Cgi Inc Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to CGI's First Quarter Fiscal 2024 Conference Call. I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Thank you, Sylvie, and good morning. With me to discuss CGI's first 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, January 31, 2024. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 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 the dollar figures expressed on this call are Canadian, unless otherwise noted. We are also hosting our Annual General Meeting this morning, so we hope you will join us live via the broadcast at 11 a.m. I'll now turn it over to Steve to review our Q1 financials, and then George will comment on our business and market outlook.

Thank you, Kevin, and good morning, everyone. I'm pleased to share with you the results of our first quarter of fiscal 2024. In Q1, we delivered $3.6 billion of revenue, up 4.4% year-over-year or up 1.5% when excluding the impact of foreign exchange. The growth was balanced between Europe and North America. From an industry perspective, we have particular strength in government with 7.5% constant currency growth and in Communication and Utilities with 6.7% constant currency growth. As anticipated, we experienced softness in the banking subsector. Government continues to be CGI's largest vertical market, representing 36% of Q1 revenue, up 100 basis points when compared to the prior year. As a reminder, CGI delivers recurring services and business solutions to support our government clients with their mission-critical functions such as citizen services, cybersecurity, logistics, and financial management. IP as a percentage of total revenue was 22% in the quarter, up 30 basis points when compared to the prior year, with the vast majority contracted as longer-term recurring engagements increasingly as Software as a Service. Overall, IP revenue growth was 4.2% in constant currency. We had once again a strong quarter of contract wins across all service offerings, booking $4.2 billion in the quarter for a robust book-to-bill ratio of 116% led by U.S. commercial and state government at 152%. Finland, Poland, and Baltics at 137% and Western and Southern Europe at 127%. Importantly, managed services, which is longer-term recurring revenue for CGI, represented 57% of total bookings with a book-to-bill ratio of 122%. With respect to IP, we continue to see ongoing demand for our business solutions with a Q1 book-to-bill ratio of 126%, led by our U.S. segments with a combined IP book-to-bill ratio of 164%. Finland, Poland, and Baltics with an IP book-to-bill ratio of 116% and Canada with an IP book-to-bill ratio of 110%. Global backlog remained strong, reaching $26.6 billion, representing 1.8 times revenue. Turning to profitability, earnings before income taxes were $527 million for a margin of 14.6%, down 40 basis points year-over-year, primarily as a result of expenses associated with our previously announced cost optimization program. This program, which is focused on SG&A, has been expanded by $26 million for a total of $100 million and is expected to complete as planned in the second quarter. The cost optimization program, along with our ongoing management discipline, will provide incremental margin improvement in the second half of the year. Adjusted EBIT in the quarter was $584 million, up 5.4% year-over-year, representing a margin of 16.2%, up 10 basis points year-over-year. We delivered strong margins in the following segments: Asia Pacific up 33%; Canada, up 24%; U.K. and Australia up 17%; and Northwest and Central East Europe also at 17%. Our effective tax rate in the quarter was 26.1%. We expect our tax rate for future quarters to be in the range of 25% to 26.5%. Net earnings were $390 million, up $7.4 million for a margin of 10.8%, down 30 basis points year-over-year, mainly impacted by the investments in the cost optimization program. Diluted EPS was $1.67, representing an increase of 4.4% year-over-year when compared to $1.50 in Q1 last year. When excluding specific items, net earnings improved to $427 million, up 7.3% when compared to Q1 last year, for a margin of 11.9%, up 40 basis points. Specific items for the quarter included integration and acquisition costs along with expenses associated with the cost optimization program. On the same basis, Diluted EPS was $1.83, an accretion of 10.2% when compared to Q1 last year. In the quarter, cash provided by operating activities was $577 million, representing 16% of total revenue. On a trailing 12-month basis, cash provided by operating activities was $2.1 billion, representing 14.4% of total revenue. DSO was 41 days in the quarter, below our target of 45 days, mainly due to improved collections and the variation in foreign exchange ending rates. In Q1, we used our cash to invest $85 million into our business, including in AI, invested $49 million in business acquisitions, invested $126 million to buy back our stock, and repaid $673 million of long-term debt. In the quarter, we continue to deliver a strong return on invested capital at 15.9%, up 40 basis points year-over-year, demonstrating our proficiency and discipline in our deployment of capital. Looking ahead, our focus continues to be on delivering value to our shareholders with the following cash allocation priorities: first, investing in our business; second, pursuing and closing accretive acquisitions; third, repurchasing our stock; and finally paying down our debt. In line with this capital allocation strategy, yesterday, our Board of Directors approved the extension of the NCIB program until February 2025, authorizing us to repurchase for cancellation up to 20.5 million shares over the next 12 months. CGI balance sheet is strong, with a net debt-to-capitalization ratio of 17.6% at the end of December as well as $2.7 billion of cash readily available and access to more if needed. Moving forward, we have the strength and capital resources to continue to execute on both our build and buy profitable growth strategy. Now, I will turn the call over to George to further discuss the insights on the quarter and outlook for our business and markets.

Thank you, Steve, and good morning, everyone. We started fiscal year 2024 in a strong position by harnessing the inherent value of our resilient business model and by employing disciplined operating practices and the execution of our plan. In the quarter, our team delivered financial results in line with our full year plan for revenue growth consistent with the current IT services demand environment, double-digit EPS accretion on an adjusted basis, and incremental margin improvement year-over-year on an adjusted basis, with cash from operations at 16% of revenue and first quarter bookings at 116% of revenue. CGI is well positioned to deliver on our build and buy profitable growth strategy. The continued strength of our financial performance is anchored by the ability of our consultants to earn clients' trust every day on every engagement. Again, this quarter, our team earned higher client satisfaction ratings on every dimension we measure, an overall rating of 9.5 out of 10, a record high. The continuous improvement in client satisfaction reflects clients' ongoing confidence in selecting CGI to innovate and support their most critical digital priorities. As anticipated, at all levels of government, demand continued to rise in Q1 as clients focused on progressing their key policy initiatives through the transformation of mission-critical applications and systems. In the quarter, government awards represented 39% of total Q1 bookings, up from 37% in the prior year. CGI's IP solutions were the main contributor to the strong government bookings, particularly in the United States segments. Governments are increasingly interested in solutions to improve their operational efficiency, leveraging the built-in security and innovation, including AI of CGI's intellectual properties. Across all industries, CGI's end-to-end services and solutions position us well to deliver the right mix of offerings as clients continue to prioritize initiatives that will deliver the highest financial returns and drive tangible organizational benefits. CGI's outcome-based value propositions for managed services and IP are specifically designed to help clients generate cost savings and accelerate transformation with lower capital costs. In line with CGI's compelling value proposition for clients, Q1 bookings were mostly comprised of managed services and IT engagements, which generate long-term recurring revenue. Managed services bookings were driven by strength in government, communications, utilities, and health. Recent managed services and IP wins include the Virginia Department of Social Services selecting CGI to modernize their statewide child support system through a platform-based solution that incorporates AI and expands our global alliance with Salesforce. Under the agreement, we will partner with government executives to simplify and innovate the end-to-end processes for delivering citizen services. Posti Group, the leading postal and logistics services provider in Finland, Sweden, and the Baltics, expanded their long-term collaboration with CGI through a new 10-year engagement to develop, modernize, and deliver secure digital messaging services across multiple channels and countries. A global multi-energy company renewed and extended its partnership with CGI to modernize the delivery of the company's business applications, primarily for their downstream operations. Our engagement takes an end-to-end approach to help the client drive their energy transformation strategy. And in 12 state and local governments across the U.S., including the County of Los Angeles, the most populous county nationwide, CGI was selected to upgrade their core business platforms. The engagements leverage CGI's Advantage IP, a modern cloud-based solution for permitting, procurement, HR, finance, collections, and performance data management. In the quarter, consulting and system integration bookings were 110% of revenue, up on a sequential quarter basis, with strength in build and run projects in the government and national critical infrastructure sectors. And platform modernization projects, particularly in the insurance industry, leveraging CGI's insurance IP portfolio and our partnership with Guidewire. Notably, in the first quarter, CGI was recognized by Guidewire for outstanding market growth in both the Americas and Europe and for our delivery excellence. Looking ahead, our overall pipeline for managed services is up year-over-year and sequentially, which we expect will contribute to ongoing bookings strength and future revenue growth. Client demand within the government sector continues to drive strength in our overall pipeline. On a sequential quarter basis, the managed services pipeline for government is up by more than 40%. The pipeline for government SI&C projects is up 20%. We continue to see strong demand related to government priorities for cybersecurity, data analytics, and modernization to drive efficiencies and enhance citizen services. While we are beginning to see improving client pipeline for systems integration and consulting across commercial industries, clients continue to exercise caution in their discretionary SI&C spending decisions, given ongoing market uncertainty. These market dynamics continue to favor CGI's managed services and IP to help these commercial clients generate cost savings and operational efficiencies. For example, within the manufacturing, retail, and distribution sector, interest in platform-based solutions to drive operational efficiencies continues to rise, and interest in generative AI is also on the rise in this sector, with clients focused on data preparedness and exploring pilots related to knowledge management, research and development, forecasting and replenishment, and production automation. In Health & Life Sciences, we recently signed industry partnerships in the U.K., Germany, and Denmark to accelerate pipeline growth through joint go-to-market offerings. In addition, we announced a global partnership with Körber focused on improving the production processes of pharma and life science clients around the world. This partnership will leverage CGI's business consulting and system integration services and Körber’s unique portfolio of integrated pharma solutions. In Financial Services, the overall pipeline is up 12% sequentially, with clients' primary focus on driving cost savings, specifically through new managed services engagements that are increasingly focused on both technology and business operations. Interest remains high for CGI's IP business solutions to modernize and manage payments, enable trade finance globally, and detect and combat financial crime. Our ability to meet the demand associated with our increasing pipeline and to deliver incremental margin improvement is underpinned by our quality delivery and operational excellence as guided by the best practices and frameworks in CGI's management foundation. We continue to make investments to drive our build and buy profitable growth strategy. For example, in line with client demand, we've been driving broader diversification of our footprint, growing our global delivery network at an even faster pace than our proximity operations. This strategy has enabled us to continually build deep relationships in proximity with clients and expand the optionality CGI offers clients to balance their cost, risk, and quality objectives. Over the past three years, CGI's global delivery capacity expanded from 31% of total consultants worldwide to 38% in Q1. This includes our onshore, nearshore, and offshore delivery locations and is contributing to incremental margin improvements. In the first quarter, we progressed several of the AI investments we previously communicated. Investments, which are already strengthening our end-to-end service offerings. These initiatives include the launch of training for all consultants globally on AI, industry initiatives utilizing available AI tools, including Microsoft's copilot offerings. Consulting offerings to assist clients in their AI strategy and a new IT solution, CGI Machine Vision, which enables clients in multiple industries to use AI for improved asset and physical infrastructure monitoring. While overall adoption of AI remains in the early stages, CGI's bookings which incorporated these technologies totaled more than $200 million in Q1, up double digits on a sequential quarter basis. The initial focus of these deals is aligned around three areas; setting an AI vision and roadmap to drive business value, preparing the data strategy to build a future-fit and adaptive foundation with responsible use of data at the core and piloting a variety of use cases, primarily focused on operational efficiency. We are investing in M&A as part of our Build and Buy profitable growth strategy. The strategy deepens our resilience and serves as a catalyst for future organic growth. We continue to focus on building critical mass in strategic metro markets within all CGI geographies. Our goal is to gradually grow this presence to mirror the economic sector distribution in each metro market and to deploy our full range of services and solutions. We remain in dialogue with several merger targets, both metro market and transformational opportunities. As always, we will be disciplined to make sure that all CGI mergers will be accretive to each of our stakeholders. In closing, we're off to a strong start for the year and reiterate our confidence in our fiscal 2024 plan. We have a resilient model with a diversified mix of geographies, economic sectors, and end-to-end services to enable profitable growth now and in the future. We have trusted client relationships and value propositions that are well aligned to meeting current demand for cost savings, digital acceleration, and ROI-led innovation. We have a strong balance sheet, and the improving M&A conditions enable us to act rapidly on accretive merger opportunities. And we have a proven track record for operational excellence for taking proactive actions to deliver continuous incremental margin expansion. Thank you for your continued interest and support. Let's go to the questions now, Kevin.

Thank you, George. So we please share with the participants, the logistics for the Q&A.

And your first question will be from Stephanie Price at CIBC. Please go ahead.

Good morning. Congratulations on the strong bookings number this morning. It seems like it's been skewed towards managed services, and we're lapping Q1 2023 when that was the case as well. Help me to understand the time to convert to revenue? And has it played out as expected over the last year? And how should we think about the pacing of that backlog conversion going forward?

Yes. No, thanks for the question. And yes, the managed services continue to drive the strength in the overall bookings. Even as we lap some of those tougher comparisons. I think that's just the nature of where the market is right now. Having said that, yes, it has taken a little bit longer to translate that from bookings to revenue, just given the nature of those deals, they're larger, they have more global delivery involved in them, and so the transition takes a little bit longer and it takes a little bit longer, therefore, to convert into revenue. The other thing that you are seeing, but we are converting that into revenue, but it's counteractive with some of the softness that you've seen in the SI&C side, particularly in the banking sector. We believe that's beginning to stabilize. So I think you'll see more of that revenue coming online in the quarters to come.

Thanks for the color. And just one more from me, just on the cost optimization program. It sounds like it's expanded a bit in the quarter. Just curious how it's progressing and what areas of business you're looking at and how we should think about it rolling out in fiscal 2024.

Yes. The cost optimization was primarily focused on the SG&A, both some of the individuals as we move more of that to global delivery and automation, but also the real estate. And so we accelerate some of the real estate. So that's really the focus. Over two-thirds of that is focused on SG&A. It's progressing very well, and we believe you'll start to see some of that in the margin improvements in the quarters to come. It also frees up the ability for us to continue making the investments that we're making in training and hiring talent in AI and our IP offerings. So it's a twofold benefit. Some of that, you'll see a margin improvement and some of it frees up the ability to make those investments for the future.

Thank you. The next question will be from Jerome Dubreuil at Bank. Please go ahead.

Hey, good morning. Thanks for taking my questions. The first one is on the read-through from hyperscalers. We've seen the results from last night. Previously, when growth was slowing on the cloud side from them, you still had optimization and cloud leveraging work to do. Now good news last time, we’ve seen some stabilization and even improvement at Google. Does that mean there could be additional work for a company like CGI that's related to this type of growth?

Yes. Clearly, we're working with all the hyperscalers in partnerships, particularly on the opportunities associated with AI. We announced one last quarter with Google. I mentioned this quarter, we're working closely with Microsoft on the copilot. So yes, I mean, it's certainly a sign that we're starting to stabilize in some of those areas, and we'll continue to work with those partners as channels for future growth for CGI in tandem.

Okay, great. And then number one, you had a lower head count sequentially in the quarter, obviously related to your cost optimization program. But a lower head count despite very good bookings in the last 12 months. Are you happy now with where utilization is? Or are you still looking for more improvement?

No. Our utilization is where we'd like it to be. It's pretty high. We did have a small increase in employees year-over-year, but a small decrease quarter-over-quarter. But again, the majority of those decreases were in SG&A. I'll just remind you that CGI's growth is not linear to people because of the intellectual property, and you see the intellectual property continuing to grow in some of those bookings as well as those ROI-led engagements. So it's a little bit different for us. But yes, we're pretty happy with where we are on the utilization. And of course, we're in an environment where turnover is down pretty sharply, which means we have less replacement hires to make. But we're being very careful not to hire in advance of demand, but we're in a pretty good place to be able to grow as the market demands come into play.

Thank you. Next question will be from Thanos Moschopoulos at BMO Capital Markets. Please go ahead.

Hi, good morning. George, could you expand on what you're seeing from your commercial clients from a demand perspective? And so I presume a number of those have just gone through the annual budgeting process heading to 2024 and so as you speak to them about their planned spend, could areas like AI be drivers of incremental spend versus last year? Or is it still very much the case where perhaps trying to expend flat and you're saving from outsourcing to reinvest in areas of AI?

Yes, that's a great question. It's somewhat varied. Generally, our discussions indicate that clients want to maintain or even increase their budgets, but this is still being discussed. There is growing interest, and our pipeline with commercial clients is expanding, but they continue to invest in cost optimization projects. They are purchasing in smaller amounts as they assess the direction of current uncertainties. Therefore, while interest is increasing, we are focused on that interest because we want to be ready for it. However, we continue to focus on selling cost optimization projects, which is reflected in our bookings. Our strategy is to engage clients in conversations to prepare for when spending decisions are made. We have not yet seen those decisions materialize, as I mentioned earlier, but we do observe a growing pipeline. The interest is definitely there, but clients have not committed yet, though they are signaling a focus on cost optimization, which should enable them to increase spending later in the year.

Great. And can you expand on how you're hearing with respect to the war on talent to build the AI capabilities? How much of that will be new hires versus training? Will that be mostly within the business unit level originally? Or will it be some stabilization of AI capability?

Yes, all of the above. As I mentioned, we're rolling out training for everybody in the company. Of course, focusing different training for developers, different training for business analysts, and different training again for leaders and business developers. Because everybody needs to be literate in AI. We’re a company where people run towards that. And so that's been very positive for us. Having said that, of course, we need to bring in expertise. We actually developed an established global AI enablement center of expertise and we do have in there PhDs and the like who are steeped in AI to ensure that we have that knowledge. And again, like I said, it's all of the above, which is what I answered initially in that way.

Great. I’ll pass it on. Thanks.

Thanks.

Next question will be from Paul Treiber at RBC. Please go ahead.

Hi, thanks so much and good morning. Just a question on the U.S. federal space. You've seen good bookings momentum over the last year or so. But this year, it's coming up to an election in the U.S. How should we think about bookings through this year? And then also how do you see revenue growth progressing through this year just given the upcoming election?

Yes. So it's more than just the election, right, because we get that continuing resolution, the battles in Congress, both in the Senate and the House. So lots going on in Federal. Having said that, here's what I would say, and it's true not just in the U.S. federal, but also a bit in the U.K. and Canada as well, we see deals accelerating in advance of upcoming elections. So what happens is the bureaucracy wants to keep things going during that election period. And so the deals tend to get a little bit accelerated, tend to be a little larger, and tend to engage a little bit longer just to get some of that stability. So I think you'll see a bit of a run-up here in the next couple of quarters on the bookings, and that will drop off during the election period. Then we'll have the change introduced in the aftermath of the election. So regardless, even if the incumbent gets reelected, there's typically new initiatives that occur after the election. So a little bit of a runoff on the bookings, then we'll eat into some of that backlog for growth during a short period of time, and then new opportunities arise. So that's kind of the general cycle. And, like I said, we're seeing that not just in the U.S. but also a bit in the U.K. and Canada.

And then looking at your Asia Pacific business and then more broadly, just around the trend towards offshoring, Asia Pacific is slow. The growth there has slowed in the single-digit range, where it's been in double digits for a number of quarters. Are you seeing that the trend towards offshoring in your business begin to slow down? Or are there some other factors that were mixed in there and you expect Asia Pacific growth to ramp back on?

Yes. Actually, believe it or not, the Asia Pacific was also impacted by some of the slowdown in SI&C, particularly in banking. So, the continued strength in demand for those managed service deals is facing similar delays. Some of those deals take a little more time to transition to global delivery, but global delivery was a big part of those deals. So, I think you're going to see over time as SI&C stabilizes, you'll see some of that growth coming back to Asia Pacific. It has been a push to give our clients optionality and some of the cost optimization they're looking for. We’re actually seeing that grow, including in parts of Europe. Even in France, we're seeing more take-up on global delivery offshore specifically, whereas they've been more nearshore focused; we're seeing more of that go offshore in France.

Okay, thanks for taking the questions.

Yes.

Next question will be from Richard Tse at National Bank Financial. Please go ahead.

Hello, thank you. Yes, given you have such great strength in government, certainly over the years, would it be unreasonable to say, looking forward lean harder in that market with acquisitions? Or are you kind of looking to diversify the business a little bit away from that?

Yes, it's a great question. We are looking at M&A in both government and commercial. I wouldn't say we're favoring government because we like having a good mix of industries out there. But at this point, yes, government, we're going to play into that. We do have a set of government opportunities in our active funnel right now.

Okay, and then with respect to the rise of AI, just kind of curious to see what proportion of bid engagements are asking you to address that and how would it eventually kind of impact the margin profile? Like does it have kind of incremental margin upside for those types of engagements? I'm just trying to understand where we are with your enterprise customers.

Yes. There's kind of two aspects of AI. Introducing AI into the solutions is very important. I think everybody is interested in how they can leverage that, particularly in the operational type solutions. So a lot of our IP is in the operational efficiencies for our clients. We're introducing a lot of AI, and that's very welcomed by them in those types of solutions because they're interested in proving out some of these cases and business cases. That’s an element of those. And of course, given that it's in high demand, yes, there's an element where accelerating those comes at a slightly higher margin profile. So that's good news there. But there's also the opportunity for us to use AI in our own delivery, in the delivery of everything that we do. We're looking at that from bidding proposal support to co-design, testing, documentation, code generation, and code migration. So that's the opportunity for margin improvements, especially as you do that on an outcome-based solution sale. So that's really the opportunity, I think, for us—it's twofold. It's introducing that for our clients into the profile. Now what I would say is we're still seeing pilots that some of the enterprise clients are maybe doing that at a little more of the scale, larger implementations. We are seeing that at some of the larger implementations. But they still tend to be smaller point projects and absolutely still experimentation when you're talking about customer-facing AI. So I think it's still the early days, but certainly—there are opportunities here for sure.

Okay, great. Thanks for the insight.

Yes.

Thank you. And your next question will be from Jason Kupferberg at Bank of America. Please go ahead.

Hi, good morning George and Steve. This is Tyler DuPont on for Jason. Thanks for taking my question. I wanted to start by asking about visibility into calendar 2024 client budgeting decisions. It seems based on your comments that backlog is rising quite steadily and nicely, but some clients are more cautious on pulling the trigger on converting some of those budgets into actual spend. I'd be curious sort of how this current environment compares to previous time periods and when you believe the visibility will firm up more substantially as we look through the year.

Yes. Well, I said this for several years: IT, just given the nature of how important it is to the business, is generally not seen as discretionary. Of course, within the spend, there's discretion—but in general, it's not seen that way. So I think you're going to see a more rapid—you didn’t see as deep a slowdown despite some uncertainty. I think you'll see a faster ramp back up. When that happens, I can't call. I think you'll see some of that in the back half of the year. But that's the discussion we're having. So you're right, we're building that pipeline and not pulling the trigger yet. But I really believe it's going to be a little bit faster. Everything happens faster in today's world, so I think you're going to see that happening a little quicker than some of the prior cycles. Even their buying is different, right? The way we execute projects, the way they buy projects is different than it was in previous economic slowdowns. So that's kind of what I see. Of course, I can't call that, but that's what I would anticipate.

Sure. That's super helpful, thanks. And I guess as a follow-up, I'd be curious to hear more about the pricing dynamics you're seeing given the current demand environment? I know, based on comments, it seems like SI&C project is a little bit softer with clients favoring more managed services at the moment. I’d be wondering if there's any pricing concessions being made in SI&C to secure the deals that do exist and maybe if you can juxtapose what you're seeing there versus the strength of the managed services deals.

Yes. We're not really seeing them. I mean, I guess there would be two things. There are SI&C deals that are more focused on cost optimizations. We're selling those, and it's ROI-led. We’re pretty good at doing that. And so it's still — although it's not a managed service, it's still driven from an outcome-based perspective. The other SI&C that's going on is pretty important, and quality becomes very important. The time to deliver becomes important. So we're not really seeing big concessions on those projects wholesale. Of course, there's always bad behaviors, I would say, by any given bit. But in general, we're not seeing that. You see our actual bill rate efficiency is holding pretty steady. We're not seeing a rising rate environment like we saw a year ago, but we're not seeing degradation right now.

Great. Thank you. I appreciate the color.

Thank you. Next question will be from Divya Goyal at Scotiabank. Please go ahead.

Good morning everyone. George, I wanted to get some color on the variance between Europe versus the North American growth that we've been seeing. And I know the peers have been commenting on it. We have an outlook on it. But I'm just curious, is that variance because Europe is doing better than North America? Or is it because North America undertook those business transformations sooner than Europe did? Is it because of that macroeconomic conditions that is driving this variance at this time?

Yes. I got to tell you, I mean we mentioned our growth was pretty balanced between the two. In general, I see it less about the geographies and far more about the industries and the services you're offering. Of course, we talked about SI&C versus managed services and IP. Even in IP, it depends on what solutions you're offering in your business solutions, right? From an industry's perspective, clearly, banking has been hit by this interest rise. That's certainly a pretty dominant factor, particularly in North America. So I think that's where you might see some of that with some of the comparisons. But of course, given our strength in government and national critical infrastructure industries, including utilities, that's strong in all geographies, both North America and Europe. I think that's why we have a little more of a balance. To your specific question, no, I don't think it’s just about one being ahead of the other. Especially when you look at some of the newer technologies and the new opportunities. I think you're going to see a little more similarities than differences.

That's helpful. Just from your M&A pipeline, you did mention that some of the government-led businesses are in the pipeline, do you see any alleviation to certain geographies as well, again going back to this Europe versus North America growth trajectory that we've been noticing over the recent quarters?

Yes. What I would say is that we're always looking in all locations, as I mentioned, to gradually grow in each of those metro markets. Certainly, the U.S., France, Germany, and the U.K. are areas that if you look at our active funnel, there are probably more opportunities in those areas. As I said, both government and commercial in each of those geographies.

That's helpful. And I'll ask one last question here on the cash flow from operations. So over the past two quarters, the CFO has been trending higher than the historical norms here. Obviously, you're undertaking cash optimization initiatives as well. Could you help us understand the go-forward trajectory for the CFO?

Steve, you want to reply?

Look, the cash flow, I would say the best thing is to look at it from a last 12-month point of view. That's really how we look at it also internally. Obviously, when the margins are improving, the cash flow will improve. We are investing in the business right now with the objective to improve future earnings and also future cash flows.

That's helpful. Thanks George, thanks Steve.

Thanks, Divya.

Next question will be from Robert Young at Canaccord Genuity. Please go ahead.

Hi, good morning. I wanted to put that $200 million in incremental bookings related to AI into context. It seems like a good number. Thanks for sharing that. But I think of that as a relative percentage of the SI&C bookings, that’s over 10%. If I just think of it as a percentage of the new bookings from new business. It’s a larger percent. And trying to put that into context with the comment you gave on an earlier question around how some of that is embedded into IP delivery. Like I’m trying to get a sense of how much of this new business is completely driven by AI? And how much of it is embedded into other parts of existing delivery?

Yes, and thanks for the question. You're correct. It's not all brand new business; some of that is embedded. Of course, it helps us continue to grow our relationship with our clients and be part of where the business is heading. That’s why I highlighted that. But, again, it's not all brand new business. I would say roughly maybe 60% within deals, 40% new, but that's just a rough estimate. We could go back and give you some of that. Given what we see, there are lots of deals with AI, but not necessarily big large-scale implementations yet. We're starting to see that, again, focused on the operational efficiencies, and we're starting to see that in some of the larger engagements that we have with the largest customers. But most are still smaller point solutions proving this out. Most of our clients are being very cautious, and I think we would agree with them being very cautious in how they use this, how they keep humans in the loop, and doing this in a modified way. That’s why I say it’s still the early days of this.

Yes. Thanks there. A lot of color. That's still great numbers. I'm curious if you could help me maybe summarize all the different drivers of margins that you're looking at right now. Just based on the comments on the call, it sounds like the cost optimization may provide some utilization benefits given there's lower attrition, maybe slightly lower hiring, the IP growth, and global delivery still growing as a percentage, if I heard that right. Are there any other pieces that you would highlight that would be supportive of margin expansion here in the near term?

That's pretty good. It's pretty good, Robert. If I think about it, I would say managed services growth, particularly with global delivery because you see the margins that drive. IP as a percentage of revenue, certainly, the cost optimization program for SG&A, including the real estate. One of the areas that maybe we didn't talk about is continuous improvement in geographies. You saw Scandinavia improvement. We can see continued improvement there through a combination of SG&A revenue mix but also growth. I did mention productivity from Generative AI. I think that will be a tailwind in the quarters to come as we leverage AI for our own operational efficiencies, including the leveraging of some of our own IP development. CGI has over half a billion lines of code in our own ownership. To the extent that we can leverage that, we can see benefits there. Those are opportunities for us to continue to provide incremental margin improvement as we continue to grow the business.

Alright. Thanks for taking the questions.

Thank you. Next question will be from Daniel Chan at TD Cowen. Please go ahead.

Hi, good morning. George, you mentioned interest rates may have affected the banking sector. Just wondering if there's anything else to call out there that you think could be affecting it. And then as a follow-on, given the view that interest rates may decline later this year, do you think that would be a driver to growth back in that sector later this year?

Yes. I do think it's a bit of wait and see. The uncertainty is what's driving some of this. When there becomes a little more certainty about when that occurs, I do think you'll see more loosening of those actions. The interest is there, and what we're doing is building the pipeline, making sure we're part of the conversations, but I do think you'll see some loosening, but I can't call when. I think you’ll see that stabilizing. It’s not getting better yet, but it is stabilizing.

That's helpful. Thank you. And then you've been pretty optimistic on the M&A opportunities over the last couple of years. Anything to call out in the current environment that changes your level of optimism relative to last year?

No. Well, I would say I'm even more optimistic that there are opportunities. Of course, we're going to continue to focus on making sure we're bringing in the right companies that can be that catalyst for growth that we talked about and provide the accretion to our shareholders. But I become even more bullish on the opportunities just given where the market is, where the valuations are, and where we are as a company. You see our balance sheet. We're going to continue to be disciplined in that approach.

Great. Thanks, George.

Yes.

Thank you. And at this time, Mr. Linder, we have no other questions. Please proceed.

Thank you, George. So we please share with the participants, the logistics for the Q&A. Thank you, Sylvie, 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 827836. 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.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.