Accenture plc - Class A (ACN) — Q3 2023 Earnings Call Transcript

Thank you, operator, and thanks everyone for joining us today for our third quarter fiscal 2023 earnings announcement. As the operator just mentioned, I am Katie O’Conor, 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 third quarter. Julie will then provide a brief update on our market position before KC provides our business outlook for the fourth 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 the call. During our call today, we will reinforce 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, Katie, and thank you to everyone for joining today. I want to extend my gratitude to our people around the world for their dedication and commitment, which is how we are able to consistently deliver 360-degree value for all our stakeholders: our clients, our people, our shareholders, our partners, and our communities. Turning to the quarter, I will start with the financials. While the macro environment continues to be uncertain overall, in Q3, we delivered solid revenue and sales with very strong profitability and free cash flow while continuing to significantly invest in our business. Now getting into the highlights, we had bookings of $17.2 billion, including 26 clients with quarterly bookings greater than $100 million, bringing the total year-to-date to 85, which is 11 more than the same time last year. We delivered revenues of $16.6 billion, representing 5% growth, with North America growing 2%, Europe at 7%, and growth markets at 9%, all in local currency, bringing us to $48.1 billion of revenue at 10% growth fiscal year to date. Revenues were impacted by lower than expected small deal sales, especially in strategy and consulting, and systems integration and lower than expected results in the communications, media, and high-tech industry group for the quarter. Excluding the communications, media, and high-tech segment, our business grew 8% globally, 7% in North America, 9% in Europe, and 10% in the growth markets in local currency. We expanded adjusted operating margin by 20 basis points, grew adjusted EPS 14% over last year, and delivered free cash flow of $3.1 billion. Over the past 11 quarters, we have operated at 91% or higher utilization, leveraging our digital enterprise to connect our sales, staffing, hiring, and skill needs to make proactive real-time decisions. We are on track with our business optimization actions to lower costs in fiscal 2024 and beyond, while continuing to significantly invest in our business with five acquisitions in strategic areas this quarter, bringing the total investment in acquisitions year to date to $1.3 billion. We invested in Cloud, Data, and AI with the acquisition of Nextira in North America, Objectivity in the UK, and Einr in Norway. We also invested in sustainability with the acquisition of Green Domus in Brazil, and in modern ERP services with Bourne Digital in Australia. We continued to take market share, growing about two times the market. Now turning to other aspects of the 360-degree value we delivered this quarter. We continue to invest in learning for our people with 9 million training hours in the quarter, representing an average of 13 hours per person, giving them the skills to grow as our clients' needs evolve. We're incredibly pleased that we were recognized as a top 10 place to work in seven countries: Argentina, Brazil, Chile, India, Mexico, the Philippines, and the U.S. Collectively, these countries represent nearly 70% of our workforce. Vibrant communities are important for our business success, and digital scaling helps ensure vibrant communities thrive. In collaboration with L'Oreal and our NGO partner, the Shambu Foundation, we are supporting women in India to build digital literacy skills alongside the technical skills needed to access jobs in the beauty industry. Together, we have collectively created sustainable livelihoods for 2,500 women across 10 states in India, accelerating equality, delivering social impact in the community, and continuing our commitment to embed diversity and inclusion in everything we do. Finally, this year, we are proud to have earned the number 22 position on Brand Z's prestigious top 100 most valuable global brands list, our highest rank to date. Over to you, KC.

Thank you, Julie, and thanks to all of you for taking the time to join us on today's call. We are pleased with our third quarter results and we are on track to deliver or exceed all aspects of our guidance provided in September on an adjusted basis. Now let me summarize a few of the highlights for the quarter. Revenues grew 5% in local currency, driven by high single or double-digit growth in seven of our 13 industries. While we've been highlighting the pressures in our communications, media, and technology industry group all year, this quarter the revenue was lower than expected with a decline of 8% in local currency. We delivered adjusted EPS in the quarter of $3.19, reflecting a 14% growth over the EPS last year. Adjusted operating margin was 16.3%, an increase of 20 basis points over Q3 last year and includes continued significant investments in our people and our business. Finally, we delivered free cash flow of $3.1 billion and returned $1.5 billion to shareholders through repurchases and dividends. Year to date, we have invested $1.3 billion in acquisitions, primarily attributed to 20 transactions. With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $17.2 billion for the quarter, representing growth of 4% in local currency with an overall book to bill of 1.0. We were very pleased with our 26 clients with quarterly bookings over $100 million. Consulting bookings were $8.9 billion with a book to bill of 1. Managed services were $8.3 billion with a book to bill of 1.1. Turning now to revenues, revenues for the quarter were $16.6 billion, a 3% increase in U.S. dollars and 5% in local currency, reflecting a foreign exchange headwind of approximately 2.5% compared to the approximately 3.5% headwind provided in our business outlook last quarter. Consulting revenues for the quarter were $8.7 billion, a decline of 4% in U.S. dollars and 1% in local currency. We see the same level of consulting decline in Q4. Managed services revenues were $7.9 billion, up 10% in U.S. dollars and 13% in local currency. Taking a closer look at our service dimensions, technology services grew high single digits. Operations grew double digits, and we expect high single-digit growth in Q4. Strategy and consulting declined high single digits this quarter and we see declines continuing in Q4. Regarding our market share, we extended our leadership position with growth estimated to be about two times the market, which refers to our basket of publicly traded companies. Now as a reminder, we assess market growth against our investable basket, which is roughly two dozen of our closest global public company competitors, which represents about a third of our addressable market. We used a consistent methodology to compare our financial results and theirs, adjusted to exclude the impact of significant acquisitions through the date of their last publicly available results. Turning to our geographic markets. In North America, revenue growth was 2% in local currency driven by growth in Public Service for our U.S. federal business, Health, and Utilities. These increases were partially offset by declines in Communications and Media, High-tech, Software and Platforms, and Banking and Capital Markets. In Europe, revenue grew 7% in local currency, led by growth in Banking and Capital Markets, Industrial, and Public Service. Revenue growth was driven by Italy, Germany, and France. In Growth Markets, we delivered 9% revenue growth in local currency, driven by growth in Public Service, Chemicals and Natural Resources, and Banking and Capital Markets. Revenue growth was driven by Japan. Moving down the income statement. Gross margin for the quarter was 33.4% compared with 32.9% for the same period last year. Sales and marketing expense for the quarter was 10.5% compared to 10.3% for the third quarter last year. General and administrative expense was 6.5% compared to 6.5% for the same quarter last year. Before I continue, I want to note that in Q3 we recorded $347 million in costs associated with the business optimization actions we announced last quarter, which decreased operating margin by 210 basis points and EPS by $0.42. This quarter, we also recognized a gain in our investment in Duck Creek Technologies, which impacted our tax rate and increased EPS by $0.38. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.7 billion in the third quarter and adjusted operating margin was 16.3%, an increase of 20 basis points from the operating margin in the third quarter of last year. Our adjusted effective tax rate for the quarter was 24% compared with an effective tax rate of 27.1% for the third quarter last year. Adjusted diluted earnings per share were $3.19 compared with diluted EPS of $2.79 in the third quarter last year. Days sales outstanding were 42 days compared to 42 days last quarter and 44 days in the third quarter of last year. Free cash flow for the quarter was $3.1 billion, resulting from cash generated by operating activities of $3.3 billion, net of property and equipment additions of $142 million. Our cash balance at May 31 was $8.5 billion compared with $7.9 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the third quarter, we repurchased or redeemed 2.8 million shares for $789 million at an average price of $279.65 per share. As of May 31, we had approximately $3.5 billion of share repurchase authority remaining. Also in May, we paid a quarterly cash dividend of $1.12 per share for a total of $708 million. This represents a 15% increase over last year. Our Board of Directors declared a quarterly cash dividend of $1.12 per share to be paid in August, a 15% increase over last year. So in closing, we remain committed to delivering on our long-standing financial objectives, growing faster than the market and taking market share, generating modest margin expansion and stronger earnings, while at the same time, investing at scale for long-term market leadership, generating strong free cash flow, and returning cash to shareholders. Now let me turn it back to Julie.

Thank you, KC. As we look at demand in our larger deals, we continue to see two common themes that I've highlighted before. First, the rapid rise of generative AI interest among our clients highlights yet again that all strategies lead to technology, particularly cloud, data, AI, and security. And second, companies remain focused on total enterprise reinvention as they execute compressed transformation to achieve lower costs, stronger growth, more agility, and greater resilience faster. Now let me give you more color on the quarter to bring this to life. Starting with the digital core, our cloud momentum continues with very strong double-digit growth in Q3 as clients prioritize building a strong and secure foundation for reinvention. We have been working with ENI, a global energy company, for more than 30 years. Now we are helping them as they continue their hybrid cloud transformation and embark on a total enterprise reinvention strategy with a focus on sustainability, digital transformation, and security. We are managing their IT infrastructure and telecommunications integration and helping implement new operating models, all hosted in the ENI green data center, one of the largest data bunkers in the industry to securely hold the company's data. The ENI green data center houses one of the most powerful nongovernmental supercomputers in the world, enabling the highest use of data across the value chain from exploration and production to the energy of the future. New operating models will help exploit the full value of data, AI, and cybersecurity for faster adoption of new business processes. This transformation is the first step toward creating a secure digital core that will accelerate ENI's energy transition, drive innovation in AI and R&D, and build even greater resilience. Clients are also working with us to undertake multifaceted compressed transformation that utilizes all of our deep industry and functional expertise in our services, along with our outstanding technology services. We are helping DuPont, a global multi-industrial specialty products company, with a compressed transformation to standardize their finance processes and achieve operational excellence. Building on our trusted relationship of over 35 years, we are now supporting our client with its strategic pivot to innovation-based growth across electronics, sustainable water and protection solutions, industrial technologies, and next-generation automotive. We've been supporting their transformation to an agile cloud-based IT infrastructure to maximize data access, drive efficiency, and modernize their landscape. Our work with DuPont is focused on achieving greater resilience, reducing costs, and increasing revenue growth while shaping its portfolio through M&A with industry-leading innovation for long-term success. With companies expanding their digital footprint and cyber risk widening, security continues to rise in importance as a fundamental part of the digital core, with very strong double-digit growth in Q3. We are working with a food and beverage company to strengthen their cybersecurity and prevent vulnerabilities along the supply chain. Building on previous operations transformation work, we are now providing managed security services, which will cover perimeter security, detection and response, as well as threat intelligence and monitoring of dark web activities. We will also provide day-to-day identity, data, and privacy management, helping provide a holistic security approach for our client. We're helping a global universal bank future-proof their cryptographic landscape and corresponding risks for over 1,000 applications, procedures, and data. Based on the analysis, we will develop and implement an end-to-end mitigation strategy, which includes evaluation of solution vendor strategies, mitigation principles, as well as change management procedures. We will also design and implement post-quantum methods and new architecture blueprints, which will help scale the solution, all to help the bank achieve post-quantum computing readiness. Our Managed Services continued to grow double digits in Q3, demonstrating the relevance of our approach to run, digitize, and transform our clients' operations. We're providing a global health care and insurance company with managed services to help run its complex claims and membership processes. As part of our long-standing relationship with the company, we will improve the efficiency and quality of these tasks and simplify the customer journey, ensuring members can easily access the support they need when they need it. Its employees will now have more time to focus on boosting customer satisfaction by better serving its millions of customers around the world. A new cost solution has also been introduced to determine fair and accurate pricing for the company when purchasing services and products from vendors to reduce costs across the business. We recently worked with a major media brand to launch a streaming platform that will help attract new subscribers, expanding their content portfolio and powering targeted broadcasting and advertising offerings, all while lowering costs. We helped engineer aspects of the new platform from the content supply chain to the player experience, ensuring that customers have a seamless viewing experience across all devices and platforms and enabling the company to use data insights to continually enhance its platform. We delivered the program as part of a managed services arrangement, demonstrating the industry and engineering innovation that we bring to help clients reinvent their business with cloud, data, and AI. As clients continue to reimagine and prioritize customer experience, our Song division experienced strong double-digit growth again in Q3. We are partnering with Virgin Media O2, a British media and telecommunications company, to reimagine their customer experience. Accenture Song will design a new, more predictive and personalized customer journey, enabled by an AI-powered cloud-based digital core. Customer care journeys will be omnichannel, combining customer calls, chat, and instant messaging to increase first-time resolution and upselling, leading to greater customer satisfaction. We will also deploy our managed services capabilities to support contact center activity using AI to provide timely agent assistance and route calls intelligently to drive precision and reduce call volume. Our work will help build brand loyalty by supporting Virgin Media O2's mission to be a more customer-first business. We see continued demand for our Industry X capabilities, which grew strong double digits. We are working with one of the world's leading consumer products companies on a transformation of its manufacturing practices to achieve energy savings. We are developing a comprehensive program to collect and analyze energy consumption data from their production plants and use data-driven analytics to identify energy savings and greenhouse gas reduction opportunities. We are also helping to track energy efficiency gains and deliver value through operational improvements in the manufacturing process. As clients progress on their total enterprise reinvention journeys, talent is at the forefront. We are working with an international consumer goods and services provider in the European market on a digital transformation of its core human resources organization and talent acquisition processes. We will design and implement an approach that includes program management, process design, training and development, and additional services. Together, we will create greater efficiencies in the human resources function, leading to a data-driven culture focused on better employee experiences. Now, stepping back, our strategy is to be at the center of our clients' business and help them continuously reinvent themselves to reach new levels of performance and to set themselves apart as leaders in their industries. Our clients are at different starting points; all are interested in AI, particularly generative AI. But most recognize the work ahead of them to get their data, people, and processes ready for AI. To reinvent requires a strong modern digital core. As they embark on this journey, clients are looking to us for unmatched global scale, deep industry and functional knowledge, and a breadth of services from strategy and consulting to technology to managed services. With that context, I want to turn to generative AI and AI more broadly. No previous technology wave has captured the attention of leaders and the general public as quickly as generative AI. We are now embarking on the age of AI, and companies will need to reinvent how they operate with AI at the core. And it is also early. Think of it as the cloud over a decade ago. Foundation models and products based on them are still maturing, with many products announced but fewer at the general availability stage and ready for wide deployment. With our position as the largest partner with most of the major technology companies, we are at the center of helping our clients navigate their choices in the evolving landscape. We've been investing in AI for years. While it is early days, we see generative AI as a key piece of the digital core and a significant catalyst for even bigger and bolder total enterprise reinvention going forward. In fact, in a survey of global executives that we completed just last week, 97% of executives said generative AI will be transformative to their company and industry, and 67% of organizations are planning to increase their level of spending in technology and prioritize investments in data and AI. Our approach to AI is clear. Just as we have successfully done with cloud, we are investing to take an early lead and position ourselves for the opportunity ahead. Last week, we announced a $3 billion investment in AI, a significant step to accelerate our clients' reinvention journey, which includes us doubling our data and AI workforce from 40,000 to 80,000 strong, including the expansion of our center for advanced AI that today has over 1,600 generative AI experts, bringing new assets such as our AI navigator for enterprise to life and developing new GenAI-powered industry solutions. Across this, we are leading with responsible AI to be the most trusted source in helping our clients mitigate the risks as they drive value. This isn't just about tomorrow. We have sold over 100 generative AI projects over the last four months. Let me give you a flavor of these across a few industries. We are working with Mitsui Sumitomo Insurance, a Japan-based subsidiary of MS&AD Insurance Group Holdings, to improve customer service by using generative AI and simplify operations for accident response. The generative AI solution will draw from the company's knowledge base, including policy causes and related laws and regulations, which will generate appropriate response plans in a timely manner, dramatically improving the accuracy and speed of explanations to customers. We're working with a global broadcasting company to explore how generative AI can drive audience engagement and growth through deeper and more personalized customer experiences. Together, we recently launched testing that leverages generative AI and large language models to explore how we can automatically create content for the company's customer-facing platforms. The content will help enhance engagement, grow the consumer base across new coverage areas and channels. We believe it will demonstrate how generative AI can be used to create content at scale for a wide variety of experiences and events. We are working with Linda Basel Industries, a leader in the chemicals industry, to increase its enterprise data and analytic capabilities and help unlock new value. We will develop a strategic data-led digital transformation program across multiple parts of their business and embed new capabilities in areas like sustainability, customer data, digital manufacturing, and generative AI to drive more insightful and predictive decision-making. Companies are coming to us for help with the strategy in the business case to understand how and where to apply AI, and generative AI specifically, to get their digital core in shape, to help assess which ecosystem partners and models to use, to rewire their processes to be AI-driven, to upgrade and reskill their talent with new ways of working, and to navigate the risks and challenges responsibly. In short, we believe clients need our full range of services, and we are well-positioned to be the leading trusted AI partner for the enterprise as they move from exploration to experimentation to reinvention. Over to you, KC.

Thanks, Julie. Now turning to our business outlook. For the fourth quarter of fiscal 2023, we expect revenues to be in the range of $15.75 billion to $16.35 billion. This assumes the impact of FX will be about flat compared to the fourth quarter of fiscal 2022 and reflects an estimated 2% to 6% growth in local currency. For the full fiscal 2023, based upon how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately negative 4% compared to fiscal 2022. For the full fiscal 2023, we now expect revenue to be in the range of 8% to 9% growth in local currency over fiscal 2022, which assumes an inorganic contribution of about 2%. We continue to expect business optimization costs of $800 million in fiscal 2023 to reduce EPS by $0.96. The gain on our investment in Duck Creek Technologies will increase EPS by $0.38. Our guidance for full year 2023 excludes these impacts. For adjusted operating margin, we now expect fiscal year 2023 to be 15.4%, a 20-basis point expansion over fiscal 2022 results. We now expect our adjusted annual effective tax rate to be in the range of 23.5% to 24.5%. This compares to an effective tax rate of 24% in fiscal 2022. We now expect our full-year adjusted earnings per share for fiscal 2023 to be in the range of $11.52 to $11.63 or 8% to 9% growth over fiscal 2022 results. For the full fiscal 2023, we continue to expect operating cash flow to be in the range of $8.7 billion to $9.2 billion. We now expect property and equipment additions to be approximately $600 million and free cash flow to be in the range of $8.1 billion to $8.6 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.1 to 1.2. 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. 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?

Hey, good morning. Thanks for taking my question. Let's dive in on the Strategy and Consulting. I know it was a high single-digit decline this quarter just looking back at your comments from last quarter. I think that came in a little bit softer than you expected, but then also called out many new projects coming in related to generative AI and other technologies. Can you just talk a little bit about kind of what's changed, what that evolution looks like, and kind of what's your confidence level in the time horizon that we'll see Strategy and Consulting improve over the next couple of quarters? Thank you.

Sure. Thanks, Lisa. So I'll first provide some color on that. The big difference in our expectations from last quarter and where we ended up really was all in the small deals. They came in lower than expected, and we saw that extend to Europe and the Growth Markets. Now that was both in Strategy and Consulting and systems integration. But that's the big reason that we have a difference in sort of where we thought we would be this quarter. Our job is to continue to pivot to higher growth areas, and we're working on that in digital manufacturing, supply chain, data, and AI. But that will take a little time. What we're seeing is that there's a lot of extensions going on in small deals, but it's the newer small projects, while at the same time, we continue to have very strong bookings and interest in huge opportunities in transformation. So I think our clients are kind of holding back on the small deals and doing the bigger projects, which obviously convert to revenue differently. You see where Strategy and Consulting makes a significant difference there, like in the DuPont example that I gave in the script, where you have to have so much expertise in the industry as well as the functions, along with technology. What that means is that it is going to take a little while for the turnaround. We don't want to go to next year without understanding how Q4 evolves, and KC will provide a little color on how we are thinking about our Q4. What I would also say is that things like generative AI are a big opportunity, but it is early. So we have done 100 projects in the last four months. That represents about $100 million in sales. That's kind of the average size of those projects. So we will continue to pivot there, but it just takes a little bit of time. Why don’t I let KC give you a little color on how we're thinking about Q4.

Yes. Great. Thanks, Julie. So let me kind of maybe step back and look at Q4 and the overall guidance for the full year. First, I did mention this, but I just want to reiterate that we are on track for our business optimization actions. We will do about $800 million of cost for the full year 2023. Additional color is that for Q4, as we look at bookings, we think they'll be about the same as what we did in Q3 of this year and will have about the same complexion. Julie talked a bit about small deals. What I will tell you in terms of our revenue guidance for Q4, which is 2% to 6%, at the top end of our revenue guidance, that reflects some improvement in small deal performance, while the bottom end allows for some further deterioration. We commented also in our scripts about the communications, media, and technology group. Within our overall range of 2% to 6%, we do allow for CMT to get a little bit worse. To bring it on home as it relates to North America, which was 2% growth this quarter, it would likely be flat around the midpoint of our guidance range and reflect a slight decline at the bottom end of our range. As Julie mentioned, obviously, we will provide more color, as I always do in September, when we discuss next year and we see how Q4 plays out.

Terrific. Thank you. And then maybe for my follow-up, a more strategic question. I mean, Julie, you talked a lot about generative AI in the prepared remarks, particularly around the revenue opportunities that you're seeing from your clients. But can you give your view on how you see generative AI impacting the IT services industry overall? A lot of people make an analogy to the impact of offshoring on the industry and other big changes in the operations and the way IT services are done. Can you give your latest perspective on that, and how you see it affecting Accenture and your industry more broadly? Thank you.

Sure. Yes. And I think another good analogy actually is more about SaaS, right? As we discussed when SaaS came, there were concerns about how it would interrupt IT services. Obviously, it has been a huge opportunity. If you think about this, there are big opportunities for us to help our clients in two other areas. First, the opportunity to help our clients; second, the opportunity for us to improve the delivery of services to our clients. That we think is a huge opportunity for us. In the context of Managed Services every year, we have to find at least 10% productivity. We talk a lot about our platform, things like myWizard and that. That's all AI-enabled. Just year-to-date in operations, not using generative AI, we have automated 13,000 jobs, and then we've reskilled those people and redeployed them. Our business model requires us to get at least 10% productivity every year. As we get to the maturity of automation and AI before generative AI, we expect generative AI to help us maintain that 10% productivity year in and year out. In the managed services area, we see that as an ability to continue doing what we must do as kind of the next generation of technology. The area we are excited about is in software development, which is more around our systems integration and big transformations around platforms because while we do automate there, generative AI may provide a real opportunity to facilitate even more. Our strategy is to deliver compressed transformation. So the more we can find ways to deliver faster and with reduced cost, that's going to be a significant differentiator. While these technologies are still early, we are doing a lot of experimentation now. It's great for things like documentation, but complex integrations and highly architected systems, which is what large enterprises do—generative AI isn't there yet. It will take some time. The cost aspect is also unclear. Many studies, including our own, examine possible uses, but since the products aren't available yet, it’s more expensive, and the actual ROI remains uncertain. So we believe there will be new kinds of productivity, especially in consulting and systems integration, but it’s still early days. We are investing $3 billion over the next three years because we view this as a major opportunity, similar to our earlier cloud-first moment, where we moved early and invested at scale.

Thank you and good morning both. I guess…

Good morning, Ashwin.

Hi. Can you hear me?

Yes.

I was hoping you could share more details. I understand you mentioned you'll discuss fiscal 2024 in September as usual, but that seems to be a key question for many. Can you elaborate on your planning process, considering the various factors at play like the macro environment, AI developments, headcount trends, and the challenging comparisons in the first half? That would be very helpful.

Sure. So just a few things, Ashwin. The most important thing right now is to stay close to our clients and really understand their needs. Our clients need ways to get value in the short term as well as to transform. Therefore, we are working hard on finding new ways to deliver value faster to them. That includes our work on generative AI, which is significant. Over the next quarter, we'll be developing new opportunities, campaigns, and ways to implement our investments in generative AI to help us address the small deal pressure we are experiencing. We don’t have a clear perspective on the economy and how quickly clients will become comfortable; we've seen this caution across multiple industries. Therefore, we're focusing on the transformations that create a solid foundation of resilience in our business. It's essential that we maximize small deals while also ensuring we remain the transformation partner of choice. That is a core aspect of our strategy.

Thank you for that. My next question is regarding hiring expectations. There’s a near-term aspect to hiring and a longer-term perspective, so let me ask both. Near-term, based on what you said regarding the macro environment and the headcount cuts announced a couple of quarters back, what should we expect in the next one or two quarters? And the longer-term question is: with AI, do you think that headcount growth will dissociate from revenue growth trends over time?

Let me just address the second one first. We have talked about this for years, because AI has been such a big part of our strategy and automation. We will continue to manage headcount as we have been doing for years. There will be no real change in that since we have a digital enterprise system to monitor what we need in terms of sales. A critical aspect is that we can reskill people as they are freed up, and we can adjust hiring accordingly. With high attrition in our industry relative to other sectors, we maintain flexibility over time to effectively manage hiring. That's how I envision it. As for hiring, we saw a year-over-year increase of about 3% this year, with 11 consecutive quarters at 91% utilization. Therefore, you should expect that every quarter we will carefully manage that headcount based on observed growth and our ongoing ability in this regard.

That's right. And I would just add, particularly with Q4, as Julie mentioned, we did not add any new heads between Q2 and Q3, which was expected. For Q4, we do not foresee a need to grow overall headcount as we continue to focus on automation and reskilling.

Hi. Thank you so much. Good morning, everyone. I just want to follow up on the small deal outlook regarding Lisa and Ashwin's question. What about large deals? Can that momentum keep going? I noticed you've increased from about 17 to 26 large deals year-over-year. I'm just curious about...

Yes, large deal momentum is continuing.

Yes, how does that look going into the fourth quarter? Are signed deals converting on time?

As KC said earlier, our bookings are expected to be about the same, which includes a lot of momentum in large deals. We saw 26 clients with bookings over $100 million this quarter. We're ahead of last year by 11 at this point. We continue to see that momentum, which is quite exciting. This demand is being driven by factors like generative AI as it accelerates the need for larger projects. This shift may be affecting smaller deals since there is increased interest in larger transformations.

No, I think that's it.

So regarding AI, you mentioned the cloud-first strategy. Reflecting on that, three years ago, you made a $3 billion investment in cloud technology, which proved to be very successful. I'm wondering if you anticipate a similar return on the $3 billion you're investing in AI. How should we evaluate that, and will the returns materialize differently?

Tien-Tsin, that's a good clever way to try to get us to talk about more of the future. But what I would say is we've got a great track record of investing and obtaining great returns. We believe that this investment will pay off well.

Hi. Thanks, guys. Just wanted to start actually picking up a little bit on Tien-Tsin's question around the larger deals. It sounds like that's going to persist with strength in Q4. And I think that will be at least a few quarters in a row at that point of those larger deals showing relative strength. Can you just talk qualitatively about to what extent those provide a foundation for top-line growth in fiscal 2024? I would assume that those deals generally ramp to full run within, what, two to three quarters or so?

In terms of our larger deals, the timeline for how they fill in varies depending on the type of work, particularly for managed services, and larger deals can extend into another fiscal year. No real change in how we've experienced bookings filling in by sales category size. We have a good foundation as we look ahead primarily due to the transformational deals being booked this year. That said, the smaller bookings are also essential for growth.

Totally understand, totally understand. Let me switch over to bookings just for a follow-up. And by the way, thank you for the level set on AI. It's not too surprising that just a tiny fraction of your total bookings are coming from AI, given how it's still early days. But I wanted to ask about the Managed Services bookings. Just curious how they came in versus your internal expectations for the quarter, understanding it can be lumpy. But it does seem like, looking ahead to Q4, the managed services bookings will slow a bit on an LTM basis based on some of the commentary that you've provided around Q4 bookings mix.

We are very pleased overall with our Managed Services bookings. They were up 9% this quarter and are up 22% on a year-to-date basis, so we are very satisfied with the bookings and revenue results. We also have a strong book-to-bill ratio trailing at 1.1. For Q4, we expect to see a similar structure of booking types within the same mix. I would also like to highlight the continuing strength in our operations business, which is very strategic as clients focus on digitizing their core and cutting operational costs.

Hi, guys. Good morning. Also, just kind of a follow-up on generative AI and the understanding and timing. I get that it's early, but the big question everybody is asking is how long will it take before it moves the needle in bookings and revenue? Is that a couple of years out still? Or is the rapidness of the use of the technology likely to push that earlier than a typical technology wave?

Well, Bryan, generally, we view generative AI is moving faster than the cloud, which took more like a decade. However, I would focus on the distinction between pure generative AI and the growth related to companies needing to get their data organized effectively. Our research indicates that only 5% to 10% of companies are mature regarding both data and AI, and they will benefit from generative AI's advantages. About half of companies have not yet initiated their data or AI journey, which positions where we expect growth will stem from, particularly in helping to organize data accurately and facilitate the cloud migration process. Therefore, while generative AI will most certainly play a part in this growth, the essential focus will be on enabling companies to update and organize their digital infrastructure, while we also form the right business cases with our technology partners. In the near term, we anticipate growth primarily in accelerating the migration of the digital core, which gives us confidence in ongoing large transformational deals.

No, that's helpful. As a follow-up, are there M&A opportunities of scale to grow in generative AI? Or is it still too early days, so there's not much M&A potential available?

It's still early. There are many startups emerging, and we are monitoring them. Our major asset is training; we have already trained another 1,000 people this past quarter in generative AI. Since 2019, we have required our 700,000 employees to take a course on AI, providing a strong training foundation. We believe organic growth will dominate the landscape, particularly because data and AI acquisitions at a substantial scale are currently limited. We use AI to scale software development, our industry expertise, and digital expertise effectively.

Hi, guys. You sometimes comment about pricing and contract profitability. I wanted to ask if you could provide an update on pricing and contract terms, particularly on a like-for-like basis in both consulting and outsourcing. Thanks.

Yes, Rod. Let me address pricing and what we've been seeing. When we talk about pricing, we define that as contractility or the margin on the work that we sell. After five quarters of consecutive improvement in pricing, we mentioned last quarter that pricing has stabilized. This quarter, we see that pricing is lower in some areas of our business. I continue to be very pleased with how we manage pricing while navigating the more challenging wage environment we've encountered over the last few years.

Okay, great. Just to wrap up, as the consulting business has slowed some here, can you talk about which demand themes have slowed the most and maybe the outlook for those themes, across various solution areas like cloud, ERP, security, and data? Are there particular themes that have slowed the most?

Yes. On our consulting side, the slowdown primarily relates to the smaller deals. For the larger transformations, we still see strong demand. We aren’t seeing any significant slowdowns in any sector such as moving to the digital core, cloud migrations, etc. Instead, the challenge lies in initiating new projects at this time. I expect demand for these areas to return as client caution decreases.

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

Thanks very much. Just a couple of follow-up questions from me here. First, on AI and AI-related projects. How do you envision pricing, project constructs, terms, and statements of work to change with the introduction and adoption of generative AI generally?

We're not anticipating any significant changes in those areas.

Got it, got it. You mentioned, in reference to generative AI, that the inorganic opportunities are pretty small right now and still in early stages. How are you thinking about inorganic strategies more generally going forward? Should we expect ongoing, sustained, and stable levels of inorganic contribution? Or should we expect changes as expectations and emphasis shift a bit more to AI?

No shift in our views on inorganic growth, which is a core part of our business model. We expect to derive about 2% of our revenue growth from inorganic this year, which remains a stable part of our strategy. The shift to AI represents an acceleration of opportunities arising from clients' business transformations more than a dramatic change in how we approach inorganic opportunities. Our growth priorities in cloud and AI remain significant moving forward.

Great. Well, thanks, everyone. In closing, I want to thank all of our shareholders for your continued trust and support, and all our people for what you are doing for our clients and for each other every day. Thanks, everyone, for joining. We look forward to being back together in a quarter.