Q1 2025 CGI Group Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to CGI's first quarter fiscal 2025 conference call. And I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.
Kevin Linder: Thank you, Sylvia, and good morning. With me to discuss CGI's first quarter fiscal 2025 results.
Speaker Change: are President and CEO, and Steve Perron, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9 a.m. Eastern Time on Wednesday, January 29, 2025.
Speaker Change: Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 MD&A, financial statements, and accompanying notes, all of which have been filed with both CDERplus and EDGAR.
Speaker Change: Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied. NCGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Speaker Change: The complete safe harbor statement is available in both our MD&A and press release as well as on CGI.com
We recommend our investors read it in its entirety.
Speaker Change: We're reporting our financial results in accordance with international financial reporting standards or IFRS.
Speaker Change: 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.
Speaker Change: All of the dollar figures expressed on this call are Canadian, unless otherwise noted. We are also hosting our annual general meeting this morning, so we hope you will join us live via the broadcast at 11 a.m. Now I'll turn the call over to Francois for some introductory remarks. Francois.
Thank you, Kevin, and good morning, everyone.
Speaker Change: Today, in line with the long-term succession plan of CGI, Julie Gaddin was appointed Executive Chair of CGI Board of Directors, effective following today's Annual General Meeting of Shareholders.
Speaker Change: CGI's founder Serge Gaden is now the co-chair of the board and will continue to focus on transformational acquisitions and on large-scale engagements with clients.
Speaker Change: During our Annual General Meeting this morning, Serge and Julie will provide further remarks on this key milestone.
Speaker Change: In addition, we announced this morning the signing of a new merger agreement. I will discuss this in my remarks. Now I'll turn the call over to Steve to review the Q1 financial results. Steve? Thank you, Francois, and good day everyone.
Speaker Change: CGI once again delivered strong results in our first quarter of Fiscal 2025.
Speaker Change: Before I begin, I would like to remind everyone about the adjustments we made to our reporting segment starting this quarter.
Speaker Change: Germany is now its own segment and our operation in Scandinavia are now combined with our Northwest and Central East Europe segment.
Speaker Change: In Q1, we delivered $3.8 billion of revenue, up 5.1% year-over-year, or up 2.7% when excluding the impact of foreign exchange.
Speaker Change: In constant currency, the CGI segments with strongest growth were U.S. Federal at 14%.
Asia-Pacific at 5.2 percent
and UK and Australia at 3.2% in constant currency.
Speaker Change: Our North American operations grew at 6.9% this quarter, while our European operations reported a change of minus 0.8% compared to last year, largely due to slower market conditions, mainly in Germany and France.
Speaker Change: We experience continued softness in the manufacturing sector, particularly in Europe.
Speaker Change: IP revenue grew in seven of our eight proximity segments on the strength of continued client interest for our business solutions.
Speaker Change: IT represented 21.6% of total revenue, down 40 basis points year-over-year due to recent business acquisitions.
Speaker Change: In Q1, bookings were $4.2 billion for a book-to-bill ratio of 110%. Our North American and Europe operations each had identical book-to-bill ratio at 110%.
On a training 12-month basis, our book-to-bill ratio was 108%.
Speaker Change: On the same basis, managed services had a book-to-bill ratio of 113%, and FINC book-to-bill ratio was 101%.
Speaker Change: Our global backlog reached $29.8 billion, or two times revenue, providing good revenue visibility. Turning to profitability.
Speaker Change: Our results once again demonstrated our ability to manage our operations with discipline.
Speaker Change: Earnings before income taxes were $592 million, for a margin of 15.6%, up 100 basis points year-over-year.
Speaker Change: Adjusted EBIT in the quarter was $612 million, representing a margin of 16.2%.
Speaker Change: The favorable impacts generated from last year's cost optimization program were offset by the temporary dilutive impact of recent business acquisition and lower billable utilization with some regions of continental Europe.
Speaker Change: Margin were strongest in the following segments. Asia-Pacific at 32.5%, Canada at 24.1%, and UK and Australia at 60.5%.
Speaker Change: Our effective tax rate in the quarter was 25.9%, down from 26.1% last year, and we expect our tax rate for future quarters to be in the range of 25.5% to 26.5%.
Speaker Change: Net earnings were $439 million for a margin of 11.6%, up 80 basis points year-over-year. Diluted EPS was $1.92, representing an increase of 15% year-over-year.
Speaker Change: Adjusted net earnings were $449 million. This represents a margin of 11.9% stable year-over-year.
Speaker Change: On the same basis, diluted EPS was $1.97, an accretion of 7.7% when compared to Q1 last year.
Speaker Change: This quarter, we initiated targeted actions in Europe, mainly in Germany, to realign our cost structure with current market conditions. As such, we anchored $8 million of costs in Q1, and we expect to anchor another $42 million to finalize these actions by Q3.
Speaker Change: The ESO was 38 days in the quarter, three days better than last year, contributing to the $646 million in our cash-from-operation, a strong 17.1% of total revenue.
Speaker Change: Over the last 12 months, CGI has generated close to $2.3 billion, up nearly $200 million compared to the same period last year.
Speaker Change: Invest $153 million to buy back our stock and return $34 million to our shareholders under our recently initiated dividend program.
Speaker Change: We continue to deliver a strong return on invested capital at 16.2% up 30 basis points, demonstrating our proficiency and discipline on deployment of capital.
Speaker Change: in line with our capital allocation strategy and priorities. Earlier today we announced that CGI entered into a new agreement for merger in the UK. Francois will provide more commentary on the merger in a few minutes.
Speaker Change: Yesterday, our Board of Directors approved the extension of our NCIB program until February 2026, authorizing us to repurchase for cancellation up to 20.2 million shares over the next 12 months.
Speaker Change: And CGI's Board of Directors also approved a quarterly cash dividend of $0.15 per share. This dividend is payable on March 21, 2025 to shareholder of records as of the close of business on February 14, 2025.
Speaker Change: As communicated in the past and consistent with our profitable growth strategy, CGI's capital allocation priorities remain focused on investing back in the business and pursuing accretive acquisitions.
Speaker Change: Now, I will turn the call over to Franois to further discuss the insights on the quarter, as well as the outlook for our business and markets. Franois?
Francois: Thank you, Steve. I am pleased with our team's performance in the first quarter as we continue to successfully execute on our build and buy a profitable growth strategy.
Francois: We began the fiscal year in a strong position, with positive momentum on a year-over-year basis.
Revenue grew 5.1% or 2.7% on a constant currency basis.
Francois: EPS accretion was 15% or 7.7% on an adjusted basis, resulting from a higher recurring revenue mix as well as proactive operational excellence actions.
Francois: and cash from operation reached nearly 650 million dollars or 17.1 percent of revenue for an improvement of a hundred and ten basis points as a result of sustained quality delivery and business excellence.
Francois: More than 87% of our 91,000 consultants and professionals are now CGI shareholders, up from 86% this time last year.
Francois: And client satisfaction levels again rose, now at 9.5 out of 10, with one of the highest scores being the intention of clients to engage CGI again in the future.
Francois: The high satisfaction and deep confidence clients have in CGI's people and capabilities drove strong bookings in Q1, representing a 110% book-to-bill ratio.
Francois: First quarter bookings continue to be led by wins within our two largest industry sectors of government and financial services.
Francois: In the quarter, we saw an uptick in financial services as some clients re-initiated investments that were previously paused.
Francois: Booking in this sector was where 123% of revenue, an increase of more than 40% compared to the same quarter last year.
Francois: In the government sector, bookings increased more than 40% on a sequential basis, resulting in a Q1 book-to-bill of 124%.
Francois: This increase was a result of a stronger client focus on driving monetization and operational efficiency.
Francois: We expect this trend to continue as governments around the world adapt their IT priorities in line with evolving mission and policy priorities.
Representative Klein: Representative Klein awards in the quarter included Skyline, a leading provider of military pilot and aircrew training in Canada, selected CGI as its strategic technology partner to design the next generation of aircrew training for the Royal Canadian Air Force.
Representative Klein: Under the 25-year agreement, CGI will deliver a comprehensive suite of innovative, secure services including cybersecurity, business consulting, and cloud computing.
Representative Klein: and WELLS, the Hiawatha University Health Board, initiated a 10-year, 75-million-pound strategic partnership with CGI to drive the digital transformation of healthcare to improve patient outcomes.
Representative Klein: CGI's consultants will partner with the board to streamline operations, modernize systems and processes, and deliver innovative solutions such as AI integration.
Representative Klein: The Swedish tax agency extended its partnership with CGI to deliver advanced EID and electronic signature services.
Representative Klein: The agreement reinforces CGI roles in providing secure, innovative digital solutions that enhance citizen access to government services while ensuring efficiency and compliance in Sweden's national digital ecosystem.
Representative Klein: and multiple North American banks extended their partnerships with CGI for consulting and systems integration services to design, build and deploy projects across multiple lines of business.
Representative Klein: We continue to see some clients exercising caution in their discussory spending.
primarily in Europe and the MRD sector.
high verse
Representative Klein: to explore with CGI the opportunities for driving monetization and operational efficiency to managed services in IP.
Representative Klein: CGI remains well positioned as a partner of choice to help clients achieve the tangible and trusted business outcomes they seek.
Representative Klein: In fact, over the past six months, CGI has earned a record number of third-party analyst endorsements which rank our expertise and capabilities in worldwide leading and major player categories.
Representative Klein: These reports and rankings cover our services related to AI, data modernization, cloud, cyber security, and business consulting.
Representative Klein: CGI also achieved new partnership levels in Q1 with several emerging alliances, including Snowflake and Databricks.
Representative Klein: Since the start of the fiscal year, we also progressed our strategic priority to pursue accretive acquisitions.
Representative Klein: In December, we expanded our positioning with Fortune 500 clients in the U.S. by merging with Doherty, a professional services firm specializing in AI, IT consulting, and business advisory services.
Representative Klein: Through the merger, our footprint increased in metros such as St. Louis, Atlanta, Minneapolis, and Chicago.
Representative Klein: I would like to warmly welcome the 1,100 new consultants who joined CGI from Doherty.
Representative Klein: and this morning we announced a newly signed acquisition agreement which will close in the coming weeks pending regulatory approvals.
Representative Klein: BJSS is one of the largest independent IT and software engineering consultancies in the UK.
Representative Klein: This acquisition will accelerate our UK-wide expansion strategy to deepen our presence in key commercial industries such as retail, financial services, and energy and utilities.
Representative Klein: Up in completion, more than 2,400 highly skilled consultants will join CGI, bringing deep expertise in a range of services such as technology strategy, customer experience design, software engineering, and AI.
Representative Klein: Through our buy strategy, we will continue to prioritize investment and aim at building critical mass and strategic metro markets in all CGI geographies.
Representative Klein: 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.
Representative Klein: We remain in dialogue with a number of firms, both venture markets and transformational opportunities. As always, we will be disciplined to ensure that mergers will be accretive to each of our stakeholders.
Representative Klein: Looking ahead, we continue to be well positioned to partner with clients as they evolve their strategies to address the ongoing macro trend within their geographies and industries.
Representative Klein: Client interest remains high for the value proposition CGI can deliver through our end-to-end offerings.
Representative Klein: This positioning is validated by CGI's pipeline of opportunities, which is up 20% compared to this time last year.
Representative Klein: In terms of client buying patterns, we continue to see some diversification by geographic region, which aligns well with CGI's greatest strengths.
Representative Klein: particularly our client relationship proximity model, our end-to-end portfolio of services, and our global delivery network. In combination, these assets enable us to quickly adapt to evolving client needs.
Representative Klein: With this in mind, I will provide commentary on the demand environment in our North American and European operations.
Representative Klein: starting in North America. Across commercial industries, clients are sustaining their focus to drive operational resilience and innovation to capitalize on emerging growth opportunities.
Representative Klein: Given these priorities, our pipeline remains strong overall with a notable uptick for our managed services offerings.
Representative Klein: Also, demand remains strong for our CGI Credit Studio IP, which is a cloud-native platform that centralizes services across the full credit lifecycle, from originations to collections.
Representative Klein: Government sector clients in North America are balancing tight budgets with the need of IT modernization and improving citizen services.
Representative Klein: In the government sector, our pipeline for managed services opportunities remains high and continues to rise. CGI government's ERP solutions continue to be in high demand, with pipelines rising compared to this time last year.
Representative Klein: Turning now to Europe, the macroeconomic landscape continues to be defined by slower economic growth and geopolitical uncertainty.
Representative Klein: Clients continue to turn to CGI to help navigate these pressures, particularly across commercial industries where they are focused on driving operational efficiency and addressing regulatory requirements.
Representative Klein: As a result, our managed services and IP pipelines across commercial industries remain strong. For example, the pipeline for CGI's financial crime detection solution is up by more than 50% compared to this time last year.
Representative Klein: In the government sector, our pipeline is high and rising as clients are focused on monetization as well as e-governance platforms and green IT solutions.
Representative Klein: Macro-level uncertainty is prompting government to adopt more efficiency-driven IT investments, with cybersecurity remaining a critical priority given the increasing risk to critical infrastructure and citizen data.
Representative Klein: These regional buying trends will continue to favor CGI as a partner of choice given our focus on value propositions that deliver trusted, tangible business outcomes that are designed to help clients generate operational efficiency and accelerate transformation, notably through our IP and managed services.
Representative Klein: Among managed services offerings gaining momentum right now is that of global capability centers or GCCs.
Representative Klein: CGI has 20 years of experience with GCC models, particularly for clients in banking, retail, and communications.
Representative Klein: Our global delivery centers of excellence enable full-scale application development and operation with a proven track record of success.
Representative Klein: Our value proposition focuses on GCCs as strategic extensions of the client's organization to drive efficiency, resilience, stability, and growth in a fast-changing business landscape.
Representative Klein: Naturally, across all industries, we remain deeply engaged with clients on their AI and Gen AI strategies and implementation.
Representative Klein: Over the past quarter, we've continued to see clients moving from investigation to implementation to drive efficiency, process automation, and legacy monetization.
Representative Klein: As previously shared, we are integrating AI and Gen-AI technologies into our engagements and our pipeline of AI opportunities continues to grow, particularly for responsible AI adversary services, data integration, and platform modernization.
Representative Klein: Booking and T1 that integrated AI technologies included a global health care and insurance company selected CGI to support their enterprise intelligent automation platform and help build the foundation for their agentic AI strategy.
Representative Klein: The City of Indoboro Council is collaborating with CGI to conduct comprehensive AI discovery sessions to identify and evaluate AI use cases for a wide range of missions from social services care to emergency and crisis management.
Representative Klein: and one of the world's leading financial services providers selected CGI to further their digital transformation by extending process automation with AI features as well as through our alliances with Google and Blue Prism.
Representative Klein: We continue to progress on our AI investments in line with our three-year plan.
Representative Klein: We are on track with this plan to strengthen our expertise, offerings, delivery, and positioning.
Representative Klein: Our investment plan includes continued initiatives such as advancing our training and tooling for developers and consultants.
Representative Klein: integrating AI and Gen AI into our portfolio of IP solutions.
Representative Klein: and then seeing our managed services and consulting offerings and mythologies.
Representative Klein: and with our clients, we are innovating to drive new business value through industry-specific use cases.
Representative Klein: the establishment of AI factories, improvement of user experience, and to generate operational efficiencies.
Representative Klein: In closing, we are off on a strong start for the year and reiterate our confidence in our fiscal 2025 plan.
Representative Klein: CGI remains well positioned as one of the few leading global firms with the scale, reach, insights and capabilities to help clients deliver the new business outcomes they require for their digital strategies.
Representative Klein: and we remain committed to achieving our strategic aspiration of doubling CGI over the next five to seven years through the disciplined execution of our build and buy profitable growth strategy.
Speaker Change: Thank you for your continuing interest and support. Let's go to the questions, Kevin. Thank you, Francois. Sylvie, we can now poll for questions.
Speaker Change: Thank you. Ladies and gentlemen, if you do have any questions, please press star followed by 1 on your touchtone phone. You will hear a prompt that your hand has been raised.
Speaker Change: Should you wish to withdraw from the question process, please press star followed by 2. And if on a speakerphone, you will need to lift the handset first.
Speaker Change: Your first question will be from Paul Treiber at RBC Capital Markets.
Paul Treiber: Thanks very much and good morning. It's nice to see the acquisition announced this morning. Just hoping that you could speak to your M&A pipelining capacity. You deployed a fair amount of capital in the last couple of months. Do you need to take a pause to integrate those acquisitions, or do you have the capacity to continue to make acquisitions here in the short term?
Paul Treiber: Thanks, Paul, for the question. No, we don't need to do a pause. You know, these acquisitions like this one that we announced this morning is in the UK. A long time we didn't do one in the UK.
Paul Treiber: So, you know, the UK team is ready for this integration. You know, the one that we did before was in the U.S. So the fact, and, you know, we have, you know, a solid operation in all these countries, you know, these...
Paul Treiber: Each of these countries have the capabilities of doing these integrations. So we don't see any problem on that side.
Paul Treiber: And as you know, on the financial side, naturally, we have the solid balance sheet and the capabilities to deploy more capital. So that's not stopping for the future.
Speaker Change: several quarters. And is the mix of revenue different in Germany? Is it more short-term SINC than other regions?
short-term pressure on some of the discretionary spending there.
Speaker Change: But, you know, I would say, and you heard in the last quarter, you know, we did sign a big managed services contract with a large manufacturer in Germany. So, they're still very, you know, they are listening a lot for to see how we can bring some cost saving. So, they are listening on that side. But for sure, you know, on the short term, I would say SINC.
Speaker Change: We see that they are reducing the spending, or be cautious to see what will happen in the next quarters.
Okay, thanks for taking the questions.
Thanks, Bob.
Speaker Change: Next question will be from Jérôme Dubreuil at Desjardins. Please go ahead.
Jerome Dubreuil: Bonjour tout le monde, thanks for taking my question. Another one on M&A. I guess what everyone wants to know today is, is this a new era of M&A? Is there maybe better appreciation of the benefits
Jerome Dubreuil: that M&A is bringing? Or, you know, I know you like to signal stability, but is it just the multiple that have changed or there's a bit of a tweak in terms of the strategy there?
Jerome Dubreuil: Yeah, no, it's not a new era, it's not, you know, our strategy is to grow by, to build and buy, so that didn't change. I think the environment did change, I think we have a certain alignment of stars.
Jerome Dubreuil: is putting pressure on some of these targets to think more about perhaps selling the business. And we see less private equity competition than we were seeing in the past.
Jerome Dubreuil: their piece of the business. So that's why I think it's really, you know, the environment that is more open for these acquisitions. And that's why, you know, we want to be sure that we will capture these opportunities.
Jerome Dubreuil: Am I sensing that the company is maybe a bit of a faster follower?
for NewTek or business as usual.
Jerome Dubreuil: No, I think we were always fast on applying new technology. I think what we're pushing a bit more, to be honest, is on the branding.
and companies and clients and future clients understand our capabilities.
Jerome Dubreuil: and so that's why we want to ensure also that we're working closely with our large partners and so that's why you're seeing more news on that but it's not a change of you know applying new technology or not that we were always there to apply new technology.
Thank you.
Merci beaucoup.
Merci. Thank you.
Speaker Change: Next question will be from Surrender Thinth at Jeffries. Please go ahead.
Thank you.
Speaker Change: Can you perhaps talk a little bit about the lumpiness in the bookings that we're seeing especially within SINC? It just seems to be a bit more lumpy than it has been historically and just
what trends you're seeing underneath that.
We're seeing some pressure still, especially in the consulting side.
Speaker Change: so that's why you know you'll still perhaps see some lumpiness on that side but at least this quarter we saw an uptick on the bookings on the SINC side.
Speaker Change: So, and the other thing also on the federal side or the U.S. federal, you know, Q1 and Q2, our Q1 and Q2 is always the historical, our lowest booking quarter with Q3 and Q4 on the highest side. So, that's a trend that you can see also on an annual basis.
Speaker Change: Just to clarify the comment there, is the messaging that if we were to exclude Germany
Speaker Change: there's an overall improvement in the demand environment for discretionary spend or not?
I would say, yeah.
Speaker Change: Like I was saying, MRD is pressure, but I'll give you the other side on the financial sector.
Speaker Change: On the banking, we are seeing an uptick on the SINC side.
with the interest rate coming down.
Speaker Change: But now that they are going down, they have regulatory pressures and changes to do. And so they don't have any choice to implement new solutions. So we are seeing an uptick on that side.
Speaker Change: And then on the commentary on the GCCs, the Global Capability Centers,
Speaker Change: It sounds like there's growing interest there. Does that impact the global delivery model in the sense that, you know, there's increased demand for offshore and we should begin to see more of a mix shift there? Any color there would be helpful as well.
Speaker Change: Yeah, but you see that we're still growing in India, and that will continue. And, you know, the model, you know, when I was saying managed services is still in demand, it's true, and it's continued to be big in demand, and people and
Speaker Change: to see how we can help them reducing their costs. And GCCs is one of the areas on how to reduce the cost. So we have a lot of clients asking us to help them in creating their own GCCs or creating ourselves a GCC that can be transferred back to the clients.
Speaker Change: or even a lot of these captives already created by clients where they're asking help.
Speaker Change: Our Indian colleagues and operations will help clients directly in India to help them achieving their own objective on their India captives.
Thank you.
Speaker Change: Thank you. Next question will be from the Viagra at Scotiabank. Please go ahead.
Speaker Change: Good morning, everyone. Francois, I wanted to get a little more color on the acquisition that's announced.
Speaker Change: So, as per the press release, CGI already has a significant footprint in UK. Now with this acquisition, the footprint expands, so I'm just trying to understand what is the company's broader growth plan across UK and European region, given the German restructuring, the UK acquisition, so if you could provide some color on the growth broadly across that region.
Speaker Change: BJSS is mostly a company in UK, so they have very, very limited business outside the UK.
And they're strong on the commercial side.
Speaker Change: You remember in the past we always said, you know, we are, we want to acquire in U.K. and we were targeting to
Speaker Change: and that was the idea with this one and and for UK to a certain point it is a game changer because it's first of all it's increasing UK by I would say on the head count.
Speaker Change: perhaps 30 to 35% more people in the UK. And like I'm saying...
Speaker Change: in the commercial area. And UK is, you know, where I'm sitting, we have some difficulties in Germany. In UK it's actually going well.
Speaker Change: to convince BJASS to merge with us and I think that will be great for the UK organization.
Speaker Change: So we're like I'm saying, you know, the buy strategy is 50% of our strategy, our growth strategy. So for sure, we're still, you know,
Speaker Change: looking in countries like Germany. Germany is a country that we want to continue to grow and, you know, this pressure or market pressure actually is putting some opportunities
Speaker Change: on potential acquisitions. So, you know, we are there for the long term. And so if we're seeing some good targets in Germany or in France or Scandinavian countries, we will look at them and see if it's making sense to trigger them.
Speaker Change: That's great. I'll just ask one more question here. So the U.S. federal as a segment grew pretty well this quarter and you did mention that it was partly driven by the growth in the transformational projects.
Speaker Change: in the flux, but what is your take on some of these new bookings?
Speaker Change: and some of these new opportunities that you are seeing evolving across that specific business segment. And that's all for me.
Yeah.
to be capable of reducing costs.
to achieve their objectives.
Thank you.
Speaker Change: Thank you. Next question will be from Robert Young at Canaccord Genuity. Please go ahead.
Speaker Change: Hi, good morning. Maybe a double-pronged AI question. The first part would be around, you mentioned in your prepared remarks, agentic AI, which is kind of a growing buzzword, and you announced an award with UiPath. And so just
Speaker Change: First part would be trying to get a better sense of what your efforts are around agentic AI and what the opportunities are. And then the second part would be just.
the IT services business in general and CGI more specifically.
Speaker Change: Thanks, Robert, for the question. I'll start with the second part with the announcement. For sure, I think some validation still needs to continue on that side. We'll see what's happening. But we are seeing that as a good news, I think.
any new initiatives to reduce the cost of AI.
Speaker Change: But we already started to implement some of it, even internally, in some of our managed services.
Speaker Change: solutions, right? We are, you know, managing a large, large mandate for clients and we are realizing that some of agentic AI can help us on specific processes.
Speaker Change: So, that's something that we continue to investigate and starting even to do some implementation and we are seeing some benefits on that side.
Speaker Change: Do you get the sense that the bottleneck for deployment is cost, or is it finding the right solutions? Does, like, does cost move, like, the revenue related to AI for CGI higher, or is it more about finding the right applications and use cases?
Speaker Change: But like I'm saying, you know, we are always trying to have industry-specific use cases and not just implementing AI for AI. You saw some of the experience or contract that we signed in the past when we were saying, for example,
Speaker Change: the federal Canadian when we implement AI to help them to reduce their bottleneck that they had with their payroll system. So that's the kind of implementation we're talking about. And when they're seeing benefits
Speaker Change: and cost-saving, it's not necessarily, it's not a showstopper for clients.
Speaker Change: putting as it relates to infrastructure and whether that would be an impact on M&A targets. And so I just want to maybe broaden that up a little bit, maybe just talk about
Speaker Change: infrastructure, I think you said it was 10% of the business thereabouts. Is that something that CGI is still working down? Is that a headwind to growth? Or have you changed your thought process there? Or is that something that, you know, given maybe the higher value placed on infrastructure, is that something you'd be willing, even in some cases, to see grow? No, pass the line.
Speaker Change: Okay, thanks for the question. So infrastructure, you know what we said in the past is that we wanted to go a bit asset-light and we didn't want necessarily to sign infrastructure deals just for the infrastructure deals.
Speaker Change: But we continue to have data centers, and we will continue to have data centers because
Speaker Change: an end-to-end services company. And so our strategy is to continue to sell end-to-end, including infrastructure business.
Okay, thanks. I'll pass the line.
Speaker Change: Thank you. Next questions will be from Thanos Moschapoulos at BMO Capital Markets. Please go ahead.
Thanos Moschapoulos: Hi, regarding the UK acquisition, are there some financial metrics you can share or should we best wait for next quarter's MD&A?
Speaker Change: I think we'll be waiting for next quarter MD&A because again we you know we it's still not closed yet we will close it in the next couple of weeks hopefully if we have the
Speaker Change: All the authorizations. Just perhaps what I can say is that, you know, on the revenue side, we are talking, like I would say, Steve, 275 million pounds.
Thank you.
Speaker Change: and that's what I will do. I mean, annual business. Annual business.
Speaker Change: Great. And just to clarify, is it very heavily weighted to SINC or is there a good-sized managed services component in there as well?
Speaker Change: I would say it's perhaps a bit more S-I-N-C than managed services.
Speaker Change: And again, the idea of one thing, they have great client relationship.
Speaker Change: And one of the fits that we're seeing with us is the fact that they don't have offshoring. And, you know, now that we have these client relationships...
Speaker Change: We will be able to sell a lot more off-shoring to these clients, and that's really the idea. So, yes, there are more SINC today, but we think that we will be able to sell a lot more managed services now to these clients.
Speaker Change: How should we think about the margin trajectory given the puts and takes with the recent tuck-in acquisitions, should we assume margins being flat year over year or maybe down a little because you're going to be integrating or what trajectory would you assume?
Speaker Change: on the margin. On the other side, you know, we are doing some actions to improve
Speaker Change: the margin in some places like Germany where we have some utilization pressure there. So, you know, I would say that, you know, one can offset the other. I don't think we'll see big changes in the EBIT margin.
Great, I'll pass the line. Thank you.
Speaker Change: Thank you. Next question will be from Stephanie Price at CIBC. Please go ahead.
Stephanie Price: Hi, good morning. Just following on Thanos' question there. Margins in the U.S. federal business seemed a bit weaker than normal. Was this a result of the margin profile of Aon, and how should we think about those U.S. federal margins going forward?
Stephanie Price: Yeah, so you have it. It's really because of Aon Acquisition. You see a lot of growth.
But there's some pressure on the...
Stephanie Price: the margin and it's because of this acquisition that we need to integrate. We signed at the end of September and integration in the federal government is taking a bit more time than other areas because of some authorization that we need to have from the client side. But the expectation is that you'll see some improvement quarter over quarter on their EBIT margin.
Speaker Change: Okay, perfect. And then maybe more broadly, can you talk a bit more about what you're seeing in Europe? Sounds like the slowdown right now is just in a few regions. What are clients saying in the rest of Europe and how do you think about the region going forward?
Speaker Change: What's the future, especially, for example, with tariffs that the U.S. is talking about. Will that have a major impact or not on some of these clients?
Speaker Change: And some example, we'll have election in Germany, in France, some discussion on the government side. So that can have an impact. We didn't see it yet, but that can have a certain impact.
Speaker Change: So that's really what we're hearing in Europe. But on the other side, like I'm saying,
Speaker Change: always a lot of discussion talking about how we can help them on the cost saving. And so a lot of discussion on managed services still in Europe. Great, thank you very much.
Speaker Change: Thank you. Next question will be from Richard C. at National Bank Financial. Please go ahead.
Richard C.: Yes, thank you. So you've obviously, I think, picked up the pace of acquisitions. Just wondering if you could maybe share with us whether you have it or not. Do you have a target with respect to the amount of capital you want to deploy this year on acquisitions?
Richard C.: We don't know we don't have necessarily a target, you know, we are generating You know more than what 2.3 billion of cash from operations, you know investing back 400 million So we have what 1.7 1.8 1.9 billion of cash from free cash flow
Richard C.: and so and the dividend is right it's very low at 30 what 34 million per month per quarter per quarter so we still have a lot of
Richard C.: We have the balance sheet and their leverage ratio is very low.
Richard C.: So we still have a lot of capacity for larger acquisitions. So no, we don't have necessarily a number.
Richard C.: and you know, the only cap I would say to you is that, you know, we...
Richard C.: when we're saying that we're at three times leverage, that's really at the top and we're very far from that, Steve, we're at what? Look, from a net basis, we are at 0.47 and from a gross debt to EBITDA basis, we're about at 1.2.
Richard C.: So we have a lot of space for other ones, including transformational acquisition.
Speaker Change: Okay. And then, you know, I appreciate your comments on elevating the brand. Obviously, you've probably sort of done a lot of work in terms of identifying opportunities. So, when it comes to elevating the brand or some of these other initiatives that you've put in place since taking over the CEO role, can you help us understand
Speaker Change: the kind of amount of incremental growth you're targeting to achieve from these all new incremental initiatives that you've put in place since taking over that role?
Speaker Change: It's really, you know, we didn't necessarily put a number related to these actions.
Speaker Change: So it's really to improve the branding, especially in places where we were still, you know, perhaps the best kept secret. So, and still in U.S., I think we still need to do more on that.
Speaker Change: And that's with the marketing group and with our leader there, Susan Balding. We will continue to do some good work.
Speaker Change: price competition in the market, you know, is that something that you may be seeing? And if so, is this sort of a temporary thing given the backdrop with respect to MRD or SINC, or is it something a bit more structural? And that's it for me. Thanks.
I would think it's not structural, you know, we...
Speaker Change: You know most of our, especially in the managed services, we don't we don't see a pressure there and our managed services We you know if we can show to them the business case
and the outcomes for them.
Speaker Change: you know, that's making sense and they'll pay for the value. I think, you know, in some places where it's the discretionary spending that went down, for sure, you know, we'll have some pressure to reduce some of the rates to be capable of.
Speaker Change: of taking out some of the utilization pressure. But I would say overall, you know, pricing is not necessarily an issue. People, clients are still ready to pay for value.
and the
Sylvie, we have time for one more question, please.
Speaker Change: Certainly. Our last question will be from Jason Kupferberger at Bank of America U.S. Please go ahead.
Speaker Change: Good morning, Francois and Steve. This is Tyler DuPont on for Jason. Thanks for taking the questions here. I try to be fast knowing that that's the last one. I wanted to ask about initial demand trends and spending applications for 2025, but particularly from a bookings context.
Speaker Change: Bill, the second quarter declines in the LTM metric, just how do you juxtapose the modestly softening bookings number with the solid top-line growth that you're putting up, and how does that translate into 2025 client spend?
Yeah.
with bookings and from for the future.
Speaker Change: That's helpful. It's great to see the SINC going above 1. Also, just as a follow-on, I just want to ask about cash flow expectations as we look through the year.
Speaker Change: During the quarter, free cash flow was pretty strong. It looked like on a revenue conversion basis around just shy of 15%, which in my understanding is sort of the medium-term or long-term target for you guys. Wondering if you could just touch on cash flow in the quarter. How should we look at conversion through 2025? Should we be thinking, you know,
Speaker Change: More than 15 on a full year basis or I know there's timing and everything there, but just love to get your thoughts
Speaker Change: Thank you for the question. I think if we say that on a long-term basis, 15% makes sense. Obviously, in the quarter, the cash from Ops was 17%, but it was with some improvement of the DSO. So, on a long-term basis, at 15%, it makes sense.
Great, appreciate it.
Thank you.
Please proceed, sir.
Speaker Change: Thank you everyone for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1-888-660-6264 and using the passcode 28413.
Speaker Change: As well, a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1-905-973-8363. Thanks again, everyone, and look forward to speaking soon.
Thank you. Thank you.
Speaker Change: Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending, and at this time, we ask that you please disconnect your lines.