Earnings Call Transcript - GIB Q1 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to CGI's First Quarter Fiscal 2025 Conference Call. And I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.

Kevin Linder, SVP of Investor Relations

Thank you, Sylvia, and good morning. With me to discuss CGI's first quarter fiscal 2025 results are Francois Boulanger, 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 a.m. Eastern Time on Wednesday, January 29, 2025. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete safe harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian unless otherwise noted. We are also hosting our Annual General Meeting this morning, so we hope you will join us live via the broadcast at 11 a.m. Now, I will turn the call over to Francois for some introductory remarks. Francois?

Francois Boulanger, President and CEO

Thank you, Kevin, and good morning, everyone. Today, in line with the long-term succession plan of CGI, Julie Godin was appointed Executive Chair of CGI Board of Directors effective following today's Annual General Meeting of Shareholders. CGI's founder, Serge Godin is now the Co-Chair of the Board and will continue to focus on transformational acquisitions and on large-scale engagements with clients. During our Annual General Meeting this morning, Serge and Julie will provide further remarks on this key milestone. In addition, we announced this morning the signing of a new merger agreement. I will discuss this in my remarks. Now, I'll turn the call over to Steve to review the Q1 financial results. Steve?

Steve Perron, CFO

Thank you, Francois, and good day, everyone. CGI once again delivered strong results in our first quarter of fiscal 2025. Before I begin, I would like to remind everyone about the adjustment we made to our reporting segments starting this quarter. Germany is now its own segment, and our operations in Scandinavia are now combined with our Northwest and Central East Europe segment. In Q1, we delivered CAD3.8 billion of revenue, up 5.1% year-over-year or up 2.7% when excluding the impact of foreign exchange. In constant currency, the CGI segments with strongest growth were U.S. federal at 14%, Canada at 5.9%, Asia-Pacific at 5.2%, and U.K. and Australia at 3.2%. In constant currency, our North American operations grew at 6.9% this quarter, while our European operations reported a change of minus 0.8% compared to last year, largely due to slower market conditions, mainly in Germany and France. From an industry perspective, constant currency revenue growth was led by government at 7.9% and financial services at 5.5%, driven by strong performance in North America. We experienced continued softness in the manufacturing sector, particularly in Europe. IP revenue grew in seven of our eight proximity segments on the strength of continued client interest in our business solutions. IP represented 21.6% of total revenue, down 40 basis points year-over-year, due to recent business acquisitions. In Q1, bookings were CAD4.2 billion for a book-to-bill ratio of 110%. Our North American and European operations each had identical book-to-bill ratios at 110%. When looking at service type, book-to-bill ratios were 107% for managed services and 114% for business and strategic IT consulting and system integration. On a trailing 12-month basis, our book-to-bill ratio was 108%. On the same basis, managed services had a book-to-bill ratio of 113%, and SI&C book-to-bill ratio was 101%. Our global backlog reached CAD29.8 billion or 2 times revenue, providing good revenue visibility. Turning to profitability. Our results once again demonstrated our ability to manage our operations with discipline. Earnings before income taxes were CAD592 million for a margin of 15.6%, up 100 basis points year-over-year. Adjusted EBIT in the quarter was CAD612 million, representing a margin of 16.2%. The favorable impacts generated from last year's cost optimization programs were offset by the temporary dilutive impact of recent business acquisitions and lower billable utilization in some regions of Continental Europe. Margins were strongest in the following segments: Asia-Pacific at 32.5%, Canada at 24.1%, and U.K. and Australia at 16.5%. Our effective tax rate in the quarter was 25.9%, down from 26.1% last year, and we expect our tax rate for future quarters to be in the range of 25.5% to 26.5%. Net earnings were CAD439 million for a margin of 11.6%, up 80 basis points year-over-year. Diluted EPS was CAD1.92, representing an increase of 15% year-over-year. Adjusted net earnings were CAD449 million, which represents a margin of 11.9%, stable year-over-year. On the same basis, diluted EPS was CAD1.97, an accretion of 7.7% when compared to Q1 last year. This quarter, we initiated targeted actions in Europe, mainly in Germany, to realign our cost structure with current market conditions. As such, we incurred CAD8 million of costs in Q1, and we expect to incur another CAD42 million to finalize these actions by Q3. DSO was 38 days in the quarter, three days better than last year, contributing to the CAD646 million in our cash from operations, a strong 17.1% of total revenue. Over the last 12 months, CGI has generated close to CAD2.3 billion, up nearly CAD200 million compared to the same period last year. In Q1, we used our cash to invest CAD83 million into our business, invested CAD30 million for business acquisition, representing the initial payment for the Daugherty acquisition, invested CAD153 million to buy back our stock and returned CAD34 million to our shareholders under our recently initiated dividend program. We continued to deliver a strong return on invested capital at 16.2%, up 30 basis points, demonstrating our proficiency and discipline in the deployment of capital, in line with our capital allocation strategy and priorities. Earlier today, we announced that CGI entered into a new agreement for a merger in the U.K. Francois will provide more commentary on the merger in a few minutes. Yesterday, our Board of Directors approved the extension of our NCIB program until February 2026, authorizing us to repurchase for cancellation up to 20.2 million shares over the next 12 months. And CGI's Board of Directors also approved a quarterly cash dividend of CAD0.15 per share. This dividend is payable on March 21, 2025 to shareholders of record as of the close of business on February 14, 2025. As communicated in the past and consistent with our profitable growth strategy, CGI's capital allocation priorities remain focused on investing back in the business and pursuing accretive acquisitions. Now, I will turn the call over to Francois to further discuss the insights on the quarter, as well as the outlook for our business and markets. Francois?

Francois Boulanger, President and CEO

Thank you, Steve. I am pleased with our team's performance in the first quarter as we continue to successfully execute our build and buy profitable growth strategy. We began the fiscal year in a strong position with positive momentum on a year-over-year basis. Revenue grew 5.1% or 2.7% on a constant currency basis. EPS accretion was 15% or 7.7% on an adjusted basis, resulting from a higher recurring revenue mix as well as proactive operational excellence actions. And cash from operations reached nearly CAD650 million or 17.1% of revenue, for an improvement of 110 basis points as a result of sustained quality delivery and business excellence. In the quarter, we also continued to see rising levels of engagement with our stakeholders. More than 87% of our 91,000 consultants and professionals are now CGI shareholders, up from 86% this time last year. And client satisfaction levels again rose, now at 9.5 out of 10, with one of the highest scores being the intention of clients to engage CGI again in the future. The high satisfaction and deep confidence clients have in CGI's people and capabilities drove strong bookings in Q1, representing a 110% book-to-bill ratio. First-quarter bookings continue to be led by wins within our two largest industry sectors, government and financial services. In the quarter, we saw an uptick in financial services as some clients reinitiated investments that were previously paused. Bookings in this sector were 123% of revenue, an increase of more than 40% compared to the same quarter last year. In the government sector, bookings increased more than 40% on a sequential basis, resulting in a Q1 book-to-bill of 124%. This increase was a result of a stronger client focus on driving monetization and operational efficiency. We expect this trend to continue as governments around the world adapt their IT priorities in line with evolving mission and policy priorities. Representative client awards in the quarter included SkyAlyne, a leading provider of military pilot and aircrew training in Canada selected CGI as its strategic technology partner to design the next generation of aircrew training for the Royal Canadian Air Force. Under the 25-year agreement, CGI will deliver a comprehensive suite of innovative, secure services, including cybersecurity, business consulting, and cloud computing. In Wales, the Hywel Dda University Health Board initiated a 10-year GBP75 million strategic partnership with CGI to drive the digital transformation of healthcare to improve patient outcomes. CGI's consultants will partner with their Board to streamline operations, modernize systems and processes and deliver innovative solutions such as AI integration. The Swedish Tax Agency extended its partnership with CGI to deliver advanced EID and electronic signature services. The agreement reinforces CGI's role in providing secure, innovative digital solutions that enhance citizen access to government services, while ensuring efficiency and compliance in Sweden's national digital ecosystem. Multiple North American banks extended their partnerships with CGI for consulting and systems integration services to design, build, and deploy projects across multiple lines of business. We continue to see some clients exercising caution in their discretionary spending, primarily in Europe and the MRD sector. However, client interest remains strong across every industry to explore with CGI the opportunities for driving monetization and operational efficiency through managed services and IP. CGI remains well-positioned as a partner of choice to help clients achieve the tangible and trusted business outcomes they seek. In fact, over the past six months, CGI has earned a record number of third-party analyst endorsements, which rank our expertise and capabilities in worldwide leading and major player categories. These reports and rankings cover our services related to AI, data modernization, cloud, cybersecurity, and business consulting. CGI also achieved new partnership levels in Q1 with several imaging alliances, including Snowflake and Databricks. Since the start of the fiscal year, we also progressed our strategic priority to pursue acquisitions. In December, we extended our positioning with Fortune 500 clients in the U.S. by merging with Daugherty, a professional services firm specializing in AI, IT consulting, and business advisory services. Through the merger, our footprint increased in metros such as St. Louis, Atlanta, Minneapolis, and Chicago. I would like to warmly welcome the 1,100 new consultants who joined CGI from Daugherty. This morning, we announced a newly signed acquisition agreement, which will close in the coming weeks pending regulatory approvals. BJSS is one of the largest independent IT and software engineering consultancies in the U.K. This acquisition will accelerate our U.K.-wide expansion strategy to deepen our presence in key commercial industries such as retail, financial services, and energy and utilities. Upon completion, more than 2,400 highly skilled consultants will join CGI, bringing deep expertise in a range of services such as technology strategy, customer experience design, software engineering, and AI. Through our buy strategy, we will continue to prioritize investment and aim at building critical mass and strategic metro markets across all CGI geographies. Our goal is to gradually grow this presence to mirror the economic sector distribution in each metro market and to deploy our full range of services and solutions. We remain in dialogue with a number of firms, both metro market and transformational opportunities. As always, we will be disciplined to ensure that mergers will be accretive to each of our stakeholders. Looking ahead, we continue to be well-positioned to partner with clients as they evolve their strategies to address the ongoing macro trend within their geographies and industries. Client interest remains high for the value proposition CGI can deliver through our end-to-end offerings. This positioning is validated by CGI's pipeline of opportunities, which is up 20% compared to this time last year. In terms of client buying patterns, we continue to see some diversification by geographic region, which aligns well with CGI's greatest strengths, particularly our client relationship proximity model, our end-to-end portfolio of services, and our global delivery network. In combination, these assets enable us to quickly adapt to evolving client needs. With this in mind, I will provide commentary on the demand environment in our North American and European operations. Starting in North America. Across commercial industries, clients are sustaining their focus to drive operational resilience and innovation to capitalize on emerging growth opportunities. Given these priorities, our pipeline remains strong overall with another notable uptick for our managed services offerings. Also, demand remains strong for our CGI credit Studio IP, which is a cloud-native platform that centralized services across the full credit lifecycle from originations to collections. Government sector clients in North America are balancing tight budgets with the necessity of our IT monetization and improving citizen services. Cybersecurity and cloud migration also are critical areas of investment as agencies work to enhance operational efficiency and mitigate risk in an uncertain environment. In the government sector, our pipeline for managed services opportunities remains high and continues to rise. CGI's government ERP solutions continue to be in high demand with pipelines rising compared to last time last year. Turning now to Europe. The macroeconomic landscape continues to be defined by slower economic growth and geopolitical uncertainty. Clients continue to turn to CGI to help navigate these pressures, particularly across commercial industries where they are focused on driving operational efficiency and addressing regulatory requirements. As a result, our managed services and IP pipelines across commercial industries remain strong. For example, the pipeline for CGI's financial crime detection solution is up by more than 50% compared to this time last year. In the government sector, our pipeline is high and rising as clients are focused on monetization, as well as e-governance platforms and green IT solutions. Macro-level uncertainty is prompting government to adopt more efficiency-driven IT investments with cybersecurity remaining a critical priority given the increasing risk to critical infrastructure and citizen data. These regional buying trends will continue to favor CGI as a partner of choice given our focus on value propositions that deliver trusted tangible business outcomes designed to help clients generate operational efficiencies and accelerate transformation notably through our IP and managed services. Among managed services offerings gaining momentum right now is that of Global Capability Centers or GCCs. CGI has 20 years of experience with GCC models, particularly for clients in banking, retail, and communications. Our global delivery centers of excellence enable full-scale application development and operation with a proven track record of success. Our value proposition focuses on GCCs as strategic extensions of the clients' organization to drive efficiency, resilience, scalability, and growth in a fast-changing business landscape. Naturally, across all industries, we remain deeply engaged with clients on their AI and Gen AI strategies and implementation. Over the past quarter, we have continued to see clients moving from investigation to implementation to drive efficiency, process automation, and legacy monetization. As previously shared, we are integrating AI and GenAI technologies into our engagements and our pipeline of AI opportunities continues to grow, particularly for responsible AI advisory services, data integration, and platform monetization. Booking in Q1, the integrated AI technologies were selected by a global healthcare and insurance company to support their enterprise intelligent automation platform and help build the foundation for their agentic AI strategy. The City of Edinburgh Council is collaborating with CGI to conduct comprehensive AI discovery sessions to identify and evaluate AI use cases for a wide range of missions from social services care to emergency and crisis management. One of the world's leading financial services providers selected CGI to further their digital transformation by extending process automation with AI features as well as through our alliances with Google and Blue Prism. We continue to progress on our AI investments in line with our two-year plan. We are on track with this plan to strengthen our expertise, offerings, delivery, and positioning. Our investment plan includes continued initiatives such as advancing our training and tooling for developers and consultants, integrating AI and GenAI into our portfolio of IP solutions, enhancing our managed services and consulting offerings and methodologies. With our clients, we are innovating to drive new business value through industry-specific use cases, the establishment of AI factories, improvement of user experience, and generating operational efficiencies. In closing, we are off to a strong start for the year and reiterate our confidence in our fiscal 2025 plan. CGI remains well-positioned as one of the few leading global firms with the scale, reach, insights, and capabilities to help clients deliver the new business outcomes they require for their digital strategies. We remain committed to achieving our strategic aspiration of doubling CGI over the next five to seven years through the disciplined execution of our build and buy profitable growth strategy. Thank you for your continuing interest and support. Let's go to the question, Kevin.

Kevin Linder, SVP of Investor Relations

Thank you, Francois. Sylvia, we can now poll for questions.

Operator, Operator

Thank you. Your first question will be from Paul Treiber at RBC Capital Markets.

Paul Treiber, Analyst

Thanks very much and good morning. It was nice to see the acquisition announced this morning. Just hoping that you could speak to your M&A pipeline and capacity, you deployed a fair amount of capital in the last couple of months. Do you need to take a pause to integrate those acquisitions or do you have the capacity to continue to make acquisitions here in the short-term?

Francois Boulanger, President and CEO

Thanks, Paul, for the question. No, we don't need to take a pause. These acquisitions, like this one that we announced this morning, are in the U.K. For a long time, we didn't do one in the U.K. So the U.K. team is ready for this integration. The one that we did before was in the U.S., so the fact that we have a solid operation in all these countries ensures each of these countries have the capabilities of doing these integrations. We don't see any problem on that side. And as you know, on the financial side, naturally, we have a solid balance sheet and the capability to deploy more capital. So that's not stopping for the future.

Paul Treiber, Analyst

And then looking at your business by the various regions, Germany, you called out softness there. Was it softer than usual this quarter or is Germany being a drag on growth for the last several quarters? And is it the mix of revenue different in Germany? Is it more short-term SI&C than other regions?

Francois Boulanger, President and CEO

No, not necessarily a different mix, but for sure, they are strong in the MRD side. And so, as you know, MRD, especially in Europe, has more difficulties. So that's why we see some short-term pressure on some of the discretionary spending there. But I would say, as you heard, last quarter, we did sign a big managed services contract with a large manufacturer in Germany. So they are still very interested in seeing how we can bring cost savings. On the short term, I would say, SI&C, we see that they are reducing their spending or being cautious to see what will happen in the next quarters.

Paul Treiber, Analyst

Okay. Thanks for taking the questions.

Francois Boulanger, President and CEO

Thanks, Paul.

Operator, Operator

Thank you. Next question will be from Jerome Dubreuil at Desjardins. Please go ahead.

Jerome Dubreuil, Analyst

Thanks for taking my question. I have another one regarding mergers and acquisitions. I think what everyone is curious about is whether we are entering a new era for M&A. Is there a greater recognition of the advantages that M&A provides? Or, while I understand you want to convey stability, has it simply been a change in multiples, or is there a slight adjustment in strategy as well?

Francois Boulanger, President and CEO

No, it's not a new era. Our strategy remains focused on growth through build and buy, which hasn’t changed. However, the environment has changed. We are witnessing a certain alignment of factors where pressure in the market for the SI&C sector is prompting some companies to consider selling their businesses. We are seeing less competition from private equity than we did previously, leading some of these companies to think about selling parts of their operations. Therefore, I believe the environment is becoming more favorable for acquisitions, and we want to ensure we take advantage of these opportunities.

Jerome Dubreuil, Analyst

Thank you. That's clear. Another one, Francois, you've been in the role since October. Are there maybe other tweaks in terms of strategy that you're adopting? You're talking about new partnerships with some of the software providers. Am I sensing that the company is maybe a bit of a faster follower for new tech or business as usual?

Francois Boulanger, President and CEO

No, I think we were always fast at applying new technology. I think what's pushing a bit more, to be honest, is on the branding. We want to be sure that people understand and companies and clients and future clients understand our capabilities. That's why we want to ensure we are working closely with our large partners. That's why you're seeing more news on that, but it's not a change of applying new technology or not that we were always there to apply new technology.

Operator, Operator

Thank you. Next question will be from Surinder Thind at Jefferies. Please go ahead.

Surinder Thind, Analyst

Thank you. Can you perhaps talk a little bit about the lumpiness in the bookings that we're seeing, especially within SI&C? It just seems to be a bit more lumpy than it has been historically. And just what trends you're seeing underneath that?

Francois Boulanger, President and CEO

Yes. Actually, SI&C bookings did increase versus last quarter. So last quarter, we were below 100% and we are higher than 100% this quarter on the SI&C side. So to be honest, we are seeing an uptick. But at the same time, like I was saying a bit, the pressure that we see, for example, on the MRD side in Europe, we're seeing some pressure still, especially in the consulting side. So that's why you still perhaps see some lumpiness on that side. But at least this quarter, we saw an uptick on the bookings on the SI&C side. And the other thing also on the federal side or the U.S. federal, Q1 and Q2 is always, historical, our lowest booking quarters, with Q3 and Q4 on the highest side. So that's a trend that you can see also on an annual basis.

Surinder Thind, Analyst

So just to clarify the comment there, is the messaging that if we were to exclude Germany, there is an overall improvement in the demand environment for discretionary spend or not? I just want to…

Francois Boulanger, President and CEO

I would say yes, like I was saying, MRD is a bit pressured, but I'll give you the other side on the financial sector. We're seeing an uptick on the SI&C side. With the interest rate coming down, the banks, for example, are coming back and doing some investment on the SI&C. They don't have any choice. They delayed some of these investments in the past quarters when interest rates were going up, but now they are going down. They have regulatory pressures and changes to make, so they don't have any choice but to implement new solutions. So, we are seeing an uptick on that side.

Surinder Thind, Analyst

That's helpful. And then on the commentary on the GCCs, the Global Capability Centers, it sounds like there's growing interest there. Does that impact the global delivery model in the sense that there's increased demand for offshore, and we should begin to see more of a mix shift there? Any color there would be helpful as well.

Francois Boulanger, President and CEO

Yes. But you see we're still growing in India, and that will continue. The model, when I was saying managed services is still in demand, that's true and it's continued to be big in demand, and we see how we can help them reduce their costs. GCCs are one of the areas on how to resolve — to reduce our costs. So we have a lot of clients asking us to help them create their own GCCs, or create a GCC that can be transferred back to the clients, or even a lot of these captives already created by clients where they're asking for help. Our Indian colleagues and operations will help clients directly in India to help them achieve their objectives on their India captives.

Surinder Thind, Analyst

Thank you.

Operator, Operator

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

Divya Goyal, Analyst

Good morning, everyone. Francois, I wanted to get a little more color on the acquisition that's announced. So, as per the press release, CGI already has a significant footprint in the U.K. Now with this acquisition, the footprint expands. So, I'm just trying to understand what is the company's broader growth plans across the U.K. and European region given the German restructuring, the U.K. acquisition. So if you could provide some color on the growth broadly across that region? Thank you.

Francois Boulanger, President and CEO

Yes, thanks. BJSS is mostly a company in the U.K. So, they have very, very limited business outside the U.K., and they are strong on the commercial side. If you remember in the past, we always said we want to acquire in the U.K., and we were targeting companies that we would be more heavily on the commercial side. That was the idea with this one. For the U.K. to a certain point, it is a game changer because it's, first of all, increasing our U.K. headcount by, I would say, 30% to 35% more people in the U.K., and, like I’m saying, in the commercial area. The U.K. is nowhere near the difficulties we are seeing in Germany. In the U.K., it’s actually going well. We see some growth, and we continue to see future growth in the U.K. So, it was perfect timing. But also, like I'm always saying, it needs to align. So, we were able to convince BJSS to merge with us. I think that will be great for the U.K. organization.

Divya Goyal, Analyst

That's great. And are you planning to grow across Europe or right now you are okay like the way the segments are structured across Europe?

Francois Boulanger, President and CEO

No, we're, like I'm saying, our buy strategy is 50% of our growth strategy. So, for sure, we're still looking in countries like Germany. Germany is a country that we want to continue to grow, and these market pressures are actually creating some opportunities for potential acquisitions. We are there for the long term. We're seeing some good targets in Germany or in France or Scandinavian countries. We will look at them and see if it's making sense to trigger them.

Divya Goyal, Analyst

That's great. I'll just ask one more question here. So the U.S. federal segment grew pretty well this quarter, and you did mention that it was partly driven by the growth in the transformational projects. However, with obviously Dodge and the new administration, I know a lot is in flux, but what is your take on some of these new bookings and some of these new opportunities that you are seeing evolving across that specific business segment? And that's all for me. Thank you.

Francois Boulanger, President and CEO

Yes. But again, on the federal side with Dodge, for sure, if they want to achieve their targets and priorities, they will need IT to be capable of reducing costs. Most importantly, in the U.S. federal sector, they will need to bring automation, AI, and new systems to be capable of reducing some of these costs. We’re seeing this as an opportunity to grow in helping them achieve their objectives.

Operator, Operator

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

Robert Young, Analyst

Hi, good morning. Maybe a double pronged AI question. First part would be around, you mentioned in your prepared remarks, agentic AI, which is kind of a growing buzzword and you announced a part — an award with UiPath. And so just first part would be trying to get a better sense of what your efforts are around agentic AI and what the opportunities are. And then the second part would be just over the last couple of days, all this new information suggests that it's going to get cheaper to run AI models. Maybe you could just give us some initial thoughts on the impact on the IT services business in general and CGI more specifically.

Francois Boulanger, President and CEO

Yes. Okay. Thanks, Robert, for the question. I'll start with the second part. For sure, I think some validation still needs to continue on that side. We'll see what's happening. But we are seeing that as good news. I think any new initiatives to reduce the cost of AI will always be good news for the end clients, and we are one of the end clients, plus we're also helping clients to implement AI. If the technology is cheaper and becoming cheaper, it's a good news for everybody, including on our side. Regarding agentic AI, we continue our discussions with our alliance partners like Salesforce, Google, and UiPath. We have already started to implement some of it internally in some of our managed services solutions. We're managing a large mandate for clients, and we are realizing that some of the agentic AI can help us on specific processes. That's something we continue to investigate and have started to implement, and we are seeing some benefits on that side.

Robert Young, Analyst

Do you think the main challenge for deployment is related to cost or is it about identifying the right solutions? Is the cost evolving in line with the revenue generated from AI for CGI, or is it more focused on finding suitable applications and use cases?

Francois Boulanger, President and CEO

As I’m saying, we are always trying to have industry-specific use cases and not just implementing AI for AI. Some of the experience or contracts that we signed in the past, when we were working with example the federal Canadian government, were implementing AI to help them reduce their bottleneck that they had with their payroll system. So, that's the kind of implementation we're talking about. When they see benefits and cost savings, it's not a showstopper for clients. So, for sure, it needs to be applied in a relevant way for them, but if the tool or tooling will reduce in cost in the future, that's just another benefit for the end clients.

Robert Young, Analyst

Okay. And then a second question, last quarter, I asked you a little bit about your strategic footing as it relates to infrastructure and whether that would impact M&A targets. I just want to maybe broaden that up a little bit. Maybe you just talk about your infrastructure. I think you said it was 10% of the business thereabouts. Is that something that CGI is still working down? Is that a headwind to growth or have you changed your thought process there? Or is that something that, given maybe the higher value placed on infrastructure, is that something you'd be willing to even in some cases to see grow? And then I'll pass the line.

Francois Boulanger, President and CEO

Yes, okay. Thanks for the question. Regarding infrastructure, what we have said in the past is that we wanted to go asset light, and we didn't want necessarily to sign infrastructure deals just for the sake of it. However, we continue to have data centers and will continue to have data centers because first, we have our IP, and we are running our IPs in our own data centers, and that's the first thing. Secondly, in these managed services contracts we're signing, we are sometimes signing full managed services, so not just the applications, but also the infrastructure. We will continue to do that in the future. We want to be an end-to-end services company, and our strategy is to continue to sell end-to-end services, including infrastructure business.

Robert Young, Analyst

Okay. Thanks. I'll pass the line.

Operator, Operator

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

Thanos Moschopoulos, Analyst

Hi, regarding the U.K. acquisition, are there some financial metrics you can share or should we best wait for next quarter's MD&A?

Francois Boulanger, President and CEO

I think we'll need to wait for next quarter's MD&A because it's still not finalized. We expect to close it in the next couple of weeks, assuming we receive all the necessary authorizations. As for pricing, I can say that on the revenue side, we were discussing it.

Steve Perron, CFO

GBP275 million.

Francois Boulanger, President and CEO

Yes. And that’s…

Thanos Moschopoulos, Analyst

Okay. That's very helpful.

Steve Perron, CFO

On the annual business.

Thanos Moschopoulos, Analyst

Yes. Great. And just to clarify, is it very heavily weighted to SI&C or is there a good sized managed services component in there as well?

Francois Boulanger, President and CEO

I would say it's perhaps a bit more SI&C than managed services.

Thanos Moschopoulos, Analyst

Okay.

Francois Boulanger, President and CEO

And again, the idea is they have great client relationships. One of the fits we're seeing with us is the fact that they don't have offshoring. Now that we have these client relationships, we will be able to sell a lot more offshoring to these clients. That's really the idea. So, yes, there are more SI&C today, but we think we will be able to sell a lot more managed services to these clients.

Thanos Moschopoulos, Analyst

Great. And then finally, just how should we think about the margin trajectory just given some puts and takes, obviously, with the recent tuck-in acquisitions? Should we assume kind of margins being flat year-over-year, maybe down a little because you're going to be integrating or what trajectory would you assume?

Francois Boulanger, President and CEO

Yes. I think with the margin, for sure, as you know, we need to integrate these companies. That will put some pressure on the margin. On the other side, we are doing some actions to improve the margin in some places like Germany, where utilization is under pressure. I would say that one can offset the other. I don't think we'll see big changes in the EBIT margin.

Thanos Moschopoulos, Analyst

Great. I'll pass the line. Thank you.

Operator, Operator

Thank you. Next question will be from Stephanie Price at CIBC. Please go ahead.

Stephanie Price, Analyst

Hi, good morning.

Francois Boulanger, President and CEO

Hi, Stephanie.

Stephanie Price, Analyst

Just following on Thanos' question there. Margins in the U.S. federal business seemed a bit weaker than normal. Was this a result of the margin profile of Aeyon? And how should we think about those U.S. federal margins going forward?

Francois Boulanger, President and CEO

Yes. That's correct. It's really because of the Aeyon acquisition. You see a lot of growth, but some pressure on margin and it's due to that acquisition we need to integrate. We signed at the end of September. Integration in the federal government is taking a bit more time than in other areas because of some authorizations we need from clients. But the expectation is that you will see some improvement quarter-over-quarter in their EBIT margin.

Stephanie Price, Analyst

Okay, perfect. And then maybe more broadly, can you talk a bit more about what you're seeing in Europe? It sounds like the slowdown right now is just in a few regions. What are clients saying in the rest of Europe, and how do you think about the region going forward?

Francois Boulanger, President and CEO

Well, I think in Europe, as you know, I would say two things. In manufacturing, we see some concerns or at least they're questioning where the future lies, especially with tariffs that the U.S. are talking about. Will that have a major impact or not on some of these clients? That's really what I'm hearing from clients. I would also say on the government side, some examples will have elections in Germany and France, some discussions on the government side. So that can have an impact. We haven't seen it yet, but that can have a certain impact. So that's really what we're hearing in Europe. But on the other side, like I'm saying, there's always a lot of discussions on how we can help them with cost savings. Therefore, we have very productive discussions on managed services in Europe.

Stephanie Price, Analyst

Great. Thank you very much.

Operator, Operator

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

Richard Tse, Analyst

Yes, thank you. So, you've obviously, I think, picked up the pace of acquisitions. Just wondering if you can maybe share with us whether you have a target with respect to the amount of capital you want to deploy this year on acquisitions?

Francois Boulanger, President and CEO

No, we don't have a specific target. We are generating more than CAD2.3 billion of cash from operations, investing back CAD400 million in the business. So we have about CAD1.7 billion, CAD1.8 billion, CAD1.9 billion of cash from free cash flow. The dividend is right, it's very low at CAD34 million per quarter. So we still have a lot of dry powder to make acquisitions. Again, our balance sheet and leverage ratio is very low, so we have a lot of capacity for larger acquisitions. We don't have a specific number. The only cap I would say to you is that when we're saying that we're at 3.3 times leverage, that's really at the top, and we're very far from that.

Steve Perron, CFO

Look, from the net basis, we are at 0.47, and from a gross debt-to-EBITDA basis, we're about at 1.2%.

Francois Boulanger, President and CEO

So, we have a lot of space for other acquisitions, including transformational acquisitions.

Richard Tse, Analyst

Okay. And then I appreciate your comments on elevating the brand. Obviously, you've probably done a lot of work in identifying opportunities. So when it comes to elevating the brand or some of these other initiatives you've put in place since taking over the CEO role, can you help us understand the kind of amount of incremental growth you're targeting to achieve from these all-new incremental initiatives that you've put in place since taking over that role?

Francois Boulanger, President and CEO

Well, no, I don’t have a specific target. Branding and all that have a long-term objective. So it's really — we didn’t set a number related to these actions. It's really about improving branding, especially in places where we're still perhaps the best-kept secret. In the U.S., I think we still need to do more on that. That's with the marketing group and our leader there, Susan Balding. We will continue to do good work on that.

Richard Tse, Analyst

Okay. And then just the last one for me. Some of your competitors have been talking to price competition in the market. Is that something that you may be seeing? And if so, is this sort of a temporary thing given the backdrop with respect to MRD or SI&C, or is it something a bit more structural? That's it from me. Thanks.

Francois Boulanger, President and CEO

I would think it's not structural. Most of our — especially in the managed services, we don't see price pressure there. If we can show clients the business case and outcomes, that makes sense, and they'll pay for the value. I think in some places where discretionary spending went down, for sure, we'll have some pressure to reduce some of the rates to maintain utilization. Overall, pricing is not necessarily an issue, and clients are still ready to pay for value.

Kevin Linder, SVP of Investor Relations

Sylvia, we have time for one more question, please.

Operator, Operator

Certainly. Our last question will be from Jason Kupferberg at Bank of America, U.S. Please go ahead.

Tyler DuPont, Analyst

Hi, good morning, Francois, Steve. This is Tyler DuPont on for Jason. Thanks for taking the questions here. Trying to be fast knowing that's the last one. I wanted to ask about initial demand trends and spending implications for 2025, particularly from a bookings context. On an LTM basis, it looks like the book-to-bill definitely appears healthy at 1.08 this quarter. However, this is the second quarter of year-on-year declines. Obviously, they're very modest, but still the second quarter declines in the LTM metric. Just how do you juxtapose the modestly softening bookings number with the solid top-line growth that you're putting up and how does that translate into 2025 client spend?

Francois Boulanger, President and CEO

Yes. You're right; the last month, the bookings went down, but some of it is timing. We had large discussions with some clients that didn't close for the quarter-end, and we won't close a deal just to have bookings at the end of the quarter. We still have good discussions regarding large contracts, and you'll see some closing of them in the future. We see a lot of momentum on managed services, so I don’t see a significant problem there. You're right that in the SI&C, there was some lumpiness, but this quarter, we did see an uptick on the SI&C. We finished with, I think, it's 114% of book-to-bill on the SI&C side. We are seeing some momentum there, and we'll see in the future, but we're comfortable with bookings and future prospects.

Tyler DuPont, Analyst

That's helpful. It's great to see the SI&C going above one. Also, just as a follow-on, want to ask about cash flow expectations as we look through the year. During the quarter, free cash flow was pretty strong. It looked like on a revenue conversion basis around just shy of 15%, which in my understanding is the medium-term or long-term target for you guys. Wondering if you could just touch on cash flow in the quarter, how should we look at conversion through 2025? Should we be thinking more than 15 on a full-year basis? Or, I know there's timing and everything there, but just love to get your thoughts.

Francois Boulanger, President and CEO

Thank you for the question. I think if we say that on a long-term basis, 15% makes sense. Obviously, in the quarter, the cash from operations was 17%, but it included some improvement in DSO. So on a long-term basis, 15% is reasonable.

Kevin Linder, SVP of Investor Relations

Thank you, everyone for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1888-660-6264 and using the passcode 28413. A podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1905-973-8363. Thanks again, everyone, and look forward to speaking soon.

Francois Boulanger, President and CEO

Thank you.

Steve Perron, CFO

Thank you.

Operator, Operator

Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines.