CGI Inc.

Good morning, ladies and gentlemen. Welcome to CGI's first quarter fiscal 2023 conference call. I would now like to turn the meeting over to Mr. Kevin Lender, SVP of Investor Relations. Please go ahead, Mr. Lender.

Thank you, Julie, and good morning. With me to discuss CGI's first quarter fiscal 2023 results are George Schindler, our president and CEO, and Steve Perron, 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 1st, 2023. 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 ICR. 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 NCGI 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 are reporting our financial results in accordance with international financial reporting standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian and less otherwise noted. We are also hosting our annual general meeting this morning, so we hope you will join us live via the broadcast at 11 a.m. I'll now turn it over to Steve to review our Q1 financials, and then George will comment on our business and market outlook. Steve. Thank you.

Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our first quarter of fiscal 2023. In Q1, we delivered $3.45 billion of revenue, up 11.6% year over year, or up 12.3% when excluding the impact of foreign exchange. Importantly, We delivered positive constant currency growth in all segments, all industry sectors, and all service offerings. The following segments generated double-digit constant currency growth. Western and Southern Europe up 30%, Asia-Pacific up 23%, and UK and Australia up 18%. Total bookings were $4 billion, generating a strong book-to-bill ratio of 117% for the quarter and 109% on a trailing 12-month basis. In the quarter, each of our client proximity segments had a book-to-bill ratio above 100%. Our bookings were particularly strong in Europe this quarter, led by UK and Australia with a book-to-bill ratio of 159%, Finland, Poland, and Baltics with a book-to-bill ratio of 143%, and Western and Southern Europe with a book-to-bill ratio of 123%. With respect to IP, we see ongoing demand for our business solutions and an increase in IP revenue across every geographic segment. IP as a percentage of total revenue improved to 21.7% in Q1. Our Q1 IP book-to-bill ratio was 128%, reflecting CGI's sustained investment in forging new relationships with clients as well as enhancing our solutions. The strength of our overall bookings contributed to growing our global backlog, which now stands at $25 billion, reaching an all-time high again this quarter. This represents 1.9 times revenue. On the profitability front, adjusted EBIT in Q1 was $554.1 million, up 6.3% year over year. This represents an EBIT margin of 16.1%, stable sequentially and down 80 basis points year over year. The decrease on a year-over-year basis was mainly due to the dilutive impact of prior year acquisitions, which are in the process of being integrated to achieve their planned synergies, as well as the expected increase in travel to support growing our business. Net earnings improved to $382.4 million when compared to $367.4 million in the first quarter last year. diluted ETS was $1.60, representing an increase of 7.4% year over year. When excluding integration and acquisition costs, net earnings improved to $398.2 million for a margin of 11.5%. This compared to $369.4 million in the same quarter last year. On the same basis, Diluted EPS was $1.66, an accretion of 10.7% when compared to $1.50 in the same quarter last year. This improvement was mainly driven by the successful execution of our build-and-buy profitable growth strategy by our operations. Our effective tax rate in Q1 was 26% compared to 25.5% in the prior year. When excluding integration and acquisition costs, our effective tax rate was 25.7% compared to 25.5% last year. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. In the quarter, cash provided by operating activities was $605 million compared to $484 million in the prior year. This is mainly due to the five-day sequential improvement in our DSO, which now stands at 44 days, an improvement of one day on a year-over-year basis. Our target remains at 45 days. For the last 12 months, cash provided by operating activities was $2 billion or 15% of revenue. In Q1, we invested $93 million into our business and $10 million to buy back our stock. We delivered a return on invested capital of 15.5% in the quarter, an increase of 20 basis points when compared to 15.3% in the year-ago period, demonstrating our efficient deployment of capital. Consistent with previous years, we reviewed our capital allocation plan to maximize shareholder returns. Our focus continues to be on delivering value for our shareholders by investing back in our business, pursuing accretive acquisitions, and repurchasing our stock and or paying down our debt. As such, in line with our capital allocation strategy, Yesterday, our Board of Directors approved the extension of the NCIB program until February 2024, authorizing us to repurchase for cancellation up to 18.8 million shares over the next 12 months. Under the current program, we have invested $657 million, repurchasing 6.4 million shares at a weighted average price of $101.84. With a net debt to capitalization ratio of 24.1% at the end of December, as well as $2.8 billion of cash readily available and access to more if needed, CGI has the strength and the capital resources to support our build and buy profitable growth strategy. Now, I will turn the call to George to further discuss the insights on the quarter and outlook for our business and markets.

George? Thank you, Steve, and good morning, everyone. CGI began fiscal year 2023 with positive momentum. delivering strong results that underscore our positioning as one of the few global firms with the scale, reach, capabilities, insights, and commitment to be a partner of choice for our clients, an employer of choice for our consultants and professionals, and an investment of choice for our shareholders. In Q1, we delivered our fourth consecutive quarter of double-digit constant currency revenue growth, and once again delivered double-digit EPS accretion on an adjusted basis. Bookings were well over 100% of revenue, reaching $4 billion, a record high. One-third of these bookings were comprised of new business engagements. And cash from operations was particularly strong this quarter, reaching a record high of over $600 million. These results reflect clients' ongoing confidence in CGI as a trusted partner for delivering on their modernization and digitization priorities. Our bookings in the quarter consisted of many long-term digitization engagements, which included the following wins. The U.S. Department of State extended its partnership with CGI's federal operations under a new 10-year agreement to continue delivery of U.S. visa application services in India. This engagement includes the use of CGI's Atlas 360 IP solution, which provides for improved efficiency, security, and customer experience. The U.K. government awarded CGI a four-year agreement to continue management of the cybersecurity analytics platform for one of the government's departments. This agreement adds new scope focused on iterative development, delivery, and evolution of the platform, as well as development of a data-as-a-service function focused on helping the government address evolving cyber threats. Spidexo, a world leader in food and facilities management services based in France, selected CGI as its global strategic partner for a five-year managed services agreement. CGI will leverage our proximity and offshore delivery model to reduce costs, improve time to market, and drive the digital transformation of Sodexo's infrastructure. The Laurentian Bank of Canada awarded CGI a five-year expanded agreement to help the bank manage its digitization while supporting its efforts to strengthen operational efficiencies and deliver an enhanced customer experience. an initiative that will benefit from a co-innovation fund focused on transformation of the bank's ecosystem. And Airbus, a global aerospace manufacturer based in France, named CGI one of their major global partners to help drive the end-to-end digital transformation of their corporate and central services functions over the next five years. These services will leverage a combination of proximity and global delivery resources from CGI's operations in France Spain, Germany, and India. Notably, we received all-time high satisfaction ratings from clients across every measure again this quarter. Importantly, one of the highest scores received was for the intent of clients to engage CGI again for future projects, demonstrating the strength of our team's ability to build ongoing, trusted relationships. Investments we are making in our end-to-end services and talent are generating value now, and they are designed to further strengthen our capacity to meet evolving client demand for full-scale enterprise digitization. With this in mind, I will highlight the positive impact these investments are generating for our operations, starting with managed services. As we communicated last quarter, we continue to see many clients prioritizing cost savings and placing a sharper focus on business case returns. while simultaneously advancing their digital transformation strategies. The investments we are making to increase business engineering capacity, enhance and modernize our managed services approach, integrate IP and BPS into our managed services offering, and broaden the partner ecosystem has strengthened our overall value proposition, enabling CGI to best address clients' cost savings and digitization objectives. In the first quarter, managed services bookings were up $465 million, or 26%, when compared to the same quarter last year. This increase was driven by several large new wins in the quarter. Overall, managed services represented 56% of total bookings, or book-to-bill of 123%. We see broad-based interest and new opportunities in both North America and Europe. particularly in energy and utilities, health, manufacturing, and government. Turning now to CGI Systems Integration and Business and Strategic IT Consulting Services. We are focused on addressing the evolving client demand for consulting engagements in areas such as business model transformation, M&A strategy and integration, enterprise architecture, and sustainability advisory. all to help clients advance their agility and future strategies. We also continue to prioritize employee certifications in the technology platforms of our global alliance partners. These certifications enabled us to generate nearly $900 million in new Q1 systems integration wins in support of partner technology platforms. SINC bookings remained robust in the quarter, with a 110% book-to-bill as we delivered on client consulting priorities across industries and large-scale modernization projects of particular strength in government. Now moving to CGI's intellectual property-based services and solutions. Client interest in our business solutions has been rising, with higher demand for CGI to help clients address the impact of economic pressures by deploying RIP. As such, we are investing in the creation of new business solutions to meet evolving demand, enrichment of existing solutions with embedded innovation, and expansion of our IP go-to-market strategies to drive new client interest. For example, given the tightening credit markets around the world, we are seeing growing demand for CGI's industry-leading collection solutions, notably our transformed cloud-native Credit Studio IP, delivered through a SaaS-based platform that now incorporates intelligent automation and machine learning. In Q1, we signed multiple client agreements for this renewed IP, including a nine-year engagement with Navy Federal Credit Union, the world's largest credit union serving over 12 million customers. As previously mentioned, another key initiative this year is the expansion of CGI's IP portfolio through go-to-market partnerships for client-owned IP. For example, in the quarter, National Bank of Canada and CGI completed a new 10-year agreement for CGI to acquire ownership of the bank's financial planning advisor solution. The addition of this new client-developed solution expands the capabilities of our market-leading Wealth360 product suite, which will also be delivered and managed for National Bank as a SaaS under this new agreement. On a year-over-year basis, IP bookings were up by more than $330 million, or 55%, for a book-to-bill of 128%. We saw significant strength in the banking, communications, and government sectors. Overall, the diversified mix of our end-to-end services, along with our geographic presence and industry portfolio, positions CGI to continue to grow and create value for all stakeholders. Central to our ability to deliver value is our discipline in project execution and ongoing investments in operational excellence. We continue to evolve and balance our hiring and talent development strategies based on client demand, including in our nearshore and offshore delivery centers of excellence, where we proactively manage each dimension to drive excellence in day-to-day operations. For example, The time from hire to train to bill for new university graduates has been shortened again this quarter, driving higher utilization in our global delivery centers and driving profitability on an ongoing basis. Overall, our team's quality of delivery and proven discipline, guided by the best practices and frameworks in CGI's management foundation, continues to result in CGI's event margin placing in the top quartile of our IT services peer group. A topic of importance to all of our stakeholders is CGI's environmental, social, and governance strategy and progress. As such, we are proud to employ our expertise in collaboration with clients, educational institutions, and local charities to improve the economic, social, and environmental well-being of our shared community. And we are sustaining our investments in diversity and inclusion, CGI academia, and health and well-being as we continue to hire and provide career development opportunities in line with client demand. We follow UN principles and global best practices in setting our ESG objectives and targets globally, which are shared transparently with all stakeholders through the publication of CGI's annual ESG report, which will be available on CGI.com early next week. Looking ahead, as many clients navigate uncertainty in the markets they operate in, they continue to communicate their intent to sustain digitization investment across two key dimensions. Tactical initiatives to generate cost savings and connect enterprise processes and systems to enable greater operational resilience. And transformational initiatives to advance their progress on building new digital business models to generate incremental value. As highlighted today, CGI has many value propositions across our proven end-to-end portfolio of offerings, and our consultants collaborate with clients every day to deliver the right balance of services and solutions to meet their objectives. Additionally, CGI's strong balance sheet enables us to rapidly act on our buy strategy, which is another key driver of CGI's profitable growth. The fragmentation of the IT services market remains high, driving a strong pipeline of merger opportunities, and we plan to allocate $1 billion of capital in 2023 to our M&A strategy. In closing, CGI's strong first quarter performance reinforces the confidence we have in our plans for 2023 to continue profitably growing at or ahead of the markets in which we operate and continue to deliver double-digit EPS accretion. Thank you for your interest and support. Let's go to the questions now, Kevin.

Thank you, George. Julia, we can now table questions from the participants.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Paul Trevor from RBC Capital Markets. Please go ahead.

Well, thanks very much, and good morning. Just a question on organic growth. We estimate organic growth was about 8% in the quarter. Is that in the ballpark in terms of what you're thinking? And then it's averaged about 8% for the last four quarters, and it's well above the historical average. Is there anything that you see unusual in the last year that has pushed up organic growth, or do you see it as structural and sustainable at these levels going forward?

Yeah, no, thanks for the question, Paul. Yeah, we have seen that strong constant currency organic growth. And it really is, it's based on some of the investments I've been talking about in the last several quarters. It really is investments that we've been making to strengthen our value proposition. The managed services capacity, we anticipated this shift to managed services. invested in the managed services capacity. The IP, both on the software engineering side, but more importantly on the go-to-market, you see the results driving the bookings there. Our consulting expertise, I always say that's the tip of the spear. We're really gaining more and more traction there. I mentioned last quarter the Forbes recognition we have as one of the top management consulting firms. And then the partnerships that's helping to drive some of that sustained systems integration. results. So it really are, there are some structural items that we've had. Of course, demand plays into that, but certainly the structural changes we made is driving that growth.

That's helpful. And then a follow-up there related to inflation and the impact on pricing and also the impact on your cost base. How do you see inflation and pricing changes impacting your growth? And then to what extent, like how should we think about your margin structure through an inflationary period? Can you raise prices faster than your costs are going up or should they move in line?

Yeah, well, you see, you know, it's not just growth. It's profitable growth. We've maintained those profit levels, and we expect to continue to be able to do that. I mentioned before on the inflation side, we've been using and deploying global delivery as one of the elements of inflation. Of course, our IP does extremely well, and, you know, the software, In many cases, we have even greater price elasticity than we have on labor. So that's a part of this. We've been moving our labor around so to make sure that we have the right people on the right jobs at the right rates. And that's been going very well. Our teams have done an excellent job. of essentially developing our people's careers and therefore driving the proper value propositions from our clients in rate increases. And, of course, I mentioned on the larger, longer-term deals, we had built indexation knowing that inflation was not going to stay at historic lows forever. We built that indexation into the contract. So I have many examples where some of those contracts, as they come up for renewal, are increasing in healthy ways. Overall, in our cost base, as I mentioned before, because of that global delivery and because of the project rotations and because of the new college hires, which continues to be a larger percentage of our hires, the vast majority of our growth really is from college. from those increased bookings and new business. But I will say that because we've been very diligent on this, probably a little bit of that inflation is in the growth, but it's not a large percentage of it.

Thank you. I'll pass the line.

Your next question comes from Divya Goyal from Scotiabank. Please go ahead.

Good morning, everyone. Congratulations on the quarter here.

Thank you.

I wanted to actually get some color on the broader M&A outlook. I know 2022 was a good M&A year for the company, and you have certain targets built up. So if you can provide some M&A outlook and how are you broadly seeing the trends in the public versus the private sort of targets out there?

Yeah, so thanks for the question, Divya. Yeah, the pipeline does remain strong for M&A, and we have included more IP-related firms in that pipeline, and actually even several captives that are also in that pipeline. And in general, the deals we're now looking at are larger. So that's certainly good news. It's a focus we've had on that pipeline. Mark is very fragmented, but, you know, getting those larger deals takes a little more time. And it's pretty – it's filled with pipeline mix of both public and private firms and mix of European firms and North American firms. So it's pretty balanced where our operation is. I will tell you, though, it's – you know, go back to the – The principles of CGI, it's the right company, right place, right time, and certainly the time is right for us, and that's why we've allocated the capital to this in our plan. But, you know, we found some that were at the right place, right price, but after due diligence, they weren't the right company. And so that operational discipline is going to be key to achieving success You know, what we see is the long-term accretion, not just the short-term accretion, but the long-term accretion of these mergers because it's really about building the long-term profitable growth of CGI. Valuations are right now all over the map. So I would say patience is key in our operational discipline. But we have the capital, we have the appetite, we have the pipeline, but you can be assured that we'll be diligent in making the right calls.

That's great. So just on that valuation that you mentioned, are you seeing a major variance in the valuations between the public and the private sector?

You know, it would be hard to say that in general. We see, like I said, particularly on the private side, we see valuations all over the map. And so there isn't that tight correlation, I would say, just given some of the volatility even in the public firms. You don't have that anchor that you had in the past. Some of that can be very good if you find the right company.

That's helpful. Just one more question on this M&A discussion here. So we did see that your integration expenses obviously have gone up recently over the past few quarters, and it does make sense with all the acquisitions you've been doing. But given the M&A pipeline continues to stay strong, what is the best way for us, if you can guide us from a modeling standpoint, so how can we think about that bit of the expense line?

Yeah, it's a good question. It really varies, again, by the company that we're bringing in. And also the geography, right? So some of that integration costs can be a little bit higher and certain geographies be a little bit lower. For example, when we do the next one in the United States, it's a little bit lower. So it's hard for me to quantify that for you. It's why we break it out and we show it to you with and without.

That's helpful. George, thanks a lot. I'll pass the line.

Yep, yep.

Your next question comes from Jerome Dubreuil with Desjardins. Please go ahead. Oh, sorry. I'm sorry. Your next question comes from Steven Lee with Raymond James. Please go ahead.

Steven, is that you?

That's Steven. Maybe not. Jerome? Steven?

It's Steven. Can you hear me? There we go. Okay. So on the margins, I know Rumanis was lower, and so there's some dilution, and you mentioned travel was up. But for the full year, George, I mean, are you still expecting some modest expansion year over year?

Yeah, we do think that we can do that. You know, the margin does remain strong, but we did call out some of the headwinds on business travel, which was planned. It's related to BD, and, of course, you see that nice uptick on the bookings. But we think that the big shift in that is behind us, so we would manage any future additional – travel with the business. So I go back to kind of our levers for margin expansion, which remain and remain strong. makes a business, you see the nice uptick in the bookings and IP and managed services. That hasn't flowed through yet to the revenue, but when it does, we should get some pickup there. Global delivery, both offshore and the nearshore, is another opportunity for us. The merger synergies as we bring the current acquisitions on board, and then the economies of scale as we grow. in the SG&A. So the expectation would be, as we move throughout the year, we should see some margin expansion.

All right, that's great. Perfect. And then, George, on your M&A comment, so you mentioned IT services, captives in the pipeline. I didn't hear IP. Are they just more difficult to come by in terms of potential targets? Thanks.

No, yeah, thanks, Stephen. I thought I did mention that, but I certainly meant to, that we do have more IP services related firms in the deal pipeline. So, in fact, in the near-term pipeline. So, yeah, they continue to be a focus. And we're finding some that have both the services and the IP. Yes, that is a little more difficult, as I mentioned on the prior call, but we do see them. Now we just have to make sure we get the right company at the right price. Great. Thanks, guys.

And your next question comes from Jerome Tibreux from Desjardins. Please go ahead.

Yes, thanks a lot. Bonjour tout le monde. Thanks for taking my question. So we've seen a slowdown in Microsoft Azure's growth in the most recent results. You know, it's still very high growth, and some of their issues regarding optimization of cloud aren't necessarily negative for you. But, Bill, I think cloud has been a big driver of growth for IT services. What would you say is the impact of the slowing growth of cloud for Microsoft Azure on your business?

Yeah, well, I think there's not a direct correlation between Microsoft and Azure and CGI. But indirectly, what I can say is, in support of some of what they're saying, is that, you know, now a lot of the enterprises that we work with are looking at how do I connect some of the work that I did on the back end to some of the work I did in the front end. This is why I highlighted some of the enterprise architecture work we're doing. They're still viewing some of that as tactical to then build on top of that on their bigger digitization strategies. But again, I think we play on multiple sides. in helping our clients, and so that slowing growth doesn't really impact us. And I'll remind you that there's still a lot of work to be done in cloud per se, but a lot of that work is helping the clients actually leverage the full power of the cloud, and that's some of the cloud factors we have on the application side. The cloud providers don't really play on that side, but of course we do.

That's great color. And then on the consulting front, you really sound upbeat on that segment of your business. We don't necessarily see that with every one of your peers. And consulting can also maybe be a generator in the coal mine in terms of the macro environment. What are you doing differently from your peers that you're seeing? Or is it just that you're starting from a lower base?

Yeah, I think it's a combination of a few things. Yes, we definitely are starting from a different base. So we're still building that expertise. And so there's some natural uptick there. I think the other is that we really are focused on the areas that clients are spending on now. I mean, they do need help on sustainability. They do need help the business business model transformation because what we see is clients aren't just looking at the here and now and the current economic landscape you know again depending on the economists you talk to but they're really focused on what's the next business cycle and they want to come out of this business cycle in a stronger place and so it's more pointed focused on efforts, and we've been investing in those areas, given where our starting point was.

Thanks, and congrats for the great results. Yep, thank you.

Your next question comes from Thanos Moskopoulos from BMO Capital Markets. Please go ahead.

Hi, good morning. George, I think you touched on this with some of the prior questions, but maybe just to be clear, on the macro, I mean, clearly you're still seeing good spending environments, but any change at all in customer behavior? Do deals require greater level of scrutiny and sign-off? Are the sales cycles longer? Are there any specific pockets where you might be seeing some of the macro weakness, or is there nothing really to call out on that front?

Yeah, no, I think it's a good question, and, you know, we've been anticipating a shift. We've been talking about a shift, and we definitely see that. We see more immediacy in the demand regarding those cost savings and sharper business case I've been talking about for the last couple quarters. So there is more immediacy there. More cautionary in some of the broader digitization initiatives. We don't see anything stopping, but we definitely see a little more caution there. In general, those cost savings – Part of that is some of the managed services deals that we're doing and some of the IP deals. That's typically a longer sales cycle in any environment. We actually see those shortening because there's more immediacy for that. I can tell you I had a discussion with the COO of a large company, and he And when we really talked about the managed services opportunity, he sent an email literally five minutes after the call to his team and connected our teams to have that discussion. So those tend to be moving a little bit faster. The SINC deals, which are shorter duration, typically shorter sales cycle, That's lengthening a little bit because of some of what I talked about, some of the caution. So overall, we've anticipated this shift. Our go-to-market, our hiring, our staffing, everything is aligned to this. And you see that in the results of the bookings. But we definitely see that shift happening. You know, on the managed services side, it's pretty widespread, all industries, all geographies. On the SINC side, it's strongest in government and the financial services, a little bit stronger in North America, as you might expect, than Europe on the SINC side. Weakest probably in manufacturing and retail. So the S&C side, you see some weakening there. But counteracting that is very strong on the managed services side, particularly in manufacturing. And then, of course, IP is strong in all markets. For us, it's strongest in banking and government. So maybe that gives you a little bit of flavor of what we're seeing. Yeah, there is some shift. We've anticipated it. We've been talking about it. And our teams are pretty aligned around that, which is why you see the growth in the bookings.

That's a very good caller. Thanks. And just a quick one on cash flow. I mean, given that the mix is shifting a bit more towards managed services, should we expect a room for further improvement on DSOs or not necessarily?

Look, you have seen the DSO improvement just this quarter. Yes, we have some clients even that have prepaid us in Q1. Usually, we see that more in Q2. uh because of the annual maintenance that we are receiving uh but yes it's usually managed services as a short-term uh shorter dso great i'll cross the line thank you your next question comes from robert young from clinical origin ready please go ahead

Good morning. I was hoping to dig in a little bit into the hiring strategies, lots of moving parts, at least from my perspective. Maybe you could talk about capacity relative to the strong demand you're seeing. Are you starting to see utilization moving higher? Maybe if you're slowing down hiring and how does the low-cost delivery? I think you said 22% has been there for a few quarters. And so is that an area that will move up? If you could just wrap up some of the comments together around the hiring strategy, that would be helpful.

Yep, sure. Happy to do it, Robert. Look, the hiring is impacted a bit by the lower turnover that we're having. The fact is, that given some of what's going on in the marketplace, we've seen a pretty sharp decrease in the voluntary turnover on an annualized basis. Now, some of that, we always see a bit of a shift in the December quarter, just given the holidays at the end of the year. But we saw a sharper one this quarter. So that gives us a little more breathing room from a hiring perspective. But also that shift to managed services, And the shift to intellectual property deals, you saw that in the pipeline. You'll start to see that flow through some as well because on the IP, it's not a linear revenue to people like it is on the SINC side, right, because you've got the IP generating revenue for you in a different way. And then the shift to managed services, many of those managed services deals, we actually rebadge people from the clients. So that, again, lessens the pressure on the hiring. We don't have to hire as much in front. And then government is very strong, and government is a little more predictable given the RFP process. And the time for that, you can plan that out much easier. And so, yes, over time, we're very focused on utilization. We're looking to drive that up. Having said that, the hiring for HUD skills remains tight. And, you know, although it's easing some, it's not really eased yet. And so we continue to make sure that we manage the hiring of those hot skills and the rates and projects that we put them in. So definitely a shift, but, again, one that we've planned for and one that we'll continue to manage closely. as we go through things. I'll just remind you, the IP and the managed services doesn't come online in the revenue overnight. So this will be something that will happen over the next few quarters.

That's great. Thanks for that. And then the second question would be around the new business mix. I think last quarter you said that the pipeline was even better than the numbers report then. I think they're consistent this quarter. Are you seeing consolidation happening? I imagine you're better positioned for efficiency and digitization than some of the others. You're giving the end-to-end coverage. And so is that something that you're starting to see? Is that what's driving new business? Or is there something else?

Yes. No, for sure that, you know, the combining some of that SINC into the managed services deals to give our clients the best balance, which is what I talked about in the opening remarks, We're definitely seeing some of that. The IP is also generating new clients. I had mentioned we've been investing in a go-to-market. Our IP has been a little more locked within the geography that was created. And so part of the rationale for creating that global IP group and deploying resources towards that was to kind of strengthen that model. That's generating some new clients for the existing IP. And so I think it's a combination of factors that's driving that.

And the last one for me, just high level, is just can you remind us about your exposure to AI, how it runs through the business, how you participate in that, just given all of the news flow around that?

Yeah, yeah, a lot of discussion about that. I'll tell you two things. One, our clients in general are pretty cautious about on deploying it for all the right reasons. But having said that, what we have the advantage of is we have our intellectual property, right? So we've got a couple hundred solutions. We've got software engineering labs associated with that. That's kind of our R&D lab for this. And so we're introducing AI and – researching where it applies, how it can be used responsibly into the solutions on IP. And then when our clients are ready for that in a more full-scale way, we'll be right there for them.

Okay, thanks.

Yep. Your next question comes from Richard Say from National Bank Financial. Please go ahead.

Yes, thank you. Actually, it's a bit of a follow-up to Rob's question on AI. When you look at different technologies, not specific to AI, but there's a lot of different things that are happening, how does CGI select those opportunities to pursue when it comes to making capital allocation decisions?

Yeah, so we have a framework, intellectual property management framework. Actually, I chair that. along with the presidents of each of our operating units. But as part of that, we also have a way to bring new ideas, kind of fast-track. It's a combination of some. There's a pool of money where there's some CGI money. and then some local money that goes into that. And then as that looks like something that could scale, it's then brought to that IP management framework. And when I say IP, you know, some of that is business solutions, but some of that can be accelerators, some of that can be technology solutions as well. That's a good way for us to do that type of work. The other is, you know, part of our lab, you always hear me say, you know, innovation happens at the shop floor. and innovation for us is working with our clients. Sometimes we do that in conjunction with our clients as they look at leveraging new technology. And that's one of the reasons we have what we call emerging technology units that work across geographies so that we can bring that to our clients. So it's a combination of those factors that allows us to leverage new technology.

Okay. And then on the acquisition question, you talked about sort of having opportunities in different markets and IP and different geographies. If you look back over the years, CGI has done acquisitions geographically and in IP. And IP, I guess the big one would have been AMS in terms of sort of changing and being transformational. If you kind of assess, you know, those acquisitions of the past, whether it's IP, large, small, medium size, like, is there a ranking in terms of, you know, returns in terms of what's better or I don't want to say worse, but, you know, the best returning assets from an acquisition standpoint?

Well, yeah, it's a good question. They're all a bit different. And as you know, AMS had a lot of long-term client relationships that were invaluable, just like the IP was very valuable. So it's kind of hard to rank those. It's funny, though, you mentioned that because in a couple cases in our pipeline, we said this looks like an AMS client. company so as far as having an IP combination of IP and services so but look the again just go back to what we're looking for when we're doing an acquisition we're looking for first and foremost the cultural alignment and that cultural alignment typically means for us having talented individuals within the company that have close relationships and and bringing value to their clients. And that value, it's hard for me to rank whether that value is from a consulting, which is very valuable, IP, which is very valuable, SI, which is very valuable, and managed services. But the key is that they have that close relationship and that it's dynamic and they continue to bring value. And that's what brings value then to CGI in the long term.

Okay. And just one last one for me. With respect to acquisitions, again, no doubt you have considerable strength in government. So when it comes to acquisitions, is that, let's say, one area that you think that you would sort of even further fortify your presence or given that it's fairly sizable of a mix today, would you just prefer to diversify the business away from that?

Yeah, it's a little of both. I think the diversification is important. We're now at 35% government, which is a great place to be. But as we continue to grow the business and make acquisitions on the commercial side, it's going to be important for us to continue to grow in the government space. And the deals, quite frankly, are getting bigger in government, and so you need to have a certain scale. So we'll continue to look at both.

great thank you your next question comes from stephanie price from cibc please go ahead good morning i was hoping you could talk a little bit hey i was hoping you could talk a little bit about the visible visibility you have into the cost structure here both in terms of pricing utilization and attrition just curious if you've seen some normalization here versus the last few quarters

normalization of the pricing and the cost structure, you know, it's still pretty dynamic. Like I said, there's still, you know, there's still the tight demand for some of the hot skills, and so there is still some wages that are increasing. We've been managing that, as I mentioned, through the through the combination of global delivery, the college hires, et cetera, and then being able to pass that along. We're still seeing price elasticity point in time for the value-added skills that our clients are looking for. So I think it will moderate over the next couple quarters, but we haven't seen wholesale moderation yet in that environment.

Okay, thanks. And then in your prepared remarks, you mentioned the prioritization of employee certifications and opportunities around supporting partner technology platforms. Just help me even dig a little bit more into this opportunity and what phase of this process you're in.

Yeah, well, as you know, about a year ago, we announced the promotion of nine different strategic partnerships to a global level. And so that's kind of the priority that we have. And then within those areas, we'll work in conjunction with those partners because by doing that, we're working with them at an executive level. What areas are they investing in and, therefore, what areas should we be investing in? Not the legacy, but where they're going and where they're heading. So that's what I mean by the prioritization. It's actually going quite well. We started from a position where we didn't have as much of that relationship, and so it's going very well. And we offer something to these platform providers that maybe others don't, given that strong base of intellectual property. And so there's joint partnerships where we can go to market together, where we build some of our IP together, to run on top of their platforms. Therefore, it's not just us doing integration of their platform, but us helping to drive their platform further into the enterprises that they're in or that we're in. So, of course, we do that in an agnostic way with and in conjunction with our partners, just like they do with their SI partners. But it's where we find that synergy. It's good for everybody. It's good for us. It's good for our partner, and it's good for our clients.

Great. Thank you very much. Your next question comes from Daniel Chen from TD. Please go ahead.

Hi, good morning. I want to do a double-click on your European and Scandinavian markets where you're booking. It's supposed to be an uncertain macro backdrop in the quarter. What do you think was driving some of that? Is it a better than expected macro outcome, or is it some of the management changes that you've recently made?

Yeah, I would say it's more of the latter. We had some structural changes we needed to address. It's great to see that Scandinavia is now growing. as an entity. We still have a little more work to do. You can see that in the numbers. It's really now, though, it's about shifting the mix of business. I always talk about the mix of business and it's about shifting the mix of business. That takes a little more time, but returning to growth, addressing some of the cost structural items is really the difference maker there. And, again, we, you know, yeah, it's an interesting backdrop on the macro environment, but it's really about pivoting to the value-added services that our clients are looking for, and the team has done a great job of that pivot. Great. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Jason Kopferberg from Bank of America. Please go ahead.

Good morning, guys. I just wanted to ask on headcount growth. It looks like net headcount growth was pretty de minimis quarter over quarter. So I just wanted to see if we can unpack that a little bit because I know, George, you referenced a little bit of choppiness as it relates to certain parts of digital right now, just in terms of a little client hesitancy in certain pockets of the business. So is the limited headcount growth just a reflection of the uncertain kind of way forward on demand from here? And I guess just in terms of managing our expectations, you just had a really strong book-to-bill quarter in The December quarter, would you expect that to soften to some extent in the March quarter just because of some of these cross currents that you referenced?

Yeah, well, what's interesting about that, thanks for the question, Jason, it's really a combination of things. One, the December quarter, you know, people don't, we don't tend to have people start in the December month because typically they're taking a week or two off in Europe, maybe even two weeks plus. And so that's not our strong hiring quarter. But it really is also that shift, and you're right, there is the shift from that T&M body-based business to the managed services outcome-based that comes with some people already, and then the intellectual property. So I would expect to see our headcount moderate a bit compared to the prior year, where you know that the The SINC was extremely strong. Overall bookings, though, you know, interestingly enough, you know, the managed services comes with typically longer durations, and so the bookings, I would, you know, just looking at our pipeline, the deal size is up, the duration is up, but the deal size is up. So still have to close the deals, but that's what I see. So I think it's not – one for one with the shift, but the shift does play into that for sure.

Okay. And just on the book to bill, I mean, would you expect that to soften a little bit in the March quarter?

You know, I can tell you that the pipeline continues to be strong. The conversations are fruitful, but, you know, You can never predict that. That's why we always say look at the book to bill on a trailing 12 months, not on a quarter-by-quarter basis, because it's by definition bookings are lumpy.

Fair enough. Thank you.

Mr. Linder, there are no further questions at this time. Please proceed.

Thank you, Julie, and thanks, everyone, for participating today. As a reminder, a replay of the call will be available either via our website, or by dialing 877-674-7070 and using the passcode 308-479. 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.

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