Capgemini SE

PAR:CAP

Earnings Call Analysis

Capgemini Q3 2024: Marginal Improvement Amid Sector Challenges

Capgemini reported a slight revenue decline in Q3 2024 of 1.6% at constant currency, reflecting contrasting sector performance. Financial Services saw a recovery, improving by 4.1% from Q2, while Manufacturing weakened significantly, declining by 3.4%. For Q4, Capgemini anticipates a constant currency growth of -2% to -2.4%, with operating margins adjusted to 13.3%-13.4%. Free cash flow guidance remains at €1.9 billion. Looking ahead, the company aims for a medium-term growth rate of 7%-9% CAGR, driven by strategic emphasis on digital transformation and increased efficiencies.

Quarterly Performance Overview

Capgemini's financial results for Q3 2024 reflected a challenging landscape. Revenue reached EUR 5,377 million, marking a decline of 1.6% on a constant currency basis, a slight improvement from a 2.1% drop in Q2. Despite an improvement in activity trends, particularly in financial services, revenues were hampered primarily by the struggling manufacturing sector, which saw a deterioration from -1.1% in Q2 to -3.4% in Q3.

Sector-Specific Dynamics

The company's performance varied significantly across sectors. Financial Services experienced a recovery, improving by 410 basis points compared to Q2, whereas Manufacturing faced significant headwinds. Other sectors such as Public Sector showed resilience with a slight growth of 3.9% year-on-year. The trends were mixed, with Consumer Goods and Retail declining further by 5.2%. This stark contrast illustrates the diversified impact of economic conditions on different industries.

Regional Revenue Insights

Regionally, Capgemini's performance was diverse. In North America, growth was reported at -3.9%, impacted by manufacturing slowdowns, while Europe demonstrated resilience with a 0.6% growth. The UK and Ireland returned to positive growth, reflecting a stronger financial services sector. Meanwhile, Asia Pacific and Latin America reported a decline of 2.2% due to ongoing manufacturing challenges.

Bookings and Operational Highlights

The company achieved bookings of EUR 5,222 million, marking a slight year-on-year decline of 0.8%. The book-to-bill ratio was a solid 0.97 for the quarter. The operations and engineering services faced a noticeable contraction of 3.4%, whereas the Strategy & Transformation segment saw a robust growth of 6.5% year-on-year, largely attributable to increased demand for AI and generative AI solutions.

Outlook and Forecast Adjustments

Looking ahead, Capgemini has adjusted its Q4 guidance to reflect ongoing headwinds in manufacturing and forecasted a growth decline for the full year of between -2.0% to -2.4%. The operating margin guidance has also been narrowed to 13.3% to 13.4%, slightly down from the previous range of 13.3% to 13.6%. Despite these adjustments, the company remains committed to its medium-term growth ambition of 7% to 9% CAGR.

Investment in Growth and Innovation

Capgemini continues to prioritize strategic investments, particularly in generative AI. With bookings in this area amounting to about EUR 600 million, the company is transitioning from initial discovery to full deployment, indicating robust potential for future growth. Management emphasized that client expectations are now aligned, indicating the potential for incremental spending despite some budget tightening in other areas.

Challenges and Strategic Actions

Management acknowledged various challenges, particularly in the manufacturing sector and the unpredictable client environment. In response, Capgemini is engaging in targeted operational actions aimed at enhancing agility and responsiveness to market changes. They have initiated measures to streamline decision-making processes and foster a culture of rapid adaptation to evolving client needs.

Market Positioning and Competitive Landscape

Capgemini's strategic positioning in the intelligent industry sector remains a focus, while concerns about market competitiveness were acknowledged. The company plans to address its current performance dynamics through operational simplification and enhanced focus on growth. Despite short-term challenges, the fundamental drivers of its long-term growth strategy remain intact, anchored in digital transformation and AI integration.

Conclusion

In summary, while Capgemini faces notable headwinds, particularly in the manufacturing sector, its strategic initiatives in AI and operational agility suggest a forward-looking growth trajectory. Investors should note the company’s commitment to navigate current challenges while laying a foundation for future recovery and expansion. The outlook for 2025 hints at a potential return to organic growth, driven by improved client visibility and recovery in key sectors.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Capgemini Q3 2024 Revenues Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Aiman Ezzat, CEO. Sir, please go ahead.

[Aiman Ezzat, executive]

Thank you. Good morning, and thank you for joining us for the Q3 2024 results call. So today, I'll be joined by our CFO, Nive Bhagat; and our COO, Olivier Sevillia. So I would like to start with Olivier. It's Olivier's last analyst call. As announced, Olivier will be leaving the group after 34 years to pursue personal interests. He has been a key architect of what the group is today, and I want to thank him for his contribution to the development of Capgemini as a leader in our industry.

[Olivier Sevillia, executive]

Thank Aiman.

[Aiman Ezzat, executive]

So coming back to our Q3, the group generated revenue of EUR 5,377 million in Q3, down 1.6% at constant exchange rates after bottoming out in Q1 2024. Our activity improved again in Q3, but only marginally. Bookings totaled EUR 5,222 million in Q3, so down 0.8% at constant exchange rate. The book-to-bill for the period reached a solid 0.97.

Now over the quarter, we did encounter contrasted dynamics affecting us in different ways, depending, of course, on our mix. If you look first from a sector perspective, our 2 sectors, Manufacturing and Financial Services, are currently moving in opposite directions. As mentioned at the end of H1, Manufacturing is slowing down and this materialized across most geographies. Q3 was at minus 3.4% compared to Q2, which was at minus 1.1%. So we can see the effect of the degradation in Manufacturing, which is our sector. On the other hand, Financial Services that we expect to recover through the year is really recovering with a Q2 at minus 5.4%, delivering at minus 1.3% in Q3 and now an expectation of being back to growth in Q4.

On the geo side, Europe again demonstrated good resilience with growth rate either stable or improving. The U.K. saw good improvement, returning to growth at plus 0.4%. Conversely, North America, stagnated. And there's a slowdown in Manufacturing sector having offset the visible improvement that we have in Financial Services.

Going to the businesses. The growth in Strategy & Transformation further improved to 6.5% year-on-year, reflecting the strength that we have in our strategic positioning and also aligned with the dynamism of the market in AI and gen AI. Application and technology improved again this quarter, where cloud infrastructure services and engineering equally weighed on the operation and engineering, which decelerated to minus 3.4%.

When we look at client demand in Q3, it continues to be driven by operational efficiencies and cost reduction. And as anticipated, we're not seeing any increase in discretionary spend. We have the right set of offerings to meet the demand in each sector, and that lead to some noticeable deals in Q3.

Just to highlight some of them, we were chosen by an Italian manufacturer eager to leverage data to reduce development cycle for its core products while modernizing engineering and production. We implement a forward-looking engineering platform and executed a complex program with multiple partners to lead the foundation of the new PLM system. And this project highlights the connection between physical and digital world, our intelligent industry play, emphasizing the digital continuity is central to product and process transformation.

Another example for U.S. conglomerate, we have taken over in a record time, a complex and critical end user managed services in the cloud for over 250 users -- 50,000 users, sorry. The transition was smooth and we have been delivering live services already to the customer. The deal, which is over EUR 600 million in total contract value is a good example of our ability to shape and deliver very large deals.

Another example for [ SZC ], we are helping to set up a data and digital-centric equipment supply chain, supporting the construction of a new nuclear power station, which will provide 6 million homes with low carbon electricity over the 60-year operational life. Our work there is focused on increased equipment flexibility across the global supply chain enabling dynamic construction schedule management to protect the critical path of the construction sequence. Through these digitally enabled techniques, SZC will be able to optimize the materials and resources in the construction of the power station.

So our positioning as the business and technology transformation partner of our clients is well recognized. And we see solid traction for most of our focused value offers, intelligent industry, cloud, digital core, supply chain sustainability and of course, in data and AI. And we see that, of course, reflecting in a pipeline that continues to grow notably in data and AI, where the pipeline almost doubled year-on-year.

Now moving to gen AI which is, of course, is on top of mind for -- our client. We continue to see a good increase in demand. So the bookings on generative AI for the first 9 months is around EUR 600 million and did not include some of the resulting data program. That's really the gen AI focus here. We have already delivered hundreds of projects, as we mentioned before, and we are engaging with clients now on larger programs to deploy use cases at scale.

So just a few examples. From automotive clients, we are customizing LLMs to create specific embedded software. It enables the developers of this client to generate code from natural language, detect errors and boost productivity, which enables to actuate the onboarding and enhancing the development efficiency.

Another example for global logistics client, we are setting up a scalable and value-driven AI factory to accelerate the development and deployment at scale of new AI products and services to enhance profitability and operational excellence.

And for retail client facing [ high cost ] and slow pace on marketing content creation, we implemented the custom gen AI solution to automate image creation. This approach will allow for a quicker and more cost-effective production ultimately, boosting content output and improving search engine visibility.

So we continue to invest in our capabilities and infuse gen AI in our operation. We have now extended our ecosystem of technology partners to 15 dedicated partnerships. We are expanding our portfolio of offerings to deploy use cases at scale, and we are strengthening notably, our intelligence industry play around generative AI with the launch of engineering and R&D specific gen AI infused solutions for clients to accelerate innovation, of course, but also streamline the engineering and R&D processes.

So example of solutions that we have launched to include augmented R&D discovery, which, of course, as you imagine, has a big impact in the -- in pharma, notably; augmented software product engineering; augmented product support and services; and augmented technical publications. We're also actively embedding gen AI in all our solutioning and deliveries. This is ongoing and the number of projects that are impacting by gen AI keeps increasing on a daily basis.

Internally, we're also leveraging gen AI across the organization, prioritizing area where gen AI adoption with high business impact and synergies across functions that can be deployed in a skilled and secured approach. We are currently looking to scale about 50 use cases internally.

Now coming to the outlook and the update that we have done. We now expect the Q4 to be in the same range as Q3 in constant currency, including a scope impact of 40 bps from M&A. So while improvement will continue to develop in areas such as Financial Services, there are also increasing headwinds in Manufacturing, which will be weaker than previously anticipated.

In terms of geography, North America will improve but not recover as much as initially expected, while France will further decline, mainly driven by Manufacturing. So as a result of that revision on Q4, the full year constant currency growth outlook is now minus 2% to minus 2.4%, including 40 bps contribution from M&A. We also narrowed down the operating margin to 13.3% to 13.4%, it was previously 13.3% to 13.6%. And it confirms again, the resilience of the margin in view of the top line evolution. And finally, we do confirm the free cash flow -- organic free cash flow at around EUR 1.9 billion.

I also mentioned the fact that we are launching a set of targeted action to simplify our operation to make the group more agile with a stronger emphasis on top line growth. And I consider today, we continue to have what it takes to achieve our growth ambition of a CAGR of 7% to 9% over the medium term.

I now leave the floor to Nive.

[Nivedita Bhagat, executive]

Thank you, Aiman and good morning, everyone. Let's start with our quarterly revenue growth. As highlighted by Aiman, our activity trends improved again in Q3 as expected, although at a marginal pace. This was due to more contrast in sector evolution compared to Q2, something that I will come back to in a moment. In Q3 2024, revenues declined by minus 2.1% on an organic basis. This is a 20 basis point improvement from Q2 2024. Accounting for scope impact of 50 basis points, growth at constant currency is minus 1.6%, which represents a 30 basis point improvement on Q2 2024. Lastly, FX had a negative impact of 30 basis points in Q3. As a result, reported growth is minus 1.9% for the past quarter. At this point in time, we expect FX to have a neutral impact for the full year 2024.

Now looking first at revenues by sector. As Aiman's already said, Financial Services confirms the recovery with a 410 basis point improvement on Q2 growth rates. But as anticipated, Manufacturing also slowed down significantly, though from minus 1.1% to minus 3.4% in Q3. Beyond this, the evolution in the other sectors was varied. Public sector remained quite dynamic with a small sequential improvement in growth rates at plus 3.9% year-on-year. TMT improved significantly in Q3, although it is still declining by minus 3% year-on-year. Energy and utilities and Services were virtually flat as activity trends deteriorated a little bit versus Q2 2024. Lastly, consumer goods and retail further declined in Q3 with a revenue contraction of minus 5.2% year-on-year.

Moving on now to revenues by region. Now I'm going to do this slightly differently today. I will not go into each year-on-year growth rate for Q3 in detail, and we'll let you look at this in the press release. Instead, I will comment on the Q3 year-on-year growth rates compared to the ones reported in July 2024.

In our 3 largest regions, Q3 2024 growth rates at constant currency were pretty similar to those of Q2. Rest of Europe posted a growth of plus 0.6%. This is a 20 basis point improvement over Q2 despite the visible headwind from the weakening Manufacturing sector. All other sectors actually improved over the period of most notably Financial Services.

In North America, the recovery in Financial Services is tangible. However, the weakening Manufacturing sector created a headwind of more than 1 point. Overall, though, in North America, Q3 growth was minus 3.9%, 20 basis points below Q2.

Revenues in France decreased by minus 2.5%. This compares favorably to the minus 2.7% reported in Q2, thanks to the improvement in Financial Services. To note, France also saw a degradation in the consumer goods and retail and energy and utility sectors.

Moving on to the last 2 regions. United Kingdom and Ireland returned to positive growth at plus 0.4%, driven by the recovery in Financial Services combined with a resilient Manufacturing sector in the region and an acceleration in energy and utilities.

Lastly, revenues in the Asia Pacific and Latin America region were down minus 2.2%. The strong acceleration in the public sector on top of the recovery in Financial Services did not fully compensate for the degradation in the Manufacturing and services sector.

Moving on to revenues by business. Our management consulting business, Strategy & Transformation, further strengthened in Q3 with total revenues up plus 6.5% year-on-year. This reflects continued demand for our strategic consulting offers, including AI and gen AI. In Applications and technology services, Capgemini's core business, growth rates improved by 170 basis points compared to Q2 2024. Conversely, total revenues in operations and engineering services further decreased in Q3 with a contraction of minus 3.4%. This was primarily driven by a decline in cloud infrastructure services and to a lesser extent, in engineering services due to their larger exposure to the Manufacturing sector.

Moving on to the bookings evolution. Q3 bookings amounted to EUR 5,220 million, slightly down year-on-year at minus 0.8% constant currency. The book-to-bill ratio reached a solid 0.97 in Q3.

Now moving on to the headcount evolution. Total headcount increased over the last 3 months to stand at 338,900 employees at the end of September. It is still down by minus 1% year-on-year, but up plus 0.6% since the end of June 2024. The workforce level remains at 57% stable since the end of last year. Lastly, attrition has been stabilizing at the current level, which is 15.4% on a -- 12-month basis.

On that note, Aiman, I hand back to you.

[Aiman Ezzat, executive]

Okay. Thank you, Nive. So while the group is seeing improvement across a number of sectors, geographies and business areas, the market is really not what we were expecting a few months ago, as example, notably by Manufacturing. So [ addition ] a set of targeted measure to further increase focus on growth. And with the ongoing transition to digital economy, we do remain confident in our ability to deliver our 7% to 9% constant currency CAGR ambition.

So let's now open the Q&A. [Operator Instructions] Operator, could you please [indiscernible].

[Operator]

[Operator Instructions] We will now take the first question from the line of Balajee Tirupati from Citi.

[Balajee Tirupati, analyst]

Balajee Tirupati from Citi. 2 questions from my side, if I may. Firstly, at this point, beyond the pipeline and targeted actions you are taking, how do you see growth prospects for 2025? That is, what would you need for the group to have organic growth in 2025?

And the follow-up is if you could share additional color on targeted actions the group has launched. Can you mention stronger emphasis to growth? Does it change a more balanced growth to margin approach group has had until now?

[Aiman Ezzat, executive]

Yes. Thank you. 2 very good questions, of course. Thank you. So first on the returning to organic growth in 2025. Yes, I mean, we do expect to return to organic growth, 2025. If you look at the -- at how we envisage it initially, was basically unifying the headwind, which was pretty stiff around the TMT, which is what's happening -- recovering Financial Services sector again, is happening bit by bit, and it will be positive in Q4, a bit slower than what we expected, that's definitely happening. And in a certain way, no more [ news ] because we seem to have stabilized at the beginning of the year.

The problem we had is really the deterioration that we have seen in the manufacturing sector, notably, which has been pretty heavy, which a big switch from growth in H1 to now a pretty stiff headwind in H2 and some bad news coming on the French side with the political environment.

So again, we do expect that the recovery that we have said we have been seeing in TMT and in financial service will continue. So that will support the positive action and that some of the manufacturing headwind we're seeing at the end of this year are stiffer than what we'll see in 2025, notably because we consider that some of them are very short-term action taken by companies more linked to preserving the end of year.

I mean some of the discussions we have with some of the clients is saying, yes, it's pretty tough right now, but we have to revert to investments next year. So that's what, for me, put us in a better position as we look into 2025 because we consider that some of the actions that are pretty stiff in some areas, notably in a number of manufacturing sector are more short-term actions and that investments will have to revert to some extent next year, supporting the return to growth.

On the targeted actions, again, I just want to clarify and of course, I expected that question. In a period of slowdown, you see opportunity to change a number of things. And here, what we want to do is the following is really we want to simplify somewhat the organization. As you grow fast -- you are seeing you create a bit of complexity. I really see an opportunity over the coming months to really simplify streamline decision processes, empower more to basically increase really the agility on the front end of people in terms of making decisions and being able to adapt very quickly to a continuous evolving environment.

So it is not a bit transformational thing like that, but there are opportunities that we see today to be able to simplify the way we operate and to be able to streamline decision-making and really accelerate the reactivity we have on the front end in terms of pushing for growth.

[Balajee Tirupati, analyst]

Very useful.

[Aiman Ezzat, executive]

Yes. And just sorry to follow up on the rest of your question, it doesn't change the balance. I mean, we continue to focus around how to -- notably through the portfolio and also some operating actions to see how we can continue to improve our margin bit by bit. We're not giving up on the margin at the expense of growth. But we definitely find opportunities -- opportunities for us to be better on the growth front and to react more quickly to some of the evolution in the market.

[Operator]

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

[Sven Merkt, analyst]

Just a few questions from me as well. So that obviously, the emphasis has shifted a bit more towards growth. You have clearly increased also the investments in sales and marketing in H1 and already have put some actions into play. When do you expect to see a more material impact from this on growth?

And considering that you now took margin down for this year and yes, the outlook for next year is still uncertain, how should we look at the 14% margin target for next year within this context?

[Aiman Ezzat, executive]

Okay. So listen, on the action, [ frankly ] the action is ongoing. It's not like suddenly we stop and we're making -- I think the action have been ongoing. We have already put in place certain things for Q4 to try to maximize the top line. I think there will be a few more -- a bit heavier process, changes and others to be able to be put in place over the next 3 to 4 months. But it's definitely impact that we should see in the course of 2025.

On the margin front, we have seen down the guidance. It was 13.3% to 13.6%, so we trimmed it down to 13% to 13.4%. And yes, I do consider that today based on the exit rate we have in Q4, the 14% margin cannot be achieved next year. But we still aim to see some improvement in margin next year compared to 2024.

[Operator]

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

[Frederic Boulan, analyst]

My question is around visibility you have on the business in the short term and then follow up on longer term. So in July, you flagged a number of points around AMD slowdown in auto. You actually said you don't really see a deterioration unless clients want to, I think you said, impact the operations. So what has really changed to drive the kind of reduction in outlook for Q4? Is it what you were mentioning before clients really holding back investment in the very short term? But it's interesting that you kind of, in July, flagged the lower points, which seem to have happened, still, it's a very meaningful change in your view for Q4.

And then follow up on to midterm. I mean, you mentioned several times that 7% to 9% growth ambition. So interesting commentary in the context of what we're seeing right now. So what kind of time frame do you have in mind to kind of see those normative levels coming back in the business?

[Aiman Ezzat, executive]

Okay. So what has changed compared to July? What has changed is some of the bad news of manufacturing have even accelerated furthermore. And you see what changes that our predictability is based on the predictability of our clients. So we have intimate relationship with clients. So they share with us their plans. And based on that, we're able to predict what we expect to deliver. Remember, we have a good concentration on the large client, which represents a good part of our revenue. So this intimate relationship with these clients is what comforts us in terms of the prediction.

The challenge we have is that our clients themselves cannot predict. So they come with surprises that themselves are not planning and they have to react to. And that's really what the challenges in the short term is our own clients have little visibility in a certain way and little prediction in terms of some of the decisions they're going to make. And this is the part that we cannot anticipate.

So it is a degradation compared to what we saw in July. But based on the fact that our client visibility has, in a certain way, was not good, and they have to react further, short term, that's why I think it's important. It's short-term reaction to change environment to be able in a certain way to preserve the year-end. And there is, as we can imagine, always some flexibility on trimming down some of the services, and that's what we have seen has been an impact.

I'll give another example. We were in growth in Manufacturing in the U.S. and this has changed. It has changed because we had a number of events in the environment in the U.S. at our clients that end up turning into negative news for us going into Q4. And I promise you, it's not something we could have predicted because these events were not predicted by the client. There are some clients who were in growth, who suddenly have basically a pretty negative impact in Q4. We know this transition. We know it's not going to last for a very long period. But in the meantime, it does have an impact for us on Q4.

On the mid-term, my view around the market in terms of the potential in the market linked to the move towards the digital economy increase spend, the push we have done intelligent industry is there even if clients are slowing down because of their own problem in the short term. The change in the transformation has to be driven is still there. This is not going to go away. So in the short term, it does have an impact. And again, the impact is higher than what we have predicted even a few months ago. But I'm completely convinced about the fact that because that's the discussion we have with them, this transition, they're going to have to do them. And that would require the investment to be able to move towards the digital economy, which will fuel that growth.

So my point around the 7% to 9% is that the fundamental of what's driving the fact that we can return to 7% to 9% haven't changed. The assets that we have built and the posting we have taken to be able to drive that has not changed. However, the headwinds in the short term, because of the environment that our clients are facing, is really what is impacting that gap between where we are today and where we expect it to come back to in the midterm.

And as Olivier specified, the final -- So it's building up to the fact if the funnel was really crashing especially on the strategic deal and the deal transformation deal. I was not missing the same thing. But when I see what's in the funnel, it conform to believe that it is in client plan. It's something that's going to happen. The delays we are seeing and some cuts in areas where we don't expect in the short term is really what's driving the current environment. And that's where we need to create a little bit agility because there are some opportunities in the short term that we should be able to address.

[Operator]

We will now take the next question from the line of Laurent Daure from Kepler Cheuvreux.

[Laurent Daure, analyst]

Also one question and a follow-up. The first question is on the U.S. If I remember well, you were ambitioning to have probably a pretty decent exit rate in the U.S. So I understand the Manufacturing was a headwind of 1 point. But did you see something else happening during the quarter in the U.S.? And how do you consolidate your performance in the U.S. versus some of your peers? Is it just a mix? Or did you win did -- or did you lose a couple of opportunities? So any additional granularity on what's happening in the region would be very useful?

And my second question is, if you could come back quickly on a few management changes that you announced last week.

[Aiman Ezzat, executive]

Okay. So U.S., if you look at -- appears -- it's a bit all over the map. Remember, we have some peers who are still pretty -- I'm not talking about the global peers -- some peers which are still declining, maybe a little bit less than us, but they are declining, and we have some peers who are some growth. So I don't think there's a uniform view today around the U.S. market. It remains a challenging market.

The misplace, probably our lack of exposure compared to some of our larger peers to the federal government or health care basically was unfavorable for us. But again, I think we can do it better than what we are doing. And yes, the -- we probably can push a little bit more in the U.S. in terms of improving a little bit more our top line.

On the management changes, I think the -- I mean, Olivier is next to me, and I think we commented specifically on that before. It's a decision in terms of pursuing some personal investors that what you consider it's a time to be able to move on to do something else in life. And I think the other thing are seeing that basically the opportunities in terms of basically moving some people or the -- one of the big changes is naming [ Ania Bambos ], who's somebody who has a lot of experience in the group who has been running Financial Services for many years to lead Americas.

I do believe that Ania will bring a lot following Jim, in terms of [ Jimbo ], will be able to accelerate the implementation, some of the transformation we have in the U.S., and we did promote [ Khatik ] was one of our very experienced leaders in Financial Services, global leaders who have been running back into around Financial Services. It's a natural succession. And of course, some other changes following Olivier's departure, notably to have [ Jerome ] who has been really -- who used to lead one of the SBUs in Europe, as you know, to basically take in charge of the front end as Chief Revenue Officer. And of course, we'll be working very closely with Jerome on the top line growth because that would be his key focus is basically focusing a lot more around basically driving the top line.

[Operator]

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

[Mohammed Moawalla, analyst]

I've got 2 for me. Firstly, I mean as you go through the kind of budgeting process or your customers start to go through the budgeting process for next year, is there anything you could say around kind of shape of growth or perhaps seasonality given the significant cuts we've kind of seen in the very short term this year? Does that change how perhaps the shape of next year looks? Or is it going to kind of exhibit your kind of more back-end loaded nature?

and secondly, one for Nive. I noticed that you haven't really changed your free cash flow guidance. Can you remind us again of some of the kind of the levers that you have there and perhaps the buffers to manage against some of the kind of revenue growth slowdown and obviously, the protection on the margin, but how you kind of manage the free cash flow?

[Aiman Ezzat, executive]

So listen, I think on the budgeting, I think, frankly, it's a little bit early because as I just mentioned, even going into September, we have seen some clients revising quite a bit, the spend for the end of the year because of events that themselves did not expect. So I think it's -- I would not -- I don't want to speculate at this stage about the shape of next year of what our clients will do. The general consensus, there should be some increase in spend. But as we know, the events during the year do have an impact on how clients spend their money.

So -- and frank, I would reserve that a little bit for the full year when we have better visibility of how [ human ] is starting and what the client spend. But the general noise we have is some increase in spend of next year. And as I say, some very steep reaction that we have seen this year are really corrective action for this year and spend will have to resume in a number of areas next year. And again, supported as well by what I think about the pipeline and the strategic deal in the pipeline.

And probably, the momentum of gen AI starts really to have an impact, having EUR 600 million bookings, excluding data on gen AI. It's 3.5% of our bookings and that should continue to increase. So there are some risks, some areas where there is momentum, return to Financial Services, which basically put us in a positive spin going into '25. Nive?

[Nivedita Bhagat, executive]

Well, thanks for your question. As far as organic free cash flow is concerned, we have enough flexibility, if you like, that's been built into that number.

Now having said that, it is a tough environment, and we are doing everything internally across a number of different areas. So whether it is a strong cash mobilization plan, whether it is working capital management, whether it is cost discipline, et cetera, we're doing a number of these different things to make sure that we're able to hit that target.

[Operator]

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

[Charles Brennan, analyst]

I was wondering if you could talk about competition more broadly. I think as -- remarks earlier, if we look at globe peers, they're probably delivering slight growth, whereas you're delivering a slight decline. Do you sense any change in your win rates versus competitors? Or do you just think you're not active in some of the pockets of demand in the industry? And is that something that you need to address strategically?

[Aiman Ezzat, executive]

Good question. Of course, we look at competition and we look at the performance, and we try to understand basically where some of the gaps are coming from. I would say we deal with a little bit unfavorable mix compared to our competitors. Our big bet on intelligence industry is the right one, and it's continues to be the right one in the midterm. But this has increased our exposure to sectors like auto and aero. And these are not the ones currently that are increasing the spend. So it has a bit of unfavorable mix here.

And I did mention the fact that we expect a slowdown in France. Again, I don't think we have any of our -- competitor has 20% exposure to France in terms of their revenue. So I think the mix is unfavorable. But as I said, this is why we're launching some targeted actions. I do believe that we can do a little bit better and there are in terms of free activity in some pockets. And that's why we're doing some of this action around streamlining a little bit some of the aspect in terms of operation and empowering people more to react faster to some shifts in the market.

[Charles Brennan, analyst]

Can you just say a word on pricing as well? I hear pockets of pricing pressure. Is that something that's giving you any cause for concern?

[Aiman Ezzat, executive]

No. I mean as you see -- I mean, I think one of the positive things that you have to take out of what we see is that the resilience of the group is very good. The margin, yes, we have trimmed a little bit the margin guidance, but we are still within our guidance for the full year, and we're still maintaining the health of our free cash flow, which means we have -- we're able to resist quite a bit some of the pressure in the market.

But is there pricing pressure? Yes. In the market, it has still down for the last 8 quarters, you can imagine there is pricing pressure. But we also doing a number of operational changes, pushing productivity up to be able to contain some of the impact of some of this price pressure. So I think the resilience of the group from that perspective has been extremely good and being able to address actually the pricing changes. And of course, the mix which continues to improve, which we should not [indiscernible].

[Operator]

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

[Toby Ogg, analyst]

Just thinking about the indications earlier that you can return to organic growth in '25. Just to check, does that mean you think you can grow organically in 2025 overall or at some point in '25? And could you talk through just some of the drivers of your confidence and sort of visibility on that number as organic growth for the full year would imply a bit of a pickup in sequential growth from the Q4 exit rate?

And then just one more just on the French tax impact. Could you give us an update on what the implications are there for Capgemini?

[Aiman Ezzat, executive]

Okay. So I'm not guiding for next year yet. So yes, we will return to growth, but we'll give more precision, I think when we talk about the full year guidance in February. And the confidence always come from the same. It comes from the strength that we have in the pipeline, the discussion we have with clients and where we have seen headwinds and we expect them to start resolving. And -- I mean that's what we expected this year, and the headwinds -- what we expected recovery to happen has happened. Well, the part that we didn't expect a significant deterioration in sectors like manufacturing, which, to be honest, was not predictable.

And going into Q4, the fact that we'd have such a deterioration in France. Again, that's not something that was expected at any moment in the year. And it comes with bad news. It comes gradually, and we have to absorb them and move on. So the change going to next year is, yes, we don't expect a huge bad news, again, coming -- affecting us because I think we pretty much shift all what we could see as bad news.

[Nivedita Bhagat, executive]

Probably on the French tax reform, the impact on the CIT we expect will be anywhere between 2% to 3% on the EPS for 2024 and roughly about 1% to 2% in the EPS of 2025. Now of course, as you're aware, there's still to be debated in Parliament. So we'll see what comes out of it once the debate actually does happen. And of course, as you also recollect, this is only expected to be for the short term, so '24 '25. So that's what we think at this moment.

[Operator]

We will now take the next question from the line of Ben Castillo-Bernaus from BNP Paribas.

[Ben Castillo-Bernaus, analyst]

Question, the generative AI bookings number. So firstly, nice to have that KPI in there. The question really is, it feels like we're moving out from the discovery phase in generative AI to deployment phase. My question is, how has the pace of that development played out versus perhaps your expectations 12 or 18 months ago?

And then my follow-up would be, are you seeing customer generative AI budgets is incremental? Or are they sort of tightening that or offsetting that in other areas to keep overall budgets or be flat or even slightly down?

[Aiman Ezzat, executive]

I think, again, 2 good questions. First, I mean, gen AI, it's a positive evolution. As I said now that customer expectations have been set at the right level and they understand that they need to drive quite a bit of change in investment if they really want to get the benefits and the maturity has increased.

To be frank, from a technology, from our side, we really start to see more and more impact. So is the pace what I would have expected 18 months ago? Yes, because I thought it would take time before we land back on us and really get to work. And I think this is what's happening. And I do see now more positive traction coming from gen AI, which I believe over time will drive additional spend.

Now is there an arbitrage at some point? Yes. I mean the suppliers who are under budget pressure is they invest in gen AI. They're cutting a little bit somewhere else for those the budget pressure. But overall, I do see gen AI is being something that will be incremental because it brings additional value. If they're cutting things, that means there's no value in it. And I think some of the other technology spend is also required in terms of driving value when we talk about digital core, we talk about cloud, we talk about software product engineering. gen AI will not come at the expense of these. So it is incremental in terms of spend because it's bringing incremental value to clients.

[Operator]

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

[Michael Briest, analyst]

Just in terms of the 14% margin target, I appreciate you said it's not deliverable next year. But is it still an ambition for the group? I think for me, at least, it feels as though there's a pivot and sort of emphasis towards growth and getting back to the 7% to 9% trajectory. Does that have an impact on margins? Maybe you can sort of talk about the balance of the 2 over time.

And then just a follow-up on actions you mentioned in terms of trying to sort of help with that acceleration. Can you quantify the sort of cost? Is this a restructuring program? Are there going to be people leaving the organization? Does this impact the sort of typical 1% of sales budget for restructuring this year or next year?

[Aiman Ezzat, executive]

For me, it's not -- the first, the 14%, yes, it's still achievable. Of course -- I mean, the premise of what's driving the 14% and the margin improvement are still there. It doesn't change. But as I said, next year, it was really linked to a good operating leverage coming from the growth acceleration based on the exit rate. I cannot say that we're starting the year with a boom in terms of growth. So the premise of how would -- what made the 14% achievable next year are not there. So by definition, it's not achievable anymore.

Now is the 14% still there in our plan in terms of what can be achieved over the next 2, 3 years? Of course, it is still there because the margin progression and the underlying reason why we can improve the margin have not changed linked to -- it's only linked to the current environment. And the balance is always between growth and margin that you have to manage. But I think for me, you have to do both. You cannot just do growth at the expense of margin because structurally, you're killing your business bit by bit. And at the same time, margin, we cannot push for margin and stop investing just to grow. So we need to keep that balance.

But coming back to your next question, this is not about a big restructuring program. This is really about speeding up the way we react and speeding up the decision and empowerment and streamlining a bit some of the processes behind some of the decisions that you made in the organization to enable faster enablement on the front end. And it's not about driving a big restructuring program.

[Michael Briest, analyst]

Okay. All the best for the future, Olivier.

[Operator]

We will now take the next question from the line of Nicolas David from ODDO BHF.

[Nicolas David, analyst]

I have one and a follow-up. The first one is regarding the -- it's good to see that you are back to positive net [indiscernible] hiring in Q3 but I would love -- I would like to have a feeling on where those recruitments carried out pre on purpose and well managed throughout the quarter? Or were you actually surprised by the deterioration of the demand during the quarter, which means that those hirings were a bit higher than what you should have done, and this is amplifying the actual reduction you need to take to adjust your operation?

And my follow-up is about to get more sense about the buffer you have taken in your Q4 guidance regarding notably U.S. and the potential impact of the wait-and-see attitude from clients on the President election and also the client behavior regarding their end of-the-year budget. Do you expect now follow as severe as last year? Or you're still expecting that [ parents ] may behave a bit better than last year?

[Aiman Ezzat, executive]

Thank you. So headcount growth. No, no, it is not, we did headcount growth, big mistake. Now that things are deteriorating, we're going to have to cut. No, no, the headcount growth, as I said, will resume at one moment. And at this stage, the headcount growth, as we do, I said in India, and I said it continues to grow in India, and we continue to see positive traction and growth driven by India. So I think that's -- there's no revert back in terms of plan and what we have done is not a surprise that we have to address. And I know you all love headcount growth as a leading indicator. So yes, headcounts are growing again.

On the -- on Q4, of course, we built some cushion on Q4. I think seem like follow, et cetera, a discussion we have had with clients, we are end of October, and we don't expect surprises. But even that, we have built in some buffer for potential surprises, but the difference is that we are -- there's a few weeks left in the year. So we can have that scenario, but I do think that we have built enough buffers for the remaining 8 weeks of the year.

Remember, we did not have a big surprise around Q3. In fact, the big shift has happened not in Q3, really. Q3 was very close to where we expected it. So it's more the Q4 swing that change -- the role is to change the adjusted guidance for the top line. So I think we feel pretty comfortable about where Q4 is.

And this was the last question. Thank you all looking forward to interact with you over the coming weeks. Have a great day.

[Operator]

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