Earnings call transcript: Capgemini Q4 2024 sees stable margins amid revenue dip

Capgemini reported its results for the fourth quarter of 2024, showcasing stable operating margins despite a slight decline in revenue. The company highlighted its continued focus on artificial intelligence and operational efficiency as key drivers for future growth. According to InvestingPro data, the company maintains a strong financial health score of 3.12 (rated as GREAT), with a notable free cash flow yield of 8%. Despite these fundamentals, Capgemini's stock experienced a slight decline of 0.53% following the earnings release, closing at 5,178.

Key Takeaways

• Revenue for the full year 2024 was €22.96 billion, a 2% decrease at constant currency.
• Operating margin remained stable at 13.3%.
• Generative AI bookings contributed significantly to the company's portfolio.
• The stock price decreased by 0.53%, reflecting cautious investor sentiment.

Company Performance

Capgemini's performance in Q4 2024 was marked by resilience in its operating model, maintaining a stable operating margin of 13.3% despite a 2% decline in revenues at constant currency. With a P/E ratio of 18.83 and a five-year revenue CAGR of 11%, the company demonstrates solid long-term growth potential. The company has been investing heavily in generative AI, which accounted for approximately 5% of Q4 bookings and 4% for the entire year. This focus on AI, along with operational simplification programs, has positioned Capgemini as a leader in AI services.

Financial Highlights

• Full Year Revenue: €22.96 billion, down 2% at constant currency.
• Operating Margin: 13.3%, stable year-on-year.
• Normalized EPS: €12.23, down 1.7% year-on-year.
• Organic Free Cash Flow: €1.961 billion.

Outlook & Guidance

Capgemini has provided a cautious outlook for 2025, projecting revenue growth between -2% and +2% at constant currency. The company expects growth in the first half of 2025 to mirror Q4 2024 and is targeting a 0 to 20 basis points improvement in margins. Additionally, Capgemini aims to generate around €1.9 billion in organic free cash flow.

Executive Commentary

CEO Ayman Ezzat emphasized the importance of AI, stating, "AI is a priority for clients. They see value from it." This sentiment was echoed in the company's strategic focus on AI and generative AI services. CFO Nivi Bagat highlighted the company's operational resilience, stating, "We demonstrated the resilience of our operating model."

Risks and Challenges

• Discretionary spending remains subdued, particularly impacting sectors like manufacturing.
• Macroeconomic and geopolitical uncertainties could hinder growth.
• High attrition rates, though improved, continue to pose a challenge.
• Competition in the AI sector is intensifying, requiring continuous investment.
• Currency fluctuations could impact financial performance.

Q&A

During the earnings call, analysts focused on the recovery of discretionary spending, particularly in financial services. Questions also centered around the company's AI investments and their expected return. Executives reiterated a cautious outlook due to the uncertain macroeconomic environment, while emphasizing efforts to improve sales effectiveness and operational efficiency.

Full transcript - Cap (CAP) Q4 2024:

Conference Operator: Good day and thank you for standing by. Welcome to the Capgemini twenty twenty four Full Year Results Webcast and Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ayman Ezzat, CEO. Sir, please go ahead.

Ayman Ezzat, CEO, Capgemini: Thank you. Good morning and thank you for joining us for the 2024 full year results call. And I'm joined today by our CFO, Nivi Bagat. In 2024, the market proved weaker than we anticipated at the beginning of the year. Client did not increase their discretionary spend.

And as we discussed before, Capgemini faced some unexpectedly strong headwinds in the second half, notably in manufacturing and in France. In this challenging environment, the group demonstrated a strong resilience of the operating model, while sustaining investment in cloud, in data and AI, digital core and intelligence industry notably. And we made significant strides in developing our leadership in AI and G and AI during the year. For the full year, the revenues stand at EUR 22,960,000,000.00, down 2% year on year at constant currency. And after bottoming up out in Q1 at minus 3.3, growth rate improved slightly through the year.

We end the year at minus 1.1% in Q4, which is in line with our revised expectations in October, reflecting the challenging environment we continue to operate into. Our bookings are solid and total EUR 23,821,000,000.000. This represents a robust book to bill of EUR 1.08 and demonstrate a strong commercial momentum despite client decision cycle that remain lengthy in this environment. The operating margin is within the target set for 2024 at 13.3% of revenue. It is stable year on year despite the revenue decline, and this is a result of continuous shift towards higher value services combined with improved operational efficiency.

Organic free cash flow remained strong in spite of the revenue decline at EUR 1,961,000,000.000 in line with the 2024 target and the previous year. Our normalized EPS stands at EUR 12.23 in accordance with our dividend policy, the Board of Directors is proposing a payment of EUR 3.4 per share dividend at the Annual General Meeting. So if I highlight a bit on Sorry. The environment remains challenging at the end of the year. The trends observed in Q4 are consistent with what we had anticipated.

The manufacturing sector continues to experience strong headwinds, whereas we see an improvement in financial services and consumer goods and retail. And robust public sector throughout the year. From a geographic perspective, growth rates improved in North America, but also in The UK, Asia Pacific and Latin America. However, as anticipated, France experienced a noticeable slowdown. Finally, on business, both Application and Technology and Operations and Engineering improves again this quarter.

It is also worth highlighting our plus 3.2% growth for the full year in Strategy and Transformation, and this continued momentum illustrates the strength of the growth positioning as a strategic partner to its clients. Overall, discretionary spend remains subdued across the market with only green shoots in Financial Services. Clients continue to be focused on efficiency, prioritizing operational agility and optimizing costs. And this has driven a strong demand for transformation program leading to sustained traction for our cloud data and AI services, as well as our innovative offerings in intelligent supply chain, digital core and generative AI. Let me highlight a few deals of Q4.

In collaboration with NVIDIA (NASDAQ:NVDA), we are helping Telenor in The Nordics to develop an energy efficient GPU as a service. It's a data center offering designed for energy efficiency. This compute service will run entirely on 100% renewable energy and the plan is to scale it into state of the art data center, where the excess heat generated by workload is planned to be reused in Oslo's local heating system. For U. S.

Utilities provider, we are upgrading and deploying an advanced metering infrastructure to support the electrical grid modernization. The system will utilize intelligent energy devices and distributed energy resources control over a common digital communication network. Advanced analytics with machine learning will enable a real time grid model with Power Flow providing proactive alerts to disruptive grid events for from storms or in service infrastructure failures. Power flow demand balance, ultimately enabling customer to better manage energy efficiency. And from Global Technology Company, we are currently delivering a highly complex digital core program with a large scale SCPS4 transformation.

This milestone has been achieved jointly with our recently acquired data platform company Syniti, who was in charge of the data transformation. This illustrates what the synergies that the acquisition of Syniti can deliver. Syniti is truly a unique asset on the market around corporate data. Data is the fuel to create value with digital transformation and SIT. We already see good synergies and target substantial growth opportunities, as we can see from some of the bookings we achieved with Syniti in Q4 and of course given the critical role of high quality data and AI and Gen AI in client projects.

So looking at generative AI, we are recognized for our leadership and the quality of our services. Demand from clients remains dynamic and has supported strong Gen AI bookings that accounted for around 5% of Q4 bookings and close to 4% full year. We delivered hundreds of projects from proof of concept to larger programs to deploy use cases at scale. We deliver value bringing the best solution supported by a large ecosystem of technology partners. It is also the result of continuous investments we have been making in our capability and in our asset, 150,000 talents have been fully trained to leverage the benefits of Gen AI tools in the projects we deliver.

And with the rise of AgenTic AI, we are accelerating value creation with hyper automation enabled by AI agents, we are able to automate highly variable processes that could be automated by just could not just be automated by data RPA or traditional AI. And there is a traction, as you might have heard in the market for AI agents, and we are positioned to catch the growth, thanks to our investment and assets. We strengthened our set of offerings to infuse them with AI agents. For example, it's a case for our RACE platform that was upgraded with AI agent framework to propose solution at scale, involving custom AI agents. So maybe interesting to look at some of the example of agents deployment.

So we're helping a global logistics company enhance its finance and accounting process, operation with AI agents to assist and empower human workers. Billing analysts are supported in detecting anomalies on invoices to finalize the booking processes. And Dispute Managers are empowered by AI agents to manage the case in less than one minute compared to previously ten to twenty minutes. For European Utility, we are building a Gentile application for the Procurement Department. AI agents retrieve, scan and verify documents within the digital core of the company, streamlining approvals and reducing significantly errors.

And for global consumer goods company, we are leveraging Agentiq AI technologies to transform end to end marketing value chain, creating personalized consumer experiences, providing tailored interaction and streamlining marketing operations. In 2024, we also demonstrated continuous leadership in corporate responsibility. ESG roadmap. From an environmental standpoint, we reduced our absolute emissions scope one, two and three by 35% compared to 2019. The share of renewable energy in the group's electricity consumption reached 98%, up from 96% in 2023.

And the group was also confirmed as a constituent of the Dow Jones Sustainability Index Europe and maintained its position on the A List in the 2024 CDP assessment. We also made notable progress on gender balance. Proportion of women in the group reached 39.7%, up by almost one point year on year and up seven points since 2019. The proportion of women among executive leadership position reached 29%, up by almost three points year on year and more than 12 points since 2019. And we continue to invest in our talent.

The average number of learning hours per employee trained reached seventy seven hours last year significantly up not to build expansion of our JNI training program. We also extended our impact on digital inclusion, our various program and partnership with leading non profit organization benefit directly or indirectly almost 3,200,000 individuals in 2024. Finally, on governance, we made good progress around cybersecurity and ethics. Now, as you know, we are focused on the top line growth. So in spite of unfavorable mix geographic mix and sectoral mix, we are focused on to see how we can accelerate top line growth.

And as announced in Q3, we launched a set of targeted actions to unlock potential at every level of the organization for fueling growth and driving efficiencies. We are simplifying processes, streamlining operation to ensure 100% client focus and increase efficiency, while sustaining our investment. So we have defined four areas of focus. First, the simplification of the operation and the streamlining of key business processes and acceleration of decision making. Second, improving the effectiveness of the go to market to reignite our growth with a high performing sales and support organization focused 100% on client success.

On the competitiveness of our offering and delivery, that means more G and A and automation in all what we deliver and more focus on the excellence of our delivery. And finally, around talent and talent deployment. First, the acceleration accelerate the investments in high growth area to be able to create more scalability, where we see huge growth and also accelerating the efficiency of talent deployment by leveraging the global platform we have deployed. Now I'm convinced that this plan is the high focus for the group with unlock good growth opportunities. Now coming to the outlook, we do start the year with contrasted trends and overall, we want to remain cautious in this uncertain geopolitical and economic environment, notably around manufacturing and Europe.

In that context, we adopted a wider growth bracket of minus 2% to plus 2% at constant currency to accommodate a balanced outlook. At the bottom, it factors a deterioration of the environment in the second half, even if we don't see any early sign at this point. And at the top, it incorporates some improvement in the environment. The scope impact is expected to be in the range of one to two points. The seasonal decline in revenues between Q4 and Q1 should be lower than historical average.

With this start, we expect constant currency revenue growth for H1 twenty twenty five to be to remain in the same range as Q4 twenty twenty four. On the operating margin, we target zero to 20 basis points improvement, leveraging our improved offering mix and continuous operational improvement. Finally, we target to maintain our strong cash flow conversion with an organic free cash flow of around EUR 1,900,000,000.0. Thank you for your attention. And I now hand over to Nynaeve.

Nivi Bagat, CFO, Capgemini: Thank you, Hamel, and good morning, everyone. Before I begin, you will notice that we have changed the format of the slides slightly. Information remains the same. And if you want to look at this in the old format, it is available in the appendix section. Now let me share with you the highlights of our full year 2024 performance.

As mentioned by Ayman, in an environment that proved to be weaker than initially anticipated in 2024, Capgemini demonstrated the resilience of its operating model. Group revenues reached EUR 96,022,000 in 2024, down minus 1.9% on a reported basis and minus 2% at constant currency. Operating margin amounted to EUR 934,002,000 or 13.3% of revenues stable year on year. After other operating expenses, financial and tax expenses, the net profit group share reached EUR $1,671,000,000, up by 0.5% year on year. Basic EPS increased by plus 1.2 to EUR 9.82.

Normalized EPS reached EUR 12.23 down minus 1.7% year on year. Finally, we maintained organic free cash flow generation at a record high level with EUR $1,961,000,000 in 2024. Moving on to our quarterly revenue growth. Q4 came at the top end of the range implied by our October growth outlook. Revenue was down minus 1.5% organically.

This represents 60 basis point improvement compared with the Q3 growth rate and brings our organic growth for the full year to minus 2.4%. Accounting for scope impact, constant currency growth was minus 1.1% in Q4 and minus 2% for the year. FX became a tailwind in Q4 with a positive impact of 50 basis points largely due to the appreciation of the British pound and U. S. Dollar against the euro.

Overall, FX had a positive impact of 10 basis points for the full year. As a result, reported growth was minus 0.6% in Q4 and minus 1.9% for the full year 2024. At this point, we expect FX to have a positive impact of around one point for the full year 2025. Moving on to the bookings. The group maintained a strong commercial momentum in 2024 despite client position cycles that remain long.

Bookings totaled EUR 23,800,000,000.0 for the year and EUR 6,800,000,000.0 in Q4. With the book to bill of EUR 1,220,000,000.00 in Q4, we end the year with another strong quarter. This brings the book to bill for the full year to 1.08, which matches our historical high. On a year on year basis, 2024 bookings are down 0.5% at constant currency with Q4 turning positive at plus 1.9%. Looking first at our revenues by sector.

The group experienced contrasting sector developments throughout the year. Some sectors accelerated as anticipated and returned to growth, but others deteriorated visibly. Today, I will focus my comments on Q4 since full year growth rates do not reflect this. In Q4, Financial Services recorded another visible improvement in its growth rate. As a reminder, this is our second largest sector and grew plus 2% at constant currency in Q4, marking its return to growth.

CMT also recorded a third consecutive quarter of improvement and with rebound in consumer goods and retail, both sectors posted positive growth in Q4 at plus 0.6% and plus 1.3% respectively. On the other hand, and as anticipated, manufacturing further contracted. Growth rates decelerated from minus 3.4% in Q3 to minus 6.1% in Q4. The Energy and Utilities and Services sectors also decelerated in Q4. Finally, the Public sector remained solid in Q4, confirming the sustained momentum recorded through the year.

Moving on to regions. Let's look first at Q4 trends and how year on year growth rates compared to those reported in Q3. Growth rates improved substantially in North America, but also in The United Kingdom (TADAWUL:4280) and Ireland and in the Asia Pacific and Latin America region. However, this slowdown visibly in France as anticipated and decelerated slightly in the rest of Europe region. Turning now to the full year 2024, where I discussed the growth rates at constant currency.

In North America, revenues are down minus 4.1%. The financial services, consumer goods and retail and TMT sectors improved significantly in H2, but this was partially offset by the slowdown in manufacturing and public sectors. France's revenues decreased minus 3.5% in an environment that clearly deteriorated towards the end of the year with a significant contraction in the manufacturing sector. As in most regions, financial services clearly improved through the year. The United Kingdom and Ireland region demonstrated resilience with minus 1% decline in revenue, driven primarily by the contraction of the consumer goods and retail sector.

The region's return to growth in H2 was driven by the recovery in financial services and continued strength in the Energy and Utilities sector. Revenues in the rest of Europe region were virtually stable year on year. The Public and Energy and Utilities sectors remained solid through the year and Financial Services returned to growth in H2. These positive trends were offset mainly by the Manufacturing sector. Finally, revenues in the Asia Pacific and Latin America region was slightly down minus 0.3% driven by a slower Financial Services sector in the Asia Pacific region.

In contrast, the public sector in this region and the consumer goods and retail sectors in Latin America both enjoyed double digit growth rates. Our operating margin improved in all regions except France. This reflects a portfolio mix improvement across the board, but also contrasted activity trends. Specifically, operating margin in North America and in The UK and Ireland region increased visibly year on year, up by 90 basis points and 110 basis points respectively. The rest of Europe and Asia Pacific and Latin America regions also delivered year on year modest margin improvement.

Conversely, operating margin in France suffered from the lower activity level combined with some one offs leading to a decrease of two forty basis points year on year. Moving on to revenues by business. Starting with Q4, revenue growth rates improved from Q3 in both Applications and Technology and Operations and Engineering. Our Strategy and Transformation business growth rate remained positive, but decelerated. For the full year at constant currency, total revenues of Strategy and Transformation Services were up 3.2% illustrating the strength of the group's positioning as a strategic partner to its clients.

Total (EPA:TTEF) revenues of Applications and Technology Services, which is a Capgemini's core business declined by minus 2.1%. Lastly, Operations and Engineering total revenues decreased by minus 2.1%. Growth in business services was more than offset by the decline in cloud infrastructure services and engineering services. Moving on now to the headcount evolution. Total headcount stands at 341,100 employees at the end of twenty twenty four, up 5.2% year on year and 0.7% since the September.

The offshore leverage stands at 58%, up by one point compared with December 2023. Lastly, attrition increased slightly over the past quarter. This brings our last twelve month attrition rate to 15.7% at the end of twenty twenty four, down by one point year on year and within our nominal operating range. Moving on to the analysis of our operating margin. The continued shift in Capgemini's mix of offerings towards more innovative and value added services combined with enhanced operational efficiency lifted the gross margin by 50 basis points to 27.4%.

This has enabled the group to offset the incremental investment in selling expenses to fuel our future growth. It also offsets a slight increase in G and A expense. The ability to maintain its operating margin in the face of a soft demand environment, while investing for the future illustrates the resilience of the group's operating model. Moving on to the next slide. Our net financial results for 2024 is a net income of EUR 13,000,000 as opposed to a net expense of EUR 42,000,000 last year.

This swing was primarily driven by higher interest income on our cash assets, while our bond debt is entirely at fixed rate. The income tax expense increased by EUR 55,000,000 year on year to EUR $681,000,000. Consequently, our effective tax rate reached 28.8% in 2024 compared with 27.2% in 2023. Let's turn now to the recap of our P and L from operating margin to net income. The other operating income and expenses are down EUR 67,000,000 year on year to EUR $578,000,000, mainly driven by lower restructuring costs.

Our operating profit is EUR 356,002,000 or 10.7 of revenues, up by 40 basis points year on year. After financial and tax expenses, minority interests and equity affiliates, the group share in net profit amounts to EUR $1,671,000,000, up plus 0.5% on 2023. Our active share capital management led to a 0.7% decrease in the average number of shares outstanding. Consequently, the basic EPS is up by 1.2% to EUR 9.82, while our normalized EPS is down at EUR 12.233 or minus 1.7 year on year. Finally, let's have a look at the evolution of our organic free cash flow and net debt.

We maintained a strong cash flow generation in 2024 despite the lower revenues and increase of our cash tax rate. Our organic free cash flow amounted to EUR $1,961,000,000, in line with our target of around EUR 1,900,000,000.0 and leading to once again an organic free cash flow to net profit ratio above one. A few final words on capital allocation. Net of the EUR $415,000,000 capital increase related to ESOP, Capgemini redeployed close to EUR 2,000,000,000 of capital in 2024, essentially funded by the organic free cash flow of the year. The group invested EUR $827,000,000 in acquisitions.

We also paid dividends of EUR $580,000,000 and allocated EUR $972,000,000 to share buybacks. EUR $498,000,000 is a part of our multi year program and EUR $474,000,000 to neutralize the dilution of the eleventh employee share ownership plan. In October 2024, the group was redeemed in full and at maturity the EUR 600,000,000 bond issued in April 2018. Consequently, our net debt stands at EUR 2,100,000,000.0 at the end of twenty twenty four. This compares with EUR 2,000,000,000 at the end of twenty twenty three and EUR 2,800,000,000.0 at the end of H1 this year.

So on that note, I'm going to hand back to you for the Q and A session.

Ayman Ezzat, CEO, Capgemini: Thank you, Nivi. Let's now open the Q and A and to allow maximum number of people in the queue to ask questions. I kindly ask you to restrict yourself to one question and a single follow-up. Operator, could you please share the Q and A instructions?

Conference Operator: Thank you. We will now take the first question from the line of Mohammed Moala from Goldman Sachs. Please go ahead.

Mohammed Moala, Analyst, Goldman Sachs: Great. Thank you, Ayman and Divi. Can you hear me okay?

Ayman Ezzat, CEO, Capgemini: Yes, perfectly. Thank you. Great.

Mohammed Moala, Analyst, Goldman Sachs: Thanks. Good morning. I just wanted to sort of better understand the construct of your outlook. Obviously, you've been helping us giving us some color on H1 and H2. But first of all, how should we think of this kind of cadence, but also by geography in terms of the when we think of the midpoint of the guidance, what sort of exit rate growth are you assuming in the second half in North America?

And secondly, in terms of sort of discretionary spend, what's your kind of visibility around that in terms of the kind of short term discretionary spend? You've talked about that as being a kind of lead indicator. How does that sort of differ between North America and Europe perhaps? And then on top of that, I just wanted to clarify, you talked about some additional levers that you're looking to drive. To what extent have you more control and in the pipeline to perhaps offset some of the kind of macro headwinds you talked about with those additional levers around Gen I in particular?

Thank you.

Ayman Ezzat, CEO, Capgemini: That looks like a question. There's plenty of questions. Okay. Listen, on the outlook, I mean, clear, the H1 constant currency, we expect it to be in line with Q4. That's around the same level.

I mean, we see two scenarios for H2, a scenario that Westin can really deteriorate further. We don't see sign of this scenario, but I have fresh twenty twenty four in my mind still. So I'm not excluding any scenario at this stage, even if we don't see we don't expect the scenario to happen today. We need to be cautious. When you see the uncertainty on the global macro economic side and on the geopolitical side, I think everything can happen in H2 at this stage from my perspective.

But we don't see signs of that. Of course, there is a scenario where things environment improves. And that's what takes you to the higher end of our growth rate. Discretionary spend, we have seen it for the moment really come back in Financial Services. Outside of that, the client are still very tight in terms of the spend and the search for efficiency, for optimization, notably deploying new technology like AI, GNAI, cloud, etcetera, is really what's the main focus versus growth agendas.

And that, of course, give us a general orientation to overall how they're deploying the spend and the fact that discretionary will remain limited at least for the first half. In terms of growth for us, what we're looking at, I mean, I think part of the program that Avalanche is really around the sales effectiveness. I mean, our sales growth have increased. I think we can deploy more effectively our sales, not necessarily reducing the spend, but driving more efficiency out of sales and that's going to be one of the focus that we have as part of the program we have launched.

Mohammed Moala, Analyst, Goldman Sachs: Great. Thank you.

Conference Operator: Thank you. We will now take the next question from the line of Balaji Tirupati from Citi. Please go ahead.

Balaji Tirupati, Analyst, Citi: Thank you. Good morning. Two questions from my side. Firstly, if you could clarify the inorganic contribution that you have factored within your outlook range? And then second question on generative AI, could you share view on implications of DeepSeek's breakthrough in IT services sector?

And given general puts and takes around generative AI, where do you see IT services industry is at present between facing headwinds from passing on efficiency gains and incremental work as clients adopt technology and new applications? Thank you.

Ayman Ezzat, CEO, Capgemini: Yes. The organic contribution is one to two points clear that it's one point on the lower end and up to two points on the higher end. That's really what's in the built into the guidance today. So I hope that clarified that point. On G and A impact of DeepSeq, listen, DeepSeq is a model, I mean, number of companies have been working on trying to develop lighter weight model.

It has two characteristics. One is a lighter weight model. So in a certain way, it can be deployed at the edge, notably, more potentially mobile phone, in PCs, in a car, in electric vehicle. So that's one of the advantages of having lighter weight models for consuming less energy and requiring less power. And the second thing, it's open, it's open source.

It's not the first open source. Lama is open source, Mistral AI has an open source model. What we like about open source model is that the weights are available notably and we can find we can better fine tune the model and make it more effective because we can play with the weights of the model to be able to fine tune it. So for me, it's part of the new generation of models going to actually the deployment of G and AI. We will need some of the large models like the OpenAI, the chat, GPT-one, etcetera, but we also need some of the lighter weight model and it's a mix of use.

For me, all these models contribute to faster deployment of and penetration of JNEI. I mean, we are it's a trend that will not stop. So we are maturities increasing, we start to deploy more clients to get more used, We start deploying at scale some of the first one, which will actually deployment of the future one. There is it's going to take time, but there is definitely a trend toward the deployment of AI and G and A in companies. It is the number one priority that we have seen in terms of areas of investment.

After that, it's cybersecurity, digital core, etcetera. But Gen AI and AI remains the top number one priority, even if the expectations are less than there were, I'd say twelve to eighteen months ago. In terms of impact on our business, it's again, there is productivity gains that we will pass to the customers, they're incremental. So it's not suddenly you improve by 30% or 40% productivity. So it's incremental.

So it goes supports our drive towards increased efficiency of delivery that we have been pursuing for the last twenty years. And on the other side, it creates new opportunities for business. I mean, one of the areas clearly, for example, we have seen, which we think is going to be quite interesting can deliver good growth is in mainframe modernization. I mean, we have now pretty solid offering around mainframe modernization and a lot of interest from clients. We really help we're going to help clients deal with a lot of the legacy and mainframe they have, which will unlock future potential in terms of spend for other technology investment.

So I remain on the right side, I'd say, of the evolution we consider G and AI is a good thing overall.

Balaji Tirupati, Analyst, Citi: This is very clear, Eman. Thanks a lot.

Conference Operator: Thank you. We will now take the next question from the line of Sven Merck (NSE:PROR) from Barclays (LON:BARC). Please go ahead.

Sven Merck, Analyst, Barclays: Great. Good morning. Thanks for taking my questions. Two on the margin, please. And maybe first on the outlook.

The midpoint is for slight improvement. Considering the guided organic growth outlook, what are the sources for a margin improvement in 2025? And then secondly, in 2024, we have seen obviously a move in the cost structure with the gross margin improving offset by higher sales and marketing and G and A expenses. Are you planning for any further movement in the cost structure in 2025? Thank you.

Nivi Bagat, CFO, Capgemini: Thank you, Sven. So I'll give you both a perspective. So as you saw, of course, our gross margin had improved in 2024 and we improved that in H1 as much as the full year. And it's important to note that our biggest lever going into the future will always be that improvement in the mix. So the improvement in terms of the portfolio mix and that is where our biggest, if you like, shift in margin will always come from.

But in addition to that, and I think to answer part of your second question as well, we see levers more across our operational effectiveness. So whether it is our utilization or better deployment of our people or onshore, offshore, etcetera, we will continue to work those levers as we go into 2025. But we will also be looking at G and A and looking at what we can do particularly in G and A. Eileen talked about more sales efficiency and in that context, we will try to make sure that we get more bang for the buck, if you like, in terms of what we do on our sales expenses as well. So to answer your question and summarize that really, the levers are biggest portfolio improvement and therefore the gross margin followed then by operational efficiencies, which we will look at.

And then of course, we will particularly be looking at G and A as well as we go into the future.

Sven Merck, Analyst, Barclays: Great. Thank you.

Conference Operator: Thank you. We will now take the next question from the line of Frederic Boulan from Bank of America. Please go ahead.

Frederic Boulan, Analyst, Bank of America: Hey, good morning. Thanks for taking the question. Eman and Niv, so my question is around free cash flow generation, strong performance again in 2024. If you can talk about some of the moving parts or specific actions you're planning to take for 2025. I've seen a small decline in the guidance despite the performance in 2024.

So any areas in particular you want to flag? And then if I can get a follow-up around headcount, second quarter of recovery in terms of headcount, more focused on offshore. So if you can give us a perspective on the investments you're doing here, is it tied up with your higher growth you're seeing on demand in financial services in particular, aligned with your cost structure with more offshore? So any comments around headcount development would be very useful. Thank you.

Ayman Ezzat, CEO, Capgemini: You see our free cash flow?

Nivi Bagat, CFO, Capgemini: Yes. So our mantra is and has always been that our free cash flow to net income should be above 1%. And that's something that we're always focused on as you've seen the performance over the last few years, as you've seen now. There's a lot of focus that's gone into it in terms of financial discipline, whether it is invoicing, collections, etcetera. So it's everyday humdrum to make sure that we actually do what we do to keep on top of that cash performance.

But having said that, it's not an easy environment. It is clients are holding on to cash much more than they have before. So it does take a lot of financial discipline, if you like, to be able to get there. Now I don't entirely understand what you meant by the guidance being lower than 24, because the guidance in '24 was around $1,900,000,000 and that is what is the guidance for 2025. So perhaps I don't fully understand.

Ayman Ezzat, CEO, Capgemini: I'm just

Frederic Boulan, Analyst, Bank of America: saying you did better. Yes, you did better in 2024.

Ayman Ezzat, CEO, Capgemini: It depends what you mean by around 2030, okay. I think the 1.96, I would say, we basically it's around the same. We've considered we can deliver around the same. It could be a bit lower. A small fluctuation in working capital that can fluctuate this number.

But we're showing that resilience and that number with the growth that subdued is still there and we can still deliver the around the same cash flow.

Nivi Bagat, CFO, Capgemini: I'll take that as a positive, but I mean on headcount.

Ayman Ezzat, CEO, Capgemini: Yes, on headcount, so no, the growth we have said that the growth has resumed already since Q2 in India. So several areas of growth we see. One, Financial Service for sure, with the recovery in Financial Services is driving quite a bit of growth in India. In Digital Corp, from notably SAP, high growth area, all data and AI, as you can imagine, supply chain. So there is a number of areas, which are the high growth areas, where we are in areas like PLM and digital continuity, and that's where we're really investing.

This is what the high growth area and we're gaining efficiency in front of that in some other areas leveraging NII in terms of coding, testing in more generic area. We're finding improvement in terms of efficiency. So overall, we see that on the other side, we do have a reduction on the number of onshore countries, because of some of the pressure on the top line. Of course, we're taking the action to be able to continue to equilibrate our headcounts and to be able to drive a good utilization to support our margin. Thank you very much.

Conference Operator: Thank you. We will now take the next question from the line of Laurent Dore from Kepler Cheuvreux. Please go ahead.

Laurent Dore, Analyst, Kepler Cheuvreux: Yes. Good morning, Ivan. Good morning, Naif.

Ayman Ezzat, CEO, Capgemini: Good morning.

Laurent Dore, Analyst, Kepler Cheuvreux: I have two questions. The first is, when I look at your Q4 performance, there are two regions that did better, is North America and Asia Pac and LatAm. When you projected yourself into the first part of the year, do you expect those two regions to continue to improve secondarily? Or do you consider the fourth quarter to be a bit of a one off there? And my follow-up is on the profitability side.

More on the French business, which is accelerating its decline, it's a country with less flexibility, I would say, on the cost. How do you plan to manage French margin in 2025? Thank you.

Ayman Ezzat, CEO, Capgemini: I'll start with second one. Listen, you know very well France. I mean, it's a high headcount country for us, which mean margin is very sensitive to activity level. We have seen the margin dive you call during COVID-nineteen, the activity level went down. We see the margin dive here again because activity level go down.

Margin is highly related to activity. So we do expect bit by bit activity to improve in France with that, that was brought on the margin, but we're not going to recover the margin in France in 2025. It will take some time before we're able to do that same thing. We need to regain the activities. This is the primary and best lever to be able to improve the margin back in France.

The second one was around the evolution around the growth of different activity. Again, there always can be fluctuations. So I remain at this stage reserved a bit about the evolution of the activity in the first half. We are comfortable overall in where we are, but there can be fluctuation in some regions. The trend seems to be positive, but again, fluctuation can happen overall in by region and by sector because it's region and sector really have an impact.

So but again, overall, if I look at the full year of 2025, we should see notably in H2, Americas being really supportive on the growth side.

Laurent Dore, Analyst, Kepler Cheuvreux: Okay, great. Thank you.

Conference Operator: Thank you. We will now take the next question from the line of Toby Ogg from JPMorgan. Please go ahead.

Toby Ogg, Analyst, JPMorgan: Yes. Hi, good morning and thanks for the question. A couple from me as well. Just on the growth, so I know you've indicated H1 should be similar to Q4 on a constant currency basis, but how should we think about that on an organic basis just given the indication for one to two points of M and A contribution in 2025? And how should we think about that M and A contribution evolution as well through the year?

And then just secondly, just on the margins, I know we've talked about better gross margins as the portfolio shifts, but then also these incremental investments in selling. Could you give us a sense for whether this higher sales intensity required to drive the growth is likely to be a more permanent feature going forward? And what are the main drivers of this need for higher sales investments? Thank you.

Ayman Ezzat, CEO, Capgemini: So, listen, on the we don't guide organic. So there's always impact from constant currency as you imagine. It could be up to one point in H1 from M and A. After that, two years depending on the activity level and the acquisition. So we said the top end is 2% for the full year in the guidance that we gave, which mean it's willing to further acquisition that would happen during the year that would have any higher impact by the end of the year.

But at this stage it's too early, because acquisitions are black and white. So we cannot really guide around the impact of acquisition. We have this one to two point bracket, which we expect for the full year. On the gross margin, the gross margin has improved, it's good. On sales, I mean, I mentioned it, I think we can improve our sales effectiveness.

So it can be drive higher growth, which mean at the end, with the same level of investment, we should be able to drive better growth, which means percentage of sales of business development as part of revenue should come down overall over time. I'm not giving a timeline for that, because I want to make sure that we drive the right level of investment to be at the top line, but it's not something that's going to be a constant, because I do believe there is effectiveness to be achieved there.

Toby Ogg, Analyst, JPMorgan: That's great. Thank you.

Conference Operator: Thank you. We will now take the next question from the line of Charlie Brennan from Jefferies. Please go ahead.

Charlie Brennan, Analyst, Jefferies: Great. Thank you. Just two questions for me as well, if I can. Can I just come back to the start year momentum again? Obviously, similar constant currency growth to Q4 and Q1, but with a higher M and A contribution implies a slight slowdown in organic trends in Q1.

Is that just conservatism at the start of the year? Or does that reflect some known programs that you know are terminating and not restarting during the quarter? And then secondly, just around AI, just if I look at your bookings performance, plus 2% bookings in Q4, but AI bookings are contributing five points of the total. That implies that non Gen AI bookings are actually down. Can you just give us some insight into how customers are thinking about funding AI investments and opportunities?

Are they effectively just squeezing dollars elsewhere in their IT spend to fund that investment? And can you just give us some insights there? Thank you.

Ayman Ezzat, CEO, Capgemini: Yes. So first, historically, we do have a decline in revenue top line between Q1 and Q4. So but we do expect that to be less pronounced than usual, but it impacts the fact that, yes, organic growth in Q1 could be below Q4, which is normal based on the seasonal decline that we expect and that's what gives the momentum at the beginning of the year. And on the so is it conservative? You don't expect me to be bold, so it's between reality and conservative?

On the bookings evolution, impact of G and A, I mean, it's difficult to look at that. There's always things that target that growth. So if when we have growth in some areas, it implies that the rest is declining. No, I mean, there are growth in number of areas. Yes, there is going to be more subdued in other areas, because it's not just incremental.

It's an evolution of the portfolio. So by definition, we have things we are growing and things we are declining a bit. The net is growth and I think it's good. On the G and A funding, again, it's priorities. AI is a priority for clients.

Why? Because they see value from it. They see return on investment from it. Question is going to be incremental, not incremental, etcetera. I know always the discussion.

The reality you see that client spend is going to increase a bit in 2025. You can look at any survey around, by definition, some of that bigger proportion of the client spending is going to go towards Gen AI at the expense of some other investment. Why? Because they see more value in investment in Gen AI to drive efficiency, agility, even innovation, etcetera. And more and more, a lot of things we do will have a G and A connotation.

I would not say it's like digital, but at the end of the day, most of the things we do have something to do with cloud, most of the things we do today have something to do with digital. And in the future, most of the things that we'll do will have something to do with AI and Gen AI. And just a clarification on this, the 5% is linked to Gen AI, is not linked to AI overall. AI overall would be bigger. Here we're talking about just the GNEI part related bookings for clarification.

Charlie Brennan, Analyst, Jefferies: Perfect. Thank you.

Conference Operator: Thank you. We will now take the next question from the line of Nicolas David from ODDO BHF. Please go ahead.

Ayman Ezzat, CEO, Capgemini0: Yes. Good morning, Eiman. Good morning, Naveed. Thank you for taking my question. My question is regarding M and A.

I know that you already guided on one to two point impact in 2025, but I mean, you already have one point of embedded impact based on the deal you closed already. It looked a bit cautious. Could you help us understand what is preventing you to be a bit more aggressive on that side? Is the market condition or your own strategy? Could you be more aggressive?

Could you consider larger acquisitions? And my follow-up is regarding tax rate. You have been managing to get the tax rate below 30% over the last two years. Should we abandon the 30% long term tax rate? Or is something still applicable?

And what should we expect in 2025? Thank you.

Ayman Ezzat, CEO, Capgemini: M and A is subject can quite widely fluctuate. Yes, we have about one point in BAC, could be two, could be more. But at this stage, as I give you a guidance, I'm not going to give more than two because right now we are bolt ons and bolt ons will not provide much more than that. So that's based on what we see currently. But as you know, we can be more aggressive if we see something that makes sense.

And maybe on the tax rate?

Nivi Bagat, CFO, Capgemini: Yes. On the tax rate, remember that in 2025, we will have the transitory corporate surtax in France that will come in and that will bring roughly about two points or add two points to the ETR. So that will therefore hover around, so to say, 30% or thereabouts. That's something that you should keep in mind.

Ayman Ezzat, CEO, Capgemini0: All right. So it means that thank you for this it means that excluding that you still target 28% as underlying tax rate

Nivi Bagat, CFO, Capgemini: or? It will be between 2930%.

Ayman Ezzat, CEO, Capgemini: Okay. Thank you.

Conference Operator: Thank you. We will now take the next question from the line of Ben Castillo Bernouz from BNP Paribas (OTC:BNPQY). Please go ahead.

Toby Ogg, Analyst, JPMorgan: Good morning. Thanks for having me on. Question on Gen AI. Could you expand a bit on what you're seeing in terms of customer demands for more pricing efficiency or savings being passed back to them given Gen AI should lower the cost of delivery in some BPO or managed services work? Have you noticed demand from customers changing on that front?

Thank you.

Ayman Ezzat, CEO, Capgemini: Thank you. And that will be the last question. So yes, I mean, listen, it's come as part of what we're able to deal with the customer. And of course, some of that is being passed to customer. It's not yet again large scale.

This productivity depends on the nature of the project. Of course, as you know, new builds have G and A has more impact when you look at work doing around legacy system productivity improvement coming from G and A is much less. So it's really a mixed environment, but it's something you embed and it's part of your competitiveness because your competitors are also embedding it. So yes, we are customers expect bit by bit cost improvement and efficiency coming from G and A like they expect from us to drive productivity every year. And that's something we embed as part of our costing, because we get some of these benefits and of course, we pass some of that to our clients as part of the competitiveness of our offerings.

So yes, it is there. Okay. Thank you all very much and looking forward to interact with you in the coming weeks.

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

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