Earnings Call
Cgi Inc (GIB)
Earnings Call Transcript - GIB Q3 2022
Operator, Operator
Good morning, ladies and gentlemen, and welcome to CGI's Third Quarter Fiscal 2022 Conference Call. And I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, sir.
Kevin Linder, SVP of Investor Relations
Thank you, Sylvia, and good morning. With me to discuss CGI's Third Quarter Fiscal 2022 Results are George Schindler, our President and CEO; François Boulanger, Executive Vice President and CFO; and Steve Perron, Senior Vice President and Corporate Controller. Effective October 1, and previously announced on May 27, François will assume the position of President and Chief Operating Officer, overseeing CGI's North American and Asia Pacific operations, excluding the U.S. Federal segment. Steve will assume the position of Executive Vice President and Chief Financial Officer. He joined CGI 23 years ago and held a number of senior finance roles before being named Corporate Controller in 2019. The appointments of François and Steve to their new roles reflect their deep understanding of CGI's business and of the IT services industry. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, July 27, 2022. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q3 MD&A, financial statements and accompanying notes all of which have been filed with both SEDAR and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete safe harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I'll now turn it over to François to review our key financials, and then George will comment on our business and market outlook. George, François and Steve will then take questions. François?
François Boulanger, Executive Vice President and CFO
Thank you, Kevin, and good morning, everyone. I am pleased to share with you the results of our third quarter of fiscal 2022. In Q3, we again delivered double-digit constant currency revenue growth as we continue to see strong demand for our services. Adjusted EBIT margin improved by 20 basis points to 16% and EPS, excluding acquisition and integration costs, expanded by 13%, even when considering the negative impact of European currency fluctuations on our Canadian reporting currency. As a reminder, and as announced during our call in April, this is the first quarter we're reporting with our new structure. The former Scandinavia and Central and Eastern Europe segments are now Scandinavia and Central Europe, comprised of Germany, Sweden and Norway; and Northwest and Central East Europe comprised primarily of the Netherlands, Denmark and Czech Republic. These changes to our organization will allow us to drive revenue growth and expand profitability, particularly in the Scandinavian countries. For the quarter, revenue was $3.26 billion, up 11.5% year-over-year when excluding $109 million of unfavorable foreign currency impact. This strong growth was driven by the following segments: Asia Pacific, up 23.3%; Western and Southern Europe, up 23.2%; Canada, up 18.2%; and U.S. commercial and state government, up 13.6%. Notably, all of our segments delivered positive constant currency growth in the quarter. In fact, the number of our consultants and professionals increased year-over-year by 10,500 for a total of 88,500. The majority of our members are located in proximity to our clients to support close collaboration. However, a large proportion of our hires this quarter were made in our global delivery centers of excellence to enhance our delivery and productivity effectiveness. Overall, 22% of our members are currently based in offshore delivery centers of excellence. Total bookings were $3.4 billion, representing a book-to-bill of 105% for the quarter, led by continued robust demand for our system integration and consulting services. Our managed services and IP bookings remain strong on a trailing 12-month basis, and we expect to see ongoing demand for these larger and recurring deals as evidenced by our growing pipeline in both service areas. In fact, our pipeline of managed services deals with a projected decision date in the next 12 months is up 32% on a year-over-year basis. We see increasing interest for our value proposition, which delivers cost savings for our clients while supporting them in the acceleration of their digitization. IP pipeline is also at a 2-year high with opportunities having a projected decision date in the next 12 months, up 54% on a year-over-year basis. In Q3, 5 of our 8 proximity geographic segments had a book-to-bill above 100%, led by U.S. commercial and state government at 136% and U.K. and Australia at 115%. And from an industry perspective, led by Health with 129% book-to-bill as organizations continue to enable virtual health care delivery while ensuring secured data privacy protection; and government with 117% book-to-bill as agencies continue to prioritize a range of domestic initiatives such as social and health services, infrastructure, space-based data solutions, environment and cybersecurity, all areas of strength for CGI. Our book-to-bill was 105% on a trailing 12-month basis and our global backlog continues to remain strong at $23.2 billion, representing 1.8x revenue. The vast majority of our backlog is comprised of long-term recurring revenue engagement. With respect to profitability, adjusted EBIT in Q3 was $520 million, while EBIT margin increased to 16%, up 20 basis points compared to Q3 last year. The year-over-year increase was largely due to margin improvements in our 2 new reporting segments and stronger demand for offshore services. This more than offsets the temporary dilutive impact of recent acquisitions in our Western and Southern Europe and U.S. segments as well as the lower billable utilization in several geographies driven by the onboarding of new hires in response to high demand. We delivered very strong EBIT margins, notably in Asia Pacific at 30.7%, Canada at 21.7% and U.S. Federal at 18.2%. Overall, and on a year-to-date basis, we delivered a 16.3% EBIT margin, an improvement of 30 basis points when compared to last year. Our effective tax rate in Q3 was 25.5% compared to 24.9% in the prior year. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. Net earnings were $364 million and diluted earnings per share were $1.51 representing an expansion of 11% year-over-year. This improvement was mainly driven by the execution of our Build and Buy profitable growth strategy. Excluding integration costs, net earnings were $171 million, reflecting a margin of 11.4% and diluted earnings per share of $1.54, an accretion of 13.2% when compared to $1.36 in the same quarter last year. In the quarter, cash provided by operating activities was $419 million comparable to the prior year. DSO was 48 days or 46 days when removing the 2-day impact created by the timing of the Umanis acquisition. This compares to 44 days last year. For the last 12 months, cash provided by operating activities was $1.9 billion or 15.1% of revenue. This represents $7.77 in cash per share. In the quarter, we deployed $512 million to fuel our Build and Buy profitable growth strategy, mainly for the Umanis and Harwell acquisitions, both in our Western and Southern Europe segment. As announced on July 18, CGI acquired over 90% of Umanis' shares and launched the squeeze-out process to acquire all remaining shares. In Q3, we invested $114 million in buying back approximately 1.1 million shares at a weighted average price of $101.31. As of the end of June, we had the authorization to buy back up to an additional 13.7 million shares under our current NCIB program. These results yield a return on invested capital of 15.8% compared to 13.8% in the prior year ago period. Looking ahead, our capital allocation focus continues to be on delivering double-digit returns to our shareholders. The cornerstone of CGI's Build and Buy profitable growth strategy is our strong balance sheet position. At the end of June, our net debt to capitalization ratio was 30.6% and our long-term debt interest is fixed at an average rate of 1.58%. We also have $2.3 billion of cash readily available with access to more if needed.
George Schindler, President and CEO
Thank you, François, and good morning, everyone. CGI's strong performance in the third quarter of fiscal 2022 again demonstrated the value of our end-to-end services, the breadth of our enterprise clients across all industries and the consistent operational rigor for which we have a proven track record of delivery through all economic cycles. Our portfolio of end-to-end services provides the right combination of value-based solutions to help our clients navigate today's market environment. By creating value for our clients, we're able to drive revenue growth and margin expansion for the benefit of all CGI stakeholders. Our revenue growth in the quarter was 11.5% on a constant currency basis and broad-based across all geographic and industry segments. Consistent with our profitable growth strategy, we again delivered double-digit EPS accretion and expanded EBIT margin. We have good visibility in the clients' expected spending plans based on the client interviews we conducted earlier this year with over 1,600 executives. I would like to share some insights from these interviews into the ongoing IT services client demand, along with examples of representative Q3 bookings that illustrate the value of each of CGI's end-to-end services. Relating to managed services, nearly 60% of clients plan for flat to declining OpEx spend over the next year, in part as a response to economic predictions. Correspondingly, clients plan to increase their reliance on managed services by up to 13% over the next 3 years, a clear and accelerating opportunity for CGI in the coming quarters. In Q3, we were awarded new managed services engagements, which point to a trend where clients are asking CGI to take on and modernize their legacy operations to generate cost savings and then subsequently manage their transformed operations for sustained cost efficiency and operational agility. For example, the Society for Human Resource Management and CGI entered into a 10-year $198 million full managed services partnership. CGI will deliver services and solutions to accelerate their digital transformation and enable them to deepen their impact on the future of work with our member base of more than 300,000 HR and business executives around the world. Rio Tinto, a leading global mining and metals company renewed and expanded their long-term partnership with CGI to help them modernize through the strategic use of cloud as part of their ongoing digital transformation. CGI will also deploy our proprietary site reliability IP or SR360, which automates the overall management of a hybrid cloud ecosystem. And the U.K. home office selected CGI to serve as a strategic delivery partner for their police and public protection technology portfolio. Under the 5-year engagement, which has an expected client spend of $145 million, CGI will deliver user-centric solutions to help the agency improve public safety through digitization. Turning to the voice of our clients' findings related to consulting and systems integration, 86% of clients planned flat to increasing CapEx spend over the next year. In addition, a higher proportion of clients plan to invest in new IT digitization programs of over $200 million over the next 3 years. Furthermore, 88% of our clients indicated they are having difficulty hiring IT talent, leading to more of our clients who plan to externalize the majority of their IT services work. Given these findings, demand remains strong for CGI's consulting and systems integration services. This was demonstrated by numerous wins in the quarter. For example, the European Commission chose our German team to support the development of the independent European satellite constellation. CGI's work will include the creation of an automated concept for operating the satellite constellation and also embedding comprehensive cybersecurity. Maersk awarded CGI in Denmark a new agreement to deliver a range of strategic IT consulting and agile application development services. Our consultants will help Maersk modernize their digital value chain, reduce costs and improve time to market for the company's global logistics and transportation services. And the Business Development Bank of Canada engaged CGI and our outcome-based model for agile development with delivery slots. CGI's unique replicable model is helping increase capacity and velocity to accelerate the bank's digital-first transformation objectives while reducing their risk. Now moving to our intellectual property. Based on ongoing client discussions, we see rising demand for CGI's offerings to help clients optimize their operations, increase their agility and counteract the impact of rising inflation, as well as increased interest in engaging CGI on go-to-market partnerships for client-owned proprietary IP. This includes an interest in monetizing their IP through a divestiture to CGI. In the quarter, we completed 2 such partnerships where we will assume ownership for clients' IP as part of broader project engagements. First, with IGM Financial in Canada for a mutual fund transfer agency platform; and second, with a global bank in France for a solution to streamline retail banking end-to-end processes. During Q3, clients also awarded new engagements for CGI IP across multiple industries. For example, a fashion retailer based in France selected CGI's Google Cloud hosted point-of-sale solution within our retail suite IP. The solution will increase their omnichannel performance and experience for consumers. One of the leading global auto manufacturers extended their relationship with CGI's U.K. team for an expanded implementation of our asset finance solution, or AFS360, for asset management processing in the U.K., France, Italy and Spain. International search and rescue organizations and the European Space Agency joined as partners in the design and development of CGI's new cloud-based data analytics and augmented reality platform Sense360. This solution provides a holistic situational overview that helps organizations more efficiently organize and accelerate rescue operations. And in the U.S. government sector, we were awarded new contracts with 3 state and local clients in Kentucky, California and New York for Advantage, our built-for-local-government ERP platform. And at the federal level, the Department of Justice extended their long-term partnership with CGI in support of their enterprise-wide financial and asset management systems based on our built-for-government momentum and sunflower IP. Globally, the percentage of overall services revenue that is IT-based was just over 20% for Q3 as a result of onboarding revenue from new mergers without IP. Consistent with our recent messaging, we continue to expand our M&A pipeline to include more IP-based services and solution firms. Our current active IP-based services targets increased by 150% compared to the same time last year. Through the combination of our managed services, consulting and system integration and IP, we are well structured to deliver value for all 3 stakeholders. This is supported by our CGI management foundation, which enables teams around the world to act effectively, efficiently and consistently as one company. The Management Foundation incorporates 46 years of proven best practices and frameworks to ensure high-quality and secure project delivery, allowing our consultants to maximize time spent on supporting and innovating for our clients. Most importantly, it codifies our values, policies, principles and performance metrics to govern and facilitate operational excellence everywhere CGI operates. Including when we do M&A, the management foundation enables us to rapidly and profitably integrate new mergers. Looking ahead, we will continue to pursue our Build and Buy strategy to continuously strengthen our positioning. First, we're preparing new university hires to rapidly join client engagements through investments in practical consulting courses and emerging technology boot camps. In addition, we continue to invest in the ongoing career development of all existing talent as part of our full-year plan to increase our training investment by 33%. Our hiring of new talent at all experience levels remains at a record high and in line with client needs. Notably, we had increases in training and new university graduate hires, up 52% and 62%, respectively, compared to the same quarter last year. Secondly, we continue to invest in our managed services capabilities to support clients who increasingly seek cost savings. In fact, we are adding capacity in our managed services deal solutioning center to provide additional support for local teams as they respond to an increasing demand for larger strategic client engagement. Next, we continue to make investments in our IP-based services and solutions, adding new solutions to our portfolio and enhancing existing solutions to meet emerging client needs, extending our IP through our relationships with external global alliance partners, integrating with their third-party IP to bring added value for our clients, and expanding our portfolio through M&A of client-based IP as well as firms focused on delivering proprietary intellectual property. Finally, our M&A pipeline is growing in both quality and quantity and at a faster pace. Valuations and market activity are creating more favorable buying conditions for mergers with both metro market services firms and for transformational mergers. In the third quarter, we closed 2 new mergers, Umanis, adding nearly 3,000 consultants and professionals specializing in data, digital and business solutions; and Harwell, adding 150 business consultants serving clients primarily in the financial services sector in France. We remain well positioned to continue executing on our plan and accelerating growth through our buy strategy, and we continue to be on a pace to meet our planned $1 billion investment in M&A this year. In closing, client demand for all of our end-to-end services remains robust, given the critical role that IT plays in helping clients drive enterprise-level modernization and digitization programs. We are now a team of 88,500 consultants and professionals worldwide with a capacity, footprint and expertise to help clients accelerate their digital transformation. We are well structured to continue driving revenue growth and margin expansion for the benefit of all 3 of CGI stakeholders. Thank you for your continued interest and support. Go to questions now, Kevin?
Kevin Linder, SVP of Investor Relations
Thanks, George. So we, let's queue up the questions from the participants, please.
Operator, Operator
Your first question will be from Thanos Moschopoulos at BMO Capital Markets.
Thanos Moschopoulos, Analyst
Congratulations to François and Steve on the new roles. George, maybe expanding on the macro side. Clearly, it sounds like you're seeing a strong demand environment. But just to be explicitly clear, if you look at the conversations you're having in recent weeks, have there been any changes you call out in terms of customer tone, in terms of sales cycles, decision-making time frames? Or would you say that across most geographies and industries is still very consistent with the demand backdrop?
George Schindler, President and CEO
Yes. Thanks for the question, Thanos. The recent discussions I've had with CXOs, of course, there's more discussion about both inflation and where the economy might go given the tightening of the mining supply. But it's not changing their resolve in those discussions around where they want to go with IT. May change the way they write their business cases, but it doesn't change their overall demand and appetite for IT. And I think that's pretty consistent across all the discussions I've had. And this is true in both Europe and in North America, where demand is holding up. Now in Europe right now, of course, we have the summer holidays. But seriously, it appears that IT demand remains strong, you can see that from our pipeline.
Thanos Moschopoulos, Analyst
Great. And in terms of offshore and the growth you're seeing there and I guess, more broadly, the growth that we've seen across the industry, would you say that's a function of clients favoring offshore to a greater extent than the past for cost reasons? Or does it have more to do with just that's where labor availability is right now in the tight labor market?
George Schindler, President and CEO
I believe there are several factors at play. Cost is definitely an important factor and likely the main one. Additionally, many clients have become more open to remote work because of the pandemic. This is another consideration. Talent availability is also a key concern for everyone. However, I can tell you that clients are becoming more inventive with onshore and nearshore global delivery centers that CGI offers. There remains interest in that, which contributes to the overall situation.
Thanos Moschopoulos, Analyst
And finally, kind of a related point, at the Investor Day, you talked about growing your offshore headcount at a 15% take over the next 3 years. It would seem that you're tracking well for that given the revenue growth we're seeing, but...
George Schindler, President and CEO
Exactly right. Exactly right. Higher percentage in global delivery. Thanks for the observation.
Operator, Operator
And your next question will be from Stephanie Price at CIBC.
Stephanie Price, Analyst
I was hoping you could talk a little bit about the puts and takes in cash flow in the quarter. As a percentage of revenue, it looks like it's lower than we've historically seen.
François Boulanger, Executive Vice President and CFO
Yes, thank you, Stephanie. You're correct. A significant part of this is related to working capital. With the acceleration in growth, we’re requiring more working capital to be invested. That’s really the main factor. Last year, we also experienced a notable one-time reduction in Days Sales Outstanding, moving from the high 40s and low 50s down to 45 or 46 days. This provided a temporary boost that isn't present this year as we're keeping it at the same level. However, the growth we are experiencing is naturally putting some pressure on working capital.
Stephanie Price, Analyst
Okay. That's helpful. And then, George, you mentioned that some clients are looking to divest IT to CGI. I was hoping you could dig a little bit deeper into this comment and talk about how large this open could be.
George Schindler, President and CEO
Yes, it's interesting, Stephanie. We've been having discussions every year with our clients about the IT resources they have within their organizations, which are quite substantial. Given the current economic conditions, they're exploring ways to unlock that potential. I mentioned two opportunities in Canada with IGM and one in France, and we're actively building a pipeline for similar projects. However, we need to ensure they align with our overall portfolio since we didn't originally develop them. We're conducting due diligence similar to what we would do in mergers and acquisitions. These projects tend to combine elements of both M&A and outsourcing because they often involve us providing services back to the client and potentially to other clients as well. It's still early in the process—just the tip of the iceberg—but there will be more developments on this front.
Stephanie Price, Analyst
And then just finally for me, following up on Thanos' question, obviously, demand has been very strong. If we were to think about this changing in the macro environment, changing even more, can you walk through kind of CGI's business and which pieces could be more resilient? And what opportunities you think are out there in a weaker market or a weaker economy?
George Schindler, President and CEO
Yes, as I mentioned in my opening remarks, we have end-to-end services that position us to thrive in various economic conditions. It begins with our proximity go-to-market model, which allows us to focus on the most in-demand services and solutions. Currently, we are more engaged in consulting and systems integration, but we can easily adjust and complement that proximity with our global support infrastructure in both delivery centers and IT and managed services. This structure facilitates our efforts. When we focus on areas where cost savings are critical, IT and managed services become significantly more resilient. The advantage is that these opportunities often lead to larger, longer-term, recurring contracts, which we can typically fulfill at higher profit margins due to increased utilization and reduced sales costs once secured. Historically, we have performed very well during previous recessionary times. However, I believe this situation is different. IT is no longer seen as discretionary, and we anticipate demand will react differently. We're already noticing strength in systems integration and consulting. Unlike previous periods where these sectors dramatically declined, our pipeline and conversations indicate otherwise. This illustrates how our end-to-end services are positioned to perform.
Operator, Operator
Next question will be from Jerome Dubreuil at Desjardins.
Jerome Dubreuil, Analyst
Mine is on the tech layoffs, I know not particularly apparent with your direct peers, but I'm wondering if this could have a positive or negative impact on CGI, more talent available for you guys but also for your clients. So maybe not a great read on the economy. So if you can provide color on this.
George Schindler, President and CEO
You're correct that it's not directly connected. Many of those large tech companies focus more on the consumer sector than we do. However, this situation does present us with two opportunities. One relates to talent acquisition, and the other concerns potential partnerships. This is similar to our previous discussion about clients seeking to leverage their proprietary IT. I believe we will find a more favorable environment for collaborations with some of these large tech firms, which also happen to be some of our major global partners. Therefore, I see potential opportunities there, although it is important to note that it doesn’t have a direct link to our IT services business, which operates differently in the business-to-business arena.
Operator, Operator
Next question will be from Steven Li at Raymond James.
Steven Li, Analyst
George, your bookings look fine, but anything you want to call out, I saw the U.S. Fed was a bit lumpy or anything stood out in Europe?
George Schindler, President and CEO
Yes, bookings were particularly strong in SI&C, as highlighted. They are not the multiyear deals typical of some IT and managed services, which is why the numbers appear as they do. Despite some larger deals being delayed, the overall performance remains very strong. Our government bookings were exceptionally robust even without significant U.S. Federal deals pushed to the right. It's worth noting that some of the strongest backlogs are in CGI, with our U.S. federal business exceeding CGI's 1.8 at about 2.3, and Canada boasting a backlog of three times its revenue. The recent acquisitions and some restructuring may have distorted the results temporarily, but that will even out. We feel confident that a healthy pipeline will result in bookings in the coming quarters. This provides some additional insights that you may find useful.
Steven Li, Analyst
And new clocks in Europe, George?
George Schindler, President and CEO
In Europe, yes. I mean Europe, like I said earlier, we continue to see strength on the demand side and in Europe, it's sustaining. It's the holiday season. You get some cyclical nature in there. But all the recent discussions, I actions just in Europe for 2 weeks, and the demand appears to still be very strong there.
Steven Li, Analyst
Got it. Okay. And then François, congrats on the appointment. The pipeline comments are very helpful. Can you maybe make a similar comment on your IT pipeline, how much it's up year-over-year? Or just give us an update on IT.
François Boulanger, Executive Vice President and CFO
Thank you for your remarks. Yes, the IT pipeline has increased year-over-year, and it's performing well. We are experiencing significant momentum in both North America and Europe. This momentum is noticeable, and in the next 12 months, we anticipate numerous decision-making activities regarding some of the larger IT deals.
Steven Li, Analyst
Got it. And then maybe a question for Steve. Also, congrats, Steve. The margin comments, the lower utilization in Canada and the U.S., with the onboarding of new hires. Typically, does utilization catch back up pretty quickly like next quarter?
Steve Perron, Senior Vice President and Corporate Controller
Yes, thank you for your congratulations and questions. Utilization is currently affected as we are hiring and training new employees through boot camps. However, once their training is complete, they will be available. We are hiring because we see demand, and this will eventually balance out.
George Schindler, President and CEO
Yes, it's a bit of a positive factor that will correct itself quickly. The good news is that we continue to hire, and there is strong demand on the hiring side. While there may be some moderation, it will ultimately benefit us in the upcoming quarters.
Operator, Operator
Next question will be from Brian Essex at Goldman Sachs.
Brian Essex, Analyst
I was wondering if you could provide more details on the hiring comments. It appears there has been a significant increase in headcount. You mentioned that a little over 3,000 came from acquisitions. Could you explain how that relates to the utilization commentary you provided? I assume that many of these additions were lateral hires. If you could elaborate on the mix and how it ties in with your remarks on utilization, that would be helpful.
George Schindler, President and CEO
Thank you for the question, Brian. You're correct that most of the inorganic hires remain billable with their existing clients. We generally have a higher utilization target within CGI as part of our management framework, which is a key aspect of the integration process. Nonetheless, as I mentioned, our hiring has significantly increased, especially among new graduates and during training sessions. Over 1,000 of these new hires are contributing to our overall headcount. These individuals undergo onboarding training, including about a 9- to 12-week boot camp, particularly in our global delivery centers, especially in India, to ensure they are fully prepared to start working with clients. While there may be a slight delay in their contributions, as discussed with Steven, they adjust quickly.
Brian Essex, Analyst
Got it. Very helpful. Really interesting commentary that you had on integration and consulting demand, particularly in a more challenging macro environment. What are you seeing inside of that business, maybe if you can split out, integration versus consulting relative to perhaps the '08, '09 time frame when we saw across the industry, system integration work kind of fell off precipitously. Are you seeing maybe just a newfound appreciation of the scalability of cloud and digital exposure within enterprise environments? Or is there a different mix of work than you've had historically in that business?
George Schindler, President and CEO
Yes, it's interesting. There are a couple of things that might be different, considering how tight supply is. I mentioned that 88% of our clients are struggling to hire IT talent. Many of the systems integration tasks we're currently undertaking are essentially work that our clients would have preferred to handle themselves, which is increasing the workload they typically would outsource. I can see this trend continuing, especially during a downturn when the demand for IT talent remains high. To your point, I think there is a shift, and this is a topic I've been discussing. Recently, I spoke with a CXO in Europe who mentioned that they are preparing for a recession but are also planning to invest more in IT than ever before. I believe that's a significant shift that you might not have heard before.
Brian Essex, Analyst
Yes. Agree. Agree. Very helpful commentary. So really appreciate it.
Operator, Operator
Next question will be from Daniel Chan at TD Securities.
Daniel Chan, Analyst
Just wondering if you can hide any color on the pricing environment, whether you're able to offset the increased costs you're seeing?
George Schindler, President and CEO
Yes, we are definitely identifying some opportunities in this area. Each of our services has its characteristics; for example, IT is less affected by wage inflation, but we do have chances for price adjustments due to the value we provide through IP. Managed Services has built-in indexation, and our team is effectively managing the impact of wage inflation by focusing on value-based pricing for new projects. We are quite disciplined in maintaining our approach; if we are increasing wages—especially for our top talent globally—this also necessitates a corresponding increase in rates. We can achieve this through project rotations and new project initiations. Overall, we are having positive experiences, and despite facing some temporary challenges, we have managed to expand our margins.
Daniel Chan, Analyst
That's very helpful. I'm joining the call late. So I don't know if someone else asked this already, but I just wonder if you can give us an update on whether you're still on track for that $1 billion of acquisitions.
George Schindler, President and CEO
Yes. Yes. I did mention that we're still on a base.
Operator, Operator
Next question will be from Robert Young at Canaccord Genuity.
Robert Young, Analyst
First question for me would be on whether there could be any kind of a pause in the demand. You described maybe some clients are shifting the way that they might spend on IT budgets, even if IT budgets are consistent or growing? Is there a potential? And you said in the prepared comments that the pipeline of managed service deals had grown 32% on a year-over-year basis. And so that's not elongation or a delay. Is there any pause happening there as people shift more towards managed services?
George Schindler, President and CEO
Yes, it's a good question. I don't see it right now, but we believe there will be a shift and a bigger opportunity in managed services, which is why we've been investing there over the last 12 months. We did experience a gap, and you're seeing some nice wins in the quarter, and we have a rich pipeline that we will need to convert. But I don't see any pause at the moment, and it's something we will continue to monitor.
Robert Young, Analyst
And then just to better understand what you mean exactly by managed services. I know that a lot of CGI's business is very, very long contract terms on outsourcing agreements. So when you think about what exactly is managed services in your context? Is it multiyear? Or is it 10-year? Like maybe just sort of lay out the landscape of what the arc of managed services to outsourcing exactly is and where that 32% growth is occurring?
George Schindler, President and CEO
Yes. So I mentioned this and I understand you had to join a little bit later, but I did mention some of this in my remarks that the managed services for us are typically 5- to 10-year deals, but they're a bit different where they're asking us to not just take on the legacy, but they're asking us to take on the legacy, modernize it, so we actually do the development of the modernization and then continue to manage those modernized operations. And that's typically a longer-term contract, which is why, typically, if you're going to do all that, it's going to be more of a 10-year contract, which is what we did with the Society of Human Resources and we're doing again with Rio Tinto. So those are examples of what's going on in that space. And that's what we mean by that. And the difference between just taking on a portion of the infrastructure and running that for a client, that's not what we're talking about here. We're really talking about an integrated both run and change and build in some cases.
Robert Young, Analyst
Okay. That's great information. For my last question, could you clarify your earlier comments about hiring? It seems that you are continuing to hire aggressively, but perhaps you're focusing more on new graduates or younger, less experienced candidates in this tighter market. Is that accurate? Also, regarding the utilization lag and its short-term correction, I would like to understand why you believe this trend may not continue in the long term given the current wage inflation pressures.
George Schindler, President and CEO
Yes, you're correct. We are directing some of our hiring towards entry-level positions and our global delivery centers. This approach helps us maintain competitive pricing while providing savings to our clients. By integrating more entry-level employees and expanding our global delivery team, we can structure our workforce effectively. Initially, the impact of this hiring will be significant, but as it stabilizes, we expect the effects to moderate. Once the hiring reaches a certain level and plateaus, it will provide some support, but we anticipate a gradual moderation over time.
Operator, Operator
Next question will be from Paul Treiber at RBC Capital.
Paul Treiber, Analyst
Just a follow-up question on your comments in regards to pricing. You mentioned indexation for managed services contracts. Does that include CPI or are there other indexes that you use because obviously, CPI has been quite significantly increased this year. And then how quickly does pricing adjust? Is it annual? Or is it quarterly?
George Schindler, President and CEO
Yes, it's typically CPI or some derivative of that. And I don't know if François, Steve, you have...
François Boulanger, Executive Vice President and CFO
And really linked to IT increases, right?
George Schindler, President and CEO
So it's not...
François Boulanger, Executive Vice President and CFO
It's not just the overall Consumer Price Index, but specifically the CPI related to the IT industry. Regarding the increases, it depends on the timing; for time and material, adjustments can happen much quicker than for outsourced managed services. Typically, managed services adjustments occur annually at the contract's anniversary, where we address the increase tied to CPI.
Paul Treiber, Analyst
And did pricing have a significant impact on revenue growth this quarter? Have you broken it out or done the analysis there? And then looking forward over the next year, anticipate a significant proportion of organic growth to be driven from pricing?
François Boulanger, Executive Vice President and CFO
The majority of the growth is coming from quantity. As you can see, we increased our headcount by 10,500, with most of this increase being billable headcount. Therefore, quantity significantly influences our indices compared to the price increase.
Operator, Operator
Thank you. And just one last one. Just in regards to Germany, I mean, I know your business there is quite small, but German manufacturing vertical, in particular, are you seeing any sort of change in their thinking around IT investments, just given that the macro headwinds that they may be facing in terms of energy costs?
George Schindler, President and CEO
Yes. Regarding Germany, we are engaging in discussions about how our end-to-end services can be utilized. They seem to be focusing less on systems integration and consulting, and more on managed services. This is particularly relevant to that market, and it's the area where we are noticing an increase in conversations.
Operator, Operator
Next question will be from Suthan Sukumar at Stifel.
Suthan Sukumar, Analyst
Congrats François and Steve on the appointments. The first question I had was on the on your vertical markets. This quarter, we saw strength across the board. I'm just wondering if there anything specific here to call out with respect to some of the trends you're seeing within some of these industry groups.
George Schindler, President and CEO
Thank you for the question. The strongest industries for us right now are definitely financial services, which is experiencing strong double-digit growth. Following closely is the health sector, which, although smaller for us, is performing well. Additionally, MRD has also shown significant strength. The larger sectors are proving to be our strongest, which is encouraging. Government spending is closely aligned with CGI's strengths, and we are monitoring this globally. As François mentioned, we have a strong book-to-bill ratio in the government sector, which should support ongoing growth. This is happening even without significant bookings in our U.S. Federal business, which we anticipate will rebound. Overall, we feel optimistic about the key industries we are involved in.
Suthan Sukumar, Analyst
Okay. Great. Regarding your margin outlook, your margin performance clearly reflects effective cost management. It seems you are still pursuing further margin expansion. Besides utilizing your existing pricing power, what additional strategies do you have in place to enhance margin growth in the long run? Are there any easily attainable opportunities you can capitalize on?
George Schindler, President and CEO
One area to consider is the opportunities to increase margins in our new geographic structure. We made changes to regions like Scandinavia, Central Europe, Northwest, and Central East Europe to align those margins more closely. While we still have some work to do, initial improvements are becoming visible, and I’m happy with the team’s efforts. Looking ahead, in addition to the growth we've mentioned, we’re focusing on our revenue mix. As we transition more towards IT, we’re developing a pipeline for mergers and acquisitions in that area. Moreover, managed services offer lower sales costs and higher utilization, enabling us to achieve strong margins in those larger deals. Even though rates differ, the net margin is greater compared to the higher rates in systems integration and consulting, but they yield quicker returns. It’s simply a different business model, yet it all integrates into our end-to-end services. This is why we're optimistic about continuing to enhance margins over time.
Operator, Operator
Next question will be from Jason Kupferberg at Bank of America.
Unidentified Analyst, Analyst
This is Tyler DuPont on for Jason. Two questions. One, when looking at book-to-bill by segment, it looks like it's a bit of a mixed bag with some regions significantly above others. When thinking about the next few quarters going ahead, would it be accurate to assume a more normalized LTM number closer to 1? Or should we think there'll be more of a stratification in the short term? Or any insight there would be helpful.
George Schindler, President and CEO
Yes, I believe the bookings are always variable. So I don't see any significant reasons for disparity at this moment. As I mentioned, we are experiencing strong demand in both North America and Europe across these segments. We do have some recent acquisitions that may affect the numbers, but I think over time they will stabilize to a more typical pattern.
Unidentified Analyst, Analyst
Perfect. And I guess one more question. I'm curious about your thoughts on the M&A front. Given where we are with multiples, both in the public and private markets, can you discuss just how that impacts your decision-making with the types amount or the size of the tuck-ins that you do? And then also if there's any specific geographies or verticals that you're trying to target?
George Schindler, President and CEO
Yes, I believe valuations are decreasing. Additionally, there is less competition due to rising capital costs. Importantly for us, the deal size has increased by about 16% compared to the same time last year. We are seeing larger opportunities that align with our interests. So, stay tuned as we continue to expand that pipeline and see it come to fruition. Does it alter our perspective on these, François...
François Boulanger, Executive Vice President and CFO
No, not really. But naturally, as George mentioned, prices are becoming more reasonable than they were a year ago. That's why the timing is becoming favorable for acquisitions, which is leading to an increase in our pipeline. We are adding more resources to this effort and seeing good opportunities for the future.
Operator, Operator
Next question will be from Divya Goal at Scotiabank.
Unidentified Analyst, Analyst
Congratulations on a good quarter. I have 2 specific questions. One of them, George, on the managed services side, the explanation that you gave, could be a view looking at what the other peers are doing, is some of the professional services revenue is lumped up with the managed services, the way CGI records them?
George Schindler, President and CEO
Yes. We talked about this in one of the earlier quarters. Yes, it is, in fact, we're seeing those larger managed services absorb some of what would have been systems integration. Of course, that's great for us because now your system integration is coming at that same utilization rate and lower cost of sales that you get in the bigger managed services. There was always some of that, but I think we're seeing more and more of it.
Unidentified Analyst, Analyst
That's a great question. Regarding potential hiring, we are observing an increase in staffing within the technology services sector across various companies. Despite the absence of a slowdown in bookings, there are concerns about the possible risks of over-hiring in light of the looming recession and challenges in the global economy. It's important to consider whether the hiring is genuinely related to specific projects or if it's aimed at strengthening our workforce. This raises the possibility of workforce adjustments in the future. I understand this is a challenging question to address given the current circumstances, but I wanted to touch on this issue from an industry perspective.
George Schindler, President and CEO
No, I think it's a relevant question. You may realize from my discussion on the management foundation. We're very rigorous in the way we manage the hiring part of that is in our proximity model, and we're pretty clear. In fact, François, now Steve and I review the utilization on a weekly basis with my team. And so we're not hiring for bench. Now we have some of that in our global delivery centers. But again, we're pretty tight on that. So obviously, we want to be able to meet the client demand. But probably compared to some of our peers, we're pretty tighter on that.
Kevin Linder, SVP of Investor Relations
Okay. Thank you. Thanks, everyone, for participating. As a reminder, a replay of this call will be available either via our website or by dialing 1-877-674-7070 and using the passcode 482468. As well, a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1-905-973-8363. Thanks again, everyone, and look forward to speaking soon.
Operator, Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.