Cgi Inc Q3 FY2024 Earnings Call

Good morning ladies and gentlemen. Welcome to CGI's Third Quarter Fiscal 2024 Conference Call. I’d 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 Third Quarter Fiscal 2024 Results are George Schindler, our President and CEO; and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, July 31, 2024. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q3 MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete Safe Harbor statement is available in both our MD&A and press release, as well as on cgi.com. We recommend our investors read it in its entirety. We 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 Q3 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 third quarter of fiscal 2024. In Q3 we delivered $3.7 billion of revenue, up 1.3% year-over-year or up 0.2% when excluding the impact of foreign exchange. The strongest CGI segments were Northwest and Central East Europe at 10% constant currency growth; Asia Pacific at 5.4%; Finland, Poland and Baltics at 3.2%; and US commercial and state government at 2%. From an industry perspective, we continue to have the highest growth in government, representing 4.1% constant currency growth this quarter. This was followed by manufacturing, retail and distribution at 2.2%, driven primarily from North America. We continue to experience softness in certain verticals within regions such as financial services and communication in both Western and Southern Europe and North America. Our IP grew at a faster pace with 5.2% constant currency growth in the quarter. As a percentage of total revenue, IP represents 22.5%, up 120 basis points year-over-year. Bookings in the quarter were strong at $4.3 billion, led by managed services and IP wins. Our book-to-bill ratio in the quarter was 117% and were strongest in US federal at 209%, UK and Australia at 153% and Western and Southern Europe at 123%. On a trailing 12-month basis, book-to-bill was 112% with 118% in managed services and 104% in SI&C. Global backlog reached $27.6 billion or 1.9 times revenue, reflecting our overall business resilience. Turning to profitability, our performance this quarter once again demonstrated our operating discipline in navigating the ongoing dynamic macro environment. Earnings before income taxes were $594 million for a margin of 16.2%, up 80 basis points year-over-year. Adjusted EBIT in the quarter was $603 million representing a margin of 16.4% up 30 basis points year-over-year. This is mainly a result of our improved mix of business and the benefits realized from our cost optimization program completed last quarter. We had strong margin in the five following segments: Asia Pacific at 31%; Canada at 22%; US Federal and Finland, Poland and Baltics both at 17%; and UK and Australia at 16%. Our effective tax rate in the quarter was 25.9%, and we expect our tax rate for future quarters to be in the range of 25% to 26.5%. Net earnings were $440 million for a margin of 12%, up 50 basis points year-over-year. Diluted EPS was $1.91 representing an increase of 9% year-over-year. When excluding specific items, net earnings were $440 million. This represents a margin of 12%, up 30 basis points year-over-year. On the same basis, diluted EPS was $1.91, an increase of 6% when compared to Q3 last year. In the quarter, cash provided by operating activities was $497 million representing 13.5% of total revenue. On a trailing 12-month basis, cash provided by operating activities was $2.2 billion up 12% year-over-year, representing 15.2% of total revenue. Days Sales Outstanding (DSO) was 42 days in the quarter, two days better than last year. In Q3, we used our cash to invest $91 million into our business and invested $499 million to buy back our stock. Subsequent to the quarter, we announced two strategic acquisitions. In Canada, we acquired Celero's business serving credit unions, which consists of managed services, core and digital banking and related IT services. In the US, we announced yesterday that we entered into a definitive agreement to purchase a leader in digital transformation for the US federal government. Both mergers, these two acquisitions would add 875 consultants and professionals to CGI. In the quarter, we continue to deliver a strong return on invested capital at 16.1%, up 40 basis points year-over-year demonstrating our proficiency and discipline on the deployment of capital. At the end of the quarter, CGI had $2.7 billion of cash readily available and access to more if needed. As part of our profitable growth strategy, CGI's capital allocation priorities are primarily focused on investing back in the business and pursuing accretive acquisitions. Additionally, the company has the flexibility to use a portion of its free cash for the repurchase of its stock. As announced this morning, the CGI Board of Directors has approved a dividend program under which the company intends to pay a quarterly cash dividend of $0.15 per share starting in the first quarter of fiscal 2025. The initiation of this program represents an additional mechanism to return value to our shareholders while continuing to maintain our financial flexibility to invest in our build and buy profitable growth strategy. Now I will turn the call over to George to further discuss the insights on the quarter and outlook for our business and markets. George?

Thank you, Steve, and good morning everyone. Our team delivered third quarter results that again reflect the disciplined execution of our plan to be a partner and expert of choice for our clients, an employer of choice for our consultants and professionals, and an investment of choice to deliver shareholder value. In the quarter, we continued to proactively manage the fundamentals of our business. We delivered sustained margin expansion and EPS accretion, driven by the continued diversification of our business mix through growth of recurring revenue. Importantly, our operational excellence actions continue to contribute to our strong earnings. Our cash from operations increased, up 21% year-over-year on the strength of quality and client delivery. And as anticipated, our revenue growth and overall bookings in the quarter continue to be largely comprised of managed services and IP engagements, which help clients accelerate cost savings and progress business transformation. As such, constant currency revenue growth in IT-based services was up 5.2% year-over-year and managed services revenue was up 1.5%, offset by continued softness in systems integration and consulting. Bookings were $4.3 billion with a managed services book-to-bill of 139% and an IP book-to-bill of 129%, both of which were largely driven by government sector awards. In fact, government sector wins comprise just over half of total Q3 bookings with a book-to-bill of 164%. More clients prioritize the services and solutions necessary to implement current mission objectives and embed flexibility to support evolving policies, all in line with the natural cycle of government. CGI's IP solutions were at the core of driving the strong government bookings, as clients increasingly turn to CGI's proven industry-specific IP solutions to raise operational efficiency while also gaining benefits from embedded security and innovation, including AI. In the quarter, we continued to see clients exercising caution in their spending on stand-alone consulting and system integration projects. As an end-to-end services provider with strong managed services relationships and market-leading intellectual property, our bookings in the quarter are reflective of our positioning for continued strong client interest in managed services and software-as-a-service. For example, Michelin selected CGI to deliver an open and green IT ecosystem to enable business innovation and support enterprise-wide digital transformation. CGI will deliver a range of IT modernization services, including the use of AI technologies through a mix of proximity teams in France and the US, as well as global delivery teams in India and Morocco. The US Department of State's Bureau of Affairs extended its relationship with CGI through a USD378 million award. Under this award, we will deliver end-to-end passport application processing services in support of the issuance of more than 21 million passports and travel documents annually. Several local governments in Finland named CGI as their partner for transforming healthcare service delivery through CGI's Omni 360 Patient Information platform. This will also create a foundation for broader use of AI in the healthcare system. Harley-Davidson Financial Services selected CGI for a new engagement to modernize the company's loan origination system, replacing disparate IT platforms with a unified CGI credit studio solution. Under this agreement, CGI will deliver an AI-enabled platform that introduces greater flexibility for dealers and an intuitive buyer experience. The French Ministry of Justice extended its partnership with CGI to drive the modernization of its HR system. Our consultants will leverage their industry knowledge, as well as their expertise in SAP to implement a new platform and transform key processes. And a major North American bank selected CGI to modernize its wire room, leveraging the CGI all payment solution, a modular and cloud-based platform. The solution will enable the bank to retire legacy systems, reduce operational costs and more easily adapt to new industry standards and regulatory requirements. Each of these examples are the types of recurring revenue engagements that serve as a base to enhance our resilience and stability of the fleet. CGI's third quarter results highlight the ongoing value that our talented consultants and professionals deliver for clients every day. In the quarter, we again saw rising levels of client satisfaction, notably for the innovation we bring to our engagements, including through the use of AI technologies. I’d like to recognize CGI's 90,000 consultants and professionals for earning the trust of our clients. Through their expertise, insights, and commitment they are helping clients around the world achieve tangible business and mission outcomes. This is particularly important given today's dynamic market conditions. Looking ahead to the demand environment, we are starting to see some underlying signs of stability in the macro business environment. This is making it possible for our clients to begin solidifying their future plans. For the past few months, we increasingly see differentiation in terms of pace and focus of key digitization investments by our clients. In short, each client is forging a unique path forward and it is incumbent on partners to meet them where they are and devise the right combination of services and solutions to help them progress their individual business objectives. This evolution towards differentiated client needs matches well with CGI's greatest strengths, particularly our client relationship proximity model, our end-to-end portfolio of services, and our global network and scale. While we do expect to see continuation and delays in the timing of decisions, particularly for stand-alone SI&C projects, client interest remains strong for the value proposition CGI can deliver through our end-to-end offerings. This positioning is validated by CGI's pipeline of opportunities over the next year. The IP pipeline is up more than 15% year-over-year with significant increases in transport and logistics, manufacturing, and energy. The managed services pipeline is up by more than 40% year-over-year with sharp increases in government, insurance, banking, manufacturing, and retail. And the pipeline of SI&C opportunities across several commercial industry sectors is rising compared to this time last year. Importantly, we saw some green shoots in our third quarter results, further pointing to stabilization of the business environment. For example, the number of total open billable positions picked up on a sequential quarter basis. CGI's utilization was also up on a sequential quarter basis, as we continue to align talent to those areas where we see growth, largely in the government and utility sectors and hires to support growth in Asia Pacific were up on a sequential quarter basis, as more commercial industry clients, notably in banking, retail, and manufacturing, are leveraging CGI's offshore centers of excellence. CGI continues to make targeted investments in our talent and our end-to-end services to best partner with clients, as they solidify and begin reaccelerating their digital initiatives. For example, we are enhancing our managed services delivery approach through the expansion of our CGI DigiOps platform, an integrated digital-first delivery fleet. This platform delivers higher quality insights for faster client decision-making, better performance and system availability, and cost savings for clients through the use of AI technologies. For our SI&C services, we continue to invest in our emblematic offerings, methodologies, and talent in areas such as business model transformation, change management, responsible use of AI, and enterprise architecture. And we are accelerating the integration of generative AI into our IP solutions portfolio through our signature CGI Pulse AI platform, which also enables clients to more easily integrate these new technologies into their existing and new base. In line with the investment we announced last year and rising client interest, AI and GenAI technologies are increasingly integrated into our engagements. In Q3, the number of projects incorporating AI rose 20% on a sequential quarter basis. Third quarter bookings at integrated AI technologies remain strong, including wins with the top 50 auto parts supplier to establish a GenAI center of expertise and help evaluate and optimize ROI use cases. A European logistics company to conduct an AI maturity assessment to evaluate organizational readiness and capabilities, and a space industry client to assess the creation of a new digital marketplace that integrates space and AI technologies to enable a rapid response to natural disasters. As Steve mentioned earlier, we are updating our use of cash strategy to incorporate a dividend program, as an additional mechanism to deliver value to our shareholders and to broaden our investor base, while maintaining financial flexibility to continuously invest in growth opportunities. With a strong balance sheet and liquidity, CGI will continue to prioritize capital allocation strategies that drive profitable growth and enhance value for shareholders through investing in our business, pursuing accretive acquisitions, ranging from metro market to large transformational opportunities, repurchasing our stock and/or paying down our debt and now distributing a dividend. Regarding our strategic priority to pursue accretive acquisitions, I'd like to expand on the two acquisitions announced subsequent to the close of the quarter. In Canada, the acquisition of the credit union business complements and expands CGI's core banking service offerings to an additional 90 Canadian credit unions nationwide. Our services and credit unions are now coast to coast covering more than two-thirds of the credit unions across Canada. I would like to warmly welcome the 150 new consultants and professionals who joined CGI from there. And in our US federal operations, we announced a definitive agreement to purchase Aeyon, a leader in digital transformation for the US federal government. This acquisition, pending regulatory approvals, will further complement and expand our US federal capabilities and relationships, including with NASA, the FAA, the Office of the Secretary of Defense, and multiple branches of the US military services. Upon final closing of the acquisition, 725 Aeyon employees will join CGI, bringing deep expertise in a range of services, such as data management and analytics, logistics and supply chain, and AI technologies. We are in active dialogue with additional merger targets at all stages of our pipeline and are committed to merging with like-minded companies that are complementary to our geographic footprint, client base and end-to-end portfolio of capabilities. Our operational strength, stability, and financial capacity will continue to enable us to move quickly with discipline on the right opportunities of all sizes. In closing, we will continue to manage the fundamentals of our business and invest in our build and buy profitable growth strategy to further deepen our client relationship proximity model, our end-to-end portfolio of services, and our global network and scale. As each client forges their unique path forward, we will continue to devise the right combination of services and solutions to deliver tangible, trusted business and mission outcomes for our clients. Thank you for your interest and support. Let's go to the questions now, Kevin?

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

Thank you. Your first question comes from Daniel Chan from TD Cowen. Please go ahead.

Hi, good morning. George, the dividend has been something that's been talked about for a while. Can you shed some color on why now is the right time to initiate the dividend?

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

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

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

Thank you for the question, Dan. Valuations are holding steady even with increased activity in the PE space. There are many sellers who feel this is a good time to merge companies. We are having discussions at various stages of our pipeline, including advanced discussions, and we recently completed a couple of deals, with more potential in the works. We believe the environment is becoming more dynamic. We are also receiving more inbound calls, primarily from smaller companies, indicating ongoing activity in the market.

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

Thanks a lot. Appreciate it.

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

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

Yes, I think, Suthan, it is a combination. Obviously, as the discretionary picks up, that augments some of the growth that we are seeing or said differently, a lot of these managed services projects as they come online are offsetting the fact that we do see a slower demand environment on the SI&C. But as I've said before I do believe that clients are making decisions, future plans on their digitization. We play on both sides. We play on the cost savings side, but we also play on the growth side. So I do believe that some of the green shoots that we are seeing will take hold. But it is going to be – it is still not consistent, still not uniform, as I mentioned in the opening, every client is looking at this a little bit differently, and I would still say that caution reigns even on the bigger deals.

Thank you. For my next question, I wanted to discuss the Aeyon acquisition because it seems like a strong deal in the US Federal space that expands your presence in that segment. Does Aeyon come with any intellectual property? Regarding the acquisition, is there an opportunity to deepen your existing relationships within the Federal sector, or does this allow you to forge new relationships across the segment?

It does open up new opportunities for us, particularly in the national security sector, which is currently seeing significant spending by the US federal government due to global events. They focus on data analytics and business operations, including finance, logistics, and supply chain. So while there are new avenues, the required skills are quite similar. Additionally, they possess complementary government-wide contract vehicles that facilitate quicker procurement for certain back-office automation services, an area where we excel. This not only brings in new clients in the crucial national security field but also provides a chance to expand our existing services with current clients, which is very positive. There is no intellectual property involved, so it is purely systems integration and consulting. However, it aligns with areas where governments, especially the US, are investing in national security.

Okay, perfect. Thanks for the color, I’ll pass the line.

Thank you Suthan.

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

Hi, good morning. Let's discuss margins. I don’t need to ask if there’s potential for margin expansion because the answer is always yes. Considering the factors that could drive margins, would you say that an increased mix of IP and managed services is what we should anticipate as the main driver for margins in the near future?

Yes. Well, you didn't ask me, but I'm going to say it anyway. We talked last time about kind of the improvement that was coming both from the cost optimization but also kind of that mix of business. And that's exactly what you saw this time and the adjusted margin accretion of the 30 basis points and that should continue, right? Because as we add more of that managed services growth, including global delivery, right? You see the margins from global delivery, so that's a piece of that mix. So it is both managed services, but also leveraging the global delivery. IP as a percentage of revenue, which did tick up again this quarter. But we still have some tailwind from the cost optimization program. And then as I always say, Thanos, there is still an opportunity for us to have a continuous improvement in some of the geographies in not just the revenue mix, but also the SG&A mix and the project execution. So it is a combination of those factors always, but yes driven by the managed services in the IP.

And in US Federal the strength you saw in bookings, is there some election dynamic that's contributing to that or would you not attribute to that?

Yes, that's definitely part of it. As we discussed in last quarter's call, we anticipated many RFPs last quarter but saw lighter bookings. However, we expect those to be finalized in the second half. Additionally, there are some large government bridge contracts this quarter as they prepare for an election and transition. The bureaucracy tends to keep things running during this period, not knowing who will be elected and what new policies might come in. Therefore, we're seeing these bridge contracts, which are a bit longer than they have been historically due to potential policy changes. The transition could take longer, and that's reflected in these contracts. Our team is doing an excellent job securing these contracts through their efforts and strong delivery for the US government.

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

Thanks a lot, Thanos. Really appreciate it.

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

Thank you, George.

Surinder, good to have you on the call.

Thank you, George. I appreciate that. At least I get one call with you before your retirement. I have a big picture question regarding the AI strategy. As you work on building solutions for clients, is there significant third-party integration of solutions, such as ChatGPT and Gemini, or are you focusing more on proprietary models so that you maintain the intellectual property? How should we think about that and its evolution?

Yes. Well, it is a combination, it's a combination. So we have our signature intellectual property is called Pulse AI and it's a multimodal approach that allows you to leverage those large language models but also develop some of those closed-loop models that most of our clients are really looking at. And that's why I mentioned in the last several calls that our AI work is largely helping clients prepare their data and their architectures to actually leverage the AI in a bigger way. I don't think, anybody is looking at just using the large language models that are available to ChatGPTs of the world. They are going to leverage pieces of them but not exclusively. They want to build closed-loop elements. So yes, there already is CGI intellectual property to make that easier to integrate. There will be other CGI intellectual property built on top of those models that is industry-specific and we're already announcing working with some of the hyperscalers on exactly that. So more to come on that. But it is still early days for that, Surinder.

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

Yes. Well, I kind of alluded to that a little bit. You can see the bookings and the growth profile in the SI&C. Some of that managed services is coming online. It's just being masked by the softness on the other side. And that's the goodness of the resilience model of CGI, right, having that balanced portfolio allows us to continue to move forward even in the current environment, but they are coming on board. Having said that, they are slower. It is slower to convert from pipeline to booking. It's slower to convert from booking to actually start the projects. It's slower to go from the start of the project to the actual engagement of revenue because there is always a transition. Clients are being cautious on all of the above. So they are being extra cautious on a lot of these managed services deals; we take on people from our clients are being very cautious in how they do that in the current environment. So it is just slower all the way around. But be that as may, yes, we are converting some of those on just offset by some of the other softness.

Thank you.

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

Congratulations, George, and for me as well. My first question is regarding the margin improvement, which is quite positive. However, I am curious if we are still in a phase of significant technological investments that might be offsetting your margin gains from the cost improvement program. Is there currently any effort underway to future-proof the organization that is having an impact, or are we seeing normal investment levels at this time?

Yes, it's a great question. We recently made a significant investment to position ourselves better to leverage AI. Currently, a lot of that investment is going towards our talent. This is really just a shift in our investment strategy. We consistently invest in training, but now our focus is on AI. Likewise, we have always invested in our intellectual property, but now we're concentrating less on generic features and more on incorporating AI into our IP. So while there is an increase in this area, some of that is coming from our cost optimization efforts. That's why I mentioned that you won't see all of the cost savings going into this. However, I don't believe it will prevent us from achieving the incremental improvements in margins that you are used to seeing. We have several strategies in place to support this, as I mentioned earlier.

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

Yes, it's an important question. We are currently planning for fiscal year 2025 and continuously updating our rolling three-year plan annually. We take into account client feedback and have identified early findings that inform our strategy. We focus on both cost savings and growth initiatives. However, I don't anticipate any significant changes. We are targeted in our approach to markets and clients, with 85% of our work serving enterprise-level clients who are inherently global. We carefully select where to direct our business efforts and how we are organized geographically. While I recognize there might be an extended recovery period, I believe there will be drivers for growth as companies seek to accomplish more with fewer resources. Additionally, demographic shifts, especially in Europe, may create challenges in finding talent, which we expect will prompt continued investment in digital solutions. Tools like AI will play a crucial role in facilitating this. Our views on capital allocation remain unchanged and we still see opportunities in all these areas.

Great. And good move on the dividend.

Thank you.

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

Hi, good morning. I was hoping to back on the consulting side of the business and just curious how you think about that part of the business specifically heading into fiscal 2025 and what you are thinking about in terms of a recovery in that consulting side of the business?

Yes, it's quite interesting, Stephanie. I have mentioned previously that during past slowdowns, there was typically very little activity in consulting. While we have seen an impact and a slowdown in consulting, it hasn't completely stopped. The reason for this is that many of our current AI initiatives are driven by consulting efforts related to data, business transformation, and change management, as clients consider their future models. I believe the recovery will be gradual. Additionally, consulting is integrated into many of our other activities, including some managed services deals, and even in our intellectual property sales. Therefore, it remains a crucial component, albeit smaller in scale. It continues to be a front-line focus for us, and we will keep investing sensibly while ensuring we meet our clients where they are. This area remains vital for both us and our clients.

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

Yes. IP continues to be increasingly strong in Europe, which has not been our historical trend, and that's good. Still really focused on operations. And a lot of our IP is there. So HR payroll secure document handling, the patient information system that I mentioned, it’s all more on operations focused, still a lot of growth in government and it's governments around the world, North America and Europe and utilities and health. So it is pretty widespread. But again very operational focus, which is where a lot of our IP plays. So it is nice to see.

Yes, that makes sense. And George, I'll echo everybody's congrats on the retirement. It's been a pleasure working with you.

Thanks a lot Stephanie. I appreciate it. Likewise.

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

Thank you very much. Good morning. Can you provide more detail on your comments regarding clients having distinct and varied needs? Additionally, it appears that your competitors' performance has been inconsistent this quarter. Do you believe that some of them have faced challenges due to these changes, and that CGI is in a relatively stronger position to adapt?

It’s a challenging topic to discuss, but I believe these variations show that each client is moving at their own pace. It's important to meet clients where they are and work alongside them. If they require additional consulting, even if it doesn't generate as much revenue, that's what they need, and we should provide it. Conversely, if they're ready for a larger managed services agreement, we must ensure we convey our value proposition effectively. We also need to offer software-as-a-service, allowing them to minimize capital expenditures, even if they intend to develop surrounding systems later on. Flexibility is essential and is a defining characteristic of CGI, as we're highly focused on our clients, thanks to our proximity model and deep understanding. While I won’t comment on other companies, I can say this approach has led us to discover significant opportunities, which is also reflected in the increase in our pipeline.

And secondly, can you speak to the environment in France, some others have called out a slowdown through June, that's related to the election or not, have you seen any changes to the quarter? And how are you thinking about France in the near term?

Yes. I was just speaking with our leader in France. The current situation is causing delays not only in the government but also in the commercial markets, as they are adopting a wait-and-see approach. There's uncertainty about how things will unfold. If there was already a cautious outlook from a macro perspective, we're seeing that reflected in the stance of clients in France, which is having a short-term impact. However, there has been no change in the long-term outlook. We observed strong bookings in Western and Southern Europe, largely driven by France, and our pipeline is continuing to grow there. This is more of a temporary situation, but we are definitely feeling its effects, as reflected in our results.

Thanks for taking the questions. And George, enjoy your retirement.

Thank you. I appreciate it.

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

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

Finland, Poland, and the Baltics have a strong intellectual property presence. I noted that we achieved some solid IP sales in those regions. However, I cannot confirm if this level of performance is sustainable. They have a strong business there, and we hold a good position in the marketplace, allowing us to engage in social and health reform through this IP. I’m not certain if we can maintain this exact level, but that is our aim. The team is doing an excellent job.

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

Yes. Yes. No, I'm glad you asked that question because what we had was an increase of 20% in the number of engagements, but those engagements are not large. So you don't see anywhere near a 20% increase in bookings. And in fact, although we're up obviously on a trailing 12-month basis, the bookings were flattish to even down a little bit in the quarter on AI. But the number of opportunities keeps increasing because it is a bit of a tip of the spear. Everybody is kind of in a different place on AI. They all recognize they want to use it, but they want to use it for business impact. And so they are really taking a very responsible approach and we’re helping them with that. So a lot more engagements, but they’re all still pretty small.

Got it. That’s great. Thanks a lot.

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

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

Yes. I believe there are two parts to this. In the short term, we may see some pricing challenges due to the tough macro environment we are currently experiencing. However, the more fundamental issue relates to the ROI-driven focus we’ve been discussing on this call for some time. Clients are increasingly seeking innovations that improve outcomes, which ultimately saves them money, as do increased efficiencies, all while maintaining quality. They are prioritizing outcomes—both short-term and long-term—over mere inputs or price points. The overall solution is more crucial than just the pricing. That’s why I highlighted our investments in CGI DigiOps, our IP with AI, and our global delivery strategy. These approaches will enable us to remain competitively priced without getting bogged down in discussions about unit price input rates. While some of that does occur occasionally, we observe that clients are becoming much more sophisticated in what they are seeking and how they approach it. More often than not, the discussion centers on whether we can deliver quality alongside operational efficiencies, rather than the other way around.

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

Yes, it's a fixed price project that is taking longer. We're not calling out clients or project names, and it was really one project. However, it was a significant project, and we mentioned it because it had an impact. It is largely behind us now, and we can move forward.

Okay. Fair enough. And it's been great working with you; all the best in your retirement.

Thank you so much, Richard. Julie, we have time for one more question, please.

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

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

Yes. So on the geographies in Europe, we saw the same thing. And if you really look at it, it is the largest geographies, I should say, in Europe are kind of more impact. We saw more impact to the current macro environment. And part of that is just they tend to be larger enterprise clients, so they're more impacted by the global economy. So it's not just that we're working with a company in France, that, that company in France has global operations. Same thing in Germany, same thing in the UK on the commercial side. In some of the smaller geographies like Finland, Poland, and the Baltics, we have some clients there that are more specific to the region. And so they are a little bit more nimble, they're moving a little bit faster and so you see our ability to drive some more growth there. But I think, again, and that gets back to my differentiation comment from the opening that every client is operating a little bit differently. As you know, we don't play into some of those international geographies that are growing a little faster. But I would suggest as maybe a similar situation there. They are just going to be a little more agile, more nimble, and a little more faster to realize some of those green shoots. That's what I would say.

That's helpful, George. I have a follow-up question regarding mergers and acquisitions. In the past few quarters, you've completed several acquisitions and announced Aeyon yesterday. Could you provide some insight into the verticals your company is targeting and the technologies and skill sets you aim to focus on going forward? Previously, we assumed that intellectual property was a significant aspect of your M&A strategy, but it seems Aeyon did not bring any IP. I’m trying to understand what our focus will be moving forward.

Yes, that's a great question, Divya. It allows me to clarify what we are primarily seeking in M&A and new client relationships, whether in existing markets where we can expand or in new metropolitan areas. For example, our acquisition of Momentum was focused on entering a new market in Miami. Similarly, with Celero and Aeyon, it's about establishing new client relationships. Aeyon, for instance, brings a focus on national security, whereas Celero connects us with credit unions nationwide, which we previously did not serve. While we have gained significant capabilities through these acquisitions, such as core banking with Celero and advancements in payments, data, and AI with Aeyon that enhance our automation, our primary objective isn't tied to a specific sector. Instead, it's about developing a metropolitan market across various sectors, leveraging all these capabilities. We believe this approach is the best way to build our business for the long term, and all these acquisitions align with that goal.

That's very helpful. If I may ask one small question, I think I know the answer, but could you provide some indication of a reasonable valuation multiple that the companies have?

Yes, sorry, you cut off at the end. Do you have another question?

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

Yes. I can explain it this way. There was a time when valuations were unreasonable, with sellers expecting multiples that were nonsensical and would have taken decades to see any return on investment. Many sellers were in this situation. Some digital transformation companies had inflated multiples that didn’t align with our standards at CGI. However, the current environment is different. Historically, our valuations have ranged from just under to just over one time revenue, based on asset margins, and we consider this more reasonable.

That sounds good for me. Thank you so much. And congratulations on the retirement. It was great working with you.

Thanks a lot, Divya.

And I will turn the call back over to Kevin Linder for closing remarks.

Thank you, Julie, and thanks, everyone, for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1 (877) 674-7070 and using the passcode 875394. 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 we look forward to speaking soon.

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