Earnings Call: Q2 2018

May 2, 2018

Good morning, ladies and gentlemen. Welcome to the CGI Second Quarter Fiscal 2018 Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Global Communications and Investor Relations. Please go ahead, Mr. Gorber. Thank you, Valerie, and good morning. With me to discuss CGI's Q2 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 Paris at 3 pm local time or 9 am Eastern Time on Wednesday, May 2, 2018. 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 have been filed with both SEDAR and EDGAR. Please note that some statements made on the call may be forward looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. The complete Safe Harbor statement is available in both our MD 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 the International Financial Reporting Standards or IFRS. As before, 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 Q2 financials, and then George will comment on our operational highlights and our strategic outlook. Francois? Merci d'Orleans et bonjour de Paris. I'm pleased to share our results for Q2 fiscal 2018. Revenue was CAD 3,000,000,000 an increase of CAD 226,000,000 or 8.3% compared with last year. On a constant currency basis, revenue grew 4.9%. Bookings in Q2 were $3,500,000,000 or 119 percent of revenue, driven by increases to the scope of services on renewals as well as the addition of new clients including TalkTalk in the UK, SNCF in France and Meyer Werf in Germany. Over the last 12 months, total bookings were $12,000,000,000 or 108 percent of revenue. Adjusted EBIT was CAD424,000,000 a year over year increase of $29,000,000 and representing a margin of 14.4%. This compared with $395,000,000 or 14.5 percent for the same period last year. During the quarter, we incurred cost of $27,500,000 related to our strategic restructuring. Through the end of March, we have expensed $149,000,000 against the plan. We are generating the plan benefits and expect to complete all remaining actions before year end. The total investment will be $185,000,000 as we have identified additional opportunities through the implementation of our strategy as well as currency headwinds. As a reminder, the majority of the program's costs are focused on positioning CGI to capture the significant shift in demand across global markets as evidenced by our strong bookings this quarter. And approximately 15% of the $185,000,000 expense is related to the retirement of certain assets that are no longer needed in the implementation of our as a service delivery model. Going forward, this will drive lower capital requirements in our infrastructure business, allowing increased investments in areas such as our IP portfolio. We also incurred expenses of $11,000,000 in Q2 for the integration of Affecto and Paragon. Turning to income tax. Our effective rate in Q2 was 25.5%, down from 27% last year, largely the results of U. S. Tax reform. We expect the tax rate for the full fiscal year to be between 24.5% and 26.5%. Adjusting for integration and restructuring expenses, net earnings grew to CAD303 1,000,000 in the 2nd quarter, up CAD 28 1,000,000 year over year. Earnings per share on the same basis expanded by 14.3% to $1.04 per diluted share and net margin was 10.3%, up 20 basis points from the year ago period. On a GAAP basis, net earnings were CAD 274 1,000,000 and EPS was CAD0.94 up from CAD0.90 in Q2 last year. Turning to cash. Our operations generated $426,000,000 in the quarter or 14.4 percent of revenue despite payments of CAD43 1,000,000 related to the restructuring. In the first half of twenty eighteen, our operations generated CAD 836,000,000 an increase of CAD 120,000,000 when compared to the same period last year. Over the last 12 months, we generated $1,500,000,000 or 13.2 percent of revenue, representing just over $5 in cash per share. We ended the quarter with a DSO of 46 days compared to our target of 45 days. In the Q2, we invested CAD91 1,000,000 back into our business including the development of our IP and the ramping up of new outsourcing contracts. We reduced our debt by CAD90 1,000,000 and we invested CAD231 1,000,000 buying back shares. Under the current buyback program, we can purchase and cancel an additional CAD 17,400,000 shares through February 2019. Net debt was CAD1.5 billion at the end of Q2, representing a net debt to capitalization ratio of 17.5%. With our revolving credit facility and CAD288,000,000 in cash, we have over CAD1.7 billion in readily available liquidity and access to more as needed in order to pursue our build and buy strategy. Now I'll turn the call over to George. Thank you, Francois, and good morning. I am pleased with our performance in Q2 and throughout the first half of the fiscal year. In both the quarter and the 6 month period, we delivered constant currency growth of 5%, nearly half of which was organic. We remain well positioned for the second half of the year with strong bookings in the quarter and underlying growth trends in every operating segment. Our positive business outlook reflects the priorities and budget plans of our clients. CGI's leaders around the world recently completed over 1400 in person discussions with client executives, which we will analyze and share as the CGI client global insights again this year. Although we just concluded the interview process, 3 clear trends are already emerging across industries and geographies. First, a larger percentage of clients we spoke with are increasing their total IT spend in both new applications as well as in existing systems. This is reflective of organizations evolving from smaller dollar standalone projects to larger dollar enterprise solutions. In fact, our largest Q2 bookings across the banking, insurance and government industries demonstrate this trend. 2nd, addressing regulatory compliance and securing data and systems moved up in terms of top priorities for both business and IT this year. We are well positioned to assist in these increasingly important areas for our clients. For example, CGI is establishing a leadership role in helping clients develop and manage their compliance roadmaps and assist them in ensuring vulnerabilities are addressed at every organizational level. With the EU's GDPR, General Data Protection Regulation, coming into effect this month, we expect this to be an area of continued opportunity for us to assist clients. And heightened security risks and awareness are also creating more opportunities for us to consult on advanced threat detection and mitigation planning. These consulting opportunities are leading to longer term client engagements to remediate vulnerabilities and provide ongoing security managed services. The 3rd clear trend that I would like to share is that once again, our clients are aligned on the need to become digital organizations, underscoring the expectations of consumers and citizens for seamless, real time and connected experiences. As a result, demand is increasingly being driven for emerging technologies and services such as advanced data analytics, intelligent automation and blockchain. Clients' investments in these emerging areas are driving more consulting and systems integration work, which is up 20% compared to the same quarter last year. This presents an opportunity to convert more business over time into longer term recurring revenue. In addition, our own IP is one of the biggest beneficiaries of clients' digital priorities. For example, we have embedded RPA into our advantage and momentum solutions, intelligent automation and robo advisory services into our Wealth360 platform, blockchain technology into Trade 360, Payments 360 and our utility solutions and all of our global IP has been made available in the cloud. As such, our IP revenue grew in dollar terms year over year. Now turning to our Q2 performance of our global operations. I'll start North America. In the U. S. Commercial and state government segment, our expanding footprint and capabilities allow us to meet more of the growing demand. Constant currency revenue growth was 13%, driven by the relationships and enhanced capabilities from recent mergers. We successfully earned new engagements with clients in the utilities, manufacturing, retail and health sectors, leading to an overall book to bill of 125%. We also saw increased strength in our state and local government business and are optimistic about the growth expectations for the back half of the year. EBIT margin in this U. S. Segment was 14.4%, down from last year, given the mix of business in the quarter. This is due to fewer licenses as more clients convert to SaaS and the short term impact of fully implementing the CGI model in multiple new acquisitions. With the bookings from the increased geographic and industry footprint from these acquisitions as well as IP opportunities, we expect margins to expand in the coming quarters. U. S. Federal Operations grew 7% organically and delivered an EBIT margin of 12.7%. Bookings for the quarter were again over 100% of revenue with the last 12 months book to bill now at 136%. The administration's focus on mission outcomes and performance metrics are fueling more opportunities in all areas of IT modernization, particularly for our momentum business, which grew 20% over the same quarter last year. In addition, we continue to see increasing security spending across U. S. Federal government agencies, where we now have over $1,000,000,000 in security focused bids awaiting award. As recent wins and momentum and other modernization opportunities ramp up over the coming quarters, we expect that margin will expand. In Canada, our team delivered constant currency revenue growth of 5.6% and a strong EBIT margin of 21.9%. Bookings were 110% of revenue for the quarter, 33% of which was IP. Strength in financial services continued in Q2. For example, we were awarded a contract with a top Canadian bank to consolidate their multiple portfolio systems into a single integrated Well360 platform. I would also like to highlight CGI's role in Canada's Innovation Super Clusters initiative, where the government is investing to build world leading innovation ecosystems and accelerate economic growth. CGI is a key partner to ScaleAI, 1 of the 5 consortiums or superclusters selected. We are joining other leading firms and world class research institutions to design and launch projects that will accelerate next generation artificial intelligence powered supply chains into the Canadian economy. Turning to the performance of our European operations. We saw constant currency revenue growth across Northern Europe, France and ECS of 4%. And in the UK, the positive bookings trend continued this quarter, strengthening our confidence in the team's ability to return to growth later this year. Across our European operations, Q2 EBIT margins were 12%. The evolving revenue mix and IP profile in Europe, combined with the benefits of the restructuring program, are expected to drive continued margin expansion going forward. This evolving revenue mix entails more IP in France, outsourcing wins in ECS, consulting traction in the UK and continued emerging technologies in Northern Europe. For example, Open Finance in France is a new piece of IP that enables clients to integrate traditional banks and fintechs to create new offerings, while helping them anticipate and comply with the emerging regulatory requirements for payments. New large outsourcing wins in ECS contributed to the region's strong bookings of over 115 percent in the quarter. These new engagements demonstrate the journey many clients are on today as they turn to technology to help drive business transformation and achieve their growth goals. In the UK, in addition to recent wins in government, utilities and communications, there is increasing demand for consulting and financial services particularly. In the quarter, for example, we initiated consulting projects with 3 U. K.-based financial services institutions, including Metrobank, a new digital entrant. And in Northern Europe, we are seeing the conversion to SaaS, hybrid cloud and advanced analytics gaining traction in most sectors. In utilities, for example, we are well positioned as Nordic countries begin standing up a national energy market later this year. Now that the integration of Effecto is largely completed and the transformation of our infrastructure business has progressed, we believe this region is poised for second half growth. Turning to our Asia Pacific operations. Our teams posted sustained growth and an EBIT margin of 18.6% in Q2. India continues to be an innovation incubator, particularly for intelligent automation solutions and support of clients around the world. Each of our recent outsourcing opportunities also benefited from our DevOps and quality engineering expertise centered in this region. In summary, the first half of twenty eighteen, we delivered revenue of $5,800,000,000 up 5% in constant currency adjusted EBIT of $831,000,000 up 5%. Adjusted net earnings of $591,000,000 up $39,000,000 for a net margin of 10.3 percent. EPS ex items of $2.03 up 13% cash from operations of $836,000,000 up $120,000,000 and bookings of $6,500,000,000 up $0.75 billion or 113 percent of revenue. In closing, let me reemphasize our optimistic outlook for the second half of fiscal twenty eighteen and beyond. We are now a team of 73,000 professionals on. We are now a team of 73,000 professionals worldwide with added management capacity and geographic footprint to capitalize on the increasing demand for IT services. We have nearly completed the planned restructuring actions with a better positioned global workforce of industry and technology experts to drive growth, higher utilization and expanding profitability. Our year over year increase in SI and C revenue represents margin expansion. We continue to advance our pipeline of buy opportunities across each of our operating regions. And with the completion of our annual Voice of the Clients interviews, we've recently added 100 of new potential buy candidates. Thank you for your continued interest and support. Let's go to the questions now, Loren. Just a quick reminder that there will be a replay of the call available either via our website or by dialing 1-eight hundred- 408-three thousand and fifty three and using the passcode 4,909,880 0 and that will be available until June 2. And as usual, there will be a podcast of the call available for download within a few hours and all follow-up questions can be directed to my office at 514-841-3355. Valerie, if we could poll for questions, please. Certainly. We will now take questions from the telephone lines. Our first question is from Steven Li with Raymond James. Please go ahead. Thank you. A couple of questions from me. I thought cash flow has been really good for a couple of quarters now. So maybe you can talk about what's driving this improvement? And also at 14% of revenues, is that sustainable in the second half? Yes. Well, first answer, I do believe it's sustainable. You see the DSO in line with our expectations and coming down. But really the cash is being generated by the fact that our business is growing on the top and the bottom line. And that's fundamentals and the cash is coming along with that. So I do believe that that will continue, Stephen. Okay, great. And George, maybe you can also talk about your recent acquisition, so Affecto and Paragon. Any revenue synergies you're seeing thus far? And how can AFFECTO be a catalyst for the Nordics? Thank you. Yes. No, that's a good question. On AFFECTO specifically, we are seeing take up around the region and interest in some of the skill sets and offerings that we have for Efecto in all the European regions and quite frankly around the globe. Most importantly, utilization is up significantly in that merged set of individuals and offerings. So that's a positive. But I think most importantly, if you look at all of the recent acquisitions, rolling them up, our book to bill in the areas where we merged operations in are over 110% book to bill. And that's significant because those operations are primarily SI and C. And so through that increased bookings in the SI and C business, we're establishing reestablishing in some cases relationships to allow us to sell through the full offering suite of CGI IP and the recurring revenue, larger outsourcing. So we're having the initial traction, with the SI and C work, but we see that continuing. It takes a little time, but that's what we see in these operations. Quite frankly, we're doing that a little bit faster than even I planned. Okay, that's great. Thanks. Thanks, Stephen. Thank you. Our next question is from Richard Tse with National Bank Financial. Please go ahead. Yes. Thank you. Congratulations on the big bookings number there. I was wondering if you could give some a bit more color on those bookings. Are these engagements longer in term, the proportion of sort of IP Digital within that bookings? And also the margin profile of these bookings, are they sort of trending higher because it's you are making that pivot to IP Digital. My guess is that the margin profile is going to improve here over time. Yes. No, that's a it's a great question and thank you for pointing out the bookings, Richard. A lot of hard work went into making that happen. But I can give you a little more color and it really does relate back to what I talked about that we're seeing early returns from our Voice of the Client interviews. And that is that we're seeing our clients looking at increasing their budget, not just in the new point solution applications, but also in some making some of the necessary investments in their existing operations and applications and linking them together. So in fact, what we've seen is that even in our renewals, so it's about 60% new business, good news, in our top 10 to 15 bookings, about 50% new business, 35% overall. I see Francois looking at me, 35% overall. But in our top bookings, it was about half new business and half renewals. The good news is 100% of those renewals in our top 10 bookings were actually at a higher run rate. And that is so important because where we've come from, if you're just renewing an outsourcing deal that is expected to drive additional cost savings and that's all you're doing, then it's going to be at a lower revenue. And that's what we've seen over the last several years. But consistent with the trends that I outlined in our voice of the client, these renewals are coming at expanded run rates. And why is that? Because they're investing in introducing both new technologies into the current operations as well as connecting the existing operations into the new applications, the digital applications they're putting in. So it's some digital, some existing, linking them together, all at higher revenue rates and as you might expect then higher margin profiles. Okay. Thanks for that. With respect to the U. S. Federal government market, I sort of noticed that the book to bill has really picked up lately. It seems like that lull is behind you. Is that in fact the case? And I guess with respect to government, where do they stand in terms of embracing this digital shift? My impression was always that they're like a little bit behind. Would you say that they are or where they stand relative to the commercial market? Thanks. Yes. I would say that's very insightful. They do tend to lag, but when they decide to make the shift, they move almost all at once just given the way that the governments can operate, which is a little different a public company. So they can make all the investment all at once. And you're absolutely right, state and local specifically has lagged even central governments, but we're seeing both pick up. We do see some stronger bookings, which will lead to stronger growth in the future in state and local. And as I've outlined in the last couple of quarters, that's been kind of masking some of the growth on the other side of our U. S. Commercial business, for example. And then central governments as well are embracing this shift in a bigger way. So we see that as a tailwind moving forward. That's great. Thank you very much. Thanks, Richard. Thank you, Richard. Thank you. Our next question is from Thanos Moskopoulos with BMO Capital Markets. Please go ahead. Hi, good morning. George, if you look at the recent tuck ins over the past year, are they currently where you want them to be from a margin and operational efficiency perspective? Or is there still some more work to do in that regard? Yes. They're I would say they're performing the way I would expect. However, there's still a little more work to do. It takes a little bit of time and they're all at a slightly different place. We track each one of them as you might expect us to do given our operational discipline. We continue to have integration meetings with some of the more recent ones, like I said. Positive utilization trend, but not where I think ultimately, we want them, need them and expect them to be. But it takes a little time to get into the CGI model. But once in the model, the performance is there. So I'm pleased with the tuck ins. I'm pleased with the teams, particularly our new leadership, which really have embraced the model. But it's a there's a number of members new members that we have to get working in that model, but it's definitely progressing well, not fully in yet. And then in the U. K, you alluded to the new consulting engagements. It looks like revenues were up sequentially in British pounds. So should our takeaway be that the region has now finally stabilized and as customers have adjusted to the new reality of a post Brexit world? Or what should our takeaway be there? I think we see 2 things. One, in the macro sense, yes, I think we're moving more into the acceptance phase and more certainty. And so that certainly helps the situation. I would also say just from a CGI profiling, we do believe we've bottom hit the bottom on the revenue side, and we're on the upswing, just as I discussed in the last couple of quarters. We are seeing that, and you're starting to see that even though it was negative. As you pointed out sequentially, it's up actually pretty significantly. And a strong bottom line, even if you take out for the one timers, it's still a strong bottom line margin improvement. Great. Thanks. I'll pass the line. Thank you, guys. Thank you. Our next question is from Maher Yaghi with Desjardins Capital Markets. Please go ahead. Thank you for taking my question. George, I wanted to just follow-up on some of your comments regarding the transition of recent business wins into longer term contracts. How is that going? And how much of that is built into your forecast of improved margins? And when we look at the business, where do you see margins going to, let's say, later this year? And I have a follow-up question on the financial stuff. Sure. Thanks, Mara. So here's what I would say on the on where we are in that mix of business. I did highlight the mix of business, higher SI and C, lower on the managed services and about stable on the IP. But again, opportunities as we move more towards managed services and IP and then do the conversion as you discussed. It takes some time on the conversion. So we're ramping up the pipeline and the opportunities. We have some success stories, but as you see, it's still growing on SI and C faster than the managed services. That's not built in to my confidence on at least the second half expanding margins. The second half expanding margins are exactly what I highlighted. The higher utilization, the higher gross margins from some of that mix of business on the consulting side as well as the impacts of repositioning our global workforce on the restructuring. So all of that is my confidence for the expanding margins. I believe that conversion is more of an opportunity for us next year to continue to expand the margin. So there's opportunity and there's opportunity. Great to hear. And in terms of cash usage, Francois, I wanted to just pick your brain on how do you allocate the upcoming cash generation? You always get this question all the time on the conference call, but with $1,500,000,000 of cash generation and $5 per share, is there any way of just telling us what are your priorities in terms of maybe buyback or because I don't think you can repay the debt necessarily quickly? Yes. Thanks, Maher, for the question. So for sure, again, as it won't be a surprise that the first priority is to invest back in the business. We increased our investment in IP and we'll continue. We signed a couple of outsourcing contract lately, TalkTalk like I was saying. So that will ask for some contract cost at the beginning of the contract. So that's the first thing. As George indicated, we had our new voice of our client just done. So we have now a lot more new opportunities on the acquisition side. So we will look at these opportunities and these new names and see what's the potential on that side. Actually on the debt, we have $90,000,000 on the line of credit and close to US200 $1,000,000 to pay in the next 12 months. So that will be also in the making and we'll need to reimburse the debt. And again, at the end of the day, we will relook at share buyback as an opportunity and flexible tool when needed to we still think that to some point the share is undervalued and it can be still a very good investment. Yes, maybe I'll add to that. Given our plan and expectations for growth on the top and the bottom line, expanding margins and we look at the valuation, we still believe that share buyback is accretive way to use our cash. Yes. Has the situation changed in terms of looking at paying a dividend? No, we did the analysis last January. As you know, it's every January that we're really looking at it with the Board. And so we'll look at it again next January. Okay. Thank you. Thanks, Maher. Thank you. Thank you. Our next question is from Daniel Chan with TD Securities. Please go ahead. Hi, guys. Hi, Daniel. It's just good to see that the U. S. Still continues to be a really strong region for you. So I want to talk about that segment a little bit. First on the commercial side, are you seeing any impact when you talk to your customers from more spending as a result of the tax cuts there? I haven't really seen that specifically highlighted. I think it plays in to the overall confidence. But again, remember what's driving some of the spending really is the need and demand from their customers. But I haven't seen necessarily any direct correlation at least as of yet. But again, commercial business continues to be strong. And with our acquisitions, we have an expanded footprint, which I did highlight in some of my remarks. So that continues to be a strong area for us. Okay. And then on the federal side, the budget increase earlier this year, has that budget increase already started to flow through and you're starting to see awards being given out? Well, awards and throughput in the federal government is always a little slower than we would like it to be, and we continue to see some of that. But I'll tell you what we do see is that the more certainty around budgets. It's not just the amount of the budget, it's the fact that you can spend the budget in the ways you need to spend it. When it's continuing resolution, regardless of what that number is, they can only spend it on existing priorities. Now they can defund and start new priorities. And as you suggest with the increase in the budget, yes, we see more and more of that opening up. 1st in RFPs and task orders under our many vehicles and then on actual awards. But you do see that the strong bookings, this is seasonally our weakest quarter in the U. S. Federal and we were over 100%. So that gives you some indication that things are opening up. But we see more opening up in the future. Great. Sounds good. Thank you very much. Thanks, Dan. Thanks, Dan. Thank you. Our next question is from Robert Young with Canaccord Genuity. Please go ahead. Hi, good morning. Some of your peers have been dampening margin expectations. I think they've been highlighting things like some of the impact of renewals, pricing pressures come up a couple of times. And you're highlighting margin expansion. You're talking about a few company specific events or benefits from the restructuring and recent M and A and some higher utilization. You also said that you're benefiting from renewals as the mix shifts to higher value, which seems different than your peers. And so I wonder if you could talk about that specifically and maybe generally talk about why you're talking about margin expansion, but some of your peers are talking about talking that down? Yes. I can't thanks, Rob, for the question. I can't really speak to my peers. I can tell you that, again, it's driven the confidence is driven by a combination of what we're hearing from our clients as well as maybe where we play. Remember, we're playing end to end, so we're playing on the front end and we're playing on the back end and we see more of those projects and contracts get bigger and get connected. So that's an opportunity for us. We're we continue to sell more of our IP in a managed services sense. And yes, we jumped on this, as you know, several quarters ago to reposition our workforce. We've already doubled down on our proximity model. We've been doing the tuck ins. Now we're starting to see some of the benefits of the restructuring. I'll remind you, we're 80% of the actions have been taken, but less than half of the benefits on a full rate basis are in these numbers that I'm announcing here. So that gives you some of the confidence of the expanding margins. Okay. And then just talking thinking about margins in the longer run, there's a lot of the way I think about it, there's a lot of investment in some of the newer revenue flows around digital and cloud and whatnot. And so should we be thinking of a sustained margin expansion over the years as the investment in those revenue lines stabilizes? Is this a sustainable margin growth that you see over the next few years? Yes. I would see that. And you're right, because we've got a couple of things going on at once in the shift. 1 is the technologies. And 2 is our clients having to make some of the spend to connect that front end in with the back end. So yes, I think it is sustainable. Okay. Last question for me. You flirted around some of the IP metrics. I was wondering if you could give the percentage of revenue and bookings in the quarter. And I'll pass the line. Thanks. Yes. So we're we continue to see growth on the dollar. But as I mentioned last quarter, we did a reset. It's still at holding at 21% of revenue as we grow our SI and C business a little bit faster, and we get less of the licenses as we convert over to software as a service. Our managed services business is up. On the IP, up to 50%. That's up about 500 basis points or so year over year. And then the actual bookings were 100 I want to say 109% were the bookings for the quarter. Strong, but not as strong as our overall bookings of 119%. So I'll take that in the quarter. Okay. Thanks. I'll pass the line. Thanks, Rob. Thank you. Our next question is from Paul Treiber with RBC Capital Markets. Please go ahead. Thanks very much and good morning. With the growth that you're seeing in the SI and C business, are you also seeing tightness in the labor market, just given that utilization is going up and how are you addressing that? And then with the growth in SI and C, is there an opportunity to push through price increases on the labor rates in SI and C? Yes. So on the answer to both questions is yes. Let me maybe start with your second question because given the tightness in the labor market, the value of the services, in fact, we are seeing some opportunities for us to increase rates or and more importantly and what we're seeing on a lot of our existing contracts adding some additional labor categories, particularly as it relates to the emerging technologies, the new digital technologies, there's an expectation that might come at a different rate structure. So that's an opportunity for us and we can do that on many of our contracts. And then certainly when we're talking about, say, a consulting agreement or consulting arrangement, like I mentioned in the K, those are coming at higher overall rates than we've seen in the past. On the tightness in the labor market, yes, the 2 do go somewhat hand in hand. One of the ways we address that, as you know, is through our global delivery. And our global delivery is not just India Offshore, particularly as some of the new digital projects require more on-site presence. We've always had a global delivery model that includes delivery resources that can get on-site very quickly in country, but are located in lower cost areas. Therefore, the cost structure looks different. But more importantly, the labor market is different. And we can tend to be the bigger employer in those areas. Another thing I'd highlight though, and it's very important, our member satisfaction is linked to our client satisfaction. And then the nice place we are right now, our client satisfaction scores continue to go up. As you know, we talk to every one of our clients multiple times, every one of our engagements with our clients multiple times a year, ask them a series of questions, our client satisfaction is higher. Likewise, our member satisfaction is higher. So even though our turnover is up slightly, it's lower than the overall benchmarks. It always goes higher in areas where we merge operations in, but that's stabilized in all those areas. And our referrals are over 25% of our hires. So they tend to be more sticky hires. So we do see some of that. And so what are we doing to address it other than everything I just talked about in the model? We're investing in the growth of our own resources, hiring more entry level individuals, and we have a series of training programs that we roll out to members of every level, and we're seeing good experience and take up there. Especially some of these newer technologies, you have to continue to grow your career. Our next question is from Stephanie Price with CIBC. Please go ahead. Good morning. Good morning, Stephanie. Hi, Stephanie. I wanted to focus a little bit more on this move to SaaS from license sales. Can you talk a bit more about what you're seeing here and what you expect the margin impact to be in the U. S. Especially? Yes. So thanks, Stephanie. Some of the managed services and software as a service wins now build the license and maintenance into the subscription price. And so as more of our clients take us up on that offer, what happens is that you don't get the large license one time. But over time, the overall engagement is lifted in margin. And of course, as we know, when you're renting something versus buying something, the overall margin gets lifted. So it's just a shift in when we get some of that margin. So that's again, it provides some sustained margin expansion, but we do take a bit of a hit. Now that's not the entire answer because not all of our clients are taking true software as a service. They might even be buying managed services, but still be willing to buy the license. And this is I had the question on tax impact. This is one area where I see maybe some of that difference, whereas normally they might go straight to a SaaS. They say, well, look, I'll buy the license because I actually have the money now. I don't need to capitalize that over time. So we're seeing a mix. It's a hybrid situation right now, partly because we offer a hybrid situation. We'll meet our client where they want to be, whereas maybe some of the pure software players will go, you're only offering it as a service. They're taking a bigger hit than we'll take. We'll just take that over time. And again, we get that back and then some in the out quarters. Great. Thanks very much. In terms of the acquisition environment, can you talk a little bit you mentioned an expanded pipeline that you were seeing after the voice of the client? Yes. So really remember what our strategy is on the tuck in mergers is we're looking for culturally aligned organizations and part of that cultural alignment is a strong sense of proximity with clients and having the relationship with clients. So we're really good at identifying that with our existing leaders in the areas we are, but maybe we're undersized or in the areas that we are or maybe in one industry and not in another industry, we're not as good at sourcing those opportunities, but we're just not in the region at all. And so that's why we turn to clients, but also prospective clients. Clients are located in areas that we're not, as well as 17% of the 1400 plus clients that we talked to this year and Voice of the Clients actually were prospective clients. So we're reaching out. That's why some of those new ones come in that we haven't sourced before. We're also sourcing from some of the best of list, best consultants in a certain area list, so that we can gain more access and source better. Now we're very good once sourced, we're very good at running the various metrics and ensuring that, in fact, it's a merger that will fit with the CGI culture and be accretive in the 1st year. We're very good at that, but it's really the sourcing that we continue to work on. Great. Thank you. Yes. Thanks, Stephanie. Thank you. Our next question is from Ralph Garcia with Echelon Wealth Partners. Please go ahead. Yes. Good morning. Thank you for taking my questions. First on the IP side, if where are you seeing the biggest take up, I guess? Is it RPA, artificial intelligence, blockchain? And is the typical path 6 to 12 months SI and C project and then that converts to a managed services or a long term outsourcing deal? Yes. So everything that you asked about is in fact we see take up particularly right now. RPA is becoming very mainstream. But in fact, it's a big opportunity for our clients, both on the operational side and on the news side. You mentioned that as far as IP, we're introducing all of that into our IP, but then also doing that in discrete projects for SI and C. And both then convert can convert to larger managed services opportunities. But it's not a 6 to 12 month or 18 month. It's a larger engagement. So let me give you an example. We might do a series of SI and C engagements. I'm using a real example here. I won't mention them, but it's a European client. And as you know, I'm in Europe, and I may be visiting some clients this week. And it's a client that we did some SI and C work growing, maybe at 10% a year for a couple of years. And then they come to us and they say, hey, we've done 5 or 6 discrete projects. We come to them and say, here's what we could do to connect them together. They come to us and they say, we like to connect them together. And we elevate the discussion, in this case, to the global CIO and the global COO and business leaders and actually become one of their strategic partners to connect them. That then turns into outsourcing deals. So it's not like one discrete project turns into an outsourcing deal. It's typically a series of deals. That's what that's over a 2 year period that I'm describing. That's just one example. Okay. Excellent. And then on the the outsourcing side, how much of a factor is an aging IT workforce in driving outsourcing contracts, especially in the government sector? Yes. On the government side, it's a big driver. I was just in the last week with our U. S. Federal Board of Directors. As you know, we have a separate board there given that we work on classified work in the U. S. And we have that set up in other locations around the world. And that is an expected big driver. And so what government clients are jumping on is that they have the opportunity to embrace these new technologies and then not replace the people because they have the same tight labor force that we have. And just one last one. On the transformational M and A side, I mean, any preference on a pan European deal or a UK centric or a U. S. Commercial? Or is it all going to come down to the right price at the right time? Right company, right time, right price. Okay, got it. Thank you. Thank you. Thanks, Ralph. Thank you. Our next question is from Paul Steep with Scotia Capital. Please go ahead. Great. Thanks. George, could you talk a little bit about transformation in the infrastructure business in Canada? You've largely done the heavy lifting from the Nordics and that took a while. But if could you talk about where you're at in terms of contracts and then maybe also where you're at in terms of the infrastructure investment cycle? Yes. Yes. So thanks for the question. Actually, we're a little bit ahead in Canada, but we're catching up now progressing in the Nordics. And in Canada specifically, it is continuing to transform quickly. We went through the 1st wave. There are multiple waves to follow. And a big part of the restructuring was, unfortunately, some individuals are not as able to move to the new. And as we shift, particularly in the infrastructure world, we're automating more and more so quickly. But that infrastructure transformation, that's the whole reason we went to asset light strategy. That transformation on that hardware side, we don't do now, right? Because that's hardware and system software that now is either owned by our client or we're using some sort of a hybrid public and private cloud. And so your traditional cycle of investment on the hardware software side starts to go away. It's more on the automation side. And we continue to evolve with that automation shift. What do we think the timing is to sort of complete that shift, George? Yes. It's a great question. Because the shift is continuing, it's about keeping up and staying on the curve, not being too far ahead of the curve, but not being behind the curve. And but it's still transforming. So I can't predict when that automation wave continues because what we're seeing is more and more of the artificial intelligence being used that actually helps us, helps everybody, helps our clients in particularly in delivering those infrastructure services. But again, I wanted to remind you, that's just the way we deliver the business solutions that we're really focused on. Okay. And then the last one for me is, it's been a while since we talked about it. You clearly got the financial capacity. Could you talk a little bit about the structuring, the size and the organizational capacity to go after maybe a significantly larger number of smaller deals? Thanks. Yes. Thank you for that. As you know, we have a proximity based decentralized model and with the central management foundation that governs and guides that. We do the same thing on the M and A. And so we have the organizational capacity in the 8 strategic business units, the 60 plus business units and even at the sub business unit level to do multiple acquisitions at the same time because other than the governance structure and assistance that we provide at corporate, all of the due diligence and all of the integration work, again, outside of the governance is done in those regions. So conceivably, I could do 60 plus in a month at the same time. Thank you. Thanks, Paul. Valerie, we're going to have time for one last question. Certainly. Our last question is from James Snyder with Goldman Sachs. Please go ahead. Good morning. Thanks for taking my question. Sorry about that. Just wanted to maybe ask again on the margin side of things. From here, I mean, what's your level of confidence in being able to deliver kind of meaningful margin expansion as we head through the end of the fiscal year? And the reason I ask the question is just given the commentary we're hearing from of your peers or competitors in India about some pricing and margin issues. So just kind of curious on your overall take there. Yes. Yes. No, thanks for the question. Couple of elements, I think, that may be if you compare it to an India player, we already have the proximity model built out. So that's not an investment for us. And we always embrace offshore as a dimension of our global delivery, but it's interlinked with our nearshore and our onshore delivery centers then along with our proximity model. So we don't have a lot of investment there with the restructuring that now we have mostly action, but not all flowing through the P and L yet, we see expansion opportunities. And one area I'd like to come back to that haven't come back to in a while, we do see opportunities to bring some of our European operations closer to where we've been at our North American operations. So even though we're approaching double digits everywhere around the world, what we'd like to see is moving more towards those North American margins, at least into the mid teens. That's a big margin opportunity for us longer term. Shorter term, I gave you some of the drivers, which has given me some of the confidence. Helpful color. Thanks. And then maybe just one clarification. Good to see the strong bookings growth in the quarter. Can you maybe just kind of help us parse out how much of that bookings was driven by outsourcing kind of longer dated contracts versus the consulting side of things and how that kind of played into the growth? Yes. Do you have the number? In the MD and A. It's in the MD and A. Do you have that? I just don't want to give you the right systems integration and consulting was 54% and the outsourcing was 46%. That's great. Thank you very much. Thanks, Jim. Thank you everyone for joining us today and we'll see you back here mid July for our Q3 numbers. Thank you. Back in Paris? No, we're back in Paris. Thank you. Thank you. Thank you, gentlemen.