CGI Group Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
January 29, 2025

Key Takeaways

  • Board succession milestone: Julie Gardin was appointed Executive Chair and founder Serge Godin now serves as co-Chair to focus on transformational acquisitions and large-scale client engagements following today’s AGM.
  • Q1 revenue reached C$3.8 billion, up 5.1% year-over-year (2.7% in constant currency), with standout growth in U.S. Federal (14%), Canada (5.9%), Asia Pacific (5.2%) and U.K./Australia (3.2%).
  • Adjusted EBIT margin expanded to 16.2% (up 40 bps year-over-year), driving diluted EPS of C$1.97 (up 7.7% adjusted) and net earnings margin of 11.6%, as cost optimization and a higher recurring revenue mix offset acquisition dilution.
  • European revenues declined 0.8% in constant currency amid softness in Germany and France; CGI initiated €50 million of cost-realignment actions in Germany, with €8 million incurred in Q1 and another €42 million expected by Q3.
  • CGI agreed to acquire UK-based BJSS (approx. £275 million annual revenue, 2 400 consultants) to strengthen its commercial footprint and accelerate its build-and-buy profitable growth strategy in key sectors.
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Earnings Conference Call
CGI Group Q1 2025
00:00 / 00:00

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Operator

Good morning, ladies and gentlemen, and welcome to CGI's first quarter fiscal 2025 conference call. I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.

Kevin Linder
SVP of Investor Relations at CGI

Thank you, Sylvie, and good morning. With me to discuss CGI's first quarter fiscal 2025 results are François Boulanger, our President and CEO, and Steve Perron, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9:00 A.M. Eastern Time on Wednesday, January 29, 2025. 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 SEDAR+ and EDGAR.

Kevin Linder
SVP of Investor Relations at CGI

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, 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.

Kevin Linder
SVP of Investor Relations at CGI

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. 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.

Kevin Linder
SVP of Investor Relations at CGI

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. We are also hosting our annual general meeting this morning, so we hope you'll join us live via the broadcast at 11:00 A.M. Now I'll turn the call over to François for some introductory remarks. François.

François Boulanger
CEO at CGI

Thank you, Kevin, and good morning, everyone. Today, in line with the long-term succession plan of CGI, Julie Godin was appointed Executive Chair of CGI Board of Directors, effective following today's annual general meeting of shareholders. CGI's founder, Serge Godin, is now the co-chair of the board and will continue to focus on transformational acquisitions and on large-scale engagements with clients.

François Boulanger
CEO at CGI

During our annual general meeting this morning, Serge and Julie will provide further remarks on this key milestone. 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?

Steve Perron
EVP and CFO at CGI

Thank you, François, and good day, everyone. CGI once again delivered strong results in our first quarter of fiscal 2025. Before I begin, I would like to remind everyone about the adjustment we made to our reporting segments starting this quarter. Germany is now its own segment, and our operations in Scandinavia are now combined with our Northwest and Central East Europe segment. In Q1, we delivered CAD 3.8 billion of revenue, up 5.1% year over year, or up 2.7% when excluding the impact of foreign exchange.

Steve Perron
EVP and CFO at CGI

In constant currency, the CGI segments with strongest growth were U.S. Federal at 14%, Canada at 5.9%, Asia-Pacific at 5.2%, and U.K. and Australia at 3.2%. In constant currency, 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.

Steve Perron
EVP and CFO at CGI

From an industry perspective, constant currency revenue growth was led by government at 7.9% and financial services at 5.5%, driven by strong performance in North America. We experienced continued softness in the manufacturing sector, particularly in Europe. IP revenue grew in seven of our eight proximity segments on the strength of continued client interest for our business solutions. IP represented 21.6% of total revenue, down 40 basis points year over year due to recent business acquisitions.

Steve Perron
EVP and CFO at CGI

In Q1, bookings were CAD 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%. When looking at service types, book-to-bill ratios were 107% for managed services and 114% for business and strategic IT consulting and system integration. On a trailing 12-month basis, our book-to-bill ratio was 108%.

Steve Perron
EVP and CFO at CGI

On the same basis, managed services had a book-to-bill ratio of 113%, and SI&C book-to-bill ratio was 101%. Our global backlog reached CAD 29.8 billion, or two times revenue, providing good revenue visibility. Turning to profitability, our results once again demonstrated our ability to manage our operations with discipline. Earnings before income taxes were CAD 592 million for a margin of 15.6%, up 100 basis points year over year.

Steve Perron
EVP and CFO at CGI

Adjusted EBIT in the quarter was CAD 612 million, representing a margin of 16.2%. The favorable impacts generated from last year's cost optimization program were offset by the temporary dilutive impact of recent business acquisitions and lower billable utilization in some regions of continental Europe. Margins were strongest in the following segments: Asia-Pacific at 32.5%, Canada at 24.1%, and UK and Australia at 16.5%.

Steve Perron
EVP and CFO at CGI

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%-26.5%. Net earnings were CAD 439 million for a margin of 11.6%, up 80 basis points year over year. Diluted EPS was CAD 1.92, representing an increase of 15% year over year. Adjusted net earnings were CAD 449 million. This represents a margin of 11.9%, stable year over year.

Steve Perron
EVP and CFO at CGI

On the same basis, diluted EPS was CAD 1.97, an accretion of 7.7% when compared to Q1 last year. This quarter, we initiated targeted actions in Europe, mainly in Germany, to realign our cost structure with current market conditions. As such, we incurred CAD 8 million of costs in Q1, and we expect to incur another CAD 42 million to finalize these actions by Q3.

Steve Perron
EVP and CFO at CGI

DSO was 38 days in the quarter, three days better than last year, contributing to CAD $646 million in our cash from operations, a strong 17.1% of total revenue. Over the last 12 months, CGI has generated close to CAD $2.3 billion, up nearly CAD $200 million compared to the same period last year. In Q1, we used our cash to invest CAD $83 million into our business, invest CAD $30 million for business acquisition, representing the initial payment for the Daugherty acquisition, invest CAD $153 million to buy back our stock, and return CAD $34 million to our shareholders under our recently initiated dividend program.

Steve Perron
EVP and CFO at CGI

We continued to deliver a strong return on invested capital at 16.2%, up 30 basis points, demonstrating our proficiency and discipline on deployment of capital. 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.

Steve Perron
EVP and CFO at CGI

François will provide more commentary on the merger in a few minutes. 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. And CGI's Board of Directors also approved a quarterly cash dividend of CAD 0.15 per share.

Steve Perron
EVP and CFO at CGI

This dividend is payable on March 21, 2025, to shareholders of record as of the close of business on February 14, 2025. 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. Now, I will turn the call over to François to further discuss the insights on the quarter, as well as the outlook for our business and markets. François?

François Boulanger
CEO at CGI

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 Profitable Growth Strategy. 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.

François Boulanger
CEO at CGI

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. Cash from operations reached nearly $650 million, or 17.1% of revenue, for an improvement of 110 basis points as a result of sustained quality delivery and business excellence. In the quarter, we also continue to see rising levels of engagement with our stakeholders. More than 87% of our 91,000 consultants and professionals are now CGI shareholders, up from 86% this time last year.

François Boulanger
CEO at CGI

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. 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. First-quarter bookings continue to be led by wins within our two largest industry sectors of government and financial services.

François Boulanger
CEO at CGI

In the quarter, we saw an uptick in financial services as some clients reinitiated investments that were previously paused. Bookings in this sector were 123% of revenue, an increase of more than 40% compared to the same quarter last year. In the government sector, bookings increased more than 40% on a sequential basis, resulting in a Q1 book-to-bill of 124%. This increase was a result of a stronger client focus on driving monetization and operational efficiency.

François Boulanger
CEO at CGI

We expect this trend to continue as governments around the world adapt their IT priorities in line with evolving mission and policy priorities. Representative Client Awards in the quarter included SkyAlyne, 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.

François Boulanger
CEO at CGI

Under the 25-year agreement, CGI will deliver a comprehensive suite of innovative secure services, including cybersecurity, business consulting, and cloud computing. In Wales, the Hywel Dda University Health Board initiated a 10-year, GBP 75 million strategic partnership with CGI to drive the digital transformation of healthcare to improve patient outcomes. CGI's consultants will partner with the board to streamline operations, modernize systems and processes, and deliver innovative solutions such as AI integration.

François Boulanger
CEO at CGI

The Swedish Tax Agency extended its partnership with CGI to deliver advanced eID and electronic signature services. The agreement reinforces CGI's 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, 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.

François Boulanger
CEO at CGI

We continue to see some clients exercising caution in their discretionary spending, primarily in Europe and the macro sector. However, client interest remains strong across every industry to explore with CGI the opportunities for driving monetization and operational efficiency to managed services and IP. CGI remains well-positioned as the partner of choice to help clients achieve the tangible and trusted business outcomes they seek.

François Boulanger
CEO at CGI

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. These reports and rankings cover our services related to AI, data modernization, cloud, cybersecurity, and business consulting. CGI also achieved new partnership levels in Q1 with several emerging alliances, including Snowflake and Databricks.

François Boulanger
CEO at CGI

Since the start of the fiscal year, we also progressed our strategic priority to pursue accretive acquisitions. In December, we expanded our positioning with Fortune 500 clients in the U.S. by merging with Daugherty, a professional services firm specializing in AI, IT consulting, and business advisory services. Through the merger, our footprint increased in metros such as St. Louis, Atlanta, Minneapolis, and Chicago. I would like to warmly welcome the 1,100 new consultants who joined CGI from Daugherty.

François Boulanger
CEO at CGI

This morning, we announced a newly signed acquisition agreement, which will close in the coming weeks pending regulatory approvals. BJSS is one of the largest independent IT and software engineering consultancies in the U.K. This acquisition will accelerate our U.K.-wide expansion strategy to deepen our presence in key commercial industries such as retail, financial services, and energy and utilities.

François Boulanger
CEO at CGI

Upon 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. Through our Buy strategy, we will continue to prioritize investment and aim at building critical mass and strategic metro markets in 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.

François Boulanger
CEO at CGI

We remain in dialogue with a number of firms, both metro market and transformational opportunities. As always, we will be disciplined to ensure that mergers will be accretive to each of our stakeholders. 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. Client interest remains high for the value proposition CGI can deliver through our end-to-end offerings.

François Boulanger
CEO at CGI

This positioning is validated by CGI's pipeline of opportunities, which is up 20% compared to this time last year. In terms of client buying patterns, we continue to see some diversification by geographic region, which aligns well with CGI's greatest strengths, 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.

François Boulanger
CEO at CGI

With this in mind, I will provide commentary on the demand environment in our North American and European operations. Starting in North America, across commercial industries, clients are sustaining their focus to drive operational resilience and innovation to capitalize on emerging growth opportunities. Given these priorities, our pipeline remains strong overall, with a notable uptick for our managed services offerings. 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.

François Boulanger
CEO at CGI

Government sector clients in North America are balancing tight budgets with the need for IT modernization and improving citizen services. Cybersecurity and cloud migration also are critical areas of investment as agencies work to enhance operational efficiency and mitigate risk in an uncertain environment. In the government sector, our pipeline for managed services opportunities remains high and continues to rise.

François Boulanger
CEO at CGI

CGI's government ERP solutions continue to be in high demand, with pipelines rising compared to this time last year. Turning now to Europe, the macroeconomic landscape continues to be defined by slower economic growth and geopolitical uncertainty. 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.

François Boulanger
CEO at CGI

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. In the government sector, our pipeline is high and rising as clients are focused on modernization as well as e-governance platforms and green IT solutions.

François Boulanger
CEO at CGI

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. 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 efficiencies and accelerate transformation, notably through our IP and managed services.

François Boulanger
CEO at CGI

Among managed services offerings gaining momentum right now is that of Global Capability Centers, or GCCs. CGI has 20 years of experience with GCC models, particularly for clients in banking, retail, and communications. Our Global Delivery Centers of Excellence enable full-scale application development and operation with a proven track record of success. Our value proposition focuses on GCCs as strategic extensions of the client's organization to drive efficiency, resilience, scalability, and growth in a fast-changing business landscape.

François Boulanger
CEO at CGI

Naturally, across all industries, we remain deeply engaged with clients on their AI and GenAI strategies and implementation. Over the past quarter, we've continued to see clients moving from investigation to implementation to drive efficiency, process optimization, and legacy modernization. As previously shared, we are integrating AI and GenAI technologies into our engagements, and our pipeline of AI opportunities continues to grow, particularly for responsible AI advisory services, data and integration, and platform modernization.

François Boulanger
CEO at CGI

Booking in Q1 that integrated AI technologies included a global healthcare and insurance company selected CGI to support their enterprise intelligent automation platform and help build the foundation for their agentic AI strategy. The City of Edinburgh 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.

François Boulanger
CEO at CGI

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. We continue to progress on our AI investments in line with our two-year plan. We are on track with this plan to strengthen our expertise, offerings, delivery, and positioning.

François Boulanger
CEO at CGI

Our investment plan includes continued initiatives such as advancing our training and tooling for developers and consultants, integrating AI and GenAI into our portfolio of IP solutions, enhancing our managed services and consulting offerings and methodologies. With our clients, we are innovating to drive new business value through industry-specific use cases, the establishment of AI factories, improvement of user experience, and to generate operational efficiencies. In closing, we are off to a strong start for the year and reiterate our confidence in our fiscal 2025 plan.

François Boulanger
CEO at CGI

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, 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. Thank you for your continuing interest and support. Let's go to the question, Kevin.

Kevin Linder
SVP of Investor Relations at CGI

Thank you, François. Sylvie, we can now poll for questions.

Operator

Thank you. Ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to withdraw from the question process, please press star followed by two. And if on a speakerphone, you will need to lift the handset up first. Your first question will be from Paul Treiber at RBC Capital Markets.

Paul Treiber
Paul Treiber
Director and Research Analyst at RBC Capital Markets

Thanks very much and good morning. It was nice to see the acquisition announced this morning. Just hoping that you could speak to your M&A pipeline and 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?

François Boulanger
CEO at CGI

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 U.K. A long time we didn't do one in the U.K. So, you know, the U.K. team is ready for this integration. You know, the one that we did before was in the U.S.

François Boulanger
CEO at CGI

So the fact, and you know, we have a solid operation in all these countries, you know, each of these countries have the capabilities of doing these integrations. So we don't see any problem on that side. 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.

Paul Treiber
Paul Treiber
Director and Research Analyst at RBC Capital Markets

And then looking at your business by the various regions, you know, Germany, you called out softness there. Was it softer than usual this quarter, or is Germany being a drag on growth for the last several quarters? And is the mix of revenue different in Germany? Is it more short-term SI&C than other regions?

François Boulanger
CEO at CGI

No, not necessarily a different mix, but for sure there's strong in the macro side. And so, as you know, macro, especially in Europe, has more difficulties. So that's why we see some short-term pressure on some of the discretionary spending there. But I would say, and you heard in the last quarter, we did sign a big managed services contract with a large manufacturer in Germany.

François Boulanger
CEO at CGI

So they're still very, you know, they're listening a lot 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 SI&C, we see that they are reducing the spending or be cautious to see what will happen in the next quarters.

Paul Treiber
Paul Treiber
Director and Research Analyst at RBC Capital Markets

Okay, thanks for taking the questions.

François Boulanger
CEO at CGI

Thanks, Paul.

Operator

Thank you. Next question will be from Jérôme Dubreuil at Desjardins. Please go ahead.

Jérôme Dubreuil
Jérôme Dubreuil
VP and Research Analyst of Telecommunications, Media and Technology at Desjardins

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 a better appreciation of the benefits that M&A is bringing? Or, you know, I know you like to signal stability, but is it just the multiples that have changed, or there's a bit of a tweak in terms of the strategy there?

François Boulanger
CEO at CGI

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 where, you know, the pressure on the market, on the SI&C, for example, I think, you know, is putting pressure on some of these targets to think more about perhaps selling the business.

François Boulanger
CEO at CGI

And we see less private equity competition than we were seeing in the past. So even some of them are thinking about, you know, even selling 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.

Jérôme Dubreuil
Jérôme Dubreuil
VP and Research Analyst of Telecommunications, Media and Technology at Desjardins

Thank you. That's clear. Another one, François, you've been in the role since October. Are there maybe other tweaks in terms of strategy that you're adopting? You're talking about new partnerships with some of the software providers. Am I sensing that the company is maybe a bit of a faster follower for new tech or business as usual?

François Boulanger
CEO at CGI

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 so, you know, we want to be sure that people understand and companies and clients and future clients understand our capabilities. And so that's why we want to be sure 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. We were always there to apply new technology.

Jérôme Dubreuil
Jérôme Dubreuil
VP and Research Analyst of Telecommunications, Media and Technology at Desjardins

Merci beaucoup. Merci,

Operator

thank you. Next question will be from Surinder Thind at Jefferies. Please go ahead.

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies

Thank you. Can you perhaps talk a little bit about the lumpiness in the bookings that we're seeing, especially within SI&C? It just seems to be a bit more lumpy than it has been historically. And just what trends you're seeing underneath that?

François Boulanger
CEO at CGI

Yeah, well, you know, actually, SI&C booking did increase versus last quarter. So last quarter, we were below 100%, and we are higher than 100% this quarter on the SI&C side. So, to be honest, we are seeing an uptick. But at the same time, you know, like I was saying a bit, the pressure that we see, an example on the macro side in Europe, you know, we're seeing some pressure still in the, especially in the consulting side. So that's why, you know, you'll still perhaps see some lumpiness on that side.

François Boulanger
CEO at CGI

But at least this quarter, we saw an uptick on the bookings on the SI&C side. So, and the other thing also on the federal side or the US 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.

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies

Just to clarify the comment there, is the messaging that if we were to exclude Germany, there's an overall improvement in the demand environment for discretionary spend or not?

François Boulanger
CEO at CGI

I would say, yeah, like I was saying, macro is under a bit of pressure, but I'll give you the other side on the financial sector. On the banking, we are seeing an uptick on the SI&C side. You know, with the interest rate coming down, you know, the banks, for example, are coming back and doing some investment on the SI&C. They don't have any choice.

François Boulanger
CEO at CGI

You know, they delayed some of these investments in the past quarters when interest rates were going up. 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.

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies

That's helpful. And then on the commentary on the GCCs, the Global Capability Centers, 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 mixed shift there? Any color there would be helpful as well.

François Boulanger
CEO at CGI

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 to see how we can help them reduce their costs. And GCCs is one of the areas on how to resolve, to reduce the cost.

François Boulanger
CEO at CGI

So we have a lot of clients asking us to help them in creating their own GCCs or creating, you know, ourselves a GCC that can be transferred back to the clients. Or even a lot, you know, of these captive already created by clients where they're asking help. And so, you know, our Indian colleagues and operations will help clients directly in India to help them achieve their own objective on their India captives.

Surinder Thind
Surinder Thind
Equity Research Analyst at Jefferies

Thank you.

Operator

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

Divya Goyal
Divya Goyal
Director of Equity Research, Technology, Software and Services at Scotiabank

Good morning, everyone. François, I wanted to get a little more color on the acquisition that's announced. So as per the press release, there is CGI already has a significant footprint in the UK. Now, with this acquisition, the footprint expands. I'm just trying to understand what is the company's broader growth plan across the U.K. and European region, given the German restructuring, the U.K. acquisition. So if you could provide some color on the growth broadly across that region. Thank you.

François Boulanger
CEO at CGI

Yeah, yeah, thanks. You know, the BJSS is mostly a company in the U.K. So they have very, very limited business outside the U.K. And they're strong on the commercial side. And if you remember in the past, we always said, you know, we want to acquire in the U.K. And we were targeting companies that would be more heavier on the commercial side. And that was the idea with this one.

François Boulanger
CEO at CGI

For the UK, to a certain point, it is a game changer because it's, first of all, it's increasing the UK by, I would say, on the headcount, perhaps 30%-35% more people in the UK. Like I'm saying, in the commercial area. The UK is nowhere. I'm saying we had some difficulties in Germany. In the UK, it's actually going well.

François Boulanger
CEO at CGI

We see some growth. We continue to see future growth in the UK. So it was perfect timing. But also, you know, like I'm always saying, it needs two to dance. We were able to convince BJSS to merge with us. I think that will be great for the UK organization.

Divya Goyal
Divya Goyal
Director of Equity Research, Technology, Software and Services at Scotiabank

That's great. Are you also planning to grow across Europe? Or right now, you are okay, like the way the segments are structured across Europe?

François Boulanger
CEO at CGI

No, 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, looking in countries like Germany. Germany is a country that we want to continue to grow. And, you know, these pressures, our market pressure actually is putting some opportunities 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.

Divya Goyal
Divya Goyal
Director of Equity Research, Technology, Software and Services at Scotiabank

That's great. I'll just ask one more question here. So the U.S. federal segment grew pretty well this quarter. And you did mention that it was partly driven by the growth in the transformational projects. However, with obviously DOGE and the new administration, I know a lot is in flux. But what is your take on some of these new bookings and some of these new opportunities that you are seeing evolving across that specific business segment? And that's all for me. Thank you.

François Boulanger
CEO at CGI

Yeah. Well, again, on the federal side, you know, with DOGE, for sure, if they want to achieve their targets and priorities, they will need IT, you know, to be capable of reducing costs, you know, and costs most on the US federal is people, you know, they will need to bring automation, AI, and new systems to be capable of reducing some of these costs. So we're seeing still this as an opportunity to grow and helping them to achieve their objectives.

Divya Goyal
Divya Goyal
Director of Equity Research, Technology, Software and Services at Scotiabank

Thank you.

Operator

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

Robert Young
Robert Young
Managing Director at Canaccord Genuity

Hi, good morning. Maybe a double-pronged AI question. 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 first part would be trying to get a better sense of what your efforts are around Agentic AI and what the opportunities are.

Robert Young
Robert Young
Managing Director at Canaccord Genuity

And then the second part would be just over the last couple of days, all this new information that suggests that it's going to get cheaper to run AI models. Maybe you can just give us some initial thoughts on, you know, the impact on the IT services business in general and CGI more specifically.

François Boulanger
CEO at CGI

Yeah. Okay. 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, you know, what's happening. But we are seeing that as good news. I think any new initiatives to reduce the cost of AI will always be good news for the end clients. And we are one of the end clients, plus also we're helping clients to implement AI.

François Boulanger
CEO at CGI

So, you know, if the technology is cheaper and becoming cheaper, I think that's a good news for everybody, including on our side. You know, on agentic AI, you know, for sure, we continue our discussion with our alliances partner like Salesforce and Google and UiPath. But we already started to implement some of it, even internally in some of our managed services solutions, right?

François Boulanger
CEO at CGI

We are, you know, managing a large mandate for clients. And we are realizing that some of the agentic AI can help us on specific processes. So that's something that we continue to investigate and starting even to do some implementation. We are seeing some benefit on that side.

Robert Young
Robert Young
Managing Director at Canaccord Genuity

Do you get the sense that the bottleneck for deployment is cost, or is it finding the right solutions? Does cost move like the revenue related to AI for CGI higher, or is it more about finding the right applications and use cases?

François Boulanger
CEO at CGI

Like I'm saying, you know, we are always trying to have industry-specific use cases and not just implementing AI for AI. You sum up the experience or contract that we signed in the past when we were saying, example, 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 and cost saving, it's not necessarily, it's not a showstopper for clients.

François Boulanger
CEO at CGI

So, for sure, it needs to be applied in. It needs to be a relevant application for them, but and actually bringing some cost reduction. And now that if the tool or if the tooling will reduce in cost in the future, that's just other benefits for the end clients.

Robert Young
Robert Young
Managing Director at Canaccord Genuity

Okay. And then a second question. Last quarter, I asked you a little bit about your strategic footing as it relates to infrastructure and whether that would be an impact on, you know, M&A targets. And so I just want to maybe broaden that up a little bit. Maybe you just talk about, you know, infrastructure. I think you said it was 10% of the business thereabouts. Is that something that CGI is still working down?

Robert Young
Robert Young
Managing Director at Canaccord Genuity

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? And then I'll pass the line.

François Boulanger
CEO at CGI

Yeah. 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. But we continue to have data centers, and we will continue to have data centers because, you know, first of all, we have our IP, and we are running our IPs also in our own data centers. So that's the first thing. And second, you know, in these managed services contract that we're signing, you know, we are signing sometimes full managed services.

François Boulanger
CEO at CGI

So, not just the applications, but also the infrastructure. And that we will continue to do in the future. And so that's not, you know, something we want to stop. You know, we're really an end-to-end, you know, services company. And so our strategy is to continue to sell end-to-end, including infrastructure business.

Robert Young
Robert Young
Managing Director at Canaccord Genuity

Okay. Thanks. I'll pass the line.

Operator

Thank you. Next question will be from Thanos Moschopoulos at BMO Capital Markets. Please go ahead.

Thanos Moschopoulos
Thanos Moschopoulos
Managing Director of Equity Research at BMO Capital Markets

Hi. Regarding the UK acquisition, are there some financial metrics you can share, or should we best wait for next quarter's MD&A?

François Boulanger
CEO at CGI

I think we'll be waiting for next quarter MD&A because, again, we, you know, it's still not closed yet. We will close it in the next couple of weeks, hopefully, if we have all the authorization. Just perhaps what I can say is that, you know, on the revenue side, we are talking, like, I would say, Steve,

Steve Perron
EVP and CFO at CGI

GBP 275 million. Okay. And that's a manual business. Manual business.

Thanos Moschopoulos
Thanos Moschopoulos
Managing Director of Equity Research at BMO Capital Markets

Yeah. Great. And just to clarify, is it very, very heavily weighted to SI&C, or is there a good size to managed services component in there as well?

François Boulanger
CEO at CGI

I would say it's perhaps a bit more SI&C than managed services. Okay. And again, the idea of, you know, one thing, you know, they have great client relationship. 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, we will be able to sell a lot more offshoring to these clients. And that's really the idea. So yes, there are more SI&C today, but we think that we will be able to sell a lot more managed services now to these clients.

Thanos Moschopoulos
Thanos Moschopoulos
Managing Director of Equity Research at BMO Capital Markets

Great. And then finally, just how should we think about the margin trajectory, just given inputs and takes, you know, obviously with the recent tuck-in acquisitions, should we assume kind of margins being kind of flat year over year, maybe down a little because you're going to be integrating, or what trajectory would you assume?

François Boulanger
CEO at CGI

Yeah, I think, you know, with the margin, with the acquisition, for sure, as you know, you know, we need to integrate these companies. So that will put some bit of pressure on the margin. On the other side, you know, we are doing some actions to improve the margin in some places like Germany, where, you know, 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.

Thanos Moschopoulos
Thanos Moschopoulos
Managing Director of Equity Research at BMO Capital Markets

Great. I'll pass the line. Thank you.

Operator

Thank you. Next question will be from Stephanie Price at CIBC. Please go ahead.

Stephanie Price
Stephanie Price
Equity Research Analyst of Software and Services at CIBC

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 Aeyon, and how should we think about those U.S. federal margins going forward?

François Boulanger
CEO at CGI

Yeah, so that's it. You have it. It's really because of Aeyon acquisition. You see a lot of growth, but some pressure on the margin. And it's because of that, this acquisition that we need to integrate. You know, we signed at the end of September. You know, 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. So, but, you know, the expectation is that you'll see some improvement quarter over quarter on their EBIT margin.

Stephanie Price
Stephanie Price
Equity Research Analyst of Software and Services at CIBC

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?

François Boulanger
CEO at CGI

Well, I think in Europe, as you know, I would say two things. On the manufacturing, we see some concern, or at least they're questioning where, what's the future, especially example with tariffs and that the U.S. are talking about, will that have a major impact or not on some of these clients? So that's really what I'm hearing from clients.

François Boulanger
CEO at CGI

And I would say also on the government side, you know, some, you know, example, we'll have election in Germany, in France, you know, 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. So that's really what we're hearing in Europe. But on the other side, like I'm saying, always a lot of discussion, talking about how we can help them on the cost saving. And so very a lot of discussion on managed services still in Europe.

Stephanie Price
Stephanie Price
Equity Research Analyst of Software and Services at CIBC

Great. Thank you very much. Thank you.

Operator

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

Richard Tse
Richard Tse
Managing Director and Technology Analyst at National Bank Financial

Yes, thank you. So you've obviously, I think, picked up the pace of acquisitions. Just wondering if you can 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?

François Boulanger
CEO at CGI

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 in the business. So we have, what, $1.7-$1.9 billion of cash from free cash flow. And so, and the dividend is, right, it's very low, 30, what, $34 million per month, per quarter, per quarter. So we still have a lot of dry powder to do acquisition.

François Boulanger
CEO at CGI

Again, also we have the balance sheet and their leverage ratio is very low. We still have a lot of capacity for larger acquisitions. No, we don't have necessarily a number. You know, the only cap I would say to you is that, you know, when we're saying that we're at 3.3 times leverage, that's really at the top. We're very far from that, Steve. We're at what?

Steve Perron
EVP and CFO at CGI

Look, from a net basis, we are at 0.47. From a gross debt to EBITDA basis, we're about at 1.2.

François Boulanger
CEO at CGI

We have a lot of space for other ones, including that transformational acquisition.

Richard Tse
Richard Tse
Managing Director and Technology Analyst at National Bank Financial

Okay. Then, you know, I appreciate your comments on elevating the brand. Obviously, you probably have 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 the kind of amount of incremental growth you're targeting to achieve from these new incremental initiatives that you've put in place since taking over that role?

François Boulanger
CEO at CGI

No, I don't have necessarily a target. You know, these kind of, you know, when we're talking branding and all that, it has a long-term objective. It's really, you know, we didn't necessarily put a number related to these actions. It's really to improve the branding, especially in places where we're still, you know, perhaps the best kept secret. It's still in the U.S. I think we still need to do more on that. That's with the marketing group and with our leader there, Suzanne Vaudrin. We will continue to do some good work on that side.

Richard Tse
Richard Tse
Managing Director and Technology Analyst at National Bank Financial

Okay, and then just the last one for me, you know, some of your competitors and talking to price competition in the market, you know, is that something that you may be seeing? And if so, is it sort of a temporary thing given the backdrop with respect to macro or SI&C, or is it something a bit more structural? That's it for me. Thanks.

François Boulanger
CEO at CGI

I would think it's not structural. You know, you know, most of our, especially in the managed services, we don't see a pressure there. You know, managed services, you know, if we can show to them the business case and the outcomes for them, you know, that's making sense and they'll pay for the value.

François Boulanger
CEO at CGI

I think on the, 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 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.

François Boulanger
CEO at CGI

Sylvie, we have time for one more question, please.

Operator

Certainly. Our last question will be from Jason Kupferberg at Bank of America. Please go ahead.

Jason Kupferberg
Jason Kupferberg
Senior Equity Research Analyst at Bank of America

Hi, good morning, François and Steve. This is Tyler Dupont on for Jason. Thanks for taking the questions here. I'll try to be fast knowing that that's the last one. I wanted to ask about initial demand trends and spending implications for 2025, but particularly from a bookings context.

Jason Kupferberg
Jason Kupferberg
Senior Equity Research Analyst at Bank of America

On an LTM basis, it looks like book-to-bill definitely appears healthy, you know, 1.08 this quarter. But this is the second quarter of year-on-year declines. Obviously, they're very modest, but still, it's the second quarter declines in this 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?

François Boulanger
CEO at CGI

Yeah, you're right down. Last one month, the booking went down, but some of it is timing. And, you know, again, we had some discussion with some clients that, you know, were not able to close for the quarter. And, you know, we won't close a deal just to close a deal to have bookings at the end of the quarter. So, you know, we have some still good discussion on some of these large contracts, and, you know, you'll see some closing of them in the future.

François Boulanger
CEO at CGI

You know, so we still see a lot of momentum on the managed services. So I don't see necessarily a problem there. And you're right that, you know, on the SI&C, some lumpiness, but, you know, this quarter, we did see an uptick on the SI&C. We finished with, I think it's 114% book-to-bill on the SI&C side. So versus last quarter, we were under one on the SI&C side. So we are seeing still some momentum on that side, and we'll see in the future, but we're still comfortable with bookings and going forward for the future.

Jason Kupferberg
Jason Kupferberg
Senior Equity Research Analyst at Bank of America

That's helpful. It's great to see the SI&C going above one. Also, just as a follow-on, just want to ask about cash flow expectations as we look through the year. During the quarter, you know, 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.

Jason Kupferberg
Jason Kupferberg
Senior Equity Research Analyst at Bank of America

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, more than 15% on a full-year basis? Or I know there's timing and everything there, but just love to get your thoughts.

Steve Perron
EVP and CFO at CGI

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.

Jason Kupferberg
Jason Kupferberg
Senior Equity Research Analyst at Bank of America

Great. Appreciate it.

Steve Perron
EVP and CFO at CGI

Thank you.

Operator

Please proceed.

François Boulanger
CEO at CGI

Okay. Thank you. 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. 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.

Steve Perron
EVP and CFO at CGI

Thank you.

Operator

Thank you, sir. Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.

Analysts
    • Jason Kupferberg
      Senior Equity Research Analyst at Bank of America
    • Thanos Moschopoulos
      Managing Director of Equity Research at BMO Capital Markets
    • Richard Tse
      Managing Director and Technology Analyst at National Bank Financial
    • Steve Perron
      EVP and CFO at CGI
    • François Boulanger
      CEO at CGI
    • Paul Treiber
      Director and Research Analyst at RBC Capital Markets
    • Robert Young
      Managing Director at Canaccord Genuity
    • Surinder Thind
      Equity Research Analyst at Jefferies
    • Kevin Linder
      SVP of Investor Relations at CGI
    • Stephanie Price
      Equity Research Analyst of Software and Services at CIBC
    • Jérôme Dubreuil
      VP and Research Analyst of Telecommunications, Media and Technology at Desjardins
    • Divya Goyal
      Director of Equity Research, Technology, Software and Services at Scotiabank
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