CGI Inc., Q2 2023 Earnings Call, Apr 26, 2023
Okay.
Okay.
Yes.
Good morning, ladies and gentlemen, welcome to Cgi's second quarter fiscal 2023 conference call I would like to turn the meeting over to Mr. Kevin lender SVP of Investor Relations. Please go ahead Mr lender.
Julia and good morning, with me to discuss Cgi's second 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 Dot Com and recorded live at nine a M. Eastern time on Wednesday April 26 2012.
Three.
Supplemental slides as well as our press release, we issued earlier. This morning are available for download along with our Q2 MD&A financial statements and accompanying notes all of which have been filed with both SEDAR and Edgar.
Please note that some statements made on the call maybe forward looking actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise the complete safe Harbor.
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.
You had a 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 will now turn it over to Steve to review, our Q2 financials and then George will comment on our business and market outlook, Steve. Thank you, Kevin and good morning, everyone I am pleased to share.
With you the results of our second quarter of fiscal 2023.
In Q2, we delivered $3 $72 billion of revenue up 13, 7% year over year or up 11, 4% when excluding the impact of foreign exchange.
Following segment generated double digit constant currency growth.
Western and southern Europe up 28%.
And then Poland and Baltics up 14%.
UK and Australia up 11%.
And Asia Pacific up 21%.
Notably we continue to see an increase in overall demand for our global delivery.
Especially offshore.
As a result, our offshore operation are now 23% of our total employee base up from 22% in Q2 of last year.
From an industry perspective, when we add the constant currency growth across all sectors, notably financial services grew 16%.
Government grew 12% and manufacturing retail and distribution also grew 12%.
From an IP perspective.
As a percentage of total revenue was 21% in the quarter.
We continue to see strong demand for our business solutions supported by an increase in IP revenue in seven of our eight proximity geographic segment in Q2.
Notably Kennedy.
Canada is IP revenue grew by 39% Western and Southern Europe , IP revenue grew by 30% to 32% and Scandinavia in Central Europe IP revenue grew by 28%.
The number of our consultants and professionals increased year over year by 7000, representing an eight 3% increase totaling now 91000 worldwide.
We booked $3 $8 billion up contract wins in the quarter, representing a book to bill ratio of 103% compared to 101% in the same quarter last year.
On the trailing 12 months basis, our book to Bill ratio reached 109% with seven of our eight proximity geographic segments.
Book to bill ratio above 100%.
Led by <unk>.
UK and Australia with a book to bill ratio of 128%.
U S commercial and state government with a book to bill ratio of 120%.
And Finland, Poland, and Baltics with a book to bill ratio of 117%.
Our Q2 IP book to Bill ratio was strong at 118% given the strong value proposition for CGI business solutions.
This is reflective of the ongoing investment in our IP, which is now generating larger and longer term IP engagements.
Overall, our global backlog reached a record of $25 $2 billion, representing one eight times revenue.
Turning to profitability.
Earnings before income taxes were $564 $5 million up 13, 2% year over year for a margin of 15, 2%.
Adjusted EBIT in Q2 was $601 million up 14, 7% year over year.
This represents an EBIT margin of 16, 2% up 20 basis points year over year, and up 10 basis points sequentially.
The year over year increase was driven by the combination of strong revenue growth and operational discipline.
We delivered strong EBIT margins in the following segments.
Asia Pacific at 39%.
Canada at 21, 7%.
And in Western and southern Europe at 16, 7%.
Our effective tax rate in Q2 was 25, 7% compared to 25, 4% in the prior year.
We continue to expect our tax rate for future quarters to be in the range of $24 five to 26, 5%.
Net earnings improved to $419 million for a margin of 11, 3%.
This compared to $372 million in Q2 last year.
Diluted EPS was $1.76, representing an increase of 15% year over year.
When excluding integration and acquisition costs net earnings improved to $435 million for a margin of 11, 7%.
This compared to $374 million in the same quarter last year.
On the same basis.
Diluted EPS was $1.82 and the accretion of 19% when compared to $1 53.
In the same quarter last year.
This improvement was mainly driven by the successful execution of our build and buy profitable growth strategy.
In the quarter cash provided by operating activities was $469 million compared to $473 million in the prior year.
DSO was 41 days compared to 42 days last year, well within our target range.
For the last 12 months cash provided by operating activities was $2 million or 14, 5% of revenue.
In Q2.
We invested $107 million into our business and $400 million to buyback our stock repurchasing three 3 million shares at a weighted average price of $119 58.
As of the end of March we have the authorization to buyback up to an additional $15 4 million shares under our current program.
In the quarter, we continued to deliver a strong return on invested capital at 15, 6% demonstrating our efficient deployment of capital.
Looking ahead our.
Our focus continues to be on delivering value to our shareholders by investing back into our business.
Pursuing accretive acquisitions and repurchasing our stock and are paying down our debt.
With a net debt to capitalization ratio of 24% at the end of March as well as $2 8 billion of cash with any available and access to more if needed.
<unk> as the strength and capital resources to continue to power, our build and buy profitable growth strategy.
Now I will turn the call to George to further discuss insight and outlook for our business and market George.
Thank you, Steve and good morning, everyone.
This quarter, we again delivered financial results in line with our plan to profitably grow at or ahead of the markets, where we operate and to continue delivering double digit EPS accretion.
Thank you to our 91000 consultants and professionals around the world are earning the trust of our clients every day your expertise insights and commitment made these strong results possible.
Today, I will focus on our performance for the first half of the fiscal year as well as the demand outlook for the second half.
On a year over year basis for the first six months of our fiscal year CGI delivered 11, 8% revenue growth on a constant currency basis.
15, 2% EPS accretion on an adjusted basis.
And over $1 billion in cash from operations or 15% of revenue up 12, 3%.
For the first half of the fiscal year revenue growth on a constant currency basis was broad based across all segments all services in all industry sectors.
With notable industry sector growth of 16, 3% in financial services.
12, 1% in government, and 11, 6% and manufacturing retail and distribution.
Looking ahead to the second half demand in these industry sectors, we see the following in financial services given the recent macro turbulence in this sector areas such as managed services intellectual property based business solutions and enterprise data strategy and services are generating the most client demand.
In government client spend is rising for modernization.
It services in support of new policy initiatives.
And in manufacturing retail and distribution client interest is increasing for managed services to realize cost savings and business efficiency.
Bookings were strong during the first half as we were awarded over $7 8 million in new engagements and increase of over $950 million.
Up 14% compared to the first half of last year.
This strength spanned across each of our end to end service lines with managed services bookings up 12% over the first half of fiscal 2022 <unk>.
Consulting and systems integration bookings up 15%.
In IP based business solutions bookings up 29%.
Specific to the second quarter awards for renewals and add ons with existing clients were particularly strong as we sustained our incumbency.
These existing enterprise clients continued to turn to CGI as their trusted partner for expanded modernization and digitization initiatives and.
In fact, we achieved a renewal rate of over 95% with increased awards that included new scope.
As a result, we expanded our client relationships and creating new opportunities to bring a fuller complement of our end to end services in support of client initiatives.
For example in Q2.
One of the world's largest property and casualty insurers extended its 20 year partnership with CGI related to their use of CGI CGI is rate of base IP solution.
The administrative office of the U S courts awarded CGI 10 year contract building on our ongoing relationship supporting their financial management portfolio.
<unk> the use of our momentum IP.
TD Bank group top 10, North American Bank extended CGI is ongoing services for the delivery of a secure and reliable shareholder management system, which is part of CGI as well 360 IP solution suite.
Under this four year agreement CGI will provide extended support as part of the bank's ongoing modernization strategy.
The SEC Poland's electricity transmission, operator awarded CGI four year engagement to build implement and support and next generation Central energy market solution, leveraging our deep expertise in the energy and utilities industry and <unk> proven data exchange IP.
The Swedish social insurance agency selected CGI as its strategic business transformation partner to support the modernization of the agency's operations and the Digitization of its core citizen facing processes.
And Fraport one of the world's largest airport operators with business activities at 29 airports across four continents selected CGI as digital partner under a new five year framework agreement aimed at further enhancing the digitization of Frankfurt Airport.
Turning now to our buy strategy Emma.
M&A consolidation activities has recently slowed across the it services market keeping fragmentation of the market at a high level and.
We will continue to favor CGI, given the strength of our balance sheet and our one company integration approach.
Our pipeline remains robust with a steady influx of new opportunities identified through our expanded sourcing strategy.
We remain disciplined in our approach to ensure our M&A investments are accretive for shareholders and have the necessary cultural fit to deliver ongoing benefits for all CGI stakeholders.
Looking ahead to the demand environment.
For the second half of fiscal 2023, we have visibility into clients' priorities and expected budget plans, given our proximity model and close relationships with clients at all levels.
Pipeline reflects CGI, a strong position to meet shifting client priorities as the value of the new opportunities in our pipeline grew by more than 15% on a sequential quarter basis.
By interest remains notably high for larger managed services engagements that incorporate <unk> end to end services to help clients realize cost savings and drive business transformation programs.
The pipeline over the next year reflects this intensified interest in managed services as the total value of these opportunities is up by more than 20% on a sequential quarter basis.
These larger managed services opportunities do have longer sales cycles, given their broader scope importantly, we are actively engaged in later stage opportunity pursuits with multiple prospective clients in every geography.
In each case, we worked collaboratively with client executives to build solutions that combine and tailor the right mix of CGI services and solutions to address the organization business objectives.
Our outlook on client demand was further validated by the preliminary findings of our annual voice of our clients proprietary research.
Our leaders recently met with over 1750 executives at companies and government agencies around the world.
Topics covered in these discussions range from macro trends influencing clients business strategies, the digitization priorities and budget plan.
We are in the process of analyzing this valuable input from current and prospective clients.
I'd like to share the three preliminary findings that we see shaping client demand.
First clients are placing a sharper focus on prioritizing investments and returns.
Given the heightened pressure on profitability more clients indicated their willingness to outsource a portion of their it landscape as a managed service over the next few years.
Finally deeper partnerships with external services providers are deemed increasingly essential to help clients achieve their holistic digital strategies.
As a prioritization of investments gets sharper clients, replacing a spotlight on the most critical digital initiatives that will deliver the highest financial returns and drive organizational benefits.
This is also leading clients to place a higher value on external partners like CGI.
Capable of providing ROI led innovation.
While clients are getting more focused on what they invest in over half of executives. We interviewed said they plan to sustain or increase their overall it services spending over the next year.
In addition, <unk>.
84% of client executives indicated they continue to have difficulty hiring.
Okay.
In terms of partner ecosystems to help deliver on client it spend we observe a new duality, taking shape, specifically, our clients engaged and trusted partnerships with their existing it services providers. They are more inclined to expand and extend those relationships yet.
Yet at the same time clients are increasingly open to engaging with new providers that embody the partnership qualities they value.
At CGI building trusted partnerships with clients is intrinsically linked with CGI culture of ownership and accountability model.
<unk> collaborative working style extends to creating a positive partnership foundation with clients and continues to be a strong differentiator or how we attract and retain the best talent.
CGI employee value proposition is grounded in trust collaboration and our commitment to operating as one team.
This is the essence of our culture and quarter ongoing talent investments, which are making a significant difference.
The satisfaction of our consultants and professionals continues to rise to new highs.
Turnover reduced sharply in the quarter remains below the it services industry average.
Our depth of industry expertise, which we continue to deepen through hiring and development is recognized by clients with an all time high satisfaction score.
And 84% of our now 91000 consultants and professionals are CGI owners collectively aligning us common success factors.
Most importantly, again this quarter the highest rated client satisfaction scores were related to the quality of our relationships. This includes both <unk> commitment to clients and the intent of clients' engagements again in the future.
Both of these scores, which come from signed client assessments were at record high levels of over nine five out of 10.
In closing.
Now more than ever Cgi's culture proximity model and commitment are an even greater demand, we were well positioned to remain a partner and expert of choice for clients empowering environment for our consultants and professionals and engaged ethical and responsible corporate citizen and investment of choice for our shareholders.
Given the strength of our first half performance and the alignment of our strategy and model with the priorities and budget plans of our clients. We remain confident to continue profitably growing CGI, where our build and buy strategy.
Thank you for your interest and support let's.
So the questions now Kevin Thanks, George Julie can you please share the logistics with the participants.
Thank you ladies and gentlemen should you have a question. Please press star one on your Touchtone phone. If you would like to withdraw your question. Please press Star Q1 moment. Please for your first question.
Your first question comes from China.
MS Coppola from BMO capital markets. Please go ahead.
Hi, good morning.
<unk>.
Hi.
Total sparked by the strengthening of the <unk> bookings of interest given the macro backdrop I would have thought we'd see some acceleration there.
In your commentary suggests that you're also seeing growth from the SMC pipeline.
Can you provide some color in terms of the broad based with more focus on certain geographies and then what kinds of initiatives and driving those assigned to bookings.
Yes, Thanks Thanos.
Growth was strong across so IP in financial services and government is pretty broad based.
Si and C was less stronger.
Both in MLD and government and <unk>, it's really around some of our larger engagements engagements for larger clients and it just shows how theyre looking to use technology for things like smart data smart factories et cetera, and then of course government is really good.
Going through a modernization phase and they'll continue to do that but but managed services and IP were also strong in government. We're encouraged that as IFC for those larger clients remains so strong in the bookings.
There's a lot of add ons.
Rather than straight new business and I think this goes to the to the partnership.
Qualities that CGI has in and not just maintaining our incumbency that extending and expanding on that on that incumbency.
And then on the macro number of your peers have suggested that there has been some softening in the last 90 days, especially North America.
Are you seeing some of that dynamic as well or from your perspective has been more consistent with getting specific verticals NGL as a focus on.
You saw our bookings were pretty strong in North America, particularly in the in the U S. At 120% book to Bill I think in general there is a little more caution and I mentioned this last time I think the Si and C. There is more caution.
A little slower to make some of those decisions.
The demand is still there, but but low more purposeful as I mentioned.
Certainly around the return on investment.
The focus that they have so I think it is getting more focused and general were seeing more of those.
Roy led.
Led projects and even in the managed services space Theyre getting larger of course, those take a little bit longer and I think thats, what youre seeing in some of these in some of these bookings numbers.
Great I'll pass along thanks George.
Okay.
Your next question comes from Paul Treiber from RBC capital markets. Please go ahead.
Thanks, so much and good morning.
Wanted to dig deeper into managed services.
The book to Bill was a little bit lighter in terms of bookings this quarter.
Alright.
And it sounds like Theres Lumpiness, there could you speak to that many of US just within the pipeline, but the conversations regarding the pipeline and the potential cost optimization and when you could see that coming through in terms of bookings is relative to the environment here.
Yes, well.
I said, we're encouraged by the later stage.
Discussions that we're having a managed services, but given their broader nature. They just in general take a little bit more time to close and again because there is such strong business case driven.
They want they want to get that get that right.
In general, they're very positive partnership type discussions.
More so partnership related than just procurement driven so that's.
Certainly I think a positive not that procurement is an evolved.
But they really are focused on those business cases, not just the input price.
And the returns and that's where I think the partnership focus really comes in.
So.
It's just a matter of timing bookings are always a little lumpy you.
You can see that actually went up on a trailing 12 month basis. So I don't think there's.
Much to read into that at all.
They are focused on closing the right deals for both us and for the client.
And shifting and looking at geographies in Europe has been really strong here and shown a steady improvement over the last.
Several years, what fundamentally has changed for your business in Europe , where you are seeing.
Steady positive organic growth.
Yes, I think it's a combination of factors part of it is a more resilient business mix, so, whereas maybe before it was primarily.
Systems integration and consulting now you see you see some nice growth on the on the IP bookings, we've actually acquired some IP around open media. There was some good bookings there retail suite with bookings there some investments that we've made in.
And bringing the full suite of CGI as end to end services to these these global clients and I think operating also as more as one team you.
<unk> seen more deals working across the various countries for larger enterprise clients there.
In Europe , and so I think they all.
Factor into.
Into that.
That opportunity and also we made some changes in the leadership so that's that.
As a part of it investments and leadership and talent as that is absolutely part of that.
Alright, Thank you I'll pass the line.
Thank you. Your next question comes from Richard <unk> from National Bank Financial. Please go ahead.
Yes. Thank you it looks like you had some pretty solid organic growth I was wondering if you can maybe give us a sense of how much of that growth is being fueled by acquisitions, meaning the capabilities that are brought on board through some of these small acquisitions in past years.
Yes, thanks for the question Richard Yes.
What we see and I think I've mentioned this in prior discussions, but we definitely see is that the organic growth is typically our strongest in areas, where we have done more of those metro market acquisition.
Part of it's the skill sets part of it is the new client relationships that we have opportunity to sell the larger set of Cgi's end to end services into and so you do see that you'll see that in.
And certainly in western and Southern Europe , you see some of that in.
In Central Europe , and Scandinavia, and so definitely that is.
As I always mentioned those metro market acquisitions are catalyst for organic growth in the future and that is why we remain very disciplined on our M&A strategy because.
We want it not just to be inorganic growth.
And in one plus one equal two but we want it to be a catalyst for growth and one plus one equal three or more.
Okay.
In terms of this.
Momentum AI.
What do you think the implications are in regards to sort of digital transformation initiatives with your clients do you think it has the potential of that pause pause and projects as they.
The potential capabilities here going forward.
Yes, that's a great question I don't have a crystal ball, but I don't see it slowing anything.
Our view is that in general.
Technologies like generative AI simply make exports experts more productive it doesn't make the lay person an expert so I don't think youre going to see that that necessarily slowing having said that we just did the voice of the clients and I'll just share some data with you two thirds.
<unk> of our clients indicated in that in that research that they are either investigating are doing proof of concepts on AI and yet you see that hasnt impacted anything in fact.
Playing part of that investigating with them. The rest are pretty evenly split about 20% are not doing anything at all in about 15%.
Our actually suggesting there in some level of implementation of AI. So I think people are moving into this rather cautiously.
And looking to.
Two partners like CGI to help them think that through in fact, we've been investing this is part of not not.
We created our own IP framework that allows you to quickly create closed the main models, which then are easier to integrate into existing applications and of course, we're also integrated that into our existing IP. So I actually think it's going to be more of an opportunity.
And anything of course.
With the cyber security concerns or data privacy concerns probably future regulation you see some of the IP and copyright concerns.
I think it's going to take some time for that to go there. So I don't think its going to slow anything down if anything though it's going to it's going to we're going to be looked on as advisers in that space.
Okay, great. Thank you for those comments.
Your next question comes from Daniel Chan from TD Cowen. Please go ahead.
Yeah.
Hi, good morning.
George Congrats on the strong quarter.
So you guys mentioned that financial services performance remained strong with its revenue growth in bookings and it sounds like <unk> is expected to also be pretty good just can you give any color on how your customer conversations in the space are cool and just given all that uncertainty.
Yes.
I guess, what I should start with is we're mostly working with the large banks. Okay. So over three quarters of our banking business in the US For example is with the 10 largest banks by definition it would be with the with the top seven or eight banks in Canada, and but but.
The remaining is spread in the U S is spread across.
Spread pretty evenly across the other banks and it's mostly around our IP. So.
So the discussions we're having in Europe , it's very similar over 90% of our banking business in Europe is with a top five bank in the country.
And over 50%.
With the top 20.
Top 20 bank across all of Europe . So we're working with the larger banks and so naturally they are looking at this as a bit of a of an opportunity maybe to do some consolidation.
Certainly there they are seeing increases in their own bank deposits and so.
Our discussions are more around how do we help them play into that it's very similar discussions around the modernization and the digitization.
We haven't really seen much in fact I was I was meeting with a large.
European.
Bank right at the time that a lot of that.
That initial turmoil has spread from the U S to Europe .
We're pretty much saying staying the course, so it's it's interesting they are more open and willing and Thats just in general they have been for a little while to to go to the IP and so IP is certainly a strength is driving some of this more willing to go to the managed services not so much because of the market turmoil, but more because of the default.
<unk> and hiring talent. So so we're seeing we're seeing those those those happen and so.
Discussions with Ceos Cto's are.
Sure.
They're fairly stable.
Consistent discussions that we've had prior to the to the terminal.
Thanks for that.
And then if we just move to the U S commercial and state segment. The margins were lower this quarter, just any color on what drove that and whether you see that continue.
Yes, yes no.
I wanted to point that out.
We do see less some less IP.
Licenses in the quarter, that's always lumpy. So that's that usually works itself out, but we also saw some some projects successfully and and other projects not start and the same timing.
A level so.
We do have new starts given the strong bookings under 20% in the quarter and 20 plus percent in the trailing 12 months, we have some rate increases that.
That have worked their way into the system. So that's a tailwind, but we definitely are taking actions to monetary utilization to ensure that what we see as a bounce back.
That's certainly the plan is to see a bounce back to those.
Mid <unk>.
Mid teens.
The U S business, so and you saw a bit of that by the way you saw better that end WMC and at the same thing where they had some project successfully and little bit slower as I mentioned in starting up new projects and you saw a little bit of that in <unk> last quarter and you saw a nice bounce back there. So I think thats, what you will what youll see in.
The U S business.
Thanks George.
Your next question comes from Sean <unk> from Deutsche Bank. Please go ahead.
Hi, Thanks for taking my questions a couple if I may.
You commented on the past on the best excuse me.
The cloud results or the slowing down of cloud a cloud for a micro scalar has had little correlation with your with your own results.
Our focus on profitability, we've seen Google with profitable cloud business last night.
Are they being are there focused on profitably having any impact on your business or is this all a all.
All pass through.
We're not really we're not really working in the in the pass through business of the of the cloud providers. So so when you're looking at our revenues there is very little if any.
Pass through sales of cloud, we are really in the deployment of the cloud and in that case actually is why I mentioned that you don't see a direct correlation because what you see is a number of clients.
Actually are looking to get more purposeful about how they move applications into the cloud what their decisions are and so we're seeing actually consulting rising associated with cloud advisory.
We're seeing our cloud factory business continue to to be strong and helping clients move things to the cloud rationalize their applications. So youre seeing more of that and in fact, if you look at our partnership.
Revenue associated and again its associated it's not it's not the software it's not the selling of the cloud that's the services associated with the cloud we've actually booked.
As much revenue in the first six months of this.
This year as we did in the prior.
Total year, so the partnership.
The partnership with firms like the Hyperscale and the platform providers is actually pretty strong.
Okay. Thanks, and then.
Regarding M&A.
Your share price has done extremely well over the last few months congrats with that is youre share price a consideration when when you are considering M&A in other words as your accretion calculation.
Just on your multiple in the market or this is not really in Europe helps duration.
No one's Jay. Thank you for the question really it's the same discipline as you are used to at CGI look we want as George mentioned, we want acquisition that will fit with our culture.
And.
We're looking really for acquisition that we.
<unk> will be an accelerator to grow and as George mentioned, and we really want something that we'll do one plus one.
With that we'll equals more than two.
On the one plus one so that's ready to go same same strategy.
Our evaluation doesn't change really how.
How we see M&A.
Okay. Thanks, and then I will squeeze one last thing.
Congrats for the really noticeable improvement in terms of Scandinavia margins.
Really seeing that there.
Coupling of segments.
Paying up there or how far along do you think you are in terms of fixing via the Scandinavian business is there sort of quite a bit left to go there.
Yeah no. Thanks for the thanks for the question there is a little more.
A little more work to be done, but the positive news is that now.
Not only to fix some of the structural items and that is that is mostly behind us, but we're also returning to growth and that's really where I think youll continue to see the progression. So I don't think its.
A headwind anymore I think it's a tailwind moving forward.
Great. Thank you.
Thank you. Your next question comes from Danielle <unk> from Scotiabank. Please go ahead.
Guys great quarter.
Thanks for all the color that you've provided in bookings, but I wanted to get a little bit deeper on this.
Bookings pipeline that you have.
Some of the global it companies recently indicated that they are seeing an increase in less than 100 million bookings is that the same sort of.
Is that similar to what you were seeing in general and what's your take on North America versus Europe growth.
On a global basis for yourself as well.
Sure.
First on the bookings I'll answer it two ways.
The quarter's bookings I think we saw a similar.
A similar situation, where we were we had fewer $100 million plus bookings and I mentioned some of the expansions and the add ons and the partnership view that was driving some of that.
Across industries, but.
Looking forward.
We still see some some very large multiyear managed services deals and I think it's just a.
It's just a timing factor that that you see that now.
We kind of talked about this on the call earlier.
Last quarter at <unk>, where I said.
The Si and C deals, we're getting a little bit slower the managed services deals are getting a little bit.
Faster, but there is still because of their broad nature are still longer to close so I think youre just seeing some of that era.
Air pocket on the bookings so I don't think yet it's a trend to be seen as far as Europe versus versus North America not much you heard more caution in Europe .
I was there two weeks of the of the last month and that's not what I heard from from clients clients are certainly more focused more more determined to get the ROI more partnership focus for sure. It's all that.
The items that are highlighted in the in the opening remarks in the U S. You hear less caution.
The narrative, but when youre talking to clients yet there is theres still some some caution there.
Both in Canada and in the in the U S. So probably to the narrative you see a little more caution in the U S and to the narrative you feel less caution in Europe , but it's pretty similar.
And again I'm talking from a point of enterprise clients.
Yes totally get that thinks a lot of that was great color. So let me shift gears here a little bit so.
Let me see M&A something that markets looking at CGI for.
The first few months have been a little bit slower. So what can we expect from an M&A standpoint from the company.
Also a question I also want to understand how long the company's integration efforts been with respect to Humana and what can we expect going forward in some of the recent acquisitions that you've closed yes.
Well, maybe I'll start with the integration and then we'll talk about more general M&A. So the integration with with Humana's is.
It is continuing to show steady progress.
According to our plans.
It does take a little bit longer in certain countries. So youre seeing.
Youre seeing some of the.
Some of the tail there and you saw that even in some of the cash but.
We're continuing to work through that just takes a little bit longer to do the restructuring, but the clients are reacting.
Very well and things have stabilized in humana so.
Our playbook works very well from integration. It is a one company approach as I mentioned I think thats.
That makes it maybe a little bit more difficult in the short run.
It has greater benefits in the long run.
And so that's one.
We will continue with that approach on general M&A and the pipeline is strong we're seeing all the deals out there.
It's really just a matter of timing we remain focused on the most accretive deals.
There is a larger deals in the pipeline.
25% of them are IP related deals.
We maintain the aspiration.
It's doable, but clearly we could run out of runway this year, but.
Just a handful of these deals could could get us there, but you can count on us to be disciplined on this sellers can't be rush and.
And we're not going to we're not going to rush to a.
Two a bad deal. So that's that's really the maintain the focus I don't know, Steve you want to know anything that alright.
That's great color. Thanks, a lot guys I'll pass the line.
Yes.
Your next question comes from Stephanie price from CIBC. Please go ahead.
Good morning, Stephanie.
Good afternoon discussions around.
And in the U S debt ceiling can you remind us how it suggests that our business Aragon prior instances and how we should think about the U S. Federal business here as we head into essentially a bit more of an uncertain period.
Yes.
It's a really it's a.
It's an interesting time seems like it's always an interesting time.
The U S federal government market, but look right now point in time.
I'm going to put the debt ceiling aside for a minute there is really strong spur.
Spending with the current budget and Theres a couple of reasons for that one knowing that the specter of this.
This.
Debt ceiling is out there because you know they're taken special measures just to keep things going.
Until that comes to a head.
And probably more importantly, the specter of most likely two year continuing resolution because you've got Congress and on one side of the aisle probably won't change you've got an incumbent president who just announced his reelection.
Campaign.
And so what youre going to get is basically continuing resolutions.
No approved budget.
Of course, he has put forward a nice budget for us as far as domestic spending that youre not going to see that come to fruition.
I would say in general these times favor that larger firms with larger Incumbencies and.
And so that's what we've seen in our business there.
We see rushing to maybe.
Rushing to expand on existing contracts use the existing frameworks book as much as they possibly can spend the money that they have now.
And then as you get into the continuing resolution Theres a couple of factors that help CGI. One is our fee based business. So for example that work we do at the passports and visas, it's totally fee basis outside of the budget.
If you do work for the FCC its funded.
Outside of the congressional budget, so when its fee based funding that that certainly helps us. It also helps us to be kind of that ROI led an innovator and be seen that way because if we can drive out some savings in one part of our business then they can use that.
On a current existing contract vehicle to deal with unfunded mandates and Thats what happens in government at times like this there's still there's still a mandate, but they don't give any budget for that and so the agencies really have to work around that and certainly thats when incumbency really.
It comes to come to fruition, we're also seeing DNI and sustainability enter into more and more of the contracts in government around the world, but particularly in the U S. Federal government, which is kind of like an unfunded mandate and that its just an add on and again only the larger firms like CGI can actually.
Meet that so.
It's I don't want to say that we that we hope for for continuing resolutions, we do better than our budget, but we do we do fine and that type of environment given our incumbents.
Great color. Thanks, and then what are the one from me in terms of IP. It sounds like IP has definitely been a differentiator here for CGI and somewhat uncertain environment can you talk a little bit about where you're seeing this kind of demand in IP back in revenue and bookings.
Yes, well in the in the quarter it was really around our wealth.
That form.
Our payroll.
It is both.
Both here in Canada and around the World are retail suite, particularly in Europe and in our open media had a good had a good quarter around the IP and we have good growth in health and utilities overall, we do see an increasing shift to software as a service.
So it was one of our biggest quarter over quarter shifts. So we're now we're now at about 60% of our businesses in suffers service I expect that to continue just given.
The uncertainty thats out there and as as people look at their capex spending et cetera that probably moving away from some of the licenses as I mentioned, you saw a little bit of that in the numbers, that's fine with us because it over over a period of time, it always cost more to rent something than to own something so.
It's just that the revenue moves around a little bit for a period of time.
But overall the investments we've made in IP around architecture around <unk>.
Allowing it to plug in to other systems ease of use.
<unk> continues to pay.
Pay dividends for us.
Moving forward and as I mentioned, even bringing new technologies like generative AI and even more importantly kind of the deep machine learning into the IP is just making it more productive for our clients and that gets back to that.
<unk>.
Making experts more productive that's what we that's what we that's kind of the value proposition of.
Some of our IP.
But I'll tell you we do have some some use cases, there, but as always the human assisted.
On AI and the way we've brought that to the market so far.
Great. Thanks, so much.
Your next question comes from Robert Young from Canaccord Genuity. Please go ahead.
Hi, Good morning, one more question on the bookings if I could just trying to understand.
The short term impact if I understand what you have said this shift in the mix towards the consulting and bookings is more a function of longer sales cycle on managed services rather than a longer term sort of an impact just given that your peers are talking about.
Some short term macro concerns maybe.
Why.
Where does the confidence come from that that's a shorter term impact.
Well I think it's looking at the pipeline looking at the discussions we have looking at the voice of the clients.
I'm, not I'm, not suggesting that the macro environment.
You can look at it in a number of different ways, where we're looking to do is to make sure that we pivot.
Sure.
Our work to the opportunities that are out there look I think what you see out there and certainly this is true with the clients I talk to that spoke very openly about this they weren't necessarily looking to reduce their spend but they were reducing the programs that they were working on.
So.
Ends on where you are right. So if you're if you're working on a program that they decided is not.
Roy led is not an area that they're going to invest in this year, then it looks like they're stopping it.
And you got to pivot to the areas that they are spending and so that's that's what we're seeing and we see that we talked a little bit about.
The vendor consolidation its a little bit different this time around it's not a it's not a concentrated effort to consolidate vendors. It's more about consolidating the work, which then has the same effect as doing some of the consolidation of our vendors.
But it's different it's led by <unk>.
By the opportunities themselves and the business case for themselves. So that's.
That's still that's still work to be done if you look at the bookings though.
The shorter duration.
By definition on the Si and C gives you a low lower total dollar value and so so that's why when I when I talk about the bookings.
Stent that we get some of those managed services deals over the line.
That will certainly be a tailwind for book.
Thanks, a lot for that that's really helpful. And then maybe the second question is just on a comment you made I think you had said that you are seeing some shift in focus from <unk>.
Internal efforts towards work with external maybe chasing profitability I think is how are you.
Yes describe that could you talk about that trend does that mean that there is maybe yes.
Step function, maybe re badging and maybe outsourcing maybe larger parts of your customers' business, maybe just you've already been very bullish around managed services, but like is this are you, suggesting maybe theres a step function there.
I don't know if its a step function in the quarter I think it's a.
More of a function of where we've been heading as.
As I have been discussing for a while I think there is any big step function here, it's more just.
Directionally, where we've been where we've been heading and yes. When we do a lot of those managed services deals that does come with some of the people.
But the point I was making on the on the difficulty in hiring talent I think plays to <unk>.
Even if a client would want to do more of the work themselves right now point in time, they can and I think thats part of the drive on some of that.
<unk> see even a point in time I don't think Thats a trend I think thats just point in time and it is interesting to understand that even in the current environment.
Certain skills and are still somewhat scarce.
And that's why I mentioned, the investments that we're making in talent and growing the talent and engaging our talent.
Both for the benefit of.
Of CGI and the individuals but also to the benefit of our clients and I think that's appreciated.
Okay and last quick one just the organic growth if you can give us a number on that.
It seemed high to me I, just want to make sure the calculation right.
Excellent.
Well, we don't we don't split out the organic and inorganic because again.
The inorganic as a catalyst for organic we make we make.
Concentrated decisions in some cases.
Stay with.
Enterprise clients and.
In certain geographies and sometimes that means running down other business. So that's why we don't really break that out okay.
Ladies and gentlemen, as a reminder, should you ask a question. Please press star One. Your next question comes from Jason Kupferberg from Bank of America. Please go ahead.
Hi, Good morning, George and Steve This is Tyler on for Jason Thanks for taking the questions.
A quick follow up on the demand environment.
And the project elongation as an enterprise decision makers seem to becoming increments.
Incrementally selective on what projects. They are interested in funding, but have you seen any projects getting canceled in their entirety.
And if so are there specific verticals or geographies to call out.
Or are these projects more likely to be delayed and pushed to the right. If you will for further revenue conversion.
I see more delays like not now.
But in the future it had some specific discussions about that with some clients.
Mainly around projects that they decided to start at a later date or push off again, it's that that's sharper focus on.
On the return on investment not wholesale, but it's really.
It's really client by client I can't really quantify it by I don't see any big difference by industry or by geography, It's more just client by client and again its why that you got to have that close relationship with the client. That's the essence of that ROI led innovation you've got to know the client we got to know the clients Biz.
And then you need to bring the technology skills.
To bear on that and so thats really what we remain focused on.
Okay. That's very helpful. Thank you for that and just as my follow up there. When you are looking more vertical specific level. It seems like it was pretty strong performance kind of across the board, particularly government financial services and Marty.
That was offset it seems at least based on my calculations by a little bit more miles growth on the health side of things could you maybe just spend a few minutes just dig into bit of the dynamics youre seeing in the health space is there any split.
Callouts, there worth mentioning or anything that would be helpful.
Yes.
That's fair.
That's very perceptive, you're absolutely right. We did see although we saw steady growth in health it was at.
The lower level, it's more steady I think it's more even if you think about it they had such explosive growth given what the world went through.
I think theyre digesting some of that and so I don't I don't see that necessarily as.
As a trend but.
We'll keep we'll keep watch on that.
Alright sounds good thank you very much guys.
Mr. Lin there there are no further questions at this time. Please proceed with your closing remarks.
Thanks, Julian and thanks, everyone for participating as a reminder, a replay of the call will be available either via our website or by dialing one 877, six 704 7070 and using the pass code 993, four to four as well a podcast of this call will be available for download within a few hours.
Follow up questions can be directed to me at one 905 973, <unk> hundred 60, <unk> III. Thanks, again, everyone and look forward to speaking soon.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines.
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