CGI Inc.

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

Thank you, Sylvie, and good morning. with me to discuss CGI's three-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, July 26, 2023. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q3M DNA, financial statements, and accompanying notes, all of which have been filed with CEDAR Plus 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 Q3 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 third quarter of fiscal 2023. In Q3, we delivered $3.62 billion of revenue, up 11.2% year-over-year, or up 6.3% when excluding the impact of foreign exchange. The following segment generated double-digit constant currency growth. UK and Australia, up 15%. Asia-Pacific, up 13%. And Western and Southern Europe, up 10%. From an industry perspective, we have growth across all sectors with particular strength in government, our largest vertical market generating constant currency growth of 11%. IP as a percentage of total revenue was 21% in the quarter, up $85 million year over year. We continue to see strong demand for our business solution with overall IP portfolio growth of 12.4% year over year or 7.7% in constant currency. Year-over-year IP revenue growth in constant currency was strong within the following industries. Government, up 19%. Communications and utilities, up 14%. And health, up 9%. The number of consultants and professionals increased year-over-year by 3,000, totaling now 91,500 worldwide. we booked $4.4 billion of contract wins in the quarter, up nearly 30% year-over-year. As a result, our Q3 book-to-bill ratio was a robust 121%, led by U.S. Federal with a book-to-bill ratio of 206%, Canada at 121%, Scandinavia and Central Europe at 117%, and Western and Southern Europe at 116%. Importantly, managed services made up 57% of total bookings, up significantly from 48% in the prior year. On a trailing 12-month basis, our book-to-bill ratio reached 113% with all of our proximity geographic segments having a book-to-bill above 100% on the same basis. Overall, our global backlog reached a record of $25.6 billion, representing 1.8 times revenue. Turning to profitability. Earnings before income taxes were $559 million, up 14.3% year-over-year, for a margin of 15.4%. Adjusted EBIT in Q3 was $585 million, up 12.5% year-over-year. This represents a margin of 16.1%, up 10 basis points year-over-year. This increase was driven by the combination of profitable revenue growth and operational discipline despite less available days to build due to the timing of statutory holidays in Europe. We delivered strong margins in the following segments. Asia-Pacific at 31.1%, Canada at 22.3%, U.S. Federal at 17.7%, U.S. commercial and state government at 17.3%. Our effective tax rate in Q3 was 25.8% compared to 25.5% in the prior year. When excluding acquisition-related and integration costs, our effective tax rate was 25.6% compared to 25.3% 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 $415 million, up 13.9% when compared to Q3 last year for a margin of 11.5%. Eluted EPS was $1.75, representing an increase of 15.9% year over year. When excluding acquisition-related and integration costs associated with prior year acquisitions, net earnings improved to $426 million, up 14.7% when compared to Q3 last year for a margin of 11.7%. On the same basis, diluted EPS was $1.80, an accretion of 16.9% when compared to $1.54 in Q3 last year. This improvement was mainly driven by the execution of our build and buy profitable growth strategy and to a lesser extent, the impact of favorable foreign exchange rates. In the quarter, cash provided by operating activities was $409 million compared to $419 million in the prior year. The ESO was 44 days in the quarter, in line with our target of 45 days. For the last 12 months, cash provided by operating activities improved to $2 billion, representing 14.1% of revenue. In Q3, we invested 102 million dollars into our business and 53 million dollars to buy back our stock as of the end of june as per our approved ncib program we have the opportunity to buy back up to an additional 15 million shares in the quarter we continue to deliver a strong return on invested capital at 15.7%, demonstrating our efficient deployment of capital. Looking ahead, our focus continues to be on delivering value to our shareholders by investing in our business, pursuing accretive acquisitions, and repurchasing our stock and or paying down our debt. CGI has a strong balance sheet with a net debt to capitalization ratio of 21.7% at the end of June, as well as $3 billion of cash readily available and access to more if needed. While M&A activity in the IT services industry has slowed significantly due to a gap in valuation expectation versus current market realities, CGI believes that our disciplined approach will result in higher quality mergers for the benefit of our stakeholders. Moving forward, CGI has the strength and capital resources to continue to execute on both 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. Our team again delivered quarterly results in line with our full year plan. We achieved constant currency revenue growth of 6.3%, which is at or ahead of the markets in which we operate. Double-digit EPS accretion of 16.9% on an adjusted basis. Sustained EBIT margin expansion up 10 basis points year-to-year on an adjusted basis. Bookings of $4.4 billion, up nearly a billion dollars compared to the same quarter last year. Continued high engagement of CGI consultants and professionals, resulting in lower employee attrition levels on both a quarter-over-quarter and year-over-year basis. And continued high client satisfaction levels, as rated and signed by client executives, demonstrating the deep confidence they have in our people and capabilities. The strong quarterly bookings were driven by client awards for managed services with a book-to-bill ratio of 120% and IP engagements with a book-to-bill of 120%. These larger engagements increasingly also incorporate consulting and systems integration services as part of their scope. This combination of CGI's end-to-end services reflects the ongoing rise in client demand for broader, more holistic partnerships to help clients realize cost savings and advance their digitization objectives. In both managed services and IP, the highest proportion of bookings were awarded within our two largest industry segments, government and financial services. For example, in managed services, the U.S. Environmental Protection Agency awarded CGI Federal a multi-year managed services contract valued at $522 million U.S. dollars. who will partner to reimagine the agency's IT portfolio at the application, platform, and enterprise levels in support of their mission to protect human health and the environment. This award renewed CGI's incumbent work and included an increase of enterprise development scope of over 45%. And Bank of Europe, Sweden's payments clearinghouse, extended their long-term partnership with CGI through a $62 million agreement to enhance system efficiency, uphold stringent security, and unlock opportunities to drive future innovation across the payment sector. And examples of IP bookings include a government ministry in Germany extended its partnership with CGI on the implementation of CGI's EGov360 solution for electronic file and data management. This will enable the ministry to increase agility and drive seamless integration and interoperability. U.S. Department of Veteran Affairs increased funding to support the implementation of CGI's Momentum IP in support of the agency's financial management business transformation program. And in the financial services sector, we signed 28 agreements for our recently transformed cloud-native credit studio solution with clients in the U.S., Canada, U.K., and Australia. Our solution incorporates AI and helps clients address the continued tightening of credit markets. Two-thirds of these awards were for net new business. A high proportion of managed services and IP in our overall bookings led to a greater size and duration of project awards this quarter. In fact, 40% of total bookings in Q3 were comprised of deals over $50 million. This is compared to 13% in the same quarter last year. Over the past several quarters, we anticipated these client buying shifts given our day-to-day engagement with clients and through our annual voice of our clients proprietary research. This research serves as an important global antenna to help identify the top priorities for clients now and over the coming years. Last quarter, I shared some preliminary findings from our discussions with over 1,750 executives in 21 industry sectors around the world. Our research indicates that clients are now heavily relying on managed services and IP to implement, optimize, and manage their transformation programs in order to achieve the expected return on investment. In our research, two in five executives cited legacy systems among the key barriers to successful digitization. This demonstrates the need to ensure that solution strategies address the complexity of modernizing current systems and integrating with new systems and processes. Our managed services offerings focus on providing client savings, which are then coupled with reinvestment to drive modernization, industrialization, and organizational agility. And our IP, including IP-enabled business processes, provides clients a digital accelerator with lower capital costs. IP provides clients with the added benefit of having security, data protection, innovation, and interoperability of third-party platforms as part of the solution. Our analysis also underscores that C-suite executives are applying a sharper focus in their decision-making to determine the highest return on investments. This is shaping most of their key program priorities. CGI, they call this ROI-led digital transformation, and is at the core of our partnership approach with clients. Many of the executives we spoke with cited the challenging economic environment as the key driver for sharpening their focus, as requiring them to prioritize cost savings while simultaneously advancing digitization to improve competitiveness, resilience, and customer experience. This dual digital agenda continues to generate demand for all of CGI's end-to-end services, as clients now require consulting partners that can design connected strategies to bridge vision and real-world implementation to deliver expected results. We are proactively working with our clients to translate their business objectives into tangible engagements with clear and measurable business cases. such as for a leading natural gas services company, we are deploying AI solutions that will unlock $150 million in value through predictive analytics and optimization. We are implementing intelligent, evidence-based solutions to help the healthcare provider better predict and lower the cost of care while reducing processing time by 90%. We're developing a business vision and subsequent roadmap for achieving the future state digital environment, including data monetization our clinical services company. And we are helping transform the small business loan processes for a multinational bank, reducing cycle time from 17 days to two days. Turning to our buy strategy. In Q3, CGI successfully completed the integration of all prior year acquisitions, according to plan. As Steve just mentioned, current M&A activity has slowed across the entire IT services industry. This, however, does not change the CGI strategy. Our appetite and capacity for M&A remains high, and we continue to have a very active program in terms of sourcing, interactive dialogues, and due diligence assessments. Closing accretive M&A transactions takes rigor and discipline, and we remain committed to making sure that we acquire the right companies for the right price at the right time, all three without exception. Looking ahead to the coming quarters, we believe the ongoing macro uncertainty in the political and economic environments will intensify client efforts to prioritize ROI-led digitization. This, coupled with the demand for broader, more holistic transformation programs, will serve to put some pressure on client decision cycles as some executives trade off speed of action for ROI-based business cases. For CGI, these buying patterns continue to favor our managed services and IP offerings. We continue to be 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 to address the organization's business objectives. The evolution of our business mix to include more managed services and IP will serve as an enabler to continue to drive CGI margin expansion and improve EPS, even as sales cycles and booking to revenue conversion will naturally expand. And as we incorporate higher proportions of global delivery into these services, our client value proposition increases, as does CGI's profitability. From the industry perspective, we see client demand in the near term as follows. In asset-intensive industries such as manufacturing, retail, and energy and utilities, client demand for efficiency and agility are paramount. We see organizations seeking to reduce the cost to operate in order to fund new investments. As such, our managed services pipeline for these industry sectors over the next year is up by more than 33%. The IP pipeline is up 30%. In banking, Many clients are reassessing their priorities and the supporting IT investments, given economic conditions and continuing central bank interest rate hikes. This is resulting in stable but slower demand for SINC and increasing demand for managed services. On a sequential quarter basis, pipeline in managed services is up nearly 20%. And in government, healthcare, and insurance, clients are accelerating their digital transformation agendas. For these industries, CGI's pipeline remains well-balanced across consulting, system integration, and managed services, and is up 20% year-over-year. Naturally, across all industries, we are increasingly engaged in discussions about the future use of generative AI, how to prepare data strategies to be ready for AI implementation, and how it integrates into clients' digital transformation agendas. we have extensive experience in delivering intelligent automation and AI technologies as part of our services and solutions over the past several years, notably in our IP. And responsible use of AI is part of CGI's management foundation, ensuring the ethical and disciplined use of AI by all CGI professionals and in line with evolving AI regulations. This serves as our foundation to engage in broad-based AI discussions with our clients. In fact, CGI teams are actively working with clients to use AI in a wide range of projects, a few of which include improving effectiveness and efficiency of city services, detecting and preventing water pollution, predicting cracks in steel manufacturing, reviewing CT scans to detect brain hemorrhages, and using Earth observation data to locate, quantify, and track seagrass mounds. As AI progresses in new ways, including generative AI, we will innovate with our clients while balancing the responsible use of this evolving technology. Earlier this week, we announced our plan to allocate $1 billion of spend over the next three years to expand our AI services and solutions. We work in partnership with clients who are seeking to responsibly move from experimentation to full-scale implementation and accelerate time-to-value of their investments by leveraging new AI technologies. CGI's AI investments through both build and buy will be prioritized across four dimensions. End-to-end offerings expansion, including an AI business consulting methodology, IT platforms, and pre-built solutions. Talent, capacity, and capability, which will include the training of our existing consultants, hiring of new expertise, and formation of communities of interest across all of CGI to accelerate AI usage. go-to-market strategies to increase awareness of CGI's AI offerings through the publication of thought leadership, and establishing new partnership channels for global alliances and operational and delivery excellence to drive efficiencies and benefits for clients and CGI through expanded AI use. In closing, CGI's broad mix of end-to-end services, balanced geographic footprint, and portfolio of clients across industries creates a resilient foundation for us to sustain our positioning as a partner of choice for our clients, an employer of choice for our consultants and professionals, and an investment of choice for our shareholders. Our investments in build and buy are made with this resilience in mind and to continuously strengthen our competitive differentiation. Thank you for your interest and support. Let's go to the questions now, Kevin. Thanks, George. Sylvie, please share with the participants how to queue for questions.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your Dutch tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And if using a speakerphone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Richard C. at National Bank Financial. Please go ahead.

Yes, thank you. You know, this AI team obviously is quite notable. Just in terms of the partnerships that you have with some of the leading players in the market today, can you maybe expand in terms of, you know, the level of engagement you're having with them? So, for example, you know, I guess one of the leaders is Microsoft. And maybe give us a sense of, like, your level of – engagement on through what their plans are going forward. Yeah, yeah. No, thanks for the question, Richard. Yeah, we are engaged with all of our Global Alliance partners actively looking to both leverage what they're doing with our intellectual property, which is a big element of our Global Alliance partnerships, but also then to further that together. And so I can't talk about anything specific yet, but we're actively engaged in forging some formal partnerships go-to-market with that, and that's part of what this investment announcement is about. Okay. And then in terms of where you sit within that sort of ecosystem, What do you see in terms of the most common use cases that your clients are looking to address, you know, with AI here going forward in their enterprises? Yeah, well, you know, current point in time, the use cases are what you've heard about on some of the call center activities are very specific opportunities like some of the examples I gave as far as looking at the brain scans that we're doing with the hospital in the Nordics or looking at the environment like we're doing with the partnering with some space-based agencies in governments in the UK. So they're very more point solutions. But I can tell you the conversations we're having are much broader. And it's really about what is the art of the possible. And part of that first step is getting the data in the shape that needs to be in order to train these models on trusted data that then can be leveraged. So we're still, I would say, in the very early days. I mentioned we're still in the early innings of digitization at large, one of the even earlier days of AI. But what I see is clients are really looking at the broadest applications of where ai could make a difference okay great and one last quick one here for me like there's certainly a lot of puts and takes in terms of you know the outlook going forward here and then some of your competitors have talked about you know perhaps um carrying off uh sort of staffing and given you know some price competition in the market but how do you sort of see the next few quarters playing out just from kind of like an operating cost perspective? You know, are you kind of in the position you want to be? Is there a potential to sort of, you know, take up some costs? Just maybe give us a sense of how that should play out here over the remainder of the calendar year. Yeah, we're pretty pleased with the position we're in. You know, those strong bookings driven by IP and larger managed services deals are We anticipated, and we've talked about even on this call last quarter, that that takes a little bit longer. We anticipated some of the shift from SINC to the IP and managed services. We do, along the way, anytime you're doing a shift in buying behaviors, we've been very active in training, retaining, training, rotating, our people to the areas of strength, and then, of course, taking actions where need be, where those aren't completely aligned. But that's all in the numbers already, and so we don't see anything big having to be done. Like I said, you know, we see the continued strength in margin driven by the profitable growth, but also the global delivery. The business mix towards IP and managed services, which we talked about before, that's a tailwind for us. Our turnover is down, as I mentioned, and utilization is actually up. So we feel like we're in a pretty good position to move forward in this shift. And, of course, the plan investment and data, and AI is just to drive that future way of growth further down the line. Okay, great. Thank you.

Thank you. Next question will be from Thanos Machopoulos at the BMO Capital Market. Please go ahead.

Hi, good morning. George, related to the AI investments, would it be reasonable to expect that your investment in IP might take a step up as a percentage of revenue in the coming quarters and years, or is that going to be more a function of case-by-case basis evaluating projects and clients, taking them to your IP investment committee? Okay.

Yeah, it's going to be more balanced. You know, what we do with the IP, as you're aware, we don't build it and they will come. We always do that in concert with our clients. We've already been making some of the investments in our IP and with AI, and we have the Pulse AI framework that I talked about last quarter. So that's been part of that. It's going to be more measured. That's why I announced it over a three-year period. It will be lockstep with our clients. Now, over time, the investment could go up if the demand curve follows that. And I will tell you that, in general, as we continue to have stronger bookings and higher revenue growth in IP than the rest of our business, we have been, over the last several years, ramping up the investment we've made in IP. But, again, always focused on making sure we have that solid market return on investment, and doing that in concert with our clients. In many cases, when we make an investment in IP, we already have letters of intent or, in some cases, signed contracts with clients that support that investment. Of course, we're making the investment, but we already know the business is there and we're working in concert with our clients. We're going to do the same thing with AF.

Great. And then just rolling into the Canadian business, there was some discoloration during the quarter. Organic was slightly negative. I think partly related to financial services. Can you speak to that? You see that as being transient, or are you hearing from customers? And I saw that the Canadian government recently awarded a very large contract to Skylane, which I think is a client of yours. Is that something that's meaningful for the Canadian business, if you could provide some follow-up? Thanks.

Yeah, yeah. So... Well, maybe I'll start with the Skyline. You did see the big announcement. It's really a down select to one. We are part of that consortium. In fact, we are the IT provider as part of that large 20-plus year deal. It is still, even though it's down selected to one, it is still an active consortium. solicitation, so that's all I can say there. It's not in the bookings, of course. That's at the tail end for the future for the Canadian business. And underscores, again, the strength of government spending around the world. As far as the quarter goes, we did have a bit of a tough comparable. We had a one-time last year, and you can see the spike in growth last year at this time, so it was a tougher comparable. But in general, yeah, we think that it's pretty temporary. as the financial services goes through some of this adjustment and shift in priorities. We had a strong 121% book to bill in the quarter. Look at the trailing 12 months is I think 108% on a trailing 12-month basis. The bookings in the quarter were underscored by large managed services. including in financial services, so kind of showing some of that shift. So we believe we're going to return to growth next quarter, and it was really more of a blip there in Canada this quarter. Great. Thanks, George. I'll pass the line. Yep.

Thank you. Next question will be from Stephanie Price at CIBC. Please go ahead.

Good morning. Maybe sticking with the government sector, the U.S. federal bookings were quite strong in the quarter. Just curious if you could talk a little bit about what was driving that growth and how you think about demand in the vertical maybe more broadly for the remainder of the year.

Yeah, well, I think government, as we've discussed for some time, is strong around the world because it is more of a counter-cyclical avenue of growth for us. And of course, it's our largest single sector. And yes, very strong in the U.S. federal, which we anticipated because a lot of the spend has been backloaded for the last couple of years in federal. You might remember we had a very strong book to go in the in the fourth quarter of last year, it's tended to be backloaded. And just to remind you, in the U.S. federal government, the fiscal year ends at the end of September, same as the CGI fiscal year. And we see that same thing going, that same phenomenon going on. The U.S. federal government is kind of behind in their spending. And part of that has been because the procurement just can't keep up with the demand. Underscoring that is government needs to digitize. Government needs to put new policies in place that have been very active in the environment. You heard the EPA win that we've had this quarter. So I think it's a combination of those factors. And then just the slowing economy, government tends to get more active, and we've seen that in Germany. We've seen that in the U.K. You saw the strong bookings and performance in the U.K., and you know that U.K. has a even higher percentage of government work where we're a strategic partner to the UK government. So a lot of goodness there. We also see space becoming more of an area, and I'm talking about outer space now, becoming more of an area of opportunity to leverage really this space-based data and connect it with digitization and technologies like AI to really unlock some value and solve some real-world problems, including in kind of government's form of ROI-led digitization, which is really furthering and bettering communities for citizens.

Great, Colleen. Thanks. And then just one more from me. Just on the M&A market, you mentioned a few times in your prepared remarks that there was a valuation gap that you're seeing. Can you elaborate a little bit more on that? And, you know, just on capital allocations, if M&A is lower, should we expect more of a focus on share buybacks here?

Yeah. You know, the M&A market has been, you know, a bit uncertain along with the economy itself. But the difference in the valuations is you've got sellers that are hanging on to 2021 valuations and buyers that are looking at 2023 and beyond valuations. And not unlike the housing market, there's a dearth of opportunities out there. But we're going to be patient on that. We'll continue to, we do have an active pipeline. There's no big late-stage opportunities, but, you know, I always say it's wait and hurry up, hurry up and wait in the M&A market. So we have a very active pipeline. I'm personally engaged in some of the discussions. So we're just going to keep at it and make sure that we do the right, the creative acquisitions As far as capital allocation goes, yes. First is investing back in our business, and you heard the investments we're making in AI and IP and those types of activities that will be accretive because that's how we're going to measure them. But if we don't have the accretive acquisitions to include in that, yes, it does provide us the opportunity to do stock buybacks, and we see that as still a very accretive way to return cash to shareholders and so we'll be active on that.

Great. Thank you very much. Thank you.

Next question will be from Divya Goyal at Scotiabank. Please go ahead. Good morning, everyone. George, I'm going to miss that. I wanted to confirm this AI investment that you've announced. So is it fair to assume that some of the discussions and early stage, you know, projects that you're seeing here, are they going to add to the consulting side of revenue before they get into the execution side of things? And would any of such revenue be currently factored into the book to build that you've mentioned here?

Yeah, no, it's a very good insight you derived there. Yes, the early days are a little bit more on the consulting, helping clients think this through, put their own frameworks for responsible use into place, do some of the experimentation. So it will be not just the consulting, but consulting and consulting. system integration as opposed to whole-scale managed services type opportunities or broader engagements. And so, yes, some of that's actually in the bookings. Some of that's actually in, as I mentioned, we're actively doing some of this now, so some of that's actually in the revenue. And I'll remind you, even though I highlighted the managed services and the IP, We still did have solid bookings in SINC, decelerating but still strong, and as we shift to more of that managed services and those other opportunities. And the other is, and I mentioned this as well, some of the managed services we do, when we're doing modernization, there is a small consulting and systems integration component that could have AI that's buried in that managed service. So It's hard to kind of separate that out, and, of course, as I mentioned, it's part of our IP as well. So it really spans all of those end-to-end services. But you're right, back to your first question, a little more on the front end than the back end for now.

That's helpful. Just going to the regular business here, have you been seeing or noticing a lot of pricing pressure in the market, and is it more pronounced in certain geographies or certain sectors, if at all?

Yeah, no, it's a good question. As clients look for cost savings, there's two ways for them to get that, right? There's the ROI-led digitization opportunities, where we're providing maybe some opportunities for them to grow their business and become more efficient with a point solution. There's another way to get that is through that longer engagement of managed services through scale, and we can provide them some of those cost savings up front and then drive those efficiencies through a longer engagement and modernization. And then there's pricing. And when it's just straight pricing, we tend not to engage as much. And, yes, we are seeing some, and you always see this on a slowdown like this, you see some what I would call bad behaviors by some competitors that might, and these are usually more local providers that drive, you know, just rate decreases. And these are some of the same players that actually maybe went overboard and on the salary wage increases, and so I think they're going to get caught, and that's an opportunity for us to take market share. They stumble. We've already seen some of that in some of our European clients where they stumble from delivery, and just because you have a lower rate doesn't mean you're going to get the value, and so we come in with our more mature way of providing the savings, and I think that's an opportunity for us to take market share. in the intermediate term. But in the short term, yeah, you always see that during a slowdown.

Yeah, that's very helpful. Just one last question on the cash flow from operations. So looking at how the CFO has historically trended, it looks like this quarter working capital was a use of cash, and Steve mentioned the SO was in line with expectations. But it looks like your payables were a little bit more tightened up. So was there a rationale for that?

Yes. Ultimately, we use less subcontractors in the quarter, so obviously it's the timing element that we have in the accrual, and also the accrual for performance-based compensation has an impact on the cash flow from operation, but it's really It's really a timing. So when we look at it on, let's say, a year-to-date basis, you see the growth. We grew by more than $100 million in the cash flow from operation. And what we're really watching, as you mentioned, is DSO in this area. economic time, we want to make sure that our clients are paying, and they are. So we are really, really focused on the collection. In terms of the equity role, it's really timing.

That's helpful. Thanks, Steve. Thanks, George.

Thank you. Next question will be from Paul Treiber at RBC. Please go ahead.

Oh, thanks very much. Good morning. George, just regarding AI, I mean, you've been in the past, big ones being like mobile and the cloud. How do you compare the enthusiasm from your customers and the interest from your customers regarding AI versus previous tech cycles? And then secondly, just looking forward, how do you think, how quickly do you think that enthusiasm will convert to bookings compared to past investment cycles?

Yeah, thanks for the question. Yeah, you know, here's what I see. I see this wave and disruptive technology being a bit of an evolution of mobile and cloud, both of which enabled us to, well, really drove a proliferation of data that's out there. And really, AI is the ability to unlock some of the value attached to all that data. So, Now, having said that, so I think that's what's driving some of the enthusiasm, because it's really building on some of the earlier technologies and ways that we've gone through. Having said that, I think it's not so much the willingness to have the adoption, but it's really having the data and the models ready to actually benefit from this is going to be really important. We kind of see the AI in our discussions with clients. It's really revolving around three key principles. One is the trust, having the closed data sets where ownership and the data providence is really verifiable, and that's going to be important for any of the regulation that goes out there. Transparency, and for us, part of that is having a human within the AI loop that you actually can can verify, again, the bias that they're not there, and align the AI activities with the company's direction and values. And so that's going to be an element of this. And the reason I'm mentioning these, Paul, is these take some time. And I don't think it's a dampening on the enthusiasm, just these things take some time. And then last, where you want to get to is you're going to make the individuals and experts more productive. It's not going to work the other way. You're not going to make lay people experts. And those that kind of skip the first two and try to go to that level, I think, are going to run into some issues. And that's why we're starting off with some of the consulting. Because really, at the end of the day, we think it's going to be the business value that you add to the AI, not the value that you extract from the AI. And that isn't dissimilar to mobile and cloud, quite frankly.

On your last point about making experts more productive, one of the things that AI is being – or generative AI is being touted as is streamlining programming. How do you see generative AI impacting the IT services, the core function of IT services in terms of product development and maintenance, Do you see IT services ultimately benefiting from that efficiency, or potentially is it a longer-term headwind that customers maybe can be more productive themselves?

No, I think it's going to be a tailwind, but the reality is it's going to shift the way that developers work, which is why we're investing to make sure we equip our customers experts to leverage and work side by side with the AI to be more productive. I think it's also probably going to shift the way pricing and buying occurs, shift it even more so towards output-driven activities, maybe even disassociate the pricing, which right now is still at least in SINC, tightly associated with labor. I think it's going to disassociate that to more output-based pricing like you see with an intellectual property product. So I think there are going to be some shifts that we're going to go through. There's going to be some puts and takes, but at the end of the day, I think it's going to be a tailwind for the industry, much like previous disruptive technologies have been.

That's interesting. Glad you provided your perspective. Just one last question for me. You called out a number of metrics regarding the pipeline. I might have missed it, but can you summarize that into the total pipeline? I think the last quarter you called out, I think it was total pipeline up 15% quarter over quarter. Now, how does your total pipeline look here?

No, I don't have that in front of me because I've been really focused on the shift. to the managed services. Typically, that drives the overall pipeline even higher because, as I mentioned, those are larger deals. But let me get that number to you.

Okay. All right. Thank you. I'll pass it on.

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

Hey, George. You guys continue to demonstrate some pretty resilient growth here, whereas some of your peers are exercising caution or even revising their guidance law. What are you attributing your relative outperformance to? What are you guys doing differently or better than your peers that's allowing you to win market share here?

Yeah, well, I think one is really that shift to both managed services, which we know takes a little bit longer, but also that IP. And I mentioned that, for example, in banking, you see some of the slowing of the straight SINC activities. But we have a lot of banking IP. And so that's a that's enabling us to counteract that in in a lot of ways. The second is that, as I mentioned, we've been doing this shift to manage services, anticipating this for a while getting a little bit ahead of it. And so we have had some bookings from six, nine months ago, they're now coming online. And that's the one caution, right, is that, you know, you win an SISD deal and it starts on a Friday and it starts on Monday and you're billing. You win a large managed services deal on a Friday and it can take three, six, nine months before you're seeing revenue on that. But we did that early, and so we're weathering some of that with some of what we have done in prior quarters. And the other is government. It's unlike some of our competitors. It's a large element. We always suggest that we like that base because of the counter cyclical nature, and that allows us to work in different markets and still be able to grow. And you saw the 11% growth in government this quarter.

That's helpful. Thanks for that. And then you mentioned the bookings conversion timeline taking three to nine months. The bookings or the book you built for your last few quarters has been really strong. Should we extrapolate that to suggest that we could see some accelerating growth in the second half of the calendar year, especially as those bookings start converting to revenue?

Yeah, I think what I would say is we definitely see that all the indicators, those bookings, and even the pipeline and what we see in the near term, point to stronger growth in the intermediate term. Like I said, it does take a little longer, and we're counteracting, and you saw that this quarter, counteracting some of the shorter-term slowdown. But I think in the intermediate term, that's when all the indicators point to a good growth path there.

Great. Thanks, George.

Thank you. Next question will be from Sutan Sukumar at CFO. Please go ahead.

Good morning. I want to chat quickly on managed services. It's good to see you guys are well-positioned to capture the strength that you're seeing in the demand backdrop. Can you talk a little bit about how your discussions with clients and how sales cycles have been trending here more recently, and are you seeing opportunities for pricing power given this strength in demand?

Yeah, no, it's a good question. You know, the discussions that we're having right now, and in many cases are one-on-one discussions, so we're more engaged with the client as a sole partner. It's really around getting the value proposition for them right. And you're right in one way. I wouldn't call it pricing power. But what I'd say is when you can get that value proposition right, they're less concerned about what your pricing is or isn't. And so really it's a matter of getting close to the client, going through. We have something we call proof of value process that really engages directly with the business and the IT individuals to kind of drive the right value proposition. And in many cases there's a big win-win. in that situation. It does take longer. So it's, you know, pipeline to booking and booking to revenue takes a little longer, but the payoff is very, very good for both top and bottom line.

Got you. Thank you. The second question I had was more on the context of, you know, your outlook for greater investments in EI. How are you thinking about headcount growth going forward as you start to invest in these AI capabilities and start to become more efficient internally?

Yeah, well, I touched on this earlier. I think we will see some distance and disassociation of just in order to get a dollar of revenue, you need to add a dollar of labor. And I think you're going to see some more disassociation just like we have with our IP. And you can see our labor grew this quarter less than our overall growth. And part of that is because IP is growing faster and, of course, we have assets that are driving some of that revenue. In this case, it's going to be, you know, the higher productivity Again, if we can do that in a value-based pricing, it's going to change that equation.

Great. Thank you for taking my questions. I'll pass the line.

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

Good morning.

Thanks for taking my question. So first question is on the headcount. We've seen that it's up a bit. But I mean, it's understandable given the bookings and the growth trends. But I want to dive in really, what's the current mindset? Have you been more careful than usual given the comments your clients have been telling you about the macro? Are you preparing

for markets to turn around. Just want to know about the mindset regarding the headcount. Yeah, well, we've been very prudent, as always, in hiring more for the known projects and known demand with turnover. Again, trending down both sequentially and year over year gives us more of that opportunity. Some of that hiring ahead had to be done because of some of the turnover, so we're seeing a shift in that. You know, we have a strong attraction and retention value proposition. It starts with our ownership, but then, of course, our training and support, and our proximity model, which kind of gives less wear and tear on our consultants having to travel. All that plays in, and so we're able to be a little more prudent in the hiring and still be positioned – for that intermediate growth, but also make sure that we're not in a place where we're underutilized at any point in time from a cost perspective. And I mentioned when you're doing that shift, we've been taking any actions that need to be done in order to drive that. But we'll continue to hire and grow, and AI will be part of that, but it's not the only driver in that. Okay, great. And then second question is on AI, too. What are the type of clients that are willing to pay first for AI? I mean, you have a high exposure to government.

I guess we can imagine that government might not be one of the first clients that are going to jump on that wagon. So what type of clients are you seeing are willing to pay for that?

Well, you know... The top innovators tend to be banking and health care right now, and that's pretty consistent with other ways of technology. You also have a lot of data that you can unlock that's a power of that with those two industries. But I'll tell you what's interesting is we see government as a potential early adopter. We're having very good discussions with government, lots of interest here, because they kind of fell behind, right? And so they may need this more than other industries and probably are more capable of managing the regulatory environment and the trusted environment just given their size and scale and scope. I think they have some drivers that can make them an actual early adopter. We'll see, but that's kind of what we see right now.

Yeah, and their own involvement in regulatory too, so thanks for the call.

Yep, yep. Thank you. Hi, Sylvie. Hi, Sylvie, we've got time for one more question, please.

Certainly, sir. Last question will be from Rob Young at Kenneco Genuity. Please go ahead.

Okay, thank you. The comments through the call that you've had some discussion around sales cycle lengthening, longer conversion. It's a bit of a trend, I think, in enterprise just in general. And so I think you've been emphasizing that it's driven, in CGI's case, around managed services and the longer sales cycle associated with that. Maybe some pivot towards ROI-based programs. I was just curious if you could give us Maybe a summary of why you think that this shouldn't be viewed as a demand-driven, if I'm correct, sales cycle.

Yeah, I think you're correct in the overall summary. But I think when I look at that, demand is still strong. It's just the timing of that demand. And so as you make any kind of shift, and we anticipated this, I talked about this the last few quarters, As you have that shift, there's just some disruption there. But the overall demand environment we see is very strong. And, in fact, the overall demand we see may be moving more in the favor of a global provider like CGI with the end-to-end services, with the intellectual property, with some of the investments that we continue to make, to be on the front end of that, to maybe be even a consolidator some of that demand and absorbing that maybe even faster than some of the others in the marketplace. That's why you hear the optimism despite the fact that you've got some short-term bumps that are inevitable when you do a shift like this. You see it in the bookings. That's where the confidence comes from.

Okay, that's great. If I squeeze one last one, I think One of the themes here that you're trying to get across is that you see a net positive impact or maybe net expansion of margins as you look forward. You highlight a whole lot of positive drivers like the mix of managed services, IP, global delivery, and then utilization improving with maybe slightly slower hiring, but On the other side of it, where do you see some of the negatives? Price pressure came up, maybe longer sales cycle, maybe the investment. Despite you view it as a net positive, what might be some of the headwinds you have to deal with?

Yeah, well, you mentioned some of them well. There's the short-term helping your clients through some of this short-term period. is maybe a short-term headwind but a long-term, stronger partnership. And I've talked a lot about the importance of partnership, particularly when clients are going through what they're going through right now. So that's why I'm net positive, but I think you highlighted the right areas. Okay. Thanks for taking the questions.

Thank you. Please proceed with your closing remarks.

Thank you, Sylvia, and thanks 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 098618. 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 I look forward to speaking soon.

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