CGI Inc.

Good morning, ladies and gentlemen, and welcome to CGI's third quarter fiscal 2022 conference call. And I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, sir.

Thank you, Sylvia, and good morning. With me to discuss CGI's third quarter fiscal 2022 results are George Schindler, our President and CEO, Francois Belanger, Executive Vice President and CFO, and Steve Perron, Senior Vice President and Corporate Controller. Effective October 1st and previously announced on May 27th, Francois will assume the position of President and Chief Operating Officer overseeing CGI's North American and Asia Pacific operations, excluding the U.S. federal segment. Steve will assume the position of Executive Vice President and Chief Financial Officer. He joined CGI 23 years ago and held a number of senior finance roles before being named Corporate Controller in 2019. The appointments of Francois and Steve to their new roles reflect their deep understanding of CGI's business and of the IT services industry. This call is being broadcast on CGI.com and recorded live at 9 a.m. Eastern Time on Wednesday, July 27, 2022. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q3 MD&A, financial statements, and accompanying notes, all of which have been filed with both 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. The complete safe harbor 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're reporting our financial results in accordance with international financial reporting standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian unless otherwise noted. I'll now turn it over to Francois to review our Q3 financials, and then George will comment on our business and market outlook. George, Francois, and Steve will then take questions. Francois.

Thank you, Kevin, and good morning, everyone. I am pleased to share with you the results of our third quarter of fiscal 2022. In Q3, we again delivered double-digit constant currency revenue growth as we continue to see strong demand for our services. Adjusted EBIT margin improved by 20 basis points to 16%, and EPS excluding acquisition and integration costs expended by 13%, even when considering the negative impact of European currency fluctuations on our Canadian reporting currency. As a reminder, and as announced during our call in April, this is the first quarter we are reporting with our new structure. The former Scandinavia and Central and Eastern Europe segments are now Scandinavia and Central Europe, comprised of Germany, Sweden, and Norway. and Northwest and Central East Europe, comprised primarily of the Netherlands, Denmark, and Czech Republic. These changes to our organization will allow us to drive revenue growth and expand profitability, particularly in the Scandinavian countries. For the quarter, revenue was $3.26 billion, up 11.5% year-over-year, when excluding $109 million of unfavorable foreign currency impact. This strong growth was driven by the following segments, Asia Pacific up 23.3%, Western and Southern Europe up 23.2%, Canada up 18.2%, and U.S. commercial and state government up 13.6%. Notably, all of our segments delivered positive constant currency growth in the quarter. In fact, the number of our consultants and professionals increased year-over-year by 10,500 for a total of 88,500. The majority of our members are located in proximity to our clients to support close collaboration. However, a large proportion of our hires this quarter were made in our global delivery centers of excellence to enhance our delivery and productivity effectiveness. Overall, 22% of our members are currently based in offshore delivery centers of excellence. Total bookings were $3.4 billion, representing a book-to-bill of 105% for a quarter, led by continued robust demand for our system integration and consulting services. Our managed services and IP bookings remain strong on a trailing 12-month basis, and we expect to see ongoing demand for these larger and recurring deals, as evidenced by our growing pipeline in both service areas. In fact, our pipeline of managed services deals with a projected decision date in the next 12 months are up 32% on a year-over-year basis. We see increasing interest for our value proposition, which delivers cost savings for our clients while supporting them in the acceleration of their digitization. IP pipeline is also at a two-year high, with opportunities having a projected decision date in the next 12 months up 54% on a year-over-year basis. In Q3, five of our eight proximity geographic segments had a book-to-bill above 100%, led by U.S. commercial and state government at 136%, and UK and Australia at 115%. And from an industry perspective, led by health with 129% book-to-bill, as organizations continue to enable virtual healthcare delivery, while ensuring sicker data privacy protections, and government with 117% book to build, as agencies continue to prioritize a range of domestic initiatives, such as social and health services, infrastructure, space-based data solutions, environment and the climate, and cybersecurity, all areas of strength for CGI. Our book-to-bill was 105% on a 12-month basis, and our global backlog continues to remain strong at $23.2 billion, representing 1.8 times revenue. The vast majority of our backlog is comprised of long-term recurring revenue engagements. With respect to profitability, adjusted EBIT in Q3 was $520 million, while EBIT margins increased to 16%, up 20 basis points compared to Q3 last year. The year-over-year increase was largely due to margin improvements in our two new reporting segments and stronger demand for offshore services. This more than offsets the temporary dilutive impact of recent acquisitions in our Western and Southern Europe and U.S. segments, as well as the lower billable utilization in several geographies, driven by the onboarding of new hires in response to high demand. We delivered very strong EBIT margins, notably in Asia Pacific at 30.7%, Canada at 21.7%, and U.S. Federal at 18.2%. Overall, and on a year-to-date basis, we delivered 16.3% EBIT margins, an improvement of 30 basis points when compared to last year. Our effective tax rate in Q3 was 25.5% compared to 24.9% 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%. And earnings were $364 million, and diluted earnings per share were $1.51, representing an expansion of 11% year over year. This improvement was mainly driven by the execution of our build and buy profitable growth strategy. Excluding integration costs, net earnings were $371 million, reflecting a margin of 11.4% and diluted earnings per share of $1.54, an accretion of 13.2% when compared to $1.36 in the same quarter last year. In a quarter, cash provided by operating activities was $419 million, comparable to the prior year. DSO was 48 days or 46 days when removing the two-day impact created by the timing of the Humanis acquisition. This compares to 44 days last year. For the last 12 months, cash provided by operating activities was $1.9 billion or 15.1% of revenue. This represents $7.77 in cash per share. In the quarter, we deployed $512 million to fuel our build and buy profitable growth strategy, mainly for the Humanis and Harwell acquisitions, both in our Western and Southern Europe segments. As announced on July 18, CGI acquired over 90% of Humanis shares and launched the squeeze-out process to acquire all remaining shares. In Q3, we invested $114 million in buying back approximately 1.1 million shares at a weighted average price of $101.31. As of the end of June, we had the authorization to buy back up to an additional 13.7 million shares under our current NCIB program. These results yield a return on invested capital of 15.8% compared to 13.8% in the year-ago period. Looking ahead, our capital allocation focus continues to be on delivering double-digit returns to our shareholders. The cornerstone of CGI's Build and Buy profitable growth strategy is our strong balance sheet position. At the end of June, our net debt-to-capitalization ratio was 30.6%, and our long-term debt interest is fixed at an average rate of 1.58%. We also have $2.3 billion of cash readily available with access to more if needed. Now I'll turn the call over to George. George?

Thank you, Francois, and good morning, everyone. CGI's strong performance in the third quarter of fiscal 2022 again demonstrated the value of our end-to-end services, the breadth of our enterprise clients across all industries, and the consistent operational rigor for which we have a proven track record of delivery. through all economic cycles. Our portfolio end-to-end services provides the right combination of value-based solutions to help our clients navigate today's market environment. By creating value for our clients, we're able to drive revenue growth and margin expansion for the benefit of all CGI stakeholders. Our revenue growth in the quarter was 11.5% on a constant currency basis and broad-based across all geographic and industry segments. Consistent with our profitable growth strategy, we again delivered double-digit EPS accretion and expanded EBIT margin. We have good visibility in the client's expected spending plans based on the client interviews we conducted earlier this year with over 1,600 executives. I would like to share some insights from these interviews into the ongoing IT services client demand, along with examples of representative Q3 bookings that illustrate the value of each of CGI's end-to-end services. Relating to managed services, nearly 60% of clients plan for flat to declining OPEX spend over the next year, in part as a response to economic predictions. Correspondingly, clients plan to increase their reliance on managed services by up to 13% over the next three years, a clear and accelerating opportunity for CGI in the coming quarters. In Q3, we rewarded new managed services engagements which point to a trend where clients are asking CGI to take on and modernize their legacy operations to generate cost savings and then subsequently manage their transformed operations for sustained cost efficiency, and operational agility. For example, the Society for Human Resource Management and CGI entered into a 10-year, $198 million full managed services partnership. CGI will deliver services and solutions to accelerate their digital transformation and enable them to deepen their impact on the future of work with their member base of more than 300,000 HR and business executives around the world. Rio Tinto, a leading global mining and metals company, renewed and expanded their long-term partnership with CGI to help them modernize through the strategic use of cloud as part of their ongoing digital transformation. CGI will also deploy our proprietary Site Reliability IP, or SR360, which automates the overall management of a hybrid cloud ecosystem. and the UK Home Office selected CGI to serve as a strategic delivery partner for their police and public protection technology portfolio. Under the five-year engagement, which has an expected client spend of $145 million, CGI will deliver user-centric solutions to help the agency improve public safety through digitization. Turning to voice of our clients' findings related to consulting and systems integration, 86% of clients plan flat to increasing CapEx spend over the next year. In addition, a higher proportion of clients plan to invest in new IT digitization programs of over $200 million over the next three years. Furthermore, 88% of our clients indicated they were having difficulty hiring IT talent, leading to more of our clients who plan to externalize the majority of their IT services work. Given these findings, demand remains strong for CGI's consulting and systems integration services. This was demonstrated by numerous wins in the quarter. For example, the European Commission chose our German team to support the development of the independent European satellite constellation. CGI's work will include the creation of an automated concept for operating the satellite constellation and also embedding comprehensive cybersecurity. Maersk awarded CGI in Denmark a new agreement to deliver a range of strategic IT consulting and agile application development services. Our consultants will help Maersk modernize their digital value chain, reduce costs, and improve time to market for the company's global logistics and transportation services. And the Business Development Bank of Canada engaged CGI in our outcome-based model for agile development with delivery squads. CGI's unique replicable model is helping increase capacity and velocity to accelerate the bank's digital-first transformation objectives while reducing their risk. Now moving to our intellectual property. Based on ongoing client discussion, we see rising demand for CGI's offerings to help clients optimize their operations, increase their agility, and counteract the impact of rising inflation. as well as increased interest in engaging CGI on go-to-market partnerships for client-owned proprietary IP. This includes an interest in monetizing their IP through a divestiture to CGI. In the quarter, we completed two such partnerships where we will assume ownership for clients' IP as part of broader project engagements. First, with IJM Financial in Canada for a mutual fund transfer agency platform. And second, with a global bank in France for a solution to streamline retail banking end-to-end processes. During Q3, clients also awarded new engagements for CGI IP across multiple industries. For example, a fashion retailer based in France selected CGI's Google Cloud-hosted point-of-sale solution within our retail suite IP. The solution will increase their omnichannel performance and experience for consumers. One of the leading global auto manufacturers extended their relationship with CGI UK team for an expanded implementation of our asset finance solution or AFS 360 for asset management processing in the UK, France, Italy, and Spain. The International Search and Rescue Organization and the European Space Agency joined as partners in the design and development of CGI's new cloud-based data analytics and augmented reality platform since 360. This solution provides a holistic situational overview that helps organizations more efficiently organize and accelerate rescue operations. And in the U.S. government sector, we're awarded new contracts with three state and local clients in Kentucky, California, and New York for Advantage, our built-for-local-government ERP platforms. And at the federal level, the Department of Justice extended their long-term partnership with CGI in support of their enterprise-wide financial and asset management system based on our Built for Government Momentum and Sunflower IPs. Globally, the percentage of overall services revenue that is IP-based was just over 20% for Q3 as a result of onboarding revenue from new mergers without IP. Consistent with our recent messaging, we continue to expand our M&A pipeline to include more IP-based services and solutions firms. Our current active IP-based services targets increase by 150% compared to the same time last year. Through the combination of our managed services, consulting, and system integration and IP, we are well-structured to deliver value for all three stakeholders. This is supported by our CGI Management Foundation, which enables teams around the world to act effectively, efficiently, and consistently as one company. The Management Foundation incorporates 46 years of proven best practices and frameworks to ensure high quality and secure project delivery, allowing our consultants to maximize time spent on supporting and innovating for our clients. Most importantly, codifies our values, policies, principles, and performance metrics to govern and facilitate operational excellence everywhere CGI operates, including when we do M&A. The Management Foundation enables us to rapidly and profitably integrate new mergers. Looking ahead, we will continue to pursue our build and buy strategy to continuously strengthen our positioning. First, We're preparing new university hires to rapidly join client engagements through investments in practical consulting courses and emerging technology boot camps. In addition, we continue to invest in the ongoing career development of all existing talent as part of our full year plan to increase our training investment by 33%. Our hiring of new talent at all experience levels remains at a record high and in line with client needs. Notably, we had increases in trainee and new university graduate hires up 52% and 62%, respectively, compared to the same quarter last year. Secondly, we continue to invest in our managed services capabilities to support clients who increasingly seek cost savings. In fact, we're adding capacity in our managed services deal solutioning center to provide additional support for local teams as they respond to an increasing demand for larger strategic client engagement. Next, we continue to make investments in our IP-based services and solutions, adding new solutions to our portfolio and enhancing existing solutions to meet emerging client needs, extending our IP through our relationships with external global alliance partners, integrating with their third-party IP to bring added value for our clients. and expanding our portfolio through M&A of client-based IP, as well as firms focused on delivering proprietary intellectual property. Finally, our M&A pipeline is growing in quality and quantity and at a faster pace. Valuations and market activity are creating more favorable buying conditions for mergers with both Metro Market Services firms and for transformational mergers. In the third quarter, we closed two new mergers, Humanis, adding nearly 3,000 consultants and professionals specializing in data, digital, and business solutions, and Harwell, adding 150 business consultants serving clients primarily in the financial services sector in France. We remain well-positioned to continue executing on our plan and accelerating growth through our buy strategy. and we continue to be on a pace to meet our planned $1 billion investment in M&A this year. In closing, client demand for all of our end-to-end services remains robust, given the critical role that IT plays in helping clients drive enterprise-level modernization and digitization programs. We are now a team of 88,500 consultants and professionals worldwide with the capacity, footprint, and expertise to help clients accelerate their digital transformation. We are well-structured to continue driving revenue growth and margin expansion for the benefit of all three of CGI's stakeholders. Thank you for your continued interest and support. Go to questions now, Kevin.

Thanks, George. Sylvia, let's queue up the questions from the participants, please.

Certainly. Ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to remove yourself from the question queue, simply press star followed by two. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Thanos Mochokopoulos at BMO Capital Markets. Please go ahead.

Hi, good morning, and congratulations to Francois and Steve on your new roles. George, maybe expanding on the macro sides, clearly it sounds like you're seeing a strong demand environment, but just to be explicitly clear, if you look at the conversations you're having in recent weeks, have there been any changes you call out in terms of customer tone in terms of, you know, sales cycles, decision-making timeframes, or would you say that across most geographies and industries, it's still very consistent with a good demand backdrop?

Yeah, you know, thanks for the question, Thanos. The, you know, recent discussions I've had with CXOs, of course, there is more discussion about both inflation and and where the economy might go given the tightening of the money supply. But it's not changing their resolve in those discussions around where they want to go with IT. It may change the way they write their business cases, but it doesn't change their overall demand and appetite And I think that's pretty consistent across all the discussions I've had. And this is true in both Europe and in North America where, you know, demand is holding up. Now, in Europe right now, of course, we have the summer holidays. But seriously, it appears that IT demand remains strong. You can see that from our pipelines.

Right. And in terms of offshore and the growth you're seeing there, and I guess more broadly the growth that we're seeing across the industry, would you say that's a function of clients, you know, favoring offshore to a greater extent than in the past for cost reasons? Or does it have more to do with just that's where the labor availability is right now in the tight labor market?

You know, I think it's a combination of factors. Certainly cost increasingly plays a role. So I would say that's one of the key drivers, probably the key driver. I think there's also a recognition by a lot of clients that given the remote nature of work over the pandemic, they're more open to it. And so, you know, that's a secondary factor. And then, you know, talent availability is something that everybody's looking for. But I'll tell you, they're also getting more creative around some of the onshore and nearshore global delivery centers that CGI has. And so there's still interest in that, which kind of gives you a combination of the above.

And finally, kind of a related point, at the investor day, you talked about growing your offshore headcount at a 15% figure over the next three years. It would seem that you're tracking well for that, given the revenue growth we're seeing. Exactly right.

Exactly right. Higher percentage in global delivery. Thanks for observation. All right. Thanks for passing the line.

Thank you.

And your next question will be from Stephanie Price at CIBC. Please go ahead.

Good morning. I was hoping you'd talk a little bit about the puts and takes and cash flow in the quarter. As a percentage of revenue, it looks like it's lower than we've historically seen.

Yeah, thanks, Stephanie. You're right, and a lot of it is explained by the working cap. So, you know, with the growth, acceleration of the growth this year, for sure it's asking to a bit more working cap. to be invested. So that's really where it's coming from. And last year, we had a big, or at least a reduction of the DSO one-time impact because the year 2020, we were at the high 40s and beginning of 50s, and we were capable to reduce it to 45, 46 days last year. So that gave us a a one-time bump that we don't see it this year because we're maintaining it at the same level. But with the growth that we have, naturally that's giving some pressure on the working cast.

Okay, that's helpful. Thank you. And then, George, you mentioned that some clients are looking to divest IP to CGI. I was hoping you could dig a little bit deeper into this comment and talk about how large this opportunity could be.

Yeah, well, it's interesting, Stephanie. We've been having this discussion every year with our clients and looking at the IP that they have locked within their own organizations, and it's pretty sizable. And, of course, given the current economic conditions, they're looking at, you know, can they unlock that? And I mentioned the two, one with IGM here in Canada and then one – one in France, but we're building a pipeline of those. Now, we have to make sure that they fit into the overall portfolio because we didn't build them, and so we're doing the due diligence the same way we would do with an M&A. And they kind of have a flavor of both M&A and outsourcing because they usually come with us providing services back to that client and maybe even some other clients. So, you know, it's early days. tip of the iceberg, but more to come on that.

Thank you. And then just finally for me, following up on Thanos' question, obviously demand has been very strong. If we were to think about this changing in the macro environment, changing even more, can you walk through kind of CGI's business and which pieces could be more resilient and what opportunities you think are out there in a weaker market or a weaker economy?

Yeah, well, you know, it's something obviously that I mentioned in my opening remarks is we've got those end-to-end services that are structured to allow us to really thrive in multiple different economic conditions. You know, it starts with that proximity go-to-market model, which enables us to really emphasize the services and solutions in highest demand. At this point in time, we're more on the consulting and the systems integration, but we're able to kind of pivot and complement the proximity by, obviously, our global support structure in both those delivery centers, but also in the IP and the managed services. you know, that structure allows us to make that happen. So clearly, when we move into areas where cost savings are more important, the IP and the managed services become far more resilient. And the nice thing about that is those tend to be larger deals. They tend to be longer-term deals, recurring deals, and we can typically deliver those at higher profit margins because it's higher utilization and lower cost of sales once you get one. And so, as I'm sure you know, we've done very well in prior recessionary periods. Now, what I'll tell you, though, is I think it's a little bit different this time. IT is no longer discretionary. And we expect demand will actually respond differently. We're even seeing that in some of the strength in the systems integration and consulting. I don't think in prior periods where systems integration and consulting go contract dramatically, I don't think that's what we're going to see. Certainly not what our pipeline shows. Certainly not what some of the conversation we have. That gives you an idea of how those end-to-end services play out.

Great, Colin.

Thank you very much. Thank you. Next question will be from Jérôme Dubreuil at Desjardins.

Hi, good morning. Thanks for taking my question. Mine is on the tech layoffs. I know it's not particularly apparent with your direct peers, but I'm wondering if this could have a positive or negative impact on CGI, you know, more talent available for you guys, but also for your clients. So maybe it's not a great read on the economy. So if you can provide color on this next.

Sure. You're right. It's not directly related. A lot of those big tech are really, you know, in the consumer space or closer to the consumer space than we are. Having said that, yeah, it gives us two opportunities. One is on the talent side, but the other is really on the partnership side. Not unlike what we just discussed with Stephanie around clients looking to unlock some of their proprietary IP. I think we'll have a richer environment for partnerships with some of those big tech, which are some of our bigger Global Alliance partners. I think there's opportunity in there, but certainly it's not directly related. Our business in IT services on the business-to-business side is different. Great. Thank you.

Thank you. Next question will be from Stephen Lee at Raymond James. Please go ahead.

Thank you. Hey, George, your bookings looks fine, but anything you want to call out? I saw the U.S. Fed was a bit lumpy, or anything stood out in Europe? Thanks.

Yeah, no, thanks for that. Yeah, bookings were particularly strong in SINC, as Francois highlighted earlier. And they obviously are not the multi-year deals that some of those IP and managed services. So that's why you see what you see. So it's still, like you said, very strong. Some of those larger deals did push to the right. Bookings are always lumpy. So that's what you see. And And you saw that our government bookings were exceptionally strong, even without the U.S. federal, where we had some big deals pushed to the right. I'll remind you, though, on the booking side, you know, some of the strongest backlogs are in CGI, our U.S. federal business, which is well over the CGI 1.8. It's about 2.3%. And Canada, of course, has a backlog of three times revenue. So, you know, and then the last thing is just the recent acquisitions and some of the restructuring skew some of the results point in time, but that will work itself out. So we feel pretty confident that the healthy pipeline will lead to bookings in the coming quarter. So nothing big, but that gives you maybe some of the color commentary we're looking for.

And no quacks in Europe, George?

In Europe? Yeah. I mean, Europe, like I said earlier, you know, we continue to see strength on the demand side in Europe. It's sustaining. You know, it is the holiday season, so you've got some cyclical nature in there. But, you know, all the recent discussions, I actually was just in Europe for two weeks. and the demand appears to still be very strong there.

Got it. Okay. And then, François, congrats on the appointment. The pipeline comments are very helpful. Can you maybe make a similar comment on your IP pipeline, how much it's up here over here, or just give us an update on IP? Thanks.

Thanks. Yeah. So thanks, Stephen. Yes, IP did go up on the – on the pipeline side year over year. So, it's going well. We have a lot of momentum on that side with including in the North America and in European segments. So, momentum is there and we saw a good in the last 12, in the next 12 months, we're seeing a lot of decision making that will happen on some of the larger deals in IP.

Got it. And then maybe a question for Steve. Also, congrats, Steve. The margin comments, the lower utilization in Canada and the U.S., with onboarding of new hires, typically, does utilization catch back up pretty quickly, like next quarter?

First of all, thank you. Thank you for your congrats, and thank you for the questions. Yeah, look, utilization, obviously, when you are hiring people, and it's our strategy right now, we are doing some boot camps. We are training folks. And new hires, obviously, it has an impact on utilization. But as soon as the people are finalizing their training, obviously, they are billable. We are hiring them because we see the demand. and obviously this will readjust.

Yeah, it's a bit of a tailwind. It corrects itself pretty quickly, Stephen. But the good news is we continue to hire. So we continue to have strong demand on the hiring side. So it kind of moderates, but ultimately it will be a tailwind in the quarters to come.

That's great. Thanks, guys.

Yep, thanks.

Thank you. Next question will be from Brian Essex at Goldman Sachs. Please go ahead.

Hi, good afternoon, and thank you for taking the question. Good morning, rather. Yeah, I was wondering if you could maybe circle back on the hiring comments. It looks like, you know, nice increase in headcount ads. I think you mentioned about a little over 3,000 came from acquisition. Could you maybe reconcile that with some of the utilization commentary that you had? I would imagine that a lot of these I guess inorganic ads would have been lateral hires. So maybe if you can kind of dig one layer deeper to help me understand what the mix is and how that kind of reconciles with the utilization comments that you have.

Yeah, yeah. Thanks for the question, Brian. As you're right, the inorganic hires, they pretty much, in most cases, stay billable with their – with their existing clients. Of course, we typically have a higher utilization target with NCGI as part of our management foundation. So that's part of the integration process. But independent of that, yes, our hiring, as I mentioned, are up significantly, particularly in our training and university grads. They do go through those onboarding. training classes, et cetera, over 1,000 of those hires joining us as part of the net new hires. And so those individuals are really driving some of that training, as well as much higher hiring in our global delivery centers, particularly in India. They also go through about a 9- to 12-week boot camp. to make sure that they're best suited to hit the ground running on our clients. So it really is a situation where there's a little bit of a lag, but as we discussed with Steven, it comes back pretty quickly.

Got it. Very, very helpful. And really interesting commentary that you had on integration and consulting demand, particularly in a more challenging macro environment. What are you seeing inside of that business, maybe if you can split out, you know, integration versus consulting relative to perhaps the 08-09 timeframe when, you know, we saw across the industry, system integration work kind of fell off precipitously. Are you seeing maybe just a newfound appreciation of the scalability of cloud and digital exposure within enterprise environments, or is there a different mix of work than you've had historically in that business?

Yeah, well, you know, it's interesting. There's a couple things that maybe are different, you know, given the fact that supply is very tight. I mentioned 88% of our clients are having difficulty hiring the IT talent. A lot of the systems integration work we're doing right now are really filling work that our clients would have preferred to do themselves in some instances. which is adding to the work that they would normally externalize. And so I can see that absolutely continuing, especially in a downturn where IT talent continues to be high in demand. And to your point, yes, I think there is a shift, and this is the discussion I've been having. In fact, I had a discussion with one CXO in Europe recently where, you know, The discussion went like this. You know, we're preparing for a recessionary environment, and yet we're also preparing to spend more in IT than we ever have before. I think that's a shift. I don't think you heard that in 08-09.

Yeah, I agree. Very helpful commentary, so really appreciate it. Yep.

Any further questions, Mr. Essex?

That's it for me. Thank you.

Thank you. Next question will be from Daniel Chan at TD Securities. Please go ahead.

Hi, good morning. Just wondering if you can provide any color on the pricing environment, whether you're able to offset the increased costs you're seeing.

Yeah, yeah. We're definitely seeing some opportunities there. I mean, you know, if you think of each of our services, the IP is obviously less sensitive to the wage inflation, but there are opportunities for us to – to have some price elasticity given the value proposition that IP has. Managed services has the indexation built in, but our team is doing a very good job of counteracting the impact of wage inflation on really getting that value-based pricing for new engagements. And, in fact, we're pretty disciplined in that management foundation of If we're going to raise the wages in lockstep, and of course we're doing some of that particularly for our top talent around the world. then that has to come with a corresponding rate increase. We can do that through project rotations. We can do that through new project starts, et cetera. But, yeah, we're having pretty good experience there. And I think that you see that clearly in our ability, despite some of the other headwinds that we talked about temporarily. that we're able to still expand our margins.

Thanks. That's very helpful. I'm joining the call late, so I don't know if someone else asked this already, but just wondering if you can give us an update on whether you're still on track for that billion dollars of acquisitions. Thank you.

Yeah, yeah. I did mention that we're still on a pace.

Thank you. Yep.

Thank you. Next question will be from Robert Young at Canaccord Genuity. Please go ahead.

Hi. Good morning. The first question for me would be on whether there could be any kind of a pause in the demand. You described maybe some clients are shifting the way that they might spend on IT budgets, even if IT budgets are consistent or growing. Is there a potential? And you said in the prepared comments that the pipeline of managed service deals is had grown 32% on year-over-year basis. And so that's not an elongation or a delay. Is there any pause happening there as people shift more toward managed services?

Yeah, that's a good question. I don't see it right now, but, you know, there will be – we do believe there will be a shift and a bigger opportunity in the managed services. That's why we've been investing – there over the last 12 months, so we didn't have kind of that gap, and you're seeing some of those nice wins in the quarter, and we have that rich pipeline. It'll be a matter of us converting those, but I don't see that right now, but, you know, that's something we'll stay on top of.

And then just to better understand what you mean exactly by managed services, I know that a lot of CGI's business is very, very long contract terms on outsourcing agreement. So when you think about what exactly is managed services in your context, is it multi-year or is it 10-year? Maybe just sort of lay out the landscape of what the arc of managed services to outsourcing exactly is and where that 32% growth is occurring.

Yeah, so I mentioned this and I understand you had to join a little bit later, but I did mention some of this in my remarks that the managed services for us are typically five to ten year deals, but they're a bit different where they're asking us to not just take on a legacy, but they're asking us to take on the legacy, modernize it, so actually do the development of the modernization, and then continue to manage those modernized operations. And that's typically a longer-term contract, which is why typically if you're going to do all that, it's going to be more of a 10-year contract, which is what we did with the Society of Human Resources and we're doing again with Rio Tinto. So those are examples of what's going on. in that uh in that space and that's what we mean by that and the difference between uh just taking on a portion of the infrastructure and running that uh for a client uh that's not what we're talking about here we're really talking about an integrated uh both uh both run and uh and change uh and and build in some cases okay that's great color and then maybe for last question just around

the comments earlier around the hiring. I think I got the impression that you are continuing to hire aggressively, but maybe shifting a little more towards new grad or younger or less experienced hiring in a tighter market. Is that correct? And then the comments around that utilization lag correcting in the short term. I'm trying to understand why you think that that might not continue over a longer term in a tight wage inflation market with.

Yeah, well, you know, you're absolutely right. We are shifting some of that hiring to the entry level and the global delivery centers. And that's to ensure, you know, we had the question on raising the rates, but you also want to be price competitive and provide the savings to the clients. And so one of the ways we make sure that our labor structure is situated for that is to bring in those entry-level and to bring that global delivery folks in. So that should continue. But when you go from nothing to something that has a bigger effect, once that's now in the system and that hiring is there, you'll see it moderate. Ultimately, when the hiring stops, it would be a bit of a tailwind, but I think it's just going to be more moderated over time. Great.

Thank you very much.

Sure. Thank you. Next question will be from Paul Trevor at RBC Capital. Please go ahead.

Oh, thanks very much and good morning. Just a follow-up question on your comments in regards to pricing. You mentioned indexation for managed services contracts. Does that include CPI or are there other indexes that you use? Because obviously CPI has been quite significantly increased this year. And how quickly does pricing adjust? Is it annual or is it quarterly?

Yeah, it's typically CPI or some derivative of that. I don't know, Francois or Steve, you have to... Yeah, and really linked to IT increases, right?

So it's not... Overall, yeah. It's not overall CPI, but really CPI in the IT industry. So that's really specific on that side. And as for the increases, again, it depends. When we have time and material... It's a lot faster sometimes than the outsourcing or managed services where most of the time managed services will be at the once a year at the annual anniversary of the contract where we'll have that discussion or that increase related to CPI.

And, you know, did pricing have a significant impact on revenue growth this quarter? Have you broken it out or done the analysis there? And then, you know, looking forward over the next year, do you anticipate a significant proportion of organic growth to be driven from pricing?

You know, the majority is coming from quantity, if I can say, because, again, and you see it in the headcount, right? We did increase our headcount by 10,500. you know, the bulk of the set count increase is billable headcounts. So naturally quantity is the bulk of the increases versus if I can say the price increase.

Okay, that's helpful. And just one last one, just in regards to Germany, I mean, I know your business is quite small, but German manufacturing vertical in particular, Are you seeing any sort of change in, you know, their thinking around IT investments, just given that the macro headwinds that they may be facing in terms of energy costs?

Yeah, I think, you know, specific to Germany, we are having some of those discussions. This is where our end-to-end services play in. where maybe they're looking at a little bit less on the systems integration and consulting side, but maybe a little bit more on the managed services side. So it's still very specific to that environment. I think that's the one area maybe where we're seeing a little more of those or having a little more of those discussions.

Thank you.

Thank you. Next question will be from Suzanne Sukumar at Stifel. Please go ahead.

Good morning, and congrats, Francois, Steve, on the appointments. The first question I had was on your vertical markets. You know, this quarter we saw strength across the board. I'm just wondering, is there anything specific here to call out with respect to some of the trends you're seeing within some of these industry groups?

Yeah, thanks for the question. You know, the strongest industries for us right now are absolutely financial services, strong double-digit growth in the financial services. And then probably right behind that is actually health is small but very healthy, if I could say that, but it's a little smaller for us, but MRD. it was also very strong. So kind of the larger ones are the stronger ones for us, which is good news. And government, you know, areas of spending are right aligned with the strengths of CGI. And so we're following that around the world. And like Francois pointed out, strong book to bill on the government side, which should bode well for continued growth there. And that's without big bookings in our U.S. federal business, which will come back. So we're feeling pretty good about the biggest industries we're in.

Okay, great. Thank you. And on your margin outlook, I mean, obviously your margin performance is a testament to your cost management here. And it sounds like you guys are still looking for further margin expansion ahead. You know, aside from leveraging your current pricing power, what are some of the other levers that you have available to drive margin expansion longer term? Are there any other low-lying fruits that you can address?

Well, yeah. I mean, one area I would point out is opportunities to increase margins in those new geographic structure. One of the reasons we made the changes to Scandinavia and Central Europe and Northwest and Central East Europe was to bring those margins more in line. And so we have a little bit more work to do there, but you're starting to see some of the improvements. I'm pleased with what the team's doing there. And then on the longer term, you know, in addition to the growth that we've been talking about is really the mix of revenues. As we move more to the IP, it's why I pointed out that we're building a pipeline of M&A on IP. And then also those managed services, because it comes at a lower cost of sales and a higher utilization, we can drive very healthy margins in those larger managed services deals. You know, the rates are different, but the net margin is higher than, you know, higher rates in SINC, but quicker turn. And so it's just a different business. Now, obviously, it all comes together in the end-to-end services, but again, That's why we're pretty bullish on continuing to expand the margins over time.

Okay, great. Thanks for taking my questions. I'll pass the line.

Thank you. Next question will be from Jason Kufenberg at Bank of America. Please go ahead.

Hello, and good morning. This is Tyler DuPont on for Jason. Thanks for taking the call. Two questions. One, when looking at book-to-bill by segment, It looks like it's a bit of a mixed bag with some regions significantly above others. When thinking about the next few quarters going ahead, would it be accurate to assume more of a normalized LTM number closer to one, or should we think there will be more of a stratification in the short term, or any insight there would be helpful?

Yeah, I think the bookings are always – thanks for the question – bookings are always lumpy. So, you know, I don't think there's any key reasons for stratification point in time. As I mentioned, we see a pretty strong demand environment continuing in both North America and in Europe across these segments. You know, we do have some recent acquisitions that skew the numbers a bit, like I said, but over time, I think they'll play out more in a in a more normalized way.

Perfect. Thank you. And I guess one more question. I'm curious about your thoughts on the M&A front. Given where we are with multiples both in the public and private markets, can you discuss just how that impacts your decision making with the types, amount, or the size of the tuck-ins that you do? And then also if there's any specific geographies or verticals that you're trying to target?

Yeah. Well, I mean, I think definitely the valuations are coming down, and quite frankly, there's a bit less competition given that the cost of capital is increasing. And so, you know, importantly for us, the deal size is up about 16% versus the same time last year. So we are seeing bigger opportunities that are more in our – And so, you know, stay tuned on that as we continue to grow that pipeline and have it materialize. Does it change the actual way we look at those, Francois?

No, no, not really. But naturally, like George is saying, prices are making more sense than perhaps a year ago. So that's why, you know, time is starting to be pretty perfect to – in the environment for acquisitions. And so that's why pipeline is going up. We're putting even more people on this and we're seeing a good opportunity for the future.

Perfect. Well, thanks again and congrats on the quarter. Thank you.

Thank you. Next question will be from Devaya Goyal at Scotiabank. Please go ahead.

Good morning, gentlemen. Congratulations on a good quarter. I have two specific questions. One of them, George, on the managed services side, the explanation that you gave, could we assume looking at what the other peers are doing is some of the professional services revenue is lumped up with the managed services the way CGI records them?

Yeah, we talked about this in one of the earlier quarters. Yes, it is, in fact, we're seeing those larger managed services absorb some of what would have been systems integration. Of course, that's great for us because now your system integration is coming at that same utilization rate and lower cost of sales that you get in the bigger managed services. There was always some of that, but I think we're seeing more and more of it.

That's perfect. Second question, it's just more of an industry-related question, and given CJ's size and scale, I think it bodes well here. With respect to the potential hiring, so we obviously hear that across all the corporates that we kind of look at and talk to, everyone's seeing on the technology services side specifically an increase in hiring and staffing and whatnot. And obviously not a slowdown in the bookings. But with the potential recession that obviously the industry in general is facing or the global economy, could there be a risk of excess hiring up front? Is all the hiring that you're doing truly project-related, or is it building up bench strength, and could that potentially happen? result in some trimming down in, say, a year's time? And it might be a harder question to answer given where we are right now, but just kind of from an industry standpoint, I wanted to ask that question.

I think it's a relevant question. You may realize from my discussion on the Management Foundation, we're very rigorous in the way we manage. The hiring part of that is in our proximity model. And we're pretty clear. In fact, Francois, now Steve, and I review the utilization on a weekly basis with my team. And so we're not hiring for bench. Now, we have some of that in our global delivery centers. But, again, we're pretty tight on that. So obviously we want to be able to meet the client demand, but probably compared to some of our peers, we're pretty tight around that.

That's helpful and good color. So that's all for me. Thank you so much and have a nice day, guys.

Thank you.

Thank you.

And at this time, Mr. Linder, we have no further questions. Please proceed.

Okay, thank you. Thanks, everyone, for participating. As a reminder, a replay of this call will be available either via our website or by dialing 1-877-674-7070 and using the passcode 482468. 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.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.