Q2 2023 Accenture plc Earnings Call
And ladies and gentlemen.
Thank you for standing by and welcome to the Accenture <unk> second quarter fiscal 2023 earnings call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session. If you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the London Zero command.
Once again, if you have a question please press one to zero.
And if you should require assistance during the call. Please press Star then zero as a reminder, today's conference is being recorded I would now like to turn the conference call.
Two Kt O'connor, managing director and head of Investor Relations. Please go ahead.
Thank you operator, and thanks, everyone for joining us today on our second quarter fiscal 'twenty twenty-three earnings announcements.
As the operator, just mentioned I'm, Katy O'connor, managing director head of Investor Relations.
On today's call, you'll hear from Julie Sweet, our chair and Chief Executive Officer, and KC Mcclure, Our Chief Financial Officer, We hope you've had an opportunity to review the news release, we issued a short time ago. Let me quickly outline the agenda for today's call Julie will begin with an overview of our results KC will take you through the.
Financial details, including the income statement and balance sheet, along with some key operational metrics for the second quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2023. We will then take your questions before Julie provides a wrap.
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 the right risk 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 Dot com as always Accenture assumes no obligation to update the information presented on this conference call now, let me turn the call over to Julie <unk>.
Thank you Katie and thank you to everyone joining today and thank you to our 738000 people around the globe for your incredible work and commitment to our clients, which has resulted in our delivering another strong quarter of financial results and the broader 360 degree value we continue to create for all our stakeholders.
Let me share a few highlights the value we created in our continued disciplined execution I'm very pleased with our record bookings for Q2 at $22 $1 billion, our highest ever including 35 clients with quarterly bookings greater than 100 million, our second highest quarter on record for such bookings representing the continued trusts that are clear.
<unk> have enough.
We delivered revenues of $15 $8 billion, representing 9% growth in local currency, bringing us to $31 $6 billion of revenue at 12% growth through H, one and we continued gaining market share growing approximately two times the market.
We continued our inorganic investments with six acquisitions in strategic areas, including cloud with the acquisition of S. Chaos in Europe , which will expand our specialized technology consulting and regulatory capabilities, enabling us to better serve our financial services clients security with the acquisition of Morpheus in Brazil, a cyber defense risk manager.
<unk> cyber threat intelligence service provider and supply chain with the acquisition of infringed in the U S, which will enhance our technology capabilities to accelerate innovation for our clients to emerging technologies, such as touch the supply chain and digital twins.
We also continued our investment in our people with $10 3 million training hours, a 12% increase year over year.
We are optimizing our business to lower cost in fiscal year, 'twenty 'twenty, four and beyond while continuing to invest in our business and our people to capture the significant growth opportunities ahead, Casey will be giving you more detail on these actions.
Finally, we believe our focus on creating 360 degree valued differentiates us in our market. We earned the number one position in our industry for the 10th year in a row and number 32 overall Unfortunately list of the world's most admired companies. We ranked number one in our industry and number four overall on the just capital list of Americas.
Most just companies and we have been recognized by Ethisphere as one of the world's most ethical companies for the 16th year in a row I'm.
I'm very pleased that our results demonstrate once again that our strategy to be the execution partner of choice for transformation lead in the five forces and heavy diverse business across markets industries and services continues to allow us to lead and take market share and in a world in which all strategies lead to technology, we have distinct.
Just distinguish ourselves and our impact in the market over to you Casey. Thank you Julie and thanks to all of you for taking the time to join US on today's call. We were pleased with our overall results in the second quarter setting a new bookings record.
At $22 1 billion $2 5 billion higher than our previous record set in Q2 of last year with consulting bookings close to matching our previous record we delivered revenue growth for the quarter at the top end of our guided range as we continue to deliver on our shareholder value proposition.
Before I summarize the results for the quarter, let me spend a moment on the business optimization actions, we are taking to reduce costs for fiscal 'twenty, four and beyond which includes streamlining operations transforming our non billable corporate functions and consolidating office space.
We estimate cost of 1.5 billion through fiscal year, 'twenty 'twenty four of which we expect to incur approximately 800 million in FY 'twenty, three and $700 million in FY 'twenty four.
Comprised of approximately $1 2 billion in severance and 300 million for the consolidation of office space.
These actions are expected to impact roughly 2.5% or 19000 of our current workforce.
Over half our non billable corporate function.
And include over 800 of our more than 10000 leaders across our markets and services.
Nearly half of the 19000 people will depart by the end of fiscal year 'twenty three.
Now, let me summarize a few of the highlights for the quarter revenues grew 9% local currency driven by broad based growth across all markets with more than half of our 13 industries growing double digits. We also continued to extend our leadership position with growth estimated to be about two times the market, which refers to our basket of publicly traded <unk>.
In Q2, we recorded 244 million in costs associated with our business optimization actions, which impacted operating margin by 150 basis points and EPS by 30 cents.
The following comparisons exclude this impact and reflect adjusted results.
We delivered adjusted EPS in the quarter of $2.69, reflecting 6% growth over E. P. S last year.
Adjusted operating margin of 13, 8% increased 10 basis points or 20 basis points expansion year to date and includes continued significant investments in our people and our business.
Finally, we delivered free cash flow of $2 2 billion and returned $1 8 billion to shareholders through repurchases and dividends year to date, we've invested $1 1 billion in acquisitions, primarily attributed to 15 transactions.
With those high level comments, let me turn to some of the details starting with new bookings.
New bookings were a record at $22 1 billion for the quarter representing growth of 17% in local currency with an overall book to Bill of 1.4 consulting bookings were $10 7 billion with a book to Bill of 1.3.
Service bookings were also a record at $11 4 billion with a book to Bill of 1.5.
We were very pleased with the strength of our new bookings, which were broad based delivering a very strong book to bill across all of our geographic markets and across our services with a book to Bill of 1.5 in operation, One foreign technology and 1.3 in strategy and consulting.
Turning now to revenues revenues for the quarter were $15 8 billion, a 5% increase in U S dollars and 9% in local currency and we're at the top end of our range adjusting for Fort Foreign exchange headwind of approximately 4% compared to the 5% provided last quarter.
Consulting revenues for the quarter were $8 3 billion a decline of 1% in U S dollars and an increase of 4% in local currency.
Managed services revenue were $7 5 billion up 12% in U S dollars and 16% in local currency.
Taking a closer look at our service dimensions technology services and operations grew double digits in strategy and consulting declined mid single digits.
Turning to our geographic markets in North America revenue growth was 5% in local currency driven by growth in public service health and utilities. These increases were partially offset by decline in communications and media and high Tech.
Revenue growth was driven by the United States.
In Europe revenues grew 12% in local currency led by growth in industrial banking and capital markets and public service revenue growth was driven by Germany, Italy and France.
And in gross markets, we delivered 14% revenue growth in local currency driven by growth in banking and capital markets.
Chemicals, and natural resources and public service revenue growth was led by Japan.
Moving down the income statement gross margin for the quarter was 36% compared with 31% for the same period last year.
Sales and marketing expense for the quarter was nine 9% compared to nine 4% for the second quarter last year.
General and administrative expense was six 8% compared to 7% for the same quarter last year.
Adjusted operating income was $2 2 billion in the second quarter, reflecting an adjusted $13, 8% operating margin an increase of 10% to 10 basis points from operating margin in the second quarter of last year.
Our effective tax rate for the quarter was 24% compared with an effective tax rate of 19, 2% for the second quarter last year.
Adjusted diluted earnings per share or $2.69 compared with diluted EPS of $2.54 in the second quarter last year.
They service outstanding were 42 days compared compared to 48 days last quarter and 41 days in the second quarter of last year.
Free cash flow for the quarter was $2 2 billion compared to approximately 400 million last quarter, resulting from cash generated.
By operating activities of $2 3 billion net of property and equipment additions of.
$108 million.
Our cash balance of <unk>.
At February 28 was $6 2 billion compared with seven 9 billion at August 31st with regards to our ongoing objective to return cash to shareholders in the second quarter, we repurchased or redeemed four 1 million shares for $1 1 billion at an average price of $273 55 per share as of February 28.
We had approximately $4 2 billion of share repurchase authority remaining.
In February we paid a quarterly cash dividend of $1 12 per share for a total of $708 million.
This represents a 15% increase over last year.
Our board of directors declared a quarterly cash dividend of $1 12 per share to be paid on May 15, a 15% increase over last year.
Finally, turning to the 360 degree value we are creating for all of our stakeholders. We are partnering with save the children to connect with new audiences and invigorate donors through fund raising and creative campaign excellent.
So at the halfway point of fiscal 'twenty. Three we are pleased with our results now let me turn it back to Julie.
Thank you Casey I will start with the overall demand environment, which is more of the same we believe that the ongoing volatility and uncertainty in the macro environment is making it even clearer to clients that they need to change more not less and that two of the five key forces of change that we have identified for the next decade, the need for total enterprise me invention and the.
Ability to access create and unlock the potential of talent are critical to succeed in the near medium and long term. We see two common themes first I'll strategies continued to lead to technology, particularly cloud data AI and security. This is reflected in our latest market estimates, which are down slightly but are still hovering around 5%.
<unk>.
And second companies remain focused on executing compress transformations to achieve lower costs stronger growth more agility and greater resilience faster.
We remain laser focused on pivoting to our clients' changing needs and being relevant across the enterprise from the frontline to core operations to corporate functions, our ability to advise shape and deliver value led transformations leveraging the breadth of our services from strategy and consulting to our strategic.
Managed services across all industries and geographic markets is what differentiates accenture.
Now I will give you more color on the quarter and in particular, how total enterprise reinvention and talent are critical to our clients. For example, we're helping shinobi and co Ltd, a Japanese pharmaceutical company with a compressed transformation to improve its business process efficiency and create a more agile organization we will.
Enter into a joint venture with a company that will provide a managed services capability to oversee back office functions, such as human resources Finance and accounting public relations facility management procurement and marketing.
The joint venture will also be charged with the management of the former Cabela's vigilance function from safety management operations to post marketing operations to regulatory compliance.
As part of this transformation, we will upscale over 400 employees, enabling them to play a greater role in the growth and development of the wider business, hence demonstrating the value of all our services from strategy and consulting our deep industry knowledge to technology and operations coming together to enable the clients' transformation.
I would like to take a moment to recognize a guy with on our head of the Japan market unit and our extraordinary people in Japan, or how they are consistently creating value for our clients with double digit revenue growth for each of the past five years.
As clients focus on building their digital core with a modern cloud based infrastructure. Our cloud business continues to grow very strong double digits. For example, we're working with the state of Missouri to replace its legacy applications and infrastructure with a modern ERP in the cloud introducing new capabilities in finance supply chain management.
Human capital management payroll and budgeting.
The current ERP system no longer fully meet the business needs of the state. They are looking for a modern system that is efficient scalable and flexible all delivered by a best in class implementation partner. This compressed transformation one of the earliest and most complex ERP implementations for any state will help reduce operating expenses.
<unk> provide opportunities for upskilling and improve customer experience and services, we are partnering with minority and women owned businesses on this transformation and we will bring in apprentices the program's life cycle part of our shared commitment with the state of Missouri to foster diversity and inclusion.
With our cloud first strategy our approach has been to help clients migrate to the cloud and then partner with them on their journey to grow and innovate in the cloud.
Our cloud growth is driven by both migration and clients are moving forward on this journey such as of now one of our largest utilities clients, who has taken their mass migration to cloud a few years ago to the next level changing their operating model tools and talent and largely automating I T operations, we are now helping them.
Accelerate the modernization of their application landscape reduce greenhouse gas emissions by up to 80% support a significant acquisition and divestment agenda and pivot to platform based business model for integrated retail delivery beyond meter services grid and renewable energy using cloud as their operating system.
<unk> is helping this market leader manage increasing levels of complexity by bringing together data AI and applications to optimize their operations and accelerate growth.
A strong and secure digital core also is essential to total enterprise reinvention. We're seeing continued very strong demand for our security services, which experienced another court quarter of very strong double digit growth.
We're working with Empress C. M. P. C S. A Chilean put pulp and paper company and a cyber security transformation of their plants operations, we will implement a security program across its 48 industrial site focused on threat detection management in response, as well as governance and workforce training through our global and local industry X <unk>.
Abilities, we will help strengthen the company's cyber security defenses do continuous monitoring of its physical locations and equipment.
We continue to lead in managed services, which experienced strong growth again this quarter at 16% managed services are strategic for our clients because they enable clients to move faster leveraging our digital platform expertise and talent as well as delivering cost efficiencies.
And our clients are turning to accenture because of the depth and breadth of our industry functional and technology expertise that we bring together into the transformation journey.
Our approach to managed services is to both run and transform and run and modernized we deliver cost savings is table Stakes. For example, we are partnering with the U K Department for work and pension, which is responsible for welfare pensions and child maintenance policy to modernize its legacy systems, eliminating backlogs and delivering a better experience.
<unk> for citizens and employees.
We developed a cloud based intelligent automation platform that combines robotic process automation AI analytics and machine learning to provide boxes of service to create the equivalent of a virtual workforce available 24 seven.
With reaching routine tests now automated the organization has already saved $2 4 million human hours, which can be reallocated to more complex higher value tests.
Let me pause to thank our global agent P. S colleagues for their amazing contributions as evidenced by 14 consecutive quarters of double digit growth.
As our clients continue to prioritize cost optimization as well as growth in Ms. Lance song is more relevant than ever.
In song, which grew strong double digits. This quarter clients are focused on more capital efficient growth that creates efficiency drive short term growth and optimizing existing assets with clear outcomes in shorter time horizons to keep up with the pace of change with customers and technology.
We've moved quickly to help clients these new opportunities and contact centers not only for enhanced customer service, but also customer acquisition and growth.
We are working with a global biopharmaceutical leader in North America to reinvent digital marketing at scale.
By data and using technologies integrated with set up the company will be able to create produce and deliver consistent world class content that informs and educate health care providers and patient communities around the world, helping to deliver innovative health services.
We're working with the product group, the Italian luxury fashion player to offer its customers in entirely new customization experience through an online to really configure eater Accenture song created a digital twin of products Iconix shoe called America's Cup, which allows shoppers to fully customize it for materials to color to trim across the over.
Lining so in other parts with more than 50 million possible configurations more than any web platform could handle this innovative approach allows customers to see high resolution three D models of their custom built with the same quality and fidelity is a physical shoe.
Song solution to online product customization, it's fully scalable through the cloud gives proud of the flexibility to apply the same strategy to other products ensuring outstanding experience, there's shoppers expect.
As they continue to move across the enterprise industries and markets I want to also highlight industry X, which grew very strong double digits again this quarter, which we believe is the next digital frontier, where our digital engineering capabilities are advancing sustainability services. For example, we are working with recharge industries battery research.
Production company in Australia to help design and engineer and one of the world's largest lithium ion battery facilities. Once built the facility will generate up to 30 gigawatt hours of storage capacity per year.
Finally, moving to the meta versus in the ongoing Tech Revolution, we've talked about the importance of artificial intelligence and building the digital core for our clients. While generative AI has recently burst into the popular imagination at Accenture, we have been working with the technology from its earliest stages and are already applying it at clients. For example, we're working with multi.
A national bank to transform how it manages high volumes of post trade processing emails every day, we are leveraging a generative AI solution that is built to understand the context of emails with high accuracy. It automatically routes large numbers of emails daily development teams and drafts responses with recommended actions and related information.
Our work will help reduce manual effort and risk boost worker efficiency and improve interactions with customers.
And finally on that note, we will release, our Tech vision 2023 on March 30th.
Fourth and fifth key forces of change we have identified for the next decade at <unk> and ongoing Tech Revolution, and this year's Tech vision is particularly relevant and actionable as our clients face a rapidly changing landscape in which generative I met averse cloud science Tech and other technologies are driving more opportunities for change and reinvent.
This year's vision will explore how these technologies and more are blending the physical world and the virtual world into a shared reality, creating a huge opportunity for our clients and for et cetera.
Okay.
Okay.
Now turning to our business outlook for the third quarter of fiscal 'twenty. Three we expect revenues to be in the range of $16 1 billion to $16 7 billion. This assumes the impact of FX will be about negative three 5% compared to the third quarter of fiscal 'twenty, two and reflects an estimated 3% to 7% growth.
In local currency.
For the full fiscal year 'twenty three based upon how the rates have been trending over the last few weeks. We now expect the impact of FX on our results in U S dollars will be approximately negative four 5% compared to fiscal 'twenty two.
For the full fiscal 'twenty three we now expect our revenue to be in the range of 8% to 10% growth in local currency over fiscal 'twenty, two which assumes an inorganic contribution of 2%.
We expect business optimization actions to impact fiscal 'twenty, three GAAP operating margin by 120 basis points and EPS by 96%.
We expect our anticipated gain on our investment and Duck Creek technology to impact EPS by 39.
Our guidance for full year fiscal 'twenty three excludes these impacts.
For adjusted operating margin, we expect fiscal year 'twenty three to be $15 three to 15, 5% a 10 to 30 basis point expansion over fiscal 'twenty to result.
We expect our adjusted annual effective tax rate to be in the range of 23% to 25%.
This compares to an effective tax rate of 24% in fiscal 'twenty two.
We expect our full year adjusted earnings per share for fiscal 'twenty three to be in the range of $11.41 to $11, 63 said or 7% to 9% growth over fiscal 'twenty to results.
For the full fiscal 'twenty three we now expect operating cash flow to be in the range of $8 seven to $9 2 billion property and equipment additions to be approximately $700 million and free cash flow to be in the range of 8 billion to $8 $5.300 billion higher than our previous guidance.
Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.15.
We continue to expect to return at least $7 1 billion through dividends and share repurchases as we remain committed to returning a substantial portion of cash to our shareholders.
With that let's open up so we can take your questions. Amy Thanks, Casey I'd like to ask that you each keep to one question and a follow up to allow as many participants as possible to ask a question.
Operator would you please provide instructions for those on the call.
Of course, and once again, ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the London Zero command.
Once again, if you have a question at this time, please press one to zero.
Our first question comes from the line of Tien Tsin Huang with Jpmorgan. Please go ahead.
Hey, thanks, so much.
Given the given the great bookings year.
Sure.
Your confidence in being able to replenish those bookings as we look to the third quarter and ahead I'm sure a lot of people are thinking what's going on in the month of February .
In March as well I know your guidance implies some reacceleration in the fourth quarter, but just curious about you know.
Sure.
Your ability to replenish on the booking side.
Yeah. Thanks, Thanks, Tien tsin, so we do feel good about our pipeline even after our record bookings this quarter.
And our sales outlook for the next quarter Q3 is solid we expect to have slightly lighter bookings than what we used to have compared to the record quarter that we just had.
Yes.
Yes and no.
Maybe just to add a little color.
Look.
As you can see in our bookings there is just continued strong demand for the larger transformational deals right and and.
And the need to in particular build the digital core and I'm I'm personally working right now with clients across insurance health care consumer goods banking and telecom all of whom are very focused on how do we upgrade our you know get rid of.
Of our technical debt, how do we build more resilience you know, they're trying to build digital products, but they've got really old systems and so you know we remain in the early innings of building the kind of digital core that's really need to transform every part of the enterprise and so we continue to feel good.
Are not just about our pipeline, but about the demand we're seeing a really rooted in our view that all companies are going to have to do total enterprise reinvention across the enterprise and it's really a continuous.
Michael starting with a digital a strong digital core and there's a lot of work to do on building those course out.
Great that's good to hear.
Very encouraging so given that given both your comments.
Integration.
They care about.
Hey, good morning, playing offense.
Defense and just trying to think about I know a lot of your clients are going through.
You may all communication efforts as well.
How does this one giving back and should we still think about this within the 10 to 30 basis point gain.
Typical monitoring station that we can kebab.
How quickly or.
Could this be incremental right.
Yeah. So.
Let me answer the last part first as you should view this as creating the room in our P&L to ensure that we can continue to deliver on that enduring shareholder value model, including the 10 to 30 basis points, which you know for a short period of time will be on an adjusted.
<unk> basis so.
And as you think about it is you know I like that is it offense or defense. It is offensive I mean, if you look at where we are today right. We've got record bookings you know.
Strong a quarter of a strong view of the year, 8% to 10% 91 per cent charge ability mirrored.
We are going after structural cost right to ensure that we're in a better position.
No we've been.
Dealing with the difficult challenges of compounding wage inflation, we've been doing that with pricing, but we've also been doing that with you know cost efficiencies and digitizing and we have identified an opportunity to you know.
Go after more structural cost to credit Cree each that resilience in that room in the P&L.
We look forward so.
You know very much a in our view getting ahead of in dealing with these structural issues that have been created over the last couple of years.
Awesome great great. Thank you.
Thank you.
And our next question comes from the line of James Faucette with Morgan Stanley . Please go ahead.
Great. Thank you very much wanted to follow up on a couple of those items first can you talk a little bit about what you're seeing around the actual <unk>.
Version in decision cycles, obviously, the bookings themselves speaks well to being able to do conversions, but are we seeing any changes in.
The sales cycle times are or the types of Av.
Projects that customers may want to engage them.
Well, let me just start with the type of projects I mean, what we've been seeing over the last several quarters is just a you know a laser focus on cost right. So you know.
Most you know Bose programs clients wanted to see a shorter return on investment right more focused on cost they love cost and growth, but it has to be you know in most cases, a shorter return on the investment at the same time you know it's important that not all industries are in the <unk>.
Same place right. So if you've got industries.
Like say in the high Tech area and some and.
In some spots on retail for example cost optimization is very dominant right. If you have any you've got some of the other less affected industries say insurance energy, it's everyone wants to be more resilient and lower costs, but they're really trying to deal with their technical that they're thinking about growth.
How do you re imagined the customer experience and so I would say a common theme is that you know in this kind of an environment, everyone does wanna be optimizing cost, but where they're focusing is different by industry is what I would say first.
And then it does to your first as a part of your question about are you seeing a change.
Changes in decision, making and I'll, let Casey talked to you about the yields in our pipeline because you all sourced.
In general seeing a trend towards these larger deals. So there is and we talked about this in the last couple of quarters. We're seeing you know less of the smaller deals and SMC into some extent S. I, particularly in North America, where we're seeing more caution North America had record sales this quarter, but.
In areas tending towards the bigger transformational deals not the smaller S. S N C and to some extent Si deals and those that transformational pipeline, which is our strategy right. Like if you think about it what are we been trying to drive for the last few years, we want to be at the <unk>.
Center of our clients' business, you want to be able to be relevant really help them transform and then be well positioned to continue to be that partner and I would just say and now I'm in my script is a great example of that I mean, theres hugely innovative utility they were very early and cloud we help them get to the club.
And now they're modernizing and once again being super innovative that's exactly the way we want to work with our clients be it their core and then be there for their next big transformation maybe.
Maybe Casey if you want to just comment on the yields real quick yeah sure no problem. So when we let me just focus really on consulting bookings because.
It's important to understand the impact of FMC and our consulting bookings and also how that relate to.
What we're doing in our larger transformation deal because they do convert to revenue at a slower pace. So as I mentioned in my script I was very pleased with our SMT bookings and our overall consulting bookings which were.
Very close to the record that we had last year and SMT participate and is a critical part of winning the larger deals, which we have 35 claims over $100 million and so what you'll see is in essence see you may see a conversion that's a little bit slower than we typically have them because we still do have some <unk>.
Sure and our smaller deals, particularly in North America, and so maybe I'll just.
So how does that all work in terms of yield then what that means for next quarter.
As we look at us and see and I mentioned that we had a modest decline.
A decline in mid single digits. This quarter, we think we'll be in the same zone overall.
In Q3, and we're going to look to reconnect with us and see growth.
In Q4, it may take us a little bit more time than that but I just want to make that connection to your question as it relates to our very strong consulting bookings in essence fee. There was definitely part of that you know part of that discussion and clearly part of that the reason why we're able to get the 35 clients at a $100 million, but youll see that.
Come into our P&L, it a little bit slower conversion.
Thank you that's really helpful. And then just quickly on DNA. It seems like we've seen a little bit of a deceleration there. How how are you thinking about G&A going forward and what was inorganic contribution in the quarter and how should we think about that for the year. Thanks.
So I'll just maybe reiterate the contribution for the year. So we now see inorganic contributions to be about 2% and you know acquisitions can be lumpy and we as you know we can't always really control the timing, but there's no change to our strategy in any given year, you'll hear us kind of go up or down a.
A bit on the percentage of contribution.
No change.
Great. Thank you.
And our next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead.
Hi, guys good morning.
Wanted to just ask about hey, good morning, I just wanted to ask about the communications media and technology group that.
That did come in at flat local currency and that's kind of a stand out versus the others can you just talk a little bit about what's happening there and what the outlook might be.
Yeah, that's that's.
Primarily happening in North America, where we've got you know comms and media and high tech or a more challenged.
Cutting back spending first sort of obvious reasons, and then our software and platforms business, which has been you know really a strong business for us for the last.
Few years has is still slightly positive, but has come down a lot and I think you know for kind of obvious reasons that we're all reading in the press and so you know we do think this will last for a bit of time as you know you look at sort of some of the.
Ways, theyre approaching spending in that and and but it'll eventually come back and these are great companies and you know we're helping them.
In many places, but their spendings just lower right now so that's a you know I think long term were very positive. These are all great companies and and you know this will just this is why we were this is why it's so great that we're diverse right that we serve so many in it and not just diversity and industries, but in markets, because youre seeing a debit or a <unk>.
Picture for example, in Comms and media in Europe .
Where it was growing double digits last quarter and in growth markets, where it was positive. So you know the diversity of our business really plays to our to our strengths and why we're continuing to deliver strong financial results.
Got it got it and.
I was just trying to reconcile in my head the strong bookings, but the actions also taken to lower costs in fiscal year 'twenty four.
What does that signal I guess for the demand environment in fiscal year 'twenty four should we expect slightly lower growth rates than typical as a result of the actions taken.
No I mean, the actions you can just kind of re ground you in like what we've been saying right, which is you know.
We've been achieving hyper growth and there's been wage inflation like none of us have ever experienced and its compounding and we've been addressing that through a combination of improved pricing.
Cost efficiencies and and so this is really us taking a step back and being able to more structurally.
Dress the impact of compounding wage inflation, so it's a real positive for how we're moving forward.
And you know think of it as really being.
Creating more room in the P&L. So that when you think about our enduring shareholder value proposition is we still expect next year to grow faster than the market. We expect to invest at scale in our business to deliver 10 to 30 basis point margin expansion on an adjusted basis to have a disciplined capital allocation, including.
A meaningful return to our shareholders. So that is a commitment and this is a you know an offensive move to say yesterday, we got great demand, we've got great utilization and we can take out more structural cost to put us in a better position as we move forward.
Okay, Great that's really helpful. Congrats.
Thanks.
Yeah.
And our next question comes from the line of Lisa Ellis with Moffett Nathanson. Please go ahead.
Terrific. Thanks for.
Taking my question.
Maybe just to kind of follow up on the sort of connecting the dots questions I noticed that.
Your head count growth slowed a bit this quarter up 6% year on year and was flat sequentially.
Can you kind of connect the dots are outside what you're seeing and sort of what you're thinking about on the hiring side with the fact that you had record bookings in the quarter and then.
Typically those two things kind of move a little bit more in tandem. Thank you.
Yeah sure. Thanks, Lisa So maybe I'll just first start with just looking back over the last two previous quarters. We added 28000 people in the two previous quarters. So, let's first start there and you're right Lisa when you take a look at what we were able to accomplish this quarter first of all we had record bookings.
Drove 9% nine 3% revenue growth and we had.
91% utilization of our people right. So we have the skills and all the people we needed to deliver to the demand in the market and if I look entering your question looking forward. We we sequentially did not add head count from Q from Q1 to Q2, we see that as being about the same from Q2 to Q.
Three and then looking forward based on the outlook that we have now we do see that we would add additional heads in the fourth quarter.
Yeah.
Okay, Great and then my follow up is related to our AI maybe.
Maybe this one is.
Particularly for you.
Can you talk a bit about how you apply AI in your own operations I know.
Every time this topic kind of stores up there's this question of whether it's.
A positive or a negative for the operations of IP services firms can you just talk about how you sort of apply it internally and how you think about that over the long term. Thank you.
Sure.
It's been I was just out of clients this week, where we're helping them.
Really transform their haul I T Department and one of the things they want from US is Rmi Rmi Wizard platform, which is a great way of explaining how over the last several years, we've built a platform that integrates the best in class technologies. So we didnt write our own code right we use the best.
<unk> technologies in a way it uses AI for example is that when a ticket comes in to address something and I T issue AI looks at it identifies whether or not it's been a problem solved before in some cases can solve the problem in other cases routes it to the right people and then it learns from every ticket so in.
The past when we've talked about.
With you about you know why is it you know how do you think about revenue and people. We said look we've already been breaking that for years now because we are using so much technology and AI and how we're delivering all of our technology.
Technology jobs. The same thing is true for example, with our testing which is incredibly automated using different technology, including AI, we're continuing to use AI in the way we run our business for example in how we look at our accounts payable and receivables in you know finding ways, where we can opt in.
To have better efficiencies there we are using it today.
And the way, we are delivering our consulting services as well and definitely very much so and how we look at sales and being able to predict you know based on lots of factors should we be running after the sale or not are we can we show the data that these you know this is not the right kind of sale were not there.
Right fit so we've increasingly been using AI both in how we deliver services as well as in how we run ourselves of course, our synapse platform for operations is also very day out AI enabled it's one of the reasons why clients turn to us because it's helping.
Them digitize faster, they're not having to build these things. So long term we see these technology changes things like generative. The AI is playing to our strengths because to use these technologies. It requires deep understanding of the industry. The use cases the prop.
Assess changes when people talk about are the new kinds of generative AI, which we're super excited about being like a co pilot to human beings.
Higher process has to be changed in order to make that work you've got to upskill the people.
And you have to be able to do all of that in a very responsible way. So we're already working with there's been a lot of demand to understand this and are in understanding it understanding actually how hard it is to be able to implement at scale in an enterprise versus you know I'm, assuming you were all having fun playing with.
But how you build that into an enterprise is very different and a great opportunity and we're partnering with all the major players to help them take the technology.
Go from technology to implementation to impact.
Thank you.
Thanks Lisa.
And our next question comes from the line of David Toga with Evercore ISI. Please go ahead.
Thank you good morning.
Could you.
Delve into demand trends in the financial services vertical and a little greater depth, especially given the evolving banking crisis, we've seen in the last month or so, particularly with some of the regional banks struggling it in may.
As part of that if you could just remind us.
You know of your.
Our profile within bank related Iot services, you know smaller banks versus regionals and money centers.
Sure.
Client base, we skewed toward the larger banks across all of the markets.
So.
No we don't comment on individual clients, but we don't have any big exposure to the kind of the smaller regional banks.
Banks and in general So if you sort of think about the.
You know stepping back obviously be the developments on the banks are still early in the last couple of weeks. So what as I talk about demand trends for our clients, which are generally the bigger banks a couple of things really stand out. So first of all there's a lot of focus on their technical debt.
Cuz, you know the banks a lot of them are still in the mainframes are mainframe practice really across industry is growing like gangbusters right now as clients across industry are really having to take on some of that harder technical that which they need to do because the more and more they digitize our services, which is a continuing trend.
In financial services, if the systems behind it or an agile then it can take a lot of time to introduce new services, you've got to have oftentimes, we'll have multiple systems, you'll have to test things you can't go as fast and so you know the banks are kind of reaching their limits in terms of what they can do without touching their core.
So we expect you know the sort of addressing the core to be.
A really important driver, we're seeing in asset management more and more views are more and more companies and asset management really digitizing they had been kind of slower behind the banks.
And then insurance, we're working with leading insurers across the world who.
Who you know not only are kind of trying to catch up because banking with a head of insurance, but you know finding sort of new and exciting opportunities on how to use data in particular to.
To grow their business had a chance for them their experience in claims so.
Financial services, which covers banking capital markets and insurance, we continue to see as you.
It was a is a vibrant area, where things are slowing down a bit in the U S where we've been a big player is in integration, we'll see that might pick up again, you know, let's just see how all of this shakes out but.
But that has slowed down for a bit hopefully that gives you some color.
Thanks, so much.
Great.
Our next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.
Good morning, Thanks, guys I just wanted to ask about Q3 bookings. If you can discuss consulting versus managed services just expectations, there, but I think the year over year comparison for consulting at least gets a bit easier.
Yeah. Thanks, Jason.
I'm not going to comment specifically on the individual breakout of the bookings, but maybe I'll just reiterate them you know what what I mentioned to Tien tsin. So we had record bookings this quarter we.
We do see that next quarter, we will have lighter bookings than what we had this quarter in terms of the record bookings overall, what you can what you can see Jason you know US well is that you know the mix right now is much more favored halfway through the year from managed services for all the reasons that Julie talked about.
We were really pleased with consulting this quarter that did we thought it was going to be strong and it came in even stronger and so that we're very encouraged by that and we do have a strong pipeline and we continue to see solid bookings for for Q3.
Okay understood.
On the cost side, what's the estimated savings from the cost takeout.
The charges will aggregate to one and a half billion, but just wanted to understand kind of with the fully annualized run rate of savings is in.
Are you essentially reinvesting the savings I mean, I know at least for this year, we're not changing the underlying margin guidance. So just wanted to get a picture of how much of this is being reinvested or are you essentially just offsetting some.
Other headwinds around wage inflation et cetera.
Thanks for that question.
Let me just first start with FY2023 so the actions that we're taking are not about FY2023 thereabout FY 'twenty four and beyond so in terms of what we'll do with those savings it really is going to depend on Jason.
Jason on how the market develops the growth opportunities that we have next year and <unk>.
As Julie said the key part of what we're really focused on it's just going to give us more room to continue to execute our enduring shareholder value proposition what she mentioned.
I mean, I know you you know well.
Alright.
Model.
To be clear I keep your model 10 to 30 basis point adjusted margin expansion, we're going to invest in our business and we're going to grow faster than the market.
We love the consistency thank you.
Thanks.
And our next question comes from the line of Darrin Peller with Wolfe Research. Please go ahead.
Okay. Thanks, guys you know I mean, when you put the pieces together with the bookings we're seeing in the actual changes in the efficiency of really does sound like were finally seeing.
More of a divergence in linearity between head count growth in bookings capabilities and revenue contribution. So I mean, I know you mentioned AI, obviously, the big thing, but is there other factors that we can point to that are structurally part of the model there or is it.
Is it a function of the mix.
Bookings or anything else.
Yeah, maybe I'll just talk a little bit about what you're seeing in terms of head count I'm, Darren and what we're recording in revenue in terms of how we'll generate aren't generating our revenue.
And Joe do you want add certainly can but you know in terms of what you're seeing is we've been very focused on hiring.
Hiring.
So supply demand to what we need to both sell and drive the revenue to meet our client demand and continue to take market share and part of what you're seeing throughout the year. As you know we've been continue you've heard us talk about us really focusing on you know a continued strong pricing.
Ramon reminder, that when we talk about pricing if the margin on the work that we sold and that has been improving over the last five quarters. It's now stable.
Which we're really happy with it so some of that is part there's a part of that that's helping to drive our revenue production as well and I would just say you know a lot of it is mix right and if you have longer transformational deals like the numbers of people that you need to drive are different so I wouldnt say theres, some big wait a minute.
We've got some new inflection point, where you know you've disconnected Morris as I talked about earlier, we've been disconnecting to some degree you know for a while now but there's there's no big change in that perspective, it's just as we've executed our strategy you know and I think it's so important to understand that.
It has been a deliberate strategy to say, we want to do transformational deals we want to take our S. N C people, who have deep industry and functional knowledge put them together with our technology people to do either big implementations right that are changing the digital core our transformations that are.
Coupled with managed services and so how that works out and so while we love when the economy is booming and S. N C. In the small deals are also booming the strategy is to be at the core. So that we continue we help them with one big project, we understand their company even more we take them on the next Big project.
And we're really getting.
Getting that kind of stickiness and in our relationships and so we'll kind of deal with you know the sort of softness in the smaller deals.
But over you know over time like this is this is exactly what we want to do and in fact I don't think about this year you know.
Consulting.
Last quarter, we thought consulting this year would be mid to mid single digits to high single digits. We now see it is mid single digits for the year and we're fine with that right because that's about kind of lower SMC and a size smaller deals you know North America and in.
In December we thought it was going to be mid single to high single digits. We now see that as a mid single digits for the year again, it's because sort of the caution that's impacting the smaller deals record sales great large transformational deals and that's just going to how it.
How it deals with and that's why as Casey said before you know S N C.
We're going to see a very similar performance next quarter, probably and it may take a little bit longer to them.
M a C.
Reconnect with growth, but remember we don't look at that as separate we see essence see as a competitive differentiator for these larger transformational deals which is our strategy.
That actually makes a lot of sense, one and one follow up on that and related is just the cyclicality of the business.
It's not surprising you would see some of the smaller deals get impacted first but pause or concern among enterprise spending when we think about.
The larger transformational side the pipeline is longer sales cycles longer there, so having that strong skills probably not.
If you do your you know given how well you guys execute it's not shocking I guess.
But on the same side of the magnitude of strength was better than we expected and so looking ahead what in your experience cyclically. When do you see that sort of slowdown if the economy does take us about them.
You know look it.
And never say never against the economy is slowing down in what we would do it but I I really stay focused we try to stay focused on our strategy being relevant across cycles. So you know and basically growing a.
Stronger than the market and so the market is still you know faster the market is still kind of hovering around 5% and so that's what we kind of watch more than the economy. Because you know technology is so core to every strategy that when the economy goes down what are you seeing what people are saying, we got to optimize we got a lower cost we gotta do managed services.
So you know.
We watch more the you know the economy can kind of do an uplift right, but what we're trying to always do is grow faster than the market. So that's a big indicator for us and you see it's a very strong market and it makes sense right. I mean, I will just tell you the amount of the just technical debt across these industries and how much work to do as we are.
Very much in early innings of of what needs to be done group you know to take advantage of cool things like generative AI, you know you're going to have data.
Awesome Alright.
Okay.
Thank you operator, we have time for one more question and then Julie will wrap up the call.
Thank you and that last question comes from the line of Bryan Bergin with TD Colin. Please go ahead.
Hi, guys. Good morning, Thank you.
Want to ask on Brian consolidates and activity and how.
How much of this has helped to really offset some of the areas that have pulled back on the shorter cycle work in I guess has that picked up meaningfully and if you were to step back and look at those 35 deals over $100 billion can you give us a sense of the mix of those that might include an aspect of vendor consolidation.
Yeah, they need a consolidation is certainly a part of what's going on in the market, but you know theres. Some industries that did that a long time ago and some clients. So I'm not I don't have the numbers off hand of what we have in our 35 clients, but I I'm not seeing that as sort of the.
The big driver of our growth and now we are often telling clients who make basically.
No need to get revenue faster, but more interestingly the vendor consolidation for many of our clients is less about cost and more that a lot of the industries like say consumer goods.
<unk> com, where they have a lots of different countries.
It's very hard to move to a platform business and sort of build things consistently if you have a ton of different vendors right. Because you want the stuff done in the same way and so the it's interesting the vendor consolidation play for many is more about how do we actually improve that.
Our strategy of kind of moving to global platforms being able to have a single approach to data Super hard to do if you've got you know 50 to 100 vendors. So.
So I would just say it it's tied to exactly the kind of strategies that we're advising clients on but but no big theme for us.
Okay. Okay, and then just a quick follow up with the record bookings in managed services.
Any near term margin impacts, we should consider as you ramp up and invest in most any consideration of an adjusted operating margin cadence as you go through the second half.
Yeah, no there's nothing unusual.
Alright, thank you.
Thank you.
Yes.
So in closing I want to thank all of our shareholders for your continued trust and support and all our people for what Youre doing for our clients and for each other every do every day thanks, everyone for joining.
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