Cgi Inc Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen. Welcome to CGI's Second Quarter Fiscal 2023 Conference Call. I would now like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.

Thank you, Julie, and good morning. With me to discuss CGI's second quarter fiscal 2023 results are George Schindler, our President and CEO, and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 AM Eastern Time on Wednesday, April 26, 2023. Supplemental slides, as well as a press release we issued earlier this morning, are available for download along with our Q2 MD&A financial statements and accompanying notes, all of which have been filed with both 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 are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I'll now turn it over to Steve to review our Q2 financials and then George will comment on our business and market outlook. Steve?

Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our second quarter of fiscal 2023. In Q2, we delivered CAD 3.72 billion of revenue, up 13.7% year-over-year, or up 11.4% when excluding the impact of foreign exchange. The following segments generated double-digit constant currency growth: Western and Southern Europe up 28%, Finland, Poland and Baltic up 14%; UK and Australia up 11%, and Asia-Pacific up 21%. Notably, we continue to see an increase in overall demand for our global delivery, especially offshore. As a result, our offshore operations are now 23% of our total employee base, up from 22% in Q2 of last year. From an industry perspective, we had constant currency growth across all sectors, notably, financial services grew 16%, government grew 12%, and manufacturing, retail, and distribution also grew 12%. From an IP perspective, IP as a percentage of total revenue was 21% in the quarter. We continue to see strong demand for our business solutions supported by an increase in IP revenue in seven of our eight proximity geographic segments in Q2. Notably, Canada's IP revenue grew by 39%, Western and Southern Europe’s IP revenue grew by 32%, and Scandinavia and Central Europe’s IP revenue grew by 28%. The number of our consultants and professionals increased year-over-year by 7,000, representing an 8.3% increase totaling now 91,000 worldwide. We booked $3.8 billion of contract wins in the quarter, representing a book-to-bill ratio of 103% compared to 101% in the same quarter last year. On a trailing 12-month basis, our book-to-bill ratio reached 109% with seven of our eight proximity geographic segments having a book-to-bill ratio above 100%, led by UK and Australia with a book-to-bill ratio of 128%. US commercial and state government with a book-to-bill ratio of 120% and Finland, Poland, and Baltics with a book-to-bill ratio of 117%. Our Q2 IP book-to-bill ratio was strong at 118%, given the strong value proposition for CGI's business solutions. This is reflective of the ongoing investment in our IP, which is now generating larger and longer-term IP engagements. Overall, our global backlog reached a record of $25.2 billion, representing 1.8 times revenue. Turning to profitability, earnings before income taxes were $564.5 million, up 13.2% year-over-year for a margin of 15.2%. Adjusted EBIT in Q2 was $601 million, up 14.7% year-over-year. This represents an EBIT margin of 16.2%, up 20 basis points year-over-year and up 10 basis points sequentially. The year-over-year increase was driven by the combination of strong revenue growth and operational discipline. We delivered strong EBIT margins in the following segments; Asia-Pacific up 30.9%, Canada up 21.7%, and Western and Southern Europe at 16.7%. Our effective tax rate in Q2 was 25.7% compared to 25.4% in the prior year. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. Net earnings improved to $419 million for a margin of 11.3%, compared to $372 million in Q2 last year. Diluted EPS was $1.76, representing an increase of 15% year-over-year. When excluding integration and acquisition costs, net earnings improved to $435 million for a margin of 11.7%. This compared to $374 million in the same quarter last year. On the same basis, diluted EPS was $1.82, an accretion of 19% when compared to $1.53 in the same quarter last year. This improvement was mainly driven by the successful execution of our build-and-buy profitable growth strategy. In the quarter, cash provided by operating activities was $469 million, compared to $473 million in the prior year. DSO was 41 days, compared to 42 days last year, well within our target range. For the last 12 months, cash provided by operating activities was $2 billion or 14.5% of revenue. In Q2, we invested $107 million into our business and $400 million to buy back our stock, repurchasing 3.3 million shares at a weighted average price of $119.58. As of the end of March, we had the authorization to buy back up to an additional 15.4 million shares under our current program. In the quarter, we continue to deliver a strong return on invested capital at 15.6%, demonstrating our efficient deployment of capital. Looking ahead, our focus continues to be on delivering value to our shareholders by investing back in our business, pursuing accretive acquisitions, and repurchasing our stock and/or paying down our debt. With a net debt to capitalization ratio of 24% at the end of March, as well as $2.8 billion of cash readily available in excess to more if needed, CGI has the strength and capital resources to continue to power our build-and-buy profitable growth strategy. Now I will turn the call to George to further discuss insights and outlook for our business and markets. George?

Thank you, Steve, and good morning, everyone. This quarter, we again delivered financial results in line with our planned profitable growth at or ahead of the markets where we operate and to continue delivering double-digit EPS accretion. Thank you to our 91,000 consultants and professionals around the world for earning the trust of our clients every day. Your expertise, insights, and commitment made these strong results possible. Today, I will focus on our performance for the first half of the fiscal year, as well as the demand outlook for the second half. On a year-over-year basis for the first six months of our fiscal year, CGI delivered 11.8% revenue growth on a constant currency basis, 15.2% EPS accretion on an adjusted basis, and over $1 billion in cash from operations or 15% of revenue, up 12.3%. For the first half of the fiscal year, revenue growth on a constant currency basis was broad-based across all segments, all services, and all industry sectors with notable industry sector growth of 16.3% in financial services, 12.1% in government, and 11.6% in manufacturing, retail, and distribution. Looking ahead to the second half demand in these industry sectors, we see the following: in financial services, given the recent macro turbulence in this sector, areas such as managed services, intellectual property-based business solutions, and enterprise data strategy and services are generating the most client demand. In government, client spend is rising from modernization. In IP services and support of new policy initiatives, and in manufacturing, retail, and distribution, client interest is increasing for managed services to realize cost savings and improve business processes. Bookings were strong during the first half as we awarded over $7.8 billion in new engagements, an increase of over $950 million, a 14% increase compared to the first half of last year. This trend spanned across each of our end-to-end service lines with managed services bookings up 12% over the first half of fiscal 2022. Consulting and systems integration bookings increased by 15%, and IP-based business solutions bookings rose by 29%. Specific to the second quarter, awards for renewals and add-ons with existing clients were particularly strong as we sustained our incumbency. These existing enterprise clients continued to turn to CGI as a trusted partner for expanded modernization and digitization initiatives. In fact, we achieved a renewal rate of over 95% with increased awards that included new scope. As a result, we expanded our client relationships and created new opportunities to provide a fuller range of our end-to-end services in support of client initiatives. For example, in Q2, one of the world's largest property and casualty insurers extended its 20-year partnership with CGI related to their use of CGI’s data-based IP solution. The administrative office of the US Courts awarded CGI a 10-year contract building on our ongoing relationship supporting their financial management portfolio, including the use of our Momentum IP. TD Bank Group, a top 10 North American Bank, extended CGI's ongoing services for the delivery of a secure and reliable shareholder management system, which is part of CGI's Wealth 360 IP Solutions suite. Under this four-year agreement, CGI will provide extended support as part of the bank's ongoing modernization strategy. PSE Poland’s electricity transmissions operator awarded CGI a four-year engagement to build, implement, and support a next-generation central energy market solution, leveraging our deep expertise in the energy and utilities industry, and CGI’s proven data exchange IP. The Swedish Social Insurance Agency selected CGI as a strategic business transformation partner to support the modernization of the agency's operations and the digitization of its core citizen-facing processes. And Fraport, one of the world's largest airport operators with business activities at 29 airports across four continents, selected CGI as its digital partner under a new five-year framework agreement aimed at further enhancing the digitization of Frankfurt Airport. Turning now to our buy strategy. M&A consolidation activities have recently slowed across the IT services market, keeping fragmentation of the market at a high level. This will continue to favor CGI given the strength of our balance sheet and our One Company integration approach. Our pipeline remains robust with a steady influx of new opportunities identified through our expanded sourcing strategy. We remain disciplined in our approach to ensure our M&A investments are accretive for shareholders and have the necessary cultural fit to deliver ongoing benefits for all CGI stakeholders. Looking ahead to the demand environment for the second half of fiscal 2023, we have visibility into clients’ priorities and expected budget plans given our proximity model and close relationships with clients at all levels. Our pipeline reflects CGI’s strong position to meet shifting client priorities, as the value of new opportunities in our pipeline grew by more than 15% on a sequential order basis. Client interest remains notably high for larger managed services engagements that incorporate CGI's end-to-end services, help clients realize cost savings, and drive business transformation programs. The pipeline over the next year reflects intensified interest in managed services as the total value of these opportunities is up by more than 20% on a sequential quarter basis. These larger managed services opportunities tend to have longer sales cycles, given their broader scope. Importantly, we are actively engaged in later-stage opportunity pursuits with multiple prospective clients in every geography. In each case, we work collaboratively with client executives to build solutions that combine and tailor the right mix of CGI services and solutions to meet the organizations’ business objectives. Our outlook on client demand was further validated by the preliminary findings of our annual voice of our clients’ proprietary research. Our leaders recently met with over 1,750 executives at companies and government agencies around the world. Topics covered in these discussions ranged from macro trends influencing clients' business strategies to digitalization priorities and budget plans. We're in the process of analyzing this valuable input from current and prospective clients. I'd like to share the three preliminary findings that we see shaping client demand. First, clients are placing a sharper focus on prioritizing investments and returns. Second, due to the heightened pressure on profitability, more clients indicated their willingness to outsource a portion of their IT landscape as managed services over the next three years. Finally, deeper partnerships with external service providers are increasingly deemed essential to help clients achieve their holistic digital strategies. As the prioritization of investments sharpens, clients are shining a spotlight on the most critical digital initiatives that will deliver the highest financial returns and drive organizational benefits. This is also leading clients to place a higher value on external partners like CGI, capable of providing ROI-led innovation. While clients are becoming more selective about their investments, over half of the executives we interviewed said they plan to sustain or increase their overall IT services spending over the next year. In addition, 84% of client executives indicated they continue to face challenges in hiring IT talent. Regarding partner ecosystems to help deliver on client IT spending, we observe a new duality taking shape. Specifically, for clients engaged in trusted partnerships with their existing IT service providers, they are more inclined to expand and extend those relationships. Simultaneously, clients are increasingly open to engaging new providers that embody the partnership qualities they value. At CGI, establishing trusted partnerships with our clients is intrinsically linked with CGI's culture of ownership and accountability. CGI’s collaborative working style fosters a positive partnership foundation and continues to be a strong differentiator for how we attract and retain top talent. The CGI employee value proposition rests on trust, collaboration, and a commitment to operate as one team. This is the essence of our culture and our ongoing talent investments, which are making a significant difference. The satisfaction of our consultants and professionals continues to rise to new highs. Turnover reduced sharply in the quarter and remains below the IT services industry average. Our depth of industry expertise, which we continue to deepen through hiring and development, is recognized by clients with an all-time high satisfaction score, and 84% of our now 91,000 consultants and professionals are CGI owners, collectively aligning us to common success factors. Most importantly, again this quarter, the highest-rated client satisfaction scores were related to the quality of our relationships. This encompasses both CGI's commitment to clients and clients' intent to engage us in the future. Both of these scores, derived from signed client assessments, reached record high levels of over 9.5 out of 10. In closing, now more than ever, CGI's culture, proximity model, and commitment are in greater demand. We are well-positioned to remain a partner of choice for clients and an expert organization for our consultants and professionals, while serving as an ethical and responsible corporate citizen and investment of choice for our shareholders. Given the strength of our first-half performance and the alignment of our strategy and model with the priorities and budget plans of our clients, we remain confident in our ability to continue profitably growing CGI through our build-and-buy strategy. Thank you for your interest and support. Let's go to questions now, Kevin.

Thanks, George. Julie, can you please share the logistics with the participants?

Your first question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

Hi, good morning. I was surprised by the strength in the interest in the SI&C national backdrop. I would have thought with the recent acceleration there, and your comps were suggesting that you are also seeing growth in the SI&C pipeline. Can you provide some color in terms of whether it is broad-based, more focused on certain geographies, and then what kinds of initiatives are driving those SI&C bookings?

Yeah. Thanks, Thanos. The growth was strong across, so IP, financial services, and government is pretty broad-based. SI&C was stronger, both in MRD and in government. In MRD, it’s truly around some of our larger engagements for larger clients. It just shows how they're looking to use technology for things like smart data and smart factories, et cetera. In government, they're really going through a modernization phase, and they'll continue to do that. But managed services and IP were also strong in government. We're encouraged that SI&C for those larger clients remains so strong in the bookings. A lot of add-ons rather than straight new business. I think this goes to the partnership qualities that CGI has and not just maintaining our incumbency, but extending and expanding that on incumbency.

And then on the macro, a number of your peers have suggested that there's been some softening in the last 90 days, especially in North America. Are you seeing some of that as well, or is your perspective more consistent just getting specific verticals that you focus on?

Yeah, we saw our bookings were pretty strong in North America, particularly in the US at a book-to-bill of 120%. I think in general, there is a little more caution. I mentioned this last time; I think the SI&C sees more caution. It's a little slower to make some of those decisions, but the demand is still there, just a little more purposeful, as I mentioned, certainly around the return on investment focus. So I think it's getting more concentrated. In general, we're seeing more of those ROI-led projects and even in the managed services space, they are getting larger. Of course, those take a little bit longer, and I think that's what you're seeing in some of these booking numbers.

Great. I’ll go offline. Thanks, George.

Thanks, Thanos.

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

Well, thanks so much and good morning. Just want to dig deeper into managed services. The book-to-bill was a little bit lighter in terms of bookings this quarter. It sounds like there's lumpiness there. Could you just speak to any of us about the pipeline, the conversations regarding the pipeline, and the potential cost optimization, and when you could see that coming through in terms of bookings relative to the environment here?

Yeah, well, like I said, we're encouraged by the later stage discussions we’re having on managed services. But given their broader nature, they just, in general, take a little bit more time to close. And again, because they are such strong business case-driven, they want to ensure that they're doing that right. Generally, they're positive partnership-type discussions. More so partnership related than just procurement-driven. So, that's certainly a positive. It's not that procurement isn’t involved; it's just that they're really focused on those business cases. Not just the input price and the returns, and that's where I think the partnership focus really comes in. It's just a matter of timing. Bookings are always a little lumpy. You can see that it actually went up on a trailing 12-month basis. So, I don't think there's much to read into that at all. We're staying focused on closing the right deals for both us and for the client.

And just looking at geographies, Europe has been really strong here and shown a steady improvement over the last several years. What fundamentally has changed for your business in Europe where you're seeing steady positive organic growth?

Yeah, I think it's a combination of factors. Part of it is a more resilient business mix. So whereas before, it was primarily systems integration and consulting. Now, you see some nice growth on the IP bookings. We've actually acquired some IP around open media with good bookings there, and our retail suite has also shown promising bookings. There's some investments that we've made in bringing the full suite of CGI’s end-to-end services to these global clients. I think operating more as one team has allowed us to work across various countries for larger enterprise clients in Europe. Those factors all contribute to that growth.

All right. Thank you. I’ll pass the line.

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

Yes, thank you. It looks like you had some pretty solid organic growth. I was wondering if you could give us a sense of how much of that growth is being fueled by acquisitions, meaning the capabilities that you may have brought on board through some of these smaller acquisitions in past years?

Yeah. Well, thanks for the question, Richard. What we see is that organic growth is typically strongest in areas where we have done more of those metro market acquisitions. Part of it’s the skill sets, part of it is the new client relationships that we have the opportunity to sell the larger set of CGI's end-to-end services into. You see that certainly in Western and Southern Europe, and you see some of that in Central Europe and Scandinavia. So, definitely, those metro market acquisitions are a catalyst for organic growth in the future. And that is why we remain very disciplined in our M&A strategy because we want it not just to be inorganic growth where one plus one equals two, but rather one plus one equals three or more.

Okay. In terms of the growing momentum of AI, what do you think the implications are for digital transformation initiatives with your clients? Do you think it has the potential to cause delays in projects as they assess the potential capabilities going forward?

Yeah. It's a great question. I don't have a crystal ball, but I don't see it slowing anything. Our view is that, in general, technologies like generative AI simply make experts more productive. They don't necessarily turn the average person into an expert. I don't think you're going to see a slow-down. Having said that, we just conducted a voice of the client survey, and I'll share some data: two-thirds of our clients indicated that they're either investigating or doing a proof of concept on AI, and that has an impact if anything. In fact, we're engaging in that investigation with them. The rest are pretty evenly split, about 20% are not doing anything at all, and about 15% suggest they are in some level of AI implementation. I think clients are moving into this cautiously and looking to partners like CGI to help them think through it. We've been investing in this area; it's part of our approach. We've created our own IP framework that allows you to quickly develop closed domain models that are easier to integrate into existing applications. We're also integrating that into our existing IP. I actually think it's going to be more of an opportunity than anything. Of course, with the cybersecurity concerns, data privacy, and potential future regulation, you see some of the IP and copyright issues take time to address. But I don't think it's going to slow anything down; if anything, we're going to be seen as advisors in that space.

Okay, great. Thank you for those comments.

Sure.

Your next question comes from Daniel Chan from TD Cowen. Please go ahead.

Hi, good morning. George, congrats on the strong quarter. You mentioned that financial services performance remained strong, with its revenue growth in bookings, and it sounds like H2 is expected to also be quite good. Can you give any color on how your customer conversations in the space are going, just given all that uncertainty?

Yeah, I guess what I should start with is that we're mostly working with the large banks. Over three-quarters of our banking business in the U.S., for example, is with the 10 largest banks, and in Canada, by definition, it's with the top 7 or 8 banks. The remaining business in the U.S. is spread evenly across the other banks, and that’s mostly through IP. In Europe, over 90% of our banking business is with the top five banks in the country, and over 50% is with the top 20 banks across Europe. We're engaging with larger banks, and so, naturally, they're looking at this as a potential opportunity for consolidation. Certainly, they're seeing increases in their own bank deposits. Our discussions are more around how we can assist them in this area. It's very similar discussions around modernization and digitization. We haven't seen much disruption. In fact, I was meeting with a large European bank right at the start of the turmoil that spread from the US to Europe, and they are pretty much staying the course. They are more open and willing to adopt IP and so that is driving more of their inclination to avail of managed services—not because of market turmoil, but more of the difficulty in hiring IT talent. So, we’re seeing those shifts happen.

Thanks for that. If we just move to the US commercial and state segment, the margins there were lower this quarter. Any color on what drove that and whether you see that continuing?

Yeah. I wanted to point that out. We do see some less IP licenses in the quarter. That's always variable and usually compensates over time. But we also saw some projects successfully conclude, while other projects did not start at the same timing level. We have new starts given the strong bookings reported at 120% and over 120% in 12 months trailing. We have some rate increases that have worked into the system, providing tailwinds. But we are monitoring utilization to ensure that we observe a rebound. That’s certainly the plan—to see a return to the mid-teens in the US business. You noted some of that, by the way, in WSE. As mentioned earlier, there were some projects that successfully concluded, and the timing of new projects was a little slower. You noted a bounce-back in WSE last quarter, and I think you will see the same in the US business.

Thanks, George.

Yep.

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

Hi, thanks for taking my questions. A couple if I may? You've commented in the past that the cloud results are just slowing, and the cloud from hyperscalers had little correlation with your results. The focus on profitability has led Google to embrace a profitable cloud business recently. Is their focus on profitability impacting your business, or is this all passthrough?

Well, we're not really working in the passthrough business of the cloud provider. Our revenues have very little, if any, passthrough sales of cloud. We're engaged in the deployment of the cloud, and that’s why I mention that you don't see a direct correlation because we observe that a number of clients are looking to become more thoughtful about how they transition applications into the cloud and what their decisions are. We're seeing growth in consulting associated with cloud advisory. Our cloud factory business remains strong as we assist clients in transitioning to the cloud and rationalizing their applications. If you observe our partnership revenue with the hyperscalers and platform providers, we've actually recorded as much revenue in the first six months of this year as we did in the entire previous year. The partnerships have proven to be robust.

Okay, thanks. Regarding M&A, your share price has performed excellently over the past few months. Congrats on that. Is your share price a factor in your M&A considerations? In other words, is your accretion calculation based on your market multiple, or is that not in your considerations?

No, Jerome, thank you for the question. Our evaluation practices remain consistent. As George mentioned, we seek acquisitions that will align with our culture and accelerate growth. We're focused on acquisitions that yield substantial benefits rather than merely seeking for one plus one to equal two.

Okay, thanks. I’ll squeeze one last in. Congrats on the noticeable improvements in the Scandinavia margins. It's evident that reshuffling your segments is paying off there. How much progress have you made in optimizing the Scandinavia business? Is there still a significant amount of work needed?

There's indeed a bit more work required, but the positive news is that most of the structural items have been dealt with. We're returning to growth, and that's where I think you will continue to see progress. So, I don’t believe it's a headwind anymore; I see it as a tailwind moving forward.

Great, thank you.

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

Good morning, guys. Great quarter. Thanks a lot for all the color you’ve provided on bookings. But I wanted to get a little deeper on this bookings pipeline that you have. Some global IT companies recently indicated that they're seeing an increase in less than $100 million bookings. Is that similar to what you’re seeing in general? What’s your take on North America versus Europe growth on a global basis for yourself?

Sure. For the quarter’s bookings, we observed a similar situation where we had fewer $100 million-plus bookings. I mentioned some expansions and add-ons driving that across industries. However, looking forward, we still see significant multi-year managed services deals. I think it’s just timing, as we discussed previously. Last quarter, Divya, I noted that SI&C deals were getting a bit slower while managed services deals are accelerating, but still take longer to close due to their broad nature. So, I believe you're observing an air pocket in bookings. With respect to Europe versus North America, I haven’t seen much difference. You heard more caution in Europe, but from my recent travels, that's not what I heard from clients; they are focused and determined to deliver ROI. In the U.S., you may hear less caution theoretically, yet there’s still some caution prevalent in both Canada and the U.S. Overall, it's pretty similar, especially when talking about enterprise clients.

Yeah, totally good. Thanks a lot. That was great color. I want to shift gears a bit. M&A has been a focus for the market regarding CGI, yet the past few months have seen some slow movement. What can we expect from an M&A standpoint from the company? I also want to understand how the integration efforts have fared regarding your recent acquisitions and what we can look forward to going ahead.

I'll start with integration and then address general M&A. The integration with Umanis is showing steady progress according to our plans. In certain countries, it does take a while longer. You may have seen it in cash flows. We continue to work through that, and although restructuring requires a bit longer, client reactions have been very positive, and things have been stabilizing with Umanis. Our integration playbook continues to be effective. It's focused on a one-company approach, which may take longer in the short run but yields greater long-term benefits. Late general M&A, the pipeline remains strong. We have many deals out there; it’s merely a matter of timing. We stay focused on the most accretive deals, and 25% of the pipeline consists of IP-related deals. Maintaining our aspirations is feasible, but we may run out of runway this year. Nonetheless, just a few of these deals could enable us to get there. Rest assured, we remain disciplined; we're not rushing for a bad deal. So, that strategy remains unchanged. Steve, is there anything you’d like to add?

No.

That's great color. Thanks a lot, guys. I’ll pass the line.

Yes.

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

Good morning.

Hi, Stephanie.

With discussions around the U.S. debt ceiling, can you remind us how the Federal business has fared in prior instances? How should we approach the US Federal business as we head into this period of uncertainty?

It’s an interesting time; it seems there's always something interesting happening in the U.S. Federal government markets. Right now, excluding the debt ceiling, there's strong spending with the current budget. The reason for that is likely knowing that specter of the debt ceiling exists, they're taking special measures just to keep the operation going until things come to a head. Most importantly, what you're likely to see is a two-year continuing resolution, given Congress's makeup and an incumbent president launching a re-election campaign. What you'll likely see is the budget continue in its current form, without an approved budget. Generally, these times favor larger firms with established incumbencies, and we see that in our business. We see an urgent push to expand existing contracts, utilizing existing frameworks to maximize current budget allocation. As you enter the continuing resolution, CGI benefits from our fee-based business. For example, the work we do on passports and visas is entirely fee-based and is outside the budget constraints. If you provide services for the SEC, that's funded outside the Congressional budget. This plays a beneficial role for us as we continuously aim to drive efficiencies in one part of our business, enabling the funding of unfunded mandates as they arise. Such dynamics, especially in government, make it imperative for incumbents like CGI to navigate the landscape effectively.

Great color. Thanks. One other quick question: in terms of IP, it sounds like IP has definitely been a differentiator for CGI in a somewhat uncertain environment. Could you discuss where you’ve seen the strongest demand in IP, both in revenue and bookings?

In the last quarter, we saw significant demand particularly for our wealth platform and payroll IP, both here in Canada and globally. Our retail suite experienced substantial growth in Europe, and we've also seen good results in open media. Overall, we’re observing an increasing trend toward Software-as-a-Service; this was one of our most notable quarter-over-quarter shifts. As of now, approximately 60% of our business operates under a SaaS framework. We expect this to continue, especially considering the current uncertainties, leading clients to reevaluate their capital expenditures and shift away from certain licenses. It’s important to note that while the revenue may seem volatile in the short term, over time, renting typically costs more than owning. The investments we've made in our IP related to architecture, allowing for easy integration with other systems, and enhancing user experience continue to yield dividends. Furthermore, we are incorporating emerging technologies like generative AI and machine learning into our IP, making it even more productive for our clients. This leads back to our key value proposition: enhancing expert productivity. We do have use cases in play. However, bear in mind that it’s primarily human-assisted AI as we bring that technology to market.

Great. Thank you very much.

And your next question comes from Robert Young from Canaccord Genuity. Please go ahead.

Hi, good morning. One more question on the bookings if I could. Trying to understand the short-term impact. If I understand correctly, the shift in the mix towards consulting in bookings is more a function of longer sales cycles in managed services, rather than a longer-term impact. Can you elaborate on your confidence that this is a shorter-term situation?

Looking at the pipeline and our discussions, I want to clarify that while the macro environment is not without its challenges, it can be interpreted in several ways. What we’re truly focused on is ensuring that we pivot towards the opportunities present in the market. Clients are not necessarily looking to reduce their IT spend, but they're scrutinizing the programs they are supporting. It depends on where they are at any given time; if they're evaluating program viability and return on investment, they may decide to pause. Thus, constant monitoring and communication with the clients become essential. In keeping with the bookings, shorter-duration SI&C by nature yields lower overall dollar values. When discussing bookings, if we can successfully finalize some of those managed services deals, it will certainly provide a boost to our bookings.

Okay, thanks a lot for that, that's very informative. And then perhaps just one more comment you made; I believe you indicated you're observing a trend of clients shifting focus from internal IT efforts toward engaging with external partners, possibly seeking profitability. Can you describe that trend? Is it leading to a rebadging or outsourcing of larger parts of your customers' businesses? You’ve been very optimistic about managed services; are you suggesting that this is a turning point?

I don't know if it constitutes a turning point in the quarter; I see it as an evolution of where we’ve been heading. I do believe there isn't a significant shift, but it's more about where the market is heading. Yes, when we conduct many managed services deals, it may necessitate adjustments in existing personnel. The challenges to hire skilled IT talent play into the mix. Even if clients wish to handle more independently, the current constraints may prevent that from materializing. This is merely a market observation rather than anything monumental. We're keenly focused on enhancing talent within CGI and engaging our workforce, benefiting both the organization and individuals alike, which is gaining recognition.

Okay. Last quick question about the organic growth. If you can provide a figure on that, it seems tight to me. I just want to make sure I have the calculation correct.

We don't segregate organic from inorganic growth, as inorganic growth often serves as a catalyst for organic growth. Our strategies may sometimes entail focusing resources on specific enterprise clients and certain locations, which means we don't break those figures out.

Your next question comes from Jason Kupferberg from Bank of America. Please go ahead.

Hi, good morning, George and Steve. This is Tyler DuPont on for Jason. Thanks for taking the questions. Just a quick follow-up on the demand environment. You mentioned project elongations and that enterprise IT decision-makers seem to be becoming increasingly selective regarding funding projects. However, have you seen projects being purely canceled? Are there specific verticals or geographies we should note, or is this more related to projects being pushed to the right for later revenue conversion?

I see more delays, but nothing outright canceled. It’s more nuanced on a client-by-client basis. I am unable to quantify the effect across industries or geographies, as each instance is client-specific. Maintaining robust relationships with clients is central to our focus, emphasizing our ROI-driven innovation.

Okay. That’s very helpful. Thank you for your insights. Regarding your performance in health, can you discuss any notable dynamics there?

Indeed, we observed steady growth in health, albeit at a lower rate. Considering previous explosive growth, it seems that this sector is digesting some of that momentum. I don't perceive this as a long-term trend, but we will continue to monitor it closely.

Alright, sounds good. Thank you very much.

Yes.

Mr. Linder, there are no further questions at this time. Please proceed with your closing remarks.

Thanks, 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 993424. A podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1-905-973-8363. Thanks again everyone, and I look forward to speaking soon.

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