CGI Inc.

Good morning, ladies and gentlemen. Welcome to the CGI first quarter fiscal 2021 conference call. I would now like to turn the meeting over to Mr. Mayor Yagi, Vice President Investor Relations. Please go ahead, Mr. Yagi.

Thank you, Sharon, and good morning. With me to discuss CGI's first quarter fiscal 2021 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 27, 2021. 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 SIDAR and EDGAR. 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 the complete safe harbor statement is available in both our mdna and press release as well as on cgi.com we encourage our investors to 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. 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 AGM this morning. So we hope you will join us live via the broadcast at 11 a.m. I'll turn it over now to Francois to review our Q1 financials, and then George will comment on our operational highlights and strategic outlook. Francois?

Thank you, Mayer, and good morning, everyone. I'm happy to share with you the results of our first quarter 2021. Our results in the quarter demonstrate the ongoing resilience of CGI's business model and the relevance of the services we provide for our clients despite continued pandemic-related shutdowns. Overall, we are pleased with our first quarter results as we turned the corner on revenue while at the same time saw strong growth in our bookings, profitability, and cash generation. We delivered revenue of $3 billion, down 1.2% when compared to last year, representing a constant currency decline of 3.6% year-over-year. This is an improvement over last quarter, where we saw a 4.5% decrease year-on-year. As we mentioned last quarter, we continue to expect a gradual improvement in the months and quarters ahead and reiterate our expectation of returning to revenue growth in the second half of fiscal 2021. Total bookings were up 23.5% year-over-year, representing $3.4 billion in new contracts for a book-to-bill of 113% of revenue and lifting our 12 months book-to-bill to 103%. New business was 28% of bookings, an increase from the previous quarter's 22%. IP bookings in the quarter were up 58% year-over-year. IP was 21% of revenue in the quarter, the same as last year, despite the continued pressure on lower transaction volumes in both payroll and travel-related services due to the pandemic. Our global backlog remains healthy at $22.8 billion, or 1.9 times revenue, the vast majority of which is comprised of long-term managed services engagements. Adjusted EBIT in Q1 was up 4.6% from the year-ago period at $496 million, while EBIT margins increased to 16.4%, up 90 basis points compared to Q1 last year. The year-over-year increase was mainly the result of savings from our restructuring plan, lower discretionary expenses, and the benefits of synergies achieved through the integration of prior years' acquisitions. As highlighted last quarter, our restructuring costs, including actions taken in response to the pandemic, total $155 million and were completed during our fiscal year ended September 30, 2020. As such, I'm pleased to report that we did not incur any additional restructuring costs this quarter and do not foresee additional pandemic-related actions at this time. Our effective tax rate in Q1 was 25.9%. This compares with 25.1% last year when excluding integration and restructuring expenses. This is within our expected range for the year. Net earnings were $343 million for a margin of 11.4%, and diluted earnings per share were $1.32, representing an increase of 24.5% year-over-year. Excluding integration and restructuring costs, net earnings were $347 million for a margin of 11.5%, and diluted earnings per share were $1.33, compared to $1.23 in the same quarter last year, for an accretion of 8.1%. We continue to generate strong cash flow. In the quarter, cash provided by operating activities was $597 million, or 19.8% of revenue, representing an increase of $132 million compared with Q1 last year. This improvement was driven by a DSO of 44 days compared to 47 days last quarter. For the last 12 months, cash provided by operating activities was $2.1 billion, or 17% of revenue. In Q1, we continue allocating capital with discipline. We invested $56 million back into our business, largely in IP and managed services engagements. After a pause in the last two quarters, we resumed share buybacks in Q1, investing $436 million for the purchase and cancellation of 4.7 million shares of CGI. And in line with our build and buy strategy, we acquired the HMB Professional Services Division, enabling us to deepen our presence within the Columbus, Ohio metro market. Net debt to capitalization decreased due to a higher level of cash generation from 24% in Q4 to 23% at the end of December. Consistent with previous years, we reviewed our capital return program to formulate the most effective capital deployment strategy to maximize shareholder returns. Buying back CGI stock has been an accretive and flexible way to return capital to shareholders. As such, our Board of Directors approved yesterday the extension of the program until February 2022, allowing us to purchase up to 19.2 million shares over the next 12 months. Looking ahead, our cash allocation priority remains the same, which is to focus our investments on growing our business. With cash of $1.7 billion on hand and a $1.5 billion revolver that remains fully accessible, We now have $3.2 billion readily available to pursue this profitable growth strategy. Now we'll turn the call over to George to provide more details on the operations and on the outlook for our business and markets. George?

Thank you, Francois, and good morning, everyone. We started fiscal year 2021 in a strong position as a result of our team's trusted client partnerships, quality project delivery, and operational excellence. In the quarter, we delivered on our plan to preserve and expand shareholder value with continued margin growth and EPS accretion. Our notable cash generation in the quarter reflects CGI's resilience and increases our capacity to invest in accelerating our build and buy profitable growth strategy. The rising client demand that began to materialize last quarter continued to upward trend during Q1. The overall uptick in demand was evidenced in our Q1 bookings, which were again over $3 billion, up 23.5% year-over-year. Our diversified mix of services continued to be a key contributor in achieving our strong financial results. Notably, systems integration and consulting services bookings increased in the quarter, indicating an emerging rebound for project-related digitization services and driving increases in hiring, and therefore, the related near-term revenue outlook. These services are largely focused on helping clients quickly reposition to meet evolving customer demand, such as implementing cloud-native IT supply chain components for one of Europe's largest payment providers, modernizing a Canadian retailer's e-commerce platform while reducing related costs by over 60%, and leading an ERP system migration to a public cloud model for a large North American telecommunications client. In addition, over half of our revenue in the quarter was for managed services and IP engagements, including SaaS-based solutions. Overall, existing clients continued to turn to CGI as their partner of choice as we achieved a renewal rate of over 95%, driven by managed services bookings to help enable business agility and digital transformations for clients while simultaneously delivering cost savings. Consistent with last quarter, we not only sustained our incumbency with these enterprise clients, we were also awarded new scope, growing our market share. These awards included new digitization initiatives, for example, the CAE, a Canadian client for nearly 30 years, we recently expanded our strategic partnership to include new services such as third-party ERP cloud migration. And with a U.S. financial services company, we renewed a 25-year partnership based on CGI's Collections360 IP along with added services to transition into CGI's private cloud and integrate with their hybrid cloud environment. Now, I'll review the Q1 regional performance highlights, starting in North America. Across our U.S. segments, demand remains strong in both the commercial and government industries, with the combined U.S. bookings growth in the quarter of 14% compared to last year. We renewed and expanded several IP-related agreements in the government sector, including with the U.S. Midwestern state for modernizing their financial ERP system on CGI's Advantage platform. and in U.S. Federal with the Department of Homeland Security, where we want to position on a new frame agreement to provide our federal financial accounting expertise. Revenue and adjusted EBIT were mostly stable across our U.S. segments, with some impact from moving a higher proportion of projects to our global delivery model, as well as lower volumes in transaction-based IP resulting from pandemic shutdowns. As more citizens receive vaccinations in the months to come, we expect these transaction-based IP volumes to gradually improve, along with the overall demand for our end-to-end services. In Canada, we see signs of demand recovering, with a particularly strong pipeline increase of 36% in the financial sector and a hiring increase of 14%, with expertise in digital technologies, both on a year-over-year basis. Bookings were 92% despite some client decisions pushing out of the quarter. EBIT margin percentage increased in the quarter to 23%, while revenue was primarily impacted by expanding client use of global delivery. Moving now to the UK and Australia, bookings were strong at 120% book-to-bill as the team continued to win new awards, particularly in the government sector. We see demand in government digitization centered around Agile, DevOps, hybrid cloud, and CGI Smart Cities IP and the associated managed services. Margin continued to expand, reflecting an improving services mix while revenue was relatively stable. And now, moving on to mainland Europe. Across Western and Southern Europe, bookings were strong in the quarter at 129% book-to-bill, and further supported by a strengthening pipeline for the government, manufacturing, and utility sectors, up 45% collectively. In retail and consumer services, one of the most impacted sectors by the pandemic, we are seeing positive signs for demand as clients refocus on rapid digital transformation. CGI is positioned as a market leader in this sector with our end-to-end retail suite of IP solutions, which incorporates Retail360, and solutions from the recently acquired MECI. We saw a positive improvement in revenue and EBIT on a sequential basis, although the pandemic and subsequent economic impacts continue to affect some clients, and consequently, year-over-year comparables. In Central and Eastern Europe, revenue, margin, and bookings all increased year-over-year due to a rebound in demand for digital initiatives, particularly in cloud, automation, and modernization projects. Going forward, we see growing opportunities for IP in this region, building on recent wins in payments and pension administration. From an industry perspective, demand is also beginning to return in the manufacturing sector and continues to be strong in communications and government. The pipeline in these sectors increased by more than 50% compared to last year. In our Northern Europe segments, bookings for the quarter were strong in both the Scandinavia and Finland, Poland, and Baltic segments. at 131% and 126% book-to-bill, respectively. EBIT improved in both segments compared to last year, reflecting operational excellence initiatives despite continued revenue impacts due to the pandemic. We see demand gradually increasing in the retail, manufacturing, and government sectors in the areas of cloud, cybersecurity, and managed services. In Asia Pacific, both revenue and margin improved year over year. Our balanced onshore, nearshore, and offshore model continues to generate demand globally as clients seek to increase their digitization and scaled agile initiatives through a balanced delivery approach. In fact, hiring on a quarterly sequential basis is up in this region by 40%, now reaching pre-pandemic levels. The strong bookings in the quarter and positive sequential growth trends underscore our confidence in returning to growth in the second half of the fiscal year. Looking ahead, given positive trends for IT services, we expect demand will only intensify across most industries. In fact, in some of the industries most impacted by the pandemic, we see increases in sequential pipeline growth, notably in manufacturing and retail and consumer services. Demand has remained high for the government, financial services, and utility sectors, all of which had year-over-year increases in bookings and strong pipelines. CGI is well positioned to help our clients modernize and digitize. We will continue to make investments in line with our cash allocation priorities to drive profitable growth through both build and buy. This includes investments in our people, investments in the innovation of our services, and investments in acquisitions. As a leading professional services firm, we believe attracting and retaining talented people is the most important investment we make. Our ownership culture is a key differentiator in retaining the best consultants and experts in the industry. Today, 86% of our employees are owners. Therefore, we continue to prioritize our ownership programs as well as investments in training, our consulting skills, industry domains, and new technologies. During this challenging time, we are also proud to provide industry-leading health and well-being programs to all employees around the world as we continue to prioritize their health and safety. Innovation in our services spans our end-to-end portfolio, where we are prioritizing investments in high-demand areas to help modernize clients' technology supply chains, such as cloud transformation, machine learning, low- and no-code platforms, and cybersecurity. Our plans include investing in our existing IP business solutions to maintain and advance our leadership position in areas such as trade, payments, wealth, collections, and government ERP, as well as new solutions, for example, in telehealth and energy transition. We are also reinvigorating our third-party partnerships with the ecosystem of technology providers and platform companies. Importantly, We continue to invest in longer-term, larger managed services opportunities and the business engineering and consulting experts needed to secure these engagements. We are also pursuing the buy side of our profitable growth strategy with a growing number of active discussions in the pipeline. As Francois mentioned, in the quarter we acquired the Professional Services Division of HMB, which deepens our work with commercial utilities and state government clients in the U.S. Midwest. I would like to warmly welcome the 165 new members from HMB. We continue to see industry consolidation providing additional opportunities for metro market and transformational acquisitions. We have the operational strength and financial capacity to move quickly with discipline on the right opportunities. As always, our investments are designed to return value to all three of our stakeholders, our clients, employees, and to you, our shareholders. In line with our core values, we also consider how our investments benefit the communities where we live and work. For example, as a signatory to the UN Global Compact and to formalize our long-standing environmental stewardship efforts around the world, we recently announced our global target to meet net zero carbon emissions by 2030. We are proud to be one of the few firms with the scale, reach, capabilities, and commitment to be our client's global partner of choice. delivering with insights our clients can act on. Our strategic aspiration remains to double the size of the company over the next five to seven years. Thank you for your interest and support. Let's go to the questions now, Mayor.

Thank you, George. Thank you, George. Just a reminder that a replay of the call will be available either via our website or by dialing 1-855-859-2056. and using the passcode 7189191. 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 514-415-3651. Sharon, we are ready to take some questions. Thank you.

If you would like to ask a question at this time, please press the star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. First question comes from Thanos Mosopoulos with BMO Capital.

Hi, good morning. George, it sounds like customer spending priorities were initially focused on cost-cutting in the initial months of the pandemic. And from your commentary, it seems like there's more of a focus now on digital. Would you agree with that? And if that's the case, what does that mean for the revenue mix? Does that mean that we might see SINC kind of rebound more strongly relative to outsourcing in the coming months?

Yeah, I think that's a yes to your first question. We are seeing a bit of a shift to digitization as most of our clients kind of adapted to the pandemic. And, of course, as their customers more quickly adapted and got used to digital, I think that only accelerated this need for digital. And so that is something we're seeing. Right now we've seen our mix stabilize. right at that 55% in managed services, 45% in SINC. Because again, as I mentioned in my opening remarks, some of our managed services are mixing in some of the digital. So I don't think it'll completely reverse Like it did last time, I think cost savings will continue to be important, but digitization is certainly accelerating, I think, faster than most expected, and you see that in our bookings this quarter.

And maybe as a function of that, as you look at your M&A pipeline, is that causing a bit of a shift in terms of the types of targets you're prioritizing or not especially?

Not especially. As you know, we're pretty disciplined on the M&A side. It really is focused on increasing our breadth and depth. And as I mentioned, we continue to have an expanding list of potential opportunities that we're looking at. So, no, it doesn't really change our mix there. We're end-to-end.

There may be a question for Francois. The DSOs came down, obviously. I think that's due to a higher outsourcing mix. First of all, is that correct? And then secondly, how would you see that evolving over the coming months if we see SINC coming back a little bit?

Yeah, it's correct that, you know, the fact that we have more managed services did help to reduce the DSO, but also correction was a part of why also some of the DSO went down. As you know, it can be lumpy from quarter to quarter, and sometimes large milestones can be built and collected in a quarter. So that's why also we had a good drop in the DSO this quarter. For sure, with George indicating that, you know, SINC can pick up, that will put some pressure to the DSO, but I still think we're capable to manage it well. Great. Thanks for that, Pauline.

Next question comes from Richard C. with National Bank.

Yes, thank you. George, I think you made some comments about this on the call, and I looked at the MD&A, and it seems like you've had a bit of a pickup in terms of the shift to Asia-Pac. And I'm kind of curious, as your customers move towards digital transformation, do you expect that segment to sort of increasingly trend higher here going forward?

Yeah, no, it is – You are correct. I mentioned it, and you definitely see it in the MD&A, that AsiaPAC continues to be strong. I think there's more of a comfort level by certain of our clients that maybe were underleveraged in offshore. There's more of a comfort level because now everybody's remote, so that certainly drives some increased demand. Likewise, on the other side, though, we actually see, given the importance of proximity to digitization and Everybody moving, every industry and every company with industry may be moving at different paces. It's still important to be in sync with the individual clients. And so some that were maybe over-leveraged in offshore are rebalancing that. We believe in the global delivery model and the balanced model that we have. I think it will drive growth both in our offshore and in our nearshore and in our proximity. So We kind of like where that's going. But definitely there's a higher comfort level right now with remote work that certainly plays into the AsiaPAC. And you see that in our hiring as well, which are now back to pre-pandemic levels.

Okay. And as sort of the portfolio does move towards digital transformation, is it true we have an expectation that, you know, you have potential operating leverage as you move more towards those services?

Yeah, is there more opportunities for us? Absolutely, because, again, digital transformation requires two things, right? There's the new leveraging the new technologies, and as I mentioned, we're rushing towards that, but also modernizing some of the legacy and integrating in. And so we play on both sides of that. And so as we move more to what we've been predicting but now is accelerating on digital transformation, yes, that's a big opportunity for CGI and our end-to-end services. Okay, great. Thank you. Thanks. Thanks, Richard.

Next question comes from Jason Kustenberg with Bank of America.

Hey, guys. This is Cassie on for Jason. I first just wanted to ask, I mean, you guys obviously had very strong bookings this quarter, you know, and you guys kind of saw the bookings from new clients pick up quite nicely. You know, can you share a little bit about what's making you win in the market? You know, are there differences in your go-to-market strategy? be booked to bill greater than 1.0 times in the coming quarter as well?

Thanks. Yeah, no, thanks for the question. Really, on differentiating CGI from some of our competitors, it really is about client intimacy. We've been talking about this for some time. Some of the uptick in our systems integration and consulting work has established closer relationships with our clients, and that's allowing us to move quickly and move quickly in relevant ways for our clients, and that's really a big differentiator When you're going to partner with somebody for a larger digital transformation project, you've got to be comfortable with them. You've got to be comfortable not only they can execute it, which we have to be able to do, but also that they understand how to execute within their environment. That's where they're looking for a partner, and CGI has that in spades. Really, part of that also is our ownership model and the way our people show up in partnership with our clients. That really differentiates itself in a market like we're in right now in a period that we're going through still during the pandemic. So really, that's some of the benefits of the CGI model. And yes, I believe our bookings will continue to be strong as we move through this period.

Okay, perfect. And my follow-up question is just, you know, by geography, it kind of looks like the U.S. federal piece of the booking, you know, saw a downtick there from last quarter. Is that just some softness or some mixed relative just due to timing in terms of, like, election-related pauses? And are we kind of expecting to see that, you know, trend or that demand come back in the coming quarters?

Yeah, we talked about this in the quarters coming up to this. In general, a change in an administration is good from a demand perspective because any type of change in an administration brings new priorities, new priorities bring new opportunities for IT. But in the lead-up to the election and the immediate aftermath where new people are getting in position, There's always a softer booking. As you know, our bookings were strong. Our trailing 12-month bookings in federal continue to be well over 100%. So we certainly can weather this transition period. But, yes, the bookings, that's really the reason for the bookings. It's not where we see demand going. In fact, there's a good alignment in demand right now of where we offer services that and the priorities of the new administration, particularly from an IT perspective.

Okay, perfect. If I could just flip one last quick question. I know you guys were able to improve your margins as well, and I know you guys have talked about cutting back some discretionary spend costs. Are you kind of expecting that to come back as travel and such related costs kind of continue to come back like throughout F21? Thanks.

Yes, you are correct. We did prioritize margins and make sure that we were very careful as we entered and weathered this pandemic period. We do expect there will be return of some, but not all of those expenses, and we're actively working to make sure that doesn't occur as we exit the pandemic. But certain things you want to return, like some of the hiring expenses, some of the training expenses, and even some of the working from the office in proximity to our clients, some of those expenses will return, but there's plenty of of margin expansion opportunities to counter that from the mix of managed services and IP specifically, opportunities in certain geographies to bring them back to the CGI historical models, and then integration of some of these new And you heard that some of our uptake this quarter was through some of those successful. And as we continue to merge operations in, we get the benefit of scale and the benefits of the CGI model. So there's plenty of margin expansion opportunities. But, yes, there will be a return of some of those expenses as we continue to grow and hopefully soon exit the pandemic period we're in.

Okay, perfect. Thanks so much for taking my question.

Sure.

Next question comes from Paul Treiber with RBC Capital Markets.

Oh, thanks so much and good morning. I just want to follow up on the margin question. You know, margin did hit a record high this quarter. I think even when you look back, that includes when you look back to the pre-logica days. So putting some numbers around, I mean, is there a structural permanent increase in Or do you think it probably dips a little bit below that when some of those costs come back in?

Yeah, well, thanks for noticing that it was a very strong margin quarter. And, again, that was purposeful as we prioritized the margin side to make sure we preserve and expand shareholder value. But, yeah, I think we would expect in certain geographies returns you know, as expenses return and growth returns, we will expect to see a little bit of a dip on the margin. However, your other comment about is some of this structural, yes, that is what we're working on. We learned something about going through this period that I think will allow us to continue given the use of collaboration software and other activities that we'll be able to preserve some of those savings and and make those permanent in the model. And like I said on the earlier question, there's plenty of margin expansion opportunities. You can see some of the geographies that now have stabilized their margin, but they're not near where we believe they can and should be returning to.

And I just want to ask a big picture question on acquisition strategy here. Over the last couple of years, there's been several large deals in the IT services space. Obviously, you passed on them. It looks like there's another large deal, a potential large deal of Agile looking at DXC. Generally speaking, how do you look at the priority or prioritize between large transformative acquisitions versus tuck-ins, And you mentioned discipline. How do you look at the risk profile for large acquisitions? Because I imagine you have the potential reward to be high, but then also the risks are higher as well.

Yeah. Well, it's mainly, you know, as far as prioritizing, we want to and believe we can do both. So the strategy of the metro market tuck-ins has been highly successful in each of the regions we've done them in, and so that continues to be part of a prong of our strategy. But the transformational, absolutely. If we're going to meet our aspiration of doubling the company, that continues to be on the path and in the priority list. And as we look at those transactions, we're mainly looking for that cultural fit. And cultural fit for us, remember, is the type of work they're doing, the type of clients that they have, and will that mesh with the overall CGI model. What we don't want to do is merge with a company that changes that culture and that path that we're on. So that's the main reason that we pass on some of these, and it's also the main reason we have an expanding list. that we will be going after. This consolidation is still at the beginning stages.

And my last question, just on culture, like when you look at the IT services market in general, do you see a lot of the competitors out there with a similar culture to you, or is it the minority of competitors of a similar culture?

It's a mix. It's a mix, you see, and actually I think the mix is broadening as different providers decide where they want to play as the industry accelerates towards digital transformation and where each player wants to continue. And what I can say is we want to be that end-to-end provider for our enterprise clients. That's the piece of the market that we're playing in. Thanks for taking my questions. Yep.

Next question comes from Matt O'Neill with Goldman Sachs.

Yes, hi. Good morning, and thanks, Shaman, for taking my question. It seems like a lot of consistent themes around both the sort of best-ever margins and the potential for those to come back down a little bit, as well as the kind of five- to seven-year doubling, the M&A horizon, as well as, of course, the material share repurchase announced. So with many of those out of the way, I was hoping maybe we could dig in a little bit more You mentioned a little bit of an air pocket around bookings when a new administration comes in, and then ultimately that new administration generally represents a positive. There's probably a lot of change required on the federal side. Is there any historical precedent that you could point us to as far as the duration of that air pocket and magnitude? Is it a quarter or two? Do you expect a little bit of softness on the federal side before then things ramp back up to and above maybe where they were before, or anything to point to there?

Yeah, it's typically, thanks for the question, it's typically no more than a quarter or so just to get the new politicals in their positions. But then, you know, that's coupled with usually a 100-day plan where those same politicals are trying to get some things done quickly. So usually it's no more than a And as I mentioned, there is a nice alignment with our focus. We do believe that the new administration's IT priorities will be in the areas of health, environment, veterans affairs, national security. And we're well positioned with both vehicles and opportunities in those areas. And, of course, technology, it's going to be cloud data and artificial intelligence with some 5G. So, you know, just as an example, they've come in and initially said they're going to pledge $10 billion increase in cyber in exactly some of the areas we already are. So, you know, there will be a little bit of that transition, but the historical is that we do very well in that environment.

That's really helpful. And would it be safe to say that the new administration, you know, I think the word digital has come up on this call fairly frequently already. Does there seem to be more inclination that, you know, it's going to push, you know, all things on the federal side incrementally more digital? It seems a bit of an inevitability, but is that a safe assumption?

I think that's a safe assumption, yes.

All right. Thank you. I'll hop back in the queue.

Thanks, Matt. Next question comes from Paul Feep with Scotiacapital.

Hey, good morning. George, can you just, on digital transformation, maybe remind us on the size of the opportunity either within the business, however you might want to categorize it, and then maybe any gating factors that you're looking at to allow CGI to go even faster against that opportunity? And then I've got one quick clarification. Thanks.

Yep, sure. Well, to thank your last question first, The gating factor really is just making sure that we get the offers in front of the customers and engage with them. And in some ways, that's more challenging in a COVID remote environment. In other ways, what we've learned is we've learned ways to do that collaboration in a very elegant way. given our prior relationships, and I mentioned some of that. And so it really is a matter of getting the right people in front, and that's why I mentioned some of the investments in our people in the training, in the hiring, particularly around business engineering, business development. and investments in our intellectual property, because that's another one that can help accelerate some of that digital transformation and get us with those clients faster. So that's really the answer and the gating. I think it answers probably the first part of your question as well, these engagements. You know, from a size perspective, what we're seeing right now, point in time, now maybe that will change, but right now we're still in the middle of a pandemic. every company is doing this a little bit differently some of them are doing it in in phases or waves some are going uh all in and some somewhere in between so it really and and we predicted this we talked about this as we move closer to exiting the pandemic what we said is the rebounds will happen differently by industry and the rebounds will happen differently by company within those industry, which again is why proximity is so important because you've got to know and meet them where they are. So maybe that gives you more color or less color than you were looking for, but that's really what we're seeing right now, Paul.

That's helpful. The clarification is just with regards to large transformational acquisitions, Can you maybe characterize how you're thinking about those versus the past? Is there a desire to, for example, avoid vendors that might be maybe categorized as having a larger book of legacy infrastructure that would just be off the table and thus, you know, shouldn't be an area investors should think that CGI has any great interest in? Thanks, guys.

Yeah, no, thanks for the question. No, I don't think we would limit ourselves in any way, and we're not. What's important for us on a digital transformation is to be part of all elements of it. What we don't want to do is only do the legacy or, quite frankly, only do some of the smaller new and miss out on the modernization required. So we really want to play on both sides, and that's certainly what we consult to our clients and, where possible, urge them to think about this. in the biggest way. That's what will help them be successful fastest and certainly is where we're the best partner to them. So I would never say we wouldn't play on one side or the other, but not exclusively, because that's where you get pigeonholed within a client.

Thank you. Next question comes from Daniel Chan with TD Securities.

Hi, thanks for taking my questions. Just to expand on some of these questions on the infrastructure and transformational acquisitions, this DXE and ATO's potential combination, would that have any impact on the competitive environment for you?

No, thanks for the question. It does play to that infrastructure side of the house. That's where they play. Again, if they want to do that from an exclusive basis, you know, that's not where we're playing. We're playing on the end-to-end. So I think it does, something like that always changes the dynamic somewhat, but we're sticking to our end-to-end, and it's having good results with our clients. Okay.

And then now that Brexit is largely over, does that open the floodgates on some of the deals that maybe have been pent up or have been held back or delayed? over the last few years? And should we expect some increasing opportunities, not just in the UK, but also across the EU?

Yeah, I think we'll see that on a gradual basis. I'd like to say the COVID is past us, but in many of the countries that we're working in, that's still something that is shutdowns, et cetera, are still occurring. But we do think that reacting differently I thought you said COVID. I apologize. That's good. I'm glad you didn't think COVID was over. Yes, Brexit being passed is certainly helpful. Most of the clients we work with have that better prepared in their plans. I think the reason I just immediately thought of COVID is that in the U.K., of course, we're still in a shutdown period, and so that's probably more of a damper on things. Point in time. than Brexit. But as COVID abates and then Brexit is past us, yes, I think there will be some pent-up demand that comes through in the U.K. and other places. So I apologize. Great. Thank you. Yep.

Next question comes from Ramzi El-Assal with Barclays.

Hey, guys. This is Ben Budish on for Ramsey. I'd like to apologize in advance for asking maybe the 100th question on margins and M&A, but perhaps I could ask it in a bit of a different way. I think in your prepared remarks, you talked about with the metro market strategy, in some cases, you see this... a lot of us looking at like some of your large IT services peers, we tend to see them do more, you know, smaller acquisitions that tend to be growth, accretive, and margin dilutive. And so I'm not sure if I perhaps misunderstood what you were mentioning earlier, but could you maybe discuss, you know, at least in the context of the metro market strategy, how you kind of balance, you know, looking for targets that either add growth or depth in that market and kind of how that all plays out?

Yeah, yeah, that's a great question. When we buy and merge something into the CGI portfolio, In almost all cases, the margin is lower than the CGI margins. So day one, it's dilutive, but then we bring that up to the CGI margins, not necessarily above the CGI margins because you're right, it really is a catalyst for growth, but we bring them back up to the margins of CGI. And so over time, that's why you see some of that. So as we buy some of the larger products, metro market mergers, there's a little bit of a dilution, then it comes back. And that's why I highlighted that, and that's why Francois did as well in the prepared remarks.

Okay, I see that. That makes sense. Thank you. And if I could ask one more, we've seen a lot of activity lately with, again, with kind of your peers talking about their cloud businesses and kind of making more investments in that, just being a really attractive growth avenue. I'm just wondering if you could kind of, you know, for CGI, kind of help us size up or give a sense of how big that is for you guys and kind of what you're doing there.

Yeah, but... I highlighted, yeah, thanks for the question. I highlighted some of the examples and just, you know, just a handful of the examples of what we're seeing in the systems integration space. And, yes, a lot of it is assisting and helping our clients in their application migration to the cloud. We're running towards that. We actually have some methodologies and tools that we built to assist our clients in that. We start with actually consulting with our clients on how and where and when to use the cloud and how to make that happen. We'll manage that for them soup to nuts. And then the partnerships with the various cloud providers is extremely important. And I mentioned we're reinvigorating that. And this is really all the cloud providers. So it's Microsoft, it's Google, it's Amazon, it's Oracle. And we have examples and projects with each of them ongoing as we speak. And really it's getting closer to them is important. It's a big opportunity for our clients and, therefore, for CGI.

Thanks so much for taking my questions.

Next question comes from Stephanie Price with CIBC. Hi, good morning. Hi, Stephanie.

Just wondering if you could talk a little bit about what you are seeing in terms of project delivery, just given the new phase of lockdown that are in certain regions. I think you mentioned the U.K. a minute ago.

Yeah, so the type of project engagements, what I would say is that this wave of pandemic shutdowns really our clients are looking at them a bit differently. They kind of already have a better way of working. They're more prepared for this. And we're actually seeing more strategic project starts and engagements. It's just kind of the new way of doing business. They're both into their plans. And, you know, even though we still have only about 11% of our people working from an office or a client site with the proper precautions, we're seeing much more of these new starts. And I think some of that is based on the experience they've had and the positive experience they had in delivering some of the ongoing projects that they didn't stop or delay, and it's giving them more confidence to start things back up.

Okay, and maybe just to follow up, I was wondering if you could talk a little bit about the closure rates you're seeing for the large deals versus the small deals and what sort of trends you're seeing around those larger deals.

Yeah, we're actually seeing more activity on the larger deals and willingness to close those larger deals. I think the surprising part, and that's why I mention it in the prepared remarks, that we're also seeing this on the smaller side. So we're seeing both now. We thought it was going to move more to just those larger deals driven by cost savings. We're actually seeing a little bit of both. But I wouldn't say that the larger deals are stopping in any way. even with this next wave of shutdowns.

Great, thank you very much. Next question comes from Robert Young with Canaccord Genuity.

Hi, good morning. I just wanted to clarify something said earlier around, you said you'd seen strong renewals, sometimes seen scope increases. driven by digital. I think it was Thanos question was asking about shift more towards digital. And you'd said that managed services was mixing in digital. And so I got, you said that you'd commented on that earlier. And so I'd taken your comments earlier to reference renewals, but are you seeing managed service scope increase like in during the project or is this something that's happening at the renewal point?

A little of both. It's a little of both. It's more pronounced, if you will, at renewal time. But I'll remind you, renewal time can happen anytime. So we can do an early renewal to put that in. And the reason I say it that way is You want to make sure you get the contract and the mechanisms correct on service level agreements, et cetera. But we're looking at that as we speak, some of the renewals that we're doing where it's actually driven by a need to digitize. But having said that, we wrap in the managed services in some ways to help fund it. And right now, it's very interesting that in a couple of these deals, getting in-year savings, in-year being 2021, getting some savings up front, but then also being able to fund and accelerate a digital transformation. That's a nice value proposition for our clients. We have the balance sheet and the wherewithal to do just that. So that's what I mean by that, and that's pretty exciting.

Is that – are some of the normally – would you normally see shorter-term consulting projects like front-end professional services turning into managed services? Is some of that sort of front-end work being pulled into these larger deals?

Like, is that better for margins, or is it something – Yeah, yeah, well, that is better for margins, and we have talked about that. Some of those systems integration and consulting projects – can lead to bigger opportunities. And the big reason for that is not necessarily the contract just turns into that. The relationship turns into that. That client intimacy backed up by the other experts and expertise that we have allows for that. And, yes, that's definitely a margin driver because you have a better utilization rate and it's a longer period of time and, therefore, a lower cost of sales over time.

Okay. Okay, thanks.

Yep.

Once again, to ask a question, please press star 1 on your telephone keypad. Next question comes from Howard Len with Veritas.

Good morning. Good morning. I just wanted to touch on kind of the SG&A savings that the others have asked about and focus on the lease side. I think you've made some comments about the importance of the proximity model to CGI, and I guess at the same time you've probably thought about what it's going to look like, I guess, for the offices after CGI. after the vaccinations are over. And what's kind of your thoughts on that? I also noticed last year you guys took some write-downs on the leases. There were some lease modifications, I think, made to last year's statements. So just kind of give us the thinking of how many days people are going to come back to the office and that kind of stuff.

Yeah, it's a great question. As you might expect, this is exactly what we're thinking about and talking about. We're not going to abandon our proximity model, and we do believe there's benefits to being in the office for purposes of training and bringing others along, the creativity that comes out of that. the interaction with our clients, having space to do that. Having said that, I think the office of the past is not necessarily going to be the office of the future. We're looking at smaller spaces, more spaces in different parts of cities, All of that is on the table as we go through that. That will take some time to convert, and so you'll see some of the costs returning, but over time we'll certainly be optimizing that for our clients and for our business.

Right, right. So it's more like as the lease rolls off, you might look at other options at that point. Correct. Correct. Um, and then just another question I wanted to turn to is the renewal rates. Um, you disclose their 95%, uh, which is pretty strong. Uh, is that, um, by revenue or by customer count and, uh, what was it like, I guess, pre COVID.

It's by, uh, it's by revenue and we've been, uh, we've been pretty consistent, uh, in the, uh, in the nineties, uh, you know, was it always over 95%? No. But it's always been in the 90s we tend to have a very good, strong relationship. I've mentioned two clients where we have over 20-year relationships. That's pretty common with CGI, and that's part of the ownership model. and the value system and how we approach our relationships. But I highlighted it because it's giving us that opportunity to do the add-on services. That's really why I highlighted it in the remarks today.

Right, right. And I guess it might correlate with, you know, if IP becomes a bigger part of your revenue, you might expect that renewal rate to increase.

Yeah, well, IP is something we haven't talked as much about, but we're making some pretty nice investments in our intellectual property right now. essentially becoming more, repurposing them to be more business platforms as a service, componentization of all of our flagship IP, specifically in government and financial services, which are giving us co-creation opportunities for that IP. And so IP then becomes an accelerator both for our clients but also for our business. We're also packaging our IP from across CGI in certain industries, adding data intelligence into these application suites and also intelligent automation in areas like health, utilities, and, again, financial services. So we're doing some exciting work with the IP to make them a driver of acceleration for our business, but, of course, first for our client's business. Okay, great. Thanks so much. I'll pass the line. Sure.

Thank you, everyone, for being with us today on the call, and we look forward to speaking to you at the end of next quarter. Thank you.

Thank you. And this concludes the conference call. You may now disconnect.