CGI Inc

TSX:GIB.A

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, welcome to the CGI First Quarter Fiscal 2019 Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Investor and Public Relations. Please go ahead, Mr. Gorber.

[Lorne Gorber, Executive Vice]

Thank you, Elaina, and good morning. With me to discuss CGI's first quarter of fiscal 2019 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 at 9:00 a.m. Eastern Time on Wednesday, January 30, 2019. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR and EDGAR, and are available for download on our website.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 statement whether as a result of new information, future events or otherwise, except as required by applicable laws. The complete safe harbor statement is available in both our MD&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 the call are in Canadian dollars, unless otherwise noted. We are hosting our AGM this morning, so we hope you'll join us live for that broadcast at 11:00 a.m. Eastern Time.I'll turn it over to François now to review our Q1 financials and then George will comment on operational and strategic highlights and outlook. François?

[François Boulanger, Executive VP & CFO]

Thank you, Lorne, and good morning, everyone. I'm pleased to share our results for Q1 fiscal 2019. Revenue was $2.96 billion, an increase of $147 million or 5.2% compared with last year. On a constant-currency basis, revenue grew 4.5%.Bookings were over $3 billion or 102% of revenue. 43% of the contract awards were related to new business, while 6 of our top 10 bookings in the quarter were new, multi-year recurring revenue streams. Over the last 12 months, total bookings were $13.5 billion or 116% of revenue.As of December 31, the backlog increased to $23.3 billion, up $2.2 billion compared with last year. Adjusted EBIT was $439 million, up 8.1% from last year. EBIT margin was 14.8%, an improvement of 40 basis points. Our effective tax rate for the quarter was 25.9%, stable with last year when excluding a onetime tax benefit in Q1 of 2018 related to U.S. tax reform. For the remainder of fiscal 2019, we expect a range of 24.5% to 26.5%.Net earnings improved to $311 million in Q1 and EPS grew 13.3% to $1.11 per diluted share. Net margin on the same basis was 10.5%, up 40 basis points. When excluding expenses related to the acquisition and integration of ckc in Germany, net earnings improved to $315 million or 10.6% of revenue, also up 40 basis points.Earnings per share were $1.12, an improvement of 13.1% compared with $0.90 -- $0.99 in Q1 last year. In the quarter, our operations generated $392 million in cash or 13.2% of revenue. Over the last 12 months, we have generated $1.5 billion or $5.15 in cash per share compared to $4.76 for the same period last year.We ended the quarter with a DSO of 54 days, up from 52 days last quarter and 47 days last year. This increase of DSO may be due to fluctuations in currency at the end of the quarter that had a 3-day impact.During the quarter, we disbursed $17 million against last year's restructuring program. As previously communicated, we expect the majority of the remaining payment to be made in Q2.In the first quarter, we allocated cash across several strategic priorities, invested $80 million back into our business, including in the development of our IP and the ramping up of new outsourcing contracts.We acquired ckc for $23 million. We repurchased 4.2 million shares for $348 million, and we repaid $383 million of long-term debt. Combined with improved profitability, these accretive investments drove our return on invested capital to 14.5% or 80 basis points higher than last year. Buying back CGI stock remains an accretive and flexible way to return value to shareholders. As such, this morning our Board of Directors approved the extension of our share buyback program until February 2020. This will give us the flexibility to purchase 20.1 million shares over the next 12 months.Under the current program, we have invested $1.2 billion repurchasing 15.9 million shares or 77% of the program's limit, at a weighted average price of $78.77. This represents a return of 10%. We also took the opportunity during the quarter to negotiate a new 5-year $500 million U.S. term loan. The fixed interest rate of this debt is less than 1.2% following the completion of a cross-currency swap into euro. At the end of December, net debt stood at $1.7 billion, representing a net debt-to-capitalization ratio of 19%, stable compared to last year.With our revolving credit facility and over $400 million in cash, we have $1.9 billion in readily available liquidity and access to more as needed in order to pursue our Build and Buy strategy.Before turning the call to -- over to George, I would like to highlight a few adjustments we made to strengthen our operations, and as a result, changed our reporting segments.The former France segment has been renamed Western and Southern Europe, as it now includes Belgium, Spain, Portugal and the Brazil global delivery center. As a result of this realignment, the former Eastern, Central and Southern Europe segment has been renamed Central and Eastern Europe and comprises Germany, Netherlands, Czech Republic and Slovakia.Finally, we transferred ownership of some IP solutions and client relationships between segments. Results and the year-over-year comparables have been updated in the MD&A to reflect these adjustments. Historical results for the last 4 quarters are also available on cgi.com.Now I'll turn the call over to George.

[George D. Schindler, President, CEO & Director]

Thank you, François, and good morning, everyone. Throughout the first quarter, clients remain focused on enterprise-wide digital aspirations. What were generally less defined enterprise strategies a year ago continue to become more actionable as organizations focus on practical implementation of digital, including analytics, cyber and systems modernization.Looking forward, some clients, particularly in manufacturing and retail sectors, have started to adjust their priorities given the anticipation of a potentially slower growth environment. These clients are focusing their IT initiatives to accelerate efficiencies and gain cost savings. These savings will allow them to fund future IT investments. We continue to hear from business and IT executives that investing in technology is a top priority, as IT has now become core to their value propositions.CGI's strong results continue to demonstrate our position as one of the few firms with the global scale end-to-end services and proven ability to deliver on client demand for operating efficiencies and new technology investments.In the quarter, constant currency revenue growth was 4.5% with continued organic growth acceleration of over 3%, up from 2% last quarter. In fact, 6 of our 7 client-facing operating segments grew in local currency. The only exception was in Northern Europe, where the comparables from a year ago included low-margin revenue from Affecto that was subsequently exited as planned throughout the year. EBIT margins were up 40 basis points as 7 of 8 segments reported double-digit margins, with the only exception in Central and Eastern Europe, where margins are on an upward trend, improving 120 basis points year-over-year. And net earnings margin increased 40 basis points to 10.6%, while EPS expanded by 13% to $1.12.Turning to the year-over-year regional highlights of our first quarter, I'll start in North America. In the U.S. Commercial and State Government segment, revenue growth was 3.4% in constant currency, led by broad-based commercial growth particularly in financial services and health and life sciences. EBIT margin was 15.6%, up 60 basis points and bookings were 111% of revenue, led by the strength in digital demand.During Q1, we built on client relationships from recent mergers through our end-to-end value proposition. For example, our team in Nashville built on a strong SI&C relationship to secure a long-term managed services agreement valued at over $60 million. And following the expansion of our footprint in Pittsburgh, we opened a new innovation center to further support this metro market, which has grown organically more than 15% from a year ago.In our U.S. Federal Operations revenue grew 3%; EBIT margin was 13.7%, up 20 basis points; and bookings were 53% of revenue, impacted toward the end of the quarter by the U.S. Government shutdown. We remain confident in the strength of our federal business, with bookings of 157% of revenue over the last 12 months. Despite the initial 8 days of the 35-day U.S. Government shutdown being in Q1, there was no impact on our results beyond bookings, as it fell at the end of December during the traditional holiday period. The impact of the remaining 27 days in our Q2 was largely mitigated due to the sizable volume of work we do that is either fee-based or considered essential, and therefore unaffected even in the closed agencies. We proactively reduced the impact to margin and revenue by restaffing some employees on work in other sectors across our broader U.S.-based business, a strategy we would implement again should we face with a similar situation later in the quarter. Now that the government has reopened, we are focusing on accelerating any affected projects to further minimize impact in Q2.In Canada, our team delivered revenue growth of over 6%, driven by demand in financial services across the country and oil and gas in Western Canada. EBIT margin was again over 20% and book-to-bill was 87%. With a backlog equal to 4 years of revenue and Canada's Q1 bookings consisting of over 50% new business, we are well positioned for continued organic growth. For example, we are seeing new business activity in the transportation sector to optimize the digital customer experience. As such, new Q1 bookings in this industry totaled $75 million.Turning to our European operations. In Northern Europe, revenue was stable even as we executed our plan to run-off non-core low-margin work coming from the effect of the merger. Without this impact, Northern Europe would have shown positive growth. Demand in this segment remains healthy and broad-based across several industries, with particular strength in financial services modernization as well as in the transportation industry. EBIT margin expanded 130 basis points to 10.7% as a result of the planned runoffs and the realization of benefits associated with last year's restructuring program. Bookings were strong at 138% of revenue, providing a positive growth outlook for the remainder of fiscal 2019. Our optimism for future growth in this region was further solidified last week as I met with top executives across the Nordics and addressed some 1,200 clients at our annual solutions seminar in Helsinki.In Western and Southern Europe, revenue grew 5%, driven primarily by the strength in our French operations, particularly in the manufacturing, transportation and government sectors. EBIT margin was stable at 14% despite the timing of R&D tax credits in France when compared with last year, and bookings came in just under 100%. Going forward, we expect to reinvigorate the growth prospects of our operations in Spain and Portugal as they benefit from the commonality of clients and industry expertise with our French operations. We see this opportunity particularly in the utilities, transportation and defense industries.In the U.K., revenue grew 6%, fueled by the growth in local government engagements, such as with the City of Glasgow and newer outsourcing engagements with commercial clients, including with TalkTalk Telecom Group. EBIT margin was 15.8% and book-to-bill came in at 85% of revenue, impacted by a slowdown in government procurement decisions due to the ongoing uncertainty related to Brexit. Given the strength of our local relationships and positioning on 17 government frameworks for contract vehicles, we remain confident in our ability to continue supporting our U.K. Government and commercial clients irrespective of the Brexit outcome.In Central and Eastern Europe, revenue growth was 14.5%, the majority of which was organic as both Germany and the Netherlands posted significant year-over-year improvement. EBIT margin continue to accelerate with a 120 basis point expansion to 8.8%, and bookings came in at 153% of revenue on the strength of CGI being selected as a preferred global partner by clients who were consolidating their IT services providers. We expect profitability to increase in this segment, given the improved workforce positioning following last year's restructuring. In addition, demand continues to be strong, and we expect this new higher-end business mix to further improve future performance.And in Asia-Pacific, when excluding a onetime favorable impact in Australia last year, our teams posted revenue growth. EBIT margin was strong at 25%, driven in part by increased utilization and growing use of automation.In summary, we're off to a great start for the year. Looking ahead, we are optimistic for the remainder of 2019 with a strong balance sheet and several other tailwinds in our favor. The fragmentation of the IT market remains high, and we expect merger opportunities will increase in an environment of macro-economic pressures. For proven consolidators like CGI, this provides both niche and transformational buy opportunities at potentially more reasonable valuations. The benefits of last year's restructuring program are being realized as planned, delivering margin improvement as a result of investments we made in adding high demand expertise and in executing an asset-light infrastructure strategy. And client demand for end-to-end innovative solutions in our proximity-based metro markets is accelerating as we continue to drive both growth and cost savings for our clients. We remain focused on executing our strategic aspiration of doubling over the next 5 to 7 years through continued Build and Buy. Thank you for your interest and support. Let's go to the questions now, Lorne.

[Lorne Gorber, Executive Vice]

Just a reminder that a replay of the call will be available either via our website or by dialing 1 [phone] and using the passcode 6149639 and it will be available until March 2. As well, a podcast of this call will be available for download within a few hours. And as usual, follow-up questions can be directed to me at [phone]. And a last reminder, our AGM today at 11, hopefully, you can join us on cgi.com if not in person.Elaina, we'll now poll for questions.

[Operator]

[Operator Instructions] The first question is from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

George, can you expand on your commentary regarding the broader spending climate? You mentioned that clients are looking to accelerate efficiencies in response to some incremental macro uncertainty. How's that manifesting itself in terms of spending priorities and sales cycles? Does that mean more digital? Does that mean more outsourcing? What are you seeing?

[George D. Schindler, President, CEO & Director]

Yes. So thanks for the question, Thanos. The spending environment on the digital, we don't really see slowing down at all. In fact, the demand from customers and citizens alike is relentless on the desire to interact with businesses from a digital platform. What we see is the added view from our clients saying, if we're going to prepare for maybe a slower-growth environment, let's make sure that we're running our own businesses as efficiency -- operationally efficient as possible, and we're seeing a shift to some thinking about that type of spending pattern. That should over time result in higher outsourcing opportunities. Now to look ahead, we don't see that yet. In fact, our SI&C business was stable in the quarter, but if you look at our bookings, actually higher bookings in systems integration and consulting. That's good news for us in the future.

[Thanos Moschopoulos, VP & Analyst]

Okay. And so sales cycles aren't being impacted at this point?

[George D. Schindler, President, CEO & Director]

Not right now. No.

[Thanos Moschopoulos, VP & Analyst]

Okay. And in terms of the margins, obviously some good margin expansion, 40 basis points year-over-year. As we look at that year-over-year improvement, what would you say was the single biggest driver? Was it mix, was it utilization or was it the restructuring efforts you took last year?

[George D. Schindler, President, CEO & Director]

It was really the combination of the restructuring and higher utilization, which has climbed quarter-over-quarter really since we initiated the restructuring program. So that's really the majority of it. Remember that restructuring also was to cull down some of our infrastructure work, which was lower margin. So that's having a tailwind on the margins as well. Looking forward though, there is still an opportunity for us to get closer to the ideal business mix that we have. Both the SI&C outsourcing and IP was stable this quarter in revenue, but has been increasing SI&C and reduced in outsourcing. So as we go into more of that operational efficiency spending pattern, we should see more of those higher-end SI&C relationships converting into outsourcing, which will help be also a tailwind to our margins looking forward.

[Operator]

The next question is from Steven Li with Raymond James.

[Steven Li, Senior Vice President]

Couple of questions for me. George, when the group was planning for 2019 on Brexit, what was considered the worst-case scenario? And how could it impact U.K.?

[George D. Schindler, President, CEO & Director]

Yes, it's a good question. We have 3 different scenarios as you might imagine on Brexit, and we plan for all of them, both the -- or the hard exit, whether it's actually an opportunity for us to deploy more resources to assist the government if that were to occur; the negotiated softer exit in which case we could use our framework agreements to increase work with the government; and then the delay, which is really the outcome that could occur here as we get closer to the March 29 date. And that's the environment that we're in now. And again, where we see that is getting closer to our customers on the government side, on the -- on incumbency, and so things are going well there. Commercial right now is a little less impacted, certainly some things have moved to other parts of Europe. We have a proximity model, and so we can catch that in proximity and then stay focused on helping our clients in the U.K. So I think they all have their different opportunities and challenges, but we're planning for all of the above.

[Steven Li, Senior Vice President]

Okay, that's helpful. And George, for Northern Europe, you talk about runoffs, are there more coming? Or should we expect the revenue growth to start improving for the rest of the year?

[George D. Schindler, President, CEO & Director]

Yes, runoffs are past us. So it was really just that -- and that was really a comparable, that was done in the first quarter. It was just that it hit us on a comparable for Affecto. So that's past us.

[Steven Li, Senior Vice President]

Okay, great. And quick one for François. Your cash from operation, did it include any restructuring disbursements?

[François Boulanger, Executive VP & CFO]

Yes. We had for a $17 million of disbursement. And again, mostly will be finished -- payments will be finished in the next quarter or this quarter at the end of March.

[Operator]

The next question is from Richard Tse with National Bank Financial.

[Richard Tse, Managing Director and Technology Analyst]

George, wonder if you can provide some color on the source of the organic growth, is it coming from the existing base or through the niche acquisitions that you guys have done over the past few years that are consuming more of CGI's broader portfolio?

[George D. Schindler, President, CEO & Director]

Yes, that's a great question, Richard. It's actually coming from both. So the demand in digital and our focus on -- refocus on metro markets, which we've done in conjunction with the buy. What we've done this everywhere is generating some increases in our SI&C work with new clients within proximities that we haven't done or metro markets where we haven't done acquisitions. But where we have done metro market mergers, it's actually accelerated. And I highlighted what's going on in Pittsburgh and in the Southeast of the U.S., but we also see it going on in Denver, we're seeing it going on in Northeast U.S., we see it going on in the Northern Germany, we see it going on in Finland. So we see it everywhere we've done, a metro market merger is actually accelerating. So it's little of both.

[Richard Tse, Managing Director and Technology Analyst]

Okay, that's helpful. So does that mean that you might sort of spend a bit more time focusing on some of these niche acquisitions where it seems like you're getting kind of returns from the more revenue synergies?

[George D. Schindler, President, CEO & Director]

Yes, we would like to accelerate that. Having said that, we will continue to be disciplined, and because culturally when it fits, you get the acceleration. If it doesn't, it looks nice on paper, but it's not going to drive the synergies that everybody is looking for. So we're still going to be disciplined about that, but we would like to see that accelerate. And that's why I mentioned, we think we're moving into a climate where that will be driven to accelerate more in the future.

[Richard Tse, Managing Director and Technology Analyst]

Okay. And I heard your comments on SI&C being a strong part of the business. I've noticed that over the past year. Have there been any situations yet where you've seen some of these SI&C engagements sort of move over to long -- longer term a propos scene engagements?

[George D. Schindler, President, CEO & Director]

Yes, I highlighted the one that we did there in Nashville this quarter, but we are seeing some of those happen over time. It takes some time, but we do see and we're having those types of conversations right now.

[Richard Tse, Managing Director and Technology Analyst]

Okay. And just one last one for me. The headcount at the end of the last fiscal year, what was it and what are your, see your targets here going into 2019?

[George D. Schindler, President, CEO & Director]

Yes, good question. We don't look at specifically headcount because we're continuously introducing agile methodologies, we're introducing advanced automation, particularly in our delivery centers. So some of our delivery centers actually -- and you see this, this quarter in our operations in Asia-Pacific, which is dominated by our India operations. You see that uptick on margin. That's occurring through addition -- additional efficiencies driven by automation that we're using to deliver for our clients. Less people, but higher margins. And the infrastructure, same thing going on, automation. So it's tough just to look at the headcount. Yes, for SI&C, that's driven by headcount, but other parts of the business actually we don't have as much. We have a pretty aggressive hiring target for the year, and we're on track for that through the first quarter.

[Operator]

The next question is from Paul Treiber with RBC Capital Markets.

[Paul Treiber, Associate]

Just following up on Richard's question around headcount and you mentioned your hiring targets. Just in regards to the Washington, D.C. area, just specifically in light of the shutdown and then also with Amazon announcing plans to come there. How you're seeing the labor market there, in particular, your retention and churn?

[George D. Schindler, President, CEO & Director]

Yes. Well, that's an interesting question. I was just talking to our federal team, and they did a really nice job in managing the shutdown, unfortunately they're practiced at it. But they did a very good job of working on that. We didn't lose any of the -- any of our members that were in the closed agency over this time period, or very little did we lose. That's a good sign. But there's definitely some pressures just in general of given the shutdown, given kind of that landscape with still a temporary deal that we're prepared that maybe some individuals would exit this type of work for other works because the demand is high as you mentioned in the Washington, D.C. area. Having said that, we have an advantage in our CGI federal operations in that we have the rest of the U.S. to deal with, including intellectual property, and we actually did move some people that would have been in a more tenuous situation without an agency to -- or a project to work on. We actually moved some of those people to our broader U.S. business. I think that's a differentiator for us in that marketplace where we're competing in the federal space where our pure-play federal that are far more exposed when events like the shutdown happens. So we're planning for it, but we're in a good position.

[Paul Treiber, Associate]

And in terms of the U.S. federal business going forward, you mentioned that the shutdown is -- or the completion of shutdown is temporary. The -- could you just elaborate on the strategy, and I guess, the nimbleness to move and to mitigate that impact if there is another shutdown in the remainder of the quarter?

[George D. Schindler, President, CEO & Director]

Yes, I think, as I mentioned, we'd do the exact same thing that we did here. A lot of our work, so 90% to 95% of our business right from the start is unaffected, both because I'll remind you 2/3 of the government is fully funded not all the -- not 2/3 of the agencies, but 2/3 of the government is -- of the dollars are fully funded. And then we do a lot of work -- for example, our work in the passport area and our visa area, that's funded through the fees that applicants pay in that space. So that's fully funded. So that's what I mean by fee-based work, and there's other work we have like that. And then we have mission- essential work, like a lot of our financial processing. An agency that's is partially opened or even it's closed and needs to reopen, still needs to have a financial system operating to close their books for a month or were to open them for the following month. So a lot of our work is deemed essential. So it's already minimized by that. We did, as I mentioned, move people very rapidly across -- both within our federal government business because it's partially opened and then outside of the federal business. So we're pretty nimble. And the impact, for example, of these 28 days, is very, very minimal at the even -- at the federal level, and of course, really not material at the company level.

[Paul Treiber, Associate]

And just one last one for me. Just shifting gears to the U.S. Commercial side, just looking at the profitability there is down from Q4. Was there anything in terms of like IP or unusual that drove the quarterly change in profitability?

[George D. Schindler, President, CEO & Director]

It's really a lot of smaller things on the U.S. Commercial side, the IP is lumpy as we know, and also, we're seeing a shift more pronounced this quarter than I've even reported on previous quarters as we move from a licensed basis to a software-as-a-service. It's up 6% this quarter. I think in the long term, that's good news, because higher profitability in the longer term, but it causes a bit of lumpiness there. So I think that's all you're seeing.

[Operator]

The next question is from Maher Yaghi with Desjardins.

[Maher Yaghi]

I wanted to just go back maybe on your expectations for organic revenue growth. We've seen a nice increase over the last quarters. Recent quarters, we went from 2% to 3%, 3.5% in the quarter. Here, what's your expectations going forward? Because I compare your improvement in organic growth with some of your peers, which are seeing some decline in organic growth. So I'm trying to see how much visibility you have going forward on organic growth? And my second question would be, when I look at your exposure or your revenue distribution, bookings revenues in Europe, it's running at 55%. So what's your propensity to look for acquisitions in Europe even if that's where probably you're seeing the more decline in valuations recently? Are you willing to increase your exposure to Europe? And to what extent are you willing to do that through acquisitions?

[George D. Schindler, President, CEO & Director]

Definitely, for sure. Thanks, Maher, for the questions. On the outlook for revenue growth, I'll give you the metrics we use to see whether that's going to continue. We're looking at our pipeline, we're looking at our trailing 12-month book-to-bill, and you see the backlog had a nice increase on the strength of that book-to-bill. So we see opportunities to continue accelerating our growth and really -- and it's broad-based growth in every metro market around the globe. And that's underlying demand is really for our customers to go digital and have a digital customer experience for their customers, and then also the cost savings as I mentioned. So we believe by playing on both sides of that equation, we should see revenue continuing to accelerate throughout the year as we've planned. On the revenue distribution, yes, you're right, we're a little over half now in Europe, but it's, obviously, a big market. We think of this as every one of our strategic business units has an opportunity to continue to buy and merge with like-minded companies and including on the transformational side, we'll look at both sides of the ocean to do that for sure.

[Maher Yaghi]

Where have you seen valuations getting more interesting lately? Because you mentioned that on your opening remarks.

[George D. Schindler, President, CEO & Director]

Yes, I said, I believe the climate will be a situation where we should see that potentially in the future. Right now, I don't see it yet. But -- so we'll continue to be disciplined. But over time, that's where we would see it heading. On the larger -- some of the larger commercial players, you do see that particularly in Europe, those that are publicly traded, but we haven't seen it yet on some of the private valuations.

[Operator]

The next question is from Edward Caso with Wells Fargo.

[Edward Stephen Caso, Managing Director and Senior Analyst]

I was curious you talked about, I guess, I was little unclear whether you said the legacy support business was improving or you were expecting it to improve? And then maybe you can talk a bit about price pressure in the sort of non-digital part -- non-digital non-IP part of your business?

[George D. Schindler, President, CEO & Director]

Yes. Ed, on the -- what I did mention is that on the operational side, which you could mention is the traditional legacy side of keeping operations running for an organization, that we do see a better climate for that because through introduction of increased automation and just general management efficiencies, we can still drive some cost savings out of that. And one of the reasons for that is, it's hard to separate new from legacy because as you introduce your new digital operations, yes, some of that's discrete from the front end perspective, but it's got to connect in with that legacy. And this is why I mentioned on the practical applications of digital, we see more clients going in that direction holistically changing their entire enterprise, which changes then the dynamics of the legacy. In doing that, we don't necessarily see price pressure, we see opportunities to actually give cost savings to our client and drop higher margins to CGI. That's what we see right now. It's not there yet, but I'm just predicting that's where we see it heading in the longer haul. Also, on the traditional-traditional infrastructure side, this is why it went to asset-light, we do see price pressures in that piece of the landscape.

[Edward Stephen Caso, Managing Director and Senior Analyst]

My other question and maybe you said it and I missed it. But your IP, what was it as a percent of the revenue in the quarter? What is it as a percent of the backlog and your pipeline, please?

[George D. Schindler, President, CEO & Director]

Yes. It's stable as far as the business mix. So it's still 21%. We reset that from 23% to 21% given the -- a lot of the mergers that we did that were pure SI&C. So it's just numerator and denominator. But it's been -- continues to be stable. The dollars continue to grow, but they grow in line with the growth of our overall business. I don't have a pipeline number for you right now, but we could probably get that for you. Okay?

[Operator]

The next question is from Robert Young with Canaccord Genuity.

[Robert Young, Director]

Just to maybe summarize some of the comments you've made around the environment for acquisitions, the valuation environment. Maybe if you can just talk about what are the drivers that you see that you're -- supporting the expectation or the potential that valuations could improve for you? And like, is that more of an impact on the metro market targets? Or is it something more relevant to larger consolidation targets?

[George D. Schindler, President, CEO & Director]

Yes. No, it's a good question. I see 2 things. What we see in the overall marketplace is 2 -- maybe 2 areas of the valuations. I think as our clients look more to go enterprise digital and IT becomes more and more core to their operation, they're looking for fewer partners. When they look at fewer partners, there's a consolidation in the marketplace. When there's a consolidation in the marketplace that goes broad-based and we maybe see a slower-growth environment so some of their spending becomes more focused, some of the smaller players get a little more exposed and little more motivated to move. We've already seen the first part, but the second part we see happening maybe a little bit faster. That's on the metro market niche opportunities. On the larger opportunities, there the market is changing quickly. And I think as various competitors make different choices in where they do or don't want to play, I think that could change some valuations as well for their businesses, which then gives us an opportunity on the consolidation side.

[Robert Young, Director]

Okay, great. That's great color. And then something else that you said earlier in the call about longer-term outsourcing opportunities potentially being connected to spending patterns moving more towards IT efficiency. Am I making that link correctly? Is that the same -- do you see that? Or do you see larger longer-term digital-related outsourcing or longer-term contracts as well?

[George D. Schindler, President, CEO & Director]

It's a good question. The 2 are a bit related. So we do see the longer-term digital-type opportunities that are also going to drive some of the efficiencies, which allows increased investment to keep those digital opportunities or digital systems fresh. And so kind of, we're seeing a bit of a convergence in the discussions there, just like we see a convergence between IT and business organizations. So we see that coming together.

[Robert Young, Director]

But the opportunity for longer-term outsourcing opportunities around IT efficiency, I mean, that's still a strong business for you, I assume? But it could potentially get stronger if the macro conditions get worse? Or is it something you generally see?

[George D. Schindler, President, CEO & Director]

I completely believe that the way you characterized it is correct. But we don't see that in our bookings just now. We do see it in the conversations that we're having with clients as they think about their next year or year's budgets.

[Robert Young, Director]

And just -- like just to dig in that a little, I guess, investors could assume that large enterprise is taking IT and technology as more of a driver of their strategy, and so may want to have more control of that, which may suggest less focus on outsourcing those components to companies like CGI. And so how would you respond to that?

[George D. Schindler, President, CEO & Director]

Yes, I don't necessarily see it. I wouldn't characterize it that way. I think the 2 -- that the 3 things really come together, I think, clients are very interested in engaging with fewer partners that can be a true extension. We see that through digital extending your ecosystem. We're part of that ecosystem now. But also connecting the digital with the legacy, driving both operational efficiencies and an opportunity to retain and capture new customers. So it's really all of the above and we see that coming together, which is why there's fewer players that can play in all aspects of that.

[Robert Young, Director]

Okay, that's great. Just 2 little ones for me. The very high SI&C bookings, is there a seasonality factor? I looked Q1 last year, there was a bit of a bump there as well. Is there something to understand seasonality wise?

[George D. Schindler, President, CEO & Director]

No, I don't think it's really seasonality. It's really probably us just having the opportunity to meet some of the demand so, but I don't think that's seasonal.

[Robert Young, Director]

Great. And I don't know if you've mentioned it and I missed it, but did you call out potential for double-digit EPS growth looking forward through this year? Is that still your expectation?

[George D. Schindler, President, CEO & Director]

We are absolutely focused on continuing to have EPS growth moving forward.

[Operator]

The next question is from James Schneider with Goldman Sachs.

[James Edward Schneider, Analyst]

Maybe just wanted to follow up on some of the earlier questions around outsourcing. Clearly, it seems like, as you mentioned, there's many companies focused on fewer partners, especially on the outsourcing; at the same time some of the larger IT services firms seem to be de-emphasizing their outsourcing operations. Is that something you're seeing in terms of competitive bids for large-scale outsourcing? And would you expect you to benefit from that in the overall market? And maybe just talk about overall pricing dynamics in large outsourcing deals, please?

[George D. Schindler, President, CEO & Director]

Yes. James, yes, we do see the outsourcing -- well, some of our competitors changing their focus on where they want to play just like we changed our focus on the asset-light and not going to big infrastructure. We're leveraging the cloud in our opportunities there as opposed to creating necessarily our own. But the dynamic of those outsourcing deals have changed. Because as I mentioned, you still have to run your legacy operations, and as you introduce your new digital, there's a different way of introducing digital, but you still have to run your operation from an enterprise perspective. And so we believe there's still an opportunity. We're just in the next wave of evolution in IT and there will be another wave behind this. And so that's why we want to play in that end-to-end spectrum. And I do think that perhaps helps us. And we do see fewer competitors in some of those deals, although a lot of the same competitors over the last few -- several quarters.

[James Edward Schneider, Analyst]

And then maybe as a follow-up, with respect to margins for the year, you put up a solid 40-basis point expansion this quarter. A lot of those you mentioned as due to restructuring and utilization. Do those restructuring benefits fade over the course of the year? And maybe can you talk about what level of upside there is potentially on the utilization front? I'm just trying to understand whether we should kind of be modeling the same kind of margin expansion throughout the year as we saw this quarter?

[George D. Schindler, President, CEO & Director]

Yes, so it's the right question asked. There is a tailwind a bit as we run through the year because of the comparisons. So you will get some of that tailwind on a year-over-year comparison. We do see continued sequential opportunities, both in higher utilization and higher gross margins as we implement our metro market strategy. So we see that. And then the bigger opportunity over time is through improved business mix within our outsourcing systems integration and consulting and intellectual property. I mentioned outsourcing and intellectual property were stable, but they have ticked up over the last several quarters. And so as we bring that back in line in capturing some of the opportunities that I discussed in outsourcing that is a higher-margin business for us because it drives higher utilization and lower cost of sales. So that's a tailwind in the future. So some from a comparison year-over-year, some from just small incremental increases in our utilization and gross margin on a sequential basis, longer-term growth on the business mix.

[James Edward Schneider, Analyst]

And maybe if I could just sneak in one last one from an accounting perspective. I think the DSOs this quarter kind of extended to 54 days, and I think that's quite a bit well beyond your -- the mid-40s where you were running most of last year. Could you maybe talk about what's driving that and whether you expect that to normalize?

[François Boulanger, Executive VP & CFO]

Yes, as I indicated in the script, 3 days only is explained by FX. And again, if I would have -- meaning that if I would have calculated in local currency, we would have been actually at 51 days instead of 54. So it's really because of the swing of the FX at the end of the quarter. Still at 51, an increase versus last year. And again, it's to reflect the fact that for more than a year now, the SI&C percentage is higher than the outsourcing. And again, coming from the acquisition that we did in the last 1.5 years that bumped the out -- the SI&C revenue higher than the outsourcing. And as you know, with SI&C, with the work, the milestone and paying after the work is done, naturally is putting pressure on the DSO. But what George was saying was the outsourcing that we're seeing coming back, that will have a positive impact also on the DSO.

[George D. Schindler, President, CEO & Director]

Elaina, I think we'll take one last question.

[Operator]

The last question will be from Howard Leung with Veritas.

[Howard Leung, Investment Analyst]

I want to ask a question about the cash levels. They've gone back up almost to kind of 2016 levels thanks to the low rate of -- the low-rate debt that you took out. And after 2016, you made a number of acquisitions and were investing in IP. Where do you see deploying cash, focusing your deployment in cash this time, is it more in acquisitions, the buybacks or maybe reducing the high rate of debt?

[François Boulanger, Executive VP & CFO]

For sure, after investing back in the business that is always our first priority. For sure, we still want to be very active on the acquisition. And we still think, like George was indicating, that the market is where we have good opportunity on it. But we will be disciplined for sure. And we'll take the ones that are making sense. And depending of the timing of it, we'll go back in the market and seeing -- and doing some share buyback. As you saw this morning, also we had a second press release to state that the Board of Director did renew the NCIB for next year. And so we will be opportunistic if -- on the market on that side also. And as for the debt, the market was pretty good. We had some payment done this year, close to USD 200 million. We have some another USD 100 million and more to pay next year on the long-term debt. And we saw that the market was very good as you saw, 1.2% of interest rate was very good, and so we decided to renew our USD 500 million on this.

[Howard Leung, Investment Analyst]

Great, that makes sense. And then talking about the buybacks. The valuation for the CGI shares has run up a bit. At what point does it make sense for you to look and see that maybe it's more attractive to deploy capital internally or in acquisitions versus buybacks, especially since, I guess, maybe some of your peers are trading at lower levels?

[François Boulanger, Executive VP & CFO]

Well again, you're totally right. The first 2 priority is again to go on share buyback and acquisition. And for sure, we are looking at the evaluation (sic) [ valuation ] and you're right. Some evaluation (sic) [ valuation ] went down a little bit, but we're still very close to it and looking at the --

[George D. Schindler, President, CEO & Director]

And that's why we like the buybacks. It's a flexible way to return cash to the shareholders, but we can redeploy to the larger acquisition when we need to, and so we balance those 2, as François said, in priority order.

[François Boulanger, Executive VP & CFO]

Yes.

[Howard Leung, Investment Analyst]

Right. And just one last one for me. Some of the other callers alluded to this, that some of your larger peers have been struggling. They got negative sales growth and they've been beat up a bit. How do you think CGI is differentiated from them? And are you actually finding you're taking market share from them given your healthy bookings?

[George D. Schindler, President, CEO & Director]

Yes. Well, I think the biggest differentiation we have is our relationship with our clients. And the fact that we do that in proximity to our clients. And so it really gives us a nice opportunity to stay close to them to meet their needs and challenges and opportunities. And we do that in every place that we operate around the world. And I think that's a big differentiator for us. I think the other big differentiator for us is our people that are able to develop those relationships and the fact that 85% of them are owners. They really are focused on taking care of our company just like a shareholder owner will do.

[Lorne Gorber, Executive Vice]

Thank you, Howard, and thank you, everyone, for joining us today. Again, follow-ups directed to me at [phone] and hope to see you here probably following our AGM.

[Operator]

Thank you, Mr. Gorber. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.