CGI Inc. (NYSE:GIB) Q4 2023 Earnings Call Transcript

CGI Inc. (NYSE:GIB) Q4 2023 Earnings Call Transcript November 8, 2023

CGI Inc. beats earnings expectations. Reported EPS is $1.79, expectations were $1.33.

Operator: Good morning, ladies and gentlemen, welcome to CGI’s Fourth 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, Collin, and good morning. With me to discuss CGI’s fourth quarter and 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, November 8, 2023. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our fiscal 2023 MD&A, audited 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 Q4 financials and then George will comment on our full year performance and 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 fourth quarter fiscal 2023. In Q4, we delivered $3.51 billion of revenue up 8% year-over-year or up 2.2% when excluding the impact of foreign exchange. Constant currency growth was 3.4% in Europe and 1.1% in North America. From an industry perspective, we had growth across four of five sectors with particular strength in both health and government growing at a combined rate of 7.2% in constant currency. Government continues to be CGI’s largest vertical markets now representing 37% of revenue, up 200 basis points when compared to the prior year. CGI delivers services and business solutions to support our government clients with their mission critical function such as cybersecurity, logistics, financial management and citizen services.

IP as a percentage of total revenue was 22.6% in the quarter with the vast majority contracted as longer term recurring engagements. Overall, IP revenue growth was 4.1% percent in constant currency, with more than half comprised of software as a service arrangement, which were up 300 basis points from the prior year. IP constant currency revenue growth was strongest in government and financial services, our largest IP revenue basis. Government represents the largest proportion of our IP revenue base, which is at 47% of total IP revenue, and financial services represent the single largest commercial revenue base, which is at 26% of total IP revenue. Our IP solutions become even more attractive to clients in times where discretionary capital is constrained as they shorten the business cycle from decision to realization of business value.

We once again add the strong quarter of overall contract wins booking $4 billion in the quarter, up 10% year-over-year for a robust book-to-bill ratio of 114% led by U.S. Federal with a book-to-bill ratio of 188%, Canada with a book-to-bill ratio of 121% and U.S. Commercial and State Government also with a book-to-bill ratio of 121%. Importantly, managed services which translates to longer term recurring revenue for CGI represented 60% of total bookings, up significantly from 52% in the prior year, aligned with the demand we are seeing from our clients. Overall, our global backlog reached a record of $26.1 billion, representing 1.8 times revenue. Turning to profitability. Earnings before income taxes were $558 million, up 14.8% year-over-year for a margin of 15.9%, up 90 basis points year-over-year.

Adjusted EBIT in Q4 was $573 million, up 9.8% year-over-year. This represents a margin of 16.3%, up 20 basis points year-over-year. This increase was driven by the combination of profitable revenue growth and operational discipline partially offset by one less calendar or day. We delivered strong margins in the following segments. Asia Pacific at 27%, Canada at 25% and U.S. Commercial and State Government at 16.7%. Our effective tax rate in Q4 was 25.7% compared to 25.4% in the prior year. We expect our tax rate for future quarters to be in the range of 25% to 26.5%. Net earnings improved to $414 million, up 14.4% when compared to Q4 last year for a margin of 11.8% up 60 basis points year-over-year. Diluted EPS was $1.76, representing an increase of 16.6% year-over-year when compared to $1.51 in Q4 last year.

In September, we initiated a cost optimization program to accelerate actions to right size our real estate portfolio and improve operational efficiencies focused on administrative activities. In the quarter, $9 million was expensed and we plan to incur approximately $65 million of additional expense over the first half of fiscal 2024. When excluding specific items, net earnings improved to $421 million, up 12.9% when compared to Q4 last year for a margin of 12%, up 50 basis points. On the same basis, diluted EPS was $1.79 an accretion of 14.7% when compared to Q4 last year. In the quarter, cash provided by operating activities was $629 million, representing 17.9% of total revenue an increase of 28.6% when compared to the prior year. On a trailing 12-month basis, cash provided by operating activities represented 14.8% of total revenue.

ESO was 44 days in the quarter in-line with our target of 45 days. In Q4, we invested $107 million into our business and $325 million to buy back our stock. As of the end of September, we have the opportunity to buy back up to an additional 12.6 million shares under our current [NCIB] (ph) Group program, which will be up for renewal in February, 2024. In the quarter, we continue to deliver a strong return on invested capital at 16% up 30 basis points year-over-year demonstrating our proficiency and discipline on deployment of capital. Looking ahead, our focus continues to be on delivering value to shareholder by investing in our business, including an AI, pursuing and closing 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 20.4% at the end of September as well as $3.1 billion of cash readily available and access to more if needed. Moving forward, CGI has the strength and cash all resources to continue to execute on both our build and buy profitable growth strategy. Now, I will turn the call over to George, to recap the full-year results and to provide business and market outlooks. George?

George D. Schindler: Thank you, Steve, and good morning, everyone. Our team’s performance in the quarter contributed to a strong fiscal 2023. And both the quarter and year, we delivered results in-line with our full-year plan to continue delivering double-digit EPS accretion and to profitably grow at or ahead of the markets in which we operate. Financial highlights for the year included 8% year-over-year constant currency revenue growth 15.3% year-over-year adjusted EPS accretion. $2.1 billion of cash from operating activities, up 13.3% year-over-year and $16.3 billion of bookings up $2.3 billion or 16.4% compared to last year. Now, I will review the performance highlights by stakeholder, starting with clients. CGI’s strong results this year would not be possible without the trust of our clients.

Once again, we ended the year with signed client satisfaction ratings that were higher on every dimension we measure. Importantly, two of the highest increases in satisfaction were for the degree to which our services are valued and for the level of innovation we introduced into our engagement. These qualities are fundamental to delivering the ROI led digitization outcomes that are currently in high demand, especially as clients apply a sharper focus on IT spending, given the current economic condition. Turning to our employees, and we now call CGI partners as 85% are also shareholders of CGI. Our performance in 2023 is the result of the world class partnership behaviors that our consultants and professionals embody as they deliver advice expertise and insights our clients can act on to achieve their business objective.

We continue to prioritize training for our talented consultants through interactive courses of CGI Academia and both development of industry knowledge and technical expertise, including for generative AI based applied learning and labs and sandbox environments. And for our shareholders, we delivered broad based constant currency revenue growth in all geographic segments and industry sectors. For the fiscal year, our book-to-bill ratio was 114%, up 500 basis points compared to the prior year. And on profitability, our results for the year continued to place CGI in the top quartile of our IT services peer group. Adjusted EBIT was up 10.8% year-over-year or 16.2% margin. Adjusted net earnings were up 12.9% year-over-year, or margin of 11.8%, up 20 basis points.

And adjusted EPS was up 15.3%. Before turning to the outlook and priorities for fiscal 2024, I would like to comment on the recent cost optimization program we initiated, which provides a tailwind for the fiscal year ahead. This program is focused on SG&A to embed additional profitability improvements into our business plans for fiscal 2024. We’ll streamline our expense profile to drive higher efficiency in our internal business operations, including through the increased use of automation and global delivery. By being proactive now while we are strong, we expect this action to help us increase EBIT margin in-line with our plan, but also freeing up capital to be allocated towards higher yield growth investments, such as innovation, including in AI, learning and development to deepen industry knowledge and technology expertise, delivery focus on our offerings and for large deal pursuits and for accretive M&A transactions.

As we look ahead to fiscal 2024, I would like to share some observations from recent meetings held with client executives across Europe and North America. Client sentiment emphasize the complexity of the IT services demand environment. Clients indicate that they are facing significant pressure from simultaneous and overlapping market dynamics. They need to navigate rapidly evolving geopolitical and economic conditions, may need to adapt to broad societal, technological, and cultural changes. In short, is a complicated operational and strategic challenge. Clients need to reduce spending while current continuing to progress their digitization and innovation agendas. CGI’s end-to-end services and solutions continue to position us well in this environment, particularly with our managed services offering, which helps clients achieve cost savings and drive transformation.

Our pipeline reflects this positioning as the value of new opportunities grew by more than 20% on a year-over-year basis, with managed services up nearly 40%. Second half managed services bookings were nearly $4.9 billion up by more than $900 million compared to the first half of the year, driven by continued strong opportunities in CGI’s largest industry sectors, of government and financial services. These larger engagements continue to increasingly require a tailored combination of our end-to-end offerings and global delivery. In-line with the higher proportion of managed services bookings, billable hiring in our offshore delivery centers once again outpaced global hiring in the second half of the year. Given the current geopolitical environment, we saw particular strength in government bookings across our end-to-end offerings.

On year-over-year basis, awards from government sector clients were up by more than $1.3 billion or 25%. This rising government sector demand was driven by continued spending to support new policy initiatives in areas such as cloud, data analytics, defense logistics and technology programs, cybersecurity and AI. Based on historical, economic and IT spending patterns, we expect that governments around the world will accelerate investments in the near-term, which will continue to provide a stable growth platform for CGI. Representative Q4 wins for broader scope engagements, including Circle K, a leading global convenience retailer, selected CGI for a 10-year strategic partnership to deliver managed IT services. Through this engagement, will help strengthen their capacity to enhance customer and employee experience and advance their business goals.

His Majesty’s Revenue & Customs authority named CGI a partner on the government wide Crown Commercial Service digitization framework. CGI’s position to deliver user centered design services and application management and delivery to support the U.K. government’s digital strategy. The French National Center for Scientific Research expanded its relationship with CGI with the award of an 8-year managed services engagement to be the institution’s strategic digital transformation partner. We will help modernize their technical and business systems, including the secure migration of enterprise applications to the cloud. And Scotiabank, a leading Canadian multinational bank, selected CGI’s all payment solution to advance the bank’s payments innovation agenda.

By deploying our modular cloud based enterprise payments platform, it’ll help the bank accelerate benefits for their global customers and ease payment processes. CGI’s overall bookings for the all payment solutions were up this year by more than 13%. In the quarter, all payments were certified as one of the first solutions to participate in the U.S. Federal Reserve Bank’s FedNow service a new real-time payments network. Leveraging our global alliance with Microsoft, all payments is also now available in the Microsoft Azure Marketplace, providing a new channel for clients to easily purchase and deploy our industry leading IP. Our business plan for fiscal 2024 incorporates continued investments in our end-to-end services, enabling our consultants to bring CGI’s full offering value proposition to clients.

For managed services, we will accelerate deals through expanded capacity in our business engineering function, and through continued investments to embed innovation and efficiencies into our delivery solution. Our managed services value proposition provides clients with ability to generate cost savings and drive forward the digital transformation agenda. CGI managed services provides longer term recurring revenue that steepens our resilience through all economic cycles. In IP, we will continue to develop new solutions and enhance existing solutions in-line with emerging client needs, including the traditional and generative AI. Our IP value proposition provides clients with digital accelerators lower capital costs and built in security and innovation.

CGI, IP provides recurring revenue with a higher margin profile expanding our overall profitability. And we will focus our business and strategic IT consulting and systems integration capabilities on industries and offerings where discretionary spending remains strong. Our SI&C value proposition provides clients with the actionable advice and implementation capabilities they need to realize business value. For CGI, our SI&C services provides a strategic client relationship entry point, while creating opportunities to deliver end-to-end value. Our fiscal 2024 business plan also includes continued investments in M&A, as macroeconomic and geopolitical dynamics continue to reshape the consolidation activities within the IT services industry. We started the fiscal year by closing the merger with Momentum Consulting, Miami-based IT and business consulting firm specializing in digital transformation and data analytics.

This merger strengthens our position in the U.S. metro market in Miami, bringing new client relationships in the manufacturing, retail and distribution sectors. I’d like to warmly welcome the more than 175 new consultants who joined CGI through this merger. We will continue to focus on building critical mass and strategic metro markets within all CGI geographies. Our goal is to gradually grow this presence to mirror the economic sector distribution in each metro market and to deploy our full range of services and solutions. We are in dialogue with a large number of merger targets, and we are seeing a better alignment of M&A conditions as compared to last year, with valuation multiples now moving into a more reasonable zone. As always, we will be disciplined to make sure that all CGI mergers will be accretive to each of our [stakeholders] (ph).

Finally, our business plan incorporates investment and innovation. Generative AI continues to be at the top of innovation discussion agendas with clients with trust and responsibility as key priorities. Engagement of our experts and government initiatives and councils around the world reinforces our commitment to continue upholding the highest standards in the development and deployment of emerging technologies as per CGI’s responsible use framework. And we are now signatory of the Canadian Voluntary Code of Conduct on the responsible development and management of advanced generative AI systems. Importantly, we announced last week a new AI focus initiative, leveraging our global alliance with Google to use their cloud platform to enhance the capabilities of CGI’s PulseAI solution.

Under this initiative with Google, we’ll also develop innovative industry specific use cases to help clients accelerate their time to value from new generative AI applications. Overall, client adoption of generative AI remains in the early stages, which is resulting in focused opportunities for CGI and data consulting and SI projects proof-of-concept efforts, and targeted use case implementations, particularly using our IP. We are currently engaged in over 600 active projects with various AI components. And in Q4, CGI’s bookings, which incorporated AI, totaled more than $175 million. Examples of recently awarded engagements using AI include the U.S. Department of State selected CGI’s Atlas360 solution, which incorporates AI-based technologies to help the agency improve efficiency, effectiveness, and security in their Asia Pacific piece of processes.

Several U.S. regional banks expanded their relationship with CGI to upgrade to our AI enabled collections IP. Our solution will help each of the banks deliver data driven customer journeys as part of the debt relief and recovery initiatives. And as part of Canada’s indigenous digital health ecosystem initiative, CGI will work with partners to use an array of advanced non-intrusive technologies including AI to build a digital twin and risk model for advancing fire safety and preparedness in First Nation communities. In closing, the combination of our strong performance in fiscal 2023, the actions we initiated in Q4 and the initiatives embedded in our business plan underscore our continued confidence for fiscal 2024 to deliver double-digit EPS accretion, incremental margin expansion and revenue growth consistent with the current IT services demand environment.

CGI’s resilience and positioning strategically, operationally and financially enable us to be one of the few leading global firms with the scale, reach, insights, capabilities, and commitment to remain a partner and expert of choice for clients and empowering environment for our consultants and professionals, and engage ethical and responsible corporate citizen and investment of choice for our shareholders. Thank you for your continued interest and support. Go to questions now, Kevin.

Kevin Linder: Thanks, George. Colin, please provide the logistics to the participants for the QA.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] One moment for your first question. Okay. And your first question comes from Thanos Moschopoulos from BMO Capital Markets. Thanos, please go ahead.

Thanos Moschopoulos: Hi. Good morning.

George D. Schindler: Hi, Thanos.

Thanos Moschopoulos: George, as you — hey, George. As you talk to your clients, do you see this very much playing out, like what prior periods of macro uncertainty, or are there some key differences to call out? And so, what I mean is at a high level, you’re seeing strength in managed services slowdown in SI&C, and so that’s exactly, like, in prior cycles. But underlying that is obviously a lot of technological change happening with public cloud, Gen-AI things like that. So, is that running a different dynamic here in terms of how things might play out over the next year or do you see it being like prior cycles?

George D. Schindler: No, here’s what I would see. And I’ve personally was in Europe for a week, been throughout North America. And what I’m hearing is kind of mentioned this, it’s a bit of a dilemma. That’s how one of the clients put it to me. They know that in order to meet their business goals, they need to continue spending in IT beyond just the managed services, but in some of the other areas, both in the systems integration and projects and pushing the innovation agenda further. At the same time, like prior downturns, of course, cost and spending comes under scrutiny. And so, I think it’s a matter of what we’re seeing a bit more tempered been in prior economic cycles like this. And, I think we’re going to recover maybe a little bit sooner, but time will tell. But that’s the discussions that I’m having to give you the color commentary there.

Thanos Moschopoulos: Great. On the restructuring initiative, is that pretty broad-based in terms across the business units or is it really more focused on subset of the businesses?

George D. Schindler: No, it’s broad-based across, everywhere. As our SG&A, we run a proximity model and our SG&A is embedded in those geographies. So, it’s pretty broad-based. And again, it’s focused on both real estate and the costs associated with running our own business and then, of course, introducing just like we’re doing for our clients, introducing more global delivery and more automation into the process. So, that’s what we’re focused on.

Thanos Moschopoulos: Great. Thanks, George. I’ll pass the line.

George D. Schindler: Yes. Thanks, Thanos.

Operator: Your next question comes from Paul Treiber from RBC Capital Markets. Paul, please go ahead.

Paul Treiber : Thanks very much and good morning. Just a couple of questions here. Just on constant currency growth and how decelerated it applies mostly to SI&C, but then managed services bookings are strong. So, what’s your outlook for constant currency growth in the near-term, just with that, those strong managed services bookings and when do you see those helping offset the slowness in SI&C?

George D. Schindler: Yes. So, maybe I’ll just start with kind of the revenue growth, we did have like you said, it’s, it is pretty centered both on managed services, but it’s really spread differently across different industry and services. So, we — it is driven by government and health which is strong in all of our geographies. Financial services is a little bit different. Insurance was strong. I think that’s where you see probably the most pronounced weakness in SI&C and strength in IP and managed services, is really in the banking space. Insurance, like I said, was pretty strong. And we’re seeing that pretty much across, again, all geographies. And then, of course, utilities is strong, you saw communications flowing. And so in those industries, that are a little more impacted by some of what’s going on, including MRD, Manufacturing Retail and Distribution, that’s where you see maybe a little more pronounced in the SI&C and a little more opportunities in the managed services and IP, which again are strong across but, that’s kind of what we see.

And so, if you look at the outlook then, those are the tailwinds are some of what I just mentioned, kind of built into our model and our approach are really those strong 12-month bookings, trailing 12-month bookings and expanding pipeline, particularly in managed services, government and health and IP. But, there are still some headwinds, particularly in Q1. We’re still seeing some slower decision making even on those managed services, discretionary spending given some of the uncertainty from the clients as a headwind. And then we always have some normal year-end furlough that we probably expect to be a little more pronounced this year, and that’s just at the end of the year around the holidays and the New Year. We see some particularly in banking, it’s just a situation where it kind of almost slow down everything and then they start back up in the New Year.

So, I think that’s going to be a little more pronounced. So, when you look at that, it’s kind of harder to predict on a quarter basis. But overall, we think that the weighting will shift to the tailwinds that I just described as we move throughout the year.

Paul Treiber : Thanks. That’s helpful. And then just in regards to the cost optimization, what’s the typical target of annual cost savings to the investments that you anticipate or in other words, how do you think about the potential year-over-year margin expansion from those initiatives?

George D. Schindler: Steve?

Steve Perron: Yes. Look, in terms of real estate, the payback is a bit longer. So, it would be more than a year. But in terms of the action where we are using the global delivery and also automation, it’s going to be faster and the payback will be about a year.

Paul Treiber : Okay. Thank you. I’ll pass the line.

Operator: Your next question comes from Richard Tse from National Bank Financial. Richard, please go ahead.

Richard Tse: Yes. Thank you. With respect to the government vertical, what do you attribute to that sort of strength to, is it a vertical that historically, I guess it historically sort of played a bit of catch up to commercial enterprises. Is that really the big driver here? And, maybe you can elaborate on that a bit, please.