CGI Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2024

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to CGI's First Quarter Fiscal 20 24 Conference Call. And I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.

Speaker 1

Thank you, Sylvie, and good morning. With me to discuss CGI's Q1 fiscal 2024 results are George Schindler, our President and CEO and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi. Press release we issued earlier this morning are available for download along with our Q1 MD and A, financial statements and accompanying notes, all of which have been filed with both Cedar Plus and EDGAR. Please note that some statements made on the call may be forward looking.

Speaker 1

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. The complete safe harbor statement is available in both our MD and A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non GAAP performance measures, which should be viewed as supplemental.

Speaker 1

The MD and A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. We are also hosting our Annual General Meeting this morning, so we hope you will join us live via the broadcast at 11 am. I'll now turn it over to Steve to review our Q1 financials, and then George will comment on our business and market outlook. Steve?

Speaker 2

Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our Q1 of fiscal 2024. In Q1, we delivered $3,600,000,000 of revenue, up 4.4% year over year are up 1.5% when excluding the impact of foreign exchange. The growth was balanced between Europe and North America. From an industry perspective, we have particular strength in government with 7.5% constant currency growth and in communication and utilities with 6.7% constant currency growth.

Speaker 2

As anticipated, we experienced softness in the banking subsector. Government continues to be CGI's largest market, representing 36% of Q1 revenue, up 100 basis points when compared to the prior year. As a reminder, CTI delivers recurring services and business solutions to support our government clients with their mission critical functions such as citizen services, cybersecurity, logistic and Financial Management. IP as a percentage of total revenue was 22% in the quarter, up 30 basis points when compared to the prior year, with the vast majority contracted as longer term recurring engagements increasingly as software as a service. Overall IP revenue growth was 4.2% in constant currency.

Speaker 2

We had once again a strong quarter of contract wins across all service offerings, booking $4,200,000,000 in the quarter For a robust book to bill ratio of 116%, led by U. S. Commercial and state government At 152%, Finland, Poland and Baltics at 137%, and Western and Southern Europe at 127%. Importantly, managed services, which is longer term recurring revenue for CGI, represented 57% of total bookings for a book to bill ratio of 122%. With respect to IP, we continue to see ongoing demand for our business solutions with a Q1 book to bill ratio of 126%, led by our U.

Speaker 2

S. Segments with a combined IP book to bill ratio of 164 percent Finland, Poland and Baltics with an IP book to bill ratio of 116% and Canada with an IP book to bill ratio of 110%. Global backlog remains strong, reaching $26,600,000,000 representing 1.8x revenue. Turning to profitability. Earnings before income were $527,000,000 for a margin of 14.6%, down 40 basis points year over year, primarily as a result of expenses associated with our previously announced cost optimization program.

Speaker 2

This program, which is focused on SG and A, has been expanded by $26,000,000 for a total of $100,000,000 and is expected to complete as planned in the Q2. The cost optimization program, along with our ongoing Management discipline will provide incremental margin improvement in the second half of the year. Adjusted EBIT in the quarter was $584,000,000 up 5.4% year over year. This represents a margin of 16.2%, up 10 basis points year over year. We delivered strong margins in the following segments: Asia Pacific at 33%, Canada at 24%, U.

Speaker 2

K. And Australia at 17% and Northwest and Central East Europe also at 17%. Our effective tax rate in the quarter was 26.1%. We expect our tax rate for future quarters to be in the range of 25% to 26.5%. Net earnings were $390,000,000 up $7,400,000 for a margin of 10.8%, down 30 basis points year over year, mainly impacted by the investments in the cost optimization program.

Speaker 2

Diluted EPS was $1.67 representing an increase of 4.4% year over year when compared to $1.60 in Q1 last year. When excluding specific items, Net earnings improved to $427,000,000 up 7.3% when compared to Q1 last year For margin of 11.9%, up 40 basis points. Specific items for the quarter included integration and acquisition costs, along with expenses associated with the cost optimization program. On the same basis, diluted EPS was $1.83 an accretion of 10.2% when compared to Q1 last year. In the quarter, cash provided by operating activities was 5 $77,000,000 representing 16% of total revenue.

Speaker 2

On a trailing 12 month basis, Cash provided by operating activities was $2,100,000,000 representing 14.4 percent of total revenue. DSO was 41 days in the quarter, below our target of 45 days, mainly due to improved collections and the variation in foreign exchange ending rates. In Q1, we used our cash to invest $85,000,000 into our business, including in AI invest $49,000,000 in business acquisitions invest $126,000,000 to buyback our stock and repay $673,000,000 of long term debt. In the quarter, we continued to deliver a strong return on invested capital at 15.9%, up 40 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 our shareholders with the following cash allocation priorities.

Speaker 2

1st, investing in our business 2nd, pursuing and closing accretive acquisitions 3rd, repurchasing our stock and finally, paying down our debt. In line with this capital allocation strategy, yesterday, our Board of Directors approved the extension of the NCIB program until February 2025, authorizing us to repurchase for cancellation up to 20,500,000 shares over the next 12 months. CGI balance sheet is strong with a net debt to capitalization ratio of 17.6 percent at the end of December as well as $2,700,000,000 of cash readily available and access to more if needed. Moving forward, we have the 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 further discuss the insights on the quarter And outlook for our business and markets.

Speaker 2

George?

Speaker 3

Thank you, Steve, and good morning, everyone. We started fiscal year 2024 in a strong position by harnessing the inherent value of our resilient business model and by employing disciplined operating practices in the execution of our plan. In the quarter, our team delivered financial results in line with our full year plan For revenue growth consistent with the current IT services demand environment, double digit EPS accretion on an adjusted basis an incremental margin improvement year over year on an adjusted basis. With cash from operations at 16% of revenue Our first quarter bookings at 116 percent of revenue, CGI is well positioned to deliver on our build and buy profitable growth strategy. Continued strength of our financial performance is anchored by the ability of our consultants to earn clients' trust every day on every engagement.

Speaker 3

Again, this quarter, our team earned higher client satisfaction ratings on every dimension we measure, an overall rating of 9.5 out of 10, a record high. The continuous improvement in client satisfaction reflects clients' ongoing confidence in selecting CGI to innovate and support their most critical digital priorities. As anticipated, at all levels of government, demand continued to rise in Q1 as clients focused on progressing their key policy initiatives through the transformation of mission critical applications and systems. In the quarter, government awards represented 39% of total Q1 bookings, up from 37% in the prior year. CGI's IP solutions were a main contributor to the strong government bookings, particularly in the United States segments.

Speaker 3

Governments are increasingly interested in solutions to improve their operational efficiency, leveraging the built in security and innovation, including with AI of CGI's intellectual property. Across all industries, CGI's end to end services and solutions position us well to deliver the right mix of offerings, As clients continue to prioritize initiatives that will deliver the highest financial returns and drive tangible organizational benefits. CGI's outcome based value propositions for managed services and IP are specifically designed to help clients generate cost savings and accelerate transformation with lower capital costs. In line with CGI's compelling value proposition for clients, Q1 bookings were mostly comprised of managed services and IP engagements, which generate long term recurring revenue. Managed services bookings were driven by strength in government, communications and utilities and health.

Speaker 3

Recent managed services and IP wins include the Virginia Department of Social Services selected CGI to modernize their statewide child support system through a platform based solution, which incorporates AI and expands our global alliance with Salesforce. Under the agreement, we will partner with government executives to simplify and innovate the end to end processes for delivering citizen services. Posti Group, the leading postal and logistics service provider in Finland, Sweden and the Baltics expanded their long term collaboration with CGI through new 10 year engagement to develop, modernize and deliver secure digital messaging services across multiple channels and countries. A global multi energy company renewed and extended its partnership with CGI to modernize the delivery of the company's business applications, primarily for their downstream operations. Our engagement takes an end to end approach to help the client drive their energy transformation strategy.

Speaker 3

And in 12 state and local governments across the U. S, including the County of Los Angeles, the most populous county nationwide, CGI was selected to upgrade their core business platforms. The engagements leverage CGI's Advantage IP, a modern cloud based solution for permitting, procurement, HR, finance, collections and performance data management. In the quarter, consulting and system integration bookings were 110% of revenue, up on a sequential quarter basis, with strength in build and run projects in the government and national critical infrastructure sectors and platform modernization projects, particularly in the insurance industry, leveraging CGI's insurance IP portfolio and our partnership with Guidewire. Notably, in the Q1 CGI was recognized by Guidewire for outstanding market growth in both the Americas and Europe and for our delivery excellence.

Speaker 3

Looking ahead, our overall pipeline for managed services is up year over year and sequentially, which we expect will contribute to ongoing booking strength and future revenue growth. Client demand within the government sector continues to drive strength in our overall pipeline. On a sequential quarter basis, the managed services pipeline for government is up by more than 40%. The pipeline for government SI and C projects is up 20%. We continue to see strong demand related to government priorities for cybersecurity, data analytics and modernization to drive efficiencies and enhance citizen services.

Speaker 3

While we are beginning to see improving client pipeline for systems integration and consulting across commercial industries, clients continue to exercise caution in their discretionary SI and C spending decisions, given ongoing market uncertainty. These market dynamics continue to favor CGI's managed services and IP to help these commercial clients generate cost savings and operational efficiencies. For example, within the manufacturing, retail and distribution sector, Interest in platform based solutions to drive operational efficiencies continues to rise. And interest in generative AI is also in the rise in this sector, with clients focused on data preparedness and exploring pilots related to knowledge management, research and development, forecasting and replenishment and production automation. In Health and Life Sciences, we recently signed industry partnerships in the UK, Germany and Denmark to accelerate pipeline growth through joint go to market offerings.

Speaker 3

In addition, we announced last week a global partnership with Korver focused on improving the production processes of pharma and life science clients around the world. This partnership will leverage CGI's Business Consulting and System Integration Services and Korber's unique portfolio of integrated pharma solutions. And in financial services, the overall pipeline is up 12% sequentially with clients' primary focus on driving cost savings, Specifically, through new managed services engagements that are increasingly focused on both technology and business operations. Interest remains high for CGI's IP business solutions to modernize and manage payments, enable trade finance globally and detect and combat financial crime. Our ability to meet the demand associated with our increasing pipeline and to deliver incremental margin improvement is underpinned by our quality delivery and operational excellence as guided by the best practices and frameworks in CGI's management foundation.

Speaker 3

We continue to make investments to drive our build and buy profitable growth strategy. For example, in line with client demand, we've been driving broader of our footprint, growing our global delivery network at an even faster pace than our proximity operations. This strategy has enabled us to continually build deep relationships and proximity with clients and expand the optionality CGI offers clients to balance their cost, risk and quality objectives. Over the past 3 years, CGI's global delivery capacity expanded from 31% total consultants worldwide to 38% in Q1. This includes in our onshore, nearshore and offshore delivery locations and is contributing to incremental margin improvements.

Speaker 3

In the Q1, we progressed several of the AI investments we previously communicated, investments which are already strengthening our end to end service offerings. These initiatives include the launch of training for all consultants globally on AI, Industry initiatives utilizing available AI tools, including Microsoft's CoPilot offerings, consulting offerings to assist clients in their AI strategy and a new IP solution CGI Machine Vision, which enables clients in multiple industries to use AI for improved asset and physical infrastructure monitoring. While overall adoption of AI remains in the early stages, CGI's bookings, which incorporated these technologies totaled more than $200,000,000 in Q1, up double digits on a sequential quarter basis. The initial focus of these deals is aligned around 3 areas: setting an AI vision and roadmap to drive business value, preparing the data strategy to build a future fit and adaptive foundation with responsible use of data at the core and piloting a variety of use cases primarily focused on operational efficiency. And we are investing in M and A as part of our Build and Buy Profitable Growth strategy.

Speaker 3

This strategy deepens our resilience and serves as a catalyst for future organic growth. We continue to focus on building critical mass and 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 remain in dialogue with a number of merger targets, both metro market and transformational opportunities. As always, we will be disciplined to make sure that all CGI mergers will be accretive to each of our stakeholders.

Speaker 3

In closing, we are off to a strong start for the year and reiterate our confidence in our fiscal 2024 plan. We have a resilient model with a diversified mix of geographies, economic sectors and end to end services to enable profitable growth now and in the future. We have trusted client relationships and value propositions that are well aligned to meeting current demand for cost savings, digital acceleration and ROI led innovation. We have a strong balance sheet and the improving M and A conditions enable us to act rapidly on accretive merger opportunities. And we have a proven track record for operational excellence and for taking proactive actions to deliver continuous incremental margin expansion.

Speaker 3

Thank you for your continued interest and support. Let's go to questions now, Kevin.

Speaker 1

Thank you, George. Sylvie, please share with the participants the logistics for the Q and A.

Operator

Thank And your first question will be from Stephanie Price at CIBC. Please go ahead.

Speaker 4

Good morning. Congratulations, Mia, on the strong bookings number this morning. It seems like it's been skewed towards managed services and we're lapping Q1, 2023 when that was the case as well. Just hoping to understand the time to convert to revenue and how has it played out as expected over the last year? And how should we think about the pacing of that backlog conversion going forward?

Speaker 3

Yes. No, thanks for the question. And yes, the managed services continues to drive the strength in the overall bookings. And even as we lap some of those tougher comparisons. And I think that's just the nature of where the market is right now.

Speaker 3

Having said that, yes, it has taken a little bit longer to translate that from bookings to revenue just given The nature of those deals, they're larger, they have more global delivery involved in them. And so the transition takes a little bit longer and it takes a little bit longer therefore to convert into revenue. The other thing that you are seeing, so but we are converting that into revenue, But it's counteracted by some of the softness that you've seen in the SI and C side, particularly in the banking sector. We believe that's beginning to stabilize. And so I think you'll see more of that revenue coming online in the quarters to come.

Speaker 4

Thanks for the color. And just one more for me, just on the cost optimization program. It sounds like it was expanded a bit in the quarter. Just curious how it's progressing and what areas of business you're looking at and how we should think about it rolling out in fiscal 2024?

Speaker 3

Yes, the cost optimization was primarily focused on the SG and A, both some of the individuals as we move More of that to global delivery and automation, but also the real estate. And so we accelerate some of the real estate. So That's really the focus. It's over 2 thirds of that is focused on the SG and A. It's progressing very well and We believe you'll start to see some of that in the margin improvements in the quarters to come.

Speaker 3

It also frees up The ability for us to continue making the investments that we're making in training and hiring, talent in AI and our IP offering. So it's a 2 for us. Some of that you'll see in margin improvements and some of it frees up the ability to make those investments for the future.

Speaker 4

Great. Thanks so much.

Speaker 5

Thank you.

Operator

Next question will be from Jerome Dubreuil at Desjardins. Please go ahead.

Speaker 6

The first one is on the read through from hyperscalers. We've seen the results from last night. Previously, when growth was slowing on the cloud side from them. You still had optimization and cloud leveraging work to do. Now good news, last time we've seen some stabilization and even improvement at Google.

Speaker 6

Does that mean there could be additional work For a company like CGI, that's related to this leg of growth?

Speaker 3

Yes. Clearly, we're working with all the hyperscalers in partnerships, particularly on the opportunities associated with AI. We announced 1 last quarter with Google. I mentioned this quarter we're working closely with Microsoft On the co pilot, so yes, I mean, it's certainly I think it's a sign that we're starting to stabilize in some of those areas. And we'll continue to work with those partners as channels for future growth for CGI in tandem.

Speaker 6

Okay, great. And then another one, you had a lower headcount sequentially in the quarter, obviously related to your cost optimization program. But a lower headcount despite very good in the last 12 months, are you happy now with where utilization is or are you still looking for more improvement?

Speaker 3

No, we're our utilization is where we'd like it to be. It's pretty high. We did have a Small increase in employees year over year, but a small decrease quarter over quarter. But again, majority of those decreases were in SG and A. I'll just remind you that the growth is not CGI's growth is not linear to people because of the intellectual property And you see the intellectual property continuing to grow in some of those bookings, but also those ROI led engagements.

Speaker 3

So it's a little bit different for us. But yes, we're pretty happy where we are on the utilization. And of course, we're in In an environment where turnover is down pretty sharply, which means we have less replacement hires to make. So but we're being very careful not to hire in advance of demand, but we're in a pretty good place to be able to grow as the market demands bring themselves out to be.

Speaker 7

Great color. Thanks. Yes.

Operator

Thank you. Next question will be from Thanos Moschopoulos At BMO Capital Markets, please go ahead.

Speaker 5

Hi, good morning. George, could you expand on what you're seeing from your commercial clients From a demand perspective. And so I presume a number of them have just gone through the annual budgeting process heading to 2024. And so as you speak to them about their planned spend, could areas like AI be drivers of incremental spend versus last year? Or is it still very much the case where perhaps you're trying to spend flat and use savings from outsourcing to reinvesting areas like AI?

Speaker 3

Yes, it's a good question. It's a bit all over the map. I think in general, The discussions that we've had is that they'd like to hold their budgets, if not increase their budgets, but that's all in discussion. So the interest is rising. Our pipeline is rising with the commercial clients, But they're still buying the cost optimization projects.

Speaker 3

They're still buying in smaller doses as they wait to see kind of where some of this uncertainty goes. So we did see again interest is rising. We're playing into that interest because we want to be positioned for that, but we're selling the cost optimization projects and you see that in our bookings. So That's kind of our approach is to engage them in the discussions to prepare for when the spending decisions come. We don't see them coming yet.

Speaker 3

I mentioned that in my remarks. But we certainly see the pipeline growing. The interest is there, But they're not pulling the trigger quite yet. But they are pulling the trigger on the cost optimization, which will only help them to spend more in the back half of the year.

Speaker 5

Great. And can you expand on how you're hearing with respect to the war on talent to build up Korea high capabilities, how much of that will be new hires versus training? Will that be mostly within the business unit level originally or will be some centralization of the high capability?

Speaker 3

Yes, all of the above. It's as I mentioned, we're rolling out training for everybody And the company, of course, focusing different training for developers, different training for the business analysts and different training again For the leaders and the business developers, so because everybody needs to be literate in AI and of course we're a company where people run And so that's been very positive for us. Having said that, of course, we need to bring in Expertise, we actually developed, established a global AI enablement center of expertise. And we do have in there PhDs and the like and steeped in AI to make sure that we have that. And then Again, I guess it's all the above.

Speaker 3

That's centralized, but then we have a network of AI experts spread throughout the business units, but then driven from a vision standpoint from that global enablement center of expertise. Likewise, in each of our intellectual property business solutions, we're introducing AI. And again, that's our built in R and D lab, if you will, because again with 22% of our revenue in IP And over 150 different solutions, we're able to really test out use cases and work and collaboratively with our clients as part of our investment. So it's really all of the above, which is why I answered initially that way.

Speaker 5

Great, George. I'll pass the line. Thanks. Thanks.

Operator

Next question will be from Paul Treiber at RBC. Please go ahead.

Speaker 8

Thanks so much and good morning. Just a question on the U. S. Federal space. You've seen good bookings momentum over the last year or so.

Speaker 8

But this year, it's coming up to an election in the U. S. How should we think about bookings through this year? And then also do you see how do you see revenue growth progressing through this year just given the upcoming auction?

Speaker 3

Yes. So it's more than just the election, right, because we get that continuing resolution, The battles in Congress, both in the Senate and the House. So lots going on in federal. Having said that, here's what I would say, and it's true not just in U. S.

Speaker 3

Federal, but it's true in a bit in the UK and Canada as well. We see deals accelerating in advance of upcoming elections. So what happens is the bureaucracy, if you will, wants to keep things going during that election period. And so the deals tend to get a little bit accelerated, tend to be a little bit larger and tend to engage a little bit longer just to get some of that stability. So I think you'll see a bit of a run up here in the next couple of quarters on the bookings and that will drop off right during the election period.

Speaker 3

And then we have the change introduced in the aftermath of the election. So regardless, even if it's even if the incumbent gets reelected, There's typically new initiatives that occur after the election. So a little bit of a run up on the bookings, Then we'll eat into some of that backlog for growth during a short period of time and then new opportunities arise. So that's kind of The general cycle and like I said, we're seeing that not just in the U. S, but also a bit in the UK and Canada.

Speaker 8

And then looking at your Asia Pacific business and then more broadly just around the trend towards offshoring, Asia Pacific is slow. The growth there has slowed in the single digit range, whereas it's been in double digits for a number of quarters. Are you seeing that the trend towards offshoring in your business begin to slow down? Or is there just some other factors that were mixed in there and you expect Asia Pacific growth to ramp back up?

Speaker 3

Yes. Actually, believe it or not, our Asia Pacific was also impacted by some of the slowdown in SI and C, including in particularly in banking. So but the continued strength and demand on these managed services deals, they're facing the same thing. Some of those deals take a little more time to transition to Global Delivery, but Global Delivery was part a big part of those deals. So I think you're going to see over time as SI and C stabilizes And I think you're going to see some of that growth coming back to Asia Pacific.

Speaker 3

Like I said, it has been a push. It gives our clients and gives them some of those cost optimization they're looking for. So we're actually seeing that grow, Including in parts of Europe, even in France, we're seeing more take up On global delivery, offshore specifically, whereas they've been more near shore focused, we're seeing more of that go offshore in France.

Speaker 8

Okay. Thanks for taking the questions.

Speaker 7

Yes.

Operator

Thank you. Next question will be from Richard Tse at National Bank Financial. Please go

Speaker 9

ahead. Thank you. Yes, given you have such great strength in government certainly over the years, Would it be kind of unreasonable to say looking forward to lean harder in that market with acquisitions or are you kind of looking to diversify the business a little bit away from that?

Speaker 3

Yes, it's a great question. We are looking at M and A in both government and commercial. I wouldn't say we're favoring government because we like having a good mix of industries out there. But at this point, yes, government we're going to play into that. And so we do have a set of government opportunities in our active funnel right now.

Speaker 9

Okay. And then with respect to the rise of AI, just kind of curious to see what proportion of bid engagements are asking you to address that and how would it eventually kind of impact The margin profile like does it have kind of incremental margin upside in those type of engagements? I'm just trying to understand like where we are with your enterprise customers?

Speaker 3

Yes. So there's kind of 2 aspects of AI, right, introducing AI into the solutions. And like I said, I think everybody is interested in seeing how they can leverage that, particularly in the operational type solutions. And so that's a lot of our IP, right? We do a lot of our IP is in the operational efficiencies for our clients.

Speaker 3

And so we're introducing a lot of AI. And that's very welcomed by them in those types of solutions because they're interested in kind of proving out some of these cases and business cases. And so that's something that we're is an element of those. And of course, Given that it's in high demand, yes, there's an element where accelerating those comes at a slightly higher margin profile. So that's the good news there.

Speaker 3

But there's also the opportunity for us to use AI in our own delivery, in the delivery of everything that we do. So we're looking at that from bid and proposal support to co design and testing, documentation, cogeneration, cogemigration. So that's the opportunity for I think margin improvements, especially as you do that on an outcome based solution sale. So that's really the opportunity I think for us. It's twofold, right.

Speaker 3

It's introducing that for our clients into the profile. Now what I would say is we're still seeing pilots Some of the enterprise clients are maybe doing that at a little more of the scale, larger implementations. We are seeing that at some of the larger implementation, but there still tend to be smaller point projects and absolutely still experimentation When you're talking about customer facing AIUs. So this is our clients to their customers. So I think it's still that's why I mentioned it's the early days, but Certainly, there are opportunities here for sure.

Speaker 9

Okay, great. Thank you for the insight.

Speaker 7

Yes.

Operator

And your next question will be from Jason Kupferberger at Bank of America. Please go ahead.

Speaker 10

Hi, good morning, George and Steve. This is Tyler Dupont on Jason, thanks for taking the questions. I wanted to start by asking about visibility into calendar 2024 client budgeting decisions. It seems like based on your comments that backlog is rising quite steadily and nicely, but some clients are more cautious on pulling the trigger on converting some of those budgets into actual spend. I'd be curious sort of how this current environment compares to previous time periods and when you believe the visibility to firm up more substantially as we look through the year?

Speaker 3

Yes. Well, I've said this for several Actually years I think is that I think that IT just given the nature of how important it is to the business, It's in general not seen as discretionary. Of course, within the spend, of course, there's discretion. But in general, it's not seen that way. So I think you're going to see a more rapid you didn't see as deep of a slowdown despite some of the uncertainty, and I think you'll see a faster ramp back up.

Speaker 3

When that happens, I can't call. I think you're going to see some of that in the back half of the year. But that's the discussions we're having. So you're right, we're building that pipeline and not pulling the trigger yet. But I really believe it's going to be a little bit faster.

Speaker 3

I think everything happens faster in today's world. But I think you're going to see that Happening a little quicker than some of the prior cycles. Even their buying is different, right? The way we execute projects, the way they buy projects is different than it was in previous economic slowdown. So that's kind of what I see.

Speaker 3

Of course, I can't call that, but that's what I would anticipate.

Speaker 10

Sure, sure. That's super helpful. Thanks. And I guess as a follow-up, I'd be curious to hear more about the pricing dynamics you're seeing given the current environment, I know based on again comments, it seems like SI and C projects are a little bit softer with clients favoring more manner services at the moment, understandably. I'd be wondering if there's any pricing concessions being made in SI and C to secure the deals that do exist.

Speaker 10

And maybe if you can sort of juxtapose What you're seeing there versus the strength of the managed services deals?

Speaker 3

Yes. We're not really seeing that. I mean, I guess there would be 2 things, right? There There's the SI and C deals that are more focused on cost optimizations. We're selling those as ROI led.

Speaker 3

And so we're pretty good at doing that. And so it's still although it's not a managed service, it's still driven kind of outcome based. And So you can the pricing is different in those situations. And then the other SI and C that's going on is pretty important And quality becomes very important. The time to deliver becomes important.

Speaker 3

And so we're not really seeing big concessions on those projects wholesale. Course, there's always bad behaviors, I would say, in any given bid. But in general, we're not seeing that. You see Our actual bill rate efficiency is holding pretty steady. We're not seeing a rising rate environment like we saw a year ago, But we're not seeing degradation right now.

Speaker 10

Great. Thank you. I appreciate the color.

Speaker 7

Yes, sure.

Operator

Thank you. Next question will be from Divya Goyal at Scotiabank. Please go ahead.

Speaker 11

Good morning, everyone. George, I wanted to get some color on this variance between Europe versus the North American That we've been seeing and I know the peers have been commenting on it. We have an outlook on it. But it's I'm just curious is it is the variance because Europe is doing better than North America or is it because North America undertook those business transformations sooner than Europe did and It is because of that macroeconomic conditions that is driving this variance at this time?

Speaker 3

Yes. I got to tell you, I mean, we mentioned our growth is pretty balanced between the two. And In general, I see it less being about the geographies and far more being about the industries and the services that you're offering. And of course, we talked about SI and C versus managed services And IP and even in IP, it depends on what solutions you're offering in your business solutions, right? And then from an industry Clearly, banking has been hit by this interest rise.

Speaker 3

And so that's certainly A pretty dominant factor, particularly in North America. So I think that's where you might see some of that with some of the comparisons. But of course, given our Strength in government and national critical infrastructure industries, including utilities, that's strong in all geographies, both North America and Europe. And so I think that's why we have a little more of a balance. To your specific question, No, I don't think it's that necessarily one is ahead of the other.

Speaker 3

I think and especially when you look at some of The newer technologies and the new opportunities, I think you're going to see a little more of similarities than you see differences.

Operator

That's helpful. Just from your

Speaker 11

M and A pipeline standpoint, you did mention that Some of the government led businesses or in the pipeline, do you see any, delineations to certain geographies as well? Again, going back to this Europe versus North America growth trajectory that have been that we have been noticing over the recent quarters?

Speaker 3

What I would say is that we're always looking in all locations as I mentioned already to gradually grow in each of those metro markets. But Certainly the U. S, France, Germany and the UK are areas that if you look at our active funnel, There are probably more opportunities in those areas. And like I said, both government and commercial in each of those geographies.

Speaker 11

That's helpful. And I'll ask one last question here on the cash flow from operations. So over the past two quarters, the CFO has been trending higher than the historical norms here. And obviously, you're undertaking now these cash optimization initiatives as well. Could you help us understand the go forward trajectory for the CFO?

Speaker 2

Steve, do you want to Look, the cash flow, I would say the best thing is to look at it from a last 12 month point of view. That's really How we look at it also internally, but obviously when the margins are improving, the cash flow will improve. We are investing in the business right now and with the objective to improve, right, The future earnings and also future cash flows.

Speaker 11

That's helpful. Thanks, George. Thanks, Steve.

Speaker 1

Thank you. Thanks, Divya.

Operator

Next question will be from Robert Young at Canaccord Genuity. Please go ahead.

Speaker 7

Hi, good morning. I wanted to put that $200,000,000 in incremental bookings related to AI into context. Seems like a good number. Thanks for sharing that. But if I think of that as a relative percentage of the SI and C bookings, it's over 10%.

Speaker 7

If I just think of it as a percentage of the new bookings for new business, it's a larger percent. And trying to put that into context With the comment you gave on an earlier question around how some of that is embedded into IP delivery, like I'm trying to get a sense of how much of this is new business is completely driven by AI and how much of it is embedded into other parts of existing delivery?

Speaker 3

Yes. And thanks for the question. And you're right, and you heard correctly. It's not all brand new business. It's some of that is embedded.

Speaker 3

Of course, it helps us continue to grow our relationship with our clients and be part of where The business is heading and that's why I highlighted that. But it's some of that is part of existing Deals or would be part of existing deals. I don't know if I'd say roughly maybe 60% within deals, 40% new, but that's just a rough estimate. We could go back and give you some of that. But Again, given what we see, lots of deals with AI, but not necessarily big large scale implementations yet.

Speaker 3

We're starting to see that again focused on the operations efficiencies. We're starting to see that in some of the larger engagements that we have with the largest of customers, but most are still smaller Point Solutions proving this out. Most of our clients are being very cautious. I think We would agree with them, be very cautious in how they use this, how they keep humans in the loop and doing this in a modified way. That's why I say it's early, early days of this.

Speaker 7

Yes. Thanks. A lot of color. That's still great numbers. I'm curious if you could help me maybe summarize all the different drivers of margins that you're looking at Right now, based on the comments of the call, it sounds like the cost optimization, maybe some utilization benefits Given there's lower attrition and maybe slight lower hiring, the IC growth, global delivery Still growing as a percentage, if I heard that right.

Speaker 7

Like are there any other pieces that you would highlight that would be supportive of margin expansion here in the near term?

Speaker 3

That's pretty good. That's pretty good, Robert. If I think about it, I would say, for me, it would be managed services growth, particularly with the global delivery because you See the margins that drives IP as a percentage of revenue, certainly the cost optimization program for SG and A, including that real estate. One of the areas that maybe we didn't talk about is continuous improvement In geographies, you saw Scandinavia improvement, we can see continued improvement there. That's through a combination of SG and A revenue mix, but also growth.

Speaker 3

And then I did mention productivity from generative AI. I think that's that will be a tailwind in the quarters to come As we leverage AI for our own operational efficiencies, including in leveraging it for some of our own IP Development, we've got CGI has over 500,000,000 lines of code in our own ownership. And to the extent that we can turn AI loose on our own intellectual property, Our own software, it's not open to anybody else. We can maybe see some benefits there. So we're looking at that as well.

Speaker 3

So All those are opportunities for us to continue to provide the incremental margin improvement as we continue to grow the business.

Speaker 7

All right. Thanks a lot for taking the questions. Sure.

Operator

Thank you. Next question will be from Daniel Chen at TD Cowen. Please go ahead.

Speaker 12

Hi, good morning. George, you mentioned interest rates may have affected the banking sector. Just wondering if there's anything else to call out there that you think could be affecting it? And then As a follow on, given that the view that interest rates may decline later this year, do you think that would be a driver to growth back in that sector later this

Speaker 3

Yes, I do think it's a bit of wait and see and I think just the uncertainty is what's driving some of this. And so I think when there becomes a little more certainty of not if, but when that occurs, I do think you'll see more loosening of those actions. Like I said, the interest is there and what we're doing is building the pipeline, making sure we're part of the conversations, But I do think you'll see some of that. In general, that's the landscape that I see. It's one, it's really the interest rates, but it's also dealing with the increase, If you will, in regulatory elements, there's a lot of focus short term on making sure that the regulatory is dealt with.

Speaker 3

And I think that's been a main focus, which kind of removes the focus from some of the other areas. But I think you'll see that loosening up. Like I said, I can't call when, but I do think that that's on the horizon. And you're already seeing it stabilize. It's not getting better yet, but it is.

Speaker 12

That's helpful. Thank you. And then you've been pretty optimistic On the M and A opportunities over the last couple of years, anything to call out in the current environment that changes your level of optimism relative to last year?

Speaker 3

No. Well, I would say it's I'm even more optimistic That there are opportunities, of course, we're going to continue to have the focus that we have to make sure that we're bringing The right companies and that can be that catalyst for growth that we talked about and provide the accretion to our shareholders. But I become more and more bullish on the opportunities just given kind of where the market is, where the valuations are And where we are as a company, you see our balance sheet. So but we're going to continue to be disciplined on that approach.

Speaker 12

Great. Thanks, George.

Speaker 7

Yes.

Operator

Thank you. And at this time, Mr. Linder, we have no other questions. Please proceed.

Speaker 1

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 1-eight seventy seven-six seventy four-seven thousand and seventy and using the passcode 827,836. 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.

Operator

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. Enjoy the rest of your day.

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Earnings Conference Call
CGI Q1 2024
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