Capgemini SE (CAP) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Capgemini Full Year 2023 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today, Aiman Ezzat, CEO. Sir, please go ahead.

Thank you. Good morning. Thank you for joining us for this full year 2023 results call. And today, I'll be joined by our new CFO, Nive Bhagat; and our CEO, Olivier Sevillia. So 2023 was another record year for the group. Our results are either in line or above our guidance. The industry slowed down in 2023 after 2 years of record growth. This gradual deceleration was well anticipated. And despite the headwinds, we brought the group to new heights. This demonstrates our agility, the quality of our teams and above all, the strength of our positioning. Looking at Q4, it came in line with our expectation at EUR 5.6 billion. Our revenues are virtually stable year-on-year and the booking remains solid with a book-to-bill of 1.18. For the full year, revenues reached EUR 22.5 billion, up 4.4% at constant currency, in line with our target. Bookings are robust with a solid book-to-bill of 1.06 and reflects sustained commercial momentum despite lengthened decision cycles. And at 13.3%, the operating margin rate improved 30 basis points. This is above the 0 to 20 basis point target we set for the year, and this is essentially results from the ongoing shift towards more innovative offerings, combined with strengthened operational efficiency. In the context of inflation and market slowdown is set another demonstration of the resilience of the group and above all, the increasing value we create for our clients. Organic free cash flow reached a record level of EUR 1.96 billion, above the EUR 1.8 billion target we set for 2023. Normalized EPS is up 8% year-on-year at EUR 12.44. In line with our dividend policy, the Board of Directors is proposing the payment of a dividend of EUR 3.4 per share at the Annual General Meeting. Now these results put us among the leaders in our industry. 2023 once again illustrates how the transformation of Capgemini and its positioning as a business and technology partner to its client, has redefined the resilience of the group. Our clients are holding firm on the digital and sustainable agenda. The gradual market slowdown, we experienced, results from lengthened decision cycle, increasing client focus on operational and cost efficiency program. This also translated in continuous demand for transformation program with shorter payback, leveraging high value-added service offering, most notably in intelligence industry as well as activities driven by cloud data and AI, where we experienced double-digit growth. There is no change in the environment at the end of the year and Q4 came in line with our expectation. The sectors, geographies and business trends are prolongation of the ones we observed since the start of the year. Public sector and manufacturing were more resilient, while telco, media and technology and financial services experienced a marked slowdown. Europe showed a greater resilience in the deceleration phase. Conversely, the slowdown was more pronounced in North America, penalized by a less favorable mix and more aggressive cost cutting by clients. However, we can expect North America to rebound faster than Europe in the reacceleration phase. The trends by business are consistent with what we observed since the beginning of the year. It's worth highlighting the 9% growth in strategy and transformation, confirming the recognition of our positioning as a business and transformation partner by our clients. Now let's just take a small time to reflect a little bit and put this 2023 results in perspective, looking at the dynamic we had over the past 10 years. The size of the group has more than doubled, our operating margin increased by more than 4 points and the normalized EPS and organic free cash flow nearly tripled. The scale of the performance improvement reflects the extent of the transformation of the group, positioned as a business and technology partner to our clients in the transition towards a digital and sustainable economy. A client-centric organization, strategic partner of CXOs, enabling us to shape transformation deal, our ability to deliver end-to-end industry-relevant solution leveraging technology as a transformation driver, and the fact that we are leading in intelligent industry. The steady improvement in pro forma despite the ups and downs of the market is a testimony of relevance of our strategy, the quality of execution and the agility which we define our resilience profile. If there are some takeaways is that we raised our growth profile through the cycle to the best in the industry. Our margin is resilient and improving, supported by our margin-accretive offering and continuous efficiency drive. Now coming back to 2023. We continue to invest in building the capabilities and solutions to help our clients transition to a digital and sustainable economy. We keep investing in our solutions. We are a leading player in intelligent industry and customer first as well as cloud, data and AI. And I will come back to the GenAI subject right after. On sustainability front, we stepped up our efforts in 2023. We continue to support our clients on the net zero strategy, on the design of sustainable products, the implementation of sustainable operation or greener IT, and we also launched our climate tech offerings around renewables and the scaling up of gigafactories. We continue to pursue our industry plays to reveal new source of value creation for our clients. In life science, we are deploying a clinical trial solution to accelerate time-to-market for drug development. Innovation remains top of mind, of course, leveraging our network of applied innovation exchanges and labs across the board to showcase technology and use cases to our clients, be it on quantum, immersive technologies, 5G, 6G or even, of course, GenAI. And we significantly strengthened our expanded -- our ecosystem of partners, which represents now more than 65% of our bookings, a significant increase in the last year, driven by our intimate relationship, notably with the hyperscalers. On talent, we demonstrated our ability to attract, retain and upskill our people. The group provided 17.8 million hours of learning to employees, representing 53.8 hours per employee, up 5% year-on-year. We are ultimately driven by delivering value-led transformation for our clients. Now let's come back to GenAI. Of course, it's top of mind for all large organization, and we continue to strengthen and upskill our teams and invest in solutions. We are positioned as a leading player, enabling our clients to explore, test and scale solutions for tangible business impact. We delivered -- or are delivering around 300 projects and we have hundreds more in our qualified pipeline. There is clearly a strong demand for Generative AI and more broadly for AI services. And we start to see more clients going from proof-of-concept to deployment. Just highlight a couple of examples. We are supporting a U.S. industrial conglomerate to become a major software player, leveraging GenAI. We are collaborating on a number of use cases, ranging from engineering to customer, sales, technical support in addition to finance and IT. We expect to bring numerous use cases to production in the course of 2024, setting a path for EUR 150 million net P&L impact for the client. We're also partnering with the U.S. telco to build GenAI customer service assistance as well as conversational bots for commerce and customer self-service. The aim is to create an immersive and personalized customer experience to address customers in a proactive and timely manner, leading to improved customer satisfaction and sales. The group is very well positioned to address the growing demand for GenAI and ready for the scale deployments. We have a strong portfolio of offering these capabilities at scale from a business, industry and technology perspective. Our Capgemini's GenAI platform [indiscernible] is fully live now enabling client to experiment use cases and to industrialize our own custom GenAI projects. We continue to expand our strong ecosystem of technology partners including Microsoft, Google, AWS, Salesforce and more recently, Mistral AI. On the ESG front, 2023 was an important year with major progress achieved towards the most sustainable and inclusive world. Regarding environmental sustainability, the group total carbon emission Scope 1, 2 and 3 have fallen by 30% against the 2019 baseline. Notably, the share of renewable energies reached 96% compared to 88% in 2022, and we were recognized last week by the CDP as part of the A List. On social engagement, the group further strengthened its position as a leader committed to fostering diversity and inclusion. On gender diversity is the proportion of women in the total workforce reached 38.8%, so up 1 point year-on-year and almost 6.6% since 2019. The proportion of women among executive leadership position reached 26.2%, up by 1.8 points year-on-year and more than 9 points since 2019. The scale of impacts for digital inclusion initiative also expanded in 2023, overall Capgemini's various programs and partnerships with leading nonprofit organization benefited almost 2.5 million individuals in 2023, bringing the cumulative beneficiaries to 4.4 million since 2018. And on governance, we continue to make progress around ethics and cybersecurity. Now coming to the outlook for 2024. So we expect a soft landing scenario setting up for a strong 2025. In terms of revenue growth, we see the trough in Q1, driven by a seasonal decline in revenue versus Q4. Starting Q2, we expect a gradual improvement towards an attractive exit growth rate in Q4, setting up for a rebound of growth for 2025. This translates for the full year in a constant currency growth of 0 to 3%, excluding a minimal contribution of M&A at the low end and up to 1 point at the top end. On the operating margin, we target 0 to 30 bps improvement, leveraging our improved offering mix as well as continuous operational improvement on our way towards this 14% target for 2025. And finally, we target to maintain our strong cash conversion with an organic free cash flow around EUR 1.9 billion. Thank you for your attention, and I now leave the floor to Olivier Sevillia, our COO.

Thank you, Aiman, and good morning, everyone. So we delivered indeed a solid performance in '23 despite the weakening macro and rising geopolitical tensions. Basically, we've won market share in a software environment. We are clearly benefiting from our strong positioning as a business and technology partner of the global Fortune 500 companies to support their digital and sustainable transformation. Digging a bit now in our revenues by sector. While all sectors experienced a gradual deceleration throughout the year, as anticipated, there is a visible contrast in our performance across sectors. Looking more specifically to our Q4 performance, as you can see, the public sector continued to deliver solid growth and Energy & Utilities proved also quite dynamic. Conversely, Telco and Tech and Financial Services continued to contract as we anticipated. Moving to the bookings. Bookings, I'm pretty proud, I would say, to report that bookings reached almost EUR 24 billion last year, which represent a 3% growth at constant currency. And in Q4, with bookings of EUR 6.6 billion, we delivered a solid 1.18 book-to-bill ratio, leading to 1.06 ratio for the full year. Our sales pipeline is strong. It demonstrates the underlying demand for the services we offer and our some relevance and support clearly our gradual revenue improvement guidance. We have a particularly good traction of intelligent industry and the pipe is promising. We continue to perform very strongly in data and AI and we see growing appetite for enterprise data hub's larger programs as GenAI picks up. On Enterprise Management [indiscernible] continues to clear sustained demand. Finally, as Aiman mentioned, our sustainability offers [indiscernible] and the pipeline growth there is really impressive. Overall, while discretionary spend remains soft, while decision cycles have stabilized and then the consolidation -- played favorably to us, we see a gradual growing demand for larger transformational deals. Let me now highlight a couple of transformation deals that we won in Q4. As Aiman stated, the execution of [ 5G ] is well underway. So these deals showcase the value we bring to our clients. They are aligned with the dimensions of our strategic framework at the same time, validate the relevance of our [ 5G program]. I would like to call out 3 examples and put those in context with our overall strategy. On intelligent industry, for our U.S. global automotive supplier, we've become their key partner for their driver assistance, R&D activities and related embedded software. On customer first for global insurance company, we are transforming their marketing strategy and implementing scalable customer data platform for customer acquisition and cost and upsell to increase the potential revenue by up to 30% on one of the key business domain. When it comes to sustainability for MTU, a German aircraft engine manufacturer, we are supporting our clients to develop, manufacture and service the next generation of sustainable and fuel efficient aircraft engines, including regulatory propulsion concepts such as flying fuel cell, aiming to reduce the climate impact of aviation longer term by as much as 95%. With this, I'll hand over to Nive.

Thank you, Olivier, and good morning, everyone. I'm pleased to share now with you the financial highlights for our 2023 fiscal year. As mentioned by Aiman, Capgemini delivered solid results in 2023 despite the market slowdown. Group revenues reached EUR 22,522 million for the full year. This represents a reported growth of 2.4%. At constant rates, the growth reached 4.4%, within the target range of 4% to 7% for 2023. Operating margin amounted to EUR 2,991 million or 13.3% of revenues. This 30 basis points improvement exceeds the 0 to 20 basis points range that we targeted for the year. After other operating expenses, financial and tax expenses, which I will further comment on in a moment, the net profit group share reached EUR 1,663 million, up 7% year-on-year. Normalized EPS reached EUR 12.44, up 8% year-on-year. Finally, we also generated a strong organic free cash flow of EUR 1,963 million, above our target of around EUR 1.8 billion for 2023. Moving on to our quarterly revenue growth. The gradual slowdown experienced, since the beginning of the year, continued in Q4 at the expected level. Q4 revenues were slightly down by minus 0.2% at constant exchange rates and minus 0.9% on organic basis. This brings the full year organic growth to 3.9%. Taking into account a positive scope impact of 0.5 points for the year, growth at constant currency was 4.4%. FX had a negative impact of 2.2 points in Q4 and minus 2 points for the full year. As a result, Capgemini's reported growth was minus 2.4% in Q4 and plus 2.4% for the full year. Looking forward, FX should have a slightly negative impact both in Q1 and for the full year 2024. Q4 came in line with our expectations globally and by region. The breakdown of the revenues by region shows that the pace of deceleration was similar across our key operating regions. On a full year basis and at constant exchange rates, the United Kingdom and Ireland maintained a robust momentum with revenues growing plus 7.9%. This performance was driven by the public sector as well as consumer goods and retail and manufacturing sectors, while revenues in Financial Services and TMT was stable year-on-year. The rest of Europe region performed well with revenue growth of plus 7.6%, fueled by the public sector and the manufacturing sector. Growth in the energy utility sector was solid and limited in financial services. France revenues grew plus 6.1%, mainly supported by strong growth in the manufacturing and consumer goods and retail sectors. TMT was the only sector to decline in 2023. Revenues in North America decreased slightly by minus 1.3%. The manufacturing and services sector delivered solid growth, revenue declined in the TMT and consumer goods and retail sectors and to a lesser extent in financial services. Finally, revenues in Asia Pacific and Latin America region grew plus 4.6%. Growth was mostly driven by Asia Pacific, where the consumer goods and retail services, manufacturing and public sectors enjoyed double-digit growth rates, whereas Financial Services remained stable and TMT declined. Moving on to our revenues by business line. Here again, Q4 came in line with our expectations. Strategy and consulting remain our fastest-growing business, up close to 5% at constant currency. Now for the full year and at constant exchange rates. Strategy & Transformation consulting services reported plus 8.6% growth in total revenues in 2023. This continued momentum reflects our strong positioning as a strategic partner to our clients for their digital and sustainable ambitions. Applications & Technology services reported plus 4.5% increase in total revenues. And finally, Operations & Engineering services grew plus 2.8% in total revenues. Moving now to the headcount evolution. The strengthening of our operational efficiency in a decelerating market led to an increase in utilization rate, but also a decrease in total headcount, particularly offshore. Our total headcount stands just above 340,000 employees at the end of 2023, down by 5% year-on-year. The offshore leverage is slightly down to 57%, 1 point lower than at the end of 2022. Lastly, last 12-month attrition further cooled down in Q4 compared to Q3. At 16.7%, the attrition for 2023 is down by almost 9 points compared to 2022 and now stands within our nominal operating range. Let's turn to the operating margin by region. In 2023, all regions maintained or improved profitability. First of all, the 50 basis points improvement in France brings the operating margin to 12.6%, which is an all-time high. U.K. and Ireland also delivered another record operating margin at 18.6% compared with 18% the year before, building on our favorable business mix in this region. Operating margin in North America is the same as last year at 15.6%. The rest of Europe margin is slightly up at 11.7%, 10 basis points above 2022. Finally, the operating margin in Latin America and Asia Pacific region improved substantially to 12.2%, up by 160 basis points year-on-year. The improvement of our operating margin is once again driven by the improvement of our gross margin. Our gross margin improved by 40 basis points in 2023. This results from the evolution of our portfolio offerings towards more innovative and value-added services combined in 2023 with the strengthening of our operational efficiency. Moving on to the next slide. Net financial expenses were visibly down at EUR 42 million in 2023 versus EUR 129 million in 2022. This is primarily driven by higher interest income on our cash assets. Income tax expenses decreased by EUR 84 million year-on-year to EUR 626 million. The group's effective tax rate stands at 27.2% in 2023. This compares with an underlying rate of 28.1% in 2022 after adjusting for the EUR 73 million tax expense in the U.S. Now a quick recap of our P&L from the operating margin to the net income. The other operating income and expenses increased to EUR 645 million, up by EUR 171 million year-on-year. On top of the higher restructuring charges, which increased by EUR 97 million, a change in French accounting practices, as set by the French National Accounting Council, resulted in an additional EUR 63 million noncash expense related to the annual employee share ownership plan. Consequently, the operating profit was EUR 2,346 million or 10.4% of the group revenues. After financial expenses, taxes, minority interest and equity affiliates, the net profit group share amounted to EUR 1,663 million, up by 7% compared to 2022. Consequently, reported basic EPS was EUR 9.70, up by 7% on 2022, while normalized EPS was up by 8% to EUR 12.44. Finally, let's have a look at the evolution of our organic free cash flow and net debt in 2023. We generated an organic free cash flow of EUR 1,963 million, above our target of around EUR 1,800 million. Over the past couple of years, the swing in liquidity and interest rates overshadowed the strong and regular underlying improvement in our cash generation. Indeed, before working capital variation, our free cash flow improved by almost EUR 1 billion between 2021 and 2023, moving from EUR 1.3 billion in 2021 to EUR 2.3 billion last year. M&A cash flows amounted to EUR 343 million, while we returned to shareholders more than EUR 1.4 billion in dividends and share buybacks. Our tenth employee share ownership plan led to a net share capital increase of EUR 465 million. Overall, the group's net debt further decreased to EUR 2 billion in December 2023 compared to EUR 2.6 billion a year ago. On that note, Aiman, over to you for your closing remarks.

Thank you, Nive. So let me wrap up. 2023, we delivered another record performance despite the market slowdown. This illustrates once again how the transformation of the group and its positioning as a business and technology partner to its clients, has redefined the resilience of the group's performance from revenues to operating margin and free cash flow. And for 2024, with the materialization of a soft landing scenario, we anticipate a gradual improvement in demand. So after a trough in Q1, revenue growth will start to improve, towards what should be an attractive exit rate in Q4. And as we continue to shift our mix towards more value-creating offerings, we aim to improve again our operating margin in 2024, confirming our ambition to reach 14% in 2025. And finally, on organic free cash flow, the objective is to maintain our very strong free cash flow conversion. We are convinced that the trajectory towards a more digital and sustainable economy cannot reverse. Therefore, we maintain our ambitious trajectory and continue our investment to strengthen our position. Let's now open the Q&A. So pleased to allow a maximum number of people in the queue to ask questions, may I kindly ask you to restrict to one question and a single follow-up. Operator, could you please share the instructions?

[Operator Instructions] We will now take our first question from the line of Laurent Daure from Kepler Cheuvreux.

So my main question is on the comments on your expectations that the U.S. market will recover stronger than Europe. Do you start to see a significant trends when you talk to clients that things will start to improve [ both ] the summer 2024 because it's been a tough market despite a decent macro scenario there? So what are under your confidence that things get better maybe 6 months from now? And my follow-up is on the restructuring. As expected, they were higher last year. Now with the market stabilizing, do you expect a quick return to your normalized restructuring rate of EUR 80 million to EUR 100 million?

Okay, I'll take the first question. I'll let Nive on the restructuring. So first for the growth on the U.S., listen, it starts to become a little bit more positive. Definitely, we see. I'm not saying that Q1 is going to be an improvement, but I'm -- what we see clearly in the market, what we see in terms of the pipeline, what we see around the decision cycle is more positive. And we do expect to start to see improvement in Q2 and then hopefully a reacceleration in the second half. So there is -- today is the sign, the green shoots of yes, we are basically really coming to the bottom of the slowdown in the U.S., and the deals we see in the pipeline, the discussion we have with clients, the budgets that clients seem to be putting on the table for 2024 points in the right direction. Nive on the restructuring?

Yes. Restructuring will visibly go down in 2024, and we expect that this will fuel the reduction of other operating expenses both in values as well as the percentage of revenues.

We will now take the next question from the line of Charles Brennan from Jefferies.

I think the key question today is just the linearity of the year. Laurent obviously offset in the context of the U.S., but can you give us some feel for how it looks for the group as a whole? I guess the key question is how deep is the trough in Q1 and how attractive is the exit run rate from Q4. Is there anything you can do to help us out?

Well, listen, for the trough in Q1, definitely -- I mean, clearly that we have -- we go back to the normal seasonality, which is basically revenue in Q1, which is lower than Q4, which basically by definition, will give a bigger trough in Q1, and the recovery then is from there. Now the slope is always a bit difficult, as you imagine, to predict. I'm always a bit careful around how the slope of the recovery. The same thing I was careful around the slope of the deceleration last year. But still -- I mean, we have positive expectations on Q4 exit rate. I mean, today, if you ask me what I'm targeting in terms of exit rate in Q4 is a mid- to high-single digit. So that's really why -- what sets up for a pretty strong 2025, but that's the exit rate we are targeting currently for Q4.

And in terms of the trajectory, have you got enough visibility to see that Q2 could be positive organically?

I'm not going to comment on that. I think we will see an improvement compared to the Q1, okay? But again, I will remain cautious around basically how Q2 looks like exactly.

We will now take the next question from the line of Michael Briest from UBS.

A follow-on Charles related to margins. I mean you've got a great quarter over many years of managing to improve margins, not just in the year, but in each of H1 and H2. Given what you're saying about growth rates and the compression on revenues, do you think the margin progression for the year should be quite evenly spread between H1 on H2? Or should there be more in H2? And then the follow-up, I guess, would be around M&A last year and the guidance for this year implies not much activity, less than the 200 basis points you talked of the CMD a few years back. Could you just talk about why that is, and what your priorities are on M&A?

Okay. So listen, on the margin, there could be a bit seasonality between H1 and H2. To be frank, it's, let's say, 0 to 30 bps. I'm not going to comment on -- I mean, H1 and H2. It can come in the first or the second half. So it's a bit difficult to predict right now. We have confidence that we have the levers. The phasing is linked to a number of things, including taxes and plenty of other things. So basically, I will wait on that. On the M&A front, more positive this year. I mean the reason we didn't go to 2% for a very simple reason is we didn't find anything attractive to spend the money on. So independent of the money that we allocate to M&A and the fact that we have an ambition, I don't think we should spend the money, if we don't think we can create value out of the acquisition. And from what we have seen over the last couple of years, to be frank, there was not anything attractive at least at the right price to be able to drive some of these decisions. So we don't want to spend the money just to say we hit a target of in terms of acquisition. Now looking at this year, I am more positive because after a couple of years of slow down -- a few -- a number of quarters of slowdown, we find that these are ready more to kind of monetize their assets. Expectation around basically valuation have become more reasonable. People are more looking at a more reasonable transaction, and we start to see real potential for value creation with a more active pipeline of things that can really try to basically end up being an acquisition. So I am more positive around what we can achieve in 2024.

Okay. But Aiman, just on the margin, the seasonality you're flagging on growth is quite different between Q1 and Q4. On the margins, we shouldn't be surprised if things are not follow the normal pattern of 0 to 30 basis points in both H1 and H2.

Agree. And for me, as you know, I never plan on normal pattern. Especially on the margin for me, it's a target for the full year. Definitely, an acceleration in Q4 will provide some operating leverage. So basically, will bode well for Q4 in terms of being able to do the margin. But I'm not saying that the margin improvement is front loaded at all, but we try to achieve the maximum in H1. But yes -- I mean logically, there should be more in H2 than in H1.

We will now take the next question. from the line of Mohammed Moawalla from Goldman Sachs.

I had -- my question was really around that kind of exit rate you talked about on the top line. As we kind of look at sort of -- as we come out of '24, you talked about the pipeline kind of transformational deal demand being still quite healthy. What are the kind of additional investments? And how do you think about headcount around in the second half of the year to kind of cater towards that? And obviously, you get to your kind of 14% target, it implies a kind of significant step-up in '25. So should we still think of it as still predominantly kind of gross margin driven? Or should we see more of an augmentation on the OpEx side? And the follow-up question I had was really around kind of AI, if you can sort of give us maybe a quantification of some of the investments you're making right now and that kind of return on that kind of investment, how you kind of see that sort of playing out in terms of top line acceleration?

Okay. So it's a first very dense question. So listen, the exit rate on the top line. So you're talking about the headcount, yes -- I mean, to fuel that exit rate on the top line, we will need to increase headcount. As you have seen, we have done quite a bit of optimization in terms of cost, in terms of utilization in the course of 2023, which supports basically our entry in 2024 and margin improvement between other things, but headcount growth will happen. In the course of the year, as you know, I'm never obsessed about just headcount growth because first, is it offshore, is it onshore, it doesn't have the same revenue duration capacity. And the market is very soft. I don't see any attention on the market. Even if things reaccelerate in terms of raising our headcount, we have reduced subcontractors to a minimum. So we have plenty of flexibility today to be able to accelerate without any challenge in terms of most raising headcounts and raising subcontractors, okay? On your -- and for the margin in 2025, again, we are quite confident. Listen, if you have 50 bps or 60 bps to do next year still, if that's the case or 40 bps, depending where we'll end, frankly, it's not a challenge. If we accelerate, there will be some operating margin leverage, but we'll continue to improve on the portfolio and the efficiency. So for us, we want to work both on the gross margin but also on our G&A, increase the efficiency around sales. So we'll continue to work on everything. Efficiency is there. And of course, the portfolio, we continue to sell today at a margin, which is higher than the margin we are delivering, which basically bodes well for the continuous improvement in gross margin. And you could see the improvement this year. We did 40 bps on the gross margin. It's really the proof point on what I'm saying. On the investment in AI, we are gradually investing. As you know, a very large majority of this investment is linked to ramp-up in terms of headcount because that's where the biggest cost is coming. And that will come with the deployment. So I do see a bigger ramp-up probably happening in the second half of the year, as people start to scale up some of these programs. But right now, we're investing in terms of solutions, invest in our platform, invest in terms of a number of assets. We're investing in terms of training and scaling up capability. We're investing in all the partnership we have with a number of our partners to develop use cases and solutions, but it's not the massive investment. I think the bigger investment will come up with the ramp-up in headcount that should happen in the course of second half of '24 and primarily 2025.

We will now take the next question from the line of Sven Merkt from Barclays.

The free cash flow guidance implies a weaker progression on a year-on-year basis, but you have obviously beaten free cash flow for a number of years now, therefore should we see the guidance really just as conservative again? Or does it maybe reflect the growth acceleration in Q4, you talked to, that might require additional working capital?

Well, thank you for that question. Just a couple of perspectives. One is that, as you're aware, our free cash flow conversion has been very strong, and our free cash flow to net income, of course, has been more than 1. With that target of 1.9 -- around 1.9 that we gave for 2024, we contend with 2 aspects. One is an increase in cash tax rate, which we expected in 2023, but that moved out to 2024 because we had some positive items in 2023. So we've got to deal with that. And the second is, as Aiman mentioned, with the potential year-end acceleration rate, this will put DSO pressure on working capital. So I believe, therefore, that the target of around EUR 1.9 billion is a sound one.

We will now take the next question. from the line of Frederic Boulan from Bank of America.

My question, if I can go back on the AI topic. If you can maybe share with us the kind of main use cases you have in mind -- clear use case for business AI when you look through different verticals, where do you think will be the kind of most obvious return investment for your customers? And a lot of announcements from [indiscernible], but if we think about you guys versus your competitors, where do you see differentiation between what Capgemini can offer on that front versus your main competitors?

Listen, use cases. I mean the interesting thing with GenAI, it has created use cases across the value chain. So we see use cases, of course, on the functional side. We see use cases in terms of software engineering applied to ourselves, but also helping our clients to benefit from it. And we see use cases from an industry perspective. I have to say a lot of what we heard and what we saw so far has been very much on the customer front end. So to be frank, the most overwork case, which is the call center productivity. I think almost every CEO in the world has mentioned that one to me. But I think there's a lot more. It goes beyond some of the call center productivity. There's a lot of work we're doing around the customer experience side, sales efficiency, innovation, cross-selling, et cetera. And here, we see a lot of appetite from clients. There is lot of functional one, looking at legal, looking at procurement, looking at finance, looking at HR, one after the other, and you go to HR, you're looking at recruitment, you're looking at -- we're even doing something with one of the agencies in Europe to basically, how do you say, to rewrite all the job descriptions of people based on new parameters. And we brought that down from 3 days per job description for 3,000 jobs to half a day. So I can give you an infinite number of use cases. The question right now is, first, the expectations, which I think have been a bit tight where people think that money will come in quickly and easily. And a lot of the real impacts will come from complex transformation that needs to be done. It's not just simple PoC that basically take a scale in 3 months. And I think this is where people are a bit hyping the cycle. And the second thing is really start going in the very industry focused use cases. I mean we see a lot of potential, for example, in R&D, in pharma, but also in auto, to be able to crush completely innovation development cycles. We've seen engineering. We've seen supply chain. We've seen manufacturing. And that's really what we're focusing a lot on, is how do we develop the really industrial specific use cases and the platform I talked about [indiscernible] is a platform where we basically start to get clients, to start experimenting with some of these use cases. And we're also trying to leverage what we have created to try to industrialize the use cases to accelerate significant deployment. The partnerships, I think, with a number of technology players, are important. And frankly, what they look with us is how do we work around actually developing the actual use cases, which will have actual business impact at our clients as we deploy them that will start to really benefit from the technology has been developed. People like Mistral AI have developed superb technology, which is much more compact, extremely efficient, open, where you can change the weight and very attractive for client. So we look for some of the best players, and we continue to work. We work with a number of other technology partners for new partnership because we are chasing the best potential technologies, models that will really create business impact at clients, and that's what we're focusing on. So it's hard work, but I think the -- there will be a lot of benefits for companies as it comes. In terms of scale up, it takes time. It takes time because going from -- I say unlike the call center example, which tends to be pretty quick, going from a PoC or use case to really deploying our skills can require a bit of change in the company, but that's how you're going to get real impact as well on the benefits.

We will now take the next question. from the line of Toby Ogg from JPMorgan.

Perhaps just coming back on the free cash flow. I appreciate the factors that play there for 2024 around the cash taxes and the DSO increases you accelerate in the back half. But just thinking about the cash conversion kind of longer term, should we expect this to improve from the current levels? And what do you see as the kind of the big buckets and the big areas of opportunity to drive that improvement in cash conversion? And then just a follow-up on GenAI. We talked about the shape of growth here -- I mean you talked about obviously soft landing for 2024 and then setting up for a strong 2025. Could you give us a sense for what you're building into that trajectory for GenAI-related contribution and demand over the next few years?

So I'll answer the first question, which is we absolutely expect to keep that free cash flow conversion strong, so with the FCF to net income of more than 1. So that's something we will continue to strive for. As far as improvements are concerned, honestly, the free cash flow will move with the earnings, so I expect that, that will be the trend that we'll follow in terms of any improvement.

I mean we already have record leading conversion saying that we should -- we can improve further. I think it's a big challenge. First, we have to try to keep it. On the GenAI, listen, there is one thing interesting about GenAI. First is that it's opening up a lot of discussion around transformation. And I think this is really what's important because as it touches the whole firm, we are basically opening discussion around transformation across the firm. So the GenAI will be the trigger to a lot of transformation. How much of it is really GenAI linked or leveraging a lot of GenAI is difficult to see. From a technology perspective, it's bringing and opening new doors. The change itself that comes behind is not necessarily GenAI change. So the GenAI program will drive a lot of transformation, changes in operating models, a lot of data engineering behind. This is where we expect the scale up to be. It's, yes, definitely around the model, around the technology, around the assets, but a lot of work around data, which has been one of the big accelerators around the GenAI growth. We had like 20% to 30% growth for a number of years. It's coming a lot triggered by some of the discussion around data and how to get the data available ready, et cetera, to be able to feed some of the models. So is GenAI important for the future growth? Yes, because GenAI is enabling a lot of discussion in terms of transformation, digital transformation in companies and I think this is -- it's a trigger for really a lot of shaping up, a lot of new deals in terms of transformation. But I cannot give you an exact weight in terms of how much it will contribute.

We will now take the next question from the line of Adam Wood from Morgan Stanley.

I just wanted to come back to the kind of phasing through the year. I mean at first line, the organic growth guide looks pretty narrow range given the uncertainty at 0 to 2. But if I take a 3% quarter-on-quarter decline in Q1, which I think is reasonably reflective of historic averages, I get to Q1 being down 4%, maybe 5%. And so actually, we've got quite a different growth in the first half, into the second half and a reasonable -- maybe not a hockey stick but a decent recovery. Could you just help us a little bit with why you have that confidence again into the second half? Is it comp pleasing? Is it a pipeline here? And obviously, if I've made a mistake on my back envelope calculations, correct that assumption for Q1?

No. See listen, one, the good news, I think, overall, things should be better. Sequentially trend is -- sequential trend is stabilizing, not declining. So, for example -- so we really expect to have the acceleration starting in Q2, but the slope is still a bit difficult to define. So what is the shape exactly of reacceleration, you know me I can give you the trend, and I'm pretty good at basically seeing what the trend is going to be. So the slope is obviously a little bit to predict, but we have pretty high level of confidence around the exit rate that we should target for the end of the year. And we -- from what we see today in the funnel from our estimation is absolutely feasible to get to the mid- to -- mid-single to high-single digit in terms of exit rate. And that's really -- for me, the obsession for the year is reacceleration by the end of the year, and the fact that we continue to see a sequential rate going in the right direction.

And it's my assumption that the average, you'd be looking at a 3% decline, that would represent a good average for Q1 over Q4. Is that reasonable thinking?

I let you make your calculation.

We will now take the next question from the line of Balajee Tirupati from Citi.

Two from my side, if I may. Firstly, could you share underlying assumption within the lower and upper end of 2024 growth and margin outlook range? And the second question is, you initially mentioned seeing some green shoots and client budgets. So any particular evolution that you may share by verticals or regional segments at this point?

The underlying assumption. I mean, frankly, the underlying assumption is just a slope, at least for the revenue, is what is the slope, how fast things reaccelerate starting in Q2. That's what basically gives you the difference in terms of the shape of the year, is what defined the range, if you're more towards the lower end or the higher end of the range. On the verticals, I mean, one of them for us is Financial Services where we have seen clients basically talking about higher budget. Doesn't mean that they will start pulling all the money into Q1, but definitely, it's one of the industries where we expect to see a rebound in the course of the year. The others, I think it's a gradual improvement. Again, I expect to see a North American operation recovering a bit faster because that's typically to be the shape of how clients basically make decision in the U.S. Interest rate might be going a bit further down in the U.S. before it goes down in Europe. Again, we will see. The timing of that has an impact, of course, on the investment cycle. But overall, I do expect a lot of verticals to improve. I mean one of the resilient one that should continue is Energy & Utilities. I think we -- this position continue to become resilient. This has picked up after being quite weak previously, like '21, '22. We saw some pickup in '23. And I do expect something positive around that as well in 2024. So it's a mix because it's also the regional impact. But again, tech is the one where I will remain a bit cautious around in terms of basically how fast this is going to turn around. It will definitely stabilize, but I'm not sure that basically we'll see a quick pick up in that.

This is helpful. And lastly, glad to know about renewal of your term and proposal of renewal of your term and also congratulation Nive for taking over as CFO of the company.

Thank you.

Thank you. Thank you very much. And this was the last question. So I wish you a great day and look forward to talking to you in the coming days and weeks. Thank you. Have a great day. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.