Earnings Call: Q3 2018

Aug 1, 2018

Good morning, ladies and gentlemen, and welcome to the CGI Third Quarter Fiscal 2018 Conference Call. I would now like to turn the meeting over to Mr. Loren Goldberg, Executive Vice President, Investor and Public Relations. Please go ahead, Mr. Gorber. Thank you, Julian, and good morning. With me to discuss CGI's Q3 fiscal 2018 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 from Montreal at 9 a. M. Eastern Time on Wednesday, August 1, 2018. The press release we issued earlier this morning as well as our Q3 MD and A, financial statements and accompanying notes, all of which are filed with both SEDAR and EDGAR, 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. 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 Canadian unless otherwise noted. I'll turn it over to Francois now to review our Q3 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 Q3 fiscal 2018. Revenue was $2,900,000,000 an increase of $104,000,000 or 3.7% compared with Q3 last year. On a constant currency basis, revenue grew 3.8% of which 1% was organic. Bookings in Q3 were $3,500,000,000 or 118 percent of revenue, of which 57% were new projects or new clients. Over the last 12 months, total bookings were $12,900,000,000 or 114 percent of revenue, bringing the total backlog to $22,400,000,000 up $358,000,000 sequentially and $1,600,000,000 over the last 12 months. Adjusted EBIT was up in Q3 to $435,000,000 compared with $399,000,000 last year, representing a year over year increase of 9%. Adjusted EBIT margin improved 70 basis points from 14.1% last year to 14.8%. Regarding the restructuring program announced last year, we incurred expenses of $20,000,000 in the quarter. To date, we have expensed $169,000,000 or approximately 90% of the program and expect to complete all remaining actions before year end. We incurred integration expenses of $8,500,000 in Q3 as we fully implement the CGI model into the operations associated with our most recent acquisitions. Turning to income tax. Our effective rate in Q3 was 25.7 percent, down from 27.1% last year, largely the results of U. S. Tax reform. We expect the 4th quarter tax rate to be between 25% 26%. Adjusting for integration and restructuring expenses, net earnings grew to $310,000,000 in the 3rd quarter, up $31,000,000 year over year and resulting in a net margin of 10.5%, 70 basis points higher than last year. EPS on the same basis expanded by 16.1 percent to $1.08 per diluted share. On a GAAP basis, our Q3 net earnings improved to $288,000,000 and EPS was $1 up from $0.92 in Q3 last year. Our operations generated $317,000,000 in cash during the quarter or 10.8 percent of revenue. This is inclusive of $22,000,000 in restructuring payments. This compared to $291,000,000 last year or 10.2 percent of revenue. And over the last 12 months, cash generated from our operations increased to over $1,500,000,000 or $5.16 per share, representing 13.3 percent of revenue. We ended the quarter with a DSO of 50 days compared to 46 in Q2 2018, primarily due to the timing of large SI and C milestone billing. With more SI and C revenue in Q3, there are less prepayments from outsourcing clients, which temporarily impacted DSO. Our target remains at 45 days and we expect the mix to rebalance over the next several quarters. In the Q3, we continued making strategic investment that will advance our business goals. We invested $85,000,000 back into our business including the development of our IP and the ramping up of new engagements. We invested $43,000,000 to acquire Facilitie Informatic, an IT consulting services firm with a strong local presence of 350 consultants and digital specialists in Montreal and Quebec City. And we invested $347,000,000 buying back 4,500,000 shares at an average weighted price of $76.64 per share. Net debt was 1 $700,000,000 at the end of June, representing a net debt to capitalization ratio of 19.6%. The increase in net debt was primarily due to returning value to shareholders through our recent This level remains well within our comfort zone. With over $1,500,000,000 in readily available liquidity and access to more as needed, we remain very well positioned to continue executing our build and buy growth strategy. Now I'll turn the call over to George. Thank you, Francois. Good morning. I am pleased with our team's execution in Q3, further strengthening our position as a leading end to end services partner for clients around the world. This quarter's results are once again underscored by the widespread demand for digital services by our clients and CGI's ability to continue bringing the right combination of local experts and global insights to help our clients implement their enterprise wide strategies. Last quarter, I highlighted some early findings from the 1400 face to face meetings we held with business and IT executives around the world. These findings I shared with you included addressing regulatory compliance and securing data and systems is now a higher priority. We continue to see an acceleration of digitization across industries to meet consumer and citizen expectations. And as a result, over half of our clients are increasing their overall IT budgets. One conclusion remains clear as we continue to slice and benchmark the data. All signs point to continued growth in demand for our consulting and IT services. As such, our business outlook remains optimistic this year and beyond. We are effectively meeting the demand for digital with a holistic integrated approach that spans our end to end portfolio of services. In fact, our 3 point were largely driven by engagements that support our clients' drive to create better and more secure digital customer experiences and those engagements that support the optimization of operations through the use of cyber, intelligent automation and emerging technologies. It is quite common for our digital mandates to include CGI IP and other enablers such as analytics and cloud to support our client strategies. Our investments in emerging technologies and IP support our ability to win full end to end enterprise engagements, which in turn will evolve our balance of SI and C, outsourcing and IP in line with our targeted business mix, creating value for all three stakeholders. With this strategic positioning as a backdrop, let's review the Q3 highlights of our global operations, beginning in North America. In the U. S. Commercial and State Government segment, revenue grew 8.4% in constant currency, driven by utilities, life sciences and manufacturing. Following last year's metro market mergers, we are leveraging new and existing relationships to bring clients a full view of our end to end portfolio of services and solutions. As a result, our U. S. Commercial business experienced double digit growth in the quarter. EBIT margin was 17.8 percent. And as we mature the CGI model within our latest metro market additions, we expect continued improvement in the growth, profitability and cash flow of this segment. Bookings were very strong in Q3 at over 160% of revenue, led by renewed activity in our state and local business. During the quarter, the California Department of Health Care Services awarded CGI a 7 year mandate to implement case management, payments and other supporting services with a total value of over $350,000,000 This new award is also an example of expanding our services from SI and C and IP into broader and longer term outsourcing arrangements. In U. S. Federal, we are seeing an increased pace of government award activity as evidenced by another strong booking quarter of over 150 percent of revenue. However, revenue contracted by 2.6% on a year over year basis as we had some positive upsides in Q3 last year including a large momentum license sale. EBIT margin was impacted by the same factors, though remained strong at 15.3% as we continue to improve the quality of our federal revenue mix. Notably in the quarter, we were awarded our first two Social Security Administration task orders under the IDIQ announced earlier this year and have booked and started the initial transition phase. The full value of these task orders is expected to be greater than $150,000,000 and will be booked in the coming quarters. And we continue to gain traction in cybersecurity. As announced earlier this week, we were awarded a $420,000,000 task order under the Department of Homeland Security's continued diagnostics and mitigation contract program. We were also awarded one of the prime positions on the comprehensive agency wide Department of Justice cybersecurity vehicle. We expect task orders to be competed over the coming quarters. In Canada, revenue grew 4% led by continued demand from the banks in all areas of digital, including human centered systems design, intelligent automation and cyber consulting. In addition, we continue to introduce new IP in areas such as Open Banking. I'd like to recognize our recent Metro Market merger in Canada, Facilitae Informatic and extend a warm welcome to these 350 professionals. EBIT margin remained strong at 21.5 percent of revenue and bookings came in at over 100 percent of revenue on the continued strength of the banking industry and with public sector wins in the West. Turning to our European operations. In Northern Europe, revenue grew 8% driven by digital experience work for clients such as Finnair and OP Financial Group. EBIT margin for this segment was 11.9%, now stabilized as the integration of Effecto into CGI operations has been completed. The alignment of the Efecto operations to the CGI model and the expected benefits of the restructuring program will yield increasing margins throughout the remainder of fiscal 2018 and beyond. Bookings were 112% of revenue. And in the quarter, we were awarded a contract utilizing CGI IP for FinGrid, which is supporting a next generation information exchange data hub to store and manage data from all of FinGrid's 3,500,000 energy consumption locations. In France, revenue grew 2.6% organically with strength across all vertical markets. EBIT margin was 11.2% as we continue to evolve the business mix. Our IP is now gaining traction. We had the first implementation of retail XP360 in System U, the €20,000,000,000 retail cooperative. And we are implementing CGI Open Finance in a Western European bank, which will enable Open Banking. In the U. K, we've returned to positive organic growth as planned, 1.5% in the quarter, fueled by the strong bookings in previous quarters. These new engagements are contributing to improved margin as we posted EBIT of 14.6%. Bookings for the quarter were just under 100%. As Brexit progresses, we expect to see a near term slowdown on procurement decisions due to a temporary focus on sovereign programs. Looking further ahead, we expect resulting upside opportunities in both public and commercial sectors due to these new programs. In Eastern, Central and Southern Europe, revenue grew 4% as Germany continues taking advantage of a robust market with strong double digit growth year over year. Similar to other European segments, ECS' business mix continues to evolve with EBIT margin increasing 130 basis points to 7% in the quarter. Bookings were strong at 113 percent of revenue driven by vendor consolidation as we see more clients moving to enterprise wide strategies with trusted global partners like CGI. Turning to our Asia Pacific operations. Revenue grew 5.6% and EBIT margin was 22.8%. India continues to be an innovation incubator, particularly for agile delivery models, hybrid cloud management, machine learning and intelligent automation solutions. Their expertise is a key element in supporting bids, winning contracts and servicing clients around the world. Across all operating segments and through the 1st 9 months of fiscal 2018, revenue is up $471,000,000 or 4.5% in constant currency. Adjusted EBIT is up 6% for a margin of 14.5%. Adjusted net earnings are up $70,000,000 for a net margin of 10.3%. EPS ex items are up 13.6%. Cash from operations is up $147,000,000 and bookings are up $1,600,000,000 or 114 percent of revenue. In summary, we remain committed to our aspiration to double the company through our build and buy strategy. We will continue our metro market acquisition approach of focusing on companies with annual revenue under $500,000,000 and with deep client relationships in areas where CGI is currently undersized. We have opportunities in each of our operating segments with a particular focus on the U. S, France and Germany. We continue to see this strategy as a short term driver of inorganic growth and a catalyst for accelerating organic growth in the intermediate term. In addition, we are at various stages of discussions regarding transformational opportunities with companies that have over 500,000,000 in annual revenue. These transactions take patience and resolve to always ensure that we acquire the right company for the right price at the right time, all three without exception. And now we have 74,000 members, a net increase of 4,000 professionals from the same period a year ago despite the impact of our restructuring program. We are successfully recruiting and developing in demand expertise in proximity to our clients in all geographies. This expanding talent base should enable us to accelerate organic growth. Thank you for your continued interest and support. Let's go to questions now, Lorne. Just before the questions, a reminder, there will be a replay of the call 62,251 that will be available until September 1. There will also be a podcast for download within a few hours. And as usual, follow-up questions could be directed to me at 514-841-3355. Julian, perhaps we could pull for questions now. Certainly. We will now take questions from the telephone lines. Our first question today will be from Thanos Moschopoulos from BMO Capital Markets. Please go ahead. With respect to the restructuring program, you mentioned you've incurred 90% of the total charges. What proportion of the savings would you say were captured in Q3 results? And ultimately, was that the main factor in driving the margin expansion you saw relative to Q2? Or is that more a function of other factors like utilization rates? Yes. Well, thanks for the question Thanos. Really, remember, we when we planned this out on the restructuring, we wanted to be at run rate savings by the end of the year. And so we're on track to do that. So I would say close to 90% of the savings are in quarter. And yes, that is a driver. And yes that part of the driver to do the restructuring was to increase the utilization. We are seeing the utilization come up. But I also want to remind you that the benefits of the restructuring were not just cost savings. It was really to position ourselves for profitable growth in the new demand areas. And we're seeing that and I highlighted that with the addition of the 4,000 professionals through the 1st 9 months of the year. And also, we continue to automate and transform our infrastructure business to the asset light model. So we will see additional benefits through that organic growth and transformation as we move into the future and also then that the benefits from the mix of business, which I've talked about before. Great. And then I think you kind of alluded to this in your prepared remarks, but could you update us in terms of the cross selling opportunities you've been able to capture with some of the Metro acquisitions still early days on that front? Or are some of those coming to fruition and in the bookings numbers? No, a number of those are coming into fruition and you saw that the U. S. Commercial and state government had very strong bookings in the quarter. It is a continuous it is a continuous process to drive the full breadth of offerings into those clients. But we are seeing growth. Had some recent success with some pharmaceutical firms from our Paragon acquisition in the Northeast. We have some success in the West, particularly around some of the digital skills around cloud native applications in the West from our ECS acquisition in Denver. So we're already seeing some of that and you're seeing them in the bookings. But having that full breadth of offerings, I think we're seeing the same thing across the world more SI and C right now with still an opportunity to drive more of that outsourcing. Great. Thanks, George. I'll pass the line. Yes. Thanks Thanos. Thank you. The next question will be from Stephen Lee from Raymond James. Please go ahead. Thank you. Hey, George. A couple of questions from me. Your comments on the U. S. Fed, these tough comparisons, does it continue next quarter or should we see your growth for a snapback? Yes. No, it's a great question. As you mentioned, the best predictor of future growth is the bookings. We continue to have some strong bookings. And the reason I highlighted, we see the pace of award decisions in federal increasing. So that's certainly helping us. We see a more normalized end of the quarter than we have in the more in the recent past. So what that means is the end of a government fiscal year when they actually have budgets, they look to spend a little bit of increase in spending on those budgets. And it's twofold. It's both in bookings, but also in some of the revenue ramp up. So even though we had a ramp up in revenue last year, it's not those one time licenses that I mentioned. So I think we've got some nice tailwinds. I'd also mention the SSAA task orders. Those are ramping up. We expected that to happen a little bit earlier, but that's ramping up. So between the bookings, the end of year pickup, the Social Security task orders, I see federal having only increases in some of the momentum of the pace of revenue growth. Great. Thanks. And then just one more question. Your MD and A also called out lower IP license especially in the U. S, which I believe is your largest IP market. So if you can update us how are you tracking relative to your IP30 target? Any regions that are that might be offsetting the lower IP in the U. S? Thank you. Sure. Sure. No, and I'll break that down 2 ways. First, actually the percentage of revenue in IP, remember we reset that to 21% in the recent quarter due to the acquisitions. That's now up to 22% of revenue. So you see that momentum through the 1st 9 months of the year. We've actually grown IP at over 6%. So it's actually growth over our revenue run rate. So that's good news. But the IP licenses that were called out really is a different nuance. It's not the revenue. It's the type of revenue. So we're introducing new IP. That's a good thing. But all of that new IP is sold in more of a SaaS model. And so that doesn't have the same license fees as some of the mature IP. The mature IP, we're adding on services. So I called out in federal the large momentum license. That license is driving more SI and C revenue in federal. And I've always said about 7 to 1 in services dollars to a licensed dollar historically. That number is much higher now, particularly in some of our mature IP and particularly in an ERP like momentum. So we're experiencing that. So more services. Another example of that is the big CMIPs win we had in California just announced this morning. That's actually on the back of our Advantage IP, but we're now expanding those services to more systems, surround systems as well as BPO. But that's not license, but it drives, so that sticky license sales is driving more revenue in the future. And I'll just remind you also on the SaaS that margin is the license margin is baked into there. So overall margins rise over time, but you don't get those one timers. And that's the comparators that we're going to have probably 1st couple of quarters here as we transition through that. All right. Great. Thanks, George. Thanks, Steve. Thank you. The next question is from Richard Tse from National Bank Financial. Please go ahead. Yes. Thank you. George, you no doubt have had a great couple of years in terms of SI and C. I'm just curious to see when you think those engagements are going to accelerate when it comes to converting to longer term outsourcing engagements. Is that sort of 1 year out, 18 months out? Just kind of question. I think, Richard, I mentioned this before. I'm not sure a good question. I think Richard I mentioned this before. I'm not sure I want to will that to happen too quickly because I want to keep building up that SI and C which is the tip of the spear if you will. But if you do see in the bookings this quarter actually it did tip the other way. It's about 55% outsourcing and that's the 1st quarter in the bookings for a while that we've seen that. And that's on the back of bookings like the one we announced this morning in California. So we are starting to see that. I think it's still the early phases of that. I think it will flip back and forth because still we're at about 55% revenue in SI and C overall. And so it will take a little bit more time, but I think it's coming and it will be a tailwind to our accelerating growth here in the future. I'd also want to highlight that 50 7% of the bookings this quarter were net new business. And I think that's also an indicator when you look at those outsourcing. That's the transition from the SI and C to new outsourcing as opposed to a renewal of outsourcing. Okay. That's helpful. And I guess related to that, you've talked recently about what I think is sort of considerable margin expansion opportunity as we look ahead, given sort of some of the changes structurally. Can you sort of confirm that you're sort of still thinking that way in terms of that potential expansion because obviously that'd be very meaningful given the leverage in the business? Yes. And yes, absolutely, Richard. And as I mentioned, the reason we did the restructuring really was strategic to capture the net new business. And as I mentioned, as that mix of business converts from the SI and C to the outsourcing as we introduce the new IP and convert that to SaaS, there should be expansion of margins in every region and every geography in the world. And then I guess related to the margin expansion, what do you think today about headcount, ability to retain talent? Clearly, everything we read now is that there's certainly a lot of lack talent I suppose out there or maybe I'm wrong, but it's a lot of discussion around wage inflation. Does that impact you in any way? And how do you bake that into sort of this prospects for margin expansion? No, it's a good question because although we are business And so that's why I highlighted the net new professionals that we added both organically and inorganically. I would say we have a couple benefits here on the talent side. We have an ownership culture of accountability and 83% we're actually up now. 83% of our professionals are owners of the CGI stock, but it just starts there. It's a mindset and it's a culture of ownership. It's very attractive, particularly on the entry level hiring. So we've had a very robust entry level hiring. This is where you're getting the new talent. I always say that talent is a renewable resource. It's not just about there's not a finite set of people. There are a number of entry level hires graduating every year. Also, our referrals are up. But because of that ownership culture and our focus and collaboration for and with our clients, which is what people really want to have is they want to have an impact, and you see that in our client satisfaction scores are up. We have very high acceptance rates. So I would not say that acquiring and retaining talent isn't paramount for a services firm, but we like where we are and we continue to be able to add to our member base in the right areas. That's great. Thank you. Yes. Thanks, Richard. Thank you. The next question is from Maher Yaghi from Desjardins Valle Amobudur. Please go ahead. Thank you for taking my question. George, I wanted to congratulation on the strong booking in the quarter, actually the past couple of quarters. And I'm trying to just understand or square off the increase in the backlog year on year, which is close to 8%. How much of that increase came from acquisitions versus bookings that you guys did organically? And again, I'm trying to just square off that growth of 8% with the 1% organic growth rate that the business is generating right now? When should we start to see acceleration of that organic growth? Yes. No, thanks for pointing that out. Just to your specific question on the addition to the backlog for our acquisitions. Yes, some of that comes from the acquisitions, but a much smaller percentage because most of these metro market acquisitions by their nature are shorter term SI and C consulting only offerings. We obviously are converting that over to the full offering suite, some outstanding talented members, but really focused on that front end of the SI and C. So not a whole lot of that is some of it goes into the backlog, but not a whole lot of that. So most of that really is from those strong bookings that we've had over the last really several quarters in many in really all areas of the business in which we operate. And so yes, you will see that coming in. That's why I also highlighted the 57% new business. It's a good indicator. I can't predict exactly when all that comes in, but it's why I'm very optimistic about accelerating growth in the future. Is there a part of the business that is acting to as a counterbalancing that momentum and growth in the bookings. And so that organic growth rate is staying at the low single digit or it's just a matter of, as you said, just getting through those converting the backlog into revenues? And that's when we should start to see the acceleration? Yes. Well, I think it's a good question because there is there have been over the last several quarters, there have been some counterbalances. Obviously, the U. K. And some of the initial fallout from just the shock of Brexit had an impact. You saw that was going down over the last really over the last year. It's now returned to a smidgen of growth. So that's gone. Federal in the quarter, and explained that in the broader context of some of the comparables on IP licenses. And then I have been highlighting for some time, Maher, as we continue to transition our infrastructure business that is a counterbalance in some of the segments around the world. Our SI and C is up everywhere organically. And but the infrastructure business by its very nature is down in virtually every place in the world. So but we're getting through that. That's why we accelerated the asset light. It's less and less of a counterbalance and which again is why in the future I see accelerating growth. Okay. Thank you. And one last question to Francois. Francois, I ask you this question probably every quarter, but I'll ask it again. Any change in how you view capital allocation with the very increasing cash balance and your view on how dividend could fit into that capital model framework that you have? And like I did say in the past, we're reviewing this every year. We did it in January and we'll relook it again in the January time frame. But just to say that we still like very much the flexibility of the share buyback, especially like Georges was saying that we're very active on the buy side. And for sure, we have a lot of opportunity on the buy side. So we like to have the opportunity of having the capital ready when it's time to trigger the next big acquisition. Okay. Thank you. Thanks, Maher. Thank you. The next question is from Stephanie Price from CIBC. Please go ahead. Good morning. Good morning. Stephanie. You mentioned in your prepared remarks that the restructures partially deposition CGI for new technologies. I was wondering if you can talk a bit about where you're investing and seeing growth? Yes. Well, thanks Stephanie for the question. It's really in a lot of the areas as I mentioned, around digital customer experience. So we're investing in front of that some of that front end human machine design, intelligent design on the front end, some of our IP in that area. We've invested in some new IP that takes advantage some of the digital technologies and provides them the value proposition to our clients. We're also investing a lot in cyber and you saw some nice strong bookings around the world. It's an area of obvious growth for us and need for our clients and we saw that in the voice of the clients. We're also investing a lot in the all areas of what I call intelligent automation, everything from the RPAs straight through to some of the machine learning and other intelligent automation areas. So these are the areas that we freed up. But when I say invest, our big investment is in IP. And when I mentioned we invest in IP, even our new IP around Open Banking, our IP around Central Market Systems, our IP in Retail XP 360, always done in conjunction with our clients. So we know the market is there. So that investment, we already have a market, in some cases, presold sales that we have. The other investments are in some of the skill sets required for us to deliver those offerings one future margin expansion as we move to the higher end services. So just want to qualify and quantify when I talk about those investments. Great. Thank you. Okay. And then in terms of recent tuck ins over the past year, can you talk about whether they where you want them to be from a margin perspective or if there's more work to do there? They actually are absolutely getting to where we want them to be from a margin perspective. However, there's still some work to be done to drive that full offering suite into those clients. As I mentioned, we're seeing some of the successes and you see that in the bookings, but we don't see all that yet in the revenue and the growth. Great. Thank you very much. Thanks, Stephanie. Thank you. The next question is from Paul Trepew from RBC Capital Markets. Please go ahead. Thanks very much. I was hoping you can just clarify a comment on the U. S. Business. You mentioned that the license sales were a tough comp, but then also in the MD and A, there was a comment about a favorable volume adjustment. Is that related to the license sales or is it independent? And then could you just quantify the dollar value or the percent value of those impacts? Yes. That was no that was relating to a BPO contract. So it was unrelated to the license. It was a one time related to the contract volume. So a lot of that dropped to the both the top line but also the bottom line. So and it was Francois, I don't have the quantified numbers maybe. I don't have it here. We can follow-up after. But if you take those out, federal would have been positive growth for sure. Yes. Okay. And then just looking at Europe, it seems like you're having strong growth in Germany, though even though it's one of your smaller regions in terms of footprint. What's been the go to market strategy there? And how do you source or how have you been sourcing the resources to execute in that market? Yes. No, it's a great question. It's really the demand is across the board in all areas of digital customer experience, but also those digital operations that I talked about. So it's leveraging new technologies including RPA as well as some innovative work on the front end. So it's really being driven by this whole digitization demand by our clients around the world. That's happening in space in Germany, especially with the strong economy there. And again, what we're seeing from clients is they're moving more away from that short term cost cutting into medium term transformation in order to grow. And you're going to see that go fastest in the strongest economies because that's where our clients are seeing the opportunities to grow themselves, which in turn drives growth for us through these digitization opportunities. Sourcing is really, as I mentioned, we're hiring. We're gaining we've hired I think by the end of the year, we will have increased our member base in Germany by 20 plus percent. So that's a number of new hires and that gives you some idea of that double digit growth that I'm talking about in Germany. What we have done recently, I think you're that you're aware is we're changing the leadership in that part of the world. So we're looking to use those same strategies in Germany and Netherlands. And I'm pleased to report that Netherlands actually is on the path to growth. And that's a significant element because what's been dragging down their margins has been utilization. And so the combination of the restructuring program and now the new bookings, we should see the improvements across the region just like we're now seeing in Germany. All right. Thank you. I'll pass on. Okay. Thanks, Paul. Thank you. The next question is from Paul Spieke from Scotia Capital. Please go ahead. Great. Thanks. Good morning. George, one question. Could you talk a little bit about M and A and the go to market for smaller metro and sort of regional deals, the process there in terms of maybe as well the capacity to produce a much larger number of smaller deals? And then maybe compare year on year if you've ramped up that team dramatically? Thank you. Yes. No, that's fine. So I'll just remind you the our approach, we've always done this on the due diligence side of the M and A process. But we moved the sourcing side of M and A also to the region. So we are a decentralized model. And so each of the business unit leaders who are always responsible for the due diligence and working with our corporate M and A team, we've now moved a significant part of the sourcing now to those same business unit leaders. So each of our business unit leaders in each of our 8 strategic business units around the globe have responsibility for sourcing. A lot of this comes from our voice of clients as I mentioned before. Some of this comes from existing partnerships and coopetition opportunities. And so they're in the markets. They know the firms that are out there. We've also expanded that sourcing to make sure that we're not missing those regions that maybe were undersized in. And so we're also expanding the efforts. But the actual then work of the due diligence talking to the various companies that's all sourced out to those business unit leaders. It's part of their responsibilities. We've changed the model there. We added some to our corporate M and A team, but I would say that we could ramp up and do 60 of these at the same time because we have 60 of those business unit leaders around the globe. Just to clarify. Thank you. On the BU, in the BU's, do you have a sense of how much they've been growing their capacity and their team to go hunt deals, I guess, is more where I was actually heading with it? Thank you. So you were going to their operations. I don't have that. They all have that capacity. It's all part of the model. And what I can tell you, we have a very active list that I review on a weekly basis with the presidents and the business unit leaders. So there's no shortage of opportunities. Thanks. Thanks, Paul. Thank you. The next question is from Robert Young from Canaccord Genuity. Please go ahead. Mr. Ramirez, you're line on mute. Okay. I'm here now. We highlighted the benefits of the metro market strategy in the U. S. And so I wanted to see if there are any areas where that strategy could be extended in the U. S. On the West Coast perhaps or other places? And do you have any plans to do that? Yes. We are looking at we have our own IP that we built with every city located on it where there could be opportunities overlaid with CGI Business, CGI Professionals and available IT Services Companies and that becomes the source of that data. And as you point out, there are a numerous set of areas in the West of the Mississippi and quite frankly even in the Midwest where we're undersized and there are opportunities to grow particularly in that Pacific Northwest. And we think of you as a vendor with broad geographic footprint, but we think if you look at that IP is how much of the opportunity is unmet inside the U. S. In the commercial space that you could address over the next little while or over the next several years? Well, we're as it's the largest market in the world. So from a both from an IP perspective and from a full offering suite, there's a lot of opportunity. It's a very highly fragmented market, particularly in the U. S. Okay. And a follow on on one of Paul's earlier questions around Germany. I think you highlighted in the monologue that you're seeing vendor consolidation as companies are moving towards global end to end partners. And so I've heard of that I've heard you mentioned that as a strategy or as a differentiator for CGI, but I haven't heard a lot of actual examples of that happening. And so is Germany an early mover? Or is that something you're seeing across the entire footprint? Maybe talk a little bit more about that. Yes. I would say that it's been more pronounced in Germany, but it also starts on where your it depends on where your starting point was. I would say less Germany an early move or more Germany had a lot of large clients that had a proliferation of IT Services Partners. So that's a pronounced I think that's what makes it more pronounced in Germany. But it's something we see around it is something we see around the globe. Okay. And last question for me. I think you mentioned the percentage of IP and the revenue. Can you provide the number in the bookings if you haven't already mentioned it? And then I'll pass the line. Yes. No, I did not mention the bookings. I think it's again because of the license change, I think it was about 16% of the bookings this quarter. Okay. Thank you. Okay. Thanks, Rob. Thank you. The next question is from Howard Lown from Veritas Investment Research. Please go ahead. Good morning, guys, and thanks for taking my question. Just wanted to touch upon transformational acquisitions, George. I think you talked a bit about that. What do you see as kind of the biggest hurdle to getting those when you're in negotiations? Is it the right price, right time, right company? Yes. No, it's I think right now it is the valuations that are out there and therefore the expectations that has created or just the hurdles that that creates. That's why it does take some time and we're not going to overpay. And so especially for public companies, the valuations have to make sense. So I would say that's the biggest hurdle point in time, but that changes. And so that's why you start the discussions. I think it's less of what it had been. It was less about valuation. It's more about the mix of the business in some of these areas, particularly on the infrastructure side and the undifferentiated BPO side. That's changed a bit. I think we see some stronger opportunities now, but the price has to right. Right. No, that makes sense. And then on the metro market strategy with the high end consulting firms, you talked about how you're at BU's trying to find their own companies to acquire as well. Do you kind of see is that throughout all of Europe and North America as well that's happening or is it more of a North American effort? No, that's happening around the globe. I have those reviews weekly with every President around the globe. Okay. No, that's great. And thanks guys. And I'll turn it back. Okay. Thanks Howard. Julian, we'll have time for one last question. Certainly. Our last question will be from Ralph Garcia from Echelon Wealth Partners. Please go ahead. Thanks for taking thanks for squeezing me in here. Just some quick questions on the Advantage and Momentum business. As you look at those renewals, what's really driving, I guess, the growth in those contracts? Is it a move to cloud and hybrid in some of those government areas and you're wrapping a cybersecurity layer around that? Or are they adding more modules to what they were using in the past? Yes. No, it's a great question. A lot of it is being driven by the introduction of more modern technologies, not just cloud, but some technologies that can change the way the users interact with the various modules. Data analytics is a big piece of that. And then as I mentioned, overlaying the BPO on top of it and even the interaction of our IP with other surround systems. So it's really a combination of all of those factors. And then on the commercial side, are you seeing more demand for Azure or AWS? Or where are you seeing your clients sort of moving from a commercial cloud business? Yes. Well, as you know, we're agnostic. I don't have the numbers on that, but we really focus on making sure that we're taking advantage of the opportunities of the cloud and consulting with our clients to make sure that they're managing hybrid cloud, because we see more and more hybrid cloud. It might be 1 or both of those flavors of public cloud plus some private cloud and or internal infrastructure. So it's all of the above. Okay. Thank you. Okay. Thank you. This concludes today's meeting. Please disconnect your lines at this time and we thank you all for your participation. Thank you all for joining us. Thank you.