Q3 2023 CGI Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Cgi's third quarter fiscal 2022 conference calls and I would like to turn the meeting over to Mr. Kevin Linda S. V. P of Investor Relations. Please go ahead Sir.
Thank you Sylvia and good morning, with me to discuss Cgi's third 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 90 at Eastern time on wind.
Date July 26, 2023 supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our Q3 MD&A financial statements and accompanying notes all of which have been filed with both SEDAR plus 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.
Arbor statement is available in both our MD&A and press release as well as on CGI Dotcom, we recommend our investors read it in its entirety.
We are reporting our financial results in accordance with international financial reporting standards or ire for us as always we will also discuss non-GAAP performance measures, which should be viewed as supplemental.
The MD&A contains definitions of each one used in our reporting.
All of the dollar figures expressed on this call are Canadian unless otherwise noted I will now turn it over to Steve to review, our Q3 financials, and then George will comment on our business and market outlook Steve.
Thank you, Kevin and good morning, everyone.
I'm pleased to share with you the results of our third quarter of fiscal 2023.
In Q3, we delivered $3 $62 billion of revenue.
11, 2% year over year or up six 3% when excluding the impact of foreign exchange.
The following segment generated double digit constant currency growth.
UK and Australia up 15%.
Asia Pacific up, 13% and the western and southern Europe up 10%.
From an industry perspective, we had growth across all sectors with particular strength in government, our largest vertical market generating constant currency growth of 11%.
IP as a percentage of total revenue was 21% in the quarter up $85 million year over year.
We continue to see strong demand for our business solutions with overall IP portfolio growth of 12, 4% year over year or seven 7% in constant currency.
Year over year IP revenue growth in constant currency was strong within the following industries.
Government up 19%.
Kevin vacations, and utilities up 14% and <unk> up 9%.
The number of consultants and professional was increased year over year by 3000 totaling now 91500 worldwide.
We booked $4 $4 billion up contract contract wins in the quarter up nearly 30% year over year.
As a result, our Q3 book to Bill ratio was a robust 121% led by U S. Federal with a book to bill ratio of 206%.
Canada at 121%, Scandinavia, and central Europe at 117% and Western and southern Europe at 116%.
Importantly, <unk>.
<unk> services made up 57% of total bookings up significantly from 48% in the prior year.
On a trailing 12 months basis, our book to Bill ratio reached 113% with all of our proximity geographic segments, adding a book to bill above 100% on the same basis.
Overall, our global backlog reached a record of $25 $6 billion, representing 1.8 times revenue.
Turning to profitability.
Earnings before income taxes were $559 million up 14, 3% year over year for a margin of 15, 4%.
Just did EBIT in Q3 was $585 million up 12, 5% year over year.
This represents a margin of 16, 1% up 10 basis points year over year.
This increase was driven by the combination of profitable revenue growth and operational discipline. Despite less available days to build due to the timing of statutory holiday easier route.
We delivered strong margin in the following segments.
Asia Pacific at 31.1% Okay.
Canada at 22, 3%.
U S federal at 17.7%.
U S commercial and state government at 17, 3%.
Our effective tax rate in Q3 was 25, 8% compared to 25, 5% in the prior year.
When excluding acquisition related and integration costs, our effective tax rate was 25, 6% compared to 25, 3% 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 $415 million up 13, 9% when compared to Q3 last year for a margin of 11, 5%.
Diluted EPS was $1 75, representing.
Representing an increase of 15, 9% year over year.
When excluding acquisition related and integration costs associated with prior year acquisitions net.
Net earnings improved to $426 million up 14, 7% when compared to Q3 last year for a margin of 11, 7%.
On the same basis diluted EPS was $1 80, and that creation of 16, 9% when compared to $1.54 in Q3 last year.
This improvement was mainly driven by the execution of our build and buy profitable growth strategy and to a lesser extent the impact of favorable foreign exchange rates.
In the quarter.
Cash provided by operating activities was $409 million compared to $419 million in the prior year.
DSO was 44 days in the quarter in line with our target of 45 days.
For the last 12 months cash provided by operating activities improved to $2 billion, representing 14.1% of revenue.
In Q3.
We invested $102 million into our business and $53 million to buyback our stock.
As of the end of June Asper, our approved and CIB program, we have the opportunity to buy back up to an additional 15 million shares.
In the quarter, we continue to deliver a strong return on invested capital at 15, 7% demonstrating our efficient deployment of capital.
Looking ahead, our focus continues to be on delivering value to our shareholders by investing in our business.
Pursuing accretive acquisitions.
And repurchasing our stock and are paying down our debt.
CGI has a strong balance sheet with a net debt to capitalization ratio of 21, 7% at the end of June .
As well as $3 billion of cash readily available and access to more if needed.
While M&A activity in the it services industry has slowed significantly due to a gap in valuation expectation versus current market realities.
Gee I believes that our disciplined approach will result in higher quality mergers for the benefit of our stakeholders.
Moving forward CGI is this strength and capital resources to continue to execute on both our build and buy profitable growth strategy now.
Now I will turn the call to George to further discuss insights and outlook for our business and markets.
George.
Thank you, Steve and good morning, everyone.
Our team again delivered quarterly results in line with our full year plan, we achieved constant currency revenue growth of six 3%, which is at or ahead of the markets in which we operate.
Double digit EPS accretion of 16, 9% on Ags adjusted basis sustained EBIT margin expansion up 10 basis points year over year on an adjusted basis bookings of $4 4 billion.
Up nearly a $1 billion compared to the same quarter last year.
Continued high engagement of CGI consultants and professionals, resulting in lower employee attrition levels on both a quarter over quarter and year over year basis.
And continued high client satisfaction levels as rated and signed by client executives demonstrating the deep confidence they have in our people and capabilities.
The strong quarterly bookings were driven by client awards or managed services with a book to bill ratio of 120% and IP engagements with a book to bill of 120%.
These larger engagements increasingly also incorporate consulting and systems integration services as part of their scope.
This combination of Cgi's end to end services reflects the ongoing rise in client demand for broader more holistic partnerships.
Clients realize cost savings and advance their digitization objectives.
In both managed services and IP the highest proportion of bookings were awarded within our two largest industry segments government and financial services.
For example in managed services the U S. Environmental Protection agency awarded CGI Federal multi year managed services contract valued at $522 million.
We will partner to re imagine the agency's portfolio at the application platform and enterprise levels in support of their mission.
To protect human health and the environment.
This award renewed CJS incumbent work and included an increase of enterprise development scope of over 45%.
And thank you Euro sweeteners payments clearinghouse extended their long term partnership with CGI through $62 million agreement to enhance system efficiency uphold stringent security and unlock opportunities to drive future innovation across the payment sector.
And examples of IP bookings include a government Ministry in Germany extended its partnership with CGI on the implementation of Cgi's <unk> 360 solution for electronic file and data management.
This will enable the ministry to increase agility, and dry seamless integration and interoperability.
U S Department of veteran affairs increased funding to support the implementation of Cgi's momentum IP and support of the agency's financial management business transformation program.
And in the financial services sector, we signed 28 agreements for our recently transformed cloud native credit studio solution with clients in the U S, Canada, UK and Australia.
Our solution incorporates AI and helps clients address the continued tightening of credit markets.
Two thirds of these awards were for net new business.
A high proportion of managed services and IP and our overall bookings led to a greater size and duration of project Awards. This quarter in fact, 40% of total bookings in Q3 were comprised of deals over $50 million. This is compared to 13% in the same quarter last year.
Over the past several quarters, we anticipated these client buying shifts given our day to day engagement with clients and through our annual voice of our clients proprietary research.
This research serves as an important global antenna to help identify the top priorities for clients now and over the coming years.
Last quarter I shared some preliminary findings from our discussions with over 1700 50 executives in 'twenty, one industry sectors around the world.
Our research indicates our clients are now heavily relying on managed services and IP to implement optimize and manage their transformation programs in order to achieve the expected return on investment.
And our research two and five executives cited legacy systems, among the key barriers to successful digitization.
Demonstrates the need to ensure that solution strategies address the complexity of modernizing current systems and integrating with new systems and processes.
Our managed services offerings focused on providing client savings, which are then coupled with reinvestment to drive modernization industrialization and organizational agility.
And our IP, including IP enabled business processes provides clients with digital accelerator with lower capital costs.
<unk> provides clients with the added benefit of having security data protection innovation and interoperability with third party platforms as part of the solution.
Our analysis also underscores that C suite executives are applying a sharper focus and their decision making to determine the highest return investments.
This is shaping most of their key program priorities.
We call this ROI lead digital transformation in it.
Is that the core of our partnership approach with clients.
Many of the executives we spoke last cited the challenging economic environment is the key driver for sharpening their focus is requiring them to prioritize cost savings, while simultaneously advancing digitization to improve competitiveness resilience and customer experience.
This dual digital agenda continues to generate demand for all of <unk> and then services as clients now require consulting partners that can design connected strategies.
<unk> vision and real world implementation to deliver expected results.
We are proactively working with our clients to translate their business objectives, and the tangible engagements with clear and measurable business cases, such as for a leading natural gas services company. We are deploying AI solutions that will unlock $150 million in value through predictive analytics and optimization.
We are implementing intelligent evidenced based solutions to help the health care provider better predict and lower the cost of care, while reducing processing time by 90%.
We are developing a business vision and subsequent roadmap for achieving the future state digital environment, including data monetization for our clinical services company and.
And we are helping transform the small business loan processes for a multinational bank reducing cycle time from 17 days to two days.
Now turning to our buy strategy in Q3, CGI successfully completed the integration of all prior year acquisitions. According to plan.
As Steve just mentioned current M&A activity has slowed across the entire it services industry. This however does not change the CGI strategy, our appetite and capacity for M&A remains high and we continue to have a very active program in terms of sourcing interactive dialogues and due diligence assessments.
<unk> accretive M&A transaction takes rigor and discipline.
And we remain committed to making sure that we acquire the right companies at the right price.
At the right time.
Three without exception.
Looking ahead to the coming quarters, we believe the ongoing macro uncertainty in the political and economic environment will intensify client efforts to prioritize.
Led digitization.
This coupled with the demand for broader more holistic transformation programs will start to put some pressure on client decision cycles as some executives tradeoff speed of action.
<unk> base business cases for <unk>.
These buying patterns continue to favor our managed services and IP offerings. We continue to be actively engaged in later stage opportunity pursuits with multiple prospective clients in every geography.
In each case, we work collaboratively with client executives to build solutions that combine and tailor the right mix of CGI services to address the organization's business objectives.
The evolution of our business mix to include more managed services and IP will serve as an enabler to continue to drive CGI margin expansion and improved EPS, even as sales cycles and bookings to revenue conversion will naturally expand.
And as we incorporate higher proportions of global delivery into these services our client value proposition increases as does CGI is profitability.
From an industry perspective, we see client demand in the near term as follows.
In asset intensive industries, such as manufacturing retail and energy and utilities client demand for efficiency and agility are paramount.
We see organizations seeking to reduce the cost to operate in order to fund new investments.
As such our managed services pipeline for these industry sectors over the next year is up by more than 33%. The IP pipeline is up 30%.
And banking many clients are reassessing their priorities and the supporting 19 investments given economic conditions and continuing central bank interest rate hikes. This.
This is resulting in stable, but slower demand for <unk> and <unk>.
Increasing demand for managed services.
On a sequential quarter basis pipeline in managed services is up.
Nearly 20%.
And in government health care and insurance clients are accelerating their digital transformation agenda for these industries Cgi's pipeline remains well balanced across consulting system integration and managed services is up 20% year over year.
Naturally across all industries, we are increasingly engaged in discussions about the future use of generative AI how to prepare data strategy is to be ready for AI implementations and how it integrates into clients' digital transformation agenda.
We have extensive experience in delivering intelligent automation and AI technologies as part of our services and solutions over the past several years, notably in our IP and.
Possible use of AI as part of <unk> management Foundation, ensuring the ethical and disciplined use of AI by all CGI professionals and in line with evolving regulations.
This serves as our foundation to engage in broad based AI discussions with our clients.
In fact, CGI teams are actively working with clients to use AI in a wide range of projects a few of which include improving effectiveness and efficiency of city services.
<unk> and preventing water pollution, predicting cracks and steel manufacturing.
<unk> <unk> scans to detect brain hemorrhages, and using Earth observation data to locate quantify and track Seagrass meadows.
As <unk> progresses in new ways, including generative.
We will innovate with our clients while balancing the responsible use of this evolving technology.
Earlier this week, we announced our plan to allocate $1 billion of spend over the next three years to expand our AI services and solutions.
In partnership with clients, who are seeking to responsibly move from experimentation to full scale implementation and accelerate time to value of their investments by leveraging new AI technologies.
Did you guys add investments through both build and buy will be prioritized across four dimensions.
End to end offerings expansion, including an AI business consulting methodology, IP platforms and prebuilt solutions.
Talent capacity and capability, which will include the training of our existing consultants hiring of new expertise and formation of communities of interest across all CGI to accelerate AI usage.
Go to market strategies to increase awareness of <unk> AI offerings through the publication of thought leadership and establishing new partnership channels global alliances.
Operational and delivery excellence to drive efficiencies and benefits our clients and CGI through expanded AI use.
In closing <unk> broad mix of end to end services balanced geographic footprint and portfolio of clients across industries creates a resilient foundation for us to sustain our positioning as a partner of choice for our clients and employer of choice for our consultants and professionals and investment of choice.
For our shareholders.
Our investments and build and buy are made with this resilience in mind and to continuously strengthen our competitive differentiation.
Thank you for your interest and support let's go to.
The questions now Kevin.
Thanks, George Shelby please share with the participants how to queue for questions. Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on you touched on the phone you will then hear Sweden.
Prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and using a speaker phone. We ask that you. Please lift the handset before pressing any keys. Please go ahead and press Star. One now if you have any questions and your first question will be from Richard Tse National Bank Financial. Please go ahead.
Yes. Thank you.
This sort of the ICM. Obviously this is quite notable just in terms of the partnerships that you have with some of the leading players in the market. Today can you maybe expand in terms of the level of engagement you are having with them. So for example, you know I guess swallow heaters is Microsoft and maybe you can just give us a sense of like your level.
Engagement on sort of what their plans are going forward.
Yeah, Yeah no. Thanks for the question Richard Yes. We are we are engaged with all of our global Alliance partners actively looking.
Looking to both leverage what they're doing with our intellectual property, which is a big element of our global Alliance partnerships, but also then to further that together and so I can't talk about anything specific yet, but we're actively engaged in forging some some formal.
Partnerships go to market with that and Thats part of what this what this investment announcement was about.
Okay, and then in terms of where you sit.
Within that sort of ecosystem.
What do you see in terms of the most common use cases that your clients are looking to address with AI here going forward in their enterprises.
Yes.
Current point in time.
The use cases are what you've heard about some of the call center activities are very specific.
Opportunities like some of the examples I gave as far as looking at the brain scans that were dealing with with the hospital and the nordics or looking at the environment like we're doing with them.
The partnering with some space age agencies in governments and U K. So theyre very more point solutions, but I can tell you. The conversations we're having are much broader and.
It's really about what is the art of the possible.
And part of that first step is getting the data in the shape that.
It needs to be in order to train. These models on trusted data that can be leveraged. So we're still I would say in the very early days I mentioned, we're still in the early innings of Digitization at large or even earlier days of AI, but.
What I see is clients are really looking at the at the broadest applications of where AI could make a difference.
Okay, Great and one last quick one here for me like there's certainly a lot of puts and takes in terms of the.
Outlook going forward here and then some of your competitors have talked about perhaps.
Turning off.
Staffing given some price competition in the marketplace have users see the next few quarters, playing out just from kind of like our operating cost perspective are you kind of in a position you want to be is there a potential to sort of take out some costs.
Maybe give us a sense of how that should play out here over the remainder of the calendar year.
Yeah, we're pretty pleased with the positioning and the strong bookings driven by IP and larger managed services deals.
We anticipated and we've talked about even on this call last quarter that that takes a little bit longer.
We anticipated some of the shift from ethane C to the IP and managed services, we do along the way any time youre doing a shift and buying behaviors.
Been very active in training re training rotating our people to the areas of strength and then of course, taking actions, where where need be where those arent aren't completely aligned but that's all in all in the numbers already and so we don't see anything big having it to be done.
Like I said.
We see the continued strength in margin driven by the profitable growth, but also the global delivery the business mix towards IP and managed services, which we've talked about before that's a tailwind for us.
Turnover is down as I mentioned and utilization is actually up so we feel like we're in a pretty good position.
To to move forward in this shift and of course, the planned investment in data and AI is just to drive that future way.
Of growth further down the line.
Okay, great. Thank you.
Thank you next question will be from Synovus multiples at BMO capital markets. Please go ahead.
Hi, good morning.
Charge related to the AI investments would it be reasonable to expect that your investment in IP might take a step up as a percentage of revenue in the coming.
Quarters in years or is that going to be more a function of case by case basis evaluating projects with clients taking them to your IP doesn't today.
Yes, it's going to be more.
To be more balanced what we do with the IP as as Youre aware, we don't build it and they will come we always do that in concert with with our clients we've already been making some of the investments in our IP with AI and we have the pulse AI framework that I talked about last quarter. So that's.
That's been part of that.
Is going to be more measured it's why I announced it over a three year period, it'll be lockstep with the with our clients now over time it could the investment could go up if the if the demand curve.
How is that and I will tell you that in general as we as we continue to have stronger bookings and higher revenue growth in IP than the rest of our business. We have been over the last several years ramping up the investment we made in IP, but again always focused on making sure we have that solid.
Return on investment and doing that in concert with our clients in many cases, when we make an investment in IP, we already have.
Letters of intent or in some cases signed contracts with clients that support that investment of course, we're making the investment, but we already know the businesses there and we're working in concert with our clients, we're going to do the same thing with <unk>.
Great.
And then just drilling into the Canadian business with some deceleration during the quarter organic was slightly negative I think partly led to financial services.
Can you speak to that you see that as being transient. So what are you hearing from customers and I saw that the Canadian government recently of Oregon's very large contract. He finally question because a client of yours.
Is that something that's meaningful for the Canadian business. If your question caller. Thanks.
Yes, yes so.
Well, maybe I'll start with the Skyline, you did see that the big announcements at really a down select to one we are part of that consortium. In fact, we are the the provider as part of that are that large.
20, plus year deal.
It is still even though was down selected to one it is still an active solicitations. So that's all I can say there. It is not in the bookings of course, that's at the tailwind for the future for the Canadian business and underscores again, the strength of government spending around the world as far as the quarter goes we do.
Did have.
A bit of a tough comparable we had a we had a one time.
Last year and you can see the spike in growth last year at this time and so it was a tougher comparable but in general yes, we think that it's it's pretty temporary as as the financial services.
It goes through some of this adjustment and shift in.
And priorities.
We had a strong 121% book to bill in the quarter.
Look at the trailing 12 months is I think one to 108.
<unk> percent on a trailing 12 month basis.
Bookings in the quarter, where we are.
Underscored by large managed services deals, including in financial services, so kind of showing some of that shift. So we believe we're going to return to growth.
Next next quarter and it was really more of a blip there in Canada this quarter.
Great. Thanks, George I'll pass the line.
Right.
Next question will be from Stephanie price at CIBC. Please go ahead.
Good morning, maybe just happening with the government with the government sector. The U S. Federal bookings were quite strong in the quarter. Just curious if you could talk a little bit about what's driving that growth and how you think about demand in the vertical and maybe more broadly for the remainder of the year.
Yes, well I think government as we've discussed for some time.
Is strong around the world because it is more of a counter cyclical avenue of growth for us and of course, it's our largest sing.
Single sector.
Yes, very strong in the U S federal which we anticipated because a lot of the of the spend has been backloaded for the last couple of years and federal you might remember we had a very strong book to bill in the in the fourth quarter of last year, it's tended to be.
Back loaded and just to remind you on the U S. Federal government fiscal year ends at the end of September same as as the CGI fiscal year end and we see that same thing going that same phenomenon going on.
The U S. Federal government is kind of behind in their spending and part of that has been because the procurement just can't keep up.
With the with the demand.
Underscoring that is government needs to digitize government needs to put new policies in place have been very active in the environment, we heard the EPA.
When that we've had this quarter. So I think it's a combination of those factors and then just the slowing economy Gov.
Government tends to get more active and we've seen that.
In Germany, we've seen that in the U K you saw the strong.
Bookings performance in the UK and you know that UK has even higher percentage of our government work, where we're a strategic partner to the to the UK government. So a lot of a lot of goodness. There. We also see space, becoming more of a.
Of an area.
And I'm talking about outer space now, becoming more of an area of.
The opportunity to leverage really the space based data.
And connect it with with Digitization and technologies like AI too.
Really unlock some some value and saw some real world problems.
<unk> and <unk>.
Governments form of ROI led Digitization, which is really furthering and bettering communities for citizens.
Great color. Thanks, and then just one more from me just on the M&A market you mentioned a few times in your prepared remarks that there was a valuation gap that youre seeing can you elaborate a little bit more on that and just on capital allocation of M&A as lower should we expect tomorrow thats focused on share buybacks here.
Yes.
The M&A market has been.
A bit uncertain, along with the economy itself.
The difference in the valuations as you've got sellers that are hanging onto 2021 valuations in and buyers that are looking at 'twenty, two 'twenty, three and beyond evaluations and.
Not unlike the housing market.
There is a dearth of opportunities out there.
But we're going to be patient on that we.
We will continue to we do have an active pipeline.
There is no big late stage opportunities, but I always say it is.
Wait in hurry up hurry up and wait in the M&A market. So we have a very active pipeline on personally engaged in some of the discussions. So we're just going to we're just going to keep keep at it and make sure that we do the right accretive acquisitions as far as capital allocation goes yes first is investing back in our business.
And you heard the investments, we're making in AI and IP and those types of activities that will be accretive because that's what we'll that's how we're going to measure them.
But.
But.
Behind the.
If we don't have the accretive acquisitions to included in that yes. It does provide us the opportunity to do stock buybacks and we see that as still a very accretive way to return cash to shareholders and so we'll be active on that.
Great. Thank you very much.
Thank you next question will be from David <unk>.
At Scotia Bank. Please go ahead.
Good morning, everyone.
George I might've missed it but I wanted to confirm this AI investment that you've announced.
Is it do you.
That some of the discussions and early stage.
Projects that Youre seeing here are they going to add to the consulting side of revenue before they get into the execution side of things.
And would any of such revenue will be currently factored into the book to Bill that you have mentioned here.
Yes, no. It's a very good very good insight that you derive there yes. The early days are a little bit more on the consulting helping clients think this through put their own frameworks for a responsible use and to place do some of the experimentation. So it will be not just the <unk>.
Salting, but consulting and system integration as opposed to whole scale.
Managed services type opportunities or broader engagements and so yes. Some of that is actually in the bookings. So that's actually and as I mentioned, we are actively doing some of this now so some of that's actually in the in the revenue.
And I'll remind you, even though I highlighted the managed services and the.
And the IP, we still did have.
Solid bookings and Nsync.
Decelerating, but still strong and as we shift to more of that managed services and those other opportunities.
And the other is and I mentioned this as well.
Some of the managed services, we do when we're doing modernization there is a small consulting and systems integration component that could have AI. That's buried in that managed service. So it's hard to kind of separate that out and of course as I mentioned as part of our IP as well so it really spans all.
Those end to end services, but you are right back to your first question a little more on the on the front end and the backend for now.
That's helpful. I'm, just going to the regular business here have you been seeing are noticing a lot of pricing pressure in the market and is it more pronounced in certain geographies or certain sectors. If at all.
Yeah, no. It's a good question as clients look for cost savings, there's two ways for them to get that right. There's the there's the rois led digitization opportunities.
Where we're providing maybe.
Some some opportunities for them to grow their business and become more efficient with a with a point solution.
There is another way to get that is through that longer engagement managed services through scale and we can provide them. Some of those cost savings upfront and then drive those efficiencies through a longer engagement and monetization and then there is pricing.
And when it's just straight pricing, we tend not to engage as much and yes. We are seeing some and you always see that as a slowdown like this you see some what I would call.
Bad behaviors by some competitors that might.
And these are usually more local providers that drive.
Just right.
Decreases and these are some of the same players that actually maybe went overboard on the on the salary wage increases and so I think theyre going to get caught and that's an opportunity for us to take market share. They stumble we've already seen some of that in.
And some of our European clients, where they stumble on.
On delivery and.
Just because you have a lower rate doesn't mean, you're.
Youre going to get the value and so we come in with our.
More mature way of providing the savings and I think that's an opportunity for us to take market share in the intermediate term.
But in the short term, yes, you always see that during the slowdown.
Yes.
Very helpful.
Question on the cash flow from operations. So looking at how the CFO has historically trended it looks like this quarter working capital was a use of cash and Steve mentioned, the DSO was in line with expectation, but it looks like your payables were a little bit more tightened up so was there a rationale for that.
Yes.
Intimately.
We use less subcontractors.
In the quarter. So obviously, if it's a timing a timing element.
That we had in the accrual.
And.
Also the accrual for performance based compensation had an impact on the cash flow from operation, but it's really.
Really.
It's really a timing so when we look at it on a let's say a year to date basis.
You see their growth, we grew by more than 100 million and their cash flow from operation.
And what we're really watching as you mentioned is DSO.
In this.
It kind of make time, we want to make sure that our clients are paying and they are.
So we are really really focused on on the collection in.
In terms of the accrual.
It's really timing.
That's helpful. Thanks, Steve Thanks, Joan.
Thank you next question will be from Paul Treiber at RBC. Please go ahead.
Alright, thanks, very much good morning.
George just regarding AI I mean, you've been through a number of industry shifts in the past.
And a big ones being mobile and the cloud how do you compare the enthusiasm from your customers and the interest from your customers regarding AI versus previous tech cycles, and then secondly, just looking forward.
How do you think how quickly do you think that enthusiasm will convert to bookings compared to past investment cycles.
Yes.
Thanks for the question yes.
Here's what I see I see this this wave and disruptive technology.
Being a bit of an evolution.
Mobile and cloud with both of which.
Enabled us to really drove a proliferation of data that's out there and and really AI has the ability to unlock some of that.
The value attached to all of that data so.
Now having said that so I think that's what's driving some of the enthusiasm.
And because it's really is building on the on some of the earlier technologies in ways that we've gone through.
Having said that I think it's.
It's not so much the willingness to be have the adoption, but it's really.
Having the data in the models ready to actually benefit from this is going to be really important we kind of see the.
The AI in our discussions with clients, it's really revolving around.
Three key principles one is the trust, having the closed datasets, where ownership and data Providence is really.
They are viable and that's going to be important for any of the regulation that goes out there transparency and for US part of that is having a human within the AI loops that you actually can can verify again.
The bias that they are not there and align the AI activities with the company's direction and values and and so that's going to be an element of this and the reason I'm mentioning these policies take some time and.
I don't think its a dampening on the enthusiasm of just these things take some time and then last where you want to get to as Youre going to make the individuals and.
And experts more productive it's not going to work the other way you're not going to make lay people experts and those that kind of skipped the first two and try to go to that level I think youre going to run into some issues and Thats why were doing some of the starting off with some of the consulting.
Because it really at the end of the day.
We think it's going to be the business value that you add to the AI not the value that you extract from the AI and that isn't dissimilar to mobile and cloud quite frankly.
On your last point about making experts more productive you know one of the things that AI has been our generative AI is being touted as.
Is streamlining programming.
How do you see generative AI impacting the IP services are core.
<unk> of it services in terms of product development maintenance do you see it services ultimately benefiting from that efficiency or potentially is it a longer term headwind and that customers. Maybe you can be more productive themselves.
No I think it's I think it's going to be a.
Tailwind, but the.
The reality is it's going to shift the way that.
Net.
Developers work, which is why we're investing to make sure we can.
With our.
Experts to leverage and work side by side with the with the AI to be more productive I think it's also probably going to shift the way.
Pricing and buying occurs shifted even more so towards output driven.
Activities may be even disassociate.
The pricing, which right now is still at least NSA and see tightly associated with labor I think it's going to disassociate that to more output.
Output based pricing like you see with within intellectual property product.
So I think there are going to be some shifts that we're going to go through there is going to be some puts and takes but at the end of the day I think it's going to be a tailwind for the industry much like previous disruptive technologies a bit.
That's interesting.
Glad you provide your perspective, just one last question for me just you called out a number of metrics regarding your pipeline kidney I might have missed it but can you.
Summarize that.
Total pipeline I think last quarter, you called out I think there's tour pipeline up 15% quarter over quarter. How does your total pipeline look here.
No I don't have that.
That in front of me because I've been really focused on the shift to the managed services typically that drives the overall pipeline even higher because as I mentioned those are larger deals, but let me get that but let.
Let me get that number to you okay.
Alright, Thank you I'll pass along.
Thank you next question will be from Daniel Chan at TD Cowen. Please go ahead.
Hey, George you guys continuing to demonstrate some pretty resilient growth here, whereas some of your peers are exercising caution or even revising that guidance lower what.
What are you attributing your relative outperformance to what are you guys doing differently or better than your peers, it's allowing you to win market share here.
Yes, well I think one is is really.
That shift.
To both managed services, which we know it takes a little bit longer but also that IP.
<unk>.
I mentioned that.
For example in banking and you see some of the slowing.
The straight Si and C activities, but we have a lot of banking IP and so that's that's enabling us to counteract that and a lot of ways. The second is that as I mentioned, we've been doing this shift to managed services anticipating this for a while.
Im getting a little bit ahead of it and so we have had some bookings from <unk>.
Six to nine months ago that are now coming online and.
And that's the one that's the one caution right is that you.
<unk> see deal and it start on a Friday and it starts on Monday and you're billing.
You win a large managed services deal on a Friday and it can take 369 months before youre seeing revenue on that.
But we did that early and so we're weathering some of that with them with some of what we had done.
In prior quarters and the other is government.
It's.
Unlike some of our competitors, it's a large element, we always suggest that wed like that base because of that.
The countercyclical nature and that allows us to.
Work.
And different markets and still.
Be able to grow and Thats and you saw the 11% growth in.
The government this this quarter.
That's helpful. Thanks for that and then you mentioned the bookings conversion timeline, taking three to nine months the bookings or the book to Bill for the last few quarters has been really strong should we extrapolate that to suggest that you could we could see some accelerating growth.
In the second half of the calendar year, especially as those bookings start converting to revenue.
Yes, I think what what I would say is we definitely.
We definitely see that.
All the indicators those bookings and even the pipeline and what we see in the near term.
Point to stronger growth in the intermediate term.
Like I said it does take it does take a little longer and we're we're counteracting that you saw that this quarter counteracting some of the shorter term.
Slowdown, but I think in the intermediate term, that's when all the indicators point to too.
Yeah.
Good growth path there.
Great. Thanks George.
Thank you next question will be from <unk> <unk> of Stifel. Please go ahead.
Good morning.
Ed just wanted to follow quickly on managed services.
See you guys here.
Well positioned to capture the strong point, you're seeing in the demand.
Demand backdrop.
Can you talk a little bit about.
How your discussions with clients and for Raphael cycles have been trending here more recently.
And are you seeing opportunity for pricing power given the strengthening in demand.
Yeah, no it's a.
A good question.
When you the discussions that we're having right now.
In many cases are.
Our one on one discussions so theyre more.
Or more engaged with the client as a sole partner it.
It's really around getting the value proposition for them right and.
Youre right in one way I wouldn't call it pricing power, but what I'd say is when you can get that value proposition right.
They are less concerned about what your pricing is or isn't and so really it's a matter of getting close to the client going through we have something we call proof of value process that really engages directly with the with the business and the.
Individuals' to kind of drive the right value proposition.
And in many cases, there is a big win win.
That situation.
It does take longer so it's pipeline to booking and booking to revenue takes a little longer but the payoff is is very very good for both top and bottom line.
Okay got it thank you.
The second question I had was all with more complex.
Your outlook for investments in AI.
When you think about head count growth going forward as you start to invest in <unk>.
Our capabilities are starting to become more efficient internally.
Yes.
I touched on this earlier I think we will see some.
Distance and.
This association of just.
In order to get a dollar revenue you need to add a dollar of labor and.
I think youre going to see some some more this association just like we have with our IP and you can see our labor grew this this quarter less than our.
And our overall growth and part of that is because it is growing faster and of course, we have assets that are driving some of that revenue in this case, it's going to be the higher productivity.
Again, if we can we can do that in a value based pricing is going to is going to change that change that equation.
Great.
Thank you for taking my questions I'll pass along.
Thank you next question will be from Zelman <unk> at Deutsche Bank.
Hi, Good morning, Thanks for taking my question. So first question is on the head count we've seen that it's up a bit.
I mean, it's understandable given given the bookings and the growth trends.
But I want to dive in really what's what's the current mindset have you been more careful than usual given the comments or your clients have been telling you about the macro are you preparing.
For the market to turn around just wanted to know about the mindset regarding regarding the head count.
Yes, well we've been we've.
We've been very prudent as always in and hiring more for the known projects and known demand.
With turnover.
Again trending down both sequentially and year over year, it gives us more of that opportunity.
Some of that.
Some of that hiring ahead had to be done because of the some of the turnover. So we're seeing a shift in that.
We have a strong attraction and retention value proposition.
It starts with our ownership, but then of course, our training and support and our proximity model, which kind of gives.
Less wear and tear on our consultants having to travel all of that plays in and so we're able to be a little more prudent and the hiring and still be positioned for that that intermediate growth, but also make sure that we're not.
Not in a place where we are.
Under utilized at any point in time from a cost perspective, and I mentioned when youre doing that shift we've been taking any actions that need to be done.
In order to drive that but we will continue.
To hire and grow and AI will be part of that but it's not the only driver of that.
Okay, Great and then second question is on the <unk>.
What are the type of clients that are willing to pay first four core AI I mean, your you have a high exposure to government I guess, we can imagine that the government might not be one of the first clients sorry.
To jump on that on the wagon so what what type of clients are you seeing are willing to pay for that.
Well.
The top innovators.
Tend to be banking and health care right now and.
That's pretty consistent with with other ways of technology.
So have a lot of data that you can unlock.
The power of that with those two industries, but I'll tell you. What's interesting is we see government as a potential for potential early adopter, we're having very good discussions with with government lots of interest here.
Because they kind of fell behind right and so they may need this more than than other industries.
And probably are more capable of managing.
Yes.
The regulatory environment and the trusted environment, just given their size and scale and scope. So.
I think they have some drivers that could make them an actual early adopter, we'll see but that's kind of what we see right now.
Yes, and their own involvement in regulatory too. So thanks for the color. Thanks Yep Yep.
Thanks, Hi, Sylvie.
Sylvie we've got time for one more question. Please certainly Sir last question will be from Rob Young with Canaccord Genuity. Please go ahead.
Okay. Thank you.
The comments through the call that <unk> had some disk.
A discussion around sales cycle lengthening longer conversion, so a bit of a trend I think in enterprise just in general and so I think you've been.
<unk> then it's driven in Cgi's case around.
Managed services and the longer sale cycle.
Cycle associated with that maybe some pivot towards ROI based programs.
I was just curious if you could give us.
Maybe a summary of why you think that this shouldnt be viewed as a demand driven if I'm correct. It sales cycle is lengthening.
Yes.
You're correct in the overall.
Summary, but.
I think when.
When I look at that demand is still strong. It's just the timing of that demand and so as you make any kind of shift and we anticipated. This we.
I talked about this.
Last few quarters.
As you have that shift.
There's just some disruption there, but the overall demand environment. We see is very strong and in fact, the overall demand we see may be moving more in the favor of <unk>.
Our global provider like CGI with the end to end services with.
The intellectual property with some of the investments that we continue to make.
To be on the front end of that to maybe be even a.
Consolidator of some of that.
Some of that demand absorbing that may be even faster than some of some of the others in the marketplace. So that's why.
You hear the optimism despite the fact that you've got some short term.
Short term bumps that.
That are inevitable when you do a shift like this so.
And you see it in the bookings right.
Where the confidence comes from.
Okay, that's great and if I squeeze one last one.
I think.
One of the themes here.
You're trying to get across is that youll see a net positive impact or maybe net expansion of margins. As you look forward you highlight a whole lot of positive drivers like the mix of managed services IP global delivery, and then utilization improving with you maybe slightly slower hiring but on the other side of it like where do you see some of the negatives.
Price pressure came up maybe longer sales cycle, maybe investment.
Despite as you view it as a net positive like what might be some of the headwinds you have to deal with.
Yes, well.
You mentioned, you mentioned some of them well.
There's the short term.
Helping your clients through some of this short term period.
As.
Maybe a short term headwind, but long term stronger partnership and I've talked a lot about the importance of partnership, particularly when when clients are going through.
What they're going through right now so.
That's why I'm net positive, but I think you highlighted the right areas.
Okay. Thanks for taking the questions.
Thank you. Please proceed with your closing remarks.
Thank you Sylvia and thanks, everyone for participating as a reminder, a replay of the call will be available either via our website or by dialing 18776, 704, 7070, and using the pass code zero or 98, 618 as well a podcast of this call will be available for download.
In a few hours follow up questions can be directed to me at $1 905, 973, <unk> hundred six three.
Again, everyone and look forward to speaking soon.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
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