CGI Inc. (NYSE:GIB) Q2 2024 Earnings Call Transcript

CGI Inc. (NYSE:GIB) Q2 2024 Earnings Call Transcript May 1, 2024

CGI Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to CGI’s Second Quarter Fiscal 2024 Conference Call. I would now like to turn the meeting over to Mr. Kevin Linder SVP of Investor Relations. Please go ahead Mr. Linder.

Kevin Linder: Thank you, Joelle and good morning. With me to discuss CGI’s second quarter fiscal 2024 results are George Schindler, our President and CEO; and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday May 1 2024. Supplemental slides, as well as the press release we issued earlier this morning are available for download along with our Q2 MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR plus and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The complete Safe Harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I’ll now turn it over to Steve to review our Q2 financials and then George will comment on our business and market outlook. Steve?

Steve Perron: Thank you, Kevin, and good morning, everyone. I’m pleased to share with you the results of our second quarter of fiscal 2024. In Q2, we delivered CAD3.7 billion of revenue, up 0.7% year-over-year or stable when excluding the impact of foreign exchange. The strongest CGI segments were UK and Australia at 5.1% constant currency growth. Asia Pacific at 5%, Northwest and Central East Europe with 4.2% and US commercial and state government at 4.1%. From an industry perspective, we had the highest growth in government with 5.7% constant currency growth while we continue to experience softness in industries more sensitive to interest rates, particularly in the banking subsectors. In addition, the majority of our geographies were negatively impacted by one less billable day in the quarter.

IP as a percentage of total revenue was 22% in the quarter. Our IP continues to resonate with clients with vast majority contracted as longer-term recurring engagements with over 60% delivered as Software as a Service. Our overall bookings in the quarter were CAD3.8 billion for a book-to-bill ratio of 100% and 113% on a trailing 12-month basis. Booking ratios for the quarter were led by Finland, Poland and Baltics at 127%, Western and Southern Europe at 115% and UK and Australia at 109%. Global backlog reached CAD 26.8 billion or 1.9 times revenue helping to support our overall business resilience. Turning to profitability. We continue to manage with discipline, despite the current macro environment, delivering solid year-over-year improvements.

Earnings before income taxes were CAD577 million for a margin of 15.4%, up 20 basis points year-over-year. Adjusted EBIT in the quarter was CAD628 million, up $28 million year-over-year. This represents a margin of 16.8%, up 60 basis points year-over-year. Mainly as a result of a larger proportion of IP-based revenues and benefits being realized from our previously announced cost optimization program. This program, which was primarily focused on SG&A has now concluded as planned. We delivered strong margin geographically as follows: Asia Pacific at 31%, North America at 17% and Europe at 14%. Our effective tax rate in the quarter was 26.1% and we expect our tax rate for future quarters to be in the range of 25% to 26.5%. Net earnings were $427 million for a margin of 11.4%, up 10 basis points year-over-year.

Diluted EPS was $1.83 representing an increase of 4% year-over-year when compared to $1.76 in Q2 last year. When excluding specific items, net earnings improved to $459 million, up $24 million when compared to Q2 last year or a margin of 12.3% up 60 basis points. Specific items for the quarter were mainly expenses associated with the cost optimization program. On the same basis, diluted EPS was $1.97 an accretion of 8.2% when compared to Q2 last year. In the quarter, cash provided by operating activities was $502 million, up 7% year-over-year representing 13.4% of total revenue. On a trailing 12-month basis, cash provided by operating activities was $2.1 billion also up 7% year-over-year representing 14.6% of total revenue. DSO was 40 days in the quarter, five days better than our target, mainly due to quality delivery and our mix of business.

As a reminder, Q2 generally produces the lowest DSO each year due to a higher volume of IP maintenance payments from clients. In Q2, we used our cash to invest $103 million into our business including NII and invest $260 million to buy back our stock. In the quarter, we continued to deliver a strong return on invested capital at 15.9%, up 30 basis points year-over-year demonstrating our proficiency and discipline on deployment of capital. Looking ahead, with $2.8 billion of cash readily available and access to more if needed, our capital allocation priorities are: First investing in our business; second pursuing and closing accretive acquisitions by leveraging CGI’s strong balance sheet evidenced by a leverage ratio of 1.1x and a net debt to capitalization ratio of 16.4%.

Finally, as appropriate, cash will be used to repurchase our stock and/or paying down our debt. Now, I will turn the call over to George to further discuss the insights on the quarter and outlook for our business and markets. George?

George Schindler: Thank you, Steve, and good morning, everyone. In the second quarter, our team again embodied CGI’s discipline and agility by prioritizing actions for delivering shareholder value and partnering with clients to position CGI for profitable growth opportunities. With continued strong profitability and cash generation, our financial strength reflects CGI’s resilience and capacity to invest in our Build and Buy growth strategy. Our team’s disciplined management practices contributed to our strong balance sheet even as macroeconomic uncertainty continued to impact some of the industries where our clients operate. Margin improved as we grew the mix of recurring revenue with IP revenue up 6.5% in constant currency and managed services revenue up 2.1% on the same basis.

As planned actions completed through the cost optimization program also contributed to margin expansion. Utilization was up year-over-year, as we continue to align talent to those industries that are growing, such as government transportation and utilities. Delivery quality remained high and client satisfaction again increased across every dimension we measure. Clients continue to partner with us to address their most complex enterprise and ecosystem-wide digitization initiatives. This operational excellence also led to deeper employee engagement as a proportion of employees who are shareholders rose to 87% further expanding our culture of ownership, which is a differentiator for client partnerships and CGI talent attraction and retention. In Q2, the diversity of new client awards affirmed CGI’s positioning as the go-to partner for driving outcomes.

Large project awards contributed to the higher proportion of SI&C bookings in the quarter. We also saw increasing demand for our emblematic business and strategic IT consulting offerings, including CGI’s framework for responsible use of AI as well as change management and CIO advisory services. Client demand for managed services remains robust in line with the buying trends we have seen over the past year. Importantly, on a trailing 12-month basis, the managed services bookings were up $1.6 billion compared to the same period a year ago for a 21% increase. We do see clients continue to exercise caution in their spending on IT services, which is most acute in the banking and manufacturing sub-sectors. However, this cautionary approach is not diminishing clients’ interest across every industry to explore with CGI the opportunities for cost efficiencies through managed services and for ROI-led system integration project.

We also see an industry-wide trend related to timing of decisions notably in delays for large engagements with enterprise clients. We remain well positioned as the partner of choice to help clients achieve the tangible and trusted business outcomes they seek. Example awards in the quarter included LocalTapiola, one of the largest insurance and financial services companies in Finland, extended their strategic managed services partnership with CGI for five years in an agreement valued at $284 million. CGI will apply new technologies, including AI and automation to help drive operational efficiencies across their enterprise. The digital department of the U.K. government cabinet office, appointed CGI as a strategic digital transformation delivery partner in an agreement valued at $162 million.

As part of this new partnership, CGI will provide a range of consulting, data and digital services to help the government innovate and drive value from digitization. The U.S. Department of State’s Bureau of Consular Affairs renewed its 10-year agreement for CGI to deliver visa services across nine countries in the Asia Pacific region. Under the $75 million award, we will continue to leverage CGI Atlas360, our AI-powered customer relationship management and business process IP to help the bureau efficiently facilitate visa applications. And the city of New York expanded its partnership with CGI in a five-year base plus two option year agreement to maintain the city’s parking violation system, which runs on CGI’s Advantage Collections IP platform.

Under this contract, CGI will partner with the city’s Department of Finance to administer the adjudication, payment and collection processes for summons violations issued by the city. Through the use of the CGI platform, the city expects to collect nearly $1 billion in annual revenue. Looking ahead now to the demand environment. Client budgets indicate continued investments in digitization over the next year, according to CGI’s most recent proprietary research. When we ask clients about their budget plans, more than 70% indicated they intend to sustain or increase their IT budgets. CGI’s pipeline over the next year validates this finding as the value of new opportunities grew by nearly 30% on a year-over-year basis. This overarching finding as part of the preliminary insights we have identified based on more than 1,800 discussions with current and prospective clients.

More than 80% of our discussions were with C-level business and IT executives and organizations located in every geography in which we operate. These annual Voice of Our Clients discussions were initiated during the second quarter as part of our strategic planning process and concluded just a few weeks ago. There are three preliminary findings that we see shaping client demand over the next 12 months. These findings underscore the tight alignment between CGI’s current investment priorities and those of our clients. First, clients across industries have indicated their intent to rebalance their business priorities, from primarily cost savings to a renewed focus and also driving revenue growth. Second, executives noted that the alignment gap between business and IT within their organizations has largely been eliminated.

And digital leaders in every industry have significantly widened the gap with their peers in realizing the benefits of digitization. Relating to the first finding, business executives globally cited driving revenue growth as their top priority for the next year. This is closely followed by the need to drive innovation and introduce new products and services. Both of these priorities are new and top 5 this year. While these top business priorities are growth-oriented, business and IT executives maintain their focus on modernization, optimization, cost control, each of which ranked within the top five priorities across most industry sectors. This resurgence in growth as a client priority along with continued focus on efficiencies is well aligned to CGI’s end-to-end services and solutions portfolio.

We expect this dual-focused client agenda to drive an expansion of new opportunities for both SI&C and holistic managed services over the coming year. Moving to the second preliminary finding of our client interviews. Business and IT are now tightly aligned as client executives noted that the alignment gap has effectively been eliminated. Over the past six years of research, this is the first time there’s been such a steep increase in the alignment ratings, indicating a new shared agenda between business and IT teams. We believe the primary driver for this finding is the combination of business efficiency focus and the promising potential of digital technologies, including AI and cloud. For CGI, this alignment is expected to generate larger value engagements as business and IT address enterprise transformations to integrate technology and operations.

We see early signs of larger value opportunities within our pipeline as the average deal size increased significantly for enterprise clients as compared to this time last year. And lastly, digital leaders are increasingly realizing the benefits of digitization and widening the gap compared to those organizations in the earlier stages. This enables digital leaders to accelerate investments in driving revenue growth. Our findings show these digital leaders are more successful in expanding their data strategies, modernizing legacy systems and applications, driving agility into their business models through a higher reliance on managed services, and implementing advanced technologies including generative AI. For digital leaders, this will drive increasing demand for all CGI services as they reinvest savings garnered from their modernization and optimization initiatives into new capital spending to drive future growth.

And for those organizations in their earlier stages of their digitization, the expanding gap and producing ROI will continue to generate new demand for CGI’s end-to-end services, with a stronger emphasis on transformative managed services and the full suite of our IP business solutions. These three preliminary findings are connected by the continuing critical role of technology and digital acceleration. Again this year, nearly three-quarters of our clients cited digital acceleration as the most impactful macro trend for their organization with CEOs rating the impact the highest. Not surprisingly, the rise in client interest for AI and GenAI solutions amplifies the importance of digitization across all aspects of society. CGI continues to progress our AI investments focusing first on talent development and hiring, which is already enabling us to enhance our end-to-end service offerings and strengthen our operations.

For example, we are improving the quality and speed of service delivery and software development for our clients through the use of GenAI, embedding AI across our IP portfolio and leveraging GenAI for more efficient development and maintenance of our 150-plus business solutions; leveraging GenAI to enhance our bid and proposal capacity, and experimenting and applying GenAI to optimize internal processes and transactions, including in our procurement, risk and HR functions. In Q2, our bookings at integrated AI technologies were again over $200 million, including wins with a large US financial and mortgage institution to create a cohesive GenAI strategy to drive portfolio-wide technical capabilities. A global car manufacturer to design and create data and AI platforms and products.

Multiple European space industry clients to leverage real-time AI to improve data transmission rates in lunar and deep space missions. And a multinational telecommunications company to deliver AI-powered solutions for cost savings and improve customer satisfaction. Notably bookings in the quarter utilizing our global alliance partnerships are up double digit on a year-over-year basis. Our client interview findings highlight the overall implementation of GenAI remains in the early and experimental stages, but it is ubiquitous with nearly 80% of clients stating that they are actively exploring AI technologies. In line with this demand, CGI’s active engagements that incorporate AI continue to increase across all lines of service. Turning to the buy side of a profitable growth strategy.

We continue to prioritize investments in M&A to deepen our resilience and serve as a catalyst for future organic growth. We are in active dialogue with merger targets at each stage of our pipeline. We remain committed to merging with like minded companies that are complementary to our geographic footprint, client base and end-to-end portfolio capabilities. Our strategy remains focused on a range of merger opportunities for metro market to transformational. As always, we will be disciplined to make sure that all mergers create value for each stakeholder. Our operational strength, stability and financial capacity will enable us to move quickly with discipline on the right opportunities. In closing, now more than ever CGI’s culture, capabilities and commitment to deliver tangible and trusted business outcomes are highly valued by clients as they navigate the current market environment.

We are well-positioned to remain a partner and expert of choice for clients and empowering environment for our consultants and professionals and engaged ethical and responsible corporate citizen and investment of choice for our share. Given our operational strength, resilient model, talented team and the alignment of our priorities with those of our clients, we remain committed to driving shareholder value through the disciplined execution of our strategy. Thank you for your interest and support. Let’s go to the questions now Kevin?

Kevin Linder: Thanks George. Joelle, we can now poll for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Richard Tse with National Bank Financial. Your line is now open.

Richard Tse: Yes, thank you. George I was just wondering, if you could maybe talk about the extent of expectations for a second half pick up that are predicated on rates coming down across the board. You did a great setup in terms of the opportunity down the road. I’m just curious to see shorter term what’s really driving that pickup here?

George Schindler: Yeah. No, it’s a great question. I don’t have necessarily the clarity that I’d like to have on that. The green shoots are increasing in most industries and geographies for new project work. But they’re just not uniform or consistent right now. So the short-term, it really is still overall managed services and IP demand is what’s generating the opportunities. But as I mentioned, it’s still offset by some cautionary spending in SI&C and overall slow procurement decision making, so and even project start-ups. So it’s just not — it’s not uniform yet and we don’t have that clarity and visibility.

Richard Tse: Okay. Fair enough. You’ve done obviously a very good job at taking margins up over the course of the past few years. And has your business changed in the way the mix of service delivery, meaning on a geographic basis or more customers willing to offshore to get more attractive pricing like, or is it pretty much the same as it was a year or two years ago?

George Schindler: No, I would say that we’ve seen an ongoing trend to moving more our work. What I would still say is the global delivery model. So it’s not just offshore but certainly offshore and you’ve seen that consistently grow faster than the rest of our business, again in this quarter showing that growth. But also the near-shore centers, which continue to pick up specifically in Eastern Europe, Southern Europe and even in Latin America. So it really is a combination of factors. So we always had a global delivery, but I think it’s even more powerful now and the way we deliver our solutions. And of course automation continues to play a role and will continue to evolve as we drive more technologies into the delivery that we do for our clients.

Richard Tse: Okay. And just one quick last one for me. Can you talk about sort of staffing levels here as we look ahead to next year and maybe the degree of wage inflation how it may have moderated here recently?

George Schindler: Yes. Well I mean wage inflation has certainly moderated in most countries in which we operate. And we have a couple of different levers that we use. One is what we just discussed around global delivery and rotating some of our work and then rotating our people to the higher end work that we can get the additional wage rates in various locations. We also have our intellectual property that we can leverage. And so that allows us not to be so linear to people and salaries. And so we’ve got a couple of ways to manage that as we continue to build out the company. So it’s — that doesn’t factor in in a big way as I look at the next year.

Richard Tse: That’s great. Thank you.

Operator: Your next question comes from Daniel Chan with TD Cowen. Your line is now open.

Daniel Chan: Hi. Good morning. George, the US Federal bookings came in a little bit weaker again I think for the second quarter rolling out. I think the expectation was that for it to accelerate as we get closer to the elections. Any color on that?

George Schindler: Yes. Here’s what I would say. I went back I looked at this and cyclically a light booking quarter for us just due to the federal government procurement cycle in the US. There are many more RFPs in this quarter and we have a large number of outstanding RFPs out there and then the award in the second half. Maybe they shift that to more awards in Q3. That’s certainly something that we’re looking at. But I’ll just remind you our trailing 12-month book-to-bill in US Federal is at 136%. So yes, it was 72% in the quarter. But I think our average in this quarter is usually between 70% and 80% and we’re right in that place. So, yes, the election isn’t necessarily having the effect that I thought it might have. It will have an effect as we move through the year and get closer.

And one of the phenomenon that we’re seeing is that there are a lot more bridges for longer periods of time just given the concern about how that election cycle and the stability might occur. So a lot of our outstanding RFPs right now are were less sole source bridge awards. They just haven’t happened yet. So that we’ll look for that in the second half of the year.

Daniel Chan: Thanks for all the details. That make sense.

George Schindler: Sure.

Daniel Chan: Maybe a question on the margin side of things. Obviously the margin strength you mentioned from a higher mix of IP. Just wondering if there’s anything else to call out there and whether you think the margin profile this is the run rate going forward or if there’s more to go?

George Schindler: Yes. So here’s what I’d say. It’s a combination of the improved IP business mix, but also the cost optimization. That’s what’s driving some of this margin. Some of that will stick because of the cost optimization and certainly has that payback. But some of that’s going to be offset by continued investments in AI business development and the growing mix of SI&C. So as we move as things pick up, you’re going to see that change a little bit. We’re still committed to the incremental margin expansion, but we had a nice uptick in this current quarter just given what’s going on. So some of that’s sustainable and then we’ll continue to expand. But some of that we’re going to give up for the right reasons on investing in AI business development and what we believe will be a return of the SI&C here. And you heard that some of that Voice of the Client insights I shared.

Daniel Chan: One more if I may. You mentioned that the sales cycles remain a little bit longer than expected. Just wonder if you can reconcile that with one of the findings in your recent client survey saying that there’s good alignment between business and IT. You would assume that when there’s good alignment you would get these projects approved faster. What do you think is causing that slight disconnect.

George Schindler: It’s a good question. I kind of highlighted that. The finding historically has led us to believe that they’re bigger deals. So business, typically, they do shorter ROI deals. IT tends to do big modernization, but it’s more focused on technology. And as you said, not always 100% aligned. But when they get aligned, it drives bigger ROI, quite frankly, less price-sensitive, more outcome-focused deals. But it’s at the highest levels. So it’s transformative. It affects everybody. We’ve been — I’ve personally been championing some of these through the process, and there’s a lot of different stakeholders within the organization to get aligned. So even though business and IT agree, you still have to get the individuals and the sign-off because it’s going to hit more departments across the organization.

So the more complex deals, just by their nature, take longer. And so that’s what we’re seeing. And again, this is the fresh information. So it’s more about the go forward than where we’ve been.

Daniel Chan: Thanks, George.

George Schindler: Yep.

Operator: Your next question comes from Paul Treiber with RBC Capital Markets. Your line is now open.

Paul Treiber: Good morning.

George Schindler: Hi, Paul.

Paul Treiber: Good morning, George. Just in regards to AI and GenAI, it does seem like everyone is evaluating it at this point. Do you believe that there may be a pause related to other initiatives, just that companies are trying to evaluate AI relative to those other initiatives?

George Schindler: It’s a great question. I’m not sure if that’s exactly what I see. What I do see is given kind of where we’ve been economically, everybody has been a little more focused on the cost cutting and saving. And so I think most organizations are taking advantage of that current backdrop to do that investigative work. And so I don’t think they’re necessarily related one for one. But I do agree with you that evaluation will drive. We see that as a catalyst for driving the next wave of digital spending. And when I say digital spending, it’s not just discrete AI spending, it’s the next wave of digitization. Most of the CEOs that I speak with, COOs I speak with and heads of lines of business, they all talk about, they think of this as just the next iteration of what technology can bring to them.

And so they’re viewing it pretty — in a pretty holistic way, not just as the discrete services. I think that’s also why you don’t see just as big spending indiscriminately on the AI. I think they’re really thinking about that as the next wave of where they’re going with digital.

Paul Treiber: That’s helpful. Still regarding AI, you called out a number of internal use cases, where do you see or what magnitude of potential efficiencies do you see AI driving over time?

George Schindler: Yeah. Well, definitely, it will drive some over time. Right now, it’s really still discrete. So, holistically, you’re not seeing a lot yet dropping to the bottom line. But the reason you go through this work is to actually get to that point. So that’s why I highlighted some of those areas. Right now, it’s less about cost and just more about effectiveness and efficiency. So if you think about the bid generation element I spoke to. It’s really about getting better quality of bids out there. So leveraging all of our information and making that available so that the individuals can spend their time really crafting that and customizing that for the individual client opportunity. So, it’s more about that than it is right now about cost savings.

I think over time, you’re going to see some of that. And by the way, this is what we see a lot of our clients looking at. They’re really now looking at this as more about the business impact to this not just from a cost savings, but from an opportunity perspective of driving the business forward. So that’s what we see right now.

Paul Treiber: And then one last one for me, just in terms of the M&A environment, there’s news around several companies for sale. And it spreads across the quality and the valuation spectrum what’s your thought in terms of leaning one way or the other in terms of or deviating from your historical to lean more either towards quality or more towards lower valuations?

George Schindler: Yeah. Well, at the end of the day, we’re resolute in making sure that we’re going to drive the EPS accretion and do that in a definitive way throughout the process. So I’ve mentioned this before, it’s why areas like the gross margins the rate equation versus the salary equation become very important. You can do a lot on the SG&A side. You can’t do as much on the gross margin side. So and that then, that runs the gamut then, right? Because you can have companies that are stronger and companies that aren’t that are in that manner. But we do see and assess all the market deals on an ongoing basis. And we’ll act when there’s something that makes sense for us and our shareholders.

Paul Treiber: Thanks for taking my questions.

Operator: Your next question comes from Robert Young with Canaccord Genuity. Your line is now open.

Robert Young: Good morning. Just a couple of questions around utilization, the head count dropped year-over-year and quarter-over-quarter. Just trying to understand the dynamic is there a shift towards low cost where you’re hiring? Or is it — are you just — is there more attrition or hiring is not offsetting the attrition? And then, how is that dynamic impacting your utilization? I think you said utilization had improved.

George Schindler: Yeah. Utilization is actually up. A big part of that drop is us getting ahead of it on the cost optimization. As you’re probably aware two-thirds of that cost optimization was focused on SG&A. That’s why you can see that, even though you see the drop in the people you don’t see a drop in the revenue at least we’re staying consistent with the revenue. And then, I think in general, we’re not as linear because of some of that IP. And so you see the IP growing faster and not being dependent necessarily on the people. Having said that, yes, we are seeing some of that shift to global delivery. Interestingly enough, that actually to get the same revenue you actually have a higher head count when you’re using global delivery. So that’s not really what’s going on at the current point in time. But utilization is up and that’s what you see ultimately in the margin, despite the deceleration on the revenue.

Robert Young: Is it fair to say that, there’s more benefit to come from utilization just as some of these you don’t have as many new employees coming in maybe maturing the consultants you have today?

George Schindler: I don’t necessarily see that. I think we’ve got a great team. We continue to train and re-skill our talent. We’re doing a lot around the AI reskilling talent. We’re bringing new talent in all the time, including through some of the outsourcing deals. Over 100 new employees joined us through several outsourcing agreements this quarter. And attrition is under control and is down on a year-over-year basis. And it’s right in the range that we would expect. So other than cost optimization that’s, I think we’re managing it very well.

Robert Young: Okay. And just last one for me is I think you said that large project awards were bigger-than-normal contribution to SI&C bookings? And what is that what exactly does that mean? Is that a long-term composition change or maybe just unpack that. And then, I’ll pass the line.

George Schindler: Yeah. It’s more just a phenomenon in the quarter. And I mentioned it, because it did drive kind of a change. When you look at our managed services bookings were down versus what I’m talking about in the pipeline and the sentiment. And it just was a function of some higher concentration of SI&C bookings that were large essentially what I would call recurring T&M project renewals. So, they show up in the SI&C but they’re really large project T&M recurring revenue. And then we had some timing delays on several larger managed services deals that I mentioned. So, I think it’s more of a phenomenon just a quarter. It’s why we always look at bookings on a trailing 12-month basis why I highlighted the strong trailing 12-month bookings in managed services is just a function of where we are right now.

Robert Young: Okay. Thanks.

George Schindler: Yes.

Operator: Your next question comes from Jerome Dubreuil with Desjardin. Your line is now open.

Jerome Dubreuil: Hi, thanks for taking my questions. Trying to reconcile what we are hearing from some other companies in the ecosystem. We heard from Microsoft just last week that they are boosting their Azure CapEx as a result of strong demand not exactly what we’re seeing in IT services. Do you think there’s a chance that maybe enterprises are directing a bigger portion of their budget through maybe the data center cloud power that you might not benefit as much from right now but that may eventually come back to boost demand?

George Schindler: I think it’s a good question. I do think that some of what we see our clients doing is preparing for the future. And so they’re back to setting up their data strategies their architectures and ultimately their infrastructure to allow for that next wave of digital spending. So, maybe in this case we’re on the tail end of that. I think you saw that even on the slowdown on the other direction. So, I think that’s what we’re seeing. So, time will tell. Like I said we’re not seeing anything uniform or consistent yet. But I think that’s it matches some of the sentiment you hear from you heard from me on our Voice of the Clients’ feedback that we just–

Jerome Dubreuil: Great. Second question for me. You provided at the beginning of the year guidance in terms of double-digit EPS growth, not that consensus is there right now, but can we agree that double-digit EPS growth would be at the higher end of your updated expectations?

George Schindler: Yes. Well, obviously, we don’t give guidance, but double-digit EPS accretion does remain a target for us. We do have the tailwind on the cost optimization improved business mix. But I think what we’re looking for is some return to improvement in the market conditions which would then allow us to see that be able to reach that.

Jerome Dubreuil: Great. And then last for me maybe one for Steve. Can you remind us of the CAD-USD impact in terms of your reporting? Obviously, offsets because of the costs that are in USD as well. But maybe a bit of a tailwind in the coming quarters with the weaker Canadian currency?

Steve Perron: Yes, in the next quarter because if you look at it last quarter in fact the U.S. dollar versus the previous year it was not positive. But currently yes, with the current exchange rate, you would see a positive sign coming from the FX in Q3.

Jerome Dubreuil: Great. Thank you.

Operator: next question comes from Thanos Moschopoulos with BMO Capital Markets. Your line is now open.

Thanos Moschopoulos: Hi, good morning.

George Schindler: Hi Thanos.

Thanos Moschopoulos: Hey George. You referenced the growth in IP, maybe just to clarify what’s driving that? Is a lot of that weighted to government given where we are in the cycle or is it from some other sectors as well?

George Schindler: Yes, Thanos, you hit that one right. There certainly is highest growth was in government, both in North America, but increasingly in Europe. We had some nice growth in Europe as well both in the bookings and the revenue operations focused. That’s where a lot of our IP plays. So, HR payroll, secure data, document handling, data intelligence solutions. We also had some growth in banking as well Trade360 Wealth360. So, — but I think really more focused on those operational systems just given where we are. So, that’s what’s continuing to generate the growth.

Thanos Moschopoulos: Great. And it seems like your R&D investments on IP is up a good amount year-over-year. Is a lot of that focused on AI or other areas of investments as well?

George Schindler: Yes. Well, we actually had a 30-plus percent increase in the CGI funded investments to enable IP within our AI. So, everything from momentum to the customer advance and other elements. And again just to remind you, some of that is just a reallocation reprioritization of the spend as we go through that. But yes, AI is — will continue to be a driver as I mentioned.

Thanos Moschopoulos: Great. I’ll pass it on, Thanks, George.

Operator: Your next question comes from Divya Goyal with Scotiabank. Your line is now open.

Q – Divya Goyal: Good morning, everyone. Hey, George, I actually wanted to get a little bit more color on this H2 optimization. I know when — at the time of the last quarter, we were talking about it. It looked like there could be more upside coming out of H2. But considering where the rate environment is right now, do you think it’s fair to build in any sizable optimization whatsoever or should we expect a flattish growth for this — remaining quarters ahead?

George Schindler: Yes. Well, as you know Divya, we don’t give guidance, but just again, what I see I just don’t see the clarity right now. The pipeline looks strong. The interest is there. We’re getting in front of our clients, which is extremely important but — and there are green shoots. It’s just they’re not very consistent even across industries or geographies. So right now, I can’t really call that. Maybe it shifts to the second half of the calendar year versus our fiscal year, I don’t know. But that’s what I see right now. I’m just sharing. That’s why I share the metrics that we have, where the pipeline is, where the bookings are. And then of course, what we’re hearing on the Voice of the Client so — which is positive on a go-forward basis. I just don’t know, when some of that’s going to show up.

Q – Divya Goyal: Yes. No, that’s a fair comment. And I wanted to get a little bit — I know you talked about the margin sustainability and you gave some commentary here on margins. What is a fair run rate for margins, now that the cost optimization program is predominantly behind us.

George Schindler: Steve?

Steve Perron: Look from — it’s a good question. But ultimately, as George mentioned, yes, we will have an uptick in the margin, with the cost optimization probably not to the level that you saw this quarter, because as George mentioned, we continue to invest. We want to invest in AI. We want to train our folks. And so we are spending at the right place, to continue to ultimately grow the EPS. That’s the ultimate goal, but something like 20 bps would make sense.

Q – Divya Goyal: Yes, no. That’s, helpful. One question on the BFSI weakness. So George, you did mention that the BFSI segment saw some weakness. We have been hearing commentary from some of the global banks indicating increased investments in IT, are you seeing that show up in your bookings given the stronger SI&C bookings? Are you seeing more momentum on the AI side or is it broadly digital core modernization where you see more of that spend coming out?

George Schindler: We’re still seeing a lot more in the digital and general modernization projects. That’s what we’re seeing. Again, we’re seeing some elements of kind of some of that spending, but it’s still early days. And so I’d say, more it’s on the modernization. I think people are still setting up for what that next wave of digital spending is going to be.

Q – Divya Goyal: That’s helpful. And my very last question here is, considering where the stock price is today as compared to where it was a few weeks ago. Do you think there are any plans to expedite the share buyback.

George Schindler: Yes. Well, as we’ve always discussed, our capital allocation priorities don’t change. So investing in the business is number one; accretive acquisitions is, number two. But to the extent that we have the capital available and I believe we do Steve, yes, we would be looking to return that through share buybacks. And we don’t base it primarily on price, because we’re basing on where we’re going as a company. But certainly, we’ll be — you should expect us to continue to be aggressive on all fronts.

Q – Divya Goyal: That’s very helpful. Thank you.

Operator: Your next question comes from Stephanie Price with CIBC. Your line is now open.

Stephanie Price: Hi, good morning.

George Schindler: Hi, Stephanie.

Stephanie Price: Hey. I was wondering if you could comment on bookings converting into revenue. I think you made a comment to an earlier question just talking about slow project start-ups. What are you seeing in terms of that managed services pipeline converting over?

George Schindler: Yeah. Well we are seeing a lot of decent growth. If you look at some of the geographies and some of the industries where we’re seeing growth, a lot of that is now being driven by the managed services. It’s just being offset by some of that slower SI&C spending. And as that returns, I think it’s going to be an accelerator because we are starting to see good growth on the managed services side.

Stephanie Price: Okay. Great. And then just in terms of IP revenue there was a comment that 60% of IP is now SaaS based. Curious, if you could talk a little bit about the evolution of those IP solutions. I know a lot of them might have been considered mature or you’ve had them for a long time interesting that they are not SaaS-based?

George Schindler: Yeah, yeah. No, I think there’s a bit of a resurgence from both the introducing some of the new technologies including AI into some of these operational intellectual property elements and then offering them as a Software-as-a-Service has given some of them a new life. And we’ve also spent some time combining some of our independent IPs and then offering that as a Software-as-a-Service that has increased opportunity and demand for the IP. So and we’ve been pretty rigorous of going through an architecture review and continuing to invest only in those IPs that we think do have that feature. And you’re seeing the results of it these last several quarters.

Stephanie Price: Great. Thank you very much.

Operator: Your next question comes from Suthan Sukumar with Stifel. Your line is now open.

Suthan Sukumar: Good morning, gents. First question I have is, I guess, on your partner ecosystem. I’ve been seeing more headlines in recent years about partnerships. Just curious on what role your partner ecosystem has been having on your business and in terms of driving client relationships and growth overall?

George Schindler: Yeah. No it’s a good question. They’re an important element and increasingly important element in the ecosystem and certainly for CGI. It’s why we elevated that whole process several years ago and that continues to pay dividends. You saw that the bookings from that network is up double digit in the quarter and will continue to play an important role. And we have a unique position with some of those partners in that we do have those 150-plus intellectual property solutions, which are attractive. They’re synergistic working together on those. So they’re not generic announcements. They’re very specific opportunities. Having said that, you’ve seen that we’ve made some of those announcements in the past you’ll expect to see more of those types of partnerships because I think they are an important part of the ecosystem. Now having said that it’s we’ll continue to be agnostic and work with our clients and what the right solution is for them.

Suthan Sukumar: Great. Thank you. Next question I guess is just more on capital allocation optionality. Just in terms of returning cash back to shareholders beyond the NCIB would a dividend ever be an option you would consider longer term?

George Schindler: Well, given where we are and what I just shared with you with the voice of the clients, the AI as a catalyst for growth, the opportunity that continues to be out there, M&A [ph] for position. That’s not the number one place that we would go to drive the accretion, we believe shareholders are looking for. And that’s we review it regularly with the Board. That’s the current thinking of the Board, but that were if that were to change we’d share it, but not right now.

Suthan Sukumar: Okay, great. And just one quick one for me. Given your ambitions around growing your IP business and also M&A as a growth driver is there potential for pure play — for deals around pure-play IP and software?

George Schindler: Yes. What we have found when we look at pure software. I don’t — we evaluate them often. The issue is that they don’t necessarily have the relationships with the clients that we’re looking for. When we’re looking at M&A we’re looking to complement and expand the relationships we have with clients. So we can sell-through the full suite of CGI services. And a lot of the pure-play software just don’t have that. Now there are some firms that are closer to that. We’re looking at how to make that happen. And but in general you don’t see that. Same thing on pure AI firms. There’s a — you’ve got to sift through a lot of firms that are masquerading as AI firms, but they’re not really — at the end of the day they’re not really AI firms. And that’s the issue with software firms. Do they have the relationship with the clients so..

Suthan Sukumar: Okay. Great. Thank you. Best of luck, guys.

Operator: Your next question comes from Jason Kupferberg with Bank of America. Your line is now open.

Tyler DuPont: Hi. Good morning, George and Steve. This is Tyler DuPont on for Jason. Thanks for taking question. I know we’re sort of running up on time. So try to be quick here. I know this has sort of been asked before as well but to put a slightly different spin on it based on my back of the envelope math it looks like SI&C revs declined for the first time in quite a few quarters of strong growth. I know you commented on green shoots that you’re seeing but when we think about sort of an inflection positive are you seeing that more as a 3Q phenomenon or 4Q? Or just any trends there worth considering as we look through 2024.

George Schindler: Yes. And that’s what I tried to explain. It’s difficult to predict. I’m not going to predict. We don’t give guidance. That’s why I shared with you the data points that I have. And what we’re really just focused on is staying in front of our clients with the value propositions that will help them now and in the future. So — but I don’t really have an answer there.

Tyler DuPont: Understandable. That makes sense. I appreciate the color there. And just as a follow-up it looks like as we’re continuing to see sort of an increase in larger and longer duration deal wins, can you just maybe balance the difference between what you’re seeing from the TPV growth side and the ACV growth side as we look at CGI as a whole? How should we anticipate these trends to evolve and sort of any disconnect how long should that last between those two growth rates? Any sort of trends that are worth calling out?

George Schindler: Yes. Well, it’s interesting. I guess maybe what I come back to is what I shared with you from the Voice of the Client that there’s a more of a dual-focused agenda that’s coming into shape. So both the cost savings and the growth drivers. And so I think you’re going to see that normalize back to something that you’re going to have the stronger SI&C growth for point projects but also those larger transformative managed services deals. So that’s what I would say that that data point would point to.

Tyler DuPont: Okay. Great. Thanks a lot. I appreciate it.

George Schindler: Thank you.

Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call over to management.

Kevin Linder: Thank you, Joelle and thanks everyone for participating. As a reminder replay of the call will be available either via our webcast or by dialing 1-888-660-6264 and using the passcode 43710. 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 looking forward to speaking soon.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.