CGI Inc.

All participants, please stand by. The conference is now ready to begin. Good morning, ladies and gentlemen, and welcome to CGI Third Quarter Fiscal 2021 Conference Call. I would now like to turn the meeting over to Mr. Meir Yagi, Vice President, Investor Relations. Please go ahead, Mr. Yagi.

Thank you, Paul, and good morning, everyone. With me to discuss CGI's third quarter fiscal 2021 results are George Schindler, our President and CEO, and Francois 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, July 28, 2021. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q3 MD&A financial statements and accompanying notes, all of which have been filed with both CDAR 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 MD&A 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. I will turn it over now to George to give a brief overview of Q3. Francois will then review our Q3 financials, and then George will comment on our business and market outlook. George?

Thank you, Mayor, and good morning, everyone. I am very pleased with our team's Q3 performance, delivering results according to our previously announced plans, returning to year-over-year revenue growth on a constant currency basis, delivering double-digit gap and adjusted EPS accretion for the quarter and first nine months of the fiscal year, generating strong cash from operations, bringing the last 12-month total to over $2 billion, a 12.4% increase over the previous 12-month period, securing significant new and expanded work with clients, raising their last 12-month booked bill to 120%, and surpassing pre-pandemic hiring of consultants on both an overall and net basis in the quarter, resulting in a 2.6% increase in total headcount year-to-date. These strong results reflect the continued trust our team has earned from clients as we partner with them to help shape and implement their digital transformation agendas. Again in the quarter, demand accelerated as more clients, particularly in commercial industries, began to reinvigorate projects that had slowed during the earlier stages of the pandemic. We delivered constant currency revenue growth across every commercial sector this quarter. We saw particular strength as follows. 9.3% global growth within manufacturing, retail, and consumer services, led by Western and Southern Europe, with year-over-year growth of over 20%. Growth globally of 5.4% in financial services, led by Central and Eastern Europe, at over 18%. An overall growth of 4.7% in the communications and utility sector, led by North America, with 21% growth. In our global government business, bookings increased on a year-over-year and sequential basis, reaching a book-to-bill of 123% in the quarter. We are seeing government clients begin to reprioritize future IT investments to reflect the changing public health and economic environment. This reprioritization is an area of strength for CGI, including core technology modernization, cloud enablement, citizen services, space-related endeavors, and cybersecurity. As such, the government sector pipeline increased in the quarter, up 18% since the start of this fiscal year. From an overall services mix perspective, bookings were up significantly for managed services, with over $1 billion in new bookings compared to the same quarter last year. And notably, the percentage of bookings that included IP were also up year over year and represented a book-to-bill of over 150%. Across every industry and geography, the pace of client demand continues to rise. CGI's combination of industry and technology expertise is providing clients with the right services to drive their digital transformation initiatives. For example, in the quarter, we awarded numerous new modernization and digitization projects, including with Nexilis, an international life sciences firm, who recently selected us to lead the execution of of their three-year technology transformation roadmap. As part of this transformation, CGI will modernize, secure, and manage their end-to-end technology value chain, supporting their business agility, performance, and growth. With the North American Bank, who extended its commitment to CGI in their commercial banking division, as part of this new five-year agreement, CGI will lead the ongoing evolution, upgrades, and management of the bank's digital commercial banking platform. And, for a European food and beverage manufacturer, who selected us to lead the modernization of their production planning systems. CGI will provide strategic advisory services, as well as implement a cloud-based industrial ERP platform. Consistent with the past few quarters, we not only sustained our incumbency with existing enterprise clients, we were also awarded net new work and or expanded scope for both existing and new clients, growing our share of business. In the quarter, this combination of net new work and expanded scope comprised over half of total bookings. Now, I will turn it over to Francois to review our financial results, and we'll return afterwards to discuss the opportunities we are seeing to expand our market share going forward. Francois?

Thank you, George, and good morning, everyone. I'm happy to share with you the results of our third quarter of 2021. As George mentioned, we returned to positive revenue growth in Q3, on a constant currency basis fueled by another strong quarter of bookings coming mostly from long-term managed services agreements. In addition, we delivered strong double-digit EPS growth despite a strong Canadian dollar causing headwinds in our reporting currency. We delivered revenue of $3 billion, up 3.5% over a year on a constant currency basis. This is a return to positive growth and an improvement over last quarter, where we saw a 1.7% decrease year over year. IP revenues represented 22% of total revenues, up from 21% last year. Strong growth in constant currency was seen in the following geographies. Western and Southern Europe, up 12.8%. Central and Eastern Europe, up 12.1%. Asia-Pacific up 6.6%, and Canada grew 6.1%. Given the continued increased demand for our services, as reflected by the strong bookings in the last few quarters, we expect continued positive momentum. Total bookings of $3.6 billion were up 28% year-over-year, representing a book-to-bill of 120% for the quarter, and lifting our trailing 12-month book-to-bill to 103%. 20% as well. I would like to call out a few strategic business units with strong bookings in the quarter, such as Canada with a book-to-bill of 170%, U.S. commercial and state government at 131%, Western and Southern Europe at 120%, and UK and Australia at 119%. Each of these seeing material improvement in new bookings. In fact, seven or eight proximity geographic segments now have a trailing 12-month book-to-bill well above 100%. New business was 31% of bookings, an increase from the previous year's 27%. On a trailing 12-month basis, new business was 30% of booking versus 24% for the year ago. Our global backlog increased by $1 billion today. year-over-year and is strong at $23.3 billion. This backlog represents 1.9 times revenue, the vast majority of which is comprised of long-term managed services engagements. Adjusted EBIT in Q3 was $477 million, while EBIT margins increased to 15.8%, up 110 basis points compared to Q3 last year. The year-over-year increase was mainly due to higher utilization rates, increased R&D tax credit, and lower SG&A costs. We saw strong margin improvements in U.S. federal and Scandinavia, with margins up 540 and 460 basis points, respectively. This was partially offset by lower margins in U.S. commercial and state government due to temporary effects from recent acquisitions, and in the UK due to a non-recurring contract provision. Our effective tax rate in Q3 was 24.9%, a reduction of 2.1 percentage points due to higher U.S. R&D tax credits. We now expect a lower tax rate for future quarters in the range of 24.5% to 26.5%. Net earnings were $338 million, and diluted earnings per share were $1.36%. representing an increase of 36% year-over-year. This improvement was mainly due to higher EBIT and lower restructuring costs. Including integration and restructuring costs, net earnings were $339 million for a margin of 11.2%, and diluted earnings per share were $1.36, an accretion of 15.3% when compared to $1.18 in the same quarter last year. In a quarter, DSO was 44 days down from 48 days last year. Cash provided by operating activities was $419 million, a decrease of $166 million year-over-year due to timing of collections and to the payment of previously deferred payroll and government tax programs related to COVID-19. For the last 12 months, cash provided by operating activities was $2.1 billion, or 17.3% of revenue. This is an improvement of $229 million year over year. In future, we invested $471 million in our built and buy profitable growth strategy, comprised of $85 million back into our business, mainly in IP and managed services engagements. $66 million on the acquisition of SenseCorp in the U.S., and $320 million to buy back our stock, canceling in the process 2.9 million shares of CGI. Buying back CGI stock has been an accretive and flexible way to return capital to our shareholders. Since the beginning of this fiscal year, we bought back 15.3 million shares and an average price of $98.16 on for a total of $1.5 billion. As of the end of Q3, the company could purchase up to an additional 10 million shares under the current NCIB program. Net debt to capitalization remained unchanged at 31% versus Q2, and down from 32% last year. Looking ahead, our cash allocation priority remains the same, investing in our business, pursuing accretive acquisitions, and buying back our stock. With cash of $1.3 billion on hand and a $1.5 billion revolver that remains fully accessible, we have $2.8 billion readily available and access to more if needed to support our build and buy profitable growth strategy. Now we'll turn the call back to George to further discuss the insights and outlook for our business and markets. George?

Thank you, Francois. Last quarter, I shared preliminary findings from CGI's Voice of Our Clients Proprietary Research Program, which encompasses in-depth interviews with business and IT executives on a range of strategic topics. These key findings are as follows. Optimizing operations is top of mind, with culture and IT supply chain modernization identified as critical areas to address. Environmental sustainability is now viewed as core to future value creation. and meeting customer expectations for better, more innovative digital experiences remains of paramount importance. A deeper analysis of this research has since revealed several additional insights that I will highlight today, particularly in terms of what we observe from leading digital organizations. Across all of our findings, we see proof points that we are, in fact, in the early stages of a complete digital rewiring of society. This is particularly the case when you consider the widespread use of technology across all facets of an organization's value chain, and yet the lack of depth and technology penetration across those same value chains. Certainly, there has been progress over the past year with organizations large and small implementing new technology-based products and services, and at a record pace. Yet our research shows that only 20% of those organizations globally indicate that they are achieving the total expected return from their investment in digitization. A key contributor to this finding is the observation that much of the recent digital work has been to accessorize customer and employee touchpoints as opposed to enabling a comprehensive digital enterprise. For those industries and organizations leading the way, our research identified three common characteristics of these digital leaders. They've been better at operating as aligned teams between business and IT, and also delivering in multi-shore agile modes. They've been faster in modernizing the entire IT supply chain while assuring security and data privacy, including by relying more heavily on managed services. And they are addressing business transformation holistically, including culture change, ecosystem touchpoints, and the integration of sustainability objectives. We are proud to partner with industry leaders who bring these characteristics to life. For example, we are partnering with a global manufacturer where we have over 900 consultants across five countries contributing to their enterprise digital transformation. Our teams provide multi-shore scaled agile services in support of their supply chain, customer experience, and manufacturing operations. With the state of California to further digitize their tax systems, CGI is delivering solutions to improve citizen self-service, embed fraud detection and prevention, enhance business intelligence, and increase operational efficiencies. And for a European manufacturer of green battery cells to help them enable the future of energy, we are working with one of our global partners, Microsoft, to modernize the client's cloud ERP platform, contributing to their sustainable production and renewable energy leadership. We believe these leaders will continue to accelerate digitization on all fronts, innovating and adopting newer technologies at a faster pace in order to drive growth and profitability. and we will continue to collaborate with them as they invest, helping them harness the power of technologies such as machine learning, cloud, blockchain, and 5G. In fact, we just announced a partnership with Nokia to build a 5G lab and CGI innovation center in London, which will showcase the capabilities of both companies. Together, we will explore and apply the potential for how 5G can enable industrial digitization in multiple sectors from manufacturing to healthcare, in areas such as autonomous robots, augmented and virtual reality, and real-time remote control of machines. We believe the gap between the results that leaders are realizing from digital compared with all other organizations will spur a further acceleration of digitization and corresponding IT spend increases. These new investments will have a deeper focus on driving enterprise-level modernization programs that help break down and reconnect the silos in their systems processes, and data. Clients are increasingly turning to CGI given our global cross-industry perspective and experiences, bringing best practices, methodologies, and IP to help advance their digital initiatives. Through our business consulting services, we help clients design the best path forward for their organization, including addressing culture and change management so that their transformation efforts are sustainable for the longer term. And through our managed services offerings, we can deliver immediate savings to help them fund critical digitization initiatives. All of the findings from our proprietary research continue to represent longer-term shifts in client demand and the need for trusted enterprise partners. These shifts are in line with the investments we've been making and will continue to make in our build and buy strategy. CGI is one of the few global firms with the necessary combinations of client partnership culture, proximity-based talent, and end-to-end service offerings to help clients implement their digital strategies with agility and at scale. We also remain focused on progressing the buy side of our profitable growth strategy. The current market conditions are conducive for further industry consolidation, and this is driving growth in our pipeline of new opportunities and active discussions. Our buy-side focus is on prospective acquisitions that will bring CGI new client relationships in existing or new geographies, along with complementary in-demand consulting and technology skills that help clients advance their digital agendas. We remain focused on expansion within all CGI geographies. The current pipeline momentum in Western and Southern Europe, Central and Eastern Europe, UK and Australia, and the U.S., We continue to have the operational strength and financial capacity to move quickly with discipline on the right buy side opportunities. In closing, we remain confident in our positive growth outlook for the future. 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. Operator, we'll go to the questions, but before we do, I just want to remind everyone that a replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the passcode 797-8334. As well, a podcast of this call will be available for download within a few hours. Follow-up questions after the call can be directed to me at 514-415-3651. Paul, we'll go now to the Q&A, please.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making a selection. If you have a question, please press star 1 on the device's keypad. You may cancel your question at any time by pressing star 2. So, please press star 1 at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. The first question is from Thanos Mastropoulos from BMO Capital Markets. Please go ahead. Your line is open, sir.

Hi, good morning. George? Hey, George. Can you extend a little bit in terms of M&A? So, you provided some geographic culture on the pipeline, which is helpful. But stepping back, you've done two tuck-ins recently, but in general, it seems like you've been a bit quieter than some of your peers over the last few months. What's been the impediment? Has it been, you know, valuations? Has it been just finding the right cultural fit? And then in terms of what you're prioritizing, is the bulk of the effort focused on metro market tuck-ins or, you know, what types of assets are you spending your time looking at? Thanks.

Yeah, thanks, Thanos, for the question. Yeah, first, we do like both the HMB and SenseCorp mergers. that we've had. They're performing exactly as we would have expected. And that's really the focus. The focus continues to be on those cultural attributes that allows us not just to bring somebody into the company, but to make the one plus one equal three, make them really thrive as part of the company. And that starts with the cultural alignment. And I remind you, for us, cultural alignment means those organizations have a deep client relationship. And when they have that, One, they come with a lot of skills in both technology and in the functional areas, but they have those client relationships that allow us to bring the full suite of CGI services, the end-to-end services into those organizations, and that's what we're really remaining focused on. From a valuation perspective, you're absolutely right. It's a very active market that tends to drive up, drive to higher multiples, Private equity continues to play a role. That contributes to driving higher multiples. We remain disciplined on both our focus, our strategy, but also finding those cultural fit organizations. And, you know, with the specialty type of firms, you know, if you specialize in a certain software or specialize in a certain global delivery area, or a sector focus, maybe cybersecurity or government intelligence. Those tend to be in higher multiple, but there's plenty of general consulting firms, thousands of them, as I mentioned. We have very active pipelines, actually tripled since this time last year, and we think there's plenty there, and we remain focused on using our cash to bring those accretive acquisitions in. That's helpful.

And then some of your peers have had challenges on infrastructure. So maybe just to clarify, I know it's not a large part of your mix, but just in recent months, has that still been a year over your headwinds, or are we at the point now where just as we look at the overall total company growth, it's starting to become kind of less relevant?

Yeah, well, you're right. We've been focused on making sure that that was right size for the – The business going forward, it is primarily now part of our end-to-end services. It's in the range of 10% to 12%, and it's stabilized. So we see it as an important element of those end-to-end services, albeit at a different mix level, as we've been talking about. Okay.

And finally for Francois, it looks like FX had a 4.5% impact on revenue in the quarter. Just to make sure we're doing the math properly, if you look at current rates, what magnitude of revenue impact would you think we'll be seeing in the September quarter if we're to see where they are?

Yeah, thanks, Donald. You're right, for 4.5%, it was close to $138 million for this quarter, for Q3. And the big swing came from U.S., where the currency varied by 11%, so close to $110 million. And, again, you know, the U.S. activities is like close to 30% of the overall CGI. The other swing was Euro at 3%, and, again, that's a 35% to 40%. of our business that is in euro transaction or in euro. You know, if you're looking just at the July number, for sure I cannot yet know what will be August and September, but just the July, the swing year over year on the U.S. is a headwind of 6%. So, again, pretty steep variation. And same thing for Euro. We're talking 5% headwind versus last year, just for July. So, again, it can change for August and September, but at least if the run rate is continued like July, we're talking to a 5% and 6% headwinds for next quarter.

All right. Thanks. I'll pass it on.

Thank you. The next question is from Paul Steep from Scotia Capital. Please go ahead. Your line is open, sir.

George, maybe talking just because it's topical this morning, I guess the U.S. administration's once again coming back, and I, American, had a couple questions about this. Can you just give us a sense of recognizing it's not yet law, and they haven't yet changed it, but, like, How you're positioned in the U.S. market relative to this is a reminder to be very helpful this morning.

Yeah, so this plays right into our proximity model, as you know. We're primarily proximity-based work in the U.S., particularly, obviously, exclusively in our CGI federal business. And so it doesn't have a dramatic effect on us. If anything, I would say maybe it even helps us. maybe not helps us quite as much as if we were an American firm exclusively, but for most global firms, we have more proximity-based work, and so we see this as an opportunity for us in both the government work and in commercial work if that's to come in.

And then just on the IP booking growth at greater than 150% in the quarter, could you maybe talk a little bit about which of the solutions you were seeing maybe the greatest traction in and maybe the progress on turning more of the solutions into sort of a global platform that was part of the aim with the changes earlier in the year?

Yep, yep. Well, you have that right on the second part. That is, the aim is to make these, extend these solutions from just a point functional solution, which they do extremely well with and a good value proposition, but to extend those, adding managed services and extend the perimeter of the business solution, extending into a more holistic security, adding that machine learning and extending that out, and the same with business intelligence. We're doing this a lot with our financial services solutions. So just an example of that, our collections solution, which is really an end-to-end solution used in some of the largest banks, around the world, but we're extending that to be not just a collection solution, but a credit solution. And using some of that as a platform and co-creating with clients using that IP as a starting point, but extending that out as they look to modernize their entire suite. And of course, when we do that, one of the things we do is drive self-service enablers into those solutions. That reduces the cost for the client and then reduces the operations And then we can actually, through managed services, just take on the operation. And this is a big value created for our clients. Actually, in the quarter, I just mentioned the financial solutions, but in the quarter, the big driver was our government solutions, both in the state, local, provincial level, but also in the federal level. So both are actually firing now as intellectual property companies. As I mentioned, digitization continues to accelerate. We see bigger take-up and value proposition for IP globally in all areas.

Great. The last one for me, just since it's out there and it's potentially topical, on the M&A front, can you just remind us of how you'd approach or consider or not consider potential large deals relating to maybe more legacy outsourcing type projects? Yeah. Businesses that may or may not, you know, move to market over time. Thanks.

Yeah. Yeah. No, I understand where you're going with that. Of course, we don't talk about anything specifically. But I mentioned where our infrastructure business is, and it's part of our end-to-end services. And so we'll evaluate any of those larger opportunities the same way we evaluate every merger and acquisition opportunity. opportunity, really looking at is there an opportunity to take those client relationships and drive more of an end-to-end services solution. So we don't eliminate anything at base value, but we're very diligent in our evaluation of those. So that's how we'd approach that. And quite frankly, we approach the big ones and the small ones the exact same way.

That's helpful.

Thank you.

Yep. Thank you. The next question is from Stephanie Price from CIBC. Ms. Price, please go ahead. Your line is open.

Good morning. Hi, Stephanie. You mentioned a 3% increase in headcount year-to-date. Just curious if you could talk a bit about staffing and retention rates in the current environment.

Yeah, sure. You know, an important part that I want to remind everybody of is we're not a one-for-one organization. growth of the business and the revenues to people, right, because this is the end-to-end services. So on a systems integration and consulting, it's pretty much you're dependent on adding headcount to add revenue. But when you overlay intellectual property assets, when you overlay some of the elements of managed services, it's not necessarily one-for-one because it's a different value proposition for our clients. Having said that, of course, we're very focused on talent. We came out of the pandemic in a very strong position from an employee engagement perspective. It's partly based on how we worked with our employees throughout that pandemic. And therefore, our turnover continues to be lower than the industry average. I will say it's ticked up a bit. but still just slightly below pre-pandemic levels on a trailing 12-month basis, well below our peers. And really it's because we're focused on an employee value proposition that's holistic. A lot of career development, I've highlighted that in the last couple quarters. Of course, with that career development and growth comes career progression, which people are focused on. We'll remain focused on giving them flexibility as part of the CGI model. Accountability goes with that, but also culture and purpose. There's a lot riding on what a company's purpose is, culture, of course, as a founder-led company that's embedded in everything we do at CGI. And what we find is total compensation is part of that, an important part of that, but it's not the only driver in that process. and that's probably a value proposition. So we're doing quite well. Our acceptance rates, we're bringing people on. Our acceptance rates have held pretty steady, which is above the norm. So it's a very high percentage. And our turnover, like I said, is a little bit lower. So we're coming into what's a high-demand environment and a pretty strong position.

That's great. And in terms of the Canadian bookings environment, bookings have been very strong over the last two quarters. Just wondering if you can give us some color on that.

Yeah, a lot of this is in expanded managed services engagements. That's one of the drivers, and you saw another one announced this morning. So that's a big driver of that. But there's also a lot of systems integration and consulting work that we're seeing. As you know, the Canadian economy is very strong, and a lot of companies, therefore, are looking to invest, and we're playing – playing a part in helping them to realize some of their goals and using some of our best practices and intellectual property to do that. Intellectual property is a big part of that in Canada as well.

That's great. And maybe a final one for Francois. Cash flow from operations is a bit lower than we were expecting in the quarter. It sounded like there were some one-time items there. Can you just walk us through what you were seeing in the quarter? Sure.

Yeah, we're below on this quarter, but two things. First of all, collection went down a little bit because, again, Q2 is always our lowest DSO, and we were at 39 days. And with the annual maintenance invoices that we received payment in the second quarter, it's giving a certain pressure on the third quarter. So that's a normal trend of DSO going up quarter over quarter. So that has an impact on collection. And we had some deferral of payment that, you know, some of the countries had some payment deferral on taxes, health tax and payroll taxes last year, especially in the U.S. and Scandinavia. So this year we needed to pay that back. And so that had also a negative impact on the cash flow. When you're looking at it on a 12-month basis, 17% of revenue is very strong. And even on a year-to-date, we're over last year by close to $200 million. So, again, it's pretty good results on a 12-month basis.

Great. Thank you very much.

Thank you. The next question is from Richard C. from National Bank Financial. Please go ahead. Your line is open.

Yes, thank you. Guys, I just had a question. Before the pandemic began, you guys had, I think, quite a bit of momentum in the pipeline, and I think we're certainly signaling sort of a pickup in growth. So when it comes to book to build, it's obviously very strong. I'm just kind of curious to see if you can distinguish for us whether that growth is kind of coming from a catch-up in those past programs kind of restarting, Or is it actually kind of, you know, incremental services, you know, over and above, you know, what we were seeing prior to COVID?

Yep. Thanks for the question, Richard. It's a combination, but heavily weighted towards the new. Because as I mentioned, I called out in my opening remarks, if you take the add-on expansion work with the new client work, which as Francois mentioned is – is up year over year and quarter over quarter, what you get is over half of our bookings are for that new work. So that's a positive indicator as you look to the continued future acceleration of growth. And as I mentioned, we don't see that slowing down at all. So the new demands are coming up on a routine basis now. And a lot of our clients now are just in the planning phases for the next year again, planning coming out of the pandemic and what they need to do to accelerate. And quite frankly, we see a little bit of a gap between what those leaders are doing, as I mentioned, and everybody else. And I think there's going to be a rush to try to close that gap. And, of course, we'll be there to help our clients realize that.

Okay. And I get sort of related. Do you think that these sort of expanded opportunities have come about as a result of issues that have come up during the pandemic, or is it just kind of giving them time to reflect on, you know, things that they were thinking about in the past here?

Yeah, I think what the pandemic did is it kind of put a bright spotlight on where some of the challenges and opportunities therefore are for many of our clients. And we are seeing, actually – I mentioned this in my remarks, we're seeing more take up also on advisory, strategic consulting opportunities because I think everybody's looking at this. One, I've got to do it and I've got to do it now, but also I want to do this in a thoughtful way, not just accessorizing, as I mentioned, but really permeating the environment. One executive said to me, You know, George, we're not just looking to put everything in the cloud. As we look at each piece, and this will take longer for us, but ultimately will be better, we want to look at each discrete element and think about that holistically and make the architecture changes that are necessary. Of course, this drives longer, larger deals. for CGI, but on the other side, drives more value for the client. And as I said, 80% are looking for more value from digitization initiatives.

And, you know, we've seen like a lot of publicly released sort of cybersecurity incidents lately, and obviously this is a practice for you guys. So I imagine it's getting a bit of a tailwind. I'm kind of curious, you know, how broad is your security offering in terms of its reach within your existing client base? I'm trying to just get a sense of, you know, what that opportunity potential would be.

Yeah, it's extremely broad, and if you think of security, there's that commodity kind of security operations center. We've been doing that for many years, but security now is expanding throughout, and it's not just about threat detection. It's really about how you're going to remediate that and how you're going to remediate that in a positive way going forward. And so our teams, particularly in the government space, are kind of leading the way. I'd say our U.K. teams, our U.S. team, our German team are kind of leading the way. We do this in France. So with governments, which then is permeating our opportunities to drive that into the commercial world. So it's pretty comprehensive.

Okay. And just the last one for me in regards to acquisitions. I think you sort of covered broadly what things you were looking at, but I'm not so sure you touched on the potential idea of maybe looking at something more heavily IP-focused, you know, much like, you know, AMS, you know, way back when kind of gave you a bunch of assets on the government side. What's your sort of feeling around that, you know, going a bit more deeper into an IP in terms of an acquisition?

Yeah. Thanks for the question. One of the reasons that we spun up the new organization and pulled Dave Henderson to lead that organization is really not just on the build side but also on the buy side to make sure that we are positioned well to bring in the IP that's going to make a difference for us. As I mentioned, you know, IP-only firms, is something where the valuations need to be looked at. But there's a lot of firms like you just mentioned we did with AMS and others. Quite frankly, we've got a lot of intellectual property of Logica as well. There's a lot of IP that's buried in some of these organizations, quite frankly, not even thought of as intellectual property, that when we get a hold of it, we can turn it into revenue-generating intellectual property. Some of these are those exact platforms that we're talking about, But the companies didn't think about it that way. So, yes, we have an eye directly towards that, and that's part of what we'll be evaluating. Okay, great. Thank you.

Yep. Thank you. The next question is from Jason Kupferberg from Bank of America. Please go ahead. Your line is open.

Hey, this is Kathy. I'm for Jason. I first just wanted to dig in a little bit deeper on digital. I mean, obviously, you know, the rising tide lifts all boats. Everyone in the industry is kind of talking about strong demand and digital transformation. You know, I just wanted to dig in a little bit more, like, where do you guys fit into that journey for clients? You know, are there specific types of projects or verticals where you have, you know, maybe deeper expertise or, you know, more of a competitive advantage that maybe translates to higher win rates?

Thanks. Yep. Thanks for the question, Kathy. We are seeing improvement and demand in each of the industries that we currently operate in. The strongest we see right now are in banking and health because they didn't have as big of a downturn. And we have, as I mentioned, a lot of intellectual property in the banking space, on the wealth side, on the trade side, on the credit side. and those are really opportunities for us to play into those digital opportunities on banking, and we're pretty widespread across geographies there. On health, we've had historical intellectual property there, but that's probably an area of investment for us, and we're seeing that accelerate as well. We've historically been strong in retail and manufacturing. Those are coming back. I would say the insurance and the space space the space environment as an industry, the space sector, is an area that we see. We've been strong on the government side, but as it moves into commercial, that's an area that we have opportunities in. And then same thing in energy and utilities as they make transition. So these are some of the areas that we're seeing growth in that we are strong in and across our various geographies. And again, some of that is intellectual property and some of that is domain expertise that we have. We tend to match in technology, but we don't go to market by technology because it's really the intersection of technology and the domain expertise. And as I mentioned, when you're leading with technology, that's when we saw a lot of our clients accessorizing, but now they need to go deeper and more holistic and And we think that's a better value proposition for CGO.

Thank you. Yes, the next question is from Stephen Lee from Raymond James. Please go ahead. Your line is open.

Thank you. Hey, George. You spoke about continued positive momentum on organic growth. Can I take this as meaning improving organic growth 4% or 5% into the next year?

Well, Stephen, thanks for the question. As you know, we don't give specific guidance, but yes, as you look at the increased bookings for the last several quarters, the pipeline and demand environment that we continue to see, the fact that a number of those engagements are for new work As we've been discussing, that's what gives us the confidence to say that we're seeing an accelerating demand or accelerating growth environment for CGI. I'm not going to put a number on it, but certainly we see accelerating.

Okay, great, thanks. And then on Scandinavia, I see quite a bit of improvement on EBIT to 5%, but revenues are still a challenge. So two questions. So one is, can the profitability get to where the other European regions is? And secondly, on the revenue challenges, I actually would have thought a candle with scale would help, but do you see a turn in the revenues there?

Yeah, so we do. I mean, we kind of hit a perfect storm with the combination of services we have, the integration and the pandemic. But we see we focus first on making sure that we preserve shareholder value. So thanks for pointing that out. That's the starting point. But there's a lot of work that's been done to make sure that we're not just adding revenue, but we're adding the right revenue. And that takes a little bit of time, but we see that coming back in the next couple of quarters.

And, George, the profitability, does it need the revenue growth to keep on improving?

Not one for one. We think we can continue to get the profitability improvements. Again, that's part of rehabilitating the type of revenue that we have. But the growth will just continue to have that rise to the level of the rest of Europe. And I didn't answer that part of the question. But, yes, there's nothing structurally that tells us that the Scandinavia region couldn't and shouldn't be able to reach that. And quite frankly, we talk about Scandinavia as a whole, but the reality is that individual Denmark were doing extremely well on both the revenue and the margin side. Obviously, there's pockets even of Sweden where we have that. Really, we're focused on the main city center, Stockholm, which, of course, is very large and drives a lot of this. But there's nothing structural in that area. that won't allow us to do that. Perfect. Thank you.

Yep. Thank you. The next question is from Daniel Chen from TD Securities. Please go ahead. Your line is open.

Hi. Good morning. Good to see the strong bookings continue, particularly for managed services. The strength in managed services seems to be a continuing trend from last quarter. Should we expect this mixture to continue, and how should we think about the margins as it gets converted to revenue, set against an environment where you start ramping up hiring and start traveling again?

Yeah, well, it's a good question, because what we're doing is we're very focused on balancing the investments that we're making in our future around hiring, around traveling, to make sure that we can continue to have these bookings, investing in our people, but also weighing that off against the need and the desire to continue to preserve and grow shareholder value. And I think we're doing a good balance there. You see that our gross margins are actually higher than they were going into the pandemic, yet we're still investing, making some of the investments in the hiring, adding people, and continue to invest in our people through training, because training's up. but utilization is up. Some of the costs are coming back into our employee base, and yet our gross margin is also up. So I think the team is doing an excellent job of balancing those. We'll continue to balance those as we go forward. I did foreshadow that we would expect some of those costs to come back, and they are, but we're also focused on preserving that. And that mix is the key. And, yes, you will see additional, I think, additional move to some more managed services. We like to see that. But we're not going to abandon the SINC market because that's an important market for us. And then intellectual property is the area that really can make the difference going forward as we go from. You saw that we added a percentage point, but we're really looking at doubling down and going to the IP30 for all the reasons that we know. That's really where we're heading.

Okay, that's helpful. Thank you. And then on the hiring front, it seems like everyone in the space is seeing strong activity. I assume many of your competitors need to hire for all the new bookings as well. So is competition for talent increasing and are you able to hire the professionals you need? And any comments on potential wage increases given this competitive environment?

Thanks. Yeah, that's a good question. You know, we're very focused on watching talent. the wage inflation for two reasons. One, the implications to the margins, but also making sure that we're addressing that to keep the people that we have. We're seeing some, but because the demand environment is so strong and the value proposition of digital is so strong, we're able to build that into our businesses. So that's why we're able to keep those gross margins where they are. So, you know, on the new hire front, we're attracting people at the same rate and actually getting the same acceptance rate that we had prior to that. So I think the team is doing very well, and it's for that value proposition, employee value proposition that I talked about. But we're staying focused on it. Of course, wage inflation is built into all of our long managed services contracts, so there's no – There's no concern there, and we're focused on it. But we haven't seen as big of a pickup there, particularly on the more junior staff. We're definitely doubling down on our new hires from universities and, again, able to transition them into billable roles much faster than we were pre-pandemic, given the demand environment.

Great. Thank you.

Thank you. The next question is from Paul Treber from RBC Capital Markets. Please go ahead. The line is open.

Thanks very much, and good morning. Just wanted to hone in on SINC versus managed services, the momentum of both. You know, managed services growth is a little bit stronger than SINC. Why isn't SINC stronger just given the environment at the moment with the demand that everyone is seeing and need for headcount and people who deploy software and other technologies?

Well, you know, Paul, part of it is the way we're presenting the value proposition to our clients. So they come to us and they say, I need some resources for this, and we take that opportunity and turn it around and say, hey, we're already supporting some solutions in this part of your organization, or we understand the managed services that you might need. Let us expand that opportunity and essentially turn the systems integration and consulting opportunity into a larger managed services. And I've been talking about this now for several quarters. You're seeing that come to fruition. That's that add-on work. And in many of these managed services deals, they're a bit of SINC wrapped with managed services. So you're going to see it in the bookings and the growth that way. But, of course, when we do that, it takes a little bit of time to get that into the revenue line. But needless to say, we're playing right into that demand.

And in regards to work from home and the move to virtual and remote working, how has that or not impacted your thinking around M&A and the geographic markets that you go into or maybe perhaps from a delivery point of view? I mean, would you consider M&A in regions like offshore regions that perhaps in the past you wouldn't have?

Yeah, it's a great question. At the macro level, it doesn't really change our viewpoints, because remember, we're looking for client relationships, and those client relationships are people-to-people and do tend to be in proximity, quite frankly, with the decarbonization landscape and the view to get to net carbon neutral. You know, I think you're going to see less of that travel, and yet you still need to have those relationships. Having said that, you know we have a global delivery model. You know we have delivery centers onshore, nearshore, and offshore. And there is an opportunity. We are growing all of those centers faster than our proximity at the current time. And we are looking at maybe a different set of M&A that brings some of those additional global delivery centers of excellence, given that our clients are more willing to go there. We think we have a good value proposition and certainly would like to build on that.

Okay. Thanks for taking my questions. Yep.

Thank you. The next question is from Kevin Christian Arathne from Desjardins. Please go ahead. Your line is open.

Hey there. Good morning, gentlemen. Thanks for fitting me in. George, you reiterated the view of doubling the business over the next five to seven years. I think historically that's been thought of as a, you know, 50-50 build versus buy. I'm wondering, you know, you talked about how it's still very early days with digital rewiring. You're seeing, you know, peers posting strong growth. All the, you know, IT estimates out there from other industry sources are pointing towards stronger growth. So I'm just wondering, is your view shifting in terms of how you see that growth coming M&A versus organic?

Yeah, no, thanks for the question, Kevin. No, I don't think it changes. And let me explain. When we say our long-term view is 50-50, in almost no time is it exactly 50-50. Sometimes it's skewed, like at the current moment, more towards organic growth. Other times it's going to be skewed more to inorganic growth. We're going to go to where the opportunities are. But overall, we're structured in a way to allow us to get that 50-50. And so over time, It'll be 50-50 at any point in time. We're going to go where the opportunities are, and that includes both build and buy, to your point.

Okay, great. Last one, just for me then. Again, on the managed services bookings, everyone's talking about how strong it is. It's quite strong. I'm wondering if you can dig in a little bit in terms of maybe in this quarter the number of deals. Did you see a higher number of deals? Are you seeing any change in the length? I know that there's some contracting. know some renewal activity in there like can you just talk about maybe the pace are our clients coming back at a at a faster pace as they as they start using the services and they need more later on just kind of what are you walk through the dynamics of what you're seeing in that booking strength yeah and and the good news is it's kind of a combination of all three we're seeing more deals we're seeing more deals that are larger in total size and we're seeing more deals that are longer

in duration. And I just looked at that, and we're seeing all three of the above. So it's a nice, strong bookings. And then when we look at the pipeline, we're seeing the exact same thing. So that's good news. And remember, we're architecting some of that. As I mentioned, bringing some of that managed services and that SINC together. So we're architecting some of that to have a bigger deal size and a longer duration.

Got it. And just on the new, you know, any new sort of wins that, new business wins within that, are those coming, you know, how do you think about those coming from competitive, you know, from another competitor or just expanding, you know, budget within, you know, the customer or the customer, you know, just expanding their, you know, spend maybe from different, you know, areas where there's other functions in the business, marketing, finance, HR. I'm just wondering where that growth is coming from. Yeah.

Yeah. It's about, you know, I don't have the exact number, but it's a pretty nice mix of kind of, if you'd say, vendor consolidation, if you will, consolidation of partners as you look at something more holistically, and so taking market share within accounts. and then also just new deals. And some of those new deals, more of those new deals, you know, used to be just I'm going to re-procure an existing project, but more and more of those are just brand-new open opportunities, and we're winning more of those as well in those bookings.

Great. Thanks, George.

Thank you, Kevin, and thank you, everyone, for all the good questions that you had on the call. Unfortunately, we have to end the call at this point. If there are some people who had questions that they wanted to ask, please reach out to me, and I'll take care of that to answer your questions. Thank you, everyone, for being on the call, and we'll see you on the Q4 conference later this year.