Accenture plc - Class A (ACN) — Q2 2026 Earnings Call Transcript

Thank you, operator, and thanks, everyone, for joining us today on our second quarter 2026 earnings announcement. As the operator just mentioned, I'm Alexia Quadrani, Executive Director and Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and Chief Executive Officer; and Angie Park, 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 an overview of our results. Angie will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the second quarter. Julie will then provide a brief update on our market positioning before Angie provides our business outlook for the third quarter and full fiscal year 2026. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and as such are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our annual report on Form 10-K and the quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed on 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 from 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 call. Now, let me turn the call over to Julie.

Thank you, Alexia, and everyone joining us this morning, and thank you to our more than 786,000 people for your extraordinary work. We delivered another strong quarter with $18 billion of revenue, growing 4% in local currency and once again taking significant market share. We had record bookings of $22.1 billion, bringing H1 bookings to a total of $43 billion. We had a record 41 clients with quarterly bookings greater than $100 million, bringing us to 74 of these bookings in the first half, 12 more than this time last year, demonstrating the continued demand for reinvention at scale. We delivered 30 basis points of operating margin expansion with strong EPS growth year-over-year, generating significant free cash flow while investing significantly in our business. We closed 3 strategic acquisitions, deploying $1.6 billion of capital, and we now expect to deploy $5 billion in acquisitions this year with capacity to do more for the right opportunities. In double-clicking on our revenue, our revenue growth was broad-based across geographic markets and types of work. Revenue from our top 10 ecosystem partners continues to outpace our overall growth, and we are expanding these partnerships. And we are on track in FY '26 to more than double our bookings over FY '25 from partnerships with our key emerging AI and data ecosystem partners. And we delivered these strong results through the disciplined execution of our growth strategy as our market remains roughly the same. Our long-term growth strategy is to help our clients reinvent and to capture other new opportunities created by AI. To accelerate this strategy, we are using 2 key competitive advantages: our strong balance sheet and our long history of successful acquisitions. Our goal with acquisitions is to more rapidly expand into higher growth areas with attractive margins, which will fuel organic growth and increasingly help us grow non-FTE-related revenue. In H1, we invested in 4 areas: first, AI-powered transformation. Last week, we closed the acquisition of Faculty, a leading U.K.-based AI native services company with the decision intelligence product business that provides a platform for us to expand into new areas of unmet AI demand with non-FTE revenue. We also acquired 2 companies to accelerate our growth with Palantir, an emerging ecosystem partner: Decho in the U.K., which focuses particularly in defense and public sector markets and RANGR Data in the U.S., which works across industries. Second, AI enablers. AI enablers include data centers, cybersecurity, energy infrastructure, and data. We acquired a 65% stake in DLB Associates, a data center engineering and consulting firm with high double-digit growth. We also acquired CyberCX, a leader in cybersecurity in Australia, and we announced the acquisition of Ookla, a global leader in network intelligence, competitive benchmarking, and customer experience analytics. Ookla, with only 430 employees, generated $231 million of revenue in their calendar year 2025 through non-FTE subscription and licensing revenue models and an 8% year-over-year growth rate, and with healthy margins accretive to Accenture. Third, high-growth secular trends. These trends include capital projects, defense and public sector, and education around AI, data, and tech. We acquired Orlade Group, a French capital projects firm, which expands our presence in the energy, utilities, rail, and aerospace sectors, including nuclear power plants and power grids. This acquisition is also part of our focus on key AI enablers because AI requires significant expansion of energy infrastructure. We also expanded LearnVantage, our business that is capturing the education opportunity through the acquisition of Aidemy in Japan, a portion of our LearnVantage business, leveraging our proprietary platforms, operates with a non-FTE commercial model, growing double digits. Finally, mid-market expansion. We made 2 mid-market acquisitions, NeuraFlash and Total eBiz Solutions, and announced one, Cabel, to expand our presence in the mid-market, where we are experiencing higher revenue growth and a higher volume of smaller deal sizes that convert to revenue faster. As we delivered this quarter, we also are executing at speed on our talent strategy for the age of AI. We now have over 85,000 AI and data professionals already exceeding our goal of 80,000 professionals by the end of fiscal 2026. Thanks to our intentional talent strategy, we will hire more entry-level reinventors in FY '26 than FY '25, which is important for our financial model. Just as our clients must reinvent, so must Accenture. Our reinventors completed 13 million training hours this quarter alone, and 192,000 completed our Agentic AI fundamentals program, co-created with Stanford Institute for Human-Centered AI. After significant investment in training starting this year, we have made the use of AI tools and contributions to helping Accenture become the most AI-enabled company in the world, now a formal part of our performance evaluation. Finally, we are pleased at the number of external recognitions of our broad-based strengths that we have received in the last several months. Please check out these recognitions in our earnings presentation for the quarter. Over to you, Angie.

Thank you, Julie, and thanks to all of you for joining us on today's call. We were very pleased with our second quarter results with record bookings for the quarter, revenue at the top end of our guided range, strong margin expansion, and robust free cash flow. These results demonstrate the resilience and durability of our business and continued execution of our strategy to be the reinvention partner for our clients. We delivered these results while continuing to invest for long-term market leadership and returning significant cash to shareholders. Now, let me summarize a few highlights for the quarter. Revenues grew 4% in local currency and were broad-based across geographic markets and types of work, reflecting the diversity of our business as we continue to take market share. Operating margin was 13.8%, an increase of 30 basis points compared to Q2 results last year and continues to include significant investments in our business and our people. We delivered EPS in the quarter of $2.93, which represents 4% growth compared to EPS last year. And finally, we delivered strong free cash flow of $3.7 billion and returned $2.7 billion to shareholders through repurchases and dividends this quarter. We also invested $1.6 billion, primarily attributed to 3 acquisitions in the quarter. With those high-level comments, let me turn to some of the details starting with new bookings. New bookings were a record $22.1 billion for the quarter, representing 6% growth in U.S. dollars and 1% growth in local currency, with an overall book-to-bill of 1.2. Consulting bookings were $11.3 billion with a book-to-bill of 1.3. Managed Services bookings were $10.8 billion with a book-to-bill of 1.2. Within bookings, the percentage of our work, which is fixed price, continues to increase over 60% in FY '25. This reflects the rising importance of our proprietary platforms and clients' need for cost and delivery certainty, where our scale, experience, and financial strength matter. Turning now to revenues. Revenues for the quarter were $18 billion, reflecting an 8% increase in U.S. dollars and 4% in local currency at the top end of our FX-adjusted guided range, as the foreign exchange impact for the quarter was positive 4.4% compared with a positive 3.5% estimate provided last quarter. Consulting revenues for the quarter were $8.9 billion, up 7% in U.S. dollars and 3% in local currency. Managed Services revenues were $9.2 billion, up 10% in U.S. dollars and 5% in local currency, driven by mid-single-digit growth in technology-managed services, which include application-managed services and infrastructure-managed services and high single-digit growth in operations. Turning to our geographic markets. In the Americas, revenues grew 3% in local currency, led by growth in banking and capital markets, software and platforms, and industrials, partially offset by a decline in public service, driven by our U.S. Federal business. Revenue growth was driven by the United States. Excluding the 2% impact from our Federal business, Americas grew approximately 6% in local currency in the quarter. In EMEA, we delivered 2% growth in local currency, driven by growth in insurance, life sciences, and public service. Revenue growth was driven by the United Kingdom and Italy. In Asia Pacific, revenue grew 10% in local currency, driven by growth in banking and capital markets, communications and media, and public service. Revenue growth was led by Japan and Australia. Moving down the income statement. Gross margin for the quarter was 30.3% compared with 29.9% for the same period last year. Sales and marketing expense for the quarter was 9.7% compared with 10.1% for the second quarter last year. General and administrative expense was 6.7% compared to 6.3% for the same quarter last year. Operating income was $2.5 billion in the second quarter, reflecting a 13.8% operating margin, up 30 basis points compared with results in Q2 of last year. Our effective tax rate for the quarter was 24.3% compared with an effective tax rate of 20.4% for the second quarter last year. Diluted earnings per share were $2.93 compared with diluted earnings per share of $2.82 in the second quarter last year, reflecting 4% growth. Days services outstanding were 46 days compared to 51 days last quarter and 48 days in the second quarter of last year. Free cash flow for the quarter was $3.7 billion, driven by cash generated by operating activities of $3.8 billion, net of property and equipment additions of $150 million. Our cash balance at February 28 was $9.4 billion compared with $11.5 billion at August 31. With regard to our ongoing objective to return cash to shareholders, in the second quarter, we accelerated our share buybacks and repurchased or redeemed 6.8 million shares for $1.7 billion at an average price of $246.09 per share. This brings our year-to-date total to $4 billion in repurchase or redeemed shares, which is a significant step up from the same time last year. Also, in February, we paid our second quarterly cash dividend of $1.63 per share, a 10% increase over last year for a total of $1 billion. And now, back to you, Julie.

Thank you, Angie. I will start with the demand environment and then turn to why we see AI as a tailwind, which we believe will shape our growth over the next few years. We saw, again, this quarter, clients continuing to prioritize their most strategic and large-scale transformational programs, which positions us in the center of their reinvention agendas. As clients finalize their budgets going into calendar year 2026, we are seeing spending similar to 2025. Demand continues to be driven by a few major themes. First, clients are implementing foundational programs with our ecosystem partners to capture the full opportunity of AI. These typically involve cloud, security, and data modernization, often combined with operating model and talent transformation. We continue to see at least 1 out of every 2 advanced AI projects lead to a data project. Second, clients continue to look to reinvent faster, leverage our proprietary platforms and expertise and achieve greater efficiencies through managed services across the enterprise, and we see clients working with us to create more investment capacity to increase their spend in new areas. And third, clients with more advanced digital cores are starting to take on larger AI programs. We also are seeing more moving from proof of concept to production, while others are still at the beginning of their journey with another 100 clients or so initiating advanced AI projects with us this quarter. Across many of these programs, AI and data are now central, sometimes as the destination and increasingly as part of the work from day 1. A good example of these demand trends is how we are partnering with the Estée Lauder Companies, a global prestige beauty company, to advance its new one operating ecosystem and to drive a more connected, scalable, and consumer-centric enterprise. Enabled by our platforms, we will collaborate with the company to transform how work gets done, leveraging AI and automation across the end-to-end value chain. Over time, this is designed to accelerate execution and enable teams to focus on driving innovation, consumer experience, and brand desirability. This work supports the Estée Lauder Companies in building the capabilities needed to activate new ways of working and aligning teams, technology and partners to enable the business to operate with greater agility. We see AI as a tailwind because it's helping us win more today and take market share, and it is creating new opportunities for growth over time. We're continuing to take market share quarter after quarter because of the combination of our early leadership in advanced AI, our deep ecosystem partnerships with both established leaders and emerging players and our decades of investments to be both deep in tech and relevant across the entire enterprise from the back office to core operations to the front office. We play a critical role in the AI ecosystem. Foundation models provide the intelligence, and our role is helping clients understand what to deploy and when, how to integrate it into their systems, reimagine their processes, modernize their data and digital core, help redesign their operating models, and do effective change management and help build the capabilities and talent needed to scale across the enterprise. As the technology changes even more quickly, our clients are turning us to help them navigate. They also want us to help them go faster, sometimes by building their capabilities and other times by leveraging ours. Take SaaS implementations overall, clients are continuing to modernize their tech stacks with SaaS, but they're now asking that new SaaS implementations be designed from day 1 to use processes that integrate both AI from the SaaS provider and other providers. And clients are more and more willing to do end-to-end transformation, all of which requires leadership in AI and SaaS, but it also requires the industry and functional knowledge and the ability to work across the enterprise, not just in certain functions. They look to us to bring our point of view and experience on what the new tech stack should be as well as on how their processes should change due to AI. We're seeing this across industries and across functions. For example, in retail, service is no longer just about fixing problems; customers expect a consistent experience every time, even on a massive scale. We're working with retailers to reinvent contact centers and design the new processes with Agentic AI. This means partnering with us to develop Agentic enterprise strategies and architecture foundations, which will serve as a platform to enable Agentic solutions. We aren't simply upgrading contact center technology; we're reimagining service at scale. The future workflow involves digital agents and human agents operating as one coordinated team to serve customers. We're starting to bring together the best of major technology ecosystems from day 1, such as a SaaS player and a hyperscaler and creating agents that work across both platforms, creating leading-edge, customized solutions. This simplifies work for employees, delivers faster and more personalized support for customers and creates a service engine designed to scale efficiently as the business grows. Our combination of strength is helping us meet the needs of our clients today, and AI is opening up new opportunities where these strengths position us for growth in the long term. We see a long funnel of work, as we have the advantage of the biggest client base in our industry, all of which will need to reinvent. Let's look at ERP. We have been the #1 partner to all the major ERP ecosystem partners for years. And over the last several years, we've deployed modern ERP systems across hundreds of clients. When those systems were implemented, advanced AI did not yet exist. Now, those clients want to embed the new AI and data capabilities and transform their end-to-end processes. For example, with one of our largest oil and gas clients, we're seeing a clear pattern. First, they modernize their digital core. Over several years, we partnered on a major ERP transformation to implement a cloud-based platform that simplifies operations, standardizes processes and creates a single source of data across the enterprise. It was a significant multiyear investment. Now, with that foundation in place, they're investing again, embedding AI directly into the systems that run the business. This is not a separate layer of technology; it's intelligence built into core workflows across finance, supply chain, asset maintenance and field operations. These capabilities analyze large volumes of data, initiate routine actions and support better decisions in real time. The impact is tangible: faster cycle times, fewer manual steps, lower operating costs, and stronger operational resilience. We're beginning to see the same sequence more broadly: modernization of the core followed by AI-driven enhancement. Enterprise systems are becoming the platform that allows AI to deliver value at scale. Because of the work required across every process and every industry, we are starting with early leaders who have advanced technology stacks and want to pioneer. We believe that over the next 12 months or so, this opportunity will gain momentum. AI is helping us grow another strong business: cybersecurity. We see advanced AI as a catalyst to our cybersecurity business as the threat landscape expands and new tools emerge to protect and attack. AI is also unlocking opportunities in technology modernization, one of our key strengths. For example, for decades, parts of the technology stack, like the mainframe, have been considered too complex or too costly to modernize. Today, advanced AI and new hardware capabilities are making mainframe modernization feasible, which we believe will open as a major services market. We are also seeing significant opportunities in core operations, where AI is enabling us to make today’s impossible possible. This is one of the reasons why our custom systems integration work has been having a renaissance and is showing strong momentum. Core operations are where generally there are not as many SaaS providers because the needs are complex and industry-specific. These are areas where a lot of digitizing still needs to happen, like moving to the cloud and building data foundations, but where advanced AI is going to be able to provide solutions that are not available to clients today or are too expensive. Examples include finance and risk, such as Know Your Customer in banking, claims in insurance, prior authorization in healthcare and manufacturing, to name just a few. Advanced AI also is opening entirely new areas of growth for us because it is creating new opportunities for our clients and because making AI work requires entirely new capabilities. Take customer engagement. In Accenture Song, LLMs are driving the biggest revolution in retail since the advent of social media. While it is still very early, conversational and Agentic commerce are changing how customers discover, evaluate and purchase products. We are seeing strong demand, and we are uniquely positioned to serve our clients because of our ecosystem relationships and expertise in marketing, sales and service. Radisson Hotel Group, a global hospitality company, is a clear example of marketing and commerce reinvention. Over the past several years, we modernized their digital and data foundation, uniting brands on a single global platform. This created a real-time 360-degree customer view to enable personalized marketing across more than 1,500 hotels and over 30 languages in markets. Now, we're putting Agentic AI at the center of how demand is created and converted with Accenture Media Console, where AI agents optimize content based on traveler intent, streamlined campaigns, and dynamically allocate budgets. We're also helping Radisson adapt to how discovery is evolving with Agentic commerce, connecting live inventory and rates directly into conversational platforms so travelers can move seamlessly from discovery to bookings within AI-driven journeys. Since our collaboration began, Radisson's share of its direct bookings has tripled. This isn't incremental marketing improvement; it's AI-driven commerce, and it shows how each wave of technology reshapes industries, like travel, opening new growth opportunities for our clients and therefore, for Accenture. Our clients also are turning to us to help them build and provide the capabilities to use AI across the enterprise. For example, in one of our large clients, we're working with a leading large language model provider to embed advanced models directly into how the company's IT team delivers their projects. Those models are accelerating software work across the board, new development to upgrades. And some projects are already seeing delivery move 50% faster. Beyond engineering, the same models are automating complex documents, enabling real-time reporting and powering AI agents embedded directly into day-to-day business processes. And for developers, a next-generation Agentic coding platform is changing how work gets done with teams building their own tools and AI agents at scale. This is what reinvention looks like: AI becoming central to how work is designed, delivered, and run. We also have entirely new offerings, such as setting up dedicated AI services to either be their main execution arm, sometimes in a build-operate-transfer model or to be like a factory augmenting a client's core AI team. This quarter, Piraeus Bank S.A., a major bank in Greece, partnered with us to set up a central AI hub to be their primary execution arm with an option to transfer to them in the future. They are leveraging our strong capabilities to help them more quickly capture value from AI and navigate the complex ecosystem environment. Before I turn it over to Angie, I want to step back and give you our perspective on the future. AI, as it stands right now, may turn out to be the most powerful technology breakthrough since electricity. We cannot even today describe all the ways in which we will use this technology, let alone the opportunities to come. But the one thing we know is that the only way to realize the power of this technology is if companies can change dramatically to use it. And through every prior technology evolution in the last 5 decades, one constant has been that companies have turned to Accenture to help them make these big changes, and that is why I am so confident in our future. Over to you, Angie.

Thanks, Julie. Before I get into our business outlook, I want to share how the conflict in the Middle East is affecting our business and how we are reflecting it in our guidance. First, we have roughly 3,000 colleagues in the Middle East, a region which represented about 1% or $1 billion of revenue in FY '25. Our colleagues are safe, and we are providing them with all the support we can. Currently, we are not seeing any significant financial impact. While we know the environment is more uncertain given the conflict, we always call it like we see it. And based upon the information we have today, we are increasing key elements of our full year guidance. Our range for Q3 and the full year reflect our best view today of the potential impact of the conflict in H2. It does not take into account a significant escalation or the occurrence of major economic disruption. Now, let me turn to our business outlook. For the third quarter of fiscal '26, we expect revenues to be in the range of $18.35 billion to $19 billion. This assumes the impact of FX will be approximately positive 2.5% compared to the third quarter of fiscal '25. Our Q3 guidance reflects an estimated 1% to 5% growth in local currency, including about a 1% impact from our Federal business. Excluding the impact of Federal, our revenue is expected to be an estimated 2% to 6%. For the full fiscal '26, based upon how rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollars will be approximately positive 2% compared to fiscal '25. For the full fiscal '26, we now expect revenues to be in the range of 3% to 5% growth in local currency over fiscal '25, including an estimated 1% impact from our Federal business. Excluding the impact of Federal, our revenue is expected to be an estimated 4% to 6%. This year, we continue to expect an inorganic contribution of about 1.5%. We have a strong pipeline of opportunities and now expect to invest about $5 billion in acquisitions this fiscal year. But as Julie said, we could do more if the opportunities present themselves. For adjusted operating margin, we continue to expect fiscal year '26 to be 15.7% to 15.9%, a 10 to 30 basis point expansion over adjusted fiscal '25 results. We continue to 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 23.6% in fiscal '25. We now expect our full year adjusted diluted earnings per share for fiscal '26 to be in the range of $13.65 to $13.90 or 6% to 8% growth over adjusted fiscal '25 results. For the full fiscal '26, we now expect operating cash flow to be in the range of $11.5 billion to $12.2 billion, property and equipment additions to now be approximately $700 million. We are raising our free cash flow guidance by $1 billion and now expect free cash flow to be in the range of $10.8 billion to $11.5 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.3. We continue to expect to return at least $9.3 billion through dividends and share repurchases, an increase of $1 billion or 12% from fiscal '25, as we remain committed to returning a substantial portion of our cash generated to our shareholders. Our Board of Directors declared a quarterly cash dividend of $1.63 per share to be paid on May 15, a 10% increase over last year. As we move into the second half of the year, we remain focused on executing our strategy, investing for the future, and managing our business with rigor and discipline. With that, let's open it up so that we can take your questions. Alexia?

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

Definitely appreciate all the AI-related commentary, the client examples. What kind of quantitative evidence should investors be looking at to help substantiate the view that Accenture is a net beneficiary of AI?

Thank you, Jason. I want to emphasize that AI is deeply integrated into all aspects of our business right now. It influences why clients are transitioning to the cloud, and even when we engage in projects not specifically focused on AI, clients examine our AI expertise because everything ultimately ties back to AI. We also have direct AI initiatives, and our managed services business is assessed based on the performance of our platforms and clients’ expectations for AI development. To evaluate our business performance relative to competitors and market share is essential. It's clear that winning at the scale we are, around $22 billion, requires AI leadership. We will provide metrics over time to illustrate this. Currently, we focus on market share and overall growth, specifically examining whether our growth within the ecosystem exceeds general growth and how we compare to emerging competitors. We are tracking how many clients are starting AI projects with us, which are the metrics we discussed today. These metrics will evolve, but they represent what we analyze to drive our business forward.

Understood. Understood. And maybe just one on the numbers. I mean, the consulting bookings growth has been accelerating in the past few quarters. And then, just looking at the modestly upsized revenue outlook for the year, I mean, even if you only deliver the middle of the Q3 range in constant currency, I think you'll be at 4% year-to-date. You've obviously got the easier compare in the fourth quarter when you lap the U.S. Federal headwind. So any reason to not think the upper part of the full year? 3% to 5% range is a pretty plausible outcome, I mean, unless obviously, if there's some major economic disruption from the Middle East.

Jason, the 3% to 5% guide for the full year, which is really 4% to 6% excluding Federal, is our best view based upon what we see today. We had bookings that were really, really strong at $22 billion, which were actually a record for us this quarter, and it's our third consecutive quarter of $20 billion of bookings or more. And so for us, our guided range, we do aim for the top. We'll see how things play out, but it's our best view. And you're right, we will anniversary AFS in the fourth quarter, the headwind from that, and we expect that to grow in the fourth quarter.

Nice results, particularly in free cash flow. I’d like to ask about AI if that’s alright. Julie, I appreciate your insights regarding the positive effects, but I've been considering how quickly these frontier models are advancing, generating significant news and discussion. Are you observing any correlation or tracking how the improvements in these models and their capabilities might affect your booking growth and revenue conversion? I’m trying to see if there's any correlation or pattern that could influence your numbers as these frontier models continue to enhance.

Thank you for the question. It's important to understand the difference between models and the release of functionality in packaged solutions. Models serve as a powerful engine, much like a car needs more than just a great engine to function effectively; it also requires wheels and a transmission. When we release models, there isn’t an immediate link to bookings or new work, but they do pave the way for new solutions. In the past, much of our focus was on summarization and content creation. Improved models allow us to move into new areas, such as Agentic, which we are beginning to see. We are witnessing increased experimentation and the use of agents, especially as the models advance. Therefore, the launch of these models marks the start of new opportunities for us to offer to our clients, in addition to the ongoing work based on our previous experiences. Does that clarify things?

No, it really helps. I like the analogy, and it's insightful. Maybe as my follow-up, just I get this question a lot, Julie and Angie, just thinking about the large deals here, you've won a lot. That trend continues. But with respect to AI, how would you characterize the mix of advanced AI work between growth or revenue-generating use cases against the efficiency-led use cases? We hear a little bit of a pickup on the growth side, but I'd love to hear what you're seeing on the ground there on the mix shift?

Yes. I believe the first change we're observing is a shift in focus. According to our latest quarterly survey of C-suite executives regarding their perspectives on AI, 78% now indicate that they see growth as the most significant value. However, this hasn't yet translated into being the primary driver on the ground, mainly due to the current state of the technology. In the initial phases, much of the emphasis has been on content and summarization, which primarily enhance efficiency. As capabilities continue to develop, we are beginning to see more opportunities for integrating AI into core business functions and handling more complex tasks. We are definitely noticing an increase in growth-oriented AI initiatives, but efficiency remains the dominant factor. I would highlight that the most promising area for growth right now is in conversational and Agentic commerce, with demand in that sector skyrocketing. We're making substantial investments there, and as that sector takes off, I anticipate seeing tangible results in growth from these advancements. This represents a completely new market and significant opportunity for us, which we are well-positioned to capitalize on, especially with Song.

Congratulations on the results. If I heard correctly, it seems the acquisitions will be over $5 billion, which is an increase from $3 billion last quarter. Is that accurate? Additionally, it appears this isn't translating into inorganic growth. Is that due to the timing of the acquisitions or their contribution? Is it simply when those acquisitions come in?

Kevin, that's exactly right. We currently see $5 billion and have the potential to do more based on the opportunities that arise. Regarding the inorganic contribution, we still expect about 1.5%, which is largely dependent on timing.

That's great to hear. Regarding the growth in AI and the increase in bookings with your new partners, can you help us understand how this compares to your existing partnerships and how it might scale over time? It appears that these new partnerships are on track to double, which is excellent. Can you provide any insight into this? Specifically, I'm curious about the new partners like Anthropic, Databricks, and NVIDIA.

What we're observing is strong growth across the board, both with our large ecosystem partners and the emerging partners. The improvement in our models enhances our ability to deploy them in enterprises. For instance, we are now working on Know Your Customer initiatives in banking, as there aren't many effective packaged software solutions available. As our models advance, they address existing challenges. In areas like the mainframe, our models assist with the complex task of converting code, which encourages clients to engage more with mainframe systems. It’s important to consider both our large ecosystem partners and emerging partners together, as all these solutions are effectively functioning throughout the ecosystem.

All right. Julie and Angie, can you just touch on your headcount growth expectations? And maybe just higher level, your headcount strategy, has there been any change in linearity that maybe you're seeing, particularly related to AI, but more broadly in the environment right now would be great?

We expect our headcount to increase in the second quarter due to the demand we are seeing. This continues the talent rotation we discussed at the beginning of the fiscal year. We anticipate adding headcount in the second half as well.

Okay. And guys, just when we think about linearity and how that's trending given AI and implementation for either your own use cases or customers, I'm just curious if it's impacting the strategy going forward.

By linearity, if you mean the sort of revenue and headcount, I just would remind you that we really have not had a linear relationship since around 2015, when RPA, when automation really came in. And so we would expect to continue to believe that disconnecting, and that's what's baked into our guidance.

Okay. All right. Just one more quick one is on visibility. Just sitting where we are today versus perhaps this time last year, how do you think about your visibility and confidence in the remainder of this year and even the next 12 months, just given all the conversations? Are there any more uncertainties in clients now given AI or anything else for that matter, that geopolitics, et cetera?

Well, I would say that there is a significant amount of uncertainty in the environment that we are not incorporating into our guidance. However, our guidance shows our confidence in what we are observing with our clients, and so far, we haven't seen any impacts from the war. Nonetheless, the war brings considerable uncertainty, but we feel very confident based on the information we currently have regarding the outlook for the next two quarters.

And that's why we were able to bring the bottom up of our guide and what we see is the large deals layering in. And the second is the anniversary of AFS, so we have visibility to that.

I wanted to ask about some of the emerging and, I guess, evolving delivery model. So, as we think about AI increasingly in the future, to what extent does the broader GSI and tech consulting model need to pivot to an FTE model? You had an interesting announcement yesterday with Microsoft. Just curious, like if we fast forward a few years, is the majority of tech service implementation likely to be in an FTE model or just more so a mix? And near term, any important financial considerations as you lean into this model with partners?

What I would say is it will definitely be a mix, and that's because the way that the FTE model today really gives value is when you are going in and solving problems that haven't been solved, typically in mission-critical areas, where in order to get the AI to work, and these are usually like bespoke problems, at least initially, you have to have deep domain knowledge from the clients, the technology knowledge and then what we bring to the table, right, the experience, the integration, the industry and functional knowledge, and you work in teams to solve new problems. And then, the idea from there, of course, is that we will then replicate that over time at other clients. And so, there's more and more agility in how we're delivering, but the actual kind of thing that people call FTE models is really about solving those problems. We do think that delivery overall, it is changing. We're already using both more technology, but also being able to like kind of use more of these teams that have all of those functions, industry, technology, functional expertise. And so we do think that the way we bring our teams together will change, and some of that will be more upfront in like an FTE model. But what we are really differentiating in the market right now is that we have all of those skills at Accenture, and that's helping us win more.

Okay. That's helpful. And then, on free cash flow, so you've got good strong generation here, trailing 12 months, almost 30%. Can you comment on what you're doing differently here in net working capital or something tax related that's allowing for that, and obviously, the raise for the year aside from lower CapEx? And is it sustainable as we think about future free cash flow conversion?

Thanks, Bryan. We have just recorded record free cash flow on a year-to-date basis of $5.2 billion, driven by efficiencies in our operations and our days sales outstanding (DSO). Our DSO was approximately 5 days lower than last quarter and 2 days better than the same time last year. This reflects our ongoing focus on improving cash flow and operating efficiency. We are very pleased with our increase this quarter for the full year, resulting in a solid free cash flow to net income ratio of 1.3.

Julie, I want to build on a prior question around V&A. Can you help us understand what's driving the step-up in deployment and whether this reflects a shift in acquisition strategy towards larger or earlier-stage assets, higher multiples in the market or perhaps a pivot toward IP-led deals?

Sure. I'll let Angie discuss how we're viewing valuations shortly, but I want to address our strategy. Over the past decade, our strategy has involved using Ventures and Acquisitions to enter new high-growth areas. We accomplished this with Song and Industry X and through capital projects in recent years. This is all aimed at fueling organic growth by expanding our total addressable market into new high-growth sectors. We are also focusing on key enablers of AI, such as data centers and energy infrastructure, as well as major secular trends like defense, which we've pursued through various acquisitions. The public sector and education are other high-growth areas we're targeting to enhance our total addressable market. Additionally, we see opportunities to satisfy unmet demand in the market by developing products either organically or through acquisitions. For instance, the Faculty acquisition gives us a unique decision intelligence product. Furthermore, we are exploring new commercial models where data plays a crucial role in enabling AI. The Ookla acquisition, for example, provides an exceptional dataset that is essential for communications networks and enterprises. This type of dataset is powerful for AI applications and fundamentally changes our commercial model to a licensing and subscription basis. We are leveraging our balance sheet to explore these exciting new areas, which introduce new commercial models that aren't tied to full-time equivalent staffing. This will lead to a different mix in our financial profile and valuations, and Angie will provide a brief update on how to approach that.

Yes. And so in some cases, we are paying higher multiples than in the past. So the immediate uplift is lower in those instances than prior acquisitions. So that said, we are intentionally shifting toward higher-growth, higher-margin assets that are going to fuel organic growth and strengthen our capabilities, and it's really to position us for long-term growth and returns.

Helpful color on the strategic pivot there. As a follow-up, one of your partners recently highlighted the ability to reduce SAP ERP migration workloads to as little as 2 weeks using AI. How do you respond to concerns that AI tools are compressing project timelines, relative rate cards and reducing the TAM for systems integration work? And are you seeing similar compression in your own engagements? And if so, how are you offsetting this through volume or new service offerings?

Our strategy focuses on using technology to deliver greater value to clients more quickly, which ultimately benefits our business. This approach has been in place since RPA gained prominence in 2015. When we can expedite the technical aspects, it significantly helps manage the extensive work of process changes and change management. SAP projects tend to span multiple years and can hinder investment in other technological areas because of their scale. We recognize that whether it's in ERP or mainframe, the technical components represent just a fraction of the overall effort, leading to increased work opportunities. For instance, last week at AIPCon, we collaborated with SAP, Palantir, and Accenture to discuss developing products that are not yet fully scaled. Our joint efforts aim to provide benefits to our clients, which in turn benefits us. That's our perspective on this matter.

So one of the themes across the sector currently is higher-margin AI services offsetting more competitive pricing in legacy services. So I was wondering if Accenture is seeing similar trends helping with gross margin? And also, how much of a productivity boost is Accenture seeing internally from these AI programs?

Sean, so let me just start with pricing. For us this quarter, we saw improvements in some areas of our business, and we continue to operate in a highly competitive environment.

Yes. Internally, we think about applying AI in our delivery, where we're continuing to improve our efficiencies in delivery, which has also helped fueling our growth. And then, in how we operate Accenture, we're deploying all the services we give to clients to us. We're often the experimentation place as well, and we're really pleased, and you can see that being reflected in the efficiencies we're getting that are reflected in ROI.

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

It appears that you are performing exceptionally well with large clients, with 41 clients generating over $100 million in quarterly bookings this quarter, an increase from the low 30s. This represents a more than 20% growth. Do you believe that these large companies are quicker to invest in AI and significant transformational projects, while mid-sized firms are taking a more cautious approach? You might be at the beginning of a notable trend where mid-sized companies start to follow the lead of these larger clients. I'm curious to hear your perspective on this.

It's a great question. I don't see it developing that way because some of the smaller companies are actually spending quite a bit, which is where a lot of growth is happening. This focus on the mid-market has led us to make acquisitions to fuel that organic growth. When I think about the $100 million bookings or more in large enterprises, it reflects the significant amount of reinvention they need to undergo, with AI acting as the catalyst. These enterprises have extensive infrastructures that must be modernized, indicating a lot of change ahead. At the same time, I believe we are at the beginning of a large influx of work. Both large and small enterprises are involved, especially those that implemented modern ERP systems in recent years, where we are the leading partner, but advanced AI was not feasible at that time. This indicates a whole wave of work that needs to begin, and we are starting to see early momentum in that area. Moreover, we have barely scratched the surface in core operations since advanced AI isn't fully developed yet; physical AI is on the horizon, and Agentic AI is still in early stages. We see a tremendous amount of work ahead, but the technology needs to reach the right level. Of course, macroeconomic factors also play a role. Overall, we are very optimistic about the long term, as clients will derive significantly more value from AI. Each quarter, we demonstrate that clients are choosing us for these solutions. Thank you for the question.

And just a quick follow-up. I think Angie said Federal spending would be up year-over-year again in fiscal Q4. I'm just wondering into next year, does that normalize that back to the higher level that it's been into next year?

David, we'll give you an update in September on that, but we feel really good about the fact that we are anniversarying the headwind, and we're getting back to growth in the fourth quarter with our Federal business.

Go Federal. All right. Thanks, everyone. I just want to thank all our shareholders for your continued trust and support and all of our reinventors around the world that every day are delivering incredible value. So thanks for joining, and we'll talk to you next quarter.

Thank you.