Q4 2023 CGI Inc Earnings Call
Okay.
[music].
Yeah.
Good morning, ladies and gentlemen, welcome to Cgi's fourth quarter fiscal 2023 conference call I would now like to turn the meeting over to Mr. Kevin lender as VP of Investor Relations. Please go ahead Mr. Lindner.
Thank you Colin and good morning, with me to discuss Cgi's fourth quarter and 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 November eight 2023.
Supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our fiscal 2023, MD&A audited financial statements and accompanying notes all of which have been filed with both SEDAR and Edgar.
Please note that some statements made on the call.
Maybe forward looking actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward looking statements whether as a result of new information future events or otherwise the complete safe Harbor statement is available in both our MD&A and press release.
As well as on CGI Dot com, we recommend our investors read it in its entirety.
We are reporting our financial results in accordance with international financial reporting standards or <unk> as always we will also discuss non-GAAP performance measures, which should be viewed as supplemental.
The MD&A contains definitions of each one used in our reporting.
All of the dollar figures expressed on this call are Canadian unless otherwise noted.
Now I'll turn it over to Steve to review, our Q4 financials, and then George will comment on our full year performance and business and market outlook Steve. Thank.
Thank you, Kevin and good morning, everyone.
I am pleased to share with you the results of our fourth quarter of fiscal 2023.
In Q4, we delivered $3 $51 billion of revenue up 8% year over year are up two 2% when excluding the impact of foreign exchange.
Constant currency growth was three 4% in Europe, and one 1% in North America.
From an industry perspective, we had growth across four of five sectors with particular strength in both health and government growing at a combined rate of seven 2% in constant currency.
Government continues to be <unk> largest vertical markets now representing 37% of revenue up 200 basis points when compared to the prior year.
CGI delivered services and business solution to support our government clients with their mission critical function, such as cyber security logistic financial management and citizen services.
IP as a percentage of total revenue was 22, 6% in the quarter with the vast majority contracted as longer term recurring engagements.
Overall IP revenue growth was four 1% in constant currency with more than App comprised of software as a service arrangements, which were up 300 basis points from the prior year.
<unk> constant currency revenue growth was strongest in government and financial services, our largest IP revenue basis.
Government represents the largest proportion of our IP revenue base, which is up 47% of total IP revenue and financial services represent the single largest commercial revenue base, which is up 26% of total IP revenue.
Our IP solutions become even more attractive to clients in times, where discretionary capital is constrained as the short term the business cycle from decision to realization of business value.
We once again had a strong quarter of overall contract wins booking $4 billion in the quarter up 10% year over year for a robust book to bill ratio of 114% led by you.
U S federal with the book to Bill ratio of 188%.
Canada with a book to Bill ratio of 121% and U S commercial and state government also with a book to bill ratio of 121%.
Importantly, managed services, which translates to longer term recurring revenue for CGI represented 60% of total bookings up significantly from 52% in the prior year aligned with the demand we are seeing from our clients.
Overall, our global backlog reached a record of $26 $1 billion, representing one eight times revenue.
Turning to profitability.
Earnings before income taxes were $558 million up 14, 8% year over year for a margin of 15, 9% up 90 basis points year over year.
Adjusted EBIT in Q4 was $573 million up nine 8% year over year.
This represents a margin of 16, 3% up 20 basis points year over year.
This increase was driven by the combination of profitable revenue growth and operational discipline, partially offset by one less calendar or date.
We delivered strong margins in the following segments.
<unk> tick up 27%.
Canada at 25% and U S commercial and state government at 16, 7%.
Our effective tax rate in Q4 was 25, 7% compared to 25, 4% in the prior year, we expect our tax rate for future quarters to be in the range of 25 to 26, 5%.
Net earnings improved to $414 million up 14, 4% when compared to Q4 last year for a margin of 11, 8% up 60 basis points year over year.
Diluted EPS was $1.76, representing an increase of 16, 6% year over year, when compared to $1 51 in Q4 last year.
In September we initiated a cost optimization program to accelerate actions to right size, our real estate portfolio and improve operational efficiencies focused on administrative activities.
In the quarter $9 million was expense and we plan to incur approximately $65 million of additional expense over the first half of fiscal 2024.
When excluding specific items net earnings improved to $421 million up 12, 9% when compared to Q4 of last year for a margin of 12% up 50 basis points.
On the same basis.
Diluted EPS was $1 79, and the accretion of 14, 7% when compared to Q4 last year.
In the quarter cash provided by operating activities was $629 million, representing 17, 9% of total revenue an increase of 28, 6% when compared to the prior year.
On a trailing 12 months basis cash provided by operating activities represented 14, 8% of.
Total revenue.
DSO was 44 days in the quarter in line with our target of 45 days.
In Q4, we invested $107 million into our business and $325 million to buyback our stock.
As of the end of September we have the opportunity to buy back up to an additional 12 6 million shares under our current NCI brief program, which will be up for renewal in February 2024.
In the quarter, we continued to deliver a strong return on invested capital at 16% up 30 basis points year over year, demonstrating our proficiency and discipline on deployment of capital.
Looking ahead, our focus continues to be on delivering value to shareholder by investing in our business, including in AI.
Pursuing and closing accretive acquisitions.
And the repurchasing our stock and or paying down our debt.
CGI has a strong balance sheet with a net debt to capitalization ratio of 24% at the end of September as well as $3 to $1 billion of cash readily available and access to more if needed.
Moving forward.
CGI is this strength and capital resources to continue to execute on both our build and buy profitable growth strategy.
Now I will turn the call over to George to recap the full year results and to provide business and market outlooks George Thank.
Thank you, Steve and good morning, everyone our team's.
<unk> in the quarter contributed to a strong fiscal 2023.
And both the quarter and year, we delivered results in line with our full year plan to continue delivering double digit EPS accretion and to profitably grow at or ahead of the markets in which we operate.
Financial highlights for the year included 8% year over year constant currency revenue growth.
15, 3% year over year, adjusted EPS accretion too.
$2 $1 billion of cash from operating activities up 13, 3% year over year.
And $16 $3 billion of bookings up $2 3 billion or.
Or 16, 4% compared to last year.
Now I'll review the performance highlights by stakeholder starting with clients.
CGI is strong results this year would not be possible without the trust of our clients.
Once again, we ended the year with signed client satisfaction ratings that were higher on every dimension we measure.
Importantly, two of the highest increases in satisfaction or for the degree to which our services are valued and for the level of innovation, we introduced into our engagements.
His qualities are fundamental to delivering ROI led digitization outcomes that are currently in high demand, especially as clients apply a sharper focus on it spending given the current economic conditions.
Turning to our employees and we now call CGI partners as 85% are also shareholders of CGI.
Our performance in 2023 as a result of the World class partnership behaviors that our consultants and professionals and body as they deliver advice expertise and insights our clients can act on to achieve their business objectives.
We continued to prioritize training for our talented consultants through interactive courses on CGI, academia, and both development of industry knowledge and technical expertise, including for generative AI based applied learning and labs and sandbox environments.
And for our shareholders, we delivered broad based constant currency revenue growth in all geographic segments.
And industry sectors for the fiscal year, our book to Bill ratio was 114% up 500 basis points compared to the prior year.
And on profitability our results for the year continued to play CGI in the top quartile of our it services peer group.
Adjusted EBIT was up 10, 8% year over year for 16, 2% margin.
Adjusted net earnings were up 12, 9% year over year for a margin of 11, 8% up 20 basis points.
And adjusted EPS was up 15, 3%.
Before turning to the outlook and priorities for fiscal 2024, I'd like to comment on the recent cost optimization program, we initiated which provides a tailwind for the fiscal year ahead.
This program is focused on SG&A to embed additional profitability improvements and our business plans for fiscal 2024.
Streamline our expense profile to drive higher efficiency in our internal business operations, including through the increased use of automation and global delivery.
By being proactive now while we are strong we expect this action to help us increase EBIT margin in line with our plan.
Also freeing up capital to be allocated towards higher yield growth investments, such as innovation, including an AI learning and development to deepen industry knowledge and technology expertise delivery focused on our offerings and for large deal pursuits and for accretive M&A transactions.
As we look ahead to fiscal 2024, I would like to share. Some observations from recent meetings held with client executives across Europe and North America.
Client sentiment emphasize the complexity of the it services demand environment.
And to indicate that they are facing significant pressures from simultaneous and overlapping market dynamics and <unk>.
To navigate rapidly evolving geopolitical and economic conditions may need to adapt to broad societal and technological and cultural changes.
In short this is a complicated operational and strategic challenge clients need to reduce spending while continuing to progress their digitization and innovation agendas.
Did you guys end to end services and solutions continue to position us well in this environment, particularly with our managed services offering which helps clients achieve cost savings and drive transformation.
Our pipeline reflects this positioning as the value of new opportunities grew by more than 20% on a year over year basis managed services up nearly 40%.
Second half managed services bookings were nearly $4 9 billion.
Up by more than $900 million.
Compared to the first half of the year.
Driven by continued strong opportunities in cgi's largest industry sectors of government and financial services.
These larger engagements continue to increasingly require a tailored combination of our end to end offerings and global delivery.
In line with a higher proportion of managed services bookings billable hiring in our offshore delivery centers once again outpaced global hiring in the second half of the year.
Given the current geopolitical environment, we saw particular strength in government bookings across our end to end offerings.
Year over year basis awards from government sector clients were up by more than $1 3 billion or.
Or 25%.
As rising government sector demand was driven by continued spending to support new policy initiatives in areas, such as cloud data analytics defense logistics and technology programs cyber security and AI.
Based on historical economic and it spending patterns, we expect that governments around the world will accelerate investments in the near term, which will continue to provide a stable growth platform for CGI.
Representative Q4 wins for broader scope engagements, including circle K, a leading global convenience retailer selected CGI for a 10 year strategic partnership to deliver managed services through.
Through this engagement, we will help strengthen their capacity to enhance customer and employee experience and advance their business goals.
<unk> revenue and customs authority named CGI, a partner and the government wide Crown commercial service Digitization framework.
<unk> is positioned to deliver user centered design services and application management and delivery to support the UK government's digital strategy.
The French National Center for scientific research expanded its relationship with CGI to the award of an eight year managed services engagement to be the institutions' strategic digital transformation partner.
We will help modernize their technical and business systems, including the secure migration of enterprise applications to the cloud.
And Scotiabank, a leading Canadian multinational bank selected CGI as all payment solution to advance the bank's payments innovation agenda by.
By deploying our modular cloud based enterprise payments platform will help the bank accelerate benefits for their global customers and EES payment processes.
<unk> overall bookings for the all payment solutions were up this year by more than 13%.
In the quarter all payments was certified as one of the first solutions to participate in the U S. Federal Reserve banks Fed now service, a new real time payments network.
Leveraging our global Alliance with Microsoft All payments is also now available and the Microsoft Azure marketplace, providing a new channel for clients to easily purchase and deploy our industry leading.
Our business plan for fiscal 2024 incorporates continued investments in our end to end services, enabling our consultants to bring cgi's full offering value proposition to clients.
Our managed services, we will accelerate deals through expanded capacity in our business engineering function and through continued investments to embed innovation and efficiencies into our delivery solution.
Our managed services value proposition provides clients with the ability to generate cost savings and drive forward the digital transformation agenda.
CGI managed services provides longer term recurring revenue, which deepens our resilience through all economic cycles.
And IP, we will continue to develop new solutions and enhance existing solutions in line with emerging client needs, including with traditional and generative AI.
Our IP value proposition provides clients with digital accelerators, low lower capital costs and built in security and innovation.
Jai IP provides recurring revenue with a higher margin profile expanding our overall profitability.
And we will focus our business and strategic consulting and systems integration capabilities on industries and offerings, where discretionary spending remains strong.
<unk> value proposition provides clients with the actual advice and implementation capabilities they need to realize business value.
For CGI Rsi and <unk> services provides a strategic client relationship entry point, while creating.
The opportunities to deliver end to end value.
Our fiscal 2024 business plan also includes continued investments in M&A as macroeconomic and geopolitical dynamics continue to reshape the consolidation activities within the it services industry.
We started the fiscal year by closing the merger with momentum consulting Miami based ITM business consulting firm specializing in digital transformation and data analytics.
This merger strengthens our position in the U S metro market in Miami, bringing new client relationships and the manufacturing retail and distribution sectors.
I would like to warmly welcome the more than 175, new consultants, who joined CGI through this merger.
We will continue to focus on building critical mass in strategic Metro markets within all CGI geographies. Our goal is to gradually grow this presence to mirror the economic sector distribution in each metro market and to deploy our full range of services and solutions.
We are in dialogue with a large number of merger targets and we are seeing a better alignment of M&A conditions as compared to last year with valuation multiples now moving into a more reasonable zone.
As always we will be disciplined to make sure that all CGI mergers will be accretive to each of our stakeholders.
Finally, our business plan incorporates investment and innovation.
Generative AI continues to be at the top of innovation discussion agendas with clients with trust and responsibility as key priorities.
<unk> of our experts and government initiatives and councils around the world reinforces our commitment to continue upholding the highest standards in the development and deployment of emerging technologies as per Cgi's responsible use framework.
And we are now signatory of the Canadian voluntary code of conduct on the responsible development and management of advance generative AI systems.
Accordingly, we announced last week, a new AI focused initiative, leveraging our global alliance with Google to use our cloud platform to enhance the capabilities of Cgi's pulse AI solution.
Under this initiative with Google We will also develop innovative industry specific use cases that our clients accelerate their time to value from new generative AI applications.
Overall client adoption of generative AI remains in the early stages, which is resulting in focused opportunities for CGI and data consulting and Si projects proof of concept efforts and targeted use case implementations, particularly using our IP.
We are currently engaged in over 600 active projects with various AI components and in Q4, <unk> bookings, which incorporated AI totaled more than $175 million.
Examples of recently awarded engagements using AI include the U S Department of state selected <unk> Atlas 360 solution, which incorporates AI based technologies to help the agency improve efficiency effectiveness and security in their Asia Pacific piece of processes.
Several U S regional banks expanded their relationship with CGI to upgrade to our AI enabled collections IP or.
Our solution will help each of the banks deliver data driven customer journeys as part of their debt relief and recovery initiatives.
And as part of Canada's indigenous digital health ecosystem initiative CGI will work with partners to use an array of advanced non intrusive technologies, including AI develop a digital twin and risk model for advancing fire safety and preparedness and first nation communities.
In closing the combination of our strong performance in fiscal 2023, the actions we initiated in Q4 and the initiatives embedded in our business plan underscore our continued confidence for fiscal 2024 to deliver double digit EPS accretion incremental margin expansion in <unk>.
<unk> growth consistent with our current services demand environment.
<unk> resilience and positioning strategically operationally and financially enable us to be one of the few leading global firms with the scale reach insights capabilities and commitment to remain a partner and expert of choice for clients and empowering environment for our consultants and professionals and engaged at the.
<unk> and responsible corporate citizen.
Investment of choice for our shareholders.
Thank you for your continued interest and support of the questions now Kevin.
Thanks, George Carlin, please provide the logistics to the participants for the QA.
Thank you ladies and gentlemen, we will now begin the question and answer session should you wish to ask a question. Please press star followed by one on your telephone keypad, if you'd like to withdraw your question simply press Star followed by two if you are using a speaker phone. Please lift the handset before pressing any key one moment for your <unk>.
First question.
Okay and your first question comes from Dan <unk> from BMO capital markets panels. Please go ahead.
Hi, good morning.
Sure.
Hey, George as you talk to clients.
Do you see this very much playing out like click prior periods of macro uncertainty or are there some key differences to call out and so what I mean is it a high level you are seeing strength in managed services a slowdown in the <unk> and so thats exactly like in prior cycles, but underlying that there's obviously lots of thoughtful change happening with public cloud journey is things like that so.
Is that finding a different dynamic here in terms of how things like that over the next year or do you see things like prior cycles.
Now here's what I would see it.
Personally was in Europe for for a week.
Throughout North America, and what I'm hearing as I kind of mentioned this it's.
It's a bit of a dilemma and thats one of the clients put it to me.
They know that in order to meet their business goals they need to continue spending in it beyond just the managed services, but in some of the other areas both.
And the systems integration and projects and pushing the innovation agenda further at the same time like prior downturns of course cost and spending comes under scrutiny and so I think it's a matter of.
What we're seeing a bit more tempered than in prior.
Prior.
Economic cycles like this.
And I think we're going to recover maybe a little bit sooner, but time will tell but that's the discussions that I'm, having to give you the color commentary there.
Great.
The restructuring initiative.
Is that pretty broad base in terms of cloud across the business units or is it really more focused on a subset of the businesses.
It's broad based across everywhere as you know our SG&A, we ran our proximity model on our SG&A as is embedded in those geographies. So it's pretty it's pretty broad based and again, it's focused on both real estate and the costs associated with <unk>.
With running our own business and then of course, introducing just like we're doing for our clients introducing more global delivery and and more automation into the process. So.
That's what we're focused on.
Great. Thanks parts offline, yes.
Thanks, guys.
Your next question comes from Paul Treiber from RBC capital markets. All please go ahead.
Thanks, So much and good morning, just a couple of questions here just on constant currency growth.
Decelerate it.
It applies mostly to assign C. But then managed services bookings are strong so what's your outlook for <unk>.
Constant currency growth in the near term just with that dose strong managed services bookings and when do you see those.
<unk> offset the slowness in S&P.
Yes, so maybe I'll just start with kind of the revenue growth. We did have like you said, it's it is pretty.
Centered both on managed services, but it's it's really spread differently across different industry and services. So we it.
It is driven by by government and health, which is strong in all of our geographies.
Financial services, a little bit different insurance was strong I think that's where you see probably the most pronounced weakness in Si and C and strength in IP and managed services is really in the banking space insurance like I said was pretty strong and we're seeing that pretty much across again all geographies.
And then of course utilities is strong, but you saw communication slow and so in those industries that that are a little more impacted by some of what's going on including Mardi manufacturing retail and distribution, that's where you see maybe a little more pronounced in the Si and C and.
A little more opportunities in the managed services and IP.
Again, our strong across but but.
That's kind of what we see and so if you look at the outlook then.
Those are the <unk> or some of what I just mentioned are kind of built into our model and our approach.
Really those the strong <unk>.
<unk> month book.
Bookings trailing 12 months bookings and expanding pipeline, particularly in managed services government and government and health and IP, but there are still some headwinds, particularly in Q1, we're still seeing some slower decision, making even on those managed services disk.
Discretionary spending given some of the uncertainty from the clients is a headwind and then we always have some normal yearend furloughs that we probably expect to be a little more pronounced this year and thats just at the end of the year around the.
The holidays in the new year, we see some.
Particularly in banking, it's just a.
A situation, where they kind of kind of almost slow down everything and then they start back up in the new year. So I think thats going to be a little more pronounced. So when you look at that it's kind of harder to predict on a quarter basis, but overall, we think that the waiting will shift to the tailwind that I just described as we move throughout.
The year.
Thanks, that's helpful. And then just in regards to the cost optimization.
What's the typical target.
Annual cost savings to be investments that you anticipate.
Warrant in other words, how do you think about the potential year over year margin expansion from those initiatives.
Steve.
Yeah look in terms of real estate the feedback is a bit longer so it would be more than a year both in terms of the.
The action, where we are using the global delivery and also automation, it's going to be it's going to be faster than the payback will be about a year.
Okay. Thank you I'll pass the line.
Your next question comes from Richard <unk> from National Bank. Richard. Please go ahead, yes.
Yes. Thank you.
With respect to the government vertical.
Tribute to that sort of strength to vertical that historically I guess it historically certain played a bit of catch up to commercial enterprises is that really the big driver here.
Maybe you can elaborate on that a bit please.
Yes, what we see as government tends to be a bit counter cyclical so.
When you go into times of periods of economic slowdown what you see as governments get very active they get active around policy initiatives to spur the economy to help the citizens et cetera, and so that's a lot of activities around us helping government implement.
Their policy initiatives, which by the way always incorporate it.
And then the more you get of those policy initiatives.
Quite frankly, it puts a more of a spotlight on kind of some of the modernization that has to happen. So that they can actually implement those quicker and so governments get more active on that front and then finally in general governments do look to stimulate the economy and so that's what we see we're in a period of that and Thats governments.
Around the globe at least in the geographies that we're in we're seeing that strength and governments, both in North America and across across Europe.
Okay, and then when you look at the existing base. It seems to be that is still contributing a fair amount of growth here. So and my guess is that some of these.
Existing deals are expanding at a larger size or theres sort of add ons. There are there any sort of commonalities to us or that expansion in terms of like a product area or service that are looking for.
Well actually one of the common areas and we did have a pretty strong new business in the in the quarter, 37% was was new business, but youre right. There is a significant number of add ons.
A lot of that is as clients looking to consolidate their partners for both quality and efficiency purposes, and so it's not necessarily focus on a specific function. It's more about adjacencies to the work that we're doing to expand that consolidate some of their partners again for both <unk>.
<unk>, which is CGI is known for and then also the efficiency purposes, which includes us being able to as a bigger partner with bigger volumes be able to provide.
Better cost savings to the client.
Okay and just one last quick one from me in terms of capital allocation.
You've been fairly active on the buyback do you think a dividend is sort of entering the next year over the next 12 months as part of that capital allocation yes.
Yes, we look at that capital allocation at the board meeting when we when we look at our.
And CIB and our use of cash.
So it continues to be discussed.
A discussion right now given what I just described about the the outlook.
Not just this current environment, but the next wave of growth, particularly around AI and the opportunities in M&A.
I don't see that right now but of course, we will have that discussion yes.
Usually we are renewing our and CIB programmer early fed so we'll.
We'll come back to that WCS.
The board and discuss that at.
At the board meeting in February, but what I can say in the meantime, as we will be we will be active and returning cash through the returning returning cash to our shareholders through the stock buyback program.
That's great. Thank you.
Yes.
Your next question comes from <unk> <unk> from Scotiabank. Please go ahead.
Good morning, everyone.
Jordan, Steve if you could provide some color specifically on the geographic segment, we noted that the U S commercial on the western and Southern Europe segment.
Saw a decline in revenue revenues, if you could provide some sort of directional.
Guidance on how do you see some of these segments trending I know last quarter, Canada was the weakest segment, how do you see some of these segments.
Brett thing on a go forward basis.
Yes. Thanks for the question Vivien, Thanks for noting that as we talked about Canada has returned back to growth in the quarter.
S commercial and state government, maybe I'll take that one first.
Certainly.
What we do see is that some of the growth that we would naturally have is masked by some of it moving.
On the managed services side to global delivery. So you saw again.
Some some growth there strong growth and global delivery. So we're moving more of that U S work.
Global delivery and in fact, we're seeing a lot of interest continued interest in global delivery. In fact, I was just in India last month with clients I can tell you that the interest is palpable right now.
In fact, our Q4.
Visits to the India offices, just the India offices alone.
This quarter, if we go back and I didn't go back a year ago and that's of course, it's higher but I want all the way back to 2019, which is the last quarter prior to the pandemic. That's a good benchmark quarter for us at twice as many client visits to our India offices. So a lot of movement towards global delivery of course that masks some of the SEC.
<unk>.
And then we had strong IP growth, but we're moving IP more to a software as a service.
That's up.
In the quarter as Steve mentioned, and so that actually masonite growth, having said that I think we'll still see some softness in ethane C, particularly in the financial services area.
Those furloughed as I mentioned in the year, we'll still hit US This next quarter, but as we move throughout the year.
I think youll see the growth.
They're in the U S commercial a similar story a bit in western and southern Europe, maybe one caveat the one day, probably hit them a little harder in the quarter. So again I think youre going to see these are traditionally very strong well managed organizations with a good diverse.
Portfolio of clients so.
I'm not I'm not very concerned about that.
That's helpful and maybe if I may ask a question on the M&A I know, it's been an important strategic priority for CDI, but could you give some color on the M&A pipeline and I know, it's a slightly different question, but how are you prioritizing M&A as compared to the $1 billion.
Investment allocation in AI on the side as Bob.
Yes.
Here's here's how I look at that.
Prior to prioritizing them both.
And they kind of come together, where some of those M&A will provide us AI capabilities and skills and so that's that.
Thats something that were they kind of converge, but the $1 billion is really over a period of three years focus right now more on the training and the partnerships I just announced.
Partnership with with Google, but it's the partnerships and alliances and it's our intellectual property on the on the M&A side, it's really about building out that scale through additional relationships with clients. So they're both prioritize.
You saw the cash generation, we have we've got plenty of cash.
<unk> two to invest in both as a priority elements in our go forward plan.
That's good to know thanks George.
Sure.
Your next question comes from Stephanie price from.
CIBC Stephanie Please go ahead.
Thank you and good morning, maybe just following up on <unk> question on M&A.
With our first M&A deal that CGI has done in several quarters. Just curious if you can elaborate a little bit on what youre seeing in the M&A markets at this point and also curious.
If you wanted to provide an M&A target for the coming year I know you had that billion dollar target last year.
Yes, so on the on the M&A kind of landscape.
As I mentioned, it's been the valuations have been jumping around there was a bit of a disconnect that we've talked about over the last several quarters, but valuations are definitely as I mentioned moving into a more reasonable range.
And so we're very remain very active looking at the pipeline the pipeline.
Frankly, even some of the pipeline is is being refilled with some activity we had in the past that maybe the valuations where we're far apart and they are coming back together and so the pipeline is both new entrants, but also some that.
We're very familiar with and have been in discussions with before that bodes well for the for the activity here in the coming quarters. So that maybe gives you. Some idea of kind of how that pipeline is shaping up and what the market looks like and again.
And this type of a period of slowdown it it helps companies to come together and so again I think theres a richer opportunity set.
But for that reason, given where the volatility was now where its going.
We're not setting a specific target, but again, it's a priority for us and.
In the coming year.
Perfect. Thanks.
And then.
Terms of bookings, obviously, you've been very solid despite the uncertain macro here just curious if you could expand a little bit on what you're seeing around pipeline conversion in the decision cycle I'm. Just curious how confident you are feeling and being able to replenish bookings as we kind of look ahead here.
Yes.
Very good about the bookings outlook given some of the the opportunity set as I mentioned some of the discussions we've had with clients. The visits that we've taken with them to our operations around the globe.
Because it's not just offshore it's really that whole global delivery model that is attractive to clients right now and I do believe as we.
Move throughout the.
The year I think youll see for all the reasons I outlined around the business needs Youll see some of that even.
C coming back and remember it's not every industry that <unk> is not remaining strong.
Like I said in government and health.
Life Sciences and.
And even insurance utilities, you see some of that remaining so I think we're feeling pretty good about the about the outlook and the other is that they're bigger deals and so we're looking at.
Bookings that are bigger size some of that consolidation that's going on so we're feeling still pretty pretty good of course bookings are always lumpy and tier one part of your question. Yes, we do see that just given the environment the decisions tend to be a bit slower.
And so we did have a number of deals in fact slip.
<unk> and some of the areas, where we had very strong bookings like U S. <unk>, we had some bookings that actually slipped from the fourth quarter to.
To the first quarter. So we are still seeing some of that happen and that's just natural.
In the current environment.
Okay, great. Thank you for the color.
Your next question comes from Jerome.
<unk> from <unk> <unk>. Please go ahead.
Hey, good morning, Thanks for taking my questions just want to make sure. We're all on the same page in terms of your outlook for 'twenty four you mentioned.
We expect revenue growth to be consistent with the demand environment.
If I'm looking quickly at what Gartner expects for FY 2024, or they are in the high single digits.
That seems a bit high and maybe youre not referring to that and granted it's not exactly the same the same periods given your fiscal year. So if you can provide a bit.
A bit more detail on this lease.
Yes, we don't we don't give guidance as you know Jerome, but but the current market.
Really what we got.
Gardner says, it's really what the market actually is producing and Thats right. Now is obviously in the low single digits. So that's where we are today I do believe that's going to.
To evolve as we move throughout the year I think the back half of the year will be stronger than the front half of the year here.
Regarding all everything I talked about but for US we can't control the decision, making speed in the market, but we do control the model and the approach we have in.
Resilience to economic slowdowns and built into our model.
Managed services at 55% of the revenue in Q4.
And 60% of the bookings gives us that long term outlook intellectual property 22, 6% of revenue in Q4 and rising it's sticky it's recurring so that's going to be a focus of ours and then as I mentioned the government industry work now at 37% up 20 basis points it tends to be countercyclical. So.
We feel pretty confident in where we're going.
We're really going to focus on the things that we can control and like I said I think those those tailwind in that approach in that model.
Outweigh some of the headwinds I can't I can't tell you exactly.
What the what those how those headwinds look.
As we move through the year, but.
That's why we feel pretty confident and that's why we believe we can deliver continue to deliver that double digit EPS accretion.
Yeah. Thanks, that's very helpful and then.
And a bit related in a different angle on bookings. We've seen you had very strong bookings obviously not exactly the same trend as we're seeing in the revenue and we've seen it for.
For some the global peers as well is there is there are different and different in terms of trends youre seeing in terms of booking conversion to revenue maybe some of the contracts that were already booked that are taking a little bit longer to translate into into revenue is this something youre seeing right now.
Yes, well, there's two things that two things going on as we talked about in the last couple of calls.
The conversion for managed services always takes a little longer because you have a transition same goes for IP in many cases.
Particularly if it's a software as a service, but theres implementation associated with it at.
At the beginning so there is just naturally a longer cycle there and of course, that's at the same time that that shorter term revenue is is under some pressure.
And so it's just a matter of timing and balancing those those out.
I think we're on the back end of that that type of.
Our situation I don't think we're past that yet just given the.
The dynamics that we see going on in a little bit of slowness not just even in making a decision, but then going from decision to starting the projects, which is taking a little bit longer but.
But.
With the model that CGI has being ROI led.
That's kind of our.
Antidote to to some of that slowness, because we put that business case.
Right in front of the client and we are aligned on it that's our antidote, but still a little bit slowness there.
Thank you.
Your next question comes from Robert Young from Canaccord Genuity. Robert Please go ahead.
Hi, maybe just a quick question.
On M&A I think in the <unk>.
The prepared comments you emphasize.
Building critical mass in strategic Metro markets.
I didn't hear anything about large deals, but then in response to one of the questions. You had said that the deals are getting larger and so is that larger metro markets or are you still evaluating larger.
Maybe mega deals and what would be the biggest things that prevents.
CGI from looking at <unk> or executing on the very large deals.
Yes.
Still we are still active in looking at larger acquisition targets.
When I talk about we're trying to do an M&A is build out those metro markets. That's both for the small ones and the large ones.
Look at large targets that have operations across Europe, and North America, when we integrate it it will still help us in specific.
Throw market. So it really is it works on both sides of the Avenue. So thanks for asking for the clarification because we are looking at both Theres no real Theres no real hurdles from a from a valuation from the integration obviously from a.
From a access to capital perspective for us to do a larger one.
Really is about making sure that they are accretive and.
Making sure that we have an understanding of how we would make that accretive and.
And as we discussed in the past.
Some some companies arent in a position.
Where we could make that happen. So that's what we're that's what we are discerning on but theres no theres absolutely no.
Barrier from from an internal integration or access to capital perspective or appetite quite frankly.
Okay, that's great.
Curious about the pace of hiring in the restructuring.
I know the emphasis has been on your global delivery we are growing.
The mix there.
Is attrition slowing down and then I'm just trying to maybe get drive to the impact on utilization.
And eventually margins from.
From the hiring and maybe a different hiring environment.
Yes, well look the turnover.
It continues to be below the industry average, but our turnover is also well below and I just looked at these numbers well below the pre pandemic levels and.
That's important to note because.
If you look at where we were just right before the pandemic of course it dropped during the pandemic.
And then rose again, but now we're back below where we were we started even before the pandemic that does have a.
It's an opportunity for us because then.
It allows us to be.
Little more discerning on the hiring at the same time of course hiring has eased and the difficulty of getting the hires.
So we can all of this adds up to we can be really focused on keeping the utilization high and not hiring in advance of the demand now having to hire as much for replacement.
So that puts us in a in a better spot from a from a from a talent perspective.
Alright, and then that growth in our the emphasis on hiring in and global delivery I assume that's mostly in India is that.
Become an easier place for you to find good talent are you relatively given if attrition is low and it's a better hiring environment and visits were up <unk> <unk> from last year.
Are you able to get the people that you need or is it easier to get the people you need relative to during the pandemic.
I hate to say easy because it's talent as always.
It is an important one but yes it has eased.
Our value proposition, particularly in India like I said I was just there.
A pretty strong value proposition and so we're doing quite well and remember, though we also look to build their own and so we bring a lot of.
The individuals very talented individuals out of school put them through <unk>.
Various training programs. So we can also build our own and so its a combination of.
Of those factors.
Okay last little one.
End of year budget flush given government is so strong and I know there is looming shut down again.
Is that a factor.
At the end of the year across your business or does the macro change.
Any opportunity for budget flush no pipeline.
Yes.
You're asking from the from the from Q4, you're asking for Q1, yes.
Yes.
So fiscal Q1 I guess.
Yes, so actually the government fiscal year was.
In the U S. For example was was the same as <unk> fiscal year. So we saw a little bit of a bump from that but.
No I don't I don't think youre going to see a bump from that specifically here as we move through I think it's going to be more of the other factors that I mentioned around policy initiatives and around stimulating the economy.
And outside of government is there anything budget flush wise.
Well Unfortunately that is not it's not so much budget flush.
On the commercial side. Unfortunately, what we're going to see I think a bit of as that.
That end of year kind of slowdown temporary shutdowns of our various.
Our clients, where they just slow down all the projects.
Till the beginning of the next year. So I think it is going to almost be the opposite.
A flush.
Okay. Thanks, that's very helpful.
Yep.
Ladies and gentlemen, as a reminder, should you wish to ask a question. Please press star followed by one. Your next question comes from Daniel Chan from TD Cowen Daniel. Please go ahead.
Hi, George I, just wanted to dig into a point you made earlier about the backlog.
Can you give us.
A sense of where you are in converting that managed services backlog into revenue.
Is the expectation still for organic growth to accelerate from here as that backlog gets converted or have some of those macro factors that you pointed out kind of tempered that expectation yes.
I think your last point as a true one we're seeing some of that managed services from the from the from the beginning of the year already come into some of the revenue but the.
It's being counteracted by some of the macro trends we are discussing having said that we just had 60% of the <unk>.
Very strong bookings quarter of 114% come in to the to the backlog and so that will be working its way through over the next couple of quarters. So it really is going to be like I said I think the tailwind as well.
Will more than overcome the headwinds as we move through the year, but point in time and when that happens.
That's that's something we'll have to stay close to.
Okay. That's helpful.
Also wanted to double click on a point you made earlier with new businesses bookings were up 37% this quarter and Thats the highest mix. We've seen this year, which is great to see so anything to call out there in terms of the new business mix being so high which seems to be counter to what we're seeing in the macro with all the uncertainty.
Yes, I think it's really a matter of the investments we've been making in getting our story our message out to the to the market we've got targeted campaigns to bring.
The value proposition, we have to to both new new clients, but also existing clients and new areas that we have not worked in and so I think it is just a realization of some of the investments that we've made over the past couple of years.
Great. Thanks George.
Yes.
There are no further questions at this time I'll turn it over to Kevin for closing remarks.
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Thanks, again, everyone and I look forward to speaking soon.
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