CGI Inc.

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

Thank you, Julie, and good morning. With me to discuss CGI's second 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, April 26, 2023. Supplemental slides, as well as a press release we issued earlier this morning, are available for download along with our Q2 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 are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I'll now turn it over to Steve to review our Q2 financials, and then George will comment on our business and market outlook. Steve.

Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our second quarter of fiscal 2023. In Q2, we delivered $3.72 billion of revenue, up 13.7% year-over-year, or up 11.4% when excluding the impact of foreign exchange. The following segments generated double-digit constant currency growth. Western and Southern Europe, up 28%. Finland, Poland, and Baltics up 14%, UK and Australia up 11%, and Asia Pacific up 21%. Notably, we continue to see an increase in overall demand for our global delivery, especially offshore. As a result, our offshore operations are now 23% of our total employee base, up from 22% in Q2 of last year. From an industry perspective, we had constant currency growth across all sectors. Notably, financial services grew 16%, government grew 12%, and manufacturing, retail, and distribution also grew 12%. From an IP perspective, IP as a percentage of total revenue was 21% in the quarter. We continue to see strong demand for our business solutions, supported by an increase in IP revenue in seven of our eight proximity geographic segments in Q2. Notably, Canada's IP revenue grew by 39%. Western and Southern Europe's IP revenue grew by 32%. And Scandinavia and Central Europe's IP revenue grew by 28%. The number of our consultants and professionals increased year-over-year by 7,000, representing an 8.3% increase, totaling now 91,000 worldwide. We booked $3.8 billion of contract wins in the quarter, representing a book-to-bill ratio of 103% compared to 101% in the same quarter last year. On a trailing 12-month basis, our book-to-bill ratio reached 109%, with seven of our eight proximity geographic segments having a book-to-bill ratio above 100%. Led by UK and Australia with a book-to-bill ratio of 128%. U.S. commercial and state government with a book-to-bill ratio of 120%. And Finland, Poland, and Baltics with a book-to-bill ratio of 117%. Our Q2 IP book-to-bill ratio was strong at 118% given the strong value proposition for CGI's business solution. This is reflective of the ongoing investment in our IP, which is now generating larger and longer-term IP engagements. Overall, our global backlog reached a record of $25.2 billion, representing 1.8 times revenue. Turning to profitability, earnings before income taxes were $564.5 million, up 13.2% year over year, for a margin of 15.2%. Adjusted EBIT in Q2 was $601 million, up 14.7% year-over-year. This represents an EBIT margin of 16.2%, up 20 basis points year-over-year and up 10 basis points sequentially. The year-over-year increase was driven by the combination of strong revenue growth and operational discipline. we delivered strong EBIT margins in the following segments. Asia-Pacific at 30.9%, Canada at 21.7%, and Western and Southern Europe at 16.7%. Our effective tax rate in Q2 was 25.7% compared to 25.4% 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%. Net earnings improved to $419 million for a margin of 11.3%. This compared to $372 million in Q2 last year. Diluted EPS was $1.76, representing an increase of 15% year over year. When excluding integration and acquisition costs, net earnings improved to $435 million for a margin of 11.7%. This compared to $374 million in the same quarter last year. On the same basis, diluted EPS was $1.82, an accretion of 19% when compared to $1.53 in the same quarter last year. This improvement was mainly driven by the successful execution of our build and buy profitable growth strategy. In the quarter, cash provided by operating activities was $469 million compared to $473 million in the prior year. DSO was 41 days compared to 42 days last year, well within our target range. For the last 12 months, Cash provided by operating activities was $2 billion, or 14.5% of revenue. In Q2, we invested $107 million into our business and $400 million to buy back our stock, repurchasing 3.3 million shares at a weighted average price of $119.58. As of the end of March, we had the authorization to buy back up to an additional 15.4 million shares under our current program. In the quarter, we continue to deliver a strong return on invested capital at 15.6%, demonstrating our efficient deployment of capital. Looking ahead, Our focus continues to be on delivering value to our shareholders by investing back in our business, pursuing accretive acquisitions, and repurchasing our stock and are paying down our debt. With a net debt to capitalization ratio of 24% at the end of March, as well as $2.8 billion of cash readily available and access to more if needed, CGI as the strength and capital resources to continue to power our build and buy profitable growth strategy. Now, I will turn the call to George to further discuss insights and outlook for our business and markets. George?

Thank you, Steve, and good morning, everyone. This quarter, we again delivered financial results in line with our plan to profitably grow at or ahead of the markets where we operate. and to continue delivering double-digit EPS accretion. Thank you to our 91,000 consultants and professionals around the world for earning the trust of our clients every day. Your expertise, insights, and commitment made these strong results possible. Today, I will focus on our performance for the first half of the fiscal year, as well as a demand outlook for the second half. On a year-over-year basis, for the first six months of our fiscal year, CGI delivered 11.8% revenue growth on a constant currency basis, 15.2% EPS accretion on an adjusted basis, and over $1 billion in cash from operations for 15% of revenue, up 12.3%. For the first half of the fiscal year, revenue growth on a constant currency basis was broad-based across all segments, all services, and all industry sectors. With notable industry sector growth, of 16.3% in financial services, 12.1% in government, and 11.6% in manufacturing, retail, and distribution. Looking ahead to the second half demand in these industry sectors, we see the following. In financial services, given the recent macro turbulence in this sector, areas such as managed services, intellectual property-based business solutions, and enterprise data strategy and services are generating the most client demand. In government, client spend is rising for modernization, and IT services in support of new policy initiatives. And in manufacturing, retail, and distribution, client interest is increasing for managed services to realize cost savings and business efficiency. Bookings were strong during the first half as we awarded over $7.8 billion in new engagements, an increase of over $950 million, up 14% compared to the first half of last year. This strength spanned across each of our end-to-end service lines, with managed services bookings up 12% over the first half of fiscal 2022, consulting and systems integration bookings up 15%, and IP-based business solutions bookings up 29%. Specific to the second quarter, awards for renewals and add-ons with existing clients were particularly strong as we sustained our incumbency. these existing enterprise clients continued to turn to CGI as their trusted partner for expanded modernization and digitization initiatives. In fact, we achieved a renewal rate of over 95% with increased awards that included new scope. As a result, we expanded our client relationships and created new opportunities to bring a fuller complement of our end-to-end services and support of client initiatives. For example, in Q2, one of the world's largest property and casualty insurers, extended its 20-year partnership with CGI related to their use of CGI's rate-based IP solution. The Administrative Office of the U.S. Courts awarded CGI a 10-year contract building on our ongoing relationship supporting their financial management portfolio, including the use of our Momentum IP. TD Bank Group, a top 10 North American bank, extended CGI's ongoing services for the delivery of a secure and reliable shareholder management system, which is part of CGI's Wealth360 IP solution suite. Under this four-year agreement, CGI will provide extended support as part of the bank's ongoing modernization strategy. PSE, Poland's electricity transmissions operator, awarded CGI a four-year engagement to build, implement, and support a next-generation central energy market solution, leveraging our deep expertise in the energy and utilities industry and CGI's proven data exchange IP. The Swedish Social Insurance Agency selected CGI as its strategic business transformation partner to support the modernization of the agency's operations and the digitization of its core citizen-facing processes. And Fraport. one of the world's largest airport operators with business activities at 29 airports across four continents, selected CGI as its digital partner under a new five-year framework agreement aimed at further enhancing the digitization of Frankfurt Airport. Turning now to our buy strategy. M&A consolidation activities have recently slowed across the IT services market, keeping fragmentation of the market at a high level. will continue to favor CGI given the strength of our balance sheet and our one-company integration approach. Our pipeline remains robust with a steady influx of new opportunities identified through our expanded sourcing strategy. We remain disciplined in our approach to ensure our M&A investments are accretive for shareholders and have the necessary cultural fit to deliver ongoing benefits for all CGI stakeholders. Looking ahead to the demand environment, For the second half of fiscal 2023, we have visibility into clients' priorities and expected budget plans, given our proximity model and close relationships with clients at all levels. Our pipeline reflects CZI's strong position to meet shifting client priorities as the value of new opportunities in our pipeline grew by more than 15% on a sequential quarter basis. Client interest remains notably high for larger managed services engagements, that incorporate CGI's end-to-end services help clients realize cost savings and drive business transformation programs. The pipeline over the next year reflects this intensified interest in managed services, as the total value of these opportunities is up by more than 20% on a sequential order basis. These larger managed services opportunities do have longer sales cycles, given their broader scope. Importantly, we are actively engaged in later-stage opportunity pursuits with multiple prospective clients in every geography. In each case, we work collaboratively with client executives to build solutions that combine and tailor the right mix of CGI services and solutions to address the organization's business objectives. Our outlook on client demand was further validated by the preliminary findings of our annual Voice of Our Clients proprietary research. our leaders recently met with over 1,750 executives at companies and government agencies around the world. Topics covered in these discussions range from macro trends influencing clients' business strategies to digitization priorities and budget plans. We're in the process of analyzing this valuable input from current and prospective clients, and I'd like to share the three preliminary findings that we see shaping client demand. First, clients are placing a sharper focus on prioritizing investments and returns. Second, given the heightened pressure on profitability, more clients indicated their willingness to outsource a portion of their IT landscape as a managed service over the next three years. Finally, deeper partnerships with external services providers are deemed increasingly essential to help clients achieve their holistic digital strategies. As a prioritization of investments gets sharper, clients are placing a spotlight on the most critical digital initiatives that will deliver the highest financial returns and drive organizational benefits. This is also leading clients to place a higher value on external partners like CGI, who are capable of providing ROI-led innovation. While clients are getting more focused on what they invest in, over half of executives we interviewed said they plan to sustain or increase their overall IT services spending over the next year. In addition, 84% of client executives indicated they continue to have difficulty hiring IT talent. In terms of partner ecosystems to help deliver on client IT spend, we observe a new duality taking shape, specifically For clients engaged in trusted partnerships with their existing IT services providers, they are more inclined to expand and extend those relationships. Yet, at the same time, clients are increasingly open to engaging with new providers that embody the partnership qualities they value. At CGI, building trusted partnerships with clients is intrinsically linked with CGI's culture of ownership and accountability model. CGI's collaborative working style extends to creating a positive partnership foundation with clients and continues to be a strong differentiator for how we attract and retain the best talent. The CGI employee value proposition is grounded in trust, collaboration, and a commitment to operating as one team. This is the essence of our culture and core to our ongoing talent investments, which are making a significant difference. The satisfaction of our consultants and professionals continues to rise to new highs. Turnover reduced sharply in the quarter remains below the IT services industry average. Our depth of industry expertise, which we continue to deepen through hiring and development, is recognized by clients with an all-time high satisfaction score. And 84% of our now 91,000 consultants and professionals are CGI owners, collectively aligning us to common success factors. Most importantly, again this quarter, the highest rated client satisfaction scores were related to the quality of our relationships. This includes both CGI's commitment to clients and the intent of clients to engage us again in the future. Both of these scores, which come from signed client assessments, were at record high levels of over 9.5 out of 10. Now more than ever, CGI's culture, proximity model, and commitment are in even greater demand. We were well positioned to remain a partner and expert of choice for clients, empowering environment for our consultants and professionals, an engaged, ethical, and responsible corporate citizen, and investment of choice for our shareholders. Given the strength of our first-half performance and the alignment of our strategy and model with the priorities and budget plans of our clients, we remain confident to continue profitably growing CGI for our build and buy strategy. Thank you for your interest and support.

Let's go to the questions now, Kevin. Thanks, George. Julie, can you please share the logistics with the participants?

Of course. Thank you, ladies and gentlemen. Should you have a question, please press the star 1 on your touch-tone phone. If you'd like to withdraw your question, please press star 2. One moment, please, for your first question. Your first question comes from Thanos Moskopoulos from BMO Capital Markets. Please go ahead.

Hi, good morning. Hi. Hi. I was surprised by the strength in the SINC bookings. I mean, just given the macro backdrop, I would have thought we'd see some acceleration there. And your commentary suggests that you're also seeing growth in the SINC pipeline. Can you provide some color in terms of, you know, is it broad-based? Is it more focused on certain geographies? And then what kinds of initiatives are driving those assigned people teams?

Yeah, thanks, Thanos. Yeah, the growth was strong across. So IP and financial services and government is pretty broad-based. SINC was stronger, both in MRD and in government. In MRD, it's really around some of our larger engagements for larger clients, and it just shows how they're looking to use technology for things like smart data, smart factories, etc., And then, of course, government is really going through a modernization phase, and they'll continue to do that. But managed services and IP were also strong in government. We're encouraged that SINC for those larger clients remains so strong in the bookings. There's a lot of add-ons rather than straight new business, and I think this goes to the partnership qualities that CGI has and not just maintaining our incumbency, but extending and expanding on that incumbency.

And then on the macro, a number of your peers have suggested that there's been some softening in the last 90 days, especially in North America. Are you seeing some of that dynamic as well, or from your perspective, has it been more consistent, just given the specific verticals and GLs that you're focused on?

Yeah, you saw our bookings were pretty strong in North America, particularly in the U.S., at 120% book the bill. I think in general, there's a little more caution. And I mentioned this last time. I think the SINC, there's more caution, a little slower to make some of those decisions. The demand is still there, but a little more purposeful, as I mentioned, certainly around the return on investment, the focus that they have. So I think it's getting more focused And in general, we're seeing more of those ROI-led projects, and even in the managed services space, they're getting larger. Of course, those take a little bit longer, and I think that's what you're seeing in some of these booking numbers.

Great, Paul. We'll pass the line. Thanks, George.

Thanks, Paul. Your next question comes from Paul Trevor from RBC Capital Markets. Please go ahead.

Well, thanks very much, and good morning. Just want to dig deeper into managed services. You know, the book to bill was a little bit lighter in terms of bookings this quarter. Is that, you know, it sounds like there's lumpiness there. Could you just speak to, I mean, you know, I spoke to the pipeline, but the conversations regarding the pipeline and the potential cost optimization and when you could see that coming through in terms of bookings just relative to the environment here?

Yeah, well, like I said, we're encouraged by the later stage discussions that we're having on managed services. But given their broader nature, they just, in general, take a little bit more time to close. And, again, because they're such strong business case driven, they want to get that right. You know, in general, they're very positive partnership-type discussions, more so partnership-related than just procurement-driven. So that's certainly... I think, a positive. It's not that procurement isn't involved, but they really are focused on those business cases, not just the input price and the returns. And that's where I think the partnership focus really comes in. So, you know, it's just a matter of timing. Bookings are always a little lumpy. You can see that it actually went up on a trailing 12-month basis. So I don't think there's any much to read into that at all. We're staying focused on closing the right deals for both us and for the client.

In shifting and looking at geographies, Europe has been really strong here and shown a steady improvement over the last several years. What fundamentally has changed for your business in Europe where you're seeing steady, positive organic growth?

Yeah, I think it's a combination of factors. Part of it is a more resilient business mix. So whereas maybe before it was primarily systems integration and consulting, now you see some nice growth on the IP bookings. We've actually acquired some IP around open media. There are some good bookings there, retail suite, good bookings there. Some investments that we've made in – in bringing the full suite of CGI's end-to-end services to these global clients. And I think operating also as more as one team. You're seeing more deals working across the various countries for larger enterprise clients there in Europe. And so I think they all factor into that opportunity. And also we've made some changes in the leadership. So that's a part of it. Investments in leadership and talent. is absolutely part of that.

All right, thank you. I'll pass the line.

Thank you. Our next question comes from Richard Sui from National Bank Financial. Please go ahead.

Yes, thank you. It looks like you had some pretty solid organic growth. I was wondering if you could maybe give us a sense of how much of that growth is being fueled by acquisitions, meaning the capabilities that you may have brought on board through some of these smaller acquisitions in past years.

Yeah, well, thanks for the question, Richard. Yeah, you know, what we see, and I think I mentioned this in prior discussions, but what we definitely see is that the organic growth is typically strongest in areas where we have done more of those metro market acquisitions. Part of it's the skill sets. Part of it is the new client relationships that we have opportunity to sell the larger set of CGI's end-to-end services into. And so you do see that. You see that certainly in Western and Southern Europe. You see some of that in Central Europe and Scandinavia. And so definitely that is, as I always mention, those metro market acquisitions are a catalyst for organic growth in the future. And that is why we remain very disciplined on our M&A strategy, because we want it not just to be inorganic growth and one plus one equal two, but we want it to be a catalyst for growth and one plus one equal three or more.

Okay. In terms of this growing momentum of AI, what do you think the implications are in regards to sort of digital transformation initiatives with your clients? Do you think it has the potential to cause pause in projects as they assess the potential capabilities here going forward?

Yeah, it's a great question. I don't have a crystal ball, but I don't see it slowing anything. You know, our view is that in general, you know, technologies like generative AI are simply make experts more productive. It doesn't make the layperson an expert. So I don't think you're going to see that necessarily slowing. Having said that, we just did the voice of the clients, and I'll just share some data with you. Two-thirds of our clients indicated in that research that they're either investigating or doing a proof of concepts on ai and yet you see that that hasn't impacted anything in fact we're we're playing part of that uh investigating with them the rest are pretty evenly split about 20 are not doing anything at all and about 15 are actually suggesting they're in some level of implementation of AI. So I think people are moving into this rather cautiously and looking to partners like CGI to help them think that through. In fact, we've been investing in this. It's part of not we created our own IP framework that allows you to quickly create closed domain models which then are easier to integrate into existing applications. And, of course, we're also integrating that into our existing IP. So I actually think it's going to be more of an opportunity than anything. Of course, you know, with the cybersecurity concerns, the data privacy concerns, probably future regulation, you see some of the IP and copyright concerns. I think it's going to take some time for that to go there, so I don't think it's going to slow anything down. If anything, though, we're going to be looked on as advisors in that space. Okay, great. Thank you for those comments.

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

Hi, good morning. George, congrats on the strong quarter. So you guys mentioned that financial services performance remains strong with its revenue growth and bookings, and it sounds like H2 is expected to also be pretty good. Can you give any color on how your customer conversations in the space are going, just given all that uncertainty?

Yeah, it's, you know, I guess what I should start with is we're mostly working with the large banks, okay? So over three-quarters of our banking business in the U.S., for example, is with the 10 largest banks. By definition, it would be with the top seven or eight banks in Canada. But the remaining is spread in the U.S., is spread pretty evenly across the other banks, and it's mostly around RIP. So the discussions we're having, and in Europe, it's very similar. Over 90% of our banking business in Europe is with a top five bank in the country, and over 50% is with top 20 banks. A top 20 bank across all of Europe. So we're working with the larger banks. And so naturally, they're looking at this as a bit of an opportunity maybe to do some consolidation. Certainly, they're seeing increases. in their own bank deposits. And so, you know, our discussions are more around how do we help them play into that. It's very similar discussions around the modernization and the digitization. We haven't really seen much. In fact, I was meeting with a large European bank right at the time that a lot of that initial turmoil had spread from the U.S. to Europe, and they were pretty much staying the course. So it's interesting. They are more open and willing, and that's just in general. They have been for a little while to go to the IP, and so IP is certainly a strength that's driving some of this, more willing to go to the managed services. Not so much because of the market turmoil, but more because of the difficulty in hiring IT talent. So we're seeing those happen. And so my discussions with CEOs, CTOs are fairly stable, consistent discussions that we've had prior to the turmoil.

Thanks for that. And then if we just move to, like, the U.S. commercial and state segment, the margins there were lower this quarter. Just any color on what drove that and whether you see that continuing?

Yeah, yeah, no, I wanted to point that out. We do see some less IP licenses in the quarter. That's always lumpy, so that usually works itself out. But we also saw some projects successfully end and other projects not start in the same timing level. So, you know, we do have new starts given the strong bookings, 120% in the quarter and 120% plus percent in the trailing 12 months. We have some rate increases that have worked their way into the system, so that's a tailwind. But we definitely are taking actions to monitor utilization to ensure that what we see is a bounce back. That's certainly the plan is to see a bounce back to those mid-teens in the U.S. business. And you saw a bit of that, by the way. You saw a bit of that in WSE. They had the same thing where they had some projects successfully end, a little bit slower, as I mentioned, in starting up new projects. And you saw a little bit of that in WSE last quarter, and you saw the nice bounce back there. So I think that's what you'll see in the U.S. business.

Next question.

Yep. Your next question comes from Jérôme Dubreuil from Desjardins. Please go ahead.

Hi. Thanks for taking my questions, a couple if I may. You know, you've commented on the past, excuse me, that the cloud results or the slowing down of cloud for hyperscalers had little correlation with your own results. focus on profitability, you know, which in Google with profitable cloud business last night, are they being – are their focus on profitability having any impact on your business or is this all a – all pass-through?

Well, we're not really working in the pass-through business of the cloud provider. So when you look at our revenues, there's very little, if any, pass-through sales of cloud. We're really in the deployment of the cloud. And in that case, actually, is why I mentioned that you don't see a direct correlation because what you see is a number of clients actually are looking to get more purposeful about how they move applications into the cloud, what their decisions are. And so we're seeing actually consulting rising associated with cloud advisory and We're seeing our cloud factory business continue to be strong in helping clients move things to the cloud, rationalize their applications. So you're seeing more of that. And, in fact, if you look at our partnership revenue associated – and, again, it's associated. It's not the software. It's not the selling of the cloud. It's the services associated with the cloud. We've actually booked – as much revenue in the first six months of this year as we did in the prior total year. So, the partnership with firms like the hyperscalers and the platform providers is actually pretty strong.

Okay, thanks. Regarding M&A, your share price has done extremely well over the last few months. Congrats for that. Is your share price a consideration when you are considering M&A? In other words, is your accretion calculation based on your multiple in the market, or this is not really in your consideration?

No, Jerome, thank you for the question. Really, it's the same discipline as you're used to at CGI. Look, we want, as George mentioned, we want acquisition that will fit with our culture and that we're looking really for acquisition that will be an accelerator to growth, as George mentioned, and we really want something that will do one plus one that will equal more than two under one plus one. So that's really the goal. Same strategy. Our evaluation doesn't change really how we see M&A.

Okay, thanks. And then I'll squeeze one last in. Congrats for the really noticeable improvement in terms of Scandinavian margins, really seeing that you're shuffling of segments is paying off there. How far along do you think you are in terms of fixing the Scandinavian business? Is there quite a bit left to go there?

Yeah, no, thanks for the question. There is a little more work to be done, but the positive news is that not only have we fixed some of the structural items, and that is mostly behind us, But we're also returning to growth, and that's really where I think you'll continue to see the progression. So I don't think it's a headwind anymore. I think it's a tailwind moving forward. Great. Thank you.

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

Good morning, guys. Great quarter. So thanks a lot for all the color that you've provided on bookings, but I wanted to get a little bit deeper on the bookings pipeline that you have. Some of the global IT companies recently indicated that they are seeing an increase in less than $100 million bookings. Is that the same sort of trend? Is that similar to what you are seeing in general? And what's your take on North America versus Europe growth on a global basis for yourself as well?

Sure. Well, first on the bookings, I'll answer it two ways. For the quarters bookings, I think we saw a similar situation where we had fewer $100 million-plus bookings. And I mentioned some of the expansions and the add-ons. and the partnership view that was driving some of that across industries. But looking forward, we still see some very large multi-year managed services deals, and I think it's just a timing factor that you see that now. And we kind of talked about this on the call earlier. last quarter, Divya, where I said, you know, the SINC deals were getting a little bit slower. The managed services deals are getting a little bit faster, but they're still, because of their broad nature, are still longer to close. So I think you're just seeing some of that air pocket on the bookings. So I don't think yet it's a trend to be seen. As far as Europe versus North America, Not much. You know, you heard more caution in Europe, but, you know, I was there two weeks of the last month, and that's not what I heard from clients. Clients are certainly more focused, more determined to get the ROI, more partnership focused, for sure. It's all the items that are highlighted in the opening remarks. In the U.S., you hear less caution in the narrative, but when you're talking to clients, yeah, there's still some caution there, both in Canada and in the U.S. So probably to the narrative, you see a little more caution in the U.S., and to the narrative, you see a little less caution in Europe. But it's pretty similar. And, again, I'm talking from a point of enterprise clients.

Yeah, totally get that. Thanks a lot. That was great color. So let me shift gears here a little bit. So, you know, obviously, M&A is something the markets looking at CGI for the first few months have been a little bit slower. So what can we expect from an M&A standpoint from the company? And both that question, I also want to understand, how are the company's integration efforts been with respect to humanity? And what can we expect going forward in some of the recent acquisitions that you've closed?

Yeah, well, maybe I'll start with the integration, and then we'll talk about more general M&A. So the integration with Humanis is continuing to show steady progress according to our plans. It does take a little bit longer in certain countries. So you're seeing some of the tail there, and you saw that even in some of the caches. But we're continuing to work through that. It takes a little bit longer to do the restructuring, but the clients are reacting very well, and things have stabilized in Humana. So, you know, our playbook works very well from integration. It is a one-company approach, as I mentioned. I think that makes it maybe a little bit more difficult in the short run, but has greater benefits in the long run. And so we'll continue with that approach. On general M&A, you know, the pipeline is strong. We're seeing all the deals out there. It's really just a matter of timing. We remain focused on the most accretive deals. There's the larger deals in the pipeline. Twenty-five percent of them are IP-related deals. You know, we maintain the aspiration. It's doable, but clearly we could run out of runway this year. But, you know, just a handful of these deals could get us there. But you can count on us to be disciplined on this. Sellers can't be rushed, and we're not going to rush to a bad deal. So that's really the maintain the focus. I don't know, Steve, if you want to add anything to that.

That's great, Cutler. Thanks a lot, guys. I'll pass the line.

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

We've had discussions around the U.S. debt ceiling. Can you remind us how CGI's federal business has fared in prior instances and how we should be thinking about the U.S. federal business here as we head into essentially a bit more of an uncertain period in the U.S. federal business?

Yeah, it's a really – it's an interesting time. It seems like it's always an interesting time in the U.S. federal government market. But, look, right now, point in time, I'm going to put the debt ceiling aside for a minute. There's really strong spending with the current budget, and there's a couple reasons for that. One, knowing that the specter of this – debt ceiling is out there because, you know, they're taking special measures just to keep things going until that comes to a head. And probably more importantly, the specter of most likely a two-year continuing resolution because you've got Congress on one side of the aisle, probably won't change. You've got an incumbent president who just announced his reelection campaign. And so what you're going to get is basically continuing resolutions, no approved budget. Of course, he's put forward a nice budget for us as far as domestic spending, but you're not going to see that come to fruition. I would say, in general, these times favor the larger firms with the larger incumbencies. And so that's what we've seen in our business there. We see rushing to maybe – rushing to expand on existing contracts, use the existing frameworks, book as much as they possibly can, spend the money that they have now. And then as you get into the continuing resolution, there's a couple of factors that help CGI. One is our fee-based business. So, for example, that work we do with passports and visas, it's totally fee-based. It's outside of the budget. If you do work for the FCC, it's funded outside of the congressional budget. So when it's fee-based funding, that certainly helps us. It also helps us to be kind of that ROI-led innovator and be seen that way because if we can drive out some savings in one part of our business, then they can use that on a current existing contract vehicle to deal with unfunded mandates. And that's what happens in government at times like this. There's still a mandate, but they don't give any budget for that. And so the agencies really have to – work around that. And certainly, that's when incumbency really comes to fruition. We're also seeing D&I and sustainability enter into more and more of the contracts in government around the world, but particularly in the U.S. federal government, which is kind of like an unfunded mandate in that it's just an add-on. And again, only the larger firms like a CGI can actually meet that. So I don't want to say that we hope for continuing resolutions. We do better in a budget, but we do fine in that type of environment, given our incumbency.

Great color. Thanks. And then one other one for me in terms of IP. It sounds like IP has definitely been a differentiator here for CGI in a somewhat uncertain environment. Can you talk a little bit about where you're seeing the strongest demand in IP, both in revenue and bookings here?

Yeah, well, in the quarter, it was really around our wealth platform, our payroll IPs, both here in Canada and around the world, our retail suite, particularly in Europe, and our open media had a good quarter around the IPs. And we have good growth in health and utilities. Overall, we do see an increasing shift to software as a service. So it was one of our biggest quarter-over-quarter shifts. So we're now... We're now at about 60% of our businesses in software as a service. Expect that to continue, just given the uncertainty that's out there. And as people look at their CapEx spending, et cetera, they're probably moving away from some of the licenses. As I mentioned, you saw a little bit of that. in the numbers. That's fine with us because over a period of time, it always costs more to rent something than to own something. So, you know, it's just that the revenue moves around a little bit for a period of time. But overall, the investments we've made in IP around architecture, around allowing it to plug in to other systems, ease of use, as it continues to pay dividends for us we see moving forward. And as I mentioned, even bringing new technologies like generative AI and even more importantly kind of the deep machine learning into the IP is just making it more productive for our clients. And that gets back to that, you know, making experts more productive. That's what we – that's kind of the value proposition there. of some of our IP. But I'll tell you, we do have some use cases there, but it's always human-assisted AI in the way we've brought that to the market so far.

Great. Thanks so much. Next question comes from Rob Young from Canaccord Genuity. Please go ahead.

Hi. Good morning. One more question on the bookings, if I could. Just trying to understand the short-term impact. If I understand what you've said, this shift in the mix towards the consulting and bookings is more a function of longer sales cycle on managed services rather than a longer-term sort of an impact. Just given that your peers are talking about some short-term macro concern and maybe lengthening, where does the confidence come from that that's a shorter-term impact?

Well, I think it's looking at the pipeline, looking at the discussions we have, looking at the voice of the clients. I'm not suggesting that macro environment, you know, you can look at it in a number of different ways. What we're looking to do is to make sure that we pivot our work to the opportunities that are out there. Look, I think what you see out there, and certainly this is true with the clients I talked to that spoke very openly about this, They weren't necessarily looking to reduce their IT spend, but they were reducing the programs that they were working on. So it depends on where you are, right? So if you're working on a program that they decided is not ROI-led, is not an area that they're going to invest in this year, then it looks like they're stopping it, and you've got to pivot to the areas that they are spending. And so that's what we're seeing. And we see that, you know, we talked a little bit about the vendor – consolidation. It's a little bit different this time around. It's not a concentrated effort to consolidate vendors. It's more about consolidating the work, which then has the same effect as doing some of the consolidation of vendors. But it's different. It's led by the opportunities themselves and the business cases themselves. So that's, you know, that's still work to be done. If you look at the bookings, though, you know, the shorter duration by definition on the SINC gives you a lower total dollar value. And so that's why when I talk about the bookings, to the extent that we get – some of those managed services deals over the line, you know, that will certainly be a tailwind for booking.

Okay. Thanks a lot for that. That's really helpful. And maybe the second question is just on a comment you made. I think you said that you're seeing some shift in focus from internal IT efforts towards work with external, maybe chasing profitability. I think how you – Describe that. Could you talk about that trend? Does that mean that there's maybe a step function, maybe rebadging and maybe outsourcing of maybe larger parts of your customer's business? I mean, you've already been very bullish around managed services, but are you suggesting maybe there's a step function there?

I don't know if it's a step function in the quarter. I think it's more of a function of where we've been heading. as I've been discussing for a while. I don't think there's any big step function here. It's more just directionally where we've been heading. And, yes, when we do a lot of those managed services deals, it does come with some of the people. But, you know, the point I was making on the difficulty in hiring IT talent I think plays to even if a client is would want to do more of the work themselves. Right now, point in time, they can't. And I think that's part of the drive on some of that SINC even point in time. I don't think that's a trend. I think that's just point in time. And it is interesting to understand that even in the current environment, certain skills in IT are still somewhat scarce. And that's why I mentioned the investments that we're making in talent and in growing the talent and in engaging our talent, both for the benefit of CGI and the individuals, but also for the benefit of our clients. And I think that's appreciated.

Okay. And last quick one, just the organic growth. If you can give us a number on that. It seemed high to me. I just want to make sure I have the calculation right. Pass the line.

We don't split out the organic and the inorganic because, again, the inorganic is a catalyst for organic. We make concentrated decisions in some cases to stay with enterprise clients and certain geographies, and sometimes that means running down other business. That's why we don't really break that out. Okay?

Ladies and gentlemen, as a reminder, should you have a question, please press star 1. Your next question comes from Jason Kupferberg from Bank of America. Please go ahead.

Hi. Good morning, George and Steve. This is Tyler DuPont on for Jason. Thanks for taking the question. Just a quick follow-up on the demand environment. You mentioned the project elongations and that enterprise IP decision makers seem to be becoming incrementally selective on what projects they are interested in funding. But have you seen any projects getting canceled in their entirety? And if so, are there specific protocols or geographies to call out? Or are these projects more likely just to be delayed and pushed to the right, if you will, for further revenue conversion?

I see more delays, like not now, but in the future. I had some specific discussions about that with some clients, mainly around projects that they decided to start at a later date or push off. Again, it's that sharper focus on the return on investment. Not wholesale, but, you know, it's really client by client. I can't really quantify it by I don't see any big difference by industry or by geography. It's more just client by client. And, again, it's why you've got to have that close relationship with the client. That's the essence of that ROI-led innovation. You've got to know the client. You've got to know the client's business. and then you need to bring the technology skills to bear on that. And so that's really what we remain focused on.

Okay, that's very helpful. Thank you for that. And just my follow-up there, when looking more at the vertical specific level, it seems like it was pretty strong performance kind of across the board, particularly, you know, government financial services and MRD. But that was offset, it seems, at least based on my calculations, by a little bit more mild growth on the health side of things. Could you maybe just spend a few minutes just digging into a bit of the dynamics you're seeing in the health space? Is there any call-outs there worth mentioning or anything that would be helpful?

Yeah, you know, it's very perceptive. You're absolutely right. We did see – although we saw steady – growth in health that was at a lower level. It's more steady. I think it's more, even if you think about it, you know, they had such explosive growth given what the world went through. I think they're digesting some of that. And so I don't see that necessarily as a trend, but, you know, we'll keep watch on that.

All right. Sounds good. Thank you very much.

Yep. Yep.

Mr. Linder, there are no further questions at this time. Please proceed with your closing remarks.

Thanks, Julie, and thanks to everyone for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1-877-674-7070 and using the passcode 993-424. 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 1905 973-8363. Thanks again, everyone, and look forward to speaking soon.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your line.