Q1 2020 Earnings Call
Please go ahead Mr. gorber.
Thank you mode and good morning.
With me to discuss CG ice first quarter fiscal tortue toward the results are George should lower our president and CEO and Francois GE Executive Vice President and CFO .
This call is being broadcast on C.G.I. Dot Com and recorded live at nine am Eastern time on Wednesday January 29, 2020 supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our Q1 Mdna financial statements and accompanying notes all of which are filed with broke SEDAR and Edgar and are available for.
Download on our website along with supplemental slides.
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 C.J. disclaims any intent their 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.
This completes safe Harbor statement is available in both our Mdna Ed press release as well as on C.J. Dotcom, we encourage our investors to read in its entirety it to 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 IRS.
Before we also discuss non-GAAP performance measures, which should be viewed as supplemental the mdna contains definitions of each one used in our reported.
All the dollar figures expressed on this call or Canadian unless otherwise noted.
We're also hosting our EG end. This morning. So we hope you will join us live or via the broadcast at 11 am.
I'll turn it over the past one out to review our Q1 financials and then George will comment on our operational highlights and strategic Airport Francois.
Thank you learn and good morning, everyone I'm pleased to share our results for Q1 fiscal 2020.
Revenue was $3.05 billion, an increase of $90.8 million or 3.1% compared with last year.
On a constant currency basis revenue grew 4.8% of which approximately 1.2% was organic.
Your your IP related revenue grew by $38 million and was 21% of total revenue.
Bookings were $2.7 billion for book to Bill, 90% impacted by the general election in the UK and seasonality and your west hurdle.
Bookings across Continental Europe were up sequentially.
Driven by managed services the man, including IP.
Also our pipeline across North America continues to grow notably due to manage services opportunities.
On a trailing 12 month basis booking remain above 100% of revenue totaling $12.4 billion.
The backlog at the end of December stood at $22.3 billion or 1.8 times annual revenue. Despite the negative currency impact of approximately $900 million you over here.
Beginning in Q1, we adopted I have for US 16, this new accounting standard relates to did a recognition oh lease agreements onto the balance sheet.
This strange lowers our cost Upsells and increases our net finance costs, resulting in a non material impact so net earnings I.
I will comment on these variations, including the impact on the cash flow statement and our capital structure. Further details are included in the M. DNA.
Adjusted EBIT increased to $474.1 million up $35 million or 8% from last year.
EBIT margin was up 70 basis points to 15.5%.
Driven by revenue growth across several geographies efficiency gains in our global delivery centers. The initial benefits of optimizing our infrastructure operations and a favorable 9.7 million dollar impact from I probably 16.
Our effective tax rate for a quarter was 26.7 per cent compared to 25.9% last year when excluding the impact on nondeductible restructuring expenses, our effective tax rate was 25.1% within the expected range of 24.5% to 26.5%.
As announced last November we are investing up to $40 million to optimize and restructure our Swedish infrastructure operations to exit, Brazil and to refocus, Portugal, as our near shore delivery Center.
During the quarter, we incurred $28.2 million of related expenses net of tax. We also expense $16.5 million in Q1 related to the acquisitions and the integrations all that Kendall and sizes.
When including these specific items net earnings were $290 million in Q1.
Our margin of 9.5%.
Earnings per share on a GAAP basis were one dollar and six cents per diluted share compared with $1.11 cents last year.
However, when excluding these specific items net earning in Q1 improved year over year to $335 million or 11% of revenue.
40 basis points.
Earnings per share on the same bases were one dollar and 23 cents compared with $1.12 cents last year.
This represents an improvement of 9.8% despite currency headwinds of over two cents.
We generated $465 million in cash during the quarter or 15.2% of revenue.
This represents an improvement of $74 million compared with $392 million generated in Q1 last year.
The year, where you're increasing cash includes $39 million related to the adoption of I have for 16.
Over the last 12 months, we have generated $1.7 billion or $6 on 20 cents in cash per share a significant increase compared with $1.5 billion or $5 at 15 cents from a year ago.
We ended the quarter with Dsos of 49 days down from 50 days last quarter, and 54 days last year, largely due to the evolving business mix.
During the quarter, we are located cash across several strategic priorities $67 million back into our business.
Hundred $56 million, an acquisition, mainly sizes, which goes on December 18.
$70 million repurchasing CDAI shares and we repaid $182 million of long term debt.
Buying back CJ stock has been an accretive and flexible way to return capital to shareholders.
Under the carbon program, we have invested $675 million.
Purchasing 7 million shares at a weighted average price of $97.13.
This represents a return of over 16% based on Yesterdays closing share price.
As such our board of Directors approved the extension of the program until February 2021, allowing us to purchase up to 20.1 million shares over the next 12 months.
At the end of December net debt stood at $2.8 billion, representing a net debt to capitalization ratio of 27.7% up from 19.1% last year largely due to I fries 16 increase excluding this impact net debt to capitalization ratio was 20.9%.
Slightly higher than last year due to increased investments and metro market mergers.
Our revolving credit facility and cash on hand, we have $1.6 billion and readily available liquidity and access to more as needed to continue pursuing our bill and by strategy now I'll turn the call over to George Thank you Francoise and good morning, everyone.
I'm pleased with our team's performance in the first quarter as we continue to successfully execute on our build and by profitable growth strategy.
This quarter's results continue to reflect the shift in client buying behavior towards outcome based engagements as evidenced by 70 basis point increase and managed services revenue as compared to last year.
And our larger managed services offering is resonating in fact, the managed IP and business process services pipeline is up 30% year over year.
However, many of our commercial clients are employing a more deliberate approach to their IP buying decisions as a shift their internal organizational focus to prior to prioritize both agility and operational excellence.
This means that our clients are currently acting most rapidly on smaller more focused outcome based solutions.
For example in the quarter, we were awarded a five year engagement with a new U.S. client in the financial services sector to deliver selective Manish application services security and infrastructure.
This is designed to immediately address and improve the clients equality and security with larger future scope.
Now under discussion.
Technology remains core to our clients business and we continue to be well position for these near term spending trends with both new and existing clients.
The investments we've made in our IP and business consulting capabilities and an IP allow us to offer services and solutions to help clients realize incremental progress on their digital initiatives.
For example in the quarter, we were awarded new work with one of Europe's leading manufacturers to provide agile consulting and enterprise architecture, enabling their digital workforce initiatives over 36 month timeframe.
Another example is a new engagement, though with a large U.S. utility to implement our pragma workflow solution to digitize their enterprise workforce management over the next two years generating immediate efficiencies.
We also see these types of engagements as an opportunity to build even deeper relationships and drive future growth and larger managed services deals, including or managed IP.
As planned this evolving revenue mix combined with their investments and operational excellence are driving earnings growth.
This is most pronounced in our global delivery centers of excellence, which are in high demand by our clients are yielding increasing margins due to our investments in talent tooling and methodologies.
Turning now to the year over year regional highlights of the first quarter I'll start in North America.
In the us commercial and state government segment.
Bookings were 107% or revenue on the strength of new managed services contracts, which accounted for 50% of bookings in Q1.
Bookings were particularly strong in the financial services and utility sectors, both over 130% book to Bill.
Organic revenue growth was 2% driven by scope expansions across some of our largest commercial clients and we continue to experience and improving state and local government market receptive to our IP offerings.
EBIT margin remained stable at 15.1%.
And our US better operations revenue grew by 11.5% as previous quarters managed service bookings and task order wins ramped to their full revenue run rates.
EBIT margin was 13.3% slightly lower year over year due to larger lower volumes and transaction based bps contracts.
And bookings were 60% of revenue.
At the federal fiscal year budget appropriations finalized at the end of December we expect an active procurement cycle in advance of the U.S. selection.
In Canada, despite bookings in the quarter of 60% of revenue candidates backlog remains very strong at four times annual revenue.
Our pipeline of opportunities continues to be robust with a notable increase in the IP pipeline, which is up 40% over last quarter.
Revenue declined in part due to lower infrastructure volumes year over year, while EBIT margin was strong at 22.8% as we are now realizing the positive impact of previously announced actions to optimize our infrastructure operations.
Turning now to our European operations, and Scandinavia revenue grew 25% driven by the addition of a condo.
This is net of the planned run off of lower margin projects, which will total approximately 10% of acquired revenue and is at the high end of the range previously communicated.
EBIT margin was 7.8%, which we expect to continue improving throughout the year as further benefits from the a condo integration and restructuring of the infrastructure business in Sweden are each fully realized.
And bookings were strong at 130% of revenue, reflecting improved ability of the merged operations to address client demand.
And Finland, Poland and the Baltics revenue was stable with a year ago period with continued strength in financial services, particularly in the insurance space.
EBIT margin expanded 90 basis points to 14.9% as a result of an improving business mix.
And bookings were 108% of revenue with increased demand for IP, which was 140 per 144% book to Bill.
In Western and Southern Europe revenue was essentially stable across the region with organic growth in France, and overall strengthened government, but impacted by the strategic actions taken in Brazil, and Portugal announced last quarter.
EBIT margin was 14.9%.
80 basis points, despite one less billable day in France, which is also reflective of an improving business mix.
Bookings were 104% of revenue was strong demand for managed services, which represented over half of the total bookings in the quarter.
And last week, we completed the merger with 90, a France based IP solutions and consulting firm specialized in the retail sector.
I want to take this opportunity to warmly welcome our 300, new members from energy.
Together, we will bring innovation through combined IP and consulting services to retail sector clients around the world.
In the UK and Australia revenue grew 1% with IP services growth and financial services sector.
Our continued market leadership in space Defense and intelligence was further solidified at the ended the quarter with the close of the size this merger.
EBIT margin was 14.7%.
And book to Bill was 69% of revenue impacted by a slowdown in both commercial and government awards decisions largely due to uncertainties created by the UK general election.
With the bright Brexit decision now made we expect a very active period of government procurement to address the backlog of mission priorities.
Price, we expect to see more normalized purchasing activity and the commercial sectors going forward.
In central and Eastern Europe .
Revenue growth was 9% of which approximately 3% was organic EBIT margin increased 10.5% an improvement of 190 basis points.
Bookings were 103% or revenue on the strength of scope expansions for large transportation and retail and consumer services clients in both Germany and the Netherlands.
And in Asia Pacific revenue growth was 10%.
Margin was strong again at 28% driven in part by increase utilization and operational excellence, our Asia Pacific delivery centers are leading the way and realizing the return on CJ innovation investments made in talent tooling and methodologies.
In summary.
We're off to a strong start and continue to position our talent and services to meet current and future client demand.
We continue to see clear interest for managed services and intellectual property solutions in the pipeline.
Given the longer decision cycles for these larger long term opportunities. We are also well positioned to meet client demand for shorter term outcome based engagements. These engagements will drive growth, albeit at a different pace in the near term.
And the benefits from recent mergers as well as our restructuring initiatives will deliver earnings and margin improvement moving forward.
We will also continue accelerating the pace of metro market based mergers with three already closed in the fiscal year and a healthy number of prospects in later stages of the M&A funnel.
And of course, we will continue to consider all opportunities to be an active consolidator in the industry through transformational mergers.
We remain focused on executing our strategic aspiration of doubling over the next five to seven years through continued delavan bye.
Thank you for your interest and support let's go to questions novel, Just a reminder, that there'll be a replay of the call available either via our website or by dialing one 804, 083, 053 and using the passcode six one for Ninesix Threenine until March 2nd we'll also.
Podcast of the call available for download within a few hours follow up questions as usual can be directed to me at five one for eight for one Threethree fivefive.
Mode, if we could pull for questions. Please.
So Tony Thank you, we'll now take questions from the telephone lines.
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We will be fall fall participants, but just a couple questions. We thank you for your patience.
Our first question is from the Stephen Lee from Raymond James. Please go ahead.
Thank you.
Joe just couple of questions on Canada, Leo margins, pushing 23%, what's many large IP in that number or do you view that as most sustainable going forward.
Yes, no actually it didnt it didn't have as much IP and that number really some of that benefit was from some of those initiatives I had mentioned in earlier quarters around or infrastructure rightsizing that and obviously that run down runs down at a lower margin, which increases our margin elsewhere. The some of that uptick.
Really was from those global delivery centers of excellence, we have a number of them here in Canada, and so that was those are in demand and utilization of those go up and obviously those are profitable both.
Beneficial for our clients, but also profitable procedure.
That IP uptick.
His is notable and in Canada and its notable also and the fact is with US financial services companies. So.
All in all.
Canada again that margin is is strong.
And repeatable.
I believe its.
Is that the absolute run rate, probably not but it's I believe we will continue to has strong margins above that 20% Mark.
Okay, Thanks, and Georgia, the IP pipeline I think you said was up 40% we.
Which areas.
Yes.
Well in Canada, specifically, it's in financial services, but but IP as up across the company and a number of areas, including utilities, including in government and also some of our newer ickes, both and utilities with open grid, which we announced but also.
So emerging in the in the space industry. So IP is up across the board, which we predicted and plan for given given that the market that we're moving into.
Okay. Thank you and just one question what are your question for me the organic growth was lower this quarter would you expect it just snap back or should we expect a couple quarters of a one 2% growth.
Yes, I think that in the near term inorganic growth will outpace organic growth. So that pace of inorganic growth is is going stronger but in the near term, yes, theres going to be some softness in the organic growth, but we have some tailwinds on our on our side there.
Thank you.
Thanks, Steve Thank thank you.
Following question is from us on Us Moschopoulos from BMO capital markets. Please go ahead.
Hi, Good morning, George if you maybe summarize the changes you're seeing now in the pipeline and demand environment versus three months ago.
It sounds like Youre seeing customers are being.
Maybe a bit more thoughtful in terms of the size of contract awards, just make sure that correct and has there been any change in terms of the typical duration of contracts or has that been consistent.
Yes, that's a it's a very good question and I tried to highlight that in the opening remarks, yeah. The larger deals are still out there, but they're being broken into smaller deals first and so it's almost a phased approach and so we see more of a selective scope and more of three.
The five year deals versus the seven to 10 year deals Fullscope just to just to highlight that though and I highlighted one in my remarks that that example that we gave that's a five year deal, but it's it's 65 million so theres still outsized, but they're not of the couple of hundred million that.
Those seven to 10 year deals with yield Fuller scope.
Okay and a lot of your commentary was focused on the managed services pipeline. If we think about the science he pipeline.
Are you still seeing a fair bit of interest in terms of digital initiatives or is that slowing down across number geographies in favor of managed services.
Yes, the digital initiatives are still out there, what's what's very interesting, though as we see the digital initiatives. Some of those are coming under the managed services opportunities.
And it really is kind of both ends of the spectrum investing as we've been talking about investing a little bit more right now and the operational efficiencies so that they free yes. Some of the funding for the digital initiatives, but certainly slowing the pace of the spending on the on the deck.
But as I mentioned, a number of times, we're only we see our clients are only about 10% what they say are actually completed with their digital initiatives and getting the returns and so that's that's causing them to take a more deliberate approach, but it's not changing overall there there go forward landscape of.
It is core to my growth in the future and digital is core to enabling that.
Great and then finally in western and Southern Europe , You mentioned, France had organic growth, but there was obviously the impact from the restructuring in Brazil in Portugal might you be able to quantify the revenue impact in the quarter from the restructuring.
Do you have that.
Number we had one less day and we had the youre talking on the revenue side on the revenue on the revenue side for Western Southern Europe , Yes, yes, it's a three to 4 million okay.
Great. Thank you thanks status.
Thank you I'll. Following question is from their Yaghi from Desjardins. Please go ahead.
Thanks for taking my question I want to go back to maybe just a question question on on the pace.
Organic revenue growth on the last call George as you said.
Do you expect to the pause in the acceleration.
In revenue growth organically, but.
What's in your view was.
The reason for.
The growth come down from four to let's say you want to half in one quarter. It's it's a it's kind of us, it's a sizeable change and and the pace of growth and I'm trying to figure out.
How is it does get back into the three four type range that we saw in the last couple of quarters and also.
Second question I had is when you look at.
The metric that I looked at in terms of.
Book to Bill, which is the last 12 months book to Bill Thats been declining since.
September quarter September 2018.
And we're getting close to hitting the one point.
Here and.
Okay and management has always also said that this is a metric that you guys are care for care more floor, because it's it's kind of it it's a barometer for the health of the business that is coming into the pipeline. So what is being done to improve that or are we should we expect that number to turn into.
Lower than one and the next couple of quarters.
Yes, no. Thanks, thanks for the questions Merit, So maybe I'll start with the the second one first on the.
On the bookings and what you've seen over the last several quarters, you've seen an uptick in essays CNS AMC comes in at a lower.
Lower bookings level. They managed services you've seen that I highlighted that as you looked at our revenue kind of.
Follows that trend our bookings follows that trends.
Yes, I'd see anything over 100% is healthy.
As you move to managed services you drive a higher book to Bill.
And a lot of other good.
Qualities as associated with that mix of business, we want a good mix of business, we are a little bit overweight on ESI and see we're moving more to our traditional managed services, which is where you'll see that pipeline come up however, and the reason I I talked about the.
Cause in the acceleration of the growth is they don't move with exact perfect time.
Decision, making on ethane see is faster decision, making on managed services. It takes a little bit is a little more deliberate.
As I as I highlighted and we're filling that gap through a number of different tailwinds right. So that we're filling that gap and now moving into the end of the gross part of the question you're filling that gap you see through the recent mergers picking up the pace. We're excited about the opportunity to spread the IP in the media the space.
Even the government ERP and the retail distribution side spread that through the broader CJ channel. So that will be a nice tailwind for both the inorganic growth that comes on with those but also organic growth as a as IP gets a it gets spread across the company.
The spending though approved in the U.S. government, placing UK, that's a tailwind for growth because in fact government demand goes up and the climate that we're going into a lot more spending on domestic and social programs and just to remind you and I am sure you're aware this but one third of our total revenue does.
From that government that comment kind of comes into a counter cyclical governments structurally move a little slower and of course when you don't have a government in place like we had in the UK or don't have the spending bill in the us that kind of impacts that that has the biggest impact on our book to bill So the book to Bill.
Even in the quarter would've been 100% without the downdraft of those two units alone and we know why that happened in the short term.
We're playing into the more selective managed services opportunities, which is why I highlighted that.
Fill the gap before they make some of those larger decisions and but what you will see as inorganic growth outpace organic growth in the near term, but will drive some of that agreement organic growth in the future. So oh no. It's not unexpected it's what I talked about last quarter, but we see the bookings follow.
In the pipeline, particularly given the the Tailwinds that I mentioned, I think bookings and growth in the intermediate term.
Returned to where we where we went on to date, it's a different spending pattern. This is why I also talent our end to end services.
And then also why we talk about the portfolio that we have across our 10 industries because every industry doesn't buy at the same at the same pace. So that really gives us the the confidence moving forward.
Just a follow up and so in terms of the organic revenue growth Tailwinds that you talked about how I know, you're not going to short term guidance or even medium term guidance, but.
How long should we see not wait to see those tailwinds to help the organic revenue growth and my second by just follow up question on.
The buyback one when you start to see the return on.
Investors invested capital or return on equity.
Coming down.
And now this is the first quarter that we see this happening, but that's the first time, we see it's happening since 2017.
Does that change how you view your stock buyback strategy.
So first question you're correct, we don't give guidance, maybe a France why you can talk a little bit about the impact for US 16 also yeah. So for sure the.
The first 16 had a small impact on the return on the within.
Our IC.
So.
Even if it went down the majority is related to that.
That said.
We still think that.
Our.
At least when you're comparing with some of our competitors that.
It's still a very good value share price of C.G. and like I indicated we did some share buyback a lot of share buyback last year.
Close to 30, 435% of our and see IB and that was with return of close to 16% from the on the share price also we still think that that's a good so good investment.
Okay. Thank you.
Thank you.
Thank you I'm. Following question is from Richardson from National Bank Financial. Please go ahead.
Hi, how are you.
Just wanted to sort of go further out of these.
Change and the nature of some of these deals on the smaller size because your clients don't necessarily I understand the technology is viewed as a way of mitigating risk or is some other reason behind that.
Yes, I think I think some of it is given all of the change that our clients are already going through.
Many of our clients are doing M&A themselves in order to to chase some of their growth that they need for for their organizations, which obviously is an intermediate opportunity for us, but a different opportunity and causes them to look internally and then.
It was something my opening remarks on I think it's more of that they're going through a lot of change one of the biggest.
Insights that we received from our voice as a client, which I have outlined here is one of the barriers the biggest barrier.
Not receiving the benefits from Digitization efforts, it's not the technology is the people, it's the culture and so as you take kind of the I look at that.
It causes them to be as I mentioned, a little more deliberate, especially given all the change so they actually get less overall savings the client, but they they enable themselves to kind of maybe digest the change in a different way. That's your discussions we're having and Thats why I also highlighted the discussion doesn't end there.
Right. The discussion still says I want to do the bigger longer deal I got to get I get my my organization under control first it's still gives CGS increase utilization and drives a higher margins as we see the shift and you're seeing that.
I mentioned, it gives us deeper relationships and proof points to gain those future larger scope, but they're not going wholesale over to that I think thats. The maybe whats pronounced in this slowing economy versus dropping off the edge economy that we're in right now.
Okay. Thanks.
To.
Infrastructure as certain reenter the mdna and I noticed.
Budgets are run off and you made comments about it.
Earlier.
Thats, probably a bit of a drag on the disposal wells. So when it comes to those run offs, where do you think we are right now in terms of.
One that will land.
Near the end of that.
Process.
Yes, it's a it's an interesting one because it continues to it continues to evolve.
And is still a very important part of our business. It's just an evolving part of our business, we're actually increasing use of infrastructure.
As it relates to software as a service for our own IP and our own.
Private cloud if you will so we're increasing actually investments as we move towards that we're doing more and more infrastructure advisory maybe getting back to your opening question about.
Clients really taking a look at where they do and don't want to use public cloud private cloud and what their what their posture is when it comes as cyber security and data privacy and particularly in Europe . So so our infrastructure advisory is growing but then of course, there softness and the.
Other parts of the infrastructure business and so as you kind of structurally have to address those changes we're doing that on the on the slide that you see some of the impacts of that.
So thats whats going on the infrastructure business can I say that we're through that so we're we're through the first round now we're in a second a second round as as that shifts again, there'll probably be one more around but just just to remind you and I don't want to misspeak francoise percentage of current businesses.
That's infrastructure today.
It's still a you know.
12% of revenue, but again thats still down from 15% to 20%. It was not that long ago. I don't think it'll go below 10%, it's still important part of our our business. Okay and just one last one from me with respect to your comments on inorganic growth.
Should we read that doesn't mean.
El Pais, because pace of organic and floor.
We expect to pick up the pace of acquisitions.
Probably a little both.
We're picking up the pace of acquisitions for sure. So so that number should go up to fill some of the gap, but as we discussed on on all the.
All the growth, there's just a well take a little bit more time to get that organic growth back as this shift plays its way through there will still be organic growth I believe but it wont wont be certainly accelerating even from here.
Yes.
Okay, great. Thank you.
Thank you.
Following question is from Robert Jones from Canaccord Genuity. Please go ahead.
Hi.
And just pick up in the last line of questioning there is any change.
You see in the Metro market strategy first.
Would pick up on M&A imply targeting larger.
Acquisitions, and then maybe the second piece of that would be around the valuation landscape Fs if I.
The consulting side of the business is little bit weaker are you seeing pressure.
That is driving lower valuations.
Yes, no. That's a good question. Thanks, Robert the Metro market strategy is still what we believe we can pick the pace up on and and bring some more of those into the business pipeline is up.
As far as as far as the pressure on the pricing really seen that maybe part of that is because we're very disciplined and what we're looking for you can see that to the last three had had intellectual property you're going to see more that.
Moving forward so.
When you when you're talking about IP don't necessarily see the pressure that I talked about on the on the systems integration consulting side, but.
Overtime, we probably would see some of that but we're going to we're going to be very disciplined.
Even as we accelerate the pace. So you won't see any lack of discipline there as we do that but given the growing pipeline and given the opportunities out there in general we believe it's a good time due to continued consolidate on the larger deals. It does not read that increase in the inorganic growth does not require any of the trends.
Promotional deals.
We continue to look at those opportunities. However on the on the larger deals. The overall pressure probably does overtime create some price pressures and opportunities for us on those largest deals.
Okay, Great and then maybe just talking a bit more about the the pipeline you said it was up 30% you talk about is that a sudden jump here in the quarter or is that something you've seen over time.
And if you can break that into cohorts.
Potentially you said that there are some longer deals seven to 10 years smaller deals five to seven and then there's the the shorter term.
Is there any way to break that sort of growth in the pipeline up into those sort of cohorts.
Fair to scrap the yes, so that the pipeline increase I'm talking about is really year over year and its print at most pronounced in those managed IP deals so thats really what what I'm referencing there.
The managed the pipeline for the ESI and see is relatively flat, but the the IP and the managed services deals.
Our up by the nature of those deals given that there they're longer deals.
Tend to be larger deals even those that art full scope are still 50 to 100 million dollar deals. So that's what drives that pipeline growth and of course, the full deals are in the hundreds of millions.
That pipeline is most pronounced actually in government and retail right now.
And because it seems like Theres, a little bit of a change happening.
And the way your customers are looking at these deals it does that imply.
Bookings gap.
As you make some of these longer deals obviously can have longer sales cycle and so maybe you can talk about what you expect them bookings over maybe the next year is there any way to.
Talk about a potential gap.
Yes, I don't necessarily say gap like I told you the a and France spreads will actually pointed out.
If you take UK and federal out we're at that 100% even in the quarter and so we still we still believe we can get the bookings and demand should be picking up.
With that with some of those big uncertainties behind us and UK and us federal which tends to be very lumpy anyway. So that's why I highlighted we're playing into the.
Into the market and we're going after some of that select ASCO.
Even as we present, the full offering which come with those those very largest deals so.
That's that's kind of what I see happening I'm not necessarily seen any any big gap there okay.
Okay, great. Thanks, yes.
Thank you.
Following question is from Ramsey El Assal from Barclays. Please go ahead.
Hey, guys that had been British on for Ramsey I wanted to circle back on M&A expectation for the you're not understanding you don't give guidance on the last quarter, you sort of talked about the longer term directory is being like 5% to 6% organic in 5% to 6%.
Inorganic so with that in mind would we maybe would be reasonable to expect that Tom.
This year the revenue contribution from acquisitions might be above that range or the high end of the range or is that protects asking too much well yeah. When it when I talked about the 5% to 6% organic and inorganic thats certainly the target to have that balance growth, which is why.
We put out the aspiration to double in the five to seven years. So that's really where that comes from that's that's the target I.
I think we would reach that target faster on the inorganic then the organic given everything else. We just discussed here, but that said that remains the target where we're heading towards.
Yes.
Okay.
And then Andy you asked just given you've been through a number of.
Presidential elections can you just give us an idea of the timing of like when you would expect revenues to kind of tick back up as one of the spending decisions are made and contracts are kind of signed or renegotiated. What can we expect to see in the next couple of quarters kind of the pacing of improvement there yeah, well actually revenues were extremely strong and us federal based on on prior.
Prior bookings and of course that will continue what I was mentioning is the bookings were impacted by not having a federal budget. So what we see typically is there will be a lot of spending.
In the run up to the election and Thats, what I talked about that spending is get things in place because when there is a presidential transition.
There's different priorities and everything kind of stalls until the new.
If there is a presidential transition I should say than there is a until the new leadership gets in place. So what you usually see is run up than a bit of a pause and I'm talking about the bookings now and then and then run up again as the new priorities get put in place.
The run up that happens down Im talking about bookings will allow us to continue to have the revenue.
Growth and stability straight through that caused period.
Thats, what we see typically an election cycle, which is why I would.
That's very helpful and if I can sneak one more can you give us some color maybe just the expectations for the eye for 16 impact on margin over the course of the year.
Hi, France was mostly at the same EBIT when we said 9.7 million for the quarter. So its 0.3 on on on the EBIT margin. So you can expect for the EBIT margin to continue like that so nine $9.7 million to $10 million per quarter.
For the net earnings like I was saying it's marginal.
Got it because again, we have more interest expense so it's really.
In the geography of the can now were whereas changing.
Okay. That's helpful. Thanks, so much for taking my questions sure. Thanks, Brett Thanks.
Thank you.
Following question is from Paul Treiber from RBC capital markets. Please go ahead.
Okay, Thanks, very much and good morning.
Just one or hoping that you can elaborate on your comment about seeing more demand for global delivery centers. There was an article I would a couple of weeks ago, indicating the C.G. I plan to higher 15000 people on India can you just comment in terms of that strategy I think previously in the past you called the near shore strategy are you seeing more demand.
And for offshore in particular in terms of India as opposed to.
Well you typically called in the past near shore.
So it's a great question and it a lot of this goes back to the mix of business and the evolving mix of business as the business evolves from more SNC and I've been highlighting that we've been talking about it in fact number of you asked me maybe even you yourself. Paul asked me what are you going to see the shift and what does.
I mean, I said, well not rooting for the shift because we're playing into this market, but when that shift happens it will be a it would be very good for us. So as this shift plays out for us it's not happening as fast as any of us we'd like to see but it is happening asset shift plays out the managed services deals allow us to.
Leverage that go with delivery centers in a different way than shorter term S&P projects allow us to leverage that we still leverage them, but not in the same way. That's why they are in demand and of course, that's exacerbated by the fact that in most of the major Metro markets, obviously, there's still a talent.
Shortage for it.
Particularly for our clients in getting access to IP, and that's where they come to firms like see JPY. They have a broader footprint to be able to add to access that talent. So that's what we're playing into so a lot of this is inter related we talk about the bookings when we talk about the.
The revenue we talk about the and certainly we'll get to this when we talk about the margin because as we've always talked about the reason we wanted to get back to that 30% as I see and 70%.
Managed services recurring revenue is that comes at the optimal.
Margin mix for us and of course, we're now shifting towards that but just barely were a little over 50%, whereas a year ago, we were we reversed in under 50%.
Yes.
Yes, that's very helpful.
I mean, just going a bit further so it's hard to clarify the I mean, you you're not selling it on an hourly rate. If it is managed services you're delivering.
Again stay a larger contract and so in terms of like your offshore resources being one of you seen in terms of profitability or in terms of performance in terms of delivering projects on time on budget versus other regions Yep well, that's that's why I highlighted our Asia Pacific.
Delivery centers. It really is a combination of investments we made.
In talent tooling and methodologies because of course, we're moving to agile methodologies ourselves with all of our own IP and the way we deliver these projects leveraging the tooling so that all drives the higher.
The higher margins.
Of course, the managed services deals because we're not selling them on an hourly basis dries up utilization, which I highlighted and you've seen that play out you see it specifically in our Asia Pacific delivery centers, but as I mentioned some of that strength in Canada is the same way and the onshore delivery centers same thing happen.
In in the U.S. and in other regions around the around the globe. So that's that's phenomenon is playing out everywhere and we'll continue to play out as you drive more managed services, while we say that optimal mix drives us a higher utilization and and lower cost of sale.
Sales, which ultimately comes with a higher margin better price point for our clients savings for our clients but.
Margin growth for us, which is why that specific offering is resonating with our clients in the current environment.
Okay and then one last one from me you mentioned earlier on the space market assay opportunity now that the size since acquisition has closed no. Perhaps you can comment more directly on what you see we like what we are or your capabilities in the space market prior to that acquisition on what do you see is the long term growth opportunity.
In profitability that segment, yes. So.
It's actually not as much I can say about the current space work other than to say it is size. So with sizes now we have approximately 1000 people in.
In the European space environment, We don't we're not as big and in North America, but most of that right now is for government and therefore it comes with its own.
Confidentiality and because it's it's.
Is that kind of work, having said that we think the opportunity as as a lot of those technologies move over into more of the commercial world, which they are not particularly from a firm and data perspective, our expertise.
Not directly but certainly indirectly can be leveraged to to expand and of course, you know that U.S. government perspective is also investing this of course, we're already leverage that from government, but we do see that will bleed over into commercial and in a bigger way, we're not just talking about.
The long must we're talking in a more ubiquitous way.
Thank you.
Thank you.
Ill. Following question is some oh, one long sometimes just investments me such please go ahead.
Thanks, and good morning.
Sure. Jeff you gave some color earlier about how assigned see the close of that drives a little lower book to bills in the past few quarters.
Well with managed services contracts also gains short or is that also a factor in lower book to Bill.
Yes that that plays into why it's not accelerating as fast as we see the pipeline. So that's that.
We'll see that transition over from pipeline to to the bookings, maybe a little bit slower because of that but you will see a transition over and and then we'll see some of those larger deals overtime as we get the proof points as our clients get through the change that they're going through and what we should see.
Those.
So the rate in the future so but again in the in this specific quarter.
The biggest the biggest downdraft really where the UK annual center.
Right. So it's low it's just lower orders from there yes.
Yes in terms of yes.
And and I guess, just one on for France, while maybe just in general and I for 16.
Impacting EBIT.
EBIT and EBIT margins, when you're evaluating your business segments and their performance how would that factored into.
How you evaluate their performance.
But for sure we are taking that into account and the growth for the growth of the between the business units. So were restating what this relooking at the versus their budget like if they would have I have for US 16, and again also they need to understand.
The impact when they're negotiating and new Lisa and the future.
Okay.
And then just maybe one more for plans, while I find the segment disclosure.
In the Mdna Theres now in elimination line in the revenue in the.
Geographic revenue by segment note that just mainly from the offshoring like in elimination.
Offshoring and some of the activities at corporate in all some corporate support that is done by by the business unit like Youre, saying like in India. So so thats, what we eliminated.
Okay, So theres sort of seems rather than some of them. Okay. Great. Okay. Thanks Salah pathway.
Thanks, Howard or mode, I guess I for one more question.
Thank you all last question is from Deepak Kaushal.
The fall JMP. Please go ahead.
Oh, Hey, guys. Good morning, Thanks for squeezing me in I know its.
Hey, Jim day, so I'll try to be thank you.
It's a quick follow up to Rob's question earlier on the gap.
Well when we're thinking about these larger managed service deals are you expecting steady state of closing these starting now or do they start kind of 612 24 months from where we are today, yeah. I think it's it's continuous it's a phase approach we've been having these discussions already for two.
12 months, plus and and so we're seeing those resonate more as the economy plays out the way we expected too so it's not like we're starting now.
We've already been we've already been doing that.
Actually thats why I highlighted this this quarter that.
Given the change going through there being even more deliberate.
But we would expect to see those happening.
Really continue moving forward, okay, and when and when you when you talked about kind of the hopscotch three to 500 pieces, starting but waiting on the six to 10 portion of that.
What kind of gives you confidence that they'll follow on with the six to 10 year piece of that are they giving your visibility into the full scope with it the tenure project, but only contracting half of that are things changing so fast that there is still not sure what's going to happen in the outbound.
Changer probability of a follow on yes, so it's a little of all the above but we do get the visibility.
We are discussing in many cases will do actually.
A proof of concept on the full scope and there will be explicit.
Going to start with this smaller scope. So we've already done some of the leg work on that and we're gaining the proof points and of course, that's part of my confidence is.
If you look at our delivery track record.
Over the years.
You look at the client satisfaction scores and the loyalty scores.
Once we are in delivering for the client.
That gives us the confidence that the bigger scope will be there.
And and quite frankly, this started with some of that assigned see work, which I had been talking about you build a relationship through the systems integration consulting get the opportunity to have the bigger discussion you lose some of that to managed services overtime you move the larger scope.
Okay, well, thanks again for taking my questions guys. Good.
Good day, Jim. Thank you Thanks, Steve talked to thank you everyone for joining us hopefully, we'll see up the GM and we'll see about your for next quarter April 29.
Thank you thanks.
Thank you.
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