CGI - Q3 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to CGI's Third 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.

Kevin Linder (SVP of Investor Relations)

Thank you, Julie, and good morning. With me to discuss CGI's third 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 9:00 A.M. Eastern Time on Wednesday, July 31, 2024. Supplemental slides, as well as a press release we issued earlier this morning, are available for download, along with our Q3 MD&A, financial statements, and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

The complete safe harbor statement is available in both our MD&A and press release, as well as on cgi.com. We recommend our investors read it in its entirety. We'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 Q3 financials, and then George will comment on our business and market outlook. Steve?

Steve Perron (EVP and CFO)

Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our third quarter of fiscal 2024. In Q3, we delivered CAD 3.7 billion of revenue, up 1.3% year-over-year, or up 0.2% when excluding the impact of foreign exchange. The strongest CGI segments were Scandinavia and Central Europe at 10% constant currency growth, Asia Pacific at 5.4%, Finland, Poland, and Baltics at 3.2%, and US Commercial and State Government at 2%. From an industry perspective, we continue to have the highest growth in government, representing 4.1% constant currency growth this quarter. This was followed by manufacturing, retail, and distribution at 2.2%, driven primarily from North America.

We continue to experience softness in certain verticals within regions such as financial services and communication in both Western and Southern Europe and North America. Our IP grew at a faster pace, with 5.2% constant currency growth in the quarter. As a percentage of total revenue, IP represents 22.5%, up 120 basis points year-over-year. Bookings in the quarter were strong at $4.3 billion, led by managed services and IP wins. Our book-to-bill ratio in the quarter was 117% and were strongest in U.S. Federal at 209%, U.K. and Australia at 163%, and Western and Southern Europe at 123%.

On a trailing twelve-month basis, book-to-bill was 112%, with 118% in managed services and 104% in SI&C. Global backlog reached $27.6 billion, or 1.9 times revenue, reflecting our overall business resilience. Turning to profitability, our performance this quarter once again demonstrated our operating discipline in navigating the ongoing dynamic macro environment. Earnings before income taxes were $594 million, for a margin of 16.2%, up 80 basis points year-over-year. Adjusted EBIT in the quarter was $603 million, representing a margin of 16.4%, up 30 basis points year-over-year. This is mainly a result of our improved mix of business and the benefits realized from our cost optimization program completed last quarter.

We had strong margin in the five following segments: Asia Pacific at 31%, Canada at 22%, US Federal and Finland, Poland, and Baltics both at 17%, and U.K. and Australia at 16%. Our effective tax rate in the quarter was 25.9%, and we expect our tax rate for future quarters to be in the range of 25%-26.5%. Net earnings were CAD 440 million, for a margin of 12%, up fifty basis points year-over-year. Diluted EPS was CAD 1.91, representing an increase of 9% year-over-year. When excluding specific items, net earnings were CAD 440 million.... This represents a margin of 12%, up thirty basis points year-over-year.

On the same basis, diluted EPS was $1.91, an accretion of 6% when compared to Q3 last year. In the quarter, cash provided by operating activities was CAD 497 million, representing 13.5% of total revenue. On a trailing twelve-month basis, cash provided by operating activities was CAD 2.2 billion, up 12% year-over-year, representing 15.2% of total revenue. DSO was 42 days in the quarter, two days better than last year. In Q3, we used our cash to invest CAD 91 million into our business and invest CAD 499 million to buy back our stock. Subsequent to the quarter, we announced two strategic acquisitions. In Canada, we acquired Celero, business serving credit unions, which consist of managed services, core and digital banking, and related IT services.

In the U.S., we announced yesterday that we entered into a definitive agreement to purchase Aeyon, a leader in digital transformation for the U.S. Federal government. Post-mergers, these two acquisitions would add 875 consultants and professionals to CGI. In the quarter, we continued to deliver a strong return on invested capital at 16.1%, up 40 basis points year-over-year, demonstrating our proficiency and discipline on deployment of capital. At the end of the quarter, CGI had $2.7 billion of cash readily available and access to more if needed. As part of our profitable growth strategy, CGI capital allocation priorities are primarily focused on investing back in the business and pursuing accretive acquisitions. Additionally, the company has the flexibility to use a portion of its free cash for the repurchase of its stock.

As announced this morning, CGI Board of Directors has approved a dividend program under which the company intends to pay a quarterly cash dividend of CAD 0.15 per share, starting in the first quarter of fiscal 2025. The initiation of this program represents an additional mechanism to return value to our shareholders, while continuing to maintain our financial flexibility to invest in our build and buy profitable growth strategy. 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?

George Schindler (President and CEO)

Thank you, Steve, and good morning, everyone. Our team delivered third quarter results that again reflect the disciplined execution of our plan to be a partner and expert of choice for our clients, an employer of choice for our consultants and professionals, an investment of choice to deliver shareholder value. In the quarter, we continued to proactively manage the fundamentals of our business. We delivered sustained margin expansion and EPS accretion, driven by the continued diversification of our business mix through growth of recurring revenue. Importantly, our operational excellence actions continue to contribute to our strong earnings. Our cash from operations increased up 21% year-over-year on the strength of quality client delivery. As anticipated, our revenue growth and overall bookings in the quarter continued to be largely comprised of managed services and IP engagements, which help clients accelerate cost savings and progress business transformation.

As such, constant currency revenue growth in IP-based services was up 5.2% year-over-year, and managed services revenue was up 1.5%, offset by continued softness in systems integration and consulting. Bookings were $4.3 billion, with a managed services book-to-bill of 139%, and an IP book-to-bill of 129%, both of which were largely driven by government sector awards. In fact, government sector wins comprised just over half of total Q3 bookings, with a book-to-bill of 164%. More clients prioritize the services and solutions necessary to implement current mission objectives and embed flexibility to support evolving policies, all in line with the natural cycle of government.

CGI's IP solutions were at the core of driving the strong government bookings, as clients increasingly turn to CGI's proven industry-specific IP solutions to raise their operational efficiency, while also gaining benefits from embedded security and innovation, including AI. In the quarter, we continued to see clients exercising caution in their spending on standalone consulting and system integration projects. As an end-to-end services provider with strong managed services, relationships, and market-leading intellectual property, our bookings in the quarter are reflective of our positioning for continued strong client interest in managed services and software as a service. For example, Michelin selected CGI to deliver an open and green IT ecosystem to enable business innovation and support enterprise-wide digital transformation.

CGI will deliver a range of IT modernization services, including use of AI technologies, through a mix of proximity teams in France and the U.S., as well as global delivery teams in India and Morocco. The U.S. Department of State's Bureau of Consular Affairs extended its relationship with CGI through a $378 million award. Under this award, we will deliver end-to-end passport application processing services in support of the issuance of more than 21 million passports and travel documents annually. Several local governments in Finland named CGI as their partner for transforming healthcare service delivery through CGI's OMNI360 Patient Information Platform. This will also create a foundation for broader use of AI in Finland's healthcare system. Harley-Davidson Financial Services selected CGI for a new engagement to modernize the company's loan origination system, replacing disparate IT platforms with a unified CGI Credit Studio solution.

Under this agreement, CGI will deliver an AI-enabled platform that introduces greater flexibility for dealers and an intuitive buyer experience. The French Ministry of Justice extended its partnership with CGI to drive the modernization of its HR system. Our consultants will leverage their industry knowledge, as well as their expertise in SAP, to implement a new platform and transform key processes. A major North American bank selected CGI to modernize its wire room, leveraging the CGI All Payments, a modular and cloud-based platform. The solution will enable the bank to retire legacy systems, reduce operational costs, and more easily adapt to new industry standards and regulatory requirements. Each of these examples are the types of recurring revenue engagements that serve as a base to enhance our resilience and stability for the future.

CGI's third quarter results underscore the ongoing value that our talented consultants and professionals deliver for clients every day. In the quarter, we again saw rising levels of client satisfaction, notably for the innovation we bring to our engagements, including through the use of AI technologies. I would like to recognize CGI's 90,000 consultants and professionals for earning the trust of our clients. Through their expertise, insights, and commitment, they're helping clients around the world achieve tangible business and mission outcomes. This is particularly important given today's dynamic market conditions. Looking ahead now to the demand environment. We are starting to see some underlying signs of stability in the macro business environment. This is making it possible for our clients to begin solidifying their future plans. Over the past few months, we increasingly see differentiation in terms of pace and focus of key digitization investments by our clients.

In short, each client is forging a unique path forward, and it's incumbent on partners to meet them where they are and devise the right combination of services and solutions to help them progress their individual business objectives. This evolution towards differentiated client needs matches well with CGI's greatest strengths, particularly our client relationship proximity model, our end-to-end portfolio of services, and our global network and scale. While we do expect to see continuation in delays in the timing of decisions, particularly for standalone SI&C projects, client interest remains strong for the value proposition CGI can deliver through our end-to-end offerings. This positioning is validated by CGI's pipeline of opportunities over the next year. The IP pipeline is up by more than 15% year-over-year, with significant increases in transport and logistics, manufacturing, and energy.

The managed services pipeline is up by more than 40% year-over-year, with sharp increases in government, insurance, banking, manufacturing, and retail. The pipeline of SI&C opportunities across several commercial industry sectors is rising compared to this time last year. Importantly, we saw some green shoots in our third quarter results, further pointing to stabilization of the business environment. For example, the number of total open billable positions ticked up on a sequential quarter basis. CGI's utilization was also up on a sequential quarter basis as we continue to align talent to those areas where we see growth, largely in the government and utility sectors. Hires to support growth in Asia Pacific were up on a sequential quarter basis as more commercial industry clients, notably in banking, retail, and manufacturing, are leveraging CGI's offshore centers of excellence.

CGI continues to make targeted investments in our talent and our end-to-end services to best partner with clients as they solidify and begin re-accelerating their digital initiatives. For example, we are enhancing our managed services delivery approach through the expansion of our CGI DigiOps platform, an integrated digital-first delivery suite. This platform delivers higher quality insights for faster client decision-making, better performance and system availability, and cost savings for clients through the use of AI technologies. For our SI&C services, we continue to invest in our emblematic offerings, methodologies, and talent in areas such as business model transformation, change management, responsible use of AI, and enterprise architecture. We are accelerating the integration of generative AI into our IP solutions portfolio through our signature CGI PulseAI platform, which also enables clients to more easily integrate these new technologies into their existing and new solutions.

In line with the investment we announced last year and rising client interest, AI and GenAI technologies are increasingly integrated into our engagements. In Q3, the number of projects incorporating AI rose 20% on a sequential quarter basis. Third quarter bookings that integrated AI technologies remained strong, including wins for the top 50 auto parts supplier to establish a GenAI center of expertise and help evaluate and optimize ROI-led use cases, a European logistics company to conduct an AI maturity assessment to evaluate organizational readiness and capabilities, and a space industry client to assess the creation of new digital marketplace that integrates space and AI technologies to enable rapid response to natural disasters.

As Steve mentioned earlier, we are updating our use of cash strategy to incorporate a dividend program as an additional mechanism to deliver value to our shareholders and to broaden our investor base, while maintaining financial flexibility to continuously invest in growth opportunities. With a strong balance sheet and liquidity, CGI will continue to prioritize capital allocation strategies that drive profitable growth and enhance value for shareholders through investing in our business, pursuing accretive acquisitions, ranging from metro market to large transformational opportunities, repurchasing our stock and/or paying down our debt, and now distributing a dividend. Regarding our strategic priority to pursue accretive acquisitions, I'd like to expand on the two acquisitions announced subsequent to the close of the quarter. In Canada, the acquisition of Celero's credit union business complements and expands CGI's core banking service offerings to an additional 90 Canadian credit unions nationwide.

Our services to credit unions are now coast to coast, covering more than two-thirds of the credit unions across Canada. I would like to warmly welcome the 150 new consultants and professionals who joined CGI from Celero. And in our U.S. Federal operations, we announced a definitive agreement to purchase Aeyon, a leader in digital transformation for the U.S. Federal government. This acquisition, pending regulatory approvals, will further complement and expand our U.S. Federal capabilities and relationships, including with NASA, the FAA, the Office of the Secretary of Defense, and multiple branches of the U.S. military services. Upon final closing of the acquisition, 725 Aeyon employees will join CGI, bringing deep expertise in a range of services such as data management and analytics, logistics and supply chain, and AI technologies.

We are in active dialogue with additional merger targets at all stages of our pipeline and are committed to merging with like-minded companies that are complementary to our geographic footprint, client base, and end-to-end portfolio of capabilities. Our operational strength, stability, and financial capacity will continue to enable us to move quickly with discipline on the right opportunities of all sizes. In closing, we will continue to manage the fundamentals of our business and invest in our build and buy profitable growth strategy to further deepen our client relationship proximity model, our end-to-end portfolio of services, and our global network and scale. As each client forges their unique path forward, we will continue to devise the right combination of services and solutions to deliver tangible, trusted business and mission outcomes for our clients. Thank you for your interest and support. Let's go to the questions now, Kevin.

Kevin Linder (SVP of Investor Relations)

Thank you, George. Julie, can you please share the logistics for the Q&A?

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. If you'd like to withdraw your question, press star two. One moment, please, for your first question. Your first question comes from Daniel Chan from TD Cowen. Please go ahead.

Speaker 6

Hi, good morning. George-

George Schindler (President and CEO)

Hi.

Speaker 6

The dividend's been something that's been talked about for a while. Can you shed some color on why now is the right time to initiate the dividend?

George Schindler (President and CEO)

Yeah, you're, you're absolutely right. We've been, we've been discussing the dividend over the years. As I've mentioned before, we, we review our use of cash priorities with the board of directors on a regular basis, including the dividends. It was determined by the board that we could include the dividend as an added mechanism of returning value to our shareholders while maintaining our overall cash priorities to drive EPS growth. So it's really just a matter of maturity. Steve, I mean, maybe you can talk a little bit about the cash generation.

Steve Perron (EVP and CFO)

Yeah. Look, thank you for the question. We have strong cash, as you said, and it's pretty much stable quarter over quarter, year over year. But it will not change our strategy at all. What we want first, the priority is really the investment in our business, and also we want to continue to deploy and allocate the cash to accretive acquisition. So, that's why, you know, the first thing is really internal investment and also M&A. But in addition to that, as George mentioned, we believe that by introducing this dividend program, we're gonna attract other investors. And that's pretty much the reason why we have done it now.

Speaker 6

... Thank you. That makes sense. And maybe a related question, maybe just any color on what you're seeing in the M&A environment. It, it sounds like you're still pretty active, but, any color around, pricing, and the willingness of, of, other companies to sell? Thank you.

George Schindler (President and CEO)

Yeah. No, thanks for the question, Dan. Yeah, the more reasonable valuations are holding. Even with PE being slightly more active, the valuations are holding. I think there's a lot of sellers believe this is the right time to combine entities. And so we're having, as I mentioned, discussions at all stages of our pipeline, including the later stages, bringing these two we just announced over the line, but there's more behind that. So we believe it's becoming a more active environment. We're getting more inbound calls as well. Now, they tend to be smaller companies on the inbound side, but we're even getting more inbound calls, so it's still a pretty active environment.

Speaker 6

Thanks, George. I don't know if you'll be on the next earnings call, but if not, best of luck. It's been a pleasure working with you.

George Schindler (President and CEO)

Thanks a lot. I appreciate it.

Operator (participant)

Your next question comes from Suthan Sukumar from Stifel. Please go ahead.

Speaker 7

Good morning, gents.

George Schindler (President and CEO)

Suthan?

Speaker 7

I wanted to...

George Schindler (President and CEO)

Yep.

Speaker 7

Good morning, guys. Can you hear me?

George Schindler (President and CEO)

Hi. Yep, we can hear you now, Suthan. Yep.

Speaker 7

Okay, great. Just wanted to kind of touch on you know, your comments about you know, seeing incremental signs of stability ahead. And, you know, when you guys are thinking about the sort of the recovery in the demand environment, as you look out in the course ahead, or- and, and really also on the growth side of things, is that, you know, is that largely dependent on a recovery in in more discretionary IT spend, or, or, or do you guys see a potential and pickup in, you know, more on the managed service side and the conversion of that large large backlog that you have there?

George Schindler (President and CEO)

Yeah, I think, Suthan, I think it's a combination. Obviously, as the discretionary picks up, that's that augments some of the growth that we're seeing, or said differently, a lot of these managed services projects, as they come online, are offsetting the fact that we do see a slower demand environment on the SI&C. But as I've said before, I do believe that, you know, clients are making decisions, future plans on their digitization. We play on both sides. We play on the cost-saving side, but we also play on their growth side. So, but I do believe that some of the green shoots that we're seeing will take hold. But it's gonna be, you know, it's still not consistent, still not uniform.

As I mentioned in the opening, you know, every client's looking at this a little bit differently, and I'd still say that caution reigns, even on the bigger deals.

Speaker 7

Gotcha. Thank you.

George Schindler (President and CEO)

Yep.

Speaker 7

For my next question, I wanna touch on the Aeyon acquisition, 'cause, you know, it looked like a pretty compelling deal in the U.S. fed space that obviously expands-

George Schindler (President and CEO)

Yeah

Speaker 7

your exposure in that segment. And does Aeyon come with any IP? And, with respect to, you know, what you acquire here, is this an opportunity to go deeper within existing relationships that you have within the Fed, or does this open you up into newer relationships, you know, across the segment?

George Schindler (President and CEO)

It does. There is some overlap, but it does, for sure, open up some new avenues for us, and particularly in that all important national security space. And that's where a lot of the spending right now is going in the U.S. Federal government, just given everything that's going on in the world. And so they specialize, though, in the data analytics and the business operations, including finance and logistics and supply chain. So new avenues, but very similar and like-minded skills in those areas. The other thing I would add, and this is, I think this is important to add, is they have some complementary government-wide contract vehicles.

They provide for maybe a more limited competition, expedited procurement pathway for certain services, and those services are those back office automation services that we're very strong in. So I think it's not only are they gonna bring some new clients in that all-important national security space, but they're gonna give us some avenue to expand on our existing services with other clients. So that's a real positive. No IP, no intellectual property to speak of, so it's straight SI&C, but again, in the area that governments around the world, and certainly the U.S. government, is spending on in national security.

Speaker 7

Okay, perfect.

George Schindler (President and CEO)

Yeah.

Speaker 7

Thank you for the color. I'll pass the line.

George Schindler (President and CEO)

Thank you.

Operator (participant)

Your next question comes from Thanos Moschopoulos, from BMO. Please go ahead.

Speaker 8

Hi, good morning.

George Schindler (President and CEO)

Hi, Thanos.

Speaker 8

Hey, George. Starting off on margins, I won't ask if there's room for margin expansion because I know the answer is always yes. But if we think about the potential drivers of margins, if you think about some of the potential drivers, I mean, is it really about maybe the IP mix and the managed services mix increasing? Is that what you'd expect to be the margin driver over the next while?

George Schindler (President and CEO)

Yeah, well, you know, you didn't ask me, but I'm gonna say it anyway. You know, we talked last time about kind of the improvement that was coming, both from the cost optimization, but also kind of that mix of business, and that's exactly what you saw this time in the adjusted margin accretion of the 30 basis points. And that should continue, right? Because as we add more of that managed services growth, including global delivery, right? You see the margins from global delivery, so that's a piece of that mix. So it's both managed services, but also leveraging the global delivery. IP, as a percentage of revenue, which did tick up again, this quarter. But we still have some tailwind from the cost optimization program.

Then, you know, as I always say, Thanos, there's still an opportunity for us to have a continuous improvement in some of the geographies, in not just the revenue mix, but also the SG&A mix and the project execution. So it's a combination of those factors always, but yes, driven by the managed services and the IP.

Speaker 8

In U.S. Federal, the strength you saw in bookings, is there some election dynamic that's contributing to that, or would you not attribute to that?

George Schindler (President and CEO)

No. Yeah, it would. There's definitely a piece of that. And if you recall, we did discuss this on last quarter's call, that we expected that there was a lot of RFPs last quarter, actually lighter bookings. But I mentioned that we would expect those to be adjudicated in the second half. The other, though, is exactly as you said, there's some large government bridge contracts in the quarter as they prepare for an election and transition. So what the bureaucracy does is says, "Okay, we don't know who's gonna get elected.

Of course, they'll come in with new policies, but we got to keep things running in the interim. And so you see a lot of these bridge contracts, and as I mentioned, they're a little bit longer than they've been in the past just because of some of the differences, let's just say, in the policies that could come out. And so they're looking at making that a little bit longer because they think it'll be maybe a little bit longer transition. So that's what's going on there, exactly as we would have anticipated, and the team is doing a great job to win those contracts through their efforts and their outstanding delivery for the U.S. government.

Speaker 8

Thanks, George, and I'll echo the congrats on your upcoming retirement and your successful tenure at CGI. I'll pass the line.

George Schindler (President and CEO)

Thanks a lot, Thanos. Really appreciate it.

Operator (participant)

Your next question comes from Surinder Thind from Jefferies. Please go ahead.

Speaker 9

Thank you. George-

George Schindler (President and CEO)

Surinder, good to have you on the call.

Speaker 9

Hey, thank you, George.

George Schindler (President and CEO)

Good to have you.

Speaker 9

Appreciate that. At least I get in one call with you before your retirement, so there you go. Big picture question here on the AI strategy. As you look to build solutions for clients, is there a lot of third-party integration of solutions, meaning the ChatGPT of the world, the Gemini, into those solutions, or are there more proprietary builds of, like, smaller models that ultimately you'll have the IP over? Like, how should we think about that or the evolution of that?

George Schindler (President and CEO)

Yeah, well, it's a combination. It's a combination. So we have our signature intellectual property is called Pulse AI, and it's a multimodal approach that allows you to leverage those large language models, but also develop some of those closed-loop models that most of our clients are really looking at. And that's why I mentioned the last several calls, that our AI work is largely helping clients prepare their data and their architectures to actually leverage the AI in a bigger way. I don't think anybody is looking at just using the large language models that are available, the ChatGPTs of the world. They're gonna leverage pieces of them, but not exclusively. They want to build closed-loop elements.

So yes, there already is some CGI intellectual property and make that easier to integrate. There will be other CGI intellectual property built on top of those models that is industry specific, and we're already announcing working with some of the hyperscalers on exactly that. So, some more to come on that, but it is still early days for sort of Surinder.

Speaker 9

Thank you. And then, more of a near-term question here, just on the managed services backlog. Obviously, continues to see good growth. But can you help us understand why maybe it's not converting faster, given ultimately these are highly beneficial projects from, from a client perspective?

George Schindler (President and CEO)

Yeah, well, I, I kind of alluded to that a little bit. You can see the bookings and the growth profile and the SI&C. Some of that managed services is coming on online. It's just being masked by the softness on the other side. And that's the, that's the goodness of the resilience model of CGI, right? Having that balanced portfolio allows us to continue to move forward even in the current environment. But they are coming on board. Having said that, they are slower. It's slower to convert from pipeline to booking. It's slower to convert from booking to actually start the project.

Speaker 9

It's slower to go from the start of the project to the actual engagement of revenue, 'cause, you know, there's always a transition. Clients are being cautious on all of the above, so they're being extra cautious on, you know, on a lot of these managed services deals we take on. People from our clients are being very cautious in how they do that in the current environment. So it's just slower all the way around, but be that as it may, yes, we are converting some of those on. It's just offset by some of the other softness.

Thank you.

George Schindler (President and CEO)

Yep.

Operator (participant)

Your next question comes from Jerome Dubreuil from Desjardins. Please go ahead.

George Schindler (President and CEO)

Jerome?

Speaker 10

Hi, good morning. Thanks, thanks for taking my question. Congrats, George, from me as well, and, François, first question for me is, looking at the margin improvement, and, and this is very healthy, obviously, but I'm wondering if we're nonetheless in a phase of high or accelerated technological investment that maybe kind of offset your margin improvement from the cost improvement program. So is there work being done right now to future-proof the organization that is having an impact, or it's kind of normal investment that we're seeing right now?

George Schindler (President and CEO)

Yeah, it's a good question. As you know, we announced a pretty big investment to make sure that we are positioned for how to leverage AI. A lot of that right now is going into our IP and into our talent. But it's really just a shift of the investments. We're always investing in training. Now, it's focused on AI. We're always investing in our IP. Now, it's focused less on maybe some of the generic feature functions, and now it's more focused on leveraging AI into the IP. So, yeah, there's an uptick, but it's...

We're taking some of that from the cost optimization, which is why I said that you wouldn't see all of the cost optimization go into that. But I don't think it prevents us from having the incremental improvements that you've come accustomed to seeing on the margin side. And we've got a number of different levers, as I mentioned earlier on that.

Speaker 11

Yep, pretty clear. Thanks. Second question from me is more on a geographic standpoint. I mean, we're looking at expected GDP growth everywhere in the world, and it's not necessarily the same as it used to be or as it was when you took your decisions in terms of capital allocation in the past. Where do you think your best marginal dollar is invested right now? Has there been a change in terms of where you want to be operating globally going forward?

George Schindler (President and CEO)

Yeah, no, it's a great question. It's something we look at. We're doing our planning for fiscal year 2025 right now. Of course, it's a rolling three-year plan that we're always updating on an annual basis. But... And, of course, we use some of that input that we get from the voice of the clients. I mentioned some of the early findings there, and it's kind of that dual track agenda of both cost savings and optimization, but also some of the growth. But look, I don't see any big changes. We've been pretty deliberate in the markets and the clients. Remember, 85% of our work is for enterprise-level clients. They're global by their very nature.

We're very deliberate in where we focus our business efforts in the geographies, but you see how we're organized. So I don't see any big changes in that, regardless of this. I agree with you, kind of we see an elongated U from a recovery standpoint, so it's not necessarily gonna be the same growth. But I think there's gonna be some catalysts. As companies continue to look for how they can do more with less resources, less people, I think we do see some of the demographics changing, particularly in Europe, where not just from an IT perspective, but just from an overall resource perspective, I think you're gonna see some pressures on just finding available talent.

That's all gonna drive a catalyst, we believe, for continued investment in, in digitization. And of course, tools like AI, it's not just AI, discrete AI, but tools like AI, are gonna allow us to, to make that happen. So, we still see, you know, opportunities in, in all those areas. It doesn't really change our, our capital allocation priorities.

Speaker 11

Great. Thank you, and good move on the day then.

George Schindler (President and CEO)

Thank you.

Operator (participant)

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

Speaker 12

Hi, good morning. I was hoping-

George Schindler (President and CEO)

Hey, Stephanie

Speaker 12

... to circle back on the consulting, the consulting side of the business, and just curious how you think about that part of the business, specifically heading into fiscal 25, and, and what you're thinking about in terms of a recovery, as in that consulting side of the business.

George Schindler (President and CEO)

Yeah, it's very interesting, Stephanie. And I, I mentioned this before. You know, in prior slowdowns, there's almost no activity... and on the consulting side. Clearly, there's been an impact and a slowdown on consulting, but it hasn't gone to nothing. And the reason is that, and you, you even heard a lot of our AI efforts right now, they're actually driven by consulting. Consulting on the data side, consulting on the business transformation side, consulting on the change management side, as clients really think through what models they wanna have for the future. So, you know, I, I think that it will be a slower ramp-up in recovery.

And as I also mentioned, consulting is maybe embedded in a lot of our other activities, even in some of those managed services deals, as they look at those. So, and also our IP, some consulting is embedded in our IP sales. So, you know, it's still gonna be an important element. It's smaller by its very nature, but it still is that tip of the spear, and we will continue to invest responsibly. And as I said in the opening, meeting clients where they are. So it, but it's still important to us and to our clients.

Speaker 12

That makes sense. And then, in terms of IP as a percentage of revenue and bookings, it was quite solid in the quarter. Can you talk a bit about what you're seeing in terms of just demand between geographies, verticals, government, commercial, anything that you want to call out there?

George Schindler (President and CEO)

Yeah, you know, IP continues to be increasingly strong in Europe, which has not been historical, and that's good. Still really focused on operations, and a lot of our IP is there. So HR, payroll, secure document handling, the patient information system that I mentioned, it's all more on operations focused. Still a lot of growth in government, and it's governments around the world, North America and Europe, and utilities and health. So it's nice to see.

Speaker 12

That makes sense. George, I'll echo everybody's congrats on your retirement. It's been a pleasure working with you.

George Schindler (President and CEO)

Thanks a lot, Stephanie. I appreciate it. Likewise.

Operator (participant)

Your next question comes from Paul Treiber from RBC. Please go ahead.

Speaker 13

Oh, thanks so much, good morning.

George Schindler (President and CEO)

Paul, great-

Speaker 13

Could you elaborate more on your comments about clients having differentiation and differentiated needs here? And then specifically, it seems some of your competitors' results have been all over the place this quarter. Do you think some of that, some of your competitors have been negatively impacted by that evolution, and that CGI is relatively better positioned for that change?

George Schindler (President and CEO)

Yeah, you know, it's a tough one for me to mention there, but I think where you see some of that, some of those variations, exactly what I'm saying, you know, every client is kind of doing this at a different pace. And so, you know, but you got to meet your client where they are, and you got to work with them. So if they're needing a little more consulting, and that's not as much revenue, that's what they need, that's what you're gonna give them. If they're ready for that big managed services deal, you got to be there with that value proposition, so they understand that.

You got to be providing them that software and service so they can spend less capital, even if they ultimately want to build some surround systems around that, but they're not ready to do that yet. And so flexibility is a key attribute, and that's kind of the hallmark of CGI in working with our clients. Because we're so client-focused, given our proximity model and our understanding. So, I don't know if that's, you know... I'm not gonna comment on others, but I can tell you that's where we're finding the biggest opportunity. It's also why I think you also see our pipeline going up because of that approach.

Speaker 13

Secondly, could you speak to the environment in France? You know, some others have called out a slowdown through June as it relates to the election and whatnot. Have you seen any changes through the quarter, and how are you thinking about France in the near term?

George Schindler (President and CEO)

Yeah. So I was just talking to our leader in France. You know, the current situation is, you know, it's not just causing a delay in government, as you'd expect, right? As the government forms, independent of the wonderful Olympics that are going on. But the commercial markets are also taking a bit of a wait-and-see approach. What's... You know, how is this gonna shake out? And so if caution was already reigning from a macro perspective, you know, I think we're seeing the same thing that you're mentioning, that France is definitely taking a wait-and-see approach, or at least our clients in France are taking a little more of that wait-and-see approach, which does have a short-term impact.

Having said that, no change in the longer-term outlook. You saw our bookings were strong in Western and Southern Europe, and a lot of that, of course, is dominated by France, and our pipeline continues to grow there. So, I think it's more of just a here-and-now point in time. But yes, we are feeling it and seeing it, and you see that in our results.

Speaker 13

... Thanks for taking the questions, and George,

George Schindler (President and CEO)

Yep.

Speaker 13

Enjoy the Chairman.

George Schindler (President and CEO)

Thank you. I appreciate it.

Operator (participant)

Your next question comes from Steven Li, from Raymond James. Please go ahead.

Speaker 14

Thank you. Just a couple of questions for me. Finland, Poland, Baltics, big jump in margins. Is, is that 16%, 17%, is that sustainable or any one-time factor there? Thanks.

George Schindler (President and CEO)

I missed the first part.

Speaker 14

Finland, Poland, Baltics.

George Schindler (President and CEO)

Finland, Poland, Baltics. Thank you. Yeah, it was just breaking up a little bit in the beginning. Yeah, so Finland, Poland, Baltics, so as you know, we have a lot of strong intellectual property there, and so I mentioned called out the fact that we had some good IP sales there. So, you know, is that sustainable exactly at that level? You know, it's they run a very good business there. As you know, we have a pretty good position in the marketplace, which is allowing us to play into this social and health reform with this IP. So, you know, at that exact level, I don't know. But, you know, that's where we want to be. So that's the team's doing a great job.

Speaker 14

Got it. And then, on the AI-related bookings, I just want to check. I think I heard you say up 20% sequentially. What, what is that in, in dollars? Is it like $300 million in AI bookings?

George Schindler (President and CEO)

Yeah. Yeah, no, I'm glad you asked that question, because it, what we had was an increase of 20% in the number of engagements. But those engagements are not large, so you don't see anywhere near a 20% increase in bookings. In fact, although we're up obviously on a trailing twelve-month basis, the bookings were flattish to even down a little bit in the quarter on AI. But the number of opportunities keep increasing because it's a bit of the tip of the spear. Everybody's kind of in a different place on AI. They all recognize they want to use it, but they want to use it for business impact. And, and so they're really taking a very responsible approach, and we're helping them with that.

A lot more engagements, but they're all still pretty small to you.

Speaker 14

Yep, that's great. Thanks a lot, guys.

George Schindler (President and CEO)

Yep.

Operator (participant)

Your next question comes from Richard Tse from National Bank. Please go ahead.

Speaker 4

Yes, thank you. A number of your competitors have flagged recently that they're seeing price pressure, becoming an increasingly common occurrence in the market. Like, what would CGI be seeing? And then, is that kind of something that's temporary, given the backdrop, in short term, or is it something, more structural here?

George Schindler (President and CEO)

Yeah. So here's what... You know, I think it's 2 answers to this. There's some short-term pricing anytime you have a macro environment like we have right now. But I think the more structural is what I've been talking about, we've been talking about on this call for a while, the ROI lead. You know, we see clients looking for innovations to improve outcomes, which does save them money, with improved efficiencies, which does save them money without sacrificing quality. That's what they're looking for. So it's outcomes, both short and long term, more than inputs. It's overall solution, more than just price or point price. And that's why I mentioned, you know, our investments in CGI DigiOps, our investments in putting IP with our AI, our investments in the global delivery approach.

These are the ways that you're going to get that price competitiveness without that unit price input, you know, rate discussion that you might be thinking when somebody calls out pricing. And I'm not saying some of that doesn't happen point in time, but structurally, I think, you know, we actually see clients being far more sophisticated in what they're looking for and how they're looking for it. And you know, I would say that more often than not, the discussion ends up with: "Are you going to be able to give me the quality with those operational efficiencies?" Not the other way around.

Speaker 4

Okay. Helpful. And then just sort of with respect to the regulatory filings, in the MD&A, under the EBIT, sort of margin section, within sort of U.S. Federal, you sort of cited a revaluation of cost to complete specific projects. Just kind of wondering if you may be able to elaborate on those, those costs.

George Schindler (President and CEO)

Yeah. Well, it's just, you know, it's a fixed-price project that is taking longer. That's about as direct as I can get there. We're not. You know, we don't call out clients or project names, and it was really one project, but it's a big project, and we called it out because it did have an impact, but it's largely behind us, and we move forward.

Speaker 4

Okay, fair enough. And, you know, it's been great working with you. All the best, in your retirement.

George Schindler (President and CEO)

Thank you so much, Richard.

Julie, we have time for one more question, please.

Operator (participant)

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

Speaker 5

Good morning, everyone. Thanks for taking my question. So, going ahead on this geographic discussion, I actually wanted to get some more color on the variances in the growth that you're seeing across geographies. So when we look at the global technology services players, we see a lot of them benefiting from the growth across international segments, and North America seems to be picking up. But looks like in your case, Europe fared better than North America. So if you could provide some color on these variances, and if you could provide some color in terms of international growth potentially, as some of those geographies continue to grow.

George Schindler (President and CEO)

Yeah. So on the geographies in Europe, we saw the same thing. And if you really look at it, it's the larger, the largest geographies, I should say, in Europe, are kind of more impact-- we saw more impact to the current macro environment. And part of that is just they tend to be larger enterprise clients, so they're more impacted by the global economy. So it's not just that we're working with a company in France, that company in France has global operations. Same thing in Germany, same thing in the U.K. on the commercial side. In some of their smaller geographies, like Finland, Poland, and the Baltics, we have some clients there that are more specific to the region, and so they are a little bit more nimble.

They're moving a little bit faster, and so you see our ability to drive some more growth there. But I think, again, and that gets back to my differentiation comment from the opening, that every client is operating a little bit differently. As you know, we don't play into some of those international geographies that are going a little faster. But I would suggest there's maybe a similar situation there. They're just going to be a little more agile, more nimble, and a little more faster to realize some of those green shoots. That's what I would say.

Speaker 5

That's helpful, George. And just second question here on M&A. So over the last few quarters, you've closed some acquisitions, announced Aeyon yesterday. I wanted to get some color in terms of what are the verticals that you, as a company, are targeting and some of the technologies and skill sets that you're looking at going forward. Because in the past discussion, we assumed IP was an important element of this M&A strategy, but it looks like Aeyon did not come with an IP here. So trying to understand what are we focused at going forward?

George Schindler (President and CEO)

Yeah. So now, it's a, it's a great question, Divya, and it gives me an opportunity to, to maybe, restate. What we're looking for, primarily when we're doing M&A, are new client relationships with either existing geographies, where maybe we can continue to grow our scale or new metros. So when we did the, Momentum, it was a new metro market in the southern U.S., in Miami. When we do Celero, when we do an Aeyon, it's about getting new client relationships. And, in the Aeyon's case, it's, national security. In Celero's case, it's credit unions, coast to coast, that we didn't have before. So it's always... Now, we get plenty, plenty of, strong capabilities, whether it's core banking in Celero, whether, or payments or, data and AI, with, with Aeyon. You get a lot intelligent automation.

You get a lot of capabilities there, but it's actually not about a specific vertical. It's about building out a metro market across verticals with all those capabilities. That's what we believe is the right way to continue to build the business for the longer term. And, and so that's what we're looking for, and all those acquisitions fit the bill.

Speaker 5

That's very helpful. If I may ask one small question, and I think I know the answer to it already, but could you provide some sort of- you, in one of your comments, mentioned that the guidance, the valuations outside are reasonable. Is there a reasonable valuation multiple that the company is targeting or looking at?

George Schindler (President and CEO)

You know, yeah, it's... Sorry, you broke up there at the end. Do you have another-

Speaker 5

No, no, that's, that's all. I was just trying to understand what's a reasonable valuation multiple.

George Schindler (President and CEO)

Yeah, well, I mean, I could maybe answer it this way. I can tell you what an unreasonable valuation is, and that's where we were. Where sellers were looking at multiples that didn't make any sense and would've taken 50 years for us to get a return on that investment. That makes no sense. And that's where a lot of these sellers were. They were... What you saw is some of these digital transformation companies just had outrageous multiples that didn't make a whole lot of sense, at least in the context of a CGI and our discipline, and that is not where it is.

Our historical, Steve, is somewhere between 1x, 1x, maybe a little under 1x, a little over 1x revenue, depending on the margin of the asset. But, that's where we, you know, we see more reasonableness there.

Speaker 5

That's helpful to me. Thank you so much, and congratulations on the time.

George Schindler (President and CEO)

Uh-huh.

Speaker 5

It was great working with you.

George Schindler (President and CEO)

Thanks a lot, Divya.

Operator (participant)

I will turn the call back.

George Schindler (President and CEO)

Okay.

Operator (participant)

- over to Kevin Linder for closing remarks.

Kevin Linder (SVP of Investor Relations)

Thank you, Julie, and thanks, everyone, for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1-877-674-7070 and using the passcode 875394. As well, a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1-905-973-8363. Thanks again, everyone, and look forward to speaking soon.

Operator (participant)

This concludes today's conference call. You may now disconnect. Thank you.