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

I'm very excited to have Jacobs with us today. We have Bob Pragada, who is the Chief Executive Officer. We've got Venk Nathamuni, who is our -- who is the CFO of Jacobs. So I'm going to come over to you guys, and maybe Bob or Venk if you have a couple of prepared remarks, and then we'll get ready to Q&A.

Sure. Well, first, Andy, thanks for having us. Just a couple of comments. One, coming off of a great quarter. Q1 was probably in recent years, in fact, we had to go back several years, really solid top line growth of 8.2% organically, good margin expansion trend continuing. We really are out in front as it pertains to the AI narrative and AI is actually enabling and augmenting our work. And so all of that kind of drove a raise in our guidance for the balance of the year. One other note, we hit an all-time high on our book-to-bill of 2.0, not to be the new norm, but really solid pipeline growth as well as continued bookings growth. So really excited.

We'll count on a book-to-bill of 2 going forward, that's right. Just kidding for anybody who's doing this. Okay. So Bob, you've been the CEO now for several years. And I think Jacobs has gone through a pretty significant transformation to that time. You did an RMT, portfolio is more focused. You now just bought or announced PA Consulting that you're going to buy the rest of it. So where do you think the company is in a journey to be sort of a more simplified focused platform? And importantly, what do you see as any sort of piece of work ahead to sort of realize the vision of where you want Jacobs to be?

Yes. I think on the last part, Andy, the vision is clear for us is that with a simplified focused business in end markets that we have, not just a leadership position, but very, very tied to the technology advancements that are happening in those end markets whether it be critical infrastructure, life sciences and advanced manufacturing or in the water and environmental sector. That starting from what's happening at the molecule, what's happening in the chip, what's happening with the science of our clients business and working outward has been the vision, and now that vision is now becoming reality moving forward. So we're really excited about where this go moving forward was in each of those end markets, technology is advancing at the fastest pace that it ever has and probably the slowest pace that it ever will.

So Bob, like I think you mentioned the book-to-bill, your backlog for lack of a better word, was sort of creeping higher then all of a sudden it just kind of exploded higher last quarter. So maybe talk about sort of what happened there. Obviously, I cover all the big multi-industry companies, data center bookings kind of exploded higher really over the last 2 quarters, particularly this quarter. So was that the biggest reason? But I think you've talked about other markets semiconductors or life sciences that help lead the charge. So maybe do you see more potential quarters like this? And could you give us a bit more postmortem on where the backlog came from?

Yes. Well, maybe just to level set, I think the other trailing 12-month booking trend of kind of creeping from 1.2 to 1.3 to 1.4 is probably the better trend that we're trying to see. With regards to Q1, it was pretty broad-based, yes. We did have and we announced it a sizable booking in the data center sector. But it really was probably 20% of the overall number. The balance was pretty equally spread between water, semi and transportation.

Got it. And maybe just -- so if I think about that data center or just to double-click on it for a second, like you've had several data center orders and like why is this one so much bigger, like in terms of capabilities, all that kind of stuff?

This one really, really -- we capitalize on the entirety of the life cycle -- the asset life cycle and our ability to go from early end advisory work on everything from site selection to the technology that was going to be deployed all the way down to the server racks and then beyond with regards to the cooling requirements, working with the supply chain ecosystem and then move that into what we're moving its active tents into different phases. Client had a tremendous amount of trust in us. It's a NeoCloud client, and we were able to book the entirety of the facility.

Got it. So we'll get to some of your other end markets later but I want to ask you about -- and you kind of alluded to it just now about the company's competitive moat, right? You're going to get that question, and you're getting that question a lot in the last couple of weeks. Can you talk about whether you bought fair amount of software over like the last 15 years or something like Jacobs bought StreetLight Data, I remember. Could you talk about whether and how these technologies are differentiating Jacobs and lead to incremental business? And then how do they create a moat versus AI ultimately?

Yes. Well, they're getting us deeper into the data analytics component. So if you look at what's going on in the industry over the last 40 years, design automation, digital replication, design or digital clean technology, that's been something that we have been deploying over the course of the last 40 years. So that has continued on now with AI enablement too. That's not only making us more efficient internally, allowing for us in a resource-constrained environment to do more. That's why we've always said this is driving top line -- top line growth and bottom line margin expansion. So we're -- while that's been going on, things like which have been in the headline news recently, billable hours, headcount, pipeline and bookings growth are all coming as a result. And so those software platforms, yes, we bought them at a point in time but the development that's happened since that as the markets have changed, I think, is the real power of those platforms.

Just one follow-up with that, Bob. Like, so how do you think about sort of the billable hours environment? Are you going to be more efficient with these engineers? What's going to happen, do you think, if I look out over the next 3 to 5 years?

I think that we're going to be able to increase our SAM, right? We're now doing things similar to the data center comment that you made that we're able to expand our SAM. The other is that the -- we're not working on one end of the spectrum. I'll use AI infrastructure the example. If you look at the continuum of AI infrastructure, starting with chips, then determining what the utility requirements are going to be required and then kind of the battery limits of the data center, we're working across that entire spectrum. We designed the chip manufacturing facilities. We're in the middle of the power and water infrastructure assessment and then that's the value that we're delivering for our clients. In that, the reason why I use that as the example, billable hours is actually going up because of that increase in service in the SAM.

Yes. No, that's helpful. And maybe to that point, Bob, like, so what are you hearing on the ground, right? Like there's the Wall Street and then there's what's actually on sort of Main Street, if you may, and what you're hearing on the ground with customers, what are they saying to you about AI? And if you think about, as you said, harvesting project efficiency, like how far along are you on that in terms of valuing or harvesting AI to create value?

Yes. So the last part of your question, Andy, I'd say we're in the early innings for baseball fans that are out there. We're in the early innings of that and we see a nice runway ahead of us. On the front part of your question with regards to what's actually happening on the ground, what's the dialogue with the client right now. The client is asking for more and the speed by which we have to go to, and we traditionally pivot to our private sector business or the tech sector on the need for speed. That's happening in the public sector as well because if you look at the effects of climate, specifically accentuated in water, but then driven in power and the energy transition as well. Speed is absolutely essential. So the clients are asking us, hey, bring all the tools that you have that you can go as fast as best one. If this was a static environment, I think then the -- what the kind of the capital markets dialogue right now of one gets replaced for the other in a static environment. This is very, very dynamic.

Yes. And like just to not belabor the point, but I should ask because like what can Jacobs do that some small AI startup can't theoretically?

The decades-long ownership of unstructured data around the facilities that we designed that we're turning into structured data and able to apply that in a very efficient way. That data has come from decades long of experience, one. Second, every single end market we're in is a regulated market that is regulated by ...

And that's an important point, by the way.

These are ingestible drugs. This is clean water that are going humans or transit systems that are being traveled by human. So adherence to those standards and codes with decades long of experience in data is something that is tough to do with an AI model in a garage.

Yes. And Andy, I'd just add to that. If you look at any given year, we have between 25,000 to 30,000 projects. So the level of insights we're able to glean from the data and then obviously over multiple decades, that gives us premeds insight into solving these complex problems that an AI algorithm can figure on its own, right? So it's something that really has expanded and accelerated our ability to solve these complex problems and expand the serviceable available market in a meaningful way for us.

Got it. And then probably this next question is for you. I think you have a relatively back-end loaded margin guide for '26, but that does seem to coincide with a solid uptick in revenue in the second half of '26. So is the margin improvement in the second half really as simple as improved operating leverage and/or some of your larger recently won projects beginning to ramp up? And if you deliver this ramp up in margin, what does that mean towards the year progress of FY '29, 16% margins?

Yes. Thanks. So just for context, in fiscal '25, we increased our EBITDA margin by 110 basis points, which is one of the largest annual increases in our sector. And for this year, we've guided for margins to increase by another 150 to 80 basis points. So as it relates to what happens to fiscal year '26 in the first quarter, we came in at 13.4%. We've guided for margins to expand by 50 basis points quarter-over-quarter. And then Andy, to your point, we have announced a lot of big projects, especially in the life sciences and advanced manufacturing. So clearly, those things are -- those projects are going to be executed over the course of the next 3 or 4 quarters. Those projects also have the ability for us to use a lot more of the global delivery model, which obviously is very conducive to margin expansion. And then last but not least, as we go through the remainder of the year, we have stated publicly in the past that our Q4 has an extra week as well. So that also helps with expansion. But overall, we feel really good about our margin expansion opportunity. It's not just the operating leverage piece, which you alluded to. So what we've guided to for The Street is as we grow our revenue by, call it, 6.5% to 10% was the guidance range, we are making a commitment to growing our OpEx at a substantially slower pace. So that drives the operating leverage of the business. And then we've guided to specific areas within gross margin expansion, global delivery that I alluded to, where we're able to implement these projects in the lower-cost geographies regardless of where those projects originate, that drives significant margin expansion for us. And then just the overall mix of the business. So multiple levers for us to drive margin expansion, and we feel pretty good about our target. To your last point about fiscal '29. So we had guided The Street at our Investor Day last year that will get to a 10% plus free cash flow margin 16%-plus EBITDA margin. We're well along our way to get there. If anything, we'll see some significant progress there in fiscal '26. And that doesn't even include our contribution from PA that's on the comp.

That's helpful, Venk. And this might be a follow-up for either you or Bob, like just on pricing. You've been doing this for a long time. Has pricing changed at all because it does seem like there's a lot of demand these larger projects to kind of hook Jacobs in for, I don't know, multiyears or something like that? Can you get a little more pricing, so maybe mix can be a little better?

On a sector-by-sector basis. But I'd say, yes, in our public sector business, some of those pricing hurdles are within procurement law. What digital enablement has allowed us to do, though, is to keep a relatively stable price point and increase margins with efficiencies. And so that's been a big play for us.

Yes. No, that's interesting, Bob. And then maybe to that point, if you had to rank the most durable margin drivers over the next several years, I mean, you talked about operating leverage. You talked about global delivery, you've got commercial models, mix, all these things. Which of the drivers probably has the most impact, whether it's this year by '29 to get that 16% target?

Yes, I'd say we had provided some ranges for each of these at our Investor Day. But I would say the bulk of what we did in fiscal '25 was driven by operating leverage, primarily driven by the fact that we had separation of our CMS business from the core Jacobs. We will continue to drive operating leverage over the coming quarters and years. But a bigger opportunity for us this year is in gross margin expansion. Global delivery is going to be a big part of it, especially given some of these life sciences and advanced manufacturing projects, which will be implemented in those global delivery centers. That's probably one of the biggest drivers in fiscal '26 and beyond. But I would say equally importantly, as we look at our commercial models in terms of how we engage with our clients. So on the private side, today, call it, roughly 70% of our business is private and 30% is government and even with the government business, a lot of it is states and municipalities. So we do have opportunities for us to change the commercial model mix as we go forward. And then last but not least, on the mix portion of it. As we complete the acquisition of PA Consulting, we have the opportunity to get engaged with our clients earlier in the asset life cycle. And as you all know, consulting and the ability to get involved at the scope definition process gives us a lot more margin uplift. So it will be all those levers. But in fiscal '26, I would say, global delivery is the biggest chunk of it, combined with operating leverage, but we have multiple levers for fiscal '27 and beyond.

Venk, you laid this all out very clearly as you said. Has one been better or more favorable than you expected, where they've all kind of about what you've expected?

I'd say operating leverage has come -- has continued to play through as we expected. On the global delivery side, especially this year, we're seeing some really, really fantastic growth rates there, just given the nature of our projects that we've signed up. And so you would see that coming through very strongly in fiscal '26. I would say on the mix portion, just given the fact that it's a smaller portion of our revenue, the impact of mix will be more elongated over multiple year period. But global delivery should have a very strong impact in fiscal '26, continued alongside with the operating leverage piece.

Got it.

Andy, one clarification because we saw this in one of the breakout sessions is that there could be, especially in today's kind of volatile narrative. Equating global delivery to, oh, that could be an AI scare because instead of going to another location, you just have a bot or an agent do it. Interestingly enough, for us, the highest concentration of our AI use cases actually happened in our global delivery centers because we've got the best opportunity to now disparate standards, codes, regulatory levels around the world. Our centers in Poland and India and the Philippines know the global standards. And so they're able to implement design automation and an AI enablement faster than anywhere else in the world.

Right. That's key. Okay. So I want to open up to audience in a second, but maybe I'll ask you a couple of more questions. And so like I want to focus on your subsegments a little bit. So start with infrastructure and advanced facilities. Maybe in water and environmental in particular, it seems like environmental might have stabilized over the last couple of quarters. It seems like it's growing more slower than water. So maybe you can talk about both. And then do you think water continues to be one of your higher growth markets over the next few years?

Yes. So maybe Venk can take the water. I'll address kind of the area, probably the one area that we've had a little bit of softness dating back probably 4 quarters in the current U.S. administration. The volatility in the environmental regulations in the U.S. did put a pause on some of the private sector. When we say environmental, it's actually kind of a T-Shape. We have a vertical that's environmental where we have an environmental offering to the client. And we count that from our taxonomy as our environmental work. We also have 10,000 environmental practitioners that work across other sectors. So the growth that we're seeing in the other sectors is actually driven by environmental work. We just -- we don't see it that way. In the direct environmental work, we did see a pause with some of our larger, mostly in the hydrocarbon space environmental work and the -- even in the public U.S. public sector, mostly federal, some pauses with regards to that environmental work. In Q3, Q4, we started to see the pipeline reverse. This quarter, pipeline is now growing. So that will start to make its way through the bookings and then the backlog and then the P&L. Venk, do you want to talk about water?

Yes. On the water side, we're feeling really good about high single-digit growth rate, especially for those of you who are following us on a regular basis, you'll see that over the last 4 to 5 quarters, we've announced some really large water projects. They've done the entire gamut from design to implementation and project management and so forth. And one of the advantages of these larger scope and larger scale projects is that it gives us multiyear time visibility, right? So we're able to take on these projects which will get executed over the course of the next 3 to 4 years. So it gives us some solid visibility. And just the level of engagement that we have across the globe has been really something we're very excited about, and we see that continued high single-digit for some time to come.

And the evolution of the U.K. water program, how has that gone for you guys?

Yes. It's been solid. Yes, the next SAM program is already -- we're starting to see it in our results right now. Europe, both water and transportation had really solid growth. Our international growth right now actually, absent -- if we were to take life sciences and advanced manufacturing outpace the U.S. and some of that was driven by what's happening in the U.K.

Any questions from the audience? Anybody want to ask a question? Anyone? They're counting on me to have many more questions which I do. So let me get to critical infrastructure. Seems to be delivering organic growth relatively in line with your company growth algorithm mid- to high single digits. But we know you have good exposure energy and power. I mean you mentioned traditional transportation. So especially in power, could we see that business pick up a little further? How do we think about sort of that growth rate in critical infrastructure moving forward?

We could. And driven by the U.S. So what we're seeing in the U.S. go across the entire electrical life cycle from generation through transmission and distribution. We are growing at a healthy double-digit rate we're ramping that skill set in the Philippines, in India as well because this is taking a lot of horsepower in order to drive it. What's driving it? We're on the other side of the meter of because we can see it on what's happening within the AI infrastructure world. And when I say AI infrastructure, I'm not only talking about data centers, but also what's going on with regards to chips in certain locations, so that would be the catalyst, Andy, is that continuing on, and we're putting a lot of effort there.

So I mean it seems like it then has overlap right with advanced manufacturing is kind of what you're saying because this -- I was talking about critical infrastructure, but if we think about Energy and Power, I'm just curious about your point around building out the Philippines and so on. So like you just have a lot more capacity now and that's going to help out with growth?

The capacity is going to help the digital enablement is helping. The actual connectivity of the life cycle? Where is the power going? How do we work now with PA? How do we work with the regulatory agencies, the state and local governments, the public utilities. That's what PA does. So going to Jacobs that can not just facilitate the demand would then be a partner to the client as they're going from delivering the required power on a continuous and uninterrupted basis for the need.

Interesting. Okay. So let me ask you about life sciences and advanced manufacturing then. Last couple of quarters, it's been accelerating 10% adjusted net sales growth in Q1. We already talked about data centers that's leading growth, but you mentioned chips, let's include life sciences. So if I think about the strong backlog that booked, can you -- can that adjusted net revenue tick up into the double digits? And I think you have a 7% to 9% longer-term guide. Should I start getting excited that maybe it could be a little bit better in that?

Yes. Maybe I'll talk about what are the drivers of why we're seeing that growth at data centers as well and then Venk can talk a little bit about what the expectation could end up being. Two main areas. Again, we talked a lot about AI infrastructure and specifically data centers. On chips, what we're seeing is this -- the advances that are happening right now with high bandwidth memory are happening at a pace that we've never seen. Just as an example, in the classic DRAM memory base, it took nearly 20 years of innovation in order to get memory chips to where they were. And so the capital infrastructure requirement kind of followed suit in the memory world. The logic road was going up and down according to cycles. That and high-bandwidth memory now has happened in 4 years and continue to innovate at a very fast clip, which is driving the capacity requirements at a faster rate. So -- and we're very close partners with the largest high bandwidth memory player in America which I can't say the name, but you probably figured it out.

No, I know what the name is. But is there anyone else who can do what you do for that particular company?

At the speed and the scale, we would say no. And that's why we stuck to our knitting around technical advisory and engineering not gotten too far out into other components of the project delivery. So that's on that piece. Life Sciences, by the way, that was also on the chip development aspect. This is where AI again, is helping. That's accelerating the advancements that need to happen on the chip. Same thing is going on in life sciences. The time for a molecule from identification that this molecule will cure this ailment to now getting it through all the clinical trials and out to market in the kind of the iterative process that, that takes with AI and drug discovery is happening at a very fast rate. I think you saw that Lilly announced even a partnership with NVIDIA, all around this. We're in the middle of that because what then becomes the constraint capacity needs. So huge headline numbers that are being thrown out. I'd say a few of them are now turning into a few of those clients are going forward at a very fast pace that's driving our business.

And just to add to what Bob said in terms of the Life Sciences and the brands Manufacturing segment. Just for context, it's about 25% of our revenue and growing at high single digits. On the semiconductor side, in particular, it's not just what's happening in the U.S. and HPM. It's actually becoming geographically diverse for us as well. We've talked about some projects outside the U.S. Those are progressing quite nicely for us and expanding our footprint there. And then on the life sciences side, clearly, it is one of the earlier examples of how AI is taking a big share of the implementation of projects. So several cases where the customer would implement the first phase of a particular project using more of a cost reimbursable model, but then quickly going to Phase II and Phase III with a digital twin or a digital replication model that allows us to, number one, add a lot of value to our clients, but also keep some of the value for ourselves with the productivity boost. And then ultimately, it's all about expanding the serviceable available market because these opportunities will allow for a lot more drugs to be in the pipeline compared to what was traditionally the case 2 or 3 years back.

And Venk, just to push you a little bit, like I know is a long time away. But if DRAM is continuing to get better and life sciences continue to get better and you're already growing close to 10%, why couldn't you grow double digits over few years without setting new guidance here today, like what would stop you from continuing to decelerate from where you are? And maybe it's a good question to ask you about life cycle of these things, right? You see an announcement from your larger customer, like how long is the tail for you guys in terms of growth?

I think it's a fair question. All I can say is without providing an updated guidance is that we feel really excited about the growth prospects, especially in these markets like life sciences and advanced manufacturing, water, where there are no major public competitors. So we feel really good about our current position, but also the pipeline at a pretty rapid clip. We will update guidance when it's appropriate, but suffice it to say that there are a lot of tailwinds for us in that business and the visibility is also increasing in a nice way.

Do you want to add anything?

No, it sounds good.

And then again, just one more on sort of the competitive moat. Like is there anything that you're doing to -- because obviously, technology is increasing or proliferating quickly now to stay ahead with these large customers?

Staying close to the science and forming partnerships where we're in the middle of the development that the client is doing. I think a classic example of that is the partnership that we have with NVIDIA right? What's going on with NVIDIA chips and the effects that those chips have on cooling requirements, on power requirements, what's going on at the rack level and how does that then influence the entirety of the facility with partners, with the ecosystem, with the Vertivs and the Eatons and everybody else. I think that is a classic example of working through that in a digital twin scenario and then that now becoming a part of NVIDIA's offering, whether it be hyperscalers. I know one probably is getting more advanced on another route or with NeoCloud providers or have you, our name is getting affiliated as an exclusive partner along the way. Very close to doing that with the chip manufacturing client that you mentioned. And we've been doing that with the likes of GLP-1 manufacturers and others for a long time. That kind of puts us into protective moat, but one that we're not taking loosely. We're -- and this is where you think about -- this is where we get really, really excited. The next generation of talent that's coming out of universities today really is exciting because they're coming out with the standard, we still hire chemical engineers and mechanical engineers, electrical engineers, but the level of data center science that the young graduates are coming out with are now giving us the ability to really expand that moat.

Interesting. So let's talk about PA Consulting, delivered strong margins, good revenue quarter. But can you talk about whether Jacobs owning all of PA now could lead to an inflection in growth moving forward. As you're able to further engage with clients on the front-end projects and potentially accelerate the build-out in the U.S.

Yes. Yes, I'll start, and then I'll let Venk continue on. Maybe just to answer the why. Why was the us acquiring the balance of the 35% important? And it was really -- it was a unique opportunity but a real benefit for us in that just for everyone to calibrate, we took on a 65% ownership in PA Consulting 5 years ago, Carlyle previously owned that percentage and then went to market. What was very attractive to PA for us is they had science-based technical advisory skill sets that had a strong digital consultancy component to it, and most importantly, in the same end markets that we're in. And so the ability to go really, really deeper into the clients business was real benefit. 35% was still owned by the employees. And so we ran the business with separate governance, Venk and I sat on the Board and then we went to market on an opportunistic basis. We're bringing the 2 platforms together, create more value for the client. We learned a lot over the last 5 years. Now we feel like, look, with all those learnings, this isn't like going into an acquisition brand new. We know each other. We know exactly where the talent is. We can now get some better cost leverage with a combined corporate functions group, combine now some of our capability sets, specifically in the digital world, and combine our pipeline in order to increase the revenue opportunities and rightfully said, the U.S. is probably the best example of where that can be. The other part was, while the kind of the geopolitical narrative was going on, PA for those who might not know, the origins of PA back after World War II is that they were the exclusive consultant to the Ministry of Defense in the U.K. and have had a defense and security advisory skill set for 70-plus years. As a result of kind of a military independent or defense independent Europe, that business is now growing at a very, very strong clip. Most of that advisory is on defense posture, which then results in defense infrastructure, which is kind of in the sweet zone of Jacobs. So you kind of put both of those together, and we said, look, this is a great opportunity to continue to go to change.

Interesting.

And as it relates to the kind of the business model for PA and we've provided guidance for high single-digit growth rate and 22% margins. By the way, 22% is industry-leading margins. And so we want to have that good balance between continuing to drive good profitability but also high single-digit growth rate. And obviously, when we complete the transaction in the next couple of months, we would provide an updated impact on the guidance in terms of margin expansion and so forth. But we're really excited about the combination in addition to the defense and security portion of the business that Bob alluded to, they're really well positioned energy and utilities and health sciences and a lot of areas where there's a lot of commonality between what we do and the ability to complement what we do is really -- is what gets us really excited about the combination.

Bob, you at least partially answered my geography question already, but maybe you could tell us direction of growth in the Middle East seems like it probably should be pretty good, but you tell me --

Yes.

And Asia, Australia. We already talked about the U.K. a bit.

Yes. Maybe I'll just go -- we'll go eastward from Middle East, eastward. Right now in the Middle East, we're still experiencing strong double-digit growth. There's a lot of headline news around the growth that is in Saudi around the 2030 vision. We were very selective, as you remember, in fact, I think we were sitting right here, and only took on those projects and programs that had some time line requirement, whether it be the World Expo, World Cup, things that we knew that they were a definitive end to, those have continued to expand. We also concentrated on the infrastructure, the water and transportation infrastructure that would be required around that. So that continues to grow. While over the course of the last probably 2 to 3 quarters, we're seeing a rebound in the pipeline in the Emirates, which we have -- that's kind of our sweet spot in the Middle East is out of Dubai and Abu Dhabi. And so that's been really transportation and water driven. So we see a nice tail in the Middle East. India continues to grow for us, kind of going eastward. India continues to grow. Interesting dynamic and Venk actually hit on it. For a long time, India was a growth platform for us for the rest of the world. Today, now we're seeing with large clients in semi and life sciences India for India. And so those types of projects, high-end chip manufacturing, biologics facilities, our population -- our Jacobs employees in India have been designing these for a long time for the rest of the world. And now they're going on India with multinationals as well as some large Indian conglomerates working there. So that's been a really nice positive for us. Singapore is on a steady rebound really driven around water for us. And then Australia, it's really been about share gain. We have seen continued growth in Australia, predominantly water, but our transportation business in Australia continues to be -- there has been a lot of programs. We've been forcing up to win those programs that have come out.

Interesting. Venk, just free cash flow margin. I think you have 7%, 8.5% this year, still well off your 10% margin that's expected by '29. So maybe just more color on how you get there, just out of curiosity.

Yes. So first of all, fiscal '26 1st quarter, we actually raised the guidance. We came in at about $36 million in free cash flow, substantially better than we expected. A lot of that was driven by the fact that the team did a fantastic job in terms of cash collection and just working capital management. But also, we had one of the larger data center customers. There was a -- there's a cash element to it as well, which helped. But suffice it to say that we feel really good with the start -- with a strong start to the year that we are raising our full year guidance from 7% to 8% to now 7% to 8.5%. And that's certainly ahead of our plan in terms of getting to the 10% plus. So it's a combination of deploying a lot of these capabilities. We talked about AI from the standpoint of what we do for customers, but also what we do internally in terms of improving the cash collection function and so forth, that's obviously a part of it, better working capital management. And then ultimately, as we drive these margin enhancements those should flow through to the bottom line and ultimately to cash flow. So we feel really good about our free cash flow margin and growth in free cash flow per share.

Got it. And then your balance sheet leverage is right now mostly your long-term target, but it seems like you're pretty happy with leaning into share repurchases being extra prudent call it, on M&A. Is that kind of a strategy for the foreseeable future?

Yes, absolutely. I think phenomenal balance sheet and 0.8x leverage in the most recent quarter. We did say that as we acquired the rest of the PA stake that we don't already own, we will probably grow slightly above the 1 to 1.5x range. We want to stay investment grade rating and tremendous free cash flow generation that I just talked about. So it gives us the optionality not only to continue to invest in the top line growth, but we've been really good about returning a lot of our cash to shareholders in form of buybacks and dividends. Our dividends have grown at double-digit growth rate for the last 5 years. Buybacks, last year, we did -- this year, we've already down about $250 million in buybacks just in the first quarter. And we're committed to continuing to be regular buyers of our stock. So it's a very balanced approach in terms of continuing to invest in organic growth, continuing to be good stewards of capital and returning cash in the form of buybacks and dividends. And then M&A is something that we'll consider in the medium to long term, but we think we have solid top line growth prospects for some time to come, and that will be the focus.

Last question, 30 seconds. I've asked you every year, what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? Are there any emerging industry trends that are perhaps being overlooked in the current discourse? Have to answer in a minute like ...

Look, I think the world -- and I'm not going to say the 2 letters, but the --

Everyone else does.

The world of digital enablement is having a profound in a positive way effect on our business, allowing us to grow. And the second would be, there might be some geopolitical undercurrent of populism that's going on. We're actually going the opposite way. We're driving the globality of our business because we've got a great company with global talent that's able to deliver to our clients' expectations every day and beyond as that technology continues to develop within our clients business.

Got it. Well, Bob, Venk, thank you very much.

Thank you.