CGI Inc. (NYSE:GIB) Q1 2023 Earnings Call Transcript February 1, 2023
Operator: Good morning, ladies and gentlemen. Welcome to CGI’s First Quarter Fiscal 2023 Conference Call. I would now like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.
Kevin Linder: Thank you, July. And good morning. With me to discuss CGI’s first 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 AM Eastern Time on Wednesday, February 1, 2023. 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. 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. We’re also hosting our annual general meeting this morning. So we hope you’ll join us live via the broadcast at 11 AM. I’ll now turn it over to Steve to review our Q1 financials and then George will comment on our business and market outlook.
Steve?
Steve Perron: Thank you, Kevin. And good morning, everyone. I’m pleased to share with you the results of our first quarter of fiscal 2023. In Q1, we delivered CAD 3.45 billion of revenue, up 11.6% year-over-year, or up 12.3% when excluding the impact of foreign exchange. Importantly, we delivered positive constant currency growth in all segments, all industry sectors and all service offerings. The following segments generated double-digit constant currency growth. Western and Southern Europe up 30%, Asia-Pacific up 23%, and UK and Australia up 18%. Total bookings were CAD 4 billion, generating a strong book-to-bill ratio of 117% for the quarter and 109% on a trailing 12-month basis. In the quarter, each of our client proximity segments had a book-to-bill the ratio above 100%.
Our bookings were particularly strong in Europe this quarter led by UK and Australia with a book-to-bill ratio of 159%; Finland, Poland and Baltics with a book-to-bill of 143%; and Western and Southern Europe with a book-to-bill ratio of 123%. With respect to IP, we see ongoing demand for our business solutions and an increase in IP revenue across every geographic segment. IP as a percentage of total revenue improved to 21.7% in Q1. Our Q1 IP book-to-bill ratio was 128%, reflecting CGI sustained investment in forging new relationships with clients as well as enhancing our solutions. The strength of our overall bookings contributed to growing our global backlog, which now stands at CAD 25 billion, reaching an all-time high again this quarter.
This represents 1.9 times revenue. On the profitability front, adjusted EBIT in Q1 was CAD 554.1 million, up 6.3% year-over-year. This represents an EBIT margin of 16.1%, stable sequentially and down 80 basis points year-over-year. The decrease on a year-over-year basis was mainly due to the dilutive impact of prior-year acquisitions, which are in the process of being integrated to achieve their planned synergies as well as the expected increase in travel to support growing our business. Net earnings improved to CAD 382.4 million when compared to CAD 367.4 million in the first quarter last year. Diluted EPS was CAD 1.60, representing an increase of 7.4% year-over-year. When excluding integration and acquisition cost, net earnings improved to CAD 398.2 million for a margin of 11.5%.
This compared to CAD 369.4 million in the same quarter last year. On the same basis, diluted EPS was CAD 1.66, an accretion of 10.7% when compared to CAD 1.50 in the same quarter last year. This improvement was mainly driven by the successful execution of our build and buy profitable growth strategy by our operations. Our effective tax rate in Q1 was 26% compared to 25.5% in the prior year. When excluding integration and acquisition costs, our effective tax rate was 25.7% compared to 25.5% last year. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. In the quarter, cash provided by operating activities was CAD 605 million compared to CAD 484 million in the prior year. This is mainly due to the five-day sequential improvement in our DSO, which now stands at 44 days, an improvement of 1 day on a year-over-year basis.
Our targets remains at 45 days. Over the last 12 months, cash provided by operating activities was CAD 2 billion or 15% of revenue. In Q1, we invested CAD 93 million into our business and CAD 10 million to buy back our stock. We delivered a return on invested capital of 15.5% in the quarter, an increase of 20 basis points when compared to 15.3% in the year-ago period, demonstrating our efficient deployment of capital. Consistent with previous years, we reviewed our capital allocation plan to maximize shareholder returns. Our focus continues to be on delivering value for our shareholder by investing back in our business, pursuing accretive acquisitions, and repurchasing our stock and/or paying down our debt. As such, in line with our capital allocation strategy, yesterday, our Board of Directors approved the extension of the NCIB program until February 2024, authorizing us to repurchase for cancellation up to 18.8 million shares over the next 12 months.
Under the current program, we have invested CAD 657 million, repurchasing 6.4 million shares at a weighted average price of CAD 101.84. With a net debt to capitalization ratio of 24.1% at the end of December, as well as CAD 2.8 billion of cash readily available, and access to more if needed, CGI has the strength and the capital resources to support our build and buy profitable growth strategy. Now, I will turn to call to George to further discuss the insights on the quarter and outlook for our business and markets. George?
George Schindler: Thank you, Steve. And good morning, everyone. CGI began fiscal year 2023 with positive momentum, delivering strong results that underscore our positioning as one of the few global firms with the scale, reach, capabilities, insights and commitment to be a partner of choice for our clients and employer of choice for our consultants and professionals and an investment of choice for our shareholders. In Q1, we delivered our fourth consecutive quarter of double-digit constant currency revenue growth, and once again delivered double-digit EPS accretion on an adjusted basis. Bookings were well over 100% of revenue, reaching CAD 4 billion, a record high. One-third of these bookings were comprised of new business engagements, and cash from operations was particularly strong this quarter, reaching a record high of over CAD 600 million.
These results reflect clients’ ongoing confidence in CGI as a trusted partner for delivering on their modernization and digitization priorities. Our bookings in the quarter consisted of many long-term digitization engagements, which included the following wins. US Department of State extended its partnership with CGI’s federal operations under a new 10-year agreement to continue delivery of US visa application services in India. This engagement includes the use of CGI’s Atlas360 IP solution, which provides for improved efficiency, security, and customer experience. The UK government awarded CGI a four-year agreement to continue management of the cybersecurity analytics platform for one of the government’s departments. This agreement adds new scope focused on iterative development, delivery and evolution of the platform, as well as development of a data as a service function focused on helping the government address evolving cyber threats.
Sodexo, a world leader in food and facilities management services based in France, selected CGI as its global strategic partner for a five-year managed services agreement. CGI will leverage our proximity and offshore delivery model to reduce costs, improve time to market and drive the digital transformation of Sodexo’s infrastructure. The Laurentian Bank of Canada awarded CGI a five-year expanded agreement to help the bank manage its digitization, while supporting its efforts to strengthen operational efficiencies and deliver and enhance customer experience, an initiative that will benefit from a co-innovation fund focused on transformation of the bank’s ecosystem. And Airbus, a global aerospace manufacturer based in France, named CGI one of their major global partners to help drive the end-to-end digital transformation of their corporate and central services functions over the next five years.
These services will leverage a combination of proximity and global delivery resources from CGI’s operations in France, Spain, Germany, and India. Notably, we received all-time high satisfaction ratings from clients across every measure again this quarter. Importantly, one of the highest scores received was for the intent of clients to engage CGI again for future projects, demonstrating the strength of our team’s ability to build ongoing, trusted relationships. The investments we are making in our end-to-end services and talent are generating value now and they are designed to further strengthen our capacity to meet evolving client demand for full scale enterprise digitization. With this in mind, I will highlight the positive impact these investments are generating for our operations, starting with managed services.
As we communicated last quarter, we continue to see many clients prioritizing cost savings and placing a sharper focus on business case returns, while simultaneously advancing their digital transformation strategies. Investments we are making to increase business engineering capacity, enhance and modernize our managed services approach, integrate IP and BPS into our managed services offering and broaden the partner ecosystem have strengthened our overall value proposition, enabling CGI to best address clients’ cost savings and digitization objectives. In the first quarter managed services bookings were up CAD 465 million or 26% when compared to the same quarter last year. This increase was driven by several large new wins in the quarter. Overall, managed services representative 56% of total bookings for a book-to-bill of 123%.
We see broad based interest in new opportunities in both North America and Europe, particularly in energy and utilities, health, manufacturing and government. Turning now to CGI systems integration and business and strategic IT consulting services. We are focused on addressing the evolving client demand for consulting engagements in areas such as business model transformation, M&A strategy and integration, enterprise architecture and sustainability advisory, all to help clients advance their agility and future strategies. We also continue to prioritize employee certifications in the technology platforms of our global alliance partners. These certifications enabled us to generate nearly CAD 900 million in new Q1 systems integration win in support of partner technology platforms.
SI&C bookings remained robust in the quarter, with a 110% book-to-bill as we delivered on client consulting priorities across industries and large scale modernization projects, with particular strength in government. Now moving to CGI’s intellectual property based services and solutions. Client interest in our business solutions has been rising, with higher demand for CGI to help clients address the impact of economic pressures by deploying our IP. As such, we are investing in the creation of new business solutions to meet evolving demand, enrichment of existing solutions with embedded innovation and expansion of our IP go-to-market strategies to drive new client interest. For example, given the tightening credit markets around the world, we are seeing growing demand for CGI’s industry-leading collection solutions.
Notably, our transformed cloud native credit studio IP delivered through a SaaS based platform that now incorporates intelligent automation and machine learning. In Q1, we signed multiple client agreements for this renewed IP, including a nine-year engagement with Navy Federal Credit Union, the world’s largest credit union serving over 12 million customers. As previously mentioned, another key initiative this year is the expansion of CGI’s IP portfolio through go-to-market partnerships for client owned IP. For example, in the quarter, National Bank of Canada and CGI completed a new 10-year agreement for CGI to acquire ownership of the bank’s financial planning advisor solution. The addition of this new client developed solution expands the capabilities of our market-leading Well360 product suite, which will also be delivered and managed for National Bank as a SaaS under this new agreement.
On a year-over-year basis, IP bookings were up by more than CAD 330 million or 55% for a book-to-bill of 128%. We saw significant strength in the banking, communications and government sectors. Overall, diversified mix of our end-to-end along with our geographic presence and industry portfolio position CGI to continue to grow and create value for all stakeholders. Central to our ability to deliver value is our discipline in project execution and ongoing investments in operational excellence. We continue to evolve and balance our hiring and talent development strategies based on client demand, including in our near shore and offshore delivery centers of excellence, where we proactively manage each dimension to drive excellence in day-to-day operations.
For example, the time from hire to train to bill for new university graduates has been shortened again this quarter, driving higher utilization in our global delivery centers and driving profitability on an ongoing basis. Overall, our team’s quality of delivery and proven discipline, guided by the best practices and frameworks in CGI’s management foundation, continues to result CGI’s EBIT margin placing in the top quartile of our IT services peer group. A topic of importance to all of our stakeholders is CGI’s environmental, social and governance strategy and progress. As such, we are proud to employ our expertise in collaboration with clients, educational institutions and local charities to improve the economic, social and environmental wellbeing of our shared community.
And we are sustaining our investments in diversity and inclusion, CGI academia, and health and wellbeing as we continue to hire and provide career development opportunities in line with client demand. We follow UN principles and global best practices in setting our ESG objectives and targets globally, which are shared transparently with all stakeholders through the publication of CGI’s annual ESG report, which will be available on cgi.com early next week. Looking ahead, as many clients navigate uncertainty in the markets they operate in, they continue to communicate their intent to sustain digitization investment across two key dimension tactical initiatives to generate cost savings and connect enterprise processes and systems to enable greater operational resilience, and transformational initiatives to advance their progress on building new digital business models to generate incremental value.
As highlighted today, CGI’s many value propositions across our proven end-to-end portfolio of offerings and our consultants collaborate with clients every day to deliver the right balance of services and solutions to meet their objectives. Additionally, CGI’s strong balance sheet enables us to rapidly act on our buy strategy, which is another key driver of CGI’s profitable growth. The fragmentation of the IT services market remains high, driving a strong pipeline of merger opportunities and we plan to allocate CAD 1 billion of capital in 2023 to our M&A strategy. In closing, CGI’s strong first quarter performance reinforces the confidence we have in our plans for 2023 to continue profitably growing at or ahead of the markets in which we operate and continue to deliver double-digit EPS accretion.
Thank you for your interest and support. Let’s go to the questions now, Kevin.
Kevin Linder : Thank you, George. July, we can now table questions from the participants.
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Q&A Session
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Operator: . Your first question comes from Paul Treiber from RBC Capital Markets.
Paul Treiber: Just a question on organic growth. We estimate organic growth was about 8% in the quarter. Is that in the ballpark in terms of what you’re thinking? And then, it’s averaged about 8% for the last four quarters. It’s well above the historical average. Is there anything that you see unusual in the last year that has pushed up organic growth? Or do you see it as structural and sustainable at these levels going forward?
George Schindler: We have seen that strong constant currency organic growth. And it really is, it’s based on some of the investments I’ve been talking about in the last several quarters. It really is investments that we’ve been making to strengthen our value proposition. The managed services capacity, we anticipated the shift to managed services, invested in the managed services capacity. The IP, both on the software engineering side, but more importantly, on the go-to-market, you see the results driving the bookings there. Our consulting expertise, I always say that’s the tip of the spear. We’re really getting gaining more and more traction there. I mentioned last quarter the Forbes recognition we have as one of the top management consulting firms.
And then, the partnerships that’s helping to drive some of that sustained systems integration results. So, there are some structural items that we’ve had. Of course, demand plays into that, but certainly, the structural change we made is driving that growth.
Paul Treiber: A follow-up there related to inflation and the impact on pricing and also the impact on your cost base. How do you see inflation and pricing changes impacting your growth? Like, how should we think about your margin structure through an inflationary period? Can you raise prices faster than your costs are going up? Or should they move in line?
George Schindler: Well, it’s not just growth. It’s profitable growth. We’ve maintained those profit levels, and we expect to continue to be able to do that. I mentioned before, on the inflation side, we’ve been using and deploying global delivery as one of the elements of inflation. Of course, our IP does extremely well. The software, in many cases, we have even greater price elasticity than we have on labor. So that’s a part of this. We’ve been moving our labor around. So to make sure that we have the right people on the right jobs at the right rates. And that’s been going very well. Our teams have done an excellent job of essentially developing our people’s careers and, therefore, driving the proper value propositions from our clients in rate increases.
And of course, I mentioned on the larger longer term deals, we had built indexation, knowing that inflation was not going to stay at historic lows forever. We built that indexation into the contract. So, I have many examples where some of those contracts, as they come up for renewal, are increasing in healthy ways. Overall, on our cost base, as I mentioned before, because of that global delivery and because of the project rotations and because of the new college hires, which continues to be a larger percentage of our hires, the vast majority of our growth really is from those increased bookings and new business. But I will say that because we’ve been very diligent on this, probably a little bit of that inflation is in the growth. But it’s not a large percentage of it.