Earnings Call
Cgi Inc (GIB)
Earnings Call Transcript - GIB Q4 2021
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the CGI Fourth Quarter and Fiscal 2021 Conference Call. I would now like to turn the meeting over to Mr. Maher Yaghi, Vice President, Investor Relations. Please go ahead, Mr. Yaghi.
Maher Yaghi, Vice President, Investor Relations
Thank you, Julianne, and good morning, everyone. With me to discuss CGI's fourth quarter fiscal 2021 results are George Schindler, our President and CEO and François Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, November 10, 2021. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q4 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 encourage our investors to read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. And all of the dollar figures expressed on this call are Canadian, unless otherwise noted. I will turn it over now to François to review our Q4 financial results and then George will comment on our business and market outlook. François?
François Boulanger, CFO
Thank you, Maher, and good morning, everyone. I am pleased with our Q4 performance as revenue growth and operational discipline contributed to double-digit EPS accretion and increased cash from operations. Our year-over-year constant currency revenue growth accelerated in Q4, as previously booked orders began to flow into revenues. We delivered 15% adjusted EPS growth. We generated strong cash flow from operations, up 7.1% year-over-year in Q4, bringing the last 12-month total to over CAD 2 billion, an increase of 9.1% year-over-year. And we strengthened our balance sheet by executing our first public debt issuance both in the US and in Canada. This was supported by strong investment-grade credit ratings from both Standard & Poor's and Moody's. For Q4, we delivered revenue of CAD 3 billion, up 6.4% year-over-year on a constant currency basis. This is an acceleration from the 3.5% growth in Q3. Double-digit growth in constant currency was achieved in the following geographies: Western and Southern Europe, up 13.6%; Asia Pacific, up 11.5%; US commercial and state government, up 11.1%; Canada, up 10.5%; and Central and Eastern Europe, up 10.1%. This was driven by strong demand in the following industries: healthcare grew 10.8%; MRD grew 9.9%; and Financial Services grew 6.4%. The total bookings of CAD 2.9 billion, representing a book-to-bill of 97.1% for the quarter while our trailing 12-months book-to-bill stands at 114.2%, up 17% year-over-year. I would like to highlight a few reporting segments with strong bookings in the quarter. US commercial and state government with a book-to-bill of 117%. UK and Australia at 111% and US Federal at a 110%. New business in the quarter was 31% of bookings, an increase from the previous year's 22%. On a trailing 12-month basis, new business was 32% of bookings versus 25% for a year ago. Given the continued increase in demand for our services as reflected by the strong bookings in the last 12 months, we expect continued positive growth trends in fiscal 2022. We finished our 2021 fiscal year with a backlog of CAD 23.1 billion. Adjusted EBIT in Q4 was CAD 493 million, while EBIT margins increased to 16.4%, up 76 basis points compared to Q4 last year. The year-over-year increase was mainly due to higher utilization rates and lower non-recurring project adjustments. We saw strong margin improvements in US Federal with margins up 350 basis points as well as US Commercial and Scandinavia both showing 170 basis point improvements. This was partially offset by lower margins in Canada due to lower tax credits this year as well in the UK due to a non-recurring contract provision. Our effective tax rate in Q4 was 25.5%. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. Net earnings were CAD 346 million and diluted earnings per share were $1.39 representing an increase of 44.8% year-over-year. This improvement was mainly due to revenue growth, margin improvement, and lower restructuring costs. Excluding integration and restructuring costs, net earnings were CAD 347 million for a margin of 11.5% and diluted earnings per share were CAD 1.40, an accretion of 14.8% when compared to CAD 1.22 in the same quarter last year. In the quarter, DSO was 45 days down from 47 days last year. Cash provided by operating activities was CAD 527 million, an increase of 7.1% year-over-year. Net debt to capitalization declined quarter-over-quarter to 26.6% from 30.9% in Q3. We are proud as an organization to have a new group of investors in our company through our integral bond offering raising in the process CAD 1.8 billion across the US and in Canada. We used a large portion of these funds to prepay the USD 1.25 billion loan facility that was due in 2023. More importantly, with this debt raise, the weighted average maturity of our debt has increased from 1.6 years to 4.7 years with 91% being fixed interest debt versus floating interest debt. For the last 12 months, cash provided by operating activities was CAD 2.1 billion or 17.4% of revenue. This is an improvement of CAD 177 million year-over-year. In fiscal 2021, we invested $1.9 billion in our Build and Buy profitable growth strategy comprised of CAD 301 million back into our business mainly in IP and managed services engagements, CAD 99 million on business acquisitions and $1.5 billion to buy back our stock. Buying back CGI stock has been an accretive and flexible way to return capital to our shareholders. In fiscal 2021, we bought back 15.3 million shares at an average price of CAD 98.16. As of the end of Q4, the company could purchase up to an additional 10 million shares under the current NCIB program. Looking ahead, our cash allocation priority remains the same: investing in our business, pursuing accretive acquisitions and buying back our stock. With cash of CAD 1.7 billion on hand and a CAD 1.5 billion revolver that remains fully accessible, we have CAD 3.2 billion readily available. In addition, we now have access to the public debt market to support our Build and Buy profitable growth strategy. Now I will turn the call over to George to provide perspectives on fiscal year 2021 and on our business for the year ahead. George?
George Schindler, CEO
Thank you, François, and good morning, everyone. I am pleased with our team's performance in the fourth quarter and full fiscal year. I would like to recognize our now 80,000 consultants and professionals around the world for their tremendous commitment to delivering end-to-end digital value for our clients. Through the expertise, insights, and disciplined project delivery of our team and the continued trust of our clients, CGI returned to revenue growth for the second half and created incremental shareholder value. For fiscal 2021, we delivered double-digit GAAP and adjusted EPS accretion, a 9% increase in cash from operations, and a nearly CAD 2 billion increase in bookings. This morning I will provide more context on the fundamental components of our business that contributed to the strong full year performance. Specifically, our diverse presence across industry sectors and regions and our proven delivery of end-to-end digital services. Starting with revenue, we finished the year with revenue of $12.1 billion, in line with our projections for growth in the second half of fiscal 2021. CGI grew 4.9% on a constant currency basis compared to the second half of last year. Growth was broad-based across every industry sector during the second half, with constant currency growth of 8.9% in manufacturing, retail, and consumer services, driven by Western and Southern Europe with 18.5% growth; 8.4% in healthcare, led by Central and Eastern Europe, with 44% growth; 6.1% in financial services, with Scandinavia delivering just over 9% growth; and 4.2% in communications and utilities, led by U.S. commercial and state government at 47% growth. Our government business also grew in the second half at 1.4%, even as clients continue to reprioritize their IT investments in line with the changing public health and economic environment. We remain well positioned as a partner of choice to help governments address a wide range of domestic priorities, including infrastructure, environment and the climate, and cybersecurity. We believe this strong second half performance demonstrates CGI's role as a leading digital services partner, positioning us well for future growth as clients accelerate spending to capture the increased benefits of digitization for their customers and employees. This strong client demand environment drove our robust bookings on a full year basis, with a book-to-bill of 114%. We sustained our incumbency with enterprise clients and we're also awarded net new projects and expanded scope, growing our share of client spend. Recent new awards for digital transformation services in the fourth quarter included the following: Canadian banks selected CGI to help with its business transformation journey. CGI will lead the modernization and migration of client interaction platforms to the cloud. Volkswagen Group U.K. awarded CGI a five-year managed services contract to implement enterprise automation, to improve employee productivity, as well as support their sustainable mobility strategy. Valley Bank in the U.S. awarded CGI new work to support the bank's omnichannel digital enablement, drawing on our capabilities in robotic process automation, machine learning, and application modernization. And the U.S. Centers for Medicare and Medicaid Services will leverage CGI's digital modernization services to move legacy platforms into the cloud. In the year, bookings were strong across several industry sectors. In manufacturing, retail, and consumer services, bookings were up 16% over last year, with a book-to-bill of 115%. Bookings increased based on demand for omnichannel transformation, supply chain modernization, and data analytics. Government and healthcare bookings were up nearly 13% with a 115% book-to-bill for the year, based on continued demand for citizen and patient services, application modernization, and cloud. Financial services bookings were up 20%, with a book-to-bill of 111% for the year. This was led by strong demand in the insurance sector for transformational managed services to enhance customer and employee experience while delivering cost efficiencies. Communications and utilities bookings were up 27% year-over-year, with a book-to-bill of 114%. This uptick was led by strong demand from utilities providers to help address climate risk and the energy transition. Moving to our fiscal year 2021 profitability, adjusted EPS accretion of 11% was delivered through a combination of revenue growth, improved business mix operational excellence, and share buybacks. Our EBIT expanded to 16.1%, up 78 basis points year-over-year. An important element of our improved business mix is business and strategic IT consulting, where demand accelerated in the second half of the year, notably for business model transformation, change management, customer experience design, and digital advisory services. We continue to invest in talent, methods, and accelerators to support our growth in high-end consulting services. CGI's proprietary industry-specific blueprints, as well as cross-industry ecosystem frameworks, are designed to help our clients navigate the changing business models and evolving value chains. Intellectual property revenue remained steady at 21% of our overall revenue mix. Despite the volume headwinds in our transaction-based IP solutions, specifically those related to travel services, we saw significant growth in revenue from new solutions, including 50% year-over-year growth in IP acquired through recent mergers, demonstrating CGI's ability to leverage our global footprint to expand the reach of acquired services and solutions. We also saw significant growth in our Open Grid 360 platform, which helps clients manage the energy transition. We expect continued strong demand for this solution as part of CGI's suite of sustainability offerings, which we are highlighting during COP26 in Glasgow through the end of this week. SaaS-based IP revenue was also up year-over-year, in line with overall increases in demand for cloud-based solutions, closing out the fiscal 2021 review and setting the stage for growth in fiscal 2022 was our strong cash generation. As we shared throughout the year, our financial strength anchors CGI's resilience and enables continued investment in our Build and Buy growth strategy. Last quarter, I shared with you some of the findings from our proprietary research, notably the characteristics of leading digital organizations. I will now highlight a few of our delivery successes from the past year in helping clients realize the full potential of their digitization. We're one of the world's largest communication and media companies. We are delivering digital design studio as a service, which combines consulting and managed services to create a unified vision for customer experience across multiple commercial platforms, 30 products, and more than 50 development teams. This is improving the company's agility and reducing their overall time to market. We're a leading global financial services company, and we're helping to redesign, digitize, and automate all business operation processes for their retail banking line of business. To deliver on this complex enterprise project, a multi-shore team has been established to join our industry and technology experts across Canada, the Czech Republic, Germany, India, Poland, and Spain. We are supporting the French agency for ecological transition and digitizing their ecosystem partner network to enhance public-private collaboration on the energy transition. And the formation of a new Salesforce-based customer relationship management platform is underway to provide them better visibility into their partners and case management across functional teams. Together, with the Swedish traffic administration, we are pioneering the collection of driver-based friction data to provide a real-time view of current road conditions, hazards, and potential road maintenance issues. Our solution uses sensor-based data and crowdsourcing to gather and analyze millions of data points to help the agency ensure driver safety. CGI implemented a new cloud-based policy administration and agent portal system for a leading US insurer's commercial products business. We are migrating them from a legacy solution to the cloud-based Guidewire platform. We help reduce their product time to market. And for a leading interbank payments network, CGI is migrating its e-transfer compute capabilities with on-premise cloud deployment in Microsoft Azure, with the aim to improve resiliency and performance of a national payment system. These are just a few of the examples of how we are collaborating with clients to develop and drive their transformational strategies. You have the opportunity to hear more about our digital capabilities at the upcoming Investor and Market Analyst day on November 22. I'm pleased to host this event along with François and Julie Godin, our Co-Chair of the Board. Joining us on the virtual stage will be the president of our operating segments and our global executives responsible for talent, M&A, marketing, and investor relations. Together, we will tell you more about our vision, growth agenda, industry expertise, global alliances, and capital allocation strategy, as well as take live questions. Importantly, the day will begin with an overview of CGI's talent strategy. As a leading professional services firm, we believe engaging our existing talent and attracting new candidates is always our most important investment. In fiscal 2021, we continue to increase our investments in learning and development programs, including virtual boot camps and online learning. During the year, we surpassed 380,000 courses completed in CGI's online university to deepen employee skills in key areas of client demand such as cloud, data science, AI, customer experience, and business consulting. Our hiring continues to be on pace to surpass pre-pandemic levels. Our ownership culture continues to be a key differentiator in attracting the best consultants and experts in our industry. In fact, our employees referred over 30% of our new hires to join them in working at CGI this past year. We also continue to invest in industry-leading programs for diversity, equity, and inclusion and employee health and well-being. Over the past year, our programs were recognized by several external organizations including the Human Rights Campaign Foundation for our policies and practices promoting LGBTQ+ workplace equality in the US. Enterprise on Santé in Canada for our global network of mental health champions and certified mental health first aiders. Jobs for her for our diversity hiring and learning and development programs for women across Asia Pacific. Universum for being selected by female IT professionals as the best ideal employer in Finland, and the diversity charter in Germany for the creation of an innovative tool to ensure job advertisements are gender-neutral. During the Investor and Market Analyst event, we will also provide a briefing on our plans to accelerate the buy side of our profitable growth strategy. At the start of fiscal 2022, we received government approvals for and subsequently closed two new mergers in October. Array, a digital services firm primarily in the US Federal market, which will expand our client relationships in the strategic markets of the US Air Force and the Space Command while deepening our offerings in modernization and DevOps. And CMC, which is a leading technology and management consulting firm primarily serving the Spanish market. This merger expands our client proximity footprint in key metro markets like Madrid and Barcelona, extends our global delivery network, deepens our capacity to deliver digital transformation in the region, and brings new relationships with enterprise clients in the IBEX 35. I would like to take this opportunity to warmly welcome the over 1,770 new consultants and technology experts joining CGI from these two firms. As we enter fiscal year 2022, we are confident in our positioning to provide the best services and solutions to our prospective and current clients around the world. Particularly given our industry and technology expertise along with the ability to hire and build the necessary capacity to achieve our growth agenda. We remain committed to executing our growth strategy through both Build and buy. Our capital allocation priorities are aligned to drive continued revenue growth and double-digit earnings per share accretion.
Maher Yaghi, Vice President, Investor Relations
Thank you, George. And Julianne now will let you all know how you can queue up for Q&A. So Julianne?
Operator, Operator
Your first question comes from Richard Tse from National Bank Financial. Please go ahead. Your line is open.
Richard Tse, Analyst
Thanks. So your ability to sort of expand margins here in a fairly tight labor market is pretty impressive. Can you maybe walk through some of the levers that you may be pulling to not just preserve those margins but expand them?
George Schindler, CEO
Yes. Thanks, Richard. As you know, we have a pretty robust model and measurement process here at CGI that we really stick to. It's called the CGI Management Foundation, and that's really built for a professional services firm. And so, we believe we can continue to grow and grow our margins at the same time. Of course, when you think about our margin, some of that is coming from revenue growth and the scale that that provides us. Some of that is coming from the business mix. I highlighted in the opening remarks both consulting and intellectual property. Some of it comes from our operational excellence, and that's a discipline that comes with the management foundation. And then, of course, some of that expansion is coming from the share buyback. So, it really is a combination of all of the above. And given the outlook and demand outlook, we expect that to continue.
Richard Tse, Analyst
Can you provide some context regarding the current number of open headcount positions compared to a year or two ago?
George Schindler, CEO
The headcount has increased significantly. If you look back a year, that was the start of the pandemic, so it's more relevant to compare it to 2019. The numbers are up compared to our pre-pandemic levels and are growing in almost all the key markets we operate in. Currently, the competition for talent is intense due to the strong demand for technology and digitization services. This is part of CGI's business model, and we're using the same tactics and strategies we've employed over the years, which are proving to be very effective.
Richard Tse, Analyst
Okay. And just one last quick one for me. Like the growth is clearly quite broad-based geographically and by vertical here. How much do you think that is coming from the catch-up with the reopening following the lockdowns of last year versus a kind of a more normalized run rate, or do you think this is the normalized run rate going forward? That’s it. Thanks.
George Schindler, CEO
Thank you for the question, Richard. A lot of this is related to what we observed during the pandemic, which highlighted some weaknesses in various technology platforms. It also increased expectations from employees and customers regarding digitization. You could say that part of this is a catch-up, but it’s more about addressing technology issues that were previously unrecognized. This isn't just about catching up on delayed projects; it’s more extensive than that. Therefore, the impact is likely to be lasting.
Operator, Operator
Your next question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead. Your line is open.
Thanos Moschopoulos, Analyst
Hi, good morning. George, maybe just expanding on the hiring question. Can you speak to retention how that's been trending? And how you feel you're tracking relative to your industry peers?
George Schindler, CEO
Yeah. So here's where we are with turnover. It's up, but it's still on a trailing 12-month basis, slightly less than our pre-pandemic levels. And speaking of catch-up. I think there was a little bit of catch-up that occurred more than a lot of movements going on right at the height of the pandemic, and we're seeing and experiencing that just like our peers. We continue to be at or below in all of our key markets. We do track that versus the industry average. And I think a lot of that is because of the culture of CGI and particularly our ownership model which plays into that. And if you look at why people want to leave, it's usually a career development. And that's why we've doubled down and actually increasing our training programs by another 33% here in fiscal 2022. It's the compensation of benefits that come with that career development. And so, we're doing lots of promotions as a result of the training and then its purpose. And of course, in a culture like CGI ownership culture where we have, the clear equilibrium between our three stakeholders and the strong support for the communities in which we live and work, it really speaks to purpose. So we believe we can continue to hold our own. Like I said, it's a more intense environment right now. So there is a lot of movements, but that's why I really focus on those employee referrals as well because that's the way we can tap into talent. And then the last part is really tapping into talent in those global delivery centers, not just offshore, but also those onshore nearshore centers, which are growing at twice the rate as the rest of the company.
Thanos Moschopoulos, Analyst
Great. And looking at the US Federal business, I know that the book-to-bill was above one, but year-over-year bookings were down a fair bit. I presume that's related to some of the budget delays in the US. If you could provide some color just in terms of when you think on a resolve and what you're seeing as far as the pipeline and timing in that business?
George Schindler, CEO
Yeah. Specific to the US market or just in general?
Thanos Moschopoulos, Analyst
US Federal specifically.
George Schindler, CEO
Well, US Federal you saw the bookings are actually above 100% for the fourth quarter. So we're seeing some of that movement occurring. Government in general, including the US Federal market has been a bit sluggish. I call it a kind of COVID hangover fighting with various decisions about mandates. But I would say, both in the US and around the world, there are a lot of domestic priorities that we're well positioned for. Interestingly enough, if you look at the Infrastructure Bill that was passed by the House and looks like it will become real. A lot of that work actually comes to the state and local governments. And so a lot of that includes grants to state and local governments. So that will help our US Commercial and State & Government business. But the Federal business will really be helped by a lot of the infrastructure, especially cybersecurity infrastructure and the Department of Homeland Security and other areas. So, again, we're very well positioned for that. So we like where things are heading. But you're right, it's been a bit sluggish as of late and you see that.
Thanos Moschopoulos, Analyst
Great. Thanks, George for that point.
Operator, Operator
Your next question comes from Paul Steep from Scotiabank. Please go ahead. Your line is open.
Paul Steep, Analyst
Great. Good morning, George. Could you speak a little bit more? Can you comment about accelerating the investment in the business into 2022, maybe talk about whether that's a larger magnitude that you and François want to talk to, or where that – those investment dollars might be getting redirected some of your comments earlier about robotic process automation and maybe other areas of investment?
George Schindler, CEO
Yeah. Well, part of that investment is on the training and development I mentioned a 33% increase in our training budgets around the world, and that's really to make sure that we're keeping pace with the demand that's out there. One part is hiring. The other part is retaining your people and giving them the growth that they need as they pivot to the new opportunities. So that's one part of it. Of course, another part of it is we are also increasing the investments in our intellectual property. I mentioned some of the opportunities we see with the changes we've made in the IP Group, the opportunities to spread our IP into broader markets also string the IP together. And then, also create some new IP for the sustainability opportunity. So that's another one. But then of course, we also have investments to grow our buy side. So I don't know, François can add a little bit about that.
François Boulanger, CFO
Already we started the year with two acquisitions that we closed in October. So versus last year, we finished with two for the full year. So it's a great start for 2022. And the expectation is that that will be accelerating in the future quarters. So, you can expect more.
Paul Steep, Analyst
Great. One cleanup just on operations, how should we think what used to be Northern Europe, but I think it's mainly in Scandinavia where we were running off some business that maybe wasn't a fit for you and the clients and you transitioned them. How close to the completion of that are we might see – start to see hopefully an inflection in that region towards more growth in the future?
George Schindler, CEO
Yeah. Thanks for the question. So we've now isolated the issues really in just two metro markets. Otherwise, we're strong both on bottom line and returning to growth. We've made leadership changes in those metro markets. And our COO, Jean-Michel is now focused and he can travel. He's been there half a dozen times since the summer. We're focused on margin first. And so you see the improvements going on margin, and then the revenue follow. But the good news is we've isolated now to just a couple of metro markets and I think you'll start to see a gradual improvement over the quarters to come.
Paul Steep, Analyst
Great. Thanks.
Operator, Operator
Your next question comes from Paul Treiber from RBC Capital. Please go ahead. Your line is open.
Paul Treiber, Analyst
Thanks very much and good morning. Just you commented that the structural organic growth is perhaps higher than historically. Does that change the prioritization of acquisitions here? In other words, I mean, with faster organic growth and also gaining a greater footprint with existing clients. Like, is it as much of a necessity to accelerate the pace of acquisitions? How do you think about that here?
George Schindler, CEO
I believe this is the ideal moment to increase our M&A activities because we have a distinct perspective on them. We prioritize acquiring quality clients, which is a key aspect of our strategy. While these acquisitions also bring strong capabilities, our main goal is to attract new clients. Given our organic growth with existing clients and our success in bringing in new ones, we aim to enhance that growth through acquisitions. We have a robust pipeline and have improved our sourcing efforts, as evidenced by our recent parallel acquisitions. That is the plan as we aim to quicken our pace. Additionally, we've made investments to enhance our ability to operate more efficiently, and we are beginning to see the benefits of those efforts.
Paul Treiber, Analyst
And could you speak to the size of potential acquisitions? There was a news article a media article in August? I think they've mentioned what I quoted and maybe they misquoted but they mentioned François said that, you're looking at some pretty large acquisition targets. Can you just elaborate on that or clarify that?
George Schindler, CEO
Yes, we are always on the lookout for significant acquisition opportunities. We have a policy for acquiring in metro markets, and we are also interested in transformative acquisitions. However, the valuations have not been very favorable lately. We paused our acquisition activities during the pandemic for some time, but we still have a strong appetite for it. Our balance sheet is in good shape, which is likely what Francois was referring to. Although there are fewer suitable options for CGI right now, we will continue to explore them. Additionally, we are considering larger metro market acquisitions, as evidenced by the CMC acquisition and Array, which were larger than our typical projects over the past two years. You can expect to see more of this in the future.
Paul Treiber, Analyst
Could you elaborate on the balance between quality and valuation? Are there specific areas where you might be flexible in those regards? Additionally, with the push towards digital transformation, are there nontraditional IT services, such as business process outsourcing or content moderation, that you're considering which you previously may not have explored?
George Schindler, CEO
Yes, I think there are some adjacent opportunities we are considering, and it's a good question as the market continues to move towards digitalization and brings these elements together. Strategically, we are exploring ways to widen our focus for potential acquisition targets that we may not have considered in previous years. So yes, that is something we are actively looking into.
Paul Treiber, Analyst
Thank you. I’ll pass it on.
Operator, Operator
Your next question comes from Stephanie Price from CIBC. Please go ahead. Your line is open.
Stephanie Price, Analyst
Hi, good morning.
George Schindler, CEO
Hi, Stephanie.
Stephanie Price, Analyst
Talk a little bit about the pricing environment and maybe your ability to pass on some potential wage or cost inflation here?
George Schindler, CEO
Yes, it's a good question. Wages are being increased across many industries due to the current supply and demand situation. We see it this way: the value proposition for our digitization services and the types of projects I mentioned has a solid business case. As we analyze the situation, leaders are deriving more value from these digital projects, and everyone is becoming more focused on their desired outcomes rather than the inputs. Our clients recognize the supply and demand dynamics and want the best talent for their projects. In that sense, we can implement and transfer any wage increases in our rates. This applies not only to new projects but also to most of our existing contracts, which include clauses tied to factors like the consumer price index and inflation rates. We're positioned to support this, and the margins we achieve as we thrive in this high-demand market reflect that reality.
Stephanie Price, Analyst
Okay, great. And then obviously a very strong environment here. Just curious what you're hearing from clients in terms of spending priorities in 2022 budgeting?
George Schindler, CEO
Yes, the priorities focus on multiple areas related to modernization and transitioning to a more agile environment, which involves technology such as cloud solutions. However, the emphasis is really on adopting an agile approach and enhancing overall digitization. We are examining how various technologies, including machine learning, cloud, and AI, can be utilized to help clients reach these objectives. Another key theme we're hearing more about, especially in light of COP26, is sustainability. This topic is prominent in every client meeting, whether with financial institutions, manufacturing firms, energy companies, or retailers. It is a consistent discussion point for us, and with our intellectual property centered on the crucial aspect of data, we see significant demand and opportunities moving forward.
Stephanie Price, Analyst
And then maybe more broadly and maybe building on the answer to that last question. When you think about doubling the size of the business, can you talk a bit about where you see those major sources of incremental revenue coming from?
George Schindler, CEO
Of the incremental revenue, a significant portion is related to the demand you observe. I addressed Paul's question earlier regarding this. As we witness some convergence, there are opportunities for us to enhance our intellectual property related to business processes. We can also move toward the convergence of what we see in the Internet of Things for manufacturers and explore areas previously classified as engineering services. These represent some of the growth opportunities for us. Naturally, we will pursue this growth through a balanced approach, considering both organic development and potential acquisitions.
Operator, Operator
Your next question comes from Daniel Chan from TD Securities. Please go ahead, your line is open.
Daniel Chan, Analyst
Hi, good morning. With the increased wage environment, any thoughts on changing up your mix of staffing to potentially increase it more in low-cost areas or nearshore areas?
George Schindler, CEO
Yes, that's a great question. We are actually experiencing faster growth in our global delivery centers of excellence worldwide, and we plan to continue this trend. The CMC involves some global delivery centers and areas that we didn't have previously, and we are seeing interest from our clients in these developments. It's important to note that it's not solely about offshore services; our global delivery model is effectively tapping into talent in other locations that are still closer to time zones and clients. We are successfully balancing proximity with offshore capabilities, and we anticipate ongoing growth in this area.
Daniel Chan, Analyst
Thanks. That's helpful. You've mentioned that you had some CPI adjustments built into your contracts. Can you just remind us of the mechanics around that? Does that usually happen around the renewals, or can you kind of go while the project is still running if there are some roles that are met?
George Schindler, CEO
Yes, that's a great question. Typically, contracts are set on an annual basis, which could be either based on the calendar year or aligned with the client's fiscal year. There isn't likely to be a single increase at one time, and we don't have to wait for contract renewals. François, do you have anything to add?
François Boulanger, CFO
No, I totally agree. Most of our contracts, if it's not the vast majority, we have co-lock clauses in the contract so that we can increase at least on an annual basis.
Daniel Chan, Analyst
Okay, that's good to hear. And then last one for me. I know bookings can be a very volatile metric, but can you kind of comment on the low bookings in this quarter relative to a strong market backdrop? Just wondering if there's anything there. Thank you.
François Boulanger, CFO
Yes, thank you for bringing that up. Bookings are typically unpredictable, which is why we pay close attention to the trailing 12-month figures. However, a few larger deals, particularly one, were delayed and haven't been signed yet. We want to ensure everything is finalized properly, so we're not overly concerned about any single quarter. That said, we experienced strong bookings in our intellectual property and consulting segments, and new business is on the rise. Additionally, we completed some significant renewals earlier this year in certain regions like Canada, which is encouraging as it positions us for growth in the near term. Overall, that's my perspective on the current state of bookings, and there’s no major concern.
Operator, Operator
Your next question comes from Kevin Krishnaratne from Desjardins. Please go ahead. Your line is open.
Kevin Krishnaratne, Analyst
Hey. Good morning, gentlemen. Question for you. You talked about how your SaaS-based IP revenue was up strong and you alluded to cloud growth there as well. Is there a way you can give us perhaps the size of the cloud business right now for you, or maybe another way, any thoughts on how penetrated you are in the cloud what your customers are saying about where they are on the journey. Just any updated thoughts there on the cloud business.
George Schindler, CEO
Thank you for the question. We don't provide specific figures on that. However, I've highlighted that about two-thirds of the deals I mentioned involve some aspect of the cloud. Additionally, I noted last quarter that we've strengthened our partnerships with all major cloud providers. Each engagement is managed by a direct report of mine because we see significant potential in this area. From a market standpoint, there remain many applications that have yet to transition to the cloud and could benefit from its advantages. It's important to note that there's considerable work ahead; it's not simply a matter of flipping a switch to move to the cloud. That's why we view our partnerships with cloud providers as a significant opportunity. While we don't break it down that way, it's a focus for us. Also, as I mentioned, our SaaS revenue for our own intellectual property is increasing as well, with more than half of our bookings now coming from SaaS. I can confirm this because it pertains to our own IP.
Kevin Krishnaratne, Analyst
Got you. Okay. That’s helpful, a kind of goes to my next question on competition. I'm wondering if you could talk about if there's been any change, any material change in how your win rates are progressing. You've talked about the consulting-based revenue has been doing well and accelerating. Just curious to know what you're doing what you're seeing, how you're winning business, how you bring your IP into the table to win those deals?
George Schindler, CEO
We have made some investments in our intellectual property and are focusing on better utilizing our global reach as a channel for that IP. I mentioned earlier a 50% increase in acquired IP, but an important point is that the deal sizes in our pipeline for IP are increasing. This is partly due to connecting some of those IPs together with our other services, like consulting and BPO, and we are also seeing a rise in our win rates. We are utilizing our global IP and subject matter experts more effectively across the company by integrating them into our global operations. As a result, our win rate with our IP is improving and remains consistent across the organization.
Kevin Krishnaratne, Analyst
It's great to hear that. Just one last question. Regarding the supply chain, I understand that there are no direct implications since your business is cloud-based software. However, I'm curious if you've noticed any indirect exposure. For instance, could there be delays in an IoT project deployment or when working with a client on a deployment that requires many devices on their end? Are you experiencing any timing delays or impacts from any of this?
George Schindler, CEO
It's a good question. You're correct that there's no direct impact, but there are some indirect effects, although they're quite limited at this time. We're monitoring the situation. As you know, many of our clients are enterprise clients, and they currently hold significant power. They have managed the challenges fairly well, and I'm impressed with their management. However, we are noticing some sporadic issues, which we are watching closely. While it hasn't caused any significant delays in our projects, it has affected revenue in certain areas, albeit just in pockets.
Kevin Krishnaratne, Analyst
Great. Thanks a lot. I’ll pass the line.
Operator, Operator
Your next question comes from Rob Young from Canaccord Genuity. Please go ahead. Your line is open.
Rob Young, Analyst
Hi, good morning. You just said a little bit ago that consulting bookings were quite strong. And so I was looking at the absolute dollar contribution from SI&C. It seems low going back a little ways. And so I'm just trying to reconcile that statement. Is that short-term signings? I mean any kind of color around what's going on there?
George Schindler, CEO
I'm separating consulting from systems integration. I mentioned earlier that we're embedding some of our systems integration work into managed services contracts, and this trend continues. This integration is part of how we present our managed services. The idea is to save money in one area and invest it back into traditional systems integration. You can even see this in our local government projects where we extend managed services contracts alongside system integration, which involves near-term expenses but falls within the managed services revenue. That's what you're noticing. Additionally, discrete consulting projects are increasing in both bookings and revenue. I highlighted that some of this growth is in digital advisory and a lot is in change management. This is positive because discrete consulting can lead to broader systems integration wrapped in managed services. That's the reason I emphasized this point.
Rob Young, Analyst
Thank you for the insights. There were many comments during today's call regarding hiring. Earlier, you mentioned that utilization was very high, contributing significantly to margins this quarter. If you take a step back and evaluate the business, are you facing any constraints related to capacity, or does it seem like there are no issues with demand? To better understand the business, are you managing to increase the number of consultants in line with the demand you're experiencing, or would you say that capacity growth presents a challenge?
George Schindler, CEO
We appreciate the question. We have been able to keep pace, although it's a challenging environment as I mentioned. To provide some context, one-third of our new hires come through referrals, which accounts for 30%. Another third comes from inbound applications, as we actively advertise, and many candidates are looking to transition to companies like CGI. Therefore, one-third of our hires come from these sources. To meet this demand, we have doubled our recruiting efforts. This remains a challenging process, and we continue to expand our initiatives. On a positive note, it's essential for us to focus on retention, as I previously mentioned, and our high engagement levels, company culture, training, and development are aiding in this effort. Additionally, our hiring has indeed surged, but our acceptance rate remains above 80%, which is encouraging as it shows we not only attract talent but also successfully secure acceptances from our chosen candidates.
Rob Young, Analyst
That's great to hear. For my final question, I want to ask about the term technology debt. When you assess your customer base, do you think your customers tend to have more technology debt compared to your peers, or do you believe your customer mix has less technology debt than some of them?
George Schindler, CEO
No, I would say it's about the same. Every industry, geography, and most clients carry some level of technology debt. It's a matter of helping them navigate through it. The technology debt is growing simply due to the changes in the marketplace. This debt may not be decades old; it could be recent, arising from shifts that have occurred in the last five years. As businesses move toward more agile DevOps environments, they need to implement certain changes. Therefore, we are witnessing our clients adapt swiftly in response to the market dynamics.
Rob Young, Analyst
Are there any end-markets, where it's more pronounced?
George Schindler, CEO
Well, there's always regional differences across this. Europe might be a little ahead in one area, whereas North America might be a little ahead in a different area. And so, this is the richness of bringing our global insights and being able to do that across regions and also across industries. As one industry moves to a more customer-facing environment that they weren't in before, they can learn from another industry, so not a pronounced way but certainly an opportunity for a global consulting firm to help our clients across the book.
Rob Young, Analyst
All right. Thanks.
Operator, Operator
Your last question comes from Howard Leung from Veritas Investment Research. Please go ahead. Your line is open.
Howard Leung, Analyst
Thank you for addressing my questions. My first inquiry is regarding the leases and your perspective on employees returning to the office versus continuing to work remotely. I noticed there was a gain from lease terminations and that lease liabilities decreased by about 12% compared to last year. Are you planning to further reduce some of these leases? Additionally, with previous discussions about hiring, how does this relate to your strategy for retaining or attracting talent?
George Schindler, CEO
Yeah. Maybe I'll let François talk a little bit about the leases. But just in general, when we look at our talent and what we are doing on behalf of our clients and working with our clients, we find it's important to spend some time working with your colleagues and sometimes working with your clients. And so, we do believe that there will be a return to the office. We're up to about 25%, if you take out India. Probably 30% of our employees now spending some time in the office, more pronounced in Europe where it's 50% in some cases higher. A little bit of a lag in North America including in Canada, but we're beginning that return in Canada in November and even beginning to return in India in January. We think that's important for innovation. We think that's important for mentoring which is what people are looking for as far as growing their careers. Having said that, of course, we are also recognizes that people were very productive during the pandemic and some of the work that they're doing. And so it really is we believe a hybrid model, at least for the current environment is one that we'll continue to look at. So to the leases yes, we're looking at hybrid, right?
François Boulanger, CFO
Exactly. In the meantime, we are reducing the number of years on our renewals and opting for more short-term leases instead of signing longer contracts like seven, ten, or fifteen years. This approach allows us to better understand market trends. As George mentioned, we are currently adopting a hybrid model until we gain clearer visibility on when employees will return fully. For now, we're focusing on shorter leases and, at times, even choosing not to renew some leases.
Howard Leung, Analyst
That's great. That's really helpful. I guess it might be too early to determine what kind of impact that could have on your adjusted EBIT or free cash flow margins moving forward.
François Boulanger, CFO
Well, for the EBIT margin, like George alluded, I think we had strong EBIT margin this quarter, this year over the 16%. I think we still have some opportunity to increase it with examples like we're seeing Scandinavia. The expectation is that we would see improvement on the EBIT margin in this area. But on the other hand also with the return back, the fact that we're meeting clients more and more now present some of the travel and out-of-market expenses are coming back in. So that will be naturally a headwind, but again, compensated by the improvement that we can still see in the operations.
Howard Leung, Analyst
That's great. Great. And then just one on M&A. George, you mentioned earlier that you're investing more in M&A now and you invested more in the capacity. Just wanted to see if there's any more color on that? Is that increasing the size of the M&A team, software for M&A, infrastructure or the process? Just wanted to find out how it's expanded.
George Schindler, CEO
Yes. No, it's a very good question because, yes, everything you just said, it's increasing the team size particularly across each of the markets, so not just centralized, but adding individuals dedicated to M&A within each of the proximities closer to the sourcing. It's leveraging some infrastructure, some various software platforms to ensure that we're seeing all the deals. And then, it's also some changes to the process. So, it's really all of the above.
Howard Leung, Analyst
Okay, that's great. I have one final question. I noticed the buyback during the quarter, and it seemed to slow down significantly compared to the previous quarter. Is that related to the price, or perhaps it was impacted by the bond offering? I would like to understand if there's anything specific to highlight regarding this.
François Boulanger, CFO
Yes, there was nothing related to the price. We did work on the bond offering, but that was not necessarily the reason for not going to market. We also had good momentum with acquisitions, closing two new ones in October, and we were close to finalizing them in September. This was part of the reason for slowing down the share buyback in the quarter. Our main priority is investing back in the business, followed by M&A, with share buyback being third. Last year, we completed only two acquisitions, but this year we have strong momentum starting with the two new ones in October, and we hope to see more throughout the year.
Howard Leung, Analyst
Okay. Thanks so much. That probably makes sense. I’ll turn it back.
François Boulanger, CFO
Thank you.
Operator, Operator
We have no further questions in queue. I'd like to turn the call back over to Maher Yaghi for closing remarks.
Maher Yaghi, Vice President, Investor Relations
Thank you, Julianne, and lots of great questions, guys. Thank you everyone for participating in this call. We hope that you will join us for our Investor Day on November 22 just a reminder. And please put it in your calendar. We hope that you can join us then. And a reminder, that a replay of the call will be available either via our website or by dialing 1-800-770-2030 and using the passcode 8986313. As well, a podcast of this call will be available for download within a few hours. And follow-up questions can be directed to me at 514-415-3651. Hope to see you soon. Thank you.
George Schindler, CEO
Thank you.
François Boulanger, CFO
Thank you.
Operator, Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.