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Accenture plc (NYSE:ACN)
Q2 2018 Earnings Conference Call
March 22, 2018, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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. [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 -- Managing Director, Head of Investor Relations

Thank you, Karen. And thanks, everyone, for joining us today on our second quarter fiscal 2018 earnings announcement. As Karen 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 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 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 it over to Pierre.

Pierre Nanterme -- Chairman and Chief Executive Officer

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 Fiscal Year '18. For the quarter, we again delivered strong double-digit revenue growth which were broad-based across all dimensions of our business. We continue to grow ahead of the market and are clearly gaining significant market share. I am particularly pleased with our record new bookings. The very strong demand we are seeing, especially in digital, could, and security demonstrate that we continue to provide clients with highly differentiated and relevant services.

Here are few highlights for the second quarter and year-to-date. We delivered excellent new bookings 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, a 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. We continue to return substantial cash to shareholders through share repurchases and dividends, including $2.2 billion year-to-date.

Today, we announce a new 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. As we move in the second half of Fiscal Year '18, I feel very good about the momentum in our business. We are raising our business outlook for revenues, earnings 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 numbers in greater detail. David, over to you.

David Rowland -- Chief Financial Officer

Thank you, Pierre, and thanks 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 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 innovative and leading in the new.

Before I get into 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 of the new, including digital, cloud, and security related services.

As the second major headline, we delivered EPS in the quarter of $1.58 on an adjusted basis, reflecting 10% 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 and 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 continued to be well balanced across the dimensions of our business, and 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 more than 60% of our new bookings.

Looking now at revenues, 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. Our outsourcing revenues were $4.4 billion, up 13% in USD and 8% in local currency.

Looking at the trends in estimate 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. 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 our 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, and 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 balance 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 the growth markets both grew double digits, reflecting continued strong demand for our services.

Financial services grew 7% in local currency, reflecting strong balance growth in both banking and capital markets and insurance. Growth was strong across all three geographies, including double-digit growth in the growth markets. 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. General 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 of 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 remeasure our net deferred tax assets at the new lower tax rate. This expense our 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 least year. Adjusted diluted earnings per share were $1.58, compared to EPS of $1.33 in the second quarter last year. Again, this reflects a 19% year-over-year increase. Our day services outstanding were 40 days, compared to 43 days last quarter and 42 days 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 and net property and equipment additions of $133 million. Our cash balance at February 28th, was $3.6 billion, compared with $4.1 billion at August 31st. With regards to our ongoing objective to return cash to shareholders, in the second quarter, we repurchased to redeem 5.2 million shares for $804 million at an average price of $1.55, $0.30 per share.

At February 28th, we had approximately $2.1 billion of share repurchase authority remaining. 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 15th [audio cuts out], 2018. So, at the halfway 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 -- Chairman and Chief Executive Officer

Thank you, David. Our excellent performance in the second quarter and year-to-date demonstrate that we have the right growth strategy and we are executing extremely well. With 10% revenue growth in local currency in the first half, we continue to grow much faster than the market, and indeed we have outperformed our basket of competitors for now 16 consecutive quarters, four full years. Our strong and durable performance reflects our ability to rapidly scale our market leading position in the new, digital, cloud, and security services.

For the first half, revenues from the new were nearly $11 billion, more than 55% of total revenues, and continue to grow at a very strong double-digit rate. The accelerated rotation of our business reflects the significant investment we have made over the last years, including record investments last year in strategic acquisitions, building assets and solutions, and hiring and developing the most relevant talent.

Let me highlight two key parts of our business, Accenture Interactive and Accenture Security. With Accenture Interactive, we are scaling to further strengthen our leadership position. For the last two years, we are recognized at Advertising (sic) 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 studio lab. With our expertise and strategy, design and technology, along with our deep industry experience and the applied R&D capabilities of Accenture Labs, we are helping Disney apply emerging technologies in 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 first half -- Mackevision, a leading producer of 3D and immersive content in Germany; Altima, a French digital commerce agency; Rothco, a creative agency in the islands; and Matter, a design innovation firm in the US.

We are also rapidly scaling Accenture Security. Less than three years, we committed to building a market leading cybersecurity 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 benefits 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 strategy and risk.

We are helping a leading insurance company transform its cyber defense with an advanced threat and incident response platform, including automation and training for their people, which has dramatically reduced the time to detect and respond to threats.

Accenture has a unique ability to scale the new with the breadth and scope of services we provide end to end, from strategy and consulting to digital technology and operations, together with our deep industry expertise. We are positioned at the core of our clients' largest transformation programs. We are working with the AirShare Company on a global transformation program with SAP S/4HANA, designed to streamline manufacturing and supply chain processes, gain real time customer insight, 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 in Southeast Asia, with a successful positive merger integration of the wealth management and retail banking businesses acquired from AFS 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 and 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. I'm especially pleased that, given our significant market share gains over the last two years in Europe, we are now positioned as the market leader.

And, we delivered another excellent quarter in gross markets, with 15% revenue growth in local currency. Japan, again, led the way with very strong double-digit growth. We had double-digit growth as well in Australia, Brazil, and Singapore.

Before turning 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, we are building a global network of more than 100 work-at centers, where we collaborate with clients and co-create innovative digital solutions.

And, we're expanding 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 newly equipped studio in Madrid, and we opened a new industry IUT 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 capabilities in the new, but also to anticipate the next waves of technology and business disruptions, to keep Accenture ahead of the curve in the new.

With that, I will turn the call over to David to provide our updated business outlook. David, over to you.

David Rowland -- Chief Financial Officer

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 $9.9-10.15 billion. This assumes the impact of FX will be about 5.5%, compared to the third quarter of Fiscal '17, and reflects an estimated 6-9% growth in 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 7-9% 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 24-26%, excluding the impact of the US tax law changes. We continue to expect our annual effective tax rate to be in the range of 22-24%.

For earnings per share, we expect our GAAP diluted EPS for Fiscal '18 to be in the range of $6.40-6.49. Excluding the change related to US tax law changes, we now expect full year diluted EPS to be in the range of $6.61-6.70, or 12-13% growth over adjusted Fiscal '17 results. For the full Fiscal '18, we now expect operating cash flow to be in the range of $5.2-5.5 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $4.6-4.9 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 -- Managing Director, Head of Investor Relations

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?

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Tien-Tsin Huang from J.P. Morgan. Please go ahead.

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Thank you. Good morning. Very strong [indiscernible] growth, but it looks like it might be coming in at a slightly higher cost. What surprised you exactly on the margin front? I think you mentioned H&PS. Can you elaborate? We figured maybe it was contract probability or use of subcontractors. I may have missed it. If you could elaborate, that would be great.

David Rowland -- Chief Financial Officer

In H&PS, there are really two 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. Some of that relates to renewals at lower level of profitability than may have been previously contracted out. Secondly, in the mix for H&PS, is higher acquisition related costs for a number of acquisitions that we've done over the trailing four quarters. Those are 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 -- J.P. Morgan -- Analyst

Right. So, the confidence in the margin expansion in the second half -- more importantly, is there any reason why Accenture can't return to the typical 10-30 basis points that we've seen for so long here? It sounds like you can address those contract issues, but anything else to consider?

David Rowland -- Chief Financial Officer

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. While, as you know, I'm not going to provide specific guidance, I do feel comfortable saying, in general terms, our strategic objective to over time expand our margins modestly, in the 10-30 basis point range, remains intact. There isn't anything about this year that changes our view on that.

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Very good. Thanks so much.

Operator

Next question comes from Joseph Foresi with Cantor Fitzgerald. Please go ahead.

Joseph Foresi -- Cantor Fitzgerald & Co. -- Analyst

Hi. About consulting, it seems like the new is driving a lot of the consulting work. Can you talk about the growth rate there, and about the conversation rate into more steady business? Is that about the same or has it changed since prior years?

Pierre Nanterme -- Chairman and Chief Executive Officer

Indeed. Our consulting business has become stronger and stronger, especially we are very pleased with the bookings we see in our consulting business. The rotation to the new ease factor, explaining that we are getting more consulting business, but as well the rotation to the new is consulting as well, creating a report effect 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 operations. So, the new is well 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. If bookings are very strong, it's because we have a good win and conversation rate.

David Rowland -- Chief Financial Officer

Yeah. I'll add one point to that. An important insight in the mix of consulting is a very strong market in our platform business. When we talk about our platform business, we're talking about SAP, Microsoft, Oracle, Salesforce, and Workday primarily. That part of our business is growing very well. There is definitely a lot of marketing activity around next generation ERP and we're benefiting from that in our consulting business. As Pierre said, 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 -- Cantor Fitzgerald & Co. -- Analyst

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 in the business outside of the new? Thanks.

Pierre Nanterme -- Chairman and Chief Executive Officer

We could say the new is the business of Accenture. We will continue to talk about rotation to the new because what we believe at Accenture is the waves of these new emerging disruptive technologies will continue coming at an incredible pace. That's why we continue to talk about the new, because today we've talking a lot about interactive mobility, analytics, and cloud security. But we know, to some extent, the next new is coming fast in terms of immersive realities, and 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. But, we play the attack by modernizing our core business. I'm thinking about what we've been doing in terms of bringing a lot of automations in our services in terms of application outsourcing and business asset services.

So, we improve and increase the competitiveness of our services 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 strong player and leader in the core.

Joseph Foresi -- Cantor Fitzgerald & Co. -- Analyst

Thank you.

Operator

Next question is from Bryan Keane with Deutsche Bank. Please go ahead.

Bryan Keane -- Deutsche Bank -- Analyst

Hi. Good morning. About the tax rate, I know the tax rate was lower. I think it was 15.1% for the quarter. But, you reiterated the guidance for the year at 22-24%. I think that implies a second half tax rate that's higher, maybe 27-28%. Post tax reform, is that a newer, higher tax rate going forward?

David Rowland -- Chief Financial Officer

No, our tax rate is lumpy by quarter. The tax rate in any particular quarter is essentially driven by four things -- the geographic mix, a change in reserves, final determinations, and the tax impact of equity compensation. For example, if you look at the second quarter, it 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. As you know, when our stock is appreciating, as it has been, and the stock price is higher than when it was initially granted as opposed to vest date, then we get a tax benefit from that, which is what we see 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 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 -- Deutsche Bank -- Analyst

A quick follow-up, in the queue 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 [audio cuts out] transfers of assets other than inventory. Just curious if we should just expect going forward a higher tax rate as well? On the operations group, it just moderated a tad from its consistent double-digit growth. Is there anything implied on that slower growth rate going forward? Thanks.

David Rowland -- Chief Financial Officer

You are a student of tax when you get into that question. We did disclose the ASU that you referenced in our 10-K. In that disclosures, we commented on a potential impact of up to 3.5 percentage points. 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.

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. I'll update that in September, but that's our current view.

Bryan Keane -- Deutsche Bank -- Analyst

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. I just wanted to see if there are any callouts. But, thanks. Congrats on the quarter.

Pierre Nanterme -- Chairman and Chief Executive Officer

I have to give a quick one. No change.

David Rowland -- Chief Financial Officer

No change on operations. Yes. Okay?

Operator

Next question is from Brian Bergin with Cowen. Please go ahead.

Bryan Bergin -- Cowen & Company -- Analyst

Hi. Thank you. On the local currency revenue guide range for the year, relative to the strong 10% first half of performance, anything you're seeing now for the second that would leave you more bullish for the full year range?

David Rowland -- Chief Financial Officer

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, we work very hard to land toward the upper end of the range. 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. That would be a good result.

Bryan Bergin -- Cowen & Company -- Analyst

Can you comment on where that inorganic was for the quarter? 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 rate of growth?

David Rowland -- Chief Financial Officer

Previously, we had said 2.5-3% for inorganic. I would say now we're looking at more like 2.5%. It's really 2.5% for the year.

Pierre Nanterme -- Chairman and Chief Executive Officer

On Accenture Interactive, 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. 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. We are not in this specific 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. We see the sweet spot, we decided to invest in, and we benefit from the investment.

Second, we are 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 as with the physical experience, what we're not 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 when compared 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. When you look at the depth of breadth 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 we acquired now three or four years ago, with over 150 people -- maybe 160. Now, they are more than 1,000 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.

Bryan Bergin -- Cowen & Company -- Analyst

Very helpful. Thank you.

Operator

Next question comes from Brian Essex with Morgan Stanley. Please go ahead.

Brian Essex -- Morgan Stanley -- Analyst

Good morning. Congratulations on the quarter. It's nice, strong growth. First of all, can I dig into your conversation with Tien-Tsin, just on health and public services, the 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? Maybe a little bit of color on those, just to give us confidence in margin expansion going forward?

David Rowland -- Chief Financial Officer

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. 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 and also our profitability agenda. I have confidence the trajectory for H&PS 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 and our investments, etc. I think they've got the levers at their disposal to navigate an improving trajectory.

Brian Essex -- Morgan Stanley -- Analyst

Got it. That's helpful. On the financial services, you continue to outpace your peers with pretty strong constant currency growth. It looks like a more European focus. Maybe a little bit of color in terms of conversations 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 -- Chairman and Chief Executive Officer

Yes, of course. Frankly, financial services, by and large, if you look this last year, has been strong. It is an industry, despite all of the effects around that industry, which is still investing a lot in technology because financial services is all about tech. They have to invest if they want to stay relevant. Now, you have some very specific areas of growth, and thinking about risk and regulatory management. You know what's happening in financial services. There is a lot on regulatory requirements across the world, especially in Europe. In insurance, they have their own regulation as well.

And then, you have all of the risk management, which is a very hot place in financial services for all the reasons we know. It's creating a significant market, which we are calling R&R -- risk and regulatory management. Of course, the other part is always related to omnichannel management. In financial services and in banking, you need now to have an omnichannel architecture with your physical branches, where you're adding your digital capabilities. All of this should create a seamless customer experience. All of this has to be built, so you need a lot of strategy work to create this experience architecture, and then you need to build the digital platforms and all the related processes.

And then, maybe three, is data. Financial services is an industry where you're mining tons of data, tons of information. All of 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 important. So, the activity there -- you mentioned Europe rightfully. 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 the market.

So, financial services is under pressure. But, 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 positioned our services.

Brian Essex -- Morgan Stanley -- Analyst

Helpful color on the trends. Thank you.

Operator

Next question comes from Darrin Peller with Barclays. Please go ahead.

Darrin Peller -- Barclays Investment Bank -- Analyst

[Indiscernible]

David Rowland -- Chief Financial Officer

It sounds like he had a bad connection as soon as he -- if you want to go to the next one?

Darrin Peller -- Barclays Investment Bank -- Analyst

[Indiscernible]

Angie Park -- Managing Director, Head of Investor Relations

Karen, why don't we go to the next caller, please?

Operator

Next question comes from David Koning with Baird. Please go ahead.

David Koning -- Robert W. Baird & Co. -- Analyst

Hey, guys. Thanks. 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 -- Chief Financial Officer

That is primarily FX [audio cuts out], 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. 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. All that's accounted for -- the important point -- in our EPS guidance.

David Koning -- Robert W. Baird & Co. -- Analyst

Gotcha. Great. The acquisition spending the last two quarters has been less than it had been in several prior quarters. Is there the expectation that that ramps back up in the back half?

David Rowland -- Chief Financial Officer

We think it'll 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.

David Koning -- Robert W. Baird & Co. -- Analyst

Okay. Great. Thanks, guys.

Operator

Next question comes from Arvind Ramnani with KeyBanc. Please go ahead.

Arvind Ramnani -- KeyBanc -- Analyst

Hi. Thanks for taking my question. 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 -- Chairman and Chief Executive Officer

With great pleasure. At Accenture it's called the new and the new new. I won't correct the overview and I will mention a few minutes because we were reading a lot about the new new and what's next. I'm going to give to you some flavor on the blockchain, on the artificial intelligence -- one the blockchain, there are more and more projects. Again, we're starting to move from typical prototypes and proof concept, to projects starting to get some scale. We're starting to see what's most important with blockchain. What are the relevant areas where blockchain could create value.

That's what we're doing in our labs. This is what we're doing with cool innovation with our partners. 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 Consumer's Bank in Singapore. This is what we're doing in the banking environment, 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 announce new opportunities in the shipping industry with a subsidiary of Zim Merchant, which is one of the largest shipping companies in the world.

In the contract management -- so, we see the payments, the transaction exchange, and a lot around document and contract management. We're starting to explore around tracking and food security or security in tracking the supply chain. Payment, transaction exchange, contract management, tracking of the supply chain -- these are four applied opportunities on the blockchain.

On artificial intelligence, it probably 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're absolutely obsessed with applying technology to create value. We're not using data as a kind of buzz and hype thing where, at the end of the day, you don't know exactly what to do with it. That's why we call it applied intelligence and not artificial intelligence for our unit, and pushing our people to deliver value to clients with agility.

Today, we are really focusing on analytics, blockchain learning, and then you're putting the mix of artificial intelligence on top of it. It's playing a lot with data, in the manufacturing industry, where now you have tons of sensors where you can mine the data and do things that are not just applications. We see a lot of artificial intelligence in the predictive business -- not just seeing 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 bringing learning and algorithmic artificial intelligence to improve cancer diagnoses and recommendations for the patient.

I can speak, but I think we don't have time, Angie.

Arvind Ramnani -- KeyBanc -- Analyst

Very helpful. When you think of this new 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 -- Chairman and Chief Executive Officer

It's always the same. When you're starting something new, it's more 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 S-curve, then you add in more of the delivery services, 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 new new is clearly more around the high-end tech, high-end consulting, the bring the industry expertise. This is what we see with -- I meant to mention the three new new, around realities, blockchain technologies, and artificial intelligence and security services. It's more on the consulting with high end tech.

Arvind Ramnani -- KeyBanc -- Analyst

Very helpful. Thank you so much.

Operator

Next question comes from Rod Bourgeois with DeepDive Equity Research. Please go ahead.

Rod Bourgeois -- DeepDive Equity Research -- Analyst

Good morning. 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 -- Chief Financial Officer

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 -- DeepDive Equity Research -- Analyst

Got it. David, can you give 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 -- Chief Financial Officer

Purely in the context of if you laid our first half results last year side-by-side with the first half results this year, the two big impacts -- and we always start with our segments. But, the first big impact is H&PS. If you look at H&PS and the rest of the Accenture business, absent H&PS, in the first half of the year, 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 the impact of our 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. Of course, that is our whole model, 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 -- DeepDive Equity Research -- Analyst

Got it. So, absent acquisitions, your margin expanded. On top of that, is there some added cost in the system because your growth accelerated? Is that an added cost? How do you look at that in terms of its impact?

David Rowland -- Chief Financial Officer

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.

Rod Bourgeois -- DeepDive Equity Research -- Analyst

Understood. Thanks for the color.

Angie Park -- Managing Director, Head of Investor Relations

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 -- Bank of America Merrill Lynch -- Analyst

Thanks, guys. Good morning. On H&PS, I just want to get a better understanding of what changed in the last quarter. I know you talked about some renewals and then 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. Can you just walk us through what changed as far as the underlying assumptions that led us to where we are on the new outlook for full year margins?

David Rowland -- Chief Financial Officer

Nothing materially changed for H&PS. The explanation of H&PS is in the context of a year-over-year comparison and 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'd 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 -- Bank of America Merrill Lynch -- Analyst

Okay. 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 vary quarter to quarter and year to year. But, is Fiscal '18 a particularly high renewal year?

David Rowland -- Chief Financial Officer

No. I don't think anything unusual in that regard.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Okay. Perfect. Thank you.

Pierre Nanterme -- Chairman and Chief Executive Officer

Alright. It's time to wrap up. Thanks again for joining us today on this call. Just in closing, clearly we have strong momentum in our business and 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 in New York on April 25th. In the meantime, if you have any questions, of course 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 28th. 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. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Duration: 64 minutes

Call participants:

Angie Park -- Managing Director, Head of Investor Relations

Pierre Nanterme -- Chairman and Chief Executive Officer

David Rowland -- Chief Financial Officer

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Bryan Keane -- Deutsche Bank -- Analyst

Rod Bourgeois -- DeepDive Equity Research -- Analyst

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Brian Essex -- Morgan Stanley -- Analyst

Bryan Bergin -- Cowen & Company -- Analyst

Darrin Peller -- Barclays Investment Bank -- Analyst

Joseph Foresi -- Cantor Fitzgerald & Co. -- Analyst

David Koning -- Robert W. Baird & Co. -- Analyst

Arvind Ramnani -- KeyBanc -- Analyst

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