Accenture plc - Class A (ACN) — Q4 2023 Earnings Call Transcript

Thank you, operator, and thanks everyone for joining us today on our fourth quarter and full 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 both the fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the first quarter and full fiscal year 2024. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we 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, Katie, and everyone joining us. And thank you to the approximately 733,000 Accenture people, who have worked hard to be at the center of our clients' business across our fiscal year '23. Our laser focus on creating 360-degree value for our clients and all our stakeholders is reflected in our overall strong results for the year. With record bookings of $72 billion, we had a record 106 clients with quarterly bookings greater than $100 million in FY '23, up from 100 last year. We now have 300 Diamond clients, our largest client relationships, an increase of 33 from last year, demonstrating yet again the depth and breadth of our capabilities and the trust our clients have in us. We delivered revenues of $64 billion for the year, representing 8% growth in local currency, while continuing to take market share. We expanded adjusted operating margin by 20 basis points and delivered adjusted EPS growth of 9%, while continuing to significantly invest in our business and our people with capital deployed of over $2.5 billion across 25 acquisitions, $1.3 billion in R&D assets, platforms, and industry solutions, and $1.1 billion invested in the training and development of our people. And we generated free cash flow of $9 billion, allowing us to return over $7 billion of cash to shareholders. And we are delivering a little ahead of schedule on our business optimization actions we announced in March to reduce structural costs to create greater resilience. We also continue to attract, retain, and inspire outstanding people through our talent strategy. We're making progress toward our commitment to Net Zero by 2025, and we invested in our communities to help ensure we have vibrant places where we work and live. I will give more detail a little later in the call. Taking a step back, coming off two fiscal years of double-digit growth and a truly extraordinary FY '22, we are very pleased with our FY '23 results and the moves we have made to optimize our business. We are also rapidly taking an early leadership position in generative AI, which will be an important part of the reinvention of our clients in the next decade. Last quarter, we shared that we had sold 100 projects with roughly $100 million in sales over the prior four months. Demand accelerated in Q4 with another approximately $200 million in generative AI sales to bring our total to over $300 million for the year. We also are embracing the use of generative AI in our own delivery of services and the way we work across Accenture. As we reflect on how our market has developed over the last year, we and our clients have had to navigate a macro environment that is tougher than we anticipated at the beginning of FY '23. While it's played out differently across markets and industries, we have seen greater caution globally, with lower discretionary spend, slower decision-making, and in particular for us, a significant impact from the challenges the communications, media, and tech industries have faced. For example, in Q4, where we grew 4% in local currency, if we exclude CMT, we grew 7% globally, 6% in North America, 9% in Europe, and 8% in growth markets. Against that backdrop, as we enter FY '24, we remain laser-focused on creating value for our clients. While the pace of spending has changed, the fundamentals have not. All strategies continue to lead to technology. Companies will need to reinvent every part of their enterprise using technology, data, and AI to optimize operations and accelerate growth. To do so, they must build a digital core. We are continuing to see significant demand in areas like cloud migration and modernization, modern ERP and data and AI, and the emergence of generative AI in particular, all of which represent areas of great opportunity. And it's still early. For example, we estimate that only 40% of workloads are in the cloud today, only one-third of clients have modernized their ERP platforms, and less than 10% have what we define as mature data and AI capabilities. We believe helping build a strong digital core and then using it to reinvent will be the drivers of our growth. Our ability to advise, shape, and deliver value-led transformation, leveraging the breadth of our services and industry expertise from strategy and consulting to technology, along with our privileged position with our ecosystem partners, is what makes Accenture unique. And you can see this unique positioning in the number of our Diamond clients, clients who turn to us for large-scale transformation.

Thank you, Julie, and thank you all for joining today's call. We are satisfied with our fourth quarter results, which met our expectations and concluded a successful year for Accenture. Our outcomes highlight the diversity of our business and demonstrate our disciplined management, which drives substantial value for our shareholders. I will start by sharing some key highlights from the quarter. Revenues increased by 4% in local currency, led by high single-digit or double-digit growth in five of our 13 industries. As we mentioned last quarter, we anticipated some challenges in our Communications, Media, and Technology (CMT) sector, resulting in a 12% decline in local currency this quarter. Excluding CMT, our global business grew by 7%. We achieved an adjusted EPS of $2.71 for the quarter, reflecting a 4% increase from last year. Our adjusted operating margin was 14.9%, up 20 basis points from Q4 last year, including significant investments in our workforce and business. We also reported free cash flow of $3.2 billion, supported by effective management of days sales outstanding. Now, let's go into more details. New bookings reached $16.6 billion for the quarter, showing a 10% decline in local currency, with an overall book-to-bill ratio of 1. Consulting bookings were $8.5 billion, also with a book-to-bill of 1. Managed services bookings stood at $8.2 billion, maintaining a book-to-bill ratio of 1. Looking at revenue, it was $16 billion for the quarter, a 4% rise in both US dollars and local currency, indicating ongoing market share growth. We compare market growth against an investable basket of around two dozen of our closest global competitors, which represent about a third of our addressable market. We apply a consistent method to compare our financial results to theirs, adjusted to exclude the effects of significant acquisitions through their latest results on a rolling four-quarter basis. Consulting revenues for the quarter were $8.2 billion, reflecting a 2% decrease in both U.S. dollars and local currency. Managed services revenue was $7.8 billion, up 10% in both currencies. In our service dimensions, technology services saw mid-single-digit growth, operations had high-single-digit growth, while strategy and consulting experienced a mid-single-digit decline. Regarding our geographic markets, North America reported a 1% revenue growth in local currency, attributed to gains in public services, health, and utilities, though offset by declines in communications, media, software and platforms, banking and capital markets, and high tech. In Europe, revenues rose by 7% in local currency, driven by banking and capital markets, industrial, and public service growth, particularly in Germany and France. Growth markets saw a 6% increase in local currency, fueled by advances in chemicals and natural resources, industrial sectors, and energy, particularly in Japan. On the income statement, our gross margin for the quarter was 32.4%, compared to 32.1% last year. Sales and marketing expenses were 10.8%, up from 10.2% in the previous year’s fourth quarter. General and administrative expenses were 6.7%, down from 7.1% last year. It’s important to note that in Q4, we incurred $472 million in costs related to business optimization actions, reducing operating margin by 290 basis points and EPS by $0.56, and affecting our tax rates. These comparisons exclude those impacts for adjusted results. Adjusted operating income for the fourth quarter was $2.4 billion, with a 14.9% adjusted operating margin, an increase of 20 basis points from last year's Q4. Our adjusted effective tax rate for the quarter was 27.4%, compared to an effective tax rate of 24.6% from last year’s fourth quarter. Adjusted diluted EPS was $2.71, up from $2.60 in the fourth quarter last year. Days services outstanding remained steady at 42 days, consistent with last quarter and a slight improvement from 43 days in the fourth quarter of last year. Free cash flow totaled $3.2 billion, resulting from $3.4 billion in cash from operating activities, less $180 million for property and equipment additions. Our cash balance as of August 31 was $9 billion, up from $7.9 billion a year earlier. Regarding our commitment to return cash to shareholders, in the fourth quarter, we repurchased or redeemed 3.2 million shares for $1 billion, averaging $312.35 per share. Additionally, in August, we paid our fourth quarterly cash dividend of $1.12 per share, totaling $706 million. Our Board of Directors has declared a quarterly cash dividend of $1.29 per share to be paid on November 15, marking a 15% increase from last year, and approved an additional $4 billion for share repurchase. Now, I would like to summarize the year as we successfully navigated a challenging macro environment and exceeded all aspects of our original guidance from last September on an adjusted basis. We secured $72.2 billion in new bookings, reflecting 5% growth in local currency. Annual revenue reached $64.1 billion, demonstrating strong growth of 8% in local currency and continued market share gains. For the full year, we incurred $1.1 billion related to business optimization actions, which reduced operating margin by 170 basis points and EPS by $1.28. We recognized a gain from our investment in Duck Creek Technologies, which impacted our tax rate and increased EPS by $0.38. These comparisons also reflect adjusted results. The adjusted operating margin was 15.4%, a 20-basis point increase over FY '22. Adjusted EPS was $11.67, indicating 9% growth from FY '22 EPS. Free cash flow for the year was $9 billion, significantly above our initial guidance, and indicates a very strong free cash flow to net income ratio of 1.3. In terms of our ongoing goal to return cash to shareholders, we surpassed our original guidance by returning $7.2 billion to shareholders while investing about $2.5 billion across 25 acquisitions. In closing, we remain dedicated to delivering on our shareholder value proposition while creating comprehensive value for all our stakeholders, including clients, our employees, shareholders, partners, and communities. Now, let me turn it back to Julie.

Thank you, KC. I would now like to share the demand we experienced from our clients this quarter as they focus on developing their digital foundations and making significant changes. This demand was evident across various markets and industries. Our cloud growth continued with strong double-digit increases in Q4, as clients emphasized the importance of creating a solid and secure foundation for transformation. We are collaborating with a multinational financial services firm on a cloud transformation initiative aimed at providing improved, personalized, and secure customer experiences while enhancing employee productivity. Together, we are crafting an integrated hosting strategy that consolidates their hybrid multi-cloud environment, setting the stage for their digital transformation in the coming decade. This partnership fosters innovative solutions throughout all banking functions, supported by a reliable and secure foundation capable of handling advanced workloads and intricate AI and data solutions. Operating from a compliant cloud platform will protect customer data, privacy, and financial assets, helping the organization to stand out due to its innovation and customer-centric approach. Additionally, we are collaborating with a U.S.-based energy firm on a comprehensive enterprise transformation strategy to align various technologies and business processes around a shared digital core. We will facilitate the development of a cloud-based IT platform that integrates customer management, finance, HR, supply chains, asset management, and operations, enhancing their ability to evaluate and improve operational performance. We are also assisting in managing and integrating vendor responsibilities and activities involved in this project, standardizing data from legacy systems, and enabling employees to navigate and manage the new processes and technologies. This will enhance data-driven decision-making, fostering improved collaboration within the organization, ultimately helping them to operate more efficiently and serve their clients better. We are working with Coca-Cola Bottlers Japan to expedite their journey to becoming a world-class bottler and a data-driven enterprise. This collaboration includes forming a substantial joint venture approximating 870 people, aimed at accelerating the transformation of their digital infrastructure, refining their operational processes, and leveraging the capabilities of cloud, data, and AI to enhance value from their core business functions. Supporting their broader business strategy, Accenture will supply specialized talent, industry knowledge, and advanced technological automation and management services to assist Coca-Cola Bottlers Japan in adopting a strategy of continuous enterprise adaptation. Leveraging data and AI is vital to developing the digital core, and we observed this work integrated within our broader transformations, as well as within focused efforts on data and AI modernization. Accenture Federal Services is supporting the defense health agency's operations to enhance the Joint Medical Common Operating Picture platform by synchronizing data across various networks and enabling real-time collaboration and information sharing, delivering a holistic view of Department of Defense medical resources. This enhances visibility into unit health, equipment, and supplies, allowing for quicker and more informed decision-making. We have partnered with the Saudi Data and AI Authority to facilitate the Kingdom's shift to a data-driven economy and to position the Kingdom as a leader in generating and deploying AI technology. Our close collaboration with Sadiya is geared toward supporting advanced research, encouraging digital innovation in public sectors, and enhancing national skills and capabilities. We are particularly excited about the double-digit growth we are experiencing in the Middle East, a smaller yet expanding segment of our business. Security remains a crucial component of a digital core, and we saw significant double-digit growth in our security division in Q4. We are collaborating with a prominent energy network in the UK to transform its cybersecurity systems. This initiative involves providing comprehensive managed services for their cybersecurity functions, including the transition to a robust security platform, consistent monitoring of threats, and response services, along with managing security tools. Our solutions are designed to enhance security, minimize vulnerability to potential global threats, and ultimately ensure the safe delivery of gas to millions of homes and businesses in the UK. As clients continue to rethink and prioritize customer experiences, our Song unit achieved strong double-digit growth in Q4. We are aiding smart Europe, creators of next-generation smart vehicles, products, and services from the renowned Smart Automobile Company, a joint venture between Mercedes-Benz and Geely. We are assisting them in redefining car shopping by developing an ecosystem that supports a seamless, fully digital purchasing experience. By centering data at the core, the system personalizes the customer journey, makes recommendations based on real-time information, and includes additional options like extended insurance coverage. This will help smart Europe reposition its brand and support the launch of its fully electric vehicle lineup. We also continue to witness strong demand for our supply chain and Industry X capabilities, the next frontier in digital innovation, which grew robustly in Q4. In Industry X, we have joined forces with a global chemical and materials company to digitally transform their manufacturing and commercial functions. Our Industry X capabilities have led to the creation of a connected worker platform for operators, maintenance technicians, and job planners, alongside a cloud-based data lake designed to derive insights from various manufacturing data sources. This program is already operational in numerous manufacturing facilities and is anticipated to generate significant revenue growth for our clients over the forthcoming years. Additionally, in supply chain, we have teamed up with a large global food and beverage corporation to enhance supply chain resilience, ensuring consumers maintain access to products in stores and online. By building a digital replica of its supply chain, we will develop models to analyze and identify supply disruptions that pose the highest risks before they materialize. These examples illustrate our unique capabilities as a technology powerhouse, combined with our industry and functional knowledge, encompassing strategy, consulting, technology, and managed services to support our clients in transformation. Now, let's shift our focus to generative AI. As a reminder, last quarter we announced a $3 billion investment in AI. Despite being in its infancy, generative AI technology is progressing rapidly, and we believe it will become a significant source of value for both us and our clients over time. We currently have around 300 projects underway, and I'd like to share some insight into how this demand is manifesting. We have projects spanning all our industries, with banking, public service, consumer goods, and utilities leading the activity. Clients are engaging in diverse work ranging from strategy and use case implementation to technological enablement, scaling, model customization, training, and responsible AI. For instance, we are collaborating with the multinational telecom firm, Telefonica Brazil, also known as Vivo, to implement a generative AI solution that assists its agents in responding to landlords' inquiries regarding property rental for network towers. This application swiftly processes landlords' queries and suggests a range of actions to fulfill requests, cutting down response time significantly. It also organizes the answers to ensure all queries are met with thoughtful responses. The solution has already decreased agent response time by 30% while boosting user experience scores by 66%. Key factors contributing to our success in generative AI include strong ecosystem partnerships, which are vital to our leadership in this field, encompassing hyperscalers, model creators, startups, and academia. It is crucial to note that we are still in the early stages of generative AI for enterprises, and our extensive expertise and insights in these areas are pivotal for guiding our clients. Furthermore, talent is integral to our approach. We possess deep technical know-how in AI and generative AI, blending this with our industry knowledge to understand how to innovate throughout enterprises, including processes and operational models—this sets Accenture apart as we bridge the current state to the future. We have already provided training on AI fundamentals to approximately 600,000 of our employees. With generative AI, the acceleration and impact are rapidly increasing. We are going a step further by ensuring more than 250,000 employees are equipped to use new AI tools in an equitable, sustainable, and unbiased manner. Additionally, our investments in the AI Academy emphasize deep specialization in AI and generative AI, progressing us towards our goal of doubling our skilled data and AI practitioners from 40,000 to 80,000. Lastly, responsible AI is crucial. Accenture boasts a leading responsible AI compliance program that is embedded in our AI usage and delivery, and we are leveraging our experience to assist clients in building their own responsible AI frameworks necessary to mitigate risks and maximize value. We are embracing generative AI across our services, developing new innovative tools and solutions that incorporate generative AI into our work practices. Our strategy considers the current technological landscape, the necessity for responsible deployment, and acknowledges the complexity of the environments we operate in. While all companies want to explore generative AI, we find that clients with higher digital maturity tend to want to advance more quickly, while others prefer to test concepts with synthetic data, and some wish to wait until their digital infrastructure is further developed. The pace and extent of generative AI's progression will become clearer in the upcoming quarters as technology and market conditions continue to evolve. Now turning our focus on our people, who have facilitated all these achievements. Central to our success is our capacity to attract, retain, and inspire exceptional talent. A robust talent strategy is essential, particularly in attracting diverse talent and implementing our Net Better Off initiative to keep our best employees. We consistently excel at drawing individuals from diverse backgrounds, perspectives, and experiences, as this diversity is fundamental to fostering innovation. Our success is showcased by being the highest-scoring company on the Bloomberg Gender Equality Index for the second consecutive year, as well as securing the top position on the Refinitiv Global Diversity and Inclusion Index for the fourth time in six years. This index evaluates over 15,000 organizations worldwide to highlight the top 100 publicly traded companies with the most inclusive workplaces. Our talent strategy aims to inspire and retain employees through the Net Better Off approach, ensuring they feel fulfilled working at Accenture. This strategy emphasizes their overall well-being—physically, emotionally, and financially—while fostering a sense of belonging, infusing purpose in their work, and facilitating skill development relevant to the market. This year, for instance, our employees participated in nearly 40 million training hours, and we received the Brandon Hall Gold Award for the best benefits, wellness, and well-being programs. Continuing our longstanding commitment to environmental sustainability, we are excited to announce we have achieved a significant milestone toward Net Zero, nearing 100% renewable electricity in all our Accenture offices. In conclusion, I'd like to comment on our engagement with communities. Thriving communities are vital to our business success, so we continue to prioritize creating value within them worldwide. For instance, Accenture is actively working to support refugees, acknowledging the strength, courage, and talent they bring to our communities. In June 2023, on World Refugee Day, we pledged to collaborate with organizations to skill and support approximately 16,000 refugee job seekers and migrants, with an aim to hire 100 refugees in Europe over the next three years.

Thanks, Julie. Now let me turn to our business outlook. For the first quarter of fiscal '24, we expect revenues to be in the range of $15.85 billion to $16.45 billion. This assumes the impact of FX will be approximately positive 2.5%, compared to the first quarter of fiscal '23 and reflects an estimated negative 2% to positive 2% growth in local currency. For the full fiscal year '24, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be flat compared to fiscal '23. For the full fiscal '24, we expect our revenue to be in the range of 2% to 5% growth in local currency over fiscal '23, which includes an inorganic contribution of about 2%. We expect business optimization actions to impact fiscal '24 GAAP operating margin by 70 basis points and EPS by $0.56. The following guidance for full-year fiscal 2024 excludes these impacts. For adjusted operating margin, we expect fiscal year '24 to be 15.5% to 15.7%, a 10 basis point to 30 basis point expansion over adjusted fiscal '23 results. We expect our annual adjusted effective tax rate to be in the range of 23.5% to 25.5%. This compares to an adjusted effective tax rate of 23.9% in fiscal '23. We expect our full-year adjusted earnings per share for fiscal '24 to be in the range of $11.97 to $12.32 or 3% to 6% growth over adjusted fiscal '23 results. For the full fiscal '24, we expect operating cash flow to be in the range of $9.3 billion to $9.9 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $8.7 billion to $9.3 billion. Our free cash flow guidance reflects a free cash flow to net income ratio of 1.2. Finally, we expect to return at least $7.7 billion through dividends and share repurchases as we remain committed to returning a substantial portion of our cash to our shareholders. And with that, let's open it up so we can take your questions.

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?

Thank you. Good morning, Julie and KC. I wanted to start by asking about CMT. Have the challenges changed at all? Are they affecting just a few clients, or are they more widespread? What is the strategy to improve demand? Are you seeing any positive signs there? Thanks.

Yes, thank you, Tien-Tsin. We're observing broad challenges globally and across our client base. These issues are expected to evolve differently depending on various markets. The difficulties in the U.S. are more pronounced, particularly within technology and communications sectors, whereas Europe presents a different landscape. Throughout the year, we anticipate improvements will occur at varied paces based on these market differences. Our approach to tackling these challenges is two-fold. Firstly, we will continue to adapt within the industry by assisting clients in managing their budgets, focusing on cost-cutting, enhancing customer service, and investing in network capabilities. Secondly, we are shifting our business towards areas with higher growth potential, evident through our recent acquisitions such as Anser Technologies and Industry X in the U.S., and Flutura in India, focusing on data and AI. There are numerous growth opportunities, and you can see this rise when excluding CMT from our overall business performance. It will take some time to complete this transition, which is reflected in our guidance as we expect gradual improvement throughout the year as our strategic actions unfold.

Thank you for that information. I wanted to follow up on generative AI. I noticed that sales have doubled and you provided a lot of detailed insights. I'm interested to know if the deal sizes have increased and if you're observing more large projects emerging recently. How do you anticipate this evolving as we enter the new fiscal year?

Sure, so at this point, and remember, when we give you generative AI numbers, we're being very clear it's pure generative AI, so we're not like, you know, sort of talking about data and all of those things. So the real generative AI projects right now are still in that sort of million dollar-ish on average range. And we expect that's going to continue for a while, right? That’s what we're seeing because there's a lot of experimentation. Now what it's doing though is leading clients to look harder at, well, where do I go faster, right, in terms of the digital core? And so we started seeing a tick up, for example, in data migration, right? But it is still extremely early, but that's how we think it's going to, you know, play out over even the coming year, right, as people get more excited about it and it also points out the challenges. But keep in mind that, you know, implementing generative AI is not easy. Entire environments need to be set up. It's quite complex, actually. So it really plays into our strengths of being able to help them understand what it takes, where their gaps are, and then how to take the next step on the journey to get there, even as we see clients being cautious, they're really focused on helping us save money, so we can take those next steps.

Yes. No, it should bode well for Accenture. Thank you.

Thank you very much. I wanted to follow up on a couple of questions. One area that had shown some strength but seems to have weakened a bit is managed services. Can you explain what is happening there? We're also noticing some variations in demand, particularly geographically, with Europe appearing a bit weaker while other markets seem stronger. Could you provide some insights on managed services and the geographic differences?

Thank you, James, for your question. I'll begin by offering some insights into managed services in relation to our guidance. Starting with our full-year outlook, we anticipate growth between 2% and 5%. As Julie mentioned, we expect to improve as the year progresses, which is evident in our Q1 range starting from negative 2 to 2 at the high end. For Q1, our guidance reflects consistent trends across various aspects of our business similar to Q4. However, we face a challenging comparison for the first quarter of FY ’24, which is our toughest comparison for the year. Looking at the full year, there are three points to consider. First, we are not expecting improvements in discretionary spending or the macro environment. Second, we foresee consulting services achieving low-single-digit growth for the year while managed services are projected to grow in the mid- to high-single-digit range. Lastly, as our revenue evolves, we anticipate increased variability in operating margins throughout fiscal '24, targeting a 10 to 30 basis points expansion for the year. Hopefully, that provides some clarity. Julie, would you like to share more details about managed services?

And what I would say on managed services, managed services continue to be really important for our clients, because it's both a cost play, but also a faster digitization play. But it will play out a little bit differently. So, for example, at Accenture, right, we've got trust and safety and other managed services in the CMT. And so that's going to affect some of our results depending on the quarter and the compare and how things kind of roll out. So that's why what we're thinking about next year will be somewhere in the mid- to high-single-digits, but we don't see a fundamental issue around managed services. In fact, we think they are a really strategic priority for many of our clients, but it will play out a little bit differently based on industries. We see less of it based on sort of market per se because clients really need the managed services.

Got it. And then just as a quick follow-up, can you talk a little bit about your inorganic strategy, just what contribution has been, and particularly in light of the increased capital return program for '24, if we should anticipate that that will have any impact on what you guys historically have done from an inorganic contribution? Thanks.

Sure. In terms of inorganic contribution, for ‘23, it was about 2% was the inorganic contribution and for ‘24, James, we're considering another about 2% in ‘24.

Yes. Regarding our inorganic strategy, we're focusing on expanding into new areas, similar to our acquisitions of Anser Advisory and Industry X in capital products. Before those acquisitions, we were quite small in that market, which has an addressable size of $80 billion. This move is essential for our growth. This year in France, we made an acquisition in insurance strategy and consulting. We also acquired a data and AI practice in India this quarter. As we shift toward higher growth sectors, our ability to invest strategically gives us a significant advantage. Currently, we anticipate an inorganic growth contribution of about 2%, but we can increase that if suitable opportunities arise. We view this as a major competitive edge in our industry, enabling us to drive growth in key market areas.

Good morning. Thank you for taking my question. I would like to start discussing the business optimization program. Can you provide more details regarding your current status, what has been completed, what remains for 2024, and how we should anticipate the impact throughout fiscal year 2024? Also, can you clarify if this is the final stage and whether we should expect a return to GAAP reporting by the end of 2024?

Thank you, Lisa. Just to remind you, when we announced our business optimization program, we indicated it would be around $1.5 billion, extending through FY ‘24. We still confirm this $1.5 billion figure for that period. Regarding next year, we expect to incur about $450 million. In FY ‘23, we recorded $1.1 billion, which was slightly above our expectations for that fiscal year, allowing us to recognize a bit more in the income statement. The impact on earnings per share for ‘24 will be $0.56, and I can address any questions you have about this. As we progress through the year, we will exclude the business optimization from our results on a quarterly basis, so it will not be the main factor contributing to margin variability throughout the year. The outcome will depend on various factors in different countries. We are not providing updates throughout the year on the full-year estimate, and we won’t be breaking this down by quarter.

Got it. Okay, great, thank you. For a quick follow-up on the managed services question, stepping back, Julie, I think over the last few quarters we've noticed some softness in strategy and consulting and shorter duration discretionary work. You've consistently highlighted that this has not impacted the larger transformation programs. I wanted to ask if you could provide an update on what you're currently seeing, especially since we observed a slight slowdown in some of the managed services bookings this quarter. Thank you.

Overall, the large transformational programs include managed services as well as the implementation of modern ERP programs. It's not just about managed services; it's about setting the stage for growth. When considering the fundamentals, we believe there's more reinvention ahead than what has already been accomplished. There’s a significant opportunity, as clients are only at 40% of their cloud journey, with less than 10% being mature in data and AI, and only a third having adopted modern ERP systems. Managed services will play a critical role in financing and modernizing these initiatives. However, as we observe the market, we are well positioned for this. Our strategy is to be a partner in this reinvention process. The first step is building the digital core, which then leads to additional work, forming our growth strategy. Recently, I engaged with about 20 different CEOs who shared three key points: technology is vital, they have significant programs in progress, and they are feeling cautious about the macroeconomic situation, which is evident in smaller deals. They are requesting our help to save money and maintain focus on larger programs. This caution is reflected in our guidance, indicating that the macroeconomic environment is affecting spending pace. Fortunately, this aligns with our strengths in being a reinvention partner and guiding clients through their journey during this cautious period, which is impacting overall demand.

Bookings can be inconsistent, especially in managed services. We analyze bookings and the book-to-bill ratio over the last four quarters, aiming for a ratio of 1.2 or higher. Currently, we have achieved that target on a four-quarter basis.

Hi, thank you very much. I wanted to ask about mergers and acquisitions. Julie, you’re indicating a contribution of 2 points from M&A to your full-year guidance, which aligns with past years, but the figure is significantly larger now. Two points means more than it did three or four years ago regarding both the capital necessary to execute those deals and the integration of the workforce. I’d like to hear your thoughts on the sustainability of this 2-point figure, considering potential balance sheet constraints and the integration needed to ensure the people side of the business is managed well, especially as the deals are getting larger. Additionally, do you typically target the same size deals, or do you need to consider larger opportunities?

No problem, Keith. Thanks, I'll handle the capital allocation part and I'll hand it over to Julie. So just from a capital allocation standpoint, Julie referenced this a little bit earlier, but our capital allocation framework is really durable, but it is also very flexible. So we've been able to continue to return a significant portion of our cash through dividends and share repurchases. Well over the time we've been flexing at various times the amount of money that we spend in V&A and we can continue with that framework. So just again as a focus, we had about 80% of our free cash flow returned to shareholders through dividends and repurchases in FY ‘23 and we actually have a $500 million, $0.5 billion increase in our guidance baked in for next year. So just shows that our capital allocation framework can flex as needed while still doing a great return.

I am really proud of how mergers and acquisitions are a core competency of Accenture. We have been on this journey for a while, and I initiated it when I was the general counsel. It was clear we needed to enhance our approach, and I had significant experience from my previous roles. As we have grown, we have consistently developed our capabilities. Our integration processes are very advanced, and we have an operating model where leaders closely oversee the acquisitions during integration. These acquisitions can range from very small to quite large; we have completed transactions over $1 billion and have the capacity to handle even larger ones with our capital. The key takeaway is that we know how to integrate acquisitions effectively, and we have been doing this for many years.

Yes, thanks, Keith. What I would say is that managing supply and demand is a core competency for us, and we will adjust our supply based on where we see growth. We did not anticipate needing to hire significantly from Q3 to Q4, and that is precisely what occurred. We will continue to hire for the necessary skills and will focus on automation and, as Julie mentioned, the re-skilling of our workforce.

Thank you. I wanted to ask about your current visibility in the environment compared to previous years regarding your outlook. Has anything changed? Could you also specify where you are seeing areas of strength, particularly concerning the demands from customers that might not align with typical trends during an economic downturn? I'm interested in understanding what aspects are maintaining demand despite weakness overall, as they are crucial right now. Thank you again.

Yes, thank you, Darrin. As we begin a new fiscal year, we feel confident that we are taking the right steps to successfully deliver throughout the year. As you know, we always aim for the upper range. However, as is typical at this time of year, the latter half is less certain since we will have more clarity once the budgets are set in the second half of the year. We plan to build momentum throughout the year and our confidence stems from the strategic steps highlighted by Julie, which focus on high-growth areas. We anticipate that this will be reflected in the latter part of the year, supported by our ongoing investments. Additionally, we have the revenue from larger-scale transformations that are active, and we just need to incorporate new growth initiatives as we move towards the second half. Lastly, we benefit from year-over-year comparisons in this period.

Yes. In terms of demand, it aligns with what we've previously discussed. The primary area of demand is developing that digital core. We have clients, such as the financial services client mentioned earlier, who are not utilizing the cloud and need to migrate. Then there are those already in the cloud who have yet to modernize their ERP systems. You’ve noticed many examples of that. Security is essential and must be addressed. Additionally, there’s significant focus on data and AI, especially for those who have already invested; they are in the cloud, have their modern ERP, and are eager to accelerate AI initiatives. However, what we’re not seeing is global discretionary spending, as observed throughout the year, particularly in North America, where businesses are refraining from smaller systems integration and consulting projects. They are focusing on larger deals and, even then, are prioritizing depending on their industry challenges. Many are cautious about the current environment and are seeking our assistance in cutting costs to afford future reinventions and to help determine where to begin next. Overall, spending has become more cautious. However, I want to emphasize that nothing has changed regarding our clients facing more opportunities ahead in building their digital core and using it for reinvention. We are uniquely positioned in our industry to build technology while having the necessary industry and functional expertise to assist them with their reinvention. Therefore, we remain very optimistic about our industry and our role within it.

That makes sense, Julie. As a follow-up to that, regarding the ramp time, you mentioned a billion dollars investment in AI last time, and we've seen some evidence of success, but it's still early days. Now that you've had a few more months, what ramp time do you expect for AI and generative AI to become a significantly larger part of the business? Can you touch on that again? Thanks.

I'm sure my team will appreciate having a few more months. Thank you for that; I will let them know. As I mentioned in our script, we are still learning. These involve significant investments, and we are beginning to integrate them into our own delivery process. It will take a few more quarters before I have a well-informed perspective on it. However, I can say that generative AI is an incredible technology with great potential. I advise all my clients that you can't utilize it unless you are in the cloud, have access to data, and have modernized your core systems. That represents our opportunity.

Good morning, guys. Thanks for taking the question. I wanted to pick up on your earlier comment, I think you said that you're not assuming any improvement in discretionary spending in the overall environment during FY '24. So I know you guys typically start the year with a relatively conservative approach to guidance that certainly served you quite well in fiscal '23. So against that backdrop, can you tell us a little bit about what you're thinking regarding growth for each of the three business dimensions in FY '24?

Yes. So, Jason, let me just kind of give you a little bit more color on guidance, right? So, as we mentioned, we're not assuming in our guidance any improvement in the macro discretionary spend, but we're going to pivot two years of growth. So the macro is going to be kind of this, you know, it's not going to help us or hurt us this year is kind of what really essentially what we're saying. In terms of, you know, color, I'll kind of stick to what we have in the type of work, maybe is the best way of thinking about it. And again, I think just consulting, it's going to build as we go throughout the year. And overall, I think, it's important to know that we are going to build in this environment. We're going to build as we go throughout the year.

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

Hi, guys. Good morning. Wanted to just follow up on strategy and consulting. I know that that was an area that we were hoping at one point during the year that it was going to turn back to positive growth by the fourth quarter. And then I know we didn't think that was going to happen as of last quarter. So I'm just curious, as we go through the year into fiscal year '24, when do you think S&C might turn towards positive growth?

Thank you, Bryan. Regarding our full year outlook, reaching the upper end of our expectations indicates that S&C is reconnecting with growth, which is our aim. However, the pace of this growth will vary by market, making it difficult to predict the exact timing throughout the year. We will keep you updated as we progress. It's worth noting that North America, being our largest market, will face some additional challenges.

Thanks so much. Take care.

All right. In closing, I really do want to thank again all of our people and our managing directors what they do every day, which is truly extraordinary and gives us a lot of confidence in the future. And I want to thank all of our shareholders for your continued trust and support. I assure you, we are working hard every day to continue to earn it. Thank you.