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Accenture plc (NYSE:ACN)
Q4 2018 Earnings Conference Call
Sept. 27, 2018, 8:00 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 fourth quarter fiscal 2018 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. If you should require assistance throughout the call, please press * then 0. 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, 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 positioning 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 -- Chairman and Chief Executive Officer

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 the full fiscal year. For the year, we continue to strengthen our leadership position in the new -- digital, cloud, and security services. We gained significant market share, growing about 3 times the market, with strong growth in nearly all of our largest markets, once again. And we returned very substantial cash to our shareholders.

Here are a 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 up 10.5% in local currency. I am especially pleased with our balanced growth once again across 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 generated outstanding free cash flow of $5.4 billion. We returned $4.3 billion in cash to shareholders, through share repurchases and dividends. 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 fiscal year '18, 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 will review the numbers in greater detail. David? Over to you.

David P. Rowland -- Chief Financial Officer

Thank you, Pierre. Thanks to 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 are 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 reflect 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. We delivered EPS of $1.58 in the fourth quarter, up 7% from last year. Finally, we delivered free cash flow of $1.9 billion, which was better than expected, driven by strong growth and profitability in 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 our 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. We were particularly pleased with double-digit bookings growth in strategy and consulting, and systems 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 $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 in 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 deploying next-generation technologies in SAP, Microsoft, Oracle, Salesforce, and Workday. Taking a closer look at our operating groups, resources led all operating groups by [cross-talk] growth 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 and 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 and 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 North America. 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 6.4%, 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 4 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.

Days 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 31st was $5.1 billion, compared with $4.1 billion at August 31st last year.

With regard 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 15th and represents a $0.13 per share or 10% increase over the previous semi-annual dividend we declared in March.

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, where 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%. 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 FY17, 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 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 FY17, and was above the original guided range, primarily driven by strong top line 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. 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 in strategic high-growth areas of the market.

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 -- Chairman and Chief Executive Officer

Thank you, David. Our outstanding results for fiscal year 2018 demonstrate that we continue to execute our profitable raw strategy of differentiation and competitiveness extremely well. Our very strong revenues and 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 years, demonstrating that our services and capabilities are highly relevant to our clients' agenda.

Over the last five fiscal years, we have delivered compound annual revenue growth of 9% in local currency, and 10% compound growth in adjusted earnings per share. 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 S&P 500. Our strong and durable performance reflect 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 '18, the New accounted for about $23 billion or approximately 60% of total revenues, more than double the revenues just three years ago. In digital, I am 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 as their global experience agency to improve customer acquisition and retention for more than a thousand hotels in 80 countries.

Accenture Interactive is leveraging our travel expertise, data analytics, and digital marketing capabilities to create more personalized customer experiences. While the New has truly become core to our business, as you would expect, we continue to invest and innovate to capture new waves of growth.

Indeed, we are making excellent progress with Accenture Industry X.0, which we launched recently, where we are helping clients reinvent manufacturing with advanced technologies like the Internet of Things, connected devices, and digital platforms. With the ABB, the Swiss 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 analytics that deepen its knowledge about model performance, competitor assets, and customer needs.

We continue to invest in our Industry X.0 capabilities, and completed 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 the leading partner of key platform players, including SAP, Microsoft, Oracle, and Salesforce, which are also rotating rapidly to the New. They have evolved to a new generation of cloud-enabled platforms, with advanced analytics, 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 as [inaudible] solution, from Lion, Australia's largest brewer, to [Chelsea], the Latin American utility, to Barilla, the Italian food company.

Turning now to the [inaudible] rapid dimension of our business. I'm just very pleased that we delivered another year of very strong, broad-based growth in most of our largest markets. 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 continued 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 Ireland, as well as high single-digit growth in Spain. Finally, our growth markets are becoming a 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 ultimately make the difference in delivering high-quality services to our clients. As we transform Accenture, we are making substantial investments to ensure sure that we have the most relevant and specialized skills at scale to meet our clients' needs. We are particularly focused on attracting and developing the best possible team of leaders in our industry. I'm extremely pleased that in fiscal '18, 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 this month, we were named the top company, No. 1 on the Thompson Reuters diversity and inclusion index, which recognizes the 100 most diverse and inclusive companies in the world.

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 clients. With that, I will turn it over to David to provide our business outlook for fiscal year '19. Over to you, David.

David P. Rowland -- Chief Financial Officer

Thank you, Pierre. Before I get into our business outlook, I want to highlight a few changes for FY19 and beyond. For our fiscal '19, we adopted the new revenue intention accounting standards, and have posted a recollection 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. As a result, going forward, we will report a single revenue number which will include reimbursements.

Also as a result of these changes, there will be a corresponding impact to operating margin, which restated for FY18 would be 14.4%, compared to the reported operating margin of 14.8%. Our FY19 guidance and comparisons to FY18 reflect the adoption of the new revenue standard, including the change in the presentation of revenues, and the resulting impact on operating margin, as well as the updated standards for pension accounting and income taxes on inter-company transfers.

I'd also like to highlight a change we'll be making in the payment of our dividends. Beginning in the first quarter of fiscal '20, we will move from a semi-annual dividend payment schedule to a quarterly dividend payment schedule. This change will take effect in FY20, and in FY19, 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 '19, we expect revenues to be in the range of $10.35 to $10.65 billion. This assumes the impact of FX will be about negative 2% compared to the first quarter of fiscal '18, and reflects an estimated 7% to 10% growth in local currency.

For the full fiscal year '19, 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 '18. For the full fiscal '19, we expect our revenue to be in the range of 5% to 8% growth in local currency over fiscal '18.

For operating margin, we expect fiscal '19 to be %14.5 to 14.7%, a 10 to 30 basis point expansion over adjusted fiscal '18 results. We expect our annual effective tax rate to be in the range of 23% to 25%, and this compared to an adjusted effective tax rate of 23% in fiscal '18.

For earnings per share, we expect full-year diluted EPS for fiscal '19 to be in the range of $6.98 to $7.25, or 4% to 8% growth over adjusted fiscal '18 results. For cash flow for the full fiscal '19, we expect operating cash flow to be in the range of $5.75 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 to $5.5 billion. Our free cash flow guidance reflects a very strong free cash flow range to net income ratio of 1.1 : 1.2. Finally, we expect to return at least $4.5 billion through dividends and share repurchases 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. Angie?

Questions and Answers:

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. Greg, would you provide instructions for those on the call?

Operator

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press * then 1 on your touchtone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the # key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press *1 at this time. One moment, please for your first question.

Your first question comes from the line of Joseph Foresi from Cantor Fitzgerald. Please go ahead.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. I was wondering if you could start off by talking about what the margin drivers look like, and how we should think about the base margin exiting this year, and how margins will expand next year?

David P. Rowland -- Chief Financial Officer

The margin drivers are really consistent with what I've talked about previously. You could really look at it two ways. First of all, our profitability fundamentally starts with strong contract profitability. That gets into the way we price our services, and gets into the discipline with which we deliver those services to the expected economics.

So, contract profitability is always high on our profit agenda. 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. Of course, we have an ongoing focus on that. Finally, we're always focused on continuing to improve our SG&A structure and the efficiency of the cost of doing business. All of those things come into our margin expansion objectives for next year.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. 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.

David P. Rowland -- Chief Financial Officer

We expect our inorganic contribution next year to be about 1.5%. That's about a point lower than our experience in FY18. 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.

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 underlying margin improvement, which I reference 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.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Thank you.

David P. Rowland -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Edward Caso from Wells Fargo. Please go ahead.

Edward Caso -- Wells Fargo -- Analyst

Good morning.

David P. Rowland -- Chief Financial Officer

Hi, Ed.

Edward Caso -- Wells Fargo -- Analyst

Can you talk a little bit on the people side? Your attrition rate was 18% versus 15% a year ago. It seems a lot of your peers are showing rising rates. Can you dig down a little bit on why, and maybe what efforts you're trying to slow that down? Or are you getting more comfortable at this higher level?

Pierre Nanterme -- Chairman and Chief Executive Officer

On attrition, let me directly answer your question. We're constant with [inaudible]. So, let's be clear. I think we are, today, we believe it's realistic level of attrition given the level of competition for talent in the marketplace. We have today zero issues to hire the talent we need. It's true everywhere across the world.

One of the things we do to be attractive, first, our strategy, 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, it's fresh from the press. I'm in Paris. We are No. 1 in all the dimensions in professional services, from an industry standpoint, from a technology standpoint, and across the board. We have zero issue being attractive.

Finally, it's our talent strategy and the environment we are providing to our people. I think we worked a lot to create the right workplace where people are collaborating. We are creating the right environment to have multiple cultures coming together, and developing a lot of creative thinking. It's our tone and style that we are developing at Accenture. It's probably the benefit of being the leader.

Edward Caso -- Wells Fargo -- Analyst

My other question relates to margins. How much benefit are you getting from platforms that you've built from reuse? It seems like a lot of the New is starting to settle in here, and it seems like there's an opportunity for an industry leader to reprint what you've already done.

Pierre Nanterme -- Chairman and Chief Executive Officer

I'm jumping on this one, David. For us, platforms are extremely important to the success of Accenture. I think this is very clear. What we're calling now the intelligent platforms, because the platform provided for our partners -- SAP, Microsoft, Oracle, Workday, Salesforce, and I could add [Vaso] System, and others, are becoming more and more intelligent.

Our strategy has always been the same. We leverage the best platform in the marketplace, and -- and this "and" is important -- on top of them, we build industry-specific specifications. For example, when working with an SAP, we have developed a very specific add-on on their platform in upstream oil and gas. The same in utilities. We're working with salesforce.com on a joint company called Velocity. The objective of Velocity is at speed develop industry-specific solutions on top of the Salesforce capabilities. This is our strategy and it's working so far very well.

Edward Caso -- Wells Fargo -- Analyst

Thank you.

David P. Rowland -- Chief Financial Officer

Thank you, Ed.

Operator

Your next question comes from the line of Tien-tsin Huang from J.P. Morgan. Please go ahead.

David P. Rowland -- Chief Financial Officer

Good morning, Tien-tsin.

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

Good morning. Congrats on the double-digit.

David P. Rowland -- Chief Financial Officer

Thank you.

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

I wanted to ask on the revenue momentum. I'm curious to pick your brain on the outlook. If we look back a year ago, you exited the year growing 8%, I believe, and you guided to 5% to 8% revenue growth. This year, you guided to the same %5 to 8%, but you're exiting at 11%. I'm curious how might the upside case be different this year versus last year? Any considerations across macro demand, competition, digital being a little more mature, etc.?

David P. Rowland -- Chief Financial Officer

First of all, there is no doubt that we have strong momentum in the business and there's also no doubt that we feel very good about our business the momentum that we have. You could point to, as you mentioned, the fact that we exited '18 with very strong, broad-based, organic growth. By the way, our organic growth in Quarter 4 was 10%. We had recording bookings in the second half of the year. We had our all-time high in the third quarter. In the fourth quarter, it was second only to Quarter 3. We've got good line of sight to 1.5% inorganic. So, there's 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 longest cycle. That comes into the mix by the very nature of the fact that we are guiding over essentially 12 months. Also, we take stock of what's happening in the macro environment as well. Maybe it's debatable, but I would say from our standpoint, 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. When you think about the global environment over that 12-month horizon, it's really in that context that we guide to 5% to 8%. The other thing, Tien-tsin, I would remind you and the others, we guide to 5% to 8% in a market, our investable basket market that is growing in the range of 2% to 3%.

So, anywhere on that guidance range of 5% to 8%, we would be taking significant share. 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 2.5x the market. 5% to 8%, which is consistent with what we've done the last three years is, in fact, reflective of what we would consider to be outstanding growth, especially in the upper end of that range, reflective of Accenture as a leader. Anything we do above that is exceptional growth. It is true that we've had a pattern over the last four years for delivering double-digit growth, and we'll see '19 plays out. We'll update our guidance appropriately as the year progresses.

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

Great. That seems very prudent. I'll ask my quick follow-up just on the financial services segment. I know you mentioned a little bit, David, it did lag a little bit. Was the impact broad-based or isolated to a region or a few clients? It sounded like North America sounded OK. I just wanted to get a little more detail there. Thanks so much.

Pierre Nanterme -- Chairman and Chief Executive Officer

I'm very pleased to comment on financial services. If I had to summarize the situation, it's mainly Europe where we are facing this challenge of lower growth. And it's mainly due to some large program we had in Europe winding down in the context of '18. So, something which is not untypical, by the way, that's happening in other industries in the past few years. I remember CNT in Europe just two years ago, we had the same phenomenon of some large program getting to a close. So what it is you need to do, and our people are working very hard, you need to replenish the pipeline to build the backlog, and that's going to create the revenues of tomorrow.

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 a couple of quarters to show in our growth. So, we expect H1 to still be in the low single digits, and then H2 to get back more power with the rest of Accenture. I do not think anything untypical coming from anything happening to this industry.

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

Got it. Thanks so much. Congrats again.

David P. Rowland -- Chief Financial Officer

Thank you, Tien-tsin.

Operator

Your next question comes from the line of Rod Bourgeois from DeepDive Equity Research. Please go ahead.

David P. Rowland -- Chief Financial Officer

Hello, Rod, good morning.

Rod Bourgeois -- DeepDive Equity Research -- Analyst

Good morning to you. 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 some macro headwinds could brew over the course of the next 12 months? I'm just trying to gauge, are you seeing visibility in the slowing, or you're just prudently thinking about the next 12 months and what might happen?

Pierre Nanterme -- Chairman and Chief Executive Officer

I'm going to take on this one, because I think David mentioned already some element of this. From an Accenture standpoint, we are pleased where we are and no doubt we are entering Q1 with good momentum. Now, for us, Q1 is the end of calendar '18. So, we're moving to a new calendar January the 1st.

To be very specific, it's not something we see now. The role of the leadership of any company is to look beyond the horizon and to understand what might happen in calendar '19. Just to build on what David mentioned, for instance, the Brexit negotiation is going to get to an end, and we'll know what's going to happen. It seems we're more moving to something like a hard Brexit, than a soft one.

What we're calling the trade war, again 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're watching as well, very closely Latin America. Latin America, we've been doing well, despite the complexities in that region. You see what we are doing in Brazil, which is absolutely great. Now, Latin America prospects are concerning, as well, and not to mention the other risks we all know.

You're starting to see again some volatility in the commodity pricing. Not long ago, we talked about the oil price at $30 a barrel, and now it's getting to be very high. We're about to see some commodity pricing volatility. Again, all of this we'll see in calendar '19 how things are going to unfold. 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. 5% to 8% is an aggressive guidance if you look at the growth of the basket of competitors and the market. So, at 8%, that will be 2 to 3x the market. I would not consider that as consecutive.

Rod Bourgeois -- DeepDive Equity Research -- Analyst

Makes perfect sense. Then on the free cash flow outlook, you outperformed on cash flow in fiscal '18, which sets up a tough comparison for fiscal '19. Is there anything lumpy in the fiscal '19 free cash flow outlook? I know you sometimes include some buffer on DSOs in case that moves around. Are there any special lumpy items in the fiscal '19 free cash flow outlook?

David P. Rowland -- Chief Financial Officer

There's no special lumpy items. Again, we focus more on the absolute number in relation to net income. That ratio, the guidance is actually quite strong in that regard. Then we do the year-over-year change. We had beyond an outstanding year in DSOs in '18. We really had an exceptional year. From a guidance standpoint, you're not going to assume that happens ever year. For example, Rod, we have allowed for the potential of some increase in DSOs, as an example. But there's not anything other than the normal things we would 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 1.2x net income.

Rod Bourgeois -- DeepDive Equity Research -- Analyst

Very helpful color, guys.

David P. Rowland -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Darrin Peller from Wolfe Research. Please go ahead.

David P. Rowland -- Chief Financial Officer

Hello, Darrin. Good morning.

Darrin Peller -- Wolfe Research -- Analyst

Hey, David. Thanks. Let me just start off, can you just give a little more color 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 given your margin guidance you should be able to pass through price increase to offset anything. But just a little more color on what you're seeing on those two variables.

David P. Rowland -- Chief Financial Officer

I'll make a couple of comments and Pierre may add as well. First of all, with the size of our workforce and the diversity of skills, geographies, etc., it's really hard to talk about wage questions in aggregate. For that reason, we typically steer away from them. Let me just generically say that 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. We hire a lot of those people and we pay the market rate.

On the other hand, we do get differentiated pricing in digital. That's the point is that we want to pay at a market-relevant rate to retain people fit for purpose for the skillset 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.

In that regard, there's not anything that we're concerned about. 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. We feel positive about that.

Pierre Nanterme -- Chairman and Chief Executive Officer

Maybe just to add on this. To attract and retain people, it's not always about the money. It's interesting when you're driving analogies and surveys. The No. 1 wish of the people working at Accenture is interesting work. That is the No. 1. The second is all the working environments and a balanced life, and 3, the comp. At the end of the day, the point is not about giving more money or to be the one who's going to pay the most. It's going to be the company who 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 environment. I mentioned that already. And in the competitive compensation. It's a mix of things you need to work on.

Darrin Peller -- Wolfe Research -- Analyst

All right. That's helpful. Just for a follow-up, could you deconstruct a little more on the growth of the New? Maybe specifically breaking down what you're seeing in cloud versus some of the Accenture Interactive side, which I know has been a big part of your growth also? And if there's any other big call-outs worth mentioning? Thanks again, guys.

David P. Rowland -- Chief Financial Officer

I'll make a couple of comments in terms of just some facts, and Pierre may add some color as well. First of all, our growth in the New is strong double digits and that has continued. 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.

When you look at the components of the New, we also see strong double-digit across every component. When you look at digital and the three components of digital: Accenture Interactive, Accenture Applied Intelligence, and Industry X. When you 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 in, and strengthening our leadership position in each, and we're benefiting from the growth that goes with it.

Pierre Nanterme -- Chairman and Chief Executive Officer

We could be ever clearer, because you mentioned the 20%. All of them are growing more than 20%, to be very clear.

Darrin Peller -- Wolfe Research -- Analyst

Appreciate it, guys.

Operator

Your next question comes from the line of Bryan Keane of Deutsche Bank. Please go ahead.

Bryan Keane -- Deutsche Bank -- Analyst

Good morning, guys.

David P. Rowland -- Chief Financial Officer

Good morning, Brian.

Bryan Keane -- Deutsche Bank -- Analyst

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 '18. I guess that means the legacy business declined less versus last year. And actually, I have legacy business almost being flat to slightly up. I just want to see if we've reached a point where we won't see that core legacy business declining as much as we have in the because there's a certain amount of spend that will always occur with that business going forward?

Pierre Nanterme -- Chairman and Chief Executive Officer

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 it is we worked hard, not to protect the core, but to make the core more competitive. 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 become uncompetitive, which would have been extremely bad.

So, we invested as well in the core. In the form, if I had to summarize, of massive robotic automation and modernization of what we are providing in terms of, for instance, application outsourcing or other activities you would put in the core, where indeed we have a rich level of automation, which is extremely high. Accordingly, we've 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 through robotic automation and modernization.

Bryan Keane -- Deutsche Bank -- Analyst

Okay, very helpful. David, without the adoption restatement and changes in the pension accounting, just curious if operating margin would still have expanded the same 10 to 30 basis points? Some folks are getting a boost on 606 on operating margin or pension accounting, and I just want to make sure that's not the case here. That there would still be underlying operating margin expansion without those changes. Thanks.

David P. Rowland -- Chief Financial Officer

That is correct. It would be the same without the changes.

Bryan Keane -- Deutsche Bank -- Analyst

Okay, great. Thanks, guys.

Operator

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

Bryan Bergin -- Cowen & Co. -- Analyst

Hi, good morning, thank you.

David P. Rowland -- Chief Financial Officer

Hi, Brian.

Bryan Bergin -- Cowen & Co. -- Analyst

I wanted to follow up on the macro demand questions. In your client budgets, the conversations you've been having in the U.S., is there any indication that there's been a pull-forward of tech spending demand in '18 due to things like tax reform or just broader deregulation?

David P. Rowland -- Chief Financial Officer

I would say no. I don't think we have any evidence that there's been a pull-forward of spending for those reasons.

Pierre Nanterme -- Chairman and Chief Executive Officer

No.

Bryan Bergin -- Cowen & Co. -- Analyst

Okay. Then my follow-up. As you're building new areas in 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're able to now leverage in these new areas?

Pierre Nanterme -- Chairman and Chief Executive Officer

Now we have a kind of routine we've established at Accenture, which is moving from first, and this is the role of R&D, especially Paul Daugherty and Accenture Research, is to understand what's coming. And clearly, as you know, we're spending $700 million in R&D at Accenture. Their job is to anticipate the next waves, and putting them in incubation in what we call in-strategy growth initiatives. So, we incubate. This is what we did for the other businesses.

We're starting to test business models. When we're getting to a level of maturity, and we see the opportunity to scale and create an impact with clients, 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 acquisitions as I mentioned, in the core.

For instance, the three acquisitions we made in Industry X.0 this very quarter, to attract the skills, so companies of small to mid-size that have deep skills, especially in Industry X.0 in embedded software and product design, where we are investing a lot. So we know now how to combine and, of course, all of this is supported, I can see Amy Fuller next to me, our Chief Marketing Officer, with a good communication campaign, we're putting behind. So, we have developed a savoir faire in terms of detection, incubation, industrialization, and launching a campaign behind with a good mix of organic and inorganic behind. So, it's quite well oiled, if you will, as a machine.

Bryan Bergin -- Cowen & Co. -- Analyst

Thanks.

Angie Park -- Managing Director, Head of Investor Relations

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 Harshita Rawat from Bernstein. Please go ahead.

Harshita Rawat -- Bernstein -- Analyst

Hi, good morning. Thank you for taking my question. My question is on headcount, a follow-up to a previous one. You're hiring almost 100,000 people annually on a closed basis. That's obviously a big number. My question is, where are you hiring people from, and are you looking at different kinds of skills, versus what you've looked at historically? 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 on the supply of people?

Pierre Nanterme -- Chairman and Chief Executive Officer

On this, we continue to hire let's say 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 three countries, I would certainly mention the U.S., Germany, and Japan, where we are recruiting a lot. It's true, as well in our other 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. We continue to hire significantly on, let's call it the offshore, especially in India. Thank you for giving me the opportunity, not to polarize that now that would be all of that onshore, and off-shore would be core, legacy. It's not true at all. Not true at all.

Everybody who would visit Accenture in India would be blown away by the quality of the people and their Rotation to the New. We had an even cluster in terms of R&D and innovation where some of our, I'm not going to mention the name, some of our largest brands and clients from the U.S. who have been moving there working for less than an hour to support that team who had been working on a truly innovative session and brainstorming.

So, we continue to invest onshore and offshore, drive the right balance, and having the right skills. This is exactly why, to your second question, is there scarcity? 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 2,000 business scientists at Accenture, growing. 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.

Harshita Rawat -- Bernstein -- Analyst

This was very helpful. Thank you very much.

Pierre Nanterme -- Chairman and Chief Executive Officer

Thanks a lot for listening and joining us on today's call. As you might have guessed, we are, and I am extremely pleased with our strong finish and excellent performance for the full fiscal year '18. No doubt we have strong momentum entering fiscal year '19, and with our leading position in the New, the significant 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 questions, 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.

Duration: 61 minutes

Call participants:

Pierre Nanterme -- Chairman and Chief Executive Officer

David P. Rowland -- Chief Financial Officer

Angie Park -- Managing Director, Head of Investor Relations

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Edward Caso -- Wells Fargo -- Analyst

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

Rod Bourgeois -- DeepDive Equity Research -- Analyst

Darrin Peller -- Wolfe Research -- Analyst

Bryan Keane -- Deutsche Bank -- Analyst

Bryan Bergin -- Cowen & Co. -- Analyst

Harshita Rawat -- Bernstein -- Analyst

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