Accenture plc - Class A (ACN) — Q2 2022 Earnings Call Transcript

Thank you, operator, and thanks, everyone, for joining us today on our second quarter fiscal 2022 earnings announcement. As the operator just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and Chief Executive Officer; and KC McClure, our Chief Financial Officer. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Julie will begin with an overview of our results; KC will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the second quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2022. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and as such are subject to known and unknown risks and uncertainties including, but not limited to, those factors set forth in today's news release and discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures, where appropriate, to GAAP in our news release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now let me turn the call over to Julie.

Thank you, Angie, and thank you, everyone, for joining. I would like to begin by honoring the incredible bravery of the Ukrainian people in the face of the unlawful invasion by Russia and extending our deep sympathy and concern over the horrific losses of life. While these words don't feel adequate to capture what is happening, we are taking actions to help in the small ways we can, which I will share more about later in the call. Turning now to the quarter. I will start by thanking our almost 700,000 people around the world for your incredible dedication and work to create 360-degree value for our clients and all our stakeholders. Thank you to our clients who are making bold moves to transform and putting their trust in us to help them. Finally, thank you to our technology ecosystem partners we work with every day to innovate and create more value for our clients. Now a few highlights from the quarter. We had record bookings of almost $20 billion and continued improved pricing, which refers to contract profitability or margin on the work that we sell across the business with 36 clients with bookings over $100 million. We had record revenue growth of 28% in local currency, bringing total revenue added through H1 to $6.2 billion, which is what we added in all of FY '21. And our EPS grew 25% year-over-year with flat operating margin and continued significant investment in our business and our people. Our workforce grew by 24,000 people, demonstrating again our ability to attract top talent at the scale needed by our clients. We were the top scoring company on the Bloomberg Gender-Equality Index out of more than 400 organizations globally. We were recognized in Ethisphere's World's Most Ethical Companies for the 15th year in a row and by JUST Capital for the sixth consecutive year. Our people completed another 9.2 million training hours this quarter. And we continue to gain market share, growing more than 3x the market. With such an exceptional quarter, I would like to particularly recognize and thank the incredibly strong delivery teams that underlie these results. Our clients know that our commitments are backed by the outstanding work our people do every day, working side-by-side with them, from shaping the future to building the best systems and platforms to creating amazing new experiences and brands to running critical functions for our clients and everything in between. Before handing over to KC, let me pause to reflect on the current macro environment. It was almost exactly 2 years ago that we did earnings only 8 days after the pandemic was declared. Then, as now, the world faced incredible uncertainty. We are all watching the events unfold in Ukraine, and there are many potential scenarios that are difficult to predict. While the circumstances are very different, our focus is the same: on the well-being of our people, serving our clients and staying close to their evolving needs and helping our communities. We emerged from the pandemic an even stronger and more relevant company, and we will use this strength to successfully navigate this environment and fulfill these same 3 goals. Over to you, KC.

Thank you, Julie, and thank you all for joining us on today's call. We are very pleased with our overall results in the second quarter, which exceeded our expectations with record new bookings of nearly $20 billion, surpassing our previous record by $2.8 billion. Our results demonstrate robust double-digit revenue growth across every area of our business, highlighting the value we deliver to our clients. We had a strong Q2 and first half of the year. While we acknowledge the uncertain environment due to the ongoing situation in Ukraine, we are committed to being transparent. Based on the best information we have today, we are raising key aspects of our full-year guidance, which I will elaborate on later. Now, let me share some highlights for the quarter. Revenues rose 28% in local currency, increasing by $3 billion compared to Q2 last year and nearly $300 million above our anticipated range, driven by broad-based performance across all markets, services, and industries, with all 13 industries achieving double-digit growth. We continue to extend our leadership position, with growth estimated at more than three times that of our comparable publicly-traded companies. Our EPS for the quarter was $2.54, reflecting a 25% increase from last year's adjusted EPS, and our operating margin of 13.7% was consistent with last year’s Q2. The 10 basis points expansion year-to-date demonstrates our ongoing significant investments in our people and business. Additionally, we generated free cash flow of $2 billion and returned $2.3 billion to shareholders through buybacks and dividends. We have invested $1.8 billion in acquisitions, mainly from 21 transactions in the first half of the year, and we anticipate investing around $4 billion in acquisitions for this fiscal year. Moving on to the details, new bookings reached a record $19.6 billion for the quarter, representing a 22% increase in USD compared to a strong Q2 last year, with an overall book-to-bill of 1.3. Consulting bookings hit a record $10.9 billion, also with a book-to-bill of 1.3. Outsourcing bookings were a record at $8.7 billion, with the same book-to-bill of 1.3. We are very pleased with our new bookings, driven by technology services, strategy and consulting, and 36 clients exceeding $100 million in bookings. Now, looking at revenues, they were $15 billion for the quarter, a 24% increase in USD and 28% in local currency. Consulting revenues for the quarter stood at $8.3 billion, a 29% increase in USD and 34% in local currency. Outsourcing revenues amounted to $6.7 billion, showing a 19% increase in USD and 23% in local currency. Examining our service areas, strategy and consulting, technology services, and operations all experienced strong double-digit growth. In geographic markets, North America saw revenue growth of 26% in local currency, driven by double-digit growth in Software & Platforms, Consumer Goods, Retail & Services, Travel Services, and Public Service. In Europe, revenues increased by 31% in local currency, led by impressive growth in Consumer Goods, Retail & Travel Services, Industrial, and Banking & Capital Markets, with strong performance in the U.K., Germany, France, and Italy. In Growth Markets, we experienced 30% revenue growth in local currency, powered by substantial gains in Consumer Goods, Retail & Travel Services, Banking & Capital Markets, and Public Service, particularly in Japan, Australia, and Brazil. Turning to the income statement, our gross margin for the quarter was 30.1%, compared to 29.7% during the same period last year. Sales and marketing expenses were 9.4%, consistent with last year’s second quarter. General and administrative expenses were 7%, up from 6.6% in the same quarter last year. Our operating income was $2.1 billion in the second quarter, maintaining a 13.7% operating margin similar to Q2 last year. As a reminder, we recognized an investment gain in Q2 last year that affected our tax rate and boosted EPS by $0.21. The following comparisons exclude these effects and reflect adjusted results. Our effective tax rate this quarter was 19.2%, compared to an adjusted rate of 17.5% for Q2 last year. Diluted earnings per share were $2.54, compared to an adjusted diluted EPS of $2.03 in the prior year’s second quarter. Days service outstanding stood at 41 days, compared to 42 days last quarter and 34 days in the second quarter of last year. Our free cash flow for the quarter was $2 billion, resulting from cash flow from operating activities of $2.2 billion, less property and equipment additions of $165 million. Our cash balance at the end of February was $5.5 billion, down from $8.2 billion at the end of August. In line with our goal of returning cash to shareholders, we repurchased or redeemed 4.6 million shares for $1.7 billion at an average price of $369.19 per share during the second quarter. As of February 28, we had approximately $4.6 billion in remaining repurchase authority. In February, we also paid a quarterly cash dividend of $0.97 per share, totaling $617 million, a 10% increase from last year. The Board of Directors has declared a quarterly cash dividend of $0.97 per share to be paid on May 13, also a 10% increase over last year. So, at the halfway point of fiscal ‘22, we have achieved very strong results. Now, I'll turn it back to Julie.

Thank you, KC. Let's begin with the demand environment. We are experiencing double-digit growth in all parts of our business across all markets, industries, and services. All our growth priorities, Applied Intelligence, Cloud, Industry X, Intelligent Operations, Intelligent Platform Services, Interactive, Security, and transformational change management all are growing double digits. Many of our clients are taking on bold transformation programs, often spanning multiple parts of the enterprise in an accelerated time frame, which we call compressed transformation, as they recognize the need to transform every part of their enterprise with technology, data, AI, and new ways of working. What is also clear is that the sheer speed at which an enterprise now needs to move and the breadth of the expertise required to transform demands partnerships. For example, our wide range of managed services from Intelligent Operations to application development and maintenance to Cloud, infrastructure, and security, our strategic capabilities that enable our clients to digitize faster, access hard-to-hire talent, transform more quickly due to our deep expertise, and achieve outcomes from greater efficiency to improved customer satisfaction, enhanced security, faster development, to higher growth. Our managed services are unique because they combine our strong strategy and consulting capabilities to anticipate and shape the future and be at the cutting-edge of industry, function, and technology. We also see our clients looking for partners who can create 360-degree value, upskilling our people, focusing on enhancing diversity, and building in sustainability, which is our focus. Stepping back, when you think about the extraordinary growth we are experiencing and how we navigated the pandemic, we believe our commitment to create 360-degree value for all our stakeholders and our unmatched diversity of people, services, industries, functions, markets, ecosystem partners, and investments, together with our leadership and technology, have made us both relevant to the world's largest companies and resilient. I will now bring to life how we are partnering with our clients with a snapshot of the range of solutions we are bringing across industries and across the enterprise. Let's start with enterprise functions. In chemicals and natural resources, we are expanding our relationship with a leading chemical manufacturer to carve out one of their business units serving the automotive industry to better focus on sustainable solutions. As part of this carve-out, we will build the backbone of this new entity with a cloud-based infrastructure, ERP platforms, and Intelligent Operations managed services for technology, HR, and finance, all in just over 1 year. This compressed transformation will create new value, reduce operating costs by up to 30%, enhance portfolio flexibility, and enable future growth in new areas. In consumer goods and services, we are working with a large multinational personal care corporation to build an integrated digital core with standardized processes, IT enterprise platforms, and instant access to consolidated data in the cloud, which will enable a more efficient and flexible supply chain and digital order processing. This will provide more time to sell, reduce human error, create a better customer experience, and deliver a stronger bottom line. We will also streamline financial operations, leading to greater agility and cost benefits to remain competitive in any environment and delight their consumers. Now I will turn to our solutions helping transform the core operations of our clients. In high tech, we are supporting Airbus, a leading aircraft manufacturer in several areas of their business, including digital design, manufacturing, and services. With our acquisition of umlaut, we're also helping Airbus engineering and manufacturing teams to develop the new A350F. At the same time, we will also onboard and manage training for new frontline employees using a realistic digital twin pilot, optimizing onboarding time and significantly reducing the learning curve of shop floor workers without disturbing production. In Banking & Capital Markets, we are helping BBVA, a global financial services firm, synchronize and speed up its digital journey. With the power of analytics, AI, and automation, we will create an intelligent data-driven banking operation with greater agility and productivity, lowering costs by up to 30% by leveraging our strategic managed services, improving their customer experience, and becoming an integral part of their talent strategy to provide new growth opportunities, upskilling, and security opportunities. This builds on our work with this digital leader that spans over 25 years, including international expansion, capital market strategy, and digital sales and services. In Health, we are helping Highmark Health, a national blended health organization, to make healthcare more personalized and proactive through the power of technology and data. By leveraging the cloud and operational hub, we'll bridge business units, consolidate enterprise data, provide faster insights, and personalize the customer experience with the flexibility to evolve as needs change. By maximizing its key asset data, Highmark Health will see faster time to market, reduce operational costs, increase innovation, and most importantly, better health outcomes. And we are helping clients accelerate their growth agenda. In consumer goods and services, we are collaborating with Del Monte, the iconic fresh and packaged food company, to establish effective B2B2C and direct-to-consumer commerce platforms. We will transition and scale their existing platforms into a one commerce ecosystem to make it easier to create and launch new products, driving significant growth in their e-commerce revenue. We are helping clients to help shape and deliver on the significant emerging opportunity of the Metaverse. We've been an early innovator in this area going back a number of years, investing in R&D, our people, and our own metaverse, One Accenture Park, all of which positions us to help our clients accelerate their Metaverse strategies and initiatives. In communications and media, we are helping Telstra, Australia's leading telecommunications company, to deploy 5G connectivity and technology to deliver immersive fan experiences at Melbourne's Marvel Stadium. From booking a seat to parking, to engaging with a match, fans will soon be able to experience a new augmented reality stadium experience before, during, and after they attend the game. And if you missed the release yesterday, please be sure to read our new technology vision, which is titled, Meet Me in the Metaverse, and is available on our website. And we are building the digital cores of our clients from replatforming in cloud to building core systems as described in many of the examples above, to helping them secure their enterprise as the security landscape widens. In Life Sciences, we are working with Merck, a global pharmaceutical leader, to create robust intangible value across the organization, which will help enable growth and accelerate the development of life-changing therapies for patients around the world. We will develop a more flexible and responsive IT infrastructure in the cloud, leveraging data and analytics and product-centric methodologies to power innovation, insight, and speed. At the same time, we are cultivating IT talent through a new operating model that drives upskilling, diversity, and development. Also in Life Sciences, we are expanding our partnership with an international drug wholesale company, which advances the development and delivery of healthcare products, including life-saving cancer treatments and COVID vaccines around the world to support their suite of cybersecurity towers by creating an integrated delivery model to increase resilience, accountability, collaboration, and feedback across monitoring, engineering, data protection, risk and compliance, and identity while also reducing costs. And we are helping our clients...

We are partnering with an international drug wholesale company to enhance the development and delivery of healthcare products, such as crucial cancer treatments and COVID vaccines globally. Our aim is to support their cybersecurity initiatives by establishing an integrated delivery model that boosts resilience, accountability, collaboration, and feedback in areas like monitoring, engineering, data protection, risk and compliance, and identity, all while lowering costs. Additionally, we are assisting our clients...

I'm sorry? The call dropped. Has the call dropped? No, I think it's still going. Sorry about that, everyone. I just want to make sure, confirm that we're good. Apologies. If you can hear me, we heard the call apparently dropped. We're good. Okay. So let's go back to we're helping our clients put sustainability in their core. We are helping a leading steel and mining company move to low-carbon steelmaking and employ decarbonization technologies. As an end-to-end partner supporting the company's ambitious decarbonization program, we will help standardize and implement the technical solution among its sites. I would now like to briefly comment on how Accenture as a company and our people have mobilized to support our Ukrainian colleagues and provide humanitarian aid. When people ask me what makes Accenture special, our actions like these are what come to mind. While we do not have operations or people who work in Ukraine, we have many Ukrainians who work for us, particularly in Poland. For their extended families who are in Ukraine, we quickly put in place Ukrainian language telehealth and other remote support services. And for those family members who are leaving Ukraine, we are providing settlement assistance. I also am proud of our people who have volunteered to drive refugees from the border to help get them settled. With a decade of experience helping refugees, we knew that not-for-profit organizations operating in Ukraine and the border countries providing humanitarian relief would have an initial immediate need for cash. We are currently donating $5 million in cash to these organizations. In addition, our people have donated nearly $1.5 million in our employee giving program, and we are providing 100% match funding. Our people also have sprung into action to anticipate the next needs of refugees. In Poland, we are piloting the first addition of an Accenture Academy for women refugees from Ukraine to build their technology skills starting in cybersecurity. Finally, as we've shared, we are discontinuing our business in Russia. We are working to support our nearly 2,300 employees there, and we want to thank them for their dedication and commitment to Accenture over the years. Back to you, KC.

Thanks, Julie. Before I get into our business outlook, I would like to provide some context as events are rapidly evolving and there's a significant amount of uncertainty. Our third quarter and full-year guidance does not include any assumption for a significant escalation or expansion of economic disruption or the conflict's current scope. Now let me turn to our business outlook. For the third quarter of fiscal '22, we expect revenues to be in the range of $15.7 billion to $16.15 billion. This assumes the impact of FX will be about negative 4 compared to the third quarter of fiscal '21 and reflects an estimated 22% to 26% growth in local currency. For the full fiscal year '22, based upon how the rates have been trending over the last few weeks, we continue to expect the impact of FX on our results in U.S. dollars will be approximately negative 3% compared to fiscal '21. For the full fiscal '22, we now expect our revenues to be in the range of 24% to 26% growth in local currency over fiscal '21, which continues to assume an inorganic contribution of about 5%. For operating margin, we now expect fiscal year '22 to be 15.2%, a 10 basis point expansion of our fiscal '21 results. We continue to expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.1% in fiscal '21. For earnings per share, we now expect our full-year diluted EPS for fiscal '22 to be in the range of $10.61 to $10.81 or 21% to 23% growth over adjusted fiscal '21 results. For the full fiscal '22, we now expect operating cash flow to be in the range of $8.7 billion to $9.2 billion, property and equipment additions to be approximately $700 million and free cash flow to be in the range of $8 billion to $8.5 billion. Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.1 to 1.2. Finally, we now expect to return at least $6.5 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. With that, let's open it up so that we can take your questions. Angie?

Thanks, KC. Operator, could you please provide instructions for those on the call?

Good stuff here. And yes, Julie, we could hear you the whole time. I don't think the call dropped. Can you talk a little bit about how, with your global presence and connection to major corporations, you are observing companies making changes in response to the macroeconomic environment, such as dealing with inflation, supply chain challenges, or sanction enforcement? Are you noticing any shifts or growing interest in pursuing different types of programs with you?

Thanks, Lisa. That's a great question because we interact with our clients frequently. I believe the pandemic experience has fostered a greater sense of resilience and agility among businesses. Consequently, we are witnessing a sense of calm in their response to the macro environment. It’s still early to assess the situation fully. Despite numerous predictions regarding inflation and supply chain issues, people are not overreacting. Instead, they remain focused on the priorities established before the crisis. Inflation has already become a reality that we are living with. In various industries, such as consumer goods, there’s been heightened attention on both growth and cost, with cost management becoming particularly critical due to the inability to fully pass on input cost increases through pricing. Considering potential scenarios like agricultural disruptions, prices may rise even higher, but it’s premature to speculate. Companies are emphasizing the need to stay on track and ensure effective execution. Similarly, energy prices are a concern. There is a growing focus on resilience alongside cost in supply chains. Furthermore, there’s a pressing need to digitize operations for better insights. The trends that emerged from the pandemic and the evolving economic conditions surrounding inflation are now being prioritized even more. The emphasis on building agility and maintaining the right pace defines the current conversations.

Sure, thanks, Lisa. I'm pleased to share that we achieved a positive performance in operating margin, expanding by 10 basis points in the first half of the year and remaining flat in the second quarter. This was driven by revenue growth and improved pricing related to our record bookings. We are very happy with this quarter's profits, highlighted by a 25% increase in EPS. It's important to note that we are operating in a hypergrowth environment, leading us to hire at elevated levels to meet demand, while also managing wage inflation. We are committed to pricing strategies, understanding that it will take some time for improved pricing to influence our profit and loss statements, but we did see some impact reflected in our second-quarter results. Moreover, investing significantly in our people and business remains a priority, with investments even higher than last year. We're also accommodating increased acquisition spending within our operating margin. In summary, we have achieved 10 basis points of margin expansion halfway through the year and expect to maintain this level in the second half. We are very satisfied with this progress, which indicates an impressive EPS growth of 21% to 23% for the year.

Congratulations on these great results. I had 2 questions. I guess the first one is, given the disruption to some of the digital engineering IT service firms in Eastern Europe, are you seeing additional demand from clients looking to other vendors?

Thanks, Bryan. It's really too early to see that. We're seeing clients staying very focused on their business and what we're doing with them.

Got it. And the other thing that jumped out at me is the 3x growth rate versus the market. I think typically, Accenture has been more of a 2x in recent years. So can you just talk to us about why the expansion in share gains that's happened over just recently here?

Thank you, Bryan. I believe it's a mix of factors, but we should always focus on our clients first. Before the pandemic, clients approached transformation in a sequential manner. The pandemic was a significant shock, prompting leaders to accelerate their efforts. Many companies realized they needed to leapfrog, shift online, and undergo digital transformation. This led to a shift from sequential to compressed transformation, with companies simultaneously focusing on manufacturing and sales. We witnessed this in several examples where companies created entirely new infrastructures across various enterprise functions, implementing new platforms along with manufacturing to stay ahead due to market demands. Accenture stands out in our industry because we can manage transformation across all parts of the enterprise. That’s what I wanted to highlight. We're addressing finance and HR, focusing on growth in sales, marketing, and service, and we've been investing in Industry X for a decade, which is gaining significant momentum. We’ve seen an increase in clients with over $100 million in bookings over the last two years compared to pre-pandemic numbers, reflecting a high level of demand. Our diverse services and extensive industry knowledge set us apart. When companies need to move quickly, they require a partner who understands the entire enterprise and possesses deep industry expertise, which drives our growth as we're harnessing the momentum across every segment of the enterprise.

Great results here. Just wanted to clarify your assumptions on the really strong outlook. Can we assume that your approach towards guidance is similar to the approach you took at the onset of the pandemic? And are you assuming any slowdown in Europe in your guide? I know there's a lot of questions we're giving on macro within Europe, so figured I'd just ask it here.

Thank you, Tien-Tsin. Let me explain our guidance assumptions. Our guidance considers the revenue impact of exiting the Russian market and the associated wind-down costs. Regarding broader risks, we are straightforward in our assessment, similar to how we approached things during the pandemic. Currently, we do not anticipate any major disruption to our business. However, it's still early, and predictions are challenging. Our guidance does not factor in any significant escalation in economic disruption or the current extent of the conflict. In Europe, we also do not observe major disruptions in our operations, which is evident in our strong bookings and revenue growth. For the latter half of the year, we continue to project a solid double-digit growth rate, including in Europe.

Okay. Great. Look, we trust your outlook. I just want to make sure I understood the approach here. Just my quick follow-up, just the 36 clients, over $100 million, big number. I'm just curious if the pipeline for larger deals, how does that look from here your ability to replenish? I know we're in March now, but just curious what you're thinking on larger deals looking ahead here.

Yes. So I'll comment on the pipeline, Tien-Tsin, and see if Julie wants to add anything else. But we continue to feel good about our pipeline even with another quarter of record bookings just completed. We were very pleased with our bookings, obviously, in Q2 and for the first half of the year. But bookings can be lumpy from quarter-to-quarter. So we focus on the trailing 12-month book-to-bill as I know many of you do, too. But we, overall, still feel really good about our pipeline.

Yes. Tien-Tsin, I just want to emphasize that we are approaching the situation as we did during the pandemic, being straightforward with our assessments. We'll provide updates every quarter. We maintain close communication with our clients. As we mentioned earlier, it's still too early to make definitive statements, so we're neither being too conservative nor overly optimistic. We're simply presenting the facts as they are. Next quarter, we will provide another update and proceed from there.

Just wanted to ask about the bookings, obviously, extremely strong here. I was just curious on the consulting and outsourcing side. How much above your internal expectations did they come in? And how should we think about book-to-bill in the back half of the year? I know year-to-date, it's nicely elevated at 1.2x. So should we just expect some normalization there in the back half?

Jason, our record bookings exceeded our expectations, with significant over-delivery across all markets, services, and industries, including consulting and outsourcing. We assess our book-to-bill ratio over a trailing 12-month period, looking at four quarters at a time. We are confident about our current position, pipeline, and bookings as we approach the second half of the year.

Sure. Poland and Romania would be the sort of the two where we've got delivery centers. We don't have big local market, but Poland and Romania.

Julie, I wanted to ask for your perspective on the sustainability of double-digit growth. I’m not referring to this year specifically. Our model tracks Accenture from 2006 to 2021, showing an average growth of about 8 points, which includes some acquisitions. In that time, half the years saw double-digit growth, while the other half did not. I’m trying to consider the potential challenges ahead, especially since investors are focusing on the outstanding performance this year, which presents a tough comparison going forward, factoring in 5 points from acquisitions. Additionally, many companies emerged from COVID with a distinct focus on transforming their operations. This may have accelerated some decisions. The initiatives we plan to implement over the next five years mirror what many firms are undertaking this year. With that context, how do you view Accenture's capacity to maintain double-digit growth as we look toward 2023 and beyond?

I appreciate your long-term perspective because that's how we operate. Our approach to growth isn't solely about achieving double-digit increases. We have a longstanding belief that we should consistently outpace market growth, which is our primary focus—continuously gaining market share is a fundamental commitment for us. To achieve this, we maintain close relationships with our clients to understand their current needs and anticipate their future demands. This is crucial. For instance, we discussed the Metaverse continuum recently, an area where we've invested for the past decade. We believe the Metaverse and Web3 will be as groundbreaking as our 2013 assertion that every business would become a digital business, leading to significant transformations in the coming decade that will drive our growth. Additionally, it's crucial to recognize that we are still in the early stages of the digital transformation across enterprises. For example, we estimate that only about 30% of workloads have transitioned to the cloud. Once workloads reach the cloud, companies can leverage these technologies to drive growth and innovation, as illustrated in the examples we presented today, where cloud adoption enables effective use of data and AI for transformation. The journey of replatforming on leading SaaS platforms is also in its infancy. While there's a heightened focus on digital transformation fueled by the pandemic, the foundational work is just beginning, and the real progress depends on how companies utilize that foundation. From a technology development perspective, consider manufacturing and supply chains. Many of the advanced technologies have emerged only in the past few years, particularly in cloud-based solutions. There's still new functionality being developed that is not yet incorporated into major platforms. We see manufacturing and supply chain as the next digital frontier. This has been a significant area of focus for us over the last decade as we transition from IT to operational technology, involving budget considerations that we're tapping into. Overall, despite the activity in the industry, many companies are still in the early stages of transformation, working on the foundational elements today, which sets the stage for future advancements like Web3.

In terms of wage inflation, it's quite similar to what we discussed last quarter. It's evident across all industries and globally, with our clients also facing challenges in this tight labor market. We anticipate ongoing wage increases for specific skills, and this will vary depending on the geography. We're monitoring the Consumer Price Index and any potential increases that could affect inflation at the lower end of our structure. Our focus is on pricing strategies to manage the rising labor costs. However, the improved pricing that began in the second quarter will take time to reflect in our profit and loss statement. We did notice some effects of this in the second quarter, but it still lags behind the compensation increases we have implemented.

I'm very pleased with our profitability. Considering our current challenges, we've faced increased costs due to rapid growth and a significant rise in acquisitions last year. We're managing that dilution this year while also increasing our business investments aimed at driving growth both now and in the future. In this unique labor market characterized by wage inflation, we are effectively managing those costs while still achieving a 10 basis points expansion in operating margins. Overall, I am confident in our position as a company, both for this year and in our efforts to ensure continued growth in a market-leading manner.

Julie, KC, congratulations on the quarter and outlook. I wanted to start with the M&A question. I believe there was no M&A since last earnings. Perhaps I may have missed a smaller deal or 2. Is that just a quirk of timing? Or is it that you just recently did larger deals and are integrating? Or might there be other factors at play?

Yes, Ash, we're about halfway through the year. We had a lot of acquisitions closed in Q1, but you're correct that we closed fewer in Q2. The timing of acquisition closings can be unpredictable, and we can't always control it. So far, we've spent $1.8 billion on acquisitions this year and continue to expect around $4 billion of acquisition spending for the fiscal year 2022. However, we will only pursue deals that make sense, so the final amount could vary from the $4 billion. We'll provide an update next quarter.

Yes. And I just like I wish we could manage it sort of like say, we're going to do this many and then we're going to absorb. But it really is just about timing goes up and down. And also, we have a lot of rigor and discipline. We're only going to do deals that we believe in, right? So we're not trying to manage in any way to a quarter. We've got a capital allocation. If we can do that with great deals, we're going to do it, and so that's the approach. I will take the opportunity just to say one of the ones we did announce, we did close 2 this quarter. But one of the ones we announced I'm super excited about, which is AFD.TECH, which is in the network space, 1,600 people in France. And it's important because as you think about what's happening in digitization, our increasing move into really leading in network is important. And it's just another great example of how we use acquisitions to accelerate our strategic growth priorities. It's an important part of Accenture Cloud First.

No doubt. I agree with that. And I wanted to ask a broader question. This has unfortunately been asked in a few different ways. But I think you captured it well in your takeoff sentence when you mentioned an incredibly high level of uncertainty. But I believe that since the compressed transformation move started, this is probably the first major test of secular trend versus cyclical uncertainty. And I know you're calling outlook like you see it. But is this time different? Can the strength of secular overcome cyclical challenges?

We have all adapted to handle various issues that may arise from this crisis, aside from military scenarios, such as increased inflation, the need for energy conservation due to rising energy prices, and disruptions in the supply chain and agriculture. Ultimately, it comes down to leveraging a combination of technology and human creativity, which is our strength. We offer effective solutions like managed services to help reduce costs and discover new growth opportunities and market access. Improvements in technology will lead to greater energy efficiency. As we consider our role, we see ourselves as a company that can assist other businesses in navigating these larger trends. We firmly believe that the role of technology and its application to achieve tangible results will be crucial. We are confident in our resilience through whatever challenges lie ahead.

The first question I'd like to ask is just about talent and your ability to acquire it more globally. Obviously, in the earlier announcement about the apprenticeship program or the expansion of it in the U.S., can you talk a little bit about as you build out the bottom base of the pyramid for your delivery. How does something like that impact bill rates or the clients' willingness to accept bill rates when you're using individuals with non-4-year degrees and so forth?

That's an interesting question. I would say that our clients are primarily focused on skills rather than degrees. They are looking for specific abilities, which is a growing trend. In fact, we anticipate that three years from now, Chief Human Resources Officers will all be discussing skills. As part of this trend, it’s essential to not just be a consumer of talent, but to become a creator of talent, understand the required skills, and be prepared to reskill.

Fair enough. And does that also impact your cost as well, though? Are you able to employ them at a better cost base, I guess? How should I think about the arbitrage opportunity there if clients are willing to pay for the full skill?

I wouldn't focus on the arbitrary opportunity. We offer pay that is relevant to the market, and our emphasis is on skills. Even in our recruitment process, the focus is on skills. Therefore, having a 2-year degree instead of a 4-year degree does not mean you will be paid less. It's all about the skills you possess, and there is a market price for these skills. So, I would not view this as labor arbitrage. What I would say is since the time of the pandemic, when we had this global shock, we continued to evolve our ability to move work and be flexible. And so, our focus is really on that agility and making sure that we have the right kinds of talent, both geographically dispersed, but also the ability to move talent around.

Operator, we have time for one more question, and then Julie will wrap the call.

Great. I want to echo my congratulations on the quarterly results. I'd like to follow up on the last question from a different perspective, focusing on the supply side. With that in mind, Julie, are you noticing any trends as companies continue to operate in a hybrid environment in the post-pandemic era? Can you identify any overarching trends by skill level or geography, particularly in how they are managing costs? Are companies shifting work to certain locations? Is there particular demand in any areas? Are there notable trends regarding the skills of labor forces in specific regions that could lead to cost benefits or improved ability to meet demand?

I frequently discuss talent with our clients, and I believe our focus is somewhat different. The main areas of concern revolve around accessing talent, which involves both attracting and retaining individuals while doing so at scale. A significant emphasis is on understanding what it takes to engage and keep talent in a hybrid work environment. Many companies are shifting away from wanting everyone in the office to adopting a hybrid model, which affects costs as they reduce their real estate expenses. When we engage with clients, the primary issue is how to attract workers who, according to our research, prefer a combination of in-person and remote work, and this approach does incur some costs. The second aspect of access relates to our managed services, which are centered around two key factors. First, digitization is faster with our platforms. Second, we provide access to talent that is often difficult to find. For instance, we have 10,000 security professionals handling everything from threat assessment to platform design and managed services. Given the expanding security landscape, this access to specialized talent is invaluable. Ultimately, we are concentrating on access and what it takes to achieve it, including through partnerships. These are the discussions we have with our clients.

Great. Thank you very much. I'm going to close the call now. Thanks, everyone, for joining us, and thank you again to our incredible people and to our shareholders for your continued trust. Please make sure to join us for our Virtual Investor and Analyst Day on Thursday, April 7. We're looking forward to being back together. Thanks, everyone.