Q4 2021 CGI Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the CGI fourth quarter and fiscal 2021 conference call.
I'd now like to turn the meeting over to Mr. Mayer Yaghi Vice President Investor Relations. Please go ahead Mr. Yankee.
Thank you Julian and good morning, everyone.
With me to discuss Cgi's fourth quarter fiscal 'twenty 'twenty. One the results are George Schindler, our president and CEO and Francois Boulanger Executive Vice President and CFO.
This call is being broadcast on CGI Com and recorded live at nine a M. Eastern time on Wednesday November 10 'twenty.
2021.
Rental slides as well as the press release, we issued earlier. This morning are available for download along with our Q4 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 maybe 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 complete Safe Harbor statement is available in both our MD&A and press release as well as on CGI dotcom.
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.
And all of the dollar figures expressed on this call are Canadian unless otherwise noted.
I'll turn it over now to Francois to review, our Q4 financial results.
And then George will comment on our business and market outlook.
Well thank.
Thank you, Mike and good morning, everyone.
I am pleased with our Q4 performance as revenue growth and operational discipline contributed to double digit EPS accretion and increased cash from operations.
Our year over year constant currency revenue growth accelerated in Q4 as previously booked orders began to flow into revenues.
We delivered 15% adjusted EPS growth.
We generated strong cash flow from operation.
Seven 1% year over year in Q4, bringing the last 12 months total to over $2 billion, an increase of nine 1% year over year.
And we strengthened our balance sheet by executing our first public debt issuance both in the U S and in Canada.
This was supported by strong investment grade credit ratings from both standard <unk> Poor's and Moody's.
For Q4, we delivered revenue of $3 billion up six 4% year over year on a constant currency basis.
This is an acceleration from the three 5% growth in Q3.
Double digit growth in constant currency. It was achieved in the following geographic westar.
Western and southern Europe up 13, 6%.
Asia Pacific up 11, 5%.
U S commercial and state government.
One 1% Canada.
Canada up 10, 5% and central and Eastern Europe up 10, 1%.
This was driven by strong demand in the following industries health care grew 10, 8%.
D grew nine 9% and financial services grew six 4%.
Total bookings of $2 9 billion, representing a book to Bill of <unk> 97, 1% for the quarter, while our trailing 12 months book to Bill stands at 114, 2%.
17% year over year.
I would like to highlight a few reporting segments with strong bookings in the quarter U S commercial and state government with a book to bill of 117%.
K in Australia at 111% in U S federal at 110%.
New business in the quarter was 31% of bookings an increase from the previous year's 22%.
On a trailing 12 month basis, new business was 32% of bookings versus 25% a year ago.
Given the continued increase in demand for our services.
As reflected by the strong bookings in the last 12 months, we expect continued positive growth trends in fiscal 2022.
We finished our 2021 fiscal year with a backlog of $23 1 billion.
Adjusted EBIT in Q4 was $493 million, while EBIT margins increased to 16, 4% up 76 basis points compared to Q4 last year.
The year over year increase was mainly due to higher utilization rates and lower nonrecurring project adjustments.
We saw strong margin improvements and U S federal with margins up 350 basis points as well as U S commercial and Scandinavia, both showing 170 basis points improvements.
This was partially offset by lower margins in Canada due to a lower tax credits this year as well in the UK due to a nonrecurring contract provision.
Our effective tax rate in Q4 was 25, 5%.
We continue to expect our tax rate for future quarters to be in the range of $24 five to 26, 5%.
Net earnings were $246 million and diluted earnings per share were $1 39.
Representing an increase of 44, 8% year over year.
This improvement was mainly due to revenue growth margin improvement and lower restructuring cost.
Excluding integration and restructuring costs net earnings were $247 million for a margin of 11, 5% and diluted earnings per share were $1 40, and accretion of 14, 8% when compared to $1 22.
In the same quarter last year.
In the quarter DSO was 45 days down from 47 days last year cash.
Cash provided by operating activities was $527 million, an increase of seven 1% year over year.
Net debt to capitalization declined quarter over quarter to 26, 6% from 39% in Q3.
We are proud as an organization to have a new group of investors in our company through our and the girl bond offering raising in the processed $1 $8 billion across the U S and in Canada.
We used a large portion of these funds to prepay the $1 25 billion U S loan facility that was due in 2023.
More importantly, with this debt raise the weighted average maturity of our debt has increased from one six years to four seven years with 91% being fixed interest debt versus floating interest debt.
Over the last 12 months cash provided by operating activities was $2 1 billion or 17, 4% of revenue.
This is an improvement of $177 million year over year.
In fiscal 2021, we invested $1 9 billion and our build and buy profitable growth strategy comprised of $301 million back into our business, mainly in IP and managed services engagements $99 million on business acquisitions, and $1 $5 billion to buyback.
Our stock.
Buying back CGI stock has been an accretive and flexible way to return capital to our shareholders in fiscal 2021, we bought back $15 3 million shares at an average price of $98 and 16 plans.
As of the end of Q4, the company could purchase up to an additional 10 million shares under the current and CIB program.
Looking ahead, our cash allocation priority remains the same investing in our business pursuing accretive acquisitions and buying back our stock with.
With cash of $1 7 billion on hand, and a $1 5 billion revolver that remains fully accessible we had $3 $2 billion readily available.
In addition, we now have access to the public debt market to support our build and buy profitable growth strategy now I will turn the call over to George to provide perspectives on fiscal year 2021, and on our business for the year ahead George.
Thank you Francois and good morning, everyone.
I am pleased with our team's performance in the fourth quarter and full fiscal year.
I would like to recognize our now 80000 consultants and professionals around the world for their tremendous commitment to delivering end to end digital value for our clients.
Through the expertise insights and disciplined project delivery of our team and the continued trust of our clients CGI returned to revenue growth for the second half and created incremental shareholder value.
For fiscal 2021, we delivered double digit GAAP and adjusted EPS accretion, a 9% increase in cash from operations and a nearly $2 billion increase in bookings.
This morning, I'll provide more context on the fundamental components of our business that contributed to this strong full year performance.
Pacifically, our diverse presence across industry sectors and regions and our proven delivery of end to end digital services.
Starting with revenue.
We finished the year with revenue of $12 1 billion.
And in line with our projections for growth in the second half of fiscal 2021, CGI grew four 9% on a constant currency basis compared to the second half of last year.
Growth was broad based across every industry sector during the second half.
Constant currency growth of eight 9% and manufacturing retail and consumer services.
Given by Western and Southern Europe was 18, 5% growth.
Eight, 4% and healthcare led by central and Eastern Europe with 44% growth.
Six 1% in financial services with Scandinavia, delivering just over 9% growth.
And for 2% in communications and utilities led by U S commercial and state government at 47% growth.
Our government business also grew in the second half at one 4% even as clients continued to re prioritize their investments in line with the changing public health and economic environment. We're in.
Remain well positioned as a partner of choice to help governments address a wide range of domestic priorities, including infrastructure environment and the climate and cyber security.
We believe this strong second half performance demonstrates <unk> role as a leading digital services partner positioning us well for future growth as clients accelerate spending to capture the increased benefits of digitization for their customers and employees.
With strong client demand environment drove a robust bookings on a full year basis with a book to bill of 114% we.
We sustained our incumbency with enterprise clients and we're also awarded net new projects and expanded scope growing our share of client spend.
Recent new awards for digital transformation services in the fourth quarter included the following.
Canadian Bank selected CGI to help with its business transformation journey.
<unk> will lead the modernization and migration of client interaction platforms to the cloud.
Volkswagen Group UK awarded CGI, a five year managed services contract to implement enterprise automation to improve employee productivity as well as support the sustainable mobility strategy.
Valley Bank in the U S awarded CGI, new work to support the bank's Omnichannel digital enablement, drawing on our capabilities in robotic process automation machine learning and application modernization.
In the U S centers for Medicare and Medicaid services will leverage <unk> digital modernization services to move legacy platforms into the cloud.
And the year bookings were strong across several industry sectors and.
In manufacturing retail and consumer services bookings are up 16% over last year with a book to bill of 115%.
Bookings increased based on demand for Omnichannel transformation supply chain modernization and data analytics.
Government and healthcare bookings were up nearly 13% with a 115% book to bill for the year based on continued demand and citizen and patient services application modernization and cloud.
Financial services bookings were up 20% with a book to Bill of 111% for the year. This was led by strong demand in the insurance sector for transformational managed services to enhance customer and employee experience, while delivering cost efficiencies.
And communications and utilities bookings were up 27% year over year with a book to bill of 114%. This.
This uptick led by strong demand from utilities providers to help address climate risk and the energy transition.
Moving to our fiscal year 2021 profitability adjusted EPS accretion of 11% was delivered through a combination of revenue growth improved business mix operational excellence and share buybacks.
Our EBIT expanded to 16, 1%.
78 basis points year over year.
An important element of our improved business mix as business and strategic consulting or demand accelerated in the second half of the year, notably for business model transformation change management customer experience design and digital advisory services.
We continue to invest in talent methods and accelerators to support our growth in high end consulting services <unk>.
<unk> proprietary industry specific blueprints as well as cross industry ecosystem frameworks are designed to help our clients navigate the changing business models and evolving value chains.
Intellectual property revenue remained steady at 21% of our overall revenue mix. Despite the volume headwinds in our transaction based IP solutions, specifically those related to travel services.
We saw significant growth in revenue from new solutions, including 50% year over year growth in IP acquired through recent mergers demonstrating <unk> ability to leverage our global footprint to expand the reach of acquired services and solutions.
We also saw significant growth in our open grid 360 platform, which helps clients manage the energy transition. We expect continued strong demand for this solution as part of CGI suite of sustainability offerings, which we are highlighting during cop 26 in Glasgow through the end of this week.
SaaS based IP revenue was also up year over year in line with overall increases in demand for cloud based solutions.
Closing out the fiscal 2021 review and setting the stage for growth in fiscal 2022 is our strong cash generation as.
As we shared throughout the year, our financial strength anchors Cgi's resilience and enables continued investment in our build and buy growth strategy.
Last quarter I shared with you some of the findings from our proprietary research, notably the characteristics of leading digital organizations.
I will now highlight a few of our delivery successes from the past year and helping clients realize the full potential of their digitization.
But one of the world's largest communication and media companies, we are delivering digital design studio as a service, which combines consulting and managed services to create a unified vision for customer experience across multiple commercial platforms 30 products and more than 50 development teams. This is improving the company's agility.
<unk> and reducing their overall time to market.
We're a leading global financial services company, we are helping to redesign digitize and automate all business operation processes for their retail banking line of business.
To deliver on this complex enterprise project, a multi short team has been established to join up our industry and technology experts across Canada, The Czech Republic, Germany, India, Poland and Spain.
We are supporting the French agency for ecological transition and digitizing their ecosystem partner network to enhance public private collaboration on the energy transition.
Implementation of our new Salesforce base customer relationship management platform is underway to provide them better visibility into their partners and case management across functional teams.
Together with the Swedish traffic administration, we're pioneering the collection of driver base friction data to provide a real time view on current road conditions hazards and potential road maintenance issues.
Our solution uses sensor based data and crowdsourcing to gather and analyze millions of data points to help the agency insured driver safety.
<unk> implemented a new cloud based policy administration and agent portal system for a leading U S insurers commercial products business.
Migrating them from a legacy solution to the cloud based Guidewire platform, we help reduce their product time to market.
And for a leading interbank payments network CGI is migrating its E transfer compute capabilities.
On premise cloud deployment, and Microsoft Azure with the aim to improve resiliency and performance of a national payment system.
These are just a few of the examples of how we are collaborating with clients to develop and drive their transformational strategies you will.
We'll have the opportunity to hear more about our digital capabilities at the upcoming investor and market Analyst day on November 20.
I am pleased to host this event, along with Francois and Julia <unk>, our co chair of the board.
Joining us on the virtual stage will be the president of our operating segments and our global executives responsible for talent M&A marketing and Investor Relations.
Together, we will tell you more about our vision growth agenda industry expertise global alliances and capital allocation strategy as well as take live questions.
Importantly, the day will begin with an overview of Cgi's talent strategy.
As a leading professional services term firm, we believe engaging our existing talent and attracting new candidates is always our most important investment.
In fiscal 2021, we continue to increase our investments in learning and development programs, including virtual boot camps and online learning.
During the year, we surpassed 380000 courses completed and CGI is online university to deepen employee skills in key areas of client demand.
As cloud data science, AI customer experience and business consulting.
Our hiring continues to be on pace to surpass pre pandemic levels. Our ownership culture continues to be a key differentiator in attracting the best consultants and experts in our industry. In fact, our employees referred over 30% of our new hires to join them and working at CGI. This past year.
We also continue to invest in industry, leading programs for diversity equity and inclusion.
And employee health and wellbeing.
Over the past year, our programs were recognized by several external organizations, including the human rights campaign Foundation for our policies and practices promoting LGBTQ plus workplace equality in the U S.
Enterprise also on <unk> in Canada for our global network of mental Health Champions and certified mental health first Aiders.
Jobs for her for our diversity hiring in learning and development programs for women across Asia Pacific <unk>.
Universal for being selected by female professionals as the best ideal employer in Finland.
And the diversity charter in Germany for the creation of an innovative tool to ensure job advertisements are gender neutral.
During the Investor and market analyst event, we will also provide a briefing on our plans to accelerate the buy side of our profitable growth strategy.
To start fiscal 2022, we received government approvals for and subsequently closed two new mergers in October.
Array of digital services firm, primarily in the U S federal market, which will expand our client relationships in the strategic markets of the U S Air Force and the space Command.
While deepening our offerings and modernization and Dev ops.
CMC, which is a leading technology and management consulting firm, primarily serving the Spanish market.
This merger expands our client proximity footprint.
Key Metro markets as Madrid, and Barcelona extends our global delivery network deepens, our capacity to deliver digital transformation in the region and brings new relationships with enterprise clients and the IBEX 35.
I would like to take this opportunity to warmly welcome. The over 1700 70, new consultants and technology experts joining CGI from these two firms.
As we enter fiscal year 2022, we are confident in our positioning to provide the best services and solutions to our prospective and current clients around the world, particularly given our industry and technology expertise along with the ability to hire and build the necessary capacity to achieve our growth agenda.
We remain committed to executing our growth strategy through both build and buy our capital allocation priorities are aligned to drive continued revenue growth and double digit earnings per share accretion.
Thank you for your interest let's go to the questions on that.
Thank you George.
As Julian now, we'll let you all know how you can queue up for a Q&A so julien.
Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Withdraw your question. Please press star one again, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Richard Tse from National Bank Financial. Please go ahead. Your line is open.
Yes. Thanks, so your ability to sort of expand margins here in a fairly tight labor markets pretty impressive can you maybe walk through.
Some of the levers that you may be pulling too not just preserve those margins, but expand them.
Yeah. Thanks, Thanks, Richard as you know, we have a pretty robust model and measurement process here at CGI that we we really stick to its called the CGI Management Foundation, and that's really built for a professional services firm and so we believe we can continue.
To grow and grow our margins at the same time of course when you. When you think about our margin some of Thats coming from revenue growth and the <unk>.
Scale that that provides us some of that is coming from the business mix and are highlighted in the opening remarks, both consulting and intellectual property. Some of it comes from our operational excellence and that's a discipline that comes with the management Foundation and then of course some of that expansion is coming from the share buyback. So it really is a combination of all of the above.
And.
Given the outlook and demand outlook, we expect that to continue.
Okay. Thank you.
You touched briefly on sort of hiring.
And your comments here could you maybe give us some context in terms of the number of head count open headcount positions.
Versus what it may have been a year ago or two years ago.
Yes.
Count is.
<unk> is up significantly in <unk>.
You are comparing if you compare over a year ago that was the beginning of the pandemic you almost have to go back to 2019 to look at it but it's up against where we were pre pre pandemic.
Nick.
And rising in essentially in every.
Strategic market that we're that we're dealing in and but it's interesting when you look at talent. It is more intense at the current at the current place given the.
Heavy demand for technology, and Digitization services, but it is part of the business of CGI. So we're employing all the same tactics and strategies that we do throughout the throughout the years and working it's working very well.
Okay, and just one last quick one from me.
The growth is clearly quite broad based geographically and by vertical here.
How much do you think that is coming from.
Shop with the reopening swallowing the lockdowns of last year versus kind of a more normalized run rate or do you think this is the normalized run rate going forward. That's it. Thanks, Yes, I mean, yes. Thanks for the question Richard.
A lot of a lot of this is as I mentioned this before.
When we went through the pandemic I think it is.
It put a spotlight on some of the weaknesses in and various technology platforms. It also raised the expectations.
Employees and customers or Digitization. So I think you could argue that some of this is is catch up but it's more of a catch up from <unk>.
Some technology that they weren't even aware of so it's not just catch up of a delayed project I think it's more broad based than that and therefore, it's going to be longer lived in that.
Great. Thank you.
Your next question comes from Santos Moscow Polish from BMO Capital markets. Please go ahead. Your line is open.
Hi, Good morning, George maybe just expanding on the.
Hiring question can you speak to retention, how that's been trending and.
How you feel you're tracking relative to your industry peers.
Yes so.
Here's where we are with turnover, it's up but it's still on a trailing 12 month basis slightly less than our pre pandemic levels and speaking of catch up I think there was a little bit of catch up that occurred.
More than a lot of lot of movements going on right at the height of the pandemic and.
And we're seeing and experiencing that just like our peers, we continue to be at or below in and all of our key markets. We do track that versus the industry average and I think a lot of that is because of the.
Of the culture of CGI, and <unk>, and particularly our ownership model, which which plays into that and if you look at why people want to leave it as it's usually career development and that's why we have.
Double down and actually increasing our training programs by another 33% here in fiscal 2022, it's the compensation of benefits that come with that career development and so we are doing lots of promotions as a result of the training and then its purpose and of course in a.
And our culture like CGI ownership culture, where we have the clear equilibrium between our three stakeholders and the strong support for the communities in which we live and work it really speaks to purpose. So we.
We believe we can continue to hold our own like I said, it's more intense environment right. Now. So there is a lot of a lot of movements, but thats why I really focus on those employee referrals as well.
Because thats the way, we can tap into the talent and then the last part is really tapping into talent in those global delivery centers not just offshore but also those onshore near shore centers, which which are growing at twice the twice the rate as the rest of the company.
Great.
Looking at the U S federal business.
I know that the book to Bill was above one but year over year bookings were down a fair bit I presume that's related to some of the budget delays in the U S.
If you can provide some color just in terms of when you take them are resolved and what youre seeing as far as the pipeline of timing in that business.
Yes specific to the U S market or just in general U S. Federal U S. Federal specifically U S. Federal you saw the bookings are actually.
Above 100% for the for the fourth quarter. So we're seeing some of that movement occurring government in general, including the U S. Federal market has been a bit sluggish I call. It the kind of Covid hangover fighting with with various do we do a mandate do we not do a mandate on vaccines.
Do we do a boost or do we not do a booster theres a lot of that.
End of dominating some of the agenda, but I would I would say both in the U S and around the world. There are a lot of domestic priorities that we're well positioned for interestingly enough. If you look at the infrastructure Bill that was passed by the by the house and looks like it will become.
It will become real.
A lot of that work actually comes to the state and local governments and so a lot of Thats grants the state and local governments. So that will help our U S commercial and state and government business, but the federal business really will be helped by a lot of the infrastructure is actually cyber security infrastructure and department of Homeland security and other areas. So we're again very well.
Position for that so we like where things are heading but youre right. Its been its been a bit sluggish as of late and you see that.
Great Thanks to our topline.
Yes.
Your next question comes from Paul steep from Scotia Bank. Please go ahead. Your line is open.
Morning, George could you speak a little bit more.
And debate accelerating the investment in the business into 'twenty, two maybe talk about.
Whether that's a larger magnitude that <unk> principal I want to talk to or.
Where that those investment dollars might be getting redirected.
Some of your comments earlier, but robotic process automation and maybe other areas of investment.
Yes.
Part of that part of that investment is on the on the training and development I mentioned of 33% increase in our training.
Just around the world and Thats really to make sure that we're keeping pace with the demand that's out there.
One part is hiring the other part is retaining your people and giving them the growth that they need as they as they pivot to the to the new opportunities. So.
That's one part of it of course another part of it is we are also increasing the investments in our intellectual property I mentioned some of the opportunities we see with the changes we made in the IP group.
The opportunities to spread our IP into broader markets also string the IP together and then also create some new IP for the sustainability opportunity. So that's that's another one but then of course we.
Also have investments to grow our <unk>.
Buy side, and so I don't know Francois and a little bit about that and are already we started the year with two acquisition that we closed in October so versus last year, we finished with.
Two for the full year. So it's a great start for 2022 and the expectation is that that will be accelerating in the future quarters.
You can expect more.
Great.
One cleanup just on operations, how should we think what used to be northern Europe, but I think it's mainly in Scandinavia, where we were running off.
Some business that maybe wasn't a fit for you and the clients in your transition Bill how close to the completion of that are we where we might see start to see so hopefully an inflection in that region towards more growth for the future.
Yes. Thanks, Thanks for the question so we've now isolated.
The issues really in just two metro markets otherwise were strong both on bottom line and returning to growth. We made leadership changes in those metro markets and our COO. Michelle is now focused now they can travel he's been there half a dozen times since since the summer.
We're focused on margin first and so youll see the improvements going on margin and then the revenue follow but the good news is we've isolated now to just a couple of metro markets and I think youll start to see a gradual improvement over the quarters to come.
Great. Thanks.
Yes.
Your next question comes from Paul Treiber from RBC Capital. Please go ahead. Your line is open.
Alright, thanks, very much and good morning.
You commented that the.
The structural organic growth is perhaps higher than historically.
Does that change the prioritization of acquisitions here.
In other words, I mean with faster organic growth.
And also gaining a greater footprint with existing clients or is it is it as much of a necessity.
To accelerate the pace of acquisitions, how do you think about that here.
Yes, I actually think it's the perfect time to accelerate.
The pace of the of the M&A because again, what the M&A does we have a very different viewpoint, we're looking for.
Quality client acquisitions Thats part of what we do of course, we get a lot of very strong capabilities that come with those type of acquisitions, but we're really looking for new clients to bring in so given the fact that we are doing.
We're getting the organic growth of existing clients and achieving some new clients on the organic side, we want to accelerate that with a buy so.
We've got a very active pipeline, we've improved our sourcing.
<unk> that we just did two in parallel that's the that's the idea as we increase that <unk>.
Increased that pace and the investments we've made and we didn't talk about this but we did make investments in the capacity to drive more velocity and youre starting to see that come through.
And could you speak to the size of potential acquisitions, there was a.
News article in media article in August I think they mentioned.
Quoted and maybe they misquoted per day.
Dave mentioned Francois said that Youre looking at some pretty large acquisition targets can you just elaborate on that or clarify that.
Yes, well, we're always looking for some large ones. If you recall, we have the metro market.
Acquisition policy, but we're also looking for the transformational ones.
Given valuations that hasnt been.
That hasnt been as achievable as of late.
Of course, we paused during the pandemic for a while there but.
That's always been we have the appetite for that we have the we certainly have the balance sheet, which I'm sure one of the things that friends, who I was talking about.
And that's kind of still on the.
On the on the docket there are fewer of them and there are fewer of them that makes it makes sense for CGI, but we'll always be we'll always be looking at that I also mentioned that we're also looking at larger metro market acquisition. So you saw that in the CMC acquisition and even array.
<unk> larger than the average we've done over the last 24 months.
You should expect to see more of that as well.
And just on just elaborating on the quality versus valuation spectrum are there other areas, where youre looking to flex on either of those and with the digital transformation initiatives like would there be areas that you would be willing to go into that are non traditional it services, so things maybe more like.
In <unk> area content moderation and things like that that traditionally you haven't looked at.
Yes, I think there are some adjacencies that we are in fact looking at Paul and I think it's a good question is the as the market continues to Digitization continues to converge. Some of these these elements together so that is strategically something that we're looking at in opening the aperture if you will for.
Or for some.
Some of the acquisition targets that we wouldn't have necessarily qualified for in previous years. So yes that is something we're looking at.
Okay. Thank you I'll pass on.
Yes.
Your next question comes from Stephanie price from CIBC. Please go ahead. Your line is open.
Hi, good morning, Stephanie.
Stephanie.
Talk a little bit about the pricing environment, Ken maybe your ability to pass on some central wage or cost inflation here.
Yes, no. It's a good question because obviously.
Ages are.
Are being increased and across many different industries and given the supply and demand situation.
Yes.
We look at it this way the value proposition or the Digitization services and the types of projects that I listed off just a few examples in my in my remarks, they have a real business case, and I, even mentioned and when we look at it there is that leaders are getting more out of these digital projects and we're seeing everyone.
[laughter] get sharper about what they want to do there they're focused on the on the business outcome, they're not focused on the business inputs and of course, our clients like everybody else realize what's going on in supply and demand and they want the best people in the projects. So that's a long way of saying, yes, we are able to.
To achieve and pass on any any wage increases in the rates and thats not just for new projects.
We have those clauses in most of our existing contracts tied to things like consumer price index and inflation rates. So we're.
We're able to support that and all you have to do is look at the margins.
We're able to achieve.
As we continue to grow in this high demand market to see that that in fact is happening.
Okay, Great and then obviously very strong environment here, just curious what youre hearing from clients in terms of spending priorities in 2020 budgeting.
Yes.
Again, the priorities or many of the areas I rattled off around modernization about.
Moving to a more agile environment, which which includes elements of things like cloud Thats the technology, but it's really about moving to an agile environment and being more digitized on a holistic basis. So those are the priorities. We're looking at and then of course, how they can leverage the technologies the various technologies, whether its machine learn.
Whether it's.
Cloud whether it's.
AI et cetera.
To help them achieve those goals. The other one I would say Stephanie that we're hearing more and more and of course with cop 26, It's pretty loud is really around sustainability and it comes up in every client meeting I have whether it's the financial institution, whether it's manufacturing.
Of course for the energy companies, it's front and center it is and even the retailers. It's a discussion that we have and of course with our IP centered on the all important element of data.
That's where that's where we see a lot of demand and opportunity moving forward.
And then maybe more broadly and maybe building on that.
That last question when you think about doubling the size of the business can you talk a bit about where you see those major sources of incremental revenue coming from.
Of the incremental revenue will again, a lot of its play yeah, a lot of it's playing into the demand you see answered Paul's question. Some of it I think as you see some of this convergence there is opportunities for us to add more too to our IP around the business process side, there is opportunities for us.
To move into the <unk>.
Convergence, what we see on the Internet of things for manufacturers and get into some of what previously might have been referred to as engineering services.
So I think those are some of the opportunities for us to grow and of course, we'll do that in a balanced build but also looking to buy.
Perfect. Thank you very much.
Your next question comes from Daniel Chan from TD Securities. Please go ahead. Your line is open.
Hey, good morning with.
With the increased wage and wage environment any thoughts on changing your mix of staffing.
Potentially increasing more in low cost areas or nearshore areas.
Yes, no that's a.
Great question, and I kind of threw this into one of my previous answers, but yes, we are actually growing faster in our global delivery centers of excellence around the world and we'll continue to do that CMC comes with some some global delivery centers in areas that we didn't have before we are seeing.
Take for that from from our clients and again, it's not just offshore in fact, it really is.
I think the the model that we have on global delivery is playing very well.
And tapping some some talent in other locations, but still closer to time zones and closer to our clients, who have kind of a mix between proximity and offshore is playing very well and we expect to continue to grow there.
Thanks Thats helpful.
You mentioned that you had some CPI adjustments built into your contracts can you just remind us of the mechanics around that does that usually happen around the renewals or can you kind of go.
While the project is still running if there's some delays that are met.
Yes, no. It's a good question typically.
They run on either a contract.
Annual basis, or sometimes a calendar annual basis in other times the clients fiscal year annual basis. So some combination so theres no youre not going to see one uptick, but we don't have to wait for the end of the contract renewal Francois.
I totally agree with most of our contract.
Vast majority.
<unk> cost and the contracts so that we can increase at least on an annual basis.
Okay. That's good to hear and then last one for me.
I know bookings can be very volatile metric, but can you kind of comment on the low bookings in this quarter relative to a strong market backdrop, just wanted to say anything there. Thank you.
And thanks for mentioning that the bookings are always lumpy in general which is why we really focus on the trailing 12, but a few larger deals.
One in particular did push out of the quarter.
Won but not signed and of course, we need to make sure that we that we dot all the I's and cross all the Ts and so we're not we're not too fussed about any one quarter, but but certainly we had strong IP bookings strong consulting bookings and the new business is up and some of that is we did some of the big rig.
<unk> in certain locations like Canada earlier in the year. That's good news because now you see the bookings are really going to be driving near term growth. So that's that's kind of how I look at the bookings right now so.
Nothing nothing to be too concerned about.
Your next question comes from Kevin Krishna Rodney from Deutsche Bank. Please go ahead. Your line is open.
Hey, good morning, gentlemen, a question for you you talked about how your SaaS based IP revenue was up strong and you alluded to cloud growth there as well as narrow way.
You can give us perhaps the size of the cloud business right now for you or maybe another way any any thoughts on how penetrated you are in.
And the quality of what your customers are saying about where they are on the journey just any any updated thoughts there on the cloud business.
Yes. Thanks for the question, we don't break it out that's why I gave some of the color commentary on some of the deals and you see that probably two thirds of the deals I mentioned.
Some element of the of the cloud involved there.
Also mentioned I think last quarter that we've elevated.
The partnerships with each of the major cloud providers.
Direct reported mine owns each of those <unk>.
Engagements, so because we see a lot of opportunity.
In general from a market perspective, there's still a lot of applications not on the cloud that could take advantage of the opportunities of the cloud and of course, there's a lot of work between here and now it's not just don't.
Just flick, a switch and the cloud work so.
That's why the partnerships with the cloud providers, we see as a big opportunity, we don't break it out that way, but that's something that that we have and of course, we have.
As I mentioned, the SaaS revenue for our own IP is going up going up as well that's now over half of our IP now as is.
Bookings are in the SaaS space.
I know that because thats our own IP.
Okay. That's helpful kind of goes to my next question on competition I'm wondering if you could talk about.
If theres been any any change material change how your win rates are progressing you talked about.
The consulting based revenue.
Been doing while accelerating just curious to know.
What youre doing what youre seeing higher winning business hi.
Hi, you bring your IP into at the table to win those deals.
Yes, well it's interesting you know we made some investments on the IP and I mentioned that better leveraging our global footprint as a channel for the IP. So that's that.
A highlight I gave on the 50% increase in acquired IP, but what I didn't say is that.
The deal size in the pipeline for our IP is going up and thats through partly through linking some of those Ips together along with some of our other services, including consulting and PPO and then the win rate is increasing so we're leveraging our global IP subject matter experts better across the company.
By bringing it into that global <unk>.
Global footprint so.
That's what so the win rate is actually increasing with our IP and it's holding steady across the across the company.
Okay great.
Great to hear one last one.
Look on supply chain I know that there's obviously no direct implications given your business software cloud base, but just wondering if youre seeing any sort of indirect exposure for example, it might be a deployment for an Iot project or you are working on with the client on a deployment that requires a lot of device.
On there and is there any any sort of.
Timing delays that you might be seeing or being impacted from anything yes, yes. Its a good question Youre right theres not theres not direct but there is there is pockets of indirect but its pretty its pretty limited right now, but we do see it.
So.
Something that we continue to look at a lot of our clients our enterprise clients as you know and they tend to have the power right now and.
And so they've done.
We've actually managed it quite well.
Very very impressed with how our clients have managed some of this but we do see pockets of it popping up and we're keeping we're keeping an eye on that.
Hasnt delayed any of our projects may be delayed some of our <unk>.
Revenue in certain places, but again just pockets.
Great. Thanks, a lot I'll pass line.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad your.
Your next question comes from Rob Young from Canaccord Genuity. Please go ahead. Your line is open.
Hi, Good morning, you just said a little bit ago that consulting bookings were quite strong and so I was looking at the absolute dollar contribution from ESI in CNC to low going back a little ways and so I'm just trying to reconcile.
That statement is that short term signings I mean, any kind of color around what's going on there yeah, yeah, well I'm breaking out consulting from systems integration and I had mentioned earlier that some of that systems integration work. We're now embedding into those managed services contracts. So that continues to be.
<unk> be a trend in fact, it's part of the offering the way we offer our managed services how do I save some money on one side and then spend that money in traditional systems integrations. So youre seeing that we're even seeing that in some of our local.
Government work, where we extend to managed services contract and then the.
System integration, which is near term spend but it's under the umbrella of the managed services. So it shows in the managed services.
Revenue.
So thats I think thats, what you are seeing but discrete consulting projects are up both in bookings and in revenue I mentioned some of Thats in digital advisory a lot of Thats in change management and again. This is really good because it's a discrete consulting which then may lead to that broader systems integration wrapped.
And managed services. So that's why I highlighted it.
That's great color and then I mean, a lot of comments on the call today about.
The hiring and I think you earlier said that utilization was very high very strong contributor to margins this quarter and so maybe if you stand back and look at the business are you seeing constraints related to capacity or would you say, it's because it doesn't sound like there is demand constraints and just I mean.
To better understand the business are you able to ratchet.
Ratchet up.
Your consultants you are able to hire in lockstep with the demand that youre seeing out there or would you say capacity growth as a constraint.
We have Ben Thanks for the question, we have been able to to keep up but.
It is it is an intense environment as I mentioned, maybe just give you some color commentary.
A third of our new hires come through those referrals that I mentioned are a 30% about a third come to us and actually inbound so we advertise and.
With the movement.
Actually people are looking to move.
Two companies like CGI and so we're about a third of them are coming from coming in and so a third is coming from that outreach and so we've increased our recruiting.
Twofold to ensure that we keep up with that.
I'm not going to say that thats, not still intense and we continue to to increase that that's a good news.
But again Thats also where we need to focus on the retention, which I mentioned earlier and then our high engagement our culture and.
And what we're doing there on the training and development are helping us to keep up with that I'd also mentioned one other statistic our our hiring has increased but our acceptance rate has held at.
At above 80%, which is which is very positive, saying that we're able to not just attract but.
But to get the acceptance from those that we choose to make offers to okay.
Okay. That's great and then last question I used the term technology that I really like that term sort of bleeding into the tech lexicon here.
Would you.
When you look at your customer mix would you say that relative to other your peers.
In the space would you say that your customers lean a little towards.
It would have technology that or would you say that.
Youre mixes less than some of your peers.
No I would say it's on par I haven't every every industry every geography and most clients have some technology that and so I think it's just a matter of.
Like I said to helping them work through that and remember the technology that is increasing just by the very nature of what's going on in the marketplace. So it might not be that Thats 30 years old it might be that that was that wasn't there five years ago, but now as you move to more agile.
Dev ops type environment.
You got to make some of those changes so we're seeing our clients move very quickly along with the well along with our marketplace are there any end markets, where it's more pronounced.
Okay.
Or.
Well, there's always there's always a regional differences.
Across this euro.
Europe might be a little ahead in one area, whereas North America might be a little ahead in a different area and so this is the richness of bringing our global insights and being able to do that across regions and also across industries as one industry moves to more of a.
Our customer facing environment that they werent in before they can learn from another industry. So.
Not not a pronounced way, but certainly an opportunity for a global consulting firm to help our clients across the globe.
Alright. Thanks.
Yes.
Your last question comes from Howard Leung from Baird Investment Research. Please go ahead. Your line is open.
Great. Thanks for taking my questions.
The first one I have it.
On the leases and just overall, how you workers going back to the office or staying the same remote.
Solid there was a gain on on these termination and and also the lease liabilities I think they were down something like 12% from last year is that is your plan to kind of continue winding down some of these leases and.
With all the questions before about hiring worker, how does that fit in with.
Your view about retaining and attracting talent.
Yes, maybe I'll, let francois talk a little bit, but the leases, but just in general.
When we look at.
When we look at our talent and what we are doing on behalf of our clients and working with our clients we find it.
It's important to spend some time working with your colleagues and sometime working with your clients and so we do believe that there will be a return.
To the office, we're up to about.
<unk>.
25%, if you take out India, probably 30% of our employees now spending some time in the office more pronounced in Europe, where it's 50% in some cases higher a little bit of a.
A lag in North America.
<unk> in Canada, but we're beginning that return in Canada in November and even beginning to return in India. In January we think Thats important for innovation, we think thats important for.
For mentoring, which is what people are looking for as far as growing their careers.
<unk> said that of course, we.
Also recognize that people were very productive during the pandemic and some of the work that they're doing and so it really is we believe a hybrid at least for the current environment is one that we'll continue to look at so two the leases we're looking at hybrid right. So <unk>.
So thats why in the meantime, our renewal or what we're doing is that we're reducing the number of years, so and going a little bit more on short term leases and signing seven or 10 or 15 years leases just to understand and also where the market is growing.
And like Georgia things since the for now we are to a certain in the hybrid model.
Until we will have a better visibility when people will come back on the full base basis for.
Now, we're going with shorter lease and sometimes even the.
Non renewing some leases in the meantime.
Alright, great.
Really helpful and any.
Maybe it maybe it might be too early to call out what kind of impact that could have on your adjusted EBITDA or free cash flow margins.
Going forward.
By further EBIT margin like Georgia alluded to I think we had strong EBIT margin.
This quarter this year over to 16% I think we still have some opportunity to increase it.
With examples like the worst thing Scandinavia that the expectation is that we would see improvement on the EBIT margin and visa in this area on.
On the other has also with the return back.
That we're meeting clients more and more now.
<unk> presence.
Some of the <unk>.
Travel and.
And out of pocket expenses are coming back in so that will be naturally a headwind.
But again compensate by by improvement that we can still see in India and the operations.
That's great great.
And then just one on M&A George you mentioned earlier that Youre investing more in M&A now.
And you invest in more of the capacity just wanted to see if there is any more color on that.
Increasing the size of the M&A team.
<unk> for M&A infrastructure or.
Or the process I just wanted to find out how how it's expanded.
Yes, no. It's a very good question because it's yes to everything you just said, it's increasing the team size, particularly.
Across each of the markets, so not just centralized but adding.
Individuals' dedicated M&A within each of the proximity is closer to the sourcing it's it's leveraging some infrastructure some some various <unk>.
Software platforms to ensure that we're seeing all the deals and then its also some some changes to the process. So it's really all of the above.
Okay.
Great.
And just one final one for me and saw that buybacks in the quarter I think slowdown ticked down quite a bit from the previous quarter was that just.
Does it have any.
Or maybe just because you were going through the bond offering just wanted to note. If there was any call out there.
Yes.
Nothing related to the price.
Yes, we did work on the bond offering, but again that was not necessarily having an impact of why we then go or go on the market, but also the fact that we had some good momentum on the on the acquisition and finally closed to new ones.
October it was close to even close them in September. So that was also part of the equation why we were slowing down some share buyback in the quarter again, just to reiterate our priorities are investing back in the business and the second priority is M&A and.
Share buyback is a third one naturally so so.
And last year, we had only two acquisition, but this year the momentum is.
It's a very good starting with the two new one in October.
Hoping that we will have more in the in the year.
Okay. Thanks, so much that the priority makes sense I'll turn it back.
Yes.
We have no further questions in queue I'd like to turn the call back over to Mary <unk> for closing remarks.
Thank you Julian and lots of great questions guys. Thank you everyone for participating on this call. We hope that will join us for our Investor Day on November 22nd just a reminder, and please put it in your calendar. We hope that you can join US then.
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The host has ended this call goodbye nanometer question.