CGI Inc.

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

Thank you, Colin, and good morning. With me to discuss CGI's fourth quarter and 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, November 8, 2023. Supplemental slides, as well as the press release we issued earlier this morning, are available for download along with our fiscal 2023 MD&A, audited financial statements, and accompanying notes, all of which have been filed with both 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 displays 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 Q4 financials, and then George will comment on our full-year performance and business and market outlook. Steve.

Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our fourth quarter of fiscal 2023. In Q4, we delivered $3.51 billion of revenue, up 8% year over year, or up 2.2% when excluding the impact of foreign exchange. Constant currency growth was 3.4% in Europe and 1.1% in North America. From an industry perspective, we had growth across four of five sectors with particular strength in both health and government, growing at a combined rate of 7.2% in constant currency. Government continues to be CGI's largest vertical market, now representing 37% of revenue, up 200 basis points when compared to the prior year. CGI delivers services and business solutions to support our government clients with their mission-critical functions such as cybersecurity, logistics, financial management, and citizen services. IP as a percentage of total revenue was 22.6% in the quarter, with the vast majority contracted as longer-term recurring engagements. Overall IP revenue growth was 4.1% in constant currency, with more than half comprised of software as a service arrangements, which were up 300 basis points from the prior year. IP constant currency revenue growth was strongest in government and financial services, our largest IP revenue basis. Government represents the largest proportion of our IP revenue base, which is at 47% of total IP revenue. And financial services represents the single largest commercial revenue base, which is at 26% of total IP revenue. Our IT solutions become even more attractive to clients in times where discretionary capital is constrained as they shorten the business cycle from decision to realization of business value. We once again add a strong quarter of overall contract wins, booking $4 billion in the quarter, up 10% year-over-year, for a robust book-to-bill ratio of 114%, led by US Federal with a book-to-bill ratio of 188%, Canada with a book-to-bill ratio of 121%, and US Commercial and State Government also with a book-to-bill ratio of 121%. Importantly, Managed services, which translates to longer-term recurring revenue for CGI, represented 60% of total bookings, up significantly from 52% in the prior year, aligned with the demand we are seeing from our clients. Overall, our global backlog reached a record of $26.1 billion, representing 1.8 times revenue. Turning to profitability. Earnings before income taxes were $558 million up 14.8% year-over-year for a margin of 15.9% up 90 basis points year-over-year. Adjusted EBIT in Q4 was $573 million up 9.8% year-over-year. This represents a margin of 16.3% up 20 basis points year-over-year. This increase was driven by the combination of profitable revenue growth and operational discipline, partially offset by one less calendar or day. We delivered strong margins in the following segments. Asia-Pacific at 27%, Canada at 25%, and U.S. commercial and state government at 16.7%. Our effective tax rate in Q4 was 25.7% compared to 25.4% in the prior year. We expect our tax rate for future quarters to be in the range of 25 to 26.5%. Net earnings improved to $414 million up 14.4% when compared to Q4 last year for a margin of 11.8% up 60 basis points year-over-year. Diluted EPS was $1.76 representing an increase of 16.6% year-over-year when compared to $1.51 in Q4 last year. In September, we initiated a cost optimization program to accelerate actions to right-size our real estate portfolio and improve operational efficiencies focused on administrative activities. In the quarter, $9 million was expensed and we plan to incur approximately $65 million of additional expense over the first half of fiscal 2024. When excluding specific items, net earnings improved to $421 million, up 12.9% when compared to Q4 last year, for a margin of 12% up 50 basis points. On the same basis, diluted EPS was $1.79, an accretion of 14.7% when compared to Q4 last year. In the quarter, Cash provided by operating activities was $629 million, representing 17.9% of total revenue, an increase of 28.6% when compared to the prior year. On a trading 12-month basis, cash provided by operating activities represented 14.8% of total revenue. ESO was 44 days in the quarter in line with our target of 45 days. In Q4, we invested $107 million into our business and $325 million to buy back our stock. As of the end of September, we have the opportunity to buy back up to an additional 12.6 million shares under our current NCI brief program, which will be up for renewal in February 2024. In the quarter, we continue to deliver a strong return on invested capital at 16%, up 30 basis points year-over-year, demonstrating our proficiency and discipline on deployment of capital. Looking ahead, our focus continues to be on delivering value to shareholders by investing in our business, including in AI, pursuing and closing 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 20.4% at the end of September, as well as $3.1 billion of cash readily available and access to more if needed. 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 over to George to recap the full year results and to provide business and market outlooks. George?

Thank you, Steve, and good morning, everyone. Our team's performance in the quarter contributed to a strong fiscal 2023. In both the quarter and year, we delivered results in line with our full-year plan to continue delivering double-digit EPS accretion and to profitably grow at or ahead of the markets in which we operate. Financial highlights for the year included 8% year-over-year constant currency revenue growth, 15.3% year-over-year adjusted EPS accretion, $2.1 billion of cash from operating activities, up 13.3% year-over-year, and $16.3 billion of bookings, up $2.3 billion, or 16.4% compared to last year. Now I will review the performance highlights by stakeholder, starting with clients. CGI's strong results this year would not be possible without the trust of our clients. Once again, we ended the year with signed client satisfaction ratings that were higher on every dimension we measure. Importantly, two of the highest increases in satisfaction were for the degree to which our services are valued and for the level of innovation we introduced into our engagement. These qualities are fundamental to delivering the ROI-led digitization outcomes that are currently in high demand. especially as clients apply a sharper focus on IT spending given the current economic condition. Turning to our employees, whom we now call CGI partners, as 85% are also shareholders of CGI. Our performance in 2023 is the result of the world-class partnership behaviors that our consultants and professionals embody as they deliver advice, expertise, and insights our clients can act on to achieve their business objectives. We continue to prioritize training for our talented consultants through interactive courses of CGI academia, in both development of industry knowledge and technical expertise, including for generative AI-based applied learning and labs and sandbox environments. And for our shareholders, we deliver broad-based constant currency revenue growth in all geographic segments and industry sectors. For the fiscal year, our book-to-bill ratio was 114%, up 500 basis points compared to the prior year. And on profitability, our results for the year continued to place CGI in the top quartile of our IT services peer group. Adjusted EBIT was up 10.8% year-over-year for a 16.2% margin. Adjusted net earnings were up 12.9% year-over-year, a margin of 11.8%, up 20 basis points. and adjusted EPS was up 15.3%. Before turning to the outlook and priorities for fiscal 2024, I would like to comment on the recent cost optimization program we initiated, which provides a tailwind for the fiscal year ahead. This program is focused on SG&A to embed additional profitability improvements into our business plans for fiscal 2024. will streamline our expense profile to drive higher efficiency in our internal business operations, including through the increased use of automation and global delivery. By being proactive now while we are strong, we expect this action to help us increase EBIT margin in line with our plan, while also freeing up capital to be allocated towards higher-yield growth investments, such as innovation, including in AI, learning and development to deepen industry knowledge and technology expertise, Delivery focused on our offerings and for large deal pursuits and for accretive M&A transactions. As we look ahead to fiscal 2024, I would like to share some observations from recent meetings held with client executives across Europe and North America. Client sentiment emphasized the complexity of the IT services demand environment. Clients indicate that they are facing significant pressures from simultaneous and overlapping market dynamics. They need to navigate rapidly evolving geopolitical and economic conditions. They need to adapt to broad societal, technological, and cultural changes. In short, it is a complicated operational and strategic challenge. Clients need to reduce spending while continuing to progress their digitization and innovation agenda. CGI's end-to-end services and solutions continue to position us well in this environment, particularly with our managed services offering, which helps clients achieve cost savings and drive transformation. Our pipeline reflects this positioning as the value of new opportunities grew by more than 20% on a year-over-year basis, but managed services up nearly 40%. Second half managed services bookings were nearly $4.9 billion, up by more than $900 million compared to the first half of the year, driven by continued strong opportunities in CGI's largest industry sectors of government and financial services. These larger engagements continue to increasingly require a tailored combination of our end-to-end offerings and global delivery. In line with the higher proportion of managed services bookings, billable hiring in our offshore delivery centers once again outpaced global hiring in the second half of the year. Given the current geopolitical environment, we saw particular strength in government bookings across our end-to-end offerings. On a year-over-year basis, awards from government sector clients were up by more than $1.3 billion, or 25%. This rising government sector demand was driven by continued spending to support new policy initiatives in areas such as cloud, data analytics, defense logistics and technology programs, cybersecurity, and AI. Based on historical economic and IT spending patterns, we expect that governments around the world will accelerate investments in the near term, which will continue to provide a stable growth platform for CGI. Representative Q4 wins for broader scope engagements included Circle K, a leading global convenience retailer, selected CGI for a 10-year strategic partnership to deliver managed IT services. Through this engagement, we will help strengthen their capacity to enhance customer and employee experience and advance their business goals. His Majesty's Revenue and Customs Authority named CGI a partner on the government-wide Crown Commercial Service Digitization Framework. CGI is positioned to deliver user-centered design services and application management and delivery to support the UK government's digital strategy. The French National Centre for Scientific Research expanded its relationship with CGI with the award of an eight-year managed services engagement to be the institution's strategic digital transformation partner. We will help modernize their technical and business systems, including the secure migration of enterprise applications to the cloud. And Scotiabank, a leading Canadian multinational bank, selected CGI's All Payments solution to advance the bank's payments innovation agenda. By deploying our modular cloud-based enterprise payments platform, we will help the bank accelerate benefits for their global customers and ease payment processes. EGI's overall bookings for the All Payments solutions were up this year by more than 13%. In the quarter, All Payments was certified as one of the first solutions to participate in the US Federal Reserve Bank's FedNow service, a new real-time payments network. Leveraging our global alliance with Microsoft, All Payments is also now available in the Microsoft Azure Marketplace, providing a new channel for clients to easily purchase, and deploy our industry-leading IP. Our business plan for fiscal 2024 incorporates continued investments in our end-to-end services, enabling our consultants to bring CGI's full offering value proposition to clients. For managed services, we will accelerate deals through expanded capacity in our business engineering function and through continued investments to embed innovation and efficiencies into our delivery solutions. Our managed services value proposition provides clients with the ability to generate cost savings and drive forward the digital transformation agenda. For CGI, managed services provides longer-term recurring revenue, which deepens our resilience through all economic cycles. In IP, we will continue to develop new solutions and enhance existing solutions in line with emerging client needs, including the traditional and generative AI. Our IP value proposition provides clients with digital accelerators, lower capital costs, and built-in security and innovation. CGI IP provides recurring revenue with a higher margin profile, expanding our overall profitability. And we will focus our business and strategic IT consulting and system integration capabilities on industries and offerings where discretionary spending remains strong. Our SINC value proposition provides clients with the actionable advice and implementation capabilities they need to realize business value. For CGI, our SINC services provides a strategic client relationship entry point while creating opportunities to deliver end-to-end value. Our fiscal 2024 business plan also includes continued investments in M&A as macroeconomic and geopolitical dynamics continue to reshape consolidation activities within the IT services industry. We started the fiscal year by closing the merger with Momentum Consulting, a Miami-based IT and business consulting firm specializing in digital transformation and data analytics. This merger strengthens our position in the U.S. metro market of Miami, bringing new client relationships in the manufacturing, retail, and distribution sectors. I'd like to warmly welcome the more than 175 new consultants who joined CGI through this merger. We will continue to focus on building critical maps and strategic metro markets within all CGI geographies. Our goal is to gradually grow this presence to mirror the economic sector distribution in each metro market and to deploy our full range of services and solutions. We are in dialogue with a large number of merger targets, and we are seeing a better alignment of M&A conditions as compared to last year, with valuation multiples now moving into a more reasonable zone. As always, we will be disciplined to make sure that all CGI mergers will be accretive to each of our state banks. Finally, our business plan incorporates investment in innovation. Generative AI continues to be at the top of innovation discussion agendas with clients. with trust and responsibility as key priorities. Engagement of our experts in government initiatives and councils around the world reinforces our commitment to continue upholding the highest standards in the development and deployment of emerging technologies as per CGI's Responsible Use Framework. And we are now signatory of the Canadian Voluntary Code of Conduct on the Responsible Development and Management of Advanced Generative AI Systems. Importantly, we announced last week a new AI-focused initiative, leveraging our global alliance with Google to use the cloud platform to enhance the capabilities of CGI's Pulse AI solution. Under this initiative with Google, we will also develop innovative industry-specific use cases to help clients accelerate their time to value from new generative AI applications. Overall client adoption of generative AI remains in the early stages, which is resulting in focused opportunities for CGI and data consulting and SI projects, proof of concept efforts, and targeted use case implementations, particularly using RIP. They're currently engaged in over 600 active projects with various AI components. And in Q4, CGI's bookings, which incorporated AI, totaled more than $175 million. Examples of recently awarded engagements using AI include the U.S. Department of State selected CGI's Atlas 360 solution, which incorporates AI-based technologies to help the agency improve efficiency, effectiveness, and security in their Asia-Pacific visa processes. Several U.S. regional banks expanded their relationship with CGI to upgrade to our AI-enabled collections IP. Our solution will help each of the banks deliver data-driven customer journeys as part of their debt relief and recovery initiatives. And as part of Canada's Indigenous Digital Health Ecosystem Initiative, CGI will work with partners to use an array of advanced non-intrusive technologies, including AI, to build a digital twin and risk model for advancing fire safety and preparedness in First Nation communities. In closing, the combination of our strong performance in fiscal 2023 the actions we initiated in Q4, and the initiatives embedded in our business plan underscore our continued confidence for fiscal 2024 to deliver double-digit EPS accretion, incremental margin expansion, and revenue growth consistent with the current IT services demand environment. CGI's resilience and positioning strategically, operationally, and financially enable us to be one of the few leading global firms with the scale and reach, insights, capabilities, and commitment to remain a partner and expert of choice for clients, an empowering environment for our consultants and professionals, an engaged, ethical, and responsible corporate citizen, and investment of choice for our shareholders. Thank you for your continued interest and support.

Go to questions now, Kevin. Thanks, George. Colin, please provide the logistics to the participants for the QA.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you wish to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, simply press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, and your first question comes from Thanos Mastropoulos from BMO Capital Markets. Thanos, please go ahead.

Hi, good morning. George, as you talk to your clients, do you see this very much playing out like prior periods of macro uncertainty, or are there some key differences to call out? And so what I mean is at a high level, you're seeing strength in managed services slow down in SINC, and so that's exactly like in prior cycles. But underlying that, there's obviously a lot of technological change happening with public cloud, Gen AI, things like that. Is that starting a different dynamic here in terms of how things might play out over the next year? Or do you see it being like prior cycles?

No, here's what I would see. And I personally was in Europe for a week, been throughout North America. And what I'm hearing is I kind of mentioned this. It's a bit of a dilemma, and that's how one of the clients put it to me. They know that in order to meet their business goals, they need to continue spending in IT beyond just the managed services, but in some of the other areas, both in the systems integration and projects. and pushing the innovation agenda further. At the same time, like prior downturns, of course, cost and spending comes under scrutiny. And so I think it's a matter of what we're seeing a bit more tempered than in prior economic cycles like this. And I think we're going to recover maybe a little bit sooner, but time will tell. But that's the discussions that I'm having to give you the color commentary there.

Great. On the restructuring initiative, is that pretty broad-based in terms of across the business units, or is it really more focused on sub-7B of the businesses?

No, it's broad-based across everywhere. As you know, our SG&A, we run a proximity model, and our SG&A is embedded in those geographies. So it's pretty broad-based. And, again, it's focused on both real estate and the costs associated with the with running our own business and then, of course, introducing, just like we're doing for our clients, introducing more global delivery and more automation into the process. So that's what we're focused on.

Great. Thanks, George. I'll pass it along. Yep. Thanks, guys.

Your next question comes from Paul Treiber from RBC Capital Markets. Paul, please go ahead. Thanks very much and good morning.

Just a couple questions here. Just on constant currency growth, how it decelerated, it applies mostly to SINC, but then managed services bookings are strong. So what's your outlook for constant currency growth in the near term just with those strong managed services bookings and when do you see those helping offset the slowness in SINC?

Yeah, so maybe I'll just start with kind of the revenue growth we did have. Like you said, it is pretty centered both on managed services, but it's really spread differently across different industry and services. So it is driven by government and health. which is strong in all of our geographies. Financial services is a little bit different. Insurance was strong. I think that's where you see probably the most pronounced weakness in SINC and strength in IP and managed services is really in the banking space. Insurance, like I said, was pretty strong. And we're seeing that pretty much across, again, all geographies. And then, of course, utilities is strong. you saw communication slowing. And so in those industries that are a little more impacted by some of what's going on, including MRD, manufacturing, retail, and distribution, that's where you see maybe a little more pronounced and the SINC and a little more opportunities in the managed services and IP, which, again, are strong across. But, you know, that's kind of what we see. And so if you look at the outlook, then, those are the tailwinds or some of what I just mentioned, kind of built into our model and our approach are really those strong opportunities 12-month bookings, trailing 12-month bookings, and expanding pipeline, particularly in managed services, government, and government and health and IP. But there are still some headwinds, particularly in Q1 We're still seeing some slower decision-making, even on those managed services. Discretionary spending, given some of the uncertainty from the clients, is a headwind. And then we always have some normal year-end furloughs that we probably expect to be a little more pronounced this year, and that's just at the end of the year around the holidays and the new year. We see some, particularly in banking, it's just a – a situation where they kind of almost slow down everything, and then they start back up in the new year. So I think that's going to be a little more pronounced. So when you look at that, it's kind of harder to predict on a quarter basis. But overall, we think that the weighting will shift to the tailwinds that I just described as we move throughout the year. Thanks. That's helpful.

And then just in regards to the cost optimization, what's the typical target of annual cost savings to the investments that you anticipate? Or in other words, how do you think about the potential year-over-year margin expansion from those initiatives? Steve?

Yeah, look, in terms of real estate, the payback is a bit longer, so it would be more than a year. But in terms of the action where we are using the global delivery and also automation, it's going to be faster, and the payback will be about a year.

Okay, thank you. I'll pass on.

Your next question comes from Richard Say from National Bank. Richard, please go ahead.

Yes, thank you. With respect to the government vertical, what do you attribute that sort of strength to? Is it a vertical that historically, I guess it has historically sort of played a bit of catch up to commercial enterprises? Is that really the big driver here?

And maybe you can elaborate on that a bit, please.

Yeah, what we see is government tends to be a bit countercyclical. So when you go into times of periods of economic slowdown, what you see is governments get very active. They get active around policy initiatives to spur the economy, to help the citizens, et cetera. And so it's a lot of activities around us helping government implement their policy initiatives, which, by the way, always incorporate IT. And then the more you get of those policy initiatives, quite frankly, it puts more of a spotlight on kind of some of the modernization that has to happen so that they can actually implement those quicker. And so governments get more active on that front. And then finally, in general, governments do look to stimulate the economy. And so that's what we kind of see. We're in a period of that. And that's governments around the globe, at least in the geographies that we're in, we're seeing that strength in governments both in North America and across Europe. Okay. Okay. And then when you look at the existing base, it seems to be that it's still contributing a fair amount of growth here. So my guess is that some of these existing deals are expanding at a larger size or there's sort of add-ons there. Are there any sort of commonalities to sort of that expansion in terms of like a product area or service that they're looking for? Well, actually, one of the common areas, and we did have a pretty strong new business in the quarter, 37% was new business. But you're right, there's a significant number of add-ons. A lot of that is clients looking to consolidate their partners for both quality and efficiency purposes. And so it's not necessarily focused on a specific function. It's more about adjacencies to the work that we're doing to expand that, consolidate some of their partners, again, for both quality, which CGI is known for, and then also the efficiency purposes, which includes us being able to, as a bigger partner with bigger volumes, be able to provide better cost savings to the clients. Okay, and just one last quick one from me in terms of capital allocation. You know, you've been fairly active on the buyback. Do you think a dividend is sort of entering the mix here over the next 12 months as part of that capital allocation? Yeah, we look at that capital allocation at the board meeting when we look at our NCIB and our use of cash. So it continues to be a discussion. Right now, given what I just described about the outlook, not just this current environment but the next wave of growth, particularly around AI and the opportunities in M&A, I don't see that right now. But, of course, we'll have that discussion.

Yeah.

Usually, you know, we are renewing our NCIU program early Feb. So we'll come back to that, obviously, with the board and discuss that at the board meeting in February.

But what I can say in the meantime is we will be active in returning cash to our shareholders through the stock buyback program. That's great. Thank you. Yep.

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

Good morning, everyone. George and Steve, if you could provide some colors specifically on the geographic segments. We noted that the U.S. commercial and the Western and Southern Europe segments saw a decline in revenues. If you could provide some sort of directional guidance on how do you see some of these segments trending? I know last quarter Canada was the weakest segment. How do you see some of these segments progressing on a go-forward basis?

Yeah, and thanks for the question, Divya, and thanks for noting that, as we talked about, Canada has returned back to growth in the quarter. You know, in U.S. commercial and state government, maybe I'll take that one first. Certainly, you know, what we do see is that some of the growth that we would naturally have is masked by some of it moving on the managed services side to global delivery. So you saw, again, some growth there, strong growth in global delivery. So we're moving more of that U.S. work to global delivery. And, in fact, we're seeing a lot of interest, continued interest in global delivery. In fact, I was just in India last month with clients. I can tell you that the interest is palpable right now. In fact, our Q4 client visits to the India offices, just the India offices alone, This quarter, if we go back, and I didn't go back a year ago, and of course it's higher, but I went all the way back to 2019, which is the last quarter prior to the pandemic. So that's a good benchmark quarter for us. twice as many client visits to our indie offices. So a lot of movement towards global delivery. Of course, that masked some of the segment growth. And then we had strong IP growth, but we're moving IP more to software as a service. That's up in the quarter, as Steve mentioned. And so that actually masked some of that growth. Having said that, I think we'll still see some softness in SINC, particularly in the financial services sector. area. Those furloughs I mentioned in the year will still head us this next quarter. But as we move throughout the year, I think you'll see the growth there in the U.S. commercial. Similar story a bit in Western and Southern Europe. Maybe one caveat, the one day probably hit them a little harder in the quarter. So again, I think you're going to see these are traditionally very strong well-managed organizations with a good, diverse portfolio of clients. So I'm not very concerned about that.

That's helpful. And maybe if I may ask a question on the M&A. I know it's been an important strategic priority for CGI, but could you give some color on the M&A pipeline? And I know it's a slightly different question, but how are you prioritizing M&A as compared to the $1 billion investment allocation in AI on the side as well?

Yeah, well, you know, here's how I look at that, prioritizing them both. And they kind of come together where some of those M&A will provide us AI capabilities and skills. And so that's something where they kind of converge. But the billion is really over a period of three years. Focus right now more on the training and the partnerships. I just announced the partnership with Google. But it's the partnership, the alliances. and it's our intellectual property. On the M&A side, it's really about building out that scale through additional relationships with clients. So they're both prioritized. You saw the cash generation we had. We've got plenty of cash generation to invest in both as priority elements in our go-forward plan.

That's good to know. Thanks, George.

Your next question comes from Stephanie Price from CIBC. Stephanie, please go ahead.

Thank you, and good morning. Maybe just following up on Divya's question on M&A. So Momentum was the first M&A deal that CGI has done in several quarters. Just in case you can elaborate a little bit on what you're seeing in the M&A market at this point. And also curious if you wanted to provide an M&A target for the coming year. I know you had that billion-dollar target last year.

Yeah, so on the M&A kind of landscape, as I mentioned, it's been, The valuations have been jumping around. There was a bit of a disconnect that we talked about over the last several quarters. But valuations are definitely, as I mentioned, moving into a more reasonable range. And so we remain very active. Looking at the pipeline, the pipeline, quite frankly, even some of the pipeline is being refilled with some activity we had in the past that maybe the valuations were We're far apart and they're coming back together. And so the pipeline has both new entrants, but also some that we're very familiar with and been in discussions with before. That bodes well for the activity here in the coming quarters. So I think it maybe gives you some idea of kind of how that pipeline is shaping up and what the market looks like. And again, you know, in this type of a period and slowdown, it helps, companies to come together. And so again, I think there's a richer opportunity set. But for that reason, given where the volatility was and now where it's going, we're not setting a specific target. But again, it's a priority for us in the coming year.

Perfect. Thanks. And then just in terms of bookings, obviously we've been very solid despite the uncertain macro here. Just curious if we could expand a little bit on what you're seeing around pipeline conversion and decision cycle. Just curious how confident you're feeling in being able to replenish bookings as we kind of look ahead here.

Yeah, I'm feeling very good about the bookings outlook given some of the opportunity set, as I mentioned, some of the discussions we've had with clients, the visits. that we've taken with them to our operations around the globe because it's not just offshore, it's really that whole global delivery model that is attractive to clients right now. And I do believe as we move throughout the year, I think you'll see, for all the reasons I outlined around business needs, you'll see some of that even SINC coming back. And remember, it's not every industry that SINC is not remaining strong. There's, like I said, in government and in health, like sciences and even insurance utilities, you see some of that SINC remaining. So I think we're feeling pretty good about the outlook. And the other is that they're bigger deals. And so we're looking at bookings that are bigger size, some of that consolidation that's going on. So we're feeling still pretty good. Of course, bookings are always lumpy. And to one part of your question, yes, we do see that just given the environment the decisions tend to be a bit slower. And so we did have a number of deals, in fact, slip, including in some of the areas where we had very strong bookings like U.S. CSG. We had some bookings that actually slipped from the fourth quarter to the first quarter. So we are still seeing some of that happen, and that's just natural in the current environment.

Great. Thank you for the comment.

Your next question comes from Jerome Dubois from Desjardins. Jerome, please go ahead.

Hey, good morning. Thanks for taking my questions. Just want to make sure we're all on the same page in terms of your output for 24. You mentioned you expect revenue growth to be consistent with the IT demand environment. If I'm looking quickly at what Gardiner expects for 2024, they're in the high single digits. That seems a bit high, and maybe you're not referring to that, and granted, it's not exactly the same period given your fiscal year. So if you can provide a bit more detail on this, please.

Yeah, we don't give guidance, as you know, Jerome, but the current market, it's not really what Gardner says. It's really what the market actually is producing, and that right now is obviously in the low single digits. So that's where we are today. I do believe that's going to evolve as we move throughout the year. I think the back half of the year will be stronger than the front half of the year here. regarding everything I talked about. But for us, you know, we can't control the decision-making speed and the market, but we do control the model and the approach that we have. And, you know, resilience to economic slowdowns is built into our model. You know, managed services at 55% of the revenue in Q4, you know, and 60% of the bookings gives us that long-term revenue. outlook in intellectual property, 22.6% of revenue in Q4 and rising. It's sticky. It's recurring. So that's going to be a focus of ours. And then, as I mentioned, the government industry work now at 37% of 20 basis points. It tends to be counter-cyclical. So we feel pretty confident in where we're going. We're really going to focus on the things that we can control. And like I said, I think those tailwinds and that approach and that model will outweigh some of the headwinds. I can't tell you exactly how those headwinds look as we move through the year, but that's why we feel pretty confident. And that's why we believe we can continue to deliver that double-digit EPS accretion.

Yeah, thanks. That's very helpful. And then Second, a bit related and a different angle on bookings, you know, we've seen you had very strong bookings, obviously not exactly the same trend as we're seeing in the revenue when we've seen it for some of the global peers as well. Is there a difference in terms of trends you're seeing in terms of booking conversion to revenue? Maybe some of the contracts that were already booked that are taking a little bit longer to translate into revenue. Is this something you're seeing right now?

Yeah, well, there's two things going on. As we talked about in the last couple calls, the conversion for managed services always takes a little longer because you have a transition. Same goes for IP in many cases, particularly if it's a software as a service but there's implementation associated with it. at the beginning. So there is just naturally a longer cycle there. And of course, that's at the same time that that shorter term revenue is under some pressure. And so it's just a matter of timing and balancing those out. I think we're on the back end of that type of situation. I don't think we're past it yet, just given the dynamics that we see going on and a little bit of the slowness, not just even in making a decision, but then going from decision to starting the projects. It's just taking a little bit longer. But, you know, with the model that CGI has being ROI-led, that's kind of our antidote to some of that slowness because we put that business case right in front of the client and we all align on it. That's our antidote, but still a little bit slowness.

Thank you. Your next question comes from Robert Young from Canaccord Genuity. Robert, please go ahead.

Hi, maybe just a quick question on M&A. I think in the prepared comments, you emphasized building critical mass and strategic metro markets. I didn't hear anything about large deals, but then in response to one of the questions, you said that the deals are getting larger. And so is that larger metro markets, or are you still evaluating larger, I mean, maybe mega deals? And what would be the biggest things that prevents CGI from looking at or executing on the very large deals?

Yeah. We're still active in looking at larger acquisition targets. When I talk about what we're trying to do in M&A is build out those metro markets, that's both for the small ones and the large ones. We look at large targets that have operations across Europe and North America. when we integrate it, it will still help us in specific metro markets. So it really is, it works on both sides of the avenue. So thanks for asking for the clarification because we are looking at both. There's no real hurdles. from a valuation, from an integration, obviously, from an access to capital perspective for us to do a larger one. It really is about making sure that they're accretive and making sure that we have an understanding of how we would make that accretive. And as we discussed in the past, some companies aren't in a position where we could make that happen. So that's what we're discerning on, but there's absolutely no barrier from an internal integration or access to capital perspective, or appetite, quite frankly.

Okay, that's great. I'm curious about the pace of hiring and the restructuring. I know the emphasis has been on your global delivery. You're growing the mix there. Yep. Is attrition slowing down? And then I'm just trying to maybe get drive to the impact on utilization and eventually margins from the hiring and maybe a different hiring environment.

Yeah, well, look, the turnover continues to be below the industry average, but our turnover is also well below. I just looked at these numbers, well below the pre-pandemic levels. And that's important to note because, you know, if you look at where we were just right before the pandemic, of course, it dropped during the pandemic and then rose again. But now we're back below where we started even before the pandemic. That does have an opportunity for us because then it allows us to be a little more discerning on the hiring. At the same time, of course, hiring has eased. and the difficulty of getting the hires. So all this adds up to we can be really focused on keeping the utilization high, not hiring in advance of the demand, not having to hire as much for replacement. And so that puts us in a better spot from a talent perspective.

Great. And then that growth in or the emphasis on hiring in global delivery, I assume that's mostly in India, has that become an easier place for you to find good talent? Are you relatively, given the nutrition is low and it's a better hiring environment and visits are up 2x from last year, are you able to get the people that you need or is it easier to get the people you need relative to during the pandemic?

I hate to say easy because talent is always an important one. But, yes, it has eased. Our value proposition, particularly in India, like I said, I was just there, it's a pretty strong value proposition. And so we're doing quite well. And remember, though, we also look to build our own. And so we bring a lot of individuals, very talented individuals out of school, put them through education.

uh various training programs so uh we can also build our own and so it's a combination of of uh of those factors okay the last little one um end of year budget flush you know given government is so strong and i mean i know there's the looming shutdown again but is that a factor uh you know at the end of the year across your business or does the macro change you know any opportunity for budget flush no past line

Yeah, are you asking from Q4 or are you asking for Q1?

Yes, end of year, so fiscal Q1, I guess.

Yeah, so actually the government fiscal year in the U.S., for example, was the same as CGI's fiscal year. So we saw a little bit of bump from that. No, I don't think you're going to see a bump from that specifically here as we move through. I think it's going to be more of the other factors that I mentioned around policy initiatives and around stimulating the economy.

And outside of government, is there anything budget-flush-wise?

Well, unfortunately, it's not so much budget-flush on the commercial side. Unfortunately, what we're going to see, I think, a bit of is that – that end-of-year kind of slowdown, temporary shutdowns of various clients where they just slow down all the projects until the beginning of the next year. So I think it's going to almost be the opposite of a flush.

Okay, thanks. That's very helpful. I'll pass it on. Yep.

Ladies and gentlemen, as a reminder, should you wish to ask a question, please press star followed by one. Your next question comes from Daniel Chan from TD Cohen. Daniel, please go ahead.

Hi, George. I just wanted to dig into a point you made earlier about the backlog. Can you give us a sense of where you are in converting that managed services backlog into revenue? And is the expectation still for organic growth to accelerate from here as that backlog gets converted or have some of those macro changes? factors that you pointed out kind of tempered that expectation.

Yeah, I think your last point is a true one. We're seeing some of that managed services from the beginning of the year already come into some of the revenue, but it's being counteracted by some of the macro trends we're discussing. Having said that, we just had 60% of a very strong bookings quarter of 114% come in to the backlog. And so that will be working its way through over the next couple quarters. So it really is going to be, like I said, I think the tailwinds will more than overcome the headwinds as we move through the year. But point in time and when that happens, you know, that's something we'll have to stay close to.

Okay, that's helpful. I also wanted to double-click on a point you made earlier where new businesses bookings were 37% this quarter, and that's the highest mix we've seen this year, which is great to see. So anything to call out there in terms of the new business mix being so high, which seems to be counter to what we're seeing in the macro with all the uncertainty?

Yeah, I think it's really a matter of the investments we are making in getting our story, our message out to the to the market. We've got targeted campaigns to bring the value proposition we have to both new clients, but also existing clients in new areas that we have not worked in. And so I think it's just a realization of some of the investments that we've made over the past couple of years.

Thanks, George. Yep.

There are no further questions at this time. I'll turn it over to Kevin for closing remarks.

Thanks, everyone, for participating. As a reminder, replay of the call will be available either via our website or by dialing 1-877-674-7070 and using the passcode 584974. 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.

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