Cgi Inc Q3 FY2021 Earnings Call

Thank you, Paul, and good morning, everyone. With me to discuss CGI's third quarter fiscal 2021 results are George Schindler, our President and CEO; and François Boulanger, 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 28, 2021. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q3 MD&A, financial statements and accompanying notes, all 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 encourage our investors to read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I will turn it over now to George to give a brief overview of Q3, François will then review our Q3 financials and then George will comment on our business and market outlook. George?

Thank you, Maher, and good morning, everyone. I am very pleased with our team's Q3 performance, delivering results according to our previously announced plans, returning to year-over-year revenue growth on a constant currency basis, delivering double-digit GAAP and adjusted EPS accretion for the quarter and first nine months of the fiscal year, generating strong cash from operations, bringing the last 12-month total to over $2 billion, a 12.4% increase over the previous 12-month period, securing significant new and expanded work with clients, raising our last 12-month book-to-bill to 120% and surpassing the prepandemic hiring of consultants on both an overall and net basis in the quarter resulting in a 2.6% increase in total headcount year-to-date. These strong results reflect the continued trust our team has earned from clients as we partner with them to help shape and implement their digital transformation agendas. Again, in the quarter, demand accelerated as more clients, particularly in commercial industries, began to reinvigorate projects that had slowed during the earlier stages of the pandemic. We delivered constant currency revenue growth across every commercial sector this quarter. We saw particular strength as follows: 9.3% global growth within manufacturing, retail and consumer services, led by Western and Southern Europe with year-over-year growth of over 20%. Growth globally of 5.4% in financial services led by Central and Eastern Europe at over 18%, and overall growth of 4.7% in the communications and utility sector, led by North America with 21% growth. In our global government business, bookings increased on a year-over-year and sequential basis, reaching a book-to-bill of 123% in the quarter. We are seeing government clients begin to reprioritize future IT investments to reflect the changing public health and economic environment. This reprioritization is in areas of strength for CGI, including core technology modernization, cloud enablement, citizen services, space-related endeavors and cybersecurity. As such, the government sector pipeline increased in the quarter, up 18% since the start of this fiscal year. From an overall services mix perspective, bookings were up significantly for managed services with over $1 billion in new bookings compared to the same quarter of last year. And notably, the percentage of bookings that included IP were also up year-over-year and represented a book-to-bill of over 150%. Across every industry and geography, the pace of client demand continues to rise. CGI's combination of industry and technology expertise is providing clients with the right services to drive their digital transformation initiatives. For example, in the quarter, we were awarded numerous new modernization and digitization projects, including with Nexelis, an international life sciences firm, who recently selected us to lead the execution of their three-year technology transformation roadmap. As part of this transformation, CGI will modernize, secure and manage their end-to-end technology value chain, supporting their business agility, performance and growth; with a North American bank who extended its commitment to CGI in their commercial banking division. As part of this new five-year agreement, CGI will lead the ongoing evolution, upgrades and management of the bank's digital commercial banking platform; and for a European food and beverage manufacturer who selected us to lead the modernization of their production planning systems. CGI will provide strategic advisory services as well as implement a cloud-based industrial ERP platform. Consistent with the past few quarters, we not only sustained our incumbency with existing enterprise clients, we were also awarded net new work and/or expanded scope for both existing and new clients, growing our share of business. In the quarter, this combination of net new work and expanded scope comprised over half of total bookings. Now, I will turn it over to François to review our financial results, and will return afterwards to discuss the opportunities we are seeing to expand our market share going forward. François?

Thank you, George, and good morning, everyone. I'm happy to share with you the results of our third quarter 2021. As George mentioned, we returned to positive revenue growth in Q3 on a constant currency basis fueled by another strong quarter of bookings coming mostly from long-term managed services agreements. In addition, we delivered strong double-digit EPS growth despite a strong Canadian dollar causing headwinds in our reporting currency. We delivered revenue of $3 billion, up 3.5% year-over-year on a constant currency basis. This is a return to positive growth and an improvement over last quarter where we saw a 1.7% decrease year-over-year. IP revenues represented 22% of total revenues, up from 21% last year. Strong growth in constant currency was seen in the following geographies: Western and Southern Europe, up 12.8%; Central and Eastern Europe, up 12.1%; Asia Pacific, up 6.6%; and Canada grew 6.1%. Given the continued increased demand for our services, as reflected by the strong bookings in the last few quarters, we expect continued positive momentum. Total bookings of $3.6 billion were up 28% year-over-year, representing a book-to-bill of 120% for the quarter and lifting our trailing 12 months book-to-bill to 120% as well. I would like to call out a few strategic business units with strong bookings in the quarter, such as Canada with a book-to-bill of 170%, U.S. commercial and state government at 131%, Western and Southern Europe at 120%, and UK and Australia at 119%. Each of these seeing material improvement in new bookings. In fact, seven or eight proximity geographic segments now have a trailing twelve-month book-to-bill well above 100%. New business was 31% of bookings, an increase from the previous year's 27%. On a trailing 12-month basis, new business was 30% of booking versus 24% for the year ago. Our global backlog increased by $1 billion year-over-year and is strong at $23.3 billion. This backlog represents 1.9x revenue, the vast majority of which is comprised of long-term managed services engagements. Adjusted EBIT in Q3 was $477 million, while EBIT margins increased to 15.8%, up 110 basis points compared to Q3 last year. The year-over-year increase was mainly due to higher utilization rates, increased R&D tax credits and lower SG&A costs. We saw strong margin improvements in U.S. Federal and Scandinavia with margins up 540 basis points and 460 basis points, respectively. This was partially offset by lower margins in U.S. commercial and state government due to temporary effects from recent acquisitions and in the UK due to a nonrecurring contract provision. Our effective tax rate in Q3 was 24.9%, a reduction of 2.1 percentage points due to higher U.S. R&D tax credits. We now expect a lower tax rate for future quarters in the range of 24.5% to 26.5%. Net earnings were $338 million, and diluted earnings per share were $1.36, representing an increase of 36% year-over-year. This improvement was mainly due to a higher EBIT and lower restructuring costs. Excluding integration and restructuring costs, net earnings were $339 million or a margin of 11.2% and diluted earnings per share were $1.36, an accretion of 15.3% when compared to $1.18 in the same quarter last year. In the quarter, DSO was 44 days, down from 48 days last year. Cash provided by operating activities was $419 million, a decrease of $166 million year-over-year due to timing of collections and to the payment of previously deferred payroll and government tax programs related to COVID-19. For the last 12 months, cash provided by operating activities was $2.1 billion or 17.3% of revenue. This is an improvement of $229 million year-over-year. In Q3, we invested $471 million in our Build and Buy profitable growth strategy comprised of $85 million back into our business, mainly in IP and managed services engagements, $66 million on the acquisition of Sense Corp in the U.S., and $320 million to buy back our stock, canceling in the process 2.9 million shares of CGI. Buying back CGI stock has been an accretive and flexible way to return capital to our shareholders. Since the beginning of this fiscal year, we bought back 15.3 million shares at an average price of $98.16 for a total of $1.5 billion. As of the end of Q3, the company could purchase up to an additional 10 million shares under the current NCIB program. Net debt to capitalization remained unchanged at 31% versus Q2 and down from 32% last year. Looking ahead, our cash allocation priority remains the same, investing in our business, pursuing accretive acquisitions and buying back our stock. With cash of $1.3 billion on hand and a $1.5 billion revolver that remains fully accessible, we have $2.8 billion readily available and access to more if needed to support our Build and Buy profitable growth strategy. Now, I'll turn the call back to George to further discuss the insights and outlook for our business and markets. George?

Thank you, François. Last quarter, I shared preliminary findings from CGI's Voice of Our Clients proprietary research program, which encompasses in-depth interviews with business and IT executives on a range of strategic topics. These key findings are as follows: optimizing operations is top of mind with culture and IT supply chain modernization identified as critical areas to address. Environmental sustainability is now viewed as core to future value creation and meeting customer expectations for better, more innovative digital experiences remains of paramount importance. Our deeper analysis of this research has since revealed several additional insights that I will highlight today, particularly in terms of what we observe from leading digital organizations. Across all of our findings, we see proof points that we are, in fact, in the early stages of a complete digital rewiring of society. This is particularly the case when you consider the widespread use of technology across all facets of an organization's value chain and yet the lack of depth and technology penetration across the same value chains. Certainly, there has been progress over the past year with organizations large and small implementing new technology-based products and services at a record pace. Yet our research shows that only 20% of those organizations globally indicate that they are achieving the total expected return from their investment and digitization. A key contributor to this finding is the observation that much of the recent digital work has been to accessorize customer and employee touchpoints, as opposed to enabling a comprehensive digital enterprise. For those industries and organizations leading the way, our research identified three common characteristics of these digital leaders. They've been better at operating as aligned teams between business and IT and also delivering multi-shore agile modes. They've been faster in modernizing the entire IT supply chain while assuring security and data privacy, including relying more heavily on managed services. And they are addressing business transformation holistically, including culture change, ecosystem touchpoints and the integration of sustainability objectives. We are proud to partner with industry leaders who bring these characteristics to life. For example, we are partnering with a global manufacturer where we have over 900 consultants across five countries contributing to their enterprise digital transformation. Our teams provide multi-shore scaled agile services in support of their supply chain, customer experience and manufacturing operations. With the State of California to further digitize their tax systems, CGI is delivering solutions to improve citizen self-service, embed fraud detection and prevention, enhance business intelligence and increase operational efficiencies. And for a European manufacturer of green battery cells to help them enable the future of energy, we are working with one of our global partners, Microsoft to modernize the client's cloud ERP platform contributing to their sustainable production and renewable energy leadership. We believe these leaders will continue to accelerate digitization on all fronts innovating and adopting newer technologies at a faster pace in order to drive growth and profitability. And we will continue to collaborate with them as they invest, helping them harness the power of technologies such as machine learning, cloud, blockchain and 5G. In fact, we just announced a partnership with Nokia to build a 5G lab in CGI's innovation center in London, which will showcase the capabilities of both companies. Together, we will explore and apply the potential for how 5G can enable industrial digitization in multiple sectors from manufacturing to healthcare in areas such as autonomous robots, augmented and virtual reality and real-time remote control of machines. We believe the gap between the results that leaders are realizing from digital compared with all other organizations will spur a further acceleration of digitization and corresponding IT spend increases. These new investments will have a deeper focus on driving enterprise-level modernization programs that help break down and reconnect the silos in their systems, processes and data. Clients are increasingly turning to CGI given our global business consulting services, we help clients design the best path forward for their organization, including addressing culture and change management so that their transformation efforts are sustainable for the longer term. And through our managed services offerings, we can deliver immediate savings to help them fund critical digitization initiatives. All the findings from our proprietary research continue to represent longer-term shifts in client demand and a need for trusted enterprise partners. These shifts are in line with the investments we've been making and will continue to make in our Build and Buy strategy. CGI is one of the few global firms with the necessary combination of client partnership culture, proximity-based talent and end-to-end service offerings to help clients implement their digital strategies with agility and at scale. We also remain focused on progressing the buy side of our profitable growth strategy. The current market conditions are conducive for further industry consolidation, and this is driving growth in our pipeline of new opportunities and active discussions. Our buy-side focus is on prospective acquisitions that will bring CGI new client relationships in existing or new geographies, along with complementary in-demand consulting and technology skills to help clients advance their digital agendas. We remain focused on expansion within all CGI geographies with current pipeline momentum in Western and Southern Europe, Central and Eastern Europe, UK and Australia and the U.S. We continue to have the operational strength and financial capacity to move quickly with discipline on the right buy-side opportunities. In closing, we remain confident in our positive growth outlook for the future. Our strategic aspiration remains to double the size of the company over the next 5 to 7 years. Thank you for your interest and support. Let's go to the questions now, Maher.

Thank you, George. And operator, we'll go to the questions. But before we do, I just want to remind everyone that a replay of the call will be available either via our website or by dialing 1 (800) 408-3053 and using the passcode 7978334. As well, a podcast of this call will be available for download within a few hours. Follow-up questions after the call can be directed to me at (514) 415-3651. Paul, we will go now to the Q&A, please.

The first question is from Thanos Moschopoulos from BMO Capital Markets.

George, can you expand a little bit in terms of M&A? So you provided some geographic color on the pipeline, which is helpful. Slipping back, you've done two tuck-ins recently. But in general, it seems like you've been a bit quieter than your peers over the last few months. What's been the impediment? Has it been valuation? Has it been just finding the right cultural fit? And then in terms of what you're prioritizing, is the bulk of the effort focused on metro market tuck-ins or what types of assets are you looking at?

Yes. Thanks, Thanos, for the question. Yes, first, we do like both the HMB and Sense Corp mergers that we've had. They're performing exactly as we would have expected. And that's really the focus. The focus continues to be on those cultural attributes that allow us not just to bring somebody into the company to make the one plus one equal three, but to make them really thrive as part of the company. That starts with the cultural alignment. And remind you, for us, cultural alignment means those organizations have a deep client relationship. When they have that, one, they come with a lot of skills in both technology and in the functional areas, but they have those client relationships that allow us to bring the full suite of CGI services, the end-to-end services into those organizations, and that's what we're really remaining focused on. From a valuation perspective, you're absolutely right. It's a very active market that tends to drive to higher multiples. Private equity continues to play a role. That contributes to driving higher multiples. We remain disciplined on both our focus and strategy, but also in finding those cultural fit organizations. And with the specialty type of firms, you specialize in certain software or specialized in certain global delivery areas or a sector focus, maybe cybersecurity or government intelligence, those tend to be in higher multiples. But there's plenty of general consulting firms, thousands of them, as I mentioned, with very active pipelines actually tripled since this time last year, and we think there's plenty there. We remain focused on using our cash to bring those accretive acquisitions in.

That's helpful. And then some of your peers have had challenges on infrastructure. So maybe just to clarify, I know it's not a large part of your mix, but just in recent months, has that spot been a year-over-year headwind? Or are we at the point now where just as we look at the overall total company growth, it's starting to become less relevant?

Yes. Well, you're right, we've been focused on making sure that, that was rightsized for the business going forward. It is primarily now part of our end-to-end services. It's in the range of 10% to 12%, and it's stabilized. So we see it as an important element of those end-to-end services, albeit at a different mix level as we've been talking about.

Okay. And finally, for François, it looks like FX had a 4.5% impact on revenue in the quarter. Just to make sure we're doing the math properly. If we look at current rates, what magnitude of a revenue impact would you think we'll be seeing in September quarter if rates stay where they are?

Yes. Thanks, Thanos. Well, you're right, for 4.5%. It was close to $138 million for this quarter for Q3. And the big swing came from the U.S. where the currency varied by 11%, so close to $110 million. And again, the U.S. activities are close to 20% of the overall CGI. The other swing was euro at 3%. And again, that's 35% to 40% of our business that is in euro transactions or in Europe. If you're looking just at the July number, for sure, I cannot know what will be August and September. But just for July, the swing year-over-year on the U.S. is a headwind of 6%. So again, a pretty steep variation. And the same thing for euro, we're talking a 5% headwind versus last year, just for July. So again, it can change for August or September. But at least if the run rate continues like July, we're talking to a 5% seeing in September quarter and 6% headwinds for the next quarter.

The next question is from Paul Steep from Scotia Capital.

George, maybe talking just because it's topical this morning, I guess, the U.S. administration is once again coming back to Buy American. Can you just give us a sense of recognizing it's not yet on, haven’t changed it, but like how you're positioned in the U.S. market relative to this? A reminder would be very helpful this morning?

Yes. So this plays right into our proximity model, as you know. We're primarily proximity-based work in the U.S., particularly, obviously, exclusively in our CGI Federal business. And so it doesn't have a dramatic effect on us. If anything, I would say maybe it even helps us, maybe not helps us as much as if we were an American firm exclusively. But for most global firms, we have more proximity-based work. And so we see this as an opportunity for us in both the government work and in commercial work if that's to come in.

And then just on the IP booking growth at greater than 150% in the quarter. Could you maybe talk a little bit about which of the solutions you were seeing maybe the greatest traction in and maybe the progress on turning more of the solution into sort of a global platform that was part of the aim with the changes earlier in the year?

Yes, you are correct about the second part. The goal is to expand these solutions beyond being merely functional offerings, which they excel at, into managed services and a broader business solution that includes more comprehensive security and machine learning, as well as enhancements in business intelligence. We are implementing this extensively with our financial services solutions. For example, our collection solution serves as a complete solution for some of the largest banks worldwide. We are evolving it from just a collection tool to a credit solution, utilizing our intellectual property as a foundation and collaborating with clients to modernize their entire suite. A key aspect of this process is integrating self-service features into these solutions, which lowers costs for clients and streamlines operations. Additionally, through managed services, we can take on operational responsibilities, which adds significant value for our clients. In the recent quarter, while I highlighted our financial solutions, we saw major contributions from our government solutions, at both state and federal levels, which are now both thriving. As I mentioned, as digitization accelerates, we are observing an increased adoption and value proposition for our intellectual property across all sectors.

Great. And the last one for me. Just since it’s out there and it's essentially topical. On the M&A front, can you just remind us of how you'd approach or consider or not consider potential large deals relating to maybe more legacy outsourcing type businesses that may or may not move to market over time?

Yes, I understand your point. While we don't discuss specifics, I mentioned that our infrastructure business is part of our comprehensive services. We will assess any large opportunities in the same manner as we evaluate all merger and acquisition possibilities, focusing on whether we can leverage those client relationships to enhance our full-service offerings. We do not dismiss anything without consideration, but we are thorough in our evaluation. In fact, we handle both significant and minor opportunities in the same way.

The next question is from Stephanie Price from CIBC.

You mentioned a 3% increase in headcount year-to-date. Just curious if you could talk a bit about staff and your retention rates in the current environment?

An important point to remember is that our business growth and revenue are not directly tied to the number of employees. This is due to our end-to-end services model. In systems integration and consulting, revenue generally correlates with headcount. However, when we incorporate intellectual property and elements of managed services, the relationship is not straightforward as it offers a different value proposition for our clients. That said, we are very focused on talent. Coming out of the pandemic, we established a strong position regarding employee engagement, which is a result of our approach during that time. Consequently, our turnover remains lower than the industry average. It has increased slightly, but it remains just below pre-pandemic levels on a trailing twelve-month basis and well below our peers. This success is attributed to our comprehensive employee value proposition, which emphasizes career development. With that growth comes career progression, which our employees appreciate. We will continue to prioritize flexibility as part of the CGI model, along with accountability, culture, and purpose. A company's purpose significantly influences its culture, and as a founder-led organization, this is integral to everything we do at CGI. Total compensation is an important aspect of this, but it is not the sole factor in our value proposition. Our acceptance rates for new hires have remained steady and above average, indicating strong recruitment, while our turnover is slightly lower. Therefore, we are entering a high-demand environment from a solid position.

That's great. And in terms of the Canadian bookings environment, bookings have been very strong over the last two quarters. Just wondering if you can give us some color on that.

Yes. A lot of this is expanded managed services engagements. That's one of the drivers, and you saw another one announced this morning. So that's a big driver of that. But there's also a lot of systems integration and consulting work that we're seeing. As you know, the Canadian economy is very strong. A lot of companies, therefore, are looking to invest, and we're playing a part and helping them to realize some of their goals and using some of our best practices and intellectual property to do that. Intellectual property is a big part of that in Canada as well.

That's great. And maybe a final one for François. Cash flow from operations is a bit lower than we were expecting in the quarter. So there were some onetime items there. Can you just walk us through what you were seeing in the quarter?

Yes, we're below expectations this quarter. Collection decreased slightly because Q3 typically has our lowest Days Sales Outstanding (DSO), which was at 39 days. The annual maintenance invoices received payment in the second quarter created some pressure in the third quarter, leading to a normal trend of DSO increasing quarter-over-quarter, which affected collections. Some countries experienced payment deferrals on taxes and payroll taxes last year, particularly in the U.S. and Scandinavia, which we needed to pay back this year, also negatively impacting cash flow. However, looking at a 12-month perspective, 17% of revenue is quite strong, and year-to-date, we are approximately $200 million ahead of last year, indicating solid results on a 12-month basis.

The next question is from Richard Tse from National Bank Financial.

I just had a question, like before the pandemic began, you guys had quite a bit of momentum in the pipeline. I think we're certainly signaling sort of a pickup in growth. So when it comes to book-to-bill, it's obviously very strong. I'm just kind of curious to see if you could distinguish for us whether that growth is kind of coming from a catch-up in those past programs kind of restarting or actually kind of incremental services over and above what you were seeing prior to COVID?

Thank you for your question, Richard. It's a combination, but it's largely oriented towards new work. As I pointed out earlier, if we examine the add-on expansion efforts alongside the new client projects, which, as François noted, are increasing both year-over-year and quarter-over-quarter, we see that over half of our bookings stem from this new work. This is a positive sign for the ongoing acceleration of growth. I believe this momentum will continue. We are experiencing new demands on a regular basis now. Many of our clients are currently in the planning stages for the upcoming year, especially as they adapt post-pandemic and figure out their strategies for growth. There's also a noticeable gap between the actions of industry leaders and others. I anticipate a rush to bridge that gap, and we are prepared to assist our clients in achieving their goals.

Okay. And I guess sort of related, do you think that these sort of expanded opportunities have come about as a result of issues that have come up during the pandemic? Or is it just kind of given them time to reflect on things that they were thinking about in the past year?

The pandemic highlighted the challenges and opportunities for many of our clients. We're seeing increased demand for advisory and strategic consulting services, as many organizations feel the urgency to act now while also wanting to approach changes thoughtfully. One executive explained that they are not just focused on moving everything to the cloud. They want to examine each component carefully, which will take longer but ultimately lead to better outcomes. This approach results in larger and longer deals for CGI while delivering more value to the client. Currently, 80% of clients are seeking greater value from their digitization efforts.

Okay. And then we've seen like a lot of publicly released sort of cybersecurity incidents lately. Obviously, this is a practice for you guys. I'm kind of curious, how broad is your security offering in terms of its reach within your existing client base? I'm trying to just get a sense of what that opportunity potential would be?

Yes, it's very comprehensive. When you think about security, there is the basic security operations center that we've been involved with for many years. However, security is now expanding beyond just threat detection. It's really about how you will address those threats effectively in the future. Our teams, especially in the government sector, are at the forefront. I would highlight our teams in the UK, the U.S., and Germany as leaders in this area. We also operate in France. Our work with governments is creating opportunities that allow us to extend these services into the commercial sector, making it a broad offering.

Okay. And just the last one for me. In regards to acquisitions, I think you sort of covered broadly what things you're looking at, but I'm not so sure you touched on the potential idea of maybe looking at something more heavily IP focused, much like AMS way back when kind of gave you a bunch of assets on the government side. What's your sort of feeling around that going a bit more deeper into IP in terms of?

Yes. Thanks for the question. One of the reasons that we spun up the new organization and pulled Dave Henderson to lead that organization is really not just on the build side but also on the buy side to make sure that we are positioned well to bring in the IP that's going to make a difference for us. As I mentioned, IP-only firm is something where the valuations need to be looked at. But there's a lot of firms like you just mentioned, we did with AMS and others. Quite frankly, we've got a lot of intellectual property of Logica as well. There's a lot of IP that's buried in some of these organizations, quite frankly, not even thought of as intellectual property that when we get a hold of it, we can turn it into revenue-generating intellectual property. Some of these are those exact platforms that we're talking about, but the companies don't think about it that way. Yes, we have an eye directly towards that, and that's part of what we'll be evaluating.

The next question is from Jason Kupferberg from Bank of America.

This is Kathy on for Jason. First, just wanted to dig in a little bit deeper on digital. I mean obviously, the rising tides are affecting all boats, everyone in the industry is kind of talking about strong demand and digital transformation. I just wanted to dig in a little bit more like where do you guys fit into that journey for clients? Are there specific types of products or verticals where you have maybe deeper expertise or more of a competitive advantage that maybe translates to higher win rates?

Yes, thank you for the question, Kathy. We are observing improvement in demand across all the industries we operate in. The strongest demand right now is in banking and health, as these sectors didn't experience as significant a downturn. We have substantial intellectual property in banking, particularly in wealth management, trading, and credit areas. These represent key opportunities for us to engage with digital initiatives in banking, and we have a broad presence in various geographies. In health, we have a history of intellectual property, and we are now increasing our investment in this area, which is showing positive momentum. We have traditionally been strong in retail and manufacturing, and those sectors are rebounding. Additionally, we're looking at the insurance industry and the space sector, which we believe present opportunities as we transition from government to commercial ventures. The energy and utilities sectors are also evolving, creating more opportunities for growth across our geographic reach. Some of this growth is driven by our intellectual property and domain expertise. We align our offerings with technology, but we do not market strictly by technology; it's really about the combination of technology and our domain expertise. Previously, we found that clients were interested in technology alone, but now they seek deeper and more comprehensive solutions, which we believe enhances our value proposition at CGI.

The next question is from Steven Li from Raymond James.

Hey, George, François. You spoke about continued positive momentum on organic growth. Can I take this as meaning improving organic growth 4%, 5% into the next year?

Well, Steven, thanks for the question. We don't give specific guidance. But yes, as you look at the increased bookings for the last several quarters, the pipeline and demand environment that we continue to see, the fact that a number of those engagements are for new work as we've been discussing. That's what gives us the confidence to say that we're seeing an accelerating demand or accelerating growth environment for CGI. I'm not going to put a number on it, but certainly, we see accelerating.

And then on Scandinavia, I see quite a bit of improvement on EBIT, 5%. But revenues are still challenged. So two questions. So one is, can the profitability get to where the other European regions is? And secondly, on the revenue challenges, actually without a thought, Acando we scaled would help. But did you see a turn in the revenues there?

Yes, we have experienced a unique combination of services, integration, and the pandemic that has created a perfect storm. Our primary focus is on preserving shareholder value, and I appreciate you highlighting that. It is our starting point, but significant work has been done to ensure we are not just increasing revenue but also generating the right kind of revenue. This process requires some time, but we anticipate seeing improvement over the next few quarters.

And George, the profitability, does it need the revenue growth to keep on improving?

Not one-for-one. We believe we can continue to achieve improvements in profitability. This is part of enhancing the type of revenue we generate. The growth will continue to align with the levels seen across the rest of Europe. I didn't address that aspect of the question. However, there is nothing structurally preventing the Scandinavia region from reaching that potential. While we discuss Scandinavia as a whole, it's important to note that in Denmark, we are performing exceptionally well in terms of both revenue and margin. There are indeed strong areas in Sweden as well; our main focus is on the city center of Stockholm, which is quite large and drives much of this performance. Overall, there is no structural issue in that region that would hinder our progress.

The next question is from Daniel Chan from TD Securities.

Good to see the strong bookings continue, particularly for managed services. The strength in managed services seems to be a continued trend from last quarter. Should we expect this mix shift to continue? And how should we think about the margins as it gets converted to revenue set against an environment where you start ramping up hiring and start traveling again?

Yes, Dan, that's a great question. We are focused on balancing our future investments, which include hiring and travel to maintain our bookings, while also preserving and growing shareholder value. I believe we have achieved a good balance here. Our gross margins are actually higher than they were before the pandemic, and we are still investing in hiring and training, which is yielding positive results as both training and utilization have increased. Although some costs related to our employee base are returning, our gross margin is also improving. The team is effectively managing these elements, and we will continue to do so moving forward. I mentioned earlier that we expect some costs to return, which they are, but we are dedicated to maintaining that balance. The key lies in how we manage this mix. You will likely see an ongoing shift towards more managed services, which we welcome. However, we will not overlook the significance of the SI&C market, as it is crucial for us. We are particularly focused on intellectual property, which we believe will play a vital role in our future growth. We've made progress there, but we plan to intensify our efforts in developing IP for all the reasons we've discussed.

Okay. That's helpful. And then on the hiring front, it seems like everyone in the space is seeing strong activity. I assume many of your competitors need to hire for all the new bookings as well. So is competition for talent increasing and are you able to hire the professionals you need? And any comments on potential wage increases given this competitive environment?

Yes, it's a good question. We're closely monitoring wage inflation for two main reasons: its impact on our margins and the need to retain our current employees. We are noticing some wage growth, but due to the strong demand and robust value proposition of digital offerings, we can accommodate that within our business models, which helps us maintain our gross margins. On the new hire front, we are attracting talent at the same rate as before and achieving similar acceptance rates. The team is performing well, driven by the value we offer to employees. We have not experienced significant wage increases for junior staff, and we are actively recruiting recent graduates, able to integrate them into billable roles more quickly compared to the prepandemic period, thanks to the current demand environment.

The next question is from Paul Treiber from RBC Capital Markets.

Just wanted to hone in on SI&C versus managed services, the momentum of both outsourcing or managed services growth was a little bit stronger than SI&C. Why isn't SI&C stronger, just given the environment at the moment with the demand that everyone is seeing and need for headcount, people to deploy software and other technologies?

Paul, part of it is the way we're presenting the value proposition to our clients. They come to us and say, I need some resources for this. We take that opportunity and turn it around and say, hey, we're already supporting some solutions in this part of your organization or we understand the managed services that you might need, let us expand that opportunity and essentially turn the systems integration and consulting opportunity into a larger managed service. I've been talking about this now for several quarters. You're seeing that come to fruition. That's that add-on work. Many of these managed services deals are a bit of SI&C wrapped with managed services. You're going to see it in the bookings and the growth that way. But of course, when we do that, it takes to get that into the revenue line. But needless to say, we're playing right into that demand.

And in regards to work from home and the move to virtual and remote working, how has that or not impacted your thinking around M&A and the geographic markets that you go into or maybe perhaps from a delivery point of view. I mean, would you consider M&A in regions like offshore regions that perhaps in the past you wouldn't have?

Yes, it's a great question. At the macro level, it doesn't really change our viewpoints because remember, we're looking for client relationships and those client relationships are people to people and tend to be in proximity. Quite frankly, with the decarbonization landscape and the view to get to net carbon neutral, I think you're going to see less travel, and yet you still need to have those relationships. Having said that, we have a global delivery model. You know we have delivery centers onshore, nearshore and offshore. There is an opportunity. We are growing all of those centers faster than our proximity at the current time. We are looking at maybe a different set of M&A that brings some of those additional global delivery centers of excellence, given that our clients are more willing to go there. We think we have a good value proposition and certainly would like to build on that.

The next question is from Kevin Krishnaratne from Desjardins.

George, you reiterated the view of doubling the business over the next 5 to 7 years. I think historically, that's been thought of as a 50-50 build versus buy. I'm wondering, you talked about how it's still very early days with digital rewiring. You're seeing peers posting strong growth, all the IT estimates out there from other industry sources are pointing towards stronger growth. So I'm just wondering how your view is shifting in terms of how you see that growth coming M&A versus organic?

Yes. No, thanks for the question, Kevin. No, I don't think it changes. Let me explain. When we say our long-term view is 50-50, it's in almost no time is it exactly 50-50. Sometimes it's skewed like at the current moment, more towards organic growth. Other times, it's going to be skewed more to inorganic growth. We're going to go to where the opportunities are. But overall, we're structured in a way to allow us to get that 50-50. Over time, it will be 50-50 at any point in time, we're going to go where the opportunities are. That includes both build and buy to your point.

Okay, great. I have one final question. Regarding the managed services bookings that everyone is discussing, I'm curious if you could provide more insight into the number of deals in this quarter. Are you noticing an increase in the number of deals? Have you seen any changes in the duration? I know there are some contract renewals happening. Could you elaborate on whether clients are returning at a quicker pace as they start utilizing the services and require additional layers? Can you walk us through the dynamics contributing to the strength in those bookings?

Yes. And the good news is it's kind of a combination of all three. We're seeing more deals. We're seeing more deals that are larger in total size and we're seeing more deals that are longer in duration. I just looked at that and we're seeing all three of the above. So it's a nice strong booking. When we look at the pipeline, we're seeing the exact same thing. So that's good news. Remember, we're architecting some of that. As I mentioned, bringing some of that managed services and SI&C together. So we're architecting some of that to have a bigger deal size and longer duration.

Thank you, Kevin, and thank you, everyone, for all the good questions that you had on the call. Unfortunately, we have to end the call at this point. If there are some people who had questions that they wanted to ask, please reach out to me, and I'll take care of that to answer your questions. Thank you, everyone, for being on the call. We'll see you on the Q4 conference later this year.

Thank you.

Thank you.