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 second quarter fiscal 2018 results are George Schindler, our President and CEO, and François Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live from Paris at 3:00 P.M. local time, or 9:00 A.M. Eastern Time on Wednesday, May the 2nd, 2018. Supplemental slides, as well as the press release we issued earlier this morning, are available for download along with our Q2 MD&A, financial statements, and accompanying notes, all of which have been filed with both SEDAR and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied. CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
The complete safe harbor statement is available in both our MD&A and press release, as well as on cgi.com. We encourage our investors to read it in its entirety and to refer to the risks and uncertainties section of our MD&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&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 François now to review our Q2 financials. George will comment on our operational highlights and our strategic outlook. François?
[Foreign language] Lorne, [Foreign language] de Paris. I'm pleased to share our results for Q2 fiscal 2018. Revenue was CAD 3 billion, an increase of CAD 226 million, or 8.3% compared with last year. On a constant currency basis, revenue grew 4.9%. Bookings in Q2 were CAD 3.5 billion, or 119% of revenue, driven by increases to the scope of services on renewals, as well as the addition of new clients, including TalkTalk in the U.K., SNCF in France, and Meyer Werft in Germany. Over the last 12 months, total bookings were CAD 12 billion, or 108% of revenue. Adjusted EBIT was CAD 424 million, a year-over-year increase of CAD 29 million, representing a margin of 14.4%. This compared with CAD 395 million, or 14.5% for the same period last year. During the quarter, we incurred costs of CAD 27.5 million related to our strategic restructuring.
Through the end of March, we have expensed CAD 149 million against the plan. We are generating the planned benefits and expect to complete all remaining actions before year-end. The total investment will be CAD 185 million, 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. Approximately 15% of the CAD 185 million 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 CAD 11 million 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 result of U.S. tax reform. We expect the tax rate for the full fiscal year to be between 24.5%-26.5%. Adjusting for integration and restructuring expenses, net earnings grew to CAD 303 million in the second quarter, up CAD 28 million year-over-year. Earnings per share on the same basis expanded by 14.3% to CAD 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 million, and EPS was CAD 0.94, up from CAD 0.90 in Q2 last year. Turning to cash, our operations generated CAD 426 million in the quarter, or 14.4% of revenue, despite payments of CAD 43 million related to the restructuring.
In the first half of 2018, our operations generated CAD 836 million, an increase of CAD 120 million when compared to the same period last year. Over the last 12 months, we generated CAD 1.5 billion or 13.2% of revenue, representing just over CAD 5 in cash per share. We ended the quarter with a DSO of 46 days compared to our target of 45 days. In the second quarter, we invested CAD 91 million back into our business, including the development of our IP and the wrapping up of new outsourcing contracts. We reduced our debt by CAD 90 million, and we invested CAD 231 million buying back shares. Under the current buyback program, we can purchase and cancel an additional 17.4 million shares through February 2019. Net debt was CAD 1.5 billion at the end of Q2, representing a net debt to capitalization ratio of 17.5%.
With our revolving credit facility and CAD 288 million in cash, we have over CAD 1.7 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, François, 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 six-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 1,400 in-person discussions with client executives, which we will analyze and share as a CGI Client Global Insights again this year. Although we just concluded the interview process, three 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. Second, 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.
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 third 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. Client 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 Wealth 360 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 CAD terms year-over-year. Turning to our Q2 performance of our global operations. I'll start in 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 CAD 1 billion 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 Wealth 360 platform.
I would also like to highlight CGI's role in Canada's Innovation Superclusters Initiative, where the government is investing to build world-leading innovation ecosystems and accelerate economic growth. CGI is a key partner to Scale AI, one of the five 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%. In the U.K., 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 U.K., 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% 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 U.K., in addition to recent wins in government, utilities, and communications, there is increasing demand for consulting in financial services, particularly. In the quarter, for example, we initiated consulting projects with three U.K.-based financial services institutions, including Metro Bank, a new digital entrant. 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 Affecto 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 in 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 2018, we delivered revenue of CAD 5.8 billion, up 5% in constant currency. Adjusted EBIT of CAD 831 million, up 5%. Adjusted net earnings of CAD 591 million, up CAD 39 million for a net margin of 10.3%. EPS ex items of CAD 2.03, up 13%. Cash from operations of CAD 836 million, up CAD 120 million. Bookings of CAD 6.5 billion, up 3 quarters of a billion CAD or 113% of revenue. In closing, let me reemphasize our optimistic outlook for the second half of fiscal 2018 and beyond.
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&C revenue represents an opportunity to generate larger recurring revenue engagements for future growth and margin expansion. We continue to advance our pipeline of buy opportunities across each of our operating regions. With the completion of our annual Voice of Our Clients interviews, we have recently added hundreds of new potential buy candidates. Thank you for your continued interest and support. Let's go to the questions now, Lorne.
Just a quick reminder that there'll be a replay of the call available either via our website or by dialing 1-800-408-3053 and using the passcode 4909880, and that'll be available until June the 2nd. As usual, there'll be a podcast of the call available for download within a few hours. 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 on the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. 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. Maybe you can talk about what's driving this improvement and also at 14% of revenues, is that sustainable in the second half?
Well, for first answer, I do believe it's sustainable. You see the DSO in line with our expectations and coming down. Really, the cash is being generated by the fact that our business is growing on the top and the bottom line. That's fundamentals and the cash is coming along with that. I do believe that that will continue, Steven.
Okay, great. George, maybe you can also talk about your recent acquisitions, Affecto and Paragon. Any revenue synergies you're seeing thus far, and how can Affecto be a catalyst for the Nordics? Thank you.
Yeah. No, that's a good question. On Affecto specifically, we are seeing a take-up around the region and interest in some of the skill sets and offerings that we have from Affecto 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. That's a positive. 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. That's significant because those operations are primarily SI&C. Through that increased bookings in the SI&C business, we're establishing, or reestablishing in some cases, relationships to allow us to sell through the full offering suite of CGI IP and the recurring revenue, larger outsourcing.
We're having the initial traction with the SI&C work, we see that continuing. It takes a little time, 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, Steven.
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 a bit more color on those bookings. Are these engagements longer in term? The proportion of IP digital within that bookings and also the margin profile of these bookings, are they sort of trending higher because you are making that pivot to IP and digital? My guess is that the margin profile is going to improve here over time.
No, it's a great question, thank you for pointing out the bookings, Richard. A lot of hard work went into making that happen. 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. That is that we're seeing our clients looking at increasing their budget, not just in the new point solution applications, but also in making some of the necessary investments in their existing operations and applications and linking them together. In fact, what we've seen is that even in our renewals, it's about 60% new business, good news, in our top 10-15 bookings, about 50% new business, 35% overall. I see François looking at me.
35% overall, 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. 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. That's what we've seen over the last several years. Consistent with the trends that I outlined in our Voice of the Client, these renewals are coming at expanded run rates. 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.
It's some digital, some existing, linking them together, all at higher revenue rates, and as you might expect, higher margin profiles.
Okay. Thanks for that. With respect to the U.S. federal government market, I noticed that the book-to-bill's really picked up lately. It seems like that lull is behind you. Is that in fact the case? I guess, with respect to government, where do they stand in terms of embracing this digital shift? My impression was always that they were a little bit behind. Would you say that they are, or where they stand relative to the commercial market? Thanks.
Yeah. 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 than a public company. They can make all the investment all at once. 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. 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. Then central governments as well are embracing this shift in a bigger way. 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 Moschopoulos with BMO Capital Markets . Please go ahead.
Hi, good morning. George, if we 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?
Yeah. I would say they're performing the way I would expect. 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. A positive utilization trend, but not where I think ultimately, we want them, need them, and expect them to be. It takes a little time to get into the CGI model, but once in the model, the performance is there. I'm pleased with the tuck-ins. I'm pleased with the teams, particularly our new leadership, which really have embraced the model.
There's a number of new members that we have to get working in that model, but it's definitely progressing well. Not fully in yet.
In the U.K., you alluded to the new consulting engagements. It looks like revenues were up sequentially in GBP. Should our takeaway be that the region has now finally stabilized and that customers have adjusted to the new reality of a post-Brexit world? What should our takeaway be there?
I think we see two things. One, in the macro sense, yes, I think we're moving more into the acceptance phase and more certainty, that certainly helps the situation. I would also say just from a CGI profiling, we do believe we've 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. 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, Thanos.
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? When we look at the business, where do you see margins going to, let's say, later this year? I have a follow-up question on the financial stuff.
Sure. Thanks, Meir. Here's what I would say on where we are in that mix of business. I did highlight the mix of business, higher SI&C, lower on the managed services, and about stable on the IP. 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. We're ramping up the pipeline and the opportunities. We have some success stories, but as you see, it's still growing on SI&C faster than the managed services. That's not built into 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.
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 margins. There's opportunity, and there's opportunity.
Great to hear. In terms of cash usage, François, 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, with CAD 1.5 billion of cash generation and CAD 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.
Yeah. Thanks, Meir, for the question. For sure, again, it won't be a surprise 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. That will ask for some contract us at the beginning of the contract. That's the first thing. As George indicated, we had our new Voice of Our Clients just done. We have now a lot more new opportunities on the acquisition side. 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 CAD 90 million on the line of credit and close to $200 million to pay in the next 12 months.
That will be also in the making, we'll need to reimburse the debt. Again, at the end of the day, we will relook at the share buyback as an opportunity and a 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.
Maybe I'll just add to that. Given our plan and expectations for growth on the top and the bottom line expanding margins, we look at the valuation, we still believe that share buyback is a creative way to use our cash.
Yeah.
Has the situation changed in terms of looking at paying a dividend?
I know we did it. We did the analysis last January. As you know, it's every January that we're relooking at it with the board, we'll look at it again next January.
Okay, thank you.
Thanks, Meir.
Thank you.
Thank you. Our next question is from Daniel Chan with TD Securities. Please go ahead.
Hi, guys.
Hi, Daniel.
Good to see that the U.S. still continues to be a really strong region for you. 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 into the overall confidence. Again, remember what's driving some of the spending really is the need and demand from their customers. I haven't seen necessarily any direct correlation, at least as of yet. Again, commercial business continues to be strong. With our acquisitions, we have an expanded footprint, which I did highlight in some of my remarks. That continues to be a strong area for us.
Okay. 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. 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. As you suggest, with the increase in the budget, yes, we see more and more of that opening up, first in RFPs and task orders under our many vehicles, and then on actual awards. You do see that the strong bookings.
This is seasonally our weakest quarter in the U.S. federal, and we were over 100%. That gives you some indication that things are opening up. 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 times. You're highlighting margin expansion. You're talking about a few company-specific events or benefits from the restructuring and resizing.
Yep
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. I wonder if you could talk about that specifically and maybe generally talk about why you're talking about margin expansion, when some of your peers are talking that down.
Thanks, Rob, for the question. I can't really speak to my peers. I can tell you that, again, 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. That's an opportunity for us. We're continuing to sell more of our IP in a managed services sense. 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, where 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. That gives you some of the confidence of the expanding margins.
Just thinking about margins in the longer run, 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. 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?
Yeah, I would see that. You're right, because we've got a couple things going on at once in the shift. One is the technologies, and two is our clients having to make some of the spend to connect that front end in with the back end. Yes, I think it is sustainable.
Okay. Last question from 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.
Yep. I continue to see growth on the dollar, but, as I mentioned last quarter, we did a reset. It's still holding at 21% of revenue as we grow our SI&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. The actual bookings were 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, good morning. With the growth that you're seeing in the SI&C business, are you also seeing tightness in the labor market, just given that utilization is going up, how are you addressing that? With the growth in SI&C, is there an opportunity to push through price increases on the labor rates in a sense?
Yes. 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, more importantly, 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 that might come at a different rate structure. That's an opportunity for us, and we can do that on many of our contracts. Certainly when we're talking about, say, a consulting agreement, or consulting arrangement, like I mentioned in the U.K., those are coming at higher overall rates than we've seen in the past.
On the tightness in the labor market, yes, the two do go somewhat hand in hand. One of the ways we address that, as you know, is through our global delivery, 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, we can tend to be the bigger employer in those areas. Another thing I'd highlight, though, it's very important, our member satisfaction is linked to our client satisfaction. 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. 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. Our referrals are over 25% of our hires, they tend to be stickier hires. We do see some of that, 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, we have a series of training programs that we roll out to members of every level, we're seeing good experience and take-up there. Especially some of these newer technologies, you have to continue to grow your career.
Okay, thanks. I'll pass the line.
Okay. Thanks, Paul.
Thank you. Our next question is from Stephanie Price with CIBC. Please go ahead.
Good morning.
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?
Yeah. Thanks, Stephanie. Some of the managed services and software as a service wins now build the license and maintenance into the subscription price. 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. Of course, as we know, when you're renting something versus buying something, the overall margin gets lifted. It's just a shift in when we get some of that margin. 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. 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." 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 would go, "We're only offering it as a service." They're taking a bigger hit than we'll take. We'll just take that over time. Again, we get that back and then some in the out quarters.
Great. Thanks very much.
Okay.
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 Our Clients?
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. 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. 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 1,400-plus clients that we talked to this year in Voice of Our Clients actually were prospective clients. We're reaching out.
That's why some of those new ones come in that we hadn't sourced before. We're also sourcing from some of the best of lists, best consultants in a certain area lists, so that we can gain more access and source better. Now, 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 first year. We're very good at that, but it's really the sourcing that we continue to work on.
Great. Thank you.
Yep.
Thanks, Stephanie.
Thank you. Our next question is from Ralph Garcea with Echelon Wealth Partners. Please go ahead.
Yes. Good morning. Thank you for taking my questions. First on the IP side, where are you seeing the biggest take-up, I guess? Is it RPA, artificial intelligence, blockchain? Is the typical path a 6 to 12-month SI&C project, and then that converts to a managed services or a long-term outsourcing deal?
Yeah. Everything that you asked about is in fact we see take up. Particularly right now, RPA is becoming very mainstream. In fact, it's a big opportunity for our clients, both on the operational side and on the new 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&C, and both then can convert to larger managed services opportunities. It's not a 6-12 months or 18 months. It's a larger engagement. Let me give you an example. We might do a series of SI&C engagements. I'm using a real example here. I won't mention them, but it's a European client. As you know, I'm in Europe and I may be visiting some clients this week.
It's a client that we did some SI&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'd like to connect them together." 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. It's not like one discrete project turns into an outsourcing deal. It's typically a series of deals. That's over a two-year period that I'm describing. That's just one example.
Okay, excellent. On the outsourcing side, how much of a factor is an aging IT workforce in driving outsourcing contracts, especially in the government sector?
Yeah. On the government side, it's a big driver. I was just in the U.S. 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. 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.
Just one last one. On the transformational M&A side, any preference on a pan-European deal or a U.K.-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.
You got it.
Thank you.
Thank you.
Thanks, Ralph.
Thank you. Our next question is from Paul Steep with Scotiabank. Please go ahead.
Great. Thanks. George, could you talk a little bit about transformation in the infrastructure business in Canada? You're largely done the heavy lifting from the Nordics, and that took a while. Could you talk about where you're at in terms of contracts and then maybe also where we're at in terms of the infrastructure investment cycle?
Thanks for the question. Actually, we're a little bit ahead in Canada, but we're catching up now progressing in the Nordics. In Canada specifically, it is continuing to transform quickly. We went through the first wave. There are multiple waves to follow. 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. 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. 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. Your traditional cycle of investment on the hardware/software side starts to go away.
It's more on the automation side, we continue to evolve with that automation shift.
What do we think the timing is to sort of complete that shift, George?
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. 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, particularly in delivering those infrastructure services. Again, I wanted to remind you, that's just the way we deliver the business solutions that we're really focused on.
The last one from me is, it's been a while since we've 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.
Yeah. No, thank you for that. As you know, we have a proximity-based, decentralized model. With the central management foundation that governs and guides that, we do the same thing on the M&A. We have the organizational capacity in the eight 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. 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 Schneider 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, what's your level of confidence in being able to deliver meaningful margin expansion as we head through the end of the fiscal year? The reason I ask the question is just given the commentary we're hearing from some of your peers or competitors in India about some pricing and margin issues. I'm just curious on your overall take there.
Yeah. No, thanks for the question. Couple elements I think that maybe if you compare it to an India player, we already have the proximity model built out, that's not an investment for us. We always embrace offshore as a dimension of our global delivery, but it's interlinked with our nearshore and our onshore delivery centers, along with our proximity model. 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&L yet. We see expansion opportunities. One area I'd like to come back to that I 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.
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. Maybe just one clarification. Good to see the strong bookings growth in the quarter. Can you maybe just 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?
Yeah. Do you have the number?
The MD&A.
It's in the MD&A. Do you have that? I want to give you the right. Systems Integration and Consulting was 54%, and the outsourcing was 46%.
That's great. Thank you very much.
Yeah.
Thanks, Jim. Thank you everyone for joining us today. We'll see you back here mid-July for our Q3 numbers. Thank you.
Back in Paris?
No, we're not in Paris.
Thank you.
Thank you. Thank you, gentlemen. Look out.