Q3 2022 CGI Inc Earnings Call

July 27, 2022

Good morning, ladies and gentlemen, and welcome to Cgi's third quarter fiscal 2022 conference call and I would like to turn the meeting over to Mr. Kevin Linda SVP of Investor Relations. Please go ahead Sir.

Thank you Sylvia and good morning, with me to discuss Cgi's third quarter fiscal 2022 results are George Schindler, our president and CEO .

Francois Boulanger executive Vice President and CFO , and Steve <unk>, Senior Vice President and corporate controller.

Effective October one and previously announced on May 27th.

First of all I will assume the position of President and Chief operating officer, overseeing CGI as North American and Asia Pacific operations, excluding the U S Federal segment.

Steve will assume the position of executive Vice President and Chief Financial Officer.

He joined Steve He joined CGI 23 years ago, and held a number of senior finance roles before being named corporate controller in 2019, the appointments of France want Steve to their new roles reflect their deep understanding of <unk> business.

The it services industry.

This call is being broadcast on CGI Dot Com and recorded live at nine a M. Eastern time on Wednesday July 27, 2022 supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our Q3 MD&A financial statements and accompanying notes all of which have been filed with both.

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 Dot com.

We recommend our investors read it in its entirety.

We're reporting our financial results in accordance with international financial reporting standards or <unk> 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 are Canadian unless otherwise noted.

I'll now turn it over to Francois to review, our Q3 financials, and then George will comment on our business and market outlook, George Francois and Steve will then take questions Francois.

Thank you Kevin and good morning, everyone I am pleased to share with you the results of our third quarter of fiscal 2022.

In Q3, we again delivered double digit constant currency revenue growth as we continue to see strong demand for our services adjust.

Adjusted EBIT margin improved by 20 basis points to 16% and EPS, excluding acquisition and integration costs expanded by 13%, even when considering the negative impact of European currency fluctuations on our cannon reporting currency.

As a reminder, and as announced during our call in April . This is the first quarter, we are reporting with our new structure.

Their former Scandinavia in central and Eastern Europe segments are now Scandinavia in Central Europe comprised of Germany, Sweden, and Norway, and northwest and Central East Europe comprised primarily of the Netherlands, Denmark and Czech Republic.

These changes to our organization will allow us to drive revenue growth and expand profitability, particularly in the Scandinavian countries.

For the quarter revenue was $3 $26 billion up 11, 5% year over year, when excluding a $109 million of unfavorable foreign currency impact.

This strong growth was driven by the following segments Asia Pacific up 23, 3%.

Western and southern Europe up 23, 2%.

Up 18, 2% and U S commercial and state government.

13, 6%, notably all of our segments delivered positive constant currency growth in the quarter.

In fact, the number of our consultants and professionals increased year over year by 10500 for a total of 88500.

The majority of our members are located in proximity to our clients to support close collaborations. However, a large proportion of our hires this quarter were made in our global delivery centers of excellence to enhance our delivery and productivity effectiveness.

Overall, 22% of our members are currently base and offshore delivery centers of excellence.

Total bookings were $3 $4 billion, representing a book to bill of 105% for the quarter led by continued robust demand for our system integration and consulting services.

Our managed services and IP bookings remained strong on a trailing 12 month basis, and we expect to see ongoing demand for these larger and recurring deals as evidenced by our growing pipeline in both services, our es and.

In fact, our pipeline of managed services deals with a projected decision date in the next 12 months are up 32% on a year over year basis we.

We see increasing interest for our value proposition, which delivers cost savings for our clients, while supporting them and the acceleration of their digitization.

IP pipeline is also at a two year high with opportunities having a projected decision date in the next 12 months up 54% on their year over year basis.

In Q3, five hour eight proximity geographic segments had a book to bill above 100% led by U S commercial and state government at 136%.

And UK and Australia at 115%.

And from an industry perspective led by health with a 129% book to Bill as organizations continue to enable virtual health care delivery.

And servings.

While answering sicker data privacy protections and government with a 117% book to Bill as agencies continue to prioritize a range of domestic initiatives.

Such as social and health services infrastructure space based data solutions environment, and the climate and cyber security all areas of strength for CGI.

Our book to Bill was 105% on a trailing 12 month basis in our global backlog continues to remain strong at $23 2 million, representing one eight times revenue.

The vast majority of our backlog is comprised of long term recurring revenue engagements.

With respect to profitability.

Adjusted EBIT in Q3 was $520 million, while EBIT margin increased to 16% up 20 basis points compared to Q3 last year.

The year over year increase was largely due to margin improvements in our two new reporting segments and stronger demand for offshore services.

This more than offset the temporary dilutive impact of recent acquisitions, and our western and southern Europe and U S segments as well as a lower billable utilization in several geographies driven by the Onboarding of new hires in response to a high demand.

We delivered very strong EBIT margins, notably in Asia Pacific at 37%, Canada at 21, 7% and U S. Federal at 18, 2%.

Overall and on a year to date basis, we delivered 16, 3% EBIT margins and improvement of 30 basis points when compared to last year.

Our effective tax rate in Q3 was 25, 5% compared to 24, 9% in the prior year.

We continue to expect our tax rate for future quarters to be in the range of 24, 5% to 26, 5%.

Net earnings were 370 <unk>.

$264 million and diluted earnings per share were $1 51.

Representing an expansion of 11% year over year.

This improvement was mainly driven by the execution of our build and buy profitable growth strategy.

Excluding integration costs net earnings were $371 million, reflecting a margin of 11, 4% and diluted earnings per share of $1 54 <unk>.

The accretion of 13, 2% when compared to $1 36.

In the same quarter last year.

In the quarter cash provided by operating activities was $419 million comparable to the prior year.

DSO was 48 days or 46 days when removing the to date impact created by the timing of the Humana acquisition.

This compares to 44 days last year.

For the last 12 months cash provided by operating activities was $1 $9 billion or 15, 1% of revenue.

This represents $7 77.

In cash per share.

In the quarter, we deployed $512 million to fuel, our build and buy profitable growth strategy, mainly for the humanity and harwell acquisitions, both in our western and Southern Europe segment.

As announced on July 18, CGI acquired over 90% of Humana's shares and launched the squeeze out process to occur are all remaining shares.

In Q3, we invested $114 million in buying back approximately one 1 million shares at a weighted average price of $101 and 31.

And as of the end of June we have the authorization to buyback up to an additional $13 7 million shares under our current and CIB program.

These results yield a return on invested capital of 15, 8% compared to 13, 8% in the prior year or a year ago period.

Looking ahead, our capital allocation focus continues to be on delivering double digit returns to our shareholders.

The cornerstone of CGI build and buy profitable growth strategy is our strong balance sheet position.

At the end of June our net debt to capitalization ratio was 36% and our long term debt interest is fixed and an average rate of 158%.

We also have $2 $3 billion of cash readily available with access to more if needed.

Now I'll turn the call over to George George Thank.

Thank you Francois and good morning, everyone.

<unk> strong performance in the third quarter of fiscal 2022 again demonstrated the value of our end to end services the breadth of our enterprise clients across all industries and the consistent operational rigor for which we have a proven track record of delivery through all economic cycles.

Our portfolio of end to end services provides the right combination of value based solutions to help our clients navigate today's market environment by.

By creating value for our clients were able to drive revenue growth and margin expansion for the benefit of all CGI stakeholders are.

Our revenue growth in the quarter was 11, 5% on a constant currency basis, and broad based across all geographic and industry segments consistent with our profitable growth strategy, we again delivered double digit EPS accretion and expanded EBIT margin.

We have good visibility in the client's expected spending plans based on the client interviews, we conducted earlier this year with over 1600 executives.

I would like to share some insights from these interviews into the ongoing piece.

Services client demand along with examples of representative Q3 bookings that illustrate the value of each of Cgi's end to end services.

Relating to managed services nearly 60% of clients plan for flat to declining opex spend over the next year in part as a response to economic predictions chorus.

Correspondingly <unk> planned to increase their reliance on managed services by up to 13% over the next three years, a clear and accelerating opportunity for CGI in the coming quarters.

In Q3, we were awarded new managed services engagements, which point to a trend where clients are asking CGI to take on and modernize their legacy operations to generate cost savings and then subsequently manage their transformed operations for sustained cost efficiency and operational agility.

For example, the.

The society for human resource management, and CGI entered into a 10 year $198 million full managed services partnership C.

CGI will deliver services and solutions to accelerate their digital transformation and enable them to deepen their impact on the future of work with their member base of more than 300, HR and business executives around the world.

Rio Tinto at leading global mining and metals company renewed and expanded their long term partnership with CGI to help them modernize through the strategic use of cloud as part of their ongoing digital transformation.

<unk> will also deploy our proprietary site reliability, IP or SAR, 360, which automates the overall management of our hybrid cloud ecosystem.

In the UK home office selected CGI to serve as a strategic delivery partner for their police and public protection technology portfolio.

Under the five year engagement, which has an expected client spend of $145 million CGI will deliver user centric solutions to help the agency improve public safety through Digitization.

Turning to voice of our clients findings related to consulting and systems integration, 86% of clients planned flat to increasing capex spend over the next year. In addition, a higher proportion of clients plan to invest in new digitization programs of over $200 million over.

Over the next three years.

Furthermore, 88% of our clients indicated they are having difficulty hiring talent leading to more of our clients who plan to externalized the majority of their it services work.

Given these findings demand remains strong for CGI as consulting and systems integration services. This was demonstrated by numerous wins in the quarter for example.

European Commission chose our German team to support the development of the independent European satellite constellation.

Work will include the creation of an automated concept for operating the satellite constellation and also embedding comprehensive cyber security.

Maersk awarded CGI in Denmark, a new agreement to deliver a range of strategic consulting and agile application development services, our consultants will help <unk> to modernize their digital value chain reduced costs and improved time to market for the company's global logistics and transportation services.

And the business development Bank of Canada engaged CGI and our outcome based model for agile development with delivery slots.

CGI is unique replicable model is helping increase capacity and velocity to accelerate the bank's digital transformation objectives, while reducing the risk.

Now moving to our intellectual property.

Based on ongoing client discussions, we see rising demand for CGI as offerings to help clients optimize their operations increase their agility and counteract the impact of rising inflation as.

As well as increased interest in engaging CGI on go to market partnerships for client own proprietary IP.

This includes an interest in monetizing their IP through a divestiture to CGI.

In the quarter, we completed two such partnerships, where we will assume ownership for clients IP as part of a broader project engagements first with IGN financial in Canada for our mutual fund transfer agency platform and second with a global bank in France for a solution to streamline retail banking end to end.

<unk>.

During Q3, it's also awarded new engagements for CGI IP across multiple industries. For example, a fashion retailer based in France selected CGI as Google Cloud hosted point of sale solution within our retail suite IP. This.

This solution will increase their omnichannel performance and experience for consumers.

On a leading global auto manufacturers extended their relationship with CGI UK team for an expanded implementation of our asset finance solution or <unk> 360 <unk>.

Asset management processing in the U K, France, Italy and Spain.

International search and rescue organization in the European Space Agency joined as partners in the design and development of <unk>, New cloud based data analytics and augmented reality platform.

360.

This solution provides a holistic situational overview that helps organizations more efficiently organize and accelerates rescue operations.

And in the U S government sector, we were awarded new contracts with three state and local clients in Kentucky, California, and New York are advantaged are built for local government ERP platform.

And at the federal level, the department of Justice extended their long term partnership with CGI in support of their enterprise wide financial and asset management systems based on our built for government momentum and Sunflower Ips.

Globally <unk>.

<unk> of overall services revenue that is IP base was just over 20% for Q3 as a result of Onboarding revenue from new mergers without IP.

Consistent with our recent messaging, we continue to expand our M&A pipeline to include more IP based services and solutions firms. Our current active IP based services targets increase by 150% compared to the same time last year.

Through the combination of our managed services consulting and system integration and IP, we are well structured to deliver value for all three stakeholders.

This is supported by our CGI management Foundation, which enables teams around the world to act effectively efficiently and consistently as one company.

The management Foundation incorporates 46 years of proven best practices and frameworks to ensure high quality and secure project delivery, allowing our consultants to maximize time spent on supporting and innovating for our clients.

As importantly, codifies, our values policies principles and performance metrics to govern and facilitate operational excellence everywhere CGI operates.

<unk> when we do M&A.

The management foundation enables us to rapidly and profitably integrate new mergers.

Looking ahead.

We will continue to pursue our build and buy strategy to continuously strengthen our positioning.

First we're preparing new university hires to rapidly joined client engagements through investments in practical consulting courses and emerging technology boot camps. In addition, we continue to invest in the ongoing career development of all existing talent as part of our full year plan to increase our training and investment by 33%.

Our hiring of new talent at all experienced levels remains at a record high and in line with client needs.

Notably we had increases in training a new University graduate hires.

52% and 62%, respectively compared to the same quarter last year.

Secondly, we continue to invest in our managed services capabilities to support clients, who increasingly seek cost savings.

In fact, we're adding capacity in our managed services deal solutions center to provide additional support for local teams as they respond to an increasing demand for larger strategic client engagements.

Next we continue to make investments in our IP based services and solutions.

Adding new solutions to our portfolio and enhancing existing solutions.

Emerging client needs.

Extending our IP through our relationships with external global Alliance partners integrating with their third party IP to bring added value for our clients.

And expanding our portfolio through M&A of client based IP as well as firms focused on delivering proprietary intellectual property.

Finally, our M&A pipeline is growing in quality and quantity.

And at a faster pace.

<unk> in market activity or creating more favorable buying conditions for mergers with both metro market services firms.

And for transformational mergers in the third quarter, we closed two new mergers humana's, adding nearly 3000 consultants and professional specializing in data digital and business solutions and harwell, adding 150 business consultants, serving clients primarily in the financial services sector and free.

<unk>.

We remain well positioned to continue executing on our plan and accelerating growth through our buy strategy and we continue to be on a pace to meet our planned $1 billion investment in M&A. This year.

In closing client demand for all of our end to end services remains robust given the critical role that it plays in helping clients drive enterprise level modernization and Digitization programs.

Now team of 88, 500 consultants and professionals worldwide with the capacity footprint and expertise to help clients accelerate their digital transformation we.

We are well structured to continue driving revenue growth and margin expansion for the benefit of all three of CGI stakeholders. Thank.

Thank you for your interest continued interest and support for the questions now Kevin.

Thanks, George Sylvia, let's queue up the questions from the participants please.

Ladies and gentlemen, if you do have any questions. Please press star followed by one on your Touchtone phone you will then hear a sweet home prompt acknowledging your request and if you would like to remove yourself from the question queue simply press star followed by two and if you're using a speaker phone. We do ask that you. Please lift the handset before pressing any keys. Please go.

Ahead in breast Dhawan now if you have any questions.

And your first question will be from Stanley <unk>.

At BMO capital markets. Please go ahead.

Hi, good morning, and congratulations Steve on your new roles.

George maybe expanding on the macro sites.

Clearly it sounds like you're seeing a strong demand environment, but just to be explicitly clear.

If you look at the conversations Youre having.

Two weeks.

Has there been any changes you'd call out in terms of customer telling in terms of.

Sales cycles decision, making timeframes or would you say that across most geographies and industries.

It's still very consistent with that demand backdrop.

Yes.

Thanks for the question Thanos.

Recent discussions Ive had with Dsos of course, there is more discussion about both inflation and.

And where the economy might go given the tightening of the money supply but.

It's not changing their resolve and those discussions around.

Where they want to go with.

It may change the way they write their business cases, but it doesn't change their overall demand and appetite for it and I think thats thats pretty consistent across all of the discussions I've had and this is true in both Europe and in the and in the North.

Ricker, where.

Demand is holding up now in Europe right now of course, we have the summer holidays, but.

Seriously.

It appears that.

At.

Demand remained strong you can see that from our pipeline.

Okay and in terms of offshore and the growth you're seeing there and I guess more broadly the growth that we're seeing across the industry.

Would you say that is a function of for clients for an offshore to a greater extent in the past for cost reasons or does it have more to do with just that's where the labor availability is right now.

Right.

I think it's a combination of factors certainly cost increasingly plays a role so I would say that that's one of the key drivers probably.

The key driver I think there is also a recognition by a lot of.

A lot of clients that given the remote nature of work over the pandemic, they're more open to it and so you got the that's a secondary and then talent availability is.

Something that everybody is looking for but I will tell you. They are also getting more creative around.

Some of the onshore and nearshore global delivery centers that CGI hasnt. So there's still interest in that kind of gives you a combination of the above.

And then finally kind of a related point at the Investor Day, you talked about growing your offshore.

CAGR over the next three years, it would seem that you're tracking well for that given given the revenue brokerage team.

Exactly right.

Exactly right higher percentage and global delivery thanks for observation.

Alright, Thanks best of luck.

Thank you.

Your next question will be from Stephanie price at CIBC. Please go ahead.

Good morning.

So can you talk a little bit of puts and takes on cash flow in the quarter as a percentage of revenue it looks like it's lower than we've historically seen.

Yeah. Thanks, Stephanie.

And a lot of it is explained by by by their working cap. So.

With the growth acceleration of the growth this year.

For sure, it's asking too to a bit more working cap.

To be invested so thats really where its coming from.

And last year, we had that big.

At <unk> <unk>.

<unk> of the DSO onetime impact because the year 2020, we were at the high Forty's and beginning of <unk> and we were capable to reduce it.

$45 46 days last year, so that gave us.

At one time bump that we don't see it this year because we're maintaining it at the same level.

But with the growth that we have and Thats really thats, giving some pressure on the working cap.

Okay. That's helpful. Thank you.

And then George you mentioned that some clients are looking to divest IP to CGI I was hoping you could dig a little bit deeper into this comment and talk about how large this opportunity could be.

Yes.

It's interesting Stephanie.

Been having this discussion every year with our clients.

Looking at the IP that they have locked within their own organizations and I'd say its pretty its pretty sizeable and of course given the current.

Economic conditions Theyre looking at.

Can they unlock that and I mentioned, the the two women with IGN here in Canada, and then one one in France, but.

We're building a pipeline of those.

Now we have to make sure that they fit into the overall portfolio because we didn't we didn't build them and so we're doing the due diligence the same way, we would do with it with an M&A and they kind of have a flavor of both M&A and outsourcing.

They usually come with us providing services back to that client and maybe even some other clients. So.

It's early days.

Tip of the iceberg, but more to come on that.

Thank you and then just finally from me following up on Jonathan's question.

Obviously demand has been very strong as if we were to think about the changing in the macro environment changing even more can you walk through kind of <unk> business, and which pieces could be more resilient and what opportunities. You think are out there in a weaker market in a weaker economy.

Yes.

Something obviously that.

Is that I mentioned in my in my opening remarks is we've got those end to end services.

Our structured to allow us to really thrive in multiple different economic conditions.

It starts with that proximity go to market model, which enables us to really emphasize the services and solutions in highest demand in fact.

Our solutions in highest demand at this point in time were more on the consulting and the systems.

Our systems integration.

But we're able to kind of pivot and.

And complement those.

Proximity by obviously, our global support structure and both as delivery centers, but also in the IP and the managed services. So.

That structure allows us to make that happen so clearly when.

When we move into areas, where cost savings are more important the IP and the managed services become far more resilient and the nice thing about that is those tend to be larger deals they tend to be longer term deals recurring deals.

And we can typically deliver those at higher profit margins, because it's higher utilization and lower cost of sales once you get one and so.

Sure you know we have done very well in prior recessionary periods now what what I'll tell you, though is I think it's a little bit different this time.

<unk> is no longer discretionary and we expect demand will actually respond differently, we're even seeing that in some of the strength in the systems integration and consulting I don't think prior periods, where our systems integration and consulting.

Contract dramatically I don't think that's what we're going to see certainly not what our pipeline shows is certainly not what some of the conversation. We have that gives you an idea of how those end to end services play out.

Great color. Thank you very much.

Thank you next question will be from July .

Okay.

Hi, Good morning, Thanks for taking my question is on the Tac layoffs.

I know, it's not particularly upfront with your direct peers, but im wondering if this could have a positive or negative impact on CGI and Omar Mark Allen It's available for you guys, but also for our clients.

So maintain part not the great drain on the economy. So if you can provide color on this thanks.

Sure.

Youre right its not its not directly related a lot of those big Tech are really in the in the consumer space or or closer to the consumer space. Then that we are having said that.

Yes. It gives us two opportunities one is on the on the talent side, but the other is really on the partnership side.

Not not.

Unlike what we just discussed with the with.

With Stephanie around clients looking to unlock some of their proprietary IP I think we'll get a we'll have a richer.

The environment for partnerships with some of those.

Those big Tech, which are some of our bigger global Alliance partners. So I think there's opportunity in there.

But certainly it's not directly related our business is in it services on the business business side is different.

Great. Thank you.

Thank you next question will be from Steven Li at Raymond James. Please go ahead.

Thank you Hey, George.

Thanks, It looks fine, but anything you wanted to call out I saw the U S fed was a bit lumpy or anything stood out in Europe . Thanks.

Yeah no.

Thanks for that bookings were particularly strong in Si and C is as Francois highlighted and they obviously are the or not.

Multiyear deals that some of those IP and managed services. So that's why you see what you see so it is still like you said very very strong some of those larger deals did push to the right bookings are always lumpy. So that's that's what you see and you saw that our government.

Bookings were exceptionally strong even without the U S Federal where we had some big deals pushed to the right I'll remind you, though on the booking side.

Some of the strongest backlogs are in CGI.

<unk> federal business, which is well over the CGI one eight it's about $2 three and Canada of course has a.

Our backlog of three times revenue so.

And then the last thing is just the <unk>.

The recent acquisitions and some of the restructuring skew some of the results a point in time, but that will work itself out. So we feel pretty confident that the healthy pipeline will lead to bookings.

In the coming quarters, so nothing nothing big but that gives you. Some maybe some of the color commentary you were looking for.

And more products in Europe George.

And in Europe , I mean Europe .

Said earlier, we continue to see strength in the on the demand side and in Europe . It's it's sustaining it is.

It's the holiday season, So you got some cyclical nature in there, but but.

All the recent discussions Ige actually just in Europe for two weeks and the demand.

As appears to still be very strong there.

Got it Okay and then congrats on the appointment.

Pipeline comments very helpful. Can you maybe make a similar comment on your pipeline how much it's up year over year or just give us an update on IP. Thanks.

Thanks, and your remarks, yeah. So thanks, Steven Yes, IP did go up on the.

On the.

On the on the pipeline side.

Year over year so so.

It's going well, we have a lot of.

Of momentum on that side with <unk>.

Including in the North America and in European segments. So momentum is there and we saw a good.

And the last in the next 12 months, we are seeing a lot of decision, making that will happen on some of the larger deals in the IP.

Got it and then maybe a question for Steve also congrats Steve and the <unk>.

Margin comments, the lower utilization in Canada, and the U S. We've onboarding of new hires.

Secondly, there is utilization catch back up pretty quickly like next quarter.

Yes.

First of all thank you and thank you for your congrats and thank you for the question.

Yes.

The litigation, obviously, when you are Ari equaled and it's our strategy right now we are doing some boot camps were training folks.

New hires obviously it doesn't impact on utilization.

As soon as that people are finalizing their trading obviously, the our vehicles, we are ring them, because we see the demand and.

You see this.

With readjust.

A bit of a tailwind it correct itself pretty quickly Steven.

Stephen but the good news is we continue to hire so we're we continue to have strong demand on the hiring side, so kind of moderates, but ultimately it will be a tailwind in the quarters to come.

That's great. Thanks, guys.

Thanks.

Thank you next question will be from Brian Essex with Goldman Sachs. Please go ahead.

Hi, good afternoon, and thank you for taking the question.

Rather.

I was wondering if you could maybe circle back on the on the hiring comments it looks like nice.

This increase in head count adds look I think you've mentioned about little over 3000 came from acquisition could you maybe reconcile that with with some of the utilization commentary that you had were.

I would imagine that a lot of these.

Inorganic.

Adds would've been lateral hires so maybe if you can kind of.

Dig one layer deeper to help me understand what the mix is in and how that how that reconciles with the utilization comments.

Yes, yes.

Thanks for the question Brian .

Youre right the inorganic hires they pretty much in most cases stay billable with their with their existing clients of course, we have typically have a higher utilization target within CGI as part of our management Foundation. So thats part of the of the integration process, but independent.

Of that yes.

Hiring as I mentioned are up significantly, particularly in our training and new University grads.

They do go through those those onboarding training classes et cetera.

Over over a 1000 of those those hires joining us as part of the net new hires and so those individuals are really driving some of that that.

That training as well as much higher much higher hiring.

Global delivery centers, particularly in India. They also go through.

<unk>.

Our 9% to 12 week boot.

Bootcamp to make sure that they are best suited to to hit the ground running on our on our clients. So it really is.

A situation, where theres a little bit of a lag, but as we discussed with Steve and it comes back pretty quickly.

Got it very very helpful. In really interesting commentary that you had on an integration and consulting demand.

Particularly in the more challenging macro environment.

What are you seeing inside of that business, maybe if you can if you can split out.

Integration versus consulting relative to perhaps the OE dollars nine timeframe when we saw.

Across the industry system integration work kind of fell off.

Precipitously.

Are you seeing and maybe just a newfound appreciation.

The scalability of <unk>.

<unk> digital.

Exposure within enterprise environments.

Or is that or is there a different mix of work than you've had historically in that business.

Yes.

It's interesting there is a couple of things that maybe are different.

Given the fact that.

Supply is very tight I mentioned, 88% of our clients are having difficulty hiring the talent a lot of the systems integration work. We're doing right now are really filling work that our clients would have.

Preferred to do do themselves and some in some instances, which is adding to the work that they would normally externalized and so I can see that that absolutely continuing especially in a downturn where it talent continues to be high.

High in demand and to your point, Yes, I think there is a shift and this is the discussion I have been having in fact I had a discussion with one.

One <unk> in Europe recently, where.

The discussion went like this we're preparing for a recessionary environment and yet we're also preparing to spend more in it than we ever have before.

I think thats a shift I don't think you heard that no 809.

Yeah, I agree I agree very helpful commentary, so really appreciate it.

Yes.

Any further questions Mr FX.

That's it for me. Thank you thank.

Thank you next question will be from Daniel Chan of TD Securities. Please go ahead.

Hi, Good morning, just wondering if you can.

Alright, any color on the pricing environment, whether you're able to offset the increased cost youre seeing.

Yes, yes, we're definitely seeing some opportunities there.

If you think of the each of our services. The IP is obviously.

Less sensitive to the wage inflation, but there are opportunities for us too.

It has some price elasticity given the value proposition that that Ips.

Services has the indexation built in but our team is doing a very good job of counteracting the impact of wage inflation on an on really getting that value based pricing for new engagements and in fact, we're pretty disciplined in.

And that management foundation of.

If we're going to if we're going to raise the.

The wages in lockstep and of course, we're doing some of that in.

Particularly for for our top talent around the World then that has to come with a corresponding rate increase we can do that through project rotations, we can do that through.

New project New project starts Etsy.

Et cetera, but.

But yes, we're having we're having pretty good.

Pretty good experience, there and I think youll see that clearly in the our ability. Despite some of the other headwinds that we talked about.

Temporarily.

That we are able to still expand our margins.

Thanks, that's very helpful.

I joined the call late so I don't know if someone else asked this already but just wonder if you could give us an update on whether you are still on track for that $1 billion of acquisitions. Thank you, yes, yes, I did mention that we're still on that we're still on a base.

Thank you.

Yes.

You next question will be from Robert Young with Canaccord Genuity. Please go ahead.

Hi, Good morning first question for me would be on.

Whether there could be any kind of a pause in demand you described maybe some clients are shifting the way that they might spend on it budgets, even if budgets are consistent or growing is there a potential.

You said in the prepared comments that the pipeline of managed services deals.

Had grown 32% on year over year basis, and so that is an elongation or a delay is there any pause happening there as people shift more towards managed services.

Yes, it's a good question.

<unk>.

I don't see it right now.

But.

There will be we do believe there will be a shift and a bigger opportunity in the in the managed services why we've been investing there over the last 12 months. So we didn't have kind of that that gap and youre seeing some of those nice nice wins in.

In the quarter and we have that rich pipeline.

Matter of.

Converting those but I don't see that right now but.

That's something we'll stay well stay on top of.

And then just to better understand what you mean exactly by managed services I know that a lot of cgi's businesses very very long contract terms on outsourcing.

So when you think about what.

He has managed services in your context.

Multiyear or is it 10 year, maybe be just sort of lay out the landscape of what.

Arco managed services outsourcing exactly where that 32% growth is occurring.

Yes, So I mentioned this and I understand you had to joined a little bit later, but I did mentioned some of this in my remarks that.

The managed services for us are.

Typically five to 10 year deals, but they are a bit different where they're asking us to not just take on the legacy but they are asking us to take on the legacy modernize it so actually do the development of the modernization and then.

Continue to manage those modernized operations.

And thats typically a longer term contract, which is why typically if youre going to do all of that it's going to be more of a 10 year contract, which is what we did with the society of human resources, and we're doing again with Rio Tinto. So those are those are examples of.

What's going on in that in that space and that's what we mean by that and the difference between just taking on a portion of the infrastructure and running that for a client that's not what we're talking about here were really talking about an integrated.

Both both run and change.

And build in some cases.

Okay. That's great color and then maybe last question just around.

The comments earlier around the hiring I think I got the.

Impression that you are continuing to hire aggressively.

Maybe shifting a little more towards new grader or younger.

Less experienced hiring and a tighter market is that correct and then the comment around that utilization.

Correcting in the short term I'm trying to understand why you think that might not continue over a longer term and a tight wage inflation market with yes.

Yes.

Youre absolutely right. We are we are shifting some of that hiring to the to the entry level and the global delivery centers and that's to ensure we had the we had the question on on raising the rates, but you also want to be.

Price competitive and provide the savings too.

To the clients and so one of the ways, we make sure that our labor structure is situated for that is to bring in those entry level and to bring that global delivery folks and so.

That should that should continue but when you go from nothing to something that has a bigger effect. Once that's now in the system and that hiring is there youll see it moderate.

Ultimately when the when the hiring stops it would be a bit of a tailwind, but I think it is going to be more.

<unk> moderated overtime, okay, great. Thank you very much.

Sure.

Thank you next question will be from Paul Treiber RBC capital. Please go ahead.

Alright, thanks, very much and good morning, just a follow up question on your comments in regards to pricing.

Mentioned indexation for managed services contracts does that includes CPI or are there other indexes that you use because obviously CPI has been quite significantly.

Significantly increased since year end and how quickly it is pricing adjust as it is an annual or is it quarterly.

Yes.

Typically CPI or some derivative of that and I don't know Francois Steve.

And really linked to IP.

Increases.

Overall, good yeah, it's not overall, CPI, but really CPI and <unk>.

Industry. So that's that's really specific on that side and as far as far the increases by again it depends.

When we have time and material.

It's a lot faster sometimes in the outsourcing managed services, where most of the time managed services it will be at.

Once a year at <unk> at the annual anniversary of the contract, where we will have that that discussion or that increase related to CPI.

And did pricing have a significant impact on revenue growth this quarter have you.

Broken it out or have done the analysis, there and then looking forward over the next year do you anticipate a significant portion of organic growth to be driven from pricing.

The majority is coming from from quantity if I can say.

Because again and you see it in the head count right. We did increase our head count by about 10500.

The bulk of these.

Head count increase is billable.

Billable head count so naturally.

Quantity is the bulk of the increases versus if I can say that price increase.

Okay. That's helpful.

Just one last one just in regards to Germany, I mean, I know your business or it's quite small, but German manufacturing vertical in particular are you seeing any sort of change.

In in.

They're thinking around investments just given that the macro headwinds that they may be facing in terms of energy costs.

Yes, I think.

Specific to Germany, we are having some of those some of those discussions is where are our end to end services.

Play play in where maybe they're looking at a little bit less on the systems integration and consulting side, but maybe a more a little bit more on the on the managed services side.

So it's still.

And very specific to that.

To that environment, I think thats, the one area maybe.

We're seeing a little more of those that are having a little more of those discussions.

Okay. Thank you.

Thank you next question will be from Suzanne So Kumar at Stifel. Please go ahead.

Good morning, and congrats.

Congrats Steve.

Steve on the appointment.

The first question I had was on the on your vertical markets. This quarter, we saw strength across the board I was wondering is there anything specific to call out with respect to some of the trends youre seeing within some of these industry groups.

Yes, thanks for the question.

The strongest industries for US right now are absolutely financial services.

Strong double digit growth in the financial services, and then probably right behind that is.

Actually health is a small but very healthy if I could say that but it's a little smaller for us but.

It was also very strong so kind of the larger ones are the stronger ones for us, which is which is good news and government.

Areas of spending are are right aligned with the strengths of CGI and so we're following that around the world and like like Francois pointed out strong book to Bill on the on the government side, which is which should bode well for continued growth there and that's without big book.

And our U S federal business, which will come back so.

So we're feeling pretty good about the biggest industries we're in.

Okay, great. Thank you.

And on the and on your margin outlook I mean, obviously your margins.

Margin performance.

As a testament to your cost management here and it sounds like you are.

You're still looking for further margin expansion ahead aside from leveraging your current pricing power.

Some of the other leverage that you have available to to drive margin expansion longer term.

Are there any other low hanging fruits that you can address.

Yes.

One area I would I would point out as opportunities to increase margins in those new geographic structure.

One of the reasons, we made the changes to Scandinavia and central Europe in northwest in Central East Europe was to bring those margins.

More in line and so we have a little bit more work to do there, but you're starting to see some of the improvements I'm pleased with what the team is doing there and then on the longer term. In addition to our to the growth that we've been talking about is really the mix of revenues as we as we move more.

The IP, it's why I pointed out that we.

We're building a pipeline of.

M&A.

On IP and then also those managed services because it comes at a lower cost of sales and a higher utilization.

We can drive very very healthy margins in those larger managed services deals.

The rates are different but the net margin is higher than <unk>.

Higher rates and S IMC, but quick return.

So it's just a different business now obviously it all comes together in the end to end services, but.

That's why we're pretty.

Pretty bullish on continuing to expand the margins over time.

Okay. Okay.

Thanks for taking my questions.

Thank you next question will be from Jason Kupferberg of Bank of America. Please go ahead.

Hello, and good morning. This is Tyler on for Jason Thanks for taking the call to questions. One when looking at book to Bill by segment. It looks like it's a bit of a mixed bag with some regions significantly above above others.

Thinking about the next few quarters going ahead would it be accurate to assume more of a normalized LTM number closer to one or should we think there'll be more of a stratification in the short term or any insight there would be helpful.

Yes, I think.

Bookings are always thanks for the question bookings are always lumpy so.

No.

I think I don't think theres any any key reasons for stratification.

Point in time as I mentioned, we see a pretty strong demand environment continuing in both North America and in Europe across these segments.

Some recent acquisitions that skew the numbers a bit like I said, but.

Over time I think it's.

The play out more.

In a more normalized with.

Perfect. Thank you and I guess, one more question I'm curious about your thoughts on the M&A front.

Given where we are with multiples.

The public and private markets can you discuss just how that impacts your decision, making with the tightest amount or the size of the tuck ins that you do.

And then also if there's any specific geographies or verticals that youre trying to target.

Yes.

I think youre definitely the valuations are coming down and quite frankly, there is a bit less comp.

Competition, given that the cost of capital is increasing.

And so.

For us the deal size is up about 16% versus the same time last year. So we are.

Seeing the bigger opportunities that.

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