Q1 2021 CGI Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the CGI first quarter fiscal 2021 conference call I would now.
I'd like to turn the meeting over to Mr. Mayer Yaghi Vice President Investor Relations. Please go ahead Mr. Yockey.
Thank you Sharon and good morning.
With me to discuss Cgi's first quarter fiscal 'twenty 'twenty. One results are George Schindler, our president and CEO and Francois Boulanger Executive Vice President and CFO.
Call is being broadcast on CGI Com and recorded live at nine a M. Eastern time on Wednesday January 27th 2021.
Supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our Q1 MD&A financial statements and accompanying notes all of which have been filed with both SEDAR and Edgar.
Please note that some statements made on the call may be forward looking.
Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise.
Any forward looking statements, whether as a result of new information future events or otherwise the.
The complete Safe Harbor statement is available in both our MD&A and press release as well as on CGI Com, we encourage our investors to read it in its entirety.
We are reporting our financial results in accordance with international financial reporting standards or Ifr S.
As always we will also discuss non-GAAP performance measures, which should be viewed as supplemental the MD&A contains definitions of each one used in our reporting.
All of the dollar figures expressed on this call on our Canadian unless otherwise noted.
We are also hosting our AGM this morning.
So we hope you will join US live via the broadcast at 11 a M.
I'll turn it over now to Francois to review, our Q1 financials, and then George will comment on our operational highlights and strategic outlook Francois.
Thank you my error and good morning, everyone I'm happy to share with you the results our first quarter 'twenty 'twenty one.
Our results on a quarter demonstrate the ongoing resilience of CGI its business model and the relevance of the services, we provide for our clients despite continuing pandemic related shutdowns.
Overall, we are pleased with our first quarter results as we turned the corner on revenue while at the same time saw strong growth in our bookings profitability and cash generation.
We delivered revenue of $3 billion down one, 2% when compared to last year, representing a constant currency decline of three 6% year over year.
This is an improvement over last quarter, where we saw a $4 five per cent decrease year on year.
As we mentioned last quarter, we continue to expect a gradual improvement in the months and quarters ahead and reiterate our expectation are returning to revenue growth in the second half of fiscal 2021.
Total bookings were 23, 5% year over year, representing $3 $4 billion in new contracts for a book to bill on 113% of revenue.
Lifting our trailing 12 months book to Bill to 103%.
New business was 28%.
38% of bookings.
The increase from the previous quarters, 22%.
IP bookings in the quarter were up 58% year over year.
<unk> was 21% of revenue in the quarter the same as last year. Despite the continued pressure on lower transaction volumes in both payroll and travel related services due to the pandemic.
Our global backlog remains healthy at $22 $8 billion or one nine times revenue.
The vast majority of which is comprised of long term managed services engagements.
Adjusted EBIT in Q1 was up four 6% from the year ago period at $496 million, while EBIT margins increased to 16, 4%.
90 basis points compared to Q1 last year.
The year over year increase was mainly the result of savings from our restructuring plan low.
Discretionary expenses and the benefit of synergies achieved through the integration of prior year's acquisition.
As highlighted last quarter on our restructuring costs, including actions taken in response to the pandemic.
Total of $155 million and were completed during our fiscal year ended September 32020.
As such I'm pleased to report that we did not incur any additional restructuring costs this quarter and do not foresee additional pandemic related actions at this time.
Our effective tax rate in Q1 was 25, 9%.
This compares with 25, 1% last year, when excluding integration and restructuring expenses.
This is within our expected range for the year.
Net earnings were $343 million for a margin of 11, 4% and diluted earnings per share were $1 32.
Representing an increase of 24, 5% year over year.
Excluding integration and restructuring costs net earnings were $347 million for a margin of 11, 5% and diluted earnings per share were $1 33 compared to $1 23 in the same quarter last year from an accretion of eight 1%.
We continue to generate strong cash flow.
In the quarter cash provided by operating activities was $597 million or 19, 8% of revenue representing an increase of $132 million compared with Q1 last year.
This improvement was driven by a DSO of 44 days compared to 47 days last quarter.
For the last 12 months cash provided by operating activities was $2 1 billion or 17% of revenue.
In Q1, we continue allocating capital with discipline.
We invested $56 million back into our business largely in IP and managed services engagements.
After a pause in the last two quarters, we resumed share buybacks in Q1 investing $436 million for the purchase and cancellation of $4 7 million shares of CGI.
And in line with our build and buy strategy, we acquired the <unk> professional services division, enabling us to deepen our presence within the Columbus, Ohio Metro market.
Net debt to capitalization decreased due to a higher level of cash generation from 24% in Q4 to 23% at the end of December.
Consistent with previous years, we reviewed our capital return program to formulate the most effective capital deployment strategy to maximize shareholder returns.
Buying back CGI stock has been an accretive and flexible way to return capital to shareholders.
As such our board of Directors approved yesterday, the extension of the program until February 2022, other wing us to purchase up to $19 2 million shares over the next 12 months.
Looking ahead, our cash allocation priority remains the same which is to focus our investments on growing our business.
With cash of $1 $7 billion on hand, and a $1 5 billion revolver that remains fully accessible.
We now have $3 $2 billion readily available to pursue this profitable growth strategy.
Now I will turn the call over to George to provide more details on the operations and on the outlook for our business and markets George.
Thank you Francois and good morning, everyone.
We started fiscal year 2021 in a strong position as a result of our team's trusted client partnerships quality project delivery and operational excellence.
In the quarter, we delivered on our plan to preserve and expand shareholder value with continued margin growth and EPS accretion.
Our notable cash generation in the quarter reflects CGI is resilience and increases our capacity to invest in accelerating our build and buy profitable growth strategy.
Rising client demand that began to materialize last quarter continued upward trend during Q1, the overall uptick in demand was evidenced in our Q1 bookings, which were again over $3 billion up 23, 5% year over year.
Our diversified mix of services continued to be a key contributor in achieving our strong financial results.
Notably systems integration and consulting services bookings increased in the quarter, indicating an emerging rebound for project related Digitization services and driving increases in hiring and therefore, the related near term revenue outlook.
These services are largely focused on helping clients quickly reposition to meet evolving customer demand.
Such as implementing cloud native supply chain components for one of Europes largest payment providers modernizing our Canadian retailers ecommerce platform, while reducing related costs by over 60%.
And leading an ERP system migration to a public cloud model for a large north American telecommunications client.
In addition over half of our revenue in the quarter was from managed services and IP engagements, including SaaS based solutions.
Overall existing clients continued to turn to CGI as their partner of choice as we achieved a renewal rate of over 95% driven by managed services bookings to help enable business agility and digital transformations for our clients, while simultaneously delivering cost savings.
Consistent with last quarter, we not only sustained our incumbency with these enterprise clients. We were also awarded new scope growing our market share. These awards included new Digitization initiatives. For example, the CAE a Canadian client for nearly 30 years, we recently expanded our strategic partnership to include New server.
As such as third party ERP cloud migration.
And with a U S financial services company, we renewed a 25 year partnership based on CGI as collections 360, IP, along with added services to transition into CGI as private cloud and integrate with their hybrid cloud environment.
Now I'll review the Q1 regional performance highlights starting in North America.
Across our U S segments demand remained strong in both the commercial and government industries with the combined U S bookings growth in the quarter or 14% compared to last year.
We renewed and expanded several IP related agreements in the government sector, including with a U S. Midwestern state for modernizing their financial ERP system on CGI is advantaged platform.
And in U S Federal with the Department of Homeland Security, where we won a position on a new frame agreement to provide our federal financial accounting expertise.
Revenue and adjusted EBIT were mostly stable across our U S segments with some impact from moving a higher proportion of projects to our global delivery model as well as lower volumes and transaction based IP, resulting from pandemic shutdowns.
As more citizens receive vaccinations in the months to come we expect these transaction based IP volumes to gradually improve along with the overall demand for add on.
Services.
In Canada, we see signs of demand recovery with a particularly strong pipeline increase of 36% in the financial sector and are hiring increase of 14% with expertise in digital technologies, both on a year over year basis bookings were 92%. Despite some client decisions pushing out.
On the quarter.
EBIT margin percentage increase in the quarter to 23% while revenue was primarily impacted by expanding client use of global delivery.
Moving now to the U K and Australia bookings were strong at 120% book to Bill as the team continued to win New awards, particularly in the government sector, we see demand and government digitization centered around agile Dev ops hybrid cloud and CGI smart cities IP and the associated.
Managed services.
Margin continued to expand reflecting an improving services mix, while revenue was relatively stable.
And now moving on to mainland Europe across Western and Southern Europe bookings were strong in the quarter at 129% book to Bill and further supported by our strengthening pipeline for the government manufacturing and utilities sectors up 45% collectively.
In retail and consumer services, one of the most impacted sectors by the pandemic, we are seeing positive signs for demand as clients refocus on rapid digital transformation.
CGI is positioned as a market leader in this sector with our end to end retail suite of IP solutions, which incorporates retail 360 and solutions from the recently acquired <unk>.
We saw positive improvement in revenue and EBIT on a sequential basis, although the pandemic and subsequent economic impacts continue to effect some clients and consequently year over year Comparables.
In central and Eastern Europe revenue margin and bookings all increased year over year due to a rebound in demand for digital initiatives, particularly in cloud automation and modernization projects.
Going forward, we see growing opportunities for IP in this region building on recent wins in payments and pension administration.
From an industry perspective demand is also beginning to return in the manufacturing sector and continues to be strong in communications and government.
The pipeline in these sectors increased by more than 50% compared to last year.
In our northern Europe segments bookings for the quarter was strong in both the Scandinavia, and Finland, Poland and Baltic segments at 131% and 126% book to Bill respectively.
EBIT improved in both segments compared to last year.
Reflecting operational excellence initiatives. Despite continued revenue impacts due to the pandemic we.
We see demand gradually increasing in the retail manufacturing and government sectors and the areas of cloud cyber security and managed services.
Finally in Asia Pacific, both revenue and margin improved year over year, our balanced onshore nearshore and offshore model continues to generate demand globally as clients seek to increase their digitization and scaled agile initiatives through a balanced delivery approach in fact higher.
Hearing on a quarterly sequential basis is up in this region by 14% now reaching pre pandemic levels.
The strong bookings in the quarter and positive sequential growth trends underscore our confidence in returning to growth in the second half of the fiscal year.
Looking ahead, given positive trends for it services, we expect demand will only intensify across most industries in fact in some of the industry's most impacted by the pandemic, we see increases in sequential pipeline growth, notably in manufacturing and retail and consumer services.
Demand has remained high for the government financial services and utility sectors, all of which had year over year increases in bookings and strong pipelines.
<unk> is well positioned to help our clients modernize and digitize, we will continue to make investments in line with our cash allocation priorities to drive profitable growth through both build and buy.
This includes investments in our people investments and the innovation of our services and investments and acquisition.
As a leading professional services firm, we believe attracting and retaining talented people is the most important investment we make.
Our ownership culture is a key differentiator and retaining the best consultants and experts in the industry today, 86% of our employees. Our owners. Therefore, we continue to prioritize our ownership programs as well as investments in training, our consulting skills industry domains and new technologies.
During this challenging time, we were also proud to provide industry, leading health and wellbeing programs to all employees around the world as we continued to prioritize their health and safety.
Innovation in our services spans our end to end portfolio, where we are prioritizing investments in high demand areas to help modernize clients technology supply chains, such as cloud transformation machine learning low and no code platforms and cyber security are.
Our plans include investing in our existing IP business solutions to maintain and advance our leadership position in areas, such as trade payments, well collections and government ERP as well as new solutions for example, in telehealth and energy transition.
We are also reinvigorating our third party partnerships with the ecosystem of technology providers and platform companies.
Importantly, we continue to invest in longer term larger managed services opportunities and the business engineering and consulting experts needed to secure these engagements.
We are also pursuing the buy side of our profitable growth strategy with a growing number of active discussions in the pipeline.
As Francois mentioned in the quarter, we acquired the professional services division of H M, B, which deepens our work with commercial utilities and state government clients in the U S Midwest I.
I would like to warmly welcome the 165, new members from HMD.
We continue to see industry consolidation, providing additional opportunities from metro market and transformational acquisitions, we have the operational strength and financial capacity to move quickly with discipline on the right opportunities.
As always our investments are designed to return value to all three of our stakeholders, our clients employees and you our shareholders and.
In line with our core values, we also consider how our investments benefit the communities, where we live and work for.
For example, as a signatory to the UN global compact and to formalize our long standing environmental stewardship efforts around the world, We recently announced our global target to be net zero carbon emissions by 2030.
We are proud to be one of the few firms with the scale reach capabilities and commitment to our clients global partner of choice delivering with insights our clients can act on our.
Our strategic aspiration remains to double the size of the company over the next five to seven years.
Thank you for your interest and support let's go to the questions now from here.
Thank you George asked a question.
Thank you George just a reminder, that a replay of the call will be available either via our website or by dialing one 850, 58592, 056 and using the passcode 701, 890 191 as well above cast of this call will be available for download within a few hours follow up.
Questions can be directed to me at 5144153651.
We are ready to take some questions. Thank you.
If you would like to ask a question at this time. Please press Star then the number one on your telephone.
I would like to withdraw your question.
First question comes from panels from southwest with BMO capital.
Hi, good morning.
George It sounds like the customer spending priorities. We're initially focused on cost cutting in the initial months of the pandemic and from your commentary. It seems like there's more of a focus now on on digital would you agree with that.
If that's the case, what does that mean for the revenue mix does that mean that you might see.
Rebound more strongly.
Relative to outsourcing in coming months, yes, I think thats.
Yes to your first question, we are seeing a bit of a shift to digitization as as most of our clients kind of adapted to the to the pandemic and of course is there.
Their customers more quickly adapted and got used to digital I think that only accelerated this need for digital and so that is something we're seeing right now we've seen our mix stabilize right at that 55 <unk>.
Percent in managed services, 45% net <unk> because again as I mentioned in day in my opening remarks. Some of our managed services are mixing in some of the digital so I don't think it will completely reverse like it did last time I think cost savings will continue to be important but digitization is certainly acts.
<unk> I think faster than than most expected and you see that in our in our bookings.
This quarter.
And maybe it's a function of that as you look at your M&A pipeline is that's causing a bit of a shift in terms of the types of targets you're prioritizing on specialty.
Not especially as you know we're pretty disciplined on the on the M&A side. It's really is focused on increasing our breadth and depth and as I mentioned, we continue to have an expanding list that are.
Potential opportunities that we're looking at so it doesn't really change our mix there were end to end.
And then maybe a question for Francois.
The Dsos came down obviously I think that's due to a higher outsourcing mix first of all is that correct and then secondly, how would you see that evolving COVID-19 launch, if we see FMC coming back a little bit.
Yes, it's correct that.
The fact that we have more managed services did help.
To reduce their DSO, but also connection was was a part of while so some of the DSO went down as you know it can be lumpy from quarter to quarter and sometimes large milestone can be.
Billed and collected in the quarter.
That's why also we had a good drop into deals for this quarter for sure with with Georgia, indicating that.
As you can pick up that will put some pressure too.
To the.
To the DSO, but theres still think capable tool to manage it well.
Great. Thanks ill pass the line.
Yeah.
Next question comes from Richard Tse with National Bank.
Yes. Thank you George I think you made some comments about this on the.
The call and I looked at the MD&A on it seems like you've had a bit of a pickup in terms of shifts to Asia Pac.
And on.
I'm kind of curious as your customers move towards digital transformation.
Do you expect that segment to serve increasingly trend higher airborne forward.
Yes.
It is.
You are correct I mentioned, it and you definitely see it in the MD&A that Asia Pac continues to be strong I think theres, a theres more of a comfort level by certain of our clients that maybe were under leveraged and an offshore theres more of a comfort level because now everybody is remote so that certainly drives some increased demand.
<unk> on the other side, though we actually see given the importance of proximity to Digitization everybody moving every industry and every company with end industry may be moving at different paces is still important to be in sync with.
The individual clients and so some that were maybe overleverage and offshore are rebalancing that we always we believe in the global delivery model on the balance model that we have I think it will drive growth both in our offshore and in our near shore and in our proximity so.
We kind of like where that where that's going but definitely there is a higher comfort level right now with with remote work that certainly plays into the Asia Pac and you see that in our hiring as well, which are now back to pre pandemic levels.
Okay, and as sort of the portfolio does move towards digital transformation.
As our share we have an expectation that you have potential operating leverage as you move more towards services.
Yes. It is there is there more opportunities for us absolutely because again digital transformation requires two things right. There is the new leveraging new technologies as I mentioned, we're rushing towards that but also modernizing some of the legacy and integrating in and so we play on both sides of that so as we move more to.
What we've been predicting but now has accelerated on digital transformation, yes, that's a big opportunity for CGI and our end to end services.
Okay, great. Thank you thanks Richard.
Next question comes from Jason Kupferberg with Bank of America.
Hey, guys. This is Kathy on for Jason.
Just wanted to ask I mean, you guys, obviously had very strong bookings quarter on you.
Kind of sad bookings from new client pick up quite nicely you. All can you share a little bit about what's making you win in the market are there.
Differences in Europe go to market share as you know on can we kind of expect to continue to see book to bill greater than one point out time.
The coming quarter as well thanks.
No. Thanks for the thanks for the question.
On differentiating.
CGI from from some of our competitors it really is about client intimacy.
We've been talking about this for some time.
The uptick on our systems integration and consulting work has established closer relationships with our clients.
And that's allowing us to move quickly and move quickly in relevant ways for our clients and that's really a big differentiator when youre going to partner with somebody for a larger digital transformation project, you've got to be comfortable with them you've got to be comfortable not only that they can execute it which we have to be able to do but also that they understand.
How to execute within their environment Thats, what theyre looking for a partner in CGI has that.
And stage and really part of that also is our ownership model and the way our people show up in partnership with our clients that really differentiate yourself and a market like we're in right now in a period that we're going through still during the pandemic. So really that's at some of the benefits of the CGI model on <unk>.
Yes, I believe our bookings will continue to be strong as we move through this period.
Okay perfect and my follow up question is just by geography, it kind of looks like the U S. Federal piece of the booking saw downtick. There from last quarter is that is that just from softness or some mixed relative just due to timing in terms of like election related pause it and I'll be kind of exciting to see.
That trend or that demand come back in the coming quarters.
Yes, we talked about this in the quarters coming up to this in general a change in administration is good because.
From from a demand perspective, because any type of change and an administration brings new priorities new priorities bring new opportunities for for it but in the lead up to the election in the immediate aftermath, where new people are getting in position. There is always a softer bookings as you know our bookings were strong our trailing 12.
Bookings and federal continued to be well over 100%. So we we certainly can Ken whether this transition period, but yes the bookings.
That's really the reason for the bookings it's not.
Where we see demand going on in fact, Theres, a good alignment and in demand right now of where we offer services and the priorities of the new administration, particularly from an it perspective.
Okay perfect. If I can just with one last quick question I know you guys were able to improve your margins as well and I know you guys had talked about cutting back on discretionary spend costs are you kind of expecting that to come back as travel on search related costs kind of continue to come back like throughout F. 'twenty one.
Thanks.
Yes.
So yes, you are correct, we did prioritize margins and make sure that we were very careful as we as we entered and whether this pandemic period. We do expect there will be a return of some but not all of those expenses and we're actively working to make sure that doesn't occur as we are.
Because of the pandemic, but certain things you want to return like some of the hiring expenses on the training expenses.
And even some of the the working from the office in proximity to our clients. So those some of those expenses will return, but theres plenty of margin expansion opportunities to counter that from the mix of managed services and IP, specifically opportunities in certain geographies to bring them back to the to the <unk>.
<unk>.
Historical models and and then integration of some of these new new mergers and you heard that some of them are uptick. This this quarter was through some of those successful on as we continue to merge operations and we get the benefit of scale and the benefits of the CGI model. So there's plenty of margin expansion opportunities but.
Yes, there will be a return of some of those expenses as we continue to grow in and hopefully soon exit.
Pandemic period, we're in.
Okay perfect. Thanks, so much for taking my question sure.
Next question comes from Paul Treiber, with RBC capital markets.
Hello, Thanks, very much and good morning, just wanted to follow up on the margin question margin did hit a record high this quarter I think even when you look back on includes when you look back to the pre logica days, so putting some numbers around it I mean is it is there a structural permanent increase in margin here should we expect 16% each.
EIT margins going forward or do you think that probably gets a little bit below that when some of those costs come back and yes, well. Thanks for noticing that it was a very strong margin quarter and again that was that was purposeful as we as we prioritize.
This is the margin side to make sure we preserve and expand.
Shareholder value, but yes, I think we would expect in certain geographies.
When the as expenses return and growth returns.
We will expect to see a little bit of a dip on the margin. However, your other comment about is some of the structural yes that is what we're working on.
We learned something about going through this period that I think will allow us to continue.
Given the use of collaboration software and other <unk>.
Activities that we'll be able to preserve some of those savings and and and make those permanent in the in the model So and like I said on the earlier question. There is plenty of margin expansion opportunity as you can see some of the geographies that now have stabilized on margin, but but theyre not theyre not near where.
Where we believe they can and should be returning to.
And I just want to ask a big force a big.
Big Picture question on acquisition strategy here over the last couple of years, there's been several large deals in the it services space obviously.
You passed on them.
Looks like there's another large deal on potential large novato is looking at DXP.
Generally speaking how do you look at the priority or prioritize between large transformative acquisitions versus tuck ins and then you mentioned discipline. How do you look at the risk profile for large acquisitions, because I imagine you have the potential award to be high. But then also the risks are higher as well.
Yes, it's Matt.
As far as prioritizing we want to and believe we can do both so there is the strategy.
<unk> of the Metro market Tuck ins has been highly successful.
In each of the regions, we've done them in and so that continues to be part of our a prong of our strategy, but the transformational absolutely if we're going to to meet our aspiration of doubling the company that's debt.
Continues to be on the on the path and in the priority list and as we look at those those transaction that we're mainly looking for that cultural fit and cultural fit for US remember is the type of work they're doing the type of clients that they have and will that Nash with the overall seat.
J model, what we don't want to do is is merge with a company that changes that culture on that path that we're on so that's the main reason that we pass on some of these and it's also the main reason we have an expanding list that we will be going after this consolidation is still at the beginning stages.
And my last question just on culture like when you look at the ICU services market in general.
Do you see a lot of the competitors out there with a similar culture to you or is it the minority of competitors with similar culture.
It's a mix it's a mix you see and actually I think the mix is broadening as different differ.
Different.
Providers decide where they want to play as the as the industry accelerates towards digital transformation and where each player wants to wants to continue and what I can say is we want to be that end to end provider for our enterprise clients. That's the piece of the market that we're playing in.
Okay. Thanks for taking my questions.
Next question comes from Matt O'neill with Goldman Sachs.
Yes, hi, good morning, and thanks, gentlemen for taking my question. It seems like a lot of consistent themes around both the.
The best ever margins.
The potential for those to come back down a little bit as well as the kind of five to seven year doubling the M&A horizon as well as of course the.
Material share repurchase announced.
So.
With many of those out of the way I was hoping maybe we could dig in a little bit more.
You mentioned, a little bit of an air pocket around bookings when a new administration comes in and then ultimately that that New administration generally represents a positive is there is probably a lot of change required on the on the federal side is there any historical precedent that you could point us to as far as the sort of duration of that air pocket in med.
And magnitude is it a quarter or two you would expect a little bit of softness on the federal side before then things ramp back up to and above maybe where they were before.
Or anything to point to there.
Yes, it's typically thanks for the question is typically no more than a quarter or so just to get the new the new political is in there in their positions, but then that's coupled with usually a 100 day plan where were those St political is or trying to get some get some things on <unk>.
So.
So so usually it's no more than than a quarter and as I mentioned, if there is a nice alignment with our focus we do believe that the new administration's priorities will be in the areas of health environment Veterans' Affairs National Security and we are well positioned with both vehicles.
And opportunities in those areas and of course technology, it's going to be cloud data and artificial intelligence with some <unk>. So just as an example, they've come in and initially said theyre going to pledge $10 billion increase in cyber and exactly some of the areas. We already are so.
There'll be a little bit of that transition, but but the historical is that it.
We do very well on net debt environment.
That's really helpful and would it be safe to say that the new administration.
Digital has come up on this call fairly frequently already.
Does there seem to be more.
Inclination that it's kind of push.
All things on the federal side incrementally more digital it seems a bit of an inevitability, but is that is that a safe assumption I think thats a safe assumption yes.
Thank you I'll hop back in the queue. Thanks, Matt.
Next question comes from Paul steep with Scotia capital.
Hey, Good morning, George could you just on digital transformation, maybe remind us on the size of the opportunity either within the business. However, you might want to categorize it and then maybe any gating factors that youre looking at too low a CGI to go even faster against that opportunity and then I've got one quick clarification.
Yeah sure well to take your.
Your last question first the gating factor really is just making sure that we get the offers in front of the customers and engage with them and in some ways, that's more challenging and in a COVID-19 remote environment and other ways. What we've learned is.
We've learned ways to do that collaboration and in a very elegant way.
Given our prior relationships and I mentioned some of that and so it really is a matter of getting the right people and front end.
That's why I mentioned some of the investments in our people.
And the training and the hiring particularly around business engineering business development and investments in our intellectual property because that's another that's another one that can help accelerate some of that digital transformation and get us with those with those clients faster. So that's really the answer on the gating I think it answers probably the first.
Part of your question as well.
These engagements.
From a from a size perspective, what we're seeing right now point in time now maybe that will change, but right now we're still in the middle of a pandemic every company is doing this a little bit differently. Some of them are doing it in phases or ways. Some are going all in and some somewhere in between.
So it really and we predicted as we talked about this as we move closer to exiting the pandemic. What we said is the rebounds, we will happen differently by industry and the rebound will happen differently by company within those industry, which again is why proximity is so important because you've got to know and meet them where they are.
So maybe that gives you more color or less color than you were looking for but but that's really what we're seeing right now Paul.
That's helpful.
Clarification is just with regards to large transfer a transformational acquisitions could.
Could you maybe characterize how you are thinking about those versus the past is there desire to for example, Boyd.
Okay.
Maybe categorized as having a larger book legacy infrastructure.
We'd just be off the table does shouldn't be an area.
You should think that CGI has any great interesting thanks guys.
Yes, no. Thanks for the question no I don't think we would we would limit ourselves in any way and we're not.
What's important for us on a digital transformation is to be part of all elements of it what we don't want to do is only do the.
Legacy or quite frankly, only do some of the smaller new and Miss out on the on the modernization required. So we really want to play on both sides and that's certainly what we what we consult.
To our clients and and.
And where possible urge them to think about this in the biggest way that's what will help them be successful fastest and certainly is where we're the best partner to them. So I would never I would never say, we wouldn't play on one side or the other but not exclusively because thats, where you get pigeonholed within a client.
Thank you.
Next question comes from Daniel Chan with TD Securities.
Hello, Hi, Thanks for taking my questions.
They spend on.
Some of these questions on the infrastructure transformational acquisitions.
DXP and it shows.
Potential combinations would that have any impact on the competitive environment for you.
Thanks for the thanks for the question and it does play to that to that infrastructure side of the house, that's where they that's where they play.
If they want to do that from an exclusive basis.
That's not where we're playing we're playing on the end to end. So I think it does.
Something like that always changes the dynamics somewhat but we're sticking to our end to end and it's having a good good results with their clients.
Okay and then.
Now that Brexit is largely over does that open the floodgates on some of the deals that maybe had been pent up north and held back were delayed over the last few years.
Should we expect some increasing opportunities not just from the UK, but also across the EU, yes, I see I think we will see that on a gradual basis I'd like to say that Covid has passed us but in many of the.
The countries that we're working in that's still that's still something that is.
Is shut.
Downs et cetera are still occurring but we do think that reacting differently.
I thought you said Covid I apologize.
Good I'm glad you didn't take Covid was over yes, Brexit being passed us.
Is is certainly helpful.
Most of the clients, we work with have that better prepared into their plans I think the reason I just immediately thought of Covid is that in the U K of course, we're still on a shutdown period. So.
That's probably more of a of a damper on things point in time than Brexit, but as they as Covid Abates and then and then Brexit is past US yes, I think there will be some some pent up demand that comes through in the UK and other places.
Colleges.
Alright, thank you.
Next question comes from Ramsey El <unk> with Barclays.
Hey, guys. This is been bullish on for Ramsey.
I'd like to apologize in advance for asking maybe the 100th question on margins on M&A, but perhaps I could ask a bit of a different way I think in your prepared remarks, you talked about with the metro market strategy. In some cases, you see this as being margin additive I think for a lot of us looking at on some of your large IP services peers, we tend to see them do more smaller acquisitions that tend to be growth accretive margin dilutive.
<unk>.
So I'm not sure if I, perhaps misunderstood what you were mentioning earlier, but could you maybe discuss at least in the context of the metro market strategy, how you kind of balance looking for targets that either add growth or depth in that market.
How that all plays out.
Yes, that's a great question, when we buy and merge something into the CGI portfolio in almost all cases, the margin is lower than the CGI margins. So.
Hey, Juan it's dilutive, but then we bring that up to the CGI margins not necessarily above the CGI margins because youre right. It really is a catalyst for growth, but we bring them back up to the to the margins of CGI and so over time, that's why you see some of that so as we buy some of the larger metro market.
Mergers there is a little bit of a dilution then it comes back and that's why I highlighted that in that's why Francois did as well in the prepared remarks.
Okay that makes sense. Thank you.
If I could ask one more.
We've seen a lot of activity lately with again with kind of your peers talking about the cloud businesses and kind of making more investments on that just being a really attractive growth avenues I'm. Just wondering if you could kind of.
For CGI can help us size up on.
Get a sense of how big that is for you guys on kind of what Youre doing there yes.
Highlighted yeah. Thanks for the question I highlighted some of the examples in gist.
Just a handful of the examples of what we're seeing in the systems integrations space and yes, a lot of it is is assisting in helping our clients and their application migration to the cloud.
We're running towards that we actually have some methodologies and tools that we built to assist our clients on that we start with was actually in coke and consulting with our clients on on how and where and when to use the cloud and how to make that happen, we'll manage that for them soup to nuts and.
And then the partnerships with the various cloud providers is extremely important and I mentioned, we're reinvigorating that so and this is really all the cloud providers. So it's Microsoft It's Google It's Amazon, It's Oracle and we have examples in projects with each of them ongoing as we speak and really it's getting closer to them.
As important it's a big opportunity for our clients and therefore for CGI.
Okay. Thanks, so much for taking my questions.
Next question comes from Stephanie price with CIBC.
Hi, Good morning, Hi, Stephanie.
I think you could talk a little bit about where you are seeing in terms of project delivery just given the new stays on lockdown that or in certain regions. I think you mentioned the U K a minute ago.
Yes, so the type of project engagements.
I would say is that.
This wave of a pandemic shutdowns really our clients are looking at them a bit a bit differently.
<unk> already have a better way of working there are more prepared for this and we're actually seeing.
More strategic project starts and engagements just kind of the new way of doing business that are prepared in their plant there built into their plans and.
Even though we still have only about 11% of our people working from an office or a client site with with the proper precautions. We're seeing much more of these new starts and and I think some of that is based on the experience they've had in and experienced the positive experience they had and delivering some of the ongoing.
That they didn't stop or delay and that's giving them more confidence to start things back up.
Okay, and maybe just a follow up I was wondering if you could talk a little bit about the closure rates youre seeing sort of large deals versus small deals and what sort of trends youre seeing are on those larger deals.
Yes.
We're actually seeing more.
More activity on the larger deals and willingness to close those larger deals.
The surprising part and that's why I mentioned it in the <unk>.
In the prepared remarks that we're also seeing this on the smaller side. So we're seeing both now.
And we thought it was going to move more to just those larger deals driven by cost savings, we're actually seeing a little bit of both but I wouldn't say that the larger deals are stopping in anyway, even with this next wave of shutdowns great.
Great. Thank you very much.
Next question comes from Robert Young with Canaccord Genuity.
Hi, good morning.
To clarify something said earlier around you said you'd seen strong renewals, sometimes seen scope increases.
Driven by digital I think it was standard question was asking about shifting more towards <unk>.
Digital and you'd said that managed services was mixing in digital and so I guess, yes.
You said that you had commented on that earlier.
So I'd taken your comments earlier referenced renewals, but are you seeing managed service scope increase.
In during the project or is this something that's happening at the renewal point.
A little of both.
Both its more.
It's more pronounced if you will at renewal time, but I'll remind you renewal time can happen anytime so.
So we can we can do on early renewal to put that put that in and the reason I say it that way is you want to make sure you get the the cons.
Contract and the mechanisms correct on service level agreements et cetera, but we're we're looking at that as we speak some of the some of the renewals that we're doing where it's actually driven by a need to digitize, but having said that we wrap in the managed services.
In some ways to help fund it but.
Right now its very interesting and a couple of these deals getting in year savings in year being 2021, getting some savings upfront, but then also being able to fund and accelerate digital transformation, that's a nice value proposition for our clients.
The balance sheet and.
The wherewithal to do just that so that's what I mean by that and that's pretty exciting.
Is that I think are.
Some of the normally.
Would you normally see shorter terms consulting projects like front end professional services, turning to managed services and some of that sort of front end work being pulled into these larger deals is that better for margins or is it something that is better from margins and we have talked about that some of those systems integration and consulting projects can.
Lead to bigger opportunities and the big reason for that is not necessarily the contract just turns into that the relationship turns into that that client intimacy.
Backed up by the other experts and expertise that we have allows for that and yes thats definitely.
A margin driver because you have a different.
Better utilization rate and it's a longer period of time, and therefore, a lower cost of sales over time.
Okay. Okay. Thanks.
Once again to ask a question. Please press star one on your telephone Keypad next question comes from Howard men with Barrington.
Good morning.
Sir I just wanted to talk about to touch on kind of the G&A SG&A savings that.
The others have asked about and focused on the.
The lease side I think you've made some comments about the importance of the proximity model to CGI.
And I guess at the same time, you probably thought about what what is going to look like I guess for the opposite after.
After the vaccination are over and what's what's kind of your thoughts on that like I'd also noticed last year you guys took some write downs on the leases.
There was some of these modifications I think made to.
Statements. So just.
Just kind of give us the thinking on how many days people are to come back to the office.
That kind of stuff.
Yes, no. That's a great question as you might expect this is exactly what we're what we're thinking about and talking about we're not going to abandon our proximity model and we do believe there is a there's benefits to being in the office for purposes of training and bringing others along the creativity that <unk>.
Out of that and the interaction with our clients having space to do that having said that I think the office of the past is not necessarily going to be the office of the future. We're looking at.
Smaller spaces.
More spaces in different parts of cities.
All of that is on the table as we as we go through that that will take some time to to convert.
And and.
And so youll see some of the costs returning but over time, we'll certainly be optimizing that.
For our clients and for our business.
Right great. So so it's more like at the lease rolls off.
Might look at other options at that point correct.
Okay.
And then just another question I wanted to turn to is the renewal rates you slowed their 95%, which is pretty strong is that by revenue whereby customer count and what was it like I guess pre COVID-19.
It's by its by revenue and we've been we've been pretty consistent.
In the nineties.
Was it always over 95% no but.
It's always been in the nineties, we tend to have a very good strong relationship I've mentioned to two customer to clients, where we have over 20 year relationships, that's pretty common with with CGI and so and that's part of the ownership model and the value system in.
How we approach our relationships, but I highlighted it because it's giving us that opportunity to do the add on services, that's really why I highlighted it in their remarks today.
Right and I guess, it might correlate with IP becomes a bigger part of your your revenue you might expect that renewal rate to increase.
Yeah, well IP is.
Something we haven't talked as much about but we're making some some pretty nice investments and our intellectual property right now.
Essentially becoming more repurposing them to be more business platforms as a service.
<unk> of all of our flagship IP, specifically in government and financial services at what Youre, giving us co creation opportunities for that IP and so IP, then becomes an accelerated or both for our clients business, but also for our business. We're also packaging our IP from across from across CGI and <unk>.
Industries, adding data intelligence into these application suites.
And also intelligent automation in areas like health utilities, and again financial services. So we're doing some exciting work with the IP to make them a driver of acceleration for our business, but of course first for the for our clients' business.
Okay, great. Thanks, so much I'll pass the line sure.
Thank you everyone for being with US today on the call and we look forward to speaking to you at the end of next quarter.
Thank you.
Thank you and this concludes our call.
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