Q4 2019 Earnings Call
Oh participants please stand by your conference is ready to begin.
Good morning, ladies and gentlemen, welcome to the C.G.I. fourth quarter in fiscal year 2019 conference call I will now links during the meeting over to Mr. long Gorber Executive Vice President Investor and public Relations. Please go ahead Mr. gorber.
Thank you Valerie and good morning.
With me to discuss the Giants fourth quarter fiscal year 2019 results are George Schindler, our president and CEO and fast Webinars, <unk> executive Vice President and CFO .
This call is being broadcast on Cdti Dot Com and recorded live for Montreal at nine am Eastern time on November six 2019.
Supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our 2019 Mdna financial statements and accompanying notes all of which are filed with both SEDAR and Edgar.
Please note that some statements made on the call maybe forward looking.
Actual events or results may differ materially from those expressed or implied and CGS disclaims any intent or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise, except as required by applicable laws.
That completes safe Harbor statement is available in both our Mdna and press release as well as on C.J. Dotcom, we encourage our investors to read in its entirety enter refer to the risks and uncertainties section of our Mdna for a description of the risks that could affect the company.
We are reporting our financial results in accordance with international financial reporting standards or I. If our EPS. We will also discuss non-GAAP performance measures, which should be viewed as supplemental.
The Mdna contains definitions of each one using our reported.
All of the dollar figure is expressed on this call our Canadian unless otherwise noted.
With that I'll turn it over to across why now to review, we provide context to our Q4 and full year financial performance and then George will comment on our operational highlights and update our strategic outlook.
Yes.
Thank you Lauren and good morning, everyone I'm pleased to share our fourth quarter and fiscal 2019 results, let's begin with Q4.
Revenue was $2.96 billion, an increase of $160 million or 5.7% compared with Q4 last year.
On a constant currency basis revenue grew 7.7% of which approximately 4% was organic.
I P solutions and services grew by 14% year over year, and now account for 22% of revenue.
Q4 book Q4 bookings totaled $3.4 billion or book to Bill of 115%.
Our focus on bringing clients more end to end services and IP is driving scope expansions and new AD on war, particularly in the U.S.
In Q4, following the pipeline ship seen in previous quarters, 53% of total bookings were from for managed IP services and fat eight over the top 10 bookings were managed by the engagements.
Adjusted EBITDA in Q4 increased to $457 million for margin of 15.5% up $22 million year over year, reflecting the quality of our revenue growth.
Our effective tax rate in Q4 was 21.4%.
When excluding one time net tax benefit of $18 million in Germany, It's was 25.1% stable compared to last year.
Looking ahead for fiscal 2020, we expect a range of 24.5% to 26.5%.
Net earnings were $224 million in Q4 for our margin of 11% up 50 basis points compared to last year.
EPS was $1.19 cents up 16% compared with one dollar and three cents last year.
When excluding acquisition and integration expenses and a favorable onetime tax adjustments and their earnings were $329 million for margin of 11.1%.
And earnings per share were one dollar and 21 cents up 11% from one dollar and nine cents a year ago.
Cash generated from operations in the fourth quarter was $405 million or 13.7% of revenue.
This represents an improvement year over year, or 150 basis points or $65 million.
Yes, so what at the end of September was 50 days compared with 52 days last quarter in last year, reflecting a higher proportion of recurring revenue.
During Q4, we made a number of accretive investments, including $80 million reinvestment in our business.
$15 million acquiring sunflower systems.
$219 million in debt reduction and $106 million repurchased 1.1 million shares.
Turning now to our fiscal 2019 full year results.
Revenue was $12.1 billion, an increase of $604 million or 5.3% compared to fiscal 2018.
On a constant currency basis revenue grew 5.9% of which approximately 60% is organic and 40% from recent mergers.
Bookings totaled $12.6 billion are 104% of 2019 revenue.
As a result, we ended the year with a backlog of $22.6 billion or 1.9 times our annual revenue.
Adjusted EBIT was $1.8 billion, representing a margin of 15.1% for the full fiscal year.
30 basis point from last year.
We continue to see opportunities to increase overall margin through the ongoing evolution of our revenue mix towards higher managed IP services revenue.
Optimization of the business as we integrate new metro market managers and the introduction of new Orient ends IP solutions.
These opportunities to improve margin, our most pronounced in central and eastern Europe , where we achieved margin progression throughout fiscal 2019, reaching double digits in Q4.
Net earnings were one point $26 billion for margin of 10.4% up 50 basis points compared to last year.
EPS was $4.55.
From $3 at 95 cents, representing a year over year improvement of 15%.
When excluding acquisition integration related expenses as well as a favorable German tax adjustment net earnings were $1.3 billion for margin of 10.8% up 30 basis points year over year.
And earnings per share, where $4.70 or 51 cents higher than last year, we're presenting growth plus 12%.
For the full for the full year operating cash flow increased to $1.6 billion or 13.5% of revenue an improvement of $141 million.
With this strong cash flow, we made a number of accretive investments $331 million reinvesting in our business and talent contracts and intellectual property.
$620 million to accompany the kendo CK seat and sunflower mergers and $1.1 billion repurchased 12.5 million shares at an average price of $90.37.
At the end of September our net debt stood at $2.1 billion for net debt to capitalization ratio of 22.9%.
This is up from 19.2% at the end of 2018 and remains well within our comfort zone.
A reminder, we took advantage of the low interest rate environment to renegotiate a portion of our long term debt at more attractive rates earlier in the year.
We have the overall financial capacity and the intention to continue building and buying in fiscal 2020.
Before turning the call over to Georgia, I want to highlight a few outcomes from our recent strategic business planning process first we are closing our delivery center in Brazil.
Second we are refocusing the infrastructure operation in Portugal to be a near shore delivery center following the nonrenewal of our large infrastructure only contract.
These two actions will result in an annual revenue impact of approximately $27 million and western and southern Europe .
Once completed will improve this segment's EBIT margin.
Finally, we decided to create two separate northern European strategic business units.
A new Scandinavia segment with over 5500 members, and Sweden, Norway, and Denmark, and which generated approximately $1.1 billion and revenue last year.
As we stand up this new segment, we are using the opportunity to optimize and restructure restructure parts over infrastructure business and Sweden.
The second new segment in the region is Finland, Poland, and Baltics, with 4300 members and which generated approximately $800 million and revenue last year.
We will provide restated historical data for than your segments. When we report our Q1 fiscal 2020 results.
The combined costs of these actions related to Brazil, Portugal in Sweden are expected to totaled $30 million to $40 million. The majority of which we plan to expense in Q1, So I'll turn the call over to George Thank you Francoise and good morning I.
Im pleased with our teams collective performance in fiscal 2019.
We successfully executed on the strategic priorities necessary to meet current client demand for innovation and business agility.
We grew organically in every operating segment with a stronger mix of managed IP and intellectual property.
We expanded our margins on the strength of the improved business mix and continued operational excellence.
We continue to broaden our reach by using our metro market merger strategy as a catalyst for organic growth and are now at scale and an additional four metro markets, Hamburg, and Wolfsburg in Germany, as slow in Norway, and Gothenburg in Sweden.
To broaden our end to end services in Q4, we merge with US based sunflower systems, expanding our key strengths and government ERP with more comprehensive business analytics for our clients.
And regarding the previously announced merger with basis, all regulatory approvals have been received and a final court hearing is set for November 14th after which we expect to close the transaction and begin merger integration activities.
I want to take this opportunity to warmly welcome more than 700, new members from sunflower and spaces to CGS.
Together, we deepened our expertise in IP portfolio in the space media and government industries.
Our results this fiscal year, 6% revenue growth and 12% earnings per share accretion demonstrates the successful implementation of our building by strategy to create value for all three stakeholders.
Before turning to our fiscal 2020 outlook.
Lets review, our fourth quarter performance highlights in North America.
Revenue in constant currency for the us commercial and state government operations grew 2% organically compared to the same period last year.
This was driven primarily by improved state government bookings in the second half, including managed IP services and IP, such as our renewed Mobilefirst advantage ERP solution.
Overall book to Bill in the quarter was 218%, reflecting the continued strength of our commercial business.
Several clients renewed and extended their managed services contracts, specifically in the financial services and how sectors.
The pattern of client demand across industries in the US is increasingly focused on better aligning digital projects with a comprehensive end to end ITD strategy.
As a result, we're seeing growth across major metro markets with significant pipeline expansion managed IP services.
EBIT margin was 15.2% impacted by onetime project adjustments. This compares to 20% in Q4 last year, which was supported by higher R&D tax credits.
And us federal we delivered organic growth of 18.2% and improved our EBIT margin by 150 basis points to 14.3%, both driven by cyber security and IP related services.
Bookings were strong at 134% of revenue the team was successful in winning large projects and task orders with US Department of state the administrative office of us courts, and the social Security administration.
We were also selected for positions on multi award contract vehicles with a health and human services administration, and Ginnie Mae the principal financing on for government mortgage loans.
In Canada revenue decreased decreased slightly year over year, while EBIT margins improved to 23.9% driven by the seasonal strength of our recurring revenue base.
Demand for IP in Canada continues to be notable in the financial services utilities, and payroll services markets, reflecting client preference to prioritize solutions to accelerate returns on their digital investments.
Additionally, we've been awarded new projects in the health industry, leveraging our PPA in analytics.
Turning now to Europe .
In Northern Europe revenue was up nearly 10% in EBIT margin was 10.3%.
We expect margins to continue improving as the integration of a condo proceeds.
Manage our key awards were strong in the quarter with a number of extensions and scope expansion for example, our partnership with local tough yola, when a finland's largest financial services providers expands our scope of managed IP.
In addition, our systems integration IP and managed services bookings were strong with public sector agencies across the region.
Separating Scandinavia from Finland, Poland in the Baltics now creates two strategic business units in the region, enabling us to further leverage the power of proximity.
Serving the local needs of our clients with increased focus while continuing to apply our global capabilities and expertise.
In Western and Southern Europe revenue grew 3.5% year over year with continued strong organic growth in France offset by revenue declines in southern Europe .
EBIT margins across the segment improved year over year by 310 basis points to 15.4%.
Bookings in the region were slightly lower than recent quarters, but remain above 100% of revenue revenue on a trailing 12 month basis.
We see continued momentum in public sector, which booked over 130% in Q4, including extensions to managed IP services contracts.
In central and Eastern Europe .
Our team delivered growth of nearly 17% driven by organic growth in Germany, and the Netherlands as well as by recent mergers.
As with other regions the slowing macro economic environment is leading to more client opportunities for the cost savings associated with managed it services.
This receptivity among commercial clients in the region mirrors aspects of the North American market as clients seek to align managed services digital investments and IP based business solutions.
Notably EBIT margins returned to double digits at 10.4% in Q4 on the strength of our Dutch operations, which continued expanding both its top and bottom lines.
In the UK and Australia revenue grew 4.6% and EBIT margin was 12.7% the same as last year.
Bookings for the quarter with just under 100%, reflecting continued uncertainty related to Brexit.
However, our strong capabilities in complex project delivery and our income than status with large government agencies positioning us for future opportunities in the first half of next year.
This will naturally follow the outcome of the general election, and the final Brexit determination.
We also see an increase in the number of commercial clients, considering larger investments come when compared with previous quarters.
And in Asia Pacific, our proven combination of industry domain and technology expertise continues to differentiate our global delivery centers of excellence and as such we delivered growth of 10.1% and an EBIT margin of 27.9% in the region.
Turning now to fiscal 2020.
So we approach our strategic business planning process with the aim of building, where we are and focusing on where we want to go.
This year, our annual business plans were informed by the insights gained from over 1500 in person interviews with commercial and government executives in each geography, where we operate.
These insights tell us that overall our clients at early stages with enterprise digital investments, 90% of executives. We interviewed report that they are not yet achieving the planned business benefits.
Additionally, clients are prioritizing both digital services and it modernization as ways to accelerate these benefits. In fact these are the top two priorities in nearly all industries. This year and a reported by our clients as having the top impact among all trends.
And lastly.
Harnessing data is key as nearly 70% of clients executives reported increase investment in analytics and business intelligence. This year with further increases planned over the next three years.
All of these findings point to a continued shift in the buying behaviors of our clients, which increasingly favor partners that can deliver on their IP monetization efforts, while achieving returns on digital investments.
At the same time, a slowing growth economy, and geopolitical uncertainties are causing many of our clients to also plays a growing premium on using technology to generate cost savings and efficiencies.
Fundamentally we have positioned ourselves in a way that allows our clients to combine our range of services the best fit their needs.
Specifically, a combination of managed it services and business process services to help clients mitigate cost and budget pressures, allowing reallocation of funds for innovation investment.
Strategic ITM business consulting to enable business agility and cultural change.
Systems integration to support it modernization efforts to optimize existing and new technologies.
And intellectual property, which serves as an accelerator to apply irrelevant innovations more quickly.
In the rate combination these services.
For the innovation agility and financial benefits, our clients need while delivering recurring revenue streams at higher margins for CGM.
We've been building a pipeline of these longer term larger opportunities over the past year.
Our 2020 plans include increase investments in the business engineering capacity intellectual property offerings and consulting expertise required to advance these opportunities.
In addition to the right balance of end to end services. We believe that CGM is uniquely positioned in terms of the level of trust. We have earned with our clients and consistently delivering on their largest most complex systems integration projects.
This is reflected by achieving all time high client ratings for satisfaction innovation and loyalty this past year.
And importantly.
85% of our employees are now CJ shareholders, given asked the talent capacity and engagement for continued excellence in delivery.
In fact, the ongoing investments in talent or perhaps our most important as these put us in an even stronger position to retain and onboard new employees.
Taken together, our proximity model range of services client Trust and ownership culture, along with our financial strength.
Make CGS resilient during times of economic and political uncertainty.
Our capital allocation approach is aligned to this positioning and will be prioritize to drive revenue growth and double digit earnings per share accretion.
Specifically, we will continue to invest back into our business, including and people IP, new offerings and manage Iraqi contracts to drive profitable growth and optimal service mix.
Fund and active metro market merger strategy to accelerate our growth.
And pursue a disciplined consolidation strategy within the ITC services industry.
And buyback our stock to increase returns to our shareholders.
In conclusion, we wanted a few firms with the scale reach capabilities and commitment to their clients global partner of choice.
We continue to see a market climate conducive to achieving our strategic aspiration of doubling CGS.
Over the next five to seven years. Thank you for your continued interest in sport, let's go to the questions. Now born just a reminder, that a replay of the call will be available either via our website or by dialing one 804, 083, 053 and using the passcode five 380 304.
Until December seven as well podcast of the call will be available for download within a few hours and follow up questions can be directed to me at 5.484 won three Threefive Valerie if we could poll for questions. Please.
Thank you Mr. conference, we will now take questions from the telephone lines. If you have a question and you are using his speakerphone. Please lift your handset before making your selection.
If you have a question. Please press star one on your telephone keypad.
If any time you wish to cancel your question you me press the pound fine.
Please press star one at this time you can have a question.
Ill be brief I was wondering participants may just a quick question. Thank you for patients.
Our first question is from Richard Tse with National Bank Financial. Please go ahead.
Thank you George with comments on so the uncertain backdrop and the interest in using technology to drive efficiencies and save on cost are you, suggesting there that we see a softening economy that demand for your services.
We're not changing in fact, they have the potential sort of move higher.
Yes, so thats.
Something I've been talking about for few quarters now Richard Thanks for the question.
What we see in in this kind of economic environment is a different mix of the of the C.J. services portfolio. So you typically see that intellectual property actually the demand goes up because the capital requirements are different for intellectual property for our clients and of course it accelerates the Bennett.
It's rather than building bespoke on systems integration.
Project as same thing goes from managed IP, but this is a little different because typically the manage ITD goes up and the systems integration and consulting goes down a bit in this type of economy IP demand as I mentioned goes up but this is a bit of a different landscape because most of our clients as I mentioned are only part way through.
Their digital transformation and so by mixing those services, giving them savings on that managed it services and allowing them to reinvest actually accelerate some of CJS guys growth and enables our clients to meet their demands. So I see this environment actually being in the.
Longer term and the intermediate term being positive procedure, but we're in that shift we're in that shift period, where the demand curve is just changing as we discuss and that's why you see some of the softening of the bookings short term intermediate term I think it plays in our two a strengths.
Okay. Thanks, and then with respect to your current base, obviously, you guys have pretty substantial base of existing customers.
Share with us.
As point in time.
As customers order of magnitude.
On a percentage basis, maybe move to these digital transformation projects here.
I would say the majority of our of our customers are in the midst of the of a set of digital transformation projects. Some are in the earlier stage.
We're actually giving them some consulting help some are in the in the middle stage I don't think anybody is clearly at the end stage and if they are they're re.
Reinvestigating what else they have to do from a digital transformation perspective.
Okay, and just one last one from me regarding your comments on Brazil, and Portugal should I read that to mean, you're kind of backing off of South America answered doubling down on their plans for Europe , yes that would that would be it would be the correct.
Correct read on that and if in fact, we've been as you know with the with the logic.
Merger, we had a lot more operations, we've been necking that down we really had net down Brazil to a delivery center, only and given the risk and the declining demand for that and the opportunities in other parts of Europe , we made the strategic decision.
That's great. Thank you.
Thanks Richard.
Thank you.
Our next question is from Jason Kupferberg with Bank of America. Please go ahead.
Hey, Thanks, Good morning, guys RF adjacent.
I just had a question maybe a couple actually on margins so.
Steven margins were down 10 basis points year over year in the quarter I know thats kind of a reversal of the trend you've been seeing per while you did call out I.
I think one particular us federal project.
That that how to charge related to its I was curious just if you could if you could size that for us just trying to get us on to the underlying margins and then as we think about fiscal 2000 and when I know you guys don't provide specific guidance, but should fiscal 2000 would be another op margin year, recognizing that you do have plans for some elevated.
The investments and Im not sure how youre going to treat those Brazil in Portugal costs, where they'd be in or out of adjusted EBIT.
Yes, so on your last question.
Those those cost that that I mentioned those will be out of the adjusted EBIT I will remind you that you're right. It's just the quarter. The margins are 30 basis points higher.
Over the year on the on really the strength of our manage IP of our growth and the excellence in in our ability to integrate recent mergers.
Also remind you that we do have a merger rather large merger, that's still undergoing and I pointed that out in northern Europe with with a condo and as we see that.
Merger integration successfully complete and we're pretty disciplined about that and then the mix of business with IP and manage IP certainly our plan, where those double digit margins would be a smart double digit EPS accretion would be to continue to expand our margins next year.
Okay. That's helpful. I was just curious also on the bookings.
The new business mix, there I think was only 20% that's kind of well below typical levels. This can be lumpy certainly quarter to quarter, but it did just kind of stick out as being particularly.
Oh it sounded like you had a lot of really positive renewal activity. So it may have been a function of of that but just wanted to see if there were any other call out or any reason to believe that we won't go back towards more sort of historical mix in the bookings as we look forward from here and based on what you see in your pipeline.
Yes, no Jason Thats, a good a good observation and is exactly as you as you pointed out we did have a number of a renewals and extensions I will point out though that some of those are actually add on business. So thats not all just rolling over existing business in fact.
Many of those and we pointed that out have add on opportunities given this environment that we're in and and this is a bit of a natural shift when you talk about returning to the the new level bookings as I had men benching, we had higher little bit higher than than average on the new side in our bookings.
And that was new systems integration and consulting.
Clients and now as we continue to sell more services and extend that SNC into managed services.
To show up more in the existing client rather than the brand new business, but I think it's actually a richer.
Mix of business and therefore, it will drive some higher margins so.
That's that's where we are right now in the.
In the evolution of the business mix.
Okay, and just last quick one for me any way you can help us size with the total revenue contribution from psychosis and sunflower might be in fiscal 2000.
France, why do we have the.
I have the specific perhaps we can take it to offline with.
What's going on that yet what leg and tell you. It's a it's over 800.
Employees members rejoining CDAI about half in Germany half in the UK, so to be a nice uptick there yes.
Okay, well, thank you guys for the color.
Thank you Hi next question is from Renzi Alexander with Barclays. Please go ahead.
Hi, Thanks for taking my question I wanted to ask about the strength in the U.S federal.
Business. This quarter you saw some nice nice growth there just wondering if I get a little more color on that and then in addition, I had a broader question about there any impact to decision making on contracts when it comes to us election cycles. Typically is there anything we should expect going into obviously a presidential cycle that now we're going through an election.
Regional electrical cycle as well just wondering if there's any any any takeaways or not.
So we have a thanks for pointing out the strength in the in the federal business.
It's really that growth is mainly on the strength of bookings we had over the trailing.
12, 12 months 18 months really.
Projects in the in the federal space, sometimes the start up a little slower given the the bureaucracy there, but then as I've been playing out so really that's a nice tailwind from prior prior quarters bookings and we continue obviously to see that strengthen the seasonally strong quarter fourth quarter that.
They see there when you move into an election cycle, you're right to a new starts tend to.
The Wayne and it's really a this is where incumbency status rules and given the the vehicles that we continue to win positions on and the incumbent status that we have in a number of the of the big agencies.
That will that will propel our continued strength I believe straight through the the election cycle.
Great. That's helpful and one follow up from there I also ask about your metro market strategy.
Help us think through given it's a key growth growth driver next year can help us think through sort of where you are in that broader longer term journey in terms of the addressable market penetration rates.
What inning are we in where that is to get that will keep giving for many many many years or are you sort of you have a plan and you're penetrating it to some degree yes. So we do have a plan. We are penetrated in I mentioned, we are now at scale at four additional markets I think that puts us in the.
In the mid Twentys and when we look at a at where as a percentage of the total addressable market. We're at scale, maybe in 25 or so percent of the of the Metro markets. We've identified so we have a lot more growth to go there and we're going to be disciplined then as you might expect a lot of that.
That opportunity is in the United States, which continues to show strength in the and the economy and albeit slowing.
And opportunities for us to continue to.
To accelerate our M&A in in that market. So that's that's kind of where we are.
Terrific. Thanks for answering my question.
In terms of.
Thank you.
Next question some may Yankee would definitely please go ahead.
Thank you for taking my question congratulation on another year with double digit EPS growth.
I wanted to maybe step back and ask you more bigger question bigger picture question regarding your.
Position as a consolidated consolidator in industry.
When you look at the opportunities that you have apart from the Metro markets acquisition.
Path that you have been on.
When you look at large.
Larger transactions what are you looking for now versus maybe you have looked that's in the past have you changed the way you look out.
Large.
M&A transactions are you looking for.
Hi, your margin companies companies with more IP or.
Like you've done in the past, where you're looking for companies that you can improve on in terms of margins that have struggled or just trying to figure out your your and also geographically where do you drive there have.
These companies position and my second question is on.
Your revenue growth.
If I if I'm not mistaken the our organic revenue growth excluding acquisitions was four to four on the half percent in the quarter up sequentially again I wanted to know what your views are on that metric are you satisfied with that number or you are hoping to achieve a higher number.
In 2020.
Yes, so maybe I'll start with the last question. There I think there is opportunities for us in certain geographies to accelerate that that are being organic growth, particularly as they look at places like the us we're now the state and local business has stabilized.
For sure we should be attacking more growth I mentioned some of the investments, we're making and our business engineering expertise, which are really kind of our forward engineers. Many of them are former Ceos that are helping to kind of drives that.
Opportunity for that managed it services and we see that opportunity expanding really made throughout the geographies, but certainly bigger opportunities in the us and so thats really has an opportunity now how the pace of that as as you know it's easier to to turn.
Systems integration and consulting opportunities rapidly into organic growth and takes a little harder and longer and you have to be more disciplined on those longer term deals because their 10 year deals you live with those with that deal for a longer period of time. So you need to make that rate for both parties. We have a lot of trust from our client.
And so we're in those conversations so turning that pipeline into bookings into revenue growth is a is something that will take a little more time on that side, but certainly I see that as an opportunity for us to accelerate and you look at the M&A strategy as I mentioned, we're certainly not through on the metro market merger stream.
Gee, there's lots of continued opportunities there, but to your to your direct question on the transformational opportunities I think again that.
I haven't seen it yet.
On the on the larger transformational opportunities on valuation, but I actually believe that we'll see more attractive valuations as the market continues to shift and slow in different geographies, most pronounced right now and in Europe , and what are we looking for its really to increase our depth.
And breadth in the markets that were already in.
That's the that's the main focus yes, it would be to fill out the.
The full end to end services, so we'd be looking for something that has some IP, but also some consulting and systems integration.
Opportunities, we're still looking for managed IP, including in the full that the ability to have full end to end capabilities for these managed shy key which will include some infrastructure.
The.
Elements because.
From an infrastructure perspective, although we've narrowed that down as a percentage of the overall, it's really stabilized and it's still an important element of being our full scale provider to our to our clients. So we're really looking to increase our breadth and depth on the end to end and.
Certainly our belief is that when we look around the market there will still be opportunities when we bring it into the CDAI model to also improve the margins as we go through the integration really in most of those companies that we will be looking at.
Okay, great. Thank you George yes.
Thanks Mary.
Thank you.
Our next question is from Thanos, let's call for both with BMO capital markets. Please go ahead, hi, good morning, George just to expand on your commentary regarding the macro environment you've spoken for some time about the mix shift to manage services from us I didn't see but specifically how is the demand environment evolves over the past three months are there any specific regions you called out where.
Customers have become notably more cautious and they were last quarter.
I would say I don't know if it's been the last three months, but certainly over the last six months.
We have seen that thats shift to be a little more pronounced but you know it really varies and it plays into the strength of our.
Diversity across geographies, our strength diversity across industries, and then of course the services that we offer.
So it's it's it really it varies a little more conservative on some of the ESI and see and more interest in the and the savings associated with manage 80 in Europe .
Little more bullish of course in the and the US Canada is a little bit inbetween from an industry perspective, I would say manufacturing is is really focused on a and getting some of those savings not surprising given.
Some of the the effects of the of the the trade climate has on on manufacturing on the other side financial services are looking to accelerate so more demand for IP and.
And then what's interesting is we see that both in the retail and in the communication sector. The pipeline actually growing for some of our consulting and systems integration services as they look to integrate new technologies kind of there on the second wave. If you will have digital transformation given that their consumer driven.
Kind of on on the on the tip of that.
Looking at more artificial intelligence data analytics.
In into their.
Their portfolios, so and then in communications really investing in Fiveg and the opportunities. It's still early days on that but we kind of see that so I'd say the shift is a little different than than the last economic downturn, where you don't see that.
That strong shift down certainly weakening on the consulting assistant integration, but still demand there, but still the uptick on the managed services. So.
Intermediate term I think the shift will be good for CJ short term there is always disruption in that.
Great and with respect to the actions, you're taking in Portugal, Sweden, and Brazil, you called out the restructuring impact what would be the revenue impact associated with those actions. It's about it's about 20 to 30 million revenue impact.
Out of that.
Out of those operations and.
But again, we believe that we will continue to be stronger because of it.
Okay, and then finally could you update us on the weekend on duration.
Update on the condo.
Grasping, yes, it's progressing well you see it does have some impact on the margins shirt short term, but.
So it's progressing well I've been there too to talk to some of our newest members. We got a new set of a strong leaders and as we went through the business planning process they've been fully engaged in that and again I see that is strengthening our mix as being able to provide the consulting expertise required.
It as part of those broader managed IP engagements.
Great offline. Thank you thanks for the house.
Thank you. Our next question is from Paul Chevy with RBC capital markets. Please go ahead.
Thanks, So much and good morning to set you reiterate the target to double the size of the company have lost or the next five to seven years, you've mentioned that number times can you just provide an update on how you think you're tracking to that goal and what you may need to either keep doing or perhaps change or accelerate to achieved that goal.
Yes. So thanks for question Paul So as I've mentioned in the past to me, it's really the combination of the build and buy so as we approach 5% pure organic growth.
What we really what we're looking for is 5% to 6% pure organic growth you heard this quarter were at at 4%. So that's that's moving along it's not where we want to be need to be in order to get that that doubling but we're progressing along that path quite nicely and on the other side, it's 5%.
6% on the inorganic growth, which would be targeting the 10% to 12% total growth you hear in constant currency. We are at 7.7. This last quarter. So we're we're moving along that along that path and and Thats without I'll remind you without the transformational opportunity with that.
We believe the market is more conducive to so I would say we're tracking.
Pretty well we're not.
We're not where where we need to be where we can be but we're tracking that evolution very well.
Then in regards to that did a aspirations to treat 5% to 6% organic.
What do you see there in your pipeline or from a from a strategy perspective that gives you confidence in getting there.
Well the managed it services.
Those are bigger by their very nature, So think of the systems integration and consulting deal.
Regardless of how important they are to our clients and we've done a lot of that the reason I describe them as tip of the sphere is they tend to be smaller more discreet projects and as you move to manage I T. The opportunities get larger and in the growth. Therefore in some of those deals we take on.
New employees.
Indicee JPY as well and so you can actually accelerate your growth faster. So that's that's what gives me the confidence and were in those discussions thats whats in the pipeline.
Course, we have to.
Work to get them into the bookings and then turn them into revenue, but thats what gives me the confidence.
Okay and one last one from me just forgot to the changes to Brazil, and Portugal, and then add to it I guess the split up in Northern Europe do you feel you at the point, where the organizational structure for the former Logica assets is now essentially essentially fully optimized or asked another way are there any areas in the former logic.
Assets you feel are underperforming your expectations, yes, I would not say that they're fully.
Integrated in with all of the services and you'll see that in a number of.
As far as operating the C.G.I. model 100, 150 per cent operating the model, but there's still opportunities for us to continue to do that and you even C.N. central and eastern Europe , there's still opportunity for us by introducing more IP and other services into the mix. It we can contain.
When you to to operate in that way I'm, particularly pleased you want to look at what was in underperforming asset clearly was a Netherlands operations and that has as I mentioned now the the the four straight quarter of increased revenue growth and margin accretion and there's more.
Opportunity to have now that they're operating in that that mode.
I think and watch mhm. Thanks.
<unk>.
Any question is found on the topic young <unk>. Okay go ahead.
Hi, Good morning, maybe just to clarify some of the short term commas sounds like you're kind of weakness particular in short term signings some restructuring different factors and maybe it just be helpful. Do you think you. The you can maintain a constant currency growth over the next couple corners, I know you don't give guidance, but it's not your expectation.
Yeah, our expectation has to continue to grow and that's what our plans are certainly oriented towards.
The caution if anything is may see a pause and acceleration as we as we worked through some of the the shift in the environment, but certainly a growth is is an important driver for us and we blew can continue then okay. Great. Thanks for that and then you know the mixed driven by renewal.
Expansions, that's a healthy thing you're arguing eight of the top 10, where you know large deals and so is this existing large deals that are rolling forward with some add ons or are you seeing the conversion from some of these short term consulting deals the tip of the spear you're talking about <unk> deals is that.
<unk> or is this just big deals are getting a little to no. It's it's beginning to work. These are some of those were actually conversion from S.I.N.C. work into more elements of a of managed services and like I said there were also add on opportunities there, but it's a mixed but in all cases, it's a it's adding on edition.
Will work in some cases, it's managed services, adding on consulting in some cases, it's system integration, adding on and converting into managed services. So it's a it's definitely a strength and that's why I pointed out okay, and what we can see in the numbers the shift towards the renewals in the shift towards outsourcing and the way that you.
Port the bookings mix. This is these numbers are showing that the strategy working over the last couple of course, you expect to see that trend.
And the numbers continue over the next year she'll be expect to see that we do expect that to continue and as you know our our long term target is to get to that 70% managed a services and and the reason for that in the 30% systems integration consulting just remind you. The reason we do that.
Is that gives us the highest margins, but also the best opportunity for growth. If it's 100 per cent managed services you Miss away. It was 100% systems integration consulting you Ah leave opportunity on the table and so that's why that next right now it's tilting now starting to go over I think it's 53, 54% managed.
This quarter. So you see it toting in the direction, we want but there's a lot of opportunity to can continue to expand that and that's the opportunity as well for expanded a margin.
Okay, maybe one last little question continued a question on the U.S. government. The elections next year I didn't there's some talk about government shutdown, maybe refresh you've said that's a low area of risk for you in the past maybe just refresh satisfy fine yeah I was with our team in a in a federal U.S., just a week and a half ago and.
There is an opportunity that that they don't come to a conclusion here at the end in November and there is another government shutdown.
I'm not it's not clear to me, that's likely but it's hard to determine what's likely anymore in politics, So I'm not a I'm not going to make that that decision, but what I can tell you is what position very well in past in past shutdowns, we've had a small very small impact yeah.
Typically that can be mitigated within quarter, depending on when it happens or a very very shortly thereafter I would remind you most of our work is deemed to me mission critical when a government shuts down it it doesn't mean that everybody stops working and a lot of our work in the managed services and intellectual property.
Can continue even if the if the government isn't working and and then there might be a lag and the cash so I don't see a big impact for us and that's what the team assured me a when I was down there last week.
Great. Thanks, a lot.
<unk>.
Thank you.
My next question is fan Howard and I'm very tests investment.
Ahead.
Good morning [noise].
Good morning, I, just want to ask about the <unk> Oh towards one of your comments you mentioned that in Europe , there was a lot of business.
Through there was interesting cost savings through managed services I.T. in Europe do you find that for those when there was little more kind of price are costs competition or were you able to winning through additional service offerings. Yeah. No. It's a it's a it's a great question and what I can tell you is we are very.
Disciplined as I mentioned these are five 710 year deals and although of course, we want to give the cost savings and we designed our offering to provide those costs savings early in the in the cycle for our clients. It's very important that we design those deals to be.
Also good for a C.G. and so we're not a we don't get into that game in some cases will walk away from deals where it's a short term cost savings an only based on price and not based on really for our clients. The the transformation that they need and so we're very.
We're very careful with that it's why these relationships and this trust and what we've been doing over the last a few years on the systems integration side swipe point that out and so important whereas we're not going to get into that that price game. There are some clients that will will buy that way. That's just that's just reality, but.
We start we tend to stay away from those those types of opportunities right.
Right and and for those claims that that tend to do that are they in a particular factor in Europe or or a particular vertical maybe no. It it varies it it it's usually how pronounce maybe what they what they need and and and sometimes what they you know how they procure but.
Again with with the clients that we're talking to in general we're seeing a a more a different approach given that there in the middle of a digital transformation and they can't just stop that.
No that makes sense. Thanks, and then just maybe when when when fine when for a friend so I for 16, when that gets adopted because at least expense shifts to <unk> <unk>, how is that going to affect jeopardy bit margins going forward.
Oh for sure, it's well lab will Ah I see some of the marginal where all margin will have a.
A little bit tough pressure in the first year or something on the size you know because we'll have we'll have some more and stress had them you know of the death and then the and the future. So so will reverse naturally after.
Button to ask for specific for next year add on it I don't see a very very minimal impact.
As you if you saw the financial statement for sure that that will fall off I 850, yet.
Minion, but you know the impact on their P.N.L. <unk> will be very minimal next year.
Okay no. It's good to know how that turn it back.
Maybe or Valerie we'll have time for a a last question, yeah, and and maybe before we before we do the last question I should correct I I mentioned that we had 800 people in a in sizes, it's really over 600 people and we'll get that revenue number two afterwards as well.
I misspoke there.
<unk>.
Thank you very last question is <unk> with G.M.P. Securities. Please go ahead.
Oh, Hey, guys I think squeezing my question.
George I just guys I was just wondering you know towards you signalled [noise].
Shifting the demand curve, a couple of times and even made a minor comparison to previous downturn yeah.
It sounds like you're also saying that customers are still willing to invest to cut costs rather than cut costs to cut costs.
<unk> is that correct or have you seen the cut costs to cut costs and in some markets and and how long can we expect this short term kind of disruption <unk> and what you're seeing and then the waterfall to that yeah. No no no. That's a it's the right way to to phrase. The question because we are seeing a difference in this cycle, particularly.
As it pertains to I T. So I.T. is so embedded now into the business plans of our clients into the business in some cases. It is the business of our clients, they're cutting costs in other places and they're using Nike cut costs and other places but.
You're absolutely right, they're looking to cut costs and the I.T. operational elements, but they are reinvesting those in the I.T., there's going to drive their business forward. So that's what we're seeing right now pretty much in a in every industry.
Okay, and just to follow up on that is it from your customers is this a reflection of their caution around the macro uncertainty or are they actually seeing a slow down from there and customers.
I think it's mostly I think it's a little both I think it's caution that they have and that they're seeing some of that however, I pointed out the systems integration and consulting a strong in some of those consumer driven area. So I think it's a it's a general caution.
Okay, and I, we holding our breath for for three months six months nine months of what's kind of your your got telling you at the stage well I don't know if if we're holding our breath given that we think that we can actually help them in this environment, but I do think this shift we'll we'll play itself out over the next several core.
<unk>.
Okay. Thank you very much I appreciate take on a question.
<unk>. Thank you everyone. We look forward to having a join US on January 30th for a few <unk> fiscal 2020 results followed by our annual share overeating like there.
Oh.
Thank you.
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