Earnings Call: Q1 2020

Jan 29, 2020

Good morning, ladies and gentlemen, and welcome to the CGI First Quarter Fiscal 2020 Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Investor and Public Relations. Please go ahead, Mr. Gorber. Thank you, Maude, and good morning. With me to discuss CGI's Q1 fiscal 2020 results are George Schindler, our President and CEO and Francois Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9 am Eastern Time on Wednesday, January 29, 2020. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 MD and A, financial statements and accompanying notes, all of which are filed with both SEDAR and EDGAR and are available for download on our website along with supplemental slides. 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, except as required by applicable laws. This complete Safe Harbor statement is available in both our MD and A and press release as well as on cgi.com. We encourage our investors to read it in its entirety and to refer to the Risks and Uncertainties section of our MD and A for a description of the risks that could affect the company. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As before, we'll also discuss non GAAP performance measures, which should be viewed as supplemental. The MD and A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. We are also hosting our AGM this morning, so we hope you will join us live or via the broadcast at 11 am. I'll turn it over to Francois now to review our Q1 financials and then George will comment on our operational highlights and strategic outlook. Francois? Thank you, Lauren, and good morning, everyone. I'm pleased to share our results for Q1 fiscal 2020. Revenue was $3,050,000,000 an increase of $90,800,000 or 3.1% compared with last year. On a constant currency basis, revenue grew 4.8% of which approximately 1.2% was organic. Year over year IP related revenue grew by $38,000,000 and was 21% of total revenue. Bookings were $2,700,000,000 for book to bill of 90% impacted by the general election in the UK and seasonality in U. S. Federal. Bookings across Continental Europe were up sequentially, driven by managed services demand, including IP. Also, our pipeline across North America continues to grow, notably due to managed services opportunities. On a trailing 12 month basis, booking remain above 100% of revenue totaling $12,400,000,000 The backlog at the end of December stood at $22,300,000,000 or 1.8 times annual revenue despite the negative currency impact of approximately $900,000,000 year over year. Beginning in Q1, we adopted IFRS 16. This new accounting standard relates to the recognition of lease agreements onto the balance sheet. This change lowers our cost of sales and increases our net finance costs, resulting in a non material impact to net earnings. I will comment on these variations, including the impact on the cash flow statement and our capital structure. Further details are included in the MD and A. Adjusted EBIT increased to $474,100,000 up $35,000,000 or 8% from last year. EBIT margin was up 70 basis points to 15.5 percent driven by revenue growth across several geographies, efficiency gains in our global delivery centers, the initial benefits of optimizing our infrastructure operations and a favorable $9,700,000 impact from IFRS 16. Our effective tax rate for the quarter was 26.7% compared to 25.9% last year. When excluding the impact of non deductible restructuring expenses, our effective tax rate was 25.1 percent within the expected range of 24.5% to 26.5%. As announced last November, we are investing up to $40,000,000 to optimize and restructure our Swedish infrastructure operations to exit Brazil and to refocus Portugal as our nearshore delivery center. During the quarter, we incurred $28,200,000 of related expenses net of tax. We also expensed $16,500,000 in Q1 related to the acquisitions and the integrations of Acando and Sisys. When including these specific items, net earnings were $290,000,000 in Q1 or a margin of 9.5 percent. Earnings per share on a GAAP basis were $1.06 per diluted share compared with $1.11 last year. However, when excluding these specific items, net earnings in Q1 improved year over year to $335,000,000 or 11 percent of revenue, up 40 basis points. Earnings per share on the same basis were $1.23 compared with $1.12 last year. This represents an improvement of 9.8 percent despite a currency headwind of over $0.02 We generated $465,000,000 in cash during the quarter or 15.2 percent of revenue. This represents an improvement of $74,000,000 compared with $392,000,000 generated in Q1 last year. The year over year increase in cash includes $39,000,000 related to the adoption of IFRS 16. Over the last 12 months, we have generated $1,700,000,000 or $6.20 in cash per share, a significant increase compared with $1,500,000,000 or $5.15 from a year ago. We ended the quarter with a DSO of 49 days, down from 50 days last quarter 54 days last year, largely due to the evolving business mix. During the quarter, we allocated cash across several strategic priorities, $67,000,000 back into our business, dollars 156,000,000 in acquisition, mainly Sisys, which closed on December 18, $17,000,000 repurchasing CGI shares and we repaid $182,000,000 of long term debt. Buying back CGI stock has been an accretive and flexible way to return capital to shareholders. Under the current program, we have invested $675,000,000 repurchasing 7,000,000 shares at a weighted average price of $97.13 This represents a return of over 16% based on yesterday's closing share price. As such, our Board of Directors approved the extension of the program until February 2021, allowing us to purchase up to 20,100,000 shares over the next 12 months. At the end of December, net debt stood at $2,800,000,000 representing a net debt to capitalization ratio of 27.7 percent, up from 19.1% last year, largely due to IFRS 16. Excluding this impact, the net debt to capitalization ratio was 20.9%, slightly higher than last year due to increased investments in metro market mergers. With our revolving credit facility and cash on hand, we have $1,600,000,000 in readily available liquidity and access to more as needed to continue pursuing our build and buy strategy. Now I'll turn the call over to George. Thank you, Francois, and good morning, everyone. I'm pleased with our team's performance in the Q1 as we continue to successfully execute on our build and buy profitable growth strategy. This quarter's results continue to reflect the shift in client buying behavior towards outcome based engagements, as evidenced by a 70 basis point increase in managed services revenue as compared to last year. And our larger managed services offering is resonating. In fact, the managed IT and business process services pipeline is up 30% year over year. However, many of our commercial clients are employing a more deliberate approach to their IT buying decisions as they shift their internal organizational focus to prioritize both agility and operational excellence. This means that our clients are currently acting most rapidly on smaller, more focused outcome based solutions. For example, in the quarter, we were awarded a 5 year engagement with a new U. S. Client in the financial services sector to deliver selective managed application services, security and infrastructure. This is designed to immediately address and improve the client's IT quality and security with larger future scope now under discussion. Technology remains core to our clients' business and we continue to be well positioned for these near term spending trends with both new and existing clients. The investments we have made in our IT and business consulting capabilities and in IP allow us to offer services and solutions that help clients realize incremental progress on their digital initiatives. For example, in the quarter, we were awarded new work with 1 of Europe's leading manufacturers to provide agile consulting and enterprise architecture, enabling their digital workforce initiatives over a 36 month timeframe. Another example is a new engagement with a large U. S. Utility to implement our Pragma workflow solution to digitize their enterprise workforce management over the next 2 years, generating immediate efficiency. We also see these types of engagements as an opportunity to build even deeper relationships and drive future growth in larger managed services deals, including for our managed IP. As planned, this evolving revenue mix combined with our investments and operational excellence are driving earnings growth. This is most pronounced in our global delivery centers of excellence, which are in high demand by our clients, are yielding increasing margins due to our investments in talent, tooling and methodologies. Turning now to the year over year regional highlights of the Q1. I'll start in North America. In the U. S. Commercial and State Government segment, bookings were 107% of revenue on the strength of new managed services contracts, which accounted for 50% of bookings in Q1. Bookings were particularly strong in the financial services and utility sectors, both over 130% book to bill. Organic revenue growth was 2%, driven by scope expansions across some of our largest commercial clients, and we continue to experience an improving state and local government market receptive to our IP offerings. EBIT margin remained stable at 15.1%. In our U. S. Federal operations, revenue grew by 11.5% as previous quarters managed service bookings and task order wins ramped to their full revenue run rates. EBIT margin was 13.3%, slightly lower year over year due to larger lower volumes in transaction based EPS contracts. And bookings were 60% of revenue. With the federal fiscal year budget appropriations finalized at the end of December, we expect an active procurement cycle in advance of the U. S. Election. In Canada, despite bookings in the quarter of 60% of revenue, Canada's backlog remains very strong at 4x annual revenue. Our pipeline of opportunities continues to be robust with a notable increase in the IP pipeline, which is up 40% over last quarter. Revenue declined in part due to lower infrastructure volumes year over year, while EBIT margin was strong at 22.8% as we are now realizing the positive impact of previously announced actions to optimize our infrastructure operations. Turning now to our European operations. In Scandinavia, revenue grew 25% driven by the addition of Acando. This is net of the planned runoff of lower margin projects, which will total approximately 10% of acquired revenue and is at the high end of the range previously communicated. EBIT margin was 7.8%, which we expect to continue improving throughout the year as further benefits from the Acando integration and the restructuring of the infrastructure business in Sweden are each fully realized. And bookings were strong at 130 percent of revenue, reflecting the improved ability of the merged operations to address client demand. In Finland, Poland and the Baltics, revenue was stable at the year ago period with continued strength in financial services, particularly in the insurance space. EBIT margin expanded 90 basis points to 14.9% as a result of an improving business mix. And bookings were 108% of revenue with increased demand for IP, which was 144 percent book to bill. In Western and Southern Europe, revenue was essentially stable across the region with organic growth in France and overall strength in government, but impacted by the strategic actions taken in Brazil and Portugal announced last quarter. EBIT margin was 14.9%, up 80 basis points despite one less billable day in France, which is also reflective of an improving business mix. Bookings were 104 percent of revenue with strong demand for managed IT services, which represented over half of the total bookings in the quarter. And last week, we completed the merger with METI, a France based IP solutions and consulting firm specialized in the retail sector. I want to take this opportunity to warmly welcome our 300 new members from ENTI. Together, we will bring innovation through combined IP and consulting services to retail sector clients around the world. In the UK and Australia, revenue grew 1% with IP services growth in the financial services sector. Our continued market leadership in space, defense and intelligence was further solidified at the end of the quarter with the close of the Sisys merger. EBIT margin was 14.7 percent and book to bill was 69% of revenue impacted by a slowdown in both commercial and government awards decisions, largely due to uncertainties created by the UK general election. With the Brexit decision now made, we expect a very active period of government procurement to address the backlog of mission priorities. Likewise, we expect to see more normalized purchasing activity in the commercial sectors going forward. In Central and Eastern Europe, revenue growth was 9%, of which approximately 3% was organic and EBIT margin increased to 10.5%, an improvement of 190 basis points. Bookings were 103% of revenue on the strength of scope expansions from large transportation and retail and consumer services clients in both Germany and the Netherlands. And in Asia Pacific, revenue growth was 10%. EBIT margin was strong again at 28%, driven in part by increased utilization and operational excellence. Our Asia Pacific delivery centers are leading the way and realizing the return on CGI's innovation investments made in talent, tooling and methodologies. In summary, we are off to a strong start and continue to position our talent and services to meet current and future client demand. We continue to see clear interest for managed services and intellectual property solutions in the pipeline. Given the longer decision cycles for these larger long term opportunities, we are also well positioned to meet client demand for shorter term outcome based engagements. These engagements will drive growth, albeit at a different pace in the near term. And the benefits from recent mergers as well as our restructuring initiatives will deliver earnings and margin improvement moving forward. We will also continue accelerating the pace of metro market based mergers with 3 already closed in the fiscal year and a healthy number of prospects in later stages of the M and A funnel. And of course, we will continue to consider all opportunities to be an active consolidator in the industry through transformational mergers. We remain focused on executing our strategic aspiration of doubling over the next 5 to 7 years through continued build and buy. Thank you for your interest and support. Let's go to the questions now, site or by dialing 1-eight hundred-four zero eight-three thousand and fifty three and using the passcode 6,140, 9,639 until March 2nd. There will also be a podcast of the call available for download within a few hours. Follow-up questions as usual can be directed to me at 514-841-3355. Maude, if we could poll for questions, please. Certainly. Thank you. We will now take questions from the telephone lines. Our first question is from Stephen Lee from Raymond James. Please go ahead. Thank you. George, a couple of questions on Canada. With your margins pushing 23%, was there any large IP in that number or do you view that as more sustainable going forward? Yes. No, actually, it didn't have as much IP in that number. Really, some of that benefit was from some of those initiatives I had mentioned in earlier quarters around our infrastructure rightsizing that. And obviously that runs down at a lower margin, which increases our margin elsewhere. Some of that uptick really was from those global delivery centers of excellence. We have a number of them here in Canada and so that was those are in demand and utilization of those go up. And obviously, those are profitable, both beneficial for our clients, but also profitable for CGI. That IT uptick is notable in Canada and it's notable also in the fact that it's with those financial services companies. So all in all, Canada, again, that margin is strong. And repeatable? I believe it's is that the absolute run rate? Probably not, but it's I believe we will continue to have strong margins above that 20% mark. Okay, thanks. And George, the IP pipeline, I think you said was up 40%, Which areas are these? Well, in Canada, specifically, it's in Financial Services, but IP is up across the company in a number of areas, including utilities, including in government and also some of our newer IPs, both in utilities with Open Grid, which we announced, but also emerging in the space industry. So IP is up across the board, which we predicted and planned for given the market that we're moving into. Okay. Thank you. And just one question, one more question for me. The organic growth was slower this quarter. Would you expect it to snap back? Or should we expect a couple of quarters of 1%, 2% growth? Thank you. Yes. I think that in the near term, inorganic growth will outpace organic growth. So that pace of inorganic growth is going stronger. But in the near term, yes, there's going to be some softness in the organic growth, but we have some tailwinds on our side there. Thank you. Thanks, Steve. Thank you. Our following question is from Thanos Moskopoulos from BMO Capital Markets. Please go ahead. Hi, good morning. George, if you could maybe summarize the changes you're seeing now in the pipeline and demand environment versus 3 months ago. It sounds like you're saying customers are being maybe a bit more thoughtful in terms of the size of contract awards, just make sure I got that correct. And has there been any change in terms of the typical duration of contracts or has that been consistent? No, yes, it's a very good question and I tried to highlight that in the opening remarks. Yes, the larger deals are still out there, but they're being broken into smaller deals first. And so it's almost a phased approach. And so we see more of a selective scope and more of 3 to 5 year deals versus the 7 to 10 year deals of full scope. Just to highlight that though and I highlighted 1 in my remarks that example that we gave, that's a 5 year deal, but it's $65,000,000 So they're still of size, but they're not of the couple of $100,000,000 that those 7 to 10 year deals would yield at a fuller scope. Okay. And a lot of your commentary was focused on the managed services pipeline. If we think about the SI and C pipeline, are we you still seeing a fair bit of interest in terms of digital initiatives? Or is that slowing down across a number of geographies in favor of managed services? Yes, the digital initiatives are still out there. What's very interesting though is we see the digital initiatives, some of those are coming under the managed services opportunities. And it really is kind of both ends of the spectrum, investing as we've been talking about, investing a little bit more right now in the operational efficiencies, so that they free up some of the funding for the digital initiatives, but certainly slowing the pace of the spending on the digital initiatives. But as I mentioned a number of times, we're only we see our clients are only about 10% what they say are actually completed with the digital initiatives and getting the returns. And so that's causing them to take a more deliberate approach, but it's not changing overall their go forward landscape of IT is core to my growth in the future and digital is core to enabling that. Great. And then finally, in Western and Southern Europe, you mentioned France had organic growth, but there was obviously the impact from the restructuring in Brazil and Portugal. Would you be able to quantify the revenue impact in the quarter from the restructuring? Do you have that number? We had one less day and we had the Yes. You're talking on the revenue side. On the revenue side for Western and Southern Europe, yes. Yes, it's $3,000,000 to $4,000,000 Okay. Great. I'll pass the line. Thank you. Thanks, Thanos. Thank you. Our following question is from Maher Yaghi from Desjardins. Please go ahead. Thanks for taking my question. I want to go back to maybe just a question on the pace of the organic revenue growth. On the last call, George, you said that you expected a pause and acceleration in revenue growth organically. But what in your view was the reason for the growth to come down from 4 to, let's say, 1.5 in 1 quarter? It's kind of it's a sizable change in the pace of growth. And I'm trying to figure out how is it going to get back into the 3%, 4% type range that we saw in the last couple of quarters? And also second question I had is when you look at the metric that I look at in terms of book to bill, which is the last 12 months book to bill, it's been declining since September, the core September 2018. And we're getting close to hitting the one point here. And we've and management has always also said that this is a metric that you guys are care for care more for because it's kind of it's a barometer for the health of the business that is coming into the pipeline. So what is being done to improve that? Or are we should we expect that number to turn into lower than 1 in the next couple of quarters? Yes. No, thanks for the questions, Mered. So maybe I'll start with the second one first on the bookings and what you've seen over the last several quarters. You've seen an uptick in SI and C and SI and C comes in at a lower bookings level than managed services. You've seen that. I've highlighted that as you looked at our revenue kind of followed that trend, our bookings followed that trend. In SI and C, anything over 100% is healthy. As you move to managed services, you drive a higher book to bill and a lot of other good qualities associated with that mix of business. We want a good mix of business. We are a little bit overweight on SI and C. We're moving more to our traditional managed services, which is where you'll see that pipeline come up. However, and the reason I talked about the pause and the acceleration of the growth is they don't move at the exact perfect time. So the decision making on SI and C is faster. The decision making on managed services takes a little bit is a little more deliberate, as I highlighted. And we're filling that gap through a number of different tailwinds, right? So, we're filling that gap and now moving into the growth part of the question, you're filling that gap. You see through the recent mergers picking up the pace. We're excited about the opportunity to spread the IP and the media, the space, even the government ERP and the retail distribution side spread that through the broader CGI channel. So that will be a nice tailwind for both the inorganic growth that comes on with those, but also organic growth as IP gets spread across the company. The spending bill approved in the U. S, government place in UK, that's a tailwind for growth because in fact government demand goes up in the climate that we're going into, a lot more spending on domestic and social programs. And just to remind you, and I'm sure you're aware of this, but one third of our total revenue does come from the government. That kind of comes into a countercyclical government structurally move a little slower. And of course, when you don't have a government in place like we had in the UK or don't have a spending bill in the U. S, that kind of impacts that. That had the biggest impact on our book to bill. So the book to bill even in the quarter would have been 100% without the downdraft of those 2 units alone. And we know why that happened in that short term. We're playing into the more selective managed services opportunities, which is why I highlighted that. So that will help fill the gap before they make some of those larger decisions. And but what you will see is inorganic growth outpaced organic growth in the near term, but will drive some of that organic growth in the future. So all in all, it's not unexpected. It's what I talked about last quarter, but we see the bookings following the pipeline, particularly given the tailwinds that I mentioned. I think bookings and growth in the intermediate term return to where we want them to be. It's a different spending pattern. This is why I also tout our end to end services, and then also why we talk about the portfolio that we have across our 10 industries because every industry doesn't buy at the same pace. So that really gives us the confidence moving forward. Just to follow-up. So in terms of the organic revenue growth tailwinds that you talked about, how I know you're not into short term guidance or even medium term guidance, but how long should we wait to see those tailwinds start to help the organic revenue growth? And my second just follow-up question on the buyback. When you start to see the return on invested capital or return on equity come down? And I know this is the Q1 that we see this happening, but it's the first time we see it happening since 2017. Does that change how you view your stock buyback strategy? So on your first question, you're correct, we don't give guidance. Maybe, Francois, you can talk a little bit about the impact IFRS 16 also had. Yes. So for sure, the IFRS 16 had a small impact on the return on equity and ROIC. So even if it went down, the majority is related to that. That said, we still think that our at least when you're comparing with some of our competitors that it's still a very good value, the share price of CGI. And like I indicated, we did some share buyback a lot of share buyback last year, close to 34 percent of our NCIB and was with a return of close to 16% on the share price. So we still think that it's a good investment. Okay. Thank you. Thank you. Our following question is from Richard Tse from National Bank Financial. Please go ahead. Hi, Richard. Hi, how are you? Good. Just wanted to sort of go further on these the change in the nature of some of these deals on the smaller side. Is that because your clients don't necessarily understand the technology and it's viewed as a way of mitigating risk or is there some other reason behind that? Yes, I think some of it is given all of the change that our clients are already going through. Many of our clients are doing M and A themselves in order to chase some of their growth that they need for their organizations, which obviously is an intermediate opportunity for us, but a different opportunity causes them to look internally and that's that was some of my opening remarks on. I think it's more of that. They're going through a lot of change. One of the biggest insights that we received from our voice of the client, which I have outlined here, is one of the barriers, the biggest barrier of not receiving the benefits from digitization efforts, it's not the technology, it's the people, it's the culture. And so as you take kind of a look at that, it causes them to be, as I mentioned, a little bit more deliberate, especially given all the change. So they actually get less overall savings to the client, but they enable themselves to kind of maybe digest the change in a different way. That's the discussions that we're having and that's why I also highlighted the discussion doesn't end there, right? The discussion still says, I want to do the bigger, longer deal. I got to get my organization under control first. It still gives CGI increased utilization and drives higher margins as we see the shift and you're seeing that. I mentioned it gives us deeper relationships and proof points to gain those future larger scope. But they're not going wholesale over to that. And I think that's the maybe what's pronounced in this slowing economy versus dropping off the edge economy that we're in right now. Okay, thanks. And with respect to infrastructure, sort of reading through the MD and A, and I noticed a bunch of sort of runoffs and you even commented about it earlier. No doubt that's probably a bit of a drag on the business as well. So when it comes to those runoffs, where do you think we are right now in terms of when that will land? Are we kind of near the end of that process? Yes, an interesting one because it continues to evolve and it's still a very important part of our business. It's just an evolving part of our business. We're actually increasing the use of infrastructure as it relates to software as a service for our own IP and our own IP private cloud, if you will. So we're increasing actually investments as we move towards that. We're doing more and more infrastructure advisory, maybe getting back to your opening question about clients really taking a look at where they do and don't want to use public cloud, private cloud and what their posture is when it comes to cybersecurity and data privacy, particularly in Europe. So our infrastructure advisory is growing, but then of course, there's softness in the other parts of the infrastructure business. And so as you kind of structurally have to address those changes, we're doing that on the fly that you see some of the impacts of that. So that's what's going on in the infrastructure business. Can I say that we're through that? So we're through the 1st round. Now we're in a second round as that shifts again. It'll probably be one more round. But just to remind you, I don't want misspeak, Francois, percentage of current business that's infrastructure today. Yes. It's still 12%, 13% of revenue. But again, that's still down from the 15% to 20% it was not that long ago. I don't think it will go below 10%. It's still an important part of our business. Okay. And just one last one for me with respect to your comments on inorganic growth, should we read that to mean it will outpace because the pace of organic is lower? Or are you going to expect to pick up the pace of acquisitions? Probably a little both. We're picking up the pace of acquisitions for sure. So that number should go up to fill some of the gap. But as we discussed on all of the growth, there's just it'll take a little bit more time to get that organic growth back as this shift plays its way through. There will still be organic growth, I believe, but it won't be certainly accelerating even from here in the near term. Okay, great. Thank you. Thank you. Our following question is from Robert Young from Canaccord Genuity. Please go ahead. Hi. Maybe if I just pick up on the last line of question in there. There's any change that you see in the metro market strategy. 1st, would a pickup on M and A imply targeting larger acquisitions? And then maybe a second piece to that would be around the valuation landscape. If the consulting side of the business is a little bit weaker, are you seeing pressure that is driving lower valuations? Yes. No, it's a good question. Thanks, Robert. The metro market strategy is still what we believe we can pick the pace up on and bring some more of those into the business. Pipeline is up. As far as the pressure on the pricing, we haven't really seen that and maybe part of that is because we're very disciplined in what we're looking for. You can see that 2 of the last 3 had intellectual property. You're going to see more of that moving forward. So when you're talking about IP, you don't necessarily see the pressure that I talk about on the systems integration and consulting side. But over time, we probably would see some of that, but we're going to be very disciplined even as we accelerate the pace. So you won't see any lack of discipline there as we do that. But given the growing pipeline and given the opportunities out there in general, we believe it's a good time to continue to consolidate. On the larger deals, it does not that increase in the inorganic growth does not require any of the transformational deals. We continue to look at those opportunities, however, on the larger deals. The overall pressure probably does over time create some price pressures and opportunities for us on those largest deals. Okay, great. And then maybe just talking a bit more about the pipeline. You said it was up 30 percent. Maybe you could talk about, is that a sudden jump here in the quarter? Or is that something you've seen over time? And if you can break that into cohorts, potentially you said that there are some longer deals, 7 to 10 years, smaller deals, 5 to 7, and then there's the shorter term. Is there any way to break that sort of growth in the pipeline up into those sort of cohorts to better describe the Yes. So the pipeline increase I'm talking about is really year over year and it's most pronounced in those managed IT deals. So that's really what I'm referencing there. The pipeline for the SI and C is relatively flat, but the IP and the managed services deals are up. By the nature of those deals, given that they're longer deals, tend to be larger deals, even those that aren't full scope are still $50,000,000 to $100,000,000 deals. So that's what drives that pipeline growth and of course the full deals are in the 100 of 1,000,000. That pipeline is most pronounced actually in government and retail right now. And because it seems like there's a little bit of a change happening in the way your customers are looking at these deals, does that imply a bookings gap as you make some of these longer deals obviously can have a longer sales cycle. And so maybe you could talk about what you expect in bookings over maybe the next year? Is there any way to talk about a potential gap? Yes. I don't and Francois actually pointed out, if you take UK and federal out, we're at that 100% even in the quarter. And so we still believe we can get the bookings and demand should be picking up with some of those big uncertainties behind us in UK and US Federal, which tends to be very lumpy anyway. So that's why I highlighted we're playing into the market and we're going after some of that selective scope even as we present the full offering which come with those very largest deals. So that's kind of what I see happening. I'm not necessarily seeing any big gap there. Okay? Okay, great. Thanks. Yes. That is correct. Thank you. Our following question is from Ramsey El Assal from Barclays. Please go ahead. Hey, guys. This is Ben Budish on for Ramsey. I wanted to circle back on M and A expectation for the year. And understanding you don't give guidance, In the last quarter, you sort of talked about the longer term trajectory as being like 5% to 6% organic and 5% to 6% inorganic. So with that in mind, would we maybe would be reasonable to expect that for this year, the revenue contribution from acquisitions might be above that range or the high end of the range? Or is that perhaps asking too much? Well, yes, when I talked about the 5% to 6% organic and inorganic, that's certainly the target to have that balanced growth, which is why we put out the aspiration to double in the 5 to 7 years. So that's really where that comes from. That's the target. I think we would reach that target faster on the inorganic than the organic given everything else we just discussed here. But that remains the target of where we're heading towards. Okay. And then in the U. S, just given you've been through a number of presidential elections, can you just give us an idea of the timing of like when you would expect revenues to kind of tick back up as once the spending decisions are made and contracts are kind of signed or renegotiated? What can we expect to see in the next couple of quarters kind of the pacing of improvement there? Yes. Well, actually revenues were extremely strong in U. S. Federal based on prior bookings and of course that will continue. What I was mentioning is the bookings were impacted by not having a federal budget. So what we see typically is there will be a lot of spending in the run up to the election and that's what I talked about. That spending is get things in place because when there is a presidential transition, there's different priorities and everything kind of stalls until the new if there is a presidential transition, I should say, then there is a until the new leadership gets in place. So what you usually see is run up, then a bit of a pause, and I'm talking about the bookings now, and then run up again as the new priorities get put in place. The run up that happens now, I'm talking about bookings, will allow us to continue to have the revenue growth and stability straight through that pause period. That's what we see typically in election cycle, which is why I highlighted it. That's very helpful. And if I could sneak one more, can you give us some color on maybe just the expectations for the IFRS 16 impact on margin over the course of the year? Well, it's mostly the same EBIT when we said $9,700,000 for the quarter. So it's €300,000,000 on the EBIT margin. So you can expect for the EBIT margin to continue like that, so $9,700,000 to $10,000,000 per quarter. As for the net earnings, like I was saying, it's marginal. Okay. Great. Because again, we have more interest expense. So it's really in the geography of the P and L where it's changing. Okay. That's helpful. Thanks so much for taking my questions. Sure. Thanks, Ben. Thank you. Following question is from Paul Treiber from RBC Capital Markets. Please go ahead. Thanks so much and good morning. I just wanted or hoping that you could elaborate on your comment about seeing more demand for global delivery centers. There was an article out a couple of weeks ago indicating that CGI plans to hire another 15,000 people in India. Can you just comment in terms of that strategy? I think previously in the past you called it nearshore strategy. Are you seeing more demand for offshore, in particular in terms of India as opposed to what you typically called in the past nearshore? So, it's a great question and a lot of this goes back to the mix of business and the evolving mix of business. As the business evolves from more SI and C and I've been highlighting that, we've been talking about it. In fact, a number of you asked me, maybe even you yourself, Paul, asked me, when are you going to see the shift and what does that mean? I said, well, we're not rooting for the shift because we're playing into this market. But when that shift happens, it will be very good for us. So as this shift plays out, and of course, it's not happening as fast as any of us would like to see, but it is happening. As that shift plays out, the managed services deals allow us to leverage the global delivery centers in a different way than shorter term SI and C projects allow us to leverage them. We still leverage them, but not in the same way. That's why they're in demand. And of course, that's exacerbated by the fact that in most of the major metro markets, obviously, there's still a talent shortage for IT, particularly for our clients in getting access to IT. And that's why they come to firms like CGI to have a broader footprint to be able to access that talent. So that's what we're playing into. So a lot of this is interrelated. We talk about the bookings, we talk about the revenue, we talk about the and certainly we'll get to this when we talk about the margin because as I've always talked about, the reason we wanted to get back to that 30% SI and C and 70% managed services recurring revenue is that comes at the optimal margin mix for us. And of course, we're now shifting towards that, but just barely. We're a little over 50%, whereas a year ago, we were reversed in under 50% from revenue. Does that help? Yes, that's very helpful. And I mean just going a little bit further, so to clarify, I mean, you're not selling it on an hourly rate if it is managed services. You're delivering against a larger contract. And so in terms of like your offshore resources, I mean, what have you seen in terms of profitability or in terms of performance, in terms of delivering projects on time and on budget versus other regions? Yes. Well, that's why I highlighted our Asia Pacific delivery centers. It really is a combination of investments we made in talent, tooling and methodologies because of course we're moving to agile methodologies ourselves with all of our own IP and the way we deliver these projects, leveraging the tooling. So that all drives the higher margins. And of course, the managed services deals because we're not selling them on an hourly basis drives up utilization, which I highlighted. And you've seen that play out. You see it specifically in our Asia Pacific delivery centers. But as I mentioned, some of that strength in Canada is the same way in the onshore delivery centers. Same thing happens in the U. S. And in other regions around the globe. So that's phenomenon is playing out everywhere and will continue to play out as you drive more managed services. Why I always say that optimal mix drives us a higher utilization and lower cost of sales, which ultimately comes with a higher margin. Better price point for our clients, savings for our clients, but margin growth for us, which is why that specific offering is resonating with our clients in the current environment. Okay. And then one last one for me. You mentioned earlier on that the space market as an opportunity. Now that the Sisys acquisition is closed, perhaps you can comment more directly on what you see like what were your capabilities in the space market prior to that acquisition? And what do you see as the long term growth opportunity and profitability of that segment? Yes. So there's actually not as much I can say about the current space work other than to say it is of size. So with Sisys now, we have approximately 1,000 people in the European space environment. We don't we're not as big in North America. But most of that right now is for government and therefore it comes with its own confidentiality and because it's that kind of work. Having said that, we think the opportunity is as a lot of those technologies move over into more of the commercial world, which they are, particularly from a data perspective. Our expertise, not directly, but certainly indirectly can be leveraged to expand. And of course, that U. S. From a government perspective is also investing in this. And of course, we're already leveraging that from government. But we do see that that will bleed over into commercial in a bigger way. We're not just talking about the Elon Musk, we're talking in a more ubiquitous way. Great. Thank you. Thank you. Our following question is from Owa Long from Veritas Investments Research. Please go ahead. Thanks and good morning. Good morning, guys. George, you gave some color earlier about how SI and C, the growth of that drives a little lower book to bill in the past few quarters. With managed services contracts also getting shorter, is that also a factor in lower book to bill? Yes, that plays into why it's not accelerating as fast as we see the pipeline. So that's that you'll see that transition over from pipeline to the bookings maybe a little bit slower because of that, but you will see a transition over and then we'll see some of those larger deals over time as we get the proof points as our clients get through the change that they're going through and we should see those accelerate in the future. So, but again, in this specific quarter, the biggest downdraft really were the UK and U. S. Federal. Right. So it's just lower orders from there typically as opposed to in terms of things. Yes. And I guess just one on for Francois, maybe just in general on IFRS 16, with it impacting EBIT and I guess EBIT margins, when you're evaluating your business segments and their performance, how would that factored into how you evaluate their performance? Well, for sure, we are taking that into account and the growth of the between the business units. So we're restating or at least relooking at versus their budget like if they would have IFRS 16. And again, also they need to understand the impact when they're negotiating a new lease in the future. Okay. Yes. That makes sense. And then just maybe one more for Francois. I saw in the segment disclosure in the MD and A, there's now an elimination line in the revenue in the geographic revenue by segment note. Is that just mainly from the offshoring, like elimination? Offshoring and some of the activities at corporate, some corporate support is done by the business unit, like you're saying, like in India. So that's what we're eliminating. Okay. I see. So if they're servicing each other, then that could eliminate it. Okay, great. Okay, thanks. I'll pass it on. Thanks, Howard. And Mohit, I guess we have time for one more question. Thank you. Our last question is from Deepak Kaushal from Stifel GMP. Please go ahead. Hey, guys. Good morning. Thanks for squeezing me in. I know it's AGM Day, so I'll be I'll try to be brief quick. Just it's a quick follow-up to Rob's question earlier on the GAAP. When we're thinking about these larger managed service deals, are you expecting a steady state of closing these starting now? Or do they start kind of 6, 12, 24 months out from where we are today? Yes, I think it's continuous. It's a phased approach. We've been having these discussions already for 12 months plus. And so we're seeing those resonate more as the economy plays out the way we expect it to. So it's not like we're starting now. We've already been doing that. Actually, that's why I highlighted this quarter that given the change you're going through, they're being even more deliberate. But we would expect to see those happening really continue moving forward. Okay. And when you talked about kind of the half scope 3 to 5 year pieces starting but waiting on the 6 to 10 year portion of that, I mean, what kind of gives you confidence that they'll follow on with the 6 to 10 year piece of that? Are they giving you visibility into the full scope of the 10 year project, but only contracting half of it? Are things changing so fast that they're still not sure what's going to happen in the outbound? How does that change your probability of follow on? Yes. It's a little of all of the above, but we do get the visibility. We are discussing in many cases, we'll do actually a proof of concept on the full scope and they'll be explicit of we're going to start with this smaller scope. So we've already done some of the legwork on that and we're gaining the proof points and of course that's part of my confidence is if you look at our delivery track record over the years, you look at the client satisfaction scores and the loyalty scores, once we are in delivering for the client, that gives us the confidence that the bigger scope will be there. And quite frankly, this started with some of the SI and C work, which I have been talking about. You build a relationship through the systems integration consulting, get the opportunity to have the bigger discussion, you move some of that to managed services, and over time you move the larger scope. Okay, excellent. Well, thanks again for taking my questions, guys. Thank you. Have a good day, Jim. Thank you. Thanks, Deepak, and thank you, everyone, for joining us. Hopefully, we'll see you at the AGM, and we'll see you back here for next quarter, April 29. Thank you. Thank you. The conference has now ended. 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