CGI Inc

NYSE:GIB

Good morning ladies and gentlemen and welcome to CGI's Third Quarter Fiscal 2023 Conference Call.

And I would like to turn the meeting over to Mr. Kevin Linder SVP of Investor Relations. Please go ahead sir.

Thank you, Sylvie and good morning. With me to discuss CGI's third quarter fiscal 2023 results are George Schindler our President and CEO; and Steve Perron Executive Vice President and CFO.

This call is being broadcast on cgi.com and recorded live at 9:00 A.M. Eastern Time on Wednesday, July 26. 2023. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q3 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 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&A and press release as well as on cgi.com. We recommend our investors read it in its entirety.

We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, 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 now turn it over to Steve to review our Q3 financials and then George will comment on our business and market outlook. Steve?

Thank you, Kevin and good morning everyone. I'm pleased to share with you the results of our third quarter of fiscal 2023. In Q3, we delivered CAD3.62 billion of revenue, up 11.2% year-over-year or up 6.3% when excluding the impact of foreign exchange.

The following segments generated double-digit constant currency growth; UK and Australia up 15%; Asia-Pacific up 13%; and Western and Southern Europe up 10%. From an industry perspective, we had growth across all sectors with particular strength in government, our largest vertical market generating constant currency growth of 11%.

IP as a percentage of total revenue was 21% in the quarter, up CAD85 million year-over-year. We continue to see strong demand for our business solutions with overall IP portfolio growth of 12.4% year-over-year or 7.7% in constant currency.

Year-over-year IP revenue growth in constant currency was strong within the following industries; government up 19%; communications and utilities up 14%; and health up 9%. The number of consultants and professionals increased year-over-year by 3,000, totaling now 91,500 worldwide.

We booked CAD4.4 billion of contract wins in the quarter, up nearly 30% year-over-year. As a result our Q3 book-to-bill ratio was a robust 121% led by US Federal with a book-to-bill ratio of 206%, Canada at 121%, Scandinavia and Central Europe at 117%, and Western and Southern Europe at 116%.

Importantly, managed services made up 57% of total bookings, up significantly from 48% in the prior year. On a trailing 12-month basis our book-to-bill ratio reached 113% with all of our proximity geographic segments having a book-to-bill above 100% on the same basis. Overall, our global backlog reached a record of CAD25.6 billion, representing 1.8 times revenue.

Turning to profitability. Earnings before income taxes were $559 million, up 14.3% year-over-year for a margin of 15.4%. Adjusted EBIT in Q3 was $585 million, up 12.5% year-over-year. This represents a margin of 16.1%, up 10 basis points year-over-year. This increase was driven by the combination of profitable revenue growth and operational discipline despite less available days to bill due to the timing of statutory holidays in Europe.

We delivered strong margins in the following segments: Asia Pacific at 31.1%, Canada at 22.3%, US Federal at 17.7%, US commercial and state government at 17.3%. Our effective tax rate in Q3 was 25.8% compared to 25.5% in the prior year. When excluding acquisition-related and integration costs, our effective tax rate was 25.6% compared to 25.3% in the prior year. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%.

Net earnings improved to $415 million, up 13.9% when compared to Q3 last year for a margin of 11.5%. Diluted EPS was $1.75, representing an increase of 15.9% year-over-year. When excluding acquisition-related and integration costs associated with prior year acquisitions, net earnings improved to $426 million, up 14.7% when compared to Q3 last year for a margin of 11.7%.

On the same basis, diluted EPS was $1.80, an accretion of 16.9% when compared to $1.54 in Q3 last year. This improvement was mainly driven by the execution of our Build and Buy profitable growth strategy and to a lesser extent the impact of favorable foreign exchange rates.

In the quarter cash provided by operating activities was $409 million compared to $419 million in the prior year. DSO was 44 days in the quarter in line with our target of 45 days. For the last 12 months, cash provided by operating activities improved to $2 billion, representing 14.1% of revenue.

In Q3 we invested $102 million into our business and $53 million to buy back our stock. As of the end of June, as per our approved NCIB program, we have the opportunity to buy back up to an additional 15 million shares. In the quarter we continue to deliver a strong return on invested capital at 15.7%, demonstrating our efficient deployment of capital.

Looking ahead, our focus continues to be on delivering value to our shareholders by investing in our business, pursuing accretive acquisitions and repurchasing our stock and/or paying down our debt. CGI has a strong balance sheet with a net debt to capitalization ratio of 21.7% at the end of June as well as $3 billion of cash readily available and access to more if needed.

While M&A activity in the IT services industry has slowed significantly due to a gap in valuation expectations versus current market realities, CGI believes that our disciplined approach will result in higher-quality mergers for the benefit of our stakeholders. Moving forward, CGI has the strength and capital resources to continue to execute on both our Build and Buy profitable growth strategy.

Now, I will turn the call to George to further discuss insights and outlook for our business and markets. George?

Thank you, Steve, and good morning, everyone. Our team again delivered quarterly results in line with our full year plan. We achieved constant currency revenue growth of 6.3%, which is at or ahead of the markets in which we operate. Double-digit EPS accretion of 16.9% on an adjusted basis sustained EBIT margin expansion up 10 basis points year-over-year on an adjusted basis.

Bookings of CAD4.4 billion, up nearly CAD1 billion compared to the same quarter last year. Continued high engagement of CGI consultants and professionals resulting in lower employee attrition levels on both a quarter-over-quarter and year-over-year basis and continued high client satisfaction levels as rated and signed by client executives demonstrating the deep confidence they have in our people and capabilities.

The strong quarterly bookings were driven by client awards for managed services with a book-to-bill ratio of 120% and IP engagements with a book-to-bill of 120%. These larger engagements increasingly also incorporate consulting and systems integration services as part of their scope. This combination of CGI's end-to-end services reflects the ongoing rise in client demand for broader more holistic partnerships to help clients realize cost savings and advance their digitization objectives.

In both, managed services and IP, the highest proportion of bookings were awarded within our two largest industry segments, government and financial services. For example, in managed services, the US Environmental Protection Agency awarded CGI Federal a multiyear managed services contract valued at US$522 million. We will partner to reimagine the agency's IT portfolio at the application, platform and enterprise levels in support of their mission to protect human health and the environment.

This award renewed CGI's incumbent work and included an increase of enterprise development scope of over 45%. And Bankgirot, Sweden's payments clearinghouse extended their long-term partnership with CGI through a CAD62 million agreement to enhance system efficiency, uphold stringent security and unlock opportunities to drive future innovation across the payment sector.

And examples of IP bookings include: a government ministry in Germany extended its partnership with CGI on the implementation of CGI's eGov360 solution for electronic file and data management. This will enable the ministry to increase agility and drive seamless integration and interoperability. US Department of Veteran Affairs increased funding to support the implementation of CGI's Momentum IP in support of the agency's financial management business transformation program. And in the financial services sector we signed 28 agreements for our recently transformed cloud-native credit studio solution with clients in the US, Canada, UK and Australia. Our solution incorporates AI and helps clients address the continued tightening of credit markets. Two-thirds of these awards were for net new business.

A high proportion of managed services and IP in our overall bookings led to a greater size and duration of project awards this quarter. In fact, 40% of total bookings in Q3 were comprised of deals over CAD50 million. This is compared to 13% in the same quarter last year.

Over the past several quarters, we anticipated these client buying shifts given our day-to-day engagement with clients and through our annual Voice of Our Clients proprietary research. This research serves as an important global antenna to help identify the top priorities for clients now and over the coming years.

Last quarter I shared some preliminary findings from our discussions with over 1,750 executives in 21 industry sectors around the world. Our research indicates that clients are now heavily relying on managed services and IP to implement, optimize and manage their transformation programs in order to achieve the expected return on investment.

In our research, two in five executives cited legacy systems among the key barriers to successful digitization. This demonstrates the need to ensure that solutions strategies, address the complexity of modernizing current systems and integrating with new systems and processes.

Our managed services offering is focused on providing client savings which are then coupled with reinvestment to drive modernization, industrialization and organizational agility. And our IP, including IP-enabled business processes provides clients a digital accelerator with lower capital costs. IP provides clients with the added benefit of having security data, protection, innovation and interoperability of third-party platforms, as part of the solution.

Our analysis also underscores that C-suite executives are applying a sharper focus in their decision-making to determine the highest return on investments. This is shaping most of their key program priorities. CGI, we call this ROI-led digital transformation and is at the core of our partnership approach with clients.

Many of the executives we spoke with cited the challenging economic environment as the key driver for sharpening their focus is requiring them to prioritize cost savings, while simultaneously advancing digitization to improve competitiveness, resilience and customer experience. This dual digital agenda continues to generate demand for all of CGI's end-to-end services, as clients now require consulting partners that can design connected strategies that bridge vision and real-world implementation to deliver expected results.

We are proactively working with our clients to translate their business objectives into tangible engagements with clear and measurable business cases, such as for a leading natural gas services company, we are deploying AI solutions that will unlock $150 million in value through predictive analytics and optimization.

We are implementing intelligent evidence-based solutions to help the health care provider better predict and lower the cost of care, while reducing processing time by 90%. We're developing a business vision and subsequent road map for achieving the future state digital environment, including data monetization for a clinical services company. And we are helping transform the small business loan processes for a multinational bank, reducing cycle time from 17 days to two days.

Returning to our buy strategy. In Q3, CGI successfully completed the integration of all prior year acquisitions according to plan. As Steve just mentioned, current M&A activity has slowed across the entire IT services industry. This however does not change the CGI strategy. Our appetite and capacity for M&A remains high and we continue to have a very active program in terms of sourcing, interactive dialogues and due diligence assessment. Closing accretive M&A transaction takes rigor and discipline and we remain committed to making sure that we acquire the right companies at the right price at the right time, all three without exception.

Looking ahead to the coming quarters, we believe the ongoing macro uncertainty in the political and economic environment will intensify client efforts to prioritize ROI-led digitization. This coupled with the demand for broader more holistic transformation programs will serve to put some pressure on client decision cycles, as some executives' trade-off speed of action for ROI-based business cases.

For CGI, these buying patterns continue to favor our managed services and IP offerings. We continue to be actively engaged in later stage opportunity pursuits with multiple prospective clients in every geography. In each case, we work collaboratively with client executives to build solutions that combine and tailor the right mix of CGI services to address the organization's business objectives.

The evolution of our business mix to include more managed services and IP will serve as an enabler to continue to drive CGI margin expansion and improve EPS. And even as sales cycles and bookings to revenue conversion will naturally expand. And as we incorporate higher proportions of global delivery into these services, our client value proposition increases as does CGI's profitability.

From an industry perspective, we see client demand in the near term as follows. In asset-intensive industries, such as manufacturing, retail and energy and utilities, client demand for efficiency and agility are paramount. We see organizations seeking to reduce the cost to operate in order to fund new investments. As such, our managed services pipeline for these industry sectors over the next year is up by more than 33%. The IP pipeline is up 30%.

In banking, many clients are reassessing their priorities and the supporting IT investments, given economic conditions and continuing Central Bank interest rate hikes. This is resulting in stable, but slower demand for SI&C and increasing demand for managed services. On a sequential quarter basis pipeline, in managed services is up nearly 20%.

And in government health care and insurance, clients are accelerating their digital transformation agendas. For these industries, CGI's pipeline remains well balanced across consulting system integration and managed services and is up 20% year-over-year.

Naturally across all industries, we are increasingly engaged in discussions about the future use of generative AI, how to prepare data strategies to be ready for AI implementation, and how it integrates into clients' digital transformation agendas. We have extensive experience in delivering intelligent automation and AI technologies as part of our services and solutions over the past several years notably in our IP and responsible use of AI is part of CGI's management foundation ensuring the ethical and disciplined use of AI by all CGI professionals and in line with evolving AI regulations.

This serves as our foundation to engage in broad-based AI discussions with our clients. In fact CGI teams are actively working with clients to use AI in a wide range of projects. A few of which include improving effectiveness and efficiency of city services detecting and preventing water pollution predicting cracks in steel manufacturing reviewing CT scans to detect brain hemorrhages and using earth observation data to locate quantify and track Seagrass beds.

As AI progresses in new ways including generative AI, we will innovate with our clients while balancing the responsible use of this evolving technology. Earlier this week, we announced our plan to allocate $1 billion of spend over the next three years to expand our AI services and solutions.

We work in partnership with clients who are seeking to responsibly move from experimentation to full-scale implementation and accelerate time to value of their investments by leveraging new AI technologies. CGI's AI investments through both Build and Buy will be prioritized across four dimensions: end-to-end offerings expansion including an AI business consulting methodology IT platforms and pre-built solutions, talent capacity and capability, which will include the training of our existing consultants hiring of new expertise and formation of communities of interest across all CGI to accelerate AI usage.

Go-to-market strategies to increase awareness of CGI's AI offerings through the publication of thought leadership and establishing new partnership channels through global alliances and operational and delivery excellence to drive efficiencies and benefits for clients and CGI through expanded AI use.

In closing, CGI's broad mix of end-to-end services, balanced geographic footprint and portfolio of clients across industries creates a resilient foundation for us to sustain our positioning as a partner of choice for our clients an employer of choice for our consultants and professionals and an investment of choice for our shareholders. Our investments in Build and Buy are made with this resilience in mind and to continuously strengthen our competitive differentiation.

Thank you for your interest and support. Let's go to the questions now Kevin?

Thanks George. Sylvie, please share with the participants how to queue for questions.

Thank you, sir. [Operator Instructions] And your first question will be from Richard Tse at National Bank Financial. Please go ahead.

Yes. Thank you. This -- so the AI team obviously is quite notable. Just in terms of the partnerships that you have with some of the leading players in the market today. Can you maybe expand in terms of the level of engagement you're having with them. So for example I guess one of our leaders is Microsoft and maybe give us a sense of like your level of engagement on sort of what their plans are going forward?

Yes. Yes. No, thanks for the question, Richard. Yes we are engaged with all of our global alliance partners actively looking to both leverage what they're doing with our intellectual property, which is a big element of our global alliance partnerships, but also then to further that together. And so I can't talk about anything specific yet, but we're actively engaged in forging some formal partnerships go-to-market with that. And that's part of what this investment announcement was about.

Okay. And then in terms of where you sit within that sort of ecosystem, what do you see in terms of the most common use cases that your clients are looking to address with AI here going forward in their enterprises?

Yeah. Well current point in time, the use cases are what you've heard about on some of the call center activities are very specific opportunities like some of the examples I gave as far as looking at the brain scans that we're doing with the hospital in the Nordics or looking at the environment like we're doing with the --partnering with some space-based agencies in governments and UK.

So they're very more point solutions. But I can tell you the conversations we're having are much broader. And it's really about what is the art of the possible. And part of that first step is getting the data in the shape that needs to be in order to train these models on trusted data that then can be leveraged.

So we're still I would say in the very early days. I mentioned we're still in the early innings of digitization at large or even earlier days of AI. But what I see is clients are really looking at the broadest applications of where AI could make a difference.

Okay. Great and one just last quick one here for me, like there's certainly a lot of puts and takes in terms of the outlook going forward here and then some of your competitors have talked about perhaps paring off sort of staffing given some price competition in the market.

But how do you sort of see the next few quarters playing out just from kind of like an operating cost perspective, are you kind of in a position you want to be? Is there a potential to sort of take out some costs? Just maybe give us a sense of how that should play out here over the remaining of the calendar year?

Yeah. We're pretty pleased with the position we're in those strong bookings driven by IP and larger managed services deals we anticipated and we've talked about even on this call last quarter that that takes a little bit longer. We anticipated some of the shift from SI&C to the IP and managed services.

We do along the way -- any time you're doing a shift in buying behaviors, we've been very active in training, re-training, rotating our people to the areas of strength and then of course taking actions where need be where those aren't completely aligned. But that's all in the numbers already. And so we don't see anything big having to be done.

Like I said we see the continued strength in margin driven by the profitable growth but also the global delivery the business mix towards IP and managed services which we talked about before that's a tailwind for us.

Our turnover is down as I mentioned and utilization is actually up. So we feel like we're in a pretty good position to move forward in the shift. And of course the planned investment in data and AI is just to drive that future way of growth further down the line.

Okay, great. Thank you.

Thank you. Next question will be from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.

Hi. Good morning. George, related to the AI investments would it be reasonable to expect that your investment in IP might take a step up as a percentage of revenue in the coming quarters and years, or is that going to be more a function of case-by-case basis evaluating projects and clients taking them to your IP investment committee?

Yeah. It's going to be more -- it's going to be more balanced. What we do with the IP as you're aware we don't build it and they will come. We always do that in concert with our clients. We've already been making some of the investments in our IP with AI and we have the PulseAI framework that I talked about last quarter. So that's been part of that.

It's going to be more measured. That's why I announced it over a three-year period. It will be lockstep with our clients. Overtime, it could -- the investment could go up if the demand curve follows that. And I will tell you that in general, as we continue to have stronger bookings and higher revenue growth in IP than the rest of our business we have been over the last several years ramping up the investment we made in IP.

But again, always focused on making sure we have that solid return on investment and doing that in concert with our clients. In many cases, when we make an investment in IP we already have letters of intent or in some cases signed contracts with clients to support that investment. Of course, we're making the investment but we already know the business is there and we're working in concert with the clients. We're going to do the same thing with AI.

Great. And then just rolling into the Canadian business there was some deceleration during the quarter organic slightly negative. I think partly linked to financial services. Can you speak to that? Do you see that as being transient to what you're hearing from customers. And I saw that the Canadian government recently awarded a very large contract to Skyline [ph] who I think is a client of yours. Is that something that's meaningful for the Canadian business, if you could provide some color? Thanks.

Yes. Yes. So well maybe I'll start with the Skyline. We did see that the big announcement it's really a down select to one. We are part of that consortium. In fact, we are the IT provider as part of that large 20-plus year deal. It is still even though it's down selected to one it is still an active solicitation. So that's all I can say there. It's not in the bookings. Of course, that's a tailwind for the future for the Canadian business and underscores again the strength of government spending around the world. As far as the quarter goes, we did have a bit of a tough comparable. We had a onetime last year and you can see the spike in growth last year at this time. And so it was a tougher comparable but in general yes, we think that it's pretty temporary as the financial services goes through some of this adjustment and shift in priorities. We had a strong 121% book-to-bill in the quarter. Look at the trailing 12 months is I think 108% on a trailing 12-month basis. The bookings in the quarter were underscored by large managed services deals including in financial services so kind of showing some of that shift. So we believe we're going to return to growth next quarter and it was really more of a blip there in Canada this quarter.

Great. Thanks, George.

Thank you. Next question will be from Stephanie Price at CIBC.

Good morning. Maybe sticking with the government sector the U.S. Federal bookings were quite strong in the quarter. Just curious if you could talk a little bit about what's driving that growth? And how do you think about demand in the vertical maybe more broadly for the remainder of the year?

Yeah. Well, I think government as we discussed for some time is strong around the world because it is more of a countercyclical avenue of growth for us. And of course, it's our largest single sector. And yes, very strong in the U.S. Federal, which we anticipated because a lot of the spend has been backloaded for the last couple of years. In Federal you might remember we had a very strong book-to-bill in the fourth quarter of last year. It's tended to be backloaded.

And just to remind you on the U.S. Federal government the fiscal year ends at the end of September same as the CGI fiscal year. And we see that same thing going that same phenomenon going on. The U.S. Federal government is kind of behind in their spending. And part of that has been because the procurement just can't keep up with the demand. Underscoring that is government needs to digitize, government needs to put new policies in place that have been very active in the environment. You heard the EPA win that we had this quarter. So I think it's a combination of those factors.

And then just the slowing economy government tends to get more active and we've seen that in Germany. We've seen that in the U.K. We saw the strong bookings and performance in the U.K. And you know that U.K. has even higher percentage of government work. We're a strategic partner to the U.K. government. So a lot of goodness there. We also see space becoming more of an area and I'm talking about outer space now becoming more of an area of opportunity to leverage really the space-based data and connect it with digitization and technologies like AI to really unlock some value and solve some real-world problems including in kind of government's form of ROI-led digitization, which is really furthering and bettering communities for citizens.

Great color. Thanks. And then just one more for me. Just on the M&A market. You mentioned a few times in your prepared remarks that there is a valuation gap that you're seeing. Can you elaborate a little bit more on that? And just on capital allocation, if M&A is lower should we expect more of a focus on share buybacks here?

Yeah. The M&A market has been a bit uncertain along with the economy itself. But the difference in the valuations is you get sellers that are hanging on to 2021 valuations and buyers are looking at 2023 and beyond valuations. And not unlike the housing market there's a dearth of opportunities out there. But we're going to be patient on that. We'll continue to -- we do have an active pipeline. There's no big late-stage opportunities, but I always say it's wait and hurry up, hurry up and wait in the M&A market. So we have a very active pipeline. I'm personally engaged in some of the discussions. So we're just going to keep at it and make sure that we do the right accretive acquisitions.

As far as capital allocation goes, yes. First is investing back in our business. And you heard the investments we're making in AI and IP and those types of activities that will be accretive because that's what we'll -- that's how we're going to measure them. But behind the -- if we don't have the accretive acquisitions to included in that, yes, it does provide us the opportunity to do stock buybacks and we see that as still a very accretive way to return cash to shareholders and so we'll be active on that.

Great. Thank you very much.

Thank you. Next question will be from Divya Goyal at Scotiabank. Please go ahead.

Good morning, everyone. George, I might have missed that, but I wanted to confirm this AI investment that you've announced, so is it fair to assume that some of the discussions and early-stage projects that you're seeing here, are they going to add to the consulting side of revenue before they get into the execution side of things. And would any of such revenue be currently factored into the book-to-bill that you've mentioned here?

Yeah. No, it's a very good insight that you derived there. Yes, the early days are a little bit more on the consulting helping clients think this through, put their own framework for responsible use into place, do some of the experimentation. So it will be not just the consulting but consulting and system integration as opposed to whole scale managed services type opportunities or broader engagements. And so yes, some of that's actually in the bookings. Some of it's actually in as I mentioned we're actively doing some of this now. So some of that's actually in the revenue.

And I'll remind you, even though I highlighted the managed services and the IP, we still did have solid bookings in SI&C decelerating but still strong. And as we shift to more of that managed services and those other opportunities. And the other is I mentioned this as well, some of the managed services we do when we're doing modernization there is a small consulting and systems integration component that could have AI that's buried in that managed service. So it's hard to kind of separate that out. And of course, as I mentioned as part of our IP as well. So it really spans all of those end-to-end services. But you're right back to your first question a little more on the front end than the back end for now.

That's helpful. And just going to the regular business here. Have you been seeing or noticing a lot of pricing pressure in the market? And is it more pronounced in certain geographies or certain sectors if at all?

Yeah. No, it's a good question. As clients look for cost savings, there's two ways for them to get that right? There's the ROI-led digitization opportunities where we're providing maybe some opportunities for them to grow their business and become more efficient with a point solution. There's another way to get that. It's through that longer engagement of managed services through scale and we can provide them some of those cost savings upfront, and then drive those efficiencies through a longer engagement and modernization.

And then there's pricing. And when it's just straight pricing, we tend not to engage as much. And yes, we are seeing some and you always see, it's on a slowdown like this. You see some what I would call bad behaviors by some competitors that might -- and these are usually more local providers that drive just rate decreases and these are some of the same players that actually maybe went overboard on the salary wage increases.

And so I think they're going to get caught and that's an opportunity for us to take market share. They stumble we've already seen some of that in some of our European clients where they stumble from delivery. And just because you have a lower rate doesn't mean you're going to get the value. And so we come in with our more mature way of providing the savings and I think that's an opportunity for us to take market share in the intermediate term. But in the short term yes you always see that during the slowdown.

Yeah. No, that's very helpful. Just one last question on the cash flow from operations. So, looking at how the CFO has historically trended, it looks like this quarter working capital was a use of cash and Steve mentioned, the DSO was in line with expectation but it looks like your payables were a little bit more tightened up. So was there a rationale for that?

Ultimately, we use less subcontractors in the quarter. So obviously it's a timing element that we have in the accrual and also the accrued for performance-based compensation had an impact on the cash flow from operations. But it's really -- it's really a timing. So when we look at it on let's say on a year-to-date basis you see the growth. We grew by more than CAD 100 million in the cash flow from operation. So -- and what we're really watching as you mentioned is DSO in this economic time. We want to make sure that, our clients are paying and they are. So we are really focused on the collection. In terms of the accrual it's really timing.

That's helpful. Thanks, Steve. Thanks, George.

Thank you. Next question will be from Paul Treiber at RBC. Please go ahead.

Thanks so much, and good morning. George, just regarding AI I mean you've been through a number of industry shifts in the past a big ones being like mobile and the cloud. How do you compare the enthusiasm from your customers and the interest from your customers regarding AI versus previous tech cycles? And then secondly, and just looking forward how do you think -- how quickly do you think that enthusiasm will convert to bookings compared to past investment cycles?

Yeah. No, thanks for the question. Yeah, here's how I see this wave in disruptive technology being a bit of an evolution of mobile and cloud both of which enabled us to well really drove a proliferation of data that's out there. And really, AI is the ability to unlock some of that -- the value attached to all of that data. So now having said that, so I think that's what's driving some of the enthusiasm and because it's really building on some of the earlier technologies and ways that we've gone through.

Having said that, I think it's the -- it's not so much the willingness to have the adoption but it's really having the data and the models ready to actually benefit from this is going to be really important. We kind of see the AI in our discussions with clients. It's really evolving around three key principles.

One is the trust having the closed data sets where ownership and the data provenance is really verifiable and that's going to be important for any of the regulation that goes out there. Transparency and for us part of that is having a human within the AI loop. So you actually can verify again the bias that's there or not there, and align the AI activities with the company's direction and values. And so, that's going to be an element of this.

And the reason I'm mentioning these Paul, is these take some time. And I don't think it's a dampening on the enthusiasm, just these things take some time. And then, last where you want to get to is, you're going to make the individuals and experts more productive. It's not going to work the other way. You're not going to make laypeople experts. And those that kind of skip the first two and try to go to that level, I think are going to run into some issues.

And that's why, we're doing some of the -- starting off with some of the consulting, because really at the end of the day, we think it's going to be the business value that you add to the AI, not the value that you extract from the AI and that isn't dissimilar to mobile and cloud, quite frankly.

And on your last point, about making experts more productive, one of the things that AI is being -- or generative AI has been counted as is streamlining programming. How do you see generative AI impacting, the IT services the core function of IT services, in terms of product development and maintenance. Do you see IT services ultimately benefiting from that efficiency, or potentially, is that a longer-term headwind that customers maybe can be more productive themselves?

No. I think, it's going to be a tailwind, but the reality is it's going to shift the way that developers work, which is why we're investing to make sure we equip our experts to leverage and work side-by-side, with the AI to be more productive. I think it's also probably going to shift the way pricing and buying occurs, shifted even more so towards output-driven activities, maybe even disassociate the pricing, which right now is still at least in SI&C tightly associated with labor. I think it's going to disassociate that to more output-based pricing, like you see with an intellectual property product.

So, I think there are going to be some shifts that we're going to go through. There's going to be some puts and takes. But at the end of the day, I think it's going to be a tailwind for the industry much like previous disruptive technologies have been.

That's an interesting -- glad you provided your perspective. The -- just one last question for me. Just you called out a number of metrics regarding the pipeline, can you -- I might have missed it but can you summarize that into the total pipeline? I think last quarter, you called out, I think your total pipeline up 15% quarter-over-quarter. Now, how does your total pipeline look here?

I don't have that in front of me, because I've been really focused on the shift to the managed services. Typically, that drives the overall pipeline even higher, because as I mentioned those are larger deals. But let me get that number to you, okay.

All right. Thank you. I’ll pass it on.

Thank you. Next question will be from Daniel Chan at TD Cowen. Please go ahead.

Hi, George. You guys continue to demonstrate some pretty resilient growth here, whereas some of your peers are exercising caution or even revising their guidance lower. What are you attributing your relative outperformance to? What are you guys doing, differently or better than your peers that's allowing you to win market share here?

Yes. Well, I think one is, really that shift to both managed services, which we know takes a little bit longer but also that IP. And I mentioned, that for example, in banking you see some of the slowing of the straight SI&C activities, but we have a lot of banking IP. And so that's enabling us to counteract that in a lot of ways.

The second is that, as I mentioned we've been doing this shift to managed services, anticipating this for a while getting a little bit ahead of it. And so, we have had some bookings from six, nine months ago that are now coming online. And that's the one caution right, is that you win an SI&C deal and it started on a Friday and it starts on Monday, and your billing. You win a large managed services deal on a Friday, and it can take three, six, nine months before you're seeing the revenue on that. But we did that early, and so we're weathering some of that with some of what we have done in prior quarters.

And the other is government. It's -- unlike some of our competitors, it's a large element. We always suggest that we like that base, because of the countercyclical nature and that allows us to work in different markets, and still be able to grow. And that's -- and you saw the 11% growth in government this quarter.

That's helpful. Thanks for that. And then you mentioned, the bookings conversion timeline taking three to nine months. The bookings or the book-to-bill for your last few quarters has been really strong. Should we extrapolate that to suggest that we could see some accelerating growth in the second half of the calendar year, especially as those bookings start converting to revenue?

Yes. I think what I would say is we definitely see that all the indicators of those bookings and even the pipeline and what we see in the near-term point to stronger growth in the intermediate term. Like I said, it does take a little longer and we're counteracting, and you saw that this quarter counteracting some of the shorter-term slowdown but I think in the intermediate term that's when all the indicators point to a good growth path there.

Great. Thanks, George.

Thank you. Next question will be from Suthan Sukumar at Stifel. Please go ahead.

Good morning. Just want to chime quickly on managed services. It's good to see you guys are well positioned to capture the strength that you're seeing in the demand backdrop. Can you talk a little bit about how your discussions with clients and – for how sales cycles have been trending here more recently? And are you seeing opportunity for pricing power given the strength in demand?

Yes. No it's a good question. When you – the discussions that we're having right now in many cases are one-on-one discussions. So they're more – we're more engaged with the client as a sole partner. It's really around getting the value proposition for them right. And you're right in one way, I wouldn't call it pricing power but what I'd say is, when you can get that value proposition right, they're less concerned about what your pricing is or isn't. And so really it's a matter of getting close to the client going through we have something we call proof-of-value process that really engages directly with the business and the IT individuals to kind of drive the right value proposition. And in many cases there's a big win-win in that situation. It does take longer. So it's pipeline, the booking and booking to revenue takes a little longer but the payoff is very, very good for both top and bottom line.

Got you. Thank you. The second question I had was more on just the context of your outlook for greater investments in AI, how are you thinking about headcount growth going forward, as you start to invest in these AI capabilities that certainly become more efficient internally?

Yes. Well I touched on this earlier. I think we will see some distance and disassociation of just in order to get $1 of revenue you need to add $1 of labor. And I think you're going to see some more disassociation just like we have with our IP, and you can see our labor grew this quarter less than our overall growth. And part of that is because IP is growing faster. And, of course, we have assets that are driving some of that revenue. In this case, it's going to be the higher productivity. Again if we can do that in a value-based pricing is going to change the play.

Okay. Thank you for taking the questions I’ve had. That’s it for me.

Thank you. Next question will be from Jerome Dubreuil at Desjardins.

Hi, good morning. Thanks for taking my question. So first question is on the headcount. We've seen it's up a bit. But I mean it's understandable given the bookings and the growth trends, but I want to dive in really what's the current mindset? Have you been more careful than usual given the comments that your clients have been telling you about the macro. Are you preparing for markets to turn around. Just wanted to know about the mindset regarding the headcount?

Yeah. Well, we've been very prudent as always in hiring more for the known projects and known demand with turnover again trending down both sequentially and year-over-year. It gives us more of that opportunity. Some of that hiring ahead had to be done because of the -- some of the turnover. So we're seeing a shift in that. We have a strong attraction and retention value proposition starts with our ownership, but then of course our training and support and our proximity model, which gives less wear and tear on our consultants having to travel all that plays in. And so we're able to be a little more prudent in the hiring and still be positioned for that intermediate growth, but also make sure that we're not in a place where we're underutilized at any point in time from a cost perspective. And I mentioned when you're doing that shift we've been taking any actions that need to be done in order to drive that. But we'll continue to hire and grow and AI will be part of that but it's not the only driver in that.

Okay, great. And then second question is on the AI too. What are the type of clients that are willing to pay first for AI? I mean, you're have a high exposure to government I guess we can imagine that the government might not be one of the first clients that are going to jump on that wagon, so what type of clients are you seeing or willing to think about?

Well, the top innovators tend to be banking and health care right now, and that's pretty consistent with other ways of technology. You also have a lot of data that you can unlock, the power of that with those two industries. But I'll tell you what's interesting is we see government as a potential early adopter. We're having very good discussions with government, lots of interest here because they kind of fell behind, right? And so they may need this more than other industries. And probably are more capable of managing the regulatory environment and the trusted environment just given their size and scale and scope. So I think they have some drivers that could make them an actual early adopter we'll see but that's what we see right now.

Yeah. And their own involvement in regulatory too. So, thanks for the color, yeah.

Yep, yep.

Hi, Sylvie. We've got time for one more question, please.

Certainly, sir. Last question will be from Rob Young at Canaccord Genuity. Please go ahead.

Well, thank you. The comments through the call that you've had some discussion around sales cycle lengthening longer conversion. It's a bit of a trend I think in enterprise just in general. And so I think you've been emphasizing that, it's driven in CGI's case around managed services and the longer sales cycle associated with that maybe some pivot towards ROI-based programs. But I was just curious, if you could give us maybe a summary why you think that this shouldn't be viewed as a demand-driven, if I'm correct that sales cycle is lengthening?

Yeah. I think, you're correct in the overall summary. But I think when I look at that demand is still strong. It's just the timing of that demand. And so as you make any kind of shift and we anticipated this we -- I talked about this the last few quarters as you have that shift there's just some disruption there. But the overall demand environment we see is very strong. And in fact, the overall demand we see maybe moving more in the favor of a global provider like CGI with the end-to-end services, with the intellectual property, with some of the investments that we continue to make to be on the front end of that to maybe be even a consolidator of some of that demand absorbing that maybe even faster than some of the others in the marketplace.

So, that's why you hear the optimism despite the fact that you've got some short-term bumps that are inevitable when you do a shift like this. So that's -- and you see it in the bookings, right? That's where the confidence comes from.

Okay. That's great. If I can squeeze one last one. I think one of the themes here that you're trying to get across is that you see a net positive impact or maybe net expansion of margins as you look forward you highlighted a whole lot of positive drivers like the mix of managed services IP, global delivery, and then utilization improving with maybe slightly slower hiring. But on the other side of it, like where do you see some of the negatives price pressure came up maybe longer sales cycle maybe the investment like despite you view it as a net positive like what might be some of the headwinds you have to deal with?

Yeah. Well, you mentioned some of them well. There's the short-term -- helping your clients through some of this short-term period is maybe a short-term headwind, but a long-term stronger partnership. And I've talked a lot about the importance of partnership particularly when clients are going through -- what they're going through right now. So that's why I'm net positive but I think you highlighted the right areas.

Okay. Thanks for taking the questions.

Thank you. Please proceed with your closing remarks.

Thank you, Sylvie, and thanks everyone for participating. As a reminder a replay of the call will be available either via our website or by dialing 1877-674-7070 and using the passcode 098618. As well, a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1905-973-8363. Thanks again everyone, and look forward to speaking soon.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again thank you for attending. And at this time, we do ask that you please disconnect your lines.