Earnings Call: Q2 2019

May 1, 2019

Good morning, ladies and gentlemen. Welcome to CTI Second Quarter Fiscal 2019 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, Donna, and good morning. With me to discuss CGI's Q2 fiscal 2019 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 a. M. Eastern Time on Wednesday, May 1, 2019. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q2 MD and A, financial statements and accompanying notes, all of which are being 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 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. We will 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 in Canadian dollars unless otherwise noted. I'll turn it over to Francois now to review our Q2 financials, and then George will comment on operational and strategic highlights as well as our outlook. Francois? Thank you, Lauren, and good morning, everyone. I'm pleased to share our results for Q2 fiscal 2019. Revenue was $3,100,000,000 an increase of $118,000,000 or 4% compared with last year. On a constant currency basis, revenue grew 4.7% of which approximately 4% was organic. Bookings in Q2 were $3,300,000,000 or 106 percent of revenue. Findings were driven in part by increases to the scope of services on outsourcing extensions and renewals. In addition, new clients have been leveraging our IP including HSBC and the U. S. Navy. Again, systems integration and consulting remained strong accounting for 71% of bookings in Q2. Perhaps even more telling is that 42% of these SI and C signings were new business, ideally positioning us to introduce more of our end to end services including outsourcing over time. Over the last 12 months, total bookings were $13,300,000,000 or 113 percent of revenue, up $1,200,000,000 from the same period last year. IP bookings were strong with a book to bill of 118% and accounted for nearly 23% of revenue in Q2 compared to 21% last quarter. With the addition of Kendall's portfolio of SI and C Services, IP as a percentage of our revenue mix will reset downward in the coming quarters. Going forward, these additional channels provide us the opportunity to pull through our full suite of end to end services. Adjusted EBIT was $454,000,000 representing a margin of 14.8%. This compares with $424,000,000 and a margin of 14.4 percent, up 40 basis points from Q2 last year. Our effective income tax rate in Q2 was stable at 25.4% compared to with 25.5 percent last year. For the full fiscal year, we continue to expect the tax rate to be between 24.5% percent 26.5 percent. Turning now to net earnings. When adjusting for expenses of $6,000,000 to complete the integration of CKC, net earnings grew to $324,000,000 in the 2nd quarter, up $21,000,000 year over year. Earnings per share on the same basis expanded by 12.5 percent to $1.17 per diluted share and net margin was 10.6 percent, up 30 basis points from the year ago period. On a GAAP basis, net earnings were $318,000,000 and EPS was $1.14 up 21% from $0.94 in Q2 last year. Our operations generated $462,000,000 in cash during the quarter, up $36,000,000 representing 15.1 percent of revenue compared with 14.4% in Q2 last year. Over the last 12 months, we generated $1,500,000,000 or $5.34 in cash per share compared to $5 per share for the same period last year. We ended the quarter with a DSO of 49 days, down 5 days sequentially due mostly to the seasonality of clients paying annual maintenance at the beginning of the calendar year. Compared with the Q2 last year, our return on invested capital improved by 140 basis points to 14.9%. As such, we continued allocating capital in the quarter to the opportunities with the highest returns. We invested $83,000,000 back into our business including the development of our IP and the ramp up of new contracts. We reduced our debt by $11,000,000 Net debt was $1,600,000,000 at the end of Q2, representing a net debt to capitalization ratio of 17.4%. We invested $160,000,000 buying back 1,900,000 CGI shares at an average price of $84.42 Under the current buyback program, we can purchase and cancel an additional 19,700,000 shares through next February. And we invested $62,000,000 to acquire the first tranche of Kendall shares in Q2. Since then, we completed the acquisition reaching over 92% of share standard and are now following the Swedish regulatory process to obtain the remaining shares. As we have realized with each acquisition, Akendo is expected to be accretive in year 1, including planned actions related to running off and or divesting non core revenue. After completing the AllCast acquisition for a total of approximately $600,000,000 we still have over 1 $500,000,000 in remaining liquidity and access to more as needed in order to continue to accelerate our build and buy strategy. Now I'll turn the call over to George. Thank you, Francois, and good morning. I'm pleased with our performance in the second quarter and throughout the first half of the fiscal year. With organic growth accelerating to 4% in Q2 and continued strong bookings, we are well positioned for the rest of the year and beyond. Our increased market momentum through the positioning of our end to end capabilities with clients has resulted in broad based organic growth in the quarter across every operating segment. We continue to have a positive business outlook, which reflects the tight alignment between our strategy and the priorities and budget plans of our clients. As Francois mentioned, our revenue and bookings mix remains weighted towards consulting and systems integration work to meet today's client demand. Over time, this continues to represent an opportunity to convert more new business under longer term recurring revenue. We believe we are still in the early stages of a shift in the buying priorities and behaviors of our clients given 2 macro dynamics taking shape. For 1, the vast majority of our clients are only partway through their digital transformation. In the latest results from the in person voice of our clients discussions we completed last month, only 8% of clients globally said they have an enterprise digital strategy in place that is implemented and producing results. This is down slightly from last year, indicating that much work remains to be done to create business value from digitization. The second dynamic is that our clients continue to adjust their overall spend given the impacts of slowing economies in each of our major operating geographies. The need for clients to invest in IT to complete their digital transformation remains high as indicated by our latest Voice of Our Clients results. Early analysis indicates that our clients' annual IT budgets are expected to increase at a rate steady compared to last year with 3 year outlooks continuing to show plans for increasing the size of IT investments. However, clients are unable to fund these necessary investments entirely through business growth. This provides an opportunity for CGI's intellectual property based business solutions to enable clients to accelerate value creation. In addition, to generate the savings critical to achieving their enterprise digital goals, clients are more receptive to new outsourcing approaches that rely on IT as a core mechanism to deliver on 3 outcomes. 1st, gaining more business agility to meet rapidly changing market and customer dynamics. 2nd, realizing immediate financial savings through operational excellence and efficiencies that can be redirected to digital initiatives. And lastly, seeding and enabling a more innovative culture focused on driving practical business innovation. Achieving these outcomes form the fundamental elements of CGI's outsourcing value proposition, which is focused on enabling clients to create, implement and benchmark continuous improvement roadmaps for their journey to world class technology capabilities. As one of the few global end to end IT and Business Services firms, we remain well positioned as a trusted enterprise partner to our clients in this changing environment. Our pipeline is already reflecting strong positioning amid the market shifts as the total value of intellectual property deals increased 9% year over year and outsourcing opportunities now represent 60% of total pipeline value. Now I'll turn to the Q2 performance highlights across our global operations starting in North America. In the U. S. Commercial and State Government segment, our expanded footprint combined with end to end capabilities is enabling us to meet more of the growing market demand, notably among U. S. Commercial clients. Constant currency revenue growth was 6.2% driven by the new client relationships and enhanced capabilities from recent mergers. With a book to bill of over 110% in the commercial markets, we successfully extended or expanded strategic client relationships in the banking, communications and health industries where we will introduce more innovation in IP. And our state and local government business is fortified by the increasing value of our market leading intellectual property, which continues to provide revenue growth at higher margins. EBIT margin in the U. S. Segment was 20.5%, a significant year over year improvement driven in part by new IP deals and the impact of fully implementing the CGI model in a growing number of metro markets. In fact, our top 15 U. S. Metro markets grew at a double digit rate in Q2. With an expanding pipeline driven by this increased footprint as well as the IP opportunities created by new relationships from mergers, we are optimistic about the build and buy prospects in this segment. U. S. Federal operations grew approximately 1% organically and delivered an EBIT margin of 12.6%. Bookings for the quarter were again strong at 134% of revenue, of which 60% was for net new business. Increased focus and investments in the last year on large strategic deals in security, health and IP are taking hold. With a trailing 12 month book to bill of 164%, we expect that margin will continue to expand with this richer business mix focused on the services and solutions that are most relevant to our U. S. Federal government clients. In Canada, our team delivered revenue growth of 3% driven by increased demand across the majority of metro markets. In Ottawa, we were recently named an AI partner for the government of Canada. And in Montreal and Toronto, we continue to gain market share in financial services. EBIT margin remained healthy at 20% and book to bill was just under 100% in Q2 supported by a strong backlog of almost 4 times annual revenue. We continue to see demand for emerging technology projects to meet business initiatives, including cybersecurity related consulting, AI engagements and end to end modernization, including payments modernization, where we are winning and delivering on engagements and continue to see significant future demand. Turning to the performance of our European operations, where our teams delivered 5.4% constant currency growth led by Central and Eastern Europe and the UK with 13% 10% growth respectively. This revenue growth encompasses more IP, greater scale and deeper expertise in consulting, IT modernization and Emerging Technologies, all important elements of our broader outsourcing offering. Across our combined European operations, Q2 EBIT margins were 11%. Our evolving revenue mix in Europe from both build and buy growth combined with the benefits of last year's restructuring program should drive margin expansion going forward. Turning to highlights in Western and Southern Europe. Revenue grew 2% in constant currency driven by continued strength in our French operations, particularly in the manufacturing, transportation and government sectors. EBIT margin was 12.6% impacted in part by the performance of our operations in Brazil. Margins in France continued to be stable year over year. Book to bill for the quarter was strong at 120%, driven by continued demand across France and now in Spain, notably in financial services, manufacturing and utilities. In the UK, the continued ramping up of newer business contracts contributed to the region's strong organic growth in Q2 with clients like Glasgow, Toktok and now HSBC. And importantly, given the long successful history of supporting space missions around the world, our UK team has taken the lead in marshaling our significant expertise in this highly specialized domain. CGI is positioning as a leader in an emerging partnership among several nations to support common interests in and throughout the space industry. In Central and Eastern Europe, growth remains strong at 13% as previously mentioned, but margin was impacted by 2 investments made in the quarter. 1st, to enhance collaboration in space, the steps we have taken to transition some project work from the UK into Germany has had a temporary impact in our German margins this quarter. And secondly, we have a lagging restructuring investment in the Netherlands, which will provide a tailwind on margins in the coming quarters. Book to bill was 105% in the quarter and a strong 119% on a trailing 12 month basis. And in Northern Europe, revenue grew 2% with particular strength in our Sweden and Finland operations driven by demand across industries such as manufacturing, financial services and government. EBIT margin expanded to 11.2% as the team completed the replacement of non core low margin work from the Effecto merger with higher end consulting, systems integration and IP engagements. Bookings for the quarter were 88% impacted by the protest of a government contract awarded to CGI in the quarter. We expect this to be resolved in the second half. New outsourcing projects with clients such as YIT and expansions with others such as Volvo position us well for future growth. With the integration of Acando underway, new end to end opportunities are now being pursued with expanded portfolio business and network of client relationships. I would like to warmly welcome the 2,000 new members joining CGI from Macondo. Together, we strengthened CGI's presence and capabilities as a leading IT and business consulting services firm in Northern Europe and Germany, notably in the major metro markets of Stockholm, Sweden Oslo, Norway and Hamburg, Germany. Turning to our Asia Pacific operations. Our team has posted organic growth of 4% and an EBIT margin of 25.2% in Q2. Many recent outsourcing wins and new opportunities are benefiting from the significant automation, DevOps and quality engineering expertise centered in this region. In summary, in the first half of twenty nineteen as compared to the first half last year, revenue increased by 4.6% in constant currency to $6,000,000,000 Adjusted EBIT increased by 7.5% to $893,000,000 EPS ex items increased by 12.3 percent to $2.28 Adjusted net earnings were up $48,000,000 for a net margin of 10.6%. Cash from operations was up $18,000,000 for a total of $854,000,000 and bookings were up $1,200,000,000 on a trailing 12 month comparable basis. In closing, let me reemphasize our optimistic outlook for the second half of fiscal twenty nineteen and beyond. We are now a team of 77,000 consultants and professionals worldwide with the capacity and geographic footprint to capitalize on the increasing and shifting demand for IT services. With the current macro environment turning more defensive, we see an increasing opportunity to generate larger recurring revenue engagements for future growth, higher utilization and a richer business mix, resulting in expanding profitability. And we continue to advance our pipeline of buy opportunities across each of our operating regions and see increasing potential for large multi metro market mergers like Acando. In fact, with the recent completion of our client interviews, we're in the process of analyzing hundreds of new potential buy candidates across each of our operating geographies. Thank you for your continued interest and support. Let's go to questions now, Loren. Just a reminder that a replay of the call will be available either via our website or by dialing 1-eight hundred-four zero eight-three thousand and fifty three and using the passcode 5,301,160 2 until June 1. As well, there will be a podcast of this call available for download within a few hours and follow-up questions as usual can be directed to me at 514-841-3355. Donna, if we could poll for questions, please. Thank you. We will now take questions from the telephone lines. And the first question is from Thanos Moschopoulos from BMO Capital Markets. Please go ahead. Hi, good morning. George, I believe within your SI and C business, you had a growing component of higher end consulting work related to digital and to some of the tuck ins you brought on. Can you talk about whether and to what extent that's been a key contributor of some of the recent margin expansion and what regions in particular might be benefiting from this dynamic? Yes. Thanks for the question Thanos. The SI and C and the higher end consulting that we've been you're correct, we've been adding that into the portfolio. It's not necessarily a driver of the expanding margin. It's actually a driver of our growth, because that's really the tip of the spear. It's a set of relationships we have with the business. But in today's world, business and IT are becoming closer and closer aligned. And so it really allows us a channel to drive through the fuller end to end services. And that's exactly what we see in the pipeline, the bookings and the growth. Over time, that does result in some of the higher margins, but the consulting business itself doesn't necessarily drive higher margins, drives higher gross margins because of the utilization doesn't necessarily drive higher net margins. Okay, that's helpful. With respect to the UK, your revenue growth was obviously remarkably strong in the quarter due to the outsourcing ramps. Can you elaborate on how Brexit uncertainty is impacting your pipeline in the region? And on whether and to what extent your current backlogs can offset some of those potential headwinds? Yes. No, it's a good question. As you know, Brexit has been pushed out yet again, which shows that what we see from most of our commercial clients, it's almost not it's almost becoming business as usual. And most of the commercial clients I've talked to much like ourselves has done a little Brexit proofing, if you will. So over these now period of years as it continues to extend out, most companies have prepared themselves for either scenario and therefore commercial companies are we have a rich robust pipeline and you saw some of the even the bookings there. On the government side, there's a lot of analysis going on. Actually there's some opportunities for us to help them on some of that analysis. And regardless of what happens with Brexit, regardless of how it's implemented, if it's implemented, there will be changes required by governments and we'll be there to help. So I would say we're well positioned for the future in the UK. Great. Just a quick one for modeling purposes. Would you be able to quantify how much of the Acando revenue needs to be run off? Probably 5% to 10%. Great. I'll pass the line. Thanks. Yes. Thanks, Thanos. Thank you. The next question is from Stephen Lee from Raymond James. Please go ahead. Thank you. Hey, George, follow-up on your SI and C comment. What has been the lag historically before it starts to drive outsourcing growth as well? Yes, it's a very good question, Stephen. And I wish I had that crystal ball. It's always it's different. It differs by region. It differs by client. It differs by economy. But as I mentioned, I think we're in a rather unique period of time where we have 2 drivers happening at the same time. The economies are slowing, which is putting pressure on some of the ability for companies to invest. But as we see in our Voice of the Client interviews, everybody is continuing while over half of our clients are saying they're going to continue to increase their IT spending. And so we see that as an opportunity if overall spending comes down, I need to increase my IT spending. We see that as an opportunity to accelerate at SI and C into the outsourcing. So I think we're moving into new territory that should be faster than our historical. But it's hard to say. And when you ask about historical, it's different in every one of these economies. Almost every one of them is unique. Okay, great. And I had a question on margins. Several of your geos were down year over year for the quarter and for the 6 months. And it looks like they had all the specific factors. So my question is, do you expect them to rebound in Q3? Or some of these factors might last 1, 2 more quarters? Thank you. Yes. No, you are correct in reading that. Most was from were from actual one time events that occurred that are already past us. The only one that I would say will continue into Q3 is in Canada where we had some of that overcapacity due to the rapid changing in our infrastructure business. And this is good news for our clients because as automation continues, drives down revenue, but obviously results in some overcapacity of the people. And we have already taken those actions in the beginning of this quarter Q3 and that will pay back in the year, but will probably have an impact on Q3. But other than that, around the region, you won't see that continuing into Q3. That's great. Thank you. Yes. Thanks, Steve. Thank you. The next question is from Richard Tse from National Bank Financial. Please go ahead. Yes. Thanks. On the acquisition side, should we think about you being more focused on metro markets going forward given your success to date so far? Yes. Hi, Richard. Yes, and we will be focused on the metro markets. But as I mentioned, Acando gave us multi metro markets across countries. And if I look at our pipeline right now, we have about 20% of our pipeline of potential targets span metro markets and or countries. And so if you think of the language of transformational buys in CGI's history, a transformational buy for us now is really just a series of metro markets, maybe across not just countries, but across continents. So the answer is yes, but with that maybe color commentary. Okay. And then I had a question about your workforce. I'm kind of curious to see or hear from you what skill sets are sort of in most demand today and what do you think that would be going forward? And I guess related to that, how has that changed at CGI over the past year? Yes. No, that's it's good to point out. We have changed, taken some opportunities to build our skill sets differently. And as you know, that started with the restructuring, which allowed us to hire some of the higher end relevant skill sets. And those skill sets are really focused on a series of technologies, including analytics and some of the methodologies that are really being utilized today like agile. So it's individual skilled in those technology skills and methodologies, but with a rooted capacity and capability in the business domains. And that's really as I talk about business and IT coming closer together. So those are the more relevant skills. So it's not just technology, it's not just business. It's really what we call some of our clients are calling and what we got a lot of with Acando is the 2 footed talented members. That's what we've been buying. That's what the restructuring allowed us to do in our hiring and we are well prepared for the future in that respect. Okay, great. Thank you. Sure, Richard. Thanks, Richard. Thank you. The next question is from Daniel Chan from TD Securities. Please go ahead. Hi, guys. Just a question on Brexit again. Was did you get any sense that any of this strength you saw in the quarter was a result of business stockpiling ahead of the original Brexit deadline? That's a good question. Some of our clients that I talk to in the UK have in fact seen exactly that. But it's usually more when you're dealing with the good side of the equation rather than the services side. On the services side, no, I don't get an inclination. This is kind of some of the Some of this Some of this is just the strength that we've had over the past year and the ramping up of some of those outsourcing deals. But if you look at our pipeline and even some of our bookings, actually I think those will accelerate as we get nearer or on the other side of what happens to Brexit. So that's where I see services side. Okay. That's helpful. And then also the color you gave around the macro environment turned more defensive was very helpful. So just a question on the overall European environment. It's been a strong region for the overall IT Services segment over the last year. It seems like the economy may be improving there. Is this something you're seeing as well? And is it expected to accelerate the strength already seen there? Yes. Well, I actually think that there could be some changes in the economy, but I think the defensive nature is still there. But what we see and some of the discussions I've had directly with CEOs, CFOs are there's been a lot of innovation happening across the European region that's been driving some of that uptick. But we're seeing our clients and you heard that also in my opening, we're seeing clients say, okay, that's good. And I've actually had a CEO say this to me, George, I have a lot of innovation. I need some delivery right now. And that's what I'd like to hear about how you do that. And so I think that's turning in a very interesting way. Of course, they still want innovation, but that's what I mean by practical innovation that's driving results. So I think that's going to actually turn in the European market, which for IT services will continue to be strong, but maybe in a slightly different way. Great. Thank you. Thanks, Dan. Thank you. The next question is from Philip Huang from Barclays. Please go ahead. Hi, thanks. Good morning. I wanted to follow-up on the organic growth side. Obviously, Your comments have suggested pretty healthy environment. We obviously saw very encouraging SI and C booking this quarter as well. I was just wondering what your visibility is to sustain and or further accelerate the growth that we're seeing? Yes. Well, as I mentioned, Phil, and thanks for the question. As I mentioned in the opening, we see a lot of opportunity for us to continue for a richer business mix. So all of that nice SI and C work that we have, we've been building those skill sets as I mentioned, but they're adding new channels for us for really bringing the full suite of services. And I think with companies maybe getting a bit more defensive given the macro environment, they're more receptive to some of those broader offerings. And because they have the experience with us, we have the trust, we have the relationship, we have a better understanding of their business, we can bring more relevant broader offerings to them, driving some of that business agility I was talking about, the actual practical innovation and help them on their journey to world class technology, which is something that every one of our clients needs. Because remember, and I've mentioned this on several earlier calls, the demand is still there from their clients. Right now, all we've done on the demand side is a lot of that is kind of the table stakes of reaching the customers. That's kind of done now, so we can reach customers digitally, but now mining that data and actually driving business benefit for the companies and then ultimately their clients as well isn't really done yet. And so that's the next wave of investment and that's a big opportunity for us. That's very helpful. And I just also want to follow-up on Acando. It's helpful to know that 5% to 10% is the expected runoff. Is there like do you expect that like what's to sort to sort of come through? Is it more front end loaded or pretty evenly through the year? Thanks. It would be any of those runoffs, we would try to do rather quickly in the next quarter or 2 to do that in a responsible way for our clients and our business relationships. But that should be done fairly quickly. And mentioning Acando, again, we're getting really good new relationships, complementary relationships. And like previous mergers, we're already seeing bids going in, combined bids, where bids are going into traditional relationships that Acando had CGI did not have, but the full offering of CGI that they could not have bid a month ago. So we're already seeing that. In fact, I talked to our leader in Sweden this morning and one went in today. So that's a good indicator of where that merger can bring us. That's very helpful. Thanks, George. Thanks, Phil. Thank you. The next question is from Paul Treiber from RBC Capital Markets. Please go ahead. Thanks very much and good morning. Just hoping could you speak about the Financial Services segment? You called out obviously the Trade360 deal with HSBC. And then also I think IP was a contributor to financial services growth in a number of regions. What's changed for the financial services segment that's driving stronger growth here? Yes. I think Financial Services was a bit behind and then became back to a leader in adopting technology. But much like the other industries, I think they're probably a little bit ahead of the curve in indicating that, hey, we need to get some business benefit from all of this innovation. As you know, a lot of the financial services firms opened up labs, really got into the technology driven in part by the competition from FinTech. Now they're looking at saying, okay, how do I reap the benefits from all these technology investments? And that's good for a services firm like CGI with the end to end being able to do the consulting and deliver some of the glue around some of those core technologies like AI, blockchain, etcetera. And so I think that's what's driving that behavior by the banks. So some competition that got them into this, but now looking at how they drive better business benefits. And those better business benefits are there. And our IP plays a nice role in that. And I mentioned trade, but payments is a big one for us as well and even collections continues to sell worldwide. And then specifically on IP, is it predominantly SaaS or subscription or is it license revenue? And on the license if it is license revenue, I imagine there may be some lumpiness there. But what do you see as the sustainability of license revenue on the IP side? Yes, it's a little of both still. It is a mix. We continue to see, as you know, virtually all of our IP now is enabled to be sold in a software as a service basis. But some clients are still in the mode of buying with a traditional license. It really depends on where the client is and what their cash flow looks like and the capital spending. And so we see both flavors. I talked to a client in Northern Europe who said if it wasn't offered, George, in a software as a service, we could not have purchased your software and your competition didn't allow for that. And so that's part of the reason we're here having this discussion. In other cases, our clients are going, hey, I want to have a different model. I want the traditional. I know this has a longer lifespan of maybe 10, 15, 20, 25 years. And so it's better for me to just do the traditional license. And the nice thing about CGI, unlike pure software plays, we can offer both. And a lot of software plays, when they made the switch, they said, okay, now we're only going to offer in a software as a service because of their business model, because we're a services firm first and solutions and the IP is just a dimension of that. It's still in our model to be able to offer both and that is a differentiator for us in this space. And lastly, the MBA called out the reevaluation of cost to complete some projects. It does seem a little bit of surprise for CGI given your operational discipline. Does what changed like what changed in the operations or assumptions like the reevaluation of costs? Yes. So you might be talking about, we mentioned or highlighted one was really part of our Brexit proofing where we moved a project from one country to another just given what might happen with Brexit and sensitivities. When you do that, you disrupt the project. So that drove that one. That's not really a discipline. We kind of created that, but it was the right thing to do, which is why I really talk about that one as an investment. And another situation, I talked about clients getting more defensive. And I've also mentioned before, our intellectual property is typically built in conjunction with clients. So we had a partner client that partway through the project, actually more than halfway through the project stopped the project. We still got paid, but that caused us to reevaluate that piece of intellectual property. It's still viable, but it's not on the same timeline. So we took the opportunity to immediately impair that asset and that's passed us and now it will be a viable asset going forward. So those are the 2 of maybe of the bigger ones. And others were really historical lawsuits. The one in the UK was something that wasn't a CGI thing. It was really a UK wide item on pensions that affected every company in the UK. So I don't see any discipline issues. In fact, on operational excellence, I'm pleased to report that our number of red projects is down and the time period that those projects stay red is shorter, meaning that we're highlighting them earlier. And that's a part of the CGI operational discipline. It's not just that a project goes red, it's are you dealing with it appropriate and quickly and we're doing just that. Thanks for taking my questions. Thank you. The next question is from Robert Young from Canaccord Genuity. Please go ahead. Hi, good morning. Early in the call, I think you said that 42% of SI and C is coming from new business. I was wondering if you could talk about whether that's consistent with recent trends? Are you calling that out as unusual? And then what's driving that? Is it the acquisitions you've been doing? Or would it be market factors? Yes. Thanks for the question, Robert. It's not really the acquisitions because when an acquisition comes in, when we merge a company in, we consider all of their clients existing CGI clients. So they're not necessarily driving new clients. They're driving expanded clients, but not new clients or new work. So the opportunity really is for us to generate new clients with our new offerings and I think it's more of that macroeconomic environment. And yes, the skill set upgrade that did come from mergers and also from our restructuring opportunities. I highlight it because it's just really an indicator, especially on the SI and C side as an indicator of new relationships that then can be converted into those broader service offerings. And so that's why I really highlighted it this quarter. Traditionally, we run-in the 30% to 40%. So it's not far out of line, but it shows you that we still have a lot ahead of us. And is there a geographic trend to highlight there? Would you say that more of that is coming out of Europe or would you say it's broad based? Yes. So here's what's nice and thank you for the opportunity to again highlight this. This is the first time in a while that we've had organic growth, not inorganic growth, but pure organic growth in every one of our operating segments. So the strength is broad based and that's also nice not just from a build perspective and really our ability to consistently drive the growth that you've come to expect, but also on the buy side because we like to buy into strength and we actually qualify business units for whether they are able to do a buy because integration obviously is very important to us. We integrate immediately. We want it to be accretive immediately. And so you have to buy into strength. And given the nature of this broad based growth, we now have the ability to target and buy into every operating region where we do have a robust pipeline. Okay. Thanks a lot. And then the 2 pronged growth that you are highlighting related to 1, the digital digitization you've been highlighting for a couple of years now. But then I think last quarter you also started to talk about slowing growth environment driving some IT efficiency work. And so the way you're talking about this quarter, it sounds as though you're highlighting that as an opportunity rather than a risk. So these two factors are going to grow could drive a higher level of growth. Maybe if you could correct me if I'm wrong on that. And then secondly, what does that do to the competitive position of CGI? Because I would assume that it would be stronger in the IT efficiency side, but I may be wrong. And then I'll pass the line. Yes. So you are correct that having the 2 come together should drive higher growth because the deals get bigger and we're even seeing that in some of the voice of the client interviews and discussions we're having where the 3 year outlook continues to look to bigger projects. Why? Because they're combining those efficiency with those innovations. And our offering brings the 2 together. We're saying we can drive savings on the efficiency side and help you quickly and maybe in a relevant practical way drive some of those innovations that drive outcome based returns. And that is to your competitive nature, that does drive some competitive opportunities for CGI because we are playing, have been playing on both sides. We participated on the growth side, on the digital, but have a long legacy and history on the efficiency side. And like I said, I've had probably half a dozen clients kind of change the conversation over the last quarter where they want to hear more about our best practices on the efficiency side. How are we able to because remember, we drive our own company the same way we're talking about our outsourcing offerings for our clients. We run our own company as a world class IT with the metrics, the continuous improvement and the benchmarking. And so more and more companies are interested in hearing how we're doing that and then how we can help them get there. So I think that's a competitive advantage for CGI. Just to get into the competitive side, is it fair to say that some of your larger competitors, some of your end to end competitors had been deemphasizing that component of the business? Or would you say that, at the amongst your largest competitors, you'd have the same they would have the same advantage as you would in this double pronged opportunity? Yes. I mean, you probably follow them more closely than I do. I'm focused on our clients and what we've been emphasizing. But I think as you know, I've had a lot of questions on the new and I've always talked about the end to end over these last couple of years. And so I think we're positioned very well. Okay. Thanks. Thanks, Rob. Thank you. The next question is from Paul Steep from Scotia Capital. Please go ahead. Great. Good morning. George, could you talk a little bit about some of the initiatives you've called out, I guess, over the last few quarters, AI analytics, cyber payment solutions. What you've been doing or maybe any initiatives the team's got to further take some of those shorter term SI and C deals into longer term engagements with clients, maybe some of the success you've been having there? Thanks. Yes. No, that's a it's a great question. And some of those do take some time, but we are seeing more and more interest in package solutions, for example, around analytics. And so one of the things that we've been doing and this is something I've highlighted before, As we work with our clients and I call it innovation at the shop floor, as we work with our clients and see how they're trying to use something like analytics, then we take that back to some of our innovation labs and create some intellectual property that then is tested with a client that was we were innovating with and then ultimately becomes IP. And we're seeing that in some additional package solutions either to our existing solutions and particularly in financial services and also in utilities, but also other solutions even in the government space around public safety. So not a lot of concrete examples today. But again, this is where this is going and we're seeing clients more receptive to those types of opportunities. Whereas maybe even 6 months ago, they said, oh, we'll just build our own. And now they're saying, yes, we're very interested in maybe being a first mover with your package, but we're okay with that being your package because then we'll have the cost efficiencies of either a software as a service or maintenance going forward. And that is what we're seeing in analytics. It's not one offs anymore. It's like how can you package that and make that more part of my business, which also comes back to a consulting opportunity. Great. Thank you. Thanks, Paul. Thank you. The next question is from James Schneider from Goldman Sachs. Please go ahead. Good morning. Thanks for taking my question. I was wondering if you maybe talk about the composition of your bookings. I think you talked about 60% on the outsourcing side of things. Directionally, would you expect that to kind of tilt more towards the outsourcing type of work over the next few quarters as you see bookings coming on? And maybe specifically, you can talk about the profile of and mix of outsourcing business you're seeing in Europe right now and whether that's skimming more heavily towards outsourcing in that region? Okay. Yes, thanks, Jim. Actually, just a small correction. On the bookings side, the composition of the bookings was actually still weighted heavily towards SI and C. And the number I gave you some visibility into in my opening was really the composition of the pipeline, which is 60%, which answers your question. Yes, we're seeing the demand shifting more to the outsourcing given the climate that I talked about. And that really is pretty broad based. So that's both in Europe and in the U. S, but probably more pronounced in Europe as you suggested. So I can confirm kind of all the above, but just with that slight change on the bookings weren't there yet, it's more in the pipeline. Okay? Yes, very good. Sorry for the misunderstanding. And then maybe just to kind of one more follow-up on the federal business in the U. S. Yes. Kind of what are you seeing there from a forward perspective? I apologize if I missed the outlook on your from your commentary. But maybe to kind of give us a sense about whether that's more skewing towards the civilian or otherwise at this stage and anything you can say about the mix of federal versus state local? Yes. So on the federal business, we had the shutdown blip, but we see the IT spending really mimicking a lot of what we see on the commercial side, which is more government agencies are focused on the modernization, on IT, very focused on cybersecurity going with what's going on around the world and governments being under attack, particularly our U. S. Federal segment is focused on that. And that's exactly where we have been investing. Health remains on the top list for domestic programs and we're well positioned there, continue to win all of our recompetes in the health space. So we see a pretty robust U. S. Federal government area. The areas that we have been kind of maybe deemphasizing over the last couple of years are the core defense areas. Our defense business is actually strong, but we moved into more of the IT core IT, cybersecurity areas of that domain. So both sides are pretty strong for us, but we have shifted our business, I would argue, a richer shift in business. So that if something like sequestration, which is a word that maybe many on the phone don't know, but it's essentially caps on the spending levels, particularly in the Defense Department, if that happens, we don't see that really affecting much of our IT business. Thank you. Yes. Thanks, Jim. Thank you. The next question is from Stephanie Price from CIBC. Please go ahead. Good morning. Hi, Stephanie. I wanted to circle back on Acando for a minute and just ask about the margin profile. Are you happy with where they are now? Or do you think there's opportunities to improve that margin profile? Yes. No, thank you. They have they do have strong margins, but there's definitely an opportunity for us to in implementing the CGI model to raise those margins. There's some simple synergies, some of the public company costs that are going on, But there's a bigger opportunity for us to raise their utilization, leverage the full suite of CGI products, which helps them and services offerings helps them raise that utilization where we think that their margins can come to the CGI margins levels and beyond. So great talented individuals, as I mentioned, very complementary, but yes, definite opportunities even in a strong business to increase that now that they have the end to end offerings, something they didn't have before. Donna, we'll have time for one last question. And the last question will be from Howard Long from Veritas Investors. Thank you. Thanks for taking my question. I just wanted to follow-up on the question on the bookings mix. As George just mentioned, as SI and C, the bookings this quarter were pretty strong and that actually drive organic growth going forward for revenues. Do you see any short term margin impact from how strong the bookings were as it flows into the revenues? Thanks for the question. I don't see that impacting the margins at all. We're very disciplined in how we bid these deals And both on the SI and C side and on the outsourcing side, we have the models in place to drive not just sustain the margins, but actually continuous improvement. And part of that's in the relevant offerings that we're bringing. It's the value proposition that we're bringing to our clients. So both the SI and C and the outsourcing, I see us expanding margins, as I mentioned, in many of the geographies. Okay, great. That's helpful. Thanks guys. Okay. Thank you, Howard. Thanks everyone for joining us and we'll see you back on July 31 for our Q3 results call. Thank you. Thank you. Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.