Earnings Call: H2 2016

Feb 16, 2017

Ladies and gentlemen, welcome to the Capgemini 2016 full year results conference call. I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead. Thank you, operator. Good morning, everyone, and thank you for attending this presentation of our 2016 full year results. I will first give you the highlights of our results, then we will have Srikant Iyengar, Group Head of Sales, going into more inputs on our businesses. Finally, Aiman Ezzat, our Chief Financial Officer, will guide you through the details of our 2016 performance. The summary of our results. Once more, our results progressed firmly in 2016, and we made a new step ahead. Our revenues reached EUR 12 billion 539 million, growing 7.9% year-on-year at constant currency. Digital and cloud grew at +29% at constant rates and represent now 30% of our revenue. Regarding our profitability, we are proud of the remarkable progression of our operating margin by 90 basis points, which now reaches 11.5%. The margin progressed in every region, and all our businesses show now a double-digit operating margin. Once again, we demonstrate our ability to deliver solid cash performance. Thanks to a disciplined execution, we achieved over EUR 1 billion of free cash flow, a 31% rise compared with 2015. Our net income stands at EUR 921 million, which represents a 14% progression year-on-year before one-offs. The normalized earning per share reaches €5.62, an increase of 16%. In terms of return to shareholder, based on the distribution of 36% of the net income as last year, the board will propose to the general assembly of shareholder to raise the dividend to €1.55 per share, which is an increase of 15% year-on-year. In addition, we will pursue our share buyback program that amounted to EUR 340 million in 2016. Now, I will focus on the iGate integration, which was our main objective of last year. I think this is a remarkable performance. We have leveraged all asset that came from this company and provide as a catalyst for our transformation. We are creating value out of this acquisition. All the key managers of iGate have found a new position in the group, and the overall retention is excellent. We are expanding our position in iGate top clients, which are growing by more than 8%. The low end of the synergy target for 2018 has already been reached in 2016 with a run rate of $75 million for the operational and direct cost synergies, and we are also in line on the revenue synergies, as Srikant will comment later on. Today, our new position gain, thanks to this acquisition, are catalyst for our growth. Our presence in financial services and manufacturing has significantly been strengthened. North America has been confirmed as our first market with an increase of the number of flagship accounts. iGate client centricity model has fueled our own client management approach. Finally, we found in iGate high potential nuggets like product and engineering service that will enrich our digital manufacturing program or what we call the iTOPS offering that our platform as a service, that are leverage to differentiate and accelerate our growth. I'd like to come back a little bit on the last five years, because I really think this is the sign of a solid improvement in all the dimension of the business. I think we enjoyed a quite remarkable journey enabled by the rigorous execution of our strategy. It overall translate into a strong set of figures. From 2012, our revenue grew by 5.1% annually. We increased our operating margin by 340 basis points. Our organic free cash flow has been multiplied by 2.2 thanks to a tight cash management. Finally, our normalized DPS grew annually by 14% since 2012. Let me highlight a few drivers of this performance. We have worked on our assets in application service and consulting to make digital the growth engine of the group. We extended our global coverage, strengthened our footprint in key markets such as North America in terms of region and financial services in terms of sector. We also built a best-in-class Indian delivery platform, which is instrumental to our competitiveness. The group is well on track, delivering strong results along the years and will deliver its midterm ambition, and the journey will not stop here. We will transform further to gain traction in 2017. First, we are accelerating our portfolio shift towards innovation, making digital and cloud the engine of our growth. To that purpose, we are carrying high investment internally and through acquisition. We enrich our portfolio of services with the launch of new offers and the development of our Applied Innovation Exchange network. In 2017, we ambition to grow by more than 20% in digital and cloud. Second, we amplify our sectorial expertise and invest in our consultancy skills, which are key for successes in digital. We already have a deep expertise in financial service and manufacturing, and we invest in CPRD and automotive. We will also increase our account focus, a proven growth driver. Our top 100 clients are growing organically by more than 5%. Third, we will fully leverage the potential of industrialization. We transfer our Indian operating model, leveraging automation and building critical skills for the growth of our innovation portfolio. We pursue our offshore leverage progression by two points in 2016, and we focus on improvement in continental Europe, where we increase our leverage by three points. In Germany and Nordics, the leverage today stands over 60%. We reach 37% in Benelux and 34% in France. We make a strong push on automation, leveraging Automation Drive, our suite of service, and have deployed automated solution for more than 210 customers. In a nutshell, the market is changing fast, so do we. Our view is that in spite of the geopolitical uncertainties, there are a lot of opportunities today in the market, in all geographies, with an incredible appetite for digital and cloud, and we are well-positioned to make the most of these opportunities. North America now. First, I would like to stress the fact that part of our operation in North America is performing well. Excluding NA E&U, we had a 3.3% organic growth in 2016 in North America, with a strong traction in financial service and manufacturing. We also improved operating margin by 50 bps, and we won, in the last month, significant deals paving the way for our rebound. However, in Q4, we shrank due to the weight of Energy & Utilities. In order to regain momentum in North America, we have implemented a strong action plan. We renewed the leadership. We made significant investment in our sales force and capabilities in digital as well as in cloud. We mobilize today the whole leadership of the group to support North America. Actually, part of the bonus of all executive committee members, including myself, of course, and all the Vice President in North America, is tied to the growth of the region. This plan is further strengthened by targeted acquisition. We announced today two of them. Idean, a top-notch digital strategy and experience design consultancy firm with about 150 employees and seven studios worldwide. It brings several blue-chip clients to the group, notably on the West Coast, and will be a transformational lever to accelerate our digital customer experience offerings. The second, TCube Solutions, is the largest service provider, independent service provider, specialized in Duck Creek Technologies, a leading solution for the insurance sector. These two acquisition will bring key capabilities for the group, and there is more to come. I'm confident, and thanks to this action and to the group's strong execution, we will be back to a positive growth in North America as of Q1, and that we will accelerate all along the year. We expect to end 2016 with a growth dynamic close to mid-single digit. To conclude, before Aiman Ezzat, of course, let me now present you our objective for 2017. We enter the year with some visible headwinds, and we are mobilizing the group to strengthen our growth trajectory. We target a constant currency revenue growth of 3%, including small acquisitions. For the operating margin, our guidance is between 11.7% and 11.9%. Finally, on organic free cash flow, we aim at generating more than EUR 950 million. I now hand over to Srikanth Iyengar, our head of sales. Thank you, Paul. As you know, I joined the group through iGate. It has been one year on the road for me, and I'm truly impressed by the strength of the Capgemini group and the passion and the capability of our people. We ended the year with strong bookings and crossed EUR 13 billion in bookings for the first time in the group's history. We reached EUR 3 billion-plus bookings in three out of four quarters. We signed many large deals in Q4, and some of these were new logos where we beat the India pure plays and other global SIs. The global account program continues to be a success. We expanded the program in 2016 to include a few large accounts coming from iGate. Most of these accounts have shown broad-based growth on the back of good service delivery, strong client relationships, and innovative services, further cementing our position as a strategic partner to these clients. All through 2016, we focused heavily on tracking booking synergies generated through the iGate integration. We are very pleased to report that our synergy realization is over EUR 300 million in bookings. For example, in two large iGate clients, one in the diversified manufacturing space and the other in the insurance space, we were able to secure our dominance and also grow by leveraging Capgemini capability. Our pipeline going into 2017 looks healthy, including North America. Sectors like manufacturing and financial services continue to show robust activity. Our digital and cloud pipeline is also higher than the corresponding figure in Q1 of 2016. If I just switch a bit to some of the large deals we've done in H2. Our successes span both large managed services wins and also strategic wins in digital and cloud. The wins came from all parts of the world and across a broad spectrum of industry sectors. We've named a few wins on the slide, but I'll just talk through some. With the North America-based medical technology client, we are the technology partner of choice across their legacy landscape and system integration. We are also their strategic partner for all digital and data and insights initiatives, as they focus on better customer and stakeholder engagement as a source of revenue growth. At ME Bank in Australia, which as you probably know, is a purely digital bank, it's an online bank, we are their chosen technology strategic partner. At Faurecia, a leading automotive parts manufacturer, we are supporting an organization-wide digital transformation initiative across areas of operations, supply chain, product lifecycle management, and customer relationship management. If I just talk a bit about the sectoral view. As you already heard, the energy and utility sector has been impacted by the shrinkage in the U.S. However, the pipeline in this sector is stronger as we enter 2017. Despite the Aspire renegotiation, we were able to retain our revenue in the public sector. I'm very happy to say that our FS revenue has grown by 7% in Q4, further demonstrating our leadership position in financial services. The growth is broad-based, both through ramp-up and existing large accounts, and also the opening of new logos. With some clients, we've started interesting projects in the area of robotic process automation. Our investments in the Applied Innovation Exchange and our collaboration with the Fintechs are elevating the kind of conversations that we're having with our clients. In the manufacturing space, in addition to digital and cloud, we continue to see consolidation initiatives leading to many multi-year annuity or managed services deals. The market is very competitive, and we are very pleased to have increased our growth trajectory. If I just talk a bit about our work with partners, I think our collaboration with partners has been stronger than ever before. Just a few key highlights. Salesforce, 9.7 on 10 in customer satisfaction ratings from Salesforce implementations. We are the top partner worldwide and also the number one partner in France. With GE Digital, we have the largest number of certified GE consultants, Predix consultants in the market. With IBM, we've launched a group strategic bet on IBM cognitive IoT for Industry 4.0. We are a founding member of the IBM IoT Lab in Munich. With Pega, we won the Pegasystems Partner Award in 2016 for partner excellence in driving growth. We've had several deals over EUR 20 million TCV and over 1,300 Pega practitioners worldwide. At Oracle, we were among a select set of partners announced to be part of Oracle's managed service provider cloud program at Oracle OpenWorld. We moved from being a strong performer to a leader in the 2016 Forrester Wave report for Oracle service providers. At SAP, more than 20% year-on-year growth for implementation services, but more importantly, more than 30% year-on-year growth for SAP S/4HANA. APAC is growing significantly at over 30%. And at AWS, we successfully retained our premier consulting status for the fifth year in a row. One of a handful of providers to achieve this milestone. We launched Cloud Choice with AWS as part of our Cloud Choice program. We also launched a global initiative with AWS on SAP workload migrations to the AWS cloud. With that, I hand over to Aymeric. Thank you, Srikanth. Good morning. I'll start with the overview of our results. 2016 was another strong year for Capgemini, a year of growth, increased profitability, and higher cash flow generation. Group revenues total EUR 12 billion 539 million, up 7.9% at constant rate within our guidance of 7.5%-9.5%. Our organic growth reached 2.6%. The difference comes primarily from the consolidation of iGate 12 months revenue in 2016 compared to six months only in 2015. Currency fluctuation resulted in a negative impact of 2.7 points, 80% explained by the depreciation of the British pound, leading to a 5.2% growth at current rates and pyramid. Our operating margin stand at EUR 1 billion 440 million or 11.5% of revenue, 14% and 90 bps above last year. This is at the top of the revised guidance of 11.0% to 11.5%, thanks notably to faster synergies achievement from iGate. I will comment later the other operating income and expenses. The operating profit rose to EUR 1 billion 148 million, up 12% versus 2015 at 9.2% of revenues. It represent a 60 bps increase year-on-year. Financial expenses reach EUR 146 million, primarily with iGate-related debt now on 12 months. We recorded a tax expense of EUR 94 million, which includes a net tax income of EUR 480 million related to goodwill resulting from legal reorganizations. As a result, net profit group share amounts to EUR 921 million. Excluding the one-off tax profit in 2015 and 2016, the increase is 14% year-on-year. And finally, organic free cash flow reached EUR 1 billion 71 million, up 31%. Going on organic free cash flow generation, it was very strong again in 2016. It exceeds EUR 1 billion for the first time in group history. The net debt stood at EUR 1,413 million at the end of the year, a decrease of EUR 354 million compared to the end of 2015. This demonstrates, of course, the strong improvement and resilience of the group business. An additional point on the pension deficit, it now stands at EUR 1.4 billion, which is up EUR 158 million year-on-year, but down around EUR 200 million since we last reported at the end of June. Looking at quarterly revenue, the Q4 growth was at 1.9% at constant exchange rate, and the organic growth was 1.6%, and the FX headwind was 2.1 point, leading to a small decrease in the published revenue number year-on-year. For the full year, the organic growth stood at 2.6%, excluding North America Energy and Utilities, the organic growth would have been 3.7%. Moving by geography. First, in North America, the revenue, as Paul mentioned, decreased by 3.1% in Q4. Excluding energy utilities, which had the highest impact in Q4, the growth was 1.1%. For the full year, the North America growth stood at 14.5%, fully leveraging the integration of iGate, notably with strong traction in financial services and manufacturing. In the U.K., growth was 1.1% in Q4, in spite of the anticipated public sector decline. For the full year, growth stood at 4.1%, but current growth is -7.3% due to the depreciation of the British pound following the Brexit vote, which, as Paul mentioned, did not have any material impact on 2016 results beyond the currency one. The private sector, which grew organically at close to double digit in 2016, now represents 57% of revenues. In France, Q4 confirmed the strong momentum of the year with a very strong 5.9% growth. For the full year, the growth was 5%, driven by consumer goods, retail, manufacturing, and financial services, and very strong traction in the digital and cloud projects. The rest of Europe, which you know includes Benelux since January 2016, grew 2.4% in Q4 with some slowdown in Benelux. For the full year, growth was 5.3%, driven by strong digital demand, notably in Germany and Nordic countries. Retail, consumer goods, manufacturing, and automotive, as well as public sector, were among the most dynamic sectors this year. In Asia-Pacific and Latin America, the most dynamic region in Q4 with 11.7% growth, with LATAM stabilizing. The Asia-Pacific and Latin American region reported growth of 8.2% for the full year with, as you know, contrasting trends. Growth in Asia-Pacific region, supported by the development of financial services, remains very strong. The situation in Brazil continued to weigh on the performance of Latin America, which recorded a further contraction in revenues for the full year. In summary, we have successfully integrated iGate and leveraged its client portfolio, and we fully leverage our transition in digital and cloud to boost our growth in Continental Europe. We now need to refocus on accelerating organic growth in North America. Moving by business. Again, at constant exchange rates, consulting revenue grew 2.7% for the full year, supplemented by the rapid development of digital consulting services initiated and billed by other businesses. So inclusive of all of this, what is billed through other businesses, the activity actually increased by more than 5%. Technology and engineering services, formerly local professional services, grew 6.9% with good traction in the rest of Europe and North America, but still a bit slow in France. In application services, which represents 60% of group revenue, the growth was sustained at 10.6%. In addition to the positive iGate impact, growth was driven by solid momentum in Europe and Asia, and overall by the rapid expansion of services related to digital and cloud. If the transition to the cloud is overall positive at the group level, notably in applications, it is obviously a headwind in traditional infra services. As illustrated by the other managed services, which reported a 2.2% increase in revenues, but excluding changes in group scope, the revenue is down year-on-year, despite the growth in the business services segment. The strong pressure from the transition to the cloud on infrastructure services is somewhat accentuated this year by the decline in U.K. public sector, which we had anticipated, but also the lower equipment resale. We still see impact from this transition through H1. On headcount, the growth was 6.9% for the full year, driven again by offshore growth of 11.6%, but we also see now onshore growth to support the digital and cloud development. Overall, we ended the year with 193,000 employees, out of which over 108,000 are in our offshore delivery center and 97,000 in India. We recruited 54,000 employees, 68% in our offshore delivery center and over 40% young graduates. Attrition decreased by one point to 18.3% with decrease both onshore and offshore. Looking at offshore leverage. The offshore penetration increased for the 10th year in a row and stand at 56%, +2 points compared to 2015. The penetration increased by 3% in Continental Europe to exceed 60%, for mentioned user penetration for European countries. The average remuneration continued to decrease by 1.4% at constant rate and perimeter, and 3.8% at current rate when excluding the impact of iGate. Going to operating margin. By geography, profitability improved in all the regions in 2016. North America first improved by 50 bps at 15.4%, in spite of competitive pricing environment. We are fully leveraging the iGate synergies. U.K. and Ireland confirmed the H1 margin improvement to reach 14.6% versus 13.4% in 2015, thanks notably to an improvement in business mix. The Indian rupee depreciation will weigh on the profitability in that region in 2017. France at 9.1% shows an improvement of 100 bps. It remains an area of focus for us as we are aiming to drive the business to double-digit operating margin. In the rest of Europe, the improvement is 30 bps at 10.5%, with double digits notably in Nordic, Germany and Benelux. Iberia continues to improve and is now above mid-single digit. In Asia, Pacific and Latin America, the full year margin recovered to 6.6%, with 240 bps increase in spite of losses in Latin America. We target a further improvement in margin in that region in 2017. Overall, 90 bps progression after 140 bps in 2015, fully protecting and leveraging the iGate integration. Moving by business, the business profitability also improved in every business, which are all now at double digits. Consulting operating margin improved for the third year in a row, progressing by 1.6 point to 10.7%. Technology and engineering services margin is up 1.2 points to 12.8%, following a 1.7 point improvement in 2015. Application services margin reaching double digit in 2014, improved by 1.3 points in 2015 and now stand at 12.7% in 2016. So another progression of 0.8 points. Finally, other managed services improved by 0.4 points to reach 10%, in spite of the very competitive pricing environment in that business. Looking at the operating margin by destination, of course, the improvement of profitability is driven by the gross margin expansion of 0.9 points, following already 1.1 points in 2015, supporting the innovation and industrialization strategy of the group. The selling expenses have increased by 20 bps, driven by the increase of project in digital and cloud, and G&A continues to decrease by 20 bps after 30 bps in 2015 and 40 bps in 2014. As you can see, we have reached the target of 7% we set four years ago. We now set ourself a new target of 6.5% in the medium term, driven by globalization, standardization and automation. The very strong margin progression in 2015 and 2016 also reflects the success of the iGate integration. The direct cost and operational synergies have now reached a run rate of $75 million at the end of 2016, while as you know the target we set was to reach $75 million-$105 million by the end of the year 2018. We are clearly ahead of plan. On financial expenses, we ended up the year with EUR 146 million, so up from EUR 118 million recorded the previous year. The increase is due to the recognition this year of 12 months of interest on the debt raised in July 2015 in connection with the financing of the acquisition and EUR 22 million in respect of the difference between the market value of the bond component of the ORNANE 2013 and the accounting value of the bond at redemption. Following the redemption of the EUR 500 million straight bond we did this year, we expect 2017 financial expenses to be slightly above EUR 100 million. In respect of income tax, for the year 2016, the group recorded a tax expense of EUR 94 million compared to EUR 233 million income in 2015. These amounts include a tax income, as you know, of EUR 476 million in 2015, following the reassessment of our deferred tax asset on tax loss carry-forward in the United States. For 2016, we have a net tax income of EUR 180 million relative to the goodwill arising from legal reorganization. If you adjust for this non-recurring non-cash item, the effective tax rate was 27.3% in 2016 and 30.1% in 2015. We guide you for an effective tax rate of 28% for 2017. On the recap of the P&L from operating margin to net income, I will comment now the other operating income and expense, which totaled EUR 292 million. There was an increase compared to the EUR 240 million recorded in 2015, mainly due to the expenses related to the acquisition of integration of iGate, both on the amortization of intangibles and the acquisition and integration cost. While the restructuring costs at EUR 103 million are in line with the envelope we set for the year. For 2017, other operating income and expense will be quite similar, as we should expect some acquisition integration expense as we roll out our acquisition strategy. Operating profit ended up at EUR 1,148 million, posting an increase of 12.3% compared to 2015. After financial expense and tax, the net profit group share is EUR 921 million. Normalized net profit is up 14% when excluding the one-off profits for both year on taxes, which leads to 16% increase in normalized EPS to EUR 5.62 per share. Looking back at the priorities set for the year, for 2016, the first priority was iGate integration, and this is a success. We can now say that the intrinsic value has been fully preserved and that synergies are significantly ahead of schedule. Our margin improvement, we report a margin at the upper end of the upgraded target. We are well on track to reach the 12.5%-13% midterm, which provide us some flexibility on the trade-off of growth versus margin in 2017. The focus on cash continues to pay off, with an operating margin to free cash flow conversion of 75%, leading to an organic free cash flow in excess of EUR 1 billion, thanks to additional operational improvement. In 2016, without significant M&A cash out, we accelerated return to shareholder. Dividend and buybacks combined represented 70% of 2015 free cash flow. We also start to reduce the share count, as the board of directors had decided yesterday to cancel 2.4 million shares after the 0.6 million canceled already in 2016. If you look at 2017 priorities, as mentioned by Paul, with iGate behind us, we will be more active on M&A. Our priorities there will be to remain selective on the financials and ensure successful integration. This year, focus shifts to organic growth, with a big focus on North America. We will do so while remaining on track to meet our midterm margin ambition. Focus is maintained on free cash flow generation, and as we restart our M&A program, we will maintain a balance between inorganic growth and return to shareholders, starting with an increase of 15% in the dividend. Let me reiterate the guidance. 3% constant currency growth, with some limited impact from acquisition, 11.7%-11.9% operating margin, and an organic free cash flow generation above EUR 950 million. Back to you, Paul. Thank you, Aiman. To conclude, in a nutshell, our main messages today, we made a new step further in 2016 towards our midterm ambition, with notably a remarkable progression of the operating margin and the free cash flow generation. We invest internally and through acquisition to accelerate the transition of our portfolio towards digital and cloud. We will focus in 2017 on the acceleration of our growth with a special emphasis on North America. Finally, with this objective, the group targets this year a normalized EPS around EUR 6.10. Thank you for your attention, and we now take your questions. Ladies and gentlemen, if you wish to ask a question, please press 0 and 1 on your telephone keypad. We have a question from Adam Wood from Morgan Stanley. Sir, please go ahead. Hi. Good morning, Paul. Good morning, Aiman. Thanks for taking the question. I have two, please. The first one is just picking up on a comment, Aiman, you made around the midterm targets of 12.5%-13% margins and 5%-7% growth. Obviously, the growth rate we are looking at for 2017 is below that. We know there is some Aspire in there. And the margin progression, the rate of margin progression is going to take out to 2020 to hit that range if I extrapolate the pace of margin expansion. Could you maybe help us with that? Is that the kind of intended pace we should think about? Or are there some investments that are going in in 2017 to help you accelerate the growth, then we should think about a better margin trajectory once those investments have been made? It is really just to understand that pace of change, the 2017 guidance and the midterm guidance. Then secondly, there is obviously a lot of noise in the U.S., particularly about visas, but also about border tax. Could you just help us understand Capgemini's reliance on H-1Bs and any initial thoughts you have around the implications of border tax changes, please? Thank you. Yes. Okay. On the margin, it is 20-40 bps improvement in 2017. If you make the calculation, if you even keep that kind of trajectory, that means 80-160 over four years. So definitely it will lead us to where we need to go. So for me, we are right on trajectory. As you know, we could not consider it as being completely linear year on year because depending on the focus of the year, there might be some fluctuations. But we are confident that year on year, we will continue to improve our margin target. Also, I would like you to notice that in 2017, we are going to have an impact from the INR appreciation against the GBP. When you know that more than half of our business in the U.K. is at 80% offshore leverage, we have a significant INR component as part of our U.K. cost, and the INR has appreciated by more than 10%. The headwind that we estimate, even if you were 50% hedged by the time the rupee appreciated against the GBP, is about 20 bps. That's a little headwind that we have to absorb in 2017. The margin progression underlying is still quite strong. That's very helpful. On the visa, Adam. First point is to say, like our peers, we do not disclose detailed figures. I would just say, we rely on each country immigration program, and the primary driver is to serve client needs while abiding to local legislation. What I want to add is there is no availability of IT staff in the U.S. market. The unemployment in the IT labor market is estimated at 3%, so any change in the visa policy would result in salary inflation and consequently, our ability to adjust prices accordingly. This being said, we have hired approximately 2,000 local employee per year, and we intend to hire 2,000 people, and we have activated our local recruitment channel, notably through Sogeti. I think we are well equipped, but we will wait for the confirmation of any legislation change before acting. I just want to add that about the border tax, in principle, higher tax in the U.S. would mean faster consumption of our tax loss carry-forward. Excellent. Thank you very much. Thank you, Adam. Next. We have a question from Stacy Pollard from JP Morgan. Madam, please go ahead. Yes. Thank you. Can you just talk about what demand you are seeing in the U.K. public sector, and do you anticipate any changes in the U.K. private sector vis-à-vis Brexit? Also just a quick detailed, you talked about managed services in Q4 weak at -5%. How do you see performance throughout 2017 and the midterm? On the U.K. public sector, what we said is they were kind of slowed down at the end of last year. I think it was organized by the government to cut spend. Things will probably get back to normal after April 1st. I just say, remember that the budget calendar in the U.K. is April to April. Assumption is the market should become normal again after April. We still think the commercial market is quite okay in the U.K. We always feared a little bit retail, but there were some apprehension regarding banking, and we have not seen a slowdown in spending in the banking U.K. sector. For us, the commercial market is quite okay. Just remember, in the U.K., we will continue to have, through the full year, the impact of the resourcing of Aspire on the public sector. So we will have a negative impact on the public sector, which will be quite important because of the resourcing of Aspire. Stacy, your next question was on Just managed services in Q4 and really how you see 2017 and Yeah, and perspective for 2017. Yes, exactly. First point, three remarks. First, there will be the prolongation of some termination in 2017. On the opposite, we won a few large deal at the end of 2016 that will ramp up through the year. Last point, it's a contrasted market, where in the U.S., frankly, the move to the cloud is extremely rapid. While in Europe, there are still a flow of opportunities in the traditional managed service. A very contrasted market between the U.S. and Europe. Yes. And just also to a bit specify a little bit, the business services part, which is BPO on transaction, is still growing well. Where we have seen some slowdown, notably linked to some contracts that were stopped, is in infrastructure services. There will still be some negative impact in H1 from that, but we expect to be back in recovery by H2 in the infrastructure business. Okay. Should we think of managed services as just a very gradually declining business over the midterm? Is that the way you think about it? No. Firstly, I think I see first an acceleration of business services, because after a few quarters of weakness, the pipeline has strongly improved and our organization is very mobilized. On infra, my view is, there is some growth in the traditional market where we should take our share. We signed very large deal at the end of last year, showing our competitiveness in large traditional outsourcing. We mobilize infra for the project part of the cloud, because the market now in infra is about cloud infrastructure project and transition. Okay, thanks. We have a question from John King from Merrill Lynch. Sir, please go ahead. Good morning. Thanks for taking the questions. Just three if I can. The first one was on the guidance, a clarification around the growth. You are targeting, I think, 3% ex FX. I appreciate the acquisitions you have announced today, I guess, are pretty minimal contributor to that. But can you clarify, is the assumption there that you will need a few more acquisitions to be closed for you to get to that 3%, or can you meet the 3% with the footprint that you have as of today? The second one was really related to that. Do you have a budget for the amount of cash you are planning to spend on these bolt-on deals that you are making at the moment for 2017? The last one was related to the bookings. I think through the course of 2016, a pretty good bookings performance, certainly running ahead of the revenue growth, 14% growth in bookings, 8% growth in revenues in constant currency. Can you just help us reconcile why that is the case? Are we seeing deals get longer? Just help us with that. Thank you. So clarification. On the constant currency growth target of 3%, yes, there is going to be some limited impact of the acquisition that we have done, which are quite small. No, we do not speculate on further acquisition to be able to meet our guidance. So there might be some minimal impact from smaller acquisition. We clearly state that if we have an acquisition that is of any size, that will have an impact on 2017, the guidance will be revised accordingly. So it is not a speculative guidance that includes plenty of acquisition. We say if you do one or two other small ones, we are not going to revise the guidance for that. But if you do some which are bigger that will have an impact, then we would revise the guidance accordingly. Does it answer your question, John? Yeah, that's great. Okay. Budget for acquisition. Frankly, our board is quite supportive of transformation through acquisitions. I think with today our balance sheet and the free cash flow generation, we can spend a sizable amount. Doesn't mean we have a budget. We have to remain reasonable. There were some pricing policies that were just discouraging, so we try to be reasonable, but we have the room for sizable acquisition this year. Okay, and on the bookings, as you know, always the booking is a mix of long-term and short-term contracts. I think the high level of bookings and the book-to-bill is a sign that we actually signed some large managed services contract in 2017 as we transition some that basically have ended, and we transition some of the new one that will start to give more fuel as we go through the year in 2017. Got it. Thank you. We have a question from Michael Briest from UBS. Sir, please go ahead. Thanks. Good morning. Just coming back on John's question there on the growth. Aiman, last Q3 results call, you said that you were targeting around two points of acquired growth every year. Are you saying that the 3% is embedding two points of acquired growth or just the few basis points that you allude to today? I have a question on North America. Oh, it's a few basis points. We say a few tens of bips. If you want me to try to specify a few tens of bips, it's less than 50 bips. Okay? By any mean, this 3% has less than 50 bips of acquisition in there. Okay, that's very clear. Then just on North America and generally, I mean, Q4 growth rate was about 50 basis points below Q3. You've guided for a sequential sort of flat performance and North America was obviously disappointing. Can you sort of explain, is that purely the E&U business? I think you also made some comments about competitive pricing. Just trying to understand why the North American business continues to underperform the targets. Q4, nothing new, okay? Maybe a bit more accentuated. We did say that E&U will be even steeper in Q4 because of the year-on-year impact, because we actually had some growth in Q4 2015. As you can see, we're at -3.1%, but +1.1% excluding E&U. That means more than four point impact. We did say that this will start to fade away, will decrease in Q1, so we expect less than half of that impact in Q1 and almost disappearing, if not fading completely by Q2. The other impact mentioned is a bit of weakness in the infrastructure services, and that weighed a little bit as well in Q4. Finally is still a bit the softness in the B2C segment. Okay? So a bit more accentuated in Q4, and this is where we have the big focus in terms of some of the acquisition like in digital design, where it's really a big layer that was missing for us as part of to be able to reboost a bit our B2C segment, notably in consumer product, retail, and distribution. To be frank, we are quite confident on the rebound. We're comfortable with the positive organic growth already in Q1 and acceleration through the year. I mean, the amount of mobilization is way beyond what you can imagine to ensure that the growth is well on track in North America. Michael, Paul speaking. Just to add that, of course, the reenergizing of North America is my first objective as defined by the board yesterday. I repeat what I said. All members of the Group Executive Committee are now incentivized on that, and all Vice President in the U.S. across all units have received a common incentive on North America. Based on that, based on some change of management on our application service unit and extended power granted to Salil to coordinate the unit, we have made a detailed forecast for North America, based on which we can say that we will be back in positive in Q1, and we see an acceleration that should translate by the end of the year and see us trend towards mid-single digit. Thank you. Just one clarification as well. On E&U, we told you it will be sequentially flat. Q4 over Q3, it is sequentially flat. I confirm that the revenue in E&U was flat, and it will be flat again in Q1, and potentially a limited growth in Q2. Thank you. Then just on cash flow, can you say, it was a stellar performance. What is going to change in 2017 over 2016 to bring the cash flow down, if you like? It is not a question of bringing the cash flow down. There is a natural cash flow conversion that will come from the improvement of the operating margin, but you also have, in 2016, some one-off. We had a further improvement in working cap. Again, I cannot speculate on improvement of working caps every year. There is a limit to it. Every year I say that, and we end up doing better, but again, I am not going to bet on that when I give a guidance. Because it is getting tight in terms of leverage from that side, but we still try to do better. All right. Thank you. The next question is from Gerard Vos from Barclays. Sir, please go ahead. Hi. Good morning, Paul and Aiman. Just a couple of questions, if I may. First of all, I think in the third quarter, you provided some kind of breakdown of the impact from Aspire North America and Brazil on the numbers. I think it was 190 basis points during Q3. I was wondering if you could have provided us an update on that, how that impacted in Q4, and if your outlook at all has changed on the first half 2017 for those kind of factors. Secondly, what was the outlay of the TCube and the Idean acquisition during the quarter? Then finally on the old local professional services division that was quite weak in the fourth quarter. Given how you see the market changing, is this still a division which can outperform economic growth in an upturn? Because if you look over the last couple of years, it's consistently underperformed. Thanks. Okay. First on the growth. In the third quarter, what we call the headwinds, which are HMRC, NA E&U, and the resale of Latam, weighed 1.8 point on the growth. In Q4, they weighed 2 points. HMRC as planned at 0.9, and NA E&U as planned at 1.1. There was no impact on Latam from the resale side. Okay? In terms of outlook, we maintain the outlook that we expect Q1 to be somewhat similar to Q3, Q4. We do expect probably a little bit better than what we saw in Q4, in Q1. We expect the real acceleration to start in Q3 of 2017. So no change in outlook from that perspective. You asked question about the TCube. Idean. Idean. Just on TCube, we had no skills in Duck Creek because as you know, Duck Creek had been bought by Accenture. Accenture sold it to a private equity, so reopening the market. I want to say that since the acquisition, we have already signed new contract bookings, not revenue, that are equal to one year of revenue. Let's not be too optimistic, but a good deal. People of insurance are very optimistic because Duck Creek is very complementary to what we do with Guidewire. Second point on Idean, frankly, it's a West Coast group, so we are not that strong on the West Coast. A good collection of client reference for us, rather optimistic of what it can open in terms of client access. Okay. Your last question was on- Just again, on Idean as well, they have really top-notch capability in terms of customer design, which is really one of our weakness layer that we're completely missing in North America as part of digital. So that really plugs a very critical hole for us on the digital side. You might have noted that we had within Sogeti something in the same space called Backelite that we developed and that we exported from France to Stockholm and Amsterdam. The leader of Idean will run the global network of studio design, and that will rapidly grow. Last question about local professional service. I would say they have signed for a quite ambitious budget for next year. We don't communicate budget. Q1 looks good. Q1 looks good. Personally, I think Sogeti local professional should be accretive to our growth next year. This- Okay. Very clear. Thank you. 2017. Thanks, guys. The next question is from Charlie Brennan from Credit Suisse. Sir, please go ahead. Great. Thank you. Just a couple of clarifications, actually, if I can. Firstly, Aiman, just in your view of the medium term, I think in the past you've expressed a 2018 and 2019 timeframe to hit your medium-term targets. I think in your response to Adam, you implied that it was more like 2020. Has your medium term slipped by 12 or 18 months? Secondly, just in terms of understanding the drivers of the top line, digital's obviously 30% of the business growing at 20%. That implies 6 points of growth. You're only guiding for 3% for the year. That implies that the non-digital is going back reasonably significantly. Can you just help us understand that underlying decline and where are you seeing the most pressure? Thanks. Okay. On the first one. There are two different guidance which were given in different years. The organic growth was given in 2014, and my midterm is 4% to 5%. That gives 2018, 2019. We're still maintaining that this is where we need to achieve our organic growth of 5% to 7%. On the margin, the guidance was given 2015, which gives 2019, 2020, and we're still confident that we'll hit the 12.5% to 13% within that timeframe. So I'm consistent. I have not changed a word since when we started giving this guidance in terms of timeline. So we have one year of buffer between 2019 and 2020. We aim for 2019, but we have one year of buffer. On the growth in digital and cloud, you always have to remember that part of it is portfolio transition. Okay? I'll take again the simple example. If I had a Siebel implementation, it was an in-house implementation. It wasn't cloud. When I do a Salesforce1, it becomes a cloud implementation and digital, so it moves in bucket. At the end of the day, the customer is still spending money on the CRM system. The important thing for us is the transition. There is a shrinkage of a traditional capability that would have been a traditional CRM moving to a Salesforce. But if I don't transition that, I would not have any more access to the market. So it is not the CRM business that is shrinking, it's the CRM business that's transitioning from a capability perspective. In addition, there's plenty of new things which are linked to digital, like digital channels, like digital marketing, which is completely new spend that I definitely want to access. So the 30% embodies in a certain way, both. Great. Thank you. We have a question from Laurent Daure from Kepler Cheuvreux. Sir, please go ahead. Sorry, but I'd like to come back again on your U.S. operations. I think last year you were talking about reshuffling massively your portfolio, and you were lacking digital exposure. So where do you stand now, and what makes you really more confident than last year that your sales are going to pick up? Because you may remember that last year you were way too optimistic. So what has happened in recent months? More specifically, I know you don't want to comment too much on the visa, but it's public that your number of requests for new visa last year really increased. So I just want to make sure that you're not increased massively your H-1B visa users. So that's for the U.S. The other point is on the M&A. I just want to be sure I understand well, you were talking about potential additional acquisition, but in the past, you'd say that they would not exceed one or two points of revenue every year. Is it still the case, or do you plan something bigger? My final question is on the one and a one and a half points gain in margin in years to come. I think you reach excellent profitability, both U.K. and U.S. So for the years to come, the additional improvement will be only on the European side of the business, or you think you have more traction to gain, especially in the U.S.? Thank you. Laurent, first, Paul speaking on the U.S. In the U.S., we had and we have the E&U factor. I think we commented clearly, Aiman was clear. Sequential stability, the drag will stop in Q2. That alone will give us a strong change. I would like to add that some of our operations that are global had not been focused that much on the U.S. I just take an example. We have a global formidable performance of financial service, but they had large opportunities in Asia and in the U.K., and probably that distracted them a little bit. I urge them with a strong incentive to focus again on the U.S., and the Duck Creek acquisition is a sign that I ask them to focus on the U.S. Paul, I think we will see probably within the same growth of financial service, more energy in the U.S. market, and that has started. My second point is in the U.S., we didn't lose large contract, but we have some renegotiation of large multi-year contract that weigh on our growth. This is now behind us, so the comparison no longer weighs on us. On the contrary, we have started signing large contracts like Carnival at the end of last year, and there are other in the pipe, so I really strongly think we are on the eve of a U.S. acceleration. On visa, Emmanuel wanted to add something. Yes, sir. On the visa, Laurent, the numbers published are absolutely meaningless. I can tell you. People confuse between the LCAs, which have nothing to do with the number of visa requests, which has nothing to do with the number of visa we end up getting. We will not disclose the number of visa, but I can promise you it's a very small fraction of these crazy LCA numbers that was posted. But we're not going to spend our time trying to correct all the numbers that get published right and left. But the only thing I can tell you, the number of visa is very small. Paul told you that we hire 2,000 people locally. We get less visas than the number of people we hire locally. Just for you to have as an idea. For me, we intend to continue both leveraging visas as we can and hiring locally. We'll adapt if the legislation changes, to be able to continue to serve our clients while maintaining something that makes sense economically. But we don't want to over-speculate on all what we'll do depending on what the future legislation could be. But we feel quite comfortable where we stand today. Third question, Laurent. M&A, we said that we will grow, and you will count on 2 points of equivalent of revenue. 2 points of revenue, which is a target that we gave you, is EUR 260 million. This does not include massive acquisition, massive consolidation, but there might be target that are more sizable that Idean or TCube. Last question about margin. Personally, I don't think we are at the end of the margin journey in the U.S. I still see some opportunities, and as you can imagine, this is a market where we have today invested in growth. So that's possibly the reason why the increase of margin of 50 basis points for North America is certainly not the maximum. In Europe, on the contrary, the continuous improvement of our offshore leverage will translate into further margin improvement in Europe. Last, I would just say, Latin America is weighing on our margin in the emerging market, but we should progressively get further. So personally, for me, the margin transition is certainly not over. Okay. One more question, and then I'm sure there's a lot more question. You can go to Vincent after. But for the call, we'll take just one last question. The last question is from Amit Harchandani from Citigroup. Sir, please go ahead. Good morning, gentlemen. Amit Harchandani from Citigroup, and thanks for taking my questions. Three quick ones, if I may. Firstly, you talked about a tough pricing environment in infra services within other managed services. Could you maybe broadly touch upon the competitive and pricing dynamics overall in your business, including on the applications side? Secondly, with respect to offshoring in continental Europe, could you give us a sense of what you're embedding within your medium-term margin ambition? And thirdly, maybe some initial thoughts on IFRS 15, which is due to come in, I believe, at the beginning of 2018, and the implications for your revenue recognition. Thank you. Okay. Quickly, to answer your three questions. First, on competitive pricing, nothing has changed compared to what we saw in Q3 and Q4. There is definitely, as you know, a bit slower growth of the IPPs. They're looking for growth, so there is some competitive pricing. I wouldn't say it's more crazy than it was two or three quarters ago. But definitely, there are still on some of the managed services deal, people looking for volume by giving basically price discounts, okay? Amalgamation is happening. We win some, we lose some. It's part of life. But today we basically want to grow while we're sustaining basically profitability. On the offshoring, what we look for is to continue to increase year on year. So at the end of the day, we aim to reach 50% at least in continental Europe. I would say if you want to look mid-term, yes, definitely, this is where we want to go. We are at about 38%. We do 3% to 4% a year, will get us to 50% to support our mid-term margin ambition. On IFRS 15, to be frank, we are still in the works. When we publish H1, we will give some level of indication of what the numbers would look like in IFRS 15 mode. We will not publish number in IFRS 15, but we will give a strong indication. Today, based on what we see, the main impact will be on the resale business that will be neutralized. That is basically the main impact that you should expect from IFRS from us. We will not come back with plenty of changes and restatement of plenty of numbers. It is mainly going to be resale neutralization on the top line. Okay? Thank you very much. Thank you, everybody, for attending this conference. We will talk again during the roadshow. You can ask questions to Vincent, of course. Emmanuel and myself are available. We have a rendezvous in late April on Q1. Thank you very much. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.