in from the consulting and strategy with the usual players. Then, you have the technology with the other players and then of course operations, different part of our business. So I guess, the environment is pretty stable with some, I mean, winners and losers and we are investing and driving our business to be part of the winners. But not much to say around the competitive environment, it’s still the usual suspects. Lisa Ellis : Terrific. Thank you. David Rowland : Thank you. Operator : Your next question comes from the line of Sara Gubins from Bank of America. Please go ahead. Sara Gubins : Hi. Thank you. Good morning. David Rowland : Hi. Good morning, Sara. Sara Gubins : Do you think that your visibility is changing at all, given that a greater portion of growth is coming from digital? David Rowland : I would say that to the extent that digital has a strong consulting concentration and if you look at the, let’s say, the average duration of a consulting contract versus an outsourcing contract, it would be true to say that the duration is shorter for consulting than it is for outsourcing. So in that sense, it does give you a different backlog kind of profile going forward. We’re very pleased with how our strategy in consulting and the development of new technology that we report within application services, that has been a great story for us, but it does change the dynamic as you’re alluding to. Sara Gubins : Great. And then separately, could you talk about your hiring plans for next year and the hiring environment overall? Thanks. David Rowland : Yeah. We will -- we are still in the midst of finalizing those and I will comment on that as appropriate at IA Day, but it’s a little premature for me to give you a number at this point. Sara Gubins : Okay. Thank you. David Rowland : Thank you. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Yeah. Good morning. Just speaking of headcount growth, I think it was up 17% year-over-year, that’s the highest I can remember in a long time, can you just talk about how that translates into revenue? I would have guessed it would have pushed a little bit higher guidance growth rate for the constant currency revenue growth for fiscal year ’16? David Rowland : Yeah. First of all, we were really pleased with our recruiting in the fourth quarter. I mean, we continue to be and even more so, a real, I would say, magnet for talent in the marketplace and so we had very successful recruiting efforts as you know. The fourth quarter is typically when we bring on our campus hires and so that’s reflected in the number and so we manage the supply and demand very carefully. And we -- the one point is where we start the year and then of course we have to manage our headcount as we progress through the year and we will see how attrition plays out as we evolve through the first half of the year. We will see how the revenue trajectory progresses and then as always, we adjust headcount appropriately. Bryan Keane : What’s that relationship, shouldn’t the relationship be closer to revenue growth for the following year? David Rowland : Well, it’s -- I’m not -- as a general -- well, it depends, it just depends on so many different assumptions. It depends on how we see pricing evolving. It depends on how we see our revenue yield per head evolving. It depends on what we might expect with attrition. It depends on – perhaps, we hired a disproportionate number of people in quarter four and we expect to hire less than normal in quarter one and so, there are so many factors that go in to that. I wouldn’t over read the headcount. What I’d focus on is the guidance we gave and the context that I gave for the guidance. Bryan Keane : Okay. Just last quick follow-up, what’s the mix between consulting and outsourcing on the growth rate that we should expect between the 5% to 8% guidance? I saw consulting has obviously been a little bit stronger than outsourcing. Just want to see if that probably continues for next year? David Rowland : Yes. We see -- we actually see very balanced growth, as we have looked at our business plans. We actually see very balanced growth and we would see, let’s say, both consulting and outsourcing in the context of a 5 to 8 range, we would see both of those kind of be in the same zone. So in the mid to high single digits is the potential range for both of them. Bryan Keane : Okay. Super. Thanks for the color. David Rowland : Thank you very much. I appreciate it. KC McClure : Great. We have time for one more question and then Pierre will wrap up the call. Operator : Okay. Your final question today comes from the line of Brian Essex from Morgan Stanley. Please go ahead. Brian Essex : Good morning and thanks for taking the question. I was wondering if you can talk about a little bit about -- I just noticed that the acceleration in the European or EMEA constant currency growth rate was really nice this quarter. So you had about a year and a half now of accelerating growth in Europe and I was just wondering if you can touch on the environment in Europe and what are some of the key drivers to that acceleration, so that we can get an idea of how that might be sustainable going forward? Pierre Nanterme : Yes. Sure. Thank you. And by the way, Jo Deblaere who is leading our European business is in the room and he could be more pleased with your comments on Europe. And yes, I mean, we’re pleased with where we are because we’ve seen the growth and of course, when you understand the overall economic environment in Europe, it’s much different from the one for instance you have in the US. So it’s more about us than about the market of course. And I would call probably the same trend. It’s fascinating to see that the digital rotation we’ve seen in Europe is as strong, even slightly stronger than the one we could see in the US. It appears that our target clients, mainly the premium brand in the G2000 we’re serving in Europe are really accelerating their investments in terms of digital rotation. Second, we had some very significant transactions, leveraging Accenture operations with our business process services, I’m thinking about, I mean the Finance and Accounting, the HR, the procurement as well and it’s been a significant source of growth and overall, the consulting is back, probably driven as well with the digital related services. So for Europe, again, the clients we’re serving, more than the GUs, are reinvesting. We’re always nice on rationalization, driving good growth for Accenture operations and the other eye on growth and digital, which is driving more business for Accenture Digital, Accenture Strategy and Accenture Consulting and of course the leadership of Jo Deblaere. Brian Essex : Great. And maybe just for a follow-up, I know the deal hasn’t closed yet, but I think Cloud Sherpas was a great pick up. We know them as a leading cloud broker and a substantial salesforce.com partner. Maybe if you could, to the extent you can, talk about the rationale behind that deal and where some of the leverage across your platform might come from and any kind of overlap with their current brokerage business? Pierre Nanterme : Yes. Sure. I mean, two main reasons. First, and you’ve seen that in the terminal, which has been used by Paul Daugherty, our Chief Technology Officer, we’re taking a cloud first approach. So we are strongly believers that indeed now and even more moving forward, this cloud first agenda will be quite prevalent for our clients and we want to preempt to be ahead of the curve or to embrace whatever you’re going to call it, this new cloud first environment and so to be a prominent provider in the add to service, software and solution as a service environment. So second, when we have defined this position for Accenture, the name of the game for us was how to scale more rapidly to take the leadership position, especially around the salesforce.com solution and Cloud Sherpas was a very relevant opportunity for us to scale rapidly the good capabilities we have as we speak, we are the leader in providing services for salesforce.com. We are already the leader and we believe that through this acquisition, they have excellent people, a significant number of this people being certified, which is even more important, we are scaling faster and are taking the leadership in this market, which we believe is going to be promising in the coming years. Brian Essex : Is there a geographical component as well or is it primarily just merging the two capabilities together? Pierre Nanterme : Yes, no, indeed, I mean, it’s global with a very significant and good footprint in the U.S., but it’s global and nicely covering two or three of our most significant markets around the world. So we should take this leading position not only in one, but certainly in few of the markets around the world. Very nice fit for us. Brian Essex : Yes. Pierre Nanterme : Alright. I think we stand to wrap up KC. Excellent. So thanks to all of you again for joining us on today’s call. And in closing, I just want to take this opportunity to first, thank our clients for the trust they place in Accenture as their business partner. At the same time, I also want to extend my deep and sincere thanks to the men and women of Accenture around the world. Every minute of every day, our people demonstrate an incredible level of commitment to delivering value for our clients and for our company and finally, of course, I want to thank you, investors for your continued support and confidence in Accenture. We look forward to talking with you again next quarter and also to seeing many of you in person at our Investor and Analyst Conference in New York on October, the 7th. In the meantime, if you have any questions, please feel free to call KC and all the best. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 Eastern time today through December 17th. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 366268. International participants dial 1 (320) 365-3844. Those numbers once again are 1 (800) 475-6701 or 1 (320) 365-3844 with the access code 366268. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,015	4	2015Q4	2016Q1	2015-12-17	5.002	5.053	5.447	5.517	null	18.72	19.5	Executives: KC McClure - Managing Director and Head, IR Pierre Nanterme - Chairman and CEO David Rowland - Chief Financial Officer Analysts : Bryan Keane - Deutsche Bank Tien-Tsin Huang - JPMorgan Dave Koning - Baird Jason Kupferberg - Jefferies David Togut - Evercore Rod Bourgeois - DeepDive Equity Jim Schneider - Goldman Sachs James Friedman - Susquehanna Joseph Foresi - Cantor Fitzgerald Lisa Ellis - Bernstein Keith Bachman - Bank of Montreal Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture’s First Quarter Fiscal 2016 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] As a reminder, this conference is being recorded. I’d now like to turn the conference over to our host, Managing Director, Head of Investor Relations Ms. KC McClure. Please go ahead. KC McClure : Thank you, Greg. And thanks to everyone for joining us today on our first quarter fiscal 2016 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, along with some key operational metrics 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 2016. We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today’s call, we’re talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on 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. Pierre Nanterme : Thank you, KC, and thanks everyone for joining us today. We had a strong first quarter, and I’m very pleased with our results and the continuing momentum in our business. Our revenue growth was again broad-based across the different dimensions of our business, including double-digit local currency growth in three of our five operating groups, and in North America and Europe, our two largest geographic regions. I’m particularly pleased with our results in digital-related services, where we delivered very strong revenue growth of more than 20%. Here are a few highlights for the quarter. We delivered $7.7 billion in new bookings, which were in line with our expectations. We grew revenues 10% in local currency, gaining significant market share. We expanded operating margin 20 basis points to 15.2%. We delivered earnings per share of $1.28 which includes a negative impact of $0.07 from a higher tax rate in the quarter. We generated solid free cash flow of $517 million. And we returned approximately $1.4 billion in cash to shareholders through share repurchases and the payment of our semiannual dividend. So, we hope to have a good start in fiscal year ‘16. And given our strong performance, we have raised our outlook for revenue growth for the full year. Now, let me handover to David. David, over to you. David Rowland : Thank you, Pierre. Happy holidays to all of you. And thank you for taking the time to join us on today’s call. Let me start by saying that we were very pleased with our overall results from the first quarter, especially as it relates to our strong and broad-based top line growth. Our differentiated growth strategy which focuses on five businesses delivered in an industry-relevant context continues to resonate with the market and yield strong value for our clients and our shareholders. Before I get into the details, let me comment on a few of the highlights this quarter. Strong local currency growth of 10% represents the fifth consecutive quarter of double-digit growth, as we continue to outpace the market and take share. The durability of our growth model is evident in our results with double-digit growth in three of the five operating groups in both Europe and North America. Digital-related services, continues to be the dominant growth theme as we continue to be a market leader in the rotation to the new. Operating margin of 15.2% reflects 20 basis points of expansion, consistent with our objective to expand margins while investing significantly in our business and our people. Free cash flow came in as expected at just over $500 million and at the same time we returned roughly $1.4 billion to shareholders through repurchases and dividends. And we continue to invest at scale in our business, closing four acquisitions in the quarter with invested capital of over 600 million, which represents a great start towards our fiscal ‘16 objective to invest as much as $900 million to a $1 billion to add scale and capabilities in key growth areas. With that said, let’s now turn to some of the details starting with new bookings. New bookings were $7.7 billion for the quarter, consulting booking for $4.4 billion, reflecting a book-to-bill of 1.0; outsourcing bookings were $3.3 billion with a book-to-bill of 0.9. This level of new bookings follows our typical pattern of lower new bookings in our first quarter which then built throughout the year. It’s important to note that this level of new bookings represents 9% growth in local currency over last year’s quarter one, with a significant portion expected to convert to revenue in fiscal ‘16. The highlight of the quarter was strong consulting bookings, which reflect 24% growth in local currency over last year, fueled by demand for digital related services across Accenture Strategy, Accenture Consulting, and Application Services. Looking forward, we are very pleased with the expansion in our pipeline and expect strong bookings in the second quarter. Turning now to revenues, net revenues for the quarter were $8 billion or 1.5% increase in USD, 10% local currency, reflecting a negative 8.5% FX impact, consistent with the assumption we provided in September. Quarter one revenues were roughly $60 million above the upper end of our guided range, primarily driven by stronger than expected consulting revenues. Consulting revenues for the quarter were $4.3 billion, up 6% in USD and 15% local currency. Outsourcing revenues were $3.7 billion, down 4% USD and an increase of 5% in local currency. Looking broadly at drivers of revenue growth for the quarter, digital-related services grew over 20% in local currency and fueled strong double-digit growth in strategy and consulting services combined. Operations in application services came in as expected with high single-digit growth and mid single-digit growth respectively. Taking a closer look at our operating groups, Communications, Media & Technology grew 12%, the sixth consecutive quarter of double-digit growth. Growth was broad based and led by double-digit growth in North America and the growth markets as well as communications, and media and entertainment globally. Financial Services strong momentum continued with 12% growth, driven by very strong growth in banking and capital markets and in both Europe and the growth markets. Products also delivered broad based growth of 12%, led by our industrial and life sciences industries with continued very strong overall growth in Europe and growth markets. H&PS grew 8% in the quarter. We continue to be pleased with the performance of our health industry which again delivered double-digit growth. And additionally, H&PS grew double digits overall in North America including in both health and the public sector. And finally Resources delivered the fourth consecutive quarter of 6% growth, led by strong double-digit growth in utilities as well as strong overall growth in North America and Europe. Revenue performance in the energy industry and in the growth markets was challenged this quarter due to industry and country specific cyclical headwinds. Moving down the income statement, gross margin for the quarter was 32% compared to 32.2% in the same period last year. Sales and marketing expense for the quarter was 10.9% compared with 11.5% for the first quarter last year, down 60 basis points. General and administrative expense was 5.8% compared with 5.6% for the first quarter last year, up 20 basis points. Operating income was $1.2 billion in the first quarter, reflecting 15.2% operating margin, up 20 basis points compared with quarter one last year. Our effective tax rate for the quarter was 29.3% compared with an effective tax rate of 25.1% for the first quarter last year. The higher effective tax rate was primarily due to lower benefits related to final determinations and other adjustments to prior year taxes compared to the first quarter of last year. As you know, our quarterly tax rate can vary. And our view of our full year tax rate has not changed, as you will hear when I provide our business outlook in a few minutes. Net income was $869 million for the first quarter compared with net income of $892 million for the same quarter last year. Diluted earnings per share were $1.28 compared with EPS of $1.29 in the first quarter last year. As I just referenced, there was $0.07 impact to EPS this quarter from the higher tax rate compared to the first quarter last year. Turning to DSOs, our days services outstanding continue to be industry leading. There were 41 days compared to 37 days last quarter and in the first quarter of last year. Our free cash flow for the quarter was $517 million, resulting from cash generated by operating activities of $611 million, net of property and equipment additions of $95 million. Moving to our level of cash, our cash balance at November 30th was $3.1 billion compared with $4.4 billion at August 31st. The current levels reflect, both the cash returned to shareholders through repurchases and dividends, and our investments in acquisitions. Turning to some other key operational metrics : We ended the quarter with a global headcount of 373,000 people with 270,000 people in our global delivery network. Utilization was 90% compared with last quarter, consistent with last quarter. Attrition was 13%, down 1% from quarter four and consistent with the same period last year. With regards to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed 6.5 million shares for $658 million at an average price of a $100.53 per share. At November 30th, we had approximately $7 billion of share repurchase authority remaining. Also in November, we paid a semiannual cash dividend of $1.10 per share for a total of $721 million. This represented an $0.08 per share or 8% increase over the dividend we paid in May. So in summary, we are off to a very good start in fiscal ‘16; our top-line results and our increased revenue outlook for the year, which I will cover shortly, reflect continued strong momentum in our business. Now, let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our strong results in the first quarter demonstrate that we continue to execute very well against our growth strategy. At our Investor and Analyst Conference in October, we provided an update on the actions we have taken and investments we have made to position Accenture to lead in the new, which we define as digital, cloud and security related services, all enabled by new and innovative technology. In the first quarter, we continued to rapidly overtake our business to the new with digital, cloud and security revenues combined, already approaching 40% of our total revenue. So, the investments we are making in these areas are clearly differentiating Accenture in the marketplace and driving significant growth. Let me bring this to life with a few examples. Digital is all about enabling our clients to unleash the power of digital technologies to create new sources of value. We continue to see very strong demand in this area and are leveraging our digital capabilities with clients in nearly every industry around the world. We are working on a five-year digital transformation with a European aerospace company, bringing our capabilities in mobility, analytics and the Internet of Things to drive productivity improvements. We are helping a global pharma company, improve its supply chain by leveraging our advanced analytics capability including the Accenture Insights platform, giving patients and doctors access to the diagnostics and medicine they need faster than ever. Cloud is increasingly becoming a starting point for clients who want to create new services faster and get access to computing capabilities in a more cost effective way. We are working with a leading U.S. energy company to deliver a new operating model, underpinned by the Accenture cloud platform and our hybrid cloud solution. With this new as a service model, the client can leverage our cloud-based data analytics while benefiting from a flexible consumption based pricing structure. At Accenture, we have a cloud first agenda to help clients move their businesses to the cloud quickly and easily and we continue to invest to build our capabilities. In September, we announced acquisition of Cloud Sherpas and in October we announced a new partnership with Amazon Web Services. The newly formed Amazon AWS Business Group will offer integrated consulting and technology solutions to help clients take advantage of the flexibility of another service model. Turning to security, in the digital and connected world, security is increasingly important to our clients. We are now leveraging FusionX, a cyber security business we acquired in Q4, in a work with a global high-tech company. We identified gaps in the clients’ differences by simulating a sophisticated cyber attack and we are now working with them to improve their security strategy. And of course we continue to work with clients on large scale mission critical transformation programs. We bring out full range of services in strategy, consulting, digital technology and operations together with our industry expertise to deliver tangible outcomes for clients. As an example, we are working with a global apparel manufacturer on an enterprise-wide transformation to reduce back office cost by 50% and position the company for growth. As a first step, we are enhancing the efficiency and quality of the client’s finance and accounting processes across 26 countries while significantly reducing cost. Turning now to the performance of our three geographic regions : In North America I’m very pleased that we again delivered double-digit growth. The 11% increase in revenues was driven by strong double-digit growth in the United States. In Europe, we had another great quarter, with 12% revenue growth in local currency driven by double-digit growth in many of our major markets, such as the United Kingdom, Spain, Italy and Switzerland as well a high single-digit growth in Germany. And in growth markets, we delivered 6% growth in local currency, led by Japan, the largest company in our growth markets. Japan has delivered eight quarters in a row of double-digit growth. At the same time, we’re carefully monitoring the situation in Australia and Brazil which have been affected by commodity price volatility in the energy and natural resources sectors. Before I turn it back to David, let me comment on talent and leadership at Accenture. I am extremely pleased that we just promoted the record 723 people to managing director and senior managing director. And I’m particularly pleased that 28% of our new promotes are women. These promotions reflect our commitment to career growth for our people and to developing the talented leaders we need to serve our clients and run Accenture as a world-class business. So, with the first quarter behind us, I’m pleased with the continued momentum in our business. We’re executing our strategy very well and our rotation to the new combined with our unique ability to deliver end-to-end solutions to clients continues to drive strong demand. With that I will turn the call over to David to provide our updated business outlook. David, over to you. David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the second quarter of fiscal ‘16, we expect revenues to be in the range of $7.5 billion to $7.75 billion. This assumes the impact of FX will be a negative 6% compared to the second quarter of fiscal ‘15 and reflects an estimated 6% to 9% growth in local currency. For the full fiscal year ‘16, 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 ‘15. For the full fiscal ‘16, we now expect our net revenue to be in the range of 6% to 9% growth in local currency over fiscal ‘15. For operating margin, we continue to expect fiscal year ‘16 to be 14.6% to 14.8%, a 10 to 30 basis points expansion over adjusted fiscal ‘15 results. We continue to expect our effective tax rate -- our annual effective tax rate to be in the range of 25% to 26%. For earnings per share, we continue to expect full year diluted EPS for fiscal ‘16 to be in the range of $5.09 to $5.24 or 6% to 9% growth over adjusted fiscal ‘15 results. Turning to cash flow, for the full fiscal ‘16, we continue to expect operating cash flow to be in the range of $4.1 billion to $4.4 billion; property and equipment additions to be approximately $500 million; and free cash flow to be in the range of $3.6 billion to $3.9 billion. We continue to expect to return at least $4 billion through dividends and share repurchases. And now expect to reduce the weighted average diluted shares outstanding in the range of 1.5% as we remain committed to returning a substantial portion of cash to our shareholders. With that, let’s open it up, so that we can take your questions. KC? KC McClure : 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 please provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Consulting was a little bit stronger, obviously than I thought, but outsourcing was a little softer, came in -- I think it was 5% constant currency that was down from 9% in the fourth quarter. Just trying to figure out any one-timers or anything going on there in outsourcing and what the outlook is going forward in outsourcing? David Rowland : Yes, there is nothing -- there is certainly nothing unusual in terms of one-time events. I mean when you pull outsourcing back the -- as a type of work and then related to our business -- our five businesses, a large part of operations, the significant portion of operations is part of the outsourcing type of work and then the application maintenance piece of application services is part of the outsourcing type of work as well. Within operations, the core driver is BPO. And I’ll say, we continue to feel very good about our BPO business. The growth rates have been such that we have continued to take significant share. And if you look at our operations business overall, our expectation for growth remains the same, no different from what I communicated at IA Day where we think our operations business will grow very well in the upper single to low double-digit range, and of course BPO is a key anchor to that. If you look at the other component of outsourcing which be application maintenance within application services, let me say that for application services, we now see mid single-digit growth. As we’ve talked about, there is kind of two components in application services there is the maintenance of the existing kind of legacy applications for our clients, which is an important function. And then on the other end of the spectrum, there is the investment in new technology and the deployment of new technology. So, when you look at our services, we see extremely strong growth in the project-based work in application services that work related to deploying and building new technology; that is reflected in our consulting type of work which is why you see consulting type of work growth so strong. What we see is clients are looking to reduce their cost of ownership of their existing applications. So therefore, there is relatively less investment in the maintenance piece in lieu of higher investments in the development piece. Bryan Keane : Okay. And then, when we look at the full year now, the 6% to 9% constant currency guidance, if you spilt that between consulting and outsourcing, what kind of growth ratio we see in both those segments? David Rowland : Yes. So for consulting for the full year -- I am talking about consulting type of work to be clear, we see low double-digit growth. For outsourcing, we see mid single-digit growth. And then underneath that you’ve got the components of operations and the maintenance piece of services as I described. Pierre Nanterme : And we are very pleased with that mix. David Rowland : Yes. Operator : Your next question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Tien- Tsin Huang : Similar question to Bryan’s, I guess just on the outsourcing side with the book-to-bill below one. I heard the answer, but is there simply just a mixed shift going on towards consulting from both your side as well as from the clients? And I am curious, if also you’ve been able to have some tougher comps as you’ve had from large 100 plus million dollar deals earlier in the year; how was the pipeline on bookings as well as; did you give the 100 million plus number of contracts this quarter? Thanks. David Rowland : I’ll just mention quickly that we had six clients with bookings over a $100 million. Let me just mention a couple of data points and then let Pierre add some commentary as well. We feel very good about our pipeline. And if you think about our pipeline and the type of work view, if you will, we feel good about our pipeline pretty much across the board. And we’ve seen good expansion in our pipeline. We see a lot of market activity, at least from our perspective, and good dialogue with our clients across those consulting and outsourcing. So, we feel good about our pipeline. Again, we expect that we will see an uptick in bookings in the second quarter and are very encouraged by what we see. Pierre Nanterme : Yes, just to add on this and as well answer to Bryan. I feel extremely comfortable with where we are, with outsourcing and consulting business. The uptick on outsourcing is lower because consulting is doing extremely well and that is why we have the results we are. And it’s all our ability indeed to take advantage of any move or shift of the budget of our clients from indeed outsourcing type of work to consulting investments. And this is exactly the opportunity we are taking to grow. And if you look at our rotation to digital and to the new, the part of the consulting business in this rotation is more important than the outsourcing part of it. So, it’s explaining that consulting is back with a strong growth and we are pleased with the growth we have in outsourcing. So from my standpoint, I have zero concern. Tien- Tsin Huang : Make sense, consulting was very strong. Just quick follow-up and just the Navitaire timing, and I know always ask about Navitaire, forgive me. But just when should we expect that to come out of the P&L? David Rowland : Yes, so Tien-Tsin, we can’t -- I wouldn’t run the risk of predicting the timing. What I can say again is that the deal has already been approved in the U.S. and in Brazil. We have been in the process of cooperating with the European Commission, as they go through their review process. And it will conclude when it concludes. Timing is hard to predict. Tien- Tsin Huang : So, probably nothing explicit in the guidance? David Rowland : Yes, right. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. Dave Koning : Hey guys, nice job. And I guess first of all, just acquisitions have ramped and you’ve talked about how that might contribute I think 1.5% to 2% to res. Is that largely in consulting? Since half of res is consulting, is that maybe benefiting right now by 4% from the acquisitions, while outsourcing isn’t benefiting from acquisitions? Pierre Nanterme : Answer is yes. Indeed our acquisitions are creating more impact in our revenue growth in consulting compared to outsourcing. So, it is another driver explaining the difference between both businesses. Dave Koning : And is that maybe -- is maybe 90% of acquisitions, or maybe what’s the mix between how much of those acquisitions are benefiting consulting relative to outsourcing? David Rowland : I would say if you look currently and in recent quarters, it’s a very high percentage. And of course, it reflects the market opportunity in a way our business is evolving. If you went back let’s say a year, year and a half ago, two years ago, they would have been more outsourcing oriented but it’s a very high percentage. And you are correct to identify that the overall inorganic contribution is in the 2% range and you are correct to identify that the majority of that is reflected in our consulting type of work growth. Pierre Nanterme : Yes, to be clear, the vast majority of our acquisitions contributing to consulting business. David Rowland : And your 4% is in the right zone, to be clear. Dave Koning : And just as a follow-up then, revenue per billable employee, that’s been declining a little bit; it’s now probably in the mid single-digit declines on a constant currency basis; so, it’s gotten a little -- I guess you did say worse. But is that really just you significantly ramping hiring kind of in anticipation of what has been and probably continues to be really good growth; is that the right way to think of it or maybe you could just kind of outline what’s happening there? David Rowland : Yes. Certainly, if you look at the last two quarters, that influence of that metric which I look at obviously as well. So, if you look at it, and let’s say in the recent two quarters, you have the impact that we have very intentionally built bench in key still areas, key growth areas. And you have seen that our utilization, let’s say in quarter one of this year compared to quarter one of last year, was down about a 1% and that reflects that building a bench. And so that does go into that calculation when you look at it all in, as you do. Operator : Your next question comes from the line of Jason Kupferberg from Jefferies. Please go ahead. Jason Kupferberg : Thanks good morning guys. I am just curious … Pierre Nanterme : Hi, Jason. Jason Kupferberg : Hey, how are you? Pierre Nanterme : Fine. Jason Kupferberg : So, on the guidance raise for the year, the 1% increase, how much of that is from some of the incremental acquisitions, because I know you did spend a bit there in Q1 versus how much is just kind of pure organic? David Rowland : Yes, it’s really no change in the incremental acquisitions. We still see about 2% for the year. And you may remember at -- I guess it wasn’t the earnings call but I think it was IA Day, I said it explicitly that the bills that had signed that we anticipated closing in the first quarter which have ultimately closed, we had reflected that in our initial guidance. So, this is -- I mean you could interpret this as an increase in our organic revenue outlook. Jason Kupferberg : Okay, good to hear. And just for a follow-up, I had a question on cash flow. I know it can obviously be lumpy on a quarterly basis, and you did reiterate the full year outlook here, but Q1 at least relative to our model was somewhat light. Maybe you can just remind us as far as timing of bonus payments, which quarter that will fall and was there anything in the cash flow performance this quarter that makes you feel any less confident reiterating the full year target? I mean I looked at on bills, it seemed like those grew a little faster than revenue in the quarter. Was that just timing or anything or any other factors that might cause that dynamic to continue? David Rowland : Yes. So, one of the factors was the increase in DSO in the first quarter. We had signaled, I think both at IA Day and probably the fourth quarter earnings call that our cash flow guidance allowed for the possibility of on an uptick in DSOs that’s what we have seen. On one hand, we are very happy with 41 days; on the other hand, we always are working to do better. We have a very cash is king kind of culture. And so, we did have an uptick. That reflects in the first quarter results. And then the second factor that influences -- there are actually three or four factors but the second one what I call -- that I would call out would be the timing of tax cash payments. Those can ebb and flow across the quarters of a year. And that was a factor in the first quarter this year compared to the first quarter of last year, doesn’t change our expectation for the full year. It just means that we had a higher percentage of tax cash payments in the first quarter this year relative to the first quarter last year. Those are really the two drivers of tax cash payments and DSO. Operator : Your next question comes from the line of David Togut from Evercore. Please go ahead. David Togut : The digital-related services growth was very strong at 20% plus but down from the 35% you generated in FY15, which was an extraordinary result. Can you give us a little more color on why the magnitude of the slowdown in growth? And in the new guidance you provided today, what is your embedded assumption about digital-related services revenue growth? Pierre Nanterme : Yes. So, I’m going to get the first part of the answer. And I’m delighted with the growth of our digital-related services over 20%; this is exactly the zone where we expect our digital-related services to grow. As you said, fiscal 015 posted some extraordinary growth and beyond our expectations, if you will. And so, we are now planning our investments and the growth of digital-related services to be in that category of growth. And we are very pleased with that. It doesn’t signal any form of slowdown. I mean we’re growing on back of big numbers. If you remember, last year, our digital-related services that do represent $7 billion, what we call in digital and this is where we measure our digital rotation. So, growing double-digit on back of that base is what I would qualify tour de force. David Rowland : And David, just to add, this is entirely consistent with what we expected and signaled. We see the outlook for digital for the year and continued strong double-digit growth. I think we mentioned again at IA Day that while we were incredibly pleased with the growth in ‘15, it was much higher than we would have expected and it’s higher than it would be prudent to assume, as we plan our year. Having said that, one of the things about our model is the flexibility and our know-how to ramp up resources as we need to if the growth opportunity presents itself strong, even stronger than we expected. So, we’ll see how it plays out. But, if we have digital growth above 20, we’re doing a heck of a job executing our strategy. Pierre Nanterme : Especially as the vast majority of this growth is organic. David Rowland : Yes. David Togut : A quick follow-up, are you able to get differential pricing for digital related services from your clients? David Rowland : We do see some differentiated -- well, first of all it’s hard to talk about. In that context, it’s hard to talk about digital overall because as you know, we have digital work that we do in Accenture Strategy, Accenture Consulting, Accenture Technology, meaning app services and operations. I would say, as a general statement, we have favorable economics in digital. And I can assure you, we are always pushing whether it’s digital or any other part of our believe where there is a high value service offering in the marketplace and where we have highly differentiated skills and capabilities that plays in our favor from a pricing standpoint and we try to get the yield from that. Operator : Your next question comes from the line of Rod Bourgeois from DeepDive Equity. Please go ahead. Rod Bourgeois : I just wanted to talk a little bit about where your partners are spending their time, because I wonder if some of the variations in growth rates across your business are really a function of where they’re devoting their attention. Right now, you’ve got your growth markets, which currently looks a little bit like misnomer, right? Your growth markets are going at half the rate of the U.S. and Europe and consulting even on an organic basis is growing a lot faster than outsourcing. Is that partly a function of where your partners are spending their time in the pipeline and it’s really -- it wouldn’t be feasible for us to expect you to grow outsourcing and consulting at this sort of double-digit pace, because your partners can only spend their time on certain things in one given quarter? David Rowland : I think I understand your question. Let me just start with the growth markets, as you characterized it as a misnomer. I think it is important to kind of peel that back, and you’ll understand that growth markets is appropriate when I say this is that we’ve talked about the cyclical challenges in energy and natural resources which is reflected in our resources operating group results. I can tell you that if you look at growth markets, absent the resources operating group, which are attributed to the cyclical challenges that we know and understand in energy and natural resources, the rest of the Accenture business is growing double digits in the growth markets. And so, it’s important to peel that one layer back, so that you can be exposed to the fact that we actually have a very vibrant business in the growth markets. On the other -- I think the essence of your question is that we have a fixed capacity of partners in the channel. And if they direct their focus to our Accenture Strategy, Accenture Consulting and the development part of application services is a simply a function of if our capacity is focused on one part of our spectrum of our five businesses, does that mean by design that outsourcing goes down. And I would say not necessarily at all. I do think that there’s a lot of activity in the consulting type of work, which is strategy consulting and the development part of app services. There is a lot of market activity and a lot of demand, and I think that’s what the growth reflects. It’s not so much about partners spending time on activity A versus activity B? Pierre Nanterme : Absolutely, I mean we have clear and differentiated strategies for our three regions. We have clear leaders in the regions, Julie Sweet in North America; Gianfranco Casati in Growth Markets and Jo Deblaere in Europe. They are executing their strategies. So, there is not [indiscernible] or some biased views on this. Indeed in the growth market, the explanation of the growth slowing down compared to prior quarters is all coming from this cyclical impact of energy and natural resources, otherwise we are very pleased. I mentioned Japan, part of our growth market, again putting a double-digit growth for I think eight quarters now in a row, which is frankly a fabulous result. And we are taking opportunities in each and every market as per our strategy in outsourcing and in consulting. I think we did comment the difference between outsourcing and consulting momentum because of the digital related services nature of the business, which is more around consulting than outsourcing, which is just the demonstration that budget from our clients up a bit moving from this outsourcing type of business to the consulting type of business. And as you see, in Europe, with 12% growth, we are defiantly putting our act together to create our own growth almost against the economic condition of the markets. David Rowland : Yes. And I want to say again, so it doesn’t get lost. Operations and BPO within operations, we are very pleased with that growth, very good growth and growing above the market taking share. That is a very vibrant business for us. Rod Bourgeois : And then the follow-up is especially given that your demand today is very weighted towards consulting, do you expect any budget uncertainties as we move into early calendar ‘15? And has your guidance accounted for the potential that the year gets off to a slow start as we’ve seen sometimes in other years, particularly when demand is coming from consulting, the early calendar year budget can be somewhat of an uncertainty. And I just wondered, to what extent that’s accounted for in the guidance? David Rowland : Well, we have -- of course our range, Rod, is three points to cover scenarios like that on the down side. So, we’ve accounted for it to the extent we have three-point range. We don’t have any evidence of any notable change in client budgets to the worst, which is your question. We don’t have any evidence of that through our channels. And again, our pipeline looks very good, which is indicative of the level of client discussions that are underway currently. Operator : Your next question comes from the line of Jim Schneider from Goldman Sachs. Please go ahead. Jim Schneider : Relatively to the financials vertical, I was wondering if you could maybe talk a little about what you are seeing there, which seems to be stronger than almost all of your peers, which -- some of which seem to be talking about a little bit of downtick in the business. Can you maybe talk about the specific elements or the subareas where you are seeing strength there and particularly, as we head into ‘16 with rate hikes, whether you think your clients are messaging a little bit even more optimistic spending expectations next year than this year? David Rowland : Your question was about financial services, the financial services operating group, correct? Jim Schneider : That’s right. Yes. Pierre Nanterme : Okay. So commenting on FS, I mean we continue to be pleased with the results. I mean we see again double-digit growth in financial services. This is an industry, if you look altogether, which is one of the largest. I think we mentioned at the IA Day that if you put together capital markets and banking would be one of the largest, the largest industry at Accenture. And of course this is an industry historically and currently investing in technology and in transformation. So, we continue to be very pleased with the opportunities offered by financial services. They have to transform. And of course digital-related services are extremely relevant in financial services, almost by definition, it’s a B2C and it’s enabling a lot digital native [ph] technologies to maximize, I mean the connectivity with the clients as well as digitalizing the portions. This is an industry where historically we made the right investments. I am talking about the investment we made in insurance where we are extremely well-positioned with our software solutions. I am talking about the investments we made in credit services where we are now building a leading independent mortgage processor in the U.S. and very pleased with the momentum we getting in Brazil where we are expanding our services and credit services to again take [indiscernible] position. We just announced this quarter a very niche but very good acquisition in Boston on asset management called Beacon. I’m very pleased with that adding super deep expertise. So overall, we are very pleased with what we’re doing in FS, which is quite broad-based across the different regions as well, if you look at North America, if you look at especially Europe where we are doing very well, excellent results in growth markets. So, this is the industry where I am coming from and this is one I love the most. Jim Schneider : That’s helpful, thanks. And then as a follow-up, to the earlier question on headcount, billable headcount increased, I think the fastest growth rate we’ve seen in quite a few years. Can you maybe first talk about how much of that is driven by the M&A that closed? And then specifically within this, any specific areas outside of digital where you are seeing a lot of uptick in the headcount growth and I guess more broadly speaking, I assume that says something pretty positive about the outlook you see for the business for the next few quarters? David Rowland : I mean in the context of the overall Accenture organization, the acquired headcount is just not that -- it’s an important skills that we are acquiring but in the context of the overall headcount, to your question, it’s just not that material. And we see growth in headcount really across our business including by the way in our GDN. You will see in the statistics that a high percentage of the headcount is in our global delivery network. And again I think the theme that underpins it, whether you are talking about strategy consulting, application services or operations, the common theme is this digital rotation and the services and the type of work we are doing in that regard, really is a driver of the skills we are acquiring as a general theme. Operator : Your next question comes from the line of James Friedman from Susquehanna. Please go ahead. James Friedman : David, in your prepared remarks, you had called out the timing of bookings to rev rec. I was wondering are there any other operating groups of business dimensions where the revenue recognition is faster than others. David Rowland : I would say, as a general rule, if you look at Accenture Strategy, Accenture Consulting and the project-based work in Application Services, which is deployment of new tech and let’s just say packaged software even more broadly. The turn to revenue is -- in all of those cases is faster than let’s say the rest of our business that I didn’t call out, and that’s just -- those are just structural differences. And so, when you see such strong growth rates in our consulting type of work business that just reflects bookings that convert to revenue faster than let’s say certainly the typical operations contract would or an application maintenance contract would. James Friedman : And then, I had a housekeeping question in response to one of your prior answers. I want to make sure I heard this right. When you were mapping the two sides application services between application maintenance, and I think you would describe it as application modernization, did I hear that right that part of it goes towards outsourcing and part of it goes towards consulting in terms of the disclosures? David Rowland : That is correct. So, application services has what we have traditionally called application outsourcing, which is -- or application maintenance work, that maps to our outsourcing type of work. The rest of application services, which is really about fundamentally development work, application development work whether it be new tech or could be development around existing legacy applications, packaged software deployment et cetera, that is what we would have historically referred to as systems integration. And that maps to the consulting type of work. Operator : Your next question comes from the line of Joseph Foresi from Cantor Fitzgerald. Please go ahead. Joseph Foresi : I was wondering if you could provide a little bit more color on just as digital is becoming a bigger part of your business, what the margin profile is for the digital work that you are doing? And is it fair to categorize its bookings realization as a faster rate than the rest of the business? David Rowland : Yes, we are not going to comment specific -- I mean not in specific terms on margin for each dimension. I think we have said before that the nature of digital, just as a general statement, tends to be high demand. We have unique and differentiated skills and capabilities and arguably, positioning in the marketplace. And all of those things lend itself to better economics. It’s our job to deliver on that, but it certainly creates the right environment for better economics. Your last question was -- the other part of the question was digital economics… Joseph Foresi : It was on the bookings; is it a faster realization rate… David Rowland : There is to the extent that a high percentage of our digital bookings are consulting and consulting has a higher velocity. Joseph Foresi : And then just as a follow-up, we have heard some commentary in the market of maybe some pricing issues within outsourcing. Has that increased or changed at all as the pricing -- I know it’s always difficult and some of the maintenance stuff, but I am just wondering if you have seen any changes in the market? David Rowland : Specifically I think you are referring to the application maintenance, application outsourcing piece of application services. What I would say is that there is no doubt that that is -- continues to be a highly competitive market. When we comment on pricing, we comment on pricing in terms of the profit percentage on work that we sell. And in that part of our business, we see stable pricing. Operator : Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead. Lisa Ellis : I was hoping to get a little bit more color around your shift to the new operating units. It’s been I guess 15 months or 18 months now that you’ve started this transition to strategy, consulting, operations and technology with digital, as an overlay. How deeply is that plumped in the organization, I guess either now or you’re planning to, meaning are these truly distinct business units at this point as labor fundable [ph] across them or do the staff sort of reside within a business unit and do they have different investment profiles, pricing models, can you just give a little bit more color around that? Pierre Nanterme : Yes, absolutely. Happy to comment on this, because I truly believe that we are proposing to the marketplace organizing Accenture in a very unique and differentiated way, and I tend to believe that none of our competitors yet could match the capabilities and the organization we’re putting in place. First indeed, we have created five Accenture Strategy, Accenture Consulting, Accenture Digital, Accenture Technology and Accenture Operations, all at scale, always highly differentiated skills, a very different positioning compared to the competitive environment, different economics. And to your question, indeed they are run as a business with the objective of being top-class in their own categories. But of course where we differentiate in the marketplace is our unique ability to combine our services to deliver what we are calling the end-to-end services, because we truly believe that more and more clients are buying an outcome more than an effort. And if you want to deliver an outcome, you need to contribute and participate to the design and planning, typically done by Accenture Strategy and Accenture Consulting, the high value services and consulting which you will, then you move in to building solution with absolutely leading and cutting edge solutions, exactly the job of Accenture Digital for digital may continue solutions and Accenture Technology for the leading platform solution or application packages. And when you have been building solution, you’re moving to Accenture Operations, the part of Accenture where we could operate on behalf of the clients, either their business process; their cloud operation or their security operation. This depth and breadth and kind of operating model is absolutely unique in the marketplace and is a great source of differentiation for Accenture. And on top of that indeed, Lisa, we’re putting our rotation to the new. Each of the five have a clear mandate to rotate their business to new type of services where Accenture Strategy is going to be being cutting edge in developing digital technologies and creating new business model for clients. Accenture Technology will now unbed [ph] very innovative ways of doing development, what we’re calling liquid, intelligent and connected. Accenture Operations will be extraordinarily analytics rich in the way we are developing operations. And in security with the acquisition of FusionX, we are absolutely top of the game in term of simulating cyber attacks. So, all these architecture we’re putting in place, and I said that with a lot of passion and energy during that call, is indeed unique in the marketplace, Lisa. David Rowland : Lisa, let me just add to what Pierre said, and address another part of your question. A key component of what Pierre just said is that our talent strategy is aligned with our five businesses. And so, we have talent that is managed, nurtured, developed specific to Accenture Strategy. Those people tend to work, essentially exclusively on Accenture Strategy work. We have people that are identified as Accenture Consulting, developed, nurtured, et cetera. Those people tend to work for the most past, exclusively on consulting work. By the way that includes our client account leads, people who are predominantly deployed to our operating groups that really not only delivers a consulting services but are also the integrator of Accenture capabilities to serve the clients need. We have operations where again we have talent model for operations. Mike Salvino and Debbie Polishook manage that workforce for the most part work, exclusively in operations. And then you have Accenture Technology. And Accenture Technology is a little bit different. In that, they have a unique talent model, but yet some of those technology people support the development type work, the new tech, some of those people may actually even be part of consulting project delivery. We also have some of those people that at points in time maybe part of our operations project delivery. So, they work a little bit more across the organization. But beyond technology, we also have the innovation labs and things like that. But excluding technology, the other businesses are very specific and fit for purpose in terms of the talent model and the types of projects those people work on for our clients. Lisa Ellis : As a follow-up, as you are in discussions with your major clients about their budgets for 2016, can you characterize the magnitude of the shift in their budgets from the old to the new, like 5%, 20%, 1%? Pierre Nanterme : I can’t characterize. I can characterize only the trend is clear that you see a shift from investment in the legacy, if you will, to investment of the new. I tend to believe that the shift is increasing and as reflected, growth in digital related services. Now I don’t have any market data that would characterize the percentage of the shift. There it’s getting bigger and indeed we could take advantage of this shift in term of budget, as reflected with our 20% plus growth in digital related services. Lisa Ellis : But where you are sitting right now, it feels stronger now than it did at this time last year. Pierre Nanterme : On balance, yes. KC McClure : Greg, we have time for one more question and Pierre will wrap up the call. Operator : Okay. That question comes from the line of Keith Bachman from Bank of Montreal. Please go ahead. Keith Bachman : Hi, many thanks. David, I wanted to go to one area that you mentioned is the growth of your global GDN. Over the last seven quarters, it’s been pretty steady in terms of increasing as a percent of total headcount by almost 1 point a quarter and it’s now just hovering below 73%. Is there a point at which you need to have local presence, it’s an impediment to the total number? In other words, how high can the global GDN go as a percent of your total headcount? Because I would think that’s been a significant contributor to the strong margin performance you’ve had over the last couple of years? David Rowland : Yes. So, first of all, we still have room to expand our GDN headcount in our model. And certainly, we don’t see that we’ve reached the destination and we wouldn’t go any further. Having said that, one of the things that highly differentiates Accenture is our deep industry expertise and our client account teams that are at the client site each and every day, working shoulder-to-shoulder with our clients. And so the thing about our model is that we have a very strong presence in each of the geographic markets around the world where we operate. That’s a vital part of what is distinctive about Accenture. And then we extend that and complement that with arguably the best technology global delivery network in the world. To your question, we have the opportunity to take that further, and we will see how the market evolves and then we will respond accordingly. Keith Bachman : Then maybe I will just quickly submit my follow-up, if I could. The free cash flow guidance for the year, not the quarter but the year, is a little slower than certainly the growth of net income or the EPS context. And I was just wondering, if you could call out some of the puts and takes there. I assume that the days cycle I think is a headwind; in addition it looks like CapEx is a little bit. But could you also address how currency might be impacting the growth of cash flow for the year? And that’s it from me. Thanks very much everybody. David Rowland : I will just say -- I can’t really do justice to the question, so I will just share a couple of quick points. First of all, the free cash flow guidance is still above 1.0 in terms of free cash flow to net income, so very healthy level of free cash flow. A couple of things that influence that, one is the DSOs; the other is timing of tax cash payments that not only impacts a particular quarter but can be different fiscal year to fiscal year; and the third is CapEx, just to name those three because you call them out. And we do anticipate a higher level of capital spending this year as compared to last year. So that’s in the mix as well. Pierre Nanterme : Okay, certainly time now to wrap up. And I want to thank you again for joining us today. With our first quarter behind us, clearly we have created strong momentum in our business, especially with investments we’ve made in digital, cloud and security services which we are now calling at Accenture, the new. And that makes me really confident in our ability to continue to successfully grow business and gain market share. I want to take this opportunity to wish all of you, our investors and analysts and our Accenture people who are hopefully listening to the call, a very happy holiday season and all the best 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 to all of you and the best for the New Year. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 Eastern Time today through March 24th. You may access the AT&T Teleconference Replay System at any time by dialing 1 (800) 475-6701 and entering the access code 374571. International participants dial (320) 365-3844. Those numbers once again are 1 (800) 475-6701 or (320) 365-3844 with the access code 374571. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,016	1	2016Q1	2016Q2	2016-03-24	5.176	5.245	5.673	5.738	null	20.24	20.47	Executives: KC McClure - Managing Director and Head, IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Tien-tsin Huang - JP Morgan Brian Essex - Morgan Stanley Ashwin Shirvaikar - Citi Bryan Keane - Deutsche Bank Darren Peller - Barclays Dan Perlin - RBC Capital Markets Lisa Ellis - Bernstein Edward Caso - Wells Fargo Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture’s Second Quarter Fiscal 2016 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] 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 Ms. KC McClure. Please go ahead. KC McClure : Thank you, Greg. And thanks everyone for joining us today on our second quarter fiscal 2016 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, along with some key operational metrics for the second quarter. Pierre will then provide a brief update on our market position before David provides our business outlook for the third quarter and full fiscal year 2016. We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today’s call, we’re talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on 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 call. And now, let me turn the call over to Pierre. Pierre Nanterme : Thank you, KC, and thanks everyone for joining us today. We delivered very strong financial results for the second quarter, and I’m extremely pleased with the momentum we have created in our business over the last eight quarters. This quarter, our growth was again broad-based across the different dimensions of our business. Our strategy is clearly resonating with the needs of our clients and differentiating Accenture in the marketplace, but in regards to gain significant market share. Here are few highlights from the quarter. We delivered outstanding new bookings of $9.5 billion. We grew revenues 12% in local currency, a very strong performance, including double-digit growth in four of our five operating groups and all three geographic regions. Operating margin was 13.7%, an expansion of 10 basis points. We delivered outstanding earnings per share of $1.34 on an adjusted basis, a 24% increase. We generated free cash flow of $169 million. And we continued to return a substantial amount of cash to shareholders through share repurchases and dividends. Today, we announced a semi-annual cash dividend of $1.10 per share, which will bring total dividend payments for the year to $2.20 per share or 8% increase over last year. Now, with the first half of the year behind us, I feel very good about our business and how we’re positioned for the year. Based on our strong performance, we are raising our business outlook for both, revenues and earnings per share for the year. Now, let me hand over to David. David, over to you. David Rowland : Thank you, Pierre. And thanks all of you for joining us on today’s call. Let me start by saying that we were very pleased with our outstanding financial results from the second quarter. Once again, our results this quarter reflect continued strong momentum across almost every dimension of our business, reflecting the strength of our leadership position in the market and the relevance of our offerings and capabilities through our clients. Before I get into the details, let me summarize some of the important highlights from this quarter. Strong local currency growth of 12% represents the sixth consecutive quarter of double-digit growth, which is even more impressive when you consider that quarter two of last year grew 12% as well. The overriding [ph] theme of broad-based growth was evident again this quarter with four of our operating groups and all three geographic areas posting strong double-digit growth. Our growing leadership position and digital related services continued to serve us well. And combined with cloud related services and security, we continue to be the partner of choice in helping our clients rotate to the new. Operating margin of 13.7% reflects 10 basis points expansion within our annual guided range. Our profitability continues to reflect the absorption of significant investments in our people and in our business, as we further strengthen our leadership position in the market. The combination of strong revenue growth, expansion in our margin and tax rate efficiencies resulted in 24% EPS growth for the quarter and 11% EPS growth year-to-date, excluding the gain on sale of Navitaire, which I’ll describe in more detail shortly. Free cash flow of $169 million came in as expected and keeps us on a trajectory to deliver our annual guidance range, which reflects free cash flow in excess of net income for the full year. And importantly, we continue to invest at scale in our business, closing five acquisitions in the quarter with year-to-date invested capital of approximately $750 million. So, we’re very pleased with our results which continue to demonstrate our ability to successfully deliver on our three imperatives for driving shareholder value, durable revenue growth; sustainable margin expansion; and strong cash flow with disciplined capital allocation. With that said, let’s now turn to some of the details for the quarter. As expected, we delivered a higher level of new booking this quarter at $9.5 billion including an all-time record high consulting bookings. Consulting bookings were $5 billion with a book-to-bill of 1.2, outsourcing bookings were $4.5 billion also with the book-to-bill of 1.2 and consistent with our target. We’re particularly pleased with the strong and balanced demand across all of our business dimensions, which is best illustrated by our estimated book-to-bills. Consulting and strategy had a combined book-to-bill of 1.1; application services, a book-to-bill of 1.2; and operations of book-to-bill of 1.3. And across the board, digital-related services continued to be a significant driver of our new bookings. Finally, we’re pleased that we had 10 clients with bookings in excess of $100 million, which again points to the strength of our client relationships and their trust and our ability to drive their most important initiatives. So, turning now to revenue, net revenues for the quarter were $7.95 billion, a 6% increase in USD and 12% in local currency, reflecting a negative 6% foreign exchange impact. Our quarter two revenues were higher than our guided range, primarily due to consulting demand being even stronger than expected across many of our operating groups and geographic markets. Consulting revenues for the quarter were $4.3 billion, up 12% in USD and 18% in local currency. Our outsourcing revenues were $3.7 billion, flat in USD and an increase of 6% in local currency. Looking broadly at drivers of revenue growth for the quarter, we had strong and balanced estimated growth across all business dimensions. Digital-related services continued to be the dominant theme [ph] with growth above 25%, which once again fueled double-digit growth in our strategy and consulting services, combined. Operations returned to double-digit growth, and we saw an uptick in application services to high-single-digit growth. Taking a closer look at our operating groups, H&PS grew 15% in the quarter with very strong double-digit growth in both health and public service; and overall in North America and the growth markets. Products delivered broad-based growth of 14% and continued to be led by our industrial and life sciences industries which were very -- with very strong overall growth in Europe and the growth markets. Communications, media and technology grew 13% in the quarter, led by double-digit growth in North America and the growth markets, as well as electronics and high-tech and media and entertainment globally. Financial services momentum continued with 13% growth, led by very strong double-digit growth in banking and capital markets as well as strong growth across all three geographies. And finally, resources delivered 4% growth, led by continued strong double-digit growth in utilities as well as strong overall growth in North America and Europe. We continue to navigate cyclical headwinds in energy and in chemicals and natural resources where growth is significantly challenged. At the same time, looking at resources overall, we feel that we are more than holding our own in a very difficult environment. Moving down the income statement, gross margin for the quarter was 29.8% compared to 29.9% in the same period last year. Our sales and marketing expense for the quarter was 10.5% compared to 10.7% for the same quarter last year, down 20 basis points. General and administrative expense was 5.7%, up 10 basis points from the second quarter last year. Operating income was $1.1 billion in the second quarter, reflecting a 13.7% operating margin, up 10 basis points compared with quarter two last year. In the second quarter, as part of launching an important partnership with Amadeus, we closed our Navitaire transaction which lowered our quarter two tax rate by 1.7%, increased net income by $495 million, and increased diluted earnings per share by $0.74. The following comparisons exclude this impact and reflect adjusted results. Our adjusted effective tax rate for the quarter was 15.4% compared with an effective tax rate of 26% for the second quarter last year. The effective tax rate for the second quarter of fiscal ‘16, benefited from a final determination of prior-year tax liabilities as well as changes in the geographic distribution of earnings. Net income on an adjusted basis was $905 million for the second quarter, compared with net income of $743 million for the same quarter last year. Adjusted diluted earnings per share were $1.34, compared with EPS of $1.08 in the second quarter last year. This reflects the 24% year-over-year increase of which $0.17 or 16% came from the lower tax rate. Turning to DSOs, our days services outstanding were 39 days compared 41 days last quarter and 35 days in the second quarter of last year. Free cash flow for the quarter was $169 million, resulting from cash generated by operating activities of $317 million, net of property and equipment additions of $148 million. Moving to our level of cash, our cash balance at February 29th was $3 billion compared with $4.4 billion at August 31st. Turning to some other key operational metrics, we ended the quarter with the global headcount of about 373,000 people, which was roughly flat with quarter one and up 15% compared to quarter two of last year. We now have approximately 273,000 people in our global delivery network. Our utilization in quarter two was 90%, consistent with last quarter. Attrition which excludes involuntary terminations was 13%, consistent with quarter one and down 1% compared to the same period last year. With regards to our ongoing objectives to return cash to shareholders, in the second quarter, we repurchased or redeemed 8.1 million shares for $829 million at an average price of $102.14 per share. At February 29th, we had approximately 6.4 billion of share repurchase authority remaining. As Pierre just mentioned, our Board of Directors declared a dividend of $1.10 per share, representing an 8% over the dividend we paid in May last year. This dividend will be paid on May 13, 2016. Finally, before I close, let me mention that our Board has approved a decision to terminate our U.S. pension plan, which will reduce future risk and administrative costs to Accenture. This is subject to regulatory approvals and is not expected to be finalized for 12 months to 18 months. Upon final settlement, we expect to record a principally non-cash settlement charge of approximately $350 million. So, at the halfway point in the fiscal year, we’ve delivered very strong results and feel that we’re well-positioned for remainder of the year. Our results continue to demonstrate the durability of our growth, profitability and cash flows, and our ability to manage our business to deliver value for all of our stakeholders. Now, let me turn it back to Pierre. Pierre Nanterme : Thank you, David. So, looking at the first half of the fiscal year ‘16, our outstanding results demonstrate that we continue to execute very well against our growth strategy and that we are taking a leadership position in every part of our business. Year-to-date, we have delivered 11% revenue growth in local currency, which is well above the market growth rate. We continue to accelerate our rotation to the new, digital, cloud and security related services, which together accounted for nearly 40% of our total revenues in the first half of the year and grew at the strong double-digit rate. At the same time, we continue to see very strong performance across the rest of our business, which remains extremely competitive and is generating very good growth. Let me bring all of these to life with a few examples, beginning with how we are leveraging our innovative capacities to help clients to our digital transformation. Working with Boston Scientific, we have jointly developed a cloud-based digital health solution for hospitals, built on the Accenture Insights Platform, the new installation is designed to leverage our analytics capabilities to significantly improve patient care and reduce treatment cost. Accenture Interactive continues to gain traction in the marketplace and has recently been named the digital agency partner for Celebrity Cruises where we are helping redesign the digital customer experience and for L’Oréal in Brazil, where we are responsible for search engine optimization and digital marketing analytics. In Accenture Mobility, we are using the Accenture connected platform to drive digital transformation for Metro de Madrid, one of the largest transportation systems in the world. We expect to increase operating efficiency, improve the passenger experience, and enable new Internet of Things based services. We continue to operate at the heart of our clients’ businesses with strong demand for our core capabilities. And given our industry expertise and end-to-end capability, we remain the partner of choice for the world’s leading companies. \ In the U.S., Accenture Strategy is helping FirstEnergy improve competitiveness and operational agility with the cash flow improvement program that is expected to deliver more than $450 million in savings over three years. We are working with a leading food company to transform its global operating model; an integrated team from Accenture Strategy, Accenture Consulting and Accenture Operations each providing process redesign as well as finance and accounting and HR business process services. We continue to invest across our business to further enhance our capabilities and differentiation in the marketplace including making nine acquisitions in the first half of the year. In particular, we have made significant investment to strengthen our industry expertise in several key sectors. In health, we acquired Sagacious Consultants, a leading provider, implementing electronic health record systems in the U.S. In financial services, we acquired Beacon Consulting, based in Boston, to expand our capabilities in asset management, and we acquired Formicary, a leading provider of systems integration and technology consulting for trading platforms in the UK, U.S. and Canada. Also in financial services, we created a specialized practice for blockchain technology, which is expected to drive significant efficiency gains or financial institutions. To accelerate our speed to market, we invested in Digital Asset Holdings, a leading developer of blockchain technologies. And in resources, we acquired Schlumberger Business Consulting, the international management consulting arm of Schlumberger. And in North, we acquired Cimation to expand our consulting digital and cyber security services for industrial asset management. Turning to the geographic dimension of our business, I am very pleased with the strong and balanced growth we are driving across all three of our geographic regions. And I am delighted that we delivered double-digit growth for the quarter in many of our largest markets including six, which together comprise 70% of our total revenues. In North America, we delivered 12% revenue growth, driven by another excellent quarter of strong double-digit growth in the United States. In Europe, we delivered exceptional results, with 14% growth in local currency. We deliver double-digit growth in the UK, Italy, Spain, Switzerland and Germany, as well as high-single-digit growth in France. And in growth markets, we delivered 10% revenue growth in local currency, led once again by strong double-digit growth in Japan, but we also generated double-digit growth in China and in India, as well as solid growth in Brazil, despite a very challenging environment. Before I turn it back to David, I want to share a few thoughts on what it means to run Accenture, as a high performance business. It is imperative that we attract, develop and inspire the very best talent in our industry. And I am proud that for eight years in a row, Accenture has been named one of the fortune best Company to work for in the U.S. I am equally proud that in India, Accenture was ranked the top company in our sector on Business Today’s list of the best companies to work for. In our business, trust is everything. And I couldn’t be more pleased that for the ninth year in a row, Accenture was recognized on Ethisphere list of the World’s Most Ethical Companies. This is strong recognition of our commitment to ethical leadership and corporate social responsibilities. So, as you can see, every day, we’re making Accenture an even better business partner for all of our stakeholders. We have very strong momentum in our business. And we continue to deliver value in the marketplace. And with that, I will turn the call over to David to provide our updated business outlook. David, over to you. David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the third quarter of fiscal ‘16, we expect revenues to be in the range of $8.1 billion to $8.35 billion. This assumes the impact of FX will be a negative 2.5% compared to the third quarter of fiscal ‘15 and reflects an estimated 7% to 10% growth in local currency. For the full fiscal year ‘16, based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollar will be negative 5% compared to fiscal ‘15. For the full fiscal ‘16, we now expect our revenues to be in the range of 8% to 10% growth in local currency over fiscal ‘15. For operating margin, we now expect fiscal year ‘16 to be 14.6% to 14.7%, a 10 to 20 basis-point expansion over adjusted fiscal ‘15 results. As I mentioned earlier, we closed our Navitaire transaction in the second quarter, which will lower the full year FY16 tax rate by approximately 1.5% and increase diluted earnings per share by $0.74. Our guidance for fiscal ‘16 excludes the impact of this transaction. We now expect our adjusted annual effective tax rate to be in the range of 24% to 25%. For adjusted earnings per share, we now expect full year diluted EPS for fiscal to be in the range of $5.21 to $5.32 or 8% to 10% growth over adjusted fiscal ‘15 results. Now, turning to cash flow, for the full fiscal ‘16, we continue to expect operating cash flow to be in the range of $4.1 billion to $4.4 billion, property and equipment additions to be approximately $500 million and free cash flow to be in the range of $3.6 billion to $3.9 billion. Finally, we continue to expect to return at least $4 billion through dividends and share repurchases, and also continue to expect to reduce the weighted average diluted shares outstanding in the range of 1.5% as we remain committed to returning a substantial portion of cash to our shareholders. With that, let’s open it up to questions. KC? KC McClure : 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 : Thank you. [Operator Instructions] Your first question comes from the line of Tien-tsin Huang from JP Morgan. Please go ahead. Tien- tsin Huang : Obviously good quarter; I just wanted to dig in on the upside [ph] given the strong book-to-bill, we’ve had revenue $200 million above guidance, and usually a pretty tricky quarter. It doesn’t sound like its large deal oriented either. So, I’m curious, do you have resources to meet this demand, especially given the strength in consulting? I’m asking because I want to gauge your confidence in executing against this momentum within your margin targets. So, I’ll start with that question. David Rowland : Thanks. So, let’s just kind of start it and work through the points that you made. We did have an even stronger quarter than we had expected, no doubt. As you alluded to, in the mix of the fact that the second quarter can be a more difficult quarter to predict, which you know that well, as you know our business well. And the reasons are that you have the holiday period in there including the New Year period which sometimes can be a little unpredictable in terms of how that impacts our available work days, if you will. And then of course you have the turn to the new fiscal year, which can also create sometimes, temporary changes in buying patterns during that first month or two of the new calendar year. In our case, neither of those things had an impact on us. And to the contrary, the momentum that we’ve had now for many quarters, continued and even built further. And we saw that the upside relative to what we had expected was in our consulting and strategy services combined or our consulting type of work where we had expected double-digit growth but it came in even stronger than we had expected. And Tien-tsin, we’re very pleased that we were able to support that growth with essentially flat headcount versus quarter one, which we view as a very positive thing. And so, as it relates to capacity, we certainly have a supply plan that supports the revenue growth that we’ve projected for the third quarter and the full year. We feel very good about our supply management, and our ability to access talent in the marketplace is as good as it’s ever been. Tien- tsin Huang : Okay, great. And just my quick follow-up, just like I asked last quarter, inorganic contribution to revenue and maybe margin, and if you can, David, give it to us across consulting and outsourcing? Thank you. David Rowland : Right. So, the inorganic contribution continues to be in the range of about 2%. And as I mentioned last quarter, if you look at it by type of work, it is bigger in consulting than it is in outsourcing and consulting last quarter, I said that it was about 4%. And so, we continued in the second quarter where it was more consulting oriented than outsourcing oriented. Your margin question Tien-tsin was, what now? Tien- tsin Huang : Just same question related to impact to operating margins from the acquisitions, given the cost side of it. David Rowland : Well, I would tell you that maybe if I just answered it even in a broader way, I mean the acquisitions are an important part of our investments, but they are not the only part of our investments. Our strategy is to expand our underlying margin at a much higher level than the 10 basis points we reported. And then, we use that headroom to then fund what are higher levels of investments in our business, which includes the impact of acquisitions. So, let me just say that our underlying margin expansion was stronger than the 10 basis points, because our investments continue to grow at a rate faster than revenue and that includes acquisitions among other things. Operator : Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead. Brian Essex : I was wondering if you could ask a little bit more about consulting versus outsourcing mix. And I guess what I’m referring to is, if you listen to vendors like Salesforce.com on their call and they talk about system integrators becoming ISVs and then we hear Accenture talk about shifting deals towards more outcome-based pricing. Is there a way to think about the changes in bookings and revenue between outsourcing and consulting, particularly as we see the acceleration in consulting going forward? David Rowland : Well, I’ll make a couple of comments and Pierre may add as well. What I would say is that, I mean the basic answer to your question is no in the sense that what we viewed as consulting is unchanged and obviously likewise the same is true for outsourcing. What we see in consulting is, probably a couple of things. One thing we see is that -- in fact, I guess, I would say it this way. At the foundation of what’s driving our consulting revenue growth is the depth of our industry expertise and the fact that we really operate, not only at the heart of our clients, but at the heart of our industries in terms of being on top of the most important trends and being able to help our clients respond to those trends. And that draws in a lot of our consulting type services. So, if you look at Accenture Strategy, Accenture Consulting, you look at Accenture Digital, that brings us right into the heart of the clients’ high priority agenda, because it’s all grounded fundamentally in industry expertise. The second thing that is driving our consulting growth is the fact that we are establishing ourselves as among the leaders if not the leader in the rotation to the new. [Ph] And when you look at consulting, it reflects it includes by the way systems integration services, which are included on our consulting type of work and our dimension reporting that reflected in app services. But we have a lot of systems integration work over recent quarters associated with clients that are investing in and deploying new technology. And so, maybe I’d just stop there. But our consulting growth is really driven by the things that we’ve been highlighting which are the priority areas that we’re focused on in our growth strategy. Brian Essex : Maybe if I could follow-up on the digital growth, it seems as that you’re indicating a nice reacceleration in growth there. Anything we can think about in terms of what’s causing some of the variability in year-over-year growth rates that we’ve seen, particularly after a slight deceleration last quarter and then obviously reaccelerating this quarter? Is it still choppy growth off of lower numbers or is there something else maybe seasonal at play there? David Rowland : I wouldn’t read anything into, I mean, I guess what I would focus on is that in both quarters, the growth was north of 20% and the north of 25%. I wouldn’t read too much into that. I mean, our digital growth is going to continue to be consistently strong double-digit. And within the context of strong double-digit, you might have some fluctuation, but overall, the growth is outstanding, and we couldn’t be more pleased with not only digital, but also the new, when you look at the growth that we have in cloud related services and security. Pierre Nanterme : This is absolutely right. And this is the reason why in my part reporting to you around the business update, I covered Q1 and Q2. I mean, all our business is not driven by quarterly activities. We are selling operating overall cycle, which is the case for these digital related services. So, there is no point you should over-read the kind of quarterly results and much more pulling these results in the context of a much longer term. This is what we mentioned that we have for our seven -- six consecutive quarters of double-digit growth. When you look our digital rotation, count has been double-digit growth for several quarters as well. So, what we are pleased with is the consistency and the duration of our growth in digital and overall Accenture, and not so much quarterly situation. Operator : Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : So, obviously very strong demand metric is expected; so, congratulations on that. My question is the higher level of revenues and EPS is not driving a corresponding rise in cash flow. Why is that? David Rowland : Well, I mean there -- as we said before, there are a lot of things that impact our cash flow in a particular year. We have had a couple of day uptick in DSO; that impacts the timing of tax cash payments as an example from year-to-year, can impact the cash flow. Ashwin, what I really focus on is that our cash flow and the range that we provided, our free cash flow continues to be at a level that is greater than net income. And if you remember back to what I’ve started saying three years ago, what I’ve really focused on is the durability of our business model and generating cash flow in excess of net income. And this year continues that trend. And that’s the mark of a -- that’s a very distinctive mark for a very successful cash flow generating business. And so, we’re very pleased with the cash flow. And also, remember that the range that we gave is $300 million, and so it’s a fairly broad range. When you think about the fact we’ve change revenue, we didn’t change cash flow; it is a broad range. But it’s in excess to net income and that’s really what we’re focused on driving. Ashwin Shirvaikar : So, the second question really is you had relative to the very strong consulting, a weaker level of outsourcing throughout the last few quarters. You’re not alone in this trend; several other companies are in the same boat. I wanted to ask how much of that weaker outsourcing planned in relative terms; is volume versus pricing versus productivity gains because of higher levels of automation, things like that? David Rowland : Yes. We don’t -- we’ve not quantified it in those three buckets. I mean it’s a very smart question to ask. We just haven’t quantified it in those three buckets. And I don’t think we’re going to do it on the call, even if I had the numbers in front of me, which I don’t. But I would tell you, may be sorry to say the obvious, but all three of those things are in the mix, no doubt about it. I mean, we are very pleased with progress that we’re making on the automation front in both the app services and BPO as well. There is no doubt that in the application maintenance piece of application services that there is -- that is a highly competitive environment, which does impact the revenue yield per labor hour in that marketplace. But yes, it’s also important to note Ashwin that if you look at pricing as we define it, which is the margin on the work that we’re selling, our margin in that AO businesses is -- I’m talking about pricing, is holding up quite well. So, we’re managing the trajectory and revenue per head; we’re managing our cost to serve in alignment or actually better than alignment with that trend. And then, we’ve also mentioned that in the market that we’re in now, clients are somewhat universally trying to be more efficient in the cost of ownership of their existing application footprint. And why, they want to do that so that they can invest more in the new. And so, we’re seeing the benefit of that investment in our systems integration business, which is part of our consulting type of work growth; it’s also part of the application services growth, which I mentioned was high-single-digit. So, all three of those things are in the mix and we’re navigating them all. Operator : Next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Health and banking, and capital markets are sectors that some peers have called out some weakness, doesn’t look like Accenture seeing that same weakness. So, I guess my question is where is or why is Accenture seeing strength in banking and capital markets and health, and what’s the outlook there going forward? Pierre Nanterme : When you look at our different industries, we have -- just to set the scene; we have now 13 industry groupings. We are reporting against the [indiscernible]. And I’m pleased to report that 9 out of the 13 enjoy double-digit growth. And so, it’s quite true across the board. So, what’s explaining in the Russian world is the same for health and for banking and capital market. The growth of our business, the growth of our countries and the growth of our industries is directly linked to the speed of the rotation to the new. It is as simple as this. And fact of the matter is that we invested in those digital related services quite ahead of the curve, certainly at the right time; we’ve been lucky enough to execute this strategy at the right time. And now, all our industries including banking and capital markets do benefit from this, what I shown to the new, again digital-related services plus cloud-related services plus security-related services. And so when I look at banking and capital markets, a lot of what we do is around the new. And I guess, if some of our competitors have lower growth, for me, this is certainly the signal that their business is still too much associated to the kind of current core activities, let’s call them classic activities, which might be under pressure. And their rotation to the new is certainly slower than what we are experiencing at Accenture. Bryan Keane : And then just as a follow-up looking at the new guidance for fiscal year ‘16, I saw the raise in constant current revenue growth. But I think the operating margin, which decreased about 10 basis points on the high end, just curious on the reason for the change in operating margin guidance. Thanks, congrats by the way. David Rowland : So, first of all, our strategic objective is to land the fiscal year within that 10 to 30, and so that is what we’re focused on and we balance multiple objectives in any given year within that target range. So, this year, if you look at where we are on a year-to-date basis and when we reflect, not only on the investments that we’ve made year-to-date in our people and our business, and we reflect on the investments that we want to continue to make in our people and our business during the second half of the year, which are clearly in the best long-term interest of our shareholders and investors. The right balance between what we deliver and reported margin expansion this fiscal year and what we need to do to invest in our business and people is 10 to 20 basis points this year. And so, it’s within that target range that we have and it just reflects the balance that we’re making between delivering margin expansion but at the same time continuing the very successful track record that we’ve had of investing in our business and positioning those investments for future year returns. Operator : Your next question comes from the line of Darren Peller from Barclays. Please go ahead. Darren Peller : I just want to start off with the inorganic growth for a moment. I mean obviously a number of deals have been coming on. And I think you said 2% was the contribution, which is similar to what you said at your IA day. So that’s consistent. I wonder if -- how much of these deals are really being dedicated towards this digital initiative that you’ve really been able to expand so well. And I guess bigger question is, going forward how much more do we need to keep doing on that front to enable Accenture to stay ahead of the curve on digital or is inorganic going to become 3% or 4% of your growth rate in the next couple of years, as in order to really maintain differentiation, if you could just help us with that? Pierre Nanterme : Yes. On this question, if you look, and I think we reported that recently that on all, if you take fiscal year of ‘15 acquisitions, 70% of the 38 acquisitions we made was digital related and the one which are not 100% digital related been more around deep industry expertise, and I’ve been highlighting a few. And some we are making from an industry standpoint would cover both topics. But let’s say, it’s a strong 70% growth and the other 30% will be more reinforcing our industry with niche acquisition with extremely deep experts. So far, our planning is to continue with the trajectory we set and we communicated to in the IA day in a way which is very consistent in the range of deploying 20% to 30% of our free cash flow. The 900 to 1 billion this year which is roughly 900 two 1 billionish in terms of cash flow being deployed in our acquisition that would typically in our model account for 2% contribution to our growth. This is still our mindset. Now, if we have the opportunity to flex because there are great opportunities in front us, we will remain flexible. Darren Peller : Well, I just wanted to figure out if these deals are part of the impact from the free cash conversion we’re seeing. I mean you said still within the range but I guess that’s really what we’re getting some questions on is this as much as that definitely enable to drive you to differentiate yourself and grow well better than most of the industry; there is some people asking about financial allocations on the rest of the model. Maybe Dave, if you could just -- I think Tien-tsin, there is a little bit of a follow-up to that question also. David Rowland : Well, again if you -- I would focus -- by the way, it’s not an inorganic -- I don’t really want to say issue because it’s not an issue. The inorganic is not driving a notable impact on our cash generation. Again very simply, I would point to two things, number one is, is that although we continue to have exceptional DSOs, they have ticked up. And so, a day or two of DSO has an impact on our cash flow. And the second thing is just the timing of large tax cash payments as an example which can fluctuate. But if you look structurally at our cash flow model and what drives our cash, really fundamentally nothing strange. Darren Peller : All right, that’s helpful. Just last follow-up on the resources side, I mean it’s been pretty impressive to us that you’ve been able to maintain growth at all in that area just given the macro backdrop across resources. And so, I mean in terms of trajectory, I know 4%, it’s lower than the rest of the business. But again for us, seeing growth at all was pretty impressive. Should we expect to see that vertical continue? Pierre Nanterme : When you talk about resources, there are really two stories in resources. We covering three industry segments, of course two of the industry segments are impacted with the overall natural resources and commodity pricing downturn. And the other one the energy and what we are calling CNR or natural resources and then you have utilities. I mean utilities, it is one of our fastest growing industries, above 20% growth for it. Darren Peller : Okay. Pierre Nanterme : Just to set the scene publicly, because it’s explaining, although I can see your question, you’re positive with two industries, what explaining that is our resources leadership; we don’t get at the same time in two rotations, if you will, to put it very simply, now rotating to higher growth and higher potential industries and today it is from energy to utilities and then rotating this industry to the new. And if you look at the utility, it is at the same time the 20 plus percent growth is significantly fueled by the rotation to the new. Darren Peller : Okay. Pierre Nanterme : I’m pleased to mention that because sometime we believe the rotation to the new is more for the business to consumer kind of industries and banking, the insurance come, the retail consumer goods and so forth. But at Accenture, the rotation to the new is big even in the B2B business. And what we’ve been doing in utilities especially providing superior services in terms of IoT, in terms of grid management and bringing the digital at the heart of the utilities operation, each creating super normal [ph] growth for utility balancing the downside. And this is an opportunity to share with you that’s why we like so much our diverse portfolio of business and diverse portfolio of industries, which is for us absolutely critical in our ability to continue delivering sustainable and predictable profitable growth. Operator : Your next question comes from the line of Dan Perlin from RBC Capital Markets. Please go ahead. Dan Perlin : Just a couple of questions real quick on the consulting growth, it clearly continues to be impressive. I’m just wondering, to what extent, if there is any that you feel like you’re benefiting from some of the global M&A, not so much M&A you’ve done, but what companies you’re doing who represent your clients. You mentioned system integration work and investments in new technology. But I’m wondering if there is a lot of integration that’s going on as a result of some of this other global M&A. Pierre Nanterme : Yes. And the answer is yes. I guess indeed, we had the opportunity to talk about it. But for the last couple of years, we said that you had two massive growth drivers in the marketplace at the high level, one is the digitalization of the industries, which is huge, massive coverage everywhere. And coming together with what we’re calling the rationalization of the operations, and the rationalization of the portion. This is what’s driving good growth in the rest of the business and non-digital specific business in application outsourcing, in application services, in business process outsourcing and that kind of services. You’re right that these last six months or six, seven months, we’ve seen a third engine kicking in which I will call consolidation, what you’re calling M&A. So, we are digitalization, rationalization and indeed we are adding consolidations. And we are, given a very good position with Accenture Consulting, operating at the heart of our clients’ businesses and quite connected to the C-Suite. We are a partner of choice in some of the major consolidation ongoing, on the planet. So, we have the third engine kicking in. Dan Perlin : That’s fantastic. And my follow-up, in the past, you’ve I think sized or given us a little bit more details around what, how big now, at this point in the business you have digital and you have cloud and you have security, and think like you said somewhere around 7 billion or something to that effect relative to the legacy ERP, which is the constant question we get. And so, I’m wondering if you’re willing to update us on that. And if you are, are you just at a point now in that kind of cycle where that digital agenda is as so much bigger that it’s worth this legacy tail which you’ve had for the year? Thank you. David Rowland : Well, I think Pierre might have had in his script that if you look at the new, digital cloud and security, that is approaching 40% of our revenue. So, you can just do math off our revenue to get the dollars. On the ERP, the ERP business continues to be under 20% of our total revenue. Now, we’ll say that we have seen some growth in the ERP space. And so, we have always expected that -- I mean ERP is fundamentally the back -- the technology backbone for all companies, manage their business. We never felt like the ERP business was going to go away. We always have anticipated a cycle where there would be investment in next generation ERP, and we’re part of helping our clients move to next generation ERP. And so, we are seeing some growth in ERP, and we’re very pleased with our ERP business. Pierre Nanterme : And maybe I think we’re using or I am using this term a lot that it’s all about the rotation of the business, as we speak. And I believe that the main difference between the winners and the losers is coming from the one who are able to rotate to the high growth areas and to rotate at speed. When you look at the ERP, as David just said, all our strategy, I think the down cycle was to start building capabilities to rotate our ERP to new ERPs and at the time we were calling as an illustration building capabilities, strong capabilities with HANA, which is going to be the next generation and as for the next generation of ERP with SAP. I am taking that as an illustration. And guess what, as we speak, given the investments we made ahead of this HANA S/4 wave, today we are already the number one in implementing S/4 and HANA in the world. We see clearly and you see improving with the results of SAP, a pick up on this new ERP development. And if you move beyond the strict definition of ERP to the broader definition of application packages, then it’s even more spectacular in terms of Accenture positioning. We are enjoying good growth in all the application package and especially with the new stat packages. And I am very pleased with the growth that I am showing with Salesforce; I am very pleased with the growth we have with Workday, with Microsoft Dynamics and some other application package services. So, we benefit from having rotating our ERP to the next generation of ERP and plus having taken a leadership position in this new application package. So, all in all this business is growing. Operator : Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead. Lisa Ellis : First, David, one quick follow-up question on the operating margin outlook for the year, you mentioned you’ve changed your investments, I guess for the rest of the year and as a result, made a different trade off there. Can you just give some examples of what some of those investment areas are that you decided to accelerate for this year? David Rowland : I wouldn’t characterize it as so much of a change. I mean, remember, 10 basis points off the top is $30 million. And so, it’s really, we are executing very well, Lisa, against the investment plan that we really started the year with. And on the inorganic front, we are certainly well-positioned to spend probably at the upper end of that range, 900 to 1 billion; so, we would be closer to 1 billion. We continue to invest in our assets and offerings and our people, et cetera. And so, I wouldn’t say that there is -- that we have set a new trajectory. It’s just that you look at the aggregation of our results; you look at where we are year-to-date; you look at our planned investment spending for the second half of the year, which is not materially different from where we started, we just think that the more likely landing zone is in that 10 basis points to 20 basis points. But, the point Lisa that I would reinforce is that it would be incorrect to interpret that as what’s a shift in the underlying economics of our business because underneath that we’re driving much more headroom in our P&L. So, our ability to drive profit improvement in our underlying business is alive and well; it’s just that this year the level of investments and the other factors will put us more in that 10 to 20 basis-point range. Lisa Ellis : And then a follow-up on the macroeconomic side, given the global and sector diversity in your business, can you just give an idea of where, now three months into the year, where you’re seeing overall IT budget settle out? And then also, how much of the digital and the new work is being funded out of IT versus out of other parts of your clients budgets, like outside the IT budgets? Pierre Nanterme : When I look to the market, to be honest, I do not see much changes, as we speak. And just to be more specific, I think I always said, it was in October that the overall economic environment is sluggish, to say the least, and it is still sluggish. So, we can’t expect much regarding the environment; it’s unstable, risky, extraordinary complex. That was the case last year; it’s still the case this year. When I am looking at the budget from our plans, I am not seeing any significant change. Again, it’s this story around the three drivers now. Digitalization, all industries are investing in digitizing their operations, because all the leaders and all these industries are subject to disruption, and to massive disruption. So that’s what the new factor in turn. It’s not about being better, it’s not about getting more productivity, it’s about not being disrupted and not being disrupted with not disappearing in the marketplace. This is the right, so I’d say this cycle is here for quite a while and they have to invest. Now, where the money is coming from is for rationalization of the operations. I mean calls for engineering, IT efficiency, it’s all of this, and it’s across the board in many organizations. It’s coming from IT, but as well it’s coming from all the business lines, looking at rationalization, which of course is driving good business for our Accenture Strategy or Accenture Consulting practices to do business process for engineering and profit improvements. We had a rise of what we call [indiscernible] and the work we’ve been doing, one is very public with Mondelez, which now is representing probably the benchmark of how you transform the cost of realization. [Ph] And if you look at more efficiency, you have a good consolidation. And you see some ways of consolidation especially in resources, especially in chemical; of course the Dow DuPont is the perfect illustration of the kind of consolidation that’s happening. And I can mention a few as well in the telecom, given the need to get to superior level of productivity. So, we’d say the environment is for a small as the same along these three drivers and in an economic context, which is non-inspiring. KC McClure : Greg, we have time for one more rather quick question and then Pierre will wrap up the call. Operator : Okay. That question comes from the line of Edward Caso from Wells Fargo. Please go ahead. Edward Caso : My first question is around Navitaire. What kind of contribution did that provide revenue margin and EPS before? And I assume this is in cash flow to the Company over and above that $4 billion number, and I know you’re planning anything special for that? David Rowland : Yes. So, we have not disclosed previously, and so I don’t think we would do it now in terms of the economics -- the full economics of Navitaire, as we owned it. I think from a revenue standpoint, we did give the size -- or we did not give the size. So Ed, we’ve not commented on that, so I’m not going to do that now. In terms of the proceeds from Navitaire, we just put that in the mix and it’s in the mix of our capital allocation plan. And we look at that in the mix and then execute our capital allocation strategy against our total cash of which Navitaire is now a piece of that. But, we don’t think about carving that out and saying now how are we going to use this piece outside of our normal capital allocation strategy. Edward Caso : Just to be clear though, the free cash flow guidance does not include the $600 million. And then the follow-on question is your balance cash levels have gone steadily down over the last few years. Is there some minimum level of cash that you’re targeting? David Rowland : Yes. So, we are very comfortable against what we view our minimum level of cash to be. And so, we are not concerned at all about our cash balance and in any way don’t think that we are touching or have any issues in terms of the minimum cash that we need to run the business. Navitaire is in our free cash guidance, so it is part of the mix. But, we’re very pleased with our cash position. I mean we anticipated that it would -- it’s progressing exactly as we anticipated. And we think by the end of the year, we’ll be -- our cash balance will be pretty close to where we started. So, we’re in a very strong cash position. And of course we have a lot of opportunities for other sources of capital, should we ever decide that we need to do so. Edward Caso : Okay. Thank you. David Rowland : Thank you. Pierre Nanterme : All right. It’s time to wrap you. And thanks again for joining us on today’s call. Just saying few words in closing and especially when I see the momentum we have created in our business, when I see our rotation to the new and our gains in market share combined with our continued investment to build a more differentiated Accenture Company, I feel very confident in our ability to deliver against our revised business outlook for fiscal year ‘16 and importantly to continue delivering value for our clients, for our people and for our shareholders. So, 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 to all of you. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 Eastern time today through June 23rd. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 387705. International participants dial (320) 365-3844. Those numbers once again are 1 (800) 475-6701 or (320) 365-3844 with the access code 387705. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,016	2	2016Q2	2016Q3	2016-06-23	5.31	5.371	5.808	5.866	null	19.71	18.72	Executives: KC McClure - Managing Director and Head, IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Bryan Keane - Deutsche Bank David Grossman - Stifel Financial Joseph Foresi - Cantor Fitzgerald Jason Kupferberg - Jefferies Lisa Ellis - Bernstein Dave Koning - Baird Jim Schneider - Goldman Sachs Tien-tsin Huang – JPMorgan Operator : Ladies and gentlemen, thank you for standing by. And welcome to Accenture's Third Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, KC McClure. Please go ahead. KC McClure : Thank you, Roxanne. And thanks everyone for joining us today on our third quarter fiscal 2016 earnings announcement. As Roxanne 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, along with some key operational metrics for the third quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the fourth quarter and full fiscal year 2016. We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today's call, we’re talking about revenues before reimbursements or net revenues. Some of the matters we'll discuss on 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. Pierre Nanterme : Thank you, KC, and thanks, everyone, for joining us today. We are very pleased with our third quarter financial results and the strong momentum we have built in our business. I am particularly pleased that we again delivered double-digit revenue growth in local currency, gaining significant market share. Our research clearly demonstrates that we are executing our strategy very well, further differentiate Accenture in the marketplace. Here are a few highlights from the quarter. We delivered strong new bookings of $9.1 billion, bringing us to $26.4 billion for the year to date. We generated very strong revenue growth of 10% in local currency. Operating margin was 15.5%, an expansion of 10 basis points from adjusted operating margin in the third quarter last year. We delivered earnings per share of $1.41, up 8% from adjusted EPS in the third quarter last year. We generated strong free cash flow of $1.5 billion. And we returned $1.2 billion in cash to shareholders through share repurchases and dividends. So, we have delivered excellent third-quarter results. And as we enter the fourth quarter I feel very good about our business and I am confident in our ability to deliver our business outlook for the year. Now let me hand over to David. David, over to you. David Rowland : Thank you, Pierre and thanks all of you for joining us on today's call. As you heard in Pierre's comments, our third quarter results were strong across almost every dimension of our business. Once again our results demonstrate the power of our highly differentiated growth strategy which is built on five businesses, delivered in an industry relevant context and focused on being the market leader and helping our clients rotate to The New. Looking out our results at a high level, there are few major themes which I think are important to note. First, 10% local currency growth marks the 7th consecutive quarter of double-digit growth. These results were strong indication of the durability of our growth model, which is underpinned by our focus on achieving market leading scale across our key industries and geographic markets. This is best illustrated by our broad based growth in the third quarter which reflected double digit growth in 8 industries and 8 geographic markets. And strong double digit growth in The New especially in digital related services continue to be a key driver of our results. Second, operating margin of 15.5%, 10 basis points higher than last year's adjusted results was consistent with our objective to deliver modest margin expansion while investing significantly in our people and our business. Our profitability agenda is enabled by our drive to achieve fit-for-purpose economics across each of our five businesses. We're pleased with our progress year-to-date which has yielded 10 basis points of operating margin expansion and 10% growth in EPS on an adjusted basis, while at the same time creating the capacity to make important investments for long term market leadership. Third, as expected we generated strong free cash flow in the quarter of $1.5 billion and return roughly $1.2 billion to shareholders through repurchases and dividends. We're well positioned to deliver free cash flow and excess of net income for the full year and importantly we continue to invest to acquire scale and capabilities in key growth areas, investing roughly $835 million across 11 acquisitions through the third quarter. So we're very pleased with our results in quarter three which combined with our first half results position us very well to achieve all of our key financial objectives for the year. With that said let's get into the details starting with new bookings. New bookings were $9.1 billion for the quarter, consulting bookings were 4.9 with the book-to-bill of $1.1, outsourcing bookings were 4.2 also with the book-to-bill of $1.1. We’re very pleased with our overall new bookings particularly in consulting which represented the second highest new bookings quarter following the record set in quarter two. Looking at bookings by business, our new bookings results were highlighted by strong demand in operations which had an estimated book-to-bill of 1.4. Strategy in consulting services combined had an estimated book-to-bill above 1.0, well within our target book-to-bill range and application services had a book-to-bill of 1.0. Across the board digital related services continue to be a significant driver. Additionally, we had 10 clients with new bookings in excess of $100 million and year-to-date we've delivered $26.4 billion in new bookings reflecting 9% growth in local currency. Turning to revenues, net revenues for the quarter were $8.4 billion, a 9% increase in USD and 10% in local currency reflecting a foreign exchange headwind of slightly less than 2%. Our consulting revenues for the quarter were $4.6 billion, up 12% in USD and 14% in local currency and our outsourcing revenues were $3.8 billion, up 4% in USD and 6% in local currency. The trends in revenue growth across our business dimensions were very similar to last quarter. Strategy and consulting services combined posted another quarter of strong double-digit growth, operations again had double-digit growth and application services grew high single-digits and across those four businesses, digital related services were significant contributor to growth with estimated growth in the range of 30%. Taking a closer look at our operating groups, products led all operating groups with 16% growth reflecting strong overall momentum in the business. Growth continues to be broad based with double-digit growth across all industries and geographies. H&PS grew 12% in the quarter driven by very strong growth in North America and the growth markets, as well as in the health business. We're also pleased with strong growth in public service especially in North America and the growth markets. Financial services also grew 12% led by very strong growth overall in banking and capital markets with solid growth across all other dimensions. Communications, Media & Technology delivered strong growth of 8% which was consistent with our expectations. From an industry perspective, electronics and high-tech, as well as media and entertainment continued their strong double-digit growth. Communications revenue was flat driven by modest declines in Europe and North America offset by double-digit growth in the growth markets. Lastly resources grew 1% in the quarter. The two divergent trends within resources continued with utilities again delivering strong double-digit growth across all three geographic regions while energy and chemicals and natural resources remain challenged due to cyclical headwinds. Moving down to income statement, gross margin for the quarter was 31.9% compared to 32.5% in the same period last year. Sales and marketing expense for the quarter was 11.1% compared with 11.3% for the third quarter last year. General and administrative expense was 5.3% compared to 5.8% for the same quarter last year. As a reminder, in quarter three of last year, we recorded a non-cash settlement charge as a result of an offer to former employees to receive a voluntary lump-sum cash payment from our U.S. pension plan. The following comparisons exclude the impact and reflect adjusted results. Operating income was $1.3 billion in the third quarter reflecting a 15.5% operating margin up 10 basis points compared with quarter three last year. Our effective tax rate for the quarter was 26.5% compared with an effective tax rate of 25.7% in the third quarter last year. Net income was $950 million for the third quarter compared with net income of $889 million for the same quarter last year. Our diluted earnings per share were $1.41, compared with EPS of $1.30 in the third quarter last year reflecting 8% year-over-year growth. Turning to DSOs, our day services outstanding were 41 days compared to 39 days last quarter and 37 days in the third quarter of last year. Free cash flow for the quarter was $1.5 billion, resulting from cash generated by operating activities of $1.6 billion, net of property and equipment additions of $94 million. Moving to our level of cash, our cash balance at May 31 was $3.5 billion compared with $4.4 billion at August 31. Turning to some other key operational metrics, we ended the quarter with global headcount of over 375,000 people, our utilization was 91% compared to 90% last quarter and attrition which excludes involuntary terminations was 15% up 2% from quarter two and consistent with the same period last year. With regards to our ongoing objective to return cash to shareholders, in the third quarter we repurchased or redeemed 4.3 million shares for $478 million at an average price of $112.44 per share. As of May 31, we had approximately 5.9 billion of share repurchase authority remaining. Finally as Pierre mentioned on May 13, 2016, we made our second semi-annual dividend payment for fiscal 2016 in the amount of $1.10 per share bringing total dividend payments for the fiscal year to approximately $1.4 billion. So with three quarters in the books, we are very pleased with our results and we are now focused on quarter four and closing out a strong year. Let me turn it back over to Pierre. Pierre Nanterme : Thank you, David. Our very strong results in the third quarter demonstrate that we are executing the right growth strategy and that we are providing highly relevant services to our clients. We are benefiting from the investments we've made to rotate our business to The New, digital, cloud and security-related services, which together now account for approximately 40% of our total revenues. Let me share a few examples of how we are leading in The New. We continue to see true demand for our digital capabilities. And we were very pleased that Accenture Interactive was recognized by Advertising Age magazine as the largest and fastest-growing provider of digital marketing services. Through Accenture Interactive, we are bringing our unique combination of design and customer experience capabilities to 70 companies in the Fortune Global 100. In cloud we are focused on building strong platforms for key industries such as our life science cloud for R&D. This truly innovative solution to collect, share and analyze clinical data is now being used by seven top pharma companies, including Pfizer, Merck, GSK and Lilly to accelerate drug development and improve patient outcome. In security, we're expanding our capabilities with the acquisition of Maglan, a cyber security Company based in Israel with strong expertise in cyber defense. And we just opened a new Accenture Lab in Israel that is dedicated to cyber R&D in threat intelligence, incidence response and internet of things security. This is all about helping clients become more resilient in today's digital world. We continue to see strong demand from clients to help them with their most complex mission-critical issues. In Accenture Strategy, we have developed a unique approach to help clients make sustainable improvements in their enterprise-wide performance. We are now a leader in this space, with a totally new zero-based methodology which we have delivered with excellent results at many consumer goods companies, including Unilever and Mondelez. We are now taking this approach to clients in health care, retail and financial services. We continue to invest across our business to drive growth and further differentiate Accenture in the marketplace. During the quarter we announced two acquisitions. We are taking a majority stake in IMJ, one of Japan's leading digital agencies. And we acquired OPS Rules, an analytics consulting company, to expand our capabilities in machine learning, supply chain and operations analytics. We continue to collaborate with leading players in the tech ecosystem to further strengthen our capabilities in cutting edge technologies. We work with IPsoft, a market leader in artificial intelligence to launch a new practice focused on its virtual agent platform which is called Amelia. Our new practice will help clients leverage artificial intelligence to realize efficiency gains and generate new growth opportunities. And we continue to invest to drive even more innovation and productivity in our global delivery network. We launched a new intelligence automation platform called Accenture myWizard, to deliver smarter and more efficient application services. We are already using myWizard with more than 200 clients to drive productivity improvements. Turning to the geographic dimension of our business. I continue to be very pleased with the strong and balanced growth we are driving across all three of our geographic regions and especially in our largest markets. In North America, we delivered 11% revenue growth in local currency, driven by double-digit growth once again in the United States, bringing us to eight quarters in a row of double-digit growth in the U.S. In Europe we delivered 12% revenue growth in local currency. I am particularly pleased that almost all of our largest markets generated double-digit growth, including the United Kingdom, Switzerland, Italy, Spain, Germany, and France. And in growth markets we grew revenues 6% in local currency, led primarily by double-digit growth in Japan, as well as strong double-digit growth in China, India, and Mexico. Before I turn it back to David, I want to reflect on a couple of Accenture core strengths that are particularly important to our future growth. The first is our portfolio of intellectual property. Over the years, we have made a significant investment and now have more than 5,000 patents and patent-pending applications in areas such as artificial intelligence, cyber security, drones, virtual agents, internet of things and other platforms. Our intellectual property is an important asset which drives differentiation and value in the marketplace. Second is our brand. I am proud that Accenture was just ranked number 38 on BrandZ's Top 100 Most Valuable Global Brands, our highest ever on this list. Again, our brand strengthens our unique positioning in the marketplace and drives significant competitive advantage. It reflects the trust our clients place in us and enables us to attract top talent. So with the first three quarters of the year behind us, I'm very pleased with our performance. We have very good momentum in our business and I feel confident that we are well positioned to deliver a strong fiscal year 2016. With that, I will turn the call over to David to provide our updated business outlook. David, over to you. David Rowland : Thank you, Pierre. Let me now turn to summarize our business outlook. For the fourth quarter of fiscal 2016, we expect revenues to be in the range of $8.25 billion to $8.5 billion. This assumes the impact of FX will be negative 1% compared to the fourth quarter of fiscal 2015 and reflects an estimated 6% to 9% growth in local currency. For the full fiscal year 2016, 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 4.5% compared to fiscal 2015. For the full fiscal 2016, we now expect our net revenue to be in the range of 9.5% to 10.5% growth in local currency over fiscal 2015. For operating margin, we now expect fiscal year 2016 to be 14.6%, a 10 basis point expansion over adjusted fiscal 2015 results. As a reminder, we closed our Navitaire transaction last quarter which lowered the full year FY 2016 tax rate by approximately 1.5% and increased diluted earnings per share by $0.74. Our guidance for fiscal 2016 excludes the impact of this transaction. We continue to expect our adjusted annual effective tax rate to be in the range of 24% to 25%. For earnings per share, we now expect full year diluted EPS for fiscal 2016 to be in the range of $5.29 to $5.33 or 10% to 11% growth over adjusted fiscal 2015 results. Turning to cash flow, for the full fiscal 2016, we continue to expect operating cash flow to be in the range of $4.1 billion to $4.4 billion, property and equipment additions to be approximately $500 million and free cash flow to continue to be in the range of $3.6 billion to $3.9 billion. Finally we continue to expect to return at least $4 billion through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding in the range of 1.5% 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. Operator : [Operator Instructions] Our first question is from Bryan Keane, Deutsche Bank. Please go ahead. Bryan Keane : Hi, good morning. Operating margin guidance to start the year, I think was 10 to 30 basis points, which has been your historical practice. This year it sounds like you will only do 10 basis points expansion. Just want to make sure I understand why the low end this year. And does that change anything going forward about your historical typical practice of 10 to 30 basis points of expansion. David Rowland : So Bryan if you look at the 10 to 30 as you well know and the others know that has been kind of our target range for many years now. And if you look at our results over the last five years, we covered the full scope of that range including having been at 10 basis points expansion at least once if not twice in that period, and I think one year been at 30 basis points. So, we've covered the expense of that range and so coming in a 10 basis points this year isn't in consistent with kind of our historical performance. Having said that, if you look at where we are year-to-date, we’re at 10 basis points of expansion through the first three quarters and so at this point based on what we see, it just feels very clear to us that we are trending in that direction. I think the important point to note and this is different about this year versus other years where we've been at 10 basis points of expansion is that we embarked on a journey especially a few years ago to really raise our gain in the investments that we’re making in our business including but not limited to the significant capital investments that we've made an acquisitions which also flow through our P&L. And so when you look at the 10 basis points, it really is a direct intention of what we’re trying to accomplish by positioning our business for the long term by investing at a scale that is truly differentiated in our sector and positions us for long term leadership. And so we’re actually very pleased with the 10 basis points of expansion and that it on one hand supports - we believe double digit growth in EPS but on the other hand underneath it, it represents significant investments that we're making in our business and our people. And last comment that I’ll make is that, if you were to look at our underline margin expansion, excluding the investments, the underlying margin expansion is quite healthy and would compare very favorably to what we've done in any previous year. So, we feel great about the economic leverage in our model and we feel great about the - the focus that we’ve had on investing. Bryan Keane : Okay, great. And then just a quick follow-up. At the Analyst Day I think you mentioned the potential to hire around 100,000 gross heads. It doesn't look like you are on track for that. I was looking for an update on gross hires for the fiscal year. Thanks to much and congrats on the quarter. David Rowland : Thank you, Bryan. I think last year we commented that our hiring was going to be over 100,000, this year it will be less than a 100,000 and I might add that we are quite pleased with that result. We view that as a positive outcome in the way we are able to - let’s say moderate our headcount growth in recent quarters well at the same time supporting continued strong topline growth, I mean that's an equation that we like. Bryan Keane : Thanks so much. Operator : Our next question comes from the line of David Grossman, Stifel Financial. Please go ahead. David Grossman : Hi, good morning, thank you. I was wondering if we could look at the overall business. Recently we've talked about the ebb and flow of the business and the shifting priorities, which has favored consulting growth versus outsourcing. Can you help us understand whether that trend continues at the same rate or whether that's beginning to equalize? Pierre Nanterme : As you look at our business and indeed these last few years, all the industries in all the markets are under significant transformation. They want to transform their business and the different industries, what we call, rotate to The New in all the digital space. They want as well to improve their operational efficiency and they want to implement new capabilities. So at the end of the day, if you look at the nature of the transformation of our industries, they are more related to consulting type of services. This is the nature of the demand because of the unique nature of the transformation in the industries. If you look back a few years ago where outsourcing was going to be stronger, it was absolutely linked to the fact that you have less need for true industry transformation and innovative play. And the industries were more looking for straightforward efficiency gains. And to some extent, to a great extent, the natural answer we provided at Accenture to straightforward efficiency gain through around the outsourcing arbitrage, more productivity, tackling the cost in operation and in IT. So I feel this natural shift from a bit of outsourcing, a bit less of outsourcing, to a bit more of consulting is reflecting the true nature of the transformation in the industries. And by the way, we feel extremely good about our positioning in this rotation, if you will, based on our industry image based on the investments we made in rotating to The New. Based on the fact that we still have significant capability at great scale to tackle the cost efficiency programs from our clients. David Grossman : So no real material change in the pace, Pierre, of how that is migrating to the market? David Rowland : We see that trend continuing, yes. Pierre Nanterme : Definitely, we see that trend continuing. You have cycles. We are in a cycle of transformation for all the reasons we all know are on the call. And I guess the cycle will continue as long as the industries will be in this transformational phase. David Grossman : Very good, thanks. Just one quick follow-up. I wonder if you could quickly contrast your comment about IT and how you view IP at Accenture versus perhaps how a product company views IP. Pierre Nanterme : Yes, very pleased. For us, IP is very important. That's why I wanted in that call to put the attention on our IP population. It's something we've been talking about, we have so many things to discuss with all of you. But we've been very active from an IP standpoint and especially as, again, we are in a phase of reinvention and in a phase of innovation. Reinvention, innovation, equals intellectual property building. And for us we are building intellectual property is in many things - and you're right - it's more than products or sometimes we feel that IP equals software or application product. And IP could be behind processes, operating models. There are a lot of things you can - methodologies, approaches, part of solutions and this is all what we do. And I was quite impressed recently when I've been reviewing the IP portfolio with our 5,000 patents or patent-pending activities. I felt that it would be good for me to share that with all of you as, again, an element where Accenture is quite on top of its game in order to drive innovation and to perfect, more important, our innovation inside Accenture for the benefit of our clients and for the benefit of our investors. David Grossman : Very good. Thank you. Operator : Our next question is from the line of Joseph Foresi, Cantor Fitzgerald. Please go ahead. Joseph Foresi : Hi, my first question here is what are the challenges in growing digital at this point? Do you think the growth rate can keep up there? And are you finding enough talent? And maybe even some color on the margins in that business would be great Pierre Nanterme : Good question. So far, so good. It's every day we're working on it at Accenture. And as you see, we've been extraordinarily active these last few years, certainly three, four years. Every day we are taking actions. These actions are to grow, if you will. In order to lead in The New, you need skills and capabilities and we've been very active from a talent standpoint. All the credit to our operating group leads, but as well to Ellyn Shook, I would like to recognize during the call here our Chief HR Officer leading all our talent agenda, and we are very active. I would like as well to recognize Roxanne Taylor from a brand standpoint because brand is absolutely key in attracting talents. That's why I wanted as well in that call to put some emphasis on the brand because it's very important in our strategy to attract talent. Of course, we've been very active from an acquisition standpoint. You've seen us raising our game these last four years and this is our objective, to continue with that pace moving forward as long as we could find relevant companies, relevant acquisitions, that will bring their capabilities. But we need to continue as well to invest on an organic standpoint. We developed our own platforms. I'm thinking about Accenture cloud platform. I'm thinking about Accenture currency platform in analytics, in marketing and so forth. So we are very active across the patch of digital. Of course, as you will see, our digital is covering interactive, mobility, analytics, cloud, security. We are even now considering the next play. I'm thinking about artificial intelligence. So far I feel good. You're right to ask the question. It's a everyday commitment from Accenture to invest in The New and to lead in The New. And I'm pleased with the momentum we are creating and I see that continuing. Joseph Foresi : Okay. And as my follow-up, to go back to the margin question, with acquisition activity being strong over the last couple of years and you needing to invest in digital, which is obviously growing very well and driving the business, should we expect a moderation in that 10 to 30 basis points typical margin expansion target? Or is that still the case going forward? Because it seems like you're in a heavy investment mode and I was wondering how to think about that going forward. Thanks. David Rowland : Well first of all, certainly I’m not going to provide guidance on this call and I will come back to that question if I can just ask for your patience, I will come back to that question in more detail at the Investor Analyst Day in October. What I will say is that our focus on investing at scale doesn't end this year. This is a cycle that we’re in but I will also tell you as I mentioned the last two investment, analyst days and I referenced again in the script we are very focused on this journey of managing our business in a fit for purpose way which is really our platform for creating underlying profitability improvement in our business to both support our ambition for higher investments but also support our ambition for margin expansion as a way to support our goals to grow EPS. And I would say the general rule, the economic leverage that we have in our model hasn’t changed and in fact I might say in some ways, we have new and exciting opportunities as we think about this move to fit for purpose focus and how we manage and drive our business. But I will get more specific on all of that in October. Joseph Foresi : Okay. Thank you. Operator : Our next question is from the line of Jason Kupferberg, Jefferies. Please go ahead. Jason Kupferberg : Good morning guys. Hey, David. Just wanted to get a quick clarification on one of the answers you gave to - I think it may have been Bryan's question about headcount growth this year, new hires. It sounded like you were alluding to nonlinear dynamics perhaps, between headcount growth and revenue growth, if I heard you correctly. And I just wanted to clarify that, because it looks like billable headcount year-to-date has actually grown faster than revenue. But I just wanted to clarify what you were referencing there. David Rowland : Yes, what I was referencing was first of all just the fact that we will hire fewer people this year than we did last year is one point. The second thing I was referencing is it, if you look at our sequential growth in headcount and recent growth quarters, it’s certainly moderated over let’s say the prior 7, 8 quarters and probably beyond. The third thing I was referencing although I didn’t say it specifically is that it is true if you look at our headcount growth in the third quarter year-over-year, it was at a rate above our revenue but that rate above our revenue was less than what you’ve seen in recent quarters. And so there is without getting overly specific, there are three things that factor in to that, one would be our focus on automation as an example and the mix although as we said, that is early days but yet a big focus for us going forward, things like chargeability around the mix, things like attrition levels around the mix, when you consider at hiring number and of course, the revenue yield that we're getting for billable head is also in the mix. And that can be influenced by things like the mix of work that we're doing across the five business mix of work by geography and it can also include pricing. So, all of those things are kind of in the mix and in some way all of those are contributing to what it has been a more moderate growth sequentially in our headcount and that's really all I was pointing out. Jason Kupferberg : Okay, that's super helpful. Maybe just to pick up on that point around utilization, I think you've been running at 90%-plus for seven straight quarters after never having been at those levels prior to last fiscal year. So do you feel like this is a new normal and that we're unlikely to see this slip below 90%? And would it also be fair to say that you're maxed out at this 90%, 91% range? Or could there be further head room, depending on how the revenue mix evolves over time? David Rowland : I guess I won't declare that it's maxed out. There are things that could work in our favor going forward that could influence that metric further. If you look at our historical norm, we are at the higher level of that range for sure. And we are running hot and I think that reflects the activity in the market. We could come down a click or two in different quarters. And a lot of times that happens with periods in the year where we tend to bring on, let's say, more heads. So for example, in the fourth quarter we have a lot of our new joiners, campus hires that will start with us in the fourth quarter and early in the fall. So the simple answer is that no doubt we are running at a very high level of utilization, reflecting the dynamics that we see in the market. But we're in a zone right now that we feel very comfortable managing but it could also be a click lower and we wouldn't be worried about that. Jason Kupferberg : Okay, I appreciate the comments. Thanks. Operator : We have a question from the line of Lisa Ellis, Bernstein. Please go ahead. Lisa Ellis : Hi. Good morning, David. I have a question. In the market it looks like you're seeing that demand for the new digital security services, cloud services, is if anything accelerating. And yet, as I guess a number of folks now have called out, a lot of your forward indicators have decelerated a bit. Headcount growth, the pace of M&A, even though it's still elevated, has slowed down since last year. So can you comment on that disconnect or how you're thinking about that? Because if anything, it seems like the demand is accelerating, not decelerating, out there. Pierre Nanterme : I can speak of that. Good morning, Lisa. On the point you're mentioning around deceleration of some of our capabilities, when you're talking about acquisitions it might very well be that we're going to make less transactions than last year, a few. But on the other hand, we will certainly deploy a bit more capital than last year because we expect to close the year with a bit more than $1 billion being deployed. So I guess it's - so we are not slowing down at all our acquisitions agenda, at least in terms of volume of capital deployed. By the volume of capital deployed it means the capabilities we are bringing back in Accenture. So I do not see on digital, anything in Accenture which would reflect a kind of slowing down of our appetite to grow, of our appetite to invest, and of our appetite to accelerate in The New. From a net standpoint I will let David comment again. David Rowland : Lisa, one thing I would point out is that - really, to get underneath your question, you would have to get into the more granular details of our business which are not practical for us to get in externally but let me just make the point that as the business is rotating overall, we are also rotating a lot of talent within our headcount. And so what is not apparent by simply looking at the overall numbers is the talent rotation that is taking place. And I can assure you that our pace of investing and acquiring headcount specifically focused on driving this new agenda, and the digital-related services agenda as part of that, has not slowed down at all. In fact, I would say the demand for talent in The New and talent in digital-related talent as one example, but also including cloud and security in our business has never been higher. And it is - as Pierre referenced earlier for Ellyn Shook, that is job number one for her, is managing the talent supply side to fuel The New. And I think our pace of activity is not slowing, if anything, our appetite for that talent is increasing. But it's underneath the overall number that we communicate. So we feel like our indicators are positive indicators right now. Pierre Nanterme : Yes, to build on this, because this is a very important question you're raising, coming back to talent, I know that we have a lot of questions regarding the total headcount. And we're working that very carefully with David to see that we've been able to grow more our revenues with a little bit less hiring of people, which on balance we will all recognize, is a good direction. If you look from a managing director standpoint, so all of the leadership of Accenture, I just would like to reconfirm that this year in fiscal 2016 we promoted much more managing directors than ever these last 4 years. And I think from a recruiting of leaders, managing directors, we've never been so active in the market in recruiting new leaders. So it's important to segregate the leadership we are hiring and promoting at scale, because the leaders are driving the business, from the total headcount which we all expect will continue to grow less, a bit less than our revenues moving forward, due to the factor of automation and productivity in our operations. Lisa Ellis : Terrific, thank you. That's great color, thanks a lot. Operator : And our next question is from Dave Koning, Baird. Please go ahead. Dave Koning : Hey, guys, thanks for taking my question. First of all, the digital business, you talked about, it's about 40% of revs, growing about 30%. That would imply that the other 60% is maybe flattish to down. Maybe you can talk a little bit about that. And then is this the formula that digital keeps growing in that range and the rest of the business is more flattish? Is that the formula going forward? Pierre Nanterme : I think the formula going forward is very simple. We want to grow. That's our goal in life is to grow and to grow more than the market. In order to grow more than the market, we believe at Accenture and this is at the heart of our strategy, that it's going to be by leading in the digital-related services. To be clear, we want to make Accenture the leading professional services company in digital-related services. This is what we're working on these last few years and we will continue moving forward. We have evidence that this rotation to The New is happening at big scale. So the most significant part of our growth will come from digital-related services because this is our strategy, first and second, this is where the demand is. Now, that being said, we want to continue making our core, if you will, extremely competitive in the marketplace. I just mentioned in the call that we invested in our new intelligent delivery platform called Accenture myWizard which is bringing a lot of success in Accenture. So of course we're growing much less in the core than in The New, which is exactly reflecting our strategy. Now, the core is still positive, growing less, but it's still positive. And I believe that on the core Accenture is growing more than the competition at the end of the day which has always been our value proposition, is to grow more than the market in The New and much more. And is to grow more than the market in the remaining core which is what we do, of course, at a much lower level and lower pace, but still positive. Right, David? David Rowland : It is. And David, let me also clarify some subtleties in the way we talk about digital-related services and The New, just to remind you and the others as well. So, we initially started talking about digital-related services, which was defined specifically to include Accenture Interactive, mobility, and analytics. And digital-related services is what I referenced was growing in the range of 30%. Following introducing digital-related services several quarters ago, we rolled forward, kind of evolved that, to talk about The New, which includes digital-related services, cloud-related services and security. With The New, we commented that it is now about 40% of our revenues. We did not comment on the growth rate for The New. But I will say that digital-related services of the three components of The New, is the fastest growing. So that helps you as well. We talk about The New and digital-related services and it's important to just reinforce the understanding of the definitions. Dave Koning : Got you. Okay, that's helpful. And then I guess the one other question I had, the growth markets grew 6% and then North America and Europe were more like 11% to 12%. I would have thought a few quarters ago that maybe China and Brazil, the gap would have been - the slower growth would have happened but it actually seems like now that gap, the growth markets are growing quite a bit slower than the others. Maybe you can just comment on that a little bit. Pierre Nanterme : Yes, happy to comment. Fact of the matter is growth markets are growing lower than the other two, maybe just because the other two are growing exceptionally well and especially Europe at 12%, which of course is a remarkable achievement. Now when you look at the growth markets, needless to say that it's a mixed bag of very different situations when we're talking our growth markets. First, we are extremely pleased that we continue with our double-digit growth with Japan. By the way, I don't know and maybe we provide information, how many quarters now we've been growing double-digits in Japan, but it's starting to be spectacular, and of course is a very large market for Accenture. Not only for the - still what we're calling the growth market, but for Accenture as a whole. So I'm extraordinarily pleased with the turnaround we've been driving in Japan, with the momentum we are making in Japan and with the acquisition we have made of IMJ in order to accelerate the rotation to The New in Japan. I am very pleased with the new momentum we are creating China this year, together with India and Mexico. Now, as you know, in the growth markets there are two factors impacting the growth markets. First is these markets are more vulnerable to the commodity markets in terms of energy and natural resources. There are significant countries very dependent on natural resources and energy. And of course they are affected by the commodity price going down, and accordingly we are affected with this factor. Secondly, the situation in Brazil. We all know what's happening in Brazil. So our growth has been slowing down in a market which is very important for Accenture. That being said, I love being public on this, because I would like to recognize the incredible leadership of Roger Ingold and now Leonardo Framil leading our practice in Brazil, where we're doing more than resisting. When I say more than resisting, it means on a year-to-date standpoint we are growing in Brazil, which is probably according to any standards, a remarkable achievement. Now, of course we're growing less in Brazil than we used to grow in the past. So on balance, it's a 6% reflecting very different dynamics. This is what - is something I like a lot in Accenture, is our diverse portfolio of businesses where, indeed, when you look at the growth markets, when Brazil is a bit under pressure, all commodity markets, we benefit from growth elsewhere and on balance 7% is pretty good from my perspective. David Rowland : Yes. If you isolated chemicals and natural resources and energy and then looked at the underlying growth in growth markets, it would be very similar to what we see in the other areas. It has that unique dynamic as well as the other points Pierre mentioned. Dave Koning : Got you, great. Well, thank you. Operator : And our next question is from the line of Jim Schneider, Goldman Sachs. Please go ahead. Jim Schneider : Good morning, thanks for taking my question. I was wondering if you could talk a little about financial services. It's an area where you've talked about previously being driven by transformation and that pace continues be pretty strong. Can you give us any sense about whether you're seeing any tone change from your financial services customers, either in banking or elsewhere in terms of the overall IT spending outlook and that would suggest that we are seeing any slowdown in that pace of change, change-driven services in particular? Pierre Nanterme : Yes. I probably could take this one, David, from my prior role. It seems that all my life I will comment on Europe [indiscernible], but very happy to. First, let's start with the beginning. We're pleased with where we are with financial services overall. If you look at the results we posted this last few quarters, we had good momentum in financial services. Second, it's an industry which is ongoing some significant rotation to The New for obvious reasons. It's a B to C industry and we have a lot of activities in terms of rotating to The New and creating digital capabilities in financial services. This is as well an industry where we see a lot of potential in what we're calling automation, if you will, to create more automated processes, bringing virtual agents to provide financial advisory services. So that's the path which is creating some momentum. However, on the other side of the coin, if you will, it's an industry which is still under pressure, especially in Europe, for all sorts of reasons. Negative interest rates have been good, especially in that industry for their commercial business. The regulatory constraints are high, as you know, with all - especially in Europe with all the Basel legislation and all the constraints which have been put on the banks and so the profitability of the banks been affected these last few years. So at the same time they need to rotate to The New, but at the same time they need to work on their cost. So there is a bit of this story with our financial services clients, investing in The New but being extremely cautious about their cost play. That's why after this good momentum we have in financial services, we might see some moderation of our growth with our verticals in Europe a bit. Nothing we are over-worried about because we believe the potential is still there, but it's an industry which is under cost pressure. Jim Schneider : That's helpful, thank you. And then maybe one for David. DSOs edged back up to 41 and I guess have been on a little bit of an upward trajectory over the last four, six quarters. Can you give us a sense about whether that says anything about the overall cash flow trends for the business and whether that, in fact, is a longer term trend? David Rowland : Yes, I would say, to be completely transparent, it was a little higher than I would have wanted in the quarter, but yet we still generated very strong cash flow. We are very focused on managing our DSO and I'm hopeful that we will see it click down at the end of the fourth quarter. As I've said before, first of all, even at the levels that we're at, as you know, you hear us say all the time, we're still very much industry-leading. I do think that we are in the zone of what I think could be a reset, new normal and, let's say, in that 40-day plus or minus zone. And so we'll continue to focus on it as one of our key operational priorities. And I'm hopeful we can continue to manage it in that zone. Jim Schneider : Thank you. KC McClure : Roxanne, we have time for one more question and then Pierre will wrap up the call. Operator : So the last question is from the line of Tien-tsin Huang, JPMorgan. Please go ahead. Tien- tsin Huang : Good morning. Forgive the noise, I'm at the airport. Just a couple quick ones. What exactly is driving the revenue raise in the guidance here? What areas specifically are running better than expected? David Rowland : Really the revenue raise is just a reflection of posting roughly 11% growth year-to-date. And if you look at the guidance range of the 6% to 9%, we just simply did the math. If you do the mathematical extension of that, you get to the 9.5% to 10.5% range. I think in terms of what's driving it of late, products is very, very hot right now. And the thing that is impressive about products, which also happens to be our largest operating group, is that their growth is broad-based across every industry in that operating group, as well as each of the three geographic areas. And so I would say that what is driving us to a strong close to the year, if you will and hence raising the revenue 0.5 point on the upper end, you would start with products and the strong story there. Health and public service is another strong story. Very good growth in the third quarter and very strong momentum as we look to the fourth quarter. I would say our business in North America is another source of momentum. If I had to name, let's say, three big drivers, I would pick those two operating groups and North America. And then of course underneath that, as Pierre covered very well, is the ongoing continued momentum in digital and The New, which we certainly will continue into the fourth quarter. So those are some of the big themes in terms of driving what we hope will be a good strong close to the year. Tien- tsin Huang : Okay. That's helpful, Pierre, thanks. I also wanted to follow up, I think it was David Grossman's question on IP and software and how the deconsolidation of Duck Creek, that action there, how does that fit in the strategy of owning IP and platforms, any comments? Thanks. Pierre Nanterme : Yes, elaborating a bit on what I said before. So we're working on our IP from, again, from a process standpoint, a metallurgy standpoint, from part of solutions standpoint, and of course, in the context of working with our partners. And it might very well be that we are creating IP on top of some market solutions, which is where we are making the bridge with your question around software, not software. We are, in our business, we are working with software companies. And the job of Accenture for many years has been to bring an industry expertise, an industry wrapper on top of these solutions. And on this wrapper we are bringing, we're working on protecting our own IP when appropriate and when possible. This is where at Accenture we make the bridge with the software providers. The software providers are all our friends and we're working with the best possible companies. They are coming to Accenture, that's why we are a good partner to bring industry expertise. And this is on the industry wrapper we could build IP. David Rowland : Pierre, you want to comment on Duck Creek? He also asked about Duck Creek and how that fits in with our strategy. Pierre Nanterme : Yes. And Duck Creek is clearly a good illustration of what we are doing. Duck Creek is a fantastic company, an excellent solution. We certainly believe this is the best in the marketplace in policy administration, in insurance policy administration in some markets including the United States. We want to invest more in Duck Creek to establish an even stronger leadership in the different markets of Duck Creek. And we believe that the right way of doing it was to partner with someone who would bring some strength in terms of investing together with us, in that case, Apax Partners. And we're very pleased that Accenture, together with Apax will be able to invest behind Duck Creek and move Duck Creek solutions to the next level and establish a stronger leadership. This is all about the new Accenture. At Accenture, we will look always at all the ways to invest, to bring the right solution, to be smart, to be thoughtful and mindful about our capital allocation and at the end of the day, to lead in the market and to lead in The New. Tien- tsin Huang : Okay. Pierre Nanterme : Okay, thanks again for joining us on today's call. Let me close with a few thoughts on Accenture's long-term performance, which I believe unites all of us, investors, analysts, Accenture leaders and all of our people. Next month on July 19 we will celebrate the 15-year anniversary of Accenture's IPO. We have performed extremely well over the years by continually reinventing our business. Since our IPO we have delivered compound annual growth of 8% in revenues and 14% in adjusted EPS, creating significant value for our shareholders, for our clients and for our people. So I want to thank all of you for the support you've been bringing to Accenture over so many years. We look forward to talking with you again next quarter. In the meantime, if you have any questions, please feel free to call KC. And all the best to all of you. Operator : Ladies and gentlemen, this conference will be made available for replay after 10 :30 AM today running through September 29, 2016 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 800-475-6701 and entering the access code 394564. International participants may dial 1-320-365-3844. And again, the access code is 394564. That concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,016	3	2016Q3	2016Q4	2016-09-29	5.458	5.537	6.023	6.113	null	19.39	20.23	Executives: KC McClure - Managing Director and Head, Investor Relations Pierre Nanterme - Chairman and Chief Executive Officer David Rowland - Chief Financial Officer Analysts : Keith Bachman - BMO Capital Markets Sara Gubins - Bank of America Merrill Lynch Tien-Tsin Huang - JPMorgan Bryan Keane - Deutsche Bank Securities, Inc. David Togut - Evercore ISI Lisa Ellis - Sanford C. Bernstein, Inc. Rod Bourgeois - DeepDive Equity Research Darrin Peller - Barclays Capital Operator : Ladies and gentlemen, we would like to thank you for standing by. And welcome to Accenture’s Fourth Quarter Fiscal 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session with instructions being given at that time. [Operator Instructions] And as a reminder, today’s call will be recorded. I would now like to turn the conference over to our host, and facilitator, as well as our Managing Director, Head of Investor Relations, Ms. KC McClure. Please go ahead. KC McClure : Thank you, operator, and thanks everyone for joining us today on our fourth quarter and full-year fiscal 2016 earnings announcement. As the operator just mentioned, I’m KC McClure, Managing Director, Head of Investor Relations. On today’s call, you will hear from 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 fourth quarter and full fiscal year. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the first quarter and full fiscal year 2017. David will then take your questions and 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’ll 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. Pierre Nanterme : Thank you, KC, and thanks, everyone, for joining us today, to learn more about our very strong results for both the fourth quarter and the full fiscal year. Given some travel limitations, I’m not able to be with you in Boston this week. So David and I decided to pre-record our remarks and then he will be available to take your questions at the end of the call. Let me start by saying how very pleased I am with our excellent financial results for both the quarter and the year. I’m particularly pleased with our durable and balanced performance. We have now delivered double-digit revenue growth for two years in a row, and we have gained significant market share. Here are a few highlights for the year. We delivered very strong new bookings of $35.4 billion. We generated record revenues of $32.9 billion with 10.5% growth in local currency. We delivered earnings per share of $5.34 on an adjusted basis [an 11%] increase. Operating margin was 14.6% an expansion of 10 basis point on an adjusted basis. We generated very strong free cash flow of $4.1 billion. We returned $4 billion in cash to shareholders through share repurchases and dividends. And we just announced a semi-annual cash dividend of $1.21 per share, a 10% increase over our prior dividend. So we delivered an excellent fiscal year. I feel very good about our performance and the momentum we have in our business, which clearly reflect the value of the services we provide to our clients each and every day. Now, let me hand over to David. David Rowland : Thank you, Pierre, and thanks to all of you for joining us on today’s call. We were extremely pleased with our results in the fourth quarter, which once again reinforce our distinctive position in the marketplace, especially as it relates to being a leader in partnering with our clients to rotate their business to The New, including digital, cloud and security. By any measure, our fourth quarter capped off what has been another truly outstanding year for Accenture, which is even more impressive when you consider that our fiscal 2016 results followed an equally strong year in fiscal 2015. At a high level, our quarter four results continued to reflect strong performance across all three of our financial imperatives, durable revenue growth faster than the market, sustainable margin expansion while investing it scale in our business and our people, and strong cash flow with disciplined capital allocation. To be more specific, quarter four represented our 10th consecutive quarter of strong growth, with continued significant gains in market share. Our net revenue growth of just over 9% local currency was broad-based and balanced across most dimensions of our business. Our operating margin of 14.1% came in as expected and up 20 basis points from quarter four of last year. We were especially pleased with the underlying drivers of profitability, which enabled us to invest significantly in our business and our people during the quarter. And we delivered strong free cash flow in the quarter of $1.9 billion, which supported our ongoing objective of investing in our business, while returning significant cash to our shareholders. So we finished the year in a manner which was very consistent with the previous three quarters, with strong broad-based growth underpinned by very good profitability and cash flows. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $9 billion for the quarter. Consulting bookings were $4.8 billion, with a book-to-bill of 1.0. And outsourcing bookings were $4.2 billion, with a book-to-bill of 1.1. We were pleased with our new bookings in the quarter, which came in as we expected and reflected continued strong demand for digital related services. For the full fiscal year, we delivered $35.4 billion in new bookings, reflecting 7% growth in local currency. Turning now to revenues. Net revenues for the quarter were $8.5 billion, an 8% increase in U.S. dollars and 9% in local currency, reflecting a foreign exchange headwind of roughly 1.5%. Revenues were approximately $40 million above the upper end of our previously guided range when adjusted for the actual foreign exchange impact. Consulting revenues for the quarter were $4.6 billion, up 11% in USD and 13% in local currency. Outsourcing revenues were $3.9 billion, up 4% in USD and 6% in local currency. The trends in revenue growth across our five businesses were very similar to last quarter. Strategy and consulting services combined, as well as operations, posted another quarter of double-digit growth, while application services delivered very solid growth in the mid-single-digit range and across those four businesses, we saw strong double-digit growth in The New led by digital related services. Taking a closer look at our operating groups. Products led all operating groups with 18% growth, reflecting continued double-digit growth across all industries and geographies. Our significant growth in products reflects the rapid adoption of The New across all of the industries within products. And our investments over the past few years are serving us very well in meeting the new demands of our clients. H&PS posted another strong quarter with 11% growth, driven by a continued double-digit growth in health, and overall in North America and the growth markets. Financial Services grew 9% in the quarter, driven by strong growth in both insurance and banking and capital markets, as well as positive growth across all three geographies, led by a double-digit growth in Europe. Communications, Media & Technology growth landed consistent with our expectations at 5% and reflected continued strong overall growth in North America and the growth markets. In Europe, we did see contraction driven primarily by communications. Finally, resources growth was flat in the quarter, as we continued to navigate cyclical headwinds in both energy and chemicals and natural resources. We continued to be very pleased with double-digit growth in utilities, which is benefiting from clients investments to digitize their businesses. Moving down the income statement. Gross margin for the quarter was 31.3% compared to 31.7% in the same period last year. Sales and marketing expense for the quarter was 11.1% compared with 11.7% for the fourth quarter last year. General and administrative expense was 6.1% compared to 6.2% for the same quarter last year. Operating income was $1.2 billion in the fourth quarter, reflecting a 14.1% operating margin, up 20 basis points compared with quarter four last year. In the fourth quarter, as part of launching a joint venture with Apax Partners, we closed our Duck Creek transaction. This transaction, along with an immaterial adjustment to finalize our gain on the divestiture of Navitaire lowered our quarter four tax rate by 1.8% and increased net income by $249 million and diluted earnings per share by $0.37. The following comparisons exclude this impact and reflect adjusted results. Our adjusted effective tax rate for the quarter was 24.3% compared with an effective tax rate of 27.1% for the fourth quarter last year. Net income on an adjusted basis was $881 million for the fourth quarter compared with net income of $788 million for the same quarter last year. Adjusted diluted earnings per share were $1.31 compared with EPS of $1.15 in the fourth quarter last year. This reflects a 14% year-over-year increase. Day services outstanding were 39 days compared to 41 days last quarter and 37 days in the fourth quarter last year. Free cash flow for the quarter was $1.9 billion, resulting from cash generated by operating activities of $2.1 billion, net of property and equipment additions of $160 million. Our cash balance at August 31 was $4.9 billion compared with $4.4 billion at August 31 last year. Turning to some other key operational metrics. We ended the year with a global headcount of about 384,000 people. Utilization was 92% compared to 91% last quarter. Attrition, which excludes involuntary terminations, was 16%, up 1% from quarter three and up 2% from the same period last year. With regards to our ongoing objective to return cash to shareholders, in the fourth quarter, we repurchased or redeemed 5.6 million shares for $640 million at an average price of $114.52 per share. At August 31, we had approximately $5.4 billion of share repurchase authority remaining. As Pierre mentioned, our Board of Directors declared a semi-annual cash dividend of $1.21 per share. This dividend will be paid on November 15 and represents $0.11 per share or 10% increase over the previous semi-annual dividend we declared in March. So before I turn it back over to Pierre, I want to reflect on where we landed for the full-year across the key elements of our original business outlook provided last September. I am extremely pleased that we continued our track record of successfully executing our strategy and managing our business to deliver on the business outlook we provided at the beginning of our fiscal year. Net revenues grew approximately 10.5% local currency for the full-year, well above the top end of the guided range that we provided at the beginning of the year. Growth was strong and balanced across our operating groups, geographies and businesses. We are very pleased with double-digit growth in products, H&PS and financial services, as well as, overall in both North America and Europe. From a business perspective, we posted double-digit growth in strategy and consulting services combined, as well as operations, with very good mid single-digit growth in application services. And of course, across the Board, we saw a double-digit growth in The New, estimated to represent approximately 40% of our revenues for the year, led by digital-related services with estimated growth of approximately 30%. Operating margin was 14.6%, a 10 basis point expansion over fiscal 2015 adjusted operating margin and within the range we provided at the beginning of the year. Importantly, we were very pleased with the scale of our investments on our business and our people as we created additional investment capacity, resulting from improvements in our underlying profitability. Adjusted diluted earnings per share was $5.34, reflecting 11% growth over adjusted FY 2015 and was above the upper end of our original guided range, primarily driven by our strong topline growth. Free cash flow was $4.1 billion, above our original guided range and reflecting a free cash flow to adjusted net income ratio of 1.1. And finally, we delivered on all of our capital allocation objectives by investing over $930 million, primarily attributed to 15 acquisitions and returning $4 billion of cash to shareholders. So again, following a very strong year in fiscal 2015, our leadership team and employees around the world have done it again with another truly outstanding year. These results demonstrate the durability of our growth, profitability and cash flows, and our ability to manage our business to deliver value to all of our shareholders. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our outstanding performance in fiscal 2016, demonstrate that our growth strategy continues to resonate with our clients, and that we are clearly executing very well. We are benefiting from the actions we have taken over the last few years to align Accenture along five distinct businesses, to transform the services we offer and to increase our investments in new and high-growth areas. This is all that’s driving differentiation for Accenture and making us the most relevant professional services company to lead in The New digital world. Our five businesses : Accenture Strategy, Accenture Consulting, Accenture Digital, Accenture Technology and Accenture Operations are each highly competitive in their own right, as well as synergistic in delivering value for our clients. Today, the breadth of capabilities we provide end-to-end is truly unique in the marketplace. From being relevant in the boardroom to delivering cutting-edge technologies, digital solutions and innovative platforms, to operating services on behalf of clients, to drive tangible outcomes. At the same time, we have transformed the services we offer, rotating our business rapidly to what we call The New, digital, cloud and security-related services, which, together, accounted for about $13.5 billion or 40% of total revenues in fiscal 2016. That is a substantial increase from approximately 30% of revenues just a year ago. Let me show a few examples of how we are helping clients on with The New. In digital, we are working with many hotels, the European hospitality company to implement a digital transformation strategy to increase sales across all channels through data driven customer segmentation. In just one-year, direct sales were up of 27% and more than one million people have joined Meliá’s Rewards program. In cloud, we are helping Rio Tinto, a global mining company, transition its enterprise systems to the public cloud, including the world’s largest SAP production system migration to Microsoft Azure, delivering increased agility with an as-a-Service model. And in security, our cyber experts are working with large U.S. based utility to define, develop and run a next-generation security operations center. We are developing a comprehensive strategy to assess risk, managed identity and enable alerts for cyber threats in real-time. We continue to make significant investments across our business, particularly in acquisitions. In fiscal 2016, we invented more than $930 million of capital in acquisitions and that is on top of about $800 million last year. And when we look at these last two years, I’m delighted that about 70% of our investments in acquisitions have been in The New. In the fourth quarter alone, we announced five acquisitions in The New, including three digital services companies : MOBGEN in the Netherlands, Tecnilógica in Spain and dgroup in Germany. And two security companies : Maglan in Israel and Redcore in Australia. We continued to see strong demand from our clients for large scale mission-critical transformation programs. The broad range of services we provide across our five businesses, together with our deep industry expertise, continues to differentiate Accenture and we remain the partner of choice for the world’s leading companies. For Stryker, the medical technology company, we are helping transform its business operations to enable more growth and agility. We are leveraging the Accenture SAP Business Solutions Group to build a solution on S/4 HANA, spanning finance, sales logistics, supply chain and procurements. Turning to the geographic dimension of our business. I am delighted as we delivered another year of both strong and balanced growth around the world, with double-digit revenue growth in local currency for the second year in a row in both North America and Europe, as well as in many other largest countries. In North America, we delivered 11% growth in local currency, driven by the United States where we have now delivered double-digit growth of five of the last six years. In Europe, we grew even 11% in local currency, with double-digit growth in the UK, Italy, Switzerland, Spain and Germany, as well as high single-digit growth in France. And in growth markets, we grew revenue 8% in local currency, driven primarily by double-digit growth in Japan, as well as strong double-digit growth in China, India, South Africa and Mexico. Before I turn it back to David, I want to share a few thoughts on our ongoing imperative to drive innovation across our business and to create cutting-edge solutions for clients. In today’s fast changing environment where companies need to continually reinvent themselves, we are increasingly taking innovation-led approach to drive more value for our clients and help them invent the future. Our approach to innovation spans everything we do, from Accenture Research where we identify market and technology trends, to Accenture Ventures, where we invest in growth-stage companies; to the Accenture Labs, where we incubate and prototype new concepts through applied R&D, to Accenture Studios, where we build innovative solutions for clients with speed and agility. Our unique approach with the Accenture innovation architecture enables us to combine our capabilities across the company to invent, develop and deliver disruptive innovations for clients and to serve them faster. So as we enter fiscal year 2017, we have momentum in our business. And you can count on us to continue to invest and build our capabilities for the future in order to deliver strong, durable and profitable growth. With that, I will turn the call over to David, who will provide our business outlook for fiscal year 2017, and then take your questions. I look forward to speaking with you again next quarter. David, over to you. David Rowland : Thanks, Pierre. Let me now turn to our business outlook. For the first quarter of fiscal 2017, we expect revenues to be in the range of $8.4 billion to $8.65 billion. This assumes the impact of FX will be about flat compared to the first quarter of fiscal 2016 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year 2017, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be about flat compared to fiscal 2016. For the full fiscal 2017, we expect our net revenues to be in the range of 5% to 8% growth in local currency over fiscal 2016. For operating margin, we expect fiscal year 2017 to be 14.7% to 14.9%, a 10 to 30 basis point expansion over fiscal 2016 results. We expect our annual effective tax rate to be in the range of 22% to 24%. This range includes an estimated benefit of less than 2% from our early adoption of a new accounting standard on employee share-based payments. For earnings per share, we expect full-year diluted EPS for fiscal 2017 to be in the range of $5.75 to $5.98 or 8% to 12% growth over adjusted fiscal 2016 results. Now turning to cash flow. For the full fiscal 2017, we expect operating cash flow to be in the 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 the range of $4 billion to $4.3 billion. We expect to generate free cash flow in excess of net income. We expect to return at least $4.2 billion through dividends and share repurchases and also 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 that we can take your questions. KC? KC McClure : Thanks, David. As Pierre mentioned, David will be taking your questions. 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. Operator, would you provide instructions for those in the call, please? Operator : [Operator Instructions] Our first question will come from the line of Keith Bachman of BMO. Please go ahead. Keith Bachman : Hi. David Rowland : Hi, good morning, Keith. Keith Bachman : Good morning, sir. Thank you very much. Very strong results indeed, particularly in the climate that we’re in. The operating margin performance for the quarter, or for the year, is what I wanted to ask about. For FY2016, you guided to 10 to 30 basis points. You came in at the lower end of the range. What were the circumstances you think that contributed to that? And as you look to the guide, which is similar of 10 to 30 basis points of operating margin expansion, what are the forces that you think would cause some influence in that income? Are you thinking more about the low end of the range again? And just any color on that. Thanks very much. David Rowland : Great. Thank you for the question. As you’ve heard Pierre and me say several times over the last really couple of years, we are at a period that really calls for us making a significant level of investments in our business to differentiate ourselves in the marketplace and also position ourselves for long-term market leadership beyond just the year that we’re in. And when you look at the 10 to 30 basis point range, that’s a range that we feel very comfortable that we can deliver within. And I would say that the swing factor generally, and it was the case this year, was the extent to which we invested in the business. And as you know, just doing the simple math, the difference in 10 basis points is about $35 million. Keith Bachman : Okay. David Rowland : And so when you look at this year, we were very pleased with the overall level of investments that we made in the business and it was that marginally higher level of investments that we made. To be clear, our investments were significantly higher, I’m talking about on the margin, even a little higher than the otherwise would have been which resulted in 10 basis points versus 20 basis points. So it’s simply a reflection of the fact that we are managing a large investment pool in the business and on the margin, an additional $35 million one way or the other is the difference between, let’s say, being at the low end or the upper end, but we are quite pleased with the 10 basis points of expansion. We created significantly more expansion in our underlying profitability in order to fund really a material level of investments overall. So we are quite pleased with that dynamic in our results, if you will. Keith Bachman : Okay, great. And then my follow-up, if I could, as it relates to that, perhaps I missed it, but I don’t know if you said how much you’re contemplating that M&A would contribute to this year’s guidance? David Rowland : Yes, good question. I don’t think I’ve said it in the prepared remarks, but the answer is about 2%. Keith Bachman : Okay. Many thanks. Best of luck. David Rowland : Thank you very much. Operator : Our next question will come from the line of Sara Gubins of Bank of America Merrill Lynch. Please go ahead. Sara Gubins : Thanks. Good morning. David Rowland : Hi. Good morning, Sara. Sara Gubins : So last year, you started out at 5% to 8% constant currency revenue growth, and ended up above 10%. As you look to FY2017, I’m trying to get a sense of what could drive your revenue trend to be at the lower end of the outlook, and perhaps what could drive it above? And if you could talk about your expectations for digital revenue growth in FY2017 in The New, that would be great. Thanks. David Rowland : Great, thank you. So, let me just take a minute and just frame how we see the environment and then how that relates to our guidance. I think, first of all, and I don’t think it’s a surprise to anyone on this call, in balance, we see the overall macro environment being more volatile, let’s say, at this time than where it was a year-ago entering fiscal 2016. So we’d see a higher level of volatility overall in the macro environment for the reasons that this group understands very well. Having said that, in that context, our guidance assumes that the market growth, and when I reference market growth, I’m talking about the basket of publicly traded companies. We expect for purposes of managing our business and the outlook that the market growth is going to be very similar in 2017 to what we saw in 2016. And in 2016, to be clear, we saw organic growth in the basket of publicly traded companies of about 2.5%. Now just to pause on that point for a minute that means that in 2016, we had an extraordinary result of growing roughly three times the basket for the full fiscal year, which is really tremendous and a reflection of - the power of our strategy and our capabilities and the relevance of the work that we’re doing with our clients. The overall basket, including the inorganic, grew at about 4.5%. So the market environment that we see is organic of 2.5 overall growth, let’s say, a 4.5% in that range. Now offsetting that so a higher risk profile in the macro - the market growth, as I called out is the fact that we’re starting this year with a high level of confidence, we continued to see strong momentum in our business. And that’s a reflection of the things that we have done very uniquely and positioning our business for the market of today and the market that we see in the future. When you look at what we’ve done organizing around five distinct businesses that can operate and do operate as leaders in their own right individually, but also can come together to do transformational work for our clients in a highly differentiated way. When you look at the extent we have invested in rotating our business to The New, meeting those new and emerging needs of our clients. All of that grounded in our innovation and grounded in our significant industry differentiation through our operating groups and the skills we have there. All of that continues to come together in a powerful way, and we’re very comfortable with the momentum that we have going into the year, all that translates in the 5% to 8% growth. As always, the range represents what we think is the full range of possibilities, we always work hard everyday to be at the upper end of the range. Across the entire range, it would be higher than market growth than we would gain share. And if we were to land toward the upper end of the range, that would continue to be about double the rate of the market growth, of which would be quite a strong result. So hopefully, that gives you the context in terms of how we see the market and our guidance. Sara Gubins : Great. And then within that digital and The New, how are you expecting those to grow, given difficult comparisons but strong momentum? David Rowland : We’d see both of those continuing to grow at strong double-digit growth. They will grow significantly higher than the average of Accenture overall. As we said last year, I believe, I think I said either on this call or at IA day is that, while we are very confident in our positioning in The New and the three components, from a planning standpoint or from a guidance standpoint, it’s not prudent for us to assume that it’s going to grow 30 plus percent again, one-month into the year. So we have, let’s say a more practical view, but yet still a view of strong double-digit growth at this point. And as the market opportunity - to the extent it becomes a higher level of growth similar to what we saw this year, then we’ll ramp up our capability and meet that need just as we did in 2016. Sara Gubins : Thank you. David Rowland : Thank you. Operator : Our next question will come from the line of Tien-Tsin Huang of JPMorgan. Please go ahead. David Rowland : Hi, good morning, Tien-Tsin. Tien- Tsin Huang : Good morning. Thanks David. Just a follow-up to Sara’s question. I guess why might this year be different, in terms of what you might deliver, relative to your guidance? It sounds like a lot of confidence, as you said, macro is more volatile, but maybe the starting point is similar. Can you comment maybe on visibility, or anything that might differentiate this year versus last year, based on what you see? David Rowland : Well, as we start the year, maybe – let me answer that through the lens of our five operating groups and that might be helpful in terms of what might be different. If you look at our five operating groups against the 5% to 8% range, at the top end of the spectrum, if you will, you have products, which is the operating group that is positioned for the strongest level of growth. And we think it’s likely that products would deliver a level of growth that is above the range of 5% to 8% and really continue to lead the way for the growth in Accenture. Now will it be as high as it was in 2016? I don’t think anyone would expect us to assume a repeat of 18%, but yet it will continue to be very, very strong. On the other end of the spectrum, we have resources. And resources is really doing a brilliant job navigating what continues to be a very difficult environment. We do expect to see continued pressure, if you will, in energy and chemicals and natural resources, I would say no different than what we saw last year. We also continue to expect utilities to be a very strong performer for us. But on balance, when you net that together, we think it’s likely that Resources is going to be below that 5% to 8% range, still flat to positive growth, but below that range. And then in the middle, we have Financial Services, H&PS and CMT. And while we continue to expect strong growth for those three operating groups in that band of 5% to 8%, for different reasons, the growth will be, let’s say, lower than the strong growth that several of those operating groups delivered in 2016. Still very healthy growth, mind you, and growth that represents taking share in the case of all three of those. But at this point in our guidance, we’re not assuming that those three operating groups would deliver above the 8%. So when you say what’s different, with products, it’s more of the same, maybe not quite as strong as it was last year. Resources continues to have the headwinds with the two verticals in particular. And then the other three operating groups, we see right in that zone. And by the way, I think I might have said 18% for products, I meant to say 15%. I misspoke on that. So they were 15% for the year. Tien- Tsin Huang : Got it. That’s helpful. So maybe just as a follow-up, just to follow through with that, just thinking about the consulting versus outsourcing for fiscal 2017, or maybe just broadly speaking, strategy versus application services, operations. Any sort of a help you can give us there, David, on what that might look like? David Rowland : Yes, I would say that when you look out through the consulting and outsourcing lens first, so the type of work lens, we see the consulting being in the high single-digit growth, at the high single-digit level, so continued again very strong growth above the market, taking share. We see outsourcing as a type of work in the mid to high single digits. And those two combined support the 5% to 8% range. I think probably more interesting is to talk about it through the dimensions of our businesses. We see strategy and consulting combined in the mid to high single-digit range. And again, that would represent very strong growth in that segment of the market. We see application services in the mid single-digit range. We see operations in the high single-digit to low double-digit range. And again, in The New, as I mentioned, we see continued strong double-digit growth across all three components, but let’s say led by digital-related services. Tien- Tsin Huang : All right. Good stuff. Really appreciate it. Was good to hear Pierre’s voice. Thanks. David Rowland : Thank you. Tien- Tsin Huang : Thank you. Operator : Our next question will come from the line of Bryan Keane of Deutsche Bank. Please go ahead. David Rowland : Hey. Good morning, Bryan. Bryan Keane : Hey, David. How are you doing? Just wanted to ask, last quarter, you warned of European Financial Service weakness on the horizon, but it was actually a strength in the quarter. I think it grew double digits. So just curious on your outlook there in Europe Financial Services, and maybe just in general, a lot of headline risk in Financial Services these days. How do you see the environment going forward for you guys? David Rowland : Yes. First of all, let me say we were quite pleased with our growth in Financial Services in Europe. We have a very strong practice. We have a strong leadership, a great team broadly. And I think it just speaks again to the differentiation that we have, in this case, in Financial Services Europe, and the extent to which they are really bringing the full power of our strategy to serve our clients, which have a variety of needs. If I remember correctly, Pierre focused on a few demand drivers in Financial Services that continued to be present in the fourth quarter and we believe will continue to be present going forward. I mean, the first demand driver – first of all, the backdrop is, I think, as we know, Financial Services is a very technology-intensive sector, especially if you’re thinking about banking and capital markets, specifically. Within that, I would say the three demand drivers continue to be significant investment in digitizing the customer channels, so what we refer to, the sector refers to as distribution and marketing. There are significant investments to digitize the channel as a way to drive growth in the bank. Alongside that, for reasons that we understand, there’s significant focus on cost rationalization and increasing to a much higher level the cost efficiency of the bank, both to deal with, let’s say, the structural pressures of a lower interest rate environment, regulatory pressures, et cetera, but also to create capacity to invest for the growth through digitizing really the enterprise but especially the channel. And then a third driver would be risk and regulatory broadly, where we have a market-leading capability and that serves us very well. So when you look at the fourth quarter, all three of those things were at play globally but certainly in Europe. And we think we’re well positioned and we think that banks, in spite of these disruptive forces, continue to have the need to invest in transforming for profitability and investing for growth. And we are well positioned to help them with that. When you look at the backdrop of Brexit, specifically in Europe, we have not seen any material impact to date. We didn’t see that in the fourth quarter and we don’t see anything in the first quarter. Having said that, we along with everyone else continue to be very focused on it. The Brexit story, if you will, will play out in the months, if not years, to come. And so we watch that very closely. We’re not blind to the fact that, that could represent some risk. And we are working hard to anticipate those, should they occur, and then respond accordingly. Bryan Keane : Okay. Helpful. And then just quick follow-ups. The lower tax rate, is that sustainable going forward, or is that just a one-year impact? And then just any thoughts on gross headcount for the year? Thanks so much and congrats. David Rowland : Thank you very much. The tax rate - the accounting change for the tax rate for share-based compensation gives us a benefit because effectively we get a higher tax deduction when the share price at the time that a share is delivered is higher than the price at the time that the share was granted. And so in this environment, where we’ve had such strong appreciation in our share price, that created the tax benefit, which as I called out, was just under 2%. So to answer your question, will that continue over time? It will continue over time to the extent our share price continues to appreciate, such that our share price at the delivery date is higher than what it was at the time we granted. So you can take a point of view on where you think our share price will head, and then that would inform you as to whether or not that would benefit us going forward. On the headcount, was the second part of your question, as you look forward to next year, there is an interesting evolution, if you will, on how we talk about headcount even externally. And really, as you think about our focus on these five distinct businesses, each of which has a unique talent, strategy and supply demand model, it’s more nuanced, if you will, in terms of how we communicate headcount related data. And so what I would say in general is that we have a history of hiring to meet the demand that we see in the marketplace. We do it very effectively. Our utilization for many, many quarters has been managed really at industry-leading levels. And so as we look forward, our headcount is going to evolve in a way that meets the demand that we see in the market. And what we take comfort in is that we think talent management and our ability to access talent in the market is as good as anyone in our industry. And we feel very confident that we will secure the talent in the quantities we need to support the growth that we’ve provided for in our guidance. Bryan Keane : Okay. Thanks David. David Rowland : Okay. Thank you very much. Operator : Our next question will come from the line of David Togut of Evercore ISI. Please go ahead. David Rowland : Hi, good morning, David. David Togut : Good morning, David. Could you address your strategy to reinvent your core, and rotate the core toward digital, security and cloud over time? And in connection with that, are there any milestones we can track, just to measure your progress in this strategic transformation? David Rowland : Yes. So that’s a very good question, I’m glad you asked it. And so when you use the word core, just to level set everyone, you’re referring to that portion of our business that it is not in the roughly 40% we identify as in The New. So you are talking about the 60%. And I think the important point to make there and Pierre has made this point several times previously as well, is that our investment agenda and our innovation agenda covers the full scope of our business, including the 40% that we identify with The New and the 60% that we identify outside of The New. So again, we have a very vibrant business outside of that which we identify as being digital, cloud or security. So the point is, is that we do invest to maintain vibrancy in our core business. And our goal, just as it is in The New, is to grow our core faster than the market and take share. If you look at the year that we just completed, we estimate that our core grew – had positive growth, albeit in the single-digit, low-single-digit range as by design, the vast majority of our growth comes from new, which is the essence of our strategy. But nonetheless, our core business continued to grow and we estimate that it grew faster than the market and we took share. And we invest for that growth and we focus on it as a key part of our business. An example of that would be something that, again, I think, Pierre has referenced, Bhaskar Ghosh who leads technology has talked about this in different forums. But an example of that would be the investment that we’ve made in our myWizard, platform, which fundamentally reinvents, if you will, innovates around the way we do core application services work through the use of a automated tool that includes an intelligent agent or agents in the case of this tool, and really just helps us deliver application services work in a way that is more efficient and more effective. When you look at, for example some of the investments that we’ve made in our strategy and consulting business, while our strategy and consulting business is focused on The New, consistent with our strategy, there are parts of our strategy in consulting business that are not in that bucket that we call The New. When you look at the investments that we make in that part of our business, for example, the acquisition that we just announced of Kurt Salmon, which gives us an industry-leading strategy capability in the resell sector and it really strengthens our position there. Certainly, a part of that investment benefits us in The New, but there’s a part of that investment of that is the core strategy capability in retail that is part of the 60% that we benefit from as well. So we invest in both parts of the business and in both cases, our intent is to be a leader, to grow faster than the market and take share. David Togut : Thanks very much, David. My thoughts are with Pierre. David Rowland : Great. Thank you, David. Operator : Our next question will come from the line of Lisa Ellis of Bernstein. Please go ahead. David Rowland : Good morning, Lisa. How are you? Lisa Ellis : Hi, I am good. Thanks. Good morning, David. David Rowland : Good. Pierre Nanterme : Good morning. Lisa Ellis : All right. First one, can you give a little bit of color around how - where you’re seeing the maturity of some of the digital service lines at this point? Now that as you highlighted, they’re $9.5 billion in revenue, meaning, is there any way to broadly characterize the digital work into build or design type of work, versus where you’ve moved into full implementation or even ongoing run activities? David Rowland : Good question. And I have to say, thanks for not asking me the margin question first. You’ll ask that one, I’m sure. So Lisa, what I would say is that when you look at the maturity curve for The New, and I think this applies to digital, it applies to the each of the three components within digital that we talked about, analytics, mobility and Accenture Interactive, it applies to cloud adoption and it applies to security. I would say, across the board, universally, we are on the low end of the curve, if you will. Or to say differently, we are in the early innings of the adoption curve. And so these are ways that we think have a lot of runway in front of them. Paul Daugherty would give you a more eloquent view as our Chief Technology Officer, our Chief Technology Strategist. But I feel comfortable that he would say that, certainly this is a decade-long, if not beyond a decade-long adoption curve for these new technologies and really, the profound impact that they will each have on the way global businesses and governments operate. And so I would say we’re early stage in the adoption. And this wave has a long runway in front of it. Lisa Ellis : Okay. And then as a follow-up, just maybe coming at the momentum question from a little bit of a different angle. Why is it that you think that – at least the splits you were giving Tien-Tsin suggest that you at this point believe your growth may decelerate into this year, even though, as you highlighted, it’s still meaningfully higher than the overall market growth. Given the momentum, though, you’re describing, and the fact that these are in early stage of adoption, and The New is an increasingly large component of your base, why would you think the business would decelerate this year? David Rowland : Well, again, I think you have to look at the fact that – I want to make sure that in the way I answer that question that I start with the fact that we feel very good about the momentum in our business and we feel very good if we work within the range that we guided to, and that would represent, we think, market-leading performance. Now having said that, why would it be different? I don’t want this to sound negative because, in fact, we’re very positive. But when you think about month one of the quarter and when you think about the operating groups and the industries that have had really extraordinary double-digit growth, in many cases, not only for the last year, but for the last two years, right, as confident as we are in many of our industries, as we sit here in the first month of the year to assume that all of those industries and all of those geographic markets are going to continue at the same level of extraordinary double-digit growth for a third year in a row would just probably wouldn’t be prudent. Now does that mean that we don’t have confidence in our industries? No. Does that mean that our business runners aren’t working hard every day to hit the repeat button and do again what they’ve done in the last two years? Absolutely not. But Pierre and I have a responsibility to be balanced and prudent in the way we set our expectations externally. And that’s what’s reflected in our guidance. And again, that’s not to say that our guidance is conservative in any way because we don’t. We think it’s very good guidance in the context of the market growth and it’s entirely consistent with our strategy to be a leader and grow faster than the market. But if some of these industries have strong, but let’s say lower growth than they’ve had the last two years, then that would put us in the 5% to 8% range. And that is the possibility in several of our industries. Lisa Ellis : Terrific. Thank you. David Rowland : Thank you. Operator : Our next question will come from the line of Rod Bourgeois of DeepDive Equity Research. Please go ahead. David Rowland : Hey. Good morning, Rod. Rod Bourgeois : Hey, good morning. Hey, David. So just wanted to clarify a couple of things that seem to be assumptions in your guidance. If I understood your comments about the verticals correctly, it sounds like all of the verticals, except energy, could be somewhat weaker in its growth in fiscal 2017 versus 2016. And energy has been challenged, so it probably stays somewhat challenged. But the other verticals, it sounds like will decelerate. And then you also mentioned that you’re assuming the market rate of growth will hold up in FY2017 at the same rate as in FY2016. And so I just wanted to, one, clarify is that the assumption about the verticals, that they’ll generally be somewhat slower this year than last? And then on the market, I just want to understand the assumption that it will – the growth rate will hold up at its current level. What’s driving that assumption? David Rowland : Yes. So I’ll start at the end, and then work back. What’s driving that assumption is that we don’t see anything as we sit here today that would fundamentally change the dynamics that we see in the market, let’s say, as we look out over the next four quarters. We see more of the same. And what we see is an organic market that would continue to grow in that 2.5% range, which means that we are making our own market through our differentiation, the uniqueness of our strategy, leveraging the power of our investments to drive a level of organic growth that is meaningfully higher than that to take share. But we don’t see anything that would meaningfully change that underlying organic growth of about 2.5%. So in other words, we’re not speculating on – you pick your black swan of the day, we’re not speculating on some black swan event that would materially change the market. If that were to happen, all companies will be revisiting the impact of something like that, should it occur. In terms of the – again, I almost hate to use the word deceleration because in almost all cases, our growth ambitions for the vast majority of our verticals continue to be quite strong and well above the market, albeit at lower levels than, in many cases, the very, very strong double-digit growth we’ve had the last year, if not two years. And so deceleration, what I would say for many of our verticals, we’ve assumed lower but still strong growth is the way I would characterize it. Energy and chemicals and natural resources, we don’t see a catalyst for change. We think those industries are going to continue to be tougher, let’s say, continue to be tough as we go through the fiscal year. As I mentioned, we have seen some pressure in communications in Europe in particular. And although we are very pleased with our growth in Financial Services, in banking and capital markets specifically, I would say that is an industry that we are watching, through Richard Lumb’s leadership, we are watching very, very carefully and very closely. Rod Bourgeois : All right. Very helpful. And two very quick one. You mentioned the acquisition contribution should be around 2% this year. Could that be 3%? And then can you just comment on your DSO outlook? David Rowland : Yes. So the 2% would align very closely to an assumption that we spend about $1 billion, which is what we’ve assumed in our capital allocation strategy, if you will. Could it be higher? As Pierre and I have said, we have the willingness and the courage, if you will, and the capacity, the fire power, to spend more than $1 billion should we have the right opportunities. And if the right opportunities presented themselves, then we have no reservations, no concerns and complete flexibility to go above $1 billion if the circumstances were right. And so, in theory, could it go higher? It could go higher and we’ll just have to see how the year plays out. A lot of it has to do with the timing of when those would occur. Rod Bourgeois : Great. And then, yes, the DSO outlook. David Rowland : Yes. On DSOs, we are managing to have our DSOs in the 40-day range. We had been signaling that DSOs, really, for many years, that our DSOs would tick up, but still be industry-leading. And right now, we are assuming DSOs in the 40-day range for next year. Rod Bourgeois : Thanks. David Rowland : Thank you very much. KC McClure : Operator, we have time for one more question and then David will wrap up the call. Operator : All right. Our last question will come from the line of Mr. Darrin Peller of Barclays. Please go ahead sir. David Rowland : Hey. Good morning, Darrin. Darrin Peller : Good morning, David. Thanks for squeezing me in. And just a quick follow-up, first on the hiring efforts. Can you give us a little more color on the distribution in terms of GDN versus on-site? Just given where you were investing in digital, I would imagine it’s more distributed towards the on-site. How much has that changed over the past year? And then I just have one more quick follow-up. David Rowland : Yes, I would say that – I mean, just in terms of color, I would say that we are investing in talent acquisition literally in every major market that we have around the world. When you look at our five businesses, you can connect the dots and see where we have more, higher growth, let’s say, in strategy and consulting as an example, but not just limited to strategy and consulting, in digital, I might add. Certainly, a lot of that talent acquisition investment is in each of the markets that we operate in around the world. I would also point out though, the digital is – I’m sorry, the GDN also supports and is very integral to a big part of The New. And so we are investing in differentiated skills, obviously in cloud and in security, in digital in the GDN as well. But again, we’re very comfortable with our ability to acquire talent and to ramp that up as we need to as the market growth evolves throughout the year. Darrin Peller : Okay. And just for my quick follow-up, I mean it really did sound like, from the gist of all the questions on the call that, and all your answers, that you really are not seeing any sentiment shift around the financial services vertical just yet post-Brexit, or anything else from a macro standpoint, hitting it just yet. I know you’re growing over a larger base, so it’s understandable, it would be a little more you prudent on outlook. But is that a fair statement, that while we’ve heard a lot of your competitors calling out more conservatism or shift in strategy by their clients, you haven’t seen it because of your focus on digital? Maybe any other color? Thanks. David Rowland : Well, again I think just quickly, as we’re running out of time, I would say that I can’t comment on our competitors. What I can say is that the resiliency – so let me back up. A key tenet of our strategy, our growth strategy, is to create durability and resiliency in our business. And that is reflected in our focus across five businesses. It’s focused in our investments to lead in The New and it’s focused and it’s rooted in the focused, but diverse portfolio that we have across industries and across geographies. And whereas maybe some of our competitors, you can apply this to who you want, are more dependent on one or two or three verticals and one or two markets, that’s not the case with Accenture. And that is, in fact, the differentiator and probably colors our comments in our results versus some of our competitors, all of whom we respect, but yet we think we are differentiated for the reasons that I mentioned. Again, in addition to chemicals and energy and natural resources, we’ve got our eye on communications, in Europe in particular. And while we haven’t seen any impacts at this point in banking and capital markets, we’re not blind to the dynamics of the Brexit and how it could evolve. And Richard Lumb, who is our Group Chief Executive for Financial Services, is very focused on staying on top of that, and we’ll see how it plays out, but I would say, so far, so good. Darrin Peller : Okay. Thanks, David End of Q&A David Rowland : Right. Thank you very much. Okay, so let me just close out the call and thank everyone again for joining us on the call. Hope you found it helpful and insightful. As we enter fiscal 2017, we are very pleased with the ongoing momentum in our business, with the differentiated capabilities we are building, our continued rotation to The New and our disciplined management of the business, we are very confident in our ability to continue gaining market share and driving profitable growth. On behalf of Pierre and our entire leadership team, I want to thank all Accenture people around the world for their hard work, dedication and commitment to our clients in our business and to delivering another excellent year. We look forward to talking with you again next quarter. In the meantime, if you have any questions at all, please feel free to reach out to KC. Thank you. Operator : Ladies and gentlemen, that does conclude our conference call for today. On behalf of today’s panel. We’d like to thank you for your participation in today’s fourth quarter fiscal 2016 teleconference call. And thank you for using AT&T. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,016	4	2016Q4	2017Q1	2016-12-21	5.586	5.649	6.125	6.179	null	19.65	20.2	Executives: KC McClure - Managing Director and Head, IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Tien-Tsin Huang - JPMorgan James Friedman - Susquehanna Lisa Ellis - Bernstein Bryan Bergin - Cowen Ashwin Shirvaikar - Citi Frank Atkins - SunTrust Brian Essex - Morgan Stanley Jason Kupferberg - Jefferies Bryan Keane - Deutsche Bank Operator : 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. KC McClure : 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. Pierre Nanterme : 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. David Rowland : 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. Pierre Nanterme : 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. David Rowland : 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? KC McClure : 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 : [Operator Instructions] Your first question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Tien- Tsin Huang : 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. David Rowland : 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. Pierre Nanterme : 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. Tien- Tsin Huang : 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. David Rowland : 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. Operator : Your next question comes from the line of James Friedman from Susquehanna. Please go ahead. James Friedman : 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? David Rowland : 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. James Friedman : 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? Pierre Nanterme : 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. James Friedman : Thank you. Operator : Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead. Lisa Ellis : 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? Pierre Nanterme : 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. Lisa Ellis : 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? David Rowland : 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. Lisa Ellis : Thank you. Happy holidays guys. Operator : Your next question comes from the line of Bryan Bergin, Cowen. Please go ahead. Bryan Bergin : 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? David Rowland : Clients 2017 budgets versus last year… Bryan Bergin : Yes, so their outlook, and what you're seeing in their behavior to start? Pierre Nanterme : 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. Bryan Bergin : 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. David Rowland : 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. Bryan Bergin : Thanks guys. Pierre Nanterme : 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. Operator : Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : 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? David Rowland : 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. Ashwin Shirvaikar : Understood. Pierre Nanterme : 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. Ashwin Shirvaikar : 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? David Rowland : 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. Ashwin Shirvaikar : Understood. Thank you, guys. Operator : Your next question comes from the line of Frank Atkins from SunTrust. Please go ahead. Frank Atkins : 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? David Rowland : 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. Frank Atkins : 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? David Rowland : 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. Frank Atkins : Thank you very much. Operator : Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead. Brian Essex : 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? Pierre Nanterme : 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. Brian Essex : 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? Pierre Nanterme : 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. Brian Essex : Very helpful. Thank you very much. Operator : Your next question comes from the line of Jason Kupferberg from Jefferies. Please go ahead. Jason Kupferberg : 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? David Rowland : 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. Jason Kupferberg : 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? David Rowland : You might comment on your risk adjustment or things like this but… Pierre Nanterme : 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. Jason Kupferberg : Thanks. Very helpful. KC McClure : Greg, we have time for one more question and then Pierre will wrap up the call. Operator : Okay. That question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : 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? David Rowland : 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. Bryan Keane : 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. David Rowland : 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. Pierre Nanterme : 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. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 Eastern Time today through March 23. You may access the AT&T Teleconference replay system at any time by dialing 1800-475-6701 and entering the access code 405525. International participants dial 320-365-3844. Those numbers once again are 1800-475-6701 or 320-365-3844 with the access code 405525. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,017	1	2017Q1	2017Q2	2017-03-23	5.714	5.782	6.25	6.32	8.18	19.44	20.13	Executives: Angie Park - Managing Director and Head of Investor Relations Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Bryan Keane - Deutsche Bank Jim Schneider - Goldman Sachs Tien-Tsin Huang - JPMorgan David Grossman - Stifel Nicolaus & Company, Inc. Edward Caso - Wells Fargo Securities, LLC David Ridley-Lane - BofA Merrill Lynch Brian Essex - Morgan Stanley & Co. Joe Foresi - Cantor Fitzgerald Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture's Second Quarter Fiscal 2017 Earnings Conference Call. During today's conference all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Angie Park : Thank you, Shannon and thanks everyone for joining us today on our second quarter fiscal 2017 earnings announcement. As Shannon just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial Officer. We hope you've had an opportunity to review the News Release we issued a short time ago. Let me quickly outline the agenda for today's call. Pierre will begin with an overview of our results. David will take you through the financial details, including the income statement and balance sheet for the second quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the third quarter and full fiscal year 2017. We will then take your questions before Pierre provides a wrap up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on the call, including our business outlook are forward-looking and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's News Release and discussed in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed on this call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of the non-GAAP financial measures where appropriate to GAAP in our News Release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now let me turn the call over to Pierre. Pierre Nanterme : Thank you, Angie, and thanks everyone for joining us today. We are very pleased with our financial results for the second quarter and first half of fiscal year 2017. For the quarter, we again delivered broad based revenue growth across many dimensions of our business and we continued to gain significant market share. We see excellent demand for our services especially in high growth areas such as digital, cloud and security-related. Our very strong bookings culture both are relevant and success of our strategy to rotate our business to the new and support our confidence as we look ahead to the rest of the fiscal year. Here are a few highlights for the second quarter and year-to-date. We delivered very strong new bookings of $9.2 billion for the quarter and $17.5 billion for the first half. We grew revenue 6% in local currency for the quarter and 7% year-to-date with continued strong growth across many areas of our business. We delivered earnings per share of $1.33 which brings EPS for the first half of the year to $2.91 an 11% increase on an adjusted basis. Operating margin was 13.7% for the quarter and 14.7% for the six months an expansion of 20 basis points year-to-date. We generated free cash flow of $50 million for the quarter and $1 billion year-to-date. And we continue to return a substantial amount of cash to shareholders through share repurchases and dividends including more than $2 billion year-to-date. Today, we announced a semiannual cash dividend of $1.21 per share which would bring total dividend payments for the year to $2.42 per share a 10% increase over last year. Now with the first half of the year behind us I feel very good about our business. We see very strong demand in the marketplace for differentiated capabilities and remain confident in our ability to deliver our business outlook for the year. Now let me handover to David who will review the numbers in greater details. David, over to you. David Rowland : Thanks Pierre, and thanks all of you for joining us on today's call. Overall we delivered strong results in the second quarter which were aligned with our expectations and position us very well to achieve our full-year financial guidance. We continue to see favorable market conditions in most areas of our business especially as it relates to strong demand for digital, cloud, and security related services which placed us straight as a leader in innovating and leading in The New. Our second quarter and year-to-date results demonstrate our ability to continue to deliver on the essential elements of our formula for driving superior shareholder value. So before I get into the details let me summarize some of the major headlines. Net revenue growth in local currency is 6% in the second quarter and 7% year-to-date, continues to significantly outpace the market driven by double-digit growth in all three components of The New including digital, cloud, and security related services. Growth continues to be broad based with positive growth in the vast majority of our industries and geographic markets more than offsetting cyclical market pressures that continue in a few concentrated areas of our business specifically energy, chemicals, and natural resources and communications and media. Absent those concentrated areas of pressure, the majority of our business grew 9% on a quarter to date basis and 10% on a year-to-date basis. Operating margin of 13.7% for the quarter came in as expected and consistent with last year. Operating margin of 14.7% for the first half of the year represents 20 basis points of expansion. These results continue to reflect significant levels of investments in our business and our people to further enhance our differentiation and competitiveness in the marketplace. And on a year-to-date basis, we delivered 11% growth in earnings per share over fiscal 2016 adjusted EPS. Our free cash flow of $50 million in the quarter and over $1 billion year-to-date puts us on a trajectory to deliver on our annual guidance which reflects free cash flow in excess of net income and importantly we continue to execute against our strategic capital allocation objectives, first by investing over $800 million across 16 transactions in the first half of the year and second by returning roughly $2.2 billion to shareholders via dividends and share repurchases. So as Pierre said, we are pleased with our overall results so far this year and we're encouraged by the trends we see in the market and the potential for even stronger growth and momentum in the second half of the year. With that said, let's get into the details of the quarter starting with new bookings. New bookings were $9.2 billion for the quarter. Consulting bookings were $4.6 billion with a book to bill of 1.1 and outsourcing bookings were $4.6 billion with a book to bill of 1.2. We are very pleased with our bookings, which landed in the range we expected and represents the third highest level of new bookings over the past 10 quarters. From a business dimension perspective, we were pleased with our bookings in both strategy and consulting services combined and application services. And as you would expect digital, cloud and security related services continued to be an important theme in the work we contracted with our clients. Looking forward, we began the third quarter with a healthy pipeline and we believe we're positioned for continued strong bookings in the second half of the year. Turning now to revenues, net revenues for the quarter were $8.32 billion a 5% increase in USD, 6% local currency reflected in our foreign exchange headwind of approximately 2% consistent with the guidance provided last quarter. Our Consulting revenues for the quarter were $4.4 billion up 3% in USD and 5% local currency and our outsourcing revenues were $3.9 billion up 7% in USD and 8% in local currency. Looking at the trends in estimated revenue growth across our five business dimensions, growth was led by operations which posted double-digit growth for the fifth consecutive quarter. Application Services delivered mid single-digit growth and Strategy and Consulting Services combined grew low single-digits. Once again the dominant driver of our growth was continued strong double-digit growth in The New with all three components going double-digits as well. Taking a closer look at our operating results, Products our largest operating group led with 15% growth reflecting continued strong momentum in the business. Growth continued to be broad based with strong growth across all geographies and industries. Financial Services grew 8% in the quarter driven by double-digit growth in banking and capital markets globally and overall in both Europe and the growth markets. As expected, banking and capital markets in North America returned to positive growth this quarter. H&PS came in as expected at 2% growth with positive growth in both Health & Public Service globally and strong overall growth in both Europe and the growth markets. Overall growth in North America was flat. We expect H&PS a to deliver stronger growth in the second half of the year and to deliver full-year growth in the mid-single-digit range consistent with the comments I made in September. Communications, Media and Technology grew 1% reflecting solid positive growth in North America and double-digit growth in the growth markets partially offset by continued contraction in Europe. From an industry perspective, CMT was led by significant double-digit growth in software and platforms with positive growth in Electronics & High Tech. However, Communications and Media contracted on an overall basis primarily driven by our business in Europe. We expect the revenue growth in our European Communications & Media business will continue to be challenged for the rest of the year. Finally, Resources revenues decreased 1% in the quarter which is in the range we expected and the storyline remains the same. We continue to see strong growth in utilities which is more than offset by challenges in both Energy and Chemicals and Natural Resources, especially in North America. We expect our Resources group to continue to navigate a challenging environment, but to deliver positive growth in the second half of the year. Moving now to income statement, gross margin for the quarter was 30.1% compared to 29.8% in the same period last year. Sales and marketing expense for the quarter was 10.5% consistent with the same quarter last year. General and administrative expense was 5.9% compared to 5.7% for the same quarter last year. Operating income was $1.1 billion in second quarter reflecting a 13.7% operating margin consistent with quarter two last year. As a reminder, in the second quarter of last year we closed our Navitaire transaction which lowered our quarter two tax rate by 1.7% and increased net income by $495 million in diluted earnings per share by $0.74. The following comparisons exclude this impact and reflect adjusted results. Our effective tax rate for the quarter was 20.7% compared with an adjusted tax rate of 15.4% for the same period last year. Net income was $887 million for the second quarter compared with adjusted net income of $805 [ph] million for the same quarter last year. Our diluted earnings per share were $1.33 compared with adjusted EPS of a $1.34 in the second quarter last year. Days services outstanding were 42 days compared to 44 days last quarter and 39 days in the second quarter of last year. Free cash flow for the quarter was $50 million resulting from cash generated by operating activities of $155 million net of property and equipment additions of $104 million. Our cash balance at February 28 was $3.2 billion compared with $4.9 billion at August 31. With regards to our ongoing objective to return the cash to shareholders in the second quarter, we repurchased or redeemed 7 million shares for $816 million at an average share price of $117.27 per share. At February 28 we had approximately $4.3 billion of share repurchase authority remaining. As Pierre just mentioned, our Board of Directors declared a dividend of $1.21 per share representing a 10% increase over the dividend we paid in May of last year and this dividend will be paid on May 15, 2017. So at the halfway point in 2017 we feel good about our results and our positioning to deliver on our full year business outlook, we continue to be laser focused on driving our business to achieve our core financial objectives which include growing faster than the market, delivering modest margin expansion and strong EPS growth, investing at scale for market leadership, and generating strong cash flow which is both invested in the business and return to shareholders through disciplined and smart capital allocation. With that, let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our strong performance in the second quarter and year-to-date demonstrated that we are executing our strategy very well to position Accenture as the leading and most innovative professional services company for the new digital world. With 7% revenue growth in local currency in the first half of the fiscal year, we are clearly growing faster than the market. This is driven by our accelerated rotations to The New, digital, cloud and security related services which generated revenues of about $8 billion in the first half, more than 45% of total revenues and continue to grow at a strong double-digit rate. And I am particularly pleased that we have achieved these results while continuing to invest for the future in strategic acquisitions, in building assets and solutions and the skills of our people while at the same time returning substantial cash to shoulders. For Accenture, acquisitions are managing to drive organic growth above the market and we have stepped up our base of acquisitions investing more than $800 million of capital in the first half of the fiscal year. And in the second quarter alone we completed or announced 11 acquisitions to further strengthen our capabilities. In digital we are acquiring SinnerSchrader, one of the largest digital agencies in Germany. In cloud we acquired solid servision a leading ServiceNow provider. In security we acquired Endgame for the oil services business and announced the acquisition of iDefense and Arismore. Avanade, our majority owned joint venture with Microsoft acquired Infusion [ph] a leading provider of digital transformation services in the Microsoft ecosystem. And we completed three acquisitions that further enhanced our industry deep expertise, Investec Asset Management [ph], [indiscernible] Group Innovation [ph] and Davies Consulting in utilities. Across Accenture we are leveraging the capabilities we have acquired to bring even more innovation to clients and to drive growth and scale organically. With [indiscernible] which is part of Accenture digital we can with Shell [ph] and Jaguar Land Rover to create the first ever payment system in a car. This new innovation allows drivers to pay at sales stations using an in counter screen and app ultimately delivering a better and more convenient customer experience. In banking and capital markets our recent acquisitions of InvestTech and Beacon Consulting are further strengthening our asset management capabilities adding deep skills and industry expertise which has enabled us to win new business with top gear asset managers. And in security with the capability of FusionX which we acquired in 2015 we are helping a large international resource company secure millions of daily tractions providing advanced services such as security audit across 15 properties, digital identity management and rigorous testing to prevent cyber attacks. We also continue to make significant investments in our unique innovation architecture which integrates our capability across research, ventures, labs and studios to pioneer new ways of collaborating with clients to develop and deliver disruptive innovations. As part of our innovation led approach, we are opening new facilities around the world including several in just the last few months. In Dublin, we open The Dock our new multidisciplinary innovation R&D and incubation hub where all elements of our innovation architecture come to life. The Dock is a launch pad for our more than 200 researchers to innovate with clients and acquisition partners with a particular focus on artificial intelligence. In Hong Kong, we launched an Accenture Liquid Studio where we are bringing together end-to-end digital customer experience services for clients. In London and Singapore, we opened new Accenture Liquid Studios designed to help clients apply rapid development techniques like Agile methodologies and DevOps to quickly turn concepts into products. And finally in the United States, we are accelerating our innovation investment including 10 new innovation hubs. We just opened our first one in Houston enabling us to collaborate more closely with clients to co-create and scale innovative solutions. Turning to the geographic dimension of our business, I am going to comment on our result for both the quarter and the first half of the year. In North America, we grew revenues in local currency 4% for the quarter and 5% year-to-date driven by United States, where we continue to grow ahead of the market. And given our strong market position and pipeline we expect to see stronger growth in North America in the second half of the fiscal year. In Europe, we continue to grow significantly ahead of the market with 7% revenue growth in local currency for both the quarter and the first half driven primarily by double-digit growth in the United Kingdom, Germany and Switzerland. We are confident Europe will keep up the strong pace in the second half. And in growth markets we were very pleased with a 9% growth in local currency for the quarter and 10% year-to-date, led once again by very strong double-digit growth in Japan as well as strong growth in China and Australia. We expect growth markets to accelerate its growth in the second half. Before I turn it back to David, I want to share a few thoughts on our talent strategy to lead in The New. The large scale transformation of our business is requiring a very significant investment in our people to ensure they have the most relevant skills to serve our clients both today and in the future. We are proactively training and up scaling thousands of people in key areas such as cloud, artificial intelligence and robotics. In New IT alone which is all about new architectures, intelligence platforms and automation, we have already trained more than 70,000 people in just over a year. Our approach to continuously investing in the scales and capabilities of our people helps us meet the needs of our clients and enhances our ability to attract the very best talent in our industry. And that is why I'm very proud that Accenture was recently named one of the Fortune’s best companies to work for, for the ninth consecutive year. So with that, I will turn the call over to David to provide our updated business outlook. David? David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the third quarter of fiscal ‘17 we expect revenues to be in the range of $8.65 billion to $8.90 billion. This assumes the impact of FX will be negative 2.5% compared to the third quarter of fiscal '16 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year '17 based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollars will be negative 2% compared to fiscal '16. For the full fiscal '17, we now expect our net revenue to be in the range of 6% to 8% growth in local currency over fiscal '16. Before I continue with our business outlook, as a reminder, in March 2016, we announced the termination of our U.S. pension plan. We expect to record a non-cash charge of approximately $425 million upon final settlement in quarter three 2017. We will provide both GAAP and adjusted quarter three and year-to-date results. For operating margin on an adjusted basis, we continue to expect fiscal '17 to be 14.7% to 14.9%, a 10 to 30 basis point expansion over fiscal '16 results. We continue to expect our annual effective tax rate on an adjusted basis to be in the range of 22% to 24%. For earnings per share on an adjusted basis and reflecting our updated revenue range, we now expect full year diluted EPS for fiscal '17 to be in the range of $5.70 to $5.87 or 7% to 10% growth over adjusted fiscal '16 results. For the full fiscal '17, we continue to expect operating cash flow to be in a range of $4.6 billion to $4.9 billion, property and equipment additions to be approximately $600 million and free cash flow to be in a range of $4 billion to $4.3 billion. We continue to expect to return at least $4.2 billion through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by slightly more than 1% as we remain committed to returning a substantial portion of cash to our shareholders. And finally for the full year, we now expect to invest in the range of $1.5 billion in acquisitions. With that let's open it up so we can take your questions. Angie? Angie Park : Thank you, David. I would ask that you please keep to one question and one followup to allow as many participants as possible to ask a question. Shannon, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] And our first question is from the line of Bryan Keane with Deutsche Bank. Please go ahead. David Rowland : Hi, good morning Bryan. Bryan Keane : Hi, good morning David. I just wanted to ask on bookings it came in at $9.2 billion. I know the Street was at $10 billion and $9.2 billion I think is down 3% year-over-year, but it sounds like that was within the range of your expectations. So just trying to gauge was bookings a little bit lighter than you expected or was Street just too aggressive in their assumptions? And then just secondly on the potential for stronger growth in second half ‘17 may be you can just give us an idea of what that looks like between consulting and outsourcing, in particular consulting slowed a little bit this quarter, but maybe it sounds like it’s going to pick up? Thanks so much. David Rowland : Yes, so first of all on the bookings – putting aside the consensus estimate what I had signaled last quarter that we felt confident that bookings would be stronger in the second quarter than the first quarter beginning pattern of building through the year which is typically what we've seen. And so we ended up with about $1 billion more in bookings in the second quarter versus the first quarter that’s consistent with the comments that I made and it's in the range that we expected. I mean, as you know there is – you know in any particular quarter there are few deals that can fall on either side of the line, so we will always have kind of a range that we expect to land in and we are very solidly in the range that we expected. And for the full year, we’re very optimistic about our bookings. As I said we began the third quarter second half of the year with a healthy pipeline and we expect to see continued strong bookings in the third and fourth quarter supporting our revenue guidance. In terms of the growth, but out type of work which I think was the other part of your question is that right? I guess he has dropped off the line, so for the full year we expect consulting type of work growth to be in the mid to high single digits and we expect outsourcing type of work growth to be in the mid to high single-digits as well. If you look at it by business dimension, which I also comment on, we think strategy and consulting services combined will be in the mid-single digit range. So we do see an increase in the growth rate of our strategy and consulting services combined in the second half of the year with the application services in the mid-single digit range we see operations in the double-digit range, and of course The New will continue to grow very strong double-digit growth throughout this year. Bryan Keane : Okay, thanks so much. David Rowland : All right. Thank you, Brian. Operator : And the next question comes from the line of Jim Schneider with Goldman Sachs. Please go ahead. Jim Schneider : Good morning, thanks for taking my question. I was wondering if. Hey David, I was wondering may be to followup on a previous question, you delivered pretty good 6% growth this quarter and there was little bit of last quarter came, so I guess, can you maybe talk about, and you talked about the acceleration in the back half of the year. So can you maybe talk about some of the factors that you are seeing that would raise - leave you to not raise your revenue outlook for the full year given the commentary you just made about the back half? David Rowland : Yes, so let me give a few comments and Pierre will perhaps want to make some comments as well from his perspective. So, let me just start, when we provided full year guidance of 5 to 8 we really entered the year with one possible scenario where the growth in the first half of the year would be relatively speaking, lower than the second half of the year and that scenario in fact is continuing to play out. As we always say, we started the year, although we had a range of 5 to 8 as we say, working hard each and every day to be at the upper end of the range and that is the, it's still our focus. In terms of what's underneath that, I mean, there's a couple of ways I could kind of help you understand the way we look at the first half versus the second half of the year. But one way is through the lens of what I have called out as these three concentrated areas of pressure which make up 15% to 18% of our revenue overall. And when you look at those three areas, energy, chemicals, natural resources and communications and media two of those three areas we see and we believe we will see positive growth in the second half of the year relative to where they were in the first half of the year and we have some confidence in that. Beyond that when you look at the rest of our business, which is growing 10% on a year-to-date basis, even within that we see certain areas of our business that did have positive growth in the first half of the year, but we expect will have even more positive growth in the second half of the year and an industry that comes to mind is health, for example, which has been lower in North America, but we expect will be stronger in the second half of the year, more in kind of the typical growth rates that we expect for health. So overall, the year is really playing out as we expected. We continue to work hard, to travel land in the upper end of our range as we always do, supporting our confidence level in the second half of the year we narrowed the range to 6 to 8. Pierre Nanterme : Yes, it's hard to be a little bit of additional very well, I mean, to put it very simply we feel very good for the second half of the year. That's it, based on stocks. We have very good bookings, we have good pipeline. We have great momentum in most part of our business, that will give you a clue. We are covering 13 industries. We're big if you well, 13 industries, of these 13 industries 10 are positive and on the 10, six are high single, when I say high single is one is at 9.5, that’s 1 to 10 for simplicity, six would be the double digits. So you could only be positive when you see such momentum. Indeed, we have three very specific situations, and frankly these three situations at least two are linked to some client situations where indeed the business has been slowing down for absolutely good and valid reasons and we have evidence that the two industries in resources [indiscernible] and energy will be backed in the second half of the year. So I’m extremely positive for the second part of the year. David Rowland : Okay? Jim thanks. Jim Schneider : Yes. Operator : The next question is from the line of Tien-Tsin Huang with JPMorgan. Please go ahead with your question. David Rowland : Hi, good morning Tien-Tsin, how are you? Tien- Tsin Huang : I’m good, thanks for taking my question. David Rowland : Somebody told me you are in Hawaii this morning, so I guess it’s early for you huh? Tien- Tsin Huang : Its, yes 2 :30 not too bad, I’m sitting outside. David Rowland : Pierre said he appreciates the commitment, you may not… Tien- Tsin Huang : Well, not too bad sitting outside the wind feels good. Well that's been your loss so that's the good way to take my mind of things and focus on Accenture. I'll ask about, I guess you just talked about the three areas of pressure. Some of them are linked to client situations. I'm curious if you have been able to replenish your pipeline or are you seeing just comps improve or you are actually selling into those existing clients? Just trying to understand how you're able to sort of remix out of the troubled area and then see improvement there does that make sense? David Rowland : Yes, I would say it’s a combination of the two. I mean, just to be blunt it is a combination of the two. There is a benefit from the comps getting easier and that's just the math, but more importantly, there are really underlying fundamental improvements that we see and the business activity, the dialog that we're having with our clients. The investment and digitization in addition to the kind of the cost rationalization focus that those industries have had for so many quarters now. And so the comps are part of it, but there is some fundamental improvement in the business, a lot of green shoots that we see that I think have a much more optimistic about the trajectory. Pierre Nanterme : And I would add, if you look at resources, which has been one of the area of watch carefully again that too tough because you are not mentioning utilities. Our utilities business is continued growing double-digits. So this one is on reasonably good fire and we're doing very well, because this industry rotating rapidly to The New and you have a direct correlation in the business with the rotation to The New from our clients and the performance of these industries. This is a simple as this. And now it is back and I think when I look at the three energy and then you have CNR, chemical and natural resources CNR being the smallest of the three to be clear. And so energy is very important moving forward and we are getting more and more evidence that energy would perform much better in the second part of the year. Yes. Tien- Tsin Huang : I see, okay just, just let me follow up and just the M&A contribution in the quarter and for the year, it sounds like you upped the spend targets to billion and a half. David Rowland : Yes, for the full year we continue to expect to be in the range of 2%, but if you peel it back H1 is, let's say closer to 1.5% and H2 would be closer to 2.5% and so in the second half of the year we will see an additional contribution in inorganic relative to H1, but for the full year it will still be in the 2% rang. The additional spend up to$1.5 billion Tien-Tsin, a lot of that will happen in the fourth quarter and the revenue impact of those transactions is much more relevant to FY '18 than it would be FY '17. Tien- Tsin Huang : Got it. Got it. Thank you so much. David Rowland : Okay, thank you. Operator : And the next question is from the line of David Grossman with Stifel Financial. Please go ahead with your question. David Rowland : Good morning David. David Grossman : Good morning. So I know there's been already several questions about growth, but if you look back consulting growth over the last four years has been pretty lumpy right, 13-14 relatively weak 15 and 16 relatively strong and this year it is falling somewhere in between. And I know we’ve had some fairly significant technology cycles as well as peers had outlined some pretty significant industry cycles impacting growth for the entire industry. But can you help us think through what the growth in the consulting business should really look like on a normalized basis if there really is such a thing, recognizing that you've got a portfolio and there's always going be pluses and minuses each year? David Rowland : Yes. I would say on a normalized basis, consulting and strategy services combined would be in the mid-single digit kind of range to let's say high single-digit depending on the cycle that we're in. So it's going to be a mid to high single-digit contributor across our portfolio of businesses. I mean the consulting growth to be clear as well is connected to this dynamic that we've talked about with our overall growth, meaning that if you look at these three industries that are contracting and primarily because of the cyclical pressures that hasn't had an impact in recent quarters in particular on our consulting and strategy growth rate. And we think that drag, if you will, that we've seen over the last, let’s take a last few quarters, we will start to mitigate some in the second half of the year. We're also making investments in our consulting business which starts to help drive our growth rate in the second half of the year and beyond as well. Pierre Nanterme : Yes, absolutely, I mean the line, the direction should be mid-to-high single-digit. We believe this is where the consulting business should be. Sometimes they're going to be higher than this because you have a combination of good factors and sometimes you just a bit behind and here we have this combination of these three situations, creating a disproportionate drag on our consulting. So as we mentioned before, definitely two of the three will get back and so the consulting associated will get back as well. On the other side of the spectrum, we are not only investing in what we call in The New digital, cloud and security, but we, as you know, putting some investments in building extremely deep skills in our yards where we believe there could be higher gross in a very specific way. You've seen the acquisition of [indiscernible] a premium brand in retail North America. We are doing the same in aviation in very deep skills in investment management where we believe it's going to be a great market and we are making acquisition there on the very targeted basis so, I'm extremely confident that the consulting will be back. David Grossman : Right. And if I could just ask a quick followup to your comment about rescaling, obviously the pace and breadth of the current cycle has driven the need to rescale at a faster than normal pace. So that aside is it fair to expect after this year that the pace of acquisitions would continue to contribute this 2% rate of growth or would you expect that to come back a little bit as the cycle matures? Pierre Nanterme : Yes, I mean we're putting very significant definition on the skills of our people. I mean we just brought 400,000 mark in terms of people and we want to have 400,000 talented people and by talented people, I mean having the right skills this is what we mean by talented people, the right skills for today and more important, the right skill for tomorrow. So what we did and not starting now, but starting years ago is to make sure that in trading and indication, we are investing significantly. I think the number is public. We are roughly investing $900 million in training and education to make sure that we have the best skilled people and will bode us well to attract the best talent. So we're combining our organic rescaling if you will $900 million we have digitalized all our training to make sure that our cost of training is extremely efficient. And I would just impress frankly to recognize my friend Bhaskar Ghosh on what he has been doing with our Accenture Technology business in rescaling last year and what we call New IT 70,000 people. He is managing roughly 200,000 people, Bhaskar roughly if I may say. And the goal for us is to scale 100% of these people over three years, 70,000 plus, 70,000 plus, 70,000. In addition, we are recruiting through acquisitions very deep skills, very deep skills, we believe it's going to take too long to grow organic. And so we have a good, I think a two pronged strategy, if you will, investing in our people to make them relevant and I think this is something we all talk like to our people. We have a responsibility, I feel that way, I have the responsibility to make them relevant for the future and then complement with high notch, iconic talent we’re getting from the market. So we have a kind of perfect blend. David Grossman : Very good, thank you. David Rowland : Alright, thank you, David. Operator : The next question is from the line of Edward Caso with Wells Fargo. Please proceed with your question. David Rowland : Good morning Ed. Edward Caso : Good morning. I'm only on the East Coast, so not too bad off here. David Rowland : We appreciate your commitment as well, thanks a lot. Edward Caso : Thank you. My question is really around robotics and artificial intelligence from two dimensions. How much are you applying that to your own business to maybe delink the little bit revenue from people growth and how much are you helping your clients and at what pace is it coming on? Thanks. Pierre Nanterme : Yes, thanks for the question and in answer to your question number one is extensively and answer to question number two is extensively. I mean what we are especially in Accenture Technology and in Accenture Operations and of course in Accenture Digital, we have now infused in Accenture Technology all new capabilities called for us intelligent platforms. The name we are using, the public name is My Wizard. My Wizard is to first in that category of intelligent platform, so you can develop code using more and more intelligent virtual agents. So we’re doing that massively, but it's not enough. We’re indeed applying to Accenture Technology, technology delivery centers and more important to Accenture Operations in our BPO centers RPAs, I mean Robotic Process Automations that we are executing for Accenture and it’s interesting to see that many clients are visiting us and considering Accenture of now the benchmark and they are learning from what we do to apply to clients. So, extensively in Accenture because the name of the game is not labor, is productivity and that's always been the name of the game in Accenture. So, we want to operate at maximum productivity and efficiency with talented people, that's what we have in mind. And as you said, starting to see in some parts of our BPO business, the de-correlation between revenue and labor, and we believe strongly that the combination of artificial intelligence, machine learning, Robotic Process Automation in the coming five years will make a significant difference in this correlation between labor to revenue. From a client standpoint huge demand. Yes, I've just been pitching RPA and closing RPA deals last week to just to give you so, it's extremely relevant why because you know the clients have generally felt the same as we said I remember in one of our IR day, digitalization and rationalization. Digitalization to create new business model and all the architecture we have been putting in place in The New is resonating with that with Accenture active mobility, analytics, cloud and security and rationalization up, is the art of rationalization for robotics and automation and the demand is just growing and we are very well positioned. Edward Caso : My other question is on the benefit side of your pension charge, what kind of in basis points contribution to operating margin will that drive in fiscal 2018? Thanks. David Rowland : It's not material. And I mean in the scheme of Accenture, the benefits that we're deriving from doing this are not that material in terms of the bottom line. Edward Caso : Thank you. David Rowland : Thank you. Operator : The next question is from the line of David Ridley-Lane with Bank of America. Please proceed with your question. David Rowland : Good morning David. David Ridley-Lane: Sure, thank you. Good morning. I did want to maybe touching on that last question, I know you did not manage to gross margin, but the year-to-date gross margin expansion is notable given the longer term trends. Are you seeing the benefit of automation show up there or is this driven more from the revenue mixed shift towards digital? Just trying to get a sense of, is this theme of automation, Robotic Process Automation helping on the gross margin today? David Rowland : Yes, it is so, most of, by the way, gross margin, let me say that even though gross margin has looked at the last two quarters stayed same, for many reasons we've explained, we really focus more on operating margin. Having so that your question, the big driver I think when you look at the first two quarters has been improvement in our contract profitability. So, our cost to serve clients is one of the bigger major components in our, in our gross margin and we have seen improvements in contract profitability which reflects broadly, some of the improvements we've seen in pricing. It reflects, there are some mixed shift as we would say we have a higher percentage of higher value kind of added services even higher percentage of those that type of work, which includes digital, but not limited to digital in the mix, et cetera, and as well just the overall efficiency of our payroll structure, which is of course the biggest driver of our cost overall. And so it's more about contract profitability and managing our payroll efficiency with a high at a high level of efficiency. Is automation in the mix of our improved contract profitability? It is, but in no way would that be a dominant driver. It's in the mix, but with many other things as well. David Ridley-Lane: And then just as a quick one, do you see any drag from regulatory uncertainty among your U.S. health insurance clients or maybe said differently, since you expect an acceleration there, what would be the main drivers to get to that? David Rowland : We did see an impact in the pace of decision making. When you look back now with the, in the rear view mirror, we did see an impact in the pace of decision making and health in North America during the first half of the year. We believe and we've got fact points, intangible evidence that we would point to that that slower pace of decision making is behind us and that as we've now turned into the new calendar year, we are every month because we're a month into the new administration then the decision making has resumed at normal levels and that's part of the reason why we are more, why we are positive on improved growth rates in the second half of the year. So we did see an impact in the first half of the year. We believe that that's largely behind us. Okay? Thank you, David. Operator : And the next question is from the line of Brian Essex with Morgan Stanley. Please go ahead with your question. Brian Essex : Hi, good morning and thank you for taking the question. I was wondering if you can maybe dig in a little bit to banking, financial services, you called out North American and Capital Markets mix improving maybe could you, can you provide a little bit of color behind the improvement in that business and what the primary drivers of that improvement might be? Pierre Nanterme : Yes, we I mean all financial services is doing very well. I mean we have been posting I think 8% growth in the… David Rowland : Yes, banking and capital markets is double-digits. Pierre Nanterme : Is double digit, yes. So I mean we're doing very well. In North America more specially we're starting to see again more demand in The New. I mean secured and we are working in think you are more diversified portfolio of clients and not only the kind of big category leaders if you will due to the more significant regionalization of our business in the United States where we expect great benefits starting in H2. And in addition as I mentioned especially in investment management, which is part of capital Market we've made a few acquisitions, you've seen Beacon and they are providing as well deep skills. So again, as in everything it’s a combination of two or three factors you're putting together to create growth and we see some more optimism as well from clients linked to the expected deregulation of some part of their business. So, all of this put together, is creating an environment which is getting better. Brian Essex : Great, that's very helpful. Maybe as a follow-up could I ask about Accenture Interactive and it seems kind of interesting moves in the press recently there, how big is that business and is that primarily CMT focused or how do you plan to kind of weave that in with your digital aspiration? Pierre Nanterme : Yes, I’m extremely pleased with Accenture Interactive and you are giving me the opportunity to recognize the leader of Accenture Interactive and you are giving me the opportunity to recognize the leader of Accenture Interactive Brian Whipple, who is just doing a great job in leading that part of the business. In less than only seven years or something like this we created the largest digital pure player in digital marketing. So the digital agency of Accenture is now one of the largest and a category leader. We are leading in digital design, especially after the acquisition of [indiscernible] and many other acquisitions. The last one being the Karmarama in the U.K., which is a premium independent, the best independent company in the U.K. Digital production, you remember the acquisition of Aventa [ph] some years ago. Digital commerce which of course is very important on the back of the acquisition of Equity we made in the U.S., some years ago and all what we're doing in terms of customer analytics. So we were very pleased that last year Ad Age ranked Accenture Interactive number one. And for us it's a very critical milestone. We see more and more clients in detailing from the so called holding companies to Accenture Interactive and our regulatory product we are very close to $6 billion in Accenture Active making us a category leader. So, couldn't be more pleased with Accenture Interactive because, sorry to elaborate a bit I know - I'm passionate about this so, I'm sharing my passion with you. The business in the future will be more and more driven by experience and design of new capabilities, of new products, of new ways of engaging with the customer, consumer, patients, employees. So, for us it was absolutely critical to put on the top of all services the experience, these design led, experience led, kind of capability and just to give you that’s a point I think we acquired [indiscernible] 150 people roughly, 150, 180 something like this less than 200. Now we're going to crack the 800 people being showed, making certainly sure one of the largest pure player in digital creative design, so that's what we do and we're pleased. Brian Essex : Well, it is quite a bit larger than we last heard, so it's great to hear, very helpful. Thank you. Pierre Nanterme : This is what we like to be. I mean we - in our rotation to The New and sorry to be too long about it, in our rotation to The New in interactive mobility edge cloud and security, we want not only to be the number one if you addition this all - this is where we go with our $8 billion in H1 only, but we want to be number one in each of the five. That's what we mean by scaling to lead and this is what we are doing relentlessly. Angie Park : Shannon, we have time for one more question and then Pierre will wrap up the call. Operator : Thank you. And our final question comes from the line of Joe Foresi with Cantor Fitzgerald. Please go ahead with your question. Joe Foresi : Hello. So I guess, what inning do you think digital might be in and what's the next phase of the digital movement? David Rowland : It's, I mean I would say that the Digital Wave is still and your baseball analogy I would say it is still in the early innings. I mean it's, there is a, if you talked about in terms of the majority curve, it is low on the majority curve. There is a ways to go. Pierre Nanterme : Yes, early days. David Rowland : Yes. Pierre Nanterme : If you look at it and of course some capabilities are more mature than the others and when we're putting that Accenture framework we said we got three ways. I mean the digital consumer and this way you got maturing a lot because I mean you see this is totally where we are doing the majority of Accenture Interactive business of around $6 billion. Then you have the digital enterprise, how you digitalize all the parts on the enterprise and here the robotics and the automation, will bring a lot, so I think this is coming and then what we are calling digital operations and IOT and this is nascent to be on us and that might be certainly the biggest wave of the three. And so we are positioning Accenture already in what we’re calling industry X.0. We are probably 4.0 as we speak, but that will be 5.0, 6.0 and we’re positioning a lot Accenture of mobility, connected platform, Internet Of Things. We have already developed many partnerships in the ecosystem with OEM providers to extend our reach to this industrial internet. We have labs. I am thinking about what we have in Bangalore, what we have in Beijing where we are developing very deep industry solutions in the context of the IOT. So it’s early days, I mean it’s going to be a wave for probably a couple of decades. Joe Foresi : Okay. And then just as a quick followup how is competition in outsourcing particular pricing? Thanks. David Rowland : I would say – really no notable change in the competitive landscape in outsourcing if you’re maybe asking specifically about the application maintenance piece of our application services, that continues to be a very, very competitive pricing environment. So that’s more of the same and I would say if you look at BPO and another big piece of outsourcing I would say no notable change. Pierre Nanterme : So no notable change, but some at Accenture, again because if there is something we hate in our company is commoditization of services. So we’re fighting against commoditization always to move and to rotate to higher value services. The business you’re mentioning is subject to commoditization at great pace. Our answer to fight against commoditization has been to infuse as I mentioned before through Bhaskar Ghosh and Debbie Polishook leading Accenture technology in our country operations, so a lot of robotics, a lot of automation, less labor arbitrage, more technology, more intelligence. And so indeed, we want to make these activities more tech automated led, less labor intensive like many of our competitors been doing and we are following a very different trajectory. Joe Foresi : Thanks. Pierre Nanterme : Okay it’s time to wrap up. Thanks a lot you have been so patient with us. Thanks again for joining us on the call today. As you can tell and have heard from David and I, we are very confident in our ability to deliver another strong year in fiscal year 2017 to continue gaining significant market share as we do. To even further accelerate our rotation to new innovative services and at the same time as we are investing significantly for the future, continuing delivering value for our clients, our people and our shareholders. At the same time, we transform Accenture to be even more successful. We look forward to talking with you again next quarter. In the meantime, if you have any questions feel free to call Angie and her team. All the best and talk to you very soon. Operator : Ladies and gentlemen, this conference will be available for playback beginning today at 10 :30 a.m. Eastern Time running through Thursday June 22, 2017 at midnight Eastern. You may access the AT&T playback service by dialing 1-800-475-6701 and entering the access code of 418844. International participants please dial 320-365-3844 with the access code of 418844. Once again this conference will be available for playback beginning today at 10 :30 a.m. Eastern Time running through Thursday, June 22, 2017 at midnight Eastern Time. You may access the AT&T playback service by dialing 1-800-475-6701. International participants please dial 320-365-3844 with the access code of 418844. That does conclude our conference for today. Thank you for your participation and for using AT&T. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,017	2	2017Q2	2017Q3	2017-06-22	5.871	5.947	6.414	6.506	8.18	20.21	20.72	Executives: Angie Park - MD and Head, Investor Relations Pierre Nanterme - Chairman and CEO David P. Rowland - CFO Analysts : Tien-Tsin Huang - JPMorgan Edward Caso - Wells Fargo Securities, LLC Bryan Bergin - Cowen & Company Lisa Ellis - Bernstein Bryan Keane - Deutsche Bank Jim Schneider - Goldman Sachs David Koning - Robert W. Baird & Company Operator : Ladies and gentlemen, thank you for standing by and welcome to Accenture's Third Quarter Fiscal 2017 Earnings Call. At this time all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. And as a reminder, today's conference is being recorded. I would now like to turn the conference over to Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Angie Park : Thank you, Ryan and thanks everyone for joining us today on our third quarter fiscal 2017 earnings announcement. As Ryan just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial Officer. We hope you've had an opportunity to review the News Release we issued a short time ago. Let me quickly outline the agenda for today's call. Pierre will begin with an overview of our results. David will take you through the financial details, including the income statement and balance sheet for the third quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the fourth quarter and full fiscal year 2017. We will then take your questions before Pierre provides a wrap up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on 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 on this call. During today's call, 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. Pierre Nanterme : Thank you Angie and thanks everyone for joining us today. This was not a strong quarter for Accenture. We delivered revenue growth in the upper end of our guided range and again gained significant market share. I am particularly pleased with our very strong new bookings for the quarter and year-to-date which demonstrates that our services and capabilities continue to be both highly relevant to our clients and very differentiated in the marketplace. We generated very strong cash flow for the quarter and returned substantial cash to shareholders all the while continuing to make significant investments to drive future growth. Here are a few highlights for the quarter. We delivered excellent new bookings of $9.8 billion. We grew revenues of 7% in local currency to $8.9 billion with broad based growth once again across the different dimensions of our business. We delivered earnings per share of $1.52 on an adjusted basis, an 8% increase. Operating margin was 15.5% on an adjusted basis, consistent with the third quarter last year. We generated strong free cash flow $1.7 billion, and we returned approximately $1.4 billion in cash to shareholders through share repurchases and the payment of our semiannual dividend. So we had another good quarter, and as we enter the fourth quarter I feel very confident that we are well positioned to deliver our business outlook for the year. Now let me hand over to David who will review the numbers in greater detail. David, over to you. David P. Rowland: Thanks Pierre and thanks to all of you for joining us on today's call. As Pierre mentioned, we were pleased with our third quarter results which were in the range we expected and position us very well to achieve our full year financial guidance. Before I get into the details of the quarter, I thought it would be useful to highlight how we're delivering on an essential aspect of our growth strategy and our model for driving superior shareholder value. You have heard me saying many times previously that our growth strategy was conceived with an important objective in mind, which is to create durability in our revenue growth at a level which is consistently above market thereby taking share and strengthening our position as a market leader. And against that objective, we've created a diverse business that spans 13 industry groups, 15 geographic markets, 5 businesses which has created a powerful growth model in both scale and durability. Our third quarter and year-to-date results are good illustration of our growth model in action where being a market leader across many dimensions of the market has resulted in consistent growth levels that we estimate are more than two times the rate of growth of the basket of publicly traded companies. And importantly, we delivered these results in a highly dynamic environment which is exactly the way our growth strategy is intended to work. With that said, we will also comment on a few of the highlights and the context of our three financial imperatives for driving shareholder value. Net revenue growth of 7% in local currency in the third quarter continued to be highlighted by strong double-digit growth in all three areas of The New including digital cloud and security related services. We continued to see positive growth in most geographic markets and industries and while we saw encouraging signs in several areas of pressure previously noted we did experience lower than expected revenues in health and public service in North America. At the same time, we continue to be very pleased with momentum in Europe in the growth markets which combined delivered 10% growth in the quarter. Operating margin on an adjusted basis of 15.5% in the third quarter was consistent with last year and resulted in 20 basis points of expansion on a year-to-date basis. This level of margin expansion continues to include significant investments in our business and our people, and on a year-to-date basis we have delivered very strong earnings per share growth of 10% over FY2016 adjusted EPS, and free cash flow of $1.7 billion in the quarter and $2.7 billion year-to-date keeps us on a trajectory to deliver free cash flow in excess of net income for the full year while returning at least 4.2 billion cash to shareholders through repurchases and dividends. And we continued to invest significantly to acquire skill and capability in key growth areas with a year-to-date capital investment of $1.2 billion across seven [ph] transactions. So we're pleased with our overall results in the third quarter which continued to demonstrate the durability of our growth, profitability, and cash flow. With that said let's get into the details of the quarter starting with new bookings. New bookings were $9.8 billion for the quarter, consulting bookings were $5.2 billion with a book-to-bill of 1.1, outsourcing bookings were $4.6 billion also with a book-to-bill of 1.1. We were very pleased with our new bookings, which represent 8% growth in local currency reflecting the second highest level of new bookings in our history with a record high in consulting bookings. Turning now to revenues, net revenues for the quarter were $8.87 billion, a 5% increase in USD and 7% in local currency reflecting a foreign exchange headwind of approximately 2% compared with a 2.5% impact provided in our business outlook last quarter. Our consulting revenues for the quarter were $4.8 billion, up 4% in USD and 6% in local currency. Outsourcing revenues were $4 billion, up 6% in USD and 7% in local currency. Looking at the trends and estimated revenue growth across our five business dimensions, growth was led by operations which posted double-digit growth for the sixth consecutive quarter and application services, which delivered high-single-digit growth. Both operations and application services growth was fueled by significant rotation to The New. Strategy and consulting services combined continued to grow low-single digits. Across those businesses, the dominant driver continues to be strong double-digit growth in The New with all three components digital, cloud, and security growing double-digits as well. Taking a closer look at our operating groups, product flow at all operating groups was 15% growth driven by strong growth across all industries and geographies led by consumer goods, retail, and travel services. Financial services grew 6% in the quarter driven by strong growth in banking and capital markets globally and overall strong growth in both Europe and the growth markets. Resources grew 4% and returned to positive growth this quarter as expected reflecting growth across all geographies. Globally we saw very strong growth in chemicals and natural resources and good growth in utilities while the challenges in energy continued. Communications media and technology also grew 4% reflecting strong double-digit growth in software and platforms which more than offset roughly flat growth in the other two industries. We saw solid overall growth in North America and very strong growth in the growth markets, partially offset by continued contraction in Europe. Finally H&PS came in lower than expected at 2% growth as we did not see the uptick that we anticipated in both public service and health in North America. Our North America business was negatively impacted by a slower than expected decision making and initiation of new projects due to continued uncertainty on healthcare legislation and state and federal budgets. We now expect these factors to continue to impact our business at least through the fourth quarter. Moving down the income statement gross margin for the quarter was 32.8% compared to 31.9% the same period last year. Sales and marketing expense for the quarter was 11.1% consistent with the third quarter last year. General and administrative expense was 6.2% compared to 5.3% for the same period last year. This quarter we recorded a settlement charge related to the terminations of our U.S. pension plan consistent with my comments in March. This $510 million charge decreased quarter three operating margin by 570 basis points, lowered our quarter three tax rate by 7.2% and decreased net income by $312 million and diluted earnings per share by $0.47. The following comparisons exclude this impact and reflect adjusted results. Operating income was $1.4 billion in the third quarter reflecting a 15.5% adjusted operating margin consistent with quarter three last year. Our effective tax rate for the quarter was 26.6% compared with an effective tax rate of 26.5% for the same period last year. Diluted earnings per share were $1.52 compared with EPS of a $1.41 in the third quarter last year. Our days services outstanding were 41one days compared to 42 days last quarter and 41 days in the third quarter last year. Free cash flow for the quarter was $1.7 billion resulting from cash generated by operating activities of $1.8 billion net of property and equipment additions of 136 million. Our cash balance at May 31st was $3.4 billion compared with $4.9 billion at August 31st. With regards to our ongoing objective to return cash to shareholders in the third quarter we repurchased to redeem 4.9 million shares for $589 million at an average price of $120.50 per share. At May 31st we had 3.7 billion of share repurchase authority remaining. Finally as Pierre mentioned on May 15, 2017 we made our second semiannual dividend payment for fiscal 2017 in the amount of a $1.21 per share bringing total dividend payments for the fiscal year to approximately $1.6 billion. So with three quarters in the books we feel good about our results today and we're working hard to deliver quarter four and another successful year. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our strong results for the quarter and year-to-date demonstrate that we continue to execute very well against our growth strategy. We are successfully driving the business transformation at Accenture while at the same time consistently delivering above market performance. Today the breadth of capabilities we provide end to end is truly unique in the marketplace and we are well positioned to compete at scale in each of our five businesses driving synergies across them to deliver value and business outcomes for our clients. We continue to rotate our business to The New, digital, cloud, and security related services which again grew at a very strong double-digit rate in the quarter and now accounts for 50% of total revenue. I am absolutely delighted that we have achieved this significant milestone for our business so rapidly. Our ascension to these new high growth areas, the differentiation of our capabilities in the market, and the diversity of our business have enabled us to continue to gain significant market share. The need to go digital remains a top priority for clients and we are investing aggressively to drive innovation and deliver digital transformation. A great example is the capability we have [indiscernible] Accenture Interactive and I am again delighted that for the second year in a row Advertising Age has named Accenture Interactive the largest provider of digital marketing services both globally and in the U.S. Accenture Interactive is working with many of the world's leading brands to transform the customer experience. As an illustration with Carnival, the cruise operator we are helping develop a new platform using wearable technology, the Internet of Things and analytics to transform the guest experience with intelligent customerization. Carnival will be able to anticipate every passengers preferences, likes, and needs. And we continue to broaden the services we provide through Accenture Interactive. In the third quarter we acquired two creative and design agencies in Australia, the Monkeys and Maud and we acquired Kunstmann in Belgium to expand our digital and user experience capabilities. In today's digital and highly connected world security is essential and we're building a market leading security capability to help clients become more resilient. I am pleased that in the third quarter we saw very strong double-digit growth in our security business and we are bringing deep and differentiated expertise to our clients. We are working with a California based facility to protect its critical assets including nuclear power plants through expertise inside their security as well as identity and access management. Increasingly the work we do is enabled more and more by new IT including automation, robotics, and intelligent platforms. We are helping a global healthcare company embrace digital across its entire enterprise. Ultimately using Accenture myWizard, our intelligence automation platform to improve application quality and productivity. We are working with the U.S. Transportation Security Administration to modernize the enterprise applications using Agile and DevOps software development. And during the quarter we expanded our capabilities in intelligent automation with the acquisition of Genfour in the UK and earlier this month we acquired SolutionsIQ, a leading provider of Agile services adding some of the most experienced Agile coaches in the industry to our team. We continued to hold a unique position in the technology echo system as the leading partner of both the established providers and emerging players. Just last week Microsoft named Accenture it's SI partner of the year for the tenth year in a row. In May we received three SAP pinnacle awards more than any other company for our work helping clients design, deploy, and manage SAP enterprise systems. And we have expanded our collaboration with SAP to co-innovate, co-develop, and jointly go-to-market with new solutions that combine our industry expertise and analytics capabilities with SAP Leonardo, the new system that integrates digital technologies including match and learning, analytics, and Internet of Things. Turning out to the geographic dimensions of our business and our results for the quarter, in North America we delivered revenue growth of 3% in local currency driven by United States. As David mentioned this was below our expectations given the increased uncertainty in the marketplace in health and public service related to healthcare legislation and State and Federal projects. In Europe I am very pleased that we had another strong performance growing revenue 9% in local currency driven primarily by double-digit growth in the United Kingdom, Germany, and France. And in gross markets we delivered another excellent quarter with 13% growth in local currency led by very strong double-digit growth in Japan [ph] as well as double-digit growth in Australia as well as in Singapore. Before I hand it back to David, I want to take a moment to acknowledge some of the external recognition we have received for our brand and differentiated strategy. And again we never take this for granted. I am delighted that for the 12th year in a row we were recognized on BrandZ's list of the top 100 most valuable global brand. As well for the sixth consecutive year we were included in Forbes ranking of the top global brands. We improved our rankings and drove significant increases in brand value on both lists. And for the second year in a row we were among the top 25 companies on the Barron's 500 and we were also included on Barron's list of most respected companies. I strongly really believe that over the years we have built a durable business model for Accenture based on two major building blocks. First, our accelerated rotation to The New which enhances our relevance to clients. And second, our highly diverse portfolio of business which enables us to drive durable performance of a cycle of uncertainty and volatility. And that is why looking ahead I remain very confident in our business strategy and our market position. With that I will turn the call over to David to provide our updated business outlook. David. David P. Rowland: Thank you Pierre. Let me now turn to our business outlook. For the fourth quarter of fiscal 2017 we expect revenues to be in the range of $8.85 billion to $9.10 billion. This assumes the impact of FX will be negative 1.5% compared to the fourth quarter of fiscal 2016 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year 2017 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 1% compared to fiscal 2016. For the full fiscal 2017 we now expect our net revenues to be in the range of 6% to 7% growth in local currency over fiscal 2016. For operating margin on an adjusted basis we now expect fiscal year 2017 to be 14.8%, a 20 basis point expansion over fiscal 2016 results. We now expect our annual effective tax rate on an adjusted basis to be in the range of 22.5% to 23.5%. Our earnings per share on an adjusted basis we now expect full year diluted EPS for fiscal 2017 to be in the range of $5.84 to $5.91 or 9% to 11% growth over adjusted fiscal 2016 results. For the full fiscal 2017 we continue to expect operating cash flow to be in the range of $4.6 billion to $4.9 billion, property and equipment additions to be in the range of 600 million, and free cash flow to be in the range of $4 billion to $4.3 billion. We continue to expect to return at least 4.2 billion through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by slightly more than 1% as we remain committed to returning substantial portion of the cash to shareholders. And finally for the full year we now expect to invest in the range of $1.8 billion in acquisitions. With that let's open it up so we can take your questions. Angie. Angie Park : Thanks David. I would ask that you each stick to one question and a follow-up to allow as many participants as possible to ask a question. Ryan would you provide instructions for those on the call. Operator : [Operator Instructions]. Our first question will come from the line of Tien-Tsin Huang with JPMorgan. Please go ahead. Tien- Tsin Huang : Hey, good morning, thanks. Just let me start by asking about bookings. Bookings were good and in line with where we were at, you said it would improve in the second half, it did in the third quarter, do you expect that momentum to carry into the fourth quarter, have you replenished the pipeline, etc. going into 4Q? David P. Rowland: Yeah we still hate tension by the way. We feel good about our bookings position in the fourth quarter and we expect to have another very good quarter of bookings. So we think that momentum does continue. Tien- Tsin Huang : Okay and then on just The New revenue here versus the, I guess you want to call it legacy or The Not New, any surprise in the trend there, just thinking about the math and if there's been any change in momentum in either? David P. Rowland: Well, I would say on that front it's really been more of the same. Our growth in The New continues to go at very, very high levels, well above 30% growth in the quarter which is what we've seen pretty consistently this year. The market demand is tremendous and it plays extremely well to the investments that we've made over the last several years now and building capabilities to be the leader in that part of the marketplace. So we're extremely pleased it is broad based literally across our operating groups, our 15 geographic units. And if you look at the three components of digital, cloud, and security again, very strong double-digit growth really across the board. So we couldn't be more pleased with what we see in that part of our business. Tien- Tsin Huang : Thank you. Operator : Thank you. Our next question comes from the line Edward Caso with Wells Fargo. Please go ahead. Edward Caso : Hi, good morning. I was curious about your efforts on the acquisition front. Obviously you're providing all your cash flow back to investors and therefore using the cash on your balance sheet to fund your fairly aggressive acquisition program. At what point do you hit a level where you desire to have your cash? David P. Rowland: Well I think -- and we've talked about this before and we are fortunate in that with the strength of our overall financials including our balance sheet we have a lot of levers at our disposal as we manage our business really for many years to come. When we look out our need to acquire critical skills and capabilities in important growth areas in the market, we don't see that changing certainly over the next three years. And so we think that's going to continue to be an important part of our investment strategy. We think it will be an important part of an engine for growth overall and ultimately for us. As you know, this is all about quickly assimilating these capabilities and driving organic growth over time. So we really see more of the same with our acquisition strategy going forward, and we think we have the financial flexibility to accommodate that while also returning cash to shareholders. Pierre Nanterme : Yeah, not much to add, I think we have an extremely clear strategy at Accenture, which is all about rotating to The New, and in order to enable this strategy, we have set very clear financial context we shared with all of you on how we are going to locate our cash and our free cash flow with this rate, at the same time investing more than ever to the transformation of Accenture to give the relevant services of the future and create durable performance over the next cycle of change and at the same time continuing with very, I guess very good return to shareholder approach, both in term of share buyback and in terms of dividends. So we believe that this strategy is playing very well, and as David mentioned we still have opportunities to invest even more should that be required leveraging more our balance sheets one way or the other. So I feel extremely good with where we are from an investment standpoint, from a financial standpoint, and from our strategic allocation of cash. Edward Caso : My other related question is around the assimilation of these employees, these are generally smaller, more entrepreneurial firms that generally have a different character of employee than a traditional Accenture trained and developed person. Can you give us any sense for the attrition at these acquired companies that are relative to the base and how you're managing that? Thank you. Pierre Nanterme : Thanks for the question because it was -- when we decided our new strategy of rotating to The New that was clearly a big question we had in front of us. We benefit from Accenture from a very strong culture, you know, very well based on what we've been doing for multiple decades. And when you are rotating to The New and The New is still different in terms of you mentioned digital, we are talking about the millennium, but again in terms of disciplines such as design-led thinking such as experience driven projects such as prototyping, such as being more Agile, DevOps, no doubt you need to attract people who are going to be different from where you are. And simply said, we make what I think is a very profound and important evolution in our industry which is creating this concept of Accenture, we have a culture of cultures. So we celebrate the diversity of the cultures, so we are extremely respectful of the cultural field which is our design, digital marketing organization with now thousand people. We have the largest digital design studio in the world. We are extremely respectful of the people we are hiring from security. As you know that well and I would not elaborate these people are different in the security specs and they're walking like a tribe around their own discipline and we are extremely respectful to keep that culture. That's why we created end-to-end Accenture Security under the leadership of Kelly Bissell, an incredibly strong security leader on the side by Omar Abbosh our Chief Strategy Officer. So we developed this culture, this concept of culture of cultures, very different from this old and I think outdated concept of one culture. On the other end we are extremely stringent on our values and we are making a big difference around cultures. They have to be different which is what is bringing richness in our company and innovation but the values shouldn’t be compromised and are not for negotiation. And the values at Accenture we will never negotiate with respect for individual inclusion and diversity, ethics, compliance, client first, stewardship, and all of this has nothing to do with culture. It's just the appropriate business and personnel behavior you and I and everybody on the planet should develop. And I think we have been very good in creating and developing this culture of cultures concept and right David, all the integration we made, all but I am not saying that's likely been successful. David P. Rowland: Yeah, are we carefully manage the retention of the people in these companies that we acquire and our performance have really over the last three years in terms of retaining talent has been very good. Edward Caso : Thank you. David P. Rowland: Thank you. Operator : And our next question comes from the line of Bryan Bergin with Cowen. Please go ahead. David P. Rowland: Good morning Bryan. Bryan Bergin : Thank you. As the number comes from majority share of your business how should we think about potential changes and corporate revenue trajectory or particularly margin expansion, do you foresee any inflection in item over the medium-term? Pierre Nanterme : You know, again I will stop short of saying anything that would imply guidance for next year or beyond. But I would say that broadly speaking if you look at two of our three overriding financial objectives the first one being to drop durable growth which is consistently above the market, as I said taking share and extending our position as a market leader. And in the second overriding objective which is consistent, modest margin expansion while investing in increasing scale in our business and driving EPS growth faster than revenue growth we remain committed to those as kind of multi-year objectives that we work very hard to achieve. And I think the rotation to the new creates more opportunity for achieving those as opposed to a threat. So that is -- I think it gives us better positioning and a better opportunity to continue to deliver on those overtime. Bryan Bergin : Okay, and just a follow up then, just as far as expanding into some of our markets, interactive business I thought was a great example of getting you access into an area within the same office. Are there other areas that you're potentially looking at within client wallets that are logical extensions that you might be targeting? Pierre Nanterme : Security is another one with the business resulting with Accenture Security. Clearly we are expanding our access to new leaders. Given the depth and breadth of all services you are absolutely right, it is our ambition to increase the coverage of the leaders we might serve with clients from the CEO, the CFO, the COO, the CIO. Now the Chief Digital Officer with the launch of Accenture Digital, you know, there are new leaders under this terminology and we want to be the top choice for the newly appointed CDOs which should be a quite a natural act. You mentioned the CMOs with what we are doing with Accenture Interactive. And we have all the business in the different parts of the business. So if I am looking at Accenture we have now settled with the five businesses. We have in this businesses you have all the activities such as analytics, interactive, mobility, cloud, security. I could mention Accenture Credit services. We are in the U.S. which is providing access in banks to credit part of the organization and I mentioned a lot. So I guess and I would claim that we are settling the organization in professional services which today broader access to any client leadership group. Bryan Bergin : Thank you. Pierre Nanterme : Thank you. Operator : Our next question comes from the line of Lisa Ellis with Bernstein. Please go ahead. Lisa Ellis : Hi, good morning guys. I am good. So question just around the mix of business. So I noticed GDN mix down ticked slightly this quarter that's quite unusual. I think that's the first time in years that's happened. And at the same time you had a really strong headcount growth quarter at over 10% but then David in your comments you called out that you're seeing very strong growth in The New in areas like application and services which suggests more like build related activities which I would associate with offshore. So kind of two part question coming out of that; one, are you with the strong headcount growth and GDN mix that are stabilizing are we going to see an acceleration in revenue per head that might cause some break in the linearly in the business? And then also just secondarily can you just talk a little bit about the mix of the type of work you're seeing in The New as it gets to be over 50% of the business and if that's sort of fundamentally different in terms of mix of service lines relative to the core? Pierre Nanterme : Yeah maybe I get a start with our strategic direction on this. We are working extremely hard as you know at Accenture on robotic automation and bringing intelligent capabilities to significantly improve our productivity especially where we have large-scale operations so with technology and in operations. So we are working hard on what you said how we are moving forward we're going to have less direct correlation between revenue and headcount. And clearly the big game on this is to accelerate our investments in robotic automation and intelligent services which is exactly [indiscernible] for Accenture Technology and Debbie Polyshoot [ph] for Accenture Operation are working extremely hard. And we are starting to see some very encouraging results where we could drive more revenues with a bit less people in some part of Accenture Operations and in some part of our BPO. We are starting to feel the support of inflection. Certainly we need another year or 18 months to see whether this trend might accelerate and change the dynamic between revenue and headcount growth which is something of course we are pursuing systematically. On the second question what is the complexion of our work in term with The New. I mean the good news is we were taking everything to The New, strategy, consulting, digital of course, technology, and operations. And all our services in The New are going very well. Strategy and consulting growth in The New is double-digit. But as well it is driving significant growth in Accenture Technology and in our platforms if I am looking at the business with driving analytics through SAP Hana and tomorrow with SAP Leonardo is driving significant growth in the new SAP, in the new Microsoft, in the new Oracle. And I can mention -- and I could mention others but as well it is creating activities in operations. I am thinking about what we're doing in customer analytics leading to Accenture Analytics or to Accenture Interactive it is driving business with platform as a service in terms of analytics what we are calling Accenture Analytics insight platform. This is a service which is directly linked to the new services we are providing from an analytical standpoint. So it's really The New is driving growth in each of our five business in a very meaningful way. And we love that. David P. Rowland: Yeah, and Lisa I would say that you may remember that it was the third quarter of last year and then again in the fourth quarter where I had made comments that we were starting to see an improving trend and the progression of revenue per billable head. And so you asked will we start to see that, I think we have seen instances of that if you look over the last three or four quarters. The other thing just to remind you and others who are looking at the headcount numbers GDN includes our locations around the world including GDN headcount and let's say the more mature markets. And so GDN is in the United States as an example it's not just India and the Philippines. Lisa Ellis : Terrific, thanks. And just one quick follow up Pierre I think on your comment there on The New. So would you characterize at this point if you just compared this year versus maybe like this time last year or two years ago that the mix of work in The New now is much more diverse across your service lines, you're fully into what I'd call more like build and run activities? Pierre Nanterme : Absolutely right, and I think we see and I'm pleased with that we see this new maturing. So as all services you have a kind of maturity curve where you are starting with more pioneering strategy consulting rich programs, kind of prototyping in the early phase of the maturity curve. What we see is now all these New capabilities, I'm thinking about interactivity, mobility, identity, cloud, security soon come into traffic artificial intelligent block chain and immersive reality and certainly in the near future quantum computing. All of this new capabilities are getting more mature, are driving on balance bigger programs, and as we are moving from small prototyping to bigger programs suddenly it is expanding in several service lines from strategy to consulting but as well to technology and to operations. So we -- this business is maturing very well at Accenture with a positive effect in all our five businesses if you will and indeed we see more bigger deals which is a sign of the market maturing. David P. Rowland: Thank you Lisa. Operator : Our next question comes on of Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Hi guys, wanted to ask about the Accenture business dimensions, the growth rates there have surprised me. I guess on one hand app services which grew mid single-digits in fiscal year 2016 has gone up to high single-digits and I know there's a lot of worries in the marketplace about a secular decline in that business so that's been a surprise on the positive end. And then on the other strategy and consulting which grew double-digits in fiscal year 2016 is kind of hovering below kind of my expectations at low single-digits. So just trying to understand the strength in app services versus the weakness in strategy and consulting? David P. Rowland: Yeah, I think when you -- I will make a few comments and Pierre may have some as well. But first of all when you look at app services it's important to focus on the point that our growth is coming from the higher value application engineering, systems integration type work that is driven by the adoption of new IT in this rotations of The New. And so to some extent it kind of ties back to Lisa's question and Pierre's answer is that what you're starting to see is the adoption rate of new IT and digital broadly is increasing. You're starting in our business to see more systems integration application work associated with the implementation of digital technologies, new IP, etc and I think that is really what's driving our application services. We've said before, Pierre has said many times that our strategy in app services is to rapidly grow and expand in the SI space. The application outsourcing is a different marketplace, it is largely commoditized, and we will continue to have an application maintenance footprint but our application services business is really all about the systems integration, application engineering, enabling the adoption of new IT and digital technologies for our clients. And that's reflected in the pickup in growth rates. Maybe just one more comment on the strategy and consulting combined again that can ebb and flow. Pierre also eluded earlier and it's worth noting again is that you really have to decompose the strategy consulting number to really understand what's going on. And if you look at our strategy and consulting business that is related to projects in The New that part of strategy and consulting is growing mid teens. So let's say in the 15% kind range. So it's a very, very strong growth for those services related to enabling The New with our clients. The area that is not as robust right now let's say is the more traditional strategy and consulting that is not specifically tied to this rotation to The New. Bryan Keane : Okay, that's helpful and then just as a follow up on contributions of acquisitions. How much did acquisitions contribute to the quarterly revenue growth and I know we talked about 2.5 points for the back half of the year, I don't know since you took up the amount that you were going to spend on acquisitions I think it went up to a little bit to 1.8 billion from 1.5 billion, if that changed anything for the outlook? Thanks so much. David P. Rowland: You know that does have materially changed the number because obviously we're acquiring these -- let's say that increases more in the back of the last three months of the year. So that has more of an impact on 2018 than it does this year. Having said that we still think we're going to be at roughly in the ballpark of 2% for the full year. Previously I have said the back half of the year would be 2.5%. It will be just incrementally kind of above that but not materially above that. So clearly it is consistent with what I have said before, a slightly higher in the back half of the year than the 2.5%. Bryan Keane : Okay, thanks so much. I'm just curious on the third quarter itself, was it up to 2.5 points so far or not quite yet? David P. Rowland: Yeah, in that zone. Bryan Keane : Okay, thanks so much. David P. Rowland: Thank you. Operator : Next question comes on of Jim Schneider with Goldman Sachs. Please go ahead. David P. Rowland: Good morning Jim. Jim Schneider : Hello, good morning. Thank you for taking my question. I was wondering if you could maybe comment on the North America piece of the business, what are you hearing from clients just broadly speaking, can you maybe just kind of give us a sense about whether the North America slowdown was purely isolated to the health and public service area or what you are hearing from clients generally and what you expect that to be kind of like a one off one quarter thing or something that could continue for a couple of quarters? David P. Rowland: First of all as it relates to our expectations and then Pierre may add some comments as well. But let me just deal with the results relative to our expectations. So we had seen slower growth in H&PS in quarter one and quarter two. You will remember quarter two was a 2% which is where we ended up and not in quarter three. We had expected not based on hope but based on what we felt was kind of tangible evidence in the second quarter that we were going to see an uptick in growth in the third quarter in the second half of the year and that's what I called out 90 days ago. What we saw was that, that uptick if you will or that freeing up of the initiation of new projects and let's say a return to more normal decision making patterns on contracting new work, that just simply did not improve as we had expected. And so if you look at North America and the difference between where we landed and where we expected to land, the difference is the vast majority of that is in health and public service for the reasons I mentioned in the script. It's the difference between North America growth being at 3% and 5% order of magnitude. And it was the difference -- it was probably a point of growth, it was a point of growth at the expense level in total. So it was meaningful. Having said that we have a very strong health and public service practice and at some point the logjam will break and work will be initiated and we will be right there and again when that happens. And of course broadly in North America we feel that way as well. Pierre Nanterme : Yes, absolutely right and I understand you are asking this question on North America. For me on the positive side we continue to grow more than the market and gaining significant market share in North America despite the fact that the level of growth is lower at the level of growth of the market as we are analyzing it as well as slowing down. Secondly our rotation to The New in North America is excellent and we're going to get close to 50% as with the rest of Accenture. So we have zero issues in terms of executing our strategy. And three, we continue to invest. So we are not changing our investment profile and we believe it's the right time to invest, to be prepared for the future and to be prepared when the market will be good again. Now what is the situation and indeed a big difference from what we expected three months ago, these annual, you should probably know, when you are in the U.S. and French you are probably have a certainly better informed point of view on this but there is an expectation that indeed the new administration will launch critical reforms in order to boost the business and economy growth. And this economic reform probably I would say the one which are the most important, the healthcare reform, the tax reform, the trade reform and anything linked to the infrastructure investments. And all of these four were the ones supposed to indeed unleash more growth for the business so the business could invest and drive more growth. And by driving more growth and driving more investment we would have a positive impact. Fact of the matter of is that we don't do this to be honest, three months ago because just rating the observers and all the analytics we believe that these four reforms would happen reasonably rapidly in the U.S. And fact of the matter they are not yet being announced or executed and so we are in this zone where the business is still waiting, it's still positive but waiting for these reforms to happen, to invest and so which has a negative effect especially on H&PS which has been the vertical more impacted by this kind of wait and see mode on what could happen with the reform. And we are ready to in fact in these couple of quarters the overall profit for services market in the U.S. been slowing down. And so to some extent we are moderating with the market while continuing to do much better than the market. And so I am positive that when the market will be back because that will happen we are in better position than anyone else given the investment and the positioning we are taking. So I'm looking that with my French glasses and I would encourage the U.S. to accelerate their reforms. David P. Rowland: And as I said it's a perfect illustration though of the power of the diversity of our model where Europe and the growth markets combined in the third quarter and grew double-digits 10%. And so that is intentionally the way our business is constructed for this exact reason. And so it is working as designed. Pierre Nanterme : And it's interesting to see, sorry to elaborate, but I think it's important for all the people listening to the call because you might wonder is why things are doing so well in Europe. We have 9% growth and you know it is -- but I think in Europe you have less uncertainties now. I think we had good prospect that probably Germany might re-elect Angela Merkel so it's a poll of stability. I guess, the election of Emmanuel Macron in France has been recognized and celebrated by the market because he is pro-European which has created a very positive impact around whether Europe will disappear or not. I think Germany and France are being extraordinary for business is recreating a very solid coalition and the Brexit thing is moving at its pace but the place we know it is going to happen. So it's not an uncertainty. The uncertainty is what exactly, is it going to be hard, soft, gentle probably the European will figure out as a -- or we can figure it out over centuries. But it's interesting if you take China. China I guess not much uncertainty. The credibility is very clear on what it wants to achieve, it's driving these five years of reform program. So you see what I mean. It's interesting that there is one place, it is a big place in the world where you have this kind of wait for the reforms to happen it is currently in the United States. But I am personally feeling very good that these reforms will happen and the business will pick up again. Jim Schneider : That that's helpful, thank you for the color. And just as a quick follow up going back to the M&A question for a second, if you look at the run rate of M&A that you are doing in Q4 this year, would you expect that to accelerate incrementally from here getting into fiscal 2018? And then I think Pierre you made an allusion to using the balance sheet for M&A, does that imply you're willing to put some debt on the balance sheet to finance more M&A at this point? David P. Rowland: I think as it relates to your last question we said consistently for as long as I can remember that we always I mean we're well aware of that being an option and given the right circumstances we would have no concern about doing that. And we would as we always do we would make very smart decisions as to when and at what level we do that. But that is certainly an option that is open to us and we have no concerns at all about using that option given the right circumstances. Pierre Nanterme : I mean so far we said, I mean David and I we are extremely disciplined. And our financial model is extremely clear and has been communicated to all of you. We expect 20% to 30% of our annual growth to be driven by acquisitions. Our growth is 70% to 80% organic. Let's be clear and frequent from that and 20% to 30% of annual growth my counter acquisitions depending on the opportunities. These things are lumpy so about that we expect that anything between 20% to 35% every year of free cash flow will be dedicated to acquisition and the right as we do would be a return to our shareholders in a program which I think is extremely attractive to all of you with the mix share buyback and dividend. So this is our ongoing thesis from a financial algorithm if you will. Now we have opportunities by leveraging more to balance it to if we have any relevant opportunities that would bring differentiation that would be more transformation, more leadership in The New. In some spaces it could be artificial intelligence, factoring immersive realities, quantum computing, would say what to make some significant steps. But so far we are with our ongoing thesis I just mentioned before and we are very pleased with where we are and I'm very pleased that we have what we need if we have for good reasons to move faster or make different transactions. Jim Schneider : Thank you. David P. Rowland: Great, thank you. Operator : Our next question will come from the line of David Koning with Baird. Please go ahead. David Koning : Yeah, hey guys, thank you. I guess first of all just when we think of The New I think you said about 50% of revs now when we looked back a year ago was about 40% of revs. So it's growing like 25% to 30%, something like that whereas the rest the business is declining high single-digits it looks like. Is that just existing clients are just shifting their preferences rather than really some of that old stuff just going away, it's just a shift? And then I guess second, to that overall growth has decelerated a little bit, is that because of the yield on some of the new projects are a little less than some of the legacy? David P. Rowland: You know first of all when you look at overall growth, when we provide a guidance of 5 to 8 at the beginning of the year and of course we're going to land very solidly within that range we have said that growing double-digits each and every year is just an unrealistic expectation. We worked hard to drive as much growth as we can but each and every year we're not going to drop double-digit growth. And we think that we look at our growth rate against what the market is growing and in a market that lets say generally has grown let's say anywhere in the 2.5% to 4% range, let's say if you looked over the last two to three years if we're growing 7% as we are this year we're growing two times the rate of the market growth. And so are we lower than where we were double-digit growth, the last two years, we are but we're growing two times the rate of overall market growth which is clearly the indicator of a leader in the sector. And so that's what we're all about and growth in the 5% to 8% range where we've got to 6% to 7% growth is actually quite strong growth in the market. Pierre Nanterme : Yeah, I mean we are just reflecting on when I'm looking at the performance of the company and we are in the right place or not I mean summarizing what we are really doing at Accenture we said our revenue would be in the range of 5% to 8%, right David, I mean so far we are at 7%, right in the zone. Then the question might be is 7 good or not. The only way to understand whether 7 is good or not is to compare with the rest of the market. And we believe that at 7% we're growing twice the market and growing twice the market for a company of our size is an incredible positive results. Second, part of our philosophy as well, at the same time our revenues are growing 7%, our EPS is growing 10%. We're growing the EPS more than our revenues and again I think it's a sign of good financial performance. I remember that it said we want to grow EPS at the same rate as our revenues. We are growing EPS even slightly higher than the revenue which is of course an exceptional performance from David. And then for me David is taking care of the numbers and I am taking care of the strategy that's why we have -- we are a good duo. For me if there is a highlight for this quarter and I hope that's the one you're going to take, is this 50%. There are all sorts of metrics, all sort of numbers there which I think are all landing in the right place. We are probably beating our guidance, we said three months ago on each and every dimension and providing extraordinary good financial. But then what's important I think for all of you and for me, are we executing this strategy which is going to create a new Accenture which could be competitive for the future. And again it is a yes, that's why I wanted to put even in the announcement for the first time outside in what according to figures we had that we hit the milestone of 50% and I would like all of us analyst, investors because you're putting a lot of confidence on Accenture to celebrate this milestone because it's a very big and important milestone for us at Accenture. We will properly celebrate in Boston with a very nice glass of Coca-Cola among other things by the way because we are still humble so no champagne yet. But it is very important jokes apart. I mean imagine what it is in 44 years we are rotating 50% of the business of the company of $35 billion to The New. That's what has been achieved and we're not going to stop there. We will continue accelerating because we won by 20 :20 towards the vast majority of our revenues being in The New. This might turn 50% was for me at least was for me the highlight of the quarter and I hope it is as well something you will consider extremely important in the successful execution of our strategy together with the rights to very strong financial performance. Pierre Nanterme : So that being said thanks again for joining us on today's call. I mean needless to say and with a few words I just said before the conclusion that I and the leadership team of Accenture we feel good about where we are. We feel good about where we are because we continue to build on our strong position in the marketplace, I mean what we have said. We are rotating our business to The New which is now 50% of our revenues and again I would like to pound that because for me it's exceptional. We are gaining significant market share growing in average twice as fast as the market and I think this is very noticeable in each and every market if you look at this. North America, Europe, and the gross market, the minimum is twice the market. In some markets we're growing much more than twice, sometimes four times the market and we continue to gain market share. And we continue and this is where I'm delighted with what we're doing, we continue to invest in new capabilities to drive future growth and to create the future of that company while delivering value for all of you but as well for all our stakeholders including 4000 people who are working every day very hard to transform the company and make Accenture the partner of choice for many of our clients. We look forward to talking with you again next quarter. In the meantime if you have any questions please feel free to call Angie and the team. All the best and talk to you very soon. Operator : And ladies and gentlemen that does conclude today's conference. I want to thank you for your participation. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,017	3	2017Q3	2017Q4	2017-09-28	6.041	6.127	6.662	6.76	null	21.25	22.4	Executives: Angie Park - MD and Head, Investor Relations Pierre Nanterme - Chairman and CEO David P. Rowland - CFO Analysts : Bryan Bergin - Cowen & Company Tien-Tsin Huang - JPMorgan Keith Bachman - BMO Capital Markets Darrin Peller - Barclays James Friedman - Susquehanna Lisa Ellis - Bernstein Joseph Foresi - Cantor Fitzgerald & Co. Operator : Ladies and gentlemen, thank you for standing by and welcome to Accenture's Fourth 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 and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Angie Park. Please go ahead. Angie Park : Thank you, Greg, and thanks everyone for joining us today on our fourth quarter and full-year fiscal 2017 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today’s call you will hear from 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 fourth quarter and the full fiscal year. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the first quarter and full fiscal year 2018. We will then take your questions before Pierre provides a wrap up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on the call, including our business outlook are forward-looking and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed on this call. During our call today, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. We include reconciliations of 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. Pierre Nanterme : Thank you, Angie, and thanks everyone for joining us today. We are very pleased with our excellent financial results for both the fourth quarter and the full fiscal year. For the year, we clearly strengthened our leadership position in the new digital, cloud, and security related services, and once again we gain substantial market share. We significantly increased our investments, including record investments in strategic acquisitions. And I’m particularly pleased that we did all of this while continuing to return substantial cash to shareholders. Here are a few highlights for the year. We delivered very strong new bookings of $37.4 billion. We generated record revenues for the year of $34.9 billion, a 7% increase in local currency with broad based growth once again across all business. We delivered earnings per share of $5.91 on an adjusted basis, an 11% increase. Operating margin was 14.8% on an adjusted basis, an expansion of 20 basis points. We generated excellent free cash flow of $4.5 billion. We returned $4.2 billion in cash to shareholders through share repurchases and dividends, and we just announced a semi-annual cash dividend of $1.33 per share, a 10% increase over our prior dividend. So we had another very strong year. And I feel very good about our business, the execution of our strategy and the momentum we have as we enter the new fiscal year. Now let me hand over to David, who will review the numbers in greater detail. David, over to you. David P. Rowland: Thank you, Pierre, and thanks all of you for joining us on today's call. Let me start by saying that we were extremely pleased with our results in the fourth quarter, which completed another outstanding year for Accenture. Our results continue to provide strong validation of our leadership position in the marketplace, the relevance of our offerings and capabilities to our clients, and our ability to manage our business in a dynamic environment to deliver significant value to our clients, our people, and our shareholders. Once again our fourth quarter results reflect our ongoing focus to deliver strong and consistent financial results across our three key imperatives for driving superior shareholder value. So let me summarize a few important highlights before I get into the details. Net revenue growth of 8% represented the strongest quarter of the year as we continue to benefit from our diverse and durable growth model, which is powered by being a market leader in the New. Our digital cloud and security related services continue to draw very strong double-digit growth and represented over 50% of our total revenues. Growth continue to be broad-based with positive growth across the vast majority of our industry groups, geographic markets and businesses, with many parts of our business delivering double-digit growth. And we estimate that we grew more than 3x the rate of growth of the basket of publicly traded companies as we continue to take share and strengthen our position as a market leader. Our operating margin of 14.2% came in as expected and up 10 basis points from last year, resulting in 20 basis points of expansion on an adjusted basis for the full-year. Importantly, we delivered this expansion while investing at record levels in our business and our people. And with EPS of a $1.48 in the fourth quarter, we delivered double-digit EPS growth in both the quarter and the full-year. And finally we delivered another strong quarter of free cash flow, $1.8 billion in free cash flow to be specific. In terms of capital allocation, its noteworthy that we closed 10 transactions in the quarter, giving us 37 transactions for the full-year with record invested capital of $1.7 billion, which provided scale and capabilities in key growth areas and further strengthened our leadership position in the New. So we’ve a strong close to fiscal '17 which yielded another year of broad based growth and significant market share gains, underpinned by strong profitability and cash flow. With those high-level comments, let me turn to some of the details starting with new bookings. New bookings were $10.1 billion for the quarter. Consulting bookings were $5.1 billion with a book-to-bill of 1.0. Outsourcing bookings were $5.0 billion with a book-to-bill of 1.2. Our strong new bookings in the quarter represent 12% growth in local currency and reflected an all-time high in new bookings in constant currency. Our bookings were well-balanced and we achieved our target book-to-bill across each of our five businesses. As you would expect the dominant theme driving our bookings in the quarter continue to be high demand for digital, cloud, and security related services, which we estimate represented more than 60% of our new bookings. For the full fiscal year, we delivered $37.4 billion in new bookings which represent 6% growth in local currency. Turning now to revenues. Net revenues for the quarter were $9.1 billion, an 8% increase in both USD and local currency, reflecting a roughly flat foreign exchange impact. This result was at the top of our FX adjusted range. Consulting revenues for the quarter were $4.9 billion, up 7% both in USD and local currency. Outsourcing revenues were $4.2 billion, up 9% in USD and 8% in local currency. Looking at the trends and estimated revenue growth across our five business dimensions, growth was led by application services in operations which both posted double-digit growth. Strategy and consulting services combined were flat in the quarter and the New including digital, cloud, and security related services continue to deliver very strong double-digit growth as I mentioned earlier. Taking a closer look at our operating groups. Products delivered its 9th consecutive quarter of double-digit revenue growth with 10% growth in local currency, led by strong growth across all three industries, especially in Europe and the growth markets. Financial services posted its strong growth of the year with 9% growth in the quarter, led by double-digit growth in banking and capital markets as a result of strong demand for our services in both Europe and the growth markets. Communications media and technology also experienced an uptick in business momentum with 7% growth in the quarter, driven by continued strong double-digit growth in software and platforms and low single-digit growth in the other two industries. We were very pleased with our overall growth in CMT in about North America and the growth markets, and we did see some improvement in Europe following several quarters of contraction. Resources grew 5% in quarter four building further on the improved growth rates we saw last quarter. The highlight of the quarter was double-digit growth in chemicals and natural resources as well as balanced growth across each of the three geographic areas each growing 5% in the quarter. We continue to see challenging market conditions in energy. Finally, H&PS grew 4% led by strong growth in public services globally. We continue to be pleased with overall growth in H&PS in both Europe and the growth markets and while we saw some improvement in North America, our health business continues to be impacted by uncertainty in U.S healthcare legislation. Moving down to the income statement, gross margin for the quarter was 31.5% compared to 31.3% in the same period last year. Sales and marketing expense for the quarter was 11% compared with 11.1% for the fourth quarter last year. General and administrative expense was 6.4% compared to 6.1% for the same quarter last year. Our operating income was $1.3 billion in the fourth quarter, reflecting a 14.2% operating margin, up 10 basis points compared with quarter four last year. As a reminder, the fourth quarter last year includes gains related primarily to our Duck Creek transaction. The following comparisons exclude these impacts and reflect adjusted results. Our effective tax rate for the quarter was 23.9% compared with an effective tax rate of 24.3% in the fourth quarter last year. Our diluted earnings per share were $1.48 compared with EPS of a $1.31 in the fourth quarter last year and this reflects a 13% year-over-year increase. Days services outstanding were 39 days compared to 41 days last quarter and 39 days in the fourth quarter of last year. Our free cash flow for the quarter was $1.8 billion resulting from cash generated by operating activities of $1.9 billion, net of property and equipment additions of $191 million. And our cash balance at August 31 was $4.1 billion compared with $4.9 billion at August 31 last year. With regard to our ongoing objective to return cash to shareholders, in the fourth quarter, we repurchased to redeem 5.2 million shares for $657 million at an average price of $127.09 per share. At August 31, we had approximately 3.1 billion of share repurchase authority remaining. As Pierre mentioned, our Board of Directors declared a semi-annual cash dividend of $1.33 per share. This dividend will be paid on November 15 and represents a $0.12 per share or 10% increase over the previous semi-annual dividend we declared in March. So before I turn it back over to Pierre, I want to reflect on where we landed for the full-year across the key elements of our original business outlook provided last September. Of course, I'm pleased that once again we successfully managed our business to deliver all aspects of the business outlook we provided at the beginning of the fiscal year. Net revenues grew 7% in local currency for the full-year, again demonstrating the power and durability of our growth model in a highly dynamic environment. Even with unexpected headwinds in some parts of our U.S business, we delivered in the upper end of our guided range and in fact outside of the U.S we delivered almost 10% growth in the rest of our business. On an adjusted basis, operating margin of 14.8% reflected a 20 basis point expansion over '16 and was consistent with our guidance. On an adjusted basis, diluted earnings per share were $5.91, reflecting a 11% growth over fiscal '16 and was at the upper end of our guided range. Our free cash flow of $4.5 billion was above our original guided range and reflected a free cash flow well in excess of our net income, and we delivered on the objectives of our capital allocation strategy by investing $1.7 billion in acquisitions, while at the same time returning $4.2 billion to our shareholders through dividends and share repurchases. So again, we had a strong year by any measure and certainly as it relates to delivering against the guidance we provided at the beginning of fiscal '17. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our very strong performance in fiscal year '17, on top of our outstanding results for the last two fiscal years demonstrate that we are executing our growth strategy very well in a durable and sustained way. As I reflect on our performance for the last three years, I am very pleased that we delivered compound annual revenue growth of 9% in local currency, as well as 9% compound growth in adjusting earnings per share. And I'm especially proud of the shareholder returns we generated over the same three year period. We delivered a compound annual total return to shareholders of 20%, twice the total return of the SAP 500. We continue to benefit from the actions we have taken to transform Accenture to rotate our business to New high growth areas and to invest ahead of the curve. The breadth and scale of the capabilities we provide end-to-end across strategy, consulting, digital, technology and operations, are absolutely unique in the marketplace. And this is why Accenture remains the partner of choice for the world's leading companies in executing large-scale transformation programs. We are helping a leading global bank with a mission-critical program to meet New regulatory requirements. Leveraging our global capabilities across consulting, digital, technology and operations, we're delivering significant changes to the core banking platforms which handles over $100 trillion of transactions per year. I am especially pleased with the leadership position we’ve built in the New. Digital, cloud, and security related services, all underpinned by New IT. In fiscal year '17, the New accounted for about $18 billion or 50% of total revenues, a very significant increase from roughly 40% of total revenues just one year ago and 30% of total revenues the year before. We’ve truly transformed Accenture capabilities to help our clients embrace the New, applying innovation and intelligence at the heart of their organizations. We're collaborating with Roche, the healthcare company to develop an analytics platform that will improve care for millions of patients around the globe. Built on the Accenture intelligent patient platform, this new solution enables Roche to underwrite data in a secure environment and generate insights to provide patients with more customized care. The rigor and discipline, we use in running our business is key to consistently executing our growth strategy. And we systematically applied the same discipline to our investments including acquisitions. Acquisitions enhance our differentiation in the marketplace and are enhancing to drive organic growth. Over the last three years, we deployed $3.4 billion in roughly 70 acquisitions. This includes a record $1.7 billion in fiscal year '17 alone. And over the last year, we expanded our relationship with ecosystem partners, including Amazon Web Services, Google, Microsoft, Oracle, Salesforce and SAP. And just last months we formed the new partnership with Apple to help businesses transform how they engage with their customers using innovative solutions built on iOS. Now turning to the geographic dimension of our business. We continue to rotate to the new consistently and successfully around the world, especially in our largest markets. We delivered another Europe's strong and balanced revenue growth, gaining market share in each of our geographic regions. In North America, we delivered 4% revenue growth in local currency for the year, driven by the United States. In Europe, we grew revenues 8% in local currency with double-digit growth in Germany and Switzerland, as well as high single-digit growth in the U.K., France and Spain. And I am particularly pleased that in growth markets we delivered 12% growth in local currency, driven primarily by very strong double-digit growth once again in Japan as well as double-digit growth in Australia, Singapore, and China. Before I turn it back to David, I want to share a few thoughts on our commitment to developing talent. As a professional services company, our people ultimately make the difference in delivering high-quality services to clients. This is why we are so focused on attracting the best people and investing to further develop their skills. To ensure we’ve the most relevant talent at the most senior levels, we promoted 600 new managing directors in fiscal year '17 and hired more than 300 managing directors from outside Accenture. These leaders are bringing highly differentiated industry expertise and specialized skills, especially in the New. At the same time, we are making significant investments in re-skilling [ph] our people to help them stay relevant in key areas such as cloud artificial intelligence and robotics. In just over 18 months, we have trained more than 160,000 people in New IT alone, including automation, HR development, and intelligent platforms. And at Accenture, we embrace diversity as the source of creativity and competitive advantage. We bring together people of different genders, races, cultures, and perspectives which makes us smarter, more innovative, and more relevant. I’m so privileged to lead our company of 425,000 talented people working in 55 countries around the world who bring their unique knowledge and experience to our clients each and every day. With that, I will turn it over to David to provide our business outlook for fiscal year '18. David, over to you. David P. Rowland: Thank you, Pierre. Let me now turn to our business outlook. For the first quarter of fiscal '18, we expect revenues to be in the range of $9.1 billion to $9.35 billion. This assumes the impact of FX will be about positive 2% compared to the first quarter of fiscal '17 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year '18, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S will be about positive 3% compared to fiscal '17. For the full fiscal '18, we expect our net revenue to be in the range of 5% to 8% growth in local currency over fiscal '17. For operating margin, we expect fiscal '18 to be 14.9% to 15.1%, a 10 to 30 basis point expansion over adjusted fiscal '17 results. We expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23% in fiscal '17. For earnings per share, we expect full-year diluted earnings per share for fiscal '18 to be in the range of $6.36 to $6.60 or 8% to 12% growth over adjusted fiscal '17 results. Now turning to cash flow. For the full fiscal '18, we expect operating cash flow to be in the range of $5 billion to $5.3 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $4.4 billion to $4.7 billion, generating free cash flow in excess of net income. We expect to return at least $4.3 billion through dividends and share repurchases and also expect to reduce the weighted average diluted shares outstanding by about 1% as we remain committed to returning a substantial portion of cash to our shareholders. With that, let's open it up, so that we can take your questions. Angie? Angie Park : Thanks, David. And 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. Operator, would you provide instructions for those on the call. Operator : Thank you. [Operator Instructions] Your first question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : Good morning. Thank you. Within your revenue guide for fiscal '18, can you just talk about where your organic growth assumption is there within the total guide? And then as well as your M&A spend projection for the year and contribution? Thanks. David P. Rowland: Yes. Thank you, Brian. Yes, so we -- when we look at next year, we expect from a -- from an investment standpoint and acquisitions that we would be in the range of 25% to 30% of our cash flow. If you calculate that in dollar terms, it's in the range of $1.1 billion to $1.4 billion. And as we’ve said many times previously, we certainly have the ability to go above that range if the opportunities present themselves during the fiscal year. And so, our inorganic strategy is an engine for organic growth and as a means of bringing on critical skills and capabilities in high growth areas, we will continue, it's an important part of our strategy. That assumption combined with what we've just done in fiscal '17, would translate to inorganic revenue contribution in the range of 2.5% to 3% in fiscal '18. Bryan Bergin : Okay. Thank you. The follow-up I’ve, just on platforms. Can you just talk about how much your business is derived from your various platforms? It seems like a lot of the award announcements this quarter involved some sort of a proprietary platform, your cloud, your insights platform, insurance products. Just give us a sense of what that's doing in changing the model of your business? Thanks. Pierre Nanterme : Yes. So, if you look at all the platforms and -- I mean, David you probably know the number better than me, it would be what in the range of 20? David P. Rowland: Yes, in that range 20% to 25%, if you look with the major platforms. Pierre Nanterme : Yes, so it is significant, but it is not the majority of what we do. So like a what we are doing with our platforms, because for us it's a source of delivering huge value for our clients and as well the base to sell our consulting and also businesses on back of this. Now as you know we are leading with SAP, we’re leading with Oracle, with Microsoft, with Salesforce, with [technical difficulty], with Microsoft, so we’re to date leading partners and you’ve seen that we’ve open new fronts with coming leaders such as Google, such as Amazon Web Services, we’re going to develop platforms on top of the cloud and you certainly hear about the announcements we made with Apple to develop solutions based on iOS. So, we are very active on platform. We are very pleased with what we’re doing and I’m especially pleased that we’re leading with their new platforms. When we talk about the SAP, we are talking about SAP Hana, Oracle in the cloud. The new generation of service with Microsoft and you probably have seen an announcement we made between Avanade-Accenture and Microsoft recently, just last week. And so we’re always aiming a leading not with the solution of yesterday, but with the solutions of tomorrow and taking a leadership position which is exactly what we do. Thank you, Brian. Bryan Bergin : Thanks, guys. Operator : Your next question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Pierre Nanterme : Hey, good morning, Tien-Tsin. Tien- Tsin Huang : Good morning. It was good to talk to you guys. I guess, I will ask on organic growth, assuming what you did in inorganic in '17, it looks like a little bit of deceleration implied at the midpoint in terms of organic growth. Am I looking at that correctly? Is there anything to explain that assumption? David P. Rowland: No, I would say that -- first of all, I’d say Tien-Tsin, as you know that while our range reflects of what we think is possible across a broad 3-point range. We're always focused on being toward the upper end of the range. And if you were to look at, let's say, the upper third of the range and if you look at the 2.5 to 3, and if you were to then look at that against the market growth for organically -- organic market growth, would continue to reflect us taking significant share, which is our strategic objective. And so it's not intended to imply deceleration. I mean, we feel good about the market as we see it. Tien- Tsin Huang : Yes, the [indiscernible]. Pierre Nanterme : Yes, but just to add on this and to be very clear, I think what we're planning for next year is extremely consistent with '17 and to be honest, it's consistent with '16. Now it depends on when you learn in the range, and as David said we are targeting to be more on the upper part of the range. But the contribution of inorganic has always been in the recent parts in the range of 2% plus and anything to between the 2% to 3% and so our organic growth is very consistent with the prior year. And as David said, as been built issue, if you will, to grow significantly more than the market. And when I said significantly more, it's probably a minimum of twice the market. So that’s the way we see our organic growth today and potentially tomorrow. So very consistent. David P. Rowland: Yes. Tien- Tsin Huang : Right. Yes, for sure at the upper half it would -- yes, be consistent with what we have organic over the last actually three years like you said. I know its splitting hairs over a percentage point here, but that's helpful. My follow-up, just -- I guess, on geographic growth, both of you called out North America versus the rest, do you expect the trends to change between North America and rest of world for Accenture in fiscal '18? Pierre Nanterme : Yes, and I’m going to take my non-American hat. And I’m feeling confident that my U.S colleagues and leaders will drive more growth next year. I mean, to be serious again, we shared with you the results of few quarters that indeed the growth in the U.S didn’t come exactly as expected for reasons we shared with you. That’s probably the markets was -- markets and our clients expecting some reforms and these reforms have not come as expected and creating kind of wait and see positioning with our clients, especially in health and public sector with all the uncertainties around the healthcare reforms. Now we’ve have year behind us and I believe that my scenario, if you will, that the business as factored was a could or could not expect from the administration. So to some extent that’s less uncertainty with what might come. Now we still believe that we’re going to see a tax reform or some evolution that’s going to be good for the business that on balance what we expected that next year the contribution of the US and North America will be incrementally better than this year. David P. Rowland: Yes, absolutely. Tien- Tsin Huang : Great. Okay. Pierre Nanterme : I believe in the U.S, my friend. Operator : Your next question comes from the line of Keith Bachman from Bank of Montreal. Please go ahead. Pierre Nanterme : Hi, Keith. Keith Bachman : Good morning. Thanks very much. I wanted to ask about the consulting business to start off with. If I look at the signings growth, it's a bit of a sign curve where 2013 was a negative year, '14 was very good, '15 was a down year, '16 was tremendous. This year the signings are, call it, low single digits. It would seem that based on that cycle '18 should be a pretty good year for signings in the consulting business. But I just wanted to hear your feedback on how you’re looking at that business in particular? Pierre Nanterme : Yes. David P. Rowland: Yes. Pierre Nanterme : So let me maybe take it, and then, I mean, David you can add on it. I mean, first, let's talk extremely rapidly by positioning what is the role of consulting at Accenture. As you know at Accenture we have different -- I mean we have -- not different businesses, we have synergistic businesses, strategic consulting where we shape the agenda with the clients, advisory services, if you will, digital and technology where we’re building leading-edge solutions and operations where we operate on behalf of the clients. And they’re not independent business at all. The formula of Accenture is end-to-end integration of the services to deliver transformation and to commit on an outcome. The role of the consulting business in that supply-chain, if you will, is to shape the clients agenda is to work with the clients and orchestrate the rest of our businesses, and it's of course to sell consulting services in addition of the rest. So therefore us, the business orchestrator, if you will, of the relationship with the clients. So at the end of the day when we are looking at the performance of Accenture, indeed we're looking at each parts because we want each parts to operate in the best market condition. But no doubt that we are much more focused on the value that all of this capability bring in driving overall growth faster than the market. Now -- so the role of consulting is to shape, is to orchestrate the depth and breadth of all services, and when I look at the market conditions we would expect certainly our consulting business to be at the mid single-digit range … Keith Bachman : Okay. Pierre Nanterme : … and this is where we believe that the consulting market is all about. But again, I would like all of you not to take consulting in isolation, because this is not the operating model of Accenture. Keith Bachman : Okay. Fair enough. And thank you for that response. My feedback or my second question rather is, David, could you talk a little about the puts and takes associated with operating margin range? What are the variables that would cause you to be at the lower end of the range and what are the variables that would cause you to be at the higher end of the range? David P. Rowland: Yes. So, I mean, there are a lot of things in the mix when we look at operating margin. I mean, first of all, just kind of state the mathematically, obvious, 10 basis points is, let's say just under $40 million for the year which on our base of operating expenses is small in the context of the total operating expense of our business. It's -- of course it's significant in the context of delivering the year and the quarter, but there are number of things in the mix. First of all is an assumption on the level of investments that we will continue to make in our business, on our people. And I can tell you that our intend in fiscal '18 is continue to -- is to continue to ramp up our investments and to invest the rate that is faster than our rate of revenue growth. And so, in essence what that means is that our business model again as a reminder is that we actually strive to have a much higher level of margin improvement underneath our business, if you will, of which a substantial portion of that margin expansion we invest into the business, on our people within the range of 10 to 30 basis points of expansion being delivered in our results. Keith Bachman : Right. David P. Rowland: And so, the things that drive that, I mean, first of all, would be the progression of contract profitability, so that gets to fundamentally the economics of the work that we do for our clients and in a normal year we would expect that our contract profitability would continue to progress in a positive way, and certainly that's our assumption next year. The other big driver of our profitability is the level of payroll efficiency that we have in our business. There are many things that go into that, including the geographic distribution of our heads, the level you utilization we run out -- run at, as well as the extent to which we're choosing to make talent investments and bring onboard critical skills that we think are going to position as well for the future. And really I could stop there, I mean, those are the two biggest drivers. How we manage the overall relationship, the payroll progression to revenue, and then also very importantly what we do with the economics of the portfolio of contracts that we deliver to our clients each year. Keith Bachman : Right. Thank you, gentlemen. I appreciate the questions. David P. Rowland: Thank you. Operator : Your next question comes from the line of Darrin Peller from Barclays. Please go ahead. Darrin Peller : Hey, thanks guys. Just a follow-up on that point of the margin front. I mean, there is clearly a very high demand for labor around some of the new opportunities that guys are doing so well. With that in mind, could you just give us a little more specifics on what wage inflation -- what type of wage inflation you would expect to see, what type of pricing you could use to offset that? Is there enough talent out there? Are you finding any challenges around that? What’s the environment like right now on those two fronts? David P. Rowland: Yes, it's hard to answer the wage inflation and price inflation question in aggregate, because -- it means -- there are so many components of our business and you really have to get into each component. Also, I don’t like commenting on the wage inflation, because it can be misinterpreted not only externally, but sometimes internally as well by our people. It’s just hard to talk about in aggregate. What I can tell you is that our business discipline is that we work very hard looking at the wage dynamics, if you will, across each of the markets that we operate in. We have specific targets for where we want to be to market and all of our workforces, obviously, our goal is to always be at a level where we can attract the best talent in the market. We are very, very disciplined in the way we manage the progression of wage inflation and what we're able to do in our pricing because that fundamentally drops our economic. So, we -- that that's kind of a foundational element, if you will, of how we manage the operations of our business. And I would say, in general, -- I don't see anything unusual about '18 either from a wage standpoint or a pricing standpoint. Let's say in the round I don't see anything different in '18 than really the last couple of years we have operated in. Pierre Nanterme : Yes, and maybe to add three elements on this to your question of how we are attracting the people and based on what condition? I wanted to communicate to the group that we are clearly focusing on attracting the best talent, and the fact that we’ve been able in fiscal year '17 to recruit 300 managing directors from the outside is for me just the restriction that indeed we are an attractive company. And we’ve no issue to hide what even what I would call iconic talents, i.e., some of the best and most differentiated talents in the marketplace. And they’re coming to us for -- let's say three reasons again, another three. I mean, first, with $18 billion in the New, 50% of our revenues, and double-digit growth year after year, they understand that we are serious about leading in the New and of course it's attractive for that. I mean, second, they’re joining us because we are the only professional services company having end-to-end businesses and so they know we’re joining in strategy or in consulting that will benefit from the rest of Accenture or if they’re joining in technology and operations, it will benefit from our consulting and advisory services. And three, we are competitive in the way we compensate and reward these people, and certainly they’ve been watching the stock evolution over these three years and they love that. Darrin Peller : All right. That helps. Pierre, just one quick follow-up. The -- when thinking about the New, first of all, what would be the most exciting areas that you’re expecting right now for 2018? Embedded in that large piece of revenue that’s now 50% that you find is the most exciting and the most innovative right now, the most in demand? And then, did you talk, David, about a growth profile of the New for 2018 versus the rest of the business? And thank you very much, guys. Pierre Nanterme : Yes, I’m excited with everything regarding the New. So by selecting a few, I don’t want to disappoint other parts of the business, because for instance, all what we’re doing in Accenture Interactive is absolutely great and I’m very excited that we’re going to launch next year new services around some ultimate intelligent and definite marketing services. So I’m very excited with the next generation of marketing services we might launch. I’m absolutely, of course excited with all the artificial intelligence, machine learning and what we have in front of us where again we’re going to in '18 make significant investments. I’m -- we are looking, if you want to look at things which are more pioneering, if you will, at the usage of quantum computing in the business. And I'm not seeing a lot of our peers or companies already making business changes based on quantum which is what we’re doing with Biogen, this biogenetic company where we are working with them in using quantum computing to genome analysis and segmentation and other kind of services. Immersive realities is something we like a lot. How are we going to use virtual and augmented reality in the context of the business, and maybe finally data driven activities and services. Data is the new currency of the world. It's not anymore the dollar, the pound or the euro, it is the data. And all the digital capabilities will reinforce and strengthens the way you can use the data to deliver value. So we are extraordinarily focused on the -- of a data centric agenda in all the services we are going to propose. So an exciting agenda in front of us and stay tuned. In '18, we will make a few announcements. Pierre Nanterme : Right. And just to close out your question, even as our -- the New is continued to scale so significantly, we do expect continued strong double-digit growth in the New in fiscal '18. Darrin Peller : Great. All right. Thank, guys. David P. Rowland: Okay. Great. Thank you. Operator : Your next question comes from the line of James Friedman from Susquehanna. Please go ahead. James Friedman : Hi, thank you. Its Jamie at Susquehanna. Pierre Nanterme : Hi, Jamie. James Friedman : Hi. I just wanted to -- you were going kind of quick there, David, I think there was an incremental disclosure, at least incremental to me. Did you disclose the New as a percentage of the bookings too? I thought you said 60%? David P. Rowland: Yes, I said -- right. I did say that. I don't know that I’ve said that previously, you're right. Good catch on your part. Every once in a while we sneak things in there, but I did say in the fourth quarter our new bookings were about 60 -- the New represented about 60% of our new bookings. And I did that is just an illustration again of the extent to which our businesses rapidly -- continues to rapidly rotate to the New. James Friedman : Okay. And then, if I could for follow-up, I’m not sure if I should go operating group or business dimension. I’m going to go business dimension. The -- so, Pierre, with your previous comments about strategy consulting, I’m looking at the fact sheet, bottom left corner, it decelerated to flat growth. You’re suggesting -- if I’m hearing you right, you’re suggesting that will accelerate now to mid single-digit. Maybe if you could provide some of the characterization of that market? Is there any cannibalization going on in that market like it might move from strategy consulting say to app services to operations, and it just doesn’t appear in strategy consulting, some perspective on the trajectory of strategy would be helpful? Thank you. David P. Rowland: Yes. Let me just mention a few things and then Pierre, I’m sure will also round it up. But maybe just kind of get grounded in the facts a little bit. So, first of all, Pierre did say and so let me just say it again, that when you look at the strategy and consulting combined, we expect that it will be in the mid single-digit range. Let me also say that it's true that in '17 the year we close strategy consulting was lower than what we had expected when we started the year, and I would say that a primary contributor to that was what we’ve commented on throughout the year with the dynamic in the United States. And so, the fact is, if you look across our broad business there are many parts of our business, many geographic markets where the strategy and consulting growth is -- very much aligned with kind of this mid single-digit expectation. So it's important to note that in the mix in '17 was the impact of some of the things that we’ve talked about in the U.S. The third thing I would say is that there is some ebb and flow of the revenue growth across our businesses. I mean, if you look at last year, meaning '16 for example, we had strong double-digit growth in consulting and strategy and certainly the nature of the work that we were doing in '16 really contributed to and set the table for the very strong revenue growth that we had in both application services and operations in fiscal '17. And so, there is some connection between our businesses that I think is important to point out as well. The final thing, I would say, is that if you kill the consulting and strategy growth back and look at the growth of strategy consulting for work that is related to the New, that portion of strategy consulting is growing double-digit. And so the services related to the New continue to grow quite fast. And Pierre, you want to add anything? No, okay. James Friedman : Yes, that’s very helpful. Thank you. David P. Rowland: Hopefully that helps, Jamie. James Friedman : Yes. David P. Rowland: Yes, thank you. Operator : Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead. Pierre Nanterme : Good morning, Lisa. Lisa Ellis : Hi. Good morning, guys. First question is M&A related. I just wanted, David, maybe just a little color on how we should think about the M&A contribution? I was just kind of looking at -- you just said, you spent $1.7 billion in fiscal '17 and that will -- roughly speaking, contributed like 2.5 to 3 points of revenue growth in fiscal '18, which is roughly the same number or slightly lower? So should we be thinking about it more just as a form of R&D spend essentially versus a revenue accelerator? Yes. David P. Rowland: So let me just be clear. Maybe I’m misunderstood what you said. So the inorganic contribution in fiscal '17 was in the range of 2%. It was just a tad higher than 2%. It rounds to 2%. And 2.5% to 3%, I mean, Lisa as you know we talk about inorganic on a rolling four quarter basis and I mean truly is a pretty straight mathematical computation. If you look at the timing of when we did our acquisitions throughout fiscal '17 as well as it is hard to predict exactly when acquisitions will occur as we look out over the four quarters of '18. But if you make a reasonable assumption about the phasing, all of that in the mix would put us in the 2.5% 3% range, which would be a stronger contribution than what we had -- incrementally stronger contribution than what we had in '17. Pierre Nanterme : Maybe -- yes, maybe, David, just for clarity, I think that will be good if you explain how we are tracking this acquisition on what on the 12 to 18 months, and then it's becoming organic because otherwise it might be confusing for the audience. So could you re-explain how we measure this? Pierre Nanterme : Yes. So our organic revenue is based on a rolling four quarters, trailing four quarters of our acquisitions. And so, in the quarter we acquire company, it's in inorganic for four quarters and then it becomes part of our organic, because our model, Lisa, as you know is that we don't buy these companies to have them operate as an appendage. We rapidly integrate them really as an engine for organic growth. Did I misunderstand your question or was that helpful? Lisa Ellis : Yes, that was helpful. I guess I'm -- I was clarifying that -- right that the -- that there is not -- that this [technical difficulty] on a lot of how we should think of the mathematical addition of the run rate revenue from those companies. But then largely they just roll into your base organic development model after that, is that right? Meaning versus like creating sort of -- an acceleration in the underlying organic revenue themselves, it's more -- it's just in addition for one year and then beyond that it just rolls into the base? Pierre Nanterme : It is after integration, of course. If you would look over five years, the contribution of our acquisition that represent a significant part of the growth that I capture, if you look at this on the aggregate level year-after-year. So you're right. We're acquiring companies for deep capabilities, what you were referring as R&D, and then after a period of time it's becoming organic. And it's totally absorbing the organization and in our organic numbers. David P. Rowland: Yes. Lisa Ellis : Okay. And then, if I don’t mind, as my follow-up question on the outsourcing side and a follow-up to the earlier question around the acceleration in outsourcing, both bookings and then book-to-bill are both running very strong. Is that -- are you seeing a continued evolution in demand there for the New into -- so should we be interpreting that as that’s now longer duration work related to the New? And in that context are you also then seeing a shift in a competitive set that you're competing against for that work? David P. Rowland: So let me just -- so let me comment, is that when you look at outsourcing or if you -- as a type of work or if I was to say if you look at application services and operations, which were big growth contributors in '17, a high percentage of those revenue streams are in the New. So it's important to understand that when we talk about operations we're not focused on legacy operations, we're focused on the operations marketplace that we have created and defined, which is all based around business as a service in the cloud with security, all powered by the New. And so, yes, I mean, I think there is -- I think you could conclude that there is a cycle that is the new technologies have matured. If reflects and they are more in kind of an operations mode, if you will, as opposed to early-stage development deployment etcetera, there is a natural cycle and I think that certainly contributes to what we’re seeing in operations and even application services to some extent. Pierre Nanterme : Yes, and in application services, to add on this, because what you said is very important, David, is indeed outsourcing is rotating to the New or what we call in outsourcing. And application services we are now selling more and more of those services based on automation, robotics, intelligent solutions based. And again, we are reinventing application services to differentiate. So when you look at your question from a competitive standpoint, to some extent you can segregate the market between the players still trying to sell more harder of the legacy older classic IT, and the players and we’re part of that camp, if you will. We are reinventing this service by providing much more of the new technologies and new features to capture more growth, and I believe that if I our outsourcing business is double-digit and is very vibrant, it's because it does what I did to the New, and not because we’re trying to sell more of the legacy. David P. Rowland: Yes. Lisa Ellis : Terrific. Thank you. Pierre Nanterme : All right. Thank you, Lisa. Lisa Ellis : Okay. Operator : Your next question comes from the line of Joseph Foresi from Cantor. Please go ahead. Joseph Foresi : Hi. I wanted to come at acquisitions, I guess, slightly differently. How do you manage the integration of all these businesses? And at what point do you think it might start to impact the culture, and is the pipeline there incredibly fertile? Pierre Nanterme : I love your question, because of course, in order to rotate to the New, we have to activate this, evolving strategy of making more acquisitions to get to talent, we couldn't develop organic and we’ve to bring from the market. And the big question is how do you integrate and how do you manage your culture? And this is something we communicated, but I'm pleased to do that with a larger group that we developed this concept which might be perceived as extremely simple, but it is more -- certainly profound than it sounds like, which is at Accenture we are developing a culture of cultures. Indeed we are coming from a long tradition like many global group of the one. One culture, having everything was one. You wanted to be one in the world and I think this cycle is behind many of the big corps, certainly behind us. You’re operating in multiple countries i.e. multiple cultures. So when you’re accommodating multiple services, i.e., multiple cultures, you need to create an environment which is going to celebrate different of cultures. And when we think about the one, the glue, if you will, its more around our values, the kind of intangible things we might expect from all our practitioners that we’re going to keep their cultures. As an illustration, I will take [indiscernible] because I think it's making exactly the right illustration of what you're saying. When we decided to be in the design and experience led kind of services quite far from Accenture. We identified a company called Fjord, 180 people at the time, less than 10 studios around the world. We said, we are going to keep the Fjord culture, the studio, the way they work, we are going to keep the Fjord identity and brand, and indeed we could have integrate them in Accenture more from a backbone standpoint, from a value standpoint they were sharing our values anyway. And they will benefit from our distribution channels. After less than four years, we are celebrating with 1,000 people in Fjord. They have a formidable brand in the marketplace. But if you would talk to the Fjord people, they’re an interesting hybrid. They live and breathe the Fjord and they live and breathe the Accenture. That's what now we want to accommodate with this concept of culture of cultures, which I think is reasonably a strong evolution for large big global group who have been developing with their concept of everything is one. At Accenture, as we said, we love diversity. Joseph Foresi : Got it. And then my follow-up, can you talk about the decline in the half of the business outside the New? How do you think about it? And can it get worse as the IT budgets get reallocated to the [technical difficulty]? Pierre Nanterme : Our job is to be relevant to the clients agenda. And to understand at what speed they’re going to evolve the kind of services we could provide. What we do see is indeed, the overall -- if you look at the overall spend we could address, its growing. If you add the marketing spend to the IT spend and to the spend they are allocating to what we are calling more at the heart of the operations, which all the industrial internet will tap on. So if you look at this from a legacy IT, its flat or shrinking. If you look at the addressable spend for us, it is growing. That’s why at Accenture we have decided five years ago in our strategy to stretch and to extend our rich from where we were famous before, support function, finance, HR, supply-chain and IT, to be relevant still in that space of support and IT stretching to the frontline, addressing the marketing spend and stretching to the operation in the field line through the industrial internet, so we could expand the addressable budget we are tapping on and the benefit of this stretching the boundaries of our scope, because should we’ve stayed in the prior scope, then it could be -- it would be much harder. So all the work is to extend your scope to expand the addressable spend. Joseph Foresi : Got it. Thank you. Pierre Nanterme : Okay. I think, Angie, we’re getting at the end of the call. So let me wrap up and thanking again all of you for joining us on today’s call. In closing, very simply we delivered an excellent fiscal year '17, we believe strongly. We finished this year strong, and I'm extremely pleased with the momentum as we enter the new fiscal year. I believe that with our highly relevant and different capabilities we are building, the dedicated and passionate Accenture people, and the very disciplined management of our business and investments, I’m very confident in our ability to continue driving profitable growth and delivering value to our clients and shoulders. We look forward to talking with you again next quarter. In the meantime, of course, if you have any question, please feel free to call Angie and the team. All the best to all of you. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 Eastern Time today through December 21. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 428382. International participants dial 320-365-3844. Those numbers once again are 1-800-475-6701 or 320-365-3844 with the access code 428382. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,017	4	2017Q4	2018Q1	2017-12-21	6.253	6.359	6.913	7.001	9.09	22.92	23	Executives: Angie Park - Managing Director and Head, IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Tien-Tsin Huang - JPMorgan Bryan Keane - Deutsche Bank Lisa Ellis - Bernstein Moshe Katri - Wedbush Rod Bourgeois - DeepDive Equity Jason Kupferberg - Bank of America Brian Essex - Morgan Stanley David Grossman - Stifel Financial Operator : Ladies and gentlemen, thank you for standing by and welcome to Accenture’s First Quarter Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. Your hosting speaker today, Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Angie Park : Thank you, Kevin. And thanks everyone for joining us today on our first quarter fiscal 2018 earnings announcement. As the operator just mentioned, I’m Angie Park, Managing Director, Head of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial Officer. We hope you’ve had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today’s call. Pierre will begin with an overview of our results. David will take you through the financial details, including the income statement and balance sheet for the first quarter. Pierre will then provide a brief update on our market positioning before David provides our outlook for the second quarter and full fiscal year 2018. We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today’s call, we’re talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on 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 on this call. During our call today, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. We include reconciliations of 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. Pierre Nanterme : Thank you, Angie. And thanks everyone for joining us today. We had an excellent first quarter and I am extremely pleased with our results. We delivered strong and broad-based revenue growth across all dimensions of our business and gained significant market share once again. Our strategy continues to different Accenture in the marketplace and we are seeing very strong demand for our services, particularly in digital, cloud and security. Here are few highlights for the quarter. We delivered very strong new bookings of $10 billion. We generated revenues of was $9.5 billion with 10% growth in local currency. We delivered very strong earnings per share of $1.79, a 13% increase. Operating margin was 15.6%, consistent with the first quarter last year. We generated strong free cash flow of nearly $900 million and we returned more than $1.4 billion in cash to shareholders through share repurchases and dividends. So, we are off to a strong start in fiscal year 2018 and I feel very good about the continued momentum in our business. Now, let me handover to David, who will review the numbers in greater detail. David, over to you. David Rowland : Thank you, Pierre. Happy holidays to all of you and thanks so much for joining us on today’s call. Building further on Pierre’s comments, we were very pleased with our quarter one results which positioned us well to achieve our full year business outlook, especially as it relates to our strong and broad-based top-line growth. Once again, these results demonstrate the durability and resiliency of our growth model and the high degree of relevance and differentiation of our capabilities in the marketplace. Before I get into the details of the quarter, let me summarize a few of the important highlights. Starting with net revenues. We expanded our business by approximately $1 billion in the quarter, with 10% growth in local currency. The diversity and durability of our growth model was evident with strong and extremely well-balanced growth across all five operating groups and all three geographic areas, with double-digit growth in four operating groups in both Europe and Growth Markets. Strong double-digit growth in digital, cloud and security continued to be the dominant driver of our growth, and it was pervasive across the business. And we estimate that our 10% growth significantly outpaced the market as we continue to gain share and strengthen our position as a leader in the new. With respect to our profitability. Our operating margin of 15.6% in the quarter was consistent with quarter one of last year, and continues to reflect the significant level of investment in our business. And we delivered very strong EPS of a $1.79, which was up 13% compared to last year. Looking at cash generation and capital allocation. Our free cash flow of $872 million in the quarter was consistent with our expectations and supports our ongoing objective to invest in our business while returning significant cash to our shareholders. We invested roughly $130 million, primarily attributed to two acquisitions, and returned approximately $1.4 billion in share repurchases and dividends. And we continue to expect to invest approximately $1.1 billion to $1.4 billion in acquisitions during fiscal 2018. With that said, let me turn to some of the details, starting with new bookings. New bookings were $10 billion for the quarter, reflecting 19% growth in local currency over last year. Our consulting bookings were $5.9 billion with the book-to-bill of 1.1 and represented an all-time high. Outsourcing bookings were $4 billion with the book-to-bill of 0.9. Once again, our new bookings were well-balanced across the business and we were especially pleased with strong bookings in North America and overall in our strategy and consulting business combined. Strong demand continued for digital, cloud and security, which we estimate represented more than 60% of our new bookings. It’s also noteworthy that we had 13 clients with new bookings in excess of $100 million in the quarter. Now turning to revenues. Net revenues for the quarter were $9.5 billion, a 12% increase in USD and 10% local currency, reflecting a foreign exchange tailwind of roughly 2%. Our net revenues were $170 million above the upper end of our previously guided range, as a result of stronger than expected performance across every dimension of our business. The consulting revenues for the quarter were $5.2 billion, up 13% in USD and 11% in local currency. Outsourcing revenues were $4.3 billion, up 11% in USD and 9% in local currency. Looking at the trends and estimated revenue growth across our five business dimensions. Growth was led by application services and operations which both posted double-digit growth. We also saw an uptick in strategy and consulting services combined, which grew mid single digits. And as I mentioned earlier, we continued to deliver strong double-digit growth in digital cloud and security by leveraging the significant investments we’ve made in recent years to build highly differentiated capabilities. Looking at our operating groups, financial services led this quarter with 11% growth in local currency, reflecting strong growth in both banking and capital markets and insurance. Growth was strong across all three geographies including double-digit growth in Europe and the Growth Markets. Communications, media and technology grew 10% in the quarter, representing their strongest growth rate in seven quarters, driven by continued strong double-digit growth in software platforms, and we delivered double-digit growth in both North America and the Growth Markets, and we’re particularly pleased with the return to strong growth in Europe. Products delivered its 10th consecutive quarter of double-digit revenue growth with 10% growth, led by double-digit growth in consumer goods, retail and travel services as well as industrial. We continue to see strong demand for our services in Europe and the Growth Markets, both of which grew double digits. Resources built further on the momentum established in the second half of last year and delivered a strong quarter at 10% growth. The highlight of the quarter continued to be strong double-digit growth in chemicals and natural resources, and we were also pleased with continued signs of stabilization in energy, resulting in positive growth in the quarter. Finally, H&PS grew 8%, reflecting significant improvement over growth rates in fiscal 2017. We saw strong growth in both health and public service, led by double-digit growth in both Europe and the Growth Markets, and strong growth in North America. Gross margin for the quarter was 32.1%, consistent with the same period last year. Sales and marketing expense for the quarter was 10.5% compared with 10.4% for the first quarter last year. General and administrative expense was 5.9% compared to 6% for the same quarter last year. Operating income was $1.5 billion for the first quarter, reflecting 15.6% operating margin, consistent with quarter one last year. Our effective tax rate for the quarter was 20.5% compared with an effective tax rate of 20.4% for the first quarter last year. Diluted earnings per share were $1.79 compared with EPS of $1.58 in the first quarter last year, and again, this reflects a 13% year-over-year increase. Days services outstanding were 43 days compared to 39 days last quarter and 44 days in the first quarter of last year. Free cash flow for the quarter was $872 million, resulting from cash generated by operating activities of $1 billion net of property and equipment additions of a $133 million. Our cash balance at November 30th was $3.7 billion compared with $4.1 billion at August 31st. With regards to our ongoing objective to return cash shareholders, in the first quarter, we repurchased or redeemed 4 million shares for $563 million at an average price of $139.69 per share. At November 30th, we had approximately $2.6 billion of share repurchase authority remaining. Also in November, we paid a semi-annual cash dividend of $1.33 per share for a total of $854 million. This represented a $0.12 per share or 10% increase of 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 2018. Now, let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our very strong results in the first quarter demonstrate that we continue to execute our strategy very well and are clearly benefited from the substantial investments we have made to build differentiated services and further enhance our competitiveness. I am especially pleased with our continued rotation to the new digital, cloud and security, which again grew at a very strong double-digit rate this quarter. We have been particularly successful with Accenture Digital, nearly tripling the annual revenue from this business since we launched it four years ago. And we have expanded our capabilities to help our clients with their digital transformations. Now, given the increasing importance of artificial intelligence, automation, machine learning and other innovative technologies, we are evolving Accenture Digital to be even more relevant to our clients and drive even greater differentiation in the marketplace. Going forward, Accenture Digital will be focused on three big areas, Accenture Interactive; Accenture Industry X.0; and Accenture Applied Intelligence. Let me bring this to life for you. We’ll start Accenture Interactive, which is all about serving the CMO and the marketing function, helping the world’s leading brands transform the customer experience. We are working with Maserati to do just that across all of its channels, leveraging our expertise in data-driven marketing, digital analytics, and creative services. We are also strengthening our end-to-end marketing capabilities for CMOs by investing to scale intelligent marketing operations. This capability, which is part of Accenture operations combines platforms, analytics and artificial intelligence to run marketing campaigns as a seamless managed service. Second, Accenture Industry X.0 focuses on the digital reinvention of manufacturing and production, helping clients create smart, connected products and services, using advanced technologies including the Internet of Things, connected devices, and digital platform. A great example is that we are partnering with Schneider Electric to create a Digital Services Factory to build and scale new services in predictive maintenance, asset monitoring, and energy optimization. By combining real time analytics with collected technologies on an IoT platform, we are helping anticipate customer needs and reducing the time to launch new services at scale by 80%. And to give our clients hands-on experience, we are opening industrial IoT innovation centers including one near Munich where we’re working with clients to design and prototype digital solutions that will improve engineering, manufacturing and production. We plan to open new centers soon in the U.S. and Asia. The third area, Accenture Applied Intelligence brings together the capability to building advanced analytics and artificial intelligence. Increasingly, we are embedding artificial intelligence into the core of our clients’ businesses across every function and process. And given our technology independence, Accenture holds a unique position in the tech ecosystem. And we are working with all the leading providers of artificial intelligence technologies including Microsoft, SAP, Google and Amazon to bring the best solutions to our clients. We are working with a leading European insurance company to use analytics and artificial intelligence to understand what their customers want and deliver a personalized experience. Our solution across marketing, claims processing and customer service is enhancing customer loyalty and making a significant bottom-line impact. We also continue to invest in this area with our acquisition of Search Technologies to expand our expertise in big data and enterprise search; and our investment in Pactera [ph] which helps companies generate value from data more quickly. Of course, we continue to work with clients on their largest and most complex transformation programs, delivering services end-to-end across our five businesses to drive business outcomes. With Marriott International, we are working at the heart of one of their most important business imperatives, the integration of Starwood, including the massive data migration. We’re also leveraging key elements of our innovation architecture to help Marriott achieve its goal to enhance the travel experience and accelerate growth. And today, we are very proud to be a flagship innovation partner for Marriott. Turning to the geographic dimension of our business. I am very pleased that we delivered strong revenue growth in all three of our geographic regions. In North America, we delivered 7% growth in local currency, driven by the United States. In Europe, we had another excellent quarter with growth of 11% in local currency, driven by strong double-digit growth in Germany, France and Italy as well as high single-digit growth in Spain. And I am extremely pleased with our development in growth markets where we delivered 16% growth in local currency, led once again by very strong double-digit growth in Japan as well as double-digit growth in Australia, Singapore and Brazil. Before I turn it back to David, I want to mention that the digital capabilities we’ve built along with our highly differentiated talent in the new are absolutely key to the successful execution of our strategy. That is why I am pleased we continue receive recognition by industry analysts in key areas ranging from the strength of our execution capabilities in digital strategy and consulting to our digital experience services in design, content and co-innovation, and for our overall market leadership in digital services. I am also pleased Accenture was recognized by Fortune as a company changing the world and by JUST Capital for our leadership in environmental sustainability and in the training and development of our people. I truly believe Accenture is a magnet for top talent in the new, not only because of the work we do for clients but because our culture supports employee who want to make a difference in the community where we live and work. So, with that, I will turn the call over to David to provide our updated business outlook. David, over to you. David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the second quarter of fiscal 2018, we expect revenues to be in the range of $9.15 billion to $9.4 billion. This assumes the impact of FX will be about positive 4.5% compared to the second quarter of fiscal 2017 and reflects an estimated 6% to 9% growth in local currency. For the full fiscal year 2018, 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 positive 2.5% compared to fiscal 2017. For the full fiscal 2018, we now expect our net revenues to be in the range of 6% to 8% growth in local currency over fiscal 2017. For operating margin, we continue to expect fiscal 2018 to be 14.9% to 15.1%, a 10 to 30 basis-point expansion over adjusted fiscal 2017 results. We now expect our annual effective tax rate to be in the range of 22% to 24%. This range does not include the impact from the U.S. tax legislation. Before I move on, let me add some additional comments on our view of the new tax legislation. Our current assessment is that we do expect to record a non-cash expense in fiscal 2018 which could be up to $500 million to reflect the impact of lower tax rates on our U.S. deferred tax assets. Beyond this expense, we expect the impact to our fiscal 2018 tax rate to be minimum. For earnings per share, adjusting for the updated net revenues, FX and tax assumptions, we now expect full year diluted EPS for fiscal 2018 to be in the range of $6.48 to $6.66 or 10% to 13% growth over adjusted fiscal 2017 results. For the full fiscal 2018, we continue to expect operating cash flow to be in the range of $5 billion to $5.3 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $4.4 billion to $4.7 billion. Finally, we continue to expect to return at least $4.3 billion through dividends and share repurchases, and also continue to expect to reduce the weighted average diluted shares outstanding by about 1% as we remain committed to returning a substantial portion of our cash to our shareholders. With that said, let’s open it up so that we can take your questions. Angie? Angie Park : 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. Kevin, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] And our first question is from the line of Tien-Tsin Huang, JPMorgan. Please go ahead. David Rowland : Hey. Good morning, Tien-Tsin. Tien- Tsin Huang : Good morning to you. Very strong results here. I guess, I’ll hone in on the consulting book-to-bill metric; like you said, it’s the highest you’ve seen. Wouldn’t that imply acceleration for the consulting segment here, in the short to mid-term? Maybe you can update us on that and just growth across consulting and outsourcing, and if that’s changed for the fiscal year? David Rowland : Yes. I mean, let me start by saying that we are very, very pleased with our consulting bookings, obviously in the first quarter. We do see good momentum in the business. We’re pleased with our pipeline. And in fact, if you look at our bookings overall, we expect to have another strong bookings quarter in quarter two. So, if you look at momentum really, broadly across our business including consulting but not limited to consulting, we are very, very positive. Perhaps your question really was getting at therefore why didn’t we raise guidance further, perhaps? And on one hand, we have a lot of reasons to be optimistic. We clearly see momentum in our business, but on the other hand it’s just one quarter in the books. And as we normally do, we want to have a little bit more visibility to the full year before we significantly change guidance. We feel obviously very comfortable. We’re taking the low end of the previous guided range off the table. And we will see where we end in quarter two. And at that point, we will reevaluate the upper end of the range. But overall, very comfortable with our business and feel very good about the momentum. Tien- Tsin Huang : Got it. That makes perfect sense. Just my quick follow-up, then I’ll just ask you obligatory question around acquisitions and the contribution to revenue or even bookings, if you have that in the quarter from acquisitions? David Rowland : Okay. Thanks, Tien-Tsin. For the full year, our view of acquisitions hasn’t changed. We expect the revenue contribution, the inorganic to be in the 2.5 to 3% range. Now, that will be heavier or higher in the first half of the year where in the first half of the year, the impact is in the 3 to 3.5% range; and certainly, in the first quarter, let’s say it was probably more toward the upper end of that 3 to 3.5% range. And then, in second half of the year, it will be lower in the 2 to 2.5% range. So, 2.5 to 3 for the full year, higher in H1, a little bit lower in H2. We continue to focus obviously on acquisitions as an essential part of our strategy. We did have a lower level of acquisitions in the first quarter. There is nothing you should read into that, is driven by market dynamics and the timing and kind of lumpiness of the way the pipeline evolves in acquisitions. We continue to focus on investing 1.1 to $1.4 billion this year, heavily focused on the new and acquiring critical capabilities to further support that part of our business, which is growing at such a high rate. Operator : Our next question is from the line Bryan Keane, Deutsche Bank. Please go ahead. Bryan Keane : Hi, guys and happy holidays as well. Just looking at strategy and consulting. That was kind of a key segment that we saw last year kind of decline through the year and I think it was flat in the fourth quarter on a constant currency basis and then, it’s bounced back here to mid single digits. Also, I heard positive bookings comments about strategy and consulting. So, maybe you can just talk about a little bit on the turn here we’ve seen in strategy and consulting? David Rowland : Yes. Let me make a comment or two, and then Pierre may want to add some comments or not, depending on what I say. So, first of all, let me just remind you. When we had this discussion last year, we noted for the group that all of our businesses are subject to going through ebbs and flows and cycles. We commented on the fact that in fiscal 2015 and 2016, we had consistent double-digit growth in consulting and strategy services combined. We mentioned last year that application services and operations were very hot. And we also talked about the fact that our strategy and consulting practitioners really play two roles. One role is to serve our clients and delivering strategy and consulting services specifically. But the other role is to really bring the full scope of Accenture services and offerings to the client. So, they have a dual role of both selling the full suite of Accenture’s capability to drive transformation, as well as let’s say business-specific service. So, in that context, as we indicated, these parts of our business can go through kind of natural ebbs and flows. We’re at a point in time now, where if you look at the transformation that a lot of industries just continue to go through, if you look at the high level of growth in the new, we’re at a point where the convergence, the factors were such the demand for those services, which is higher in quarter one, it was fairly broad-based and it was heavily focused on the new. In fact, the growth rate for consulting and strategy in the new was much higher than the average growth rate of mid-single-digits that I commented on. Pierre, let me just see if there is anything you’d want to add to that. Pierre Nanterme : Yes, sure. Complementing to just what you said, I clearly see three main drivers for strategy and consulting growth. I think of course the number one is pretty obvious is there is a strong and stronger demand around digital strategies and digital transformations in all industries and across the world. And number two, there is still the same appetite today for rationalization. You know what is this [ph] around the evolution of the industries; digitalization is on one hand, rationalization on the other hand. In terms of rationalization as administration, we have great success with our, what we call, BBZ, budget base zero kind of approach, which is all about rationalizing operations and cost to make our client more effective. And three, it is a clear rebound in what I would call the platform business. And by platform, I’m thinking about SAP, I’m thinking about Microsoft, I’m thinking about Salesforce.com as an illustration. Clearly, their new platforms, cloud-enabled are creating demand for our technology services, but as well are driving demand for consulting services, because you have to significantly transform the organization as well as the processes. Bryan Keane : Just one quick follow-up. When thinking about the 10% constant currency revenue growth rate, I know that’s up from 8% constant currency last quarter. Just trying to think about the two big dimensions. Did the new growth portion accelerate that cause that acceleration or did just the core growth business improve? Thanks so much. David Rowland : The primary driver of our growth in the quarter continues to be the new. So, the big story continues to be underpinning that 10% is just very, very strong growth in the new. Operator : And our next question is from the line of Lisa Ellis of Bernstein. Please go ahead. Lisa Ellis : So, can you guys comment on -- as you’re now in the close of the calendar year and you’re doing your discussions for calendar 2018 with clients, what the underlying growth rate is looking like in their overall IT budgets? I mean, we talk a lot about the shift into the new. But, I am curious what the dynamic is with overall growth. I highlight that just because in our recent CIO surveys, we’re actually seeing a material uptick in actually overall budget growth. I am curious if you guys are sort of seeing a similar thing as you look into calendar 2018? Pierre Nanterme : Yes. Thanks Lisa for your question. And indeed, I’ve been reading carefully the report you provided regarding your CIO survey. And I could only describe to the conclusion you’ve made from this survey, indeed there is an increase in the budget. But, as you know, the investments -- I mean, they continue to shift from the legacy to the new to use our own terminology. And on the legacy, the demand is still around rationalizing the application and rationalizing the infrastructure, which is creating a good demand on our cloud services administration or good demand as well and we have results this year on our application outsourcing business, which is part of our application services. And indeed, we see a shift of the budget to digital technologies at large, including the digital technologies in the IT shelf but I would extend to the digital technology in the marketing budget as well. And all of this is increasing, as I think we’re moving in digital from what I would qualify these last couple of years, the proliferation of the POC, the proof-of-concept. So, the prototypes that have been proliferating across the different organizations; and now we are moving to the industrialization of the deployment of the digital capabilities. And of course, it’s creating strong demand to Accenture services because we organize our capabilities exactly to support the industrialization of digital services. Lisa Ellis : Perfect, thank you. And then, David, my follow up is for you. Could you give a little color on the free cash flow numbers? I just noticed those are -- actually free cash flow is a little bit down year-on-year, quarter-to-quarter and also your guidance for the year and the midpoint of the guidance is -- doesn’t have growth year-on-year, despite the strong earnings growth outlook? David Rowland : Yes. I mean, as I said, I don’t think there’s anything particular to point out on our free cash flow guidance. The first quarter played out pretty much exactly as we had expected. It’s typical that we have an uptick in DSO in the first quarter from the fourth quarter, and that played out as expected in the range that we had expected. And we continue to track well for our free cash flow for the full year. Again, one of the things that you know Lisa we comment on is the relationship between free cash flow and net income. And our free cash flow range continues to indicate that we have a model where the free cash flow exceeds our net income. So, we feel very good about it. I mean, we work hard every day on DSOs and other aspects of our cash flow to try to land as high in the range as possible. But, we feel good about the range that we started here with and reconfirmed just few minutes ago. Lisa Ellis : Okay, cool. Yes. I just wanted to know if there were no specific call outs, all right. Thank you. David Rowland : Yes. All right. Thank you, Lisa. Operator : Thank you. And next we have Moshe Katri, Wedbush. Please go ahead. Moshe Katri : Yes, thanks. Good morning. Can we talk a bit about digital, cloud and platforms? I’m assuming it’s north of 50% of revenues. Maybe some color in that. And you did indicate double-digit growth, maybe some more color on that. Is growth accelerating or are we still at the same level that we’ve seen a year maybe two years ago? Thanks. Pierre Nanterme : Yes. I’m very pleased to comment on this. I mean, first, what we’re calling the new digital, cloud, security services; you added platforms, I’m fine with that. We see continued momentum in the services we have built these last few years, interactive, what we call mobility, analytics, cloud and security. This is very strong and we continue to enjoy a good growth. But, in addition, we don’t stand still. And this is what I wanted to communicate, especially in this call to all of you is the new ways of digital technologies and innovations are coming extremely rapidly. And so, what we wanted to make sure we stay ahead of the curve and so we could provide to our clients at scale, the services in these new technologies, and that’s why we are launching these three new services that are going to join Accenture Digital. I’m thinking about Accenture Applied Intelligence, so bringing the artificial intelligence and machine learning on top of our existing analytics business. So, the analytics business had a good momentum, and we are adding artificial intelligence and machine learning to accelerate this momentum and accelerate growth. We’re doing a very similar thing by the creation of Accenture Industry X.0 where we’re bringing the new capabilities we’ve developed in terms of engineering, production on the internet manufacturing, if you will, around the digital manufacturing platforms and all the IoT and connected devices world to again sustain and accelerate our momentum in that space. And the last one is around what we’re calling intelligent marketing campaign in Accenture Interactive. Again, Accenture Interactive has an excellent momentum as we speak in the existing services, mainly design, content production and commerce production as well. And we are adding intelligent marketing operations. So, we are adding on top of the good momentum an accelerator, if you will with the new capabilities we are launching. So, I’m very comfortable that we will continue to drive excellent double-digit growth in this part of our business. David Rowland : And if I could just add -- let me just add one comment just on the quantitative side and call out that our revenues in the new now represent approximately 55% of our total revenue stream. One of the things that Pierre and I were looking at yesterday is -- and of course, we have been managing this for many quarters now is just how pervasive that is across our business. I mean, literally, every industry, every geographic market, you see a level of rotation to the new that is let’s say in the range of 50% or higher and 55% overall. And I think that that’s important for a number of reasons, not the least of which is that supports an essential element of our strategy which is to create durability and resiliency in our revenue. And that’s an illustration, one illustration of how our model is working to do that. Moshe Katri : Thanks. And just as a follow-up to this. Our surveys are talking about the fact or indicating the fact that average project sizes in this area are starting to pretty much scale and increase pretty significantly, just given the fact that we’re getting to a point where you are saying your typical enterprise buyer kind of connecting the front end to the back end legacy backbone systems. Are you seeing that as well? And obviously, from your perspective that could be kind of a multi-year phase as well. Pierre Nanterme : No doubt the digital projects are getting bigger and they are getting bigger, just consistent with the transition, as mentioned before. We had this space where clients were investing in smaller projects that qualified in terms of prototyping or proof-of-concept type of projects, testing the thing. Now, we’ve passed that phase where we have evidence that the digital transformation is driving growth and value for the different industries and clients are shifting to industrialize the digital capabilities. You’ve seen more and more the creation of what we’re calling or clients are calling digital factories, digital hub. That’s exactly what we’re doing with Schneider Electric, illustrated a few minutes ago. So, the projects are getting bigger in average as digital technologies are maturing and are scaling. So, it’s a very good trend. And of course, it is supporting double-digit growth in digital- related services. Operator : Thank you. And next question is from the line of Rod Bourgeois, DeepDive Equity. David Rowland : Hello, Rod. How are you? Rod Bourgeois : Hey, doing fine. Thanks very much. Hey, I wanted to talk a little bit about -- the growth definitely came in strong; I want to talk about the margins for a second. Your operating margin was equal to the year-ago quarter. But I know there is a lot of moving parts underneath that margin result, particularly since you’re reporting a gap margin and essentially absorbing all of those acquisition investments. So, can you share the main puts and takes on your margin trend when you compare this year to last year? And I want to know, are there certain underlying factors that are meaningful headwinds year-to-year and certain factors that are meaningful tailwinds? David Rowland : Okay, great. Very good question. So, first of all is -- I think you started with -- let me just again say that our operating margin can in fact vary quarter-to-quarter. That’s the typical pattern in our business for a variety of reasons. Let me also reiterate that irrespective of what our margin was in quarter one which we were pleased with, we feel very comfortable that we’re on the trajectory of delivering 10 to 30 basis points of expansion for the full year while also meeting on our management objective which is to invest at significantly higher levels than the rate of our revenue growth and then covering that by real underlying expansion in our margin. As it relates to quarter one, there are probably two or three things that I would point out, none of which are too much of a surprise in terms of a normal flow of our business. The first thing, I would highlight is that quarter one of last year was an extremely strong quarter for us. You may remember, Rod, that quarter one of last year, we reported 40 basis points of expansion. And so, some of what you say in our first quarter result is -- compare against a very strong quarter last year. I think if I was to just point two other things in our results in the first quarter. One thing is, as you alluded to and I confirmed, we did have a very high level of investments flow through our P&L in the first quarter, which I think you and others would expect, given many reasons including the $1.7 billion of acquisitions that we invested in last year. And I would say in general, our investments are probably on balance higher in the first half of the year this year than the second half of the year. The other thing that we called out is that we did see some of our operating groups had lower consulting contract profitability. But again, as you know as well, our contract profitability ebbs and flows at different points in time in our business. And we expect that consulting contract profitability improves as we progress through the year. So, those are some things, I would say, the tough, the higher compares. So really, I would say, we delivered a consistent level of very high profitability that we reported quarter one last year. And the rate of investment growth was much higher than the rate of revenue growth. Rod Bourgeois : On a somewhat related note, I want to ask about your trend in your sole-source business. In our research, we’re seeing some reasons for sole-source activity to increase, but some other factors that could put some pressure on that. So, I’d love to know, when you net all the trends together, what’s the net impact on sole-source signings activity kind of on a weighted average basis across your business. So, can you say where your sole-source percentage is now and whether it’s heading up or down? David Rowland : Yes. I mean, we have had -- we track this every quarter. And frankly, we have an amazing level of consistency in the sole-source deals as a percentage of the total. It continues to run in the range of about 70%. So, really, Rod, we’ve seen -- we haven’t seen a significant change in that pattern. I think, Pierre, you wanted to add something. Pierre Nanterme : Yes. I’m going to give some color on this, because it’s giving me the opportunity to give you an information we didn’t match in the script. When you talk about sole-source, I think it does relate to the quality and the deepness of the trusted relationships we have developed with our clients over many, many years. And I’m very pleased to share with all this group that we have now 169 diamond clients. I am mentioning this number, because many of you know how important are these diamond clients in the Accenture’s strategy including in the economic model. It’s a record high of diamond clients at Accenture, 169, including the best brands across all the world and the deepness and the kind of relationship we’ve been developing for many, many years are as well driving these sole-source projects, because sole-source projects are directly correlated to the trust and the confidence our clients are putting in Accenture. Operator : Our next question is from the line of Jason Kupferberg, Bank of America. Please go ahead. Jason Kupferberg : Good morning. So, I just wanted to start with a question on digital, which obviously is the biggest part of the new. We have estimated that the Interactive business might be upwards of maybe half of digital. So, any commentary around that? And just a general update on the growth trajectory of Interactive and the competitive positioning you see there versus the digital and the traditional ad agencies as the lines continue to blur there? I would love to hear about that? Pierre Nanterme : I couldn’t be more pleased to comment on Accenture Interactive, which I would qualify as a darling of Accenture. And I want to take this opportunity to recognize Brian Whipple for the amazing job he has been doing in providing leadership on Accenture Interactive. And Accenture Interactive has been creating not long ago and as you know, for two years in the row, we have been ranked as the leading company in digital marketing by Advertising Age in terms of size, in terms of growth. We have an amazing momentum. I was very pleased to announce in my presentation that we are now the agency of record for Maserati. It means something for us because it means that indeed we are now a key player in the agency world. We are gaining massive market share. We are becoming certainly a leader in digital marketing solutions. And we have three major segments so far in Accenture Interactive, all the digital design was filled, all the digital content production. And you will remember that some years ago we acquired a company called avVenta being the basis for that. And in all commerce, e-commerce solutions with Acquity. You’ll remember an acquisition made in the U.S., and very pleased with the acquisition of Altima we made in France as well, which is going to boost our equity -- digital equity business. And we are adding now this intelligent marketing campaign where we’re going to analytics and artificial intelligence. So that’s the kind of fourth growth engine we are adding in Accenture Interactive. And so, I am extremely comfortable that we will continue to gain market share and to grow significantly with Accenture Interactive. And I am very pleased by the way that to lead our intelligent marketing campaign, we are going to welcome a very prominent and iconic leader from the industry Nikki Mendonça who is going to join Accenture soon to lead that business. So, couldn’t be more pleased. Jason Kupferberg : Okay, terrific. So, Accenture along with pretty much everyone else in the space is seeing this real bifurcation in growth between the new versus the legacy service offerings. And I am just wondering, if you guys think that that may lead to some acceleration in industry consolidation perhaps including larger deals and not just tuck-ins that have been more of the norm across the industry in recent years? Pierre Nanterme : It’s a good question. So, let me start by -- I’m going to talk for David on this because David has got a very strong point of view on the topic and always telling me that the big transaction in professional services fails at 100%, which is quite a significant percentage if you will. So, are we going to see that? I don’t know. This is not our game at Accenture. Our game is to drive organic growth on top of acquisition of very specific companies with very specific and differentiated capabilities. And then, what Accenture is offering to these companies we’re acquiring is our unique access to the best brands in the world and our unique geographic footprint; that’s the combo we’re bringing. You imagine, when these companies are joining Accenture with access to 169 diamond clients the best brands in the world. So, I tend to trust David, I always trust David. 100% of the big transaction in professional services and consolidation fail. Jason Kupferberg : Okay. Well, trusting David has worked so far. So, you might as well -- happy holidays, guys. David Rowland : You should always trust David. It’s the best year for the industry. Jason Kupferberg : Thanks, enjoy. David Rowland : Hey, Jason. Thanks for teeing that up. Jason Kupferberg : Anytime. Operator : And next question is from the line of Brian Essex, Morgan Stanley. Please go ahead. David Rowland : Good morning, Brian. Brian Essex : Good morning. Thank you for taking the call and happy holidays from me as well. There is a lot of conversation about the new, certainly worth highlighting. I was wondering if maybe I could follow on a question I think that Bryan had asked. We’ve seen some better than expected results, particularly recently from traditional on-premise hardware vendors. Kind of driving the debate for on-premise workflow computing environment, and what’s going on in that space. What are seeing -- are you seeing stabilization in the core as stabilization within legacy contracts as well or do you have any insight into what’s going on there, or do you view that as maybe an anomaly in the market? Pierre Nanterme : What I can share with you is indeed our view on this platform’s market. As you know, we are working with all the major players in the ecosystem, I mean think about SAP, or I call Microsoft, Salesforce.com, Workday to mention a few. If you take what probably you’d call the legacy players and not the -- I mean, the cloud native [ph] such as Salesforce.com and Workday, there are kind of periods, especially SAP and Oracle, of pause where they were facing this transition from on-premise to cloud-enabled platforms. And then what you’ve been seeing is that put the act together in a very strong way. And if you take just SAP, they launched S/4HANA and then on top of HANA their in-memory analytics tools, they are putting now Leonardo, which is bringing more intelligent and artificial intelligence on top of it. And all of this now is cloud enabled and you heard that partnership between SAP and Azure to provide the SAP solution on the cloud. And now, this is what we’ve seen in our services that our services on these platforms are growing significantly. And so, to a great extent, I don’t believe that there is anymore -- the terminology of legacy players. I think they’ve been able to transition in the new and now they could compete in cloud ERP solution, likewise the Salesforce.com or the Workday. So, I’m very impressed with the rotation they’ve been driving in their business to move from on-promise legacy to cloud as a service business. Brian Essex : Great. And then, maybe if I could touch on, as a follow-up on a question that Lisa I think has asked with regard to budgets. I mean, our CIO surveys also pointed to better spend next year but that was a 3Q survey that was prior to tax reform. Are you having any -- or do you have an incremental color for next year, if there is any sensitivity to lift from reform and potential upside to what you’ve initially had in terms of conversations with your customers? Pierre Nanterme : No, I can mention. I mean there are many analysts who have been providing information as well as you are driving CIO surveys and they are all very consistent that the budget would increase with the shift from legacy to digital. But for me, to be honest, with 10 billion bookings in Q1, it would be hard not to acknowledge there is a demand out there. Angie Park : Kevin, we have time for one more question and then Pierre will wrap up the call. Operator : Thank you. That question is from the line of David Grossman, Stifel Financial. Please go ahead. David Grossman : David, sorry if I missed this, but I think you mentioned the tax reform had minimal impact on fiscal 2018 EPS. Can you provide us with any parameters that may help us understand the potential impacts of tax reform beyond this fiscal year? David Rowland : Yes. So, just to I guess to reconfirm, to ensure I was clear in the remarks I made in the script. Again, we expect our tax rate this year again to be in the 22 to 24% range. And that does not include the impact of the U.S. tax legislation. Again, our current assessment is that the impact on the effective tax rate will be minimal, other than a non-cash expense for fiscal 2018, which could be up to 500 million which reflects the impact of lower tax rates on our U.S. deferred tax assets. I didn’t say it in the script but let me also add that we do not expect an impact on our tax cash payments this year. So, having said that, over time, on an ongoing basis the legislation could modestly impact our ongoing effective tax rate by imposing taxes on our intercompany transactions and limiting our ability to deduct certain expenses. And so, the specific answer to your question beyond what I said about 2018 is that on an ongoing basis, we think it could modestly impact our ongoing effective tax rate. And essentially, you’ve got the lower rate, which is let’s say offset essentially or closely offset by the loss of certain deductions and then the other thing in the mix as well is the tax imposed on intercompany transactions. But, in the mix, we see a modest impact over time. David Grossman : So, that’s the modest impact, plus or minus, is that up? David Rowland : I would say more likely a modest upward pressure than downward. David Grossman : Got it. Great. Thanks for that. And just one very quick follow-up. So just in addition to -- you’ve done a great job of using acquisitions to accelerate your ability to reach scale change in the marketplace. So, if in fact that’s an accurate observation, given that the guidance for a slower pace of acquisition for this year, should we assume that your recruiting and training infrastructure is now at a point that you can better satisfy in market demand or are there other dynamics that play in that equation? David Rowland : I would say that -- I wouldn’t -- I understand that if you just look at it purely numerically, you would say that we have a lower rate of acquisitions. I wouldn’t say that -- what I would say is that this year’s estimate of 1.1 to 1.4 is entirely consistent with our strategic objective. It just so happens that last year, the nature of the opportunities in the marketplace was such that we went above what would be our typical strategic range. That could happen at any time in the future. So, it’s not a slowdown as much as it was last year; it was just above our strategic range. And this year, we’re guiding 1.1 to 1.4 which is right consistent with our strategic objective and we’ll see how the year plays out. Pierre Nanterme : All right. I think it’s time right Angie to wrap up the call. Thanks again for joining us on today’s call. So, in closing and with the first quarter now behind us, as you probably heard from David and I, we feel very good about where we are. And I’m personally confident that we are well-positioned to continue gaining market share, driving profitable growth and delivering value for both our clients and all our stakeholders. I want to wish you, our investors and analysts and everyone at Accenture a very happy holiday season and all the best for the New Year. We look forward to talking with you again next quarter. In the meantime, if you have any question, as always, please feel free to call Angie and the team. All the best. Happy New Year. Talk to you next year. Operator : Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining while using AT&T Executive Teleconference. You may now disconnect. Have a good day.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,018	1	2018Q1	2018Q2	2018-03-22	6.466	6.568	7.12	7.208	10.16	22.13	22.62	Executives: Angie Park - MD, IR Pierre Nanterme - Chairman and CEO David Rowland - CFO Analysts : Tien-tsin Huang - JPMorgan Joseph Foresi - Cantor Fitzgerald Bryan Keane - Deutsche Bank Brian Bergin - Cowen Brian Essex - Morgan Stanley David Koning - Robert W. Baird Arvind Ramnani - KeyBanc Rod Bourgeois - DeepDive Equity Jason Kupferberg - Bank of America Merrill Lynch Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture’s Second Quarter Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. 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, Angie Park. Please go ahead. Angie Park : Thank you, Kian. And thanks everyone for joining us today on our second quarter fiscal 2018 earnings announcement. As Kian just mentioned, I’m Angie Park, Managing Director, Head of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial Officer. We hope you’ve had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today’s call. Pierre will begin with an overview of our results. David will take you through with the financial details, including the income statement and balance sheet for the second quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the third quarter and full fiscal year 2018. We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today’s call, we’re talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on 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 on this call. During our call today, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. We include reconciliations of 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. Pierre Nanterme : Thank you, Angie. And thanks everyone for joining us today. We are very pleased with our excellent financial results for both the second quarter and the first half of 2018. For the quarter, we again delivered strong double-digit revenue growth which was broad based across all dimensions of our business. We continued to go ahead of the market and are clearly gaining significant market share. I am positively pleased with our record new bookings. The very strong demand we are seeing especially in digital, cloud and security, demonstrate that we continue to provide clients with highly differentiated and relevant services. Here are a few highlights for the second quarter and year-to-date. We delivered excellent new booking of $10.3 billion for the quarter and 20.2 billion for the first half. We grew revenues 10% in local currency for both the quarter and year-to-date. We delivered outstanding earnings per share for the quarter of $1.58 on an adjusted basis, 19% increase and for the first half EPS grew 16% on an adjusted basis. Operating margin was 13.4% for the quarter and 14.5% for the first half, a contraction of 20 basis points year-to-date. We generated very strong free cash flow of $791 million for the quarter and nearly 1.7 billion year-to-date. And we continue to return substantial cash to shareholders through share repurchases and dividends including $2.2 billion year-to-date. Today, we announced a semi-annual cash dividend of $1.33 per share, which will bring total dividend payment for the year to $2.66 per share, a 10% increase over last year. So as we move in the second half of 2018 I feel very good about the momentum in our business. We are raising our business outlook for revenues, earning per share and free cash flow, and I am confident in our ability to deliver another strong year. Now let me hand over to David, who will review the number in greater detail. David over to you. David Rowland : Thank you Pierre and thanks all of you for taking the time to join us all in today’s call. Let me start by saying that we were very pleased with our financial results in the second quarter, which put us on a strong trajectory to exceed the net revenue, EPS and cash flow guidance provided at the beginning of the year. Once again our results this quarter reflect broad based momentum across every dimension of our business and reinforce our relevance and differentiation as the market leader in innovating and leading (inaudible). Before I get in to the details of the quarter, let me summarize the major headlines of our results. Continued strong topline growth was the first major headline with net revenues increasing almost $1.3 billion, reflecting growth of 10% in local currency. The overall theme of broad based growth was evident again this quarter with strong growth across all five operating groups and all three geographic areas with double-digit growth in three operating groups and in both Europe and the growth markets. Growth continues to significantly outpace the market, driven by strong double-digit growth in all three components avenue including digital, cloud and security related services. As a second major headline, we delivered EPS in the quarter of $1.58 on an adjusted basis, reflecting 19% growth over last year. This level of EPS growth was driven primarily by 13% growth in our operating income. At the same time, operating margin of 13.4% decreased 30 basis points compared with quarter two of last year. Our operating margin primarily reflects the impact of lower profitability in H&PS, as well as the impact of the record level of investments made in fiscal ‘17 to acquire critical skills and capabilities in high growth areas of our business. We do expect operating margin expansion in the second half of the year, and I’ll come back to that in our business outlook. The third major headline relates to outstanding cash flow in the quarter of $791 million, resulting in 1.7 billion on a year-to-date basis, which puts us on a very strong trajectory for the full year. For the first half of the year, we continue to execute against our strategic capital allocation objectives first by investing over $340 million primarily attributed to five transactions and second by returning roughly $2.2 billion to shareholders via dividends and share repurchases. With that said, let me turn to some of the details starting with new bookings. New bookings were $10.3 billion for the quarter, representing a record high in our third consecutive quarter with bookings of 10 billion or more. Our consulting bookings were 5.7 billion with a book-to-bill of 1.1 and outsourcing bookings were 4.6 billion with a book-to-bill of 1.0. Bookings continue to be well balanced across the dimensions of our business and 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 more than 60% of our new bookings. Looking now at revenue; net revenues for the quarter were $9.6 billion, an increase of 15% in USD and 10% in local currency, reflecting a foreign exchange tailwind of roughly 5.5% compared to the 4.5% impact provided last quarter. This result was approximately $95 million above the upper end of our FX adjusted range. Our consulting revenues for the quarter were 5.2 billion up 17% in USD and 11% in local currency, and our outsourcing revenues were 4.4 billion, up 13% in USD and 8% in local currency. Looking at the trend and estimated revenue growth across our five business dimensions, growth was led by application services which posted double digit growth, driven by strong demand in application development services to deploy new technologies. Operations grew high single-digits and strategy and consulting services combined grew mid-single digits. And as I mentioned earlier, we continue to deliver strong double digit growth in digital, cloud and security related services by leveraging the significant investments we’ve made in recent years to build highly differentiated capabilities. Taking a closer look at our operating groups, communications, media and technology led all operating groups with 15% growth in local currency. Continued momentum was driven by double-digit growth in both software and platforms in communications and media as well as double-digit growth across all geographies. Resources grew 11% in the quarter, driven by strong double-digit growth in chemicals and natural resources and further improvement in energy which posted strong growth. We were pleased with the strong balanced growth across all three geographies and resources. Products delivered 10% growth in the quarter, representing its 11th consecutive quarter of double-digit growth which is an incredible accomplishment. Growth was led by strong double-digit growth in industrial and strong growth in consumer goods, retail and travel services. Europe and growth markets both grew double digits reflecting continued strong demand for our services. Financial services grew 7% in local currency, reflecting strong balanced growth in both bank in the capital markets and insurance. Growth was strong across all three geographies including double-digit growth in the growth markets. And finally, H&PS grew 6% with relatively balanced growth in both health and public service, led by double digit growth in Europe and the growth markets and solid growth in North America. Moving down the income statement; gross margin for the quarter was 29.7% compared to 30.1% in the same period last year. Sales and marketing expense for the quarter was 10.4% compared to 10.5% for the second quarter last year and general and administrative expense was 5.9% consistent with the same quarter last year. Operating income was $1.3 billion in the second quarter, reflecting a 13.4% operating margin, a decrease of 30 basis points compared to quarter two last year. Before I continue with the other metrics, I’d like to highlight that this quarter we recognized a provisional tax expense of $137 million primarily to re-measure our net deferred tax assets at the new lower tax rates. This expense increased our quarter two tax rate by 11% and decreased diluted earnings per share by $0.21. The following adjusted results exclude this impact. Our adjusted effective tax rate for the quarter was 15.1% compared to an effective tax rate of 20.7% for the second quarter last year. Adjusted diluted earnings per share were $1.58 compared to EPS of $1.33 in the second quarter last year, and again this reflects a 19% year-over-year increase. Our day services outstanding were 40 days compared to 43 days last quarter and 42 in the second quarter of last year. Our free cash flow for the quarter was $791 million, resulting from cash generated by operating activities of 924 million, net of property and equipment additions of 133 million. Our cash balance at February 28 was $3.6 billion compared with $4.1 billion at August 31. With regards to our ongoing objective to return cash to shareholders in the second quarter we repurchased or redeemed 5.2 million shares for 804 million at an average price of $1.55 $0.30 per share. At February 28, we had approximately 2.1 billion of shares repurchase authority remaining. And as Pierre mentioned, our Board of Directors declared a dividend of $1.33 per share, representing a 10% increase over the dividend we paid in May last year. This dividend will be paid on May 15, 2018. So at the half way point of fiscal ‘18, we’ve delivered very strong results and are very well positioned for the remainder of the year. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our excellent performance in the second quarter and year-to-date demonstrate that we have the right growth strategy and that we are executing extremely well. With cent percent revenue growth in local trends in the first half, we continue to grow much higher than the market and indeed we have outperformed our basket of competitor for now 16 consecutive quarters for years. Our strong and durable performance, reflects our ability to rapidly scale our market leading position in the new digital, cloud and security services, and for the first half, revenues from the [new] were nearly $11 billion more than 55% of total revenues and continued to grow at a very strong double-digit rate. The accelerated rotation of our business reflect the significant investment we have made over the last few years including record investments last year in strategic acquisitions in building assets and solution and in hiring and developing the most relevant talent. Let me [bring] to light in two key parts of our business, Accenture Interactive and Accenture Security. With Accenture interactive, we are scaling to further strengthen our leadership position. And for the last two years, we are recognized at Advertising Age as the world’s largest provider of digital marketing services. Just this month, Walt Disney Studios named Accenture Interactive along with Fjord, an innovation partner for its new StudioLAB. With our (inaudible) strategy, design and technology, along with our deep industry experience and the applied R&D capabilities of Accenture labs, we are helping Disney to apply emerging technologies, immersive entertainment, artificial intelligence and the Internet of Things to create the future of entertainment, and we continue to invest in Accenture Interactive to enhance our capabilities and market differentiation, including four acquisitions we made in the Mackevision, a leading producer of 3D and immersive content in Germany; Altima, a French digital commerce agency; Rothco, a creative agency in Ireland; and MATTER, a design and innovation firm in the US. We’re also rapidly scaling Accenture Security. Less than three years ago, we committed to building a market-leading, cyber security business to help clients become more resilient to cyber threats. Today, Accenture Security is one of the largest providers in the market approaching $2 billion in annual revenues. Our security business benefit significantly from Accenture’s global scale, and we tailor industry specific solutions across the full range of security services including identity and access management, cyber defense, managed security and strategic and risk. We are helping leading insurance company transform its cyber defense with an advanced threat incident response program, including automation and training for their people which has dramatically reduced the time to detect and respond to [service]. Accenture has a unique ability to scale the new, with the breadth and scope of service we provide end-to-end from strategy and consulting to digital technology and operations together with outdating the expertise. We are positioned at the call of our clients’ largest transformation programs. We are working with the LG Company on the global transformation program with SAP S/4HANA designed to streamline manufacturing and supply chain processes, gain real-time customer insight to improve decision making and accelerate innovation to drive growth. And we continue to work with clients on mission critical integrations. We helped DBS Bank, the largest bank in Southeast Asia with a successful positive merger integration of the wealth management and retail banking businesses acquired from ANZ Bank in five key markets including Indonesia, Taiwan and Singapore. Now turning to the geographic dimension of our business; I am particularly pleased that we continue to deploy our capabilities in the new, at scale, in the largest markets around the world. In North America, we delivered 8% growth in local currency led by another uptick in growth in the United States. In Europe, we had another quarter of double-digit growth with 10% in local currency, driven by strong double-digit growth in Germany, Italy, France and Spain. And I’m especially pleased that given our significant market share gains over the last few years in Europe, we are now positioned as the market leader. And we delivered another excellent quarter in growth market with 15% revenue growth in local currency. Japan again led the way with very strong double-digit growth, but we had double-digit growth as well in Australia, Brazil and Singapore. Before I turn it back to David, I want to say a few words about innovation and how we are building scale through continued investment in our unique innovation architecture which integrates our capabilities from research, ventures and labs to studio, innovation centers and delivery centers to bring even more innovation to clients, appeal the global network of more than 100 world class centers where we collaborate with clients and co-create innovative digital solutions, and by extending this network to be even closer to clients. In the last few months, we opened new innovation hubs in Zurich, Tokyo, Boston and Columbus. We launched a new Liquid Studio in Madrid, and we opened our new industrial IoT innovation center in Modena, Italy. Quite simply innovation is at the heart of everything we do at Accenture, and we will continue to invest not only to scale our current capability in the new, but also to anticipate the next wave of technology and business disruptions to keep Accenture ahead of the curve in the new. So with that I will turn the call over to David to provide our updated business outlook. David, over to you. David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the third quarter of fiscal ’18, we expect net revenues to be in the range of $9.9 billion to $10.15 billion. This assumes the impact of FX will be about 5.5%, compared to the third quarter of fiscal ‘17, and reflects an estimated 6% to 9% growth local currency. For the full fiscal year ‘18, based upon how the rates have been trending over the last few weeks, we now assume the impact of FX on our results in US dollar will be 4% compared to fiscal ‘17. For the full fiscal ‘18, we now expect our net revenues to be in the range of 7% to 9% growth in local currency over fiscal ‘17. For operating margin, we now expect fiscal year ‘18 to be 14.8%, consistent with adjusted fiscal ‘17 results. This assumes approximately 20 basis points of expansion in the second half of the year. We expect our GAAP annual effective tax rate to be in the range of 24% to 26%. Excluding the impact of the US tax law changes, we continue to expect our annual effective tax rate to be in the range of 22% to 24%. For earnings per share, we expect our GAAP diluted EPS for fiscal ‘18 to be in the range of $6.40 to $6.49. Excluding the change related to US tax law changes, we now expect full year diluted EPS to be in the range of $6.61 to $6.70 or 12% to 13% growth over adjusted fiscal ‘17 results. For the full fiscal ‘18, we now expect operating cash flow to be in the range of $5.2 billion to $5.5 billion; property and equipment additions to be approximately 600 million; and free cash flow to be in the range of $4.6 billion to $4.9 billion. Finally, we continue to expect to return at least 4.3 billion through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by about 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. Angie? Angie Park : 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. Karen, would you provide instructions for those on the call? Operator : [Operator Instructions] And our first question will be from Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Very strong (inaudible) growth, obviously it looks like it might be coming in at a slightly higher cost. Maybe what surprised you exactly on the margin front? I think you mentioned H&PS, can you elaborate there? We figured maybe contract profitability or use of subcontractors as I may have missed it. If you could elaborate that would be great. David Rowland : Yes, on H&PS there are really two set of things at play; first of all, we had a decline in profitability that was primarily driven by lower contract profitability on a few large contracts, and some of that relates to renewals at lower level of profitability that may have been previously contracted out. And then secondly in the mix for H&PS are higher acquisition-related costs for a number of acquisitions that we’ve done over the trailing four quarters. So those are really the two factors in H&PS, our leadership team is very focused on the profit agenda in H&PS and we do expect H&PS’s profit to improve in the second half of the year. But in the quarter, those were the two primary drivers. Tien- tsin Huang : Right. So I guess as my follow-up and just a follow-up too on the confidence in the margin expansion in the second (inaudible), and more importantly any reason why Accenture can’t return to the typical 10 to 30 bps that we’ve seen for so long here? It sounds like you can address those contract issues but anything else to (inaudible)? David Rowland : What I would say is; stating the obvious; this year’s guidance at 14.8 is in the context of this year. It in no way signals anything about what our ability is on an ongoing basis to deliver modest margin expansion. And while as you know, I’m not going to provide specific guidance, I do feel comfortable saying in general terms that our strategic objective to overtime expand our margins modestly in the 10 basis points to 30 basis point range remains intact. There isn’t anything about this year that changes our view on that. Operator : Next question is from Joseph Foresi with Cantor Fitzgerald. Please go ahead. Joseph Foresi : I wanted to ask about consulting, it seems like the new is driving a lot of the consulting work. Can you talk about the growth rate there and also about the conversation rate into more steady business, is that about the same or has it changed since prior years? Pierre Nanterme : Yes, indeed, our consulting business as you’ve seen has become stronger and stronger and you’ve seen specially we are really pleased with the bookings we see in our consulting business. The rotation to the new [easy] factor explaining that we are gaining more consulting business but as well the rotation to the new is consulting as well, creating a ripple affect with the rest of Accenture. So it has a good contribution in the full range of our services, from strategy to consulting, digital and technology, and as well operations. So the new is really impacting across the board, but we see a very positive impact in our strategy and consulting business as well as in system integration. Bookings are very strong, and if bookings are very strong, it’s because we have a good win and conversation rate. David Rowland : And I’ll just add one point to what Pierre said I think an important insight in the mix of consulting is a very strong market in our platform business. You when we talk about our platform business, we’re talking about SAP, Microsoft, Oracle, Salesforce, and Workday primarily, and that part of our business is growing very well. There is definitely a lot of market activity around next generation ERP, and we’re benefiting from that in our consulting business. And as Pierre said the conversion rate - with stronger growth in consulting, those projects on average tend to be shorter in duration, so bookings do tend to convert to revenue at a faster rate. Joseph Foresi : And it looks like the business outside of the new is improving a little bit. Can you talk about that and any comments on your strategy or your strategy in the business outside of the new? Pierre Nanterme : Good question. Now we could say the new is the business of Accenture. So I think we will continue to talk about (inaudible) to the new, because what we believe at Accenture is the wave of this new emerging disruptive technology will continue to come in at an incredible pace. That’s why we continue to talk about the new, because today we’ve been talking a lot about interactive mobility, analytics, and cloud security. We know to some extent the next new, if I could use that language is coming fast in terms of immersive realities, blockchain, even quantum gate and other technologies. So the new is Accenture, now the remaining core is pretty solid and we are pleased with that because frankly we have invested as well to continue modernizing the core. So we didn’t play defense, which is something we don’t like to do at Accenture frankly, but we played the attack by modernizing our core business, and I’m thinking about what we’ve been doing in terms of bringing a lot of [robotic] automations in our services in terms of application outsourcing, in terms of business process services. So, we improve and increase the competitiveness of our services vis-à-vis of our clients, and by the way it does reflect in the good growth we had in technology and operations. So we don’t let the core down, we invest in the core, we pay interest tax, we modernize, and we continue to be a very stronger player and leader in the core. Operator : Next question is from Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Just wanted to ask about the tax rate; I know the tax rate was lower, I think it was 15.1% for the quarter. But you kind of reiterated the guidance for the year at [20] to 24. I think that implies a second half tax rate that’s higher, maybe 27% to 28%. So post tax reform, just thinking is that a newer, higher tax rate going forward, just thinking about tax? David Rowland : Our tax rate is lumpy by quarter. The tax rate in any particular quarter is essentially driven by four things, it’s driven by the geographic mix, it’s driven by the change in reserves, it’s driven by final determinations, and it’s also driven by the tax impact of equity compensation. So for example, if you look at the second quarter, the second quarter typically has a structurally lower tax rate, the lowest of the four quarters, primarily because of the equity compensation, and the fact that the equity compensation is primarily granted on January 1. And as you know when our stock is appreciating as it has been, and the stock price is higher when it was initially granted as opposed to the [best] date, then we get a tax benefit from that, which is what we see, for example in the second quarter of this year. So, do not read anything into the implied tax rate for the second half of the year or quarter three or quarter four. I would focus more on the annual tax rate and recognize that in any given year our tax rate is lumpy by quarter for any number of reasons. Bryan Keane : And then just a quick follow-up on tax rate, I know in the Q, I think it talked about the effective tax rate could go up 3.5 points in fiscal year ‘19 due to the adoption of the FAS-B, I think it’s the intra-entity transfers of assets other than inventory. Just curious if we should just expect going forward a higher tax rate as well? And then just a quick question on the operations group, it just moderated a tad from its consistent double-digit growth. Just wanted to make sure there wasn’t anything implied on that slower growth rate going forward? David Rowland : You are a student of tax when you get into that question. So we did disclose the ASU that you referenced in our K. And in that disclosure, we commented on a potential impact of up to 3.5 percentage points. I think I might have also called out, at that time, that that is an impact in isolation, but as always there are other things that impact our tax rate including tax planning. Also you’re asking about ’19, in the case of ‘19, you’re aware that the base erosion tax kicks in, but it kicks in at a lower level than it does in ‘20. So there are a lot of things in the mix in ‘19. Again I’m not going to comment specifically on guidance, but I will say that, as we sit now subject to change as we continue to evaluate our tax situation, we don’t see a material change in our tax rate in ‘19 from the adjusted guidance that we’re providing this year. And I’ll update that in September, but that’s our current view. Bryan Keane : Okay, helpful. I’ll turn it over. I just was asking really quick on the operations group. It had been double-digits consistently, and then it’s just high-single digits now, so just wanted to see if there is any [color]. But thanks, congrats on the quarter. Pierre Nanterme : I’m going to give a quick one. No change. David Rowland : No change on operations. Operator : Next question is from Brian Bergin with Cowen. Please go ahead. Bryan Bergin : Wanted to ask on the local currency revenue guide range for the year, relative to the strong 10% first half of performance, anything you’re seeing now in the second if it wouldn’t leave you more bullish for the full year range? David Rowland : One thing is that the inorganic contribution will be incrementally lower in the second half of the year. That’s in the mix, but other than that, there is not anything specifically. As you know, I think everyone knows is that we work very hard to land towards the upper end of the range, and we feel very good about our business as we turn the page to the second half of the year. We feel great about our pipeline, we expect to have another good bookings quarter in the third quarter, and we’re going to work hard every day to try to land at the upper end of the range, and that would be a good result. Bryan Bergin : Can you comment on where that inorganic was for the quarter, and then on the interactive business, we’ve seen the challenges demonstrated by the traditional agencies with market spend evolving. What do you think is the biggest difference in your model that’s enabling your stronger relative growth? David Rowland : I’ll comment briefly on inorganic and then I’ll I’m going to let Pierre pick up on the second. Previously we had said 2.5% to 3% for inorganic, and I would say now we’re looking at more like 2.5%. So really its 2.5% for the year, I’m referring to. Pierre Nanterme : On Accenture Interactive, and I clearly understand your question. When you look in the typical business of the agency, there are things we’re competing against and things we’re not doing at all. And the things we are not doing at all is all in this buying business you have in the agencies and this business is trending down significantly, as we all know. So we are not in this typical part of the business. Where we are focused on is clearly the high growth part of this digital marketing environment, where what we are calling brand meets creativity enabled by technology. This is the sweet spot we decided to invest in and we benefit from the investment. Second is, we are certainly one of the very few, if not unique to provide a full range of services against our mentality of end-to-end from design to production services to commerce services to analytic services, and now, we’re launching intelligent marketing services. So we have this full range of technologies from experience to enabling the customer to want magic of marketing in digital as well with the physical experience, what we’re now calling the physical, the combination of physical and digital. And three, it’s just the leverage of the full scale and footprint of Accenture. Just bear in mind, we are among the very few if you compare to any of our competitors to operate in more than 50 markets or 50 countries. We are covering more than 15 industries, I guess, 19. So when you look at the depths and breadths of our footprint, we have the opportunity to grow in much more industries and in much more markets, bringing these end-to-end capabilities, highly differentiated, and targeted in high growth areas. Proof-point, take Fjord as an illustration, we acquired now three or four years ago with around 150 people, maybe 160. Now, they are more than a 1.000 people creating the largest experience agency in the world. This is the leverage which is provided by Accenture, and this leverage opportunity is absolutely second to none in the marketplace. Operator : Next question comes from Brian Essex with Morgan Stanley. Please go ahead. Brian Essex : I was wondering if first of all, if I could dig into your conversation with Tien-tsin, just on Health & Public Services, these contracts that were signed at lower profitability rates. Is there anything in the quarter that was maybe one-time in nature in terms of upfront costs that give you confidence in better profitability on a run rate basis or maybe a little bit of color on those, just to give us confidence in margin expansion going forward? David Rowland : I don’t think there’s not anything one-time in nature that would be appropriate to call out on this call. In a big operating group, there are a lot of things in the mix. And I would tell you that we have a very, very strong leadership team led by Dan London and our H&PS operating group and they are very diligently focusing on both driving the strategy and growth agenda, but also our profitability agenda. And I have confidence the trajectory for H&PS in the second half of the year is going to be a positive trajectory. They are working all levers that we normally focus on, which is everything from our pricing to our cost of delivery, through to the efficiency and effectiveness of our sales and marketing costs, our investments, etcetera. And I think they’ve got the levers at their disposal to navigate an improving trajectory. Brian Essex : Got it, that’s helpful. And then maybe on the financial services, you continue to outpace your peers with some pretty strong constant currency growth there. Looks like a more European focus. Maybe a little bit of color in terms of conversations that you’re having with your customers’ budget outlook for the remainder of the year and an outlook for ongoing strong growth in that segment? Pierre Nanterme : Yes, of course. Frankly, financial services by and large if you look this (inaudible) has been strong. It is an industry, despite all of the value effects around that industry. It’s an industry which is still investing a lot in technology because financial services is all about tech. And they have to invest if they want to stay relevant. Now, you have some very specific areas of growth. I’m thinking about risk and regulatory management. You know what’s happening in financial services, there’s a lot on regulatory requirements across the world, especially in Europe, we have to do the paddle (inaudible). In insurance, the severance in capital market, they have their own regulation as well, and then you have all the risk management which is a very hot place in financial services for all the reasons we know. So it’s creating a significant market, so all what we could, we are calling (inaudible), risk and regulatory management. Of course the other part is always related to omni-channel management. In financial services and in banking, you need now to have an omni-channel architecture with your physical branches, where you’re adding your digital capabilities. And all of this should create a seamless customer experience. All of this has to be built, so you need a lot of strategic work to create this experience architecture, and then you need to build the digital platforms and all the new related processes. And maybe three, is data; financial services is an industry where you’re mining tons of data, tons of information. And all this concept for the banks, mining their own data, I’m talking about the data of the banks to find new business models that could create value is very (inaudible). So the activity there, you mentioned Europe rightfully, because in Europe, it’s true in the US, but it’s very true in Europe, the retail businesses is pretty depressed because the interest rates are pretty low. So, when your interest rates are pretty low, you’re not delivering the same profit in your core business, the retail business. So you need to do something in order to uplift your growth and improve our market. So the financial services is under pressure, but again it’s like the other businesses. They’re under pressure, so they are looking for new capabilities, new business models, and this is where we position those services. Operator : Next question comes from Darrin Peller with Barclays. Please go ahead. David Rowland : It sounds like he had a bad connection, do you want to go to the next one, are you hearing me better now or --? Darrin we cannot hear you actually, you’re breaking up on us. Angie Park : Karen, why don’t we go to the next caller, please? Operator : The next question comes from David Koning with Baird. Please go ahead. David Koning : My first question is just the other expense line, the 44 million or so in Q2, how is that supposed to look in the future and what exactly is that again? David Rowland : That is primarily FX (inaudible), essentially what is driving that this year. We have two types of hedging we do; we hedge certain balance sheet items to hedge against intercompany movement of cash and transactions, and then the other hedging program of course is on our GDN. But there are some balance sheet items we don’t hedge. So some of those are unhedged losses, if you will. But then even for our hedging programs, at times the hedging programs can result in hedging gains or losses below operating income. So that’s all in the mix. The simple answer is, it’s all related to hedging losses this quarter and that can vary quarter-to-quarter. And so all that’s accounted for the important point in our EPS guidance. David Koning : And then just one follow-up, the acquisition spending the last two quarters has been less than it had been in several prior quarters. Is there any expectation that that kind of ramps back up in the back half? David Rowland : We think it will be stronger in the back half of the year, but we think we could land a bit lower than $1 billion for the full year. Operator : Next question comes from Arvind Ramnani with KeyBanc. Please go ahead. Arvind Ramnani : Can you talk about the nature of conversations on some of the new areas, such as AI and blockchain, including the scope and size of these projects? Pierre Nanterme : As I’ve said before particularly at Accenture, it’s called the new and the [nu-new]. And I encourage all of you and I will mention that in a few minutes to participate with the idea, because we will reveal a lot about the nu-new and what’s next. So I’m going to give to you some flavor on the blockchain, on the artificial intelligence. On the blockchain, there are more and more projects, and again, what we see is we’re starting to move from typical prototypes and proof-of-concept to [famous book] to projects starting to get some scale. We’re not yet there and I think we’re starting to see what’s most important with blockchain. What are the relevant areas where blockchain could create value? And that’s what we’re doing in our labs. This is what we’re doing with cool innovation with our partners. And when you have a new technology, the big question is how you create business and value out of this new tech. This is what we’re doing currently with the accounts of several banks in Singapore. So it can do banking arrangement, where we see lots of application of blockchain. Capital markets as well. This is what we’re doing with the exchange in Australia. Very recently, we announced new opportunities in the shipping industry with a subsidiary of St Maarten CGM, which is one of the largest shipping company in the world. In the contract management, we see the payments, we see the transaction exchange, and we see a lot around document and contract management. At first we’re starting to explore is as well around tracking and food security or security in tracking the supply chain. So payment, transaction exchange, contract management, tracking of the supply chain, these are four applied opportunities on the blockchain. On artificial intelligence, probably it would take two days to mention all of the opportunities we see in applying the artificial intelligence across the globe. Clearly, the way we look at it, because we are absolutely obsessed with applying technology to create value. I’m not using a data, the kind of (inaudible) thing, where at the end of the day you don’t know exactly what to do with it. So that’s why we call applied intelligence and not artificial intelligence unit, and pushing our people to deliver value to clients with the italics. Today, we are really focusing on analytics, plus machine learning, and then you’re putting the growing mix of artificial intelligence on top of it. It’s playing a lot with data, it’s playing a lot in the manufacturing industry, where now you have tons of sensors where you can mine the data and do things such as predicting investments, just to mention one of not just application, but we see a lot of artificial intelligence in the predictive business, massive application in healthcare and life science. Couldn’t be more pleased with the partnership we made with Roche in cancer research, when we’re working on the app, which is called a Tumor Board, where we are integrating machine learning and algorithmic artificial intelligence to improve cancer diagnosis and recommendations for the patient. I can speak forever, but I think we don’t have time, Angie. Arvind Ramnani : It was very helpful. Just a quick follow-up, when you think of this nu-new, which encloses blockchain and AI, is the compositional work different? Do you have a higher mix of product based solutions or do you have a higher mix of consulting, how is the nature of your work different than the other stuff that you guys do? Pierre Nanterme : It’s always the same. When you’re starting something new, it’s rich if you will in terms of services, in terms of strategy, consulting, and high-end tech. That’s the way you start. And when these new businesses are starting to mature in the (inaudible) if you will, then you add in more of the delivery services, more of the operations services coming behind. Take security services, for instance, we started with security strategy, identity, cyber threats, and we added managed security services. So, the nu-new is clearly more around the high-end tech, high-end consulting to bring the industry expertise, and this is what we see with to mention the three nu-new as you will know more again by the idea, I’m doing a bit of advertising for the (inaudible) around immersive realities, blockchain technologies, and artificial intelligence and security services. So it’s more on the consulting like high-end tech. Operator : Next question comes from Rod Bourgeois with DeepDive Equity Research. Please go ahead. Rod Bourgeois : A couple of questions on the margins, congrats on the revenue side. What’s the trend in contract profitability in both consulting and outsourcing outside of the H&PS vertical? David Rowland : Sequentially the trend is an improvement, and we expect sequentially the trend to continue to improve throughout the rest of the year. We’re always focused on contract profitability. No matter what the result, we always want it to be better than it was, and that is certainly true in the second quarter. But sequentially it was a moderately improving trend. Rod Bourgeois : Got it, and then can you give us David, a little more color on the puts and takes on your margin performance in the first half of the year. I’m specifically interested in the year-over-year impact of acquisition related cost? But you’ve also got bonus accrual and pricing and other factors. Can you call out any significant changes year-to-year on those trends? David Rowland : Purely in the context of if you laid our first half results last year side-by-side with the first half results this year, really the two big impacts, and we always start with our segments. But the first big impact is H&PS, and if you look at H&PS and if you were to look at the rest of the Accenture business absent H&PS, in the first half of the year, absent H&PS, the rest of the Accenture business was flat in the first half of the year. On the other hand, if you look at our inorganic and if you were to look at the impact of inorganic in the P&L and you look at the side-by-side, the underlying business or, let’s say the organic part of Accenture, the margins would’ve expanded significantly in the first half of the year. And of course, that is our whole model is to expand the underlying profitability in order to absorb investments. And, for the full year, delivering consistent operating margins is a reflection of that. Rod Bourgeois : Got it. So absent acquisitions, your margin expanded. And then on top of that, is there some added cost in the system because your growth accelerated? Is that an added cost or how do you look at that in terms of its impact? David Rowland : Not really. Our business is growing rapidly and we’re constantly in the talent market, bringing people on board. Maybe there’s a little friction cost there, but it’s just normal business. That’s all within the space of our normal supply chain management and hiring activities. Angie Park : Hey, Karen, we have time for one more question, and then Pierre will wrap up the call. Operator : The last question will be from Jason Kupferberg with Bank of America Merrill Lynch. Please go ahead. Jason Kupferberg : Just maybe one more on H&PS, I just wanted to get a better understanding of what changed in the last quarter, because I know you talked about some renewals and then you talked about impact of acquisitions over the last 12 months. Those just sound like factors that we would’ve been aware of maybe a quarter ago that there were some pending renewals as well as the deals that were already done. So maybe can you just walk us through what kind of changed as far as the underlying assumptions there that led us to where we are on the new outlook for full year margins? David Rowland : Nothing materially changed for H&PS. The explanation of H&PS is in the context of a year-over-year comparison in the context of what we had expected this year. We had expected H&PS’s profitability to be lower, and it’s in the range of what we had expected. Our change in margin outlook for the year is really a reflection of a conscious decision we’re making to create the right capacity to continue making investments in our business this year in order to continue to execute our strategy, and to do that while, at the same time, generating significant returns to our shareholders with strong market leading revenue growth, double-digit EPS growth, and strong market leading cash flow generation. So, everything is in the context of driving significant value to our shareholders and having the right investment capacity to position our business for the long run. Jason Kupferberg : And then just quickly for my follow-up, are there any more renewals than average across your business that you see during the balance of fiscal ‘18? I know the pace of renewals can obviously vary quarter-to-quarter and year-to-year. But is fiscal ‘18 a particularly high renewal year or no? David Rowland : No. I don’t think anything unusual in that regard. Pierre Nanterme : Alright. It’s time to wrap up, and thanks again for joining us today on this call. Just in closing, clearly we a strong momentum in our business, our market leading position in the new, we feel very confident in our ability to continue gaining market share and delivering value for our clients, our people, and our shareholders. We really look forward to talking with you again next quarter, and also to seeing many of you in person at our Investor and Analyst Conference, I mentioned many times in that call, in New York on April 25. In the meantime, if you have any questions or calls, please feel free to connect and call Angie and the team. All the best, talk to you soon and see you in New York. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :30 a.m. Eastern time today through June 28. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 444873. International participants, dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 444873. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,018	2	2018Q2	2018Q3	2018-06-28	6.674	6.766	7.246	7.324	10.22	22.65	23.64	Executives: Angie Park - Managing Director, Head of Investor Relations Pierre Nanterme - Chairman & Chief Executive Officer David Rowland - Chief Financial Officer Analysts : Jason Kupferberg - Bank of America Merrill Lynch Tien-tsin Huang - JPMorgan Bryan Bergin - Cowen & Co. Jamie Friedman - Susquehanna Financial Group Jim Schneider - Goldman Sachs Harshita Rawat - Bernstein Rod Bourgeois - DeepDive Equity Research Bryan Keane - Deutsche Bank Brian Essex - Morgan Stanley Operator : Ladies and gentlemen, we’d like to thank you for standing by, and welcome to Accenture’s Third Quarter Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session with instructions being given at that time. [Operator Instructions] And as a reminder, today’s conference call will be recorded. I would now like to turn the conference over to our host and facilitator as well as our Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Angie Park : Thank you, Steve, and thanks, everyone, for joining us today on our third quarter fiscal 2018 earnings announcement. As the operator just mentioned, I’m Angie Park, Managing Director, Head of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial Officer. We hope you’ve had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today’s call. Pierre will begin with an overview of our results. David will take you through the financial details, including the income statement and balance sheet for the third quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the fourth quarter and full fiscal year 2018. We will then take your questions before Pierre provides a wrap up at the end of the call. As a reminder, when we discuss revenues during today’s call, we’re talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on 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 on this call. During our call today, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. We include reconciliations of 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. Pierre Nanterme : Thank you, Angie, and thanks, everyone, for joining us today. Accenture had a truly outstanding third quarter. We delivered excellent results from new bookings and revenues to operating margin, EPS and cash flow, and we gained significant market share once again. The durability of our performance demonstrates the relevance of our growth strategy and our ability to continue delivering strong results and returns for our shareholders, while at the same time investing significantly in new growth opportunities to strengthen our position for the long-term. Here are a few highlights from the quarter. We delivered record new bookings of $11.7 billion. We grew revenues 11% in local currency to $10.3 billion, and our growth continues to be well-balanced across the dimensions of our business. We delivered earnings per share of $1.79 on an adjusted basis, an 18% increase. Operating margin was 15.7%, an expansion of 20 basis points on an adjusted basis. We generated very strong free cash flow of $1.8 billion, and we returned approximately $1.6 billion in cash to shareholders through share repurchases and the payment of our semiannual dividend. So we’re entering the fourth quarter with excellent momentum in our business, and I feel confident that we are very well-positioned to deliver our business outlook for the year. Now, let me hand over to David, who’ll review the numbers in greater detail. David, over to you? David Rowland : Thank you, Pierre, and thanks to all of you for taking the time to join us on today’s call. As you heard in Pierre’s comments, we’re extremely pleased with our results in the third quarter, which once again, reflect strong momentum across every dimension of our business. Based on the strength of our third quarter results and the strong confidence and visibility we have in our fourth quarter, we will be increasing key elements of our full-year outlook, which I’ll cover in more detail later in our call. Importantly, both our third quarter results and our updated outlook for the full-year reflect very strong execution against all three financial imperatives for driving superior shareholder value, which I covered in some detail at our Investor Analyst Day in April. So before I get into the details of the quarter, let me summarize the major headlines of our third quarter results. Net revenue increased more than $1.4 billion, reflecting growth of a 11% local currency and representing the third consecutive quarter of double-digit growth. The strong top line growth exceeded our expectations and reflected strong and balanced growth across all operating groups and geographic areas with several growing double digits. The growth continues to significantly outpace the market, reflecting both our leadership position in "the New" and the durability of our diverse yet highly focused growth model. Operating margin of 15.7% expanded 20 basis points, compared to adjusted operating margin last year, consistent with our expectations and reflected strong underlying profitability, which allowed us to invest at scale in our people and our business, and we delivered very strong EPS of $1.79 on an adjusted basis, up 18% over fiscal 2017 adjusted EPS. And our free cash flow of $1.8 billion reflected both our strong profitability and excellent DSOs. We continue to execute our strategic capital allocation objectives with year-to-date investments of over $450 million in acquisitions and roughly $3.8 billion return to shareholders via dividends and share repurchases. With that said, let me turn to some of the details starting with new bookings. New bookings were $11.7 billion for the quarter, the highest level of new bookings in our history and represents 15% growth in local currency. Consulting bookings were $5.9 billion, with a book-to-bill of 1.0, and outsourcing bookings were $5.8 billion, with a book-to-bill of 1.3. Our new bookings were extremely well-balanced across the dimensions of our business. Accenture Interactive, Accenture Applied Intelligence, Accenture Industry X.0, as well as Cloud and Security were all important themes and represented roughly 60% of our total new bookings. Turning now to revenues. Net revenues for the quarter were $10.3 billion, an increase of 16% in USD and a 11% in local currency, reflecting a foreign exchange tailwind of roughly 5%, compared to the 5.5% impact provided last quarter. This result was approximately $200 million above the upper-end of our FX adjusted range. Consulting revenues for the quarter were 5.7 billion, up 18% in USD and 12% in local currency, and our outsourcing revenues were $4.6 billion, up 14% in USD and 10% in local currency. Looking at the trends in estimated revenue growth across our business dimensions, the overrunning theme was strong and balanced growth across all business dimensions. We saw an uptick in Strategy and Consulting Services, which grew high-single digits, while both Application Services and Operations posted double-digit growth. And “the New” including Digital Cloud and Security, continued to deliver very strong double-digit growth, reflecting many of the market themes and key points of differentiation, which we discussed at our Investor Analyst Day. I’d like to also highlight the strong demand for Intelligent Platform Services, which continued to be an important contributor to our growth. As you know, Intelligent Platform Services brings together our industry, functional and next-generation application capabilities powered by our innovation architecture to drive mission-critical programs for our clients, and these services primarily relate to deploying next-generation technologies in SAP, Oracle, Microsoft, Salesforce, and Workday. Taking a closer look at our operating groups, Communications, Media, & Technology led all operating groups with 18% in local currency, reflecting continued strong momentum in many parts of the business, especially Software and Platforms and Communication and Media, which both posted double-digit growth, as well as double-digit growth across all three geographies. Resources grew 12% in the quarter, driven by strong double-digit growth in Energy and Chemicals and Natural Resources. We continue to see strong demand for our services across all geographies with double-digit growth in North America and the growth markets and strong growth in Europe. Products delivered its 12th consecutive quarter of double-digit growth with 11% growth in the quarter, led by Industrial and Consumer Goods, Retail and Travel Services. Growth was strong across all geographies with double-digit growth in both Europe and the growth markets. Financial services grew 8% in local currency, reflecting strong growth in both banking and capital markets and insurance. Growth was strong across all three geographies led by double-digit growth in the growth markets. And finally, H&PS grew 7%, driven by double-digit growth in public service. We continue to be pleased with double-digit growth in Europe and the growth markets and solid growth in North America. Moving down the income statement, gross margin for the quarter was 32.2%, compared to 32.8% in the same period last year. Sales and marketing expense for the quarter was 10.7%, compared to a 11.1% for the third quarter last year, and our general and administrative expense was 5.7%, compared to 6.2% for the same quarter last year. We have two items impacting metrics this quarter. As a reminder, in quarter three last year, we recorded a settlement charge related to the termination of our U.S. pension plan. In this quarter, we recorded charges of $102 – $122 million related to tax law changes, which increased our quarter three tax rate by 7.6% and decreased diluted earnings per share by $0.19. The following comparisons exclude those impacts were applicable and reflect adjusted results. Operating income was $1.6 billion in the third quarter, reflecting a 15.7% operating margin, an increase of 20 basis points, compared to op – adjusted operating margin in quarter three last year. Our adjusted effective tax rate for the quarter was 26.8%, compared to an adjusted effective tax rate of 26.6% for the third quarter last year. Adjusted diluted earnings per share were $1.79, compared to an adjusted EPS of $1.52 in the third quarter last year, and this reflects an 18% increase over last year’s result. Day services outstanding were 39 days, compared to 40 days last quarter and 41 days in the third quarter of last year. Our free cash flow for the quarter was $1.8 billion, resulting from cash generated by operating activities of $2 billion, net of property and equipment additions of $174 million. Our cash balance at May 31 was $3.9 billion, compared with $4.1 billion at August 31. With regards to our ongoing objective to return cash to shareholders in the third quarter, we repurchased or redeemed 4.7 million shares for $720 million at an average share price of $153.60 per share. At May 31, we had approximately $1.4 billion of share repurchase authority remaining. Finally, as Pierre mentioned, on May 15, 2018, we made our second semiannual dividend payment for fiscal 2018 in the amount of $1.33 per share, bringing total dividend payments for the fiscal year to approximately $1.7 billion. So in summary, we’re extremely pleased with our outstanding third quarter results and now focused on quarter four and closing out a strong year. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. At our Investor and Analyst Conference in April, we provided an update on our strategy of building differentiated capabilities for the digital world, applying innovation at scale and ensuring that we anticipate the impact of the next waves of technology disruption for our clients. Our excellent results for the third quarter demonstrate that we continue to execute this strategy very well. The end-to-end capabilities we have built at scale and in an industry context are unique in the marketplace. Our ability to integrate these services from strategy and consulting to digital, technology, operations and cybersecurity enables us to deliver targeted business outcomes for clients. Our rapid rotation to “the New” digital, cloud and security, continues to drive significant growth for Accenture. Revenues in “the New”, again grew at a very strong double-digit rate in the third quarter and accounted for about 60% of total revenues for the first time, highlighting that “the New’ has now become the core of our business. Digital transformation is now a clear imperative for our clients, and we are uniquely positioned to deploy digital services end-to-end at scale across industries and geographies. With Accenture Applied Intelligence, we are bringing together our capabilities in data, analytics and artificial intelligence, combined with our deep understanding of industries and business functions to help clients reimagine their core processes. With Bepensa, a Coca-Cola bottler in Mexico, we are leveraging the Accenture Insights Platform to mine the data from 2 billion transactions a year to provide a holistic view of the business, better service 300,000 daily customers and significantly increased market share. We’re also gaining significant traction with Accenture Industry X.O, where we are reinventing manufacturing with smart connected products and services using advanced technologies, including the Internet of Things, connected devices and digital platforms. We are helping BSA Group, the Italian manufacturer, expand beyond products into digital services. BSA is rolling out connected services ranging from management alerts to in-depth analytics across its installed base of 20,000 industrial machines, driving new revenue streams, as well as significant cost savings. And we continue to build our Industry X.O capabilities. This month, we announced our agreement to acquire designaffairs, a design firm based in Germany that specializes in smart products and services for manufacturers. It complements very well our acquisition of Mackevision in the second quarter. Accenture also remained the partner of choice for the world’s leading companies on large-scale, mission-critical transformation programs. And our ability to mobilize and integrate end-to-end services to deliver value and business outcomes is clearly setting us apart in the marketplace. We are helping DowDuPont with the post-merger integration of Dow Chemical and Dupont, as well as preparations for their planned spin-offs. We have expanding the scope of our services to include substantial work in digital, strategy and management consulting, with the goal of enabling each of the future companies with the distinctive capabilities needed to lead in their respective markets. Turning now to the geographic dimension of our business. I’m just very pleased that we again delivered strong growth in the third quarter across all three of our geographic regions with double-digit growth in most of our major markets. Starting in North America, we delivered 11% growth, driven by further acceleration in the United States. In Europe, revenues grew 9% in local currency, driven by strong double-digit growth in Germany, Italy, Ireland, France and Spain. And in growth market, I’m delighted that we delivered another exceptional quarter with 17% growth in local currency, led once again by very strong double-digit growth in Japan, as well as double-digit growth in Australia, Brazil and Singapore. Before I hand back to David, I want to take a moment to touch on Accenture’s role in helping to solve important societal challenges. Trust and responsibility are increasingly critical in evaluating companies as a potential partner, employer or investment. And at Accenture, we feel a responsibility to encourage the use of emerging technologies as a positive force for the economy and the broader society. For example, we are using blockchain and value metrics to support ID2020, which is helping to solve the challenges of identity faced by more than 1.1 billion people around the world. In Japan, we use artificial intelligence and machine learning to create a revolutionary system to dispatch emergency vehicles more quickly ultimately saving lives. And I’m particularly proud of the work our people do across the Accenture Labs in Bangalore, Dublin, San Francisco and Sophia Antipolis to use cutting-edge technologies in innovative ways through our Tech4Good initiative like AI smartphone solution that helps the blind navigate the world and lead more productive lives. Creating innovative solutions that improve the way the world walks and leaves is our mission at Accenture and quite simply the right thing to do. With that, I will turn the call over to David to provide our updated business outlook. David, again, over to you? David Rowland : Thank you, Pierre. So let me now turn to our business outlook. For the fourth quarter of fiscal 2018, we expect net revenues to be in the range of $9.8 billion to 10.05 billion. This assumes the impact of FX will be about flat compared to the fourth quarter of fiscal 2017 and reflects an estimated 7% to 10% growth in local currency. For the full fiscal year 2018, 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. dollar will be positive 3% compared to fiscal 2017. For the full fiscal 2018, we now expect our net revenues to be in the range of 9.5% to 10% growth in local currency over fiscal 2017. For operating margin, we continue to expect full fiscal 2018 to be 14.8% consistent with adjusted fiscal 2017 results. We now expect our annual effective tax rate to be in the range of 27% to 28%. The increase in our guidance from last quarter is primarily due to the $122 million tax charge that I mentioned earlier. The charge includes two components, an additional $41 million provisional charge related to the adoption of the U.S. Tax Act, as well as an $81 million expense from a non-U.S. tax law change. Excluding the impact of these tax law changes, we now expect our adjusted annual effective tax rate to be in the range of 22.5% to 23.5%. For earnings per share, we now expect our diluted EPS for fiscal 2018 to be in the range of $6.26 to $6.31. Excluding the impact of tax law changes, we now expect adjusted full-year diluted EPS to be in the range of $6.66 to $6.71, or 13% to 14% growth over adjusted fiscal 2017 results. For the full fiscal 2018, we now expect operating cash flow to be in the range of $5.5 billion to $5.8 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $4.9 billion to $5.2 billion. Finally, we continue to expect to return at least $4.3 billion through dividends and share repurchases and continue to expect to reduce the weighted average diluted shares outstanding by about 1%, as we remain committed to returning the substantial portion of our cash to our shareholders. With that, let’s open it up, so we can take your questions. Angie? Angie Park : Thanks, David. I would ask that you each keep to one question and the follow-up to allow as many participants as possible to ask a question. Steve, would you provide instructions for those on the call. Operator : Ladies and gentlemen, we’ll now begin our question-and-answer session. [Operator Instructions] Our next question will come – our first question will come from the line of Jason Kupferberg of Bank of America. Please go ahead. Jason Kupferberg : Hey, good morning, guys. How are you? David Rowland : Good morning, Jason. How are you? Jason Kupferberg : Good, good, good, thanks. Great set of constant currency results here obviously. So we’re just continuing to get lot of questions around FX just given some of the recent moves. I wanted to just get some of your initial thoughts. If FX spot rates today or in recent weeks were to in theory hold going forward, how should we think about the potential FX headwind to revenue and EPS next year just so we can start to get our models calibrated? David Rowland : Yes, this will be the only comment I’ll make relative to next year quantitatively by the way, but I don’t mind saying this, because it’s just really an extrapolation of the math. As we do our analysis, so looking at the rates that we used as a basis for the FX impact that I just provided for this year, if those rates were to hold constant as we do our analysis, it would create a headwind of about 2%, so it will have a negative 2% impact on our results next year. Jason Kupferberg : Okay, both top and bottom line? David Rowland : Yes, both. Jason Kupferberg : Okay. David Rowland : Essentially, yes. Jason Kupferberg : Okay, great. So just as my follow up, obviously, really good to see the constant currency top line raise for this year. Is most all of that organic, and I know you did announce a couple of additional acquisitions since the last earnings call, but it didn’t seem like there would be enough time left in this year for them to contribute much. So are we still thinking kind of 2.5%-ish for M&A contribution in fiscal 2018? David Rowland : Yes. The beat, if you will, in quarter three was 100% organic. And therefore, that’s the basis for us raising our guidance for the year. There’s no change in our view on inorganic for the full year. We still think we’ll end the full year with it making about a 2.5% contribution, and against that 2.5% contribution for the year, it was a little higher than that in the first half of the year to a little lower than that in the second half of the year and averages to about 2.5% for the year. Jason Kupferberg : Okay. Well, nice job. Thanks for the comments. David Rowland : Thank you. Operator : Our next question will come from the line of Tien-tsin Huang of JPMorgan. Please go ahead. Tien- tsin Huang : Hi, good morning. David Rowland : Hey, good morning, Tien-tsin. Tien- tsin Huang : Good morning, good morning, good revenue acceleration here. So just on the revenue front, I’ll ask if there are any callouts on what surprised you, perhaps strategy consulting, accelerating. Just curious what drove the let’s say, the – I think you said $200 million above the FX-adjusted range to the top line of the guide? David Rowland : Yes, the good news is that the additional revenue was really broad-based. Literally, every operating group delivered above their expectations. As you might guess, the strongest over-delivery came from the three operating groups with the double-digit growth. So CMT, Products and Resources were the biggest contributor to the strong revenue performance. As you also alluded to and I called out in my script, strategy and consulting combined was also quite strong at high-single digits, and we were very pleased with that, but it was really the over-delivery from a top line standpoint was broad-based. And I think it aligns with the fact that we had such strong, broad-based, record-setting new bookings that underpinned that and just reflective of the strong momentum in the market overall. Tien- tsin Huang : Sure, good. David Rowland : Yes. Tien- tsin Huang : So my follow-up quickly is just on the outsourcing booking that 1.3x book-to-bill, I believe. David Rowland : Yes. Tien- tsin Huang : So what’s the – are larger deals back? Just curious if there is anything chunky that, that contributed to that or if there’s anything unusual? David Rowland : Yes, we did have – we had some large, I mean, as you would expect, we had some larger deals in there. We had a couple of, in particular, larger deals. I think the total number of deals are more than $100 million, I didn’t say it, but it was – I think it was 12. If I’m remembering that correctly, and so that is in the zone probably in the high end of what we see in a typical quarter. I don’t know that big deals are back necessarily, because we’ve always had a good flow of big deals, but as we look at our pipeline going forward, what we call our mega pipeline actually looks really good. And actually, I’m being told that we had 13 deals over $100 million, not 12, so, yes. Tien- tsin Huang : Off by one. David Rowland : Yes. Tien- tsin Huang : It’s in the zone. Thank you, sir. David Rowland : All right. Thank you, Tien-tsin. Operator : Bryan Bergin of Cowen. Please go ahead. Bryan Bergin : Hi, good morning. Thank you. I wanted to ask on the headcount growth versus revenue growth. Can you comment on whether you’re seeing any change in the inflection of the resource requirements that you need for this high level of growth due to better automation traction of the Platform business. And then can you just give us some color on the pickup in attrition? David Rowland : Yes. So our headcount growth did grow at a pace below our revenue growth, and we have seen that several quarters if you look over the last eight quarters or so. Certainly, there’s the potential for that trend to be more common as we look forward both as it relates to the productivity efficiencies that we will drive into the business, including through technology and as well we are always constantly focused on pricing improvement and increasing the revenue yield per head in our revenue. And so, it is – it’s a part of our strategy of extracting more value from our business for our shareholders and our employees, and in a perfect world, we would see a higher revenue yield per head going forward, and our challenge is to achieve that through the mix of our services, the pricing, et cetera. On the attrition front, there’s not anything we’re particularly concerned about. The attrition did tick up, but we feel very good about our ability to attract the talent in the marketplace that we need. We are an employer of choice certainly in our sector. We have no issues recruiting the people that we need in the market, and we also are quite pleased with our overall retention, including retention of critical skills even with what was a slight tick up in overall attrition. So we don’t have any particular concerns there. Bryan Bergin : Okay, thanks. And then on the H&PS segment, have you seen improvement in those healthcare contracts that you cited last quarter, anything around the contract profitability? Thank you. David Rowland : Yes, very pleased with the H&PS profitability as we were all the operating groups. Every single operating group if you look at this concept of underlying profitability that we talk about sometimes at the Accenture level, which is the underlying profitability above and beyond our reported profitability that – where we use the headroom to invest in our people and our business. Every single one of our operating groups had a really strong improvement in underlying profitability. Now underneath that, they had investments, et cetera, that are reflected in the operating margin numbers that, that we report. But we were quite pleased with all of our operating groups and H&PS included, which did show sequential improvement in profitability, and that is as we expected and as we signaled in the first-half of the year. Bryan Bergin : Thanks. David Rowland : Thank you. Operator : Jamie Friedman of Susquehanna Financial Group, please go ahead. Pierre Nanterme : Good morning, Jamie. Jamie Friedman : Hi, thank you. Hey good morning, guys. Good set of results here. Sorry if I don’t have the greatest connection. But, David, I wanted to ask in your prepared remarks, I thought you said something that was new, at least, new to me, We decomposed the bookings, it was the Industry X.O and Interactive, I thought you said 60%. If you wouldn’t mind just repeating that if you have that there, that would be helpful? David Rowland : Yes. And there was a subtle change, and frankly, the intent was to – we talk about “the New” so much that I was just taking the opportunity to remind people what the components of “the New”. So I called out the five components by name. And the only intent was to again remind the components of “the New”, especially as we have changed some of the terminology as we’ve evolved digital to talk about Accenture Interactive, Accenture Applied Intelligence and Accenture Industry X.O. And “the New” overall, so those five components in aggregate represented about 60% of our total bookings and that’s consistent with the comments that Pierre made where from a revenue standpoint, “the New” represents approximately 60% of our revenues at this point as well. Pierre Nanterme : Maybe I can jump on this one, because nobody is asking me any questions. They’re all for you, David, so I’m jumping on it. You mentioned that we had evolved the terminology but, of course, it’s more than the terminology. And the reality is that we’re constantly evolving the content of our capabilities in “the New”. Accenture Interactive has been there since day one, no change. We continue growing, developing and scaling. We had Accenture Mobility around enterprise apps and connected platform. We evolved now to Industry X.O to build a capability totally focused on smart and digital manufacturing. Same thing we’ve been doing with Accenture Analytics. We started with – we upgraded this year to Accenture Applied Intelligence by adding on top of the analytics, machine learning and applied intelligence. So it’s important for all of you to understand that almost every year or every couple of years, we will always significantly improve, upgrade, what we’re calling “the New” to make sure we are always ahead of the curve and bringing innovation at the heart of our existing capabilities. Jamie Friedman : Thanks, Pierre. And then I did have one for you, Pierre, which was with regard to the growth and Strategy Consulting and Application Services, do you – is it fair to think of those as lead indicators for the company, or would that be an exaggeration? Pierre Nanterme : No, I think for us, it’s important with range, strategy, management consulting and intelligent platform, so the added value part of our system integration, because it’s demonstrating that what we’re selling is highly differentiated is more at the high-end of the value chain of our services. And of course, it is important in the context of contributing to our margin and – to our margin and ultimately, profitability. So I’m very pleased that we moved Strategy Consulting to high single digits. I think this is a good place to be and it’s the demonstration that our services are more and more differentiated with that piece, which is clearly around industry specific solutions and very cutting-edge consulting work, same with Application Services. The system integration piece is on fire right, and especially with what we’re calling the intelligent platforms. So all this new digital artificial intelligence, analytic or rich platforms, where we are leading with all of them to be honest in the marketplace and again, it’s a significant contributor to our rotation to “the New”. So it’s a sign of good health. You’re absolutely right. Jamie Friedman : Thank you. Operator : Jim Schneider, Goldman Sachs. Please go ahead. David Rowland : Hey, good morning, Jim. Jim Schneider : Hey, good morning, David. Just a question on the CMT, that continues to be very, very strong there. Their growth, I think accelerated even further. Can you maybe give us a sense about what the components of that growth are and what kind of work you’re seeing there that maybe you didn’t see a year or two ago? Is there anything kind of increment on that front? Pierre Nanterme : Yes, I’ll sort of take this one. David Rowland : Go head. Go ahead, please. Pierre Nanterme : I mean, CMT, we talked a lot about CMT these last years. Needless to say, it’s a set of industries on the massive transformation. If you take the different components, high-tech, telecom and what we’re calling software and platforms. Software and platforms are the driving force of the growth in terms of CMT, because these companies are investing massively in the context of leading in the market. So here, the business is to support the leaders providing, I mean, you know well the names, the leading platforms in the marketplace. So we’re supporting them and supporting their growth and we are the enabler of that growth. On the other side of the spectrum, you will find telecom. Telecom is small transformation. These companies are facing significant challenges and you know now they’re on path [ph]into massive M&A consolidation and so a lot happening, including they’re all launching new networks. Yes, we’re moving from web. We’re moving from – we’ve been moving from the three to the fourth to the fifth GB. You put the cyber on top of it, so they need to continue investing and again, they need people like us to support their transformation, as well as being an enabler of their network implementation. And then in-between, you have the high-tech and high-tech companies again are not only CMT companies, but they are enablers of many industries in providing the equipment, providing the technology. And I’m extremely pleased with the progress we’re making in high-tech across the Board, especially with some recent excellent progress we have made with aerospace and defense, where we decided to focus on as a very promising industry. And with the focus we put as an illustration on this industry, it’s as well a good contributor to our overall growth. So three different segments with three different set of issues, but we are the enabler of their change, their transformation and ultimately, their leadership in the marketplace. Jim Schneider : Thanks, that’s helpful. And then maybe just regarding the tax rate, David, I know you said you won’t talk about fiscal 2019. But can you maybe just talk about your overall tax rate or sort of your overall tax planning, how that’s evolved over the last few quarters or so and whether you think that there’s any kind of change to what you previously said about the tax rate on go-forward basis, given all that context? David Rowland : Yes. So first – I mean, first of all, the – it goes without saying that the tax environment continues to be highly complex and fluid, if not even volatile perhaps. And so it is a significant effort with a lot of talented people that stay on top of our tax planning and all of the math – matters and policy progression and all the tax jurisdictions around the world. You’re right, I’m not going to comment on FY 2019 beyond what I have said previously. I would prefer that we just give one update in September when we provide guidance. There’s basically two statements that I’ve made or that we’ve disclosed just to remind you. So one thing that we disclosed and I commented on is the accounting change on income tax effects of intercompany transfers, the ASU 2016-16. And we disclosed that in isolation that would have about a 3.5% impact on our tax rate. And so that’s one item that we called out, which is in our future. Now that impact would be in isolation. And obviously, there are other elements of our tax planning that we’re constantly working on. And so that’s not to imply necessarily that, that would be the ultimate impact, but that item alone will have that impact. And, of course, the other item that we called out obviously is the U.S. tax reform. And previously, we had said that, that would have a modest – create modest upward pressure on our tax rate. And so those are really among a longer list of items that we’re focused on. Those are the two things that we’ve talked about the most and that we’ve had disclosures on. Jim Schneider : Thank you. David Rowland : Thank you. Operator : Harshita Rawat of Bernstein. Please go ahead. Harshita Rawat : Hi, good morning. Thank you for taking my question. So, Pierre, it does appear that we are in one of the strongest enterprise IT demand environment in many years. And do you have a sense of whether this is cyclical and tax reform-related update, or is there more – is this more structural in nature, because IT is again sort of perceived to be an investment area versus a budget that needs to be managed? Pierre Nanterme : I tend to believe it’s more a structural than something, which is more cyclical on the short-term and for many reasons. I mean, first, it’s incredibly pervasive across all the industries. So when you look at our rotation to “the New”, it’s amazingly consistent across all our industries, whatever you’re taking the B2C and now the B2B. The same thing, it’s amazingly consistent across the world. When you look at the rotation to “the New” from the U.S. to Europe to Brazil, Australia and Japan, you see the same level of demand across the world. So it’s something, which is extremely significant. Next, when you look at this IT revolution, and let’s call that digital revolution, it’s coming through waves. So it’s got one thing. It is now a continuous flow of new technologies coming one of the other to change the game. So we started with some basic Internet technology solutions more on the B2C. Now we’re moving to look at it everything connected. If you look at this, that would be a big market in itself. So what we’re calling the Internet of Things, but everything connected then you move to the artificial intelligence at large. And everybody would believe we are more at the very beginning of this wave than anything else. Then the blockchain we talked in last three years and we incubated, now it’s starting to pickup. And by the way, we’ve put all act together. We have made significant investments, and now we’re taking the position of leader in this blockchain technologies. And it’s not enough, you’re moving to immersive realities, virtual realities, and then you have “the New” IT. The new ways of developing system, dev ops, agile. And then I can continue with quantum computing. So look at the series of incredible digital disrupt – technology disruptions, where in the past probably you would have one for 40 years. Now you have one every 18 months. So I tend to believe that we are in a true force revolution – industrial revolution based on digital and it’s something, which going to be more secular than cyclical. Harshita Rawat : Great, thank you. And just as a follow-up, again, this context of this growing IT demand environment. Is there any change in your thinking about your continued ability to hire and retain talent in this tightening labor market? Pierre Nanterme : We have no issues, I mean, to make it. I know that the – I mean, the data when you look at this and you take a bit your microscope, you will see some pickup in the attrition, but we are in the zone, as David said, I mean rightfully. The reality is, are we able to attract the best talent in the marketplace, sometime we’re calling them iconic talent from the outside? The answer is, yes. Are we retaining our best Managing Directors? We have and we have now 7,000 Managing Directors. The level of attrition is incredibly low in the ranks of Managing Directors. Everyday, we have people willing to join Accenture. So – and finally, our brand is attractive and the brand is attractive because of the success of the rotation to “the New” and the pivot we’ve been executed to be now perceived and it’s not a perception, it’s the reality as a highly innovative company accommodating multiple cultures in the same company from designers to business scientists to the more classic programmers and developers. And to people extraordinary knowledgeable in leading and cutting-edge IT, plus all the effort we made to make the Accenture what we’re calling, Truly Human, Tech4Good what I mentioned in my script. All of this is creating an environment, which I tend to believe is Accenture is very attractive. Evidence is recently we won many awards in term of the best place to work most attractive place to work. And I’m very pleased as you’re giving me the opportunity to mention that that we’re not only the best place to work for everybody, but as well with a great sense of diversity in it. So we have received many recognition for women for LGBT. And I’m extremely pleased that we are attractive for everybody as we should. All the talent, all the background, all the different best gender, and all the diversity, and we have a good brand supporting that. Harshita Rawat : Okay. Thank you very much for taking my questions. Pierre Nanterme : Thank you. Operator : Rod Bourgeois of DeepDive Equity. Please go ahead. Pierre Nanterme : Good morning, Rod. Rod Bourgeois : Hey, good morning. Good to talk to you, guys. Hey, within the Intelligent Platforms business where you work on ERP systems. Can you talk about, which ERP platforms are contributing the most to your growth? And also perhaps the software market trends that are catalyzing your demand and that ERP services space? Pierre Nanterme : I mean, as you know, Rod, we’re walking with all the usual suspects from the platform standpoint. So I would mention the names you all know in the leading platform from SAP, Oracle, Microsoft Salesforce.com, Workday, to mention maybe the names everybody would know. All of these platform and software provider did their rotation to “the New”. So the one that were not in the cloud are now in the cloud. And all of them as they have added features in term of analytics and in term of artificial intelligence insight. That’s why now we’re calling them at Accenture Intelligent Platforms, because they are not any more the old ERP we knew. They are ERP in the cloud for which in term of new functionalities, analytics and the artificial intelligence. So this market has been very good for Accenture. We’ve been driving excellent growth from our, let’s call, that the ERP business or Intelligent Platform business. We are – I mean, we are again the partner of choice. And the market is vibrant as well, because many clients been waiting for the new platforms to arrive, to upgrade and move. And I believe we’re more again at the beginning of this wave of replacing the old ERP with the new one, because it’s going to drive lot of benefits in terms of again of leveraging the cloud, leveraging analytics, and leveraging artificial intelligence. So we have a very strong position. We organize our capabilities in our operating group as well in Accenture technology to have at scale capability to support all these leading platforms and we are getting a very good return. Rod Bourgeois : That’s helpful. And just a quick follow-up. Can you give any color on the relative contributions of the components of New to your overall growth? I’m particularly interested in your view on which component in “the New” has the most future potential to evolve with success akin to the Accenture interactive business. So as an example, is IoT, the best candidate for future growth potential, or is something else catching your attention there? Pierre Nanterme : I would say, all our new babies have the potential to grow successfully for many years. Now in the family, some are already operating at scale grown-up, I mean, you mentioned Accenture Interactive. Now three years in a row, number one in advertising age as the fastest growing and largest digital experience agency. By the way, I’m pleased that you give me the opportunity to mention to the whole group that we won seven awards at the Cannes Lions with an acquisition we made in Dublin with a company called Rothco. So we are in the interactive game big time. We are winning not only awards, but as well big clients. So with Accenture Interactive, it’s scaled to lead, if you will. It’s more mature than the others. Next, I would mention certainly, cloud as well is more scaled to lead. So these two are scaled to lead. That Applied Intelligence is as well at a very significant scale, but the name of the game for us is to infuse the latest cutting-edge artificial and algorithmic technologies in that unit we’re calling Applied Intelligence. And then we have two with a big potential to grow, because they are not yet operating at the same scale. I’m thinking about Accenture Security, where we have put together all our cybersecurity capabilities and it’s growing, David would say, strong double-digit that would probably add hyper-strong double digits just to give you a sense of – it’s a bit more than strong double-digit. And the last one we launched with industry X.0 I mentioned, which is all the digital applied to manufacturing. This is clearly for us a significant investments we’re going to make this year and in the coming three years, because it’s all about replicating to the B2B industries the success we have with the B2C. And we’re making good progress and I’m pleased. And more to come, because every year, we’re going to launch new capabilities in “the New” when they will mature. Rod Bourgeois : It sounds like you don’t have a favorite baby, you have all of them. Pierre Nanterme : This is the way we are in France, we we love all of them. Rod Bourgeois : Thank you, guys. David Rowland : Thanks, Rod. Operator : Bryan Keane of Deutsche Bank. Please go ahead. Bryan Keane : Yes. Hi, guys. Congrats on very solid results here. Just want to follow-up on the and the strength in the bookings. Was that a lot of renewals in there, or is that new business that pushed that higher? And then just thinking about the pipeline now, does it become a little more depleted since you had such a big quarter this quarter? David Rowland : Yes. So there – I mean, there’s a lot of new business in the $11 billion-ish, $11 billion-plus bookings, $11.7 billion in the quarter. I mean, you don’t get to that number with, let’s say, a disproportionate or unusual level of renewals. And the other part of the question was pipeline. Yes, I mean, any time we have a bookings quarter that large then, I mean, obviously, it has some impact on the pipeline. But having said that, we have had a lot of replenishment even during the quarter, so we feel good about our pipeline. But yet, as you can imagine, we’re very focused on our pipeline replenishment as we think about turning the page into fiscal 2019 and, let’s say, the next challenge of growth. So we always have work to do on our pipeline. We feel good about it, but we’re always focused on expanding that. Bryan Keane : Okay. And then just want to follow-up on the fourth quarter revenue guidance. I know top line was strong in a 11% constant currency this quarter. I think, the guidance imply some like 7% to 10% constant currency for the fourth quarter, which is a tad below the strength of this quarter. Just thinking about that growth considering the strong bookings, is that just a little bit of conservatism built in there, or another possibility is some of the M&A business has fallen off that’s causing a little lower growth rate than we saw in the third? Thanks so much. David Rowland : Yes. I mean, I don’t know if it’s conservatism, 11% growth is really outstanding and as well the upper-end of our range at 10% growth is also outstanding. And so, as we always say, we have a 3 point range. You never like the bottom part of the range and, of course, we’re always focused on being as high in the range as we possibly can. And to the extent, we were to deliver at the upper-end of the range. We would continue to gain massive share in the marketplace. I mean, that level of growth would be outstanding and we would be very pleased with that at the upper-end of the range. So, I wouldn’t say there’s not the intent to be conservative. There’s the intent to have a reasonable range. And again, the upper half of the ranges is quite strong. Bryan Keane : Okay, great. Thanks. Angie Park : Hey, Steve, we have time for one more question and then Pierre will wrap up the call. Operator : Okay. Our last question will come from the line of Brian Essex, Morgan Stanley. Please go ahead. Brian Essex : Great, thank you for taking the question. David Rowland : Hey, Brian. Brian Essex : Pierre, how are you. Yes, I was just wondering if maybe you can unpack the digital a little bit. I get a lot of questions in terms of what’s maybe migrational in nature and Pierre did a great job kind of differentiating ERP part of the equation. We’ve also had some great stories on truly transformational digital projects. I think, Pierre had one in this prepared remarks. I know on the operational side, your operations team has some great supply chain examples, particular in the beverage market. How much of the digital would you say is truly transformational versus more kind of migrational in nature where you’re just taking an application and putting into new operating environment? Pierre Nanterme : It’s getting more and more transformational. I mean, you’re right. I mean, the first waves, you’ll always fight to catch the low-hanging fruit that’s going that way. And the low-hanging fruit, for instance, would be I’m taking my current applications, no change, no transformation and I move them to the cloud just to benefit from the cost difference with a classic infrastructure, what you’re calling the migration. So we’ve seen some of the journey to the cloud. You’re taking the existing, you lift and and brought to the cloud, and you’re making the benefits. You still have some of this work, of course. But what I find and I found very interesting is, indeed, the market is shifting at these results and our clients to using digital as more transformational. For instance, when you move or change from the existing ERP to a new ERP in the cloud and then you’re using the Analytics and Applied – and the Artificial Intelligence features in order to drive more value in the company in term of forecasting, for instance, or other activity then it is more transformational. As we speak, we’re working in some very large organization in CMT. Again, in the context of aerospace and defense to deploy these new digital platforms from engineering services to production to cross-sell end-to-end with 3D features in it and so forth. It’s truly transformational and it’s not just the low-hanging fruit, simple migration. So we see more and more now as the market is maturing. And as the leaders are understanding better the core of the digital transformation, the shift from simple migration to drive the easy cost to a more profound digital transformation to win the big prize. So from the low-hanging fruit to the big prize, this is the difference with the migration to the transformation. We see more of those. Brian Essex : Great. That’s very helpful. And one quick follow-up for David. David, I think last quarter, you said you might come in a tick under $1 billion for M&A. You still have that outlook, or is it that change at all for the remainder of the year? David Rowland : Yes, it is – our current view is that we’ll land somewhere in the range of $650 million to $750 million of invested capital. We’re fine with that. We’re not in the business of just trying to do deals for the sake of doing deals, we want to do the right deals. And so that’s going to be the level that we’re going to be at this year, but we are committed to that being an important part of our strategy going forward. And as we’ve said, up to 25% of our operating cash flow is our strategic capital allocation model objective. We always have an active pipeline and that’s true today. And so, it’s something that we continue to focus on as an important part of our strategy. Brian Essex : Super helpful. Thank you for squeezing me in. David Rowland : Right. Thank you. Operator : We’ll now turn the conference back over to our host and panelists for any closing remarks. Pierre Nanterme : Yes. I mean, thanks a lot again to all of you for joining us on today’s call. In closing and I’m sure you heard that throughout the call, we and I feel very good about where we are. We feel confident in our ability to finish the year strong. We believe that with the highly differentiated capability, we have built in “the New”, our continued investment across Accenture and the disciplined management of our business. We are extremely well-positioned to continue driving profitable growth and delivering value for our clients, our people and our shareholders. We look forward to looking with you again next quarter. And in the meantime, if you have any questions, please feel free to call Angie and the team. All the best and thanks, again, for joining and supporting Accenture. Operator : Ladies and gentlemen, it does conclude our conference call for today. On behalf of today’s panel, we’d like to thank you for your participation in today’s earnings call and thank you for using our service. Have a wonderful day. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,018	3	2018Q3	2018Q4	2018-09-27	6.836	6.9	7.378	7.447	null	21.86	20.27	Executives: Angie Park - Managing Director, Head of IR Pierre Nanterme - Chairman & CEO David Rowland - CFO Analysts : Joseph Foresi - Cantor Fitzgerald Edward Caso - Wells Fargo` Tien-tsin Huang - JPMorgan Rod Bourgeois - DeepDive Equity Research Darrin Peller - Wolfe Research Bryan Keane - Deutsche Bank Bryan Bergin - Cowen Harshita Rawat - Bernstein Operator : Ladies and gentlemen, thank you for standing by, and welcome to Accenture’s Fourth Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] 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, Angie Park. Please go ahead. Angie Park : Thank you, Greg, and thanks, everyone, for joining us today on our fourth quarter and full year fiscal 2018 earnings announcement. As the operator just mentioned, I’m Angie Park, Managing Director, Head of Investor Relations. On today’s call you will hear from 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 fourth quarter and the full fiscal year. Pierre will then provide a brief update on our market position before David provides our business outlook for the first quarter and full fiscal year 2019. We will then take your questions before Pierre 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 on this call. During our call today, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. We include reconciliations of 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. Pierre Nanterme : Thank you, Angie, and thanks, everyone, for joining us today. We are extremely pleased with our outstanding financial results for both the fourth quarter and full fiscal year. For the year, we continued to strengthen our leadership position in "the New", Digital, Cloud and Security Services. We gained significant market share growing about three times to market with strong growth in nearly all of our largest markets once again. And we returned very substantial cash to our shareholders. Here are the few highlights for the year. We delivered record new bookings of $42.8 billion. We’re generating revenues of $39.6 billion, another record and of 10.5% in local currency. I am especially pleased with our balanced growth once again across the dimensions of our business. We delivered record earnings per share of $6.74 on an adjusted basis, a 14% increase. Operating margin was 14.8%, consistent with last year on an adjusted basis. We’re generating outstanding free cash flow of $5.4 billion. We returned $4.3 billion in cash to shareholders through share repurchases and dividends and we just announced a semi-annual cash dividend of $1.46 per share a 10% increase over our prior dividend. So, we delivered an excellent year in fiscal 2018 and I feel very good about our business, the durability of our performance and the strong momentum we have as we enter the new fiscal year. Now, let me hand over to David, who’ll review the numbers in greater detail. David, over to you. David Rowland : Thank you, Pierre, and thanks all of you for taking the time to join us on today’s call. By any measure our fourth quarter results capped off what has been another truly outstanding year for Accenture. These results were underpinned by our ability to manage our business with rigor and discipline while leveraging the full power of Accenture’s unique leadership position in the marketplace to drive significant value for our clients, our people and our shareholders. Before I get into the details of the quarter let me summarize a few of the important highlights which once again reflects strong execution across all three financial imperatives for driving superior shareholder value. Revenue momentum continued with very strong net revenue growth of 11% in local currency reflecting our fourth consecutive quarter of double-digit growth. Our growth continued to significantly outpace the market reflecting both our leadership position in "the New" and the durability of our diverse yet highly focused growth model. Our operating margin of 14.3% came in as expected and was up 10 basis points from last year. We were very pleased with our strong underlying profitability, which allowed us to invest significantly in our business and our people, and we delivered EPS of $1.58 in the fourth quarter up 7% from last year. And finally, we delivered free cash flow of $1.9 billion which was better than expected driven by strong growth and profitability and continued industry leading DSOs. With those high level comments, let me turn to some of the details starting with new bookings. New bookings were $10.8 billion for the quarter reflecting our second highest bookings on record. Consulting bookings were $6.1 billion, representing an all-time high and a book-to-bill of 1.1, and outsourcing bookings were $4.7 billion, with a book-to-bill of 1.0. The dominant theme continued to be strong demand for "the New" which represented more than 60% of our total bookings. For the full fiscal year, we delivered nearly $43 billion in new bookings which represents 12% growth in local currency and we were particularly pleased with double-digit bookings growth and strategy and consulting and system integration. Turning now to revenues. Net revenues for the quarter were $10.1 billion, an 11% increase in both USD and local currency. This was a $100 million above the top-end of our guided range. Our consulting revenues for the quarter were $5.5 billion, up 12% in both USD and local currency, and our outsourcing revenues were $4.6 billion, up 9% in both USD and local currency. Looking at the trends an estimated revenue growth across our business dimensions, we were especially pleased with the strong balance in our growth with double-digit growth across all dimensions Strategy and Consulting Services, Operations and Application Services. And "the New" including Digital Cloud and Security related services continued to deliver very strong double-digit growth. Consistent with last quarter, I’d also like to highlight continued strong demand for Intelligent Platform Services, which was an important contributor to our growth. These services primarily relate to deploy next-generation technologies and SAP, Microsoft, Oracle, Salesforce, and Workday. Taking a closer look at our operating groups, resources led all operating groups with [15%] in local currency, reflecting double-digit growth across all three industries and all three geographies. Communications, Media and Technology grew 15%, driven by continued strong momentum in Software Platforms which posted very strong double-digit growth, especially in North America. Products delivered its 13th consecutive quarter of double-digit growth with 12% growth in the quarter. We saw strong broad-based growth across all three industries in all three geographies. H&PS grew 6%, driven by strong growth in public service, as well as double-digit growth in both Europe and the growth markets. We saw flat growth in North America primarily reflecting some pressure in our U.S. federal business. Finally financial services grew 3% reflecting good growth in insurance and modest growth in banking and capital markets. We saw double-digit growth in the growth markets and solid growth in North America offset by some challenges in Europe. We expect a similar level of growth in the first quarter. Moving down the income statement, gross margin for the quarter was 31.8%, compared to 31.5% in the same period last year. Sales and marketing expense for the quarter was 10.7%, compared with 11% in the fourth quarter last year. General and administrative expense was 6.7%, compared to 6.4% for the same quarter last year. Operating income was $1.5 billion in the fourth quarter, reflecting a 14.3% operating margin, up 10 basis points, compared with quarter four last year. Our effective tax rate for the quarter was 28%, compared with an effective tax rate of 23.9% for the fourth quarter last year. The higher tax rate in the fourth quarter was primarily related to an increase in prior year tax liabilities. Diluted earnings per share were $1.58, compared with EPS of $1.48 in the fourth quarter last year. This reflects a 7% year-over-year increase. Day services outstanding were 39 days, consistent with last quarter and the fourth quarter of last year. Our free cash flow for the quarter was $1.9 billion, resulting from cash generated by operating activities of $2.1 billion, net of property and equipment additions of $179 million. Our cash balance at August 31 was $5.1 billion compared with $4.1 billion at August 31 last year. With regards to our ongoing objective to return cash to shareholders in the fourth quarter, we repurchased or redeemed 3.4 million shares for $552 million at an average price of $163.24 per share. This week our Board of Directors approved $5 billion of additional share repurchase authority bringing the total to $6 billion. As Pierre mentioned, our Board of Directors declared a semi-annual cash dividend of $1.46 per share. This dividend will be paid on November 15, and represents a $0.13 per share or 10% increase over the previous semi-annual dividend we declared in March. So before I turn it back over to Pierre, I want to reflect on where we landed for the full year across the key elements of our original business outlook provided last September. As a reminder we had two unusual items impacting metrics for this year. Last year we recorded a settlement charge related to the termination of our U.S. pension plan and this year we recorded charges related to tax law changes. The following comparisons exclude these impacts were applicable and reflect adjusted results. For the full year net revenues grew 10.5% in local currency well above the top end of the guided range that we provided at the beginning of the year with strong growth across all areas of our business with many posting double-digit growth. Roughly 80% of our overall growth was attributed to strong organic growth of 8%, and "the New" represented approximately 60% of revenues for the year reflecting our strategic focus to be a market leader in digital cloud and security-related services. On an adjusted basis, operating margin of 14.8% was consistent with FY 2017 and in line with our updated guidance while slightly below our original guided range. As I mentioned earlier, we're pleased with the continued underlying margin improvement that allows us - that has allowed us to continue to invest for long-term market leadership. On an adjusted basis diluted earnings per share was $6.74 per share reflecting 14% growth over FY 2017 and was above the original guided range primarily driven by strong topline growth. Our free cash flow of $5.4 billion was well above our original guided range again reflecting strong operating discipline and industry-leading DSOs. And finally, we delivered on the objective of our capital allocation model by returning $4.3 billion of cash to shareholders while investing roughly $660 million to acquire critical skills and capabilities and strategic high-growth areas of the market. So again, we had another outstanding year of broad-based growth resulting in significant market share gains underpinned by strong profitability and cash flow. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our outstanding results for fiscal year 2018 demonstrate that we continue to execute our profitable growth strategy of differentiation and competitiveness extremely well. Our very strong revenue was our new bookings reflect excellent demand for our services. We are clearly leading in "the New" in the marketplace and we have gained significant market share over the last few years, demonstrating that our services and capabilities are highly relevant to our client's agenda. Over the last five fiscal years we have delivered compound annual revenue growth of 9% in local currency and 10% compound growth in adjusting earnings per share. And I'm especially pleased that over the same period we have delivered a compound annual total return to shareholders of 21%, significantly above the 15% annual total return for the SAP-500. Our strong and durable performance reflects the relevant investments we have made ahead of the curve to differentiate our offerings and enhance our competitiveness, as well as the rigor and discipline we bring to managing the business. Our rapid rotation to "the New" digital, cloud and security-related services has contributed significantly to our performance. In fiscal year 2018 "the New", accounted for that $23 billion or approximately 60% of total revenues more than the double the revenues just three years ago. In digital, I'm especially pleased with the success we have had in growing Accenture Interactive. Today we are the market leader operating at scale for many of the world's leading brands. We're working with Radisson Hotel Group at their global experience agency to improve customer acquisition and retention for more than 1000 in 80 countries. Accenture Interactive leveraging our travel industry expertise, data analytics and digital marketing capabilities to create more personalized customer experiences. Why is "the New" has truly become core to our business. As you would expect we continue to invest and innovate to capture new ways of growth. And indeed we are making excellent progress with Accenture industry X.O which we launched recently, where we are helping clients to range that manufacturing with advanced technologies like the Internet of Things, connected devices and digital platforms. With ABB, the switch industrial manufacturer, we developed an IoT Solution to connect data from smart sensors embedded in its electric models to customers. With a new mobile app portal and sensor platform, ABB can now apply more advanced analytic that's deepen its knowledge about multiple performance, competitive assets and customer needs. We continue to invest in our industry X.0 capabilities and complete its three acquisitions in the first quarter; Pillar Technology, a software firm in Columbus, Ohio, Mindtribe, a hardware engineering company in San Francisco and Designaffairs, a design firm in Germany. At the same time, we continue to leverage our unique role in the technology ecosystem as re-leading partner of key platform players including SAP, Microsoft, Oracle and Salesforce which are also rotating rapidly to "the New". That evolves to a new generation of cloud-enabled platforms with advanced analytic, artificial intelligence and machine learning capabilities. We are working with a broad range of clients across industries around the world to transform their businesses using SAP S/4 HANA Solution from Lion, Australia's largest brewer, to Chelsea, the Latin American utility, to Barilla, the Italian food company. Turning now to the geographic dimension of our business, I feel very pleased that we deliver another year of very strong broad-based growth in most of our largest market. Starting with North America, I'm delighted with the acceleration in our business with revenue growth of 9% in local currency for the year driven primarily by the United States. In Europe we continue to drive high single-digit growth. We delivered 9% growth in local currency for the year led by double-digit growth in Germany, Italy, France and Island as well as high single digit growth in Spain. And finally our gross markets are becoming an increasingly significant contributor to our performance with 16% growth in local currency led once again by very strong double-digit growth in Japan as well as double-digit growth in Australia, Brazil and Singapore. Before I turn it back to David, I want to share a few thoughts on our talent strategy to continue leading in "the New", which clearly sets us apart in the marketplace. Our people intimacy makes the difference in delivering high quality services to our clients. And as we transform Accenture, we are making substantial investments to ensure that we have the most relevant and specialized skill and scale to meet our client's needs. And we are particularly focus on attracting and developing the best possible team of leaders in our industry. And I'm extremely pleased that in fiscal year 2018 we promoted about 700 new managing directors and hired nearly 300 from outside Accenture adding very significant industry expertise and specialization. At Accenture we continue to believe that diversity is a critical source of competitive advantage. I'm especially proud that just these months, we were named the top company, number on the Thomson Reuters Diversity and Inclusion Index which recognizing the 100 most diverse and inclusive companies in the world. And finally, I want to thank our 459,000 people for their unique passion and energy which makes all the difference for Accenture and more importantly for our client. With that, I will turn it over to David to provide our business outlook for fiscal year 2019. Over to you, David. David Rowland : Thank you, Pierre. Before I get into our business outlook I want to highlight a few changes for FY 2019 and beyond. For our Fiscal 2019 we adopted "the New" revenue intention accounting standards and have posted reconciliation on our IR website. In summary the adoption does not have a material impact on our financial reporting. However, you'll notice that revenues will now include reimbursements and as a result going forward we will report a single revenue number which will include reimbursements. Also as a result to these changes there will be a corresponding impact to operating margin which restated for FY 2018 would be 14.4% compared to the reported operating margin of 14.8%. Our FY 2019 guidance in comparisons to FY 2018 reflect the adoption of "the New" revenue standard including the change in the presentation of revenues and the resulting impacts on operating margin, as well as the updated standards for pension accounting and income taxes on intercompany transfers. I'd also like to highlight a change we will be making in the payment of our dividends. Beginning in the first quarter of fiscal 2020, we will move from a semi-annual dividend payment schedule to a quarterly dividend payment schedule. This change will take effect in FY 2020 and in FY 2019, we will continue to pay dividends on a semi-annual basis. Now let me turn to our business outlook. For the first quarter of fiscal 2019, we expect revenues to be in the range of $10.35 billion to $10.65 billion. This assumes the impact of FX will be about negative 2% compared to the first quarter of fiscal 2018 and reflects an estimated 7% to 10% growth in local currency. For the full fiscal year 2019, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in USD will be about negative 2.5% compared to fiscal 2018. For the full fiscal 2019, we expect our revenue to be in the range of 5% to 8% growth in local currency over fiscal 2018. For operating margin, we expect fiscal 2019 to be 14.5% to 14.7%, a 10 to 30 basis point expansion over adjusted fiscal 2018 results. We expect our annual effective tax rate to be in the range of 23% to 25% and this compares to an adjusted effective tax rate of 23% in fiscal 2018. For earnings per share, we expect full-year diluted EPS for fiscal 2019 to be in the range of $6.98 to $7.25 or 4% to 8% growth over adjusted fiscal 2018 results. For cash flow for the full fiscal 2019, we expect operating cash flow to be in the range of $5.75 billion to $6.15 billion, property and equipment additions to be approximately $650 million and free cash flow to be in the range of $5.1 billion to $5.5 billion. Our free cash flow guidance reflects a very strong free cash flow range to net income ratio of 1.1 to 1.2. And finally we expect to return at least $4.5 billion through dividends and share repurchases as we remain committed to returning a substantial portion of cash to our shareholders. With that, let's open it up so that we can take your questions. Angie? Angie Park : 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 on the call. Operator : [Operator Instructions] Your first question comes from the line of Joseph Foresi from Cantor Fitzgerald. Please go ahead. Joseph Foresi : I wonder if you could start off by talking about what the margin drivers will look like and how we should think about the base margin exiting this year and how margins will expand next year? Pierre Nanterme : Yes, I mean the margin drivers are really consistent with what I've talked about previously and you could really look at it in two ways, I mean first of all our profitability fundamentally starts with strong contract profitability and that gets into the way we price our services, and gets into the discipline with which we deliver those services to the expected economics and so contract profitability is always high on our profit agenda. And of course it can be impacted by a number of things including the mix of work in a particular quarter or year across the business dimensions, it can also be influenced by the mix of work across geographies. But we're very focused on profitability and of course our strategy which is focused on leading and delivering high value services to our clients to be outcome driven in the work that we perform for our clients and of course our focus on leading in "the New", all of that supports our objective of expanding our contract profitability over time. The other two things if you look at it through another lens would be that our profit drivers are also focused on efficiently managing the evolution of our payroll structure in relation to the evolution of our revenue and of course we have an ongoing focus on that. And then finally we're always focused on continuing to improve our SG&A structure in the efficiency of the cost of doing business and all of those things come into our margin expansion objectives for next year. Joseph Foresi : And then as my follow-up just staying with margins. On the M&A front, what's your expectations for contribution to the top line and how do you balance that with your desire to obviously expand margins? Thanks. Pierre Nanterme : Yes, so we expect our inorganic contribution next year to be about 1.5%, that's about a point lower than our experience in FY 2018 but it’s important to reinforce that we are firmly committed to our inorganic strategy again using inorganic as an engine of organic growth. This year we would expect to spend up to $1.5 billion consistent with our capital allocation strategy as always given the right opportunities and the right circumstances, we could certainly spend more than that. And from a profitability standpoint, all of that is in the mix of how we manage our margin expansion over time, you've heard us say many times that underneath the margin that we report externally, we have underlined margin improvement which I referenced from time to time and our focus as an organization is to get sufficient improvement in our underlying margin so that we can absorb all of our investments which includes our ambition around acquisitions as part of our growth strategy. Operator : Your next question comes from the line of Edward Caso from Wells Fargo. Please go ahead. Edward Caso : Can you talk a little bit on the people side, your attrition rate was 18% versus 15% a year ago seems a lot of your peers are showing rising rates. Can you sort of dig down a little bit on why and maybe what efforts you're trying to maybe slow that down or you’re getting more comfortable at this higher level? Pierre Nanterme : Yes, on attrition, so let me directly answer your question. We are constant with the 17 not at all. Let’s be clear, I think we are today, we believe it’s reality level of attrition given the level of competition for talents in the marketplace. We have today zero issues to hire the talent that we need and it’s true everywhere across the world and so we are - and from way we do to be attractive, I mean first our strategy, I mean the rotation to "the New", the fact that we are leading in all these new ways of interactive manufacturing Internet, artificial intelligence, advanced analytics, cloud, blockchain and I can mention and it is creating a very attractive place to be. Second is our performance. We are the leader in the industry and of course it's attractive for talent. I was just reading this morning, its fresh from France, I’m in Paris], we are the number one in all the dimensions as in professional services from an industry standpoint, from a technology standpoint and across the board. So we have zero issue being attractive and finally it’s our balance strategy and the environment we providing to our people. I think we worked a lot to create the right workplace where people are collaborating. We are creating a right environment to add multiple cultures coming together and developing a lot of creative thinking. And it’s our tone and style we are developing at Accenture and its probably to benefit of being the leader. Edward Caso : My other question it relates to margins, around how much benefit are you getting from platform that you built from reuse it seems like the - a lot of "the New" starting to settle in here and it seems like there is an opportunity for an industry leader to sort of reprint what you’ve already done? Pierre Nanterme : Yes on this jumping on this one David, I mean for us platforms are extremely important to the success of our country. I think this is very clear what we’re calling now the intelligent platforms because the platform provided by our partners SAP, Microsoft, Oracle, Workday and Salesforce but that could add that so system and others are becoming more and more intelligent and our strategy has always been the same. We leveraged the best platform in the marketplace and this and is important on top of them we build industry specifications. So for instance when we’re working with an SAP we have developed a very specific add on that platform in upstream oil and gas. The same in utility we’re working with the Salesforce.com on joint company called Velocity and the objective of Velocity is add speed develop industry specific solutions on top of the Salesforce capabilities. So this is our strategy and it’s working so far very well. Operator : Your next question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Congrats on double-digit growth. I’ll ask on the revenue momentum, I am curious it sort of bigger brand on the outlook just if we look back a year ago, you exited the year growing 8% I believe and you guided to 5% to 8% revenue growth. So this year your guidance is same 5% to 8% but you using at 11%. So I am curious how might the upside case be different this year versus last year any considerations across macro demand competition, digital being little bit more mature et cetera? David Rowland : I would say I mean first of all there is no doubt that we have strong momentum in the business and there is also no doubt that we feel very good about our business and the momentum that we have. And you could point to as you mentioned the fact that we exited 2018 with very strong broad based organic growth by the way our organic growth in quarter four was 10%. We had record bookings in the second half of the year. We had our all-time high in the third quarter and in the fourth quarter it was second only to quarter three. And we got good line of sight to 1.5% in organic and so there is a lot of things for us to feel positive about and we do to be clear. At the same time, you also have to reflect on the fact as we do that this is the point in time where we are providing guidance over the longer cycle. And so that comes in to the mix by the very nature of the fact that we’re guiding over essentially 12 months. And also we take stock of what’s happening in the macro environment as well and may be its debatable but I would say from our standpoint and perhaps this year the macro environment is incrementally more volatile than it was last year at the same point in time. You think about the potential for a hard Brexit. And of course you can reflect on all of the disputes around global trade and so we think about the global environment over that 12 month horizon. And it’s really in that context that we guide to 5% to 8% and the other thing Tien-tsin I would remind you and the others of is that we guide to 5% to 8% in a market our investable basket market that is growing in the range of 2% to 3%. And so anywhere on that guidance range of 5% to 8% we would be taking significant share and if you think about the upper end of the range which is where we always strive for then at 8% we would be growing more than 2.5 times the market. And so 5% to 8% which is consistent with what we’ve done the last three years is in fact reflective of what we would consider be outstanding growth especially in the upper end of that range reflective of the Accenture as a leader. Anything we do above that is exceptional growth and it is true that we had a pattern over the last four years for delivering double-digit growth and we’ll see how 2019 plays out and we’ll update our guidance appropriately as the year progresses. Tien- tsin Huang : Agreed, now it seems very prudent. I’ll ask my quick follow up just on the financial services segment I know you mentioned a little bit David just it lag a little bit was the impact broad based or isolated to a region or few clients it sound like North America it sound like it was okay just wanted to get a little bit detail there? Thanks so much. Pierre Nanterme : Yes, sure so very pleased to comment on financial services. If I had to summarize the situation it’s mainly Europe where we are facing this challenging of lower growth. And it’s mainly due to some large program we had in Europe winding down in the context of 2018. So something which is not un-typical by the way that happened in other industries this last few years. I remember CMT in Europe just two years ago we had the same phenomenon of some large program getting to a close. And so what it is you need to do and now people are working very hard you need to replenish the pipeline to build the backlog and that is going to create the revenues of tomorrow. So our people are working on it, we have encouraging signals that indeed the pipeline in financial services in Europe is building up. We certainly believe that it’s going to take couple of quarters to show in our growth, so we expect the H1 to still be in the low single digit and then H2 to get back more power with the rest of Accenture. So I do not think anything un-typical are coming from anything happening to this industry. Operator : Your next question comes from the line of Rod Bourgeois from DeepDive Equity Research. Please go ahead. Rod Bourgeois : So in terms of the revenue growth outlook I want to ask, are you seeing actual headwinds starting to impact your growth in upcoming months or is your guidance simply accounting for the possibility that’s the macro headwinds could grow over the course of the next 12 months. I am just trying gauge are you seeing visibility into flowing or you just prudently thinking about the next 12 months and what might happen? Pierre Nanterme : I cannot take on this one because I think David mentioned already some element of this. From an Accenture standpoint, we’re pleased with where we are and no doubt we are entering Q1 with good momentum. Now for us Q1 is the end of the calendar 2018. So we’re moving to a new calendar January the 1st, so to be very specific it’s not something we see now. But the role of the leadership of any company is to look beyond the horizon and to understand what might happen in calendar 2019. And just to build on what David mentioned for instance I mean the Brexit negotiation going to get to end and we’ll know what’s going to happen and its seems we more moving to something like a hard Brexit than a soft one. What we’re calling the trade war again not signaled as we speak to you now that there is an effect but this trade war might impact some industries moving forward and by impacting these industries there could be a ripple effect on our business. We are watching as well very closely Latin America. Latin America, we've been doing well despite the complexities in that region, you’ll see what we're doing in Brazil which is absolutely great. Now Latin America prospects are concerning as well, and not to mention the other risk we all know you’re starting to see again some volatility in the commodity pricing. Not too long ago we talk about the oil price at $30 a barrel and now it’s getting to be very, very high. We are about to see some commodity pricing volatility again all of these we will see in calendar 2019, how things going to unfold. So that is the answer, nothing now but our job is to consider and to risk adjusting our guidance accordingly. Now that being said, what David said is absolutely true five to eight is an aggressive guidance if you look at the growth of the basket of competitor and the market. So it’s at 8% that would be two to three times the market. I would not consider that as conservative. Rod Bourgeois : And then on the free cash flow outlook, you outperformed on cash flow in fiscal 2018 which sets up a tough comparison for fiscal 2019. Is there anything lumpy in the fiscal 2019 free cash flow outlook, I know you sometimes include some buffer on DSOs in case that moves around but are there any special lumpy items in the fiscal 2019 free cash flow outlook? David Rowland : I mean there's no special lumpy items that’s - again we focus more on the absolute number in relation to net income and that ratio which is the guidance is actually quite strong in that regard then we do the year-over-year change. I mean we had beyond an outstanding year in DSOs in 2018, we really had an exceptional year and from a guidance standpoint, you're not going to assume that happens every year and so for example Rod we have allowed for the potential of some increase in DSOs as an example. But there is not anything other than the normal things that we would kind of factor in that’s in the mix. Again we would be very pleased to land a free cash flow in the range of 1.1 to 1.2 times net income. Operator : Your next question comes from the line of Darrin Peller from Wolfe Research. Please go ahead. Darrin Peller : Let me just start off, I mean can you just give a little more color on what you are seeing around wage inflation specifically in "the New" or maybe some of your better digital areas. How is it around pricing for those areas, it seems like giving the margin guidance you should be able to pass through price increase to offset but just a little more color on what you’re seeing on those two variables? David Rowland : Yes, I mean it’s - I will make a couple of comment and Pierre may add as well. I mean first of all it’s with the size of our workforce and the diversity of skills and geographies et cetera, it's really hard to talk about wage questions in aggregate and for that reason we typically stay away from them. But let me just generically say that, I mean certainly when you look at the high growth areas of the market especially the leading edge areas of the market, there are in many cases premium salaries that go with premium skills and we hire a lot of those people and we always - we pay the market rate. On the other hand, we do get differentiated pricing in digital and that's the point is that we're not, we want to pay at a market relevant rate to retain people kind of fit for purpose for the skill set that we're talking about but what we focus on is whether or not we can get the right bill rates and ultimately yield the profitability off of those resources and so in that regard, there's not anything that we're concerned about, we as I said earlier we're always focused on driving our contract profitability upward which ultimately means that we have to get the right pricing in relation to what we're paying people and we feel positive about that. Pierre Nanterme : Yes, and maybe just to add on this, I mean, to attract and retain people, it's not always about the money. And it's interesting when you're driving analysis and surveys, the number one wish of the people working at that center is interesting work that is number one, the second is all the working environments and the balance and three the comp. So at the end of the day, the point is not about giving more money or to be the one who could have paid the most, it’s going to be the company is going to provide the most interesting work for our people and this is what we do with our rotation to "the New" and working with our diamond clients. Second, creating the right working environments I mentioned that already and indeed competitive compensation, so it's a mix of things you need to work on. Darrin Peller : And just sort of a follow-up, I mean could you just deconstruct a little more around the growth of that specifically maybe breaking down what you are seeing in Cloud versus some of the center interactive side which I know has been a big party of growth also and if there is any other big call outs worth mentioning and thanks again guys. David Rowland : I’ll make a couple of comments in terms of just some facts and Pierre may add some color as well. I mean the - first of all our growth in "the New" was strong double-digits and that has continued and when we say strong double-digits as we've said before, we mean very strong double-digits. So let's say well north of 20% is the growth rate that we see in "the New". And when you look at the components of "the New", we also see strong double-digit growth across every component, so when you look at digital and the three components of digital, Accenture Interactive, Accenture Applied Intelligence and Industry X, when you look at our cloud related services and when you look at security, all of those businesses are contributing with strong double-digit growth to the overall numbers that we very often talk about with respect to "the New". These are very attractive markets, we are - and strengthening our leadership position in each and we're benefiting from the growth that goes with it. Pierre Nanterme : Yes, we could be even clearer because you mentioned the 20% as [zero], I think all of them are growing more than 20%, to be very clear. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : I wanted to ask a follow-up on that. I think you guys have a fact in there that "the New" grew about 25% constant currency in fiscal year 2018, I guess that means the legacy business declined last versus last year and actually I have legacy business almost being flat to slightly up, so just want to see if maybe we've reached a point where we won't see that core legacy business declining as much as we have in the past because there's a certain amount of spend that always will occur with that business going forward? Pierre Nanterme : Excellent analysis indeed. The core is declining less than in the prior year, so you made exactly the right analysis and calculation. But the rationale behind is we worked hard to not to protect the call but to make the call more competitive. So it was not like if our strategy was we’re going to put all our investment behind "the New" and let the core decline or becoming uncompetitive which would have been extremely bad. So we invested as well in the core in the form if I have to summarize of massive robotic and automation and modernization of what we are providing in term of - for instance application outsourcing or other activities you would put into core where indeed we have reached a level of automation which is extremely high and accordingly we have been able to protect the margin of the core and limit the erosion. So, you're absolutely right, but it's more because we worked on it for robotic automation and modernization. Bryan Keane : And then, David, without the adoption restatement and changes in the pension accounting, just curious if operating margin still would've expanded the same 10 to 30 basis points? Some folks are getting a boost through 606 on operating margin or pension accounting. I just want to make sure that's not the case here. That’s still be underlying operating margin expansion without those changes? Thanks. David Rowland : That is correct. It would be the same without the changes. Operator : Your next question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : I wanted to follow-up on the macro demand questions. In your client budgets, the conversations you're having in the U.S., is there any indication that there's been a pull forward of tax spending demand in 2018 due to things like tax reform or just broader deregulation? David Rowland : I would say, no. I don't think we have any evidence that there's been a pull forward of spending for those reasons. No. Bryan Bergin : And then my follow-up, as you're building new, new areas in area - places like Industry X.0 and Applied Intelligence? Can you give us a sense of scale of these businesses? And then just talk about what you learn from building out the interactive business that you were able to leverage in these new areas? Pierre Nanterme : Yes. Now we have a kind of routine we established at Accenture, which is moving from the first and this is a role of R&D specially Paul Daugherty, an Accenture Research, is to understand what's coming. And clearly as you know we're spending $700 million in R&D at Accenture. And their job is to intensify to next ways and putting them in incubation in what we call strategic growth initiatives. So we incubate. This is what we did for the other businesses. We're starting to test business models. And when we get into a level of maturity, and we see the opportunity to scale and create an impact with client then we industrialize and move to the big business of Accenture. So we learn about this process of incubation to industrialization. Second, it's all about talent and leadership. And this is where we have the combination between acquisition and organic growth. So indeed we are making acquisition and I mentioned in the call, for instance, the three acquisitions we made in Industry X.0 this very quarter. To attract the skills, so companies of mid - small to mid-size that having deep skill especially in Industry X.0 on embedded software and product design where we are investing a lot. So we know now how to combine and of course all of this supported, I could see Amy Fuller next to me, our Chief Marketing Officer with good communication campaign we putting behind. So we have developed a savoir-faire in term of incubation - detection, incubation, industrialization and launching the campaign behind with a good mix of organic and inorganic behind. So its quite well oiled, if you will as a machine. Angie Park : Greg, we have time for one more question and then Pierre will wrap up the call. Operator : That question comes from the line of Harshita Rawat from Bernstein. Please go ahead. Harshita Rawat : My question is on headcount follow-up to a previous one. So you're hiring almost 100,000 people annually on a gross basis. That's obviously a big number. So my question is where are you hiring people from? Are you looking at different kinds of skills versus what you've looked at historically? And more broadly how should we think about your ability to continue to find and not just attract people and drive more automation in a very tight labor market which puts constraints in a supply of people? Pierre Nanterme : On this, I mean, we are - we continue to hire on onshore large markets especially in the context of our rotation to "the New", our largest markets are as you know, U.S., U.K., a lot in Germany, Japan if I had to mention maybe - maybe three countries I would certainly mention the U.S., Germany and Japan where we are recruiting a lot. But it’s true as well in our other metro markets U.K., France, Italy, Spain. So onshore deep skills probably more around high-value consulting in the context of "the New" and in the context of driving our largest relationship with clients especially with our Diamond clients, and we continue to hire significantly on - let's call at the offshore especially in India. And thank you for giving me the opportunity not to polarize that now that we'd e all about onshore and offshore would be called legacy. It's not true at all. Not true at all. And everybody would visit Accenture in India would be blown away by the quality of the people and their rotation to "the New". We had an event last year in term of R&D and innovation where some of our, I'm not going to mention the name, but some of our largest brand and clients from the U.S. being moving there for less than an hour to support that team who've been working on truly innovative session and brainstorming. So, we continue to invest onshore and offshore, drive the right balance and having the right skills. And this is exactly why, to your second question, is there scarcity in the pool? We don't believe. We operate in many markets. And in many markets we find the right people including business scientists. I think we have more than 2000 business scientists at Accenture, growing, and we could find these people all around the world. Again to your prior question, Accenture today is very attractive. Good for us. So we need to take our chance. And while we are attractive based on our results and positioning, we have no issue in finding the right people. Pierre Nanterme : So, thanks a lot for listening and joining us on today's call. As you might have guessed, we are and I'm extremely pleased with our strong finish and excellent performance for the first fiscal year 2018. No doubt we have a strong momentum on during fiscal year 2019 and with our leading position in "the New" the significance investments we are making and the disciplined management of the business, I'm very confident in our ability to continue gaining market share and delivering value for all our stakeholders. We look forward to talking with you again next quarter. In the meantime, if you have any question please feel free to call Angie and the team. All the best to everybody. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,018	4	2018Q4	2019Q1	2018-12-20	6.964	7.026	7.532	7.615	10.35	20.53	21.55	Executives: Angie Park - Managing Director, Head of Investor Relations Pierre Nanterme - Chairman and Chief Executive Officer David Rowland - Chief Financial Officer Analysts : Tien-tsin Huang - JPMorgan James Friedman - Susquehanna Financial Group Rod Bourgeois - DeepDive Equity Research Brian Essex - Morgan Stanley & Co. David Togut - Evercore ISI Harshita Rawat - Bernstein Bryan Bergin - Cowen & Co. David Grossman - Stifel Nicolaus & Company, Inc. Bryan Keane - Deutsche Bank Securities David Koning - Robert W. Baird Co., Inc. Lisa Ellis - MoffettNathanson Operator : Ladies and gentlemen, thank you for standing by, and welcome to Accenture’s First Quarter Fiscal 2019 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] 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, Angie Park. Please go ahead. Angie Park : Thank you, Greg, and thanks, everyone, for joining us today on our first quarter fiscal 2019 earnings announcement. As Greg just mentioned, I’m Angie Park, Managing Director, Head of Investor Relations. On today’s call, you will hear from 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 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 2019. We will then take your questions before Pierre 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 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. Pierre Nanterme : Thank you, Angie, and thanks, everyone, for joining us today. We’re very pleased with our first quarter results, continuing our strong momentum from fiscal year 2018. We again delivered revenue growth significantly ahead of the market, solid new bookings, and expanded operating margin, while investing significantly in the business. We continue to see excellent demand for our services, especially in digital, cloud, and security, as well as new technologies, confirming the relevance of our growth strategy and the differentiated solutions we bring to our clients. Here are a few highlights for the quarter. We delivered new bookings of $10.2 billion. We grew revenues 9.5% in local currency to $10.6 billion, which continued broad-based positive growth including double-digit growth in many parts of our business. We delivered earnings per share of $1.96, a 9% increase. Operating margin was 15.4%, an expansion of 20 basis points. We generated strong free cash flow of $950 million, and we returned more than $1.7 billion in cash to shareholders through share repurchases and dividends, so we are off to a strong start in fiscal year 2019. I feel very good about the momentum in our business and I’m confident in our ability to deliver our updated business outlook for the year. Now let me hand over to David, who’ll review the numbers in greater detail. David, over to you? David Rowland : Thank you, Pierre. Happy holidays to all of you and thanks for taking the time to join us on today’s call. Building further on Pierre’s comments, let me start by saying that we were very pleased with our overall results in the first quarter, which came in as expected and position us extremely well to achieve our full-year objectives. Before getting into the results for the quarter, I want to remind you that both our quarter one results and the FY 2018 comparisons reflect the adoption of the new revenue and pension accounting standards, which impact our revenues and operating margin percentage in an immaterial way. In addition, as we previously discussed, we adopted the accounting standard for income taxes on intercompany transfers, and the impact is reflected in both our results and our business outlook. With that said, let me begin, as I normally do by summarizing a few of the important highlights for the quarter. Strong revenue growth of 9.5% in local currency continues to reflect broad-based momentum in our business and once again, demonstrates the durability of our growth model with double-digit growth in three of our five operating groups and in both North America and the Growth Markets. We estimate that our growth continued to significantly outpace the market, underpinned by strong organic growth of over 8% in local currency. Our operating margin of 15.4%, expanded 20 basis points compared with last year and reflects strong underlying profitability, which continues to allow us to invest at scale in our people and our business. And we delivered very strong EPS of $1.96, up 9% compared to last year, even with an FX headwind of approximately 2%. Regarding cash flow, we generated significant free cash flow of $950 million, while at the same time returning roughly $1.7 billion to shareholders through repurchases and dividends. We’re also pleased that we invested a little over $200 million in the quarter -- $200 million in the quarter to acquire nine companies to bolster our skills and capabilities in strategic high-growth areas of our business. And we continue to expect to invest up to $1.5 billion in acquisitions during fiscal 2019. With that said, let me turn to some of the details starting with new bookings. Our new bookings were $10.2 billion for the quarter. Consulting bookings were $5.9 billion, with a book-to-bill of 1.0, and our outsourcing bookings were $4.3 billion, with a book-to-bill of 0.9. This level of new bookings was in the range we expected and follows our typical pattern of lower new bookings in the first quarter, which then build throughout the year. Looking forward, we feel good about our pipeline and are encouraged by our new bookings potential in the second quarter. Turning now to revenues. Revenues for the quarter were $10.6 billion, a 7% increase in USD and 9.5% in local currency and at the top-end of our guided range. Consulting revenues for the quarter were $6 billion, up 8% in USD and 10% in local currency, and outsourcing revenues were $4.6 billion, up 7% in USD and 9% in local currency. Before I comment on the underlying growth drivers, I want to mention that we’ve made some minor changes to our business dimensions, which we do from time to time as our business evolves. For fiscal 2019, we have renamed application services to technology services and expanded the definition to include infrastructure outsourcing, which was previously included under Accenture operations. These changes were made to reflect the synergies between our infrastructure and cloud services business and our application services business and the revised name of technology services simply reflects the broader scope. So now looking across the business dimensions, we were especially pleased with the balanced growth in the first quarter. Both strategy and consulting services combined and technology services grew at very healthy high single-digit rate, and operations continued its trend of double-digit growth. And “the New”, including digital, cloud and security-related services continued very strong double-digit growth as well. I would also like to highlight the continued strong demand for intelligent platform services, which grew double digits and was an important contributor to our growth. As a reminder, these services primarily relate to deploying next-generation technologies in SAP, Microsoft, Oracle, Salesforce and Workday, where we continue to be the number one service provider for all of these important partners. Taking a closer look at our operating groups, resources led all operating groups with 21% growth in local currency, driven by continued double-digit growth across all three industries and all three geographies. Communications, Media & Technology grew 14%. Continued strong momentum was driven by double-digit growth in Software and Platforms, which was the primary contributor to overall double-digit growth in North America and the Growth Markets. Products delivered its 14th consecutive quarter of double-digit growth, with 10% growth in the quarter, driven by broad-based demand across all three industries and all three geographies. H&PS grew 5%, driven by strong growth in public service, as well as double-digit growth in both Europe and the Growth Markets. As expected, we saw modest overall growth in North America, which reflects some continued pressure in our U.S. federal business. Finally, financial services grew 1%, which is the range we expected, reflecting strong growth in insurance and slight contraction in banking and capital markets. Overall, for financial services, we saw double-digit growth in the Growth Markets and modest growth in North America, partially offset by contraction in Europe. We expect growth in the same range in quarter two before seeing improved growth rates in the second half of the year. Moving down the income statement, gross margin for the quarter was 31.1%, compared with 31% for the same period last year. Sales and marketing expense for the quarter was 10.1%, consistent with the first quarter last year. Our general and administrative expense was 5.6%, compared to 5.7% for the same quarter last year. Operating income was $1.6 billion in the first quarter, reflecting a 15.4% operating margin, up 20 basis points compared with quarter one last year. Our effective tax rate for the quarter was 19.8%, compared with an effective tax rate of 20.5% for the first quarter last year, and diluted earnings per share were $1.96 compared with EPS of $1.79 in the first quarter last year, and this reflects a 9% year-over-year increase. Day services outstanding were 42 days, compared to 39 days last quarter and 43 days in the first quarter of last year. Our free cash flow for the quarter was $950 million, resulting from cash generated by operating activities of $1 billion, net of property and equipment additions of $78 million. Our cash balance at November 30 was $4.4 billion, compared with $5.1 billion at August 31. With regards to our ongoing objective to return cash to shareholders in the first quarter, we repurchased or redeemed 4.9 million shares for $788 million at an average price of $162.01 per share. At November 30, we had approximately $5.2 billion of share repurchase authority remaining. Also in November, we paid a semi-annual cash dividend of $1.46 per share for a total of $933 million. This represented a 13% – a $0.13 per share, or $0.10 [ph] increase over the dividend we paid in May. Let me say that again, this represented a $0.13 per share, or 10% increase over the dividend we paid in May. So in summary, we’re off to a very good start in fiscal 2019 and working hard to sustain our strong revenue growth, profitability and cash flow for the remainder of the year. Now let me turn it back to Pierre. Pierre Nanterme : Thank you, David. Our strong first quarter performance demonstrate that our strategy of building highly differentiated capabilities for the digital world by applying innovation at scale and anticipating the next ways of technology disruption continues to position us as the market leader. We continue to leverage the unique leadership position we have built in “the New” digital, cloud and security services. Our revenues from “the New” again, grew at a very strong double-digit rate in the first quarter and accounted for more than 60% of total revenues. Why “the New” has become the core of our business? We continue to invest and innovate to capture new growth opportunities. You may recall that at this time last year, we launched new digital capabilities in Industry X.O, Applied Intelligence and Accenture Interactive. We are making excellent progress in all of these areas, and today, I want to update you on our strong position in applied intelligence. With Accenture Applied Intelligence, we bring together our capabilities in analytics, machine learning and artificial intelligence, combined with our deep understanding of industry disruptions, to help clients become data-driven and invent new business models to create superior value.. Today, we have more than 20,000 people focused on applied intelligence, including 6,000 with deep expertise in artificial intelligence and data science. We are as well leveraging our unique position in the ecosystem and working with all the leading providers of artificial intelligence technologies, enabling us to bring cutting-edge solutions to our clients. And we recently launched new partnerships in artificial intelligence with Amazon, Google and Microsoft. Applied intelligence also comes to life through our new innovation architecture and our global network of studios, labs and innovation centers, where we co-innovate with clients to accelerate the development and delivery of leading-edge, industry-specific solutions. And now intellectual property in this area, which now includes approximately 1,500 patents, is an important asset that further differentiates us. In addition, we continue to make significant investments in applied intelligence. In the last two quarters, we acquired Kogentix, a U.S. company in big data and machine learning. And through Accenture Ventures, we made minority investments in Ripjar, a data intelligence company, focused on security, and Quantexa, a data analytics and specializing firm in fraud detection. Of course, Accenture Applied Intelligence benefits significantly from synergies across all our businesses to bring clients and to win value propositions. For Schlumberger, we are combining the industry expertise of Accenture strategy, with the data in artificial intelligence capabilities of Accenture Applied Intelligence to improve the productivity of the people, repair data utilization and asset turnaround. With innovative video analytics, artificial intelligence and machine learning, we are significantly reducing the time machines spend offline for repairs, driving higher returns on investments. At the same time, with the breadth and scope of capabilities we have built across Accenture and now unique ability to combine them at scale in an industry context, we remain the partner of choice for our clients’ largest and most complex transformation problems. We are working with Sprint on an enterprise-wide digital transformation to co-create new customer experiences and optimize our digital marketing and operations. The changes have driven a substantial increase in customers buying their phone digitally, significantly higher customer satisfaction, and millions of dollars in operational cost savings. Turning now to the geographic dimension of our business. I’m very pleased that in the first quarter, we again delivered strong growth in all three of our geographic regions and gained significant market share. In North America, we delivered 10% revenue growth in local currency, driven primarily by double-digit growth in the United States. In Europe, revenues grew 6% in local currency with double-digit growth in Italy and Ireland, as well as mid to high single-digit growth in the United Kingdom, Germany and Spain. And I’m just delighted that we delivered another excellent quarter in Growth Markets, with 17% growth in local currency. Japan again, led the way with very strong double-digit growth, and we had double-digit growth in Brazil, in China and in Singapore as well. Before I turn it back to David, as you know, the capabilities we are building in “the New”, along with our highly skilled and diverse talent and discipline management are absolutely key to our long-term and durable success. And I’m particularly proud of some recent recognition we received for our leadership in these areas. The Wall Street Journal ranked Accenture in the top 10 on their management of 250 list. And the Journal Editors also named Accenture as one of just seven companies to do everything well. They consider us a leader in the way we manage Accenture across the Board. In addition, we were recognized by multiple industry analysts as a leaders in the IoT services, which underpin our industry X.0 business, demonstrating that we also have the pioneering capabilities to continue differentiated – differentiating Accenture in “the New” and driving future growth. With that, I’ll turn it over to David to provide our updated business outlook. David, over to you, again. David Rowland : Thank you, Pierre. Let me now turn to our business outlook. For the second quarter of fiscal 2019, we expect revenues to be in the range of $10.1 billion to $10.4 billion. This assumes the impact of FX will be about negative 4% compared to the second quarter of fiscal 2018, and reflects an estimated 6% to 9% growth in local currency. For the full fiscal year 2019, based upon how the rates have been trending over the last few weeks, we now assume the impact of FX on our results in USD will be about negative 3% compared to fiscal 2018. For the full fiscal 2019, we now expect our revenues to be in the range of 6% to 8% growth in local currency over fiscal 2018. For operating margin, we continue to expect fiscal year 2019 to be 14.5% to 14.7%, a 10 to 30 basis point expansion over fiscal 2018 results. We continue to expect our annual effective tax rate to be in the range of 23% to 25%, and this compares to an adjusted effective tax rate of 23% in fiscal 2018. For earnings per share, we now expect full-year diluted EPS for fiscal 2019 to be in the range of $7.01 to $7.25, or 4% to 8% growth over adjusted fiscal 2018 results. For the full fiscal 2019, we continue to expect operating cash flow to be in the range of $5.75 billion to $6.15 billion, and property equipment additions to be approximately $650 million and free cash flow to be in the range of $5.1 billion to $5.5 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $4.5 billion through dividends and share repurchase, 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. Angie? Angie Park : Thanks, David. I would ask that you each keep the one question and a follow-up to allow as many participants to ask a question. Greg, could you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Hi, good morning, everyone. Pierre Nanterme : Hey, good morning, Tien-tsin. Tien- tsin Huang : It’s always good to hear from you. Happy holidays. Just the gross margin, I want to start out with if that’s okay. It looks like it’s expanding now a couple of quarters, which is encouraging, and I know you manage the operating margin, but what’s driving the better gross margin here? Can we infer that pricing and contract profitability are in a good place? David Rowland : So there’s – overall, there’s really three things that drive our operating margin overall and really all three things apply to gross margin as well. So, you just mentioned it -- you start with contract profitability, and we are pleased with the progression of our contract profitability, and we’ve also been very pleased with the progression of our pricing. You know, Tien-tsin that, we have invested substantially in our strategic areas of focus to build what we think is significantly differentiated capability in the marketplace, I’m referring to the components of “the New.”. And as we said before, in those areas where we have significant differentiation and where there’s high demand, then we tend to get some pricing power. And, of course, beyond the contract profitability and pricing, we have been very efficient in how we have managed our overall payroll efficiency, as well as our non-payroll expenses. And so and I know I speak for Pierre. I think, our organization has done a particularly good job in recent quarters. And certainly, this quarter we just closed in driving our profit objectives. Tien- tsin Huang : That’s great. Then I’ll – for my quick follow-up, I’ll ask – I think I’ve asked this last quarter as well. The financial services piece, you’ve mentioned the same thing, you said last quarter you’re looking for second-half growth improvement. Do you still feel good about that? Has that changed at all? Have you replenished the pipeline? Pierre Nanterme : Yes. I mean, no change with what we said in the prior quarter. FS delivered as expected. So we expected a lower Q1 and certainly as well the same in Q2. But we have the pipeline and we have the committed bookings, which are making us comfortable enough that in the second part of the year, Q3 and Q4, as such we’ll get back to their mid-single-digit growth we would expect from them. Tien- tsin Huang : Thank you. Thanks for the clean results at year-end. David Rowland : Thank you, Tien-tsin. Happy holidays. Pierre Nanterme : Thank you. Operator : Your next question comes from the line of James Friedman from Susquehanna. Please go ahead. James Friedman : Hi. Thank you, and happy holidays as well. David Rowland : Hi, James. James Friedman : Dave, in your prepared remarks, you had called out some changes in the definitions of business dimensions to operations and technology services. I just wanted to check that in the factsheet the presentation of the growth is adjusted towards a double-digit growth in operations, high single-digit growth in technology services. Is that contemplated in those changes? David Rowland : Yes, it is. It is reflected in those numbers. James Friedman : Okay. And then I guess, I’ll go to the operating group for my follow-up. So resources, great to see the continued performance here for a couple of quarters, again. I’m just getting questions from clients about the potential cyclicality of that OG, or is this more secular. What’s going on that is growing so quickly? Pierre Nanterme : Yes. On resources, I mean, the good news is, if you look at, I mean, the three industries making resources, they are all growing double-digit in Q1, and we’re pleased with that. Coal mining, chemical, oil and gas, utilities, so it’s broad-based. So we are not dependent on one industry in resources to another, and we love that. Probably, if there’s a world, David and I would love the most is broad-based, and because it’s making our model more durable. If you look at this, what’s hot as we speak. Again, all what we’re calling the intelligent platform services around the SAP or the other platforms, so in resources, you have what we anticipated as well and discussed with you a few quarters ago the next wave of ERP implementation to take the benefits of these new platforms. As well, digital is starting to kick more and more in these B2B business, if you will, or B2B2C business, because in utilities and oil and gas, of course, they have a B2C business where you need to provide the digital experience. So they are becoming more digital. They are becoming more intelligent platform services-driven, and we’re starting to expand more of our industry X.0 services. I’m talking about things such as asset virtualization and digital twins, as well add “the New” 3D platforms in order to reinvent all the supply chain and the production of these large companies. So I feel, again, absent the oil price massive drop, so if we are staying in the zone, we might be more in a kind of what you’re calling secular or maybe a structural part of the reinvention of these industries. James Friedman : That was a lot. Okay, thank you very much. Happy holidays. Pierre Nanterme : Happy holidays. David Rowland : Same to you again. Operator : Your next question comes from the line of Rod Bourgeois from DeepDive Equity. Please go ahead. David Rowland : Hello, Rod. Rod Bourgeois : Hi there. Hey, thanks for the call here. Hey, I wanted to talk about the change of the calendar and the New Year budget and all the macro uncertainties that are swarming around. Do you feel you have good visibility into your clients’ discretionary spending plans as we move into the New Year budget? And I guess more specifically, as you look at those client budgets, are you seeing clients’ priorities shifting in any significant way to respond to the heightened macro concerns that are out there? Pierre Nanterme : I mean, frankly, from a macro standpoint, we talked a lot. I think the last – during the last call. I already signaled all these volatility uncertainty of the environment, this is what it is. Frankly, nothing has really changed. If you look at these macro uncertainties, it’s all about the trade. It’s all about the economic growth, it’s all about [indiscernible] that’s still there. So frankly, the clients we’re working with which are all leaders in their industries and all, I would call them, the best brand and sometimes the global giants I’m referring to our 180-plus diamond clients. They are figuring out this environment. There is nothing really new for them or for us in what’s happening. Their budget has been set and the pattern on the budget is pretty clear is, all the traditional legacy commoditizing services going to be be under big pressure. And the budgets are being reallocated to "the New" – or to what we’re calling “the New” at large. Everything is digital. The cloud prospects are very good. Security services, I would add – what we’re calling intelligent platforms. So all these ways of new platform with deep analytics, artificial intelligence, and and this is what is. So what – I would say, this is probably what we have read the budget. We continue to grow maybe to a lesser extent than last year, but we will continue to grow. But the reallocation between commoditizing digital services and digital might be even more dramatic. You need to be in the right side of defense, yes, with 60% of our revenues in “the New”. We believe we are in the right side of defense, that’s why we’re growing 9.5%. Rod Bourgeois : Great. And as a follow-on to that. I mean, as you look at the new calendar year, will there be any meaningful changes in your mix? In other words, could outsourcing accelerate relative to consulting or vice versa, or any of the subsegments that might make a meaningful change in mix, as you look at the pipe for next year? David Rowland : No. there – I mean, there’s nothing about 2019 specifically that would influence the mix trend that you’ve seen now for several quarters. So I think that trajectory of an increasingly higher percentage of our revenue being in “the New” as well as the trajectory of stronger growth with our consulting type of work that – I think that continues. Rod Bourgeois : Got it. Thanks, guys. David Rowland : Thank you. Operator : Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead. Brian Essex : Hi, good morning, and thank you for taking the question. David Rowland : Hey, good morning, Brian. Brian Essex : Hey, good morning. Happy holidays. I was wondering if I could dig into healthcare a little bit. I think that was a little softer this quarter than last, maybe what’s happening behind the scenes there, and how you see that unfolding throughout the rest of the year? David Rowland : Yes. Actually, we are – you mentioned healthcare specifically and I assume that’s what you meant as opposed to H&PS. If you look at… Brian Essex : Yes, H&PS in general, yes. David Rowland : Okay. So if you look at H&PS overall, then really the story is pretty clear and maybe the best point to share is the fact that if you look at our H&PS business absent the impact of the cycle that our U.S. federal business is going through. So if you look at the rest of the public service business and if you look at health, absent the U.S. federal business, H&PS is growing upper single digits, really right at almost touching double-digit growth. And so actually, we’re quite pleased with the performance of our health and public service business. If you look at the health business specifically, we’ve seen continued strong trends in the payer side of the business. And at the same time in the most recent quarter, we’ve seen some green shoots and sign – encouraging signs on the provider part of the business as well. We have double-digit growth in H&PS in both Europe and Growth Markets. And again, really, if you look at North America, it’s really a story of the U.S. fed – federal business going through kind of a natural cycle as contracts wind down and reconnecting with growth. But overall absent that, H&PS is doing quite well. Brian Essex : That’s super helpful. And maybe for a quick follow-up, Dave. If you could give us a little bit of color on the tax rate, I think, that was a little bit better or benefit than we expected in the quarter. You held your guidance for the year. And I think previously, in previous quarters, you noted potential for upward pressure there. Maybe if we can kind of like fine tune our expectations on the tax rate? David Rowland : Really nothing. There wasn’t anything unusual in quarter one relative to what we said when we provided annual guidance and, of course, we haven’t changed our annual guidance. And so, quarter one played out as we expected and again, our annual guidance has remained unchanged. So the things that influence our tax rate this year, four of which we’ve talked about continually over the years is geographic mix of income, changes in prior year tax liabilities, final determinations and then tax impacts on equity compensation. And then in addition to those four that we’ve traditionally talked about, we have the U.S. tax reform, which we’ve said previously, statement remains true today that it would have a modest upward pressure. And then we have the adoption of the new tax standard regarding intercompany transfers and again, that is exactly as we stated, it has about a 3% headwind in our tax rate in 2019 and going forward. And then, of course, how that plays out in any particular year is based on all of those factors coming together. And so this year, all of that is reflected in our tax rate. Brian Essex : Very helpful. Thank you. David Rowland : Thank you. Operator : Your next question comes from the line of David Togut from Evercore ISI. Please go ahead. David Togut : Good morning. Happy holidays. David Rowland : Same to you, David. Good morning. David Togut : In our recent surveys the bank CEOs, they’re calling out their 2019 tech spending priorities as being online and mobile banking, security and payments. We know you are very strong in security, but can you talk about what you’re offering the banks in terms of online and mobile banking payments and kind of how that ties into your second-half recovery plan from a revenue growth standpoint? David Rowland : We are very active in mobile banking. So to be honest, I couldn’t be more pleased with the different activities you’re mentioning, because they resonate pretty well with what we’re doing, security payment and mobile-first, mobile banking. It’s "the New" wave after the big wave we had before on risk and regulatory management, where they have been a lot of investments so far. Mobile – everything being mobile, we have certainly among the best references in the market. Unfortunately, they are not public, as we speak, maybe next time, maybe in the next earning, we’ll try to make some public, and so you will see what we’re doing in it and it is pretty spectacular more or less with most of our clients in banking, we own that in the digitalization of their channels. So they are truly omni-channel from physical to digital with the focus on mobile-first mobile banks. Security, as you know, it’s an area, where we decided to invest two or three years ago with Accenture Security. And Accenture Security is doing strong double-digit, as David would say, which is growing big in my own term. And payment is the bread and butter of the bank. You’re right, Accenture is right to mention that certainly the activity, which is more subject to disruption by the new players, the Fintech and others, and the platforms as well, given all the payments. So, indeed, we are very active to look at what are the strategies for the banks in order to face the new competition of the big platforms, as well as the Fintech. So we are well equipped to provide good response to our clients on this area. David Togut : Understood. And as my follow-up, I’d like to ask about your industry X.0 solutions, especially what type of demand you’re seeing for industry X.0 as the trade war grows and as global companies are trying to manage complex supply chains? David Rowland : Strong demand. Again, if you’re looking at what we’re calling “the New”, you have digital, you have cloud and you have security. In digital, you have three main activities. Accenture Interactive doing extremely well in digital marketing, strong double-digit. You have applied intelligence, I decided to focus on, because Artificial Intelligence, as we speak, in the name of the game and I wanted to make sure with all of you about the investments we’re making and the leadership we have established in Analytics, Machine Learning and Artificial Intelligence. X.0 we launched exactly a year ago and made that public, growing extremely fast. So I would say that probably strong double-digit will not reflect what we are talking about. It’s extremely fast on the back of the reinvention of the supply chain and manufacturing from R&D to production to post-sales. I mentioned in the heavy equipment, everything we are doing and maybe we’ll have a deep dive on Industry X.0 soon to talk about the digital trends, which as well the new way to the manufacturing in the X.0 world. I’m talking about the virtualization of the assets and I’m talking about the implementation of the new platforms, 3D, analytic-rich, I’m talking about our partners such as Dassault, of course, but as well Siemens and other platforms Dassault Systèmes, Siemens and other platforms we’re working with, including General Electrics in some industries in the U.S. So we are well-equipped in the different markets. These are three examples, but we’re going to come back to you with an update on X.0, maybe in two or three quarters, where things would have been built to a larger scale. But today, I mentioned that we already recognized as the leader in IoT services – Internet of Things services, which are significant part of X.0 by multiple analysts and I’m delighted with that. David Togut : Thank you. David Rowland : Thank you, David. Operator : Your next question comes from the line of Harshita Rawat from Bernstein. Please go ahead. David Rowland : Good morning, Harshita. Harshita Rawat : Hi. Good morning. David Rowland : Good morning. Harshita Rawat : Good morning. Thank you for taking my question. My question is in bookings growth. And I know you called out the first quarter tends to be a seasonally low quarter in terms of bookings. But bookings was – bookings growth was – on a year-over-year basis was also weak. And I know you talked about the macro environment earlier. And it does appear the 2019 enterprise IT demand environment was still being robust, could be weaker versus 2018. So my question is, if the weak bookings growth this quarter primarily reflecting seasonality, or is there any macro impact there, especially on consulting type of engagements, which are often leading indicators in the case of a slowdown? David Rowland : Yes. I would say that in our case, it’s more seasonality. Again, we have seen this isn’t the case every year, but certainly most years, we tend to see softer bookings in the first quarter. I think also when you look at our first quarter bookings, it’s important to look at them in the context of what we’ve done in the six months or the two quarters previously, where we had I believe our largest and second largest bookings quarters in our history in those two quarters, or to say it differently, over a 6-month period, we had a record level of bookings. And so I think that said, it play as well as you kind of rebuild and reestablish the pipeline. I also made the comment in the script, and so I’ll just say it again that we are pleased with our pipeline. And as we look at the second quarter in particular, we’re very encouraged with our bookings potential, as we look at the second quarter. Harshita Rawat : Thank you very much. David Rowland : Thank you. Operator : Your next question comes from the line of Bryan Bergin from Cowen. Please go head. Bryan Bergin : Hi. Thank you. Happy holidays. David Rowland : Sure. Same to you. Bryan Bergin : I wanted to ask on talent competition to start with. You had a nice reduction in attrition. Can you give us some color on what you’re seeing around the wage inflation environment, particularly in the U.S. and then how that’s comparing to other key regions for you? David Rowland : I don’t – I think the talent market in the – some areas of “the New” where the the supply is tight. It is – it’s a competitive market. Having said that, one of the hallmarks of Accenture is that, we have established ourselves and have been and continue to be a real magnet for talent in the marketplace. And I think that there’s three reasons behind that. The first is that, people in the marketplace know that Accenture is the leader in “the New”. So, we are working in the areas that are the most attractive to the most attractive people in the marketplace. The second thing is that talent is attracted to market leaders and companies that have demonstrated superior performance and certainly, we’ve done that over the years. And then the third thing and this is something that Pierre talked about from time to time and it’s an important part of Accenture is our culture and our values and the environment that people work in, how we treat them and how we value what they do. And those are the three things that really make Accenture distinctive. We have no issue attracting talent and don’t expect that to be an issue going forward. Bryan Bergin : Okay, thank you. And then my follow-up, around the interactive business and M&A strategy, can you remind us how you see your services comparing to the traditional model? And then are there aspects of that traditional advertising model that you would be interested in building or building up further organically or through acquisition? Pierre Nanterme : I said before that probably the world we like the most with is broad-based. The world we hate the most is traditional. And no, we have no appetite to build anything traditional, anything legacy, anything that has been doing by the industry for 50 years. All the hypothesis has been challenged again, if you will. It was challenged by the way. We even more say on this is our point is to be part of the disruption of this industry, and we want to be a disrupter. And by being a disrupter, we want to be a digital-native marketing and experienced provider from design to, what we have today, design; production; commerce; campaign, including programmatic; and of course, analytics and artificial intelligence to capture the frequencies and to make the campaign more impactful. We will always look to look at things that’s going to be either more creative or more new, if you will. But the point is, if it’s too traditional, it’s going to commoditized. And if it’s commoditizing, this is not the market we want to be in. Bryan Bergin : Okay. Thank you. David Rowland : Thank you, Dave – or Bryan, excuse me. Operator : Your next question comes from the line of David Grossman from Stifel Financial. Please go ahead. David Rowland : Good morning, David. David Grossman : Good morning. So just first, I have a question on the business segments outside of “the New”. Can you give us any sense for what the growth trends are in that segment of your because, back of the envelope our math suggest declines. And if that math is right, are you seeing any leading indicators that would suggest that business is plateauing? And also perhaps you could address just kind of what the margin trends are and then kind of non-"the New" as well? David Rowland : Yes. I mean, it – the math is clear. It is contracting and I think that math is clear. We – we’ve talked about it previously. In terms of the margin trends, as we’ve also mentioned is that, that tends to the – the common characteristic is that that’s the most commoditized part of the marketplace. And as you can imagine, therefore, there is significant competition and pricing pressure. And at the end of the day, what – to some extent, we are disrupting that part of our business intentionally. We’re disrupting it by focusing our efforts on growing in “the New”. And then for those legacy services, if you will, we are again using new technology to even reinvent those and in some cases, to automate the way those things are done as one form of disrupting that part of our business. And so all our focus is on “the New” and the the rest of the business will continue to evolve the way it evolves. David Grossman : Okay, got it. Thanks for that. And then, just Secondly, it appears that you’ve executed a fairly healthy pace of acquisitions year-to-date. So given that pace and that we’re early in the year, should we reconsider the contribution that you’ll get from inorganic growth this year? David Rowland : Yes. At this point with only one quarter in the books, it’s really too early to adjust the number. And so there’s a lot that – it’s hard to predict the timing of acquisition flows for the remaining three quarters. So right now, we still see about 0.5, which is what I said on last quarter’s call. Obviously, we’ll provide an update at the end of the second quarter. But right now, think in terms of about 0.5. In the first quarter, it was just below that. So I mentioned that our organic growth, which is very important to us was just over 8%, and then the balance of that by definition below 0.5 was in organic. David Grossman : Okay, got it. Thanks very much and have a great holiday. David Rowland : Thank you. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. David Rowland : Hello, Bryan. Bryan Keane : Hi, guys, good morning. I just want to ask, if we do fall into an economic slowdown, can you talk a little bit about the resilience of the business model and what you guys would expect and what you’ve seen in the past from changes in economic conditions? Pierre Nanterme : Yes. And I’m very pleased to comment on that, because during the Investor and Analyst Day or many earnings call, you probably heard me and David using a lot durability, sustainability of our business model, being able to resist over a cycle of downturn. So again, I mean, when it’s raining hard, either you watch the rain or you build an umbrella. At Accenture, we decided to build an umbrella. And once the umbrella is made up, if you will, probably seven key elements, which I truly believe, are making Accenture more resilient and more durable across different cycles. I’ve been very rapidly – I’d say the number one is the quality of our client portfolio. We have this diamond-client approach. More than 182, I think, 182 to be even more specific, but 180-plus anyway, and it’s all the best brand, companies operating at scale with a global footprint and they know how to deal with the economic conditions. So first, working with the right client. Second, and probably – and maybe even the most important is all what we discussed during that call to be in the right services. For us, it’s "the New" versus traditional IT. Today, it’s very clear that the clients are allocating more budget to "the New" and the traditional IT will suffer even more. With more than 60% of our revenue in "the New" growing strong double-digit, we are building the new services, which are on-demand. Three is the balance growth. I mean, you see two of our three region in double-digit. Absent FX, Europe would have been at 10% double-digit growth. We have eight of our 13 industries strong high-single to double-digit growth. So we have these balanced growths, which I think is making us resilient. Next is the diversifying portfolio of businesses : strategy, consulting, digital, technology, operations and then you can move even in digital, interactive, X.0, Applied Intelligence, Accenture Security. We have certainly, one of the portfolio in professional services, which is on one hand the more diversified, but which as well is creating more synergies than any other portfolio. Finally, the discipline management of the cost, I think we demonstrated last year between H1 and H2 in 2018, the ability of Accenture in less than a quarter to fix out challenge in term of cost with discipline and then to make that resilient as you could see with our profitability in Q1. And finally, and for me it’s absolutely critical, doing all of this while keeping our investment capacity intact in order to be able to invest what we do more than our competitors who might be impacted in the downturn in new growth – and to seize new growth opportunities when maybe competition will have to stop their investments. So these seven elements are clearly, for me, the backbone of our durability and of our resilience, and we’re working hard on these seven attributes, if you will. Bryan Keane : That’s super helpful. Thanks. And as a follow-up, just on financial services, there’s a lot of folks seeing weakness in capital markets and in Europe. Can you just talk about maybe what you guys are seeing exactly there, maybe how it might be different than the market, because you guys are expecting a rebound in 3Q and a lot of other IT folks can be a little bit more hesitant on calling a rebound in that business? Thanks. Pierre Nanterme : Yes. I mean good question, because indeed, as David said, banking and capital market being slightly negative. So it’s not the right place to be. Now the proof of all of this is, do we have the pipeline and do we have the committed bookings? So the hard facts making us more comfortable about that rebound. Reality is, and especially in Europe, that we have the pipeline and we have the committed bookings as we speak and we will continue to build that making us comfortable enough to predict a rebound in the second part of the year. So it’s really based on the facts we see in our pipeline and in our booking, especially in the areas which has been mentioned before, the new platforms, the mobile-first online banking, the transformation. It’s still a lot on risk and compliance and regulatory management and fraud management. So yes, we look at this extremely carefully as you might imagine, and we have the element in the pipeline in the bookings, which are making us comfortable enough. Bryan Keane : Great. Happy holidays, guys. David Rowland : Same to you. Thank you. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. David Koning : Yes. Hey, guys, thank you. And I guess my first question just the Growth Markets have been incredibly strong and pretty stable right around kind of 14% to 17% now for maybe six quarters. Historically, there was similar volatility there. Sometimes it would slowdown, sometimes I’d be really strong. Do you think those will be volatile in the future still, or is there something about it now that can kind of maintain the mid-teens-ish growth for a long time? David Rowland : Growth Markets, I – I’m certainly not going to suggest that we’re going to comment on mid-teens growth over the long-term. But again, many of the things that Pierre has been talking about in terms of being diversified and broad-based, we see that in our Growth Markets model as well. When you talk about Growth Markets at Accenture, while we have a lot of great stories, for us, it really starts with Japan. And when you look at the business that we have built in Japan, which in the context of the Japanese market, is a reflection of the Accenture strategy in the sense that it’s diversified across several industries and it represents the full scope of the services that we provide from consulting to operations. That creates some resiliency for all the reasons that Pierre mentioned in the Japanese context. And so that will give us some resiliency and durability over time. Japan is not the other – the only store some have other important markets, if you think about our business in Australia. You go to Latin America, even in the context of challenging macro conditions in Latin America, we actually have had very strong growth in Latin America again, for all the reasons that Pierre has mentioned in terms of our go-to-market strategy and what we’re doing to be relevant to our clients, leverage our investments and have durability in our model. So I’m not going to get a guide to a double-digit percentage, but we feel very good about our Growth Markets business. Pierre? Pierre Nanterme : Yes, and you give me the – I mean, the opportunity. If you look at Japan, we moved directly to the positioning in "the New" to become the number one in digital-related services in Japan, not number one in the market overall, but number one in this specific segment. Because as well, in Japan, we did not have any traditional IT services creating a kind of drive. So we jumped rapidly to the target positioning. And imagine that right David, we have 20 consecutive quarters of double-digit growth in Japan, 20, it’s just fabulous. And in Brazil, how you’re growing double-digit in Brazil with terrible economic condition? Because in Brazil, we are the number one. We are the market leader. And when times are tough, you’ll remember the fly to quality. I would use the same comparison with fly to leadership. When times are tough, clients are going to the leader with all the characteristics we have and the values. But maybe in closing, because I know we’re starting to be a bit late, we still have one question. I would like to take this opportunity to recognize a fabulous leader of Accenture, Gianfranco Casati. Leadership means a lot. Gianfranco Casati is leading the Growth Markets and yet providing more than an exceptional leadership in growing this market. So hats off for Gianfranco Casati. And we have, again, what’s done in Japan, what has been done this last four years with – again, what’s done is absolutely second to none. So when you have great leaders and the best in the industries, you have good results. Angie Park : Okay. Greg, we have time for one more question and then Pierre will wrap up the call. Operator : Okay, that question comes from the line of Lisa Ellis from MoffettNathanson. Please go ahead. Lisa Ellis : Hi. Good morning. David Rowland : Good morning, Lisa. We’re going to let you bring in some. Lisa Ellis : All right. I had a question actually about the work Accenture is doing in cloud, which tends to get less focus, I guess, than digital. Can you just characterize a bit, like what the mix or focus of Accenture’s cloud work is across public, private, hybrid, et cetera? And then also, as cloud begins to sort of enter, I guess, phase 2, how much run activity are you seeing in cloud? Pierre Nanterme : Yes. I mean, very good question and indeed. There are so many deep dives we could do with you guys. And we need more time, Angie, next time. If I look at the cloud, which frankly, is growing again, double-digit at Accenture. We did not talk about cloud, because it seems to be already old stories in "the New”, but you’re absolutely right, Lisa, it’s super spot on now. Our activities are around one, what we’re calling journey to the cloud, supporting our clients moving from on-premise to the cloud and with the cloud in the mix of the hybrid, public, private and we’re working with all our partners. I would say, especially, certainly, Amazon and Azure on this journey to the cloud and others, but it’s activity number one. Activity number two, because you have synergies, is all it related to SaaS solution. We are number one with the SaaS providers, especially with salesforce.com. Again, more than strong double-digit with salesforce.com this quarter. And all this Software-as-a-Service cloud-matching solution are getting more and more traction, salesforce.com, Workday and few others as well. And three is the cloud infrastructure, and that’s why we decided to move our infrastructure from operations to technology, because we see unique synergies between the three elements of Software-as-a-Service, cloud-based, we could run with our infrastructure services. And that’s why we have now all of this in a single place and organization around Accenture technology to drive more synergies. So you’re absolutely right, but our growth in cloud is very big, right David? David Rowland : Yes, absolutely. Pierre Nanterme : This quarter. And we have very strong foot prospect in the cloud moving forward. Lisa Ellis : Thank you. And then just a super quick follow-up, because I think important as we’re going into 2019 and everyone is getting a bit concerned about discretionary ITspending in the macro environment. On the digital side of your business, which is now approaching 50%, directionally, how much of the funding for digital comes from outside the IT budget? Is it like half or more than half or a quarter just directionally? Pierre Nanterme : Hard to say. Roughly, it’s – I don’t know, David, if you would have a point of view on this. I think it’s quite hard to provide probably a direction on this. David Rowland : Yes. We – let us maybe come back to that and the right public forum, but we’ll come back and try to give some insight on that, maybe our next next call. Lisa Ellis : Wonderful. Thanks, guys. Happy holidays. Pierre Nanterme : We have a bit more analytics to make sure we’re providing not so right answers. So we’re going to use some machine learning and applied intelligence, Lisa, to provide the right answer. Lisa Ellis : Okay, great. Thank you. Thanks a lot. Happy holidays, guys, and thanks for running a little long. I know it’s late in here. So thank you. David Rowland : Thank you. Pierre Nanterme : I mean, thanks again for joining us on today’s call, and thanks again for all your good question, because this is the opportunity for David and I indeed to provide more insights around our strategy, and it’s so important for you, for us and for all clients. I mean, with the first quarter behind us, I feel very good about where we are as we build on, first, the strong momentum in our business. We enhanced our leadership in "the New" and we continue driving growth ahead of the market. So we’re pleased with all of this, we have the momentum and, I guess, we’re up for a strong start and a good year at Accenture. Of course, I want to wish all our investors and analysts and everyone at Accenture a very happy holiday season and all the best for the New Year. We look forward to talking with you again next quarter. In the mean time, of course, if you have any questions, feel free to call Angie and her team. All the best, and enjoy the holiday season and a happy New Year. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,019	1	2019Q1	2019Q2	2019-03-28	7.133	7.215	7.75	7.843	10.84019	22.6	23.45	Operator : 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. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to our host Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Angie Park : 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, 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’ll 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 Rowland : 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 this decades-long career and his leadership as Chairman and CEO. From a personal standpoint, it’s certainly a different feeling doing an earnings call without him. But as you’ll hear in our comments, I’m confident Pierre would have been really pleased with all we accomplished in the second quarter and the first-half of fiscal 2019. 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 is outstanding at $1.2 billion, and we continue to return substantial cash to shareholders through share repurchases 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-based 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 : Thank you, David. It’s both an honor and a privilege to follow in your footsteps and service Accenture CFO. Let me start by saying that, we were extremely pleased with our overall financial results in the second quarter, which were in line with our expect – expectations and position us very well to achieve our full-year financial guidance. Our second quarter results continue to provide strong foundation 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 financial imperatives. Strong revenue growth of 9% in local currency, reflects the consistency and durability of our growth model, where being a leader across many dimensions of our market has resulted in a growth level that we estimate at more than two times the rate of the market. We had double-digit growth in three of our operating groups and in the Growth Markets. The broad-based momentum continued with growth in 12 of the 13 industry groups and in each of the components of “the New”, digital, cloud and security, which we estimate 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 an FX 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 objectives with roughly $2.7 billion return 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, and 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 book – 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 are 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 booking, which were broad-based and aligned to our strategic areas of focus. They reflect our continued differentiation in the market and the high-level of trust our clients place in us to partner with them in driving critical work and supporting their strategy to adopt and implement new technologies. The dominant driver of our bookings in the quarter continued 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 U.S. 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 U.S. dollars and 9% in local currency. Outsourcing revenues were $4.7 billion, up 5% in U.S. dollars and 9% in local currency. Looking at the trends in estimated revenue growth across our business dimension, strategy and consulting services and technology services, both posted strong high single-digit growth and operations continuing its trend of double-digit growth. And as previously mentioned, “the New” continue to deliver strong double-digit growth. Taking a closer 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 & 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 Markets and strong growth in Europe. Products, our largest operating group, delivered its 15th consecutive quarter of double-digit growth at 10%. Demand continued to be 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 Markets. We saw slight contraction in North America, which reflects some continued pressure in our U.S. 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 last quarter, with double-digit growth in insurance and slight contraction in banking and capital markets. Overall, for financial services, we saw double-digit growth in the Growth Markets 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’m 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 Markets, 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. Sales and marketing expense for the quarter was 9.8%, compared with 10.1% for the second quarter 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 U.S. tax law changes. The following comparisons exclude the impact and reflect adjusted results. Our effective tax rate for the quarter was 17.1%, compared with an adjusted effective tax rate of 15.1% in the second quarter last year. Diluted earnings per share were $1.73, compared with adjusted EPS of $1.58 in the second quarter last year. This reflects a 9% year-over-year increase. DSO 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 28 was $4.5 billion, compared with $5.1 billion at August 31. 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. At February 28, we had approximately $4.5 billion of share repurchase authority remaining. As David mentioned, our Board of Directors declared a semiannual 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, beginning in the first quarter of fiscal 2020, we will move from a semiannual to a quarterly dividend payment schedule. So at the halfway point of fiscal 2019, 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 stronger 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 Rowland : 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’s 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 momentum 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 represents 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 2019, we have invested significantly in this area and have announced six acquisition so far this year to further enhance our scale and differentiation in the 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. And we’ve developed more than 250 proprietary industry-specific assets that significantly differentiate us in the market. We’re making excellent progress with Industry X.O, which is using advanced digital technologies to help clients transform their core operation from R&D and engineering to production and after-market support. We’re building a market-leading capability, with more than 10,000 people supporting the Industry X.O 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 cyber security business. Today, we’re one of the leading providers in this market, growing double-digits year-to-date, with revenues that we estimate will be well above $2 billion in fiscal 2019. The second pillar of our strategy is Accenture Technology, which we believe represents the strongest technology capability in our industry. And 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’re 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-digit so far this year. Intelligent software engineering services is the next area of focus, where we’re 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 that demand for custom, cloud-based applications will grow significantly in the coming years, and we’re well-positioned to meet that demand. And with intelligent clout and infrastructure services, who are 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 seven consecutive years. And to complete the picture, we 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. And 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 ratings than any other company. Of course, what makes Accenture truly special is our ability to combine our capabilities across the strategic areas of focus to drive large-scale transformational change for our clients 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, our Accenture’s unique position in the ecosystem, our relentless focus on innovation and a significant capacity we have to invest strategically and at scale. So in summary, our strong financial performance is the direct result of our ability to continue executing our growth strategy, with a high level of focus and precision in all we do. Finally, our results also underscore the strength and depth of our leadership team and the resiliency of our organization. Accenture has always been a collection of extremely talented individual leaders, who are motivated first and always about the power of the team, and that certainly is evident in our second quarter and year-to-date results. Before I hand it over to KC, I want to provide a brief update on our CEO succession. As you would expect, our Board continues to execute a very rigorous and comprehensive process, which is going very well. Given the strength of our leadership bench, our expectation is that we will name an internal candidate and that the process will be completed by the end of this fiscal year. With that, I’ll turn it over to KC to provide an up – to provide our updated business outlook. KC? KC McClure : Thanks, David. And before I turn to our business outlook, let me clarify that our European revenues growth this quarter was 7% in local currency, not 6%. With that, let me turn to our business outlook. For the third quarter of fiscal 2019, we expect revenues to be in the range of $10.8 billion to $11.1 billion. This assumes the impact of FX will be about negative 4.5% compared to the third quarter of fiscal 2018 and reflects an estimated 5.5% to 8.5% growth in local currency. For the full fiscal year 2019, based on how the rates have been trending over the last few weeks, we continue to assume the impact of FX on a result in U.S. dollars will be about negative 3% compared to fiscal 2018. For the full fiscal 2019, we now expect our revenues to be in the range of 6.5% to 8.5% growth in local currency over fiscal 2018. For operating margin, we continue to expect fiscal 2019 to be 14.5% to 14.7%, a 10 to 30 basis point expansion over fiscal 2018 results. We now expect our annual effective tax rate to be in the range of 22.5% to 23.5%. It compares to an adjusted effective tax rate of 23% in fiscal 2018. For earnings per share, we now expect full-year diluted EPS for fiscal 2019 to be in the range of $7.18 to $7.32, or 7% to 9% growth over adjusted fiscal 2018 results. For the full fiscal year 2019, we now expect operating cash flow to be in the range of $5.85 billion to $6.25 billion, property and equipment additions to be approximately $650 million and free cash flow to be in the range of $5.2 billion to $5.6 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $4.5 billion through dividends and share repurchases, as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let’s open it up, so that we can take your questions. Angie? Angie Park : Thanks, KC. I would ask that you each keep the one question and a follow-up to allow as many participants as possible to ask a question. Trish, would you provide instructions for those on the call? Operator : Certainly. [Operator Instructions] And our first question is from the line of Tien-tsin Huang with JPMorgan. Please go ahead. Tien- tsin Huang : Good morning. David Rowland : Good morning, Tien-tsin. Tien- tsin Huang : Good morning. David Rowland : How are you? Good luck to your team tonight, by the way. Tien- tsin Huang : Thanks for making me nervous away, I can’t wait to to watch. Thanks for that. Yes, so good result obviously. Just I was surprised by the strength in Growth Markets, let’s say, year-to-date, this has been growing in the mid-teens. Just curious if this is sustainable and or could we see more balanced growth across the geos based on what we’ve seen in bookings? David Rowland : Well, Growth Markets has been a great – has really been a great story for us. And as we’ve highlighted several times, the real strength of the Growth Markets has been what has been an amazing story led by our leader [indiscernible] in Japan. And in Japan, we do have a very broad-based – we believe a very broad-based durable business, which reflects all of the elements of our strategy, which are constructed to create some durability. There are other important markets in the Growth Markets as well though. For example, interesting, you look at Brazil, which is a market that even in the backdrop of some macro challenges, our Brazil businesses has been very strong. You look at China, for example, this quarter, where we also had double-digit growth, which is not material in the context of Accenture overall, but yet it’s an important part of that Growth Markets story. So if you’re asking me, would I expect that we will grow forever at the rate of growth that we’ve been at recently in Growth Markets, I wouldn’t necessarily make that assumption. But we are extremely well-positioned in the Growth Markets and ultimately, what we – the measure that we hold ourselves against is that, we continue to grow significantly faster than the market and take share. And I think we’re well-positioned to do that in the Growth Markets going forward. Tien- tsin Huang : Gotcha. Just my follow-up, just on the CEO succession. And so that’s completed, can we expect business as usual? Will you still be active in M&A and whatnot? David Rowland : It is absolutely business as usual. What – the statement that I’ve made and our leadership team has embraced is, we don’t hit the pause button at all. So we continue to move forward. We operate and I’m executing the responsibilities in the same way the Pierre would have executed them if he was on the call today. So no pause. We continue to drive our business forward. Tien- tsin Huang : Great. Thank you, guys. David Rowland : Thank you. Operator : And we will move to the line of Jason Kupferberg with Bank of America. Please go ahead. Jason Kupferberg : Hey, good morning, guys, and congratulations on the rebound. And consulting was, I think, even stronger than most had expected and clearly it can be lumpy quarter-to-quarter. But I think, the book-to-bill in consulting was the best in the past three years. So can you just maybe go a little bit deeper into which specific areas within consulting and which geographies performed particularly well? And just based on the pipeline, do you expect the book-to-bill for consulting and overall to remain north of 1.0 in the second-half? KC McClure : Yes. Hi, Jason, thank you for your question. Jason Kupferberg : Hi. KC McClure : We were very pleased with our consulting bookings this quarter that we’re very broad-based across all parts of our business and all geographies. In terms of what was driving the demand, we spoke a lot about it. David carried a lot of the conversation in these areas of our business. But it was across first, all the areas of “the New”. So we estimated that our bookings in “the New” were about 65% of our overall bookings and that continues as well in consulting. If you look at also the power of what we’re seeing in our intelligent platform business, which includes a significant portion of work in consulting as well, which is across Salesforce, Microsoft, Workday, and the… David Rowland : Oracle. KC McClure : … Oracle, thank you, David. David Rowland : Yes. KC McClure : So that was also a very strong driver of our growth in consulting. And as it relates to going forward, we feel very – we feel really comfortable about our pipeline. As we look at the back-half of the year, we always, as you know, have work to do for the back-half of the year to close our pipeline, but we feel pretty well-positioned as we sit here today with our pipeline in consulting. David Rowland : Yes. I mean, it’s one of the important parts about what differentiates Accenture, because when you look at our strategic areas of focus as I outlined in my script, all of those things, the common threat across all of that is that, many of them are enabled by a strong strategy in consulting practice that is deep in both industry skills and differentiation, but also in functional skills and differentiation. And that is part of the end-to-end model that we talk about at Accenture. And, of course, the consulting and strategy capability underpins that and really in many ways, it’s the tip of the spear for most of the pillars of our strategy. And as I mentioned, we continue to invest significantly in building that capability and in staying ahead of the market. Jason Kupferberg : Okay. Well, that all makes sense. Can you just clarify how much of the 50 basis point revenue guidance raise here was organic? And then can you just make a couple of updated comments on financial services? I know you talked last quarter about it getting back to mid single digits in the second-half. Is that still the expectation? And would that be more of perhaps a Q4 event just given, I think, the comparison gets easier? KC McClure : Okay. As it relates to organic and inorganic, we still see our inorganic growth rate for the full fiscal year to be about 1.5%. We’re at about 1.5% now, Jason, for the first-half of the year. And as we look at our inorganic guidance for the back-half of the year, we look at a few things. First of all, our pipeline and then the timing of when we estimate the deals that are in our pipeline would close and provide revenue this year. We also obviously do some risk adjustment on those numbers overall. So as we sit here today, we are seeing that inorganic growth is still about 1.5%, so there’s no change to our guidance overall for the year as it relates to inorganic. So as it relates to financial services, we do see an uptick still in the back-half of the year. So we were very pleased with financial services bookings, which came in as expected, but we’re very strong across all the elements of our financial services business, including banking capital markets, as well as insurance and across all of our geographies. So that bodes well for what we had anticipated seeing and we continue to anticipate seeing, which is an uptick in the back-half of the year for financial services. As it relates to what quarter that will happen in the back-half of the year, it really just depends, Jason, on the pace and the scale of that uptick as we proceed throughout the back-half of the year. Jason Kupferberg : Okay, understood. Thank you, guys. David Rowland : Thank you. Operator : And we’ll go to the line of Jim Schneider with Goldman Sachs. Please go ahead. David Rowland : Good morning, Jim. KC McClure : Hey, Jim. Jim Schneider : Good morning. Good morning, David and KC. How are you? Thanks for taking my question. I was just wondering if you can maybe talk a little bit back to the Q4 call last year. I think you called out some macro risk in the business at that point Brexit trade tensions, et cetera. Can you maybe just kind of give us an update on what clients are saying about those potential macro risks? And how it’s kind of impacting, if at all your kind of outlook for the rest of the year? And to the extent, any of that has materialized in terms of client activity? David Rowland : Yes. So, when you look at the risks that we’ve talked about, which includes Brexit and it includes the trade disputes, among others. I mean, as you well know, really those risks still exist today. So, our view of the macro environment, the potential for some slowdown in overall economic growth that has not changed at all. Having said that, consistent with what we’ve said before, for global companies to operate in this volatile dynamic environment is the new norm, but it’s been the new norm now for several years. And so as we talk to our clients, they continue to focus on, for the most part, driving their business forward, and the two teams remain the same. Our clients continue to focus on investing and digitizing their business, both for top line growth – differentiation in the market, but also as a way to create operating efficiency in the business. And so, we believe that companies continue, for the most part, continue to be on their front foot looking to invest in digitizing the business. And the other thing that continues to be at play, maybe incrementally stronger is the whole focus on strategic cost management and cost rationalization, which is always aimed at creating capacity to invest more in “the New”. And I think, as we talked about last time, all of that really plays to our strength, because where companies are investing is in these areas of new services, which, of course, is where we have put 100% of our focus. We also commented on the last call that we continued to see client budgets grow. I think we said last quarter, they would grow in 2019, maybe at a slightly lower clip, but in the same range as what we had seen the previous year. We haven’t seen anything that changes our point of view on that. And, of course, the best illustration of that is the $11.8 billion in bookings that we just posted. And so, look, the market is always challenging. There’s nothing different about it today than it was a year ago. The market is never easy. It’s always challenging. But as I talk to our C-Suite executives and our clients, there is a willingness and a desire really to invest and drive the business forward, and that’s not changed. Jim Schneider : That’s helpful color. Thanks. And then maybe as a follow-up, David, I think in your prepared remarks, you talked about going after custom client applications as a significant opportunity. It’s an interesting commentary to me. I’m curious, was that concentrated in one or two different verticals, or whether it’s more broad-based? Is it financials or something else? And maybe talk about how differentiated you feel that strategy is in the market relative to some of your traditional competitors? Thank you. David Rowland : Yes. It is absolutely broad-based, and it is an interesting point of view to share and it’s an interesting trend that we see in the market quite different from what you might have expected three to four years ago, where everyone was talking about package, package, package. And if you think about it, it’s easy to understand as strong as the functionality is and the next-generation packages and platforms that companies are embracing. Really to get the full power of the data, the artificial intelligence, the machine learning, there is the need to do a lot of custom apps software development in the cloud, so to speak, to really exploit all of the advantages of kind of the broader landscape of new technology and new platforms. And I see that with our own company, and I see that with so many of our companies that I meet with. And so these are not, as you would expect, these are not like large-scale necessarily individual projects. But it’s a rapid pace of quick development of custom apps in order to really exploit and take advantage of the power of data, artificial intelligence, machine learning, all of those things that require some customization for individual companies. And so I think it’s broad-based and pervasive. And it’s really just the – it’s kind of the art, if you will, behind the power of the technology and really customizing that to the needs of a particular company. Jim Schneider : Thank you. David Rowland : You’re welcome. KC McClure : Trish? Operator : And we’ll open the line of Edward Caso with Wells Fargo. Please go ahead. Edward Caso : Good morning. Congrats on a strong quarter here. I was wondering if you – looks like you’re targeting another $1 billion in acquisitions in the back-half. Can you sort of help us in what areas you’re focused and how they may be changing? Thanks. KC McClure : Yes. Great, Ed. So we are – our guidance for the full-year is up to $1.5 billion. So given where we are, it would be about a $1 billion if we get to the – up to – range. In terms of what we’re looking at, it should be no surprise, that’s really aligned to our important strategic growth areas. And I’ll just point to what we’ve already done today. So you see a mix of various things, obviously, very much in “the New” with acquisitions that we’ve done in the past in Accenture Interactive. We’ve also done acquisitions in Industry X.O, as well as very specific industry plays that tie those to these new technologies, both in products and financial services, just to point out a few. So, it really is a key part of our strategy. And the demand in the areas that we look at are no different than what we do overall in our business, which are really tied to leading in “the New” and finding disruptive technologies and acquisitions in that – in those areas of the business. David Rowland : Yes. And just to add to what KC said, just using what we’ve done, what we’ve announced, let’s say, really as of today. We’ve done roughly about seven acquisitions in Accenture Interactive. We’ve done three in Industry X.O. We’ve done four in Technology. If you look at Technology, three of those were directly tied to deepening our skills and the platforms. So I think there were a couple in Oracle and one SAP, as an example. There was another one around data and analytics. And then we had several vertical specific acquisitions, several in financial services, as an example. And so I think that’s a good representation of we’re all about investing in “the New”, so that’s a good roadmap for our acquisition strategy, as well as our highest-growth, highest-priority verticals, and that’s a good roadmap going forward just as it’s been in the past. Edward Caso : My other question is just seeking some help on translating strength and consulting to outsourcing. How height is the linkage still between those two, or is consulting really more contained and less of a link than it used to be outsourcing? Thank you. KC McClure : Yes. Ed, I don’t think there’s really any significant difference in terms of the linkage that we’ve seen. So if you take a look at what we do in our consulting business, obviously, first starts with strategy, which can be projects that are specific to strategy, but also oftentimes serve as the beginning for an end-to-end solution for our clients. That’s no different than really what we have seen in the past. As we look at the consulting front-end capabilities that we have, we’re in a management consulting space and we connect that to, for example, the intelligent platform space, which leads into outsourcing as well. There is still that very same connection that we’ve had in the past. So we don’t really see any big difference, Ed, in terms of what you would think about as it relates to consulting and outsourcing, both as it relates to doing end-to-end services here at Accenture. Edward Caso : Thank you. David Rowland : Thank you. Operator : And we will open the line of Joseph Foresi with Cantor Fitzgerald. Please go ahead. Joseph Foresi : Hi. My first question here is, it seems like you’ve sort of hit a second gear in digital. And I know you’ve – in some of your literature, you’ve talked about going from sort of the consumer to more of the enterprise part of it. Could you maybe describe a little bit more about the strength of this demand, because I think it’s surprisingly strong sort of late in what we would consider the cycle and maybe where you think it’s coming from? David Rowland : Yes. Well, first of all, when we look at digital, as we define it, there’s really not any aspect of our digital business that we consider to be late in cycle. I mean, look, so just what you start there. If you look at Accenture Interactive, which is the business that, relatively speaking is the most mature within our business. Accenture Interactive, if you look at the G2000 and if you look at the rate of adoption of the power of digital and really reimagining and recreating customer experiences and all of the analytics and revenue enhancement and all of the other offerings that go around that, the rate of adoption while we are, let’s say, several years into that cycle, there’s still a lot of runway in that business going forward. I don’t think you would find any G2000 company that would tell you that they think they’re kind of done with that. That is an ongoing process, and so that has a lot of potential going forward. And, of course, we’re constantly investing and kind of reimagining on our business to find the next best curve or the next growth curve, which is exactly what we’re doing in Interactive, as we speak. If you look at Industry X.O, I think that it’s widely recognized that the potential of Industry X.O is massive, but yet very, very early cycle in terms of the adoption. And so if you look at the kinds of things that we are doing digital services factories for manufacturing companies, when you look at the adoption of intelligent products or connected smart products, what – digitizing the manufacturing process as a way to accelerate time to market, again, that is very early adoption. And I think if you look at Applied Intelligence, and I don’t think you would find any company that says that they think they’ve arrived in terms of fully exploiting the power of data, artificial intelligence, machine learning, et cetera, and I could continue on. Accenture Security, companies have a big agenda, multi-year agenda still to really deal with all that is required to fully secure the enterprise, their customer, data customer relationship, et cetera. And so we look at this as a longer cycle and a cycle where we are still early innings if you want to use the baseball game analogy. So, we think there’s runway when you look at the elements of our digital business. Joseph Foresi : Got it. And then my second question, I know this is kind of strange, but we get this occasionally from investors. I think most people think that the overall economy is maybe late cycle. And I’m wondering with all the digital work, do you believe it’s more discretionary than it’s been in the past last cycle? And last downturn, Accenture did very well and held in very well. I’m wondering sort of what your thoughts would be assuming that we eventually hit an end of the road on that side as well? Thanks. David Rowland : Yes. Well, I’ll tell you what we believe, what we observe and then we’ll see – at some point, perhaps we’ll see how this plays out. But our observation is that, with the pace of disruption in global business, with the pace at which industries are getting disrupted, companies are getting disrupted, there’s a recognition we believe we see among companies that you cannot afford to hit the pause button. You cannot afford to slowdown. And I think that when we hit the eventual soft spot, what you will see is, companies doubling down more and pushing harder on the operational efficiency and cost rationalization agenda, because in order to fuel what is the lifeblood, which is constantly reimagining, reinventing and investing in growth, continuing up this adoption curve of the power of the new technology. And so what we see – what we believe is that, there’s going to be resiliency and companies’ willingness to invest in their definition of “the New”, because to do otherwise would just fundamentally jeopardize the existence of the enterprise going forward. We’ll see the extent to which that plays out, but that is the observation that we have. Joseph Foresi : Thank you. David Rowland : You’re welcome. Operator : And we will open the line of Darrin Peller with Wolfe Research. Please go ahead. Andrew Bauch : Hey, guys, this is Andrew Bauch on behalf of Darrin Peller. David Rowland : Good morning, Andrew. Andrew Bauch : Hey, how are you? I wanted to dig into the H&PS briefly. I know last quarter you highlighted some challenges on the federal side due to the budget uncertainty. Just wondering if you could provide just a little more color on what’s happening here and some insight on expectations for the rest of the year? KC McClure : Yes, sure. Happy to do that. Nice to meet you. In terms of H&PS and the U.S. Federal business, consistent with what we said last quarter, our federal business is really going through the natural cycle of a few contracts winding down. So we do see improvement in our U.S. Federal business in the back-half of the year, and that will also be part of, obviously, the increase in our H&PS business improving in the back-half of the year. As it relates – I’ll give you a little bit color on since you talked about budgets. The partial government shutdown that we experienced this quarter was not material at the Accenture level for either the quarter, nor will it be for the year. As it relates to H&PS, it was about 2% of an impact in the quarter. But we do not expect it to be material at all for the H&PS business for the full-year. Andrew Bauch : Got it. Thank you. And then just wanted to touch on Accenture Interactive one more time. I mean, obviously, over the last couple of years, the growth rate would imply you’re taking some meaningful share in the digital agency. Just wanted to get a better understanding of the – how the competitive environment has kind of evolved over time? And if you’re seeing more pushback from the incumbents, building out their own digital practices and so on? David Rowland : I would say there’s really no change. I think when you look at the Accenture and, let’s say, the competitors that have been part of the disruption. And so I think about Deloitte Digital, PWC Digital. IBM has a business that is focused on this space to some extent. I think, this is an attractive market. It’s a top of the sea level agenda discussion. And so I think, companies continue to invest and attempt to compete. And so I think that those companies that have been successful at disrupting and really bringing technology and industry depth and differentiation, the consulting and strategy and then also the ability to operate. What I just described, we think is unique to Accenture. But the other companies are competing hard. I think the incumbents are – intend to try to rotate to look more like the disruptors in the market. But that’s a difficult thing to do, because when you look at the things that are relevant to Accenture Interactive, some of these things at the core things that capabilities that we’ve built over decades. So to build a front-end consulting and strategy practice, for example, is tough to do to have the technology capability and DNA to underpin that business is tough to do. To have the operations capability, so one of our big offerings in operations now is Accenture Interactive operations. You don’t just create that overnight. And so we think that we’re well-positioned in that market going forward, but it’s an attractive market and we don’t underestimate any of the competitors. Andrew Bauch : Got it. Thank you so much for the color. David Rowland : You’re welcome. Operator : And we’ll open the line of Lisa Ellis with MoffettNathanson. Please go ahead. Lisa Ellis : Hi. Hey, guys. So question about hybrid cloud. I think one of the most striking trends across the IT landscape this year is the emergence of strong hybrid cloud growth, meaning with a strong on-premise and more private component to it. Some – I’d love some color just on how if you are evolving your cloud business, how you are sort of evolving it to reflect that trend, which arguably give some hope to the legacy incumbent data center outsourcers who have more of an incumbent position within the private space? David Rowland : Yes. Lisa, you just haven’t fun with me asking me a deep technology question and [inaudible]. Is this a test? Lisa Ellis : Come on, David, you had to read the first part of the script today. You got to. David Rowland : That’s right. I’ll channel Paul Daugherty. But in all seriousness, I mean, what – as always, the way you characterized it is exactly right. And I will say that Accenture’s position really from the very beginning was that the cloud adoption would evolve to be more of a hybrid environment. We’ve had that belief from the very earliest days of discussion about cloud adoption, and that is exactly the way it is played out. And I think that – and there’s a lot of things that influence the need to do that. Part of it is an issue around a client’s comfort or willingness to put certain data, certain apps on the public cloud. Of course, there’s also the opportunity to exploit the power of the public cloud, which is maybe exceeds the potential power of any private cloud with all of the capabilities and especially the machine learning and artificial intelligence kind of capabilities that are embedded in many of the cloud offerings. And so, I guess, I could just say that, that is the definite trend. There’s a lot of work that we do for our clients in helping them think through their cloud migration strategy. So if anybody thinks that, that is kind of behind us, I would say to the contrary, in fact, again, I was just with one of our client CEOs two weeks ago and the first thing that he wanted to talk about was cloud migration strategy. And it was all around the context of this hybrid cloud and the private versus the public and then the public the strategy across the range of very strong providers. And so it is a dynamic going forward. And it’s exactly the approach that I think every single company is taking in their adoption of the power of cloud. Lisa Ellis : Terrific. And then my follow-up, maybe KC, is for you. Can you come a little bit on how revenue per head and also contract duration are trending? The reason I’m asking is, because just look at the longer-term trends, headcount growth has moderated a little bits as has the longer-term trend on book-to-bill. But that’s not consistent with your revenue growth, which has remained very strong. So I’m just wondering if you could comment on some of the second order drivers? KC McClure : Yes, sure. So first on the – in terms of the length or conversion, we haven’t really seen any change at all in our book to revenue conversion rates. And then – and as it relates on the revenue per head, Lisa, I’ll first start with that we have a real focus, obviously, on pricing. And what we’ve been able to do in areas where we have invested for differentiation is, we have seen pricing improvements in those parts of our business. And so that’s really is – that continues to be a very strong focus of ours. And we have made progress and continue to make progress that area. Again, always more work to do in that space, but that really first starts with pricing. And that gives us the most leverage as it relates to getting productivity out of our payroll. Then if you take a look at our overall payroll expense, which is the large bulk of what we do, right, a large bulk of our cost structure is in our payroll. So we’re very focused on making sure that we have the most efficient use of our payroll directed at our clients and recovering what is the right and proper rate for that work in the marketplace. So we have been making progress on that. It’s something that we continue to be focused on. It’s a never-ending job. But we are pleased with the progress that we’re making and you do see that coming through, not only in our revenue per head as a real driver of our operating margin expansion. Angie Park : Okay. Lisa Ellis : Terrific, thank you. Thanks, guys. David Rowland : Thank you, Lisa. I appreciate it. Angie Park : Hey, Trish, we have time for one more question and then David will wrap up the call. Operator : Okay. And our final question then will be from Harshita Rawat from Bernstein. Please go ahead. Harshita Rawat : Hi, good morning. Thank you for taking my question. KC McClure : Hi, Harshita. David Rowland : Good morning. Harshita Rawat : Hi, can you hear me? David Rowland : Yes. Hello, good morning. Harshita Rawat : Good morning. So I wanted to ask about artificial intelligence and automation, both of which have been meaningful investment areas for you, both from an internal efficiency and also from a client perspective. So can you perhaps talk about where are we in the journey of AI potentially breaking the linearity between headcount and revenue in your business? And on the other side, from a client IT demand perspective, is this now a meaningful investment area? And if so, in what verticals? David Rowland : Yes. So first of all, I think, when you look at the adoption of artificial intelligence and automation, consistent with what I said earlier, I think, any company that, I think, you could talk to would tell you that they are early in that cycle. And so I think from a market standpoint, in terms of the work that we do for our clients in that area, I would say, artificial intelligence, especially is still early cycle. When you talk about automation, I would say that, that is – the adoption rate of that is higher, although still I would say relatively early cycle. When you look at then the connection to the relationship between headcount and revenue with Accenture, I’m not going to predict the timing with which we would see a direct impact of that. We clearly is we do multi-year financial planning and we think about the evolution of our business and our own economic model. We see some potential for a different dynamic there. But the pace and timing, I just wouldn’t want to predict. Okay. Harshita Rawat : Great. Thank you. David Rowland : All right. Thank you. Okay thanks, again, to everyone for joining us on today’s call. And as you can tell at the point of fiscal 2019, we’re very pleased with our financial results and the momentum in our business. With our highly differentiated growth strategy and disciplined management of the business, we’re very confident in our ability to continue driving profitable growth and delivering significant value for our clients, our people and our shareholders. We look forward to talking with you again next quarter. And in the meantime, as always, if you have any questions, feel free to reach out to Angie and her team. Have a great day. Operator : Ladies and gentlemen, that does conclude your conference for today. Today’s conference will be available for replay later on and instructions will follow. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,019	2	2019Q2	2019Q3	2019-06-27	7.303	7.383	7.947	8.032	10.43867	23.82	24.17	Operator : Ladies and gentlemen thanks for standing by. Welcome to Accenture's Third Quarter Fiscal 2019 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] 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, Angie Park. Please go ahead. Angie Park : Thank you, Greg. And thanks everyone for joining us today on our third quarter fiscal 2019 earnings announcement. As operator just mentioned, I'm Angie Park, Managing Director, 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 third quarter. David will then provide a brief update on our market positioning before KC provides our business outlook for the fourth 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 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 David. David Rowland : Thank you, Angie. And thanks so much to all of you for joining us on today's call. Accenture delivered another strong quarter and I couldn't be more pleased with our overall performance as we continue to execute our growth strategy and create significant value for all of our stakeholders our clients, employees and shareholders. We again delivered revenue growth well ahead of the market as well as strong profitability and free cash flow, while continuing to make substantial investments for long-term market leadership. Here are a few to highlights for the quarter. We delivered new bookings of $10.6 billion which was in the range we expected. We generated record revenues of $11.1 billion at the top of our guided range with 8.4% growth in local currency. We delivered earnings per share of $1.93 an 8% increase compared to adjusted earnings per share last year. Operating margin was 15.5% an expansion of 20 basis points. Our free cash flow was very strong at $2 billion. We returned $1.4 billion dollars in cash to shareholders through our share repurchases and the payment of our semi-annual dividend. So, all-in-all, it was another strong quarter by any measure. Looking forward, I feel very good about our business and our ability to deliver a strong fourth quarter and in doing so to complete what will be another truly outstanding year for Accenture. Now let me hand it over to KC to review the numbers in greater detail. KC? KC McClure : Thank you, David, and thank you all of you for joining us on today's call. Let me start by saying we were very pleased with our third quarter results which were in line to our expectations and were strong across many dimensions of our business. Once again, our results demonstrate the power of our highly differentiated growth strategy. As we have often stated a key intent of our growth strategy is to create durability in our revenue growth at a level that is consistently above the market taking share and strengthening our position as a leader. Against this objective, we have created a unique footprint that includes scale and leadership and the world's largest and most critical geographic markets and industries. This footprint along with our highly relevant offerings delivered within our end-to-end service model is key to being a market leader in helping our clients rotate to the new. Our third quarter and year-to-date results are an illustration of our growth model in action and based on the strength of our results and the confidence and the visibility we have in our fourth quarter, we are increasing key elements of our full-year outlook which I will cover in more detail later in the call. Importantly, our results and updated guidance reflects very strong execution against our three financial imperatives for driving superior shareholder value. Revenue growth of 8.4% in local currency in the third quarter continued to be driven by strong double-digit growth in all three areas of the new including digital, cloud and security related services. This strong top-line growth was broad based with several areas growing double digits or high single digits. Revenues landed in the range we expected and importantly, we did see the anticipated improvement in financial services and the U.S. Federal business. Operating margin of 15.5% expanded 20 basis points for the quarter and reflects strong underlying profitability allowing us to invest at scale, in our people and in our business. And we delivered very strong EPS of $1.93 which represents 8% growth compared to adjusted EPS last year even with an FX headwind of over 4%. And we have record free cash flows for both the quarter of $2 billion and year-to-date of $4.2 billion which reflects both our strong profitability and our excellent DSO management. We are well positioned to deliver free cash flow in excess of net income for the full year. We continue to execute against our strategic capital allocation objectives with year-to-date investments and acquisitions of approximately $1.1 billion and over $4.1 billion return to shareholders via dividends and share repurchases. Now, let me turn to some of the details starting with new bookings. New bookings were $10.6 billion for the quarter, consolidated bookings were $6 billion with a book to bill of 1; outsourcing bookings were $4.6 billion with a book to bill of 0.9. This quarter, our bookings continue to be well balanced across the dimensions of our business and the dominant driver of our bookings in the quarter continue to be high demand for digital, cloud and security related services which we estimated approximated 65% of our new bookings. Overall, Q3 bookings landed in the range we expected. As you know, quarterly bookings can be lumpy which you've seen in our year-to-date results. And that is consistent with our historical pattern. Looking forward, we have a very strong pipeline and we expect strong bookings in Q4. Turning now to revenues. Revenues for the quarter were $11.1 billion, a 4% increase in U.S. dollars, an 8.4% in local currency and were at the top of our previously guided range. Consulting revenues for the quarter were $6.2 billion up 3% in U.S. dollars and 7% in local currency. Outsourcing revenues were $4.9 billion, a 5% in U.S. dollars and 10% in local currency. Looking at the transit estimated revenue growth across our business dimensions, technology services posted strong high single digit growth, strategy and consulting services grew mid-single digits and operations continued its trend of double-digit growth. Taking a closer look at our operating groups. Resources grew 19% in local currency delivering its seventh consecutive quarter of double-digit revenue growth. Continued momentum was driven by double-digit growth across all three industries and all three geographies. Products grew 8% reflecting continued strength in our largest operating group. Demand continued to be broad based across all three industries and all three geographies. Communications media and technology grew 7% reflecting continued strong double-digit growth in software platforms and we had strong balance growth across all three geographies. H&PS delivered 6% growth in line with our expectations. Europe was double-digit growth and we were very pleased with the strong growth in North America which reflected strong growth in our U.S. federal business. Finally, as expected, we saw an up tick in financial services this quarter with 4% growth. Insurance again grew double digits across all geographies and we saw some improvement in banking capital markets globally including in Europe. Overall, financial services delivered double-digit growth in growth markets, strong growth in North America partially offset by contraction in Europe. Turning to the geographic dimensions of our business, I am very pleased with the continued demand across all three of our geographic regions. In North America, we delivered 9% revenue growth in local currency driven by continued strong growth in the United States. In Europe, revenues grew 5% in local currency with double-digit growth in Italy and Ireland as well as mid single-digit growth in the U.K. And we delivered another very strong quarter in growth markets with 13% growth in local currency led by Japan which again had very strong double-digit growth. We had double-digit growth in China and Brazil as well. Moving down the income statement. Gross margin for the quarter was 31.8% compared with 31.2 for the same period last year. Sales and marketing expense for the quarter was 10.7% compared with 10.3 for the third quarter last year. General and administrative expenses was 5.6% compared to 5.5% for Q3 of last year. Operating income was 1.7 billion in the third quarter reflecting a 15.5% operating margin up 20 basis points compared with Q3 last year. As a reminder, in Q3 of last year, we recognized a charge related to tax law changes. The following comparisons exclude the impact and reflect adjusted results. Our effective tax rate for the quarter was 25.6% compared with an adjusted effective tax rate of 26.8% for the third quarter last year. Diluted earnings per share were $1.93 compared with adjusted EPS of $1.79 in Q3 of last year. DSO was 39 days compared to 40 days last quarter and 39 days in the third quarter of last year. Free cash flow for the quarter was $2 billion resulting from cash generated by operating activities of $2.1 billion net of property and equipment additions of $140 million. Our cash balance at May 31 was $4.8 billion compared with $5.1 billion at August 31. And with regards to our ongoing objective to return cash to shareholders, in the third quarter, we repurchased or redeemed 2.8 million shares for $488 million at an average price of $173.95 per share. At May 31, we had approximately $4.1 billion of share repurchase authority remain. Finally, as David mentioned on May 15, 2019, we made our second semi-annual dividend payment for fiscal '19 in the amount of $1.46 per share bringing the total dividend payments for the fiscal year to approximately $1.9 billion. So, in summary, we are very pleased with our third quarter results and are now focused on Q4 in closing out another strong year. With that, let me turn it back to David. David Rowland : Thank you, KC. Our strong results for the third quarter and year-to-date demonstrate that we continue to execute our growth strategy extremely well. In particular, we continue to benefit from our leadership position in "the New" where revenues again grew at a double-digit rate with broad based growth across all components of "the New" including the Accenture Interactive upon intelligence industry [indiscernible], cloud and security. And as KC mentioned, our third quarter and year-to-date performance is powered by our unique leadership footprint in the marketplace with breadth and scale across the most strategic geographies, industries and capabilities and this provides for durability and consistency in our performance and uniquely positions us to deliver seamless outstanding service to our global clients. While there are many positive aspects of our third quarter results; today, I want to focus on Accenture Technology, which is the largest part of our business overall and also accounts for the majority of our revenues in "the New." So, in many ways, Accenture Technology is really the engine of our strong leadership position in "the New." We believe Accenture has the strongest and most innovative technology capability in our industry with scale and leadership in all the areas that are most relevant to our clients. To-date all companies are digital businesses and certainly Accenture is a digital technology company at our core with advanced capabilities such as data and analytics, automation, artificial intelligence and machine learning. Last quarter, I highlighted three key focus areas in Accenture Technology that powered growth in our business. And today, I'd like to dig a little deeper. First, in intelligent platform services, we apply our digital capabilities, innovation and industry expertise on top of the leading core platforms, SAP, Microsoft, Oracle, Salesforce and Workday to help clients drive large scale enterprise wide transformation. We are proud to be a leading partner of all the key players and we see continued strong demand for intelligent platform services which again grew at a double-digit rate in quarter three and accounts for about 40% of our total revenues. As one example, we're helping a leading fashion retailer with a global implementation of SAP S/4HANA that leverages myConcerto. Our proprietary AI powered development platform, myConcerto brings together our deep industry knowledge and differentiated tools and methodologies to help clients innovate and accelerate platform implementation. Our work is driving greater synergies across the retailer's global brands and building a strong foundation for future growth. The second area intelligence software engineering services is focused on developing and delivering the custom systems that our clients are increasingly demanding. With more than 30,000 people, we have one of the largest teams of specialized software engineers and architects solving the most challenging problems in agile and creative ways using data, the cloud, artificial intelligence and other new technologies. As an example, we're helping Swisscom, Switzerland's leading telecom company transform into a digital service provider by leveraging our proprietary digital omnichannel platform with AI, machine learning and analytics. We are increasing the precision and personalization of the customer experience across all their channels. And third, an intelligent cloud and infrastructure services, we provide clients with powerful differentiated solutions from cloud strategy and migration to managed services and cloud security. We are the leading partner of Microsoft Azure, Amazon Web Services and Google Cloud Platform which are often at the heart of our clients' agendas to adopt new and leading technologies and rotate their own businesses to "the New." To-date, Accenture has worked on more than 25,000 cloud computing projects for clients including 80% of the Fortune Global 100 and we have more than 77,000 people trained in cloud technology. A good example is our work with Del Monte Foods to unlock innovation and streamline their operations by migrating hundreds of servers and critical SAP Enterprise wide applications to the cloud in less than four months. They're benefiting from a more agile operating environment, real-time customer insights and a 35% reduction in IP cost freeing up resources to grow the core business. There are three common threads that run through all of these areas in technology one is innovation and in fact technology is at the heart of our innovation agenda. A great illustration is our AI high powered Microsoft myWizard platform which you've heard us mention many times previously, which differentiates our service delivery by improving client's business performance with superior productivity and predictability. And we continue to leverage our unique innovation architecture, which integrates our capabilities from research, ventures, labs, innovation centers and delivery centers. Second is our powerful ecosystem relationships as the largest independent provider of technology services. While scale is certainly a factor, it's also our ability to co-innovate with our partners delivering outcomes and value at speed in "the New" and looking to the next new that differentiates us in the marketplace. And the final piece that underpins our technology leadership and is pervasive across everything we do is our unmatched industrialized global delivery capability which uniquely positions Accenture to deliver large scale complex programs. Let me now switch gears and comment on our continued commitment to invest for long-term market leadership including operating investments related to assets and solutions, talent and innovation as well as capital investments to acquire critical skills and capabilities and strategic high growth markets. So far this year, we've deployed approximately $1.1 billion in capital on acquisitions with the majority focus in "the New" and especially Accenture Interactive where we've completed nine deals so far this year. I'm particularly pleased with the acquisition of Droga5 by far our biggest of the year which has a large New York based creative agency that significantly strengthens our capabilities to design, build and run customer experiences that grow brands and businesses. But before I hand it back to KC, I want to take a moment to acknowledge some of the external recognition we've received. Accenture rose to number 28 on Brandz list of top 100 most valuable brands. And we also achieved our highest ranking ever on Forbes list of the top global brands and we had our highest ever -digit increases in brand value on both list. I'm also very pleased that we were named for the first time into FastCompany rankings for innovation. First, in the category of world's most innovative companies and second for world changing ideas. And finally, Accenture was ranked number one on Barron's new list of the most sustainable international companies. Before I close, I want to briefly mention that our CEO succession process is going very well. And as I said last quarter, we expect to complete the process by the end of this fiscal year. With that, I'll turn it over to KC to provide our updated business outlook. KC? KC McClure : Thanks David. Let me now turn to our business outlook. For the fourth quarter of fiscal '19, we expect revenues to be in the range of $10.85 billion to $11.15 billion. This assumes the impact of FX will be about negative 2% compared to the fourth quarter of fiscal '18 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year 19, based on how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollars will be approximately negative 3% compared to fiscal '18. For the full fiscal 19, we now expect our revenues to be in the range of 8% to 9% growth in local currency over fiscal '18. For operating margin, we now expect fiscal '19 to be 14.6%, a 20 basis point expansion over fiscal 18 results. We continue to expect our annual effective tax rate to be in the range of 22.5% to 23.5%. This compares to an adjusted effective tax rate of 23% in fiscal '18. For earnings per share, we now expect full year diluted EPS for fiscal '19 to be in the range of $7.28 to $7.35 or 8% to 9% growth over adjusted fiscal '18 results. For the full fiscal '19, we continue to expect operating cash flow to be the range of $5.85 billion to $6.25 billion. Property and equipment additions to be approximately $650 million and free cash flow to be in the range of $5.2 billion to $5.6 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. And we continue to expect to return at least $4.5 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that let's open it up so that we can take your questions. Angie? Angie Park : Thanks KC. I'd ask that you each keep to one question and a follow-up to allow as many participants as possible to ask the question. Frank would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Thank you. Good morning, David. Good morning KC. David Rowland : Good morning, Ashwin. Ashwin Shirvaikar : I want to start with a question on bookings. Generally [indiscernible] with the book-to-bill lower than one, can you detail a bit? Particularly when I looked at the comment it says 65% of bookings are in the New implies a third is from legacy services. Is this what sort of there you have a need to provide clients with higher productivity requirements? Is this a plan we should be looking at more carefully in the future because that's what FX bookings growth and in the New were the growth, is that a visibility question we should be asking with regards to a higher cloud component or higher agile development component. Does that also bring with it low visibility? KC McClure : Okay. Thanks Ashwin. Let me just cover a lot of the questions there. You have booking, so maybe I will first start with as I mentioned bookings really were in the range that we expected and they were quite well balanced. And we'd like that they are about 65% in the New. So just as a reminder, that's well for covering up so long bookings can be lumpy by quarter. So you see that in our results this year where we had really strong bookings record bookings in Q2. But there are historical patterns, we've always had some lumpiness and variability quarter-to-quarter of bookings. So as it relates to what we're seeing, the second half is really playing out largely as expected. We'd like our position where we are year-to-date. It really is where we anticipated that we would be at this time of the year. And so they're looking forward and talking about your visibility question. Now based on the strength of our pipeline and the visibility that we do have, we do see strong bookings in Q4. There's not really an element of the new impact of visibility, we like that we have the majority of our bookings in the New. And we feel that we're really well positioned based on where we are to-date with what we can see for Q4 bookings to be well positioned for next year. And I think that really just points to as you were talking about our offerings, the relevance of our offerings and our capabilities in the marketplace. Ashwin Shirvaikar : Got it. And then, with the anticipated improvement in financial services that's good to see that come through. Looking forward is it -- should we assume that continues to step up? KC McClure : So as you said, we were also pleased with the up tick in financial services that we saw this quarter and that did come in as expected. And I did note, I will say again that we were particularly pleased with our strong growth in North America and the continued double-digit growth that we have in the growth markets. And while Europe did contract, it is -- we did see improvement in banking capital markets and as it relates to what we think for the rest of the year, we still see the second half of the year in financial services being stronger than the first half of the year which is what we had anticipated. And you see the first part of that happening in Q3. Ashwin Shirvaikar : Thank you. Operator : Your next question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Good morning guys. How are you? David Rowland : Good morning, Tien-tsin. How are you? Tien- tsin Huang : I'm good. Let me ask on the margin side. It looks like gross margin drove the raise in margin guidance. Is that correct? And what would you attribute that to the favorable mix pricing, contracts execution, a little bit bumping up overall? KC McClure : Yes. Hi, Tien-tsin. As you know, we really do run our business first of all to operating margin. So that's really how we manage the business. And the first thing that we do look at -- within gross margin is, how contract profitability is performing. And overall for both the quarter and for the year, we're happy with our improvement in contract profitability. And that really just all starts with pricing, right. So as we have more and more of our work in the new and in areas where we see strong demand and where we have highly differentiated skills, we do see that we're able to price at a better rate than in other areas. So you'll see that that is part of what's driving our gross margin which is in fact a part -- a big part of driving operating margin. It's also important to note that even within gross margin, we do have our investments and that's really key for what we're doing. So again that's why we run our business operating margin but from quarter-to-quarter, we are also absorbing investments in our people, in our business, in our gross margin as well. Tien- tsin Huang : Got it. That's healthy. Then on top of Ashwin's questions on pushing on bookings just a bit lumpiness there, is it, now to simplify, but is it -- attribute it to just normalization and given the outperformance you saw in the prior quarter and the time required to refill the pipeline then obviously bookings came in quite strong last quarter. David Rowland : Yes. Tien-tsin let me just jump in because you remember, some may remember this became a little bit of an -- maybe even an unnecessary distraction in quarter one. And just to make sure that maybe we're even more clear on our messaging. So let me just say that we're very, very pleased with the demand environment. So let's be clear on that. That's reflected in our revenue growth year-to-date that's reflected in the revenue growth that we see in the New is reflected. And what we feel is a very strong pipeline position as we closed out the third quarter and that's reflected in our statement and our confidence that we will have strong bookings in the fourth quarter. So to be clear, we're not concerned about bookings, bookings do vary by quarter. Very often it can be influenced by the timing of when the large deals closed and in the scheme of our big business that we have deals that close in the month of June let's say as opposed to a few weeks early in the month of May. Obviously, that didn't make any difference in the health of our business and what we see from a demand standpoint. So, we're very encouraged by the demand environment. And as KC said the bookings aren't lumpy as they have always been in our business. And I would focus more on the confidence that we have in the fourth quarter than I would, the fact that quarter three was at $10.6 billion. Tien- tsin Huang : Okay. Message delivered. Thank you. David Rowland : Thank you. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead guys. Bryan Keane : Hi, guys. Good morning and congrats on the solid results. I just want to ask about strategy and consulting. I know you in the past had hovered around mid single digits then it bumped up a little bit when the [indiscernible] double digits. And then now, I think it decelerated a tad in mid single digits. So can you just talk a little bit about maybe the ups and downs of that business and the slight deceleration we saw in the quarter? KC McClure : Yes. Thanks Bryan. So, overall as you mentioned, we do feel good about our business in strategy and consulting. And we do feel good about mid-single-digit growth. And we did have very solid bookings this quarter as well. And as you mentioned the growth will ebb and flow from quarter-to-quarter. And really as we look at our strategy and consulting business just a reminder that there's really kind of a dual purpose of what we're trying to accomplish there. First of all is just a main objective of the role of delivering strategy and consulting work to our clients. But then also, it's really to bring as you know the full scope of our end-to-end services. A lot of the overall transformation work and any of the larger scale deals in the pipeline that we may have also led by and brought by our strategy and consulting business. So in that context as we stated before, we see strategy and combined, if it's in the mid, the high single digits and that will ebb and flow by quarter, we think that's [indiscernible] for us. Bryan Keane : Okay. Helpful. And as a follow up, I want to ask about the acquisition. It sounds like it's been about $1.1 billion capital deployed in acquisitions. Can you just talk about how much you plan to spend in acquisitions as we go into next year, are we still thinking a point or two of acquisitions kind of as a revenue contribution is kind of the right metric to think about? KC McClure : Yes. Maybe I'll just give some of that financial data and David can talk a little bit more on that. So overall for this fiscal year, we think that we will probably spend based on where we are today very closer to $1.3 billion in acquisitions -- for acquisitions. And overall for this year than we believe based on what we've seen in the pipeline that we have in front of us and the deals we've already closed. We think the revenue for the inorganic revenue contribution this year will be closer to 2% probably closer to 1.5% that we had previously mentioned. David Rowland : And again, I would say just in terms of how to think about this going forward, our inorganic strategy or our acquisition strategy as we've said through the years really using inorganic as an engine for organic growth that continues to be a focus area for us and that will -- that is a strategic objective will -- is really unchanged as we look forward. And really if you look at what we've done year-to-date it's -- I'm really pleased with how we've executed that. I think over about 80% of what we've done is focused on the New we've done of course several deals and interactive as I called out, but we've also done deals in both Industry X.0 and applied intelligence. We've also done several deals and Accenture Technology in both our intelligence platform services where we were strengthening our skills and differentiation in a few of the platforms. And then, we've also done deals to acquire high-end software engineering capabilities again in our intelligence software engineering services. And then to round out as will always be the case we have a handful of bills in the mix that are verticals specific and it's interesting and just as an illustration of the importance to banking and capital markets does over the long haul is an important industry. We've made several investments in banking during this period of time. So this will be an important part of our strategy and you should really expect more of the same as we look forward. Bryan Keane : Okay, helpful. Thanks for taking the questions. David Rowland : Thank you. Operator : Your next question comes from the line of Lisa Ellis from Moffettnathanson. Please go ahead. Lisa Ellis : Good morning. Question actually on the non-new I guess I'd say looking at performance of some of your peers over the last few months, one of the notable striking observations is that some of the traditional services appear to be deteriorating. So, I'm just hoping you could unpack for us a little bit in the Accenture's non news meaning the other 35% or so. Just remind us a little bit, what exactly is in there and what trends are you seeing in that -- in those traditional services? Thank you. David Rowland : So, first of all from a business trend standpoint we have -- we really haven't seen a change in the pattern at all. If you were to even -- if you just took the information that we provide you could extrapolate that the 35% is declining, let's say in the single digit range and that's a pattern that we've seen now for some time. And so to be clear all of our growth and this is by design comes from our rotation to the new and the success that we've had in driving those services. In many ways, we are in some instances -- we're actually accelerating that because we are in the interests of our clients, for example, we're taking some legacy services, I think legacy application maintenance type services and we are introducing new technology to do that work in a more innovative way. And in doing so, you see those legacy services an application maintenance as an example decline, but that is by design. You might say we're cannibalizing ourselves which is in support of our strategy, but we also do it in delivering value to our clients. The other thing that you have in the New and this is not to say that this is not a comment on market demand, but you do have a lot of -- let's say more traditional classic consulting services would be in the New and while there's still demand for some of those classic consulting services where our real opportunity is and where we're really focusing on our skills capabilities and serving our clients is the strategy and consulting service tied to work that we do in the New. And so the classic services have less focus therefore less growth because we're doing everything rotated to the New. So hopefully that, really the bottom line is, we really haven't seen any change in the dynamic of the growth rate in the non-new versus the growth in the New. And it's really happening exactly as we intent for our strategy. Lisa Ellis : Got it. Okay, terrific. Thank you. That's helpful. And maybe a quick one for KC. It looks like attrition picks back up a little bit this quarter. Can you just comment on what you're seeing on the labor front? Thank you. KC McClure : Yes. So it is an 18%. It's in the range that we have been before. At least that's the overall 18% it's not something that we're concerned about. But I would like to say that within that if I peel back a little bit, I do feel really good and we feel really good about the strong retention rates that we have in the areas that David just talked about a lot of the strategic high growth areas of our business including strategy and consulting as well as many other components of the New. And maybe just to close out as a reminder, we really have no issues getting the talent that we need. We are really quite a magnet for talent based on the strategy that we have. Our financial performance is attractive and overall our talent strategy and the experience that we provide to our people the right workplace and our culture, our strategy, it's really an environment where innovation is at the heart of everything that we do and that's very attractive to many people in the workplace. Lisa Ellis : Terrific. Thanks. I think it's good to talk to you. David Rowland : Thanks Lisa. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. Dave Koning : Oh, yes. Hey guys. Thank you. And I guess my first question I know in the details you send out the New has been over 60% now for four quarters, the prior seven quarters it's stuffed up every single quarter. And I think you did call it on this call, it's more like 65% now. But is there any reason that that pace of like change into the New seems to maybe be slowing. I know the growth is really good. But is there anything changing at all there? David Rowland : I don't think there's anything changed. I mean I think you're going to see as we continue to talk about the New in the quarters ahead, I think you're going to see the same type trend line in terms of what it -- how it increases as a percentage of our revenue. So, I think as we get to the fourth quarter where we typically round the number that we quote externally inside, I think you'll see the typical pattern continue to evolve. Dave Koning : Okay. Now, that's great. And the other thing just I know it sounds like the environment remains strong and hasn't changed a lot, but the last seven, eight quarters or so have been kind of in the 8% to 11% constant currency. And I think you're kind of guiding 5 to 8 or so in Q4. Is that kind of the typical set the bar to somewhere that's pretty easy to hit and if you execute well you kind of beat that? Or is there something a little different maybe related to the bookings this quarter that you're just trying to be a little more conservative? KC McClure : Hey Dave. I would say that, I wouldn't characterize our book -- our guidance range is any different in terms of our practice. I mean as you know for the 5% to 8% from Q4, we always tend to aim -- we aim towards the upper end of that range. That's no different than what we have historically done and what we always try to do. And there's not really any difference within because the bookings in Q3 or what we see in Q4, I think it's pretty much our standard way of looking at the quarter and getting the right balance that we believe the revenue expectations we would want to set with all of you. Dave Koning : Got you. All right. Well, thank you. Good job. David Rowland : Thank you. KC McClure : Thank you. Operator : Your next question comes from the line of Edward Caso from Wells Fargo. Please go ahead. Edward Caso : Hi. Thanks for taking my call here. I wanted to ask about non-linear growth with your head count now at 481,000 and it seems like a lot more of the digital world is sort of platforms and non-people based solutions. And if you talk about your investments in that area and where you see it maybe going as a percent of revenue? Thank you. David Rowland : No. We have talked about that before and at the level that I guess is appropriate for us to talk about in this forum, I will say again that certainly we believe that non-linear growth over time will be more in the mix. You are right that that platform based solutions bringing IP to the table solution aids et cetera which I referenced several in my script are increasingly a bigger part of the services industry and increasingly a bigger part of our differentiation. And so, over time, we will be focused even more. And I'm sure we'll become even better at capturing the value of the IP and the solution aids et cetera that we bring to our clients to deliver services and to deliver value to our clients. The pace at which it happens is harder to predict. We're quite comfortable as we look forward in terms of our ability to manage the SaaS talent organization we have. And as we looked out as you would expect we do over a multiyear horizon there's not anything about the progression of our headcount that that concerns us in terms of executing our business strategy. So non-linear growth that I think will be more in the mix in the industry and I would expect Accenture would lead the way, but the timing and the slope of the curve I think is still yet to be defined and we'll see how that plays out. Edward Caso : Okay. Another question, I think in the past you might have given us a view on the FX for the coming fiscal year. I wonder if you could help us out in that department, your initial views on the FX headwind or benefit in FY'20? KC McClure : Hi, Ed. We won't provide any FY'20 guidance including FX until we get the full FY'20 guidance that we typically do at the end of our fourth quarter. Edward Caso : Great. Thank you. Congrats. David Rowland : Thanks Ed. Operator : Your next question comes from the line of Rod Bourgeois from DeepDive Equity. Please go ahead. Rod Bourgeois : Hey, there. Good to talk to you guys. I wanted to ask how you're feeling about the trends and valuations that you're paying for acquisitions, maybe you can talk about how you're performing against your ROI targets, for your average acquisition that you've completed in recent history. David Rowland : As we've said before, we are very rigorous in tracking our return on our investment for our acquisitions. As a management team we do it very rigorously and we actually review that with the Finance Committee and the Board every quarter. And so, it is a big focus and as I said before we are really pleased with the performance of our portfolio and really have been for the last several years as we really started to ramp up our game in this area. As it relates to valuations in certain areas of the market which well valuations have gotten pretty frothy and we consider that as we do the analysis of [barb] [ph] versus build. We're not going to be -- we will never be irrational and in overpaying for an asset in the market. But on the other hand, if we also look at things through a strategic lens and we understand that if something has significant strategic value and there's a scarcity of the skill in the marketplace then we make the judgment about paying a little bit more in those instances and there's been instances where we've done that. So as you would expect of us Rod, we are extremely thoughtful. There are areas like applied intelligence. In the analytic space for example where the valuations are super high, Industry X and in some areas there the valuations are super high. And so, we navigate that within our financial objectives. Again, we have a willingness where it is the right strategic play, but by and large we focus on valuation because we're very return focused in the way we execute our strategy. Rod Bourgeois : Got it. That makes sense. Just a follow up on the outlook in consulting growth versus outsourcing growth. I was impressed last quarter with the strength in outsourcing growth and it up ticked again this quarter and while consulting slowed a little bit. So is your outlook for growth in consulting versus outsourcing at a similar clip or do you expect one to look stronger than the other in the next few quarters as you look at what's happening in the pipeline? KC McClure : I will give you a little bit of color and how we see that playing out in FY'19. So for the fourth quarter, we've been consulting and outsourcing both are going to be about mid to high single digits growth and that would put for the full year both consulting and outsourcing at a high single digit growth range. Rod Bourgeois : All right. Great. Thank you guys. David Rowland : Thanks Rod. Operator : Your next question comes from the line of James Friedman from Susquehanna. Please go ahead. James Friedman : Thank you. David, thanks for the deep dive on the sensor technology, you had articulated the dimensions of intelligent platforms, intelligent software, engineering and cloud and infrastructure. I was wondering can you help us -- I don't say that intelligent platforms is 40% of revenue, big number. I was wondering can you give us some sense of the sizes of the other two? David Rowland : I don't think we can communicate that externally. And I don't think I want to do that on this particular call, but we take that point and we have anticipated that we will start to introduce some quantitative numbers behind those parts of our business. But right now it's a little bit premature to do that. But expect that we will do that as we move forward. James Friedman : So maybe a different direction then, KC you commented in your observations about the operating groups that the platforms which David has described in his prepared remarks. He's populated very well in CMT. Or, you said it was like driver of growth – software and platforms you said was the driver growth CMT. Can you give us an idea of how we would use the presence of say platforms in the other operating groups, do they over index with any of the other operating groups? KC McClure : Jamie, thanks for that question because that provides a good opportunity to make sure that we're clear with the use of the word platform maybe so. Platforms that David was talking about that we talk about quite a bit, they are pervasive in all parts of our business all operating groups, all geographies, in all parts of our business dimension. So that's what we talk about when we discuss platforms. David Rowland : And by the way again in that case when we talk about the platforms, it's the work that we do around SAP, Microsoft, Oracle, Salesforce and Workday and we refer to that as our intelligent platform services business that's the work we do around those platform in that context. KC McClure : Right. So that's all five of those, and that is pervasive everywhere. When I commented specifically Jamie on CMT; CMT has three industry groups that make up the operating group of CMT. One of which is called software and platforms. So I know that, it’s the use of the platforms name twice, but that's why I specifically called that out within CMT. But most importantly the IPF that David talked about the five platforms that we quantify in IPF, intelligence platform services are pervasive everywhere. David Rowland : So, on CMT, it was the industry segment reference she was making as a driver of growth. James Friedman : I got you. Okay. Thanks for the clarification guys. David Rowland : Thank you. Operator : Your next question comes from the line of Jason Kupferberg from Bank of America. Please go ahead. Jason Kupferberg : Hey, good morning guys. So just to clarify on the comment about bookings improving in Q4, do you mean in absolute terms, do you mean the book to bill, do you mean acceleration in year-over-year growth, would it be all the above? KC McClure : Yes. It's pretty much all the above. I mean mainly I'm focusing on -- in absolute terms, but it would generally be all the above. Jason Kupferberg : Okay. Got it. And just on Accenture Interactive, obviously, you mentioned all the deal activity there which is quite interesting, want to see if we can just get an update on how fast that business is growing organically or the annualized revenue run rate of it. I know you've talked about it in some Investor Days in the past. I know you've been getting a little bit bigger on the agency record side there. So just hoping to get a general update qualitatively and quantitatively on that part? David Rowland : Yes. The last time we saw, it was for FY'18 and it was $8.5 billion. And when you look at this business, this year it has continued to grow strong double-digit growth. And if I pair it the way peer would have said it, I mean very strong double digit growth. So you can think of it as -- is not in the teens but higher than that. And that growth continues. And of course within that as important as the acquisitions are and how we've executed our growth strategy in the context of 8.5 plus billion dollar business the vast, vast, vast majority of that growth of course is organic. And so it is fundamentally an organic driven business where we have used the strategic acquisitions, it's really an igniter if you will of the organic growth and which ultimately led to the scale of 8.5 plus billion dollars. Jason Kupferberg : Okay. I appreciate the comments. David Rowland : Sure. Angie Park : Greg, we have time for one more question, and then, David will wrap up the call. Operator : Okay. That question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : Hi, good morning. Thank you. I wanted to follow up margin question from earlier. So you’ve had solid performance this year. Can you comment on what's being done differently this year to yield that margin expansion really getting back on track for your model versus last year? Because I think you call that contract profitability earlier, but any other particular factors that are standing out. KC McClure : Thanks for the question Bryan. We're really focused as I mentioned before on pricing. So we're always focused on pricing and I talked about this a little bit last quarter. That's nothing new, but we continue to really be taking a look at our business in terms of getting the right value for the offerings that we're bringing and pricing out the right way in the marketplace. The benefit, first us, would also as well as make sure that we're doing the right arrangements for our clients. So I think that's really what I would say is the difference that is yielding probably most of the power within our margins is what we're able to do in pricing. Bryan Bergin : Okay. That's helpful. And then, just to close out here.. Industry X.0, it seems like peers are also emphasizing connected products in IoT with a pick up in recent deals. Can you give us an update just on that business how you see this space, how you feel about the outlook and then any metrics you can share on that business? David Rowland : I mean it is central to our strategy. We're super excited about the potential and Industry X. We've said that many times before, it is relative to Accenture Interactive which still has a big growth proposition in front of it. X is lower on the maturity curve if you will. And so there's a lot of runway in front of Industry X.0. In many ways it's still relatively immature. But we are working hard to be positioned right at the heart of that wave. And we've and -- we're well positioned now to be a leader in that way. So we're very focused on it. It is a top short list strategic objective and we're excited about the market potential. Bryan Bergin : Thank you. David Rowland : All right. Thank you. David Rowland : Okay. So, thanks again for joining us on today's call. And as you can tell we feel very good about where we are and confident in our ability to finish the year strong. With our highly differentiated capabilities, continued investments across Accenture and disciplined execution of our growth strategy, we're very well-positioned to continue delivering profitable growth and significant value to all of our stakeholders. We look forward to talking with you again next quarter. And in the meantime if you have any questions as always please feel free to call Angie and her team and I hope all of you have a great day. Thanks. Operator : Ladies gentlemen that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,019	3	2019Q3	2019Q4	2019-09-26	7.451	7.52	8.001	8.097	11.06	24.19	25.41	Operator : Ladies and gentlemen, thank you for standing by. And welcome to Accenture's Fourth quarter Fiscal 2019 Earnings Call. Now, at this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I would now turn the call over to Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Angie Park : Thank you, Kevin. And thanks everyone for joining us today on our fourth quarter and full year fiscal 2019 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our 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. Julie 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 both the fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the first quarter and full fiscal year 2020. We will then take your questions before Julie 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'll 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 Julie. Julie Sweet : Thank you, Angie, and thanks everyone for joining us. As a company and the leadership team, we focus every day on delivering on our commitments and creating value for our clients. And today, we are proud to announce that we have delivered another year of outstanding financial results, meeting or exceeding each of the objectives we laid out in our initial fiscal 2019 business outlook. And I know that Pierre, our Chairman and CEO, who passed away in January would've been very proud of the accomplishments this year of our nearly 500,000 people, including more than 7,000 outstanding managing directors. I would like to add a special thank you to David Rowland for his inspiring and exceptional leadership during these past several months and to our entire Global Management Committee who came together under David's leadership to ensure that we delivered on our commitments and which also was the ultimate way to honor Pierre and his incredible contribution to Accenture. Let me share a few highlights for the year. We generated record new bookings of $45.5 billion, including our highest ever quarterly bookings of $12.9 billion in Q4. Revenues for the year were $43.2 billion, an 8.5% increase in local currency. We delivered earnings per share of $7.36, a 9% increase on an adjusted basis. Operating margin was 14.6%, an expansion of 20 basis points. We generated outstanding free cash flow of $6 billion. We returned $4.6 billion in cash to shareholders through share repurchases and dividends, and we just announced our first quarterly cash dividend of $0.80 per share, which reflects a 10% increase over the equivalent quarterly rate last year. We have demonstrated once again the durability and resilience of our business and the strong demand for our services positions us very well for fiscal 2020. Now, let me hand over to KC who will review the numbers in greater detail. KC? KC McClure : Thank you, Julie. And thanks to all of you for taking time to join us on today's call. We were very pleased with our results in the fourth quarter, which completes another outstanding year for Accenture. Our results continue to provide strong validation of our leadership position in the marketplace, our relevance to clients, and our ability to manage our business in a dynamic environment, all to deliver significant value to our clients, our people, and our shareholders. Once again, our fourth-quarter results reflect our constant focus to deliver strong and consistent financial results across our three key imperatives for driving superior shareholder value. So, let me summarize a few important highlights before I get into the details. Revenue growth of 7.2% in local currency continued to be highlighted by strong double-digit growth in all three areas of the New, including digital, cloud, and security-related services. Growth continued to be broad based with the vast majority of our industries at high-single to double-digit growth levels. We continue to extend our leadership position with growth at about 2 times the market. Operating margin was 14.2% for the quarter, an increase of 20 basis points, resulting in 20 basis points expansion for the full year. Importantly, we delivered this expansion while investing at record levels in our business and in our people to position us for long-term market leadership. We delivered very strong EPS of $1.74, which represents 10% growth even with an FX headwind of about 2%. And finally, we delivered free cash flow of $1.9 billion, which surpassed our expectations driven by our strong growth in profitability and continued superior DSO management. Now, let me turn to some of the details. New bookings were a record $12.9 billion for the quarter and surpassed our previous all-time high by over $1 billion. We had very strong overall book-to-bill of 1.2. Consolidated bookings were $6.1 billion, with a book to bill of 1.0. Outsourcing bookings were $6.8 billion, with a book to bill of 1.4. We were extremely pleased with our bookings this quarter, which were broad based and strong across many dimensions of our business. They continue to be dominated by high demand for digital, cloud, and security-related services which we estimate represented more than 65% of our new bookings. For the full fiscal year, we delivered $45.5 billion in new bookings. These record bookings reflect the relevance of our services and the high level of trust our clients place in us as their partner. Turning now to revenues. Revenues for the quarter were $11.1 billion, a 5% increase in US dollars and 7.2% in local currency. Consulting revenues for the quarter were $6.2 billion, up 5% in US dollars and 7% in local currency. Outsourcing revenues were $4.9 billion, up 6% in US dollars and 8% in local currency. Looking at the trends in estimated revenue growth across our business dimensions, technology services posted strong high-single-digit growth, strategy and consulting services grew mid-single digits, and operations continued its trend of double-digit growth. Taking a closer look at our operating groups, resources delivered its eighth consecutive quarter of double-digit revenue growth at 12% in local currency. Growth continued to be strong across all three industries and all three geographies. Products grew 8%, reflecting continued strength in our largest operating group. We had strong growth across all three geographies and very strong double-digit growth in life sciences. H&PS grew 8% this quarter, reflecting double-digit growth in health and strong growth in public service. We were especially pleased with the strong growth in both growth markets and North America, with North America benefiting from continued strong growth in our US federal business. Communications, Media, & Technology grew 5%, reflecting double-digit growth in software and platforms. And overall, we saw double-digit growth in Europe and strong growth in growth markets. Finally, Financial Services delivered 4% growth, in line with our expectations. Insurance again grew double-digits, and we saw continued improvement in banking and capital markets globally. Overall, Financial Services delivered double-digit growth in growth markets, strong growth in North America, partially offset by contraction in Europe. Turning to geographic dimensions of our business, I am very pleased with the continued demand across all three of our geographic regions, which illustrates the diversity of the business that continues to serve us well. In North America, we delivered 8% revenue growth in local currency, driven by continued strong growth in the United States. In Europe, revenues grew 4% in local currency, with double-digit growth in Italy and Ireland and high-single-digit growth in the Netherlands. And we delivered another very strong quarter in growth markets, with 12% growth in local currency led by Japan which again had very strong double-digit growth. We had double-digit growth in China and Singapore, as well as high-single-digit growth in Brazil. Moving down the income statement, gross margin for the quarter was 31.1% compared with 30.8% for the same period last year. Sales and marketing expense for the quarter was 10.6% compared with 10.4% for the fourth quarter last year. General and administrative expense was 6.2% compared to 6.5% for the same quarter last year. Operating income was $1.6 billion in the fourth quarter, reflecting a 14.2% operating margin, up 20 basis points compared with quarter four last year. Our effective tax rate for the quarter was 26.6% compared with an effective tax rate of 28.0% for the fourth quarter last year. Diluted earnings per share were $1.74 compared with EPS of $1.58 in the fourth quarter last year. Days service outstanding were 40 days compared to 39 days last quarter and 39 days in the fourth quarter of last year. Free cash flow for the quarter was $1.9 billion, resulting from cash generated by operating activities of $2.1 billion net of property and equipment additions of $241 million. Our cash balance at August 31 was $6.1 billion compared with $5.1 billion at August 31 last year. With regards to our ongoing objective to return cash to shareholders, in the fourth quarter, we repurchased or redeemed 2.1 million shares for $407 million at an average price of $189.78 per share. And our Board of Directors declared a quarterly cash dividend of $0.80 per share to be paid on November 15, a 10% increase over the equivalent quarterly rate last year. Now, I would like to take up few minutes to summarize our outstanding year. And as Julie mentioned, we were extremely pleased that we successfully executed our business to meet or exceed all aspects of our original outlook that we provided last September. Revenue growth of 8.5% in local currency for the full year was above the top end of the guided range that we provided at the beginning of our fiscal year. This result is a strong indication of the durability and resilience of our growth model, which is underpinned by our focus on achieving market-leading scale across key industries, geographic markets and services. This includes our strategic focus to lead in the new, which represents approximately 65% of revenues for the year. Operating margin of 14.6% reflected a 20 basis point expansion over FY 2018 and was aligned with our original outlook. The diluted earnings per share was $7.36, reflecting 9% growth over adjusted FY 2018 EPS and was above our original guided range. As a reminder, in fiscal year 2018, EPS was adjusted to exclude the impact of tax law changes. Free cash flow of $6.0 billion was well above our original guided range, reflecting a free cash flow to net income ratio of more than 1.2, driven by strong profitability and continued industry-leading DSOs. And finally, we exceeded our objectives for capital allocation by returning $4.6 billion of cash to shareholders, while investing roughly $1.2 billion across 33 acquisitions to acquire critical skills and capabilities in strategic high-growth areas of the market. So, again, we had a truly outstanding year and we feel really good about our positioning as we head into fiscal 2020. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. Our strong results reflect the power of our growth strategy. Our strategy starts with what our clients need. And our clients need to transform their entire enterprise. What we see is that most of our clients are still in the very early stages of their transformation journeys. The starting points and speed are different by industry and by company, but the scope of the ambition is consistently broad. Our fiscal 2019 results reflect the strong demand for our services and the significant growth opportunities in front of us. I am extremely pleased that we finished the year with 200 diamond clients, which represents our largest relationships with many of the world's most iconic companies. I'm also proud to share with you that, in fiscal year 2019, Accenture Interactive achieved a significant milestone, reaching over $10 billion in revenue. And finally, this quarter, we had 16 clients with new bookings over $100 million. Clients choose Accenture for their largest and most complex transformation programs because they know we are uniquely positioned to create value by combining our unparalleled technology expertise, our privileged ecosystem relationships, our focus on innovation and our broad industry depth. Our proven track record of global implementations at scale, coupled with our capabilities from strategy to operations, create significant value for our clients. Let me double-click on a few of these important elements of our business, starting with our deep technology expertise and our privileged ecosystem relationships. Transformation for our clients begins with their understanding that technology is core to their business. And they turn to us because technology is core to our business. The depth, breath and scale of our technology expertise, combined with the power of our deep ecosystem relationships where we are a leading partner with all the key players, is critical to being our client's partner of choice. Another element I want to highlight is our deep and broad industry expertise across our 13 diverse industry groups. This breath has always provided us durability and resilience in our business. And today, it has created another competitive advantage. CEOs are increasingly looking to benchmark themselves against the best companies regardless of industry and they are turning to us for our cross-industry expertise. Because we bring both deep industry expertise in their industry as well as across other industries, we can help drive even more value at speed for our clients. Let me bring this to life with an example of a solution that we originally developed for the communication industry and are now using to accelerate value in other industries. For comms companies, building out their network and providing excellent customer service across all channels are the biggest imperatives. We helped Verizon use artificial intelligence, coupled with our deep understanding of the industry, to create digital assistant experiences at scale that can now address more than 70% of Verizon's calls. In many cases, a 20-minute call with an agent has been reduced to a 3 to 4-minute digital interaction, significantly improving the customer experience. Verizon's agents have enhanced their skills and now have more time to handle the most complex calls, which is also the most interesting work. As you can imagine, call centers represent a significant opportunity to drive value in many industries. Recognizing this, we were able to tailor our solution to the unique needs of our clients in both utilities and public service. At Enbridge, the global energy company, we implemented a solution in their gas utility operations to address inquiries similar to Verizon's, such as billing questions and service changes, to improve their customer experience. Now callers are able to complete many transactions digitally and customer satisfaction is up significantly. And the New Mexico Human Services Department is using our solution to help employees answer questions about Medicaid faster and more accurately. For example, the state has reduced the time it takes to complete the process of providing Medicaid coverage to newborn babies by up to 75% and our solution has freed up employees to focus on more complex tasks, enhancing their experience as well. Let me wrap up by talking a bit more about our people and the inclusiveness of our culture. Our people and culture are our biggest competitive advantage and our unwavering commitment to inclusion and diversity enables us to recruit the most talented people in our markets. This creates an environment which unleashes innovation and allows our people to perform at their very best. Today, I am announcing yet another milestone on our path to gender equality by 2025. With nearly 500,000 people around the world and as a technology powerhouse, we are now 44% women. In addition to gender, we are focused on leading in all areas of inclusion and diversity, and I'm proud to announce that, for the second year in a row, we have been ranked number one on Refinitiv's Diversity and Inclusion Index, which was previously produced by Thomson Reuters, and identifies the 100 publicly traded companies around the world with the most diverse and inclusive workplaces based on environmental, social and governance data from more than 7,000 companies. With that, I'll turn it over to KC to provide our fiscal 2020 business outlook. KC? KC McClure : Thanks, Julie. Now, let me turn to our business outlook. For the first quarter of fiscal 2020, we expect revenues to be in the range of $10.9 million to $11.2 billion. This assumes the impact of FX will be about negative 2% compared to the first quarter of fiscal 2019 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year 2020, based on how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in US dollars will be approximately negative 1% compared to fiscal 2019. For the full fiscal year 2020, we expect our revenue to be in the range of 5% to 8% growth in local currency over fiscal 2019. For operating margins, we expect fiscal year 2020 to be 14.7% to 14.9%, a 10 basis point to 30 basis point expansion over fiscal 2019 results. We expect our annual effective tax rate to be in the range of 23.5% to 25.5%. This compares to an effective tax rate of 22.5% in fiscal 2019. For earnings per share, we expect full year diluted EPS for fiscal 2020 to be in the range of $7.62 to $7.84 or 4% to 7% growth over fiscal 2019 results. For the full fiscal 2020, we expect operating cash flow to be in the range of $6.35 billion to $6.75 billion., property and equipment additions to be approximately $650 million and our free cash flow to be in the range of $5.7 billion to $6.1 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we expect to return at least $4.8 billion through dividends and share purchases as we remain committed to returning a substantial portion of cash to our shareholders. And with that, let's open it up, so we can take your questions. Angie? Angie Park : Thanks, KC. I would ask that you would each keep to one question and a follow-up to allow as many participants as possible to ask a question. Kevin, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions]. First question is from the line of Tien-tsin Huang, JP Morgan. Please go ahead. Tien- tsin Huang : Okay, thanks. Good morning. No surprises on the outlook. But I do want to ask on the bookings here. So, outsourcing bookings were strong. You said that large deals did come through. You suggested that it would, which is great. But on the consulting bookings side, that was flattish for the – I guess, I’m looking at the second half of the year, so can we expect a rotation here perhaps into more outsourcing revenue and maybe bookings, looking at your fiscal 2020? Can you give us maybe your views on outsourcing versus consulting growth in fiscal 2020? Julie Sweet : Sure. So, thanks, Tien-tsin, for the question. Maybe, I'll start with the last part of your question. In terms of how we're thinking about growth in fiscal 2020 for consulting and outsourcing, we expect for the full year that growth for consulting and outsourcing, they'll both be in the mid-to-high, single-digit range, and that's baked within our 5% to 8% guidance for the year. And taking your booking questions, as you mentioned, we had record bookings for this quarter, $12.9 billion. And if you peel that back and look at our consulting bookings, we also had bookings at $6.1 billion in consulting type of work, and that's one of our highest booking quarters ever, and it was out of our book-to-bill target of 1.0 or higher. And I think importantly, Tien-tsin, as well, we feel really good about the pipeline that we have as we enter in the beginning parts of fiscal 2020, and we say that on an overall broad base in terms of all aspects of our business. And so, when you peel that back and you look at overall what we've done in terms of our bookings for the fourth quarter in consulting, our overall bookings at $12.9 billion, a record, as well as our strong pipeline as we head into fiscal 2020, we still see – we see balanced growth across both types of work. Operator : Okay. Our next question is from the line of Bryan Bergin of Cowen. Please go ahead. Bryan Bergin : Hi. Thank you. I wanted to follow-up just on that booking question. It seems like the variability quarter to quarter has become more volatile. Can you just talk about the major drivers of that and is that something that we should expect to continue in fiscal 2020? Julie Sweet : Yeah, in terms of our bookings, I think if you take a look at how we position bookings and think of it from a quarterly basis, and we've said this kind of historically, they can be lumpy from quarter to quarter. And really what we're looking at in terms of our overall booking is that we meet on a prolonged period our bookings targets, which for consulting or anything from 1.0 and above which we did this year and this quarter, and for outsourcing which tends to be 1.1 and above over a prolonged period. In this quarter, we did 1.4. So, we expect that there will be some variability. You saw that certainly this year where we had really strong bookings in quarter two. We had it a little bit lighter as it relates to the rest of the full year and quarter three, and we signal that based on our pipeline, we thought that we would have very strong bookings in Q4, and indeed we did. So, that's something that we're very used to. As we think about FY 2020, we tend sometimes to have – Q1 might be a little bit of a lighter bookings in relation to the rest of the quarter, but again this – coming off a particularly very strong year, in quarter four, that may be the case as well for this year, but we feel very strong – we feel very good about our strong pipeline as we enter into 2020. Bryan Bergin : Okay, thanks. And then just a follow-up here on your talent and resourcing model, as you approach 500,000 employees, can you talk about what you're doing to reduce the manual effort around work? I think in the past, you disclosed automated FTE or efforts within your operations group. So, any update you can provide there? And it's in the context of just the uptick that we saw in attrition to 19% and your comfort levels there? Thanks. Julie Sweet : I'll let KC address the specific uptick around the attrition, but let me give you a broader perspective on how we look at talent. So, one of our greatest strengths, right, is how we manage talent and people. And so, if you look at it at any given time, we are always adjusting the use of technology in our business and the talent that we then need to hire. And so, we have talked about it in the context of our operations business. But when you think about the work that we do in technology with our myWizard platform where we're using the latest in artificial intelligence and analytics to help our clients, that was work that, five years ago, we used people. And so, we don't think about this as a particular sort of strategy to do X, but that at any given time, we are continuously innovating how we are giving services and then adjusting what that means for our talent, and we do that really seamlessly quarter to quarter and year to year. KC McClure : And, Bryan, just to answer your question on the actual attrition number, we did have a slight uptick this quarter by about 1%, but we feel good about the strong retention rates that we have in key strategic areas of our business, and that includes areas such as our digital practice as well as strategy and consulting. As you know, we really have no issues in attracting the people that we need, and people choose Accenture because of our strategy, our strong financial performance, and the experience that we provide to our people, continuous learning, the amount of investments we make in training and innovation, and it really does make Accenture one of the best places to build a career. Operator : And next we have David Togut of Evercore. Please go ahead. David Togut : Thank you. Good to see the bookings strength. I'd like to ask about any changes you're seeing in average contract length, especially given the ongoing strength in outsourcing bookings and possibly in the evolution of your shift to the new – are you in more of an operating and run stage with a lot of bigger clients? KC McClure : Hi, David. There's really no change to the duration of our contract and our bookings. No change. Julie Sweet : David, I would think about – really think about what we're seeing in the business because really our clients are focusing on enterprise-wide transformation. And what that requires is that we bring all of our capabilities together, really from strategy to operations. And you saw that on the bookings we had this last quarter of 16 clients with over $100 million. And just to give you an example, we're working in products with – one of those was a products company, Fortune Global 100 who is transforming HR using everything from our strategy capabilities to our operations capabilities to transform the experience from hiring to retirement and, at the same time, drive down costs. And our competitive advantage in this market is that we are able to bring all of those capabilities. And what we're seeing is that boards and CEOs are really focusing on the enterprise-wide transformation which means large and strategic programs which is what we are very uniquely positioned to deliver. David Togut : Understood. Just as a quick follow-up, you announced a leadership change Tuesday at the head of your Products group, your largest operating group. What changes should we expect with Simon Eaves taking over Products leadership? Julie Sweet : That's going to be a very seamless transition to Simon. He's been working in Products for most of his career and brings the deep both – industry, operational and sales expertise. So, that should be very seamless. David Togut : And next, we have questions from the line of Bryan Keane, Deutsche Bank. Please go ahead. Bryan Keane : Hi, guys. I wanted to ask about digital. If I look inside the new, digital appeared to be slowing a little bit more than cloud and security. It's off its high growth rate in fiscal year 2018. So, just thinking about it, is digital getting more penetrated or more competitive inside there? I know it's still growing robustly at, looks like, high teens, maybe low 20%, but it is off of the growth rate that it was growing at previously. So, we always get questions about penetration there. Thanks. KC McClure : Yeah. Sure, Bryan. I'll answer the questions on the growth rate. I'll hand it over to Julie to talk about what's happening within the digital business. So, digital, in terms of what we estimate for the full year, we estimate digital to be about $21 billion business. So, it's very significant in terms of scale. It's about 50%, almost pushing 50% of our overall revenue base. So, with that scale, as you mentioned in terms of growth, we are at the very high teens in terms of growth rate. So, we're really pleased with what we're seeing in the continued, very strong, high-teen double-digit growth that we have in digital. And we expect that, as we look into next year, that overall we will have – in the new, we'll continue, which includes digital, to have double-digit growth overall in FY 2020. Julie Sweet : I think, Bryan, it is important to look at, again, what our clients are doing when we think about where we are in our growth strategy. As I said earlier, we do see our clients at the very early stages of their transformation. And so, really think about what is happening in three buckets. The first is, they are building out their digital core, right, which is establishing the technology foundation. And so, in the scale parts of our business, intelligence platform services, which is all about the next gen platform, that's 40% of our business today growing double-digits because they need – our clients need to establish that new foundation that's going to fuel the enterprise transformation. At the same time in the digital core, we're still in the early stages of scaling areas like data, right, how our clients are going to be able to find and curate that data which is just really beginning when you think about how much data there is, security which is only at $2.5 billion and then the move to the cloud. So, within building the digital core, we have scale plays like intelligent platform services growing double-digits and then we have the next scale plays which are also growing double-digit. Then the second big area our clients are focused on is driving the growth agenda which is all about creating better customer experiences which is fueling Accenture Interactive, which hit $10 billion this year, but it's also fueling the focus on new products and services which is what X.O is about. That's at very early stages, right, having connected products and services. And so, that will be the next area that we are really focused on scaling in the growth agenda. And then, the third area is in optimizing their operations. And again, scale part of our business, operations, which is growing double-digit, right, and that's because it helps our clients reduce costs to increase their investment capacity, but it also enables our clients to do the transformation because we have invested in operations to use machine learning and other forms of emerging technologies, and so they are accessing those technologies through our platform in operations. But then, at the same time, right, you have again X.O where we're seeing the early stages of digitizing manufacturing and creating the connected plant, which will be the next play that we are scaling, right? And then, of course, at any given time, we're in the innovation space and we're looking at the emerging technologies that will fuel growth. But in each of the areas of what our clients are doing, we have scale today growing double-digits and then we have the next plays that we're scaling. Bryan Keane : That's helpful. I just had one follow-up for KC. On tax rate, I see tax rates going up, looks like, about 100 basis points to 300 basis points and I know there's some moving pieces in terms of tax rate. So, can you just talk about what are the factors we should be considering there for tax in this fiscal year? KC McClure : Sure, Bryan. So, our range, just to maybe to anchor to where we're starting with, so our range for fiscal 2020 is up about 0.5 point compared to where we started last year for fiscal 2019. And the increase from fiscal 2019 to fiscal 2020 is primarily due to the US tax reform provision that phased in over two years. And as a reminder, there are four factors that I think you probably know well, but just might bear repeating, that can influence our tax rate in any given year. And the first one is our geographic mix of our income. Second is the changes in our prior-year tax liability. The third is our final determinations. And the fourth is the tax impacts on our equity compensation. Operator : Thanks. Our next question is from the line of Harshita Rawat of Bernstein. Please go ahead. Harshita Rawat : Hi. Good morning. Thank you for taking my question. My question is for you, Julie. Given your background in M&A and what's happening in the marketplace, should we expect Accenture to potentially look at larger deals now versus the tuck-ins you've done historically? And then, as a follow-up to that question, over the last couple of years, you've done a lot of acquisitions on Accenture Interactive. So, going forward, what we should we expect is the focus of your M&A activity? Julie Sweet : Thanks for the question. Harshita, let me start with the overall strategy around acquisitions, which is, while it served us extremely well and we think about acquisitions to do three things, to scale hot areas in the market. So, for example, this year, we did about six acquisitions in technology, three of them in particular around intelligent platform services where I've already talked about, we're seeing double-digit growth and we need to – we wanted to help scale our capabilities. The second is to add new capabilities. And this has been a lot of our acquisitions in the new, which has been about 20 of the acquisitions that have been in digital and security, particularly as you pointed out in Accenture Interactive. And so, that is all about adding new capabilities. And then, the third is really getting deeper industry and functional expertise. And so, this year, we did four in the area of financial services where we really expanded our expertise in that industry through these acquisitions. So, you should expect that our strategy is always going to around those three areas, and that it is meant to fuel our organic growth. Now, with respect to whether we would do a larger acquisition, we've always said that we could do a larger acquisitions, but it would really need to make sense for us in the context of what we look to acquisitions to do. So, there are certainly no plans to do that, but, obviously, we have the capability if that ever made sense. And then, finally, as we think about going forward, well, certainly, Accenture Interactive is an important focus point and we've done a lot of acquisitions there. As you think about where we're scaling, right, so the next scale plays, like X.O, you should expect to see that we're going to focus in that area as well. And so, at each year, we're going to look at where we need to either scale, add new capabilities or add industry expertise. And it'll really change based on what we're seeing in the market and what's available. Harshita Rawat : That's very helpful. Thank you very much. Operator : And next question is from line of Keith Bachman, Bank of Montréal. Please go ahead. Keith Bachman : Hi. Thank you very much. Julie, I'd like to direct this first one to you. And that's, how do you think about Accenture's business line related to more challenging economic cycles? And to put a little more context on the question, it would seem to me that operations is pretty resilient if, in fact, the economy got tougher. The one I question is strategy and consulting rather. And if I look back to 2009 when the economy got really tough, the strategy and consulting element declined double-digits. And so, if we look at out the next year or two, if we hit more difficult economic times, how is strategy and consulting different today that it might be more or less immune from economic cycles? And I have quick follow-up for KC. Julie Sweet : Sure. Well, if we sort of take a step back and think about what have we been trying to achieve over the last five years, and that has been our rotation to the new, meaning focusing on the most relevant services that our clients need to transform their businesses. So, our strategy and consulting business today, right, is focused on these new services, how do you take blockchain and apply it to Financial Services, how do you use data and combine it with deep customer insights and use the skills of an Accenture Interactive to create a different customer experience. And we believe that, in a downturn scenario, our relevance to our clients comes in the fact that they are still going to need – and, in fact, we think, during that time, even more so to use these capabilities that we have in order to drive their growth agenda, optimize their operations and, of course, still build the digital core. And so, that's where we see the resilience of our current business model. Keith Bachman : Okay. All right, thank you. And, KC, just a quick one for you. On the cash flow, particularly operating cash flow, looks like CapEx is up a little bit, but if I focus on operating cash flow, you're guiding it to be more or less flattish year-over-year. And while I understand that your cash flow metrics on guidance are almost an output, but is there anything you wanted to call out as being unusual that would make the year-over-year comparisons on operating cash flow a little more challenging or either pluses or minuses on the operating cash flow? And that's it for me. Thank you. KC McClure : Thanks, Keith. In terms of operating cash flow in our overall free cash flow, there's a minor uptick, $50 million in capital expenditures. So, that's not really very different. But really, the way we look at our free cash flow is the goal that we have is for it to be over – at 1 or better in terms of percentages, the ratio to net income. And so, with our guidance this year, we're actually at 1.1t to 1.2. So, that's outstanding. Another year of outstanding free cash flow. Now, this year, in FY 2019, we did above 1.2. And why did we do even better? And what are the influences that can put us in one place or the other? It really has to do with a couple items that I would point out. And this year in particular, we had significant outstanding performance continuing in our DSO. And so, for every day of DSO, it's about 130, give or take, to our free cash flow. So, we always assume at the beginning of the year that we give ourselves a little bit of room to stay in the low 40s because that would still be outstanding within our business. And I'll just point out maybe a couple of other things that influence the fourth quarter, for example. The timing of things such as cash tax payments and just overall timing of accounts payable, those are things that can really change our – the timing of our free cash flow. But for next year, we have just another stellar free cash flow performance baked into our guidance at 1.1 to 1.2. And we continue to be very proud of how we operate our business in that respect. Keith Bachman : Many thanks. Operator : The next question is from the line of Rod Bourgeois, DeepDive Equity. Please go ahead. Rod Bourgeois : Hey, there. And welcome, Julie. Julie, I just wanted to ask a big picture question here. Do you have any strategic changes or major priorities that you plan to implement as you take the helm? Julie Sweet : Rod, our strategy starts with our clients. And so, we are going to continue to stay focused on our clients. And so, there's no change – no major change in our strategy because a new CEO doesn't change our clients. So… Rod Bourgeois : Got it. And is there anything significant happening in any of the verticals that may change the vertical mix as you move into next year? It looks like the range of growth outcomes that you're getting across your verticals has narrowed some. Some of the really high performers has slowed and some of the weaker performers has improved. So, are the vertical performances next year prone to be more parity or could the spread widen? KC McClure : Thanks, Rod. This is KC. I would say that, in terms of our verticals, if you're obviously talking about our operating groups, within our range of 5% to 8%, we see that all of them have the ability to be within that range. And, certainly, the opportunity exists also for some of them [ indiscernible 0 :46:22] resources in particular to perform above that range. Operator : Thank you. Next question is from the line of Jamie Friedman, Susquehanna. Please go ahead. Jamie Friedman : First, thank you for all these incremental disclosures. They are very helpful. The observation about the diamond clients, the $100 million, the decomposition of the growth, it's all appreciated. I just want to ask you briefly about the business dimension of strategy consulting. So, that dimension, I'm looking at the bottom left corner, the Q4, so the purple grid, so the mid-single digit growth for the Q4 did trend just below the flipside, which was high-single digit growth for that dimension for the year. And I know each quarter can be lumpy, but any expectation about that staying here or potentially accelerating that's contemplated in the guidance would be helpful? KC McClure : Yeah, sure. Thanks for the question. In terms of our overall strategy and consulting business, as you mentioned, it's $14 billion is what we estimate that business to have been in the fiscal year that we just closed, 2019. It's a little bit less than – it's right around a third of our business. And at that scale, we're really pleased when we have growth in mid to high single digits range. And so, for the year, we see that it was high-single digits for this quarter and Q4 and we saw that it was mid. But we're happy when it's in the mid-to-high-single digit range. And as you mentioned, it will lap from quarter to quarter. But I think it's important and as Julie – just picking up on some of the things that Julie talked about, as you know, that consulting and strategy, it's a really important capability because that helps us drive value across the C suite, not only in the role of delivering pure strategy and advisory work to clients to shape their transformation agenda, but also to bring the entire full scope of Accenture's transformation capabilities, including technology, industry, all at a global scale. And as Julie put it on her examples as well as with our 16 clients at over $100 million, we saw that really in evidence this quarter as well. So, it's a bit of a dual purpose that we have in strategy and consulting advisory work. And we're really pleased with overall – our performance in the year, our performance in the quarter. And we feel that, with the bookings that we had in Q4, $6.1 billion which was in consulting type of work overall, but a portion of that obviously within consolidating in strategy, and we feel well-positioned in this regard for fiscal 2020. Jamie Friedman : Okay. Thanks, KC. And then, I just wanted to ask about operation, so incredible double-digit growth again above company average, above the industry. So, I know you shared some already, but any texture there would be helpful. Can we keep that up? And is that contemplated in the guide? Thank you. KC McClure : Yeah. So, Jamie, yes, we're really proud of what we – what Debbie and the team have been able to do in operations over the last years where they continue to have double-digit growth. And for next year, for operations, we do see that that will continue probably and maybe in the high single to the low double-digit growth range is what we see in operations. Julie Sweet : And just to take a minute to expand on why operations is so strategic for us and for our clients, and it really is for two reasons. So, first of all, operations is a great and proven way to create value for our clients because it helps them reduce costs, create more investment capacity, but the operations business today is very different than, say, even five years ago because we have invested to bring these great technologies to the platform which we call SynOps. And if you are a CEO and you think about where do I want to build my own capabilities around artificial intelligence and emerging technologies. Do I want to do that in order to transform finance or HR or the marketing backbone? Or do I want to do that in places that are going to truly differentiate me in terms of my products, for example? And the equation is often, well, why don't we go to Accenture that is built to have platform, that's doing it across hundreds of clients with deep and long expertise in the enterprise and access that technology to transform how we're doing those functions, so that I can put my investments into these other areas that are going to differentiate us in the market. And that is really helping drive the next wave of growth for operations. And we think that's going to be even more important as we see this enterprise-wide transformation. Operator : And our next question is from the line of Jason Kupferberg of Bank of America. Please go ahead. Jason Kupferberg : Hey, good morning, guys. Can you just tell us how much M&A contribution you're expecting in the fiscal 2020 revenue growth? And can we also just get a follow-up comment on the tax rate with the increase in 2020? Is that the new normal we should be thinking about in, call it, medium term just based on the phase in of the tax law changes? KC McClure : Yeah. Thanks, Jason. In terms of the contribution that we have assumed in FY 2020 in our 5% to 8% guidance range, it's about 2% inorganic which is around the same as we land in FY 2019. In terms of our tax rates, maybe again, I will just answer that. Our range is only up 50 basis points from where we started the year and there's various things that can impact our tax rate throughout the year. So, not really in a very different space from where we started last year. But you're right that this is – in FY 2020, we have phased in the US tax reform provision that phased in over two years. So, we do think that that's really where our rate will be for this year. I'm not going to guide to – you know we don't guide to out years on our tax rate. But we will then work our four other factors that can influence our tax rate overall, but we do have, in 2019 to 2020, the second-year phasing of the US tax reform. Jason Kupferberg : On attrition, just to come back to that, I know you guys aren't having any issue attracting the talent that you want/need, but should we expect just in light of the generally tight labor markets, especially for digital talent, that this kind of high teens ZIP code is just sort of a new normal? KC McClure : Yeah. So, Jason, I don't think there's anything that you should expect that's different than what you've seen, and you've followed for a long time, than we've had in the past. We're in the higher teens to mid-teens in attrition. That's a level that, historically, we feel we can manage and that's how we build our business. So, there's nothing that you should expect as very different and nothing that we're concerned about. Angie Park : Okay, great. Kevin, we have time for one more question and then Julie will wrap up the call. Operator : Thank you. And that question is from line of Lisa Ellis of MoffettNathanson. Please go ahead. Lisa Ellis : Hi. Good morning, guys. A question on outsourcing bookings again. Just didn't follow-up, I think, from Tien-tsin's question opening the call. The Accenture of old, we'd always think of Accenture's outsourcing business being heavily things like ERP management and whatnot, but that is clearly not what it is now. Can you decompose a little bit what makes up outsourcing at this point? Is this like managing clouds on behalf of clients? Is this a lot of digital marketing ongoing management? Just give a sense for what's underneath there. Thank you. Julie Sweet : Lisa, it's interesting is that the breadth of what we do there is actually not different. It's just how we're doing it. So, for example, we're still doing application outsourcing, but we're doing it using dev ops and Agile and something we call living systems because it's a different way of doing application outsourcing that's allowing the application outsourcing that we do for our clients to help drive their business transformations. We have, of course, a $6 billion business in operations. And again, the kinds of functions in that we're doing are similar, although we've added marketing and scaled marketing over the last couple of years. But, again, it's how we're doing it. It used to be about labor arbitrage 10 years ago. It's very, very different now. And so, the breadth in terms of the activities that we're going after has not changed. What makes it so successful for us is that we've evolved how we do it. And so, you can see application outsourcing, because of the techniques we're using, is now helping our clients get to things like Agile and dev ops at scale and be able to help drive their business differently. Lisa Ellis : Terrific. Thanks. And then, quick follow-up for KC on the guide. One more guidance question. Can you articulate what macro outlook for 2020 is embedded in the guidance? And then, realizing it's still September, are you seeing enough visibility into budget outlooks and stuff for next year that you're feeling – what's your confidence level around that macro outlook? Thank you. KC McClure : Thanks, Lisa. And as you mentioned, this is, obviously, obvious point. At the beginning of the year, this is our longest range of time that we're giving an outlook. But with that, as you know, we guided to 5% to 8% growth for next year. And that contemplates a market that we see growing about the same as it has done in 2019. So, for us, for our addressable market, we think it's probably somewhere in the 3% to 4% range overall for next year. Julie Sweet : So, thanks again for joining us on today's call. KC and I and the entire team are extremely pleased with our excellent performance for fiscal 2019. We see significant opportunity ahead and we are laser focused on delivering value for all of our stakeholders. And let me end by thanking our stakeholders, thanking our clients for placing their trust in us, our investors for their continued confidence, our ecosystem partners for their shared commitment to our clients, our exceptional leadership team and, finally, all of our people around the world. You are what makes Accenture so special. I'll see everyone on the road. Thanks. Operator : Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining and for using &T Executive TeleConference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,019	4	2019Q4	2020Q1	2019-12-19	7.578	7.582	8.178	8.119	11.05	24.68	18.62	Company Representatives : Julie Sweet - Chief Executive Officer KC McClure - Chief Financial Officer Angie Park - Managing Director, Head of Investor Relations Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture's, First Quarter Fiscal 2020 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. [Operator Instructions] 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, Angie Park. Please go ahead. Angie Park : Thank you operator, and thanks everyone for joining us today on our first quarter fiscal 2020 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our 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. Julie 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 first quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the second quarter and full fiscal year 2020. We will then take your questions before Julie 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 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 Julie. Julie Sweet : Thank you, Angie, and thanks everyone for joining us. Today we are very pleased to announce strong financial results for the first quarter, continuing our momentum from fiscal year ‘19. We are especially pleased with our revenue growth of 9% in local currency, well ahead of the market, which is broad-based across all dimensions of our business. We also delivered strong profitability and again returned substantial cash to our shareholders. Our strong results across industries and geographic markets reflect the diversity and scale of Accenture's business around the world. We are very well-positioned to continue creating value for all our stakeholders. We're off to a great start in Q1 and we feel confident in our ability to deliver another strong year in fiscal ‘20. Now, let me hand it over to KC who will review the numbers in detail. KC McClure : Thank you, Julie. Happy holidays to all of you, and thanks for taking the time to join us on today's call. We were very pleased with our Q1 results, which were strong across all dimensions of our business and position us well to achieve our full-year business outlook. Once again, the broad-based strength of our results demonstrates the durability of our business, the relevance of our services in the marketplace and our scale and leadership in the world’s largest and key geographic markets. Our results reflect very strong execution against our three financial imperatives for driving superior shareholder value. Revenue growth of 9% in local currency was well above the top end of our guided range for the quarter. Growth was broad based across all dimensions of our business, with the majority of industries growing at a high-single or double-digit rate. Results continue to be driven by strong double-digit growth in digital, cloud and security-related services, and our 9% growth represents continued market share gain as we extend our leadership position. Our operating margin was 15.6% for the quarter, an increase of 20 basis points. Importantly, we delivered this expansion while investing significantly in our people and in our business to position us for long-term market leadership. We delivered very strong EPS of $2.09, which represents 7% growth, which includes an FX headwind of about 2%. And finally, we delivered free cash flow of $692 million and returned $1.2 billion to shareholders through repurchases and dividends. We also invested $110 million in acquisitions in the quarter to bolster our skills and capabilities in strategic, high-growth areas of our business, and we expect to invest up to $1.6 billion in acquisitions this fiscal year. Now, let me turn to some details for the quarter. New bookings were $10.3 billion. Consulting bookings were $6 billion, with a book-to-bill of 0.9. Outsourcing bookings were $4.3 billion with a book-to-bill of 0.9. This quarter our bookings continue to be well-balanced across the dimensions of our business and continue to be dominated by high demand for digital, cloud and security-related services, which we estimate represented more than 65% of our new bookings. Overall Q1 bookings landed in the range that we expected, and followed our historical pattern of lower bookings in the first quarter. As you know, quarterly bookings can be lumpy, and looking forward we have a strong pipeline and expect strong bookings in Q2. Turning now to revenues. Revenues for the quarter were $11.4 billion, a 7% increase in U.S. dollars and nine percent in local currency. Consulting revenues for the quarter were $6.4 billion up 7% in U.S. dollars and 9% in local currency. Outsourcing revenues were $5.0 billion, up 7% in U.S. dollars and 9% in local currency. Looking at the trends and estimated revenue growth across our dimensions; technology Services and strategy and consulting services, both posted strong high single-digit growth and operations continued its trend of double-digit growth for the 24th consecutive quarter. Taking a closer look at our operating groups. H&PS grew 13% in local currency, driven by double-digit growth in both health and public service, including double-digit growth in North America and growth markets and strong growth in Europe. Products grew 12%, reflecting continued strength in our largest operating group, with double-digit growth in life sciences and consumer goods, retail and travel services. We continue to see strong demand for our services across all three geographies. Resources grew 7% in the quarter, with double-digit growth in energy and strong growth in utilities. Overall, we saw double-digit growth in both Europe and gross markets. Communications, Media and Technology delivered 7% growth, reflecting continued double-digit growth in software and platforms, with double-digit growth in Europe and strong growth in gross markets. Finally, Financial Services grew 6% this quarter. Insurance again grew double-digits and we saw continued improvement in banking and capital markets globally. Overall, Financial Services delivered double-digit growth in growth markets and strong growth in North America, partially offset by contraction in Europe. We expect to see continued challenges and banking capital markets in Europe and the near-term. Turning to the geographic dimension of our business. I am very pleased with the continued demand across all three of our geographic markets, which illustrates the diversity of our business which continues to serve us well. In North America we delivered 9% revenue growth in local currency, driven by double-digit growth in the United States. In Europe revenue grew 7% in local currency with double-digit growth in Italy, Germany and Ireland and high single-digit growth in France. And we delivered another very strong quarter in growth markets with 13% growth in local currency led by Japan, which again had very strong double-digit growth. We also had double-digit growth in Brazil and Singapore. Moving down the income statement. Gross margin for the quarter was 32.1% compared with 31.1% for the same period last year. Sales and marketing expense for the quarter was 10.5% compared to 10.1% for the first quarter last year. General and administrative expenses were 6.1% compared to 5.6% for the same quarter last year. Operating income was $1.8 billion for the first quarter, reflecting a 15.6% operating margin, up 20 basis points compared with quarter one last year. Our effective tax rate for the quarter was 23.6% compared with an effective tax rate of 19.8% for the first quarter last year. Diluted earnings per share were $2.09 compared with EPS of $1.96 in the first quarter last year. Days service outstanding were 43 days compared to 40 days last quarter and 42 days in the first quarter of last year. Free cash flow for the quarter was $692 million, resulting from cash generated by operating activities of $787 million, net of property and equipment additions of $95 million, and our cash balance at November 30th was $5.8 billion compared with $6.1 billion at August 31st. With regard to our ongoing objective to return cash to shareholders, in the first quarter we repurchased or redeemed 3.8 million shares for $729 million at an average price of $189.65 per share. At November 30 we had approximately 3 billion of share repurchase authority remaining. Also in November we paid our first quarterly cash dividend of $0.80 per share for a total of $508 million. This represents a 10% increase over the equivalent, quarterly rate last year and our Board of Directors declared our second quarterly cash dividend of $0.80 per share to be paid on February 14, also a 10% increase over the equivalent quarterly rate last year. So in summary, we were very pleased with our Q1 results and we are off to a good start in fiscal ‘20. Now, let me turn it back to Julie. Julie Sweet : Thank you KC. Our first-quarter performance reflects continued strong demand for our services, as well as the disciplined execution of our growth strategy. Accenture is uniquely positioned to partner with our clients to successfully achieve transformation across the enterprise. We have unparalleled technology capabilities and ecosystem partnerships, deep industry and function expertise, a focus on continuous innovation, digital at scale and incredibly talented people. We create value for our clients from building out their digital core to helping them innovate across their growth agenda and realize significant value from optimizing their operations. ‘The New’ digital, cloud and security is now our core, accounting for about 65% of total revenues, and we are focused on continuous innovation across these services. In cloud for example, we have more than 300 patents and pending patent applications. We have 90,000 cloud professionals and are the leading global partner of Amazon Web Services, Google Cloud Platform and Microsoft Azure. And I am very pleased that we just launched MyNAP, a groundbreaking new platform to help clients accelerate their cloud transformation. Identifying the right cloud solutions can be complicated, so the key is stimulating and testing a scaled-up model to quantify value and build the business case, giving clients confidence in the potential benefits so they can move forward quickly. This is just another great example of our continuous innovation mindset and how we drive speed to value for our clients. Over the past few months, I have been spending time in many of our key geographic markets around the world, meeting with our clients, our people and our ecosystem partners. We have scale in every major market and we are the leader, number one in both North America and Europe and number three in growth markets where we continue to rapidly gain market share. As an example, we have reached scale in China with more than 17,000 people, and this is a key strategic market for us and our Global Clients. Let me double-click on our major markets. Our eight largest countries as we move around the world; the U.S., the U.K., Italy, Germany, France and Spain and Europe and Japan and Australia in the growth markets. These countries account for nearly 80% of our revenues and they all generate $1 billion or more in annual revenues. They also are home to more than 85% of our 200 diamond clients, our largest relationships with the world's leading companies. Our extensive global presence has always positioned us uniquely in the market to deliver best-in-class global programs for the largest multinational companies. And today it has created yet another competitive advantage, which is the ability to create value at speed and scale by leveraging our global expertise tailored to the local context. Leveraging our global network of more than 100 innovation hubs that we have built over the last few years, we can bring innovation from every corner of the world to our clients. And while the theme of transformation is common across the globe, it plays out at the intersection of industry technology and geography. We see growing and significant differences by country, while at the same time our global footprint gives us the opportunity to leverage our learnings and our talent from around the world to accelerate outcomes for our clients. Let me bring this to life with a few examples from our Resources business. The ways in which energy is produced, consumed and distributed are changing dramatically. But the shape and pace of the change and the opportunities for Accenture are different around the world. In Europe, we are working with clients in France and Italy to help them succeed in the transition to a low carbon economy. For Engie, the French Multinational Utility company, we are teaming with sales force and velocity, which we have a minority investment on a global unified CRM platform for more than 15,000 employees. The new platform gives Engie a common intelligent view of its customers across more than 70 countries and empowers employees to strengthen customer relationships and provide personalized recommendations to support Engie’s new zero-carbon transition strategy for the Fortune Global 500. In Italy we are collaborating with Snam, which operates the largest gas transmission network in Europe, to identify Internet-of-Things technologies on the Microsoft Azure platform, leveraging connected devices, as well as machine learning, artificial intelligence and advanced analytics to optimize the monitoring and maintenance of energy infrastructure to make it smarter and more sustainable, as well as more efficient. In the United States we are working with Southern Company, the gas and electric utilities, which is building the first new nuclear reactor in the U.S. in 30-years. Partnering with Southern Company, Accenture built the new cloud-based construction work management system on the Amazon GovCloud platform from scratch in just six months. This enabled Southern Company to expand and accelerate plant construction as it strives to bring this clean carbon-free energy production online for 500,000 homes and businesses. Let me pause for a moment and take a step back. Each of these examples demonstrates the power of our unique business model, which spans services from strategy to operations, with digital and technology at the core. This enables us to create the multidisciplinary teams that are needed to not just create a vision of transformation, but to execute and scale and give our clients the confidence that they will achieve real value. If you think about the environment our clients are navigating, unprecedented change, the need for speed and major investments to drive their enterprise transformation, our unique model and capabilities give us an incredible competitive advantage to be the partner of choice for the world's leading companies. Now, let me turn to Accenture’s greatest and undeniable strength, which is our people. During the first quarter the number of Accenture people surpassed 500,000, a significant milestone. I want to thank each and every one of them for their incredible commitment and dedication to serving our clients. As always, we continue to strengthen our leadership team, which now includes more than 8,000 Managing Directors. I was delighted that earlier this month we promoted 787 new Managing Directors and Senior Managing Directors, including a record 260 new women Managing Directors, accounting for 36% of the promotions to this level. And before I turn it back to KC, I just want to mention some of the great recognition we have recently received for our long-term success and cutting-edge capabilities. We are especially proud that Droga5, which joined Accenture Interactive last April was named Agency of the Decade by Adweek, which characterize Droga5 as a dominating creative force. Interbrand ranked Accenture number 31% on its list of top global brands, our highest ranking ever. Our brand value increased 14% for the second year in a row, and I want to recognize Amy Fuller, our Chief Marketing Officer, her team and all our people for this great work to continually strengthen the Accenture brands. With that, I will turn it over to KC to provide our updated fiscal ‘20 business outlook. KC? KC McClure : Thanks Julie. Now let me turn to our business outlook. For the second quarter of fiscal ‘20 we expect revenues to be in the range of $10.85 billion to $11.15 billion. This assumes the impact of FX will be about negative 1% compared to the second-quarter fiscal ‘19 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year ’20, based on how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our result in U.S. dollars, will be approximately negative 1% compared to fiscal ‘19. But for the full fiscal ‘20 we now expect our revenue to be in the range of 6% to 8% growth in local currency over fiscal ‘19. For operating margin we continue to expect fiscal year ‘20 to be 14.7% to 14.9%, a 10 to 30 basis-point expansion over fiscal ‘19 results. We continue to expect our annual effective tax rate to be in the range of 23.5% to 25.5%. This compares to an effective tax rate of 22.5% in fiscal ‘19. For earnings per share, we now expect full-year diluted EPS for fiscal ‘20 to be in the range of $7.66 to $7.84 or 4% to 7% growth over fiscal ‘19 results. For fiscal ‘20 we continue to expect operating cash flow to be in the range of $6.35 billion to $6.75 billion; property and equipment additions to be approximately $650 million and free cash flow to be in the range of $5.7 billion to $6.1 billion. Finally, we continue to expect to return at least $4.8 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so we can take your questions. Angie? Angie Park : Thanks KC. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask the question. Operator, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions]. Your first question comes from the line of Lisa Ellis from Moffett Nathanson. Please go ahead. Lisa Ellis : Hi, good morning guys and happy holidays! I just wanted to ask a question on acquisitions. I think KC you mentioned you are expecting to spend up to about $1.6 billion on acquisitions this year. Can you just give a little bit more color on the expected contribution to revenue growth this year from acquisitions and then also what you're, you know what your focus areas are for M&A? Thank you. KC McClure : Yes, sure. So happy holidays to you to Lisa. In terms of our expected contribution to revenue in full fiscal year ‘20 from inorganic, we continue to expect it to be about 2%, which was in line of what we also had last year. And in terms of focus areas, I’m going to hand it over to Julie. Julie Sweet : Great! Let me give you a color. So happy holiday to you too Lisa and thanks for joining us. So our acquisition strategy continues to be centered really around three focused sales – focus areas. The first is scaling in the hot skill areas where we see a big market opportunity. The second is continuing to add skills and capabilities in The New. And then the third is deepening our industry and functional expertise. And as you might imagine, acquisitions don't always fit exactly into one of those three; they often cross those. So let me just give you like a little bit of sense of just the three that we just announced in the last few months. So if you start in the U.S., we announced that we're buying, we're acquiring Clarity Insights, which is a leading provider of data science and applied intelligence capabilities. They are very focused on three industries; Healthcare and Financial – banking capital markets and insurance, which are priority areas for us globally and in particular in the U.S. And at the same time they bring with them accelerators that will help us bring more speed to value for our clients, and they are focused on one of our most important markets, so they are helping us scale where we already have scale, but it's a very hot area in Applied Intelligence, because it really crosses our services. Then if you move around the world and go to Europe, Silveo which we announced and expect to close actually just in a couple of days which is headquartered in London, they are a company that's focused on supply chain and manufacturing and particularly solutions on SAP and Dassault Systems which are both important partners. And so they are very much a part of our industry X.O strategy and at the same time providing scale and functional expertise in core areas for us; SAP, Dassault Systems and supply chain. And then if you move again around the world to China, where I was just there a few weeks ago, we're really excited about future move automotive. I actually spent a few hours there myself, really touching and feeling the work that they're doing and they are digital and mobility service provider for the automotive industry in China, incredibly advanced right, working with leading automakers there and what's so exciting is not only does this acquisition help us really partner with our clients in China, but they are advanced services and what they are doing with the connected car is something we’ll be able to leverage and bring as innovation all around the world, because we have important clients who are not only operating in China, but in the U.S. and Europe. And so that just sort of gives you a flavor and as you can probably tell, I'm so enthusiastic about what our team is delivering here, because it's very much targeted on making an impact close to clients in our markets around the world, but also bringing us skills that we can leverage around the world. Lisa Ellis : Terrific! Thank you. And then maybe just for my follow-up, I know this is the time of year you are in a lot of discussions with clients around your 2020 programs with them. What are you seeing that's going to be different about 2020 in terms of the types of work you are doing with clients compared to 2019? Thanks. Julie Sweet : It's very much more of the same in the sense of enterprise-wide transformation and then a focus on innovation, particularly around the growth agenda, and then continuing to optimize operations, and that really, that's been the theme and it continues to be the theme. In fact, I think since September 1 I've met with over 100 C-suite executives, and I'm very confident of – that we have a pulse on the demand and that we have the capabilities they need. Operator : Your next question comes from the line of Joseph Foresi from Cantor Fitzgerald. Please go ahead. Joseph Foresi : Hi! I wondered if we could talk about the cadence on bookings. I know that we’ve – and you said many times in the past that it can be lumpy. We saw it a little bit light ending I guess this quarter. So maybe you could talk about how you see the cadence and what we should expect from a seasonality perspective. KC McClure : Yes sure. Hey Jos, thanks for joining. Yes, so you're right, you've heard us talk about – and you know us very well. You know that our history of bookings, you do see lumpiness. And I think really the most important thing and that's within that is that we're very pleased with the demand for our services in the marketplace, and if you think about that in the backdrop of bookings. So we're coming off a quarter, Q4, which was our records bookings quarter, and that was a record by more than $1 billion. We had strong bookings that came in the range that we expected in quarter one, right, and we talked about that last quarter. We tend to have it seasonally, lower quarter in one, so again this met our expectations, and that very importantly we have a strong pipeline and we see strong bookings in quarter two. And I think the other part of demand that's important, and you saw this in our results in the first quarter as well, is that we have broad-based demand in our revenue, right, and we far exceeded the upper end of our guidance by more than $160 million. So you would see that bookings demand – you see the demand in the market coming through our bookings, both in terms of what we've done last quarter, bookings coming in the range that we expected this quarter, a strong pipeline with strong bookings expected in quarter two, as well as broad-based, over-delivery of our expected range in the first quarter in revenue, which allowed us to increase our revenue range for the year. Joseph Foresi : Got it. And then maybe you could talk a little bit about your expectations from a demand perspective across the verticals and the geographies. I’m particularly interested in Financial Services and what's going on with the European banks, but any color you know from a very high level across those geos and verticals would be very helpful? And happy holidays as well. Julie Sweet : Hi Joe, this is Julie. Happy holidays! So maybe just kind of going across, let me just start with Financial Services, right. So on the Financial Services side, as you say Europe continues to be a challenging market in the industry and for us, and so we expect that we're going to continue to face challenges there, particularly in the UKI right. But overall our Financial Services business, if you look at North America and the growth markets, you know it remains robust, right. But we continue to expect challenges in Europe. If you just look at – take it up a little [ph] across the dimensions of our business and our industries, North America delivered very strong results. We are seeing continued momentum there. We have a very strong business in Europe, and so while we've got pockets of pressure in Financial Services and the other area I would call out in Europe is we have seen pressure in industry and automotive. But otherwise Europe remains a strong business, and in fact 12 out of 13 of our industries this quarter had positive growth. And then the growth markets keep being strong really across-the-board. The only other place of pressure that I would call out was in North America, we did also see not surprisingly some pressure in industry and automotive. Operator : Your next question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien-tsin Huang : Thanks, good morning. Good revenue acceleration here. I wanted to first ask on gross margin expansion. Actually it's one of the largest increases we've seen in some time looking at the model here. Would you attribute that large expansion to and then same thing on SG&A, that spend was up, can we assume that that's driving some prospecting and deal pursuit costs given your positive comments on bookings? KC McClure : Yeah, so thanks for the question and hello Tien-tsin. In terms of how we look at our business as you all know, we first always start with looking at operating margin, and because the way our payroll costs works as you well know Tien-tsin, based on the activities that we have people doing from quarter-to-quarter and the demand that we see in the marketplace, you can see differences in the different segments of our income statement. So as it relates to the gross margin increase this quarter, it is tied to the sales and market, what's happening in sales and marketing, where we have more people out working our pipeline. So that will help our gross margin, and then you'll see the offsetting impact in sales and marketing. And you're right, that does tie in to the statements we've made of having – continuing to have a very strong pipeline. Tien-tsin Huang : Okay. No, that’s helpful. KC, real quick if you don’t mind. Just on the consulting revenue growth, that has been improving here and I guess widening the gap to your consulting bookings growth or pattern. What explains the faster conversion? Thanks for the second question, I appreciate it. A - KC McClure : Yes, so we really haven't seen any change in conversion Tien-tsin of our overall bookings, just overall to revenue. You know that can be within a range and that can vary. So as we look at what we've done in consulting bookings, we feel very good with our bookings for the quarter, as well as our pipeline, and see also strong bookings in quarter two as well in consulting. Then if you look at what our – production of our bookings in relation to revenue, you know we look at that over a prolonged period of time, and so we're still in the zone that we like, which is a book-to-bill ratio of about one point. A - Julie Sweet : Yes, and Tien-Tsin hi. Hello! Nice to talk to you. And I would say, you know as we talked about last quarter, you know from the revenue side we are very pleased with mid-to-high single-digit growth and you're going to have some quarters here in mid, you have some quarters here in the high-growth, that's the zone we want to be in, because the context for our strategy and consulting business, you need to look at it in the context of our overall business. You know big drivers of growth are the fact that we can bring together these multi-disciplinary teams to drive enterprise-wide transformations, right. That is our huge competitive advantage. It's the demand that we see in the market, right, and it's our ability to actually go from strategy to operations, to feel these teams that really is what drives big growth in our business and of course that at the core we've got the digital and technology. So we look at our strategy and consulting business in the context of the needs we are trying to fulfill for our clients, which are very much around these multidisciplinary teams that span our services, which frankly nobody else can do, right, at our scale. Operator : Your next question comes from the line of Darrin Peller from Wolfe Research. Please go ahead. Darrin Peller : Thanks guys. You know it's amazing to see the headcount, where it is right now, and so if you could just quickly comment on you know your thoughts on talent management and going forward from this kind of a level, your ability to hire what you need, what you've always been obviously extremely strong at, and then maybe just comment on the linearity and the model now; maybe looking forward given where you are around the new and the type of revenue? Julie Sweet : Sure. I mean maybe just to start with, you know our philosophy right around people and size, because you know every time we hit a milestone, it's always ‘can you keep doing it? Are you able to get the people?’ and so first of all our philosophy is that we can continue to grow in size as long as what our people are doing is the high-value work that drives our financial objectives, right, and so we're very focused on what our people are doing versus how many people we have, because the size part of it is about our ability to manage and we're really good at that, right. Like over the years we've made the adjustments, we've done the things we need to do to focus on our clients and our people, and so the big focus for us is on what our people are doing, which ties to the demand that we see in the market, right. We are early innings of digital transformation, enterprise-wide transformation. We are constantly seeing new emerging tech. You know for example, we're doing some great work with [Inaudible] Japan where we're putting in one of the most significant early examples of using block-chain to drive their business or creating a platform that allows their customers to access other financial products. That's very new cutting-edge, right, we're still at the beginning. So we see the demand for these new high-value services still quite early. Then you look at the model itself. We don't see the model today as being linear. I mean one of the things that people often talk about is well, you’re continuing to grow. But underneath that is we've been automating; we've been using people and their talents differently. I mean we often talk about the automation in our operations business where there, we actually didn't let people go. We automated and then up-skilled them to do the higher-value work, but not just in operations, but if you look at our other assets. So we are constantly – we don't have a linear model today, because we are constantly doing what we're doing for our clients, is leveraging technology to change the mixture of how we are using tech and our people to again continue to focus on the higher-value services, and so you know we are – and hopefully that gives you kind of the color for how we think about our model. Darrin Peller : Yeah, no that is helpful. Just a quick follow-up is on pricing. I mean again, it seems like as you've trained your people to do the higher part of the food chain, you are able to pass that through. Any changes on that pattern or has pricing held up, just given competition has also picked up for digital. Thanks guys. KC McClure : Yeah, so pricing – you know the environment for pricing remains competitive, right, and that's always the nature of the work that we do. Now within that, we are able to see pricing differentiation in areas where we're differentiated, where we've invested, and we do continue to see that we have pricing improvement in some areas of our business continuing in this quarter. It’s a constant focus for us and that really is the key part of – the key first lever to really driving our margin expansion pricing. So we are always – we always have been and will always continue to be focused on driving pricing that's the right value for the client and for Accenture. Operator : Your next question comes from the line of Harshita Rawat from Bernstein. Please go ahead. Harshita Rawat : Hi, good morning. Thank you for taking my question. I want to ask about industry X.O. It's a relatively new business for you and somewhat early innings, so can you talk about the journey in Interactive which was a new business for many, many years ago and now a huge revenue contributor. So can you talk about that journey, the lessons there and how you plan to go about scaling Industry X.O. Thank you. A - Julie Sweet : Thanks Harshita, that's a great question, and we often you know internally talk about the analogies, because you'll remember with Accenture Interactive, that growth came from a mixture of both, inorganic and organic, and very much fueled though by the power of Accenture. So even as we were bringing in, as we've been bringing in skills and capabilities that we didn't have traditionally like a Droga5 and before them Monkeys and Kalorama [ph], these creative agencies, the value proposition for our clients is to take these other capabilities and pair them with the traditional strengths of Accenture for example on building digital platforms, and that is what has been able to drive the growth in Accenture Interactive. And as we look at Industry X.O, this is an opportunity for us to serve areas of the company that we serve today, but not as much at scale. Just like with Accenture Interactive we weren't as relevant to the CMO as we are today. Once we've built Accenture Interactive as well as you know new business creation and Industry X.O. Well, of course we have served and we have practiced, you know still significant practices in manufacturing and supply chain, Industry X.O is really about the digitization of manufacturing, the creation of connective products, and then also these digital platforms and engineering around the software. And while again we're in – just like Accenture Interactive when we began were in parts of these, what we're doing is we're adding the complementary skills that will allow us to take the power of Accenture and really scale and bring all of that to our clients who themselves are going through a whole change, because manufacturing is now being digitizing and it's the convergence of IT with operating technology, and we expect to grow Industry X.O as we have with Accenture Interactive through a combination of organic and inorganic. So you saw us last year buy companies like Mindtribe and Pillar in the U.S., which are all about connected products. We saw the future move acquisition I just mentioned in China, which is about automotive and Connected Services; Silveo in London, which is just the recent, and that's really about digitizing, manufacturing, leveraging our ecosystems. But at the same time we're building on the scaled digital and technology capabilities, which is what our clients need to do as we all go through, where we see this transformation to digitize these areas of the company that haven't been digitized in the same way that you have the customer front-end. Harshita Rawat : Thank you very much. Operator : Your next question comes from the line of David Koning from Baird. Please go ahead. David Koning : Maybe my first question, just when we look back at some of the metrics you've given around The New you know in the percent of total revenue and we go back a couple of years, it looks like that was drilling 20% to 30% and some of the legacy was declining maybe low double. Today it looks like The New might be growing low-to-mid teens and legacy has actually kind of improved to maybe slightly declining. I’m just wondering that pace of change, you know what might be driving that and if that's even the right way to think about it. KC McClure : Yeah, hi Dave. So in terms of looking at The New, I think really what you're touching on is the growth rates that we've had over the last few years and we continue to have very strong growth rates in The New. And as you look at that scale right of our business, I mean you would anticipate that even very strong growth rates would slow a bit, but again be very strong just based on scale. And if you look at the other portion of our business, let's call it the non-New or the core, we continue to see that that is stabilizing; it's been decreasing at about a mid-single digit rate and that's by design, that's our strategy, but it's been pretty consistent over the last few quarters. David Koning : Great, thanks! And just one quick follow-up just on accounting. There was another income line in Q1 that was about $11 million positive this quarter. Last year that line was about $25 million to $35 million negative all through the year. Was there a one-time item in Q1 and does that more normalize the rest of the year. KC McClure : Yeah, so we did have this quarter a small benefit below operating income where we had, we indeed do have non-operating income this quarter as opposed to what you saw in quarter one of last year, which was non-operating expense. So as a reminder last year, we adopted a new revenue - a new accounting standard that require that we marked our investments to fair market value, and while we don't have a large investment portfolio, what you will see Dave from time-to-time that may cause a little bit more variability in what we have a non-operating income and non-operating expense. In this quarter we did have a gain in non-operating income on some of our investments and that was offset by some FX losses as well, but it was a net gain this quarter in non-operating areas and it will fluctuate probably slightly more than it has in the past, really just because of that accounting change. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Hi guys, good morning. Just wanted to ask about the beat and the upside surprise. For you guys was it in consulting in particular, because I know a lot of investors were concerned consulting was weakening and actually it strengthened. So just trying to figure out if that also surprised you guys or was there something else that created the upside. KC McClure : Yeah, so we were really pleased overall with our revenue growth rate for this quarter Bryan, and obviously at 9% growth, which was as you mentioned a beat, $160 million higher than we expected. But the other thing that we were very pleased with is the fact that it was also a broad-based over-delivery. Now if I had to point out two areas in particular, I'd point to health and public service, particularly in North America, which was strong both in the health, industry, as well in the public sector industry and that's a statement overall for North America including our federal practice. And then also products that continue to have very good [ph] in life sciences, as well as consumer goods, retail and travel. And so what you'll see is that we do and we continue to expect Bryan that we will have for the full-year consulting in the mid-to-high single-digits growth and outsourcing also in the mid to high single growth rate. Julie Sweet : Yes, and Bryan I would just add – this is Julie, that again as I talked about earlier, although obviously we look at strategy and consulting, tech services and operations separately and report on that, you know remember that our focus really has been because of the demand we see in the market, on our unique business model that brings these services together, and so it's not so much. You know you can't really – for us the way we manage our business, it's not that wait, there's a big surprise in strategy consulting, because KC's giving the answer around industries and clients because a lot of our work is actually bringing all of these services together to meet the needs we're seeing in the market. And so while we do report this to give you that insight into the types of work, when we are thinking about what's happening it's much more focused, it is only focused on clients, what are their needs, and how are we bringing these services together. And that really is the power of Accenture, is that we're able to bring these services together. And if you think about what our clients need right now, I mean as I said, I literally in the last four months, almost four months spent time with over a 100 C-Suite executives and top of mind for them is the importance of making sure they are going to get value. And that's why they want to partner with us, is because we're bringing the teams and we're able to really give them confidence in outcomes and we're able to point to the execution we've done with other clients and demonstrate the value, and that we're bringing that learning. And I think particularly as we see this inflection in the marketplace, moving from pilots and use cases to this enterprise-wide transformation, multiyear programs, it's more important than ever that we're able to bring these services together for our clients. Bryan Keane : That's helpful and just as a follow-up on Europe, it was up 7% constant currency; I think that's up from four last quarter. Again a lot of investor concern around Europe, but you guys are showing an acceleration there. You talked about I think 12 of 13 industries showed improvement. So I guess I'm a little surprised to hear about that improvement. Can you just talk about broadly what's going on in Europe and why you are seeing that improvement? KC McClure : Yeah, and I will maybe just reiterate a couple of the points, and some of that you also mentioned. So we were pleased with our business in Europe this quarter and we did have broad-based growth and it wasn't 12 of the 13 industries. And importantly it was high single to double-digit growth and nine out of that 13, and so that's really important to us, and that's something that we're very focused on and we're very proud of, the overall broad-based nature of our business in Europe and the diversity that we have. Then I think you'll see it has been and continues to provide some durability in that market. Now as we've mentioned, you know we do continue to have a focus on banking capital markets in Europe and that's particularly in the UK. So we do have some more work to do in that area, and as also as Julie mentioned, we do have some pressure in industrials and the automotive as well in Europe. But I just would point back to the double-digit growth that we Italy, Germany and Ireland as well. And so we're very focused on continuing in that market to drive the transformation that Julie was talking about, the she sees and talks with all the C-Suite about in her travels throughout the world. Operator : Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Julie you mentioned Droga5, I’m going to take you up on that one. Obviously Accenture spent many years growing the various parts of that business, steadily expanding from the technology part creative. Droga5 recently won The Kimberly-Clark Childcare account and based on our checks, you are increasingly going head on with the traditional agencies for what I'd call the whole shooting match. Can you speak to what you're seeing there specifically and whether you think your missing any pieces, so you could go when full accounts end-to-end what the traction you currently have there is? Julie Sweet : Sure. Well, Kimberly-Clark is a great example of what we see is the demand in the market, which is for a company to bring together not only world-class creative, but the digital capabilities, as well as the advisory capabilities to truly transform the customer experience, right. And you’ll hear that term now a lot. We believe we're the only company today that actually has all of the capabilities that are needed in order to deliver a very different customer experience. And so while I know you think of it as going up straight against the agencies, what we think about it is what the clients are looking for is not just the creative agency and you see that in the industry as the industry, the broader creative industry is also expanding into these capabilities. The fact of the matter is very difficult to have creative, it's equally difficult to have depth and breadth in the digital and technology capabilities that our clients need, and so we believe that our competitive advantage here is to have such strong creative capabilities coupled with, like just unparalleled digital and technology capabilities at a huge scale in every major market. Because remember Accenture Interactive, we have built around the world, right, and we've got it – you know and I was in the studios in China, we have it in Australia, across Europe, as well as the U,S. So we're extremely proud of the work that Accenture Interactive under the leadership of Bryan Whipple, but his entire team have done, that its powered by the rest of Accenture, right, all of these skills and capabilities. That is very hard for anyone to replicate in our view. Ashwin Shirvaikar : Got it, makes sense. The second question is, you mentioned the incremental elements of nonlinearity in the model in the prior question on headcount and revenue growth. What's the longer-term impact on margins and cash flow; if I can extend that question to those metrics? KC McClure : So Ashwin, in terms of how we think about those two elements, right. In terms of margin, I think it's important to just point out that we always continue to look for modest margin expansion. But more importantly to us is that we're doing more than just the modest margin expansion as you well know that goes to our bottom line. We are doing more underlying margin expansion, so that we can invest at scale in our people and in our business for long-term market leadership, so that's a key part. And on free cash flow, you know that continues to be – you know there's no change there. I mean this year you’ll see that we managed that part of our business by looking at free cash flow to net income ratio, right, and this year again it's 1.1% to 1.2%. And as you think about that, while I won't guide for that long term, you know strong free cash flow will continue to be an anchor of how we run Accenture. Angie Park : Okay, and operator we have time for one more question and then Julie will wrap up the call. Operator : Okay. Your final question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : Hi, good morning, thank you. I wanted to ask a question on how the mix of your client counterparts have changed. So if we think about enterprise budgets, can you give me a sense of how your revenue stream currently maps across an organization, whether it's CIO or the CMO budget or like board-level initiatives. And the reason I ask this, we’ve diversified the business so much over the last several years. I'm just really curious how this has evolved and how you really are mapping across the various budgets now today? KC McClure : Well, I guess what I'd say is, if you think about what we're doing with respect to, you know for example Accenture Interactive, that work is almost always a combination of marketing plus-CIO, often plus the business units right, because the work is not – you know really is around customer experience and so where the budget sits really varies by company, and some companies you'll have budget sit with the Chief Digital Officer right. So what we – our focus is less on the specific budgets and more how are we serving the different needs of the enterprise. So if you just – and remember we go back to really – we think about it in three things; building the digital core, so 40% of our business growing double-digit today is in our intelligent platform services our five big platforms, because that's all about next-gen platforms right. Similarly our cloud business is there. Then we have the optimizing operations, so you've got a $6 billion scaled business growing high single-digit to double-digit, right, which is all about optimizing and making sure that within the functions, as well as industries they've got access to the best technologies in a most efficient way. And then on top of that you have the growth agenda like Accenture Interactive which is $10 billion. We announced last quarter with strong growth, as well as the new areas like connected products and services. And so we continue to focus – our big next focus area is Industry X.O, which is growing on our historic work and manufacturing and supply chain to the new and really going after that part of the enterprise along with the market, because that's not digitized as fast to say customer experience and that's really how we think about the business. Bryan Bergin : Okay, that's helpful. And then just lastly, I heard your inorganic 2% you expect for fiscal ’20, was that close for that in 1Q as well? And happy holidays! KC McClure : Yeah, Happy holidays to you too Bryan. I mean we look at that over a full year. So I would say you know 2% inorganic for the full-year is the number that I would continue to focus on. Julie Sweet : Okay, thanks Bryan. So thanks everyone again for joining us on today's call. We are very pleased with our strong start in fiscal ‘20 as you've just heard and we are well-positioned to achieve our updated business outlook for the year. We will stay laser-focused on continuing our current momentum, capturing the opportunities in the marketplace and creating value for our clients and all of our stakeholders. I want to wish you all, our investors and analysts and everyone at Accenture and your families all the best for the New Year. And finally, I want to thank each of our people around the world, you are what makes Accenture unique and special. I will see everyone on the road. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,020	1	2020Q1	2020Q2	2020-03-19	7.54	7.552	7.975	7.973	9.90978	22.05	25.74	Operator : Ladies and gentlemen, thank you for standing by and welcome to Accenture’s Second Quarter Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Now, I’d like to turn the conference over to your host, Angie Park, Managing Director and Head of Investor Relations. Please go ahead. Angie Park : Thank you, operator and thanks everyone for joining us today on our second quarter fiscal 2020 earnings announcement. As the operator just mentioned, I am Angie Park, Managing Director, Head of Investor Relations. On today’s call, you will hear from Julie Sweet, our Chief Executive Officer and KC McClure, our Chief Financial Officer. We hope you have had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today’s call. Julie 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. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2020. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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, 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 Julie. Julie Sweet : Thank you, Angie and thank you everyone for joining us. Today, we are very pleased to announce our outstanding financial results for the second quarter and first half of fiscal ‘20. I want to start by thanking our leadership team and all of our people for their dedication to our clients and to delivering on our commitments. And it is because of our leaders and people that I have absolute confidence in our ability to adapt and successfully navigate the unprecedented global health crisis the world is now facing. I am incredibly proud of how our leadership team and people have rallied in the face of this crisis and works 24/7 to ensure the safety and well-being of each other and to continue to serve our clients at this time of great need. KC and I know that you are keenly interested in understanding how the coronavirus is impacting Accenture and our people. First, we are going to cover our starting point, KC will take you through Q2 results and I will give you color on the strength of our business and our growth strategy as we exited H1. Then I will specifically address the current environment in light of the coronavirus and how we are managing the impacts. Finally, KC will give you our updated business outlook. KC, over to you to go through our strong Q2 results. KC McClure : Thank you, Julie and thanks to all of you for taking the time to join us on today’s call. Let me start by saying that we were very pleased with our overall financial results in the second quarter, which were aligned with our expectations and completed a very strong first half of the year. Both our Q2 and H1 results demonstrate the power of our highly differentiated growth strategy. A key intent of our growth strategy is to create durability in our revenue range at a level that is consistently above the market taking share and strengthening our position as a leader. Against this objective, we have created a unique footprint that includes scale and leadership in the world’s largest and most critical geographic markets and industries. This footprint, along with our highly relevant offering, from strategy and consulting to operations, is key to being a market leader in helping our clients the world’s leading companies rotate to the new. Now, let me begin by summarizing a few of the highlights for the quarter. Revenue growth of 8% in local currency was at the top end of our guided range for the quarter and reflected growth in 12 of our 13 industry groups, with 5 growing double-digit. Revenue continued to be driven by strong double-digit growth in digital, cloud and security related services and broad-based growth across our business dimensions. We continue to expand our leadership position with growth we estimated to be more than 2x the market. Operating margin was 13.4%, an increase of 10 basis points for the quarter and 20 basis points year-to-date, reflecting strong underlying profitability as we continue to invest in our business and in our people to position us for long-term market leadership. We delivered very strong EPS of $1.91 which represents 10% growth compared to last year and includes a 1% FX headwind. And finally, we generated significant free cash flow of $1.4 billion in the quarter and $2.1 billion year-to-date. We continue to execute on our strategic capital allocation objectives with roughly $2.7 billion return to shareholders via dividends and share repurchases year-to-date. And we have made investments of $584 million in acquisitions primarily attributed to 17 transactions in the first half of the year. And we continue to expect to invest up to $1.6 billion in acquisitions this fiscal year. With that, let me turn to some of the details starting with new bookings. New bookings were a record at $14.2 billion for the quarter and surpassed our previous all-time high by $1.3 billion. We had very strong overall book-to-bill of 1.3 in the quarter and 1.1 year-to-date. Consulting bookings were $7.2 billion, a record high with a book-to-bill of 1.2. Outsourcing bookings were also a record at $7 billion with a book-to-bill of 1.4. We were very pleased with our new bookings which represent 22% growth in local currency and reflect our unique position in the market and continued strong demand for our services. Bookings continued to be dominated by high demand for digital, cloud and security related services which we estimate represented more than 65% of our new bookings in the quarter. Turning now to revenues, revenues for the quarter were $11.1 billion, a 7% increase in U.S. dollars and 8% in local currency. Consulting revenues for the quarter were $6.2 billion, up 7% in U.S. dollars and 8% in local currency. Outsourcing revenues were $5 billion, up 6% in U.S. dollars and 8% in local currency. Looking at the trends and estimated revenue growth across our dimensions : strategy and consulting services posted strong high single-digit growth; technology services grew mid single-digits; and operations continued its trend of double-digit growth. Taking a closer look at our operating groups. H&PS led all operating groups with 15% growth in local currency driven by double-digit growth in both health and public service. Double-digit growth in North America was driven by our U.S. federal business and we also had double-digit growth in the growth markets. Products grew 10%, reflecting continued strength in our largest operating group, with double-digit growth in life sciences, consumer goods and services as well as retail. We are very pleased with the double-digit growth in both North America and growth markets. Communications, Media and Technology delivered 5% growth, reflecting continued double-digit growth in software and platforms. We had strong growth overall in the growth markets and solid growth in both North America and Europe. Resources grew 5% in the quarter driven by double-digit growth in energy with double-digit growth in chemicals in Europe and in the growth markets. Overall, we saw double-digit growth in the growth markets and strong growth in Europe. Finally, Financial Services grew 3% this quarter with solid growth in insurance. We continued to see modest growth in banking and capital markets globally, with strong growth in North America and in the growth markets and continued declines in banking and capital markets in Europe. Overall, in Financial Services, we continued to see double-digit growth in the growth markets and strong growth in North America partially offset by contraction in Europe. Turning to the geographic dimensions of our business, in North America, we delivered 11% revenue growth in local currency driven by double-digit growth in the United States. In Europe, revenue grew 2% in local currency with double-digit growth in Germany, Italy and Ireland offset by a decline in the UK. And we delivered another very strong quarter in growth markets with 11% growth in local currency led by Japan, which again had very strong double-digit growth as well as double-digit growth in Brazil. Moving down the income statement, gross margin for the quarter was 30.2% compared with 29.2% for the same period last year. Sales and marketing expense for the quarter was 10.4% compared with 9.8% for the second quarter last year. General and administrative expense was 6.4% compared to 6.2% for the same quarter last year. Operating income was $1.5 billion in the second quarter, reflecting a 13.4% operating margin, up 10 basis points compared with Q2 last year. Our effective tax rate for the quarter was 17.1% consistent with the effective tax rate for the second quarter last year. Diluted earnings per share were $1.91, an increase of 10% from EPS of $1.73 in the second quarter last year. Days service outstanding were 39 days compared to 43 days last quarter and 40 days in the second quarter of last year. Free cash flow for the quarter was $1.4 billion, resulting from cash generated by operating activities of $1.5 billion, net of property and equipment additions of $165 million. Our cash balance at February 29 was $5.4 billion compared with $6.1 billion in August 31. With regards to our ongoing objectives to return cash to shareholders, in the second quarter, we repurchased or redeemed 4.7 million shares for $970 million at an average price of $206.73 per share. As of February 29, we had approximately $2.8 billion of share repurchased authority remaining. Also, in February, we paid our second quarterly cash dividend of $0.80 per share for a total of $511 million. This represented a 10% increase over the equivalent quarterly rate last year and our Board of Directors declared our third quarterly cash dividend of $0.80 per share to be paid on May 15, also a 10% increase over the equivalent quarterly rate last year. So, at the halfway point of fiscal ‘20, we have delivered very strong results. Even in the current environment, we remain extremely focused on achieving our longstanding financial objectives bring factors in market and taking share, generating modest margin expansion, while at the same time investing its scale for long-term market leadership, generating strong free cash flow and returning cash to shareholders. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. So, as we reflect in where we are for the first half, we delivered record bookings of $24.5 billion, revenue growth of 8% in local currency, 20 basis points of operating margin expansion and 8% increase in earnings per share and $2.7 billion in cash return to our shareholders, which means we exceeded H1 in a clear position of strength delivering outstanding results, taking market share and continuing to successfully execute our growth strategy. In H1, we continue to see how our unique business model, which spans services from strategy and consulting to operations, resonates with our clients who seek speed to value and our unparalleled digital and technology capabilities, ecosystem partnerships, deep industry and functional expertise, and incredibly talented people are making the difference. Let me give you color on the demand we saw from our clients in Q2 and H1 overall. This quarter, we had 18 clients with new bookings over $100 million and operations hit a milestone of 25 consecutive quarters of double-digit growth. Let me double click on operations. First of all, congratulations to the entire operations team on this remarkable achievement. In operations where we continue to lead the market at nearly twice the size of our largest competitor, we have unparallel capabilities to create value for our clients by delivering tangible business outcomes at speed by leveraging our SynOps operating engine. This engine uses a truly unique approach combining data, applied intelligence and emerging technologies with human expertise to reinvent business processes and enable intelligent operations. It allows our clients to reduce costs and achieve technology enabled enterprise transformation faster by using our engine rather than investing to build their own. Our operations capabilities span the enterprise from finance, HR, marketing, procurement, supply chain and digital manufacturing to industry specific offerings, such as banking and insurance operations, health claims operations and trust and safety, which is doing the vital work of helping to keep the internet safe. And the power of our operation services also comes from our unique business model which allows us to bring multidisciplinary teams to create new value for our clients. For example, Accenture was recently named Agency of Record for Kimberly Clark’s Baby and Childcare segment, a huge win for Accenture Interactive and their Droga5 Creative team combining creative talent with our unparalleled operations capabilities was key to our success enabling us to deliver customized, local, market-driven experiences powered by data and technology. And we are so proud that Droga5 was just recently named by Fast Company as one of the world’s most innovative companies. Our industry expertise across our 13 diverse industry groups also continues to be a core competitive advantage allowing us to bring deep industry and cross industry knowledge coupled with our technology, including our ecosystem relationships and applied intelligence capabilities to help our clients tap into new opportunities for growth. For example, for KDDI, the Japanese telecom operator, we are leveraging our data and analytics capabilities, the AWS platform and knowledge of the industry to grow their core business by improving customer retention and expanding services for existing customers. At the same time, with our broad industry expertise, we are uniquely positioned to partner with KDDI to help transform their business by expanding beyond telecom into the banking, insurance, electricity and automotive sectors. Finally, as always, let me highlight how our continuous innovation approach is driving our business. Last year, we launched Living Systems, a new approach to IT and business transformation. Living Systems is an innovation multiplier that creates value for our clients through a series of transformations, including organizational, technological and talent in an agile way, while efficiently managing applications and infrastructure for our clients. It fundamentally shifts IT to be measured by business outcomes rather than traditional metrics. This offering continues to gain momentum in the marketplace across multiple industries. For example, we are partnering with Cortiva, the major global agroscience company to enhance its performance through our Living Systems approach. We leveraged Accenture’s myWizard platform and analytics to enable Cortiva’s innovative product-driven IT organizations, while activating savings that funded essential projects during its first year as a public company. Innovation is core to our growth strategy and is in the DNA of Accenture. We just released our Accenture Technology Vision for 2020 marking the 20th anniversary of this annual thought leadership piece on the most important technology trends for the next few years. This is where we first predicted in 2013 that every business would be a digital business and today, digital is everywhere. It is the core of our business and our client’s business. This year’s research explores how enterprises need to think differently and re-imagine their fundamental business and technology approaches in a responsible human-centered way in order to deliver on the full promise and value of digital. Finally, we are incredibly proud that Ethosphere recently recognized us as one of the world’s most ethical companies for the 13th consecutive year and Fortune included Accenture under list of Best Companies to Work For in the U.S. for the 12th consecutive year ranking us #41, up significantly from #61 last year. Let me now turn to the coronavirus. We currently have two priorities, the safety and well-being of our people and continuing to serve our clients at this time of critical need. In addition to our exceptional leaders and people and strong financial hand, we are well-positioned to address the impacts of the growing global health crisis due to five key factors. First, our global management committee already operates our business as a virtual team. We do not have a headquarters, our top leaders are spread across the globe and Accenture has operated this way as a management team for over three decades. And so mobilizing to address this situation has been seamless. Second, we have a standing crisis management committee, which is led by our Chief Operating Officer, Jo Deblaere, one of our most experienced leaders. As designed, we were able to quickly activate our protocols and a team of our most senior leaders, who under the leadership of Jo and with support from across Accenture has done what can only be called a truly remarkable job. We have had these protocols in place, which we have tested and we tested for years through real and simulated crisises and they are focused in our people, business continuity, facilities management and financial impact, among other things. While we have not planned for a global pandemic, the ability to trigger these protocols and then adapt for this unprecedented situation is allowing us to move rapidly. For example, we have restricted travel and asked people to work remotely from home where possible. As of today globally, we have already enabled a very significant percentage of our people to work from home, including 60% – approximately, 60% of our people in our centers in India and the Philippines. And to give you a bit more color on how our crisis management team is operating. Some of our work cannot be done from home given the nature of the work and some employees do not have the ability to work from home. And these cases we have reduced the density of the people in our offices and centers and instituted extra hygiene procedures and social distancing protocols. We are working closely with our clients every step of the way as they also adapt to remote working environment and to-date, have not experienced any material service interruptions. Third, we are deeply experienced in working virtually and already have deployed at scale in the normal course in our business collaboration technologies and infrastructure for remote working. For example, with the largest user of teens by Microsoft in the world and in the last few weeks as we rapidly ramped more people working remotely from home, team’s audio usage has almost doubled from our typical 16 million minutes per day to almost 30 million minutes per day. We are using our deep experience of working together virtually across Accenture and with our clients to help adapt how we work together from home. Fourth, our strong corporate functions and investments we have made to digitize Accenture have always been key to our attracting and retaining talent and operating Accenture with rigor and discipline. Our top notch professionals in finance, HR, operations, geographic services, marketing and communications and CIO enabled by these significant investments in our own digitization are making the critical difference in how we are responding agility to the crisis and we are deeply grateful for their dedication and hard work. Finally, as our record bookings in Q2 demonstrate, our services are highly relevant to our clients. Our rotation to the new over the last several years now at over 60% of our business, our deep clients’ relationships with the world’s leading companies and our unique business model will enable us to help our clients succeed in this uncertain period and continue to position us strongly for the long-term. With that, I will turn it over to KC to provide our updated business outlook. KC? KC McClure : Thanks, Julie. Before I get into our business outlook, I would like to provide some context. The coronavirus crisis is rapidly evolving and has created a significant amount of uncertainty. Our third quarter and full year guidance reflects our assumptions as of today based on the best information we have regarding the potential effect of the coronavirus on our business. There are number of factors that we may not be able to accurately predict, including the duration and magnitude of the impact as well as those factors described in the quarterly filing we made earlier today. I would also like to point out that our guidance assumes a higher degree of impact to our financial results in Q3 with some improvement in the business environment in the fourth quarter either due to an improved situation or our clients having adjusted to operating in a new environment. With that said, let me now turn to our business outlook. For the third quarter of fiscal ‘20, we expect revenues to be in the range of $10.75 billion to $11.15 billion. This assumes the impact of FX will be about negative 1.5% compared to the third quarter of fiscal ‘19 and reflects an estimated negative 2% to positive 2% growth in local currency. For the full fiscal year ‘20, based on how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately negative 1.5% compared to fiscal ‘19. For the full fiscal ‘20, we now expect our revenues to be in the range of 3% to 6% growth in local currency over fiscal ‘19. For operating margin, we now expect fiscal year ‘20 to be a 14.7% to 14.8%, a 10 to 20 basis point expansion over fiscal ‘19 results. We continue to expect our annual effective tax rate to be in the range of 23.5% to 25.5%. This compares to an effective tax rate of 22.5% in fiscal ‘19. For earnings per share, we now expect full year diluted EPS for fiscal ‘20 to be in the range of $7.48 to $7.70 or 2% to 5% growth over fiscal ‘19 results. For the full fiscal ‘20, we now expect operating cash flow to be in the range of $6.15 billion to $6.65 billion, property and equipment additions to be approximately $650 million, and free cash flow to be in the range of $5.5 billion to $6 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $4.8 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let’s open it up so that we can take your questions. Angie? Angie Park : Thanks, KC. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask the questions. Operator, would you provide instructions for those on the call? Operator : Yes, thank you. [Operator Instructions] Our first question is going to come from the line of Tien-tsin Huang. Please go ahead. Tien- tsin Huang : Good. Thanks so much. I hope everyone is safe and healthy. I want to ask on the – let me ask on your commitment to protect earnings, if a recession is longer than expected, I am curious what levers or levers you have that might be different than the credit crisis in ‘08/09 to protect margins if demand comes in weaker than expected? Thanks. Julie Sweet : Yes, thanks Tien-tsin and thanks for taking time to calling today. So we talk about margin expansion in earnings. You have heard me talk about in the context of a few levers. So let me talk about that as it relates to how we are running our business now and how we think about that as we go forward in this environment. So I will start with pricing. You have always heard me talk about how earnings expansion really starts with pricing. So if we look at where we were pre-crisis in the first half of the year, our pricing in Q2 was relatively stable. So in this environment, we are fortunate to have our client executives who have longstanding relationship with our clients and they know how to help our clients navigate this uncertainty, but they also know how to ensure that we are making the right arrangements for both them and for us. So we sill have a focus on pricing. The second thing that we have talked about in terms of margin expansion is how we are going to continually invest and Tien-tsin that continues to be with what I consider, we consider competitive advantage for us. So we will be able to continue to expand margins, while we invest in our business and you have heard me say today that we continue to expect to invest up to $1.6 billion in acquisitions this year. We have already committed $1.1 billion to-date. So we have the ability to invest another $500 million in acquisitions, should those opportunities arise. So we continue to invest, and we’re also going to continue to invest in our people. We’re going to make sure that we have the capabilities that our clients need, both today and in the future, and we are going to invest, so that people can develop the skills that they will need for today and for tomorrow. In terms of what is a specific margin lever, Tien-tsin, that we would have now, I’ll just point to the help that we will get from not traveling, right? So even in a virtual organization like ours, you’ve heard Julie talk about the status of how often and how much we use Teams. We still with 500,000 people have significant travel costs, and we do see that decreasing as a result of the current environment and that is something that is unique during this time period, that does help support our margin expansion. Tien- tsin Huang : Got it. That makes sense on the travel point. Maybe just a quick follow-up really helpful comments around your business continuity. Just curious, does your guidance reflect any sort of – maybe inability to deliver against the bookings in your signed contracts? I’m just curious if there is any sort of plans there, anything specific that we should be aware of on the, on the continuity side, it sounds like not, but just wanted to make sure? KC McClure : Yes, so let me maybe take a second just explain how we arrived at our guidance overall, and Julie will talk about a lot of the continuity question that you had, Tien-tsin. So I think first of all, it’s important to step back and take a look at our trajectory for our year prior to the coronavirus. As you heard Julie and I talk, we exited H1 with very strong momentum, and we were on a path to be at the top end of our previous annual guidance range of 6% to 8%. And at a minimum, we would have been reconfirming all of the other elements in our guidance. But obviously, things are different and let’s talk a little bit about how we arrived at our guidance, and it really reflects how we manage our business today. So we took a look at our business from an industry, geography and a type of work, specifically the various services that we offer, and then we analyze the potential impacts from these unprecedented circumstances, such as you know, working remotely at this scale for us and for our clients and the fact that there will be more impacts in various industries and others. And then based on these impacts, we reasonably estimated what we saw today, as being the impact in our business in the second half of the year. So as a result of that, we lowered the top end of our previous guidance range from 8% to 6% as you have seen, and given the uncertainty, Tien-tsin, we also, as you saw broadened to a 3 point range for the full year and also 4 point range for Q3. There is an important thing that’s on the other side of the travel discussion that we just talked about, as it relates to margin. The other context is, the impact of lower travel on our revenue, and that’s really important, as you look at our lowered guidance range for the year. So the importance of that on revenue is, to understand that we will have a significant decline in our travel reimbursement revenue. And for the full year, that could be a full percent. So really, it could be as much as 2% in the second half of the year. So that is really reflected in the guidance range, where we said, we are at sort of negative 2% to positive 2%. And also, it’s important to understand that that is disproportionately weighted to our consulting type of work, probably, as you would expect. And lastly, before I hand over the Julie, I do want to just mention, probably the most important thing is, we continue to be laser focused on our clients during this time. As Julie mentioned in her script, we are clearly the fabric of our clients’ business now, more than ever, doing mission critical work. We are an integral part of their operations and we’re partnering with them on what they need. We know that the fundamental drivers of our business will continue to create tremendous opportunity for us in the long term, and we’re very confident in our positioning in the market. So thanks for letting me take a little bit of time to maybe expand a bit on guidance, because I thought it was important given the environment. And I hand it over to Julie to talk about continuity. Julie Sweet : Sure. Really, what I want to take you through, Tien-tsin and thanks for the question, because clearly, the way we’ve updated guidance, is we are expecting that our business is going to evolve differently for the next two quarters for a whole host of reasons. So I think maybe what might be most helpful, is to kind of give you some color on what’s really happening on the ground with our clients. And there is really three sets of activities right now, right? So the first is, our clients are focused, as a first priority of the safety of their people and adjusting to the need to have remote working, right which for many of our clients is very new and we’re helping many of our clients make that adjustment. So for example, we have a client who asked us literally to go – when we partnered with Microsoft to do this, to go from zero people using Teams, in five days it’ll be their entire 61,000 workforce, right? So in 5 days zero to 61,000 right. And so as we look at it, our clients are very much focused on how to adjust to remote working, and that’s easier or harder depending on the nature of the industry and the kind of work, and at the same time, is responding to the crisis you have. Our clients for example in the public sector, who are having to respond not only for their own work forces, but to what they need to do for the public. So for example, we’re working with some of our public sector clients, to deploy more virtual agents that are pre-configured with COVID-19 advice to continue to free up capacity, to add to the more critical questions in our call center. So, the first is, safety of their own people and adjusting to this new environment, where they have to have remote working and make decisions about that. The second activity is really focused on mission critical services. That of course varies by company, but if you look at the work that we’re doing with our clients, we’re working very closely to them on mission critical services like – we do the settlement of services of trades for major banks. We do payroll services. We support many different healthcare services. We’re doing trust and safety services, keeping the Internet safe. So there is a big focus in this first phase on mission critical services, working together with our clients, being able to do that in some cases remote, in some cases, continuing to go into the centers. And then the third thing that’s going on with our clients, in parallel, of course, is the assessment of the impact on both the global health crisis and the disruption in the economy and what’s been happening with the travel restrictions, the restrictions of people needing to stay at home, in some cases sheltering and place. Now, as you might imagine, that assessment occurs along two vectors. It comes at the intersection of industry, technology and geography, as well as the individual circumstances of the clients. And so to give you some sense of the variety, I have a client in the utility industry that is of course dealing with the macro environment. But in my discussions with the CEO just this week, the first question was, hey, how do you feel Accenture, about your COVID-19 arrangements, because you do a lot of work for us. And then we went right back to our usual touch point on the ERP system that we are putting together, which they consider to be mission critical for how they operate. On the other side of the spectrum, you have a client in the industry – in automotive industry, that has been hard hit. We are executing our strategy beautifully there, because we’re helping them with enterprise transformation right and they are making choices in this environment, given what they’re facing. So in that case for example, they said look our HR transformation is mission critical. We may need to and are likely to postpone the finance transformation, and they’re working with us and their other partners, as they make the essential choices you would expect in this environment. If you go to a consumer goods client, that has less expectation of significant impact, our conversations with them are, help us understand how you are going to adjust and can we move even faster, because we think there is a competitive advantage in putting in place the ERP system that we’re helping them do. And then of course you have something like travel where what is critical at this time is very-very significantly different than many of the other industries for the obvious reasons. So as you think about our guidance, we’re thinking about how the impact is varying, looking at industry, geography and understanding the work, and anchored of course in much of the work that we do for our clients, is mission critical or critical to their agendas. Tien- tsin Huang : That’s great. Thanks. Thoughtful. Thank you. Operator : Thank you. Our next question then is going to come from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Thank you. Hi, Julie. Hi, KC. Hi, Angie. Good morning and I hope you and the entire Accenture team are doing well in these kind of tough times. It seems based on and thanks for the very detailed answer to the previous question from Tien-tsin. It seems clients are beginning to respond, but still possibly quite considerably internally focused. So I am specifically interested in a couple of areas. For example, what would be the creative elements of Interactive that perhaps might not look so well with social distancing norms, how would something like that be affected? And then secondly, the conversion of bookings into revenues, it needs the knowledge transfer and things like that which might need travel, how wouldn’t that be impacting what are you looking at different pace of conversion? Julie Sweet : Sure. It’s interesting because Accenture Interactive that has some of our creative minds, so probably best suited in fact in thinking very creatively about how to stay connected. Many of those as you may know – as you think about how they work, virtually often do work in studios and so they work virtually with our clients as well. At this point, we are really just focusing on how to adapt the virtual environment and keep them and keep people connected. And so from an Accenture perspective, we feel very confident in our workforce being able to adjust and then of course working with our clients to help them do so. With respect to knowledge transfer, that’s a great question. And as you might imagine, because we are so familiar with how to do virtual, what we have done is rapidly look at, I mean, it’s one of the first things we do, how do you do knowledge transfer remotely. Some of it is already there. And to be honest, we have had a lot of that and oftentimes our clients have wanted to do it onsite even though we said it could be done much more efficiently. And one of the things you should recognize is that this is really going to be helping accelerate also the digital transformation of our clients, right, because our clients, for example, some of whom who wouldn’t have allowed us to work from now who are giving us permission who don’t themselves work remotely who aren’t using collaboration technologies are now being forced to and the upside for them is really the opportunity to accelerate the cultural change and the digital transformation. So on knowledge transfer, to answer your specific question we have put in place new ways of doing that, but it’s based on thinking that in this case we have already done. Do you think about SAP, one of the first things we did, SAP, Oracle, any of our systems is that we have looked at all of our methodologies, obviously, our methodologies today do involve being onsite and so we are converting them and then pushing that out across our workforce and helping our clients understand it. We are rapidly doing testing of those methodologies. And so at some point of course there is limitations. You do need to be able to get together for some pieces of it. And of course just remember, today, we have people working in offices as do our clients for essential work. And so on balance right, we have rapidly moved to use all of our knowledge to be able to convert, to help our clients do that to change our methodologies and then as we continue forward depending on the duration and the magnitude, our expectation today is we will get into a rhythm that continues to allow the essential things to happen over time. Ashwin Shirvaikar : Thank you for that. And then the second question is with regards to sort of the underlying assumptions for the new updated guidance? To what extent are you – and this might just too early, but to what extent are you able to sort of make assumptions about some of the secondary impact say for example, looking on a vertical basis, financial services companies might be – profitability might be affected because the rates are in resources there are number of examples of profitability being affected or supply chains being affected, how are you thinking through that? Julie Sweet : I mean our guidance and KC can add anything she’d like. At this point, we are giving you the guidance we see over the next six months, based on the best information we have today. And as you said, it’s early to speculate how some of this may play out on the individual industries and it’s just – it’s quite early. Ashwin Shirvaikar : Thank you. Julie Sweet : Thank you very much. Operator : Thank you. And our next question is going to come from the line of Lisa Ellis from MoffettNathanson. Please go ahead. Lisa Ellis : Hey, thank you and thanks for the transparency in what you’re seeing on the ground. So of course its imperfect and it’s still very early, but the best reference point many investors have for understanding, kind of how Accenture’s business reacts to this sort of sudden shock, is looking back at the financial crisis. However, of course, you now have Accenture Interactive you now have Accenture Operations, big pieces of the business that are very different. Can you just kind of give your perspective, whether you like it or not, I guess that that comparison is probably being made? So how do you think about how this situation might be different or similar to what we saw 10 plus years ago? Thank you. Julie Sweet : Sure. Well at a macro level, of course, there are some real differences and that several years ago, that was about an economic crisis and today, because of the global health crisis you’re dealing with circumstances that are quite different in terms of, you know globally, clients having to move to work from home and what that does in terms of just the adaptation that they’re making, the cessation of commerce and retail etcetera in many communities, and so what I would say is, you kind of start with – this isn’t just an economic crisis, which one would never have thought that they would say that, as they look back at the financial crisis. But you are really dealing with two things. So, as you think even about how we expect the situation to evolve and then I’ll come to how we are different, as we enter into this, but you’d expect – what we are expecting is that right now, as clients are very focused in adapting to, not just the economic disruption, but as I said in those three buckets of things having to adjust how they’re working. Right, that’s why our guidance assumes that there’ll be an improvement in the business environment in Q4, either because the situation is better or because simply clients and ourselves, are adjusting to working together. But I would say, as you think about today that is at very different circumstances than the financial crisis, but as we look at it, we can’t imagine a better positioned company to address it for all the reasons that we talk about. This thing though is the nature of our services today. As you saw with our results in H1, if you go back to what have we been focusing on? We’ve been focusing on building the digital core of our clients, which is moving to the cloud, having the right systems, all of which this current crisis actually points out to, are very critical, right. And then the first wave of that, you’re just seeing it in the demand for us to help them improve their infrastructure, deploy collaboration technologies and so on. The second thing we’ve been helping them with is optimize their operations and the ability to use technology, not only to reduce costs, but to be more productive. And what you are seeing even now we are already having inbound things about, can you help us achieve more savings through technology in the shorter term? So we have very relevant offerings and what’s really interesting, if you go back to the financial crisis and operations, that business is very different. It was much more around labor arbitrage with some analytics on top of it. Today, as I talked about earlier, our business in Operations, our business in Living systems start fundamentally with technology platforms that we have built, so that as our clients are making decisions, do they invest themselves to build something, or should they leverage here. The current crisis actually makes those investments we’ve been making for years, even more attractive and relevant, because clients will have less investment capacity, they will need to move fast, and they’ve got to address the challenges. And so the final area is around accelerating the growth agenda and this is where Accenture Interactive is critical. I mean just think about what’s happening right now. People are staying home and they’re getting online and they can’t go to stores. The opportunity over time to engage differently with your customers, to establish different relationships, are going to be very important and Accenture Interactive is at the core, right, of customer experience and very relevant. So we knew coming out of H1, you see the strength of that. But as you think about what’s actually happening, and of course it’s still early days, but we could see what’s going – our services, we believe will be even more relevant rate, as we get through this first period, where we need to, and I just want to be clear, at the end of the day, we have to serve our clients, and we need to help them adjust. We need to make sure their mission critical services are continuing, and then help them evaluate how to navigate, grow and address this, and that will be very different in different industries and companies and we are very – this is where our relationships matter so much. 95 of our top 100 clients, we have been there for over 10 years. So I feel very confident and I think we are in a very significant position of strength as we go into this chapter. KC McClure : Yes. And maybe one thing I’d just add is – one thing that I would say that, we do expect that we saw coming out of the last crisis, that we also believe we’re well positioned this time again, is taking market share. So when we came out of the last financial crisis, we did take market share and that is our expectation that we are – as we look long term, that we will have tremendous opportunities for us over the long-term by staying close to our clients. Lisa Ellis : Thank you. Then maybe my follow-up is on the talent side. I mean your 500,000 people are the most critical asset of Accenture. Can you just remind us, I mean it looks like headcount slowed a little bit in this last quarter, but it’s still running close to 7%. So, just as you think about this kind of sudden shock, can you just remind us how you manage rebalancing the types of skills and level of headcount you need in a very rapidly changing environment, what levers you’re pulling, just around slowing hiring etcetera? Thank you. Julie Sweet : Sure. Thanks. It’s a great question. So first of all, just philosophically we are not ever going to be shortsighted here. And as you said, our people are really our competitive advantage and we are the envy of the industry. And so as we look at this, we do a couple of things. First of all, we’re obviously slowing recruiting, but we’re still recruiting, like for example, in Italy – and we all know the situation there. We’re still recruiting for security right now, because as our clients have been moving to home, they need greater health and security services. And just you know, a shout out to our HR team, we’ve rapidly turned our onboarding into entirely virtual, so that we can continue to recruit the critical services our clients need during this time, when obviously we cannot have people coming to the office. The second thing that we do, is we look at where we need skills and our ability to pivot people because of course, we are a great learning organization right, and so one of the first things we always do is, where is the demand and what can we do, and we’ve trained over 300,000 people in the last couple of years just on new IT. And so, part of what we will be doing – a significant part, is making sure that we also are able to adapt. For example, if you just look at the digital – the need for digital workplace; in this week alone, we took 600 people and spun them up and trained them on all the skills they need, to be deploying these technologies like Teams, because our clients rapidly needed that for the demand. And so in its first phase, our focus is of course, the slowing down on our recruiting, except where we need the critical skills and then deploying our people at the demand and we won’t be shortsighted. Lisa Ellis : Wonderful. Thank you. Operator : Thank you. Our next question then will come from the line of Bryan Keane from Deutsche Bank. Please go ahead. One moment please. And our next question from Bryan Keane. Please go ahead. Just another moment. Angie Park : Why don’t we go to the next person in queue, please? Bryan Keane : Can you guys hear me? Angie Park : Sorry, Bryan. Julie Sweet : Hey, Bryan. Bryan Keane : Hey, guys. I am not sure what the issue is there, just wanted to ask about the guidance. Is the guidance about what the quarter looks like so far in March, and then straight-lining that forward, or is there an estimate on what kind of deterioration you’ll see? And then thinking you mentioned a little bit, I assume most of the guidance reduction is in consulting and not outsourcing? Thanks. KC McClure : Yes. So let me start with the second part of your question first. So, as we look to what we think the back half of the year will be by type of work, we do think that consulting could be low-single digit positive or negative and remember, that also factors in – as they get a more disproportionate impact of the lower travel reimbursement revenue, Bryan. In the back half of the year, outsourcing will be low to mid single digit positive. Both types of work right now as you have seen are high single-digit growth. So at the end of the year, we do see consulting at low to mid single digit growth for the full year, and outsourcing at mid to high single digit. And what I would just give, in terms of other color on our guidance, just as an overall point. Is that we’ve done the risk profile, as you know, it’s higher than normal. We have provided our guidance in that context, based on what we see today. As a leadership team, we’re going to be as relevant as we can to our clients, and as we’ve always said, it’s our job to try to deliver as high as we can, the range. But I think it’s also important to note that in this environment, we believe it’s reasonably possible that we can land anywhere in this range. So our guidance does take into consideration what we see today, but Bryan, the environment remains fluid and evolve differently from our assumptions. Bryan Keane : Okay. And then just a quick follow-up on staffing, thinking about staffing issues, is Accenture seeing any impact to the guidance due to – you’re not able to get on company sites. So just trying to think about the supply side issue of the guidance versus the demand issue? Julie Sweet : Yes, I mean obviously we’ve got – its sort of client by client, and by the way our legal department is doing an amazing job right now because – as you might imagine, many of our contracts didn’t even contemplate ever working from home, right, and so they’ve been working client by client sort of 24/7 to evaluate that. But it’s just a mix and so I’d just tell you, our guidance is kind of taking into account, all of these different factors and that’s where we updated it to. Bryan Keane : Okay. Stay safe. Thanks so much. Angie Park : Thank you. Operator, we have time for one more question and then Julie will wrap up the call. Operator : Thank you. Our next question then will come from the line of Bryan Bergin from Cowen. Please go ahead. Julie Sweet : Hi, Bryan. Bryan Bergin : Hi, good morning. Thank you. I wanted to just clarify some comments you made on the remote operations. I heard 60% in India and Philippines, curious, can you move that to a higher level or is that currently the max? And then just as far as the global mix of workforce, how are you thinking about the ability to deliver remotely on the total base of operations and what do you think that will go to ultimately? Julie Sweet : Well, so, in the Philippines, we’re probably about where we are expect to be. In India, we’re still adding. But again, it really depends on the nature of the work, and so we wouldn’t expect it to be much higher than that, because some of the work – if you think about bandwidth, the need for power. What our employees can do in some – their conditions and then sort of be availability, the bandwidth on some of the things that take more bandwidth. So it’s going to go a little bit higher in India. But I think we’re in a pretty good position. Around the world, it varies. I mean, look at in Italy we are at 85% to 90%, in Spain, 90%. So globally, it’s actually much higher, right, because of the nature of the workforce. So you really have to look at nature of the work and country by country. But as my stat, at 16 million minutes a day to 30 million minutes a day, so we’ve mobilized very quickly. Bryan Bergin : Okay. And then just as far as demand and the guidance, can you just discuss clients, what you are seeing in their spending priority, understanding it’s fluid, how are clients considering spend across those new areas versus traditional IT areas here – I mean, the crisis, and really just trying to understand what’s built into the guide across those two channels or whether you want to break it down by how you formulated the guide by industry verticals or regions? Just trying to understanding one layer of depth down on the guidance assumptions? Julie Sweet : Why don’t you take that? KC McClure : We did take a look, as I mentioned we – Bryan, we did take a look at different geographies, the lens of geography in our guidance. We also looked at the lens of industries. And we did take a look at which ones will be more severely impacted in our view, I’d put – as Julie talked about, we did mention, travel is a small part of Accenture’s business, it’s about 3% of our revenue and had already been in decline even before coming into this crisis. So that’s one industry, although it’s not a big part, we have important clients there, so not big part of our revenues, but travel is an industry. We talked last quarter about industrial being a little bit under pressure in North America and Europe. We do think – that’s about 7% of Accenture’s revenue and we do think that will be – continue to be affected, go forward. And I think within high tech, where we have our aerospace and defense business, that obviously will be – continue to be impacted as well. So maybe that gives just a little bit of color on some of our industries. Bryan Bergin : Thank you. Julie Sweet : Alright. Thank you again for joining us on today’s call. As we navigate the current environment, it is important to remember that we will continue to invest in our business and our people for the long-term. The fundamentals of our business are strong and we plan to emerge even stronger. I cannot emphasize enough my gratitude for the extraordinary efforts of our leaders and our people around the world, to both take care of each other and continue serving our clients, which they have done, even as they are concerned for their own health and health of their loved ones and communities. I also want to thank our clients for placing their trust in us, our investors for their continued confidence and our ecosystem partners for their shared commitment to our clients. Perhaps what is most unprecedented about the situation we face is how universal the tragedy is, that is unfolding around the world. It truly affects us all and I hope that each of you and your family and friends are healthy and continue to be well. Thank you. Operator : Thank you. Ladies and gentlemen, this conference will be available for replay after 10.30 a.m. today through June 25, 2020. You may access the AT&T teleconference replay system at anytime by dialing 866-207-1041 and entering the access code of 2467991. International participants may dial 402-970-0847. Again, those numbers are 866-207-1041 and 402-970-0847 with an access code of 2467991. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,020	2	2020Q2	2020Q3	2020-06-25	7.623	7.68	8.07	8.185	10.05388	27.85	29.25	Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture’s Third Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this 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 : Thank you, Greg and thanks everyone for joining us today on our third quarter fiscal 2020 earnings announcement. As Greg just mentioned, I am Angie Park, Managing Director, Head of Investor Relations. On today’s call, you will hear from Julie Sweet, our Chief Executive Officer; and KC McClure, our Chief Financial Officer. We hope you have had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today’s call. Julie 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 third quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the fourth quarter and full fiscal year 2020. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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 Julie. Julie Sweet : Thank you, Angie, and thank you everyone for joining us. Since our last earnings call, the world has continued to face unprecedented challenges; health, economic, and social, and throughout Q3 we saw rapidly deteriorating economic conditions globally. I am proud of and want to thank our people and our leaders around the world for coming together in Q3 to continue to deliver on our commitment to our shareholders, our clients, our people, and our communities in the face of this crisis. Before turning to our delivery on these commitments, let me provide a bit more color on the context. Within days of our earnings call on March 19, we continued to quickly mobilize our people to work from home, and during the quarter we had approximately 95% of our people enabled to work remotely. For all of April and May other than China, virtually every country in which we operate was in lockdown. In addition, as you may remember, in January we announced that as of March 1, we were implementing a new growth model and making leadership changes. We seamlessly implemented this new model demonstrating our agility at massive scale, which is a testament to the talent of our over 500,000 people and the strength of our leadership team. So, in terms of delivery on our commitments to our shareholders, we delivered Q3 revenues in line with the range we provided only eight days after the global pandemic was declared, and we hit a new milestone of approximately 70% in the “New,” which is digital, cloud, and security. We delivered $11 billion in new bookings, a 6% increase over Q3 last year, which demonstrates the relevance of our services and our ability to sell in a remote everything world. We continue to invest in our business for the long term, closing an additional $742 million in strategic acquisitions for a total of $1.3 billion year-to-date. We delivered operating margin expansion of 10 basis points, and we continued to strengthen our balance sheet closing the quarter with $6.4 billion in cash. In terms of delivering on our commitments to our clients, our clients rely on us for mission-critical work. 95 of our top 100 clients have been with us for over 10 years because we are a trusted partner. And during this time, we have deepened that trust yet again because of our ability to deliver seamlessly, including how we transitioned our people from the delivery centers in India and the Philippines to work from home without service interruption. For example, we closed the books on time for more than 70 public companies in operation, and we continued our pre-crisis track record in technology with around-the-clock go live on new releases every 15 minutes on average. In both technology and operations, we were able to execute entirely remote knowledge transfer with great success. In terms of delivering on our commitment to our people, we continue to invest in training and development and the continuous re-skilling of our people. We are on track to deliver the same training hours as last year while pivoting completely to a digital learning experience built on our platform Accenture Connected Learning. We continued to promote people midyear, although at a reduced level compared to last year to ensure that our very best talent continues to build a vibrant career and is recognized and rewarded. In terms of delivering on our commitment to our communities, we believe strongly in our responsibility to contribute to the well-being of our communities. In addition to our teams who have supported our health and public service clients with extraordinary COVID-19 related work, we also wanted to make a unique pro bono contribution that leveraged our strength. In addition to our many local activities, we are very proud that we are helping put people back to work around the world with the People + Work Connect platform that we created together with Lincoln Financial Group, ServiceNow, and Verizon. This platform is a global online employer-to-employer initiative to bring together at no cost companies that have laid off or furloughed people with organizations in urgent need of workers. Designed by CHROs including our own extraordinary CHRO, Ellyn Shook, Accenture built the platform in only 14 days. The response has been overwhelming as more than 1,300 organizations across approximately 80 countries have engaged with currently about 400,000 positions already on the platform which are balanced between open needs and availability. With that, over to you KC. KC McClure : Thank you, Julie and thanks to all of you for taking the time to join us on today's call. We are pleased with our third quarter results which were in line with our expectations and reflect the diversity and durability of our growth model across geographies, industries, and services. Our results continue to reinforce the relevance of our offerings and capabilities in the market to deliver value for our clients. Importantly, these results illustrate Accenture's unique ability to manage our business and deliver significant value to our shareholders in a very uncertain environment. Before I get into the details, let me summarize the major headlines of our third quarter results, which reflect continued strong execution against our three financial imperatives. Revenue grew 1.3% in local currency at the top end of our guided range. This includes a reduction of approximately 2% from a decline in revenues from reimbursable travel costs. Taking a look at revenues through an industry lens, the diversity of our portfolio continues to serve us well. Approximately 50% of our revenues came from seven industries that were less impacted from the pandemic and in aggregate grew high-single digits with double-digit growth in software and platforms, life-sciences, and public service. At the same time as we expected, we saw pressure from clients in the highly impacted industries which include travel, retail, energy, high-tech including aerospace and defense and industrials. While performance varied, this group collectively represents over 20% of our revenues and declined high-single digits. Given this is the first quarter of results since the onset of the pandemic, let me share a bit more color on how it shaped our quarter. We had strong momentum coming into the quarter, which continued through March. We began to see the impacts on our business in April and May as a result of clients postponing work, reducing existing volumes, and deferring decisions on new work. These impacts were more pronounced in strategy and consulting. We did not, however, see an uptick in cancellations over typical levels. In addition, we experienced very little revenue impact from needing to shift to remote working as we continued to successfully deliver services to our clients. Operating margin was 15.6%, an increase of 10 basis points, both for the quarter and year-to-date as we continued to demonstrate our ability to drive sustainable margin expansion. This result continues to reflect the absorption of significant investments in our people and our business as we further strengthen our leadership position in the market. We are also benefiting from significant lower spend on non-billable travel, meetings, and events. And finally, we delivered very strong free cash flow of $2.6 billion in the quarter, while also continuing all elements of our capital allocation program, including returning roughly $1.1 billion to shareholders via dividends and share repurchases. We've made investments of $1.3 billion acquisitions, primarily attributed to 29 transactions year-to-date, and we continue to expect to invest up to $1.6 billion in acquisitions this fiscal year. With that, let me turn to some of the details starting with new bookings. New bookings were $11 billion for the quarter, reflecting growth of 6% in local currency and 4% in U.S. dollars. Consulting bookings were $6.2 billion, up 5% in local currency and 3% in U.S. dollars with a book-to-bill of 1. Outsourcing bookings were $4.8 billion, up 8% in local currency and 5% in U.S. dollars with a book-to-bill of 1. We were very pleased with our new bookings which continue to be dominated by high demand for digital, cloud, and security-related services, which we estimate represented approximately 70% of our new bookings in the quarter. Looking forward, we expect strong bookings in Q4. The fact that we delivered $11 billion of bookings in this environment with growth over last year with much of these sales closed virtually, while at the same time building a very strong pipeline, speaks to both our agility and the strength of our client relationships. Turning now to revenues. Revenues for the quarter were $11 billion, a 1% decrease in U.S. dollars and a 1.3% increase in local currency, reflecting a foreign exchange headwind of roughly 2.5% compared to the 1.5 estimated impact provided in our guidance for quarter. This result was at the top end of our FX adjusted range. Consulting revenues for the quarter were $6 billion down 4% in U.S. dollars and down 2% in local currency which includes a reduction of approximately 3 percentage points from a decline in revenues from reimbursable travels. Outsourcing revenues were $5 billion, up 3% in U.S. dollars and up 5% in local currency. Taking a closer look at our service dimensions. Technology services grew mid-single-digits, operations grew low single-digit, and strategy and consulting declined mid-single-digit. Additionally, digital, cloud and security-related services grew high-single-digits. Turning to our geographic markets, in North America we delivered 2% revenue growth in local currency driven by double-digit growth in public service, life-sciences and software and platforms and high single digit growth in banking and capital markets. Growth is offset by declines in chemicals and natural resources and high-tech. In Europe revenue declined 2% in local currency. We saw double-digit growth in four industries, including software and platforms, chemical and natural resources, health and life-sciences. Growth was offset by declines in consumer goods, retail and travel, high-tech, and banking and capital markets. Looking closer at the countries, Europe was driven by high single-digit growth in Italy and mid-single-digit growth in Germany, offset by continued declines in the UK as well as declines in Spain and France. In growth markets we delivered 5% revenue growth in local currency driven by double-digit growth in six industries with particular strength in software and platforms, public service, and chemicals and natural resources. Growth is offset by decline in consumer goods, retail and travel. From a country perspective, growth markets was led by Japan, which again had strong double-digit growth. Moving down the income statement, gross margin for the quarter was 32.1% compared with 31.8% for the same period last year. The sales and marketing expense for the quarter was 10.2% compared with 10.7% for the third quarter of last year. General and administrative expense was 6.3% compared to 5.6% for the same quarter last year. Operating income was $1.7 billion in the third quarter reflecting a 15.6% operating margin up 10 basis points compared with Q3 last year. Our effective tax rate for the quarter was 25.5% compared with an effective tax rate of 25.6% for the third quarter last year. Diluted earnings per share were $1.90 compared to EPS of $1.93 in the third quarter last year. Days service outstanding were 41 days compared to 39 days last quarter and 39 days in the third quarter of last year. Free cash flow for the quarter was $2.6 billion resulting from cash generated by operating activities of $2.7 billion net of property and equipment additions of $150 million. Our cash balance at May 31, was $6.4 billion compared with $6.1 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the third quarter we repurchased or redeemed 3.7 million shares for $627 million at an average price of $107.54 per share. As of May 31, we had approximately 1.9 billion of share repurchase authority remaining. Also in May we paid our third quarterly cash dividend of $0.80 per share for a total of $509 million. This represents a 10% increase of equivalent quarterly rate late last year. And our Board of Directors declared our fourth quarterly cash dividend of $0.80 per share to be paid on August 14, also 10% increase of the equivalent rate last year. So in summary, we delivered to the expectations we provided in March. Looking ahead, we remain laser focused on capturing growth opportunities in the market and delivering value for our clients. As you know and expect of us, we will operate with vigor and discipline, while continuing to invest in our business and our people for long-term market leadership. We entered the crisis in a position of strength and we are driving our business to emerge even stronger. We remain committed to delivering significant value to our clients, our people, and our shareholders, as we continue to navigate this very uncertain environment. Now let me turn it back to Julie. Julie Sweet : Thank you, KC. As we look forward, we are starting to see the overall business environment improve with more engagement with many of our clients. However, the high level of uncertainty persists and it is too early to predict when the pandemic and economic conditions will improve. Now working from home is highly efficient and I am connecting personally with more clients around the world than ever before. I first want to share our perspective on the crisis and how demand is shaping up based on what I'm hearing from CEOs and then bring it to life. Crisis is unique in two ways, first it has created the largest ever change in human behavior, at scale, and almost instantaneously, requiring companies to fill new demand trends, change how they engage with customers and adapt quickly to volatile market conditions, all of which require a strong digital foundation just as they also face massive cost pressures. Second, the pandemic is happening during a period of exponential technology change, which was already driving entirely new ways of doing business. In our future systems research last year, we identified that the top 10% of companies in terms of tech adoption, depth and culture where the leaders are performing twice as well and is the bottom 25%. We believe COVID immediately widened that gap. We see the leaders doubling down on their investments while the laggards recognize the speed to accelerate the pace of their transformation. Companies are turning to Accenture as the trusted partner with the industry experience and the ability to help them create investment capacity and change at scale and to execute with multidisciplinary teams, spanning strategy and consulting to operations and trust matters more than ever, making our strong client relationships and reputation a critical advantage. This is reflected in our Q3 bookings, which include 11 clients over $100 million and importantly is reflected in our strong pipeline as we look ahead to Q4. Let me highlight some of the transformational deals in our Q3 bookings to bring to life what our clients need and how we're able to deliver. Leveraging our intelligent platform services for a major global beverage company seeking to drive growth, we will be implementing SAP S/4HANA to support business simplification and better engagement with customers and consumers through real-time data. We are also providing ongoing IT modernization and application maintenance leveraging our myWizard asset to lower costs and improved user experience. IT modernization overall continues to be an area of high demand. Leveraging our industry ex-capabilities, another area where we are seeing increased demand, we will be helping Airbus reduce costs by up to 15% and speed time-to-market by modernizing their legacy product lifestyle, lifecycle management system. We are implementing and enabling a digital platform built with that source [ph] systems a leader in 3D design to help the company reinvent how they design, build and support new aircraft, products and components. Leveraging operations, we extended our strategic partnership with Microsoft to provide them with credit and collection services, collecting over $120 billion in cash annually across the 170 countries in 30 languages. By combining the market-leading AI powered assets in our SynOps platform, like intelligent collections. With Microsoft's Azure and power platform technologies and by simplifying global processes and policies, we will drive significant day one savings and lower the marginal cost of growth. At the same time, we will deliver top-tier performance. This is an example of why we continue to be the market leader in business process services powered by our ecosystem relationships. Operations is an area where we are seeing a significant increase in demand. Each of these deals create tangible value in both cost efficiency and business outcomes, leveraging our mix of services in deep industry and functional expertise which Accenture is uniquely able to bring to our clients. I also want to touch on another area of demand where we are seeing even more significant growth post COVID across industries. Cloud migration and cloud-based data and innovative business models have quickly accelerated, Amazon Web Services, Microsoft Azure, and Google Cloud platform, as well as Alibaba Cloud in China, and Oracle Cloud Infrastructure or OCI. Companies are looking to more quickly reduce costs and capture the innovation of the cloud as well as provide the foundation for better access to data for new business outcomes and models. Examples from our Q3 sales include working with a global pharmaceutical company to consolidate multiple data sources on AWS to drive faster product development. Working with a major global insurance company to migrate over 30% of their business applications to Azure in just 18 months, working with a leading Asian bank to build digital banking services on GCP, working with one of the largest dairy companies in China to migrate and modernize their customer and omnichannel commerce systems using Alibaba Cloud, and working with a European telecommunications provider on a living systems IT modernization, which includes the migration of their Oracle state to OCI. With cloud our ability to bring industry and cross industry insights to our clients and world class change management for speed and value due to our strong strategy and consulting capability is a major competitive advantage. Given the events of the last weeks, I do you want to pause and take a moment to talk about a core part of who we are as a company. We have an unwavering commitment to inclusion and diversity and equality for all. We have zero tolerance for racism, bigotry and hate of any kind. We live this commitment every day because it is the right thing to do and because becoming the most inclusive and diverse company in the world has been critical to our strategy. Since 2014, when we doubled down on inclusion and diversity and created our digital business, we have delivered 9% compound annual revenue growth in local currency. We are a talent magnet, in part because the most talented people want to work at a company that not only creates value but also leads with values. We have made progress with respect to our people of color, but not enough. We are determined to use this moment in the U.S. as another moment of change for us. This month we announced our commitment to take our next set of actions, which includes setting external goals in the U.S. for increasing overall representation and managing directors for African-American, black and Hispanic American Latin communities, similar to how we have set public goals for gender globally. We also are adding new mandatory training that will help our people identify, speak up against and report racism, and we are committed to take similar actions globally. Now, I'll turn it over to KC to provide our updated business outlook. KC? KC McClure : Thanks Julie. Before I get into our business outlook, as I did last quarter, I would like to remind you that given the coronavirus pandemic, there are a number of factors that we may not be able to accurately predict, including the duration and magnitude of the impact, the pace of recovery, as well as those described in the quarterly filing we made earlier today. Now with that said, let me turn to our business outlook. For the fourth quarter of fiscal 2020, we expect revenues to be in the range of $10.6 billion to $11.0 billion. This assumes the impact of FX will be approximately negative 1 compared to the fourth quarter of fiscal 2019 and reflects an estimated negative 3% to positive 1% growth in local currency and includes approximately negative 2% from the decline in revenues from reimbursable travel. For the full fiscal year 2020, based on how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our results in U.S. dollars will be approximately negative 1.5% compared to fiscal 2019. For the full fiscal 2020, we now expect revenue to be in the range of 3.5% to 4.5% growth in local currency over fiscal 2019. For operating margin, we now expect fiscal year 2020 to be 14.7%, a 10 basis point expansion over our fiscal 2019 results. We now expect our annual effective tax rate to be in the range of 23.5% to 24.5%. This compares to an effective tax rate of 22.5% in fiscal 2019. For earnings per share we now expect full-year diluted EPS for fiscal 2020 to be in the range of $7.57 to $7.70 or 3% to 5% growth over fiscal 2019 results. For the full fiscal 2020 we now expect operating cash flows to be in the range of $6.45 billion to $6.95 billion, property and equipment additions to be approximately $650 million, and free cash flow to be in the range of $5.8 billion to $6.3 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.2 to 1.3. Finally, we continue to expect to return at least $4.8 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open up so we can take your questions. Over to Angie. Angie Park : Thanks KC. I would ask that you each keep to one question and a follow-up to allow as many people as possible to ask a question. Greg, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Hey, thanks so much Greg. Tien-tsin here. Just on the – I want to hone in on the strong bookings comment for the fourth quarter, can you maybe give us a little bit more on the type of work you are doing, consulting versus outsourcing, but also what is COVID-specific work versus transformational? And maybe also Julie, I think last quarter you mentioned or talked about clients adapting to a new normal. Has that happened or is Accenture really driving or just adapting to demand in this uncertain market, as you called it? KC McClure : Yes, so maybe I’ll start and then Julie can weigh in on demand. So, Tien-tsin, thanks for your question. In terms of strong bookings, maybe I'll just talk a little bit about what, maybe if I could take this opportunity to talk about guidance overall, and I'll hit on the bookings point as well. So, in terms of what we’re talking - what we’re looking at for the fourth quarter in terms of both, you know, our revenue and our bookings, I want to put some context into our guidance. Obviously, it continues to be an uncertain environment; and in revenue, we always aim for the top portion of our guided range, but as we said last quarter, this quarter, the entire range is at play. And if I put the context of Q4 into what we experienced in Q3, you know, we have [indiscernible] momentum coming into the third quarter and that carried through in March, and we began to see the impacts of the pandemic on our business in April and May. And so, as we think about Q4, as it relates to what we saw in Q3, at the top end of our revenue guidance range, it implies an improved performance over what we saw in April and May, and at the bottom end of our revenue guidance for the fourth quarter, it means we’ve stabilized. And so, as it relates specifically to your question on bookings, we were able to grow very strong pipeline during the same time, and we do see that we have the potential for strong bookings in the fourth quarter. I’ll let Julie give you a little bit of view on that - on the color as it relates to what we’re seeing in demand in the market. Julie Sweet : Sure, and as between kind of consulting and outsourcing, we saw sort of similar patterns in Q3 in this. We had lower sales in strategy and consulting in Q3, and we’re going to have some lower sales, you know, in Q4. We sort of expect that as we continue, but as we step it back, let’s just look at demand, right, because the whole set of demand that started in Q3 that will continue into Q4 in some areas around a few things. So, health and public sector, right. So, we saw a surge in need in health and public sector. For example, we became, we pioneered in the - before the Commonwealth of Massachusetts in the U.S. working with partners in health and Salesforce, diverse, you know, contracting, tracing applications and operation, which we've now taken to Phoenix; for example in the State of California where we’re working with Salesforce and AWS, that work will continue. You saw us working around the world doing things like using our industry and technology expertise to set up virtual agents like in India with MyGov and Microsoft in [indiscernible] we set up virtual agent. If you go to Brazil, we worked with Microsoft to set up telemedicine for a major hospital there. That work and the trends around telemedicine and the need to support citizens through the pandemic will continue, we believe. And what’s important there is, it is not simply - this isn’t about technology right? This is about taking all of our insights from the needs of – from health and public sector and supporting citizenry [ph] with technology, with the ecosystem partners, and quite honestly innovating remotely. Right? The work that we've been doing and that will continue. You also see the supply chain really being an area of big focus. So, we worked with Danone, a multinational food products company whose supply chain was immediately disrupted severely and leveraging analytics it became essential for them to give them a near real-time data around their supply chain to avoid disruption. So that kind of work supply chain is gowing, we’ve been doing it, it’s going to continue and of course clients are now moving from the immediate needs in leveraging the assets and tools and understanding that we have to thinking longer-term because of course what you have is completely different, trends and uncertainty, and so how do you really connect everything from understanding the customer all the way back to manufacturing, and that's why you start to see the demand in digital manufacturing, supply chain, and we expect on the customer side that to continue. Then finally the whole area of online, so we worked with a global retailer who’s been investing for years in omnichannel. We've been piloting curbside pickup before the crisis of a hundred stores, and in 48 hours we took them to 1,400 stores. And so we’re beginning to really talk about -- with the other retailers who were behind. Right? We talked about the laggards and the leaders to how are they going to be adjusting it. Now, if you take a step back, Tien-tsin on the big picture, we do three big things. We build digital core, and I talked about it in my script how cloud is accelerating, security is accelerating. We just bought Symantec's Managed Service business. We are now one of the largest and leading providers in the world. The threat landscape has expanded and we're seeing tons of demand in security, lots of demand in data and applied intelligence, as data is so necessary. But on the other hand, intelligent platform services, which as we've shared in the past is about 40% of our business and pre-crisis was growing double-digits, that moderated in Q3 and we'll see further moderation. In Q4, we expect, as clients have to take a step back, refocus, prioritize, we're helping them shape that, but the demand long term is absolutely there. And you saw that in our bookings that we talked about the S/4HANA implementation in Q3, where we are at - there we're doing so to drive growth as well as efficiencies. And so, while we continue to see that moderating, we really do see that is being very much affected by the industries that are most severely impacted. But also as clients frankly are taking a step back to figure out how they're going to accelerate and in what sequence their digital core building. In the area of optimizing operations, which is the second big thing we do, our operations business is seeing surge in demand. We talked about this last quarter, where we had double-digit growth for 25 consecutive quarters. Obviously, some crisis-related impacts in this quarter. But as the need for digital transformation has accelerated, the ability to use our digital platform SynOps to drive cost efficiencies and to get better data faster, right, is really taking - having that business have another new surge in demand as we look at our pipeline and then also the digital manufacturing as I've referred to. And then finally on the growth agenda side, Accenture Interactive, right, an incredible business. We hit $10 billion and it was having significant growth. It was significantly impacted in Q3 as companies focused more on shoring up what they had as opposed to thinking about the next generation of customer experience, et cetera. We're now seeing those conversations begin again. And what's really interesting there, is that the B2B companies like the industrials, who have their - have a traditional field sales model, were able to get connected with remote work, but they weren't online, right? And so, we think there's going to be a real surge over time and we're starting to have those conversations about how you move online. In general, to your question around kind of remote working, we've enabled lots of companies to work remotely, right, whether it was an aerospace and defense company on G Suite, 100,000 people to the NHS hospital system with teams over 1 million people, companies have really adapted, and where we have the advantage is because we've been so remote and because of the - we are a global company and have a strong tradition of working with our clients around the globe, we've just adapted very quickly and you see that in our strong bookings. You know it's higher than last year's Q3 and what we expect in Q4. Tien- tsin Huang : Great, that's good stuff. Good color. I'll get back in the queue. Thank you. Operator : Thanks. Your next question comes from the line of Lisa Ellis from MoffettNathanson. Please go ahead. Lisa Ellis : Hi, good morning and good to hear your voices. Just a follow-on on Tien-tsin question. I mean, you obviously recorded solid revenue in 3Q, solid growth in bookings, have a strong pipeline again for 4Q. At the same time the WEO just downgraded its economic outlook to nearly a 5% decline for this year. So, which is pretty terrible. So I'm just trying to ask, can you provide color on how those two things and those two trends reconcile, meaning, are you seeing that businesses either a, have not made revisions yet to their overall IT budgets to reflect a weaker longer-term economic outlook or more optimistically, be they have, but they have actually reallocated more dollars into IT to drive the digital transformations or is it that you're picking up share? I mean, I guess maybe just some color on kind of how you reconciled those two dynamics? Thank you. Julie Sweet : Yes, sure. You know, Lisa remember what we're guiding to is really a modest growth, it would reflect the economic conditions. Right? So what we're seeing in Q4 is we're seeing our business stabilize at what is a much lower level, right than pre-crisis with at the high end of the range, starting to tick up and improve. Right? So that is what's really, as you said like that's how you reconcile that. Right? And as I just went through with Tien-tsin, there are parts of our business that are accelerating like cloud and security and operations. But a big part of our business, our intelligent platform services business, which is 40% was growing double-digits moderated in Q3 and we expect a further moderation reflecting the economic conditions, clients sort of taking a step back and saying, how do I sequence and so, when you look at what's happening, the IT budgets, all the analysts are telling us and we're seeing it is too is that they are declining, but they are focusing on the digital transformation that's needed to navigate. So like the supply chain examples where you have to do this, this is why Lisa, our position is so important right now, because what we can uniquely do is provide cost savings while we transform. When we talk about IT modernization and managed services, we're doing managed services and we talked about this in prior quarters called Living Systems, where we're taking down the costs, but we're helping them have DevOps and Agile at scale to get their product releases faster. We are seeing deals like if you look at the one I highlighted on SAP, it has two components where they put the global beverage company. It was re-platforming, but it also had a managed service component that was modernizing and cutting their costs and so what we're seeing is this flight to Accenture for flight to quality, because we can deliver with the ability to increase investment capacity, decrease costs, but still modernize like what we do with operations. And so, of course we're going to be impacted, but we've got severely impacted is went through businesses that industries that of course we're good, we're feeling all of those effects, but we believe our results, we don't know, nobody else has come yet are taking share in this environment. Lisa Ellis : Terrific, thank you. And then maybe my follow on is just on the talent side, can you provide, I mean, I know you're an environment where attrition just dropped to 11%. Not surprisingly, given the environment. Utilization is also down a little bit, but of course you're continuing as you said to maintain promotions, maintain higher, and can you just remind us of how you manage talent through this type of environment, so you emerge with a stronger bench on the other side? Thanks. Julie Sweet : Sure. I mean, it's a great question and something we really focus on because our competitive advantage is phenomenal talent. And the underlying fundamentals of the market, the need to digitally transform and of our business remain strong. And so, we are very focused on preserving that great talent and our strategic capabilities because we have everything from Strategy and Consulting to operations and so that's been our principle. So we're pulling the usual levers of less hiring, except in specific areas of replacing subcontractors if we don't need it. We continue to promote, but we moderated the promotions. But it's important that we're delivering still on it. We've delayed some start dates, as you would do, as you would imagine. The second thing we're doing is, we did just put in this new growth model and we were able in a more simplified organization to identify efficiencies. So we're going after some cost structural decreases that are helping. And then as we move forward, we'll do things like we're in our annual performance process. And so, the pace of how we do our kind of business as usual, managing out of our lower performers is another lever that we can pull as we look forward, and what we're really focused on is making sure, like say for our intelligent platform services business, yes it's moderating, but we know it is an absolute critical part of our business. So we're doing a lot of upskilling. I mean, I think this - I'm going to give you a number that I think is so phenomenal. Since the beginning of March, when we hit COVID and we saw the shift in demand in technology we have reskilled 37,000 people in hot areas like cloud since the beginning of March. And these are in sort of 15 to - on average 15 to 20-hour modules of reskilling to pivot. We've taken our Strategy and Consulting people and pivoted to some of the needs for operations in the public sector, because again those are - also require those insights. And the resiliency of a business like ours because we're in multiple industries, multiple types of work and we're able to kind of seamlessly move people who are used to working in these multi-dimensional teams anyway. And by the way, our people love it, because they get great new opportunities. So we feel really good about how we're managing it. And to your point, Lisa, we think we're going to come out much stronger because of how we're delivering for our people. Lisa Ellis : Terrific, great color, thank you. Thanks, guys. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. David Koning : Yes, hey, guys. Thank you and congrats. My question, The New really didn't decelerate that much and maybe that just is a function of exactly you're talking about some of these newer products doing well, while some of the older part decelerated more. As the economy comes back, eventually, do you think The New kind of just gets to just a higher level of growth and then the older services just stay at a lower level? I mean is that really what we're seeing now? Julie Sweet : I mean, look, if you sort of look at it I would start with like we're in the big shock, right? I mean that how fast the economy went down, the need that every business is now a health business and so all of these. So, I don't read too much into a quarter's sort of response in terms of now new versus legacy other than the impact of what's happening to have to move to online everything and remote will absolutely require and is requiring and that's what we see in our pipeline, an acceleration of building the digital foundation which means, companies are going to have to make more choices. And this is why - we used to tell you, our theory was in a financial crisis that the rotation to The New would make us more resilient and that's what is absolutely the facts. So is that - we've seen what's happened. You have to be more digital and that's going to stay and that will no doubt have some effects on where you're spending the money, but it's part of what's driving what we're doing now with our managed services and helping modernize those for our clients in a more cost-effective way to get our clients to The New. And a lot of what we're doing now is taking all of our learning capabilities and building that in for our clients to help them rotate their talent, which they need to do as well. David Koning : Great, thanks. And one quick numbers question. The new reporting on segments with the geos, the margins in the growth markets have been very high this year, and specifically in Q3 was very high, I think 21%. Is there something changing in the environment that allows those margins to be higher? Is that going to continue, or maybe it's just a short-term blip? KC McClure : Yes, thanks for the question. This is the first time that we have provided operating income by market. And the way I would just say, to take a look at operating income across our markets, Dave, would be the very same way that you thought about it as it relates to the operating groups, like you're going to have - we have variations by markets just like we did throughout the years in operating groups. It's really going to be impacted by these services that we do in that market, the mix of industries that we have, any type of economic impacts that are happening in a specific market, as well as maybe investments that we're making particularly to that geography. So I think that's - the lens I would look at operating income would be the same as we've always historically done against operating groups and we manage obviously to overall Accenture operating income. As it relates specifically to the growth markets, we had very strong performance in our Japanese business, which is a major growth driver, and overall our contract performance and profitability is very strong in the growth markets. David Koning : Great, thanks, guys. Operator : Your next question comes from the line of Harshita Rawat from Bernstein. Please go ahead. Harshita Rawat : Hi, good morning Julie, KC. My question is, we are seeing in this environment that many companies are starting to rethink work from home policies as a margin driver longer term, given the higher productivity we've seen in this remote working environment. Is this something you're seeing, looking at? And more broadly what have been some of the positive and negative surprises in this new working environment? Thank you. KC McClure : Yes, I think I'll start and Julie can certainly weigh in. I think one of the things that's kind of - you asked about margin and unique in this environment is, what I would say that, and we're taking full advantage of this is the fact that we are really not traveling, particularly for non-billable events and meetings. And so we are using - we're taking full advantage of that and making sure that we continue then to use that extra capacity to invest in our business, to preserve our talent, while at the same time giving margin expansion. So I think for us, that's probably the bigger change within this environment. We have obviously moved - we've always been able to work from home to a great degree, and within our centers, we have been able to make that change as well this quarter. But that's not really going to be a significant increase or decrease in margin in and of itself. Julie Sweet : And then if you look at it, as it relates to ourselves, it's complicated. Right? Looking at our operations business it's 24/7 and we run shifts and we get to have the advantage of sort of using assets over and over. So, I mean, it's a - it's not a straightforward sort of discussion around that, but maybe let's just take a step back, what are the realities, right? We're opened 30% of our offices now, but we're not putting a lot of people back in the office and neither are our clients around the globe because we're dealing with an ongoing health situation. And so, whether you like it or not, remote working is going to be here to stay at a pretty high level for some time. And so, we and our clients are focused on understanding where does that make sense. I was just talking to a technology company yesterday where what they've said is, look, everything is working pretty well except R&D, not because R&D needs to be in the office, but they're just struggling to collaborate as well. And so, company by company, are learning. I give a lot of advice to CEOs about this because there are some who've got really excited about, let's get rid of all our real estate. Back in the '90s, we pioneered remote working and we called it hoteling, and particularly in the U.S., we took out a lot of real estate because we said our people are at our client sites and they're - or they could be home. And what we found, in fact, over the last five years, when I was running North America, we started gradually to expand the footprint again because there is a benefit of bringing people together as well. Now, we've proved you can innovate remotely as I gave some of those examples, but I would say it's going to be cautious. As a respect to sort of driving our business, what it has helped CEOs really understand is some of the areas in some industries that have resisted say finance and accounting and certain areas saying no, no, no, we need to have the teams together is to recognize that they can really rethink like what should they do in-house? What can they rely on a partner like Accenture? How to get the right balance, both from an expertise and a cost perspective, but just as much this idea of leveraging others for digital transformation and you're going to see more of that thinking. I mean, when you move to the cloud, you're basically saying you have this important permanent third-party partners that are running your business, right? And so, how digital transformation happens at speed going forward is really going to be this weaving of partners together, which is why the fact that we're so trusted really helps us in this environment. Harshita Rawat : Great, thank you very much. Operator : Your next question comes from the line of Edward Caso from Wells Fargo. Please go ahead. Edward Caso : Hi, good morning. Can you talk a little bit more about your Consulting bookings? How much of the sort of the solid quarter do you expect that you had in the quarter was related to the responding to the COVID crisis? And I'm not sure I heard it in response to Tien-tsin's question, but the strong awards outlook for Q4, how does that split out between Consulting and Outsourcing? Thank you. KC McClure : Yes, hey, nice to talk to you. In terms of what we were guiding to in Q4, we see overall stronger bookings. I'll leave it at that in terms of, you know, we don't really give a sense or guide to the overall fourth quarter. And I think, just in terms of what was in our consulting bookings, Julie provided a lot of color, we had, as we talked about our overall bookings were 70% in The New which is digital to move to the cloud. Security was really important in this current environment, as well as other digital areas. So, I don't know, Julie, if there's anything else in addition you want to add on. Julie Sweet : No, I mean as I said, our bookings were kind of sort of split between Outsourcing and Consulting sort of similar to that pattern overall. KC McClure : No, change there, yes. Julie Sweet : In the quarter. KC McClure : Yes, in the quarter. That's right. Edward Caso : And my other question is around utilization, it went down a few points here. Have you found bottom yet on utilization or we're sort of picking up information that you guys are doing some layoffs and so forth and wondering if you've been able to sort of stabilize the utilization yet? KC McClure : Yes, maybe I'll just quickly on utilization, yes, we did do a tick down in Q3. It's nothing that we're concerned about. It's really a bit particularly in operations in our centers, as we moved during the time that we moved to work from home, as well as there were some elements - minor elements of work from home restrictions. But that said, it was within the zone that we expected, and we continue to deliver for our clients in their time of need. Julie Sweet : Yes. And with respect to managing, as I've said before, we've identified some real areas of efficiencies and so that has obviously headcount implications to it, which may be what you're calling layoffs. We really see it is as focusing on our cost structure, and then otherwise managing our supply and demand as I went through before in a pretty ordinary course. We don't see some extraordinary workforce actions, and remember that Q4 guidance builds that in and that we think we're either stabilizing to slightly up in terms of our business environment, because if you look at our guidance, we're pretty pleased. I mean Q3 had a great strong March. We don't have that in Q4. And so we see - do see our business either stabilizing or slightly up. KC McClure : Yes and then I just - another fact on that, as you saw from our - our headcount went up sequentially 1%. Right? So for the quarter, we're up over 6% for the year. Edward Caso : Thank you. Angie Park : Great, thanks, Ed. Greg, we have time for one more question, and then Julie will wrap up the call. Operator : Okay. That question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : Hi, good morning, thank you. I wanted to ask on bookings conversion. Can you comment on clients' willingness to ramp up some of these large projects in this environment? I'm curious, if you're seeing any extension of the period between signings and project startups and how that might impact near-term outlook? Julie Sweet : Well, I mean, our outlook includes kind of what we're seeing and it's a little bit all over the map, right? You've got some clients who want to go faster, because they need the savings faster, you have other clients to maybe having a slower ramp-up. So I'd say it's mixed. KC McClure : Yes. And I think maybe in terms of our outlook, maybe the way I'd answer it too is, if you look at our Q4 revenue guidance, I think there is really kind of what would put us at the top versus what would put us at the bottom is probably two swing factors. One would be really how the industries - that industry dynamic that we talked about, how that continues to play out and then how the Strategy & Consulting work evolves in the quarter. Bryan Bergin : Okay. And then just on your comments on digital, can you give us a sense on how those underlying components performs interactive relative to cloud and security and any quantification there? Julie Sweet : Well, we don't, we don't know about quantify. But as I told you earlier, right, we had Accenture Interactive pre-crisis have been significantly growing and it was significantly impacted in Q3 and that primarily around industries and kind of focus, so you've got that. And then, whereas we sort of look at cloud that really was up and security was up, and remember Intelligent Platform Services came down. So those are kind of the big components that we normally kind of give you a sense of. KC McClure : Yes, I would say just - just to add on to what Julie said when we talked about the industry dynamics that I talked about earlier, that really plays out the same way with Accenture Interactive. There was growth in Accenture Interactive and the less impacted industries. Right? And they had also a similar dynamic on the areas that had more pressure - industries that had more pressure this quarter they have some declines. Julie Sweet : Great. Well thank you, everyone. Before I wrap up, I did want to give a special shout out to Fabio Benasso, who leads our Italian business to his leadership team and all of our people in Italy. As you all saw, Italy was actually in lockdown in the entire three months of the quarter and it was an extraordinarily difficult time, and yet they delivered 8% revenue growth in local currency in Q3, because they stayed so close to our clients and to each other and I just thought it deserved a very special mention. As I wrap up, we really believe that Accenture is uniquely positioned today to help our clients succeed in the current environment, both because of what we do as well as how we do it. We are committed to shared success with our clients, people, shareholders and communities to living our core values and to being a trusted leader and responsible business. Thank you to our people and leaders for how you come together every day to deliver on our commitments, and a special thank you to our shareholders for your continued trust and support. Be well everyone, and thank you for joining. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconferencing. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,020	3	2020Q3	2020Q4	2020-09-24	7.609	7.673	8.235	8.393	null	28.78	29.48	Operator : Ladies and gentlemen, thank you for standing by, and welcome to Accenture's Fourth Quarter Fiscal 2020 Earnings Call. [Operator Instructions]. And I would now like to turn the conference over to your host, Angie Park, Managing Director, Head of Investor Relations. Please go ahead. Angie Park : Thank you, operator, and thanks, everyone, for joining us today on our fourth quarter and full fiscal 2020 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chief Executive Officer; and KC McClure, our Chief Financial Officer. We hope you've had an opportunity to review the news release issued a short time ago. Let me quickly outline the agenda for today's call. Julie will begin with an overview of our results. KC will take you through the financial details, including the income statement and the balance sheet, along with some key operational metrics for both the fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the first quarter and full fiscal year 2021. We will then take your questions before Julie 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 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 Julie. Julie Sweet : Thank you, Angie, and thank you, everyone, for joining us. Fiscal '20 results demonstrate the relevance of our growth strategy, the resilience of our business and our people, our operational rigor and discipline, the power of the relationships we have with the world's leading companies and ecosystem partners and our ability to pivot rapidly to meet the needs of our clients and new ways of operating. Fiscal year '20 also demonstrated the unique advantages of our long track record of focusing on being a responsible business, from our commitment to inclusion and diversity that has helped make us an innovation-led company, to our focus on investing in our people and their skills, to the way we live our core values, all of which help make us the trusted partner that our clients have turned to in the face of the ongoing global health, economic and social crisis. And if there was ever any doubt, we clearly demonstrated that scale matters. We are unique in our industry for the scale of our digital, cloud and security capabilities, and for our leadership in all the services critical to building a company's digital core, transforming its operations, and accelerating growth with our four services of strategy and consulting, interactive, technology and operations, as well as our deep industry experience and data and artificial intelligence capabilities, and we are also unique in the scale we have with large client relationships and across 13 industry groups with a global footprint. This scale has been core to our resilience in the second half of FY '20. Let me share a few highlights. We are now approximately 70% in "the New"- digital, cloud, and security, just when the need for these services, already high, accelerated dramatically as a result of COVID-19. In fact, in FY '21, we will no longer measure "the New" as "the New" is now our core. And as of March 1, with the new growth model, we have embedded digital everywhere. We will continue to share color on our growth drivers, including cloud and security as we continue to invest in these large, high-growth market opportunities. We ended FY '20 with 216 Diamond clients, which represent our largest client relationships, a net increase of 15 over the prior year. We transitioned seamlessly to our new growth model with a new global management committee to increase our agility in bringing together the power of our multiservice teams to our clients and to create greater opportunities for our people. And the new model and team successfully passed a challenging test, navigating the pandemic and emerging stronger. More on that later. We committed to stronger bookings in Q4, and we delivered with our second highest bookings ever in the fourth quarter, finishing the year with a record $50 billion of sales. In FY '20, we continued to increase our investments for the future at scale with $1.5 billion in acquisitions, $871 million in R&D in our assets, platforms and solutions, including growing our portfolio of patents and pending patents to over 7,900 and delivering a 6% increase in training hours for our 500,000 people, while reducing our training cost by 11% to $866 million due to our digital learning platforms. We are now 45% women, on track for our 2025 goal of a 50-50 gender balance. And this month, we announced ambitious new goals to increase our African-American and Black and Hispanic American and Latinx communities in the U.S. And despite the unprecedented uncertainty and volatility, with the pandemic declared only a few days before we had to give guidance for Q3, we called it like we saw it for each of Q3 and Q4 and delivered within our guidance. For the full year, we delivered either within or above our guided range and continued to deliver growth ahead of market modest margin expansion and record free cash flow. Our resilience begins with an exceptional leadership team and our incredibly talented and dedicated people. Before I turn over to KC, I want to thank each of them for what has truly been an exceptional year that we should all be proud of. KC, over to you. Kathleen McClure : Thank you, Julie, and thanks to all of you for joining us on today's call. We were pleased with our overall results in the fourth quarter, which were within our guided range and aligned to our expectations. Our results reinforce our distinctive position in the marketplace and reflect the diversity of our business. Once again, these results illustrate Accenture's unique ability to run our business with discipline and deliver significant value for our shareholders in an uncertain environment. So, let me begin by summarizing a few of the highlights of the quarter. Revenues declined 1% in local currency, in line with our guided range. This includes a reduction of approximately 2 percentage points from a decline in revenues from reimbursable travel costs. Importantly, aligned with our growth imperatives, we continued to take significant market share for both the quarter and the year. The diversity of our business continues to serve us well. From an industry perspective, consistent with last quarter, approximately 50% of our revenues came from seven industries that were less impacted from the pandemic and, in aggregate, grew high-single digits with continued double-digit growth in Public Service, Software & Platforms, and Life Sciences. At the same time, as we expected, we saw continued pressure from clients in highly impacted industries, which include travel; retail; energy; high tech, including aerospace and defense; and industrial. While performance varied, this group collectively represents over 20% of our revenues and declined mid-teens. Operating margin was 14.3%, an increase of 10 basis points for the quarter and the full year. We continue to drive sustainable margin expansion while making significant investments in our business and our people to extend our market leadership. We continue to benefit from lower spend on travel, meetings, and events. And finally, we delivered free cash flow of $3 billion, which surpassed our expectations, driven by superior DSO management. Now let me turn to some of the details. New bookings were $14 billion for the quarter, our second highest on record and reflect 9% growth with a book-to-bill of 1.3. Consulting bookings were $6.5 billion with a book-to-bill of 1.1. Outsourcing bookings of $7.5 billion were a record with a book-to-bill of 1.5. Bookings continue to be dominated by strong demand for digital, cloud, and security-related services, which we estimate represented approximately 70% of our new bookings. We were very pleased that we delivered on our expectations of strong bookings this quarter, and they came in as we expected with strong bookings in technology and operations and lower bookings in strategy and consulting. Turning now to revenues. Revenues for the quarter were $10.8 billion, a 1% decline in local currency and 2% decline in U.S. dollars, including a reduction of approximately 2% from a decline in revenues from reimbursable travel costs. Consulting revenues for the quarter were $5.7 billion, a decline of 8% in both local currency and U.S. dollars, which includes a reduction of approximately 3% from a decline in revenues from reimbursable travel costs. Outsourcing revenues were $5.2 billion, up 7% in local currency and 6% in U.S. dollars. Digital, cloud, and security-related services grew low-single digits. Taking a closer look at our service dimensions. Operations grew high single digits. Technology services grew mid-single digits. And strategy and consulting services declined low teens. Before I give color on our markets, the industry dynamics that I have mentioned previously played out in a similar fashion across all 3. In North America, revenue growth was flat in local currency. In Europe, revenue declined 5% in local currency. We saw mid-single-digit growth in Italy, slight growth in Germany, with continued declines in the U.K. In the Growth Markets, we delivered 3% revenue growth in local currency, led by double-digit growth in Japan and high single-digit growth in Brazil. Moving down the income statement. Gross margin for the quarter was 31.8% compared with 31.1% for the same period last year. Sales and marketing expense for the quarter was 10.6%, consistent with the fourth quarter last year. General and administrative expenses was 6.8% compared to 6.2% for the same quarter last year. Operating income was $1.5 billion in the fourth quarter, reflecting a 14.3% operating margin, up 10 basis points compared with Q4 last year. Before I continue, I'd like to highlight an investment gain that impacted our tax rate and increased EPS by $0.29 for the fourth quarter and $0.43 for the full year. Of this $0.43 gain, $0.27 was factored into the full year EPS guidance provided in June, and a quarterly reconciliation can be found on our website. The following comparisons exclude this impact and reflect adjusted results. Our adjusted effective tax rate for the quarter was 28.4% compared with an effective tax rate of 26.6% for the fourth quarter last year. Adjusted diluted earnings per share were $1.70 compared to EPS of $1.74 in the fourth quarter last year. For the full fiscal year, adjusted earnings per share were $7.46, which was $0.03 above our adjusted guidance range for the year. Days service outstanding were 35 days compared to 41 days last quarter and 40 days in the fourth quarter of last year. Free cash flow for the quarter was $3 billion, resulting from cash generated by operating activities of $3.2 billion, net of property and equipment additions of $189 million. Our cash balance at August 31 was $8.4 billion compared with $6.1 billion at August 31 last year. With regards to our ongoing objective to return cash to shareholders, in the fourth quarter, we repurchased or redeemed 2.6 million shares for $590 million at an average price of $225.25 per share. Also in August, we paid our fourth quarterly cash dividend of $0.80 per share for a total of $509 million. And our Board of Directors declared a quarterly cash dividend of $0.88 per share to be paid on November 13, a 10% increase over last year, and approved $5 billion of additional share repurchase authority. Reflecting our results for the full year. We started with strong momentum in the first half and quickly adjusted and reset with the onset of the pandemic. We delivered approximately $50 billion in new bookings, reflecting a 10% increase over last year, setting 2 record highs this year. We continued to provide guidance on our business throughout the year and, importantly, delivered revenues within our guided range at 4%, significantly taking market share. We delivered on our commitment of margin expansion even with lower top line growth and fully continued all elements of our capital allocation, with $1.5 billion of investments in acquisitions, a record $7.6 billion of free cash flow and returned $5 billion of cash to shareholders, exceeding our outlook provided last September. In closing with fiscal year '20 behind us, we are proud of how we managed our business and delivered for our clients, our people, our shareholders, our partners and our communities in what was truly an unprecedented fiscal year. And we feel really good about our positioning for fiscal '21. Now let me turn it back to Julie. Julie Sweet : Thank you, KC. From an overall demand perspective, the trends that we discussed last quarter are continuing. Companies need to accelerate their digital transformation across their enterprises and move to the cloud; address cost pressures, which vary by industry but are universal; build resilience; adjust their operations and customer engagement to a remote-everything environment; and find new sources of growth. Now I will give you a little more color on the depth and breadth of our ability to deliver value to our clients in this environment through the lens of some of our 17 clients with new bookings over $100 million in Q4. Then I will turn to fiscal year '21. Diebold Nixdorf, a global leader in services, software and hardware for the banking and retail industries, and Accenture have extended a strategic agreement to accelerate Diebold Nixdorf's multiyear digital and cloud transformation program, which includes streamlining its finance, human resource, IT and sales systems. The collaboration will unlock approximately $50 million of incremental savings through 2023, while improving business productivity, consolidating operations and enabling investment in innovation and growth opportunities. Prudential Financial, a financial wellness leader and premier active global investment manager, has entered into an agreement with Accenture to transform its group insurance operating model by redesigning its processes, operations and technology to create simple, intuitive interactions between brokers, customers and employees that enhance financial wellness. New digital solutions designed by Accenture Interactive and powered by artificial intelligence and analytics from our SynOps platform and our operations team will provide more data-driven, seamless and human-centered experiences in onboarding, billing and claims processes, enhancing user satisfaction and, ultimately, revenue growth. Halliburton, a leading global provider of products and services to the energy industry, Accenture and Microsoft entered into a 5-year strategic agreement to advance Halliburton's digital capabilities in Microsoft Azure. Halliburton will complete its move to cloud-based digital platforms, drive additional business agility, reduce capital expenditures and strengthen its customer offerings as well as achieve sustainability benefits by migrating all of its physical data centers to Azure. A leading global automotive company has selected Accenture to migrate 55% of its applications over 18 months to the cloud, working with its ecosystem partners for the public cloud, AWS and GCP, and HPE for its hybrid cloud. This work will address both cost pressures and the need to transform their IT infrastructure to address obsolescence and provide digital experiences. These examples are noteworthy for their diversity across industries, complexity requiring multiservice teams, strong ecosystem partnerships and using our assets, platforms and solutions. And many involve us delivering what we call 360-degree value, because we are creating agility, helping reskill our clients' employees or helping reduce their carbon footprint to the move to the cloud in addition to delivering clear financial value. And stepping back for a moment. Our clients were being impacted by unprecedented change before COVID-19. Then came COVID-19, giving a whole new meaning to unprecedented and requiring our clients to change virtually every aspect of their business faster than ever before, and they are turning to us to help embrace that need for change and become stronger. Turning to fiscal year '21. Our own formula for market leadership is enduring. We continually transform our business and embrace change to create more value for our clients with incredibly talented people. We view fiscal year '21 as turning a page. We are no longer navigating a crisis. We are facing a new reality, and we plan on returning to pre-COVID growth rates by the second half of this fiscal year, and we are ready. We are emerging from the second half of fiscal year '20 stronger than when we entered, which was our strategy. As a leadership team, we set five measures of what stronger means, and we have met each of them. First, did we grow market share faster than pre-COVID? Check. We grew at approximately 4x the market in H2 as compared to 2x the market in H1. And as a reminder, when we say market, we were referring to our basket of publicly traded companies. Second, did we execute on our big deal pipeline in H2 despite the crisis, which would be a proxy for enhancing our role as the trusted transformation partner? Check. In fact, we had 3 more clients with over $100 million of bookings in H2 compared to H1 of this year. Third, did we capture new growth opportunities? Check. We have had substantial new bookings in the health and public sector, such as the 10 states in the U.S. where we are doing contact tracing in remote collaboration services as well as cloud, security, supply chain and digital manufacturing, which helped offset a portion of the severe impact on some of our clients. Fourth, did we continue to invest in our business and our people? Check. Not only did we invest significantly in our business and increase our training hours, but we also created the capacity to pay our people meaningful bonuses for fiscal year '20 performance and are planning for a significant level of promotions in our upcoming December promotion cycle. And all of this, we believe, will distinguish us from our competitors. And finally, fifth, did we continue to deliver consistently on our shareholder commitments? Check. And we also reduced structural costs through our new growth model and took to accelerate our fiscal year '21 usual level of performance management-related exits of around 5% each fiscal year so that we are preserving our talented workforce for the future while positioning ourselves for modest margin expansion and continued investment in our business in fiscal year '21. Before KC gives you more details on our FY '21 outlook, I want to touch on Accenture Cloud first, which is an example of how we anticipate client needs and then act at speed and at scale. Last week, we announced the creation of Accenture Cloud First and a $3 billion investment over 3 years, which will be funded by prioritizing our expected investments across the business. Accenture Cloud First is a new multiservice group of 70,000 cloud professionals with more than 100,000 people providing cloud-related services, which brings together the full power and breadth of Accenture's industry and technology capabilities, ecosystem partnerships and deep commitment to upskilling clients' employees and to responsible business with the singular focus of enabling organizations to move to the cloud with greater speed and achieve greater value for all their stakeholders at this critical time. We have been building our cloud capabilities for the last decade and are a leader with approximately $12 billion in cloud revenue for FY '20, growing double digits, which includes our SaaS capabilities delivered through our Intelligent Platform Services business. This positioned us well to recognize that COVID-19 has created a new inflection point that requires every company to dramatically accelerate the move to the cloud as a foundation for digital transformation to build the resilience, new experience and products, trust, speed and structural cost reduction that the ongoing health, economic and societal crisis demands and that a better future for all requires. Post-COVID leadership requires that every business become a cloud-first business, quickly moving from today's approximately 20% in the cloud to 80%. This is a "once in a digital era" massive replatforming of global business. Accenture Cloud First works seamlessly with our Intelligent Platform Services, which focuses on our SaaS capabilities, which are an important part of replatforming global businesses. Recent wins include working with a leading consumer goods manufacturer on a global deployment of SAP S/4HANA, initially focusing on their central finance system and building a new digital backbone for the entire supply chain in China from purchasing to direct-to-consumer sales; working with the U.S. Air Force to establish a new cloud-based common infrastructure for its Oracle Enterprise Resources Planning program; working with a bank on the integration of their front office operations and enhancing customer relationships powered by Salesforce; and working with a top higher education research institution to implement Workday to transform their HR capabilities, to drive real-time data analytics and become a strategic partner across the organization. And ServiceNow is another digital platform that is critical. For example, for a public service agency, we collaborated with ServiceNow to rapidly implement a cloud-enabled workflow solution, enabling millions of citizens to access government services while complying with dynamic pandemic health safety guidelines. Now over to you, KC. Kathleen McClure : Thanks, Julie. Before I get into our business outlook, as I did last quarter, I would like to remind you that given the coronavirus pandemic, there are a number of factors that we may not be able to accurately predict, including the duration and magnitude of the impact, the pace of recovery as well as those described in our most recent quarterly filings. With that said, let me now turn to our business outlook. For the first quarter of fiscal '21, we expect revenues to be in the range of $11.15 billion to $11.55 billion. This assumes the impact of FX will be about a positive 1.5% compared to the first quarter of fiscal '20. It also reflects an estimated negative 3% to flat growth in local currency and includes a reduction of approximately 2 percentage points from a decline in revenue from reimbursable travel costs. For the full fiscal year '21, based on how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be approximately positive 2% compared to fiscal '20. For the full fiscal '21, we expect our revenue to be in the range of 2% to 5% growth in local currency over fiscal '20, including approximately negative 1% from a decline in revenues from reimbursable travel based on a 2% reduction in the first half of the year and no material impact in the second half of the year. A couple of key points that are helpful to understand our guidance. We expect our growth will be lower in H1, with Q1 and Q2 ranges being similar, and we expect we will reconnect with higher growth in H2 in the range of high single digits to low double digits. For operating margin, we expect fiscal year '21 to be 14.8% to 15%, a 10 to 30 basis point expansion over fiscal '20 results. We expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.9% in fiscal '20. For earnings per share, we expect full year diluted EPS for fiscal '21 to be in the range of $7.80 to $8.10 and or 5% to 9% growth over adjusted fiscal '20 results. For the full fiscal '21, we expect operating cash flow to be in the range of $6.35 billion to $6.85 billion; property and equipment additions to be approximately $650 million; and free cash flow to be in the range of $5.7 billion to $6.2 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we expect to return at least $5.3 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so that we can take your questions. Angie? Angie Park : Thanks, KC. [Operator Instructions]. Operator, would you provide instructions for those on the call? Operator : [Operator Instructions]. Our first question today will come from the line of Tien-Tsin Huang of JPMorgan. Tien- Tsin Huang : I wanted to -- you gave a lot of good information here. It sounds like strategy and consulting services saw the biggest rate of change exiting the year, a little bit more pressure. I know operations improved. So I'm curious on the visibility and the outlook for strategy and consulting in fiscal '21. I presume that's going to see probably a nice recovery in the second half, based on your comments there. And are you over-indexed at all in strategy and consulting to some of the industries impacted by the pandemic? Kathleen McClure : Thanks, Tien-Tsin, for your question. So let me talk about what we see for growth in strategy and consulting, and then Julie can pass on some additional color. So first thing I would say is that when we look at strategy and consulting, we really do see that it's held up in this environment, because it really is critical to our differentiation in the places where our clients are continuing to invest. And if we look at the actual results, strategy and consulting, they came in really as we expected in Q4. And you're right, it does follow a very similar pattern from an industry perspective, Tien-Tsin, where we see pressure in strategy and consulting in the most highly impacted industries in the market. Now in terms of the dynamics for growth, we see the same dynamics in the first quarter essentially that we're seeing from an industry perspective in strategy and consulting growth in the first quarter as we saw in the fourth quarter, and that should play out pretty similar in the first half. But we do see recovery and reconnecting with growth in the back half of the year. Let me just hand it over to Julie for some more comments. Julie Sweet : Yes. Tien-Tsin, I think what's important -- so in other words, we're not over-indexed in strategy and consulting versus the rest of our business and industries, and so how it's kind of worked with sort of 20% in severe industries, et cetera. As I talked about last quarter, right, when you think about strategy and consulting, it's a huge differentiator in sort of these transformational deals, and I'll talk about that in a minute. And then, as I said, the leading companies right now are very focused. So some of the smaller work that you would do to sort of incubate and to start doing things, companies are saying and we're telling companies, focus on the big rocks that you need to do, right. And so, what's playing out in the market isn't about sort of a weakness in strategy and consulting. It's a reflection of how our clients are thinking about their businesses and what they need. So, I'm actually quite pleased with how well strategy and consulting is holding up. And the thing that's the most important is that this is how we're delivering 17 clients with over $100 million bookings, because each of these big transformations, like require this deep understanding of industry and functions. And you see that in other places. For example, the Bank of England, we announced a deal there where we're helping them with their high-value payments infrastructure to support resilience and innovation, right. Digital payments and instant payments were huge before the crisis. As you know, it's changed dramatically. And because we understand the industry, we have cross-industry expertise in how digital payments are being used, right, as well as the understanding of data and the technology, those things come together to create this new system that improves resiliency, customer experience, access to data and end-to-end risk management. No one can do that, right, with all of those skills but [audio disturbance] anything? Maybe next question. Angie Park : Next question is from Lisa. Operator : Lisa Ellis of MoffettNathanson. Lisa Ellis : Yes, following up a little bit on -- well, a related question to Tien-Tsin's question about consulting. Can you talk a little bit about -- just looking like, obviously, revenue is down in the quarter, but then bookings and consulting very strong. I guess a follow-up on that is what are you seeing clients kind of commit to in the current environment on the consulting side of things? Like meaning, what's their willingness to commit on these kind of new, more strategic projects in the current environment? I'll leave it there, and then I have a follow-up. Julie Sweet : So Lisa, and again, and I know all of you guys think very much about strategy and consulting and then the technology and operations separately. But in fact, as I've said consistently, including pre-COVID, we really think about our services together. But let me just give you an example of one of the most severely impacted industries, energy. So last week, I'm with the CEO and the leadership team of one of our major clients, and the meeting goes like this : The first part of the meeting is, thank you very much, Accenture, for helping us save money in finance and accounting operations because we lowered what they needed to create some -- help them with their cost pressures. Then the next part of the meeting is all about the IT modernization that we signed during Q3, right, which includes strategy and consulting. It includes our application outsourcing, maintenance. And it includes other technology services, right. And that was about -- because they have to continue to build their digital core, they need -- it's helping them with cost, but it's also about moving to the cloud. It's about creating those capabilities. Then the third part of the meeting was around some pilots that we're trying to shape with them that include -- that are -- it's driven by strategy and consulting, where the criteria is we need to turn them faster. So there's small pilots all about innovation, right. But the criteria we're helping them say is, well what should we do that will get more return, right, because they've got to balance, right. So again, we think about this as what are the needs of the client and how do we bring these services to deal with their short term, their longer-term transformation and also thinking very quickly about how they can innovate to get nearer-term returns. Does that help kind of bring that together in terms of how they're thinking? Lisa Ellis : Yes. Yes. And then my follow-up, this is a kind of broader industry question. But we're looking at -- we typically think of Accenture, given your scale, as sort of a bellwether for the industry, and we are looking at kind of historical times in history when we've seen this bifurcation between IT spending and GDP. And you're running kind of flattish on revenues, which is very impressive given that GDP is running down mid- to high-single digits. And those times in the history have always been when there's been like a really big disruption on the technology side : the Internet, personal computers, whatnot. Do you feel like -- and this is again a question because I know you're in client meetings all day every day. Do you feel like the shift to digital happening right now because of the pandemic is kind of similar to those situations and that we're seeing sort of that level of dislocation or change at the enterprise level in terms of their investments in technology? Julie Sweet : Yes. And Lisa, that's exactly what's happening. Because remember, before crisis, there was exponential technology change, right. I mean, just in January, we were talking about the big inflection point. Remember, it was back in 2013 that we first said every business is a digital business. So that was happening pre-COVID. What COVID has done -- we thought it would take a decade. It's now shortened to what we think is more like five years. That's why we announced Accenture Cloud First last week, because we think this is right now the "once in a digital era" moment where we are rapidly moving to a complete replatforming of global business, right. It is hugely significant and that's why having invested since 2014 when we first created digital in these capabilities is what's helping us, as you say, do so well in this incredibly difficult challenging macro environment. Angie Park : Great. Thank you, Lisa. Operator : We'll go next to the line of Jason Kupferberg of Bank of America. Jason Kupferberg : I just had kind of a two-part question, so maybe I'll ask it upfront. Just if we look at the growth in "the New" here in Q4, it was up low single digits, and it was less of a premium in the growth rate there relative to the overall corporate growth than we saw last quarter. So I just wanted to get a sense of whether or not that was in line with your expectations. And then can you just more broadly comment like across consulting and outsourcing, what you're seeing in terms of the pace of converting bookings to revenue? And how that's factoring into your thought process, especially for the outlook in the first half of fiscal '21. Kathleen McClure : Yes. Let me cover the first question. In terms of the growth of "the New", so it did hold up very well, and it really came in as we had expected, right. So remember, "the New" now is 70% of our business. And when we talked about "the New" and you remember this well when we put this in, the point of it really was to make sure that we were resilient in the pace of change. And if you go through and look back at what we did in 2015, where it's 1/3 of the business, it's now 70% of our business. And that really has provided us with a position of strength in which we were able then to -- when we talked about our new growth model in March 1, that we embedded digital everywhere. So that's all now the core of our business. So we did come in where we expected it to be. And overall, we feel very good about our positioning in "the New." So on the second question around how are things kind of bleeding into -- I think your question is more, how are bookings bleeding into our revenue? So let me just cover that in terms of maybe, first, looking at our bookings in terms of the mix. So if you look at the mix of what we're selling, which was very strong in the fourth quarter, $14 billion of bookings, very strong in tech, very strong in operations and I mentioned lower bookings in strategy and consulting, which we expected. So given that the lower percentage of the mix of our bookings are strategy and consulting, and as you know, they tend to be shorter, the overall duration of our bookings are a little bit longer. So when you think about our revenue and when it's going to start coming into our bookings and when it's going to start coming into revenue, I think it's important to really take a look at what's been happening in our business since COVID hit. So when we talked about our business as really impacted, and we hit our lows in April and May. And we were very pleased that in Q4, we improved from those lows, right? And we came in at where we expected within our guidance range. We also, Jason, have that 2% headwind from reimbursable revenues. So that also has a 3% impact in consulting. So that's also very unique and unusual to the situation. And the third thing just to continue to remember is that dynamics that we saw, we talked in Q3, about the higher -- the more impacted industries being where we said, 20%, feeling a little bit more pressure on growth. That's going to play out very similar -- that played out very similar in Q4, and we see that playing out very similar in the beginning part of H1 in the year. But we will build back our business in Q1 to Q2 based on our guided range that we provided. So just again, to be very clear, the guided range for Q1 of negative 3% to 0% implies stability from the growth that we -- the build back that we had in Q4, stability at the bottom end, and improvement at -- anywhere else in the range. And we continue to see that build happening in Q2 through the first half of the year. Operator : We'll go next to the line of Bryan Keane of Deutsche Bank. Bryan Keane : I had kind of a similar question, and so let me ask it a different way. The dichotomy between strong bookings, up 9% in Q4, but revenue is dropping down 1% in constant currency, that gap is the biggest, I recall, in the company's history. Because bookings are so strong, but it doesn't quite translate to revenue. And other factors I'm thinking about is potentially pricing and was there any cancellations. And then maybe there's a high amount of renewals in there. Just thinking about for the quarter itself, the dichotomy, maybe you can comment on that. Kathleen McClure : Yes. And let me just take, Bryan -- I'm going to just take your question, and I want to just talk about connecting the point of, okay, bookings and the top line revenue growth. So I talked a little bit about the duration when I was talking with Jason on his question. So let me round it out by just kind of stepping back and looking at how we see all of these bookings connecting to revenue growth. So I did touch on already what happened in Q3 and how we -- the build back from April and May in Q4. And I've touched quite a bit on H1, how we see that playing out, where we're going to continue to build back in our business. So you're going to see those bookings, Bryan, start coming back into Q1 and Q2. Although our growth rates are going to be in the similar range, we are building back our business. But let me just talk a little bit about the second half, because it's going to get a little bit more to probably your question on bookings. So we do see a different growth dynamic in the second half of fiscal '21, and we expect to reconnect with higher growth. And when we say higher growth, at the bottom end of our range, that's high single digits. At the top end, it's low double digits. And there are really 4 main drivers that we see for connecting with this higher-level growth in the back half. So the first assumption that we have is we do expect some improvement in the macroeconomic environment, which doesn't -- so we don't assume another macroeconomic shock. The second thing that we see, and this gets to your question is, we will see more of the benefit from the significant transformation deals that we sold over the last few quarters in the back half of the year. But then the third point is, at the same time, that's when we expect strategy in consulting to reconnect with growth. And I think Julie gave just terrific color on why it is that we see that coming back in the second half. And then the fourth point is that we will have in the back half of the year, as all of you know, the benefit of an easier compare. And with that, I just want to point out a couple of things. We're going to anniversary the reimbursable revenue headwind. So that's been 2% in the first half of the year. But not only will we anniversary that, but we have adjusted to this new reality of less travel as have our clients. So of course, we are meeting with clients, and, yes, we are returning to some client sites, but our H2 revenue assumption does not include a significant increase in travel. So along with a 2% inorganic contribution for the year, which aligns to about $1.7 billion acquisition spend, that gives you kind of the full picture of how we shaped our guidance, how the bookings are going to come in, when they're going to come in and drive our top line growth. And based on the current environment, while I want to continue to say for quarter one and for the full fiscal '21, that all of our ranges in play, we will connect with strong level of growth in H2. So you can consider that if you look at the impact of this, and Julie talked about turning the page, the pandemic, it was really an H2 of FY '20 impact on our business. We're building back up in H1 of fiscal year '21. And we're going to connect with growth that we believe is a strong level of growth, as characterized by at least high single digits in the second half of the year, which is implied in the low end of our guidance. Operator : Our next question will come from the line of Ashwin Shirvaikar of Citi. Ashwin Shirvaikar : So good results. Good results and comments, pretty directionally consistent with what we essentially said. And thank you for the clarification with regards to just the trajectory. I just want to put maybe a couple of finer points on it, if you don't mind. So you're essentially saying on one of those elements, the step-up in demand for "the New," you're already seeing in terms of conversations, bookings, pipeline building, all of that. The meat of it can potentially basically kick in when budgets are nailed down by your clients next calendar year, because it just takes time for large enterprises to move from a plan to do something over 5, 7 years to do it over 3 to 5 years, right and then the clarification on that is consultants traveling on projects with clients, you do not expect that to come back. Is that more of a fiscal '21 thing? Or is that just like the new reality? Kathleen McClure : Yes. So let me take just the last question and a point on the first question, then hand it over to Julie. So maybe Ashwin, a point on your first question, so let me talk about how we see demand in terms of our pipeline and bookings in FY '21. So we have a strong pipeline coming into the year, even after doing the $14 billion of bookings in Q4. And just as we look at how that's going to play out over the year, we do see Q1 being a little bit lighter and building throughout the year, which is our typical pattern. And then on the last point, what I would say is, I just want to be clear on the assumption that I have made on what we have in revenue in the back half of the year. We've been talking about this revenue headwind from travel. So I just wanted to be really clear about the assumption that I'm making in revenue that we are not assuming an uplift in the back half of the year. Julie Sweet : Yes, which means, of course, H1, we've still got the headwinds in terms of the compare. It's like the sunsets. But we're not saying, hey, but we're just going to get on. We're going to get an uplift. Kathleen McClure : I'm not baking any uplift in. Julie Sweet : It could be an upside, right, but just on the demand side, you do have it right, Ashwin, in that there's -- what's happening right now is you've got certain things we're doing immediately, and then you have these bigger conversations that we're doing. That's how you saw 17 clients last quarter. We're continuing to shape a lot of these bigger things. If you take like supply chain, for example, with one client, they needed immediate forecasting help because it's a pharma client that had to get PPE. So we worked quickly with SAP to put an integrated business planning, help forecasting, decrease critical shortages, while we're talking about a broader transformation of supply chain. Same thing for a leading health and personal care company. They needed a transportation management system, which we partnered with Blue Yonder to put in, to immediately address the issues about getting goods to different places. But we're talking about shaping an entire transformation of the supply chain to build in the resilience, get the data and the analytics, right. And that's what we're doing kind of everywhere, where we have the agility to quickly -- and by the way, the critical ecosystem partnerships to do that while at the same time we're shaping the larger conversations. That's happening in cloud as well, right. That's why we're doing Accenture Cloud First. We're oftentimes doing some immediate things, but we're shaping these bigger transformations, working with the public hyperscalers on the hybrid cloud, working with the hyperscalers as well as the HPE, VMware, Red Hat, Ciscos of the world, who are incredibly important partners as we shape this. Ashwin Shirvaikar : Got it. And then the second question on cash flow. It's solid in the quarter, continues to be -- projections look pretty good for next year. And I know cash flow has always been a strong point for Accenture, but these levels of cash conversion are still quite impressive. So I had to ask, has something changed? Or is it perhaps related to single factors like lower variable comp? Is it sustainable at this level? Kathleen McClure : Yes. So thanks for the question on free cash flow. You're right, I mean we had record free cash flow of $7.6 billion in the year, and it surpassed even our expectations for the year. And why is that? Really, it's due to just stellar billing and collections this year. So you know we have industry-leading DSO, right. You know us well. So we're usually either around 40 days, 41 days. We closed at 35 days, right, so -- which is we haven't seen those levels since fiscal 2015. And we did all that during liquidity crisis, during a pandemic, right. So I think it's just very impressive. And it just goes to the rigor and discipline that our team has and how we run the business. And that was a 1.5 free cash flow to net income ratio. So Ashwin, you're used to how we do guide free cash flow. You know how strong we perform. And it's typical for the bottom end of our range to be a decline. And what you see this year is that we have all of our ranges decline over what we did last year. And I just want to give you some just context in this. As you know, when we go back to what is still industry-leading DSO, we've added at least five days to get back into 40 days of DSO. The way free cash flow works is it's that change of five days, and that's almost $1 billion, it's like $800 million plus of a change in free cash flow, just getting ourselves back to that level. So there's nothing other than just stellar free cash flow this year and going back to what is still superior cash management next year. Operator : We'll go next to the line of James Faucette of Morgan Stanley. James Faucette : Just two quick questions from me. First, we've talked a lot about the engagement with customers and what they're looking for from Accenture. But wondering if you can provide any color as to what we're seeing in terms of decision cycles and times around those. If those are seeing any improvement, et cetera? And my second question is related to inorganic contribution. I think you mentioned that you're expecting some level of inorganic contribution is built into your guidance. Can you just once again clarify what that looks like? And I guess more importantly, as we think about all the change and the type of work you're doing for your clients, should we expect that level of inorganic contribution to persist into the future beyond fiscal year '21? Kathleen McClure : So thanks for the question. So I'll just take the -- just clarify and confirm that for next year, we do have 2% inorganic revenue contribution factored into our guidance with up to $1.7 billion of spend. I'm not -- we won't -- don't guide into future years in terms of what we're going to do. But obviously, the D&A is a key part of our capital allocation. We have no planned changes at all to our capital allocation approach. And I'm going to hand it over to Julie to talk a little bit about any other color. Julie Sweet : Yes. Look, on the decision-making, what's happening is what you'd expect to happen, right. Everyone had to make really fast decisions in how to navigate the crisis. So there are some things that are happening at lightning speed, right. When you have to figure out your supply chain or get up on Teams fast, you do that. We've seen some acceleration in the transformation deals, right, because they're like, we got to move faster to kind of get to that. And you have other places where they slowed down things, clients where we had three things teed up, and they're like, let's do this one and then let's wait and see on these others. And so I would just say it's very contextual right now and it varies also by industry. And of course, we're now going into kind of budgets for the end of the -- as you normally note, due in the fall season. So that will be -- and that will -- we'll see how that plays out as well. Angie Park : Okay. Operator, we have time for one more question, and then Julie will wrap up the call. Operator : And that will come from the line of Bryan Bergin of Cowen. . Bryan Bergin : I just got one here for you. So on margin, how should we be thinking about your comfort level in your typical margin expansion range? And can you also comment how work-from-home implications may play into that? Kathleen McClure : Yes. So thanks for the question. So obviously, one of our key financial imperatives is to expand -- give modest margin expansion while investing at scale in our business and in our people. And we did this, you saw, Bryan, even in fiscal year '20 with lower ranges of revenue growth. And so we feel comfortable that we can continue to create the flexibility and the investment, to do our investments in talent, to do the investments in the business. Julie talked quite a bit about how excited we are in Cloud First. So I would say it's the normal rigor and discipline that we need to bring to our business, to create that margin capacity, to invest back while keeping within our 10 to 30 basis points of expansion. Julie Sweet : Yes. And on remote -- on the work from home, right, that's -- I talked about the new reality, and we're going to be working differently, but it's going to be constantly evolving. So for example, we've got about 1,400 clients worldwide, where our people are back at the clients. We're encouraging our people to come into the offices with respect to doing collaboration. We're back to approving travel. Now it's massively restricted because you're not going to go to a place where you're quarantining. We've got some people who have childcare issues, who've got health issues, and that is the reality, right. And so we're going to continue to navigate that. And this, of course, is where we already were so remote that we're really good at being able to navigate that. But that's all about the new reality. Bryan Bergin : Okay. And KC, you said 2% inorganic for fiscal '21. Was that -- was it 1% or 2% in fiscal '20 as well? Kathleen McClure : Yes. It was 2% in fiscal '20. Julie Sweet : Great. So we're excited to turn the page and deliver for our clients, people, shareholders, ecosystem partners and communities in FY '21. We call this shared success, and it is a mindset we strive to live every day. Thank you to our people and leaders for how you come together to deliver on these commitments and shared success and a special thank you to our shareholders for your continued trust and support. Be well, everyone, and thank you for joining. Operator : Thank you. And ladies and gentlemen, today's conference will be available for replay, available today after 10 a.m. Eastern Time, running through December 17 at midnight. You may access the replay system by dialing 1-866-207-1041 and entering the access code of 4996254. International participants may dial 402-970-0847. That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconferencing Services. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,020	4	2020Q4	2021Q1	2020-12-17	7.816	7.985	8.618	8.862	null	29.86	29.82	Operator : Ladies and gentlemen, thank you for standing by. Welcome to the Accenture's First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instruction will be given at that time. [Operator Instructions] 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, Ms. Angie Park. Please go ahead. Angie Park : Thank you, operator, and thanks, everyone, for joining us today on our first quarter fiscal 2021 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our 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. Julie 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 first quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the second quarter and full fiscal year 2021. We will then take your questions before Julie 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 on this call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of 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 Julie. Julie Sweet : Today, we are very pleased to announce strong financial results for our first quarter. I will begin by thanking our 514,000 people for their hard work and dedication to delivering value for our clients, which is what these results represent. Last quarter, I shared that as we began our fiscal year 2021, we were turning a page, no longer navigating a crisis, but facing a new reality with a laser focus on delivering value to our clients at this time of great need and on returning to pre-COVID growth rates by the second-half of our fiscal year. I also shared how we began fiscal year 2021 stronger than pre-crisis. Our results in Q1 made clear how we have strengthened our market position, as well as our ability to pivot our business with agility. Not only have we delivered a strong quarter, but we took exciting new actions to continue to strengthen our market position for FY 2021 and the future. Let's start with our financial results. We delivered revenue growth of 2% in local currency, well ahead of our guidance with broad-based improvement across the globe. We continue to extend our leadership position with our growth estimated over the trailing four quarters to be more than four times the market, which refers to our basket of publicly traded companies. We delivered exceptionally strong new bookings of $12.9 billion, a 25% increase over Q1 last year, including 16 clients with over $100 million in bookings. We continued to invest substantially in our business, including closing 10 acquisitions this quarter in strategic areas, such as Cloud, Intelligent Operations and Industry X. And as KC will walk through, we delivered strong profitability and returned substantial cash to shareholders. Now, let me highlight the actions we've taken in Q1 to better serve our clients, attract the best talent and extend our leadership as a responsible business and trusted partner. We created Accenture Cloud First with the planned $3 billion three-year investment to help clients in what has become a once in a digital era replatforming of global business in the cloud. We launched our new purpose, our growth strategy to deliver 360-degree value to our clients and our largest and most significant new brand campaign in a decade. In our annual cycle in December, we promoted 605 Managing Directors with a record 39% women, and I appointed 663 Senior Managing Directors, including a record 29% women. I'm excited to announce today that we met our previous goal of 25% women Managing Directors globally by the end of 2020, and have raised the bar again, setting a new goal of 30% by the end of 2025. With 45% women overall, we are on track to meet our goal of 50-50 gender equality by 2025. We set external goals in the U.S., UK and South Africa to achieve greater race and ethnicity representation overall, and among Managing Directors in these countries by 2025. We remain the only major professional services company in our industry around the world, public or private to set these types of external goals and to have our level of transparency. We believe our diversity and commitment to inclusion and equality have been and will continue to be critical to our success and a differentiator into attracting the best talent. And building on our long-standing and well-recognized commitment to the environment, we announced industry-leading goals for 2025 to achieve net zero emissions, move to zero waste and plan for water risk. As you can see, we have been busy moving forward in our new reality. KC, over to you. KC McClure : Thank you, Julie. Happy holidays to all of you, and thanks for taking the time to join us on today's call. We were very pleased with our overall results in the first quarter, which exceeded our expectations and represent a positive first step to achieving our full-year objectives. The focused execution of our strategy continues to extend our leadership position in the marketplace, as we deliver significant value to our clients and our shareholders in an uncertain and volatile environment. So let me begin by summarizing a few of the highlights of the quarter. Revenues grew 2% in local currency and continue to include a reduction of approximately 2 percentage points from a decline in revenues from reimbursable travel costs. Q1 revenues were more than $200 million above our guided range, driven by broad-based over-delivery across markets, services and industries. We also continue to extend our leadership positions with growth significantly above the market. The diversity of our business continues to serve us well, and the industry trends remain consistent with the last few quarters. Approximately 50% of our revenues came from seven industries that were less impacted by the pandemic, and in aggregate continue to grow high single digits, with continued double-digit growth in public service, software platforms and life sciences. At the same time, we saw continued pressure but at a more moderate level from clients in highly impacted industries, which include : travel, energy, high-tech, including aerospace and defence, retail and industrial. While performance varied, this group represents over 20% of our revenues and declined low double digits. Our operating margin was 16.1% for the quarter, an increase of 50 basis points. We delivered expansion while making significant investments in our business and our people to extend our market leadership. We continue to benefit from lower spend on travel and events. And we delivered very strong EPS of $2.17, up 8% over fiscal 2020, after adjusting both years for gains on an investment. And finally, we delivered significant free cash flow of $1.5 billion and returned $1.3 billion to shareholders through repurchases and dividends. We also invested approximately $500 million in acquisitions and we expect to invest at least $1.7 billion in acquisitions this fiscal year. With those high level comments, let me turn to some of the details, starting with new bookings. New bookings were $12.9 billion for the quarter, reflecting an overall book-to-bill of 1.1. Consulting bookings were $6.6 billion with a book-to-bill of 1.0. Outsourcing bookings were $6.3 billion with a book-to-bill of 1.2. We were very pleased with our bookings this quarter, which grew 25%, driven by both technology services and operations. We were also pleased with the strength of our bookings in strategy and consulting, with a book-to-bill of 1.1. Looking forward, we continue to feel very good about our pipeline. Turning now to revenues. Revenues for the quarter were $11.8 billion, a 4% increase in U.S. dollars and 2% in local currency, including a reduction of approximately 2% from a decline in revenues from reimbursable travel costs. Consulting revenues for the quarter were $6.3 billion, a decline of 1% in U.S. dollars and a decline of 2% in local currency, including a reduction of approximately 3% from a decline in revenues from reimbursable travel costs. Outsourcing revenues were $5.4 billion, up 9% in U.S. dollars and 8% in local currency. Taking a closer look at our service dimensions, operations grew double digits, technology services grew mid-single digits, and strategy and consulting services declined low double digit. Turning to our geographic markets. The industry dynamics that I mentioned earlier continue to play out in a similar manner across all three markets. In North America, revenue growth was 4% in local currency. In Europe, revenue declined 1% in local currency. We saw mid-single digit growth in Italy, with UK improving to flat. In growth markets, we delivered 3% revenue growth in local currency, led by high single digit growth in both Japan and Australia. Moving down the income statement. Gross margin for the quarter was 33.1%, compared with 32.1% for the same period last year. Sales and marketing expense for the quarter was 10.4%, compared with 10.5% for the first quarter last year. General and administrative expense was 6.6%, compared to 6.1% for the same quarter last year. Operating income was $1.9 billion for the first quarter, reflecting a 16.1% operating margin, up 50 basis points compared with Q1 last year. As a reminder, last year in fiscal '20, we’ve recognized an investment gain which impacted our tax rates and increased EPS by $0.08 in the quarter. This year in Q1, we again recognized investment gain which impacted our tax rate and increased EPS by $0.15. The following comparisons exclude these impacts and reflect adjusted results. Our adjusted effective tax rate for the quarter was 23.7%, compared with an adjusted effective tax rate of 23.9% for the first quarter last year. Adjusted diluted earnings per share were $2.17, compared with adjusted diluted earnings per share of $2.01 for the first quarter of last year. Days service outstanding work 38 days compared to 35 days last quarter and 43 days in Q1 of last year. Free cash flow for the quarter was $1.5 billion, resulting from cash generated by operating activities of $1.6 billion. Net of property and equipment additions of $93 million. Our cash balance at November 30th was $8.6 billion, compared with $8.4 billion in August 31st. With regards to our ongoing objective to return cash to shareholders. In the first quarter, we’ve repurchased or redeemed 3.3 million shares for $769 million at an average price of $229.98 per share. At November 30th, we had approximately 5.8 billion of share repurchase authority remaining. Also in November, we paid a quarterly cash dividend of $0.88 per share for a total of $558 million. This represents a 10% increase over last year. And our board of directors declared a quarterly cash dividend of $0.88 per share to be paid on February 12th, a 10% increase over the last year. So, in summary, we were very pleased with our Q1 results, and we're off to a good start in fiscal '21. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. Let me start with the environment. We saw in Q1 a broad base increase in demand that is faster than we anticipated 90 days ago. This means that as our clients have the confidence and ability to spend, they are turning to Accenture. But the uncertainty and volatility of the biggest health, economic and social crisis in our lifetimes remains, particularly as the world continues to face a deepening health impact pre-widespread vaccination. From an overall demand perspective, the trends that we discussed last quarter are continuing. Companies need to accelerate their digital transformation across their enterprises and move to the cloud, address cost pressures, build resilience and security, adjust their operations and customer engagement to a remote everything environment and changing expectations and find new sources of growth. What is becoming even more clear however, is that we are in an era of compressed transformation, in which the winners by industry will be those who are earliest to replatform their businesses in the cloud, and have the digital core and new ways of working that allows them to continuously improve their operations and find new sources of growth, which for most leading companies is requiring them to simultaneously transform multiple parts of their enterprises and their talent. For the pre-COVID digital leaders, they are racing to widen the gap, and for the digital laggards, they are racing to leapfrog. We are uniquely positioned to help the leaders and the laggards because of the depth and breadth of our capabilities. We bring the trust, experience, speed and scale that are essential to achieve compressed transformation. Now let's bring some of these demand trends to life through the lens of our Q1, and look at our own broad-based improvement. First, replatforming to the cloud. In fiscal year '20, our cloud revenue was approximately $12 billion with low double digit growth, which accelerated in Q1 with significantly higher double digit growth, driven by Accenture Cloud First. In fact, across low to highly impacted industries, and all geographic markets, we saw strong double digit growth, the race to replatform to the cloud and create new business value is clear across all our services. Our clients need our deep technical and engineering skills, and our unmatched set of relationships with the world's leading technology ecosystem companies, which are critical partners to us and to our clients. We were pleased that in Q1 industry analysts recognized us as the leading systems integrator for each of AWS, Azure and Google Cloud Platform, as well as the leading multi cloud managed services provider. Fundamental to accelerating our clients’ replatforming in the cloud, however, are our leading strategy and consulting capabilities, which give us the industry and functional insights to move rapidly and achieve early business value. For example, we are working with Takeda, a global values-based R&D-driven biopharmaceutical leader to modernize their technology platforms, including moving 80% of applications to the cloud, accelerate data services and establish an internal engine for innovation, while equipping employees with new skills and ways of working and reducing their carbon footprint. The business impact is illustrated by the plans for Takeda's plasma derived therapies business unit, which is harnessing the power of the cloud and these data services to create state-of-the-art digitally connected donation centers and modernize the donor experience, optimizing the plasma collection process, and contributing to the goal of increasing plasma collection and manufacturing by at least 65% by 2024. We are working with the Norwegian Health Net [ph] to create a health analytics platform, which is using the power of the cloud to analyze and interpret data, and ultimately improve patient outcomes, by reducing research turnaround times and access to data from months to a matter of minutes or days. And we are working with Generali, a major player in the global insurance industry to help replatform approximately 70% of its IT footprint to the cloud, to improve service quality, innovate and build a set of new cloud ready core insurance applications for emerging markets, while achieving a sustainable reduction in its total cost of ownership, and helping to upscale its workforce. In Intelligent Platform Services, which returned to low single digit growth this quarter, we saw building momentum fueled by our clients rotating to Software-as-a-Service, as well as new digital platforms. In a quick trip around the world, we see this compressed transformation playing out from the rapid transformation of the finance functions of Nickel Bank, a subsidiary of BNP Paribas, and a fast growing Neo-bank in France, with the implementation of leading software-as-a-service and ERP solutions, to the cloud based marketing transformation of a global bank with a large U.S. footprint with a SaaS implementation across its worldwide private banking network, to one of the largest implementations in the chemicals industry of a modern digital ERP system, hosted on the cloud for Indorama Ventures, a world class chemicals company with global operations headquartered in Asia, that will provide a single source of information globally, and cloud-based solutions to enhance its operations, employee development capabilities, and customer and supplier experiences. So that's the cloud. Now let's turn to digitizing operations across the Enterprise. In operations, which returned to double digit growth this quarter, we are helping our clients transform by digitizing their operations with our SynOps platform, increasing agility and reducing cost. Operations as-a-service that enables us to continue diversify our value to clients by expanding across functions and industries, we have an unmatched global footprint ability to invest an innovation engine powered by the broader Accenture. We were excited to welcome to the Accenture family this quarter N3, an Atlanta-based B2B sales firm, with more than 2,000 employees that combined specialized talent in AI and machine learning to enable smarter, more efficient sales interactions and drive sales growth in virtual environments. The power of Accenture's breadth and depth comes together at Halliburton, a leading provider of products and services to the energy industry, and a leader in driving true enterprise wide transformation enabled by digital and technology. Last quarter, we shared how we are helping Halliburton move to cloud-based digital platforms. This quarter, we announced that we are teaming with Halliburton to accelerate its digital supply chain transformation, and support digitization within Halliburton's manufacturing functions to improve service levels and business outcomes. We will leverage SynOps which we already use as part of Halliburton's digital transformation of its finance and accounting function, and our strategy and consulting expertise. In Industry X, we are digitizing manufacturing and operations and creating intelligent products and platforms. In fiscal year '20, Industry X was approximately $3 billion and grew low double digits, which is continued in Q1. We see COVID deepening the need to transform manufacturing in a contactless world with disrupted supply chains and greater cost pressures. One of our latest wins with that CNH Industrial, the manufacturer of capital goods across the agriculture, construction equipment and commercial vehicle sectors, where we are improving the global operating model to develop smart connected products and services that will grow revenue, while building a digitally enabled workforce and enhancing security and sustainability. Finally, let's look at the trends around new ways of engaging customers, patients, citizens and employees. In interactive, which is all about the business of experience, the crisis had a significant impact due to severe disruptions in industries like travel and retail, and due to our clients being focused on shoring up their experience of their businesses, rather than the next generation of experiences. This quarter we saw building momentum with a return to low single digit growth from a low single digit decline in H2 of FY'20 as clients focus on creating new experiences in the new environment. For example, Accenture Federal Services is working with the Federal Retirement Thrift Investment Board to reimagine retirement services for the digital age and improve the customer experience for a retirement savings plan serving 6.1 million civilian employees and members of the armed services with over $644 billion in assets. I want to take a moment to talk about another bold move we made this quarter. In October, we simultaneously launched a new purpose, our growth strategy to deliver 360-degree value to our clients, and a new brand campaign created by our own Droga5 team that joined our family in 2019. Our new purpose is to, deliver on the promise of technology and human ingenuity. Our purpose is what we are uniquely able to do and our growth strategy is our action plan to bring this purpose to life. Our strategy to deliver 360-degree value to our clients is a direct response to the rising demand we see for talent transformation, and help achieving responsible business goals. We define 360-degree value as delivering the financial business case experiences and unique value a client maybe seeking, and striving where possible to partner with our clients to achieve greater progress on inclusion and diversity, reskill their employees and achieve their sustainability goals. At the heart of this strategy is embedding responsible business by design into our work for clients in addition to our own operations. Our new brand, Let There Be Change, captures our purpose and the depth and breadth of Accenture's expertise. Together, our purpose, strategy and brand better reflect Accenture's unique role in helping companies reimagine and rebuild differently for the benefit of all. Over to you KC, for a look ahead. KC McClure : Thanks, Julie. Before I get into our business outlook, as I did last quarter, I would like to remind you that given the coronavirus pandemic, there are a number of factors that we may not be able to accurately predict, including the duration and magnitude of the impact, the pace of the recovery, as well as those described in our most recent quarterly filings. Now, with that said, let me turn to our business outlook. For the second quarter of fiscal '21, we expect revenues to be in the range of $11.55 billion to $11.95 billion. This assumes the impact of FX will be about positive 3% compared to the second quarter of fiscal '20, and reflects an estimated 1% to 4% in local currency and includes a reduction of approximately 2 percentage points from a decline in revenue from reimbursable travel costs. The entire range for Q2 reflects the continued build back of our business over Q1. For the full fiscal year '21, based on how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately positive 3% compared to fiscal '20. For the full fiscal '21, we now expect our revenues to be in the range of 4% to 6% growth in local currency over fiscal '20, including approximately negative 1% from a decline in revenues from reimbursable travel, based on a 2% reduction in the first-half of the year and no material impact in the second-half of the year. For operating margin, we continue to expect fiscal '21 to be 14.8% to 15.0%, a 10 to 30 basis point expansion over fiscal '20 results. We continue to expect our annual adjusted effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.9% in fiscal '20. For earnings per share, we now expect our full year diluted EPS for fiscal '21 to be in the range of $8.17 to $8.40. We now expect adjusted full year diluted EPS to be in the range of $8.02 to $8.25 or 8% to 11% growth over adjusted fiscal '20 results. For the full fiscal '21, we now expect operating cash flow to be in the range of $6.65 billion to $7.15 billion. Property and equipment additions to be approximately $650 million, and free cash flow to be in the range of $6 billion to $6.5 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $5.3 billion through dividends and share repurchases, 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. Angie? Angie Park : Thanks, KC. 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. Operator, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Lisa Ellis from MoffettNathanson. Please go ahead. Lisa Ellis : Good morning, guys. Great to hear all of you and happy holidays. I would just ask my two right up-front. Looking at the utilization number of 93% in the quarter, I peeked back and that is the highest number you've reported in more than 10 years. So two questions, one more strategic and one more numbers related on that. I guess, first, can utilization be structurally higher now with the shift to remote work and so we should expect these kinds of levels going forward? Or are you kind of getting to the point that you're labor constrained and you're going to be ramping hiring and that number will come down a bit? That's the more, I guess, strategic question. And then maybe for KC, was higher utilization the primary driver of the 100 basis point increase in gross margins? Or is that also being affected by the reduction in travel costs? Thank you. KC McClure : Okay. Hi, Lisa. Thanks for your question. Happy holidays. So maybe I'll start with your second question first. Just on gross margin. So we did have expansion in gross margin and there were a few drivers to that. The first is contract profitability was up this quarter. And in contract profitability, we did benefit from lower travel, so that does help our contract profitability overall. So that is the first thing, I would say, benefited our gross margin. And you do see that the fact that we have higher utilization also does help our gross margin as well. So both of those points were included in drivers of our gross margin. And when you look at utilization, we did have a very high productivity this quarter. It did click up in parts and that was pretty broad-based and that was also driven by our over-delivery of Q1 revenue. We did continue to recruit throughout the summer, and obviously into this quarter, you can see that our headcount is up sequentially. And so we don't see any issues meeting demand and attracting talent. And to your point on, is there a structural change from working remotely, the answer is really no. We were just able to get more productivity out of all of our groups this quarter. And looking forward, we do think that's going to kind of ease back into kind of a more normal range, which still is very high productivity, but not continuing at these levels. Lisa Ellis : Terrific. Thank you. Operator : Your next question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Tien- Tsin Huang : Hey, thanks. Good morning. Good results here. I want to just ask about the outlook here and what's changed in the last 90 days. I know you received – looking at revenue while you're up $200 million over your guidance, you overcame low-double-digit declines in strategy and in consulting. From a macro standpoint, we got what vaccines have been approved and cases are up, but your bookings are strong again. So I'm just trying to think you seem really well set up for the second-half to be quite strong, even if strategy and consulting comes back slowly. So do you feel more confident in the outlook for strategy and consulting? Or is the composition of work just changing versus what you thought maybe 90 days ago? Any thoughts on that? KC McClure : Yes. So let me just talk a little bit about what drove our overperformance in Q1, and how that impacts our view of Q2 and H2, Tien-Tsin. So, when you look at Q1, we were obviously very pleased with our performance, and we have rather significant over-delivery against our expectations. And that was really driven by broad-based over-delivery, in all three of our markets, in all of our industry groups and all of our services all did a bit better. And as I mentioned in our script, when you take a look at the industries and the higher impacted industries, which represent over 20% of our revenues, they did improve from Q4 of a decline of mid-teens to low double digits. And as Julie talked quite a bit about the fact that that was really driven broad-based by our strong demand in cloud. And so that is an area that performed better than we expected. But if you also look at the lower impacted industries, which are 50% of our revenue, they continue to grow high single digits like Q4, but they actually did improve also within that sense. And so let me maybe connect this a little bit to how we did our sales this quarter. So we had a very strong start to the year, as you could see in our sales of $12.9 billion, which is about $2.5 billion more than what we've done in the last two quarter ones, last two fiscal years. And when you peel that back, Tien-Tsin, you can see that it was really driven by all categories of our sales side, so the large, which Julie highlighted that we have 16 clients over $100 million in sales, but all the way through and significantly driven by an improvement in our smaller deals, which came in better than we expected. And that can help us with revenue yield in the current quarter. So when I take a look at that, that's what happened with Q1. And then when you look at that compared to 90 days ago, obviously, that's better. And when you look at -- then what for Q2, we obviously have a better outlook for Q2 than we did 90 days ago with our 1% to 4% growth range. Really important to note that all of points in that range are an improvement over Q1. So we continue to build back our business from the lows of H2. And we would be really pleased with anywhere that we land in that range. Now, when you look at the second-half of the year, we haven't changed our views on the second-half of the year from 90 days ago. And just to be very specific, we still see that we would have high single-digit to low double-digit growth in the back-half of the year. And just as a reminder, the four factors that we talked about last quarter that we're going to drive that remain the same. And just very briefly, they are first, that we continue to expect an improvement in the macroeconomic environment. We don't see another -- we're not anticipating another macroeconomic shock that's built into our guidance. We expect to see more of a benefit from the significant transformational deals that we sold last year. And at the same time, to your question, we do expect strategy and consulting to reconnect with growth. And our performance in Q1 and our outlook for Q2 do encourage us even more on that statement this quarter. And the fourth thing is that we have the benefit of an easier compare that obviously remains the same. And we are also still going to anniversary the reimbursable revenue headwind, that's 2% in the first-half of the year and that won't be a headwind in the back-half of the year. So, of course, we're still meeting with our clients, you can see that by the fact that we were able to book $27 billion in the last two quarters. But we are not planning on having significant increases in revenue related to travel in the back-half of the year. So hopefully, that gives you a sense of how we see the business compared to what is stay the same now from 90 days ago, which is our outlook in H2. But obviously, we're very pleased with the improvements and performance in Q1 and outlook for Q2 than we had 90 days ago. Julie Sweet : And, Tien-Tsin, let me just kind of give you a little more color from the clients’ perspective, because -- and this is what I talked a little bit about in my script, right?. If you just sort of remember, pre-COVID, we said we were in the early innings of transformation with the beginning of the decade, it’d be enterprise-wide, right? COVID hits, technology becomes the lifeline. And you really see companies understanding kind of the two truths of our world, right? There is - every business is now a technology business and exponential technology change is going to continue, right? And now it's about the speed. And this is why we're seeing what I'm calling compressed transformation, where you continue to see companies say we are going to take on this transformation more broadly. So look at the example of Takeda. They're both moving to the cloud, improving their data and making sure that they're getting near-term business value. You take a Halliburton, cloud, finance, supply chain. So there's this speed of change and we see that in the confidence. We're nine months in now. The first part of the crisis, people were getting their footing, getting back up and running. And it's interesting, we did some research in July across 10 markets and nearly 80% of the executives that we surveyed said that they were planning on investing in digital transformation. And that was up from 50% in May. And we're continuing just to see this recognition of the need to get there faster. And then what's important to understand is that, all of this is happening, though, in the context of the cost pressures, the changing expectations. And this is where a decade and in some cases multiple decades of investment from Accenture has put us in a very unique position, because no other company in our industry can simultaneously do operations and that help a company reduce their supply chain in their finance function and reduce costs and digitize. At the same time, we're helping them migrate to the cloud and give them that view, which because all of this has interdependencies. You want to get end-to-end process change. And we have literally been building these capabilities for years and years. And this is where the scale and the breadth matter. Tien- Tsin Huang : It sounds very clear. I appreciate for the complete answer, guys, here, and it seems like the outlook is set up pretty well here. Thank you. Operator : Your next question comes from the line of Matthew O'Neill from Goldman Sachs. Please go ahead. Matthew O'Neill: Yes, thank you so much for taking my question. I was hoping we could drill down a little bit deeper into Accenture Cloud First, I think it's just on 90 days since the formal announcement. Curious, understanding a lot of sort of anecdotes in the prepared remarks around Takeda, Halliburton, et cetera. But where you're seeing the most immediate need to deploy the $3 billion that you identified for an investment, earliest and first? And sort of mirroring that where the greatest demand is coming from the client side, understanding, there's kind of a broad-based, I think COVID-driven catalyst to potentially get off the fence and move one's business to become fully digital cloud, et cetera, et cetera? Julie Sweet : Sure. So, Matthew, thanks for the question. So maybe just take, let's just first start why our companies having to accelerate faster to the cloud. And there's a few clear reasons. So first of all, there's a cost pressure, because when they move to the cloud, there's immediate savings just in the migration and there's obviously to get that kind of savings. Second, the cloud is really important for resilience and security. And in this current environment in particular, you can see why that matters. The crisis really exposed the vulnerabilities of a lot of the on premise IT estates. And then that has been compounded, of course, by the expansion of the threat surface through more remote working. And so the resilience and security of the cloud is also an immediate driver as to the need to do that. What I would say is probably most important and really the rapid acceleration is the need for the power of the cloud to enable the data driven transformations. And so you saw that in the example that we gave, with Takeda, where they're changing the customer experience, which requires near real time access to data in order to personalize and to be able to actually do that. And what I think is very unique, I know is very unique about Accenture is that this is where our strategy and consulting capabilities are so important, because the reason to go to the cloud is not simply cost and resilience and security, it's about the business value. And here's how we're helping clients get early business value. And you have to deeply understand the industry, the patients, the customer, and also what data is valuable among all of the data and which workloads go first. And so, it really is driven by all of these things at once, which is why our capabilities around changed management, around talent transformation and leadership are important, because, by the way, everybody wants to go higher at cloud talent in this thing. And so, it's not going to be enough available to our ability to reskill, which you saw in each of these examples that we gave in the script like Generali and Takeda is also a critical. So that's sort of the big picture. Now, when you think about where we're going to do investment, we talked about we did 10 acquisitions this quarter, four of them were in cloud. They were in each of our three markets and they were about building scale for the most part in more markets. And so, as we think about the acquisition strategy which will be a big component of the $3 billion, it's about building scale and markets around the world as well as acquiring niche capabilities. The second big area of that $3 billion investment though, is creating more and more of the assets that will allow our clients to move quickly. Everything from the myNav asset that we talked about, that does a fast diagnostic with benchmarks to help clients figure out what kind of a strategy to have and how to get value to the migrating navigate advisor that helps you figure out the reduction in carbon, to the industry blueprints that we're creating, and the solutions that are repeatable like in digital manufacturing on the cloud. So this will be an important part of our continued investment. And again, it really comes right back to -- no other company has both these deep engineering and infrastructure skills, the deep relationships. And then the strategy and consulting capabilities to actually move industries to the cloud to create business value solutions. And you don't build that overnight. We have been building our strategy and consulting business for decades. We have been an early adopter for cloud for decades. And let's not forget, we're our own best credential when it comes to all of these capabilities. Matthew O'Neill: That's really helpful and interesting. I guess, as a quick follow-up, I was just curious, you mentioned in the script Droga5 acquisition and more broadly Accenture Interactive. And wondering if there's significant sort of cross sell and upsell opportunity as you integrate more assets like Droga5 and present a more comprehensive suite to both the existing and new clients for things that they might not have maybe originally known or thought of Accenture for first and foremost. Is that a part of the equation here? Julie Sweet : Absolutely. And when you think about Accenture Interactive, like we are doing amazing work like our own brand and purpose work for ourselves via again our best credential. But what these capabilities bring is we're actually embedding them in all of our services. Our clients come to us for outcomes and experience is a really important part of it. Again, when you think about the work we are doing with Prudential that we talked about last quarter, that was fundamentally a different way of engaging with the customer. Takeda, a different way of engaging with the donor, the researchers in the Norway example about how they're going to engage. We are embedding this experience, and how to do that in all of our work, and so that's why I often talk about, I know you all certainly look at our services, separately our four services, our clients look at our outcomes. And what differentiates us is our ability to embed the business of experience across Accenture, as well as going to market of course, like a Droga5 that continues to do amazing, pure work in terms of brand for example. Matthew O'Neill: Thanks so much. Really helpful. Thinking about that in the context of sort of experience and outcome. I'll jump back in the queue. Operator : Your next question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : Hi, good morning. Thank you. I wanted to ask on bookings. Was there anything pulled forward in bookings relative to your prior expectation? Or do you still anticipate a building cadence for the year? And can you comment on bookings conversion pace and considering the outperformance you've had the last two quarters. I'm just curious how you're seeing the pace of these larger transformational engagements? KC McClure : Yes, thanks. We were really pleased with our bookings this quarter. As I mentioned, they did grow 25%, and as you just pointed out, and I mentioned as well, we did have a stronger Q1 than we had in the last two years. If you peel that back it's really because the demand, again, which was very broad-based. It was really also driven by cloud, which we've talked a lot about Industry X security. So they're also aligned to our strategic priorities. If you look at it, what drove the strength in bookings, again, broad base, when you look at it by type of work. We have particular strengths in outsourcing, that really was up quite a bit with very strong book-to-bill. But, within the 16 clients that we booked over $100 million, they were represented, what I liked about that is by outsourcing as well as consulting type work, it was a nice mix, all five of our industry groups were in there too. So again, it points to very broad-based. And if you look at the services, again, no surprise based on cloud, security and Industry X tech services, very strong. And I mentioned, I just want to highlight again, that we are pleased with our progress in strategy and consulting, they had a 1.1 book-to-build in the quarter. So, overall, we felt really pleased. And as it relates to kind of what we see ahead, we feel very good about our pipeline. And if you're taking on the question about conversion or revenue yield in bigger deals, we did see that our bookings were strong across all parts of our sales, large all the way through, but particularly to the smaller deals, and they do yield more revenue in the current quarter. So that's also true. And then as you see -- when you look really at our duration, it's not that the duration of the bookings in themselves have changed, it's really more of the services that are in the mix. So, as we have more strategy and consulting bookings coming online, they obviously tend to be of a shorter duration. So nothing's really changed in the duration of each of our individual services. It's really more of the mix of the bookings within each quarter. Julie Sweet : Yes. And so next quarter, we expect a very nice, very strong quarter in bookings. Bryan Bergin : Okay. And then just over the last several years, you've had special businesses here that competitors have not that have enabled you to grow faster than the market. I'm thinking about operations and interactive specifically, as critical growth engines. From here, do you anticipate a rotation of the growth engine? So is Cloud First and Industry X, are those the new engines that you expect to drive above market? I'm just curious, how you consider those now relative to competitors that are also heavily investing in those areas. And doing so earlier today than they did around interactive before? KC McClure : Sure, great question. So let me just start with, we have been investing in cloud for a decade, which is a very hard to replicate. And so we start with a $12 billion business that is growing strong double digits. So we would expect to continue to take market share there. And in this environments, where you have a rapid acceleration, and you're moving mission critical workloads, we would expect to continue to differentiate, because of our decades of experience and our relationships with the world's leading technology ecosystem players. So cloud will continue to be a big trend. Think about Industry X, and we've talked about this now for some time, it's kind of the next Accenture Interactive. And as you know, we've been investing in Industry X for some time. The COVID, what we're seeing the early signs of is that like in other areas, Industry X is we think going to accelerate over the next couple of years, because that was still a newer part of the enterprise that was being digitized the manufacturing and operations space. But as we now need to have like, a lot of health concerns about can you do manufacturing in a more contactless way, the supply chains have been disrupted. And so we have said, for some time Industry X is going to be the next growth engine. And the early signs are is that it's likely to be accelerating as well. So we'll see how that continues to play out. And remember, Accenture Interactive is an ongoing growth engine. I mean, we have three big platforms. You have the move to the cloud, which then has the data and the business value innovation on top. So it's not just moving there, it's everything that comes. And so that is an early innings, 20% into the cloud, but it's not just about the move, it's our unique ability to create business value to access the data and you're seeing that in the examples of what we're doing. This depends on where you are on that journey. So that is an ongoing platform for waves and waves of instant growth. The second being everything we do around intelligent operations, our operations business, our ability to move to modern digital platforms like what we talked about in IPS today. So that, again, provides we're early innings in the digitization of operations. And then Accenture Interactive, the business of experience that's an ongoing business in terms of that will always have to continue to evolve. And so, we see that the impact of the COVID crisis, we're starting to move out of that and building momentum. We continue to expect that to be a growth engine. And once again, this is where you can't make up for quickly the scale that we've achieved, because we've been investing for years and creating these capabilities. And then finally, you have this area of Industry X, and not to mention security and data, which will all continue to be of growing engines for us. Bryan Bergin : Thank you. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Good morning, guys, and congrats on the solid results. I wanted to ask on Interactive, just trying to understand the trajectory there. What did it kind of do in the fourth quarter? Did it even turn negative growth? And then now it's at low single, so does it kind of move up from here? I know there's been a lot of questions before on Interactive, given would that business be weaker during kind of a slowdown and it looks like it's hanging in there. So just curious on the trajectory where it was last quarter and kind of what you expect it to do throughout the year? KC McClure : Yes, so in each two so kind of a whole six months, it was a low single digit decline, and now we're in a low positive growth rate. And it's building momentum. So, for example, we're helping a big European bank with their digital sales, new things. So everyone's now starting to kind of reconnect with new experiences. Bryan Keane : Got it. And then just on the other strategic priority on security, low double digit growth, is that about the right growth rate for that, too? Or does that also accelerate as we get into the back-half when we see the pickup in the growth rates? KC McClure : Look, I think on security, we're super pleased with that about double digit growth. So, whether it's going to be low or strong, it'll probably ebb and flow. But the consistency of that double digit growth in security has been impressive to-date, and we continue to see that to be the trajectory. Thanks. Angie Park : Great. Operator, we have time for one more question, and then Julie will wrap up the call. Operator : Okay, that question comes from the line of James Faucette from Morgan Stanley. Please go ahead. James Faucette : Thank you very much. I wanted to ask, you mentioned that you have some targets for M&A this year. From a spend perspective, can you talk a little bit about what you're seeing from a valuation perspective and how we should expect those to contribute to growth in the coming fiscal year or during the current fiscal year and beyond? And what kind of areas you're targeting more specifically? KC McClure : Yes, thanks. So in terms of our D&A, we expect to spend at least $1.7 billion and there's no change to what we started out at the beginning of the year, the 2% expectation of additional revenue growth for this year. And it's aligned to really a lot of our all of our strategic priorities that we went through. James Faucette : And then thinking about that and I realized look that's consistent with what you've said before. But I'm just wondering how we should project that then into the future? Is this kind of the right level of acquisitions for Accenture? Or should we expect that to grow? Or do you think we're in a peak period? Just trying to think about that part of capital allocation. Thanks. KC McClure : Yes, sure. So we've always aimed around 20%, 25% of our operating cash flow in our capital allocation program to be for D&A. But we've always had the ability and we continue to have the ability to do more should any opportunity arise. So there's really no change to how we view D&A of our capital allocation. Thanks. James Faucette : Thanks. Julie Sweet : Great. So thank you, everyone, for joining us on today's call. We're very pleased with our strong start in fiscal '21. Thank you again to our incredible people across the globe. And thank you to our shareholders for your continued trust. Best wishes to all for a safe, healthy and joyful holiday season. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,021	1	2021Q1	2021Q2	2021-03-18	8.167	8.302	9.096	9.237	null	30.8	30.74	Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture’s Second Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] 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, Ms. Angie Park. Please go ahead. Angie Park : Thank you, operator and thanks everyone for joining us today on our second quarter fiscal 2021 earnings announcement. As the operator just mentioned, I am Angie Park, Managing Director and Head of Investor Relations. On today’s call, you will hear from Julie Sweet, our Chief Executive Officer and KC McClure, our Chief Financial Officer. We hope you have had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today’s call. Julie 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. Julie will then provide a brief update on our market positioning, before KC provides our business outlook for the third quarter and full fiscal year 2021. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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 metrics, 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 Julie. Julie Sweet : Thank you, Angie and thank you everyone for joining us. Today, we are proud to announce outstanding financial results for the second quarter of fiscal ‘21 and our return to pre-COVID level financial results a quarter earlier than we expected and with a tough compare. Let’s first go back 12 months ago, on March 19, only 8 days after the pandemic was declared, when we were all together to announce our outstanding fiscal year ‘20 Q2 financial results. Results you may not remember, because at the time, we were all focused on the go-forward potential impact of the pandemic. In Q2 of fiscal year ‘20, we had 8% revenue growth in local currency, our then highest bookings ever of $14.2 billion and strong underlying profitability and free cash flow. We also announced that 18 clients that quarter had bookings over $100 million. With this backdrop of fiscal year ‘20 Q2, the significance of this Q2’s results in fiscal year ‘21 becomes even more clear. We have delivered 5.4% revenue growth in local currency, which includes a reduction of 2 percentage points from a decline in revenue from reimbursable travel costs, meaning, apples-to-apples, 5.4% is in the zone of fiscal year ‘20 Q2 revenue when you exclude the travel costs related revenue. We have delivered bookings of $16 billion, beating our previous record set in Q2 last year by $1.8 billion and we have delivered strong profitability and free cash flow. This quarter, 18 clients had bookings over $100 million and we continue to take market share faster than pre-COVID. In H1, we have accelerated our investment in B&A, with approximately $1.1 billion of capital deployed and we are increasing our programmatic B&A investment to at least $2 billion for FY ‘21 from the $1.7 billion we previously communicated. And for the last 12 months, we have remained consistent. We gave guidance every quarter which we met or beat. We deliberately invested in our people and preserved our talent to continue to serve our clients as demand came back and we continued to significantly invest in our business and our communities. And throughout, we have lived our core values, including maintaining without pause our commitment to make more progress on diversity and inclusion and sustainability. These financial results reflect these choices, the strength of our core values and the power of our laser focus on creating client value and being a trusted partner as well as our incredibly talented people, strong ecosystem relationships and the resilience of our growth strategy as well as the substantial investments we have made year in and year out, since we set out to be the leader in digital cloud and security and continuous innovation. They also reflect the operational rigor and discipline that long has been a hallmark of our success. I want to thank our people for their hard work and continued dedication to our clients and for delivering on our commitments. KC, over to you. KC McClure : Thank you, Julie and thanks to all of you for taking the time to join us on today’s call. We were very pleased with our overall results in the second quarter, which exceeded our expectations and reflects strong momentum across our business. We are particularly pleased with our record new bookings and strong revenue growth, which demonstrates our leading position in the market as a trusted partner to deliver value for our clients. Based on the strength of our second quarter results and the confidence in the second half of the fiscal year, we are increasing all elements of our full year outlook, which I will cover in more detail later in our call. Now, let me begin by summarizing a few of the highlights for the quarter. Revenues grew 5.4% in local currency and continue to include a reduction of approximately 2 percentage points from a decline in revenues from reimbursable travel costs. Q2 revenues were nearly $140 million above our guided range driven by broad-based over-delivery across all dimensions : markets, services and industries, as our business built back even faster than anticipated. We also continued to extend our leadership position, with growth significantly above the market. We saw broad improvement in industry trends. Approximately, 50% of our revenues came from 7 industries that were less impacted by the pandemic, which in aggregate accelerated this quarter to low double-digit growth. At the same time, we saw continued improvement from clients in highly impacted industries, which collectively represents over 20% of our revenues and declined mid single-digits. Operating margin was 13.7%, an increase of 30 basis points for the quarter and 40 basis points year-to-date, reflecting strong underlying profitability as we continued to invest in our business and our people, including the one-time bonus we just announced. We continued to benefit from lower spend on travel, meetings and events and we delivered very strong EPS of $2.03, up 10% over fiscal ‘20, after adjusting both years for gains on an investment. And finally, we generated significant free cash flow of $2.4 billion in the quarter and $4 billion year-to-date. We continue to execute on our strategic capital allocation objective, with roughly $3.1 billion returned to shareholders via dividends and share repurchases year-to-date. We have made investments of $1.1 billion in acquisitions, primarily attributed to 19 transactions in the first half of the year and we expect to invest at least $2 billion in acquisitions this fiscal year. With that, let me turn to some of the details starting with new bookings. New bookings were a record at $16 billion, representing a 13% growth in U.S. dollar over previous record in Q2 of last year. We had very strong overall book-to-bill of 1.3 in the quarter and 1.2 year-to-date. Consulting bookings were $8 billion, a record high with a book-to-bill of 1.2. Outsourcing bookings were also a record at $8 billion, with a book-to-bill of 1.4. Similar to last quarter, our bookings were driven by both technology services and operations. We were pleased with the strength of our bookings in strategy and consulting, with a book-to-bill of 1.2. Turning now to revenues, revenues for the quarter were $12.1 billion an 8% increase in U.S. dollars and 5.4% in local currency, including a reduction of approximately 2% from a decline in revenues from reimbursable travel costs. Consolidated revenues for the quarter were $6.4 billion, up 4% in U.S. dollars and up 1% local currency, including a reduction of approximately 3% from a decline in revenues from reimbursable travel costs. Outsourcing revenues were $5.6 billion, up 14% in U.S. dollars and 11% in local currency. Taking a closer look at our service dimensions, both operations and technology services grew double-digits. As expected, strategy and consulting services declined high single-digits and we expect strategy and consulting to return to growth in Q3. Turning to our geographic markets, the industry dynamics that I mentioned earlier continued to play out in a similar manner across all three markets. In North America, revenue growth was 7% in local currency. In Europe, revenues grew 3% in local currency, driven by mid single-digit growth in Italy and the UK. In growth markets, we delivered 6% revenue growth in local currency driven by double-digit growth in Japan. Moving down the income statement, gross margin for the quarter was 29.7% compared with 30.2% for the same period last year. Sales and marketing expense for the quarter was 9.4% compared with 10.4% for the second quarter last year. General and administrative expenses, was 7.6% compared to 6 point – excuse me, 6.6% compared to 6.4% for the same quarter last year. Operating income was $1.7 billion in the second quarter, reflecting a 13.7% operating margin, up 30 basis points compared with Q2 last year. Before I continue as a reminder, in Q2 last year, we recognized an investment gain, which impacted our tax rate and increased EPS by $0.07. This quarter, we again recognized an investment gain, which impacted our tax rate and increased EPS by $0.21. The following comparisons exclude these impacts and reflect adjusted results. Our adjusted effective tax rate for the quarter was 17.5% compared with the adjusted effective tax rate of 17.1% for the second quarter last year. Adjusted diluted earnings per share were $2.03 compared with an adjusted EPS of $1.84 in the second quarter last year. This reflects a 10% year-over-year increase. Days service outstanding were 34 days compared to 38 days last quarter and 39 days in the second quarter of last year. Free cash flow for the quarter was $2.4 billion, resulting from cash generated by operating activities of $2.5 billion, net of property and equipment additions of $93 million. Our cash balance at February 28 was $9.2 billion compared with $8.4 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the second quarter, we repurchased or redeemed 4.6 million shares for $1.2 billion at an average price of $255.29 per share. As of February 28, we had approximately $5 billion of share repurchase authority remaining. Also in February, we paid a quarterly cash dividend of $0.88 per share for a total of $561 million. This represented a 10% increase over last year. And our Board of Directors declared a quarterly cash dividend of $0.88 per share, to be paid on May 14, a 10% increase over last year. So at the halfway point of fiscal ‘21, we feel really good about our results to-date and our positioning for the remainder of the year, realizing that the pace of recovery is hard to accurately predict. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. Let me start with the environment. We continued to see compressed transformation, where companies have to simultaneously transform multiple parts of their enterprise and reskill their people in what previously would have been sequential programs. They are doing so to replatform their businesses in the cloud, address cost pressures, build resilience and security, adjust their operations and customer experiences and find new sources of growth. COVID has hit a giant fast forward button to the future and we believe the demand to innovate at unprecedented speed and scale with rapid adoption of cloud, AI and other disruptive technologies, is accelerating. For digital leaders, we see them no longer strictly competing for market share, but to build their vision of the future faster than the competition. And for digital laggards, they are determined to not simply catch up, but to leapfrog. While COVID has accelerated the demand, the reality is that the extent of transformation ahead is enormous. The move from approximately 20% to 80% in the cloud alone is a huge undertaking and it is just the start as companies will then continue to invest to grow and innovate on their new cloud foundations, which leads me to the role we are playing. In Q2, our engines of growth across Accenture have lowered to the life to meet these needs of our clients and we see strong momentum going into Q3. I will share some color and examples. We called the once in a digital era replatforming of businesses into the cloud in September 2020 when we created Accenture Cloud First to bring industry cloud and state-of-the-art change management and transformation together. We saw this quarter’s strong double-digit growth in cloud overall as well as the subset of Accenture Cloud First, which growth was even higher. Intelligent platform services, which is essential to building the digital core of our clients is back to high single-digit growth as companies resume this critical aspect of their transformation. Applied intelligence, with our data and AI solutions and security both sizable, but still in the early stages of the scale we expect long-term, both had strong double-digit growth in Q2. Operations grew double-digits as companies seek to digitize their enterprises, leveraging our deep industry and functional expertise in AI-driven SynOps platform. Interactive improved and grew high single-digits as companies continue to shift to digital channels need cost efficiencies around sales and marketing to invest in new capabilities, seek more data-driven marketing campaigns and compete for customers and employees on the experience they provide. Industry X, which is helping diversify our sources of revenue in the enterprise, grew strong double-digits, driven by the need for product and engineers to accelerate the time to market of smarter and more sustainable products and the need to enhance the efficiency and flexibility of manufacturing facilities and the ability to interconnect machines and operate remotely. These engines of growth are multi-service, bringing the best of Accenture’s strategy in consulting, interactive technology and operation services together to create value. We are distinctive, because no other competitor has our scale and breadth of services, which allows us to seamlessly serve the different dimensions of compressed transformations. We also are able to give our clients speed and cost levers through our managed services to digitize using our assets and platforms and address cost pressures. Furthermore, our distinctive capabilities in industry, innovation and investment are clear differentiators. Our strong strategy and consulting practitioners bring deep industry expertise to all functions of the enterprise and help bring together our services to deliver to our clients, often informed by cross-industry insights, such as for payments and omni-channel engagement. Our ability and commitment to consistently invest in acquisitions, R&D and our people is unmatched in our industry and our clients know that through our investment and focus on innovation, we will help future-proof them, such as our innovation in emerging technologies like the work Accenture Labs is doing, testing applications using neuromorphic computing, where circuits are modeled after systems in the human brain and nervous system to deliver new AI capabilities and our 360-degree value strategy, which seeks to bring talent upskilling, diversity and inclusion and sustainability to our work, is resonating with our clients as they seek to make progress as they transform. Two great examples of compressed transformation, strong leaders and our 360-degree value strategy are AIG and Shiseido. We are partnering with AIG, a leading global insurance organization, to help them drive their AIG 200 program, which is designed to achieve underwriting excellence, modernize their operating infrastructure, enhance user and customer experience and become a more unified company. This quarter, we acquired AIG’s shared services operations, which we will transform to serve AIG to create a modern digital shared services platform with end-to-end processes that will improve the user experience using our SynOps platform. And consistent with our 360-degree value strategy, we are investing in upskilling our new employees. We have entered into a strategic partnership with Shiseido, a leading global beauty company headquartered in Japan. Shiseido has launched a fundamental business transformation aiming to become a global leader in premium skin beauty by 2030 under its new medium to long-term strategy, Win 2023 and Beyond. We are partnering with Shiseido to accelerate digital transformation and create personalized and seamless customer experiences, design, develop and implement a cloud-based system that will help it adopt processes that enable continuous financial reporting that are forecasting accuracy and more precise inventory management. We are helping them use AI, analytics and automation to create new business value and helping their employees gain high level digital skills. We are working with Specsavers, the UK base leader in optometry, audiology and other healthcare services, to reimagine and transform their entire IT organization through our living systems approach. We are leveraging new ways of working in agile foundations to capture efficiencies and reduce costs, while positioning the company for growth and diversification to drive business resilience. With our managed security services, we are helping a central bank in Asia to strengthen their resilience against cyber threats, builds in the flexibility to securely grow their payment transactions from millions to billions at speed and scale. Our Industry X team is helping Formula One re-launch its F1 TV Grand Prix racing product. By using the cloud-based Accenture video solution, live streams from 20 trackside and onboard cameras and a growing range of connected devices, we are continuously innovating to embed intelligence in their platforms to deliver the best possible viewer experience. Now, let me turn to Accenture’s greatest and undeniable competitive advantage, our nearly 537,000 people. They are at the heart of our outstanding results. Fundamental to our core values is to care deeply for our people and we placed significant importance on providing a meaningful employee experience. For almost every person around the world, living and working during the pandemic has been challenging. To help our people succeed both professionally and personally during this time, we have put in place many programs. For example, we are partnering with Bright Horizons in the U.S. through development of an innovative program for school aged children to receive proctoring for their virtual studies and homework. We have extended telemedicine to parents of our employees in India and we are providing industry leading mental wellness programs, including Thriving Mind, a holistic well-being program that teaches us about the science behind stress and how to recharge your brain’s battery. We are proud that more than 160,000 of our people have completed the program with impressive results, including nearly 9 out of 10 participants reported feeling significantly better able to handle challenges in the workplace. Equally important is our focus on vibrant career paths. We have maintained pay increases, bonuses and promotions both in our normal December time period as well as an added round of promotions in February, enabling us to promote in total at the same level as the prior year. Additionally, we will expand our regular midyear promotions this coming June to include managing directors, a first in our company’s history as one more way, we continue to create new opportunities for our people. And today, we are announcing a special one-time bonus for all of our people below managing director to recognize the contributions and dedication to our clients during this difficult year. Continuous learning also is a defining feature of Accenture. We continued to invest in our people and their market leading skills, with a 28% increase in training hours and 25% increase in hours per person just this quarter. And coming back to our ability to attract talent, we know that people want to work for companies that not only create value, but also lead with values. We are proud this quarter to have been named for the 14th consecutive year on Ethisphere’s World’s Most Ethical Companies list and for the 19th consecutive year on Fortune’s World’s Most Admired Companies. Our strategic decision to preserve our talent last year, including our recruiters, provided a strong base to meet the surge in demand we have experienced. Recruiting, hiring and managing supply and demand has always been a core competency and we are confident in our ability to attract talent and continue to meet the increased demand. We increased hiring approximately 50% both year-over-year and since last quarter. And we have on-boarded over 100,000 people virtually over the last 12 months, with new innovative approaches. I would like to recognize the extraordinary leadership and efforts of our Chief Leadership and Human Resources Officer, Ellyn Shook and her outstanding team around the globe for how they have helped care for our people throughout the pandemic, guided us through health and safety of COVID, are ensuring that we are continuously reskilling our people and have helped us manage and realize the incredible expansion of our talent to meet the needs of our clients. Over to you, KC, for a look ahead. KC McClure : Thanks, Julie. Let me now turn to our business outlook. For the third quarter of fiscal ‘21, we expect revenues to be in the range of $12.55 billion to $12.95 billion. This assumes the impact of FX will be about positive 4.5% compared to the third quarter of fiscal ‘20 and reflects an estimated 10% to 13% growth in local currency. For the full fiscal year ‘21, based upon how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our results in U.S. dollars will be approximately positive 3% compared to fiscal ‘20. For the full fiscal ‘21, we now expect our revenue to be in the range of 6.5% to 8.5% growth in local currency over fiscal ‘20, including approximately negative 1% from a decline in revenues from reimbursable travel, based on a 2% reduction in the first half of the year and no material impact in the second half of the year. For operating margin, we now expect fiscal year ‘21 to be 15% to 15.1%, a 30 to 40 basis point expansion of our fiscal ‘20 results. We continue to expect our annual adjusted effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.9% in fiscal ‘20. For earnings per share, we now expect full year diluted EPS for fiscal ‘21 to be in the range of $8.67 to $8.85. We now expect adjusted full year diluted EPS to be in the range of $8.32 to $8.50 or 12% to 14% growth over adjusted fiscal ‘20 results. For the full fiscal ‘21, we now expect operating cash flow to be in the range of $7.65 billion to $8.15 billion, property and equipment additions to be approximately $650 million, and free cash flow to be in the range of $7 billion to $7.5 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to adjusted net income ratio of 1.3 to 1.4. Finally, we now expect to return at least $5.8 billion, an increase of $500 million through dividends and share repurchases as we remain committed to returning a substantial portion of cash to our shareholders. With that, let’s open it up so that we can take your questions. Angie? Angie Park : Thanks, KC. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask the questions. Operator, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Hey, thanks. Terrific results here. I can’t remember. I was thinking the last time you guys raised your margin outlook, especially against such strong bookings and investments like cloud first, you talked about plus this one-time bonus to employees, etcetera? So what’s different this time to allow you to do that to raise margins modestly against some good momentum here? And I will ask my follow-up just together with this, which is given the big bookings, thinking about contract execution, do you feel good about sort of the level of expectations you need to deliver here to keep this momentum going, because I know you put a lot of hard work into driving up the bookings here, but I am curious if there is anything different to consider here with contract execution looking ahead? Thanks. KC McClure : Okay. Thanks, Tien-tsin. So in terms of operating margins, let me just cover with you what’s the driver this year of our 30 to 40 basis points operating margin expansion. And you are right it is unusual for us to expand our operating margin halfway through the year. And so implied in our guidance for the year, there is obviously continued healthy margin expansion in the back half. That’s in addition, Tien-tsin to the 40 basis points that we have already done year-to-date. And then as I mentioned, which does include the impact of the one-time bonus that we are doing for employees below managing director. And I will just maybe highlight a few things in terms of drivers for the expansion this year. I mean, as always, we first look to strong revenue growth and we have that again this year. And that’s coming along with increased contract profitability. We do have increased contract profitability coming through in our gross margin in the first half of the year and that’s really the first lever that we always look at. Within this year uniquely are a couple of things. One is utilization. So, we are getting some additional margin expansion this year based on our higher utilization rate. We talked about that last quarter that we are looking to bring that down to more normal levels. It did go up this quarter. We are still working on that. But clearly, in the first half of the year and into the second half, there will be some benefit to operating margin expansion on that. And the second part is due to the lower travel events and meetings of spend this year. So, we are going to benefit from that overall for the full year, but that benefit really is in the first half of the year. As the baseline last year in the back half is as you know, we really didn’t travel or have meetings, so it’s not a benefit that we will have in the back half of the year. And so I think overall, the key thing though in operating margin is that we always look to drive strong underlying profitability, because we want to ensure that we are investing first in our business because we want to drive long-term shareholder value. And so that’s really the critical part that we are able to continue to invest in our business and in our people and in acquisitions, but while at the same time expanding operating margin significantly. Julie Sweet : Yes. And Tien-tsin, why don’t I take the – I will take the question about execution, we are very confident about our ability to execute. And let me just remind you that one of the things that’s really benefiting us is just our absolute excellent performance when the pandemic started and we had to move all of our people from our centers, while our clients were having to move remotely. As you will recall, I shared that we closed the books for 70 public companies and we did so without missing a beat that we on average pre-pandemic, have a new release every 15 minutes, 24 hours a day, on the technology say 7 days a week and we have continued with that execution. And in fact, one of the things that we believe is driving our growth is that we enhanced our standing with our clients because of how we have been able to execute, while at the same time, we help many of them move online. So we feel very good. Our centers and our people across the globe in terms of delivery are just amazing. And I should thank them, because at the end of the day, that’s what really matters for our people and we really just have exceptional people. Tien- tsin Huang : Yes, thanks both. Operator : Your next question comes from the line of Lisa Ellis from MoffettNathanson. Please go ahead. Lisa Ellis : Hey, good morning. Nice results here. Julie, I wanted to kind of rewind the clock back to early 2020, which obviously feels like eons ago now, but when you reorganized Accenture to pivot to more focus on the geographies and geographic expansion. Now that we’re a year plus in and the dust had settled a little bit, can you just kind of bring us back to that and reflect on what’s working well with that pivot, what’s working maybe less well, or it’s been more challenging than you expected. And what’s different about operating in growth markets? Just realizing that those – that the growth markets are an important part of the growth story for Accenture going forward. Thank you. Julie Sweet : Sure. Great question. One of the things that we look back on internally as a leadership team was that we actually were very bold in our ambition in my first year as CEO to actually put that new model in place only 6 months into the fiscal year and change our P&L in the middle of the fiscal year. And we look back and often use it as a lesson as to speed matters because as you think about our execution during the last 12 months, we did so with a new leadership team and a new way of working. And what it really demonstrated was we made the right strategic move. Driving the move from industry to geography were a few things. And remember, what we did was we also put digital everywhere. So we simplified because digital is now the core of our business. But the first thing is what we call the Client Proximity Imperative. We had such scale in all of our markets. We wanted to put our leaders really closer to our clients, while at the same time really enhancing the ability to move innovation around the world. And we did that by massively simplifying. And so we – at the one hand, where – we made a geographic P&L. But on the other hand, we made critical changes to actually make it easier to move innovation around the world. And secondly, we felt as if the ability to simplify and then have teams come together across our services would really unlock value. And of course, you did that before we had COVID, but we’ve seen the acceleration of the need for that because our clients are really looking for ability to bring outcomes. And so just think about the work that we are doing right now. Like I take BBVA, which you may know, it’s a customer-centric global financial services company headquartered in Spain. And we have worked with them to move – they wanted to increase their digital sales. And that brings together operation, all of our interactive capabilities, like paid media, search engine optimization, analytics and marketing operation, plus our deep industry experience. And with our support over the last 12 months, they have grown their digital sales more than 50% and they saw an increase in digital customers by more than 50%. The ability to bring those services together seamlessly to deliver those outcomes has really been enabled by that growth model that both simplified, recognize that the core of our business is now digital cloud and security, and enable us to really meet the needs of the client globally. In terms of growth markets, there is really nothing different there. I mean the geographic model helps us both focus on the opportunity in each of the markets, while at the same time, really connecting the innovation and being able to serve global clients better. Lisa Ellis : Terrific. Thanks. Maybe my quick follow-up is maybe for KC, a follow-up on Tien-tsin’s question. I know you said you’re – yes, you’re running a little hot on utilization right now. And you commented on that as well last quarter. I’m curious though, with the shift to remote work, one, do you think that shift is going to remain more permanent? And will it allow you to actually maintain a higher level of utilization on a more permanent basis? KC McClure : Yes. So thanks, Lisa, for the question. Yes, I will just reiterate. We are trying to – we are working to get it back – our utilization back into a more normal range as they did tick up this quarter. And this really is tied to the increased demand that came back harder than we expected, right? So – but we continue to believe that the right answer for our people is to lower it back into our more normal historical ranges. And in terms of the structural – is there a structural change? I believe, just now that over time, there is really not a structural change in utilization. There is probably some increase right now due to remote working, but we don’t see on a go forward any long-term structural change in our utilization rate. Julie Sweet : Yes. And just to remember, Lisa, like we have a very important value proposition that includes being able to do continuous learning, but also the right level of time to do strategic thinking, for example, and to come together around important initiatives. And so that’s why we believe that, over time, we really should get back into kind of a more normal regardless of where people are working from. Lisa Ellis : Terrific. Thank you. Thanks a lot. Operator : Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Thank you. Hi, Julie. Hi, KC. Congratulations. These are tremendous results. Julie Sweet : Hi, Ashwin. Ashwin Shirvaikar : Just I hate to keep bringing up margin again and again. But one thing I did not necessarily hear you explicitly call out was pricing, which you might expect given sort of a price for value component, given the pivot, the mix, as you primarily do digital cloud and security, and also, frankly, a shortage of resources. It was also going to be my follow-up question, is that your attrition has ticked up, but still below historical levels. I see all the steps you took towards employee health, wellness, eventually controlling attrition. But as demand accelerates across the industry, do you expect inflation to return to historical, like mid upper teens type levels? KC McClureb : Yes. So Thanks, Ashwin, for the question. So I’ll cover the pricing point, and I’ll hand it over to Julie to talk about attrition. So maybe let’s start with context overall and what we’re seeing in the overall market and the business environment. So as we have been saying and we continue to see that the business environment does remain competitive and in some areas, we experienced pricing pressure, but we are seeing signs of stability, right? So that’s probably the first key point. In terms of the pricing that we have across our different markets or our services, as you know, the pricing can vary depending on what it is that we’re selling and in what markets that we’re doing that commercial arrangement. But what is important, what stays the same is that we always look to make sure that we are doing a smart commercial arrangement that benefits both our clients and Accenture. And that’s a key part of our 360-degree value. But as it relates to what we’re actually delivering in terms of profitability, I do want to highlight that within our operating margin and within gross margin, we did, we haven’t expanded the delivery of client profitability and contract profitability. So that’s a key part of our operating margin expansion for the year. And Julie, you want to talk about attrition? Julie Sweet : Yes Ashwin. Look, I think it’s – I think we would expect that we’re going to go back to sort of industry norms on attrition, although we will always work hard to not do that, right. And we do believe that we’re benefiting right now from the way we have cared for and – our people and the decisions we made to preserve our talent and invest in keeping them through the lower demand areas. So – but certainly, we’re tuned as a company to be able to grow and recruit at this level and at the more normal levels, as you said, in the higher teens. Ashwin Shirvaikar : Thank you. Good result. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Hi, guys and congratulations from me as well. Just thinking, Julie, about this more structurally longer term, is this growth rate – the back half growth rate obviously being really strong in the back half, double-digit growth, implied for both the third and the fourth quarter. How has the pandemic changed things that this could be maybe more sustainable than just kind of a onetime pickup in growth and maybe the growth could be? I know we’ve talked about in the past 5% to 8% constant currency growth. Just wondering if that formula has potentially changed in the future due to the pull forward of some of the digital transformation from the pandemic? KC McClure : So we knew someone was going to try to get us to look ahead for next year, but… Bryan Keane : You got me. KC McClure : So but we’re not going to. But let me just – so instead of trying to look ahead to next year and thinking about it, let’s maybe just focus on how we are looking at our business right now. So if you think about the last 6 years when we started digital, we rotated our business so that now the core of our business is digital, cloud, security and all of our services, meaning not just – that’s not from a technical perspective. And so think about what we have built are engines of growth as the core of our business, which is what we went through when you think about cloud, Industry X, applied intelligence, operation, the things we went through on our script today. And so we have these engines of growth which we continue to invest in. And I think what’s really important in the way we think about our business is we’re – for example, cloud, we already scaled. We told you last quarter, it was $12 million in FY ‘20 but it’s growing double-digits because we’re at the very early stages of it. And when you think about Accenture Cloud First, we brought together, right, all of our services, from strategy and consulting, to experience, to cloud, industry experience, because not only are companies having to migrate to the cloud, but they need to create value, like we’re working with an American entertainment company, where we’re helping them use – leverage the cloud to accelerate the time to market of new video services, right? So it’s not about the migration. It’s about the value. And so think about our business as having built these engines of growth, some of which already have massive scale and are continuing. And then others, like Industry X, Industry X is a way that we are going to continue to diversify our revenue sources for resilience over the long-term. We made two acquisitions this quarter, [indiscernible] Solutions and Myrtle Consulting Group, to help build our manufacturing and supply chain. We’re going to continue to invest there. We think about that as the next interactive, right, in terms of building this new area. And we’re at this amazing tipping point right now where we’re seeing an acceleration of digitization in manufacturing and in product engineering. And so we continue to think about how do we both make sure these growth engines is going, but never have to have another rotation because we’re always investing. And I mean, the last point I would just say is our capacity to invest in acquisitions has been a huge differentiator in building the business we have today, as being the core of our business is now these engines of growth. And we continue to execute on that in all of our major strategic areas and the next scale plays. And I’d call out the two we made this quarter in cloud, for example, Infinity Works and Edenhouse. Bryan Keane : Got it. Got it. And just KC, a quick follow-up, will travel and reimbursables, will that go up back to the norms of previous past? I’m just trying to figure out if some of that, obviously – some of that travel work doesn’t have to continue until the model slightly changes on that front. KC McClure : Yes. So that’s a great question, Bryan. So let me just first tell you what we’ve assumed as it relates to kind of our revenue. So we do not have in our revenue guidance an increase in travel revenue from travel-related expenses. Now obviously, we’re continuing to meet with our clients and do well, and engage with them, as you can see from our record bookings and our really strong revenue growth. But we don’t have any of that in – we don’t have that significantly embedded in our revenue. In terms of for the rest of the year, we’ll continue to see where we are with the travel and expand events and meetings. As we go throughout the rest of the year and into next year, so it’s kind of too early to tell. Julie, if you want to add anything? Julie Sweet : Yes. I agree. I mean, look, I’m having lots of conversations with companies who are just trying to figure this out, right? Will travel – will it actually explode once people feel safe because they need to reconnect? Will it structurally shift? And I would say that it’s really – we think it’s too early and company, it’s really kind of allover the map. And that hopefully will have a lot better sense as we get through the next 6 months. And we see vaccination variance and healthy – how comfortable people are. But it’s still pretty unclear. Bryan Keane : Got it. Thanks for taking the questions. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. Dave Koning : Hey, guys. Thanks, nice job. And I guess my first question, outsourcing growth was the strongest, I think, in 6 years, and that’s really not on an easy comp either. You had a pretty normal Q2 of last year in terms of growth. I’m wondering, is there something within outsourcing that has kind of step function change to just a better level than normal or something happening there that’s really triggering growth in such a stable part of your business typically? Julie Sweet : Well, it’s a great question. And this really is a big driver of how well we’re doing now because in this – when you have compressed transformation where the companies need to do so much at the same time, there is a really sharp focus on, what do I need to do? How do I source the talent, right? And that conversation has absolutely gone faster. But also, how can I digitize every part of the organization? And what Accenture has, which is very unique, is this investment we’ve been making for years in the SynOps platform, for example, in operations, and in technology, things like myWizard and myConcerto, which builds in best-of-class AI, machine learning, rapid testing. And these are platforms that we continuously invest in. And so when you – happening is here is that we’re helping them digitize. We are helping them focus on, what do they really need to have in-house versus can leverage in order to go faster. But one thing I want to be really, really clear about is, although our strategy and consulting business continued to have a high single-digit decline, it was better than we expected, strategy and consulting is absolutely essential to all of these results, including outsourcing. Because what we are bringing to them, right? It’s not simply always at a lower cost. It’s increase is in sales through our marketing operations, like the BBVA example I gave, right? It’s manufacturing in at AIG, which I talked about, it’s insurance, right, as well as deep process skills. It is helping them transform the ways they are working by being integrated with us where we’re bringing modern ways of working and digital. And so this is what distinguishes us as a company for our clients. It’s not – you for guys, it’s type of work, outsourcing versus consulting, which is basically managed services, it’s project work. For our clients, it’s our ability to bring all these services together, which is why I emphasize that each of the examples I gave in my script, and I gave you many more, really are polling all of these things together for an outcome and when you are going to compress transformation, that’s more important than ever. Dave Koning : Great, thanks. That’s great. And I guess my just quick follow-up. Every vertical accelerated in the quarter except for resources. And so I’m just wondering, on that vertical specifically, that got a little worse, but that hits really easy comps in the back half, anything to kind of call out there on momentum kind of reaccelerating in the future? KC McClure : Yes. Thanks, Dave. So resources, it came in, in the zone that we expected it to. And I’d just point out a couple of things. So we’ve talked about the industry is more impacted by the pandemic, and resources clearly has one of those, which is energy and that continued to be under pressure. And I would also say that our clients in the chemical industry also have been feeling some pressure as well but we have seen stability in our utilities portfolio which is good. And go forward, as we look into Q3, we do see an improvement in the resources growth rate. Julie Sweet : Yes. And by the way, this is where Industry X is going to be so critical. For example, we’re working with a North America, one of the largest oil integrators in the world, in re-imagining their plants from both health and safety security and efficiency perspective. I was just in our brand-new OT security lab in Houston last week. Yes, I actually did go on a business trip. And a big focus of OT security is across all of our volt process and discrete manufacturing. So there – obviously, as an industry – set of industries, they have been impacted. But if you think about where we’re focused and how we’re going to help them from efficiency and safety and security, it’s great. We’re well positioned. Dave Koning : Great. Thanks guys. Operator : Your next question comes from the line of James Faucette from Morgan Stanley. Please go ahead. James Faucette : Great. Thank you very much. And wanted to go back to one of the comments you made in the prepared remarks in terms of increasing your programmatic B&A. And wondering if you could just give us a little color of how we should think about contribution from that, specific areas of focus, durability, etcetera. Just trying to understand how you are thinking about that initiative, which seems really important? KC McClure : Yes. So thanks for the question. You’re absolutely right. I mean, our ability to invest significantly in our business, and that includes B&A, is a key competitive advantage. And I would just say, we’ve been at this for a long time, to your point. It’s been a core part of our strategy since 2013. On average, we’ve done about 20% of our operating cash flow to B&A, and that’s our updated guidance of about up to $2 billion – at least $2 billion, puts us in that same zone. So – but it’s not just being able to acquire. It’s successful integration. And so you can see that, that typically provides about 2% of inorganic contribution in this year. It’s going to be more, in the 2.5% zone. So we really are very focused on that as a key part of our strategy, and we will look to continue to invest. And as we’ve said, we can always – we can do more than the $2 billion if the opportunity presents itself, but it is a key part of our investment portfolio. James Faucette : Thanks. And just turning operationally for my follow-up question, can you give some color on how much of the strong demand that you’re seeing is driven by your partner network this year? And where you’re seeing most strength there? And I guess, how you would think about that part of business generation evolving over the next few quarters and periods? Julie Sweet : Our ecosystem partners are absolutely essential to our growth. I called them out in our script. We’re really proud to be the number one or number two partner, with all of the major ecosystem partners. And what we uniquely bring is, because of the strength of our relationships, we can really bring integrated value propositions to our clients. And so, those relationships are very high priority and to – and important to our future growth. James Faucette : Thanks, Julie. Thanks, KC. Julie Sweet : Thank you. Angie Park : Operator, we have time for one more question and then Julie will wrap up the call. Operator : Okay. That question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : Hi, good morning. Thank you. Question on the outsourcing and operation strength, so you highlighted the AIG Shared Services deal this quarter, have you seen a pickup in captive acquisition opportunities that you’ve acted upon here over the last several quarters? And I’m curious how we should think about this mix contributing to your outperformance and the pipeline going forward? Julie Sweet : Well, we’ve shared in prior calls that we do see more interest in captives. We’re starting to see us execute on some of them. But I think it’s too early to say whether that’s going to be a big part of the mix or not. For the reasons I’ve talked about, we can go in and help digitize. KC, do you want to add anything? KC McClure : No. I would just say, in terms of what we see, in terms of the mix, for H2, we still see a double-digit growth in outsourcing. And for the full year, I think they will end up with high single to low double-digit positive growth in terms – to give you some sense of the mix. Bryan Bergin : Okay, I appreciate that. And then just on H&PS and Financial Services, so those both clearly had outsized performance in the quarter. Can you just talk about the key contributors underlying those two? KC McClureb : Yes. So, we were really pleased with H&PS and Financial Services growth this quarter. H&PS continues to be growth that we’ve seen in public service and the work that we’ve been doing during – not just only, but clearly led by a lot of the work that we’re doing within the COVID space. And then in financial services, we’re pleased that we do have strength in our banking and capital markets, and that’s a statement globally as it relates to – particularly – and not only in our business in Europe, but all over, including North America. So very strong performance in both of those, and we expect that to continue. Julie Sweet : Yes. And it’s the things that are – it’s cloud, right. It’s – there is a big movement to cloud. It’s digital experience. It’s more like the example I gave in BBVA. It’s basically all the trends that we’ve talked about are playing out really across industry and financial services is one of the less – more moderate impacted industries, and they are investing. Bryan Bergin : Thank you very much. Julie Sweet : Okay, great. Well, thank you again for joining today. And thank you again to all of our incredible people around the globe. And as always, I just want to end by thanking our shareholders for your continued trust in us. May everyone stay well and healthy. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,021	2	2021Q2	2021Q3	2021-06-24	8.705	8.899	9.752	9.961	null	32.57	34.58	Company Representatives : Julie Sweet - Chief Executive Officer KC McClure - Chief Financial Officer Angie Park - Managing Director, Head of Investor Relations Operator : Ladies and gentlemen, thank you for standing by and welcome to Accenture’s Third Quarter Fiscal 2021 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Managing Director, Head of Investor Relations, Ms. Angie Park. Please go ahead. Angie Park : Thank you, operator, and thanks everyone for joining us today on our third quarter fiscal 2021 earnings announcement. As the operator just mentioned, I am Angie Park, Managing Director and Head of Investor Relations. On today’s call, you will hear from Julie Sweet, our 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. Julie 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 third quarter. Julie will then provide a brief update on our market positioning, before KC provides our business outlook for the fourth quarter and full fiscal year 2021. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we will 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 metrics, 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 Julie. Julie Sweet : Thank you, Angie, and thank you everyone for joining us. We had another outstanding quarter reflecting our laser focus on creating 360 degree client value and the importance of our scale, experience, industry knowledge and trust to the world's leading companies and governments as they continue to digitally transform their enterprises. We had a record 20 clients with bookings over $100 million and a total of $15.4 billion in bookings. We delivered 16% revenue growth in local currency, 3% above the top of our guided range with outstanding profitability and free cash flow. We estimate that we continue to take significant market share. Our growth was broad based across geographic markets and industries with 11 out of 13 industries growing double digits this quarter and reflects our ability to bring together our unmatched breadth of services from strategy and consulting to interactive technology and operations to create the solutions which achieve the value and speed that makes a difference to our clients. We continue to meet our clients’ strong demand adding a net 32,000 talented people this quarter alone. We offer an employee value proposition that allows us to attract top talent, develop our people with world class training and provide them with vibrant career paths. We are pleased with our record 117,000 promotions year-to-date, including almost 1,200 promotions to Managing Director, and while delivering these results we have raised the bar again in terms of investment. We now expect to invest about $4 billion in strategic acquisitions this fiscal year with 39 acquisitions closed or announced year-to-date. This includes announcing this quarter, two acquisitions with purchase prices over $1 billion each. The acquisition by Accenture Federal Services of Novetta in the U.S., an advanced analytics company which we expect to close in August, and with Umlaut, a world class engineering services company headquartered in Germany, which we expect to close in Q1. These 39 acquisitions are well balanced with 10 in North America, 17 in Europe, and 12 in growth markets. Our level of investment demonstrates as well how scale, experience and trust matters. Scale, in terms of our financial capacity; experience, in terms of our track record of the successful integration of approximately 200 companies since 2013, and the trust we have earned in the market that attracts leading companies to want to join the Accenture family. We invest in acquisitions to scale in areas where we see a big market opportunity, to add skills and new capabilities and to further deepen our industry and functional expertise, all to drive continued innovation and the next waves of growth. Finally, because we believe strongly in our commitment to share its success with our communities, we recently announced that we would donate $100 for every one of our zen 540,000 employees or $54 million to urgently address the needs of our communities due to pandemic, including $25 million for India. KC, over to you. KC McClure : Thank you, Julie, and thanks to all of you for taking the time to join us on today's call. As you heard in Julie’s comments, we are extremely pleased with our results in the third quarter, which continue to reflect very strong momentum across all dimensions of our business. Based on the strength of our third quarter results, and the confidence we have in our fourth quarter to continue to expand our market leadership position, we are increasing our full year outlook which I will cover in more detail later in the call. Before I get into the details, let me summarize the major headlines of our third quarter results, which reflect continued superior execution against our three financial imperatives. Revenue increased nearly $2.3 billion, reflecting growth of 16% in local currency. Results were approximately $300 million above the top end of our guided range, driven by broad based over performance across the business with double digit growth in all three markets, four of five industry groups and in technology services and operations. As we expected, both strategy and consulting and the resources industry group returned to grow. These results demonstrate the power of our business model and our unique ability to seamlessly integrate our services at scale. We estimate that our growth continues to significantly outpace the market. Operating margin was 16%, an increase of 40 basis points for the quarter. Importantly, we no longer have the margin expansion tailwind from lower travel as we anniversary the benefit of the compare this quarter. We continue to absorb significant investments in our people and our business as we are always focused on positioning our business for the future, and we delivered very strong EPS of $2.40, up 26% over fiscal ‘20. Finally, we delivered strong free cash flow of $2.2 billion in the quarter and $6.2 billion year-to-date while also continuing all elements of our capital allocation program, including returning roughly $1.4 billion to shareholders this quarter via dividends and share repurchases. We've made investments of $1.5 billion in acquisitions through Q3 and we now expect to invest about $4 billion in acquisitions this fiscal year, which does not include the Umlaut acquisition which we anticipate to close in FY’22. I want to take a moment to highlight that as you can see from our results and guidance this year, we are able to step up our acquisition spend and continue to expand operating margin. And while I won't comment on the specifics of FY ‘22 until September, based on our current line of sight, you should think of next year's inorganic contribution in the range of 4% and we expect margin – modest margin expansion as we continue to run our business with rigor and discipline. With that, let me turn to some of the details starting with new bookings. New bookings were $15.4 billion for the quarter, with a very strong book-to-bill of 1.2. Consulting bookings were $8 billion, with a book-to-bill of 1.1. Outsourcing bookings were $7.4 billion with a book-to-bill of 1.2. We were very pleased with our new bookings, which represent 39% growth in U.S. dollars and reflect a record 20 clients with bookings over $100 million. Each service dimension; strategy and consulting, technology services and operations delivered double digit bookings growth in local currency. Turning now to revenues. Revenues for the quarter were $13.3 billion, a 21% increase in U.S. dollars and a 16% increase in local currency. Consulting revenues for the quarter were $7.3 billion, up 21% in U.S. dollars and 16% in local currency. Outsourcing revenues were $6 billion, up 20% U.S. dollars and up 16% in local currency. Taking a closer look at our service dimensions, operations grew very strong double digit, technology services grew strong double digits, and strategy and consulting grew high single digits. Turning to our geographic markets, in North America revenue growth was 18% local currency, driven by double digit growth in public service, software and platforms and consumer goods, retail and travel services. In Europe, revenues grew 14% local currency. We saw double digit growth in consumer goods, retail and travel services and industrial, and high single digit growth in banking and capital markets. Looking closer at the countries, Europe was driven by double digit growth in the U.K., Italy and Germany. In growth markets we delivered 15% revenue growth in local currency, led by double digit growth in consumer goods, retail and travel services, banking and capital markets and public service. From a country perspective, growth markets was led by double digit growth in Japan and Brazil. Moving down the income statement, gross margin for the quarter was 33.2% compared with 32.1% for the same period last year. Sales and market expense for the quarter was 10.6% compared with 10.2% for the third quarter last year. General and administrative expense is 6.6% compared to 6.3% for the same quarter last year. Operating income was $2.1 billion in the third quarter, reflecting a 16% operating margin, up 40 basis points compared with Q3 last year. Our effective tax rate for the quarter was 25% compared with an effective tax rate of 25.5% for the third quarter last year. Diluted earnings per share were $2.40 compared to EPS of $1.90 in the third quarter last year. Day Service Outstanding were 36 days compared to 34 days last quarter and 41 days in the third quarter of last year. Free cash flow for the quarter was $2.2 billion, resulting from cash generated by operating activities of $2.4 billion, net of property and equipment editions of $158 million. Our cash balance at May 31 was $10 billion, compared with $8.4 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the third quarter we repurchased or redeemed 3 million shares for $835 million at an average purchase price of $276.98 per share. As of May 31 we had approximately $4.2 billion of share repurchase authority remaining. Also in May, we paid a quarterly cash dividend $0.88 per share for a total of $559 million. This represents a 10% increase over last year, and our Board of Directors declared a quarterly cash dividend of $0.88 per share to be paid on August 13, also a 10% increase over last year. So in summary, we are extremely pleased with our results to-date, and are now focused on Q4 and closing out a very strong year. Now, let me turn it back to Julie. Julie Sweet : Thanks KC. I’ll start with the environment. The dynamics in the market we are seeing are not only of recovery from the lower spending pattern at the onset of the pandemic, but a more sustained growth in demand as companies race to modernize and accelerate their digital initiatives with compressed transformation. Pre-COVID our research showed a digital achievement gap with leaders growing 2x faster than laggers and we estimate that gap has now widened to 5x, with leaders stepping up their investment in technology and innovation, and lead progress taking accelerated steps to catch up. Cloud is an even more critical enabler as companies are increasing their focus on enterprise wide transformations and rapidly moving to digital and cloud powered models. These needs of our clients are driving strong momentum in our business, with an acceleration of continued strong double digit growth across Applied Intelligence, Cloud, Industry X, Intelligent Operations and Security, with interactive and intelligent platform services returning to strong double digit growth this quarter. These strategic priorities are multi-service and are powered by our unparalleled technology ecosystem relationship. Let me share some color to bring this demand to life. I want to particularly highlight Cloud, which continues to have very strong double digit growth rates, as well as the subset of Accenture Cloud First with growth was even stronger and has exceeded our expectations when we formed Cloud First last September. With our Cloud First services we are helping agencies served by concept, Italy's National Procurement Agency to deliver on Italy's National Recovery and Resilience Plan. We are developing and running industry specific cloud based platforms to standardize and improve their efficiency and speed, reducing the time to launch new contracts and ultimately providing much improved services for Italy’s citizens. We are using our Intelligent Platform services to help DuPont, a company with a rich history of business reinvention. We imagine its financial structure to coordinate operations across its large geographic footprint. After going through a strategic and deliberate restructuring through M&A, we will now help DuPont implement essential finance processing suites that will help them to consolidate their multiple financial systems and chart of accounts into one and close the books faster. This will provide real-time review of results for all of the business units, all in the cloud, giving DuPont more agility, speed and certainty in a complex and volatile market. We are helping Jaguar Land Rover transform its global marketing model to deliver a more personalized customer experience with creativity and technology at its core. We were selected for our technology capabilities, data led performance and experience led approach. We will use the strength of the experience, creative and digital capabilities of interactive, and the marketing delivery capabilities of operations with our SynOps platform, which we already used as part of Jaguar Land Rover warranty operations. SynOps will deliver AI powered insights and highly automated production around the world. Security is top of mind for our clients as the threat landscape expands. Our very strong double digit growth is driven by the breadth and depth of our services, from advisory to cyber defense, to managed security. For example, facing ever increasing cyber threats and continued financial pressures as a result of COVID-19, Accenture is helping a UKI bank by bringing together the whole breadth of these capabilities to provide innovative solutions to support the bank's future security strategy. Across many of these examples are our implied intelligence services. We were excited this quarter to announce Accenture federal services agreement to acquire Novetta, an advanced analytics company serving U.S. Federal Organizations that is demonstrating what's possible with analytics, machine learning, cyber and cloud engineering. This will augment our already strong capabilities and scale in these critical areas, providing even more diversification across our federal business, specifically in the national security space which is seeing substantial growth. I wanted to give a special recognition to our colleagues serving the public sector around the world throughout the pandemic. Your seven consecutive quarters of double digit growth reflect your absolute commitment to the important missions of government serving their citizens. Turning now to Industry X, our digital, engineering and manufacturing services. We believe that product development, design engineering, manufacturing and the supply chain make up the next big digital transformation frontier. The impact of COVID-19 is accelerating the need to transform these core operations, and for nearly a decade we have been investing to build the unique capabilities and ecosystem partnerships to combine the power of data and digital with traditional engineering services. We are very pleased with the announcement of our agreement to acquire Umlaut, which will add more than 4,200 industry leading engineers and consultants across 17 countries, and expand our capabilities across a range of industries, including automotive, aerospace and defense, telecommunications, energy and utilities. Some recent examples of our Industry X services include helping a German telecom company continuously develop and enhance their internet television service by utilizing embedded engineering in their set top boxes and managing new features on the platform. Helping a large media conglomerates accelerate their primary revenue streams and digital products and advertising, with our product and platform engineering expertise to design, build, test and deploy new products, services and features; and working with a global automotive OEM to execute online remote software updates for their in-car computer systems to allow seamless deployment of new software versions. We are also working with an American multinational manufacturer of confectionery pet food and other food products to deploy a digital twin platform to optimize production in its manufacturing facilities, improve margins and reduce waste. We’re working with a large electric company in Japan to help their power plants – to help bring their power plants into the future by digitizing their operations and standards across each department. And with a large oil and gas company to build their internal digital capabilities to substantially reduce time to market for new digital solutions that extends to its customers while supporting the company's key safety and sustainability goals throughout the use of the digital factory. Taking a step back, the examples I have provided today, all require deep industry knowledge and innovation. Our breadth and depth across industries enables us to tailor industry solutions, while bringing cross industry expertise as we help our clients facing industry convergence and by using the lessons of other industries. We are proud this quarter that Fast Company recognized us for our innovation across multiple initiatives in its World Changing Ideas Awards. Our cross-industry expertise is one of the powerful sources of our ability to innovate. For example, using our deep banking industry and technical expertise, we rapidly developed for a commercial bank which was not a traditional small business administration lender; a program under the U.S. paycheck protection program that allowed them to make loans to thousands of small businesses struggling with the impacts of the pandemic. We then pivoted to apply this approach to stand up’s Facebook’s small business grants program for black owned businesses, enabling the distribution of 10,000 grants to black-owned businesses in the U.S. This grants program is an important part of Facebook's overall commitment to invest $200 million in building programs and tools for black owned businesses. Finally, let me turn to our incredible people. Their health and safety remain our top priority. We are supporting our people by facilitating vaccinations, including standing up clinics in many of our offices such as in India where already 50,000 of our people, their families and contractors have been vaccinated. We have been focused on taking the lessons as an almost 100% remote workforce during the pandemic to a new way of working, moving from a remote or hybrid model to an omni-connected experience. People will work in the office, from home and at client sites, and its likely many of our clients will be doing the same. So our approach focuses on the experience of connecting to continue to serve our clients in a differentiated way and create an environment that our people feel a sense of belonging. The rich diversity and ingenuity of our people from our Board of Directors to our new hires, helps us deliver 360 degree value for the benefit of all. We now have more than 250,000 women representing approximately 46% of our workforce. As you may recall, shortly after the murder of George Floyd in the U.S., on this call I shared with you our commitment to take three actions in the U.S.: setting external goals to increase representation, training our people and making a bigger impact in our communities. One year later I am pleased to report that we not only took each action, but have made measurable progress, including increasing our representation, having 95% of our U.S. people complete our new anti-racism training and making substantial new investments in our communities. You can find a full progress update on our website, because we believe transparency and accountability are hallmarks of good governance and essential to building trust. As we see the rise or continuation of all kinds of hate crimes against diverse communities, including violence against Asians, the LGBTI community, antisemitism and Islamophobia, I want to reaffirm my and Accenture’s unwavering commitment to equality and justice for all and zero tolerance for racism, bigotry and hate of any kind. KC, back to you. KC McClure : Thanks Julie. Let me now turn to our business outlook. For the fourth quarter of fiscal ’21, we expect revenue to be in the range of $13.1 billion to $13.5 billion. This assumes the impact of FX will be positive 4% compared to the fourth quarter of fiscal ‘20 and reflects an estimated 17% to 21% growth in local currency. For the full fiscal year ’21, based upon how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our results in U.S. dollars will be approximately positive 3.5% compared to fiscal ‘20. For the full fiscal ’21, we now expect our revenues to be in the range of 10% to 11% growth in local currency over fiscal ’20, including approximately negative 1% from a decline in revenues from reimbursable travel, based on a 2% reduction the first half of the year and no material impact in the second half of the year. Importantly, organic revenue is the driver of the increase to our updated guidance as we still expect the inorganic contribution to remain at about 2.5% for the full year. For operating margin, we now expect fiscal year ‘21 to be 15.1% a 40 basis point expansion over fiscal ‘20 results. We now expect our annual adjusted effective tax rate to be in the range of 23% to 24%. This compares to an adjusted effective tax rate of 23.9% in fiscal ‘20. For earnings per share, we now expect full year diluted EPS for fiscal ‘21 to be in the range of $9.07 to $9.16. We now expect adjusted full year diluted EPS to be in the range of $8.71 to $8.80 or 17% to 18% growth over adjusted fiscal ‘20 results. For the full fiscal ‘21 we now expect operating cash flow to be in the range of $8.65 billion to $9.15 billion. Property and equipment additions to be approximately $650 million and free cash flow to be in the range of $8 billion to $8.5 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.4 to 1.5. Finally, we continue to expect to return at least $5.8 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so that we can take your questions. Angie? Angie Park : Thanks KC. 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. Operator, would you provide instructions for those on the call. Operator : Thank you. [Operator Instructions] It comes from the line of Lisa Ellis with MoffettNathanson. Please go ahead. Lisa Ellis : Hey, good morning and thank you. Great results here! A couple of questions; one is a little more tactical, one more strategic. The first one, in bookings KC, can you just remind us one, how acquisitions are not reflected in bookings and then on a related note, is the composition of your bookings changing at all? I'm just specifically thinking about these big $100 million plus transformation programs. Are you seeing a notable change in duration or anything like that? Just trying to understand the booking number a little bit and then I’ll follow up. Thank you. KC McClure : Okay, great, thanks Lisa. So let me just decompose bookings a little bit. So we were really pleased with our bookings this quarter right, $15.4 billion, and again that grew 39% in U.S. dollars, really strong book-to-bill 1.2%. And in terms of – when you look at it, there was very strong bookings in both consulting and outsourcing, as well as all three geographic markets. And if you look at specifically in our V&A, which also was represented across all of those dimensions, there will be a slight impact in the bookings based on the backlog that we bring in from these acquisitions, but it's not overall significant. But let me just peel it back in terms of when you look underneath that 15.4, I’d say there's really kind of three things I’d point out. First was that there was really a good mix of all categories of our sales. As Julie mentioned, we had a record 20 clients, over $100 million of sales and that as you know positions us really well for the future. But if you go all the way down through the categories, all the way through our smaller deals, they’ve represented very well and that can help us with revenue in the current quarter. The second thing that I would point out is that our bookings were very broad based across all of our services, and that include strategy and consulting. And the third thing was that it was aligned to our strategic priorities as we pointed out, you know driven by cloud industry [accent] (ph) security for example. So you know with those points I'll hand it back to you to ask the second question or if there's any other color that you want. Lisa Ellis : Terrific! Thank you. The second one, maybe Julie this is for you. I just wanted – was hoping to comment on acquisitions. You know this is – obviously you’ve up-ticked acquisitions, made a couple of bigger ones than Accenture has historically done. Can you just talk about – you know is this just kind of opportunistic or has something kind of shifted in terms of your willingness to do larger acquisitions or specific market opportunities you're going after. Thank you. Julie Sweet : Sure Lisa. And well, so we've always said we have the capacity to do larger acquisitions, but we’re very disciplined about what we will acquire, and so these were you know opportunities that were very aligned to our strategic priorities. So you know Novetta being both, investment and public sector, but primarily all about you know advanced analytics, machine learning, cyber and cloud engineering, and also importantly diversification for our federal business, because they are in the national intelligence space and Umlaut is in engineering, which was just an opportunity as a company that we know very well, that really is giving us an opportunity to accelerate our scale in Industry X and we've seen the digitization of manufacturing and engineering be a major priority post COVID. Now we've been investing for nearly a decade in this space. We predicted this would happen. As you can see by the number, the amount of work that we're already doing, and this was a great opportunity for a company that we know well, and you know our strategy continues to be – we're going to make acquisitions to scale and big market opportunities to add new skills and opportunities as you know that we built a lot of interactive through acquisitions, for example those renewed skills and capabilities, and then to deepen industry and functional knowledge. And so this is the continuation of that and you know I think the advantage we have is our financial capacity to make investments and to increase our investment you know for the benefit of our clients and all of our stakeholders when we see the right opportunities and we’re going to continue to have that discipline around making strategic acquisitions. Lisa Ellis : Terrific! Good stuff. Thank you. Operator : Thank you. Our next question comes from the line of Ashwin Shirvaikar of Citi. Please go ahead. Ashwin Shirvaikar : Hey! Thanks and a great quarter. Congratulations on that from me as well. The question I had is about the momentum that you are seeing in the business and it seems to have actually accelerated from what you're seeing in the past quarters. I wanted to ask you with regards to whether this changes how you think about managing the business in the interim, in order to continue to deliver what you’re seeing from a demand perspective, particularly as we see attrition go up and so on and that's an across the board statement, not just an Accenture statement. So any thoughts with regards to how you're thinking of delivery? KC McClure : Yeah, Ashwin I’ll take this and maybe I'll frame up a few things for you and hand it over to Julie as well. So let me just maybe frame up how we’re thinking about you mentioned the demands you know in overall business and thinking about the quarter and our year-to-date from a financial perspective. You know these results are really exceptional when you think about it in the context of our historical performance, so I’ll start there. I mean clearly we’re benefiting from an easier compare in a strong market demand and we see that continuing, but even with that bookings at $44 billion growing 25% year-to-date and that’s off the base of record sales through Q3 last year. And then you couple that with 54 clients with bookings over $100 million through Q3, which is more in the first nine months of this year, than the whole of last year ‘20, FY‘20 and FY‘19 and I mention that as you talk about things in different ways, you may need to manage differently just to talk about the scale in our bookings. As we look at the scale in revenue, we grew record $2.3 billion in revenue this quarter year-over-year. When you think about our industries, where we’re clearly the leader with the breadth and depth of industries, with 11 of the 13 growing double digits and as I mentioned before in our guidance, the increase in our full year outlook, it's driven by organic revenue given that inorganic is contribution staying pretty much the same. And then you end that all with profitability of 40 basis points expansion this quarter. We had very strong profitability and we're no longer benefiting from a travel tailwind and we continue to invest at scale in our business and our people. So you know with that, let me hand it over more to Julie to round out some of the question you had on demand and attrition. Julie Sweet : Yes, so Ashwin it’s a great question around you know managing our business and so I want to just take you all back to right before the pandemic. I remember back then and on March 1 we put in a new growth model we call the nextgen growth model and that was designed for helping us manage our business as we saw the scale increasing, right, and that change in growth model was focused on being able to have more of our leaders closer to our clients, we changed the P&L as you recall to the geographic. And so we’ve already put in place a model that is designed to allow us to continue to scale, and so this for us was anticipated, and it’s exciting to see how we are very uniquely positioned as our clients’ needs have accelerated, because that’s what’s driving the demand right. The needs of our clients have accelerated post-COVID to do compressed transformation, and we have the right operating model in place. As we think about attrition, you now it’s ticked up to pre-COVID levels in a hot market although not the highest we’ve ever seen, and so as you said it’s an industry phenomenon, we are comfortable – I mean our core competency is about managing our supply and demand, but more importantly our core competency is being a great company to work for. And as you saw with our numbers this quarter, we hired net 32,000 incredible people and that is just a testimony to our ability to attract great talent, as well as continue to train our people. We’ve trained over 100,000 people since the pandemic started, pivoting to the areas of our clients’ needs. So we feel good about it, and of course this is what you expect from us, so we’ll continuously improve. Ashwin Shirvaikar : Thanks for that. All good points and I agree. I guess the next question it with regards to you know – and ordinary I don’t focus on a particular acquisition, but this Umlaut seems to be, I have to ask is this the first of many as you expand into a much bigger engineering services type presence. That is a relatively massive end market, so just strategically how are you thinking of this? Julie Sweet : Well the sort of big picture, we believe that the digital engineering and manufacturing space is the next frontier for our clients, right. There’s been a lot and there’s still a lot to do with respect to the front office and the back office for lack of a better term, that you know our clients are building a digital core, they’re transforming operations and they’re trying to find new ways of growth. But the areas that have been not as digitized over the last several years as companies have pivoted, has been in core operations, manufacturing and supply chain. Now we predicted this just as we predicted back in 2013, that someday everybody would be a digital business, and so we’ve been investing. We’ve already made, I don’t know, seven, eight, nine acquisitions over the last several years to build these capabilities, and you saw that with all the examples that we did in the script. And so this is about rapidly scaling with some of the best engineers in the world, right, because we see the market opportunity, but most importantly the need from our clients, and so you should expect that will continue to build these both organically and inorganically, but obviously this is a great add in terms of scale for us. Ashwin Shirvaikar : Great! Thank you. Congratulations! Operator : Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead. Jason Kupferberg : Thanks guys. Good morning. I’m wondering if you can estimate for us perhaps how much the acceleration in all this enterprise, digital transformation has enhanced your structural organic revenue growth profile, relative to pre-pandemic levels, because it certainly sounds like this trend continues to have lags. Julie Sweet : Yeah, I mean I think the way to think about it is that we’re taking market share and we are really well positioned to capture the growth that’s available because of the needs of our clients. And so you’re obviously seeing that uptick in organic growth and we think this will be sustained demand. I think it’s too early and we’re not going to kind of get back into sort of giving sort of a view of FY‘22, but what we would say is we do believe that what you’re seeing right now in demand isn’t just like you know a recovery because spending decreased, but actually sustained demand and that we are incredibly well positioned to capture that, because clients are looking for outcomes and the breadth of our services. You know they’re turning to us because we can give them solutions, not just individual services. They want the innovation that we’re bringing; you know the things like our SynOps platform. They are very appreciative and focused on the fact that we care about the 360 degree value, so that we’re helping improve their own skills, as well as achieving their goals and finally, you know and I think something that is really critical right now and why we are so well positioned is they see it’s a company that creates value and leads with values. And so trust really matters when you are doing major transformation and you know I’ll give you one example. We’ve had over 80 clients in the last 12 months just come and sit down with us to learn more about our diversity supplier program, because it really matters to them and they see us as a leader, right. These are the things that make us an incredibly attractive and trusted partner. And so we think that you know this is really an enduring differentiation at a time when there is going to be subsisting demand for compressed transformation. Jason Kupferberg : Okay, understood. Just a quick two part follow up here, your thoughts on Q4 book-to-bill and what were the areas of the business that surprised you most in terms of revenue this quarter, because obviously the overall upside was quite significant. Thank you. Julie Sweet : Yes, Jason just in terms of how we think about the fourth quarter. I mean so obviously we’ve had $44 billion of booking year-to-date and even with that, we still have a strong pipeline and we feel good about our position for Q4 as it relates to bookings. And in terms of what did better, you know as I mentioned earlier, it really was broad based, every part of our business did a bit better. Jason Kupferberg : Okay, thanks for the comments. Operator : Thank you. Our next question comes from the line of Rod Bourgeois with DeepDive. Please go ahead. Rod Bourgeois : Hey guys! Hey, I just wanted to ask about the margin outlook given the increased acquisition contribution that you’ll be digesting in fiscal ‘22. I just like to ask about the margin levers that you’ll be able to pull in order to still achieve overall operating margin expansion. And also, I guess besides digesting this added acquisition content, are you also needing to spend more on people costs given the war for talent that’s out there. So question about margin levers and also the investments in people? Thanks. KC McClure : Yes, thanks Rod. So I mean, let’s start with the second one first. So yes, in terms of for the people side of it, obviously there’s a lot of demand in the market. We’re in a hot market right now and historically we’ve seen wages increase and that vary by skills and geographies and that’s happening now, but you see that Rod flowing through our results already to-date and through our guidance. So it’s really up to us to manage our business with rigor discipline as we always do, you know us well, you know managing our pyramid, increasing the use of automation and just overall delivery efficiencies. So that’s the first part on wages as it relates to operating margin. And just coming back to the same point on V&A, so let me just give you a little bit more color on V&A coupled with what I talked about a little bit earlier and of course, I’m not going to give any specific guidance for FY ‘22 until September. But we do expect to have a higher level of inorganic contribution next year, probably around something closer to 4% and that’s really due to the fact that we’re deploying about $4 billion in FY ‘21, a larger portion that’s closer to the later part of the year, and we expect to benefit from more of that revenue in FY ‘22. We also expect at this time to deploy somewhere around $4 billion in FY ‘22, that’s including Umlaut, which we expect to close next year, early in the year. And of course as Julie said, we’ve always said we have the ability to do more, but that’s our line of sight today, and it’s up to us to manage our, to all the levers that we have in our disposal, to continue within the premise of clients and our overhead and structural costs, to make sure that we continue to drive modest margin expansion while investing at scale in our business and our people. Rod Bourgeois : Great! And then just a quick follow-up on the revenue progression that’s happening. Clearly, this is a big industry recovery, some of that cyclical, some of it secular, and you have certain COVID-impacted verticals that are coming back online. I guess as we head into the next fiscal year, are there on the other side, are there any revenue contributions that will taper as the COVID crisis ends? Are there any, is there any sort of lumpy work that might taper off as you head into the next fiscal year amidst all of the other momentum that’s happening in the business? Julie Sweet : I mean there is nothing material. I mean like think about the public sector for example. We did a lot of COVID surge work, but now you’ve got the fiscal stimulus that’s around the world and you see the digitization of the public sector like we gave the example of concept in Italy. So there is nothing material that we think will be difficult to manage, because you’re seeing really, when you see that in the results, kind of across industries, there this need to digitize, so nothing material that we think to mention. Rod Bourgeois : Thank you. Operator : Thank you. Our next question comes from the line of Bryan Bergin with Cowen. Please go ahead. Bryan Bergin : Good morning, thank you. I’m curious, over the last two to three quarters, have you seen a notable change in clients’ appetite for price increases as broader transformation demand is ramped up? KC McClure : Yes, so let me talk to you a little bit about what we’re seeing in terms of pricing overall. So just importantly, as a reminder, we talked about pricing. We define it as the contract profitability or margin on the work that we sell Bryan. And as always the environment remains competitive, and in many areas of our business we did see pricing was lower and that’s really based on a combination of the fact that the market is competitive and disciplined investments that we’re making, and so all of that is baked into our operating margin guidance for the year. Bryan Bergin : Okay. And then one on Accenture Operations, I’m curious if you’re seeing any change in the size and scope of engagements that clients are outsourcing too. Can you just comment on some of the strengths or the drivers of the continued strength that you’ve shown in that business? Julie Sweet : Yes, it’s a great question. It’s not so much about the size, it’s really about the intent. I mean what you’re seeing is clients really saying, in a world where I’ve got to digitize the entire enterprise, right, where do I want to focus my own resources and leadership and where can I leverage Accenture and their investments? And this is where we really got ahead of the market, right, where we developed SynOps and what we’re providing them is both cost efficiencies, but really outcomes of actual insights that come from being able to digitize. And then you add on top of that, where we have more clients thinking about having us takeover, we have a strong pipeline and you know taking over more people, because we have such a great employee value proposition and so they’re starting – you know when we think about the future of work, think about it, we’re seeing more of our clients really see it as a combination of their own employees automation or bots, and then partners like Accenture that really integrate with their own employees and we’re just a leader here. And so it’s more about the trends of the need to digitize that is what you’re seeing reflected, digitized at speed. Bryan Bergin : Thank you. Operator : Thank you. Our next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Hi guys, congrats on the results. I wanted to ask about Strategy Consulting. It had been a laggard, but saw that it moved positively into high single-digit. Just a little bit on the outlook there. Do you continue to see that maybe reach some of the demand you’re seeing in some of your other industry groups? KC McClure : Yes. Hey, Bryan. Thanks for the question. You’re right, we were very pleased with the acceleration to high single-digits in the quarter in strategy consulting, which is what we expected. In terms of how we look at just consulting overall type of work go forward, we see it being strong double-digit for the fourth quarter and the second half of the year that would mean we round up really kind of at a strong double-digit growth perspective. Julie Sweet : And Bryan as a reminder, because I remind you all every single quarter, right, clients aren’t focused on is it strategy and consulting or technology or operations. They are looking for outcomes and what makes us so unique is that all of these things, whether it’s Cloud or Intelligent Operations or marketing transformation bring together our services and with more confidence and certainty and that’s really how we think about it. Bryan Keane : Got it. And then just as a follow-up. The increase in M&A, just curious on how you guys are thinking about capital allocation, in particular the dividends and the share repurchase. Does that change at all with a little more M&A? KC McClure : Obviously, we’ll give you – I’ll give you specifics in September Bryan for next year, but overall our capital allocation framework really remains intact. Julie Sweet : I mean, you should all just think about this as we’re going to deliver on our commitments and we are investing to drive the next waves of growth and we are taking advantage of our ability to do so in this market. Bryan Keane : Great! Thanks so much. Angie Park : Last question. Operator, we have time for one more question, then Julie will wrap up the call. Operator : Thank you and that question will come from Tien-tsin Huang with JPMorgan. Please go ahead. Tien- tsin Huang : Hey! Thanks so much. Amazing results! Sorry if this was already asked, I had to jump off earlier. Just on the record number of deals over $100 million. I’m just curious how the pipeline is for such deals going forward. Is there an opportunity to replenish? Just what is the – what do you see out there in terms of large deal potential from here? KC McClure : Yes. Hey Tien-tsin, we still have a strong pipeline overall and that includes in the large deal category. Tien- tsin Huang : Okay, good. And then just on the four point inorganic contribution, I heard that for next year. How about on the margin impact there, I think KC you mentioned that there’ll be a little bit impact on the margin. You’ll still be able to expand. Just wanted to make sure I heard that correctly? Thanks. KC McClure : Yes. So yes, we want to – so what I did say is that we do expect inorganic contribution next year about 4% and our line of sight now is about $4 billion of capital spend next year ‘22, but we expect modest margin expansion to continue in ‘22. Tien- tsin Huang : Okay, very good. I appreciate that guys. Well done! KC McClure : Thank you. Julie Sweet : Great, Tien-tsin. Okay, in closing, we really appreciate everyone joining us today. We believe that we are unique because of both what we do and how we do it and we are a company that as I’ve shared before, creates value and leads with values. I want to thank all of our people and our leaders for what you’re doing every day. And finally, I want to thank all of our shareholders for your continued trust and support. We will make sure to earn it every day. Be well. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :00 AM Eastern today through September 23. You may access the AT&T replay system at any time by dialing 1-866-207-1041 and entering access code 1334620. International participants may dial 402-970-0847. Those numbers again are 1-866-207-1041 and 402-970-0847 with access code 1334620. That does conclude our conference for today. We thank you for your participation and for using AT&T Concerning Service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,021	3	2021Q3	2021Q4	2021-09-23	9.088	9.293	10.36	10.673	null	34.09	35.16	Operator : Ladies and gentlemen, thank you for standing by, and welcome to the Accenture Fourth Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Angie Park, Managing Director and Head of Investor Relations. Please go ahead. Angie Park : Thank you, operator, and thanks, everyone, for joining us today on our fourth quarter and full fiscal 2021 earnings announcement. As the operator just mentioned, I am Angie Park, Managing Director and Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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 both the fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning, before KC provides our business outlook for the first quarter and full fiscal year 2022. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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 metrics, 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 Julie. Julie Sweet : Thank you, Angie, and everyone, for joining us. Before diving into our results, thank you to our 624,000 incredibly talented people around the world, including over 8,500 managing directors. This past fiscal year, your hard work and dedication to creating value that matters for our clients was unwavering, despite the ongoing and sometimes quite extreme challenges of COVID. We've had a truly extraordinary year, as reflected in our outstanding financial results and in the 360 degree value we delivered beyond our financials. From the over 120,000 promotions and over 31 million training hours, an increase of 43% for our people, to increasing our workforce by approximately 118,000 people, creating significant employment opportunities in our communities, to achieving 46% women on our way to our goal of gender parity by 2025, to our top three ranking in the Refinitiv Global Diversity and Inclusion Index, for the fourth consecutive year. To the number one position with our largest ecosystem partners, to the exciting accomplishment of 50% renewable energy now powering our offices and centers globally, to the donation of $54 million in COVID surge relief. In December, we will publish our first ever annual 360 degree value report to more fully describe the FY'21 value we created in all directions and we’ll report against three additional key ESG frameworks : SASB, TCFD, and WEF/IBC. We believe that the trust we have from our clients and partners, our continuous innovation, and our ability to consistently attract the best people, including the 56,000 net new hires this past quarter, are directly linked to our commitment to measuring our success by how well we create this 360 degree value for all our stakeholders, clients, people, partners, shareholders, and communities, and on our culture of shared success. Here are some key financial highlights of the year, which position us strongly as we begin FY'22. FY'21 demonstrated our leadership in helping our clients achieve compressed transformation, with 72 clients with bookings greater than $100 million compared to 53 last year and 229 diamond clients, our largest client relationships compared to 216 last year. With a 20% increase in bookings to $59 billion, we have strong momentum across all dimensions of our business across geographic markets, industries, and services. Reaching revenues of $50.5 billion, a significant milestone, representing 11% growth, we added $6.2 billion in revenue this year, gaining significant market share with 40 basis points of operating margin expansion, demonstrating, yet again, our ability to grow profitably and at scale. We achieved this profitable growth while investing at a higher level than ever before, with $4.2 billion in acquisitions; $1.1 billion in R&D in assets, platforms, and industry solutions, including growing our portfolio of patents and pending patents to more than 8,200; and total training investment of $900 million. And according to BrandZ, our brand value increased 56% to over $64 billion, ranking us number 27 on the prestigious BrandZ's Top 100 Most Valuable Global Brands list. Finally, I want to highlight cloud and our ability to move with agility to serve our clients' needs and capture momentum in the market. At the beginning of FY'21, after investing in cloud for a decade, we saw that the pandemic would dramatically accelerate our clients' move to the cloud. More than technology, the move to the cloud would be about the adoption of a new operating system for future enterprise, a dynamic continuum of capabilities from public to edge to everything in between, opening up radically new ways for companies to work, compete, and drive value. Just over one year ago, we created Accenture Cloud First to capitalize on this momentum, bringing together all of our capabilities from migration to cloud-native development, data AI, industry talent, and change. Accenture Cloud First was the biggest driver of our overall cloud business growth from $12 billion to $18 billion, a 44% increase. KC, over to you. KC McClure : Thank you, Julie, and thanks to all of you for joining us on today's call. We were very pleased with our results in the fourth quarter, which completes an outstanding year for Accenture and reflect broad-based momentum across all dimensions of our business. Once again, our results reflect our relentless focus to deliver across our three key imperatives for driving superior stakeholder value. So, let me begin by summarizing a few of the highlights of the quarter. Revenue growth of 21% in local currency, at the top end of our guided range, reflects double-digit growth across all markets, all industry groups, and all services. We also continue to extend our leadership position at an accelerated pace, with growth significantly above the market. Operating margin was 14.6%, an increase of 30 basis points for the quarter, reflecting 40 basis points of expansion for the full-year. We delivered this expansion while investing significantly in our business and in our people to position us for long-term market leadership. We delivered very strong EPS of $2.20, which represents 29% growth, compared to adjusted EPS last year. And finally, we delivered free cash flow of $2.2 billion, which was driven by continued strong growth and profitability. Now, let me turn to some of the details. New bookings were $15 billion for the quarter, with a book-to-bill of 1.1. Consulting bookings were $8 billion, with a book-to-bill of 1.1. Outsourcing bookings were $7.1 billion, with a book-to-bill of 1.2. We were very pleased with our new bookings, which represent 7% growth in U.S. dollars, with 18 clients with bookings over $100 million. We were also pleased with the strength of bookings across all services, with a book-to-bill of 1 in strategy and consulting, 1.2 in technology services, and 1.1 in operations. Turning now to revenues. Revenues for the quarter were $13.4 billion, a 24% increase in U.S. dollars and 21% in local currency, slightly above our FX-adjusted range as the FX tailwind was 3% compared to the 4% estimated last quarter. Consulting revenues for the quarter were $7.3 billion, up 29% in U.S. dollars and 25% in local currency. Outsourcing revenues were $6.1 billion, up 19% in U.S. dollars, and 16% in local currency. Taking a closer look at our service dimensions, strategy and consulting, technology services, and operations, all grew very strong double digits. Turning to our geographic markets, in North America, revenue was 22% in local currency, driven by double-digit growth in consumer goods, retail and travel services, software and platforms, and public service. In Europe, revenues grew 18% in local currency, led by double-digit growth in consumer goods retail and travel services, industrial, and banking and capital markets. Looking closer at the countries, Europe was driven by double-digit growth in the U.K., Germany, France, and Italy. In growth markets, we delivered 21% revenue growth in local currency, driven by double-digit growth in consumer goods, retail, and travel services, banking and capital markets, and high-tech. From a country perspective, growth markets was led by double-digit growth in Japan, Australia, and Brazil. Moving down the income statement, gross margin for the quarter was 33.3%, compared with 31.8% for the same period last year. Sales and marketing expense for the quarter was 11.3%, compared with 10.6% for the fourth quarter, last year. General administrative expense was 7.4%, compared to 6.8% for the same quarter last year. Our operating income was $2 billion in the fourth quarter, reflecting a 14.6% operating margin, up 30 basis points compared with Q4, last year. As a reminder, in Q4, last year, we recorded an investment gain that impacted our tax rate and increased EPS by $0.29 for the quarter. The following comparisons exclude this impact, and reflect adjusted results. Our effective tax rate for the quarter was 25%, compared with an adjusted effective tax rate of 28.4% for the fourth quarter last year. Diluted earnings per share were $2.20 compared with adjusted EPS of $1.70 in the fourth quarter last year. Days service outstanding were 38 days compared to 36 days last quarter and 35 days in the fourth quarter of last year. Free cash flow for the quarter was $2.2 billion, resulting from cash generated by operating activities of $2.4 billion net of property and equipment additions of $236 million. Our cash balance at August 31 was $8.2 billion, compared with $8.4 billion at August 31 last year with regards to our ongoing objective to return cash to shareholders. In the fourth quarter, we repurchased or redeemed 3 million shares for $915 million at an average price of $305.61 per share. Also in August, we paid our fourth quarterly cash dividends of $0.88 per share, for total of $558 million and our Board of Directors declared a quarterly cash dividend of $0.97 per share to be paid on November 15, a 10% increase over last year and approved $3 billion of additional share repurchase authority. Now, I would like to take a moment to summarize our outstanding year. We're extremely pleased with the performance of our business in fiscal year '21, greatly exceeding all aspects of our original outlook that we provided last September, we delivered $59 billion in new bookings, a 20% increase in U.S. dollars over last year, which positions us well as we begin fiscal year '22. Revenues increased a record $6.2 billion, hitting the $50 billion mark, reflecting growth of 11% in local currency for the full-year. This result which is more than double the revenue growth we anticipated at the beginning of the year showcases our agility and ability to quickly scale to deliver value and outcomes for our clients. Operating margin of 15.1% reflected a 40 basis point expansion over fiscal year '20 above the top-end of our original guided range, even after making continued significant investments in our business and our people. Adjusted earnings per share were $8.80, reflecting 80% growth over adjusted FY'20 EPS and was well above our revenue growth. As a reminder, we adjusted earnings in both years to exclude gains on an investment. Free cash flow of $8.4 billion was significantly above our original guided range, reflecting a free cash flow to net income ratio of 1.5 driven by strong profitability. And finally, we significantly exceeded our original guidance for capital allocation by returning $5.9 billion of cash to shareholders, while investing roughly $4.2 billion across 46 acquisitions to acquire critical skills and capabilities in strategic high growth areas of the market. So, again, FY'21 was truly an outstanding year. Momentum continues into fiscal '22 and we're laser focused on capturing the market opportunities, coupled with a disciplined execution that you and we expect of us. Now, let me turn it back to Julie. Julie Sweet : Thanks, KC. Turning to the demand environment, compressed transformation underpinned by cloud and digital continues to drive strong double-digit growth across our business, including for Applied Intelligence, cloud, Industry X, Intelligent operations, Interactive, Intelligent platform services, security and transformational change management. Technology is the single biggest driver of change in companies today and the depth, breadth and scale of our technology capabilities across our services is unmatched. We see the demand environment shaping up for FY'22 to be more of the same while digital leaders seeking to widen their competitive advantage, and companies seeking to leapfrog their cloud and digital transformation are driving momentum in our business, the vast majority of companies are early in their transformation. And whether digital leader, leapfrogger, laggard or in between all face multi-year journeys ahead of them because the re-platforming in the cloud and use of new technologies across the enterprise is a once in a digital era profound transformation. Simultaneously, we have ongoing exponential technology change that is accelerating and will create new opportunities, disruptions and change for our clients. In addition, growth in parts of our business are by their very nature continuously evolving. For example, interactive, now a $12.5 billion business growing 15% continue to set a new standard for customer experience, connection, sales, and marketing at the intersection of data, creativity and technology, and is tied to the ever-changing needs and preferences of B2C and B2B customers. Similarly, security, now a $4.4 billion business growing 29% is driven by needs related to an ever expanding digital threat landscape. And with our managed services is providing much needed protection and talent to our clients. Our clients value the depth and breadth of our services for the entire enterprise across strategy and consulting, interactive technology and operations and industry and functional expertise across 13 industries. Plus the ability to deliver tangible outcomes as well as our strong track record of investing ahead of our clients to anticipate their needs and drive our next ways of growth such as our early moves in digital cloud and security. There remain entire parts of the enterprise. So, which digitization and the move to the cloud has only just begun. In particular, both the things companies make and the way they make things are being dramatically changed by technology. And that is the focus of our Industry X business, which we believe is the next big digital frontier. In fact, a 2021 Gartner survey, a Board of Directors indicates that 93% expect that the number one business priority that will see transformational improvement from digital technology is manufacturing, distribution, and supply chain. We have invested for nearly a decade in Industry X and are now at approximately $5 billion in revenue growing 36%. We look forward to welcoming the 4,200 industry leading engineers and consultants of Umlaut when the acquisition closes in October. Similarly, sustainability is a critical area for which technology is still evolving. We believe that every business must be a sustainable business, and yet companies are at very early stages of figuring out how to make this shift. Last year, building on years of investment and experience, we've launched our sustainability services under our new Chief Responsibility Officer and Global Sustainability Services Lead. We have continued to accelerate our focus in this expanding and changing market, and are proud of the work we are doing with leading partners like MasterCard, as we enhance its ability to track and analyze the carbon emissions of their suppliers and help de-carbonize the U.K. energy system with clients such as National Grid. We do see a shift in the nature of the demand for our managed services across IT, security and operations with these services emerging as one of our most strategic differentiators as companies simultaneously seek greater resilience, face a war for talent, the need to rapidly digitize and cost pressures, strategic managed services are increasingly a C-suite priority with Accenture as a trusted partner of choice, and increasingly integrated as part of their talent strategy. Table stakes from managed services are efficiency, resiliency, and reliability. We further differentiate in our managed services because they are uniquely informed by our strong strategy and consulting capabilities and deep industry and functional expertise. And they benefit from our strong level of investment for digital platforms like SynOps and myWizard and the seamless integration with our ecosystem partners, as well as due to the incredible pool of talented people our clients can access quickly when partnering with us. For example, we are partnering with Olympus, a leading manufacturer of optical and digital precision technology to help them drive their transformation to become a global medical technology company. As part of this partnership, we have acquired their Japanese IT subsidiary company, which we will transform to deliver significant IT cost savings to Olympus, as well as up-skill their people, combining their knowledge with our talent and technology to lead Olympus's digital transformation. And let me bring to life some more the demand we are seeing. All of these examples bring together the diverse capabilities across Accenture to create tangible value. We are a leader in cloud, because we're able to serve our clients across the cloud continuum and create business value. We are partnering with Kubota, a Japanese multi-national company, providing solutions leveraging a diverse range of products, technologies and services in the fields of food, water and the environment. To accelerate Kubota's digital transformation by creating solutions that will enhance the productivity and safety of food, promote circularity of water resources and waste and improve urban and living environments. We will help create innovative sustainability solutions and a platform applying leading edge digital technologies, including AI and IoT. Diverse data held across the group will be centralized for easy maintenance and use. We're also modernizing replacing our migrating legacy applications to the cloud and strengthening their global computer security incident response team. We are partnering with Jbal, a US-based global manufacturing services company to further enhance their IT infrastructure capabilities through providing infrastructure managed services for digital workplace, network, cloud and data center support. We're helping Senya a finish insurer offering casualty motor and health and accident services to implement a cloud-based policy administration system to improve customer service using data and automation to make sales, claims, payments and policy management processes more user friendly. This will allow the company to quickly respond to changing market and customer demands and meet its goal of providing the best customer experience in the industry. Compressed transformation is occurring across industries. We're partnering with Unilever, one of the world's largest consumer goods companies in their digital transformation. Together, we are setting a new industry standard by reinventing technology delivery with cutting edge automation, delivering cloud migration at scale, the largest ERP migration to the cloud and the industry and shifting to technology solutions that support their growth strategy. With McCormick a global leader in flavor in the food industry, where we're partnering on a strategic transformation program encompassing finance, supply chain logistics and plant maintenance. The new cloud-based platform an innovative data driven approach will help standardize processes, increase efficiencies, and support their goal of doubling in size quickly. We're helping a European financial institution, build the bank of the future and helping them become a next level innovator. One that is leveraging technology and sustainability to transform multiple parts of their business, drive hyper personalized customer experience, and create new lines of business like wealth management and insurance, which is expected to triple digital sales by 2023 and improve their already stellar cost to income ratio. At the same time, we're helping them deliver on their ESG initiatives, including inclusive financing, green software and carbon data free data centers. At Accenture, we're enabling new experience in growth and cost transformation across the enterprise and across industries. And a key enabler to these innovative scaled services is the power of our operations capabilities. We are helping Open Fiber an Italian telecommunications company design and orchestrate construction of an ultra-broadband network, which will deliver fiber to 20 million households across Italy. Digitization and automation will help the construction site to proceed faster and more efficiently. With Interactive, we're helping MediaMarktSaturn Retail Group, Europe's leading consumer electronics retailer transform their digital content capabilities with a state of the art marketing operations. Automation and data insights enabled by synapse will help deliver more engaging and personalized content, while driving millions and savings. Our industry expertise continues to be a core competitive advantage, allowing us to breathe deep industry and cross industry knowledge enterprise wide for our clients. I want to recognize in particular, our software and platform industry, which is approximately $4 billion in revenue. In Q4 this group celebrated 20 consecutive quarters of double-digit growth, serving as a leading partner to our clients in this hyper growth industry. KC, back to you. KC McClure : Thanks, Julie. Now let me turn to our business outlook. For the first quarter fiscal '22, we expect revenues to be in the range of $13.9 billion to $14.35 billion. This assumes the impact of FX will be about positive 0.5%, compared to the first quarter of fiscal '21, and reflects an estimated 18% to 22% growth of currency. For the full fiscal year '22, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results, in U.S. dollars, will be approximately negative 0.5% compared to fiscal '21. For the full fiscal '22, we expect our revenue to be in the range of 12% to 15% growth in local currency over fiscal '21, which includes an inorganic contribution of about 5% as we continue to expect to invest about $4 billion in acquisitions. For operating margin, we expect fiscal year '22 to be 15.2% to 15.4%, a 10 to 30 basis point expansion over fiscal '21 results. We expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.1% in fiscal '21. For earnings per share, we expect full-year diluted EPS for fiscal '22 to be in the range of $9.90 to $10.18 or 13% to 16% growth over adjusted fiscal '21 results. For the full fiscal '22, we expect operating cash flow to be in the range of $8.2 billion to $8.7 billion, property and equipment additions to be approximately $700 million, and free cash flow to be in the range of $7.5 billion to $8 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we expect to return at last $6.3 billion through dividends and share repurchases, as we remain committed to returning a substantial portion of cash to our shareholders. With that, let's open it up so that we can take your questions. Angie. Angie Park : Thanks, KC. 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. Operator, would you please provide instructions for those on the call? Operator : Of course. [Operator Instructions] And today, let’s see our first question comes from the line of Keith Bachman of Bank of Montreal. Please go ahead. Keith Bachman : Hi, many thanks for letting me the opportunity to ask a question. I had two, if I could. Outstanding set of results and guidance, first of all. I wanted to ask about the cash flow, if I could, guidance. And even at the high end of the range, the cash flow margin would be a pretty significant step down from fiscal '20 and fiscal '21. So, I just wondered, is there any puts and takes within the cash flow guidance that we should be aware of as we're doing our model? Thank you. And I have a quick follow-up to that. KC McClure : Sure, it's great, thanks. Nice to hear from you, Keith. Yes, so our free cash flow of $7.5 billion to $8 billion, it reflects very strong free cash flow to net income ratio of 1.1 to 1.2. And so, we're really pleased with that. And it does have slightly higher CapEx expense of $700 million. So, that's one slight difference from over '21. We did have exceptionally strong free cash flow in fiscal year '21 at 1.5 free cash flow to net income ratio, and that is just exceptional performance. It's not unusual for us to have free cash flow guidance at the beginning of the year, that is a decrease over what we've done in the previous years. And then lastly, we do allow for a slight uptick in DSO in our guidance for next year, which would still be very industry-leading DSO performance. Keith Bachman : Okay, excellent. And then Julie, maybe just for you, I think you mentioned, this year, you did 46 M&A deals. And you mentioned in the guidance comments that there's quite a bit of M&A, I think, $4 billion in M&A contemplated for this coming fiscal year. How do you think about the integration risk? Accenture has, I would argue, a very special culture. And you're brining in a lot of new people over the course of the last 12 months, and the forward next 12 months. How do you think about the risk of assimilation of these deals? And how do you manage this process? You have a very good track record over the last 10 years, but there is a lot of M&A on the table that you're bringing in the company. I’m just wondering if you could speak to how you think about the risk associated with that to make sure the business keeps moving forward? Julie Sweet : Sure. So great question, and thanks, Keith. So, first of all, as you indicated, we've got a really strong track record. And so, this step up in acquisition comes based on years of experience, including and fine-tuning integration, so that's number one. Secondly, our acquisitions happen globally. And then as I've talked about this year, they're pretty evenly balanced. And why it is that important? When we switched to our model earlier this year of a geographic-focused model from a P&L perspective, one of the reasons is to allow us as well to be super close to our people. And most of these acquisitions are not global, right? Some are like an umlaut, but like for example, Project Novetta, in the federal business, very local. And the vast majority are in one or two markets. Like there -- and so, the integration, it's not like you have this enormous company that's trying to integrate lots of people all over the globe at the same time. We have senior leaders accountable for the acquisitions. And so, we really get the right balance. And we have our own -- and so, for example, when we look at this, we look at market-by-market how many acquisitions are we doing in this market, so how does that enable us to make sure that we can spend the time? So, this is a finely tuned approach for integration. And of course, we bring on people in acquisition or not all the time. And so, this focus on culture is just part of who we are. Keith Bachman : Okay, excellent. Thank you, Julie. Operator : And our next question comes from the line of Lisa Ellis with MoffettNathanson. Please go ahead. Lisa Ellis : Hi, good morning. Thanks for taking my question. Thinking about the $50 billion revenue milestone, which is pretty amazing. Julie, as you're mapping out the path to $60 billion over the next few years, can you talk about where you see the major sources of incremental revenue looking out from here forward? Thank you. Julie Sweet : Great. Well, thanks, Lisa, nice to talk to you. So, first of all, and I talked a little bit about this in the script. We are still very early in the transformation of companies in building just their digital core. So, for example, if you look at something like SAP, their stats that they could point out, you sort of have less than 20% of companies who've actually both bought and begun implementing S/4HANA, right? And we see the move to the cloud. You've got sort of maybe today, roughly 25% to 30% of workload. So, there's a lot of work, which is a multiyear journey in actually building the digital core, and then at the same time transforming the way they work. And there -- so, we've got multiyear ahead. And even when you look at who is doing compressed transformation, you have this core of leaders and leapfrogger. But the vast majority of companies are not yet engaged in compressed transformation. So, just from a multiyear outlook on the fundamentals of re-platforminig and moving to a true digital-enabled enterprise is still in early stages. Then you add on top of that, there are whole parts of the enterprise where even the technologies are really new. And so Industry X is a great example of that. We see that as the next digital frontier, and we're still very, very early. And so, that will be kind of its own wave as we look forward. And then areas like sustainability, again, technology is early. Every industry has to find its way on sustainability. And so, as we think about our own growth strategy, it starts with what our clients need. So, we continue to diversify the parts of the enterprise that we're serving. And that enables -- that's what our clients need, and that enables the next wave of growth for us. And we continue to innovate and anticipate, like in sustainability, what our clients need. And so, when you kind of take his, you see, both from serving the enterprise, the maturity of that. And then on add on top of that that there are areas that are evergreen, like interactive, it's all about client, the growth agenda, it's always going to change. Manufacturing will be the same. Security grows as the digital landscape grows. So, hopefully, that gives you a flavor of how we're thinking about, both our next ways of growth and just the resiliency of the diversity of what we do. Lisa Ellis : Yes, terrific. My follow-up was actually on managed services, which you called out in the prepared remarks. Not really used to thinking about Accenture doing managed services. Can you just elaborate a bit on that? Is this primarily actually infrastructure-related managed services or apps or just maybe a little bit more detail on what exactly you're doing in Accenture's differentiation there? Thanks. Julie Sweet : So just think if we have consulting and outsourcing, right, so managed services is just another term for outsourcing. And so, if you think about our operations business, which is now about $8 billion, right? So, all the managed services we provide, everything from finance and accounting to industry specific, like we called out in the script, the stuff we're doing in telecom, we're doing things in insurance, in both health and P&C, so we have industry specific, we have marketing services through that. Then of course, there's our powerful IT services, we've been doing outsourcing for years, right, term application outsourcing is an industry term. And then, we have our managed services and security, we bought Symantec last year. And so, this is a core part when you think about our revenue between consulting and outsourcing. And the point that's happening now is that we've already done this, but what we're seeing is, I just had a call with the CEO the other day, who's like he started a call with like, Julie, I'm really having a hard time hiring people in digital, right? And how are you seeing companies help and we talked about how, by strategically outsourcing like in security, in marketing, you can access the digital talent, and it becomes part of their own talent strategy to address the work for talent, while at the same time, digitizing faster, I have another client who said look, you had 50 things that my IT department was about to build in order for us to automate and transform and I get it through your SynOps platform, the same as to on the IT and infrastructure side. And, of course, infrastructure managed services in the cloud growing area as well from the move to the cloud. So, I think the shift we were calling out is just how strategic this is, at a time of compress transformation, because it's meeting the needs of the war on talent, and the need to digitize and the need to move fast at the same time. Lisa Ellis : Great, thank you. Thanks a lot and congrats. Julie Sweet : Thanks. Operator : And our next question comes from the line of Bryan Bergin with Cowen. Please go ahead. Bryan Bergin : Hi, good morning. Thank you. First, got a question on bookings, can you talk about the dynamic in 4Q, it looks like outsourcing did tick down for the first time in a while year-over-year. So, just anything to call up there, and then just generally, how do you see the pipeline developing as you think about fiscal '22 bookings levels? KC McClure : Yes, thanks, Bryan. So, there's nothing really to point out in terms of Q4 bookings with outsourcing, they can just be a little bit lumpy. But it was very strong performance. But let me just maybe talk a little bit about overall bookings as we head into '22, we do feel really good about the momentum in our business. And as Julie went through, we had 72 clients with bookings over $100 million this year. And you can see that then helping us as we head into FY'22, Bryan with 18% to 22% that we have in Q1. And you also see that in our 12% to 15% revenue range that we have for fiscal '22. I think it's important to also note that, it does include about 5% in organic contribution, but it's at the top end of our revenue range, again driven by bookings, it's going to represent about 10% organic growth at the upper end. And while we do benefit from an easier compare in the first-half, it does continue to imply strong organic growth in the second-half. And if you look at why is that, when you peel back bookings, again pleased with the $15 billion that we had in Q4, strong book-to-bill is 1.1, it is $60 billion for the whole year with double-digit growth in consulting. And I think it's important also net consulting bookings, we had $8 billion for the last three quarters, which is terrific. In outsourcing, which for the entire year have had a very strong book-to-bill of 1.2 in all three markets and services. And when you peel it back, there's really three things again, just peeling back bookings for you, there's three things that I would also note, one is that yes, we did have a lot of larger bookings that help us for -- position us well for the future throughout FY'22, but we had a nice mix all the way through to the smaller deals which benefit near-term revenue. The second thing is that the bookings were very broad-based across all of our services, and that includes strategy and consulting, which is really good as well. And lastly, they're aligned as Julie talked quite a bit about our strategic priorities cloud, Industry X and security for example. Bryan Bergin : Okay. Thank you. A follow-up here then on attrition, can you just give us a sense of what you're anticipating for attrition levels backward into '22, and any added measures you're taking to try and drive that 19% down? KC McClure : Yes. So, let me just maybe talk a little bit about the numbers, and Julie can give some other color here, but our managed attrition 90% Bryan was really the fourth quarter was in the zone that we expected. And it's 14% for the year, and we've been at 19% before. It's obviously a very hot market right now, but when you peel it back, it continues to be more in the lower part of the pyramid, and it's largely concentrated in India where we really don't have any issues in hiring. Julie Sweet : Yes. And I think that's important because you look at a headline number, and then you'd have to really kind of understand whereas the attrition, and at the same time, as you might imagine, we're always very focused on making sure that we're attractive. So, we're very pleased at our executive retention is going very well. I think we are very much focused on our employee value proposition. And when you think about the actions you've taken like a record number of 120,000 promotions, the training that we're providing people that's really valued. And then, frankly, things like the way that we have approached vaccines, right? So we've now vaccinated 85,000 of our people in their families directly in addition to what we're supporting through like in the U.S. through our carriers. And as I talked a little bit about in the script, what we find is people really care about the fact that they are working for a company that focuses on financials and all of the other -- what we call 360 degree values. So, what we're doing in sustainability, being a leader that we're going to be carbon emission by 2025 really matters. And so, we continue to look at how can we help our people be net better off succeed personally and professionally, and be proud of a company that not only creates value, but leads with values. Bryan Bergin : Okay. Thank you. Operator : And our next question comes from the line of James Faucette with Morgan Stanley. Please go ahead. James Faucette : Thank you very much. Wanted to ask a couple of quick questions that are follow up on the hiring your pace of hiring and net has been quite stunning, at least over the last couple of quarters. Can you talk about a little more detail in terms of how you're finding the hiring environment, particularly for newer skill sets, and I guess, do you think you need to kind of sustain the recent pace of hiring going forward? And I guess my second question, I'll just throw it in at the same time as back to V&A, you talked about kind of the inorganic contribution and integration, but is this kind of the recent pace that we've seen? Is this also something that you expect to need to sustain and want to sustain on a go-forward basis on whether in terms of number of deals or amount that you're spending, et cetera? Thanks a lot. Julie Sweet : Okay. Thanks. I will cover the head count. So, I would just first start with in this market with a war for talent, we're very pleased with the 56,000 net additional people that we hired in Q4, as we see strong momentum, really continuing in FY'22, and you see that again in our growth rates for the first quarter, we're off to a strong start at 18% to 22% in Q1, and the full-year at the top end at 15%. And we were able to accelerate some of our hiring, and we plan to continue to do so in quarter one, in order to have the talented people that we need to match demand in the market. And so, that's to your first question on hiring. To your second question on V&A, I won't guide longer term, and to the amount of spend that we're going to do past '22 in V&A. It remains an important part of our strategy on a go-forward basis. KC McClure : Yes. And I think it's just to remember taking a step back, on two things. One is on the people side, we made a deliberate decision to accelerate hiring this quarter and next quarter, which given as you said, the environment and our ability to attract people we think makes sense so that we're not -- we're not worried about being constrained with respect to people. And we're able to do that. And I think that's a huge differentiator for us. And secondly, and we made a decision last year, and we've made a decision this year in V&A to really invest and take advantage of our ability to invest to serve our clients. And when I got clients, one of the things that we talk about is, and clients really value is that when they're partnering with us, they're partnering not just for the capabilities we have today, but because we have a track record of investing year in and year out and creating and anticipating their needs. And we point to the kinds of acquisitions like in Umlaut, like in Nevada, like Infinity Works in cloud, that we're doing it in markets all around the world to benefit them. And so, we believe this is really setting us up last year and this year, right for this next ways of growth. And it's truly differentiating in the eyes of our clients. Operator : And our next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Thank you. Hi, Julie. Hi, KC, Angie, congratulations on the results and outlook. First question is, it seems clear, we're in a very exciting time here for IT services. I've had this view for some time now that the acceleration of demand that you're seeing is sustainable for several years. And I don't mean to imply that getting revenue growth is easy. But if you have to worry less about revenue growth, given the investments you've already made. Do you have the opportunity to change your financial model as accelerated to get higher gross margins, better G&A leverage? Thoughts on moving to a more non-linear model with solutions may be especially important given the 620,000 people? Julie Sweet : Yes, I'll start with that. I think, Ashwin, our financial model really remains the same in terms of three key imperatives that we have to go through each year, which is grow faster than the market take share, modest margin expansion while investing at scale and our business and our people. So, in the last part, maybe just talk about op margin. So, we are very proud of the 10% to 30%, that we have this year. That does imply obviously, that we will continue to get efficiencies in how we run our business, both in terms of how we deliver to our clients, as well as within the SG&A and how we run our own organization. KC McClure : Yes, maybe just set a couple of points. I'm glad to acknowledge that revenue growth is not easy. So, thank you for that. But we're just taking a step back to just to make sure, because I think over the last decade you've seen a real shift in the professional services industry. The nature of the exponential technology change and the need to help clients move faster, and do so more efficiently has meant that you need to be able to invest significantly. So, as we think about moving forward, like the investments we've done to build, SynOps like to and continue to evolve it to build industry solutions as you mentioned, require us to continuously innovate, invest. You saw that in our IP patent portfolio. And so, what I would say is, it's not that you sort of say, here's the revenue, and then can you just fundamentally ship because there is significant cost. Having all aspects of our business grow like this is not simply, because there's demand. It's the solutions we're bringing them. And as I've talked about in prior earnings call, it isn't linear today even, because we've automated so much of what we do when you look at something like our operations business, you look at my wizard, and we continue to do so. And that's really part of the business now. And so, I think it's important to kind of understand what's helping drive the demand for our services. The way we're gaining market share is not simply because there's a lot of demand in the market, but the solutions we're bringing. And this is our big differentiator, because we can go all the way from strategy to operations right? All of the examples we're giving involve multiple assets or services and you can't just build that overnight either, right? So, the fact that we're becoming integrated in talent strategy in our outsourcing and we also call managed services is about being trusted. And the fact that we could deliver during the pandemic and be a trusted partner puts us in a very different place than others who might be trying to build these capabilities. Ashwin Shirvaikar : Got it, got it. Thank you for that. And then the other question is over the last 18 months, your revenue growth has absorbed the negative impact of less P&E. Is that coming back, do you have updated thoughts on back to office, what's the assumption for that in your outlook? Julie Sweet : So, I'll let KC answer specifically, but I will say that if any of us can actually predict, how we're going to go to the office, I'd like to meet that person. It is good to say, it's been a humbling experience, right? How many times have we all gotten ready to go back and I don't know about you, but like five different things that we're going to be in person the next two months, I've just turned back to Zoom or Teams. So, it's been an interesting time the new normal but KC, why don't you take us through just to see assumptions we're using? KC McClure : Yes, so Ashwin, just I'll first start with revenue, our revenue guidance the 12 to 15, it does not include any specific up tick from reimbursable travel, and if that assumption changes will reflect that in our updated guidance. And as Julie said, just in terms of increases to travel assumed in our overall P&L for '22, it is difficult to predict, but we do have an increased build into particularly in the back half of the year for some travel costs. Ashwin Shirvaikar : Got it. Thank you for that. Operator : And our next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead. Jason Kupferberg : Thanks, guys. Good morning. I wanted to start just with the visibility question. The reason I asked is obviously your cost of currency revenue growth here in Q4 was quite robust. So, it wasn't really above the top end of your guidance, whereas in recent quarters, you had been handily exceeding the top end of your expectation. So, I'm just wondering, is this simply because your visibility has improved, so you've gotten more comfortable, you don't necessarily need to put extra cushion into the guidance or did some bookings not ramp as fast as expected in the quarter and then just a related question for fiscal '22 as you set the initial outlook for this year, any change in approach versus this time last year again perhaps because your visibility has improved? Thanks. KC McClure : Yes, I will answer both questions in really the same way, which is for the fourth quarter, we were slightly above our FX adjusted guided range, but we always try to aim to be in the top quadrant, top part of our guided range. And really just this year, it's been a story of an unprecedented ramp. So, we're really pleased that we were able to kind of nail down where we thought we would end up the quarter. And it's the same thing really for '22, it's not any change in visibility, it's not any change in the way we're doing things. We always call it as we see it, these are our best estimates. And with the 12 and 15 all parts, all points are in possibility. That's why they're in the range, but we continue like we always do to aim for the top quadrant in top part of the range, no change. Jason Kupferberg : Okay. Okay, good to know. And just a follow-up, what are your expectations for book-to-bill, in consulting and overall for the first quarter and for the full fiscal year? And then just what you're thinking about for consulting versus outsourcing revenue growth this year? Thanks, guys. Congrats. KC McClure : Yes, thank you. Yes, so we feel good about our pipeline as we head into the fiscal year, I would say, I will just comment on Q1 bookings, we do feel really good about where we are, historically, we do see some seasonality in Q1 and large deals can make things lumpy, but we feel really good about our positioning for the first quarter. And in terms of revenue growth, I'll just say that for quarter one, we see consulting continuing in strong double-digits and outsourcing in the double-digit range. Jason Kupferberg : Okay, got it. Angie Park : Great, operator, we have time. KC McClure : Yes, for the full-year, I mean consulting should continue to be strong double-digits and outsourcing depending on where we landed, the range will be high single to low double-digits. Jason Kupferberg : Thank you. Angie Park : Great, thanks. Operator, we have time for one more question and then Julie will wrap up the call. Operator : Of course, and that last question comes from the line of Tien-tsin Huang with JPMorgan. Please go ahead. Tien- tsin Huang : Thank you so much. Really impressive growth at scale here, I wanted to ask on Industry X, it was $5 billion in revenues, so it's up 36% I wrote down, so I think Julie said it's the next frontier here. Does this have potential to be as big as cloud? I'm just trying to think about the sizing of Industry X recognizing it's early, but also its importance? Julie Sweet : Yes, I mean I think we're not really sizing that today. I mean, if we think about cloud as the entire enterprise, so sort of hard to sort of do that. What we'd say is, this will be I mean, we're already at $5 billion and we consider it the next digital frontier and it's super early, right, some technologies have just really been coming online in the last year or two that are cloud based. And when you look at like what we're doing for example, like Vivienne Westwood, one of the largest independent global fashion companies, we're doing a new PLM solution for them. We're doing so for Ahlstrom, Ahlstrom a ultimate global leader in transportation where you doing the same in a power company so that the range of what we're doing I mean is both broad based in terms of industry. And so, we do think of this as really a big growth driver for the future, but not sizing it today. Tien- tsin Huang : Okay, no worries. Just thought it was interesting, because the scope of it can be quite large. Just my quick follow-up, I know you had you feel a lot of questions on acquisitions, already. Digital assets are being valued pretty highly here across the board. Looks like you're still implying a reasonable revenue multiple with your inorganic contribution, have you seen any changes on the valuation side? I know, you're still a destination for many companies, but just curious the valuations have changed in any way you're thinking? Julie Sweet : KC, do you want to answer that? KC McClure : You know, clearly, valuations, we participate in the overall market, you've seen what valuations have done in the overall market, but I would just say that, we have pretty high hurdle rates in terms of what we expect from our business cases. And we track that very closely, as you would expect of us. And we're very pleased with our ongoing performance of our portfolio against the hurdle rates that we put forth in this business cases. Tien- tsin Huang : Yes, it's impressive. Thank you both. KC McClure : Okay, thank you. Julie Sweet : All right, well now it's time to wrap up. In closing, I want to thank all of our people and our Managing Directors for what you all do every day, our people at actions and results in FY'21 has really put us in a terrific position as we go into FY'22 to create even more value ahead. And I know I and the entire leadership team are super excited and confident about what's to come. And I'll simply end by thanking all of our shareholders for your continued trust and support. Be well everyone. Thanks. Operator : And ladies and gentlemen, today's conference will be available for replay after 10 A.M. Eastern today through December 16. You may access AT&T Replay System at anytime by dialing 1-866-207-1041, entering the access code 6704907. International participants may dial 402-970-0847 and those numbers again are 1-866-207-1041 and 402-970-0847 again entering the access code 6704907. That does conclude your conference for today. Thank you for your participation and for using AT&T Conference Service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,021	4	2021Q4	2022Q1	2021-12-16	9.588	9.885	11.074	11.412	null	31.09	28.47	Operator : Ladies and gentlemen, thank you for standing by. Welcome to the Accenture First Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Ms. Angie Park, Managing Director and Head of Investor Relations. Please go ahead. Angie Park : Thank you, operator, and thanks, everyone, for joining us today on our first quarter fiscal 2022 earnings announcement. As the operator just mentioned, I am Angie Park, Managing Director and Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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 first quarter. Julie will then provide a brief update on our market positioning, before KC provides our business outlook for the second quarter and full fiscal year 2022. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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 metrics, 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 Julie. Julie Sweet : Thank you, Angie, and thank you everyone for joining us. I would like to start by thanking our 674,000 people around the world for your extraordinary work and commitment to our clients. Our results again, this quarter reflect how you are living our purpose every day to deliver on the promise of technology and human ingenuity. As more and more companies embrace compressed transformation, our clients are turning to us as their trusted partner, as reflected in our outstanding growth of 27% this quarter. We added 15 new diamond clients bringing the total to 244. Diamond clients are our largest relationships. And to give some context, we added 13 diamonds in all of FY '21. We also had record bookings of $16.8 billion, 30% growth year-over-year with 20 clients with bookings over $100 million. And we expanded operating margin 20 basis points in Q1 with adjusted EPS growth of 28%. While we continue to invest in our business and people, including $1.7 billion in acquisitions, and in just the first quarter, we invested $250 million in learning for our people, with 8.6 million training hours for approximately 14 hours per person. The extraordinary demand we see in the market reflects the imperative of digital transformation. Companies are making critical decisions about who will be their strategic partners. And they are selecting us because of our talented people, our deep industry and technology capabilities, and our commitment to both create value and lead with value. We predicted back in 2013 that every business would be a digital business. And we have executed a clear strategy to rotate our business to anticipate and be ready to serve our clients. And when the pandemic hit, we were ready with capabilities that scale reflected in 70% of our revenue at that time being from digital cloud and security, with strong relationships with the world's leading technology companies, which in some cases go back decades, with a focus on growing our people through learning, allowing us to rapidly re-skill, with an unwavering commitment to inclusion and diversity and equality and caring for our people professionally and personally, making us a talent magnet in a tight labor market, adding 50,000 talented individuals in Q1. And it is our breadth of capabilities across strategy and consulting interactive technology and operations, which is unique in our industry that allows us to work side by side with our clients to deliver results. And we believe our goal to create 360 degree value for our clients, people, shareholders, partners and communities is an essential part of our success. Certainly our commitment to creating vibrant career paths for our people is an important part of this value and we just completed our annual promotion process. I want to congratulate our 1,030 new promotes to Managing Director, 143 new appointments to Senior Managing Directors and the more than 90,000 people we promoted around the world in Q1 overall. Today we launched our 360 value reporting experience, a new way to show our progress and the value we create in all directions for all of our stakeholders. More on that later. KC, over to you. KC McClure : Thank you, Julie. Happy Holidays to all of you, and thanks for taking the time to join us on today's call. We were very pleased with our overall results in the first quarter, which exceeded our expectations, setting a new bookings records at $16.8 billion, with consulting bookings exceeding the previous record by more than $1 billion. Our results reflected strong double-digit revenue growth across all dimensions of our business, all markets, services and industry groups. And we saw improved pricing in many parts of our business. Based on the strength of our first quarter results and the demand we see in the market, we are significantly increasing our full year revenue and EPS outlook. Now let me summarize a few of the highlights of the quarter. Revenues grew 27% in local currency, increasing more than $3.2 billion over Q1 last year, and more than $600 million above our guided range, with broad based over delivery across all markets, services and industries with all 13 industry groups growing double digits. We continue to extend our leadership position with growth we estimate to be more than 5x the market which refers to our basket of publicly traded companies. Operating margin of 16.3% for the quarter, an increase -- with an increase of 20 basis points. We continue to drive margin expansion while making significant investments in our people, in our business, including acquisitions. We delivered very strong EPS of $2.78, up 28% over adjusted fiscal '21 results. Finally, we delivered free cash flow of $349 million and return $1.5 billion to shareholders through repurchases and dividends. We also invested approximately $1.7 billion in acquisitions, and we continue to expect to invest approximately $4 billion in acquisitions this fiscal year. With those high level comments, let me turn to some of the details, starting with new bookings. New bookings were record at $16.8 billion for the quarter, representing 30% growth in U.S dollars, and were $800 million higher than our previous record. With an overall book-to-bill of 1.1. Consulting bookings were record at $9.4 billion with a book-to-bill of 1.1. Outsourcing bookings were $7.4 billion with a book-to-bill of 1.1. We were very pleased with our bookings this quarter, which reflected 20 clients with bookings over $100 million. All of our service dimensions, strategy consulting, technology services and operations, as well as our geographic markets delivered strong double-digit bookings growth in U.S dollars. Turning now to revenues. Revenues for the quarter were $15 billion, a 27% increase in U.S dollars and in local currency. Consulting revenues for the quarter were $8.4 billion, up 33% in U.S dollars and 32% in local currency. Outsourcing revenues were $6.6 billion, up 21% U.S dollars and in local currency. Taking a closer look at our service dimension, strategy and consulting, technology services and operations all grew very strong double-digit. Turning to our geographic markets. In North America, revenue growth was 26% in local currency, driven by double-digit growth in public service, software and platforms, and consumer goods, retail and travel services. In Europe, revenues grew 28% local currency, led by double-digit growth in consumer goods, retail and travel services, industrial and banking and capital markets. Looking closer to countries, Europe was driven by double-digit growth in Germany, U.K., France and Italy. In growth markets, we delivered 30% revenue growth in local currency, driven by double-digit growth in consumer goods, retail and travel services, banking and capital markets and public service. From a country perspective, growth markets was led by double-digit growth in Japan and Australia. Moving down the income statement. Gross margin for the quarter was 32.9%, compared with 33.1% for the same period last year. Sales and marketing expense for the quarter was 9.7% compared with 10.4% for the first quarter last year. General and administrative expenses were 6.9% compared to 6.6% for the same quarter last year. Operating income was $2.4 billion in the first quarter, reflecting a 16.3% operating margin, up 20 basis points compared with Q1 last year. Before I continue, as a reminder, we recognized an investment gain in Q1 last year, which impacted our tax rates and increased EPS by $0.15. The following comparisons exclude these impacts and reflect adjusted results. Our effective tax rate for the quarter was 24.4% compared with an adjusted effective tax rate of 23.7% for the first quarter last year. Diluted earnings per share were $2.78 compared with adjusted diluted EPS of $2.17 in the first quarter last year. Days service outstanding were 42 days, compared to 38 days last quarter and 38 days in the first quarter of last year. Free cash flow for the quarter was $349 million, resulting from cash generated by operating activities of $531 million, net of property and equipment additions of $182 million. Our cash balance at November 30 was $5.6 billion compared with $8.2 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed 2.4 million shares for $845 million at an average price of $346.19 per share. At November 30, we had approximately $5.6 billion of share repurchase authority remaining. Also in November, we paid a quarterly cash dividend of $0.97 per share for a total of $613 million. This represents a 10% increase over last year. And our Board of Directors declared a quarterly cash dividend of $0.97 per share to be paid on February 15, a 10% increase over last year. So in summary, we are very pleased with our Q1 results and we are off to a very strong start in FY '22. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. Starting with the demand environment, as we expected across industries and the globe, technology continues to be the single biggest driver of change, accelerating, disrupting and creating new opportunities. More companies are embracing compressed transformation underpinned by cloud and digital and are moving to build their digital core and use technology to transform how they operate and to find new ways to compete and grow as you would expect for 27% revenue growth. We are seeing broad based demand across all markets, services and industries with double-digit growth across all our strategic growth priorities, including Applied Intelligence, Cloud, Industry X, Interactive, Intelligent Operations, Intelligent Platform Services, Security and Transformational Change Management. Let me bring this demand to life. First, compressed transformation is occurring across the globe and the key enabler is the cloud across the continuum from public to hybrid to increasingly the edge, and the move to leading SaaS platforms along with the convergence of cloud and data. For example, we are working with a leading global supplier of tires and mobility solutions to migrate to the cloud, modernize its IT platforms, use data to accelerate growth and value and shift to a digital supply chain. We created a state-of-the-art system to track inventory, sales, warranty information and returns, all in the cloud, all in real time and have already helped to increase customer satisfaction 35% with improved cost optimization and increased revenue up next. We're also helping Mount Sinai Health System, New York City's largest academic medical system transform, modernize and increase its resilience by migrating its clinical systems, non-clinical systems and clinical data to a stable, secure cloud based infrastructure to proactively detect and prevent threats, adapt to business and regulatory changes, together with a potential to save millions over the next 5 years, savings that can be reinvested to fund strategic innovative programs and help rescale teams. Our deep industry expertise is helping companies find new solutions and path to growth and helping their customers. For example, we are collaborating with Opay, a leading Finnish Financial Group to use automation, advanced analytics and other emerging technologies to increase business agility, reduce cost, and deliver enhanced customer and employee experiences. Opay will adopt the Intelligent Automation Platform, Accenture myWizard to enable the company to extract greater value from its technology investments. We are working with TUGA, a leading utilities provider in Germany to create and operate a game changing meter-to-cash IT platform in the cloud. It will help reduce operating costs by up to 40%, accelerate time to market and free up resources for energy transition and innovations like smart metering, helping customers make environmentally conscious decisions and energy providers stay responsive and reliable. And as we talked about last quarter, our Sustainability Services are focused on helping our clients across industries move from commitment to action at scale. We see these services is critical to our clients agendas. I'm pleased to announce that we have signed an agreement to acquire Zestgroup, a Dutch sustainability services company with 140 employees that specializes in energy transition services and sourcing renewables and other clean energy sources. We look forward to welcoming them and working together to help clients move at speed to achieve net zero carbon. We continue to help our clients to enter the next digital frontier of Industry X. We're excited to have completed the acquisition of umlaut and are seeing the power of our combination already. Together we're working with a global technology leader to transform from a traditional engineering platform to a more agile model based engineering platform that uses simulation and analysis from design and development all the way through the product lifecycle. We were also working with an American wireless operator to help improve daily operations and transform their network security by combining our deep security risk assessment and communications industry skills. Of course, growth is at the heart of every client's agenda and Interactive is helping our clients capture new growth with their customers with our unique combination of creativity, technology, data, AI and industry expertise. For example, we are applying our digital global capabilities to help Capri Holdings Limited, a global fashion luxury group consisting of the iconic brands Versace, Jimmy Choo and Michael Kors, translate its rich in-store luxury shopping experience to a digital experience that aligns with shifting customer behaviors and accelerate sustainable growth. As a strategic partner with Volkswagen Group, a German motor vehicle manufacturer, we're helping Audi and VW to pave the way for sustainable growth through precise continuous commerce and rich experiences along the entire car buying journey. We are combining the power of AI of predictive analytics to deliver the right experiences at the right time to accelerate revenue growth through an expanded digital commerce ecosystem. We're also working with VLI, a Brazilian logistics solutions company and Trato [ph] its new platform business to provide a digital one stop shop for self employed truckers to enhance their growth, to improve logistics by offering options for more profitable freight products as well as to provide them access to critical services such as insurance, loans and health care, all by combining data [ph] analytics and AI. We see an increasing demand to create the platforms that power the digital products and experiences our clients seek for their customers. We're helping CLO, a leader in electronic payments in Latin America become more competitive by migrating to the cloud, which will accelerate new product development and enables cutting edge technologies. This will make it easier to launch innovative products, reduce time to market by two-thirds and lower costs, all while enhancing their customers experience. And of course security is critical to all our clients. We were proud to be selected by the Department of Homeland Security's Cybersecurity and Infrastructure Security Agency, CISA in the U.S., America's risk advisor defending against today's threats, with advanced cyber services to help the Department of Homeland Security protect federal, civilian and executive branch systems against cyber attacks like ransomware, botnets and malware campaigns. Even as companies undergo compressed transformation, exponential technology changes continue. We are investing to anticipate the future and we are working with our clients to innovate and take advantage of emerging technologies to compete and win. Our R&D is powered by Accenture Labs and Ventures and extends across every part of our business so that we can quickly translate research into real results for our clients. For example, we are working with ESPN to explore how emerging technologies can enable new ways for fans to experience sports at the ESPN edge innovation center, leveraging the years of early investments we've made in extended reality. We've been a key participant in shaping the innovation in enterprise, blockchain technologies across the globe, with applications in financial markets, supply chain and digital identity, which now are creating value for our clients. From partnering with the Digital Dollar Foundation to explore a U.S central bank digital currency to working with Hong Kong Exchanges and Clearing Limited to build a new integrated settlement platform using digital asset modeling language, Smart Contract. And while the metaverse has recently burst into the public eye, we've been an early innovator in applying the technology. In fact, we often innovate on cutting edge technologies by deploying them at Accenture first. We are proud to have the largest enterprise metaverse to what we call the Nth Floor and are deploying over 60,000 virtual reality headsets and have created one Accenture Park, a virtual campus for onboarding and immersive learning, including meeting rooms and collaborative experiences. Our VR environments provide our people with a human connection and learning experiences in an immersive digital world. We are also working with clients to help explore and shape their early forays into the metaverse through new digital experiences enabled by virtual reality and responding to their interests in new products enabled by NFTs, or non-fungible tokens, new ways to conduct commerce as the metaverse takes shape. Many of these client examples reflect our goal to create 360 degree value. This goal reflects our growth strategy, our purpose, our core values and our culture of shared success. It is also how we operate Accenture and we measure our success by how well we are achieving this goal for all our stakeholders. And today, we are proud to present our new 360 degree value reporting experience, a new way to share our progress, which is available on our website. With this comprehensive digital tool, you'll find all our reporting and data in one place, measuring how we're doing. We've expanded our ESG reporting with three additional ESG framework, the Sustainability Accounting Standards Board, SASB, the Task Force on Climate-related Financial Disclosures, TCFD and the World Economic Forum International Business Council WEF, IBC metrics, while continuing to report against the Global Reporting Initiative GRI standards, the UNGC 10 principles and the Carbon Disclosure Project, CDP because we believe that transparency builds trust and helps us all make more progress. Back to you, KC. KC McClure : Thanks, Julie. Now, let me turn to our business outlook. For the second quarter fiscal '22, we expect revenues to be in the range of $14.3 billion to $14.75 billion. This assumes the impact of FX will be about negative 4% compared to the second quarter of fiscal '21 and reflects an estimated 22% to 26% growth in local currency. For the full fiscal year '22, based on how the rates have been trending over the last few weeks, we now expect the impact of FX on a result in U.S dollars will be approximately negative 3% compared to fiscal '21. For the full fiscal '22, we now expect our revenue to be in the range of 19% to 22% growth in local currency over fiscal '21, which continued to assume an inorganic contribution of 5%. For operating margin, we continue to expect fiscal year '22 to be 15.2% to 15.4%, a 10 to 30 basis point expansion over fiscal '21 results. We continue to expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.1% in fiscal '21. For earnings per share, we now expect our full year diluted EPS for fiscal '22 to be in the range of $10.32 to $10.60 or 17% to 20% growth over adjusted fiscal '21 results. For the full fiscal '22, we now expect operating cash flow to be in the range of $8.4 billion to $8.9 billion, property and equipment additions to be approximately $700 million and free cash flow to be in the range of $7.7 billion to $8.2 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $6.3 billion through dividends and share repurchases 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. Angie? Angie Park Thanks, KC. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask the question. Operator, would you provide instructions for those on the call? Operator : Of course. [Operator Instructions] And the first question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- tsin Huang : Thank you so much. Yes, really remarkable growth here in [technical difficulty] $600 million. I think that's the largest number of growth [technical difficulty] got to ask what surprise you [technical difficulty] with the compressed transformation and [technical difficulty] more on … Julie Sweet : Hi, I think we were -- Tien-tsin, we are having a little trouble hearing you, but I think I got it. You want to know what drove our over delivery -- are the over delivery $600 million? Tien- tsin Huang : You got it. KC McClure : Okay, that's what I thought. So first of all, good morning to you. So the first thing I would say is that overall in terms of our revenue production this quarter, everyone did better. It really was broad based over delivery across all of our markets, all of our industries and our services. And when you want to -- when you peel that back, you really start with bookings. So we have broad based over delivery also in our bookings. And so you see that flowing through our revenue production, Tien-tsin. And on that bookings production, well, we had 20 clients with bookings over $100 million. It really was broad based growth in our bookings, across, the larger deals all the way down to midsize and smaller deals. And then so that also really did help us drive more revenue. And importantly, we were able to meet this demand, because we have the people able here to work on the extra demand coming from the bookings. So we were really very pleased with the overall broad base delivery in the first quarter. And that is why we see that coming into the second quarter, and then a big part, obviously, of our full year revenue increase. Tien- tsin Huang : Got it. Thanks [technical difficulty] hope you can hear me okay. My follow-up just maybe for Julie [technical difficulty] 360 degree in [technical difficulty] been hearing a lot about that here. [Technical difficulty] becomes a bigger factor [technical difficulty]. Is that part of the [technical difficulty] care of pushing this [technical difficulty] 360 degree? Julie Sweet : Yes, no, it's a great question, Tien-tsin. And I think there's a couple of things that are going on. So first of all, we absolutely see in more of the requests for proposals, our clients asking to understand your position on sustainability, for example. So we’re -- we've been -- and we've seen that trend for at least the last 12 months that it's more important formally in our RFPs. But we also see it in the conversations we're having with clients, that they are asking a lot about this, they're very much focused. And so when we talk about it, it's important to them. And so, when we launch this strategy around 360 degree value over a year ago now, it was based on the conversations we were already having with clients, right. We launched it, because our clients were saying, we have to achieve this. And the biggest issues, I think in the world that we look for is how do you move from commitment to action. And so there's -- and part of that is, therefore clients also want to partner with companies that are equally committed, and it matters to them things like 50% of our centers around the world are using renewable energy, right? It matters to them, the work that we're doing on IT -- green IT software, so that eventually we'll be able to have much more sustainable software development. So it's definitely a buyer value. We see it formally. We see it informally. And we see it in terms of what they're trying to do, which is why our sustainability services are also so important, and you heard some of the examples today. Tien- tsin Huang : That's excellent. Thank you, guys. Julie Sweet : Thanks. KC McClure : Thanks. Operator : And our next question comes from the line of Bryan Bergin with Cowen. Please go ahead. Bryan Bergin : Hi, good morning. Thank you. So you often talk about the market share gains. I'm curious if you've seen an inflection in win rates over the last few quarters, or has there been a significant uptick in overall demand in the market with consistent win rates that is driving this level of growth? Julie Sweet : Good morning, Bryan. It's the latter. So let me just start with -- we've seen a really consistent win rate. But maybe I'll peel back to what we talked about in the fourth quarter. When we were coming into the year, we felt really good about our pipeline. Even in a seasonably lower quarter, we thought -- we saw good bookings for the first quarter. And obviously, you saw that come through. And our bookings are record bookings this quarter. But I will say even with that, we feel really good about our pipeline, even after the record bookings and that's the statement across all markets and services. Bryan Bergin : Okay. And then my follow-up, so when we think about headcount progression, it would seem you're on a path to hit a million people here over the next 3 years or so. So as you've gotten larger, can you talk about what you've had to do differently to enable the strong execution across so many global resources. And just how are you thinking about what you were going to need to do more of as you get even larger? Julie Sweet : Sure. That's a great question, Bryan. Let me take that. And I think there's three things to focus on. One is how we manage the business. So just to take you back to March 1, 2020 when we announced our next gen growth model, one of the explicit reasons we reorganized at the time, focused on geographies we said was to enable us to scale. And so that's enabled us because we're still fundamentally a people business. It's also driven by a lot of assets, but you need to be able to be close to clients and people. And so that change really allowed us to be where we are now, where we're scaling. But it also, in addition to the scaling, it helps us be more agile. Like you'll remember, we put that into place and we created Accenture Cloud first 4 months later, right, which has been a huge success. And it's the agility by simplifying our structure at the same time. So first, it's -- how we manage our business in terms of an organizational perspective, and having simplified our business. The second piece is the focus on employee experience. Our -- one of our eight leadership essentials is caring for our people, personally and professionally. And this is a very important part of how we are able to scale and drive our culture. And you'll see in our attrition, it again is at the lower end of the pyramid in India, and we have significantly lower attrition at the executive and above. And that is very much we believe, because of how we focus on our people. And the last piece, which is our culture. You notice that we talked about the metaverse and what we've launched in our script today. That's another way of how we're driving our culture. We are constantly innovative -- innovating. So in a world where people can have as many physical experiences today, we created this immersive experience, which connects people, right, which builds connections. And so the focus on being smart about how we manage our people and staying close to them and our clients, our leadership and how we promote and develop and then constantly innovating to build the connection and the culture. We call it omni connections are absolutely critical when you're scaling. Bryan Bergin : Thank you. Julie Sweet : Okay. Operator : And we do have a question from the line of Lisa Ellis with MoffettNathanson. Please go ahead. Lisa Ellis : Hi. Good morning. Thanks for taking my question. A couple of macro questions from me. Can you talk about how inflation is affecting your business? Specifically, is it a tailwind to revenues? Because you're seeing -- you're able to pass through labor cost inflation on to clients? And if so, are there other factors as well that you might call out on inflation? Thank you. KC McClure : Yes, maybe I'll start and then Julie, if there's -- you can add in, in terms of what we're seeing with our clients. But maybe, Lisa -- maybe we'll start with inflation, and I'll take it from maybe from a wage increase perspective. So, to state the obvious wage inflation is on all our minds, it's occurring in all industries and it's across the globe, and our clients are all experiencing a tight labor market. So for us as it relates to inflation in wages, we see for our business that we will continue to have wage increases in the market for certain skills, and that varies by geographies and we expect it really to continue. So what are we doing? It's not so different from what other clients are doing. We're focused on pricing to absorb our higher labor costs. And one other thing that we pointed out, Lisa, that we were very pleased with the improved pricing that we had this quarter on our record bookings, but we have more work to do. And so as one of the things that I want to just point out that it's just going to take some time for the improved pricing to flow through our P&L, and that's going to lead to higher compensation that we see. It may even result for us in some operating margin contraction in Q2, although we expect to continue to expand margin by 10 to 30 basis points for the full year. So I mean, that's just maybe a bit of a glimpse on what it means for us, as we run our own P&L. And I'll hand it over to Julie to give some thoughts on what she's thinking and talking with our clients. Julie Sweet : Yes, great. And so, look, we're all managing different aspects, there's wage inflation. There's -- inflation, it's obviously on products. And so -- and it varies by industry in terms of the extent of the impact. And what we really see our clients doing is, because there's a lot of uncertainty about how inflation is going to develop in 2022 is being laser-focused on cost efficiencies and growth, right, because for many industries, they can't pass on the improved pricing, or they're like us, right. It takes a while to be able to do that. And so it is helping as well, drive some of the demand for both things, helping them grow, but also do that efficiently. Lisa Ellis : Terrific. Thank you. And then just for my follow-up, maybe a follow-up on Tien-tsin's question. So clearly, the level of demand you're seeing is sort of surprised even you guys have a very good handle on it all the time. So if you can just give some color around what your senses about what's happening, like what's happening out in the marketplace. You said it's very broad based across industries across geographies. And so maybe just sort of from a narrative perspective, what's your sense of what's happening differently or differently than you expected even 3 months ago in terms of -- that's driving dramatic increase in demand? Thank you. Julie Sweet : Sure. I think a big aspect of it is embracing the need for speed. And so you are continuing to see more and more companies doing the compressed transformation, the willingness to take on more at the same time and even to do that faster. And just think we have a couple of calls I had just this past week, clients that we've been working with, on some -- for some time speaking about their cloud journey, I wouldn’t call me up Monday and say, okay, we're going to pull forward Wave 2. We've got to go faster. It's harder than we thought we need to go faster. And in so there's this, as companies are kind of getting into it, they're seeing that they want to go even faster, they're also seeing the impact of those who come ahead. I was recently talking to the CEO of a company where we're doing a major cloud and data platform, and his point, so as we speak, okay, now I get it, I can only go so fast, but can you go faster, because I now see what I can really do one side replatform, right. And so, this embracing more change and speed, we do think is helping drive this demand. And we predicted the sort of -- remember, we talked about compressed transformation, that it's really only been in about a third of industries, and that it was going to continue to expand. But the point is, the first round of compressed transformation is just the first round. And as you begin to see the power of what it is to be in the cloud, the next steps of opportunities are being seen by the clients. And so I do think it's mostly around a recognition of the value of replatforming and the need for speed competitively. Lisa Ellis : Terrific. Thank you and happy holidays. Julie Sweet : Happy holidays. Operator : And we do have a question from the line of Jason Kupferberg with Bank of America. Please go ahead. Jason Kupferberg : Thanks, guys. Congrats on these numbers. Happy holidays. Maybe a little bit more to follow-up on some of these top line questions. You mentioned the pipeline still remains robust after the very strong Q1 bookings. So how should we be thinking about second quarter bookings growth in both consulting and outsourcing relative to the Q1 levels? KC McClure : Thanks, Jason, Happy Holidays to you too. We do feel good about our pipeline and -- for the second quarter and for the remainder of the year. So, but bookings can be lumpy. So there's nothing that I would project to, obviously one way or the other against Q1, Jason. But for both outsourcing and consulting, and across all of our markets and the services within those we do feel really good. Jason Kupferberg : Okay. Okay, got it. Got it. So we will have to account for some of that lumpiness. And I'm wondering also, if there's been any noticeable change in average project sizes or conversion cycles of backlog into revenue. And then just anything you may want to comment on regarding updated assumptions for consulting and outsourcing revenue growth in full year fiscal '22? Thanks, again. Julie Sweet : Sure. So there's really no change, Jason, to anything that we're seeing in duration or in conversion. I mean, it all depends on the mix of the work that we're selling. But every individual type of service there's no change within those durations or mixes. And then just in terms of what we're seeing for the full year, I'll just comment on the type of work we see. Consulting, strong double digits, even probably stronger than what we saw, obviously, at the beginning of the year. And outsourcing now, a double-digit growth. Julie Sweet : Yes, and it's probably worth reminding what KC said earlier, right, our expectations were exceeded across all sizes. And obviously, when small deals are also over delivering that in quarter revenue, right. So it's really -- it is broad based. Jason Kupferberg : Okay, appreciate all that. Thanks, again, guys. KC McClure : Sure. Operator : And we do have a question from the line of Rod Bourgeois with DeepDive Equity Research. Please go ahead. Rod Bourgeois : Hey, guys. Congrats on the results and the color that you're providing here. I just have one question. I'd like if you could comment on your newer offerings, it'd be helpful to know which of your newer offerings are showing the most uptick against this growth wave? If you could weigh the relative amount of lift that you're getting from offerings like Industry X, Cloud, Automation, et cetera, is there a certain newer offering that's getting more uptick than the others? Or is it again -- I mean maybe you can go beyond the everything is good comment and give a little more color on the specific offerings? Thanks. KC McClure : Sure. Thanks, Rod. I'll give you a little bit more color, maybe on some of the numbers and hand it over to Julie to add anything she'd like to. But what you'll see is on Cloud, Industry X, Interactive Security, I mean they're all at scale, they're all strong or very strong double-digit growth. And so, there's really not what I would call out individually. Julie also mentioned another other list of our strategic priorities within her commentary at the beginning of the call. So I won't be redundant and go through this again. But Julie is there anything you want to add in terms of additional color? Julie Sweet : Well, sure. I mean, so first of all, you just have to remember scale, right. So Accenture Cloud First was a $12 billion business. Our cloud business overall, is $12 billion business is down $80 billion business, right. So that's what we announced last quarter. And so when cloud is very strong, double-digit growth is obviously adding big dollars, but across each of the strategic priorities. So obviously, it would be a different scale. But, look, you have to look at the cloud, right? Because the cloud is the enabler. Think about it this, cloud is the enabler, data is the driver and then AI will be the differentiator for our clients. And so you saw many, many of the examples, really bringing these things together, right, so that you've got to get to the cloud, you got to get a handle on your data, right, and then be able to use AI. And we saw that in many of the examples that I gave in the script today. And so the first big step is, of course, replatforming in the cloud, both through migration and SaaS [ph] products. So just if you kind of have that mental model, I think it's helpful and then that goes across the organization. Rod Bourgeois : Well explained. Thanks. Angie Park : Next question. Operator : And we have a question from David Togut with Evercore ISI. Please go ahead. David Togut : Good morning, and congrats on these superior results. I'd like to ask about the sustainability of the compressed digital transformation. Can you give us some proof points that you're still in the early innings of this transformation, especially in some of your largest practices like Cloud First and Interactive? Julie Sweet : Sure. So a few things, right. So -- and we shared this last quarter that if you look at -- you have to build your digital core, right? So if you look at platforms like Oracle, SAP and they're moving to the cloud, those are all well below 50% of their installed base having moved, right? The sort of move to the cloud itself, the percentages are still around 30%-ish, maybe a little bit more in terms of workloads that have moved to the cloud, right? So if you just sort of look at kind of where are we just technically, right, you see a lot of waves. Then you look at our own research, where we talked about leaders and leapfroggers. And what we see is that about 10% on average of every company are really leaders and performing much better than the bottom 25%. But that's only still a part of their organization. They're still working on lots of compressed transformation, you've got these leapfroggers are coming from behind, that's about -- we estimate about a third are really doing compressed transformation. And those compressed transformation is wave on wave, right. Once you get to the cloud, and what do you do with the data. So, we continue to see this as really being a multiyear journey. And I will tell you that a lot of people will talk about the pandemic accelerated, years of transformation into months. That's only in thinking, right? It is really hard to re-platform, right. And then -- and it's really hard to move, get your data under control, and then be able to do that. Once you do it, it opens up so much. But there's a lot of hard work for our clients ahead, and we're privileged to get to be their partner. David Togut : Thanks for that. Just as a quick follow-up, could you comment on where you are with Industry X in terms of the innings of the growth of this business? I mean, clearly, we've got huge supply chain problems currently. I mean, how long do you think supply -- the supply chain problems will last as you look around the globe? Julie Sweet : Well, that's always -- we talk about that with our clients all the time, right? Because, look, the supply chain problems there's kind of the immediate issues, but there's the longer term issues like the ports are not, up to snuff in most of the markets around the world, right? There's fundamental shifts going on, in terms of how do you get -- how do you build resilience, which has been moving from sort of cost to resilience. And so, the work of supply chain is multi year. But I think it's important, just -- I always go back to kind of where we were. The new technologies have really only come online, some of the newer platforms like Blue Yonder Luminate or SAP. As for supply chain work in the last couple of years, right. And so they're just starting to really get the momentum and the implementation. And so I would say the digital supply chain work is very, very early innings and the same with manufacturing. That's why we call it the next frontier. It's a big focus. I mean, I think Gartner had a survey that said 93%, or 91% of directors believe it's the biggest transformation opportunity. But we're in very, very early innings still. David Togut : Thank you. Happy holidays. Julie Sweet : Happy holidays. Operator : And our next question comes from the line of Jamie Friedman with Susquehanna Please go ahead. Jamie Friedman : Hi. Good morning. Nice work here. Good way to finish the year. I was just -- oh, I don't think anyone asked about travel yet. And if they did, I apologize, if I missed it. But KC, what are you contemplating in terms of travel for fiscal '22 at this point? KC McClure : Jamie, on travel, it's no change to the assumptions that we had at the beginning of the year. So two components to travel, revenue from reimbursable travel, we don't have that in our guidance at the beginning of the year and there's no travel revenue assumed. And if it changes, we'll let you know. And then in terms of travel, outside of contract travel to clients, we continue to have an uptick in our expenses forecasted for the back half of the year, which again continues to be difficult to accurately estimate. Jamie Friedman : Thanks for that. And then either Julie or KC, do you have any early view on calendar '22 IT budgets for your clients? Are those -- I know you'll make your own weather a lot of time, but those rising to what degree? Is it the pace different than it was say last calendar? KC McClure : I mean, I would just say that this is kind of when the budgets are getting finalized. So we'll have much more insight next quarter because they get finalized into January. But what we're seeing is, which is reflected in our guidance is continued strong demand. Jamie Friedman : Got it. Thank you very much. Angie Park : Right. Operator, we have time for one more question. And then Julie will wrap up the call. Operator : Of course. And that last question then comes from the line of Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Hi, guys. Happy holidays. The first question I want to ask was, the surprise jump in diamond client adds? I think it was 15 in the quarter, and you did 13 all of last fiscal year. So just trying to get a sense is that something Accenture is specifically doing with the sales force to grab those larger clients? Or is that just a function of the demand environment that people are knocking down your door, even these larger clients that you would think you would already be working with you're not, and they're just continue to add to the number of diamond clients for you guys? Julie Sweet : Yes, it's really a function of what we've been talking about, it's compressed transformation, right? It's a function of more clients taking on more change, right, because that's what builds this level of bookings. And we've been talking about that trend, really from the first 6 months after the pandemic, where we had more clients do over $100 million bookings in the first 6 months of that fiscal year. And we continue to see that building as clients recognize how much change they need to do, and that they have to go faster. So that's really what we see is the function. Bryan Keane : Got it. Got it. And then KC, when just looking at the numbers on for the revenue growth, obviously a 27% constant currency number for the quarter. And then the guide, I think, for 2Q was above street expectations 22% to 26%. I guess, what does that imply for the back half of the year. Obviously, it would be a much different growth rate in the back half. Is that some conservatism versus just tougher comps? Can you talk about the back half for '22? KC McClure : Sure. What that implies in the back half is very -- it's still very strong and that it's double digits across the back half of the year at the low end and the upper end of our guidance range, which implies also really strong organic growth in the back half of the year. And a continuing build of our business in the back half of the year, coming out of the first half of the year, overall. Bryan Keane : But nothing specific to call out in terms of any weakness you see in the back half, but it's just a function of how the demand lays out? KC McClure : Correct. Bryan Keane : Got it. Thanks so much, and Happy Holidays again. KC McClure : Same to you. Julie Sweet : Thanks, Bryan. Okay. I think that was our last question. So thank you for joining us on today's call. And thank you again to our really incredible people across the globe. And thanks to all of our shareholders for your continued trust. We work to earn it every day and we really appreciate it. So best wishes to all for a safe, healthy and joyful holiday season. Operator : And ladies and gentlemen, today's conference will be available for replay after 10 A.M. Eastern today through March 17 at midnight. You may access to AT&T replay system at any time by dialing 1-866-207-1041, entering the access code 5745754. International participants may dial 402-970-0847. And those numbers again are 1-866-207-1041 and 402-970-0847, again entering the access code 5745754. That does conclude your conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,022	1	2022Q1	2022Q2	2022-03-17	10.207	10.467	11.711	11.883	null	25.82	23.66	Operator : Ladies and gentlemen, thank you for standing by, and welcome to Accenture's Second Quarter Fiscal 2022 Earnings. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Angie Park, Managing Director, Head of Investor Relations. Please go ahead. Angie Park : Thank you, operator, and thanks, everyone, for joining us today on our second quarter fiscal 2022 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2022. We will then take your questions before Julie 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 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 Julie. Julie Sweet : Thank you, Angie, and thank you, everyone, for joining. I would like to begin by honoring the incredible bravery of the Ukrainian people in the face of the unlawful invasion by Russia and extending our deep sympathy and concern over the horrific losses of life. While these words don't feel adequate to capture what is happening, we are taking actions to help in the small ways we can, which I will share more about later in the call. Turning now to the quarter. I will start by thanking our almost 700,000 people around the world for your incredible dedication and work to create 360-degree value for our clients and all our stakeholders. Thank you to our clients who are making bold moves to transform and putting their trust in us to help them. Finally, thank you to our technology ecosystem partners we work with every day to innovate and create more value for our clients. Now a few highlights from the quarter. We had record bookings of almost $20 billion and continued improved pricing, which refers to contract profitability or margin on the work that we sell across the business with 36 clients with bookings over $100 million. We had record revenue growth of 28% in local currency, bringing total revenue added through H1 to $6.2 billion, which is what we added in all of FY '21. And our EPS grew 25% year-over-year with flat operating margin and continued significant investment in our business and our people. Our workforce grew by 24,000 people, demonstrating again our ability to attract top talent at the scale needed by our clients. We were the top scoring company on the Bloomberg Gender-Equality Index out of more than 400 organizations globally. We were recognized in Ethisphere's World's Most Ethical Companies for the 15th year in a row and by JUST Capital for the sixth consecutive year. Our people completed another 9.2 million training hours this quarter. And we continue to gain market share, growing more than 3x the market. With such an exceptional quarter, I would like to particularly recognize and thank the incredibly strong delivery teams that underlie these results. Our clients know that our commitments are backed by the outstanding work our people do every day, working side-by-side with them, from shaping the future to building the best systems and platforms to creating amazing new experiences and brands to running critical functions for our clients and everything in between. Before handing over to KC, let me pause to reflect on the current macro environment. It was almost exactly 2 years ago that we did earnings only 8 days after the pandemic was declared. Then, as now, the world faced incredible uncertainty. We are all watching the events unfold in Ukraine, and there are many potential scenarios which are difficult to predict. While the circumstances are very different, our focus is the same : on the well-being of our people, serving our clients and staying close to their evolving needs and helping our communities. We emerged from the pandemic an even stronger and more relevant company, and we will use this strength to successfully navigate this environment and fulfill these same 3 goals. Over to you, KC. KC McClure : Thank you, Julie, and thanks to all of you for taking the time to join us on today's call. We were extremely pleased with our overall results in the second quarter, which exceeded our expectations with record new bookings of almost $20 billion, $2.8 billion higher than our previous record set last quarter. Our results reflect very strong double-digit revenue growth across all dimensions of our business, which reinforce the relevance of our offerings and capabilities in the market to deliver value for our clients. We had a very strong Q2 and first half of the year. While we know the environment is uncertain given the ongoing conflict in Ukraine, we always call it as we see it. And based on the best information we have today, we are increasing key elements of our full year guidance, which I will cover in more detail later in our call. Now, let me begin by summarizing a few of the highlights for the quarter. Revenues grew 28% local currency, increasing $3 billion over Q2 last year and nearly $300 million above the top end of our guided range, driven by broad-based over-delivery across all markets, services and industries with all 13 industries growing double digits. We also continued to extend our leadership position with growth estimated to be more than 3x the market, which refers to our basket of publicly-traded companies. We delivered EPS in the quarter of $2.54, reflecting 25% growth over adjusted EPS last year, and operating margin of 13.7% was consistent with Q2 of last year. And 10 basis points expansion year-to-date reflects continued significant investments in our people and our business. Finally, we delivered free cash flow of $2 billion and returned $2.3 billion to shareholders through repurchases and dividends. We have made investments of $1.8 billion in acquisitions, primarily attributed to 21 transactions in the first half of the year. And we continue to expect to invest approximately $4 billion in acquisitions this fiscal year. With that, let me turn to some of the details. New bookings were a record at $19.6 billion for the quarter, representing growth of 22% in USD over a very strong Q2 last year, with an overall book-to-bill of 1.3. Consulting bookings were $10.9 billion, a record high, with a book-to-bill of 1.3. Outsourcing bookings were also a record at $8.7 billion with a book-to-bill of 1.3. We were very pleased with our new bookings, which were driven by both technology services and strategy and consulting, as well as 36 clients with bookings over $100 million. Turning now to revenues. Revenues for the quarter were $15 billion, a 24% increase in U.S. dollars and 28% in local currency. Consulting revenues for the quarter were $8.3 billion, up 29% in U.S. dollars and 34% in local currency. Outsourcing revenues were $6.7 billion, up 19% in U.S. dollars and 23% in local currency. Taking a closer look at our service dimensions, strategy and consulting, technology services and operations all grew very strong double digits. Turning to our geographic markets. In North America, revenue growth was 26% in local currency, driven by double-digit growth in Software & Platforms, Consumer Goods, Retail & Services -- Travel Services and Public Service. In Europe, revenues grew 31% in local currency, led by double-digit growth in Consumer Goods, Retail & Travel Services, Industrial and Banking & Capital Markets. Looking closer at the countries. Europe was driven by double-digit growth in the U.K., Germany, France and Italy. In Growth Markets, we delivered 30% revenue growth in local currency, driven by double-digit growth in Consumer Goods, Retail & Travel Services, Banking & Capital Markets and Public Service. From a country perspective, Growth Markets was led by double-digit growth in Japan, Australia and Brazil. Moving down the income statement. Gross margin for the quarter was 30.1% compared with 29.7% for the same period last year. Sales and marketing expense for the quarter was 9.4%, consistent with the second quarter last year. General and administrative expense was 7% compared to 6.6% for the same quarter last year. Operating income was $2.1 billion in the second quarter, reflecting a 13.7% operating margin, consistent with Q2 last year. Before I continue, as a reminder, we recognized an investment gain in Q2 last year, which impacted our tax rate and increased EPS by $0.21. The following comparisons exclude these impacts and reflect adjusted results. Our effective tax rate for the quarter was 19.2% compared with an adjusted effective tax rate of 17.5% for the second quarter last year. Diluted earnings per share were $2.54 compared with an adjusted diluted EPS of $2.03 in the second quarter last year. Days service outstanding were 41 days compared to 42 days last quarter and 34 days in the second quarter of last year. Free cash flow for the quarter was $2 billion, resulting from cash generated by operating activities of $2.2 billion, net of property and equipment additions of $165 million. Our cash balance at February 28 was $5.5 billion compared with $8.2 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the second quarter, we repurchased or redeemed 4.6 million shares for $1.7 billion at an average price of $369.19 per share. As of February 28, we had approximately $4.6 billion of share repurchase authority remaining. Also in February, we paid a quarterly cash dividend of $0.97 per share for a total of $617 million. This represents a 10% increase over last year. And our Board of Directors declared a quarterly cash dividend of $0.97 per share to be paid on May 13, a 10% increase over last year. So, at the halfway point of fiscal '22, we have delivered very strong results. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. Let's begin with the demand environment. We are experiencing double-digit growth in all parts of our business across all markets, industries and services. All our growth priorities, Applied Intelligence, Cloud, Industry X, Intelligent Operations, Intelligent Platform Services, Interactive, Security and transformational change management all are growing double digits. Many of our clients are taking on bold transformation programs, often spanning multiple parts of the enterprise in an accelerated time frame, which we call compressed transformation, as they recognized the need to transform every part of their enterprise with technology, data and AI and new ways of working. What is also clear is that the sheer speed at which an enterprise now needs to move and the breadth of the expertise required to transform demands partnerships. For example, our wide range of managed services from Intelligent Operations to application development and maintenance to Cloud, infrastructure and security, our strategic capabilities that enable our clients to digitize faster, access hard-to-hire talent, transform more quickly due to our deep expertise and achieve outcomes from greater efficiency to improved customer satisfaction, to enhance security, to faster development, to higher growth. Our managed services are unique because they combine our strong strategy and consulting capabilities to anticipate and shape the future and be at the cutting-edge of industry, function and technology. We also see our clients looking for partners who can create 360-degree value, upskilling our people, focusing on enhancing diversity and building in sustainability, which is our focus. Stepping back, when you think about the extraordinary growth we are experiencing and how we navigated the pandemic, we believe our commitment to create 360-degree value for all our stakeholders and our unmatched diversity of people, services, industries, functions, markets, ecosystem partners and investments, together with our leadership and technology, have made us both relevant to the world's largest companies and resilient. I will now bring to life how we are partnering with our clients with a snapshot of the range of solutions we are bringing across industries and across the enterprise. Let's start with enterprise functions. In chemicals and natural resources, we are expanding our relationship with a leading chemical manufacturer to carve out one of their business units serving the automotive industry to better focus on sustainable solutions. As part of this carve-out, we will build the backbone of this new entity with a cloud-based infrastructure, ERP platforms and Intelligent Operations managed services for technology, HR and finance, all in just over 1 year. This compressed transformation will create new value, reduce operating costs by up to 30%, enhance portfolio flexibility and enable future growth in new areas. In consumer goods and services, we are working with a large multinational personal care corporation to build an integrated digital core with standardized processes, IT enterprise platforms and instant access to consolidated data in the cloud, which will enable a more efficient and flexible supply chain and digital order processing. This will provide more time to sell, reduce human error, create a better customer experience and deliver a stronger bottom line. We will also streamline financial operations, leading to greater agility and cost benefits to remain competitive in any environment and delight their consumers. Now I will turn to our solutions helping transform the core operations of our clients. In high tech, we are supporting Airbus, a leading aircraft manufacturer in several areas of their business, including digital design, manufacturing and services. With our acquisition of umlaut, we're also helping Airbus engineering and manufacturing teams to develop the new A350F. At the same time, we will also onboard and manage training for new frontline employees using a realistic digital twin pilot, optimizing onboarding time and significantly reducing the learning curve of shop floor workers without disturbing production. In Banking & Capital Markets, we are helping BBVA, a global financial services firm, synchronize and speed up its digital journey. With the power of analytics, AI and automation, we will create an intelligent data-driven banking operation with greater agility and productivity, lowering costs by up to 30% by leveraging our strategic managed services, improving their customer experience and becoming an integral part of their talent strategy to provide new growth opportunities, upskilling and security opportunities. This builds on our work with this digital leader that spans over 25 years, including international expansion, capital market strategy and digital sales and services. In Health, we are helping Highmark Health, a national blended health organization to make Health care more personalized and proactive through the power of technology and data. By leveraging the cloud and operational hub, we'll bridge business units, consolidate enterprise data, provide faster insights and personalize the customer experience with the flexibility to evolve as needs change. By maximizing its key asset data, Highmark Health will see faster time to market, reduce operational costs and increase innovation and most importantly, better health outcomes. And we are helping clients accelerate their growth agenda. In consumer goods and services, we are collaborating with Del Monte, the iconic fresh and packaged food company, to establish effective B2B2C and direct-to-consumer commerce platforms. We will transition and scale their existing platforms into a one commerce ecosystem to make it easier to create and launch new products, driving significant growth in their e-commerce revenue. We are helping with clients to help shape and deliver on the significant emerging opportunity of the Metaverse. We've been an early innovator in this area backing -- going back a number of years, investing in R&D, our people and our own metaverse, One Accenture Park, all of which positions us to help our clients accelerate their Metaverse strategies and initiatives. In communications and media, we are helping Telstra, Australia's leading telecommunications company, to deploy 5G connectivity and technology to deliver immersive fan experiences at Melbourne's Marvel Stadium. From booking a seat to parking, to engaging with a match, fans will soon be able to experience a new augmented reality stadium experience before, during and after they attend the game. And if you missed the release yesterday, please be sure to read our new technology vision, which is titled, Meet Me in the Metaverse, and is available on our website. And we are building the digital cores of our clients from replatforming in cloud to building core systems as described in many of the examples above, to helping them secure their enterprise as the security landscape widens. In Life Sciences, we are working with Merck, a global pharmaceutical leader to create robust intangible value across the organization, which will help enable growth, accelerate the development of life-changing therapies for patients around the world. We will develop a more flexible and responsive IT infrastructure in the cloud, leveraging data and analytics and product-centric methodologies to power innovation, insight and speed. At the same time, we are cultivating IT talent through a new operating model that drives upskilling, diversity and development. Also in Life Sciences, we are expanding our partnership with an international drug wholesale company, which advances development and delivery of health care products, including life-saving cancer treatments and COVID vaccines around the world to support their suite of cybersecurity towers by creating an integrated delivery model to increase resilience, accountability, collaboration and feedback across monitoring, engineering, data protection, risk and compliance and identity while also reducing costs. And we are helping our clients... Unidentified Company Representative : [Technical Difficulty] Julie Sweet : I'm sorry? Unidentified Company Representative : The call dropped. Julie Sweet : Has the call dropped? Unidentified Company Representative : No, I think it's still going. Julie Sweet : Sorry about that, everyone. I just want to make sure, confirm that we're good. Apologies. If you can hear me, we heard the call apparently dropped. We're good. Okay. So let's go back to we're helping our clients put sustainability in their core. We are helping a leading steel and mining company move to low-carbon steelmaking and employ decarbonization technologies. As an end-to-end partner supporting the company's ambitious decarbonization program, we will help standardize and implement the technical solution among its sites. I would now like to briefly comment on how Accenture as a company and our people have mobilized to support our Ukrainian colleagues and provide humanitarian aid. When people ask me what makes Accenture special, our actions like these are what come to mind. While we do not have operations or people who work in the Ukraine, we have many Ukrainians who work for us, particularly in Poland. For their extended families who are in Ukraine, we quickly put in place Ukrainian language telehealth and other remote support services. And for those family members who are leaving the Ukraine, we are providing the settlement assistance. I also am proud of our people who have volunteered to drive refugees from the border to help get them settled. With a decade of experience helping refugees, we knew that not-for-profit organizations operating in Ukraine and the border countries providing humanitarian relief would have an initial immediate need for cash. We are currently donating $5 million in cash to these organizations. In addition, our people have donated nearly $1.5 million in our employee giving program, and we are providing 100% match funding. Our people also have sprung into action to anticipate the next needs of refugees. In Poland, we are piloting the first addition of an Accenture Academy for women refugees from Ukraine to build their technology skills starting in cybersecurity. Finally, as we've shared, we are discontinuing our business in Russia. We are working to support our nearly 2,300 employees there, and we want to thank them for their dedication and commitment to Accenture over the years. Back to you, KC. KC McClure : Thanks, Julie. Before I get into our business outlook, I would like to provide some context as events are rapidly evolving and there's significant amount of uncertainty. Our third quarter and full year guidance does not include any assumption for a significant escalation or expansion of economic disruption or the conflict's current scope. Now let me turn to our business outlook. For the third quarter of fiscal '22, we expect revenues to be in the range of $15.7 billion to $16.15 billion. This assumes the impact of FX will be about negative 4 compared to the third quarter of fiscal '21 and reflects an estimated 22% to 26% growth in local currency. For the full fiscal year '22, based upon how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our results in U.S. dollars will be approximately negative 3% compared to fiscal '21. For the full fiscal '22, we now expect our revenues to be in the range of 24% to 26% growth in local currency over fiscal '21, which continues to assume an inorganic contribution of about 5%. For operating margin, we now expect fiscal year '22 to be 15.2%, a 10 basis point expansion of our fiscal '21 results. We continue to expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.1% in fiscal '21. For earnings per share, we now expect our full year diluted EPS for fiscal '22 to be in the range of $10.61 to $10.81 or 21% to 23% growth over adjusted fiscal '21 results. For the full fiscal '22, we now expect operating cash flow to be in the range of $8.7 billion to $9.2 billion, property and equipment additions to be approximately $700 million and free cash flow to be in the range of $8 billion to $8.5 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we now expect to return at least $6.5 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so that we can take your questions. Angie? A - Angie Park : Thanks, KC. [Operator Instructions] Operator, would you provide instructions for those on the call? Operator : [Operator Instructions] Our first question comes from the line of Lisa Ellis with MoffettNathanson. Lisa Ellis : Good stuff here. And yes, Julie, we could hear you the whole time. I don't think the call dropped. Can you talk a little bit about, given you guys are very global and very much on the front lines with major corporations, how -- what impact or changes are you seeing companies start to make with the work they're doing with Accenture in response to the macroeconomic environment, meaning to deal with inflation or supply chain challenges or sanction enforcement or anything like that? What are some of these -- are you seeing -- starting to see some conversations going, some shifts or interest in doing different types of programs with you? Julie Sweet : Thanks, Lisa. Great question because we're talking to our clients all the time. And I guess, let me just start with, I think the experience of the pandemic has just built in more of a sense of resilience and agility. And so we're seeing really a lot of what I call calm in response to the macro environment. I mean the reality is that it's very early. And while there are lots of like predictions around what could happen with inflation, what could happen with supply chain, people are not overreacting. And instead, what I'd say is they're remaining very focused on the priorities they had before the crisis because as you talk about, inflation is already a reality, right? And we're already living that. And so for inflation, depending on the industry, like, for example, consumer goods, there's been a lot of focus on growth and cost, right, with cost being even higher up because you're seeing that you can't push through all of the -- and price increases, all of the increases in input. Of course, as you think about the potential scenarios around like disruption of agriculture and so on, we could see that potentially going higher, but it's too early to tell. And instead, companies are saying, look, we've got to make sure that we're on pace, and we're executing. The same as I think about energy prices. Supply chain, if anything, there's just been an increased focus on we need to think as much about resilience, right, as cost in supply chain. And we absolutely have to digitize so we've got more insight. And so I think the trends that we were already seeing to address, things coming out of the pandemic, the changing economic environment around inflation are simply being focused on even more. And this premium on are we building in agility and are we going at the right pace, that's really the nature of the conversations. Lisa Ellis : Got it. Okay. Okay. And then maybe my follow-up, KC, for you. I'll ask the inevitable margin question. It looked like -- I know Julie made a comment about contract pricing being up. It looks like gross margins are up, but SG&A also was up a bit, and then you're coming in at the lower end of your margin expectation. Can you just talk a little bit about the drivers there, what's going on in the underlying cost base? KC McClure : Yes. Sure. Thanks, Lisa. So let me first start with, we were really pleased with our performance in operating margin. So we've expanded 10 basis points to the first half of the year. And we were flat in the second quarter. And really, that was driven by revenue growth, as we mentioned, with -- that had improved pricing on our record bookings. So very pleased with profit this quarter, including the 25% growth that we delivered in EPS. And so let's -- let me just peel that back a bit. So we're in a hypergrowth environment where we're hiring at elevated levels to meet this demand. So at the same time, as you know, we're navigating wage inflation. So Lisa, we remain very focused on pricing, knowing that it's going to take some time for the improved pricing, which lags compensation to flow through our P&L, but we did see some impact to that in this second quarter results. I think probably more importantly, it's really very important that we significantly invest in our people and our business and we're doing so at even higher levels than last year. So we're absorbing that also in our up margin as well as the step-up that we've talked about in our acquisition spend. So just in summary, we're halfway through the year. We're 10 basis points of margin expansion. We think we'll continue to that level of margin expansion in the back half of the year. Really pleased with that. And that would mean an EPS growth, which is stellar at 21% to 23% growth for the year. Operator : Our next question comes from the line of Brian Keane with Deutsche Bank. Bryan Keane : Congratulations on these great results. I had 2 questions. I guess the first one is, given the disruption to some of the digital engineering IT service firms in Eastern Europe, are you seeing additional demand from clients looking to other vendors? Julie Sweet : Thanks, Bryan. It's really too early to see that. We're seeing clients staying very focused on their business and what we're doing with them. Bryan Keane : Got it. And the other thing that jumped out at me is the 3x growth rate versus the market. I think typically, Accenture has been more of a 2x in recent years. So can you just talk to us about why the expansion and share gains that's happened over just recently here? Julie Sweet : Yes. Thanks, Bryan. It's really, I think, a combination of things, right, but let's just always start with our clients. Prepandemic, what we saw were clients much more into -- they did transformation quite sequentially, right? The pandemic was a major shock. You saw the leaders who are kind of coming into that saying we've got to go even faster. And you saw a bunch of companies saying, we need to leapfrog, right? We need to move online. We need to do digital transformation. And that meant that we saw companies starting to take on -- not sequential transformation, but what we call compressed transformation, where they're, at the same time, doing manufacturing as well as sales. And you saw that in some of the examples that I gave today where you've got entirely new backbones being created across multiple enterprise functions, where you've got both new platforms being put into place and manufacturing. And they're doing that in order to lead because of what they see in the business. And when you think about who is able to help navigate, because you don't do that kind of transformation with like a different partner for every transformation, right? Accenture is very distinctive in our industry because we are able to transform every part of the enterprise. And that's one of the things I was trying to emphasize. Like we can do -- we're going to finance in HR, right? We've got the growth agenda, sales, marketing and service, right? We've been investing for a decade in Industry X, which is really taking off. We talked about the digital frontier. And so you have in Accenture a partner that can do that. And you see that over the course of the last 2 years in the record numbers compared to prepandemic of clients with over $100 million in bookings. And it's really -- it's recognizing, it's representing that level of demand. And we're quite unique. Like we've talked about this for years, right? All of our different services, our deep industry knowledge. And when you're moving fast, you need a partner that really can span the enterprise and has that deep knowledge of the industry. And that is, of course, driving the growth, right? Because we are capturing the momentum in every part of the enterprise that's happening now. Operator : Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Tien- Tsin Huang : Great results here. Just wanted to clarify your assumptions on the really strong outlook. Can we assume that your approach towards guidance is similar to the approach you took at the onset of the pandemic? And are you assuming any slowdown in Europe in your guide? I know there's a lot of questions we're giving on macro within Europe, so figured I'd just ask it here. KC McClure : Yes. So thanks, Tien-Tsin. So let me just cover what we're assuming in our guidance. So -- and maybe I'll first start with our guidance does take into account the revenue impact of discontinuing our business in Russia and the cost to wind that down. Now with respect to the broader risk, our guidance, we're calling it like we see it, Tien-Tsin. So the same way that we did -- we always do, we did during the pandemic. And today, we don't see a significant disruption in our business. Now it's still very early, and it's difficult to predict. So our guidance does not take into account any significant escalation or expansion of economic disruption or the conflict's current scope. Now as it pertains to Europe, we are not seeing a significant disruption in our business in Europe. You've seen that reflected as well in our very strong bookings and revenue growth. And for the back half of the year, our guidance continues to assume a very strong double-digit growth, including in Europe. Tien- Tsin Huang : Okay. Great. Look, we trust your outlook. I just want to make sure I understood the approach here. Just my quick follow-up, just the 36 clients, over $100 million, big number. I'm just curious if the pipeline for larger deals, how does that look from here your ability to replenish? I know we're in March now, but just curious what you're thinking on larger deals looking ahead here. KC McClure : Yes. So I'll comment on the pipeline, Tien-Tsin, and see if Julie wants to add anything else. But we continue to feel good about our pipeline even with another quarter of record bookings just completed. We were very pleased with our bookings, obviously, in Q2 and for the first half of the year. But bookings can be lumpy from quarter-to-quarter. So we focus on the trailing 12-month book-to-bill as I know many of you do, too. But we, overall, still feel really good about our pipeline. Julie Sweet : Yes. And Tien-Tsin, the only one thing I want to add maybe back to your last question is, we are doing exactly what we did at the pandemic, which is we're calling it like we see it, right? So we'll update every quarter. And we've got -- we're really close to the clients, right? And as we said at the beginning, it is too early. So we're not trying to build in, be overly conservative or overly optimistic. Like we really just call it down the fairway. And next quarter, we'll update and we'll go from there. Operator : Our next question comes from the line of Jason Kupferberg with Bank of America. Jason Kupferberg : Just wanted to ask about the bookings, obviously, extremely strong here. I was just curious on the consulting and outsourcing side. How much above your internal expectations did they come in? And how should we think about book-to-bill in the back half of the year? I know year-to-date, it's nicely elevated at 1.2x. So should we just expect some normalization there in the back half? KC McClure : Jason, I would say that our bookings -- our record bookings did come in higher than we expected. That was a broad-based over-delivery across all markets, all services and industries as well as consulting and outsourcing type of work. And again, we look at an overall book-to-bill, as I just mentioned to Bryan, in a trailing 12 months, 4 quarters at a time. So, we feel good about where we are and our positioning and our pipeline and our bookings to date as we head into H2. Jason Kupferberg : Okay. All right. Understood. And then can you just remind us which countries within Central and Eastern Europe you have the most meaningful headcount, obviously, excluding Russia? But I know you mentioned Poland earlier, but just so we have a broader picture of the headcount distribution in the region? Julie Sweet : Sure. Poland and Romania would be the sort of the two where we've got delivery centers. We don't have big local market, but Poland and Romania. Operator : Our next question comes from the line of Keith Bachman with Bank of Montreal. Keith Bachman : Julie, I wanted to direct this to you. And the nature of the question is, I wanted to get your view about the durability of double-digit growth. And I'm not focused on this year. So, our model goes back to 2006 for Accenture. So, 2006 to 2021, Accenture grew on average, by about 8 points, which includes some M&A. Half of those years were in the double-digit range, half were not. And so, I'm just trying to think and I think investors are really focused on the phenomenal year that you're having this year, but it sets up : a, a very difficult compare, including 5 points of M&A and b, a lot of companies, including my firm, came out of COVID and said, we need to do a lot of things differently. So, stressing -- trying to fix our IT infrastructure and -- may have created some pull-ins. The things we're going to do over the next 5 years, many firms are doing over the next 1 year. So, I wanted to get your -- with that as a context, how do you see, as you look out to 2023 and beyond, how do you view Accenture's ability to sustain double-digit growth? Julie Sweet : I love that you look at it over the long term because that's how we do. And so, the way we think about growth isn't about, is it double digit or not, right? We've had a very enduring and I think it served us well, belief that we should be growing more than the market, right? And so that is what we focus on, is that we are always continuing to take market share. And that is an enduring commitment that we sort of -- that we anchor to. Now, the way we do that is that we stay very close to clients so that we know not only what they need today, but also, we can anticipate what they need tomorrow, right? And that's really important. So yesterday, for example, we talked about the Metaverse continuum where we have been investing for a decade. We think the Metaverse and Web3 is as significant as when, in 2013, we called that every business would be a digital business. And that will be a huge transformation over the next decade that will also be part of -- sort of next waves of growth. At the same time, it's really important to look at where we are now, which is still extraordinarily early in the digital transformation of every part of the enterprise, right? We estimate, for example, that only about 30% of workloads have been -- have moved to the cloud. And once you get to the cloud, that's when you actually use those technologies to grow and innovate. You saw that in some of the examples that we gave today where you're having the cloud piece, but then you're figuring out how to use the data and the AI to really transform. When you look at replatforming on the leading SaaS platform, similarly, extraordinarily early. So, everyone feels, right, the big focus on digital because that was the wake-up call from the pandemic. But the actual transformation and just putting in the foundation is still very early stages, and then it's what you do on that foundation. Then if you look at from a technology development point of view, let's take manufacturing and supply chain. Many of the technologies have that are advanced have only been introduced in the last couple of years, right, the advanced cloud-based technologies. And so, technology itself, like there's still new functionality that doesn't even exist in some of the major platforms that's still being created. And so, we consider the manufacturing and supply chain as the next digital frontier. And of course, that was a big play for us, which we've been doing for the last decade because it's a move from IT to OT as you think about the budgets that we're accessing, right? And so overall, like as much as we feel there's so much going on, you still have many, many companies who’ve not started the compressed transformation. You're very early in the platforming of what's today, let alone the next things that we can already see like Web3. Keith Bachman : Okay. Great. Very helpful. KC, I'll make my follow-up a bit more poignant question, and just want to try to understand the operating margin comments that you made before. And specifically, is wage inflation impacting that negatively, influencing some of the comments you made about potential for operating margin expansion this year? KC McClure : Yes. So in terms of wage inflation, I will -- it's really a pretty similar case to what we've discussed last quarter. So maybe it just kind of goes back through that again. So obviously, it's occurring in all the industries, and it's across the globe. And our clients have also obviously experienced this as well in this very tight labor market. But for us, as it relates to wage inflation, we see for our business that we're going to continue to have wage increases in the market for certain skills, and that's going to continue to vary by geography. And we're also looking at have the Consumer Price Index and any increases there and how that might potentially spill over into inflation at the lower end of our pyramid. And so we're focusing on pricing to absorb our higher labor costs. And again, as it relates to pricing, what we're seeing is that it's going to take some time, Keith, for the improved pricing, which we did have in the second quarter, again, on our record bookings. We see that flow through -- see that flow through our P&L. We did see some of that impact in the second quarter, but that obviously lags the impact of compensation increases. Julie Sweet : And I'm just going to add -- and I just want to add that I'm very happy with where we are on profitability. I mean if you think about what we are navigating, right, hyper growth has increased costs from all the recruiting, right? We did a big step-up in acquisitions last year. We're absorbing that dilution this year, right? We've increased significantly the investments in our business, which are all about driving growth today, but also tomorrow, right? We're in an unprecedented labor market with wage inflation, which we are absorbing and still delivering at 10 basis points operating margin expansion. So I feel really good about where we are as a company, both for this year and all the things that we're doing to position ourselves to continue to grow in market-leading ways. Operator : Our next question comes from Ashwin Shirvaikar with Citi. Ashwin Shirvaikar : Julie, KC, congratulations on the quarter and outlook. I wanted to start with the M&A question. I believe there was no M&A since last earnings. Perhaps I may have missed a smaller deal or 2. Is that just a quirk of timing? Or is it that you just recently did larger deals and are integrating? Or might there be other factors at play? KC McClure : Yes. Maybe I'll just state some facts and you can -- yes, so Ash, we're about halfway through the year. And we did have a lot of acquisitions closed in Q1. You're right, we did have less close in Q2. But acquisition closing, they can be lumpy. We can't always control the timing. So we've deployed $1.8 billion of acquisition spend year-to-date. We continue to expect about $4 billion of acquisition spend in FY '22. But of course, we're only going to do deals that make sense. And so it could be plus or minus the $4 billion. And we'll update you next quarter. But let me... Julie Sweet : Yes. And I just like I wish we could manage it sort of like say, we're going to do this many and then we're going to absorb. But it really is just about timing goes up and down. And also, we have a lot of rigor and discipline. We're only going to do deals that we believe in, right? So we're not trying to manage in any way to a quarter. We've got a capital allocation. If we can do that with great deals, we're going to do it, and so that's the approach. I will take the opportunity just to say one of the ones we did announce, we did close 2 this quarter. But one of the ones we announced I'm super excited about, which is AFD.TECH, which is in the network space, 1,600 people in France. And it's important because as you think about what's happening in digitization, our increasing move into really leading in network is important. And it's just another great example of how we use acquisitions to accelerate our strategic growth priorities. It's an important part of Accenture Cloud First. Ashwin Shirvaikar : No doubt. I agree with that. And I wanted to ask a broader question. This has unfortunately been asked in a few different ways. But I think you captured it well in your takeoff sentence when you mentioned an incredibly high level of uncertainty. But I believe that since the compressed transformation move started, this is probably the first major test of secular trend versus cyclical uncertainty. And I know you're calling outlook like you see it. But is this time different? Can the strength of secular overcome cyclical challenges? Julie Sweet : Look, we all rose to dealing with the types of things that may come out of this crisis other than perhaps the military scenarios, right, whether it's more inflation, the need for energy conservation due to higher energy prices, the disruption in supply chain, agriculture. All roads lead to some combination of technology and human ingenuity, right, which is what we bring together. And so, you've got great solutions like managed services to accelerate both cost takeout and finding new ways to grow, new ways to access markets, right? You've got energy efficiency that's going to come from technology improvements. And so, as you think about what we do, right, we're the company that's going to be able to help companies navigate these macro trends. And so, we really believe that the technology -- importance of technology and then being able to apply it to get tangible outcomes is going to be critical. And so, we believe we'll be resilient through this, through whatever this is going to be as well. Operator : Our next question comes from the line of Surinder Thind with Jefferies. Surinder Thind : The first question I'd like to ask is just about talent and your ability to acquire it more globally. Obviously, in the earlier announcement about the apprenticeship program or the expansion of it in the U.S., can you talk a little bit about as you build out the bottom base of the pyramid for your delivery.How does something like that impact like bill rates or the clients' willingness to accept bill rates when you're using individuals with non-4-year degrees and so forth? Julie Sweet : Interesting question. I would say that our clients really focus on skills. They don't focus on degrees. And so, what they're looking for are the skills. And that's a broader trend. In fact, we predicted that 3 years from now, Chief Human Resources officers will all be talking about skills. And as part of this trend, you need to be -- not a consumer, but a creator of talent, understand skills and then be able to reskill. Surinder Thind : Fair enough. And does that also impact your cost as well, though? Are you able to employ them at a better cost base, I guess? How should I think about the arbitrage opportunity there if clients are willing to pay for the full skill? Julie Sweet : I wouldn't think about the arbitrary opportunity. We pay market-relevant pay. And it's the focus on skills. Even if you look at our -- the way we draft our recruiting thing, it is about skills. And so, there isn't something that because you've got a 2-year degree versus a 4-year degree, now you're paid less. It's about skills. So, there's a market price for these skills. So, I wouldn't think of it as labor arbitrage. Surinder Thind : Got it. And then as a follow-up question, just a big-picture, longer-term question just about the delivery model. Do the current geopolitical events maybe change your perception of where you may want to operate or expand to? There's generally been in the trend of the last few years, much more global delivery. Obviously, you guys are very global. But in terms of just trying to get as much talent in every country everywhere, how does that kind of change the way that you might be thinking about delivery, whether it's being more concentrated in certain regions or areas or avoiding other regions and areas? Julie Sweet : What I would say is since the time of the pandemic, when we had this global shock, right, we continued to evolve our ability to move work and be flexible. And so, our focus is really on that agility and making sure that we have the right kinds of talent, both geographically dispersed, but also the ability to move talent around. Angie Park : Operator, we have time for one more question, and then Julie will wrap the call. Operator : Our last question will come from the line of Brian Essex with Goldman Sachs. Brian Essex : Great. I echo my congratulations on the results for the quarter. I guess, I wanted to follow up to the last question, maybe a little different angle, focused on the supply side. So, I guess with that` in mind, Julie, are you seeing -- obviously, in a post-pandemic era or hopefully coming out of the pandemic, companies are used to operating in a hybrid world, more agnostic to where work is performed. Any trends that you -- or overarching trends that you can call out either by skill level or by geography where they might, and specifically, would love to focus it on how they're managing costs? So, are they looking to shift work to particular geographies? Do you see demand in particular geographies? Are there certain trends that you can call out with regard to the skilling of labor forces in particular geographies that are notable where you might see some cost benefit or better ability to supply to meet demand? Julie Sweet : I'm talking about talent all the time with our clients. And I'd say that it's slightly different than what your focus is. Here are the two big things, which are all around accessing talent. So, in accessing talent, means you have to be able to attract and retain it, and you've got to be able to get it at scale. So the bigger focus is around what does it take to attract and retain in a hybrid work environment. And so more companies are focused on where they did -- they used to want everybody in the office, having more of a hybrid model, and that has knock-on cost effects as you decrease your real estate. And so that's been a big focus. But the actual -- the thing we talk to clients about is it's more about how do you attract people who today, all of our research shows that if you're not having to be there in a frontline worker, you want some combination, and then that does have costs. And so that's a huge focus around talent. The second piece on access, if you look at the way our managed services are being driven, it is really 2 big things. One is it's faster to digitize because you use our platforms. And the second is the access to hard-to-get talent, right? And so let's just take security. We have 10,000 security professionals who do everything from threat assessment to the rebuilding and designing platforms to managed services. And in today's world, with the security landscape broadening, right, that access to that kind of talent is incredible. And so just the real focus is on access and what does it take to access it, including through partnerships. And those are the kinds of conversations that we have. Brian Essex : Got it. That's super helpful. And maybe just one quick follow-up on resources. What have you seen historically? I know we've got accelerating energy prices, oil in particular. What have you seen historically with regard to follow-on for alternative projects and greater investment in the energy sector, in particular, in response to prices? How high is it been correlated, particularly on the discretionary side and maybe your experience in terms of how you've seen follow-through with spend in that sector? Julie Sweet : Yes. Well, listen, I was just at CERAWeek, which is the world's largest energy conference for a couple of days just last week, so I spent a lot of time with everyone in the energy sector. And I think rather than looking at it historically, let's look at it like what are people talking about now. So first of all, despite the increases in prices, say, in oil and gas, no one is saying, "Hey, now we've got to let up on cost." In fact, the exact opposite. Because the oil and gas industry, in fact, the entire energy industry has a major challenge ahead of investing to move to sustainable energy solutions. And so what I would say is that there is an absolutely laser focus on continuing what that industry had to do during the pandemic because how it was fit and focus on cost and now accelerate innovation and moving to sustainable energy solutions. And that's where we gave the example today of how we're helping in decarbonization. We announced this week what we're doing with Ecopetrol and AWS around water management, right? And so we're playing -- we're obviously very well situated. We have a deep, deep expertise in utilities and oil and gas and the entire energy sector in -- at their core both enterprise as well as in the grid, at the refinery and then helping really create those sustainable solutions. We see this as a major opportunity for our clients that we want to help them on. Angie Park : Great. Thank you very much. I'm going to close the call now. Thanks, everyone, for joining us, and thank you again to our incredible people and to our shareholders for your continued trust. Please make sure to join us for our Virtual Investor and Analyst Day on Thursday, April 7. We're looking forward to being back together. Thanks, everyone. Operator : Ladies and gentlemen, this conference will be available for replay after 10 :00 a.m. Eastern today through June 23. You may access the AT&T replay system at any time by dialing 1-866-207-1041 and entering access code 6300496. International participants may dial 402-970-0847. That does conclude our conference for today. We thank you for your participation and for using AT&T conferencing service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,022	2	2022Q2	2022Q3	2022-06-23	10.619	10.797	11.981	12.083	null	24.08	23.05	Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture's Third Quarter Fiscal 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Angie Park, Managing Director and Head of Investor Relations. Please go ahead. Angie Park : Thank you, operator. And thanks everyone for joining us today on our third quarter fiscal 2022 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, and Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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 third quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the fourth quarter and full fiscal year 2022. We will then take your questions before Julie 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 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 Julie. Julie Sweet : Thank you, Angie. And thank you everyone for joining. And thank you to our 710,000 people around the globe for their extraordinary work and commitment to our clients, which resulted in delivering another very strong quarter of financial results and creating significant 360 degree value beyond our financials for all our stakeholders. Here are a few highlights of the 360 degree value we created this quarter. Starting with our people, we continue to invest in their skills and they completed 10.6 million training hours, which averages to 16 hours per person this quarter. We are incredibly pleased to be recognized as a top 10 Great Place to Work for 2022 in countries representing 76% of our people, Argentina, Brazil, France, India, Japan, Mexico, the Philippines, UK and the United States. Specifically on the US list, we are particularly proud that Accenture jumped 38 spots in one year to rank number six. Overall, this is the 14th consecutive year that Accenture has been recognized by great place to work. Also a particular note in India, not only were we ranked number 10 by Great Place to Work, Business Today recognized Accenture in India as number four of the best companies to work for marking our 11th consecutive year on the list. All these recognitions reflect a tangible demonstration of our commitment to our people. The strong demand for our people and services and trust from our clients are once again seen in our strong bookings of $17 billion which represents 15% growth in local currency. Compressed transformation continues with another 18 clients with bookings over $100 million, bringing the total year-to-date to 74, which is 20 more than the same time last year. We had revenue growth of 27% in local currency, continuing to take significant market share growing nearly three times the market while delivering margin expansion of 10 basis points. Our ongoing investment in our communities was reflected this quarter, and how we are leveraging our expertise in digital learning and collaboration, partnering with UNICEF’s Generation Unlimited on the new passport to earning platform program to equip 10 million young people ages 15 to 24 with digital skills across 10 countries to prepare them for work. This program went live this quarter in India, the first and largest country of the 10. As always, well as always, we are staying close to our clients and our ecosystem partners to help them succeed today, and to anticipate the needs of the future. And our very strong financial results this quarter reinforced the trust our clients and partners have in our ability to do so. Over to you, KC. KC McClure : Thank you, Julie. And thanks to all of you for taking the time to join us on today's call. We delivered very strong overall results in the third quarter, reflecting very strong double digit revenue growth across all dimensions of our business, as well as continued operating margin expansion, as we continue to invest at scale in our business and our people. We continue to lead the industry with these results, demonstrating the relevance of our services, and our trusted client and ecosystem partnerships. We continue to deliver on our shareholder value proposition, including both our financial results and creating 360 degree value for all our stakeholders. Let me summarize a few of the highlights of the quarter across our three financial imperatives. Revenues grew 27% in local currency. And we're above the top end of our guided range driven once again by broad based over delivery across all markets, services and industries. With all 13 industries growing double digits. We once again extended our leadership position, adding an incremental $9 billion in revenue year-to-date, with growth estimated to be nearly three times the market, which refers to our basket of publicly traded companies. Operating margin up 16.1% for the quarter was an increase of 10 basis points. We continue to drive margin expansions while making significant investments in our people and our business. We delivered EPS of $2.79, which represents 60% growth over fiscal ‘21 results, and includes $0.15 or 6% negative impact related to the disposition of our business in Russia. Finally, we delivered free cash flow, up $2.9 billion and returned $1.6 billion to shareholders through repurchases and dividends. We've made investments of $2.2 billion in acquisitions, primarily attributed to 27 transactions year-to-date. And we now expect to invest about $2.5 billion in acquisitions this year, with another $1 billion that we expect to close in Q1 given required regulatory approvals With that, let me turn to some of the details. New bookings were $17 billion for the quarter and overall book-to-bill of 1.0. Consulting bookings were $9.1 billion with a book-to-bill of 1. Outsourcing bookings were $7.8 billion with a book-to-bill of 1.1. We were very pleased with our bookings this quarter, which represent our second highest ever, and were in line to our expectations. Our bookings reflect 15% growth in local currency and 18 clients with bookings over $100 million. Looking forward, we continue to have a strong pipeline. Turning now to revenue. Revenues for the quarter were $16.2 billion, a 22% increase in US dollars and 27% in local currency reflecting the foreign exchange headwind of 5% compared to the 4% headwind provided in our business outlook last quarter. Adjusted for the actual foreign exchange impact, we were $160 million above our guided range. Consulting revenues for the quarter were $9 billion, up 24% in US dollars and 30% in local currency. Outsourcing revenues were $7.1 billion, up 19% in US dollars and 23% in local currency. Taking a closer look at our service dimension, strategy and consulting and technology services, both grew very strong double digits and operations grew strong double digit. Turning to our geographic markets. In North America, revenue growth was 23% in local currency driven by double digit growth and consumer goods retail and travel services, public service, software platforms and communications and media. In Europe, revenues grew 30% in local currency led by double digit growth in industrial, consumer goods, retail and travel services, and banking and capital markets. Looking closer at the countries, Europe was driven by double digit growth in Germany, the UK, France and Italy. In growth markets, we delivered 30% revenue growth in local currency driven by double digit growth in consumer goods, retail and travel services, banking and capital markets and public service. From a country perspective, growth markets was led by double digit growth in Japan and Australia. Moving down the income statement, gross margin for the quarter was 32.9%, compared with 33.2% for the same period last year. Sales and marketing expense for the quarter was 10.3% compared with 10.6% for the third quarter last year. General and administrative expense was 6.5% compared to 6.6% for the same quarter last year. Operating income was $2.6 billion in the third quarter, reflecting a 16.1% operating margin, up 10 basis points compared with Q3 of last year. Our effective tax rate for the quarter was 27.1% compared with an effective tax rate of 25% for the third quarter of last year. Diluted earnings per share were $2.79 including a $0.15 or 6% negative impact related to the disposition of our business in Russia, compared with diluted EPS of $2.40 in the third quarter last year. Days services outstanding were 44 days, compared to 41 days last quarter and 36 days in the third quarter of last year. Free cash flow for the quarter was $2.9 billion resulting from cash generated by operating activities of $3.1 billion, net of property and equipment additions of $195 million. Our cash balance at May 31 was $6.7 billion compared with $8.2 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the third quarter, we repurchased or redeemed 3.1 million shares for $972 million at an average price of $313.43 per share. As of May 31, we had approximately $3.7 billion of share repurchase authority remaining. Also, in May, we paid a quarterly cash dividend of $0.97 per share, for a total of $614 million. This represents a 10% increase over last year, and our Board of Directors declared a quarterly cash dividend of $0.97 cents per share to be paid on August 15, a 10% increase over last year. Finally, turning to the 360 degree value we are creating for all our stakeholders. We were very pleased to be ranked number 13 on 3BL Media's 100 Best Corporate Citizens in the United States report, which recognizes outstanding ESG transparency and performance against the Russell 1000, which are the largest companies in the US equity markets. For more information on a 360 degree value weeks, we are creating go to center 360 degree value reporting experience, which reflects new information each quarter. So in summary, we are extremely pleased with our results to date, and are now very focused on Q4 and closing out another very strong year. Now let me turn it back to Julie. Julie Sweet : Thank you, KC. As we shared at our recent Investor and Analyst Day, we believe there are five forces that our clients must harness over the next decade and that in turn will drive our growth. Total enterprise reinvention, talent, sustainability, the Metaverse continuum and the ongoing tech revolution. Today, we continue to see strong demand across our markets, services and industries, which is being driven primarily by two of these five forces. Total enterprise reinvention, which involves transformation of every part of every business, leveraging technology, with new ways of working and engaging with customers and employees, and new opportunities for growth and talent, which requires every business to be able to access talent, be a talent creator, not just a talent consumer and to unlock the potential of their people. Compressed transformation continues with our clients seeking to execute bold programs in accelerated timeframes, often spanning multiple parts of the enterprise at the same time, when in the past, they may have taken a more sequential approach. This desire for speed with strong execution is driving our growth as clients partner with us because of the breadth and depth of our capabilities, the insights that come from our scale, global footprint and our deep functional industry and cross industry expertise. And they partner with us because they trust us. And because we are trusted partners with the technology ecosystem, which are also critical to our clients transformation. While the current macroeconomic environment affects industries and markets differently. The common theme across our clients is that all strategies whether for growth, cost or resilience, lead to technology, particularly cloud data and AI, and our clients turn to us to be able to effectively use technology to achieve their goals. Let me bring this demand environment to life. We help our clients execute total enterprise reinvention by helping them build their digital core, optimize operations and accelerate growth. Cloud Data and AI are fundamental to a strong digital core. We are working with the Clorox company, a leading multinational manufacturer and marketer of homecare, household and health and beauty products for consumers, as well as products and technologies for professional customers. The company is undertaking a broad digital transformation that will touch every aspect of the enterprise. We will help the company modernize business processes, streamline their operating model, leverages advanced data and analytic insights and establish a future ready technology foundation to deliver new levels of customer and consumer experiences, accelerate go- to-market activities and enable a more agile and resilient supply chain so they can lead and shape the consumer goods industry. We are helping new look, a global fashion retailer migrate its existing ecommerce platform to the cloud and strengthen its technology foundation to enable a seamless experience across stores, online, mobile and social media. AI and machine learning will create greater efficiency, increased sales and provide the flexibility to scale for growth and overcome industry disruption. The company is committed to infusing sustainability into their transformation roadmap, using innovation as an accelerator toward their own 2040 sustainability targets, all of which promises to keep the company in step with the store of the future, the speed of the fashion industry and the demands of their stakeholders. And as we build the digital course of our clients, security is more important than ever. Our integrated capabilities from identity to threat intelligence to manage security services to incident response are critical as our clients respond to increasing risks and expand their digital footprint. We are helping a large healthcare services provider assess their cybersecurity and business resilience levels. With much of their growth coming through mergers and acquisitions, technology and security have become more challenging to manage with multiple security providers, data centers and environments. We help design a cloud strategy and secure their backups in the cloud with an end-to-end cybersecurity approach that will provide flexibility as they continue to acquire more companies. We are also providing a managed security service from cyber resilience to threat intelligence to monitor their infrastructure and their security products, improving their ability to protect against future attacks. Our clients value our unique combination of capabilities from strategy and consulting to technology to manage services, because it enables us to deliver holistic solutions and expands their access to digital talent. We are helping INFRONEER Holdings, a Japan based infrastructure construction services company, digitally transform operations in finance and HR through a data driven approach. Through our managed services capabilities in our SynOps platform, we will help the company shift to intelligent operations by standardizing and automating key business processes, driving efficiency and productivity, reducing operating costs and providing greater opportunity for their people to focus on high value and strategic growth areas such as business design and digital experience. Shifting to the next digital frontier in the enterprise, our industry X capabilities are digitizing engineering and manufacturing to reimagine the products our clients make and how they make them and to build a greater resiliency, productivity and sustainability. We are partnering with a German multinational corporate manufacturer of luxury vehicles to develop an in-car software platform that will power the Central Intelligence Unit for personalized driver interaction information, convenience functions and entertainment. The platform provides a continuous flow of customer data to the automaker, enabling it to enhance vehicle functionality and create the superior customer experience, the automaker is renowned for. We are helping Albras, the largest producer of primary aluminum in Brazil to increase its productivity, energy efficiency and minimize greenhouse gas emissions by creating a new smelter control system operated over a new IoT architecture that utilizes cloud platforms for data storage and machine learning. Data insights will enable better visibility of gas emissions around the clock, allowing operations to be proactively managed, leading to increase energy efficiency and operational safety, as well as additional sustainability strategies to reduce their carbon footprint. Sustainability, one of the five forces shaping the next decade continues to be a growing priority area for our clients. And they value our ability to help them achieve their sustainability goals as part of their larger transformation such as the Albras example and directly as part of sustainability focused engagements, such as the work we are doing for Pos Malaysia Berhad, the national operator running Malaysia's largest post and parcel delivery network, we are helping Pos Malaysia Berhad to embrace a data driven approach to reducing emissions, cutting waste and upgrading its employees’ digital skills, best-in- class solutions for environmental, social and governance benchmarking, plus a sustainability implementation roadmap and skills for the future program will lead to dramatic reductions in direct waste and Scope 1 and 2 carbon emissions along with rapid progress and workforce upskilling. We continue to build our capabilities in this area both organically and inorganically. We are pleased that this quarter we announced three new sustainability acquisitions; Greenfish, akzente and Avieco, extending our reach and enhancing our ability to deliver deep skills and expertise to clients in ESG measurement and non-financial reporting, net zero strategy and regulation and real time data analytics. Our unmatched ability to access, create and unlock talent is valued by our clients as a key component of their compressed transformations, such as Pos Malaysia Berhad. In other cases, we help provide our clients access to talent through our managed services, and we help them become talent creators by having their shared services groups join Accenture where they can benefit from our ability to transform, upskill and provide new career pathways. For example, we are working with BNL a leading Italian banking group and subsidiary at BNP Paribas on a compressed transformation just 18 months from start to finish that will leverage our SynOps platform, maximize our clients’ existing talent and reduce total cost of ownership. We will consolidate data to provide deeper analytic insights and a better customer experience with tailored services and faster fulfillment times for customer requests. As part of this transformation, more than 500 people from their team will move to Accenture, where we will leverage their industry specific skills while also providing opportunities for professional development, enabling BNL to focus on strategic growth and benefit from this upskilling. We also do work with our clients that is primarily focused on their talent agenda. For example, we're collaborating with a large utility who is creating 1000s of clean energy jobs in areas like renewable electricity generation, energy saving homes and buildings and sustainable transportation. They're doing so for unemployed, underemployed and low to middle income residents. We are developing a recruitment, employment and tracking platform that matches people’s skills, with available positions leveraging AI and market insights. This solution reduces hiring time, improves the candidate experience and unlocks talent potential to create jobs for the underrepresented residents who need the most. We are uniquely positioned to help our clients drive cost efficiencies and their growth agenda. As you may have seen Accenture Interactive will now go-to-market as Accenture Song to reflect the fundamental change in the way companies must engage with customers, and the incredible speed at which they need to operate and innovate. Song is uniquely operating at the intersection of creativity, technology and intelligence. To help our clients reinvent connections and meaningful experiences, including sales, commerce, marketing, new business platforms, and the Metaverse continuum. We are helping a North American multi brand retailers scale their digital business and accelerate growth while reducing operational costs up to $100 million over the next five years. Together, we are designing and implementing a new multiproduct platform to improve the customer experience and enable the use of data and insights to drive increased engagement and better business performance overall. While still very early, we are seeing our clients look to take advantage of the Metaverse, another of the five forces. For example, we are collaborating with an international property developer, MQDC to develop their business model and design their customer experience in the Metaverse. As you can tell, this continues to be an exciting time for Accenture as the depth and breadth of our business allows us to help our clients with innovative and impactful work. Back to you, KC. KC McClure : Thanks Julie. Turning to our business outlook. For the fourth quarter of fiscal ’22, we expect revenues to be in the range of $15 billion to $15.5 billion. This assumes the impact of FX will be about negative eight, compared to the fourth quarter of fiscal ‘21 and reflects an estimated 20% to 24% growth in local currency. For the full fiscal year ’22, based on how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in US dollars will be approximately negative 4.5% compared to fiscal ‘21. For the full fiscal ’22, we now expect our revenue to be in the range of 25.5% to 26.5% growth in local currency over fiscal ‘21 which continues to assume an inorganic contribution of roughly 5%. For operating margin, we continue to expect fiscal year ‘22 to be 15.2%, a 10 basis point expansion over fiscal ‘21 results. We now expect our annual effective tax rate to be in the range of 23.5% to 24.5%. This compares to an adjusted effective tax rate of 23.1% in fiscal ‘21. For earnings per share, we now expect our full year diluted EPS for fiscal ‘22 to be in the range of $10.61 to $10.70 or 21% to 22% growth over adjusted fiscal’ 21 results. This guidance range reflects a negative $0.14 impact from the updated FX guidance, partially offset by the increase in revenue guidance. For the full fiscal ’22, we continue to expect operating cash flow to be in the range of $8.7 billion to $9.2 billion. Property and equipment additions to be approximately $700 million and free cash flow to be in the range of $8 billion to $8.5 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $6.5 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to shareholders. With that, let's open it up so we can take your questions. Angie? Angie Park : Thanks KC. I would ask that you each key to one question and a follow up to allow as many participants as possible to ask a question. Operator, would you provide instructions for those on the call? Operator : [Operator Instructions] And our first question is from Tien-Tsin Huang. Tien Huang : Thank you so much. Good morning. Really good results here. I want to ask on the -- let me ask bookings, which came in line with your expectations. In the book-to-bill and a quarter look like more a like pre-pandemic levels on tough comps. So, KC, I heard the strong pipeline comment. Just wondering, can we expect book-to-bill above 1.0 but maybe below the 1.1 or higher that we saw during the pandemic, just trying to better understand how the pace of bookings might be changing here beyond the comp? KC McClure : Yes, thanks, Tien-Tsin. So let me just start with anchoring to what we saw this quarter in bookings and our pipeline, and I'll talk then a little bit about what we expect for Q4. So as you mentioned, we were really pleased with our book-to-bill this quarter. And you talked about our tough comps, we did 30% growth in consulting. And we have year-to-date of 1.1 book-to-bill in consulting through Q3. We're very pleased with that. And outsourcing, we did 23% revenue growth, again over tough comps from last year in the quarter at 1.2 year-to-date book-to-bill. So as we look ahead at Q4, we do see continued very strong revenue growth of 20% to 24%. So you heard that in our guidance. And we do think bookings and outsourcing, bookings for both, excuse me, revenue for both consulting and outsourcing, both going to be in that range. So we have another strong quarter in consulting and outsourcing revenue growth. And on top of that Tien-Tsin, we do see another strong sales quarter in Q4. And we feel good about both our consulting and our outsourcing pipeline. So hopefully that gave you enough color on where we see bookings and the rest of the year playing out. Tien Huang : Got it. So balance across the two, which is great. So maybe my quick follow up that everyone's been asking us. So I thought I'd ask you guys, Julie, specifically here maybe for you just how recession ready is Accenture, right? With what the stock market is telling us? How's Accenture different or maybe similarly positioned to what we've seen in past down cycles? Any quick comments on them? Thank you. Julie Sweet : So I think, Tien-Tsin, so we don't predict the macroeconomic. So what we do is really focused on what has helped us to be successful. And obviously, every financial situation is going to be different to pandemic, we don't know how this is going to be versus what was happening a decade ago. And so let me just focus on why we are in a strong position. And that is, first of all, what's driving today is total enterprise reinvention. And so that means companies are trying to transform using tech data and AI around the enterprise. And we've been investing for a decade to be in the position that were relevant to the enterprise. And so we can do everything as you saw in our examples from HR and finance to manufacturing, right to in the insurance industry, underwriting and claims, right, so and it's really the entire enterprise that we're relevant to, and that'll gives us a huge power to help our clients. And you see that's happening right now with the inflationary environment, you've got consumer goods companies focused very much on cost, as well as growth. And we're able to help them do both, right. And on the other hand, you've got, say the energy companies that have had a really rough cycle, who now have the ability to invest more continuing on their cost discipline, but trying to also drive their transition to clean energy right into advance their digitization. And so our diversity in both what we can do, and our diversity in industries, is extraordinarily helpful. And then as you think about why we're a leader today, I just want to sort of make sure people understand the power of the fact that we can do everything from strategy to consulting, to manage services. So if you just take a consumer goods company, one of the biggest areas of spend is in marketing. We have amazing strategists at Accenture, right. It's a huge group, it's really, really relevant. And what they bring is not simply here, let's go after your marketing spend that looks like the biggest spend, what they can say is, and let me explain to you that the trend is to digitize to use hubs to not be as geographic specific. And let me show you where we've actually executed that and are managing that service for some of the leading companies. That's what our strategists can uniquely bring. And we can talk to our clients and say, and we can either help you build the capability, or we can do it on your behalf because we can access the talent, we can move you more quickly. And so as we think about why are we strong today, and how do we deliver on our enduring shareholder value proposition and growing faster than market delivering large and expansive, returning to shareholders and delivering 360 degree value? It's really based on this unique set of capabilities, these very strong trusted relationships. And then, of course, all of this underpinned by technology, where we're a powerhouse and we are the leading partner of the largest and technology companies in the world. Operator, next question. Operator : We will next go to the line of Lisa Ellis with MoffettNathanson. Lisa Ellis : Hi, good morning. Thanks for taking my question. I guess I'll take the attrition one, it looks like attrition after coming down a bit the last couple of quarters re uptick a bit this quarter. Can you just talk about perhaps any color there any underlying dynamics? And how is the attrition environment looking going forward? Thank you. Julie Sweet : Yes, sure, Lisa. I mean, usually we see an uptick in attrition from Q2 to Q3. We actually also see seasonally another uptick in Q4, which we'll expect to see. So this is kind of in line with prior patterns. And again, it's primarily driven by India at the lower end of our pyramid, which is highly competitive. At the same time, we're able to hire for the demand we see. And so, and also, as we've commented before, our overall executive retention, which is the people who are driving our business every day, it continues to be high. So not a lot of change and these are really seasonal upticks. Lisa Ellis : Okay, got it. And maybe a follow up on that. And then also on Tien-Tsin’s question related to R word, the recession word. What are the types of steps can you just remind us? Like, if you do start to see a slowdown in the business, kind of what are the adjustments that Accenture makes or can make quite quickly to react to changing demand environment, realizing that you're often at the kind of front end of the spear on that, given your strength in consulting in a lot of shorter duration projects. Julie Sweet : So, I mean, at the core of our businesses, how we manage supply and demand, right, and so we're, our ability to, we do have high attrition, right? So our ability to not for example, when I say high attrition, meaning our industry has higher, high attrition, and so our ability to not hire to replace that attrition, right. So our core competency is managing supply and demand. And we have an ear to the ground with our clients, but we also have a lot of analytics around what we're seeing in open demand, what we're seeing in our pipeline. So we manage our business with great rigor and discipline, and we'll continue to do that throughout the cycle and of course, I just want to make sure we're not walking past an incredible quarter from revenue and a booking. And as KC said, we see continued strong demand going into the next quarter with another strong bookings quarter and another strong revenue quarter. Operator : And next we go to line of Jason Kupferberg with Bank of America. Jason Kupferberg : Good morning, guys. I just wanted to start with a clarification on the full year EPS guidance, it sounds like you're now absorbing an extra $0.29 of headwind, relative to where you were last quarter or the $0.15 from exiting Russia and the $0.14 from incremental FX headwind. Is that accurate? KC McClure : So, Jason, that is accurate in that. The $0.15 for Russia. That's absolutely accurate. And then we have an additional $0.14 from the updated from the guidance that we gave you last quarter that we are absorbing. So you're correct. Jason Kupferberg : Right. So you're still maintaining the lower half of the EPS guidance from last quarter, despite absorbing an extra $0.29. Okay. I just wanted to make, okay. KC McClure : That’s right. I mean, I think the key thing that you're asking and the key point, I want to make sure that we are getting across is that there's no change to our business, right, fundamentals and our business performance. Jason Kupferberg : That's right. KC McClure : We actually had a bit of an increase in our revenue guidance, which helps us partially offset the $0.14 drag that we have from FX. So really strong, we continue to see really strong fiscal operations, we just can't absorb completely, all of that large FX movement that we saw from last quarter to this quarter. That's all. Jason Kupferberg : Of course. And I guess it's encouraging to hear that there doesn't seem to really be much change at all in the demand environment. Obviously, there's been a lot of worry and wonder about that. But can you maybe just talk to us about like nuances of how client conversations have been evolving over the past three months? Any change in clients decision making patterns or clients doing more recession preparation on their end? Julie Sweet : Sure. And so, first of all, as always, we call it like we see it. So today, we see strong demand and we're not seeing a change in decision making. What we are seeing is a shift depending and the industry and the market on what clients are asking for it. So for example, in the industry is like a consumer goods industry, you're seeing a lot more focused on costs than a year ago, right, with CEO saying, hey, Julie, I always used to talk to you about growth. Can we talk about growth and cost? Right, you're seeing more investment going into help me do more with less. And at the core of that is Cloud Data AI, you also see a big focus on can we go faster. And I was just meeting with a CEO last week who said, Julie, I just -- can you just look at our strategy? And are we being transformational enough, right? Are we challenging ourselves to go fast enough? And this is where the experience that we have of doing this particularly over the last two years where we saw this compressed transformation is so important. I was just speaking with an energy company last week, where they, like a lot of companies early on when digital transformation started, say, five, six years ago on the front office, they've been doing a bunch of experiments of digital twins around and they're saying to us, okay, Julie, help us understand where we're going to get the most value, but how do we scale and that's the unique combination we have of like, we can understand from a strategic perspective, where's the biggest value, but I can then take like, let me take you this company over here, different industry that's been doing digital twins that we've just been massively scaling over the 18 months, let's share with you the lessons learned on how to do that, because it is the next digital frontier, there isn't as much experience. And now we'll help you go faster. So the context is different depending on the industry. I mean every CEO is of course, focused on the macroeconomic, and people like to use that as a catalyst for doing some of the harder things around cutting costs. And what we do as Accenture because we can help on all aspects of that. We also can embed in a growth conversation. You saw the example we used as big retailer in earnings where we're helping them grow and we're taking out $100 million in costs at the same time, right. And that's what makes us so unique and that's why we will just continue to stay very focused. We're doing a lot in supply chain that those conversations accelerated in Europe for obvious reasons. But they're really it's a global phenomenon. And we're doing a ton here. And of course, as we think about our business, when we look at the demand, we also look at, do we need to upskill anyplace because we're seeing more demand, say in supply chain, or more demand in a particular industry? And that's where the agility of our learning, as you may recall, in the first six months after the pandemic we upskilled 100,000 people to shift to cloud and collaboration technology. So that's how we stay very close. And then we use these other tools, we have like our ability to upskill to make sure that we are responding to what our clients need. Operator : And our next question is from Ashwin Shirvaikar. Ashwin Shirvaikar : Thank you. Good quarter, folks. Demand trends still seem strong. I appreciate the qualitative remark on the revenue focus versus cost focus. We already saw take down here in the percent of revenues from consulting as well. I guess the question is around whether you believe that consulting, outsourcing balance might maybe get back down to 50 :50 if you anticipate air pocket down the road, because outsourcing work just tends to have longer ramps. Could you to kind of talk through that? KC McClure : Yes, sure. Ashwin, happy to and so just in terms, I'll start with the last part first, in terms of just our mix, right, we and I'm not going to guide anything into next year. But if you just look historically, at our mix, it can move around 1% or 2% between consulting and outsourcing. But it's generally been as , three years in the zone of like about 55% consulting and about 45% outsourcing, So that and we're seeing the same this year. So that's the first point. And then in terms of consulting, we are really pleased with our performance to date. And as you know, when we, I gave you some -- I gave guidance for consulting for Q4, but just a reminder, there are book-to-bill is really strong for the year in consulting. And anything is as you know, over one around one book-to-bill consulting, we consider strong, we also look at it over trailing four quarters, right. So but I -- we will give guidance for you in September of -- in September for next year. And that's where we can give you some sense of what the outsourcing is, consulting type of work will be next year. But now, you can look at our patterns and see it's about 55%, 45%. Ashwin Shirvaikar : Got it, no, thank you for that. I guess the follow up is on M&A. I think you might have mentioned in the past quarter that your M&A spend target this year was closer to $4 billion, it looks like you might not get there. Any color around where valuations easing? What's sort of going on with regards to sort of the strategic approach to M&A? Are you now looking, is that also changing, given the revenue versus cost focus? Or is that just a longer term view? Thought around that would be great. KC McClure : Yes, I'll let Julie talk about the strategy. But just to recap what I did say, you're right, we had previously said we thought it would be about $4 billion. We now think it is going, we’ve done $2.2 billion to date, 27 transactions year-to-date. We now think it will be about $2.5 billion. And that's because there's about $ billion, Ashwin, that is going to go into next year because of required regulatory approvals. So that really is the biggest difference between the $2.5 billion and $4 billion that we talked about. Julie Sweet : Yes. And from a strategic point of view, we continue to believe that the mergers and acquisition, V&A as we call it is critical to the way we grow. And there's three big reasons, right. The first is we will do it for scale. So you saw us do a lot of cloud acquisitions, for example, because we wanted to capture the momentum in the market and to build scale in area, in countries like we did a big one in France, for example, where we didn't have the scale and we had a lot of market momentum. The second reason we do it, is to move into adjacencies. So you saw a spilled Accenture Song and interactive over years, we've used that very effectively with industry X. So you saw that enough big acquisition last year, for example and that continues. And you starting to see that now in sustainability. We just announced three acquisitions. So where we're really built going into new areas with new skills and capabilities and then third, we're always looking to sort of continue to add in our industry and functional expertise and that strategy has served as well. And we continue to believe that that's an important part of our growth going forward. Operator : Our next question is from Bryan Keane with Deutsche Bank. Bryan Keane : Hi, guys. Good morning and congrats on the results. Wanted to specifically to ask about Europe continues to show robust growth, 30% growth, and I think, KC call that Germany, France, UK, Italy. So lots of concern about the unfortunate situation and war in Ukraine. Is there anything that you guys are seeing that could be in the go forward impacting Europe? Because right now, we're not seeing any weakness in those results. Julie Sweet : And we're not seeing any weakness in those results. And so we continue to really stay close to our clients. There's, as I talked a little bit about earlier, there's a shift in focus in many of the more impacted industries, and across the board around things like energy efficiency, right. And so our strengths in, for example, manufacturing and sustainability is helping us drive conversations and helping our clients get more energy efficient, for obvious reasons, given the background in Europe, supply chain, lots going on in supply chain, as you think about what we're doing there, we're doing everything from helping them have greater insight. So we're working with a food retailer, for example, to understand how they can anticipate disruptions better and earlier using data and analytics. So supply chain is a big topic. And then costs because everyone's anticipating, it leads to continuation of the inflationary environment that we're seeing globally. And so cost becomes a big focus. So it's today, again, all roads lead to not just technology data and AI, but how do you use it to transform the business? Which is our sweet spot, right? That is what we do. We partner with the technology companies and our clients to help them use these technologies to get results. And that's what we're doing today. And that's the environment that we're seeing our clients need. Bryan Keane : Got it, no, that's helpful. And then maybe just as a quick follow up, KC. Any thoughts on the latest on pricing and Accenture’s ability to maintain or even get pricing increases in some different areas where the demand is strongest? Thanks so much and congrats again. KC McClure : Okay. Yes, so we were -- we were pleased that we did see, again, improvement, Bryan in our pricing. And again, reminder that pricing, when we talked about pricing, it's the margin on the work that we sold. And we really need to continue to focus on that, which is what we are doing to offset what we're continuing to see in wage inflation in our business, which as we all know is in all industries, it really is across the globe. So and we are seeing some improvement coming from pricing in our P&L. So I'm pleased with that. And at the same time, as you would expect, we're changing the mix of people on our contracts, and also using technology to help offset the impact of wage increases. So again, very focused on pricing. That's the biggest lever that we have but there -- that they all of these improvements together are still lagging the compensation increases. But we're still very, very satisfied. Operator : And our next question is from Bryan Bergin with Cowen. Bryan Bergin : Hi, good morning. Thank you. Follow through on bookings, any changes in bookings profiles as it relates to contract duration? And are you seeing any uptick in the interest of clients to sell captive operations here? I'm curious if that type of transaction is picked up. KC McClure : There really is no change at all in terms of the profile for bookings as it relates to duration. Julie Sweet : Yes. And I'd say on the captive side, it's more of a steady, kind of, it's been steady. I don't think I'd say picked up or not picked up. It's been steady for the last couple of years. Bryan Bergin : Okay, and then just a question on Accenture Song. Can you talk about some of the operational changes that have been reported in that business as it relates to the consolidation of agency brands and what that does for you? Julie Sweet : Yes. I think a couple of things, I start with the rebranding is really more around reflecting what we’re doing today in Accenture Interactive and that brand was kind of old because it started a decade ago, right where, and it doesn't really reflect kind of the particularly post pandemic, which is really a complete use of technology, bringing in creative using data and AI and moving very, very fast. So this is where you've got examples like we've given in the past, like a Jaguar Land Rover, where they're using managed services to personalize experiences, and they're moving very, very quickly. And so Song just really captures better what, in fact, we are doing there. And from an operational perspective, it's just a natural evolution to bring together some of the brands that we've acquired over the years as you know, we built Accenture Song through a very deliberate, M&A strategy. And so I think it bit more of just kind of the natural evolution. Angie Park : Great. And operator, we have time for one more question, and then Julie will wrap up the call. Operator : Very good. That will come from James Faucette with Morgan Stanley. James Faucette : Great, thank you very much. And thanks for all the details this morning. Wanted to ask a couple more nuanced questions around Accenture’s operations right now. And first, starting with the bench. How would you characterize your bench right now? Are there pockets of resources that are underutilized versus over utilized? And how much of an operational impact could that be having right now, if any? KC McClure : James, thanks for the question. I will just make just focus on the key metrics that we look at. And we report every quarter as it talks about our people and the usage of our people, clients. We're at 91%, which is really in the zone of utilization that we like to be in, it's a little running a little bit hot throughout the past year and a half since pandemic and we're at 91%. So that's a very healthy range that we're good with. James Faucette : Got it. And then a lot of the conversation this morning, obviously is focused on macro and demand, et cetera. But are there any industry groups and/or service dimensions that you're expecting to accelerate versus decelerate, especially as you know the customers seem to be at least modifying a little bit. The conversations they are having to focus a little more on cost versus growth, et cetera. Are there key parts of that -- those different industries and segments that could see changes as a result? KC McClure : Maybe I'll just anchor to what we saw this quarter. And I can hand it over to Julie to give a little bit of color on that. But we did see all 13 industries this quarter have double digit revenue growth, right. And when we talked about bookings, we had strength across all of our markets, services and industry. Julie Sweet : Yes, and I would just add that, remember, an industry isn't a monolith, right? So you had coming out of the pandemic, in almost every industry, you had some percentage, we've talked about this, who went really fast. Now you've got others who are saying, wait a minute, we're seeing the impact of some of the leaders move faster on their digital transformations. And so for example, those who moved early to the cloud, we're now talking about the next phase of how do you utilize the cloud to drive new things. Remember, our little formula cloud is. The cloud is the foundation, data is the driver and AI is the differentiator. And so if you've moved to the cloud, now, you're using the data in that differently, right, as opposed to those who still need to move to the cloud. Like we are very early in the transition. And so the way we think about it is if you have a total enterprise we walk our clients through, what's the digital core, you need to have? Where are you on the maturity scale? And how do you prioritize? And so while we look at the industries is growing double digits, what's actually happening within the industry really depends on where you are on the maturity curve. And that's what drives our business, right? Because we can help the clients who are leaders go to the next level, and we're helping the ones that are behind trying to leapfrog. And so I think it's important to look at in that sense is that you need to have granular deep understanding of the industries and help our clients. We help our clients with that to know where to go next. James Faucette : All right, thanks for that color. Well, thanks everyone. Great. Thanks James. All right. In closing, we really appreciate everyone for joining us today. And thank you again to all of our people and our leaders for another outstanding quarter in every dimension from our financial results to our 360 degree value beyond our financials. And thank you to all of our shareholders for your continued trust and support. We'll work hard every day to continue to earn it all the best. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,022	3	2022Q3	2022Q4	2022-09-22	10.851	10.93	11.742	11.783	16.2	23.89	24.73	Operator : Ladies and gentlemen, thank you for standing by, and welcome to Accenture's Fourth Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Managing Director, Head of Investor Relations, Ms. Angie Park. Please go ahead. Angie Park : Thank you, operator, and thanks, everyone, for joining us today on our fourth quarter and full fiscal 2022 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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 both the fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the first quarter and full fiscal year 2023. We will then take your questions before Julie 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 effect 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 Julie. Julie Sweet : Thank you, Angie, and everyone joining us today. And thank you to our 721,000 people around the globe for delivering a truly extraordinary year. We measure our success by both our financial results and the broader 360-degree value we create for all our stakeholders, our clients, people, shareholders, partners and communities. Strong financial results allow us to deliver more 360-degree value. Let me share a few highlights of this extraordinary year. In FY '22, we delivered record bookings of $72 billion. As our clients continue to execute compressed transformations, we had 100 clients with quarterly bookings greater than $100 million compared to $72 million last fiscal year. We delivered revenues of $62 billion, representing a record 26% growth in local currency, adding $11 billion in revenue for the year. We continue to take significant market share growing more than 2x the market. Our financial results reflect our commitment to creating value for our clients every day, which is why they are turning to us as their trusted partner across the enterprise. We now have 267 Diamond clients, our largest client relationships compared to 229 last fiscal year. We expanded operating margin by 10 basis points and had EPS growth of 22% over adjusted FY '21 EPS, demonstrating our ability to grow profitably and at scale. We achieved this profitable growth while continuing to invest significantly in our business and people with $3.4 billion deployed across 38 acquisitions that are well balanced across markets, services and strategic priorities; $1.1 billion invested in R&D assets, platforms and industry solutions, including growing our portfolio of patents and pending patents to more than 8,300; and $1.1 billion invested in the training and development of our people to grow the skills needed to serve our clients. We continue to offer an employee value proposition that includes providing vibrant career paths and opportunities for our people with approximately 157,000 promotions and over 40 million training hours while expanding our workforce by almost 100,000 and achieving 47% women as we continue our progress towards gender parity by 2025. We believe our unwavering commitment to diversity, broadly defined and inclusion is an essential element of our ability to deliver market-leading financial results because our diversity and inclusiveness makes us smarter, more innovative and more attractive to top talent. We achieved over 85% renewable electricity powering our offices and centers around the world on our way to 100% by 2023. We prioritize creating value around the world and the communities where we work and live, both through investments and job creation and through our direct support of meaningful local initiatives, including our apprenticeship programs in the U.S., UK, Switzerland and Latin America and our growing partnership with Youth Business International, which will help an additional estimated 240,000 young entrepreneurs, ages 18 to 35, build skills and success in a digital future on top of the 370,000 young entrepreneurs already supported through this partnership in many different communities throughout the world. This year, we are proud to achieve our highest brand value and rank to date on BrandZ's prestigious Top 100 Most Valuable Global Brands list, increasing 28% to over $82 billion and ranking number 26. Over to you, KC. KC McClure : Thank you, Julie, and thanks to all of you for joining us on today's call. We were very pleased with our results in the fourth quarter, which completes another outstanding year for Accenture. Once again, our results continue to provide strong validation of our leadership position in the marketplace, the relevance of our services to our clients and our ability to consistently deliver on our shareholder value proposition, including both our financial results and creating 360-degree value for all our stakeholders. So let me begin by summarizing a few highlights from the quarter across our three financial imperatives. Revenue grew 22.4% in local currency, driven by double-digit growth across all markets, services and industries. We once again extended our leadership position with growth estimated to be more than 2x the market, which refers to our basket of publicly traded companies. Operating margin was 14.7%, an increase of 10 basis points for the quarter. We continue to drive margin expansion while making significant investments in our people and our business. We delivered very strong EPS of $2.60, which represents 18% growth compared to EPS last year. And finally, we delivered free cash flow of $3.6 billion, driven by superior DSO management. Now let me turn to some of the details. New bookings were $18.4 billion for the quarter, our second highest ever with a book-to-bill of 1.2. Consulting bookings were $8.4 billion with a book-to-bill of 1. Outsourcing bookings of $9.9 billion were a record with a book-to-bill of 1.4. We were very pleased with our strong bookings this quarter, which reflects 22% growth in U.S. dollars and 31% growth in local currency, including 26 clients with bookings over $100 million in the quarter. Turning now to revenues. Revenues for the quarter were $15.4 billion, a 15% increase in U.S. dollars and 22.4% in local currency. Consolidated revenues for the quarter were $8.3 billion, up 14% in U.S. dollars and 22% in local currency. Outsourcing revenues were $7.1 billion, up 16% in U.S. dollars and 23% in local currency. Taking a closer look at our sales dimensions. Technology services grew very strong double digits, operations grew strong double digits and strategy and consulting grew double digits. Turning to our geographic markets. In North America, revenue growth was 18% in local currency, driven by double-digit growth in public service, software and platforms and consumer goods, retail and travel services. In Europe, revenues grew 26% in local currency, led by double-digit growth in industrial, banking and capital markets and consumer goods, retail and travel services. Looking closer to the countries, Europe was driven by double-digit growth in Germany, the UK, Italy and France. In growth markets, we delivered 26% revenue growth in local currency, driven by double-digit growth in banking and capital markets, consumer goods, retail and travel services and public service. From a country perspective, growth markets was led by double-digit growth in Japan and Australia. Moving down the income statement. Gross margin for the quarter was 32.1% compared with 33.3% for the same period last year. Sales and marketing expense for the quarter was 10.2% compared with 11.3% for the fourth quarter last year. General and administrative expense was 7.1% compared to 7.4% for the same quarter last year. Operating income was $2.3 billion in the fourth quarter, reflecting a 14.7% operating margin, up 10 basis points compared with Q4 last year. Our effective tax rate for the quarter was 24.6% compared with an effective tax rate of 25% for the fourth quarter last year. Diluted earnings per share were $2.60 compared with EPS of $2.20 in the fourth quarter last year. Days service outstanding were 43 days compared to 44 days last quarter and 38 days in the fourth quarter of last year. Free cash flow for the quarter was $3.6 billion, resulting from cash generated by operating activities of $3.8 billion, net of property and equipment additions of $177 million. Our cash balance at August 31 was $7.9 billion compared with $8.2 billion at August 31 last year. With regards to our ongoing objective to return cash to shareholders. In the fourth quarter, we repurchased or redeemed 2.1 million shares for $605 million at an average price of $293.23 per share. Also in August, we paid our fourth quarterly cash dividend of $0.97 per share for a total of $614 million. And our Board of Directors declared a quarterly cash dividend of $1.12 per share to be paid on November 15, a 15% increase over last year. And approved $3 billion of additional share repurchase authority. Now, I would like to take a moment to summarize our outstanding year. We were extremely pleased with our performance in fiscal year '22, greatly exceeding almost all aspects of our original outlook that we provided last September. We delivered $71.7 billion in new bookings, reflecting 21% growth in U.S. dollars, hitting 100 clients with quarterly bookings of $100 million, which positions us well as we begin FY '23. We added significant scale with a record $11 billion in incremental revenue, almost double what we added in fiscal '21. Revenue of $61.6 billion for the year reflects growth of 26% in local currency. Operating margin of 15.2% reflects a 10 basis point expansion over FY '21. We were extremely pleased that we were able to deliver within our original guided range particularly with the continued significant investment in our business and people, including higher wages. Earnings per share were $10.71, reflecting 22% growth over adjusted FY '21 EPS, which is our highest growth in over a decade, reinforcing our ability to grow at scale profitably. As a reminder, we adjusted earnings last year to exclude gains on an investment. Free cash flow of $8.8 billion was significantly above our original guided range, reflecting a very strong free cash flow to net income ratio of 1.3. And with regards to our ongoing objective to return cash to shareholders, we exceeded our original guidance for capital allocation by returning $6.6 billion of cash to shareholders while investing approximately $3.4 billion across 38 acquisitions. In addition to these excellent financial results, let me turn to the 360-degree value we are creating for all our stakeholders. Through our partnership with Save the Children, we are preparing young people for a more sustainable and exclusive future by skilling an estimated 70,000 people to drive social and environmental change. For more information on the 360-degree value we are creating, please go to the Accenture 360-degree value reporting experience, which reflects new information each quarter. So again, FY '22 was a truly extraordinary year and we are now focused on delivering in fiscal '23. And now let me turn it back to Julie. Julie Sweet : Thank you, KC. We succeed by being close to our clients, understanding and anticipating their needs, helping them from strategy to execution with the best solutions for their businesses, whether for growth, cost optimization or both and resilience. And it all starts with technology. With the breadth and depth of our existing capabilities, combined with our incredible learning organization, we are able to pivot as necessary, positioning us to serve our clients' changing needs and capture new market opportunities all while being laser-focused on our own operational excellence. I will give some color on the demand we are seeing. First of all, against the backdrop of the current macroeconomic environment, we delivered $18.4 billion in new bookings in Q4, a year-over-year increase of 31% in local currency. While industries and markets are being affected differently, there are two common themes : all strategies lead to technology, particularly cloud, data, AI and security, which are fundamental to its strong digital core. Our cloud business is now $26 billion and grew 48%, with Cloud First being the biggest driver of the growth. Companies are also seeking to execute compressed transformations, the second theme. These mean bold programs on accelerated time frames often spanning multiple parts of the enterprise at the same time. Managed services have become increasingly strategic as companies seek to move faster and leverage our digital platform and talent, and they are turning to Accenture because of our excellence across the enterprise. We are unmatched in terms of breadth and depth of capabilities and industry coverage. We continue to see a growing number of companies embrace the need to harness the five key forces of change that we have identified for the next decade. Total enterprise reinvention, talent, sustainability, the Metaverse Continuum and the ongoing tech revolution, which in turn will fuel our growth. Let me bring this demand to life. First, total enterprise reinvention. We are helping our clients transform every part of their business with technology from building a digital core to optimizing operations to achieve agility, efficiency and resilience to accelerating their growth agendas. While it is still early stages, there are leading companies that have begun systematically transforming multiple parts of their enterprise from moving to the cloud and adopting new ways of working to digitizing manufacturing, to reimagining shared services to creating entirely new business models. Unilever, one of the world's largest consumer goods companies is an example of a company that is leading in total enterprise reinvention. Together, we are setting a new industry standard by reinventing technology delivery with cutting-edge automation, delivering cloud migration at scale, the largest ERP migration to the cloud and the industry and shifting to technology solutions that support their growth strategy. They have changed their business model from a matrix structure to being organized around five distinct business groups. Each business group is fully responsible and accountable for their strategy, growth and profit delivery globally. Now we are helping them build a B2B marketplace that will help millions of small retailers in emerging markets grow their business and create what the Company called shared prosperity. We helped launch in seven markets in just 12 months, implemented a cloud-native, scalable commerce platform powered by data and advanced analytics, and we are managing front-end back-office operations and campaigns delivered in partnership with the Accenture Song team. Because across our industries, we are as relevant to the boardroom to the CFO to the business unit leader to the GM of the factory, and we understand the connections across the enterprise we are uniquely positioned to help our clients as they seek to often simultaneously drive growth, efficiency, cost reduction and increased resilience. For example, we are helping Lupin Limited, a global pharmaceutical company, become an intelligent enterprise by enabling its data-driven transformation journey. A new digital platform will unlock enterprise data to increase efficiencies and decision-makers will now have real-time visibility into integrated data across 100 countries and 15 manufacturing and research facilities. This consolidated view of global business operations and performance will help the Company navigate supply chain disruptions and accelerate product innovation and speed to market while supporting the Company's mission to provide affordable health care to people around the world. We see continued demand for our industry capabilities, which are all about digitizing engineering and manufacturing -- this is the next digital frontier. Industry X revenues grew 38% in FY '22 to total $7 billion. We are helping EDF, a French multinational utility company digitize the construction of a nuclear power station that will provide low carbon energy for more than 6 million U.K. homes. As part of a total enterprise reinvention, our Industry X team transformed EDF digital construction processes by creating a global digital factory model on a secure cloud infrastructure, driving cost efficiency. Construction methods that used to be paper and blueprint based will be digitized and AI will consolidate parts information from millions of pages of supplier guides. Digital dashboards will provide real-time data visibility across all systems and digital twins will help identify areas for automation across power plants, all of which drive safety, efficiency and quality. We are leveraging our expertise of nuclear construction in our cutting-edge cloud, digital and AI capabilities to help EDF deliver on one of the largest capital projects in Europe and accelerate its mission, helping Britain achieve net-zero. And our operation services, now a $9 billion business with 19% growth in FY '22 are fundamental to total enterprise reinvention for our clients because they help our clients digitize faster, access digital talent and reduce cost. For example, we are collaborating with one of the world's largest commercial vehicle manufacturers to develop an independent finance operation, leveraging our deep functional expertise in finance and accounting. With our managed services, we will implement a new platform underpinned by SynOps. Automation, data and analytics will drive and provide real-time decisions while digitizing processes to improve efficiency and user experience, all leading to significant cost reductions, better decision-making and savings. And as our clients build their digital core, security continues to be more important than ever, With over $6 billion in revenue and 45% growth, our integrated security capabilities from identity to threat intelligence to manage security services to incident response are critical as our clients respond to increasing risk as the security landscape widens. We are working with an Asian multinational conglomerate to deliver a comprehensive managed security services, security operations center and holistic security solution to detect, monitor and respond to global security threats 24/7. We will also manage tools to continuously monitor end-user devices to detect and respond to cyber threats, like ransomware and malware and will perform regular threat hunting activities to detect new cyber hacking techniques. This will provide its business units with timely detection and defense against cyber attacks, deliver threat intel for proactive defense, reduce false alarms by 90% and minimize emergency incidents to less than 1% of total incidents. Moving from total enterprise reinvention to the other five forces. Next, talent. Our clients look to us to help them access, create and unlock the potential of talent. We collaborated with Sky, one of Europe's leading media and entertainment companies to modernize its employee experience in human resources operations in the era of hybrid working. By migrating to a Software-as-a-Service multi-platform human capital management solution, all in the cloud, employees will be empowered with anytime, anywhere self-service solutions and access to real-time data and dashboards across all markets in one place. The solution supports all people, management functions from recruiting and onboarding to performance management and learning as well as compensation, benefits and payroll integration. Employees have the full picture of their work experience at their fingertips helping them to build their careers and perform at even higher levels. Now, sustainability. With $1 billion in revenues in FY '22, we continue to believe clients will increasingly need our sustainability services in the decade to come. We collaborated with Swisscom, Switzerland's number one firm for communications, IT and entertainment, on a climate strategy to reduce the Company's emissions and help its customers reduce their emissions by 1 million tons of carbon by 2025 and equal to 2% of Switzerland's total carbon emissions by leveraging technology such as cloud, data, AI, 5G and IoT. These technologies will address faster and higher capacity data transmission with remote management and control of connected devices. We are also helping the Company explore strategies to incorporate technologies within the emerging Scope 4 classification that can help further reduce carbon emissions from customers, allowing Swisscom to positively impact the planet and provide their customers with a larger number of green products and services to choose from. Moving to the metaverse and the ongoing tech revolutions. We continue to invest ahead of our clients' needs and have more than a decade of experience and leadership in metaverse-related capabilities. In fact, we expect to onboard over 150,000 new joiners using Accenture's end floor, and we use our experience and expertise to help our clients as we believe the Metaverse Continuum provides greater possibilities in the wave of digital transformation, and it is still early days. For example, we are helping Tokyo Land Corporation, a Japanese leading leasing, construction and retail real estate company, leverage the metaverse to transform the customer experience through digital twin technology leveraging computer-generated imaging to recreate walk-throughs of its condominiums online to greatly improve its in-person model retour. Customers will be able to visualize the property online, including different home equipment options and the Company will attract more buyers and increase sales while reducing marketing costs and the environmental impact of the construction, operation and removal of the model room. Into the future, we will help create continuous touch points with customers throughout the real estate life cycle and develop new collaborative digital businesses such as purchasing furniture and home appliances and ordering renovation services. And with our continued focus on innovation and the ongoing tech revolution, we continue to invest in our business for the future. For example, in Q4, we invested in Pixel a leader in cutting-edge earth imaging space technology. Back to you, KC. KC McClure : Thanks, Julie. Now let me turn to our business outlook. For the first quarter of fiscal '23, we expect revenues to be in the range of $15.2 billion to $15.75 billion. This assumes the impact of FX will be approximately negative 8.5% compared to the first quarter of fiscal '22 and reflects an estimated 10% to 14% growth in local currency. For the full fiscal year '23, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be approximately negative 6% compared to fiscal '22. For the full fiscal '23, we expect our revenues to be in the range of 8% to 11% growth in local currency over fiscal '22, which includes an inorganic contribution of about 2.5%. For operating margin, we expect fiscal year '23 to be 15.3% to 15.5%, a 10 to 30 basis point expansion over fiscal '22 results. We expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an effective tax rate of 24% in fiscal '22. For earnings per share, we expect full year diluted EPS for fiscal '23 to be in the range of $11.09 to $11.41 or 4% to 7% growth over fiscal '22 results. For the full fiscal '23, we expect operating cash flow to be in the range of $8.5 billion to $9 billion, property and equipment additions to be approximately $800 million and free cash flow to be in the range of $7.7 billion to $8.2 billion. Our free cash flow guidance reflects a free cash flow to net income ratio of 1.1. Finally, we expect to return at least $7.1 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to shareholders. With that, let's open it up so that we can take your questions. Angie? Angie Park : Thanks, KC. I would ask that you each keep one to question and a follow-up to allow us to as many participants as possible to ask a question. Operator, would you provide instructions for those on the call? Operator : [Operator Instructions] Our first question will come from the line of Lisa Ellis with MoffettNathanson. Please go ahead. Lisa Ellis : Good stuff here. Just a question about the outlook for fiscal '23. Can you elaborate a bit further on what underlying macroeconomic outlook that you have embedded in guidance above and beyond the 6 points of FX translation. And maybe the broader question is sort of how, if at all, are you seeing the rising rate environment inflation sort of escalating dynamics of what we've been seeing all year long affecting your business? Julie Sweet : Great. Thanks, Lisa. So yes, let me give you a little bit of color around our guidance assumptions. So our revenue range of 8% to 11% for fiscal '23, it includes 2.5% inorganic contribution, and that's compared to about 5% that we did in '22. And that would represent then about 8.5% organic growth at the upper end of our range. And so, we continue to see really strong demand for our services, Lisa. And as you've seen, the most recent estimate for IT Services continues to show the growth for our industry will be about 5%. So anywhere in our range, it will show us continuing to take share. But at the same time, while our growth is not directly correlated with GDP, we read the same things that you do. And the latest GDP estimate for most of the world's largest economies are lower in 2023 than 2022. So again, we're calling for double-digit growth at the top part of our range. Another year of double-digit growth, which would have us adding significant scale, yet again on top of our current $62 billion business. Julie Sweet : Maybe I'll add, Lisa, is that -- when we think about the macro environment, what we're really thinking about is what do our clients need, right? So as -- so -- and I talked a little bit about this last quarter, right, is this environment affects different industries differently. So, you've got those who are really tied to the supply chain disruption and the inflation continuing to focus on cost. But you also see that as the uncertainty increases. So over the last 90 to 120 days, you saw changes in the estimates around the GDP growth for 2023, it makes all clients really think about, okay, what's my resilience? Is there more that I can do? Can I take advantage of the environment to push through deeper cost cuts that require you to change behaviors? And so we really think about the environment as what does that mean we need to do to help our clients and how do we continue to pivot. And it's very similar if you think about what we did in the early days of the pandemic, where we've pivoted a lot to, for example, cloud using all of our learning organization. So that's the focus. So it's always an opportunity to better serve our clients. Lisa Ellis : Okay. Yes. Great color. And then just quick follow-up on bookings, realizing they're obviously always lumpy to quarter-to-quarter and the overall number this quarter was extraordinarily strong, continuing that 1.12 book-to-bill. But is there any -- was it sort of an unusual shift in mix into outsourcing and less consulting? Is there any color or call out there? Or is that just sort of the vagaries of the kind of quarterly fluctuations? KC McClure : Sure. And so Lisa, as you mentioned, we feel really good about our bookings in Q4. It was our second highest bookings ever our highest also being this year in the second quarter. What I really liked about it was driven by broad-based demand. So across all markets and our services, and we peel it back. We had good book-to-bill in all dimensions of our business. And with outsourcing a record of almost $10 billion, and that was almost $1.3 billion more than what we did for our last record. And we do continue to see a strong pipeline going into the year, even with those the second best record bookings. But I will say that as we often do, we have seasonally lower bookings in quarter one and we are seeing that again this year. Operator : Thank you. Our next question comes from the line of Tien-tsin Huang with JPMorgan. Please go ahead. Tien- Tsin Huang : Just tacking on what Lisa just asked there with this larger book-to-bill in outsourcing relative to consulting. Is the shift to larger deals, does that tell you or should it tell us anything about client priorities? And I'm curious if that changes or even improves your visibility overall for fiscal '23, given you have so much more in the way of larger deals in the backlog. Julie Sweet : Yes. I mean I don't -- I mean, obviously, we've got larger deals. You have more visibility around larger deals just because they're larger deals and you see how it is. And certainly, how we think about the business so much, I mean, I think if you just take a -- your underlying question is what are clients focused on, right? And so what we do see is -- and what we actually -- more than just see what we are recommending is that leadership teams remain sort of focused on prioritizing where they can get good time to value, making sure that they are doing things that are material, not having 1,000 different pilots as opposed to actually getting to scale. And so a lot of that does lead to a focus on larger transformation deals, and it's tied to what we call total enterprise reinvention, right? What we're talking to clients about is systematically reinventing. And actually, we've got some research coming out at the end of September that says 68% of CFOs say they today have either three or more transformation programs either going right now or about to start in parallel. And so, what that really does mean that is that you've got more companies do what we've been talking about since the early days of the pandemic, which is systematic transformation. We'll try to do it faster and that does lead to larger programs. And probably the bigger impact for us is less about visibility, but those obviously convert to revenue differently. KC McClure : Yes. And maybe Tien-Tsin, I'll just add in terms of -- if you just look at our bookings this year from an outsourcing type of work compared to consulting type of work compared to our history over the last few years, there's really no difference, right? We actually have a slight percentage uptick in what we closed out this year in consulting type of work looking versus outsourcing. So there's no real difference in our mix. Tien- Tsin Huang : Very good. No, that's really helpful. Just on the -- my follow-up on margins, if you don't mind. Just thinking about investment priorities, organic versus inorganic, I know it's a lower inorganic assumption on growth this year. But -- any update there in terms of the balance? And I'm wondering, I wrote down, I think you said 48% growth in cloud for the year. And I think back to the Cloud First investment you did, I think it was a $3 billion investment. It seems like you got a good return out of that. So, we see more investments like that at this point in the cycle? So yes, just think about organic versus inorganic investing. KC McClure : Yes. So, I'll take the inorganic point, and then I'll hand it over to Julie to give some more color. So, first of all, there's no change overall to our capital allocation strategy, right? So, we will continue to use V&A to fuel our organic growth. And so, you'll see the 2.5%, Tien-Tsin, is an inorganic contribution. It's generally in the zone of what we've done in previous years. And so maybe I'll also just take a chance to talk about what that means in terms of how we're going to invest in our business next year and how that relates to how we're seeing our profit because I think it's really important to point out that we're really proud of what we accomplished this past year in '22, where we did 10 basis points of expansion. And Tien-tsin, we were continuing to invest at scale in our business, right? And also in our people, particularly this year with managing wage inflation. So as we look through next year, we expect to continue to invest in our business. We expect wage inflation to continue. It's across all industries and across the globe. And for us, it's going to vary by geography by scale. And we will navigate that like we did this past year with a focus on pricing, which we all know can lag compensation a bit. But I just want to point out that we did see the benefit of improved pricing in our P&L in '22. And so again, we're going to do all of this while changing the mix of people in our contracts, the use of technology to absorb the higher investments that we're making organically and the higher investments that we're making in our people. But -- so it's really important that we continue on our investment profile. And with that, like I'd be really happy next year to land anywhere within the 10 to 30 basis points of op margin expansion. And I would say that based on how we're going to invest throughout the year, there's a bit more potential for us to have a more variability in the quarters as we go throughout fiscal year '23 on our way to 10 to 30 basis points of expansion for the year. Julie Sweet : Yes. And Tien-Tsin, I just -- Tien-Tsin, I would just emphasize, we believe it is very important to continue to invest at higher levels in our business every year and that's our commitment. And it's been -- we think a big reason for our success is that through every cycle, we continue to invest. Operator : Thank you. Our next question will come from the line of Keith Bachman with BMO. Please go ahead. Keith Bachman : I wanted to ask to start with on the outlook. In particular, Julie, if there's any comments directional or otherwise, you could give on bookings. I understand you provided the revenue guidance in constant currency, even the backlog runoff of the booking -- tremendous bookings you've given so far, the revenue guidance seems very reasonable, if not a touch conservative. But as you indicated in your prepared remarks, you had record bookings this year. You're facing -- your clients are facing a deeper economic challenge. So, is there any comments you could give whether book-to-bill or the growth rates or any parameters on how we should be thinking about bookings this year? Because it seems like the trajectory there could be different from the revenue growth. Julie Sweet : Well, I'll let KC start, and then I'll add on. KC McClure : Yes. So Keith, maybe I'll start with a little bit more color on how we actually see revenue kind of breaking out for the year. So from a type of work perspective for the full year '23, we do see consulting revenue growth to be within the context of the 8% to 11% that we gave out overall, which remember has been 6% FX headwind embedded in that. We see consulting revenue to be high single digits to double digits. And outsourcing, we see being double digits. And when you think about what our bookings expectations are, while we don't guide to bookings, you should -- our view remains the same. We look for over a rolling four quarters period of time for book-to-bill to be over one. Julie Sweet : Great. And Keith, what I would just say is that -- remember, our focus is helping our clients create value within whatever environment that they are operating in, right? So -- and which is very different depending on your industry. So like pick right now, providers in the U.S., right? They are focused on cost cutting because they went through a tough time with COVID, they're behind in digitization, so they're investing there. And they have to because they're facing one of the most difficult labor markets they've ever had to now sort of resistance and difficulty in automating before. That is a completely different that a global consumer company like Unilever, we talked about in our script, who's reinventing everything that been on this journey for a few years, looking to the next thing, right? And they're dealing with supply chain disruptions, right, cost inputs. And so, that is how we continue to succeed is by understanding the depth of difference in our industry. We're using knowledge that we had from other industry to now accelerate what the providers are doing because they're now implementing SaaS solutions to connect their patients that we've been doing for years in retail, right, and in banking and in lots of other industries. So that our outlook for the year reflects our confidence that we are going to continue to be able to use that knowledge, stay close to our clients and deliver on what they need. Keith Bachman : Okay. Okay. My follow-up is then focused on free cash flow. The free cash flow guidance is a touch certainly lighter than what we had modeled and I think Street had modeled your margins continue to move higher. So I was just wondering what the puts and takes that you might want to call out with the free cash flow guidance for the year. And then I will see the floor. Many thanks. KC McClure : Yes. Thanks, Keith. So, as you know, when we set our guidance, we always first start with looking at the ratio. So the ratio that we have in our free cash flow guidance is a very strong $1.1 billion free cash flow to net income ratio. So, we're happy with that. We also are allowing in that guidance a bit of an uptick in DSO from our current level. And then also, we are assuming we are going to have the FX impact of 6% that will obviously impact our free cash flow as well. And as you know, it's not unusual for us to start guidance at the beginning of the year with a free cash flow guidance range, that's below where we delivered the previous year. Operator : Thank you. Our next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Obviously, a lot of folks are asking about the macro. So just curious how the macro has changed for you guys over the last three months and how that's influenced your business because it doesn't really show up much in results? So just curious how you would frame that? Julie Sweet : Well, as KC said earlier, our guidance for the year takes into account the current estimates for 2023 for GDP, which, as we all know, over the last sort of 90 days have decreased. So, we take that into consideration. And where we see that really affecting our business is our ability to help our clients and think about what to do, right? How do you execute a faster transformation? Are there new opportunities? I'm talking to a consumer goods client now, where we're helping them think about, well, how do we cut marketing and get more effective because they need growth, but marketing is one of the biggest spend areas for a consumer goods company. And by the way, let's not waste a good environment to be able to catalyze cultural and behavioral change as they think about things. So that's where we are seeing it. And otherwise, our guidance reflects -- as you know, it's not a one for one, but we obviously take into account the economic environment. Bryan Keane : Got it. Yes. Yes, I was just looking at Europe, in particular, up 26% in local currency, given all the concerns around Europe. It's just a pretty amazing number. It doesn't seem to have come off much from the growth rates you've been putting up. Julie Sweet : Yes. We're very proud of our European team because they are really close to our clients. KC McClure : Yes. And maybe, Brett, I'll give you a little bit of color on that as it relates to Q1. Let me give you a peel back a little bit on the revenue outlook that we have for the first quarter -- and when we look at the markets, we see all the markets for the first quarter within that 10% to 14% revenue range that we gave. They all have the potential to be double digits, and that includes Europe. And then also for the consulting type of work in Q1, we see a high single-digit to low double-digit growth range within that 10 to 14. And I would peel back consulting a little bit for you, too. Within consulting, we see the detect portion of consulting the systems integration, we'll have continued strong demand and S&C, we expect to be in lower single digits. Bryan Keane : No, that's really helpful and then just a quick follow-up, just thinking on KC on visibility. How has visibility changed at all, if at all, for Accenture? When you look out further on in the quarters as we get to Q4, it's obviously almost 12 months away, so it's probably a little bit hard to figure out exactly the right growth rates, but just thinking about the visibility of the business. KC McClure : I would say, Brian, that in terms of looking at the back half of the year, I mean, that's no different than the way it is, honestly, every year. We talked a lot about what we just mentioned on how we look at the macro in the market. But the back half of the year, we always -- it's always less certain at this time of the year than obviously the first quarter and the first half. Again, it's no different than what we have experienced every year. Julie Sweet : And as always, clients still -- most of our clients are calendar year, and they'll set their budgets, and we'll know more about that in January. So it's really the same. KC McClure : It is. It is. Bryan Keane : Got it, great. Congrats on the results. Julie Sweet : Thanks. KC McClure : Thank you. Operator : Thank you. Our next question comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette : Appreciate all the commentary today as usual. Looking at kind of the supply and kind of how you're managing your own employees, et cetera, how does the shift in client priorities manifest itself in where and how your services are being delivered? And how is that influencing your talent strategy right now around pace of hiring, where you hire, et cetera? Julie Sweet : Well, as you know, our -- we have a very deep competency in supply and demand. And actually, over the course of the last couple of years, we continue to innovate. We have an incredible what we call integrated talent control tower that is able to predict earlier and earlier in our sales cycle, where the skills will be needed and what type of skills. And so for us, this is just normal business, right? And keep in mind, technology demand is really incredible, right? I mean you saw that in our results. All strategies lead to technology. And we're super pleased with not only our performance there, but what we're seeing ahead as clients continue to build the digital core as fundamental to all of their other strategic needs. And our talent supply chain is able to see that, predict it, understand the skills and keep moving forward. James Faucette : That's great. And then turning to pricing, just wondering what the tone and tenor of pricing conversations have been? How those have progressed. And how are you building in? Or how should we think about what's being built into your formulation of outlook around magnitude of potential uplift to revenue from pricing versus margins, et cetera? KC McClure : So let me just remind you that when I'm talking about pricing in my answer, I'm talking about the margin on the work that we've sold. And I'm really pleased that we've continued to see improvements in pricing. And we are seeing the benefits. I mentioned this earlier, but I'll just repeat it. We are seeing the benefits come through in our P&L. And we continue to focus on improvements in pricing as we enter into fiscal year '23. So I'm really I'm really pleased with the progress we've made. Operator : Thank you. And our next question will come from the line of Jason Kupferberg with Bank of America. Please go ahead. Jason Kupferberg : KC, I just wanted to pick up on your comment on one of the prior questions around -- I think you said strategy and consulting, up in the low single-digit range in Q1. So Curious if that's the same kind of range you anticipate for the full year fiscal '23? And is that below corporate average level, just reflective of the more kind of discretionary nature and growth-oriented nature of those services? KC McClure : Yes. Thanks, Jason. In terms of Q1, it's really just a few simple things. One, we got a tough compare. Two, is there's less -- when I mentioned less inorganic that really does also hit in essence in the S&C part. And then as Julie talked about, a lot of our S&C practitioners are really focused on some -- a lot of the larger transformational deals. And that just has Jason, a different revenue yield, and it bleeds in later throughout the year. Jason Kupferberg : Okay. Understood. Maybe just turning to the supply side for a second. It looks like attrition was unchanged in Q4 versus Q3. And wondering what you're expecting there in fiscal '23 as well as what you're expecting for wage inflation relative to 2022 and whether or not some of the broader layoffs across other parts of the tech industry, is that taking some of the pressure off some of your supply metrics at all? KC McClure : Yes. So I'll start, Jason, with the last part. I mean we had -- I'm really pleased with the way we were able to grow at scale profitably while managing the wage inflation in FY '22. And as we said a little bit earlier, but just to repeat, we do expect wage inflation to continue, and we have factored that into our guidance. Julie Sweet : Yes. And look, I would just say to you that technology skills are in demand by both companies as well as our competitors because technology is at the core of strategy. And so, we're expecting to have a continued tight labor market, and we continue to expect us to really excel because despite that market, as you know, even this last year, we added 100,000 people. So, I don't -- the fact that there has been some layoffs in certain markets isn't really, I think, going to change much. Angie Park : Operator, we have time for one more question, and then Julie will wrap up the call. Operator : Thank you. And that question will come from the line of Bryan Bergin with Cowen. Please go ahead. Bryan Bergin : I wanted to start on the growth outlook. Can you just give us a sense on how you're thinking about the second half trajectory just in the fiscal '23 range, just given a significant uncertainty? Just curious how you went about building that second half forecast. And then just within the year, are you expecting the strategic priorities to hold the double-digit growth? So across Song and Cloud First and Next or are any of those a little bit more exposed to potential slowdown and uncertainty? KC McClure : Yes. So, I'll maybe just start with the overall outlook that we have read. You can see that we started with 8 to 11. I already gave the color on that. So -- and within that, obviously, we have a strong start at 10% to 14% growth. And in terms of really what that looks like for the rest of the year, I mean we'll continue to give guidance like we typically do as we progress through FY '23. I mean, as Julie mentioned, we see continued strong demand in our technology -- our areas of technology. And other than that, we don't really give any more guidance and kind of view on revenue outlook than what I've already shared. Julie Sweet : Yes. And just -- I think it's always important that we are continuously thinking about both the near term, this fiscal year and the longer term and anchoring on the five forces of change for the next decade. And so, total enterprise reinvention, talent we talked about the investments we're making in sustainability. We just made a great acquisition that's on Carbon Intelligence, which is all about consulting around carbon getting to net-zero strategies. The Metaverse Continuum, small today. We're the leading enterprise user our own way of onboarding, but lots and lots of interest, and we're already making those investments and then the ongoing tech revolution. And so that's why as you think about our results, right, we are investing today and tomorrow and really are looking at the demand that we see over the next decade. Bryan Bergin : Okay. Okay. And then it looks like just on M&A, it looks like you did close on more in 4Q than you had initially anticipated. So how should we think about the planned spend in fiscal '23 for M&A underlying the 2.5% growth contribution? And then just how do you start off the year in 1Q? What's the inorganic assumption in that outlook? KC McClure : Yes, sure. So you're right, we did end up spending $3.4 billion for the year in '22 because we were able to get some of the regulatory approvals done this last fiscal year '22 that we weren't sure of the timing. And you'll see that because of that, while we're going to continue to always provide the inorganic outlook on a full year basis. So, that 2.5% is a full year. We're not -- we don't really do that by quarter because that again can also be lumpy. We're not going to continue to provide the capital allocation amount as we go into '23, just because it can really vary by the end of the year, and we'll be able to -- you'll be able to see it and we'll report it every quarter. Julie Sweet : Yes, it's probably worth reminding that last Q1, we had Umlaut and Novetta, which were both very large acquisitions come in, in Q1. So probably just good to remind everyone that's part of what's driving the Q1 S&C results too. Great. So before we wrap up, I do want to mention that Angie Park, who has been our Head of Investor Relations for the past six years, has been promoted to become the CFO for our really outstanding technology services business. Angie has been an absolutely incredible Head of IR and we're particularly grateful for how she has helped lead us through some of the most turbulent times in the history of Accenture. I know from speaking to our investors and analysts how much they've appreciated Angie's steady hand, her commitment to transparency and connection. And I know we'll all miss her in this role, but are extremely excited to see her start the next chapter of what has already been an incredible career. So thank you very much, Angie. And I am also pleased to welcome Katy O'Connor who will become our new Head of Investor Relations. She's got incredible experience. She's held many finance roles during her 25 years at Accenture. So please join me in welcoming Katy and I know she's looking forward to getting to know all of you in the days ahead. In closing, I do want to thank again all of our people and our managing directors for what you're doing every day. Our people, our actions and our results in FY '22 have positioned us to be very strongly going into FY '23 and create even more 360-degree value. And finally and very importantly, thank you to all of our shareholders for your continued trust and support. Thank you. Operator : Ladies and gentlemen, that does conclude our conference for today. The replay will be available after 10 a.m. Eastern today through December 16, 2022. You may access the AT&T executive replay system at any time by dialing 1 (866) 207-1041 and entering the access code 4002764. International participants may dial (402) 970-0847. Those numbers again are 1 (866) 207-1041 and (402) 970-0847 with access code 4002764. That does conclude our conference for today. We thank you for your participation and for using AT&T conferencing service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,022	4	2022Q4	2023Q1	2022-12-16	11.057	11.165	11.973	12.12	16.08	23.21	20.31	Operator : Thank you for standing by. Welcome to the Accenture's First Quarter Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] 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, Katie O'Conor. Please go ahead. Katie O'Conor: Thank you, operator, and thanks, everyone, for joining us today on our first quarter fiscal 2023 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you'll hear from Julie Sweet, our Chair and 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. Julie 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 first quarter. Julie will then provide a brief update on our market positioning, before KC provides our business outlook for the second quarter and full fiscal year 2023. We will then take your questions before Julie 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 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 Julie. Julie Sweet : Thank you to everyone joining us today and especially to our people around the world for their extraordinary work and commitment to our clients, which resulted in delivering another strong quarter of financial results and the broader 360-degree value we continue to create for all our stakeholders, our clients, our people, our shareholders, our partners and our communities. Let me share a few highlights of this 360-degree value and our continued disciplined execution. We delivered strong bookings of $16.2 billion, with 24 clients with quarterly new bookings over $100 million, demonstrating our clients’ continued commitment to transformation and our ability to understand and anticipate our clients' needs, whether for growth, cost optimization or resilience and our ability to deliver compressed transformations. We delivered revenues of $15.7 billion, representing 15% revenue growth in local currency, with double-digit growth in each market. We estimate that we are growing more than 2x the market, while delivering margin expansion of 20 basis points. We continue to invest in our people, with 10.4 million training hours this quarter, representing an average of 15 hours per person, providing learning opportunities and upscaling to enable us to pivot as our clients' needs evolve. We earned the number one position on the Refinitiv Diversity and Inclusion Index for the third time in the past five years and a top score on the Workplace Pride Global Benchmark, recognizing Accenture as the leader in our industry. We believe our unwavering commitment to diversity and inclusion is both the right thing to do and an essential element of our business strategy and strong financial performance. We have reached 97% renewable electricity, closing in on our goal of 100% by the end of 2023. Our own progress in sustainability is important to our ability to lead in helping our clients harness this key force of change and in attracting top talent. Finally, I want to congratulate our more than 1,200 new promotes to Managing Director, 119 new appointments to Senior Managing Director and the more than 90,000 people we promoted around the world in Q1 overall, reflecting our commitment to providing vibrant career paths. Over to you KC. KC McClure : Thank you, Julie. Happy holidays to all of you, and thanks for taking the time to join us on today's call. We were pleased with our overall results in the first quarter, where we continue to drive growth across markets, services and industries to extend our leadership position in the market. We ran our business with rigor and discipline and expanded operating margin while investing at scale, and we continue to deliver on our shareholder value proposition to both our financial results and by creating 360-degree value for all our stakeholders. Let me begin by summarizing a few key highlights across our three financial imperatives from the quarter. Revenues grew 15% in local currency, reflecting a foreign exchange headwind of about 9.5% compared to the 8.5% provided in our business outlook last quarter. Adjusted for the actual foreign exchange impact in the quarter, we were approximately $150 million above our guided range with double-digit growth across all of our markets and industry groups, with 10 of the 13 industries growing double digits and three high single digits. We continue to take market share with growth estimated to be more than 2x the market, which refers to our basket of publicly traded companies. Operating margin was 16.5% for the quarter, an increase of 20 basis points. We continue to drive margin expansion while making significant investments in our people and our business, including acquisitions. We delivered very strong EPS of $3.08, up 11%, while absorbing a substantial FX headwind. Finally, we delivered free cash flow of $397 million and returned $2.1 billion to shareholders through repurchases and dividends. We also invested $686 million in acquisitions. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $16.2 billion for the quarter with a book-to-bill of one and growth of 6% in local currency. Consulting bookings were $8.1 billion, with a book-to-bill of one. Managed Services bookings, which we formally refer to as Outsourcing, were $8.1 billion with a book-to-bill of 1.1. In addition, we continue to see improved pricing on our new bookings, which refer to contract profitability or margin on the work that we sell. Turning now to revenues. Revenues for the quarter were $15.7 billion, a 5% increase in U.S. dollars and 15% in local currency. Consulting revenues for the quarter were $8.4 billion, up 1% in U.S. dollars and 10% in local currency. Managed Services revenues were $7.3 billion, up 11% in U.S. dollars and 20% local currency. Taking a closer look at our service dimensions, Technology services grew strong double digits, Operations grew double digits and, as expected, Strategy & Consulting grew low single digits. Turning to our geographic markets. In North America, revenue growth was 11% in local currency, driven by double-digit growth in Public Service, consumer Retail and Travel Services, Industrial and Health. In Europe, revenues grew 17% in local currency, led by double-digit growth in Industrial, Banking & Capital Markets and high single-digit growth in Consumer Goods, Retail & Travel Services. Looking closer to the countries, Europe was driven by double-digit growth in Germany, the United Kingdom, Italy and France. In Growth Markets, we delivered 19% revenue growth in local currency, driven by double-digit growth in Banking & Capital Markets, Public Service, and Chemicals & Natural Resources. From a country perspective, gross markets was led by double-digit growth in Japan. Moving down the income statement. Gross margin for the quarter was 32.9%, consistent with the same period last year. Sales and marketing expense for the quarter was 9.8% compared with 9.7% for the first quarter last year. General and administrative expense was 6.6% compared to 6.9% for the same quarter last year. Operating income was $2.6 billion in the first quarter, reflecting a 16.5% operating margin, up 20 basis points compared with Q1 last year. Our effective tax rate for the quarter was 23.3% compared with an effective tax rate of 24.4% for the first quarter last year. Diluted earnings per share were $3.08 compared with diluted EPS of $2.78 in the first quarter last year. Days service outstanding were 48 days compared to 43 days last quarter and 42 days in the first quarter of last year. Free cash flow for the quarter was $397 million, resulting from cash generated by operating activities of $495 million net of property and equipment additions of $99 million. Our cash balance at November 30 was $5.9 billion compared with $7.9 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed 5.2 million shares for $1.4 billion at an average price of $272.3 per share. At November 30, we had approximately $4.9 billion of share repurchase authority remaining. Also in November, we paid a quarterly cash dividend of $1.12 per share for a total of $706 million. This represents a 15% increase over last year. And our Board of Directors declared a quarterly cash dividend of $1.12 per share to be paid on February 15, a 15% increase over last year. Finally, turning to the 360-degree value we are creating for all our stakeholders. We are extremely proud to be recognized as one of the seven company all stars on the Wall Street Journal Management Top 250 List for Excellence in customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength, and we also received the top score for social responsibility overall. In summary, we were pleased with our results in the first quarter, and we're off to a strong start for the year. And now let me turn it back to Julie. Julie Sweet : Thanks, KC. We remain laser-focused on staying close to our clients, advising them how to navigate the macro, providing the right solutions to enable compressed transformations and adjusting to their changing needs. Let me give some further color on what we're seeing in the market and how we see the demand environment shaping up. Over the last quarter, as we can all read, the economic estimates for 2023 continue to decline. While the latest industry estimates for 2023's technology spending continue to show robust growth of 5% or so, we will see how the market evolves as clients finalize 2023 budgets. So what does today's market mean for our clients? We believe that the current macro is making it even clearer to clients that they need to change more, not less, and that two of the five key forces of change that we have identified for the next decade : the need for total enterprise reinvention enabled by tech data and AI; and the ability to access, create and unlock the potential of talent, are critical to succeed in the near, medium and long term. We see this continuing across industries and markets with two common themes. First, all strategies continue to lead to technology, particularly cloud, data, AI and security. And second, companies remain focused on executing compressed transformation to achieve lower costs, stronger growth, more agility and greater resilience faster. What does this mean for Accenture? Our strategy positions us for continued industry leadership because we have a unique set of strengths that our clients need to navigate today and succeed tomorrow. We are able to do so because of our deep strategy and consulting expertise across industries, allowing us to be a trusted adviser during different economic cycles as we bring the expertise, coupled with the real-life practical experience they need. Our ability to help clients achieve total enterprise reinvention through our depth across the enterprise, from the frontline to core operations to corporate functions, as well as our ability to advise our clients shape and deliver value-led transformations, and through our breadth of services, from strategy and consulting to our strategic managed services, which help clients digitize faster, access talent and lower costs. And our global footprint allows us to act at scale and with speed. Together, this positions us as the compressed transformation partner of choice, as you can see, and yet another strong quarter of clients who selected us for work of more than $100 million this quarter. I am pleased to see how quickly we are pivoting to meet the evolving needs of our clients. We have seen a higher level of sales and pipeline coming from cost-focused initiatives, often also including growth or capability enhancements. We are leveraging our breadth of services, deep-client and ecosystem relationships and industry and functional expertise to help our clients and Accenture shift to the highest value opportunities. Our track record of delivery at speed and scale over many years with clients -- remember, 99 of our top 100 clients have been with us for over 10 years, this gives our clients confidence that by partnering with us, they will deliver on their commitments. Investments in our assets and solutions such as myWizard and SynOps, which underlie both strategy and consulting, technology and operations managed services, as well as our delivery of compressed transformation, enables us to differentiate with our insights and services. Our ability to invest in acquisitions helps us to expand our relevance across the enterprise from building a digital core with Sentia and Albert, to optimizing upper duration to achieve agility, efficiency and resilience with Pilatus, to accelerating their growth agendas with RAMP, and our substantial investment in the skills of our people allows us to pivot to new areas of demand to be an attractive destination for top talent. Now let's turn to the quarter. To bring to life this demand environment across the five key forces of change for our clients : total enterprise reinvention, talent, sustainability, the metaverse and the ongoing tech revolution, which in turn drag our growth. First, total enterprise reinvention, we continue to help our clients achieve a new performance frontier by building their digital core, optimizing operations and accelerating growth, leveraging cloud, data and AI and new ways of working. We are helping Roche, a Swiss multinational health care company specializing in pharmaceuticals and diagnostics, with a total enterprise reinvention, building a digital infrastructure to match changing business needs. Using data integration, we have changed the way tumor boards are organized and conducted, empowering counter teams to be more efficient and effective in determining next steps for cancer care. And we have built a digital ecosystem that will create innovative products and solutions to drive diabetes care. Now as part of one of the largest ERP modernizations in the world, we are working together to deploy a digital backbone that will unify and harmonize nearly 700 business processes for more than 100,000 end users. The integrated platform will simplify the system landscape and connect activities across the value chain from R&D and manufacturing to patient treatment. Cloud, a $26 billion business in FY '22 grew 48%, with even stronger growth in Cloud First and continues to grow very strong double digits. In fact, we believe that the cloud continuum will become the new operative system for the future enterprise. Migrating to the cloud to drive efficiencies is just the first step. As we anticipated with our Cloud First strategy and investments, we are seeing our clients make significant investments to modernize, improve and innovate in the cloud, leveraging data and AI to drive new business value. For example, Accenture Federal Services is partnering with the Centers for Disease Control and Prevention, a U.S. federal agency under the Department of Health and Human Services, to accelerate its migration to the cloud across the enterprise and modernize its IT portfolio. Through this work, we will also help to achieve CDC's mission to protect people from health, safety and security threats by supporting the development of integrated, real-time public health data and surveillance systems. As our clients build their digital core, security continues to be more important than ever, as reflected in our very strong double-digit growth in Q1. We are expanding our cybersecurity footprint for a large health care network in Brazil to elevate their cybersecurity posture to a new hot level of preparedness. We are growing the organization's security profile with a cyber as a service solution that will enhance the cyber readiness of their infrastructure and operations. This new project not only consolidates the work that up to four different providers typically do, it also is the largest cybersecurity contract ever signed in Brazil by any provider. High demand for our strategic Managed Services, reflecting $7.3 billion in revenue and 20% growth in the quarter, demonstrates the importance of these services to our client strategies as it enables clients to move faster, leveraging our digital platform's expertise and talent. Our Managed Services are differentiated by our ability to bring in our deep expertise from across the enterprise, including Song, which grew double digits in the first quarter. For example, we're expanding our partnership with Allianz, an Italian and main bank of Allianz Group, to continue the bank's digital transformation with a new platform in the cloud, a modern IT architecture and a new operating model. Our Song team is helping to create a new customer mobile app to improve customer experience. And our end-to-end managed services capabilities, tailored to the financial services industry, will help the bank grow and scale its position in the market, ensure regulatory compliance and lower total cost of ownership. We continue to see strong demand for our industry edge capabilities, digitizing engineering and manufacturing, which we see as the next digital frontier with continued very strong double-digit growth in Q1. We are helping Celanese, a global chemical and specialty materials company on their digital transformation journey that will increase their manufacturing production resiliency, productivity and predictability of plant operations. We're teaming with ecosystem partners to design and implement a scalable digital twin platform at one of their largest manufacturing facilities, which plans to increase revenues through increased plant output, reduce costs through improved productivity, product quality and equipment reliability and improve overall safety in the workplace. We also are supporting an enterprise cloud transformation to provide a scalable platform for future enterprise growth and innovation. Next, talent. Our clients continue to look to us to access, create and unlocked talent as a critical element of their transformation. We're helping a global chemical manufacturer with an end-to-end IT transformation as part of their multiyear digital journey. The Company faces increasing IT costs, aging assets and tools and overreliance on contractors. We're implementing a full Managed Services model that will help modernize its IT, and this digital transformation includes a talent transformation. Together, we will upskill their people and data cloud and AI through our Accenture Academy so that everyone grows together, helping the Company leapfrog its competitors with innovative industry-leading solutions. Now, sustainability. We continue to prioritize embedding sustainability into our clients' digital transformation and on providing a direct sustainability service. For example, we are expanding our partnership with the European Multinational Aerospace Corporation to help improve their environmental and social impact across the enterprise. In recent years, we have worked together to digitize the Company's supply chain and manufacturing operations using a digital twin to improve productivity and reduce waste. Now we are working together to advance their sustainability agenda. We're supporting their aviation decarbonization road map, from accelerating the use of sustainable aviation fuel to helping design low-emissions aircraft. We are finding new ways to help make the supply chain more transparent and ethical, helping the Company replace hazardous materials from the product life cycle with safer, greener alternatives. And we are outlining a strategy to help them meet its net zero targets and internally foster a culture that is focused on sustainability. Finally, the metaverse and the ongoing tech revolution. While still in the early innings, we believe the metaverse will not only change how people work, but it will also profoundly change every part of every business, from how we interact with customers, what products and services they offer, how they are made and distributed, how you engage with your people from employee onboarding to personal productivity. We're partnering with NTT DOCOMO, a Japanese mobile operator to speed up the adoption of Web3, a new blockchain-based version of the Internet that promises a digital economy with greater social impact. We will develop and grow a secure technology platform for Web3, which will enable new products, services and community building. Training will ensure that Web3 engineers and business leaders collaborate with organizations effectively and securely on the platform. NTT DoCoMo's work on societal issues will now expand with the use of Web3, helping companies and governments transform social infrastructures and provide solutions that would improve people's lives. We continue to invest ahead of our clients' teams to the future, with a keen focus on innovation and the ongoing tech revolution. Back to you, KC. KC McClure : Thanks, Julie. Turning now to our business outlook. For the second quarter of fiscal '23, we expect revenues to be in the range of $15.2 billion to $15.75 billion. This assumes the impact of FX will be about negative 5% compared to the second quarter of fiscal '22 and reflects an estimated 6% to 10% growth in local currency. For the full fiscal year '23, based upon how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately negative 5% compared to fiscal '22. For the full fiscal '23, we continue to expect our revenue to be in the range of 8% to 11% growth in local currency over fiscal '22, which continue to assume an inorganic contribution of about 2.5%. For operating margin, we continue to expect fiscal '23 to be 15.3% to 15.5%, a 10 to 30 basis point expansion over fiscal '22 results. I mentioned last quarter, we may see more variability in quarters as we go throughout fiscal year '23, and that's playing out as we expected, with contraction in the second quarter expected and potentially overall for H1. We continue to expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an effective tax rate of 24% in fiscal '22. For earnings per share, based on the change to FX, we now expect our full year diluted EPS for fiscal '23 to be in the range of $11.20 to $11.52 or 5% to 8% growth over fiscal '22 results. Full fiscal '23, we continue to expect operating cash flow to be in the range of $8.5 billion to $9 billion, property and equipment additions to be approximately $800 million and free cash flow to be in the range of $7.7 billion to $8.2 billion. Our free cash flow guidance continues to reflect a strong free cash flow to net income ratio of 1.1%. Finally, we continue to expect to return at least $7.1 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. And with that, let's open it up so we can take your questions. Katie? Katie O'Conor: Thanks, KC. I would ask that you each keep one to question and a follow-up to allow us to as many participants as possible to ask a question. Operator, would you provide instructions for those on the call? Operator : [Operator Instructions] Your first question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Happy holidays. Really good results, strong results here. The one area that was a little softer was the Strategy & Consulting area, and I think you guys called that out as expected. Just thinking about Strategy & Consulting that you knew it was going to be a little bit softer, and it's becoming a little bit softer. Is that just more the move towards the cost agenda versus growth and just thinking about what we can expect there going forward? KC McClure : Hi, Bryan, thanks for the question. As you mentioned, our Strategy & Consulting results for Q1, they did come in as expected. But let's talk about what we're seeing go forward. And we do see a slight decline in Strategy & Consulting for Q2 before we're going to reconnect with growth in H2. And why is that for Q2? It's really a couple of things. We do see that we are going to have some impact from less revenue from smaller deals that which Julie will talk a little bit about here. And second, we do continue to see our S&C practitioners focus on high impact transformational deals, and they're going to bleed into revenue a little bit later in the year. There's a really important to our clients, but the revenue conversions at a slower pace. Julie Sweet : Yes. Bryan, maybe -- I want to maybe say -- to make sort of two points. So first of all, specifically on S&C, I think it's important to understand we really have a tale of two worlds. So our S&C work is growing high single-digit to low double-digit when it's tied to areas around cloud, enterprise and industry platforms, talent, cost reduction, everything tied to building to the core. So underneath our results, like that's growing great. The other world, right, is S&C that's tied to things like ad spend, creative marketing strategy and campaigns and other sort of front-office initiatives are contracting, right? And that's, of course, the strength of Accenture, is that we've got a very broad range of services even within the Strategy & Consulting as well as a broad range of industries. And so while the -- at the top line, you saw it 3% this quarter, there'll be a slight decline next quarter, underneath that, you've got a lot of strength in everything that's really driving our results. And I think that's really important to just understand. But then, I want to take a step back and just maybe comment on the demand environment. KC just mentioned kind of the impact in S&C and smaller deals. So first of all, like we're obviously super pleased with Q1, right? Great growth, and we're really happy with how we're seeing the year start. Now at the same time, what do we see over the last 90 days, what we saw what everybody saw, right, which was the macros continue to have uncertainty and you've got GDP estimates declining over the past 90 days. And on the one hand, our clients clearly are remaining ambitious, right, they're committed to revamping their business. And you see that in the 24 clients with quarterly new bookings over $100 million, right, which is an increase over this time last year. At the same time, they're more and more focused on cost and resilience. And many are having to make pretty hard choices, right, because the macro affects the industries differently. So you've got some industries, retail consumer goods, that are much more challenged than say, energy. But at the same time, and we talked about starting to see this last quarter, kind of regardless of industry, as the macro uncertainty has increased, right, they're being a little bit more cautious. So we're seeing some delays in decision-making. We see changes in the pace of spending, and we're seeing some pausing of the smaller deals. And all of this impacts the smaller deals more than the bigger deals because we're continuing to see that big transformation focus. So that impacts our revenue and profit build over the year, which is part of what we're seeing in S&C in the second quarter with the decline. And then, I just want to remind everyone that this is exactly the environment that you see the strength of Accenture. It is because we are so broadly diverse. I mean you saw it in the examples in my script, all around the world, all around industries. But who else could be in Asia doing border security, in the U.S., working with the state of Missouri on a talent and tech implementation; in Europe, working with a European grocer doing IT modernization, cost reduction and customer experience? Just moving around the world, you're back into Asia, working with a telecom operator, digitizing their platform, creating a new customer experience. And so, you just continue to see that our strategy that we've had for decades to be across industries, a global footprint and depth and breadth of services. I mean Managed Services is on fire because we could digitize faster, get that compressed transformation, help them access the talent and lower cost. So back to you, Bryan. Operator : Your next question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Tien- Tsin Huang : Okay. Just to – and good morning. I just add to the Bryan's last question here, just as on the visibility side, especially in consulting relative to Managed Services. And given, Julie, what you just said there, any change in your thinking on mix of growth across Consulting versus Managed Services, asking for both, I guess, bookings as well as revenue here? KC McClure : Yes. I'll take – Hey, Tien-Tsin. I'll take the -- in terms of the outlook for how we see growth going by our various – by our two types of work. So for the full year, at the top end of our range, we see Consulting high single digits, and we see Managed Services continue to grow double digits. And as it relates to outlook and bookings, what we're seeing is that we do have a strong pipeline and we actually see continued strong pricing in that pipeline. And we do see that we will have a solid bookings quarter in Q2, and that includes Consulting. It's likely -- it will likely be lower though than the record bookings in Consulting that we had last quarter, and we expect to continue to see really strong bookings in Managed Services. Julie Sweet : Yes, and we're going to continue to focus our Strategy & Consulting expertise on these platform and cloud-led transformation. Tien- Tsin Huang : Gotcha. Okay. Perfect. Then a quick follow, if you don't mind. I heard the pricing favorable utilization looks like it's steady attrition nicely, better or lower, 13%, I think I saw on the sheet there. So just same question on visibility with respect to cost and margin, if you're flexing or changing anything here, I know the range overall is the same, but it feels like you've got a good line of sight in terms of your costs. I just wanted to confirm that. KC McClure : Yes. Sure. So I'll talk a little bit about on the attrition point, and then we can get into kind of what we're seeing overall in our cost and our visibility in that regard. So attrition was down to 13%, and I think all of you know, but there's a structural pattern of attrition that typically comes down from Q4 to Q1. This year came down at a tick more, and we're really pleased with that. And that means we have to hire fewer replacement people, it means less recruiting costs, and you saw that in our improvement in G&A this quarter, and it's less ramp up for new hires. And so Tien-Tsin, in terms of visibility of what we see, I mean, we expect to continue to hire for the specific skills that we need. With upskilling, we may not need to hire as many people as we go throughout the year. But we have a very deep -- and we have a very deep competency in our supply and demand balancing and we're always focused on. And in terms of profit, let me talk a little bit about what we're seeing in operating margin. So operating margin, we're pleased with the 20 basis point expansion that we have in Q1 and really pleased to be confirming our 10 to 30 basis points expansion for the year. And as I said last quarter, we'd be pleased to land anywhere within the 10 to 30 basis point range. But let me give you a little bit more color about what we're seeing in Q2 and then just the visibility, as you ask, about the rest of the year. So I mentioned last quarter, we may see more variability in the quarters as we get through fiscal '23. And as I mentioned in the script, that is exactly playing out. Now, there's a few reasons for that. So in Q2 overall, the first thing, and I think all of you know, it's a structurally lower profit quarter just to begin with, in part because of the holidays. As well as for us, it's when most of our compensation increases kick in. So while we've planned for those comp increases, it does take some time to work through our P&L. And then in addition, in Q2, the impact of the changes of smaller deal volumes that Julie described, it's going to impact Q2 revenue. And that -- when you take everything into consideration, that's why we expect the Q2 operating margin decline in Q2 and potentially for the first half of the year. And so with that, then the math shows that most of our margin expansion will be in the back half of the year. And how -- why is it that we see that? We have a strong pipeline, as I mentioned. We have continued strong pricing improvements in our pipeline. And as always, we have some simple, but important levers on how we run our business. We are going to in addition to pricing, focused on cost efficiencies and delivery efficiencies within how we run our contracts. We're going to manage supply and demand, as we always do, with even more rigor and discipline. And we're going to continue to work on digitizing and cost-effective running the operations of Accenture. Operator : Your next question comes from the line of Lisa Ellis from SVB MoffettNathanson. Please go ahead. Lisa Ellis : I wanted to ask, Julie, a bit about the progress on compressed transformations. I think you started using that phrase about two years ago sort of in the earlier days of the pandemic. And now as you're working with clients looking out into 2023, can you just give some color on sort of like how far they are along in the compressed transformation? Is this -- do we -- are we still only in the third or fourth inning? Or a lot of your clients sort of in full rollout mode and we've got a couple of years left? Just trying to get a sense for sort of that big push we've seen, how far through the process are we? How much of this sort of sustained growth can we expect going forward? Julie Sweet : Thanks, Lisa. It's a great question. And there's a couple of ways that you look at it. So what we saw particularly in the early days was that leaders before the pandemic kind of we're doubling down and becoming more ambitious. And from that time, you've got more and more companies then looking to see their competitors and sort of being pushed to themselves being more ambitious. And so, I think I shared last quarter that we got some recent research that said something like 68% of CFOs we surveyed are working in companies that have three or more transformation programs in progress in parallel. That being said, it's still very much the early days because we're so early in building the digital core that's enabling these transformations. So while we've had a big acceleration on the migration to the cloud, it's still kind of early innings, 35% or so. And most of the companies report, that although the -- when they get to the cloud they haven't actually been able to access the services and get the value yet, and that's why you're continuing just to see this drive in our cloud business, particularly Cloud First, because we continue to do all the migration work. And then those we've migrated are now coming to us and say, "Hey, look, we sign these big consumption contracts. We're trying to figure out how to transform our business and we don't know how to." So you basically got people who have moved fast, have lots more to do, and that's this concept of total enterprise reinvention. And then you have many companies that are just starting to really take on these more ambitious programs. So, we see this as a decade of transformation. Lisa Ellis : Okay. Good. Then a quick one on M&A. I think you highlighted, KC, about close to $700 million in this past quarter in M&A. Can you guys just give a little more color on what you're seeing in the environment? Have you seen some of the private valuations come in? And are you seeing sort of an uptick in activity in that space? Julie Sweet : Yes. I mean great companies never come at cheap prices, is what I would say. So -- and we really try to focus on buying highly valued companies. So we really aren't seeing that. The broader environment, yes, but where we're focusing, we're not really seeing any big differences. And we think that's the right answer, right, we want to buy great companies. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. David Koning : And I guess my question, I've noticed your -- the strategic priorities continue to grow significantly. And they grew at the same pace, at least the qualitative like numbers you wrote were at the same pace as last quarter. Is that -- I mean, is that like very close to, I guess, the same growth? Like did it decelerate at all? Or is that actually very similar? And what percent of revenues are those? Just I'm kind of thinking through the rest of the business must have decelerated a little more of that. KC McClure : Yes. So, overall -- let me say first, Happy Holidays. It's good to talk to you. In terms of overall, our strategic priorities, as you mentioned, and you're right, you would expect in a quarter where we grew 15%, we did have higher growth overall in terms of what we have in our strategic priorities. They would -- in total, they did grow at a faster pace than the rest of Accenture at 15%, which is the intent overall of our strategic priority. And so -- which does account for the majority of our revenue. Julie Sweet : Yes. Look, as you go forward, we talked a little bit about earlier, you've got parts of our business like some of the customer focus ad spending and marketing that's -- where clients are more challenged to be able to prioritize those areas, you also see some changing in industry. So, we're all reading about comms, media and tech, right? So, we are going to see -- we expect kind of a slowdown in spending from those clients as they reposition and think about sort of their -- what the changes they need to make, and we're helping them do that. So again, the diversity of our business really helps us balance. You do have, at any given time in an environment like this, areas that -- where the clients are having to make different choices and we're trying to pivot to help them and be really relevant to their current needs. And that's why it was so important to see the -- we've been talking about this for a couple of quarters, the importance of cost and to see that really coming through in our sales and pipeline, just demonstrates how our breadth of services allows us to pivot to the needs of our clients. David Koning : Yes. Got you. And just one quick follow-up. You mentioned in Consulting, I think Tien-Tsin asked, you mentioned in Consulting, I think, bookings being down. Was that sequentially or year-over-year? And is that on a constant currency basis? KC McClure : Yes. So just first of all, bookings overall in terms -- let's just talk about bookings overall, Dave. They were up in local currency by 6%. But when you take the FX headwind, they were down overall in U.S. dollars. And what I mentioned was -- we expect a strong bookings quarter in Q2. The question that Tien-Tsin had was about the Consulting bookings expectation for Q2, and we expect a strong bookings in Q2. I just want to remind you that that's where we -- that was also the quarter though, last year, where we had our record Consulting bookings last year of about $11 billion. And so I just wanted to set the expectation that will be strong, it may not surpass the $11 billion that we did last quarter, last year in Q2. Operator : Your next question comes from the line of James Faucette from Morgan Stanley. Please go ahead. James Faucette : Great. Just wanted to follow up on the D&A question, and I completely get the point around valuations and wanting to look at the best companies. But are there any specific capabilities we should think about that you would be targeting especially as you're seeing clients evolve a bit their needs in the current environment? Julie Sweet : So a few things, right? So first of all, since the pandemic began, we've been very focused on building scale in markets around cloud, data and AI because that's so critical to building the digital core. So last quarter, we bought something in the Nordics, for example, that was all about getting scale. We bought something in France around mainframes because that's a very specific skillset that is relevant to moving some industries like financial services off of these core systems. And so we'd expect to continue to invest there. And we did this quarter, for example, with eLogic and with Sensis, these were acquisitions that we did this quarter, all in sort of the cloud and cloud platform technology space. Data and AI solutions will continue to be important. And again, we try to focus both on scale and getting scale in market. So we made a really exciting acquisition in Japan this quarter around data and AI solutions because we see that such a big market for us and we see a lot of interest, and it was just a great company. So, if you think about what clients are focused on building their digital core, that's going to continue to be a focus. The next digital frontier, so supply chain, digitizing supply chain and manufacturing, so we made a couple of acquisitions there this quarter, MacGregor, Stellantis. And so really, we keep very close to our strategy, which is tied to clients. They want reinvention across the enterprise, so continuing to build areas like in the digital frontier, making sure we've got scale and all of the capabilities needed across the digital core will continue to be a focus. James Faucette : That's great. And then just as a quick follow-up, and it's kind of related to accounting or some of the accounting metrics that are moving in. Looking at DSOs, you guys almost always have industry-leading DSOs. But for you specifically, it looks like it's a little bit higher than last year. Can you talk us through puts and takes and what's moving that around? And should we expect to see improvement from here? Or is this something, just from a monitoring working capital, that this is the kind of level we should expect going forward? KC McClure : Yes. Thanks for the question. And you're right, we do have industry-leading DSO, and we continue to have industry-leading DSOs. So let's talk about what we're seeing this quarter. So we had 48 days this quarter. And I think as you know, we do have a structural uptick every year from Q4 to Q1. And this is about a day of higher uptick than we would traditionally have, but it's nothing that we're concerned about. And we do feel really good about our DSO coming down by the end of the year. As I mentioned in our free cash flow guidance at the beginning of the year, we did allow for a couple of days uptick in DSO, and that's what we still expect. And maybe I'll talk a little bit about the free cash flow. So when you take a look at that in free cash flow and our expectations, overall for free cash flow for the year, you heard me reiterate the free cash flow guidance for the year. So that allows for us to have a few days uptick in DSO. And so, we're still really -- feel that the $1.1 billion is a really very strong free cash flow guidance, and it takes into account and increased DSO for the year. Operator : Your next question comes from the line of Bryan Bergin from Cowen. Please go ahead. Bryan Bergin : I wanted to follow up on the growth outlook and a little bit of the client behavior. So I'm curious if you've seen any actual change in backlog or prior book sales being deferred or potentially coming out there? So I hear you on the macro uncertainty, and I'm curious if their incidence of clients actually taking work out versus more so dragging on new bookings? KC McClure : Yes. So, I -- we haven't seen any real change. What you're talking about is what's happening with the work that we've already sold, we're not seeing any real change in anything that's already in our book of business in terms of what's happening with the macro. And Julie, I don't know if there's anything else you want to add? Julie Sweet : Yes -- no. And really I think what's important is that regardless of industry or country, the focus still is on transformation, right? There is nobody saying, "I'm going to change less," right? Unfortunately, the companies are having -- sometimes are having a harder time, right, doing what they'd like to do because they're under pressure. And again, that's where our relationships really matter because we're the trusted partner, right? And if you got to know that whatever you are going to spend money on, it's going to have to deliver value, it's a flight to quality, right? And so, we've seen that since the early days of the pandemic, and it continues in this environment. And remember, that the idea of total enterprise reinvention is things are connected. Like I gave the example of the European grocer, right? One company that can transform IT, do an ad strategy, provide personalized customer experience and lower overall cost, right, that is not easy to do, and it requires industry expertise and expertise in many parts of the enterprise. And that's really where our resilience comes from. And by the way, also our ability to pivot, right, to pivot, and that particular one started as a cost play, and we were able to show the client how not only could they reduce cost, but they could actually drive more growth by connecting these things and understanding the intersections. And that's what we're focused on, right? We always start with what do our clients need. And right now, they need to be more efficient, they need to do more with less, they need to optimize what they have and we're investing. And I will tell you that one of the things that's so critical are assets and solutions. Because I was just doing or earlier this week, and I always ask the client what do you think about what you've seen, and they're like, it's amazing like you have this myWizard platform, it's got data, it's got AI, it's stuff that we can even begin to build, and you not only have it built but it's been used in thousands of clients. So that's the kind of place where our ability to invest, not just now, but over the last decade, really matters to clients. And compared to anybody out there, right, the amount of money that we're putting in acquisitions and solutions is really tremendous in driving value for our clients. Bryan Bergin : Okay. That's good to hear. Follow-up, just geographic and vertical growth performance was quite broad-based here. Did you expect that to continue through the balance of the year? And I was particularly surprised on Europe and Growth Markets actually outperforming North America, is that going to persist or do you see that changing? Julie Sweet : By the way, my CEO of Europe and my CEO of Growth Markets like that out to their friends in North America as well. So, a little good-natured competition there, but KC, why don't you... KC McClure : Yes. And so in terms of what we expect to see for the year, we do expect to see Europe and Growth Markets for the full year be in the double-digit range. And we do expect that North America, which is -- as the CEO of North America says, "I have a much, much bigger business," will grow at a mid- to high single-digit range for the year. And Julie, I don't know if there's anything else that you want to add on... Julie Sweet : Yes, on North America, I mean, they had unbelievable growth last year on a huge book of business. So growing anywhere in the high single digit to double digit again this year is quite impressive. I mean their growth was 26% last year. So, we are very pleased with kind of the growth we see ahead. Katie O'Conor: Operator, we have time for one more question, and then Julie will wrap up the call. Please go ahead. Operator : Okay. That question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Let me say a good quarter in a tough environment and also Happy Holidays. Let me -- I'll ask both the questions together. The first one is I see the sequential hiring growth, and obviously, many other tech companies cutting back. And I'm wondering if your positive hiring is partly a function of the rapid decline in attrition, so you might not have put the brakes on hiring yet? So, what should we expect for hiring? And could you comment on wage inflation? KC McClure : Yes, sure. Hi, Ashwin, nice to speak with you. So just in terms of what we expect for hiring, first of all, as you know, our ability to manage supply and demand is a core competency of ours, and we're always focused on it. And so, we did hire about -- we added about 17,000 people this quarter, as you mentioned. And we will continue to hire for the specific skills that we need. I think I made reference to that earlier, which means we may not need to hire as many people as we go throughout the year, but we'll balance that as we go through. And on wage inflation, I'll just go back to what we said when we set guidance, we did see wage inflation continuing. We do have comp increases that are kicking in that we've planned for, of course, and included in our pricing. But they are higher than they've been, and that's a statement across all industries, all geographies. And of course, that we're no different in that regard. Ashwin Shirvaikar : Understood. And then on bookings, obviously, a good quarter overall. And you've referenced the underlying sort of Consulting versus Managed Services a couple of times. I want to kind of take that forward and ask the revenue conversion question because, obviously, Consulting, one might think of shorter cycle and it gets into revenue faster; Managed Services, longer ramps and things like that. Is that a fair observation still just looking at what you signed? And how might that affect sort of the calendar 2023 layout, if you will? KC McClure : Yes. I think here's the way I would look at it. In terms of when you look at Managed Services and Consulting, as a broad statement, you have more the benefit of Managed Services is that you have already sold a fair amount of work, right? So while they are longer deals and they made the deals that you sell in that quarter may turn into revenue a little shorter than they would in A consulting sale, for example, which is typically a shorter duration, you have more work already sold as you go into a quarter. So there's a terrific benefit to that, which is why we like this diversity, right? We have that as well as in Consulting. They do -- the length and shape of them really do vary. And when you look at it overall, Ashwin, if you go back, and I know you followed us for a long time, and just look at our mix, of Managed Services to Consulting, it doesn't really change the bookings, really don't change much as you go throughout our history, in terms of the percent -- the proportion of each. Julie Sweet : Yes. I mean this year, the bigger shift that we called out is just the smaller deal volume that's tied more to the macro and the sort of the shift on to these mega transformation deals, some of which are Consulting, some of which are Managed Services, they just bleed through revenue differently. So, that's more of the impact this year that we see right now. Okay. Well, thank you very much, and happy holidays. Good. So in closing, I want to thank all of our shareholders for your continued trust and support and all of our people for what you do every day. And I'd like to wish everyone a happy and healthy holiday season. Thank you. Operator : That does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,023	1	2023Q1	2023Q2	2023-03-23	11.322	11.452	12.281	12.408	15.94	22.88	25.39	Operator : And ladies and gentlemen, thank you for standing by and welcome to the Accenture’s Second Quarter Fiscal 2023 Earnings Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Katie O’Conor, Managing Director and Head of Investor Relations. Please go ahead. Katie O’Conor: Thank you, operator and thanks everyone for joining us today on our second quarter fiscal 2023 earnings announcement. As the operator just mentioned, I am Katie O’Conor, Managing Director, Head of Investor Relations. On today’s call, you will hear from Julie Sweet, our Chair and Chief Executive Officer; and KC McClure, our Chief Financial Officer. We hope you have had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today’s call. Julie 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. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2023. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we will 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 Julie. Julie Sweet : Thank you, Katie and thank you to everyone joining today and thank you to our 738,000 people around the globe for your incredible work and commitment to our clients, which has resulted in our delivering another strong quarter of financial results and the broader 360-degree value we continue to create for all our stakeholders. Let me share a few highlights of value we created in our continued disciplined execution. I am very pleased with our record bookings for Q2 at $22.1 billion, our highest ever including 35 clients with quarterly bookings greater than $100 million, our second highest quarter on record for such bookings, representing the continued trust that our clients have in us. We delivered revenues of $15.8 billion, representing 9% growth in local currency, bringing us to $31.6 billion of revenue at 12% growth through H1 and we continued gaining market share, growing approximately 2x the market. We continued our inorganic investments with six acquisitions in strategic areas, including cloud with the acquisition of SKS in Europe, which will expand our specialized technology consulting and regulatory capabilities, enabling us to better serve our financial services clients; security with the acquisition of Morphus in Brazil, a cyber defense risk management, cyber threat intelligence service provider; and supply chain with the acquisition of Inspirage in the U.S., which will enhance our technology capabilities to accelerate innovation for clients through emerging technologies such as touchless supply chain and digital twins. We also continued our investment in our people with 10.3 million training hours, a 12% increase year-over-year. We are optimizing our business to lower costs in fiscal year 2024 and beyond, while continuing to invest in our business and our people to capture the significant growth opportunities ahead. KC will be giving you more detail on these actions. Finally, we believe our focus on creating 360-degree value differentiates us in our market. We earned the number one position in our industry for the 10th year in a row and number 32 overall on Fortune’s list of the World’s Most Admired Companies. We ranked number one in our industry and number four overall on the JUST Capital list of America’s Most JUST Companies. And we have been recognized by Ethisphere as one of the world’s most ethical companies for the 16th year in a row. I am very pleased that our results demonstrate once again that our strategy to be the execution partner of choice for transformation, lead in the five forces and have a diverse business across markets, industries and services continues to allow us to lead and take market share. And in a world in which all strategies lead to technology, we have distinguished ourselves in our impact to the market. Over to you, KC. KC McClure : Thank you, Julie and thanks to all of you for taking the time to join us on today’s call. We were pleased with our overall results in the second quarter, setting a new bookings record at $22.1 billion, $2.5 billion higher than our previous record set in Q2 of last year, with consulting bookings close to matching our previous record. We delivered revenue growth for the quarter at the top end of our guided range as we continue to deliver on our shareholder value propositions. Before I summarize results for the quarter, let me spend a moment on the business optimization actions we are taking to reduce costs for fiscal ‘24 and beyond, which includes streamlining operations, transforming our non-billable corporate functions and consolidating office space. We estimate cost of $1.5 billion through fiscal year 2024, of which we expect to incur approximately $800 million in FY ‘23 and $700 million in FY ‘24, comprised of approximately $1.2 billion in severance and $300 million for the consolidation of office space. These actions are expected to impact roughly 2.5% or 19,000 of our current workforce, of which over half are non-billable corporate functions and include over 800 of our more than 10,000 leaders across our markets and services. Nearly half of the 19,000 people will depart by the end of fiscal year ‘23. Now, let me summarize a few of the highlights for the quarter. Revenues grew 9% local currency, driven by broad-based growth across all markets with more than half of our 13 industries growing double-digits. We also continue to extend our leadership position with growth estimated to be about 2x the market, which refers to our basket of publicly traded companies. In Q2, we recorded $244 million in cost associated with the business optimization actions, which impacted operating margin by 150 basis points and EPS by $0.30. The following comparisons exclude these impacts and reflect adjusted results. We delivered adjusted EPS in the quarter of $2.69, reflecting 6% growth over EPS last year. Adjusted operating margin of 13.8% increased 10 basis points, with 20 basis points expansion year-to-date and includes continued significant investments in our people and our business. Finally, we delivered free cash flow of $2.2 billion and returned $1.8 billion to shareholders through repurchases and dividends. Year-to-date, we have invested $1.1 billion in acquisitions, primarily attributed to 15 transactions. With those high level comments, let me turn to some of the details, starting with new bookings. New bookings were a record at $22.1 billion for the quarter, representing growth of 17% in local currency with an overall book-to-bill of 1.4. Consulting bookings were $10.7 billion with a book-to-bill of 1.3. Managed service bookings were also a record at $11.4 billion with a book-to-bill of 1.5. We were very pleased with the strength of our new bookings, which were broad-based, delivering a very strong book-to-bill across all of our geographic markets and across our services with a book-to-bill of 1.5 in operations, 1.4 in technology and 1.3 in strategy and consulting. Turning now to revenues. Revenues for the quarter were $15.8 billion, a 5% increase in U.S. dollars and 9% in local currency and were at the top end of our range, adjusting for a foreign exchange headwind of approximately 4% compared to the 5% provided last quarter. Consulting revenues for the quarter were $8.3 billion, a decline of 1% in U.S. dollars and an increase of 4% in local currency. Managed services revenue were $7.5 billion, up 12% in U.S. dollars and 16% in local currency. Taking a closer look at our service dimensions, technology services and operations grew double-digits and strategy and consulting declined mid single-digits. Turning to our geographic markets. In North America, revenue growth was 5% in local currency, driven by growth in public service, health and utilities. These increases were partially offset by a decline in communications and media and high tech. Revenue growth was driven by the United States. In Europe, revenues grew 12% in local currency, led by growth in industrial, banking and capital markets and public service. Revenue growth was driven by Germany, Italy and France. In Growth Markets, we delivered 14% revenue growth in local currency, driven by growth in banking and capital markets, chemical and natural resources and public service. Revenue growth was led by Japan. Moving down the income statement. Gross margin for the quarter was 30.6% compared with 30.1% for the same period last year. Sales and marketing expense for the quarter was 9.9% compared to 9.4% for the second quarter last year. General and administrative expense was 6.8% compared to 7% for the same quarter last year. Adjusted operating income was $2.2 billion in the second quarter, reflecting an adjusted 13.8% operating margin, an increase of 10 basis points from operating margin in the second quarter of last year. Our effective tax rate for the quarter was 20.4% compared with an effective tax rate of 19.2% for the second quarter last year. Adjusted diluted earnings per share were $2.69 compared with diluted EPS of $2.54 in the second quarter last year. Days service outstanding were 42 days compared to 48 days last quarter and 41 days in the second quarter of last year. Free cash flow for the quarter was $2.2 billion compared to approximately $400 million last quarter, resulting from cash generated by operating activities of $2.3 billion, net of property and equipment additions of $108 million. Our cash balance of – at February 28 was $6.2 billion compared with $7.9 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the second quarter, we repurchased or redeemed 4.1 million shares for $1.1 billion at an average price of $273.55 per share. As of February 28, we had approximately $4.2 billion of share repurchase authority remaining. Also in February, we paid a quarterly cash dividend of $1.12 per share for a total of $708 million. This represents a 15% increase over last year. And our Board of Directors declared a quarterly cash dividend of $1.12 per share to be paid on May 15, a 15% increase over last year. Finally, turning to the 360-degree value we are creating for all our stakeholders, we are partnering with Save the Children to connect with new audiences and invigorate donors through fundraising and creative campaign excellence. So at the halfway point of fiscal ‘23, we are pleased with our results. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. I will start with the overall demand environment, which is more of the same. We believe that the ongoing volatility and uncertainty in the macro environment is making it even clearer to clients that they need to change more, not less. And that two of the five key forces of change that we have identified for the next decade, the need for total enterprise reinvention and the ability to access, create and unlock the potential of talent are critical to succeed in the near, medium and long-term. We see two common themes. First, all strategies continue to lead to technology, particularly cloud, data, AI and security. This is reflected in the latest market estimates, which are down slightly, but are still hovering around 5%. And second, companies remain focused on executing compressed transformations to achieve lower cost, stronger growth, more agility and greater resilience faster. We remain laser focused on pivoting to our clients’ changing needs and being relevant across the enterprise from the frontline to core operations to corporate functions. Our ability to advise, shape and deliver value-led transformations, leveraging the breadth of our services from strategy and consulting to our strategic managed services across all industries and geographic markets is what differentiates Accenture. Now, I will give you more color on the quarter and in particular, how total enterprise reinvention and talent are critical to our clients. For example, we are helping Shionogi & Co. Limited, a Japanese pharmaceutical company with a compressed transformation to improve its business process efficiency and create a more agile organization. We will enter into a joint venture with the company that will provide managed services capability to oversee back office functions such as human resources, finance and accounting, public relations, facility management, procurement and marketing. The joint venture will also be charged with the management of the pharmacovigilance function from safety management operations to post-marketing operations to regulatory compliance. As part of this transformation, we will upscale over 400 employees, enabling them to play a greater role in the growth and development of the wider business, hence demonstrating the value of all our services from strategy and consulting, our deep industry knowledge to technology and operations coming together to enable the clients transformation. I would like to take a moment to recognize Egawa-san, our Head of the Japan market unit and our extraordinary people in Japan for how they are consistently creating value for our clients with double-digit revenue growth for each of the past 5 years. As clients focus on building their digital core with a modern cloud-based infrastructure, our cloud business continues to grow very strong double-digits. For example, we are working with the state of Missouri to replace its legacy applications and infrastructure with a modern ERP in the cloud, introducing new capabilities in finance, supply chain management, human capital management, payroll and budgeting. As the current ERP system no longer fully meets the business needs of the state, they are looking for a modern system that is efficient, scalable and flexible, all delivered by a best-in-class implementation partner. This compressed transformation, one of the earliest and most complex ERP implementations for any state will help reduce operating expenses, provide opportunities for upskilling and improve customer experience and services. We are partnering with minority and women-owned businesses on this transformation and we will bring in apprentices, the program’s lifecycle part of our shared commitment with the state of Missouri to foster diversity and inclusion. With our cloud-first strategy, our approach has been to help clients migrate to the cloud and then partner with them on their journey to grow and innovate in the cloud. Our cloud growth is driven by both migration and clients who are moving forward on this journey, such as Enel, one of our largest utilities clients who has taken their mass migration to cloud a few years ago to the next level, changing their operating model, tools and talent and largely automating IT operations. We are now helping them accelerate the modernization of their application landscape, reduce greenhouse gas emissions by up to 80%, support a significant acquisition and divestment agenda and pivot to platform-based business model for integrated retail delivery beyond meter services, grid and renewable energy. Using cloud as their operating systems is helping this market leader manage increasing levels of complexity by bringing together data, AI and applications to optimize their operations and accelerate growth. A strong and secure digital core also is essential to total enterprise reinvention. We are seeing continued very strong demand for our security services, which experienced another quarter of very strong double-digit growth. We are working with Empresas CMPC SA, a Chilean pulp and paper company and a cybersecurity transformation of their plant operations. We will implement a security program across its 48 industrial sites focused on threat detection, management and response as well as governance and workforce training. Through our global and local Industry X capabilities, we will help strengthen the company’s cybersecurity expenses through continuous monitoring of its physical locations and equipment. We continue to lead in managed services, which experienced strong growth again this quarter at 16%. Managed services are strategic for our clients, because they enable clients to move faster, leveraging our digital platform expertise and talent as well as delivering cost efficiencies. And our clients are turning to Accenture because of the depth and breadth of our industry, functional and technology expertise that we bring together into the transformation journey. Our approach to managed services is to both run and transform and run and modernize. We deliver cost savings as table stakes. For example, we are partnering with the UK’s Department for Work and Pensions, which is responsible for welfare pensions and child maintenance policy to modernize its legacy systems, eliminating backlogs and delivering a better experience for citizens and employees. We developed a cloud-based intelligent optimization platform that combines robotic process automation, AI, analytics and machine learning to provide bots as a service to create the equivalent of a virtual workforce available 24/7. With routine tests now automated, the organization has already saved 2.4 million human hours, which can be reallocated to more complex higher value tasks. Let me pause to thank our global H&PS colleagues for their amazing contributions as evidenced by 14 consecutive quarters of double-digit growth. As our clients continue to prioritize cost optimization as well as growth in Vigilance, Song is more relevant than ever. In Song, which grew strong double-digits this quarter, clients are focused on more capital efficient growth that creates efficiency, drive short-term growth and optimizes existing assets with clear outcomes and shorter time horizons to keep up with the pace of change with customers and technology. We have moved quickly to help clients seize new opportunities in contact centers, not only for enhanced customer service, but also customer acquisition and growth. We are working with a global biopharmaceutical leader in North America to reinvent digital marketing at scale. Driven by data and using technologies integrated with SynOps, the company will be able to create, produce and deliver consistent world class content that informs and educates healthcare providers and patient communities around the world, helping to deliver innovative health services. We are working with the Prada Group, the Italian luxury fashion player, to offer its customers an entirely new customization experience through an online 3D configurator. Accenture Song created a digital twin of Prada’s iconic show called America’s Cup, which allows shoppers to fully customize it from material to color to trim across the overlay, lining, sole and other parts. With more than 50 million possible configurations, more than any web platform could handle, this innovative approach allows customers to see high resolution 3D models of their custom builds with the same quality and fidelity as a physical shoe. Song solution to online product customization is fully scalable to the cloud. It gives Prada the flexibility to apply the same strategy to other products, ensuring the outstanding experience that their shoppers expect. As I continue to move across the enterprise, industries and markets, I want to also highlight Industry X, which grew very strong double digits again this quarter, and which we believe is the next digital frontier where our digital engineering capabilities are advancing sustainability services. For example, we are working with Recharge Industries, a battery research and production company in Australia, to help design and engineer one of the world’s largest lithium-ion battery facilities. Once built, the facility will generate up to 30-gigawatt hours of storage capacity per year. Finally, moving to the metaverse and the ongoing tech revolution. We’ve talked about the importance of artificial intelligence in building the digital core for our clients. While generative AI has recently burst into the popular imagination, at Accenture, we’ve been working with the technology from its earliest stages and are already applying it at clients. For example, we’re working with a multinational bank to transform how it manages high volumes of post-trade processing e-mails every day. We are leveraging a generative AI solution as it is built to understand the context of e-mails with high accuracy. It automatically routes large numbers of e-mails, daily to relevant teams and draft responses with recommended actions and related information. Our work will help reduce manual effort and risk, boost worker efficiency and improve interactions with customers. And finally, on that note, we will release our Tech Vision 2023 on March 30. The 4th and 5th key forces of change we have identified for the next decade at a metaverse and ongoing tech revolution. And this year’s tech vision is particularly relevant and actionable as our clients face a rapidly changing landscape in which generative AI, metaverse cloud, science, tech and other technologies are driving more opportunities for change and reinvention. This year’s vision will explore how these technologies and more are blending the physical world and the virtual world into a shared reality, creating a huge opportunity for our clients and for Accenture. Now turning to our business outlook. For the third quarter of fiscal ‘23, we expect revenues to be in the range of $16.1 billion to $16.7 billion. This assumes the impact of FX will be about negative 3.5% compared to the third quarter of fiscal ‘22 and reflects an estimated 3% to 7% growth in local currency. For the full fiscal year ‘23, based upon how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately negative 4.5% compared to fiscal ‘22. For the full fiscal ‘23, we now expect our revenue to be in the range of 8% to 10% growth in local currency over fiscal ‘22, which assumes an inorganic contribution of 2%. We expect business optimization actions to impact fiscal ‘23 GAAP operating margin by 120 basis points and EPS by $0.96. We expect our anticipated gain on our investment in Duck Creek Technologies to impact EPS by $0.39. Our guidance for full year fiscal ‘23 excludes these impacts. For adjusted operating margin, we expect fiscal year ‘23 to be 15.3% to 15.5%, a 10 to 30 basis point expansion over fiscal ‘22 results. We expect our adjusted annual effective tax rate to be in the range of 23% to 25%. This compares to an effective tax rate of 24% in fiscal ‘22. We expect our full year adjusted earnings per share for fiscal ‘23 to be in the range of $11.41 to $11.63, or 7% to 9% growth over fiscal ‘22 results. For the full fiscal ‘23, we now expect operating cash flow to be in the range of $8.7 billion to $9.2 billion, property and equipment additions to be approximately $700 million and free cash flow to be in the range of $8 billion to $8.5 billion, $300 million higher than our previous guidance. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.1. Finally, we continue to expect to return at least $7.1 billion through dividends and share repurchases 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. Katie? Katie O’Conor: Thanks, KC. [Operator Instructions] Operator, would you please provide instructions for those on the call? Operator : [Operator Instructions] Our first question comes from the line of Tien-Tsin Huang with JPMorgan. Please go ahead. Tien- Tsin Huang : Hi, thanks so much. I had to ask, given the great bookings here, your confidence in being able to replenish those bookings as we look to the third quarter and ahead? I’m sure a lot of people are thinking what’s going on in the month of February and March as well. I know your guidance implies some reacceleration in the fourth quarter, but just curious about your ability to replenish on the bookings side? Thanks. KC McClure : Yes. Thanks, Tien-Tsin. So we do feel good about our pipeline even after our record bookings this quarter. And our sales outlook for the next quarter, Q3 is solid. We expect to have slightly lighter bookings than what we’ve had compared to the record quarter that we just had. Julie Sweet : And maybe just to add a little color. Look, as you can see in our bookings, there is just continued strong demand for the larger transformational deals, right? And the need to, in particular, build the digital core. And I’m personally working right now with clients across insurance, healthcare, consumer goods, banking and telecom, all of whom are very focused on how do we upgrade our – get rid of our technical debt, how do we build more resilience. They are trying to build digital products, but they have got really old systems. And so we remain in the early innings of building the kind of digital core that really need to transform every part of the enterprise. And so we continue to feel good, not just about our pipeline, but about the demand we’re seeing really rooted in our view that all companies are going to have to do total enterprise reinvention across the enterprise that it’s really a continuous cycle starting with a digital – a strong digital core. And there is a lot of work to do on building those cores out. Tien- Tsin Huang : Good. Glad to hear. Very encouraging. So given that, given both your comments and the optimization, I’m just trying to think about is it more playing offense versus defense? So I’m just trying to think about – I know a lot of your clients are going through similar optimization efforts as well. How does this one fit given that? And should we still think about this within the 10 to 30 basis points of typical margin expansion that we think about sort of philosophically? Or could this be incremental? KC McClure : Yes. So just let me answer the last part first, is you should view this as creating the room in our P&L to ensure that we can continue to deliver on that enduring shareholder value model, including the 10 to 30 basis points, which for a short period of time will be on an adjusted basis. So – and as you think about it, it is – I like that, is it offense or defense. It is offensive. I mean if you look at where we are today, right, we’ve got record bookings, a strong quarter of – strong view of the year, 8% to 10%, 91% chargeability. We’re going after structural cost, right, to ensure that we’re in a better position. As you know, we’ve been dealing with the difficult challenges of compounding wage inflation. And we’ve been doing that with pricing, but we’ve also been doing that with cost efficiencies and digitizing. And we have identified an opportunity to go after more structural costs to kind of create that resilience and that room in the P&L as we look forward. So very much in our view, getting ahead of and dealing with these structural issues that have been created over the last couple of years. Tien- Tsin Huang : Awesome. That’s great. Great results then. Thank you. Julie Sweet : Thank you. Operator : And our next question comes from the line of James Faucette with Morgan Stanley. Please go ahead. James Faucette : Great. Thank you very much. Wanted to follow-up on a couple of those items. First, can you talk a little bit about what you’re seeing around the actual conversion and decision cycles? Obviously, the bookings themselves speak well to being able to do conversions, but are we seeing any changes in the sales cycle times or the types of projects that customers may want to engage in? Julie Sweet : Well, let me just start with the type of projects. I mean what we’ve been seeing over the last several quarters is just a laser focus on cost, right? So most programs, clients want to see a shorter return on investments, right, more focused on cost. They love cost and growth, but it has to be, in most cases, a shorter return on the investment. At the same time, it’s important that not all industries are in the same place, right? So if you’ve got industries like, say, in the high-tech area, and some spots on retail, for example, cost optimization is very dominant, right? If you have – you’ve got some of the other less affected industries, say, insurance, energy, it’s – everyone wants to be more resilient and lower cost. But they are really trying to deal with their technical debt, they are thinking about growth, how do you reimagine the customer experience. And so I would say a common theme is that in this kind of an environment, everyone does want to be optimizing costs, but where they are focusing is different by industry is what I would say first. And then just to your first part of your question about are you seeing changes in decision making and I’d let KC talk to you about the yields in our pipeline because you all saw, in general, seeing a trend toward these larger deals. So there is – and we talked about this in the last couple of quarters, we’re seeing less of the smaller deals in SMC and to some extent, SI, particularly in North America, where we’re seeing more caution. North America had record sales this quarter. But in areas tending towards the bigger transformational deals, not the smaller SNC and to some extent, SI deals. And those – that transformational pipeline, which is our strategy, right, like if you think about it, what have we been trying to drive for the last few years? We want to be at the center of our clients’ business, we want to be able to be relevant, really help them transform and then be well positioned to continue to be that partner. And I would just say, Enel in my script, is a great example of that. I mean they are hugely innovative utility. They were very early in cloud. We help them get to the cloud. And now they are modernizing and once again being super innovative. That’s exactly the way we want to work with our clients, be their core and then be there for their next big transformation. Maybe, KC, if you want to just comment on the yields real quick. KC McClure : Yes, sure. No problem. So when we – let me focus really on consulting bookings because it is important to understand the impact of F&C and our consulting bookings and also how to what we’re doing in our larger transformation deals because they do convert to revenue at a slower pace. So as I mentioned in my script, I was very pleased with our SNC bookings and our overall consulting bookings, which were very close to the record that we had last year. And SNC participates, and is a critical part of winning the larger deals, which we have 35 clients over $100 million. And so what you’ll see is in SNC, you may see a conversion that’s a little bit slower than we typically have because we still do have some pressure in our smaller deals, particularly in North America. And so maybe I’ll just – how does that all work in terms of yield then? What that means for next quarter? As we look at SNC, I mentioned that we had a modest decline, a decline in mid-single digits this quarter. We think we will be in the same zone overall in Q3, and we’re going to look to reconnect with SNC growth in Q4. It may take us a little bit more time than that. But I just want to make that connection to your question as it relates to our very strong consulting bookings in SNC. They were definitely part of that discussion and clearly part of that the reason why we are able to get the 35 clients in a $100 million, but you will see that come into our P&L at a little bit slower conversion. James Faucette : Thank you. That’s really helpful. And then just quickly, on D&A, it seems like we’ve seen a little bit of a deceleration there. How are you thinking about D&A going forward? And what was inorganic contribution in the quarter and how should we think about that for the year? Thanks. KC McClure : So I’ll just maybe reiterate the contribution for the year. So we now see inorganic contribution to be about 2%. And acquisitions can be lumpy. And we – as you know, we can’t always really control the timing, but there is no change to our strategy. In any given year, you’ll hear us kind of go up or down a bit on the percentage of contribution. No change. James Faucette : Great. Thank you. Operator : And our next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Hi, guys. Good morning. Wanted to just ask about… Julie Sweet : Good morning. Bryan Keane : Good morning. I just wanted to ask about the communications, media and technology group that did come in at flat local currency and is kind of a standout versus the others. Can you just talk a little bit about what’s happening there and what the outlook might be? Julie Sweet : Yes. That’s primarily happening in North America where we’ve got comms and media and high-tech are more challenged, cutting back spending for sort of obvious reasons. And then our software and platforms business, which has been really a strong business for us for the last few years has – it’s still slightly positive, but has come down a lot, and I think for kind of obvious reasons that we’re all reading in the press. And so we do think this will last for a bit of time as you look at sort of some of the ways they are approaching spending in that. And – but it will eventually come back, and these are great companies. And we’re helping them in many places, but their spending is just lower right now. So that’s – I think long-term, we’re very positive. These are all great companies. And this why it’s so great that we’re diverse, right, that we serve so many and not just diversity in industries but in markets because you’re seeing a different picture, for example, in comms and media in Europe, where it was growing double digits last quarter in growth markets where it was positive. So the diversity of our business really plays to our strength and why we’re continuing to deliver strong financial results. Bryan Keane : Got it. Got it. And I was just trying to reconcile in my head the strong bookings, but the actions also taken to lower costs in fiscal year ‘24. What does that signal, I guess, for the demand environment in fiscal year ‘24? Should we expect slightly lower growth rates than typical as a result of the actions taken? Julie Sweet : No. I mean the actions, I can just kind of reground you on like what we’ve been saying, right, which is we’ve been achieving hypergrowth and there is been wage inflation like none of us have ever experienced and it’s compounding. And we’ve been addressing that through a combination of improved pricing, cost efficiencies, and so this is really us taking a step back and being able to more structurally address the impact of compounding wage inflation. So it’s a real positive for how we’re moving forward. And think of it as really being – creating more room in the P&L so that when you think about our enduring shareholder value proposition is we still expect next year to grow faster than the market. We expect to invest at scale in our business, to deliver 10 to 30 basis point margin expansion on an adjusted basis, to have a disciplined capital allocation, including a meaningful return to our shareholders. So that is a commitment – this is an offensive mood to say, yes, today, we’ve got great demand, we’ve got great utilization, and we can take out more structural costs to put us in a better position as we move forward. Bryan Keane : Okay. Great. That’s really helpful. Congrats. Julie Sweet : Thanks. Operator : And our next question comes from the line of Lisa Ellis with MoffettNathanson. Please go ahead. Lisa Ellis : Terrific. Thanks for taking my question. Maybe just a kind of follow-up on the sort of connecting the dots questions. I noticed that your headcount growth slowed a bit this quarter, up 6% year-on-year and was flat sequentially. Can you kind of connect the dots that side, what you are seeing and sort of what you’re thinking about on the hiring side with the fact that you have record bookings in the quarter and then typically, those two things kind of move a little bit more in tandem? Thank you. KC McClure : Yes, sure. Thanks, Lisa. So maybe I’ll just first start with just looking back over the last two previous quarters. We added 28,000 people in the previous quarters. So let’s first start there. And you’re right, Lisa, when you take a look at what we were able to accomplish this quarter, first of all, we had record bookings. We drove 9% – 9.3% revenue growth, and we had 91% utilization of our people, right? So we have the skills and all the people we needed to deliver to the demand in the market. And if I look – answering your question, looking forward, we sequentially did not add headcount from Q1 to Q2. We see that being about the same in Q2 to Q3. And then looking forward, based on the outlook that we have now, we do see that we would add additional heads in the fourth quarter. Lisa Ellis : Okay. Great. And then my follow-up is related to AI. Maybe this one is, Julie, for you. Just can you talk a bit about how you apply AI in your own operations? I know every time this topic kind of stirs up, there is this question of whether it’s a positive or a negative for the operations of IT services firms. Can you just talk about how you sort of applied internally and how you think about that over the long-term? Thank you. Julie Sweet : Sure. In fact, I was just at a client this week where we are helping them really transform their whole IT department. And one of the things they want from us is our myWizard platform, which is a great way of explaining how over the last several years, we have built a platform that integrates the best-in-class technology. So, we didn’t write our own code, right. We use the best technologies. And the way it uses AI, for example, is that when a ticket comes in to address something, an IT issue, AI looks at it, identifies whether or not it’s been a problem solved before, in some cases, can solve the problem, in other cases, routes it to the right people. And then it learns from every ticket. So, in the past, when we have talked about – with you about why is it – how do you think about revenue and people, we said, look, we have already been breaking that for years now because we are using so much technology and AI in how we are delivering all of our technology jobs. The same thing is true, for example, with testing, which is incredibly automated, using different technology, including AI. We are continuing to use AI in the way we run our business, for example, in how we look at our accounts payable and receivables and finding ways where we can optimate to have better efficiencies there. We are using it today in the way we are delivering our consulting services as well and definitely very much so in how we look at sales and being able to predict based on lots of factors. Should we be running after the sale or not, or can we show the data that these – this is not the right kind of sale, we are not the right fit. So, we have increasingly been using AI, both in how we deliver services as well as in how we run ourselves. Of course, our SynOps platform for operations is also AI-enabled. It’s one of the reasons why clients turn to us because it’s helping them digitize faster. They are not having to build these things. So, long-term, we see these technology changes, things like generative AI is playing to our strengths because to use these technologies, it requires deep understanding of the industry, the use cases, the process changes. When people talk about the new kinds of generative AI, which we are super excited about, being like a co-pilot to human beings, the entire process has to be changed in order to make that work. You have got to up-skill the people and you have to be able to do all of that in a very responsible way. So, we are already working with. There has been a lot of demand to understand this. And in understanding it, understanding actually how hard it is to be able to implement at scale in an enterprise versus, I am assuming you are – we are all having fun playing with it, but how you build that into an enterprise is very different and a great opportunity, and we are partnering with all the major players to help them take the technology go from technology to implementation to impact. Lisa Ellis : Thank you. Julie Sweet : Thanks Lisa. Operator : And our next question comes from the line of David Togut with Evercore ISI. Please go ahead. David Togut : Thank you. Good morning. Could you delve into demand trends in the financial services vertical in a little greater depth, especially given the evolving banking crisis we have seen in the last month or so, particularly with some of the regional banks struggling? And maybe as part of that, if you could just remind us of your profile within bank-related IT services, smaller banks versus regionals and money centers. Julie Sweet : Sure. As a client base, we skew towards the larger banks across all of the markets. So, we don’t comment on individual clients, but we don’t have any big exposure to kind of the smaller regional banks and in general. So, as you sort of think about the stepping brake, obviously, the developments on the banks for the – are still early in the last couple of weeks. So, as I talk about demand trends for our clients, which are generally the bigger banks, a couple of things really stand out. So, first of all, there is a lot of focus on their technical debt, because the banks, a lot of them are still in the mainframe. Our mainframe practice really across industry has growing like gangbusters right now as clients across the industry are really having to take on some of that harder technical debt, which they need to do because the more and more they digitize their services, which is a continuing trend in financial services, if the systems behind it aren’t agile, then it can take a lot of time to introduce new services. You have got to – oftentimes, we will have multiple systems. You will have to test things. You can’t go as fast. And so the banks are kind of reaching their limits in terms of what they can do without touching their core. So, we expect the sort of addressing the core to be a really important driver. We are seeing, in asset management, more and more views – more and more companies in asset management, really digitizing. They had been kind of slower behind the banks. And then insurance, we are working with leading insurers across the world who not only are kind of trying to catch up because banking was ahead of insurance, but finding sort of new and exciting opportunities on how to use data, in particular, to grow their business, how to transform their experience and claims. So, financial services which covers banking, capital markets and insurance, we continue to see as a vibrant area. Where things are slowing down a bit in the U.S. where we have been a big player is in integration. We will see that might pick up again. Let’s just see how all of this shakes out. But that has slowed down for a bit. Hopefully, that gives you some color. David Togut : It does. Thanks so much. Operator : Our next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead. Jason Kupferberg : Good morning. Thanks guys. I just wanted to ask about Q3 bookings. If you can discuss consulting versus managed services, just expectations there? I mean I think the year-over-year comparison for consulting at least gets a bit easier. KC McClure : Yes. Thanks Jason. I am not going to comment specifically on kind of individual breakout of the bookings. But maybe I will just reiterate what I mentioned to Tien-Tsin. So, we had record bookings this quarter. We do see that next quarter. We will have lighter bookings than what we had this quarter in terms of the record bookings. Overall, what you can see, Jason, you know us well, is that the mix right now is much more favored halfway through the year to managed services, all the reasons that Julie talked about. We were really pleased with consulting this quarter that did – we thought it was going to be strong, and it came in even stronger. And so that, we are very encouraged by that, and we do have a strong pipeline, and we continue to see solid bookings for Q3. Jason Kupferberg : Okay. Understood. And then just on the cost side, what’s the estimated savings from the cost takeout program? And I know the charges will aggregate to $1.5 billion, but I just wanted to understand kind of what the fully annualized run rate of savings is? And are you essentially reinvesting the savings? I mean I know at least for this year, we are not changing the underlying margin guidance. So, just wanted to get a picture of how much of this is being reinvested, or are you essentially just offsetting some other headwinds around wage inflation, etcetera? KC McClure : Thanks for the question. Let me just first start with FY ‘23. So, the actions that we are taking are not about FY ‘23. They are about FY ‘24 and beyond. So, in terms of what we will do with those savings, it really is going to depend, Jason, on how the market develops, the growth opportunities that we have next year. And as Julie said, the key part of what we are really focused on is just going to give us more room to continue to execute our enduring shareholder value proposition, what she mentioned. And I know you know that. Jason Kupferberg : Yes. Alright. So, just… Julie Sweet : Keep your model – to be clear, keep your model 10 basis point to 30 basis point adjusted margin expansion. We are going to invest in our business and we are going to grow faster than the market. Jason Kupferberg : We love the consistency. Thank you. Julie Sweet : Thanks. Operator : And our next question comes from the line of Darrin Peller with Wolfe Research. Please go ahead. Darrin Peller : Hey. Thanks guys. I mean when you put the pieces together with the bookings we are seeing and the actual changes in the efficiency, it really does sound like we are finally seeing more of a divergence in linearity between headcount growth and bookings capabilities and revenue contribution. So, I mean I know you mentioned AI, obviously, is a big theme. But is there other factors that we can point to that are structurally part of the model now, or is it a function of the mix type of bookings or anything else? KC McClure : Yes. Maybe I will just talk a little bit about what you are seeing in terms of headcount, Darrin, and what we are recording in revenue in terms of how we are generating our revenue. And Julie, if you want to add in, you certainly can. But in terms of what you are seeing is we have been very focused on hiring, balancing our supply, demand to what we need to both sell and drive the revenue to meet our client demand and continue to take market share. And part of what you are seeing throughout the year is we have been continuing – you have heard us talk about us really focusing on continued strong pricing. Again, reminder, that when we talk about pricing, it’s the margin on the work that we sold. And that has been improving over the last five quarters. It’s not stable, which we are really happy with. And so some of that is part – there is a part of that that’s helping to drive our revenue production as well. Julie Sweet : And I would just say, a lot of its mix, right. If you have longer transformational deals like the numbers of people that you need to drive are different. So, I wouldn’t say there is some big, wait a minute, we have got some new inflection point where you have disconnected more. As I talked about earlier, we have been disconnecting to some degree, for a while now, but there is no big change in that perspective. Just as we have executed our strategy. And I think it’s so important to understand that it has been a deliberate strategy to say we want to do transformational deals. We want to take our SNC people who have deep industry and functional knowledge, put them together with our technology people to do either big implementations, right, that are changing the digital core or transformations that are coupled with managed services and just how that works out. And so while we love when the economy is booming and SNC and the small deals are also booming, the strategy is to be at the core so that we continue – we help them with one big project, we understand their company and met it more. We take them on the next big project, and we are really getting that kind of stickiness in our relationships. And so we will kind of deal with the sort of softness in the smaller deals. But over time, this is exactly what we want to do. And in fact, if you think about this year, consulting – last quarter, we thought consulting this year would be mid-single digits to high-single digits. We now see it as mid-single digits for the year, and we are fine with that, right, because that’s about kind of lower SNC and SI smaller deals. North America in December, we thought it was going to be mid-single to high-single digits. We now see that as the mid-single digits for the year. Again, it’s because sort of the caution that’s impacting the smaller deals, record sales, great large transformational deals, and that’s just going to how it deals with. And that’s why, as KC said before, SNC, we are going to see a very similar performance next quarter probably, and it may take a little bit longer to reconnect with growth. But remember, we don’t look at that as separate. We see SNC as a competitive differentiator for these larger transformational deals, which is our strategy. Darrin Peller : That actually makes a lot of sense. One follow-up on that and related is the cyclicality of business is it’s not surprising, you would see some of the smaller deals get impacted first by pause or concern among enterprise spending. When we think about the larger transformational side, the pipeline is longer. The sales cycle is longer there. So, having that strong still is probably not – if you do – given how well you guys execute, it’s not shocking, I guess. But on the same side, the magnitude of strength was better than I think we expected. And so looking ahead, what in your experience, cyclically, when do you see that sort of slow down if the economy does take a step down? Julie Sweet : Look, it’s never say never I guess the economy slowing down and what we do it, but I really stay focused. We try to stay focused on our strategy being relevant across cycles, so – and basically growing stronger than the market. And so the market is still faster than market, it’s still kind of hovering around 5%. And so that’s what we kind of watch more than the economy because technology is so core to every strategy that when the economy goes down, what are you seeing, well, people are saying, we got to optimize. We have got a lower cost. We have got to do managed services. So, we watch more – the economy can kind of do an uplift, right. But what we are trying to always do is grow faster than the market. So, that’s the big indicator for us. And you see it’s a very strong market. And it makes sense. I mean I will just tell you like the amount of the just technical debt across these industries and how much work to do, we are still very much in early innings of what needs to be done to take advantage of cool things like generative AI. You got to have data. Darrin Peller : Yes. Awesome. Alright. Thanks Julie. Thanks KC. KC McClure : Thank you. Operator, we have time for one more question and then Julie will wrap up the call. Operator : Thank you. And that last question comes from the line of Bryan Bergin with TD Cowen. Please go ahead. Bryan Bergin : Hi guys. Good morning. Thank you. I wanted to ask on consolidation activity. And whether – how much of this has helped to really offset some of the areas that have pulled back in the shorter cycle work? And I guess has that picked up meaningfully? And if you were to step back and look at those 35 deals over $100 billion, can you give us a sense of the mix of those that might include an aspect of vendor consolidation? Julie Sweet : Vendor consolidation is certainly a part of what’s going on in the market, but there are some industries that did that a long time ago in some clients. So, I am not – I don’t have the numbers off hand of what we have in our 35 clients. But I am not seeing that as sort of the big driver of our growth. Right now, we are often telling clients who like basically need to get revenue faster, but more – it’s interesting, the vendor consolidation for many of our clients is less about cost and more that a lot of the industries, like say, consumer goods, telecom where they have lots of different countries. It’s very hard to move to a platform business and sort of build things consistently if you have a ton of different vendors, right, because you want the stuff done in the same way. And so the – it’s interesting the vendor consolidation play for many is more about how do we actually implement a strategy of kind of moving to global platforms being able to have a single approach to data, super hard to do if you have got 50 vendors to 100 vendors. So, I would just say it’s tied to exactly the kind of strategies that we are advising clients on, but no big theme for us. Bryan Bergin : Okay. And then just a quick follow-up, with the record bookings in managed services, any near-term margin impacts we should consider as you ramp up and invest in those? Any considerations on adjusted operating margin cadence as you go through the second half? KC McClure : Yes. No, there is nothing unusual. Bryan Bergin : Alright. Thank you. Julie Sweet : Thank you. So, in closing, I want to thank all of our shareholders for your continued trust and support in all our people for what you are doing for our clients and for each other every day. Thanks everyone for joining. Operator : And ladies and gentlemen, today’s conference will be available for replay after 10 :00 a.m. Eastern today through June 22nd. You may access the AT&T replay system at any time by dialing 1-866-207-1041 and entering the access code 4319130. International participants may dial 402-970-0847 and those numbers again are 1-866-207-1041 and 402-970-0847 and entering the access code 4319130. That does conclude your conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,023	2	2023Q2	2023Q3	2023-06-22	11.562	11.677	12.478	12.607	16.25	25.14	24.9	Operator : Thank you for standing by. Welcome to Accenture's Third Quarter Fiscal 2023 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Katie O’Conor, Managing Director, Head of Investor Relations. Please go ahead. Katie O’Conor: Thank you, operator, and thanks everyone joining us today on our third quarter fiscal 2023 earnings announced. As the operator just mentioned, I am Katie O’Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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 third quarter. Julie will then provide a brief update on our market position before KC provides our business outlook for the fourth quarter and full fiscal year 2023. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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 the call. During our call today, we will reinforce 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 Julie. Julie Sweet : Thank you, Katie and thank you to everyone joining today, and thank you to our people around the world for their dedication and commitment, which is how we are able to consistently deliver 360 degree value for all our stakeholders, our clients, our people, our shareholders, our partners and our communities. Turning to the quarter, I will start with the financials. While the macro environment continues to be uncertain overall, in Q3 we delivered solid revenue and sales with very strong profitability and very strong free cash flow, while continuing to significantly invest in our business. Now getting into the highlights, we had bookings of $17.2 billion, including 26 clients with quarterly bookings greater than $100 million, bringing the total year to date 85, which is 11 more than the same time last year. We delivered revenues of $16.6 billion, representing 5% growth with North America growing 2%, Europe at 7% and growth markets at 9%, all in local currency, bringing us to $48.1 billion of revenue at 10% growth fiscal year to date. Revenues were impacted by lower than expected small deal sales, especially in strategy and consulting and systems integration and lower than expected results in the communications, media and high-tech industry group for the quarter. Excluding [CMT] (ph), our business grew 8% globally, 7% in North America, 9% in Europe and 10% in growth market in local currency. We expanded adjusted operating margin by 20 basis points, grew adjusted EPS 14% over last year and delivered free cash flow of $3.1 billion. And over the past 11 quarters we have operated at 91% or higher utilization, leveraging our digital enterprise to connect our sales, staffing, hiring and skill needs to make proactive real time decisions. We are on track with the business optimization actions to lower costs in fiscal 2024 and beyond, while continuing to significantly invest in our business with five acquisitions in strategic areas this quarter, bringing the total investment in acquisitions year to date to $1.3 billion. We invested in Cloud, Data and AI with the acquisition Nextira in North America, Objectivity in the UK and Einr in Norway. We also invested in sustainability with the acquisition of Green Domus in Brazil and in modern ERP services with Bourne Digital in Australia. We continued to take market share growing about two times the market. Now turning to other aspects of the 360 degree value we delivered this quarter. We continue to invest in learning for our people with 9 million training hours in the quarter, representing an average of 13 hours per person, giving them the skills to grow as our clients' needs evolve. We're incredibly pleased that we were recognized as a top 10 place to work in seven countries. Argentina, Brazil, Chile, India, Mexico, the Philippines and the U. S. Collectively, these countries represent nearly 70% of people. Vibrant communities are important for our business success and digital scaling helps ensure vibrant communities thrive. In collaboration with L'Oreal and our NGO partner, [Shambu] (ph) Foundation, we are supporting women in India to build digital literacy skills alongside the technical skills needed to access jobs in the beauty industry. Together, we have collectively created sustainable livelihoods for 2,500 women across 10 states in India, accelerating equality, delivering social impact in the community and continuing our commitment to embed diversity and inclusion in everything we do. Finally, this year we are proud to earn the number 22 position on [Brand Z's] (ph) prestigious top 100 most valuable global brands list, our highest rank today. Over to you KC. KC McClure : Thank you, Julie, and thanks to all of you for taking the time to join us on today's call. We are pleased with our third quarter results and we are on track to deliver or exceed all aspects of our guidance provided in September on an adjusted basis. Now let me summarize a few of the highlights for the quarter. Revenues grew 5% local currency, driven by high single or double digit growth in seven of our 13 industries. While we've been highlighting the pressures in our CMT industry group all year, this quarter the revenue was lower than expected with a decline of 8% in local currency. We delivered adjusted EPS in the quarter of $3.19, reflecting 14% growth over EPS last year. Adjusted operating margin was 16.3%, an increase of 20 basis points over Q3 last year and includes continued significant investments in our people and our business. Finally, we delivered free cash flow of $3.1 billion and returned $1.5 billion to shareholders through repurchases and dividends. Year to date, we have invested $1.3 billion in acquisitions, primarily attributed to 20 transactions. With those high level comments, let me turn to some of the details, starting with new bookings. New bookings were $17.2 billion for the quarter, representing growth of 4% in local currency with an overall book to bill of 1.0. We were very pleased with our 26 clients with quarterly bookings over $100 million. Consulting bookings were $8.9 billion with a book to bill of 1. Managed services were $8.3 billion with a book to bill of 1.1. Turning now to revenues, revenues for the quarter were $16.6 billion, a 3% increase in U.S. dollars and 5% in local currency, reflecting a foreign exchange headwind of approximately 2.5% compared to the approximately 3.5% headwind provided in our business outlook last quarter. Consulting revenues for the quarter were $8.7 billion, a decline of 4% in U.S. dollars and 1% local currency. We see the same level of consulting decline in Q4. Managed services revenues were $7.9 billion, up 10% in U.S. dollars and 13% in local currency. Taking a closer look at our service dimensions, technology services grew high single digits. Operations grew double digits and we expect high single digit growth in Q4. Strategy and consulting declined high single digits this quarter and we see declines continuing in Q4. Regarding our market share, we extended our leadership position with growth estimated to be about two times the market which refers to our basket of publicly traded companies. Now as a reminder, we assess market growth against our investable basket which is roughly two dozen of our closest global public company competitors, which represents about third of our addressable market. We used a consistent methodology to compare our financial results and theirs, adjusted to exclude the impact of significant acquisitions through the date of their last publicly available results. Turning to our geographic markets. In North America, revenue growth was 2% in local currency driven by growth in Public Service for our U.S. federal business, Health and Utilities. These increases were partially offset by declines in Communications and Media, High-tech, Software and Platforms and Banking and Capital Markets. In Europe, revenue grew 7% local currency, led by growth in Banking and Capital Markets, Industrial and Public Service. Revenue growth was driven by Italy, Germany and France. In Growth Markets, we delivered 9% revenue growth in local currency, driven by growth in Public Service, Chemicals and Natural Resources and Banking and Capital Markets. Revenue growth was driven by Japan. Moving down the income statement. Gross margin for the quarter was 33.4% compared with 32.9% for the same period last year. Sales and marketing expense for the quarter was 10.5% compared to 10.3% for the third quarter last year. General and administrative expense was 6.5% compared to 6.5% for the same quarter last year. Before I continue, I want to note that in Q3 we recorded $347 million in costs associated with the business optimization actions we announced last quarter, which decreased operating margin by 210 basis points and EPS by $0.42. This quarter, we also recognized a gain in our investment in Duck Creek Technologies, which impacted our tax rate and increased EPS by $0.38. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.7 billion in the third quarter and adjusted 16.3% operating margin, an increase of 20 basis points from operating margin in the third quarter of last year. Our adjusted effective tax rate for the quarter was 24% compared with an effective tax rate of 27.1% for the third quarter last year. Adjusted diluted earnings per share were $3.19 compared with diluted EPS of $2.79 in the third quarter last year. Days source outstanding were 42 days compared to 42 days last quarter and 44 days in the third quarter of last year. Free cash flow for the quarter was $3.1 billion, resulting from cash generated by operating activities of $3.3 billion net of property and equipment additions of $142 million. Our cash balance at May 31 was $8.5 billion compared with $7.9 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the third quarter, we repurchased or redeemed 2.8 million shares for $789 million at an average price of [$279.65] (ph) per share. As of May 31, we had approximately $3.5 billion of share repurchase authority remaining. Also in May, we paid a quarterly cash dividend of $1.12 per share for a total of $708 million. This represents a 15% increase over last year. And our Board of Directors declared a quarterly cash dividend of $1.12 per share to be paid on August, a 15% increase over last year. So in closing, we remain committed to delivering on our long-standing financial objectives, growing faster than the market and taking share, generating modest margin expansion and stronger earnings, while at the same time, investing at scale for long-term market leadership, generating strong free cash flow and returning cash to shareholders. Now let me turn it back to Julie. Julie Sweet : Thank you, KC. As we look at demand in our larger deals, we continue to see two common themes that I've highlighted before. First, the rapid rise of generative AI interest among our clients highlights yet again that all strategies lead to technology, particularly cloud, data, AI and security. And second, companies remain focused on total enterprise reinvention as they execute compressed transformation to achieve lower costs, stronger growth, more agility and greater resilience faster. Now let me give you more color on the quarter to bring this to life. Starting with the digital core, our cloud momentum continues with very strong double-digit growth in Q3 as clients priorities building a strong and secure foundation for reinvention. We have been working with ENI, a global energy company for more than 30 years. Now we are helping them as they continue their hybrid cloud transformation and embark on a total enterprise reinvention strategy with a focus on sustainability, digital transformation and security. We are managing their IT infrastructure and telecommunications integration and helping implement new operating models, all hosted in the ENI green data center, one of the largest data bunkers in the industry to securely hold the company's data. The ENI green data center houses one of the most powerful nongovernmental supercomputers in the world, enabling the highest use of data across the value chain from exploration and production to the energy of the future. New operating models will help exploit the full value of data, AI and cybersecurity for faster adoption of new business processes. This transformation is the first step toward creating a secure digital core that will accelerate ENI's energy transition, drive innovation in AI and R&D and build even greater resilience. Clients are also working with us to do multifaceted compressed transformation that utilize all of our deep industry and functional expertise in our SNC services, along with our outstanding technology services. We are helping DuPont, a global multi-industrial specialty products company with a compressed transformation to standardize their finance processes and achieve operational excellence. Building on our trusted relationship of over 35 years, we are now supporting our client with its strategic pivot to innovation-based growth across electronics, sustainable water and protection solutions, industrial technologies and next-generation automotive. We've been supporting their transformation to an agile cloud-based IT infrastructure to maximize data access, drive efficiency and modernize their landscape. Our work with DuPont is focused on achieving greater resilience, reducing costs and increasing revenue growth and shaping its portfolio through M&A with industry-leading innovation for long-term success. With companies expanding their digital footprint and cyber risk widening security continues to rise in importance as a fundamental part of the digital core with very strong double-digit growth in Q3. We are working with a food and beverage company to strengthen their cybersecurity and prevent vulnerabilities along the supply chain. Building on previous operations transformation work, we are now providing managed security services, which will cover perimeter security, detection and response as well as threat intelligence and monitoring dark web activities. We also will provide day-to-day identity, data and privacy management, helping provide a holistic security approach for our client. We're helping a global universal bank future-proof their cryptographic landscape and corresponding risks for over 1,000 applications, procedures and data. Based on the analysis, we will develop and implement an end-to-end mitigation strategy, including evaluation of solution vendor strategies, mitigation principles as well as change management procedures. We will also design and implement post-quantum methods and new architecture blueprints, which will help scale the solution, all to help the bank achieve post-quantum computing readiness. Our Managed Services continued to grow double digits in Q3, demonstrating the relevance of our approach to run, digitize and transform our clients' operations. We're providing a global health care and insurance company with managed services to help run its complex claims and membership processes. As part of our long-standing relationship with the company, we will improve the efficiency and quality of these tasks and simplify the customer journey, ensuring members can easily access the support they need when they need it. Its employees will now have more time to focus on boosting customer satisfaction by better serving its millions of customers around the world. A new cost solution has also been introduced to determine fair and accurate pricing for the company when purchasing services and products from vendors to reduce costs across the business. We recently worked with a major media brand to launch a streaming platform that will help attract new subscribers, expanding their content portfolio and power-targeted broadcasting and advertising offerings, all while lowering costs. We helped engineer aspects of the new platform from the content supply chain to the player experience, ensuring that customers have a seamless viewing experience across all devices and platforms and enabling the company to use data insights to continually enhance its platform. We delivered the program as part of a managed services arrangement, demonstrating the industry and engineering innovation that we bring to help clients reinvent their business with cloud, data and AI. As clients continue to reimagine and prioritize customer experience, Song experienced strong double-digit growth again in Q3. We are partnering with Virgin Media O2, a British media and telecommunications company to reimagine their customer experience. Accenture Song will design a new, more predictive and personalized customer journey, enabled by an AI-powered cloud-based digital core. Customer care journeys will be omnichannel, combining customer calls, chat and instant messaging to increase first-time resolution and upselling, leading to greater customer satisfaction. We also will deploy our managed services capabilities to support contact center activity using AI to provide timely agent assistance and route calls intelligently to drive precision and reduce call volume. Our work will help build brand loyalty supporting Virgin Media O2's mission to be a more customer-first business. We see continued demand for our Industry X capabilities, which grew strong double [indiscernible]. We are working with one of the world's leading consumer products companies on a transformation of its manufacturing practices to achieve energy savings. We are developing a comprehensive program to collect and analyze energy consumption data from their production plans and use data-driven analytics to identify energy savings and greenhouse gas reduction opportunities. We are also helping to track energy efficiency gains and deliver value through operational improvements in the manufacturing process. As clients progress on their total enterprise reinvestment journeys, talent is at the forefront. We are working with an international consumer goods and services provider in the European market on a digital transformation of its core human resources organization and talent acquisition processes. We will design and implement an approach that includes program management, process design, training and development and additional services. Together, we will create greater efficiencies in the human resources function, leading to a data-driven culture focused on better employee experiences. Now stepping back, our strategy is to be at the center of our clients' business and help them continuously reinvent themselves to reach new levels of performance and to set themselves apart as leaders in their industries. And our clients are at different starting points. All are interested in AI, and particularly generative AI. But most recognize the work ahead of them to get their data, people and processes ready for AI. To reinvent requires a strong modern digital core. And as they embark on this journey, clients are looking to us for unmatched global scale, deep industry and functional knowledge, breadth of services from strategy and consulting to technology to managed services. With that context, I want to turn to generative AI and AI more broadly. No previous technology wave has captured the intention of leaders and the general public as fast as gen AI. We are now embarking on the age of AI, and companies will need to reinvent how they operate with AI at the core. And it is also early. Think of it as the cloud over a decade ago. Foundation models and products based on them are still maturing with many products announced but fewer at the general availability stage and ready for wide deployment. And with our position as the largest partner with most of the major technology companies, we are at the center of helping our clients navigate their choices in the evolving landscape. We've been investing in AI for years. And so while it is early days, we see generative AI as a key piece of the digital core and a big catalyst for even bigger and bolder total enterprise reinvention going forward. In fact, in a survey of global executives that we completed just last week, 97% of executives said gen AI will be transformative to their company and industry and 67% of organizations are planning to increase their level of spending in technology are prioritizing investments in data and AI. Our approach to AI is clear. Just as we have successfully done with cloud, we are investing to take an early lead and position for the opportunity ahead. Last week, we announced a $3 billion investment in AI, a big step to accelerate our clients' reinvention journey, which includes us doubling our data and AI workforce from 40,000 to 80,000 strong, including the expansion of our center for advanced AI that today has over 1,600 generative AI experts bringing new assets such as our AI navigator for enterprise to life and developing new GenAI-powered industry solutions. And across this all, we are leading with responsible AI to be the most trusted source in helping our clients mitigate the risks as they drive value. And this isn't just about tomorrow. We have sold over 100 generative AI products -- projects over the last four months. Let me give you a flavor of these across a few industries. We are working with Mitsui Sumitomo Insurance, a Japan-based subsidiary of MS&AD Insurance Group Holdings to improve customer service by using generative AI and simplify operations for accident response. The generative AI solution will draw from the company's knowledge base, including policy causes and related laws and regulations, which will generate appropriate response plans in a timely manner, dramatically improving the accuracy and speed of explanations to customers. We're working with a global broadcast company to explore how generative AI can be used to drive audience engagement and growth through deeper and more personalized customer experiences. Together, we recently launched testing that leverages generative AI and large language models to explore how we can automatically create content for the company's customer-facing platforms. The content will help enhance engagement, grow the consumer base across new coverage areas and channels. We believe it will demonstrate how generative AI can be used to create content at scale for a wide variety of experiences and events. We are working with [Linda Basel] (ph) Industries, a leader in the chemicals industry to increase its enterprise data and analytic capabilities and help unlock new value. We will develop a strategic data-led digital transformation program across multiple parts of their business and embed new capabilities in areas like sustainability, customer data, digital manufacturing and generative AI to drive more insightful and predictive decision-making. Companies are coming to us for help with the strategy in the business case to understand how and where to apply AI, and gen AI specifically, to get their digital core in shape, to help assess which ecosystem partners and models to use, to rewire their processes to be AI-driven, to upgrade and reskill their talent with new ways of working and to navigate the risks and challenges responsibly. In short, we believe clients need our full range of services and we are well positioned to be the leading trusted AI partner for the enterprise as they move from exploration to experimentation to reinvention. Over to you, KC. KC McClure : Thanks, Julie. Now turning to our business outlook. For the fourth quarter of fiscal 2023, we expect revenues to be in the range of $15.75 billion to $16.35 billion. This assumes the impact of FX will be about flat compared to the fourth quarter of fiscal 2022 and reflects an estimated 2% to 6% growth in local currency. For the full fiscal 2023, based upon how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately negative 4% compared to fiscal 2022. For the full fiscal 2023, we now expect revenue to be in the range of 8% to 9% growth in local currency over fiscal 2022, which assumes an inorganic contribution of about 2%. We continue to expect business optimization costs of $800 million in fiscal 2023 to reduce EPS by $0.96. The gain on our investment in Duck Creek Technologies will increase EPS by $0.38. Our guidance for full year 2023 excludes these impacts. For adjusted op margin, we now expect fiscal year 2023 to be 15.4%, a 20 basis point expansion over fiscal 2022 results. We now expect our adjusted annual effective tax rate to be in the range of 23.5% to 24.5%. This compares to an effective tax rate of 24% in fiscal 2022. We now expect our full year adjusted earnings per share for fiscal 2023 to be in the range of $11.52 to $11.63 or 8% to 9% growth over fiscal 2022 results. For the full fiscal 2023, we continue to expect operating cash flow to be in the range of $8.7 billion to $9.2 billion. We now expect property and equipment additions to be approximately $600 million and free cash flow to be in the range of $8.1 billion to $8.6 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $7.1 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so we can take your questions. Katie? Katie O’Conor: Thanks, KC. 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. Operator, would you provide instructions for those on the call? Operator : [Operator Instructions] We'll go to the line of Lisa Ellis with MoffettNathanson. Lisa Ellis : Hey, good morning. Thanks for taking my question. Let's dive in on the Strategy and Consulting. I know it was a high single-digit decline this quarter just looking back at your comments from last quarter. I think that came in a little bit softer than you expected, but then also called out many new projects coming in related to gen AI and other technologies. Can you just talk a little bit about kind of what's changed, what that evolution looks like and kind of what's your confidence level in the time horizon that we'll see Strategy and Consulting improve over the next couple of quarters? Thank you. Julie Sweet : Sure. Thanks, Lisa. So I'll first give some color on that. So, the big difference in our expectations from last quarter and where we ended up really was all in the small deals. And we saw a further -- they came in lower than, and we saw that extend to Europe and the Growth Markets. Now that was both in S&C and systems integration. But that's the big reason that we have a difference in sort of where we thought where we would be this quarter. Now our job is to continue to pivot to higher -- where there is higher growth, and we're working on that in digital manufacturing, supply chain, data and AI. But that will take a little time. And what we're seeing is that, there's a lot of extensions going on in small deals, but it's the newer small projects, while at the same time, we continue to have very strong bookings and interest and huge opportunity in transformation. So I think our clients are kind of holding back on the small stuff and doing the bigger stuff, which obviously converts to revenue differently. But you see where Strategy and Consulting makes a big difference there, like in the DuPont example that I gave in the script where you have to have so much expertise in the industry, as well as the functions, as well as technology. What that means is that, it is going to take a little while for the turnaround. And we're not going to go to next year because we really want to see how Q4 evolves, and KC will give a little bit of color on how we are thinking about our Q4. And what I would also say is that, things like gen AI are a big opportunity, but it is early. So we did in the last four months 100 projects. That represents about $100 million in sales. That's kind of the average size of those projects where it is. And so, we're going to continue to pivot there, but it just takes a little bit of time. So why don't I let KC give you a little color on how we're thinking about Q4. KC McClure : Yes. Great. Thanks, Julie. Yes. So let me just kind of maybe step back and look at Q4 and the overall guidance for the full year. So first, I did mention this, but I just want to -- just reiterate that we are on track for our business optimization actions. So we're going to do about $800 million of cost for the full year 2023. Additional color is that, for Q4, as we look at bookings, we think they'll be about the same as what we did in Q3 of this year and have about the same complexion. Julie talked a bit about small deals. What I will tell you in terms of our revenue guidance for Q4, which is 2% to 6%. At the top end of our revenue guidance, that reflects some improvement in small deal performance, while the bottom end allows for some further deterioration. And we commented also in our scripts about CMT. And so, within our overall range of 2% to 6%, we do allow for CMT to get a little bit worse. And then lastly, to bring it on home as it relates to North America, because these two factors do impact North America performance in the context of our overall 2% to 6% range for the quarter. North America, which was 2% growth this quarter, it would likely be flat around the midpoint of our guidance range and it reflects a slight decline at the bottom of our range. And as Julie mentioned, obviously, we will give you more color, as I always do on next year when we get into September, and we'll see how Q4 plays out. Lisa Ellis : Terrific. Thank you. And then maybe for my follow-up, maybe a more strategic question. I mean, Julie, you talked a lot about gen AI in the prepared remarks, particularly around the revenue opportunities that you're seeing in your clients. But can you give your view on how you see gen AI impacting the IT services industry overall? Like a lot of people make an analogy to sort of the impact of offshoring on the industry and sort of other big sort of step function changes to the operations and the kind of composition and the way IT services is done. Can you kind of give your latest perspective on that, how you see it affecting Accenture and your industry more broadly? Thank you. Julie Sweet : Sure. Yes. And I think another good analogy actually, maybe even less so than the offshore is more about like SaaS, right? Because you remember when we talked about when SaaS came, what would be the opportunities. And there was a lot of worry about how SaaS would interrupt IT services. And obviously, it's been just a huge opportunity. So I think, Lisa, if you think about this, so obviously a big opportunity for us to help our clients. We see it as two other areas of opportunities. So the first is help our clients, big opportunity. The second is, the opportunity for us to improve the delivery of services to our clients, right? Now what is -- and that, we think, is a huge opportunity for us. So think about it first. In context of Managed Services every year, right, we have to find at least 10% of productivity. So we talk a lot about our platform, things like myWizard and that. That's all AI-enabled. Like just year-to-date in operations, not using gen AI, right, we have automated 13,000 jobs and then we've reskilled those people and redeployed them. Our business model requires us to get at least 10% productivity year in and year out. As we're kind of getting to the maturity of automation and AI before generative AI, we see generative AI as our ability to continue to give at least that 10% productivity year in and year out. So in the managed services area, we see that more as the ability to continue doing what we have to do as kind of the next generation of technology. Where we're super excited is in software development that is more around our systems integration and our big transformations around platforms because while we do automate there, we think gen AI may provide a real opportunity to do even more. And remember, our strategy is to deliver compressed transformation. So the more that we can find ways to deliver faster and less costly, that's going to be a big differentiator. So we're leaning in hard. At the same time, these technologies are [indiscernible] early. And so for example, we're doing a lot of experimentation now. It's really good for things like documentation, but complex integrations, being able to use them for highly architectured systems, which is what our large enterprises do. GenAI isn't there yet, right? So think it's going to take some time. We also don't yet know the cost. And one of the things we are really -- a lot of clients are looking at for us to help them with the business case because most of the studies, including our own, are all about what potentially uses of it. But because these products aren't out yet, we know that -- it's much more expensive to use gen AI, it's much more energy efficient. And so the actual ROI, so there's the art of the possible, but what's actually the return, it's still really early days. So we're very excited that we can get new kinds of productivity, particularly on things like consulting and systems integration but it's early days yet. And we are leaning in because we think it's a big opportunity for us to differentiate. And that's why we are investing $3 billion over the next three years because we think this is like another cloud first moment where we were out early, we invested at scale. The last thing I would say is, there's also an opportunity for us to use it in our own enterprise. And of course, we like -- part of our strategy is to be our own best credential. And we're prioritizing it, using it wherever we think we can use it for us and then take it to market to help our clients. So overall, we think that like prior big changes, right, first, the change to cloud, right, and before that to servers, that it always creates new opportunities as long as you have the ability to invest, like we do, you've got leading partnerships, we've just announced yesterday expanded partnerships with all of the three big cloud providers; and you have that agile innovation mindset that says embrace change and move fast. Lisa Ellis : Thank you. Operator : We'll go next to the line of Ashwin Shirvaikar of Citi. Ashwin Shirvaikar : Thank you and good morning both. I guess… Julie Sweet : Good morning, Ashwin. Ashwin Shirvaikar : Hi. Can you hear me? Julie Sweet : Yes. Ashwin Shirvaikar : Okay. Sorry. I was hoping that you could provide a little bit more information. I know you said that you'll comment specifically on fiscal 2024 after -- in September as you normally do. But that seems to be one of the primary questions that people are asking. So more about the framework of how you're going about the planning process for that, just given that there are so many moving parts when we kind of think of macro, when we think of AI, when we think of headcount trends, the tough comps in the first half. Maybe just kind of framework that for us and that would be quite helpful. Julie Sweet : Sure. So just a few things, Ashwin. So first of all, the most important thing right now just as a framework is, stay close to our clients, and really understand. And the thing is, our clients do need ways to get value in the short term as well as to transform. And so, we're working hard on finding new ways to get value to them faster. That's where the gen AI, for example, comes in. And so, over the next quarter, we're going to be developing new opportunities, new campaigns, new ways of pushing out our investments in gen AI to help us address the small deal pressure that we're seeing. We don't have a crystal ball that is going to say what the economy is going to do, how fast clients are going to get comfortable. Because you remember, we saw this over this quarter to more industries, including industries that are doing well. There's just a level of caution right now. And so, how we're looking at it is certain things we can't control, focus on not only doing the big large transformational deals, but finding new ways to develop returns faster, which is why the work we're doing on gen AI is so important. And you're seeing that kind of early focus with 100 projects in four months. So we're going to keep doing that. Secondly is, stay focused on those transformational deals, right? This provides a base level of resilience in our business. So we've got to absolutely try to do -- maximize the small deals, but it is really important that we continue to be the transformation partner of choice. And that is where bringing together all of these services and making sure that we've got the right proposition is super important. So that is a core part of our strategy. And so that's really how we're thinking about it. Ashwin Shirvaikar : Thank you for that. And I guess the next question is with regard to hiring expectations. And there's a near-term aspect to that and the longer term so let me ask both. Near term, just kind of given what you said with regards to macro and so on and, of course, the headcount cuts announced a couple of quarters back, what should we expect in the next one or two quarters? And the longer-term question is, with AI, do you think that headcount growth dissociates from rev growth trends over time? Julie Sweet : Let me just take the second one first, right, is, again -- and we've been talking about this for years, right, because AI has been such a big part of our strategy and automation, right, is that we will continue to manage it just like I talked about in my last answer, like where we've already automated 13,000 jobs this quarter and we've reskilled. And so, we will continue to manage that headcount as a result of AI in the way that we've been doing it for years. So no real change in that because we have a digital enterprise system that looks at what we need and sales. And what's really core is that we can reskill people as they are being freed up, and then we can adjust how much we have to hire. And of course, with attrition that in our industry is high relative to other industries, it gives us a lot of flexibility over time to get that people hiring right. So that's how I would think about it. And then for the way that we're going to hire, we saw a year-over-year increase of about 3% over last year. 11 consecutive quarters of 91% utilization. So you should just expect that every quarter we're going to manage carefully that headcount based on where we see the growth and to do that well. And I think we've proven our ability to do that. KC McClure : That's right. And I would just add just maybe on Q4, in particular. As Julie talked about, we did not add any heads really between -- any people between Q2 and Q3, which is what we expected. And then just Q4, we don't really see a need to grow our overall headcount as we continue to focus on the automation and reskilling that Julie talked about. Ashwin Shirvaikar : Got it. Thank you. Operator : We'll go next to the line of Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang : Hi. Thank you so much. Good morning, guys. I just want -- I think you went through the small deal outlook to Lisa and Ashwin's question. So how about large deals? Can that momentum continue? I think you're up from about 17 to 26 large deals year-over-year. So just curious about... Julie Sweet : Yes, large deal momentum is continuing. Yes. Tien-Tsin Huang : Yes. So yes, -- no, I'm just going to ask that, how does that look going into the fourth quarter here? And are signed deals converting on time. My follow-up to that. Julie Sweet : Yes. So as KC said earlier, our bookings are going to be about the same, and that includes a lot of momentum in large deals, right? So we saw 26 clients with bookings over $100 million this quarter. We're ahead of last year by 11 at this point. We can see -- continue to see that momentum. And we're actually really excited about the demand there, right? Because as you can imagine, things like gen AI are just accelerating the ability to say, "Hey, we have to do bigger deals." And by the way, that may be impacting some of what we're seeing on the smaller deals because we do see more excitement about -- because the thing is the problem with gen AI for most companies is if you don't have the data, you can't use it. And so that gets you right back to the big transformations of your digital core. KC, anything to add? KC McClure : No, I think that's it. Tien-Tsin Huang : So on the AI front, you did mention, I think, the cloud-first. As you draw that parallel when you guys -- I think that was three years ago, you did a $3 billion cloud first investment. That's paid off very well for you. So I'm curious, do you expect a similar return here on the $3 billion you're putting into AI? How should we measure that? Or is it going to perhaps convert differently in terms of the returns? Julie Sweet : Tien-Tsin, that's a great clever way to try to get us to talk about more of the future. But what I would say is, we've got a great track record of investing and getting a great return. And so, we think that it's going to pay off well. Tien-Tsin Huang : Yes, no, I like [indiscernible] and the coincidence of similarity there. Thank you, guys. Julie Sweet : Thank you. Operator : We'll go next to the line of Jason Kupferberg of Bank of America. Jason Kupferberg : Hi. Thanks, guys. Just wanted to start actually picking up a little bit on Tien-Tsin's question around the larger deals. It sounds like that's going to persist the strength there in Q4. And I think that will be at least a few quarters in a row at that point of those larger deals showing relative strength. Can you just talk just qualitatively about to what extent those provide a foundation for top line growth in fiscal 2024? I would assume that those deals generally ramp to full run within, what, two to three quarters or so? KC McClure : So in terms of what you should think about on our larger deals, they really do -- it really does vary in terms of how they fill in over the quarters going into next year and sometimes depending on what the work is, particularly in managed services, and there's larger deals, they can go out -- they can go into another fiscal year. So that's no real change in what we have experienced in terms of how the bookings fill in by the -- what I would say, the sales category size. What you're seeing is that, we do have a good foundation as we look out, right? And we've had a good foundation throughout this year everything that we've been booking in the transformational deals. But what really does also matter as you get into the year and then into -- closer to the quarters is how do you fill in with some of the smaller bookings. Julie Sweet : If said another way, if small deals don't come back. We're going to have -- that's an important part of sort of understanding, which is why we want to see how Q4 works out before we look at next year. Jason Kupferberg : Totally understand, totally understand. Let me switch over to bookings just for a follow-up. And by the way, thank you for the level set on AI. It's not too surprising that just a tiny fraction of your total bookings given how it's still early days. But I wanted to actually ask on the Managed Services bookings. Just curious versus your internal expectations how those came in, in the quarter. I know they can be pretty lumpy. But it does seem like looking ahead to Q4, the managed services bookings will slow a bit on an LTM basis just based on some of the commentary that you provided around Q4 bookings mix. KC McClure : Yes. So let me just talk about overall Managed Services. Yes, we're very pleased overall with our Managed Services bookings, right? They were up 9% this quarter and they're up 22% on a year-to-date basis. So we're very pleased with the bookings overall and the result of revenue, which continue to be very strong. We also have a very strong book-to-bill with the trailing of 1.1. And when I talked about Q4, Jason, we'll have about the same complexion of bookings in terms of the breakout of type of work. And I would -- and I will highlight just the continued strength within our bookings of our operations business, which, again, Julie had a lot of great examples in her script. It really is around when clients are focusing on digitizing their core, cutting costs of operations business is a differentiator and obviously very strategic. Jason Kupferberg : Thanks, KC. Operator : We'll go next to the line of Bryan Keane with Deutsche Bank. Bryan Keane : Hi, guys. Good morning. Also, just kind of a follow-up on generative AI and the understanding and timing. I get that it's early, but the big question everybody is asking is how long will it take before it moves the needle in bookings and revenue? Is that a couple of years out still? Or is that the time frame and the rapidness of the use of the technology should push it earlier than a normal technology wave? Julie Sweet : Well, Bryan, I think in general, we think gen AI is going to go faster than, say, cloud, right, which took more like a decade. I would focus on -- so first of all, we're being very rigorous when we talk about gen AI, because we're really saying like what are the actual gen AI. The big growth, we think, is going to be in all the companies that then have to get their data done faster. And we're not lumping that together. And so, I don't know what others are going to do, but we're really being very pure in saying like, "Hey, this is pure gen AI." And if you think about where companies are, our research shows like only 5% to 10% of companies are mature right now with data and AI, and they're the ones that are really going to be able to use gen AI at scale. About -- we just had this research done that came in last week that hasn't been published yet. About 50% of companies have not started on their data or AI journey and everything in between -- some are good in data but not AI. They're having a hard time to scale. So where we think growth is going to come particularly next year, the bigger growth is going to be not in like the pure gen AI, but it's going to be in helping companies finish getting their end-of-life data migrated to the cloud. Because you need your data in the cloud, right? It's going to come in the data strategy and the -- all the governance and getting it architected while some of the stuff around gen AI gets sorted out. So for example, like cost is not there yet. And how do you take data from one cloud and there's cost to take it and put it another cloud. All of that, we're going to be working with our clients and our technology partners to really create the right business cases. But the growth we think in the near term is going to be from accelerating the digital core. And that's why we feel really good about the bigger transformational deals continuing next year because there's so much work to do. Bryan Keane : No, that's helpful. And then just as a follow-up, are there M&A opportunities of scale to grow in generative AI? Or is it still early in the days there, so there's not really a lot of M&A you can do? Julie Sweet : It's really early. I mean, there's a lot of companies popping up as we know, and we're going to continue to scan. But one of the great things that we have is the ability to train, right? We've already trained in the last quarter another 1,000 people in gen AI. And by the way, since 2019, we have been requiring all of our 700,000 people to take a course on AI. So we have a really good baseline. And so, we think that it's going to be a lot like when we move to digital, a lot of organic. And this is where we're so competitively well positioned because we have great credentials in how we have trained our own table to rotate. Bryan Keane : Great. Thanks so much. Operator : We'll go next to the line of Rod Bourgeois of DeepDive Equity Research. Rod Bourgeois : Hi, guys. You sometimes comment about pricing and contract profitability. So I wanted to ask if you could provide an update on pricing and contract terms, particularly on a like-for-like basis in both consulting and outsourcing. Thanks. KC McClure : Yes. Rod, so let me just comment on pricing and what we're seeing. So just let me start with as a reminder, when we talk about pricing that we define that as contractility or the margin on the work that we sell. And so what we're seeing in pricing is after five quarters of consecutive improvement in pricing, we mentioned last quarter that it's stabilized. And this quarter, we see the pricing is lower in some areas of our business. I continue to be very pleased with how we are managing pricing, particularly navigating the more challenging wage environment that we've experienced over the last few years. So very pleased with how we're performing in pricing and our overall contract profitability that we have this year. . Rod Bourgeois : Okay. Great. And then maybe just to wrap up, as the consulting business has slowed some here, can you talk about what demand themes have slowed the most and maybe the outlook for those themes, I mean, maybe across your various solution areas, like cloud and ERP and security and data. Are there certain of the themes that have slowed the most? Thanks. Julie Sweet : Yes. Look, on our consulting on the systems integration side, it's really more a tale about the small deals, right? So what we're seeing is that, sort of some of the small things versus the bigger, so a lot of the big transformations are continuing. So that's -- we're not seeing -- I mean, basically anything around the digital core, moving to cloud, all of that's going really well at the bigger levels. It's more about starting new projects right now. And so -- which is why we expect that demand to come back when people are less cautious. Rod Bourgeois : Okay. Thank you. Katie O’Conor: Operator we have time for one more question and then Julie will wrap-up the call. Operator : Thank you. And that will come from the line of James Faucette with Morgan Stanley. James Faucette : Thanks very much. Just a couple of follow-up questions from me here. First, on AI and AI-related projects. How do you envision pricing, project constructs, terms and statements of work to change with the introduction of and adoption of generative AI generally? Julie Sweet : I mean, we're not anticipating any big changes in those areas. James Faucette : Got it, got it. And then you mentioned, in reference to generative AI, like the [B&A] (ph) opportunities are pretty small right now and really nascent. But how are you thinking about B&A more generally going forward? Should we expect ongoing sustained and pretty stable levels of inorganic contribution? And -- or should we expect there to be some changes as expectations and emphasis shifts a little bit more to AI. Julie Sweet : Well, no, a couple of things. So first of all, no shift in how we view inorganic, which is a core part of our business model, right? So we expect to get about 2% of our revenue growth from this year from inorganic, and this has been a stable part of our strategy. And I just want to be clear that the shift to AI is just -- let's go back to total enterprise reinvention. What are clients doing? They are reinventing every part using tech data and AI. So when you look at our growth priorities, cloud, both the move to the cloud, but also cloud-based platforms, all growing very significantly, right, at the top level overall. And so, it's about building a digital core. And then the opportunity to take AI is to then reinvent the processes and the ways of working, which is, by the way, a huge opportunity for Accenture because we're not just about the technology. Our strength is in being able to do all of that. So I think it's really important that it's not an emphasis shift on AI. It's a rapidly accelerated opportunity because companies who were kind of resistant or not focused on it are now focusing on it. So I think that's important. Then the last piece is we will -- our focus is not going to suddenly in M&A be around just data and AI. And in fact, we think that there's going to be much more organic because there isn't a lot out there. But we use AI, right, to scale things like consulting, industry expertise, digital expertise. We've done that for digital manufacturing, supply chain. We also use it to get into new areas. So I'm super excited that yesterday we announced that we acquired Answer Advisors, which is a primarily US-focused, North America-focused company and capital projects. That's a really small business today in the U.S. and we just acquired a great company with 900 professionals in a market that has an $88 billion addressable market in North America, growing really well. That's a whole new area of net new growth for our North America business. So we use our ability to invest, right, to scale great things and continuously seed new areas of growth for Accenture. And you've seen us do that over and over again. We did it with Song, we did it with Industry X and digital manufacturing. We're now in supply chain and we're moving into capital projects. So that is just a huge advantage as you think about, not just the next couple of years, but growth over the decade for Accenture. James Faucette : That’s great color. Thank you so much. Julie Sweet : Great. Well, thanks, everyone. In closing, I want to thank all of our shareholders for your continued trust and support and all our people for what you are doing for our clients and for each other every day. Thanks, everyone, for joining. Look forward to being back together in a quarter. Operator : Thank you. And this conference will be available for replay beginning at 10 a.m. Eastern Time today and running through September 28 at midnight. You may access AT&T replay system at any time by dialing (866) 207-1041 and entering the access code of 4564655. International participants may dial (402) 970-0847. Those numbers again are (866) 207-1041 or (402) 970-0847 with the access code of 4564655. That does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,023	3	2023Q3	2023Q4	2023-09-28	11.774	11.853	12.499	12.593	null	25.59	27.29	Operator : Thank you for standing by. Welcome to Accenture's Fourth Quarter Fiscal 2023 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Katie O'Conor, Managing Director, Head of Investor Relations. Please go ahead. Katie O'Conor: Thank you, operator, and thanks everyone for joining us today on our fourth quarter and full fiscal 2023 earnings announcement. As the operator just mentioned, I am Katie O’Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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 both the fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the first quarter and full fiscal year 2024. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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 Julie. Julie Sweet : Thank you, Katie, and everyone joining us. And thank you to the approximately 733,000 Accenture people, who have worked hard to be at the center of our client's business across our fiscal year ‘23. Our laser focus on creating 360-degree value for our clients and all our stakeholders is reflected in our overall strong results for the year. With record bookings of $72 billion, we had a record 106 clients with quarterly bookings greater than $100 million in FY ‘23, up from 100 last year. We now have 300 Diamond clients, our largest client relationships, an increase of 33 from last year, demonstrating yet again the depth and breadth of our capabilities and the trust our clients have in us. We delivered revenues of $64 billion for the year, representing 8% growth in local currency, while continuing to take market share. We expanded adjusted operating margin by 20 basis points and delivered adjusted EPS growth of 9%, while continuing to significantly invest in our business and our people with capital deployed of over $2.5 billion across 25 acquisitions, $1.3 billion in R&D assets, platforms, and industry solutions, and $1.1 billion invested in the training and development of our people. And we generated free cash flow of $9 billion, allowing us to return over $7 billion of cash to shareholders. And we are delivering a little ahead of schedule on our business optimization actions we announced in March to reduce structural costs to create greater resilience. We also continue to attract, retain, and inspire outstanding people through our talent strategy. We're making progress toward our commitment to Net Zero by 2025, and we invested in our communities to help ensure we have vibrant places where we work and live. I will give more detail a little later in the call. Taking a step back, coming off two fiscal years of double-digit growth and a truly extraordinary FY ‘22, we are very pleased with our FY ‘23 results and the moves we have made to optimize our business. We are also rapidly taking an early leadership position in gen AI, which will be an important part of the reinvention of our clients in the next decade. Last quarter, we shared that we had sold 100 projects with roughly $100 million in sales over the prior four months. Demand accelerated in Q4 with another approximately $200 million in gen AI sales to bring our total to over $300 million for the year. We also are embracing the use of gen AI in our own delivery of services and the way we work across Accenture. As we reflect on how our market has developed over the last year, we and our clients have had to navigate a macro environment that is tougher than we anticipated at the beginning of FY ‘23. While it's played out differently across markets and industries, we have seen greater caution globally, with lower discretionary spend, slower decision-making, and in particular for us, a significant impact from the challenges the comm, media, and tech industries have faced. For example, in Q4, where we grew 4% in local currency, if we exclude CMT, we grew 7% globally, 6% in North America, 9% in Europe, and 8% in growth markets. Against that backdrop, as we enter FY ‘24, we remain laser focused on creating value for our clients. While the pace of spending has changed, the fundamentals have not. All strategies continue to lead to technology. And companies will need to reinvent every part of their enterprise using tech, data, and AI to optimize operations and accelerate growth. To do so, they must build a digital core. We are continuing to see significant demand in areas like cloud migration and modernization, modern ERP and data and AI, and the emergence of gen AI in particular, all of which represent areas of great opportunity. And it's still early. For example, we estimate that only 40% of workloads are in the cloud today, only one-third of clients have modernized their ERP platforms, and less than 10% have what we define as mature data and AI capabilities. We believe helping build a strong digital core and then using it to reinvent will be the drivers of our growth. Our ability to advise, shape, and deliver value-led transformation, leveraging the breadth of our services and industry expertise from strategy and consulting, to technology, to our managed services across industries and geographic markets, along with our privileged position with our ecosystem partners, is what makes Accenture unique. And you can see this unique positioning in the number of our Diamond clients, clients who turn to us for large-scale transformation. Over to you, KC. KC McClure : Thank you, Julie. And thanks to all of you for joining us on today's call. We were pleased with our results in the fourth quarter, which were within our guided range and aligned to our expectations, completing another strong year for Accenture. Our results reflect the diversity of our business and once again illustrate our ability to run our business with discipline and deliver significant value for our shareholders. So let me begin by summarizing a few highlights for the quarter. Revenues grew 4% local currency, driven by high-single or double-digit growth in five of our 13 industries. As we called out last quarter, we expected increased pressure in our CMT industry group and we saw declines of 12% local currency this quarter. As Julie mentioned, excluding CMT, our business grew 7% globally. We delivered adjusted EPS in the quarter of $2.71, reflecting 4% growth over EPS last year. Adjusted operating margin was 14.9%, an increase of 20 basis points over Q4 last year, and includes significant -- continued significant investments in our people and our business. And finally, we delivered free cash flow of $3.2 billion, driven by very strong DSO management. Now, let me turn to some of the details. New bookings were $16.6 billion for the quarter, a 10% decline in local currency, with an overall book to bill of 1. Consulting bookings were $8.5 billion with a book to bill of 1. Managed services bookings were $8.2 billion with a book to bill of 1. Turning now to revenues, revenues for the quarter were $16 billion, a 4% increase in both US dollar and local currency, representing continued market share gains. Now, as a reminder, we assessed market growth against our investable basket, which is roughly two dozen of our closest global public company competitors, which represent about a third of our addressable market. We used a consistent methodology to compare our financial results and theirs, adjusted to exclude the impact of significant acquisitions through the data of their last publicly available results on a rolling four quarter basis. Consulting revenues for the quarter were $8.2 billion, a decline of 2% in both U.S. dollar and local currency. Managed services revenues were $7.8 billion, up 10% in both U.S. dollars and local currency. Taking a closer look at our service dimensions, technology services grew mid-single-digits, operations grew high-single-digits, and strategy and consulting declined mid-single-digits. Turning to our geographic markets. In North America, revenue growth was 1% in local currency, driven by growth in public service, health, and utilities. These increases were partially offset by declines in communications and media, software and platforms, banking and capital markets, and high tech. In Europe, revenues grew 7% in local currency, led by growth in banking and capital markets, industrial and public service. Revenue growth was driven by Germany and France. In growth markets, we delivered 6% revenue growth in local currency, driven by growth in chemicals and natural resources, industrial and energy. Revenue growth was driven by Japan. Moving down the income statement, gross margin for the quarter was 32.4%, compared with 32.1% for the same period last year. Sales and marketing expense for the quarter was 10.8%, compared with 10.2% for the fourth quarter last year. General and administrative expense was 6.7%, compared to 7.1% for the same quarter last year. Before I continue, I want to note that in Q4, we recorded $472 million in costs associated with our business optimization actions, which decreased operating margin by 290 basis points and EPS by $0.56, and also impacted our tax rates. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.4 billion in the fourth quarter, reflecting a 14.9% adjusted operating margin and an increase of 20 basis points from operating margin in Q4 last year. Our adjusted effective tax rate for the quarter was 27.4%, compared with an effective tax rate of 24.6% for the fourth quarter last year. Adjusted diluting earnings per share were $2.71, compared with EPS of $2.60 in the fourth quarter last year. Days services outstanding were 42 days, compared to 42 days last quarter, and 43 days in the fourth quarter of last year. Free cash flow for the quarter was $3.2 billion, resulting from cash generated by operating activities of $3.4 billion, net of property and equipment additions of $180 million. Our cash balance at August 31 was $9 billion, compared with $7.9 billion at August 31 last year. With regards to our ongoing objective to return cash to shareholders, in the fourth quarter, we repurchased or redeemed 3.2 million shares for $1 billion, an average price of $312.35 per share. Also in August, we paid our fourth quarterly cash dividend of $1.12 per share for a total of $706 million. And our Board of Directors declared a quarterly cash dividend of $1.29 per share to be paid on November 15, a 15% increase over last year, and approved $4 billion of additional share repurchase authority. Now, I'd like to take a moment to summarize the year, as we've navigated a challenging macro environment and successfully executed our business to deliver or exceed all aspects of our original guidance that we provided last September on an adjusted basis. We delivered $72.2 billion in new bookings, reflecting 5% growth in local currency. Revenue of $64.1 billion for the year, reflecting strong growth of 8% local currency, and reflecting continued market share gains. Before I continue for the full-year, we recorded $1.1 billion in costs associated with business optimization actions, which decreased operating margin by 170 basis points, and EPS by $1.28. We also recognized a gain on our investment in Duck Creek Technologies, which impacted our tax rate and increased EPS by $0.38. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating margin of 15.4%, a 20-basis point expansion over FY ‘22. Adjusted earnings per share was $11.67, reflecting 9% growth over FY ‘22 EPS. Free cash flow of $9 billion was significantly above our original guided range, reflecting a very strong free cash flow to net income ratio of 1.3. And with regards to our ongoing objective to return cash to shareholders, we exceeded our original guidance for capital allocation by returning $7.2 billion of cash to shareholders, while investing approximately $2.5 billion across 25 acquisitions. In closing, we remain committed to delivering on our enduring shareholder value proposition, while creating 360-degree value for all our stakeholders, clients, our people, our shareholders, partners, and our communities. And now let me turn it back to Julie. Julie Sweet : Thank you, KC. Let me now bring to life for you the demand we saw from our clients this quarter as they build their digital core and reinvent. We saw this demand across markets and industries. Our cloud momentum continued with very strong double-digit growth in Q4, as clients prioritized building a strong and secure foundation for reinvention. We're partnering with a multinational financial services company on a cloud-based transformation to deliver enhanced, personalized, and secure customer experiences, and to increase employee productivity. Together, we're developing an integrated hosting strategy that unifies their hybrid multi-cloud landscape and lays the foundation for their digital transformation over the next decade. This partnership enables innovative solutions across all bank functions and is backed by a trusted and secure foundation that supports advanced workloads and complex AI and data solutions. Working from a compliant cloud platform will safeguard the customer data, privacy, and financial assets, positioning the organization to stand out for its innovation and customer focus. And we are supporting a U.S.-based energy company on a total enterprise reinvention strategy to unify different technologies and business processes around a common digital core. We'll help leading the deployment of a cloud-based IT platform that integrates customer management, finance, HR, supply chains, asset management, and operations, improving the ability to assess and optimize operational performance. We also are helping manage and integrate the responsibilities and activities of the vendors involved in the project, standardize data from legacy applications, and enable company employees to understand and manage the new processes and technologies. Data-driven decision-making will be improved, allowing the company to cultivate better collaboration within their business, helping them operate more efficiently and better serve their customers. We are partnering with Coca-Cola Bottlers Japan to accelerate their path to becoming a world-class bottler and data-driven organization. The partnership includes establishing an innovative joint venture of significant scale of approximately 870 people that will accelerate transforming their digital core, optimizing their enterprise operations, leveraging the power of cloud, data, and AI to increase the value delivered from their core business functions. In support of their broader strategic business plan, Accenture will provide specialized talent, industry expertise, and leading-edge technology automation and managed services to help Coca-Cola Bottlers Japan adopt a strategy of continuous enterprise reinvention. Data and AI are an important part of building the digital core, and we see that work both embedded in our larger transformations, as you just heard, and in work focused on data and AI modernization. Accenture Federal Services is helping the defense health agency operate and enhance the Joint Medical Common Operating Picture platform by implementing data synchronization across multiple network domains and near real-time collaboration and information sharing, we will provide a comprehensive picture into Department of Defense medical assets. This increases visibility into unit health, equipment, and supplies and allows for faster and more informed decision-making. We are a strategic partner for the Saudi Data and AI Authority to boost the Kingdom's transformation to a data-driven economy and help the Kingdom become a world leader in generation and deployment of AI technology. We're working closely with Sadiya to support cutting-edge research, promote digital innovation in public life, and boost national capabilities and talent. We're especially pleased with the double-digit growth we have in the Middle East, a small, but growing part of our business. Security is essential to a digital core, and we had very strong double-digit growth in our security business in Q4. We're working with a major energy network in the U.K. on the transformation of its cybersecurity systems. We will provide an entire managed service for their cybersecurity capability, including migration to a more powerful security platform, continuous and active threat monitoring, and response services, as well as security tools management. Our solutions will help provide improved security, reduce exposure to potential global security threats, and ultimately better safeguard the safe delivery of gas to millions of U.K. homes and businesses. As clients continue to reimagine and prioritize the customer experience, Song delivered strong double-digit growth in Q4. We are helping smart Europe, maker of the next generation of smart vehicles, products, and services of the iconic brand from smart Automobile Company -- Co Limited., a joint venture between Mercedes-Benz and Geely. We are helping them reinvent car shopping by creating an ecosystem that supports a seamless, fully digital-driven buying experience. By putting data at the core, the system allows personalization of the customer journey, makes recommendations based on real-time data, and includes enhanced offerings such as extended insurance coverage. It will help smart Europe reposition its brand and support the launch of its intelligent, fully electrical car lines. We also continue to see demand for our supply chain in Industry X capabilities, the next digital frontier, which grew strong double-digits in Q4. In Industry X, we are partnering with a global chemical and materials company on a digital transformation of their manufacturing core and commercial capabilities. Through our Industry X capabilities, we have built a unified connected worker platform for operators, maintenance technicians, and job planners, along with a cloud-based data lake to help generate insight from disparate sources of manufacturing data. The program is already live in dozens of manufacturing sites and is expected to create significant revenue growth over the next few years for our clients. And in supply chain, we have partnered with a large global food and beverage conglomerate to strengthen supply chain resilience, so consumers have continued access to their products in stores and online. By creating a digital twin of its supply chain, we will develop stress test models to help identify supply disruptions with the highest risk before they occur. Across these examples, you can see our unique capabilities of both being a technology powerhouse, along with our industry and functional expertise from strategy and consulting to technology, to managing services -- managed services to help our clients reinvent. Now let's turn to generative AI. As a reminder, last quarter we announced a $3 billion investment in AI. While still in the early stages, gen AI technology is maturing rapidly and we believe it will be a significant source of value for us and our clients over time. We now have about 300 projects and I want to share a little color in how this demand is coming through. We have projects across all our industries with banking, public service, consumer goods, and utilities leading an activity. Clients are doing a variety of different types of work from strategy and use case implementations to tech enablement, to scaling, to model customization, tuning and training, to talent and responsible AI. For example, we're working with a multinational telecom company, Telefonica Brazil, also known as Vivo, to deliver a generative AI solution that helps its agents respond quicker to landlords' queries about property rental for network towers. The application quickly reads landlords' queries and proposes a set of actions to help fulfill requests, reducing the time it takes agents to respond. It also structures the response with a set of relevant answers to increase the response quality and ensure all queries are answered in a helpful manner. The solution has already reduced agent response time by 30% and increased the user experience score by 66%. Some of the key ingredients of our success in gen AI are : first, ecosystem partnerships. As always, we are starting with deep relationships and leadership in the ecosystem, from the hyperscalers to the model builders to the startups and academics. It is important to emphasize that we are early in the maturity of gen AI for enterprise, and our depth, experience, and insight on these [plant-forwards] (ph) is essential to guiding our clients. Second, Talent. We start with a deep technical knowledge and understanding of AI and gen AI and blend that with our industry and functional expertise to know how to reinvent across the enterprise, including processes and operating models, bringing together the depth and breadth of our expertise. And that is where Accenture is different, building the bridge from as is to the future. And we have already trained approximately 600,000 of our people in the fundamentals of AI. Now with generative AI, the pace and impact is growing rapidly. And we are now taking a further step to equip more than 250,000 people and using new AI tools equitably, sustainably and without bias. And with investments in our AI Academy focused on deep AI and gen AI specialization, we are also progressing towards our goal of doubling our deeply skilled data and AI practitioners from 40,000 to 80,000. Third, responsible AI is essential. At Accenture, we have an industry-leading responsible AI compliance program, which is embedded in how we use and deliver AI. And we're using the experience and lessons learned by us to help our clients build out their own responsible AI program, which is necessary to address the risks and get the full value from AI. Finally, we are embracing gen AI across our services, developing new cutting-edge tools and solutions, inventing gen AI in the way we work. Our approach takes into account where the technology is today, the need to deploy it responsibly, and the recognition that we do work in highly complex environments. While all companies want to explore and understand gen AI, what we find is that clients who are more mature digitally want to go faster, while others would like to test the waters with proofs of concepts and synthetic data, and others prefer to wait until they have built more of their modern digital core. The extent and pace of this generative AI progression will become more clear over the coming quarters as the technology and the market continue to mature and progress. Now turning to our people, who have made all of this happen. Core to our success is our ability to attract and retain and inspire our outstanding talent. Essential to our success is our robust talent strategy, and in particular, our ability to attract diverse talent and our Net Better Off approach to retaining our great talent. We continue to lead in our ability to attract people with different backgrounds, different perspectives, and different lived experiences. These differences ensure that we’ve -- have and attract the cognitive diversity to deliver a variety of perspectives, observations, and insights, which are critical to drive the innovation needed to reinvent. Our success is reflected in our being the top-scoring company on the Bloomberg Gender Equality Index for the second year in a row, and we also earned the number one position on the Refinitiv Global Diversity and Inclusion Index for the fourth time in six years. This index ranks over 15,000 organizations globally and identifies the top 100 publicly traded companies with the most diverse and inclusive workplaces. Our talent strategy includes inspiring and retaining our best talent through our Net Better Off approach. We want our people to feel they are Net Better Off for working at Accenture. This strategy has four dimensions, focusing on people feeling healthy and well, physically, emotionally, and financially, feeling connected with a sense of belonging, feeling their work as purpose and filing feeling they are continuing to build market-relevant skills. This year, for example, our people participated in approximately 40 million training hours, and we were a recipient of the Brandon Hall Gold Award for best benefits, wellness, and well-being programs. Building on our longstanding commitment to the environment, we are pleased to have hit a significant milestone on our path to Net Zero, approaching -- seeing 100% renewable electricity across all of our Accenture offices. I will wrap up with a comment on our work and communities. Vibrant communities are important to our business success, and therefore we continue to prioritize creating value in these communities around the world. For example, Accenture is helping to welcome refugees, recognizing how they enrich our communities with their courage, strength, and talent. In June 2023, on World Refugee Day, we committed to partner with organizations to help skill and support an estimated 16,000 refugee job seekers and migrants and to hire 100 refugees in Europe over the next three years. Back to you, KC. KC McClure : Thanks, Julie. Now let me turn to our business outlook. For the first quarter of fiscal '24, we expect revenues to be in the range of $15.85 billion to $16.45 billion. This assumes the impact of FX will be approximately positive 2.5%, compared to the first quarter of fiscal ‘23 and reflects an estimated negative 2% to positive 2% growth in local currency. For the full fiscal year ‘24, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be flat compared to fiscal ‘23. For the full fiscal ‘24, we expect our revenue to be in the range of 2% to 5% growth in local currency over fiscal ‘23, which includes an inorganic contribution of about 2%. We expect business optimization actions to impact fiscal '24 GAAP operating margin by 70 basis points and EPS by $0.56. The following guidance for full-year fiscal 2024 excludes these impacts. For adjusted operating margin, we expect fiscal year ‘24 to be 15.5% to 15.7%, a 10 basis point to 30 basis point expansion over adjusted fiscal ‘23 results. We expect our annual adjusted effective tax rate to be in the range of 23.5% to 25.5%. This compares to an adjusted effective tax rate of 23.9% in fiscal ‘23. We expect our full-year adjusted earnings per share for fiscal '24 to be in the range of $11.97 to $12.32 or 3% to 6% growth over adjusted fiscal ‘23 results. For the full fiscal ‘24, we expect operating cash flow to be in the range of $9.3 billion to $9.9 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $8.7 billion to $9.3 billion. Our free cash flow guidance reflects a free cash flow to net income ratio of 1.2. Finally, we expect to return at least $7.7 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. And with that, let's open it up so we can take your questions. Katie? Katie O'Conor: Thanks, KC. 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. Operator, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Our first question will come from the line of Tien-Tsin Huang of JPMorgan. Tien- Tsin Huang : Hey, thank you. Good morning, Julie and Casey, I just wanted to dig in first on CMT, if you don't mind. Just curious there if the challenges are -- have changed at all, has it isolated just a few clients or is it more broad-based? And what's the strategy here to turn demand around? Are you seeing any green shoots there? Thanks. Julie Sweet : Yes. Great, thanks Tien-Tsin. So it is broad-based, I mean, we have -- we're seeing it broad-based across the globe and across clients. And we continue to see those challenges. So we do think that it's going to -- we do know that it's going to develop a little bit differently based on markets. The challenges in the U.S. are more difficult. They're more focused on both technology and the technology companies and comms, whereas Europe, it's a little different, the complexion. And so, over the course of the year, we expect that the improvement will come at a little different pace depending on the market. And in terms of how we're addressing it, it's really two-fold. So first of all, we're going to continue to pivot within that industry to areas like helping within the confines of how much they are spending, trying to help them cut costs, working on things like customer service investing in more network capabilities. And what we're also doing is pivoting our business to the higher areas of growth, and you see that with acquisitions, like we did answer technologies and Industry X in the U.S., we did Flutura in India and data and AI. And so we've got a lot of areas of growth and you can see that when you take out CMT with the -- how the rest of our business is growing and it's just going to take a little time to make that pivot and that's why what you're seeing in our guidance is that we're going to build over the year as the actions we're taking to continue to pivot the business play out. Tien- Tsin Huang : Understood on that one. Thank you. Just my quick follow-up on gen AI, I know the sales doubled there and you went through a lot of good detail. I'm just curious, is it -- are the deal sizes getting larger? Is it pulling through more large projects from what you've seen recently? I'm just curious how that might evolve here as we get into the new fiscal year? Julie Sweet : Sure, so at this point, and remember, when we give you gen AI numbers, we're being very clear it's pure gen AI, so we're not like, you know, sort of talking about data and all of those things. So the real gen AI projects right now are still in that sort of million dollar-ish on average range. And we expect that's going to continue for a while, right? That’s what we're seeing because there's a lot of experimentation. Now what it's doing though is leading clients to look harder at, well, where do I go faster, right, in terms of the digital core? You know, and so we started seeing a tick up, for example, in data migration, right? But it is still extremely early, but that's how we think it's going to, you know, play out over even the coming year, right, as people get more excited about it and it also points out the challenges. But keep in mind that, you know, implementing gen AI is not like, it's like, it's not easy. Entire environments need to be set up. It's quite complex, actually. So it really plays into our strengths of being able to help them understand what it takes, where their gaps are, and then how to take the next step on the journey to get there, even as we see clients being cautious, they're really focused on help us save money, so we can take those next steps. Tien- Tsin Huang : Yes. No, it should bode well for Accenture. Thank you. Julie Sweet : Thanks. Operator : We’ll go next to the line of James Faucette with Morgan Stanley. James Faucette : Great. Thank you very much. Wanted to, kind of, follow-up on a couple of questions there. One of the other areas that had seen some strength and seems like it's weakened a little bit has been managed services. Can you talk through, kind of, what's happening there and one of the things that we're also seeing is, hear is -- or hearing is that there's some variation in demand right now, especially geographically, maybe with Europe being a little weaker, but other markets being a little stronger. Can you just give color on managed services and what's happening geographically? KC McClure : Yes. Thanks, James, for the question. I will -- maybe I'll start with, just kind of giving you a little bit of color on what we're seeing on managed services as it relates to guidance and just maybe broader guidance kind of overall. So I'll just start with our full-year, right? So we started with our full-year guidance, which is 2% to 5% growth for the year. I think the key part, as Julie mentioned, is that we expect that we're going to build as we go throughout the year. And you can see that in our range for Q1, which starts negative 2 and has 2 at the top end of our range. And then if you look at Q1, for the most part, what we are reflecting in our Q1 guidance is really more the same across the various dimensions of our business that we saw in Q4. And -- but we have a backdrop of a tougher compare in the first quarter of FY ’24, that's our toughest compare for the full-year. And then if you look at the full year, maybe three things to add. From a macro, we're not assuming that there's an improvement in the discretionary spend environment or the macro as we look at the year. The second on your -- to get to the type of work question, we're going to build as we go throughout the year and we see consulting for the full-year being at low-single-digit. And managed services is going to be a healthy mid to high-single-digit growth for the full-year. And then, depending on how the revenue builds, the last point would be on operating margin. We do expect to see more variability in the quarters as we go through fiscal ‘24 on our way to 10 basis points to 30 basis points of expansion for the year. So hopefully that gave you a little bit of color. Julie, if you want to talk a little bit more about specifics in managed services? Julie Sweet : And what I would say on managed services, managed services continue to be really important for our clients, because it's both a cost play, but also a faster digitization play. But it will play out a little bit. So, for example, at Accenture, right, we've got trust and safety and other managed services in the CMT. And so that's going to affect some of our results depending on the quarter and the compare and how things kind of roll out. So that's why what we're thinking about next year will be somewhere in the mid to high-single-digits, but we don't see a fundamental issue around managed services. In fact, we think they are a really strategic priority for many of our clients, but it will play out a little bit differently based on industries. We see less of it based on sort of market per se because clients really need the managed services. James Faucette : Got it. And then just as a quick follow-up, can you talk a little bit about your inorganic strategy, just what contribution has been, and particularly in light of the increased capital return program for ‘24, if we should anticipate that that will have any impact on what you guys historically have done from an inorganic contribution? Thanks. KC McClure : Sure. In terms of inorganic contribution, for ‘23, it was about 2% was the inorganic contribution and for ‘24, James, we're considering another about 2% in ‘24. Julie Sweet : Yes. And, look, on our inorganic strategy remember that the way we think about it is, can we get into new areas through our inorganic, like what we did with Anser Advisory and Industry X, which is capital products. It's basically we're very small there before the acquisition, that's an $80 billion addressable market. So that's an acquisition to start to grow there. We think about it as being important to invest in our industry and functional expertise. So in France this year, we -- this last quarter, we did an insurance acquisition in strategy and consulting. And we think about it in terms of scale. So we bought a data and AI practice in terms -- in India this quarter. And so as we are pivoting to the higher areas of growth right now, a real advantage we have is the ability to leverage our investment capacity in order to do that pivot. And of course we're -- right now, we're kind of assuming 2%, but we have the ability to do more if we have the right opportunities. And so we really do think about this as a huge competitive advantage in our industry, in our ability to drive growth and to be in the hot areas of the market. James Faucette : That's great. Thank you so much. Operator : We'll go next to the line of Lisa Ellis with MoffettNathanson. Lisa Ellis : Hey, good morning. Thanks for taking my question. I might start on the business optimization program. Can you just give a little bit more detail in terms of what -- where exactly you are, what's completed, what remains in 2024, and maybe a little bit of more detail on how we should expect that impact to sequence in throughout fiscal ‘24? And then just remind us whether that's then the end of it and we should expect to kind of move back toward GAAP reporting at the end of ‘24? Julie Sweet : Yes. Thanks, Lisa. So just in terms of -- just as a reminder, so we -- when we announced our business optimization program, we said it would be about $1.5 billion, and that would go through FY ‘24. So we still are saying $1.5 billion through FY ‘24. As it relates to next year, right, we expect to incur approximately $450 million. We were -- we did record $1.1 billion in FY ‘23, which is a little bit more than we expected to do in ‘23. So we were able to get a bit more into the P&L in last fiscal year '23. And I'm happy to go through the impacts on EPS, but you saw that it will be a $0.56 impact on EPS for ‘24, and I'm happy to go through some of the questions that you have. Yes. And also as we go throughout the year, the two -- we take the business optimization out of our results as we go throughout the quarters, so that doesn't -- that's not their driver for why we'll have more margin variability as we go throughout the year. And we'll see how it plays out. It really depends on the countries and different things that we have to go through in terms of process and procedures. And so we're not giving an update as we go throughout the year on the full-year estimate, but we're not breaking that up by quarter. Lisa Ellis : Got it. Okay, okay. Great, thank you. And then maybe my follow-up, just to -- a quick follow-up on the managed services question, maybe just a little bit taking a step back, Julie, I think over the last few quarters, as we've been seeing some of the softness in strategy and consulting and this shorter duration discretionary work, you've been highlighting pretty consistently that has not really bled over into the larger transformation programs. And I just wanted to kind of ask if you could kind of update us on the latest you're seeing on that given that we saw a little bit of a slowdown in some of the managed services bookings this quarter. Thank you. Julie Sweet : Sure. I mean, what I would say is that overall -- first of all, the large transformational programs include managed services, but they also include building, like so putting new modern ERP programs in place, right? So it's not only kind of managed services just to kind of set the stage for that. And just as you think about the fundamentals, because we think of the transformation deals, managed services are often a way to pay for them. They're often also a way to go faster and modernize, but we really look at those transformational programs in the round. So when you think about the fundamentals that our clients are facing, there is more reinvention ahead than they have done so far. So huge opportunity ahead. And you see that in where they are in the cloud journey, only 40% workloads, right? We estimate less than 10% of our clients are mature in data and AI. Only a third have put in the modern ERP programs. And so as you think about what they have to do, managed services will continue to play a huge role in paying for it and in actually modernizing much of it, as well the other big implementations. We do see, however, right, when you kind of go to the market-- and by the way, that's why we're super well positioned, right? Our strategy is to be that partner and then reinvention begets more, right? So you first build the digital core and then you've got a lot of work on top of that. And that is our growth strategy. Now, if you come to what we're seeing in the market, right? So always best to hear from what's going on in the ground. Last week, I was very busy and I was with about 20 different CEOs and they had three messages, right? Tech is super important, that's number one. Number two, they already have major programs underway and they know they need to do a lot more. But number three is they're feeling cautious about the macro and we've already seen that in the small deals. But they're asking us to help them save money and be more focused right now, even on the bigger programs. And so what I would say is and that's reflected in our guidance is that, the macro is having an effect on the pace of spending right now. Now, again, plays into our strengths in terms of being able to be the reinvention partner, being able to really think about the journey and positions us super well as they navigate that macro. But that is -- the reality is that there is this sense of caution and it's bleeding over to kind of overall, overall demands. KC McClure : Right. And Lisa, maybe I'll just add, bookings can be lumpy, particularly in managed services. And we look at bookings -- book to bill over rolling four quarters and our goal in managed services is to be 1.2 or above. And that's exactly where we are on a four-quarter basis. Lisa Ellis : Great. Thank you. Thanks a lot. Operator : We'll go next to the line of Keith Bachman with BMO. Keith Bachman : Hi, thank you very much. I wanted to ask -- go back to M&A if I could start with you, Julie. You're guiding to 2 points of M&A contribution to your full-year guidance which is consistent with sort of the past years, but the number here much bigger. 2 points is meaningfully than what it was even three or four years ago in terms of, A, the capital required to do those deals; and B, the integration therefore of the head count? And I just wanted to hear your, kind of, philosophically, it doesn't seem like 2 points can continue on for perpetuity, but just how do you think about any, kind of, balance sheet constraints or also the integration required to make sure the people side of the business -- because again, implicitly the deals are getting larger. And then as part of that, could you just speak to -- do you look at the same size deals or do you need to kind of flex up a little bit in terms of looking at larger opportunities? And then I have a follow up. Sorry about the background noise. KC McClure : No problem, Keith. Thanks, I'll handle the capital allocation part and I'll hand it over to Julie. So just from a capital allocation standpoint, Julie referenced this a little bit earlier, but our capital allocation framework is really durable, but it is also very flexible. So we've been able to continue to return a significant portion of our cash through dividends and share repurchases. Well over the time we've been flexing at various times the amount of money that we spend in V&A and we can continue with that framework. So just again as a focus, we had about 80% of our free cash flow return to shareholders through dividends and repurchases in FY ‘23 and we actually have a $500 million, $0.5 billion increase in our guidance baked in for next year. So just shows that our capital allocation framework can flex as needed while still doing a great return. Julie Sweet : And what I would say is that I'm really proud that how we do M&A is a core competency of Accenture, right? So we've now been on this journey. I helped start it when I was the general counsel. I remember that was -- I came in and they were like, we kind of need to increase this and I've done a lot of that in my prior life and what you see is that, as we've grown, we've continued to build the capabilities. We have a very mature machine around integration, but we also have an operating model where we have leaders close to the acquisitions, doing the integration. And they really do vary from very small to larger ones. We've done over $1 billion and we could do even bigger ones with our capital. The point is that, we know how to integrate and we've been doing this now for many, many years. Keith Bachman : Okay, fair enough and thank you, Julie. My follow-up is just how do you think about headcount for Accenture through the year? You're just kind of finishing off your risk, but how do you think about headcount as we process through FY ‘24 and I'm really thinking on an organic basis, excluding the M&A. Many thanks and that's it for me. KC McClure : Yes. Thanks, Keith. Really what I would say is managing supply and demand. As you know, it's a core competency of ours and we're going to manage our supply skills based on wherever we see the growth. So we didn't expect that we would need to add a lot of people in -- from Q3 to Q4 as we said and that's exactly what happened. And so we're going to continue to hire for the skills that we need and we're going to focus on the automation and as Julie mentioned, the lot of re-skilling of our people. Operator : Thank you. We'll go next to the line of Darrin Peller with Wolfe Research. Darrin Peller : Thanks, guys. I just wanted to ask in terms of visibility that you'd say you have now in the environment relative to prior years on the outlook side. I mean, has anything changed and just maybe if you could reiterate for us where you're seeing the pockets of strength in a little bit more of a specific manner around example that customers need right now that might be -- that might buck the trend of what you typically see in a downturn macroeconomically. Just curious kind of what's fighting through the demand weakness no matter what just because it's really mission critical right now. Thanks again. KC McClure : Yes. Great, thanks, Darrin. In terms of visibility, right, as we sit here at the beginning of a new fiscal year, as -- we're really confident that we're taking all the right steps to successfully deliver for a full-year and as you know well, we always aim for the top part of the range. But just like every other year at this time, the back half of the year is less certain, because we'll know more when the budgets are set which is really in the back -- which is in the H2 of our year. But as we mentioned, we are going to build throughout the year and why do we say that? Well, first of all, we're confident in the steps that we're taking that Julie highlighted many examples to pivot to the higher growth areas. And we expect that we'll see that come through in the back half of the year and that's also backed up by the investments that we'll make. The second part is that we do have the revenue from the larger scale transformations. It is out there, right? And so we just need to layer in some of the new growth area work that we'll get to as we approach the back half of the year. And the last part, as you're aware, I mean, we do have the benefit of each year comparison in the back half. Julie Sweet : Yes. And then in terms of demand, it's exactly what we've been talking about. The number one area of demand is building that digital core. So you've got clients like the financial service client I mentioned in the script that's not in the cloud at all and is basically needing to migrate to the cloud, right? Then you've got those who are in the cloud but they haven't modernized their ERP. You saw a lot of examples of that. Then you've got security, right? Absolutely has to happen. And then lots of focus on now on data and AI, particularly for those who've already been investing, so they're in the cloud, they've got their modern ERP, and now they want to really accelerate AI. So what's not happening, right, is discretionary spend globally as we saw throughout the year, starting in North America, people are not doing smaller systems integration. They're not doing smaller strategy and consulting, they're prioritizing and focusing on larger deals. And even there, there's prioritizing, especially depending on the industry where you've got more challenges to say, can we -- we've got a lot underway, we're cautious about the environment, so help us Accenture cut costs, so we can afford all of the reinvention ahead of us and help us prioritize what we start next. And that's kind of the overall, sort of, more cautious spending. But I just want to reemphasize, nothing has changed about the fact that our clients have more ahead of them than behind them in terms of building the digital core and then using it to reinvent. And we're the only one in our industry that can both build the technology and at this scale have the industry and the functional expertise to then be positioned to help them use that technology to reinvent. So we are super optimistic about this industry in our position. Darrin Peller : That makes sense, Julie. And just -- I guess, as a follow-up to that, the ramp time, you know, you talked about a billion dollars investment in AI last time, and we've obviously seen some evidence of success, but early days still. So now that you've had the luxury of a few more months, the ramp time you'd expect to see that really become a much, much bigger part of the business. Can you just quickly touch on that again? This is around AI and generative AI. Thanks, [Indiscernible]. Julie Sweet : I'm sure -- my team are going to love the luxury of a few more months. You know, so thank you for that, I'm going to tell them that. See you guys, you've had a few more months. So look, as I talked a little bit about in our script, we're still learning. Remember, these are like, you know, a million dollar sort of things. We're starting tom, you know, look at our -- work it in our own delivery. So it's going to take a few more quarters till I've really got a well-informed view of that. But what I will say is, gen AI is an amazing technology. It's going to do great things. And what I tell all my clients, can't use it unless you're in the cloud, have data, and you've, you know, modernized your core. So that's our opportunity. Darrin Peller : Thanks, guys. Operator : And we'll go next to the line of Jason Kupferberg with Bank of America. Jason Kupferberg : Good morning, guys. Thanks for taking the question. I wanted to pick up on your earlier comment, I think you said that you're not assuming any improvement in discretionary spending in the overall environment there during F ‘24. So I know you guys typically start the year with a relatively conservative approach to guidance that certainly served you quite well in fiscal ‘23. So against that backdrop, can you tell us a little bit about what you're thinking regarding growth for each of the three business dimensions in F ‘24? Julie Sweet : Yes. So, Jason, let me just kind of give you a little bit more color on guidance, right? So, as we mentioned, we're not assuming in our guidance any improvement in the macro discretionary spend, but we're going to pivot two years of growth. So the macro is going to be kind of this, you know, it's not going to help us or hurt us this year is kind of what really essentially what we're saying. In terms of, you know, color, I'll kind of stick to what we have in the type of work, maybe is the best way of thinking about it. And again, I think just consulting, it's going to build as we go throughout the year. And overall, I think, it's important to know that we are going to build in this environment. We're going to build as we go throughout the year. Jason Kupferberg : Okay, and then on -- just on bookings, any thoughts on the first quarter or the full-year? I know there's some seasonal elements that typically consider in the November quarter? Thank you. Julie Sweet : Yes, sure. So let me just talk about maybe a little bit of bookings. You know, in bookings, we're going to start with the fourth quarter. I mean, if did come in a little bit lighter than we expected, and they can be lumpy, and we saw some deals, kind of, push out. Of the quarter, when it came to small deals, we didn't see any change in the discretionary spend environment. And just to reiterate that we're really pleased with the 21 clients that we had, over $100 million. Julie talked about that, if just reinforces our strategy to be the client's transformational partner of choice and to be at their core. And lastly, as it relates to ‘23, you know, we look at bookings that we're rolling for quarters and I mentioned this on managed services, but just overall we're at a 1.1 book to bill, which I'm really pleased about for the fourth quarters. And then for next year, looking at ‘24 Q1, you're right, it's seasonally a little lighter for us. However, we have a solid pipeline and we do expect that FY ’24 Q1 bookings will reflect growth over FY ’23 Q1. Jason Kupferberg : Thank you. Katie O'Conor: Operator, we have time for one more question and then Julie will wrap up the call. Operator : Thank you. And that question will come from the line of Bryan Keane with Deutsche Bank. Mr. Keane, your line is open. Bryan Keane : Hi, guys. Good morning. Wanted to just follow up on strategy and consulting. I know that that was an area that we were hoping at one point during the year that it was going to turn back to positive growth by the fourth quarter. And then I know we didn't think that was going to happen as of last quarter. So I'm just curious, as we go through the year into fiscal year '24, when do you think S&C might turn towards positive growth? KC McClure : Yes. Thanks, Bryan. So, look, in terms of our full year range, at the top end of our full year range, which again, always where we try to be, it does reflect S&C reconnecting with growth, and that clearly is our goal. Now when -- really the pace is going to differ by market, right, so it's hard to tell exactly when it will be throughout the year. Of course, we'll update you as we go through. And North America is our biggest market, it will be a bit more challenged. Bryan Keane : Got it. I'll leave it there because I know we're at the end of the call. Thanks so much. Katie O'Conor: Thanks so much. Take care. Julie Sweet : All right. In closing, I really do want to thank again all of our people and our managing directors what they do every day, which is truly extraordinary and gives us a lot of confidence in the future. And I want to thank all of our shareholders for your continued trust and support. I assure you, we are working hard every day to continue to earn it. Thank you. Operator : Thank you. And this conference is available for replay beginning at 10 AM Eastern time today and running through December 19 at midnight. You may access the AT&T replay system by dialing 866-207-1041 and entering the access code of 5848756. International participants may dial 402-970-0847. Those numbers again are 866-207-1041 or 402-970-0847, with the access code of 5848756. That does conclude our conference for today. Thank you for your participation and for using AT&T event conferencing. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,023	4	2023Q4	2024Q1	2023-12-19	11.952	12.038	12.842	13.029	19.9	28.15	29.07	Operator : Thank you all for standing by. Welcome to Accenture's First Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Katie O'Conor, Managing Director, Head of Investor Relations. Please go ahead. Katie O'Conor: Thank you, operator, and thanks everyone for joining us today on our first quarter fiscal 2024 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, Chair and 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. Julie 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 first quarter; Julie will then provide a brief update on our market positioning before KC provides our business outlook for the second quarter and full fiscal year 2024; we will then take your questions before Julie 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 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 Julie. Julie Sweet : Thank you, Katie and everyone joining, and thanks to our 743,000 people around the world for their incredible dedication and commitment every day, which is how we are able to consistently deliver 360 degree value for all our stakeholders. I am pleased that we delivered on our commitments this quarter, while continuing to invest significantly in strategic areas to drive the next waves of growth, including extending our early leadership in generative AI, and we did so against a macro backdrop that continues to be challenging. Starting with our financial results. Our bookings were $18.4 billion, representing 12% growth in local currency. We had 30 clients with quarterly bookings greater than $100 million in the quarter and over half were in North America, representing the trust our clients have in us to be at the center of their major programs, spending and ongoing reinvention. We delivered revenues of $16.2 billion for the quarter, at the top-end of our FX adjusted range, representing growth -- 1% growth in local currency. We continue to take market share. As expected, we continue to see lower discretionary spend, which particularly impacts our consulting type of work as well as slower decision making and our CMT industry group continues to be challenged. We remain on track with the business optimization actions we announced in March to reduce structural costs to create greater resilience. And finally, we expanded adjusted operating margin by 20 basis points and delivered adjusted EPS growth of 6%, while continuing to invest in our business and our people. Turning now to our investments. We closed 12 acquisitions this quarter for a total of $788 million in strategic areas across our geographic markets. In North America, we are continuing to build out our new growth area of capital projects, an $88 billion addressable market in North America, which we entered in August with the acquisition of Anser Advisory. In Q1, we added Comtech, a consulting and program management company for infrastructure projects in Canada. We also invested in the next digital frontier with our supply chain acquisition of The Shelby Group. We expanded our cloud capabilities with the acquisitions of Ocelot Consulting and Incapsulate. And we invested in digital marketing in the healthcare industry with the acquisition of ConcentricLife. In EMEA, we expanded our cybersecurity capabilities with the acquisition of Innotec in Spain, enhanced our business process services in the insurance industry with the acquisition of ON Service GROUP in Germany, and invested in digital healthcare and talent with the acquisitions of Nautilus Consulting and The Storytellers in the UK. Finally, in Growth Markets, we are focused on the cloud opportunity with the acquisition of Solnet in New Zealand, along with cybersecurity with the acquisition of MNEMO in Mexico, and on digital marketing services with the Song acquisition of SIGNAL in Japan. Our ability to invest at scale to fuel our organic growth is a competitive advantage. For example, in EMEA, we are focusing on pivoting our CMT business. We are investing with Vodafone to create a strategic partnership to commercialize its market-leading shared services operations and unlock new sources of growth and efficiency, enhance speed to market and new customer opportunities for their operating companies and partner markets. Together, we plan to create a new data and AI-driven shared services model and a scaled, commercially-driven and more efficient organization with higher-quality services and enhanced speed to market for its portfolio of offerings. The new unit will utilize Accenture's world-class technology, transformation and managed services such as its digital solutions and platforms and deep AI expertise. It will also tap into our well-known learning capabilities to continuously create new skilling and career paths for our -- for its people. This move speaks to Vodafone's ambition to work in new ways, reduce structural complexity, reinvent their company and the industry. And of course, we continue to invest in learning for our people with approximately 8 million training hours in the quarter, representing an average of 12 hours per person. Turning to generative AI, our growth and investments. We continue to take an early leadership position in GenAI, which will be an important part of the reinvention of our clients in the next decade. Last quarter, we shared that we had sold approximately 300 projects with $300 million in sales in all of FY '23. Demand continued to accelerate in Q1 with over $450 million in GenAI sales. As you know, we are investing $3 billion in AI over three years. For many of our clients, 2023 was a year of generative AI experimentation. We are now focusing on helping our clients in 2024 realize value at scale. We are excited about the recent launch of our specialized services to help companies customize and manage foundation models. We're seeing that the true value of generative AI is to deliver on personalization and business relevance. This is driven by context and accuracy, data readiness along with foundation model choices and customization are some of the most important steps and decisions that companies will make in the next year as they pursue value. Our clients are going to use an array of models to achieve their business objectives. Our proprietary switchboard allows a user to select the combination of models to address business context or factors like cost or accuracy. And we will offer rigorous training and certification programs to organizations using these new services to customize and scale GenAI solutions and transform every link in their value chain. We are also investing in AI acquisitions. For example, we recently announced our intent to acquire Ammagamma, an Italy-based firm that helps companies advance their uses of AI and generative AI technologies. With this acquisition, we will add 90 experienced AI professionals, many specializing in generative AI along with the expertise that includes engineering, mathematics, economics, historians, philosophers and designers, who will join our growing network of professionals in our advanced center for AI. And we are progressing towards our goal of doubling our deeply skilled data and AI practitioners from 40,000 to 80,000, with an additional 5,000 practitioners as of Q1. Finally, a few additional highlights of the 360 degree value that we created this quarter. We recently achieved our highest brand value and rank to date on Interbrand's prestigious Best Global Brands list, increasing to $21.3 billion and ranking number 30. We jumped from number 17 to number 10 on the 2023 World's Best Workplaces list by Fortune and Great Place to Work. This recognition is particularly noteworthy, because it is based on feedback from our people. We were recognized for the seventh year in a row on the Wall Street Journal list of Best-Managed Companies for excellence in customer satisfaction, employee engagement and development, innovation, social responsibility, and financial strength. And we also received the top score for social responsibility and are among the top 10 for customer satisfaction. We continue to lead in our ability to attract people with different backgrounds, different perspectives, and different lived experiences. Our success is reflected in the top score on the Human Rights Campaign Corporate Equality Index in the U.S. for the 16th consecutive year for leading equitable workplace policies, practices and benefits for LGBTQ+ people. And today, we are proud to present an update to our 360-degree value reporting experience, which is available on our website, because we believe that transparency builds trust and helps us all make more progress. Over to you, KC. KC McClure : Thank you, Julie. Happy holidays to all of you, and thanks for taking the time to join us on today's call. We are pleased with our Q1 results, which were in-line with our expectations and include continued investments at scale to strengthen our position as a leader in the market. Once again, our results illustrate our ability to manage our business with rigor and discipline and deliver value for our shareholders. So, let me begin by summarizing a few of the highlights for the quarter. Revenues grew 1% local currency with mid-single digit growth or higher in five of our 13 industries, including public service, industrial, utilities, health and energy. As expected, we saw continued pressure in our CMT industry group. And we continue to take market share. As a reminder, we assess market growth against our investable basket, which is roughly two dozen of our closest global public competitors, which represents about a third of our addressable market. We use a consistent methodology to compare our financial results to theirs, adjusted to exclude the impact of any significant acquisitions through the date of their last publicly available results on a rolling four-quarter basis. We delivered adjusted EPS in the quarter of $3.27, reflecting 6% growth over EPS last year. Adjusted operating margin was 16.7% for the quarter, an increase of 20 basis points over Q1 last year and includes significant investments in our people and our business. Finally, we delivered free cash flow of $430 million and returned $2 billion to shareholders through repurchases and dividends. We also invested $788 million in acquisitions across 12 transactions in the quarter. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $18.4 billion for the quarter, representing 14% growth in U.S. dollars and 12% growth in local currency, with a book-to-bill of 1.1. Consulting bookings were $8.6 billion, with a book-to-bill of 1.0. Managed services bookings were $9.8 billion, with a book-to-bill of 1.3. Turning now to revenues. Revenues for the quarter were $16.2 billion, a 3% increase in U.S. dollars and 1% local currency, and we're at the top-end of our guided range adjusted for a foreign exchange tailwind of approximately 1.5% compared to the 2.5% estimate provided last quarter. Consulting revenues for the quarter were $8.5 billion, flat in U.S. dollars and a decline of 2% in local currency. Managed services revenues were $7.8 billion, up 6% in U.S. dollars and 5% in local currency. Taking a closer look at our service dimensions : technology services grew mid-single digits, operations was flat, and strategy and consulting declined mid-single digits. Turning to our geographic markets. In North America, revenue declined 1% in local currency. Growth was led by public service, offset by declines in communications and media, software and platforms, and banking and capital markets. Before I continue, I want to highlight that for this fiscal year '24, we have reorganized our geographic segments. Europe is now EMEA and includes the Middle East and Africa, which were previously included in Growth Markets. The reclassification for prior years can be found in our Investor Relations website. In EMEA, revenues grew 2% in local currency, led by growth in public service and banking and capital markets, partially offset by a decline in communications and media. Revenue growth was driven by Italy, Austria, and France, partially offset by a decline in the United Kingdom. In Growth Markets, we delivered 5% revenue growth in local currency, driven by growth in chemicals and natural resources, public service, and banking and capital markets. Revenue growth was led by Japan. Moving down the income statement. Gross margin for the quarter was 33.6% compared to 32.9% for the first quarter of last year. Sales and marketing expense for the quarter was 10.5% compared with 9.8% for the first quarter of last year. General and administrative expense was 6.4% compared to 6.6% for the same quarter last year. Before I continue, I want to note that in Q1, we recorded $140 million in costs associated with our business optimization actions, which decreased operating margin by 90 basis points and EPS by $0.17. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.7 billion in the first quarter, reflecting a 16.7% operating margin, an increase of 20 basis points from operating margin in Q1 last year. Our adjusted effective tax rate for the quarter was 23.2% compared with an effective tax rate of 23.3% for the first quarter last year. Adjusted diluted earnings per share were $3.27 compared with diluted EPS of $3.08 in the first quarter last year. Days services outstanding were 49 days compared to 42 days last quarter and 48 days in the first quarter of last year. Free cash flow for the quarter was $430 million, resulting from cash generated by operating activities of $499 million, net of property and equipment additions of $69 million. Our cash balance at November 30th was $7.1 billion compared with $9 billion at August 31st. With regards to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed 3.8 million shares for $1.2 billion at an average price of $311.90 per share. At November 30th, we had approximately $5.4 billion of share repurchase authority remaining. Also in November, we paid a quarterly cash dividend of $1.29 per share for a total of $810 million. This represents a 15% increase over last year. And our Board of Directors declared a quarterly cash dividend of $1.29 per share to be paid on February 15th, a 15% increase over last year. So, in closing, we remain committed to delivering on our long-standing financial objectives, growing faster than market and taking share, generating modest margin expansion and stronger earnings, while at the same time investing at scale for our long-term market leadership, generating strong free cash flow and returning a significant portion of that cash to shareholders. And now, let me turn it back to Julie. Julie Sweet : Thank you, KC. As we begin our second quarter, we remain laser-focused on creating value for our clients. The pace of spending continues to be impacted by the macro environment. Our business in the UK in particular, in Q1, saw even greater challenges than we expected last quarter. The fundamentals of our industry remain unchanged. All strategies continue to lead to technology and companies need to reinvent every part of their enterprise using tech, data and AI to optimize operations and accelerate growth. To do so, they must build a digital core. Strategy and consulting, which brings our deep industry and functional expertise is critical to how we differentiate by helping our clients ensure they drive business value from their digital core. We are continuing to see significant demand in areas like cloud migration and modernization, modern ERP and data and AI, including GenAI, platforms and security, all of which represent areas of great opportunity and is still early with more digital core to be built in the future than has been done to date. Let me bring to life the significant opportunities still ahead with examples from the quarter. Our cloud momentum continued in Q1 with strong double-digit growth, reflecting the ongoing significant market opportunity. We estimate only 40% of enterprise workloads are in the cloud, of which only 20% or so are modernized, an 80% opportunity remaining. Clients are continuing to prioritize the digital core as evidenced by strong demand for cloud migration. We're working with a leading insurance provider to continue their cloud transformation. Together, we are migrating hundreds of applications to a cloud-based platform, enabling the company to exit their data centers by 2025. To date, we have migrated more than half of their apps to the cloud. And this is not just a migration. We are modernizing applications and accelerating automation to integrate disparate data more easily from acquisitions and help the company move into new markets. And we are helping reshape their organizational mindset, drive cultural change and find new ways of working, including the creation of a new IT service model to lead complex transformations with agility and speed. This transformation will reduce legacy complexity and technical debt, enable more cost effective back-office operations, and drive growth and innovation, ultimately helping the company provide more affordable and personalized insurance solutions for families and businesses. And for those clients who have made significant progress on their migration, they are investing to modernize and innovate across the cloud continuum, extending cloud to the edge, unlocking greater value with more opportunities still ahead. For example, we recently announced an expansion of our strategic partnership with McDonald's to help it execute their technology strategy and leverage the company's scale to unlock greater speed and efficiency for customers, restaurant teams and employees. This new work supports McDonald's ambition to connect restaurants worldwide with cloud technology and apply generative AI solutions across McDonald's platforms. Accenture also will support the acceleration of automation innovation and the enhancement of the digital capabilities of McDonald's employees. Accenture's deep understanding of the McDonald's business, industry and technology will help unlock opportunities in their ongoing digital investments as McDonald's reinvents the customer experience and stays ahead of their customers' changing needs. Turning to data and AI. We estimate that less than 10% of companies have mature data and AI capabilities. This is a critical part of building the digital core and we see this embedded in our larger transformations, in work focused on data and AI modernization and in the opportunities of generative AI. We help leaders such as BBVA, a global financial services group, to stay ahead of the curve by continuing to reinvent its business model with GenAI. For example, we are building a GenAI-powered financial coach assistant to help them disrupt customer centricity in the banking industry while they reinvent their digital core to also become even more efficient. This work is a continuation of our ongoing GenAI implementation which is transforming BBVA's operations and digital marketing and is helping employees be more productive. Thanks to its strong digital core, BBVA can continue to reinvent across their enterprise by applying GenAI. We're also helping a global hospitality group to support its content production capability and marketing communications across its hotel brands, tailoring content to guests' evolving needs. This new data-driven content supply chain model will create personalized, flexible and efficient marketing communications content across every customer touchpoint. Spanning both physical and digital communications, this service will be available to all marketing professionals enabling content production management from its initial brief to performance measurement and content optimization. This will increase the effectiveness of its digital marketing programs, drive more traffic to its branded website, and deliver exceptional customer experiences, all while reducing costs. Platforms are a core component of the digital core and are critical to our clients' transformations. We estimate 60% of the opportunity is still ahead as clients upgrade their core platforms. We are working with OCBC Group, a Singapore-based multinational banking and financial services corporation, on a two-year transformation journey to modernize their human resources organization. We will shift key HR functions such as hiring, talent management, and career development to the cloud and create a next-generation HR operating model with enhanced capabilities. Together, we will drive operational efficiency with a strategic focus on future talent readiness, employee experience, and AI-driven decision-making. And by providing a scalable framework to meet evolving business needs, we'll free up HR capacity to provide high-value advisory work and empower business and HR leaders with analytics and insights to facilitate better talent decisions. Security is also essential to a digital core, and we continue to see very strong double-digit growth in our security business this quarter. While the opportunity to continue to grow and expand, we estimate that currently only 36% of business leaders are confident that their organizations are cyber resilient, representing at least 64% of untapped potential. An example of our important work with our clients to build secure organizations is Fortrea, a global contract research organization of about 19,000 people that provides clinical trial and research services for life sciences companies in more than 90 countries. We're working with Fortrea to deliver database outcomes and health-related insights, which require adherence to regional and local industry and government regulations. As they continue to grow and enter new markets, they need a partner to ensure that their cybersecurity program remains resilient and compliant with security best practices. We will co-create, architect, and operate a series of global cybersecurity services and capabilities through our managed services. Our partnership will help Fortrea grow its business, utilizing flexible risk and security strategies. We are focused on helping clients reimagine marketing and their customer experience to drive growth. Song demand continues to remain strong with double-digit growth in Q1. We are collaborating with Peugeot, a French automotive brand, to lead strategic and creative direction for its global communications. The partnership supports Peugeot's ambition to engage a younger audience and become a leader in the electric vehicle market. Accenture Song will manage global communications across all traditional and digital media channels. The first campaign will be a full 360 integrated launch of the all-new electric fastback SUV E-3008 in early 2024. Finally, we continue to see strong demand for digital manufacturing and engineering services. We estimate that only 5% of enterprises have scaled, matured digital capabilities across their organizations. Industry X grew strong double digits in Q1. We are working with a leading global -- a leading German multinational car manufacturer to engineer the next generation of infotainment system. Using our deep industry expertise and software engineering capabilities, we will support the implementation of a new flexible platform that enables the next level of in-car experience with cutting-edge customer features while minimizing complexity and maximizing the software we use across hardware generations. We're working with a global food manufacturer on a total enterprise reinvention strategy to modernize its supply chain, reduce operating costs, and position it for the future. We will transform key supply chain processes such as planning, procurement, manufacturing, and distribution. AI and intelligent automation will optimize end-to-end supply chain operations and achieve greater efficiency and agility. It will also help the company leverage data for better decision making and implement portfolio optimization to ensure the right assets are focused on for investment to maximize returns and minimize risks. This self-funded program is expected to generate significant productivity gains with ongoing savings fueling further capability builds and bottom-line growth. Back to you, KC. KC McClure : Thanks, Julie. Now, let me turn to our business outlook. For the second quarter of fiscal '24, we expect revenues to be in the range of $15.4 billion to $16 billion. This assumes the impact of FX will be about negative 0.5% compared to the second quarter of fiscal '23 and reflects an estimated negative 2% to positive 2% growth in local currency. For the full fiscal year '24, based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollars will be about flat compared to fiscal '23. For the full fiscal '24, we continue to expect our revenue to be in the range of 2% to 5% growth in local currency over fiscal '23, with the inorganic contribution now expected to be more than 2%. We continue to expect business optimization actions to impact fiscal '24 GAAP operating margin by 70 basis points and EPS by $0.56. The following guidance for full year '24 excludes these impacts. For adjusted operating margin, we continue to expect fiscal year '24 to be 15.5% to 15.7%, a 10 basis point to 30 basis point expansion over adjusted fiscal '23 results. We continue to expect our annual adjusted effective tax rate to be in the range of 23.5% to 25.5%. This compares to an adjusted effective tax rate of 23.9% in fiscal '23. We continue to expect our full year adjusted earnings per share for fiscal '24 to be in the range of $11.97 to $12.32 or 3% to 6% growth over adjusted fiscal '23 results. For the full fiscal '24, we continue to expect operating cash flow to be in the range of $9.3 billion to $9.9 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $8.7 billion to $9.3 billion. Our free cash flow guidance reflects a free cash flow to net income ratio of 1.2. Finally, we continue to expect to return at least $7.7 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so we can take your questions. Katie? Katie O'Conor: Thanks, KC. 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. Operator, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Jason Kupferberg from Bank of America. Please go ahead. Jason Kupferberg : Good morning, guys. Happy holidays. I just wanted to start with a question on the revenue guidance for Q2. The midpoint there would suggest 1 point of deceleration, but we do have an easier comparison, and there was a return to positive growth in consulting bookings. So, just hoping you can help us reconcile that and then maybe comment on the second half reacceleration that is continuing to be implied in the guide, maybe slightly steeper than previously thought. Thank you. KC McClure : Yeah, great. Thanks, Jason. Happy holidays to you, too. So first, let me first start in terms of our guidance. I'll first start with Q1. And as you heard us say, we were really pleased with our Q1 performance. And as you stated, our Q2 guidance is the same as Q1. And maybe a couple of things that I'll point out compared to what we thought 90 days ago, and as Julie mentioned, we do see some differences in EMEA, particularly in the UK, where we're focused on repositioning the business back to growth, and that's going to take some time. But Jason, what is the same is that we are still operating in an environment, which is the same that we described last quarter, where the discretionary spend and the decision making is slow. And so right now, as you expect, and you know that we do this every year, we're talking to our clients right now about their '24 budgets. And so that's all, again, to be expected. When we look forward into H2, to start with just what the math is, we continue to see higher growth in the back half of the year. That's going to start with higher growth in Q3. And our confidence in our H2 increased growth is really based on a few things. Again, reiterating what we talked about at the beginning of the year versus our results in Q1, so we're confident, again, that we were able to deliver across the board as we expected in the first quarter. And also then, as Julie mentioned quite a bit, we made a lot of investments in our business in the quarter, and that's helping us pivot to higher growth areas. In addition to that, as we talked about last quarter, the same remains, we do have our revenue positioned in the back half of our year from these larger transformation deals. So that has not changed. We continue to see that. And then, we just need to continue to layer in our new sales as we get closer to the back half of the year. So, we're really very pleased to reiterate the 2% to 5% revenue guidance that we had at the beginning of the year. Jason Kupferberg : Okay. That's helpful. And just as a quick follow-up, what should we expect in terms of second quarter bookings for consulting and management -- managed services year-over-year? I know managed services has a particularly tough comp. Thanks again. KC McClure : Yeah. So, Jason, I know I've been giving color and basically kind of guiding to future quarter bookings, but as you know really well covering up for so long, bookings can really be lumpy. So, I'm not going to give that color anymore, go forward. What I would say is the best way to think about demand for our business is the revenue guide that we give. And we gave revenue guidance for the second quarter as well as our 2% to 5% for the full year. And obviously, we'll continue to do that. And I'll just put in that we do feel good about our pipeline. We have a very solid pipeline. Operator : Your next question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Tien- Tsin Huang : Hey, perfect. Yeah, I just want to follow up to Jason's question just with the bookings, which is better than expected, and your large deal backlog is quite large now. Just the visibility on the timeliness of those conversions? Have you seen any signs of pushout or delays or that kind of thing? Just trying to understand the conversion potential. KC McClure : Yeah. So maybe just a couple of things on that. So I think, conversion can be really mainly impacted by the mix, right? So, the mix of deals that we have. So, let's just start with, overall, we haven't seen any change in the conversion based on the mix of work. So, strategy and consulting which converts faster than with operations. There's been no change within those different parts of our business, no change in the conversion. What we have talked about, and we've been consistent, that there's really been -- there's no change over the last 90 days in our discretionary spend environment, and that is consistent with our expectations. So -- and we haven't been reliant, and we're not reliant on a change in that macro to get to our full-year guidance. So, what does that mean? Hopefully you guys can hear me. The lower -- a little trouble in the line. Okay. Is that there -- as we have lower discretionary spend, that does impact the conversion, Tien-Tsin, as you know, but we have factored that all into our guidance. Tien- Tsin Huang : Understood, KC. Thanks for that. And just my quick follow-up. I know you've been really busy with acquisitions, and Julie, you listed a bunch of them. Is there a change here in the rhythm of acquisitions or your appetite? It sounds like the revenue contribution is up a nudge, but -- up a little bit. But you tell me. I didn't know if there was a change in your thinking here on the deal. Thanks. KC McClure : Yeah. I'm going to maybe give a little bit of color and then I'll certainly hand it over to Julie. Just more from a financial perspective, I think -- and as you know this really well, but our competitive advantage really is our investment capacity that allows us to pivot to higher areas of growth. And we can do that and invest through every cycle, and you've seen us do that. And I really think that is clearly a differentiator for us. You see that with our strong start this quarter. Julie talked about the 12 acquisitions, $800 million of spend, and we have five more that we've announced for Q2. All of that, and we're reconfirming op margin expansion of 10 basis points to 30 basis points. I think it's important to see that in terms of our strategy, we're continuing to do this to really fuel organic growth. And lastly, I think one of the parts that really distinguishes us is our capital allocation framework, which is durable yet flexible. So, we're able to flex up and do inorganic to the degree that we see that we'd like to, while at the same time, continuing to increase our return to our shareholders. So, I think it's really, really great. Julie Sweet : Great. Yeah. And there's no change in the strategies in the sense of we're still trying to -- we're still investing to either scale in hot areas or add new types of skills. So, you see that we're executing in capital projects like we described, right? In August, we did the -- yeah, in August, we did the Anser Advisory. We just added Canada. And then, of course, adding the niche skills in consulting and whether it's industry or functional. So, no change in strategy. But I would reiterate that it is really a huge competitive advantage for us that we can invest across the cycles. You saw that we did that in the first year after the pandemic, where we significantly increased, and again, always to drive organic growth and position ourselves for those next waves. So, you're going to see the AI acquisitions. You saw health in the UK, another great area of growth, capital projects. So, think about our strengths here is how we accelerate pivoting to growth. KC McClure : And then, I'll just add, Tien-Tsin, that you heard me mention in guidance, that we are going to do now more than 2% in organic contribution for this year. Julie Sweet : Yeah. Tien- Tsin Huang : Yeah. No, I'm sure you'll amplify the growth of what you buy. Just wanted to check on that. That's helpful. Thank you. Julie Sweet : Thanks. Operator : Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Thanks, and congratulations on the performance. Happy holidays from me. I wanted to ask about, as you have conversations with your clients with regards to budget and spending priorities into next year, if you can comment, first of all, on that? And then, it's only a couple of quarters since sort of the GenAI kind of took hold, but it's a fast-moving technology, and I want to kind of inquire into whether the nature of those discussions has changed or become more meaningful, gone past proofs of concept and so on. Julie Sweet : Great. And happy holidays to you, too. Great question. So first, with respect to -- on your first point around what's happening in the market on client budgets is what I would say is that we're having lots of discussions that are pretty similar to what we've been talking about, which is, how do you prioritize in a more cautionary environment? So, we'll really know how that will play out in January as always because this is when we -- they finalize. But what I'd say is it's a consistent thing I've been talking about, which is in a cautionary environment, in a tough macro, we're helping clients prioritize. And they're in the things that we talked about in the script again today, things like building the digital core. It's using the technology to drive both growth and cost. And I would just say on the macro side, right, is that, our clients, we recognize you cannot cut yourself to growth. And if you think about the examples that I used in today's script, most of them were both cost and growth, right? Because that is what our clients are focused on, is how are they going to grow revenue despite whatever the environment is. And that, of course, is our unique capabilities to be able to do both. And then, with respect to GenAI, so first of all, I just want to say $450 million in sales this quarter, we're very pleased with. I mean, it demonstrates we are leading here. All of last year, it was $300 million. And to your point, the conversations are changing. You have examples like BBVA, which we talked about earlier in my script, where we're starting to use it at scale. Our clients want to get out of proofs of concept to material value, and we're super well positioned. Why? GenAI is not plug and play. It is not just technology. In fact, it's closer to any other technology. Think about cloud, that's farther away from the heart of the business. In order to scale, you have to deeply understand the technology, which is still rapidly changing, and the business value. And this is Accenture's leadership position, right? We have strategy. We have consulting, deep industry and functional expertise. We're the biggest partner with every major player. We're working with them at a product level and we can bring those two things together. So, think of 2024 as being the shift for our clients from experimentation to scale, and we believe we're at the best position to lead that shift to value. Ashwin Shirvaikar : Understood. I want to ask also about operations performance. It did decelerate meaningfully. I think it was high-single-digit growth, and now it's flat. Is that also a reflection you mentioned just now, maybe a pivot from cost savings to revenue generation maybe is beginning? Is that what's happening or are there other factors in here? KC McClure : Yeah. Maybe just in terms of the quarter performance, operations came in as expected. As we talked about at the beginning of the year, Ashwin, we do have some impacts in CMT that impact operations, and so we'll see that growth may fluctuate as we go throughout the year. As part, though, of our overall guidance for the full year of managed services continuing to be mid-single to high-single-digit growth for the year. Julie Sweet : Yeah. And in fact, I would say, it's the opposite. Operations, which was impacted, by the way, by CMT, for example, look, it's going to build similar to the way Accenture is going to build over the course of the year. Actually, the sweet spot of operations is that it does both cost and growth. So, the BBVA example includes operations, Fortrea includes operations. So, these are -- our managed services are highly strategic because they are typically able to do both. Think about IT transformation. Our managed services are as much about modernizing. So, in IT, modernized tech is what drives growth. So, we really see our strength being that our managed services are strategic. And one of the reasons is that we do them in the context of understanding the industry and the function. So, we're not back office. We're bringing that strategy and consulting expertise to make sure that it isn't just a cost play. And that's an important differentiator for us. Ashwin Shirvaikar : Got it. Thank you both. Julie Sweet : Thank you. Operator : Your next question comes from the line of Bryan Bergin from TD Cowen. Please go ahead. Bryan Bergin : Hi, guys. Good morning. Happy holidays. I wanted to start on your some of the expectations around shorter cycle and discretionary work within S&C and SI. Do you have a sense of stabilization forming there or cuts still occurring in those areas? And maybe can you give us a sense on how you expect consulting to do in the second quarter? Julie Sweet : Yeah. So, look, we're -- as KC said earlier, we're operating kind of the same environment we have for the last few quarters, right? Discretionary spend is down. And we're right in the middle of the budget cycle, so next quarter, we'll have a much better view of what's there. But if you sort of look around in the environment, there aren't a lot of green shoots on the economic side. And obviously, the volatility on the geopolitical side continues. And so, as KC said, we're not planning right now for kind of a change in the macro, which means that we're not planning for a change in discretionary spending. We just don't see that being meaningfully different as we go into 2024. And obviously, we'll update you. But that's why when you think about the question earlier on revenue conversion, our level of smaller deals is just down. It's going to stay down for a while, which means that how revenues going to -- how sales are going to bleed into revenue is going to be consistent with what we've been seeing. So -- and then, you want to comment? KC McClure : Yeah. Just in terms of, Bryan, on the overall growth, there's no change from what we said at the beginning of the year in terms of our full-year outlook for consulting type of work. We see low-single-digit positive growth for the full year. That's in our 2% to 5%. And Q1 came in as we expected, which was negative 2%. Bryan Bergin : Okay. That's helpful. And then, just a clarification around the M&A. So first, I don't know if you mentioned M&A in the first quarter, the contribution to growth, and we're saying greater than 2% for the full year. Just to be clear, that's just rounding around 2% or upwards of 3%? Thanks. KC McClure : Yeah. So, we're saying more than 2% for the full year, and it can fluctuate by quarter, so we really just stick to our guidance for the overall year. Julie Sweet : Right. And if we get close to 3%, we'll talk about that. But right now it's more than 2%. KC McClure : More than 2%. Julie Sweet : Right. Because we gave you guidance, so it's down definitely more than 2%. And remember, we only do deals that we think are good deals. So, what we see right now is a lot of good deals that is going to get us to above 2%. And if that -- we have a lot of financial flexibility, so if that changes, we'll update if it gets above 3%. Bryan Bergin : Thanks. Happy holidays. Julie Sweet : Happy holidays. KC McClure : Same to you. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. Dave Koning : Yeah. Hey, guys. Thanks so much. One thing I noticed, I guess, gross margin growth, year-over-year expansion in gross margin was the strongest in about nine quarters or so. Is that just lower attrition, offshore shift? Maybe walk through why that's gotten nicely better. KC McClure : Yeah. Hey, Dave. Thanks for the question. So, as you know, we run our business to operating margin, which we did 20 basis point expansion this quarter. And I will mention that if I didn't already, that the 10 basis point to 30 basis point that we have for the year, we might see more variability as we go throughout the quarters. But now back to gross margin, you're right, we did see expansion this quarter, but it's really hard to look at that in isolation. And why is that? Well, there's various things that can go in and out of gross margin in terms of increased or decreased spend. So, for example, one would be acquisitions. There's a lot of -- some of the investment acquisitions, some of that spend will go into gross margin, and that can be lumpy as we go throughout. As you know, it also depends on where people spend their time. So for example, you saw that, yes, we had improvement in gross margin, but then we also had increased sales and marketing costs, which is a result of people spending more time out in the market selling to create the $18.4 billion in sales that we have. So that's why -- again, we look at those components, but really at the end of the day, we always continue to run our business to op margin. Dave Koning : Got you. Thanks for that. And then, maybe as a follow-up just to Jason's question at the beginning on kind of the back-end loaded growth. If I just put in normal sequential patterns in Q3 and Q4, I get to about 2% constant currency, so the low-end of guide. Is there a scenario given bookings were really good this quarter that it actually, the progression sequentially in the back half of the year is better than normal and then that kind of gets to the better parts of the guidance range for revenue? KC McClure : Yeah. So, I think, obviously when you do -- what you're just kind of talking about is a bit of the math. What I would tell is give you the year-over-year way we look at it in terms of our guidance, right? So, we had 1% growth this quarter with strong bookings, right, 1% revenue growth with strong bookings. We see Q2 shaping up the same way year-over-year. And again, just reinforcing that we do see fuel in our sequential growth in the back half of the year based on the transformation deals that we have signed. That's no different than what we talked about at the beginning of the year. We've layered in then the sales that we expect as we go throughout. And that -- there's no difference to how we're doing our range that gets us to the 2% to 5% range. I would say at the top end of our range, again, as we said, last quarter, just when we said guidance, that when -- to get to the top end of our guidance range, you would see S&C reconnecting with growth would be one thing that we'd see. And you would probably also see the mid- to high-single digits that we've been referencing consistently in managed services be more like high-single digits. So hopefully that helps, Dave. Dave Koning : Yeah, that's helpful. Thanks, guys. Nice job. Julie Sweet : Thank you. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Hi, guys. Good morning. I just wanted to ask on the clarification on the UK market in particular. I know the economy has been weak there for a couple years. So -- and I know it's been a call out for kind of the quarter. What exactly happened in the UK? And then, what's the outlook for that? Julie Sweet : In the UK, as you said it, it has been kind of challenge for a couple of years, and we have a big banking capital markets business there, and we're really trying to pivot to more growth there in other areas. That's why you saw the acquisitions that we did, for example, this quarter. And what we're seeing is that it's just taking longer than we anticipated to really move into the other areas. And banking capital markets, which we've talked about, has been more challenged, particularly in the UK. And so, it's really about how long it's taking us to pivot. And we think it's going to take some time. So, I'm not going to call exactly when, but we do think it's going to take some time, and it's taking more time than we anticipated going into the fiscal year. So, we've got a good team. We're on it. And again, this is where you're going to see us do more acquisitions to diversify our business there as we reposition that. KC McClure : Yeah. Maybe just also, Bryan, just for context, it's about 6% of our overall business, a little bit more than $4 billion that we have in the UK. Bryan Keane : Got it. No, that's helpful. And then, KC, just to make sure we understand, the comments on the margins, given the movement in acquisition and the pick of an acquisition, there could be some fluctuations in given quarters. You're not going to have it perfectly 10 -- in the range of 10 basis points to 30 basis points per quarter. Any quarters to call in particular where it could fall below the range given the ramp of acquisitions and the ramp of investments? Thanks. KC McClure : Yeah. I don't want to really guide to the quarter because 10 basis points or 20 basis points on a quarter, that's spend, Bryan, as you know. That's kind of big and small in terms of the dollar amount that we're talking about. So, we're going to guide overall to the full year of 10 basis points to 30 basis points for the full year. And I just wanted to point out that we might have some periods where it's just a little bit more variable than what you've seen us do over the years. Bryan Keane : Got it. Thank you. Happy holidays. KC McClure : Thanks, Bryan. Operator : Your next question comes from the line of Darrin Peller from Wolfe Research. Please go ahead. Darrin Peller : Hey, thanks guys. Just want to touch on headcount growth. I mean, it's still -- I think it's still a bit decelerating. And so, what are the expectations going forward, I mean, just given the backdrop of an acceleration on the revenue in the second half of the year? And then, Julie, maybe we could just touch on the linearity of the business one more time. Just if we could revisit the mix of the kind of business you're seeing now and the revenue per head you'd expect, or maybe just directionally, what you'd anticipate based on the mix we're seeing and what demand is for? KC McClure : Yeah. So, thanks for that, Darrin. So, I'll talk about -- in terms of our people, in terms of number of people we have, first, I'll start with, as you know, managing supply-demand is really our core competency. And you can see that in our ability to manage our utilization at high levels. And I'll just point out that for the last 13 quarters, our utilization has been 91% or higher. And so, we hire for the skills that we need and we hire where we need them. And what you're pointing out is that we had about a 1% increase year-over-year in our headcount, as well as about a 1% sequentially. And that's in-line with what we -- how we see revenue going for the rest of the year. So there's really no change there. And as it relates to the revenue per head and the non-linearity, I mean, we do have automation. We do have value-based projects. So, while there still is a, obviously, connection to the amount of people that we have, we have been able to break that. There are parts where we are able to not fully disconnect, but not completely rely on headcount to drive revenue. Julie Sweet : And Darrin, in terms of just demand, right, so I'd kind of anchor to, first of all, we're seeing demand for transformational deals. So, in an environment like this, the thing that I look at most is, are we continuing to have our clients do more than $100 million of bookings, right, which is in our industry, we are a real standout here. And what does that mean? That means that we continue to be at the heart of where clients are spending to do material transformations. That's where you want to be so that you're positioned when inevitably discretionary spending, the pace goes back up, the macro changes, you want to be at the heart. So, at times like this, that's what I'm really looking at. And that's where you're seeing -- I will tell you, this is one of the most exciting times in the market. Like you just take what we are announcing today on McDonald's. I talked about in the script, right? Incredible company, technology driven. We've been their long-time partner. Just expanded the partnership to take it all the way to the edge and reinvent their restaurants and their crew experience. This is going to be really cutting work at the edge, because that's where we're starting to see the leaders in cloud go, and we're leading there. Those are the kinds of things that then you see how they're going to expand. There's so much opportunity still in these big areas of cloud, of data, and AI. But cloud itself, yes, we've done a lot of migration. There's still more migration to go, but even more importantly, you've got to take it all the way to the edge. So, from a demand perspective, we continue to see the transformations that move the needle for cost and growth, and that's what we're expecting. From a mix perspective, we're not seeing a big change between managed services and consulting. The mix we're seeing is that in this environment, you're seeing less of the smaller deals, which convert to revenue faster, and more on the larger deals. And that's been around for a while, and that's what you're going to continue to see. And we are laser-focused on making sure we are winning in the reinvention, the transformation, and at the same time massively pivoting to GenAI, right? And our clients have so much work to do to be able to use GenAI, but you can see the momentum in our business, right, from that change from $300 million of all of last year to $450 million in a quarter. And I'll just remind you, that's not the pull-through. That's not data. We are very pure because we really want to be sharing with all of you where is GenAI in the market. So, we're pretty excited about where we are today and what's ahead. Darrin Peller : That's really helpful. Look, you guys have obviously managed well through what was a softer discretionary demand environment. So, I guess, my question would be, if we thought about what a normalized run rate of revenues on really S&C would be, if we just said today's a normal, no longer softer discretionary environment, where do you think the difference is? I mean, I know it's probably hard to give an exact or precise estimate, but how much upside is there when we get that back? Julie Sweet : Well, we have a good -- a really strong strategy in consulting business. And so, we're very positive about that business growing. But beyond that, I think, Darrin, we're not going to start to predict growth rates. But in the meantime, it is a huge differentiator. Nobody has that combination that we have, and that is what is driving the resilience of our business to be at the core of our clients' agenda. Thanks so much, Darrin. Darrin Peller : Great. Thanks, guys. Katie O'Conor: Operator, we have time for one more question, and then Julie will wrap up the call. Operator : Okay. That question comes from the line of James Faucette from Morgan Stanley. Please go ahead. James Faucette : Great, thank you so much. I want to just ask a couple of follow-up questions to those that have already been asked. First on the inorganic contribution, appreciate that it's going to be better than 2%. Can you talk a little bit about whether that increased activity is -- or how you would balance that increased activity between just better valuations and more opportunities from a purely financial perspective in the market versus it sounds like some of the acquisitions you're doing, you're just trying to push into new strategic areas, and just wondering how you're balancing those strategic imperatives versus perhaps a little better valuations? Julie Sweet : Yeah. I mean, I wouldn't call out -- I wouldn't say that this activity is because of better valuations, right? At any given time when we look at the market, right, and we see where are the growth opportunities, we want to move quickly and we look at organic versus inorganic ways of moving quickly. We never do anything purely inorganic, right, or purely organic. And so, think about our acquisitions as being matched to what is the opportunity in the market and what's the best way to capture that growth quickly, right? And so, the strategy of categories is the same, right? So, there are new areas that we want to go into, like capital markets. That's an investment decision. We go into a certain number of those. We're executing now with rigor. We went and bought Anser Advisory. Now we bought the next one in Canada, right? So that's just about -- it's a great growth area and we're trying to pivot. And the best way to do that to build something that we don't have already organically is to make some inorganic acquisitions and then that becomes organic growth and we're able to kick in our recruiting machine. If you think about the UK, health is a great area. We just bought a health company, right? So, you look at the market and you say, "If I want to diversify, what's the fastest way to diversify into new areas?" And that's where often inorganic can help us do that through these niche acquisitions and consulting and industry. And then, you've got just massive opportunities like cloud and security, where you saw some of those acquisitions in supply chain. And that's all about both adding phenomenal talent quickly and scaling to go after a market that's today, right? So, that's how we think about it. It's extremely rigorous. We always have a decision what's the best way to get there organically or inorganically. And inorganic is always about acceleration and driving organic growth. So, it's very consistent. We've been doing it in a very disciplined way. And in these kinds of environments, we believe the companies that invest win. And that is why we do actions like we did last year to increase our business resilience and enable us to be really well positioned to invest when others are not. James Faucette : That's great color. I appreciate that. And similarly, just on bookings activity and AI contribution, there are clear acceleration in the AI level of activity, et cetera. When you're talking to clients and that kind of thing, how are they thinking about AI budget allocation versus other initiatives, et cetera, right now? Are they looking at it as, "Hey, this is an incremental investment that we need to be making given the pace of change in technology," or are they trying to really use that spend or have that spend be to offset some other projects maybe that they're going to curtail a little bit sooner? Just trying to think about as that continues to build, how we should think about it being incremental versus substitutive within a lot of the budgets. Julie Sweet : Right now we're seeing a lot of reprioritization, right, because -- I mean, obviously the market is growing. Like, we're growing. The market is growing. So, spending in technology is increasing. It's not increasing as fast as it was increasing a couple of years ago, right? So, spending on technology is increasing. But within that, you're seeing more prioritization. And our research, everybody's research is saying, hey, more spending on AI. For lots of companies, it's also more spending mostly on building that digital core, because many companies don't have the data estates in order -- they're not in the cloud. They don't have the data in order to use the GenAI. So, think of it as a real focus on building a digital core to enable as well. So, market is still growing. It's more about prioritization of where that spending is going. Okay. Great. Thank you so much. So, in closing, I want to thank all of our shareholders for your continued trust and support in all of our people for what you do every single day. And I wish everyone a happy and a healthy holiday season. Thank you for joining today. Operator : That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,024	1	2024Q1	2024Q2	2024-03-21	11.986	11.953	12.857	12.752	19.55	25.03	22.38	Operator : Good morning. Thank you for standing by, welcome to Accenture's Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode, later we will conduct a question-and-answer session. [Operator Instructions] 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, Katie O'Conor. Please go ahead. Katie O'Conor: Thank you, operator. And thanks, everyone, for joining us today on our second quarter fiscal 2024 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2024, we will then take your questions before Julie 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 report 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 Julie. Julie Sweet : Thank you, Katie and everyone joining, and thank you to our 742,000 people around the world who work every day to deliver 360 degree value for all our stakeholders. I'm pleased with our performance in an uncertain macro. Our results highlight the benefit of the deep trust our clients have in us, our capabilities to do the most complex work at the heart of their businesses, the privileged position we hold within the ecosystem and our ability to invest for the next waves of growth. We continue to see momentum in the quarter and how we are executing on our strategy to be the trusted reinvention partner of our clients, with a record 39 clients with quarterly bookings greater than $100 million. These large transformational wins position us to capture more growth as spending increases. We also had over $600 million in new GenAI bookings taking us to $1.1 billion in GenAI sales in the first-half of the fiscal year, expanding our early lead in GenAI, which is core to our clients reinvention. We now have over 53,000 skilled data and AI practitioners against our goal of doubling our data and AI workforce from 40,000 to 80,000 by the end of fiscal year 2026. We are laser-focused on the needs of our clients and this focus is reflected in our bookings of $21.6 billion, representing our second highest quarter on record. This included $10 billion of bookings in North America, our highest ever. We continue to take market-share with revenues of $15.8 billion for the quarter, flat compared to last year and slightly above the midpoint of our range. As we turn the page on the calendar year, we saw another turn of the dial unconstraining spending by our clients, including spending on our services, particularly in parts of EMEA and North America. This was evident in the composition of our new bookings, which came in differently than expected. We see clients continuing to prioritize investing in large-scale transformations which convert to revenue more slowly, while further limiting discretionary spending particularly in smaller projects. We also saw continued delays in decision-making and a slower pace of spending. We are pleased that despite these conditions our focused efforts to return to growth resulted in North America and CMT, showing improvement over last quarter. We are running our business with rigor and discipline and we remain on-track with the business optimization actions we announced last year to reduce structural costs to create greater resilience. We delivered adjusted EPS growth of 3%, we continue to invest significantly in our business to drive additional growth in highly strategic areas with $2.1 billion of capital deployed across our geographic markets in Q2 in 11 acquisitions, bringing the total investment in acquisitions to $2.9 billion in H1 across a total of 23 acquisitions. We also continue to invest in learning for our people with approximately $10 million -- 10 million training hours in the quarter, representing an average of 14 hours per person. In recognition of the 360 degree value we create, we are proud that we earned the number one position in our industry for the 11th year in a row and number 33 overall in Fortune’s list of the World's Most Admired Companies. We ranked number one in our industry and number three overall on the JUST Capital CNBC list of America's Most Just Companies. And we have been recognized by Ethisphere as one of the World's Most Ethical Companies for the 17th year in a row. An important part of our growth strategy is to use our strong balance sheet to invest in order to scale higher-growth areas and expand into new growth areas. We have a strong track-record of delivering on this strategy. Here are some highlights from the quarter. In North America, we invested in supply-chain, an area with significant reinvention ahead with the additions of inside sourcing in [indiscernible] and on-process technology. We acquired Navisite site to help clients across multiple cloud providers enterprise applications and digital technologies, modernize their digital core, and in Song, we acquired Work & Co to help our clients drive growth by designing and bringing digital brand strategies to market and operationalizing world-class digital products at scale. In EMEA, we are investing to help clients build their digital core and drive growth. In the UK, we invested in 6point6, which will help our clients transform their digital capabilities and modernize their legacy systems. We also acquired in the UK, Redkite with its full stack data expertise that will help our clients accelerate their performance with data driven intelligence and AI. And in Germany we added Vocatus, which will accelerate our clients' growth strategies using behavioral economics modeling to develop pricing strategy and sales concepts for B2B and B2C models. Similarly, in good markets our acquisitions position us to drive our clients' growth agendas by expanding our capabilities in marketing and customer experience with Rabbit's Tale in Thailand and [GIC] (ph) in Singapore, helping clients in Indonesia, capitalize on their fast-growing digital economy. Our ability to invest to fuel our organic growth is a competitive advantage and as our clients continue to transform, we announced earlier this month that we will invest $1 billion over the next three years in Accenture LearnVantage, which will provide comprehensive technology learning and training services to help our clients re-skill and upskill their people. Our investment includes the acquisition of Udacity, a digital education pioneer, which we expect to close by the summer. Once closed, we will have revenue in the zone of $100 million annually. These services are highly strategic and they enhance our position as a reinvention parts are of choice, because talent is at the top of the agenda for CEOs. For example, we are helping Merck, a global biopharmaceutical company known as MSD outside of the United States and Canada launching groundbreaking Generative AI training program for their employees to create world class digital leaders. As a renowned thought leader in the biopharmaceutical market, Merck has long-lead the way in investing in its people and helping them build the skills and expertise needed to develop breakthrough therapies. Digital, data, analytics and AI play a pivotal role in discovering, developing, manufacturing, and providing access for patients to medicines and vaccines. By once again investing in its people, Mark will be able to continue delivering on its promise to use the power of leading-edge science to save and improve lives around the world. Over to you KC. KC McClure : Thank you, Julie. And thanks to all of you for taking the time to join us on today's call. We were pleased with our overall results in the second quarter with our second highest quarter of new bookings. We continue to invest at scale to strengthen our leadership position, while delivering value for our shareholders. Now let me summarize a few of the highlights of the quarter. Revenues were flat in local currency, with mid-single digit growth or higher in six of our 13 industries, including public service, life science, utilities, energy, health and high-tech. While our CMT industry group improved this quarter, we continue to see pressure as expected. And we continue to take market share. As a reminder, we assessed market growth against our investable basket which is roughly two dozen of our closest global public competitors, which represents about a third of our addressable market and we use a consistent methodology to compare our financial results to theirs. Adjusted to exclude the impact of significant acquisitions. Through the date of their last publicly available results on a rolling four quarter basis. Adjusted operating margin of 13.7% decreased 10 basis points, compared to Q2 last year and year-to-date operating margin is flat. This includes continued significant investments in our people and in our business. We delivered adjusted EPS in the quarter of $2.77, reflecting 3% growth over adjusted EPS last year. Finally, we delivered free cash flow of $2 billion and returned $2.1 billion to shareholders through repurchases and dividends. In the first half of the year, we've invested $2.9 billion in acquisitions across 23 transactions. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $21.6 billion for the quarter, representing a 2% decline in both US dollar and local currency, with an overall book-to-bill of 1.4. Consulting bookings were $10.5 billion with a book-to-bill of 1.3. Managed services bookings were $11.1 billion with a book-to-bill of 1.4. Turning now to revenues, revenues for the quarter were $15.8 billion, flat in both US dollars and in local currency, and we're slightly above the midpoint of our guided range. Consulting revenues for the quarter were $8 billion, a decline of 3% in both US dollars and local-currency. Managed service revenues were $7.8 billion, up 3% in both US dollars and local-currency. Taking a closer look at our service dimensions, technology services grew low-single digits and operations and strategy and consulting declined low-single digits. Turning to our geographic markets. In North-America revenue was flat in local currency with growth in public service, offset by declines in banking, capital markets, software and platforms and communications and media. In EMEA, revenues declined 2% in local currency with growth in public service, offset by declines in communications and media and banking capital markets. Revenue growth in Italy was offset by declines in the United Kingdom, France and Ireland. In growth markets, revenue grew 6% in local currency, led by growth in banking, capital markets, industrial, public service and chemicals and natural resources. Revenue growth was driven by Japan and Argentina, partially offset by declines in Australia and Brazil. Moving down the income statement, gross margin for the quarter was 30.9% compared with 30.6% for the same-period last year. So marketing expense for the quarter was 10.3% compared to 9.9% for the second quarter last year. General and administrative expense was 6.9% compared to 6.8% for the same quarter last year. Before I continue, I want to note that in Q2 of FY 2024 and FY 2023, we recorded $150 million and $244 million in costs associated with our business optimization actions respectively. These costs decreased operating margin by 70 basis-points and EPS by $0.14 this quarter and operating margin by 150 basis-points and EPS by $0.30 in Q2 of last year. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.2 billion in the second quarter, reflecting an adjusted operating margin of 13.7%, a decrease of 10 basis-points from adjusted operating margin in the second quarter of last year. Our adjusted effective tax rate for the quarter was 18.8% compared with an adjusted effective tax rate of 20.4% for the second quarter last year. Adjusted diluting earnings per share were $2.77 compared with adjusted diluted EPS of $2.69 in the second quarter last year. Days services outstanding were 43 days compared to 49 days last quarter and 42 days in the second quarter of last year. Free cash flow for the quarter was $2 billion resulting from cash generated by operating activities of $2.1 billion, net of property and equipment additions of $110 million. Our cash balance at February 29th was $5.1 billion compared with $9 billion at August 31st. With regards to our ongoing objective to return cash to shareholders, in the second quarter we repurchased or redeemed 3.8 million shares for $1.3 billion at an average price of $352.35 per share. As of February 29th, we had approximately $4.6 billion of share repurchase authority remaining. Also in February, we paid a quarterly cash dividend of $1.29 per share for a total of $813 million. This represents a 15% increase over last year. And our Board of Directors declared a quarterly cash dividend of $1.29 per share to be paid on May 15th, a 15% increase over last year. In closing, we remain laser focused on capturing growth opportunities in the market and delivering value for our clients. As you know and expect of us, we will operate with rigor and discipline, while continuing to invest for long-term market leadership. Now, let me turn it back to Julie. Julie Sweet : Thank you, KC. Let me give a little more color on the demand environment, all strategies continue to lead to technology and reinvention. Our clients are navigating an uncertain macro-environment due to economic, geopolitical and industry-specific conditions. And in response, we are seeing them thoughtfully prioritize larger transformations, building out their digital core to partnering, to improve productivity, to free-up more investment capacity to focus on growth and other initiatives with near-term ROI. Our focus on being at the center of our client's business doing their most complex transformational work provides us with resilience see overtime, as demonstrated by the fact that our top 100 clients have been clients for over 10 years. There is now near universal recognition of the importance of AI, which is the heart of reinvention. The ability to use AI at scale, however, varies widely with clients on a continuum with those which have strong digital cores generally seeking to move more quickly, while most clients are coming to grips with the investments needed to truly implement AI across the enterprise and nearly all are finding it difficult to scale, because the AI technology is a small part of what is needed. To reinvent using technology, data and AI you must have the right digital core, change your processes and ways of working, reskill and upskill your people and build new capabilities around responsible AI. All with a deep understanding of industry and function in order to unlock the value. And many clients need to first find more efficiency to enable scaled investment in all these capabilities, particularly in their data foundations. We are able to help our clients with this AI rotation because of our broad services across strategy and consulting, technology and operations as well as everything customer through Song and digital manufacturing and engineering through Industry X. And our relevance across the functions of the enterprises in 13 industries. Our privileged position in the technology ecosystem has perhaps never been more important. Generative AI is rapidly evolving and still in the early stages of maturity and adoption. And we are working closely with our ecosystem partners to help our clients understand the right data and AI backbone that is needed and how to achieve tangible business value. I will now bring to life the complex work we are doing at the heart of our clients' businesses. Building on the back of a long trusted partnership, we are working with Mondelez International, a world-leader in snacking with well-known brands like Oreo, belVita and Cadbury. To continue to drive growth and be an industry-leader. Having laid the foundations of a strong shared services modeled model powered by leading technology platforms and data and AI foundation we are now working on an ambitious reinvention of their digital core. We will design and implement a single cloud-based platform. We'll also modernizing the finance function and transforming their supply-chain planning and warehouse management capabilities. This will enable faster availability of products for customers to have more sales growth and maximum profitability. This new digital core will also allow Mondelez to further reinvent how they satisfy customers through the adoption of new technologies like Generative AI. Cloud continues to be the foundation of the digital core. Our cloud business grew high-single digit this quarter as clients do work across the cloud continuum from migration to modernization, to new business models to working at the intelligent edge. For example, we're helping Riyadh Air, a digitally native airline based in Saudi Arabia, become the world's first fully cloud-based airline. We will equip the brand-new airline with a cloud-only infrastructure enhanced cyber security and AI driven operations. Our capabilities will ensure that Riyadh Air’s digital core is future-proof and remains legacy free, enabling the airline to use cutting-edge technologies such as cloud, data and AI to scale quickly and deliver a seamless and more personalized travel experience for its customers and employees. This will also help the company to scale as it plans to operate over 100 destinations by 2030. We are partnering with Belden, a global networking solution organization on a cloud transformation program that will help them become a platform business. Unlocking the power of edge, data and AI to drive new business opportunities and enhance the customer experience. This platform will be powered by edge to cloud technology, allowing them to collect and analyze real-time data from industrial environments and improve operational efficiencies. This will provide valuable data driven insights to Belden and to their clients in industries where real-time insights are crucial. This reinvention will enable them to break-down operational technology silos, allowing them to become a key player in the digital twin domain. We will also help enable this new service in the market, this strategic partnership will support Belden's reinvention from a product company into a data engineering and insights company that leverages the power of platforms. We are focused on helping our clients, leverage the power of AI quickly, generating tangible business value, leveraging our investment in differentiated tools that accelerate results. Our AI Navigator has helped clients across industries outline their value case, AI architecture and AI solutions and our recently-announced AI switchboard is already helping clients with the complex new need for integration across LLM models. For example, one of the largest [indiscernible] companies is currently testing the switchboard to compare how the same prompt would be interpreted by different models and how they perform before deciding on which model to use. Ultimately an enterprise-wide AI rotation requires a strong data foundation, we are working with Telstra, Australia's leading telecommunications and technology company on a radical simplification and modernization of its data ecosystem, accelerating its efforts to become AI powered. We are modernizing and consulting over 50 disparate enterprise data sources into a small integrated set forming Telstra's governed and secure data and AI core, allowing Telstra to rapidly scale bespoke Generative AI capabilities in the future. Our work will also support the company's efforts to develop responsible ethic and secure market leading AI frameworks, while helping their teams provide quicker, more effective and more personalized customer interactions. One of the areas of riches opportunities for our clients is customer experience transformation, including with Generative AI, which uses the unique capabilities of Song across creative customer insights and deep technology expertise. Song grew low-single digits this quarter, we continue to help clients reimagine marketing to drive growth. We're helping ExxonMobil, an energy super major transform and optimize its end-to-end fuels marketing operations to drive future growth. With our global capabilities, our managed services will leverage our SynOps platform to drive automation and deliver measurable efficiencies across the fuels marketing business. We are strengthening our partnership with Best Buy, a leading consumer electronics retailer across multiple fronts to reimagine the customer experience, optimize costs and drive growth. By leveraging data and Generative AI, we are helping to transform their contact center operations and improve customer and employee experience. We are also pleased to have entered into an agreement with Best Buy for lifecycle management of our own Accenture devices in North America and our creating a joint offering end-to-end field service advice support for clients. We have already applied this new offering to a major TV provider, marking our first entry into this new market. These strategic initiatives underscore our commitment to helping Best Buy, achieve superior customer experiences, operational efficiencies and growth. Security is essential to reinvention, moving beyond IT to protecting the core assets of the business and evolving the critical role of security as technologies change. We saw very strong double-digit growth in our security business this quarter. We are working with one of the largest electric utility holding companies in the United States to integrate their operational technology into a seamless unified cyber security solution. Together, we will enhance our security capabilities by implementing advanced monitoring and response, vulnerability management and security automation. This will help reduce the risk of secure of cyber events in their grid environment protecting critical infrastructure serving tens of millions of people. We continue to see strong demand for digital manufacturing and engineering services. Industry X grew double-digits in Q2. We're working with Indo Count Industries Limited, a global leader in the home textile space on digital transformation to simplify operations, support its ambitious growth plans and maximize e-commerce opportunities. We will build a cloud-enabled digital core, powered by data and analytics that will help standardize, digitize and automate processes and operations. From supply chain to logistics to manufacturing, the new platform will enable more efficient inventory management, quality standardization optimal energy consumption and better customer experiences. Together we will reinvent their operations and help expand our business in India, Middle-East and North America, the UK and Europe. And we continue our support for corporate green transformation by promoting carbon footprint compliance to the calculation and visualization of greenhouse gas emissions. To create a market where consumers can choose environmentally conscious products and services [indiscernible] visualize the carbon footprint of each product is necessary. For example we're assisting, Matsumoto Precision, a precision machine parts processing company based in Japan to gain more detailed insight into the sustainability of their projection and achieve their decarbonization goal. We implemented a solution through our manufacturing platform that uses individual manufacturing performance information to record and report the CO2 emission on a per product basis. This will allow Matsumoto Precision to enhance understanding of the environmental impact of their business and contribute more effectively to the realization of a decarbonized society. Back to you, KC. KC McClure : Thanks, Julie. Now let me turn to our business outlook. For the third quarter of fiscal 2024, we expect revenues to be in the range of $16.25 billion to $16.85 billion. This assumes the impact of FX will be about negative 1% compared to the third quarter of fiscal 2023 and reflects an estimated negative 1% to 3% positive growth in local-currency. For the full fiscal year 2024, based upon how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our results in US dollars will be about flat compared to fiscal 2023. For the full fiscal 2024, we now expect revenue to be in the range of 1% to 3% growth in local-currency over fiscal 2023, which assumes an inorganic contribution approaching 3%. We continue to expect business optimization actions to impact fiscal 2024 GAAP operating margin by 70 basis-points and EPS by $0.56. For adjusted operating margin, we now expect fiscal year 2024 to be 15.5%, a 10 basis point expansion over fiscal 2023 results. We now expect our adjusted annual effective tax rate to be in the range of 22.5% to 24.5%. This compares to an effective tax rate of 23.9% in fiscal 2023. We now expect our full year adjusted earnings per share for fiscal 2024 to be in the range of $11.97 to $12.20 or 3% to 5% growth over fiscal 2023 results. For the full fiscal 2024, we continue to expect operating cash flow to be in the range of $9.3 billion to $9.9 billion. Property and equipment additions to be approximately $600 million and free cash flow to be in the range of $8.7 billion to $9.3 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.2. Finally, we continue to expect to return at least $7.7 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to shareholders. With that, let's open it up so that we can take your questions. Katie? Katie O'Conor: Thanks, KC. 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. Operator, would you provide instructions for those on the call. Operator : Thank you. [Operator Instructions] And one moment please for your first question. Your first question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Tien- Tsin Huang : Hi. Thank you. Good morning to all of you. Julie, just a big picture, maybe two simple of a question, but just curious to get your thoughts on where we are in the cycle for IT services spend, because we've been doing sector softness for quite some time now, Accenture has done well, you have very large deal activity come through, short-term cycle stuff is always little pressured as you said, where are we in terms of seeing maybe things bottoming or short-cycle discretionary spend returning? Julie Sweet : Yes. I mean, Tien-Tsin, I think it's hard to predict at this point anything other than what we see right now. Right? So what's different than 90 days ago. Well, as we said in December, we really get visibility into our clients' budgets in January, we say that every year, right? And so, as the calendar year, we turn the page, what we saw was a further tightening of spending at our clients. Particularly [indiscernible] our services and particularly on the smaller projects. So from that sort of trend perspective, 90 days ago we didn't see the same level. Now you kind of turn the dial a little bit more constraints and that's where we see the budgets being set for calendar year 2024, right? And as you said though, in this environment we're taking market share and we're seeing building momentum on our strategy to be the reinvention partner with a record 39 clients with bookings over $100 million. So what does that tell you, right? So, the clients understand the importance of the technology-led transformation. And the fundamentals remain the same. There is a lot more reinvention ahead. We're still -- when you look at where is cloud, both migration and modernization, we say about 80% of the opportunities ahead. Data and AI, but 90% of the opportunities ahead. Re platforming in cloud-based platforms. About 65% of that opportunity ahead, based on who has actually adopted that more modern platforms and security. Well, I think security can be kind of forever ahead, but at least 65% ahead. And that's before you get to thinking about areas like digital manufacturing, engineering services, where that technology has only been coming online, even in the last couple of years sort of the modern technology. And of course, customer also extraordinarily early days. So, where we really focused on is meeting clients where they are today. So that prioritize the large transformational deals and then be positioned to capture the spending when it increases. And we see the sort of the industry has been very strong, because all clients have to get there. They need to get to the technology transformation. They need to get the reinvention and that's why you're seeing -- even as the constraints you're seeing that early interest in GenAI. I mean, $1 billion sales in the first-six months of the year, that is the fastest we have ever built sales in an emerging technology. And what it tells you is that, clients understand the importance of AI that they're going to have to reinvent every part of the enterprise and that's exactly where everything we've done for the last decades at Accenture. Being the company that can go from strategy to build, to operations, deepen industry and functional expertise, because the strategy and consulting all comes together for this moment to be the partner for reinvention across the enterprise, not just to build the technology, but to use it to reinvent and that's exactly what you see in these results, which is why I'm super confident about the industry and the future. Tien- Tsin Huang : Yes. No, I'm confident that Accenture will be there to catch-all that like you said, but maybe as my follow-up with the GenAI bookings any trends on deal size. And in confidence that, that some of these early bookings will convert to become a part of this whole large $100 million plus deal activity across more pull-through from GenAI, that question makes sense. Julie Sweet : So couple of things. What you see in our resilience is that, we are doing these bookings over $100 million and that's what kind of layers that. That just gives you that base rate of resilience during this period. As we said, we're seeing further constraint on the smaller projects. That's why you've got the updated guidance, right? But the pace of these larger deals, we feel really good about from a resilience perspective. And then, you know how this straight, you're at the client, you are at the heart of their business, you're really doing the strategic work that's what all these large deals represent. And then as spending increases you catch the pent-up demand and that's kind of how we see it and that's how we've run it in the past. And by the way, of course, as you know, we're really investing inorganically to capture more growth which you also start to see. Particularly at the back-end of our fiscal year. Thanks, Tien-Tsin. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Hi, good morning. KC, if Accenture does 1% constant currency in the third quarter, that's kind of the midpoint of the range. I guess the implied midpoint for 4Q is a ramp-up to 6% constant currency. What kind of visibility do you have going into a number of the midpoint like that in the fourth quarter? KC McClure : Yes. Hi, Bryan. Thanks for your question. And you're right, you're obviously your math is correct, that that would be what our guidance would say. In terms of visibility, look, it's really no different than what we have anytime in the past in this part of the year for our full-year guidance. Obviously, we are not forecasting that the whole year we just have the back-half of the year, there's no difference in visibility as it relates to what we've done in any other time of the year -- any other year at this time. And we do our same at analysis and outlook to provide you with our guidance of the 1% to 3%. Bryan Keane : Got it, got it. And then, Julie. Just thinking about the clients need to update their data in order to leverage AI and scale. Why isn't that translating into stronger demand in the business, you would think that everybody would turn-around and spend considerably on short-term to get that ramp-up in order to get AI to leverage it, but it doesn't quite translate. I'm just trying to figure out the disconnect there? Julie Sweet : Yes, so there is two things. So first of all, it's about prioritization. Right? So their overall constrained on spending. So, you make choices as opposed to it being additive. So they are not able to allocate extra budget, they're prioritizing their budget. So you're seeing more of a substitution right now as opposed to, hey, we need to do this, let's add to the budget and that's tied to the uncertain macro, that's putting people constraint. I had one banker say, if the corporates have put themselves on a diet, given the macro. Right? The second thing, Bryan is, you have to remember that you can't just jump to the great data foundation. You need to be in the cloud. You've got to have modern platforms. And so what you should read into the higher clients -- the clients during these higher bookings rate is that, they're doing the big transformations oftentimes to be ready to put in the data foundation, right? There's only still 40% of workloads are in the cloud. 20% of those roughly haven't been modernized. Many of our clients haven't put in the platform, if you don't have the major ERP platforms that are modern, you don't create a data foundation to fuel GenAI in isolation. So you've got to build the digital core. And as we've said, there's a lot more to go. And that's what's driving these larger complex transformations like, people will not like to do these big transformations in a sense of the other big, they're hard, they're complicated and they need to do them in order to ultimately be able to use the AI, not just in a part of the business or as a proof-of-concept, but really to transform and get the value they now see and so it's -- again, you can't jump to AI, you've got to put all the pieces, and a lot of clients aren't there yet. Which is our opportunity. Bryan Keane : Got it. Thank you for taking the questions. KC McClure : Thanks, Bryan. Julie Sweet : Thanks, Bryan. Operator : Your next question comes from the line of James Faucette from Morgan Stanley. Please go-ahead. James Faucette : Great. Thank you very much. Wanted to follow-up on the questions around, particularly AI, etcetera. I recognize like everybody is kind of at different stages. How should we think about : first, the timeline in terms of preparing and getting ready to implement news solutions, etcetera, and then moving into the full implementation? And how we should think about that affecting Accenture’s business? And like you mentioned, you've talked about some record bookings or the number of new customers over $100 million, like how that will ramp-in the timeframe? Julie Sweet : Yes, so maybe just -- let me just start with like the strategy around capturing the growth opportunity from GenAI. So, this is the same playbook that we have used in every wave of new technology evolution. When we went from mainframe to client-server then to cloud and Software as a Service and then to RPA and AI driven automation when you saw things like myWizard and SynOps. We have the same strategy, the strategy starts with, we want to be the first-mover to help our clients use the technology. And that's why what we're doing with our investments of $3 billion to create solutions for them and you see that coming through with our sales in Generative AI, which, as I've said on earlier, are the fastest we've ever seen in sort of these new technologies where there's a lot of interest and we're the leader. So we want to be the first-mover in helping our clients use it. The second part of our strategy is to be the first-mover in using the technology itself to serve our clients. And we did that would like the digital, with AI automation, with all of our platforms. And with that said, it's a proven formula, because if we invest big to be early and be the first-mover, then we're positioned to capture all the opportunity in our -- with our clients, because they need to adapt it and transform. And as I just went through, that requires a lot the digital core, then you've got to actually use it to change new ways of working to upskill your talent and build new capabilities like responsible AI. When we are able to be the first-mover, which we are already starting now to use GenAI and how we deliver, that enhances our competitive position. It makes us more differentiated and, of course, it also then allows our clients overtime the more we use the GenAI to achieve the results they need at a lower cost, which frees up their investment capacity to do the massive reinvention. And of course, we are in the best positioned to be their partner as they reinvest in using the tech and AI to [Technical Difficulty] lot of the digital core that's got to-be-built, you can't jump that step. It's not a magic technology. But then as you build it, you then have to go function by function to change the ways you work to actually get the productivity and the growth. So we really see this as being kind of the next decade of what our clients are going to be focused on and we are positioning ourselves to be their partner and be the first-mover in both places. KC McClure : Yes. And maybe I'll take the layering in question on the larger deals and talk a little bit about how that's going to work for the back-half of the year as it relates to guidance. So we have the larger deals that were terrific in our second quarter and our whole first-half of the year. But you're right, they do layer-in slower than the smaller deals and we see pressure in the volume of our smaller deals. And that's why we have the 1% to 3% guidance for the full-year. Now we do feel-good about delivering to this guidance and what that means for H2, and that really is for a few reasons that we've talked about before, but let me just kind of reiterate. The first is that, our competitive advantage is that we have the ability to invest. You saw us do that in H1 and Julie talked about that, with investing more in acquisitions this year, in the first half than we did all of last year. And that's really important because that drives inorganic growth. But again, we do that really to fuel organic growth, but we see that coming online in the back half of the year. The second thing is that, we have done these larger transformation deals, but also the ones from the previous years. And we see that continuing to benefit us as it relates to revenue as they will layer on in the back half of the year. And that really just speaks to the resilience of our strategy, both in terms of being what Julie has talked about, being where our clients need us and our inorganic strategy to continue to benefit to pivot to scale in new areas of growth. And so, that's how that all comes together in terms of revenue conversion from those larger deals and when they come online, James. And maybe I'll just also add, what that means from a type of work for the entire year. What we now see from the context of the 1% to 3% is, our consulting type of work will be about flattish. And we see our managed services growing to about mid-single digit growth for the year. James Faucette : Great. Thanks for the color to both of you. And then quickly KC, just in terms of that investment. How do we think about like how that affects the margin expansion. I mean typically one, you're doing acquisitions, there a little bit of time before you can start to get people to the same type of trajectory as Accenture on margin expansion, but just trying to get a sense of how we should think about that impacting as well? KC McClure : Yes. Thanks for that. Well, first of all, I'm just -- I just want to put out that I'm really pleased with our profitability in the first half of the year and the outlook for profitability for the full year. Our margin is flat, but we have EPS growth for the first half of the year, profit growth of 5%. And that really just points to the rigor and discipline that we continue to operate our business in. But really importantly, as Julie talked about, all the investments we're making in our business and our people continue. So as you look at the back-half of the year, we now see the 10 basis points expansion is where we see it. Again, very important, continue to have high levels of investment in our people and our business. And EPS, we see for the whole year at about 3% to 5%. One thing I will point out just to help all of you. We did benefit from the first-half of the year in our EPS with higher non-operating income, which makes lot of sense on interest income, on our higher cash balance. In the first-half, you see our cash went from 9% to 5%. So great cash, we can -- no concerns will continue with our capital allocation strategy, but just as you model in the back half of the year, you'll see that not surprisingly with lower cash flow will have lower interest income. So just as you're working through your EPS for the first-half and second-half, that's something that you might want to consider. James Faucette : Super helpful. Thank you. Operator : Your next question comes from the line of Bryan Bergin from TD Cowen. Please go ahead. Bryan Bergin : Hi, good morning. Thank you. So Julie, I'm curious just based on your conversations with leaders, what might be the catalyst here to have clients release spending programs and kind of lean back into shorter cycle work. As economic data generally holds up, are we just in a slower for longer backdrop or just kind of hoping that you can share some color on how you're thinking about a recovery internally and what enterprises really are watching and waiting for? Julie Sweet : Look, I think there's going to be a couple dynamics, right? Remember they just set budgets. So we're kind of assuming there are the budgets for their calendar year and we see in general, most of this constraint is tied to the uncertain macro. So those are the kind of things. They set budgets and they've got uncertain macro. KC McClure : Yes. And just a reminder that everything that we're talking about in terms of giving guidance. I know all of you know this, but just as a reminder, our fiscal year-ends on August. Right? So there -- it's a little bit over halfway through the calendar year. Bryan Bergin : Okay, okay, that makes sense. And then as it relates to GenAI, just kind of a revolutionary versus evolutionary kind of questioning here. Just given how much work needs to be done for most clients to really do anything with large language models, how do we interpret that as a driver of your growth? So meaning, does GenAI enabled you to potentially drive a higher-level of growth when spending does become more normal or should we think about this more as a next tech wave that enable comparable levels of normalized growth just because of how long this might all take for large enterprises to get there? Julie Sweet : Yes, what I'd say is, this is this is more about -- like we think of this as like prior technology waves. Right? Each one has been a little bit faster in terms of that, but especially when you look at kind of where our clients are on the continuum of building out that digital core, there is a lot to go and you really need that to fully realize it. So we see this is more like our prior kind of the way these things have evolved in the past. Right now, that's what we see. Bryan Bergin : Okay. Thank you. Operator : Your next question comes from the line of Dave Koning from Baird. Please go-ahead. Dave Koning : Yes. Hey guys. Thanks so much. I guess my question, are you seeing your clients probably having much lower attrition, just like every company has low employee attrition, right now. Are you seeing them take their own employees, their own IT employees and just do more internally right now? And is that a little bit of just the demand issue right now? Julie Sweet : We certainly are seeing -- obviously, our clients have invested in more technology internally at our advice. Right? We've said to them during the pandemic with technology being so important, they should be building up their technologies. So there is clients, they've got a lot of clients, not all of it, because it really depends on your positioning to some of our clients, that's really not the differentiator. So they want a smaller IT and they've got others who built it up and it really depends on where they are. But sure, I mean, we certainly got clients doing more -- doing more in-house as part of it and we've got other clients outsourcing more. So like, it's really all over the map, because it's very company specific as to what makes sense for their strategy. Dave Koning : Yes. Okay, thanks. And just one quick follow-up for KC. The tax rate, clearly you lowered guidance just on the tax-rate itself. Is that something one-off to this year or is that something now that just seems more normalized? KC McClure : Yes. So, there's really four things that every year are the same, that really influence our tax rate. And just really is how those things come together. There are geographic mix of income, any settlements from previous years, any increase that we need to do on prior year tax liabilities, and lastly, the impact of our equity on our tax rate. So these four things really are confluences the same every year, depending on how they fall. That's going to influence where we land on our tax rate. And so, we -- this year we saw them favorably in aggregate. So we're able to keep our 2 point range, but drop by 1%. Dave Koning : Okay. Well, thank you guys. Julie Sweet : Thank you. Operator : Your next question comes from the line of Jamie Friedman from Susquehanna. Please go-ahead. Jamie Friedman : Hi. Good morning, everyone. I have a really big picture question. I'm curious, Julie, how you feel about Accenture’s role in the broader context of technology like software and cloud? And I realize in your prior very thoughtful answer about technology architectures. That was a great structure as was your innovation session back on February 16th. But it does seem like other parts of tech are doing better than services. So I'm just interested in your perspective on services in the context of broader tech spending? Julie Sweet : No, absolutely. It's a great question. Services are where you can dial back more easily than when you're signing-up for licenses for technology that you need. So you'd imagine and just what we're seeing that, when you are constraining overall spending, your discretionary spending, you go to like service providers where you're saying, I can pause for that. I can wait for that. And at the same time you've got in other parts of it, like with software where you've got to fix things you really need to invest in and you've got different licenses. So it's really not different than other cycles. Services have a bigger opportunity to say, it's a little more discretionary, let's wait. Even if I bought the licenses, I'm going to wait to actually incur the costs, because a lot of times the cost of the services can be significantly higher than the software licenses, because you've got all the change that you've got to do and all that around. So again, we don't see anything sort of different than when you've got an uncertain macro you look around for your discretionary spending and you cut that. And that's why, of course, you're seeing still the big transformations happening because it's not discretionary and they really got to re-platform in that. So it's like nothing mysterious about is kind of what I consider kind of normal in this kind of a macro. KC McClure : That's right. An. I think just as a reminder, even with all that we still have the record spend with us with $40 billion of bookings for the first half of the year. Jamie Friedman : Yes, those are great things. All right, I'll jump back. I'll jump back in the queue. Thank you, Julie. Thanks KC. Katie O'Conor: Operator we have time for one more question and then Julie will wrap-up the call. Operator : Okay. That question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Ashwin Shirvaikar : Thank you. Hi, Julie. Hi, KC. Julie Sweet : Hi, Ashwin. Ashwin Shirvaikar : Going back to -- Hey. Going back to the question of bookings, are clients actually visiting existing bookings ones that they sign maybe last year and at times prior, relooking at them using the lens of applying sort of rapidly evolving GenAI capabilities. To what extent is that happening and then that kind of implies, obviously -- can we can reuse those past bookings and backlog as an indicator of future growth and how soon that can layer-in? Julie Sweet : Yes. I'll take that. Just maybe more just the financial kind of mechanical part of it. We have not seen a change in us working the work that's already been contracted, what we would call our backlog and what we talked about was really spending on new sales, new services and their smaller projects and that's the dynamic that we have factored into our guidance for the year. Ashwin Shirvaikar : Got it. And then the other question was on LearnVantage and Udacity, I thought that was a particularly interesting deal. If you could walk us through maybe the mechanics of that deal? And every company is investing in talent care, there seems to be a bit different approach maybe. Can you just talk about the rationale, the downstream impact and so on? Julie Sweet : Sure, thank you. Because it's -- I'm super passionate about what we're doing with LearnVantage, because it is so critical for our clients. Talent is the number one agenda item for CEOs. The number one. And when you think about what reinvention means, the clients have to do and AI rotation and they have to do a talent rotation. And what LearnVantage does is, it first and foremost provides the ability for everything from the Board to the C-Suite to business users, to the technologists to get the technology training they need to make the right decisions on AI, for example. To be able to become deeper in the new technologies. And so it really goes from the Board to the technologist. And with Udacity what we're able to provide is essentially the same approach Accenture uses, right? So, we spent over $1 billion ourselves. You saw our latest average 14 hours per employee. And we have -- we use learning science to learn and do. Most of our clients are unable to do that. The big differentiator for us in the market here is that, we Accenture know when you train someone we have to then put them on a job, and they have to get paid to do something, so they are work ready. So we're bringing that expertise now at scale to our clients. And what Udacity does is the same thing, they use exports mentors, they have a real project work that they then coach people on. So it's that same sort of approach of learn and do, but our companies -- our clients don't have all the work that we do, so Udacity has created this ability. And so -- and it's coupled then with Accenture's deep understanding of what it takes to train and be work ready. So we're really excited about it. Our clients are excited about it, they've been coming to us. We've been doing this learning and this enables us now to do it at scale. And again, we want to be the reinvention partner. So the more that we can fill all of the needs of our clients around that, the better position that we will be. So we see LearnVantage is highly, highly strategic. And by the way, it also has, we have a managed service today to actually manage the learning services that companies are now doing internally, which we also expect to -- we're investing and expect to grow. So, very excited. And then finally, [indiscernible] responsibility is our -- as corporates to bring our people along the journey. And so when people worry about things like AI in displacement, we feel that our ability to bring like who then upskilling expertise to help our clients be able to bring their people is really, really important. It's important for our communities. It's important to their Board’s and we also consider it really important because it's the right thing to do. Ashwin Shirvaikar : Got it. Julie Sweet : Great. So thanks, everyone. In closing. I want to thank all of our shareholders for your continued trust and support all of our people for what you do every day. To assure you that we are working every day to continue to earn that trust. Thank you. Operator : That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,024	2	2024Q2	2024Q3	2024-06-20	11.946	12.023	12.771	12.932	19.5	24.8	25.99	Operator : Ladies and gentlemen, thank you for standing by. Welcome to Accenture's Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] 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, Katie O'Conor. Please go ahead. Katie O'Conor: Thank you, operator, and thanks everyone for joining us today on our third quarter fiscal 2024 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and 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. Julie 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 third quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the fourth quarter and full fiscal year 2024. We will then take your questions before Julie 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 as 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 Julie. Julie Sweet : Thank you, Katie, and everyone joining. And thank you to our 750,000 people around the world who work every day to deliver 360-degree value for all our stakeholders. Before we get into the quarter, I want to thank KC, who's been an excellent partner for these last five years, and our three other extraordinary leaders who are stepping down in the next two quarters, Jean-Marc, Ellyn, and Paul. Each have given over 36 years of service and demonstrated strong stewardship in developing outstanding successors, including Angie, who you all know from her former role as Head of Investor Relations, who will succeed KC on December 1. As always, we are executing a smooth leadership transition to the next generation with our strong bench of great leaders. Now, on to the quarter. I am pleased this quarter to bring to life yet again the resilience and agility of our business, as our actions to remain laser-focused on our clients' needs and quickly adapt to market conditions can be seen in our results, which are building a foundation for stronger growth as we go into Q4 and next fiscal year. As you know, this fiscal year, our client spending developed differently than we expected at the beginning of the fiscal year. And these conditions continue, with clients prioritizing large-scale transformations, which convert to revenue more slowly, while limiting discretionary spending, particularly in smaller projects, with delays in decision-making and a slower pace of spending as well. In response, we have moved quickly to adjust by leveraging our unique strengths, our end-to-end services, including deep industry and functional expertise that enable these large-scale transformations or what we call reinventions. We're also leveraging our deep technology expertise and ecosystem partnerships and our learning machine and culture that gives us the agility to shift to new areas of demand, including, for example, GenAI while continuing to invest at scale for future growth. Here is how these strengths and our strategy are demonstrating results three quarters into the fiscal year. With our clients prioritizing large-scale transformations, we have accelerated our strategy to be the reinvention partner of our clients. Our success is reflected in our bookings of $21.1 billion, including another 23 clients with quarterly bookings greater than $100 million, bringing the total of such clients with these bookings to 92 year-to-date, seven more than last year at this time. This focus on being the reinvention partner is an important part of our strategy to return to stronger growth. As we enter next year, as this work ramps, the revenue from these large-scale bookings is expected to continue to layer in throughout the year, and we are also well-positioned to capture increases in discretionary spend when it comes back because of the strategic positioning these deals bring at our clients. We also have leaned into the new area of growth, GenAI, which is comprised of smaller projects as our clients primarily are in experimentation mode, and this quarter we hit two important milestones. With over $900 million in new GenAI bookings this quarter, we now have $2 billion in GenAI sales year-to-date, and we have also achieved $500 million in revenue year-to-date. This compares to approximately $300 million in sales and roughly $100 million in revenue from GenAI in FY 2023. Leading in GenAI positions us to help our clients take the actions needed to reinvent and to benefit from GenAI, which frequently means large-scale transformations. We are also taking an early lead with an eye toward long-term leadership in this critical technology, which is still in the early stages of maturity and adoption, despite its rapid evolution. We have built our expertise in making strategic acquisitions over the last decade, leveraging a strong balance sheet, and we have used this expertise to expand into new growth areas, scale in hot areas and geographies, and continue to build strength in our industry and functional consulting. We deployed $2.3 billion of capital across our geographic markets in Q3 across 12 acquisitions, bringing the total number of acquisitions to 35 with invested capital of $5.2 billion year-to-date as compared to $2.5 billion for the entire FY 2023. As a learning organization and talent creator, we continue to invest in our people with approximately 13 million training hours this quarter. This averages 19 hours per person, representing an increase predominantly due to GenAI as we continue to prepare our workforce for the infusion of GenAI across our business in the coming years. We also continue to steadily increase our data and AI workforce, reaching approximately 55,000 skilled data and AI practitioners against our goal of doubling our data and AI workforce from 40,000 to 80,000 by the end of FY 2026. We continue to take market share on a rolling four-quarter basis against our basket of our closest global publicly traded competitors, which is how we calculate market share, with revenues of $16.5 billion for the quarter, up 1.4% in local currency and slightly above the midpoint of our FX adjusted range. We expanded adjusted operating margin by 10 basis points and delivered free cash flow of $3 billion. I want to congratulate our 97,000 people we have promoted around the world through June 1, including 702 to Managing Director and 64 to Senior Managing Director, reflecting our commitment to providing vibrant career paths. We are recognized as a Top 10 Place to Work in 10 countries, representing more than 70% of our people, number two in Argentina, Brazil, and the Philippines, number four in Singapore, number five in Costa Rica, Finland, and Indonesia, number seven in the US, and number 10 in Chile on the Great Place to Work list of Best Workplaces and number two on Business Today's Best Companies to Work For in India. And in recognition of our strong brand, we are proud to earn the number 20 position on Kantar BrandZ's prestigious Top 100 Most Valuable Global Brands list, our highest rank to date, with an 11% increase in brand value to $81.9 billion. Our scale across strategy, consulting, technology, and operations, and our breadth and depth across industries and functions make us uniquely capable of helping our clients reinvent using technology, data, AI, and new ways of working. Before turning to KC, I want to give a little more color on our acquisitions this quarter, which yet again demonstrate the strategic importance of both our ability to invest, and our expertise in identifying, attracting, and integrating great companies joining Accenture. Let's start with new areas of growth. We completed our acquisition of Udacity to scale our technology learning and training services and to help our clients reskill and upskill their people. Udacity is a critical part of our LearnVantage digital learning platform, which we announced last quarter as a new area of growth for the future. Building on our expertise in customer-focused consulting, we invested to help drive our clients' growth agendas. We acquired Unlimited, an award-winning customer engagement agency with a deep understanding of human behavior as evidenced by its proprietary human understanding lab and AI-powered data insights platform. We acquired The Lumery in Australia, a marketing technology consultancy that helps leading organizations deliver seamless customer experiences and transform their marketing services. It provides industry and platform consulting services, including marketing, advisory, and planning, implementation across entire technology stacks, operational excellence, and simplification. We closed our acquisition of GemSeek in Bulgaria, a leading customer experience analytics provider helping global businesses understand customers through insights, analytics, and AI-powered predictive models. And we closed MindCurv, a global digital -- a cloud-native digital [indiscernible] experience and data analytics company specializing in composable software, digital engineering, and commerce services. Now, let's turn to scaling and hot industries. We acquired Cognosante, a provider of innovative technology solutions for US federal health, defense, intelligence, and civilian agencies. With this acquisition, federal services is creating a new federal health portfolio for its business. We invested in Customer Management IT and SirfinPA, which will provide the public sector with technology, support, and justice and public safety in Italy. We see public service and, in particular, health, intelligence, and defense as highly strategic industry focus areas globally for the next several years. And we invested in Teamexpat, focusing on testing integration for lithography systems in the semiconductor industry, another attractive industry segment. Our investment in Flo Group, a leading European consultancy and Oracle business partner, who specializes in global supply chain logistics is helping us scale in supply chain, also a major growth area. Finally, we're scaling in attractive geographic markets. We acquired CLIMB, a technology-based consultancy based in Japan, where we continue to experience very strong revenue growth. Over to you, KC. KC McClure : Thank you, Julie. And thanks to all of you for taking the time to join us on today's call. We are pleased with our Q3 results, which were in line with our expectations and reflect continued investment at scale. We continue to serve as a trusted partner for our clients, while running our business with rigor and discipline. Now, let me summarize a few of the highlights for the quarter. Revenues grew 1.4% local currency with mid-single digit growth or higher in seven of our 13 industries, including public service, industrial, high-tech, life sciences, energy, utilities, and health. We also continue to see improvement in our CMT industry group. And we continue to take smart share. As a reminder, we assess market growth against our investable basket, which is roughly two dozen of our closest global public competitors, which represents about a third of our addressable market. We use a consistent methodology to compare our financial results to theirs, adjusted to exclude the impact of significant acquisitions to the date of their last publicly available results on a rolling four-quarter basis. Adjusted operating margin was 16.4%, an increase of 10 basis points over Q3 last year, and includes continued significant investments in our people and our business. Finally, we delivered free cash flow of $3 billion and returned $2.2 billion to shareholders through repurchases and dividends. Year-to-date, we've invested $5.2 billion across 35 acquisitions. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $21.1 billion for the quarter, representing 22% growth in US dollars and 26% growth in local currency, with an overall book-to-bill of 1.3. Consulting bookings were $9.3 billion with a book-to-bill of 1.1. Managed services bookings were $11.8 billion with a book-to-bill of 1.5. Turning now to revenues. Revenues for the quarter were $16.5 billion, a 1% decline in US dollars and a 1.4% increase in local currency, and slightly above the midpoint of our FX adjusted guidance range, as the FX headwind was approximately 2% compared to the 1% headwind estimated at the beginning of the quarter. Consulting revenues for the quarter were $8.5 billion, a decline of 3% in US dollars and a decline of 1% in local currency. Managed services revenues were $8 billion, up 2% US dollars and up 4% local currency. Taking a closer look at our service dimensions, technology services and strategy and consulting grew low single digits and operations was flat. Turning to our geographic markets, in North America, revenue grew 1% local currency, led by growth in public service, partially offset by decline in banking and capital markets. In EMEA, revenues declined 2% local currency with growth in public service, offset by declines in banking and capital markets and communications and media. Revenue growth in Italy was offset by a decline in France. In growth markets, revenue grew 8% local currency, led by growth in banking and capital markets and industrial. Revenue growth was driven by Argentina and Japan, partially offset by a decline in Australia. Moving down the income statement, gross margin for the quarter was 33.4%, consistent with the same period last year. Sales and marketing expense for the quarter was 10.6%, compared to 10.5% for the third quarter last year. General and administrative expense was 6.3%, compared to 6.5% for the same quarter last year. Before I continue, I want you to note that in Q3 of FY 2024 and FY 2023, we recorded $77 million and $347 million in costs associated with our business optimization actions, respectively. These costs decreased operating margin by 40 basis points and EPS by $0.08 this quarter and operating margin by 210 basis points and EPS by $0.42 in Q3 of last year. In Q3 of last year, we also recognized a gain on our investment in Duck Creek Technologies, which impacted our tax rate and increased EPS by $0.38. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.7 billion in the third quarter, reflecting an adjusted operating margin of 16.4%, an increase of 10 basis points from adjusted operating margin in the third quarter of last year. Our adjusted effective tax rate for the quarter was 25.5%, compared with an adjusted effective tax rate of 24% for the third quarter last year. Adjusted diluted earnings per share were $3.13, compared with adjusted diluted EPS of $3.19 in the third quarter last year. Days sales outstanding was 43 days, compared to 43 days last quarter and 42 days in the third quarter of last year. Free cash flow for the quarter was $3 billion, resulting from cash generated by operating activities of $3.1 billion, net of property and equipment additions of $124 million. Our cash balance at May 31 was $5.5 billion, compared with $9 billion at August 31. With regard to our ongoing objective to return cash to shareholders. In the third quarter we repurchased or redeemed 4.3 million shares for $1.4 billion, an average price of $320.41 per share. As of May 31, we had approximately 3.3 billion of share repurchase authority remaining. Also in May, we paid a quarterly cash dividend of $1.29 per share for a total of $811 million. This represents a 15% increase over last year. And our board of directors declared a quarterly cash dividend of $1.29 per share to be paid on August 15, a 15% increase over last year. In closing, we feel good about our results in Q3 and are now working hard to deliver Q4. We remain focused on capturing growth opportunities while continuing to invest in our business for long-term market leadership. Now let me turn it back to Julie. Julie Sweet : Thank you, KC. As I mentioned earlier, we're seeing more of the same in terms of the demand environment. Now let me give a little context on how we're executing our strategy to be the reinvention partner of choice and why we're uniquely positioned to be helping our clients on AI. It is important to remember that while there is a near universal recognition now of the importance of AI, which is at the heart of reinvention, the ability to use GenAI at scale varies widely with clients on a continuum. With those which have strong digital cores genuinely seeking to move more quickly, while most clients are coming to the realization of the investments needed to truly implement AI across the enterprise, starting with a strong digital core from migrating applications and data to the cloud, building a new cognitive layer, implementing modern ERP and applications across the enterprise to a strong security layer. And nearly all clients are finding it difficult to scale GenAI projects because the AI technology is a small part of what is needed. To reinvent using technology, data, and AI, you must also change your processes and ways of working, rescale and upscale your people, and build new capabilities around responsible AI, all with a deep understanding of industry, function, and technology to unlock the value. And many clients need to first find more efficiencies to enable scaled investment in their digital cores and all these capabilities, particularly in data foundations. In short, GenAI is acting as a catalyst for companies to more aggressively go after cost, build the digital core, and truly change the ways they work, which creates significant opportunity for us. And this is why clients are coming to us. We are able to help our clients with this AI rotation because of our broad services across strategy and consulting technology and operations, as well as everything customer through Song and digital manufacturing and engineering through Industry X and our relevance across the functions of the enterprises and 13 industries. Our privileged position in the technology ecosystem has never been more important. We are working closely with our ecosystem partners to help our clients understand the right data and AI backbone that is needed and how to achieve tangible business value. Now let me give you a few examples of the complex work of reinvention and building a digital core. We are partnering with Currys, a leading European technology retailer to unlock new growth and cost savings by accelerating its adoption of new technologies. First, we will move their operations from a legacy data center to a new cloud platform using pre-built and customized solutions to create a powerful digital core. This unified data foundation allows us to deploy automation and generative AI in key growth areas, such as repair centers, customer service, e-commerce, procurement, and in-store experiences, delivering faster, more efficient services to their customers. The move to a new platform supports the company's sustainability goals, reducing energy consumption by transitioning to a more efficient cloud infrastructure. Now, Currys' employees will be empowered to serve their customers better by offering high-touch experiences, both online and in-stores. We're working with Independence Health Group, IHG, a leading health organization headquartered in Southeastern Pennsylvania on a transformation journey to modernize end-to-end operations, improving the way they serve current and future generations of customers. We will help migrate nearly 2 million members to a new digital-first platform, expected to drive immediate improvements in existing business processes. This will lay the foundation to leverage advanced technology and generative AI to proactively manage members' health. We are also helping reskill and retrain their operations staff, creating opportunities for employee development. With this reinvention, Independence continues its ongoing efforts to increase service quality, improve experiences, and enable better health outcomes, positioning them for new areas of growth in the rapidly changing healthcare landscape. Digital core work also requires deep industry expertise as we work with our clients to design the right tech, data, and AI to reinvent their enterprise and their industry. We are helping Macy's, an iconic American retailer with a technology modernization effort. As a strategic technology execution partner, we will migrate their mainframe systems to a cloud platform, a move that will enhance their operational efficiency and scalability. This will allow Macy's to be more agile and enable growth. We are helping the Central Bank of the United Arab Emirates, the regulatory body responsible for the country's banking and insurance sector with a digital transformation to strengthen the financial system's stability and contribute to growth, innovation, and diversification in the sector, in line with the UAE's national vision. Our program will deliver advanced analytics along with AI-driven automation to improve supervisory capabilities and streamline activities for licensed financial institutions by creating best-in-class processes to support regulatory compliance. We will also modernize the bank's enterprise data management by implementing a single unified portal to provide a holistic view of the financial services ecosystem, all of which will enhance the UAE's position as a global financial center. We are partnering with Virgin Media O2, a leading carrier services provider in the UK to support regional businesses to realize the promise of 5G, opening new revenue streams and stimulating growth in the telco market. We will bring to market solutions built on our edge orchestration platform, which combines edge computing, data AI, GenAI, and embedded security. This will enable use cases such as quality inspections, safe workplace management, and behavior monitoring to improve operations and customer experience. Whether it's enabling safe communication on building sites, creating a fan experience while handling crowds and busy venues, or supporting vital devices and clinician workflow in healthcare, Virgin Media O2 can now offer businesses a range of flexible, secure, and affordable solutions that boost efficiency, growth, and performance. And with our managed services and customer operations, we can work together with Virgin Media O2 to scale this growth. Security is a critical part of reinvention in the digital core. We saw continued very strong double-digit growth in our security business this quarter. We are partnering with the US Navy to enhance its cybersecurity operations with cutting-edge capabilities that will strengthen its data security posture and support mission readiness. More than ever, data and information are critically important to national security. Our solution sets are configured to provide defensive cyber operations across Navy networks to help safeguard digital assets and mission operations. Together, we will help ensure the US Navy can combat evolving cyber threats, protect our sailors at sea, and defend American interests around the world. Once clients have a strong foundation, they can explore new opportunities to drive growth and efficiencies with GenAI. We are helping a leading global food and beverage company who already built a strong digital core as part of its reinvention journey to now leverage the power of generative AI to create new value. Together, we developed a digital shelf console pilot, a GenAI engine that accelerates content creation for e-commerce and optimizes it to drive sales. The engine empowers marketers to audit and customize content at scale, expected to reduce time to deliver one year's worth of content to just eight working days and save costs of up to 80% quickly and effectively. Once they scale, this enables the company to produce more targeted content with significant time and cost efficiency, increase sales, and transform customer experiences. We have partnered with National Australia Bank, one of the country's largest financial institutions to strategically implement and scale generative AI to create material value at speed, enhance relationship-driven customer service, and drive operational efficiencies. We worked on a methodical build of a secure and robust GenAI platform built within the bank's existing strategic data platform with the creation of 200 generative AI use cases in backlog. To date, over 20 use cases have been tested across the bank with eight of these enterprise-grade pilots underway and a number of those scaling and already delivering value. We also co-created a methodology for delivering GenAI projects from experiments to scalable deployment, ensuring each stage delivers tangible business benefits. While doing so, National Australia Bank and Accenture are putting safety at the core of the approach through responsible AI and risk policies alongside developing in-house AI expertise and literacy. One of the areas of richest opportunities for our clients is customer experience transformation, which uses the unique capabilities of Song across creative customer insights and deep technology expertise. Song grew mid-single digits this quarter. We are helping Saudia Airlines, the national flag carrier of Saudi Arabia, to launch an innovative digital platform to transform the travelers experience. Powered by GenAI, the platform will provide a one-stop solution enabling customers to seamlessly plan their journeys, book flights, and modify their trips in just a few words, all while providing a personalized and conversational experience. The platform is continuously evolving and will integrate more services over time. This modernization will support Saudia Airlines' vision of redefining the standards of travel in a digital world. We continue to see strong demand for digital manufacturing and engineering services. Industry X grew high single digits in Q3. We are supporting a large Asia-Pacific automobile manufacturer on their reinvention towards software-defined vehicles. We will help accelerate software development and create a software center of excellence to optimize quality, cost pressures, and delivery times. This center of excellence will manage four key workstreams, advanced driver assistance systems, in-vehicle infotainment, electrical and electronics, and powertrain. By leveraging our expertise and strategic partnerships, we are empowering them to strengthen and evolve its in-vehicle software, providing advanced functions and services throughout the vehicle's lifecycle. This enables the company to drive innovation, enhance driver and passenger experiences, and realize the full potential of software-defined vehicles. And we will continue to leverage all of our strengths to manage the current macro conditions and constrained spending while investing in leadership for the future. Back to you, KC. KC McClure : Thanks, Julie. Now turning to our business outlook. For the fourth quarter of fiscal 2024, we expect revenues to be in the range of $16.05 billion to $16.65 billion. This assumes the impact of FX will be about negative 2% compared to the fourth quarter of fiscal 2023 and reflects an estimated 2% to 6% growth in local currency. For the full fiscal year 2024, based upon how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in US dollars will be negative 0.7 compared to fiscal 2023. For the full fiscal 2024, we now expect our revenues to be in the range of 1.5% to 2.5% of growth in local currency over fiscal 2023, which assumes an inorganic contribution approaching 3%. We continue to expect business optimization actions to impact fiscal 2024 GAAP operating margin by 70 basis points and EPS by $0.56. For adjusted operating margin, we continue to expect fiscal 2024 to be 15.5%, a 10 basis point expansion of fiscal 2023 results. We now expect our adjusted annual effective tax rate to be in the range of 23.5% to 24.5%. This compares to an adjusted effective tax rate of 23.9% in fiscal 2023. We now expect our full year adjusted earnings per share for fiscal 2024 to be in the range of $11.85 to $12, or 2% to 3% growth over fiscal 2023 results. For the full fiscal 2024, we continue to expect operating cash flow to be in the range of $9.3 billion to $9.9 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $8.7 billion to $9.3 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.2. Finally, we continue to expect to return at least $7.7 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so we can take your questions. Katie? Katie O'Conor: Thanks, KC. 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. Operator, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] Your first question comes from the line of Tien-tsin Huang from JPMorgan. Please go ahead. Tien- Tsin Huang : Thank you so much, and congrats to KC and Angie. I'm excited for both of you guys. I just wanted to ask upfront, just for Julie, maybe you mentioned stronger growth next year. Hoping you can just elaborate on that at a high level. I know there's a lot of moving pieces. On one hand, you have a big backlog, a lot of large deals. You have strong inorganic growth, but on the other hand, the sector is struggling with this weak discretionary spend, and there's uncertainty with global elections in the second half of the year. So just -- I know you can't give formal guidance until next year. I know consensus is at, what, 6%? Can you just give us maybe just some high-level considerations that are worth underlining as we're recasting our outlook for next year? Thank you. Julie Sweet : Sure, and thanks for the question, Tien-tsin. So, let's just anchor on our strategy for growth and what you're seeing in three quarters into the year, because obviously, expectations at the beginning of this year were different in terms of how things develop with spending. So, what did we do? We leaned into what do clients need, and they need these reinventions, they need these big, large-scale transformations. And so, what you've seen us to do is, like, you've got to go with what the clients need, and that's what they're buying. And so, we have accelerated our leaning into these large transformation deals, which is why you see that we have seven more than last year at this time of clients with bookings of over $100 million. Now, these convert to revenue more slowly, but as we're accelerating, you'll know that they ramp up and they will start to layer in. And we are very uniquely positioned in this market to be able to do these large-scale transformations because they require the combination of services, everything from the ability to help them move faster through our managed services, our industry expertise. Everyone wants to do that with the eye towards GenAI, so even though the transformations are often in preparation for GenAI, they want to work with the partner who really understands GenAI, and so how do we get there faster. And so, as you think about the reinvention strategy, that's a strategy we've been executing for a couple of years, and we uniquely can lean in, and that -- you're seeing the results of that this quarter with the acceleration of -- compared to last year, of clients with that level of bookings and those, of course, then ramp next year. The second is, our leaning into where we are seeing growth in smaller deals because remember that discretionary spending is constrained, overall spending constrained, and particularly in smaller projects. But what did we do, right? We see GenAI as the new growth. We have an incredible ability to pivot our people. You can see the specialists in data and AI growing. We started at 40,000, we're at 55,000 now against our goal of 80,000 by the end of 2026. We're also training our people. You saw that big increase, because we're preparing our people. You're now doing a transformation. It may not be GenAI, but you have to understand GenAI. And so, we're uniquely able to train our people at scale to understand GenAI. And how is that translating? We'll look at our bookings this quarter now getting to $2 billion, three quarters into the year as compared to $300 million last year and $500 million in revenue. So starting to be meaningful, right? In terms of the numbers, we were at $100 million for all of last year. So we expect to continue to lean into GenAI. And what it's doing is very interesting from where we were, say, three quarters ago. It's acting as the catalyst to understand what you have to do. So I'll finish here and then I'll just, of course, mention our ability to invest in inorganic. But right now from a perspective of like the pull through, we're still reprioritizing. But every other GenAI project now is leading to some data project, because people are understanding, hey, this is a great technology and I'm not ready. So we feel really good about being very well positioned as spending increases, when it does increase because of what we're doing. And then finally, remember we invest in acquisitions to drive organic growth. Like that is -- so it's all about future growth. And I gave a lot in the script today to just help bring to life just how strategic our ability to invest is as we think about future growth. So not trying to comment at all on FY 2025. We'll call it like we see it. But we also want to be clear that our strategy is working and these deals will ramp up. KC McClure : Yes, maybe I'll just add, Tien-tsin, just how we feel just within this fiscal year. So, we're very pleased with where we landed in Q3. When you look to Q4, we do have, and you see that in our growth rate, a clear uptick in our growth rate for the fourth quarter. And I think importantly included in that is the expectation that our consulting type of work in Q4, Tien-tsin, will return to growth and that we haven't had growth in consulting type of work since Q2 of last year. Tien- Tsin Huang : Good. No, thank you both for that. I'll be less wordy with my follow-up. Just on the inorganic piece, can this pace continue? KC McClure : I'll let Julie talk about -- add on here. But in terms of our -- let's talk about capital allocation. And we've always said this, we have the ability, and I think it's a differentiator of ours, to be able to invest and approach the market as whenever we see something that we want to execute. And that remains unchanged. And we've been able -- and you've seen us do that over all the different business cycles. And importantly, when we do that, we're able to continue all parts of our capital allocation in terms of share buybacks and dividends as well. So, from a financial standpoint, we have a very strong balance sheet. We have the ability to continue to flex up and down as we see fit from a capital allocation standpoint, Tien-tsin. Julie Sweet : Yes, Tien-tsin, and I think we'll make the decision as we go into next year as to what level we want to drive for next year. So, I think we'll comment next quarter. Tien- Tsin Huang : That's perfect. I know you've been able to amplify the growth of what you bought. So, that's why I asked. Thank you. Julie Sweet : Thanks. Operator : Your next question comes from the line of Dave Koning from Baird. Please go ahead. Dave Koning : Yes. Hey, guys. Thanks so much. One thing I noticed, debt was up to $1.6 billion or so. Sequentially, it was the highest. Really, in 20 years, you've almost had no debt, and you have a lot of cash. So, I guess, what's the strategy around borrowing money now? And maybe it's just geographic cash positions, too. KC McClure : Yes. No, that's a great question. So, in terms of our cash, you said that we started the year at $9 billion, and now we're little bit -- we are about $5.5 billion. And we do have some debt. It's very small, as you mentioned, for a company of our size. We do have a -- we had a credit facility that we put in right during the pandemic, and we continue to have a credit facility. It's about $5.5 billion. It's a five-year credit facility and what you just see, Dave, is that we're just exercising some of that credit facility, kind of normal treasury operation. Dave Koning : Okay. And maybe just as a follow-up, margins this year up at the lower end of kind of normal and certainly scale, just the growth this year being a little slower, maybe the acquisitions. And just as we kind of look forward, the margin puts and takes, how should we think that with acquisition spending maybe a little higher, does the next few quarters remain kind of putting a little pressure on margins or how should we think of just the moving parts of margins going forward? KC McClure : Yes, sure. So I'll just obviously keep my comments to this year, to 2024, but -- and maybe I'll just point out where we are and what we are continuing to assume. So we stated last quarter that we'd be at 10 basis points of operating margin expansion and we reconfirmed that, Dave, for the full year, again this quarter, and we feel confident in our ability to do that. So if you look at -- we run our business to operating margin. If you look at gross margin and overall what we've been saying on pricing and just importantly, when we talk about pricing, we mean the margin on the work that we sell. What I think is really important for us is that, we've been able to operate our business with rigor and discipline in how we run ourselves in an operation -- in efficient operations of Accenture and be our own best credential as we absorb kind of higher selling costs, which you would expect. We're looking at our record $60 billion of bookings and also the continued pressure and pricing that we've had across the business. So with that, we feel really good. And if you look at it, we grew 1% in quarter one. As an example, we were able to do 20 basis points of margin expansion. We grew 1% this quarter, and we were able to do 10 basis points of margin expansion. So we feel good about the way we run our business with rigor and discipline. Dave Koning : Great. Thanks and nice bookings. KC McClure : Thank you. Julie Sweet : Thank you. Operator : Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Bryan Keane : Hi, guys. Good morning and congrats, KC. A great run at Accenture. You were awesome. So, I want to ask on managed services on the bookings, the $11.8 billion, that was an outsized number. How much of that is new bookings versus renewals? And maybe give us some flavor on what caused that spike in growth. KC McClure : Yes. Maybe I will give you the -- I'll talk a little bit about the numbers. In terms of, it is a record bookings for managed services. As Julie's -- and as we've been talking, it is obviously based on the larger transformational deals that we're doing. Well, those larger transformational deals, just to be clear, Bryan, they do have both consulting and outsourcing -- excuse me, managed services type of work with them. They do have, as you would expect, a larger portion of managed services type of work. So when you see what we were able to do this year, we're already at 92, seven more than last year. And we did have a very strong managed services bookings, as you noted, in Q3. We don't really do a breakout in terms of extensions or new, but there's always -- we always have a healthy mix, I would say, of both. That's what we strive to over rolling four quarters in our business always and no difference there. Julie Sweet : Yeah. And just maybe a little color, Bryan. As you think about this idea of reinvention, Virgin Media O2 was a great example, because there, right, we have a combination using our Edge platform to provide -- help O2 provides -- Virgin Media O2 to provide these new services. And at the same time, we're supporting it with our customer operations, supporting their growth so that they can scale. And right now, clients, of course, they're looking for growth, they're also looking for transformation and efficiency. The other thing I'd say is, this is a great example of how we're embracing GenAI. You've heard us talk in the past about our myWizard platform, which helps in our managed services. We now -- that's become Gen Wizard and we're seeing that our embracing -- early embracing of using Gen AI where it's ready to be used has been a real differentiator in our technology managed services. So, we're very focused on helping our client, who move faster using our expertise and leverage our digital investments in order for them to transform and reinvent faster and you're seeing that focus. Bryan Keane : Got it. And just a follow-up, just looking at some of the dimensions breakout, when I look at operations being flat, just any call-outs for that. I know it was negative last quarter, so it's turned a little bit here, but just trying to understand the growth there and the prospects. Thanks. Julie Sweet : Yes, no, it's -- we're really pleased that it's, that ticked up this quarter and it's a very strategic part of our business. Think about it really is like sort of two-ways, right? So we remain number-one in our industry in finance and accounting and we're embracing again GenAI there to help differentiate our platform. And so, there's a focus that we're seeing in our clients as they're saying, okay, we need to -- we really understand how much more we need to digitize and we need to do that in the enterprise, they're excited about our ability over-time. Again, it's very early days still in Gen AI over-time to help build our -- we're building our SynOps platform, we're building in GenAI and that helps them have less to build-in in their enterprise side by partnering with us. And so that's -- we think a really great differentiator. And then we continue to diversify into areas that are in the core of our business, whether -- core of our industries for our clients, whether it's claims and underwriting and insurance, or supply-chain for consumer goods and industrial or core banking in the financial services. So we feel really good about the business and kind of continue -- and its continued prospects. Bryan Keane : Thank you. Julie Sweet : Thanks, Bryan. Operator : Your next question comes from the your next question comes from the line of Rod Bourgeois from DeepDive Equity Research. Please go ahead. Rod Bourgeois : Hey guys, and very best wishes to KC as well. Julie, you mentioned that the demand environment is sort of more of the same. At the same time, it appears you've seen some growth mending in certain key areas. I'm particularly interested in the growth improvement in the CMT vertical and in strategy and consulting. Can you talk about what's enabling those growth improvements and a sense of the outlooks for CMT and S&C? Thanks. Julie Sweet : So, really want to compliment our entire team on the work that they're doing with our clients in CMT. So, as we've been talking about that for now for a little while and we start to see things like the Virgin Media O2 deal. So our teams are working with our clients on what do they need. And they're focused on getting rid of technology debt, because that's critical in order to use some of these new technologies. They're focused on using the new technologies. So we have a number of clients that -- while it's still small, are working on GenAI. And then being very focused on efficiencies. And then finally network. So, really across the board what I would say is the industry was challenged. We have been just focused on going to where they need help and you're seeing that result in our results. And then on strategy and consulting, again, it's all about being focused on what do our clients need. And so, we've pivoted many more people, for example, toward cost and strategy. So cost takeout is a big theme, and particularly for our strategy. We are seeing a lot of growth still in things like implementing modern ERP platforms with the focus on the digital core. And again, at Accenture, it's not just technology, right? It's about we're the number one player with all of these technology ecosystem players, but our clients want to do it faster. They need the industry expertise. And so, you saw a number of examples in the script about how we're putting in these platforms and we're doing so within an industry context. And so, I'd say cost takeout and move the cloud data platforms wrapped around with industry and functional expertise, that's where we're seeing the growth. And we just continue to remain laser focused on more people, more focus, working with the clients on what they need to buy. Rod Bourgeois : Great. Thanks for that. And you're seeing revenue mix incrementally shift into managed services, and I'm curious if you think some of that mix shift towards managed services is due to secular forces, or are you purely seeing that mix shift as just a cyclical phenomenon? KC McClure : Yes, I think, it's -- in terms of what the real driver is, it's the larger deals that have a little bit of both in those -- both components of a sector and cyclical and what you're talking about. So it really is just based on the larger deal. Julie Sweet : So just think about Accenture is very uniquely positioned in this market. Clients are prioritizing large scale transformations. And doing those and getting the efficiencies and moving faster, managed services is a highly strategic component of being able to do that. And this is where Accenture, with such scale in both strategy, in both consulting type of work with managed services is really able to lean into what are clients buying now. Rod Bourgeois : Got it. Thank you. Operator : Your next question comes from the line of Bryan Bergin from TD Cowen. Please go ahead. Bryan Bergin : Hi. Good morning and congrats KC and the other leaders on the retirements and appointments. First question I wanted to ask on the consulting existing revenue-base performance, can you just talk about how base business runoff kind of progressed within the minus 1% local currency performance? I heard your comment on the 4Q consulting or just returning to growth. I'm trying to understand if that's a reflection of sustainable stabilization potentially and really gauge whether you're reaching a point where the new consulting bookings conversion should more than offset the existing base runoff moving ahead. Julie Sweet : Yes. So, Brian, in terms of what we'll give -- what we'll talk about is really is what I just mentioned on Q4. I guess -- and I understand what you mean by a base runoff. We don't really think of it that way. We kind of look at it as maybe our terms will be whether we have booked and backlog and what are we already -- and what's new coming in from these sales. And so, I get -- so just kind of going with those two points, the way we evaluate and we talk about it, Brian, is from a year-over-year basis, looking at both the components of what we've already sold for the next quarter and then what we see in our pipeline and how we see those sales will convert to revenue, that's how we kind of assess what we think that we will be overall. And again, very pleased that consulting -- we do feel that and see that it will return to growth. And I think it's a milestone that we haven't had in a number of quarters, so we'll pleased with that. And we'll comment on anything else for next year, next year, I mean in September. Bryan Bergin : Okay. And then bookings, obviously, very solid here. Can you just comment on pipeline and any bookings expectations worth calling out for 4Q? Julie Sweet : Yes. Overall, we feel good about our pipeline. And we don't put -- we don't give guidance to next quarter bookings. But we feel good. Bryan Bergin : Thanks. Julie Sweet : Thank you. Operator : Your next question comes from the line of James Faucette from Morgan Stanley. Please go ahead. James Faucette : Great. Thank you very much. I wanted to follow up on the acquisition activity. It's obviously been really robust, providing a lot of good opportunities. Can you give us any sense collectively across the acquisitions you've been doing and maybe what you are looking at in terms of what the growth rates of those businesses are generally or collectively when you do the acquisitions? And I know there's a target to accelerate those, how the growth rates tend to change as those companies are absorbed into [index center] (ph), even if directionally. Julie Sweet : Yes, I mean, I think in terms of -- make sure I'm answering your question is, when we look at overall at our acquisitions, they all come with -- they're typically higher growth business cases that we have from the companies that we buy and we have a base case that comes with the organization and we assess that growth rate. And then we obviously put in pretty significant synergy cases that are -- without going through kind of metrics that are a pretty high bar for those acquisitions to deliver to, along with a broader center. And that's why integration is so important in what we do, because we're not just having a great business case, that is maybe half of what you need to do, but the key really is in how you integrate to deliver to that, and we have a very strong track record. And so, what you'll see is, you could just maybe get the sense to your question, is look at how many we've done over the last five years and you can see how we've been able to continue to grow our business throughout that time. And it is really continuing to fill our organic growth. James Faucette : Got it. And then quickly, one of the areas where you've leaned in on and was mentioned in the prepared remarks is the government and healthcare sector, really strong growth there obviously. How should we be thinking about that as a long-term or medium-term potential grower in that segment and any -- and how are you thinking about the investment needed to continue to drive that? Thanks. Julie Sweet : Thanks. We feel really good about that vertical. Obviously there's a lot of transformation that's going on in public service. You see health is a big driver, defense is a big driver. There's a lot of infrastructure support, whether it's IRA in the U.S. or what the EU has been doing as well. And of course, a lot of the digital transformation hasn't happened in the public service and health, And so, we see that now being the time and you're seeing that in the results. So we feel very confident and we think about the investment like we do all our industries. I mean, remember, we have 13 industry groups. We have -- the diversification is a key part of both our resilience and our growth strategy. And so, at any given time, we're investing differently depending on the growth trajectory. And as we called out this quarter, we've been investing significantly in public service, because we see the next several years this being a big growth area and we're making those investments now. Katie O'Conor: Operator, we have time for one more question, and then Julie will wrap up the call. Operator : Okay. That question comes from the line of Keith Bachman from BMO. Please go ahead. Keith Bachman : Hi. Many thanks. And first, Casey and Paul, special congratulations as you make the transition. I wanted to ask a question, and I'll just make it concurrently in the interest of time. And Julie, I think I'll direct this to you. Number one, on BPO, one of your competitors just talked pretty openly about pricing's been under pretty material duress as of late, and I wondered if you would echo that? And I'm really curious as to why. Why do you think pricing has been under duress? And how do you think about impacting future growth? And then the second area that I wanted to ask about is, Song. Thank you for the comment on mid-single digit growth. And I'm really interested how you think GenAI will impact over your digital agency over the next 12 to 24 months. And the reason I ask the question is, we also spend a lot of time with companies like Adobe that have significant -- generative AI is going to have a significant impact on digital agencies. And some of the agencies are talking about seat reductions because of the value associated with generative AI. And I'm just wondering if you could comment on how you think generative AI will impact the growth potential of Song. And that's it for me. Many thanks. Julie Sweet : Great. KC, why don't you quickly cut pricing, and then I'll do Song. KC McClure : Keith, I would say just in terms of pricing, and we've been commenting on this for quite some time. You are correct in that, we've had overall in our entire business continued pricing pressure. So, I mean, that's the way I would reflect on that statement -- on your question [indiscernible]. Julie Sweet : Yes, it's overall is a tight market, So that's what you normally see. On Song, here's where we are so unique, because our business is not an agency business, right? The agencies are part of an incredibly differentiated value proposition where you have creative and technology and digital and by the way managed services. And so, we see this as a huge opportunity because we are embracing it as fast as possible to help our clients get value, but we put it together with all of these other services. So we were happy to see the uptick in growth this quarter with Song and long term where we really think it's great. And remember, this is our playbook, right? We embrace technology. We've done it in every wave. We've done it when we did managed services. Remember in 2015, we had SynOps and myWizard. Our business is to help our clients be more efficient and grow. That is what we do. And we use technology in how we deliver it. And we help them use technology and how they operate. And so, we see GenAI as yet another way that we're going to embrace it. We're going to be fast. And we're going to do what we do for clients. And that is a very exciting opportunity, so we feel really good about our Song business. Great. So, thanks everyone for the questions and the time today. In closing I want to again, as always, thank all of our shareholders for your continued trust and support, and all of our people for what you're doing for our clients and for each other every day. Thanks so much for joining. Operator : Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,024	3	2024Q3	2024Q4	2024-09-26	12.125	12.207	13.06	13.141	21.01	27.69	26.53	Operator : Thank you for standing-by. Welcome to Accenture's Fourth Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded. And I will now turn the conference over to our host, Katie O'Conor, Managing Director, Head of Investor Relations. Please go ahead. Katie O'Conor: Thank you, operator, and thanks, everyone for joining us today on our fourth quarter and full fiscal 2024 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and Chief Executive Officer; KC McClure, our current Chief Financial Officer; and Angie Park, our incoming 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. Julie 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 fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning before Angie provides our business outlook for the first quarter and full fiscal year 2025. We will then take your questions before Julie 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 as 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 Julie. Julie Sweet : Thank you, Katie, and everyone joining. And thank you to our 774,000 people around the world who have worked every day to be at the center of our clients' business and deliver 360 degree value for all our stakeholders. Our performance this year clearly demonstrates the resilience and agility of our business model, the power of our scale and reinvention in action. FY '24 was marked by a challenging market environment, and we have rapidly shifted to where our clients are buying, large reinventions that utilize the scale of Accenture's expertise and ecosystem relationships. And we have yet again put reinvention into action at Accenture with our significant investment and yearly (ph) leadership in what we believe will be the most transformative technology of the next decade, GenAI. As a result, over the last four quarters, we have successfully positioned Accenture for strong growth in FY ‘25. When market conditions improve, we will be well positioned to capitalize them. In FY ‘24, we continue to deliver on our enduring shareholder value proposition to grow faster than the market and take share, deliver earnings growth and margin expansion while investing at scale with strong free cash flow, disciplined capital allocation and significant cash return to shareholders. Turning to our results and the foundation for growth we have built for FY '25. With our clients prioritizing large scale transformations, we doubled down on our strategy to be the reinvention partner of our clients. Our success is reflected in our full fiscal year bookings of $81 billion, representing 14% growth in local currency, including 33 clients with quarterly bookings greater than $100 million in the fourth quarter, bringing the total of such bookings to 125 for the year, 19 more than last year. We are proud to now have 310 Diamond clients, our largest client relationships, an increase of 10 from last year, expanding our base of deep client relationships and the vantage point we have on the market. We delivered revenues of $65 billion for the year, representing 2% growth in local currency, while continuing to take market share on a rolling four quarter basis against our basket of our closest global publicly traded competitors, which is how we calculate market share. We expanded adjusted operating margin by 10 basis points and delivered adjusted EPS growth of 2%, while continuing to significantly invest in our business and our people with $6.6 billion in Strategic Acquisitions, $1.2 billion in R&D, and $1.1 billion in Learning and Development. We generated free cash flow of $8.6 billion allowing us to return $7.8 billion of cash to shareholders. We completed the business optimization actions we announced in March 2023 to reduce structural costs. For the full fiscal year, we had $3 billion in new GenAI bookings, including $1 billion in Q4. And for the full fiscal year, we had nearly $900 million in revenue. The magnitude of this achievement is seen in the comparison to FY '23, where we had approximately $300 million in sales and roughly $100 million in revenue from GenAI. This was an area where our clients continued to buy small deals, and we focused on accelerating our growth here. We have continued to steadily increase our data and AI workforce, reaching approximately 57,000 practitioners against our goal of 80,000 by the end of FY '26. We invested in our people to continue to develop their marketable skills and to help us reinvent our services using GenAI. Our people had approximately 44 million training hours this year, representing an increase of 10%, predominantly due to GenAI training. In addition to being a talent creator through our investment in learning, our talent strategy to succeed over the next decade is to have the best access to talent and to unlock the potential of our talent through, among other actions, ensuring our people feel they are net better off for working at Accenture across four dimensions : marketable skills, working for a purpose, well-being financial, mental and physical and relationships, where our people feel they belong and can thrive. In addition, our leadership in the market requires that we lead in innovation, which in turn requires access to broad pools of talent that provide the variety of perspectives, observations and insights, which are essential to continuously innovate. These strategies depend on us fostering a diverse and inclusive workplace, and our superior execution of these strategies is demonstrated by our global recognition for the third year with the number one spot on the FTSE, Global Diversity and Inclusion Index, an objective measurement of over 15,000 organizations and our recent achievement of having 50-50 gender equality in our advanced technology centers in India, which have over 220,000 people. Our long-term growth depends on thriving communities, and we continue to successfully create value in the communities where we operate, such as our work helping address the United Kingdom's digital inclusion gap, partnering with Tech [indiscernible] on a new program, regenerative AI, that aims to empower people and socioeconomically disadvantaged communities across the country to build their digital skills. Finally, I want to acknowledge how proud we are to have earned the number two spot on Times World's Best Companies list and the top spot on the World's Best Management Consulting Firms list by Forbes. Over to you KC. KC McClure : Thank you, Julie, and thanks to all of you for joining us on today's call. We're very pleased with our results in the fourth quarter, which were aligned to our expectations and reflect improvement across all dimensions of our business. We continue to invest for long-term market leadership, while delivering significant value for our shareholders. So let me begin by summarizing a few highlights for the quarter. Revenue grew 5% in local currency, driven by mid-single digit growth or higher in seven of our 13 industries, including public service, industrial, software and platforms, health, high tech, energy, and life sciences. We had growth in all three markets, all three services as well as return to growth in consulting type of work for the first time in six quarters. Organic revenue improved as well to slightly positive growth, and we continue to take market share. Adjusted operating margin was 15%, an increase of 10 basis points over Q4 last year. We continue to drive margin expansion while making significant investments in our business and our people. We delivered adjusted EPS of $2.79, which represents 3% growth compared to adjusted EPS last year. And finally, we delivered free cash flow of $3.2 billion and returned $1.4 billion to shareholders through repurchases and dividends. With those high level comments, let me turn to some of the details. New bookings were $20.1 billion for the quarter, representing 21% growth in U.S. dollars and 24% growth in local currency with an overall book-to-bill of 1.2. Consulting bookings were $8.6 billion with a book-to-bill of 1. Managed services were $11.6 billion, with a book-to-bill of 1.4. Turning now to revenues. Revenues for the quarter were $16.4 billion above the mid-point of our guided range, reflecting a 3% increase in U.S. dollars and 5% in local currency. Consulting revenues for the quarter were $8.3 billion, up 1% in U.S. dollars and 3% in local currency. Managed services revenue were $8.1 billion, up 5% in U.S. dollars and 7% in local currency. Taking a closer look at our service dimensions, technology services and strategy and consulting both grew mid-single digits and operations grew low-single digits. Turning to our geographic markets. In North America, revenue grew 6% in local currency driven by growth in public service and industrial. In EMEA, revenue grew 2% local currency led by growth in public service and life sciences, partially offset by a decline in banking and capital markets. Revenue growth was driven by Italy and the United Kingdom, partially offset by a decline in France. In growth markets, revenue grew 9% in local currency, led by growth in banking and capital markets, software and platforms, and industrial. Revenue growth was driven by Argentina and Japan. Moving down the income statement. Gross margin for the quarter was 32.5% compared with 32.4% for the same period last year. Sales and marketing expense for the quarter was 10.7% compared with 10.8% for the fourth quarter last year. General and administrative expenses were 6.8% compared to 6.7% for the same quarter last year. Before I continue, I want to note that results in Q4 of FY '24 and FY '23 include costs associated with business optimization actions, which impacted operating margin and EPS. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.5 billion in the fourth quarter, reflecting a 15% adjusted operating margin, up 10 basis points compared with Q4 last year. Our adjusted effective tax rate for the quarter was 26.2% compared with an adjusted effective tax rate of 27.4% for the fourth quarter last year. Adjusted diluted earnings per share were $2.79 compared with adjusted EPS of $2.71 in the fourth quarter last year. Days service outstanding were 46 days compared to 43 days last quarter and 42 days in the fourth quarter of last year. Free cash flow for the quarter was $3.2 billion, resulting from cash generated by operating activities of $3.4 billion, net of property and equipment additions of $214 million. Our cash balance at August 31 was $5 billion compared with $9 billion at August 31 last year. With regards to our ongoing objective to return cash to shareholders. In the fourth quarter, we repurchased or redeemed 2.1 million shares for $628 million at an average price of $303.07 per share. Also in August, we paid our fourth quarterly cash dividend of $1.28 per share for a total of $808 million. And our Board of Directors declared a quarterly cash dividend of $1.48 per share to be paid on November 15, a 15% increase over last year, and approved $4 billion of additional share repurchase authority. Now I'd like to take a moment to summarize the year. Our fiscal '24 results illustrate the diversity and durability of our business as well as our ability to continue to manage our business with rigor and discipline. We delivered record bookings of $81.2 billion, reflecting 13% growth in U.S. dollars and 14% growth in local currency, with a record 125 quarterly client bookings over $100 million, which positions us well as we begin FY '25. Revenue of $64.9 billion for the year reflects growth of 2% local currency. Before I continue, I want to note that results for the full fiscal year '24 and fiscal '23 include costs associated with business optimization actions, and fiscal '23 results also reflect a gain on investment in Duck Creek Technologies, which impacted operating margin, our tax rate and EPS. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating margin of 15.5%, a 10 basis point expansion over FY '23. Adjusted earnings per share were $11.95, reflecting a 2% growth over adjusted FY '23 EPS. Free cash flow of $8.6 billion reflected a very strong free cash flow to net income ratio of 1.2. And with regards to our ongoing objective to return cash to shareholders, we returned $7.8 billion of cash to shareholders while investing approximately $6.6 billion across 46 acquisitions. In closing, we feel good about how we managed our business while navigating a challenging macro environment in FY '24 and we remain committed to delivering on our enduring shareholder value proposition while creating 360 degree value for all our stakeholders. And now back to you, Julie. Julie Sweet : Thank you, KC. Our FY '24 growth was driven by our clients seeking to reinvent using tech, data, AI and new ways of working. Reinvention requires a strong digital core. In FY '25, a significant driver of our growth will continue to be helping our clients with digital transformation, including building out their digital core and then using it to drive productivity and growth. We see the advent of GenAI and its tremendous potential acting as a catalyst for reinvention. Our clients turn to us for our unique combination of services across strategy, consulting, song, Industry X, technology and operations. Our strategists and deep industry functional customer and technology consultants work hand-in-hand with our clients and across services to shape and deliver these reinventions. Our investments in our advanced platforms, our assets and solutions, our process expertise, the insights from our scale and diversification, and our ability to both design and build the solutions, combined with our managed services are key differentiators for us. At the same time, we see AI as the new digital. Like digital, AI is both the technology and a new way of working, and the full value will only come from strategies built on both productivity and growth. And it will be used in every part of the enterprise. We believe the introduction of GenAI signifies a transformative era that is set to drive growth for us and our clients over the next decade much like digital technology has in the last decade and continues to do so. As part of that, we expect that the work to prepare enterprise data, which is the fuel for AI will be an increasing part of our growth. To accomplish reinvention and take advantage of AI, businesses need to focus on talent, their ability to access the best people at the right time, place and cost, the ability to be a talent creator to keep their people market relevant and their ability to unlock the potential of their talent is critical. We see talent as a top C-suite agenda item. Today, our managed services are an important part of our clients' long-term talent strategy. Our ability to harness AI is helping them close talent gaps and our strong expertise across talent, change, HR and organizations differentiates all our services. Our launch of LearnVantage, which provides comprehensive technology learning and training services, helps our clients reskill and upskill their people so they can be a talent creator. Let me give you a few examples of the types of reinventions we are doing. In Financial Services, banking and insurance are on their reinvention journey, while retirement services a $15 billion global addressable market growing at about 6% has lagged behind. We have invested to grow our capabilities and talent to capture this next wave of growth. We are working with TIAA, the largest U.S. provider of lifetime income to accelerate the transformation of the company's retirement record-keeping capabilities and operations. Leveraging the power of AI, automation in the cloud, we are helping the company implement new technologies, making record-keeping processes more efficient over time and easier for their customers. Through this strategic partnership, we are supporting parts of TIAA's record-keeping operations, including back end processes and technology. For example, retirement plan sponsors will experience faster plan changes and participants will find it easier to initiate account openings and investment selections. Together, we are making retirement planning more accessible, efficient and personalized for individuals and clients, helping TIAA need its mission of a more secure in retirement for more Americans. Today, we work with 75% of the world's largest communication services providers. With our strong industry and technology expertise, we are modernizing a global Telecom's core IT operations to drive growth. Through our managed services program, we are consolidating IT vendors, increasing productivity by an estimated 60% and reducing cost by half. We are also infusing our GenAI tools to enhance the software development life cycle and automate manual tasks such as resolving technical issues with customer orders, invoices or service availability. Now this will free up employees to focus on strategic growth initiatives and improve the overall customer experience. We are also implementing new ways of working, and then we'll train and upscale the team to use the new GenAI tools more effectively, helping to create more profitable outcomes for the company. These changes will create a stronger management framework and prepare the company for expansion into new markets. Security continues to be one of the fastest growing parts of our business, reaching $9 billion in revenue this year, representing 23% growth. We are partnering with the Kuwait Government Central Agency for information technology to revolutionize the security posture of its public services and national critical infrastructure. We are implementing and managing a scalable platform powered by GenAI, enabling the agency to act on evolving cyber threats up to 60% quicker than with traditional technologies, including detection response and containment models. In the past, security analysts manually research threats with limited information before handing the incident to the impacted government entity losing valuable time as the attack progressed. But now using a new platform, when analysts open a potential incident, they can quickly drill down into details about the users, systems under attack, type of attack and more with just one click. Thanks to GenAI's ability to process significant amounts of data and automatically elaborate context as a threat is detected, we are supporting our experts in making faster decisions with confidence as we progressively onboard over 60 government entities and while we also develop local talent. The strategic collaboration underscores our commitment to safeguarding Kuwait's digital assets and empowering the nation's journey towards enhanced cybersecurity resilience. A key area for companies to seek reinvention is in marketing, where the potential to use tech, data and creativity to drive growth, drive tangible outcomes for the enterprise. We are very proud to be working with HP and American multinational information technology company and a new global partnership to develop the right data sets, technology and creative for their B2B powerhouse business and brand that fulfils their goal to move away from the traditional agency model to true marketing capability transformation to significantly improve the impact, efficacy and efficiency of their marketing investment with the ability to drive tangible business results. In every industry, there is a challenge or opportunity that GenAI can now uniquely solve. Our deep understanding of both the industry and the technology positions us to be the best at creating real value from GenAI with our clients. For example, in insurance, companies can't typically process 100% of their coverage submissions. This creates a bottleneck for revenue growth. The ability to leverage GenAI to read 100% of submissions allows insurance companies to better assess risk as well as quote and write more policies and do it all more quickly and cost effectively. Utilizing a new set of solutions we created, we're working with QBE Insurance Group, a multinational insurance company headquartered in Sydney, to scale industry-leading AI powered underwriting solutions, replicated across multiple lines of business to help the company to make faster and more accurate business decisions. A series of Board, executive level and all employee learning sessions were conducted to help drive the design and build those solutions that analyze new business submissions for completeness, appetite check and risk evaluation insights. They can now process 100% of submissions received from brokers, greatly accelerating market response time. After nine months in market, these solutions are winning multiple industry innovation awards and early results indicate an increase in both quote to buying rate and premium. This collaboration will enable QBE Insurance Group to identify and select risk more effectively, improve broker and customer experience and support growth. We are collaborating with a major integrated downstream energy provider to drive significant improvements in safety, sustainability and operational performance with three new GenAI powered solutions. We aim to continue to improve safety by using proactive insights from GenAI to inform planners of potential incidents instead of reactively waiting for specific warning signs to appear. This means 90% faster data access, reducing planning time from hours to minutes per task. Another solution will help detect methane leaks in real time and prioritize their resolutions. We also helped build a smart solution for operators and process engineers to drive custom insights to optimize refinery performance and reduce downtime. The energy provider is on a path to set a new industry standard for innovation and refinery operations. One of the most powerful impactful uses of GenAI today across industry is in consumer experience transformation. We are working with Mondelez International, a world leader in snacking with well-known brands like Oreo, belVita and Cadbury to transform their marketing organization with GenAI to help drive consumer behavior. As part of this program, we're standing up a refreshed operating model with a primary focus on upskilling their employees in GenAI technologies. We are also helping enable a new capability to scale content creation and generate personalized text, images and videos across markets. This means exceptional creative can be developed in hours, not weeks, allowing content to be catered to consumers quickly as demands change. The strong digital core we established also allows the company to collect and process real-time data using GenAI to create new contextualized insights that can be easily accessed, shared and used by decision makers across the company. This work will increase the effectiveness and efficiency of messaging to create more impactful experiences. Now let's turn to our acquisitions. Over the last decade, we have built a finely tuned acquisition capability, becoming known in the market as a good home with approximately 70% on average of our acquisitions sole sourced. While our ability to identify and evaluate our acquisitions is critical, it is our ability to integrate them successfully that has made our acquisition capabilities so formidable. As we look forward, we are excited about the opportunity to better serve our clients and differentiate in the market to the acquisitions we've made this last fiscal year. As a reminder, we do acquisitions ultimately to drive our organic growth. Our global footprint, deep client relationships across industries as well as strong ecosystem gives us a unique perspective on growth opportunities. We use acquisitions to scale quickly in growth areas, to build new skills in adjacent markets and to deepen our technology, industry and functional expertise. Over the years, acquisitions have built major areas of growth like what we call Song today in our security practice. Here are a few examples of where we are investing now to lead in the next waves of growth. Starting with capital projects, an over $440 billion addressable global market growing approximately 5%. In FY '22, globally, we had approximately $300 million in capital projects revenue. We entered the U.S. market in FY '23 with the acquisition of Anser Advisory. Since the beginning of FY '24, we expanded our reach into Canada with Comtech in Q1, and this Q4, we acquired BOSLAN in EMEA. We recognized over $800 million in revenue on capital projects this fiscal year '24. Health is an industry still early in digitization, where we see significant opportunity over the next decade. It is a $70 billion addressable global market growing approximately 6%. This year, we added Cognosante in the U.S., creating a new federal health portfolio in our federal service business. We also acquired Nautilus Consulting in the U.K., a digital consultancy specializing in electronic patient records. And we announced our intent to acquire consus.health, a health care consultancy in Germany that offer services ranging from medical strategy and patient management to procurement and logistics, infrastructure management and construction planning services. And in Europe, public service, an industry that is early in digitization with significant investment allocated for transformation, our acquisitions are accelerating our growth and setting us up to take shares in a $46 billion market that is growing approximately 5%. We acquired Arns, Aris (ph) in Germany, a technology services provider supporting the public sector transformation across Europe. In Italy, we acquired Intellera Consulting, one of Italy's main professional services providers operating the public administration and health care sectors, and Customer Management IT and SirfinPA, jointly owned consultancies, supporting the public sector and specializing in justice and public safety. Now it gives me great pleasure to hand over to Angie Park, who'll become our new CFO on December 1, who will take us through our guidance for FY '25. Angie? Angie Park : Thanks, Julie. Now let me turn to our business outlook. For the first quarter of fiscal '25, we expect revenues to be in the range of $16.85 billion to $17.45 billion. This assumes the impact of FX will be approximately positive 1.5% compared to the first quarter of fiscal '24 and reflects an estimated 2% to 6% growth in local currency. For the full fiscal '25, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be approximately positive 1.5% compared to fiscal '24. For the full fiscal '25, we expect our revenue to be in the range of 3% to 6% growth in local currency over fiscal '24, which includes an inorganic contribution of a bit more than 3%. And we expect to invest about $3 billion in acquisitions this fiscal year. For operating margin, we expect fiscal year '25 to be 15.6% to 15.8%, a 10 basis point to 30 basis point expansion over adjusted fiscal '24 results. We expect our annual effective tax rate to be in the range of 22.5% to 24.5%. This compares to an adjusted effective tax rate of 23.6% in fiscal '24. We expect our full year diluted earnings per share for fiscal '25 to be in the range of $12.55 to $12.91, or 5% to 8% growth over adjusted fiscal '24 results. For the full fiscal '25, we expect operating cash flow to be in the range of $9.4 billion to $10.1 billion, property and equipment additions to be approximately $600 million and free cash flow to be in the range of $8.8 billion to $9.5 billion. Our free cash flow guidance reflects a free cash flow to net income ratio of 1.1 to 1.2. We expect to return at least $8.3 billion through dividends and share repurchases as we remain committed to returning a substantial portion of cash to our shareholders. Finally, as part of our routine review of our capital structure, we expect to tap the long-term debt market in the near term to increase our liquidity for general corporate purposes as we look to optimize our capital structure and reduce our cost of capital. We expect to raise a modest amount of debt. In connection with that, there would be no change to our capital allocation strategy, which includes how we look at and use D&A (ph) or our strong credit ratings and our net leverage will remain low. We have incorporated the potential for long-term debt into our guidance, including the interest expense. With that, let's open it up, so that we can take your questions. Katie? Katie O'Conor: Thanks, Angie. We will now take your question. I would ask that you each keep to one question and a follow up to allow as many participants to ask a question. Operator, would you provide instructions for those on the call? Operator : Thank you. [Operator Instructions] We'll go to the line of Tien-Tsin Huang of JPMorgan. Please go ahead. Tien- Tsin Huang : Hey. Thank you so much. Yeah, really strong bookings. I wanted to think about how that translates into revenue visibility. If you don't mind, I know Accenture doesn't normally talk about ACV, but can you maybe comment on the current relationship between ACV and TCV and how that's evolving? It seems really important to us as we think about revenue and visibility. Duration looks like it's up, but you also have a lot of large deals converting as well, so can you comment on that? Angie Park : Hi, Tien-Tsin. Good morning. It's Angie. So let me cover guidance because maybe it will help to paint a picture of how we're thinking about the full fiscal year. I think it's really important. Let's start with how we ended Q4. If you think about the 5% growth that we posted in the fourth quarter, what we highlighted was that we did have slight growth in organic, which is important as we exit the year. And as you just talked about, over the last few quarters, we've really pivoted our business to what our clients are buying, which are the large transformation deals. And what that does is it positions us better than compared to the same time last year on the revenue that we've already sold. From an inorganic contribution, I do want to highlight that overall, we expect a bit over 3% for the year, which would imply with our guidance of 3% to 6%, that at the bottom end of the range, organic is flat. And then at the top end of the range, we're growing 3% in organic growth. And then as you peel it back and you look at the revenue growth that we see, it is broad based, and we saw that coming out of Q4, we see it across the market and across all of our industry groups. And then as -- when you look at it by type of work as well, what we see right now is that both consulting and managed services, we see low to mid-single digit growth rates for the year. And so stepping back with the color and how we're looking at our guidance, we're very pleased with how we have set ourselves up that and positioned ourselves for fiscal '25. Julie Sweet : Yeah. And so Tien-Tsin, what that means is, we're not commenting specifically on ACV and TCV because as you said that isn't. But the way to think about the confidence level and going to the year, right, is that we told you that we had a strategy to have more megas. We've shared with you that we had 19 more of these bookings than last year, $100 million or more. So you can see there's a big quantum. And so as you think about going into the year, we've got a bigger base of revenue coming from these larger deals coming online than we did going into fiscal year '24. And so that's really how we're trying to help you all think about it is by being clear about that strategy and how -- and the quantum of that, and that's how we then think about the year. So hopefully, that gives you some more insights together with the view on the guidance. Tien- Tsin Huang : No, it does and it's very reasonable as well, just to say that loud out. Just on the acquisition side, Julie, I think I asked it last quarter, so I'll ask again. I know you've been very busy. I like the examples that you gave around the productivity you're getting from some of the deals and the examples you gave again. But how about just overall appetite this year, are you still seeing good opportunities? Could we see a stepdown or a pause in the short term, anything else to add? Julie Sweet : Yeah. So what I would say is, as Angie just said, our inorganic plan for the year, like, in terms of -- as you think about revenue guidance, we kind of -- we're going into the year with nearly 3%, and we think we'll -- right now, the plan for is a little bit above 3% is what we're seeing for fiscal year '25. And that reflects an expected plan right now of about $3 billion of deployed capital. So a step down from last year and probably more backend loaded as we look at our pipeline. Now obviously, we always have the ability to flex up or down. We only tie it to the opportunities in the market, but that’s how we’re seeing this year as we think about our investments. Tien- Tsin Huang : Perfect. Thank you. Well done. Thanks. Julie Sweet : Thank you. Operator : We'll go next to the line of James Faucette with Morgan Stanley. Unidentified Participant : Great. Thanks for taking our question, guys. This is Antonio (ph) on for James. I wanted to actually dig into the technology segment. I know cloud is a big component of this. Could you talk through how clients spend on these cloud migration projects has been trending over the last 90 days and how we should think about cloud growth going into fiscal year '25? And then I have a follow-up after. Julie Sweet : Hi, Antonio. I'm not going to think about it in the last 90 days is just think about like sort of where we've been and where we think we're going, right? Unidentified Participant : Yeah. Julie Sweet : So, in cloud, you still have a lot of migration that's happening, but on more of the high-performance compute applications. So things like mainframe, right? So -- and you also still have some clients who are very, very early in their cloud journey. And one of the things I talked about in the script, for example, was like retirement services. Like that's an entire segment where they're very, very early in the cloud journey. And so at the same time, you've got companies that are very early, just starting their cloud journey. You have those who are farther along who are now getting to the harder applications like mainframe. And then we still have a lot of modernization because what happened in the pandemic, people who were trying to get to the cloud to get the infrastructure savings, have not yet done the modernization. And that modernization, of course, feeds into all the things we do, right, brings the industry and the functional expertise. And so as we look going into FY '25, we continue to see those strengths. So we expect that cloud is going to continue to be a significant driver of growth but on all of those dimensions, right? And the high performance compute as well requires very deep industry knowledge, like doing mainframe in the context of health is very different than the context of banking. So hopefully, that helps you. Unidentified Participant : Got it. No, that's helpful. And then, I wanted to ask on the organic headcount. It actually looks like that ticked up quite a bit. Could you comment on your hiring strategy and in what geographies you're sort of looking to shape that? Angie Park : Yeah. Why don't I start and then Julie add (ph) any additional comments as well. So as you can see, I mean, I want to start with how we're exiting the year. We saw slight organic growth in Q4, and we see that momentum into FY '25. You will have also seen that we added about 24,000 people this year in Q4, which is reflective of the momentum that we see in the business. And as always, right, looking ahead, we will always hire for the skills and the demand that we see. And just more broadly, I would just remind us that as you think about us, as a business, our core competency is balancing supply -- managing supply and demand. And you see that through our utilization rates, which continue to be in the 92% range. Julie Sweet : And we're hiring -- from a talent strategy, right, we are hiring primarily in India. So a lot of that hiring is technology in India and, of course, also addresses -- we are refreshing our pyramid at this time. So you've got kind of the new college graduates coming in. So there's really no change in our talent strategy. We hire all over the world. And in technology, which is a big driver of the growth that we're seeing now and going into FY '25, that is a lot of hiring in India. Unidentified Participant : Great. Thank you, both. Operator : We'll go next to the line of Jason Kupferberg with Bank of America. Jason Kupferberg : Good morning, guys. Thanks. I wanted to pick up on the commentary about the consulting outlook for fiscal '25. You said up low to mid-single digits. I think that's very consistent with the exit rate of 3% coming out of fiscal '24. So does that imply that you are not building much of a discretionary spending recovery into this initial F '25 guide? Angie Park : Yeah. Hi, Jason. Good morning. How are you? And let me just give you a little bit of color on that as you think about the types of work and the question that you just asked. If you think about our range overall, so we're at 3% to 6% for the full year. And what this assumes is, at the top end, we see more of the thing, right, in terms of the discretionary spending environment. While at the bottom end, it allows for further deterioration in the discretionary spend environment over what we experienced in FY '24. Jason Kupferberg : Okay. That's very helpful. And then maybe one for Julie. I just wanted to get your broad take on the macro backdrop. I mean, I guess, what are decision makers telling you right now versus three months ago? What are they waiting to see to open the discretionary budget a little bit more? Julie Sweet : Yeah. Well, the environment is really more of the same and that environment has been kind of a cautious environment. Right now, they're going into budget season. So as always, we'll really see in January and on February, but there hasn't been much of a change, right? The macro is kind of the same. Obviously, there's some events going to come up in the fall that people are thinking about, but there's not like a big tone change, right? And I think, because if you look at the macroeconomic environment, FY '25 is going to click down in the U.S., maybe a little bit better in Europe. But overall, not a lot of improvement. So we're not hearing -- I'm not hearing from CEOs, and I'm talking to them almost every day, some big like, hey, now we're ready to go spend more, right, in discretionary spending. So it's really just more of the same. And by the way, one of the changes that we made this last fiscal year '24 was normally we do for decades, our big promotion period was in December, and then a small one in June. And so in fiscal year '24, we switched these, right? We said we have a lot more visibility in our business in January or February because that's where budgets are set. So we did that this past year and had a really big promotion, a very nice promotion, I would say, not really big, but very nice promotion in this past June. We've now permanently shifted that promotion cycle. So we will do our big promotion cycle in June and our smaller one in December to better match when our clients are setting their budgets and we have better visibility. And that's what we're seeing again. The justification for that is clear that we're really no IT spending and spending on our services in the budgets in January, February. Jason Kupferberg : Thanks for all the color. Julie Sweet : Thanks. Operator : We'll go next to the line of Keith Bachman with BMO. Keith Bachman : Hi. Good morning. Thank you very much. I wanted to revisit on M&A, if I could, and just get some clarification. In FY '24, you spent, as you noted $6.6 billion, which was up about 160% year-over-year. And if we sort of do the math on what your normalized multiples are to revenue, it looks like you're starting the year of FY '25 with 3 points of M&A help. And so I just want to understand, is that the right way to think about it? And then Julie, you had indicated that you plan to spend $3 billion more in M&A this year, and it will be, as you said, backend weighted. But I'm just struggling why M&A is that $3 billion number is even second half weighted, why M&A isn't 4% or more for the year? Angie Park : Let me just start with peeling back our inorganic contribution a bit. As we look at the deals that we closed in '24, it's nearly 3% contribution, right? And so with the backend loaded approach in our capital deployed, we do see a bit over 3%, and that's just the math. Julie Sweet : Yeah. It's just timing, right? It's not quite 3% going in because a lot of this closed at the end of Q4, right? And so it's just its timing, right? And it's the way we see our pipeline developing, right? Because we have a view of what we're going to -- we think we're going to spend in Q1 and Q2 and how that rolls in. Keith Bachman : Okay. Let me transition the bookings then. As you think about FY ‘25, and I know you don't guide to bookings, it's more of an output, but any puts and takes that you want us to think about in terms of the book-to-bill ratio in FY '25 that might be higher or lower? Any kind of cadence there? And if you don't mind, was there an M&A help in the August quarter bookings as well or signings, excuse me? Angie Park : Why don't I start, in terms of the way to think about our bookings, we were super pleased with the $81 billion of bookings that we had for the year, which was 14% growth, which included the 125 quarterly client bookings over $100 million. And so I think that, that we were super pleased with. And you saw that in our book-to-bill and our growth rate in managed services was driven by our large transformation deals. For us, over time of our four trailing quarters, we're always looking for our consulting book-to-bill to be 1.0 or better and for our managed services to be 1.2 or better and nothing has changed there. Julie Sweet : Yeah. And there was nothing in M&A about our bookings in Q4. Keith Bachman : Okay. Many thanks. Julie Sweet : Thanks. Operator : We'll go next to the line of Bryan Keane with Deutsche Bank. Bryan Keane : Good morning. Julie, I just want to ask about GenAI. I think bookings were up almost about $300 million in the third quarter sequentially, up about $100 million this quarter. Anything about the cadence there of GenAI and fall through there that you can help us understand? Julie Sweet : Sure. So yeah, so we ended with $3 billion bookings for the year, and we'd expect in FY '25, another healthy increase. We know there's clear demand. We're starting to see more of our clients move from proof-of-concept to sort of larger implementations, which is important. So the size of those bookings is kind of, is clicking up. And also, we're continuing to see kind of at least every other one has got data pull-through and even that's kind of moving up. So we're kind of going into the year, we'd see -- we'd expect another healthy increase in our bookings and our revenue from that and also that data will continue to kind of be a bigger and bigger part of that building out of the digital core because one of the biggest limitations on using GenAI today and why it's going to take a while is our client needs data and our clients have a lot of work to do on data, which is, of course, a big opportunity for us. Bryan Keane : Got it. And then just a clarification on the guide. I know the fourth quarter organic growth was positive, and we're talking about fiscal year '25 revenue guide of 3% to 6% on a constant currency basis. And if you back out the acquisitions, I think you guys said on the low end, we're talking about flat organic growth, that would be a slight step down from the fourth quarter, which is -- would be a little surprising given some of the momentum that you guys are seeing in bookings and in headcount growth. So just wanted to make sure I understood what that low end might imply and why would there necessarily be a step down from where the fourth quarter kind of ended? Thank you. Julie Sweet : Yeah. No. And the way we're thinking about it, right, we're going into the year with momentum. We had executed on the strategy around the bigger deals. So we have a stronger base of revenue. We've got the acquisitions. And so on the bottom end of the range, what we would see, like the most likely reason to be there is if there was a deterioration in the discretionary spend environment, right? So we're trying to just kind of give some flexibility. We’re not seeing that, right? We sell more of the same this quarter. And so as we kind of go into the year, at the top end of the range, it’s the current environment going forward. And at the bottom of the range, if you were to ask me today, what is that mostly accommodated is if there was a deterioration in spending, right, so -- because of kind of the way we’ve positioned ourselves. Bryan Keane : Great. Thank you. Julie Sweet : Thanks. Operator : We'll go next to the line of Dan Dolev with Mizuho. Dan Dolev : Hi. Thanks for taking my questions. Great results and great guidance here. Two questions on GenAI. Are you seeing more of your conversations being less replacement and reallocation and purely incremental on G&A? And then I have a follow-up. Julie Sweet : Well, I think it starts with, we're not seeing a change in what our clients are spending on IT, right? So -- but what we are seeing is the continued trend of trying to save money on IT to free up the spending on areas of GenAI. So on the one hand, right now, we haven't seen a change in overall spending. We'll see what the budgets come in January, February, but we're not expecting a big change. But what we also are seeing is that as they're saving money, they want to invest it in things like GenAI and data. So that's really the dynamic that's going on, save to invest, but we haven't seen signs of overall change. Dan Dolev : Got it. And then a quick follow-up on margins. Can you maybe touch on the GenAI services margin, how it stands versus your traditional business? I think that would be really helpful for investors. Thank you. Julie Sweet : Are you -- I mean, are GenAI margin and sort of -- is that different from when we're doing GenAI versus other GenAI technology? Dan Dolev : Correct. GenAI services versus your traditional consulting business. Julie Sweet : Look, GenAI is still a small part of our business, and I wouldn't really think about it as having a particularly different margin profile at this time. And as you probably heard in our -- in my script that a lot of time we're starting to embed GenAI in our larger deals and so we're not really thinking about it as like a sort of a separate way. So I wouldn't think about it too differently than our usual business. Dan Dolev : Got it. Thanks. Well, great momentum. Thank you. Julie Sweet : Thanks. Operator : We'll go next to the line of Jim Schneider with Goldman Sachs. Jim Schneider : Good morning. Thanks for taking my question. Very helpful commentary on the client outlook on limited discretionary spend. But can you maybe help us understand or unpack, when you talk to them, what are they looking for to release discretionary spend? Is it more macro factors, whether that be rates, election or regulatory or is it more micro factors tied to their IT budgets? And if it's the latter, what are the things they're looking for in terms of getting increased clarity on those priorities going into 2025? Julie Sweet : Sure. It's a good question. And it's really -- overall, there is a sense of the macro, right? Because if you look at the -- a lot of our clients are global. If you look at the macroeconomic, there isn't a big change. There's kind of going into next year, like the U.S., which is a big market, it looks like it's going to be down a little bit. Europe's up a little bit, but still not great. And so kind of if you start with they're not seeing a big change in the macro. But then you really have to look at it industry by industry because each industry has factors. So for example, in the energy industries, they're super focused on how much investment they have to do and the change – and the shift in climate change and renewables. So there's a big appetite for major investment. So there's no catalyst that says, oh, like I've got a ton of thought. They've got a lot of big investments, right? If you look at consumer goods, where a lot of the consumer goods companies are not able to get pricing. They've got to get up volume, which means they've got to drive down their -- they've got to improve their efficiency and their manufacturing costs, and that takes big investments because manufacturing. Our latest research says like two-thirds of the journey in digitization is still to come. And so those are big investments. And so I can kind of take you through industry by industry. The reality is, it's obviously good growth for us is the digitization journey is still very early in many, many industries, that's like public service is another great example. So they've got big transformations going. And at the end of the day, if you're a big enterprise, like, the deals that are smaller, right, they do not move the needle. And when you've got big investments, that's where they're focused because they see now the potential of things like GenAI, and everyone's like we got to get going, that's really what's driving it. So that's why we're not having a bunch of discussions about like I can't wait to unlock that spending. Our discussions are entirely on help us move faster with our bigger information. That's really what we're focused on. Jim Schneider : That's very helpful. Thanks. And then maybe as a follow-on, you referenced several verticals there. Can you maybe, as you prospectively look into fiscal '25, call out maybe one or two verticals where you expect the most improvement and maybe one or two where you see potential risk of deterioration? Thank you. Angie Park : Yeah. Hey, Jim. Nice to talk to you. I think that as we look across FY '25 in our overall guide of 3% to 6%. We see broad-based growth across -- it's really broad-based across all of our industries as well as our services and markets. Jim Schneider : Great. Thank you. Katie O’Conor: Operator, we have time for one more question, and then we’ll wrap up the call. Operator : Thank you. And that will come from Bryan Bergin with TD Cowen. Bryan Bergin : Hi. Good morning. Thank you. On GenAI, can you give us a sense of the size of some of the largest individual programs have reached? And then as it relates to internal productivity progress, may be comment on any of the service lines where you're seeing the earliest impacts as it relates to productivity or any metrics that you can share in more advance programs? Julie Sweet : Sure. I don't want to start like giving tons of data on this. But like you went from deals that were -- in GenAI that were, on average, kind of sub-$1 million, right, that you've now got some that are above $10 million, right? So that's still the smaller end because you're sort of moving into production and scale. But you're starting to see these things move from POCs to larger bookings. And then with respect to internal productivity and our guidance, of course, takes into account what we're seeing. As I've been talking about is that the first area that we anticipate -- remember, we're trying to embrace GenAI fastest because we think it's a big differentiator with our clients. And so in our managed services is where we're seeing the most because that's where we have a platform. So you all remember we used to talk about myWizard. Now we talk about GenWizard, right? But what we're seeing is that the technology and the productivity is like similar ways before. So if you go back to 2015, 2016, when we first introduced myWizard, right? So it's not really different than the kinds of productivity that we've been experiencing. And here, of course, there's an added wrinkle in that GenAI, in order for us to use it with our clients, they have to allow us to use it and they have to prioritize. And they have a lot of other areas where they want to use GenAI that's not necessarily in their technology productivity where they're already many of our clients are using our platforms, they're using AI, etc. So there's a lot of factors that kind of go into the pace of how quickly we can use it even if we're ready to use it now in many places. So hopefully, that's helpful because it is a little bit different in that sense because our clients have to prioritize where they want to use GenAI, too. Bryan Bergin : Okay. That's helpful. Thank you. And then I appreciate your commentary on the capital returns on the balance sheet and understanding this has overall been a tougher environment, while M&A outlay has been on the upper end. But just curious how we should be thinking about the potential magnitude of leverage in the model going forward? Just any guardrails we should consider? Angie Park : Yeah. And a couple of things that I would say around that. We indicated that it's going to be modest. We'll maintain our strong credit ratings and net leverage will be low. And so -- and included in our guidance that we provided you, we have also allowed for the potential for the interest expense and in our overall guidance, which is in addition to the variability that we may see in operating margin throughout the year. Bryan Bergin : Okay. Thank you. Julie Sweet : Great. Well, thank you, everyone, for joining us. Before I wrap up, I want to thank KC, who's been an amazing partner and friend these last five years. They've been quite some five years, as we all know, just a few things in the environment that we've gotten together work with. And so I'm really excited for KC and her next chapter. And KC, would you like to say a few words? Katie O'Conor: I would, thanks, Julie. I just want to offer my sincere thanks to the investor and analyst community for the decade plus of console and support. It's really meant a lot to me. It's really been appreciated. Thanks a lot, and best wishes to all of you. Julie Sweet : So I want to thank everyone for joining us and thank all of our people for what you do every day, allowing us to create 360 degree value and giving us a lot of confidence in our success in FY ‘25. And thanks again, KC, and welcome Angie to your new role, and we’ll see you all in the next quarter. Angie Park : Thank you. Operator : This conference will be available for replay beginning at 10 :00 a.m. Eastern Time today and running through mid-night on December 18. You may access the AT&T replay system at any time by dialing 1-866-207-1041 and entering the access code of 9225580. International callers may dial (402) 970-0847. Those numbers again are 1-866-207-1041 or (402) 970-0847 with the access code of 9225580. That does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.
ACN	Accenture	1,467,373	Information Technology	IT Consulting & Other Services	Dublin, Ireland	1989	2011-07-06	2,024	4	2024Q4	2025Q1	2024-12-19	null	null	null	null	18.58	null	null	Operator : Good day and welcome to Accenture's First Quarter Fiscal 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Katie O'Conor, Managing Director, Head of Investor Relations. Please go ahead. Katie O'Conor : Thank you, operator, and thanks everyone for joining us today on our first quarter fiscal 2025 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and Chief Executive Officer, and Angie Park, 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. Julie will begin with an overview of our results. Angie will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the first quarter. Julie will then provide an update on our market positioning before Angie provides our business outlook for the second quarter and full fiscal year 2025. We will then take your questions before Julie 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 the 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 Julie. Julie Sweet : Thank you, Katie, and everyone joining. And thank you to our nearly 799,000 people around the world for their extraordinary work and commitment to our clients, which resulted in a strong quarter of financial results, creating 360-degree value for all our stakeholders. I am very pleased with our performance this quarter, as we delivered on our strategy to position Accenture for strong growth and fiscal year 2025. Here are a few highlights of the 360-degree value we created. Our clients continue to prioritize large-scale transformations, and we are their reinvention partner of choice, as reflected in our bookings of $18.7 billion, including 30 clients with quarterly bookings greater than a $100 million. We grew 8% in local currency this quarter with revenue of $17.7 billion approximately $240 million above the top end of our guided range and continue to take market share on a rolling four-quarter basis against our basket of our closest global publicly traded competitors, which is how we calculate market share. We had another milestone quarter in GenAI with $1.2 billion in bookings and approximately $500 million in revenue. Operating margin was flat compared to adjusted operating margin last year. EPS grew 10% over Q1 adjusted FY24 EPS. While we continue to invest in our business and our people with $242 million deployed primarily across five acquisitions and with approximately 14 million training hours this quarter designed to help us bring the latest in solutions and technology to our clients, provide our people with marketable skills, and reinvent our services using GenAI. This averages 19 hours per person. We increased our data and AI workforce to approximately 69,000, continuing progress against our goal of 80,000 by the end of fiscal year 2026. We are proud to be recognized by Fortune as one of the world's best workplaces, jumping from #10 to #6. This recognition is important, as it is based on feedback from our people around the world. An essential part of our strategy is having access to the best people and being an attractive workplace is critical to our success. And in recognition of our strong brand, we are proud to earn our highest brand value to date on Interbrand's Prestigious Best Global Brands List, increasing to $21.9 billion and ranking #31. We continue to invest in creating and maintaining thriving communities, which our long-term growth depends on. This quarter, among other things, Accenture has partnered with the NGO Instituto PROA in Brazil to help transform the lives of low-income youth by providing them with digital skills to enter the workforce. I am very pleased with our results this quarter and our return to broad-based growth due to our strategy to be our client reinvention partner of choice. We also have a resilient business model with diversity across markets, industries, and the types of work our clients come to us for, both consulting type of work and managed services. Over to you, Angie. Angie Park : Thank you, Julie, and happy holidays to all of you, and thanks for taking the time to join us on today's call. We were very pleased with our results in the first quarter, which exceeded our expectations and reflects momentum across our business. We are particularly pleased with our strong revenue growth, which was broad-based across geographic markets, industry groups, and consulting and managed services, demonstrating we are a leader in the market as a trusted reinvention partner for our clients. Based on the strength of our first quarter results, we are increasing our full year revenue outlook, which I will cover more detail later in our call. So, let me begin by summarizing a few highlights in the quarter. Revenues grew 8% in local currency above the top end of our guided range with six of our 13 industries growing double digits, and we continue to take market share. We delivered EPS in the quarter of $3.59, reflecting 10% growth over adjusted EPS last year. Operating margin was 16.7% for the quarter, consistent with adjusted Q1 results last year and includes significant investments in our people in our business. Finally, we delivered free cash flow of $870 million and returned $1.8 billion to shareholders through repurchases and dividends. We also invested $242 million primarily attributed to five acquisitions in the quarter. With those high-level comments, let me turn to some of the details starting with new bookings. New bookings were $18.7 billion for the quarter representing 1% growth in both U.S. Dollars and local currency with an overall book-to-bill of 1.1. Consulting bookings were $9.2 billion with a book-to-bill of 1.0. Managed services bookings were $9.5 billion with a book-to-bill of 1.1. Turning now to revenue. Revenues for the quarter were $17.7 billion, a 9% increase in U.S. Dollars and 8% in local currency, approximately $240 million above the top end of our guided range. The foreign exchange impact for the quarter was approximately positive 1% compared with the positive 1.5% estimate provided last quarter. Consulting revenues for the quarter were $9 billion, up 7% in U.S. Dollars and 6% in local currency. Managed services revenue were $8.6 billion, up 11% in both U.S. Dollars and local currency, driven by double-digit growth in technology-managed services, which includes our application-managed services and infrastructure-managed services, and high single-digit growth in operations. Turning to our geographic markets, in the Americas, revenues grew 11% in local currency. Growth was led by industrial, software and platforms, banking and capital markets, and consumer goods, retail, and travel services. Revenue growth was driven by the United States and Argentina. In EMEA, revenues grew 6% in local currency, led by growth in public service, life sciences, and health, partially offset by a decline in banking and capital markets. Revenue growth was driven by the United Kingdom and Italy, partially offset by a decline in France. In Asia Pacific, we delivered 4% revenue growth in local currency driven by growth in utilities, industrial, and health, partially offset by a decline in chemicals and natural resources. Revenue growth was led by Japan, which represents approximately half of Asia Pacific, partially offset by declines in Singapore and Australia. Moving down the income statement, gross margin for the quarter was 32.9% compared to 33.6% for the first quarter last year. Sales and marketing expense for the quarter was 10.2% compared with 10.5% for the first quarter last year. General and administrative expense was 6% compared to 6.4% for the same quarter last year. Before I continue, I want to note that in Q1 of last year, we recorded $140 million in costs associated with our business optimization actions, which decreased operating margin by 90 basis points in EPS by $0.17. Following comparisons exclude these impacts and reflect adjusted results. Operating income was $2.9 billion in the first quarter reflecting a 16.7% operating margin consistent with adjusted operating margin in Q1 of last year. Our effective tax rate for the quarter was 21.6% compared with an effective tax rate of 23.2% for the first quarter last year. Diluted earnings per share were $3.59 compared with adjusted EPS of $3.27 in the first quarter last year reflecting 10% growth over adjusted EPS in Q1 last year. Day services outstanding were 50 days compared to 46 days last quarter and 49 days in the first quarter of last year. Free cash flow for the quarter was $870 million resulting from cash generated by operating activities of $1 billion, net of property and equipment additions of $152 million. Following the completion of our $5 billion inaugural debt offering, our cash balance at November 30th was $8.3 billion compared with $5 billion at August 31st. With regards to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed 2.5 million shares for $898 million at an average price of $355.03 per share. As of November 30th, we had approximately $5.9 billion of share repurchase authority remaining. Also, in November, we paid a quarterly cash dividend of $1.48 per share for a total of $926 million. This represented a 15% increase over last year and our Board of Directors declared a quarterly cash dividend of $1.48 for share to be paid on February 14th, a 15% increase over last year. So in summary, we are very pleased with our Q1 results, and we are off to a strong start in FY25. And now, let me turn it back to Julie. Julie Sweet : Thank you, Angie. Starting with the demand environment, we saw more of the same. Our clients are focused on reinvention, which means large-scale transformations. We do not currently see an improvement in overall spending by our clients, particularly on smaller deals. When those market conditions improve, we will be well-positioned to capitalize on them, as we continue to meet the demand for the critical programs our clients are prioritizing. As expected, building the strong digital core required for reinvention was a strong driver of our growth this quarter. GenAI continues to be a catalyst for reinvention across the enterprise and building out the data foundation necessary to capitalize on AI, as an increasing part of that growth. Themes around achieving both cost efficiencies and growth continue across the demand we're seeing. Through the examples from Q1, you can see both our strategy to be the reinvention partner of choice and how we are bringing together our services, our ecosystem relationships, and our scaled investments in cutting-edge platforms like SynOps and GenWizard, as well as technologies like GenAI to drive value for our clients. We are helping our clients build their digital core, including in the cloud, which saw double-digit growth this quarter. Accenture Federal Services is working with the U.S. Air Force, the nation's military service air branch, on a cloud monetization journey to manage its complex IT environment so that military personnel can maintain their competitive edge. We will develop a multi-cloud ecosystem using services from multiple providers to create a robust, secure, and integrated infrastructure. This will enhance how different systems and devices work together and communicate to quickly implement cutting-edge tools and technologies. We also provide managed services that foster collaboration and enable personnel to quickly make data-driven decisions about their cloud usage and costs while adapting to changing mission requirements. This partnership will enable the U.S. Air Force to get the most out of their cloud investments to achieve real-time cross-cost transparency, accelerated cost savings, increased efficiency, and improved agility. Our industry expertise is critical to building the right digital core. We are partnering with the BCC ICCREA Group, Italy's largest cooperative banking group, through a joint venture with its IT subsidiary on a reinvention journey to help over 100 affiliated banks grow. Our managed services will modernize the IT platform and migrate applications to the cloud, enhancing resiliency, stability, and service quality. We will also consolidate data and build an integrated cloud platform for advanced analytics and AI, strengthening their digital core. GenAI will be applied to increase internal IT efficiency and reduce customer response time on digital interaction channels. We will expand digital offerings, employee onboarding, and payments using our suite of shared finance services solutions. A change management communications program will offer targeted up-skilling and re-skilling opportunities to ensure employees use new technologies and methodologies effectively. Together we will help BCC, ICCREA Group, reduce costs and drive innovation, enabling the banking group to be more competitive and bring new products and services to market faster. Security is an absolutely essential component of every company's digital core, and we again saw very strong double-digit growth. We are the partner-of-choice in part because we bring both the understanding of cross industry threats and industry specific threats with our deep experience across 13 industry groups. We are supporting a leading aircraft manufacturer and its cybersecurity across aerospace and defense on critical infrastructure and production systems. We will provide managed services and solutions for their cyber security capability, leading to a more powerful and secure program, bringing security by design and industrial assets and the extended enterprise. Our solutions will help provide improved security and meet regulatory compliance. We are also helping with the digitization of manufacturing and supply chains. Industry X grew double digits this quarter. We are continuing to evolve our long-time partnership with a global leader [in tire] (ph) manufacturing to revolutionize the way factories operate and to reduce time-to-market for new products, accelerating innovation. We will build a hybrid data foundation in the cloud, integrating millions of data points. We will also implement advanced analytics, AI, and digital twin technologies to optimize operations processes such as quality checks. This will enable the company to trace the root cause of a failed batch of tires back to a machine or process in minutes instead of days. And predictive maintenance will pinpoint what parts of their process or machinery may be impacting quality and productivity, preventing costly down times. Engineering teams will benefit from machine learning and simulation tools to generate and optimize the design of new products. We will also implement new ways of working to attract tech-savvy talent and cultivate a learning culture where employees in over 100 factories are upskilled on the AI powered tools. The company will look to increase growth opportunities and support their digital first strategy, all while remaining competitive in the market. We are partnering with PUMA India, a leader in sports lifestyle products, to reinvent their supply chain and distribution network. This will meet the ever-evolving customer demand for order delivery in a highly competitive, omni-channel market where quick commerce is becoming the norm. We will use data and AI to identify and set up localized fulfillment centers, optimizing their size and location based on customer sales. Digital twins of these facilities will simulate various process designs and physical automation scenarios to identify bottlenecks. This will help redefine warehouse layouts and improve material flow for more efficient order and return processing, delivering orders up to 70% faster with express delivery for online orders expected to double. Supply chain costs are also expected to decrease by up to 10%, and additional features like solar power and EV charging stations at fulfillment centers will further reduce costs and support sustainability goals. PUMA India will be the first amongst sports brands in the region to build this type of cutting-edge operating model, enhancing customer loyalty to drive future growth. We are reinventing all things customer through Song, which grew high single digits this quarter. We have the ability to integrate creative, data and AI, tech and strategy while leveraging our industry and operations expertise to unlike marketing as a growth enabler for our clients while delivering efficiencies. We are helping Spotify optimize its advertising business by finding opportunities to drive efficiency as it scales globally. Our marketing operations managed services support their ad operations under a single roof, touching a significant amount of their ad revenue across 150 markets. We've infused automation across their operational workflows to help significantly reduce the time and effort required to launch advertisers' campaigns, getting them to market more quickly to help ensure revenue realization and advertiser satisfaction. We continue to expand beyond ad operations, actively launching new capabilities across analytics and insights, data integrity and enrichment, customer support, and more. Our partnership helps Spotify to focus on its core competencies so it can achieve long-term relevance and growth in an increasingly competitive market. We are collaborating with CaixaBank, a leading financial group in Spain, on their plan to enhance customer and employee experiences. We will increase productivity and efficiency by leveraging AI and GenAI to build multiple solutions, such as the bank's chat bot, which has significantly reduced response times and improved the quality of answers for clients, and an employee assistant tool that utilizes natural language conversations and solution searches. We will also build a customer service claim solution that analyzes documents and supports agents and lawyers in proposing the right responses, reducing processing time, and assisting specialized teams. This will help CaixaBank reinvent with GenAI and we are creating real value from GenAI across industries and countries. We are partnering with Vale, a Brazilian mining and logistics company, to transform its environmental licensing program, speeding up permit applications and expanding its sustainability goals. We created Smart Licensing, an end-to-end licensing management platform that uses GenAI to scan application materials and environmental studies to promote compliance with regulatory and environmental requirements. This creates actionable summaries reducing internal document reviews from days to minutes. We've trained over 500 people to use Smart Licensing and established a change management team to combine previously segmented teams, helping Vale plan and execute more efficiency while further reducing environmental impact. We are partnering with Indosat, a Digital Telecommunications Company and its subsidiary, Lintasarta, a leading provider of data communication, Internet, and IT services to launch Indonesia's first sovereign AI cloud platform. This will accelerate their AI-driven digital transformation and support the country's vision of becoming a digitally empowered nation by 2045. The collaboration will initially focus on AI solutions for Indonesia's financial services sector, one of the key pillars of the country's economy. Accenture's AI refinery platform will provide scaled AI capabilities with pre-built solutions that have a modular architecture to meet clients' needs wherever they are in their AI journey, significantly reducing time to value. This partnership will help Indonesian companies to drive reinvention by harnessing the power of scaled GenAI, propelling innovation, operational efficiency, and sustainable growth in a competitive market. Talent continues to be at the top of the agenda for CEOs and governments, and our LearnVantage services position us to be able to help clients invest in their workforce. Our partnership with S&P Global, a leading provider of financial data analytics and ratings, is driving GenAI innovation across the financial services industry, empowering their workforce to adopt GenAI at scale to enhance productivity and deliver revenue growth. They are equipping nearly 40,000 of their employees with the necessary skills, leveraging Accenture LearnVantage Services, a comprehensive GenAI learning program. This program includes curate and customized content to drive AI fluency and address the industry's evolving talent requirements. Finally, a quick look at how we're continually using our investments and acquisitions to drive our future growth. To continue to scale LearnVantage, we acquired award solutions in the U.S., which expands our learning offerings tailored to the unique needs of the network leaders, network operations and performance engineers, and IT professionals in the telecom space. To enable us to scale [faster in health] (ph), a $70 billion adjustable market growing approximately 6%. We acquired consus.health, a leading German healthcare management consultancy. Health is an industry still early in digitalization, and our investments are positioning us for the continued growth we see over the next several years. And supply chain continues to be in early in digitalization, and we are investing to continue to drive growth. This quarter, we acquired Camelot, an international SAP-focused management and technology consulting firm from Germany with specific strengths in supply chain, data and analytics and Joshua Tree Group in the U.S., supply chain consulting firm specializing in distribution center performance. Back to you, Angie. Angie Park : Thanks, Julie. Now, let me turn to our business outlook. For the second quarter of fiscal 2025, we expect revenues to be in the range of $16.2 billion to $16.8 billion. This assumes the impact of FX will be about negative 2.5% compared to the second quarter of fiscal 2024 and reflects an estimated 5% to 9% growth in local currency. For the full fiscal year 2025, 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 approximately negative 0.5% compared to fiscal 2024. For the full fiscal 2025, we now expect our revenue to be in the range of 4% to 7% growth in local currency over fiscal 2024, which includes an inorganic contribution of a bit more than 3%, which we expect will be about 4% in the first half and about 2% in the second half. And we continue to expect to invest about $3 billion in acquisitions this fiscal year. For operating margin, we continue to expect fiscal year 2025 to be 15.6% to 15.8% at 10 to 30 basis point expansion over adjusted Fiscal 2024 results. We continue to expect our annual effective tax rate to be in the range of 22.5% to 24.5%. This compares to an adjusted effective tax rate of 23.6% in fiscal 2024. We now expect our full year diluted earnings per share for fiscal 2025 to be in the range of $12.43 to $12.79 or 4% to 7% growth over adjusted fiscal 2024 results, reflecting the raise in our revenue outlook and adjusting for the revised FX assumption. For the full fiscal '25, we continue to expect operating cash flow to be in the range of $9.4 billion to $10.1 billion, property and equipment additions to be approximately $600 million and free cash flow to be in the range of $8.8 billion to $9.5 billion. Our free cash flow guidance continues to reflect a free cash flow to net income ratio of 1.1 to 1.2. Finally, we continue to expect to return at least $8.3 billion through dividends and share repurchases, as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open to -- so that we can take your questions. Katie? Katie O'Conor: Thanks, Angie. 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. Operator, would you provide instructions for those on the call? Operator : Absolutely. [Operator Instructions] Today's first question comes from Tien-Tsin Huang with JPMorgan. Please go ahead. Tien- Tsin Huang : Thank you good morning. It's really encouraging to see the revenue come in here above the guidance range. I think it's the widest margin in nearly two years. Julie, you said that the demand environment is more or less the same. So I'm curious what you [attribute] (ph) this new pattern to and if market conditions are maybe improving underneath here. Any comments? Julie Sweet : Thanks, Tien-Tsin. This is the strategy that we've been outlining for the last few quarters, where last year, when we saw the -- spending, particularly on the smaller deals, we pivoted to really focusing on getting -- winning more reinvention partners of choice, so increasing the number of our deals that were over $100 million in a quarter. You'll remember last year, we actually had [125] (ph) of those. And the idea was to increase -- go after the demand, which is in the larger reinventions and that, that would position us to get back to a strong growth in '25 as those deals begin to layer in. And so what you're seeing is the result of -- what we're really proud of was quite a bit of agility last year that when the market changed, we changed, because as you know, these are not easy deals to do quickly. And we quickly pivoted last year, went after the demand and then put ourselves in this position. And that's why we did underscore that the market environment has not changed. This is the result of the strategy we executed, which we're uniquely able to do because we have all the skills and capabilities, we have the mix of consulting and managed services. And so this is what we were talking about last quarter when we said we are going to get back to strong growth based on execution of this strategy. And of course, these are super critical strategic programs. And so when spending does come back and the market does improve, we're at the heart of our clients' business, and we should be well capitalized to pick up on not spending. Tien- Tsin Huang : Yes. No, the last point is important, short-term stuff comes back. Hope you should see that pretty quickly as well on top of this. So good, thanks. And my follow up, just have to ask it, I get a lot of questions on the U.S. federal government and Accenture's exposure there. I think it's about 8% of revenue based on some of your annual report disclosures. So just curious, given some of the change in administration and the discussion around efficiency, have your expectations? Or are you going to change your strategy here on the U.S. federal government side? Any comments there would be terrific. Thanks for the time. Julie Sweet : Yes. Well, we're really excited because our core competencies in federal, right, are around driving efficiencies. They're around helping -- keep our country secure. We're working with the U.S. federal agency on securing critical infrastructure, right, and on changing citizen services. We work across very important agencies. And so we believe that we're super well positioned to continue to help the mission of the federal government to secure itself, to help citizens and to drive more efficiencies, which will be tied very much to cloud, data and AI. And what really makes us uniquely positioned is that we believe that there is going to be an even greater appetite of taking commercial solutions to the federal government. And we are very uniquely positioned because we have strong government expertise, but we've got commercial and private sector solutions. We are the leader with every major ecosystem partner. And you saw that -- I was talking today about the U.S. Air Force and what we are doing on the cloud modernization. And our work is mission critical. I mean, the vast majority of what we do is mission critical to the federal government. So we see a real opportunity to continue to partner with the new administration as we've partnered with all administrations, and also with all of the leaders in the federal government every day are waking up to really drive those three things. So really, really feel good about where we are positioned in the federal government to help this agenda. Tien-Tsin Huang : Awesome, thank you. Operator : Thank you. And our next question today comes from Jason Kupferberg with Bank of America. Please go ahead. Jason Kupferberg : Good morning guys. Happy holidays. I know that last quarter, you indicated the high end of the initial revenue guide. For this fiscal year, did not require any material improvement in consulting. Just wondering if that's still the case as you're now raising the top end a little bit? Or are you now assuming any improvement in consulting since you're almost four months into the new fiscal year? Angie Park : Yeah, hi Jason. Good morning. And I'll take that. For us, with the raise in -- to 4% to 7% for the full year, there's really no change in what we shared with you before, which is that at the top end of the range, we continue to see more of the same, whereas at the bottom of the range, we see a bit more -- we allow for a little bit more deterioration. So no change there. Julie Sweet : Yes. And our over delivery, I mean, we're very pleased, obviously, with consulting and managed service growth this quarter. And these large deals came in a little bit better, which is how we overdelivered and now raising the guidance. Jason Kupferberg : Great to hear. And then I'm just looking at the net headcount adds cumulatively over the past two quarters. I think we're almost 50,000. That was a pretty big step up from what the prior trend looked like. So can you give us any sense of how much of that was from acquisitions versus organic? And I guess is there any reason to not look at this accelerated hiring as kind of a bullish indicator? Angie Park : So let me take that question. And as it relates to the net people adds that we had in Q1. So we did add about 24,000 people in the first quarter, which is really reflective of the momentum that we see in our business. And managing supply and demand is a core competency of ours. And what you see is the continued high utilization rates at around 90%. Looking ahead, we'll continue to hire for the demand that we see and the skills that we need. And I'll give you a little bit more context that the hiring that we saw this quarter, similar to last was that it was concentrated in India. Julie Sweet : Yes. And I would just say that underlying our guidance, you are seeing organic momentum, right? So at the high-end of our guidance, for the year, we are going to exit at -- the range of organic growth in our guidance is 1 to 4, right? So I think that is -- it is a positive sign that we're hiring and some of it is coming from acquisitions, but we are seeing organic momentum in our business. Jason Kupferberg : Thanks for the comments. Operator : Thank you. And our next question comes from Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane : Hi guys. Congrats on the solid result. And Happy holidays. Kind of asking the guidance question a little bit differently. The 4% to 7% constant currency revenue guide for the fiscal year 2025, is a touch below just the first quarter number of 8% on a constant currency basis. So just trying to think about if there is any reason why the growth would decelerate off the first quarter level as we get more into fiscal year 2025? Angie Park : Hi, Bryan, happy holidays to you as well. Let me give you -- here's how we were thinking about our guidance for the full year and the raise to 4% to 7%. If you think about where we are, we had a strong start in Q1. We have strong guidance in Q2, which was really driven -- it was broad-based and driven by our organic growth. At the same time, you heard Julie say, the macro remains the same. There's no change in the overall environment. And I want to reinforce importantly what I said earlier, which was we do expect -- we continue to expect inorganic contribution of about -- of a bit over 3%. And one of the things that we provided to you was how that will come in. So H1, we expect somewhere around about 4%, second half about 2%, and that will give you more of an understanding of how we see organic playing out for the year. And we will continue to see organic throughout this fiscal year. And then as it relates to -- if you think about it, we're one quarter in. We've got one quarter under our belt. We've got three more to go. And as Julie said earlier, we're executing on our strategy, and you can count on us to continue to do so. Bryan Keane : Got it. Got it. That's helpful. And then maybe you guys could just talk a little bit about the industry group, the Financial Services. A lot of times, that kind of leads out of economic slowdowns. But it sounds like Banking & Capital Markets was a little bit softer, but some other areas of strength and just trying to figure out where that is in the industry right now because we're kind of getting mixed messages from some of the other IT service providers. Thanks so much. Julie Sweet : Yes. So -- and I think it's a little bit different by market, right? So we are seeing the results a bit different by market. I will say, by the way, that we were pleased to see the U.K., as you might have heard, is coming back as we reposition the U.K. But with the dynamics in the U.S. market where it is a little bit better, in EMEA, it was a little bit worse, and you've got a mixed picture on the interest rates, what the expectations are. And so I'd say that -- and that is probably not a surprise. Yesterday, probably complicated that a little bit in the U.S., right? And so on the one hand, we are seeing a lot of interest, for example, in Banking & Capital Markets on things like GenAI. On the other hand, there is a lot that's being kind of processed with what's going to happen with interest rates and that. And so I -- we see -- obviously, it is getting better, but it is a mixed picture by region. Angie Park : Yes. And just as a reminder, Bryan, as we look at Financial Services overall, we exited Q4 last year with a minus 2%, and we saw the uptick in the first quarter at 4% globally which reflects the dynamics that Julie was just describing, which really plays for our strength, as you think about the diversity of our business across markets and industries. Bryan Keane : Great. Thanks again. Operator : Thank you. And our next question today comes from Darrin Peller at Wolfe Research. Please go ahead. Darrin Peller : Guys, thanks. Great results. Could we just touch on your potential for visibility this year into budgets and the timing you'd expect again? I know last -- I think earlier this year, it was generally in the January, February time frame, which had moved back up a little bit. But do you still anticipate that kind of visibility at that part of the year? Or we could get a better picture on whether discretionary is really going to pick up or not? And then maybe just as a dovetail on that, maybe just conversations you are happening right now around AI for next year. Obviously, the bookings keep looking really strong for you guys, which is great. Any more specifics on where you are seeing it incrementally improve? Thanks guys. Julie Sweet : Yes. So a great understanding of Accenture. January is sort of -- January, February as we really see what the client budget is going to be looking at. So that's where we get the most visibility. And so we'll be reporting more on that in the next quarter. So you're absolutely right, we do anticipate getting that visibility in January, February. And then with respect to AI, we are continuing to see in our conversations, and I probably talked to 30 CEOs in the last 2 months, right? So spend a lot of time, and also around the world. So it's been a busy travel quarter. I've been in Europe, I've been in Southeast Asia, Australia, the U.S. So -- and pretty consistently, clients are seeking to do more in AI, but they are in such different places. I mean I'll be with one bank where we're talking about what is GenAI, AI, why does it matter? And the fact that they are not yet in the cloud. And I'll be talking to another bank where they've been fully in the cloud and they want to be the first out to use GenAI. And so I think it is hard to generalize. You are still seeing that because the overall spending environment is the same, that they're -- that those who really want to go into -- in AI are more prioritizing spending as opposed to spending more, right? Where we see the biggest opportunity when companies start to get more confident to spend more is going to be and moving faster with their data foundation that fuels AI and then AI. But right now it still generally feels more like a prioritization within current budget. And so we'll see what happens in January and February. And that's why our strategy has been to pivot there, right? So to go after [more than] (ph) our fair share of those budgets. Darrin Peller : All right. That's really helpful. And then just when we look at the opportunity for what you're -- where you're hiring, you mentioned India, but we've heard a lot of customers are starting to think about a little bit even more onshore. And so just maybe talk a little bit more about the mix again. It had gone for a while more offshore looking for better price optimization. But where are we on that right now? Are you seeing any evidence of a shift back to nearshore, onshore? Thanks again guys. Great job. Julie Sweet : No big trend. What I'd say is we focus on the G2000. So a lot of our companies are global. And so they really are looking for optimization of right skills because a big piece of why people, for example, use India is about skills, right? 10 years ago, it was about labor arbitrage, right? Today, it is about like the ability to get these skills at scale. What I would say is that we, at Accenture, are continuing to develop more because in some cases, it is language, right, as you're kind of doing more transformation, new parts of the enterprise where you want maybe lanes with skills or time zones. So we have a global network in -- with 100 centers around the world. In the U.S., for example, we've been opening some new centers in underserved environments. We just opened a center in the Bronx recently. So -- but all of it is kind of aimed at being very sophisticated, and we see ourselves as part of the integrated talent strategy of our clients. And it's like right skills, right time zone, right price, continues to be the guiding with I would say an emphasis on skills. Darrin Peller : Great. Thanks Julie, thanks Angie. Operator : Thank you. And our next question today comes from Jim Schneider with Goldman Sachs. Please go ahead. Jim Schneider : Good morning. Thanks for taking my question. Julie, understand that your outlook, and you’re not really seeing any differences on macro side, and your outlook look like sort of idiosyncratic growth. But can you maybe discussed a little bit about when you talk with clients, what's the sort of range of outcomes for discretionary increases in the 2025 budget outlook? And how big a factor is rates specifically as a macro impact when they're thinking about that? And do you think that changes materially given the Fed message yesterday? Julie Sweet : The rates definitely depends on industry, right? So if you're a more capital-intensive industry or you're an industry that wants to grow more in acquisitions, the rates -- there's lots of puts and takes in doing the range. And I think it's just too early based on yesterday's there's been a lot of speculation. I mean our business is very much focused on like -- when there's change, and it doesn't matter what the change is, good or bad change, that's where we really partner with our clients successfully because if they've now got new constraints because the rates are higher, then they want more opportunity to cut costs. If the rate are going to fuel things like capital projects, we've got our capital projects business, right? So what we focus on, and I think what we are so successful is we have these deep relationships with our clients. Our top 100, we've been them over 10 years. We understand them. And we are always looking at this and say, okay, what that mean, anticipating what they are helping. So that's -- so whatever the change is, that's where Accenture really can help them pivot. And it's part of our strength that we're so relevant to both growth and cost. Jim Schneider : That's helpful. Thank you. And then with respect to the AI work, you talked about some of the context of the client conversations you're having. But quantitatively, are you seeing any kind of major changes in terms of the size and scope of the individual projects? And what are clients saying about sort of their pivot or when they might pivot to sort of larger, more transformative projects within GenAI? Julie Sweet : Yes. We are already starting to see that, right? We are starting to see the clients -- and the characteristics are pretty clear. If you have a client that's been investing in their digital core, include security and data for many years, and we have many of those that we've helped, they're now able to start to scale, and we are starting to do that, and we're seeing those partnerships. Where you have clients where we've been helping them prove it and maybe scale in a part of the business, but they really haven't got their data foundation or they're not moving into the cloud, then what they're working with us is how do we accelerate that. And what you probably heard as we were talking through some of the examples today is that there's a lot of data foundation now being built along with getting into modern cloud platforms. And so we are seeing an acceleration of the data work, which is absolutely fundamental to using GenAI. Jim Schneider : Thank you. Operator : And our next question today comes from Dave Koning with Baird. Please go ahead. Dave Koning : Yeah, hi guys. Great job. And I guess my question, just on the fiscal Q2 guide. Historically, Q2 has been a pretty flat sequential quarter. And you are guiding, I believe to down about $1 billion to $1.5 billion sequentially this quarter. I know a little of that may be a few hundred million FX, I get that. But what -- was there anything in Q1 that kind of naturally falling off in Q2 this year, that's a little unnormal or some sequential pattern that's a little different? Angie Park : Yes, David, happy holidays and good morning. As we think about our Q2 guide of 5% to 9%, it's a very solid guide, based upon what we see. And there's nothing unique in Q2 that I would call out. And in fact, just anchoring back to our over delivery that we saw in the first quarter was really a function of the larger deals coming online a bit better than we expected, and we continue to see that, which gave us confidence in driving -- in raising our guidance for the full year. So nothing to call out for Q2. Dave Koning : Got you. Yes. You definitely crushed Q1. And then, I guess, one just a nerdy kind of financial question, but now that you fully have like the debt in place, should we think about a sequential pickup in interest expense? I think it was $30 million in Q1. Does that go to like $50 million in Q2 or something like that? Angie Park : Yes. Different than giving you the specific numbers in terms of how to think about it, yes that is correct because when you – there is certain things, of course, that we see in our income below operations. And what you saw there was the interest -- the net interest income was lower as a result of we did have average lower cash balances, also lower interest rates. And then we also had the interest expense from our long-term debt. So -- but all of that has been factored in the guidance that we've given and so it's in there. Dave Koning : Gotcha. Thanks guys. Great job. Operator : Thank you. And our next question today comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette : Great. Thank you very much. I want to just quickly ask a follow-up on capital structure and allocation. It sounds like you are still quite committed to pursuing both acquisitions, as well as capital return. Last year, we looked at -- we did some essentially debt raise to help fund those priorities. Where are we at from that perspective? Or do you feel like we're in a pretty good overall cash position and continue to be able to do that? Or should we expect that at some point, at least over the next couple of years, we can see further decreases in debt and debt raising to fund the capital allocation priorities? Angie Park : Yes. Hi James. Nice to talk to you. Why don't I start. We were pleased to execute our inaugural bond offering of $5 billion, which we did in October. And when we step back, it was really a routine review of our capital structure where we tap the long-term debt market to increase our liquidity for general corporate accounting purposes, and what it does is, it ultimately, it optimizes our capital structure and reduces our cost of capital. That said, let me just reinforce for you, there is no change to our capital allocation as strategy, which also includes how we look at and use G&A. Julie Sweet : And this year, we are going back to kind of more of a business as usual. We think it's going to be somewhere around $3 billion. But as we've always said, if there is opportunities or not, we've got the balance sheet. So we could raise debt, but there's no strategy to increase debt. But we might, if we had the right opportunities. I mean, last year, we had a great opportunity to double down on strategic acquisitions, and it served us well as we've gone into this year. But this year, we are back to kind of standard around $3 billion, which is kind of the right percentage. So we'll communicate as we go. We always have that flexibility. And I think that's the strength if you think about Accenture is having a strong balance sheet and to have the flexibility to go after opportunities in the market that drive long-term growth. And that's how we think about the decisions about whether or not to do debt or not. James Faucette : That's great color there. And then I wanted to ask about the consulting bookings, seeing nice growth and acceleration there. I'm wondering -- and I know it is hard given the breadth of Accenture's customer base, but I'm wondering if you can help us maybe generalize what you're seeing in consulting bookings and if there's a change there? And I guess I'm wondering if we're seeing a focus on cost control versus potential revenue generation or new technology evaluation or how it folds into AI. Just any color you could provide on what the tenor of those consulting bookings look like right now? Julie Sweet : Yes. So maybe just keep in mind that what we're generally bringing to our clients are multiservice solution. So you might do, as we talked about, we're doing managed services in security, and that requires industry consulting as a part of it to make sure that we're doing all the work. A lot of the reinvention is a lot of process that. So I think I would anchor on -- there are really are two themes that at least -- when they come to us. They want cost efficiency. Every industry wants a cost efficiency now, and they're looking for growth or other outcomes, speed to market. You heard a lot -- when we talked about, like what we're doing with like CaixaBank, that was both speed to market, as well as efficiencies. And so that's one of the things that we focus on, and that really gives us -- it's our unique differentiation because we got things like Song, that's everything about customer, and we can put to that. We understand the industry. So the twin themes here is cost efficiency and growth. James Faucette : Great. Thank you so much. Operator : Thank you. Our next question today comes from Keith Bachman with BMO Capital Markets. Please go ahead. Keith Bachman : Hi, good morning. Many thanks and happy holidays to everyone. My first question I wanted to ask is around pricing dynamics. And you've indicated that the macro backdrop is fairly steady. You're gaining share through skills, and I wanted to ask specifically about some of the legacy areas such as application maintenance, maybe the BPO work. One of your competitors suggested that pricing is pretty challenging because there aren't enough deals and a lot of folks chasing those deals, but could you specifically address what you're seeing as pricing dynamics during the quarter? Any changes? Julie Sweet : It's a very competitive market, which is what we've been saying every quarter and we did see lower pricing across the business, which has been pretty consistent. What I would say is, that which makes sense, right you're in a constrained -- as we said, that the clients have constrained spending, particularly on small deals and so you'd expect it to be constrained. What I would say, though that AMS, Application Managed Services, is not legacy if you do it the way we do it, right? So what we offer to our clients is we have the talent, the full-stack engineers, the GenAI, we have a platform called GenWizard. And so clients are coming to us to say, hey, can you take off my old applications. They're coming on us to modernize while taking costs down. And you see that for -- and what the work we're doing, it's very advanced in how we are doing it. So we basically call it run to the new right? It's like have us help you run your applications in order to rotate to the new. So we see this as a critical way that we are at the heart of their business in modernizing their digital core. It's not legacy. Same thing with our operations business. Keith Bachman : Yes. Okay. That makes a ton of sense. Thank you Julie. My follow-up question is, some of our recent discussions, and to be fair, with software companies, have suggested that Europe's softened in the last 30, 45 days and -- which makes sense, if you just read the newspapers about what's going on in Europe. But have you guys seen any change in the dynamics underpinning Europe and/or change the perspective that you may have as it relates to European demand over the next 12 months? And that's it for me. And many thanks again, and happy holidays. Julie Sweet : Thanks. So our view of European demand is -- over the next 12 months, is baked into the rise of in our guidance, right? And we are all reading the same papers. Europe is definitely more, Middle East is obviously different. Europe is definitely in a more challenging environment. And you see that with our growth rate is there on a relative basis as well. But we feel very good about -- we have an excellent business in EMEA. We are very relevant to our clients. And so we feel good about the -- us -- our demand environment, and that's fully reflected in the raise in guidance that we just gave you. Thank you. Can we have the next question? Katie O’Conor: Operator, we have time for one more question, and then Julie will wrap up the call. Operator : Absolutely. And our final question comes from Bryan Bergin with TD Cowen. Please go ahead. Bryan Bergin : Hey, guys. Good morning. Happy holidays. I wanted to ask on the service lines here. Can you comment on performance across strategic consulting, tech services and operations? Julie Sweet : Yes. All very -- all strong this quarter. Angie Park : Yes. Bryan, the thing that I would add to that is we did see broad-based growth. And if you look at it from a consulting and a managed services type of work perspective, we had mid-single-digit growth in consulting and 11% growth in managed services. And as you think about the rate that we have for the year, which is 4% to 7% underneath that, we see consulting now in the mid-single range growth and managed services in the mid-to-high range growth. Bryan Bergin : Okay. And then a follow-up here on the workforce and contract profitability. So you know the most headcount was added across India. Can you just comment on what you're seeing there as far as wage inflation dynamics, just given most services companies and GCCs have been leaning in, and particularly amid the competitive pricing environment? Just talk about the levers you have here to mitigate gross margin pressure. Angie Park : Yes, I'll start, Bryan. No real change in terms of the market dynamics of what we see reflected around wage inflation. And of course, we are always paying market relevant pay based upon the skills and the locations of our people. And we continue to see that the same, and then as it relates to pricing, as Julie mentioned, it is -- it continues to be highly competitive. At the same time, as you know of us, right, we are managing that. We're focused on pricing as well as on our differentiation, and we're focused on cost and delivery efficiencies in our business and how we operate. Bryan Bergin : All right. Understood. Happy holidays. Angie Park : Thank you Bryan. Julie Sweet : Good happy holiday. Well, in closing, I want to thank all of our shareholders for your continued trust and support and all of our people for what you do every single day. I wish everyone a very happy and healthy holiday season. Thank you for joining us today, and we look forward to being back here in a quarter. So thanks, everyone. Operator : Thank you. This concludes today's conference call, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,014	1	2014Q1	2014Q1	2014-03-19	1.298	1.28	1.307	1.457	null	48.92	46.43	Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s first quarter fiscal year 2014 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately one hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, our financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans is based on information as of today, March 18, 2014 and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our financial targets document and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. Adobe is redefining the Creative and Digital Marketing categories with our industry-leading cloud offerings. Through a steady stream of innovation, we will expand adoption of Creative Cloud; grow multi-solution sales of Adobe Marketing Cloud; and drive integration across our cloud offerings. We made progress on all fronts this quarter. In Q1, we achieved $1 billion in revenue, with non-GAAP earnings per share of $0.30. We drove strong performance across key growth metrics, including Creative Cloud subscriptions, annualized recurring revenue or ARR, and Adobe Marketing Cloud bookings. In Digital Media, Creative Cloud momentum continued. Creative Cloud ARR grew to just under $1 billion in Q1 and we exited with over 1.8 million subscriptions. Driving that customer adoption and satisfaction is the ongoing flow of innovation in the Creative Cloud platform. Coming off our delivery of more than 500 new features and capabilities last year to Creative Cloud subscribers and enterprise users, in Q1 we delivered numerous updates including major features in Photoshop, Illustrator, and InDesign. We are excited about the amazing innovation we will deliver in a major update to Creative Cloud in the next few months. Our digital publishing business continues its momentum, where we are building on our success with publishers in the corporate market, like General Motors and Disney. Last month, we announced the integration of Digital Publishing Suite and Adobe Experience Manager, part of the Adobe Marketing Cloud. This integration enables publishers and brands to create, deliver, and measure experiences across the web and content-rich apps like digital magazines using one set of assets. This enables a faster and more efficient publishing process. In Document Services, Acrobat continued to achieve solid performance, with online document services continuing their momentum. EchoSign adoption continues, with brands including Citrix, Electronic Arts, Kia, NEC Financial Services and UC Berkeley using our eSignature platform. Combined with Acrobat ETLAs, Document Services ARR grew to $164 million exiting Q1. Between our Creative and Document Services businesses, total Digital Media ARR grew to $1.15 billion at the end of Q1. In Digital Marketing, Adobe Marketing Cloud achieved 24% year-over-year revenue growth in Q1. We continue to have the most comprehensive offering in the market for Chief Marketing Officers, Chief Revenue Officers, advertising agencies, publishing executives and digital marketers. To create even more impact for our marketing customers, we are focused on integrating our six Adobe Marketing Cloud solutions. In January, we announced the integration of Adobe Campaign and Adobe Experience Manager. This will allow marketers to use a single digital asset management repository and integrate data from anonymous visitors and identified customers to create personalized customer experiences. Campaign is off to a strong start, as it addresses marketers’ challenge to manage communications with their customers across multiple channels. Examples of customers licensing multiple Adobe Marketing Cloud solutions in Q1 included GMC, Kohl’s, MGM, NBC Universal and Under Armour. Last month, we had an exciting event when NBC Sports used Adobe Primetime to deliver the Sochi Olympics to desktops, tablets and other mobile devices. Millions of viewers were able to access events live and on-demand. NBC was able to use Primetime’s analytics, authentication, ad delivery and media playback capabilities to stream video across screens. With more than 10.2 million video stream starts, the men’s hockey game between the U.S. and Canada stood out as the biggest, authenticated online event in history. Next week, we will hold our Digital Marketing Summit in Salt Lake City, with over 5,500 attendees. Summit has become a premier industry venue where we engage with current and prospective customers as well as an ever growing list of global partners. We have a number of significant announcements on the docket as well as an amazing speaker lineup, including senior marketing executives from brands like Audi, FedEx, REI and Sephora. I am proud to share we donated over $300 million of software and training to the White House’s ConnectED initiative. The goal of ConnectED is to advance digital learning among our youth, and we are excited about enabling 15,000 schools across the country to help students express their creativity and build skills for future success. We delivered another strong quarter and continue to make great progress against our goals in both Digital Media and Digital Marketing. Next week at Summit we will walk you through more details about where we are headed. We hope to see you there. Now, I will turn it over to Mark. Mark Garrett : Thanks Shantanu. In the first quarter of FY ‘14, Adobe achieved revenue of $1 billion, at the high end of our targeted range. GAAP diluted earnings per share in Q1 were $0.09, non-GAAP diluted earnings per share were $0.30. Highlights in the quarter included : Adding more than 405,000 net new Creative Cloud subscriptions. Creative subscription reported revenue exceeding perpetual licensing revenue for the first time, growing Digital Media ARR by over $200 million to a quarter ending total of $1.15 billion, driving 24% Adobe Marketing Cloud year-over-year revenue growth. Increasing deferred revenue by $52 million to a record $881 million. And exiting Q1 with 52% of our $1 billion of Q1 revenue as being recurring, this is truly a major milestone in the company’s transformation. In Digital Media, we achieved revenue of $641 million. This segment has two major components of revenue : our Creative family of products and our Document Services products. In our Creative business, customer adoption of Creative Cloud grew quarter-over-quarter. We exited Q1 with 1.844 million paid Creative Cloud individual and team subscriptions. With this achievement, we hit a milestone, where Q1 reported Creative revenue from subscriptions and ETLAs exceeded reported revenue from perpetual licensing for the first time. Our success with subscriptions, ETLAs and Digital Publishing Suite adoption helped to drive Creative ARR to a total of $987 million exiting Q1, an increase of $186 million quarter-over-quarter. As of the end of Q1, 96% of Creative Cloud subscriptions were annual plans. The percentage of single app subscriptions grew as a percentage of total subscriptions as a result of our successful Photoshop/Lightroom bundle, which is expanding our overall market opportunity. We are making good progress migrating individual, team and enterprise customers to Creative Cloud. In addition, we are offering incentives to accelerate migration of Creative Suite customers, acquire new creative customers, and further expand in the photography market. Retention and renewal rates after promotions expire continue to track ahead of our internal projections. The resulting average revenue per user, or ARPU, was lower in Q1 as expected. As a result of Creative Cloud success across teams and enterprises, we will soon end general availability of CS6 perpetual licensing in the channel. This decision is consistent with our comments last December when we stated we expected no material revenue from perpetual licensing of CS6 in the second half of fiscal 2014. We anticipate this change will align channel resellers to exclusively focus on Creative Cloud for team subscriptions. In Document Services, we achieved revenue of $194 million in Q1. Our success in this category is being driven by continued adoption of Acrobat, Acrobat ETLAs, Acrobat cloud services and our EchoSign e-signing solution. Document Services ARR grew from $143 million exiting Q4 to $164 million exiting Q1. Total Document Services subscriptions spanning EchoSign, Create PDF Online and related services grew to nearly 1.8 million. In our Digital Marketing segment, there are two components. The first is revenue from our Adobe Marketing Cloud offering, and in Q1 we achieved Adobe Marketing Cloud revenue of $267 million, representing year-over-year growth of 24% and ahead of our target of 20% growth in FY ‘14. We drove strong bookings in the quarter, which puts us on pace to achieve our target of 30% bookings growth this year. Total transactions managed by all our Marketing Cloud solutions grew to more than 5.4 trillion in Q1. Mobile device use continues to be a driver in our Digital Marketing business. Mobile transactions increased to 36% of total Adobe Analytics transactions, up from 33% last quarter. Next week at Summit, we are hosting a Financial Analyst Briefing and we intend to update you on numerous metrics, which reflect our leadership and momentum in our Digital Marketing business. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $47 million in Q1 revenue. As a reminder, late last year we introduced a path for LiveCycle customers to migrate to our Adobe Experience Manager offering. As a result, we expect LiveCycle revenue will continue to decline, while Connect revenue will remain relatively flat. Print and Publishing segment revenue was $45 million in Q1. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter perspective, FX decreased revenue by $0.7 million. We had $2.8 million in hedge gains in Q1 FY ‘14 versus $3.1 million in hedge gains in Q4 FY ‘13. Thus the net sequential currency decrease to revenue was $1 million. From a year-over-year currency perspective, FX decreased revenue by $10.9 million. Comparing the $2.8 million in hedge gains in Q1 FY ‘14 to the $7.1 million in hedge gains in Q1 FY ‘13, the net year-over-year currency decrease to revenue considering hedging gains was $15.2 million. In Q4, Adobe’s effective tax rate was 27.5% on a GAAP basis, and 21% on a non-GAAP basis. The GAAP rate was higher primarily due to stronger than forecasted profits in the U.S. Employees at the end of Q4 totaled 11,802 versus 11,847 at the end of last quarter. Our trade DSO was 46 days, which compares to 44 days in the year ago quarter, and 52 days last quarter. Cash flow from operations was $252 million in the quarter. And our ending cash and short-term investment position was $3.13 billion, compared to $3.17 billion at the end of Q4. In Q1, we repurchased approximately 4.5 million shares at a total cost of $263 million. Now, I would like to go over our financial outlook. In Q2 of FY ‘14, we are targeting a revenue range of $1 billion to $1.50 billion. Assuming the midpoint of our Q2 revenue range, we are targeting total Digital Media and Adobe Marketing Cloud revenue to grow sequentially. We also expect LiveCycle and Connect revenue to decline sequentially. And we are targeting Print and Publishing revenue to be relatively flat. During the quarter, we expect to add approximately the same number of Creative Cloud subscriptions and amount of Digital Media ARR as what was achieved in Q1. We are targeting our Q2 share count to be 508 million to 510 million shares. We are targeting net non-operating expense to be between $16 million and $18 million on both a GAAP and non-GAAP basis. We are targeting a Q2 tax rate of 28% to 29% on a GAAP and 21% on a non-GAAP basis. These targets yield a Q2 GAAP earnings per share range of $0.06 to $0.12 per share, and a Q2 non-GAAP earnings per share range of $0.26 to $0.32. Looking to the second half of the year, in the coming months we are planning a major launch of our Creative products and the removal of legacy CS6 products from the channel. We expect both of these will cause channel partners and our customers to increase their focus on Creative Cloud adoption. Finally, based on this roadmap, and factoring our Q1 performance and our Q2 targets, we expect we will meet or exceed all of the annual FY ‘14 targets we provided in December. These targets are available in the financial targets document on our Investor Relations website. I will now turn the call back over to Mike. Mike Saviage : Thanks Mark. We look forward to hosting everyone that has signed up to attend Summit next week. The opening keynote session is on Tuesday morning March 25. We will be hosting a brief financial analyst meeting with presentations by Adobe management and a Q&A session at the event on Tuesday afternoon starting at 3 :00 PM Mountain Time. It’s not too late to sign up. Contact Adobe Investor Relations for registration information and discounted pricing for professional financial analysts and investors. Keynote sessions and the audio of the financial analyst meeting will be webcast for those unable to attend. We remind everyone that Adobe increasingly utilizes blogs and social channels as a primary means to disclose important information. Investors and analysts who want to stay current on the latest Adobe news are encouraged to follow Adobe on Twitter, Facebook and YouTube and to frequently check Adobe’s corporate blogs on blogs.adobe.com. In addition, tv.adobe.com is a great resource to learn more about Adobe’s products and solutions and find new customer case studies. Our Investor Relations website provides easy access to these resources. For those who wish to listen to a playback of today’s conference call, a web-based Adobe Connect archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 5410066. Again, the number is 855-859-2056 with ID number 5410066. International callers should dial 404-537-3406. The phone playback service will be available beginning at 4 PM Pacific Time today and ending at 4 PM Pacific Time on Friday March 21, 2014. We would now be happy to take your questions. Operator? Operator : (Operator Instructions) Your first question comes from the line of Brent Thill from UBS. Your line is open. Brent Thill : Good afternoon. On the Adobe Marketing Cloud, it was a little shy of what I think our estimate in the Street was at, I was just curious if you could just walk through the dynamics there? And I realized you’re still guiding to 20% plus growth, can just maybe walk through where you see kind of the lowest hanging fruit in that business in the dynamics in the market? Thanks. Shantanu Narayen : Sure. I will take that Brent. I mean, when we look at the prospects for the Marketing Cloud, we continue to be very optimistic. The bookings were strong during the quarter. As you know in the enterprise business, you have a seasonally weak Q1 after what was an extremely strong Q4, but when we look at it big picture, we just continue to see great awareness, good traction with all of our solutions, people adopting the new solutions rather than point products. And I am sure you will get a lot more information next week at Summit and Campaign was off to a strong start, so that adds to another solution that we have now as part of the offering. So, we continue to be very excited about the prospects for the Marketing Cloud. Brent Thill : And just a quick follow-up, in terms of the duration of some of the contracts customers are signing, can you just give us a sense of what the general trend you are seeing there? Shantanu Narayen : Yes. I mean, I think people are still continuing to sign contracts. And I would say the average is probably 18 months, Brent, but it’s – you have multiple that are three years and retention continues to be fairly high in that space. Brent Thill : Thank you. Operator : Your next question comes from the line of Walter Pritchard from Citigroup. Your line is open. Ken Wong : Hi guys. This is Ken Wong for Walter. Just a quick question on the point products, I mean, you noted that, that was driving some of the subscriber adds this quarter, I think the last time you guys updated us on the mix, it was about 80% were on the full Creative, I mean, how should we think about the mix going forward? Does that trend closer to kind of roughly two-thirds being on a full suite that you guys had when it was a desktop product? Shantanu Narayen : I would think, Ken, that overall we would continue to have a higher mix for the entire Creative Cloud when we think about the Creative Cloud offering as opposed to the equivalent comparison with the Creative Suite product. And when we think about what happened in Q1, overall unit demand for the Creative products continue to be really strong and I think you will see mix changes during the quarter as long as we continue to have the perpetual option. The other thing I would say is we saw a lot of strength with new customer acquisition in the Photoshop and Lightroom bundle that was quite well received, but overall I would say that we continue to expect that overall mix in the Creative Cloud will continue to be towards the entire offering. Ken Wong : Got you. And then just – go ahead. Mark Garrett : I was just going to add to that, this is Mark, that like I mentioned we have this major launch coming with a big marketing campaign. And as we said, we are going to take CLP and TLP out of the channel and those two actions together are going to help drive Creative adoption and ARR in the second half of the year. Ken Wong : Got you. And then Mark, you mentioned raising well you guys would beat the financial guidance you guys laid out there for fiscal year ‘14, does that also include the 3 million Creative Cloud subs? Mark Garrett : Yes. All the targets we laid out we feel good about meeting or exceeding. Shantanu Narayen : I would again continue to impress like I think we have for investors that the annualized recurring revenue is really the right long-term way to look at the health of the business. We are off to a strong Q1. And again as Mark said, that gives us confidence for us to expect to continue to beat the targets that we have. We are just not updating the guidance every quarter, annual guidance. Ken Wong : Got you. Thanks a lot guys. Operator : Your next question comes from the line of Brendan Barnicle from Pacific Crest Securities. Your line is open. Brendan Barnicle : Thanks so much. Shantanu, I was interested in where you guys might be seeing leverage between the Creative Cloud and the Marketing Cloud and I am guessing it something will see more of next week, but do you have any commentary on that or how we might start to think about the TAM or new opportunities that you are seeing as those two products increasingly get used together? Shantanu Narayen : Yes. We are seeing actually more and more, Brendan, it’s a good question. I mean I will give you some customer examples. The publishing industry certainly, they want a single asset repository and workflow to create content once and repurpose it across web and mobile applications and video. We are seeing in retail actually a number of innovative customers are looking to accelerate the entire time to market. So they have their design done with hopefully an enterprise version of the Creative Cloud ETLA. And then they are actually providing that design directly through manufacturing, through the workflow that we have, so instead of using traditional product databases they are actually using our content repository system. We are seeing marketers accelerate campaigns by having the content assets directly flow into the marketing platform. And you know in video, I think you are seeing creation, delivery and ad insertion also all done through a single system like Primetime. The two products that we have specifically in that space the digital asset management that’s represented within the Adobe Experience Manager and also we have the integration right now between DPS and AEM. So hopefully that gives you some color of how customers are actually aggressively wanting us to further integrate both within the clouds and across clouds. Brendan Barnicle : Great. Thanks. And Mark just a quick one, any reason to assume Creative Cloud subscribers would decline sequentially at any point through the second half of the year? Mark Garrett : Not based on what we see coming with the launch and like I said the removal of CLP and TLP from the channel. We are feeling good about subscribers and growing them in the back half of the year? Brendan Barnicle : Great. Thanks a lot guys. Mark Garrett : Thank you. Operator : Your next question comes from the line of Jennifer Lowe from Morgan Stanley. Your line is open. Jennifer Lowe : Great. Thank you. I wanted to ask about the Creative Cloud mix in the quarter, in particular any color around demand from individual or a team versus ETLA? Shantanu Narayen : Well Jennifer, I think demand from individuals continues to be strong. I think the ETLA pipeline again you traditionally have a strong close to Q4 and then we start building up the pipeline in Q1. And so ETLAs will see a sequential seasonal decline between Q4 and Q1 and team continues to get stronger every quarter as we see both CS6 being longer in the tooth as it relates to channel fulfilling demand from the customers as well as people looking at the value added innovation that’s available through the Creative Cloud, team continues to get stronger. So that hopefully gives you color. And if you look at the individual application mix versus the overall you will also see that the Photoshop/Lightroom combination did well. As we have done survey on those customers we are definitely seeing market expansion and attracting new customers to the platform. Jennifer Lowe : Great and just a quick follow-up clarification question, Mark to your answer earlier to Brendan, you said that you expect Creative Cloud subscribers to continue growth throughout the year, should we expect the rate of subscriber adds to grow throughout the year I just wanted to clarify that? Mark Garrett : I didn’t get that specific but again with the launch and the removal of CLP, TLP in the back of the year, we would expect subscribers to grow. I would leave it at that for now. Jennifer Lowe : Great. Thank you. Operator : Your next question comes from the line of from the line of Ross MacMillan from Jefferies. You line is open. Ross MacMillan : Thank you and congratulations. Mark you mentioned that the Creative subscription revenue was greater than perpetual licenses for the first time, is there any more color you can provide around that approximate mix between the two in Q1? Mark Garrett : I don’t know is that we want to get that specific I mean what, like I said on the call it’s really pleasing to see more than half of our total revenue in the quarter coming from ratable sources now and more of the Creative revenue coming from recognized subscription revenue than from perpetual revenue. We did say that a couple of times now that perpetual revenue really falls off dramatically in the back half of year, again even more so now with the CLP TLP coming out of the channel. So I think it gets fairly de minimis like we talked about in the back half of the year. Ross MacMillan : And just on that removal of the Creative Suite from the channel, does that apply also to direct sales as well so from adobe.com or through other mechanisms, in other words will it be basically impossible to get your hands on Creative Suite in the second half of the year? Shantanu Narayen : No, Ross. I mean, the way we are looking at it we first feel that the offering that will be coming out later this year is going to be so strong. CS6 is definitely going to look longer in the tooth. I mean, we have created all of the appropriate training with the channel partners as well as making sure, the two licensing programs that we had CLP and TLP, both of them will still be available. We will in certain markets continue to offer the licensing. Again, that would be de minimis in the second quarter. And then electronic software download, you will continue to see us offer that, but even today honestly on adobe.com, the vast, vast majority of all purchases is clearly the subscription. So, Adobe.com has already made that transition. The direct enterprise business is all driving ETLAs. The channel mix is slightly different, but we feel so confident that we now have the product offering, we have the appropriate way for both the channels to resell our products as well as for people who are acquiring it within enterprises to have an admin console. I mean, all of that just leads us to make sure that we have a unified story about what the right product is for all of our customers. Ross MacMillan : That’s really helpful. Maybe one last one just on ARPU, obviously it was lower as you expected in Q1 as a result of the Photoshop/Lightroom shift. Given the changes that are coming here in the second half, would you expect ARPU to actually begin to increase given I think the changes are going to drive more traditional suite users to move to the full Creative Cloud, I was just curious so that ARPU trend that you see this year? Mark Garrett : Yes. So I mentioned this in the script, Ross. But again, the best measure of the business we still believe is ARR, because that incorporates everything obviously. And as we looked at the segmented offerings with individual team and enterprise, ARPU was relatively flat quarter-over-quarter across each of those offerings, but in aggregate, it was down due to mix and still remains kind of in the mid 30s, which we feel good about. And like we have said, over the longer term we feel that there is plenty of opportunity to drive that ARPU up. Right now, we want to drive subscriber adoption and we are going to do things that are prudent to do that, but again, ARPU remains in the mid-30s and it was affected by mix this quarter more than anything else. Shantanu Narayen : And directionally, Ross, if you actually look at the ARPU, when you take out the Photoshop/Lightroom bundle, it was actually up slightly. And so again completely on strategy in terms of execution when we get Creative Cloud, we get people to renew at the upper price, all of that’s working well. So we continue to see an expansion opportunity with Photoshop/Lightroom, but if you remove the SLR from the mix, ARPU was actually slightly up? Ross MacMillan : That’s very helpful. Thank you. Operator : Your next question comes from the line of Kash Rangan from Merrill Lynch. Your line is open. Kash Rangan : Hi, thank you very much guys. Nice cover on the new sub adds. Mark, can you talk about the 12.8 million subscriber base that you disclosed at the Analyst Day back in May and what percentage of that is roughly the breakup between commercial versus education government? And do you think that this ARPU of mid-30s can sustain even if you were to go back to a mix in your subscription base with CC as you get back into cumulative CS base of 12.8 million? That’s it for me. Thank you. Mark Garrett : Kash, to be honest, we are not going to be updating that installed base migration at least not on the call here. That’s something that we would do maybe down the road at an Analyst Day or something, but like we said we continue to see good adoption from people that are both perpetual users as well as new users on Creative Cloud. Kash Rangan : So is it possible then to give us some feel for when you have more of a normal mix of education versus commercial in your Creative Cloud subscriber base, how do we expect the ARPU to shape up our ASP to shape up, is it I mean relatively flat? How do you feel about the integrated pricing in the so-called non-commercial markets? Thank you. Shantanu Narayen : Well, in the non-commercial markets, I think when we think about education, Kash, I mean it will continue to be a seating strategy in order to get people and it will probably be a lower ARPU much like the ARPU was lower when we think about what we had with the Creative Suite. We also continue to offer ETLAs within educational institutions, which is doing well. So the direct sales force has moved to educational institutions. So when we think about the education market specifically think of it as individuals within the education whether they are students, whether they are administrators or whether they are faculty they will have the ability to get Creative Cloud at a lower price point. You will have the equivalent of team for deployment within labs that product is also going to get updated as we talked about and at the higher end for enterprises. But it’s a great seating strategy and it allows us to continue to have people embrace our products as the products of choice as they embark on a creative career. Operator : Your next question comes from the line of Steve Ashley from Robert W. Baird. Your line is open. Steve Ashley : Thanks very much. I was just going to inquire about the dichotomy between your performance in geographies with your Asia-Pacific market being down 22% year-over-year. I was just wondering if you can give us a little color on that, does that have to do anything with the adoption of Creative Suite there and how that might have performed versus your expectation? Shantanu Narayen : Clearly, Creative Suite started off strong in the U.S. and we are rolling it out kind of around the world it’s like anything else it seems to kind of move from the U.S. to Europe to Asia. So Asia has probably got the biggest opportunity in terms of Creative Cloud adoption moving forward. I don’t think there was anything we saw Steve around the world from a demand perspective that was troubling. Like I said, we saw stable demand across all the geographies. So it was nothing unusual in the numbers. And there is definitely upside on Creative Cloud adoption in Asia. Mark Garrett : And when we talk Steve about digital marketing I think we have made it explicit about our focus on developed economies as the first area of focus and so as the percentage of digital marketing revenue in our overall revenue mix grows that will also show up more disproportionately in both the U.S. as well as in Europe. Steve Ashley : It’s helpful. Maybe one last thing Mark, in the past you have been able to give us the ETLA ARR as a metric, I was wondering if we could get that at this time? Mark Garrett : Yes, we actually have not split that out in the past I mean it’s fairly straightforward if you take the ARPU in the mid-30s times the number of users that we told you about in the quarter. You can kind of back into an enterprise ETLA ARR number. We have never really broken it out to be honest Steve. Steve Ashley : Okay. Thank you. Operator : Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. You line is open. Jay Vleeschhouwer : Thank you. Good evening. I would like to ask first about businesses where you get paid in effect or at least in part based on customer activity, Shantanu you have alluded to DPS and I was wondering if you could update us a bit more on how that’s progressing and another business where you in affect get paid according to customers activity such as Media Optimizer and whether there were any other opportunities like those to where you could be on the meter in terms of revenue like those first two I mentioned then would follow-up? Shantanu Narayen : Sure Jay. I mean I think with DPS we might have mention that we had about 150 million downloads. I think if we update that, it would be closer to 170 million right now. And so that traction continues. What’s exciting about DPS is that actually a lot of the new business is in commercial accounts as I think we mentioned, so that that all goes well for us as we see deployment within enterprises. Media Optimizer continues to do well, grow year-over-year in terms of the annualized marketing spend that we have. But I would actually say that all of Marketing Cloud is really transaction based. And when you sort of look at what’s happening with mobile and the move towards mobile devices and mobile traffic, I mean that is driving whether it is the number of multichannel messages that are communicated, whether that’s the amount of advertising spend that we do, whether it’s the amount of targeted offers that are going out on behalf of our customers. So the good thing about the Marketing Cloud is that as transaction volume increases with mobile clearly driving adoption that actually all goes well for all of Marketing Cloud. Jay Vleeschhouwer : Okay. The second question has to do with your services and support revenue you had mentioned a quarter ago during Q&A that customers don’t want to do their own integration as far as digital marketing is concerned and your various solutions and you alluded to the same this evening. But we noticed that your services revenue were down sequentially and year-over-year, is that a function of older maintenance running off an older LiveCycle and Connect services revenue running off, but underneath it all you are seeing growing engagements in services revenue for Marketing Cloud than anything else? Shantanu Narayen : Jay, I will let Mark answer that specifically. I think big picture as it relates to people adopting Creative Cloud, you are seeing more and more partners in the ecosystem who are standardizing on the Adobe Marketing Cloud. And again, I think you will see some exciting announcements next week about how more and more people are creating digital practices on our marketing platform. And so our strategy continues to be how do we engage those partners, how do we educate those partners, and for some of the key customers, we will certainly be prime, but we want the entire ecosystem to evolve. Mark Garrett : And then Jay, you are right, on the services line to the extent that we have more and more customers adopting ETLAs, which is consistent with our strategy and where the sales forces really performing very well, you will see maintenance falloff on the old model and move into more of an ETLA model for Creative. Jay Vleeschhouwer : One clarification, sorry Mark, one quick clarification regarding adobe.com, where you said the vast majority of Creative Cloud subs activity is occurring, is the total amount of adobe.com revenue now larger than it would have been two years ago before you began the transition when you were still relying largely on perpetual business going through the site? Mark Garrett : Honestly, I have to look at that, Jay. I don’t know about the recognized subscription revenue specifically from adobe.com versus perpetual from adobe.com. I would think that if it’s not there already, it’s certainly going to get there, but I don’t know if it’s there yet. Jay Vleeschhouwer : Thanks a lot. Operator : Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open. Heather Bellini : Great, thank you so much. And I apologize, because I have juggling between a couple of different calls tonight, but I was wondering you talked a lot in the year ago if we go back to the Marketing Summit that you had, you talked about how you are integrating your products. I mean one of the things we hear from looking at the sales forces in the Facebooks and the Googles of the world as people would like one dashboard to kind of manage all their different marketing offerings and I think you guys are obviously in the pole position to offer that. I am just wondering if you could share with us kind of the current experiences of some of the customers that you have been winning as a result of that and what the common themes are and what you think the opportunity is to kind of increase that penetration into your installed base? Shantanu Narayen : Sure, Heather. So, as you know, we announced at the last Marketing Summit that we would be moving all of the 20 or 30 products that we had into essentially five solutions that then got expanded when we made the Neolane acquisition into Adobe Campaign. If I look at our results for Q1, the vast majority of that revenue is now coming from solution. So it’s clear that people are buying the solutions as opposed to the individual point products and some of those solutions again have multiple point products of the past. So that’s one really positive dataset. The second one is as we delivered Adobe Campaign, which was off to a strong start it comes with the same user experience. So we have already built a single dashboard that allows people to in a unified way, use all of our different solutions. I think that two other things maybe I will leave you with. The first is managed services when we have an Adobe Experience Manager solution, it provides us with a great opportunity to not just have the Adobe Experience Manager solution as part of the installation, but to actually have all the solutions ready to go and all that a customer has to do is to turn it on rather than to explicitly have to contract with us. And finally, I think one of the things that is exciting for us is a lot of the CMOs are now looking at it and saying whether it’s their spend across multiple channels, whether it’s their communication across multiple channels, the entire media mix and attribution we are uniquely qualified to solve that for CMOs across their entire marketing spend. And so stay tuned for some exciting announcements in that front as well. Heather Bellini : Thank you so much. Operator : (Operator Instructions) Your next question comes from the line of Phil Winslow from Credit Suisse. Your line is open. Siti Panigrahi : Thanks. This is Siti Panigrahi for Phil Winslow. Could you touch on the competitive environment in marketing given the continued consolidation in the space? And also I wanted to ask about the acquisition of Neolane, any initial feedback from customer and how should we look for Neolane to be more integrated into Marketing Cloud? Shantanu Narayen : I will do the second one first. I mean it’s already integrated, it’s Adobe Campaign. We mentioned in the prepared remarks that it’s off to a strong start and so having that multichannel orchestration capabilities across all of our offerings across all the channels is a very strong add already to the Marketing Cloud. I think in terms of what’s happening in a competitive landscape, you are right. I mean there is more activity because it’s probably the most explosive new enterprise software category. And I think our D&A about creativity and marketers continued to give us a lot of optimism about how we are going to perform in this. We are the leaders and we are going to continue to differentiate honestly by integrating entire content delivery into this platform. So hopefully that gives you some indication. But yes there is more competition I think it’s just raising awareness of the entire category. And if you look at the industry analyst reports, we continue to be the leader not just in the entire platform but also in individual solutions. Mike Saviage : Operator, we will take two more questions. Operator : Your next question comes from the line of Derrick Wood from Susquehanna Financial Group. Your line is open is open. Derrick Wood : Great. Thanks. Shantanu you just mentioned that the customers are shifting to solution deployments in the Marketing Cloud, I am just curious if there is any general metric you can provide in terms of the ASP uplift from this change? Shantanu Narayen : I think you are going to hear some of that next week. You do know we are doing an FA summit there as well Derrick. So we will leave some information for you to come listen to both the announcements as well as an update on the business. Derrick Wood : Okay. And just a follow-up on the Marketing Cloud, I mean given the publicity from the breach at target, I know that’s more on the point of sale side of things, but I am just curious if that’s having any impact in spending trends kind of in the e-commerce vertical? Shantanu Narayen : No, I think customer behavior is really driving more e-commerce across every single device and I don’t know of a single customer that – of a single customer or partner who doesn’t believe that the move towards online digital commerce is going to diminish. So it’s just going to increase. Derrick Wood : Thank you. Operator : Your next question comes from the line of Rob Breza from Sterne Agee. Your line is open is open. Rob Breza : Hi, thanks for taking my questions. Mark, maybe just a quick question I know was asked a little bit beforehand, but as you think about the geographical mix, I know Asia was around 16% for the last two quarters here, is that a trend or should we expect it’s kind of return back to that normal 20%? Thanks. Mark Garrett : Well, I think over the right period of time, you will see Asia come back to where it was. And there is no reason to believe that it wouldn’t like that both I and Shantanu said they are going to be a little bit behind on Creative Cloud adoption. They are certainly behind on Digital Marketing adoption. And as perpetual falls off more and more that changes the mix, but there is no reason to believe that those mixes shouldn’t come back to where they were over the longer period. Shantanu Narayen : Thank you again for joining us. We are executing well against the strategy and feel really great about the progress we have made. When we look at it, we think Q1 was a strong start in both our growth initiatives. In Digital Marketing, we do have the most comprehensive marketing platform, strong year-over-year bookings growth and we will share more details on the roadmap as well as industry partnerships that we are signing to accelerate that business. And in Digital Media, the strength of Q1 coupled with the innovation that we are on track to deliver later this summer leads us to expect to exceed the annual target that we had provided. We look forward to seeing you at Summit. Thank you. Mike Saviage : This concludes our call. Thanks for joining us today. Operator : This concludes today’s conference call. You may now disconnect.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,014	2	2014Q2	2014Q2	2014-06-17	1.263	1.276	1.571	1.738	null	41.01	42.06	Executives: Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett - Executive Vice President and Chief Financial Officer Analysts : Walter Pritchard - Citigroup Steve Ashley - Robert W. Baird Brent Thill - UBS Kash Rangan - Merrill Lynch Mark Moerdler - Sanford Bernstein Kirk Materne - Evercore Jennifer Lowe - Morgan Stanley Derrick Wood - Susquehanna International Jay Vleeschhouwer - Griffin Securities Matt Hedberg - RBC Capital Markets Robert Breza - Sterne Agee Mike Saviage - Vice President, Investor Relations : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s second quarter fiscal year 2014 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately one hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, our financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans is based on information as of today, June 17, 2014 and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our financial targets document and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen - President and Chief Executive Officer : Thanks, Mike and good afternoon. Adobe’s business momentum continued in Q2. I am happy to report we achieved $1.68 billion in revenue, with non-GAAP earnings per share of $0.37, both exceeding the high end of our targeted ranges. We drove strong performance across key growth areas, including Creative Cloud, Adobe Marketing Cloud and Document Services. In Q2, Creative ARR grew to $1.2 billion and we exited with more than 2.3 million Creative Cloud subscriptions, well ahead of the target we set for the quarter. More importantly, moving forward all Adobe and channel focus will solely be, on Creative Cloud offerings and CS6 perpetual revenue becomes de minimis. Building on our strong Q2 momentum, tomorrow we will unveil a broad set of Creative Cloud innovations, including desktop and mobile applications, new services and specialized offerings for key customer segments. In addition to targeting Creative Professionals and CS customers, we will expand the core Creative Cloud platform to target hobbyists and consumers, including former Photoshop Elements and Photoshop Lightroom customers. We believe this addresses a larger market opportunity. While Creative Cloud customers regularly receive access to new features, products and services as part of their subscription, this is our biggest update since CS6. We are excited to share what we have been working on and will host a live customer event in New York that will be webcast on Adobe.com at 1 PM Eastern Time. In Digital Publishing, we continued to see traction in the corporate market. New DPS customers include Booz Allen Hamilton, Dow Jones & Co., Honeywell and Procter & Gamble. In addition, Samsung will support DPS as the publishing platform for their new magazine service, Papergarden. In Document Services, Acrobat continued to achieve solid performance and our hosted Document Services offerings continued their momentum. With EchoSign, we teamed up with Progressive Insurance to make electronic signature solutions available to their more than 35,000 agencies in the U.S. to help them tackle their biggest business challenges, combining the reliability of Adobe PDF with EchoSign e-signatures, so agents can close business faster, more easily and securely. Combined with Acrobat ETLAs, Document Services ARR grew to $183 million exiting Q2. Across our Creative and Document Services businesses, total Digital Media ARR grew to $1.38 billion at the end of Q2 compared to $444 million exiting Q2 of last year. This year-over-year growth in ARR demonstrates the stellar progress we have made in transforming our Digital Media business. In Digital Marketing, Adobe Marketing Cloud achieved strong bookings in Q2 led by Adobe Experience Manager. Every enterprise is faced with the task of re-platforming their web infrastructure to deliver more personalized, relevant content to their customers and provide a first class mobile experience. Given our number one position in the web experience management and analytics categories and integration with our Campaign, Social and Target solutions, we have the leading offering in the market. In addition, Adobe Marketing Cloud integration with Creative Cloud and DPS is a unique differentiator enabling Adobe to target the C-suite with corporate-wide, mission-critical solutions. During the quarter, we held Digital Marketing Summits in Salt Lake City and London. Both events were sold out and have generated strong pipeline for the Adobe Marketing Cloud among our growing number of partners and direct enterprise customers. Major announcements at these events, included the introduction of new core services, innovation in mobile solutions and deep integration across our Marketing Cloud offerings. Early in Q2, we announced a global agreement with SAP, which will resell Adobe Marketing Cloud with their HANA platform and hybris Commerce Suite into their base of 250,000 enterprise customers. We are hard at work with SAP to address goals such as improved product and solution integration, sales enablement and partner education. Adobe continued to earn strong industry analyst recognition of our Marketing Cloud solutions in Q2. We were recognized as a leader in Forrester’s Web Analytics Wave report achieving the highest scores in all major categories evaluated, current offering, strategy, and market presence. In Gartner’s Multi-Channel Campaign Management Magic Quadrant, we achieved leadership positioning and the highest scores in completeness of vision, underscoring the progress we have made with the Neolane integration and the competitive advantage we have built with Adobe Marketing Cloud. In summary, we are pleased with the great progress we have made against our strategy in the first half of the year. Creative Cloud ARR has grown faster than expected. User satisfaction and retention remains strong and Creative Cloud customers will benefit from exciting new innovation in the second half of the year. Our leadership in the digital marketing category is widening with industry recognition, a thriving ecosystem of partners and Adobe Marketing Cloud revenue growth ahead of our target for the year. I am proud to share that we were named the greenest technology company in the world, according to Newsweek’s just released 2014 Green Rankings. This is an important recognition of our commitment to make Adobe a sustainable business and a great place to work. Our employees are at the core of our success. We thank them for our strong results and the momentum we have built. Now, I will turn it over to Mark. Mark Garrett - Executive Vice President and Chief Financial Officer : Thanks, Shantanu. In the second quarter of FY ‘14, Adobe achieved revenue of $1.68 billion above the high end of our targeted range. GAAP diluted earnings per share in Q2 were $0.17 and non-GAAP diluted earnings per share were $0.37, both also above the high end of our targeted ranges. Highlights in the quarter included : adding 464,000 net new Creative Cloud subscriptions; growing Digital Media ARR by $227 million to a quarter ending total of $1.38 billion; achieving 23% Adobe Marketing Cloud year-over-year revenue growth; generating $368 million in cash flow from operations; growing deferred revenue by $48 million to a record $929 million; and exiting Q2 with 53% of our quarterly revenue as being recurring. In Digital Media, we achieved revenue of $692 million. This segment has two major components of revenue : our Creative family of products and our Document Services products. In our Creative business, customer adoption of Creative Cloud accelerated quarter-over-quarter. We exited Q2 with 2,308,000 Creative Cloud individual and team subscriptions. Q2 was the last quarter we broadly offered perpetual volume licensing of CS6 through the channel. As a result, there was a high demand by customers serviced by the channel who wanted to add to their perpetual seat capacity. This drove the upside relative to the high-end of our total targeted Q2 revenue range. We believe these customers will migrate to Creative Cloud over time. Beginning in Q3, the channel is solely focused on licensing Creative Cloud. Our success with subscriptions, ETLAs and Digital Publishing Suite adoption helped to drive Creative ARR to a total of $1.2 billion exiting Q2, an increase of $208 million quarter-over-quarter. Our strategy with segmented Creative Cloud offerings is to target existing customers across all user categories as well as attract new customers to the platform. Overall, we are seeing strength in migrating the installed base as well as expanding our market with new user adoption. Enterprise customer migration is proceeding well with Adobe’s direct sales force driving new enterprise term license agreements, or ETLA adoption. Adoption of the full Creative Cloud offering in the Creative Professional segment was strong in Q2, with acceleration over Q1. Creative Cloud for team subscriptions has now become a significant percent of overall subscriptions and is expected to grow given increased channel focus with the elimination of CS6 perpetual licensing; and we are expanding the overall opportunity with our Photoshop/Lightroom offering targeting the Photography segment. This offer is enabling us to acquire new customers as well as migrate those who historically licensed Photoshop Elements and Photoshop/Lightroom. Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections. Q2 average revenue per user or ARPU in each Creative Cloud offering was consistent with Q1. As you know, the Photography offering has a lower ARPU than the rest of the Creative Cloud business and is also responsible for a majority of the subscription upside we have achieved in the past couple of quarters. Given total subscription mix, the growth in Photoshop/Lightroom subscriptions slightly decreased total Creative Cloud ARPU in Q2 while expanding our overall market opportunity. In total, Creative Cloud subscription and ETLA adoption drove stronger than expected Creative ARR in Q2, which reflects the strong health of the business. In Document Services, we achieved revenue of $196 million in Q2. Our success in this category is being driven by continued adoption of Acrobat, Acrobat ETLAs, Acrobat cloud services and EchoSign. Document Services ARR grew to $183 million exiting Q2. Total Document Services subscriptions spanning EchoSign, Create PDF Online and related services grew to 1.9 million exiting the quarter. In our Digital Marketing segment, there are two components. The first is revenue from our Adobe Marketing Cloud offering and in Q2 we achieved Adobe Marketing Cloud revenue of $283 million representing year-over-year growth of 23%. We drove near-record bookings for any quarter, which is impressive for a Q2 and continues to put us on pace to achieve our target of 30% Marketing Cloud bookings growth this year. Total transactions managed by all our Marketing Cloud solutions grew to more than 6.3 trillion in Q2. Mobile device use continues to be a driver in our Digital Marketing business. Mobile transactions increased to 37% of total Adobe Analytics transactions. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $47 million in Q2 revenue flat with Q1 revenue and consistent with our expectations. Print and Publishing segment revenue was $46 million in Q2. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter perspective, FX increased revenue by $3 million. We had $2.6 million in hedge gains in Q2 FY ‘14, versus $2.8 million in hedge gains in Q1 FY ‘14; thus the net sequential currency increase to revenue was $2.8 million. From a year-over-year currency perspective, FX increased revenue by $3.1 million. Comparing the $2.6 million in hedge gains in Q2 FY ‘14 to the $15.3 million in hedge gains in Q2 FY ‘13, the net year- over-year currency decrease to revenue considering hedging gains was $9.6 million. In Q2, Adobe’s effective tax rate was 27% on a GAAP basis, and 21% on a non-GAAP basis. The GAAP rate was lower than targeted primarily due to stronger-than-forecasted profits outside the U.S. Employees at the end of Q2 totaled 12,026 versus 11,802 at the end of last quarter. Our trade DSO was 45 days, which compares to 42 days in the year-ago quarter, and 46 days last quarter. Cash flow from operations was $368 million in the quarter. And our ending cash and short-term investment position was $3.33 billion, compared to $3.13 billion at the end of Q1. In Q2, we repurchased approximately 2.6 million shares at a total cost of $166 million. Now, I would like to go over our financial outlook. As I noted earlier, our reported revenue in Q2 included final demand for CS6 perpetual product. Moving forward, we will be solely focused on subscriptions and ETLAs. With this as context, in Q3 of FY14 we are targeting a revenue range of $975 million to $1.25 billion. In Q3, we expect to add approximately $250 million of Digital Media ARR, with Digital Media segment revenue declining sequentially. We are targeting Adobe Marketing Cloud revenue to grow approximately 20% year-over-year. We expect combined revenue with LiveCycle and Connect to decline sequentially and we are targeting Print and Publishing segment revenue to be relatively flat. We are targeting our Q3 share count to be 506 million to 508 million shares. We are targeting net non-operating expense to be between $14 million and $16 million on both a GAAP and non-GAAP basis. We are targeting a Q3 tax rate of 26% to 28% on a GAAP and 21% on a non-GAAP basis. These targets yield a Q3 GAAP earnings per share range of $0.02 to $0.08 per share and a Q3 non-GAAP earnings per share range of $0.22 to $0.28. In the second half of fiscal 2014, we expect Creative Cloud adoption to continue to accelerate. We are targeting Digital Media ARR to grow sequentially in Q4 to a total of $1.925 billion exiting the year, an increase over our prior annual target of $1.85 billion. We expect to add approximately 1 million net new Creative Cloud subscriptions in the second half of the year, with sequential growth in each quarter. This means we expect to achieve approximately 3.3 million Creative Cloud subscriptions by year-end, which is 300,000 higher than our target of approximately 3 million that we gave entering the year. Our updated Digital Media ARR target exiting the year reflects the Creative Cloud subscription and ETLA product mix we expect, including continued success of the Photoshop/Lightroom offer that is expanding our market opportunity. We also continue to target at least 20% revenue growth and 30% bookings growth with Adobe Marketing Cloud for the year. I will now turn the call back over to Mike. Mike Saviage - Vice President, Investor Relations : Thanks Mark. Before we get to Q&A, a few logistics items. Adobe MAX is coming up in October and will be held again in L.A. The opening day MAX keynote is on Monday October 6 and we plan to host a brief financial analyst update meeting that afternoon. We will be sending out registration information in the next week for investors and analysts to sign up for MAX. We will also webcast the MAX keynote sessions as well as our financial analyst briefing. For those who wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 54143487. Again, the number is 855-859-2056 with ID number 54143487. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 PM Pacific Time today and ending at 4 PM Pacific Time on Monday, June 23, 2014. We would now be happy to take your questions. Operator? Operator : (Operator Instructions) And your first question comes from the line of Walter Pritchard with Citigroup. Walter Pritchard - Citigroup: Hi, thanks. I am wondering, Mark, if you could talk about ARPU in Q3 have a few factors here with acceleration potentially in team edition, which carries a higher ARPU and then continued growth in the lower end. Just wondering how we should think about ARPU headed into Q3? Shantanu Narayen : Walter, why don’t I start and then Mark can add, because overall we continue to track ARPU for CC subscriptions, which again just to remind everybody, it does not include the enterprise ETLAs. And to give you all some color, excluding the Photoshop/Lightroom bundle, overall ARPU across individuals and teams, single applications as well as the complete Creative Cloud in all markets, including education, which you know is priced lower than commercial has actually increased every quarter for the last few quarters and is now in the high 30s. When you blend in Photoshop and Lightroom that’s priced at approximately $10, the ARPU, the resulting ARPU is now in the low 30s. So, keep in mind that with the PS/LR bundle, we believe that the overall opportunity is larger than when we first outlined the Creative Cloud opportunity and therefore presents a great ARR potential. So, that’s how we have seen ARR progress. Mark Garrett : Yes. I wouldn’t add much to that. I think it’s doing exactly, Walter, what we would like it to do. Across each of the different offerings, it’s holding up very well. And as Shantanu said, the important part is on the Creative Professional side, it’s been increasing the last several quarters. It really just – I was just going to say it’s just going to move around based on product mix every quarter. Walter Pritchard - Citigroup: Got it. And I guess just a follow-up to that, would you expect that you did see sort of a nice reacceleration in the full suite adds this quarter from it being flat in Q4 to Q1? I am wondering if you look into Q3 and Q4, do you expect that as part of the subscriber guidance that you gave that the full suite additions would continue to accelerate along with the total? Shantanu Narayen : I think we will continue to strength, Walter, in the full units as well. And as you know, the channel I think we identified that the channel is also going to focus exclusively on the complete offering as well as the team offering. And so I think the combination of those give us confidence for the number that we outlined for the remainder of the second half. Walter Pritchard - Citigroup: Great. Thanks a lot. Operator : Your next question comes from the line of Steve Ashley with Robert W. Baird. Steve Ashley - Robert W. Baird: Thanks very much. Shantanu, my question is about the Creative Cloud and I am assuming one of your goals is to get the Creative Cloud customers to save more of their content to the Cloud. I first want to confirm that, that is something you would like to do? And number two is there any steps you would hope to take to encourage that behavior? Shantanu Narayen : Sure. Steve, that’s a good question. And yes, we do want people to be able to collaborate effectively whether it’s freelancers who are working with other freelancers on a project, whether it’s people who wish to show their portfolios on Behance as well as within an enterprise people wanting to collaborate either through Creative Cloud or through our Marketing Cloud, Adobe Experience Manger solution. So being able to allow people to collaborate is a clear goal. We have actually now turned on the ability for people to save files for anybody whether you are a trial user or whether you are a full user, we have functionality that is now present in Creative Cloud that people – allows people to share individual files, allows people to share complete folders. And the way we will continue to encourage that is by integrating it directly into the desktop applications. Again tomorrow, I think there is some exciting announcements hopefully you will all be on the call to hear about what’s new both in services and mobile apps as well as in desktop apps. Steve Ashley - Robert W. Baird: Great. And maybe a quick follow-up for Mark, in the Marketing Cloud we all know there is a business transformation going on in the Creative Cloud, but there is also a little bit of a business model change taking place in the Marketing Cloud with Experience Manger shifting to subscription and can you talk at all maybe qualitatively about the impact it might be having on a reported revenue growth and/or when that might normalize year-over-year in the future? Mark Garrett : Yes, sure Steve. I mean clearly in Digital Marketing, AEM is the hottest solution and it’s a competitive advantage for us that we have both in on-premise perpetual offering as well as term based managed services offering. We believe that the better option for most customers and for Adobe frankly is the term based offering. And while it may vary quarter-over-quarter, the hosted offering now represents over 50% of the bookings in Q2 and we would expect this trend to continue in ‘15 to your point, in FY ‘15 we would expect the vast majority to be term bookings. So, we are kind of getting through the bulk of that little mini transition if you will. Steve Ashley - Robert W. Baird: Great. Thanks so much. Operator : Your next question comes from the line of Brent Thill with UBS. Brent Thill - UBS: Good afternoon. About a year ago you articulated the Creative Cloud base are on the credit solution was around 12.8 million when you looked at the CS3 to CS6 cycle with 2.3 million of that 12.8 million you get to kind of 18% of the base that’s converted, is that still the numbers that we should be looking at in terms of judging the conversion over? Shantanu Narayen : Well, Brent, firstly when we outlined the number that you talked about that does include the enterprise customers. And as you know when we talk about the subscription numbers we are only talking about the subscription numbers that are individual and team. So I think it’s important to remember that 12 million plus includes our enterprise customers. The second thing I would say is that when we think about the longer term opportunities for Creative Cloud given the initiatives we described with the photography offering, it’s actually increasing our available market opportunity. And you also have to remember that when we last did our surveys, a number of the people that are now signing up for Creative Cloud are new customers and therefore that’s expanding the available opportunity. So, we are not providing the longer term numbers at this time because we are really focused on driving financial performance in the second half. But I think you should look at big picture and say we are making good traction migrating the existing customer base. We are attracting new customers to the platform and we are providing market expansion opportunities with the Creative Cloud platform to target a broader set of customers. Brent Thill - UBS: Okay. And just a follow-up for Mark just as a follow-on given you are still in the infancy of converting the base over that ARPU in the near-term we should assume that you are going to continue to effectively try to drive everyone on that versus trying to drive ARPU off as it relates to that the conversion rate that you are at today inside the install base? Mark Garrett : Yes, that’s right Brent. Right now the key is to get people to move over to Creative Cloud, get those new users to adopt Creative Cloud. There will be ARPU expansion opportunities down the road. Brent Thill - UBS: Terrific. Thank you. Mark Garrett : By the way one other point on all that, we keep saying this, but keep in mind we firmly believe the true health of the business is measured through ARR. ARR encompasses everything, it encompasses ARPU, it encompasses retention. So, while I understand the focus on ARPU, the right way to look at the businesses on the ARR side. Operator : Your next question comes from Kash Rangan with Merrill Lynch. Kash Rangan - Merrill Lynch : Hi, thank you very much. Shantanu, could you give us a bit of an estimate on how much the base of 12.8 million expands by as a result of the new offerings that you are going to be targeting tomorrow to launch? And also as you pointed out, you are trying to reach to a broader base of individual point solutions and recognizing that 12.8 million is more of a thing of the past looking backwards. I am curious if I could think about the percentage expansion to that number as a result of targeting new users, point solutions, etcetera? Shantanu Narayen : Yes, Kash and first… Kash Rangan - Merrill Lynch : Is it 10% more or 20% more or there is just some rough magnitude? Shantanu Narayen : Well, Kash, first the expansion opportunities that we are talking about, I do want to reflect that they are already represented in the outlook that we have for the second half of the year. And so the 1 million subs that we are talking about as well as the 1.925 billion ARR both reflect our expectation of what we expect to see with the announcements tomorrow. Again, Kash, we really want to focus on the second half. We give you color relative to the 20% new customer growth that we have been seeing, but expanding that entire available opportunity and articulating what the numbers are, we are not providing updates to that at this time. Kash Rangan - Merrill Lynch : Got it. Understood. And sorry, this is another longer term question for Mark, just wondering how is your confidence level today relative to say three months back or so with respect to earnings targets for fiscal ‘15 and ‘16 being at least 2 and at least 3 respectively? Thank you. That’s it for me. Mark Garrett : Hey, Kash. Well, unfortunately, I am going to give you the answer that Shantanu just did. I mean, obviously we have put those targets out there. They are still there, but we are not going to update them on a regular quarterly basis as we get through towards the end of this year and get ready for FY ‘15 that will be the appropriate time to update some of those longer term targets. Shantanu Narayen : And Kash, I hope you are seeing that everything that we have articulated, we continue to focus on execution against it. And we certainly believe in the company that we have had a good first half and we expect to see a strong second half as well as to continue to expand on our opportunities. Kash Rangan - Merrill Lynch : Got it. My question is more, just spurred by looking at that subscription revenue growth rate and the very little operating expense growth rate you would have to put through to get that almost 70%, 80% subscription growth rate. It feels like the operating leverage in your model is finally starting to really come through and this seems to be the pivotal quarter of that happening. Congrats. Mark Garrett : Yes, thank you. Keep in mind we did have upside this quarter like we said because of perpetual, right. The beauty of the story this quarter is as in the past prior to this transition when we have revenue upside, you are going to have earnings upside and that’s starting to come back into the picture. So, going forward, just like in the past when we have revenue upside, we will likely have earnings upside. Shantanu Narayen : And just to confirm again, Kash, in response to your question, what I wanted to say was in the surveys that we are doing 20% of the user base that we are finding who are adopting the Creative Cloud are new users to the platform. Kash Rangan - Merrill Lynch : Wonderful. Thank you so much. Operator : Your next question comes from the line of Mark Moerdler with Sanford Bernstein. Mark Moerdler - Sanford Bernstein : Sure. Thank you very much. I appreciate it. So, maybe you just answered that and I didn’t catch it completely, but what percent in terms of the net new users within the subscriber base? How many of the – what percentage of subscribers are net new? Do we have that yet? Shantanu Narayen : Well, Mark, we do surveys on a periodic basis is what we were saying and it’s approximately 20% of the users are net new. That’s sort of an order of magnitude way of looking at it. Mark Moerdler - Sanford Bernstein : Okay. So, that’s still staying constant. And then a follow-up for Mark, cash and cash equivalents has been growing quarter-over-quarter, is this U.S. cash that’s growing? Was it all overseas? Shantanu Narayen : Well, it’s both. But as we have said in the past, the great majority of our cash is overseas. We still believe that the best way of returning cash to shareholders is in the form of share repurchases. We continue to do that. You saw we bought a bunch of stock again this quarter. We will continue to do that. And obviously, we look at our capital planning and our capital structure on a regular basis. But right now, we think that’s the right answer. Mark Moerdler - Sanford Bernstein : Perfect. Thank you. I appreciate it. It’s also important. Mark Garrett : Thank you. Operator : Your next question comes from the line of Kirk Materne with Evercore. Kirk Materne - Evercore: Yes. Thanks very much. Can you talk a little bit about the progress you are seeing in terms of cross selling with the Digital Marketing and the Digital Media solutions in your customer base, I think we all understand that you guys have a very strong product offering both in a very big customer base of Digital Media, I guess how well or I guess can you give us some anecdotes that give you some comfort that the progress and some of the advantages you have in say the CMO officer are starting to play out especially as it relates to the Digital Marketing business? Shantanu Narayen : We certainly track that internally and we continue to feel good about the progress that we are making in having larger enterprises adopt both the Creative Cloud, ETLA offering as well as multiple Marketing Cloud solutions. I think there are two areas where we see the most traction. The first area where we see traction is where people are now adopting the Creative Cloud and doing all of the asset management within the Marketing Cloud, Adobe Experience Manager, asset management solution so that’s one area where we see traction. The second area where we see traction is certainly in the area of people wanting to use the same workflow for both delivering mobile applications using PhoneGap Enterprise as well as DPS which is the Digital Publishing Suite option. And last but certainly not the least there is no question that when we look at the new deals that we are having we are selling to the C-suite. We are selling the combination of the entire content LiveCycle. And while there maybe specialist sales force that are selling one solution or the other, the number of quarter backs that we have in these large accounts selling the entire Adobe story is certainly drawing. So hopefully that gives you some color. With respect to which markets, I would say retail continues to be an area where we are seeing quite a bit of traction when we see travel, automotive these are a couple of the industries where – and financial services where we are seeing synergy between the two solutions. Kirk Materne - Evercore: And just a quick follow-up if I may, you guys announced a partnership with SAP at the summit, I guess any update on how that’s progressing or your thoughts on how that might impact the digital marketing opportunity in the back half of the year? Shantanu Narayen : Yes, I think we said when we announced the partnership that we don’t expect a material impact, it’s all baked into our targets as well Brad Rencher certainly was at Sapphire where as you know it’s their largest event and they showcased the partnership as well in terms of what we are jointly doing together. I think long-term and next year what you are going to expect to see is that both companies will jointly go to market. I think the real areas of synergy, is as commerce is becoming a bigger player for SAP with their hybris commerce suite the integration that we have with that. And for the real time enterprise the integration that we have between HANA as well as our Adobe Marketing Cloud, but we are hard at work educating their sales force on our offerings and we are starting to see both companies go into join customer accounts, but it’s early yet. Kirk Materne - Evercore: Thanks very much. Operator : Your next question comes from the line of Jennifer Lowe with Morgan Stanley. Jennifer Lowe - Morgan Stanley : Great. Thank you. Just to go back to ARPU a little bit I know this topic has almost been beaten to death at this point, but just looking at Q2 I think coming into the quarter the guidance that’s been for subs adds similar to last quarter and Digital Media ARR at similar to last quarter, we saw the Digital Media at similar to last quarter it looks like from an ARR perspective, but certainly the subs came in much, much better than we and others had expected from what we thought in Q1, so just sort of running those two items through that would suggest that there is something in the ARR that maybe didn’t play out the way that you had thought given that you didn’t see the similar magnitude uplift in ARR, so is there anything that kind of surprised you negatively or didn’t play out if you were thinking coming into Q2 given the outperformance in subs with more in line-ish number on the ARR side? Shantanu Narayen : No, I don’t think there was anything that actually surprised us. I remember when you look at the Creative ARR are $1.2 billion, we did say that the significant amount of the over achievement in the subscriptions was as a result of the PSLR bundle, but the team continued to do well and it’s actually we expected to continue to do well but the channel focused on it Jennifer. So, we are pleased with the mix, we are pleased with the market expansion as well as again as I mentioned if you look at just the Creative ARPU, it is in the high 30s and it actually been increasing sequentially. Jennifer Lowe - Morgan Stanley : And switching gears a little bit, one of the things that they have talked about in the past as being capacity constrained in the Marketing Cloud and you also highlighted on the call some of the efforts to build that direct sales capacity around ETLAs on the media side, can you just talk a little bit about the growth in direct sales force and your efforts in building out some of the capacity there? Shantanu Narayen : Sure. Matt, who heads up field operations, we continue to focus on adding capacity both directly as well as the partner revenue that we are starting to see in the Marketing Cloud in particular is actually increasing. So, a very substantial portion of our Adobe Marketing Cloud also has a partner element in it, which we think is good, because it actually enables us to work effectively with partners. We still continue to think Jennifer that we are capacity constrained as opposed to market constrained. We are focused on a few countries right now, because that’s where we see tremendous opportunity and will continue with geographic expansion as we continue to build out into the second half of 2014 and beyond. But we don’t provide numbers specifically in terms of the direct sales capacity. Jennifer Lowe - Morgan Stanley : Okay, thank you. Operator : Your next question comes from the line of Derrick Wood with Susquehanna International. Derrick Wood - Susquehanna International : Thanks. You guys have the outage on Creative Cloud last month, we have seen this with many cloud companies obviously in the past, but just curious what the reaction has been? And it certainly doesn’t seem like you have seen any impact in terms of your guidance, but do you think there has been any impact at all? Shantanu Narayen : Well, with all cloud-based services as you mentioned, Derrick, the new reality is that we have to be even more vigilant about making sure that we have 100% uptime. The outage that occurred in Q2 should really never have happened. There was a sequence of things. And we have learned from it as well as introduced additional safeguards and redundancies as a preventive measure. I think our outreach to our customers has helped address any issues and you are right we did not see any real impact from that outage. Derrick Wood - Susquehanna International : Okay. And quick question for Mark, any – now that CS is withdrawn from the channel, can you give us any color on the degree of step down in product revenue expected in the second half? Mark Garrett : Well, it’s really baked into the guidance. I mean, if you look at the 10.68 this quarter going down to 9.75 to 10.25, I mean, that’s really driven by this sequential decline in perpetual revenue. I mean, that is the reason for the decline, because obviously Creative Cloud subscription revenue is increasing. Digital Marketing Cloud revenue is increasing. So, it’s really that, that is the size as it declined right there. Derrick Wood - Susquehanna International : Okay, alright. Thank you. Mark Garrett : And like we said, you don’t have to worry about perpetual revenue much anymore. It’s literally de minimis in Q3 and beyond. Mike Saviage : Next question? Operator : Your next question comes from Jay Vleeschhouwer with Griffin Securities. Jay Vleeschhouwer - Griffin Securities : Got it, thanks. Good afternoon. Shantanu, Mark, I would like to ask about the potential magnitude of Creative ETLA as a metric, it would appear that for the last couple of quarters, the year-over-year growth of ETLA has perhaps been triple or more, that’s at least our inference, but the comps get harder of course into the second half of this year and into next. But when you think about the potential for corporate maintenance renewals, capacity, access to new technology and so forth, wouldn’t it stand to reason that over time that Creative ETLA number could be potentially a several $100 million number substantially higher than it is today? Shantanu Narayen : Well, Jay, first I will say that the field team has done a really good job of educating customers on the benefits of the Creative ETLA and helping transition them from perpetual offering to the term-based offering. I think when you look at the potential that we still have to get customers to the Creative ETLA, you are right, the growth that we have seen in that business has been quite significant, it is a little bit more seasonal that ETLA and that you build a pipeline over the year and then you tend to have a stronger Q4 and the Creative ETLA much like you might see in Digital Marketing bookings. We are not going to provide specific targets of how large the creative ETLA business can be, but I think we have outlined in the past how much licensing was meaningful component for the Creative business and certainly that licensing revenue should move into what is now ETLA. So it’s an area of significant focus for us in the company because it enables us to have a good relationship with the customers. Jay Vleeschhouwer - Griffin Securities : Alright. Thank you for that. My follow-up is on that EPS and I was wondering if you could update us on the volume to-date that you have seen there versus the 1.70 that you have reported at the end of Q1 and could you comment as well on how the corporate versus traditional publisher customer base mix has evolved over the last year or so and how you are thinking about that? Shantanu Narayen : Sure. Jay, I think directionally the corporate customers is where we have been focusing a little bit more because we have a number of the publishers already as customers and so when you look at the growth that we are finding in DPS it is for all of these other use cases whether it’s training or manuals or corporate brochures, I think Mike used it for our annual shareholder report. So that’s where the growth is. I don’t have the exact download number with me, but growth continues in the publishing segment as well. Jay Vleeschhouwer - Griffin Securities : Thank you. Mike Saviage : Operator, we will take two more questions. Operator : And your next question is from Matt Hedberg with RBC Capital Markets. Matt Hedberg - RBC Capital Markets : Thanks guys. Nice quarter. I guess follow-up to Jay’s question. You guys have a large ELA installed base, I guess I am wondering should all former ELA customers become ETLA customers or will some of those fall into different segments and I guess if so, is there a way to kind of think about the split there? Shantanu Narayen : No, I think the way of looking at it is all ELA customers should become ETLA customers, in fact directionally we have also said that some of the customers that may have in the past had smaller licenses which may have “moved to team offering could also move to the ETLA customers”. So getting a relationship with small marketing departments, entire media agencies through ETLAs is very much a part of our strategy. Matt Hedberg - RBC Capital Markets : That’s great. And then maybe one quick question on the geography, it looks like Asia-Pac was down again a little bit and clearly more in line with your expectations, should that market start to grow in the second half? Shantanu Narayen : With Asia-Pacific the important thing to remember is that what you are seeing is the Digital Media business moved to subscriptions and in Digital Marketing it’s not as much of a market as some of the other markets. So Asia continues to perform well. We believe that Australia and some of those other markets are really good markets for Digital Marketing, but it’s not as extensive market for us in Digital Marketing as it has traditionally been in Digital Media and so the growth that we are seeing in Digital Marketing in the U.S. and Europe make that as a percentage of our revenue greater than it formally was. Matt Hedberg - RBC Capital Markets : That’s great. Thanks guys. Shantanu Narayen : Thank you. Operator : And your final question comes from the line of Robert Breza with Sterne Agee. Robert Breza - Sterne Agee : Hi. Thanks for squeezing me in. Maybe just I think most questions have been asked but Mark you I think tried to make the point you are very clear that one perpetual license are gone, we shouldn’t probably see any seasonality, is there anything else that we need to think about as we look out towards FY ’15 and ’16 in terms of seasonality or changes to the model that you could kind of point us towards? Thanks. Mark Garrett : Not really as we move forward now this frankly gets easier for me, it gets easier for you as well to model out I mean the percent of ratable revenue going into quarter is only going to increase with perpetual coming out. You don’t need to worry about the decline of perpetual in any given quarter. We really do think now that Q3 could be the low point from a revenue perspective. I mean one little caveat would be if for some reason we sold unusual amount of AEM perpetual in any given quarter, so you will see Q4 revenue go up from Q3 due to seasonality, particularly around AEM. And then you have that seasonality come out in the first quarter, but we really think that Q3 could be the low point here. Again, with the little caveat around AEM, but for the most part, this gets much easier to forecast. Robert Breza - Sterne Agee : Perfect. Thank you very much. Shantanu Narayen - President and Chief Executive Officer : Well, thanks again all of you for joining us. It feels like we are executing really well against our strategy. We had strong first half financial results and with upside in both Digital Media subscriptions as well as ARR. And in Digital Marketing also we feel good with strong year-over-year revenue as well as bookings growth. And as you saw the earnings upside has accompanied revenue upside demonstrating the leverage of our financial model. We look at Q2 as a significant milestone for the Creative Cloud business as we eliminated most of the options to license CS6. So, both Adobe, our customers as well as our partners can now focus solely on driving more Creative Cloud adoption. And most important, I think we continue to innovate with successful product launches of our marketing products that we unveiled at the U.S. and Europe summit events. And hopefully all of you will tune in to the global Creative Cloud launch scheduled for tomorrow that should lead to a strong second half. Thank you joining us. We think Adobe is in great shape. Mike Saviage - Vice President, Investor Relations : And this concludes our call. Thanks for joining us today.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,014	3	2014Q3	2014Q3	2014-09-16	1.263	1.257	1.841	1.932	null	38.56	34.84	Executives: Mike Saviage – Vice President of Investor Relations Shantanu Narayen – President and Chief Executive Officer Mark Garrett – EVP and Chief Financial Officer Analysts : Ross Macmillan – RBC Capital Markets Brent Thill – UBS Brendan Barnicle – Pacific Crest Securities Walter H. Pritchard – Citibank Kirk Materne – Evercore Partners Kash Rangan – Bank of America Merrill Lynch Jennifer Lowe – Morgan Stanley Heather Bellini – Goldman Sachs & Co. Mark Moerdler – Sanford C. Bernstein & Co., LLC Robert P. Breza – Sterne, Agee & Leach, Inc. Samad Samana – Friedman, Billings, Ramsey, & Co., Inc. Steve Ashley – Robert W. Baird Operator : Welcome to the Adobe Systems Q3 Fiscal Year 2014 Earnings Call. I’d like to turn the call over to Mr. Mike Saviage, VP of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s third quarter fiscal year 2014 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We’ve also posted PDFs of our earnings call prepared remarks and slides, our financial targets and an updated investor datasheet on Adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans, is based on information as of today, September 16th, 2014, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our financial targets document and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike, and good afternoon. Adobe’s strong performance continued in Q3. We achieved $1.005 billion in revenue, with non-GAAP earnings per share of $0.28. Adoption of Creative Cloud, Adobe Marketing Cloud, and Document Services was robust, demonstrating continued momentum across our businesses. In Digital Media, we continued to deliver new innovation and enhanced value for our customers spanning our Creative and Document Services businesses. In June we unveiled a major update to Creative Cloud with 14 new versions of our desktop applications and four new mobile apps, and we announced the Creative SDK for mobile devices. We added new offerings for enterprises, educational institutions and photographers. With the pace of innovation accelerating with Creative Cloud, adoption from existing as well as new customers has been outstanding. We exited Q3 with $1.4 billion of Creative Annualized Recurring Revenue, or ARR, which now includes more than 2.8 million Creative Cloud subscriptions and reflects a record increase of more than 500,000 from the prior quarter. To capitalize on the large opportunity with Creative Cloud, we remain focused on three growth initiatives. First, we are aggressively converting the large installed base of CS customers to Creative Cloud. This transition is going well as CS customers realize the significant value they obtain when they migrate. We are driving this conversion with individuals through trials and promotional pricing on Adobe.com, and moving enterprises and teams to Creative Cloud through direct sales and the channel. Second, we are expanding the market opportunity through acquiring new customers with tailored offerings such as Creative Cloud for photographers. The potential market for creative expression has never been greater, with the desire to use creative tools at work, at home and at school. While Adobe remains dedicated to meeting the needs of the creative professional, we see big opportunities ahead with a broader array of workers, students and consumers – and you will continue to see new targeted offerings for these audiences. And third, we will significantly expand the definition of Creative Cloud with mission critical and valuable services such as mobile apps built on our SDK, training, a marketplace for content, and talent search and acquisition. This focus will expand the Creative Cloud market opportunity and revenue potential beyond our current subscription offerings. MAX has become the community’s showcase for creative inspiration and innovation, and we are excited about what we will be able to announce and deliver in October, particularly in the area of mobile, which represents a big opportunity for our customers and for Adobe. In Document Services, we achieved strong revenue of $208 million in Q3. Our Document Services business spans Acrobat ETLAs, cloud-based Acrobat services and Echosign. Document Services ARR grew to $217 million exiting Q3. PDF and Acrobat are de facto standards for document collaboration and workflows, and mobile represents huge potential to increase usage of our document creation, sharing, and signing services. We have permission to expand our footprint and brand in these areas, and are excited about the product roadmap which will position our document solutions as must haves now and in the future. Across our Creative and Document Services businesses, total Digital Media ARR grew to $1.62 billion at the end of Q3. Digital marketing is an explosive category that is fundamentally transforming every business. In order to enable the personalized experience that every consumer expects, companies need to invest significantly in a modern technology platform. This revolution is beginning in marketing, but is extending to include the entire real-time enterprise. We are the leader in this category. We achieved strong Adobe Marketing Cloud bookings in Q3, and have a healthy pipeline heading into Q4. The volume and size of engagements with our customers is growing. In Q3, the number of customers with annual contract value of greater than $500,000 grew by more than 40% year-over-year. Examples of marketing-cloud customers wins in the quarter included Adidas, Biogen, British Sky, Ford Motor, H&M, Lloyds Bank, Nestle, The State of Illinois, The State of Utah, Tiffany, Travelocity, The U.S. Department of Treasury, The U.S. Marine Corp, DSV in Germany and Motorola in the UK. Our value proposition is clearly resonating with marketers, driven by the market share and thought leadership that we have built in the category. Interest in our solutions is high, as evidenced by sold-out conferences across the globe. In addition, we are earning strong industry analyst recognition for our Adobe Marketing Cloud solutions. Forrester recognized Adobe as a Strong Performer and best positioned in their Digital Experience Delivery Platforms report. Gartner named Adobe a Leader in their 2014 Magic Quadrant for Mobile App Development Platforms, highlighting the capabilities of Adobe Experience Manager, PhoneGap and Digital Publishing Suite. And Forrester named Adobe Campaign a Leader in their Cross Channel Campaign Management 2014 Wave report. This recognition and our leadership in the Digital Marketing industry is helping to build an even stronger partner ecosystem with software companies, agencies and systems integrators. Recent partnerships include : A global reseller agreement where SAP will resell Adobe Marketing Cloud with their HANA platform and hybris Commerce Suite. The relationship has progressed well since the announcement in March. A strategic partnership with The Publicis Groupe to deliver the first end-to-end marketing management platform automating all components of a client’s marketing efforts. All Publicis agencies will standardize on Adobe Marketing Cloud, making this our most comprehensive agency partnership to date and a partnership with Wipro, a leader in global IT, consulting and business process services, which is creating a new business unit to deliver integrated marketing, commerce, analytics and customer experience solutions. In summary, Adobe demonstrated strong execution across our business in Q3. Our Creative Cloud user base continues to grow as we offer an ever-expanding stream of new Creative solutions and tailored customer offerings. Adobe Marketing Cloud had another strong quarter, and is outpacing the market from a solution, partner and customer perspective. Content and data have never been more important. And Adobe is the leader in both. We have become the trusted content and data partner for the world’s biggest brands, media companies, governments and educational institutions. We have a strong tailwind moving into Q4 and are excited about the opportunities ahead. We hope to see many of you at our MAX conference. Mark. Mark Garrett : In the third quarter of FY2014, Adobe achieved revenue of $1 billion 5 million dollars (1.005 billion), within our targeted range. GAAP diluted earnings per share in Q3 were $0.09 and non-GAAP diluted earnings per share were $0.28. Looking at highlights in our third quarter, those that stand out include : Driving strong adoption of Creative Cloud; growing Adobe Marketing Cloud bookings well ahead of our target, managing expenses to deliver up-side on earnings per share, achieving record deferred revenue, and generating a substantial increase in recurring revenue; we exited Q3 with 63% of our revenue as recurring. In Digital Media we achieved revenue of $621 million. This segment has two major components of revenue : our Creative family of products and our Document Services products. In our Creative business, adoption of Creative Cloud accelerated quarter-over-quarter while reported revenue declined sequentially as expected due to Q2 being the last quarter of any meaningful perpetual CS6 revenue. We exited Q3 with 2 million 810 thousand Creative Cloud individual and team subscriptions. Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections. Across all active subscriptions, average revenue per user, or ARPU, in each Creative Cloud offering was consistent with Q2. Given continued adoption of the Photography offering and seasonal Educational strength which are adding new customers, total Creative Cloud ARPU exiting Q3 decreased slightly. Our success with subscriptions, Enterprise Term License Agreements or ETLAs, and Digital Publishing Suite adoption helped to drive Creative ARR to a total of $1.4 billion exiting Q3 at constant currency from December of 2013, an increase of $209 million quarter-over-quarter. Our strategy with segmented Creative Cloud offerings is to target existing customers across all user categories as well as attract new customers to the platform. Overall, we are seeing strength in migrating the installed base, as well as expanding our market with new user adoption. Adobe’s direct sales force continues to migrate enterprise customers with new ETLAs, and we have a strong pipeline going into the end of the year. Creative Cloud for Team units grew sequentially on both Adobe.com and through the channel. Subscriptions through the channel were below our expectations in Q3 as resellers came off a strong final push with CS6 in Q2. We expect subscriptions and the associated ARR will gain momentum as the channel now focuses exclusively on Creative Cloud. Q3 adoption of the full Creative Cloud offering in the Creative Professional segment was consistent with our performance in Q2. Our Photoshop/Lightroom offering, which was re-branded as the Creative Cloud Photography Program in June, continues to drive new customer adoption as well as migrate those who historically licensed Photoshop Elements and Photoshop Lightroom. In Document Services, we achieved revenue of $208 million in Q3. Our momentum in this category is being driven by continued adoption of Acrobat – including several large contracts which closed during the quarter. Adoption of Acrobat ETLAs, Acrobat cloud services and EchoSign grew Document Services ARR to $217 million exiting Q3. In our Digital Marketing segment, there are two components. The first is revenue from our Adobe Marketing Cloud offering, and our momentum as the leader in this market continued. We achieved revenue of $290 million in Q3. More importantly, we continued to drive strong year-over-year bookings growth that puts us ahead of our goal for the year. Our success is being driven by an increase in size of transactions, number of solutions per customer, international expansion and growth in partner-driven business. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $47 million in Q3 revenue and was consistent with our expectations. Print and Publishing segment revenue was $47 million in Q3. Geographically, we experienced stable demand across our major geographies. Asia as a percent of total revenue was low given Creative Cloud adoption in Japan has been slower than other geographies. With the removal of perpetual licensing from the channel in Japan, we are confident the transition towards Creative Cloud will begin to accelerate. From a quarter-over-quarter currency perspective, FX had no meaningful impact on revenue. We had $1.1 million in hedge gains in Q3 FY2014, versus $2.6 million in hedge gains in Q2 FY2014; thus the net sequential currency decrease to revenue was $1.5 million. From a year-over-year currency perspective, FX increased revenue by $7.1 million. Comparing the $1.1 million in hedge gains in Q3 FY2014 to the $10.5 million in hedge gains in Q3 FY2013, the net year-over-year currency decrease to revenue considering hedging gains was $2.3 million. In Q3, Adobe’s effective tax rate was 29% on a GAAP basis, and 21% on a non-GAAP basis. The GAAP rate was higher than targeted primarily due to stronger-than-forecasted profits in the U.S. Employees at the end of Q3 totaled 12,368 versus 12,026 at the end of last quarter. Our trade DSO was 48 days, which compares to 48 days in the year-ago quarter, and 45 days last quarter. Cash flow from operations was $269 million in the quarter. And our ending cash and short-term investment position was $3.52 billion, compared to $3.33 billion at the end of Q2. In Q3, 2014, we repurchased approximately 1.9 million shares at a cost of $133 million. Now, I would like to go over our financial outlook. We are targeting a revenue range of $1.025 billion to $1.075 billion in our fourth quarter of fiscal 2014. In Q4 we expect Digital Media segment revenue to grow sequentially – with Document Services revenue relatively consistent with the strong revenue we achieved in Q3. We expect Creative ARR and Document Services ARR to grow sequentially. We expect net new Creative Cloud subscriptions to grow on a sequential basis and slightly exceed the approximately 1 million net new subscriptions we targeted in the second half of FY2014. We continue to expect we will achieve total Digital Media ARR of approximately $1.925 billion exiting the year. We are targeting Q4 Adobe Marketing Cloud revenue to grow slightly on a year-over-year basis. As you think about Adobe Marketing Cloud revenue, it is important to understand we are seeing increased customer adoption of our term-based Adobe Experience Manager and Adobe Campaign solutions. This is resulting in larger customer engagements, more predictable revenue as well as higher long-term revenue growth. In FY2013, approximately 45% of these Marketing Cloud bookings were term-based. Entering FY2014, we anticipated a move towards a mix of approximately 60% term-based bookings in FY2014 for AEM and Campaign. With the acceleration of term-based adoption in FY2014, we anticipate achieving approximately 75% term-based bookings this year. As a result of the faster transition, we estimate approximately $60 million of revenue that would have been recognized in FY2014 will have shifted from perpetual AEM and Campaign licensing to term-based contracts during the year. Adding the Q3 portion back to our results this quarter would have driven total Adobe revenue to the high-end of our targeted revenue range, and Adobe Marketing Cloud would have achieved greater than 20% year-over-year revenue growth in Q3. Adding back the estimated Q4 impact, the high-end of our targeted Q4 revenue range would have been $1.1 billion. And adding back the $60 million full-year impact, Adobe Marketing Cloud FY2014 year-over-year revenue growth would have been greater than our annual target of 20%. We highlighted at the outset of the year our goal of driving at least 25% revenue CAGR for Adobe Marketing Cloud revenue between FY2014 and FY2016 – and we’re on pace to achieve this. We expect combined revenue with LiveCycle and Connect to decline sequentially; and we are targeting Print and Publishing segment revenue to be relatively flat. We are targeting our Q4 share count to be 508 million to 510 million shares. We are targeting net non-operating expense to be between $12 million and $14 million on both a GAAP and non-GAAP basis. We are targeting a Q4 tax rate of 28% to 29% on a GAAP and 21% on a non-GAAP basis. These targets yield a Q4 GAAP earnings per share range of $0.05 to $0.11 per share, and a Q4 non-GAAP earnings per share range of $0.26 to $0.32. Mike. Mike Saviage : Adobe MAX is coming up in a few weeks, with the opening day keynote on the morning of Monday October 6th. As we previously announced, we will host a Financial Analyst briefing that afternoon beginning at 3 pm Pacific Time. The MAX keynote, as well as our meeting with the financial community, will be webcast with the financial analyst briefing ending by approximately 5 pm Pacific Time. If you still want to sign up to attend MAX, please contact Adobe Investor Relations. For those who wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 95884752. Again, the number is 855-859-2056 with ID number 95884752. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today, and ending at 4 pm Pacific Time on Friday September 19th, 2014. We would now be happy to take your questions. Operator. Operator : (Operator Instruction) Your first question comes from the line of Ross Macmillan from RBC Capital Markets. Your line is open. Ross Macmillan – RBC Capital Markets : Thanks very much. Mark, the question on the mix between the full Creative Cloud and the point products this quarter I think maybe some of us thought we might see that return to a higher mix of full Creative Cloud because of the rundown of inventory of the Creative Suite from the channel. Obviously, there was some mix difference there perhaps it’s explained by education strength and so forth. What is your expectation for that mix going forward and also for the blended ARPU as we think about Q4 and beyond? Thanks. Mark Garrett : Yes, Hi Ross, like we said on the prepared remarks we feel really good about the quarter, we drove 500,000 units this a Q3 for us which is a seasonally more difficult quarter and we felt very good about how we did. We do believe there is tremendous upside in the channel. In the second quarter you saw the channel was primarily focused on kind of the last hurrah of perpetual revenue with CS6 if you will, this is the first quarter they had to sell exclusively the subscription product and we think there is a tremendous ramp that we are going to see from them contributing to that mix moving forward. Education as you know is strong in Q3 as well we had a good education quarter. And the bundle continues to attract new customers. So we are really happy with how it’s progressing. We do think that the channel will be able to contribute more moving forward and that’s going to help that mix and it’s also going to add to ARPU over time. Shantanu Narayen : And Ross maybe if I were to add two other quick things when we think about excluding the PSLR bundle as well as education units, ARPU across the individual team single application as well as the complete CC in all the markets was relatively consistent in fact it increased slightly again. So we feel good about how that performance is happening. And in general you have to also go back to the Creative Suite mix that we had, single application was even in that particular business about 40%. We realize that’s an on ramp that’s accretive to overall ARR as Mark also mentioned with photography bundle. So pleased with how the quarter performed. Ross Macmillan – RBC Capital Markets : That’s great. Maybe just one quick follow-up I know that you’re seeing better retention rates than your initial 80% assumption. Will we get to a point in the near future where we might actually talk about what sort of percentage retention you’re seeing? Thank you. Shantanu Narayen : Well, Ross, we told you approximately 80% we’re ahead of that as we talk about in our retention rate. So we think that gives you the right color to understand that the business is very healthy. I mean other way we look at it is when you think about the number of units that we’ve transacted with 2.8 million subscriptions as well as what we’re doing with the enterprise ETLA that’s already ahead of what we were doing steady state with Creative Suite. And we continue to think there is headroom both in terms of migrating existing customers as well as attracting new customers. So that should also give you a good sense of how healthy the business is. Ross Macmillan – RBC Capital Markets : That’s helpful. Thank you very much for taking my question. Mark Garrett : Let’s take the next question, and let’s try to limit to one just so we can fit everybody in. Thanks. Operator : Your next question comes from the line of Brent Thill from UBS. Your line is open. Brent Thill – UBS: Thanks, good afternoon. Mark just on the Q4 guidance, you are guiding below the Street, I just want to be clear that’s largely a transition to the term versus perpetual? Mark Garrett : Yes, Brent. So as I pointed out upfront. In the Adobe Marketing Cloud we’re seeing a much faster move to term based managed services solutions for AM and Campaign. We went into the year assuming about 60% term based mix. And we’re going to end more around 75% and that delta that $60 million delta for the year is what’s really driving the difference. If you look at the fourth quarter as I said we would have been closer to $1.1 billion at the high-end of our range had we not gone through a faster shift of this AM and Campaign from perpetual to term based. Brent Thill – UBS: Okay, just a quick follow-on. And as you mentioned the Marketing Cloud bookings were well ahead of target I know you don’t give out a booking number. But can you perhaps just give us some color as it relates to what you’ve seen in the last couple of quarters relative to your booking target if you significantly seen or any other color you could help us to frame that that would be helpful. Thanks. Shantanu Narayen : Brent, maybe I can jump in there I mean we had talked about getting 30% bookings which would drive 25% CAGR over three years. And as Mark mentioned in his prepared remarks we’re seeing significant strength above that particular target and maybe big picture is better to explain that. It’s really in our best interest to manage and deliver the entire customer marketing platform. And what that is resulting in is we’re seeing multi-year deployments. It’s increasing the revenue per customer, we gave you some color on what we are seeing of deals greater than 500,000 that grew over 40%. What we’re also seeing is more solutions within existing customers, which is driving stickiness. And so I think this transition to the platform the multi-solution, multi-year sale has really gone faster than expected, which hopefully is good news if you want better and more predictable revenue. And that’s why we also provided you with some way to model it with what happen with AEM and Campaign for 2014. Mark Garrett : And then just to add on to that one more time, what that does Brent as you know, is it helps drive deferred revenue, we had a record deferred revenue quarter. It also helps drive the unbilled backlog, which we disclosed at the end of the year. And between the two of them now we’ve got roughly $2 billion of contracted business waiting to be recognized in the form of revenue. So it just makes for a much healthier business over all. Brent Thill – UBS: Great, thanks. Operator : Your next question comes from the line of Brendan Barnicle from Pacific Crest Securities. Your line is open. Brendan Barnicle – Pacific Crest Securities : Thanks you so much. Shantanu, I was interested in where you might be seeing some of the cross sell around both the Creative Cloud and the Marketing Cloud. And you’ve highlighted that at some of the conferences. Can you give us any more color on where we are in that migration and maybe a sense of – maybe what percent of the installed base is even looking at using both of those and leveraging both of each other. Thank you. Shantanu Narayen : Sure. I mean I think when we look at what’s happening with our enterprise sales force and the sales force that is selling both the Creative Cloud as well as the Marketing Cloud into enterprises through either ETLAs, the Document Services ETLAs as well as Marketing Cloud bookings. That’s where Matt and his team are driving multiple billions of dollars in terms of what we have been able to sell. Some customer examples there include publishing, they want to single asset repository and workflow to create content once and repurpose that across web and mobile applications and video, which is fast becoming one of the key things for every publisher to do online, so publishing is a good industry. In retail, you’re seeing more and more of the innovative customers want to completely accelerate their time to market by having the design for these goods directly delivered through this workflow all the way out to manufacturing as well as for the consumer to have the ability to actually create personalized goods directly on a retail website. And video, I think when you talk about creation, delivery and add insertion. So hopefully that gives you some examples, but it’s driving more strategic relationships with customers across all of these industries. Brendan Barnicle – Pacific Crest Securities : Okay, thank you. Operator : Your next question comes from the line of Walter Pritchard from Citibank. Your line is open. Walter H. Pritchard – Citibank: Just one question Mark around pricing, you’ve been in the market now for quite a while with the individual addition and you haven’t talked about what percentage of your customers have gone past the one year anniversary and have had pricing go up. But can you talk about maybe an ARPU on that segment or something that would give us an idea of how many of those customers or what progress you’re seeing in terms of this exploration of the promo and the uplift in ARPU that that would drive? Mark Garrett : Well, I mean, generally speaking like Shantanu mentioned and I think I mentioned across each of the offerings, the ARPU has either remain constant or actually increased. And from the retention perspective, we’re seeing very good retention with people renewing even after the promo expires. So, as that happens of course it does drive ARPU up. Shantanu Narayen : And Walter if you go to the website and you look at the pricing for the various offerings, I think you would recognize that the individual complete is about 49.99 and you’ve been look at the promotional pricing at about 29 and for team you know the complete pricing is 69.99 and promotional pricing could be 39 or 49. So, I think that gives you some sense of what you’re seeing in terms of as people migrate off the promotional pricing what kind of ARPUs we are getting from those customers. Walter H. Pritchard – Citibank: Okay, thank you. Operator : Your next question comes from the line of Kirk Materne from Evercore. Your line is open. Kirk Materne – Evercore Partners : Yes, thanks very much. Mark you mentioned that the channel had a little bit of a slower start to the third quarter given that they shifted away from the license based product. I guess in your guidance for the fourth quarter. I guess how much will you counting on that bounce back to meet your subscription as well as your ARR targets for the quarter? Or do you expect it to sort of maintain itself the way it was in 2Q that’s up side if you get lift on that? Mark Garrett : We’re expecting it to move up, I mean, we’re not expecting a huge ramp, but we are expecting it to a move up from here given that they are done with the perpetual and frankly there solely focused on selling subscription now. Shantanu Narayen : The other thing I might add, is if you look at the traditional Q3 to Q4 transition and you go back and look at what happened last year. The two things that drive it, first is seasonal strength, the second is enterprise ETLAs, Q4 tends to be the strong quarter for that. And so you should factor that and also as you think about how we go from Q3 ARR to adding Q4 ARR. Kirk Materne – Evercore Partners : Thanks. If I can just add really quick follow-up to Mark’s comment on the deferred being just around this quarter. Obviously, I am sure that the transition of term deals and Marketing Cloud played a part in that. Was there anything else in terms of billing, how you are billing some of your customers that quite a part that you expect to continue to go forward? Thanks. Mark Garrett : Yes, I mean there is two big pieces really at Digital Marketing Cloud and then it’s the Creative Cloud as well as, it’s the ETLAs around Creative Cloud as well. ETLAs are build and advanced for the first year and that goes into deferred and then years two and three would show up in that unbilled backlog number that are referenced. So it’s really both businesses that are driving the deferred revenue as well as the unbilled backlog. Kirk Materne – Evercore Partners : Thanks. Operator : Your next question comes from the line of Kash Rangan from Merrill Lynch. Your line is open. Kash Rangan – Bank of America Merrill Lynch : Hi, thank you for taking my question. I’m just wondering if you could talk about the percentage of business from term based bookings and Marketing Cloud that has obviously caught you by surprise. Why would you not just take the step of making all the business completely right about and if you were do it I am wondering what might be a rough way to think about impact your revenue maybe if you could talk about a 10 percentage point shift in term based bookings might be X million of dollars from revenue, so we will not be at all and absolutely surprised by any development in the future. And also curious we can comment on at the time I think Shantanu likes to mention reiterate that the goal of the company is to do out to the entire installed base. At this base that which we add something looks like you could transition entire large installed base about four years to five year or so. Question is we anticipate that adding more capacity so you could even add more units than what you are doing now to enable this transition to happening with book? Thank you. Shantanu Narayen : So Kash there were multiple questions in that let me address sort of that question associated with the term based as well as the perpetual from an offering point of view. There is certainly still a number of customer and we think it’s a competitive advantage for us that want to have the AEM solution the experience managers as well as the campaign solution On-Premise. I mean you can think about government agencies and other agencies who want to actually managed themselves, which is why we can’t completely transition from the perpetual offering to the Managed Services, which we definitely think is the right long-term solution. If you look at the trend as Mark pointed out it’s moved from 45% to close to 75%. So I think it’s now becoming less and less and as Digital Marketing revenue grows the impact of this is certainly going to be muted. So, I think that should give you comfort as it relates to the marketing cloud, bookings and revenue on that transition. Mark Garrett : Yes, Shantanu said exactly what I was going to say the 75%, this is the reason we wanted to tell you the 75%, because it shows that we are pretty much through this is a very quick transition the good news is it really happened much faster in the back half of the year, then we’ve got with only 25% left to go and the business in total growing, as Shantanu said it’s not going to have a material impact next year. Shantanu Narayen : With respect to a second question cash Q3 was first $500,000 subscription quarter for Creative Cloud it was a couple of half million Q3, it was a strong quarter. And so I mean as we look at what’s happening in the business we have both migrating existing customers, but we continue to add a healthy dose of new customers to the platform. So the strategy that we outline namely getting new customers to the platform as well as migrating continues with CS6 perpetual being strong in the last couple of quarters all of them represent available opportunity or headroom for us to move over to the cloud. As do some of the countries, where we outlined that the adoption has been slightly slower. So, we’re going to be focused on driving that MAX is going to be another catalyst in terms of how far to the Creative Cloud offering distances itself from the Creative Suite offering. So, we have to continue to innovate, we’re focused only on the Creative Cloud as an offering in; there is still significant headroom opportunity. Mark Garrett : Next question. Operator : Your next question comes from the line of Jennifer Lowe from Morgan Stanley. Your line is open. Jennifer Lowe – Morgan Stanley : Great, thank you. Shantanu in your remarks, you mentioned that there was thought of having more targeted offerings against the photography SKUs fees especially given success you had this I guess two questions related to that. One as you think about how those targeted SKUs fit into the traditional point versus suite, strategy, what in terms of breakpoints around packaging and pricing to go after specific use cases versus maintaining the premium ASP traditionally associated with suite is it a situation where we can see a whole spectrum of offerings or are you still working along the lines of point versus suite with a relatively big gap in between. And then related to that in terms of the time horizon that we should think about for intakes of targeted offerings is that something that will give more about next month at MAX or is that something that's going to be more of a multiyear strategy for you? Shantanu Narayen : Jennifer, when I think that overall the Creative Cloud offerings in the fact that the complete offering as still we think the best solution for a Creative professional, who wants to create content for multiple kinds of media. We still believe that that’s are really the right offering. Photography has always been even with the traditional Creative Suite, such a large opportunity that having the photography bundle was the right way to go target that. Part of what we are alluding to is new ARPU enhancing services that we will start to introduced and that could be to the entire Creative Cloud customer base and you will start to see some of that starting at MAX. And some of them might be even more market expansion opportunities as it relates to what consumers are trying to do and you’ve seen us introduce mobile offering. So I think for the core Creative professional, I think we have it right and I think we have to continue to innovative and migrating existing customers, but I think you’re going to start to see us implement against the things we’ve talked about the mobile SDK leading to new ARPU enhancing services for the entire base. Jennifer Lowe – Morgan Stanley : Okay. Thank you. Operator : Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open. Heather Bellini – Goldman Sachs & Co.: Great, thank you. I was wondering just if you could walk us through we’ve heard a lot about how agencies are evolving their Digital Marketing strategies and trying to figure out how to build or whether to buy some of the ad tech that they think they need to serve their clients better, I’m just wondering how you see kind of the landscape evolving on that front and how you feel Adobe, how you position Adobe in that context? Mark Garrett : For Heather, first I think it’s a good opportunity to reiterate that global agreement that we announced with Publicis Groupe. From my point of view Digital Marketing agencies have always been working with their key clients, Chief Marketing Officers, Chief Revenue Officers, Chief Digital Officers to demonstrate a digital strategy for media buying as well as a Creative strategy. I think the Creative strategy need continuous unawaited and I think all digital agencies have to continue to provide that Creative strategy and now augmented with what they’re doing on the technology side to enable people to truly understand the return of investment. And move the marketing spend from just being analog to more digital. And I think again if you saw the announcement around what Publicis announced today, Digital certainly becomes a more important part of any agency’s strategy. I think what they are also seeing honestly is that systems integrators are seeing the marketing automation is a huge untapped market and so I think they’re going to see competition as it relates to the traditional systems integrators, companies like Deloitte or PWC also enter that market. And from our point of view is a technology provider none of these relationships are competitive they’re all using our technology to go implement and automate marketing flows within all traditional industries. To give you some color, relationship with Publicis allows them to use our technology to do automated search spin or social spin or display using our technology it allows the company like Razorfish that’s part of the Publicis Groupe to go ahead and implement re-platforming associated with websites, it also allows them honestly to now with our audience manager solution have a way to segment both the online and offline customers, which is a big part of how they want to target their offering. So, we’re excited about that and where its agencies or SIs expect to see more people want to partner with Adobe. Heather Bellini – Goldman Sachs & Co.: Great, thank you. Operator : Your next question comes from the line of Mark Moerdler from Sanford Bernstein. Your line is open. Mark Moerdler – Sanford C. Bernstein & Co., LLC: Thank you very much. I would like to have Mark fill a little more on the $16 million. Should we be thinking of this move to 75% being term agreements does it simply mean that we get the license revenue is ratably recognized over the contract term where is there a revenue lift during the first contractor. So, obviously that’s a lift after the first contract. And then a quick follow-up on that? Mark Garrett : Hey, Mark, yes, its $60 million just to make sure everybody heard that right 60, and it’s recognized ratably over the contract term for the most part. So, it is spread out typically their multiyear deals and its spread out over that multiyear period. Mark Moerdler – Sanford C. Bernstein & Co., LLC: But this is not – it’s not a move in the first contract term it’s not more revenue and just ratably recognized and then potentially is more revenue for second contract? Mark Garrett : Correct. Mark Moerdler – Sanford C. Bernstein & Co., LLC: Okay. And then the quick follow-up to that keep you online. Are you now selling still selling the same mix of term versus perpetual in this space are you now basically the predominantly selling the term and agreements? Mark Garrett : Yes, by far we’re now predominately selling the term agreement. So the 75% that will end the year at, like I said, only reads 25% of perpetual. So it’s not going to be material shift in any given quarter moving forward now. Mark Moerdler – Sanford C. Bernstein & Co., LLC: Okay, thank you. Operator : Your next question comes from the line of Derric Wood from Susquehanna. Your line is open. J.Derric Wood, CFA –: You guys talked about Japan being a little weaker than expected, I guess how do you weigh the impact potentially coming from the macro versus the impact coming from kind of the shifting channel focus around Creative Cloud. And then how does that kind of baked into your expectations for Japan next quarter and looking your pipeline and sub add contribution? Susquehanna Financial Group, LLP: You guys talked about Japan being a little weaker than expected, I guess how do you weigh the impact potentially coming from the macro versus the impact coming from kind of the shifting channel focus around Creative Cloud. And then how does that kind of baked into your expectations for Japan next quarter and looking your pipeline and sub add contribution? Shantanu Narayen : For my point of view I think Japan continues to be large untapped opportunity for Creative Cloud. It’s been a traditional strength for us with the Creative products when we had the Creative Suite offering. I think was a little bit about that geography is the large dependency on our retail in that and we had the retail product in Q2, we see early adapters and we think there is untapped opportunity associated with the Japanese market. So nothing changes our long term view and it’s not a demand issue. Mark Moerdler – Sanford C. Bernstein & Co., LLC: Thank you Operator : Your next question comes from the line of Robert Breza from Sterne Agee. Your line is open. Robert P. Breza – Sterne, Agee & Leach, Inc.: Hi and thanks for taking my question. Just wanted to touch back onto the $6 million market, So if you think about the remaining 25% do you think that’s a – how should we think about that transition, I know you are saying it shouldn’t be a big part, but do you think that moves to 80% by the end of FY2015 or how do you think that this trends longer term? Mark Garrett : I think that the 75 continue to group up a little bit I think we will get a point where it stops frankly and we are getting close to that. It’s a little hard to say exactly where, but yes I could see it going up to 80, 20 or something like that over the course of next year. it going to depend in any given quarter on how the booking come in and who the customer are, Shantanu said certain customers want the perpetual version, but I don’t think it’s going to get the point where it moves the needle in term of our total company revenue like it has back half of this year. Robert P. Breza – Sterne, Agee & Leach, Inc.: Okay maybe as a quick follow, given the strong deferred revenue number that you guys did put up. I mean it’s hard to quantify certainly what growth that - part of that being more of this $60 million to a term based fees or overall strength of the demanded, just qualitative commentary would be helpful? Thanks. Mark Garrett : Yes, that the $60 million represents multi-year contraction, so a big chunk of the – well the $60 million is the impact to this year, but the bookings that that drove will get recognized over time under a term based model and that would show up in next year’s revenue on a ratable basis, the first years would be in differed and years two and three of those booking would be in unbilled. Robert P. Breza – Sterne, Agee & Leach, Inc.: Great thank you very much. Operator : Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Jay Vleeschhouwer – Griffin Securities, Inc.: Shantanu you marked other than highlighting the momentum you are seeing for EM and for campaign, could you talk otherwise in term of what you are seeing for the other components of marketing class specifically to a example maybe optimizer which you have highlighted in the past as particularly strong new product for you and perhaps update us as well on the number of solution that customer are thinking on the average. I believe the last time you updated that was six months ago at Salt Lake where it was 1.4 solutions to the customer, an update in that respect and then I could follow-up? Shantanu Narayen : Yes, Sure Jay I mean in term of the solutions what we were trying to do was highlight the key differentiation that we had. And the differentiation is still very much the combination of experience manager plus analytics. Campaign has been doing really well, after the acquisition of Campaign it’s got really good analyst reviews as well as customer adoption. So Campaign is off to a solid start. Media Optimizer the amount of marketing spend on the management continues to grow, I would say target has been doing really well, we’ve seen significant growth year-over-year as the ability to offer personalized solutions really increases. And so when I look at it – the way we look at that business as both new sales which are largely multi-solution sales as well as existing installed customer base and how we can continue to sell existing customers on more and more of our solutions. And when you think about the number of large deals again as we said that grew 40% year-over-year. So, overall I think people are standardizing on our platform, the usage starts always pretty much with AEM plus analytics and now Campaign as a third leg of that. Robert P. Breza – Sterne, Agee & Leach, Inc.: Okay. And lastly for Mark, just a clarification from the earlier questions on retention or renewal rates, now that we’ve had 10 quarters at Creative Cloud behind those. Could you talk a little bit more about the cohort turn of the original class from 2012, let’s say or early 2013 in terms of their retention rates to go back eight, nine, ten quarters. How does that retention look? Mark Garrett : Yes, so Jay, we can’t kind of get into that level of detail here, but the bottom line is like I said from a retention perspective people are renewing after the promotion along the lines of what we would had expected it’s not even better than we had expected. All I’m chatting here, one thing I try to be very clear about the impact of the Digital Marketing shift from perpetual to term. I think we laid it out at the end of my prepared remarks really well. So if you any questions please refer back to that paragraph and then we can do some more follow-up phone calls, because we try to lay it out exactly as we had in the past under the Creative transition. Shantanu Narayen : Next question. Operator : Your next question comes from the line of Samad Samana from FBR Capital Markets. Your line is open. Samad Samana – Friedman, Billings, Ramsey, & Co., Inc.: Hi thanks for taking my question, I wanted to ask you about ELA that you kind of after a little bit over a year now. What has existed in upselling that in the installed base and how is the integration we put there, rest of the Marketing Cloud going for that, that’s sort of products? Shantanu Narayen : Really well. That’s the solution that we now call Adobe Campaign. Adobe Campaign had another strong quarter in Q3 pipeline looks great for Q4. And the ability to orchestrate these multiple Campaigns across the web, e-mail, SMS outside the U.S. which is pretty strong, we’re very pleased with the performance of Campaign so far. Samad Samana – Friedman, Billings, Ramsey, & Co., Inc.: And have you seen any change in the competitive environment? ExactTarget with Salesforce for a while now and their customers acquire it for renewals. Has there been any change in the competitive environment in the marketing space for you guys? Mark Garrett : Well, I think from a competitive point of view as this market continues to explode, you’re seeing everybody participating that we still think we’re the leader in the category and our solutions are most differentiated. And we continue to grow that by both expanding our footprint, so specifically as it relates to ExactTarget versus Campaign. A lot of the Campaign solutions for us right now are Greenfield opportunities as people are continuing to implement and automate their marketing processes. So we’ve been focused a lot of that. Samad Samana – Friedman, Billings, Ramsey, & Co., Inc.: Okay, thanks. Mark Garrett : Operator we’re coming up on the hour, so maybe we’ll take one more question. Operator : Your final question comes from the line of Steve Ashley from Robert Baird. Your line is open. Steve Ashley – Robert W. Baird.: Hi, thanks very much for speaking again. Hey, I just wanted to swing back to the Digital Marketing business. Again you talked about the nice increase at the number of larger deals that’s happening there since you introduced platform and I was hoping to get more color over how you’re driving that is that coming from you going back to the installed base and cross-selling multiple solutions into existing customers. Or is that also coming from new customers buying more solutions when they initially buy and where you're getting kind of traction of bundles expect? Shantanu Narayen : Steve, the short answer is actually its both, its both and its happening both through our direct salesforce and honestly its happening through partners who are increasingly recommending us as the solution of choice as they going to all of these digital transformation products. Again, I would say till two quarters ago it was largely driven by the combination of AEM and analytics. And then the cross-sell was media optimizer and social and target. Today I would say the initial sale is much more AEM plus analytics plus Campaign because that’s being very well received. And then the upsells continue to be those other solutions. In terms of industries retail continues to be really strong, automotive is strong, financial services is doing well. Government as government does digital government we’ve had a really strong presence with AEM and analytics and government as well as document security there. So, we’re seeing trend good positive trend across every industry. There isn’t a CMO in the world that I go to who is and talking about digital transformation and trying to understand how technology helps them. So I think it’s that tremendous tailwind, Steve. Steve Ashley – Robert W. Baird.: That’s really helpful. Thank you, Shantanu. Shantanu Narayen : Well, thanks for joining us, I mean, I think as I think about all of the questions I do want to reiterate what’s traditionally being a weak quarter for Adobe Q3, we really have strong performance both with subscriber additions over $0.5 million, Digital Marketing bookings that was strong as well as Document Services revenue in Q3. And as a result we’re on track to deliver the key financial commitments that we outline for the second half of the year. On the Creative Cloud it still is how do we drive customer adoption and migration to Creative Cloud. Adobe.com has been focused on this for a couple of years and now the entire channel ecosystem as well ELTAs through the enterprise we’re focused on this. In Digital Marketing I would say awareness has being growing, we continue to drive leadership with successful product launches of our marketing products. The fact that we’re seeing this shift from perpetual to term, we view that as a real positive, because people are shining these large multiyear agreements with us. On the internal side, the innovation engine is humming. We’re delivering new value with Creative Cloud, Marketing Cloud as well as Document Services. And I think the earnings upside continues to demonstrate the leverage of our financial model. We are excited about MAX and we look forward to seeing you there. Thank you for joining us. Mike Saviage : And this concludes our call. Thanks for joining us.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,014	4	2014Q4	2014Q4	2014-12-11	1.263	1.356	2.037	2.179	null	33.09	33.96	Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to the Adobe Systems Fourth Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] Thank you. I would like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's Fourth Quarter and Fiscal Year 2014 Financial Results. By now, you should have a copy of our earnings press release which crossed the wire approximately 1 hour ago. We've also posted PDFs of our earnings call prepared remarks and slides, our financial targets and an updated investor data sheet on Adobe.com. If you'd like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans, is based on information as of today, December 11, 2014, and contains forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe's SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the 2 is available on our financial targets document and in our updated investor data sheet on Adobe's Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be rerecorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : FY '14 was an outstanding year. Our achievements included better-than-expected Digital Media ARR and subscriptions, strong bookings growth for Adobe Marketing Cloud, broad industry recognition of our product leadership, and great progress in growing and deepening our customer relationships. In Q4, we delivered revenue of $1.07 billion, contributing to total revenue of $4.15 billion in FY '14. In Digital Media, Creative Cloud continued its strong performance. As of the end of Q4, Creative Cloud adoption grew by more than 644,000 to over 3.45 million subscriptions, significantly exceeding our annual target. Subscription growth was fueled by continued movement of the Creative Suite installed base to Creative Cloud as well as the addition of customers that are new to Adobe creative products. We saw strength across all our offerings : Creative Cloud Complete, Creative Cloud for teams in the channel and on Adobe.com, Creative Cloud Single App and the Creative Cloud Photography bundle. Creative Cloud innovation continues to accelerate. At MAX, we unveiled another major update to Creative Cloud, which includes significant new versions of CC desktop tools, a new family of complementary mobile apps, touch support for Microsoft Windows 8 and Surface Pro 3, and the new Creative Profile, which connects creatives to their work, assets and communities. We made significant strides in realizing our vision for Creative Cloud as much more than desktop tools. The Behance creative community continues to thrive, growing to over 4 million members. We launched a public beta of a Creative SDK that enables the delivery of third-party mobile apps that connect to Creative Cloud. This move comes on the heels of our September announcement when we acquired Aviary, a developer of mobile SDKs for the delivery of creative apps. At MAX, we launched Creative Talent Search, a service that connects creatives around the world with job opportunities. This was the first step in making Creative Cloud a true marketplace for the creative community. Today, we took another major step in expanding the marketplace with the announcement of our intention to acquire privately held Fotolia, a leading service for creatives to buy and sell photos, graphics and video. Stock content is critical for creatives and is a large and fast-growing multibillion-dollar market. Once closed, we intend to integrate Fotolia into Creative Cloud, resulting in higher ARPU and increased revenue. We also plan to continue to operate Fotolia as a standalone stock content service. Creative Cloud has become the preeminent destination for creatives, transforming how they find inspiration and deliver their best work. The Document Services business continues to grow. PDF and Acrobat remain the de facto standards for document creation and collaboration. In fact, we have more than 1 billion cumulative downloads of Reader on desktop and mobile. In FY '14, we drove strong year-over-year and sequential growth in Document Services ARR, primarily due to strength in the adoption of Acrobat ETLAs and subscriptions. We have introduced new mobile and cloud capabilities to increase usage of our document creation, sharing and EchoSign electronic signature services. We have permission to expand our footprint and extend our brand in these areas, and are excited about a major update in the first half of FY '15. Across our Creative and Document Services businesses, total Digital Media ARR grew to $1.95 billion at the end of FY '14. In Digital Marketing, we achieved record Adobe Marketing Cloud bookings in Q4 and we were well ahead of our 30% annual growth target. Reported revenue for Adobe Marketing Cloud in Q4 was $330 million. We continued to deliver significant innovation in Adobe Marketing Cloud during Q4. Mobile is a key focus area for us, and we launched new mobile functionality across Adobe Marketing Cloud in 2014. Last month, we introduced new intelligent location marketing features, allowing companies to reach their customers with targeted content based on a user's proximity to iBeacons. In October, we released cross-device targeting and personalization capabilities via Adobe AudienceManager. With these capabilities, marketers now have the tools to profile which individuals in a household are consuming content on a connected device at any given moment. In the video space, we announced the availability of Adobe Primetime Digital Rights Management across mobile apps on connected devices and via HTML5 on major web browsers. We continue to drive large-scale engagements with Adobe Marketing Cloud customers. Big deals in Q4 included Ford, FedEx, MasterCard, Morgan Stanley, QVC, Commonwealth of Pennsylvania and U.S. Department of Veterans Affairs. Adobe Experience Manager and Adobe Analytics are our unique differentiators and continue to be the foundation of our growth. Adobe Target and Adobe Media Optimizer solutions had strong results in Q4. One of the best performing solutions in Q4 was Adobe Campaign, which came from our acquisition of Neolane last year. This is another proof point of our success in integrating acquisitions to effectively expand our offerings to customers. Adobe Primetime, which brings TV to every IP-connected screen, is gaining traction among both programmers and operators in the fast-growing online video market. In October, we announced an alliance with Nielsen to deliver the industry's first comprehensive, cross-platform system for measuring online TV, video and other digital content across the web and apps. Both companies will jointly market Nielsen's Digital Content Ratings, Powered by Adobe, which will give customers comparable metrics to measure audiences accurately and consistently across every major IP device, including desktops, smartphones, tablets, game consoles and over-the-top boxes. The Nielsen alliance builds on other Adobe Marketing Cloud strategic partnerships announced earlier this year, including our relationship with advertising giant Publicis. With over 30 trillion data transactions measured annually by Adobe Marketing Cloud, we're in a unique position to predict and report on major retail and consumer trends. Through our Adobe Digital Index report, we recently tracked Black Friday and Cyber Monday online sales. Our prediction came within 1% of the nearly $6.4 billion spent online, and 22% year-over-year growth versus 2013. Another interesting statistic was that over 1/4 of Thanksgiving Day and Black Friday online sales were transacted on a mobile device. Press coverage of our holiday reports was extensive across online, print and broadcast channels. Adobe Marketing Cloud continued to be recognized as the leader in numerous industry analyst reports. This quarter, new recognition includes : we were named the leader in the first-ever Forrester Wave report, evaluating the most significant marketing cloud vendors. Adobe Marketing Cloud was positioned highest in current offering, strategy and market presence; and Adobe Experience Manager was recognized as a leader in the 2014 Gartner Magic Quadrant for Web Content Management report. Adobe was positioned highest in ability to execute and placed strongly in completeness of vision. Our strong results in 2014 represent the collective efforts of our employees around the world. Creative Cloud has become the preeminent destination for millions of creatives, and we are delivering more value every day. The Fotolia acquisition gives us yet another opportunity to grow Creative Cloud revenue and tighten our bond with the creative community. Adobe Marketing Cloud continues to lead in the fast-growing digital marketing category and we're seeing strong partner and customer momentum. And we're shaping new opportunities for our Document Services business. All of this positions us well for another strong year in 2015. Mark? Mark Garrett : Our earnings report today covers both Q4 and fiscal year 2014 results. In FY '14, Adobe achieved annual revenue of $4,147,000,000. GAAP EPS was $0.50 and non-GAAP EPS was $1.29. All of these results were well ahead of the annual targets we provided entering the year. These numbers are a result of strong execution against our strategy, and from some noteworthy achievements during the year. In FY '14, we reported Digital Media segment revenue of $2.6 billion, ahead of our target of $2.5 billion that we communicated last December. More importantly, we built Digital Media ARR to a total of $1.95 billion exiting the year, which was nearly $100 million higher than the annual target we provided last year. Helping to drive this was 3.45 million Creative Cloud subscriptions exiting the year, more than 400,000 higher than the target we provided a year ago. In Digital Marketing, we drove record Adobe Marketing Cloud bookings well above our target of 30% growth for the year. As we outlined in September, reported revenue for Adobe Marketing Cloud was impacted by the faster-than-anticipated transition of Adobe Experience Manager and Adobe Campaign to a subscription-based revenue model this year. Were it not for the quicker shift to ratable revenue, Adobe Marketing Cloud revenue would have grown 21%, above our original target of 20% annual revenue growth in the year. Other financial highlights during the year include growing deferred revenue to a record $1.16 billion and increasing our unbilled backlog to approximately $1.74 billion exiting the year; together, this represents nearly $3 billion of contracted revenue that will be recognized over time; and returning nearly $700 million in cash to stockholders through our stock repurchase program. In the fourth quarter of FY '14, Adobe achieved revenue of $1,073,000,000, at the high end of our targeted range. GAAP diluted earnings per share in Q4 were $0.14, and non-GAAP diluted earnings per share were $0.36. Highlights in our fourth quarter include driving strong adoption of Creative Cloud across all offerings : individual, team and enterprise; growing Adobe Marketing Cloud bookings well ahead of our target; managing expenses to deliver upside on earnings per share; achieving $400 million in operating cash flow; and exiting Q4 with 66% recurring revenue. In Q4 of last year, the percentage was 44% and in Q4 of fiscal 2012 it was 27%. In Digital Media, we achieved revenue of $649 million. This segment has 2 major components of revenue : our Creative family of products and our Document Services products. In our Creative business, adoption of Creative Cloud accelerated significantly quarter-over-quarter. We exited Q4 with 3,454,000 Creative Cloud subscriptions. Adoption across all Creative Cloud offerings grew quarter-on-quarter. Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections. Average revenue per user, or ARPU, within each of our Creative Cloud offerings maintained steady levels consistent with results over the past year. Blended ARPU across all Creative Cloud offerings declined slightly as a result of the significant increase in new Single App subscriptions. It is important to note that the unit mix between Creative Suites and individual point products in our perpetual offering was approximately 50-50. We are excited that adoption of Single Apps and the Creative Cloud Photography plan is expanding our market opportunity. During this growth phase, we fully anticipate the percentage of Single App subscriptions will continue to grow. This strategy is driving higher ARR and revenue, and creates the opportunity to drive even higher revenue through ARPU-enhancing services. Adoption of Creative Cloud for teams accelerated in Q4, with momentum in both the channel as well as on Adobe.com. Our success with individual and team subscriptions, and enterprise term license agreements, or ETLAs, helped to drive Creative ARR to a total of $1.68 billion exiting Q4 at constant currency from December of 2013, an increase of $272 million quarter-over-quarter. In Document Services, we achieved revenue of $197 million in Q4. Revenue declined slightly quarter-over-quarter, offset by strong growth in ARR. Strong adoption of Acrobat ETLAs, subscriptions, and cloud services including EchoSign helped to grow Document Services ARR to $271 million exiting Q4 at constant currency rates, a $54 million sequential increase over Q3. In our Digital Marketing segment, there are 2 components. The first is revenue from our Adobe Marketing Cloud offering, and our momentum as the leader in this market continued. We achieved revenue of $330 million in Q4. More importantly, we drove record bookings that put us ahead of our goal of 30% bookings growth for the year. Our Adobe Marketing Cloud success is being driven by an increase in the size of transactions, number of solutions per customer, international expansion and growth in partner-driven business. Adobe Analytics, Experience Manager, Campaign, Target and Media Optimizer all had strong bookings which sets us up nicely for FY '15. The mix of Adobe Experience Manager and Campaign that was ratable versus perpetual revenue grew to approximately 75% for the year. As you recall, we explained in September, our target for that mix entering the year was approximately 60%. Were it not for this incremental shift of approximately $60 million of revenue to ratable with these 2 solutions, we would have achieved 21% Marketing Cloud revenue growth for the year. The growth rate would have been greater than 25% for the year if no shift at all had occurred, and we are reiterating our 25% Marketing Cloud revenue CAGR. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $44 million in Q4 revenue, consistent with our expectations. Print and Publishing segment revenue was $50 million in Q4. Geographically, we experienced stable demand across our major geographies, and we saw increased adoption of Creative Cloud subscriptions in Japan. Asia as a percent of total revenue remains lower given Creative Cloud and Marketing Cloud adoption trails other geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $11.7 million. We had $12.2 million in hedge gains in Q4 FY '14 versus $1.1 million in hedge gains in Q3 FY '14, thus the net sequential currency decrease to revenue considering hedging gains was $0.6 million. From a year-over-year currency perspective, FX decreased revenue by $8.8 million. We had $12.2 million in hedge gains in Q4 FY '14 versus $3.1 million in hedge gains in Q4 FY '13, thus the net year-over-year currency increase to revenue considering hedging gains was $0.3 million. In Q4, Adobe's effective tax rate was 21% on both a GAAP and non-GAAP basis. The GAAP rate was lower than targeted primarily due to stronger-than-forecasted profits outside the U.S. Employees at the end of Q4 totaled 12,499 versus 12,368 at the end of last quarter. Our trade DSO was 50 days, which compares to 52 days in the year-ago quarter and 48 days last quarter. Cash flow from operations was $400 million in the quarter. Our ending cash and short-term investment position was $3.74 billion compared to $3.52 billion at the end of Q3. In Q4 FY '14, we repurchased approximately 1.8 million shares at a total cost of $127 million. For the year, we repurchased 10.9 million shares at a total cost of $689 million. Now I would like to go over the acquisition announcement we made today, as well as provide our financial outlook. Today, we announced a definitive agreement to acquire privately held Fotolia in an all-cash transaction of $800 million. We expect it to close in the second half of Q1 and add approximately $75 million in FY '15 revenue, net of purchase accounting adjustments. We believe this transaction will be neutral to non-GAAP earnings in FY '15 and accretive in FY '16. At this time, we cannot estimate the impact to earnings on a GAAP basis. Fotolia is a U.S.-based company, so we're primarily using onshore cash for the transaction. The bulk of their operations and business are in Europe, and we intend to invest in the business during the year to drive broader global adoption of their services, particularly in the U.S. We see significant synergies over time with Fotolia and our Creative Cloud offering, in what is a large and fast-growing market. Turning to our financial outlook. The targets we are providing today reflect current currency rates and exclude any benefit or impact from the announced acquisition of Fotolia. We are happy to report we are either on track or are ahead of key long-term goals we set a year ago. Consistent with our target of approximately 20% compound annual revenue growth between FY '14 and FY '16, we are targeting total revenue of approximately $4.85 billion in FY '15. We expect GAAP earnings per share of $1.20 and non-GAAP earnings per share of $2.05, which is ahead of the target we provided a year ago. As we've mentioned before, we will adjust ARR on an annual basis to reflect any material FX changes. Our FY '14 exiting Digital Media ARR of $1.947 billion was based on December 2013 FX rates. We've revalued that ARR amount based on December 2014 FX rates, and this has led to an updated ARR of $1.875 billion, which is approximately $72 million lower entering FY '15. In Digital Media, we remain on track to drive a revenue CAGR of 20% between FY '14 and FY '16, supported by strong growth in ARR and the subscription adoption we've driven. In FY '15, we expect to grow ARR by greater than 50% from $1.875 billion to approximately $2.9 billion by year end. We expect to grow total subscriptions by approximately 70% year-over-year and exit the year with approximately 5.9 million subscriptions. We also expect continued ETLA adoption during the year. In Digital Marketing, we have strong momentum with Adobe Marketing Cloud bookings. We expect to continue to drive annual bookings growth of 30%, with annual reported revenue growth of approximately 25% in FY '15. Both are consistent with our long-term targets. During FY '15, we anticipate revenue and earnings will grow sequentially every quarter during the year. Given strong adoption in Q4 and normal seasonality in Q1, we expect net new Creative Cloud subscriptions will decline in Q1 when compared to the 644,000 we added in Q4, and then grow sequentially in the second, third and fourth quarters. We expect Digital Media ARR to follow the same trend. In Digital Media, we expect creative revenue to grow significantly year-over-year. We are targeting Document Services revenue to grow slightly year-over-year. We also expect annual revenue for LiveCycle and Connect, and for Print and Publishing, to decline slightly year-over-year. Quarterly Adobe Marketing Cloud bookings and reported revenue should also follow normal seasonality during the year. In Q1 of FY '15, we are targeting a revenue range of $1,050,000,000 to $1,100,000,000. Again, this excludes the expected benefit of adding Fotolia during the quarter. We expect Digital Media segment revenue to grow sequentially in Q1. Within Digital Media, we expect Creative revenue to grow sequentially, with Document Services revenue declining slightly. In Digital Marketing, we are targeting Q1 Adobe Marketing Cloud revenue to decline on a sequential basis and grow on a year-over-year basis. We expect combined revenue with LiveCycle and Connect to decline sequentially. We also expect Print and Publishing segment revenue to decline. We are targeting our Q1 share count to be 508 million to 510 million shares. We are targeting net nonoperating expense to be between $12 million and $14 million on both a GAAP and non-GAAP basis. We are targeting a Q1 tax rate of 25% to 27% on a GAAP and 21% on a non-GAAP basis. These targets yield a Q1 GAAP earnings per share range of $0.14 to $0.20 per share, and a Q1 non-GAAP earnings per share range of $0.34 to $0.40. In summary, 2014 was a great year. With multiple growth opportunities and category-leading products, we are poised to see strong revenue and earnings growth in the coming years. Mike? Mike Saviage : Dates for our Digital Marketing Summit in Salt Lake City have been announced and registration is now open. The opening day keynote will be on the morning of Tuesday, March 10, and we are once again providing special pricing for financial analysts and investors to attend. We will send out a formal invitation in January. But in the meantime, if you'd like to register, you can contact Adobe Investor Relations by e-mailing ir@adobe.com for registration information. For those who wish to listen to a playback of today's conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling (855) 859-2056; use conference ID number 39655431. International callers should dial (404) 537-3406. The phone playback service will be available beginning at 5 p.m. Pacific Time today and ending at 10 a.m. Pacific Time on Tuesday, December 16, 2014. We would now be happy to take your questions. Operator? Operator : [Operator Instructions] Your first question comes from the line of Brad Zelnick from Jefferies. Brad Zelnick : Can you please just talk a bit about the evidence that you're seeing Digital Marketing and Digital Media categories driving demand for one another? And maybe if you could share trends in the percentage of enterprise deals that include solutions from both sides of Adobe. Shantanu Narayen : Sure. Thanks, Brad, first, on your comment on the quarter. We were certainly pleased with what we accomplished in Q4. With respect to joint deals that we are seeing that's primarily with the ETLAs as well as the Digital Marketing bookings that we are seeing, and it actually is across most segments, Brad. In the publishing space for sure, people are using our digital creation tools as well as our infrastructure tools. We're seeing a fair amount in retail as people are trying to create campaigns. We've talked about companies like Under Armour who are using all of our products. We're seeing that in video, as people are using both Primetime, as well as Creative Cloud, Premiere, as well as our digital marketing products like Primetime. And so I think across the board, while we might lead with CC ETLA and then go in with Digital Marketing or might go in with Digital Marketing and then come back to a CC ETLA. And at the end of the day, I mean, more marketing is moving online. And I think our sales force goes in with a one Adobe [ph] story. Clearly, DPS is another area where we're seeing synergy between the 2 businesses, and now what we have with PhoneGap Enterprise. Brad Zelnick : It's definitely working. Just one more follow-up, if I may. Last quarter, you noted about 20% of CC users were new to the franchise. Are there any directional updates on this? I know it's only one quarter since when we think about the mix. And can you maybe comment on any thoughts you might have on where this can go as you penetrate into new geographies and perhaps capture some of the opportunity on piracy? Shantanu Narayen : Well, 2 thoughts there, Brad. The first is, while we don't do the surveys every quarter, certainly given the strength that we saw in Q4, we are confident that we are continuing to attract new customers to the platform. What was really nice about Q4 was we actually saw strength across every single offering in all the geographies. You correctly point out that we are still focused primarily on developed markets and we continue to think that emerging markets is an opportunity over time with differential pricing and products. But at this point, I would say, we are still just combating casual piracy in developed markets and really attracting new customers. One thing I will mention also is that one of the offerings that we added in Q4 was the team offering on Adobe.com did not have the Single App option. And so allowing that just enables teams to be more collaborative, and so team had a good showing in Q4 as well. Operator : Your next question comes from the line of Brent Thill from UBS. Brent Thill : Shantanu, just on the acquisition. I'm just curious if you could walk through the revenue model. Just casually going through the site, looks like you can pick up stock photos for single dollars or videos for high single digits. How does the revenue model work for Fotolia? Shantanu Narayen : Sure. So, Brent, I mean the big picture is that with Creative Cloud continuing to become the preeminent destination for creatives, all our surveys show that our customers of our creative tools are the primary purchasers of stock content, creative assets that exist. I would look at Fotolia today and really their presence is more in Europe. In the U.S., they have attempted to come in with an offering that is aimed at beyond the creative professionals. The sweet spot for us is with the creative professional community, we think all the millions of creative professionals will be people who will acquire these products. And I think the offerings will look like an on-demand offering where people who have need for a specific content can go online and find and search it. We will have subscription offerings which exist as a standalone service, which allow people to just subscribe and get a certain number of stock content on the frequency that they want. And as you can imagine, once we are closed, I think we have opportunities to also offer our desktop products in conjunction with the subscription offering of our stock content. So I think we see a lot of options. And what that should result in is, first, more stickiness with our creative community because they have a one-stop shop for talent search, buying stock as well as the creative tools. And that should hopefully result in increased revenue and increased ARPU. Brent Thill : Okay. And real quickly, on the Marketing Cloud, you highlighted a handful of big deals in that campaign. It was one of the best performers inside this suite. Can you maybe just bring us up to speed in terms of what you're seeing in terms of the deal sizes? Are you seeing a nice improvement as, back to your original comments, they're taking more of the suite? Any color to help us understand the direction of the Marketing Cloud on pricing would be really helpful. Shantanu Narayen : Yes, we didn't update this time, Brent, the number of large deals, million-dollar deals. I know we've updated that in the past. But when you drive record bookings, you're certainly driving it at a more strategic level with adoption of multiple solutions. We highlighted Campaign because we've always believed that campaign orchestration was important. We are winning a number of deals of what was traditionally e-mail service provider accounts with Campaign, so I wanted to make sure that we highlighted that in the quarter. But it's a spectrum. I mean, we have really large deals that we are seeing from customers at the CMO, CEO level. Operator : Your next question comes from the line of Walter Pritchard from Citi. Walter Pritchard : I'm wondering if you could, Mark, just give us a little bit more detail on the mix of versions -- or not versions, but point versus suite. You talked about, in your perpetual business, a 50-50 mix. Did you throw that out there to sort of point us to that's where it is today? Or is that where you think it'll be in '15? Or just trying to get a sense of how we should be thinking about where it is right now. Because you've provided that the last -- I guess since you've started undergoing the transition, and then, how we should think about that in the future. Mark Garrett : Yes, I think the most important thing to remember is that this is right on strategy. The idea of selling more single apps, especially as it relates to driving a higher market opportunity and attracting new users, and that's working really, really well. So what you see in subs, what you see in ARR is a result of driving new users to the platform, which we would not have been able to do without these single apps. The mix was really just to show you that what's happening is not terribly different from what you saw under the suite model with the Perpetual offering. We're not saying that it's ultimately going to settle in at 50-50, but it's certainly going that direction. And you can see that in the mix this quarter. If you do the math on the mix this quarter, you'll see that it's roughly 50-50 in terms of the net new adds this quarter. So we had really good uptick in the full units this quarter, but we also had a nice increase in the single app. And that's right on strategy. Shantanu Narayen : And also, overall, we are convinced that it is increasing the total available market, and we continue to see, as people adopt the individual app and they get familiar with our products, it represents an opportunity for them to migrate up to Creative Cloud Complete. Walter Pritchard : Got it. So just actually, that was, Shantanu, the follow-up I had for you. We did some survey work just a little bit ago, and one thing we noted is there was a high intention from point product customers to upgrade to suite. Some short term, some over time. Can you talk about -- it hasn't been that long that you've had the point product out, but it's been -- some of those folks are -- were renewing in the quarter. Can you talk about sort of any color on how many of those renewed to the full suite from the point? Shantanu Narayen : Well, what we said, I think, in the prepared remarks was that retention continues to be ahead of our internal expectations. And while we continue to have pricing that's promotional in nature to get customers to migrate from CS to Creative Cloud when they, then, continue to stay on the platform, they are actually -- the retention is at the higher price points. So we're happy about that. We have become really good by using our own digital marketing products, Walter, in terms of the pipeline. So while I have numbers, everything, from new trial users, how many are overlapping with Behance, how we are seeing them going through the funnel in terms of usage. It was such a strong quarter across all elements : new customer acquisitions, upgrades, retention and team. We were really pleased. And I think, if we take a step back, it just reflects. First, we're continuing to deliver significant product value for the customers. They're seeing that innovation, things like Touch that we delivered in the quarter; second, the sole focus on all routes-to-market on the Creative Cloud is certainly helping. There isn't perpetual anymore in the channel. And I think, third is we're just getting better at dealing with this consumer marketing funnel in the business unit. Operator : Your next question comes from the line of Mark Moerdler of Sanford Bernstein. Mark Moerdler : So I got 2 quick questions. The first one is you have subs increasing next year from 3.5 million to 5.9 million, which is a 71% increase in subs year-over-year, but you have ARR in Digital Media increasing over 50%. Can you give us some color maybe, Mark, on the -- what the disconnect is? Is it ETLAs growing slower or Document Services ARR growing slower? What -- how should we think about that? Mark Garrett : Yes, I don't you should think about it as ETLA growing slower. I think you should think about 2 things, Mark. One is the $1 billion increase reflects new FX rates, right? So there is a fairly significant, as you know, from every company, change in FX, and that has a chunk of it in there. Plus, as we were just talking about with Walter's question, we are seeing more single app to acquire new customers and expand the market. And I think it's primarily those 2 things. I don't think you should read anything into that in respect of anything slowing down. Mark Moerdler : Okay. And then as a second question, can you give us a sense in terms of digital marketing, whether -- and you talked a little bit about it, but in terms of how much of the mix of the growth is coming from expansion into the existing customers versus sales to new customers. Shantanu Narayen : It's across the board, honestly. I mean, we're seeing new logos coming into the platform. I think we highlighted some of the key customers. But without a doubt, within existing customers as well. If they were an analytics customer, they are continuously looking at the Experience Manager. If they're using both of those. Campaign, which was such a strong showing in the quarter, is certainly seeing more adoption within Analytics and Experience Manager. And I think what we said at our prior call is we're seeing something like 74% growth in customers with 3-plus solution products. This was the data that we had provided at MAX. So I mean, that continues to be the case, and we're seeing the ARR of customers with 3-plus solution products in the millions. Operator : Your next question comes from the line of Kash Rangan from Merrill Lynch. Kash Rangan : It looks like you're well on track to hit about 6 million subs by the end of next year, which relative to the TAM that you laid out, I think, in the spring of last year, Mark or Shantanu, is roughly about 50%, a little bit less than 50%. The question for you, Shantanu, is are we in the second innings of a cricket game or second innings of a baseball game? And depending upon how you're going to answer the question, I'd like to also find out, if it is indeed a baseball game, how much larger can the TAM be? Especially because when I look at the upside of this quarter, even if you didn't have a positive deviations in the point solutions, you would have still had a very good quarter, just with the full suite lot. It looks like you're expanding the TAM but I don't want to get too ahead of myself. If you can just put it in context, that will be very appreciated. Shantanu Narayen : Well, first, for the sports fans on the call. Baseball, having 9 innings, we certainly believe that we're definitely in the second innings of a 9-inning game rather than a 2-inning game, Kash. So we continue to think there's significant upside. I think we provided the numbers on the number of Creative Suite perpetual products and licenses that we've delivered. As you can see from our numbers, there's significant headroom. I think you are continuing to see, as we have said, new customers being attracted to the platform. And if I take a step back, we're actually executing against everything we laid out 3 or 4 years ago. We're continuing to migrate customers and demonstrate value and drive customer satisfaction to be higher. We are adding new customers, the Individual apps are certainly attracting new customers to the platform. And the ARPU-enhancing services, things like Fotolia, I think, we're really excited about how that also, not only keeps the current customers on the Creative Cloud, but that it also brings people who may be laggards onto the Creative Cloud, because it just demonstrates more value that we're going to be providing. So I think Mark's numbers reflect why we continue to be really enthusiastic about this business in '15 and beyond. Kash Rangan : Wonderful. And on the Fotolia side, to the extent that you know this information, how many subscribers do they have? How many of them are CC or CS users already? And what is the rough potential for cross-selling the core Creative Cloud family to the Fotolia user base, and vice versa? Anything, any color commentary. Qualitative would be fine. I understand that you may not be able to share numbers, because the deal's not closed yet. Shantanu Narayen : Well, Kash, we did surveys of our creative professionals. And I would say, the vast majority of creative professionals that exist globally are customers of stock content. So I first want to -- in terms of the available market opportunity, it's important to remember that we believe that every single creative professional is a customer of Fotolia. The other thing we actually find is that a number of marketers are the people who actually buy this stock content to use in campaigns or put on websites. So the customer base for Fotolia actually extends beyond the creative professional as well as the marketer to, also, consumer hobbyists. As we look at the numbers right now, and it's really early with Fotolia, we certainly think that getting access to Fotolia content to every one of our creative professionals is the opportunity that we have. There's a high overlap, clearly, of the Fotolia customers who are already Creative Suite or Creative Cloud customers, but we can package it and provide a lot more value as we move down this path. Operator : Your next question comes from the line of Ross MacMillan from RBC Capital Markets. Ross MacMillan : Two questions, if I could. Just first on operating expense growth. That's been really impressive this year in the sense that it's been very low. I think 3% for the year, 1% in the quarter. And if I look on a sort of trailing 3-year [ph] basis, I think OpEx grew something more like 8%, on average, over the last 3 [ph] years. So I'm just curious, either Shantanu or Mark, is this sort of lower trajectory of operating growth sustainable? Could you maybe just provide some color? Mark Garrett : Hey, Ross. It's Mark. Yes. I mean, I think the bottom line is we really felt it was important to drive earnings leverage back into the model as revenue starts to come back, since we're through this transition now. And that's what you're seeing both in FY '14 and especially in FY '15 as we move from $1.29 to $2.05 and then, to over $3. So earning starts to come back into the model in a big way. OpEx will increase, probably a little bit more than what you've seen recently, and that's obvious for you guys to figure out as you do your revenue model and figure out what the OpEx is that'll drive that EPS. So the short answer is we've done a great job this year of containing costs and still hitting all of our targets. As we build out more and more of an enterprise sales force, you're going to see us invest more and more in sales and marketing. But it's all embedded in that $2.05 and over $3 in '16. Ross MacMillan : That's great. And then just a clarification for me. Mark, you commented that the unit mix between Suites and Point products in your perpetual offering was 50-50. I think my reference was going back to the Analyst Day in '13 when you described that installed base of Suites versus Point products of $12.8 million. And I think it was more like 2/3 Suites versus 1/3 Point products. Is there some kind of bridge there that I'm not seeing to connect the 50-50 with that sort of 2/3-1/3 mix? Shantanu Narayen : Again, we'll go back and look at those numbers, Ross. I think, from a revenue point of view versus units point of view, there's a difference, clearly. And revenue was more towards Suites than it was towards Point products. But we'll get back to you on that one. Operator : Your next question comes from the line of Kirk Materne from Evercore ISI. S. Kirk Materne : I guess, maybe just first, Shantanu, you mentioned that when customers have come back to renew, they're renewing at a higher price than the promotional price they might have signed up on. I guess I just want to clarify that, that's correct. And I guess have you had any pushback from clients that maybe signed up on promotional? And I guess, how are you dealing with that in terms of making sure that they obviously still feel like they're getting the value? I guess, could you just give us some color on how that's been going? Because you obviously have a much bigger cohort renewing at this point this year versus, say, last year. Shantanu Narayen : Sure. Well, just to clarify, the promotional pricing tends to be more on the CC Complete than it is the CC Photography. So the CC Photography, the pricing is now the permanent pricing. And what we were trying to do it was reflect that long-term customers of CS, if they had just bought CS6, they were entitled to promotional pricing for a year. And yes, I was saying that as they, then, retain or renew after a year, they are renewing. And I think the big reason for the renewal is they're seeing the amount of innovation that we're delivering. I mean, we've delivered over 1,000 features; we now have mobile apps that we've delivered, they're looking at the services like share and sync, what we're delivering with points. So again, continues to be incumbent on us to demonstrate the value of our Cloud Service by constantly providing new value to them. S. Kirk Materne : Great. And then, just one for Mark. Mark, on the Digital Marketing side, obviously, in the back half of the year, you had a lot of sort of mix of Experience Manager and Campaign going more ratable. I guess, will that cause the actual revenue growth of digital marketing in 2015 to be a little bit more back-end loaded? Meaning, you'll still be going up against the sort of headwinds in the first half of the year? Or am I sort of overthinking that? Is the growth in bookings going to overcome that so it's -- you're perhaps not so much of a step function in the back half of the year than I might be assuming? Mark Garrett : Yes, you're right. It isn't going to be a little bit more back-end loaded. You also have seasonality going from Q4 to Q1, as I said, in Digital Marketing. So you're going to have a lower Q1 than you did in Q4 but up year-over-year. But you're right. It's going to be a little bit more back-end loaded because of that mix shift that you saw from '14. Operator : Your next question comes from the line of Brendan Barnicle from Pacific Crest Securities. Brendon Barnicle : Shantanu, I wanted to follow up on the Marketing Cloud. Some of our industry contacts have been suggesting that customers are starting to want to see more commerce apps and functionality tied more directly into their marketing platforms. Are you seeing that trend? And how do you see tying more commerce into the Marketing Cloud, potentially? Shantanu Narayen : I think at the end of the day, Brendan, when people are re-platforming their website, commerce is definitely one of the key reasons why they're doing that. We have partnerships with virtually all of the key commerce providers, including hybris, that's available through SAP. And so I think what we find is, whether it's an Adobe installation or whether it's one of the numerous partners that we have that's built digital transformation practices on our solution. They have all the tools that are required to take Adobe Experience Manager and tie into whatever commerce engine exists. So we view that as a partnership opportunity. Brendon Barnicle : So you haven't seen it as a disadvantage that you don't have it natively? Shantanu Narayen : No, we don't. I think the big thing that CMOs, really, are focused on is how do they deliver really great, rich, interactive experience on mobile devices and tablets. And I think every report that you read out there demonstrates that we have the best technology in that space. Brendon Barnicle : Terrific. And just a quick one, Mark. You mentioned in your prepared comments the slight dip in overall ARPU because of the single app subscriptions. I was also wondering if there's any seasonality that you ever see in ARPU. I just didn't recall. Mark Garrett : I don't think you should think about ARPU as seasonal. It's really driven by that blended rate, which I would encourage you guys not to focus on. It's really driven by mix. Like we said, ARPU across each offering through the year has either been consistent or, frankly, up throughout the entire year. Shantanu Narayen : The 2 things you might think of in that particular space, the first is education. And when there's an education season, there's a high potential for a lot more edu [ph] units during that season. The second thing I would say is that as we are seeing former Premiere Elements or Photoshop Elements customers think about what a holiday purchase might be, the Creative Cloud Photography bundle is certainly, hopefully, high on their list of things that they want to get their kids and family. And so I would say, you'll see that a little bit of seasonally in the holiday season. Operator : Your next question comes from the line of Steve Ashley from Robert W. Baird. Steven Ashley : Great. I'd just like to start and ask about ETLA activity. Maybe you could give us a little bit more color around how that performed in the period -- and if there are any renewing ETLA agreements from a year ago, how that might have gone [ph]. Shantanu Narayen : So Steve, when you think about enterprise agreements in the ETLAs for the Creative business or the Acrobat business, they tend to be 3-year agreements. The vast majority tends to be 3-year agreements. And so they're not up for renewal, really, yet. Clearly, in the Digital Marketing business, we have renewals happening all the time. And that continues to perform well. In fact, I would say that the organization has done a really good job this year of making sure that we drive new bookings growth over and above renewals at the existing level. So I think the team has done a good job there. And with respect to color, overall, in that business, the enterprise business did really well in Q4. And I think that's why you see the strength. It's become a traditional Q4 seasonally strong quarter, and I think that's just true of all enterprise companies. Europe did well. North America did well. Australia continues to be a strong performance for us as well, from a geo perspective. Steven Ashley : Great. And just my follow-up. I'd like to ask about the single app business, which has really been strong here and, I think, aided by the Photoshop Lightroom, which really helped you tap into a whole new vein of customers. Are there other opportunities similar to that to introduce single apps that might be more segmented to tap other new user groups? Shantanu Narayen : Well, I think that our mobile apps, Steve, we certainly believe that everybody is -- want to be creative. And our job is to continue to make the power of our creative tools available to everybody. So as our mobile apps, we've seen millions of downloads of the mobile apps that we deployed at MAX. I think we definitely have opportunities to provide a different kind of a subscription service for the vast non-photographer, creative community. But at this point, we're still pretty ruthlessly focused on the creative and the photography segments, because those are the largest and those are the ones that are really where we need to focus. Operator : Your next question comes from the line of Heather Bellini from Goldman Sachs. Shateel Alam : This is Shateel Alam, filling in for Heather. So you said your blended ARPU declined again for the quarter. I understand how single app subs are bringing this down, but you should also have some positive factors offsetting this like promo pricing from Creative Cloud anniversary-ing. I just want to know, when should we expect your blended ARPU to trough and begin increasing again? Should we expect that sometime in fiscal '15? Mark Garrett : Well, again, we pointed out that 50-50 mix because we want you to understand that there's a good chance that single app will just keep growing and may grow faster than full for the reasons we mentioned, and it does expand the market opportunity for us. So we view that as strategic and very positive. I don't think you should expect that ARPU number. Even though, again, I encourage you not to look at a blended ARPU number, I don't think you should expect that blended ARPU number to go up soon. We also have, down the road, other opportunities like Fotolia to help bring ARPU up. Shantanu Narayen : Hey, Walter, I just wanted to go back to your question as well because I just looked at the data. And what we said was right. The unit mix in the historical perpetual business was 50-50, which was inclusive of commercial enterprise, education, upgrades, et cetera. And as I mentioned, the revenue mix was closer to 70-30. And I think the data that we presented in May 2013 was showing the installed base and not the annual unit mix of perpetual users and point product users. And so if customers in multiple point products, and as they migrate to suites, we de-duped [ph] and normalized that for -- in our installed base data. So hopefully, that provides that -- or Ross. Shateel Alam : Just one follow-up. On Adobe Marketing Cloud, that grew 15% this year. What drives that to 25% growth for '15? And is there any assumption of acquisitions in there? Shantanu Narayen : There's no assumptions of acquisitions. Mark Garrett : Yes, I was just going to say that. We don't assume acquisitions in our guidance. The growth really comes from the fact that, obviously, you're bringing more and more revenue in from bookings, and you also don't have the big shift from perpetual to hosted like we had in '14. The shift is, for the most part, going to stabilize now. Operator : Your next question comes from the line of Robert Breza from Sterne Agee. Robert Breza : I was wondering if you could comment geographically whether you're seeing the single app uptake, are you seeing it more here in North America? Or geographically, just curious to understand kind of the geographical mix. Shantanu Narayen : I think it's fairly consistent across all geographies. I won't point to any real difference in adoption right now between geographies. Robert Breza : As you look at bringing in Fotolia into the group, I think in your prepared comments you said it was -- mostly dominated in Europe today. How do you think or how do you plan to bring that more back towards the North American market? Just curious to understand the geographics. Shantanu Narayen : Well, I think the first thing that we hopefully have is affinity with our customers, and the brand that Adobe has in the U.S. market continues to be strong. I think they have a really good technology. And that, coupled with our brand and our ability to deliver that to our customers, we're confident. The surveys that we've done, again, as we said earlier, was that the creative professionals continue to look for stock photography as a mechanism to start a particular creation. And over time, we can also provide value-adds by helping integrate that within our products as well. Operator : Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Jay Vleeschhouwer : Shantanu, I'd like to ask, first for you, about the product and services game plan for 2015 and beyond, based on some of the strategies that you and David laid out, for example, and Brad, at the Summit back in March and at MAX just a couple of months ago. So the Digital Marketing Summit, for example, you spoke very broadly about enabling what you called the real-time enterprise and then spoke specifically about some core services that you would need to deliver to enable that and also alluded to the possibility of Marketing Cloud turnkey solutions for the SMB market. So I'd like to ask if that's something that you're still looking to do. And similarly, at MAX, you talked about increasingly tiering or segmenting the Creative Cloud. And so is that still [ph] something that you're expecting to roll out in '15 and beyond? And then, I've got a follow-up for Mark. Shantanu Narayen : So Jay, first, with respect to the announcements that we made about the Marketing Cloud, and as you pointed out, for services, clearly, we're hearing from our customers, as they adopt multiple solutions, that they want to continue to see things work more consistently across our solutions and the value-add that we can provide. So for example, the product that we have, Adobe AudienceManager, that's perceived to be a really key enabling glue between all of our products in order to enable people to use the same segmentation of users across media optimization or across targeting or across analytics. That's a great example of a core service. The visualization, the ability to, again, run a campaign across all of these different products is another one of the core service that, I think, the team continues to perform. And we've also always talked about the fact that we have all of these data transactions and the ability to derive insight from what's happening on those for our customers continues to be an area of value add. And in SaaS-based businesses, unlike the perpetual product, we're constantly delivering that value add to our customers right through the year. So yes, in 2015, we will continue to deliver more core services, and I would highlight AudienceManager as one of the key areas. The other one, I think, we've talked about also is media mix. All CMOs are trying to understand how they do media mix across each of their different channels. And I think that's another area that we have some unique technology. With respect to the Creative Cloud and the creative business, we're excited about Fotolia. I think it represents a great opportunity in the sharing economy. And the entire community can now participate, whether it's finding talent or whether it's being able to acquire stock. And so yes, expect to continue to see new services that are being added, and Talent Search and Fotolia are just the 2 most recent ones. Jay Vleeschhouwer : Okay. And for Mark, in your prepared remarks, you suggested that in fiscal '15, Doc Services revenue would be up only slightly. And that would be so in spite of your expectation of -- I assume it's still your expectation, of an Acrobat release next year? Mark Garrett : Yes, yes. Shantanu talked about a release in the first half of the year. And the only reason I'd say it's up slightly, Jay, is because we are driving more and more towards ETLAs in the enterprise. And you'll -- you're seeing that in the ARR. Operator : Your next question comes from the line of Samad Samana from FBR Capital Markets. Samad Samana : I would like to ask you on Fotolia. So Shutterstock would be a natural competitor, and it looks like they're growing around a 40% level. I was wondering if you could just give us an idea of how fast Fotolia was growing, and how you're sizing that market. Shantanu Narayen : Well, in terms of the sizing of the market, I think we definitely view it as a multibillion-dollar market. You're right, in that the other players in that space are growing very rapidly. We're not providing historical information on Fotolia today. But we certainly have high aspirations for the growth in that market for Adobe as well as for the entire market. Samad Samana : And then one follow-up to that. So they offer both annual and monthly subscription plans. And I know you're not disclosing the size of their subscriber base, but could you give us an idea of the mix between annual and monthly subscribers? To see what their pricing model looks like. Shantanu Narayen : I think it's all a little early. We haven't even closed the deal. We just announced the definitive. And I think, as the business gets integrated into Adobe, we'll definitely, as we do with all of our other businesses, provide more color. Operator : Your next question comes from the line of Philip Winslow of Crédit Suisse. Philip Winslow : Congrats on the continued growth here. I wanted to focus in on part of the Digital Marketing business. Mark, automation [ph] obviously, over the past couple of years, we've seen a lot of consolidation in the space, including you guys. Just wondering if we can get an update of what you're seeing. Sort of post the acquisition, any change in sort of the competitive [ph] dynamics or how you're positioning the product, et cetera? Shantanu Narayen : Well, first, thanks on your comments on the quarter. I think, with respect to Digital Marketing, there's no question that everybody views this as the most explosive enterprise category that exists. I think our unique differentiation continues to be the fact that we've targeted marketers. And when we talk about the fact that it's becoming the real-time enterprise, I think the tentacles of the Marketing Cloud are certainly spreading into the rest of the organization and needs to be integrated with that. I think in that context, we continue to see real great traction for our particular solutions. But the standard players, whether it's Oracle or IBM or Salesforce. I think they also see the opportunities that exist. We continue to do really well against each one of those competitors in the marketplace. Given that's the last question, I just wanted to say that I'm really proud of what Adobe and our employees accomplished in both Q4 as well as FY '14. We really continue to focus on delivering value and innovating in these large, growing markets where we both have a license to play as well as, we believe, we have tremendous customer affinity and a strong brand. We executed against our goals of adding ARR, migrating existing CS customers as well as attracting new customers. And we continue to be really excited about the opportunity that we see ahead of us in Digital Marketing. More importantly, with initiatives that we just announced delivering our Marketplace, integrating our Marketing Solutions and reimagining our Document Services, we believe we are positioning the company for even better things in the future. So thank you for joining us today, and happy holidays. Mike Saviage : And this concludes our call. Thank you.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,015	1	2015Q1	2015Q1	2015-03-17	1.45	1.553	2.321	2.463	4.32	31.89	31.21	Executives: Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and CEO Mark Garrett - Executive Vice President and CFO Analysts : Brad Zelnick - Jefferies Brent Thill - UBS Steve Ashley - Robert W. Baird Brian Wieser - Pivotal Research Brendan Barnicle - Pacific Crest Securities Mark Moerdler - Bernstein Jay Vleeschhouwer - Griffin Securities Jennifer Lowe - Morgan Stanley Samad Samana - FBR Capital Markets Walter Pritchard - Citi Matt Williams - Evercore ISI Derrick Wood - Susquehanna International Group Operator : I would like to welcome you to Adobe Systems First Quarter Fiscal Year ’15 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s first quarter fiscal year 2015 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We’ve also posted PDFs of our earnings call prepared remarks and slides, our financial targets, and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans, is based on information as of today, March 17, 2015, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our financial targets document and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : FY15 is off to a strong start. In Q1, we reported revenue of $1.109 billion and non-GAAP earnings per share of $0.44. We achieved solid growth across our Creative Cloud and Marketing Cloud businesses, and delivered a new wave of product innovation. In Digital Media, Creative Cloud continues to be the preeminent destination for creatives around the world, enabling them to work seamlessly across desktop and mobile devices. While the desktop applications continue to be the foundation of Creative Cloud, 50% of Creatives are using mobile devices in their creative process. Over 30 million mobile apps have been downloaded, including capture apps like Adobe Brush and Shape, as well as desktop companion apps for Photoshop CC and Illustrator CC. Over 5 million new free subscribers were acquired through our Creative Cloud mobile apps since MAX in October. We celebrated the 25th anniversary of Photoshop last month and were blown away by the tremendous response from customers, partners and the press. Photoshop is one of the world's most iconic brands and has had a profound impact on every form of design and media, from animation to photography to film to web design. Through consistent innovation over the span of two and a half decades, Photoshop has stayed fresh and relevant and is now attracting a new generation of fans. We continue to successfully migrate the Creative Suite installed base, as well as bring new customers into the community. In Q1, Individual and Team adoption grew by 517,000 to over 3.9 million subscriptions. This represents 28% year-over-year growth in net new subscriptions. Creative Annualized Recurring Revenue or ARR grew to $1.79 billion exiting Q1. Delivering on our promise to make Creative Cloud the one-stop shop for creatives, we closed the acquisition of Fotolia in January. Stock content is a part of an incremental $4 billion of addressable market for Adobe. 93% of stock content sellers and 85% of stock content buyers use our tools. Work is underway to integrate Fotolia into Creative Cloud, providing current and future Creative Cloud members with the ability to access and purchase over 35 million images and videos within the Creative Cloud experience. We will also continue to operate Fotolia as a standalone stock service, accessible to anyone. With seamless integration, we believe we can increase Creative Cloud ARPU over time, as well as grow Adobe’s share of the stock content market. In Document Services, today we announced the Adobe Document Cloud, a modern way to manage documents at home, in the office and across devices. Adobe Document Cloud will include an all new version of Acrobat called Acrobat DC, which has an intuitive, touch-enabled interface and features revolutionary new mobile capabilities. For the first time, eSign Services, formerly Adobe EchoSign, will be included with every Adobe Document Cloud subscription to enable sending and signing from any device. Adobe Document Cloud will integrate analytics and capabilities to manage, track and control documents. Adobe invented PDF and it is the de facto standard in the documents category. We see a sizable opportunity ahead of us in the documents space to monetize the millions of existing Acrobat customers and hundreds of millions of Reader and PDF users. We plan to make Document Cloud available to our customers as both a perpetual and subscription offering within the next 30 days. It will also be available to our Creative Cloud subscribers as part of the full Creative Cloud offering. In Q1, we reported Document Services revenue of $193 million and exited the quarter with $297 million of ARR. Across our Creative and Document Services businesses, total Digital Media ARR grew to $2.09 billion as of the end of Q1. In Digital Marketing, reported revenue for Adobe Marketing Cloud in Q1 was $311 million, representing 17% year-over-year revenue growth. Last week, we held our Digital Marketing Summit in Salt Lake City, which has become the premier marketing industry event for marketing, media, and publishing professionals around the world. With over 7,000 attendees, Summit has become the biggest pipeline building event of the year. We introduced two new Adobe Marketing Cloud solutions, Adobe Primetime, the industry’s leading multi-screen TV platform; and Audience Manager, our fast-growing data management platform as well as new capabilities in Adobe Campaign and Adobe Analytics. We highlighted advancements in mobile marketing and app development, the extension of marketing intelligence into product design and Internet-of-Things, and the fusion of ad-tech and marketing technologies. Customers from some of the world’s top brands joined us on the keynote stage, including executives from Under Armour, Time Warner Cable, Girl Scouts of America, Starwood Hotels and Resorts, and National Australia Bank. Partners play a significant role in our go-to-market strategy and the ecosystem of companies who recommend, sell, and deliver Adobe Marketing Cloud solutions continues to grow. We announced a new partnership with IBM, which will provide specialized enterprise consulting capabilities for Adobe Marketing Cloud. We announced an expansion of the alliance with Accenture through the launch of Accenture Customer Engagements, a cloud-based managed service that simplifies the development, execution, and measurement of digital marketing. We have built two fast-growing cloud businesses and are well on our way to building a third. All three share a common goal of enabling our customers to make, manage, measure and monetize virtually every type of content. We are driving the future of digital media and marketing in a way that no other company can, and we are excited about our roadmap for the year. Mark? Mark Garrett : In the first quarter of FY ‘15, Adobe achieved revenue of $1.109 billion above the high end of our targeted range. GAAP diluted earnings per share in Q1 were $0.17 and non-GAAP diluted earnings per share were $0.44. During the quarter, we closed the acquisition of Fotolia which contributed $7 million in revenue in Q1 and was not material to non-GAAP earnings per share. Highlights in our first quarter include, delivering revenue above the high end of our targeted revenue range; achieving 28% year-over-year growth in net new subscriptions to Creative Cloud; closing the acquisition of Fotolia, which when combined with other creative marketplace services we offer, increases our creative addressable market by $4 billion, Adobe Marketing Cloud revenue of $311 million and exiting Q1 with a record 70% recurring revenue. In Digital Media, we achieved revenue of $703 million. This segment has two major components of revenue, our creative family of products and our Adobe Document Cloud products. In our creative business, we exited Q1 with 3,971 million Creative Cloud subscriptions. Net new Creative Cloud subscriptions increased by 517,000 in Q1, consistent with our expectations given Q1 seasonality. Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections. Q1 adoption of Creative Cloud for teams grew substantially on a year-over-year basis, and we are building a healthy Enterprise Term License Agreement or ETLA pipeline. Average revenue per user, or ARPU, within each of our Creative Cloud offerings maintained steady levels, consistent with results over the past year. Blended ARPU across all Creative Cloud offerings declined slightly as a result of mix. As we discussed last week at the Financial Analyst Briefing at Summit, Creative Cloud Single Apps and the Creative Cloud Photography Plan are expanding our market opportunity through the addition of new customers, and create the potential for higher ARR in the future via ARPU-enhancing services such as Fotolia, and upsell to higher-tiered Creative Cloud offerings. Consistent with our expectations, creative ARR grew to $1.79 billion, an increase of $180 million quarter-over-quarter. As a reminder, we revalued ARR exiting FY2014 based on December 2014 currency rates. With Document Services, in advance of the Adobe Document Cloud launch, we achieved revenue of $193 million. Document Services ARR grew to $297 million exiting Q1. This ARR growth was driven by adoption of Acrobat ETLAs, subscriptions and Document Services including EchoSign. In our Digital Marketing segment, there are two components. The first is revenue from our Adobe Marketing Cloud offering, and our momentum as the leader in this market continued. Last week at Summit, we discussed growth with large customer engagements and multi-solution selling. Our announcements and the pipeline that gets built at our conference should continue this success in 2015. In Q1, we achieved Adobe Marketing Cloud revenue of $311 million, up 17% year-over-year and consistent with our expectations. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $46 million in Q1 revenue, consistent with our expectations. Print and Publishing segment revenue was $49 million in Q1. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $17 million. We had $24 million in hedge gains in Q1 FY15, versus $12 million in hedge gains in Q4 FY14. Thus, the net sequential currency decrease to revenue considering hedging gains was $5 million. From a year-over-year currency perspective, FX decreased revenue by $26 million. Considering the $24 million in hedge gains in Q1 FY15, versus $3 million in hedge gains in Q1 FY14, the net year-over-year currency decrease to revenue considering hedging gains was $5 million. In Q1, Adobe’s effective tax rate was 48% on a GAAP basis and 21% on a non-GAAP basis. The GAAP rate was higher primarily due to tax costs associated with licensing acquired company assets to Adobe’s trading companies. These one-time costs were partially offset by tax benefits related to the retroactive reinstatement of the U.S. R&D credit in December 2014. Employees at the end of Q1 totaled 12,698 versus 12,499 at the end of last quarter. Our trade DSO was 44 days, which compares to 46 days in the year go quarter, and 50 days last quarter. Cash flow from operations was $183 million in the quarter. The sequential decline from Q4 is consistent with previous first quarters since prior year annual bonuses and commissions are paid in Q1, as well as prepayments of certain employee fringe benefits for the current year. Deferred revenue grew to $1.18 billion, up 34% year-over-year. Our ending cash and short-term investment position was $3.18 billion, compared to $3.74 billion at the end of Q4. The primary driver of this decline was the acquisition of Fotolia which closed during the quarter. In Q1, we repurchased approximately 2.4 million shares at a cost of $174 million. In January, our Board of Directors approved a new stock repurchase program granting us the authority to repurchase an additional $2 billion of common stock through the end of FY 2017. Now, I would like to provide our financial outlook. In Q2 of FY'15, we are targeting a revenue range of $1.125 billion to $1.175 billion. Assuming the midpoint of our Q2 revenue range, we are targeting total Digital Media and Adobe Marketing Cloud revenue to grow sequentially. We also expect LiveCycle and Connect revenue, and Print and Publishing revenue to be relatively flat. During the quarter, we expect to add more net new Creative Cloud subscriptions and Digital Media ARR than what was achieved in Q1, and we continue to expect both to grow sequentially in the third and fourth quarters. We are targeting our Q2 share count to be 508 million to 510 million shares. We are targeting net non-operating expense to be between $15 million and $17 million on both a GAAP and non-GAAP basis. We are targeting a Q2 tax rate of approximately 24% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q2 GAAP earnings per share range of $0.20 to $0.25 per share, and a Q2 non-GAAP earnings per share range of $0.41 to $0.47. We’re pleased with our performance in Q1, and we’re off to a great start for the year. Mike? Mike Saviage : Adobe MAX will occur again in Los Angeles this fall during the week of October 5th. We will provide registration information later this summer. More information is available at max.adobe.com. For those who wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 94371293. Again, the number is 855-859-2056 with ID number 94371293. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 PM Pacific Time today, and ending at 10 AM Pacific Time on Monday March 23, 2015. We would now be happy to take your questions. Operator? Operator : [Operator Instructions] And your first question comes from the line of Brad Zelnick at Jefferies. Your line is now open. Brad Zelnick : Thank you very much for taking my questions. Mark, you said the 517,000 Creative sub adds was consistent with your expectations, given Q1 seasonality. So this is very different than last year’s Q1 seasonality if we just look at subs. But can you maybe frame it for us in the context of total Creative units since obviously there is a lot less Creative perpetual revenue this year? Shantanu Narayen : Sure. So let me also jump in a little bit on color for the quarter and then Mark can add to that. I think we’ve been telling you for a while that Digital Media ARR is really the best health for the business, and as you saw that grew to $2.09 billion. One of the things that I think we should also reflect is that, we offer customers multiple ways to acquire Acrobat subscriptions. And depending on the type of customer, this can get reflected in either the Creative subs and ARR Brad or the document ARR. So when you acquire Acrobat as part of CC offering whether it’s single app or complete, that’s reflected in the Creative ARR. And when you get it as part of the Document Cloud offering, the ARR is then reflected in the Document Cloud. And this is actually very similar to the way in which we offer the perpetual software when we had Acrobat as well as Creative Suite. So one of the things in the quarter was that as we contemplated the Acrobat mix changing, we experimented we’re driving more Acrobat in conjunction with the Document Cloud launch. So if you look at the Acrobat subs ratio in Q1, if they were reflected in CC subs similar to prior quarters, the Creative reported subs would have been significantly higher. And so I think a number of you probably had the mix different in terms of being over-weighted in CC subs and ARR since you guys were unaware of the experimentation we were doing in conjunction with the Doc Cloud launch. So when we look at the results that we had in Q1 overall, as it relates to Digital Media ARR and adoption of the Creative Cloud and Acrobat, that’s why we said it was very much in line with our targets. Mark Garrett : I think the only thing I would add to that… Brad Zelnick : Thank you. That’s actually helped. Mark Garrett : The only thing I would add to that Brad is in Q4, we did have holiday promos, especially around photography to drive adoption in advance of the holidays. And in Q1, we really did not have any of that. So we didn’t have much from a promo perspective in Q1 driving units. Brad Zelnick : That’s helpful. And if I can just slip in one quick follow-up. Mark, I think, you see it in the release or in your comments, but especially in light of Fotolia closing and the volatility in FX translation and the impact that that has, can you just remind us of your full year targets? Thanks. Mark Garrett : Yes. Let me ask you since you brought up FX, let me talk about FX for a couple minutes because it is important. And there’s three considerations that you should consider as it relates to FX, right. One is revenue. Two is the balance sheet and specifically deferred revenue. And then the third is ARR, as it does impact ARR as well. So let me just walk through each of those. I think I have explained this over the years. We have a hedging program to hedge a portion of our revenue through a cash flow hedging program. So we have revenue and expense in euro, pounds, and yen, as you know and we hedge a large portion of that net position of revenue versus expense in each of those currencies by buying put options. And we hedge a few quarters out at any point in time and we have been doing that for years and you saw it worked very well in Q1 and Q2 -- in Q1 I should say. Because we hedge a few quarters out in a rate dropping environment, it was minimal impact to our revenue after hedging in Q1 and you saw that in the results. At current rates, I would also expect minimal impact to revenue after hedging in Q2, and that’s factored into the Q2 guidance that I provided. And as we learn more about rates going forward for Q3 and Q4, we will let you know about any potential impact at that time. And as is customary for us, we are not going to update our annual targets at this time. The second piece is the balance sheet. The deferred revenue balances, the balance on the balance sheet is protected. However, again, in a rate declining environment since deferred revenue balances are made up of activity from as much as a year ago, the deferred revenue that comes off the balance sheet is at a higher rate than the new deferred revenue going onto the balance sheet. So the rate drop does have an impact to net new increases to deferred revenue. And then the last piece is ARR. So as you know, we report ARR in constant currency from the rate at the start of the year. And as you know, we revalued our year ending ‘14 ARR based on December '14 rates. But when you compare Q1 of '15 net new ARR to Q1 of '14 net new ARR, it’s a similar situation to deferred where in the '14 net new ARR, you would be building that up at a higher rate and that lowers the reported year-over-year growth. So it’s likely had a mid-single-digit impact on year-over-year net new ARR growth in Digital Media. So that’s kind of a mouthful, but I know there’s going to be a lot of questions on FX and hopefully that clears it up. Brad Zelnick : No. That’s very helpful. And just on the full year targets and I’ll leave it here after this. The 5.9 million Creative subs and I know that’s only one piece of a much bigger story, but everybody seems to focus on it, that still stands and you still feel confident in that for the year? MarkGarrett: So again, Brad, we customarily do not update annual guidance after Q1 and we’re not doing that today. But as Shantanu said, we’re happy with how we did in Q1 and it’s consistent with our expectations. Brad Zelnick : Thank you so much. Shantanu Narayen : Next question please. Operator : And your next question comes from the line of Brent Thill from UBS. Your line is now open. Brent Thill : Hi. Good afternoon. On the marketing side, number continues to do very well. I’m just curious when you look at the percentage of the revenue that is perpetual now versus recurring. Can you just give us a sense of what you're seeing going forward in that line? And I know it was seasonal in Q1 when you called for that and anything else we should think about as we’re modeling that up for the year. MarkGarrett: Yes. Brent, as we said, towards the end of last year, we’ve kind of gotten to the point where the perpetual number is pretty small. I mean, it’s going to bounce around a little bit based on customer preference, but it's not. It's not a material number anymore and it's not going to swing the revenue that much anymore. So we feel good about the fact that that has transitions into a more ratable model now. Brent Thill : Okay. And the follow-up for Shantanu on Document Cloud, I know there is pieces of this that you had and somewhat of a re-brand. Can you just give us a sense of maybe what’s new at a high level and what opportunity you think this can unlock? Now, it seems that you’re a more focused on this than perhaps in the past. Shantanu Narayen : Sure, Brent. I mean, I think the fundamental issue is that the need to manage documents and document workflows is actually increasing rather than decreasing. And we have this incredible franchise when we think about both the reader, distribution that we have across virtually every device, the fact that we've distributed over a billion of them. And the fact that PDF has been accepted as the de facto standard for documents. So when you put that together and you consider the massive shift that's happening from paper to digital, we just think we have a really unique opportunity to convert paper documents to this high-quality PDF that you can edit, you can auto populate, you can fill forms, you can send for signatures and more. And so what we announced today was as part of the Document Cloud Acrobat DC, which is a completely re-imagined user experience far more simple, far more intuitive, we've aligned all of the product offerings from Acrobat to reader to standard, all associated with Acrobat DC. And then the other thing we've done is a huge focus on mobility, so we’ve designed Acrobat DC to be touch enabled and work seamlessly across devices. These signatures are now part of every subscription of Acrobat DC and we think that integrating documents across other systems like Office 365 as well as other storage providers we've added significant more value. And so we just feel like this is a large opportunity, it’s ours to win. And I think when you think about both, what's being used within the Document Cloud, as well as I mentioned earlier, Acrobat within the Creative Cloud, it just continues to be an opportunity that we focus on. So as we think about the year for Acrobat, we think we will keep revenue relatively consistent with last year, but we will grow ARR quite a bit. And so I think we're excited about that. Brent Thill : Thank you. Operator : And your next question comes from the line of Steve Ashley for Robert W. Baird. Your line is now open. Steve Ashley : Great. I just had maybe my first question on the Marketing Cloud. Just wondering if you had any color around bookings growth you’re seeing there? Shantanu Narayen : Yeah. Steve, I think, the bookings growth again were in line with targets that we have. As you know, you were there at Summit. Summit was an incredibly successful event for us. It’s -- as we said in the prepared remarks, the largest pipeline growing event for us. I think, we continue to grow our lead in that particular category and our recognized does that. So we’re pleased with what we did in Q1 and continue to be really bullish about the opportunity that Adobe has in the marketing space. Steve Ashley : Yeah. One other things you guys talked about at the Marketing Event was some of the core services in the Marketing Cloud included assets. And I’m just wondering in terms of the long-term strategy, is there a plan or hope to maybe link that to the Creative Cloud and if there is maybe you could talk about that a little bit? Shantanu Narayen : Sure. I think the core services that you’re alluding to Steve, for the benefit of others on the call, I mean, there are things like what we've introduced with audience manager, the ability to run both campaigns and to have them specific to customer segments, whether you're doing that for your media span, whether you're doing that associated with understanding analytics or targeted campaigns and converting them to paying customers. With respect to the integration of the Clouds and today I’ll say, three Clouds. One of the things that we continue to view is Asset Management is the core of what you can do between Creative Cloud and Marketing Cloud. You saw number of customers talk about how the velocity of content creation is increasing and how the fact that we have integrated, the Clouds help them with that. So the core service I would say are the Asset Management service that's part of the Marketing Cloud, the ability to run campaigns and overtime you can also look at the audience segmentation. The other thing, I think, we showed at Summit was the ability to look at an asset as part of the sneak and understand how effective the usage of that asset was creative asset across all campaign. So I think that also give some indication of the innovation that we’re doing in this space. Steve Ashley : Great. Thanks. Operator : And your next question comes from the line of Brian Wieser at Pivotal Research. Your line is now open. Brian Wieser : Yeah. Thanks for taking the questions. First, I was wondering if you can update us on the backlog for the overall business and separately, I was wondering if there’s any characterizations you can offer on the numbers of customers you have in the Marketing Cloud alone? MarkGarrett: Hi. It’s Mark. So on unbilled, we only disclose that number with the K at the end of each fiscal year. So, obviously, we would expect that to keep growing, but we don't disclose the number other than at the K. Shantanu Narayen : And Brian, with respect to the number of Marketing Clouds customers, they are in the thousands. I think the focus on those customers as you know is both with new logo addition, as well as with increased upsell of our existing solutions, but we don't have an update to that number. It is clearly in the thousands and growing well. Brian Wieser : Okay. Great. And for me just one brief question around Nielsen and your relationship there, just wondering if you could update us on when you expect to see product in the market and any current commentary on relationships, evolution of that product? Shantanu Narayen : Yeah. Brian, the rational for the partnership that we announced was that, every single advertiser and publisher would like to see consistent cross domain understanding of customers. And since we are clearly the leaders of what’s happening in web analytics and Nielsen is a leader of what’s happening on TV, providing a consistent demographic of who’s viewing what content across what device is something that the two of us can uniquely provide. We are working together. We don’t have an update on exactly when that’s going to be in market. But it’s been received well by publishers and advertisers because they do want that currency to cut across multiple TV screens, multiple screens. Brian Wieser : Great. All right. Thank you very much. Operator : And your next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is now open. Brendan Barnicle : Thanks so much Mark. In your prepared remarks you mentioned that blend in AR -- blended ARPU across Creative Cloud offerings declines slightly as a result of mix. We’ve seen that for a while now as you’ve had individual product sales. When do you think that starts to bottom out? Are you guys modeling a point where that bottoms out? Mark Garrett : Yeah. Actually it’s come down this quarter less than it has in recent quarters. So it was a much smaller decline this quarter. So it is conceivable that we are starting to see that now actually. Shantanu Narayen : Yeah. When we look at it, maybe I’ll just add to that. We found the ARPU very healthy in the quarter. The thing to remember again is the steady state of the creative business for sure what we had was both a mix between the full units as well as individual point units. And I think we’ve stated in the past that if you consider it from a revenue point of view, it was approximately a 70-30 towards the suites. And if you consider it from a units’ point of view is 50-50. And when we rolled out the Creative Cloud, as you know we rolled out the Creative Cloud complete first and then added offerings such as the individual lap offering for team as well as the CCPP offering. And so all of this is happening in line with our expectations. We are increasing the market for both of those, but the revenue that we see today for Creative Cloud complete as a percentage of the total revenue is higher than what it was with the creative suite offerings. So things are playing out in line with our expectations. Brendan Barnicle : And Shantanu, at the marketing companies, is it clear you are seeing bigger deals and bigger RFEs. Do you have any commentary of what you seeing on a sort of ARPU over Marketing Cloud side of business? Shantanu Narayen : Well we don't use the word ARPU there. But in terms of the large deals and the number of transactions greater than $500,000 or $1 million we don't have an update right now. Actually Brad had some data that he put in that datasheet so that does reflect the progress that we are making in multi-solution selling. We are not updating that today over and above what Brad described at the marketing summit, Brendan. Mark Garrett : And just for reference those are in the slides on our IR site, there's a reference to the summit slides from last week that you can access that information at. Brendan Barnicle : And then just one last product question Shantanu on the document cloud, I was wondering what you guys are seeing with EchoSign and changes in the competitive landscape there? Thanks. That’s it for me. Shantanu Narayen : Well, I think with respect to signatures, the demand for signatures the organic demand for signatures and making that paper based workflow move digital. I think we are seeing tremendous demand for that. I think there are a couple of players in that market. I think today's announcement allows us to enable every reader on every device to start to participate in the electronic signature workflow, which we think will be a jumpstart both for us as well as other players in that market. It's going to be a big market and it's going to take years by the time we get all of the approval. So I think everybody is going to see a significant amount of growth. And there are other competitors as you point out. But we really like what footprint we have right now and the offering that we have in the market. Brendan Barnicle : Great. Thanks guys. Operator : And your next question comes from the line of Mark Moerdler at Bernstein. Your line is now open. Mark Moerdler : Thanks. This is Mark Moerdler. So quick questions, do you believe the FX has had any impact on subscriber’s adoption in any of these regions. Do you think you’ve seen anything slower in terms of the mix of subscribers? And was the FX itself a larger impact on creative than other divisions? Then I have got a quick follow-up. Mark Garrett : I mean the net to both of those questions is no. I don't think it has any impact on customer adoption and the FX is going to be skewed towards where revenue is by currency and that's not going to be much different for creative versus other pieces of the business really. Shantanu Narayen : Mark, just to, again clarify, both all of the individual offerings, team continued to do well in the quarter. We had a strong quarter for team, as it related to Creative Cloud subscriptions. And again, I do want to repeat that the Acrobat subscriptions in the quarter, virtually every one of them went against the Document Cloud ARR as opposed to the Creative ARR but it is reflected in the Digital Media ARR. Mark Moerdler : So is that going to then -- is that a long-term impact? In other words, are we going to see more of those subscribers float over? I know you’ve guided to a number in terms of subscribers for the year, but overall should we see that as a long-term gain that those pick ups are going to occur on the document side? Shantanu Narayen : No, I think we were experimenting this time, as it related to the Document Cloud launch. I think we continue to think that there's a tremendous headroom in the Creative Cloud install base that we will continue to drive towards. And we remain confident about the long-term subscriber numbers as well, that we will continue to drive in Creative. But I think, this time we wanted to reflect that you see that strength more on the Document ARR than the creative ARR. Mark Garrett : And that mix -- that mix, Mark, would’ve been factored into the 5.9 when we guided. Mark Moerdler : Okay. And one another quick one, does the Document Cloud drive any change in revenue recognition license versus subscription? Shantanu Narayen : Well, we certainly have subscription as an offering right now. That subscription offering for Acrobat has been there for a while. We continue to believe that as you -- the migration will not happen the way the Creative Cloud migration happened. So, we've said that revenue we expect to be in the Document Cloud business relatively flat for the year but ARR to grow well. Mark Moerdler : Thank you very much. Operator : And your next question comes from Jay Vleeschhouwer of Griffin Securities. Your line is now open. Jay Vleeschhouwer : Thanks. Good evening. Mark, question for you first. Regarding the revenue profile in parts of your business, particularly marketing cloud because that is -- you have a mix in some cases of platform access revenues and then you have a large mix of course of usage based or transactional based revenue. Could you talk about how you think that mix might evolve both in the marketing cloud side of the business and perhaps in the other sides of the business, Creative Cloud or doc services in terms of platform and usage based revenue and then a follow-up? Thanks. Mark Garrett : If I understand you correctly, Jay, I mean for the most part, it’s all usage based. I mean, some of it is specifically tied to usage numbers every single quarter. Some of it is based on an annual usage number. But for the most part, it is usage-based revenue kind of oriented. Jay Vleeschhouwer : Okay. Okay. On the Creative Cloud subs add number, two things you mentioned last week at Summit that you have 5 million trial users signed up from your player downloads. How are you thinking about converting those to paying subscribers? And in terms of another potentially very long source of subscriber add, particularly for DSLR. How are you thinking about converting the old element space to subscription? I would think that the package full of elements would have over the years generated several millions at least of nominal users, so how are you thinking about converting them? Shantanu Narayen : It’s a good question, Jay. I think both the millions of elements customers that we have, as well as the over 30 million Acrobat units that are out there, both represent an install base that we will consider moving to the appropriate subscription offering. So more specifically to your question about elements, the elements base, certainly we believe a better migration path for them moving forward is the Creative Cloud Photography. Both the elements base, as well as the trial users, we have a very carefully constructed campaign to continue to your target them and have them move over from being trial users to being paid subscribers of the Creative Cloud and we will continue to execute against that opportunity. Jay Vleeschhouwer : All right. Just one more if I may, Mark, your Q1 cash flow was relatively low or lower than Q1 last year anyway? In spite of that just given the revenue staffing of various subscription businesses and margin expansion that you will likely see this year, were there the reason that your operating cash flow should probably meet or beat $2 billion for fiscal ’15? Mark Garrett : So I am not going to guide to a total number for the year, Jay. But suffice it to say that this is a low quarter coming off of Q4 with all the payments that we make in Q1 and it’s going to back very nicely through the rest of the year. Jay Vleeschhouwer : Thanks a lot. Operator : And your next question comes from line of Jennifer Lowe at Morgan Stanley. Your line is now open. Jennifer Lowe : Great. Thank you. I wanted to touch quickly on the reseller channel and in particularly in Q3 there was little bit of air pocket there given the pulling out of perpetual but seemed like that came back pretty strongly in Q4? Do you think the reseller channel is now kind of stable where you like to see it at this point? Shantanu Narayen : Yeah. I feel good, Jennifer, about how the reseller channel is also focused on the Creative Cloud opportunity and how they're executing against it. They are certainly targeting the installed base and helping them migrate from Creative Suite to Creative Cloud. So we feel good about it around the world. Jennifer Lowe : Great. And then just one for, Mark, this is the second quarter in a row, where expense growth -- operating expense growth has been less than a percent, which is pretty impressive given, especially how you are investing in the Marketing Cloud? I guess, two questions, one is, how much of that, or maybe really just one question, how much of that is upward figure proactively making trading costs versus something more tactical like FX? Mark Garrett : It’s not FX. We manage the cost structure the company very, very carefully. We've always been very good at that frankly. We've got the money we need to invest in the business. We’ve got the sales capacity we need to invest in the Digital Marketing business. That OpEx number, you are going to see it start to grow. Now as we go through the year, don't forget when you come off of Q4, there's a lot of additional comp expense for sales commissions and things that you have in Q4 that you don't have in Q1. So that's a big reason for what you see between Q4, Q1. But it will ramp as we go through the rest of the year and you'll see that based on the guidance for the year that we had provided. Jennifer Lowe : Great. Thank you. Operator : And your next question comes from the line of Samad Samana from FBR Capital Markets. Your line is now open. Samad Samana : Hi. Thanks for taking my questions. I wanted to touch base on Fotolia with the acquisition that closed? Could you remind us how many subscribers they have and could you share any data on the overlap between their subscriber base and who is using the Creative Cloud already? Shantanu Narayen : We have not provided their subscriber base numbers. What we have provided is the overall market available opportunities. So, we've said, when you consider all of services, it’s approximately a $4 billion. We have also shared everything over 90% of the people who contribute stock content, use our tools and over 80% of those who buy that stock content use various tools. And strategically, what you should think about it is that the integration is on track. We will continue to offer as a standalone service the two models that Fotolia had namely on-demand model as well as a subscription model for stock photos as well as we will introduce new offerings, which includes Creative Cloud and stock offering. So that's conceptually how you should think about it. When it's introduced into the market, we’ll certainly provide more details. Samad Samana : Okay. And if I could ask one more on the Creative Cloud side of the business. Historically, you provided a mix between point products and full suite numbers. You didn’t break that mix out this quarter. Could you give us an idea if there is any type of meaningful change directionally between the mix that you’d seen over the last few quarters and this quarter and that’s my last question? Mark Garrett : It’s Mark. It’s 59% full. Samad Samana : Okay. Great. Thanks for that. Operator : And your next question comes from the line of Walter Pritchard at Citi. Your line is now open. Walter Pritchard : Hi. Thanks. Mark, I’m just wondering as we think about seasonality this year on the subscriber side. You put the line in the mark that you would expect subscribers to grow each quarter. It seem like did you step up a meaningful year -- more meaningfully during some of these quarter at $5.9 million and I’m wondering with this experimentation in Q1 that it sounds like it’s about to continue in Q2. Should we expect that there is sort of step back up from Q1 and Q2 with some of the Acrobat stuff coming back into the Creative Cloud market? Mark Garrett : So yes, there will be a step-up from Q1 to Q2. It wouldn’t just be from Acrobat. It would be a natural step-up as we march towards that $5.9 million that we had guided to but definitely a step-up from Q1 and Q2. Shantanu Narayen : And Walter, the other thing as you are aware is as we continue to rollout the innovation roadmap that also continues to get people who are on CS6 of prior versions moved over to the Creative Cloud. So that will continue as well. Walter Pritchard : And I have just one follow-up. Last year, you had a sort of discrete events with the major launch midyear and then in Q3, you saw basically cleared lot of the point products, the package products and they started selling. That seemed like that was a bit of a shocking arm for the subscribers’ growth numbers during the year. As we looks at this year, is there anything like that we should be aware of that would impact our seasonality other than from the fact that you addressed there? Mark Garrett : We’re not announcing products but, Walter, I think to the question that you asked you can expect that we’re going to be coming out with a fair amount of innovation. And if you look at our historical delivery, delivering something again in a few months would be consistent with what we've done last year, yes. Walter Pritchard : Okay. Thanks very much. Mike Saviage : Operator, while we take -- operator, we’ll take two more questions. Operator : Thank you. Your next question comes from Matt Williams at Evercore ISI. Your line is now open. Matt Williams : Hi guys, sitting in for Kirk Materne. Thanks for taking the question. Just maybe if you could provide a little bit of color on sort of how you are thinking about the reacceleration of Marketing Cloud revenues throughout the remainder of the year given that you are lapping the anniversary of deferring more of the experienced manager campaign revenue? Mark Garrett : Yeah. I mean, we had -- as you know, we had guided to 25% revenue growth for the year. We start out the year here with 17%. It definitely ramps the growth from a year-over-year perspective. We will ramp pretty much every quarter as we get up to Q4 to get to that 25%. Matt Williams : Okay, great. And I mean this but did you guys give up booking growth rate for the Marketing Cloud for quarter? Mark Garrett : Now we did not. We don't disclose the bookings growth rates every quarter. We just said -- Shantanu had mentioned that we had a good quarter. Matt Williams : Okay. Fair enough. Thanks for taking the questions. Operator : And your last question comes from the line of Derrick Wood at Susquehanna International Group. Your line is now open. Derrick Wood : Thanks. Last week, you guys talked about the TAM for the photography market being significantly higher than the traditional creative products and now you’ve got a more strategic cloud focus on document side. So have you guys done the work to kind of update the total user TAM and the Digital Media segment? Shantanu Narayen : We certainly have a lot of data on what's happened with the Acrobat segment as well. And I think to Jay’s question earlier, as well in terms of what the available opportunity is for us to attract customers who previously brought elements that is -- I think at max, you can expect us to continue to give you an update on what's available as a total available market. We are not certainly providing that level of detail on our earnings call, Derrick. Mark Garrett : And Derrick, you could also watch the slides from the past that have also disclosed some of that, so I’ll be happy to follow-up later on where we will discuss sort of the Document Services TAM and related addressable markets. Derrick Wood : Okay. And then on the -- you guys mentioned that ETLA pipelines are building nicely and I suspect ETLAs were seasonally softer in Q1, as is typical. Can you just remind us as what kind of seasonality you typically see throughout the year and then, whether do you think the Document Cloud will help drive some kind of incremental strength in the size of ETLA? Shantanu Narayen : So, ETLA is typically, as you’ve seen historically, Q4 tends to be a seasonally very strong quarter. Q1 does, as you point out, tend to be a weak quarter and then it starts to build up and so we expect to -- as Mark also said in the prepared remarks see a sequential increase. And to your other question, there is no doubt in our mind that what we're seeing is, as we have multiple offerings that are targeting an enterprise, our ability to sell higher into the organization and sell more complete solutions is increasing. And from that point of view, the availability of the document offerings will only help the fact that we have creative offerings, as well as we have marketing offering. So, I think all of those with the announcement of the Document Cloud should be positive. Derrick Wood : All right. Thank you. Shantanu Narayen : Since that's a last question, maybe I will just recap and say, we're proud of what we accomplished in Q1 and the strong start that we had to fiscal ‘15. It was a strong revenue, as well as EPS quarter. We drove strong Digital Media ARR and had a very successful Summit that we organized in Utah. We announced the new Document Cloud this morning and the reception to that has also been extremely positive. Fotolia integration is on track. We will make available the Document Cloud to our customers also this quarter. And so we feel like we're in great shape and we remain focused on driving both product innovation, as well as strong financial results for the rest of fiscal ‘15 as well as beyond. Thank you for joining us today. Mike Saviage : And this concludes our call.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,015	2	2015Q2	2015Q2	2015-06-16	1.65	1.739	2.596	2.719	4.58482	29.63	28.65	Executives: Mike Saviage - VP, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett – EVP and Chief Financial Officer David Wadhwani - SVP and General Manager, Digital Media Analysts: Walter Pritchard - Citi Brent Thill - UBS Brad Zelnick - Jefferies Kash Rangan - BofA Merril Lynch Sterling Auty - JPMorgan Ross MacMillan - RBC Capital Markets Kirk Materne - Evercore ISI Mark Moerdler - Bernstein Philip Winslow - Credit Suisse Jay Vleeschhouwer - Griffin Securities Keith Weiss - Morgan Stanley Steve Ashley - Robert W. Baird Alex Zukin - Stephens Samad Samana - FBR Capital Markets Shateel Alam - Goldman Sachs Operator : Good afternoon, Ladies and gentlemen. I would like to welcome you to Adobe Systems Second Quarter Fiscal Year 2015 Earnings Conference Call. My name is Ian and I would now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; Mark Garrett, Executive Vice President and CFO; and David Wadhwani, Senior Vice President and General Manager, Digital Media. In the call today, we will discuss Adobe's second quarter fiscal year 2015 financial results. We will also review announcements made earlier today regarding our latest Creative Cloud release, and our new Adobe Stock offering. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We've also posted PDFs of our earnings call prepared remarks and slides, our financial targets and an updated investor datasheet on www.adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, June 16th, 2015, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release and financial targets document we issued today as well as Adobe's SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our financial targets document and in our updated investor datasheet on Adobe's Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Adobe delivered strong results in Q2 with revenue of $1.162 billion and non-GAAP earnings per share of $0.48. Momentum across our Creative Cloud, Document Cloud and Marketing Cloud businesses drove these results. As digital continues to disrupt industries, Adobe is uniquely positioned to help brands, media companies, government agencies and educational institutions create digital experiences that are unique, relevant, and effective across every touch point. We are the only company with the vision and assets to address the entire content lifecycle – from creation and delivery to optimization and monetization. We are accelerating the pace of innovation in each of our Cloud offerings and customers are looking to us to provide a complete, integrated platform for their digital transformation. Adobe Marketing Cloud is the industry's most comprehensive offering. We had strong bookings in Q2 and reported revenue of $327 million, representing 15% year-over-year growth. We continued to drive Adobe Marketing Cloud adoption across all eight solutions in Q2 and saw a significant uptick in customers acquiring multiple solutions. In fact, two thirds of our top customers this quarter licensed multiple solutions. Key customer wins included Saks & Co, The Gap, DirecTV, Fox Entertainment and Canadian Imperial Bank of Commerce. The breadth of Adobe Marketing Cloud has been extended with two new solutions, Adobe Audience Manager and Adobe Primetime. Adobe Audience Manager is a data management platform that integrates online and offline data enabling marketers to create and target audience segments in their multi-channel campaigns. Adobe Primetime is a multiscreen TV platform that helps broadcasters, cable networks and service providers create and monetize engaging and personalized TV and film experiences. Primetime has emerged as the global leader in powering TV content across screens, including over-the-top devices such as Apple TV and Roku, and we're partnering with content owners, programmers and pay-TV providers such as Major League Baseball Advanced Media to offer innovative programming across all screens. The integration of the creative and marketing workflow is a unique differentiator for Adobe Marketing Cloud. In Q2, we announced a common asset management foundation across Adobe Marketing Cloud and Creative Cloud, which will make it easier and more efficient for creative and marketing teams to work together. In Q2, we acquired Tumri's advertising technology to add dynamic creative optimization to Adobe Media Optimizer, extending Adobe's lead in the programmatic advertising space. We continue to build a vibrant ecosystem of industry partners for Adobe Marketing Cloud. In Q2, we announced a strategic partnership with Microsoft to integrate Adobe Marketing Cloud into Microsoft's Dynamics CRM to help enterprises better engage with customers. Our Digital Marketing events around the world provide inspiration, education and networking opportunities for leading brands and marketers around the world. In Q2, the Digital Marketing Summits in Salt Lake City, London, and New Delhi were all sold out, and this summer, we will host thousands more at our Digital Marketing Symposia in Sydney and Singapore. Industry analysts continue to recognize our solutions as market-leading in their categories. In April, Gartner recognized Adobe's leadership in its 2015 Magic Quadrant for Multichannel Campaign Management. In Digital Media, we launched the Document Cloud in March and early response has been positive. We saw strong Acrobat DC subscription uptake during the quarter. As the paper-to-digital transition continues, Adobe has a tremendous opportunity to capitalize on our leadership with the PDF and Acrobat franchise. Document Cloud features new mobile and touch capabilities and has built-in electronic signature tools for all users. We reported Document Cloud revenue of $197 million in Q2, and exited the quarter with $329 million of Document Cloud Annualized Recurring Revenue or ARR. Creative Cloud continues to be the preeminent destination for creatives. We are migrating customers from our Creative Suite installed base as well as attracting new users. In Q2, Creative ARR surpassed the $2 billion mark, driven by strong adoption across our Individual, Team and Enterprise offerings. Net new Creative Cloud subscriptions grew by 639,000 in the quarter to over 4.6 million and represent 38% year-over-year growth. Across our Creative and Document Cloud businesses, total Digital Media ARR grew to $2.35 billion as of the end of Q2. Today, we launched our 2015 release of Creative Cloud, featuring innovation in desktop and mobile apps, and Creative Sync technology to enable seamless integration between the two. We unveiled Adobe Stock, a new service that enables creatives to buy and sell stock content as part of the Creative Cloud experience. Now I would like to turn it over to David to provide an update on our Creative Cloud strategy and more details on today's announcements. David? David Wadhwani : Thanks, Shantanu. Our Creative Cloud strategy focuses on three growth drivers : The continued migration of Creative Suite customers to Creative Cloud; the expansion of our market through tiered offerings that attract new customers; and the introduction of value-added services that increase ARPU. We are executing well in each of these areas. Our strategy to migrate Creative Suite customers to Creative Cloud is working. We are delivering constant innovation in our Creative Cloud desktop apps, we are expanding our family of connected mobile apps, and we are delivering powerful, integrated asset management capabilities that connect our mobile and desktop app workflows. These cross device workflows are resonating with our customers and have been improving both trial conversion and customer retention. In addition to migration, we are successfully attracting new customers to Creative Cloud through our family of mobile apps and the Creative Cloud Photography Plan. In Q2, we delivered a milestone release of CCP featuring a simplified user experience and new mobile features. CCP is ideal for all photographers and a large percentage of the subscribers are first time Adobe customers. Finally, we remain focused on expanding the value of Creative Cloud through services that drive stickiness, conversion and increased ARPU. Today's introduction of Adobe Stock builds on our Creative Marketplace and represents an estimated $3 billion of incremental addressable market. Now, I'm happy to share a bit about today's 2015 release of Creative Cloud. The release includes major updates to all our flagship desktop apps including significant breakthroughs in productivity, performance and new features. We also updated our family of mobile apps across iPhone, iPad and now for the first time, Android. And we announced significant updates to CreativeSync, the technology that enables our mobile and desktop apps to work together seamlessly. The combination of these capabilities unlocks new creative workflows that will motivate CS customers to upgrade, and drive active use and retention of existing members. Enterprise customers will benefit from all the new Creative Cloud features. In addition, they will get expanded security options and deeper connections between Creative Cloud and our Digital Publishing and Marketing Cloud offerings. Finally, we're introducing Adobe Stock, a brand new service based on our acquisition of Fotolia. We estimate that 85% of Creatives who buy stock content use Adobe tools, and more than 90% of stock content sellers use Adobe software in the preparation of their photos and images. Adobe Stock is the first stock marketplace embedded into the way creatives work. Deep integration with our Creative Cloud desktop apps including Photoshop, Illustrator and InDesign makes buying and using stock photos, images and illustrations incredibly easy. The global launch of Adobe Stock shakes up the multi-billion dollar stock content market. Customers can buy images on demand or as part of a subscription plan. Most importantly, existing and new Creative Cloud members are also able to add Adobe Stock to their subscription plan at a special rate driving increased ARPU over time. Adobe Stock extends the value of Creative Cloud to subscribers who want to monetize their assets and participate in a large, global Creative Marketplace. In just a few short years, we have successfully re-imagined the entire creative process driving over $2 billion of ARR. Today's announcements significantly advance all three of our growth objectives. We're excited this innovation is now available to all our subscribers and we can't wait to see what they do with it. Mark? Mark Garrett : In the second quarter of FY15, Adobe achieved record revenue of $1.162 billion. GAAP diluted earnings per share were $0.29 and non-GAAP diluted earnings per share were $0.48. Highlights in our second quarter include, growing Creative ARR to $2.02 billion exiting Q2. ARR has now grown to the point where it has exceeded the peak annual revenue achieved from our legacy Creative Suite perpetual offering. Achieving total Digital Media ARR of $2.35 billion which is the sum of Creative ARR plus another strong quarter of Document Cloud ARR growth; delivering Adobe Marketing Cloud revenue of $327 million; showing leverage in our model, with strong year-over-year growth in operating and net income; growing deferred revenue to a record $1.23 billion; achieving strong cash flow from operations of $471 million, and exiting Q2 with a record 72% recurring revenue. In Digital Media, we achieved revenue of $748 million. This segment has two major components of revenue, Creative Cloud and Document Cloud. The best overall measure of the health of our creative business is Creative ARR, and we grew ARR by $230 million during Q2. Net new Creative Cloud subscriptions increased by 639,000 thousand, and we exited Q2 with 4,610,000 Creative Cloud subscriptions. Retention rates remain strong. With our Document Cloud products, we achieved revenue of $197 million. The benefits of subscription and Enterprise Term Licensing Agreements, or ETLAs, which is a core go-to-market focus with our new Document Cloud offering that shipped during the quarter, helped to grow Document Cloud ARR to a record $329 million exiting Q2. In our Digital Marketing segment there are two components. The first is revenue from our Adobe Marketing Cloud offering and we achieved Adobe Marketing Cloud revenue of $327 million, up 15% year-over-year. Bookings accelerated in Q2, driven by strong pipeline creation at our Digital Marketing Summit user conferences across the world during the quarter. Multi-solution adoption is growing the size of customer engagements. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $40 million in Q2 revenue consistent with our expectations. Print and Publishing segment revenue was $48 million in Q2. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $16 million. We had $22 million in hedge gains in Q2, FY15, versus $24 million in hedge gains in Q1, FY15, thus the net sequential currency decrease to revenue considering hedging gains was $18 million. From a year-over-year currency perspective, FX decreased revenue by $48 million. Considering the $22 million in hedge gains in Q2, FY15, versus roughly $2 million in hedge gains in Q2, FY14, the net year-over-year currency decrease to revenue considering hedging gains was $28 million. In Q1, Adobe's effective tax rate was 18.5% on a GAAP-basis and 21% on a non-GAAP basis. The GAAP rate was lower than targeted primarily due to tax benefits recognized as a result of the completion of certain tax examinations. Employees at the end of Q2, including summer interns, totaled 13,266 versus 12,698 at the end of last quarter. Our trade DSO was 39 days which compares to 45 days in the year-ago quarter and 44 days last quarter. Cash flow from operations was $471 million in the quarter. Deferred revenue grew to $1.23 billion, up 32% year-over-year. Our ending cash and short-term investment position was $3.41 billion compared to $3.18 billion at the end of Q1. In Q2, we repurchased approximately 2.6 million shares at a cost of $200 million, of which $133 million was done under the new $2 billion authorization approved by our Board of Directors in January, 2015. Now, I would like to provide our financial outlook, covering both Q3 as well as the rest of FY15. We have executed well in the first half of FY15 meeting or exceeding key targets that we set at the outset of the year and we expect our momentum to continue in the second half of this year and into FY16. Adobe has a global business, where currently more than 40% of our revenue comes from outside the U.S. As we've explained, our hedging efforts focus on three quarters out and that strategy has served us well over time. Based on the rolling approach of our hedging program, our hedges maturing in the second half of FY15 and early FY16 were struck at current rates. Therefore moving forward our hedges will not mitigate the FX impact against our FY15 and FY16 revenue targets provided in December 2014. With the strengthening US dollar on a revenue weighted average basis, FX rates have moved approximately 9% from December of 2014 until today. We expect approximately $900 million of foreign currency denominated revenue in the second half of FY15. Applying the 9% rate change to the expected $900 million of revenue yields an estimated $80 million of impact due to FX that we expect will not be offset by hedging. We estimate $30 million of this impact will occur in our third quarter. Our FY15 annual revenue target was $4.925 billion. This revenue target was the sum of our original guidance of $4.85 billion in December plus the additional $75 million of expected FY15 revenue from our acquisition of Fotolia in January. We are now targeting FY15 annual revenue of $4.845 billion, solely due to the estimated $80 million impact of FX in the second half of FY15. We also expect second half year-over-year Adobe Marketing Cloud reported revenue growth of approximately 24%. Given our business momentum, we are increasing our Digital Media ARR target to approximately $2.925 billion exiting FY15, which as a reminder is measured on a constant currency basis. This updated ARR target does not include any benefit from our newly launched Adobe Stock service. Despite the impact of currency, we continue to expect Adobe Marketing Cloud bookings growth of approximately 30% for the year and non-GAAP earnings per share of approximately $2.05.Taking into account the negative impact of $30 million from FX, in Q3 of FY15 we are targeting a revenue range of $1.175 billion to $1.225 billion. In Q3, we expect the sequential increase in Digital Media ARR to be similar to what we achieved in Q2; we expect Digital Media segment revenue to grow sequentially and we expect approximately 21% year-over-year reported revenue growth for Adobe Marketing Cloud. We are targeting our Q3 share count to be 506 million to 508 million shares. We are targeting net non-operating expense to be between $14 million and $16 million on both a GAAP and non-GAAP basis. We are targeting a Q3 tax rate of approximately 25% on a GAAP basis and 21% on a non-GAAP basis. These targets yield Q3 GAAP earnings per share range of $0.23 to $0.29 per share, and Q3 non-GAAP earnings per share range of $0.45 to $0.51. In summary, our strong execution continued in Q2 and Adobe's P&L now reflects the positive impact from the growth of our Cloud-enabled solutions. Mike? Mike Saviage : Thanks Mark. As part of our Adobe MAX conference this fall in Los Angeles, we will host an analyst meeting on the afternoon of Tuesday October 6th. Registration information for MAX and the analyst meeting will be sent out later this month. The main keynote presentation at MAX will be on Monday October 5th, and more information about our user conference is available at max.adobe.com. For those who wish to listen to a playback of today's conference call, a web based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 58501348. Again, the number is 855-859-2056 with ID number 58501348. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5pm Pacific Time today, and ending at 10am Pacific Time on Monday June 22nd, 2015. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] And your first question comes from Walter Pritchard at Citi. Your line is open. Walter Pritchard : Hi, thanks. We might prefer David talked about the Fotolia opportunity for ARPU and that makes lot of sense. I am wondering if you could just talk a bit about ARPU trends during the quarter and we noticed from a promotional perspective you've added some stuff at the end of the quarter which we've seen and haven't resumed that, could you put that in the context of how should we think about ARPU here as we move through the second half of the year? Mark Garrett : Hey, Walter. It's Mark. Sure, so as it relates to promotions, I think we told you on the last quarter call in Q1 we did not have a lot of promotions in the quarter, very, very little. This also was a quarter where we had very little promotional activities. So we are really pleased with the amount of net new subscribers we are driving without a lot of promotional activity. That doesn't suggest that we won't do them in the future but the fact that we are driving a lot of net new subscribers without it right now is a very good sign. As it relates to ARPU, we had the smallest sequential decline we had in quite a long time. So we are very happy with ARPU as we've continued to say ARPU by offering continues to remain stable or increase and the average of all of the ARPUs this quarter dropped very, very slightly and again it was the smallest decline we had in several quarters. Shantanu Narayen : Also, Walter, with respect to Adobe Stock just to clarify, as David said in his prepared remarks, you can if you are a Creative Cloud subscriber add a subscription for Adobe Stock and you can also as a new subscriber subscribe to both Creative Cloud applications as well as Adobe Stock. Both of those will be reflected in the ARR numbers that we report on a going quarterly basis. I wanted to clarify for everybody listening on the call that the standalone subscription for just Adobe Stock is not reported at this point in the Creative Cloud numbers. Mark Garrett : And we would likely not add that until 2016, FY16. Operator : And your next question comes from the line of Brent Thill with UBS. Your line is now open. Brent Thill : Thanks, Shantanu, C6 just past, it is three year birthday and I am curious that basis is fairly large and what you've seen so far in the CS6 base now converting over to Creative Cloud and I had a quick follow up with Mark just it relates to Japan. What you saw in the quarter? And any trends there would be helpful. Shantanu Narayen : Sure. So, Brent, as you point out CS6 is definitely long in the -- with today's CC2015 release, the innovation that we are providing as well as the integration with the services makes it even older. We still have a fairly large CS6 base which clearly represents upside opportunity for us to convert to the Creative Cloud. As you are aware in Japan that was the market where we were selling CS6 till even late last year. And so we continue to target CS5 and CS6 as the most likely installed base to convert to CC. They are converting; the innovation is definitely resonating with them. And that continues to be the focus for David and his group. Mark Garrett : I think Shantanu touched upon Japan so I don't have anything to add. Brent Thill : And Mark just a quick follow up maybe on the DSO, it was 39 days, we had to go back six years in the model, was that just a subscription model kind or was there -- is there something about lean area in the quarter that surprised you. Mark Garrett : There is nothing that really surprises us. It is definitely related to the subscription model. Team does a great job on a collection front as well. It is going to move around as you go through quarters and you have various linearity and deal sizes but we've always been, as you know historically very good at driving a low DSO. Operator : And our next question comes from the line of Brad Zelnick with Jefferies. Your line is now open. Brad Zelnick : Thanks for taking my question. On Creative Cloud, can you give us an update on the mix of point products versus full suite subscription and particularly with the strength in the home products the past several quarters which seemed to be accretive to the model? Can you update us with even a directional sense of how many users you are attracting that are net new and where are they coming from? Shantanu Narayen : Sure. So, Brad, I'll go ahead and take that. I think the mix in the second quarter of 2015 was 56% was complete as well as 44% was single app. We are certainly -- we saw strength across the board. The momentum of subscriptions if you look at 630,000 plus subscriptions that we had, 38% growth we are seeing, good momentum across each one of them as we've mentioned in the past the Creative Cloud photography is certainly attracting a significant number of new customers and the overall new customer adds continues to be greater than 20%. So we are continued to be pleased with what we are seeing on Creative Cloud adoption. Brad Zelnick : Thanks. If I could just sneak in a quick one for Mark, OpEx looks like it is guided up 5% sequentially in Q3. Other than the seasonal hires of the summer interns which look like headcount is also up similar percentage sequentially. Is there anything else that we should be thinking about seasonally and where do you expect headcount for the full year? Thanks. Mark Garrett : Yes. I mean the bulk of the increase in OpEx as you look out from here is really going to be driven by sales and marketing. Interns don't drive it that much. The regular hires in the quarter were about 350 and there were couple hundred interns in this quarter. But the OpEx moving forward is really going to be driven continued investment in sales and marketing to drive that 30% bookings growth that we need to do in digital marketing and obviously the ETLAs in digital media as well. Operator : And our next question comes from the line of Kash Rangan with Merril Lynch. Your line is now open. Kash Rangan : Hi, guys. Thank you. You made an observation that the creative business is finally at the point where it was roughly comparable to the size of the creative business the licensed model, yet you have only 4.6 million subscribers in your base. It feels like the overall opportunity is at least only one third penetrated, maybe -- and maybe even less so. So what are the opportunities to be able to triple the size of your creative business given that you got about one third penetration off your old base, opportunities and challenges consequentially as well as you try to triple the size of the business, is that to say a possibility, and also wanted to ascertain from you what realistic attach rate should we expect for the stock business given your base of creative pros is about 6 million - 6.7 million, I think that's the data that I have from your analyst day a couple of years back. Thank you. Shantanu Narayen : Yes. So, Kash, I think you are alluding to the numbers that we've given in terms of the Creative Suites installed base being over 12 million and clearly the innovation that David and his group are driving and I'll then ask him to add color on the specific features. We'll certainly continue to help drive new, migrate the existing CS customers into the Creative Cloud option. The addition of the new services are certainly continuing to attract a brand new set of customers that's expanding the overall installed base as we continue to target creatives both in the imaging space and with a number of the mobile applications, what we are doing to increase the size of the funnel which again is adding to the available opportunity that we have in that particular market. And I think Stock is a little bit early in terms of the rollout, but again I think David has talked about what percentage of people both buy and sell using Adobe tools and that represent an opportunity. David Wadhwani : Sure. Let me add a couple of things to that. First of all, the announcements that we had with the 2015 release were very broad based. We had major enhancements to our desktop applications and their mobile applications on IOS and we also for the first time introduced the mobile applications on Android. So we feel that that's going to have a broader play as well. Additionally, we made some significant updates to the Creative Sync Technology that moves assets across the desktop and mobile application to enable them to work as a single family. And of course we introduced the Adobe Stock in addition to some very visible changes that we made to the desktop applications around touch which is one of the big drivers that we believe in terms of CS4, CS5 and CS6 customers coming to the platform. A couple of things to call out in terms of what we are seeing in terms of the new capabilities and how that's driving existing customer behavior. A lot of the existing enhancements we've made to mobile applications are having significant driving on both the migration and also on new customers coming into the family. So as you noted and as we've talked about in the past, the mobile applications have been around for about a year and what we are seeing is that they are driving increased conversion of people filing the products. We see that they are increasing retention of paid numbers that are using -- that have been using the products. And we see that they are driving additional creation of Adobe ID, so we are seeing more Adobe IDs created as a result of mobile first interaction with Creative Cloud than ever before and I’d characterize the conversion of those mobile IDs to paid customers as generally strong. So we are very happy with how all of that has been playing out in the ecosystem. Kash Rangan : So conceptually I want to make sure I am not making a mistake here. The ARPU is going to lift and the TAM is actually larger than the old base which means in the new world you only have to give revenue guidance but it feels like your creative business could be multiples of what it was in the prior to this model transition. But I just add up your comments. Shantanu Narayen : Yes, Kash. I mean the whole strategy around the Creative Cloud was to reimagine the creative process, make it far more predictable and we definitely thought to increase significantly the size of the market opportunity. I think one measure that you can see even today of how successful we’ve already been is the fact that we've talked about how we used to sell approximately 3 million units in the past and now if you look at what we are doing with this 4.6 million subscribers and in addition to that all of the enterprise deals that we have, we've already dramatically I think increased the size of the available opportunity. One last thing I might add in addition to what David and I said, the enterprise also represents an opportunity with this particular release. We've some very significant functionality that will enable enterprises to store all of their assets from behind the firewall and so continuing to focus on ETLAs and migrating enterprise customers with this new product I think represents an untapped opportunity. Operator : And our next question comes from the line of Sterling Auty from JPMorgan. Your line is open. Sterling Auty : Yes, thanks. Hi, guys. Wondering in terms tell us around the Marketing Cloud in terms of the revenue growth in particular how much of the new target this year is impacted just by the FX versus anything else is going on. And just as a quick follow up, Mark, any sense of what's EPS on a third quarter for FX looks like? Mark Garrett : Sure, Sterling. So on the Marketing Cloud as we said booking remains very strong. In fact, I am sure you caught that we are not changing that 30% bookings outlook despite the impact to currency which obviously suggest that we would have done better than 30% without the change in FX rate. So FX is clearly impacting bookings, it is clearly impacting the marketing revenue growth. We've always felt that the marketing revenue growth would accelerate in the back half of the year. And that's why I mentioned that the second half would grow 24% year-over-year. So we are still seeing really strong growth in marketing despite currency, but there is no doubt that currency has an impact on that revenue growth rate just like the rest of the business. And then as it relates to EPS, Sterling, I mean it is pretty straight forward. We said that FX was impacting Q3 by about $30 million. So if you do the rough math, you are going to get to around $0.04 to $0.06 of earnings impact in the third quarter as a result of that $30 million but like we said we are still confident in the in the $2.05 again despite the impact of $80 million worth of currency in the back half of the year. Operator : And your next question comes from the line of Ross MacMillan with RBC Capital Market. Your line is open. Ross MacMillan : Yes, thanks a lot. Hey, Mark, just wanted to ask you on the subs. I know you are focused on ARR but earlier in the year you talked about sequential and pieces in the sub add -- to this year, so just curious whether you still expect sequential increases in 3Q, 4Q and the $5.9 million target for the year and then just on -- I had one specific one for David on Fotolia regarding the contributor payout, it looks like you said 33% payout and I just want to get a sense of whether that was new-- whether that was an increase of the payout to the contributors still we have -- Thanks. Mark Garrett : Hey, Ross, Yes, so as you know we've always said for a four years now that ARR is really the best measure of the health of the business. And the sub number is an incomplete number because it doesn't include enterprise and as we add future offerings like Adobe Stock, looking at that sub number gets I think less and less meaningful over time. But everything is encompassed in that ARR number. That's obviously going very well, that's why we've raised our guidance on the ARR number and we had a great sub quarter. We are thrilled with the sub quarter and we continue to report sub actuals. But we are not going to guide on the sub number moving forward. That said our annual expectations really have not changed. We need that $5.9 million sub number to hit the increased ARR target, and clearly with the performance we've had today we are on the path to meet or exceed that $5.9 million target. But we really do want you guys as we do to focus more and more on ARR. David Wadhwani : Great. And on the question about the contributor payouts. The way we look at this opportunity is that, it is obviously a large growing opportunity where we have strong relationships with both the buying side and the selling side. And as we looked at the market make up, we saw the opportunity to grow this -- grow the TAM of this opportunity by doing two fundamental things. First was to move the friction in terms of how sellers and buyers come together. And that's what we've done to integrate both the selling and the buying directly within the tools. And we believe that's going to be a really big opportunity to increase the velocity of content flowing through the system. But the second thing we wanted to do is streamline the economics around these businesses. There we believe that the marketplace today is priced with too much complexity. So we wanted to streamline the opportunity for pricing for the buyers and we wanted to create a very simple price model for the contributors as well. So instead of doing a complex tiered approach Adobe Stock we are doing a simple 33% for sales that we have. Shantanu Narayen : In terms of thinking of Q3 and Q4, Ross, just too maybe add a little bit more color. I would look at ARR being slightly up in Q3 and then sequentially up in Q4. And that's reasonable proxy for sub, sub. David Wadhwani : Right, exactly. Operator : And our next question comes from the line of Kirk Materne from Evercore ISI. Your line is open. Kirk Materne : Thanks very much. Shantanu, wondering if you could talk a little bit more about the digital marketing business just with two thirds of your customers now taking on more than one product. Could you just talk about some of the -- I guess the solution that are doing particularly well within sort of more of bundle framework and you start to sell more solution, I guess the competitive environment change at all or you just placing more point core products, is it so much mean the greenfield opportunity, I was wondering if you just provide a little bit more color on that front. Thanks. Shantanu Narayen : Sure, Kirk. With respect to where the bulk of the booking are right now and the revenue, I would say it is the combination of the Adobe experience manager which is helping people create the online web infrastructure for the future. It continues to be Adobe Analytics so people can get insight on what's exactly happening on their website. And Adobe Campaign continues to do very well which enables you to have multi-channel orchestration of communication with your customers. Having said that, the breadth of the offerings right now is starting to make all of the sticky and that's resulting in the increased booking and the most strategic relationships. And I can say that some of the smaller or newer solutions, when you look at what's happening with media optimizer as well as the other solutions like target. You are actually seeing that business double year-over-year. So we are seeing some really good traction in the new solutions as people look at the benefit of that. Primetime had a great quarter. Again, slightly smaller numbers in the scheme of things but the good news from our point of view is the new solutions like Audience Manager, Primetime, Target as well as media optimizer are doing really very well on a year-over-year basis. And makes the entire platform far more comprehensive and sticky. Kirk Materne : If I get just have really quick follow up, you guys had some nice partnership announcement added to summit this year with Accenture, IBM. Can you just talk a little bit -- just about how your broader chain on this digital marketing is going in terms of the kind of leverage, you are potentially getting at if this type of partnership, if you want to talk about any of them specifically. Shantanu Narayen : Well, I think the great news is every single analyst who covers the digital marketing space has clearly identified Adobe as the leader. That continues to be the case, and what that means is that the inbound request for systems integrators, for digital agencies to want to partner with Adobe is only increasing. The way we look at the revenue as we look at what are partner source, partner influence and partner driven. And that as a percentage of the booking is certainly going up. And without highlighting anyone partner on this call, the number of significant partnership is only increasing. Operator : And our next question comes from the line of Mark Moerdler of Bernstein. Your line is now open. Mark Moerdler : Thank you, I appreciate. Two questions. First on the Digital Marketing side. Bookings were bit slowly this quarter. Was this timing of billing, FX, deal closure, what else was impacting that number? Then on the Adobe Stock. Should we think this has been purchased by Digital Marketing Cloud customers or will the sale be through the Creative Cloud, their additional market? Shantanu Narayen : So, Mark, I do want to clarify. We had a very strong bookings quarter in Q2. So as it related to bookings, our revenue Mark and maybe add more color on that but in terms of booking we had a very strong quarter with Digital Marketing. And as it relates to Adobe Stock very quickly, you can both as an individual get it through adobe.com as well as we have enterprise offering that we will sell. I think you are very perceptive in that the number of marketing professionals who will also use Stock and the integration of Adobe Stock with our Marketing Cloud also definitely represents on tapped opportunity. And as David said, we are really increasing the total available market for this because making pictures more accessible to people and allowing more people to contribute, I think that's a unique advantage that Adobe has. Mark Garrett : Yes, and Shantanu said Mark on the Digital Marketing side bookings were very strong. We are reiterating the 30% growth for the year despite the impact of currency. Revenue grew 15%, so if you looking at revenue, revenue growth were maybe a little less you would have thought. But as I said we expected that to ramp over the course of the year and in the second half of the year again despite currency, we are anticipating 24% growth in the second half of the year. Second half over second half. So there is some currency impact in there without a doubt but still strong growth in the back half of the year. Mark Moerdler : Perfect. And one quick and the follow up I apologize. How should we think about the impact of Document Cloud or document services revenue? We see a dip as quite tradition or is it just going to be revenue growth? Shantanu Narayen : We talked about Document Cloud is that the revenue will continue to be relatively consistent or flat. But way we are seeing the adoption is in the annualized recurring revenue or ARR so we are seeing good growth in the ARR. I think we highlighted that in the prepared remarks as well. And we did see a good healthy subscription adoption of the new Acrobat DC product. Operator : And our next question comes from the line Phil Philip Winslow, Credit Suisse. Your line is now open. Philip Winslow : Hi. Thanks for taking my questions. Just have a question on the Marketing Cloud. Obviously a lot of companies have made acquisitions here in different categories so just the broad marketing space of that couple of years. Wondering if you could just comment on the competitive environment. What you are seeing out there? I just kind of look at your portfolio sort of versus the competition, what really sort of standout is why you continue to win business but also what areas do you think you could see yourself looking to fill in either organically or inorganically? Shantanu Narayen : Yes. I think to your point, everybody recognizes that addressing the chief revenue officer, the chief digital officer or chief marketing officer is the most explosive software category that exist. I think our sweet spot has always been how do we target this marketer publisher with the customer experience solutions that we have. In the offerings that we have I will continue to say, it is the combination of content plus data that represents the unique advantage that Adobe has. And that's the combination of the Adobe Experience Manager as well as Adobe Analytics. But the product that's doing really very well right now is Audience Manager. And what Audience Manager allows people to do is have absolutely the same segmentation across their marketing spend if they are trying to attract customers across any personalized offers that they want to make as well as conversion. And so I think it is the combination of all of our products. And honestly it is also the tieback with the creative products that content velocity in terms of people trying to run campaigns. The fact that Creative Cloud works with the Adobe Experience Manager asset management solution that enables us whether you are a retailer, whether you are a financial servicers, whether you are government, whether you are a publisher, that content velocity that we can provide is just so much faster than anybody else. And I think across the marketing platform, we don't really don't see one single competitor. We do have a number of point product competitors for each of the individual solutions but I think as the comprehensiveness of our offering that enables us to win those deals. Operator : And our next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is now open. Jay Vleeschhouwer : Thanks, good afternoon. Now the question first on the components of growth in the doc services or Document Cloud. ARR then a cash flow question. So this was touched on couple of questions back but when we think about the components of doc services in terms of new business you must be shipping at least couple million new licenses a year of acrobat. And you made very clear that you are not going to pull the plug on perpetual at least not any time soon but how are you thinking about regarding those or having signed as subscription versus perpetual and then on the ETLA side of doc services, win an extends that ETLA there is a proportion of doc services, it should be substantially higher for historically based reasons than ETLA on the creative side. Another words looks like ETLA are about tenth of creative ARR. But given the old volume license in part of Acrobat shouldn't ETLA be much, much higher percentage of doc services. Shantanu Narayen : So, Jay, with respect to the Document Cloud you are right that the ETLA portion of document services is higher than the ETLA portion of the Creative Cloud due to the historical adoption of Acrobat within the enterprise. And then moving to three year ETLAs. With respect to individual, Acrobat shrink used to continue to be a part of the offering and now on adobe.com the main offering that we provide is the subscription offering and the subscription offering uptake within individuals and teams is actually very healthy. I think what's happen honestly in the marketplace is that when you look at after Creative Cloud even Office 365 has now been offered through subscription is just become the most standardized way of happening. And so you are right that the perpetual mix of Acrobat is higher than other products in our category. But what we continue to be pleased with is that when people come to adobe.com, the individual adoption which is important to create that viral impact within enterprises, the subscription offering uptake is very healthy. Jay Vleeschhouwer : All right, thanks. On cash flow for Mark, through the first half your GAAP operating cash flow is about 650, you gave your guidance for the second half of the year, into taking into account currency plus the stocking effect to the model doesn't extend to reason that your second half cash flow should be at least much and probably substantially higher than the first half, so that total fiscal 2015 cash flow should be at least couple hundred million higher than the amount of fiscal 2014. Mark Garrett : Yes, Jay, so we don't guide obviously on cash flow. I can't tell you there is quarterly seasonality to cash flow. If you look at Q4 to Q1 it is typically down coming off of Q4 due to all the yearend payments that you make and debt interest and then you get to Q2 and there is none of those payments so it goes back up which is what you saw this quarter. In Q3, you typically see a dip relative to last quarter again because of tax payments and ESPP and debt interest and then you got a spike back up in Q4. So there is seasonality quarter-to-quarter. Obviously, the net income and the business starts to get better and better as we start to drive more and more earnings, cash flow is going to follow that. So without a doubt cash flow is going to get better and better. Operator : And our next question comes from the line Keith Weiss with Morgan Stanley. Your line is now open. Keith Weiss : Thank you, guys for taking the question and good quarter. You talked about earlier on there is quite much decline in ARPU dollar was small you have seen in quite some time. And it seems like we have a couple of financial -- and several potential ARPU sort of benefit on the horizon. I was wondering if you could talk just little bit about what our expectations should be with the timing of that particularly on when we think that the Adobe Stock is fair than getting ARPU and when this sort of the renewal of commercial pricing or the expiration promotional pricing could start to get benefit ARPUs so just we get better understanding to following that ARPU. Mark Garrett : Keith, I'll start and then Shantanu or David can add on. I have to sound like a broken record but focus on ARR right I mean that's really the metric that's going to incorporate everything. Subs, ARR, any kind of churn so that is where we are focused and we obviously feel good about that because just we just raised the number on the year for ARR. Shantanu Narayen : And I think in terms of the mix when you think about what's happening with the mix just continue to recognize as we've said that within each band ARPU has been very stable and as the mix continues to drive new offerings what the ARPU will reflect is the blended mix and so I'll also end with what Mark said. I think continuing to focus on ARR and if you look at the second half of the year it shows that ARR will continue to increase over Q1 and Q2 which I think shows the momentum in the business. Keith Weiss : Got it, and I take rather different type of question then, I think you mentioned earlier about that the conversion of trial customers to the end users are improving. Wondering if you could just give little bit color in terms of -- is that an inflection going on or is just an improvement, is there anything that this kind of cap rising that a transition from residue. David Wadhwani : Yes. I can take that. From a perspective of the improvements we've been seeing to conversion and retention associated with mobile application I believe is what you are referring to the statement you made. This is really just an ongoing evolution that we started a year and half ago. As we started to move more and more of our business online, we have the added advantage of having access to the world's best Marketing Cloud. So in the context of using all of the technology from that side of the business, it has been an ongoing set of activities to improve conversion that we see as traffic comes to adobe.com. More recently we've had an increase in terms of traffic and utilization of our mobile applications. So we understand what's driving that, what are the predictive indicators of use in those applications that are driving conversion to paid customers. And we are increasingly seeing the use of data and content flows with creative sync as another material driver of conversions and retention. So what we are doing is that we are building the products and updating the products with new capabilities and features, but we are also making sure that as we do that the user experience, the on boarding workflows and the communication that we have with them through email and other forms through training are all driving people to use these features that drive higher conversion and retention. So it is not one magic bullet but it has been a series of actions that we've taken. And we see a lot more we can do in the years to come. Operator : And our next question comes from the line of Steve Ashley with Robert W. Baird. Your line is now open. Steve Ashley : Thanks. A couple of questions. I think on the last call you said that Japan had been really lagging in terms of just where it was in Creative Cloud adoption but we had started to see some improvement there. Is that improvement or ramping of Creative Cloud adoption in Japan continuing? Then my second question is just on the Marketing Cloud business and partner or channel leverage. Are you seeing improved partner contribution in that business? Thanks. Shantanu Narayen : Yes. So, Steve, Japan continues to as the distance from CS6 gets longer and longer improve, we have a special event also that we are doing in Japan to ensure that the awareness of the CC2015 as well as all of the other additional services and mobile apps is strong right now. And so we continue to expect that would lead to increased adoption of Creative Cloud in Japan. And the second question was with respect to Marketing Cloud and partner leverage. I mentioned earlier that the amount of partner influence across sourced as well as influenced, revenue and the Marketing Cloud is fairly high and that's happening across both digital agencies as well as system integrators. And all of the large deals that we are doing because consulting is something that we would like partners to provide, there is a partner involved in most of the larger deals. Operator : And our next question comes from the line of Alex Zukin from Stephens. Your line is now open. Alex Zukin : Hey, guys. Thanks for taking my question. Can you talk about what you are seeing with respect to overall users that are realizing some of the synergies throughout content creation and distribution and maybe which combination are currently the most popular? Shantanu Narayen : Sure. I think we've talked in the past about how the publishing segment for sure as publishers are trying to provide the content creation once and then delivery across multiple forms of devices. That's clearly the vertical that has led the integration of Creative Cloud and Marketing Cloud. Retail tends to be another large vertical where we are seeing a lot of adoption of the Creative Cloud and the Marketing Cloud because the velocity of the products that they are offering tends to be fairly high. And everything to do with consumers, whether it is travel or entertainment is an area where I think we've talked about companies like Under Armour and others who are certainly using that particular technology as well. So we are seeing it across all industries, financial services, honestly we are getting better at also painting the entire Adobe story with the CC Enterprise release that's coming out now. And the fact that it synchronizes with the Adobe Marketing Cloud, that's going to make it even more natural. So while I would say the publishing and retail led the charge in terms of seeing the benefits of the creative cloud and marketing cloud integration, now that's spreading to honestly every single vertical in every geography. Alex Zukin : Got it. In fact if I could just squeeze in one more about the recent partnership announcement with Microsoft and what that could means strategically for Marketing Cloud? Shantanu Narayen : Yes. I think with Marketing Cloud, our vision really is that as every single enterprise moves to become more of a real time enterprise where the need to in the last millisecond deliver the right piece of content based on the consumer profile or the consumer demographic, it becomes even more apparent to us that enabling us integration with people who have CRM solution is something that will add value of our Marketing Cloud. So Microsoft with dynamic CRM has a great offering in that and that was the reason for the integration. The other reason for our partnership with Microsoft continues to be how we can leverage Azure in terms of having technology that enables us to create all of these compelling offerings in real time. So that's the benefit on the digital marketing side. On the Creative Cloud side I think we've shown that as touch becomes more natural way for people to do content creation with what we've done on the Surface Pro and in products like Illustrator and Photoshop, I think we've demonstrated significant value associated with touch which both Microsoft and Adobe are excited about. Operator : And our next question comes from the line of Samad Samana from FBR Capital Markets. Your line is now open. Samad Samana : Hi, thanks for taking my questions. I want to shift gears a little bit and talk about the profitability side, margin expanded, nice swing continue to say year-over-year, operating expenses were actually down year-over-year, I was curious how you think about the ramp in expenses, whether there is some cash that will happen in the back, how we should expect expenses to ramp going forward? Mark Garrett : Hi, it is Mark. Yes, we've obviously been very focused on driving earnings back into the model as revenue comes back into the model. And as we get back to where we before we started this transition which is going to happen relatively soon. Moving forward from here you will see OpEx increase and I touched on this earlier, we are driving 30% bookings growth in digital marketing that requires a lot of sales and marketing capacity. And obviously we are driving ETLAs in the enterprise for the document services business the Document Cloud business as well as the creative business. So you will see more OpEx investment but with that we are going to continue to drive more and more margin moving forward. Operator : And finally our next question comes from Heather Bellini from Goldman Sachs. Your line is now open. Shateel Alam : Hi, this is Shateel Alam filling in for Heather. I just want to ask a quick one on seasonality of single app subs. in the past you said that mix was about 50 :50; little lower this quarter at 44%. Should we expect that to swing around a lot from quarter-to-quarter and what do you expect that to fall out at for the year? Shantanu Narayen : I think what we've said in the past is if you look steady state or what's happen in the Creatives suite, the mix was approximately 50 :50, I think as we continue to attract new customers to the platform through the Creative Cloud photography offering, we are certainly seeing the single app adoption increase. We've also said in the past that when we first offered team, team was only offered in the complete option and the single app is definitely an on ramp to the Creative Cloud. And so I think as it relates to the creative segment part of Creative Cloud, steady state on the Creatives suite is probably a good metric. Certainly as we are expanding the entire available market through the introduction of these new single app offerings that was skew it a little bit more towards the single app as well. Given that was the last question, sort of in summary what I would like to say is it is clear that all around the world companies are focusing on how they use technology as an enablers to accomplish this customer centric transformation. And I think delivering these great online experiences across mobile devices which is key to the transformation is driving Adobe's business because we have this unique set of technology assets to help customers solve this across various industries. And the business momentum we are experiencing, we believe is a result of both having a great strategy as well as excellent execution. We are pleased with Creative Cloud momentum. This week was a really important milestone as we release CC2015 and introduced Adobe Stock which is both an ARPU as well as TAM enhancing service. And it is really more proof of how we are making Creative Cloud a one stop destination for creators. Document Cloud continues to go after the large paper to digital opportunity and Marketing Cloud continues to be the leader and delivering great value in an explosive software category. I think in this quarter you also saw the earnings upside which is the leverage of our financial model. And in summary we think Adobe is in great shape and we remain focused on driving both product innovation as well as strong financial results for the rest of 2015 and beyond. Thank you for joining us today. Mike Saviage : And this concludes our call.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,015	3	2015Q3	2015Q3	2015-09-18	1.832	1.932	2.874	3.018	4.58482	28.61	26.68	Executives: Shantanu Narayen - President and CEO Mark Garrett - EVP and CFO Mike Saviage - VP, Investor Relations Analysts : Steven Ashley - Robert W. Baird & Company Ross MacMillan - RBC Capital Markets Brent Thill - UBS Brad Zelnick - Jefferies Sterling Auty - JPMorgan Walter Pritchard - Citi Kash Rangan - Bank of America Merrill Lynch Mark Moerdler - Sanford C. Bernstein & Co. Kirk Materne - Evercore ISI Keith Weiss - Morgan Stanley Derrick Wood - Susquehanna International Group Brendan Barnicle - Pacific Crest Securities Jay Vleeschhouwer - Griffin Securities Heather Bellini - Goldman Sachs Philip Winslow - Credit Suisse Operator : Good afternoon, ladies and gentlemen. I’d like to welcome you to Adobe Systems Third Quarter Fiscal Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’d like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's third quarter fiscal year 2015 financial results. By now you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We've also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, September 17, 2015, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today as well as Adobe's SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe's Investor Relations Web site. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations Web site for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I’ll now turn the call over to Shantanu. Shantanu Narayen : Adobe delivered strong results in Q3 with revenue of $1.218 billion and non-GAAP earnings per share of $0.54. Strong Creative Cloud Adoption and record Adobe Marketing Cloud revenue drove these results. In digital media, Creative Cloud has become the de facto platform for all creatives, providing the tools and services to fulfill every creative need. We are migrating customers from our Creative suite installed base as well as attracting new users with strong adoption across our individual team and enterprise offerings. Net new Creative Cloud subscriptions grew by 684,000 during Q3 and we exited the quarter with over 5.3 million subscriptions. Combining this adoption with the annual value of enterprise agreements in success with Adobe Stock, Creative Annualized Recurring Revenue or ARR achieved sequential growth of $262 million. We exited the quarter with approximately $2.3 billion of Creative ARR. Continuous innovation is the hallmark of Creative Cloud and the catalyst for our retention and growth. In the video space Adobe continues to trail blaze. Last week at IBC 2015, Europe’s largest professional broadcast conference, we announced the next wave of Creative Cloud innovation coming soon to Adobe Premier Pro. Featuring groundbreaking support for Ultra HD, brilliant color technology improvements, a new touch work flows, Premier Pro is the leader in professional video. We see a large growth opportunity in enabling film and broadcast customers to transition to an entirely Adobe based workflow. Marquee customers continue to make the switch to Premier Pro. 20th Century Fox is using Adobe’s Video Solution for its upcoming movie Deadpool which opens in February. Creative Cloud innovation is forging ahead in the mobile space where our mission is to help Creatives bridge their desktop and mobile design processes into a seamless Creative workflow. One of our most anticipated mobile apps Photoshop Fix debuted last week on stage at Apple’s launch event. Photoshop Fix will deliver incredible retouching capabilities to a mainstream mobile first audience while providing pros with a handy tool for quick edits. Our plan to deliver new values with services such as Adobe Stock to augment our desktop and mobile applications is off to a strong start. Customers appreciate the deep integration of Adobe Stock in our Creative applications and are adopting Creative Cloud subscription offerings that include Adobe Stock. We will continue to deliver new services and partner with a broader ecosystem to make Creative Cloud the one stop shop for Creative inspiration. In July we announced our next generation digital publishing solution. Already the leader in the publishing segment, our new DPS offering will enable brands to easily repurpose their existing marketing content into immersive mobile apps without writing code. Next month we will hold our Max Creativity Conference in Los Angeles. Max has become the annual meeting place for the Creative community and we expect this to be our biggest event ever. We are excited to showcase how customers are changing the world with their creativity and we will unveil our newest Creative Cloud technology. In our documents business, reception to our new Adobe Document Cloud and Acrobat DC has been positive. Success with the new launch helps to drive Document Cloud revenue of $194 million in Q3. We grew Document Cloud ARR to $357 million exiting the quarter. Document Cloud ARR is increasing based on Enterprise Adoption as well as the growth of individual subscriptions with new users. We continue to expand our offering in e-signatures through integrations with a vibrant and growing enterprise partner ecosystem including Ariba, Salesforce and Workday. Across our Creative Cloud and Document Cloud businesses, total digital media ARR grew to $2.65 billion as of the end of Q3. Adobe Marketing Cloud continues to be the leader in the exploding digital marketing category offering the most complete set of solutions and a robust partner network with strong bookings in Q3 and record marketing cloud revenue of $368 million, representing 27% year-over-year growth. In July, we held sold out Digital Marketing events in Sydney and Singapore where we hosted thousands of marketers for a day of inspiration, education, and networking. Customers on stage included Starwood Hotels and Resorts Unilever, Nestlé, Rakuten, and Tourism Australia. Next week we will host nearly 2,000 customers at our symposia in Tokyo and San Francisco. Partners continue to be a critical part of our digital marketing strategy. Last week we announced the WPP Adobe Alliance and expanded partnership with WPP, one of the world’s largest agency networks. WPP agencies will become certified Adobe Marketing Cloud experts with the skills required to design and develop, sell, deploy and operate our solutions throughout their network. Adobe announced a major advancement in our programmatic ad platform for advertisers and media publishers leveraging fully integrated solutions in Adobe Marketing Cloud. Powered by Adobe media optimizer, the new self-service technology allows advertisers to take direct control of automated ad buying for search, display, and social media across ad exchanges and media networks like Google, Facebook, and Yahoo!. Tight integration with Adobe Analytics and Adobe Audience Manager, ensures that advertisers can tap into data to refine and target granular audience segments. Dynamic creative capabilities enable advertisers to use images, videos, and other assets from Creative Cloud to deliver the right content to the right user at the right time. In addition to making this programmatic platform available to advertisers, Adobe also announced its programmatic offering for media publishers. Adobe Primetime, Adobe's TV platform, now supports over the top and direct to consumer offerings with audience acquisition, engagement, monetization, and measurement capabilities. Recently launched services benefiting from Adobe Primetime include HBO Now, Showtime, MLB and Sony Pictures Entertainment. Industry analysts continue to recognize our solutions as market leading in their categories. Last month Gartner named Adobe as a leader in two Magic Quadrant reports. Web content management where we were ranked highest in completeness of vision and mobile application development. Earlier today we announced some changes to our executive team. David Wadhwani has decided to leave Adobe, to pursue a CEO opportunity and we’ve named Brian Lampkin to head up the combined digital media business. Brian, who currently leads the Document Cloud business is no stranger to the Creative business having being one of the architects of both Photoshop and Creative Suite. Under Brian's leadership we have the opportunity to further align Creative Cloud and Document Cloud product development and go to market efforts. I want to thank David for his numerous contributions and wish him well. In July we announced Abhay Parasnis, as our new CTO. Abhay has 20 years of experience in enterprise software industry and his charter is to drive Adobe's overall technology strategy, architecture and innovation roadmap for cloud services. Human resources are our capital at Adobe. In Q3 we announced a new employee leave policy. Progressive benefits such as this help us be recognized as one of the best places to work and enable us to attract and retain incredible talent including a record number of new college hires. Great software comes from great people. I look forward to seeing many of you at our Financial Analyst meeting at MAX in October. Mark? Mark Garrett : In the third quarter of FY15, Adobe achieved record revenue of $1.218 billion. GAAP diluted earnings per share were $0.34 and non-GAAP diluted earnings per share were $0.54. Highlights in our third quarter include, accelerating adoption of Creative Cloud which helps to grow Creative ARR to almost $2.03 billion exiting Q3. Building total Digital Media ARR to $2.65 billion which is the sum of Creative ARR plus another strong quarter of Document Cloud ARR growth. Achieving record Adobe Marketing Cloud revenue of $368 million, which represents 27% year-over-year growth, delivering strong year-over-year growth in operating and net income; growing deferred revenue to a record $1.3 billion; achieving strong cash flow from operations of $360 million, and exiting Q3 with a record 73% recurring revenue. In Digital Media, we achieved revenue of $770 million. This segment has two major components of revenue, Creative Cloud and Document Cloud. As we have said, the best overall measure of the health of our creative business is Creative ARR, and in Q3 growth of Creative ARR was strong. We added $262 million of Creative ARR during the quarter, driven by strong net new Creative Cloud subscription ads of 684,000. Te exited the quarter with 5,334,000 Creative Cloud subscriptions. Our investor data sheet on adobe.com reflects a favorable adjustment of Creative Cloud subscriptions. We slightly underreported Creative Cloud subscriptions due to how retail point of sale or POSA units were reported. The adjustment added approximately 40,000 net new subscriptions over the prior three quarters. Across all routes to market, we continue to see strong demand for Creative Cloud. We are migrating existing customers to Creative Cloud and are attracting large numbers of first-time customers. In addition, we are now migrating significant numbers of hobbyist customers who previously used Photoshop Elements and Lightroom on a perpetual basis to the Creative Cloud photography subscription offering. Adobe Stock is contributing to both ARR and ARPU. Creative Cloud ARPU was consistent with Q2 and Creative Cloud Retention remains strong. With our Document Cloud products, we achieved Q3 revenue of $194 million. Adoption of our new Document Cloud offering that shipped during Q2 has been solid, helping to grow Document Cloud ARR to $357 million exiting Q3. Document Cloud reported revenue remains relatively flat as we continue to drive towards our goal of more acrobat subscriptions, which is reflected in the Document Cloud ARR growth. In our Digital Marketing segment there are two components. The first is revenue from our Adobe Marketing Cloud offering and we achieved record Adobe Marketing Cloud revenue of $368 million, up 27% year-over-year. Despite currency impact, based on our strong Q3 bookings, we remain on track to achieve 30% or greater Marketing Cloud bookings growth for the year. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $34 million in Q3 revenue. Print and Publishing segment revenue was $46 million in Q3. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $6 million. We had $9 million in hedge gains in Q3, FY15, versus $22 million in hedge gains in Q2, FY15, thus the net sequential currency decrease to revenue considering hedging gains was $19 million. From a year-over-year currency perspective, FX decreased revenue by $58 million. Considering the $9 million in hedge gains in Q3, FY15, versus $1 million in hedge gains in Q3, FY14, the net year-over-year currency decrease to revenue considering hedging gains was $50 million. In Q3, Adobe's effective tax rate was 25% on a GAAP-basis and 21% on a non-GAAP basis, consistent with our targets for the quarter. Employees at the end of Q3 totaled 13,665 versus 13,266 at the end of last quarter. Our trade DSO was 44 days which compares to 48 days in the year-ago quarter and 39 days last quarter. Cash flow from operations was $360 million in the quarter. Deferred revenue grew to $1.31 billion, up 31% year-over-year. Our ending cash and short-term investment position was $3.67 billion compared to $3.41 billion at the end of Q2. In Q3, we repurchased approximately 1.6 million shares at a cost of $132 million. Now, I’d like to provide our financial outlook. Our overall business remains strong across our key product segments and geographies. We continue to drive large portions of our legacy perpetual businesses to a recurring model and this shift has improved the overall long-term health of our business. ARR deferred revenue and unbilled backlog have all grown faster than expected with some short-term impact to revenue. In Digital Media, we have discussed how the transition to subscriptions is happening faster in Creative. We're now seeing a similar trend with Acrobat Lightroom and Photoshop Elements. As a result, we’ve consistently raised our Digital Media ARR targets and we’re doing so again for Q4 FY15. Our new Digital Media ARR target existing this year is 2.95 billion with slightly lower revenue in Q4 than previously expected. In Digital Marketing, we are driving larger, multi-year and multi-solution customer contracts. As a result of larger engagements and longer implementation cycles, we are seeing strong growth in deferred revenue and unbilled backlog. We are targeting a Q4 revenue range for Adobe Marketing Cloud of $365 million to $400 million based on the potential variability of contracts that closes perpetual versus ratable licensing. We are therefore targeting an overall Adobe Q4 revenue range of $1,275,000,000 to $1,325,000,000. We expect our Q4 share account to be between 506 million to 508 million shares. We're targeting net non-operating expense to be between $40 million and $60 million on both a GAAP and non-GAAP basis. We are targeting a Q4 tax rate of approximately 25% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q4 GAAP earnings per share range of $0.32 to $0.38 per share and a Q4 non-GAAP earnings per share range of $0.56 to $0.62. In summary, we delivered record results once again and are focused on a strong finish in Q4. We remain excited about our long-term growth prospects and look forward to sharing a financial roadmap with you at MAX in a few weeks. Mike? Mike Saviage : Thanks Mark. As we have discussed, Adobe MAX is coming up next month in Los Angeles with the main keynote presentation on Monday, October 5. We will host a financial analyst meeting on the afternoon of day two at MAX, which is Tuesday October 6. Registration information for MAX and the Analyst Meeting was sent out during the summer and more information about our user conference is available at max.adobe.com. If you haven't already signed up and need registration information, sent an email to IR at adobe.com. If you’re unable to attend in person, we will provide a live video webcast of the meeting along with an archive. For those who wish to listen to a playback of today's conference call, a web based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 24899607. Again, the number is 855-859-2056 with ID number 24899607. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today, and ending at 5 pm Pacific Time on Friday October 2nd. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] And our first question comes from the line of Steve Ashley with Robert W. Baird. Your line is open. Steven Ashley : Great. Thanks so much. Mark, I’d just like to drill down, you talked about the fourth quarter, the revenue guidance being slightly lower than you had originally expected. You laid out the fact that there has been a conversion outside of Creative Cloud with some of the single products. Wonder if you could just talk about which of those products might be seeing the most aggressive transition, and maybe the magnitude of the impact of that dynamic? Shantanu Narayen : Sure. Steve, let me again maybe just touch on what we're seeing happening across the industry and then I think we can have Mark answer that specific question, because the industry shift to the subscription business model which clearly is helping drive both customer intimacy as well as productivity in the -- predictability in the business we clearly see that accelerating. As you know we were the pioneer in moving desktop software to the cloud and now we see actually all major software vendors on the desktop adopt similar strategies. And from a color point of view while the Creative business has mostly transitioned, what we are seeing is the same trends and increased adoption of subscription in both our imaging hobbyists business where Photoshop Elements customers are now subscribing instead to the Creative Cloud photography program and Acrobat users especially on adobe.com are moving increasingly to the subscription offering much like what I think Microsoft is also seeing with Office 365. So that's just a big trend that we are seeing across. On the Enterprise side, Steve, it's slightly different because the trend has a little more variability based on industry verticals as to their preference of whether they want to go with the subscription or ratable versus perpetual. And so the overall mix may be a little harder to predict, but the strength of our overall business during the transition is not being impacted. So maybe with that as a big picture of what we are seeing Mark can address your question. Mark Garrett : Yes, so Steve on the Digital Media side, Shantanu just touched on and it’s Hobbyist, it’s Lightroom, and it’s Acrobat. And if you look at ARR, because as you know for the past four years we’ve been talking about this transition, if you look at ARR over the course of this year, we raised it twice. We started at 2.9 billion. In Q2 we raised it to 2.925, now in Q3 we are raising it another 25 million to 2.5 billion. That $50 million increase in ARR if you use that old rule of thumb that we used to have of each dollar of ARR is roughly $3 of revenue that’s a lot of revenue. It’s moved over during the course of this year. So from a Digital Media perspective you clearly see it in ARR. On the Digital Marketing side, it’s a similar story, but slightly different metrics. So we had some perpetual in the fourth quarter that closed early in Q3, that’s why you saw 27% year over growth instead of 21% year over growth. We are seeing larger multi-year deals and those deals are great to locking customers but they have as we said longer implementation cycles. What you’re going to see though is on the Digital Marketing side reflected in deferred revenue and unbilled backlog, really nice increases. And so by the end of this year, I’d anticipate that the two of those together deferred and unbilled backlog will be over $3.5 billion. That’s $3.5 billion of closed business that will get recognized to revenue over time. So that’s really healthy both in Digital Media on the ARR side and Digital Marketing on the deferred and unbilled backlog side. Steven Ashley : Perfect. Really helpful. Thank you. Operator : And our next question comes from the line of Ross MacMillan with RBC Capital Markets. Your line is open. Ross MacMillan : Great. Thanks a lot and congrats on a great quarter. Just two questions from me. Just on the sub adds, Mark, you have the mix between full Creative Cloud and single app, do you have that? Mark Garrett : I do. Its 54% fall 46 -- and 46% point. Yes, 54%, 46%. Ross MacMillan : That’s interesting. I guess, along those lines are you starting to see -- I know you will talk about this at MAX, but are you starting to see a better sort of shift, if you will, from that Creative Suite base excluding the CS6 base to the Creative Cloud now that we’re three years after the launch of CS6. I’m just curious to get a sense for what we’re seeing there? Shantanu Narayen : Ross, I will take that. And yes we’re definitely seeing a good mix. I think we’ve characterized the CS6 base as a healthy base for us to migrate to the Creative Cloud. And to give you an example of that one of the things that we had been talking about is how international adoption in the past was lagging the adoption of Creative Cloud within the U.S. In the quarter that just finished, we saw some great progress with respect to migrating the CS6 base in Japan. So Japan had a good quarter and as you know the perpetual business was healthier there later in the cycle relative to the U.S. And so clearly the CS6 base continues to be a base that we think is ripe for migration to the Creative Cloud and we’re clearly seeing signs of success in transitioning them from Creative Suite to Creative Cloud. Ross MacMillan : That's great. Maybe one if I could squeeze it. Just on Digital Marketing, Mark last year we’ve the shift where I think you went to 75% term ratable. If we get to low end of the Q4 revenues, where we’re going to stand in that sort of ratable mix within Digital Marketing Cloud? Thanks. Mark Garrett : If we were at the lower end that would mean most of the perpetual in Q4 would have moved over to subscription, because the pull in of that perpetual into Q3 was a piece of what we were anticipating in Q4 and then the range that you see is basically a mix of perpetual moving to subscription depending on whether you’re at the high end or the low end. There would be very little left at the low end. Ross MacMillan : That’s great. Congrats again. Thank you. Mark Garrett : Thank you. Shantanu Narayen : Thanks, Ross. Operator : And our next call comes from the line of Brent Thill with UBS. Your line is now open. Brent Thill : Thanks. A question just on Digital Marketing. Mark, you mentioned that you’re seeing larger deals, you’re seeing longer deals, I’m just curious if you can just give us a little more color around perhaps what you’re seeing in the overall lift of ASPs and when you look at the contract duration, is there been a change in terms of what you’re seeing, maybe you could comment on what the duration is and I had a quick follow-up just as it relates to Digital Marketing. Shantanu Narayen : Sure. Brent, why don’t I give you a little bit of color on what’s happening with Digital Marketing. As you know when we first started the business and we had these different solutions, we would be selling primarily to practitioners who continue to be important buyer within the companies. And when we were selling into the practitioners, the practitioners would implement the product of virtually instantly and we recognize revenue and it’s up and running. As more and more customers are adopting the entire Creative Cloud and multiple solutions, what they’re doing is they’re standardizing on the Adobe Solution, but the sequence with which they implement each of the solutions is still they implement one then they may implement others. And so what Mark was alluding to was these deals if they are in the million dollar plus range, it has to do with more solutions being acquired and then them implementing it sequentially, which is why you see it in unbilled backlog and you see it in deferred revenue, but you don’t see it translate to revenue as quickly. From our point of view that’s all great, because they’re standardizing on our platform, the value proposition of the entire marketing cloud is working with them Brent and we recognize that in the large -- in the bigger picture, it’s actually a more predictable and healthy business for us. The other thing that’s also seeing good traction is the managed services, which again is in our best interest, because those deal sizes are larger and we’ve tremendous visibility into how they’re using our solutions. Brent Thill : Okay. And just -- so I’m clear, you’ve been talking about 30% backlog growth for quite sometime yet. The revenue has been understated and it feels like that the milestone to hit that keeps getting pushed out, is there anything else that we should consider or is this just naturally because of the issues that you just brought up I think there is a lot of questions around that that’s been off for quite sometime? Mark Garrett : Yes, I understand Brent. It’s Mark. I think you meant 30% bookings growth, you said backlog … Brent Thill : That’s right. Mark Garrett : …but yes 30% bookings growth, no there nothing else going on. I mean, that’s really what it is. A lot of it is just moment of perpetual; a lot of it is as Shantanu just said this larger multiyear transactions as well. And like I said, you do see it in unbilled and deferred. Brent Thill : Great. Thanks. Operator : And our next question comes from the line of Brad Zelnick with Jefferies. Your line is now open. Brad Zelnick : Thanks very much. And I will also echo my congratulations on a nice Q3. I want to revisit the first question that was asked, maybe to ask a little bit differently. Trying to resolve the Digital Media ARR outlook for next quarter going up with revenue coming down and logically there is only two ways that make sense to me to get there either your linearity assumptions changed and you thought you could achieve greater ARR in Q3 or at more earlier within Q4 or the mix of subscription versus product change which you already spoke to. And if that’s the case, how can you forecast that or maybe ask differently what’s changed in a way that you’re offering those three products in Q4 that gives you the visibility to know that the take rate will be more subscription versus product? Shantanu Narayen : That’s a good question Brad and what is really happening in the imaging business in particular is as you know that traditional Q4 cycle when we had predicted what the revenue would be viewed have a version of Photoshop Elements that was released in every Q4, which was always perpetual revenue. We have also had Lightroom that is offered in both perpetual and now as part of the Creative Cloud photography offer, a subscription offering. And as we see both of those migrate through the Creative Cloud photography offer that is giving us visibility into the fact that our customers are increasingly choosing the subscription offering rather than the perpetual offering. So think of it as Photoshop Elements not having the normal change or increment that we normally see in Q4 and continue to see Lightroom move towards the subscription rather than the perpetual is resulting in that revenue. And again as Mark said, if you think about it as every $10 million is leading to -- in ARR is leading to $30 million or so in revenue. And if you look at what we had given as our Q4 targets, at the high end of the range approximately half of that is probably in Digital Media and it's clearly shown as a greater portion of that going through ARR. So hopefully that helps. Brad Zelnick : Thanks for taking my question Shantanu. It’s helpful. And I will save my others for a couple of weeks when I see you all at MAX. Mark Garrett : Okay. Shantanu Narayen : Thank you. Operator : And our next question comes from the line of Sterling Auty with JPMorgan. Your line is open. Sterling Auty : Yes, thanks guys. I apologize I got kicked off the call, so it may have been asked, but what’s causing the longer implementation time that you mentioned in your prepared remarks and also geographically where are you seeing the best strength in terms of the Creative Cloud net adds? Shantanu Narayen : The Creative Cloud Net adds, Sterling continue to be strong everywhere. One of the things I talked about earlier was that Japan which we’ve had a lag relative to the adoption of Creative Cloud in the U.S is now showing good strength. We had the CS6 sold in Japan later than we had in any another country and now that’s CS6 base, whether it's in Japan or Germany, other countries, we’re certainly seeing migration of that into the Creative Cloud, which all goes well for continued strength of Creative Cloud across the globe. And with respect to the implementation cycles, what I had mentioned was that as we move from selling to practitioners single solutions to selling entire Marketing Cloud and multiple solutions higher up in the chain, what’s still happening is the implementation of the solutions happen sequentially and therefore as soon as the solution goes live we start to recognize it. So they standardize on the Adobe product which results in the bookings and the unbilled backlog, but the implementation because it is multiple solutions takes a little longer than single solution. Sterling Auty : Got it. Thank you guys. Operator : And our next question comes from the line of Walter Pritchard with Citi. Your line is open. Walter Pritchard : Hi, thanks. Shantanu, I look at the full suite adds and its coming a little to your growth is continuing to slowdown there a bit. And we also noticed that you’re being a lot less aggressive with promotion in -- especially this year overall, but even into the August quarter where we’re tracking it. And I’m wondering how you’re thinking about the mechanisms to continue to convert full suite customers over. I mean it would feel like you’re feeling pretty good about it, because you’re not being as promotional, but we’re seeing the gross add as we calculate it on the full suite adds decelerating a bit more from where they were in the first half of your fiscal year? Shantanu Narayen : Yes, I think Walter we had a good Creative Cloud subs add across virtually every single offering that we had. Team had actually a very strong quarter and globally we continue to feel strong about the migration capabilities of moving Creative Cloud -- Creative Suite customers to Creative Cloud. You’re also right in that, we had fewer promotions in the quarter which again I think reflects both the distinction now that we’ve drawn between Creative Cloud and the old Creative Suite products, and the fact that in Q4 we continue to expect to see strength. And we’ll talk a little bit more about this at MAX as well Walter relative to all of the new stuff that’s coming and how we see the business unfold in 2016 and beyond. Walter Pritchard : Okay. Thank you. Operator : And our next question comes from the line of Kash Rangan with Merril Lynch. Your line is open. Kash Rangan : Hi, guys. Thank you for taking my question. I apologize for the background noise here. Mark, if you could just parse for us the new guidance maybe take the mid-point of your revenue versus where Wall Street had been and break it down into how much of the delta is coming from the Digital Marketing business rev rec changes vis-à-vis the Digital Media that will be helpful. And also as it pertains to Digital Marketing are we completely done with this, because I remember you’re saying that about 70% of the business was booked at subscription not too long ago, but basically you commented that you expect that number could be higher, and so effectively are you going to be completely done and devoid of surprises in the Digital Marketing subscriptions? Thank you. Mark Garrett : Hi, Kash, it’s about half and half in terms of the new guidance to the old guidance from a revenue perspective. So about half of it is Digital Media driven which is now showing up in ARR and about half of it is Digital Marketing driven which is showing up in deferred and un-built backlog. So it’s roughly half and half. On the mix, yes you’re right, we said it was moving towards 70-30 or even 80-20 but if you do the math that’s, its still a lot of dollars of perpetual revenue in any given quarter. And so, there is going to be some variability based on customer preference as we said and we closed some of it in Q3 instead of Q4 but there’s still going to be some variability in the fourth quarter and that’s why we gave you a range. At the high end of that range right at that $400 million which is the high end of the range, we would still hit the 24% year-over-year growth that we said we would go in Digital Marketing for the second half. Kash Rangan : Got it. I think its actually a good thing and I completely agree with you guys that you’re designing the solutions such way to assume the [indiscernible] of revenue ratably, but as a quick [indiscernible] just so investments are offered that the data, is there a way which we can say that you expected your off balance sheet, on balance sheet backlog that for revenue to be X, but as a result of the shift you expect it to be Y at the end of this year so we can see that as supposed to the Digital Media business where you clearly pointed out that ARR increase can be match fit with a corresponding 150 million [ph] or whatever, is there something like that that we can offer to investors as to what to look for if you report the end year results as far as backlog for digital markets is concerned? Thank you. Mark Garrett : Yes. On the Digital Media side there is, because we originally guided to $2.9 billion and ARR is now going to be $2.95 billion. So there is a lot of increase to ARR in the Digital Media side, so you can clearly show that. On the Digital Marketing side granted it’s a little bit harder. We don’t guide on deferred revenue, we don’t guide on build backlog. I will tell you though, its growing faster, both of those are growing faster than our own expectation, that’s about all I could give you right now. Shantanu Narayen : And Kash, maybe I’ll just repeat again what Mark said, which was in Q3 we definitely saw strength in the perpetual licensing which was reflected in the 21%. We had strong bookings in Q3, we continue to see the pipeline is really strong for Q4 and so we expect a strong finish. And for Q4 the high end of the range, it’s really identical to, the targets that we provided at the end of the Q2 call with respect to what kind of revenue achievement we expect for the second half of fiscal ‘15. So I think the fact that we continue to reiterate 30% bookings and now this is in, even despite the change in currency. So I think those are some of the factors which give us continued confidence in the momentum of the Digital Marketing business. Kash Rangan : Nice work gentlemen. Thank you. Mark Garrett : Thank you. Shantanu Narayen : Thank you. Operator : Our next question comes from the line of Mark Moerdler with Bernstein Research. Your line is now open. Mark Moerdler : Thank you very much. So drilling a little more on the, Adobe has moved to the Cloud, what's driving that adoption now, is it pricing, is it functionality or how should we think about what the key drivers, and then I have a quick follow-up? Shantanu Narayen : Mark, I think in the highest sense it’s the Photoshop brand and the Photoshop name and the fact that the Creative Cloud innovation pace is happening at a much faster pace than it is with traditional 12 month Photoshop element cycle, Photoshop elements cycles. The other thing that I think we are starting to see, maybe I can touch on this a little bit more, is that the mobile apps. What we’re seeing with usage of mobile across imaging, this is light-room mobile as well as what you can do on smartphones. I mean we have 10s of millions of downloads of our mobile applications. And in the imaging when we look at usage data, the usage data and imaging across multiple devices which we would argue will lead to much higher retention is also fairly high. So I think the elements move is largely due to the attractiveness of the element -- the offer of both light-room and Photoshop as well as the fact that it’s mobile enabled. Mark Moerdler : Okay. And a quick follow-up, how should we think about, I know you said that Adobe stock is strong in terms of adoption. Can you give us a little more color of how that is going? Were you expecting it to, how we should think about stock having an impact? Shantanu Narayen : Well it’s early. I think you when Mark had given us targets for how much revenue we expect to see added when we had talked about the revenue addition for Fotolia versus the revenue reduction at that point for currency. I would say we’re on track with that business, it’s early. We’re seeing people both add to and existing Creative Cloud subscription with stock and we are starting to see people adopt the new subscription offers that have the Creative Cloud complete plus stock. So I realize that’s not quantifying it yet for you, but relative to any of the targets that we’ve provided earlier we’re on track. Mark Moerdler : Okay. One other quick question, what's the percentage of subs with annual contracts, do we know that? Shantanu Narayen : Yes, we do Mark. Its about 97% annual and 3% month-to-month. Mark Moerdler : Perfect. Thank you, and it was a nice quarter. Thank you very much. Shantanu Narayen : Thank you. Operator : Our next question comes from the line of Kirk Materne from Evercore. Your line is open. Kirk Materne : Thanks very much, and I’ll eco my congrats on the quarter. One of the things that had been talked a whole lot since you guys have been switching over to some of the element of [indiscernible] some of the software that was perhaps not obtained legally historically, and I’m kind of curios just that you, I see a little bit more traction especially in our sort of international markets with the suite. If you feel like you’re recapturing maybe [indiscernible] casual pirating Cloud especially around that Hobbyist level. I was just kind of curious on your thoughts there. And then just a really quick one in certain, all that related on the marketing side, just the difference in competition as you get into these multi-year deals, multi-product multi-year deals? That’s it. Thanks. Shantanu Narayen : Sure, to answer both your questions, the first thing I would say is relative to the new seat adoption that we’re seeing, the new seat adoption is definitely being driven both by creators who are entering the market as well as casual pirates who existed for whom the lower price of entry is far more attractive way to have legal software than not. There’s no question about that, we hear that anecdotally all the time that people are pleased with the fact that they can have legitimate software. As we’re delivering more Cloud based services, as you know the only way to use the mobile apps and share content between the mobile apps as well as our Creative Cloud, is by having a subscription. So I think that’s also as we see more creative sync and creative profile being used, that’s certainly, driving that. So I think we feel good about that. With respect to your second question on completion. I think our differentiator continues to be honestly the content and data part, and there’s nobody that comes at it with respect to having the kind of content infrastructure that we have to enable them to re-platform their websites which is a massive trend as well as the fact that we have the analytics. We had this announcement recently also about what we’re doing with respect to a programmatic advertising platform that also leverages the fact that we have analytics. So I think the unique differentiation was analytics in the past. It continues to be audience manager right now, because for the first time people can have the same audience, the same segment, the same campaign, the same content, the same assets used across all of our marketing solutions. With respect to external competition, I think we still see a number of point product vendors that are in that market place and I think you’re seeing the larger ISVs as well start to identify marketing as one of the large growth opportunities for them and Oracle is the company that’s probably done a lot of acquisitions in that space. But we like our differentiation and we continue to execute on it. Kirk Materne : Thanks very much. Operator : Our next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open. Keith Weiss : I just want to thank you guys for taking the question and congrats on a very nice quarter. Maybe just to carry on the theme of the marketing environment, the competitive environment, one of the things a lot of us have been looking for in this space for quite sometime is that sort of consolidation of what has been a very fragmented market. Where do you think we are in that progress of the marketing cost ever being more willing to consolidate multiple solutions into one suite just from a prior market perspective? And then how do you sort of help to push that along? Shantanu Narayen : I think Keith, the thing that I hear a lot when I talk to customers and I spend a lot of time with customers is, this notion of digital transformation and digital disruption at the C-suite is front and center across every single industry. Without a doubt that is leading to people looking at larger systems and saying, how do we transform our business to drive more direct relationship with customers and build a customer centric company. So I think every C-suite that I’m talking whether you’re in retail, whether you’re in financial services that’s a thing that’s leading to understanding which companies, which vendors have a larger offering in that particular space. I think as they think through that, they’re also having to reorganize the marketing function, because search versus commerce, versus revenue has traditionally been in different places. So I think you’re see that play out over the next year, couple of years, but I think you are seeing more of them recognize that having a unified platform is the way to go. So we still sell to practitioners and we still have to make sure we’re best of breed in each of the individual solutions, but I would say increasingly our deals especially the new customer acquisition is a larger deal that’s being sold higher in the chain. Keith Weiss : Okay. And can I just stick one last one, just on the broader environment there’s been a lot of obviously market turmoil particularly around emerging markets. How have you seen overall demand trends particularly internationally sustain throughout the quarter? Shantanu Narayen : Well maybe this is one of the benefits of not having too much of emerging markets, business or presence in the creative space that it’s not really impacting us. So we continue to see strength across most international markets. And as you know in Digital Marketing that’s primarily the UK, Germany, Japan and Australia where we have significant presence and some presence in other places. But I think as we said on the prepared remarks, the interest in the solutions when we were in Singapore or when you’re in Sydney or now in Tokyo, all of these symposia being held to sold out audiences. So the awareness and the understanding of this as one of those important technologies is only growing. Keith Weiss : Excellent. Thank you guys. Operator : Our next question comes from the line of Derrick Wood with Susquehanna International Group. Your line is open. Derrick Wood : Thanks. Mark, given the accelerated mix shift and the model on the revenue side, does that impact the framework you’ve given for 2016 expectations on revenue and EPS or maybe do we need to think about trends in gross margins in any different way? Mark Garrett : I don’t know if they need to think about trends in gross margins in any different way. As it relates to ’16, we don’t typically comment on next year until we get to the Q4 call. So I can't really given you any insights into ’16, but it shouldn’t have any significant movement in gross margins. Because on the creative side, it’s not a fully hosted offering, it’s got Cloud componentry to it, but it’s not a huge Cloud component. Derrick Wood : Okay. And then Shantanu, I’d be curious to hear how you ranked the impact for some of your ARPU enhancing services on the creative platform. You’ve got [indiscernible] with social, a talent search, you’ve got Fotolio with stock content, you’ve got things like video and mobile apps. Anyway you could just couch the relative impact on driving additional ARR and how you see that ramping in the upcoming quarters? Shantanu Narayen : I think with respect to new services that have the largest potential upside, we continue to think that Adobe stock is what drives upside in terms of ARR. Usage of Behance is driving higher retention. So the way we look at what's happening with Behance is being part of the community because, that’s included for the most part. There are some value added services as you point out, but for the most part Behance is driving greater retention. And video is driving more usage from single app to the CC complete. So I think we look at each of the different ones as driving either an increase in ARPU as you pointed out or as driving greater retention both of which from our point of view are useful, because as you know as people move off of any promotional pricing retention is something that’s key to us and adding increased value is important in that respect. Derrick Wood : Great. Thank you. Operator : Our next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is now open. Brendan Barnicle : Thanks so much. Shantanu, I wanted to follow-up on Keith’s question about the Marketing Cloud and you alluded to uncertainty that C-suite tab and they’re figuring what to do with their marketing strategy. Is that the biggest obstacle that you run into in terms of closing Marketing Clouds, that folks are still trying to figure out what tools to work with or is this something else that’s holding up deals? Shantanu Narayen : No, I actually continue to feel like the awareness and the importance of that deal is actually playing to our favor rather than the other way around and that’s why we continue to see strong bookings and it’s leading to larger deal sizes rather than then other way around. So from our point of view, we have the most comprehensive offering. We’re the leader in that particular category and so those deals actually play to Adobe’s favor. Brendan Barnicle : Great. And then, Mark do you have a percentage number for us in terms of total end customers to in subscription not net news but folks who are brand new to you. Do you have that kind of breakdown? Mark Garrett : We’ve been consistently saying that it’s over 20% and that’s still holding true. Brendan Barnicle : Great. Thank you guys. Operator : Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is open. Jay Vleeschhouwer : Thank you. I’d like to ask first about the transition you’re seeing now in Document Cloud and then just follow-up on adobe.com. So perhaps, Shantanu you could talk about the Document Cloud transition within volume terms. Two quarters ago, you updated us by noting that the active base, you calculated for Acrobat was something more than $30 million. We know historically that the average new unit volume for Acrobat were somewhere in that mid-single digit unit [indiscernible] when it was packaged software. So if we look out over the next number of years, how you’re thinking about converting that large phase, most of which was done on the LA's over to subscription. And given what you’re seeing now are anymore client [indiscernible] on perpetuals that you’ve been doing or collecting to do for Acrobat? Shantanu Narayen : I think we’ve always stated Jay that we think that the Document Cloud transition will be different from the Creative Cloud transition, in that it will be important for us to continue to offer the same perpetual version for a while. What we are seeing is on adobe.com the vast, vast majority of people who are buying Acrobat DC right now are buying the subscription option. And so I think as we have previously indicated, I think with respect to the Acrobat transition, we expect to continue to see revenue relatively stable but you will see an acceleration in the Document Cloud ARR that’s reflected, that’s showing how the transitioning is happening. And with respect to the $30 million number that you said, that was the number that we eluded to in terms of what number of Acrobat seats we have sold in the history of Acrobat. And so, again I think we’re pleased with what we see on the Document Cloud but it has slightly different characteristics than what we’re seeing with the Creative Cloud. Jay Vleeschhouwer : All right. As a follow-up on adobe.com, I would have to think that at this point the business flowing through adobe.com is larger that your revenues than was the case prior to the model change if you go back a number of years, adobe.com was probably doing roughly lets say about $0.5 billion give or take, it depends on the year of course, but now I would think given the scale of Creative Cloud and the other businesses that its substantially larger that it might have been historically; so the question is, could you relate Mark, do you presume scaling up significantly adobe.com for the profitability of the company, is there a substantial effect on your operating income by having so much more business going through adobe.com now than historically most case. Mark Garrett : Yes, without a doubt Jay, we’re doing more and more business on adobe.com much, much more than we did before the transition by far more than we did before the transition and yes, it is going to be more profitable than going through even our own direct sales force or the channel. So to the extent that we can drive more and more business there, it does improve us from a profitability perspective. I can't give you a number, but it definitely is more profitable for us. Jay Vleeschhouwer : Thank you. Mike Saviage : Operator, we’re coming up in the top of the hour. Lets do two more questions, please. Operator : Thank you. Heather Bellini from Goldman Sachs. Your line is open for questions. Heather Bellini : Great. Thank you for taking the question. I just wanted to follow-up on Adobe stop for a second. I was just wondering if you can share with us, where you seen the best opportunity for cross sell and also, if you have a sense of when you look out for the potential of the attachment here in install base, kind of how are you framing that opportunity? Shantanu Narayen : Sure, Heather, I think what we’ve said in the past is approximately 85% and greater of that is of the buyers as well as the sellers are using Adobe products. And when you think about the size of that market which is in the multiple billion that represents an opportunity for us to add value to the customers. In terms of what we’ve done Heather for the integration, as you know within Photoshop and all of our products, you now have the ability to both put something up on the market place to sell as well as you have the ability to search for something when you’re starting with a blank canvas and you want to get a creative idea or inspiration to get something going. So integrating it into the workflow makes a lot of sense. And what we’re also offering right now is new subscriptions which say if you are getting a subscription where you know what kind of demand you have for stock, you can buy all of the complete applications in addition to the stock. So I think the value within the workflow is well understood, both the supply and demand participate with us. I think two things maybe underappreciated as we are building this business. The first is the number of people who are running campaigns and when you’re running a campaign using our Marketing Cloud technology being able to use this stock to also stock your campaign progress and time that in we showed brief sneak of that. We think that, that’s an opportunity for us to drive it and second is, within the enterprise. So as we’re selling enterprise ETLAs, there isn’t an enterprise in the world that doesn’t have a marketing department that’s procuring stock. And so if we can demonstrate the value of how an enterprise ETLA for the creative products can include stock as part of that, we think that has value as well. Heather Bellini : Thank you. Operator : And our last question comes from the line of Phil Winslow with Credit Suisse. Your line is open. Philip Winslow : Hi, guys. Thanks guys for taking my question. Most of my questions have been answered. But I wanted to actually double click on something you talked about earlier, the TAM expansion on the creative side. Obviously you had great user count growth in particular the past couple of quarters and you’ve done a great job of framing the Cloud, the Creative Cloud transition looking to call it your core users, but if you think about net TAM expansion in incremental users, what if you could just help us kind of with the math about how you think about these new sort of lower price products expanding the TAM, just any sort of guide post there would be really helpful? Mark Garrett : Yes, Phil I think we’ll definitely share more of that at MAX and so that’s a good segue to match because sharing the numbers for example of how many people have bought our consumer photography offerings in the past that we did not include as part of the TAM or the market, that’s certainly expansion capabilities that are now available for us. As we’re getting more information on piracy and understanding what kind of activations we may have seen, giving you a little bit more color on that with respect to the TAM I think is another way for us to expand. So we’re looking forward to MAX, we will share with you more information on TAMs at MAX and hopefully give you insight into in addition to the core migration of the Creative Suite customer to create a Cloud. How this market expansion with respect to targeting new users as well as users who traditionally may have used other products or value expansion which is how we can sell new services like talent or like Adobe stock into that existing base help us expand our TAM. So I think we’ll be certainly sharing more information with you on that. MAX is coming up in a few weeks, so we look forward to seeing you as well as others at MAX. And let me just end by thanking you for joining us again on the call today. From my point of view, we had a strong quarter, the underlying trends in our business in both Digital Media and Digital Marketing continue to be strong. And I look at it and say, whether it’s a student retouching a photo on their tablet, a director making a latest block buster film or what you see as consumer brand publishing their marketing content across the web and mobile. It’s clear that Adobe technology is at the heart of the world’s best experiences and we look forward to increasing that. Thank you for joining us today. Operator : And this concludes our call. Thank you.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,015	4	2015Q4	2015Q4	2015-12-10	2.029	2.137	2.811	2.848	5.05	31.18	33.55	Executives: Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and CEO Mark Garrett - Executive Vice President and CFO Analysts : Steve Rogers - Citi Sterling Auty - JP Morgan Kash Rangan - Bank of America Merrill Lynch Kirk Materne - Evercore ISI Mark Moerdler - Bernstein Research Ross MacMillan - RBC Capital Markets Brent Thill - UBS Samad Samana - FBR Capital Markets Brian Wieser - Pivotal Research Heather Bellini - Goldman Sachs Keith Weiss - Morgan Stanley Jay Vleeschhouwer - Griffin Securities Derrick Wood - Susquehanna International Group Brendan Barnicle - Pacific Crest Securities Operator : Good afternoon, ladies and gentlemen. I’d like to welcome you to Adobe Systems Fourth Quarter Fiscal Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’d now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's fourth quarter and fiscal year 2015 financial results. By now you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We've also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, December 10, 2015, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe's SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe's Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike, and good afternoon. FY15 was a record year. Adobe is driving digital experiences that are fundamental to the transformation of every global brand, government and educational institution. We delivered strong performance across each of our three cloud businesses. We exceeded our targets in Creative Cloud annualized recurring revenue and subscriptions, launched and ramped our Adobe Document Cloud business, and drove strong revenue and bookings growth for Adobe Marketing Cloud. In Q4, we delivered revenue of $1.3 billion and non-GAAP EPS of $0.62. For the year, we grew total revenue to $4.8 billion with non-GAAP EPS of $2.08. In Digital Media, Creative ARR grew to $2.6 billion exiting the year, an increase in Q4 of $310 million. This strong performance was driven by enterprise adoption and the addition of 833,000 net new individual and team Creative Cloud subscriptions. Ending Q4 Creative Cloud subscriptions were 6.17 million. Subscription growth was fueled by continued migration of the Creative Suite installed base, as well as the addition of customers that are new to Adobe’s creative products. We achieved strength across our Complete and Single App offerings, including Creative Cloud for individuals, Creative Cloud for teams, Creative Cloud for education and the Creative Cloud Photography Plan. The value of the Creative Cloud service grew significantly in 2015, with innovation in many areas including, hundreds of new features across Creative Cloud desktop apps, with innovation across our imaging, illustration, web design and video tools. New Photoshop features like Dehaze, which eliminates fog and haze from photos and Illustrator’s Shaper tool, which lets you draw with natural gestures that magically transform into perfect geometric shapes, drew rave reviews from our customers. Innovation in our Creative Cloud video apps continues to entice the Hollywood community to switch to Adobe Premiere Pro, which is now the leader in its category. The upcoming Coen Brothers movie, Hail Caesar and 20th Century Fox’s much-anticipated Deadpool are the latest to be edited in Premiere Pro. New mobile apps like Photoshop Fix, which revolutionizes photo retouching, Premiere Clip, which lets users create and edit videos, Comp CC, which helps users lay out designs and Capture CC, which simplifies the capture of creative assets on the go, have all received high app store ratings from customers. These millions of downloads are bringing new customers into the Adobe franchise, almost half of new Adobe IDs are created in one of our mobile apps. Our goal is to make the mobile-to-desktop workflow for creatives as seamless as possible so that they can be creative and productive wherever they are. We’re looking to expand further, with new mobile apps, like Adobe Voice and Slate, which bring Adobe technology to storytellers of every age and ability. The power of our mobile and desktop apps is significantly enhanced by the introduction of our CreativeSync technology, which enables Creatives the freedom to create and collaborate in an increasingly connected world. The Adobe Marketplace which includes Adobe Stock, is the industry’s first stock content service to be integrated directly into the content creation process. Adobe Stock is a fast growing marketplace with over 1 million high-definition video files and 45 million photo and graphics assets integrated directly within CC desktop apps, and is driving attach to existing and new Creative Cloud subscriptions. Four years into our Creative Cloud journey, we have deeper insight into the needs of the Creative community, more satisfied customers and a significantly larger total addressable market. Growth will continue to be fueled by three initiatives, migrating the Creative Suite installed base, attracting new customers and driving higher ARPU through cloud services such as Adobe Stock. In March we introduced Adobe Document Cloud, an innovative solution to manage documents across devices. Building on our strong PDF and Acrobat franchise, Document Cloud is a complete portfolio of secure digital document solutions that streamline business processes. It includes Acrobat DC, Adobe eSign electronic signature services, plus web and mobile apps. In October, we launched our first file sync and share partnership with Dropbox, integrating Acrobat, Acrobat Reader and Dropbox across mobile, desktop and web. This quarter we delivered a milestone release of Adobe eSign services with innovative mobile app functionality and a focus on enterprise mobility and control. Adobe eSign services have attracted a strong stable of partners, including integrations with Workday, Ariba, Microsoft and Salesforce. Q4 Document Cloud revenue was $209 million and we grew Document Cloud ARR to $397 million exiting the year. In Digital Marketing, we achieved strong Adobe Marketing Cloud bookings in Q4 and revenue of $352 million. We continue to drive large-scale engagements with Marketing Cloud customers. Significant transactions in Q4 included Home Depot, Etihad Airlines, McDonald’s, Comcast Cable and Kaiser. Last month, we announced the availability of Audience Marketplace, a new data exchange in our Adobe Audience Manager platform that connects advertisers and content publishers. Through our integrations with leading data providers, Audience Marketplace can access large volumes of high-value audience data for more accurate and valuable insights. The platform also allows advertisers and content publishers to create more accurate audience segments and have greater insights into real-time performance. An ecosystem of global partners allows us to scale Adobe Marketing Cloud to better engage with customers at every touchpoint. Eight of the 10 largest agencies and eight of the 12 largest system integrators have built digital marketing practices around Adobe Marketing Cloud. Today, we announced the expansion of our global alliance relationship with Accenture to create and deliver digital marketing solutions utilizing Adobe Marketing Cloud for life science, healthcare, and financial services organizations in North America and Europe. Adobe manages over 40 trillion customer data transactions through Adobe Marketing Cloud every year. And we are viewed as the expert in reporting and predicting major retail and consumer trends. Adobe Marketing Cloud measures 80% of all online transactions from the top 100 U.S. retailers, and over $7.50 out of every $10 spent online with the top 500 U.S. retailers. Our widely covered Adobe Digital Index holiday shopping report measured $11 billion in sales from Black Friday through Cyber Monday and revealed that a third of sales came from mobile devices. Adobe Marketing Cloud continued to be recognized as the leader in industry analyst reports. In Q4, Forrester Research recognized Adobe as the industry leader in two Wave reports : Data Management Platforms and Digital Experience Platforms. Gartner also named Adobe as an industry leader in its 2015 Magic Quadrant for Digital Marketing Analytics research report. For 2015 in total, Adobe received leadership recognition in 15 industry analyst reports, reinforcing our strong momentum in the competitive digital marketing arena. Adobe Marketing Cloud is the leader in this explosive enterprise growth category, with the most integrated offering for customers and a deep and growing set of partnerships. We are targeting multi-year, multi-solution engagements, which gives us a critical role in our customers’ digital success. We will continue to invest to expand our offerings, capture market share and drive future growth. Our record results in 2015 represent the collective efforts of our employees around the world to deliver innovation to a wide spectrum of customers that spans from students to photographers to data scientists to CXOs. While Creative Cloud, Adobe Document Cloud and Adobe Marketing Cloud each achieved significant momentum and are leaders in their categories, our true opportunity is in bringing all of these solutions together. As companies and institutions face the need to create and deliver more compelling and personalized content, faster than ever before, our role is even more critical. We help our customers build digital experiences informed by insights, supported by data, brought to life through powerful creations, and delivered at the moment that matters. Coming off a great year, we continue to have a sense of urgency and purpose. There is a lot of opportunity ahead and we will work hard to capture it. We look forward to another record year in 2016. Mark? Mark Garrett : Thanks, Shantanu. Our earnings report today covers both Q4 and fiscal year 2015 results. In FY ‘15, Adobe achieved annual revenue of $4.796 billion dollars, which represents 16% year-over-year growth. GAAP EPS for the year was $1.24, and non-GAAP EPS was $2.08. This performance is the result of strong execution against our strategy, and from some noteworthy achievements during the year. Growing Digital Media ARR by approximately $1.1 billion during the year to exit fiscal 2015 with just under $3 billion, well ahead of our original and upwardly revised targets. Exiting the year with approximately $2.6 billion of Creative ARR, driven by strong adoption of Creative Cloud across individual, team and enterprise offerings. Total individual and team Creative Cloud subscriptions ending the year were 6.17 million, also well ahead of our projections. Delivering Document Cloud revenue of $796 million and growing Document Cloud ARR to $397 million. Achieving record Adobe Marketing Cloud revenue of $1.36 billion and our goal of approximately 30% annual bookings growth. Generating $1.47 billion in operating cash flow during the year. Growing deferred revenue to a record $1.49 billion, and increasing our unbilled backlog to approximately $2.9 billion exiting the year together, this represents nearly $4.4 billion of contracted revenue that will be recognized over time. And returning nearly $627 million in cash to stockholders through our stock repurchase program. In the fourth quarter of FY ‘15, Adobe achieved record revenue of $1.306 million, which represents 22% year-over-year growth. GAAP diluted earnings per share were $0.44 and non-GAAP diluted earnings per share were $0.62. Highlights in our fourth quarter include driving Creative Cloud adoption that resulted in record sequential Creative Cloud ARR growth and record Creative product family quarterly revenue. Posting record net new Digital Media ARR of $350 million. Delivering Adobe Marketing Cloud revenue of $352 million. Reporting strong year-over-year growth in operating and net income. Achieving strong cash flow from operations of $455 million. And exiting Q4 with a record 74% recurring revenue. In Digital Media, we added $310 million of Creative ARR during Q4, which is the highest ever quarterly growth of Creative ARR. Contributing to this strong growth was record net new Creative Cloud subscriptions of 833,000. Across all routes to market, we are seeing strong demand for Creative Cloud. We continue to migrate existing customers to Creative Cloud, and are attracting large numbers of first-time customers. Overall, Creative Cloud retention remains strong. Commercial Creative Cloud ARPU, including individual and team subscriptions, grew in Q4, while Education and Photography Plan ARPU remained relatively consistent with prior quarters. Adoption of Adobe Stock continues to increase ARPU. Across all offerings, blended ARPU remains relatively consistent with last quarter. We are excited about the progress we’ve made with Adobe Stock. We achieved our revenue target for the year and are focused on driving attachment of Stock subscriptions with existing and new Creative Cloud subscribers. With Document Cloud, we had a strong Q4 to finish a solid year. We’ve delivered on our goal of maintaining consistent revenue while shifting more of the business to be recurring. In Q4, we achieved Document Cloud revenue of $209 million, while growing Document Cloud ARR to $397 million exiting the year. To give some context, only 16% of this business was recurring revenue in fiscal 2012. In fiscal 2015, 48% of the business was ratable-based revenue. We delivered Adobe Marketing Cloud revenue of $352 million, with record bookings in Q4 that contributed to achieving our annual bookings growth goal of approximately 30%. During Q4, we migrated even more Experience Manager and Campaign perpetual business to a ratable managed services offering than we had targeted. In fact, we achieved higher bookings for Experience Manager as a managed services offering in Q4 than we achieved in all of fiscal 2014. This performance is reflected in deferred revenue and unbilled backlog. Entering fiscal 2016, it is expected that there is no material perpetual revenue remaining. Other marketing Cloud highlights in Q4 include, continued growth in multi-solution adoption by our biggest customers, improved customer retention rates on a larger book of business, strong performance with our two newest solutions, Audience Manager and Primetime, and benefits to our business from mobile device use and the beginning of the online holiday shopping season, in Q4 mobile data transactions grew to 47% of total data transactions with products such as Adobe Analytics. Our Digital Marketing segment revenue also includes LiveCycle and Connect revenue, which continues to decline as expected. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $8.4 million. We had $1.3 million in hedge gains in Q4 FY15 versus $9.1 million in hedge gains in Q3 FY15, thus the net sequential currency decrease to revenue considering hedging gains was $16.2 million. From a year-over-year currency perspective, FX decreased revenue by $59.6 million. We had $1.3 million in hedge gains in Q4 FY15 versus $12.2 million in hedge gains in Q4 FY14, thus the net year-over-year currency decrease to revenue considering hedging gains was $70.5 million. In Q4, Adobe’s effective tax rate was 25% on a GAAP basis and 21% on a non-GAAP basis, consistent with our targets for the quarter. Employees at the end of Q4 totaled 13,893 versus 13,665 at the end of last quarter. Our trade DSO was 47 days, which compares to 50 days in the year ago quarter and 44 days last quarter. Cash flow from operations was $455 million in the quarter. Unbilled backlog at the end of FY15 grew to a record $2.89 billion, which now includes the value of individual annual Creative Cloud subscriptions. This compares to unbilled backlog at the end of FY14 of $2.19 billion, which we have also updated to include the value of individual annual Creative Cloud subscriptions. Deferred revenue grew to a record $1.49 billion, up 29% year-over-year. Our ending cash and short-term investment position was $3.99 billion, compared to $3.67 billion at the end of Q3. In Q4, we repurchased approximately 1.4 million shares at a cost of $122 million. For the full fiscal year we repurchased 8.1 million shares at a total cost of $627 million. We currently have $1.6 billion remaining under our latest repurchase authority granted in January, 2015. Now I will provide our financial outlook. As a result of the continued momentum in our business, we are reaffirming all of the long-term financial targets that we provided at our Analyst Meeting in October, highlighted by a 20% total Adobe revenue CAGR through fiscal 2018. For fiscal 2016, our targets include, total Adobe revenue of approximately $5.7 billion, approximately 20% year-over-year Digital Media segment revenue growth, exiting Digital Media ARR of approximately $3.875 billion, an increase of approximately $1 billion during fiscal 2016, approximately 20% year-over-year Marketing Cloud revenue growth, with approximately 30% annual bookings growth, and GAAP EPS of approximately $1.80, with non-GAAP EPS of approximately $2.70. These fiscal 2016 targets are consistent with the preliminary targets we provided in October at our Analyst Meeting, with the exception of an increase to our Digital Media ARR target. In October, we provided a FY16 Digital Media ARR growth target of approximately 25%, based on a targeted exit of $2.95 billion in FY15. This implied net new Digital Media ARR growth of $738 million in FY16. We exited FY15 with $2.99 billion of actual Digital Media ARR, above our target of $2.95 billion. We adjust ARR on an annual basis to reflect any material FX changes. Our fiscal 2015 actual exiting Digital Media ARR of $2.99 billion was based on December 2014 FX rates. We’ve revalued that ARR amount based on December 2015 FX rates and this has led to an updated Digital Media ARR exiting FY15 of $2.88 billion. As a result of the momentum in Q4 that we expect to continue in FY16, we are raising our net new Digital Media ARR growth target to approximately $1 billion from the original implied target of $738 million. This results in a new target of $3.875 billion of Digital Media ARR exiting FY16. In addition, we are providing quarterly color on FY16. We expect revenue and earnings per share to grow sequentially during the year. We expect net new Digital Media ARR to ramp sequentially similar to what was achieved in FY15. We expect Marketing Cloud revenue to grow sequentially during the year. However, quarterly year-over-year revenue growth will fluctuate below and above our annual target of 20% based on the amount of perpetual revenue achieved in the prior year ago quarters. In Q1 fiscal 2016 we are targeting a revenue range of $1,300 billion to $1,350 billion. We expect sequential growth from Q4 to Q1 in Creative and Marketing Cloud. We expect our Q1 share count to be between 506 million to 508 million shares. We are targeting net non-operating expense to be between $14 million and $16 million on both a GAAP and non-GAAP basis. We are targeting a Q1 tax rate of approximately 25% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q1 GAAP earnings per share range of $0.33 to $0.39 per share and a Q1 non-GAAP earnings per share range of $0.56 to $0.62. All of our targets are summarized in the Financial Targets document on our Investor Relations website. In summary, fiscal 2015 was a watershed year for Adobe. Strong growth across key financial metrics reflect our amazing performance. Our long-term financial targets, including a 20% revenue CAGR through fiscal 2018, show that the benefits of our move to the cloud are just beginning. Mike? Mike Saviage : Thanks Mark. Registration is now open for Adobe’s annual Digital Marketing Summit. In 2016, Summit moves to Las Vegas during the week of March 21st. The opening day keynote will be on the morning of Tuesday March 22nd, and later that day we will also host an informal meeting with Adobe management for Summit attendees from the financial community. Registration information for Summit was sent out last week to our investor and analyst database, and more information about our user conference is available at summit.adobe.com. If you haven’t already signed up and need registration information, send an email to ir@adobe.com. If you are unable to attend in person, the keynote session will be webcast live. For those who wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 85090018. Again, the number is 855-859-2056 with ID number 85090018. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5pm Pacific Time today, and ending at 5pm Pacific Time on December 16, 2015. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator. Operator : [Operator Instructions] Your question comes from the line of Walter Pritchard from Citi. Your line is open. Steve Rogers : Good day. It’s Steve Rogers on for Walter. Just wanted to ask you about what you’re seeing in terms of the subscribers moving from point to full and just kind of the impact there that, that would have on ARPU? And then I got a quick follow-up if you could allow me second question. Shantanu Narayen : I think overall in terms of the subscriptions, we saw strength across all of the offerings. Certainly, I think as we innovate, we’re distancing our Creative Cloud offering from the Creative Suite offering. So we’re seeing good migration of existing customers. I would say Q4 was also characterized by international adoption accelerating in countries like Japan and Germany. Hobbyist and consumer customers are adopting the photography plan and education also continues to grow. And I think all of those contributed to a seasonally strong Q4. I think as you look at the individual versus complete, we've always maintained that individual is a good new way to attract customers to our platform and whether we move them from individual to compete or to we add stock, those are ways in which we are increasing the ARPU. And so across all of them we continue to execute well. Steve Rogers : Great. And just to follow-up, just on Fotolia, if you just sandbox that business and look at kind of expectations for next year. Can you talk about what you're kind of expecting there and maybe give some color in terms of just standalone Adobe Stock customers versus people attaching on Creative Cloud? Shantanu Narayen : From how we present that to our customers, the two real opportunities for us is to both take existing Creative Cloud subscribers and offer them an upsell to the Creative Cloud plus the stock subscription and in addition to that for new customers to have opportunity to both get that applications, as well as stock. And we offer both of those today, both of them are doing well. I think Mark mentioned in his prepared remarks that we accomplish the goals that we set for Adobe Stock for ourselves in fiscal ‘15 and certainly we expect to see it accelerated in ‘16. We’re not breaking it out because it's part of the annualized recurring revenue as well as the revenue that we report in Creative but so far so good. We've also added on the product side, two things we've added, video files right now which I think is going to be important and with the November release of the Creative Suite products we’ve added integration so that the workflow for the content creative professionals is now improved and enhanced. Steve Rogers : Good. Thanks. Operator : Your next question comes from the line of Sterling Auty from JP Morgan. Your line is open. Sterling Auty : Yes. Thank you. One follow-up on the line of question, the 833,000 subscriber additions, were there anything that you did in terms of incentives in the quarter. You matched with some of the international geographies. Is there anything that you did different to drive conversions in those international markets? How should we think about the sustainability of that impact? Shantanu Narayen : Well, Sterling, as it relates to what we did specifically in Q4, I won’t highlight anything that was unusual or different from what we've been doing since the introduction of the Creative Cloud. We’re constantly finding ways to incent people to move from Creative Suite to Creative Cloud or new customers. And as you know, we look very closely at retention, as well as how they migrate off any promotional pricing that we might do as they finished the first year. So I would say nothing unusual and I think just executing on all cylinders. Sterling Auty : Great. Thank you. Operator : Your next question comes from the line of Kash Rangan from Bank of America Merrill Lynch. Your line is open. Kash Rangan : Hi. Thank you very much. Congratulations. Will you be reporting net new subs going forward and if you have any thoughts on where you're shooting for fiscal ‘18, I know you gave us a framework or ARR revenue EPS but where would you likely be targeting subs as you exit your long-term framework and also on an annual quarterly basis? Thank you. Mark Garrett : Well, first, thanks Kash for you comments. Clearly, our long-term goal is to attract tens of millions of customers to the vision of Creative Cloud and drive both higher ARR and revenue. It's been important to us through this entire transition to make sure we give you metrics to understand the health of the business. And as we keep stating, we believe that as we are going to introduce new subscriptions whether it's mobile only subscriptions or education subscriptions to attract new customers to the platform, ARR continues to be the most important metric of the health of the business, as well as revenue. And so certainly, if you look at our goals of tens of millions of subscribers, we continue to expect to see acceleration and subscription growth. But I think the more important metric and maybe to answer Sterling’s question as well in terms of how you think about 2016, I would look at the $1 billion of ARR that we’ve provided and look at the seasonal way in which it was added in FY ‘15. And I think that should be a good proxy for how you model FY ‘16. Kash Rangan : Got it. Also, secondly, Shantanu, thank you for taking the question. What is your goal for Fotolia attached within the Creative installed base? Shantanu Narayen : Kash, I'm not sure we have a specific goal that we outline. We certainly think that as we’ve said over 85% of both the buyers and sellers are Creative customers. And so you know, we would like to see all of them when they have inspiration and want to use stock for photography or videos, to use our stock service. And conversely it's a great marketplace for them to monetize their creative assets. So we continue to think there is significant upside there. Kash Rangan : Happy holidays gentlemen. Shantanu Narayen : Thanks Kash. Operator : Your next question comes from the line of Kirk Materne from Evercore ISI. Your line is open. Kirk Materne : Yes. Thanks very much. Shantanu, I was wondering if you could talk a little bit about the competition in the marketing cloud as you guys get into more multiproduct, multi-year deals. Is the competition so changing, are you seeing or imagine bigger competitors there. Are you still seeing some point products or solutions in the market. And I guess when you talk about lot of these big deals, obviously you guys expand your relationship with Accenture this morning. Could you talk about how many of those big deals have big SI partner or advertising partner going in there with you and the importance of those partnerships? Thanks. Shantanu Narayen : Sure. So multiple questions there Kirk. Let me address the last one first, which is partners are playing increasingly important role in large number of the implementations. I think what we are certainly seeing as it relates to the multi-solutions is digital disruption as this conversation that's happening in every single boardroom and the awareness and the recognition that the customer journey and digital experience is fundamental to making that transformation, we hear that everywhere we go. And so I think marketing departments, CIOs, Chief Revenue Officers are recognizing that a platform is essential to helping with this particular transformation. So I think what's fueling our business is that the importance of digital transformation is now a Board level discussion rather than just a practitioner. With respect to the systems integrators and the digital agencies, up all of them have been great partners to us. I think today's announcement with Accenture just highlights how we can even further accelerate in the U.S. what we're doing in healthcare, as well as in financial services with them. To your other question about competitive dynamics that are happening in the marketplace, we clearly have the most comprehensive integrated offering. I don't think that's in question. There are a number of players who are offering point solutions and we recognize much like we did on the creative business that we have to deliver best-of-breed but we have to integrate it better than ever before. Products like audience manager are starting to really take traction and I think that reflects the growing importance of how customer segmentation is important across our solutions. So we have a number of point product competitors. We have a number of the large enterprise vendors who also look at marketing as an opportunity. I would say for the most part our offering is clearly differentiated and the distinction between us and others as we keep innovating should continue to increase. So it's been a healthy and positive. Kirk Materne : Thanks very much and congrats on the fiscal year. Shantanu Narayen : Thank you. Operator : Your next question comes from the line of Mark Moerdler from Bernstein Research. Your line is open. Mark Moerdler : Thank you and congrats on the quarter. So I want to drill a little bit on deferred revenue which continues to grow much faster than revenue itself and you would expect that to some extent. I just want to confirm that there are no other factors that are affecting or impacting it, there is no change in contract terms or anything else or payment terms et cetera that would be affecting that. Mark Garrett : Hey, Mark, it’s Mark. No. there is no change there at all. Deferred really is just growing as a result of ETLAs on the creative side and bookings on the digital marketing side, just as you would expect. Mark Moerdler : And one quick follow-up and deferred is not include the hobbyists, correct? Deferred does not include the hobbyists, correct? Mark Garrett : Yeah. Because the hobbyists are being billed monthly. Mark Garrett : Yeah. Anyone that’s billed monthly wouldn't show up in deferred, right. So deferred is just things that have been billed but not yet recognized to revenue. And you also see this effect in the unbilled backlog that I talked about in the script as well. Mark Moerdler : Perfect. Thank you. Congrats on the quarter. Mark Garrett : Thank you. Operator : Your next question comes from the line of Ross MacMillan from RBC Capital Markets. Your line is open. Ross MacMillan : Thanks so much and congratulations for me as well. I just was curious this quarter on the mix of Creative Cloud subscribers between single app and complete, do you have that number, Mark or Shantanu? Mark Garrett : Yeah. Give me one second Ross. If you have another question, [indiscernible] Ross MacMillan : Yeah. My second question was on the marketing side, it sounded like you had a very strong booking this quarter. But I think the marketing cloud revenue was a tad lower than the low end of that guidance range you had provided. And I was just curious as to what that puts and takes there were? Was it really just even less perpetual than you thought or any other factors on that line that would be helpful? Thanks. Mark Garrett : Yeah. Sure. I'll answer both of those, Ross. So the mix was 52 complete and 48 point on Creative Cloud. And as it relates to digital marketing, what we would say is that as Shantanu mentioned, we're the leader in this category, we've had record revenue and record bookings in that space, AM and Analytics of the largest pieces of the business. And as you know, AM for a little while now has been going through this migration from perpetual to one of the Managed Services offering. In Q4, to put some numbers around it, in Q4 we had roughly $20 million of perpetual revenue. That was well below what we thought in that $365 million to $400 million range we’ve provided. So even though we were anticipating perpetual being less than it was a year ago, it came in well below the range that we had provided you. In ’16, the FY16 targets have less than $45 million in perpetual for the entire year. So we basically taken almost all of the perpetual revenue risk out of the targets for this very reason. So it should not be an issue going into next year. It’s out of the guidance for the most part and it's really the only reason we came in below that range we had provided for Q4. Shantanu Narayen : And just to clarify, Ross, when Mark says that, perpetual was low, it did change to ratable rather than… Mark Garrett : Yeah. Yeah. Shantanu Narayen : … dropping out and so as it related to bookings… Mark Garrett : Yeah. Shantanu Narayen : … especially when you consider it FX adjusted for constant, we saw both quarterly and annual growth rates greater than 35%, so stronger bookings. Mark Garrett : And the last thing I'd add to that is, the quarterly growth, when you look at the quarterly growth next year on a quarter year-over-year basis, its going to vary under the 20%, over the 20% slightly each quarter based on how much perpetual was in the FY15 related quarter. Shantanu Narayen : Yeah. Mark Garrett : But we still believe we’re going to hit the 20% on a year. Ross MacMillan : Yeah. That’s very clear. That’s great. And maybe just one very quick last follow-up. Just somewhat like cash’s question, but I know you’re not guiding to subs. But you added $1.1 billion of Creative ARR this year? You're targeting $1 billion next year. That delta if we think about that of $100 million and then we think about your sub adds this past year, is that a good proxy? So call it just under 10% less, is that a good proxy for the way we should think about sub adds give or take or do you think there is an ARPU delta that we should also take into account? Shantanu Narayen : It’s the later, Ross, and it’s not the former. Again, as we introduced new subscriptions that will target mobile or education as we said and as we are looking to attract tens of millions of subscribers, we don't necessarily foresee decline in year-over-year growth in subscriptions. Ross MacMillan : Great. Shantanu Narayen : To put another way there is more growth there. Mark Garrett : Yeah. Ross MacMillan : Yeah. Understood. Mark Garrett : Subscription is to go up. Ross MacMillan : That’s great. Well, congratulation again. Thanks so much. Shantanu Narayen : Thank you. Mark Garrett : Thanks, Ross. Operator : Your next question comes from the line of Brent Thill from UBS. Your line is open. Brent Thill : Thanks. Shantanu, the Marketing Cloud, you’ve continued to highlight really strong bookings. I’m curious if you could just walk through what you're seeing in terms of some of the deal sizes, I think in the past you talked about deal sizes are getting bigger, they’re taking more components of the large suite. Anything else stand out to you this quarter or maybe perhaps sort of the last couple of quarters that seems to be a trend that you're seeing now that you haven't seen in the past? Shantanu Narayen : I think the two things I’d highlight Brent is first, adoption of the entire Marketing Cloud, as well as some of the Core Services. So, I would say, Audience Manager is seeing good strength. Audience Manager, again, just to clarify like a Data Management Platforms, as well as the ability for people to use the same customer segments across each of our products. So we are seeing good growth in Audience Manager. The two are large components of the Marketing Cloud analytics, as well as Experience Manager continue to power along. Made some good progress with Campaign, Campaign growth has been really good to see. And last but certainly not least, I would say Primetime. I think with video being explosive category. We haven’t touched on that as much. But TV Everywhere and digital consumptions of videos increasing and so I think we’re continuing to see some good progress in video. But there is a clear requirement on the part of our customers to say, does all this stuff work together and I think that is only playing to our strength as well our brand. So across the Board we continue to see good strength. Brent Thill : Okay. And just real quick on the Marketing Cloud, Mark, as a follow-up. The question from investors, obviously, the doubling of the backlog versus the revenue growth for the last two years and at some point that has to converge in your -- your client for that conversions next year? Has there been anything else that’s been surprising on implementation duration or have been some of these transactions has there been any churn on some of the original contracts that have been signed? That is a question that’s come up, but I wanted to, it didn’t sound like it, but I wanted to make sure we ask? Mark Garrett : Yeah. That’s a fair question, Brent. No, churn has not been a problem, retention remains really high. We've done really well from that perspective. We’ve talked about the fact that as customers do larger deployments. It does take a little bit longer to get them up and running and that delays the revenue clock a little bit. It's not a huge material problem. In fact it’s a good thing, because they are doing larger deals with us. But nothing has changed from that perspective. It’s really… Brent Thill : Thanks for the color. Mark Garrett : It’s mainly been this perpetual shift. Brent Thill : Thank you. Operator : Your next question comes from the line of Samad Samana from FBR Capital Markets. Your line is open. Samad Samana : Hi. Thanks for taking my question. So, I wanted to touch on the geographic side. It looks like there is a nice acceleration in Asia-Pacific? I was curious if there is something specific that drove that. And then conversely with EMEA, it seemed like there is a slowdown, despite you guys calling out fairly healthy booking, especially on the Marketing Cloud side? I was wondering if you guys give us some color on what’s going on in Asia-Pacific and EMEA? Thanks. Shantanu Narayen : Samad, I mean, when we look at what's happening with the business in Asia-Pacific. Certainly both Japan, we continue to see good adoption of the Creative Cloud and the rest of Asia-Pacific had a very strong Digital Marketing growth as well. I mean, we see more adoption of that. In Financial Services, Australia continues to perform well. And as it relates to Europe as well, I mean we are seeing good growth in Digital Marketing in both regions. We focused our Digital Marketing on a few geographies, so the U.K., Germany, Australia and Japan, I would highlight as the areas where we are focusing a lot of our Digital Marketing. But nothing stands out in terms of what's happening in those regions. All of them continued to show promise for both Creative Cloud, as well as Digital Marketing. Samad Samana : Great. Thanks. Operator : Your next question comes from the line of Brian Wieser from Pivotal Research. Your line is open. Brian Wieser : Thanks for taking the question. Just building more on the Marketing Cloud and Data Management platforms in particular. We’re seeing lot of really interesting suites from some of your competitors out there, integrating more of a focus on attributions from some and then more focus on actual data from others, of course, Google launching theirs. I'm just curious, what sort of vision you have in terms of, how you see Data Management evolving in terms of product offering? Obviously, you're integrated with your overall other product suite. I’m just curious, if you think you need to push further into attribution, for example, push further into display buying that loan, other direction or if the segments that of marketers are focused on are those for whom your currency is most appropriate? Shantanu Narayen : From our point of view, I think the focus that we have for the digital marketing business in the Marketing Cloud, in particular, is how can we enable people to have a great experience across mobile devices, tablets, and create that compelling web experience that people want. From our point of view, everything starts with the content platform and the data intelligence. The Data Management platform itself for us, it's a means to both how are you spending your advertising dollars and ensuring that you get the return of investment on that. And the advertising part is just a small portion of our overall marketing cloud revenue as well as our offering. So it's an important strategic part to enable people to understand who their customers are, the demographics, the profiles, so that they can effectively give them the offering that they need. But it should not be construed as a further increase into the advertising ecosystem even though that's a healthy business for us. Brian Wieser : All right. Thank you. Operator : The next question comes from the line of Heather Bellini with Goldman Sachs. Your line is open. Heather Bellini : Great. Thank you. I would just wonder just watching everything that’s going on with TV dollars shifting and mobile advertising really starting to take up with bigger form factors in the market especially the likes of 6 plus. Just wondering, if you can share with us that kind of how you see this is potentially even accelerating some of the growth that you’ve been seeing. Now that you’ve got kind of what looks like accelerating shift of offline go into online. It seems like you have some attribution technology that really, might out of the competition there. So, I was just wondering, if you could share that with us. And then the other question was just related to OpEx for Mark. Obviously you guys did a great job in fiscal ‘15 and only grew it by about 2% and your guidance for this year implies a pretty good wrap. I’m just wondering which line items should we see the strongest growth from in fiscal ‘16 from an OpEx perspective? Thank you. Mark Garrett : Hi, Heather, it‘s Mark, I'll start. On the OpEx side, the bulk of the increase will show up in sales and marketing. I mean COGS is going to go up because it's variable with revenue especially in the digital marketing business. But across both businesses, if you want to go after these large new TAMs that we out line at Analyst Day, we’re going to need the sales and marketing dollars to do that. So that that's what's baked into the model for the next three years frankly and that's included in the guidance that we provided. Shantanu Narayen : And Heather on your first question, first with respect to attribution clearly the versions of the Marketing Cloud have attribution. We’re continuing to enhance the attribution, so that we can not just do attribution at a individual spend level but we can also do it across both the entire Marketing Cloud as well as what's happening between online spend, display spend, service spend, social spend, and off-line spend. So we've been spending more of our research efforts to better enable marketers to understand the efficacy of their dollar spend. I think with respect to mobile, it’s actually driving everyone of our individual solution components. I think Mark alluded to something like 40 plus percent of the transactions that people now have are on mobile. And so if you think about it from the point of view of the content that’s being delivered to mobile devices, the video that's being consumed on mobile devices, the campaigns that require SMS or messaging, mobile is being just a huge tailwind for us across each of our solutions, in terms of the important for people to have new solutions. The advertising component again for us is represented in the media optimizer that business is showing growth. But it's not just the advertising part of mobile that's fueling our business. It's the consumption just as much. Heather Bellini : Thank you very much. Operator : Your next question comes from line of Keith Weiss from Morgan Stanley. Your line is open. Keith Weiss : Thanks. Thank you for taking the question guys and very nice quarter. Two questions, sort of -- one on sort of the [topline segregation] [ph] and the other on expenses. In terms of sort of the -- sort of international adoption of Creative Cloud, you talked about international market is picking up for you guys. How should we think about the lag between sort of where the U.S. is, where that lead us at the spaces versus where international market is and how far back is sort of the rest of world to be beyond -- behind the U.S.? And then on the OpEx side of the equation, just looking for little bit more color. It looks like you guys said headcount growth around 11% and so that’s picking up a little bit, just wondering where you guys are making those investments and how we should think about that headcount growth into the forward fiscal year? Shantanu Narayen : I will take the first questions and the first question as it related to sort of the lag between U.S. markets and international markets. The way I would describe it is, Australia was the first place that we introduced it and so we've got tremendous experience through what we did in Australia and certainly, a lot of the focus that we have had has been in the U.S. The other non-speaking international markets, we consider them a year behind or year and half behind in some cases and catching up, because we put as -- we put a significant amount of our attention in the U.S. So nothing in those markets would lead us to believe that we won't see the same kind of success, but that may give you some sort of measure of where we are in the U.S. versus the rest of the world. We haven't yet really targeted and we've always talked about this being an opportunity, the emerging markets and having completely different pricing available there, because we continue to believe that there's so much opportunity and what we would say our markets where the propensity to both take subscriptions, as well as the network bandwidth is higher than in some of the other markets. So that continues to be on the roadmap. Mark Garrett : And if you look at the headcount, it’s pretty consistent with what I told Heather. The headcount adds in Q4 were primarily in sales and marketing. The headcount adds frankly across the entire year were primarily in sales and marketing, and it's really just to drive sales capacity in the sales organization quarter carrying sales capacity and to do marketing activities to address these larger TAMs that we talked about. Keith Weiss : Thank you. Mike Saviage : Next question. Operator : Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Jay Vleeschhouwer : Hi. Thanks. Good evening. Two things, first, with respect to the ongoing momentum in subscriber apps for Creative Cloud, I understand you are not guiding specifically? But, how are you thinking about the importance or contribution from net new customers, I’ll just say, due to Adobe as you define them as compared to upgrading the base? But first couple of years at least if Creative Cloud looked as new, new customers were something over 20% of the count and that number seem to have move closer to 30% more recently? If you look at over the next couple of years, what sort of contribution of, again, new, new to Adobe kind of Creative Cloud subscribers are thinking of or that you might need to have? And secondly, for Mark, with respect to the profitability of the digital marketing business, how are you thinking about that in terms of the role of cost of services, which is a large part of that revenue stream, when you look at your cost of revenues sequentially year-over-year, it’s obvious that Digital Marketing is a significant part of the sequential and year-over-year increases in your cost of revenue and that seems to be very heavily driven by services, specifically? So, how are you thinking of the progression overtime of the dependency on services and perhaps, the ability to improve the profitability of the Digital Marketing business? Shantanu Narayen : Yeah. Sure, Jay. And certainly sub adds we would expect that we will continue to drive net new subscribers to Adobe. You're right it's been more like 30%. We would expect that to continue. That's how we are going to address these large new TAM opportunities that we outlined at Analyst Day. And in Digital Marketing, the margin on that business continues to improve, from a gross margin perspective. We fully expect that we can do better and better from a hosted gross margin perspective, as well as from a professional services perspective and I would expect that to continue. Jay Vleeschhouwer : All right. Thanks. And if I could maybe squeeze one more. Are you have such visibility in model but unusually you don’t will be guide to cash flow and I was wondering if you might give a comment on that for ’16? Mark Garrett : Well, we did for the first time give a cash flow guide from a CAGR perspective over ‘15 through ‘18 at Analyst Day. So as we get more and more predictable, I’ll look at whether we bring that in a bit tighter, but we did give a 25% cash flow CAGR through ’18. Jay Vleeschhouwer : Okay. Thanks, Mark. Mark Garrett : Sure. Operator, we’re coming up in the top of the hour, why don’t we take two more questions. Operator : Your next question comes from line of Derrick Wood from Susquehanna International Group. Your line is open. Derrick Wood : Thanks. A question on guidance on the Digital Media side, it looks like you’re guiding to 35% growth in ARR and 20% growth in revenue. And I think that these numbers overtime start to converge, but there's obviously still a bit of a delta out there with some slower growth or maybe shrinking perpetual license components. So can you give us some context about what those moving parts are the way on revenue growth as we think about that as in ’16? Mark Garrett : Hey, Derrick. It’s Mark. Yeah. You're right. It's a big ARR guide and smaller revenue guide if you will. They do converge overtime and there are pieces in that segment that are perpetual that are telling off that we’ve talked about things like Lightroom, things like the hobbyist products, things like the interactive development, the monetization of our website. Those pieces of the business have been perpetually oriented and are definitely tailing off, and that's causing a little bit of a short-term slowdown on the revenue growth. But overtime they definitely converge ARR in revenue. Derrick Wood : And I could squeeze in other one in on the digital marketing side and it was mentioned earlier that longer time to go live because projects are getting more complex that's weighed on time to revenue recognition. Is there anything you can do with the, I guess, engaging with the SI community to lower those cycles or kind of do we expect that to be constant really at these levels going forward? Shantanu Narayen : Well, I think another way that you should be thinking about it is the customer in question may have the most immediate need of completely replacing their website. But what they decide to do because of the breadth of our offering, say, not only are we going to take the experience manager and analytics solution which is natural, but because all of the solutions work together, we’re actually going to go ahead and engage Adobe in the entire solution. But in terms of how they implement them, then they may implement them sequentially in order to make sure that they get the most benefit out of it and that it goes smoothly. So some of these are just their large complete replacements of the web infrastructure and the entire online presence. And from our point of view, they’re making a very strategic decision to go with Adobe for the entire platform and so we think that's good. And as Mark pointed out, the revenue starts to flow starting fiscal ‘16. Derrick Wood : Great. Thanks, guys. Operator : Your next question comes from the line of Brendan Barnicle from Pacific Crest Securities. Your line is open. Brendan Barnicle : Thanks so much. Shantanu, I just wanted to follow-up on your answer to Ross MacMillan’s question and when you think about the guidance for next year, are you contemplating any ARPU improvement? Shantanu Narayen : I think as it related to ARPU even this year, we did see in the commercial segment actually an ARPU increase. So certainly, the ARPU as it related to commercial increase, the ARPU as it related to the other services were relatively consistent and then when you look at it from a blended point of view, it was also relatively consistent. We definitely expect to see stock getting uptick in terms of the existing install base. At the same time, there are opportunities for us to attract a completely new set of customers whether they be in education, whether they be mobile only customers. And we would be crazy not to get them to our platform and drive future ARR and revenues. And so that’s the way we are looking at the business. I realize it’s easier to just do a p-time SKU but the truth is we don’t have just one single offering that allows you to take it. It’s the breadth of our offering that will actually enable us to be a more predictable and honestly drive future growth more than sticking to only the Creative Cloud enter single offering. So we’re pleased with way that’s going but hopefully that gives you some color into where we’re headed. Well, given that was the last question, I just wanted to say we feel like we had a fantastic finish to a great year. And more importantly, we enter fiscal ‘16 with significant momentum as well as an incredible opportunity for us to continue to innovate on behalf of our customers and grow. As I think about it for individuals, good design in Creative have never been more important. And I think with Creative Cloud, we’ve delivered a one-stop destination that delivers everything from inspiration all the way up to monetization. And for businesses, the digital disruption topic is absolutely dominating boardroom conversations. And we realized that a direct compelling digital experience is so critical to enabling this transformation and our lead in digital marketing solutions enables all of these customers to make the transition happen. And from our point of view when you combine these two opportunities, the power of creative content as well as data intelligence, we feel that’s going to continue to fuel our business and excellent execution by our employees helps us deliver the results that you saw. So thank you for joining us today and we look forward to the next call. Mike Saviage : This concludes our call. Thank you.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,016	1	2016Q1	2016Q1	2016-03-17	2.223	2.31	2.963	3.083	5.23	29.5	28.6	Executives: Mike Saviage - VP, Investor Relations Shantanu Narayen - President and CEO Mark Garrett - EVP and CFO Analysts : Brent Thill - UBS Ross MacMillan - RBC Capital Markets Kirk Materne - Evercore ISI Kash Rangan - Bank of America Merrill Lynch Sterling Auty - JP Morgan Heather Bellini - Goldman Sachs Unidentified Analyst - Bernstein Research Keith Weiss - Morgan Stanley Brendan Barnicle - Pacific Crest Securities Jay Vleeschhouwer - Griffin Securities Brian Wieser - Pivotal Research Walter Pritchard - Citi Nandan Amladi - Deutsche Bank Operator : Good afternoon, ladies and gentlemen. I’d like to welcome you to Adobe Systems First Quarter Fiscal Year 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I’d now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s first quarter fiscal year 2016 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We’ve also posted PDFs of our earnings call prepared remarks and slides, financial targets, and an updated investor datasheet on Adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, March 17, 2016, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks Mike and good afternoon. Adobe’s year is off to a strong start, with first quarter revenue of $1.38 billion and non-GAAP earnings per share of $0.66. Adobe’s opportunity has never been greater. Every brand, government agency, and educational institution is undergoing large-scale digital transformation. Creating a compelling experience for their customers and constituents across every touch point is paramount to their success, and they are turning to Adobe for help. In Digital Media, Creative Cloud momentum continued in Q1 with strong adoption across all segments. There have never been more people creating content. Whether it’s creative professionals, photographers, students or hobbyists creating compelling images, videos, websites, or mobile applications, our opportunity is to provide them with a one-stop shop for all their creative needs. There are three primary growth drivers for Creative Cloud as we target a $17 billion addressable market : continuing to migrate our core base of Creative users, market expansion into new segments, and value expansion through new services. Our migration strategy focuses on driving Creative Suite users to our core offerings, Creative Cloud for individuals, teams and enterprises. In Q1 we executed well against this opportunity driving adoption across all routes to market, including Adobe.com, our channel partners, and Adobe direct sales. Our market expansion strategy is to bring in new users, including photo enthusiasts and hobbyists with our Creative Cloud Photography plan. Over 30% of Creative Cloud subscribers are new to Adobe, and many are coming to us through our mobile apps. Over 23 million new Adobe IDs have been created through our mobile apps to date. In terms of value expansion, we have begun to see the positive effect of Adobe Stock, our stock content marketplace, on our Creative revenue and ARR. Millions of Creatives use stock content and we believe Adobe has a tremendous opportunity to deliver additional value by seamlessly integrating Adobe Stock directly into the Creative Cloud service. We intend to become the leader in this space through further product integration and new offerings, including stock video. In February, we added more than 100,000 native 4K video assets to Adobe Stock, which already includes more than 1 million video assets and more than 45 million images and graphics. The primary benefit of a Creative Cloud subscription is access to Adobe’s continuous innovation. Earlier this week, we announced the preview release of a brand new product, Adobe Experience Design CC, a design and prototyping product that empowers user experience designers to deliver new mobile apps and web sites quickly and easily. User experience design is one of the fastest growing creative disciplines. According to data from our Behance Creative Community of over 6.6 million Creatives, interaction design projects grew by 52% in 2015, more than any other creative field. We look forward to hearing feedback from our community as we work toward launching the product later this year. Adobe’s momentum continues in the video space, where we are now the leader in video production and editing. Over 175 films debuting at the 2016 Sundance Film Festival used Adobe Premiere Pro CC and other Creative Cloud tools. “Deadpool” is the latest blockbuster film to be edited exclusively with Adobe Premiere Pro. Our footprint is extending beyond Creative pros to Creative consumers. In February, we introduced Adobe Post, a free mobile app that allows consumers to quickly and easily turn photos and text into beautifully designed graphics and share them on social media. It joins our other consumer mobile apps, Adobe Voice and Adobe Slate, in bringing fast and fun storytelling capabilities to a broad audience, including students and small businesses. Adobe Document Cloud is becoming critical to the paper-to-digital transformation of document processes. More than 6 billion digital and electronic signature transactions are now processed through Document Cloud each year. Global businesses like The Royal Bank of Scotland, Scottrade, and NetApp rely on Document Cloud and Adobe Sign for fast, secure and mobile e-signatures. In Q1, Document Cloud revenue was $199 million and we exited the quarter with $393 million in ARR. Across our Creative and Document Cloud businesses, total Digital Media ARR grew to $3.13 billion as of the end of Q1. We are the leader in the exploding digital marketing category. In Q1 we achieved strong Adobe Marketing Cloud bookings, with revenue of $377 million which represents a 21% year-over-year increase. We continue to drive large-scale, multi-solution engagements with Marketing Cloud customers. Significant customer engagements in Q1 included RR Donnelly, Samsung Electronics, MGM Resorts International, Nissan, Workday, and Goldman Sachs. At Adobe, we are focused on product innovation and Adobe Marketing Cloud solutions continue to garner accolades from industry analysts. Earlier this month, we were recognized by IDC as a Leader in its Worldwide Marketing Cloud Platforms vendor assessment, and Forrester Research recognized Adobe Analytics, the data and analytics backbone of Adobe Marketing Cloud, as a leader in its Customer Analytics Solutions Wave report. In January Gartner named Adobe as a leader in the 2016 Magic Quadrant for Digital Marketing Hubs. Adobe managed over 51 trillion customer data transactions through the Marketing Cloud over the past four quarters, and our Adobe Digital Index reports are increasingly being viewed as the source for reporting and predicting major retail and consumer trends. Yesterday, we launched our new Digital Economy Project, which includes three digital indicators of the U.S. economy – a digital price index, a housing index and a job seeking index. Next week we will hold our Adobe Summit event in Las Vegas and we’re expecting record-breaking attendance, including hundreds of our partners and main stage speakers from top brands including Cirque de Soleil, McDonald’s, Comedy Central, Mattel, and Royal Bank of Scotland. Adobe Summit is the industry’s leading digital marketing conference and the venue to learn where the industry is headed and see Adobe’s latest technical advancements in mobile, video and data science. For over 30 years, Adobe employees have demonstrated a sense of purpose and commitment to our communities and we’re proud of the recognition we received in Q1 as both an employer and a good corporate citizen. We were included as one of the Global 100 Most Sustainable Corporations and were recognized as Fortune’s Most Admired Company within the software category. While Creative Cloud, Adobe Document Cloud, and Adobe Marketing Cloud are all leaders in their respective categories, our true opportunity is in bringing these solutions together. We have been unwavering in our mission to use content and data to deliver world-class experiences to our customers, whether they're on the web, in an app, in a retail store, or in a car. Adobe is the only software company with deep history in content and vast data capabilities to deliver consistent, continuous, and compelling experiences. We have a robust technology platform, a thriving ecosystem of partners and developers, and a strong brand that has affinity worldwide with the world's largest enterprises, agencies, governments and educational institutions. Our Q1 results demonstrate strong execution against this vast opportunity. Our market leadership, product differentiation, and continued momentum give us confidence to raise our fiscal 2016 revenue and earnings targets. Mark. Mark Garrett : Thanks, Shantanu. Before I comment on Q1 results, as a reminder, 2016 is a 53 week fiscal year with a 14 week first quarter. This was factored into all of the targets we provided in December. In the first quarter of FY16, Adobe achieved record revenue of $1.383 billion, which represents 25% year-over-year growth. We estimate the extra week added approximately $75 million of revenue to the quarter, but this was mainly offset by a net year-over-year currency decrease to revenue of approximately $69 million. GAAP diluted earnings per share in Q1 were $0.50 and non-GAAP diluted earnings per share were $0.66. These strong results reflect the continued momentum across our Cloud businesses. Highlights in our first quarter include : better-than-expected growth in Digital Media ARR, exiting the quarter with $3.13 billion, record Creative revenue of $733 million, which represents 44% year-over-year growth, record Adobe Marketing Cloud revenue of $377 million, which represents 21% year-over-year growth, strong growth in operating and net income, with cash flow from operations of $498 million, and exiting Q1 with a record 81% of Q1 revenue as recurring. In Digital Media, we grew Q1 segment revenue by 33% year-over-year, and exited the quarter with Digital Media ARR of $3.13 billion. Within Digital Media, we delivered Creative revenue of $733 million which represents year-over-year growth of 44%. We increased Creative ARR by $238 million during Q1. Driving this strong performance was demand for Creative Cloud across all offerings and routes to market, including the addition of 798,000 net-new Creative Cloud subscriptions during the quarter. Migration continues to represent a large opportunity. Creative Cloud continues to distance itself from Creative Suite, and Creatives are migrating as well as renewing at non-promotional pricing. New customer adoption continues to increase our installed base. Creative Cloud mobile apps are driving new top-of-funnel traffic and first-time customer adoption. Market expansion is being driven by offerings such as the Creative Cloud Photography Plan which targets photo enthusiasts. Value expansion with new services like Adobe Stock are increasing ARPU and ARR. Our performance across all of these offerings and the health of the business is best reflected in ARR. Because of this, moving forward we have decided to provide forward-looking quarterly ARR targets to help you better model the total business. With respect to subscriptions, it has been our stated goal to attract tens of millions of customers at widely-varying price points. We reviewed this strategy with you back in October at our analyst meeting. Creative Cloud Photography Plan was our first market expansion offering, and has resulted in well over a million subscribers. New SKUs such as the recently announced K-through-12 education offering will make Creative Cloud available to millions of students. And as we said at the analyst meeting, we are also considering a mobile-only offering. All of this further dilutes the relevance of the number of subscribers as a measure of the health of the business. In addition, with respect to Acrobat, customers have been able to choose to subscribe to Acrobat either through Creative Cloud, which has been reflected as Creative Cloud subscriptions and Creative ARR or via Document Cloud, which has been reflected in Document Cloud ARR. For all these reasons, while we might choose to periodically report subscriptions, we no longer intend to provide actuals on a quarterly basis. With Document Cloud, we achieved revenue of $199 million with Document Cloud ARR exiting the quarter of $393 million. Adoption of our new Acrobat DC offering was strong in Q1 both through the perpetual offering as well as in both Creative Cloud and Document Cloud subscription offerings on Adobe.com, all of which is captured in Digital Media ARR. In Digital Marketing, we achieved record Adobe Marketing Cloud revenue of $377 million. We delivered strong bookings during the quarter, and both the revenue and bookings in Q1 put us on pace to achieve our annual targets of approximately 20% revenue growth and 30% bookings growth. Other Marketing Cloud highlights in Q1 include : Strong year-over-year revenue growth across all Marketing Cloud solutions, continued growth in multi-solution adoption by our biggest customers, and mobile data transactions grew to 49% of total Adobe Analytics transactions. Our Digital Marketing segment revenue also includes LiveCycle and Connect, which declined as expected. From a quarter-over-quarter currency perspective, FX decreased revenue by $9.5 million. We had $3.2 million in hedge gains in Q1 FY16, versus $1.3 million in hedge gains in Q4 FY15; thus the net sequential currency decrease to revenue considering hedging gains was $7.6 million. From a year-over-year currency perspective, FX decreased revenue by $48.1 million. We had $3.2 million in hedge gains in Q1 FY16, versus $23.7 million in hedge gains in Q1 FY15; thus the net year-over-year currency decrease to revenue considering hedging gains was $68.6 million. In Q1, Adobe’s effective tax rate was 13% on a GAAP-basis and 21% on a non-GAAP basis. The GAAP rate was lower than targeted primarily due to the retroactive reinstatement of the 2015 R&D tax credit. Employees at the end of Q1 totaled 14,154 versus 13,893 at the end of last quarter. Our trade DSO was 42 days, which compares to 44 days in the year-ago quarter, and 47 days last quarter. Cash flow from operations was $498 million in the quarter. Deferred revenue grew to $1.61 billion, up 36% year-over-year. Our ending cash and short-term investment position was $4.10 billion, compared to $3.99 billion at the end of Q4. In Q1, we repurchased approximately 1.5 million shares at a cost of $133 million. We currently have $1.48 billion remaining under our latest repurchase authority granted in January, 2015. Now I will provide our financial outlook. When considering our targets for the second quarter of fiscal 2016, it is important to remember that the first quarter had an extra week of revenue which we estimate had an approximate benefit of $75 million. Based on Q2 being a standard 13 week quarter, we are targeting a second quarter revenue range of $1.365 billion to $1.415 billion dollars. In Digital Media, we expect to add approximately $275 million of net new Digital Media ARR during Q2, with strong year-over-year Digital Media segment revenue growth. In Digital Marketing, as we said in December, we expect Marketing Cloud quarterly year-over-year revenue growth will fluctuate below and above our annual FY16 target of approximately 20% growth based on the amount of perpetual revenue achieved in the prior year-ago quarter. Given this, we are targeting approximately 17% year-over-year Adobe Marketing Cloud revenue growth in Q2, with continued momentum in bookings. We expect our Q2 share count to be between 506 million to 508 million shares. We are targeting net non-operating expense to be between $14 million and $16 million on both a GAAP and non-GAAP basis. We are targeting a Q2 tax rate of approximately 23% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q2 GAAP earnings per share range of $0.42 to $0.48 per share, and a Q2 non-GAAP earnings per share range of $0.64 to $0.70. Based on Q1 upside and the benefit of strong Digital Media ARR momentum, we are raising certain full year financial targets. In Digital Media, we are increasing our Digital Media ARR exiting FY16 to approximately $4 billion, which is above our prior target of approximately $3.875 billion. We are increasing our targeted revenue for the year to approximately $5.8 billion, up from our prior target of approximately $5.7 billion. FY16 targeted EPS is now approximately $2 on a GAAP basis, and approximately $2.80 on a non-GAAP basis. Our prior FY16 EPS targets were approximately $1.80 on a GAAP-basis and approximately $2.70 on a non-GAAP basis. In terms of color for the rest of the year, in Q3 we expect a slight sequential increase in both total revenue and Digital Media ARR. We also expect Q3 Marketing Cloud revenue growth of less than 20% year-over-year due to the large amount of perpetual revenue in the year-ago quarter. In Q4 we expect seasonally strong sequential growth in both total revenue and Digital Media ARR. And we expect Q4 Marketing Cloud revenue growth greater than 20% year-over-year. In summary, Q1 was a great start to what will be another strong year for Adobe. Mike. Mike Saviage : Thanks Mark. Next week Adobe will host its annual Digital Marketing Summit in Las Vegas, with the opening day keynote on the morning of Tuesday, March 22nd. If you would like to attend Summit, please send an email to ir@adobe.com for registration information. If you are unable to attend in person, keynote sessions on Tuesday and Wednesday will be webcast live. For those who wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 63288010. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 PM Pacific Time today, and ending at 5 PM Pacific Time on March 23, 2016. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator. Operator : [Operator Instructions]. Your first question comes from the line of Brent Thill from UBS. Your line is open. Brent Thill : Thanks and Mark on operating expenditures, you were running flat to low single-digit growth, this quarter you were up 15% year-over-year. Can you just give us a sense of where these incremental investments are going and maybe talk a little bit about the build out of the direct distribution team around the Marketing Cloud and your aspirations there? Mark Garrett : Sure Brent, first off keep in mind we did have the extra week which impacts expense just like it impacts revenue. So a large chunk of that is based on just having the extra week. In addition we have merit increases that happened in the beginning of the year and you have got the full quarter effect of hires that you did in the fourth quarter. As you look out over the rest of the year, OPEX it won't be up sequentially just because of that extra week that you had in the first quarter and then you will see some growth in Q3 and Q4. And to your point that is more around driving sales and marketing capacity for the growth that we are seeing in all three clouds and the need to have that sales capacity on board as we get closer and closer to FY17. Brent Thill : Thanks. Operator : Your next question comes from the line of Ross MacMillan from RBC Capital Markets. Your line is open. Ross MacMillan : Thanks very much and congratulations on a strong start. Shantanu on Mobile, our recent survey work suggest that mobile apps are actually driving some new subscribers to the Creative Cloud and I would love if you can maybe cast some light on how mobile was influencing the business going forward and especially around maybe monetization of mobile-only users? Thanks. Shantanu Narayen : Yeah Ross, and I saw your survey as well, that was good work. I mean clearly what we are finding is that the over 20 million people who are first coming to us on Mobile. It is serving as a great top of the funnel in terms of the new creators getting interest in Adobe and they experience our mobile apps and then they both subscribe to as well as download all of our desktop applications. And part of it is because they all recognize that the content that they are creating is going to be consumed in Mobile and in terms of working in groups that’s the other thing that’s driving both tablet, mobile, as well as PC usage. The new experience design project as well initial feedback has been very positive. People have been asking about how they can get that also as well on Mobile and Touch. And so we just look at the explosion of mobile devices and where both content is created and consumed and it’s clearly being a tailwind, not just in the digital media business but also in the digital marketing business. And things like being able to take a picture and move that from camera into Photoshop, people just love the fact that they now have independence of where they can create content when inspiration strikes. Ross MacMillan : Thank you. Operator : Your next question comes from the line of Kirk Materne from Evercore ISI. Your line is open. Kirk Materne : Thanks very much. I was wondering Shantanu if you could talk a little about the educational SKUs that you guys have announced recently. If I recall correctly I think education was about with 25% of the units before you guys started this transition, can you just talk a little bit about where perhaps we are in that transition within education and some of the opportunities still see in front of us on that front? Thanks very much. Shantanu Narayen : Sure Kirk. I mean as you correctly pointed out, education has always been one of the largest verticals in terms of the Creative products and we have multiple offerings. We certainly offer site licenses for both K-through-12 institutions as well as higher Ed. I mean the student and teacher addition and then there is lab usage of our products. So, big picture what we are trying to do is make sure that in any setting that exists that we have the right Creative products. Creative in the education season tends to be Q3. We certainly believe that there is tens of millions of Creatives as they come into the market as part of the education segment, that’s a growth for us and that’s part of the reason why in Mark's prepared remarks also he talked about as we continue to offer our Creative products as a site license that we don’t talk about sub. So, it’s going well. More and more people are using our Creative products. Internationally also we are starting to have education be adopted. But big picture we look at it and say whether it’s a student teacher single edition, whether it’s an institution, or whether it’s a lab usage. We want to make sure that our offering is applicable in all of those settings. Kirk Materne : Thanks a lot. Operator : Your next question comes from the line of Kash Rangan from Bank of America Merrill Lynch. Your line is open. Kash Rangan : Hi, thank you guys. I am curious if you can give us some feel for the momentum for stock in this particular quarter, can you roughly quantify how many in terms of subscribers you added for stock? And Shantanu maybe a quick refresher on what are your longer term attached rate targets for stock perhaps netting three to four years within the Creative family? And if you have the time what was that Marketing Cloud bookings in this quarter, bookings growth rate in this quarter? Thank you. Shantanu Narayen : So multiple questions there Kash, let me try and pass them one by one. The first is as it relates to revenue for stock during the quarter it was in line with our expectations so it’s doing well. Again just to refresh folks, we offer on demand stock as a way for people to buy particular stock assets. We certainly offer a stock only subscription and we then offer a combined subscription which allows people to both access stock as well as our desktop products. And so across all of them we are continuing to see accelerated usage of the stock subscriptions. We don’t break that out Kash in terms of what it is and that’s the reason we’re focused on just continuing to make sure we gain market share in the stock and deliver value. I think big picture as we’ve always said over 80% of the people who are buying or selling stock are using our products and that’s the opportunity. From a roadmap point of view we look at integrating the stock service more directly within our applications as a way to both increase awareness for our customers and to improve their workflow. So as the year progresses we continue to expect to do better in stock moving forward. So off to a good start and it's only in the entire marketplace strategy for Adobe. And with respect to bookings I think Mark also alluded to the fact that they were strong. We did not see any seasonal slowdown from Q4 to Q1 in terms of how we look at the business. And one of the things I should probably state is when you look at the Digital Marketing revenue for Q1. It is actually being driven primarily by the bookings that we had last year, now translating into things getting live. There really wasn’t much perpetual revenue in the quarter. So, the good news is that marketing is all as a result of the strong bookings we experienced last year. Mark Garrett : In fact to add on to that when you see the Q you will see the Digital Marketing segment, the whole segment subscription revenue is up 25% year-over-year for the whole Digital Marketing segment which is great. Operator : Your next question comes from the line of Sterling Auty from JP Morgan. Your line is open. Sterling Auty : Yes, thanks. Just want to follow up on the Adobe Stock portfolio items, so specifically it sounds like you are gaining traction. Wondering what that’s going to do to the ARPU in the Creative side versus the offset that you still have because of the expanding – with photography bundle and things like that so what's that tug of war look like and what should we be thinking around ARPU trends from here? Mark Garrett : Hi Sterling, it's Mark. You know that’s why frankly this average ARPU number gets very difficult to use as a gauge for the business. If you look at just Creative, we certainly expect that Stock will raise the ARPU for the Creative Professional, the people that are going to buy Stock. It just doesn’t make sense to look at the average any more especially for all the reasons we articulated around subs with millions of people potentially buying this K-through-12 education bundle or as you said millions of people buying CCPP. But Stock will add to ARPU for the Creative Professional. Shantanu Narayen : And as it relates to the overall ARPU in the quarter again Sterling we continue to see for the core creative product an increase in ARPU very much in line as people renew at non-promotional pricing. Sterling Auty : Great, thank you. Operator : Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open. Heather Bellini : Great, thank you. I just had a couple of questions. I was wondering now that you have a multiple years under your belt if you’ve seen with the change to subscription if you’d seen any change in the level of piracy and have you been able to combat that in any way with the new way of subscribing to the software? And then secondarily I might have missed this but did you give out the percentage of subs that were suite subscriptions versus single app? Shantanu Narayen : So Heather let me take both. The first is when you look at the number of new users that we’ve stated who are part of the Creative platform which is 30% of the people who are doing business with us, there is no question that our surveys and anecdotal evidence speak to the fact that people who may have formally pirated or used our products casually are paying for the service because its far more affordable. As you know we are seeing increased growth in international markets where there was more piracy. The reality is we still haven't offered the Creative Cloud product in China as Creative Cloud. So all of that is upside for us in terms of combating piracy, there is so much opportunity in the developed markets that’s where we focus. So, making progress and we continue to think as we roll it out in other markets around the world it's going to impact it. With respect to the single app versus the complete, as we said it's going to gravitate towards 50 :50 in the quarter. I think it was 52% CC Complete. Mark Garrett : Right. Heather Bellini : Okay, great. Thank you so much. Operator : Your next question comes from the line of Mark Moerdler from Bernstein. Your line is open. Unidentified Analyst : Hi, this is Dan calling in for Mark, thanks for taking my question. I just wanted to ask about the opportunity for ARPU expansion outside of Stock. Obviously Stock is a homerun in terms of driving up ARPU and I know you mentioned the average ARPU in subs numbers becoming less meaningful as the mix becomes more complex but if you can just talk about what you see as opportunity for ARPU expansion outside of stock that will be really helpful? Thank you. Shantanu Narayen : Well the opportunity for ARPU expansion around Stock is as we are attracting people to the platform we’re certainly attracting them at what we would call promotional pricing. So that’s one big opportunity and we’re clearly seeing as people come onto the Creative Cloud platform they typically come from CS6 and prior versions where we give them a promotional pricing and then convert it into the full pricing. The other opportunity for ARPU expansion is moving from single app to the entire product. The third opportunity for ARPU expansion is Acrobat. We’re certainly seeing a lot of people and that’s why we’re moving them more through the Creative Cloud funnel as opposed to the Document Cloud funnel, up selling them into the entire product. And last but certainly not least while it is not called ARPU within the enterprise as well as we move from selling what used to be custom like solutions of Creative Suite into the entire Creative Cloud Complete. So, even on the core desktop products there is ARPU expansion against all of those four. Then in addition to that it’s the new services that we’ve introduced and will continue to introduce that represents ARPU expansion. And as you know in our Analyst Meeting we provided therefore the entire TAM available for us on both the Creative Cloud as well as the Document Cloud as part of Digital Media. Unidentified Analyst : Fantastic, thank you. Operator : Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open. Keith Weiss : Excellent, thank you guys and again congratulations on a great quarter. Shantanu I want to follow on something that -- the comment that you made about the lack of seasonality in the quarter going from a Q4 to Q1 which is a lot different than what we saw last year at the time particular when it came to a subscriber add. Anything in particularly you could point to for why that happened or what was different this year than last year and the efforts you guys do to sort of sustain that level of any subscriber so much better? Shantanu Narayen : Well, I think there are a couple of things. I think at the macro level Keith firstly the solutions that we are providing I think are playing to what is a very key need in the marketplace which is everybody is dealing with digital transformation, everybody is trying to bring their businesses online. So there is no question in the marketing side as it relates to the kinds of solutions we offer. But the demand is only getting greater in organizations around the world. So I think that’s one issue. Certainly the fact that we are doing less perpetual also factors into this and so as you think about the traditional Q4 to Q1, they would be big perpetual pushes and then it would sort of fall off. The third thing I would give is our marketing group is doing a much better job of having consistent demand and growing demand so we’re looking at it not just as fiscal boundaries but as a continuous process of driving demand for our particular solution. So I think there are a number of things and then on the Creative side, I think it just continues to be opportunity to migrate customers and attract new customers. So I think for all of those four reasons we feel good about our business and we feel like they are in the sweet spot of what customers need right now. Keith Weiss : Excellent, thank you. Operator : Your next question comes from the line of Brendan Barnicle from Pacific Crest Securities. Your line is open. Brendan Barnicle : Good afternoon and Happy St. Patrick's Day. Thanks for taking my questions. Shantanu there is a lot of concerns about the macro economy particularly in the most recent quarter I was interested what you saw in the quarter in the U.S. and globally, particularly given your new Adobe Digital economy project? And just a quick one for Mark, can you remind us of the distribution breakdown between Adobe.com, the Channel, and Adobe direct sales right now? Thanks. Shantanu Narayen : Well clearly we saw a strong demand and we did not see any issues from the macro economy and that’s the reason for both the strong quarter as well as the strong outlook not just for Q2 but for the rest of the year. So if there is macro economic conditions that are impacting other peoples businesses, we haven't seen that yet. I think even should that happen as you know we are far more near to that as a result of the recurring business, but we didn’t see any demand weakness anywhere in the world. Mark Garrett : As it relates to route to market there is no doubt that we want Adobe.com to be the premier place people come to do business with us and it's becoming a much bigger piece of the business than it has overtime. As well our business from a direct sales perspective would come in right behind that. And then channel while its always going to be important to us it has just been shrinking consistently. I think at some point of levels off its not going to go away. But we really want to go direct and we want to go through adobe.com. Brendan Barnicle : Great, thanks so much. Operator : Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Jay Vleeschhouwer : Thank you, good evening, couple questions for Mark. I noticed that in your prepared remarks you didn’t make any mention of ETLAs and could you comment on how those performed within the context of the increase in Creative ARRs sequentially. Your total subject were substantially ahead of our forecast but your Creative ARR was right in line, so I am wondering if perhaps you had somewhat flatter performance relatively in ETLAs? And then secondly you had quite substantial growth margin improvement sequentially in both businesses both Digital Media and Digital Marketing, if you could comment on what's driving the improvement in Digital Media gross margin including a sequential decline of your cost revenue there? Thanks. Shantanu Narayen : Sure Jay, you’re right. As it relates to ETLAs there is some seasonality and you’ll see that reflected in the ARR numbers for Creative and for doc services. So there is some seasonality in the ETLAs. On the gross margin side, a lot of that just has to do with the stacking effect frankly of having these subscribers build up overtime and not needing to add as much cost structure to support them because you’ve got critical mass. So, it’s a benefit of the stacking effect on the Creative side. Jay Vleeschhouwer : Thank you. Operator : Your next question comes from the line of Steve Ashley from Robert W. Baird. Your line is open. Steve Ashley : Alright, terrific, thanks so much. I'd like to talk about the Adobe Experience Design products that have been previewed now, seems have gotten a very nice response in the market and I am just wondering the users of that product, I am assuming as current customers do you foresee this as being an incremental purchase for these people or is it something that you would use in place of other Adobe products they’ve used in the past? Thanks. Shantanu Narayen : Yes, Steve I think what we’re seeing as big phenomenon in the Creative market is more people doing design and prototyping. It certainly is the traditional Creatives who’ve been doing design and prototyping and they may have used products like Photoshop or Illustrate or Fireworks from Adobe in the past. But I actually think that there is a new community of people, product managers all around the world, the way we are designing products right now is they are doing a prototyping of what that product looks like, whether that’s on mobile or on the web. And so I think this inherent need for people to have designed far more as a part of product creation I think will lead the experienced design product to be used not just by our existing customers but also by a whole new set of customers who are thinking about how do they use design to create a new generation of Experience product. So I am very excited about it, the feedback has been really good, but I do think product managers, the new breed of product managers that exist in startups they will all need to use a product such as the Experience Design product. Steve Ashley : Great, thanks. Operator : Your next question comes from the line of Brian Wieser from Pivotal Research. Your line is open. Brian Wieser : Thanks for taking the questions. I was wondering if you could talk a bit about Marketing Cloud and the competitive environment as you’re seeing it attach rate of different products and if what you think your customers are taking full suite versus individual products and maybe at the same time if you might be able to comment about how your recent issues of data, the data marketplace might be impact from the business at this point? Shantanu Narayen : Sure, with respect to the marketing cloud I think we continue to be the most both unified as well as comprehensive offering that’s out there in the market. The results are driven not just by new logos and the new logos are increasingly using multiple solutions when they start off but also with certainly up selling existing customers to new solutions. So I think we’re seeing that across the space. In terms of competition as we said even at the analyst meeting when you have a $27 billion opportunity you are going to attract other customers but I think we’re so far ahead of them, we continue to be rated and we continue to innovate. On the data market stuff, stay tuned. Next week is our Summit and we’re going to be talking a lot more about some of the exciting areas that we have on data. And so hopefully you are going to be at Summit and we’ll share more at that time. Brian Wieser : I will be there, curious so maybe to your point as new entrants and obviously I was thinking of Google but try to push harder into this space, do you see that they are -- whether it's them or others that they are really tapping into other marketers and maybe you are not and that its helping contribute to growth is totally consistent? Shantanu Narayen : Well I think with respect to what's happening we used to target the Chief Revenue Officer, the Chief Digital Officer, the Chief Marketing Officer within the enterprise and I think that has now expanded to being a C level issue all the way up to the CEO in terms of the customer journey. I think there are companies who are certainly providing the ad stack for this customer journey. There would be people who provide the experience for the customer journey and the analytics. So in that sense you are right, I mean it is -- the opportunity is dramatically expanding because this is becoming front end and center not just for the marketing function but also at the C level function. Brian Wieser : Great, thank you. Mike Saviage : Carl we’re approaching the end of the hour, why don’t we take two more questions. Operator : Your next question comes from the line of Steve Rogers from Citi. Your line is open. Walter Pritchard : Hey guys, I am Walter, just wanted to see if you can get some more color on net adds and just the strength there, is that more internationally or is that kind of the net new to the franchise ads or potentially kind of Acrobat stuffs that are coming through the Creative Cloud funnel, just some color there would be great? Shantanu Narayen : I think it’s all of the above in terms of where the net ads were. You’re right, it was strong net ads. We certainly as it relates to the document businesses or Acrobat there was a fair amount. We definitely have a clear preference for customers to adopt Acrobat DC through the Creative funnel so that shows up as net adds in the Creative funnel because that gives us permission to up sell them to the Photography plan. But team did well, team continues to do well and so we’re seeing strength. International, Japan and Germany that we’ve identified as areas for growth are growing nicely. There still is a significant opportunity there to migrate existing customers and attract new customers. So I would say those markets are a couple of years behind but we haven't seen any slowdown in the U.S. yet. Walter Pritchard : Thanks. Operator : Your last question comes from the line of Nandan Amladi from Deutsche Bank. Your line is open. Nandan Amladi : Hi, good afternoon, thanks for taking my question. So Mark question for you on metrics, since you are no longer going to be providing the Creative Cloud subscriber count historically we’ve sort of used your commentary on ARPU and the units to back into LA number or ETLA number. Going forward as you provide just the ARR number would you be providing any finer segmentation of that? Mark Garrett : Not right now. The best way to do the model from my perspective would be to take ARR which we’re now going to guide to quarterly, so we did say we will add some additional guidance by giving you ARR every quarter. And you can take that ARR and do a waterfall flowing that into revenue to get a sense of what revenue is. To be honest with you, using what you were using which was a sub number that was incomplete and an average ARPU number, it really doesn’t work anyway. We’ll periodically give you more insight into what's going on like we do at analyst days and things like that. But the best way to do it is to take that ARR number and flow it through into revenue. Shantanu Narayen : And Nandan I think as Mark said, the goal is to continue to help you model the business and provide more color on ARR so that you get a sense not just for the overall health of the business but the various components. And since that was the last question, I mean just a couple of comments, as I am travelling around the world meeting both customers and partners, it is really clear that consumer expectations and what's happening with technology is causing every business to rethink how they interact with customers. And I think that’s a digital first strategy right now for every one of them. From our point of view that great experience starts with great content. We’re clearly the company that’s helping bringing their concepts to life for Creatives and Creative Cloud is clearly the one stop shop for these customers providing everything from inspiration to monetization. I think the other thing we see is delivering that experience to the right person at the right time requires a technology platform that deals with large volumes of content and data but more importantly with the right intelligence and that’s the goal of the Adobe Marketing Cloud. All of these tailwinds we see now benefiting our businesses and I think in Q1 we saw a strength across Creative Cloud adoption and ARR growth, DC and Acrobat adoption as well as strong bookings and revenue, and implementations that are going live with the Adobe Marketing Cloud. And that’s the reason why our Q1 upside and Q2 outlook gave us confidence to raise the revenue as well as earnings target. We think we are in great shape, we remain focused on driving innovation, and strong financial results and I want to thank our customers and partners worldwide for their ongoing commitment and to our employees for continuing to drive innovation in our industry. We hope to see you folks next week at Summit and otherwise we will look forward to our next call. Thank you for joining us today. Mike Saviage : And this call concludes our call, thank you.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,016	2	2016Q2	2016Q2	2016-06-21	2.426	2.523	3.267	3.394	5.23	28.99	28.58	Executives: Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett - Executive Vice President and Chief Financial Officer Analysts : Kirk Materne - Evercore ISI Brent Thill - UBS Sterling Auty - JPMorgan Ross MacMillan - RBC Capital Markets Kash Rangan - Bank of America Merrill Lynch Walter Pritchard - Citi Keith Weiss - Morgan Stanley Heather Bellini - Goldman Sachs Mark Moerdler - Bernstein Research Steve Ashley - Robert W. Baird Jay Vleeschhouwer - Griffin Securities Michael Nemeroff - Credit Suisse Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to the Adobe Systems Second Quarter Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s second quarter fiscal year 2016 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor data sheet on adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans is based on information as of today, June 21, 2016 and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor data sheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. In Q2, Adobe delivered another record quarter, reporting revenue of $1.4 billion, GAAP earnings per share of $0.48 and non-GAAP earnings per share of $0.71. Our momentum is a result of the continuous delivery of breakthrough product innovation across each of our three cloud offerings. We advanced our strategy of enabling the world’s biggest brands, governments and educational institutions to develop well-designed, data-led and personalized digital experiences to their customers across every channel. In our Digital Media segment, we exited Q2 with $3.41 billion of annualized recurring revenue, a net increase of $285 million. We exceeded our ARR target as a result of continued adoption and retention of Creative Cloud and Document Cloud across all customer segments. Creative Cloud is the one-stop shop for creators from inspiration to monetization. Q2 ARR performance was driven by strong demand across all offerings, routes to market and geographies. We continue to execute against our strategy of migrating CS customers, expanding into new market segments and adding value by introducing new services. In addition to continued strength on Adobe.com, we were particularly pleased with the strength of renewals of enterprise term license agreements, which drove an increase in enterprise ARPU. Creative Cloud innovation continues at a torrid pace. Our goal is to make the creative process more fun, seamless and efficient for creatives, enabling them to go from a blank page to a brilliant composition in record time. We announced a major Creative Cloud update today that includes new features in flagship applications like Content-Aware Crop in Photoshop, performance enhancements in cross-product capabilities like CreativeSync and a significant update to Adobe Stock, which now includes a premium collection of stock content and deeper integration within the CC desktop and mobile applications. We believe this innovation will promote migration and enhance retention. We continue to introduce new applications to target new design categories. Adobe XD, our solution for user interface design, has already garnered more than 200,000 downloads as a preview release. In addition to delivering cutting-edge innovation for use by professionals, we are excited about the broader opportunity to enable anybody with an idea to create and share high-impact visual stories. Adobe Spark was introduced in May to address this need, and enables students and consumers to create professional quality, social posts, web stories and animated video in minutes. Adobe Document Cloud, the leading digital document service, enables businesses to transform inefficient paper-based processes into 100% digital workflows. Net new Document Cloud ARR grew quarter-over-quarter, demonstrating the continued momentum of this business. Document Cloud revenue was $188 million in Q2, and we exited the quarter with $415 million of Document Cloud ARR. Cross-cloud integration remains a high priority for Adobe. In April, we announced the first integration between Adobe Sign and Adobe Experience Manager, eliminating the cost and frustration of manual paper-based processes for enrollment, on-boarding and servicing across the customer journey. We announced new Document Cloud storage integrations with Box and Microsoft OneDrive to seamlessly and securely connect workflows across enterprise content collaboration platforms. In our Digital Marketing segment, Adobe Marketing Cloud remains the leader in the emerging high growth customer experience category. Through our unique combination of content and data, Adobe Marketing Cloud enables businesses to deliver highly personalized digital experiences across devices and digital channels. Adobe Marketing Cloud customer retention remains high and we continue to drive adoption of multiple solutions by our customers. Q2 customer wins include Southwest Airlines, eBay, the NFL, FedEx, American Red Cross, Logitech and Singapore Workforce Development Agency. In Q2, we had record attendance at Adobe Summit events in Las Vegas and London as well as Symposia in Mumbai and New York. We unveiled the next generation Adobe Marketing Cloud, shared our Adobe Cloud platform roadmap and announced the Adobe Marketing Cloud Device Co-op, a network that will enable the world’s biggest brands to work together to better identify consumers across digital devices. A key takeaway from these customer events was the strong growth of partners and developers who are building vertical applications on our platform. In March, we announced Adobe Primetime over-the-top capabilities that make it easy for TV networks and pay-TV providers to bring more personalized TV and ad experiences directly to consumers via Apple TV, Microsoft Xbox, Roku and other connected devices. In May, we introduced expanded virtual reality and augmented reality capabilities within Adobe Primetime, with ad insertion, digital rights management and playback. In May, we acquired Livefyre, a social content curation company. Livefyre will continue to be available as a standalone service and will be integrated within Adobe Experience Manager. With this integration, customers will be able to collect, curate and publish user-generated content from major social networks into digital experiences across their own marketing channels. Based on these announcements, innovation and momentum, industry analysts continue to recognize Adobe’s Marketing Cloud solutions as market leaders in their respective categories. In Q2, Adobe’s Campaign solution was named the leader by both Gartner and Forrester Research in their 2016 Magic Quadrant for Multichannel Campaign Management and the 2016 Cross-Channel Campaign Management Wave reports, respectively. Last week, Gartner named Adobe as a leader in its 2016 Magic Quadrant for Mobile Application Development Platforms report. Finally, Forrester Research recognized Adobe as a leader in its 2016 Enterprise Marketing Software Suites Wave report, where we once again received the highest scores for our overall Adobe Marketing Cloud offering and strategy. In Q2, Adobe Marketing Cloud managed nearly 19 trillion customer data transactions for our customers, reinforcing Adobe as the leading big data company in digital marketing. With unique insights from this data, we launched our new Digital Economy Project in March, which has quickly garnered broad attention as a critical indicator for the U.S. digital economy. The monthly report includes a digital price index, a housing index and a job seeking index. Dealing with digital disruption is the main concern we hear about in every meeting we have with business, education and government leaders the world over. A key strategy for dealing with this disruption is to deliver a compelling digital experience, which is the new basis for customer satisfaction, loyalty and growth. This business imperative creates great opportunity for Adobe. We are the only company that helps with every stage of a digital experience from creation through monetization. With another strong quarter behind us, we continue to be bullish about our growth prospects. Mark? Mark Garrett : Thanks Shantanu. In the second quarter of FY ‘16, Adobe achieved record revenue of $1.399 billion, which represents 20% year-over-year growth. GAAP diluted earnings per share in Q2 were $0.48 and non-GAAP diluted earnings per share were $0.71. Revenue came in above the midpoint of our targeted range, GAAP earnings were at the high end of our targeted range and non-GAAP earnings were above our targeted range. These strong results reflect continued momentum across our business. Highlights in our second quarter include; strong growth in Digital Media ARR, which reflects the overall health of our Creative Cloud and Document Cloud businesses, record Creative revenue of $755 million, which represents 37% year-over-year growth, record Adobe Marketing Cloud revenue of $385 million, which represents 18% year-over-year growth, strong growth in operating and net income, with cash flow from operations of $489 million and 81% of Q2 revenue was from recurring sources. In Digital Media, we grew segment revenue by 26% year-over-year. More importantly, we exceeded our Q2 target for Digital Media ARR. We added $285 million during the quarter and exited Q2 with $3.41 billion. Within Digital Media, we delivered Creative revenue of $755 million, which represents year-over-year growth of 37%. We increased Creative ARR by $263 million during Q2. Driving this momentum was continued strong demand for Creative Cloud across all offerings and routes to market during the quarter, including net new Creative Cloud subscriptions. Retention rates remain consistent with prior periods. We continue to execute well against our key Creative Cloud opportunities growing our core base of users, including migrating the legacy user base of Creative Suite users and growing our installed base in the education market, driving new customer adoption in adjacent markets with market expansion efforts such as the Photography plan and using Creative Cloud mobile apps to drive new member adoption and achieving higher ARR with value expansion services such as Adobe Stock, where revenue has grown sequentially over each of the past three quarters. With Document Cloud, we achieved revenue of $188 million, which was in line with our expectations. In addition, Document Cloud ARR exiting Q2 grew to $415 million, which represents higher quarter-over-quarter growth when compared to Q1. We continued to drive adoption of Acrobat subscriptions and value-add services such as Adobe Sign, which is benefiting ARR and building a foundation for growth in the future. In Digital Marketing, we achieved record Adobe Marketing Cloud revenue of $385 million, driven by multi-solution adoption. We achieved another strong quarter with Adobe Campaign and Adobe Audience Manager is becoming a strategic asset as our customers are increasingly utilizing data to enhance their Digital Marketing programs to deliver personalized, engaging experiences. In Q2, for the first time, mobile transactions grew to 50% of total Adobe Analytics transactions. From a quarter-over-quarter currency perspective, FX increased revenue by $5.2 million. We had $3.6 million in hedge gains in Q2 FY ‘16 versus $3.2 million in hedge gains in Q1 FY ‘16, thus the net sequential currency increase to revenue, considering hedging gains was $5.6 million. From a year-over-year currency perspective, FX decreased revenue by $21.7 million. We had $3.6 million in hedge gains in Q2 FY ‘16 versus $22.2 million in hedge gains in Q2 FY ‘15, thus the net year-over-year currency decrease to revenue, considering hedging gains was $40.3 million. In Q2, Adobe’s effective tax rate was 26% on a GAAP basis and 21% on a non-GAAP basis. Our GAAP tax rate was higher than expected primarily due to the acquisition of Livefyre. Our trade DSO was 43 days, which compares to 39 days in the year ago quarter and 42 days last quarter. Cash flow from operations was $489 million in the quarter. Deferred revenue grew to $1.68 billion, up 37% year-over-year. Our ending cash and short-term investment position was $4.32 billion compared to $4.1 billion at the end of Q1. In Q2, we repurchased approximately 2.2 million shares at a cost of $205 million. We currently have $1.2 billion remaining under our current authority granted January 2015. I will now provide our financial outlook. Based on our strong first half performance and business momentum, we expect to meet or exceed our FY ‘16 annual targets, which we raised in March. We expect the second half of the year to play out as we outlined in our Q1 call. We are targeting a third quarter revenue range of $1.420 billion to $1.470 billion. In Digital Media, we expect to add approximately $285 million of net new Digital Media ARR during Q3, with strong year-over-year Digital Media segment revenue growth. In Digital Marketing, we expect continued momentum in bookings and approximately 7% year-over-year Adobe Marketing Cloud revenue growth in Q3, factoring in the strong perpetual revenue in the year ago quarter. We are targeting our Q3 share count to be between 504 million to 506 million shares. We expect net non-operating expense to be between $11 million and $13 million on both a GAAP and non-GAAP basis. We are targeting a Q3 tax rate of approximately 24% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q3 GAAP earnings per share range of $0.46 to $0.52 per share and a Q3 non-GAAP earnings per share range of $0.69 to $0.75. In summary, Q2 was another solid quarter for Adobe and we look forward to our momentum continuing in the second half of fiscal 2016. Mike? Mike Saviage : Thanks Mark. A few weeks ago, we opened registration for Adobe MAX, which is a user conference for our Creative business that will be held on November 2 through November 4. This year MAX moves to San Diego and we will host a financial analyst meeting on the first day of the conference, which is Wednesday, November 2. Next week, we will send an invitation out to our investor e-mail list to attend MAX at a discounted price. If you have any questions, please contact Adobe Investor Relations with an e-mail to ir@adobe.com. For those who wish to listen to a playback of today’s conference call, a web based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056, use conference ID number 18786308. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 p.m. Pacific Time today and ending at 5 p.m. Pacific Time on June 24, 2016. We would now be happy to take your questions and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] Your first question comes from the line of Kirk Materne with Evercore ISI. Your line is open. Kirk Materne : Hi, thanks very much and congrats on the quarter. Mark, I had a question just on the guidance around the Digital Marketing business. I realized that there has been some, I guess, changes in sort of how the rev rec has been going given the shift from perpetual to more subscription-based rev rec. But this next quarter, even when you adjust for some of that deal that fell into 3Q last year, which I understand is quite a little bit of a tougher comp. It seems like that gap between bookings in that segment and sort of revenue growth still isn’t closing perhaps as fast as one might be thinking. So, can you just walk through that if there is changes in terms of implementation times are taking longer so there is some issue there or if you have longer deals that are – can span over say six quarters versus four. I was just kind of getting – I just want to get a sense on when do we start to see the inflection in the revenue growth in that business come back in the line a little bit closer with the bookings trends? Thanks. Mark Garrett : Hey, Kirk. Yes, thanks. So, as you pointed out in Q3 of last year, we did have an unusual amount of perpetual revenue. In fact, if you normalized last year for that perpetual revenue that was kind of above and beyond, the growth this year would have been somewhere in the 20% area. So, that is the reason why you are seeing 7% instead of what would have normally been something like 20%. We are still on a path to do 20% for the year, which is what we guided to quite a while ago. So, there is no change. There is no change in implementations or any of the other factors that you mentioned. It’s really just how the quarters play out relative to perpetual last year. Kirk Materne : Okay, thanks a lot. Operator : Your next question comes from the line of Brent Thill with UBS. Your line is open. Brent Thill : Thanks. Mark, just following up on Kirk’s question. Can you just confirm that you are still, on the bookings side, I think catch what you did in Q2 in the Marketing Cloud? Can you give us a sense of what the gross booking number was in Q2? Mark Garrett : Yes. So, we don’t disclose the booking number, Brent, every single quarter. But what we have said is that we are driving towards 30%. We are driving both long-term total contract value and we are focusing more and more now on annual contract value and we expect that to grow 30% this year, which is consistent with what we have been saying. Brent Thill : Okay. So, no change in the background other than the [OpEx] [ph], the perpetual... Mark Garrett : Yes, that’s right. And as we are pointing out, we are still saying we are going to grow 20% revenue this year. It just doesn’t make for a bigger Q4, but you are also getting now the stacking effect of those bookings that will start to play out in Q4. Shantanu Narayen : And two things both Brent and Kirk, if you look at our numbers for last year it actually does have traditional and seasonal expectation to it, so Q3 and Q4. And when we gave our updated targets at the end of Q2, this was very much part of the plan. So, it’s playing out exactly as we had expected. Brent Thill : Shantanu, just a quick follow-up on the Creative Cloud. Where do you see the biggest next lever of growth? Is this coming to international? Is it a new user type? [Indiscernible], it seems like it’s doing well. What’s the next big wave you see that you have yet to hit? Shantanu Narayen : Well Brent, firstly with respect to Q2, we exceeded our ARR target that we had specified. We had expected $275 million. We came in at $285 million. And if you normalize for the 14-week quarter in Q1, you will actually see it was extremely strong performance. From the point of view of color, we said that we actually saw strength across all of the offerings as well as all of the geographies. And I think I highlighted in particular, as the 3-year ETLAs are now all coming up for renewal, the first time around, we had actually done a lot of the ETLAs as sort of custom deals. Now, we are seeing services as part of it. So, the enterprise continues to be an opportunity. International, to your point, also continues to be an opportunity. We have always highlighted Japan and Germany, which are continuing to show progress against the migration goals that we have as well as new customer acquisition. Education also continues to be an area where we are seeing interest in the Creative Suite. And I think if you see some of the announcements we made today, whether it was the new product in XD, adding virtual reality to premiere, things that we are doing with touch, there is just so much innovation possible. I think the core elements of migrating existing customers, adding new customers and adding new services, we continue to be excited about the opportunity ahead of us. And it’s actually pretty interesting that 3 years into the transition, we expect record net ARR add in 2016. I think by all accounts, that’s great performance. Brent Thill : Thanks, Shantanu. Operator : Your next question comes from the line of Sterling Auty with JPMorgan. Your line is open. Sterling Auty : Yes, thanks. Hi, guys. I know that you are no longer disclosing the sub numbers around Creative Cloud, but triangulating some of the commentary on ETLA renewals, increase in ARPU might have some people wondering qualitatively, was there any softness in terms of the net increase in Creative Cloud subs in the quarter? Shantanu Narayen : Sterling, we were expecting multiple people would ask us that. We had a great quarter in subs, but ARR continues to be where we are focusing. No issues there whatsoever. Great quarter. Sterling Auty : Alright, great. Thanks, guys. Operator : Your next question comes from the line of Ross MacMillan with RBC Capital Markets. Your line is open. Ross MacMillan : Thanks a lot. Hey, Mark. Just wanted to drill in on Digital Marketing. In Q1, the Digital Marketing subscription revenue grew 25% and we get that in the filing. I wondered if you had that subscription revenue growth in 2Q. And in context of that, when you talk about 20% overall growth, what will that subscription revenue kind of grow at ballpark for the year do you think? Thanks. Mark Garrett : So, let me answer that a slightly different way and I may have to get a little bit more detail for you later, Ross. But in Q1, the subscription revenue that you see that was reported had an extra week. And that week, we said on our Q1 earnings call was worth $75 million in total revenue, but the bulk of that is subscription-oriented. So, again in Q1, we had that extra week, we talked about of revenue which was worth $75 million. The bulk of that is going to be subscription-oriented revenue. So, when you look at sequentially the subscription revenue that we report from Q1 to Q2, it’s definitely muted by the fact that you had an extra week in Q1. So, there is really strong growth in subscription revenue in Q2. Shantanu Narayen : The other thing, Ross, I would just add is as expected, the amount of perpetual revenue that we are seeing in the Digital Marketing business is decreasing and becoming immaterial. So, I think the health of the business is driven by bookings and converting the bookings to revenue. Operator : Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Your line is open. Kash Rangan : Hey, thanks and congratulations on still continuing to be the gold standard for these model transitions. One clarification for you, Mark is so when you look at the Creative revenue number, Q1 was significantly better than expected. How much of the Creative revenue performance itself this quarter is more so than normalization, because you do not have that extra week and therefore you are forecasting a number that – or guiding to a number that’s closer to where you landed vis-à-vis any changes in the linearity or trends of the business itself this quarter vis-à-vis the previous quarter? And I have a quick follow-up. Thank you. Mark Garrett : Yes, Kash, it’s really driven by the extra week. Like I said, $75 million in Q1 came from that extra week. That $75 million is driven by subscription revenue, which would be both Digital Media and Digital Marketing. There is no change to the core underlying businesses. It’s really just driven by that extra week. Kash Rangan : Got it. So, with respect to Street numbers, which may have – your guidance certainly is a little – at the lower end of your range is a little bit below, considering that you are very conservative, it’s a little bit below the Street expectations, is that primarily due to the Digital Marketing Cloud site, where you correctly pointed out that you have a tough comparison to the perpetual induced Q3, is that all there is to it with respect to how your guidance shakes out relative to the rest of the Street or are there other pieces to the guidance that explains the discrepancy versus at least where our models were? And that’s it for me. Thank you again. Mark Garrett : As Shantanu and I have both said, we expect to meet or exceed all of our FY ‘16 targets, and these are targets that we have raised after Q1. We didn’t give specific Q3 and Q4 targets. But what we are laying out now for the rest of the year is very consistent with the quarterly color we provided. And it’s also very similar to what you saw last year in terms of seasonality. There is still seasonality as it relates to revenue in Q3, Q4. So I think what you are seeing from us is exactly what we would have expected, exactly consistent with what we have been saying all year long. And it’s probably just driven by the fact that we didn’t give specific targets in Q3 and Q4. Shantanu Narayen : The other thing, Kash… Kash Rangan : Actually, you did point a deceleration on the March quarter call in Digital Marketing upcoming in Q3, so you did give us a bit of a heads-up? Mark Garrett : Yes. Shantanu Narayen : Kash, the other thing that’s really happening is from our point of view, Mark and mine, I mean and the quarters are playing out exactly as expected. And when you see the percentage of revenue right now that’s recurring, when you look at it relative to the midpoint of what we specified in Q2, it was an outstanding quarter from our point of view. And our ability to predict the revenue is actually getting better and better. And so I think when you look at some of the ranges that used to be the traditional part of our business when the amount of perpetual was different, the good news from our point of view is the business is actually becoming more predictable and we have more visibility. So it’s playing out like we have thought. Kash Rangan : Congrats. Mark Garrett : Thank you. Shantanu Narayen : Thank you. Operator : Your next question comes from the line of Walter Pritchard with Citi. Your line is open. Walter Pritchard : Hi. Thanks. Shantanu, I am wondering if you can talk about larger M&A and how that sort of bolsters [ph] your strategy here as you are looking at growth in the Digital Marketing space and how willing you are to step up to do a large deal and what that deal might look like if you were looking to step up and do something more than $1 billion? Shantanu Narayen : Walter I mean I think from our point of view, when we look at the overall opportunity, we have estimated it as approximately $27 billion. And we don’t think any single adjacency is going to impact our ability to either differentiate or continue to lead the market. I mean we have very established criteria. We look at strategic expansion, we look at cultural fit and we look at healthy financial returns. And if something meets those criteria, we will engage. If something doesn’t, we will continue to focus on our organic growth opportunities, which are outstanding. The second thing I would say is that specifically as it relates to our focus, as we are delivering the platform more and more of this actually represents a partner ecosystem. And I would suspect that commerce is on some people’s minds relative to what our strategy is. And we continue to partner with multiple companies, whether it’s IBM, SAP or Demandware, because we control the entire digital experience. And we partner with them, with Demandware, on the specific retail vertical as well as physical goods. And if you think about the much larger opportunity that exists there, it’s around non-physical commerce and we have partnerships there as well. So net, I would say we feel really good about our organic growth prospects and we will continue to be disciplined about looking at potential adjacencies. Walter Pritchard : Okay. Thank you, Shantanu. Shantanu Narayen : Thanks. Operator : Your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open. Keith Weiss : Thank you, guys for taking the question and nice quarter. I guess in terms of the overall macro, one of the things that we picked up today and our test was a potential for some pause in spending, particularly in the UK, I mean more broadly in Western Europe ahead of the Brexit vote, did you see any of that in your quarter at all, any indication that guys are just maybe pausing ahead of that that a period of uncertainty and was there any of that reflected in your guidance, any of that uncertainty? Shantanu Narayen : No Keith, we neither saw any weakness nor do we think that there is any impact to the macroeconomic opportunity that we have in those countries. As I said, there isn’t a customer on the planet that we go visit where digital disruption is not top of mind, it’s a line item in everybody’s budget and they are all talking about how they are going to aggressively transition to digital experiences. So our conversation with them is front and center. Keith Weiss : Got it. Thank you very much. Operator : Your next question comes from the line of Heather Bellini with Goldman Sachs. Your line is open. Heather Bellini : Great. Thank you. I actually had two questions, the first one was related to Adobe Stock and now that that deal has been closed for about a year and a half, just wondering if you could share with us how your strategy with that has been evolving and any stats if you can share with us about that driving incremental ARR. And then the second question Mark, is you guys have been exceptional in terms of your operating expense control and if we do however, look at the – look at what you are forecasting or what’s implied in your forecast for the back half of the year, there is a pretty material ramp that you are baking in, I was wondering if you could just give us a sense of what those incremental investments might be? Thank you. Shantanu Narayen : I will take the first Heather, with respect to Adobe Stock. I think the big picture opportunity has always been that the people who both contribute to the Stock ecosystem and the people who use Stock in order to create their compositions both are Adobe customers. I think when you look at the number of people who are using Adobe Stock, the percentage of them who represent – who are CC subscribers is a very high percentage. So clearly, we are targeting folks who are already have a strong affinity towards our products strategically and view this as a value added service. With respect to how we are going to market Heather, we have offerings that allow people who have a CC subscription to add a Stock subscription to that. And we also offer a complete offering, which includes both access to CC desktop applications as well as Stock. And we are seeing uptake in both of those categories in addition to the traditional on-demand business that existed in Stock. And when I look at the revenue numbers over the last three quarters, we have been seeing good growth in the Adobe Stock line item across all three quarters. So it’s leading to both revenue as well as ARPU and ARR. Mark Garrett : And Heather, as it relates to OpEx, I know this has been a question on analysts’ minds for a while. We do have enough OpEx in our model, whether it’s this year’s model or the 3-year model that we have provided to make sure that we can grow the business the way we want to grow the business. And that growth is going to require sales capacity in Digital Marketing and it’s going to require marketing activities in Digital Media. And of course, we are going to constantly invest in R&D. That’s where it goes. To the extent that in any given quarter, we don’t need it and we don’t have a responsible place to put it, we are going to give it back to shareholders. And that’s what you have seen from us in the last couple of quarters. And you know over many, many years that when we control costs and don’t have a short-term need to make those investments, we will provide it back to you in the form of upside to EPS. Heather Bellini : Thank you very much. Operator : Your next question comes from the line of Mark Moerdler with Bernstein Research. Your line is open. Mark Moerdler : Thank you very much. Can you give us some more color on the Document Cloud transition to subscription, how that’s progressing, when and if we could see a bigger inflection, how we should think about the whole process going forward? Shantanu Narayen : Yes. Mark, we had a strong quarter in the Document Cloud. And as you know, a significant portion of what we are seeing even with the Creative customers is adoption of the new Acrobat. Adobe Sign also continues to do well, that’s represented in the Document Cloud business. So if I look at it quarter-over-quarter, that business continues to show momentum. We think there is a significant opportunity ahead of us. We have stated in the past that we have over 30 million people who have bought the perpetual or traditional version of Acrobat that represents opportunities and that the migration to subscription will be more muted overall than the Creative business. But on Adobe.com, we are actually seeing mostly adoption of the subscription version of the Document Cloud. So pleased with the business and continue to think that, that’s a growth opportunity for us. Mark Moerdler : Thank you. Operator : Your next question comes from the line of Steve Ashley with Robert W. Baird. Your line is open. Steve Ashley : Well, I was going to ask a Document Cloud question as well and specifically Document Cloud has allowed you to augment and change your go-to-market strategy? And are you trying to also push adoption within larger Creative accounts with the Document Cloud? Shantanu Narayen : Steve, you broke up a little bit. But if the question was around what we are doing with respect to cross-selling each of our clouds into enterprise customers, yes, we are seeing significant progress with that, specifically, I would say in three areas. The first area is in what we have done with mobile and combining the DPS offering with AEM mobile and now providing a one-stop shop for whether they were Creative customers or Digital Marketing customers with our mobile publishing suite. The second area is in the cross-integration between Adobe Sign as well as AEM forms thereby allowing people to automate their inefficient paper-based processes. And the third area of cross-cloud integration and selling that we are doing is in the Creative Cloud enterprise offering, where people both have access to all of the Creative Cloud desktop applications as well as asset management through our Digital Marketing solutions to improve their content velocity. So, those are the three areas where we are continuing to both see traction from our customers, cross-sell into those specific accounts and continue with innovation on an integration. Steve Ashley : Perfect. Thank you, Shant. Shantanu Narayen : Thanks, Steve. Operator : Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is open. Jay Vleeschhouwer : Got it. Thanks. Good evening. Shantanu, at Summit 3 months ago and again today on the call, you highlighted AudienceManager among your Marketing Cloud solutions. And I am wondering if you are anticipating a significant re-ranking, let’s say, of the various solutions that comprise total Marketing Cloud revenues. Could AudienceManager in effect become the next AEM as a major driver to growth of total Marketing Cloud? Also at Summit, you have said almost in passing during the investor meeting that you were experimenting with a new kind of licensing or usage model. If you have any update on that? And just a quick follow-up for Mark. Shantanu Narayen : Sure, Jay. I think both of those relate to the big picture question of how are we making progress of migrating from individual solutions to customers adopting our entire Digital Marketing platform. I think the big three as it relates to solution revenue continue to be the Adobe Analytics, the Adobe Experience Manager as well as the Adobe Campaign solutions. But I think what’s really exciting about Adobe AudienceManager is that it’s one of the core services that’s helping integrate all of these other three products into a more meaningful offering to marketers and Chief Revenue and Chief Digital Officers. And the traction that we are seeing with that I think reflects the growing trend in the industry, where people don’t want to buy individual solutions, but they want to buy an entire platform that they can deploy and see the benefit of it easily. So, I think that’s the reason to highlight the success that we are seeing with AudienceManager as a core service. And with respect to your second question, I mean, we are continuing to clearly see that the multi-product solutions are being adopted and that will continue to be our focus and delivery. Jay Vleeschhouwer : So Mark, you say you don’t have the record revenue for services. We have talked about this subject in the last couple of quarters. On the other hand, your margins improved in services sequentially and year-over-year. So, the question is do you think you can keep the services margin stable or perhaps on some upward path as we saw in Q2? And is the services growth driven by both Creative Cloud and Marketing Cloud or one more than the other? Mark Garrett : No, the services growth is really driven by Marketing Cloud. As we do larger engagements with customers, as we deploy multiple solutions within customers, they want us to help them get the ROI out of that purchase and they are coming to us for implementation help. That’s what’s driving the marketing consulting. And yes, Jay, I mean, obviously, I am focused on the margin in that business. It’s going to be deal specific from time-to-time. But overall, I would like to see the margins in that business continue to get better. Jay Vleeschhouwer : Thank you. Operator : Your next question comes from the line of Michael Nemeroff with Credit Suisse. Your line is open. Michael Nemeroff : Hi, thanks. Great. Thanks for taking my questions. I am curious if maybe you could help us with how many more customers there are left to convert to the Creative Cloud from the Creative Suite and maybe just a sense of what inning we are in? And then also, if you could maybe comment a little further on the ETLA strength in the quarter. Shantanu, I think you had mentioned that you were starting to see some contracts from a couple of years ago start to come up for renewal. Should investors and should we expect that the strength in ETLA renewals is going to be similar to what we saw this quarter? Shantanu Narayen : Yes, I think with respect to your first question on installed base migration, as you know, we don’t update those on every quarter, but I would encourage you to look at the last numbers that we had at our MAX event. And you will see there is still very significant opportunity in both migration as well as market and value expansion. And I think those numbers still show significant headroom relative to where we are today. So, I think that’s a good metric for you to look at. I think with enterprise ETLAs, 3 years ago, when we started this move of having enterprise customers license our software rather than buy it outright, we were just starting on this journey and it was nice as those 3-year terms are coming up to see that there is actually a fairly nice up-sell associated with that. People are now adopting the entire Creative Cloud. They may have only had single applications there and are adopting services. So, we certainly will continue to focus on that trend of driving significant up-sell as people come up for retention and demonstrating the value. So, we are pleased with it. And certainly from an execution point of view, we are going to focus on continuing to drive that over the next few years. Michael Nemeroff : And could you talk about the pricing dynamics on those renewals? Shantanu Narayen : I think the pricing dynamic has such a different range associated with it. I mean, we are certainly – it’s very large range as a result of the size of the installed base. But I mean, as we look at it, we would like that to be greater than either the individual or the team for a number of our customers. And so it’s driving overall sort of ARR and ARPU up from what other customers might pay. Michael Nemeroff : Thanks for taking my questions. Mike Saviage : Stephanie, we are coming up in an hour. Maybe we will do one more question, please. Operator : Certainly. Our last question comes from the line of Ross MacMillan with RBC Capital Markets. Your line is open. Ross MacMillan : Thank you. I just had one follow-up. Mark, obviously, on operating expense, your growth rates here have been running at around headcount growth levels. And I just wondered, as we think about going forward, should that still continue to be the case or could it be any sort of material diversion from headcount growth and OpEx growth in the future? Thanks so much. Mark Garrett : No. As a software company, we are going to be tied pretty tightly to headcount. OpEx is going to be tied pretty tightly to headcount. So, I think you would see them track pretty closely together. Shantanu Narayen : So, Ross thanks for asking that question. I think from my point of view as well as the management team, ‘16 is shaping up to be a great year. As you know, we raised our annual revenue target at the end of Q1 as well as our Digital Media annualized recurring revenue target. And it was good to confirm that we are on track to meet or exceed these financial targets. I am particularly pleased with the Digital Media ARR. We are 3 years into the transition. We continue to expect to add record bookings that exceed the $1 billion that we added last year. And in Digital Marketing, we continue to be the leader in this explosive customer experience category. I think most important though for me we continue to innovate in our major businesses. If you saw the announcements we have made both at Digital Marketing Summit in terms of the additions to the marketing platform roadmap as well as what we have announced both for Document Cloud and today for Creative Cloud, I think that positions us incredibly well for FY ‘17 and beyond. And from all of the questions that were asked, I mean we certainly believe that we have leverage in our model and we continue to demonstrate tremendous financial discipline on the expense – expense front and we will continue to do that. So, thank you for joining us today. Mike Saviage : And this concludes our call. Thanks, everyone. Operator : This concludes today’s conference call. You may now disconnect.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,016	3	2016Q3	2016Q3	2016-09-20	2.637	2.738	3.531	3.653	5.32	27.84	27.04	Executives: Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett - Executive Vice President and Chief Financial Officer Analysts : Ross MacMillan - RBC Capital Markets Brent Thill - UBS Walter Pritchard - Citi Kirk Materne - Evercore ISI Heather Bellini - Goldman Sachs Keith Weiss - Morgan Stanley Kash Rangan - Bank of America/Merrill Lynch Sterling Auty - JPMorgan Jay Vleeschhouwer - Griffin Securities Alex Zukin - Piper Jaffray Derrick Wood - Cowen and Company Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to the Adobe Systems Third Quarter Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] Thank you. I would like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s third quarter fiscal year 2016 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans is based on information as of today, September 20, 2016 and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. In Q3, Adobe delivered another record quarter, with revenue of $1.46 billion; GAAP earnings per share of $0.54; and non-GAAP earnings per share of $0.75. These strong results are a reflection of our market leadership and momentum we have with Creative Cloud, Adobe Document Cloud, and Adobe Marketing Cloud. We are enabling the world’s leading brands to develop design and data-driven digital experiences for their customers across every channel. Our unique value proposition continues to distance Adobe from our competitors. In our Digital Media segment, we exited Q3 with $3.7 billion of annualized recurring revenue, or ARR, which represents an increase of $285 million quarter-over-quarter. The increase was a result of the continued adoption and retention of Creative Cloud and Document Cloud across all customer segments. Creative Cloud is a one-stop shop for creativity and design, offering the world’s best creative apps, services and training, as well as a vibrant marketplace and community. We achieved record Creative revenue of $803 million in Q3, which represents 39% year-over-year growth. Creative ARR grew in line with our expectations and was driven by continued migration of Creative Suite users, the addition of new value to existing subscribers with services such as Adobe Stock, new customer acquisition in the education and hobbyist photography markets, and retention of existing subscribers. Creative Cloud continues to deliver powerful new innovations across our segments at a rapid pace. As the leader in digital photography, Adobe has set the standard for professional grade photography across cameras and mobile devices with Adobe DNG, a raw file format we created. As of last week’s iOS 10 release, Adobe DNG is now supported natively by iOS and Android, and Lightroom is the first cross platform app to empower users with an end-to-end raw mobile photography workflow for high quality image capture and editing. New Creative Cloud innovation enables subscribers to design for emerging categories like Experience Design. Adobe XD, our solution for designing and prototyping websites and mobile apps, continues to gain momentum among users and industry watchers. Although still only available as a preview release, last week it was selected as one of 15 winners in the Fast Company Innovation by Design Awards, a distinct honor given the 1,700 entries. Earlier this month, we showcased Adobe’s leadership in the video category, unveiling advancements in virtual reality, character animation, and 3D at the IBC Conference in Amsterdam. These new capabilities are enabling video creators of all kinds from YouTubers to Hollywood studios to create, deliver, monetize, and measure innovative and immersive media across multiple screens. This morning, we announced the beta release of our new Adobe Stock Contributor Site, which reduces the friction for Creative Cloud users to promote and sell their work. The new site is integrated with Creative Cloud apps and introduces auto-keywording, which uses machine learning algorithms to analyze and tag content, streamlining the submission process, and increasing the discoverability of Adobe Stock content. In November, we will hold our annual MAX Creativity Conference in San Diego. We expect this year’s MAX to be the largest gathering ever of designers, photographers, film makers, and other creative professionals from around the world. As always, we look forward to unveiling new technology at MAX, including whole new categories of cloud-first creative solutions. The world’s leading digital document service, Document Cloud, leverages PDF and enables businesses to transform inefficient paper-based processes to digital, using Acrobat desktop and mobile apps as well as integrated cloud services like Adobe Sign. In Q3, Individual Acrobat subscription units exceeded perpetual units for the first time. And on Adobe.com, over 90% of Acrobat customers chose the subscription offering. Document Cloud revenue was $187 million in Q3. Combined with Acrobat adoption reflected in Creative Cloud, Document Cloud continues to be an important growth business for Adobe. In June, we announced the Cloud Signature Consortium, a group comprised of leading industry and academic organizations committed to building a new open standard for cloud-based digital signatures across mobile and web, so anyone can digitally sign documents from anywhere. Adobe led the way in establishing PDF as a digital document standard and is now raising the awareness of electronic signatures as a key to any business’ digital transformation. In our Digital Marketing segment, Adobe Marketing Cloud is the leader in enabling brands, government agencies, and institutions to deliver great digital experiences across devices and channels. Whether it’s financial institutions, retail, travel and entertainment, or automotive, entire industries are experiencing disruption and aggressively deploying technology to drive stronger loyalty and growth. Success hinges on a strong foundation of content and data, which enable a deep understanding of customer needs, development, and delivery of consistent, personalized experiences, and the ability to monitor business performance in real time. In Q3, Adobe managed a record 23 trillion data transactions. Our customers in every major category of business are utilizing our machine learning algorithms to predict customer behavior and drive their business. Adobe Marketing Cloud solutions, including Adobe Campaign, Adobe Audience Manager and Adobe Media Optimizer are achieving strong growth as our customers invest more in data-driven solutions. In August, Adobe Marketing Cloud once again played a key role in the digital broadcast of the Olympic Games. NBC Sports used Adobe Primetime to power the digital delivery of the 2016 Rio Olympics, the largest digital Olympic Games in history. In addition to being listed earlier this year as the Marketing Cloud platform category leader, Adobe Marketing Cloud was recognized by industry analysts during the quarter as a leader in categories such as Mobile Application Development, Cross Channel Campaign Management, and Enterprise Marketing Software. We continue to drive new logo wins and expand our business across geographies and vertical markets. Some Q3 customer wins include T-Mobile, Nordstrom, Subaru, SunTrust Bank, AstraZeneca and the state of Tennessee. At the core of our business are the people that make it happen. As a software business, we know that employees are our most strategic asset and we are committed to increasing diversity. We have broken new ground in terms of employee benefits like extended parental leave and are implementing new programs, including coding initiatives focusing on young women. We were recently recognized as one of Forbes’ Most Innovative Companies and we continue to garner best place to work honors around the world, most recently in Australia and India. In addition, our focus as a company on the environment and sustainability is important to our employees and to many investors. We were pleased to learn Adobe has been selected as a component of the Dow Jones Sustainability World Index for the first time. Today, every company is under pressure to be more connected and in tune with its customers, to know their history, their preferences and to create and deliver powerful, personalized experiences to them anywhere they go. Content and data are at the core of these exceptional experiences and Adobe is the only company that brings these critical capabilities together in our market leading cloud solutions. The market opportunity is significant. Our strategy is sound. And our results demonstrate the leverage in our model. All of these are what make us excited about the opportunities ahead. Mark? Mark Garrett : Thanks Shantanu. In the third quarter of FY ‘16, Adobe achieved record revenue of $1.464 billion which represents 20% year-over-year growth. GAAP diluted earnings per share in Q3 were $0.54 and non-GAAP diluted earnings per share were $0.75. Strong performance across our three cloud offerings helped to deliver revenue towards the high end of our targeted range. Our cost discipline helped to deliver earnings upside while we continued to invest in the business to drive future growth. Highlights in our third quarter include; Solid growth with Digital Media ARR, We achieved our target of $285 million net new ARR during what is typically a seasonally soft quarter and keeps us on pace to achieve our annual target that we increased earlier this year, Record Creative revenue of $803 million, which represents 39% year-over-year growth, Record Adobe Marketing Cloud revenue of $404 million, which represents 10% year-over-year growth and was above our target for the quarter, Strong growth in operating and net income, Record cash flow from operations and deferred revenue And 83% of Q3 revenue from recurring sources, an all-time high. In Digital Media, we grew segment revenue by 29% year-over-year. The addition of $285 million net new Digital Media ARR during the quarter grew total Digital Media ARR to $3.7 billion exiting Q3. Within Digital Media, we delivered Creative revenue of $803 million, which represents year-over-year growth of 39%. In addition, we increased Creative ARR by $258 million during Q3 and exited the quarter with $3.26 billion of Creative ARR. Our Creative ARR is more than $1 billion higher than the peak annual Creative revenue we achieved when it was just perpetual licensing of Creative Suite. Driving the momentum with our Creative business was continued strong demand for Creative Cloud across all offerings and routes to market during the quarter, including net new Creative Cloud subscriptions and enterprise contract renewals. Retention rates for subscriptions overall remained ahead of our original targeted projections. Creative Cloud ARPU across each of our commercial offerings continues to grow quarter-on-quarter as new users on promotion pricing renew at full price after their promotions expire. We also drove strong subscription growth in the education market during the back-to-school season in Q3. Our focus with Creative Cloud continues to be in three key areas; growing our core base of users, including migrating the legacy user base of Creative Suite users, addressing piracy and growing our installed base in the education market, driving new customer adoption in adjacent markets with market expansion efforts such as the Photography plan and using Creative Cloud mobile apps to create awareness and drive new member adoption and growing ARPU and ARR with value expansion services such as Adobe Stock, where revenue grew by over 40% year-over-year in Q3. With Document Cloud, we achieved revenue of $187 million, which was in line with our expectations as we gradually migrate this business to be more recurring. Document Cloud ARR exiting Q3 grew to $442 million, which represents the highest sequential quarterly growth this year. Helping this growth is our effort to drive adoption of Acrobat subscriptions and value add services such as Adobe Sign, both of which are benefiting ARR and building a foundation for revenue growth in the future. In Digital Marketing, we drove strong year-over-year growth in annual Adobe Marketing Cloud subscription bookings and greater than 25% year-over-year growth in subscription revenue. Reported Marketing Cloud revenue was a record $404 million, ahead of our Q3 target as a result of accelerated second half pipeline conversion and resulted in year-over-year growth of 10%. Marketing Cloud retention, bookings in Q3 and our pipeline set us up for a strong Q4. Our increased focus on first year annual subscription value will help us more quickly convert our bookings into reported revenue as we look to FY ‘17 and beyond. Mobile remains a key market trend for this business. Mobile data transactions grew to 52% of total Adobe Analytics transactions in the quarter. From a quarter-over-quarter currency perspective, FX increased revenue by $0.9 million. We had $3.9 million in hedge gains in Q3 FY ‘16 versus $3.6 million in hedge gains in Q2 FY ‘16, thus the net sequential currency increase to revenue, considering hedging gains was $1.2 million. From a year-over-year currency perspective, FX decreased revenue by $14.2 million. We had $3.9 million in hedge gains in Q3 FY ‘16 versus $9.1 million in hedge gains in Q3 FY ‘15. Thus, the net year-over-year currency decrease to revenue, considering hedging gains was $19.4 million. We experienced stable demand across all major geographies during the quarter. Although there was a short-term impact on demand following the Brexit announcement in the UK, it did not affect our ability to achieve our Q3 goals and we do not anticipate any significant impact through the rest of FY ‘16. In Q3, Adobe’s effective tax rate was 24% on a GAAP basis and 21% on a non-GAAP basis. Our trade DSO was 45 days, which compares to 44 days in the year ago quarter and 43 days last quarter. Deferred revenue grew to a record $1.8 billion, up 38% year-over-year. Our ending cash and short-term investment position was $4.45 billion compared to $4.32 billion at the end of Q2. Cash flow from operations was a record $518 million in the quarter. During this year we have been using excess domestic cash to buyback stock and drive our share count down. In Q3, we repurchased approximately 3.5 million shares at a cost of $344 million. We currently have $800 million remaining under our current authority granted in January 2015. Now I will provide our financial outlook. We are targeting a fourth quarter revenue range of $1.55 billion to $1.6 billion. In Digital Media, we expect to add slightly more than $300 million of net new Digital Media ARR during Q4 to achieve our full year target of approximately $4 billion of ARR exiting the year. In Digital Marketing, we expect our business momentum to enable us to achieve Q4 Marketing Cloud year-over-year revenue growth of approximately 30%, which puts us on pace to achieve our annual growth target of approximately 20% for the year. We are targeting our Q4 share count to be between 503 million to 505 million shares. We expect net non-operating expenses to be between $8 million and $10 million on both a GAAP and non-GAAP basis. We are targeting a Q4 tax rate of approximately 24% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q4 GAAP earnings per share range of $0.60 to $0.66 per share and a Q4 non-GAAP earnings per share range of $0.83 to $0.89. For the year, our updated annual targets reflect our year-to-date results and our Q4 targets. We expect FY ‘16 annual revenue between $5.8 billion and $5.85 billion, GAAP EPS between $2.12 and $2.18 and non-GAAP EPS between $2.94 and $3. In summary, Q3 was yet another strong quarter for Adobe, with the leverage in our model continuing to be reflected in our bottom line performance. Our year-to-date results and targets for Q4 keep us on track to meet or exceed all of the financial targets we provided at the outset of the year. We look forward to finishing the year strong and hope to see you at MAX and our upcoming financial analyst meeting in San Diego. Mike? Mike Saviage : Thanks Mark. Adobe MAX will be held on November 2 through November 4 in San Diego and we will host a financial analyst meeting on the first day of the conference which is Wednesday, November 2. We have sent e-mail invitations to our investor list to attend MAX at a discounted price. If you have not registered and wish to attend, please contact Adobe Investor Relations with an e-mail to ir@adobe.com. For those unable to attend MAX and the financial analyst meeting, we will provide live webcast of the November 2 MAX keynote presentation and the financial analyst meeting later that afternoon. If you wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056, use conference ID #73287217. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 :00 p.m. Pacific Time today and ending at 5 :00 p.m. Pacific Time on September 23, 2016. We would now be happy to take your questions and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] Your first question comes from Ross MacMillan from RBC Capital Markets. Your line is open. Ross MacMillan : Thanks so much, and congratulations from me. Shantanu, I think Mark commented that the Creative ARR is now about $1 billion higher than the peak in the Creative revenue versus – or under the Creative Suite licensing model, so you clearly cleared that barrier and you are growing that rapidly. But I actually wondered if you could look at the – compare and contrast that with the Acrobat and Document Cloud given that, that’s earlier in its cycle of conversion. And I wondered if you could maybe frame for us what the opportunities are there in terms of driving expansion in that opportunity over time and maybe how much larger that could be? Thanks. Shantanu Narayen : Well, thanks Ross. And while I won’t be updating our TAMs at this point, we are pleased with our performance and I will be happy to give you some color on how we see the opportunity ahead of us in terms of what the Creative Cloud as well as the Document Cloud. The Creative Cloud business is certainly being driven both by customer migration as well as by new customer adoption and we certainly think that’s going to be true for the document business as well. As you know, we have tens of millions of people who have bought Acrobat over the lifetime of the Acrobat product. And for the first time as we mentioned again in our prepared remarks, the number of subscription units of Acrobat actually exceeded the perpetual units. So, we are pleased with how that transition is going. The playbook is exactly the same. It’s about how do we migrate Acrobat customers to Acrobat DC. It’s about adding new services like Sign. It’s about enhancing new services that we can add to the business. But the thing I would also caution folks listening is to recognize that part of the Creative ARR that’s being driven is also already being driven by the document business. And so while we report the document segment separately, let’s already reflect that it’s actually helping not just the document business, but also the creative business. So, we are pleased with that on mobile. PDF has continued to be adopted as a wide standard, which I think also augurs well for its continued growth. Ross MacMillan : Great. And maybe just a quick follow-up if I could. Mark, great to see the operating leverage coming through, OpEx is growing in the mid-teens, which you think is ahead of headcount growth. So, I wondered if you could just maybe just bridge that for us as we see OpEx growing a little bit ahead of headcount this quarter and probably next quarter? Thanks. Mark Garrett : Yes. I mean, in terms – thanks, Ross. In terms of OpEx growing faster than headcount, I would say a couple of things. Number one, when you hire people during the quarter you don’t get the full effect of their expense in the quarter. They are averaged out over the course of the quarter, so you don’t get the full impact until the following quarter. And as you saw, we did add 500 heads this quarter. There is also a lot of spending that we do that’s non-headcount related, particularly in marketing, and that can come and go despite what we do from a headcount perspective. But let me comment briefly on EPS overall, because I know this will be a follow-on question. We have consistently shown that we have leverage in our model. I think Adobe has been a poster child of that for a number of years now. And with good revenue execution and good cost discipline, I think you have come to expect that from us. When we don’t have very specific short-term investment needs, you are going to see earnings upside like you saw in the back half of this year, both in Q3 and our guidance in Q4. In the longer term, we see a lot of tremendous opportunity that’s going to continue to require investment in sales and marketing. I mean, you saw that in the 500 heads that I mentioned we hired this quarter. So for the longer term, ‘17, ‘18, I would encourage you not to raise your EPS models right now. I would encourage you to recognize that we are going to continue to invest in sales and marketing and wait as we provide ‘17 revenue and earnings guidance later this year. Ross MacMillan : Understood. Thanks so much and congrats again. Mark Garrett : Thanks, Ross. Operator : Your next question comes from Brent Thill from UBS. Your line is open. Brent Thill : Thanks. Shantanu, the Marketing Cloud is set to accelerate into the fourth quarter, and I would assume given the perpetual falloff and more moving to the new model that should continue accelerating into fiscal ‘17. Can you just talk a little bit about your confidence underpinning what’s happening in Marketing Cloud as some of your competitors have shown a pretty material slowdown in their growth rates in their cloud, are you taking share? What’s happening here that’s giving you this confidence? Shantanu Narayen : Well, Brent, I think we continue to be the undisputed leader of the Marketing Cloud. It’s a category that we created. And I think from a unique differentiation, what we provide in terms of both the core content and analytics and all of the personalization software that we are delivering, I just – we continue to execute against that opportunity. I mean, the macro environment, Brent – I mean, people are still talking about digital disruption and how do they help create more personalized experiences for customers, and we are right in the center of that particular tailwind. With respect to the second half of the year, again, it’s playing out as we expected. We told you at the end of Q2 that we had a strong pipeline, which gave us confidence to grow approximately 20% for the year. We were actually able to close deals on an accelerated basis in Q3, which is why you saw upside to our Q3 numbers relative to the target. And we just have to keep executing the way we are, Brent. It’s not for lack of market opportunity in the marketing space and we just have to keep innovating as well. So, that’s what gives us confidence, the market leadership that we have and continued focus on execution. International expansion, I will again continue to say, is a large opportunity for us in marketing and cross-selling existing customers with new solutions. Brent Thill : Thank you. Operator : Your next question comes from Walter Pritchard from Citi. Your line is open. Walter Pritchard : Thanks. Shantanu, I am wondering if you could talk about on the creative side, maybe you will update this at MAX, so I will ask another one if you do. But the Creative users that you have talked about in the past that were still to convert, any update on sort of what is left that you have visibility into conversions of the prior CS users still to go on to CC? Shantanu Narayen : I think big picture Walter, we continue to do a good job of migrating them. As you know, there was a fairly healthy cohort of CS6 customers that continues to be an opportunity for us in the U.S. And we talked about international expansion also as an opportunity. Both Japan and Germany had a good quarter. Now, when we looked at Q3, Japan and Germany grew – run rate units grew greater than the overall units, so that’s continuing to please us in terms of now seeing CS customers in those geographies migrate. Education had another great subscription units quarter, which means we are attracting that next generation of customers. When you look at overall subs in the quarter, it was a very healthy number, so we are attracting new customers to the platform, but even the migration opportunity continues to be one. I think one of the areas where we are executing well is whether you are an existing customer or whether you are a new customer, the work we are doing in terms of delivering new innovative products, what they are seeing with XD, you will see some new announcements as well at MAX that I am not going to preview here today. What we are doing with VR and video, I think that also gives a lot of people the confidence that by adopting the Creative Cloud, it is the one stop shop for all of their Creative needs. So I think that gives us continued confidence that those who haven’t migrated, they will continue to see additional value as we continue to deliver new innovation. Walter Pritchard : Okay, thank you. Operator : Your next question comes from Kirk Materne from Evercore ISI. Your line is open. Kirk Materne : Thanks very much and congrats on the quarter guys. Shantanu, I was wondering if you could just talk a little about where you think we are on the Digital Marketing side in terms of customers moving away from buying sort of point products or best of breed products towards buying more Digital Marketing solutions where you guys obviously I think have an advantage just given the breadth of the product portfolio, can you just talk where we are in that transition in your view and how much of an advantage is that today for you all versus some of the competitors, especially some of the smaller ones out there? Thanks. Shantanu Narayen : Sure, Kirk. I think we mentioned that when we think about big picture what’s happening in the enterprise space, if the first era was all about back office automation and the second era was about what happened with productivity or front office, we really are motivated by this notion that it’s going to be the experience business. And if you are trying to create the experience business, the only way to transform your company is by adopting an entire platform rather than piece-meal trying to buy individual products and trying to fit that together. Virtually every new logo that we get is a multi-solution deal because what they want is a complete offering that enables them to do that transformation. Given the breadth of existing customer base, certainly we are up selling all of them to multiple solutions. But whether it’s a new logo acquisition or whether it’s renewals, most of the deals are now multi-solution deals and much larger revenue to Adobe and value to the customer. So hopefully that gives you some color in terms of the number of solutions that they are all adopting and how that’s certainly migrating. To your point, it is a competitive advantage for us most definitely. Kirk Materne : If I can just ask a really quick follow-up for Mark around that topic Mark, deferred revenue growth has obviously been looking really, really strong, I assume that’s primarily being driven by the strength you have seen in bookings around Digital Marketing, I guess do ETLAs play into that as well I guess from the Creative Cloud side? Thanks. Mark Garrett : Yes. It’s actually both. It’s been driven by Digital Marketing bookings, but it’s also very heavily driven by ETLAs on the Creative side and on the Acrobat side. So it’s really across the board, Kirk. Kirk Materne : Thanks. Operator : Your next question comes from Heather Bellini from Goldman Sachs. Your line is open. Heather Bellini : Great. Thank you. Most of my questions have been answered. But I was wondering, Shantanu or Mark, if you could talk a little bit about – you mentioned piracy reduction earlier in your prepared remarks and I am wondering if you could share with us how much of a tailwind do you see that giving you, is there kind of a framework that we could think about in terms of the impact on top line growth that you can get from piracy reduction and are there things that you are doing that you are changing even more than you were kind of a couple of years ago to stay ahead of the pirates? Thanks. Shantanu Narayen : Sure, Heather. I mean if you look at the macro level and we used to sell approximately 3 million units of Creative Suite a year and if you look at the numbers right now of where we are with Creative Cloud, it’s clear that we have seen significant acceleration. Without a doubt, a large part of that acceleration is people who want Creative Cloud and are no longer pirating Creative products, but are actually as a result of the low price and the value that we are delivering using the entire subscription based offerings. So what we have done from a technical perspective already we have actually ensured that people who download the trials that once the trial expires that they don’t have access to the products. And as you know, we have also shutdown places, online websites where people could buy a repackaged box. So there is no question that we have already addressed piracy in a meaningful way. In terms of the installed base of pirates, I think the numbers for that are all over the map. But I think you can go back and look at the last numbers that we gave in terms of the addressable market and you would see that there is still significant headroom. And the last thing I will mention is I think later this year, we will also make some announcements. There are still a number of countries where we actually only sell CS6 and we are going to start to offer CC in all of those markets. And for the first time we have the ability to offer differential pricing. So this is playing out exactly as we expected. Let’s get the markets that are most developed, let’s address casual pirates, let’s hit the enterprise and then let’s now expand that into emerging markets where there was more piracy and now we have the ability to counter that, both through pricing as well as through technology. Heather Bellini : Thank you. Operator : Your next question comes from Keith Weiss from Morgan Stanley. Your line is open. Keith Weiss : Thank you, guys for taking the question and very nice quarter. What are the things that we were picking up when we were talking to let’s say channel partners was increasing benefit from the roll-off of promotional pricing and good renewal rates on those – as your promotions roll-off and your comments seem to support that, so I was wondering if you could help us think about that in terms the magnitude of the impact, how much are we seeing that in the numbers today and how much we think about that’s occurring on a go-forward basis and how well is that going to sustain into FY ‘17? Shantanu Narayen : Certainly some part of that, Keith is reflected in the ARR. When you think about it, Mark may have mentioned in his prepared remarks that when we think about all of the commercial offerings, the ARPU of all of the commercial offerings are increasing. And that, as you point out is a reflection of high retention rates of people who are moving off of promotions. And again, the strategy very much is let’s have promotions to bring people onto our platform. And once we deliver the value as they retain at the annual boundaries, then we get the additional revenue. So it certainly has had an impact on ARR. The same thing is also true in the enterprise. When we first introduced the enterprise offerings, we had what we would call sort of custom enterprise offering, which was more of a mirror of what they were accustomed to buying with the Creative Suite. As they all move off the 3-year cycle and they are renewing, we are definitely marketing to them the value of the entire Creative Cloud offering. And we have seen adoption of that is fairly high again, which again leads to increased revenue per customer. Keith Weiss : Got it. And if I could perhaps follow-up on that latter comment in terms of the ETLAs to the enterprise market, is there any change in terms of who is able to sell those ETLAs, any expansion of that into the partner channel that we should be aware of? Shantanu Narayen : For the most part, I would say the large enterprise offerings it’s a direct sales force in our sales force. I think if I look at that also moving forward, we are going to be providing more and more of those as self-serve on adobe.com moving forward. I mean the trend in the industry is clear whether it’s us directly or whether it’s through channel partners in addition to very motivated direct sales force. We want to reduce the friction of procuring, of expanding, of administering the Creative Cloud within enterprises. And we will continue to make that easy for people who just come to our website to start small and then grow as their organization grows. That’s very much of the vision of how we look at adobe.com. Keith Weiss : Excellent. Thank you very much. Operator : Your next question comes from Kash Rangan from Bank of America/Merrill Lynch. Your line is open. Kash Rangan : Hey guys. Thanks for taking my questions. Congrats on the quarter. Mark, question for you as it relates to the longer term operating leverage in the business. And clearly you have gotten to a point where I think you mentioned 80% plus of revenues are recurring. And as you have you this recurring revenue business that renews at very high margins, the secondary derivative starts to slow down, although the overall growth still looks pretty good. You don’t have to grow your new subscription revenues quite at the pace that you have been growing before. So therefore that has some positive consequences for acquisition cost and sales and marketing or perhaps are we missing some other consideration in relation to your statement that you continue to see investment opportunities? So, just trying to measure or square off the merits of the subscription model vis-à-vis your comments that we should be more muted as far as how much margin expansion we should be expecting? Thank you. Mark Garrett : Yes. Hey, thanks, Kash. I am not saying you should be more muted. I am saying just don’t get a little carried away based on what we are delivering in the second half of this year at all. Yes, we gave you guys a 3-year model a year ago that shows some pretty significant margin expansion over the next several years and we are ahead of that pace in the back half of this year. As I said because when we don’t have some short-term investment needs we can deliver that to you in the form of upside to EPS and deliver that to shareholders. You are right in 83% recurring revenue model, particularly on the creative side, you are going to over time have less cost of acquisition and you can drive more margin. On the Digital Marketing side as we have discussed, that business is a very different business. We have got a lot of variable cost that comes with that business in the form of hosted infrastructure. It’s going to be a very different margin profile. So, we have got two different businesses with two different margin profiles both growing very fast right now. But nothing has changed from our perspective about our ability to continue to drive more margin in the out years. Shantanu Narayen : And Kash, maybe the one thing I will add is we are clearly seeing the benefits of the stacking effect. When you look at the results for just Q3, I think digital media grew approximately 29%. The Creative grew approximately 39% and certainly the core Creative is growing even faster than that. So very pleased with both new customer acquisition as well as seeing the benefits of the stacking effect in the core subscription revenue stream. Kash Rangan : Congrats guys. Thank you so much. Shantanu Narayen : Thank you. Operator : Your next question comes from Sterling Auty from JPMorgan. Your line is open. Sterling Auty : Yes, thanks guys. Actually looking for the intersection of two questions that I think were asked earlier was just I think Shantanu, you talked about Creative Suite 6 is still – the migration path is still there. Later I think you have talked about Germany and Japan having good quarters. But I want to put those two together and try to understand where are you still seeing the most momentum in the Creative Suite conversion by geography? Shantanu Narayen : I think we continue to see strength across all geographies, Sterling. I think in terms of trying to give some color, Japan and Germany had a good quarter. It was very interesting as Australia where as you know we started the entire process for the Creative Cloud. They had a great new unit growth and run rate and so new customer acquisition is also clearly powering the business. And hopefully those three data points give you – and Rest of World is growing. It’s just – we are seeing nice growth across all of the geographies in the run rate business. Clearly, there is more untapped opportunity in terms of international markets than they are in the U.S., no question, because in the U.S., we have seen tremendous progress. But I don’t want to give anybody the impression that in the U.S., we are not both growing new customers as well as migrating existing customers. Sterling Auty : Got it. Thank you, guys. Shantanu Narayen : Thanks. Operator : Your next question comes from Jay Vleeschhouwer from Griffin Securities. Your line is open. Jay Vleeschhouwer : Thanks. For Mark, would it be fair to say that your pace of hiring could very well accelerate in terms of total heads even as compared – or especially as compared with Q3 adds? When looking, for example, at the number of open positions, right now on in your website we detected a pretty sharp increase year-over-year and sequentially over the past few months in all major regions, Americas, Asia, EMEA, sales and R&D spiking up pretty considerably. And interestingly, Japan is picking up in terms of opening U.K. post-Brexit, picking up in terms of openings. So, again, would it be fair to say that do you think you might even drive the headcount additions, particularly in non-U.S. markets more rapidly? Mark Garrett : Hey, Jay. Yes, without a doubt, the 500 people we added roughly this quarter is the most we have added in a quarter in my recent memory and it’s all being driven by what we have been seeing for quite a while, which is our need to drive sales capacity for both Digital Media and Digital Marketing, drive more marketing and R&D as well for that matter. So, I would expect that to continue and that’s why I made the comment I did about our investment for the next couple of years. We are going to need to make sure we have got the right available funds to invest in that and drive the growth that we are trying to driving these businesses. We are driving 20% revenue growth on the Digital Media side of the business and 30% bookings growth on the Digital Marketing side. Those are pretty significant growth numbers and you have got to have the investment to drive that growth. Jay Vleeschhouwer : Right. For Shantanu, you have spoken at Summit and on other occasions Mark has as well, about your future technology infrastructure meaning you have referred on a number of occasions to defining a common data model, common cloud architecture, investments in data science and so forth. Could you talk about that a little bit in terms of ultimately where do you see the platform going? Is that part of what you were referring to earlier in terms of a frictionless self-service capability that you could offer customers? What do those really mean in terms of functionality and deliverables to the customer? Shantanu Narayen : Well, Jay, I think in terms of how we as a product company continue to innovate for our customers, there is no question that Creative Cloud has been as successful as it is, because not only is it best-of-breed individual products for specific users, but the integration across all of those is unparalleled in the industry in terms of how colors or types of fonts work. Our vision for the Marketing Cloud is exactly the same, which is we are building a data platform that enables all of our products to work seamlessly together. We have made a lot of progress in that space. And the benefit for customers is certainly as they think about a campaign, as they think about customer segments it naturally flows from the analytics product to the target product to the campaign product. And in the enterprise space, we certainly see that our Marketing Cloud, while it’s a leader, we have aspirations for that not to be an island unto itself, but really to be the hub that interconnects all of the enterprise software. And so investing as you point out in these core data platforms to enable our customers to derive value and for us to continue to build a technology moat that will serve us well for many years is very much part of the strategy. And last but not least, customer expectations right now across the globe are that content flows seamlessly from our Creative Cloud into our Marketing Cloud and so we do that. The one other comment I will make you are right, there is a lot of conversation right now about machine learning and AI. It’s something that we have invested in for years. I mean, we wouldn’t be building the magic that we build in Creative Cloud or Creative Suite without very deep technology in terms of machine learning. And the reality is when we think about Marketing Cloud, it’s not about data collection, it’s all about how we are driving insight and predictive, which is another form of machine learning and that’s what’s really fueled our Marketing Cloud business. So continue to invest in deep technology across the company. Jay Vleeschhouwer : Okay, thank you. Operator : Your next question comes from Alex Zukin from Piper Jaffray. Your line is open. Alex Zukin : Thanks for taking my question guys. Shantanu, you mentioned some accelerated deal signings in the quarter. And I guess maybe you can comment on the macro backdrop as you are seeing this year versus last year as some of the other vendors in the space saw some deal pushes and you clearly aren’t seeing that. So maybe just give a comment there and then I have got a quick follow-up. Shantanu Narayen : Yes, Alex, I think when, after Q2, we said as we looked at the pipeline for the second half of the year, it was a healthy pipeline. And we look at it and we have our internal expectations of what’s going to close in Q3 and what’s going to close in Q4. As you know, enterprise software Q4 is the traditionally strong quarter, which again to the question that Brent also asked earlier gives us confidence the strength of the pipeline for the numbers that we said. But I think we executed well against it. And I think it also reflects the importance of our solutions for the customers that we are serving. I mean if you are trying to move your business online, if you are trying to create a more personalized relationship with your customers sure, you can defer the decision. You are only deferring the inevitable in terms of having to invest in technology that helps you automate that process. And so I would say part of it is the offering that we have, part of it is execution that we have. And we have to just continue to be focused on it. Mike Saviage : Operator – sorry Alex, go ahead. Alex Zukin : Yes. I was going to ask a question, you mentioned machine learning and predictive analytics and Shantanu I guess – and kind of in the context of AI, do you see – when you think about the application of data within your product suite, are you thinking more in terms of automation context or insights context, just in general how do you see that playing out in the marketing landscape over the next few years? Shantanu Narayen : I think Alex, for years we have been talking about our platform unique advantage being the combination of data and content. And as we are enabling our customers to have these Marketing Clouds deliver more personalized experience, I think table stakes a few years ago was being to actually just collect that data to the core Web Analytics. Our business is being fueled by not just collecting the data. Our business is certainly being fueled by across campaign and across target. How are we providing a unique insight into our customers, so we have been doing this for years and I think to your point, there are a lot of people talking about it. It’s going to become something that becomes the industry buzz. We have partly been executed against that for quite a while now. Mike Saviage : Operator, we are coming up at the top of the hour, why don’t we take one more question? Operator : Thank you. Your next question is from Derrick Wood from Cowen and Company. Your line is open. Derrick Wood : Great. Thanks for squeezing me in. Shantanu, on the Marketing Cloud, based on our conversations, at least within the enterprise B2C base, it seems like we are moving a bit past the website re-platforming cycle and a bit more towards adding modules on top of AEM and better monetizing the content in the platform, would you agree with this and if so, what does that mean to the kind of the velocity of transaction activity and the type of deal sizes you are seeing. And then maybe correlated but Mark, I think I heard you say you want to increase both more focused on first year contract value and shorten time to go live, could you just flush out a bit more about what you guys are doing and what you hope to yield from it? Mark Garrett : Yes. I will start and then Shantanu can add on. So as it relates to that. I think we have discussed this with you. I know we have discussed this with you in the past, but we want to more closely align revenue to bookings. And as a result to that, our focus has shifted more towards annual subscription value. So the field – our sales force is now compensated more towards annual subscription value. We continue to believe that we are going to hit our 30% ASP bookings growth for the year. And by doing so, that puts revenue more closely aligned to bookings. Shantanu Narayen : And Derrick, as to your question, you are absolutely right. I mean the single point of interaction in the digital world for most customers used to be the website with AEM as you pointed out. What’s becoming table stakes increasingly is having that same kind of personalized experience across all digital channels, whether you are in airlines and that’s the experience in the kiosk or a terminal, whether it’s in retail and that’s the particular experience when you walk into a retail store, whether it’s in food and functionality, whether it you are coming to a drive-in. And so what’s fueling our business is the ability to actually deliver that same experience across each of those different channels. And more specifically, what that means is as people are creating new mobile applications and using our AEM mobile solutions or as people are corresponding more with people and addressing our campaign solutions. And it’s certainly our goal to provide that single stop shop for all communication and all experience across all different channels. It’s very definitely driving it. The one product that I will again single out is Audience Manager really just continues to do extremely well in the enterprise. And I think the reason for that is all enterprises are starting off with this question who are my customers, what are the demographics and how do I set up that up. And Audience Manager is so much more than just DMV. It actually allows enterprise to start off in a business strategy and say, let me get as real clear understanding of my customers and what I am trying to deliver to them across all different touch points. So our vision of the Marketing Cloud and continuing to be the one stop shop, I think it’s paying off and you are seeing that in the results. And big picture, since that was the last question, I think we continue to focus on the large opportunities ahead of us as a company. And we are helping create the world’s content. We are helping enterprises use technology to deliver better customer value. I know Mark and I are pleased with our Q3 results. Our Q4 targets reflect the continued momentum in the business. It’s going to be able to enlist macro environment, continue to reiterate our financial targets. And as you saw, increase our EPS target for the year. And so we think we are in great shape. We remain focused on driving innovation for our customers. I again want to thank customers, partners worldwide for their commitment and to our employers – employees for continuing to drive innovation in this industry. We look forward to seeing you all at MAX. There are going to be some exciting announcements and we will have an update for you, but thank you for joining us today. Mike Saviage : And this concludes our call. Thank you.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,016	4	2016Q4	2016Q4	2016-12-15	2.927	3.078	3.799	3.912	5.6	27.55	27.05	Executives: Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett - Executive Vice President and Chief Financial Officer Analysts : Steve Ashley - Robert Baird Kirk Materne - Evercore ISI Sterling Auty - JPMorgan Brent Thill - UBS Walter Pritchard - Citi Shankar Iyer - Bank of America/Merrill Lynch Stan Zlotsky - Morgan Stanley Jay Vleeschhouwer - Griffin Securities Ross MacMillan - RBC Capital Markets Brian Wieser - Pivotal Research Jack Cogan - Goldman Sachs Michael Nemeroff - Credit Suisse Samad Samana - Stephens Inc. Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Systems Fourth Quarter Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s fourth quarter and fiscal year 2016 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans is based on information as of today, December 15, 2016 and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. FY ‘16 was another great year for Adobe. Our record growth and net income were driven by strong performance in Creative Cloud annualized recurring revenue, continued growth of Adobe Document Cloud subscriptions and strong revenue and bookings for Adobe Marketing Cloud. In Q4, we delivered record revenue of $1.61 billion, which represents 23% year-over-year growth. GAAP earnings per share in Q4, was $0.80 and non-GAAP earnings per share was $0.90. For the year, we grew total revenue to $5.85 billion, which represents 22% annual growth. GAAP earnings per share in FY ‘16, was $2.32 and non-GAAP earnings per share was $3.01. In Digital Media, we are advancing the state-of-the-art for content and setting the standard for creativity and digital documents. We exited the year with over $4 billion of annualized recurring revenue, or ARR. The net ARR increase in Q4 was $316 million and was driven by continued adoption and retention of Creative Cloud and Document Cloud across all customer segments. Creative Cloud is the one-stop shop for creativity and design. And in FY ‘16, we expanded our customer base while continuing to deliver a rapid stream of product innovations. We achieved record Creative revenue of $886 million in Q4. For the year, we achieved Creative revenue of $3.2 billion, which represents 38% year-over-year growth. At the heart of the Creative Cloud is the promise of continuous innovation and the pace at which we are delivering new technology is accelerating. Last month at our MAX Creativity Conference, we unveiled next-generation desktop, mobile and cloud services for designers, photographers and filmmakers as well as sneak previews of creative technologies in the areas of virtual reality, image matching and digital painting. Our Creative customers have always counted on us to turn the future into reality. Creative Cloud is the place designers expect to get the best tools and services in emerging categories like Experience Design and 3D. Earlier this week, we released two public betas, Adobe XD for Windows, the first all-in-one tool for designing, prototyping and sharing user experiences for web and mobile apps; and Project Felix, a new application that enables designers to create photorealistic composites with 2D images and 3D assets. Adobe Stock continues to gain momentum in the multibillion dollar stock image category. In Q4, we launched the Adobe Stock contributor site, a new platform that allows users to upload and sell photos, illustrations, videos and vectors to the world’s largest creative community. We also announced a partnership with Reuters that will bring their expansive video and photography library, across news, sports, business and entertainment to the Adobe Stock service. With creativity exploding across the globe, geographic expansion represents a significant growth opportunity. In November, we launched Adobe Creative Cloud for teens in China. China is one of the world’s largest digital economies and we can now address its extensive community of designers and creatives. We believe everyone is creative and should have the opportunity to express themselves. Adobe Spark, our consumer-friendly web and mobile solution for creating and sharing professional quality animated videos, web stories and social graphics, is gaining traction with small businesses, social marketers and students. We will continue to invest in Adobe Spark, which we see as a key way to reach broader consumer audience as part of Creative Cloud. The world’s leading digital document service, Adobe Document Cloud, leverages the PDF standard we pioneered and enables businesses to transform inefficient paper-based processes to digital. In Q4, Document Cloud revenue was $191 million and we grew Document Cloud ARR to $475 million. Document Cloud represents the modern way for managing digital documents. Core cloud capabilities like mobile and collaboration as well as services like electronic signatures have become a requirement for our customers. As a result, Document Cloud subscriptions now eclipse licensing of perpetual Acrobat software on adobe.com and we expect to see stronger migration among our enterprise customers in the coming year. As part of the ongoing innovation delivered through Document Cloud, this quarter, we rolled out critical new scan functionality in our Adobe Reader mobile apps. In October, we expanded the global footprint for Adobe Document Cloud with the launch of the Adobe Sign service in Japan. In our Digital Marketing segment, Adobe Marketing Cloud is the leader in enabling brands, government agencies and institutions to deliver great digital experiences across devices and channels, whether its financial institutions, retail, travel and entertainment or automotive, entire industries are experiencing digital disruption and aggressively deploying technology to drive stronger brand loyalty and growth. Adobe’s winning formula is built on a unique foundation of content and data, which enables deep customer insights; development and delivery of consistent personalized experiences; and the ability to monitor and optimize business performance in real time. Adobe Marketing Cloud continues to be the most comprehensive offering in the exploding Digital Marketing category with best-in-class solutions in analytics, content management, cross-channel campaigns and data management as well as media optimization. We are seeing strong demand for the Adobe Marketing Cloud across the globe as evidenced by the sold-out crowds at events this quarter in London, Paris, Munich and Tokyo. Major customer wins this quarter included Lufthansa, Pandora, UnitedHealthcare, UPS, U.S. Defense Information Systems Agency and Verizon. In Q4, Adobe managed record 33.5 trillion data transactions, providing us with an unparalleled view into real-time business and cultural trends. Debuting in 2016, the Adobe Digital Price Index has redefined how inflation and consumer goods prices are tracked and measured and has received broad support from the world’s leading economists. Leveraging over 20 billion visits to retail websites, Adobe Digital Insights’ Holiday Shopping Report accurately predicted online sales for this holiday season within a margin of error of less than 0.5%. Adobe measures 80% of all online transactions from the top 100 U.S. retailers and $7.50 out of every $10 spent online with the top 500 U.S. retailers go through Adobe Marketing Cloud. This tremendous volume of data puts Adobe in the unique position to deliver highly accurate, census based online sales totals, pricing and product availability trends each holiday season. Last month, we announced our intention to acquire TubeMogul, a leading demand side video advertising platform, further strengthening our leadership in digital marketing and ad tech. Adobe is currently a leader in search, display and social advertising, planning and delivery with our Adobe Media Optimizer solution. The addition of TubeMogul to our ad tech capabilities will enable Adobe’s customers to maximize their video advertising investments across desktop, mobile, streaming devices and TV. Together, Adobe and TubeMogul will enable our customers to identify the right audience segments and plan, execute and measure paid media performance across any device. We expect the transaction to close in December. In September, we announced a strategic partnership with Microsoft to help enterprises embrace digital transformation. Adobe announced it will make Microsoft Azure, the preferred platform for our cloud services, providing customers with a trusted, enterprise grade global platform and that we will integrate our Adobe Marketing Cloud technology with Microsoft’s Dynamics 365 Enterprise and Power BI. Microsoft announced it will make Adobe Marketing Cloud the preferred marketing service for its enterprise customers and its extensive partner and developer ecosystem. Adobe’s success has been a result of our ability to predict the future. While others are jumping on the machine learning and AI bandwagon, these capabilities have been the foundation of our innovation for decades. Our engineers and scientists are squarely focused on harnessing the massive volume of content and data assets captured in our cloud solutions to tackle today’s complex experience challenges. Last month, we announced Adobe Sensei, a new framework and set of intelligent services for dramatically improving the design and delivery of digital experiences. Adobe Sensei’s services address the critical demands of our creative document and marketing customers from image matching across millions of images to understanding the meaning and sentiment of digital documents to finally targeting important audience segments. Dozens of these intelligent services have been deployed in our products to-date and we are increasingly significant our investment. We also intend to make Adobe Sensei available to our ecosystem of partners, ISVs and developers. Adobe’s success over the decades is in no small part due to the unique culture we have created. In October, we were named a Best Multinational Workplace by the Great Places to Work Institute and this month, we were among the top 10 employers on Glassdoor’s 2017 List of 50 Best Places to Work. We know that a strong workforce is a diverse workforce and we are committed to increasing diversity among our employee base. We have broken new ground in terms of employee benefits like extended parental leave and are implementing new programs, including youth coding and media making initiatives to inspire future female technologists. Being a good global citizen is important to our employees, customers and investors. For the first time, Adobe has been selected as a component of the prestigious Dow Jones Sustainability World Index. For the third year in a row, we received a perfect score on the 2017 Corporate Equality Index report from the Human Rights Campaign Foundation. In light of these accomplishments, Adobe’s brand momentum has never been stronger and we were honored to be one of the five fastest growing brands on the 2016 Interbrand Best Global Brands ranking. FY ‘16 was a great year for Adobe. We are driving growth in each of the large categories we have created. With a $64 billion total addressable market by 2019, our opportunity has never been greater. Our mission to change the world through digital experiences has never been more relevant and our strategy, our technology and our people set us up for continued success. I would like to thank our employees for their dedication and innovation over the past year. We remain incredibly excited about the opportunity ahead. Mark? Mark Garrett : Thanks Shantanu. Our earnings report today covers both Q4 and fiscal year 2016 results. In FY ‘16, Adobe achieved record annual revenue of $5.85 billion, which represents 22% year-over-year growth. GAAP EPS for the year was $2.32 and non-GAAP EPS was $3.01. This performance is the result of strong execution against our strategy and noteworthy achievements including growing Digital Media ARR by $1.13 billion during the year to exit fiscal 2016 with $4.01 billion, well ahead of our original target of $3.875 billion. Achieving 38% year-over-year revenue growth in our creative business and exiting the year with $3.54 billion of ARR. Delivering Document Cloud revenue of $765 million and growing ARR to $475 million, both of which reflect progress against our goal of migrating this to a subscription business. Achieving record Adobe Marketing Cloud revenue of $1.63 billion and 20% annual year-over-year growth. Generating $2.2 billion in operating cash flow during the year, which represents 50% year-over-year growth. Growing deferred revenue to $2 billion and increasing our unbilled backlog to approximately $3.4 billion exiting the year. Together, this represents approximately $5.4 billion of contracted revenue that will be recognized over time and returning over $1 billion in cash to stockholders through our stock repurchase program. In the fourth quarter of FY ‘16, Adobe achieved record revenue of $1.61 billion, which represents 23% year-over-year growth. GAAP diluted earnings per share in Q4 was $0.80 and non-GAAP diluted earnings per share was $0.90. Highlights in the quarter included achieving $316 million of net new Digital Media ARR, record Creative revenue of $886 million, which represent 33% year-over-year growth, record Adobe Marketing Cloud revenue of $465 million, which represents 32% year-over-year growth, strong growth in operating and net income, record cash flow from operations and deferred revenue and 82% of Q4 revenue from recurring sources. In Digital Media, we grew segment revenue by 23% year-over-year. The addition of 316 million net new Digital Media ARR during the quarter grew total Digital Media ARR to $4.01 billion exiting Q4. Within Digital Media, we delivered Creative revenue of $886 million, which represents 33% year-over-year growth. In addition, we increased Creative ARR by $283 million during Q4 and exited the quarter with $3.54 billion of Creative ARR. Driving the momentum with our Creative business was continued strong demand for Creative Cloud across all offerings and routes to market during the quarter, including net new Creative Cloud subscriptions and enterprise contract renewals and up-sells. Creative Cloud ARPU grew quarter-over-quarter across all offerings in Q4. As we outlined at our Analyst Meeting in November, our focus with Creative Cloud continues to be in three key areas growing our core base of users, including migrating the legacy user base of Creative Suite users, addressing piracy and growing our installed base in the education market, driving new customer adoption in adjacent markets with market expansion efforts such as photography plan and using Creative Cloud mobile apps to create awareness and drive new member adoption and growing ARPU and ARR with value expansion services such as Adobe Stock. Some highlights against these goals during the year include 53% year-over-year subscription growth outside the U.S., broadly expanding our base of users by adding more than 1 million Creative Cloud Photography Plan subscribers during the year and growing Adobe Stock revenue by more than 40% year-over-year. With Document Cloud, we achieved revenue of $191 million. Document Cloud ARR grew to $475 million, the highest sequential quarterly growth this year. Driving this growth was adoption of Acrobat subscriptions and value-add services such as Adobe Sign, both of which are benefiting ARR and building a foundation for revenue growth in the future. In Digital Marketing, we achieved record quarterly and annual Adobe Marketing Cloud revenue. Entering the year, we targeted approximately 20% Adobe Marketing Cloud annual revenue growth and approximately 30% annual subscription value, or ASV bookings growth. Included in these targets in FY ‘16 was an expectation of approximately $45 million of perpetual revenue. Relative to our expectations at the beginning of the year, we experienced increased demand for on-premise, perpetual licensed solutions by some customers. When we combine ASV bookings for the year with an overachievement in first year value of perpetual contracts, we achieved 30% bookings growth. In Q4, we achieved Marketing Cloud revenue of $465 million, which represents 32% year-over-year growth. With this Q4 performance in FY ‘16, we achieved 20% annual revenue growth. Mobile remains a key driver for this business. Mobile data transactions grew to 55% of total Adobe Analytics transactions in the quarter. From a quarter-over-quarter currency perspective, FX decreased revenue by $4.5 million. We had $8.1 million in hedge gains in Q4 FY ‘16 versus $3.9 million in hedge gains in Q3 FY ‘16. Thus, the net sequential currency decrease to revenue considering hedging gains was $0.3 million. From a year-over-year currency perspective, FX decreased revenue by $9.1 million. We had $8.1 million in hedge gains in Q4 FY ‘16 versus $1.3 million in hedge gains in Q4 FY ‘15. Thus, the net year-over-year currency decreased to revenue considering hedging gains was $2.3 million. We experienced stable demand across all major geographies during the quarter. In Q4, Adobe’s effective tax rate was 12.5% on a GAAP basis and 21% on a non-GAAP basis. The GAAP rate was lower than targeted due to tax benefits recognized as the result of the completion of certain income tax audits. Our trade DSO was 47 days, which compares to 47 days in the year ago quarter and 45 days last quarter. Deferred revenue grew to a record $2 billion, up 36% year-over-year. Our ending cash and short-term investment position was $4.76 billion compared to $4.45 billion at the end of Q3. Cash flow from operations was a record $696 million in the quarter. During this year, we have been using excess domestic cash to buyback stock and reduce our share count. In Q3, we repurchased approximately 3.2 million shares at a cost of $331 million. We currently have $500 million remaining under our current authority granted in January 2015. Now, I will provide our financial outlook. Entering FY ‘17, we have great momentum and continue to see strength across our three cloud businesses. We are excited about our large addressable markets and are uniquely positioned to drive strong top line and bottom line growth. At our November 2 Financial Analyst Meeting, we outlined our long-term strategy and provided long-term growth rates and preliminary FY ‘17 financial targets. We remain confident in our ability to operationally execute against those targets and we are reaffirming our long-term FY ‘15 to FY ‘18 financial targets today. Since the Analyst Meeting, the U.S. dollar has strengthened considerably. Were it not for this currency fluctuation, we will be reaffirming all of the preliminary FY ‘17 targets we provided on November 2. Based on today’s FX rates, we believe our hedging programs will effectively mitigate the impact of these rate changes in Q1 and Q2. But if they persist, current FX rates will affect our ability to achieve the preliminary annual targets due to the impact in the second half of FY ‘17. As a result, we are providing the following FY ‘17 targets. We expect total revenue of approximately $6.95 billion, which factoring in the extra week in FY ‘16, represents approximately 21% year-over-year growth. We continue to target Digital Media segment revenue growth of approximately 20%. As you know, we measure ARR on a constant currency basis during a fiscal year, and if necessary, we revalue ARR at year end for the current currency rates. FX rate changes have resulted in a $27 million reduction and an updated Digital Media ARR exiting FY ‘16 of $3.99 billion. The effect of this revision is reflected in our updated investor datasheet and we continue to expect approximately 25% Digital Media ARR growth, which equates to approximately $1 billion of net new ARR in the year leading to approximately $5 billion of Digital Media ARR exiting FY ‘17. By quarter, we expect to add approximately $225 million of net new Digital Media ARR in Q1, followed by sequential growth of net new ARR in Q2. Then in Q3, we anticipate a seasonally driven sequential decline followed by strong seasonal growth in the fourth quarter to achieve the target for the year. In Digital Marketing, we continue to target Adobe Marketing Cloud revenue growth of approximately 20% and Adobe Marketing Cloud ASV bookings growth of approximately 30%. Despite the currency impact, we expect to achieve the same FY ‘17 EPS targets we provided on November 2, which are a GAAP earnings per share of approximately $2.85 and non-GAAP earnings per share targeted at approximately $3.75. During the year, we expect revenue and earnings per share to grow sequentially each quarter with the largest sequential increase in Q4. Starting with FY ‘17, we are providing quarterly estimates for our most likely results rather than providing targeted ranges due to the increased predictability in our business. In the first quarter of fiscal year 2017, we are targeting revenue of approximately $1.625 billion. We expect to achieve approximately $225 million of net new Digital Media ARR in Q1. We expect Digital Media Q1 segment year-over-year revenue growth of approximately 19%, and Adobe Marketing Cloud year-over-year revenue growth of approximately 20%. When comparing Q1 FY ‘17 targets, it is helpful to remember that Q1 FY ‘16 had an extra week due to our 52/53-week fiscal year calendar. Factoring the extra week in Q1 FY ‘16, all Q1 FY ‘17 revenue targets represent greater than 20% year-over-year growth. We are targeting our Q1 share count to be approximately 501 million shares. We expect net non-operating expense to be approximately $13 million on both the GAAP and non-GAAP basis. We are targeting a Q1 tax rate of approximately 15% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q1 GAAP earnings per share target of approximately $0.71 and Q1 non-GAAP earnings per share of approximately $0.87. Finally, the targets we are providing today do not reflect our planned acquisition of TubeMogul, which we expect to close in December. We plan to issue updated Q1 and annual FY ‘17 financial targets after the acquisition closes. We strongly believe analysts and investors should wait for the close of the acquisition to combine expected results of both companies into an updated model for the coming year. We plan to host a brief call to discuss our strategy and targets that factor in items such as a stub quarter period and accounting implications. In summary, 2016 was another strong year for Adobe. We are the market leader with all three of our cloud solutions and we are executing well against a large and growing addressable market. We are excited about what lies ahead for Adobe and look forward to sharing more progress with you in the coming year. Mike? Mike Saviage : Thanks Mark. If you wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056. Use conference ID number 25369759. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5.00 p.m. Pacific time today and ending at 5.00 p.m. Pacific time on December 21, 2016. We would now be happy to take your questions. And we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] Your first question comes from the line of Steve Ashley with Robert Baird. Please go ahead. Your line is open. Steve Ashley : Thanks so much for taking my question. I was going to look at the Creative Media business, you are hitting on all cylinders, I mean the Creative business is strong, you have strengthened education, Document is coming up the curve, I was going to ask about the consumer opportunity there, can you remind us what you have today in consumer and if there is an opportunity to maybe push out and expand how far you are pushing the consumer market in the future? Thanks. Shantanu Narayen : I am happy to take that, Steve. You are right and thank you for the acknowledgment of how we are executing against the Creative business. From our point of view, Creative Cloud is very much about not just migrating the core customer segment, but significantly through market expansion, making sure that we are targeting new customers. I would point out two or three different initiatives in that space. The first one clearly is Creative Cloud Photography Plan. As you know, we used to have Lightroom and Photoshop Elements, we are increasingly seeing those consumers adopt Creative Cloud Photography Plan. That continues to do really well in terms of the new customer acquisition that we have. Second category that I will talk about are products like Adobe Spark, we are seeing more and more people who have a story to tell, wanting to use Adobe Spark. And I think in this year, you will see that also start to get integrated and folded into the Creative Cloud much like mobile apps are. They represent a big customer acquisition and adoption and migration opportunity. And the third, I have continued to impress upon education. Education as a segment does really well in Creative Cloud. It’s our next-generation or whether it’s K-12 students or higher ed, as they get exposed to our products, clearly as they enter university or the marketplace, they are using our products, all of which we look at as positive trends for the future. Steve Ashley : Great. Thanks so much. Operator : Your next question comes from the line of Kirk Materne with Evercore ISI. Please go ahead. Your line is open. Kirk Materne : Thanks very much and congrats on a great fiscal year to you all. Shantanu, the last time we met you, it’s right the week before the election and I think there is a lot of folks, wondering what you guys have seen sort of post the results from a macro perspective, I know you guys are sort of operating and serve your own cadence right now through your products and your strategy, but I was just kind of curious, I guess especially in the Digital Marketing world where you guys are obviously talking to a lot of enterprises, is there any change in tone or I guess projected spend or anything like that, I was just curious, if you could give us kind of an update on that? Thanks. Shantanu Narayen : Sure. Kirk, I have seen a rally in the stock market as well, which I think all of us have certainly experienced. But in addition to that, I would just continue to emphasize this notion of how all enterprises are being transformed by what’s happening in digital and the urgency with which they really need to think about technology that they can leverage to become more of an experienced business. I think that continues to be unabated. As you saw, we had a pretty strong Q4 revenue growth over 30% year-over-year in the Digital Marketing business. And I think the opportunity continues to be one that we are excited about not just in the U.S. but internationally as well, so nothing that we have seen either just before the election or post election changes are belief in the large opportunity and our continued execution in that space, Kirk. Kirk Materne : Thanks very much. Operator : Your next question comes from the line of Sterling Auty with JPMorgan. Please go ahead. Your line is open. Sterling Auty : Yes. Thanks. Hi guys. In your prepared remarks, you mentioned the overage or the higher than expected demand on-premise perpetual in the Digital Marketing side, how much of that happens in the fourth quarter and if you normalize, how would you kind of characterize the bookings and revenue relative to what your expectations were? Shantanu Narayen : Sterling, when we look at the entire year first, let me reflect that we continue to think that we both have the most comprehensive offering. And we are pleased with both the revenue and the bookings growth for the year. I do want to clarify that we think the cloud remains the long-term right offering for our customers, but it is a not. The fact that we have an on-premise solution, we continue to think it’s a competitive advantage. And globally, it’s hard to predict which option customers might prefer on a quarter-by-quarter basis. But I want to reiterate, it’s all from our point of view, good revenue. When we look at the different components of revenue in the Marketing Cloud and you look at subscription, which we think is the healthiest long-term predictor and then you look at perpetual and consulting. The subscription bookings revenue grew 29% year-over-year in FY ‘16, so stronger than the overall 20%. And if you actually go back to what Mark showed at the FA meeting and look at the pie chart, it was exactly in line with what we had predicted for Q4. Relative to the beginning of the year to your question, we certainly over achieved a little bit in perpetual revenue relative to subscription bookings. However, when you normalize that and you take given perpetual revenues a multiyear commitment and look at just the first year component, I think it’s really small. And so relative to overall growth, we feel good about it. The mix was slightly different relative to what we thought at the beginning of the year. Sterling Auty : Got it. Thank you. Operator : Your next question comes from the line of Brent Thill with UBS. Please go ahead. Your line is open. Brent Thill : Thanks. Shantanu, the Asian business has been very strong in the last couple of quarters and I was curious if you could just talk through the fall through that you are seeing there, I know you have also made a bigger push into China where many software companies have not been successful for a lot of reasons, can you just talk a little bit about what you are seeing there so far, as you push more aggressively to China? Shantanu Narayen : Sure. Brent, I think the two things that we factor in, the first is as we have always stated when we first released Creative Cloud, adoption of Creative Cloud in Asia lagged adoption of Creative Cloud in the U.S. and UK for example, as markets. We now are pleased with the adoption that we are seeing. Australia was always a strong market. Australia continues to be a very strong market. So as it relates to Creative Cloud, as we said even having it in China right now, it was long overdue and the fact that we now have Creative Cloud for teams in China, I think shows our commitment to the Chinese digital economy, which we continue to think is one of the largest, so we feel good about it. The other large opportunity as you know, for us is in the Digital Marketing. And that’s driven by two different phenomena. The first phenomenon is as we increasingly have global agreements with U.S. multinationals, they expect the climate of our solutions, whether it’s in retail, financial services or other places to also be true in China and in India and in Australia and Southeast Asia. So that’s continuing to drive some growth. And then even local companies in all of those markets as they realize mobile in particular there and the digital disruption there. There is excitement around our products. So in Digital Media, it’s all about the adoption of Creative Cloud and Digital Marketing. It’s both about global adoption of our Digital Marketing solutions as well as local companies increasingly recognizing that they have to migrate to digital with mobile being the key driver there. Brent Thill : Thank you. Operator : Your next question comes from the line of Walter Pritchard with Citi. Please go ahead. Your line is open. Walter Pritchard : Thanks. Shantanu, I am wondering if you can talk about the ETLA performance in the fourth quarter and your expectations in terms of ETLA as a part of that $1 billion in incremental ARR next year? And specifically trying to figure out if that – if the new ETLA business is still growing. I know you are kind of coming up on some renewals and so forth there. I just wanted to get a sense of the trajectory? Shantanu Narayen : Net summary, Walter, very strong quarter in Q4, I think driven by two different phenomena. The first is 3 years ago when we had first introduced the ETLA program for our customers it was really more a reflection of what they were licensing for Creative Suite. So I would call them more of these custom solutions, which reflected what versions of different products that we are using. Starting in fiscal ‘16, we move to a more complete solution which is people were licensing all of the products and the fact that it was integrated. The field organization did a really great job of articulating the benefits of moving to the entire complete solution. And the second thing that actually happened in the year was also true-ups, which is people are finding that as they are deploying more and more of Creative Cloud, they were volunteering during true-ups so new logos as well as moving from what I would say, custom to complete and clearly resulting in an increase in ARPU for the enterprise. And we continue to believe that, that represents a large opportunity in the U.S. and internationally for FY ‘17. Walter Pritchard : Thank you. Operator : Your next question comes from the line of Kash Rangan with Bank of America/Merrill Lynch. Please go ahead. Your line is open. Shankar Iyer : Hi, this is Shankar on behalf of Kash. I have a question on your overall margin profile as you look into the next few years. You mentioned in your prepared remarks about the increased investment that you are going to make in Sensei and Adobe Spark and whole lot of other products. But if you also look at the large down potential and the potential that as your partnership that can drive your Marketing Cloud and also your margins down over time, what’s the leverage in the model and can we expect an operating margin to be in the 40% to 45% range there by the end of the decade? Mark Garrett : Hey, it’s Mark. Thanks for the question. I am glad I got one. I was getting ready to go home. So first, we are extremely proud of our ability to be one of the only, if not the only cloud companies that can grow significantly on top line and bottom line and the fact that we got to $3.01 this year and being well ahead of our guidance is something that we are very proud of. We do have room in the model to invest in the businesses that we need to invest in. And if you look at next year’s guidance and you do the P&L based on what we just told you, you are going to come up with operating margins that are increasing by around a point from this year, so from 34% to 35%. We gave you guidance for ‘18. You can see that margins continue to improve from there. I am not going to say at this point that we are going to go back to 40%, which is where we were in 2008, but you can see that there is still tremendous leverage in our model and we feel very good about that. Shankar Iyer : Thank you. Operator : Your next question comes from the line of Keith Weiss with Morgan Stanley. Please go ahead. Your line is open. Stan Zlotsky : Hey, guys. Good afternoon. This is Stan Zlotsky sitting in for Keith Weiss. So, I actually wanted to ask a question on the Document Services business, the ARR that you added in Q4 was very impressive. You guys had mentioned in your prepared remarks, the fastest and the most that you have added all year, so what was the driver of that outperformance in the quarter? And more broadly, as you moved the Document Services business to subscription, how are you thinking about that versus the kind of strategy that you adopted moving to Creative Cloud business to subscription as well? So, thank you. Shantanu Narayen : Yes, I think two comments come to mind there. First is it was a very strong year. And if you look at just the Document Cloud segment, ARR, it probably under-represents the momentum that we have with the Document Cloud and Acrobat businesses because as you know, significant number of people also use Acrobat DC when they are using the Creative Cloud. So big picture, it was driven by both the adobe.com where we have very dramatically made the switch from people buying the perpetual product to people buying the subscription offering as well as enterprise and the adoption of new services like Adobe Sign. And so when you look at the ARR, I think the ARR growth was over 20% for the year. And when you think about the unit growth that we are seeing in it, it just reflects that PDF as a standard has continued to be the win, which people share it. For those on the call, I would also really recommend, you try out our new mobile apps and the scan functionality where it’s I would say one of the easiest ways for people to create a PDF out of any picture that they might have using the camera. So continued innovation I think in that space just reflects as paper to digital is this macro trend. We are very uniquely positioned to capitalize on that. Mike Saviage : Next question, please. Operator : Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead. Your line is open. Jay Vleeschhouwer : Thank you. Mark, don’t go home yet. I have a question for you. So the question concerns cash flow. Mike Saviage : Jay, it’s Mike. I am glad you are in our call, not the Oracle call like others. Thanks. Jay Vleeschhouwer : Okay, you are very welcome. So, you just grew your GAAP operating cash flow by about $800 million in ‘16. And the question is how are you thinking about cash flow in ‘17? Do you think you could achieve a similar increment even considering all the investments of course that you are talking about, particularly in terms of geographic expansion in Asia, and of course, R&D? Mark Garrett : Yes, Jay. Thanks for the question. Obviously, we had extremely strong cash flow on the year, really good cash flow in Q4. As I look into next year, I expect very strong cash flow again. I will say, I am glad you asked the question, I will say just so everybody understands cash flow from Q4 to Q1 always naturally declines. We have a lot of payments that get made in the first quarter for commissions and bonuses and things like that. So you should expect a pretty substantial decline just sequentially, but I do fully expect another strong cash flow year next year. Jay Vleeschhouwer : Okay. Maybe just as a follow-up, could you talk about perhaps the non net income components of that? I mean, how are you thinking in terms, for example, of deferred in particular? Mark Garrett : Again, I expect deferred to continue to increase as we drive bookings faster than we are driving revenue. Jay Vleeschhouwer : Okay, good. Thanks very much. Operator : Your next question comes from the line of Ross MacMillan with RBC Capital Markets. Please go ahead. Your line is open. Ross MacMillan : Thanks for taking my question. Mark, when we look at ARR, big picture I guess is that we added about $1.1 billion this year, ‘16, about the same level as fiscal ‘15. We are talking about $1 billion in ‘17, so there is really very little decay in the rate of new ARR being added. And I know you are not yet talking about the year even further out. But how should we be thinking about that kind of pace of moderation shall we see in that ARR increment? And the question really goes to this sort of notion of where we are both in terms of new user adds and base transition? I am just curious to just your high level thoughts. Mark Garrett : I mean, we have – like you say, we have been consistently adding around $1 billion. And we feel very good about that number. We continue to attract new users. We continue to drive higher ARPU. We are getting people off of promotions on to full price. We are adding value-add services like Stock, all of those things help drive that ARR number. Retention helps drive that ARR number. So, there is lots of different ways that we can do that. And as you know, we are addressing a much bigger TAM than we were addressing a number of years ago. So all of that plays into our ability, we believe to continue to drive that kind of net new ARR. Ross MacMillan : And then just one other just follow-up quickly, just on the seasonality of ARR this year, I think this will be the first year where we actually see decline in fiscal Q3. Is that just the base effect like the numbers are getting bigger, are there any particular things this year we should think about as we transition Q2 to Q3 that maybe we didn’t see last year or the prior year? Mark Garrett : Yes, there is nothing new. We are just trying to make sure we incorporate seasonality. I mean Q3 is a slower seasonal quarter for buying for us and we just want to factor that in. Ross MacMillan : Okay, thanks again. Congratulations. Shantanu Narayen : Thank you. Mark Garrett : Thanks Ross. Operator : Your next question comes from the line of Brian Wieser with Pivotal Research. Please go ahead. Your line is open. Brian Wieser : Thanks for taking the question. Following the TubeMogul acquisition, I was just wondering if you could talk a bit about any other aspects of that type you think you maybe emphasizing investment in whether internal or external and may be relatedly, Tube made a pretty strong focus as an independent company on the demand side orientation, given the business you have on Primetime, I am wondering if you expect it will have some supply side orientation as well? Shantanu Narayen : I think at this point Brian, what I would say is we are excited about the TubeMogul acquisition. And we are excited about the long-term video as well as data opportunity. Just to highlight from our point of view, TubeMogul enables – it’s more heft in our Ad Tech platform, which is a key part of as we are targeting the CMO or the Chief Revenue Officer or the Chief Digital Officer at an enterprise and adding to what we have in display, search and social, so that’s good. To your point, we do have now more end-to-end capabilities all the way from video delivery to monetization for our publisher as well as our advertiser customers. And I think what’s perhaps more strategic, the integration between their DSV offering and our DMV, we are seeing more and more people wanting to integrate with our industry leading audience manager DMV. That has really become in fiscal ‘16, a driver of the adoption of the platform. And so I think our goal when this closes, will be to share more about what we are planning to do strategically. But big picture, it just enables us to be more of a trusted platform for the Chief Marketing Officers and Chief Revenue Officers. And to enable both personalization in terms of delivery and better segmentation in deriving value from all of the data that they have. So excited about it and we will say more about that after we close. Brian Wieser : Great. Thank you very much. Operator : Your next question comes from the line of Heather Bellini with Goldman Sachs. Please go ahead. Your line is open. Jack Cogan : Thanks. It’s Jack Cogan filling in for Heather. So you mentioned Creative Cloud ARPU continues to grow sequentially, I just wondered if you could rank order the drivers behind this, I know you mentioned that users on promo pricing, renewing at full price, new offerings like Stock, maybe if you can just put into context what sort of the biggest drivers are and how long we should expect a tailwind like the promo users renewing at full price to exist? Thanks. Shantanu Narayen : All of them are clearly driving the transition of the business to ARR. I would say people are migrating off of the promotional pricing. And as long as they continue to retain to full price, that’s certainly one of the large drivers. I think we talked about enterprise as one of the large drivers. The mix as it moves from single app to complete is another driver. So hopefully that gives you a little bit of color. And that’s why our strategy of getting more and more people on to the platform, we actually did fewer promotions in the quarter, they were more targeted promotions, so they were successful. And that gives you some color, I think. Stock and Sign are starting to become reasonable ARR and we expect continued growth in both those areas as well. Jack Cogan : Thank you. Operator : [Operator Instructions] Your next question comes from the line of Michael Nemeroff with Credit Suisse. Please go ahead. Your line is open. Michael Nemeroff : Hi guys. Thanks for taking my questions. Just building on the last one, so some recent survey work that we have done suggest that the majority of enterprises have yet to upgrade to Windows 10, but they plan to do so within the next 12 months to 24 months, so I am just curious, how much of the as yet converted suite days is running Windows versus iOS and do you expect because I didn’t hear you mention in the last answer that those Windows 10 upgrades would drive some of the ARR growth in fiscal ‘17? Shantanu Narayen : I think big picture, what I would say in that particular space is whenever there are hardware transitions or software transitions with significant new functionality, they always represent opportunities for us to accelerate migration. When people look at Windows in particular, I think what’s most exciting to them is in addition to the incredible hardware that Microsoft and other companies are doing, the fact that it’s touch-enabled, has really made a very significant difference. Video capabilities also in that platform are just so powerful that there is clearly migration from the high end proprietary video systems into PCs, so that hopefully gives you some color. I think Apple continues to innovate. But with Windows 10, as people migrate, it always is an opportunity for us to work with that transition team, to make sure that they also migrate to Creative Cloud. Michael Nemeroff : Thank you very much. Mike Saviage : Operator, we are coming up on to the top of the hour. Why don’t we take one more question? Operator : Your last question comes from the line of Samad Samana with Stephens Inc. Please go ahead. Your line is open. Samad Samana : Hi. Thanks for taking my question and squeezing me in. I apologize if my question has already been asked. I jumped on late. But could you give us any idea, you gave that 1 million use of Photoshop subs that you added on your photography package, maybe any color on just what the full year trend looks like for full Creative Cloud adds and if there is any change in either the retention rate that you saw there or the add-on rates for the Adobe Stock package that the Creative Cloud packs that included Stock? Thank you. Shantanu Narayen : I think with respect to both the addition of subs as well as the migration of the business, all of them just continue to be really powerful. If I had to give you a little bit of color as it relates to what happened in retention, I think in 2011 when we first outlined the opportunities, we estimated at that point that even at 80% retention rates for the core Creative it would be great for the business. Clearly, retention for the core Creative is higher than that. And in fact, for the entire base, that includes – if you could mute your line also, that would be great. Thank you. And so what I said was where retention for the core Creative is really higher than that. And when you think about it for the entire base that includes consumers, it’s also higher than 80%. So as we look at retention, it’s actually a very good indicator of the core health of the business. And we are pleased with that. With respect to the Creative Cloud Photography Plan, it just continues to be a very vibrant way for us to attract new customers to our particular platform. Shantanu Narayen : And since that was the last question, for me my summary remarks would be while FY ‘16 was clearly a great year, in many ways I am even more excited about the long-term opportunities that we have created for ourselves as a company. When we think about the two big areas of focus for Adobe empowering people to create and transforming how businesses compete, it just represent massive opportunities in our content and data platform really allow us to uniquely address this need. On the Creative business, just continuing to enable any individual who has a story to tell, to tell them across any medium, any device. And on the enterprise side, enabling them to leverage technology to reinvent themselves as an experienced business, represent large unmet needs. I feel good that we are innovating while staying in an extremely select group of people and companies that are delivering impressive both top line and bottom line growth. I would like to thank our customers, partners, employees and investors and wish you all a happy holiday season. Thank you for joining us. Mike Saviage : And this concludes our call. Thanks everyone.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,017	1	2017Q1	2017Q1	2017-03-16	3.178	3.283	4.027	4.16	6.1	28.22	29.35	Executives: Mike Saviage - Vice President of Investor Relations Shantanu Narayen - President and CEO Mark Garrett - Executive Vice President and CFO Analysts : Kash Rangan - Bank of America Merrill Lynch Sterling Auty - J. P. Morgan Alex Zukin - Piper Jaffray Walter Pritchard - Citigroup Heather Bellini - Goldman Sachs Ross MacMillan - RBC Capital Markets Keith Weiss - Morgan Stanley Jay Vleeschhouwer - Griffin Securities Samad Samana - Stephens Inc Derrick Wood - Cowen and Company Brent Bracelin - Pacific Crest Securities Pat Walravens - JMP Securities Kirk Materne - Evercore ISI Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Systems’ First Quarter Fiscal 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I would now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon. And thank you for, joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s first quarter fiscal year 2017 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately one hour ago. We’ve also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to Adobe’s Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans, is based on information as of today, March 16, 2017, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release, and in our updated investor datasheet, on Adobe’s Investor Relations Web site. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations Web site for approximately 45 days, and is a property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks Mike and good afternoon. Adobe had an outstanding first quarter with record revenue of $1.68 billion and record profit, GAAP earnings per share in Q1 was $0.80, and non-GAAP earnings per share was $0.94. We continue to execute well against our strategy, and are driving momentum across our entire business. Digital transformation has created a tailwind for Adobe among a diverse spectrum of customers in a broad number of industries, from students, to designers, to the public sector, and the world’s largest brands. Once the domain solely of professionals, today everyone is a creator; from the teenager doing a school photography project; to the small business owner, prototyping her Web site to the film-maker; working on his first documentary; and designers become a critical element in the fabric of our lives. Design is the starting point for every connection we make, and great design requires innovative technology. At the same time, massive amounts of data, the proliferation of devices and skyrocketing customer expectations, are forcing enterprises to completely rethink their business strategies. To forge stronger customer connections that lead to brand loyalty and growth, forward-looking enterprises are reimagining the experience they provide to their customers. At Adobe, we’ve have always known that a great customer experience is the differentiator that separates market leaders from the pack. At the center of every great experience are customer intelligence and amazing design, and these are Adobe’s core competencies. Our mission to help our customers design and deliver great experiences has never been more relevant as is reflected in our outstanding Q1 results. In Digital Media, we continue to be the undisputed leader in helping customers inject creativity into their jobs, schoolwork and their daily lives. We achieved a record $1.14 billion in Digital Media revenue in Q1 and exited the quarter with over $4.25 billion of Digital Media annualized recurring revenue, or ARR. The net ARR increase in Q1 was $265 million, and was driven by continued strength in our Creative Cloud business. Creative Cloud is the one-stop shop for creatives the world over and we continue to execute against our strategy of migrating CS customers, expanding into new market segments, and adding value through new services. In Q1, Creative Cloud ARR growth was driven by strong performance in the SMB segment with our Creative Cloud teams offering and international growth, as well as strong retention of existing subscribers. This year, two of Adobe’s iconic creative apps are celebrating anniversaries. In March, Adobe Illustrator, the industry-standard vector graphics app that lets you create logos, typography, and complex illustrations for print, web, video, and mobile, celebrated its 30th anniversary. 30 years of Illustrator projects are visible everywhere across the world, from billboards on U.S. highways to magazine covers in Tokyo. More than 180 million graphics are created monthly with Illustrator. Earlier this week, we celebrated Premiere Pro’s 25th anniversary. Premiere Pro is the world’s leading video production solution, and continues to grow its footprint across every video segment. Premiere Pro was the official editing tool of the 2017 Sundance Film Festival in January. Premiere Pro’s virtual reality workflows are seeing strong adoption with the majority of the films in the Virtual Reality category at Sundance having used it in their creative process. As part of our year-long celebration, we are partnering with the Grammy-award-winning band, Imagine Dragons, which just released the music video for its newest song, Believer. Earlier this week, we announced that creatives in 27 countries will have the chance to take the raw video footage from the original video and cut their own version. Our Adobe Stock service business continues to accelerate. In the past year, we have grown Adobe Stock assets to more than 60 million and in January, we announced a partnership with 500px, a global online photography community, which expands Adobe Stock’s Premium collection. The world’s leading digital document service, Adobe Document Cloud enables businesses to reinvent inefficient paper-based processes. In Q1, Document Cloud revenue was $196 million and we grew Document Cloud ARR to $493 million. Acrobat units across Creative Cloud and Adobe Document Cloud combined, again grew double-digits year-over-year. This achievement was driven by new customer acquisition with our subscription model and the funnel of users created by the broad use of PDF and the proliferation of Adobe Reader across mobile devices. In February, in conjunction with the Cloud Signature Consortium, we unveiled the world’s first open cloud-based digital signature standard, available in any browser and on any device. We announced new functionality in Adobe Sign that enables users to create end-to-end business workflows, such as advanced document routing, online collaboration and Microsoft SharePoint integration. Adobe Sign now includes mobile tools, powered by Adobe Sensei, for scanning, reading, routing and signing documents. Deep intelligence fueled by trillions of data transactions are the foundation of our Digital Marketing business. We drove a record $477 million in Adobe Marketing Cloud revenue in Q1, which was 26% year-over-year revenue growth. Adobe Marketing Cloud continues to lead the category and be the most comprehensive offering for global brands, government agencies and institutions that need to deliver personal, consistent and relevant experiences to their audiences everywhere and every time they connect with them. Adobe Marketing Cloud features best-in-class solutions in analytics, content management, cross-channel campaign management and media optimization. We managed more than 100 trillion data transactions on behalf of our customers over the past year across our Adobe Marketing Cloud solutions. In February, Gartner recognized Adobe as a leader in its 2017 Magic Quadrant for Digital Marketing Hubs research report. For the third consecutive time, Adobe was ranked the highest in completeness of vision axis among the 22 companies that were evaluated. Also in Q1, Adobe was recognized as a Leader in the Forrester Wave report on Web Content Management systems, receiving the highest score. Thanks to the completeness of our offering, our continued innovation and our growing partner network, we continue to see strong market momentum, with major customer wins this quarter at Dick’s Sporting Goods, Mercy Health, Hutchison UK, Autotrader.com, Computer Sciences Corporation, ADT and the University of Michigan. In December, we completed our acquisition of TubeMogul, a leader in demand-side video advertising. We achieved strong Q1 TubeMogul revenue, and we are hard at work integrating TubeMogul with our current Adobe Media Optimizer solution. As a combined advertising solution, we will enable Adobe’s customers to optimize their video, search and display advertising investments across desktop, mobile, streaming devices and TV. Next week in Las Vegas, we will conduct our largest Adobe Summit ever, with more than 12,000 attendees, including more than 1,000 of our global partners. Executives from top brands, including the NBA, National Geographic, T-Mobile and Facebook will take the stage and we’ll give an update on our strategic partnership with Microsoft. We’re continuing to aggressively invest in the Adobe Cloud Platform and Adobe Sensei, our unified artificial intelligence and machine learning framework and intelligent services. Our trillions of content and data assets, along with our deep category expertise in the markets we serve, give Adobe Sensei a unique ability to help customers tackle complex experience challenges. We plan to unveil new Adobe Sensei capabilities at Adobe Summit. We will also provide an update on our adobe.io capabilities for partners, ISVs and developers, who can utilize our open platform to develop their own applications. This level of innovation can only come from talented, creative and dedicated employees. Last month, we held our internal Tech Summit where we announced our commitment to train every one of our technical employees in artificial intelligence fundamentals. We also demonstrated the incredible work happening across the Company. Last month, we were included on Fast Company’s Most Innovative Companies list, and last week we were honored to be named to the Fortune Best Places to Work list for the 17th year. Adobe would not be the Company it is today without our rich diversity of employees, and that continued diversity is vital to our future. I would like to thank all our employees for the role they play in our continued success. To create an exceptional customer experience, you need a potent combination of deep intelligence and amazing design. These are our unique capabilities, and our opportunity has never been greater. We have the technology leadership, partner ecosystem and customer relationships, to fundamentally reshape how individuals, brands and institutions transform themselves in the 21st century. Q1 was a great start to what we believe will be another great year for Adobe. Mark? Mark Garrett : Thanks, Shantanu. In the first quarter of FY17, Adobe achieved record revenue of $1.68 billion dollars, which represents 22% year-over-year growth. GAAP diluted earnings per share in Q1 was $0.80 and non-GAAP diluted earnings per share was $0.94. When comparing Q1 FY17 and Q1 FY16 results, it is helpful to remember that our year-ago quarter had an extra week due to Adobe’s 52/53 week fiscal year calendar. Factoring in the extra week a year ago in Q1 FY16, year-over-year revenue growth in the quarter was greater than 25%. Highlights in Q1 included; achieving $265 million of net new Digital Media ARR; record Creative revenue of $942 million; record Adobe Marketing Cloud revenue of $477 million; strong year-over-year growth in operating income and net income; record cash flow from operations and deferred revenue; and 85% of Q1 revenue came from recurring sources. In Digital Media, we grew segment revenue by 22% year-over-year. The addition of $265 million net new Digital Media ARR during the quarter grew total Digital Media ARR to $4.25 billion exiting Q1. Within Digital Media, we delivered Creative revenue of $942 million, which represents 29% year-over-year growth. In addition, we increased Creative ARR by $244 million during Q1 and exited the quarter with $3.76 billion of Creative ARR. Driving the momentum with our Creative business was continued demand for Creative Cloud across all offerings and routes to market during the quarter. Q1 ARR performance was driven by strong subscription adoption and retention; strength with Creative Cloud for teams, particularly in Europe; and continued growth with Adobe Stock. Creative Cloud ARPU was either steady or grew quarter-over-quarter across all offerings in Q1. With Document Cloud, we achieved revenue of $196 million. Document Cloud ARR grew to $493 million exiting Q1. Driving this growth was continued adoption of Acrobat subscriptions and value-add services, such as Adobe Sign, both of which are benefitting ARR and building a foundation for revenue growth in the future. In Digital Marketing, we achieved record Adobe Marketing Cloud revenue of $477 million, which represents 26% year-over-year growth. TubeMogul added $32 million of revenue in Q1, which was $13 million above our target of $19 million. Approximately $10 million of the upside was due to some of the TubeMogul revenue being recognized on a gross basis in the quarter rather than on a net basis. Excluding the extra $10 million of gross TubeMogul revenue, year-over-year Adobe Marketing Cloud revenue growth was 24%, which was in line with our Q1 target. As we discussed on our TubeMogul conference call in January, we intend to recognize TubeMogul revenue on a net basis. Due to some ongoing contractual commitments, there will be some small gross revenue amounts through year-end. Mobile remains a key driver for our Marketing Cloud business; mobile data transactions grew to 56% of total Adobe Analytics transactions in the quarter. Total data transactions in Q1 grew to $41.3 trillion, and in the trailing four quarters, data transactions with our Marketing Cloud solutions exceeded $100 trillion. From a quarter-over-quarter currency perspective, FX decreased revenue by $14.8 million. We had $18.3 million in hedge gains in Q1 FY17 versus $8.1 million in hedge gains in Q4 FY16; thus a net sequential currency decrease to revenue considering hedging gains was $4.7 million. From a year-over-year currency perspective, FX decreased revenue by $11.9 million. We had $18.3 million in hedge gains in Q1 FY17 versus $3.2 million in hedge gains in Q1 FY16; thus the net year-over-year currency increase to revenue considering hedging gains was $3.2 million. We experienced stable demand across all major geographies during the quarter. In Q1, Adobe’s effective tax rate was 13.5% on a GAAP-basis and 21% on a non-GAAP basis. The Q1 GAAP rate was slightly lower than targeted due to Adobe’s adoption of the new accounting standard affecting taxes related to equity-based costs. Our trade DSO was 46 days, which compares to 42 days in the year-ago quarter, and 47 days last quarter. Deferred revenue grew to a record $2.06 billion, up 28% year-over-year. Our ending cash and short-term investment position exiting Q1 was $4.65 billion. Cash flow from operations was a record $730 million in the quarter. In Q1, we repurchased approximately 2.2 million shares at a cost of $238 million. We have $300 million remaining under the January 2015 authority, after which we will begin repurchases under our new $2.5 billion authority granted in January 2017. Now, I will provide our financial outlook. In the second quarter of fiscal year 2017, we are targeting revenue of approximately $1.73 billion. We expect to achieve approximately $290 million of net new Digital Media ARR in Q2, which represents both sequential and year-over-year growth in net new ARR achievement. We expect Digital Media Q2 segment year-over-year revenue growth of approximately 24%, and Adobe Marketing Cloud year-over-year revenue growth of approximately 26%. We are targeting our Q2 share count to be approximately 499 million shares. We expect net non-operating expense to be approximately $15 million on both a GAAP and non-GAAP basis. We are targeting a Q2 tax rate of approximately 24% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q2 GAAP earnings per share target of approximately $0.66, and Q2 non-GAAP earnings per share of approximately $0.94. In summary, Q1 was an amazing start to what we believe will be another record year for Adobe. We remain bullish about our prospects for the rest of the year and beyond. Mike? Mike Saviage : Thanks Mark. Next week, Adobe will host its annual Digital Marketing Summit in Las Vegas, with the opening day keynote on the morning of Tuesday March 21st. We are also hosting an informal Q&A session for financial analysts and investors in attendance on Tuesday afternoon. If you would like to attend Summit, please send an email to ir@adobe.com for registration information. If you are unable to attend in person, keynote sessions on Tuesday and Wednesday, as well as the Q&A session for financial analysts and investors, will be webcast live and we will send out webcast access information tomorrow. If you wish to listen to a playback of today’s conference call, a Web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 70709434. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 PM Pacific Time today, and ending at 5 PM Pacific Time on March 22, 2017. We would now be happy to take your questions. And we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] Your first question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Your line is now open. Kash Rangan : Mark, I hate to bring this up but, AC 606, a lot of companies are starting to give it a little thought. I’m wondering if you could give us your perspective on how it would that change the revenue recognition in the Marketing Cloud and also the expense recognition? Thank you so much. Mark Garrett : You’ll see that we’ve written some disclosure in our SEC filings on this. The standard, as you know, is effective for Adobe in the first quarter of 2019. So, we have quite a bit of time until it goes effective for us. We don’t plan early adopt that we haven’t selected a transition method yet. We’re clearly evaluating the effect and the standard, and what it will do some revenue for us. We expect that revenue related to professional services in our cloud offerings, or enterprise individual and teams, would remain substantially unchanged. But again, we’re in the process of evaluating that. And as it relates to, what we would call more of an ETLA, a term-based license where software and maintenance are bundle together. Those are the arrangements that will like have some impact from the standard. But again, we have until 2019 to work through that. And as you know, we’re now selling the full could solution to the enterprise. So, that’s where we stand as of today. But clearly, more work to do and lots more time. Operator : And your next question comes from the line of Sterling Auty with J. P. Morgan. Your line is now open. Sterling Auty : On the Creative Cloud side, the growth of momentum continues to be strong. But can you give us a little more at least qualitative color as to the drivers of it. How much of it might be something you’re doing on price and managing promotions? How much are you adding new customers, and how much of it is deeper penetration into existing customers? Shantanu Narayen : Sterling, I’ll take that question. I think we’re continuing to seeing good strength across each of the groups, particularly as it relates to Q1. We saw some good SMB, small and medium business, demand that continues to do well. As you know that’s the team offering, which is a higher price point offering. And especially in EMEA, we had a good quarter. I would say, Acrobat, had strong unit quarter that’s reflected both in Creative Cloud, as well as in Document Cloud. In addition to that, we continue to see good progress on retention. And so, as people migrate off the performance or the promotional pricing and get on to the full plans; and then new unit adoption, as well for the new offerings, especially the photography solution; and international continue to do well. And also, there is no question that we’re combating piracy as the ability to get boxes in most countries diminishes. So, I would say across the spectrum of the different offerings. And from an ARPU point of view, as well Sterling, I think Mark mentioned that in his prepared remarks. So, that continues to be strong as well. Operator : And your next question comes from the line of Alex Zukin with Piper Jaffray. Your line is now open. Alex Zukin : Shantanu, I wanted to ask a bigger picture question for you about what you’re seeing in terms of the growth of front-office budgets. And maybe what change you’ve observed this year, or at least start this year from, maybe the last year and the year before that. And how is that driving a change in kind of -- is that accelerating your visionary way because it seems like the shift of the digital transformation budget to the importance of the CEO level has really accelerated; so just curious to get your thoughts on that. Shantanu Narayen : You’re absolutely right. I think big picture, the conversations that we’re having day-in and day-out, our enterprises recognizing that digital is transforming their agenda. And then they decompose that into what are the key things that they have to do in order to use that as an opportunity rather than a challenge. And clearly from our point of view, the engagement that they do with their customers or how they deliver their experience continues to be we think one of the key ways in which people make digital tailwind rather than a headwind. And we're part of all of those conversations. I think if you talk to also the consulting companies, they're being brought in to aspirationally help all of these companies, rethink their business model processes and people. But top of the agenda for even the CEO and the CIO and CFO, is what are we doing with respect to delivering a better engaging customer experience? Next week at Summit, we'll talk a little bit more about how that expands on our vision or what we can do, and what people are asking to step up and do. But I think the way it manifests itself in the business is people are saying if it's just so key to my future, I want to bet and standardize on companies that have a comprehensive platform, which is why we're always pleased to see us being rated as the number one platform that exists for this kind of technology solution. Operator : And your next question comes from the line of Walter Pritchard with Citigroup. Your line is now open. Walter Pritchard : I heard your response Shantanu on the question around demand drivers. I'm wondering if you can just talk about ARPU, specifically as a driver in fiscal '17 and beyond. In addition to like your commentary around stock suggested that you were seeing more of an uptick there, and you have things like Sensei and so forth that are incremental to the product that you're delivering in the market. Can you help us understand how much more of a driver ARPU is versus what it’s been over the last several years in this transition? Shantanu Narayen : Walter, maybe I'll give you some color which we didn't touch on as another demand driver, which is in the enterprise. As you know, we are coming up on the anniversary of lot of the three year ETLAs. And the first time when we did the three year ETLAs Creative Cloud was relatively new. And so, what we were doing was in-effect providing them with subscription model that mirrored their, what I would call custom way of buying CS in the past. As those are all rolling off the first three year milestone, we are clearly selling them both on the CC complete solution as well as on services. So the number of people who are contracting for services right now, people have to get an exception to not contract for services. And so that clearly represents an increase in ARPU as well. To your point, stock had a good quarter. We continued to see growth, both in terms of the demand, as well as in terms of the inventory. Sign had a good quarter, all of them are adding. And I think what's on your minds as well as investors is, hey, is there leverage and room for price increase as we still think we're in new customer acquisition growth, we're helping people deliver value. And so, that's really what's still driving a lot of the upside in ARR with the potential to look at optimizing further out as well. Operator : And your next question comes from the line of Heather Bellini with Goldman Sachs. Your line is now open. Heather Bellini : Shantanu, I was wondering if you could share with us how you've seen the success of Creative Cloud impact the adoption of the marketing suites. And I know that's been one of your goals that one could help drive the other. But have you seen any change in the ability for you being the industry standard for Creative, start to impact the Marketing Cloud side of the business? And has the messaging with customer and the receptivity started to -- have you seen any noticeable difference over the last 12 months? Shantanu Narayen : It's a really good question Heather, and there's no question actually in our mind that where Creative Cloud was first the door opener for us to have conversations with the enterprise. There is an increased expectation from customers that the content lifecycle that we talk about, namely, the ability for them to accelerate how they deliver campaigns or how they personalize the experience that they wish to deliver across all of these different channels, is predicated on making sure that that content from, content all the way from creation through asset management and all the way out to delivery, is more seamless than it’s ever been. So, I would say three years ago, two years ago, we were talking about that as one of the benefits. I would say today every conversation with the enterprises they see that as a differentiator for us. And the expectation is that’s how they will accelerate both the campaigns and how they will ensure personalize delivery. So, we’re seeing that whether it's in financial services, whether we are seeing retail, travel hospitality, automotive, it’s a key part of our differentiator and one that we will continue to innovate in. Operator : And your next question comes from the line of Ross MacMillan with RBC Markets. Your line is now open. Ross MacMillan : Mark, I didn’t see any commentary on fiscal ’17 guidance. I’m just curious, I guess specifically, about how you are thinking on the 1 billion ARR target, given the strength in Q1 and your guide for Q2, which is certainly above our number. Mark Garrett : Clearly, from our perspective, the business is performing exceptionally well. We had a great Q1 across all the key metrics. And to your point, we provided we think are strong Q2 targets. If you remember back, we’ve guided FY ’17 the first time at Analyst Day back in November of last year. We updated it again in December with Q4 earnings. We updated it once more in January for TubeMogul. And we just don’t want to get in the habit of updating annual guidance so frequently. So, we’re very happy with the first quarter. We’re very pleased with what we were able to do from a guidance perspective on Q2. Clearly, we’ve got momentum. We just don’t want to get in the habit of updating annual guidance that frequently. Ross MacMillan : And then one just quick one, just looking at Q2 guide it implies, at least I think in our model that operating margins maybe are down a little bit sequentially. And I know we have a little bit of an extra three weeks, I think from Tube. But are there any other factors for us to think about in terms of OpEx this quarter, Summit or anything else that’s unusual? Thanks. Mark Garrett : Our salary increases kick-in for the Company and that has an effect on Q2 from a cost perspective. You’ll see that every year. We continue to hire and invest in the Company. Again, we feel great about our performance in Q1 and our ability to drive leverage in the model going forward. Operator : And your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is now open. Keith Weiss : On the Marketing Cloud side, you talked about and there’s Gartner Magic Quadrant that came out during the quarter, and I think Forrester Wave. Are you seeing any change in the competitive environment? Are any of the surround guys or any of the big guys like the Microsoft or the Oracle of the world getting more competitive in that Marketing Cloud field for you guys? And then on as a follow up, any initial gains or any initial benefits you guys are seeing from Microsoft relationship in FY17? Shantanu Narayen : Let me take the second first, which is, you’ll get an update as well as Summit. So we’re hoping a lot of will be at Summit. I think you’ll be pleased with how quickly we’ve been able to integrate the products. And from my point of view, the benefit with the Microsoft relationship is really customer driven. Customers are asking for integration with Azure, Power BI, as well as Dynamics. And I think the team has done a great job. But next week we’ll give you a little bit of an update on that. On the first question, as it relates to the competitors, I think we have talked about. This is a $40 billion TAM. Clearly, there are other players that you are alluding to that that are also seeing this as a market opportunity. But our track record and our winning percentage record in the areas that we’re strong continues to be excellent. I think we have a differentiated solution. And I think our vision of where we want to take this and how we want to continue to expand it, I think it still makes us a unique leader. But certainly, there are other players in this market as well Keith. Operator : And your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is now open. Jay Vleeschhouwer : Question for Mark, as you know, I am particularly interested in your gross margin structure and the various components of that. You had a couple of dichotomous outcomes in Q1 expect to cost revenue the graphic you addressed. You had an usually large sequential increase in digital marketing; cost of revenue were before you’ve been seeing some margin expansion there. Was that tied somehow to the TubeMogul mobile revenue upside given the way they were recording and their cost of revenues versus their gross revenue recognition? On the other hand you had a pretty material and sequential decrease in digital media COGS. Is that anomalous, or is that something that you think is sustainable? And lastly, you had a pretty significant increase in services cost of revenue, your revenues were down materially from Q4 to Q1, so lots of moving pieces in COGS. But maybe you can address those? Mark Garrett : Yes, I mean the still biggest thing probably worth mentioning Jay, is you’re exactly right. If you look at Digital Marketing this quarter that $10 million of gross revenue recognition would flow right into COGS. So you have $10 million of revenue and $10 million of COGS. If you back that $10 million of COGS out of digital marketing, the gross profit would be exactly the same as last quarter. So, there is really no change to Digital Marketing cost of service, it's been pretty consistent. And you are exactly right it's really driven by Tube. On the Digital Media side, I think what you saw this quarter is some of the upside that you see in our revenue relative to our guidance was from a bit more perpetual product, especially on the Acrobat side. And that comes, as you know, a very, very high gross margin. So, that’s why you would have seen Digital Media gross margin better this quarter. Jay Vleeschhouwer : Okay. And the services piece? Mark Garrett : I can't remember what your question was. It was back to… Jay Vleeschhouwer : So, services revenue were down sequentially, but you had a pretty meaningful sequential increase in services COGS? Mark Garrett : The revenues down sequentially mainly because in Q4 it's a very difficult time for the teams to deliver services with holidays and year-end. So, typically Q1 revenue is going to be a little bit lighter on the services side, and the cost of services doesn't change that much. So, that's why you see a little bit less on the gross margin side. Operator : And your next question comes from the line of Samad Samana with Stephens Inc. Your line is now open. Samad Samana : So, we saw that in early February, the Company pushed-out price increases in some international, or outside of the U.S., in some countries where FX is a particular headwind. I'm curious if you learned any lessons from those price increases, and whether it shows you what the appetite for customers is. Is this to accept those, and how it impacts your thought on raising prices in the U.S.? Mark Garrett : We did push-out some price increases around the world in various markets, because of FX to stay FX neutral, if you will. And the good news there is we really did not see an impact to ARR. So, that does give us confidence that down the road we're able to tweak pricing a bit. We're not taking advantage of that yet other than FX, but that was a very good sign. Samad Samana : Maybe just a quick follow up. Could you give us what the Marketing Cloud revenue growth would have grown year-over-year, excluding the extra week, and the revenue contribution from TubeMogul, just for an apples-to-apples compare? Thanks. Mark Garrett : With the week, I'm going to have to get back to you. The TubeMogul gross, you just take out $10 million and instead of $26 million it would have been $24 million. But I don't have the week broken out between the different businesses. It was about $75 million, we said a year ago, but we didn't split it between businesses. I don't think it's very material for Digital Marketing, to be honest with you. It's more material on the media side, that extra week; because you think about it as recognizing revenue from subscribers, it doesn't change that much from a enterprise perspective. Operator : And your next question comes from the line of Derrick Wood with Cowen and Company. Your line is now open. Derrick Wood : Shantanu, you mentioned the Adobe Stock has $60 million assets now, and I don't really know how this compares to other offerings. But I know you guys announced partnership with [technical difficulty] a few months ago. And I guess I am just curious how impactful it is when you onboard new content into the service. So, specifically, do you think these partnerships move the needle and increase the attach rate, or getting people to subscribe to the monthly version? And would you say growth is tied to bringing more content onboard, or are you really at that full scale? Shantanu Narayen : The way I would answer that is strategically as we look at that business, there're three things that we think we continue have to execute on to ensure that we capitalize on the opportunity that we've talked about; the first is integration within the products. I think you've seen us make some good integration with products like PhotoShop. So the ability for people to contribute and to acquire assets is built into the product. So, that's one area that we're continuing to make sure we invest. The second one that tends to be a way in which you compete effectively is the inventory. So, I think having the inventory and having the inventory across different kinds of assets, including premium and including partnerships with some of the people that you're talking about, that also helps us ensure that we're competitively, either ahead of the market or at least in line with the market. And the third one that we think about when we think about stock is how good is our technology to find the right asset, based on the intelligence that we can provide. And that's where I think you know we will demonstrate superior advantage to anything else that’s out there. Because our ability to understand these assets and, irrespective of what keyword is being used to search for a particular asset return the right. So in other words search relevance and search is going to be a key part of it. Now, I think in all three of those, we’re continuing to make great progress. And I think at MAX, we showed you a lot of really cool ways in which we will make that more relevant. It’s an area we’ll continue to invest in. So, we feel good about it Derrick. Operator : And your next question comes from the line of Richard Davis with Canaccord Genuity. Your line is now open. Richard Davis : Just real quick question. So it seems to me and you’ve touched on this. So you’re becoming a lot more critical to your customers, and typically that means larger deals. But larger deals have a different selling motion and cadence, and staff dynamics. Could you just talk a little bit about how -- what you believe you need to do to evolve and position yourself to move to larger deals? I mean you obviously keep up with the small stuff too. But that would be helpful. Thanks. Shantanu Narayen : You’re absolutely right. The good news is we’re absolutely mission-critical to our customers, so the level engagement that we have with these enterprises is at multiple levels, all the way from the C-Suite to all the practitioners who are using our products. I would say actually on the field side and on the partner side, we have evolved that over many areas. Where we think we have a world class organization that does that. Because it’s not just what you do internally, it's ensuring that the thousand partners that I talked about who are also partners to the companies that we’re working with are evangelizing and are promoting our products, and are educated on our projects. So I actually feel good about all of those. In some cases, you have those deals, the larger the size the time taken can increase, but that’s why we want to build a healthy pipeline and continue to execute against that. So, I feel very good about it, and that is without a doubt one of the areas where we’ve invested in over the last few years. Operator : Your next question comes from the line of Brent Bracelin with Pacific Crest Securities. Your line is now open. Brent Bracelin : Mark, I wanted to go back to the operating margin, non-GAAP operating margins of 36% this quarter. Should be above where we had thought they’d be. If you go back to last two years, Q1 was the low-point. And then you saw basically improvement throughout the year. Is there something different about this year, or different that we should think about, relative to additional expenses or hiring plans that might be a different sequence? And then as a follow-up to that, if I go back and look at where op margins could go, I think the peak was back in 2008 at 40%. How you’re thinking about the op margin trajectory longer term? Mark Garrett : There is no difference on the cost side than what you’ve seen in prior years. As I just mentioned a few minutes ago, on the revenue side in Q1, we did have a little bit of the upside coming from some increased perpetual revenue on Acrobat side of the business, on the toolbar distribution deal. And that revenue upside can typically drop-down to the bottom-line pretty readily. So, that’s where you saw a bit more margin than we had guided in the first quarter. Expense wise is no real change to our trajectory, and there hasn’t been for quite some time. In terms of long-term margins, the best I can do for you right now is few things; one is we’re very focused on margin; you see that in any given quarter; you see that when we over-achieve on revenue like we did Q1. And we gave a three year model a little while back that shows what margins could look like through, at least '18. And if you looked at that model and looked at it back when we gave it to you, you would see margins up above 35%. Beyond that, we will see. Mike Saviage : Operator, we’ll take two more questions please. Operator : Certainly. Your next question comes from the line of Pat Walravens with JMP Securities. Your line is now open. Pat Walravens : Shantanu, probably for you, what key points would you make to investors at this point about your activation strategy going forward, and what you’re looking for? Shantanu Narayen : We actually feel really good about all of the technology that we have, and we were always on the lookout for small innovative companies. And I think both Mark and I have always talked about; we look for is it bringing our strategic advantage; what is the culture of the companies that we’re looking at, because we are very, very thoughtful about making sure that we continue to expand on the vision of what people want; and the third is financially whether it make sense. And so we have done some when they make sense. But we feel really good about the core value that we have, and we’ll continue to be on the lookout for things that meet our criteria in all of those; namely, continuing to expand strategically what we can do; ensuring that the culture fit is right, and financially making sense. Operator : And your final question comes from the line of Kirk Materne with Evercore. Your line is now open. Kirk Materne : Shantanu, I was wondering if you could talk a bit about how the upsell stock in the Marketing Cloud customers is going relative to the Creative Cloud. As that would seem to be somewhat of untapped opportunities that we don’t talk perhaps as much about? Just kind of curious how should we think about that as another step forward in terms of stock? Thanks. Shantanu Narayen : I think, Kirk, from my point of view as we are going more and more to these large enterprises with solutions across the Creative Cloud, Document Cloud and the Marketing Cloud, we have a quarter back model, and the named account model with this quarter back is that they are clearly bringing to bear opportunities like the ones that you are talking about. If you are in there primarily with Marketing Cloud ensuring that we sell more solutions, sale Stock, sale Sign and continue to drive the CC DLAs. And so, I think the model that we have in the field is really one of how do we comprehensively to these larger accounts ensure that they are getting the benefit of the breadth of our solutions. And to your point, in CC when we think about the CC enterprise opportunity and the conversation that we are having with those customers, we’re very much moving them from custom to complete and we are moving them from complete to complete plus services. And the service that is top of mind for as Stock. So, a good question and it's clearly one of the areas that we are focused on. And since that was the last question, I think in summary, we were really pleased with the strong start to Q1. It was an outstanding quarter, and I think the Q2 targets that we gave reflect the continued momentum in the business. But in addition to the great quarterly performance, we’re really excited about the long-term opportunities that we’ve outlined, namely the ability to empower people to create the things they want to create and to enable businesses to transform themselves. And I think we’ll continue to be unique in that, we’re one of the only companies that delivering great top line growth and bottom line earnings. We're looking forward to next week's Adobe Summit, it's our largest ever. We really hope you'll join us to hear about our vision for the future, and demonstrate both product and partner progress against that vision. But thank you for joining us today. Operator : And this concludes our call. Thanks everyone.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,017	2	2017Q2	2017Q2	2017-06-20	3.431	3.558	4.4	4.557	7.18314	29.84	30.34	Executives: Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett - Executive Vice President and Chief Financial Officer Analysts : Ross MacMillan - RBC Capital Markets Walter Pritchard - Citi Tom Mao - Evercore ISI Stan Zlotsky - Morgan Stanley Mark Grant - Goldman Sachs Mark Moerdler - Bernstein Research Derrick Wood - Cowen and Company Saket Kalia - Barclays Capital Alex Zukin - Piper Jaffray Sterling Auty - JPMorgan Jay Vleeschhouwer - Griffin Securities Samad Samana - Stephens Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Systems’ Second Quarter Fiscal Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen and Mark Garrett, Executive Vice President and CFO. In our call today, we will discuss Adobe’s second quarter fiscal year 2017 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on Adobe.com. If you would like a copy of these documents, you can go to Adobe’s Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans, is based on information as of today, June 20, 2017 and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. Adobe had a record quarter with revenue of $1.77 billion, representing 27% year-over-year growth. GAAP earnings per share in Q2, was $0.75 cents and non-GAAP earnings per share was $1.02. We are executing on our strategy of enabling our customers to design and deliver best-in-class digital experiences. Digital transformation continues to be the burning agenda for creative professionals, enterprises, governments and educational institutions. Adobe is now the go-to company for creating world-class digital customer journeys from design to delivery to measurement and monetization. At the core of our ability to drive transformative change across all customer segments is Adobe Sensei, our artificial intelligence and machine learning framework, which is being deployed across all Adobe solutions to solve our customers’ greatest experience challenges. Central to our strong performance this quarter was record revenue in our Digital Media business. We achieved $1.21 billion in Digital Media revenue in Q2, a 29% increase year-over-year. We exited the quarter with over $4.56 billion of Digital Media annualized recurring revenue, or ARR. The net ARR increase in Q2 was $312 million and was driven by continued strength in our Creative Cloud and Document Cloud businesses. Creative Cloud is the one-stop shop for millions of creative people globally and we continue to successfully migrate CS customers, acquire new customers, expand into new market segments, and add value through new services. In Q2, we exceeded the $1 billion mark for Creative product revenue for the first time, an increase of 34% year-over-year. Creative Cloud growth was driven by healthy net new subscription adoption, strong retention and positive trends in our average revenue per user or ARPU. Our Adobe Stock business continues to accelerate, driven by customer demand for powerful visual content. Last week, we introduced Aesthetic Filters, a next-gen search capability leveraging Adobe Sensei, to streamline one of the most cumbersome, time-consuming tasks for creatives, finding the perfect image or video for creative projects. With nearly 90 million assets, Adobe Stock is becoming the most comprehensive marketplace for digital assets, and this week we announced the availability of new collections from Reuters and Stocksy, with USA TODAY Sports coming soon. In our video business, Premiere Pro continues to be the leader in the category, with 49% year-over-year growth in single-app subscriptions. At NAB, we unveiled a major update to Premiere Pro, which will help filmmakers and video producers create, deliver and monetize their video assets faster than ever before. This latest update delivers new features for graphics and titling, animation, polishing audio and sharing assets; support for the latest video formats, such as HDR, VR and 4K; and new integrations with Adobe Stock. Our leadership in video applications is attracting a new set of Creatives to our platform. With flagship applications like Photoshop, Illustrator and After Effects, and innovative new apps like Character Animator, we have the most comprehensive video authoring solution. New customers buying single apps like Premiere Pro will be a great base to convert over time to a full Creative Cloud subscription. In addition to video, we continue to innovate in new categories like Experience Design, 3D, and mobile apps, including Adobe Spark, which greatly simplifies the process of designing social graphics, web stories and animated videos. These offerings will expand our footprint and bring new customers to Creative Cloud. The world’s leading digital document service, Adobe Document Cloud is addressing growing customer demand for more efficient digital processes. In Q2, Document Cloud revenue was $200 million and we grew Document Cloud ARR to $520 million exiting the quarter. Acrobat units across Creative Cloud and Adobe Document Cloud combined grew double-digits year-over-year, fueled by a record number of new subscriptions in the quarter. Adobe is focused on delivering innovative capabilities to enable PDF creation in the mobile era. We recently introduced a new app called Adobe Scan, which turns a smartphone or tablet into a PDF creation tool that can do both scanning and intelligent text-recognition through integration with Document Cloud. In its first 12 days, the Adobe Scan app had over 750,000 downloads across iOS and Android. Adobe is recognized as the leader in the Digital Marketing category and we have expanded our ambition to solve enterprises’ broader customer experience mandate. At Adobe Summit in March, we unveiled Adobe Experience Cloud, a comprehensive set of cloud services designed to give enterprises everything they need to deliver exceptional customer experiences. Adobe Experience Cloud includes Adobe Marketing Cloud, an integrated set of industry leading solutions to help marketers differentiate their brands and engage their customers. Adobe Advertising Cloud, the industry’s first end-to-end platform for managing advertising across traditional TV and digital formats and Adobe Analytics Cloud, the core system of data and intelligence for the enterprise. We drove a record $495 million in Adobe Experience Cloud revenue in Q2, representing 29% year-over-year revenue growth. We managed more than 135 trillion data transactions on behalf of our customers over the past four quarters across our solutions. This massive volume of data feeds Adobe Sensei, enabling our Experience Cloud solutions to better understand, predict and personalize customer interactions. We announced the availability of our first set of joint solutions with Microsoft to help enterprises transform cross-channel experiences and campaign orchestration using Adobe Experience Cloud and Microsoft Azure, Dynamics 365 and Power BI. In addition, we will collaborate on an industry standard to create semantic data models that will define language for marketing, sales and services which will accelerate the delivery of digital experiences at scale across the entire enterprise. Adobe’s ad tech momentum continues to build. We have now integrated Adobe Audience Manager into Adobe Advertising Cloud, enabling advertisers to identify high performing segments and do automated, data driven media planning and buying across all channels, including linear TV. Adobe Experience Cloud continues to be the leader across multiple industry analyst categories. Forrester Research named Adobe as the only leader in Digital Intelligence Platforms, an emerging market segment bringing together digital data management, digital analytics and customer engagement optimization technologies. They also recognized Adobe Advertising Cloud as a leader in the Omnichannel Demand Side Platforms and Adobe Audience Manager as a leader in Data Management Platforms. Gartner recognized Adobe as a leader in its Magic Quadrant for Multi-channel Campaign Management, where they placed Adobe furthest in the Leaders quadrant for completeness of vision out of 22 vendors evaluated in the report. Interest in Adobe Experience Cloud continues to be strong. We had record attendance at our US and EMEA Summits as well as at our symposia in New York, London, Mumbai, Toronto and Sydney. Major customer wins this quarter included Best Buy, Cisco, Morgan Stanley and Verizon. Last week, Adobe joined the Fortune 500 list for the first time, an exciting milestone for our company. This quarter, we were also included on Forbes’ Best Large Employers list and LinkedIn’s Top Global Companies List, and received Great Places to Work recognition in the UK and Germany. People are our greatest asset at Adobe and we continue to invest in creating an innovative culture and exciting work environment to attract and retain the best talent in the industry. With the introduction of Adobe Experience Cloud, we have expanded our vision and our market opportunity. Our brand, coupled with our deep technology platforms are further distancing us from the competition. We have the world’s best customers, partners and employees and we look forward to a strong second half. Mark? Mark Garrett : Thanks Shantanu. In the second quarter of FY ‘17, Adobe achieved record revenue of $1.77 billion, which represents 27% year-over-year growth. GAAP diluted earnings per share in Q2 was $0.75 and non-GAAP diluted earnings per share was $1.02. Highlights in Q2 included; our first $1 billion quarter of Creative revenue, achieving strong net new Digital Media ARR of $312 million, record Adobe Experience Cloud revenue of $495 million, strong year-over-year growth in operating profit and net income, record deferred revenue with strong cash flow from operations and 86% of Q2 revenue came from recurring sources. In Digital Media, we grew segment revenue by 29% year-over-year. The addition of $312 million net new Digital Media ARR during the quarter grew total Digital Media ARR to $4.56 billion exiting Q2. Within Digital Media, we delivered Creative revenue of $1.01 billion which represents 34% year-over-year growth. In addition, we increased Creative ARR by $285 million during Q2 and exited the quarter with $4.04 billion of Creative ARR. Driving the momentum with our Creative business was continued solid demand for Creative Cloud across all segments, including individual, team and enterprise. We saw particular strength on Adobe.com and in the education market. International adoption of Creative Cloud was notable, particularly in Germany and Japan. Q2 ARR performance was also driven by solid retention, as well as quarter-over-quarter ARPU growth across all key offerings. Adobe Stock contributed to this performance with another quarter of record revenue. We are also pleased to see the growing subscription base for Adobe Stock adding to overall ARR. With Document Cloud, we achieved revenue of $200 million and Document Cloud ARR grew to $520 million exiting Q2. Across Creative Cloud and Document Cloud, Acrobat unit growth accelerated when compared to last quarter and again achieved double digit year-over-year growth. In addition, Adobe Sign growth continues and we expect the recent Document Cloud launch with new Acrobat, Sign and Scan functionality to contribute to the overall Document Cloud performance moving forward. In Digital Marketing, we achieved record Adobe Experience Cloud revenue of $495 million, which represents 29% year-over-year growth. We are hard at work integrating TubeMogul into our new Advertising Cloud solution and Q2 performance with the TubeMogul business continues to track as we outlined earlier this year. TubeMogul gross revenue recognized in the quarter was de-minimus, as forecasted. Mobile remains a key driver for our Experience Cloud business, mobile data transactions grew to 57% of total Adobe Analytics transactions in the quarter. Experience Cloud success is fueled by a large ecosystem of partners including systems integrators and digital agencies. They are working with us and our joint customers to create digital strategies, plan and execute implementations and achieve value realization. In Q2, partners were involved in approximately 50% of our bookings. From a quarter-over-quarter currency perspective, FX increased revenue by $0.4 million. We had $13.3 million in hedge gains in Q2 FY ‘17, versus $18.3 million in hedge gains in Q1 FY ‘17, thus the net sequential currency decrease to revenue considering hedging gains was $4.6 million. From a year-over-year currency perspective, FX decreased revenue by $19.2 million. We had $13.3 million in hedge gains in Q2 FY ‘17, versus $3.6 million in hedge gains in Q2 FY ‘16, thus the net year-over-year currency decrease to revenue considering hedging gains was $9.5 million. We experienced stable demand across all major geographies during the quarter. In Q2, Adobe’s effective tax rate was 24% on a GAAP basis and 21% on a non-GAAP basis. Our trade DSO was 46 days, which compares to 43 days in the year ago quarter and 46 days last quarter. Deferred revenue grew to a record $2.07 billion, up 23% year-over-year. Our ending cash and short-term investment position exiting Q2 was $4.93 billion. Cash flow from operations was $645 million in the quarter. In Q2, we repurchased approximately 2 million shares at a cost of $266 million and we exhausted our $2 billion authority granted in January 2015. In Q3 we will begin utilizing our new $2.5 billion authority granted in January 2017. Now I will provide our financial outlook. In Q3 ‘17, we are targeting; revenue of approximately $1.815 billion, net new Digital Media ARR of approximately $300 million, Digital Media segment year-over-year revenue growth of approximately 26%, Adobe Experience Cloud year-over-year revenue growth of approximately 25%, share count of approximately 501 million shares, net non-operating expense of approximately $14 million on both a GAAP and non-GAAP basis, tax rate of approximately 24% on a GAAP basis and 21% on a non-GAAP basis, GAAP earnings per share of approximately $0.72 and non-GAAP earnings per share of approximately $1.00. Given our business momentum, we continued to expect total Adobe revenue, Digital Media ARR and earnings per share to all grow sequentially from Q3 to Q4. When modeling segment and total revenue estimates for Q4 ‘17 it is important to factor the material amount of perpetual revenue reported in our digital marketing business in Q4 ‘16 which we do not expect to reoccur in Q4 of this year. Considering this and our strong performance year-to-date, we now expect total Adobe revenue year-over-year growth to be approximately 23%, an increase from our prior target. In summary, our record Q2 achievement demonstrates we are executing well against a large growth opportunity. We remain excited about our prospects for the rest of the year and beyond. Mike? Mike Saviage : Thanks Mark. Adobe MAX is scheduled this fall during the week of October 16. Day 1 of our conference is Wednesday, October 18, and Adobe management will have a meeting with financial analysts and investors that afternoon. An invitation with registration information will go out within the next month and more details about the conference is available at max.adobe.com. If you wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID #28928378. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 p.m. Pacific Time today, and ending at 5 p.m. Pacific Time on June 27, 2017. We would now be happy to take your questions and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] Your first question is from Ross MacMillan from RBC Capital Markets. Ross MacMillan : Thanks a lot and congratulations. I had one for Shantanu and a follow-up for Mark. Shantanu, just you mentioned Premiere Pro and the success you are having there with the single app products and then you commented that, that could be mechanism to drive more sales into pool of Creative Cloud. And I guess I just had a question on the overall sort of strategy in terms of the potential to create new bundles in the Creative Cloud with the analogy being the Creative Suite, but I think you had 6 different suite types. So I just wondered if you could just elaborate on that for a second and help us think about the opportunities going forward to kind of segment the Creative Cloud product portfolio? Thanks. Shantanu Narayen : Yes, thanks Ross. I am happy to do so. Also, I wanted to say upfront Mark and I are actually on different cause, I was visiting the debt counsel, so I am in New York and Mark is in San Jose as usual. The strategy, Ross, with Creative Cloud was initially as you know to migrate existing customers. And so it was really important for us to simplify the offering and have a CC complete that we thought would be the right solution for the broad swath of customers that we have. And as you are aware that has played out really well. We always knew that as we wanted to attract new customers, the single app product would be a great stepping stone to get people into the platform and then convert them into full units. This is something that we did in the past whether it was within design during the print era or think products like Dreamweaver or Photoshop or Illustrator, they have always been great ways to attract new customers who may have real experience with one product and then focus on multiple products. And video is clearly being one of those new categories where more and more people are using video and the fact that Premiere Pro is such a great product in video were attracting customers to the platform and then we will convert them into CC complete whether it’s through promotions as well as training. So that’s the way to really think about it, which is when we are doing new customer acquisition just the way, photography has played out really well with photography expansion and market expansion, we think video will be the same. We are equally excited about XD and what’s happening with screen design. So, think about it as bring more customers into the platform through single apps and then convert them to higher ARPU servicing products. Ross MacMillan : That’s helpful. And just the follow-up for Mark on the ARR, you have obviously exceeded now Q1, Q2 and guiding a bit above where certainly we were for Q3, it looks like you are going to do better than your $1 billion for the year, but you didn’t raise that number. Just maybe any thoughts around sort of the $5 billion sort of exit target how we should think about that? Thanks. Mark Garrett : Yes. Actually, if you don’t mind Ross before I answer that question, I want to clarify something. As we were reading our prepared remarks I caught something that needs clarification. So in the end of my prepared remarks we talked about how we now expect Adobe revenue year-over-year growth to be approximately 23%, that’s for the full year. It wasn’t clear whether that was the full year or the quarter, so just to be very clear, we expect the full year to be up 23% year-over-year. So, just make sure you think about that as you update your models. For ARR yes, we are very pleased how that’s playing out Ross, obviously relative to our expectations and we are not updating annual targets but clearly we are on a great trajectory, we had a great first half. And as you know, there is just lots of positive trends that are driving ARR up, everything from ARPU growing across each of the offerings. We have consistently said ARPU continues to grow across each of the offerings bringing new people into the franchise, selling them services, migrating the base over and all those trends continue. So, we are very optimistic about ARR in general. Shantanu Narayen : And Ross, the other thing I might add here is that we are really focused on the $20 billion large opportunity that exists for this entire business. We were pleased also in addition to the stuff that Mark said with how both Germany and Japan have started to adopt Creative Cloud and Stock as well. So, our focus is continue to execute on the near-term, but focus on the large untapped opportunity that we have. Ross MacMillan : Great. Thanks, again. Congratulations. Mark Garrett : Thanks, Ross. Shantanu Narayen : Thank you. Operator : Your next question is from Walter Pritchard from Citi. Walter Pritchard : Hi, thanks. Mark, I am wondering just on the ARR guidance for Q3 that seems like stronger performance than you are seeing in the last couple of years given that’s a pretty seasonally light quarter and you had strength in areas like Germany and Japan which might be weaker that quarter as well. I am wondering what gives you the confidence and what areas of the business do you expect to see the strength in Q3 ARR for Digital Media? Mark Garret : Yes. I mean, we kind of touched on it, Walter. We do have seasonality in prior years in the third quarter. So, I don’t think this is anything unusual in terms of strength. We just continue to see momentum across the business though it’s everything from international whether that’s Germany or Japan, like you said, ARPU going up across all the different offerings. We continue to migrate the base over. We continue to attract new users. Stock is contributing to ARR. We are starting to see the benefit of less piracy across the offering. So, all of those factors just play into our performance in the first half and what we see moving forward. Operator : Your next question is from Kirk Materne from Evercore ISI. Tom Mao : Hi, this is actually Tom Mao on for Kirk. Mark, as some of your original ETLA deals come to can you talk about how that’s impacting ARPU for Creative Cloud now that you have a subscription version for the enterprise? Shantanu Narayen : Yes. Maybe even I can touch on what we are hearing when we go meet with all of these customers from enterprises. The two points I would make is firstly ARPU is actually increasing. One of the things we track is the amount of the Creative Cloud ETLA customers who are adopting services when they renew their contract. And the second thing we are actually tracking right now is the actual number of users who are downloading and using the products and training it so that we can ensure that our customers get the value associated with it and both of those are going well. That again and even answering Walter’s question gives us confidence as to the ARR moving forward in the Digital Media business. But fundamentally, it’s the adoption of services, it’s the deployment of the Creative Cloud applications and the usage and training associated with it that have all done well for us in the enterprise customer base. Tom Mao : And just more broadly in the Digital Media business, can you talk about I think you kind of touched on the this a little bit, but just some of the drivers for ARPU increases outside of Adobe Stock? Shantanu Narayen : Well, I think we have always said that as it relates to getting people on to the platform, the first step is on promotional prices to get them on to the platform. I think we mentioned in the prepared remarks that retention continues to be strong. People are using increased number of products. And so I think when we look at ARPU that’s really the reason and foreign exchange hasn’t had an impact. So it’s true usage as well as adoption of more products that’s driving ARPU. Tom Mao : Great. Thank you. Operator : Your next question is from Keith Weiss from Morgan Stanley. Stan Zlotsky : Hi guys, good afternoon. This is actually Stan Zlotsky sitting in for Keith. So one question for Shantanu and then one for Mark, for Shantanu, since the marketing summit what has the customer feedback been like on the partnership with Microsoft, what are customers most excited about and with this combined solution, which parts of the market are you looking to address near-term and then more long-term as the solution matures. And then a quick one for Mark, recurring revenue now just hit 86%, how much further can that go as we go and as we look at 2018 and beyond? Thank you. Shantanu Narayen : I think big picture, actually when you look at what customers are saying they are all struggling with digital transformation and they want to understand how we can help them create this digital customer journey and help them take advantage of all of the technology trends that are happening. The combination of Adobe and Microsoft in that regard is clearly providing a more comprehensive solution than each one of us alone and as they are thinking about which is the cloud provider that they would standardize on the fact that we have a great application. On Azure, also really provides great go-to-market synergy between the two build organizations. The first solutions that we identified and we have actually started to deliver are the Adobe Experience Manager solution, which is a managed service on Azure. The second solution is being able to run campaign integrated with dynamics, so think of it as a complete CRM as well as messaging and campaign and orchestration solution and clearly being able to look at all of the data that they have in Experience Cloud and visualize that through Power BI. And so I think it’s the fact that together we have a more comprehensive solution, the fact that the field organization and the marketing organization is very aligned. And the fact that unlike all other partnerships which are press releases the fact that we have actually executed against it and delivered value, I think is leading to a lot of interest in our joint solutions. Mark Garrett : And in terms of recurring revenue that’s my favorite number. It does just keep creeping up. It’s going to keep going up a bit. But it’s not going to go to 100% if we are always going to have some revenue that’s going to be recognized upfront. But I do expect that it keeps slowly increasing like this is hard to say exactly where it settles in. Stan Zlotsky : Got it. Thank you. Operator : Your next question is from Heather Bellini from Goldman Sachs. Mark Grant : Hey, this is Mark Grant on for Heather. Thanks for taking the question. Just wanted to follow-up real quick on the enterprise, as you talked about some of those renewals from the ETLAs from 3 years ago and with the announcements that you made around Experience Cloud at the summit, are you seeing an improvement in customer response there given the introduction of the Experience Cloud and that integrated suite and what’s the impact that you are seeing on typical contract values in the enterprise as you bring that up? Shantanu Narayen : If you put yourselves in the shoes of a customer, if you are in retail what you are trying to do is ensure that all the assets that you have from creative – creation of these assets all the way out to delivery are in a consistent life cycle of content all the way from our content creation tools to when it’s delivered either through a mobile application or on the website. If you are an advertising or you are creating a campaign you want to make sure that the brand content that you have created in one country rolls out exactly with the same fidelity across multiple countries. So when we go customer after customer, they are trying to ensure that all of the digital content that’s exploding they have a good way to deal with it and to roll it out with the fidelity and the efficacy that they expect. That’s where the combination of what we have done with Creative Cloud with the ETLA option and AEM assets, the experience manager assets solution is a clear leader in the marketplace. And when I alluded to the fact that services and tracking the service usage within CC ETLA, that’s what we are trying to do which is to make sure that they have the ability to do asset management. So, the interest level I would say 3 or 4 years ago we were pitching this vision of how they could corral all their assets across the enterprise in a global way. Today, they are absolutely utilizing it and getting benefit out of it. So there is no question that we have been able to solve a customer pain point. Mark Grant : Great. Thank you. Operator : Your next question is from Mark Moerdler from Bernstein Research. Mark Moerdler : Thank you very much. I would like to ask a question both Shantanu and Mark. Given the strong revenue growth for Adobe in the last few years and the expected growth this year of 23%, what would you think are the largest impediments to driving roughly 20% year-over-year growth for the next few years, is it external issues such as market size, lot of large numbers, because more internal issues such as sales staff or breadth of product offering in Digital Marketing, how should we think about it? Shantanu Narayen : Well, Mark I think the first thing we always try to do is to state the overall opportunity in TAM that’s available for us. And we identified that, that was an over $60 billion market opportunity available to us. So I think you start with that. I think you look at the tailwinds that exist in the categories that we are namely content creation and what’s happening on the media side with new media types, what’s happening with augmented reality, virtual reality, more people coming into a Creative franchise. And frankly, as we have always said people having and wanting a story to tell. On the Digital Marketing side, continuing to help businesses transform just like on the individual side we are empowering people to create, it’s a massive opportunity associated with it. So, we look at it and say big picture there is no question that the market opportunity is available. Within the company, we want to make sure we are really focused on building these deep technology platforms. I think at summit Mark, you saw us talk about what we are doing with the data platform and these key strategic partnerships to ensure that we build a moat around our offering and that’s what we are focused on. And we have to continue to execute and focus on our customers. But as long as we keep our customers front and center, the opportunity is there. If you are trying to get us to back into a long target right now we are not going to do that, but we are really pleased with what we did in the first half and we are going to continue to execute against this opportunity. Mark Moerdler : That’s excellent. I appreciate it. We are just trying to get an understanding of how we should think about it. Any color would be appreciated? Shantanu Narayen : Okay. Thanks, Mark. Mark Moerdler : Thanks. Operator : Your next question is from Derrick Wood from Cowen and Company. Derrick Wood : Thanks and nice job on the quarter. A question on the partner front, one of the things we have heard, I have been hearing recently is that demand for certified developers on Adobe, especially the Marketing Cloud is really starting to outstrip supply. So, are there incremental investments you guys are looking at in terms of driving more partner enablement in the channel? And I guess as a follow-up I would be curious if the integration with Microsoft or other ISBs can attract new third-party developers or resellers to your cloud? Shantanu Narayen : Yes. Derrick that’s a great question and I think we said at summit and this is to not just of the U.S. summit, but all around the world. The number of partners who are there and creating digital practices that are based solely on Adobe’s Experience Cloud solutions is growing quite dramatically. I think from our point of view, we continue to ensure that we are providing the best training solutions for these customers. Our professional services organization is available to help them onboard, to help with architectural services that they might need and to continue to be the eyes and ears, but we are thrilled with the number of practices that have been created in every large SI as well as every large digital agency that exists. And so we just have to continue to focus on providing the best training allowing them to download and use our products. All of them are our customers. So they have first hand experience so every thing that they are doing in this particular space. And with respect to your second question, you are absolutely right, they are a couple of key both digital agencies and SI partners who view the fact that Microsoft and Adobe are working so closely together to actually create a joint practice where they have real experience with integrating these two and delivering that as value to their customers. So as long as it continues to grow and do as well as it has and an Experience Cloud does, there will be a market for somebody who is an expert in specifically the integration of these two offerings. Derrick Wood : Okay, thanks. Operator : Your next question is from Saket Kalia from Barclays Capital. Saket Kalia : Hi, guys. Thanks for having me in the call. Maybe just to build in that last question for you, Mark, in the prepared comments you mentioned that partners were involved with about 50% of bookings in the Experience Cloud. Qualitatively, could you just talk about how services revenue in the Digital Marketing business has trended and maybe how you are thinking about it going forward? Mark Garrett : Yes. Services marketing has clearly increased in that business over time as we have driven more implementations into customers, but that is not a critical number for us. From our perspective, a lot of customers want us to do the services, but we are very happy if that partner ecosystem picks up some of the services work as well. So, it’s going to be a mix of us doing it as well as our third-party ecosystem. Shantanu Narayen : So one thing I might strategically add from a color perspective is one of the things we are doing is as they become more and more facile at doing each of the individual point products, we are focusing our services a little bit more on architecture and the integration between these products as a way to supplement and augment their offerings. And so again I think as Mark said in the prepared remarks, we are thrilled that we have more partners and that they are driving more revenue for themselves and we are happy to augment that through higher end architectural services as required. Saket Kalia : Got it. Thank you. Operator : Your next question is from Alex Zukin from Piper Jaffray. Alex Zukin : Thanks, guys. I wanted to ask a go-to-market question around the Experience Cloud, can you maybe comment about the current structure of the sales organization? And maybe as you move towards these bigger solution oriented sales and it’s less kind of individual product focused is how are you realigning or thinking about strategically with the sales organization? And then just a follow-up to Mark, any impacts on deferred revenue that we should be aware of from the ETLA to Creative Cloud conversion or anything else? Shantanu Narayen : I will take the first part. Certainly, big picture when we think about our go-to-market with sales organization and I am assuming you mean primarily in Digital Marketing, it’s a very traditional named account and organized by vertical with our sales organization in Digital Marketing, so think of it as a financial services or retail or travel and hospitality, media and publishing sales organization, so that our customers clearly understand the vocabulary of the people that they are dealing with named accounts, because these named accounts are increasingly relying on us as the complete mission-critical solution for them. And then we have the equivalent of what you might call either territory or commercial which are customers who are not yet named accounts or other verticals that exist. And we certainly have specialists as well and these specialists are able to augment, but exist with the named accounts. So, the field organization has been structured like that. All around the world, it’s executing against that. One of the new initiatives that we also have in the field organization is the strategy group that’s actually enabling them to have a recipe all the way from going from a digital transformation all the way to how they can start to execute us. So more and more customers are asking us to be their trusted strategic advisor in that particular effect and we stepped up to do that as well. Mark Garrett : And then Alex, as it relates to deferred revenue, yes, there are a couple of things that you should probably know in there. As you know, it’s comprised of both digital media and digital marketing invoiced bookings. On the digital media side, ETLAs continue to perform well and that flows through deferred. More and more of our business is going through Adobe.com, some of which goes through deferred and then some frankly doesn’t flow through deferred. And then in Digital Marketing, there is a seasonal component to deferred. So, in Digital Marketing, you usually see a decline from Q1 to Q2, because in Q4, we have a very strong booking quarter and those Q4 bookings are typically built and hit deferred in Q1 so then you will see a bit of a seasonal decline in Q2. It was a little bit different than that last year, not to complicate things, because we had the extra week last year in Q1 and that extra week ended up billing in Q2, but typically you do see in Digital Marketing a seasonal decline from Q1 to Q2. Alex Zukin : Got it. Thank you, guys. Operator : Your next question is from Sterling Auty from JPMorgan. Sterling Auty : Yes, thanks. Hi, guys. Shantanu, I would be curious if you could compare and contrast the drivers of the strength in Creative Cloud today versus a year ago and specifically wondering how much of the strength is what you are doing in the enterprise versus continued conversions of legacy Creative Suite versus just up-sell an expansion within existing Creative Cloud users? Shantanu Narayen : Yes. Sterling, I think when we identified the three strategies that we were going to continue to focus on which is migration of the Creative Suite based market expansion and delivering new services. I think you have to look at it across each one of those. On the migration side, certainly, we had I think identified in November of 2016 that we have about 7 million people left to convert. We are continuing to make progress against that. We have said that Japan and Germany had lagged. That’s now showing good progress. So, the migration continues well. From a new customer acquisition, the new customer acquisition has been very healthy. And I think the fact that we have combated piracy, you can’t buy a box anymore on one of those e-commerce channels that you were able to the fact that it’s a low price of entry like I mentioned, Sterling, with video, with XD, we have new categories where we are leading the platform. That continues to be really healthy. It starts off a lot with single app and so people come on with a single app and then may move them into the complete suite. Education had a strong quarter. So that was good. And on the CC ETLA and team, I think we are just executing against all of this, our awareness of the customer, our ability for them to get value out of the entire offering is improving. And I would say big picture, Sterling, I think the biggest thing that’s driving it is the creation of good design and content has never been more important, whether that’s for the web, whether it’s for mobile applications. And so it’s not like I can point to one thing that’s actually fueling this business, it’s the fact that we have the most comprehensive offering we are innovating and we are executing, because we understand each customer in a more unique way and are addressing our offering to target them in a personalized way using our Digital Marketing solution. So, I can’t point at one thing, but are pleased with our progress against all of the initiatives we identified. Sterling Auty : Great. Thank you. Mike Saviage : Operator, well, we try to fit two more questions in, please. Operator : Your next question is from Jay Vleeschhouwer from Griffin Securities. Jay Vleeschhouwer : Thank you. Good evening. Two questions for both Shantanu and Mark. Mark, you highlighted the role of Adobe.com as you typically do on the call, could you talk about the margin leverage that you are continuing to get from the growth of Adobe.com? Do you think that’s marginally played out or do you think there is further margin leverage benefits you can get from Adobe.com as the business continues to grow or perhaps you offer some new structural ways of doing business with Adobe perhaps with new combined products, single sign-on and the like? And secondly, with respect to Document Cloud, your ARR increased just over 100 million there year-over-year. At that rate, it would probably take you another 4 or 5 years to get to a $1 billion ARR for Document Cloud, but given the size of the Acrobat base more than double the Creative base and the conversion more and more to subscription. Could you foresee a perhaps material acceleration in the ARR accretion for Document Cloud and thereby get to a much higher 9-figure number sooner? Shantanu Narayen : Maybe I will start off with the latter one, Mark and then you can, which is on the Document Cloud side, Jay, I think it’s really important to remember that Acrobat is also available as part of the Creative Cloud offering and is doing extremely well as part of the Creative Cloud offering. It’s probably something I should have mentioned even in Sterling and the other questions that are coming. I think we mentioned that Acrobat is seeing a record number of subscriptions and is doing well both in the Creative Cloud funnel as well as in the Document Cloud funnel and I think we have identified many times that one of the choices that we have made is to offer Acrobat as a single opt more in the Creative Cloud funnel so that we can than upsell them to our imaging solution. So I don’t just look at the Document Cloud ARR or the revenue when you think about how well Acrobat is doing, because PDF is actually doing well across both Creative Cloud and Document Cloud. And I will let Mark answer the second question. Mark Garett : Yes. And then as it relates to Adobe.com, Jay as you know we have been scaling Adobe.com dramatically over the past several years as we have gone through this transition. There is no doubt that that has contributed to improved margin. I think it will continue to contribute to improved margin as we continue to scale up the business on Adobe.com. It’s a major, major channel for us now and clearly a profitable, very profitable one. Jay Vleeschhouwer : Thank you. Operator : The last question is from Samad Samana from Stephens. Samad Samana : Hi, congrats on a great quarter. Mark, I have a question for you, when I look at the Experience Cloud forecast for the third quarter, it looks like a deceleration which I am really surprised given the year-over-year comp and adding TubeMogul revenue can you maybe remind us if there is a lot of license revenue in the third quarter of last year and also I think you mentioned ASV growth in the past from Marketing Cloud, maybe what that was so we can reconcile that the forecast with our models? Mark Garrett : Yes. There was some perpetual in the third and especially the fourth quarter of last year as I said in my prepared remarks. You have also got as we have said for quite a while now the mix of ASV subscription and services revenue is well in there and sometimes the services revenue plays into that. But if you look at it across the year, it’s tracking nicely against what we have said. Samad Samana : Okay, great. Thanks for answering that. Shantanu Narayen : And since that was the last question, I just wanted to end by saying we are really pleased with our performance in the first half of fiscal ’17 both by delivering great top line growth as well as bottom line earnings I think what excites us really is the long-term opportunities that we have to continue to empower people to bring their creativity to life as well as to enable businesses to transform themselves. And from our point of view if this combination of content to create the world class digital experience customer journey is that it become so important. And the analysis of that data to deliver great business outcomes we think as what differentiates the modern enterprise and we have a unique mission critical solution in that entire life cycle. We continue to invest in deep technology. We didn’t touch much on AI & ML, but that we believe will continue to distance us from our competitors. We look forward to chatting with you at our next earnings call. Thank you for joining us today. Operator : This concludes our call. Thanks everyone.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,017	3	2017Q3	2017Q3	2017-09-19	3.739	3.885	4.773	4.927	7.2871	31.21	31.71	Executives: Mike Saviage - VP, IR Shantanu Narayen - President and CEO Mark Garrett - EVP and CFO Analysts : Walter Pritchard - Citi Brent Thill - Jefferies Sterling Auty - JP Morgan Ross MacMillan - RBC Saket Kalia - Barclays Capital Heather Bellini - Goldman Sachs Kash Rangan - Bank of America Merrill Lynch MoffettNathanson - Adam Holt Jay Vleeschhouwer - Griffin Securities Keith Weiss - Morgan Stanley Derrick Wood - Cowen and Co. Evercore - Tom Mao Nate Cunningham - Guggenheim Keith Bachman - Bank of Montreal Alex Zukin - Piper Jaffray Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Third Quarter Fiscal Year 2017 Quarterly Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In our call today, we will discuss Adobe’s third quarter fiscal year 2017 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We’ve also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to Adobe’s Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, September 19, 2017, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. Adobe had another record quarter with revenue of $1.84 billion, representing 26% year-over-year growth. GAAP earnings per share in Q3 was $0.84, and non-GAAP earnings per share was $1.10. We continue to deliver strong top-line and bottom-line growth, with expanding operating margins and strong cash flow from operations. Digital transformation has become the top agenda item for C-suites across the globe, and Adobe’s Cloud offerings are mission-critical for CMOs, CIOs, CTOs and CEOs charged with modernizing their businesses and the way they engage with their customers. At the same time, we are significantly growing our footprint in the creative space well beyond our loyal base of creative professional customers. Whether it’s designing the user experience for a personal blog or editing a short film, Creative Cloud’s capabilities are expanding to address the needs of today’s youth, social media mavens and creative enthusiasts while continuing to push the technology boundaries for our most demanding creative pros. In addition to delivering continuous product innovation, we are investing deeply in Adobe Sensei to dramatically improve the accessibility, design and delivery of digital experiences. Adobe Sensei leverages Adobe’s massive volume of content and data assets as well as our deep domain expertise in the creative, document and marketing segments. We are making the Adobe Sensei framework and intelligent services available to our ecosystem of partners, ISVs and developers who will deliver additional magic. Central to our strong performance this quarter was record revenue in our Digital Media business. We achieved $1.27 billion in Digital Media revenue in Q3, a 28% year-over-year increase. We exited the quarter with over $4.87 billion of Digital Media Annualized Recurring Revenue, or ARR. The net ARR increase in Q3 was $308 million, and was driven by continued strength in our Creative Cloud and Adobe Document Cloud businesses. Creative Cloud is the one-stop shop for creativity and we increased revenue 33% year-over-year in Q3. Creative Cloud growth was driven by net-new subscriptions, continued focus on customer value that fuels retention, adoption of enterprise services, and focus on high-potential segments like education. The video category is exploding and we continue to drive strong growth with our market-leading Creative Cloud video solutions. At the IBC Conference in Amsterdam, we highlighted our latest innovations in virtual reality, animation, motion graphics, editing, collaboration and Adobe Stock video. We unveiled new premium features in Adobe Spark, a family of easy-to-use services for creating high-quality social graphics, web pages and video stories. Spark with premium features is now available as a standalone subscription, and is also included in our Creative Cloud All Apps subscription. In addition to Adobe XD for Experience Design and Project Felix for 2D to 3D photo-realistic rendering, we are driving innovation to enable authoring for emerging media types such as AR and VR. We recently acquired best-in-class 360-degree and virtual reality software from Mettle. The acquisition complements Adobe Creative Cloud’s existing 360/VR cinematic production technology, and we will integrate this functionality natively into future releases of Premiere Pro and After Effects. Next month’s MAX in Las Vegas will be the world’s largest creativity conference. At MAX, we will outline our expanding vision for Creatives, release new Creative Cloud apps and services, and showcase amazing new technology that our brilliant scientists are working on in our labs. The world’s leading digital document service, Adobe Document Cloud is enabling businesses to automate their paper-based processes. In Q3, Document Cloud revenue was $206 million, a year-over-year increase of 10%, and we grew Document Cloud ARR to $556 million exiting the quarter. We drove strong uptake of Acrobat across both Creative Cloud and Adobe Document Cloud. Adobe Sign is helping drive Adobe Document Cloud ARR growth. Earlier this month, we announced Adobe Sign is now Microsoft’s preferred e-signature solution across the company’s portfolio, including the 100 million monthly commercial active users of Microsoft Office 365. Adobe Scan is at the heart of our mobile PDF creation strategy. Adobe Scan has had over 2.7 million downloads across iOS and Android, delivering revolutionary scanning and text-recognition capabilities through integration with Adobe Document Cloud. The leader in the Digital Marketing category, Adobe Experience Cloud is enabling enterprises to deliver intelligent, intuitive and effective customer experiences. We achieved record Adobe Experience Cloud revenue of $508 million in Q3, which represents 26% year-over-year revenue growth. The breadth of Adobe Experience Cloud, which includes Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud, is enabling us to address an expanding array of customer experience categories. Central to the differentiation of Adobe Experience Cloud is our data and analytics platform, which provides unique insight into customer behavior and ROI across every digital touchpoint. In the trailing four quarters, we’ve helped our customers manage more than 150 trillion data transactions across our Experience Cloud solutions. Adobe Marketing Cloud enables marketers to deliver hyper-personalized content and campaigns to their customers. We announced new capabilities in Adobe Target to further enhance customer recommendations and targeting, optimize experiences and automate the delivery of personalized offers. In Adobe Campaign, marketers can now predict the highest performing images, forecast likely customer churn and gain real-time insights to adjust their campaigns. Adobe Analytics Cloud is foundational to the digital enterprise. We announced new voice analytics capabilities that enable brands to deliver personalized customer experiences using voice-based interfaces. Through deep analysis of voice data, brands can gain robust audience insights and recommendations, while automating the traditionally cumbersome, manual analysis. Adobe Advertising Cloud enables marketers to deliver video, display and search advertising across any screen in any format. We announced the addition of digital audio advertising formats on desktop and mobile devices. We added Spotify as a premium inventory source for digital audio, display and video advertising formats. At Advertising Week, we are extending automated buying and data-driven optimization to all TV advertising for the first time in a cross-channel platform. Last week, we announced new automotive focused analytics, personalization and advertising capabilities in Adobe Experience Cloud that give brands the ability to deliver unique consumer experiences including personalized playlists, on-route recommendations and audio ads. The 10 largest automakers in the world already use Adobe Experience Cloud and Adobe is working with these brands along with ecosystem players to advance new digital in-car capabilities. Our strategic partnership with Microsoft is providing us with an expanded footprint in the enterprise with Microsoft Azure, Dynamics 365 and PowerBI complementing Adobe Experience Cloud. We see a strong pipeline of joint customer opportunities with enterprise customers who are navigating their digital transformation. Significant customer wins this quarter included Adidas, HSBC, Kellogg’s, Marks & Spencer and University of Maryland. Despite this success with global enterprise customers, we were disappointed with our Experience Cloud bookings in Q3 but remain confident in our ability to execute against this large opportunity. Two weeks ago, we held our second annual internal Adobe & Women Leadership Summit and announced that we will be at 100% pay parity between women and men in the U.S. by the end of this fiscal year. Achieving pay parity underscores our leadership and commitment to being a diverse and inclusive employer. In Q3, we were named one of the Best Workplaces for Millennials and one of the top 10 Best Places to Work in both India and Australia. And for the second year in a row, Adobe has been named to the Dow Jones Sustainability Index World, the gold standard of corporate responsibility reporting for the investment community. Adobe is the clear leader in creating and delivering digital experiences across all segments and geographies. Our strategy has never been more relevant and we continue to execute well against our plan. No other company empowers every individual to tell their story while enabling businesses to compete more effectively in the digital age. With the world’s best employees, partners and customers, we are equipped to continue to deliver on our mission and look forward to a strong close to our fiscal year. Mark? Mark Garrett : Thanks, Shantanu. In the third quarter of FY17, Adobe achieved record revenue of $1.84 billion, which represents 26% year-over-year growth. GAAP diluted earnings per share in Q3 was $0.84 and non-GAAP diluted earnings per share was $1.10. Highlights in Q3 included record Creative revenue of $1.06 billion, strong Document Cloud revenue of $206 million, strong net new Digital Media ARR of $308 million, record Adobe Experience Cloud revenue of $508 million, strong year-over-year growth in operating profit and net income, record deferred revenue of $2.2 billion, more than $700 million in cash flow from operations, and a record 88% of revenue during the quarter came from recurring sources. In Digital Media, we grew segment revenue by 28% year-over-year. The addition of $308 million net new Digital Media ARR during the quarter grew total Digital Media ARR to $4.87 billion exiting Q3. Within Digital Media, we delivered Creative revenue of $1.06 billion which represents 33% year-over-year growth. In addition, we increased Creative ARR by $272 million during Q3 and exited the quarter with $4.32 billion of Creative ARR. Driving the momentum with our Creative business was continued strength with Creative Cloud across all segments, including individual, team and enterprise. Notable Q3 highlights included the achievement of strong net new subscriptions; maintaining or growing ARPU across all key Creative Cloud offerings and strength in Japan. With Document Cloud, we achieved revenue of $206 million, and Document Cloud ARR grew to $556 million exiting Q3. Across Creative Cloud and Document Cloud, Acrobat adoption accelerated again when compared to recent quarters, achieving 19% year-over-year unit growth. In addition, our electronic signature service Adobe Sign continues to show strength and we expect the recent partnership we announced with Microsoft to fuel growth of Adobe Sign moving forward. In Digital Marketing, we achieved record Adobe Experience Cloud revenue of $508 million, which represents 26% year-over-year growth. Notable areas of strength include Adobe Audience Manager, Adobe Campaign, and Adobe Advertising Cloud. We now have approximately $3 billion of annualized ad spend across search, social, display and video. Mobile remains a key driver for our Experience Cloud business; mobile data transactions grew to 57% of total Adobe Analytics transactions in the quarter. Overall interest in digital marketing and Adobe Experience Cloud is strong, and we continue to drive subscription bookings growth. The scale of our engagements is growing with customers increasingly adopting multiple Adobe solutions which is leading to larger deal sizes but longer sales cycles. As a result, we did not achieve our Q3 bookings goal and are no longer on track to achieve our 30% net new ASV bookings growth target for the year. However, we do expect greater than 20% organic annual growth in FY17 on the subscription book of business. From a quarter-over-quarter currency perspective, FX increased revenue by $9.6 million. We had $200,000 in hedge gains in Q3 FY17, versus $13.3 million in hedge gains in Q2 FY17; thus, the net sequential currency decrease to revenue considering hedging gains was $3.5 million. From a year-over-year currency perspective, FX decreased revenue by $11.3 million. We had $200,000 in hedge gains in Q3 FY17, versus $3.9 million in hedge gains in Q3 FY16; thus, the net year-over-year currency decrease to revenue considering hedging gains was $15 million. In Q3, Adobe’s effective tax rate was 22.5% on a GAAP-basis and 21% on a non-GAAP basis. The GAAP rate was slightly lower than targeted due to stronger-than-forecasted profits from outside the U.S., as well as certain tax benefits we were entitled to claim upon filing our U.S. income tax returns. Our trade DSO was 50 days, which compares to 45 days in the year-ago quarter, and 46 days last quarter. Deferred revenue grew to a record $2.2 billion, up 23% year-over-year, primarily driven by strength in Digital Media. Our ending cash and short-term investment position exiting Q3 was $5.4 billion. Cash flow from operations was $704 million in the quarter. In Q3, we repurchased approximately 2.1 million shares at a cost of $298 million. We have approximately $2.2 billion remaining of our $2.5 billion stock repurchase authority granted in January 2017. I will now provide our financial outlook. In Q4 FY17, we are targeting revenue of approximately $1.950 billion; net new Digital Media ARR of approximately $330 million; Digital Media segment year-over-year revenue growth of approximately 25%; Adobe Experience Cloud year-over-year revenue growth of approximately 17%; as a reminder, last quarter we outlined that the Experience Cloud Q4 FY17 year-over-year growth rate will be affected by a material amount of perpetual revenue that we achieved in Q4 FY16; share count of approximately 500 million shares; net non-operating expense of approximately $13 million on both a GAAP and non-GAAP basis; tax rate of approximately 24% on a GAAP basis, and 21% on a non-GAAP basis; GAAP earnings per share of approximately $0.86, and non-GAAP earnings per share of approximately $1.15. Our Q4 targets, combined with our year-to-date performance, would yield the following annual FY17 revenue results : Total Digital Media segment growth of approximately 26%; total Adobe Experience Cloud growth of approximately 24%; and total Adobe growth of approximately 24%. Our strong results coupled with our Q4 targets demonstrate that FY17 will be another record year for Adobe. Mike? Mike Saviage : Thanks, Mark. As we highlighted last quarter, Adobe MAX is coming up in Las Vegas during the week of October 16th. Day One of our conference is Wednesday October 18th, and Adobe management will host a meeting with financial analysts and investors that afternoon. An invitation with registration and discounted MAX pricing information was sent out in August, and more details about the conference is available at max.adobe.com. Please contact Adobe Investor Relations with an email to ir@adobe.com if you wish to receive the registration information. If you wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 77046940. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today, and ending at 8 pm Pacific Time on September 23, 2017. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] Your first question comes from Walter Pritchard from Citi. Walter, your line is open. Walter Pritchard : Hi, thanks. I’m wondering, Shantanu, on the digital marketing performance. I noticed one product that wasn’t mentioned as strong in the quarter was Experience Manager. If you go into some detail as to whether or not weakness in that product was because of what you saw -- and I know, what you mentioned on the larger transactions, but was there any sort of product maturity issues you were facing there? And any more detail around sort of steps you’re taking to try to resolve some of those challenges you faced in the quarter? Thanks. Shantanu Narayen : Sure. I’ll talk about that, Walter. I mean, we wanted to be clear in our communication that Q3 subscription bookings were below our expectations, but that in no way diminishes both, our excitement around the opportunity and how we’re helping companies deal with digital transformation. And when you see the minor impact of that Q3 bookings to our Q4 revenue target, you’ll see that we’re still targeting 24% revenue growth in fiscal 2017. So, as we think about providing a little bit more color on how we inspect that business, as you know, Walter, there are three components to the Experience Cloud. There is the non-recurring revenue sources including perpetual and that’s now de minimis in the consulting services. The largest part of the business is now represented by our subscription based model in both marketing cloud and analytics cloud. And growth there is best described I think by net growth on the book of business at the beginning of the year, and that’s very similar to how we describe Digital Media ARR. That continues to grow and we are expecting that book of business to grow organically at greater than 20% this year. So, the fact that we highlighted revenue in certain categories, has nothing to do with an implication that there was revenue weakness in AEM. So, wanted to get that out there. In Advertising Cloud, the business model again, as you know is the traditional usage based model and/or percentage of advertising spend. This includes an organic -- inorganic compare in FY17 but again, that will grow substantially over 30% this year. And so, the way we think about it, the 30% target that we had given was actually based on a different methodology which was prior to the acquisition of TubeMogul and was blended across both the subscription and the usage based models, and was actually growth on top of last year’s growth in the business as opposed to just net growth on the beginning book of business. So, the business remains healthy. There were some large deals that were taking longer. But we expect the traditional year-end strength across Experience Cloud will lead to a substantial increase in sequential bookings from Q3 to Q4, which was the last part of your question, very stringent focus on execution, and we remain excited about the business. We will probably provide an update to you guys at MAX as well. Operator : Your next question comes from Brent Thill from Jefferies. Brent your line is open. Brent Thill : Thanks. Shantanu, just to follow up on Experience Cloud. There was some concern that you pulled the target that may be these larger deals will take longer than Q4 to close. Can you just comment in terms of what you are seeing in the pipeline or are these just pushing from Q3 to Q4 or do you anticipate a push into the fiscal year? And then, just a quick follow-up. There has been a lot of talk about iOS 11 and the blocking of cookies and ads, as well as the weakness that’s been found in some of the ad agencies as of late. Is there anything else going, maybe outside your control that you are seeing that’s new, that we should take into account? Shantanu Narayen : As it relates to the Q3 pipeline, that did not close, it’s primarily moved to Q4, it has nothing to do. We still remain the leader in the category and it’s not competitive. So, we expect the traditional year-end strength across Experience Cloud will lead, as I said earlier, to the substantial increase in sequential bookings. But we are also anticipating that as a result of the larger deals, there is a possibility that we will continue to see an ongoing larger sales cycle that might lead to a phase shift in terms of when the bookings are closed. And so, we don’t think that the fundamental opportunity has changed. With respect to the Advertising Cloud, we had a strong quarter. And as I said, the business is growing substantially over 30% this year. So, no impact yet in terms of what we are seeing with respect to cookies or iOS. The advertising spend, I think Mark also spoke to in his prepared remarks, we have a significant amount of dollars under marketing spend. Operator : Your next question comes from the line of Sterling Auty from JP Morgan. Sterling, your line is open. Sterling Auty : Just want to continue that line of questions. Shantanu, you mentioned that you don’t think it’s competitive, but still want to try to zero in, is there any more color as to why the extension or the lengthening of sales cycle, whether the approval process, rethinking in terms of the direction that customers are taking some of their spend, because I know, we’re going to hit that question allow, which is why? Why do you think, you’re seeing the lengthening sales cycle and spillover in some of these deals? Shantanu Narayen : Well, one thing, Sterling, that is happening is given that these are much larger deals, the number of approvals that you need within an enterprise is extending beyond the marketing person who is responsible for this activity. And so, as we were targeting the Chief Revenue Officer, the Chief Digital Officer that was a single point of approval, now there may be a couple of points of approval. But beyond that, it’s just the bigger engagements, is resulting in more people in an organization, who are responsible for digital transformation and being involved in the process. Sterling Auty : Got it. Thank you. Shantanu Narayen : Yes. I think people agreed [ph] too much into this as opposed to the fact that, we are being as candid and transparent as we always are. The big term opportunity remains exactly the same. Operator : Your next question comes from Ross MacMillan from RBC. Ross, your line is open. Ross MacMillan : Mark, maybe one of your. Just, this year has obviously been a really strong year in Digital Media ARR. I think the net add in your forecast is going to be above 1.2 billion, which is actually higher than we’ve seen in the past two years. I’m just -- I know you’re not guiding for next year, but just to help us think about the shape of the curve on the net new ARR, because we’ve been sort of hanging out above a 1 billion now for three years. Is it something you think is sustainable or should we start thinking about the potential for the net new ARR to begin to come down. Maybe just help us think about that because there is a lot of factors obviously that play into that number? Mark Garrett : Yes. We’re very pleased with ARR and we’re very pleased with the fact, to your point Ross, that we’ve been able to continue to add over $1 billion every year. And as you know, it comes from three big groups. So, we’re still migrating the base over, there is still opportunity there. We continue to attract more and more new users, and that remains a very big opportunity, and we continue to sell services. So, those three growth vectors still play out very nicely. We don’t really see any change in that right now. We are very pleased with what we’ve been able to do. And as Shantanu laid out on the marketing side, this 1 billion plus dollars that we’re adding every year is an increase to our book of business, which is how we were trying to explain the way we will begin to look at digital marketing. So, no change to the trajectory from our perspective. Shantanu Narayen : And also Ross, more nascent businesses like Adobe Stock and Adobe Sign are continuing to perform really well, international expansion continues to grow, and new customer acquisition, so as well as enterprise services. So, continued focus on that. And last but certainly not least, you can see that impact of Acrobat on that overall business continues to be strong. Acrobat had a strong business in both, Document Cloud as well as in the Creative Cloud. Mark Garrett : And not to pile on, but we also continue to see an opportunity to combat piracy and drive more into education. So, there is just a lot of growth vectors left in this business. Ross MacMillan : Yes. That’s very clear. Thank you. And then, just quick follow-up on marketing. The 30% number is a big one. And as you mentioned, that was a kind of combined -- sorry for the background noise, combined on the advertising as well as sort of underlying prior assets. Just as you’re thinking about that business, do you think a 20% growth in sort of new ACV [ph] is a reasonable way to think about at that? Do you think that’s high, do you think that’s potentially low? Just maybe little bit of framework around what you think is sustainable one kind of new ACV [ph] basis that will be helpful. Thank you. Shantanu Narayen : Yes. I think, first, Ross, the market opportunity continues to be incredibly large. I think we’ve talked about 40 billion TAM. I think you’ve got it exactly when you talked about, that was a growth-on-growth number as opposed to just a percentage growth on the book-of-business. And so, when we look at it as a percentage growth on the book-of-business which is similar to what we do in digital media, as I said, the Marketing Cloud and Analytics Cloud will grow greater than 20% then the Advertising Cloud is going to be substantially greater than 30%. And so relative to the market opportunity, we continue to think that there is headroom for us and we continue to be the leader. Operator : Your next question comes from Saket Kalia from Barclays Capital. Saket, your line is open. Saket Kalia : Sure. Hey guys, thanks for taking my question here. Just to change gears a little bit towards Creative. Shantanu or Mark, can you just talk a little bit about Adobe Stock? I realize that you won’t give the contribution to ARR. Could you maybe talk qualitatively about whether customers are asking for monthly or annual plans and maybe what price spans are proven to be more popular? Shantanu Narayen : Yes. With respect to Adobe Stock, we just continue to think it’s a significant opportunity for us. Big picture, we offer it both in conjunction with the Creative Cloud all apps as well as we offer it as a subscription. We have actually tapered down the on-demand part of the Adobe Stock in favor of the subscription, so that it becomes a recurring part of the business. I think it’s clear when you look at the other stock content services that the growth in that category, we are continuing to drive it. We’ve added new capabilities in video as well. But the business is growing well for us across our offerings which are primarily subscription based offerings. Operator : Your next question comes from Heather Bellini of Goldman Sachs. Heather, your line is open. Heather Bellini : Great, thank you. I was wondering, Shantanu, if you could help share some color with us on the cross-sell and up-sell trends you’ve been seeing in the Creative Cloud community. And also wondering if you look forward, what do you see is being a bigger driver of growth? Can you help us think about just directionally, net new subs contribution versus cross-sell? Thank you. Shantanu Narayen : Yes, Heather. When we look at the business, I think as we add new categories of products in the authoring space, whether it’s Adobe XD, or whether it’s what we are doing with Project Felix and as we think about AR and VR, the first that we can continue to do is think about is it time to also offer another premium Creative Cloud service that can drive and up-sell in terms of ARR. We continue to see good adoption of new single apps as was also evident in the Creative Suite business of old. That’s the way in which people enter the platform and then, we move them from single app to the entire Creative Cloud offering. Services, the ARPU in the enterprise continues to grow as people adopt the services. And we are certainly in the process and have seen success in attaching whether it’s Stock or whether it’s Sign to those Creative Could enterprise term license agreements. We haven’t yet started even looking at pricing, which continues to be a big opportunity for us in terms of optimizing pricing because we are trying to get more and more people to the platform. So, I think net international expansion, Mark talked about education and piracy, it’s -- the nature of everybody who has a story to tell is just expanding. I am excited about Spark and now offering Spark as a premium feature, which we think there should be a significantly larger set of people who would be interested in Spark. So, across all of those dimensions Heather, the cross-sell of people who have the applications through mobile and stock, the upsell from individual users to the entire suite and also from enterprises, not only adopting asset management and Creative Cloud ETLAs but also adopting the Marketing Cloud, I think all of those continue to be areas of focus and execution for us. Operator : Your next question comes from Kash Rangan from Bank of America Merrill Lynch. Kash your line is open. Kash Rangan : Hi, thanks. A good segue way to Heather’s question. I was looking to see, given your exceptional track record in being able to lay out longer term targets and being able to hit that with a lot of panache and style. How should we think about Adobe’s growth opportunities ahead? Is it -- the way you answered Heather’s question, the different vectors, is that the next third chapter, if you will, of your long-term planning that is going to give us the comfort in your ability to sustain this growth? [Ph] because there is not maybe a widely held belief but in maybe some pockets of the investor community that once you hit the full penetration in Creative, whenever the time, it’s 2018 or 2019 that growth will decelerate and therefore Adobe is going to have to do something to keep that growth rate. Just curious how we should think about it and you think about it, more importantly? Thank you. Shantanu Narayen : I think, at our analyst meetings, we always take it upon ourselves to talk about our long-term growth opportunities, whether they’d be in Creative, Document or Marketing Cloud. And as we talk about the large TAM available to us, it’s clear actually that we are executing against all three of those. And so, we will continue to provide updates at MAX. But from the point of view of your specific question around Creative, we think we are so early in the adoption of our Creative Cloud applications and services and mobile and new forms of offering that any concern associated with sort of migration being the only fuel of the business, we should have put that to bed a long time ago in terms of the new customer acquisition and the new services that are driving the growth. So, a multiple opportunities. I hope you are coming to MAX where you will see a lot of the tremendous innovation, and we’ll again outline all of the growth vectors that are available for us. Kash Rangan : MAX in Vegas, tough combination to be, we’ll be there. Mark Garrett : I was going to say, Kash, we both touched on it separately but if you just list out all the different opportunities in Creative to grow the business, whether it’s people coming from the base, new users or services, and then pricing opportunity, international opportunity, piracy opportunity, education opportunity, international opportunity -- I said that one, there’s just a lot of different opportunities to continue to grow this business for quite a while from our perspective? Operator : Your next question comes from Adam Holt from MoffettNathanson. Adam, your line is open. Adam Holt : A very good quarter from a cash flow perspective, and I was hoping maybe you could detail a little bit, what drove that, specifically around the deferred revenue lines. I wanted to know, are you seeing any benefit -- are you making any changes [Technical Difficulty]? And then, secondly… Shantanu Narayen : Adam, you’re fading. Can you be just a little bit closer to the mic, please? Adam Holt : Sure. Sorry about that. Can you hear me now? Shantanu Narayen : Yes. Adam Holt : So, a very good quarter from a cash flow perspective, and I wanted to drill down on what’s driving deferred revenue. Specifically, have you started to see any impact of maybe better duration from your billings, moving people from monthly and quarterly to annual, and how do you think that plays out going forward? Mark Garrett : As it relates to the Creative business -- so first of all, Adam, congrats on the new job, welcome back. Adam Holt : Thank you. Mark Garrett : As a relates to the Creative business, most people are on an annual plan already. So that gets factored into deferred revenue already. The beauty of our business and you guys all know this, but the beauty of our business overall is that you’ve got two businesses, three businesses growing very nicely and two of which just are amazingly profitable businesses that drive a lot of cash flow, and that’s going to continue. So, we’re thrilled with the cash flow; that is one of the beautiful parts of our business, and that will continue. But, as it relates to deferred, most people are already on an annual plan on the creative side. So, it’s really factored in there. Adam Holt : If I could just ask a quick follow-up to what you talked about moments earlier. Would you expect relationship [technical difficulty] bookings change going forward? Mark Garrett : To the extent that we in a quarter come up a little short on bookings like we did this quarter, you’re going to come up a little short on invoicing and you’re going to come up a little sure on deferred. And that’s why we said, in the deferred, most of what you saw there was Digital Media related. So, there is definitely a correlation there. But again, none of the fundamentals of the business have changed, none of the opportunity has changed. This is from our perspective, just a short-term change to drive larger transactions in the enterprise. Operator : Your next question comes from Jay Vleeschhouwer from Griffin Securities. Jay, your line is open. Jay Vleeschhouwer : Shantanu, Mark, without meaning to suggest anything about the new customer acquisition, I’d like to ask about you of various opportunities in upgrading and migrating several large basis. Specifically, if you could comment on for instance, the opportunity to upgrade or migrate CC Team to CCE; by our calculation about a quarter of the CC subscriber base is using the full product on teams, that seems just a pretty substantial base upgrade opportunity. Similarly, the years after you grew AEM after the acquisition of Day, you still sold a substantial amount of your life cycle business. We calculate roughly $0.5 billion or more over a period of half a decade, even as AEM was growing. So, again, there too seems to be a substantial migration opportunity. And then, lastly, with respect to Doc Cloud, which has always been your bigger base, do you think that the new PDF to point out spec could engender a new growth cycle for Acrobat either within the base or for new customers? Shantanu Narayen : So, Jay, I’ll go third backwards. And so first on Acrobat, I think we’ve said in the past, we had over 30 million installations of Acrobats. So clearly that represents a large opportunity. I think mobile PDF creation with what we’ve done with Adobe Scan and the ability for all of those assets to be in the cloud and to use Adobe Sensei to do things like OCR, clearly we see large opportunity. That business has migrated faster than we would have thought to subscription based business while we are growing the overall base. So, large opportunity, continue to be focused on it, and clearly, I think to your point, we are much earlier in the cycle in terms of migrating. I think as for the second one that you talked about within the enterprise, the opportunity associated with how people move from traditional lifecycle to new forms capabilities in the AEM stack, absolutely that continues to be a large opportunity as people are moving from paper to digital, the ability to now electronic signatures which completes the last mile of that workflow is again an opportunity whether that’s in government or whether that’s in enterprises that are regulated, continues to be a large opportunity. And on the CC Team versus CCE, we look at that a little bit more honestly as a buying preference that people have where some people are buying CC Team and they are getting that fulfilled through the channel, and others are CC Enterprise and want the direct relationship with the customer and with Adobe in that particular case. In both those scenarios, we’re focused on up-selling services as opposed to migrating them from one buying vehicle to another buying vehicle. So, on that one, I would say, the focus is more on how do we get both of those categories to buy more of the services rather than necessarily transition them at their preferences buying through the channel or adobe.com to having that CC Enterprise relationship with Adobe. Operator : Your next question comes from Keith Weiss from Morgan Stanley. Keith, your line is open. Keith Weiss : I wanted to ask a couple of bigger picture questions. One is on Sensei, with respect to you’ve got some positive feedback on Sensei, particularly in the broader Experience Cloud. Could you guys talk to us a little bit about sort of what you’re hearing back from customers? And also remind us kind of how the monetization strategy around Sensei is going to be evolving as we move forward? Shantanu Narayen : Sure, Keith. I mean, as it relates to Sensei, I mean, we’ve had as we’ve outlined on many occasions, decades of significant expertise, whether it’s an understanding video, understanding images, understanding the semantic meaning of documents, and on the Experience Cloud side everything to do with predicting based on these large data sets, behavior that will drive otpizmation of business outcomes on behalf of our customers. And as we embed more and more of that intelligence that people have access to directly in how they use their products, I think the aha moment is going. I think people have that more and more on the creative side when they saw the magic that they saw within our products. And now what we are doing is actually ensuring that the ability for them to action all of the insights that we are getting is far more within the hands of the users. So, as you point out, the feedback that we are getting on Sensei across all of our offerings is very positive. I do want to clarify one issue as it relates to the question around monetization of intelligence in our applications is there are other companies that are saying we’re going to monetize the intelligence separately, does that mean that their other applications and dumb and don’t have actually the functionality. So, for us we just look at all of the technology that we are putting in and it’s making our existing products that are already world class better. So that’s the way I look at it. We are not going to go and say you can buy the non-intelligent product for a $1 and you can buy the additional intelligent product for additional $1 amount. That makes no sense whatsoever, Keith. But the intelligence is being appreciated. We are investing very deeply in it. And from our point of view, the best is getting better. Keith Weiss : And perhaps one follow-up on distribution. We heard about sort of an expansion of the ETLA program, trying to sort of [technical difficulty] put more customers into it. Can you talk a little bit about that expansion of ETLAs and whether sort of the initial feedback has been -- whether you’ve been successful on getting more customers on to that program? Shantanu Narayen : Yes, Keith. I think we’ve had tremendous success with actually migrating people from the traditional way of procuring the Creative applications from us into ETLAs. And I think we have described in the past how the first version of that ETLA was in effect mimicking the sort of different solutions that they got in Creative suite. In other words, Creative suite was available as a design collection or as a master collection or as a video collection, and the first versions of ETLAs in terms of doing no harm, we were just providing an equivalent way for them to license the Creative Cloud applications. The second wave of that as they are rolling off the three years, we have been very active in up-selling them into the Creative Cloud Complete application which is an increase in ARPU for us as well as selling them new services like Stock and Sign, which is additional revenue. And so, the way we measure the business and I look at this all the time, is migrating all ETLA customers first to Creative Cloud, then to Creative Cloud Complete and then monitoring usage of not just Creative Cloud all of our applications but also monitoring Stock as well as Sign. And so, we are well on our way to the journey, which is leading to better satisfaction on the part of our customers and clearly increase revenue and ARPU to us here at the Adobe. Operator : Your next question comes from Derrick Wood from Cowen and Co. Derrick your line is open. Derrick Wood : Great, thanks. Back on the marketing side. And it seems like there is more companies forming a position for the Chief Data Officer. I know you guys have all had the era of the Chief Marketing Officer, but I would think as data has become more important in the marketing investments, you guys start to have more engagement with the CDO. So, I guess what I am trying to get at is, do you think that may be an element of longer sales cycles? And if so, do you think you need to change or expand your account coverage capacity to sell in through a different approval point or do you feel like you’re entrenched enough with large accounts that the rate of investment doesn’t need to change much? Shantanu Narayen : Good question, Derrick. I think we are definitely entrenched in the accounts where the selling motion or process doesn’t have to change as a result of what we are seeing because they know about us; the cycle may take a little bit longer. With respect to your second question, there is no doubt that there is additional scrutiny on ensuring whatever the frameworks are to protect the data appropriately. If you go to our website, you’ll see were leader and whether it’s FedRAMP and the government or looking at it as HIPAA or healthcare and ensuring that all of those standards as part of Adobe’s security framework and our data privacy framework that we’ve taken the lead on that. I think the third part of your question associated with are we then finding ways that enable our customers to monetize the insight associated with that data, that’s clearly something that we’ve been doing for a while including with the data co-op go up that we’ve announced in terms of being able to monetize their data. So at all three levels, we feel confident. Namely, we have the right people on the table, we deal with all of the checkless items that are important for them to feel comfortable with our solutions, and we’re providing business value and business outcome. Operator : Your next question comes from Kirk Materne from Evercore. Kirk, your line is open. Tom Mao : This is Tom Mao, calling in for Kirk. Just from the product side. Can you talk about some of the updates to your 360/VR technology apart from Mettle? What kind of impact could we start to see in 2018 and how do you think about the TAM of those segments today? Shantanu Narayen : Within the Creative Cloud, I think we’ve touched on the fact that video is clearly the most exclusive category that we’re seeing, IBC was another great opportunity for us. Within video, we had already added some 360/VR capabilities. The technology that we’ve acquired also was available as plug-ins to some of our applications. But as we have done traditionally, we take those plug-ins and apply that natively, because then the performance is significantly better and the usability of that functionality is better. So big picture, we look at it saying, video is certainly exploding with the leaders in that video as Apple and other companies do a lot more innovation on things as AR and VR, extending our existing applications and continuously looking at new opportunities like we did with Project Felix to enable people to author [ph] for those. There is no question that’s going to lead to both an increased set of new users as well as established users asking from Adobe support for all of those new media types. So both represent long-term opportunities for us, and we’re pleased with the performance. Tom Mao : And just a quick follow-up. It looks like your sales and marketing expense grew 14% year-on-year. Can you talk about where you are in terms of adding sales capacity on digital marketing side and how, we should think about that initiative, as we head into 2018? Mark Garrett : Yes. It’s Mark. We’ve said for a while now that our incremental spend, if you look at it quarter-to-quarter or year-to-year, is going to be primarily in sales and marketing and R&D. And we’re going to need to continue to invest in sales and marketing to drive both, awareness on the Creative Cloud side and sales capacity on the digital marketing side. So, I don’t foresee that changing, especially as you look out and we continue to drive growth in both of those businesses. Operator : Your next question comes from Nate Cunningham from Guggenheim. Nate, your line is open. Nate Cunningham : Shantanu, on the marketing side of the business, what do you see as the strategic gaps in your portfolio? And what are some areas where we could see you either partnering or making acquisitions in the future? Shantanu Narayen : Well, let’s start with the partnering. We clearly see an opportunity with Microsoft to partner. We have -- that’s far more than a press release, we’re open for business on that particular front, both with AEM and with Campaign in terms of managed service implementation on Azure and integration with Dynamics as well as integration with the PowerBI is certainly an opportunity. That pipeline is growing very healthily. We will be at Microsoft events. I think they’ve been participating in the Adobe events. So, on partnership wide, we have a platform that enables a number of small startups to also benefit from and leverage our data assets. That’s the one that I would highlight first and foremost. With respect to M&A, I’m certainly not going to highlight for the smaller companies that may be on our radar, what we are interested in to drive our price. But, we feel really good about the overall portfolio that we have. And in terms of the available market and growth opportunities for what we already have, we feel really good. We will continuously look at adjacencies in order to continue to extend our lead, but nothing stands out as a weakness or gap in our portfolio. Operator : Your next question comes from Keith Bachman from Bank of Montreal. Keith, your line is open. Keith Bachman : Hi. Many thanks. Shantanu, I wanted to try this for you. Going back to the Marketing Cloud and you commented in your formal remarks the Experience Cloud that you expect FY17 to be better than 20% organic bookings growth. And yet, I’m trying to understand how to reconcile, because there was clearly some degradation in the Q4 guidance. And I understand it’s a tough comp where you’re talking about 17%, but that still includes TubeMogul, which is mostly in the quarter. And so, as we think about the business, as you look out beyond this quarter, can the Experience Cloud grow on an organic basis more -- is 20% the message that we should be thinking about as we look at next fiscal year for the growth of the Experience Cloud? Shantanu Narayen : I think those are two separate issues. And we want to make sure, Keith that we separate the two separate issues. Because when we started the second half of the year and provided targets for the remainder of the year for the Digital Marketing revenue segment, even at that point, we had talked about while we were targeting 25% which is now 24%, we expected sequentially Q3 to be higher from a year-over-year growth perspective than Q4. So, there is nothing that you should read into the 17% because that’s something that we had outlined at the beginning of the second half of the year. So, I wanted to make sure we clarified that. Mark Garrett : And the reason Keith that we had a 25% target as opposed to what used to be a 20% target for revenue was specifically because of Tube. So, that was factored in both the quarter and the year. Shantanu Narayen : Correct. And as it relates to the long-term growth prospects, I think we’ve outlined how large this opportunity is. We’re not proving FY18 targets right now. But nothing has changed, as it relates to the substantial opportunity that exists for the offerings that we have as people embark on digital transformation. Keith Bachman : Okay. Will you provide some specific context associated with the upcoming Analyst Event? Mark Garrett : At Analyst Day, yes, we will provide much more context. Keith Bachman : Okay. Thank you. Operator : Your last question comes from Alex Zukin from Piper Jaffray. Alex, your line is open. Alex Zukin : Hey, guys, thanks for taking my questions. So, maybe the first question on Marketing Cloud specifically. Were there any changes to sales teams or sales leadership or do you anticipate making them on the digital marketing side? And then, Shantanu, maybe a big picture question along the same lines, not necessarily what a gap you have in the marketing portfolio. But if you stack rank your ability to weigh [ph] your success in continued market leadership in B2C marketing into B2B or do you need a customer record or a customer dataset to be able to do that and/or do you look at maybe going down market as easier pathway to continued growth? So, just big picture and a small -- more specific account there? Shantanu Narayen : Yes, I think on the first question, I mean, there’s nothing that we are outlining except continued focus on execution with respect to sales execution. So, that one is an easy one. As it relates to the stack ranking, I think you are right in saying that B2C clearly represented the first beachhead in terms of people who are embarking on digital transformation. However, there are a number of customers who are already in the B2B space who are adopting our solutions because they are going through absolutely the same scenarios and they have been using our solutions in order to deliver digital transformation whether it’s B2B or B2C. So while the first beachhead was B2C, we have already made traction and continue to see opportunity in B2B. As it relates to your question around going down market and the existence of a customer record, I think the big differentiation in our particular product is not about the customer record as much as it’s the ability to in real time deliver the customer experience. And I think over time, the existence of what’s on disc as a customer record is far less important than what is in memory in terms of being able to deliver the digital experience. So, I think the game is completely changing to an in-memory how do you action based on all the data that you have, the behavior, the demographics rather than an existence or a flat file or a record associated with it. And that’s really what we are focused on. We talk about it as the last millisecond in the Experience Cloud. And big picture, I think that’s where we will continue to across all digital touchpoints where a customer engages with an enterprise, ensure that we deliver the best possible customer experience. And given that was the last question, in close, we are absolutely proud of the strong financial results we reported in Q3. And I think you’re clearly seeing the leverage that exists in our business model. We remain excited about the growth opportunities, clear the strategy, whether it’s empowering people to bring their creativity to life or enabling businesses to transform, continuous to resonate with customers from individuals to the larger enterprises. We have a strong portfolio of products. And this represents multiple multi-year growth opportunities. And we continue to be one of the only companies that’s delivering stellar top-line and bottom-line financial results. We hope you are going to join us at MAX because we are going to showcase tremendous innovation and we will provide update at our Analyst Meeting in conjunction with MAX. With that, thank you for joining us today. Mike Saviage : And this concludes our call. Thanks everyone.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,017	4	2017Q4	2017Q4	2017-12-14	4.157	4.411	5.359	5.612	null	31.04	31.51	Executives: Mike Saviage - VP, IR Shantanu Narayen - President and CEO Mark Garrett - EVP and CFO Analysts : Jennifer Lowe - UBS Walter Pritchard - Citi Brent Thill - Jefferies Ross MacMillan - RBC Stan Zlotsky - Morgan Stanley Jay Vleeschhouwer - Griffin Securities Samad Samana - Stephens Saket Kalia - Barclays Capital Adam Holt - MoffettNathanson Tom Roderick - Stifel Taylor Reiners - Piper Jaffray Shankar Subramanian - BofA Merrill Lynch Keith Bachman - BMO Capital Markets Operator : Good afternoon ladies and gentlemen. I would like to welcome you to Adobe Systems' Fourth Quarter Fiscal Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Question-and-Answer Session. [Operator Instructions]. Thank you. I would like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go-ahead sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In our call today, we will discuss Adobe’s fourth quarter and fiscal year 2017 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We’ve also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to Adobe’s Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, December 14, 2017, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. FY '17 was another strong year for Adobe, highlighted by record Creative Cloud, Document Cloud and Experience Cloud revenue and capped off by the first ever $2 billion quarter in company history. In Q4 we delivered revenue of $2.01 billion, which represents 25% year-over-year growth. GAAP earnings per share in Q4 was $1, and non-GAAP earnings per share was $1.26. For the year we grew total revenue to $7.3 billion which represents 25% annual growth. GAAP earnings per share in FY '17 was $3.38 and non-GAAP earnings per share was $4.31. Our strong results are validation of the relevance of Adobe's mission to change the world through digital experiences. That vision serves a broad and diversified set of customers from artists, students and anyone with a story to tell to the world's most prestigious brands, media companies and institutions all of whom are betting their future on Adobe as they embrace the opportunities of digital transformation. In digital media Creative Cloud and Adobe Document Cloud are fundamental to how people and businesses communicate, entertain and engage with each other. We exited the year with more than 5.2 billion of digital media annualized recurring revenue or ARR. The net ARR increase in Q4 was 359 million, fueled by our ability to attract and retain new users, deepened product engagement and drive new opportunities through services. Creative Cloud remains the gold standard for creativity and design. Tens of millions of people use Creative Cloud and it is becoming the creativity platform for all. We achieved Creative revenue of 1.16 billion in Q4. For the year we achieved Creative revenue of 4.2 billion which represents 31% year-over-year growth. At our annual Max Creativity Conference in October we introduced the next generation of Creative Cloud including a set of new applications across the design, video and photography segments. Highlights included the introduction of Adobe XD, our tool for end-to-end UX/UI design, Adobe Dimension, which greatly simplifies 3D design, Adobe Character Animator, which brings 2D puppets to life using voice, facial expressions and gestures; and Adobe Lightroom CC, our photography cloud service that works across desktop, mobile and web to edit, organize, store and share photos. We have delivered on Creative Cloud’s promise to bring continuous innovation through updates to our flagship products including Photoshop, Illustrator and Premiere Pro. We introduced a premium version of Adobe Spark, our tool for helping everyone communicate their ideas visually. Spark with Premium Features offers enhanced customization capabilities for branded graphics, web pages, and video stories and is a key part of Adobe’s strategy to introduce our creative tools to a wider audience of storytellers. The value of Creative Cloud is enhanced through the delivery of innovative new cloud services. Adobe Stock has continued its steady growth as we innovate in areas like aesthetic search and introduce new features and content such as Motion Graphics templates. We’ve continued to add new contributor features to Adobe Stock, allowing our community to customize their portfolios and present their best work. Last week we announced that Scott Belsky, co-founder of Behance, returned to Adobe as Chief Product Officer, and EVP of Creative Cloud and has joined my staff. Scott is one of the most admired leaders in the design community. In this role, he will focus on product delivery and driving long-term innovation for Creative Cloud products and services. Scott will partner closely with Bryan Lamkin, EVP and General Manager of Digital Media, as we continue to push the boundaries of what’s possible with Creative Cloud and drive continued growth and customer engagement. The world’s leading digital document service, Adobe Document Cloud, is enabling businesses to transform inefficient paper-based processes to digital. In Q4, Document Cloud revenue was 235 million and we grew Document Cloud ARR to 600 million. We achieved annual revenue of 837 million for Document Cloud in FY'17. Mobile has become the new frontier for Document Cloud. This quarter, we announced new updates to Adobe Scan which leverage Adobe Sensei to capture and create intelligent PDFs on your mobile device. To date, Adobe Scan has had more than 5 million downloads. Adobe Creative is the leader in the digital marketing category, which has redefined the enterprise software landscape. Today, we are targeting the much broader Experience Business opportunity which we estimate to be a 53 billion addressable market in 2020. In Q4 we achieved Adobe Experience Cloud revenue of 550 million, resulting in annual revenue of 2.03 billion. In an era when entire industries are being disrupted, every business must now compete for the hearts and minds of their customers with every click and every interaction. With Adobe Experience Cloud, we are transforming how businesses compete in this new reality. Our offering includes Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud, making it the industry’s most complete and integrated offering. Adobe Advertising Cloud is the first end-to-end platform that helps marketers manage their ad spend across all digital formats including display, search and video, as well as traditional TV. It’s been a year since our acquisition of TubeMogul and we have successfully integrated the technology with Adobe Media Optimizer. This has played a key role in driving strong Advertising Cloud performance and leadership in the digital advertising space. We introduced several advancements to Advertising Cloud, including the release of the Adobe Advertising Cloud Mobile App, the industry’s first mobile app for cross-channel advertising campaign management. Adobe Analytics Cloud continues to be the intelligence engine for the enterprise, combining digital and offline data to help brands move from insight to action. Recently, Gartner positioned Adobe as a leader in its Magic Quadrant for Digital Marketing Analytics research report, for the third year in a row. Adobe was also recognized as a leader in the recent The Forrester Wave : Web Analytics report. Adobe Experience Cloud processed approximately 65 trillion data transactions for its customers in Q4, and 186 trillion data transactions in the trailing four quarters. The insights gleaned from this data provide a valuable window into customer behavior and business trends. Our annual Holiday Shopping Report has become the industry benchmark for measuring the trajectory of ecommerce spending and trends. This year we accurately predicted Cyber Monday to be the largest online sales day in U.S. history. Underscoring the importance of delivering a great mobile shopping experience, revenue driven by smartphones hit an all-time high of more than $1.59 billion on Cyber Monday. Together with Microsoft, we are now enabling enterprise marketers to deliver one-to-one personalization of web content at scale and connect any lead generation data captured on the web to their CRM system through Adobe Experience Manager integration with Microsoft Dynamics 365. To date, more than 50 enterprises leverage Adobe and Microsoft’s joint offerings including Air Canada, Great West Life Assurance and the U.S. Army. Other significant customer wins in the quarter included Allianz, Barclays, BNP Paribas, IKEA, JPMorgan, Mattel, and Opel. The centerpiece of our innovation efforts across Adobe is Sensei, our artificial intelligence and machine learning framework. We’ve invested heavily to make Sensei a foundational part of our offerings to both our creative and enterprise customers. With Adobe’s massive volume of content and data assets fueling Adobe Sensei, and our unmatched domain expertise in creativity, documents and experiences, Sensei is a critical differentiator for our business. Last week, we celebrated Adobe’s 35th anniversary. I know I speak for our 18,000 Adobe employees around the world when I share how proud we are of everything we’ve achieved as a company, not only the strong business results, but the impact Adobe has made in the markets we serve and in the communities where we do business. We were recently recognized by Glassdoor as a 2018 Best Places to Work, as well as a World’s Best Workplace and one of the Best Workplaces for Diversity by Fortune. We recently announced that Adobe has achieved equal pay between men and women in the U.S., an important milestone in Adobe’s ongoing efforts to create an inclusive and rewarding environment for all employees. The pride in what we’ve accomplished is exceeded by our excitement about Adobe’s future. With our strong brand, our compelling strategy, and our culture of innovation, our best days remain ahead of us. We’re looking forward to a fantastic 2018. Mark? Mark Garrett : Thanks, Shantanu. Our earnings report today covers both Q4 and fiscal year 2017 results. In FY17, Adobe achieved record annual revenue of $7.3 billion, which represents 25% year-over-year growth. GAAP EPS for the year was $3.38, and non-GAAP EPS was $4.31. This performance is the result of strong execution against our strategy, and noteworthy achievements, including record Creative revenue with 31% year-over-year revenue growth and exiting the year with $4.63 billion of Creative ARR; record Document Cloud revenue of $837 million and exiting the year with $600 million of Document Cloud ARR; record Adobe Experience Cloud revenue of $2.03 billion, which represents 24% annual year-over-year growth. Generating a record $2.91 billion in operating cash flow during the year, growing deferred revenue to approximately $2.5 billion, and increasing our unbilled backlog to approximately $3.9 billion exiting the year; together, this represents approximately $6.4 billion of contracted revenue; and returning over $1.1 billion in cash to stockholders through our stock repurchase program. In the fourth quarter of FY'17, Adobe achieved record revenue of $2.01 billion, which represents 25% year-over-year growth. GAAP diluted earnings per share in Q4 was $1.00 and non-GAAP diluted earnings per share was $1.26. Highlights in Q4 included : record Creative revenue of $1.16 billion; record Adobe Document Cloud revenue of $235 million; record Adobe Experience Cloud revenue of $550 million; record net new Digital Media ARR of $359 million; and record cash flow from operations of $833 million. In Digital Media, we grew segment revenue by 29% year-over-year. The addition of $359 million net new Digital Media ARR during the quarter grew the total to $5.23 billion exiting Q4. Within Digital Media, Creative revenue grew 30% year-over-year and we increased Creative ARR by $315 million during Q4. The strong quarter for our Creative business was achieved across several areas : strong net new subscriptions, helped by increased Adobe.com traffic after the Adobe MAX announcements and end-of-year promotions; stable or improving ARPU across key offerings; the attachment of services with Team and Enterprise offerings; and continued momentum with Adobe Stock. With Document Cloud, we achieved record revenue with 23% year-over-year growth. The performance in Q4 was driven by continued strength with Acrobat subscription adoption, normal Q4 enterprise seasonality, and strong year-end Acrobat perpetual product licensing through the channel. Unit growth for Acrobat DC across Creative Cloud and Document Cloud accelerated again in Q4, pushing total year-over-year Acrobat unit growth to over 20% for FY'17. Adobe Sign also achieved strong results, and contributed to Document Cloud ARR growth. In Digital Marketing, we exceeded $2 billion of Adobe Experience Cloud revenue for the year, with 24% annual revenue growth. Advertising Cloud had a strong year, and we achieved the expectations we set in January for TubeMogul. Excluding the addition of TubeMogul, Experience Cloud subscription revenue grew 22% year-over-year during FY'17. Subscription revenue growth was helped by strong performance with Adobe Experience Manager, Adobe Campaign and Adobe Audience Manager during the year. In Q4, we achieved record Adobe Experience Cloud revenue of $550 million, which represents 18% year-over-year growth. We drove strong sequential subscription bookings growth from Q3 to Q4, reflecting typical enterprise year-end strength. Multi-solution selling in our top accounts and strong bookings of the Adobe/Microsoft solutions drove this sequential growth. From a quarter-over-quarter currency perspective, FX increased revenue by 11.1 million. We had 1 million in hedge gains in Q4 FY'17, versus 0.2 million in hedge gains in Q3 FY'17; thus, the net sequential currency increase to revenue considering hedging gains was 11.9 million. From a year-over-year currency perspective, FX increased revenue by 4.1 million. We had 1 million in hedge gains in Q4 FY'17, versus 8.1 million in hedge gains in Q4 FY'16; thus, the net year-over-year currency decrease to revenue considering hedging gains was 3 million. In Q4, Adobe’s effective tax rate was 22% on a GAAP-basis and 21% on a non-GAAP basis. Our trade DSO was 55 days, which compares to 47 days in the year-ago quarter, and 50 days last quarter. Our DSO has increased slightly over the past year given the nature of the Advertising Cloud business model and the addition of the TubeMogul business. Deferred revenue grew to a record 2.49 billion, up 24% year-over-year. Our ending cash and short-term investment position exiting Q4 was 5.8 billion. Cash flow from operations was a record 833 million in the quarter. In Q4, we repurchased approximately 1.9 million shares at a cost of 297 million. During the year, we repurchased 8.2 million shares, returning 1.1 billion dollars to stockholders. We have approximately 1.9 billion remaining of our 2.5 billion stock repurchase authority granted in January 2017. Now I will provide our financial outlook. Entering FY'18, we are excited about our momentum and the large addressable markets we discussed at our recent analyst meeting. We remain well-positioned to continue to deliver strong top-line and bottom line growth. As you know, we measure ARR on a constant currency basis during a fiscal year, and if necessary we revalue ARR at year-end for the current currency rates. FX rate changes between December of last year and this year have resulted in a 154 million increase in Digital Media ARR. This increases our FY'18 beginning Digital Media ARR to 5.39 billion. The effect of this revision is reflected in our updated investor data sheet, and ARR results will be measured against this amount during FY'18. In FY'18, we are targeting : total adobe revenue of approximately 8.725 billion; digital media segment revenue growth of approximately 23%; Adobe Experience Cloud subscription revenue growth of approximately 20%; adobe experience cloud total revenue growth of approximately 15%; GAAP earnings per share of approximately $4.40; non-GAAP earnings per share of approximately $5.50; net new digital media ARR of approximately 1.1 billion; and Adobe experience cloud subscription bookings growth of approximately 20%. We expect quarterly revenue, earnings per share and Digital Media ARR results to follow similar seasonality as was achieved in FY'2017. In Q1 FY'18, we are targeting : revenue of approximately $2.40 billion; digital Media segment year-over-year revenue growth of approximately 25%; Experience Cloud year-over-year total revenue growth of approximately 15%; tax rate of approximately 9% on a GAAP basis, and 21% on a non-GAAP basis; share count of approximately 500 million shares; GAAP earnings per share of approximately $1.15; non-GAAP earnings per share of approximately $1.27; and net new Digital Media ARR of approximately $275 million. As a reminder, our operating cash flow is seasonally higher in Q4, and typically decreases sequentially in Q1 due to several year-end related disbursements made during our first quarter. In summary, 2017 was another strong year for Adobe. We are the market leader across our key businesses, and are executing well against a large and growing addressable market. We’re excited about what lies ahead for Adobe and look forward to sharing more progress with you in the coming year. Mike? Mike Saviage : Thanks, Mark. Beginning with our Q1 FY18 earnings report in March, we will modify our segment reporting moving forward. LiveCycle and Connect, which have been reported in our Digital Marketing segment, will be moved to a new segment called Publishing which will include the current Print and Publishing segment products. We will also rename our Digital Marketing segment to Digital Experience. As we’ve done in the past, we will publish an updated investor data sheet in late January with historical information adjusted to reflect the segment changes. The updated data sheet will coincide with the issuance of our Annual Report on Form 10-K for FY'17 which will also reflect these changes. Adobe Summit, the world’s largest digital marketing conference, is scheduled for the last week in March, with Day One on Tuesday March 27. An invitation with registration and discounted Summit pricing information will be sent out in January to our investor and analyst email list. More details about the conference will be available at summit.adobe.com. If you wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859- 2056; use conference ID number 9467178. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today, and ending at 5 pm Pacific Time on December 20th, 2017. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions]. Your first question comes from the line of Jennifer Lowe. Your line is open. Jennifer Lowe : Great, thank you. Mark, I wanted to follow up a little bit on the comment you made about the traffic uptick you saw post MAX to the adobe.com site and you also added promotional activity in there but specifically the post-MAX uptick, was that sort of what you normally would see after a MAX event or was it different this time? And what were the types of products that were really benefitting from that uptick in traffic. Was it the traditional fully configured Creative Cloud or were you seeing more activity around some of the newer product offerings? Shantanu Narayen : Why don't I take that? In terms of what we saw after MAX if you recall MAX was perhaps the most productive release ever in the history of the company in terms of the five new products that we had introduced. At the end of Q4 if you look at the business that we have both in terms of single app adoption which continues to grow as well as the CC complete which continues to grow. I would say the photography offering continues to be a very popular offering we introduced a new version of Lightroom and so that’s seeing good traction. The second product I would highlight would be XD which is the product for screen design, everything that the creators are doing in terms of designing new interfaces for products across a variety of screens. And then we saw the traditional strength in the existing products that we continue to see namely Photoshop, Illustrator, the video products continue to do well as well. So, I think this is something that we do standard which is, we just continue to make sure that we are delivering great innovation for our customers. MAX certainly represents the culmination of a lot of effort and so as expected the attention that we bring to it drives more traffic. Jennifer Lowe : And maybe just one more if I can. On the Experience Cloud I know in Q3 there was some color around extending sales cycles, bigger deals, the longer sales cycles. I'm curious if that was the trend you saw in Q4 as well or if there was any change there? Shantanu Narayen : We had a really strong close to the end of the year so the sequential increase in bookings from Q3 to Q4 as is consistent with year-end seasonality, we were pleased with the strength associated with that in terms of the subscription bookings for the years as well. We were pleased with that advertising cloud had a good quarter as well. So, the opportunity continues to be really large as we talked about the $53 billion-dollar opportunity that we have we’re the undisputed leader. And our innovation is really helping our enterprise customers with their digital transformation needs. Mark Garrett : And I would add just add a little bit to that subscription bookings were up 20% for the quarter and for the full year which is what we had targeted back at Q3. And the subscription organic revenue I said this in my prepared remarks even without the benefit of 2 was up 22% year-over-year. And that subscription revenue as we have said is the way we are really going to start to measure the health of the business. So, we were really pleased with both of those. Operator : Your next question comes from the line of Walter Pritchard. Your line is open. Walter Pritchard : Mark I'm wondering if relative to what you are thinking about for ARR the progression and the number for the year, you expect any impact from customers buying ahead of this price increase. And any impact you saw generally in terms of customer behavior reacting to that move you made? Mark Garrett : So, we have not seen any indication that people are buying just ahead of the price increase. We just think the strength that we saw in the fourth quarter was coming off as Shantanu said MAX as well as just Q4 seasonality. And the truth of the matter is if people are buying ahead of the price increase that’s great, because just like we do with promotions that brings people into the franchise and allows us to move them up the ladder so to speak later. So, either way we are happy but we don’t think Q4 was a result of people buying early. Shantanu Narayen : A big picture in terms of the overall demand for Creative Cloud, it continues to be clearly the one stop shop for creativity and the increase in the ARR that we issued as a target is more a reflection of just the continued comprehensive nature of the offering, the adoption that we're continuing to see in international markets rather than necessarily anything different in terms of what we expect for the price increase which as we said at the Analyst call we expect to be low this year. Operator : Your next question comes from the line of Brent Thill. Your line is open. Brent Thill : On Experience Cloud, Shantanu are there new routes to market, or new ways you're thinking about distribution for that business as you head into the new fiscal year? Shantanu Narayen : Yes, Brent, I mean as that business continues to expand and continues to grow well, I think the first phase of that business was clearly everything that we were doing direct with large verticals in what we would call the strategic accounts in specific verticals, and B2C was a big push associated with that, we're seeing quite a bit of adoption in B2B and consistent with the way I think every other enterprise software company would do we're looking not just at the strategic and corporate accounts but expanding into Greenfield territory both in the United States and abroad so that continues to be an area of push and as you can imagine that happens both with our direct sales force as well as with the ecosystem of partners that continues to be really key for us in terms of growth in that business. We talked and touched on the Microsoft partnership and how that's yielding good implementations with customers and we expect that momentum to continue but also whether it'd be digital agencies or SI partners they're certainly bringing us into more of their accounts. So, just continued expansion and we're pleased with the execution that we have there. Brent Thill : Mark just to clarify on Experience Cloud to Jen’s question, I wanted to be clear, the deals that did push in Q3, it's not like some of those came back into Q4, but did you see other deals extend out into the next fiscal year that were not closed yet? Shantanu Narayen : Brent maybe I'll take that one as well, I mean the pipeline just continues to be an evergreen pipeline and we're continuing to both close deals, we're continuing to up sell, when we looked at the number of large deals that we have and we think about the number of customers who are adopting multi solution deals that has certainly increased which we look at as good validation of the comprehensive and integrated nature of our product but you've been tracking enterprise software for a long time, we had a great sequential bookings quarter between Q3 and Q4 but pipeline is an evergreen thing that we'll continue to put a lot of focus on. Operator : Your next question comes from the line of Ross MacMillan. Your line is open. Ross MacMillan : Congrats. Maybe Shantanu first, just on the Document Cloud, you highlighted Acrobat DC units up 20% growth. Any context for that in terms of history and then I had a follow-up for Mark? Shantanu Narayen : Sure Ross, I mean I think it's driven a lot by PDF adoption on mobile devices and PDF continuing to be the best way for people to share files across devices, when we think about PDF adoption it actually accelerated in Q4, over the rest of the year which as we've been saying all along was pretty strong. Primarily we've seen people adopt the subscription which is consistent with what we're doing across the Creative Cloud but we also saw some traditional strength that we expect at the end of the year with respect to enterprises continuing to either true up or do licensing of the perpetual version. We're pleased with that and that provided some nice upside. There's a significantly larger install based of Acrobat that isn’t on the subscription and as people continue to adopt both the subscription offering, which is the primary offering, as well as the perpetual that just signifies good growth opportunity for us. But specifically, we saw quite a bit of licensing of the perpetual new Acrobat DC product at the end of the year as enterprises use the end of cycle to true up and buy more product. Ross MacMillan : And Mark, just a clarification. So, when you rebase the end of the year Digital Media ARR, the way I think about it is it’s the rebase on the base. So, 154 and 5.23 billion is about 3% rebase. And then every new ARR dollar that comes into fiscal ’18 is going to be commensurately higher at 3%. I just wanted then to think about that in the context of what you’d said previously about net new ARR of 1 billion and now 1.1 billion, I would argue that’s 10% higher, not 3% higher. So, it’s an implicit raise and I just wanted to make sure I was thinking about that correctly. Mark Garrett : For sure, this is an implicit raise. Shantanu Narayen : Explicit raise, Ross. Ross MacMillan : Explicit raise, I’m just a bit slow tonight. Mark Garrett : Yes. The 100 million has little to do currency, it’s more based on our over achievement through the year and what we expect to deliver in ’18. So, it’s not a currency related raise. Operator : Your next question comes from the line of Keith Weiss. Your line is open. Stan Zlotsky : It’s actually not Keith Weiss, its Stan Zlotsky seating in on his behalf. But thank you so much for taking our question. Around the large deal that you’re seen on ground experience manager and approach services that are associated with those deals. Should we expect given the complexity deal that you part services would maybe take up a little bit in order to dedicate the proper resources to these large strategic implementations? Shantanu Narayen : Stan, the Analyst Meeting, we actually talked about given the robustness of the ecosystem that we will be leveraging the ecosystem more to do the actual implementation of these whether they be for the entire marketing cloud or for Adobe experience managers specifically that’s part of the reason, why when we talk about our bookings growth it's going to be greater than the revenue growth that we report, that includes services. So, a great ecosystem of partners, I think we’re focusing on some specialized services with these customers, which is at the very strategic level. But for the most part, we have a great set of partners, who will be doing the heavy lifting associated with the implementation of not just experience manager, but the rest of our solutions and in fact our clouds with the customers. Stan Zlotsky : And just a quick follow-up. The 50 joint customers you now have with Microsoft, you mentioned a few sample logos. But from a go-to-market perspective how do these opportunities could develop, who brings into the deal and are the logos that you mentioned are they kind of representative of the typical logo that we would see within that list of 50? Thank you so much. Shantanu Narayen : Stan, I think the real goal for us was to demonstrate that we are open for business, the stuff is actually working, customers are excited about as you can expect in these cases, it’s both joint selling between Microsoft and us, its us bringing them into deals, its them bringing us into deals and its partners bringing both of us into deals. So, it's the usual combination that you see in the enterprise in terms of how people adopt software. Operator : Your next question comes from the line of Heather Bellini. Your line is open. Mark Grant : Hi. This is Mark Grant on for Heather. Just a quick for me on marketing and analytics. We got the announcement last month, the partnership with Google Analytics and Salesforce. Just wanted to get your thoughts on how you interpret that, what you think the competitive landscapes is going to be looking like over the next little while. And just any interpretation you can offer there. Thanks. Shantanu Narayen : Well, I think we've always talked about how we have been the leaders in creating those categories and how the analytics that we have is without a doubt one of the secret sauces and the biggest competitive advantage that we continue to have. Enabling integration between that Analytics as well as our other solutions has been over a five-year effort and we've integrated it. And I think it's just of a reflection that others in the marketplace are understanding that Adobe has a significant competitive advantage with respect to everybody else. But big picture this is an incredibly large opportunity. We're the leader we're going to continue to innovate. We're seeing great customer wins and there will be competition in the space as well as we expect. Operator : Your next question comes from the line of Jay Vleeschhouwer. Your line is open. Jay Vleeschhouwer : Thanks, good evening. One each on Creative Cloud and the digital marketing business. On Creative Cloud when we think about the new product roadmap that you laid out at MAX, and couple that with the creation of a new position with the Scott's joining the company as Chief Product Officer, could you perhaps talk about some of the objectives over the next number of years for Creative Cloud? And what I have in mind specifically is would you think there is any sense to perhaps re-segmenting the product line as you once did with CS and use that as a means to further drive APRU upside? Secondly on the marketing cloud, you've spoken in the past of having four dozen or more use cases across multiple industries and as well an objective of eventually having more of a single sign-on or a usage model across all the products. Could you in that score talk about perhaps the momentum across the various verticals or use cases that you're seeing or perhaps talked about? Shantanu Narayen : Sure, Jay. I mean first on the Creative Cloud, the success that we've continued to see it's the golden age of creativity and design right now. And when you think about what's happening with Augmented Reality, Virtual reality, artificial intelligence, the kinds of mobile apps that are being created at Adobe. We're just attracting the best. And as you know, we focused tremendously on product Scott is phenomenal at that. And we're just attracting the best in the world to continue to help us push the envelope on being the design and creativity applications. So, thrilled to have him onboard. I would not read into that necessarily anything different with respect to segmenting that. I would definitely read into that that we continue to focus on innovation and making sure that we lead that market the way we've been doing. And with respect to your question on the Marketing Cloud, we will continue to demonstrate all of the different use cases. We will continue to focus on vertical industries, we will focus on sort of how people are using this at high level for things like personalization or multichannel engagement with our customers. But from our point of view, the integration associated with these products, every year it gets better. So, the notion of a single sign on that you're talking about and the fact that our customers can think about audience segmentation and demographics, or campaigns, or promotion or content velocity already within this platform, we're so far ahead of where the rest of the market is, but you can correctly continue to expect us to make both the integration better as well as the individual point products better. Operator : Your next question comes from the line of Samad Samana. Your line is open. Samad Samana : So, I had a question on the company's partner program, it's something that your competitors and enterprise software talk about a lot and I think the companies have been talking a lot more about them as well, I was wondering if you maybe could help us understand how much of Experience Cloud bookings they help you close out and maybe how we could think about that contribution changing in fiscal '18 as you come off of the changes that you put in place in fiscal '17? Shantanu Narayen : I think when you look at the partner program, there're multiple dimensions to it but very quickly the first dimension to it certainly is that all of our products when we architect our products just allow developers whether they be individual developers, whether they be enterprises, whether they be system integrators or agencies, to extend our products and so them having their secret sauce to augment our products is a key part of one of our partner strategy. With respect to implementation and strategy services, again the traditional SIs and digital agencies are very much part of the ecosystem in terms of both implementation, architecture, services and strategy, and as is probably similar to everybody else in this space when you think about the large deals and the large customers that we have most of these customers have engagement with some partners as well, and so the partner involvement in these accounts will only continue to increase with the strategic nature of this, but everybody has an Adobe practice you'll see at our kickoff that we have, they're very well represented as well as our summit where we have a Partner Day, so we're pleased with the partner interest and we will continue to leverage it because it's in our best interest as well as in the customer's best interest. Samad Samana : And then maybe Mark if I can just ask a follow-up the guidance for 15% growth in the first quarter for Experience Cloud I believe implies kind of flat revenue from 4Q to 1Q, could you maybe help us think about seasonality for that business and how we should think about the growth cadence across the quarters? Mark Garrett : I mean we've said that if you model out the business next year it'll follow typical patterns that you saw in 2017 so I think you should expect whether that's total company or even down to the segment level, things following along similar growth patterns to what you saw in '17. Operator : Your next question comes from the line of Saket Kalia. Saket Kalia : Mark perhaps a less exciting question about the business but topical nonetheless, I guess I was just wanted to ask about tax structure and the impact of potential reform, so I guess I understand that a lot of it is still very uncertain, can you just give some broad brushes about how free tax income and tax rates in the U.S. maybe compared to the rest of the world and how you are thinking about potential tax reform for Adobe? Mark Garrett : Yes, I mean obviously as you said based on the fact that this isn't final yet, I can't comment too much. I'll say we clearly believe that the tax code needs to be overhauled, that its outdated and we clearly are excited about the proposition to really access foreign cash. So, based on what I see this is all very positive for Adobe. It would result we believe in a lower tax rate for us. It would result we believe in our ability to access foreign cash. The good news for Adobe as well is that we have been accruing for a significant percentage of our foreign cash at a 30% tax rate. So, if this passes at a 14% rate on all our foreign cash you wouldn’t see a significant P&L hit, because basically we have already accrued that tax which is great from the Adobe's perspective. So, we will see where it plays out but based on what we see so far, it's very positive from our perspective. Operator : Your next question comes from the line of Keith Bachman. Your line is open. Keith Bachman : I was wondering if you care to make some comments on cash flow for FY '18 and the context of the question is either as our percent of revenue or cash flow growth rates. You mentioned previously and it was in Q4 your days receivable were up. Is there anything you want to call out? Or give us any kind of context for cash flow guidance for CY'18 or FY'18 rather. Mark Garrett : So, the only significant change to the way we have been executing so far is that as I said DSO is up a little bit because of the two-mobile business just being a different kind of a business from a collections perspective. But outside of that we gave you margin and earnings guidance for next year that will continue to drive good strong cash flow. I did say Q1 there is some seasonality in cash flow because it makes a lot of year end disbursements based on accruals that we make in the fourth quarter, but we are continuing to drive growth in cash flow. That’s about all I can tell you right now. But I fully expect that cash flow will be up again significantly next year. Keith Bachman : And I'll ask a quick follow up if I could -- your total book business the 6.9 million was up about 18%, so strong growth, but relative to your guidance of revenue growth it's a little less than what the revenue guidance is. How should we think about that number as a proxy going forward in terms of the total book business relative to revenue guidance? Mark Garrett : So deferred revenue was up 24%, unbilled navy was up less than that year-over-year. But we are pretty pleased with just that total number of 6.4 billion and the growth that that generates going into next year. It’s a little hard to take just that and think about how that compares to revenue growth because it's a little bit apples and oranges not all of the revenue comes off of deferred or unbilled. So, you kind of have to look at them separately. Operator : Your next question comes from the line of Kirk Materne. Your line is open. Tom Roderick : This is Tom on for Kirk. So, I was actually wondering about the transition of ETLA contracts to subscription and how that’s impacting your growth in Creative Cloud? And what are your expectations for that transition heading into 2018? Shantanu Narayen : Tom on the Creative Cloud side, a lot of those transitions have actually happened and what we are actually seeing and what we focus on even more right now. Two things, one is name user deployment, so ensuring that the adoption of the new Creative Cloud within enterprises is high and second, adoption of services. So, I would say the transition of enterprise customers from buying perpetual to buying Creative Cloud is largely behind us and really the focus is on adoption of all the new products and services that we have and on ensuring that the named account and deployment is going well from their point of view. I would say on the Acrobat side, they’re still probably some install base that exists, but on the Creative Cloud it’s largely behind us. Tom Roderick : And can you just touch upon your thoughts on opportunities for Document Cloud heading into fiscal year ’18 and seems like it was picking up momentum in the quarter? Shantanu Narayen : We talk about right through the year, how the unit growth is really been driving momentum not just in the Document Cloud, but also since some of that is reflected in the Creative Cloud and its primarily subscriptions, in fact all of the subscriptions and services that we continue to see such as sign and the scan product is driving more PDF adoption. And so, we continue to think that PDF will be a really important format as people move from inefficient paper based processes to electronic processes. Operator : Your next question comes from the line of Alex Zukin. Your line is open. Taylor Reiners : This is Taylor Reiners on for Alex. I had a follow-up question on the ETLA question. What are the things that we’ve been hearing in a conversation? Is that, you've been having a lot of increased success on renewals moving ETLA customers from point solutions to the entire Creative Cloud portfolio. Just wondering, if you could speak to what aiming you’re at with respect to its expansion dynamics? Shantanu Narayen : Well, I think the focus that the field organization has in that particular area is really making sure that people understand that there is a complete offering and we have customer success managers who are in there ensuring that people get the value out of it. That’s a program that’s really been working, we do Adobe Day as we do evangelism. And as design is becoming more prevalent within enterprises, I think adoption of either the individual products or the complete product within enterprises is increasing. As with the adoption of the Creative Cloud, we started in North America and now we continue to roll that out. But we think that as we’ve laid out even for individual users moving the core, migrating the core to Creative Cloud and then doing both market expansion and value expansion even with enterprise customers based on the new offerings continues to be headroom for us. Operator : Your next question comes from the line of Kash Rangan. Your line is open. Shankar Subramanian : This is Shankar on behalf of Kash. Congrats on a great quarter. I have a question on the Marketing Cloud. As you work through the adoption curve and get into the mid-sized businesses, can you talk about the adoption trends for marketing solutions? Do you see customers adopting more client solutions versus more than full speed? And is, how much of that is factored into that fiscal ’18 kind of support. Shantanu Narayen : Well, I will answer the second question first. I mean, we clearly look at everything that’s happening in the marketplace as we think about the guidance that we have because we take it very seriously. But I think I would say in terms of adoption with new customers the multi-solution adoption is primarily the way in which we are going to market, because people see if they're using content management having content management with analytics is really the way to go as well as the audience segmentation part of audience manager. And so, the fact that we have this comprehensive offering from Visitor acquisition to delivery of the content to measurement and monetization, it's really the way we go to market to reflect the depth of our suite and the importance of the platform adoption. Shankar Subramanian : Got it. And I think a follow up, on the Microsoft partnership you talked about the 50 logos that you added on. But you also talked about any up selling that you had based on the partnerships with your existing customers. Shantanu Narayen : Well, I think this is still early, but the initial success that we are seeing is really good. And it was just to reflect when you think about whether it’s the dynamics integration with campaign, whether it's what we are doing with Adobe Experience Manager with Azure, what's happening with PowerBI. The people are adopting both solutions and the momentum in the business is strong. Operator : Your last question comes from the line of Adam Holt. Your line is open. Adam Holt : Hey, guys. Thanks so much and congrats on a terrific end to the quarter. I just had two quick ones. One to E-mark [ph]. This is sort of another embarrassment of margin riches and as we look into next year you're looking at 40% margin plus. You are getting into a rare era for software companies. Do you think that this has actually margin upside from 40% or we kind get into the level where you have to reinvest for the growth rates that you all want to achieve? Mark Garrett : Yeah, obviously we are very fortunate to be able to have in my perspective both significant top-line growth that 20% plus and significant margin growth at scale already. We've done a great job over the years of managing margins. If there is anything we know how to do with Adobe that's it. If there are things that we feel that we need to invest in to drive growth, we will do that. But outside of that, we can deliver margins. So, I'm not going to guide beyond the 40%ish that we talked about for next year. But we make those tradeoffs every month as we go through spending in the company and clearly want to drive growth. Adam Holt : And if I can just a quick follow up for Shantanu. When he had talked to Brian Lincoln at our event a couple of weeks ago. He was pretty constructive about the services opportunity and you called it out relative to one of the drivers for the Digital Media cloud. Could you maybe breakdown how do you see that unfolding? What services you're most excited about and how big that can potentially be from a revenue stream? Just order of magnitude not guidance obviously? Thanks so much. Shantanu Narayen : Well thanks Adam. And as it relates to services, the one that we're seeing a fair amount of traction and year-over-year had quite significant growth versus Stock as it relates to Creative Cloud as well as sign as it relates to the Document Cloud. And in addition to that, I mean when we think about the Creative Cloud total addressable market, and we think about market expansion in the $5.7 billion I think we had talked about as the 2020 addressable and $7.1 billion for value expansion. I think the other thing such as storage collaboration I think is a big opportunity ahead of us. The number of people who do the design within an enterprise as it relates to the number of people who will engage in that collaboration, so I expect to see Adobe do more in that particular space. But I think just continuing to afford our customers, the ability to come -- training we've always said is a -- and learning content is something that's an opportunity associated with it, so at the Analyst Meeting, Adam we gave some numbers but hopefully that also gives you some color in terms of the different services that we have. And since that was the last question, what I wanted to say was as we celebrate our 35th anniversary I know all of us here at Adobe are really proud of the impact that we've had on society and really the continuous innovation that we're delivering across the world by all of our employees. It feels the strategy that we have empowering people to create and helping businesses transform is really resonating, they represent large addressable markets with very significant tailwinds, the relentless execution we continue to demonstrate, means that we're pretty unique from a financial perspective in terms of both driving top line and bottom line growth profitably, with significant operating margins. We had outstanding financial results in Q4 and FY'17. Our focus in FY'18, continuing to deliver great value to an incredibly diverse set of customers, and so we remain really enthusiastic about the opportunities ahead of us. Thank you for joining us today and wishing you and your families a joyous holiday season. Operator : Thank you. This concludes our call today.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,018	1	2018Q1	2018Q1	2018-03-15	4.667	4.967	6.102	6.563	9.32	32.29	33.28	Executives: Mike Saviage - VP, IR Shantanu Narayen - President and CEO Mark Garrett - EVP and CFO Analysts : Adam Holt - MoffettNathanson Ross MacMillan - RBC Capital Markets Jennifer Lowe - UBS Brent Thill - Jefferies Alex Zukin - Piper Jaffray Jay Vleeschhouwer - Griffin Securities Walter Pritchard - Citi Kash Rangan - Bank of America Merrill Lynch Saket Kalia - Barclays Mark Grant - Goldman Sachs Sterling Auty - JPMorgan Keith Weiss - Morgan Stanley Derrick Wood - Cowen and Company Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Systems' First Quarter Fiscal Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go-ahead sir. Mike Saviage : Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In our call today, we will discuss Adobe's first quarter fiscal year 2018 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We've also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on Adobe.com. If you would like a copy of these documents, you can go to Adobe's Investor Relations page and find them listed under Quick Links. Before we get started we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, March 15, 2018, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe's SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe's Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. FY2018 is off to a strong start for Adobe as we continue to successfully execute against our strategy. In Q1 we delivered record revenue of $2.08 billion dollars, which represents 24% year-over-year growth. GAAP earnings per share in Q1 was $1.17, and non-GAAP earnings per share was $1.55. Our strategy to empower people to create and transform how businesses compete is working. Our relentless focus on delivering innovation to our customers is continuing to drive our outstanding performance. Across the globe, individuals and companies now recognize that great experiences have become the basis of differentiation in an increasingly competitive and complex world. With the world's best digital media and digital experience cloud-based solutions, Adobe has become the go-to company for helping customers develop and deliver transformative digital experiences. In our Digital Media business, we achieved strong growth in both Creative revenue and Document Cloud revenue for Q1, achieving net new annualized recurring revenue, or ARR growth of $336 million. We exited Q1 with Creative ARR of $5.07 billion, marking the first time Creative ARR has surpassed $5 billion. Across our individual, team and enterprise offerings, we continue to acquire new subscribers through Creative Cloud single app and all app offerings. We focus on retention by driving customer engagement through products, services and community. In addition to strength in our major geographies, emerging markets such as Korea, China and Southeast Asia are beginning to contribute to subscriber growth. Creative Cloud remains the gold standard for creativity and design. We deliver ongoing value to our subscribers through major feature enhancements in our existing flagship applications across desktop and mobile devices. In addition, we are attracting a broader set of consumers and creative professionals through innovative new applications like Adobe Character Animator, Spark, Lightroom CC, Dimension and XD. Adobe XD is an innovative new app for designing experiences across multiple screens. In addition to graphic, mobile and website designers, product managers are adopting this all-in-one solution that combines design, prototyping and collaboration capabilities. We recently delivered workflow enhancements, tighter integration with Photoshop and deeper support for new modalities such as pen and touch. Major companies including Wipro have standardized on XD as their core design product. Video continues to be an explosive category, and our editing and production products including Adobe Premiere Pro and After Effects, continue to gain momentum among large production houses as well as independent film makers. More than half of the films at the recent Sundance Film Festival were edited with Premiere Pro, as were the majority of virtual reality projects. Adobe Spark makes it easy for everyday communicators to transform their ideas into beautiful visual stories that make an impact with graphics, videos and web pages. Starting next month, Adobe Spark Premium will be accessible to every student globally, and we're already beginning to see strong adoption across school districts in areas like Anaheim in California, Roanoke in Virginia, Burnsville in Minnesota and Deer Park in Texas. In addition to the world's best desktop and mobile tools, we continue to focus on community and services to provide inspiration and accelerate the creative process. Adobe Stock now has a library of more than 80 million images, videos and creative assets. Last month we announced a partnership with the Pantone Color Institute to curate a collection of Adobe Stock Premium images inspired by the top colors in fashion, as well as a gallery of Adobe Stock images that captures the essence of Pantone's always highly-anticipated Color of the Year. It's Pantone, 18-3838 Ultra Violet, for those of you who are curious. Adobe Stock achieved record revenue in the quarter, with greater than 20% year-over-year growth. Adobe Document Cloud is the world's leading digital document service, enabling individuals and businesses to automate inefficient paper-based processes. Acrobat performance across Creative Cloud and Document Cloud was particularly strong in Q1. Document Cloud subscriptions and Acrobat perpetual licensing drove 18% year-over-year revenue growth, and $33 million in net new ARR. As worldwide PDF adoption continues, we are focused on delivering new services including Adobe Scan and Adobe Sign. Adobe Scan, our mobile PDF application that leverages Adobe Sensei to capture and create intelligent PDFs, has been downloaded more than 7 million times. Adobe Sign is now the preferred e-signature solution in Office 365, and we closed our first set of joint customers in the quarter. Digital transformation and the ability to deliver immersive, intelligent and impactful customer experiences is a strategic imperative for businesses and governments worldwide. To drive customer engagement and growth, you need to be an experience business and the Adobe Experience Cloud is the industry's most complete and integrated offering. We achieved Experience Cloud revenue of $554 million in Q1, and strong bookings across Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud. Key customer deals included Braun, City National Bank, Expedia, Ford, the NFL, Rakuten, Samsung and T. Rowe Price. In Q1, Adobe was once again recognized as a leader by industry analyst firms, achieving top scores among evaluated vendors in The Forrester Wave : Enterprise Marketing Software Suites and The Forrester Wave : Cross Channel Campaign Management reports. Adobe was positioned as a Major Player in IDC's Marketscape Worldwide AI in Enterprise Marketing Clouds Vendor Assessment, with Adobe Sensei ranking highest in capabilities. In the competitive category of Digital Experiences, Adobe was recognized as a leader in the Gartner Magic Quadrant for Digital Experience Platforms. We are in a world where businesses are challenged to reach, engage and influence their customers across multiple digital touch points and new interfaces including voice, augmented reality and virtual reality. Our goal is to be a mission-critical partner to governments and enterprises as they undergo this essential digital transformation. Our success is a result of our comprehensive offering, our deep investment in technology and a rich ecosystem of partners. In two weeks we will be hosting Summit, our annual digital experience conference that brings together the world's biggest brands, agencies, consulting firms and media companies. Leaders from Coca-Cola, the NFL, Mercedes Benz, Tourism Australia, Marriott and more will share how they're tackling digital transformation and capitalizing on new opportunities in the experience era. We plan to unveil a spectrum of new Experience Cloud capabilities, including new Sensei-powered features that will use new algorithms to simplify complex tasks. We've long recognized that our Experience Cloud customers need more than just innovative products, they need a partner, who can help them navigate the many challenges involved in digital transformation. Adobe has always prided itself on being that trusted partner, and at Summit we will introduce a broad spectrum of programs that champion and enable our customers. We have made great strides in delivering new magic through Adobe Sensei, our artificial intelligence and machine learning framework across Creative Cloud, Document Cloud and Experience Cloud. Last month we were recognized by Fast Company as one of the Most Innovative Companies in Artificial Intelligence. We are keenly aware that our continued growth as a company is made possible by an innovative and exceptional team of employees around the world. We were recently recognized by Fortune as one of the World's Most Admired Software Companies. Fortune also named Adobe one of its 100 Best Companies To Work For, the 18th year we've been honored with that designation. Adobe continues to have the right strategy, products and people in place to drive future growth. And we're fortunate to go to market with the industry's best partners and serve the world's most innovative customers - across all industries and geographies. 2018 is off to an outstanding start and we look forward to building on this momentum. Mark. Mark Garrett : Thanks Shantanu. In the first quarter of FY18, Adobe's momentum continued with record revenue of $2.08 billion, which represents 24% year-over-year growth. GAAP diluted earnings per share in Q1 was $1.17 and non-GAAP diluted earnings per share was $1.55. We drove strong performance across our product offerings and geographies during the quarter. Highlights in Q1 included, record Digital Media revenue, including Creative revenue of $1.23 billion and Adobe Document Cloud revenue of $231 million; record Adobe Experience Cloud revenue of $554 million; net new Digital Media ARR of $336 million, and exiting Q1 with more than $5 billion of Creative ARR; deferred revenue growth of 25% year-over-year; record cash flow from operations of $990 million; returning over $300 million of cash to our stockholders through stock buyback; and a record 88% of our revenue in Q1 was from recurring sources. In Digital Media, we grew segment revenue by 28% year-over-year. The addition of $336 million net new Digital Media ARR during the quarter grew the total to $5.72 billion exiting Q1. Within Digital Media, Creative revenue grew 30% year-over-year in Q1 and we increased Creative ARR by $303 million. Several key factors helped drive this growth, including, strong net new subscriptions across user segments and geographies, spanning creative professionals to consumers and students; And quarter-over-quarter growth in ARPU across all product categories. In addition, services are helping to grow Creative ARR and revenue. Adobe Stock had a strong quarter, and Stock and collaboration services helped grow Creative Cloud enterprise ARR. 86% of creative enterprise agreements signed during Q1 included services, which helps expand the use of Creative Cloud within companies and makes it more mission critical to content workflows. During Q1, we finalized the transition on Adobe.com from using US dollar estimates from our third-party ecommerce platform in certain emerging markets, to using transactional level data denominated in local currencies. This transition resulted in a one-time catch-up of approximately $20 million to our ending ARR balance, and is reflected in the Q1 ARR increase. With Document Cloud, we achieved strong revenue with 18% year-over-year growth. The performance in Q1 was driven by continued strength with Acrobat subscription adoption, and perpetual licensing of Acrobat through the channel. Acrobat year-over-year unit growth across Creative Cloud and Document Cloud again exceeded 20%, and Adobe Sign contributed with another solid quarter of revenue and ARR growth. In our Digital Experience segment, we achieved Adobe Experience Cloud revenue of $554 million which represents 16% year-over-year revenue growth. Subscription revenue grew 22% year-over year. Experience Cloud performance in Q1 was driven by success across our Analytics Cloud, Marketing Cloud and Advertising Cloud offerings, with emerging solutions such as Audience Manager, Campaign, Target and Media Optimizer solutions achieving strong results. From a quarter-over-quarter currency perspective, FX increased revenue by $12.2 million. We had $1 million in hedge gains in Q1 FY18, versus $1 million in hedge gains in Q4 FY17; thus, the net sequential currency increase to revenue considering hedging gains was $12.2 million. From a year-over-year currency perspective, FX increased revenue by $35.6 million. We had $1 million in hedge gains in Q1 FY18, versus $18.3 million in hedge gains in Q1 FY17. Thus, the net year-over-year currency increase to revenue considering hedging gains was $18.3 million. In Q1, Adobe's effective tax rate was 17% on a GAAP-basis and 11% on a non-GAAP basis. These rates are consistent with the updated tax rate targets we provided in January which reflect the impact of the new Tax Act. Our trade DSO was 47 days, which compares to 46 days in the year-ago quarter, and 55 days last quarter. Deferred revenue grew to a record $2.57 billion, up 25% year-over-year. Our ending cash and short-term investment position exiting Q1 was $6.15 billion. Cash flow from operations was a record $990 million in the quarter. In Q1 FY18 we repurchased 1.6 million shares at a cost of $301 million, which lowered our diluted share count to less than 500 million shares. We have approximately $1.6 billion remaining of our $2.5 billion stock repurchase authority granted in January 2017. I will provide our financial outlook. In Q2 FY18, we are targeting, revenue of approximately 2.150 billion dollars; Digital Media segment year-over-year revenue growth of approximately 25%; Digital Experience segment year-over-year revenue growth of approximately 15%; tax rate of approximately 13% on a GAAP basis, and 11% on a non-GAAP basis; share count of approximately 499 million shares; GAAP earnings per share of approximately $1.16; Non-GAAP earnings per share of approximately $1.53; and Net new Digital Media ARR of approximately $330 million. We expect revenue, earnings per share and Digital Media ARR results in Q3 and Q4 to follow similar seasonality as was achieved in FY17. Our leadership in the large addressable markets we created, combined with Adobe's leveraged operating model, contributed to another record quarter in Q1. We look forward to seeing you at Summit. Mike? Mike Saviage : Thanks, Mark. Day One of Adobe Summit - the world's largest digital experience conference is Tuesday March 27th. An invitation with registration and discounted pricing information to attend Summit in Las Vegas was sent out in January to our investor and analyst email list. We will host an informal Q&A session with financial analyst attendees and Adobe management on the afternoon of the 27th. Attendees can also attend educational sessions, meet with customers and partners, and learn more about our solutions at the conference. More details about Summit are available at summit.adobe.com. If you wish to listen to a playback of today's conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859- 2056. Use conference ID number 6388567. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5pm Pacific Time today, and ending at 5pm Pacific Time on March 21st, 2018. We will now be happy to take your questions, and we ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] Your first question comes from Adam Holt with MoffettNathanson. Adam Holt : Hi, guys. Thanks very much and congratulations on another spectacular quarter, 60% plus EPS growth, just amazing. I guess my question is for Shantanu. As we head into the Summit event, it's an interesting market. We've been seeing headlines about companies like Procter & Gamble cutting digital media spend. And it's been - it sort of seems like a little bit more of a mixed environment, yet you all continue to do well. And I wanted to, A, get your sense for how the end market feels to you? Whether things like cut on digital spend trickles down into your market? And, B, just thinking about the growth rates, do you feel like you're at steady state with sort of Digital Experience at 15%? Or can that - can you do better as some of your products get more mature? That's it. Thanks. Shantanu Narayen : Thanks, Adam. As it relates to digital transformation and what's happening in the Digital Experience business, it actually feels like the spending environment for digital within enterprises remains unaffected by what you're referring to as marketing spend. And the reason for that is that everybody is trying to engage with their customers digitally across touch points. And as you know, our offering, which is the most comprehensive, actually has everything to do with not just the advertising spend aspect of marketing but also the delivery of the content, the multichannel campaign communication, the audience segmentation. And to give you maybe a little bit more color on that, Adam, it's really about - the themes that we hear about are first, every business is trying to do customer segmentation. Every business is trying to do - ensuring that they can personalize the experience they're delivering for their customers, and running the business, frankly, by looking at real-time metrics, which correspond clearly to our Audience Manager product, our Analytics product and our Campaign product. So it feels like long term, the digital media spend is only going to increase. People are going to ask for more attribution associated with it. And so it feels really strong. We had a strong revenue as well as a booking's quarter. The last thing I might say in that is if you look at the underlying business, I think we said in the prepared remarks that the revenue actually grew greater than 20%. And that's as a result of us focusing a lot more on subscription bookings and subscription revenue rather than focusing on services because we have an incredibly large ecosystem of partners. So feels really good and we expect the momentum to continue. Adam Holt : That's great. Thank you. Operator : Your next question comes from Ross MacMillan with RBC Capital Markets. Your line is open. Ross MacMillan : Thanks so much and my congratulations as well. Maybe just on actually on Digital Media. I'm curious on the comment on 86% attach of services on Creative Cloud. I'm just curious as to, is there any way to think about how material that is on driving ARPU as you think about that service attach? And then maybe as a follow-up to Mark, was there any impact on new ARR from the impending price increase that went into effect on March 1? Was there any sort of shift of renewals, for example, into Q1? Thanks. Shantanu Narayen : Ross, with respect to your first question and the environment within the enterprise, we have talked about, during the first time we transitioned enterprise customers from buying the perpetual product to buying the cloud product that we had, in effect, mirrored the various solutions that we had as part of Creative Suite. As we are now increasingly renewing them, we have been doing, I think, a great job of evangelizing the entire suite of products. So the first thing we see as it relates to ARPU increases is people moving from a subset of products to using the entire suite of products. The other thing that we've been doing with enterprises is continuing to reflect the benefits of adopting Adobe Stock, so that they can have access to all of those great content as an on-ramp to accelerate the creativity process as well as things like Creative libraries, which enables an enterprise to globally ensure that they're using the same fonts and colors and assets to ensure consistency and improve what we call as content velocity. And so I think the need from enterprises to really standardize across all of our products and with content management and asset management now becoming an increasingly important thing, it's really great to see both the ARPU increase and the increased adoption of our Creative product within enterprises. And that's certainly contributing to the strength in ARR that you saw. Mark Garrett : And then Ross, as it relates to the price increase in Creative Cloud, it's a process. We started communication with the channel and customers in March. We're trying to be very diligent about the communication and getting it right. The price changes were not in effect in Q1. They'll take effect in Q2. And as we've said from the very beginning, it won't represent a material impact on ARR in '18. Shantanu Narayen : And the last thing I'd maybe add to that, Ross, is we don't think there was some impact associated with the impending price as it related to Q1 results. And so when we look at our Q1 results across geographies, it wasn't as if there was an impact of that in Q1. Mark Garrett : Meaning that people were not buying in advance of the price increase. Ross MacMillan : Yes, exactly. No, I think that was clear from your guide on ARR in Q2. Thanks again, congratulations. Shantanu Narayen : Thank you. Operator : Your next question comes from Jennifer Lowe with UBS. Your line is open. Jennifer Lowe : Great, thank you. Shantanu, maybe a question for you, you've commented in your prepared remarks that you were seeing an increase in demand for Creative Cloud in some emerging markets and you named Korea, China, Southeast Asia. And China in particular is an interesting one, given how usage of Creative Suite and may be low monetization. Can you talk a little bit about what your sense is on how much of that is existing paying customers migrating to Creative Cloud versus starting to eat into piracy a bit in that market in particular? Shantanu Narayen : Sure, Jennifer. I mean, I think what we are seeing in those emerging markets is actually a phased shift in what we have seen in the other major geographies that we have, which is people love the new innovation that we're providing. People love the comprehensive nature of what we've delivered with Creative Cloud. People, who are casual pirates are now finding that the affordability of the upfront price allows them to actually be legitimate customers of Creative Cloud. And I think the one difference that we have for the first time is in those markets we're able to offer differential pricing and not feel like the differential pricing will cause people to take the product, put it in a box and resell it in the United States. And so I think we've very effectively combated piracy. But I think it just actually reflects with mobile exploding in those particular areas and content creation for mobile being such a large requirement in those emerging markets. It just continues to do well. In different markets the last thing I might say is that there may be different offerings where we are seeing the initial traction. So I would say in the - in some of those emerging markets the traction might be more with team and enterprise, then in individual, but overall I think the trend is really positive. Jennifer Lowe : Okay thank you. Operator : Your next question comes from Brent Thill with Jefferies. Your line is open. Brent Thill : Good afternoon. Mark, you mentioned the ARPU was up, quarter-over-quarter in all categories. I think that's a shift in your tone versus kind of the flat to up that you've commented in the past. I am just curious if going forward you expect that trajectory to continue throughout the year? Mark Garrett : Well clearly we are benefiting from continued people coming off of price promotion. As we said we are benefitting from services. As we said stock's doing well and we are benefiting from services there. So that's clearly the trajectory that we see. The price increases, like I said, have not taken affect yet. So that will help down the road as well. Brent Thill : Okay, and just a quick follow-up on close to 42% operating margins. One of the questions that you've gone is as it relates to the reinvestment back in the business, and at the growth rate you are at and the margin structure is there a level where you feel that there is an appropriate reinvestment back for the future you feel that you are balancing that, given where margins are at now? Mark Garrett : Yeah, I mean clearly we think we are balancing it. Q1 strengthen margin and earnings, though was clearly driven by the revenue upside that you saw. And hiring in the first quarter is lower just based on seasonality with hiring. We expect hiring to pick up the balance of the year. We have Summit. We have MAX. We're definitely going to have increased spending as we go through the rest of the year. So I wouldn't look at that 42% as the new watermark. I would look at the revenue and earnings and information we provided for Q2, and you'll see that operating margin will be a little bit lower in Q2. So that's not kind of the new run rate. Shantanu Narayen : And Brent, we'll continue to be very diligent about the opportunities. There are still tremendous opportunities ahead of us. I think our investment in deep technology, you'll see some of the benefits of that at Summit, and with AI and us being continued to recognize in terms of what we are doing with AI, expect to see continued investments in that space. And so we have large opportunities and we're going to continue to focus on driving aggressive growth. Brent Thill : Thank you. Operator : The next question comes from Alex Zukin with Piper Jaffray. Your line is now open. Alex Zukin : Hey, guys. Congrats on another great quarter. I guess one question I maybe had and then a follow-up is just given the upside versus kind of the guide for Digital Media ARR, were you more surprised by the strength in our ARPU growth or new subscriber growth? And maybe also just can you help us stack rank the new subscriber growth coming from the lower SKU customers versus the international subscriber growth? Shantanu Narayen : Yes. Again, I would look at the success that we had and what we have seen in the past is maybe a little bit a falloff from Q4 to Q1. And the momentum actually continued, which I think just reflects interest in the Creative products. It continues to be across the board. Clearly, a lot of the new customer acquisition we are seeing is as a result of Single App adoption and we're doing an effective job of completing them to use the entire suite. So I would say it was the new customer adoption that drove more of the ARR than the ARPU. We're doing a good job, however, of engagement, as we mentioned in our prepared remarks. And as people are coming to their annual cycle or re-upping. And I think as it relates to the specific products, the usual suspects continue to show a lot of strength. Imaging continues to be strong. One interesting thing, we introduced a mobile offering of our product. We're seeing now mobile offering being adopted, and so we're starting to monetize that. We're monetizing Spark, and stock continues to feel good. And last but certainly not least, as we have said, Acrobat and the strength of Acrobat, both as it relates to what we are seeing on subscriptions across Creative and Document Cloud as well as licensing, the licensing tends to be primarily customers who are already using Acrobat and are adding more seats as a result of the strength of their businesses, that was also really encouraging. And all of the Acrobat that's being used as perpetual, that continues to be an opportunity for us down the road to move to subscription. So I feel strong all around. Alex Zukin : Got it. And then, Shantanu, maybe a follow-up on Sensei and AI, are you seeing that given the broader adoption of the suite rather than specific products, are you seeing any of that being driven by Sensei? And maybe the automation of workflows across product lines that you're driving? Shantanu Narayen : Without a doubt. I mean, what people come, and whether it's a company like Reliance Telecommunications in India or Loblaw visited us from Canada or Tourism Australia, or MasterCard, what they're asking us is you guys have transitioned your business to be more direct. Tell us how you are moving from data collection, to insight, to automation, and whether it's in analytics or what we do with anomaly detection, or whether it's in personalization, what we do with recommendations based on data or media attribution in the marketing side. They are clearly expecting and we're delivering on this automated nature of what AI can bring to it. Hopefully you're going to be at Summit and we'll share a little bit more about it. The deep investment that we've also made in our data platform and how you can actually start to get this unified view of a customer, I think a lot of people are finding that very impressive in terms of what that can do for their businesses. So the investment is clearly being recognized and adding value. Alex Zukin : Great, thank you guys. Operator : The next question comes from Jay Vleeschhouwer with Griffin Securities. Your line is open. Jay Vleeschhouwer : Thank you. Good evening. One for you, Shantanu, and one for Mark. For Shantanu, we've sometimes spoken of the cohort phenomenon within Creative Cloud, that is the aging or mix of older Digital Media customers that you've been trying to move or migrate to CC. So similar question regarding Marketing Cloud, when you think back to the deployment of AEM and MO and so forth, 4, 5, 6, seven years ago, what kind of upgrading phenomenon have you been seeing as part of the business recently? And for Mark, what further gross margin leverage do you think you might still be able to experience? You are at 95% in Digital Media but might there still be some upside there in you are around 63% or so in Digital Marketing? Is there some leverage there? Shantanu Narayen : Jay, as it relates to the Digital Experience business, I think we have always said that with existing customers who have adopted one solution, the strategy has been to continuously demonstrate how the integration of our newer solutions can add more value. I think in the prepared remarks we talked about how some of the emerging solutions showed strength, whether it's Audience Manager, which is being used for customer segmentation and definition. So that's clearly the - how we continue to grow existing accounts as well as increased usage of our products. And with new accounts, it tends to be a little bit more of adoption of the entire platform that's driving it. So I would say the earlier cohorts, because they had originally adopted one or two solutions because that's what the portfolio had, that cohort we focus more on upsells. And the newer cohorts, we are focusing more on the entire story in the platform. Mark Garrett : And then Jay, on gross margin, a lot of that improvement comes from operating efficiency in our hosted costs and it comes from better margin on professional services. I would expect that we'll continue to see margin improvement, probably more so on the Digital Experience side than the Digital Media side. You're not going to see a big movement but you'll see continued improvement in gross margin. Jay Vleeschhouwer : Thank you. Operator : Your next question comes from Walter Pritchard with Citi. Your line is open. Walter Pritchard : Hi, thanks. Shantanu, on the Digital Marketing side, I'm wondering you bought TubeMogul about a year ago. I'm wondering how you're thinking about M& A in that area, it just does seem like that market's moving pretty quickly and acquisitions could be a part of the future. Just curious, anything especially anything large you might be contemplating in that area? Shantanu Narayen : Well, Walter, I think with the acquisition of Tube, we became the most comprehensive offering already in the market and adding the ability to do linear, nonlinear and adding TV to the mix of search, social, display really was good. So we feel good about our opportunity there. And it's unlikely that there's anything large that's going to change. We like what we have organically, Walter. Walter Pritchard : Thank you. Operator : Your next question comes from Kash Rangan with Bank of America Merrill Lynch. Your line is open. Kash Rangan : First of all, congratulations to Mark Garrett on your retirement. Outstanding job, and still be tremendous value. I think it will go down as one of the best. And a question for you, Shantanu. When you look at the old cycle, which ended I think you gave CS installed base of 12.8 million, I forget how many years back that was. Now you got a different word [ph] to your point, it's more mobile, it's more smartphones. What is your best prognostication as to how the days of the old Creative users will play out in the next cycle? Are we looking at an addressable opportunity in terms of even it's a job creation that is multiples of what the old base? Because we're used to analyzing Adobe through the lens of this is the old cycle, this is the old base, this is where the company matures, and whatnot. Can help us understand some numbers in perspective as to why the addressable market could be, if I'm right, it could be multiple, given mobile and a whole bunch of other factors that just did not exist in the prior cycle. That's it for me. Thank you. Shantanu Narayen : Well, Kash, you're right that we about the fact that we look at it as not just as a migration opportunity but a very significant new opportunity as it relates to the importance of creativity, everything from K-12, which is why we try to give an example of how Spark is used there. It was never really a migration story and as people like you have recognized that it's been a hugely expansive story in terms of attracting new customers. And what we try and do, and that's probably more appropriate at our analyst call, is to continue to show how big that TAM is, when we talk about the $20 billion TAM and the number of users and the different offerings that we have. And so within the company, we're just focused on how do we keep adding more subscribers, the migration is not the first, second or third thing we talk about. We talk about the acquisition, we talk about engagement. And our product like XD, every product manager in the world should be using it. When we talk about everyone has a story to tell and the media types that they are using to tell that story and the devices that they are using to tell that story on and the modalities that they're using to create that story, it has never been more exciting in terms of what we can do for content creation. And I think our teams are doing an incredible job at innovating. So it's clearly a multiple of what we considered at the peak of the Creative Suite. And it really should be. I'd love to see every single student in K-12 as part of every history project use our Creative Suite to tell - Creative Cloud to tell the story. Kash Rangan : In my next life I want to be a creative artist. Thank you so much guys. Congrats. Shantanu Narayen : With artificial intelligence, we're going to make that happen right now happen right now, Kash. Kash Rangan : Exciting guys. Thank you. Shantanu Narayen : Thanks. Operator : Your next question comes from Saket Kalia with Barclays. Your line is open. Saket Kalia : Hi, guys. Thanks for taking my question here. Mark, I think it was mentioned earlier that in Digital Experience, there is more of a focus on subscription versus services kind of given the ecosystem of partners. And I know we don't talk about segment margins specifically, operating margins that is. But can you just talk about qualitatively whether we should see a more concerted effort in leveraging the partner ecosystem in Digital Experience? And what that can mean for segment margins? Shantanu Narayen : Maybe I'll start off and then Mark can certainly add. When we talk about ecosystem of partners, the ecosystem of partners is really in three categories. I mean, we have an incredible set of what you would have considered the traditional SI partners, the Accentures, the Deloittes of the world who have practices built around digital transformation, who are out there not just implementing our solutions but also certainly co-selling and helping sell our solutions. We have the media agencies as the media agencies are moving their business to include a technology and strategy component for digital transformation, the WPPs, the Publicises of the world have become incredibly great partners in that. And then you have the traditional ISVs and the partnership with Microsoft allows us to jointly go to market with a very integrated offering across what they are doing with dynamics and power BI and Azure, and what we are doing with Analytics Cloud, Marketing Cloud and Advertising Cloud. When the business was starting, we had a consulting organization that enabled people to implement this. I think a lot of the implementation and the running - we have a great ecosystem of partners, and so that results in us not requiring as many consulting resources. And we've shifted our focus there to be more architectural services, so that we can ensure that people are getting the best value out of our products. And so that reflects itself in terms of when we use those services as part of COGS instead of that being there, and that's why it's more a traditional software sale, which, in your words, would result in better margins. So that's how we tend to think of what's happening in the environment and why we feel well-served by both the super global partners as well as some regional partners. Mark Garrett : The only thing I'd add to that is to the extent that we can leverage that partner ecosystem that Shantanu talked about, we could potentially invest a little bit less in the sales and marketing line than we are currently doing a lot on our own today. So you get leveraged both in professional services and in sales and marketing. Saket Kalia : Very helpful. Thanks guys. Operator : Your next question comes from the line of Heather Bellini with Goldman Sachs. Your line is open. Mark Grant : Thanks. This is Mark Grant on for Heather. Appreciate you taking the question. You've mentioned a couple of times that there are opportunities that you've taken advantage of within the customer base to look at customers that are single product, or using a subset of the product and then moving them to the full suite, obviously driving some improved ops there. Can you give us a sense of the relative size of that opportunity going forward? And how much of the base do you think is still in a position to make that shift into a larger ticket? Shantanu Narayen : You're referring to the Digital Experience side in terms of single solutions and multiple? I think Brad, at the last analyst call, gave you some update about how we are moving in terms of the top 100 customers and the significant improvement in revenue associated with each of those customers. But as we continue to offer more integration between our products, as they continue to grow their own businesses and the transactions caused, they're significant. I would go back to our big picture of how when we think about Digital Experience, it's a $60-plus billion opportunity. And while we are doing well, there's still is a significant amount of headroom in that business. Mark Grant : Great, thank you. Operator : Your next question comes from Sterling Auty with JPMorgan. Your line is open. Sterling Auty : Yeah, thanks. Hi, guys. You called out Acrobat and Document Cloud a couple of times. I'm just curious is there any particular vertical industry that are seeing a bigger uptake? Or maybe a new use case that's starting to drive that growth? Shantanu Narayen : Well, I think the use of both PDF and Adobe Sign to automate paper-based processes across a variety of industries is certainly one of the places that we are seeing it. But I would also point back to mobile and the adoption of PDF on mobile and what's happening there and the ability for that. We've also done a really incredible job I think as a team of leveraging Reader. And so the fact that we have Reader distributed and you get when you get one of these documents that has an embedded, whether it's a spreadsheet or something else in it and you want to edit it, the ability for people to now edit PDFs and to use it as an on-ramp as part of their creative process, that's also helping out. So I think there are three or four horizontal use cases. And as it relates to vertical industries, anybody who is trying to automate paper-based processes and regulated industries like government, financial services, tends to be at the forefront of that. They're certainly seeing the benefits, not just of moving to PDF but also the benefit of using Adobe Sign. Mike Saviage : And this is Mike. Operator, we'll do two more questions and before we do that, just to build on what Shantanu said, the datasheet that we have publish has the Excel file built into it as an attachment, just as an example of what Shantanu said. And I say that not only to point that out but also with the new segment information we published in January, it would be helpful to look at the updated datasheet for the new segment information that we have moving forward this year. So operator, two more questions, please. Operator : Certainly. You're next question comes from Keith Weiss with Morgan Stanley. Your line is open. Keith Weiss : Just want to thank you for taking the call guys. And another outstanding quarter. Just a quick question on sort of Digital Marketing side of the equation, with GDPR really coming onto the horizon, do you guys see an indication or do you have any concerns that there may be some frictions around some of the more sort of customer data-type functionalities that guys are doing in the marketing office with deeper innovation [ph] and segmentation? Or is that kind of a non-issue amongst the customer base? Shantanu Narayen : I'd point back to what happened when the cloud first came out. When the cloud first came on the horizon, I think a lot of people appropriately talked about what that meant for security. And I think a number of cloud vendors clearly pointed out that the ability for people to update that would actually make systems more secure, which is something that I think most people would look at. I think as people are collecting data, the emphasis and importance of data and privacy continue to be front and center. But I don't think it changes the fundamental trajectory associated with people wanting to have all of this in the cloud. We just have to make sure that we use it as a tailwind against the competition and step up, like we have done when we collect customer data to enable our customers to do that as well. And so we'll be ready for GDPR when it comes, but it's not going to change this fundamental move where things are going to move in the cloud and digital is going to be the way in which enterprises transact with consumers. Keith Weiss : Got it. And maybe a quick one for Mark. The repurchase activity continues to go on pace and even sort of up the pace a little bit. You guys building up a lot of cash on the balance sheet, any update on kind of potential uses for that cash? Mark Garrett : So there's no change to our current prioritization of capital. We still take excess cash and put it towards M&A and share repurchases. Obviously, we have more excess cash now with the tax reform. We have $1.6 billion remaining on our current authorization, and obviously we're executing against that. When we're ready, of course we'll come out to you with any change to the current trajectory on that. Keith Weiss : Excellent, thank you guys. Operator : Your last question comes from Derrick Wood from Cowen and Company. Your line is open. Derrick Wood : Great, thanks. So we're hearing more and more digital agencies enter the SI market and kind of want to participate in technology implementation on the marketing side. Not just large ones that you talked about but a lot of midmarket agencies. So I'm just wondering how you're thinking about the midmarket opportunity for Experience Cloud. Is there anything - any new initiatives he could look at to focus more on the midmarket? Shantanu Narayen : We've announced a couple of partnerships there, Derrick, with midmarket providers in order to do it. I would say our focus is really more on the larger enterprises right now. That's not to say that we do not partner with regional media agencies and/or SIs. They tend to have, in many countries, very strong relationships with enterprises. So our partner ecosystem is open to all. But in terms of taking our own solutions and focusing them down market as opposed to focusing our solutions on what we think the largest opportunity is, we're focused a lot more on the large enterprise opportunity. Since that was the last question, you know what, Mark, Mike and I do is when we are going through our preparation we try and make sure we address some of the things that may be top of mind. And one of the questions that actually didn't come up was the fact that we haven't updated our annual guidance, and we wanted to sort of proactively ensure that we address that and say we really don't want to get into updating annual targets across revenue and balance sheet every quarter. I think for those of you as you think about how this plays out, the Q1 performance as well as the Q2 targets, I think, are clear indicators of the strength of the business. And the one thing we might have you continue to focus on is our original second half growth of 20% on revenue as you think about how you want to be prudent about your models. But having said that, we had an outstanding quarter. This strategy of empowering people to create and helping businesses transform just represent large addressable markets. And we see significant tailwinds. I'm pleased with the relentless execution. And it just continues to hopefully demonstrate to you that we're a unique company that's able to drive both top line and bottom line growth with significant operating margins. We will continue to invest in driving innovation through long-term technology investments in both Digital Media and Digital Marketing. And we're really pleased with how Sensei has continued to be a differentiator. Look forward to those of you who will be able to join us at Summit, and thank you again for joining us today. Mike Saviage : And one last thing, we had some connectivity problems on Connect. So for those that are on Connect, the archive will be complete as well as the phone replay. So if you did have some issues listening on the Connect session, we'll have that rectified in the archive, and thanks again for joining us. Operator : This concludes today's conference call. You may now disconnect.
ADBE	Adobe Inc.	796,343	Information Technology	Application Software	San Jose, California	1982	1997-05-05	2,018	2	2018Q2	2018Q2	2018-06-14	5.279	5.564	6.816	6.962	12.92025	34.48	36.79	Executives: Mike Saviage - VP, IR Shantanu Narayen - President and CEO John Murphy - EVP and CFO Analysts : Sterling Auty - JP Morgan Alex Zukin - Piper Jaffray Brent Thill - Jeffries Jennifer Lowe - UBS Brad Zelnick - Credit Suisse Saket Kalia - Barclays Capital Mark Moerdler - Bernstein Research Ross MacMillan - RBC Jay Vleeschhouwer - Griffin Securities Walter Pritchard - Citi Heather Bellini - Goldman Sachs Kirk Materne - Evercore ISI Derrick Wood - Cowen & Company Keith Weiss - Morgan Stanley Kash Rangan - Bank of America Merrill Lynch Pat Walravens - JMP Securities Brian Wieser - Pivotal Operator : Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Systems Second Quarter Fiscal Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir. Mike Saviage : Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen; and John Murphy, Executive Vice President and CFO. In our call today, we will discuss Adobe’s second quarter fiscal year 2018 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately one hour ago. We’ve also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you would like a copy of these documents, you can go to the Adobe Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, June 14, 2018, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Shantanu Narayen : Thanks, Mike and good afternoon. Adobe delivered record revenue in our second quarter with strong financial results. Q2 revenue was $2.20 billion dollars, which represents 24% year-over-year growth. GAAP earnings per share for the quarter was $1.33, and non-GAAP earnings per share was $1.66. Adobe enables individuals, companies, governments and educational institutions to design and deliver transformative digital experiences, immersive, intelligent experiences that inspire, entertain, and drive loyalty and growth. The breadth of our product portfolio, the deep science embedded in our Adobe Cloud platform, the insights derived from the trillions of data transactions we process every year on behalf of our customers, and our global ecosystem of partners and developers have made Adobe the leader in enabling great customer experiences. In our Digital Media business, we achieved strong growth in both Creative and Document Cloud revenue in Q2. We added net new Digital Media annualized recurring revenue, or ARR of $343 million, which grew total Digital Media ARR exiting Q2 to $6.06 billion. We continue to drive steady adoption of Creative Cloud subscriptions and services by individuals, teams and enterprises across all segments and geographies. This resulted in another strong quarter for Creative Cloud, with Creative revenue growing to $1.3 billion. At Adobe, we believe everyone has a story to tell. Our strategy to empower more of the world’s storytellers to express themselves depends on our ability to make our tools more accessible, enjoyable and invaluable to a broader set of creative customers, from creative pros, to hobbyists, to young creatives. Experience Design is one of our fastest growing creative segments and we recently introduced a new starter plan for Adobe XD, our all-in-one UX/UI design platform. Adobe XD is the most modern, cloud-based solution available for designing, prototyping and collaborating with colleagues across multiple platforms. We recently announced several new integrations between XD and designers’ existing workflows inside of tools such as Photoshop and Illustrator. We launched a $10 million design investment fund to support designers and developers who innovate and push the boundaries of Experience Design. Enabling creativity in the Education segment remains a passion for Adobe. Adobe Spark Premium, our application for everyday communicators to transform their ideas into beautiful visual stories, is now available to every student globally. We’ve achieved strong adoption of Spark in school districts across the nation. To further bolster our commitment to K-12 students, we introduced a new offering that gives students more affordable access to applications including Photoshop, Illustrator, Premiere Pro, and XD. These actions are part of our commitment to partner with educators, promote STEAM, and ensure art and creativity remain an essential part of education and professional development. Adobe’s video editing and production tools, including Adobe Premiere Pro and After Effects, are the gold standard for creating films and video from the silver screen to the mobile screen. At NAB, Adobe unveiled innovative updates to Creative Cloud’s digital video tools. In addition, partners including Canon, RED Cameras, AMD, and Sony announced tools and updates that allow users to work in an integrated, collaborative production environment. Our mission is to push the limits of creativity and storytelling while supporting exciting new mediums. We provided a sneak peek of Project Aero, a powerful new augmented reality, or AR authoring tool at Apple’s WWDC last week. Project Aero is a system that makes it easier for designers and developers to create immersive content and bridge the gap between the physical and digital worlds. With close to 1 billion AR-enabled devices expected to be in market next year, AR can drive a new wave of digital transformation and creativity. In addition to the world’s best desktop and mobile tools, Creative Cloud services are driving growth in our business while offering new ways to inspire our customers and accelerate their creative process. Adobe Stock achieved record revenue in the quarter, with greater than 25% year-over-year growth. Adobe Stock now has a library of more than 100 million images, videos and creative assets including new curated HD and 4K videos, as well as Motion Graphics templates. Adobe Document Cloud is the world’s leading digital document service, enabling individuals and businesses to digitize inefficient paper-based processes. In Q2, we achieved record revenue for Document Cloud of $243 million. Document Cloud subscriptions and Acrobat perpetual licensing drove 22% year-over-year revenue growth, and $47 million in net new Document Cloud ARR. This week marks the 25th anniversary of Acrobat and PDF, the innovation that ushered in the era of digital documents. 25 years later, the pace at which we’re innovating with Document Cloud has only accelerated as digital documents become more collaborative and mobile. More than 800 million PDFs are opened in Adobe Acrobat Reader on mobile devices each month. Adobe Scan, our mobile PDF creation app powered by Adobe Sensei that turns your phone or tablet into a scanning and text recognition tool, has been downloaded more than 10 million times. Adobe Sign, our digital signature solution for Document Cloud, continues to have strong momentum. Today, over half of Fortune 100 companies use Adobe Sign. Last September, we teamed up with Microsoft to integrate Adobe Sign into Microsoft Office 365. Next week, we’ll be unveiling industry-first innovations in Adobe Sign focused on delivering superior digital document experiences to millions of customers. Adobe Experience Cloud is the most comprehensive, integrated, and actionable set of solutions in the market, designed to help companies deliver consistent, continuous and compelling experiences across every touch point and channel. In Q2, we achieved Experience Cloud revenue of $586 million, and strong bookings across Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud. Key customer deals in the quarter included Audible, Intuit, Shell, H&R Block, Japan Airlines, PNC Bank and Samsung. In May, we announced our intent to acquire Magento, a leading commerce platform. Commerce is an integral part of an end-to-end customer experience as consumers and businesses now expect every interaction to be shoppable. The addition of Magento Commerce will enable commerce to be seamlessly integrated into Adobe Experience Cloud, delivering a single platform that serves both B2B and B2C customers globally while providing the flexibility to scale to serve mid-market and large enterprise customers. The Magento Platform is supported by a robust community of more than 300,000 developers and a partner ecosystem that provides thousands of pre-built extensions, including payment, shipping, tax and logistics. The acquisition of Magento will make Adobe the only company with leadership in content creation, marketing, advertising, analytics and now commerce, enabling real-time personalized experiences across the entire customer journey, whether on the web, mobile, social, in-product or in-store. We believe the addition of Magento expands our available market opportunity, builds out our product portfolio, and addresses a key underserved customer need. When combined with our world-class content and data platform, and leveraging our Sensei machine learning and AI framework, this latest capability will further differentiate Adobe Experience Cloud as the leading platform for Experience Businesses. We expect the acquisition to close next week. We continue to host successful customer Summits across the globe where we roll out new innovations across Adobe Experience Cloud, including major enhancements to the Adobe Cloud Platform. Recent advancements include a new Unified Customer Profile that combines data across an enterprise, intelligent services, and General Data Protection Regulation, or GDPR readiness, all aimed at solving key challenges facing marketers, data scientists and developers. Adobe was once again recognized for our leadership in technology segments that help to deliver and orchestrate experiences across the entire customer journey. We were named a Leader in the Forrester Wave : Digital Asset Management for Customer Experience, achieving the highest score for current offering of the vendor leaders. Adobe was positioned as a Leader in the Gartner Magic Quadrant for Multichannel Marketing Hubs. In this inaugural report, Adobe had the strongest ranking for completeness of vision among the 21 vendors evaluated. Adobe Sensei, our artificial intelligence and machine learning framework forms the foundation of the innovative Adobe Magic across Creative Cloud, Document Cloud and Experience Cloud. We were pleased to be recognized again as one of the World’s Most Innovative Companies by Forbes for 2018. The talent and passion of our more than 18,000 employees worldwide continues to be the catalyst for Adobe’s success. We take pride in making Adobe one of the world’s best workplaces and cultivating a diverse and innovative team of global employees. This summer, we’re pleased to welcome over 1,000 interns and university graduates to Adobe, the largest such group in company history. Adobe has the right strategy, partners, products and people in place to win. We look forward to building on the momentum we’re driving across our entire business and expect a strong second half of the year. John? John Murphy : Thanks, Shantanu. In the second quarter of FY18, Adobe’s momentum continued with record revenue of $2.20 billion, which represents 24% year-over-year growth. GAAP diluted earnings per share in Q2 was $1.33 and non-GAAP diluted earnings per share was $1.66. We drove strong performance across our product offerings and geographies during the quarter. Highlights in Q2 included record Digital Media revenue, including Creative revenue of $1.30 billion and Adobe Document Cloud revenue of $243 million; record Adobe Experience Cloud revenue of $586 million; net new Digital Media ARR of $343 million, and exiting Q2 with $5.37 billion of Creative ARR; deferred revenue growth of 27% year-over-year; cash flow from operations of $976 million; returning $589 million of cash to our stockholders through stock buyback; and approximately 89% of our revenue in Q2 was from recurring sources. In Digital Media, we grew segment revenue by 28% year-over-year. The addition of $343 million net new Digital Media ARR during the quarter grew the total to $6.06 billion exiting Q2. Within Digital Media, we achieved another record quarter with our Creative business. Creative revenue grew 29% year-over-year in Q2 and we increased Creative ARR by $296 million. Several key factors helped drive this growth, including strong net new subscriptions across user segments and geographies, helped by robust traffic and conversion on adobe.com; continued momentum with Creative Cloud adoption in emerging markets; stable or increasing ARPU across key offerings, which continues to be driven by retention of users on promotional prices migrating to standard prices, as well as attachment of services in the enterprise and the recently introduced price increase in North America; and strong growth with Adobe Stock. With Document Cloud, we achieved record revenue of $243 million, which represents 22% year-over-year growth. The performance in Q2 was driven by continued momentum with Acrobat subscription adoption as well as strength in the enterprise with Acrobat and Document Cloud services. In our Digital Experience segment, we achieved record Adobe Experience Cloud revenue of $586 million, which represents 18% year-over-year revenue growth. Subscription revenue grew 24% year-over year. Experience Cloud performance in Q2 was driven by success across our Analytics Cloud, Marketing Cloud and Advertising Cloud offerings. Experience Cloud data transactions grew to 97 trillion in the quarter, with 60% of Analytics transactions driven by mobile device usage. From a quarter-over-quarter currency perspective, FX increased revenue by $15.2 million. We had $0.3 million in hedge gains in Q2 FY18, versus $1 million in hedge gains in Q1 of FY18; thus, the net sequential currency increase to revenue considering hedging gains was $14.5 million. From a year-over-year currency perspective, FX increased revenue by $51.3 million. We had $0.3 million in hedge gains in Q2 FY18, versus $13.3 million in hedge gains in Q2 of FY17; thus, the net year-over-year currency increase to revenue considering hedging gains was $38.3 million. In Q2, Adobe’s effective tax rate was 4% on a GAAP-basis and 5% on a non-GAAP basis. These rates are below the targets we provided due to a structural change we made during Q2 in how we serve foreign customers based on the new U.S. Tax Act. Our recent international tax structure change will benefit our tax rates for the remainder of FY2018 as well as next year. Our trade DSO was 44 days, which compares to 46 days in the year-ago quarter, and 47 days last quarter. Deferred revenue grew to a record $2.63 billion, up 27% year-over-year. Our ending cash and short-term investment position exiting Q2 was $6.33 billion. Cash flow from operations was $976 million in the quarter. In Q2, we repurchased approximately 2.6 million shares at a cost of $589 million. We currently have $900 million remaining of our $2.5 billion authority granted in January 2017. We expect this authorization to be exhausted by the end of this fiscal year. On May 21st, we announced that our Board had authorized an incremental $8 billion stock repurchase program through fiscal year 2021, which will be funded from future cash flow generation. Now, I will provide our financial outlook. In January, we updated our financial targets to reflect provisions of the new U.S. Tax Act which became law during our fiscal Q1. The Tax Act affords companies like Adobe the ability to make changes to the way we serve our foreign customers with our international corporate structure. During Q2, we made a structural change and the effect of it results in even lower tax rates than we discussed previously for both this year and subsequent fiscal years. In fiscal 2018, we anticipate an incremental 6 percentage-point reduction in our GAAP and non-GAAP tax rates when compared to the rates we provided in January. We are now expecting a GAAP tax rate of approximately 7% in Q3 and Q4 of fiscal 2018; and a non-GAAP tax rate of approximately 5% in Q3 and Q4 of fiscal 2018. Our November fiscal year calendar and the timing of certain Tax Act provisions make our FY18 a unique year from a tax rate perspective. We indicated in January that we anticipated our tax rates would stabilize at a new rate of approximately 18% on both a GAAP and a non-GAAP basis in FY19. Based on the structural change we made in Q2, we now estimate our tax rates in FY19 will stabilize at GAAP and non-GAAP rates of approximately 14%. Turning to Q3 FY18, we are targeting revenue of approximately $2,240,000,000; Digital Media segment year over-year revenue growth of approximately 25%; Digital Experience segment year-over-year revenue growth of approximately 15%; tax rate of approximately 7% on a GAAP basis, and 5% on a non-GAAP basis; share count of approximately 498 million shares; GAAP earnings per share of approximately $1.27; non-GAAP earnings per share of approximately $1.68; and net new Digital Media ARR of approximately $310 million. Our Q3 targets do not reflect our pending acquisition of Magento Commerce. We have received regulatory clearance and anticipate closing the acquisition next week. For the second half of calendar year 2018, Magento’s internal plan projected achieving approximately $100 million in revenue. After the transition to Adobe’s November fiscal calendar and the write-down of deferred revenue due to purchase accounting rules, we anticipate Adobe will report approximately $40 million of Magento revenue in the second half of Adobe’s fiscal 2018, with approximately $10 million of it in our fiscal Q3. We expect the closing of Magento to be slightly dilutive to our Q3 GAAP earnings per share target. We do not expect the closing to impact our non-GAAP Q3 earnings per share target. In Q4, we anticipate normal seasonal strength and a strong finish to the year. I’ll now turn the call back over to Mike. Mike Saviage : Thanks, John. Adobe MAX returns to Los Angeles this fall, and Day One of our user conference is Monday October 15th. We plan to host a financial analyst meeting on the afternoon of the 15th, and an invitation with registration information will be sent out in early July. More details about MAX are available at max.adobe.com. If you wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056; use conference ID number 4599054. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today, and ending at 5 pm Pacific Time on June 20, 2018. We would now be happy to take your questions. We ask that you limit your questions to one per person. Operator? Operator : [Operator Instructions] And your first question comes from the line of Sterling Auty from JP Morgan. Your line is open. Sterling Auty : Yes. Thanks. Hi, guys. Looking at the results, the revenue in Digital Media, both in the quarter and from the outlook is better than expected, despite the Digital Media ARR coming in line. I am wondering if there’s something that’s improving the revenue conversion in the quarters or some other factor that’s allowing that to happen? Shantanu Narayen : Sterling, I’ll take that. I think, as we look at Digital Media, as you pointed out, ARR was again strong across all different segments. Retention continues to be in line with expect. Acrobat Perpetual had a good quarter. So, Acrobat, as it related to both licensing and perpetual was strong as well as Stock. So, I think across the board we continue to focus on converting ARR to revenue. Operator : Your next question comes from the line of Alex Zukin from Piper Jaffray. Your line is open. Alex Zukin : I wanted to ask on the Experience Cloud business, clearly showed some really nice acceleration in the quarter on a much tougher comp to last year. So, I wanted to ask if kind of what changes have you observed, what strengthening, renewal activity and up sell, any comments would be helpful and how sustainable do you expect some of these trends to be? Shantanu Narayen : Alex, big picture, I think we’re very pleased with our performance in the Experience business. I think, the metric that we look at a lot was the subscription revenue growth. If you look at the subscription revenue growth in the quarter, that was 24% year-over-year. I think in the prepared remarks we said, it was across the Marketing Cloud, Analytics Cloud as well as the Advertising Cloud. Again, digital transformation is front and center as an imperative for every single organization. Without a doubt, we have the clear leadership position in that. The value proposition is very unique. We’re getting larger deals. We’ve talked about the multi-solution opportunities that we have. I would say, particularly in the quarter as well, with the two summits that we organized and the interest that we have in summits, as closing opportunities for us. And last but not least, partnership with Microsoft where we’re jointly going in and engaging with customers at higher levels. So, I’d just point to continued leadership on the product and vision side and focus on execution in the quarter. Alex Zukin : Thank you, guys. Operator : Your next question comes from the line of Brent Thill from Jeffries. Your line is open. Brent Thill : Thanks. Shantanu, just following up on digital experience, the first half of the year, you actually outpaced your yearend growth rate target and you have easier comps in the back half of this year. So, I’m just curious in terms of why not take up your aspirations there? Is there something that’s worrying you in the second half? Obviously, you’ll have Magento layer in as well. So, are you just kind of waiting for that to layer in before you update your aspirations there? Shantanu Narayen : I think, in terms of overall, as you know, Brent, we do not update our full year guidance. At this point, we’re coming into what has been the Q3 seasonal quarter in Europe. But, the interest and the excitement or aspirations haven’t diminished in any way. As you point out, it was a strong quarter. We have with Magento even more of a comprehensive offering and so, particularly remain excited. But it’s -- I won’t read anything into it except for the fact that we -- we did touch on the fact that Q4 will continue to be seasonally strong. So, should proceed as expected. Brent Thill : And just a quick follow-up for John on ARPU. I think, last quarter, you said ARPU was kind of up across the board. I think now, you’re saying flat to up. Given the price increases, can you just maybe parse that? And I know we’re probably digging in on a metric that we’re probably going too deep into, but any color there why that won’t be up and up like we saw in Q1? John Murphy : No. I think what we said is that it's stable and that we expect it to remain stable to up. So, also, I think it’s really from our perspective a healthy metric. We don’t guide to that or target externally but this really contributes to our ARR. Shantanu Narayen : Maybe just adding color, Brent, on that as it relates to the enterprise licensing, nothing has changed, as we see enterprise licensing, we’re certainly seeing good adoption of the full offering from the customized versions that we had said. As it relates to the price, since you asked that question, we always expected it to be marginal in terms of the impact associated with that. We’re pleased with what we have seen so far in terms of whether it’s people buying new subscriptions or renewal, where people see the price increase, I think that is very much in line with the additional value that we provided. So, on Digital Media, we continue to be excited about the opportunity. Operator : Your next question comes from the line of Jennifer Lowe from UBS. Your line is open. Jennifer Lowe : Great. Thank you. I wanted to follow up a little bit on subscription growth that you’re seeing with Creative Cloud outside of the U.S. and in particular in geographies outside of the U.S., and I guess in two pieces. First, I think last year, one of the talking points was that Japan and Germany were still relatively early in the transition from on-prem to cloud. So, I’m curious if we sort of have any update on the rate of the base migration there. And then, related as you think about subscriber growth in emerging markets, I’m curious if you have sort of an update on how much of that sort of piracy conversion versus net new users to the base. Shantanu Narayen : Yes. Jennifer, I think globally, when we look at the demand for the creative solutions and specifically the cloud offerings, I think we’ve stated that Japan and Germany and the other emerging markets were phase shifted from the United States and Australia where we first introduced the offerings on the learnings that we’ve had about how to acquire customers and convert them whether they be new customers to the platform or as you point out former pirates. We have certainly learnt from that. We continue to think that the differential pricing that we have in countries like China as well as Southeast Asia is helping us. There is more creativity in those markets. So, Japan and Germany net-net continue to be good areas of growth for us moving forward. The emerging markets, both the piracy as well as the attractive upfront pricing are reasons why people are adopting the platform. Operator : Your next question comes from the line of Brad Zelnick from Credit Suisse. Your line is open. Brad Zelnick : Thank you very much and congrats on a great quarter. Shantanu, can you share with us, what the learnings have been from the price increase you introduced in North America this quarter and your observations on elasticity? Shantanu Narayen : Yes. I think, Brad, it’s early. I would actually point to the learnings that we’ve had from the foreign exchange changes that have happened in other countries and as a result of that what we have done with respect to pricing. Our strategy continues to be how do we get more and more people on the platform. And so you know, we continue to attract new customers with attractive pricing. And during the first year, the more engagement that we have with them, the more they are likely to add the standard pricing continue in renewal. And so, renewal continues to be an area of focus for us. And again, the goal for us right now is attracting new customers to the platform. Everything we’ve done with respect to price changes has not impacted retention. And so, we continue to focus on that blend, if that makes sense. Operator : Your next question comes from the line of Saket Kalia from Barclays Capital. Your line is open. Saket Kalia : Shantanu, realizing that it still has to close, can you just talk about initial customer feedback on Magento? It’s been a few weeks. And any early ideas, broad brushes that you can share with us on how the business can look different as part of the Adobe family, post closing? Shantanu Narayen : Sure, Saket. I mean, I think, despite the fact that we already had integrations with commerce systems, we had clear ask from our customers for a complete Adobe solution from content creation to delivery to analytics and now all the way out to commerce. What we are particularly excited about is the investment that we’ve made in the Adobe Cloud platform provides a clear architecture and a playbook for us to integrate new acquisitions like Magento, seamlessly. We were attracted by a few things when we looked at Magento, great people, great technology. But I think what’s unique was that they targeted both digital and physical goods as well as B2B and B2C in terms of the customer segments. And Mark, who is their CEO, did a great job of leading them after they transitioned out of eBay. While their traditional strength has been in the mid market and departments or single geographies where large enterprises use them for commerce in one geography and then translate it, I think that will continue to be an area of good opportunity for us. And what we will bring to that is the enterprise relationships that we have with larger enterprise. So, like all our acquisitions, we look at it from the point of view of can we accelerate their growth, does it fill out our offering that we have a unique and differentiated solution. And the good news was, Magento, I think checked all of those boxes. And so, we’re excited about it, as we said, hopefully it closes next week. And we’ve given you some transparency into the size of their business. Operator : Your next question comes from the line of Mark Moerdler from Bernstein Research. Your line is open. Mark Moerdler : Congrats on the quarter. And thanks for taking my question. So, I’m going to follow-up on the questions on Magento. Discuss how Magento has had strength in selling the digital goods Adobe’s -- digital marketing is all about digital marking but both digital and electronic. How big a nuance, how big a difference is there, how big an opportunity is there? The fact that they are so strong in selling the digital goods and how does that play into the existing customer base that Adobe has in digital marketing? Shantanu Narayen : Yes. Mark, I think from our point of view, we just want a very comprehensive solution. When you go into a retail customer, for example with Digital Experience who is making available for sale physical goods, we say, yes, we have the ability for you to transact and finalize your sale for physical goods that’s shipping. That doesn’t mean that we are in shipping our sales, but the ability to have that inventory, the building materials, the payment methods is clearly an advantage in terms of them taking non-digital way of transacting commerce and converting it to commerce. What’s also nice about them is for people who want to do rooms or airline reservations or other digital ways of transacting business, the same solution scales from physical goods to digital goods. Things like subscription, what Adobe offers. I think, we would all acknowledge that more and more companies want to get to a subscription mechanism. And so, I think, I would look at it more as a comprehensive way of dealing with anything that needs to be transacted online, whether the end result was a physical good or digital good or subscription, being able to have a comprehensive offering across B2B and B2C is really helpful. And what I mean by B2B is you might have companies whether they’re consumer goods companies or companies that are actually shipping to other retailers who also want to use this to transact business electronically. So, that’s what’s exciting for us about what Magento offers. Operator : Your next question comes from the line of Ross MacMillan from RBC. Your line is open. Ross MacMillan : Shantanu, congrats on the quarter. You look like you’re tracking again this year to something around 1.3 billion of net new Digital Media ARR. And we’re just coming up into a period where you’re starting to move on price, you have some new product introductions, there are some ARPU effects from Stock. Just philosophically, how do you think about the progress of that net new ARR, as we think about that, no just this year, but broadly speaking over the next two or three years? And do you feel like there are levers that you have to manage that number to a sort of target? And I’m just trying to get a sense for sustainability on that line item. Thanks. Shantanu Narayen : Yes, Ross. Again, when we look at the ARR accomplishment and entire Digital Media performance in the first half, it’s very clear that we continue to have momentum across all of the various offerings, as well as geographies. I think, if you look at our Q3, and then I’ll get to the picture, we do expect Q3 is seasonally weak. And we’ve said that we expect the traditional strength in Q4. One of the things that we are discontinuing to monitor in Q3 is what’s happened with GDPR and the recent privacy law changes is that everybody who is doing business online in Europe, will have to make sure that GDPR is not sort of just the checklist item but a new ways of doing business which requires people to tailor their digital marketing. We were ready with that on May 25th. We just want to continue to monitor that as we transact business online. We are best-in-class both for ourselves as well as for the service that we deliver for our customers. And so, we look at the 310 million target for ARR; it’s the highest we’ve actually had in Q3 for Digital Media. To your point, it should result in record ARR addition in this business for FY18. But long-term, as you think about new media types, as you think about devices, what we are doing across education, immersive media opportunities with AR and VR, screen design, video and the explosion of video, I think, you’ll continue to see us innovate more, attract new customers to the platform, and really drive the addressable opportunities. So, that’s really is the focus for us in that business. Ross MacMillan : And just a quick follow-up, if I can, for John. Welcome, just on the tax rate that new run rate of 14%, is that something that in the absence of material geographic revenue mix shift or M&A, is that something that you would view as broadly a sort of stable run rate, even beyond fiscal ‘19? John Murphy : Yes. Thanks, Ross. I think, how I would describe it is with the new Tax Act, we’ve been digesting the different impacts to that. And so, you see as we made this recent change, again after just starting in January. So, we do feel this rate is stable, but we continue to evaluate opportunities with the provisions of the tax law. And just to remind you, our fiscal year ‘18 is really unique for us. So, we don’t have the full effects of the Tax Act until FY19. But I think you can rely on those rates at this point, to be relatively stable. And then, as we continue to evaluate opportunities, take advantage of the provisions, we can update them. Operator : Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Jay Vleeschhouwer : Shantanu, a technology roadmap question for you regarding Digital Experience. How much of a role do you think there may ultimately be for you to have a self-serve model in the portfolio in digital experience, paralleling what you’ve done with Digital Media, particularly with adobe.com. The reason I’m asking is was the launch of Advertising Cloud Creative at Summit for instance perhaps an early sign of a longer term ambition for more comprehensive self-serve capability that you can deliver to customers for Digital Experience. If that’s so, would there then be positive incremental margin implications, as you’ve seen on the Digital Media side from that kind of a model? Shantanu Narayen : I think, Jay, there is no question that a focus on time to value and getting more practitioners adopting our digital experience solution sooner rather than later is a priority for us. We’ve certainly, to your point, done that with Acrobat and CC. Magento is a really nice addition to that, because if people can create a website, start doing it with their customers through multiple channels and transact business through commerce, that opens up new vistas for us. And if you remember, the original Day Software as well as what Omniture had, actually targeted small and medium businesses. So, I look at it as, are we focused on continuing to drive time to value and getting more practitioners to be self served. That’s only a benefit in terms of their NPS with Adobe. And it’s clearly an area of focus for us. Jay Vleeschhouwer : A quick one for John. Could you talk about the implications for cash flow from the new cash structure, both in terms of not just net income, which is obviously going to be affected on the GAAP side but also perhaps in terms of deferred tax implications within cash flow? John Murphy : Clearly, we benefit from the tax rate changes. And I think what we’ve demonstrated is that our business continues to throw cash flow strength in growth. So, I would just say that that trend is pretty consistent. Operator : Your next question comes from the line of Walter Pritchard from Citi. Your line is open. Walter Pritchard : Just a further question around pricing. You’ve talked about services for some time and stock I think continues to do well. Can you help us understand how services are impacting pricing versus some of these other factors, especially the price increase that just started to have impact this quarter, maybe a stack rank or kind of relative conversation about the drivers of ARPU? Shantanu Narayen : Sure, Walter. I mean, I think as it relates to Adobe Stock, that is clear service. It makes the entire offerings sticker. And I think we mentioned in our prepared remarks that Stock had a very strong quarter, I think it continues to make the whole aspect of an on-ramp to creativity easier. So, that’s been good. I would say in the enterprise in particular as people are finding that whether you’re interfacing between freelancers and the marketing or graphics departments within enterprises, storing all of these assets, so that you can increase content velocity, things like Adobe Sign, all of them are causing us to be able to both deliver better value and charge more to our enterprise customers. So, in the enterprises in particular, we’re very maniacally focused on named user deployment, ensuring more people use it within an enterprise, having services be the win, which they can engage more people in the creative process. And that’s leading to both greater ARPU as well as new seat deployment within the enterprise. Operator : Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open. Heather Bellini : I just had a question about, as we look at your revenue targets, Shantanu, and as you look out a few years, is there a reason to think that the pace of expense growth, which we’ve been seeing, would change at all? You guys have done such a great job kind of growing expenses at such a much lower pace obviously than revenue. I am just wondering if there is any reason to think that kind of the pace of what we’ve seen in terms of expense growth would change based on what your revenue plans might be down the road. Shantanu Narayen : That’s a great question, Heather, in terms of how we think about it. And I think as a company, we’re just being ruthlessly focused on both top line and bottom line growth. I mean you are driving 24% year-over-year growth in revenue, but driving 60% growth in non-GAAP EPS, I think it shows that we’re really focused on both of those. We just have some very significant opportunities. And I think as you think about Q2, maybe there were a couple of investments in the Adobe Cloud platform as well as in preparation for GDPR that were factored in. But I think long-term, we just continue to ensure that are we driving great top line growth at a very profitable margin, and we’re going to continue as we did in Q1, for example, all revenue overachievement will result in greater earnings and that continues to be our focus. Operator : Your next question comes from the line of Kirk Materne from Evercore ISI, your line is open. Kirk Materne : Shantanu, I was wondering if you could just -- I want to go back to Magento again. And could you just walk us through I guess how you’re thinking about the integration? I assume given the time of your fiscal year, it’ll operate generally on a standalone basis. But, is this a product that the Adobe sales force can start taking to market once the deal closes? I guess, just how are you thinking about sort of integrating, I guess mainly from a go to market perspective once the deal closes over the next couple of quarters? Thanks. Shantanu Narayen : Kirk, I think, the sales force is already chomping at the bits in terms of saying how do we, once the deal is closed, have Magento in our bag. It’s such a natural extension. But, I think to your point, our focus has always been with acquisitions, do no harm, really make sure that we can continue to bring to bear the Adobe brand, bring to bear the customer relationships that we have and truly understand the magic sauce that makes them so special. So, certainly, in terms of from day one when we are closing being able to expand our story of how we can serve customers, looking at some of the customers. And I think we pointed that out in the introductory call in terms of who they already have as customers. So, I think, we will start to deliver to enterprises but we will be a little cautious because we just want to make sure that we have discipline on-ramp to that particular product. Operator : Your next question comes from the line of Derrick Wood from Cowen & Company. Your line is open. Derrick Wood : Great, thanks. I wanted to touch, drilling in on GDPR. And one could argue, it could have some mixed impact for you guys. The regulation focuses on data minimization in terms of the amount of content companies should be storing about their end consumers and email lists have to be more scrutinized. And I guess that could weigh on capacity subscription sales. But at the same time, companies are needing to put more governance and workflow around their digital engagements and we could see more standardization and more usage on the Adobe platform. You clearly had a good quarter, but how do you see these dynamics around GDPR working out and impacting the demand trajectory on Experience Cloud. Shantanu Narayen : When I take a step back, Derrick, the trend towards online businesses and digital spend and the desire on the part of enterprises to understand attribution is only going to increase. More money is going to be spent digitally but the bar of how that’s being spent and the understanding and effectiveness of that marketing and spend is only going to increase. And I think big picture, we look at that as a big opportunity for Advertising Cloud, because not only are we a channel for the major online marketing platforms like search, social, display and TV, but we are unique and that we have sort of the broadest perspective of efficacy across all marketing expense. On the second side, all companies will need to balance the customer acquisition where this third-party data plays an important role. And the more important issue for all companies is going to be customer engagement, to your question around email list and how you engage with them. And then, I think leveraging the first-party data is going to become even more crucial. And so, we look at it and say we have the best of both worlds. The Advertising Cloud will continue to focus on helping customer acquisition, but really the energy is going to be spent by companies more on Marketing Cloud where engagement is going to be even more critical in this world of GDPR, so that you don’t in any way impact the trust that you have built with companies. And I actually think analytics also across both acquisition and engagement will become even more critical in this new environment. So, you’re right in that we have to help our companies navigate it and you’re right. And I think long-term, it just continues to be a tailwind as the leader in this business. Operator : Your next question comes from the line from Keith Weiss from Morgan Stanley. Your line is open. Keith Weiss : I just had a clarification question around the guidance. Last quarter, Mark Garrett was talking about Digital Media ARR and talking about Q3 and Q4, the expected seasonality of Q3 and Q4 to follow similar to what was achieved in FY17. And when I look at ARR from last year, Q2 to Q3 was pretty sort of flat seasonality. It looks like we are looking for closer to like down 9% to 10% this year. Is something changed between sort of Mark Garrett’s comments and sort of how we are thinking about ARR into Q3 this quarter? Shantanu Narayen : No, Keith. I think, as I mentioned a little bit earlier, when you look at from an absolute perspective, the Q3 target that we provided for ARR will still be the largest that we have. I think we continue to see strength in the business and nothing’s changed from that particular quarter. I mentioned briefly that we want to just make sure that we get a little bit more experience with what’s happening with GDPR to Derrick and other peoples questions associated with what’s happening online but in no way reflects a change in how we see the business. And Q4 again, we expect the traditional strength in the business. Keith Weiss : So, some caution perhaps around GDPR, potentially questioning some Digital Media business from Q3 into Q4? Shantanu Narayen : I think, we look at it from first half second half and we still continue to model it, but you can look at it as we just want to make sure that we underpin GDPR in more detail across Q3. Yes. Operator : Your next question comes from the line of Kash Rangan from Bank of America Merrill Lynch. Your line is open. Kash Rangan : Shantanu, I’m just curious, if you look at companies like in your peer groups Microsoft, Intuit, they have had revenue growth in some of the key businesses outpace unit growth. Obviously, pricing and ARPU growth has been a key trend of the industry. I’m curious how you think about that. Are you at a point where it’s more so ARPU growth versus unit growth? If so, what is driving that? If you on the contrary believe what you said, on the previous earnings conference call that the TAM is a multiple of the previous cycle. I was curious to hear you elaborate on why you believe the TAM as a multiple of the prior cycle. That’s it for me. Thank you. Shantanu Narayen : Yes. I mean, I think when we look at the two businesses where we have a B2C business, when we look at Acrobat and units growth for Acrobat, all the strength in the Document Cloud businesses is being driven by unit growth rather than what you would call ARPU growth. When we look at customer acquisition in Creative Cloud, we’ve been pretty forthcoming about how it’s really being driven by few people coming to our platform. And so I can’t comment on what Microsoft and Intuit are saying, but from our point of view, it’s certainly being driven not more by few customer acquisitions and focus on that. And so, as we thing about big picture, what we are focused on in creative, the first is let’s just continue to drive net new subscriptions, focused on retention, the pool is becoming larger and larger. So, this is in emerging markets. I would say a little bit more adjacent markets, what we’ve done with education and hobbyists. We continue to make sure that ARPUs are increasing as people go into renewals. But price is not on that first list of things that we’re focused on, given where we’re in the cycle. Operator : Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open. Pat Walravens : Shantanu, I’m going to step back a little bit. And I’m curious how far -- I'm sorry, the artificial intelligence side of things. How far away are we from having Sensei help customers search video content with a high degree of accuracy, Sensei find all the footages that has Brad Pitt in it. Shantanu Narayen : Pat, I think if you look at what we already have with respect to Adobe Stock, the two things that I would call Adobe magic that Sensei has provided is first auto tagging. So, you can actually get thousands of pictures and we have the ability based on the prior data set to be able to tag it and infer intent. And so, you can search. And the economical example we give us fire engine versus being it called different things in different countries. And so, we already have that. With video as well I think we have the ability across frames to do searching. And so, it’s only going to get better and better with the data sets. But that data is not far in terms of being able to find across video. And in fact, we have already demonstrated abilities to do search on video. Mike Saviage : Operator, we’re coming up on the hour. Why don’t we take one more question, please? Operator : And your last question comes from the line of Brian Wieser from Pivotal. Your line is open. Brian Wieser : I was wondering if you could offer a little more color on what you’re seeing with Advertising Cloud. You called it certainly as supporting some growth there. And we see some of the peers to that business in particular doing phenomenally well. And related GDPR, as we’re seeing something with shake out with much of the ad tech sector, I’m wondering if you see opportunities for deeper investment. It seems like anyone with deep pockets a long time horizon is maybe well-positioned to take advantage just growing organically or by picking up businesses that are now available. Shantanu Narayen : We had a good strong revenue quarter for Advertising Cloud in Q2. I think if you look at our overall revenue growth of 18%, it was certainly higher than what we had guided to. Advertising Cloud played a role in that. I think, to your point, we are one of the few companies that has the brand to have the ability for people to invest across search, social, display and all forms of TV. And so, I think, we’re pretty uniquely positioned. I think what’s even more unique about our offering is the tie-in to the segmentation that we have with audience manager and the analytics that we provide on the efficacy of the spend. So, we continue to be excited about the opportunity that we have both in Advertising Cloud as a separate cloud an opportunity, and the integration of that across the entire Experience Cloud. And since Brian that was the last question, in close, the momentum in our business clearly continued in Q2. We continue to be excited about the product roadmap that we will deliver in the second half and the innovation agenda. Big picture, the strategy of empowering people to create, as well as helping businesses transform, continue to be large addressable markets with good tailwinds, and we continue to focus on driving both top-line and bottom-line growth with significant margins while we invest in technology as a long-term differentiator for Adobe. Thank you for joining us today. Mike Saviage : Thanks, everyone. This concludes our call.

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