Q1 2023 CGI Inc Earnings Call
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Good morning, ladies and gentlemen, welcome to <unk> first quarter fiscal 2023 conference call.
Now like to turn the meeting over to Mr. Kevin lender SVP of Investor Relations. Please go ahead Mr lender.
Thank you Julie and good morning, with me to discuss <unk> first quarter fiscal 2023 results are George Schindler, our president and CEO and Steve <unk> Executive Vice President and CFO .
This call is being broadcast on CGI Com and recorded live at nine a M. Eastern time on Wednesday February one 2023.
Supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our Q1 MD&A financial statements and accompanying notes all of which have been filed with both SEDAR and Edgar.
Please note that some statements made on the call may be forward looking actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
The 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 are 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 we're also hosting our annual general meeting. This morning. So we hope you will join US live by the broadcast.
At 11 a M.
I'll now turn it over to Steve to review, our Q1 financials, and then George will comment on our business and market outlook Steve. Thank.
Thank you Kevin and good morning, everyone I am pleased to share with you the results of our first quarter of fiscal 2023.
In Q1, we delivered $3 $45 billion of revenue up 11, 6% year over year.
<unk> up 12, 3% when excluding the impact of foreign exchange.
Importantly, we delivered positive constant currency growth in all segments, all industry sectors and our service offerings.
The following segments generated double digit constant currency growth.
Western and southern Europe up 30%.
Pacific up, 23% and UK and Australia up 18%.
Total bookings were $4 billion generating a strong book to bill ratio of 117% for the quarter and 109% on the trailing 12 months basis.
In the quarter.
Each of our client proximity segment had the book to bill ratio above 100%.
Our bookings were particularly strong in Europe . This quarter led by U K and Australia with a book to bill ratio of 159%.
Finland, Poland and Baltics with the book to Bill ratio of 143%.
And the western and southern Europe , with a book to Bill ratio of 123%.
With respect to IP.
We see ongoing demand for our business solutions and an increase in IP revenue across every geographic segment.
IP as a percentage of total revenue improved to 21, 7% in Q1.
Our Q1, IP book to Bill ratio was 128%, reflecting CGI sustained investment in forging new relationships with clients as well as and then seeing our solutions.
The strength of our overall bookings contributed to growing our global backlog, which now stands at $25 billion, reaching an all time high again this quarter.
This represent.
One nine times revenue.
On the profitability front adjusted EBIT in Q1 was $554 $1 million up six 3% year over year.
This represents an EBIT margin of 16, 1% stable sequentially and down 80 basis points year over year.
The decrease on a year over year basis was mainly due to the dilutive impact of prior year acquisitions, which are in the process of being integrated to achieve their planned synergies as well as the expected increase in travel to support growing our business.
Net earnings improved.
<unk> $382 $4 million when compared to $367 4 million in the first quarter last year.
Diluted EPS was $1 60, representing an increase of seven 4% year over year.
When excluding integration and acquisition costs net earnings improved to $398 $2 million for a margin of 11, 5%.
This compared to $369 $4 million in the same quarter last year.
On the same basis diluted EPS was $1 66 and.
And that accretion of 10, 7% when compared to $1 50.
In the same quarter last year.
This improvement was mainly driven by the successful execution of our build and buy profitable growth strategy by our operations.
Our effective tax rate in Q1 was 26% compared to 25, 5% in the prior year.
When excluding integration and acquisition costs, our effective tax rate was 25, 7% compared to 25, 5% last year.
We continue to expect our tax rate for future quarters to be in the range of $24 five to 26, 5%.
In the quarter cash provided by operating activities was $605 million compared to $484 million in the prior year.
This is mainly due to the five day sequential improvement in our DSO, which now stands at 44 days an improvement of one day on a year over year basis.
Our target remains at 45 days.
Over the last 12 months cash provided by operating activities was $2 billion or 15% of revenue.
In Q1, we invested $93 million into our business and $10 million to buyback our stock.
We delivered a return on invested capital of 15, 5% in the quarter, an increase of 20 basis points when compared to 15, 3% in the year ago period, demonstrating our efficient deployment of capital.
Consistent with previous years, we reviewed our capital allocation plan to maximize shareholder returns our focus continues to be on delivering value for our shareholder by investing back in our business.
Pursuing accretive acquisitions and repurchasing our stock and are paying down our debt.
As such in line with our capital allocation strategy yesterday, our board of directors approved the extension of the <unk> program until February 2024 or to rising us to repurchase for cancellation up to $18 8 million shares over the next 12 months.
Under the current program, we have invested $657 million of repurchasing six 4 million shares at a weighted average price of $101.
<unk> 84.
With a net debt to capitalization ratio of 24, 1% at the end of December as well as $2 8 billion of cash readily available and access to more if needed CGI has the strength and the capital resources to support our build and buy profitable growth strategy now.
Now I will turn the call to George to further discuss the insights on the quarter and the outlook for our business and markets George.
Thank you, Steve and good morning, everyone CGI began fiscal year 2023 with positive momentum delivering strong results that underscore our positioning as one of the few global firms with the scale reach capabilities insights and commitment to be a partner of choice for our clients and employer of choice for our <unk>.
<unk> and professionals and investment of choice for our shareholders.
Q1, we delivered our fourth consecutive quarter of double digit constant currency revenue growth and once again delivered double digit EPS accretion on an adjusted basis.
Bookings were well over 100% of revenue, reaching $4 billion.
Our record high.
One third of these bookings were comprised of new business engagements and cash from operations was particularly strong this quarter, reaching a record high of over $600 million.
These results reflect client's ongoing confidence and CGI is a trusted partner for delivering on their modernization and digitization priorities.
Our bookings in the quarter consisted of many long term digitization engagements, which included the following <unk> wins.
The U S Department of state extended his partnership with Cgi's Federal operations under a new 10 year agreement to continue delivery of U S visa application services in India.
This engagement includes the use of Cgi's Atlas III 60, IP solution, which provides for improved efficiency security and customer experience.
UK government awarded CGI, a four year agreement to continued management of the cyber security analytics platform for one of the government's departments.
This agreement adds new scope focused on iterative development delivery and evolution of the platform as well as development of a data as a service function focused on helping the government address evolving cyber threats.
<unk> a world leader in food and facilities management services based in France selected CGI as its global strategic partner for a five year managed services agreement.
CGI will leverage our proximity and offshore delivery model to reduce costs improve time to market and drive the digital transformation of <unk> infrastructure.
The Laurentian Bank of Canada awarded CGI, a five year expanded agreement to help the bank manages digitization, while supporting its efforts to strengthen operational efficiencies and deliver an enhanced customer experience and initiative that will benefit from our co innovation fund focus on transformation of the bank's ecosystem.
And Airbus a global aerospace manufacturer based in France named CGI, one of their major global partners to help drive the end to end digital transformation of their corporate and central services functions over the next five years.
These services will leverage a combination of proximity and global delivery resources from <unk> operations in France, Spain, Germany and India.
Notably we received all time high satisfaction ratings from clients across every measure again this quarter.
Importantly, one of the highest scores received was for the intent of clients to engage CGI again for future projects.
Demonstrating the strength of our team's ability to build ongoing trusted relationships.
Investments, we are making in our end to end services and talent are generating value now and they are designed to further strengthen our capacity to meet evolving client demand for full scale enterprise digitization.
With this in mind I will highlight the positive impact these investments are generating for our operations starting with managed services.
As we communicated last quarter, we continue to see many clients prioritizing cost savings and placing a sharper focus on business case returns while simultaneously advancing their digital transformation strategies.
The investments, we are making to increase business engineering capacity enhance and modernize our managed services approach integrate IP and bps into our managed services offering and broaden the partner ecosystem has strengthened our overall value proposition, enabling CGI to best address clients.
Cost savings.
And digitization objectives and.
In the first quarter managed services bookings were up $465 million or 26% when compared to the same quarter last year.
This increase was driven by several large new wins in the quarter.
Overall managed services represented 56% of total bookings for a book to bill of 123%.
We see broad based interest in new opportunities in both North America, and Europe , particularly in energy and utilities health manufacturing and government.
Turning now to CGI systems integration and business and strategic consulting services.
We are focused on addressing the evolving client demand for consulting engagements in areas such as business model transformation and.
<unk> strategy and integration enterprise architecture and sustainability advisory.
All to help clients advance their agility and future strategies.
We also continue to prioritize employee certifications and the technology platforms of our global Alliance partners.
Certifications enabled us to generate nearly $900 million.
And new Q1 systems integration wins in support of partner technology platforms.
<unk> bookings remained robust in the quarter with a 110% book to Bill as we delivered on client consulting priorities across industries and large scale modernization projects.
Particular strength in government.
Now moving to Cgi's intellectual property based services and solutions.
Client interest in our business solutions has been rising.
Higher demand for CGI to help clients address the impact of economic pressures by deploying our IP as.
As such we are investing in the creation of new business solutions to meet evolving demand enrichment of existing solutions with embedded innovation and expansion of our IP go to market strategies to drive new client interest.
For example, given the tightening credit markets around the world, we are seeing growing demand for <unk> industry, leading collection solutions, notably.
Our transformed cloud native credit studio IP delivered through a SaaS based platform that now incorporates intelligent automation and machine learning in.
In Q1, we signed a multiple client agreements for this renewed IP, including a nine year engagement with Navy Federal credit Union, the world's largest credit union, serving over 12 million customers.
As previously mentioned another key initiative. This year is the expansion of Cgi's IP portfolio through go to market partnerships for client owned IP for.
For example, in the quarter National Bank of Canada, and CGI completed a new 10 year agreement for CGI to acquire ownership of the bank's financial planning advisory solution.
Addition of this new client developed solution expands the capabilities of our market, leading well 360 product suite suite, which.
Which will also be delivered and managed for National Bank as a SaaS under this new agreement.
On a year over year basis, IP bookings were up by more than $330 million or 55% for <unk>.
Book to Bill of 128%, we saw significant strength in the banking communications and government sectors.
Overall diversified mix of our end to end services, along with our geographic presence and industry portfolio positioned CGI to continue to grow and create value for all stakeholders.
Central to our ability to deliver value is our discipline and project execution and ongoing investments in operational excellence.
We continue to evolve and balance our hiring and talent development strategies based on client demand, including in our nearshore and offshore delivery centers of excellence.
Proactively manage each dimension to drive excellence in day to day operation.
For example, the time from hire to training to build our new University graduates has been shortened again this quarter driving higher utilization in our global delivery centers and driving profitability on an ongoing basis.
Overall, our teams quality of delivery and proven disciplined guided by the best practices and frameworks and CGI is management Foundation continues to result in <unk> EBIT margin, placing in the top quartile of our it services peer group.
The topic of importance to all of our stakeholders as CGI as environmental social and governance strategy and progress as such we are proud to employ our expertise in collaboration with clients educational institutions and local charities to improve the economic social and environmental wellbeing of our share.
Community and.
And we are sustaining our investments in diversity and inclusion CGI academia and health and wellbeing as we continue to hire and provide career development opportunities in line with client demand.
Follow UN principles, and global best practices, and setting our ESG objectives and targets globally, which.
Which are share transparently with all stakeholders through the publication of Cgi's annual ESG report.
Which will be available on CGI dot com early next week.
Looking ahead as many clients navigate uncertainty in the markets. They operate in they continue to communicate their intent to sustain digitization investment across two key dimensions.
Tactical initiatives to generate cost savings and connect enterprise processes and systems to enable greater operational resilience.
And transformational initiatives to advance our progress on building, new digital business models to generate incremental value.
As highlighted today CGI as many value propositions across our proven end to end portfolio of offerings.
And our consultants collaborate with clients every day to deliver the right balance of services and solutions to meet their objectives.
Additionally, CGI a strong balance sheet enables us to rapidly act on our buy strategy, which is another key driver of Cgi's profitable growth.
The fragmentation of the it services market remains high.
Driving a strong pipeline and merger opportunities and we plan to allocate $1 billion of capital in 2023 through our M&A strategy.
In closing <unk>.
Strong first quarter performance reinforces the confidence we have in our plans for 2023.
To continue profitably growing at or ahead of the markets in which we operate and continue to deliver double digit EPS accretion.
Thank you for your interest and support.
The other questions I'll, Kevin. Thank you George Julia we can now take questions from the participants.
Thank you, ladies and gentlemen will begin the question and answer session.
Do you have a question. Please press the star followed by the one on your Touchtone phone you should like to withdraw your question. Please press the star followed by the Q, if you're using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Paul <unk> from RBC capital markets. Please go ahead.
Well, thanks, very much and good morning, just a question on organic growth.
We estimate organic growth was about 8% in the quarter is that is that in the ballpark in terms of what Youre thinking and then it has averaged about 8% for last four quarter and well above the historical operator is there anything that you see unusual in the last year.
Pushed up organic growth or do you see it is structural and sustainable at these levels going forward.
No. Thanks for the question Paul Yes, we have seen that strong.
Constant currency organic.
Growth and it really is it's based on some of the investments I've been talking about in the last several quarters.
It really is the investments that we've been making.
To strengthen our value proposition the managed services capacity, we anticipated this shift to managed services and vested in the managed services capacity. The IP both on the software engineering side, but more importantly on the go to market you see the results driving the bookings there are consulting expertise I always say, that's the tip of the.
Spear, we're really getting gaining more and more traction there I mentioned last quarter the.
Forbes recognition, we have as one of the top management consulting firms and then the partnerships that's helping to drive some of that sustained systems integration.
Results. So it really are there are some structural items that we've had of course demand plays into that but that certainly the structural changes. We made is is driving that growth.
That's helpful and then a follow up there related to inflation and the impact on pricing and also the impact on your cost base.
How do you see.
Inflation.
Pricing changes impacting your growth and then to what extent.
Like how should we think about your margin structure through an inflationary period can you raised prices faster than your costs are going up where should they move in line.
Yeah, well you see it.
It's not just growth is profitable growth, we've we've maintained that those profit levels.
And we expect to continue to be able to do that I've mentioned before on the inflation side, we we've been using and deploy and global delivery as as one of the elements of a inflation of course, our IP.
Does does extremely well in the software.
In many cases.
We have even greater price elasticity than we have on labor. So that's that's a part of this we've been moving our labor around.
So to make sure that we have the right people in the right jobs at the rate at.
At the right rates and that's been going very well our teams have done an excellent job of.
Essentially developing.
Our our peoples.
People's careers and.
Therefore, driving the proper value propositions from our clients in rate increases and of course I mentioned on the on the larger longer term deals. We had built indexation knowing that inflation was not going to stay at historic lows forever. We built at indexation into the contract. So I have many examples where.
There were some of those contracts as they come up for renewal are increasing.
In healthy ways overall on our cost base as I mentioned before.
Because of that global delivery and because of the project rotations and because of the new college hires which continues to be a larger percentage of our hires.
Vast majority of our growth really is from from those increased bookings in new business, but I will say that.
Because we've been very diligent on this probably a little bit of that inflation is.
In the in the growth, but it's not it's not.
Not a large percentage of it.
Okay. Thank you I'll hop on.
Yes.
And your next question comes from Dave Yes.
<unk> from Scotiabank. Please go ahead.
Good morning, everyone and congratulations on the quarter here.
Thank you.
I wanted to ask to go get some color on the broader M&A outlook I know 2022 was a good M&A year for the company and you have certain targets.
You can provide some M&A outlook and how are you broadly seeing the trends in the public versus the private.
Targets out there.
Yeah. So thanks for the question.
<unk> does remain strong for M&A.
We have included more IP related firms in that in that pipeline and actually even several captives that.
That are also in that pipeline.
So and in general the deals were now looking at our larger so.
That's certainly good news, it's a focus we've had on that pipeline market is very fragmented but.
Getting those those larger deals takes a little more time.
And it's pretty.
It's filled with pipeline.
Mix of both public and private firms and mix of European firms and North American firms, So it's pretty balanced where operation is.
We'll tell you though.
Go back to the.
The principles of CGI, it's the right company right place right time, and certainly the time is right for us and that's why we've we've allocated the capital.
To this in our plan, but we found some that we're at the right place right price, but after due diligence they werent there a company and.
And so that operational.
<unk> discipline is going to be cheap key to achieving what we see as the.
The long term accretion not just the short term accretion, but the long term accretion of these.
Mergers because it's really about building the long term profitable growth of CGI valuations are right now all over the map. So I would say patience is is key and our operational discipline. So but we have that we have the capital we have the appetite we have the pipeline so but we will be.
You can assure you can be assured that we'll be diligent in making the right cost.
That's great. So just on that valuation that you mentioned are you seeing.
In the valuations between the public and the private sector.
Yeah.
It would be hard to say that in general.
We see like I said, particularly on the private side, we see valuations all over the map.
So there isn't that tight correlation I would say just given some of the volatility even in the public firms you don't have that anchor that you had in the past some of that can be very good if you find the right company.
That's helpful and just one more question on the M&A.
M&A discussion here. So we did see that your integration expenses of the <unk> have gone up recently over the past few quarters.
It does makes sense with all the acquisitions have been doing.
And given the M&A pipeline continues to stay strong what is the best way for us.
Guidance from a modeling standpoint, how can how can we think about that.
<unk> expense line.
Yes, it's a good question it really varies again by the company that we're that we're bringing in and.
And also the geography right so some of that.
Integration costs can be a little bit higher in certain geographies and be a little bit lower for example, if we when we do the next one in the United States, It's a little bit lower so it's hard for me to quantify that for you. It's why we break it out and we show it to you with and without.
That's helpful. George Thanks, a lot I'll pass the line, yes, yes.
And your next question comes from John Kim.
Tim O'hara with Sidoti. Please go ahead.
Sorry Im sorry. Your next question comes from Steven Li with Raymond James. Please go ahead.
Steven is that you.
Steven.
Rome Steven.
Stephen can you hear me.
Very good.
Yeah.
Okay.
So on the margin.
I know Brian is.
It wasn't.
So there is some dilution that you mentioned travel was up but for the full year. George I mean are you still expecting some modest expansion year over year.
Yes, we do think that we can do that.
The margin does it remained strong but we did we did call out some of the headwinds on business travel which was planned.
Related to BD and of course, you see that nice.
Nice uptick on the bookings, but we think that the big shift in that is is behind us.
So we would we would manage any future additional travel with the business. So I go back to kind of our levers for margin expansion, which remain and remained strong mix of business you see the nice uptick in the bookings in IP and managed services.
That hasn't flowed through yet to the revenue, but when it does we should get some pick up their global delivery, both offshore and near shore is another opportunity for us the merger synergies as we as we bring the current acquisitions onboard.
And then the economies of scale as we as we grow and.
On the SG&A, so the expectation would be as we move throughout the year, we should see some margin expansion.
Alright Thats great.
And then George on your M&A comment. So you mentioned it services captives in the pipeline I Didnt see IP.
And then just more difficult to come by in terms of potential targets. Thanks.
Yes, Thanks, Stephen I thought I did mentioned that but I certainly meant too that we do have more IP related firms in the in the deal pipeline. So in fact.
In the near term pipeline. So yes, they continue to be a focus and we're finding some that have both the services and the IP, yes that is a little more difficult as I mentioned on the prior call, but we do see them now we just have to make sure we get the right company at the right price.
Great. Thanks, guys.
Yes.
And your next question comes from Dubai from Deutsche Bank. Please go ahead.
Yes, Thanks a lot.
Thanks for taking my question, so we've seen a slowdown in Microsoft Azure <unk>.
Growth rates in their most recent results, it's still a very high growth in some of their issues regarding optimization with cloud necessarily negative for you.
But Phil I think cloud has been a big driver of growth for it services.
Would you say is the impact of the slowing.
Slowing growth and growth of cloud and assortment croissant browser on your business.
Yes, well I think theres not a direct.
Correlation between Microsoft.
And as <unk> and CGI.
But but indirectly what I can say is in.
In support of some of what they're saying is that.
Now.
Lot of the enterprises that we work with are looking at how do I connect some of the work that I did on the backend to some of the work out in the front and this is why I highlighted some of the enterprise architecture work we're doing.
There is still viewing some of that as tactical to then build on top of that on their on their bigger digitization strategies, but again I think it's.
We play on multiple sides.
And helping our clients and so.
Thats slowing growth doesn't really impact us and I'll remind you.
There's still a lot of work to be done and cloud.
<unk>, but a lot of that work is helping the clients actually leverage the full power of the cloud and Thats. Some of the cloud factories, we have on the application side. The cloud providers don't really play on that side, but of course, we do.
That's that's great color and then on the consulting front, you really sound upbeat on that segment of your business.
We don't necessarily.
So you see that with every one of your peers.
And consulting can also maybe being generated the coal mine in terms of the macro environment. What are you doing differently from from your peers that youre seeing or is it just that you're starting from a lower base.
Yes, I think I think it's a combination of a few things yes, we definitely are starting from a from a <unk>.
A different base, so we're still building that expertise and so.
There is some some natural uptick there I think the other is that we really.
We are focused on the areas that clients are spending on now I mean, they do need help on sustainability. They do need help on the business business model.
Transformation.
What we see is clients aren't just looking at the here and now and the current economic landscape.
Depending on the economist you talk too, but they are really focused on what's the next business cycle.
And they want to come out of this business cycle in a stronger place and so it's more pointed.
<unk> efforts and we've been investing in those areas.
Given where our starting point was.
Thanks, and congrats for the great results.
Yep. Thank you.
Your next question comes from Kenneth Ms Coppola from BMO capital markets. Please go ahead.
Hi, good morning.
I think you touched on this in some of the prior questions, but maybe just to be clear on the macro.
I mean, clearly youre still seeing good spending environment, but any any change at all in customer behavior deals require.
Greater level strictly and final.
This helps cyclic longer are there any specific pockets, where you might be seeing from the macro weakness or is there nothing really to call out in that process.
Yes, no I think it's.
It's a good question and we've been anticipating a shift we've been talking about a shift and we definitely see the we see more immediacy and the demand regarding those cost savings and sharper business case I've been talking about for the last couple of quarters. So so there is more immediacy there.
More cautionary and some of the broader digitization initiatives.
Don't see anything stopping but we definitely see a little more caution there in general those are those cost savings part of that is some of the managed services deals that we're doing and some of the IP deals that's typically a longer sales cycle cycle in any environment.
Actually see those shortening because theres more immediately for that.
I can tell you that I had.
A discussion with the CEO COO of a large company and.
And when we really talked about the managed services opportunity.
He sent an email literally five minutes after the call to his team and connected our teams to have that discussion. So those tend to be moving a little bit faster the Si and C deals, which are shorter duration typically shorter sales cycle, that's lengthening a little bit because of some of what I talked about some of the caution so over.
They're all.
We see we've anticipated this shift our go to market or hiring a staffing everything is aligned to this and you see that in the results of the bookings, but we definitely see that shift happening.
On the managed services side, it's pretty widespread all industries all geographies.
On the on the <unk> side, it's strongest in government and in the financial services.
Stronger in North America, as you might expect in Europe on the CMC side.
Weakest probably in manufacturing retail so the Si and C side, you see some some weakening there, but counteracting that is very strong on the managed services side, particularly in manufacturing and then of course IP is strong in all markets for.
US is strongest in banking and government. So maybe that gives you a little bit of flavor of what we're seeing yes. There is some some shift we've anticipated we've been talking about it and our teams are pretty aligned around that which is why you see the growth in the bookings.
That's very good color, thanks, and just a quick one on cash flow I mean, given that the mix is shifting a bit more towards managed services.
Should we expect further improvement in DSO or not necessarily.
Look you have seen.
The DSO improvement just this quarter.
Yes, we have some clients even that are prepaid us in Q1, usually we see that more in Q2.
Because of the annual maintenance that we are receiving.
But yes it is.
Usually managed services as the short term.
Shorter DSO.
Great I'll go offline. Thank you.
Your next question comes from Robert Young from Canaccord Genuity. Please go ahead.
Good morning, I was hoping to dig in a little bit into the hiring strategies lots of moving parts from my perspective.
Maybe you can talk about capacity relative.
The strong demand you're seeing.
Are you still are you starting to see utilization moving higher maybe for slowing down hiring and how does.
The low cost delivery and look I think you said, 22% it's been there for a few quarters and so is that an area that will move up just if you could.
Just wrap up some of the comments together around the hiring strategy would be helpful.
Yes, sure happy to do it Robert.
Look the hiring is.
Is <unk>.
Impacted a bit by the lower turnover that we're having.
Sure.
The fact is that given some of what's going on in the marketplace. We've seen a pretty sharp decrease in the voluntary turnover on an annualized basis now some of that we always see a bit of a shift in the December quarter, just given the holidays at the end of the year, but we saw a sharper one.
This quarter, so that gives us it.
It gives us a little more breathing room from a from a hiring perspective.
But also that shift to managed services and the shift to intellectual property deals you saw that in the pipeline you'll start to see that flow through some as well because on the IP, it's not a linear.
Revenue to people like it is on the on the science side, Alright, because you've got the VIP generating revenue for you in a different way and then the shift to managed services. Many of those managed services deals we actually re badge people from the from the clients so that again.
Lessens the pressure on the hiring we don't have to hire as much in front and then government is very strong in government is a little more predictable given the RFP process.
And the lines at the time for that you can plan that out much easier and so yes over time, we're very focused on utilization, we're looking to drive that.
Having said that the hiring for hot skills remains tight.
And.
Although it's easing some it's not really eased yet and so we continue to make sure that we manage that the hiring of those hot skills and the rates and projects that we put them in so definitely a shift but again one that we've planned for in and one that we'll continue to.
To manage closely as we go through things I'll, just remind you the IP and the managed services doesn't come online and the revenue overnight. So so this will be something that will happen over the next three quarters.
That's great. Thanks for that and then.
Second question would be around the new business mix.
Like last quarter, you said the pipeline was even better than the numbers.
Before then.
Just this quarter or so.
Are you seeing consolidation happening.
I imagine you are better positioned for efficiency and Digitization some of the other shared given the coverage and so does that mean that youre starting to see is that what's driving new business.
Or is there something else yes.
Yes, no for sure that.
Combining some of that ethane into the managed services deals to give to give our clients the best balance which is what I talked about in the.
Opening remarks, we're definitely seeing some of that.
IP is also generating new clients I mentioned, we've been investing in our go to market.
Our IP has been a little more locked within the geography that was created and so part of the part of the rationale for creating that global IP group and deploying.
Resources towards that was to kind of can strengthen that model that's generating some some new clients for the existing IP and so I think it's a combination of factors.
That's driving that.
Okay and last one for me just high level is just can you remind us about.
Your exposure to AI, how it runs through the business how do you participate in that just given all of that.
The news flow around that.
Yeah, a lot of a lot of discussion about that I'll tell you I'll tell you two things one our.
Our clients in general are pretty cautious on deploying it for all the.
All the right reasons.
But having said that.
What we have the advantage of as we have our intellectual property rights. So we've got a couple of hundred solutions. We got software engineering labs associated with that that's kind of our R&D lab for this and so we're introducing.
AI and researching where where it applies how can be used responsibly into the into the solutions on IP and then when our clients are ready for that in a more full scale way will be we'll be right there for it.
Okay. Thanks.
Yes.
And your next question comes from Richard <unk> from National Bank Financial. Please go ahead.
Yes. Thank you actually this is a bit of a follow up to Rob's question on AI like when you look at different technologies not specific to AI, but theres a lot of different things that are happening how does CGI select those opportunities to pursue when it comes to making capital allocation decisions.
Yes, so we have we have a framework.
Intellectual property management framework.
Actually.
I chair that along with the presidents of each of our operating units and but as part of that we also have a way to bring new ideas kind of fast track.
It's a combination of some there's a pool of money, where theres. Some CGI money and then some local money that goes into that and then as that looks like something that could scale, it's been brought to that.
IP management framework, and when I say AIP.
Some of that is business solutions, but some of that can be accelerated some of that can be technology solutions as well.
A good way for us to do that type of work. The other is part of our lab that you always hear me say.
Innovation happens at the shop floor and innovation for US is working with our with our with our clients, sometimes we do that in conjunction with our clients.
As they look at leveraging new technology and that's one of the reasons, we have what we call emerging technology units that work across geographies. So that we can we can bring that to our clients. So it's a combination of those factors that allows us to leveraging technology.
Okay and then on the acquisition question, you talked about sort of having opportunities in different markets and IP in different geographies.
If you look back.
Over the years CGI has done acquisitions geographically and in IP.
And I guess, the big one would've been MFS in terms of.
Sort of changing and being transformational if you kind of assess.
Those acquisitions in the past, whether it's IP large small medium size like is there a ranking in terms of returns in terms of what's better or I don't want say worse, but the best returning assets from an acquisition standpoint.
Well, yes, it's a good it's a good question.
They are all a bit different and as you know.
Ams had a lot of long term.
Client relationships that were.
Invaluable just like the IP was.
Valuable so it's kind of hard to rank those it's funny, though you mentioned that because.
And a couple of cases in our.
Pipeline, we said this looks like in Ams.
Company so.
As far as having an IP combination of IP and services. So.
But look the <unk>.
Again, just go back to what we're looking for when we're doing an acquisition, we're looking for first and foremost the cultural.
Alignment and the cultural alignment typically means for us having talented.
The individuals within the company that have close relationships and bringing value to their clients and that value.
It's hard for me to rank whether that value is from a consulting which is very valuable IP, which is very valuable.
Hi.
Which is very valuable and managed services so but the key is that they have that close relationship and that it's dynamic and they continue to bring value and thats what brings value then to CGI in the long term.
Okay, and just one last one from me.
Two acquisitions again.
Doug you have considerable strength in government so when it comes to.
Acquisitions is that let's say one area that you think that you would sort of even further fortify your presence there.
Given that it's fairly sizable over the mix today would you just prefer to diversify the business away from that.
Yes, so it's a little of both.
The diversification is important we're now at 35% government, which is which is a great place to be.
But as we continue to grow the business and make acquisitions on the commercial side, it's going to be important for us to continue to to grow in the government space and the deals quite frankly are getting bigger in government and so you need to have a certain scale.
We will continue to look at it both.
That's great. Thank you.
Your next question comes from Stephanie price from CIBC. Please go ahead.
Good morning.
Stephanie can you talk a little bit I was hoping you could talk a little bit about the visibility visibility you have into the cost structure here both in terms of pricing utilization and attrition just curious if you've seen some normalization here versus the last few quarters.
Normalization of the.
The pricing and the cost structure.
<unk>.
Still it is still pretty dynamic like I said theres still.
There's still the tight demand for some of the hot skills and so there is still some.
Some.
Some wages that are increasing we've been managing that as I mentioned through the through the combination of global delivery the college hires et cetera.
Then being able to pass that along we are still seeing price elasticity point in time.
For the for the value added skills that that our clients are looking for so I think it will moderate over the next couple of quarters, but we haven't seen a wholesale moderation yet in that environment.
Okay. Thanks, and then in your prepared remarks, you mentioned the prioritization of employee certification opportunities around supporting partner technology platforms.
You can take a little bit more into this opportunity in what phase of this process urine.
Yes, well as you know about about a year ago, we announced the.
The promotion of nine different strategic partnerships to global level and so that's kind of the priority that we have and then within that those areas where work in conjunction with those partners because by doing that we're working with them at a at an executive level.
What areas are they.
Investing in and therefore, what areas should we be investing and not the not the legacy, but where they're going and where they're heading so that's why I mean by the prioritization, it's actually going quite well we started from a from a position where we didn't have as much of that relationship and so so.
It's going very well and we offer something to these platform providers that maybe others don't given that strong base of intellectual property and so there is there's joint partnerships, where we can go to market together, where we build some of our IP to run on top of their platforms.
Therefore, therefore, it's not just us doing integration of their platform, but us helping to drive their platform further into the enterprises that theyre in or that we're in so it's of course, we do that in an agnostic way.
With and in conjunction with our partners just like they do with their Si partners, but it's where we find that synergy. It's good for everybody. It's good for us good for our partner and its good for our clients.
Great. Thank you very much.
Your next question comes from Daniel Chan from TD. Please go ahead.
Hi, good morning, So I wanted to double click on your European and Scandinavian markets, where youre booking.
Well as you had to be an uncertain macro macro backdrop in the quarter. What do you think was driving some of that is at a better than expected macro outcome or is it some of the management changes that you've recently made.
Yes, I would say it's more of the latter.
Had some structural changes we needed to to address it is it's great to see that Scandinavia is now growing.
As an entity, we still have a little more work to do you can see that in the numbers.
Really now, though it's about <unk>.
Shifting the mix of business I always talk about the mix of business.
And it's about shifting the mix of business that takes a little more time, but returning to growth addressing some of the.
Structural items is really the difference maker, there and again we.
Yes, there is.
An interesting backdrop and the macro environment, but it's really about pivoting to the value added services that our clients are looking for and.
And that.
The team has done a great job of that pivot.
Great. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one. Your next question comes from Jason Kupferberg from Bank of America. Please go ahead.
Hey, good morning, guys I just wanted to ask on head count growth. It looks like net head count growth was pretty de minimis quarter over quarter. So just wanted to see if we can unpack that a little bit because I know George you referenced a little bit of Choppiness as it relates to certain parts of.
Digital right now just in terms of.
Little client's hesitancy.
Certain pockets of the business so as the limited head count growth just a reflection of the uncertain kind of a way forward on demand from here and I guess just in terms of managing our expectations. You just had a really strong book to bill quarter in the December quarter would you expect that to soften to some extent in the March quarter.
<unk> just because of some of these these cross currents that you referenced.
Yes, what's interesting about that.
Thanks for the question Jason.
It's really a combination of things one the December quarter.
People don't we don't tend to have people start at the in the December month, because typically they are taking a week or two off in Europe , maybe even two weeks plus and so that's not that's not our strong hiring quarter, but it really is also that shift and youre right. There is the shift from that.
At PNM body based business to the managed services outcome base that comes with some people already and then the intellectual property. So I would expect to see our our head count moderate a bit compared to the prior year, where you know that the.
The <unk> was extremely strong.
Overall bookings, though.
Interestingly enough the.
Managed services comes with typically longer durations and so the bookings.
I would.
Just looking at our pipeline.
Deal sizes up durations up but the deal sizes up so still have to close the deals but.
That's what that's what I see so I think it's not one for one with with the shift but the shift does play into that for sure.
Okay and just on the book to Bill I mean would you expect that to soften a little bit in the March quarter.
I can tell you the pipeline continues to be strong.
The conversations are fruitful but.
<unk>.
You can't ever you can never predict that's why we always say look at the book to Bill on a trailing 12 months not on a quarter by quarter basis, because it's by definition bookings are lumpy.
Yeah fair enough. Thank you Yep Yep.
Mr. Lender there are no further questions at this time. Please proceed.
Thank you Julia and thanks to everyone for participating today as a reminder, a replay of the call will be available either via our website or by dialing 870, 767 hundred 47070, and using the pass code 308, 479, as well a podcast of this call will be available for download.
Load within a few hours follow up questions can be directed to me at $1 905, 973, <unk> hundred 63.
Again, everyone and look forward to speaking soon.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and ask that you. Please disconnect your lines. Thank you.
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