CGI Inc. (NYSE:GIB) Q3 2024 Earnings Call Transcript

CGI Inc. (NYSE:GIB) Q3 2024 Earnings Call Transcript July 31, 2024

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

Kevin Linder: Thank you, Julie and good morning. With me to discuss CGI’s Third Quarter Fiscal 2024 Results are George Schindler, our President and CEO; and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, July 31, 2024. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q3 MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The complete Safe Harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I’ll now turn it over to Steve to review our Q3 financials and then George will comment on our business and market outlook. Steve?

Steve Perron: Thank you, Kevin and good morning, everyone. I’m pleased to share with you the results of our third quarter of fiscal 2024. In Q3 we delivered $3.7 billion of revenue, up 1.3% year-over-year or up 0.2% when excluding the impact of foreign exchange. The strongest CGI segments were Northwest and Central East Europe at 10% constant currency growth; Asia Pacific at 5.4%; Finland, Poland and Baltics at 3.2%; and US commercial and state government at 2%. From an industry perspective, we continue to have the highest growth in government, representing 4.1% constant currency growth this quarter. This was followed by manufacturing, retail and distribution at 2.2%, driven primarily from North America. We continue to experience softness in certain verticals within regions such as financial services and communication in both Western and Southern Europe and North America.

Our IP grew at a faster pace with 5.2% constant currency growth in the quarter. As a percentage of total revenue IP represents 22.5%, up 120 basis points year-over-year. Bookings in the quarter were strong at $4.3 billion, led by managed services and IP wins. Our book-to-bill ratio in the quarter was 117% and were strongest in US federal at 209%, UK and Australia at 153% and Western and Southern Europe at 123%. On a trailing 12-month basis, book-to-bill was 112% with 118% in managed services and 104% in SI&C. Global backlog reached $27.6 billion or 1.9 times revenue, reflecting our overall business resilience. Turning to profitability. Our performance this quarter once again demonstrated our operating discipline in navigating the ongoing dynamic macro environment.

Earnings before income taxes were $594 million for a margin of 16.2% up 80 basis points year-over-year. Adjusted EBIT in the quarter was $603 million representing a margin of 16.4% up 30 basis points year-over-year. This is mainly a result of our improved mix of business and the benefits realized from our cost optimization program completed last quarter. We had strong margin in the five following segments: Asia Pacific at 31%; Canada at 22%; US Federal and Finland, Poland and Baltics both at 17%; and UK and Australia at 16%. Our effective tax rate in the quarter was 25.9%, and we expect our tax rate for future quarters to be in the range of 25% to 26.5%. Net earnings were $440 million for a margin of 12%, up 50 basis points year-over-year. Diluted EPS was $1.91 representing an increase of 9% year-over-year.

When excluding specific items, net earnings were $440 million. This represents a margin of 12%, up 30 basis points year-over-year. On the same basis, diluted EPS was $1.91, an accretion of 6% when compared to Q3 last year. In the quarter, cash provided by operating activities was $497 million representing 13.5% of total revenue. On a trailing 12-month basis, cash provided by operating activities was $2.2 billion up 12% year-over-year, representing 15.2% of total revenue. DSO was 42 days in the quarter, two days better than last year. In Q3, we used our cash to invest $91 million into our business and invest $499 million to buy back our stock. Subsequent to the quarter, we announced two strategic acquisitions. In Canada, we acquired Celero’s business serving credit unions, which consists of managed services, core and digital banking and related IT services.

In the US, we announced yesterday that we entered into a definitive agreement to purchase a leader in digital transformation for the US federal government. Both mergers, these two acquisitions would add 875 consultants and professionals to CGI. In the quarter, we continue to deliver a strong return on invested capital at 16.1%, up 40 basis points year-over-year demonstrating our proficiency and discipline on deployment of capital. At the end of the quarter, CGI had $2.7 billion of cash readily available and access to more if needed. As part of our profitable growth strategy, CGI capital allocation priorities are primarily focused on investing back in the business and pursuing accretive acquisitions. Additionally, the company has the flexibility to use a portion of its free cash for the repurchase of its stock.

As announced this morning, CGI Board of Directors has approved a dividend program under which the company intends to pay a quarterly cash dividend of $0.15 per share starting in the first quarter of fiscal 2025. The initiation of this program represents an additional mechanism to return value to our shareholders while continuing to maintain our financial flexibility to invest in our build and buy profitable growth strategy. Now I will turn the call over to George to further discuss the insights on the quarter and outlook for our business and markets. George?

George Schindler: Thank you, Steve, and good morning everyone. Our team delivered third quarter results that again reflect the disciplined execution of our plan to be a partner and expert of choice for our clients and employer of choice for our consultants and professionals and investment of choice to deliver shareholder value. In the quarter, we continued to proactively manage the fundamentals of our business. We delivered sustained margin expansion and EPS accretion, driven by the continued diversification of our business mix through growth of recurring revenue. Importantly, our operational excellence actions continue to contribute to our strong earnings. Our cash from operations increased, up 21% year-over-year on the strength of quality and client delivery.

And as anticipated, our revenue growth and overall bookings in the quarter continue to be largely comprised of managed services and IP engagements, which help clients accelerate cost savings and progress business transformation. As such, constant currency revenue growth in IT-based services was up 5.2% year-over-year and managed services revenue was up 1.5%, offset by continued softness in systems integration and consulting. And bookings were $4.3 billion with a managed services book-to-bill of 139% and an IP book-to-bill of 129%, both of which were largely driven by government sector awards. In fact, government sector wins comprise just over half of total Q3 bookings with a book-to-bill of 164%. More clients prioritize the services and solutions necessary to implement current mission objectives and embed flexibility to support evolving policies, all in mind with the natural cycle of government.

CGI’s IP solutions were at the core of driving the strong government bookings, as clients increasingly turn to CGI’s proven industry-specific IP solutions to raise the operational efficiency while also gaining benefits from embedded security and innovation, including AI. In the quarter, we continued to see clients exercising caution in their spending on stand-alone consulting and system integration projects. As an end-to-end services provider with strong managed services relationships and market-leading intellectual property, our bookings in the quarter are reflective of our positioning for continued strong client interest in managed services and software-as-a-service. For example, Michelin selected CGI to deliver an open and green IT ecosystem to enable business innovation and support enterprise-wide digital transformation.

CGI will deliver a range of IT modernization services, including use of AI technologies through a mix of proximity teams in France and the US, as well as global delivery teams in India and Morocco. The US Department of State’s Bureau of Affairs extended its relationship with CGI through a USD378 million award. Under this award, we will deliver end-to-end passport application processing services in support of the issuance of more than 21 million passports and travel documents annually. Several local governments in Finland named CGI, as their partner for transforming health care service delivery through CGI’s Omni 360 Patient Information platform. This will also create a foundation for broader use of AI in health care system. Harley-Davidson Financial Services selected CGI for a new engagement to modernize the company’s loan origination system, replacing disparate IT platforms with a unified CGI credit studio solution.

Under this agreement, CGI will deliver an AI-enabled platform that introduces greater flexibility for dealers and an intuitive buyer experience. The French Ministry of Justice extended its partnership with CGI to drive the modernization of its HR system. Our consultants will leverage their industry knowledge, as well as their expertise in SAP to implement a new platform and transform key processes. And a major North American bank selected CGI to modernize its wire room, leveraging the CGI all payment solution, a modular and cloud-based platform. The solution will enable the bank to retire legacy systems, reduce operational costs and more easily adapt to new industry standards and regulatory requirements. Each of these examples are the types of recurring revenue engagements that serve as a base to enhance our resilience and stability of the fleet.

CGI’s third quarter results for the ongoing value that our talented consultants and professionals deliver for clients every day. In the quarter, we again saw rising levels of client satisfaction, notably for the innovation we bring to our engagements, including through the use of AI technologies. I’d like to recognize CGI’s 90,000 consultants and professionals for earning the trust of our clients. Through their expertise, insights and commitment they are helping clients around the world achieve tangible business and mission outcomes. This is particularly important given today’s dynamic market conditions. Looking ahead now to the demand environment. We are starting to see some underlying signs of stability in the macro business environment.

This is making it possible for our clients to begin solidifying their future plans. For the past few months, we increasingly see differentiation in terms of pace and focus of key digitization investments by our clients. In short, each client is forging a unique path forward and is incumbent on partners to meet them where they are and devise the right combination of services and solutions to help them progress their individual business objectives. This evolution towards differentiated client needs matches well with CGI’s greatest strengths, particularly our client relationship proximity model, our end-to-end portfolio of services and our global network and scale. While we do expect to see continuation and delays in the timing of decisions, particularly for stand-alone SI&C projects, client interest remains strong for the value proposition CGI can deliver through our end-to-end offerings.

This positioning is validated by CGI’s pipeline of opportunities over the next year. The IP pipeline is up from more than 15% year-over-year with significant increases in transport and logistics, manufacturing and energy. The managed services pipeline is up by more than 40% year-over-year with sharp increases in government, insurance, banking, manufacturing and retail. And the pipeline of SI&C opportunities across several commercial industry sectors is rising compared to this time last year. Importantly, we saw some green shoots in our third quarter results, further pointing to stabilization of the business environment. For example the number of total open billable positions picked up on a sequential quarter basis. CGI’s utilization was also up on a sequential quarter basis, as we continue to align talent to those areas where we see growth, largely in the government and utility sectors and hires to support growth in Asia Pacific were up on a sequential quarter basis, as more commercial industry clients notably in banking, retail and manufacturing are leveraging CGI’s offshore centers of excellence.

CGI continues to make targeted investments in our talent and our end-to-end services to best partner with clients, as they solidify and begin reaccelerating their digital initiatives. For example, we are enhancing our managed services delivery approach through the expansion of our CGI DigiOps platform, an integrated digital-first deliveries fleet. This platform delivers higher quality insights for faster client decision-making, better performance and system availability and cost savings for clients through the use of AI technologies. For our SI&C services, we continue to invest in our emblematic offerings, methodologies and talent in areas such as business model transformation, change management, responsible use of AI and enterprise architecture.

And we are accelerating the integration of generative AI into our IP solutions portfolio through our signature CGI Pulse AI platform which also enables clients to more easily integrate these new technologies into their existing and new [base] (ph). In line with the investment we announced last year and rising client interest, AI and GenAI technologies are increasingly integrated into our engagements. In Q3, the number of projects incorporating AI rose 20% on a sequential quarter basis. Third quarter bookings at integrated AI technologies remain strong, including wins with the top 50 auto parts supplier to establish a GenAI center of expertise and help evaluate and optimize ROI use cases. A European logistics company to conduct an AI maturity assessment to evaluate organizational readiness and capabilities and a space industry client to assess the creation of new digital marketplace that integrate space and AI technologies to enable a rapid response to natural disasters.

As Steve mentioned earlier, we are updating our use of cash strategy to incorporate a dividend program, as an additional mechanism to deliver value to our shareholders and to broaden our investor base, while maintaining financial flexibility to continuously invest in growth opportunities. With a strong balance sheet and liquidity, CGI will continue to prioritize capital allocation strategies that drive profitable growth and enhance value for shareholders through investing in our business, pursuing accretive acquisitions, ranging from metro market to large transformational opportunities repurchasing our stock and/or paying down our debt and now distributing a dividend. Regarding our strategic priority to pursue accretive acquisitions, I’d like to expand on the two acquisitions announced subsequent to the close of the quarter.

In Canada, the acquisition of credit union business complements and expands CGI’s core banking service offerings to an additional 90 Canadian credit unions nationwide. Our services and credit unions are now coast to coast covering more than two-thirds of the credit unions across Canada. I would like to warmly welcome the 150 new consultants and professionals who joined CGI from there. And in our US federal operations, we announced a definitive agreement to purchase Aeyon a leader in digital transformation for the US federal government. This acquisition, pending regulatory approvals, will further complement and expand our US federal capabilities and relationships, including with NASA, the FAA, the Office of the Secretary of Defense and multiple branches of the US military services.

On final closing of the acquisition, 725 Aeyon employees will join CGI, bringing deep expertise in a range of services, such as data management and analytics, logistics and supply chain and AI technologies. We are in active dialogue with additional merger targets at all stages of our pipeline and are committed to merging with like-minded companies that are complementary to our geographic footprint, client base and end-to-end portfolio of capabilities. Our operational strength, stability and financial capacity will continue to enable us to move quickly with discipline on the right opportunities of all sizes. In closing, we will continue to manage the fundamentals of our business and invest in our build and buy profitable growth strategy to further deepen our client relationship proximity model, our end-to-end portfolio of services and our global network and scale.

As each client forges their unique path forward, we will continue to devise the right combination of services and solutions to deliver tangible, trusted business and mission outcomes for our clients. Thank you for your interest and support. Let’s go to the questions now, Kevin?

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

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Daniel Chan from TD Cowen. Please go ahead.

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

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

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

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

George Schindler: Yes. No, thanks for the question, Dan. Yes, the more reasonable valuations are holding even with PE being slightly more active, the valuations are holding. I think there is a lot of sellers believe this is the right time to combine entities. And so we are having, as I mentioned, discussions at all stages of our pipeline including the later stages, bringing these two, we just announced over the line, but there is more behind that. So it’s — we believe it is becoming a more active environment. We are getting more inbound calls as well. Now they tend to be smaller companies on the inbound side, but we are even getting more inbound calls. So it is still a pretty active environment.

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

George Schindler: Thanks a lot. Appreciate it.

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

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

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

Suthan Sukumar: Got you. Thank you. For my next question, I wanted to touch on the Aeyon acquisition because I — because it looked like a pretty compelling deal in the US Fed space that obviously expands your exposure in that segment. As does Aeyon come with any IP? And with respect to the — what you acquired here, is this an opportunity to go deeper within existing relationships that you have within the Fed or does this open you up into newer relationships across the segment?

George Schindler: It does. There is some overlap, but it does, for sure, open up some new avenues for us, particularly in that all important national security space. And that’s where a lot of the spending right now is going in the US federal government, just given everything that’s going on in the world. And so that’s — they specialize though in the data analytics and the business operations, including finance and logistics and supply chain. So new avenues, but very similar and like-minded skills in those areas. The other thing I’d add, and this is — I think this is important to add is they have some complementary government-wide contract vehicles. They provide for maybe a more limited competition, expedited procurement pathway for certain services, and those services are those back-office automation services that we are very strong in.

So I think it’s not only — are they going to bring some new clients in that all important national security space, but they are going to give us some avenue to expand on our existing services with other clients. So that’s a real positive. No IP, no intellectual property to speak of. So it is straight SI&C. But again, in the area that governments around the world and certainly the US government is spending on in national security.

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

George Schindler: Thank you Suthan.

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

Thanos Moschopoulos: Hi, good morning. Starting off on margins. I won’t ask if there is room for margin expansion because I know the answer is always yes. But if we think about the potential drivers of margins — if you think about some potential drivers, I mean, is it really about maybe the IP mix and the managed services mix increasing, is that what you’d expect to be the margin driver over the next while?

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

So it is a combination of those factors always, but yes driven by the managed services in the IP.

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

George Schindler: Yes. It would — that’s definitely a piece of that. And if you recall, we did discuss this on last quarter’s call that we expected that there was a lot of RFPs last quarter, actually lighter bookings, but I mentioned that we would expect those to be adjudicated in the second half. The other, though is exactly, as you said, there is some large government bridge contracts in the quarter as they prepare for an election and transition. So what the bureaucracy does is, it say, okay, we don’t know who’s going to get elected. Of course, they’ll come in with new policies, but we got to keep things running in the interim. And so you see a lot of these bridge contracts. And as I mentioned, they are a little bit longer than they’ve been in the past just because of some of the differences, let’s just say, in the policies that could come out.

And so they’re looking at making that a little bit longer because they think it will be maybe a little bit longer transition. So that’s what’s going on there. Exactly as we would have anticipated, and the team is doing a great job to win those contracts through their efforts and their outstanding delivery for the US government.

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

George Schindler: Thanks a lot, Thanos. Really appreciate it.

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

Surinder Thind: Thank you. George –.

George Schindler: Surinder, good to have you on the call.

Surinder Thind: Hey, thank you George. I appreciate that. At least I get in one call with you before your retirement. Big picture question here on the AI strategy. As you look to build solutions for clients, is there a lot of third-party integration of solutions, meaning the ChatGPTs of the world, the Gemini [intercourse] (ph) solutions or are there more proprietary builds of like smaller models that ultimately you’ll have the IP over? Like how should we think about that or the evolution of that?

George Schindler: Yes. Well, it is a combination, it’s a combination. So we have our signature intellectual property is called Pulse AI and it’s a multimodal approach that allows you to leverage those large language models but also develop some of those closed-loop models that most of our clients are really looking at. And that’s why I mentioned in the last several calls that our AI work is largely helping clients prepare their data and their architectures to actually leverage the AI in a bigger way. I don’t think, anybody is looking at just using the large language models that are available to ChatGPTs of the world. They are going to leverage pieces of them but not exclusively. They want to build closed-loop elements. So yes, there already is CGI intellectual property to make that easier to integrate.

There will be other CGI intellectual property built on top of those models that is industry specific and we’re already announcing working with some of the hyperscalers on exactly that. So more to come on that. But it is still early days for that, Surinder.

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

George Schindler: Yes. Well, I kind of alluded to that a little bit. You can see the bookings and the growth profile in the SI&C. Some of that managed services is coming online. It’s just being masked by the softness on the other side. And that’s the goodness of the resilience model of CGI, right, having that balanced portfolio allows us to continue to move forward even in the current environment, but they are coming on board. Having said that, they are slower. It is slower to convert from pipeline to booking. It’s slower to convert from booking to actually start the projects. It’s slower to go from the start of the project to the actual engagement of revenue because there is always a transition. Clients are being cautious on all of the above.

So they are being extra cautious on a lot of these managed services deals, we take on people from our clients are being very cautious in how they do that in the current environment. So it is just slower all the way around. But be that as may, yes, we are converting some of those on just offset by some of the other softness.

Surinder Thind: Thank you.

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

Jerome Dubreuil: Congrats, George, for me as well and [Foreign Language]. First question for me is looking at the margin improvement and this is very healthy, obviously, but I’m wondering if we’re nonetheless in the phase of high or accelerated technological investments that maybe kind of offset your margin improvement from the cost improvement program? So is there a word being made done right now to future approved the organization that is having an impact or kind of normal investment that we are seeing right now?

George Schindler: Yes, it is a good question. As you know, we announced a pretty big investment to make sure that we are positioned for how to leverage AI. A lot of that right now is going into our and into our talent. But it’s really just a shift of the investments. We’re always investing in training. Now it’s focused on AI. We’re always investing in our IP, now it’s focused less on maybe some of the generic feature functions and now it is more focused on leveraging AI into the IP. So yes, there is an uptick, but it’s — and we are taking some of that from the cost optimization, which is why I said that you wouldn’t see the — all of the cost optimization to go into that. But I don’t think, it prevents us from having the incremental improvements that you have come accustomed to seeing on the margin side. And we’ve got a number of different levers, as I mentioned earlier on that.

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

George Schindler: Yes. No, it is a great question. It is something we look at. We are doing our planning for fiscal year 2025 right now. Of course, it is a rolling three-year plan that we’re always updating on an annual basis. But — and of course, we use some of that input that we get from the voice of the clients. I mentioned some of the early findings there and it is kind of that dual-track agenda of both cost savings and optimization, but also some of the growth. But look, I don’t see any big changes. We’ve been pretty deliberate in the markets and the clients, remember 85% of our work is for enterprise-level clients. They’re global, by their very nature. We are very deliberate and where we focus our business efforts and the geographies that you see how we’re organized.

So I don’t see any big changes in that regardless of this. I agree with you that kind of we see an elongated U from a recovery standpoint. So it’s not necessarily going to be the same growth. But I think there’s going to be some catalysts as companies continue to look for how they can do more with less resources, less people I think we do see some of the demographics changing, particularly in Europe, where not just from an IT perspective, but just from an overall resource perspective, I think you are going to see some pressures on just finding available talent that’s all going to drive a catalyst, we believe for continued investment in digitization. And of course, tools like AI, it is not just AI, discrete AI, but tools like AI are going to allow us to make that happen.

So we still see opportunities in all those areas. It doesn’t really change in our capital allocation priorities.

Jerome Dubreuil: Great. And good move on the dividend.

George Schindler: Thank you.

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

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

George Schindler: Yes. It is very interesting, Stephanie. And I mentioned this before: in prior slowdowns, there is almost no activity in — on the consulting side. Clearly, there is been an impact and a slowdown on consulting, but it hasn’t gone to nothing. And the reason is that — and you’ve heard a lot of our AI efforts right now, they’re actually driven by consulting; consulting on the data side, consulting on the business transformation side, consulting on the change management side as clients really think through what models they want to have for the future. So I think that it will be a slower ramp up in recovery. And as I also mentioned, consulting is maybe embedded in a lot of our other activities even in some of those managed services deals as they look at those.

So — and also our IP some consulting is embedded in our IP sales. So it is still going to be an important element. It is smaller by it is very nature. But it still is that tip of the spear, and we will continue to invest responsibly and as I said in the opening meeting clients where they are. So — but it is so important to us and to our clients.

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

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

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

George Schindler: Thanks a lot Stephanie. I appreciate it. Likewise.

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

Paul Treiber: Thanks so much. Good morning. Could you elaborate more on your comments about clients having differentiation and differentiated needs here? And then specifically, it seems to me your competitors’ results have been all over the place this quarter. Do you think some of that — some of your competitors have been negatively impacted by that evolution and that CGI is relatively better positioned for that change?

George Schindler: Yes. It is a tough one for me to mention there. But I think where you see some of those variations, exactly what I’m saying every client is kind of doing this at a different pace. And if — so you got to meet your client where they are and you’ve got to work with them. So if they’re needing a little more consulting and that’s not as much revenue, that’s what they need, that’s what you’re going to give them. If they are ready for that big managed services deal, you got to be there with that value proposition so they understand that. You got to be providing them that software-as-a-service, so they can spend less capital even if they ultimately want to build some surround systems around that but they are not ready to do that yet.

And so flexibility is a key attribute and that’s kind of the hallmark of CGI and working with our clients because we are so client focus, given our proximity model and our understanding. So I don’t know if that’s — I’m not going to comment on others, but I can tell you that’s where we’re finding the biggest opportunities. It is also why I think you also see our pipeline going up because of that approach.

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

George Schindler: Yes. So I was just talking to our leader in France. The current situation is, it is not just causing a delay in government, as you’d expect, right as the government forms independent of the wonderful Olympics that are going on. But the commercial markets are also taking a bit of a wait-and-see approach. What’s — how is this going to shake out? And so if caution was already raining from a macro perspective, I think we’re seeing the same thing that you’re mentioning that France is definitely taking a wait-and-see approach or at least our clients in France are taking a little more of that wait and see approach, which does have a short-term impact. Having said that, no change in the longer-term outlook. You saw bookings were strong in Western and Southern Europe.

And a lot of that, of course is dominated by France and our pipeline continues to grow there. So I think it is more just a here-and-now point in time. But yes, we are feeling it and seeing it, and you see that in our results.

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

George Schindler: Thank you. I appreciate it.

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

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

George Schindler: Yes, so Finland, Poland and Baltics, so as you know, we have a lot of strong intellectual property there. And so I mentioned, I called out the fact that we had some good IP sales there. So — is that sustainable exactly at that level? If they run a very good business there. As you know, we have a pretty good position in the marketplace which is allowing us to play into the social and health reform with this IP. So at that exact level, I don’t know but you know that’s where we want to be. So that’s — the team is doing a great job.

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

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

Steven Li : Got it. That’s great. Thanks a lot.

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

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

George Schindler: Yes. So here is what — I think it’s twos answers to this. There’s some short-term pricing anytime you have [indiscernible] macro environment like we have right now. But I think the more structural is what I’ve been talking about — we’ve been talking about on this call for a while, the ROI led. We see clients looking for innovations to improve outcomes, which does save their money; with improved efficiencies, which does save their money, without sacrificing quality. That’s what they’re looking for. So it is outcomes, both short and long-term more than inputs. It’s overall solution more than just price or point price. And that’s why I mentioned our investments in CGI DigiOps, our investments in putting IP with our AI or investments in the global delivery approach, these are the ways that you’re going to get that price competitiveness without that unit price input rate discussion that you might be thinking when somebody calls out pricing.

And I’m not saying some of that doesn’t happen point in time. But structurally, I think we actually see clients being far more sophisticated in what they’re looking for and how they are looking for. And I would say, that more often than not, the discussion ends up with, are you going to be able to give me the quality with those operational efficiencies, not the other way around.

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

George Schindler: Yes. Well, it’s just — it’s a fixed price project that is taking longer. That’s about as direct as I can get there. We’re not — we don’t call out clients or project names, and it was really one project. But it was a big project, and we called it out because it did have an impact, but it is largely behind us, and we move forward.

Richard Tse: Okay. Fair enough. And it’s been great working with you; all the best in your retirement.

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

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

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

George Schindler: Yes. So on the geographies in Europe, we saw the same thing. And if you really look at it, it is the largest geographies, I should say, in Europe are kind of more impact. We saw more impact to the current macro environment. And part of that is just they tend to be larger enterprise clients, so they’re more impacted by the global economy. So it’s not just that we’re working with a company in France, that, that company in France has global operations. Same thing in Germany, same thing in the UK on the commercial side. In some of the smaller geographies like Finland, Poland and the Baltics, we have some clients there that are more specific to the region. And so they are a little bit more nimble, they’re moving a little bit faster and so you see our ability to drive some more growth there.

But I think, again, and that gets back to my differentiation comment from the opening that every client is operating a little bit differently. As you know, we don’t play into some of those international geographies that are growing a little faster. But I would suggest as maybe a similar situation there. They are just going to be a little more agile, more nimble and a little more faster to realize some of those green shoots. That’s what I would say.

Divya Goyal: That’s helpful, George. And just second question here on M&A. So over the last few quarters, you’ve been — you’ve closed some acquisitions, announced Aeyon yesterday. I wanted to get some color in terms of what are the verticals that you as a company are targeting and some of the technologies and skill set that you’re looking at going forward? Because in the past discussion we assumed IP was an important element of this M&A strategy. But it looks like Aeyon did not come with an IP here. So trying to understand what are we focused on going forward?

George Schindler: Yes. So no, it is a great question, Divya, and it gives me an opportunity to maybe restate what we’re looking for primarily when we’re doing M&A or new client relationships with either existing geographies where maybe we can continue to grow our scale or new metros. So when we did the Momentum, it was a new metro market in the Southern US in Miami. When we do Celero, when we do an Aeyon, it’s about getting new client relationships. In the Aeyon’s case, it’s national security. In Celero’s case, it’s credit unions coast-to-coast that we didn’t have before. So it is always — now we get plenty, plenty of strong capabilities, whether it’s core banking and Celero, whether or payments or data and AI with Aeyon, you get a lot of intelligent automation.

You get a lot of capabilities there. but it’s actually not about a specific vertical. It’s about building out a metro market across verticals with all those capabilities. That’s what we believe is the right way to continue to build the business for the longer-term. And so that is what we’re looking for and all those acquisitions fit the bill.

Divya Goyal: That’s very helpful. If I may ask one small question, and I think I know the answer to it already, but could you provide some sort of — you and one of your comments mentioned that the valuations are reasonable, is there a reasonable valuation multiple that the companies [technical difficulty]?

George Schindler: Yes, it’s — sorry, you broke up there at the end. Do you have another –.

Divya Goyal: No, no, that’s all. I was just trying to understand what’s a reasonable valuation multiple.

George Schindler: Yes. Well, I mean, I can — maybe I can answer it this way. I can tell you what an unreasonable valuation is, and that’s where we were, where sellers were looking at multiples that didn’t make any sense and would have taken 50 years for us to get a return on that investment. That makes no sense. And that is where a lot of these sellers were. They were — what you saw is some of these digital transformation companies just had outsized multiples that didn’t make a whole lot of sense at least in the context of the CGI and our discipline. And that is not where it is. Our historic Steve, is somewhere between one-time maybe a little under one-time, a little over one-time revenue, depending on the margin the asset, but that’s where we see more reasonableness there.

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

George Schindler: Thanks a lot, Divya.

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

Kevin Linder: Thank you, Julie, and thanks, everyone, for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1 (877) 674-7070 and using the passcode 875394 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: This concludes today’s conference call. You may now disconnect. Thank you.