CGI Inc.

Good morning, ladies and gentlemen. Welcome to CGI's second quarter fiscal 2024 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, Joelle, and good morning. With me to discuss CGI's second quarter fiscal 2024 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, May 1, 2024. Supplemental slides, as well as a press release we issued earlier this morning, are available for download, along with our Q2 MD&A, financial statements, and accompanying notes, all of which have been filed with both Cedar 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 mdna and press release as well as on cgi.com we recommend our investors read it in its entirety We're reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I'll now turn it over to Steve to review our Q2 financials, and then George will comment on our business and market outlook.

Steve. Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our second quarter of fiscal 2024. In Q2, we delivered $3.7 billion of revenue, up 0.7% year-over-year, or stable when excluding the impact of foreign exchange. The strongest CGI segments were UK and Australia at 5.1% constant currency growth, Asia-Pacific at 5%. Northwest and Central East Europe with 4.2%. And U.S. commercial and state government at 4.1%. From an industry perspective, we had the highest growth in government with 5.7% constant currency growth while we continue to experience softness in industries more sensitive to interest rates, particularly in the banking subsectors. In addition, the majority of our geographies were negatively impacted by one less billable day in the quarter. IP as a percentage of total revenue was 22% in the quarter. Our IP continues to resonate with clients with vast majority contracted as longer term recurring engagements with over 60% delivered as software as a service. Our overall bookings in the quarter were $3.8 billion for a book-to-bill ratio of 100% and 113% on a trailing 12-month basis. Booking ratios for the quarter were led by Finland, Poland, and Baltics at 127%, Western and Southern Europe at 115%, and UK and Australia at 109%. Global backlog reached $26.8 billion, or 1.9 times revenue, helping to support our overall business resilience. Turning to profitability, we continue to manage with discipline despite the current macro environment, delivering solid year-over-year improvements. Earnings before income taxes were $577 million for a margin of 15.4%, up 20 basis points year over year. Adjusted EBIT in the quarter was $628 million, up $28 million year over year. This represents a margin of 16.8%, up 60 basis points year over year, mainly as a result of a larger proportion of IP-based revenues and benefits being realized from our previously announced cost optimization program. This program, which was primarily focused on SG&A, has now concluded as planned. We delivered strong margin geographically as follows. Asia Pacific at 31%. North America at 17%, and Europe at 14%. Our effective tax rate in the quarter was 26.1%, and we expect our tax rate for future quarters to be in the range of 25 to 26.5%. Net earnings were $427 million for a margin of 11.4%, up 10 basis points year over year. Diluted EPS was $1.83, representing an increase of 4% year-over-year when compared to $1.76 in Q2 last year. When excluding specific items, net earnings improved to $459 million, up $24 million when compared to Q2 last year, for a margin of 12.3%, up 60 basis points. Specific items for the quarter were mainly expenses associated with the cost optimization program. On the same basis, saluted EPS was $1.97, an accretion of 8.2% when compared to Q2 last year. In the quarter, Cash provided by operating activities was $502 million, up 7% year-over-year, representing 13.4% of total revenue. On a trading 12-month basis, cash provided by operating activities was $2.1 billion, also up 7% year-over-year, representing 14.6% of total revenue. DSO was 40 days in the quarter, five days better than our target, mainly due to quality delivery and our mix of business. As a reminder, Q2 generally produces the lowest DSO each year due to a higher volume of IP maintenance payments from clients. In Q2, We used our cash to invest $103 million into our business, including in AI, and invest $260 million to buy back our stock. In the quarter, we continued to deliver a strong return on invested capital at 15.9%, up 30 basis points year-over-year, demonstrating our proficiency and discipline on deployment of capital. Looking ahead, with $2.8 billion of cash readily available and access to more if needed, our capital allocation priorities are, first, investing in our business. Second, pursuing and closing accretive acquisitions. By leveraging CGI's strong balance sheet, evidenced by a leverage ratio of 1.1, and a net debt to capitalization ratio of 16.4. Finally, as appropriate, cash will be used to repurchase our stock and or sink down our debt. Now, I will turn the call over to George to further discuss the insights on the quarter and outlook for our business and markets. George?

Thank you, Steve, and good morning, everyone. In the second quarter, our team again embodied CGI's discipline and agility by prioritizing actions for delivering shareholder value and partnering with clients to position CGI for profitable growth opportunities. With continued strong profitability and cash generation, our financial strength reflects CGI's resilience and capacity to invest in our build and buy growth strategy. Our team's disciplined management practices contributed to our strong balance sheet, even as macroeconomic uncertainty continued to impact some of the industries where our clients operate. Margin improved as we grew the mix of recurring revenue, with IP revenue up 6.5% in constant currency and managed services revenue up 2.1% on the same basis. As planned, actions completed through the cost optimization program also contributed to margin expansion. Utilization was up year over year as we continued to align talent to those industries that are growing, such as government, transportation, and utilities. Delivery quality remained high, and client satisfaction again increased across every dimension we measure. Clients continued to partner with us to address their most complex enterprise and ecosystem-wide digitization initiatives. This operational excellence also led to deeper employee engagement As a proportion of employees who are shareholders rose to 87%, further expanding our culture of ownership, which is a differentiator for client partnerships and CGI talent attraction and retention. In Q2, the diversity of new client awards affirmed CGI's positioning as the go-to partner for driving outcomes. Large project awards contributed to the higher proportion of SINC bookings in the quarter. We also saw increasing demand for our emblematic business and strategic IT consulting offerings, including CGI's framework for responsible use of AI, as well as change management and CIO advisory services. Client demand for managed services remains robust, in line with the buying trends we have seen over the past year. Importantly, on a trailing 12-month basis, the managed services bookings were up $1.6 billion compared to the same period a year ago, for a 21% increase. We do see clients continue to exercise caution in their spending on IT services, which is most acute in the banking and manufacturing subsectors. However, this cautionary approach is not diminishing clients' interest across every industry to explore with CGI the opportunities for cost efficiencies through managed services and for ROI-led system integration projects. We also see an industry-wide trend related to timing of decisions, notably in delays for large engagements with enterprise clients. We remain well positioned as the partner of choice to help clients achieve the tangible and trusted business outcomes they seek. Example awards in the quarter included Local Tapiola, one of the largest insurance and financial services companies in Finland, extended their strategic managed services partnership with CGI for five years in an agreement valued at $284 million. CGI will apply new technologies, including AI and automation, to help drive operational efficiencies across their enterprise. The Digital Department of the UK Government Cabinet Office appointed CGI as a Strategic Digital Transformation Delivery Partner in an agreement valued at $162 million. As part of this new partnership, CGI will provide a range of consulting, data, and digital services to help the government innovate and drive value in digitization. The U.S. Department of State's Bureau of Consular Affairs renewed its 10-year agreement for CGI to deliver visa services across nine countries in the Asia-Pacific region. Under the $75 million award, we will continue to leverage CGI Atlas 360, our AI-powered customer relationship management and business process IP, to help the Bureau efficiently facilitate visa applications. And the City of New York expanded its partnership with CGI in a five-year base plus two option year agreement to maintain the City's parking violation system, which runs on CGI's Advantage Collections IP platform. Under this contract, CGI will partner with the City's Department of Finance to administer the adjudication, payment, and collection processes for summons violations issued by the City. Through the use of the CGI platform, the city expects to collect nearly $1 billion in annual revenue. Looking ahead now to the demand environment. Client budgets indicate continued investments in digitization over the next year, according to CGI's most recent proprietary research. When we asked clients about their budget plans, more than 70% indicated they intend to sustain or increase their IT budgets. CGI's pipeline over the next year validates this finding, as the value of new opportunities grew by nearly 30% on a year-over-year basis. This overarching finding is part of the preliminary insights we've identified based on more than 1,800 discussions with current and prospective clients. More than 80% of our discussions were with C-level business and IT executives at organizations located in every geography in which we operate. These annual voice of our clients discussions were initiated during the second quarter as part of our strategic planning process and concluded just a few weeks ago. There are three preliminary findings that we see shaping client demand over the next 12 months. These findings underscore the tight alignment between CGI's current investment priorities and those of our clients. First, Clients across industries have indicated their intent to rebalance their business priorities from primarily cost savings to a renewed focus on also driving revenue growth. Second, executives noted that the alignment gap between business and IT within their organizations has largely been eliminated. And digital leaders in every industry have significantly widened the gap with their peers in realizing the benefits of digitization. Relating to the first finding, business executives globally cited driving revenue growth as their top priority for the next year. This is closely followed by the need to drive innovation and introduce new products and services. Both of these priorities are new to the top five this year. While these top business priorities are growth-oriented, business and IT executives maintain their focus on modernization, optimization, cost control. each of which ranked within the top five priorities across most industry sectors. This resurgence in growth as a client priority, along with continued focus on efficiencies, is well aligned to CGI's end-to-end services and solutions portfolio. We expect this dual-focus client agenda to drive an expansion of new opportunities for both SINC and holistic managed services over the coming year. Moving to the second preliminary finding of our client interviews, business and IT are now tightly aligned, as client executives noted that the alignment gap has effectively been eliminated. Over the past six years of research, this is the first time there's been such a steep increase in the alignment ratings, indicating a new shared agenda between business and IT teams. We believe the primary driver for this finding is the combination of business efficiency focus and the promising potential of digital technologies. including AI and cloud. For CGI, this alignment is expected to generate larger value engagements as business and IT address enterprise transformations to integrate technology and operations. We see early signs of larger value opportunities within our pipeline as the average deal size increased significantly for enterprise clients as compared to this time last year. And lastly, digital leaders are increasingly realizing the benefits of digitization and widening the gap compared to those organizations in the earlier stages. This enables digital leaders to accelerate investments in driving revenue growth. Our findings show that these digital leaders are more successful in expanding their data strategies, modernizing legacy systems and applications, driving agility into their business models through a higher reliance on managed services, and implementing advanced technologies, including generative AI. For digital leaders, this will drive increasing demand for all CGI services as they reinvest savings garnered from their modernization and optimization initiatives into new capital spending to drive future growth. And for those organizations in the earlier stages of their digitization, the expanding gap in producing ROI will continue to generate new demand for CGI's end-to-end services. with a stronger emphasis on transformative managed services and the full suite of our IP business solutions. These three preliminary findings are connected by the continuing critical role of technology and digital acceleration. Again this year, nearly three-quarters of our clients cited digital acceleration as the most impactful macro trend for their organization, with CEOs rating the impact the highest. Not surprisingly, the rise in client interest for AI and Gen AI solutions amplifies the importance of digitization across all aspects of society. CGI continues to progress our AI investments, focusing first on talent development and hiring, which is already enabling us to enhance our end-to-end service offerings and strengthen our operations. For example, we are improving the quality and speed of service delivery and software development for our clients through the use of Gen-AI, embedding AI across our IP portfolio, and leveraging Gen-AI for more efficient development and maintenance of our 150-plus business solutions, leveraging Gen-AI to enhance our bid and proposal capacity, and experimenting and applying Gen-AI to optimize internal processes and transactions, including in our procurement, risk, and HR functions. In Q2, our bookings that integrated AI technologies were again over $200 million, including wins with a large U.S. financial and mortgage institution to create a cohesive, generalized strategy to drive portfolio-wide technical capabilities. The global car manufacturer to design and create data and AI platforms and products. Multiple European space industry clients to leverage real-time AI to improve data transmission rates in lunar and deep space missions. And a multinational telecommunications company to deliver AI-powered solutions for cost savings and improve customer satisfaction. Notably, bookings in the quarter utilizing our global alliance partnerships are up double-digit on a year-over-year basis. Our client interview findings highlight that overall implementation of Gen AI remains in the early and experimental stages, but it is ubiquitous, with nearly 80% of clients stating that they are actively exploring AI technologies. In line with this demand, CGI's active engagements that incorporate AI continue to increase across all lines of service. Turning to the buy side of our profitable growth strategy, we continue to prioritize investments in M&A to deepen our resilience and serve as a catalyst for future organic growth. We are in active dialogue with merger targets at each stage of our pipeline. We remain committed to merging with like-minded companies that are complementary to our geographic footprint, client base, and end-to-end portfolio capabilities. Our strategy remains focused on a range of merger opportunities from metro market to transformational. As always, we will be disciplined to make sure that all mergers create value for each stakeholder. Our operational strength, stability, and financial capacity will enable us to move quickly with discipline on the right opportunities. In closing, now more than ever, CGI's culture, capabilities, and commitment to deliver tangible and trusted business outcomes are highly valued by clients as they navigate the current market environment. We are well-positioned 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, an investment of choice for our shareholders. Given our operational strength, resilient model, talented team, and the alignment of our priorities with those of our clients, we remain committed to driving shareholder value through the disciplined execution of our strategy. Thank you for your interest and support.

Let's go to the questions now, Kevin. Thanks, George. Well, we can now poll for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Richard C. with National Bank Financial. Your line is now open.

Yes, thank you. George, I was wondering if you could maybe talk about the extent of expectations for a second half pickup that are predicated on rates coming down across the board. You did a great setup in terms of the opportunity down the road. I'm just kind of curious to see shorter term what's really driving that pickup here.

Yeah, no, it's a great question. I don't have necessarily the clarity that I'd like to have on that. The green shoots are increasing in most industries and geographies for new project work. But they're just not uniform or consistent right now. So the short term, it really is still overall managed services and IP demand is what's generating the opportunities. But, you know, as I mentioned, you know, it's still offset by some cautionary spending SINC and overall slow procurement decision making. So, and even project startups. So, it's just not uniform yet, and we don't have that clarity of visibility. Okay, fair enough.

You've done, obviously, a very good job at taking margins up over the course of the past few years. Has your business changed in the way the mix of service delivery, meaning sort of on a geographic basis, are more customers willing to sort of offshore to get more attractive pricing, like

or is it pretty much the same as it was a year or two years ago no i i would say that we've seen an ongoing trend to moving more our work what i would still say is a global delivery model so it's it's not just offshore but certainly offshore and you've seen that consistently grow faster than the rest of our business again um in uh in this quarter showing that uh that growth but uh but also the the near shore centers which continue to uh to pick up uh specifically in eastern europe southern europe and and even in uh latin america so um it really is a combination of factors so we always had a global delivery but i think it's even more powerful now in the way we deliver our solutions. And of course, automation continues to play a role and will continue to evolve as we drive more technologies into the delivery that we do for our clients. Okay.

And just one quick last one for me. Can you talk about sort of staffing levels here as we look ahead to next year and maybe the degree of wage inflation, how it may have moderated here recently.

Yeah, well, I mean, wage inflation has certainly moderated in most countries in which we operate. And, you know, we have a couple of different levers that we use. One is what we just discussed around global delivery in rotating some of our work and then rotating our people to the higher-end work that we can get the additional wage rates in various locations. We also have our intellectual property that we can leverage, and so that allows us not to be so linear to people and salaries. And so we've got a couple ways to manage that as we continue to build out the company. So that doesn't factor in in a big way as I look at the next year. Sounds great. Thank you.

Your next question comes from Daniel Chen with TD Cowan. Your line is now open.

Hi, good morning. George, the U.S. federal bookings came in a little bit weaker again, I think, for the second quarter in a row now. I think the expectation was that for it to accelerate as we get closer to the elections. Any color on that?

Yeah, here's what I would say. I went back, I looked at this, and it's cyclically a light booking quarter for us. due to the federal government procurement cycle in the U.S. There are many more RFPs in this quarter, and we have a large number of outstanding RFPs out there. And then the award in the second half. Maybe they shift that to more awards in Q3. That's certainly something that we're looking at. But I'll just remind you, our trailing 12-month book to bill in U.S. Federal is at 136%. So, yes, it was 72% in the quarter, but I think our average in this quarter is usually between 70% and 80%, and we're right in that place. So, yeah, the election is, you know... isn't necessarily having the effect that I thought it might have. It will have an effect as we move through the year and get closer. And one of the phenomenons that we're seeing is that there are a lot more bridges for longer periods of time, just given the concern about how that election cycle and the stability might occur. So a lot of our outstanding RFPs right now are

or less sole source bridge awards they just haven't happened yet so um so that uh we'll look for that in the second half of the year yeah thanks for all those details that make sense maybe a question on on the margin side of things obviously the margin strength you mentioned from a higher mix of ip just wondering if there's anything else to call out there and whether you think the margin profile this is the the run rate going forward or if there's more to go

Yeah, so here's what I'd say. It's a combination of the improved IP business mix, but also the cost optimization. That's what's driving some of this margin. Some of that will stick because of the cost optimization. It certainly has that payback. But some of that's going to be offset by continued investments in AI, business development, and the growing mix of SINC. So as we move, as things pick up, you're going to see that change a little bit. We're still committed to the the uh you know incremental margin expansion but we had a nice uptick in this current quarter just given uh uh what's uh what's going on so some of that's sustainable and then we'll continue to uh to expand but some of that we're going to give up for the right reasons on uh investing in ai business development and uh and what we believe will be a return of the sinc here and you heard that some in that voice of the client uh insights i shared

One more, if I may. You mentioned that the sales cycles remain a little bit longer than expected. Just wonder if you can reconcile that with one of the findings in your recent client survey saying that there's good alignment between business and IT. You would assume that when there's good alignment, you would get these projects approved faster. What do you think is causing that slight disconnect?

It's a good question. I kind of highlighted that. The findings historically, has led us to believe that they're bigger deals. So, business typically, they do shorter ROI deals. IT tends to do big modernization, but it's more focused on technology, and as you said, not always 100% aligned. But when they get aligned, it drives bigger ROI and quite frankly, less price-sensitive, more outcome-focused deals, but it's at the highest levels. So it's transformative. It affects everybody. I've personally been championing some of these through the process, and there's a lot of different stakeholders within the organization to get aligned. So even though business and IT agree that You still have to get the individuals and the sign-off because it's going to hit more departments across the organization. So the more complex deals just by their nature take longer, and so that's what we're seeing. And, again, this is the fresh information, so it's more about the go-forward than where we've been.

Thanks, Josh.

Yep. Your next question comes from Paul Treiber with RBC Capital Markets. Your line is now open.

Thanks very much. Good morning. Good morning, George. In regards to AI and Gen AI, it does seem like everyone is evaluating it at this point. Do you believe that there may be a pause related to other initiatives just as companies are trying to evaluate AI relative to those other initiatives?

It's a great question. I'm not sure if that's exactly what I see. What I do see is, given where we've been economically, everybody's been a little more focused on the cost cutting and saving. I think most organizations are taking advantage of that current backdrop to do that investigative work. And so I don't think they're necessarily related one for one, but I do agree with you that evaluation will drive We see that as a catalyst for driving the next wave of digital spending. And when I say digital spending, it's not just discrete AI spending, it's the next wave of digitization. Most of the CEOs that I speak with COOs I speak with and heads of lines of business, they all talk about – they think of this as just the next iteration of what technology can bring to them. And so they're viewing it in a pretty holistic way. not just as the discrete services. I think that's also why you don't see just this big spending indiscriminately on the AI. I think they're really thinking about that as the next wave of where they're going with digital.

That's helpful. Still regarding AI, you call it a number of internal use cases. Where do you see or what magnitude of potential efficiencies do you see AI driving over time?

Yeah, well, definitely it will dry some over time. Right now, it's really still discreet. So holistically, you're not seeing a lot yet dropping to the bottom line. But the reason you go through this work is to actually get to that point. So that's why I highlighted some of those areas earlier. Right now, it's less about cost and just more about effectiveness and efficiency. So you think about the bid generation element I spoke to. It's really about getting better quality of bids out there, so leveraging all of our information and making that available so that the individuals can spend their time really crafting that and customizing that for the individual client opportunity. So it's more about that than it is right now about cost savings. I think over time you're going to see some of that. And by the way, this is what we see a lot of our clients looking at. They're really now looking at this as more about the business impact to this, not just from a cost savings, but from an opportunity perspective of driving the business forward. So that's what we see right now.

And then one last one for me, just in terms of the M&A environment, there's news around several companies for sale and it spreads across the quality and valuation spectrum. What's your thoughts in terms of leaning one way or the other in terms of or deviating from your historical to lean more either towards quality or more towards lower valuations?

Yeah, well, at the end of the day, we're resolute in making sure that we're going to drive the EPS accretion and do that in a definitive way throughout the process. So I've mentioned this before. It's why areas like... uh you know the the gross margins uh the rate equation versus the uh the salary equation become very important you can do a lot on the sgna side you can't do as much on the uh on the gross margin side so um and that then that runs the gamut then right because you can have companies that are stronger and companies that aren't that are in that that manner but um you know we we do see and assess all the market deals on an ongoing basis and will act when there's something that makes sense for us and our shareholders.

Thanks for taking the questions.

Your next question comes from Robert Young with Canaccord Genuity. Your line is now open.

Good morning. Just a couple of questions around utilization. The headcount dropped year over year and quarter over quarter. Just trying to understand the dynamic. Is there a shift towards low cost where you're hiring, or is there more attrition where hiring is not offsetting the attrition? And then how is that dynamic impacting your utilization? I think you said utilization had improved.

Yeah, utilization is actually up. You know, a big part of that drop is us getting ahead of it on the cost optimization. As you're probably aware, two-thirds of that cost optimization was focused on SG&A. It's why you can see that even though you see the drop in the people, you don't see a drop in the revenue. At least we're staying consistent with the revenue. And then I think in general, we're not as linear because of some of that IP. And so you see the IP growing faster and not being dependent necessarily on the people. Having said that, yeah, we are seeing some of that shift to global delivery. Interestingly enough, that actually, to get the same revenue, you actually have a higher headcount when you're using global delivery. So that's not really what's going on at the current point in time. But utilization is up, and that's what you see ultimately in the margin, despite the deceleration on the revenue.

Is it fair to say that there's more benefit to come from utilization, just as some of these don't have as many new employees coming in, maybe maturing the consultants you have today? Yeah.

I don't necessarily see that. I think we've got a great team. We continue to train and reskill our talent. We're doing a lot around the AI reskilling. We're bringing new talent in all the time, including through some of the outsourcing deals. Over 100 new employees joined us through several outsourcing agreements this quarter. And attrition is under control and is down on a year-over-year basis, and it's right in the range that we would expect. So other than cost optimization, I think we're managing it very well.

Okay, and this last one for me is, I think you said that large project awards were a bigger than normal contribution to SINC bookings, and what exactly does that mean? Is that a long-term composition change, or maybe just unpack that and then I'll pass the line.

Yeah, it's more just a phenomenon in the quarter. And I mention it because it did drive kind of a change when you look at our managed services bookings were down versus what I'm talking about in the pipeline and the sentiment. And it just was a function of some higher concentration of SINC bookings. that were large, essentially what I would call recurring T&M project renewals. So they show up in the SINC, but they're really large project T&M recurring revenue. And then we had some timing delays on several larger managed services deals that I mentioned. So I think it's more of a phenomenon of just a quarter. It's why we always look at bookings on a trailing 12-month basis, why I highlighted the strong trailing 12-month bookings and managed services. It's just a function of where we are right now. Okay, thanks. Yep.

Your next question comes from Jerome Dubreuil with Desjardins. Your line is now open.

Hi, thanks for taking my questions. I'm trying to reconcile what we are hearing from other companies in the ecosystem. We heard from Microsoft just last week that they are boosting their Azure CapEx as a result of strong demand. Not exactly what we're seeing in IT services. Do you think there's a chance that maybe enterprises are directing bigger portions of their budget through maybe the data center, cloud power that you might not benefit as much from right now, but that may eventually come back to boost them in?

I think, you know, it's a good question. I do think that some of what we see our clients doing is preparing for the future. And so they're back to setting up their data strategies, their architectures, and ultimately their infrastructure to allow for that next wave of digital spending. So maybe in this case, we're on the tail end of that. I think you saw that even on the slowdown. on the other direction. So I think that's what we're seeing. So time will tell. Like I said, you know, we're not seeing anything uniform or consistent yet, but I think it matches some of the sentiment you hear from, you heard from me on our voice of our clients' feedback that we just heard.

Great. Second question for me. You provided at the beginning of the year a guidance in terms of double-digit TPS growth. Not that consensus is there right now, but can we agree that double-digit TPS growth would be the higher end of your updated expectations?

Yeah, well, obviously we don't give guidance, but double-digit EPS accretion does remain a target for us. We do have the tailwind of the cost optimization, improved business mix, but I think what we're looking for is some return to improvement in the market conditions, which would then allow us to be able to reach that.

Great. And then last for me, maybe one for Steve. Can you remind us of the CAD-USD impact in terms of your reporting? Obviously offsets because of costs that are in USD as well, but maybe a bit of a tailwind in the coming quarters with the weak hurricane currency?

Yeah, in the next quarter, because if you look at it last quarter, in fact, the U.S. dollar versus the previous year, it was not positive. But currently, yes, with the current exchange rate, you would see a positive sign coming from the FX in Q3. Great. Thank you.

Your next question comes from Thanos Mosopoulos with PMO Capital Markets. Your line is now open. Hi, good morning.

Hi, Thanos. George, you referenced the growth in IP, maybe just to clarify what's driving that. Is a lot of that weighted to government, given where we are in the cycle, or is it from some other sectors as well?

Yeah, Thanos, you hit that one right. There certainly is highest growth was in government growth Both in North America, but increasingly in Europe. We had some nice growth in Europe as well, both in the bookings and in the revenue. Operations focused. That's where a lot of our IP plays. So, HR payroll, secure data document handling, data intelligence solutions. We also had some growth in banking as well, Trade360, Wealth360. But Think really more focused on those operational systems, just given where we are. So that's what's continuing to generate the growth.

Great. And it seems like your R&D investments on IP is up a good amount year over year. Is a lot of that focused on AI or other areas of investment as well?

Yeah, well, we actually had a 30-plus percent increase in the CGI-funded investments to enable IP within our AI. So everything from momentum to the customer advance and other elements. And again, just to remind you, some of that is just a reallocation, reprioritization process. spend as we go through that. But yeah, AI will continue to be a driver, as I mentioned.

Great.

I'll pass the line. Thanks, George.

Yep.

Your next question comes from Divya Goyal with Scotiabank. Your line is now open.

Good morning everyone. Hey George, I actually wanted to get a little bit more color on this H2 optimization. I know when at the time of the last quarter we were talking about it, it looked like there could be more upside coming out of H2. But considering where the rate environment is right now, do you think it's fair to build in any sizable optimization whatsoever? Or should we expect a flattish growth for this remaining quarters ahead?

Yeah, well, you know, as you know, Divya, we don't give guidance. But just again, what I see, I just don't see the clarity right now. The pipeline looks strong. The interest is there. We're getting in front of our clients, which is extremely important. And there are green shoots. They're not very consistent, even across industries or geography. So right now, I can't really call that. Maybe it shifts to the second half of the calendar year versus our fiscal year. I don't know. But that's what I see right now. That's why I share the metrics that we have, where the pipeline is, where the bookings are. And then, of course, what we're hearing on the voice of the clients, which is positive on a go-forward basis. I just don't know when some of that's going to show up.

Yeah, no, that's that's a fair comment and I wanted to get a little bit. I know you talked about the margin sustainability and you gave some commentary here on margins. What is a fair run rate for margins now that the cost optimization program is predominantly behind us?

Steve look from it's a good question, but ultimately as George mentioned. Yes, we will have an uptake in the margin with the cost optimization. Probably not to the level that you saw this quarter because, as George mentioned, we continue to invest. We want to invest in AI. We want to train our folks. And so we are spending at the right place. to continue to ultimately crew the EPS. That's the ultimate goal, but something like 20 bits would make sense.

Yeah, no, that's helpful. One question on the BFSI weakness. So George, you did mention that the BFSI segments have some weakness. We have been hearing commentary from some of the global banks indicating increased investments in IT. Are you seeing that show up in your bookings given the stronger SINC bookings? Are you seeing more momentum on the AI side? Or is it broadly digital core modernization where you see more of that spend coming out?

We're still seeing a lot more in the digital and general modernization projects. That's what we're seeing. Again, we're seeing some elements of kind of some of that spending, but it's still early days. And so I'd say more it's on the modernization. I think people are still setting up for what that next wave of digital spending is going to be.

That's helpful. And my very last question here is considering where the stock price is today as compared to where it was a few weeks ago, do you think there are any plans to expedite the share buybacks?

Yeah, well, as we've always discussed, you know, our capital allocation priorities don't change. So investing in the business is number one. Accretive acquisition is number two. But to the extent that we have the capital available, and I believe we do, Steve, yeah, we would be looking to return that through share buybacks. And we don't base it primarily on price because we're basing it on where we're going as a company, but certainly you should expect us to continue to be aggressive on all fronts.

That's very helpful. Thank you.

Your next question comes from Stephanie Price with CIBC. Your line is now open.

Hi, good morning. Hi, Stephanie.

Hi.

Hey, I was hoping you could comment on bookings converting into revenue. I think you made a comment to an earlier question just talking about slow project startups. What are you seeing in terms of that managed services pipeline converting over?

Yeah, well, we are seeing a lot of decent growth. If you look at some of the geographies and some of the industries where we're seeing growth, a lot of that is now being driven by the managed services. It's just being offset by some of that slower SINC spending. And as that returns, I think you're it's going to be an accelerator because we are starting to see good growth on the managed services side.

Okay, great. And then just in terms of IP revenue, there was a comment that 60% of IP is now SaaS-based. I'm curious if you could talk a little bit about the evolution of those IP solutions. I know a lot of them might have been considered mature or you've had them for a long time. Interesting that they're now SaaS-based.

Yeah, yeah. No, I think there's a bit of a resurgence from both the introducing some of the new technologies, including AI, into some of these operational intellectual property elements and then offering them as a software as a service has given some of them a new life. And we've also spent some time combining some of our independent IPs And then offering that as a software as a service that has increased opportunity and demand for the IP. And we've been pretty rigorous of going through an architecture review and continuing to invest only in those IPs that we think do have that future. And you're seeing the results of it these last several quarters.

Great. Thank you very much.

Your next question comes from Suthan Sukumar with Stifel. Your line is now open.

Good morning, gents. The first question I have is, I guess, on your partner ecosystem. I've been seeing more headlines in recent periods about partnerships. Just kind of curious on what role your partner ecosystem has been having on your business in terms of driving client relationships and growth overall.

It's a good question. They're an increasingly important element in the ecosystem and certainly for CGI. It's why we elevated that whole process several years ago. And that continues to pay dividends. You saw that the bookings from that network is up double-digit in the quarter and will continue to play an important role. And we have a unique position with some of those partners in that we do have those 150-plus intellectual property solutions, which are attractive. They're synergistic. working together on those so they're not generic announcements. They're very specific opportunities. Having said that, you've seen that we've made some of those announcements in the past. You'll expect to see more of those types of partnerships because I think they are an important part of the ecosystem. Now, having said that, we'll continue to be agnostic and work with our clients and what the right solution is for them.

Okay, great. Thank you. Next question, I guess, is just more on capital allocation optionality. Just in terms of returning cash back to shareholders beyond the NCIB, would a dividend ever be an option you would consider longer term?

Well, given where we are and what I just shared with you with the voice of the clients, the AI as a catalyst for growth, the opportunity that continues to be out there and eliminate the position, that's not the number one place that we would go to drive the accretion we believe shareholders are looking for. So that's – and that's – we review it regularly with the board. That's the current thinking of the board. But – If that were to change, we'd share it, but not right now.

Okay, great. And just one quick one for me. Given your ambitions around growing your IP business and also M&A as a growth driver, is there potential for deals around pure play IP and software?

You know, what we have found when we look at pure software, we evaluate them often. The issue is that they don't necessarily have the relationships with the clients that we're looking for. When we're looking at M&A, we're looking to complement and expand the relationships we have with clients so we can sell through the full suite of CGI services. And a lot of the pure play software just don't have that. Now, there are some firms that are closer to that. We're looking at how to make that happen. But in general, you don't see that. Same thing on pure AI firms. There's a You've got to sift through a lot of firms that are masquerading as AI firms, but they're not really, at the end of the day, they're not really AI firms. And that's the issue with software firms. Do they have the relationship with the client?

Okay, great. Thank you.

Your next question comes from Jason Kupferberg with Bank of America. Your line is now open.

Hi, good morning, George and Steve. This is Tyler DuPont on for Jason. Thanks for taking the questions. I know we're sort of putting up on time, so I'll try to be quick here. I know this has sort of been asked before as well, but to put a slightly different spin on it, based on my back of the envelope math, it looks like SINC revs declined for the first time in quite a few quarters of strong growth. I know you commented on green shoots that you're seeing, but when we think about sort of an inflection positive, Are you seeing that more as a 3Q phenomenon, 4Q, or just any trends there worth considering as we look through 2024?

Yeah, well, and that's what I've tried to explain. It's difficult to predict. I'm not going to predict. We don't give guidance. That's why I share with you the data points that I have. And what we're really just focused on is staying in front of our clients with the value propositions that will help them now and in the future. But I don't really have an answer there.

but understandable that that makes sense i appreciate the color there um and just as a follow-up it looks like you know as we're continuing to see sort of an increase in larger and longer duration deal wins um can you just maybe balance the difference between what you're seeing from the tdv growth side and the acv growth side uh as we look at cgi as a whole you know how should we anticipate this trend to evolve and sort of any disconnect? How long should that last between those two growth rates? Any sort of trends there worth calling out?

Yeah, well, you know, it's interesting. I guess maybe what I'd come back to is what I shared with you from the voice of the client, that there's more of a dual-focus agenda that's coming into shape, so both the cost savings and the growth drivers. And so I think you're going to see that normalized back to something that you're going to have the stronger SINC growth for customers for point projects, but also those larger transformative managed services deals. So that's what I would say that that data point would point to.

Okay, great. Thanks a lot. I appreciate it.

Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star 1. There are no further questions at this time. I will now turn the call over to management.

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