Accenture plc - Class A (ACN) — Q1 2023 Earnings Call Transcript

Thank you, operator, and thanks, everyone, for joining us today on our first quarter fiscal 2023 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you'll hear from Julie Sweet, our Chair and Chief Executive Officer; and KC McClure, our Chief Financial Officer. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Julie will begin with an overview of our results. KC will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the first quarter. Julie will then provide a brief update on our market positioning, before KC provides our business outlook for the second quarter and full fiscal year 2023. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we will 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 to everyone joining us today and especially to our people around the world for their extraordinary work and commitment to our clients, which resulted in delivering another strong quarter of financial results and the broader 360-degree value we continue to create for all our stakeholders: our clients, our people, our shareholders, our partners, and our communities. Let me share a few highlights of this 360-degree value and our continued disciplined execution. We delivered strong bookings of $16.2 billion, with 24 clients having quarterly new bookings over $100 million, demonstrating our clients’ continued commitment to transformation and our ability to understand and anticipate our clients' needs, whether for growth, cost optimization, or resilience, as well as our ability to deliver compressed transformations. We delivered revenues of $15.7 billion, representing a 15% growth in local currency, with double-digit growth in each market. We estimate that we are growing more than 2x the market while delivering margin expansion of 20 basis points. We continue to invest in our people, with 10.4 million training hours this quarter, representing an average of 15 hours per person, providing learning opportunities and upskilling to enable us to pivot as our clients' needs evolve. We earned the number one position on the Refinitiv Diversity and Inclusion Index for the third time in the past five years and a top score on the Workplace Pride Global Benchmark, recognizing Accenture as the leader in our industry. We believe our unwavering commitment to diversity and inclusion is both the right thing to do and an essential element of our business strategy and strong financial performance. We have reached 97% renewable electricity, closing in on our goal of 100% by the end of 2023. Our own progress in sustainability is important to our ability to lead in helping our clients harness this key force of change and in attracting top talent. Finally, I want to congratulate the more than 1,200 individuals promoted to Managing Director, 119 new appointments to Senior Managing Director, and the more than 90,000 people we promoted around the world in Q1 overall, reflecting our commitment to providing vibrant career paths. Over to you, KC.

Thank you, Julie. Happy holidays to all of you, and thanks for taking the time to join us on today's call. We were pleased with our overall results in the first quarter, where we continue to drive growth across markets, services, and industries to extend our leadership position in the market. We ran our business with rigor and discipline and expanded operating margin while investing at scale, and we continue to deliver on our shareholder value proposition through both our financial results and by creating 360-degree value for all our stakeholders. Let me begin by summarizing a few key highlights across our three financial imperatives from the quarter. Revenues grew 15% in local currency, reflecting a foreign exchange headwind of about 9.5% compared to the 8.5% provided in our business outlook last quarter. Adjusted for the actual foreign exchange impact in the quarter, we were approximately $150 million above our guided range, with double-digit growth across all of our markets and industry groups, with 10 of the 13 industries growing double digits and three high single digits. We continue to take market share with growth estimated to be more than 2x the market, which refers to our basket of publicly traded companies. Our operating margin was 16.5% for the quarter, an increase of 20 basis points. We continue to drive margin expansion while making significant investments in our people and our business, including acquisitions. We delivered very strong EPS of $3.08, up 11%, while absorbing a substantial FX headwind. Finally, we delivered free cash flow of $397 million and returned $2.1 billion to shareholders through repurchases and dividends. We also invested $686 million in acquisitions. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $16.2 billion for the quarter with a book-to-bill of one and growth of 6% in local currency. Consulting bookings were $8.1 billion, with a book-to-bill of one. Managed Services bookings, which we formally refer to as Outsourcing, were $8.1 billion with a book-to-bill of 1.1. In addition, we continue to see improved pricing on our new bookings, which refer to contract profitability or margin on the work that we sell. Turning now to revenues. Revenues for the quarter were $15.7 billion, a 5% increase in U.S. dollars and 15% in local currency. Consulting revenues for the quarter were $8.4 billion, up 1% in U.S. dollars and 10% in local currency. Managed Services revenues were $7.3 billion, up 11% in U.S. dollars and 20% in local currency. Taking a closer look at our service dimensions, Technology services grew strong double digits, Operations grew double digits, and, as expected, Strategy & Consulting grew low single digits. Turning to our geographic markets, in North America, revenue growth was 11% in local currency, driven by double-digit growth in Public Service, consumer Retail and Travel Services, Industrial and Health. In Europe, revenues grew 17% in local currency, led by double-digit growth in Industrial, Banking & Capital Markets and high single-digit growth in Consumer Goods, Retail & Travel Services. Looking closer at the countries, Europe was driven by double-digit growth in Germany, the United Kingdom, Italy, and France. In Growth Markets, we delivered 19% revenue growth in local currency, driven by double-digit growth in Banking & Capital Markets, Public Service, and Chemicals & Natural Resources. From a country perspective, growth markets were led by double-digit growth in Japan. Moving down the income statement, our gross margin for the quarter was 32.9%, consistent with the same period last year. Sales and marketing expense for the quarter was 9.8% compared with 9.7% for the first quarter last year. General and administrative expense was 6.6% compared to 6.9% for the same quarter last year. Operating income was $2.6 billion in the first quarter, reflecting a 16.5% operating margin, up 20 basis points compared with Q1 last year. Our effective tax rate for the quarter was 23.3% compared with an effective tax rate of 24.4% for the first quarter last year. Diluted earnings per share were $3.08 compared with diluted EPS of $2.78 in the first quarter last year. Days service outstanding were 48 days compared to 43 days last quarter and 42 days in the first quarter of last year. Our free cash flow for the quarter was $397 million, resulting from cash generated by operating activities of $495 million net of property and equipment additions of $99 million. Our cash balance at November 30 was $5.9 billion compared with $7.9 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed 5.2 million shares for $1.4 billion at an average price of $272.3 per share. At November 30, we had approximately $4.9 billion of share repurchase authority remaining. Also in November, we paid a quarterly cash dividend of $1.12 per share for a total of $706 million. This represents a 15% increase over last year. Finally, our Board of Directors declared a quarterly cash dividend of $1.12 per share to be paid on February 15, a 15% increase over last year. In summary, we were pleased with our results in the first quarter, and we're off to a strong start for the year. And now let me turn it back to Julie.

Thanks, KC. We remain laser-focused on staying close to our clients, advising them how to navigate the macro landscape, providing the right solutions to enable compressed transformations, and adjusting to their changing needs. Let me give some further color on what we're seeing in the market and how we see the demand environment shaping up. Over the last quarter, as we can all read, the economic estimates for 2023 continue to decline. While the latest industry estimates for 2023's technology spending continue to show robust growth of about 5%, we will see how the market evolves as clients finalize their 2023 budgets. So what does today's market mean for our clients? We believe that the current macro environment is making it even clearer to clients that they need to change more, not less, and that two of the five key forces of change that we have identified for the next decade: the need for total enterprise reinvention enabled by technology, data, and AI; and the ability to access, create, and unlock the potential of talent are critical to succeeding in the near, medium, and long term. We see this continuing across industries and markets with two common themes. First, all strategies continue to lead to technology, particularly cloud, data, AI, and security. And second, companies remain focused on executing compressed transformations to achieve lower costs, stronger growth, more agility, and greater resilience faster. What does this mean for Accenture? Our strategy positions us for continued industry leadership because we have a unique set of strengths that our clients need to navigate today and succeed tomorrow. We are able to do so because of our deep strategy and consulting expertise across industries allowing us to be a trusted adviser during different economic cycles as we bring the expertise, coupled with the real-life practical experience they need. Our ability to help clients achieve total enterprise reinvention through our depth across the enterprise, from the frontline to core operations to corporate functions, as well as our ability to advise our clients on shaping and delivering value-led transformations, and through our breadth of services, from strategy and consulting to our strategic managed services, which help clients digitize faster, access talent, and lower costs. Our global footprint allows us to act at scale and with speed. Together, this positions us as the compressed transformation partner of choice, as evidenced by yet another strong quarter of clients who selected us for work of more than $100 million this quarter. I am pleased to see how quickly we are pivoting to meet the evolving needs of our clients. We have seen a higher level of sales and pipeline coming from cost-focused initiatives, often including growth or capability enhancements. We are leveraging our breadth of services, deep client and ecosystem relationships, and industry and functional expertise to help our clients and Accenture shift to the highest value opportunities. Our track record of delivery at speed and scale over the years with clients — remember, 99 of our top 100 clients have been with us for over 10 years — provides them confidence that by partnering with us, they can deliver on their commitments. Investments in our assets and solutions, such as myWizard and SynOps, which underlie both strategy and consulting, technology, and operations managed services, as well as our delivery of compressed transformations, enable us to differentiate with our insights and services. Our ability to invest in acquisitions helps us to expand our relevance across the enterprise from building a digital core with Sentia and Albert, to optimizing operations to achieve agility, efficiency and resilience with Pilatus, to accelerating growth agendas with RAMP. Our substantial investment in the skills of our people allows us to pivot to new areas of demand and be an attractive destination for top talent. Now let's turn to the quarter. To bring to life this demand environment across the five key forces of change for our clients: total enterprise reinvention, talent, sustainability, the metaverse, and the ongoing tech revolution, which in turn drives our growth. First, total enterprise reinvention, we continue to help our clients achieve a new performance frontier by building their digital core, optimizing operations, and accelerating growth, leveraging cloud, data, AI, and new ways of working. We are helping Roche, a Swiss multinational healthcare company specializing in pharmaceuticals and diagnostics, with a total enterprise reinvention, building a digital infrastructure to match changing business needs. Using data integration, we have changed the way tumor boards are organized and conducted, empowering counter teams to be more efficient and effective in determining next steps for cancer care. We have built a digital ecosystem that will create innovative products and solutions to drive diabetes care. Now, as part of one of the largest ERP modernizations in the world, we are working together to deploy a digital backbone that will unify and harmonize nearly 700 business processes for more than 100,000 end users. The integrated platform will simplify the system landscape and connect activities across the value chain from R&D and manufacturing to patient treatment. Cloud, a $26 billion business in FY '22, grew 48%, with even stronger growth in Cloud First, and continues to grow at strong double digits. In fact, we believe that the cloud continuum will become the new operating system for the future enterprise. Migrating to the cloud to drive efficiencies is just the first step. As we anticipated with our Cloud First strategy and investments, we are seeing our clients make significant investments to modernize, improve, and innovate in the cloud, leveraging data and AI to drive new business value. For example, Accenture Federal Services is partnering with the Centers for Disease Control and Prevention, a U.S. federal agency under the Department of Health and Human Services, to accelerate its migration to the cloud across the enterprise and modernize its IT portfolio. Through this work, we will also help achieve the CDC's mission to protect people from health, safety, and security threats by supporting the development of integrated, real-time public health data and surveillance systems. As our clients build their digital core, security continues to be more important than ever, as reflected in our very strong double-digit growth in Q1. We are expanding our cybersecurity footprint for a large healthcare network in Brazil to elevate their cybersecurity posture to a new level of preparedness. We are growing the organization's security profile with a cybersecurity-as-a-service solution that will enhance the cyber readiness of their infrastructure and operations. This new project not only consolidates the work that up to four different providers typically perform, but it is also the largest cybersecurity contract ever signed in Brazil by any provider. High demand for our strategic Managed Services, reflecting $7.3 billion in revenue and 20% growth in the quarter, demonstrates the importance of these services to our client strategies as they enable clients to move faster by leveraging our digital platform's expertise and talent. Our Managed Services are differentiated by our ability to bring in deep expertise from across the enterprise, including Song, which grew double digits in the first quarter. For example, we're expanding our partnership with Allianz, an Italian bank that is part of the Allianz Group, to continue the bank's digital transformation with a new platform in the cloud, a modern IT architecture, and a new operating model. Our Song team is helping to create a new customer mobile app to improve customer experience. Our end-to-end managed services capabilities, tailored to the financial services industry, will help the bank grow and scale its position in the market, ensure regulatory compliance, and lower total cost of ownership. We continue to see strong demand for our industry edge capabilities, digitizing engineering and manufacturing, which we see as the next digital frontier with continued strong double-digit growth in Q1. We are helping Celanese, a global chemical and specialty materials company, on their digital transformation journey to increase their manufacturing production resiliency, productivity, and predictability of plant operations. We're teaming with ecosystem partners to design and implement a scalable digital twin platform at one of their largest manufacturing facilities, which plans to increase revenues through increased plant output, reduce costs through improved productivity, product quality, and equipment reliability, and improve overall safety in the workplace. We also are supporting an enterprise cloud transformation to provide a scalable platform for future enterprise growth and innovation. Next, talent. Our clients continue to look to us to access, create, and unlock talent as a critical element of their transformation. We're helping a global chemical manufacturer with an end-to-end IT transformation as part of their multiyear digital journey. The company faces increasing IT costs, aging assets and tools, and overreliance on contractors. We're implementing a full Managed Services model that will help modernize its IT, and this digital transformation includes a talent transformation. Together, we will upskill their people in data, cloud, and AI through our Accenture Academy so everyone grows together, helping the company leapfrog its competitors with innovative industry-leading solutions. Now, sustainability. We continue to prioritize embedding sustainability into our clients' digital transformation and providing direct sustainability services. For example, we are expanding our partnership with a European multinational aerospace corporation to help improve their environmental and social impact across the enterprise. In recent years, we have worked together to digitize the company's supply chain and manufacturing operations, using a digital twin to improve productivity and reduce waste. Now, we are working together to advance their sustainability agenda. We're supporting their aviation decarbonization roadmap, from accelerating the use of sustainable aviation fuel to helping design low-emissions aircraft. We are finding new ways to help make the supply chain more transparent and ethical, helping the company replace hazardous materials from the product lifecycle with safer, greener alternatives. Lastly, we're outlining a strategy to help them meet their net-zero targets and foster a culture focused on sustainability. Finally, regarding the metaverse and the ongoing tech revolution. While still in the early stages, we believe the metaverse will not only change how people work but will also profoundly change every part of every business, from how we interact with customers, the products and services offered, how they are made and distributed, and how we engage with employees from onboarding to personal productivity. We're partnering with NTT DOCOMO, a Japanese mobile operator, to speed up the adoption of Web3, a new blockchain-based version of the Internet promising a digital economy with greater social impact. We will develop and grow a secure technology platform for Web3, enabling new products, services, and community building. Training will ensure that Web3 engineers and business leaders collaborate with organizations effectively and securely on the platform. NTT DOCOMO's work on societal issues will now expand with the use of Web3 to help companies and governments transform social infrastructures and provide solutions that would improve people's lives. We continue to invest ahead of our clients' needs for the future with a keen focus on innovation and the ongoing tech revolution. Back to you, KC.

Thanks, Julie. Turning now to our business outlook. For the second quarter of fiscal '23, we expect revenues to be in the range of $15.2 billion to $15.75 billion. This assumes the impact of FX will be about negative 5% compared to the second quarter of fiscal '22 and reflects an estimated 6% to 10% growth in local currency. For the full fiscal year '23, based on how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately negative 5% compared to fiscal '22. For the full fiscal '23, we continue to expect our revenue to be in the range of an 8% to 11% growth in local currency over fiscal '22, which continues to assume an inorganic contribution of about 2.5%. For operating margin, we continue to expect fiscal '23 to be 15.3% to 15.5%, a 10 to 30 basis point expansion over fiscal '22 results. I mentioned last quarter that we may see more variability in quarters as we go throughout fiscal year '23, and that's playing out as we expected, with contraction in the second quarter expected and potentially overall for H1. We continue to expect our annual effective tax rate to be in the range of 23% to 25%. This compares to an effective tax rate of 24% in fiscal '22. For earnings per share, based on the change to FX, we now expect our full-year diluted EPS for fiscal '23 to be in the range of $11.20 to $11.52 or 5% to 8% growth over fiscal '22 results. Full fiscal '23, we continue to expect operating cash flow in the range of $8.5 billion to $9 billion, property and equipment additions of approximately $800 million, and free cash flow in the range of $7.7 billion to $8.2 billion. Our free cash flow guidance continues to reflect a strong free cash flow to net income ratio of 1.1%. Finally, we continue to expect to return at least $7.1 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. And with that, let's open it up so we can take your questions. Katie?

Thanks, KC. 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?

Happy holidays. Really good results, strong results here. The one area that was a little softer was the Strategy & Consulting area, and I think you guys called that out as expected. Just thinking about Strategy & Consulting that you knew it was going to be a little bit softer, and it's becoming a little bit softer. Is that just more the move towards the cost agenda versus growth and just thinking about what we can expect there going forward?

Hi, Bryan, thanks for the question. As you mentioned, our Strategy & Consulting results for Q1 came in as expected. But let's talk about what we're seeing going forward. We do see a slight decline in Strategy & Consulting for Q2 before we will reconnect with growth in H2. And why is that for Q2? It's really a couple of things. We do see that we are going to have some impact from less revenue from smaller deals, which Julie will talk a little bit about here. Second, we continue to see our S&C practitioners focusing on high-impact transformational deals, and they're going to bleed into revenue a little bit later in the year. This is really important to our clients, but the revenue conversions are happening at a slower pace.

Yes. Bryan, maybe I want to say two points. So first of all, specifically on S&C, it’s important to understand we really have a tale of two worlds. Our S&C work is growing high single-digits to low double-digits when it's tied to areas like cloud, enterprise, and industry platforms, talent, cost reduction, and everything tied to building the core. Underneath our results, like that's growing great. The other world, right, is S&C that's tied to things like ad spend, creative marketing strategy, campaigns, and other front-office initiatives that are contracting. And that's, of course, the strength of Accenture, we've got a very broad range of services even within Strategy & Consulting and a broad range of industries. At the top line, you saw a 3% increase this quarter; there'll be a slight decline next quarter, but underneath that, you've got a lot of strength driving our results. I think that's really important to understand. But then, I want to take a step back and comment on the demand environment. KC just mentioned the impact in S&C and smaller deals. We're obviously super pleased with Q1, great growth, and we're really happy with how we see the year starting. At the same time, what do we see over the last 90 days? The macros continue to have uncertainty, and you've got GDP estimates declining over the past 90 days. Our clients clearly remain ambitious; they're committed to revamping their business. You've seen that in the 24 clients with quarterly new bookings over $100 million, which is an increase over this time last year. However, they're becoming more focused on cost and resilience. Many are having to make hard choices because the macro affects the industries differently. You've got some industries, like retail consumer goods, that are much more challenged than energy. At the same time, as we mentioned last quarter, as the macro uncertainty has increased, they're being a little more cautious. We're seeing some delays in decision-making, changes in the pace of spending, and some pausing of the smaller deals. This impacts smaller deals more than the bigger ones. We're continuing to see that big transformation focus, which impacts our revenue and profit build over the year, and that is part of what we're seeing in S&C in the second quarter. I just want to remind everyone that this is exactly the environment that demonstrates the strength of Accenture. We are so broadly diverse. You saw it in the examples I mentioned, all around the world, across industries. Who else could be in Asia doing border security, in the U.S. working with the state of Missouri on a talent and tech implementation, in Europe working with a European grocer on IT modernization, cost reduction, and customer experience? Just moving around the world, you're back into Asia, working with a telecom operator to digitize their platform and create a new customer experience. You continue to see that our strategy, which we've had for decades, is to be across industries, have a global footprint and depth and breadth of services. Managed Services is on fire because we could digitize faster, get that compressed transformation, help them access talent, and lower costs. So back to you, Bryan.

Okay. Just to – and good morning. I just add to Bryan's last question here, as on the visibility side, especially in consulting relative to Managed Services. Given, Julie, what you just said there, any change in your thinking on the mix of growth across Consulting versus Managed Services, asking for both, I guess, bookings as well as revenue here?

Yes. I'll take it. In terms of the outlook for how we see growth across our various work types, for the full year, at the top end of our range, we see Consulting growth in the high single digits, and we see Managed Services continuing to grow in double digits. Regarding outlook and bookings, we have a strong pipeline, and we are seeing continued strong pricing in that pipeline. We anticipate having a solid bookings quarter in Q2, including Consulting. It will likely be lower though than the record bookings in Consulting that we had last quarter.

Yes, we're going to continue to focus our Strategy & Consulting expertise on these platform and cloud-led transformations.

Gotcha. Okay. Perfect. Then a quick follow, if you don't mind. I heard the pricing favorable utilization looks like it's steady attrition nicely, better or lower, 13%, I think I saw on the sheet there. So just the same question on visibility with respect to cost and margin, if you're flexing or changing anything here. I know the range overall is the same, but it feels like you've got a good line of sight in terms of your costs. I just wanted to confirm that.

Yes. Sure. So I'll talk a little bit about the attrition point, and then we can get into what we're seeing overall in our costs and our visibility in that regard. So attrition was down to 13%, and I think all of you know there’s a structural pattern of attrition that typically comes down from Q4 to Q1. This year came down a tick more, and we are really pleased with that. It means we have to hire fewer replacements, leading to less recruiting costs, and you've seen that in our improvement in G&A this quarter, indicating less ramp-up for new hires. In terms of visibility, we expect to continue hiring for specific skills that we need. With upskilling, we may not need to hire as many people as we go throughout the year. But we have a deep competency in balancing supply and demand and are always focused on it. Regarding profit, we are pleased with the 20 basis point expansion we achieved in Q1 and to confirm our 10 to 30 basis points expansion for the year. As mentioned last quarter, we would be pleased to land anywhere within that range. Let me give you more color about what we’re seeing in Q2 and then the visibility for the rest of the year. I mentioned last quarter that we may see more variability in quarters as we progress through fiscal '23. That's exactly playing out. There are a few reasons for that. In Q2 overall, as you all know, it's a structurally lower profit quarter due to the holidays. For us, it's also when most of our compensation increases kick in. While we've planned for those increases, it takes time to work through our P&L. In addition, in Q2, the changes in smaller deal volumes that Julie described will impact Q2 revenue. So when you take everything into consideration, this explains why we expect a decline in operating margin in Q2 and, potentially, for H1. Most of our margin expansion will happen in the back half of the year. And why do we see that? We have a strong pipeline, and we have continued strong pricing improvements. Additionally, we have levers on how we run our business. We will focus on pricing, cost efficiencies, delivery efficiencies, and managing supply and demand with increased rigor and discipline.

I wanted to ask, Julie, a bit about the progress on compressed transformations. I think you started using that phrase about two years ago in the earlier days of the pandemic. Now, as you're working with clients looking out into 2023, can you give some color on how far they are along in the compressed transformation? Are we still only in the third or fourth inning, or are many of your clients sort of in full rollout mode? Just trying to understand how far through the process we are and how much sustained growth we can expect going forward.

Thanks, Lisa. It's a great question. There are a few ways to look at this. We saw particularly in the early days that leaders before the pandemic doubled down, becoming more ambitious. Since then, more companies have observed their competitors and have been pushed to become more ambitious themselves. I think I shared last quarter some recent research indicating that around 68% of CFOs we surveyed are working in companies with three or more transformation programs in progress in parallel. That being said, it's still very much the early days as we're just beginning to build the digital core that enables these transformations. While we've seen a big acceleration in migration to the cloud, it's still early innings, with about 35% completion. Most of the companies report that although they have signed big cloud contracts, they have not yet been able to access the services and realize the value. That's why we continue to see significant interest in our cloud business, especially Cloud First, as we provide ongoing migration support. Essentially, many companies have moved quickly but have lots more to do. This is part of our concept of total enterprise reinvention. Many companies are just beginning to undertake these more ambitious programs. We see this as a decade of transformation.

Okay. Good. Then a quick one on M&A. I think you highlighted, KC, about close to $700 million in this past quarter in M&A. Can you provide a bit more detail on what you're seeing in the environment? Have you seen some of the private valuations come in? Are you seeing an uptick in activity in that space?

Yes, great companies never come at cheap prices, is what I would say. We really focus on highly valued companies. So, we are not seeing significant differences in valuations. The broader environment may be changing, but where we're focusing, we haven't observed big differences. We think that focusing on acquiring great companies is the right approach.

I’ve noticed your strategic priorities continue to grow significantly, and they grew at the same pace, at least by the qualitative numbers you provided last quarter. Is that indicating that it decelerated at all, or is it very similar? Additionally, what percentage of revenues do those account for? It seems like the rest of the business must have decelerated a bit more from that.

Yes. Let me say first, Happy Holidays. It's good to speak with you. In terms of our strategic priorities, as you mentioned, you would expect that in a quarter we grew 15%. Overall, they did grow at a faster pace than the rest of Accenture at 15%, which is the intended goal. They account for the majority of our revenue.

Yes. As you go forward, we talked a bit earlier about parts of our business, such as customer-focused ad spending and marketing, which have faced challenges as clients reassess their priorities. You also see shifts in industry spending. For instance, we all read about challenges in communications, media, and tech. Therefore, we expect a slowdown in spending from those clients as they consider what changes are necessary. Our business diversity helps us balance here. At any given time in an environment like this, certain segments may see changed client priorities, and we aim to pivot to help address their needs. That’s why it’s so crucial to emphasize the increased focus on cost, which has been translating into our sales pipeline. This demonstrates how our breadth of services allows us to respond to our clients' current requirements.

Just one quick follow-up. You mentioned in Consulting, bookings being down. Was that sequentially or year-over-year, and is that on a constant currency basis?

Yes. Let's first talk about bookings overall. They were up by 6% in local currency but down overall in U.S. dollars due to FX headwinds. We expect a strong bookings quarter in Q2. However, I’d like to remind you that this quarter last year was our record Consulting bookings of about $11 billion. I wanted to set the expectation that while Q2 will be strong, it may not surpass the $11 billion from last year.

I want to follow up on the D&A question. I completely understand your point around valuations and your inclination to look at the best companies. Are there any specific capabilities you would be targeting especially as you're seeing clients evolve their needs in the current environment?

So a few things. Since the pandemic began, we've focused on building scale in markets around cloud, data, and AI because they're critical to building the digital core. Last quarter, we acquired something in the Nordics about scaling capabilities. We're acquiring companies like one in France focused on mainframes, which is relevant to moving some industries, like financial services, off core systems. We'd expect to continue investing in these areas. For example, we made acquisitions this quarter in cloud and cloud platform technology, as well as data and AI solutions. We view building our capabilities needed for total enterprise reinvention as a continuing emphasis.

That's great. And one last question related to DSOs. You almost always have industry-leading DSOs, but this quarter, it seems a little bit higher than prior years. Can you walk through the factors affecting this, and should we expect to see improvement? Or is this a sort of benchmark level going forward?

Yes, thanks for the question. You’re correct, we maintain industry-leading DSOs. We observed 48 days this quarter. We typically have an annual uptick from Q4 to Q1. This year, we saw a slightly larger uptick, but it's not concerning. We're confident about our DSOs decreasing by the end of the year. As noted in our free cash flow guidance, we accounted for a few days’ increase in DSO. Overall, we still regard our guidance of approximately $1.1 billion as very strong free cash flow guidance.

I wanted to follow up on the growth outlook and client behavior. I'm curious if you've seen any actual change in backlog, or have any prior booked sales been deferred? I'm curious about how much this is due to macro uncertainty versus clients dragging on new bookings?

We haven't seen any real change. What you're referencing is work that we've already sold, and we haven't observed significant changes in anything currently in our book of business regarding the macro environment. Julie, is there anything else you'd like to add?

No, what's crucial is that regardless of industry or country, the transformation focus remains. Nobody is saying they will change less. Unfortunately, companies are finding it harder to do what they desire due to various pressures. That’s where strong relationships matter because we are viewed as the trusted partner. Clients know that whatever they spend must deliver value; this has led to a flight to quality. We've observed this trend since the early days of the pandemic, and it persists. The goal of total enterprise reinvention highlights interconnected initiatives. One example is a European grocer transforming its IT, developing an ad strategy, enhancing customer experience, and lowering costs. Delivering on such complex, interrelated agendas requires significant industry expertise. This is where our resilience comes from, enabling us to pivot to meet clients' needs effectively. We're committed to ensuring our assets and solutions remain relevant to what clients require and are investing accordingly.

That's good to hear. As a follow-up, geographic and vertical growth performance was quite broad based here. Do you expect this to continue through the balance of the year? I was particularly surprised by Europe and Growth Markets outperforming North America; will that continue, or do you see it changing?

By the way, my CEO of Europe and my CEO of Growth Markets are pleased to hear that! KC, why don't you...

Yes. We do expect to see double-digit growth from Europe and Growth Markets for the full year. North America, while having a much more substantial business, is expected to grow in the mid- to high single-digit range for the year. Julie, do you have anything else to add?

Yes, North America grew 26% last year. Thus, achieving a mid- to high single-digit growth is considerable. We are very pleased with the growth outlook.

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

Let me say a good quarter in a tough environment and also Happy Holidays. I'll ask both questions together. The first is about the sequential hiring growth, as many tech companies are cutting back. I'm wondering if your positive hiring is partly a function of the rapid decline in attrition, so you might not have put the brakes on hiring yet. What should we expect for hiring? Secondly, could you comment on wage inflation?

Yes, sure. Hi, Ashwin, nice to speak with you. First, regarding our expectations for hiring, we added about 17,000 people this quarter. We will continue to hire for specific skills we need. I referred earlier to how we may not need to hire as many people throughout the year. Regarding wage inflation, as we stated during our guidance, we saw wage inflation continue. We planned for compensation increases, which are higher than previously, but that's a trend observed across industries.

Understood. Last question on bookings, which had a good overall quarter. You referenced underlying Consulting versus Managed Services a couple of times. I want to take that further to revenue conversion. Generally, Consulting is perceived as a shorter cycle with quicker revenue realization, while Managed Services has longer ramps. Is that still a fair distinction looking at what you signed? How might that affect your calendar year layout?

Yes. Here’s how I see it. When comparing Managed Services to Consulting, Managed Services has generally more work sold, allowing for a benefit even if they are longer deals. The work we sell during a quarter translates into revenue somewhat faster than Consulting, which varies significantly. Overall, if you look back, our mix of Managed Services and Consulting doesn’t change much historically through the quarters.

Yes. This year, the more significant shift that we have identified is simply the volume of smaller deals that are influenced by macro conditions. The larger transformational deals, some in Consulting and some in Managed Services, affect revenue realisation differently.

Thank you very much, and happy holidays. In closing, I want to thank all of our shareholders for your continued trust and support and all of our people for what you do every day. I'd like to wish everyone a happy and healthy holiday season. Thank you.