CGI Inc.

Good morning, ladies and gentlemen. Welcome to the CGI fourth quarter and 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, Juliane, and good morning, everyone. With me to discuss CGI's fourth quarter fiscal 2021 results are George Kindler, 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, November 10, 2021. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q4 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 revive 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. And all of the dollar figures expressed on this call are Canadian, unless otherwise noted. I'll turn it over now to Francois to review our Q4 financial results And then George will comment on our business and market outlook. Francois?

Thank you, Mike, and good morning, everyone. I am pleased with our Q4 performance as revenue growth and operational discipline contributed to double-digit EPS accretion and increased cash from operations. Our year-over-year constant currency revenue growth accelerated in Q4 as previously booked orders began to flow into revenues. We delivered 15% adjusted EPS growth. We generated strong cash flow from operation, up 7.1% year-over-year in Q4, bringing the last 12 months total to over $2 billion, an increase of 9.1% year-over-year. And we strengthened our balance sheet by executing our first public debt issuance, both in the U.S. and in Canada. This was supported by strong investment-grade credit ratings from both Standard & Poor's and Moody's. For Q4, we delivered revenue of $3 billion, up 6.4% year-over-year on a constant currency basis. This is an acceleration from the 3.5% growth in Q3. Double-digit growth in constant currency was achieved in the following geographies. Western and Southern Europe, up 13.6%. Asia-Pacific up 11.5%. U.S. commercial and state government up 11.1%. Canada up 10.5%. And Central and Eastern Europe up 10.1%. This was driven by strong demand in the following industries. Healthcare grew 10.8%. MRD grew 9.9%. And financial services grew 6.4%. Total bookings of $2.9 billion, representing a book-to-bill of 97.1% for the quarter, while our trailing 12-month book-to-bill stands at 114.2%, up 17% year-over-year. I would like to highlight a few reporting segments with strong bookings in the quarter. U.S. commercial and state government with a book-to-bill of 117%. UK and Australia at 111%, and U.S. Federal at 110%. New business in the quarter was 31% of bookings, an increase from the previous year's 22%. On a 12-month basis, new business was 32% of bookings versus 25% for the year ago. Given the continued increase in demand for our services, are as if reflected by the strong bookings in the last 12 months, we expect continued positive growth trends in fiscal 2022. We finished our 2021 fiscal year with a backlog of $23.1 billion. Adjusted EBIT in Q4 was $493 million, while EBIT margins increased to 16.4%, up 76 basis points compared to Q4 last year. The year-over-year increase was mainly due to higher utilization rates and lower non-recurring project adjustments. We saw strong margin improvements in U.S. federal with margins up 350 basis points, as well as U.S. commercial in Scandinavia, both showing 170 basis point improvements. This was partially offset by lower margins in Canada due to lower tax credits this year as well in the UK due to a non-recurring contract provision. Our effective tax rate in Q4 was 25.5%. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. Net earnings were $346 million, and diluted earnings per share were $1.39, representing an increase of 44.8% year-over-year. This improvement was mainly due to revenue growth, margin improvement, and lower restructuring costs. Excluding integration and restructuring costs, net earnings were $347 million for a margin of 11.5%, and diluted earnings per share were $1.40, an accretion of 14.8% when compared to $1.22 in the same quarter last year. In the quarter, DSO was 45 days down from 47 days last year. Cash provided by operating activities was $527 million, an increase of 7.1% year-over-year. Net debt to capitalization declined quarter-over-quarter to 26.6% from 30.9% in 2003. We are proud as an organization to have a new group of investors in our company through our inaugural bond offering, raising in the process $1.8 billion across the U.S. and in Canada. We used a large portion of these funds to prepay the $1.25 billion U.S. loan facility that was due in 2023. More importantly with this debt raise, the weighted average maturity of our debts has increased from 1.6 years to 4.7 years, with 91% being fixed interest debt versus floating interest debt. For the last 12 months, cash provided by operating activities was $2.1 billion, or 17.4% of revenue. This is an improvement of $177 million year over year. In fiscal 2021, we invested $1.9 billion in our build and buy profitable growth strategy, comprised of $301 million back into our business, mainly in IP and managed services engagement, $99 million on business acquisition, and $1.5 billion to buy back our stock. Buying back CGI stock has been an accretive and flexible way to return capital to our shareholders. In fiscal 2021, we bought back 15.3 million shares at an average price of $98.16. As of the end of Q4, the company could purchase up to an additional 10 million shares under the current NCIB program. Looking ahead, our cash allocation priority remains the same, investing in our business, pursuing accretive acquisitions, and buying back our stocks. With cash of $1.7 billion on hand and a $1.5 billion revolver that remains fully accessible, we have $3.2 billion readily available. In addition, we now have access to the public debt market to support our build and buy profitable growth strategy. Now, I will turn the call over to George to provide perspectives on fiscal year 2021 and on our business for the year ahead. George?

Thank you, Francois, and good morning, everyone. I am pleased with our team's performance in the fourth quarter and full fiscal year. I would like to recognize our now 80,000 consultants and professionals around the world for their tremendous commitment to delivering end-to-end digital value for our clients. Through the expertise, insights, and disciplined project delivery of our team and the continued trust of our clients, CGI returned to revenue growth for the second half and created incremental shareholder value. For fiscal 2021, we delivered double-digit GAAP and adjusted EPS accretion, a 9% increase in cash from operations, and a nearly $2 billion increase in bookings. This morning, I will provide more context on the fundamental components of our business that contributed to this strong full-year performance. Specifically, our diverse presence across industry sectors and regions. and our proven delivery of end-to-end digital services, starting with revenue. We finished the year with revenue of $12.1 billion. And in line with our projections for growth in the second half of fiscal 2021, CGI grew 4.9% on a constant currency basis compared to the second half of last year. Growth was broad-based across every industry sector during the second half, with constant currency growth of 8.9% in manufacturing, retail, and consumer services, driven by Western and Southern Europe, with 18.5% growth. 8.4% in healthcare, led by Central and Eastern Europe, with 44% growth. 6.1% in financial services, with Scandinavia delivering just over 9% growth. And 4.2% in communications and utilities, led by U.S. commercial and state government, at 47% growth. Our government business also grew in the second half at 1.4%, even as clients continued to reprioritize their IT investments in line with the changing public health and economic environment. We remain well positioned as a partner of choice to help governments address a wide range of domestic priorities, including infrastructure, environment and the climate, and cybersecurity. We believe this strong second-half performance demonstrates CGI's role as a leading digital services partner, positioning us well for future growth as clients accelerate spending to capture the increased benefits of digitization for their customers and employees. This strong client demand environment drove our robust bookings on a full-year basis, with a book-to-bill of 114%. We sustained our incumbency with enterprise clients and were also awarded net new projects and expanded scope, growing our share of client spend. Recent new awards for digital transformation services in the fourth quarter included the following. Canadian banks selected CGI to help with its business transformation journey. CGI will lead the modernization and migration of client interaction platforms to the cloud. Volkswagen Group UK awarded CGI a five-year managed services contract to implement enterprise automation to improve employee productivity as well as support their sustainable mobility strategy. Valley Bank in the U.S. awarded CGI new work to support the bank's omnichannel digital enablement, drawing on our capabilities in robotic process automation, machine learning, and application modernization. And the U.S. Centers for Medicare and Medicaid Services will leverage CGI's digital modernization services to move legacy platforms into the cloud. In the year, bookings were strong across several industry sectors. In manufacturing, retail, and consumer services, bookings were up 16% over last year, with a book-to-bill of 115%. Bookings increased based on demand for omnichannel transformation, supply chain modernization, and data analytics. Government and healthcare bookings were up nearly 13% with a 115% book to bill for the year based on continued demand in citizen and patient services, application modernization, and cloud. Financial services bookings were up 20% with a book to bill of 111% for the year. This is led by strong demand in the insurance sector for transformational managed services to enhance customer and employee experience while delivering cost efficiencies. And communications and utilities bookings were up 27% year-over-year, with a book-to-bill of 114%. This uptick led by strong demand from utilities providers to help address climate risk and the energy transition. Moving to our fiscal year 2021 profitability, adjusted EPS accretion of 11% was delivered through a combination of revenue growth, improved business mix, operational excellence, and share buybacks. Our EBIT expanded to 16.1%, up 78 basis points year over year. An important element of our improved business mix is business and strategic IT consulting, where demand accelerated in the second half of the year, notably for business model transformation, change management, customer experience design, and digital advisory services. We continue to invest in talent, methods, and accelerators to support our growth and high-end consulting services. CGI's proprietary industry-specific blueprints, as well as cross-industry ecosystem frameworks, are designed to help our clients navigate the changing business models and evolving value chains. Intellectual property revenue remains steady at 21% of our overall revenue mix, despite the volume headwinds and our transaction-based IP solutions specifically those related to travel services. We saw significant growth in revenue from new solutions, including 50% year-over-year growth in IP acquired through recent mergers, demonstrating CGI's ability to leverage our global footprint to expand the reach of acquired services and solutions. We also saw significant growth in our Open Grid 360 platform, which helps clients manage the energy transition. We expect continued strong demand for this solution as part of CGI's suite of sustainability offerings, which we are highlighting during COP26 in Glasgow through the end of this week. SaaS-based IP revenue was also up year over year, in line with overall increases in demand for cloud-based solutions. Closing out the fiscal 2021 review and setting the stage for growth in fiscal 2022 was our strong cash generation. As we shared throughout the year, our financial strength anchors CGI's resilience and enables continued investment in our build and buy growth strategy. Last quarter, I shared with you some of the findings from our proprietary research, notably the characteristics of leading digital organizations. I will now highlight a few of our delivery successes from the past year in helping clients realize the full potential of their digitization. For one of the world's largest communication and media companies, we are delivering Digital Design Studio as a Service, which combines consulting and managed services to create a unified vision for customer experience across multiple commercial platforms, 30 products, and more than 50 development teams. This is improving the company's agility and reducing their overall time to market. We're a leading global financial services company. We're helping to redesign, digitize, and automate all business operation processes for the retail banking line of business. To deliver on this complex enterprise project, a multi-shore team has been established to join up our industry and technology experts across Canada, the Czech Republic, Germany, India, Poland, and Spain. We are supporting the French Agency for Ecological Transition in digitizing their ecosystem partner network to enhance public-private collaboration on the energy transition. Implementation of a new Salesforce-based customer relationship management platform is underway to provide them better visibility into their partners and case management across functional teams. Together with the Swedish Traffic Administration, we are pioneering the collection of driver-based friction data to provide a real-time view on current road conditions, hazards, and potential road maintenance issues. Our solution uses sensor-based data and crowdsourcing to gather and analyze millions of data points to help the agency ensure driver safety. CGI implemented a new cloud-based policy administration and agent portal system for a leading U.S. insurer's commercial products business. By migrating them from a legacy solution to the cloud-based Guidewire platform, we helped reduce their product time to market. And for a leading interbank payments network, CGI is migrating its e-transfer compute capabilities to an on-premise cloud deployment in Microsoft Azure with the aim to improve resiliency and performance of a national payments These are just a few of the examples of how we are collaborating with clients to develop and drive their transformational strategies. You will have the opportunity to hear more about our digital capabilities at the upcoming Investor and Market Analyst Day on November 22nd. I'm pleased to host this event along with Francois and Julie Gaudin, our co-chair of the board. Joining us on the virtual stage will be the president of our operating segments and our global executives responsible for talent, M&A, marketing, and investor relations. Together, we will tell you more about our vision, growth agenda, industry expertise, global alliances, and capital allocation strategy, as well as take live questions. Importantly, the day will begin with an overview of CGI's talent strategy. As a leading professional services firm, we believe engaging our existing talent and attracting new candidates is always our most important investment. In fiscal 2021, we continue to increase our investments in learning and development programs, including virtual boot camps and online learning. During the year, we surpassed 380,000 courses completed in CGI's online university to deepen employees' skills in key areas of client demand, such as cloud, data science, AI, customer experience, and business consulting. Our hiring continues to be on pace to surpass pre-pandemic levels. Our ownership culture continues to be a key differentiator in attracting the best consultants and experts in our industry. In fact, our employees referred over 30% of our new hires to join them in working at CGI this past year. We also continue to invest in industry-leading programs for diversity, equity, and inclusion, and employee health and wellbeing. Over the past year, our programs were recognized by several external organizations, including The Human Rights Campaign Foundation for our policies and practices promoting LGBTQ+, workplace equality in the U.S. Enterprise En Santé in Canada for our global network of mental health champions and certified mental health first aiders. Jobs for Her for our diversity hiring and learning and development programs for women across Asia Pacific. Universum for being selected by female IT professionals as the best ideal employer in Finland. And the Diversity Charter in Germany for the creation of an innovative tool to ensure job advertisements are gender neutral. During the investor and market analyst event, we will also provide a briefing on our plans to accelerate the buy side of our profitable growth strategy. To start fiscal 2022, we received government approvals for and subsequently closed two new mergers in October. Array, a digital services firm primarily in the U.S. federal market, which will expand our client relationships in the strategic markets of the U.S. Air Force and the Space Command, while deepening our offerings in modernization and DevOps. And CMC, which is a leading technology and management consulting firm primarily serving the Spanish market. This merger expands our client proximity footprint in key metro markets as Madrid and Barcelona, extends our global delivery network, deepens our capacity to deliver digital transformation in the region, and brings new relationships with enterprise clients in the IBEX 35. I would like to take this opportunity to warmly welcome the over 1,770 new consultants and technology experts joining CGI from these two firms. As we enter fiscal year 2022, we are confident in our positioning to provide the best services and solutions to our prospective and current clients around the world, particularly given our industry and technology expertise, along with the ability to hire and build the necessary capacity to achieve our growth agenda. We remain committed to executing our growth strategy through both build and buy. Our capital allocation priorities are aligned to drive continued revenue growth and double-digit earnings per share accretion. Thank you for your interest. Let's go to the questions now, Matt.

Thank you, George. And Juliane now will let you all know how you can queue up for Q&A. So, Juliane.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Richard C. from National Bank Financial. Please go ahead. Your line is open.

Yes, thanks. So your ability to sort of expand margins here in a fairly tight labor market is pretty impressive. Can you maybe walk through some of the levers that you may be pulling to not just preserve those margins but expand them?

Yeah, thanks, Richard. As you know, we have a pretty robust model and measurement process here at CGI that we really stick to. It's called the CGI Management Foundation. And that's really built for a professional services firm. And so we believe we can continue to grow and grow our margins at the same time. Of course, when you think about our margin, some of that's coming from revenue growth and the scale that that provides us. Some of that's coming from the business mix, and I highlighted in the opening remarks both consulting and intellectual property. Some of it comes from our operational excellence, and that's a discipline that comes with the Management Foundation. And then, of course, some of that expansion is coming from the share buyback. So it really is a combination of all of the above. And, you know, given the outlook and demand outlook, we expect that to continue.

Okay.

I think you touched briefly on sort of hiring in your comments here. Can you maybe give us some context in terms of the number of headcount, open headcount positions versus what it may have been a year ago or two years ago?

Yeah, well, the headcount is up significantly. And, you know, you're comparing, you know, if you compare over a year ago, that was the beginning of the pandemic. You almost have to go back to 2019 to look at it. But it's up against where we were pre-pandemic and rising in essentially in every strategic market that we're dealing in. And, you know, but it's interesting when you look at talent It is more intense at the current place given the heavy demand for technology and digitization services, but it is part of the business of CGI. So we're employing all the same tactics and strategies that we do throughout the years, and it's working very well.

Okay. And just one last quick one from me. The growth is clearly quite broad-based geographically and by vertical here. How much do you think that is coming from the catch-up with the reopenings following the lockdowns of last year versus kind of a more normalized run rate? Or do you think this is the normalized run rate going forward? That's it. Thanks.

Yeah, I mean, yeah, thanks for the question, Richard. You know, a lot of this is, and I mentioned this before, When we went through the pandemic, I think it put a spotlight on some of the weaknesses in various technology platforms. It also raised the expectations of employees and of customers for digitization. So I think you could argue that some of this is catch-up, but it's more of catch-up from some technology debt that they weren't even aware of. So it's not just catch-up of a delayed project. I think it's more broad-based than that, and therefore it's going to be longer-lived than that. Great. Thank you.

Your next question comes from Thanos Moskopolous from BMO Capital Markets. Please go ahead, your line is open.

Hi, good morning. George, maybe just expanding on the hiring question, can you speak to retention, how that's been trending, and how you feel you're tracking relative to your industry peers?

Yeah, so here's where we are with turnover. It's up, but it's still on a trailing 12-month basis, slightly less than our pre-pandemic levels. And speaking of catch-up, I think there was a little bit of catch-up that occurred more than a lot of movements going on right at the height of the pandemic. And we're seeing and experiencing that just like our peers. We continue to be at or below in all of our key markets. We do track that versus the industry average. And I think a lot of that is because of the of the culture of CGI and particularly our ownership model, which plays into that. If you look at why people want to leave, it's usually career development, and that's why we've doubled down and actually increasing our training programs by another 33% here in fiscal 2022. It's the compensation of benefits that come with that career development. And so we're doing lots of promotions as a result of the training. And then it's purpose. And, of course, in a culture like CGI ownership culture where we have the clear equilibrium between our three stakeholders and the strong support for the communities in which we live and work, it really speaks to purpose. So we believe we can continue to hold our own. Like I said, it's a more intense environment right now, so there is a lot of movements, but that's why I really focus on those employee referrals. as well, because that's a way we can tap into talent. And then the last part is really tapping into talent in those global delivery centers, not just offshore, but also those onshore, nearshore centers, which are growing at twice the rate as the rest of the company.

Great. And looking at the U.S. federal business, I know that the book to bill was book one, but year-over-year bookings were down a fair bit. I presume that's related to some of the budget delays in the U.S. If you could provide some color just in terms of, you know, when you think that might resolve and what you're seeing as far as pipeline and timing in that business.

Yeah, specific to the U.S. market or just in general?

U.S. federal. Yeah, no, U.S. federal specifically.

Well, U.S. federal, you saw the bookings were actually above 100% for the fourth quarter. So we're seeing some of that movement occurring. Government in general, including the U.S. federal market, has been a bit sluggish. I call it the kind of COVID-19. hangover, fighting with various, do we do a mandate? Do we not do a mandate on vaccines? Do we do a booster? Do we not do a booster? There's a lot of that kind of dominating some of the agenda. But I would say both in the U.S. and around the world, there are a lot of domestic priorities that we're well positioned for. Interestingly enough, if you look at the infrastructure bill that was passed by the by the House, and it looks like it will become real. A lot of that work actually comes to the state and local governments. And so a lot of that's grants to state and local governments, so that will help our U.S. commercial and state and government business. But the federal business really will be helped by a lot of the infrastructures, actually cybersecurity infrastructure. and Department of Homeland Security and other areas. So we're, again, very well positioned for that. So we like where things are heading, but you're right, it's been a bit sluggish as of late, and you see that. Great. Thanks, George. I'll pass the line. Yep.

Your next question comes from Paul Steep from Scotiabank. Please go ahead. Your line is open.

Great morning, George. Could you speak a little bit more? You comment about accelerating the investment in the business into 22. Maybe talk about whether that's a larger magnitude that you and Francois want to talk to or where those investment dollars might be getting redirected. Some of your comments earlier about robotic process automation and maybe other areas of investments.

Yeah, well, part of that investment is on the training and development. I mentioned a 33% increase in our training. budgets around the world. And that's really to make sure that we're keeping pace with the demand that's out there. You know, one part is hiring. The other part is retaining your people and giving them the growth that they need as they pivot to the new opportunities. So that's one part of it. Of course, another part of it is we are also increasing the investments in our intellectual property. I mentioned some of the opportunities we see With the changes we made in the IP group, the opportunities to spread our IP into broader markets also string the IP together and then also create some new IP for the sustainability opportunity. So that's another one. But then, of course, you know, we also have investments to grow our buy side. And so I don't know, Francois, a little bit about that.

You know, already we started the year with two acquisitions that we closed in October. So versus last year, we finished with two for the full year. So it's a great start for 2022. And the expectation is that that will be accelerating in the future quarters. So you can expect more.

Great. One cleanup just on operations. How should we think what used to be Northern Europe, but I think it's mainly in Scandinavia where we were running off, some business that maybe wasn't a fit for you and the clients, and you transitioned them. How close to the completion of that are we where we might start to see, so hopefully, an inflection in that region towards more growth in the future?

Yeah, thanks for the question. So we've now isolated the issues really in just two metro markets. Otherwise, we're strong both on bottom line and returning to growth. We made leadership changes in those metro markets, and our COO, Jean-Michel, is now focused. He can travel. He's been there half a dozen times since the summer. We're focused on margin first, and so you see the improvements going on margin, and then the revenue will follow. But the good news is we've isolated now to just a couple metro markets, and I think you'll start to see a gradual improvement over the quarters to come.

Great. Thanks. Yep.

Your next question comes from Paul Trever from RBC Capital. Please go ahead. Your line is open.

Thanks very much and good morning. Jesse, you commented that the structural organic growth is perhaps higher than historically. Does that change the prioritization of acquisitions here? In other words, with faster organic growth and also gaining a greater footprint with existing clients, is it as much of a necessity to accelerate the pace of acquisitions? How do you think about that here?

yeah i actually think it's the perfect time to accelerate the uh the pace of the of the m a because again what the m a does we have a very different uh viewpoint we're looking for uh quality client acquisitions that's part of the what we do of course we get a lot of very strong capabilities that come with those type of uh of acquisitions but we're really looking for new clients to bring in so given the fact that we are doing uh We're getting the organic growth of the existing clients and achieving some new clients on the organic side. We want to accelerate that with a buy. So we've got a very active pipeline. We've improved our sourcing. You see that we just did two in parallel. That's the idea is we increased that pace. And the investments we've made, and we didn't talk about this, but we did make investments in the capacity to drive more velocity, and you're starting to see that come through.

And could you speak to the size of potential acquisitions? There was a news article, a media article in August, I think, that mentioned or that quoted, and maybe they misquoted, but they mentioned Francois said that you're looking at some pretty large acquisition targets. Can you just elaborate on that or clarify that?

Yeah, well, we're always looking for some large ones. If you recall, we have the metro market. acquisition policy, but we're also looking for the transformational ones. Given valuations, that hasn't been as achievable as of late. And then, of course, we paused during the pandemic for a while there. But that's always been, we have the appetite for that. We certainly have the balance sheet, which I'm sure one of the things that Francois was talking about. And that's kind of still on the on the docket. There are fewer of them, and there are fewer of them that make sense for CGI, but we'll always be looking at that. I also mentioned that we're also looking at larger metro market acquisitions. So you saw that in the CMC acquisition, and even array larger than the average we've done over the last 24 months. You should expect to see more of that as well.

Just elaborating on the quality versus valuation spectrum, are there areas where you're looking to flex on either of those? With the digital transformation initiatives, would there be areas that you would be willing to go into that are non-traditional IT services, so things maybe more in the BPO area, content moderation, things like that, that traditionally you haven't looked at?

Yeah, I think there are some adjacencies that we are, in fact, looking at, Paul, and I think it's a good question as the market continues to digitization, continues to converge some of these elements together. So that is strategically something that we're looking at and opening the aperture, if you will, for some of the acquisition targets that we wouldn't have necessarily qualified for in previous years. So, yes, that is something we're looking at.

Thank you. I'll pass on. Yep.

Your next question comes from Stephanie Price from CIBC. Please go ahead. Your line is open. Hi.

Good morning.

Hi, Stephanie.

Can you talk a little bit about the pricing environment and maybe your ability to pass on some potential wage or cost inflation here?

Yeah, no, it's a good question because obviously wages are being increased across many different industries and given the supply and demand situation. You know, we look at it this way. The value proposition for the digitization services and the types of projects that I listed off, just a few examples in my remarks, they have a real business case. And I even mentioned When we look at it, the leaders are getting more out of these digital projects, and we're seeing everybody get sharper about what they want to do there. They're focused on the business outcome. They're not focused on the business inputs. And, of course, our clients, like everybody else, realize what's going on in supply and demand, and they want the best people on the project. So that's a long way of saying, yes, we are able to achieve and pass on any wage requirements increases in the rates. And that's not just for new projects. We have those clauses in most of our existing contracts tied to things like consumer price index and inflation rates. So we're able to support that, and all you have to do is look at the margins that we're able to achieve as we continue to grow in this high-demand market to see that that, in fact, is happening.

Okay, great. And then obviously a very strong environment here. Just curious what you're hearing from clients in terms of spending priorities and 2022 budgeting.

Yeah. Again, the priorities are many of the areas that I rattled off around modernization, about moving to a more agile environment, which includes elements of things like cloud. That's the technology, but it's really about moving to an agile environment and being more digitized on a holistic basis. So those are the priorities we're looking at. And then, of course, how they can leverage the technologies, the various technologies, whether it's machine learning, whether it's cloud, whether it's AI, et cetera, to help them achieve those goals. The other one I would say, Stephanie, that we're hearing more and more, and, of course, with COP26, it's pretty loud, is really around sustainability. And it comes up in every client meeting I have, whether it's a financial institution, whether it's manufacturing. Of course, with the energy companies, it's front and center. It is in even the retailers. It's a discussion that we have, and, of course, with our IP centered on the all-important element of data, that's where we see a lot of demand and opportunity moving forward.

And maybe more broadly, and maybe building on the answer to that last question, when you think about doubling the size of the business, can you talk a bit about where you see those major sources of incremental revenue coming from?

Of the incremental revenue, well, again, a lot of it's playing into the demand you see. I answered Paul's question, some of it, I think, as you see some of this convergence. There is opportunities for us to add more to our IP around the business process side. There is opportunities for us to move into the convergence, what we see on the Internet of Things for manufacturers and and get into some of what previously might have been referred to as engineering services. So I think those are some of the opportunities for us to grow. And, of course, we'll do that as a balanced build, but also looking to buy.

Perfect. Thank you very much. Your next question comes from Daniel Chan from TD Securities. Please go ahead. Your line is open.

Good morning. With the increased wage environment, any thoughts on changing up your mix of staffing to potentially increase it more in low-cost areas or near-shore areas?

Yeah, that's a great question, and I kind of threw this into one of my previous answers. But, yes, we are actually growing faster in our global delivery centers. of excellence around the world and will continue to do that. CMC comes with some global delivery centers in areas that we didn't have before. We are seeing uptake for that from our clients. And again, it's not just offshore. In fact, it really is I think the model that we have on global delivery is playing very well in tapping some talent in other locations, but still closer to time zones and closer to clients. So kind of a mix between proximity and offshore. It's playing very well, and we expect to continue to grow there.

Thanks. That's helpful. You mentioned that you had some CPI adjustments built into your contrast. Can you just remind us of the mechanics around that? Does that usually happen around the renewals, or can you kind of go while the project is still running if there are some potentials that are met?

Yeah, no, it's a good question. Typically, they run on either a contract annual basis or sometimes a calendar annual basis and other times the client's fiscal year annual basis. So some combinations. So you're not going to see one uptick, but we don't have to wait for the end of the contract renewal. Francois, anything? Yeah, no, I totally agree.

Most of our contract, if it's the vast majority, we have a COLA clause in the contract so that we can increase at least on an annual basis.

Okay, that's good to hear. And then last one from me. I know bookings can be a very volatile metric, but can you kind of comment on the low bookings in this quarter relative to a strong market backdrop? Just wondering if there's anything there. Thank you.

Yeah, and thanks for mentioning that the bookings are always lumpy in general, which is why we really focus on the trailing 12. But a few larger deals, one in particular did push out of the quarter. It's one, but not signed. And, of course, we need to make sure that we dot all the I's and cross all the T's. And so we're not too fussed about any one quarter. But certainly we had strong IP bookings, strong consulting bookings, and the new business is up. And, you know, some of that is we did some of the big renewals in certain locations like Canada earlier in the year. That's good news because now you see the bookings are really going to be driving nearer term growth. So that's kind of how I look at the bookings right now. So nothing to be too concerned about.

Your next question comes from Kevin Krishna Ratney from Dejao Bank. Please go ahead. Your line is open.

Hey, good morning, gentlemen. Question for you. You talked about how your SaaS-based IP revenue was up strong, and you alluded to cloud growth there as well. Is there a way that you can give us perhaps the size of the cloud business right now for you or maybe another way, any thoughts on how penetrated you are in the cloud, what your customers are saying about where they are on the journey, just any updated thoughts there on the cloud business.

Yeah, thanks for the question. We don't break it out. That's why I gave some of the color commentary. on some of the deals and you see that probably two-thirds of the deals i mentioned um some element of the of the cloud involved there uh i also mentioned uh i think last quarter that we've elevated uh the uh partnerships with each of the major cloud providers uh a direct report of mine owns each of those uh engagements so because we see a lot of opportunity In general, from a market perspective, there's still a lot of applications not on the cloud that could take advantage of the opportunities of the cloud. And, of course, there's a lot of work between here and now. It's not just like a switch and the cloud works. That's why the partnerships with the cloud providers we see as a big opportunity. We don't break it out that way, but that's something that we have. And, of course, we have, as I mentioned, the SAS revenue for our own IP is going up as well. That's now over half of our IP now is bookings are on a SAS-based basis. I know that because that's our own IP.

Gotcha. Okay, that kind of goes to my next question on competition. I'm wondering if you could talk about, you know, if there's been any change, any material change, how your win rates are progressing. You talked about, you know, the consulting-based revenue, you know, has been doing well and accelerating. Just curious to know, you know, what you're doing, what you're seeing, how you're winning business, you know, how you bring your IP into the table to win those deals.

Yeah, well, it's interesting. You know, we made some investments on the IP, and I mentioned that better leveraging our global footprint as a channel for the IP. So that's that highlight I gave on the 50% increase in acquired IP. But what I didn't say is that the deal size and the pipeline for our IP is going up, and that's partly through linking some of those IPs together, along with some of our other services, including consulting and BPO, and then the win rate. is increasing so we're leveraging our global ip subject matter experts better across the company by bringing it into that global uh global footprint so uh that's what that so the win rate is actually increasing with our ip and it's uh and it's uh holding steady across the uh across the company okay that's super great great to hear one one last one

Look, on supply chain, I know that there's obviously no direct implications given your business software cloud-based, but just wondering if you're seeing any sort of indirect exposure, for example, if there might be a deployment for an IoT project or you're working with a client on a deployment that requires a lot of devices on their end. Is there any sort of timing delays that you might be seeing or being impacted from anything? Yeah.

Yeah, it's a good question. You're right. There's not direct, but there is pockets of indirect, but it's pretty limited right now, but we do see it. So something that we continue to look at. A lot of our clients are enterprise clients, as you know, and they tend to have the power right now. And so they've done – they've actually managed it quite well, very – Very impressed with how our clients have managed some of this. But we do see pockets of it popping up, and we're keeping an eye on that. Hasn't delayed any of our projects, maybe delayed some of our revenue in certain places, but, again, just pockets. Great. Thanks a lot. I'll pass the line.

As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your next question comes from Rob Young from Canaccord Genuity. Please go ahead. Your line is open.

Hi. Good morning. You just said a little bit ago that consulting bookings were quite strong. And so I was looking at the absolute dollar contribution from SINC. It seems low going back a little ways. And so I just try to reconcile that statement. Is that short-term signings? I mean, any kind of color around what's going on there?

Yeah, yeah. Well, you know, I'm breaking out consulting from systems integration. And I had mentioned earlier that some of that systems integration work we're now embedding into those managed services contracts. So that continues to be a trend. In fact, it's part of the offering, the way we offer our managed services. How do I save some money on one side and then spend that money in traditional systems integration? So you're seeing that We're even seeing that in some of our local government work where we extend the managed services contract and then the system integration, which is near-term spend, but it's under the umbrella of the managed services. So it shows in the managed services revenue. So I think that's what you're seeing. But discrete consulting projects are up, both in bookings and in revenue. I mentioned some of that's in digital advisory. A lot of that's in change management. And, again, this is really good because it's a discrete consulting, which then may lead to that broader systems integration wrapped in managed services. So that's why I highlighted that.

Okay, thanks. That's great color. And then, I mean, a lot of comments on the call today about the hiring. And I think you earlier said that utilization was very high, a very strong contributor to margins this quarter. And so if you stand back and look at the business, are you seeing constraints related to capacity? Or would you say it's because it doesn't sound like there's demand constraints. And just, I mean, to better understand the business, are you able to ratchet up your consultants, you're able to hire in lockstep with the demand that you're seeing out there, or would you say capacity growth is a constraint?

We have been, thanks for the question, we have been able to keep up, but it is an intense environment, as I mentioned. Maybe just give you some color commentary. you know, a third of our new hires come through those referrals that I mentioned, or 30%. About a third come to us and actually inbound. So we advertise and, you know, with the movement, actually people are looking to move to companies like CGI. And so about a third of them are coming in. And so a third is coming from that outreach. And so we've increased are recruiting a twofold to ensure that we keep up with that. I'm not going to say that that's not still intense, and we continue to increase that. That's good news. But, again, that's also where we need to focus on the retention, which I mentioned earlier, and our high engagement, our culture, and what we're doing there on the training. and development are helping us to keep up with that. I'd also mention one other statistic. Our hiring has increased, but our acceptance rate has held at above 80%, which is very positive, saying that we're able to not just attract, but to get the acceptance from those that we choose to make offers to.

Okay, that's great. Last question. You used the term technology debt. I really like that term. It's sort of bleeding into the tech lexicon here. When you look at your customer mix, would you say that relative to your peers in the space, would you say that your customers lean a little towards those that would have technology debt, or would you say that your mix is less than some of your peers?

No, I would say it's on par. Every industry, every geography, and most clients have some technology debt. And so I think it's just a matter of, like I said, helping them work through that. And remember, the technology debt is increasing just by the very nature of what's going on in the marketplace. So it might not be debt that's 30 years old. It might be debt that wasn't there five years ago, but now as you move to more agile DevOps-type environment, you've got to make some of those changes. So we're seeing our clients move very quickly along with the marketplace.

Are there any end markets where it's more pronounced, like regions or –

Well, there's always regional differences across this. Europe might be a little ahead in one area. whereas North America might be a little ahead in a different area. And so this is the richness of bringing our global insights and being able to do that across regions and also across industries. As one industry moves to more of a customer-facing environment that they weren't in before, they can learn from another industry. So, you know, not a pronounced way, but certainly an opportunity for a global consulting firm to help our clients across the globe. All right, thanks.

Your last question comes from Howard Lung from Veritas Investment Research. Please go ahead. Your line is open.

Great. Thanks for taking my questions. The first one I have is on... on the leases and just overall how you view workers, you know, going back to the office or staying remote, you know, saw that there was a gain on lease termination and also lease liabilities. I think they were down, you know, something like 12% from last year. Is your plan to kind of continue winding down some of these leases? And, you know, with all the questions before about, you know, hiring workers, how does that fit in with you? your view about retaining or attracting talent.

Yeah, maybe I'll let Francois talk a little bit about the leases, but just in general, when we look at our talent and what we are doing on behalf of our clients and working with our clients, we find it's important to spend some time working with your colleagues and some time working with your clients. And so we do believe that there will be a return to the office. We're up to about 25% if you take out India, probably 30% of our employees now spending some time in the office, more pronounced in Europe where it's 50% in some cases higher, a little bit of a lag in North America. including in Canada, but we're beginning that return in Canada in November, and even beginning the return in India in January. We think that's important for innovation. We think that's important for mentoring, which is what people are looking for as far as growing their careers. Having said that, of course, we also recognize that people were very productive in during the pandemic in some of the work that they're doing. And so it really is, we believe, a hybrid, at least for the current environment, is one that we'll continue to look at. to the leases, we're looking at hybrid, right?

Exactly. So that's why in the meantime, our renewal, what we're doing is that we're reducing the number of years and going a little bit more on short-term leases than signing 7, 10, or 15 years leases, just to understand also where the market is going. And like George is saying, since for now we're to a certain hybrid model, until we'll have a better visibility when people will come back on a full basis, for now we're going with shorter lease and sometimes even non-renewing some leases in the meantime.

Great. No, that's really helpful. And any, I guess maybe it might be too early to call out, you know, what kind of impact that could have on your which has to be bid or free cash flow margins going forward.

But for the EBIT margin, like George alluded, I think we had strong EBIT margin this quarter, this year, over the 16%. I think we still have some opportunity to increase it with examples like we're seeing in Scandinavia that the expectation is that we would see improvement on the EBIT margin in this area. But on the other hand, also, with the return back, the fact that we're meeting clients more and more now present some of the travel and out-of-pocket expenses are coming back in. So that will be naturally a headwind, but again, compensate by improvement that we can still see in the operations.

That's great. And then just one on M&A, George, you mentioned earlier that you're investing more in M&A now and you invest more in the capacity. Just wanted to see if there's any more color on that. Is that increasing the size of the M&A team, software for M&A, infrastructure, or the process? Just wanted to find out how it's expanded.

Yeah, no, it's a very good question because it's yes to everything. You just said it's increasing the team size, particularly across each of the markets, so not just centralized, but adding individuals dedicated to M&A within each of the proximities closer to the sourcing. It's leveraging some infrastructure, some infrastructure. some various software platforms to ensure that we're seeing all the deals, and then it's also some changes to the process. So it's really all of the above.

Okay, that's great. And just one final one for me. Saw that buyback from the quarter, I think, slow down, take down quite a bit from the previous quarter. Was that just, you know, that doesn't have anything to do with the price or maybe just because you were going through the bond offering? Just want to know if there was anything to call out there.

Yeah, no, nothing related to the price. Yes, we did work on the bond offering, but again, that was not necessarily having an impact of why we didn't go on the market. But also the fact that we had some good momentum on the acquisition and finally closed two new ones in October. It was close to even close them in September, so that was also part of the equation why we were slowing down some share buyback in the quarter. Again, just to reiterate, our priority is investing back in the business, and the second priority is M&A, and the share buyback is the third one, naturally. Last year we had only two acquisitions, but this year the momentum is very good, starting with the two new ones in October and hoping that we'll have more in the year. Thanks.

Thanks so much. That priority makes sense. I'll turn it back.

We have no further questions in queue. I'd like to turn the call back over to Mayor Yagi for closing remarks.

Thank you, Juliane, and lots of great questions, guys. Thank you, everyone, for participating on this call. We hope that you will join us for our Investor Day on November 22nd. Just a reminder, and please put it in your calendar. We hope that you can join us then. And a reminder that a replay of the call will be available either via our website or by dialing 1-800-770-2030 and using the passcode 8986313. As well, a podcast of this call will be available for download within a few hours, and follow-up questions can be directed to me at 514-415-3651. Hope to see you soon. Thank you. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.