Jacobs Solutions Inc. (J) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. Thanks for joining. I'm Steve Fisher, UBS Machinery Engineering & Construction and U.S. Building Materials analyst. Welcome to the Jacobs Solutions conference session. Really pleased to have Bob Pragada, CEO. We have Venkatesh Nathamuni, CFO; and we have Bert Subin here for -- with Investor Relations. Exciting times at the company. We're going to go through this as a fireside chat. There is a QR code up -- it was up on the screen, but I think you have access to it. We can -- you can submit questions that way or we can just have the microphone go around if anyone has questions as we go along. So with that, welcome. Great to have you here.

Maybe just to kick it off here. Bob, could you just talk about the evolution of Jacobs in recent years and kind of what your primary focus is now that the spin is done?

Sure. So without getting into too long of the company's history, but company started off with strong engineering roots, 75-plus years ago by Dr. Jacobs and really grew up through the decades as the leader in the engineering space, predominantly in the chemical process industry, mostly the pharmaceutical and in the hydrocarbon space. Diversified in the '90s and 2000s when it went public in 1989. And through that investment capital, diversified markets, geographies and service mix into aerospace and defense, continued down the hydrocarbons and pharmaceutical space and then started kind of with -- through acquisition in the infrastructure space and kind of rode that wave all the way to the recession. Post recession, I think you're -- looking for some growth when growth wasn't necessarily coming. I don't think it was ever easy, but similar to the way it was before the recession. And kind of for the first time in the company's history, actually executed on developing a strategy. Our strategy prior to that was -- and it was formed by Dr. Jacobs was take care of our client's business and the business will take care of itself effectively, and it worked. It worked for several decades. And 2016 was kind of an inflection point for the company where we kind of sat back, paid a consultant, to not be named a lot of money, to basically come up with this. You're market leaders in certain markets, you're in geographies, and you've got a great service mix, you're also in markets that you shouldn't be, you're in geographies that aren't growing, and there's certain services that you perform that you're not really good at. So get out of the stuff that you're not good at, that's not growing and double down on those areas that are, that was the 235-slide McKinsey report that came out, summarized with that. And so we did. We kind of -- it was Jacobs for Jacobs and went on that. During that strategy, one of the areas and this is where it's kind of going, one of the areas that we felt like we were underindexed in was the water market in the water sector. We had that capability and skill set outside the U.S., but very limited in the U.S. And so we were organically trying to build that up and then 2017, probably the most defining acquisition ever made for the company, possibly even the industry. So we had the opportunity to come together with CH2M, world leader in the water and environmental space and acquired CH in '17 and went through a very, very deliberate integration strategy of the company, creating almost a new company and took off immediately post-acquisition, great synergies between the 2 companies, formed, rebranded ourselves, and really started to go deep into the space of water, environmental and growing our transportation business as well. Coincidentally enough, a year later, we were approached by a company called WorleyParsons who was also looking to shed some businesses and become a pure play in the hydrocarbon space. And we were offered ironically enough, the same amount for our Energy & Chemicals business as we had just paid for CH2M. People think that this is the brainchild of people sitting in a building somewhere thinking of this grand strategy. It's good to be lucky sometimes as well. And we ended up selling our energy and chemicals business in 2018, and really focused in on infrastructure and advanced facilities, and our government services, our aerospace and defense work as well and move through. Got through the pandemic, kind of mid pandemic, we started to see that this business that we had formed with our Infrastructure and Advanced Facilities business now was 2.5x the size that it was 6 years prior when we acquired CH2M and growing at a faster rate with margin expansion. I think at this point, we had already expanded margins by nearly 500 bps, and we were on a high single-digit growth rate in that business, and kind of moderate growth within our CMS business. But really what kind of got to us was the investment needs for both were different. We had a nice organic play in our Infrastructure Advanced Facilities business, a market leader in water at this point, environmental, transportation and in the life sciences and semiconductor space, a market leader by a margin, and probably a bit subscale in our government services business, and a required investment. So taking a look at that and saying what would be best for our people within, we call it a critical mission solutions business as well as what would catalyze growth in that business, made the decision working with our Board to separate the businesses. We then were approached by a company called Amentum to do a merger and the best means and methods to do that with a tax-free basis was through a Reverse Morris Trust or an RMT and really focus in our Infrastructure and Advanced Facilities business. That decision was made back in the summer of '23 and happy to announce and here is the end of the story. It took me 7 minutes to do it, is that we were successful in the separation and the merger of our government services business with Amentum. It's now a publicly traded company, doing well. And now the new Jacobs is very focused on infrastructure, transportation, water, environmental, in the energy and power businesses as well as advanced facilities, which predominantly is life sciences, semiconductor and data center work. So we're off and running, and the future looks bright.

That's great. Congratulations on that. So as you think about -- maybe I'll combine these 2 questions in terms of what you think are really the most unique and differentiating aspects of Jacobs go-forward organization. And then trying to get at what is your strategy for the new organization going forward? And so how do you -- what are the unique characteristics? And how do you leverage those into formulating what your strategy is? Because we know you're among the elite companies in what you do in these critical infrastructure, life sciences and advanced manufacturing areas, there's a handful of companies that take different approaches to it. So what's unique about Jacobs and what's your strategy going forward?

Sure. So split up into 2 parts. I'd say what's most unique about our business, and I know it was a little painful walking through 75 years of history, but I thought it was important because there is a component of what Dr. Jacobs said that really has now proven itself out after 75 years. But I think what's unique is that we pride ourselves on really understanding look, in our hearts, in our soul, we're engineers, we're scientists. We're technicians. But we make it a point to really understand the business of our clients' business. So the science of our clients' business is really where we come from and what does that mean to drive a client outcome. Now how we do that is through our capability set, engineering, consulting and advisory, program management, all the capabilities that we have. But why, it's the why of our client needs to deliver this asset to provide business transformation and business growth for our clients. And that's how we look at things. Some RFPs tend to be very prescriptive. We are compliant in -- when we bid work, we negotiate a lot of work also. What we're looking at it from the context of how is this going to drive a client outcome, right? And I think that's unique to Jacobs. The kind of the differentiating skills on looking forward is because we've spent so much time understanding our clients' business, now when we look at some of the tools and methodologies and innovation and technology that's going on within our space, utilizing that to drive efficiencies and drive the best solution. So whether it be the use of AI and software platforms to deliver a client solution. The use of innovative skills in the field in order to drive efficiencies and productivity in the field as the asset is being built. All of those things are what we're building capability sets in order to drive a better outcome. And what we're calling it will be more talked about this at Investor Day is, we're reimagining the asset life cycle. If you think about the asset life cycle of our clients' business, for years, it's been very linear. You have a job, you conceptualize it, you do a schematic, you design it, you program or build it and then you operate and maintain it. Now with consulting and advisory, data platforms, digitization of everything, we're able to accelerate that and actually get the same outcome.

That's really fascinating. It kind of goes into what I was going to ask you next, which is, what are your customers asking you of you now? And how is that driven 3 to 5 years ago, are they asking you about this sort of different asset life cycle approach? Or is there something that you're bringing to them and saying, hey, you should think about this differently?

I'd say more so today than probably ever before and even if we say 3 to 5 years, even if you go back 10 years, most of our clients knew exactly what they wanted, not exactly, but they knew what they wanted. They even had a concept of -- or even a predesign of what they wanted, and then they would go out to an engineer or a consultant to, okay, I want you to go design this. Today, a lot of the situations we're in is that the client knows that they have an issue, right? They have a therapy that they've got to get to market as fast as they can. They've got congestion problems in a metropolitan city. They've got drinking water issues in the metropolitan city. They know that they have an issue, they don't know what the solution is. So they'll call us to come in and help conceptualize what is that solution, then it will turn into a scope in a project and then we have the opportunity to deliver it. That front-end piece, that has been growing over the course of the last 3 and 5 years.

Interesting. And how does that connect with your global perspective? Are you able to draw on increasingly so your global expertise in solving these problems that you may be given to you on a local basis?

We absolutely. And that's been something we've been working on for quite a while. If you think about the infrastructure space, even in the private sector within kind of the tech manufacturing space, too, it was for years very vertical. If you had a -- if you had a water job that was in California, you did all of the work for that job in California. And then as talent continue to rise up in different areas of the country then the world, not that it started, it's always been there. We just identified it. Now it's -- we're able to utilize talent that we have in Europe, in Central Asia, in Australia and New Zealand to bring together a global solution delivered locally. And that now makes up nearly 70-plus percent of all engagements that we have. We have people coming from all over the planet delivering on that work. Before it used to be called offshore engineering or low-cost centers or different types of terms over the years that have been utilized, we don't see it that way at all.

Interesting. And you mentioned before some of the different tools that you're now bringing to the market. So I think digital might be one of those, but you can correct me if I'm wrong. So how do you see digital evolving in the context of your business? Is it more internally focused? Is it more externally focused? Can you get a competitive advantage in digital? Can you talk about that?

Yes, it's both. Maybe I'll talk about the -- what we're doing externally and maybe Ven can talk about what we're doing internally. Externally, so if you think about an engineering challenge or a challenge that needs to be engineered, what is it? It's nothing but data, right? It is the use of data in order to drive a solution. And so for years, whether it be transportation planning, conceptualizing treatment plants or waste treatment plants. There's a tremendous amount of data that we would go collect, synthesize and then deliver into a design solution. All of what I said on the front end now, we can do with these software platforms that are AI-enabled and it's accelerating our ability to get to the solution with optionality that's right in front of us. So I'll use an example. One of the platforms that we've utilized now that has really took off, it's probably over 100 plants in the U.S., and we're taking it outside the U.S., too. it's called Aqua DNA. And effectively, what Aqua DNA is, it's a -- we're in partnership with Palantir. We're using a very strong -- I'm not a computer genius -- computer science genius, but we're using a very strong algorithm developed by Palantir that was designed to collect mass quantities of cyber and intelligence data. We've modified that, put our proprietary software on top of the stack of this algorithm and in an existing water treatment plant asset being able through sensor technology, collect, chemical usage, energy usage and water quality and make decisions that can extend the asset life cycle of the treatment plant, while using less chemicals, less energy and better quality water. And so that has taken off. So what's great about it is that we utilized it in order to operate and maintain in a more efficient manner, but also leave the software behind and collect SaaS revenue as a component of that platform. Maybe Ven can talk a little bit about internally.

Yes. No, absolutely. And then so from an internal perspective, clearly, AI is now at the forefront of some of the capabilities that we can use across the entirety of the organization. So clearly, from an engineering perspective, how do we improve the efficiencies by incorporating AI into digital printing and things of that sort. But also internally from a finance function, I'll give you a couple of specific examples. We could -- we have on any given year, we have 25,000 to 30,000 projects, the ability to glean insights from those projects, and then identify what are the commonalities that we can replicate in other -- from one project to another, that's one. In the finance field, clearly, DSO collection efficiency is a big focus for us, how do we go through all the various regions, identify what the opportunities are for us to improve the DSO, and then one additional example is, if you look at the contracts, there are several contracts that have some commonality, some contracts of unique variations and so to speak. So how do you make sure that you are identifying the right set of parameters that are best practices for us to deliver value to our clients, but also make sure that we are not leaving money on the table. So a multitude of opportunities from the standpoint of just incorporating advanced technologies and improving the operational efficiency of business.

Value-add and efficiency, good combination. Yes. Okay. Maybe we can shift gears a little bit to growth. And I know you're going to quantify some of the growth elements and forecast at your Investor Day, but maybe we just talk a little qualitatively about the potential and how investors should think about the growth opportunities here. Is there a way that you want people to think about the algorithm in terms of, is it basically multiple legs of a stool where you've got some structural private sector end market opportunities and then everything infrastructure? What are the sort of the growth framework that you want people to think about it?

Yes. So I think it all starts, and this is not uncommon from our peer competitors, competitive mates, a lot of them are partners as well is that start with the market disruptors. What's happening in the markets that we serve from an underlying disruption perspective, and so clump infrastructure always one in advanced facilities, always one. Within the infrastructure world, the effects of climate and continued -- well climate, continued urbanization as well as aged infrastructure is kind of that undercurrent that's really driving the markets that we have. Sometimes, you like to think about it from the top down, where there are areas that are being stimulus funded, and that's creating the growth. It's actually from the bottom up in our view. And stimulus assist, but those growth trends aren't going away. And so we kind of think about, hey, so long as we're getting deeper and deeper into our clients' business, we've got a long-term secular growth trend there in water transportation, environmental, energy and power, that aren't going away. So part one. Within tech manufacturing, it is the innovation of science. And we've already used AI 14 times, so we'll keep using AI as well. If you look at what's happening in both life sciences and chip manufacturing, the use of AI in life sciences and drug discovery is -- I think that Dave Ricks, the CEO of Lilly says the best is that drug discovery is all about the meantime between failure. You try a formulation out, you're moving the molecule into different formats, you fail, you learn from your failure, you play it forward. Now that time between failure has been completely accelerated, but you can run all of these simulations in seconds rather than days and weeks. And so that is driving then the need for, well, new discoveries, whether it be GLP-1s, kind of like the recipe of the day. But there's also tremendous amounts of discoveries that are happening in oncology, immunology, in a whole variety of therapies. And so that's accelerating CapEx needs to get to commercial scale manufacturing fast. And in chip manufacturing, it really is about the long-term effect of the development of AI chips. And so what used to be a very logic centered type of community has now turned into high-bandwidth memory chips in all of just the ubiquitous world of the infrastructure that's needed in order to drive that through, which is also soon-to-come gigawatt level of data centers, too. So that's how we're kind of looking at the long-term growth trajectory.

And just for context, if I could add. In the last earnings call, we talked about the fact that we're looking at our business in the 3 categories. So it's water and environmental that Bob talked about, roughly 30% of our revenues, critical infrastructure includes transportation, rail roads and such, that's another 40% of our revenue, and then life sciences and advanced manufacturing is the other 30%. So there are clear secular megatrends across all these different sectors, and what we're excited about is clearly executing on the opportunity in front of us, both from a revenue growth standpoint as well as from a margin expansion standpoint.

Terrific. So maybe if we kind of focus that a little bit within those, would you say there's any particular market of all those that you say you're most excited about the growth opportunities at the moment? I know you've talked a lot about water in the last couple of years, but there's certainly a lot of exciting things about life sciences. How do you sort of rank what you find to be most exciting for the next couple of years?

Across those 3, the way we've categorized them, right now, all 3 of them have double-digit pipeline growth. So the opportunities are -- we can see them, and this is a multiyear kind of pipeline that we see. The two that probably rises to the top though, Steve, is clearly water and life sciences. Those -- even during -- as the geopolitical volatility was felt in Europe and in Australia and New Zealand over the course of the last 12 to 18 months. Our water business across the world was pretty constant in that double-digit growth and double-digit pipeline growth. So I think that's an area that just the need is there. It's a business -- it's a sector that if you go back 20 years or even 10 years, grew at 3% to 5% in perpetuity, and now we're seeing a spike, a lot of that being driven by climate. The life sciences piece talked about. That is also accelerating as a result of -- first, it was kind of onshoring, reshoring. But then during the pandemic, we learned a lot about these globalized manufacturing networks and what happens when the world logistics stop and people can't get insulin, right, because there's pieces that are coming from all parts of the world, and so that has accelerated this trend taking manufacturing and bring it back to the U.S. It didn't really -- unlike chip manufacturing, really didn't totally leave. It stayed around the R&D hubs in the U.S. and in Western Europe, but it's really accelerated coming back.

And on the water side, would you differentiate in any sense the international piece versus the North America piece? Anything different in the growth rates and growth potential and opportunities?

Actually, we've seen the growth rate the same.

Really?

Yes, across the globe.

Interesting. And on the life sciences side, you talked a little bit about it a couple of minutes ago, but maybe also just coming back to that for a minute or two, just to understand where the market is relative to its potential. I know we've talked a lot about GLP-1, but you just mentioned oncology and some other things. So could you just talk about what's the growth path within life sciences. Is it more of these solutions? Is it different customers out there to be penetrated by? How does that business evolve?

Yes. I think it's more of the solutions. It's more -- the top -- if you look at the top 20 biopharmaceuticals, we'll put biotech and pharmaceutical companies in there. Almost I just read the statistic. It's almost like 80% of the capital investment goes on with the top 10 -- the top 5 pharmaceutical players in the world. And so that is a high concentration. And we have focus in on those clients for the better part -- well, actually, Dr. Jacobs was a Merck employee. So we've been in that space for a long time. And so the discovery that's going on there and more personalized care. So you hear these things called cell and gene therapy. That is Steve Fisher has a certain DNA profile we're going to manufacture a therapy just for Steve Fisher, right, in his DNA profile. That's also generating a different wave of next-generation technologies.

And again, just add more context to the life sciences and advanced manufacturing. So the way to think about it is the vast majority of it is life sciences, call it, 2/3 of it. And then we have 1/3 of the business in semiconductors and the rest of it is relatively small. But the data center opportunity within life sciences and advanced manufacturing is something that we're really excited about. We think it's in the early stages of substantial growth. And also, in addition to just being a data center design play, it's also an intersection of multiple assets in terms of water, energy needs and so forth. So when you talk about differentiation earlier, that's one of the areas where Jacobs is uniquely positioned to provide cross-cutting solutions across a range of different categories for the soup to nuts solution for the client. So we're able to bring to bear our expertise across multiple domains so that we provide a comprehensive solution for our clients.

Yes, that's really fascinating. We were going to maybe jump into that next and maybe we can do that now in a little bit more detail. And maybe the way to do that is to start by bringing up the data center topic. So what would you say is the -- is Jacobs role in the data center market today, what have you done so far? What lies ahead? And then to the extent that, like you said, any given one of these projects might touch a number of different areas. Can you give an example of how you would kind of fit at that nexus of those various needs and the cross currents and how you can provide a solution to your client?

Yes. Maybe to contextualize it first on what it was and now what it's going to be because it's still -- we're in kind of that transition mode right now. So what it was, was we were in the 50-megawatt to, call it, 150-megawatt scale data center. A majority of the complexity was sitting in the server room. And so that's where Jacobs kind of made its name of designing those server rooms. The power requirements weren't you could connect it to the grid, right kind of thing. So it wasn't that big of a deal. Now as we move forward and just in the last 2 quarters, we've probably received I think, 53 new studies and concepts for the gigawatt plus type data centers from not just hyperscalers, but a few of the colocation folks that are building on behalf of that hyperscaler. So this complexity of now the server room kind of looks like it did before, and you've got the equivalent of -- you need an SMR, a nuclear reactor on the power pad, because of the power requirements that are required. So that interface is really what these studies are looking at. A lot of people are looking at kind of the leading indicator there of what's going on with the electrical equipment manufacturers, the Schneiders, the Eatons, others because they're getting out -- the hyperscalers are getting way out ahead of it in anticipation of moving forward. I think the real challenge is going to be how does grid modernization and solving the power need come in parallel with the need for the capacity for the AI-driven data center capacity. And so that's what we're right in the middle of today. So I see that being a bigger part of our business in a few years. We're going to talk a lot more about it. In fact, we're calling it the sustainable data center at our Investor Day.

Nice sneak peek there. So is it possible then that we could see -- you said 53, so dozens of these opportunities kind of going on for you at once and they would become bigger scope as the project goes along or...

Absolutely. In fact, we're having an internal debate right now, we like to think vertically, right? That's a water job. That's a transportation job. That's a life sciences job. But now with this cross-cutting element, we were kind of talking the other day about our data center work, we might just end up calling that an energy and power job because it's moving that way. I'd say just put some metrics here. Historically, the total installed cost or the cost of a -- it was about $1 million a megawatt. So 150 megawatt, $150 million data center. The Jacobs play in that would be about a $5 million design fee, right? So you needed a lot of these in order -- and even then you still don't show up in a $10 billion P&L. You show up as like Venk was saying, a small percentage. Tomorrow, gigawatt, so that probably scales to a certain extent. But then you add all of these other items. And so now you're talking about a potential fee revenue component of the data center, looking a lot more like a chip manufacturing plant or a life sciences plant from a Jacobs engagement perspective. So it's exciting.

Material. Yes. So speaking of that, maybe we can talk just for a minute about semiconductors and the chip. So we've seen maybe some starts and stops in some of these customer opportunities. What do you think the debates are at the moment that you're helping your customers think through on the semiconductor opportunities? And where do you see that market going from here?

Yes. Since '76 we were the engineer of record for -- for Intel and that's public information. Now obviously, Intel is in the news, made a big business decision back in '21. And kind of what the end of that story is going to be, it will be. I can't opine on that. But a lot of that work for moving in the business model in that direction, we'd already -- we've done. So as things were stopping and starting within the Intel world, that really didn't have that much of an effect on us because that starting 5 fabs all at once, 4 years ago, we had already finished a lot of that design. What that's led to is a lot more diversity in our client base. So now other DRAM manufacturers and even now outside the U.S. what's going on with India with regards to not just commercial scale manufacturing, but test and assembly and packaging. We're in the middle of that, too. So you're going to see a different client mix while the chips are getting more sophisticated.

And if we can just add a couple of things. In terms of just the semiconductor landscape, clearly, we think we're in the early stages of the onshoring and reshoring because, as you know, the vast majority of chip manufacturing capabilities, the site outside the U.S. today, a lot of it is now coming to the U.S., not just for the advanced AI process nodes, but also for areas like automotive and industrial, lot of the capacity to data side in China and Taiwan. And that's coming mostly to the U.S. and Europe. And so we think of it as a multiyear phenomenon. Any given quarter, there could be some cyclicality. But over the long run, we feel pretty good about our presence in the semiconductor space.

Great. Maybe just one sort of strategy point to talk about in terms of larger projects versus smaller projects. And then also related to sort of program management. I'm curious if you have a philosophy about how important it is to be focused on large projects and programs. And I know you've announced a number of program management assignments recently. Is this a critical part of your strategy to do larger projects and more program management? Or do you not necessarily say we just need to have a certain mix of large projects. So curious how you thinking about that?

So maybe I'll start off by giving our perspective on what program management is and what it's not, right? We see program management as a capability, not as a vertical, right? So program management at its core is really consulting and advisory during the course of an entire asset life cycle, right? And we do a lot of that. So I know E&R and others want to label it as almost a sector, right? But it is a capability set that crosses all of our markets that we have, and we have that skill set along with other consulting and advisory skill sets. So the balance to the first part of your question, the balance of -- of larger jobs, engagements, consultative assignments. It's a balance. It's not like we have a prescriptive. We need to have 50% in large projects and 50% in consultancy and advisory because it's almost like this virtuous cycle, one feeds the other. And so you get these early assignments that may turn into a project, a lot of times, especially long-term clients, we might be doing consulting advisory work to not build the job because it's in the best interest of our clients for the long term. So that's -- it's a client relationship and then how is that balanced. So at any one time, Steve, we might have 50% of our portfolio is in projects, $500 million and above type projects, 50% in consultative engagements, average price on that, $500,000. And sometimes that balance might go shift one way or the other, but it's really on where our client needs are.

Okay. Excellent. So I wanted to touch upon margins, cash flow, capital allocation. We have a handful of minutes left. Maybe at this point, we'll just see if there's anyone in the audience that would like to ask a question. We can pause for a minute to see if anyone has any questions. And while people are deciding that, we can roll along here to talk about margins. So now with the spin completed, you've put out a 2025 target, how do we think about just some of the core margin drivers kind of qualitatively from here?

Yes. Thanks, Steve. So I'd say from a high level perspective, just for context, in fiscal '24 that ended 1.5 months ago, we did roughly 12.8% in EBITDA margin, which represented a 100 basis point improvement over the prior year. And then in fiscal '25, we have guided for EBITDA margin to be in the range of 13.8% to 14%. So that's another 110 basis point improvement from year-over-year. And a lot of that is driven by the fact that we did a lot of operational efficiency improvements in fiscal '24. We only got a partial benefit in the year because it was happening throughout the year. We get the full benefit of the annualization of those operating efficiencies in fiscal '25. And that will be the largest contributor to our margin expansion in fiscal '25. But outside of that, there are a couple of other opportunities that we're pursuing, one, certainly from the standpoint of the differentiation that Bob alluded to earlier in terms of our global delivery mechanism. So the ability for us to implement these projects in different geographies regardless of where the project is actually won, that is actually a source of really good margin performance for us over the long term. And then the third piece of it is the mix. So some projects can be on the consulting and advisory side of the equation. Some could be on the other extreme on O&M. So to the extent that we can move the mix such that we're moving higher in the value chain that will allow us to also expand margins. Now that's obviously a multiyear phenomenon. But I'd say the vast majority of the margin expansion for fiscal '25 is going to come from continuing operating efficiencies, but we see good tailwinds, which will quantify by the way, at Investor Day in a couple of months to talk about what are the other drivers of margin expansion over time.

Excellent. So on cash flow, this past quarter, you showed a very nice improvement there. Obviously, cash flow is more than a 1-quarter dynamic. Can you talk a little bit about whether there's more work to do, more focus on cash flow improvement? How do we think about the sustainability of that nice improvement that you just made?

Yes, thanks for that point, Steve. I think from a free cash flow conversion standpoint, obviously, it's a really good measure of our operating efficiency. So we reported 100% plus free cash flow conversion, and we've guided to fiscal '25 free cash flow conversion staying above 100%. Clearly more work to do in terms of just our operating efficiencies and DSO collection data and such. But also from the standpoint of just the CapEx requirement, we put out our fiscal '25 forecast, call it, roughly 1% of our revenue would be in CapEx. So that's how we see it at least for the next couple of years, which allows us to now obviously generate a lot of free cash flow, and we want to return that cash flow to shareholders in the form of both buybacks and dividends. So to your question about capital allocation, as Bob alluded to earlier, we are very excited about the growth opportunities in front of us. So first order of business is to invest in the business in the organic growth. And then the second most important priority from a capital allocation perspective is to return a lot of the cash to shareholders in the form of buybacks and dividends. So last year, we did a double-digit dividend growth performance. Obviously, it's a board decision, but we continue to expect that to move forward. And then from a capital buyback perspective, we did almost $550 million in the capital returns to investors, and we expect to do something in a similar scale, and we'll quantify that at Investor Day in a couple of months.

And is there any M&A that makes sense to do at this point?

Yes, great question. I mean M&A is certainly something is an option for us. And again, for context, we have a pristine balance sheet, less than 1x net leverage ratio, and we're generating a lot of free cash flow, as I just mentioned before. And so for us, we have the ability and the willingness to do M&A. But the next few quarters, we're going to focus on organic growth. and then we'll use M&A as an accelerant, where we think we can double down on some of the areas that we're already very well invested in.

Terrific. Well, we are just about out of time here. So I think we'll wrap it there. Thank you so much, Bob, thanks so much Venk and Bert, I appreciate your time, and we'll look forward to the Investor Day in February.

Steve, thank you.

Thanks, everyone.

Thank you, everybody.