CGI Inc.

Good morning, ladies and gentlemen, and welcome to the CGI first quarter fiscal 2020 conference call. I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Investor and Public Relations. Please go ahead, Mr. Gorber.

Thank you, Maud, and good morning. With me to discuss CGI's first quarter fiscal 2020 results are George Schindler, our President and CEO, and François Boulanger, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9 a.m. Eastern Time on Wednesday, January 29, 2020. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q1MDNA financial statements and accompanying notes, all of which are filed with both CEDAR and EDGAR and are available for download on our website, along with supplemental slides. 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, except as required by applicable laws. This complete safe harbor statement is available in both our MD&A and press release, as well as on CGI.com. We encourage our investors to read it in its entirety and to refer to the risks and uncertainty section of our MD&A for a description of the risks that could affect the company. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As before, we'll also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian and less otherwise noted. We are also hosting our AGM this morning, so we hope you will join us live or via the broadcast at 11 a.m. I'll turn it over to Francois now to review our Q1 financials, and then George will comment on our operational highlights and strategic outlook. Francois? Thank you, Loren, and good morning, everyone.

I'm pleased to share our results for Q1 fiscal 2020. Revenue was $3.05 billion, an increase of $90.8 million, or 3.1% compared with last year. On a constant currency basis, revenue grew 4.8%, of which approximately 1.2% was organic. Year-over-year IP-related revenue grew by $38 million and was 21% of total revenue. Bookings were $2.7 billion for a book-to-bill of 90%, impacted by the general election in the UK and seasonality in U.S. federal. Bookings across continental Europe were up sequentially, driven by managed services demand, including IP. Also, our pipeline across North America continues to grow, notably due to managed services opportunities. On a trailing 12-month basis, booking remained above 100% of revenue, totaling $12.4 billion. The backlog at the end of December stood at $22.3 billion, or 1.8 times annual revenue, despite the negative currency impact of approximately $900 million year over year. Beginning in Q1, we adopted IFRS 16, This accounting standard relates to the recognition of lease agreements onto the balance sheet. This change lowers our cost of sales and increases our net finance costs, resulting in a non-material impact to net earnings. I will comment on these variations, including the impact on the cash flow statement and our capital structure. Further details are included in the MD&A. Adjusted EBIT increased to $474.1 million, up $35 million, or 8% from last year. EBIT margin was up 70 basis points to 15.5%, driven by revenue growth across several geographies, efficiency gains in our global delivery centers, the initial benefits of optimizing our infrastructure operation, and a favorable $9.7 million impact from IFRS 16. our effective tax rate for a quarter was 26.7% compared to 25.9% last year. When excluding the impact on non-deductible restructuring expenses, our effective tax rate was 25.1% within the expected range of 24.5% to 26.5%. As announced last November, we are investing up to $40 million to optimize and restructure our Swedish infrastructure operations, to exit Brazil, and to refocus Portugal as a near-shore delivery center. During the quarter, we incurred $28.2 million of related expenses, net of tax. We also expensed $16.5 million in Q1 related to the acquisitions and integrations of Acando and FISIS. When including these specific items, net earnings were $290 million in Q1, or a margin of 9.5%. Earnings per share on a GAAP basis were $1.06 per diluted share, compared with $1.11 last year. However, when excluding these specific items, net earnings in Q1 improved year-over-year to $335 million, or 11% of revenue up 40 basis points. Earnings per share on the same basis were $1.23 compared with $1.12 last year. This represents an improvement of 9.8% despite a currency headwind of over $0.02. We generated $465 million in cash during the quarter, or 15.2% of revenue. This represents an improvement of $74 million compared with $392 million generated in Q1 last year. The year-over-year increase in cash includes $39 million related to the adoption of IFRS 16. Over the last 12 months, we have generated $1.7 billion or $6.20 in cash per share, a significant increase compared with $1.5 billion or $5.15 from a year ago. We ended the quarter with a DSO of 49 days, down from 50 days last quarter, and 54 days last year, largely due to the evolving business mix. During the quarter, we allocated cash across several strategic priorities, $67 million back into our business, $156 million in acquisition, mainly sizes, which goes on December 18th. $17 million repurchasing CGI shares, and we repaid $182 million of long-term debt. Buying back CGI stock has been an accretive and flexible way to return capital to shareholders. Under the current program, we have invested $675 million repurchasing 7 million shares at a weighted average price of $97.13. This represents a return of over 16% based on yesterday's closing share price. As such, our Board of Directors approved the extension of the program until February 2021, allowing us to purchase up to 20.1 million shares over the next 12 months. At the end of December, net debt stood at $2.8 billion, representing a net debt-to-capitalization ratio of 27.7%, up from 19.1% last year, largely due to IFRS 16. Excluding this impact, the net debt-to-capitalization ratio was 20.9%, slightly higher than last year, due to increased investments in metro market mergers. With our revolving credit facility and cash on hand, we have $1.6 billion in readily available liquidity and access to more as needed to continue pursuing our build and buy strategy. Now I'll turn the call over to George.

Thank you, Francois, and good morning, everyone. I am pleased with our team's performance in the first quarter as we continue to successfully execute our build and buy profitable growth strategies. This quarter's results continue to reflect the shift in client buying behavior towards outcome-based engagement, as evidenced by a 70 basis point increase in managed services revenue as compared to last year. And our larger managed services offering is resonating. In fact, the managed IT and business process services pipeline is up 30% year over year. However, many of our commercial clients are employing a more deliberate approach to their IT buying decisions, as they shift their internal organizational focus to prioritize both agility and operational excellence. This means that our clients are currently acting most rapidly on smaller, more focused outcome-based solutions. For example, in the quarter, we rewarded a five-year engagement with a new U.S. client in the financial services sector to deliver selective managed application services, security, and infrastructures. This is designed to immediately address and improve the client's IT quality and security with larger future scope now under discussion. Technology remains core to our client's business, and we continue to be well-positioned for these near-term spending trends with both new and existing clients. The investments we have made in our IT and business consulting capabilities and in IP allow us to offer services and solutions to help clients realize incremental progress on their digital initiatives. For example, in the quarter, we were awarded new work with one of Europe's leading manufacturers to provide agile consulting and enterprise architecture, enabling their digital workforce initiatives over a 36-month timeframe. Another example is a new engagement with a large U.S. utility to implement our Pragma workflow solution to digitize their enterprise workforce management over the next two years, generating immediate efficiency. We also see these types of engagements as an opportunity to build even deeper relationships and drive future growth in larger managed services deals, including for our managed IP. As planned, this evolving revenue mix, combined with our investments and operational excellence, are driving earnings growth. This is most pronounced in our global delivery centers of excellence, which are in high demand by our clients and are yielding increasing margins due to our investments in talent, tooling, and methodology. Turning now to the year-over-year regional highlights of the first quarter, I'll start in North America. In the U.S. commercial and state government segment, bookings were 107% of revenue on the strength of new managed services contracts, which accounted for 50% of bookings in Q1. Bookings were particularly strong in the financial services and utility sectors, both over 130% booked to build. Organic revenue growth was 2% driven by scope expansions across some of our largest commercial clients, and we continue to experience an improving state and local government market receptive to our IP offering. Even margin remains stable at 15.1%. In our U.S. federal operations, revenue grew by 11.5% as previous quarters managed service bookings and task order wins ramped to their full revenue run rate. Even margin was 13.3%, slightly lower year-over-year due to lower volumes in transaction-based BPS contracts. And bookings were 60% of revenue. With the federal fiscal year budget appropriations finalized at the end of December, we expect an active procurement cycle in advance of the U.S. election. In Canada, despite bookings in the quarter of 60% of revenue, Canada's backlog remains very strong at four times annual revenue. Our pipeline of opportunities continues to be robust, with a notable increase in the IP pipeline, which is up 40% over last quarter. Revenue declined, in part due to lower infrastructure volumes year over year, while EBIT margin was strong at 22.8%, as we are now realizing the positive impact of previously announced actions to optimize our infrastructure operation. Turning now to our European operation. In Scandinavia, revenue grew 25% driven by the addition of a condo. This is net of the planned runoff of lower margin projects, which will total approximately 10% of acquired revenue and is at the high end of the range previously communicated. Even margin was 7.8%, which we expect to continue improving throughout the year as further benefits from the Accondo integration and the restructuring of the infrastructure business in Sweden are each fully realized. And bookings were strong at 130% of revenue, reflecting the improved ability of the merged operation to address client demand. In Finland, Poland, and the Baltics, revenue was stable at the year-ago period, with continued strength in financial services, particularly in the insurance space. Even margin expanded 90 basis points to 14.9% as a result of an improving business mix. And bookings were 108% of revenue with increased demand for IP, which was 144% of the bill. In Western and Southern Europe, revenue was essentially stable across the region with organic growth in France and overall strength in government, but impacted by the strategic actions taken in Brazil, and Portugal announced last quarter. Event margin was 14.9%, up 80 basis points, despite one less buildable day in France, which is also reflective of an improving business mix. Bookings were 104% of revenue, with strong demand for managed IT services, which represented over half of the total bookings in the quarter. And last week, we completed the merger with METI, a France-based IT solutions and consultancy firm specialized in the retail sector. I want to take this opportunity to warmly welcome our 300 new members from ETI. Together, we will bring innovation through combined IT and consulting services to retail sector clients around the world. In the UK and Australia, revenue grew 1% with IT services growth in the financial services sector. Our continued market leadership in space, defense, and intelligence was further solidified at the end of the quarter with the close of the CISIS merger. EBIT margin was 14.7%, and book-to-bill was 69% of revenue, impacted by a slowdown in both commercial and government awards decisions, largely due to uncertainties created by the UK general election. With the Brexit decision now made, we expect a very active period of government procurement to address the backlog of mission priorities. Likewise, we expect to see more normalized purchasing activity in the commercial sectors going forward. In Central and Eastern Europe, revenue growth was 9%, of which approximately 3% was organic, and even margin increased 10.5%, an improvement of 190 basis points. Bookings were 103% of revenue on the strength of scope expansions from large transportation and retail and consumer services clients in both Germany and the Netherlands. And in Asia Pacific, revenue growth was 10%. EBIT margin was strong again at 28%, driven in part by increased utilization and operational excellence. Our Asia Pacific delivery centers are leading the way in realizing the return on CGI's innovation investments made in talent, tooling, and methodology. In summary, we are off to a strong start and continue to position our talent and services to meet current and future client demand. We continue to see clear interest for managed services and intellectual property solutions in the pipeline. Given the longer decision cycles for these larger long-term opportunities, we are also well positioned to meet client demand for shorter-term outcome-based engagement. These engagements will drive growth, albeit at a different pace in the near term. And the benefits from recent mergers, as well as our restructuring initiatives, will deliver earnings and margin improvement moving forward. We will also continue accelerating the pace of metro market-based mergers, with three already closed in the fiscal year and a healthy number of prospects in later stages of the M&A funnel. And, of course, we will continue to consider all opportunities to be an active consolidator in the industry through transformational markets. We remain focused on executing our strategic aspiration of doubling over the next five to seven years for continued building by. Thank you for your interest and support.

Let's go to the questions now, Lauren. Just a reminder that there will be a replay of the call available either via our website or by dialing 1-800-408-3053 and using the passcode 614-9639 until March 2nd. There will also be a podcast of the call available for download within a few hours. Follow-up questions, as usual, can be directed to me at 514-841-3355. Maud, if we could pull for questions, please.

So do me. Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Stephen Lee from Raymond James. Please go ahead.

Thank you. George, a couple of questions on Canada. Your margin is pushing 23%. Was there any large IP in that number, or do you view that as more sustainable going forward?

Yeah, no, actually it didn't have as much IP in that number, really. Some of that benefit was from some of those initiatives previously. I had mentioned in earlier quarters around our infrastructure, right-sizing that, and obviously that runs down at a lower margin, which increases our margin elsewhere. Some of that uptick really was from those global delivery centers of excellence. We have a number of them here in Canada, and so those are in demand, and utilization of those go up, and obviously those are profitable, both beneficial for our clients but also profitable for for CGI, that IP uptick is notable in Canada, and it's notable also in the fact that it's with those financial services companies. So, all in all, Canada, again, that margin is strong. And repeatable? I believe it's, you know, is that the absolute run rate? Probably not, but I believe we'll continue to have strong margins above that 20% mark.

Okay, thanks. And, George, the IP pipeline, I think you said, was up 40%. Which areas are these?

Well, in Canada, specifically, it's in financial services, but IP is up across the company in a number of areas, including utilities, including in government, and also some of our newer IPs, both in utilities with open grid, which we announced, but also emerging utilities, in the space industry. So IP is up across the board, which we projected and planned for given the market that we're moving into.

Okay, thank you. And just one more question for me. The organic growth was slower this quarter. Would you expect it to snap back, or should we expect a couple of quarters of 1%, 2% growth?

Yeah, I think that in the near term, inorganic growth will outpace organic growth. So that pace of inorganic growth is – is going stronger, but in the near term, yeah, there's going to be some softness in the organic growth, but we have some tailwinds on our side there. Thank you.

Thank you.

Thank you. The following question is from . Please go ahead.

Hi, good morning. George, could you maybe summarize the changes you're seeing now in the pipeline and demand environment versus three months ago? It sounds like you're saying customers are being maybe a bit more thoughtful in terms of the size of contract awards. Just make sure I got that correct. And has there been any change in terms of the typical duration of contracts, or has that been consistent?

Yeah, that's a very good question. I tried to highlight that in the opening remarks. Yeah, the larger deals are still out there, but they're being broken into smaller deals first. And so it's almost a phased approach. And so we see more of a selective scope and more of three- to five-year deals versus the seven- to ten-year deals of full scope. Just to highlight that, though, and I highlighted one in my remarks, that example that we gave, that's a five-year deal, but it's $65 million. So they're still of size, but they're not of the couple hundred million that those seven- to ten-year deals are. would yield at a fuller scope.

Okay. And a lot of your commentary was focused on the managed services pipeline. If we think about the USINC pipeline, are we still seeing a fair bit of interest in terms of digital initiatives, or is that slowing down across a number of geographies in favor of managed services?

Yeah, the digital initiatives are still out there. What's very interesting, though, is we see the digital initiatives, some of those are coming under the managed services pipeline. opportunities. And it really is kind of both ends of the spectrum. Investing, as we've been talking about, investing a little bit more right now in the operational efficiencies so that they free up some of the funding for the digital initiatives, but certainly slowing the pace of the spending on the digital initiatives. But as I mentioned a number of times, we're only We see our clients are only about 10% what they say are actually completed with their digital initiatives and getting the returns. And so that's causing them to take a more deliberate approach, but it's not changing overall their go-forward landscape of IT is core to my growth in the future and digital is core to enabling that.

Great. Thanks. And then finally, in Western and Southern Europe, you mentioned France had organic growth, but there was obviously the impact from the restructuring in Brazil and Portugal. Might you be able to quantify the revenue impact in the quarter from the restructuring?

Do you have that number? We had one last day, and we had the – Yeah, you're talking on the revenue side.

On the revenue side. On the revenue side for Western and Southern Europe, yeah.

Yeah, it's 3 to 4 million.

Okay. Great. Well, that's fine. Thank you. Thanks, fellas.

Thank you. Our following question is from Nair Yagi from Desjardins. Please go ahead.

Thanks for taking my question. I want to go back to maybe just a question on the pace of the organic revenue growth. On the last call, George, you said that you expected a pause in acceleration in revenue growth organically. But what, in your view, was the reason for that? the growth to come down from 4 to, let's say, 1.5 in one quarter. It's a sizable change in the pace of growth, and I'm trying to figure out, you know, how is it going to get back into the 3-4 type range that we saw in the last couple of quarters. And also, the second question I had is, when you look at, The metric that I look at in terms of book-to-bill, which is the last 12 months book-to-bill, it's been declining since the quarter of September 2018. We're getting close to hitting the one point here. And management has always also said that this is a metric that you guys care more for because it's a barometer for the health of the business that is coming into the pipeline. So what is being done to improve that or should we expect that number to turn into lower than one in the next couple of quarters?

Yeah, no, thanks for the questions, Mayor. So, maybe I'll start with the second one first on the bookings and what you've seen over the last several quarters. You've seen an uptick in SINC, and SINC comes in at a lower bookings level than managed services. You've seen that. I've highlighted that. If you looked at our revenue, it kind of followed that trend. Our bookings followed that trend. In SINC, anything over 100% is healthy. As you move to managed services, you drive a higher book-to-bill and a lot of other good qualities associated with that mix of business. We want a good mix of business. We are a little bit overweight on SINC. We're moving more to our traditional managed services. which is where you'll see that pipeline come up. However, and the reason I talked about the pause and the acceleration of the growth is they don't move at the exact perfect time. So, the decision-making on SINC is faster. Decision-making on managed services takes a little bit more deliberate, as I highlighted, and we're filling that gap through a number of different tailwinds, right? So, the We're filling that gap, and now moving into the growth part of the question. We're filling that gap. You see through the recent mergers picking up the pace. We're excited about the opportunity to spread the IP and the media, the space, even the government ERP and the retail distribution side, spread that through the broader CGI channel. So that will be a nice tailwind for both the inorganic growth that comes on with those, but also organic growth, as IP gets spread across the company. The spending bill approved in the U.S., government place in U.K., that's a tailwind for growth because, in fact, government demand goes up in the climate that we're going into, a lot more spending on domestic and social programs. And just to remind you, and I'm sure you're aware of this, but one-third of our total revenue does come from that government. That kind of comes into a counter-cyclical situation governments structurally move a little slower. And, of course, when you don't have a government in place like we had in the U.K. or don't have a spending bill in the U.S., that kind of impacts that. That had the biggest impact on our book-to-bill. So the book-to-bill, even in the quarter, would have been 100% without the downdraft of those two units alone. And we know why that happened in the short term. We're playing into the more selective managed services opportunities, which is why I highlighted that. That will help fill the gap before they make some of those larger decisions. But what you will see is inorganic growth outpace organic growth in the near term, but will drive some of that organic growth in the future. So, all in all, it's not unexpected. It's what I talked about last quarter. But we see the bookings following the pipeline, particularly given the tailwinds that I mentioned. I think bookings and growth in the intermediate term return to where we want them to be. It's a different spending pattern. This is why I also tout our end-to-end services and then also why we talk about the portfolio that we have across our 10 industries because every industry doesn't buy at the same pace. So that really gives us the confidence moving forward.

Just to follow up, in terms of the organic revenue growth tailwinds that you talked about, I know you're not into short-term guidance or even medium-term guidance, but How long should we wait to see those tailwinds start to help the organic revenue growth? And my second, just a follow-up question on the buyback. When you start to see the return on invested capital or return on equity come down, and I know this is the first quarter that we see this happening, but it's the first time we see it happening since 2017. Does that change how you view your stock buyback strategy?

So, on your first question, you're correct. We don't give guides. Maybe, Francois, you can talk a little bit about the impact IFRS 16 also has.

Yeah. So, for sure, the IFRS 16 had a small impact on the return on equity and ROIC. So, yeah.

Even if it went down, the majority is related to that. That said, you know, we still think, you know, that our – at least when you're comparing with some of our competitors, that, you know, it's still a very good value, the share price of CGI.

And like I indicated, you know, we did some share buyback, a lot of share buyback last year, close to 34%, 35% of our NCIG value. And it was with a return of close to 16% on the share price.

So we still think that it's a good investment.

Okay, thank you. Thank you.

Thank you. Our following question is from Richard C. from National Bank Financial. Please go ahead.

Hi, Richard. Hi, how are you? Just wanted to sort of go further on the change in the nature of some of these deals on the smaller side, is that because your clients don't necessarily understand the technology and it's used as a way of mitigating risk or is there some other reason behind that?

Yeah, I think some of it is given all of the change that our clients are already going through. Many of our clients are doing M&As themselves in order to chase some of their growth that they need. for their organizations, which obviously is an intermediate opportunity for us, but a different opportunity causes them to look internally. That was something I opened your remarks on. I think it's more of that. They're going through a lot of change. One of the biggest insights that we receive from our voice as a client, which I have outlined here, is one of the barriers, the biggest barrier, of not receiving the benefits from digitization efforts, it's not the technology, it's the people, it's the culture. And so as you take kind of a look at that, it causes them to be, as I mentioned, a little bit more deliberate, especially given all the change. So they actually get less overall savings to the client, but they enable themselves to kind of maybe digest the change in a different way. That's the discussions that we're having, and that's why I also highlighted the discussion doesn't end there. right? The discussion still says, I want to do the bigger, longer deal. I've got to get my organization under control first. It still gives CGI increased utilization and drives higher margins as we see the shift, and you're seeing that. I mentioned it gives us deeper relationships and proof points to gain those future larger scope, but they're not going wholesale over to that. I think that's maybe what's pronounced in this slowing economy versus dropping off the edge economy that we're in right now.

Okay, thanks. And with respect to infrastructure, I was sort of reading through the MD&A, and I noticed, you know, a bunch of sort of runoffs. You even commented about it earlier. No doubt that's probably a bit of a drag on the business as well. So when it comes to those runoffs, where do you think we are right now in terms of when that will land? I know we're kind of near the end of that process.

Yeah, it's an interesting one because it continues to evolve, and it's still a very important part of our business. It's just an evolving part of our business. We're actually increasing the use of infrastructure as it relates to software as a service for our own IP and our own IT private cloud, if you will. So we're increasing, actually, investments as we move towards that. We're doing more and more infrastructure advisory work. maybe getting back to your opening question about clients really taking a look at where they do and don't want to use public cloud, private cloud, and what their posture is when it comes to cybersecurity and data privacy, particularly in Europe. So our infrastructure advisory is growing, but then, of course, there's softness in the other parts of the infrastructure business. And so as you kind of structurally have to address those changes, we're doing that on the fly, but you see some of the impacts of that. So that's what's going on in the infrastructure business. And I say that we're through that, so we're through the first round. Now we're in a second round as that shifts again. There will probably be one more round. But just to remind you, I don't want to misspeak, Francois, percentage of current business that's – That's infrastructure today. Yeah, it's still, you know, 12%, 13% of revenue. But again, it's still down from the 15% to 20% it was not that long ago. I don't think it'll go below 10%.

It's still an important part of our business. Okay, and just one last one for me with respect to your comments on inorganic growth. Should we read that to mean it'll outpace because it's organic and slower or are you going to expect to pick up the pace of acquisition? Probably a little both.

We're picking up the pace of acquisition for sure. So that number should go up to fill some of the gap. But as we discussed on all the growth, it'll take a little bit more time to get that organic growth back as this shift plays its way through. There will still be organic growth, I believe, but it won't be certainly accelerating even from here.

Okay, great. Thank you.

Thank you. Our following question is from Robert Young from Tenacore Genuity. Please go ahead.

Hi. Maybe if I just pick up on the last line of questions in there. There's any change that you see in the metro market strategy? First, would a pickup on M&A imply targeting larger acquisitions? And then maybe a second piece to that would be around the valuation landscape. If the consulting side of the business is a little bit weaker, are you seeing pressure that is driving lower valuations?

Yeah, no, it's a good question. Thanks, Robert. The metro market strategy is still what we believe we can pick the pace up on and bring some more of those into the business. Pipeline is up. As far as the pressure on the pricing, I haven't really seen that, and maybe part of that is because we're very disciplined in what we're looking for. You can see that two of the last three had intellectual property. You're going to see more of that moving forward. So when you're talking about IP, you don't necessarily see the pressure that I talk about on the systems integration and consulting side. But over time, we probably would see some of that, but we're going to be very disciplined even as we accelerate the pace. So you won't see any lack of discipline there as we do that. But given the growing pipeline and given the opportunities out there in general, we believe it's a good time to continue to consolidate. On the larger deals, it does not – that increase in the inorganic growth does not require any of the transformational deals. We continue to look at those opportunities, however, on the larger deals. The overall pressure probably does, over time, create some price pressures and opportunities for us on those large deals.

Okay, great. And then... Maybe just talk a bit more about the pipeline. You said it was up 30%. Maybe you could talk about is that a sudden jump here in the quarter or is that something you've seen over time? And if you can break that into cohorts, potentially you said that there are some longer deals, 7 to 10 years, smaller deals, 5 to 7, and then there's the shorter term. Is there any way to break that sort of growth in the pipeline up into those sort of cohorts to –

Yeah, so the pipeline increase I'm talking about is really year-over-year, and it's most pronounced in those managed IT deals. So that's really what I'm referencing there. The pipeline for the SINC is relatively flat, but the IP and the managed services deals are up. By the nature of those deals, given that they're longer deals, tend to be larger deals. Even those that aren't full scope are still $50 to $100 million deals. So that's what drives that pipeline growth. And, of course, the full deals are in the hundreds of millions. That pipeline is most pronounced, actually, in government and retail right now.

And because it seems like there's a little bit of a change happening – in the way your customers are looking at these deals, does that imply a booking gap? Some of these longer deals obviously can have a longer sales cycle, and so maybe you could talk about what you expect from bookings over maybe the next year. Is there any way to talk about a potential gap?

Yeah, I don't necessarily see a gap like I told you. As Francois actually pointed out, If you take U.K. and federal out, we're at that 100%, even in the border. And so we still believe we can get the bookings, and demand should be picking up with some of those big uncertainties behind us in U.K. and U.S. federal, which tends to be very lumpy anyway. So that's why I highlighted we're playing into the market, and we're going after some of that select-a-scope. even as we present the full offering, which come with those very large skills. So that's kind of what I see happening. I'm not necessarily seeing any big gap there. Okay. Okay, great. Thanks. Yep.

Thank you. Our following question is from Ramsey Elassal from Barclays. Please go ahead.

Hey, guys. This is Ben Boudichon for Ramsey. I wanted to circle back on the M&A expectation for the year, and understanding you don't give guidance. In the last quarter, you sort of talked about the longer-term directories being, you know, like 5% to 6% organic and 5% to 6% inorganic. So with that in mind, would it be reasonable to expect that, you know, for this year, the revenue contribution from acquisitions might be above that range or at the high end of the range, or is that perhaps asking too much?

Well, yeah, when I talked about the 5% to 6% organic and inorganic, that's certainly the target to have that balanced growth, which is why we put out the aspiration to double in the five to seven years. So that's really where that comes from. That's the target. I think we would reach that target faster on the inorganic than the organic, given everything else we just discussed here. But that remains the target of where we're headed for. One thing to add.

Okay. And then in the U.S., just given you've been through a number of, you know, presidential elections, can you just give us an idea of the timing of, like, when you would expect revenues to kind of pick back up as, you know, once the spending decisions are made and contracts are kind of signed or renegotiated? What can we expect to see in the next couple of quarters, kind of the pacing of improvement there?

Yeah. Well, actually, revenues were extremely strong in U.S. federal based on prior bookings. And, of course, that will continue. What I was mentioning is the bookings were impacted by not having a federal budget. So what we see typically is there will be a lot of spending in the run-up to the election, and that's what I talked about. That spending is get things in place because when there is a presidential transition, there's different priorities and everything kind of stalls until the new, if there is a presidential transition, I should say. then there is a – until the new leadership gets in place. So what you usually see is run-up, then a bit of a pause, and I'm talking about the bookings now, and then run-up again as the new priorities get put in place. The run-up that happens now, and I'm talking about bookings, will allow us to continue to have the revenue growth and stability straight through that pause period. That's what we see typically in the election cycle, which is why I highlighted it.

That is very helpful. And if I could sneak one more, can you give us some color on maybe just the expectations for the IFRS 16 impact on margin over the course of the year?

Mostly the same EBIT when we said $9.7 million for the quarter. So it's 0.3 on the EBIT margin. So you can expect for the EBIT margin to continue like that, so $9.7 to $10 million per quarter. As for the net earnings, like I was saying, it's marginal. Okay, great. Because, again, we have more interest expense, so it's really in the geography of the T&L where it's shifting.

Okay, that's helpful. Thanks so much for taking my questions. Sure.

Thank you. Our following question is from Paul Trevor from RBC Capital Markets. Please go ahead.

Thanks very much, and good morning. I just wanted or hoping that you could elaborate on your comment about seeing more demand for global delivery centers. There's an article out a couple weeks ago indicating that CGI plans to hire another 15,000 people in India. Can you just comment, you know, in terms of, That strategy, I think previously in the past you called it a nearshore strategy. Are you seeing more demand for offshore, in particular in terms of India, as opposed to what you typically called in the past nearshore?

So it's a great question, and a lot of this goes back to the mix of business and the evolving mix of business. As the business evolves from more SINC, and I've been highlighting that, we've been talking about it, in fact, A number of you asked me, maybe even you yourself, Paul, asked me, you know, when are you going to see the shift and what does that mean? I said, well, you know, I'm not rooting for the shift because we're playing into this market, but when that shift happens, it will be very good for us. So as this shift plays out, and of course it's not happening as fast as any of us would like to see, but it is happening, as that shift plays out, the managed services deals allow us to leverage the global delivery centers in a different way than shorter-term SINC projects allow us to leverage them. We still leverage them, but not in the same way. That's why they're in demand. And, of course, that's exacerbated by the fact that in most of the major metro markets, obviously, there's still a talent shortage for IT. particularly for our clients, in getting access to IT. That's why they come to firms like CGI to have a broader footprint to be able to access that talent. So that's what we're playing into. So a lot of this is interrelated. We talk about the bookings. We talk about the revenue. We talk about the – and certainly we'll get to this when we talk about the margin because, as I've always talked about, the reason we wanted to get back to that 30% SINC and 70% managed services recurring revenue, that comes at the optimal margin mix for us. And, of course, we're now shifting towards that by just barely. We're a little over 50%, whereas a year ago we were reversed at under 50% of revenue.

Does that help? Yeah, that's very helpful. I mean, just going a little bit further, so to clarify, I mean, you're not selling it on an hourly rate if it is managed services. You're delivering against a larger contract. And so in terms of like your offshore resources, I mean, what have you seen in terms of profitability or in terms of performance in terms of delivering projects on time and on budget versus other regions?

Yeah, well, that's why I highlighted our Asia-Pacific delivery centers. It really is a combination of investments we've made in talent, tooling, and methodologies because, of course, we're moving to agile methodologies ourselves with all of our own IT and the way we deliver these projects, leveraging the tooling. So that all drives the higher margins. And, of course, demand services deals, because we're not selling them on an hourly basis, drives up utilization, which I highlighted. And you've seen that play out. You see it specifically in our Asia-Pacific delivery centers, but as I mentioned, some of that strength in Canada is the same way in the onshore delivery centers. Same thing happens in the U.S.

and in other regions around the globe. So, out everywhere and will continue to play out as you drive more managed services.

That's why I always say that optimal mix drives us a higher utilization and lower cost of sales, which ultimately comes with a higher margin. Better price point for our clients, savings for our clients, but margin growth for us, which is why that specific offering is resonating with our clients in the current environment.

Okay, and then one last one for me. You mentioned earlier on the space market as an opportunity. Now that the SISIS acquisition is closed, perhaps you can comment more directly on what you see, like what were your capabilities in the space market prior to that acquisition, and what do you see as the long-term growth opportunity and profitability of that segment?

Yeah, so there's actually not as much, I can say, about the current space work, other than to say it is of size. So with CISIS now, we have approximately 1,000 people in the European space environment. We're not as big in North America. But most of that right now is for government, and therefore it comes with its own confidentiality because it's – It's that kind of work. Having said that, we think the opportunity is, as a lot of those technologies move over into more of the commercial world, which they are, particularly from a data perspective, our expertise, not directly but certainly indirectly, can be leveraged to expand. And, of course, you know that the U.S., from a government perspective, is also investing in this. And, of course, we're already leveraging that from government. But we do see that that will bleed over into commercial in a bigger way.

We're not just talking about, you know, the Elon Musk. We're talking in a more ubiquitous way. Thank you.

Thank you. Our following question is from Owen Long from Veritas Investment Research. Please go ahead.

Thanks, and good morning. George, you gave some color earlier about how SINC, the growth of that, drives the little lower booked bills in the past few quarters. With managed service contracts also getting shorter, is that also a factor in lower booked bills?

Yeah, that plays into why it's not accelerating as fast as we see the pipeline. So that's that. You'll see that transition over from pipeline to to the bookings maybe a little bit slower because of that. But you will see a transition over, and then we'll see some of those larger deals over time as we get the proof points, as our clients get through the change that they're going through, and we should see those accelerate in the future. But, again, in this specific quarter, the biggest downdraft really were the U.K. and U.S. federal.

Right, so it's just lower orders from there, particularly as opposed to long-term. And I guess just one on for Francois, maybe just in general, and I for S16, with it impacting EBIT and I guess EBIT margins, when you're evaluating your business segments and their performance, how is that factored into how you evaluate their performance?

Well, for sure we are taking that into account in the growth or the growth between the business units. So we're restating what is we looking at versus their budget like if they would have IFRS 16. And again, also they need to understand the impact when they're negotiating a new lease in the future.

Okay, that makes sense. And then just maybe one more for Francois. I find the segment disclosure in the MD&A there's now an elimination line in the revenue, in the geographic revenue by segment note. Is that just mainly from the offshoring, like elimination?

Yeah, offshoring and, you know, some of the activities at corporate, you know, some corporate support that's done by the business unit, like you're saying, like in India.

So that's what we're eliminating. Okay. So I think they're sort of seeing each other. Okay. Great. Okay, thanks.

I'll pass the mic. Thanks, Howard. I guess we have time for one more question.

Thank you. Our last question is from Deepak Koshal from Stiefel GMP. Please go ahead.

Oh, hey, guys. Good morning. Thanks for squeezing me in. I know it's AGM day, so I'll try and be quick. Yeah, thank you. Just a quick follow-up to Rob's question earlier on the gap. When we're thinking about these larger managed service deals, are you expecting a steady state of closing these starting now, or do they start kind of 6, 12, 24 months out from where we are today?

Yeah, I think it's continuous. It's a phased approach. We've been having these discussions already for 12 months plus, and so we're seeing those resonate more as the economy plays out the way we expect it to. So it's not like we're starting now. We've already been doing that Actually, that's why I highlighted this quarter that given the changes going through, they're being even more deliberate. But we would expect to see those happening really continue moving forward.

Okay. And when you talked about kind of the half scope, three to five-year pieces starting but waiting on the six to ten-year portion of that, I mean, what kind of gives you confidence that they'll follow on with a six to ten-year piece of that? Are they giving you visibility? into the full scope of the 10-year project, but only contracting half of it? Are things changing so fast that they're still not sure what's going to happen in the outbound? How does that change your probability of follow-up?

Yeah, so it's a little of all the above, but we do get the visibility. We are discussing, in many cases, we'll do, actually, a proof of concept on the full scope, and they'll be explicit of, we're going to start with this smaller scope, so We've already done some of the legwork on that, and we're gaining the proof points. And, of course, that's part of my confidence is if you look at our delivery track record over the years, you look at the client satisfaction scores and the loyalty scores, once we are in delivering for the client, that gives us the confidence that the bigger scope will be there. And quite frankly, this started with some of the SINC work, which I have been talking about. You build a relationship through the systems integration consulting, get the opportunity to have the bigger discussion. You move some of that to managed services, and over time you move the larger scope.

Okay. Well, thanks again for taking my questions, guys. Okay. Thank you. Have a good AGM.

Thank you. Thanks, Deepak. And thank you, everyone, for joining us. Hopefully we'll see you at the AGM, and we'll see you back here for next quarter, April 29th. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.