CGI Inc. (NYSE:GIB) Q1 2024 Earnings Call Transcript
CGI Inc. (NYSE:GIB) Q1 2024 Earnings Call Transcript January 31, 2024
CGI Inc. beats earnings expectations. Reported EPS is $1.83, expectations were $1.31. GIB isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to CGI's First Quarter Fiscal 2024 Conference Call. And I would like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.
Kevin Linder: Thank you, Sylvie, and good morning. With me to discuss CGI's first quarter fiscal 2024 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, January 31, 2024. So 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 supplementental. 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 are also hosting our Annual General Meeting this morning, so we hope you will join us live via the broadcast at 11 a.m. 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 2024. In Q1, we delivered $3.6 billion of revenue, up 4.4% year-over-year or up 1.5% when excluding the impact of foreign exchange. The growth was balanced between Europe and North America. From an industry perspective, we have particular strength in government with 7.5% constant currency growth and in Communication and Utilities with 6.7% constant currency growth. As anticipated, we experienced softness in the banking subsector. Government continues to be CGI's largest vertical market, representing 36% of Q1 revenue, up 100 basis points when compared to the prior year. As a reminder, CGI delivers recurring services and business solutions to support our government clients with their mission-critical functions such as citizen services, cybersecurity, logistics and financial management.
IP as a percentage of total revenue was 22% in the quarter, up 30 basis points when compared to the prior year, with the vast majority contracted as longer-term recurring engagements increasingly as Software as a Service. Overall, IP revenue growth was 4.2% in constant currency. We had once again a strong quarter of contract wins across all service offerings, booking $4.2 billion in the quarter for a robust book-to-bill ratio of 116% led by U.S. commercial and state government at 152%. Finland, Poland and Baltics at 137% and Western and Southern Europe at 127%. Importantly, managed services, which is longer-term recurring revenue for CGI, represented 57% of total bookings for a book-to-bill ratio of 122%. With respect to IP, we continue to see ongoing demand for our business solutions with a Q1 book-to-bill ratio of 126%, led by our U.S. segments with a combined IP book-to-bill ratio of 164%.
Finland, Poland and Baltics with an IP book-to-bill ratio of 116% and Canada with an IP book-to-bill ratio of 110%. Global backlog remained strong, reaching $26.6 billion, representing 1.8 times revenue. Turning to profitability, earnings before income taxes were $527 million for a margin of 14.6%, down 40 basis points year-over-year, primarily as a result of expenses associated with our previously announced cost optimization program. This program, which is focused on SG&A has been expanded by $26 million for a total of $100 million and is expected to complete as planned in the second quarter. The cost optimization program, along with our ongoing management discipline will provide incremental margin improvement in the second half of the year.
Adjusted EBIT in the quarter was $584 million, up 5.4% year-over-year. This represents a margin of 16.2%, up 10 basis points year-over-year. We delivered strong margins in the following segments; Asia Pacific up 33%; Canada, up 24%. U.K. and Australia up 17%; and Northwest and Central East Europe also at 17%. Our effective tax rate in the quarter was 26.1%. We expect our tax rate for future quarters to be in the range of 25% to 26.5%. Net earnings were $390 million, up $7.4 million for a margin of 10.8%, down 30 basis points year-over-year, mainly impacted by the investments in the cost optimization program. Diluted EPS was $1.67, representing an increase of 4.4% year-over-year when compared to $1.50 in Q1 last year. When excluding specific items, net earnings improved to $427 million, up 7.3% when compared to Q1 last year, for a margin of 11.9%, up 40 basis points.
Specific items for the quarter included integration and acquisition costs along with expenses associated with the cost optimization program. On the same basis, Diluted EPS was $1.83, an accretion of 10.2% when compared to Q1 last year. In the quarter, cash provided by operating activities was $577 million, representing 16% of total revenue. On a trailing 12-month basis, cash provided by operating activities was $2.1 billion, representing 14.4% of total revenue. DSO was 41 days in the quarter, below our target of 45 days, mainly due to improved collections and the variation in foreign exchange ending rates. In Q1, we used our cash to invest $85 million into our business, including in AI, invest $49 million in business acquisitions, invest $126 million to buy back our stock and repaid $673 million of long-term debt.
In the quarter, we continue to deliver a strong return on invested capital at 15.9%, up 40 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 our shareholders with the following cash allocation priorities. First, investing in our business. Second, pursuing and closing accretive acquisitions. Third, repurchasing our stock and finally paying down our debt. In line with this capital allocation strategy, yesterday, our Board of Directors approved the extension of the NCIB program until February 2025 authorizing us to repurchase for cancellation up to 20.5 million shares over the next 12 months. CGI balance sheet is strong, with a net debt-to-capitalization ratio of 17.6% at the end of December as well as $2.7 billion of cash readily available and access to more if needed.
Moving forward, we have the strength and capital resources to continue to execute on both our build and buy profitable growth strategy. Now, I will turn the call over 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. We started fiscal year 2024 in a strong position by harnessing the inherent value of our resilient business model and by employing disciplined operating practices and the execution of our plan. In the quarter, our team delivered financial results in line with our full year plan for revenue growth consistent with the current IT services demand environment, double-digit EPS accretion on an adjusted basis and incremental margin improvement year-over-year on an adjusted basis, with cash from operations at 16% of revenue and first quarter bookings at 116% of revenue. CGI is well positioned to deliver on our build and buy profitable growth strategy. The continued strength of our financial performance is anchored by the ability of our consultants to earn clients' trust every day on every engagement.
Again, this quarter, our team earned higher client satisfaction ratings on every dimension we measure, an overall rating of 9.5 out of 10, a record high. The continuous improvement in client satisfaction reflects clients' ongoing confidence in selecting CGI to innovate and support their most critical digital priorities. As anticipated, at all levels of government, demand continued to rise in Q1 as clients focused on progressing their key policy initiatives through the transformation of mission-critical applications and systems. In the quarter, government awards represented 39% of total Q1 bookings, up from 37% in the prior year. CGI's IP solutions were the main contributor to the strong government bookings, particularly in the United States segments.
Governments are increasingly interested in solutions to improve their operational efficiency, leveraging the built-in security and innovation, including with AI of CGI's intellectual properties. Across all industries, CGI's end-to-end services and solutions position us well to deliver the right mix of offerings as clients continue to prioritize initiatives that will deliver the highest financial returns and drive tangible organizational benefits. CGI's outcome-based value propositions for managed services and IP are specifically designed to help clients generate cost savings and accelerate transformation with lower capital costs. In line with CGI's compelling value proposition for clients, Q1 bookings were mostly comprised of managed services and IT engagements, which generate long-term recurring revenue.
Managed services bookings were driven by strength in government, communications and utilities and health. Recent managed services and IP wins include the Virginia Department of Social Services selected CGI to modernize their statewide child support system through a platform-based solution incorporates AI and expands our global alliance with Salesforce. Under the agreement, we will partner with government executives to simplify and innovate the end-to-end processes for delivering citizen services. Posti Group, the leading postal and logistics services provider in Finland, Sweden and the Baltics, expanded their long-term collaboration with CGI through a new 10-year engagement to develop, modernize and deliver secure digital messaging services across multiple channels and countries.
A global multi-energy company renewed and extended its partnership with CGI to modernize the delivery of the company's business applications, primarily for their downstream operations. Our engagement takes an end-to-end approach to help the client drive their energy transformation strategy. And in 12 state and local governments across the U.S., including the County of Los Angeles, the most populous county nationwide, CGI was selected to upgrade their core business platforms. The engagements leverage CGI's Advantage IP, a modern cloud-based solution for permitting, procurement, HR, finance, collections and performance data management. In the quarter, consulting and system integration bookings were 110% of revenue, up on a sequential quarter basis, with strength in build and run projects in the government and national critical infrastructure sectors.
And platform modernization projects, particularly in the insurance industry, leveraging CGI's insurance IP portfolio and our partnership with Guidewire. Notably, in the first quarter, CGI was recognized by Guidewire for outstanding market growth in both the Americas and Europe and for our delivery excellence. Looking ahead, our overall pipeline for managed services is up year-over-year and sequentially, which we expect will contribute to ongoing bookings strength and future revenue growth. Client demand within the government sector continues to drive strength in our overall pipeline. On a sequential quarter basis, the managed services pipeline for government is up by more than 40%. The pipeline for government SI&C projects is up 20%. We continue to see strong demand related to government priorities for cybersecurity, data analytics and modernization to drive efficiencies and enhance citizen services.
While we are beginning to see improving client pipeline for systems integration and consulting across commercial industries, clients continue to exercise caution in their discretionary SI&C spending decisions, given ongoing market uncertainty. These market dynamics continue to favor CGI's managed services and IP to help these commercial clients generate cost savings and operational efficiencies. For example, within the manufacturing, retail and distribution sector, interest in platform-based solutions to drive operational efficiencies continues to rise and interest in generative AI is also on the rise in this sector, with clients focused on data preparedness and exploring pilots related to knowledge management, research and development, forecasting and replenishment and production automation.
In Health & Life Sciences, we recently signed industry partnerships in the U.K., Germany and Denmark to accelerate pipeline growth through joint go-to-market offerings. In addition, we announced last week a global partnership with Körber focused on improving the production processes of pharma and life science clients around the world. This partnership will leverage CGI's business consulting and system integration services and Körber’s unique portfolio of integrated pharma solutions. And in Financial Services, the overall pipeline is up 12% sequentially, with clients' primary focus on driving cost savings, specifically through new managed services engagements that are increasingly focused on both technology and business operations. Interest remains high for CGI's IP business solutions to modernize and manage payments, enable trade finance globally and detect and combat financial crime.
Our ability to meet the demand associated with our increasing pipeline and to deliver incremental margin improvement is underpinned by our quality delivery and operational excellence as guided by the best practices and frameworks in CGI's management foundation. We continue to make investments to drive our build and buy profitable growth strategy. For example, in line with client demand, we've been driving broader diversification of our footprint, growing our global delivery network at an even faster pace than our proximity operations. This strategy has enabled us to continually build deep relationships in proximity with clients and expand the optionality CGI offers clients to balance their cost, risk and quality objectives. Over the past three years, CGI's global delivery capacity expanded from 31% of total consultants worldwide to 38% in Q1.
This includes in our onshore, near shore and offshore delivery locations and is contributing to incremental margin improvements. In the first quarter, we progressed several of the AI investments we previously communicated. Investments, which are already strengthening our end-to-end service offerings. These initiatives include the launch of training for all consultants globally on AI, industry initiatives utilizing available AI tools, including Microsoft's copilot offerings. Consulting offerings to assist clients and their AI strategy and a new IT solution, CGI Machine Vision, which enables clients in multiple industries to use AI for improved asset and physical infrastructure monitoring. While overall adoption of AI remains in the early stages, CGI's bookings, which incorporated these technologies totaled more than $200 million in Q1, up double digits on a sequential quarter basis.
The initial focus of these deals is aligned around three areas; setting an AI vision and road map to drive business value, preparing the data strategy to build a future-fit and adaptive foundation with responsible use of data at the core and piloting a variety of use cases, primarily focused on operational efficiency. And we are investing in M&A as part of our Build and Buy profitable growth strategy. The strategy deepens our resilience and serves as a catalyst for future organic growth. We continue to focus on building critical mass in 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 remain in dialogue with a number of merger targets, both metro market and transformational opportunities. As always, we will be disciplined to make sure that all CGI mergers will be accretive to each of our stakeholders. In closing, we are off to a strong start for the year and reiterate our confidence in our fiscal 2024 plan. We have a resilient model with a diversified mix of geographies, economic sectors and end-to-end services to enable profitable growth now and in the future. We have trusted client relationships and value propositions that are well aligned to meeting current demand for cost savings, digital acceleration and ROI-led innovation. We have a strong balance sheet and the improving M&A conditions enable us to act rapidly on accretive merger opportunities.
And we have a proven track record for operational excellence for taking proactive actions to deliver continuous incremental margin expansion. Thank you for your continued interest and support. Let's go to the questions now, Kevin.
Kevin Linder: Thank you, George. So we please share with the participants, the logistics for the Q&A.
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