CGI Inc.

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Good morning, ladies and gentlemen. Welcome to CGI's first quarter fiscal 2022 conference call. I would now like to turn the meeting over to Mr. Kevin Linder, Senior Vice President, Finance and Treasury, and Head of Investor Relations. Please go ahead, Mr. Linder.

Thank you, Julie, and good morning. With me to discuss CGI's first quarter fiscal 2022 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, February 2, 2022. Supplemental slides, as well as a press release we issued earlier this morning, are available for download, along with our Q1 MD&A, financial statements, and accompanying notes, all of which have been filed with both Cedar 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. A complete safe harbour statement is available in both our MD&A and press release, as well as on CGI.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. We're also hosting our annual general meeting this morning, so we hope you'll join us live by the broadcast at 11 a.m. I'll now turn it over to Francois to review our Q1 financials, and then George will comment on our business and market outlook. Francois.

Thank you, Kevin, and good morning, everyone. I am pleased to share with you the results of our first quarter of fiscal 2022. Our revenue growth continues to accelerate on a constant currency basis, fueled by strong bookings from prior quarters, along with continued demand for our digital services and business solutions. In addition, we delivered double-digit EPS growth despite a strong Canadian dollar causing headwinds in our reporting currency. We recorded revenue of $3.1 billion up 6.8% year-over-year on a constant currency basis. Strong constant currency growth was seen in the following segments. Asia-Pacific up 19.5%. Western and Southern Europe up 15.2%. U.S. commercial and state government up 14.5%, Central and Eastern Europe up 11.9%, and Canada up 8.3%. Total bookings were $3.6 billion, representing a book-to-bill of 116.5% for the quarter and lifting our trailing 12 months book-to-bill to 115.2% compared to 103% for the prior year. I would like to call out a few segments with strong bookings in the quarter. Scandinavia at 117%, the UK and Australia at 122%, and Finland, Poland, and Baltics with a book-to-bill of 353%, driven by a new eight-year managed services contract signed with the Finnish government, whereby CGI will serve as the largest provider of hybrid IT services to dozens of public sector organizations. In addition, yesterday, we announced an award by the U.S. Department of Justice for a $250 million U.S. dollar blanket purchase agreement with the first task order already granted for a value of $134 million U.S. dollars for approximately $170 million in Canadian dollars. Out of our eight proximity geographic segments, six now have a trailing 12-month book-to-bill well above 100%. New business was 33% of bookings, an increase from the previous year's 28%. On a trailing 12-month basis, new business was also 33% as compared to 26% for the year-ago period. Our global backlog increased by $808 million year-over-year and remained strong at $23.6 billion. This backlog represents 1.9 times revenue, the vast majority of which is comprised of long-term managed services and digital transformation engagements. Given the continued increased demand for our services, as reflected by the strong bookings in the last few quarters, we expect continued positive momentum. On the profitability front, adjusted EBIT in Q1 was $521.5 million, while EBIT margins increased to 16.9%, up 50 basis points compared to Q1 last year. The year-over-year increase was mainly due to revenue growth in IT services and solutions and improved utilization primarily within the Western and Southern Europe, Central and Eastern Europe, and U.S. federal segments. In addition, we continue to benefit from stronger margins due to operational excellence. We delivered strong EBIT margins in the following segments, Asia-Pacific at 32.1%, Canada at 25.6%, UK and Australia at 15.8%, and Western and Southern Europe at 15.4%. Due to the strength of our value proposition to clients and our embedded indexation clauses within our contracts, we have largely been able to absorb wage and other cost pressures in our pricing. Our effective tax rate in Q1 was 25.5% compared to 25.9% in the prior year. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. Then earnings were $367 million and diluted earnings per share were $1.49, representing an increase of 12.9% year-over-year. This improvement was mainly due to revenue growth and EBIT margins improvements as outlined earlier. Excluding integration costs, net earnings were $369 million for a margin of 11.9%, and diluted earnings per share were $1.50, an accretion of 12.8% when compared to $1.33 in the same quarter last year. In the quarter, cash provided by operating activities was $484 million compared to $597 million in the prior year, which had reduced variable compensation payments related to the impact of the pandemic. As a percentage of revenue, our cash generation was strong at 15.7%. DSO was 45 days compared to 44 days last year, aligned with our targets. For the last 12 months, cash provided by operating activities was $2 billion, or 16.4% of revenue. This represents $8.02 in cash per share. In the quarter, we invested $206 million in our Build and Buy Profitable Growth Strategy, mainly in our IP, and for the acquisition of Connie Case Management Consulting and Array. In addition, we used $267 million to buy back our stock. Buying back CGI stock has been an accretive and flexible way to return capital to shareholders. As such, yesterday, our Board of Directors approved the extension of the NCIB program until February 2023, allowing us to purchase up to 18.8 million shares over the next 12 months. In addition, we reimbursed $250 million of scheduled debt repayments in the quarter, leaving only $50 million of scheduled debt repayments for the remainder of fiscal 2022. With the issuance of our senior notes in September 2021, CGI's weighted average maturity is now 4.9 years with 100% fixed interest rate at very favorable rates. Consistent with previous years, we review our capital allocation plan to formulate the most effective capital deployment strategy to maximize shareholder returns. In Q1, we delivered a return on invested capital of 15.3%, a significant increase when compared to 12.4% in the year-ago period, returning to pre-pandemic levels. Looking ahead. and as indicated during our investor day this past November, our cash allocation priority remains the same, investing in our business, pursuing accretive acquisitions, and buying back our stock. With a net debt to capitalization ratio of 27.8% at the end of December, as well as $2.7 billion of cash readily available and access to more if needed, CGI has the strength and capital resources to support our build and buy profitable growth strategy. Now, I will turn the call to George to further discuss the insights and outlook for our business and markets.

George? Thank you, Francois, and good morning, everyone. I'm pleased with our team's strong first quarter financial performance. We started fiscal year 2022 with positive momentum in all key metrics, double-digit EPS accretion, accelerated revenue growth on a year-over-year and sequential quarter basis, robust bookings for the quarter and the last 12 months, and cash from operations of 15.7% for the quarter. The continued strength of our financial performance is grounded in our consultants' ability to earn clients' trust every day. This is evident in our modernization and digitization wins in the quarter. For example, Fannie Mae extended our long-term partnership in the U.S., We were awarded new work to support their migration to the cloud and implement intelligent automation and data analytics across all consumer and commercial lines of business. Mayhi Lainen, a recognized pioneer in healthcare and social services in Finland, has expanded their relationship with CGI to assist in completing their Google Cloud-based transformation. This engagement aims to help optimize costs and increase business agility. The Quebec government selected CGI to help them establish and operate a new government cloud for the next three years. Upon completion, this cloud environment will be delivering services to multiple government agencies, serving over 8 million citizens. Electroscandia, the Swedish electrical wholesaler, which is a company of Sonpar, the world's largest electrical products, systems, and services firm. named CGI as their digital transformation partner to support their modernization efforts, including the implementation of SAP S4 HANA. The French Agency for Ecological Transition chose CGI to deliver application services, Agile at Scale, and DevOps to help modernize their technology capabilities and services, supporting over 3 million businesses. And in the UK, The University of Nottingham awarded CGI a new consulting services agreement. Through this partnership, we will help modernize their digital value chain in support of learning services for over 45,000 students and 7,000 employees. Our robust bookings in the quarter were led by awards from government sector clients, up 28% year-over-year, for a book-to-bill of 151%. We expect this uptick to continue given that governments around the world are reprioritizing their IT initiatives in line with the evolving public health and economic environment. On a sequential quarter basis, we also saw demand accelerate in the financial services sector, resulting in a nearly 40% increase in Q1 bookings and a book-to-bill of 114%. This was driven by client demand for digital services across all geographic segments. In addition to our strong performance, clients continue to recognize the depth and breadth of our knowledge and expertise, resulting in all-time high client satisfaction scores. Notably, our two highest client satisfaction scores measure how we partner with clients, specifically our level of commitment, collaboration, and communication. These qualities are key elements of the world-class delivery excellence for which CGI is known. In fact, client executives often raise these qualities as some of the most important priorities for their partner selection and cite them as differentiators for CGI. As a people-centered firm, we also recognize that our success is founded on the strength of our consultants and professionals, 85% of whom are CGI shareholders. Our employee satisfaction scores also continue to be at record high levels. This is primarily due to our ongoing investments in digital tooling, health and well-being, and employee development. These are critical elements to provide rapid career growth for our talented employees and are therefore instrumental to our overall employee retention. As such, our voluntary attrition rates remains below the IT services industry average. Now, as outlined during our recent Investor and Market Analyst Day, client demand for end-to-end digitization remains the key driver for CGI's planned profitable growth in fiscal 2022 and beyond. During that meeting, we shared four areas of investment with annual and three-year objectives. First and foremost, an industry knowledge to help clients in their quest to build their right future. And technology expertise to support them in building it right. and offering intellectual property assets to enable them to build with speed. And finally, the operational excellence to help clients operate and evolve their planned future state. Today, I'll provide updates on each of these areas, starting with the right industry knowledge. We announced our plan to grow strategic business and IT consulting services revenue by 15 to 20% on a compound annual growth rate basis over the next three years. In the quarter, we saw an uptick in consulting and systems integration demand as bookings increased by over $100 million compared to this time last year. This is due, in part, to the expansion of our local consulting practices and the related increased investment in hiring and developing industry expertise. In fact, we are finalizing a new white paper which consolidates input from our board of directors, CGI industry experts, and external alliance partners to explore the key trends that will impact and shape the long-term trajectories of most global industries. Our consultants will be sharing this paper with our clients to help inform their strategic planning, and we will then discuss with clients how CGI can best support their business objectives. Our next area of investment, technology expertise, helps clients balance the potential of technology with the reality of complex enterprise delivery. We previously announced our fiscal 2022 plan to increase employee training in digital technologies by 33%. A key mechanism for supporting this plan is CGI's online university, where 35% of employees completed courses in Q1. This training enables rapid reskilling and upskilling in areas of high demand, such as scaled agile and cloud technologies. Also, in support of our technical expertise investment, we plan to add over 15,000 employee certifications of Global Alliance Partner Solutions over the next three years. So far this year, we have already surpassed 2,100 of these certifications. This has contributed to a 15% increase in bookings with our Global Alliance Partners on a year-over-year basis. Leveraging our investments in intellectual property, we also announced our plan to reach 30% of our revenue derived from IP by 2025. In the first quarter, IP services and solutions accounted for 22% of revenue, up from 21% last quarter. Our investments in IP globally are focused on deploying new value-add capabilities across the existing IP portfolio, as well as investing to co-create with clients on new innovations to bring even greater value to clients' digital transformation and add to CGI's IP portfolio. Most importantly, our plans for operational excellence are a critical element our clients are looking for, not only for us to be a safe pair of hands, but also for us to deliver in a cost-efficient manner. To support delivery and operational excellence objectives, the three-year plan we announced includes increasing headcount, by 15% on a three-year compound annual growth rate basis across all of our global delivery centers, particularly in India. In Q1, our current hiring pace in India is almost two and a half times more than before the pandemic. This hiring contributed to the 20% year-over-year growth in our Asia-Pacific operations. Given CGI's strong value proposition, our attrition rate in India stands well below the India peer group average. Our ability to deliver these results is ensuring we have the right talent in both our client proximity and global delivery operations. Over the past few months, we've continued to evolve our hiring strategies to meet increasing client demand. In Q1, the number of new hires more than doubled compared to this time last year. We ended the quarter with 82,000 employees, a year-over-year net increase of 6,000 consultants and professionals. We continue to deploy an effective and efficient talent attraction and onboarding approach, with two-thirds of candidates coming directly to CGI, either through referrals from current employees or through direct applications for open positions on CGI.com. In addition, to support our proactive recruiting outreach, we have increased our recruiting capacity across all operating units. Our operational leaders, the same leaders who are responsible for client delivery, are involved in candidate sourcing, assessment, and decision-making at every step of our hiring process. This ensures tight alignment between candidate skills and client needs and reduces overall time to fill open, fillable positions. Moving to the growth outlook for the rest of the year, we expect client demand for end-to-end digitization to continue accelerating across most of the key industries we serve. In government, as I stated earlier, we see positive client demand momentum, particularly in areas well aligned to CGI's positioning and offerings. This includes helping agencies address a range of domestic priorities spanning social and health services, infrastructure, space-based data solutions, environment and the climate, and cybersecurity. And manufacturing supply chain disruptions continue to require reshaping and reconfiguration. This is driving demand for data-driven enterprises to improve service quality and generate new revenue streams through use of digital services, including AI and advanced analytics. In retail and consumer services, the permanent shift to more digital orders is requiring prioritization of omni-channel investments, while supply chain challenges are creating pressure on customer service and loyalty, driving demand for AI and predictive analytics to improve forecasting, inventory management, and workforce planning. And in financial services, banks are aggressively implementing their digital transformation agendas to better understand their customers and improve organizational performance. Banking client initiatives now often include, if not hinge on, faster modernization of legacy assets, advanced data analytics, and a need for greater operational efficiency. We see this more intensive focus on operational efficiency across all commercial sectors that we serve. This is one of the key levers to help clients counterbalance increased competition against increasing operating costs due to pricing pressures from supply chain disruption, and inflation. Our growth outlook is also positive on the buy side of our strategy, as the fragmentation of the IT services market remains high and we have a growing pipeline of opportunities. As previously mentioned, we increased our M&A team by 25% this year to facilitate our stated plan of allocating $1 billion of capital to merge with Metro Market Services firms and or merge with firms focused on delivering proprietary intellectual property. In the first quarter, we closed two new mergers, Array and CMC, and announced an agreement to acquire Unico, an Australian consulting and systems integration firm. This transaction remains subject to government approval and is expected to close in the second quarter of fiscal 2022. We look forward to welcoming Unico's employees to CGI as they bring high-end digital skills in key industries, including communications, utilities, and banking. With these mergers, we are on pace to meet our planned M&A capital allocation priorities for the year. In closing, CGI remains one of the few firms with the scale, reach, capabilities, and commitment to be a client partner of choice and an employer of choice. We remain committed to delivering accelerated revenue growth and double-digit EPS accretion for fiscal 2022. This ensures we continue to be an investment of choice. Let's go to the questions now, Kevin.

Thank you, George. Julie, we are now ready to take our first question in the queue, please.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. And your first question comes from Thanos Moskopoulos from BMO Capital Markets. Please go ahead.

Hi, good morning. George, just starting off on margins, obviously some good margin expansion this quarter, which is good to see in a rising wage environment. Just help us understand whether there's some puts and takes we should be mindful of or whether this would be a sustainable level you can build on in subsequent quarters. And also, to what extent have the recent tuck-ins been weighing on margins? Is that a factor that should provide upside as you integrate those? Or what does that trajectory look like? Thanks.

Yep, thanks for the question. And it's a good way to shape it. Of course, there are some puts and takes. Francois mentioned what we're doing to deal with some of the wage inflation and build that into our contracts. It's actually already built into our contracts. Having said that, as we come out of the lockdowns, for all the right reasons, we expect some of our expenses to go up as we continue to drive organic growth with our clients and be in proximity with them. So some of that will be a take. But we have plenty of levers on the put side. You mentioned one correctly. As we tuck in acquisitions, There is always a plan to get them accretive by the first year, but it doesn't happen quarter one. And so there's a little bit of a put and take always when we do those tuck-ins. But more importantly, there are other levers to improve through the business mix, including our increased investments in IP30. There are some underperforming geographies that we have plans to continue to bring them back to the CGI metrics. And then, of course, global delivery and automation continue to give us an opportunity. So even though there will be a little bit of a take as we open back up, we believe we'll be able to continue to build on these strong margins.

Great. Turning to capital allocation, I think this is the time of year that you reevaluate your dividend policy. And it seems like once again, you've decided not to have a dividend. So maybe if you could provide some color on that decision, is that maybe a function of just, you know, the opportunities that you see as you think about capital allocation for the upcoming year?

Thanks, Thanos. It's François. I'll take this one. You're right. And that's what we indicated at the Investor Day. We feel that the acquisition and M&A activities will be a lot more active this year. We're talking about allocating a billion. on this and that we're on the right path for now. And what we're seeing is that we think that we'll be able to achieve this objective. So that's why we thought that, again, to wait again for the dividend. As indicated, we will renew our NCIB. So if needed, we will put some investment in the share buyback. But we think that versus this versus last year, a lot more in the M&A side.

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

Your next question comes from Paul Steep from Scotia Capital. Please go ahead.

Good morning. George, can you just talk a little bit, you touched in it in the comments on the IP solutions, but maybe talk about where you've been in the journey of sort of globalizing more of the solutions. I know about a year ago this time you started down that path. Maybe give us an update on how you see things trending.

Yep. No, it's a great question because you're right. I call it our unified approach. to uh to growing ip and uh it really is first and foremost about having process and methodology to propagate the existing ip across the entire channel of cgi so this is everything from improved value proposition through add-ons to our existing ip broader target market across industries geographies and functions and and having a more efficient and profitable delivery model. So just to give you a quick update, in the quarter, we do have over 10% increase in the pipeline. We have an over 10% increase in the deal size of the bookings that we have. So that gets to that improved value proposition and that broader delivery mechanism. And then we have an over 10% increase in the win rate. So those are some nice early proof points that say that what we're doing around that propagation is working. In fact, we have three of our SBUs that are at the 30%. And the two fastest growing are the ones that are under 10%. So we have opportunity and, of course, propagating that IP is the way to get there. We're also making increased investments in the sourcing the new IP. So this is everything from ideation with our industry experts. So that's showing some signs of opportunity. Co-creating with clients. Sometimes we actually co-create and acquire the IP from our clients. Sometimes we actually just co-create and jointly own it and everything in between. That's where a lot of our best IPs actually came from. And so we're doing that across clients. the global CGI now. And then, as I mentioned in the opening remarks, M&A is an area where we're going to be looking at IP services and solutions firms, not just software only, but services and solutions firms. We're opening up the aperture to more of that in our M&A. So early returns are coming, and we're bullish on the future.

Great. And then just the one final one for me, just around maybe more quarterly matters here, either you or Francois, could you talk about, you mentioned client contract adjustments, mainly in the UK and Australia, you mentioned a little bit in Scandinavia, but just, you know, obviously this is always sort of a puts and takes, but where we are in the process of sort of running off maybe those adjustments for those engagements and ramping other stuff.

Thanks. Yeah. Yeah, thanks. I'll take it, Paul. So for UK, clearly it was, you know, one non-recurring adjustment that had an impact on their growth and contributions. So that's behind us. And so you can expect to have a margin and revenue picking up in the next few quarters for UK. And same thing in Scandinavia. We have some operational issue that we need to resolve in Scandinavia, but we had also non-recurring one-time adjustment that are behind us and expecting that also there we'll see some growth in the contribution. Perfect. Thank you.

You're next, Tom. The next question comes from Richard C. from National Bank Financial. Please go ahead.

Hello. Can you hear me?

Yeah, we can hear you now, Richard.

Just wanted to get a bit of perspective in terms of the operating level of the business, you know, compared to pre-pandemic. Like, are utilization rates kind of back to where they've been? Like, I'm trying to get a bit of understanding on that.

Yeah, actually, our utilization rates are a little bit stronger than they were pre-pandemic. And part of that is that strong demand side that we see, but also the opportunity we took right at the beginning of the pandemic to take the actions that we felt necessary. So we measure the utilization on a weekly basis, obviously not just with reports, but in a call that I have with all the operating leaders. So we're very focused on it, and I'm pleased to tell you that it's actually a little bit above where we were pre-pandemic.

Okay. And then obviously you're in pretty constant contact with your accounts and clients. What are they saying about IT budgets? going into 2022, particularly how much higher they are or lower they are in kind of areas of priorities where they want to spend?

Yeah, it's a good question. Obviously, everybody's got slightly different planning periods. But in general, in areas like financial services, we see those budgets continuing to go up. And across the board, the focus is on both growing their revenue and using technology to help do that and some client-facing solutions in their IT budgets, but also focused on that operational efficiency. We hear our clients talking about they're dealing with the current economic pricing pressures and looking to make sure that they stay competitive through operational efficiencies. Technology, as you know, plays on both sides. It plays on the upside, on the revenue side, but technology also plays on the operational efficiency. So we see a pretty strong environment for IT. And I've been talking for a while, Richard, this wasn't just pent-up demand. that we saw coming out of the pandemic. It's something we think is sustainable from an IT perspective.

Okay. And just one last quick one for me. You know, on the acquisition side, you talked about opening up the aperture for technology. Historically, you guys have been more sort of value conscious. And so when you look at, you know, technology-type deals, no doubt the valuations are certainly a bit more robust, despite maybe the pullback here at the beginning of the year. So how do you look at sort of the relative valuation you're kind of willing to pay for these and maybe give us a bit of perspective on that?

Yeah, maybe I'll start and then I'll ask Francois to continue. Just to remind you, we are looking to make these acquisitions accretive, and so we're very conscious of not overpaying. Having said that, if the value is there, we're willing to pay higher multiples.

So I don't know, Francois, if you... And, you know, where we're... So it's important, conservative in our acquisition where we know when we're building our return, we're building it a lot of times with cost synergies. For sure, in IP, we need to be convinced that we will have revenue synergies, and so meaning expecting a lot more revenue increase coming from these acquisitions. And we have now the channel across the world to do it. So for sure what we are looking at is IP that can be sold across the world without too much changes. And so for sure, you know, it will be valued a bit more, but we naturally with the return that we think we can enable, we don't have any problem to pay the right price. Okay, great.

Thanks a lot.

Your next question comes from Paul Trevor from RBC Capital Market. Please go ahead.

Look, staying healthy isn't easy. Watching your diet, hitting the gym, avoiding stress. Thanks very much and good morning.

I just want to touch on, you know, CGI's growth relative to the market and peers. Now, maybe this isn't an apples-to-apples comparison, but some of your peers have reported quite strong growth recently. I just wanted your thoughts on, you know, what's your view on CGI's growth, you know, just relative to those peers and the market? And do you feel like, you know, you're matching, you're exceeding or lagging the growth of peers in the markets that you're in?

Yeah, thanks for the question, Paul. Look, we like where we are in our profitable revenue growth current landscape, but also where we're headed towards. Very, very proud of the fact that we've been able to take this growth that we are achieving both through the build and the buy and drop that to earnings per share accretion, double digits, here in the first quarter. So we like where we are on where we're getting that growth and what the outlook is. And you see that outlook based on the strong book to bill again this quarter and for the trailing 12 months. So we feel like we're in a very good position to continue to accelerate our growth through both the build and the buy. And like I said, our clients are rewarding us for that with new work. and also in the satisfaction scores they're giving us, which translates to future new work. So we feel like we're in a very good place there.

And just looking at, you know, the growth in your employees offshore, so India, you know, you mentioned that that's reflective of the demand that you're seeing. So, you know, can you speak to, like, your clients? Are they increasingly prioritizing offshore versus what they did in the past? And what's the underlying driver of that? Is it cost? Is there something else that's driving it, capabilities perhaps?

No, I think for a lot of reasons. There are some companies that hadn't gone to leveraging offshore. And when the pandemic happened and everybody went remote, both onshore and offshore, it gave them a view that maybe some of that could work. And so I think it's just some catch-up by some of those players. I'd add at the same time, given the pandemic, those that were heavily, heavily in offshore look to rebalance some of that. But on average, you know, if you're rebalancing some of it versus you're going from zero to something, the move to offshore is outweighing it. It's also that operational efficiency. There are operational efficiencies to be gained in leveraging offshore, and, of course, that's given. kind of what the outlook is for cost, we see some of that. But, you know, it's something that we'll continue to leverage. And just to remind you, we're going to stay true to our proximity model, even as we leverage global delivery.

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

Your next question comes from Stephanie Price from CIBC. Please go ahead.

Good morning.

Hi, Stephanie. Hi.

I was hoping that you could touch just on the percentage of bookings from new clients. It was very strong in the quarter. I'm just curious about what's driving the strength and if you've made any changes to the sales process.

Yeah, thanks, Stephanie. As I mentioned, we have made investments on the talent side in both the technology, reskilling, upskilling, and also the certifications, as I mentioned, on alliance partners. So that gives us another channel to reach some of the newer clients. Also, we're making investments on the industry expertise and the consulting skills. That's another new avenue for us to generate those new clients. So those are kind of two of the investments that we've been making and will continue to make that's driving some of those new client logos. Thanks.

And then maybe one for Francois. Cash flow came in a little bit below street expectations in the quarter and a little bit below priority or percentage of revenue. I'm just curious if you could talk about and put some takes here on how we should be thinking about modeling cash flow for the rest of the year.

Yeah. Thanks, Stephanie, for the question. Yeah, as I indicated, you know, last year we had a very strong cash flow, close to $600 million just in the quarter. And it really was the fact that last year because of COVID, you know, we had a lot less bonuses, year-end bonuses to pay last year in the first quarter. So versus 2021 where we had a way better year on bonuses and that had an impact on the quarterization or the cash coming from the first quarter. I'm still convinced that we'll be capable to generate the right level of cash like last year and even perhaps a bit better than last year. So it's just a timing. on the cash side, but still pretty. And you saw the DSO at 45 days, and I think now it's the last five or six quarters that we are at our target of DSO, so pretty comfortable where we are with the cash generation.

That's helpful, Collin. Thank you.

And your next question comes from Howard Long from Veritas. Please go ahead.

Thank you so much for taking the questions. I'll just like to start with the one about IP. George, you mentioned that one of the ways you're developing IP, and this has been for a while, is to work with clients. And I just wanted to get a sense of how that's structured and how you share the costs. I know before you did this a long time ago with the big banks in Canada, and now as you're evolving and working with more clients outside of Canada, how is that structure evolving as well? Thank you.

Yeah, no, thanks for the question, Howard. It really does vary. The most typical opportunity, though, that we see is that the client actually provides some of the industry expertise, obviously the use case, if you will, and, of course, then accelerates it through some of their quality assurance and then piloting it What they get from that is first mover status. And then, of course, we build some of those customizations and productize it with CGI's investment. And as a result, they get the long-term maintenance benefits. So a lot of times it's really as simple as that. And then they may pay us for some of the customizations directly and keep them outside of the product. And we're seeing that more and more. So there might be some proprietary or specific elements that we decide upfront would not go into the product, but they still get the leverage, kind of the platform nature of the product. That's typically the most used opportunity that we see. Others are, but we've done the other where we actually jointly put the money in, and then we have a royalty scheme that goes back to the clients based on new wins. And, of course, CGI in all cases owns the rights to the IP, but then the client gets the rights to use it. in a perpetuity. So that's typically how we see those. We also see sometimes it's consortium. If it's the cost of doing business, which is kind of the opposite of first mover or proprietary nature of the business, it might be a cost, a regulatory cost of doing business. and everybody puts money in as equal partners, including CGI, but CGI runs, owns, and operates the IP for the consortium. So we see kind of multiple models. And that's pretty consistent across each of the geographies that we operate in.

That's a great explanation. Thanks for highlighting all the different structures. On the acquisitions, just looking at the revenue contribution from Array and CMC, and I know it's just one quarter, but the multiples, they look pretty good, I guess, compared to the past acquisitions. Is there anything you'd like to call out there? Maybe it's just acquisition-specific, or is there something about the valuations that you're seeing in your targets?

Yeah, well, valuations, you know, as we know, over the last couple years have gone up. But we still are interested in finding valuations that we can make accretive to CGI in that first year. And so, yeah, you do see some of that. I would say, though, moving forward, we're seeing valuations starting to favor EBITDA over growth. And I don't know, Frank.

Yeah, no, exactly, George. I think we saw a stabilization of the valuation, and George is right, seeing a bit more, you know, concentration on how much margin or EBIT or EBITDA that the company can bring in. So, yeah, we are seeing a stabilization of it, and so good opportunities for us.

Yeah, that makes sense given, I guess, what's been going on in the market the past few weeks. Exactly. And then maybe just one last one for Francois. Just noticed in the quarter, P&D spending ticking up. Is that just kind of a return to normal, investing again in physical facilities, or could you just put a little more color to that?

Yeah, I bet a return to normal. You're totally right. With people that start to come back to the offices, for sure, we started to do some investment in offices and all that. So that's a part of it. And some of it is also, as we know, with the supply chain in some places that it's a little bit tougher, we can have a bit of swing from one quarter to the other with some of the delays. So both of them. So, yes, some of it is just, you know, coming back to a normal investment level, and some of it you can have some seasonality just because of some supply chain issues.

Okay, great. Thanks for the color. I'll turn it back.

Your next question comes from Kevin Kushnaretny from Desjardins. Please go ahead.

Good morning, gentlemen. Can you hear me?

Yes.

Hi, Kevin. Awesome. Perfect. Good morning. Question for you, is there any sort of way to think about your customer mix in terms of size, you know, sort of thinking about the split between enterprise, mid-market, SMB? I'm wondering, you know, if maybe any recent change in focus, any opportunities or ability to take a greater share of IT spend from smaller versus larger customers, and just if that's the case, how would you think about the structure of your sales and consultant mix and the macro market strategy, you know, just to be aligned with how you're seeing the various customer end markets?

Yeah, no, thanks, Kevin. Our focus is primarily on enterprise clients. We feel that the value proposition that we can bring to them, the impact that we can have on them, particularly given our global footprint and our end-to-end services, is, in fact, greatest. And so that's really the primary focus. In fact, if you look at some of those recent M&A transactions, whether it's Array or DMC and Unico, they all have that same makeup of very large enterprise, at least one very large enterprise client that generates a lot of their revenue. It does not mean that we do not take some of our IP and solutions to the medium-sized business, not as much on the small side. But it really, the primary focus is on enterprise and those accounts that we can really, again, drive the highest value. And I want to make sure you recognize when we're talking about those metro markets, those metro markets are where those enterprise companies are headquartered. It's not looking at metro markets where it's only going after a small or medium-sized company.

Very good. Thank you for that explanation. Maybe just one perhaps for Francois. I know you don't disclose gross margin. You talked about trends there. I feel like year over year, the split of managed IT versus consulting is 50-50. It was 50-50 a year ago as well. But what are you seeing on the sort of gross margin underlying trends and how is that contributing to the EBIT outperformance?

Gross margin is very good and improving since last year. Like George alluded before, utilization is very high, so that contributing to the gross margin. So, no, continue to be pretty good on it. And SG&A with the automation that we're pushing more and more and offshoring of some of the SG&E activities is also improving year-over-year, and that's why you see the EBIT improvement.

Super. Thanks very much. I'll pass the line.

Your next question comes from Daniel Chen from TD Securities. Please go ahead.

Hi, good morning. Good to see that you guys are still able to grow your team and your employee attrition rates are lower than the industry average. Any color on why you're able to achieve this? Is it because you guys are paying more or is it based on the locations where you're operating out of? Any color would be helpful.

Sure. Well, I think the biggest reason for kind of where we're able to do that is our employee value proposition. It includes significant stock ownership, the 85%, the investments we've been making in career development, the 33% increase in training development around reskilling, et cetera. These are really some of the reasons that we have this, including our community involvement. it's really an attractor there. But it goes one step further. We recognize that we're in a unique environment, and so we've really focused on a few areas to keep that, not just the attrition down, but also the attraction up. And what we're doing on the attraction side is really focused on who we recruit, where we recruit, and how we recruit. And I think that's some of where you were talking about the who we recruit, higher concentration on college hires, and also trainees that are coming from non-traditional IT environments. That's about 20% of our hires now. We have boot camps that then build the digital skills that they need. Where we recruit, yeah, proximity and offshore, but also those onshore delivery centers. That's a better place to recruit for us and then a lower turnover rate. And we have 39% of our hires came from global delivery. And then it's how we recruit. I've mentioned before that a third of our people come through employee referrals. They're a stronger attraction to CGI, but the people that refer them have a higher retention rate as well. So we're really making sure that we invest to not just rest on the employee value proposition that we have, but continue to build in this current environment.

Thanks for that, George. As a follow-up to that, given that 20% of your hires are from non-traditional IT and from relatively junior members from college, would you say that the ramp-up time for these employees might take a little bit longer than typical?

Although we do put them through boot camps, so there is a little bit of a ramp-up, and yet this is what we're doing today, and you see that we're still able to deliver the utilization of and margins that you see in our results in this quarter. And yet that's probably another lever as they come on board to increase the utilization and margin going forward.

Okay, that makes sense. François, you mentioned that you model revenue synergies into your IP acquisitions, whereas typically you've typically looked to leverage value from cost synergies. How about on the market, metro market modeling side too? When you're looking at metro market acquisitions, are you also starting to model in revenue synergies, given your view to bring in additional services as you make these acquisitions?

For sure, especially when we're investing in in metro markets where we're not necessarily there. So most of the time it's because we want to buy relationships also with clients and new clients. And that's what we did in the past in some places. So, you know, sometimes these smaller firms will have good relationship with large clients, but not having the full capabilities that CGI has. And so by coming and doing this merger, we are bringing the capabilities to this metro market. And with the relationship that we just bought, you know, we're capable to have some revenue synergies there.

Great. Thank you. Julie, I think we've got time for one more question, please.

Perfect. Your next question comes from Jason Kupferberg from Bank of America. Please go ahead.

Hey, guys. This is Cassie Chan on for Jason. Good morning. I'll just, you know, quickly slip into a question. So my first one I just wanted to ask, you guys obviously had pretty strong bookings this quarter. You know, I think it's the fourth quarter of, like, LTM book to build, you know, greater than 1.1. Can you just talk about, you know, very briefly, like, the core drivers of this and the potential sustainability? So, like, can we expect this trend to continue, you know, maybe at least for the next couple of quarters given the strong demand environment that you guys, you know, are able to capitalize on? Thanks.

Sure. Kathy, one of the areas I already talked about, some of the investments that we're making to drive some of the new clients, particularly around some of the digital skills and the global alliances, as well as the industry skills and some of the consulting growth. So that's one of the areas that's driving that is that that mix of new clients that are coming in. Certainly IP, as we move to IP 30, will give us an opportunity as we increase those deal size. I talk about some of the investments that we're making there to drive that. And then the last is really the operational excellence, this drive to efficiencies by our clients. And a lot of that requires automation and that offshore mix. And what we're doing around our managed services offering is building modernization into the operational excellence platform. That's driving, again, longer-term, larger deals. So we do believe that in this environment we'll be able to sustain a strong book to build.

Okay, awesome. And then, you know, one final question from me. I know you guys have talked a lot about, you know, the consulting investments that you guys are making. And, you know, during the analyst day, you guys talked about that 15% to 20% revenue takeover over the medium term. You know, your Uniqlo acquisition obviously bolsters your capabilities there as well. And while you don't really break apart bookings or revenues like by consulting, you know, per se, you know, can you share any metrics on, you know, perhaps like how book to bill for consulting is trending or any other details there? Thanks, guys.

Yep. So we don't break that out now, so I don't have that number in front of me. But I can tell you just in general about 10% of our SINC is now in the consulting side. So we're looking at that's kind of the basis of what we'd like to continue to grow.

Okay, awesome. Thanks, guys. Take care.

Okay. Okay, thanks everyone for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1-800-770-2030 and using the passcode 7425436. As well, a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1-905-973-8363. Thanks again everyone and look forward to speaking soon.

This concludes this conference call. You may now disconnect. Thank you.

Thank you. Thank you. Thank you.

You're welcome.

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