Accenture PLC

Q2 2024 Earnings Conference Call

3/21/2024

spk03: Good morning. Thank you for standing by. Welcome to Accenture's second quarter fiscal 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you have a question at any time during the call, please press 1, then 0. If you should require assistance during the call, please press star, 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, Katie O'Connor. Please go ahead.
spk01: Thank you, Operator, and thanks, everyone, for joining us today on our second quarter fiscal 2024 earnings announcement. As the Operator just mentioned, I'm Katie O'Connor, Managing Director, Head of Investor Relations. On today's call, you'll hear from Julie Sweet, our Chair and Chief Executive Officer, and Casey 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. Casey 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 Casey provides our business outlook for the third quarter and full fiscal year 2024. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and as such are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures, where appropriate to GAAP, in our news release or in the investor relations section of our website at Accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now, let me turn the call over to Julie.
spk05: Thank you, Katie, and everyone joining, and thank you to our 742,000 people around the world who work every day to deliver 360-degree value for all our stakeholders. I'm pleased with our performance in an uncertain macro. Our results highlight the benefit of the deep trust our clients have in us, our capabilities to do the most complex work at the heart of their businesses, the privileged position we hold within the ecosystem, and our ability to invest for the next waves of growth. We continue to see momentum in the quarter on how we are executing on our strategy to be the trusted reinvention partner of our clients, with a record 39 clients with quarterly bookings greater than $100 million. These large transformational wins position us to capture more growth as spending increases. We also had over $600 million in new Gen AI bookings, taking us to $1.1 billion in Gen AI sales the first half of the fiscal year, expanding our early lead in Gen AI, which is core to our clients' reinvention. We now have over 53,000 skilled data and AI practitioners against our goal of doubling our data and AI workforce from 40,000 to 80,000 by the end of fiscal year 26th. We are laser focused on the needs of our clients, and this focus is reflected in our bookings of $21.6 billion, representing our second highest quarter on record. This included $10 billion of bookings in North America, our highest ever. We continue to take market share with revenues of $15.8 billion for the quarter, flat compared to last year and slightly above the midpoint of our range. As we turn the page on the calendar year, We saw another turn of the dial on constraining spending by our clients, including spending on our services, particularly in parts of EMEA and North America. This was evident in the composition of our new bookings, which came in differently than expected. We see clients continuing to prioritize investing in large-scale transformations, which convert to revenue more slowly, while further limiting discretionary spending, particularly in smaller projects. We also saw continued delays in decision-making and a slower pace of spending. We are pleased that despite these conditions, our focused efforts to return to growth resulted in North America and CMT showing improvement over last quarter. We are running our business with rigor and discipline, and we remain on track with the business optimization actions we announced last year to reduce structural costs to create greater resilience. We delivered adjusted EPS growth of 3%, We continue to invest significantly in our business to drive additional growth in highly strategic areas with $2.1 billion of capital deployed across our geographic markets in Q2 in 11 acquisitions, bringing the total investment in acquisitions to $2.9 billion in H1 across a total of 23 acquisitions. We also continue to invest in learning for our people with approximately 10 million training hours in the quarter, representing an average of 14 hours per person. In recognition of the 360-degree value we create, we are proud that we earned the number one position in our industry for the 11th year in a row and number 33 overall on Fortune's list of the world's most admired companies. We ranked number one in our industry and number three overall on the Just Capital CNBC list of America's most just companies. And we have been recognized by Ethisphere as one of the world's most ethical companies for the 17th year in a row. An important part of our growth strategy is to use our strong balance sheet to invest in order to scale higher growth areas and expand into new growth areas. We have a strong track record of delivering on this strategy. Here are some highlights from the quarter. In North America, we invested in supply chain, an area with significant reinvention ahead. with the additions of insight sourcing, impending, and on-process technology. We acquired Navisite to help clients across multiple cloud providers, enterprise applications, and digital technologies modernize their digital core. And in Song, we acquired Work & Co. to help our clients drive growth by designing and bringing digital brand strategies to market and operationalizing world-class digital products at scale. In EMEA, we are investing to help clients build their digital core and drive growth. In the UK, we invested in 6.6, which will help our clients transform their digital capabilities and modernize their legacy systems. We also acquired in the UK RedKite with its full-stack data expertise that will help our clients accelerate their performance with data-driven intelligence and AI. And in Germany, we added Voketas, which will accelerate our clients' growth strategies using behavioral economics modeling to develop pricing strategy and sales concepts for B2B and B2C models. Similarly, in growth markets, our acquisitions position us to drive our clients' growth agendas by expanding our capabilities in marketing and customer experience, with Rabbit's Tail in Thailand and Jixi in Singapore, helping clients in Indonesia capitalize on their fast-growing digital economy. Our ability to invest to fuel our organic growth is a competitive advantage. And as our clients continue to transform, we announced earlier this month that we will invest $1 billion over the next three years in Accenture LearnVantage, which will provide comprehensive technology learning and training services to help our clients reskill and upskill their people. Our investment includes the acquisition of Udacity, a digital education pioneer, which we expect to close by the summer. Once closed, we will have revenue in the zone of $100 million annually. These services are highly strategic, and they enhance our position as a reinvention partner of choice because talent is at the top of the agenda for CEOs. For example, we are helping Merck, a global biopharmaceutical company known as MSD outside of the United States and Canada, launch a groundbreaking generative AI training program for their employees to create world-class digital leaders. As a renowned thought leader in the biopharmaceutical market, Merck has long led the way in investing in its people and helping them build the skills and expertise needed to develop breakthrough therapies. Digital, data, analytics, and AI play a pivotal role in discovering, developing, manufacturing, and providing access for patients to medicines and vaccines. By once again investing in its people, Merck will be able to continue delivering on its promise to use the power of leading edge science to save and improve lives around the world. Over to you, Casey.
spk04: Thank you, Julie. And thanks to all of you for taking the time to join us on today's call. We were pleased with our overall results in the second quarter with our second highest quarter of new bookings. We continue to invest at scale to strengthen our leadership position while delivering value for our shareholders. Now let me summarize a few of the highlights of the quarter. Revenues were flat in local currency, with mid-single-digit growth or higher in six of our 13 industries, including public service, life science, utilities, energy, health, and high tech. While our CMT industry group improved this quarter, we continued to see pressure as expected. And we continue to take market share. As a reminder, we assess market growth against our investable basket, which is roughly two dozen of our closest global public competitors, which represents about a third of our addressable market, and we use a consistent methodology to compare our financial results to theirs, adjusted to exclude the impact of significant acquisitions, through the date of their last publicly available results on a rolling four-quarter basis. Adjusted operating margin of 13.7% decreased 10 basis points compared to Q2 last year, and year-to-date operating margin is flat. This includes continued significant investments in our people and in our business. We delivered adjusted EPS in the quarter of $2.77, reflecting 3% growth over adjusted EPS last year. Finally, we delivered free cash flow of $2 billion and returned $2.1 billion to shareholders through repurchases and dividends. In the first half of the year, we've invested $2.9 billion in acquisitions across 23 transactions. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $21.6 billion for the quarter, representing a 2% decline in both U.S. dollar and local currency, with an overall book-to-bill of 1.4%. Consulting bookings were $10.5 billion, with a book-to-bill of 1.3. Managed services bookings were $11.1 billion, with a book-to-bill of 1.4. Turning now to revenues. Revenues for the quarter were $15.8 billion, flat in both U.S. dollars and in local currency, and were slightly above the midpoint of our guided range. Consulting revenues for the quarter were $8 billion, a decline of 3% in both U.S. dollars and local currency. Managed service revenues were $7.8 billion, up 3% in both U.S. dollars and local currency. Taking a closer look at our service dimensions, technology services grew low single digits, and operations and strategy and consulting declined low single digits. Turning to our geographic markets, in North America, revenue was flat in local currency, with growth in public service offset by declines in banking, capital markets, software and platforms, and communications and media. In EMEA, revenues declined 2% local currency with growth in public service, offset by declines in communications and media and banking capital markets. Revenue growth in Italy was offset by declines in the United Kingdom, France, and Ireland. In growth markets, revenue grew 6% in local currency, led by growth in banking capital markets, industrial, public service, and chemicals and natural resources. Revenue growth was driven by Japan and Argentina, partially offset by declines in Australia and Brazil. Moving down the income statement, gross margin for the quarter was 30.9% compared with 30.6% for the same period last year. Social market expense for the quarter was 10.3% compared to 9.9% for the second quarter last year. General administrative expense was 6.9% compared to 6.8% for the same quarter last year. Before I continue, I want to note that in Q2 of FY24 and FY23, we recorded $115 million and $244 million in costs associated with our business optimization actions, respectively. These costs decreased operating margin by 70 basis points and EPS by 14 cents this quarter and operating margin by 150 basis points and EPS by 30 cents in Q2 of last year. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.2 billion in the second quarter, reflecting an adjusted operating margin of 13.7%, a decrease of 10 basis points from adjusted operating margin in the second quarter of last year. Our adjusted effective tax rate for the quarter was 18.8%, compared with an adjusted effective tax rate of 20.4% for the second quarter last year. Adjusted diluted earnings per share were $2.77 compared with adjusted diluted EPS of $2.69 in the second quarter last year. Day services outstanding were 43 days compared to 49 days last quarter and 42 days in the second quarter of last year. Free cash flow for the quarter was $2 billion, resulting from cash generated by operating activities of $2.1 billion, net of property and equipment additions of $110 million. Our cash balance at February 29th was 5.1 billion, compared with 9 billion at August 31st. With regards to our ongoing objective to return cash to shareholders, in the second quarter, we repurchased or redeemed 3.8 million shares for $1.3 billion, an average price of $352.35 per share. As of February 29th, we had approximately 4.6 billion of share repurchase authority remaining. Also in February, we paid a quarterly cash dividend of $1.29 per share for a total of 813 million. This represents a 15% increase over last year. And our board of directors declared a quarterly cash dividend of $1.29 per share to be paid on May 15th, a 15% increase over last year. In closing, we remain laser focused on capturing growth opportunities in the market and delivering value for our clients. As you know and expect of us, we will operate with rigor and discipline while continuing to invest for long-term market leadership. Now, let me turn it back to Julie.
spk05: Thank you, Casey. Let me give a little more color on the demand environment. While all strategies continue to lead to technology and reinvention, our clients are navigating an uncertain macro environment due to economic, geopolitical, and industry-specific conditions. And in response, we're seeing them thoughtfully prioritize larger transformations, building out their digital core, to partnering to improve productivity, to free up more investment capacity, to focus on growth and other initiatives with near-term ROI. Our focus on being at the center of our clients' business, doing their most complex transformational work, provides us with resiliency over time, as demonstrated by the fact that our top 100 clients have been clients for over 10 years. There is now near universal recognition of the importance of AI, which is the heart of reinvention. The ability to use AI at scale, however, varies widely with clients on a continuum, with those which have strong digital cores generally seeking to move more quickly, while most clients are coming to grips with the investments needed to truly implement AI across the enterprise. And nearly all are finding it difficult to scale because the AI technology is a small part of what is needed. To reinvent using technology, data, and AI, you must have the right digital core, change your processes and ways of working, reskill and upskill your people, and build new capabilities around responsible AI, all with a deep understanding of industry and function in order to unlock the value. And many clients need to first find more efficiency to enable scaled investment in all these capabilities, particularly in their data foundations. We are able to help our clients with this AI rotation because of our broad services across strategy and consulting, technology and operations, as well as everything customer through Song and digital manufacturing and engineering through Industry X, and our relevance across the functions of the enterprises in 13 industries. Our privileged position in the technology ecosystem has perhaps never been more important. Generative AI is rapidly evolving and still in the early stages of maturity and adoption. And we are working closely with our ecosystem partners to help our clients understand the right data and AI backbone that is needed and how to achieve tangible business value. I will now bring to life the complex work we are doing at the heart of our clients' businesses. Building on the back of a long trusted partnership, we are working with Mondelez International, a world leader in snacking with well-known brands like Oreo, Velveeta, and Cadbury, to continue to drive growth and be an industry leader. Having laid the foundations of a strong shared services model powered by leading technology platforms and a data and AI foundation, we are now working on an ambitious reinvention of their digital core. We will design and implement a single cloud-based platform while also modernizing the finance function and transforming their supply chain planning and warehouse management capabilities. This will enable faster availability of products for customers, driving more sales growth and maximum profitability. This new digital core will also allow Mondelez to further reinvent how they satisfy customers through the adoption of new technologies like generative AI. Cloud continues to be the foundation of the digital core. our cloud business grew high single digit this quarter as clients do work across the cloud continuum, from migration to modernization to new business models to working at the intelligent edge. For example, we're helping Riyadh Air, a digitally native airline based in Saudi Arabia, become the world's first fully cloud-based airline. We will equip the brand new airline with a cloud-only infrastructure, enhanced cybersecurity, and AI-driven operations. Our capabilities will ensure that Riyadh Air's digital core is future-proof and remains legacy-free, enabling the airline to use cutting-edge technologies such as cloud data and AI to scale quickly and deliver a seamless and more personalized travel experience for its customers and employees. This will also help the company scale as it plans to operate over 100 destinations by 2030. We are partnering with Belden, a global networking solution organization on a cloud transformation program that will help them become a platform business, unlocking the power of edge, data, and AI to drive new business opportunities and enhance the customer experience. This platform will be powered by edge to cloud technology, allowing them to collect and analyze real-time data from industrial environments and improve operational efficiencies. This will provide valuable data-driven insights to Beldum and to their clients in industries where real-time insights are crucial. This reinvention will enable them to break down operational technology silos, allowing them to become a key player in the digital twin domain. We will also help enable this new service in the market. This strategic partnership will support Beldum's reinvention from a products company into a data engineering and insights company that leverages the power of platforms. We are focused on helping our clients leverage the power of AI quickly, generating tangible business value, leveraging our investment in differentiated tools that accelerate results. Our AI Navigator has helped clients across industries outline their value case, AI architecture, and AI solutions. In our recently announced AI Switchboard is already helping clients with the complex new need for integration across LLM models. For example, one of the largest entertainment companies is currently testing the switchboard to compare how the same prompt would be interpreted by different models and how they perform before deciding on which model to use. Ultimately, an enterprise-wide AI rotation requires a strong data foundation. We are working with Telstra, Australia's leading telecommunications and technology company, on a radical simplification and modernization of its data ecosystem, accelerating its efforts to become AI-powered. We are modernizing and consolidating over 50 disparate enterprise data sources into a small integrated set, forming Telstra's governed and secure data and AI core, allowing Telstra to rapidly scale bespoke generative AI capabilities in the future. Our work will also support the company's efforts to develop responsible, ethic, and secure market-leading AI frameworks while helping their teams provide quicker, more effective, and more personalized customer interactions. One of the areas of richest opportunities for our clients is customer experience transformation, including with generative AI, which uses the unique capabilities of Song across creative, customer insights, and deep technology expertise. Song grew low single digits this quarter. We continue to help clients reimagine marketing to drive growth. we're helping ExxonMobil, an energy supermajor, transform and optimize its end-to-end fuels marketing operations to drive future growth. With our global capabilities, our managed services will leverage our Synapse platform to drive automation and deliver measurable efficiencies across the fuels marketing business. We are strengthening our partnership with Best Buy, a leading consumer electronics retailer across multiple fronts, to reimagine the customer experience, optimize costs, and drive growth. By leveraging data and generative AI, we are helping to transform their context in our operations and improve customer and employee experience. We are also pleased to have entered into an agreement with Best Buy for lifecycle management of our own Accenture devices in North America and are creating a joint offering end-to-end field service device support for clients. we have already applied this new offering to a major TV provider, marking our first entry into this new market. These strategic initiatives underscore our commitment to helping Best Buy achieve superior customer experiences, operational efficiencies, and growth. Security is essential to reinvention. Moving beyond IT to protecting the core assets of the business and evolving the critical role of security as technology has changed. We saw very strong double digit growth in our security business this quarter. We are working with one of the largest electric utility holding companies in the United States to integrate their operational technology into a seamless, unified cybersecurity solution. Together, we will enhance their security capabilities by implementing advanced monitoring and response, vulnerability management, and security automation. This will help reduce the risk of cyber events in their grid environment protecting critical infrastructure serving tens of millions of people. We continue to see strong demand for digital manufacturing and engineering services. Industry X grew double digits in Q2. We're working with Indocount Industries Limited, a global leader in the home textile space, on digital transformation to simplify operations, support its ambitious growth plans, and maximize e-commerce opportunities. We will build a cloud-enabled digital core powered by data and analytics that will help standardize, digitize, and automate processes and operations. From supply chain to logistics to manufacturing, the new platform will enable more efficient inventory management, quality standardization, optimal energy consumption, and better customer experiences. Together, we will reinvent their operations and help expand their business in India, Middle East, North America, the UK, and Europe. And we continue our support for corporate green transformation by promoting carbon footprint compliance through the calculation and visualization of greenhouse gas emissions. To create a market where consumers can choose environmentally conscious products and services, a system to visualize the carbon footprint of each product is necessary. For example, we're assisting Matsumoto Precision, a precision machine parts processing company based in Japan, to gain more detailed insights into the sustainability of their production and achieve their decarbonization goal. We implemented a solution through our manufacturing platform that uses individual manufacturing performance information to record and report the CO2 emission on a per-product basis. This will allow Matsumoto Precision to enhance their understanding of the environmental impact of their business and contribute more effectively to the realization of a decarbonized society. Back to you, Casey.
spk04: Thanks, Julie. Now let me turn to our business outlook. For the third quarter of fiscal 24, we expect revenues to be in the range of $16.25 billion to $16.85 billion. This assumes the impact of FX will be about negative 1% compared to the third quarter fiscal 23 and reflects an estimated negative 1 to 3% positive growth in local currency. For the full fiscal year 24, based upon how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our results in U.S. dollars will be about flat compared to fiscal 23. For the full fiscal 24, we now expect revenue to be in the range of 1% to 3% growth in local currency over fiscal 23, which assumes an inorganic contribution approaching 3%. We continue to expect business optimization actions to impact fiscal 24 gap operating margin by 70 basis points and EPS by 56 cents. For adjusted operating margin, we now expect fiscal year 24 to be 15.5%, a 10 basis point expansion over fiscal 23 results. We now expect our adjusted annual effective tax rate to be in the range of 22.5% to 24.5%. This compares to an effective tax rate of 23.9% in fiscal 23. We now expect our full year adjusted earnings per share for fiscal 24 to be in the range of $11.97 to $12.20, or 3% to 5% growth over fiscal 23 results. For the full fiscal 24, we continue to expect operating cash flow to be in the range of $9.3 billion to $9.9 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $8.7 billion to $9.3 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.2. Finally, we continue to expect to return at least $7.7 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to shareholders. With that, let's open it up so that we can take your questions.
spk01: Katie? Thanks, Casey. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask a question. Operator, would you provide instructions for those on the call?
spk03: Thank you. If you'd like to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. 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 then 0 at this time. And one moment, please, for your first question. Your first question comes from the line of from JP Morgan. Please go ahead.
spk00: Hi, thank you. Good morning to all of you. Julie, just a big picture, maybe too simple of a question, but just curious to get your thoughts on where we are in the cycle for IT services, Ben, because we've been seeing sector softness for quite some time now. Accenture has done well. You've had very large deal activity come through. You know, short-term cycle stuff is always a little pressured, as you said. Where are we in terms of seeing maybe things bottoming or short-cycle discretionary spend returning?
spk05: Yeah, I mean, Tianjin, I think, you know, it's hard to predict at this point, you know, anything other than what we see right now, right? So what's different than 90 days ago? Well, as we said, you know, in December, we really get visibility into our clients' budgets in January. We say that every year, right? And so as the calendar year, you know, we turned the page, what we saw was a further tightening, you know, of spending at our clients, particularly, and that affects our services and particularly on the smaller projects. So, you know, from a sort of trend perspective, right? 90 days ago, we didn't see the same level. Now you've kind of turned the dial a little bit more constraint. And that's where we see the budgets being set for calendar year 24, right? And as you said, though, you know, in this environment, we're taking market share and we're seeing building momentum on our strategy to be the reinvention partner with a record 39 clients with bookings over $100 million, right? So what does that tell you, right? So the clients understand the importance of the technology-led transformation, right? And the fundamentals remain the same, right? There's a lot more reinvention ahead. We're still, when you look at where is cloud, right, both migration and modernization, we say about 80% of the opportunity is ahead, right? Data and AI, about 90% of the opportunity is ahead. Re-platforming and cloud-based platforms, about 65% of that opportunity ahead based on who has actually adopted the more modern platforms. And security, well, I think security can be kind of forever ahead, but at least 65% ahead. And that's before you get to thinking about areas like digital manufacturing, engineering services, where that technology has only been coming online even in the last couple of years, sort of the modern technology, and, of course, customer, also extraordinarily early days. So, you know, where we really focus on is, you know, meeting clients where they are today, right? So that's prioritize the large transformational deals and then be positioned to capture the spending when it increases. And, you know, we see... the industry as being very strong because all clients have to get there. They need to get to the technology transformation. They need to get to reinvention. And that's why you're seeing, even as the constraints, you're seeing that early interest in Gen AI. I mean, a billion sales in the first six months of the year, that is the fastest we have ever built sales in an emerging technology. And what it tells you is that clients understand the importance of AI, that they're going to have to reinvent every part of the enterprise. And that's exactly where everything we've done for the last decades at Accenture, right? Being the company that can go from strategy to build to operations, deep in industry and functional expertise because of strategy and consulting all comes together for this moment to to be the partner for reinvention across the enterprise, not just to build the technology, but to use it to reinvent. And that's exactly what you see in these results, which is why I'm super confident about the industry in the future.
spk00: Yeah. No, I'm confident Accenture will be there to catch all that, like you said. But maybe it's my follow-up with the with the GNAI bookings, any trends on deal size and confidence that some of these early bookings will convert to become a part of this whole large $100 million plus deal activity across or pull through from GNAI, if that question makes sense.
spk05: So a couple of things, right? What you see in our resilience is that we are doing these know uh bookings over 100 million and that's what kind of layers that that just gives you that base right of resilience during this period as we said we've seen further constraint on the smaller projects so that's why you've got you know the updated guidance right but the base of these larger deals we feel really good about from a resilience perspective and then you know you know how this is right you you're at the client You're at the heart of their business. You're really doing the strategic work. That's what all these large deals represent. And then as spending, you know, increases, you catch the pent up demand. And, you know, that's kind of how we see it. And that's how we've, you know, run it in the past. And by the way, of course, as you know, we're really investing in organically to capture, you know, more growth, which you also start to see in particular at the back end of our fiscal year. Thanks, Tianjin.
spk03: Your next question comes from the line of Brian King from Deutsche Bank. Please go ahead.
spk02: Hi, good morning. Casey, if Accenture does 1% constant currency in the third quarter, that's kind of the midpoint in the range. I guess the implied midpoint for 4Q is a ramp up to 6% constant currency. What kind of visibility do you have going into a number of the midpoint like that in the fourth quarter?
spk04: Yeah. Hi, Brian. Thanks for your question. And you're right. Obviously, your math is correct. That would be what our guidance would say. In terms of visibility, look, it's really no different than what we have any time in the past in this part of the year for our four-year guidance. Obviously, we are not forecasting the whole year. We just have the back half of the year. There's no difference in visibility as it relates to what we've done any other time of the year, any other year this time. And we do our same, you know, analysis and outlook to provide you with our guidance of the one to three.
spk02: Got it. Got it. And then, Julie, just thinking about clients needing to update their data in order to leverage AI and scale, why isn't that translating to stronger demand in the business? You would think that everybody would turn around and spend, you know, considerably on short term to get that ramp up in order to get AI to leverage it. but it doesn't quite translate. I'm just trying to figure out the disconnect there.
spk05: Yeah, so there's two things. So first of all, it's about prioritization, right? So they're overall constrained on spending, right? So you make choices, right, as opposed to it being additive. So they're not able to allocate extra budget. They're prioritizing their budget. So You're seeing more of a substitution right now as opposed to, hey, we need to do this. Let's add to the budget. And that's tied to the uncertain macro that's putting people constrained. I had one banker say it's like corporates have put themselves on a diet given the macro, right? The second thing, Brian, is you have to remember that you can't just jump to the great data foundation, right? You need to be in the cloud, right? you've got to have modern platforms. And so what you should read into the you know, the higher clients, the clients doing these higher bookings, right, is that they're doing the big transformations oftentimes to be ready to put in the data foundation, right? There's only still 40% of workloads are in the cloud. 20% of those roughly haven't been modernized, right? Many of our clients haven't put in the platforms. If you don't have the major ERP platforms that are modern, you know, you don't, you don't, create a data foundation to fuel Gen-AI in isolation. So you've got to build the digital core And as we've said, there's a lot more to go. And that's what's driving these larger complex transformations. Like people don't like to do these big transformations in the sense of, you know, they're big, they're hard, they're complicated, and they need to do them in order to ultimately be able to use the AI, not just in a part of the business or as a proof of concept, but really to transform and get the value they now see. And so, again, you can't jump to AI. You've got to put all the pieces, and a lot of clients aren't there yet, which is our opportunity.
spk02: Got it. Thank you for taking the questions.
spk05: Thanks, Brian. Thanks, Brian.
spk03: Your next question comes from the line of James Fassett from Morgan Stanley. Please go ahead.
spk06: Great. Thank you very much. I wanted to follow up on the questions around particularly AI, et cetera. I recognize, like, everybody's kind of at different stages. How should we think about, first, the timeline in terms of preparing and getting ready to implement new systems? solutions, et cetera, and then moving into full implementation and how we should think about that affecting Accenture's business. And like you mentioned, you've talked about some record bookings or the number of new customers over 100 million, like how that will ramp in the timeframe.
spk05: Yeah, well, so maybe just let me just start with like the strategy around capturing the growth opportunity from Gen AI, right? So This is the same playbook that we have used in every wave of new technology evolution, right? When we went from mainframe to client server, then to cloud and software as a service, and then to RPA and AI-driven automation when you saw things like MyWizard and Synapse, right? We have the same strategy. The strategy starts with we want to be the first mover of to help our clients use the technology. And that's why what we're doing with our investments of $3 billion to create solutions for them, and you see that coming through with our sales in generative AI, which, as I said earlier, are the fastest we've ever seen in sort of these new technologies because there's a lot of interest and we're the leader. So we want to be the first mover in helping our clients use it. The second part of our strategy is to be the first mover in using the technology itself to serve our clients, right? And we did that with like the digital, with AI automation, you know, with all of our platforms. And what that does, it's a proven formula because if we invest big to be early and be the first mover, right, then we're positioned to capture all the opportunities with our clients because they need to adopt it and transform. And as I just went through, that requires a lot, the digital core. Then you've got to actually use it to change new ways of working, to upskill your talent and build new capabilities like responsible AI. When we are able to be the first mover, which we are already starting now to use Gen AI and how we deliver, that enhances our competitive position, right? It makes us more differentiated. And of course, it also then allows our clients over time, the more we use the Gen AI to achieve the results they need at a lower cost, which frees up their investment capacity and to do the massive reinvention. And of course, we are then best positioned to be their partner as they reinvest in using the tech and AI to reimagine their enterprise. And that use of AI, because remember, as you think about the growth, you've got a lot of a digital core that's got to be built. You can't jump that step. It's not a magic technology. But then as you build it, you then have to go you know, function by function to change the ways you work to actually get the productivity and the growth. So we really see this as being, you know, kind of the next decade of what our clients are going to be focused on, and we're positioning ourselves to be their partner and be the first mover in both places.
spk04: Yeah, and maybe I'll take the layering in question on the larger deals and and talk a little bit about how that's going to work for the back half of the year as it relates to guidance. So we have the larger deals that were terrific, right, in our second quarter and our whole first half of the year, but you're right, they do layer in slower than the smaller deals, and we see pressure in the volume of our smaller deals, and that's why we have the one to three guidance for the full year. Now, we do feel good about delivering to this guidance and what that means for H2. And it really is for a few reasons that we've talked about before, but let me just kind of reiterate. You know, the first is that, you know, our competitive advantage is that we have the ability to invest. And you saw us do that in H1, and Julie talked about that, with investing more in acquisitions this year in the first half than we did all of last year. And that's really important because that drives inorganic growth. But again, we do that really to fuel organic growth. But we see that coming online in the back half of of the year. The second thing is that we have done these larger transformation deals, but also the ones from the previous years. And we see that continuing to benefit us as it relates to revenue, as they will layer on in the back half of the year. And that really just speaks to the resilience of our strategy, both in terms of being what Julie has talked about, being where our clients need us and our inorganic strategy to continue to benefit, to pivot to scale in new areas of growth. And so that's how that all kind of comes together in terms of revenue conversion from those larger deals and when they come online. James, and maybe I'll just also add what that means from a type of work for the entire year. What we now see from the context of the 1 to 3 is our consulting type of work probably will be about flattish, and we see our managed services growing to about mid-single-digit growth for the year.
spk06: Great. Thanks for the color to both of you. And quickly, Casey, just in terms of that investment, how do we think about like how that affects the margin expansion? And I mean, typically when you're doing acquisitions, there's a little bit of time before you can start to get people to the same type of trajectory as the extentors. margin expansion, but just trying to get a sense of how we should think about that impacting as well.
spk04: Yes, thanks. Well, first of all, I just want to put out that I'm really pleased with our profitability in the first half of the year and the outlook for our profitability for the full year. Our margin is flat, but we have EPS growth for the first half of the year, profit growth of 5%. And that really just points to the rigor and discipline that we continue to operate our business in. Well, really importantly, what Julie talked about, all the investments we're making in our business and our people continue, right? So as you look at the back half of the year, we now see that 10 basis points expansion is where we see it. Again, very important to continue to have high levels of investment in our people and our business. In EPS, we see for the whole year at about 3% to 5%. One thing I will point out just to help all of you. We did benefit from the first half of the year in our EPS with higher non-operating income, which makes a lot of sense on interest income, on our higher cash balance. The first half, you see that our cash went from nine to five, still great cash. No concerns. We'll continue with our capital allocation strategy. But just as you model on the back half of the year, you'll see that, not surprisingly, with lower cash, we'll have lower interest income. So just as you're working through your EPS modeling for the first half and the second half, that's something that you might want to consider.
spk03: Super helpful. Thank you. Your next question comes from the line of Brian Bergen from TD Cohen. Please go ahead.
spk10: Hi. Good morning. Thank you. So, Julie, I'm curious, just based on your conversations with leaders, What might be the catalyst here to have clients release spending programs and kind of lean back into shorter cycle work? Just as economic data generally holds up, are we just in a slower for longer backdrop? I'm just kind of hoping you can share some color on how you're thinking about a recovery internally here and what enterprises really are watching and waiting for.
spk05: I think there's going to be a couple dynamics, right? Like, remember, they just set budgets. So, you know, we're kind of assuming these are the budgets for their calendar year. And we see, in general, most of this constraint is tied to the uncertain macro.
spk07: So, you know, those are the kind of things. They've set budgets, and they've got an uncertain macro. Yeah, and just a reminder that, you know,
spk04: Everything that we're talking about in terms of giving guidance, I know all of you know this, but just as reminders, our fiscal year ends in August, right? So it's a little bit over halfway through the calendar year.
spk10: Okay, okay, that makes sense. And then as it relates to Gen AI, just kind of the revolutionary versus evolutionary kind of questioning here, just given how much work needs to be done for most clients to really do anything with large language models, How do we interpret that as a driver of your growth? So meaning, does Gen AI enable you to essentially drive a higher level of growth when spending does become more normal? Or should we think about this more as an ex-tech wave that enables comparable levels of normalized growth just because of how long this might all take for large enterprises to get there?
spk05: What I'd say is this is more about, like, we think of this as, like, prior technology waves, right? Each one's been a little bit faster, right, in terms of that. But especially when you look at kind of where our clients are on the continuum of building out that digital core, right?
spk07: There is a lot to go, and you really need that to fully realize it. So, you know, we see this as more like our prior, you know, kind of the way these things have evolved in the past. Right now, that's what we see.
spk03: Okay. Thank you. Your next question comes from the line of Dave Corning from Baird. Please go ahead.
spk09: Yeah. Hey, guys. Thanks so much. I guess my question, are you seeing your clients probably having much lower attrition just like every company has low employee attrition right now? Are you seeing them take their own employees, their own IT employees, and just do more internally right now? And is that a little bit of just the demand issue right now?
spk05: We certainly are seeing, you know, obviously our clients have invested in more technology internally at our advice, right? We've said to them, you know, during the pandemic, with technology being so important, they should be building up their technology. So sure, their clients, they've got a lot of our clients, not all of it, because it really depends on So some of our clients, that's really not the differentiator, right? So they want a smaller IT, and they've got others who've built it up, and it really depends on where they are. But sure, I mean, we've certainly got clients doing more in-house as part of it, and we've got other clients outsourcing more, right? So, like, it's really all over the map because it's very company-specific as to what makes sense for their strategy.
spk09: Yeah. Okay, thanks. And just one quick thought for Casey. The tax rate, clearly you lowered guidance just on the tax rate itself. Is that something one-off to this year, or is that something now that just seems more normalized?
spk07: Yeah, so, you know, there's really four things that every year are the same that really influence our tax rate.
spk04: It just really is how those things come together. You know, there are geographic mix of income, any settlement from previous years, any increase that we need to do on prior year tax liabilities, and lastly, the impact of our equity on our tax rate. So those four things really are confluences through the same every year, depending on how they fall. That's going to influence where we land on our tax rate.
spk07: And so we, this year we saw them, you know, favorably and aggregate. So we were able to keep our two point range, but drop by one, 1%. Okay.
spk09: Well, thank you guys.
spk07: Thank you.
spk03: Your next question comes from the line of Jamie Friedman from Susquehanna.
spk08: Please go ahead. Hi. Good morning, everyone. I have a really big picture question. I'm curious, Julie, how you feel about Accenture's role in the broader context of technology like software and cloud. And I realize in your prior very thoughtful answer about technology architectures, that was a great structure, as was your innovation session back on February 16th. But it does seem like Other parts of tech are doing better than services. So I'm just interested in your perspective on services in the context of broader tech spending.
spk07: Absolutely. It's a great question. Services are where you can dial back. more easily than when you're, you know, signing up for licenses for technology that you need, right?
spk05: So you'd imagine, and which is what we're seeing, that when you're constraining overall spending, right, your discretionary spending, you know, you go to, like, service providers where you're saying, wait, I can – pause for that. I can wait for that. And at the same time, you know, you've got in other parts of it, like with software, where you've got to, you know, if it's things you really need to invest in and you've got different licenses.
spk07: So, you know, it's really not different than other, you know, than other cycles is, you know, the services, you know, have the, you you know, bigger opportunity to say, you know, it's a little more discretionary.
spk05: Let's wait. Even if I bought the licenses, I'm going to wait to actually incur the cost because a lot of times, you know, the cost of the services can be significantly higher than the software licenses, right, because you've got all the change that you've got to do and all of that around. So, you Again, we don't see anything sort of different than, you know, when you've got an uncertain macro, you look around for your discretionary spending and you, you know, cut back. And that's why, of course, you're seeing still the big transformations happening because it's not discretionary and they've really got to, you know, replatform in that. So, you know, it's like nothing mysterious about it. It's kind of, you know, what I consider kind of normal in this kind of a macro.
spk04: That's right. And I think just as a reminder, even with all of that, we still have the record spend with us, right, with $40 billion of bookings for the first half of the year.
spk08: Yep, those are great points. All right, I'll drop back in the queue. Thank you, Julie. Thanks, Casey.
spk01: Operator, we have time for one more question, and then Julie will wrap up the call.
spk03: Okay, that question comes from the line of Ashwin Srivikar from Citi. Please go ahead.
spk07: Thank you. Hi, Julie. Hi, Casey.
spk11: Going back to the question of bookings, are clients actually revisiting existing bookings, ones that they signed maybe last year and times prior, relooking at them using the lens of applying sort of rapidly? evolving gen ai capabilities uh to what extent is that happening and then that kind of then implies obviously you know can we can we use those past bookings and backlog as a indicator of future growth and how soon that can layer in
spk04: Yeah, I'll take maybe more just the financial kind of mechanical part of it. You know, we have not seen a change in us working the work that's already been contracted, what we would call our backlog. And what we talked about was really spending on new sales, new services, and their smaller projects. And that's the dynamic that we have factored into our guidance for the year.
spk11: Got it. And then the other question was on LearnVantage and Udacity. I thought that was a particularly interesting deal. If you could walk us through maybe the mechanics of that deal and, you know, every company is investing in talent companies. This seems to be a bit different approach maybe. Could you just talk about the rationale, the downstream impact, and so on?
spk07: Sure.
spk05: Thank you because I'm super passionate about what we're doing with LearnVantage because it is so critical for our clients.
spk07: Talent is the number one priority. agenda item for CEOs, the number one.
spk05: And when you think about what reinvention means, the clients have to do an AI rotation and they have to do a talent rotation. And what LearnVantage does is it first and foremost provides the ability for everything from the board to the C-suite, to business users, to the technologists to get the technology training they need to make the right decisions on AI, for example, right?
spk07: To be able to become deeper in the new technologies.
spk05: And so it really goes from the board to the technologist. And within Udacity, what we're able to provide is essentially the same approach Accenture uses. So we spend over a billion dollars ourselves. You saw our latest average 14 hours per employee. And we use learning science to learn and do. Most of our clients are unable to do that.
spk07: The big differentiator for us in the market here is that we experience Accenture know when you train someone, we have to then put them on a job and they have to get paid to do something. So they are work ready.
spk05: So we're bringing that expertise now at scale to our clients. And what Udacity does is the same thing. They use exports, mentors, They have, you know, real project work that they then coach people on. So it's that same sort of approach of learn and do, you know, but our companies, our clients don't have all the work that we do. So Udacity has created this ability. And it's coupled then with Accenture's deep understanding of what it takes to train people and be work ready. So we're really excited about it. Our clients are excited about it. They've been coming to us. We've been doing this learning and this enables us now to do it at scale. And again, we want to be the reinvention partner. So the more that we can fill all of the needs of our clients around that, the better position that we will be. So we see LearnVantage is highly, highly, highly strategic. And by the way, it also has, we have a managed service today to actually manage the learning services that companies are now doing internally, which we also expect to, we're investing and expect to grow.
spk07: So very excited.
spk05: And then finally, we all have the responsibility as corporates to bring our people along the journey. And so when people worry about things like AI and displacement, right? We feel that our ability to bring proven, upskilling expertise to help our clients be able to bring their people is really, really important. It's important for our communities. It's important to their boards. And we all should consider it really important.
spk07: It's the right thing to do. So thank you very much.
spk05: Great. So thanks, everyone. In closing, I want to thank all of our shareholders for your continued trust and support, all of our people for what you do every day, and to assure you that we are working every day to continue to earn that trust. Thank you.
spk03: That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference.
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