CGI Inc (GIB) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CGI Third Quarter Fiscal 2017 Conference Call.

I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Global Communications and Investor Relations. Please go ahead, Mr. Garber.

Thank you, Marge, and good morning. With me to discuss CGI's Third Quarter Fiscal 2017 Results 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 a.m. Eastern time on Wednesday, August 2, 2017. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with Q3 MD&A, financial statements and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking statements. 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 on both our MD&A and press release as well as on cgi.com. We encourage our investors to read it in its entirety.

We are reporting our financial results in accordance with the International Financial Reporting Standards, or IFRS. 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 turn it over to François to review our Q3 financial performance, and then to George, who will comment on our operational and strategic highlights. So with that, François?

Thank you, Lorne, and good morning, everyone. I am pleased to share the results for the third quarter.

Revenue grew for the sixth straight quarter coming in at $2.8 billion, representing constant currency growth of 5.2% year-over-year or 3.7%, excluding the acquisitions made over the last year.

On the GAAP basis, revenue growth was 6.4%, including a positive impact of $31 million from currency, mostly due to the U.S. dollar. Bookings were $2.7 billion for the quarter, over half of which were new business. Over the last 12 months, global bookings were $11.2 billion for a book-to-bill of 104%.

As an update of our IP30 initiative, IP drove 37% of bookings and accounted for 22% of revenue in the quarter, consistent with Q2 and up 400 basis points from Q3 last year.

Adjusted EBIT increased by $8.6 million to $399 million for a margin of 14.1%, down 50 basis points year-over-year, largely due to fewer working days compared to last year.

Our effective tax rate in Q3 was 27.1% compared with 26.5% last year. Going forward, we continue to expect a range of 27% to 29%.

On a GAAP basis, net earnings were $277 million and EPS was $0.92 compared with $0.89 last year. Integration costs related to the U.S. acquisitions, ECS and CTS, totaled $2.9 million in Q3 or $1.8 million net of tax. The remaining expenses will be incurred in Q4. Excluding these costs, net earnings were $279 million or a margin of 9.8% and EPS of $0.93. This compared favorably to $274 million and $0.89 a year ago.

Cash generated from operations remained strong at $291 million in the third quarter and $1.4 billion over the last 12 months. This represents $4.60 per share, up from $4.40 at the same time last year.

We ended the quarter with a DSO of 45 days, flat with last year and at our target level. In the quarter, we continued making accretive investments primarily back into our business. In addition, we acquired CTS and ECS for $122 million, returned $95 million to shareholders through the repurchase of 1.5 million shares, and we repaid $14 million in long-term debt, ending June with net debt of $1.4 billion or $199 million lower than last year.

Net debt-to-capitalization improved by 330 basis points from 20.5% in Q3 last year to 17.2% this year. With our revolving credit facility that remains fully accessible and $303 million in cash, we have more than $1.8 billion in readily available liquidity and access to more as needed to pursue profitable growth.

Finally, as mentioned in this morning's release, we will incur $165 million pretax expense over the next year to compress the time line on several aspects of our long-term growth strategy. This will be allocated in 2 ways. 85% is related to the reduction of expenses at both the operational and corporate levels and will address underutilized resources, including SG&A, due to the accelerating shift in client demand. This will impact the total of approximately 1,600 members across all business segments; and 15% is related to the retirement of assets that are no longer needed in the implementation of our as-a-service delivery model. This strategy reflects our experience on recent large outsourcing engagements where legacy assets are no longer purchased from our clients. This strategy will free up future capital to allocate to other growth initiatives that will yield higher returns.

We expect to incur to half of the total expense in Q4 with the remainder to be expensed throughout next fiscal year. The cash disbursements will naturally lag the expenses by a few quarters. This initiative will yield benefits throughout fiscal 2019.

Now I'll turn the call over to George.

Thank you, François, and good morning, everyone.

The third quarter is when we kick off our planning for the next fiscal year. As such, following the operational highlights, I will spend a few minutes providing some additional strategic context on the initiative we announced this morning.

Let's begin with our operations in North America. In the U.S., both top and bottom line were strong in Q3. EBIT margin was 18.2% and revenue grew by 12.5%, driven by double-digit growth in both commercial and federal businesses. The recent U.S. acquisitions are fully integrated and generating new client pipeline while contributing to be strong bottom line performance. 70% of bookings in Q3 included IP with particular demand in financial services, utilities and government. For example, we're awarded the Army Contract Writing System for USD 182 million, which will be built utilizing our momentum IP. And at the end of July, we were notified by our U.S. State Department client that we were awarded a 5-year renewal with a ceiling value of USD 915 million to continue providing support for passport production and services. Under the current contract, we will support a significant increase of passport and travel card volumes slated to exceed 20 million this year.

In Canada, revenue grew 6.7% and EBIT margin was strong at 19.7% as we continue to deliver on the high demand in our largest Metro markets: Montréal and Toronto, as well as across Western Canada. Over 25% of Q3 bookings included IP. We are also experiencing increasing demand for business and technology consulting, which positions us well for future large long-term opportunities.

Moving to Europe. In France, revenue grew 5.2%, the seventh consecutive quarter of growth, with particular strength in financial services, manufacturing and public sector. EBIT margin of 9.8% was down slightly over the last year due to fewer working days. During the quarter, we opened a new Center of Excellence in Lyon to support manufacturing clients around the world as they adapt and integrate advanced digital technologies into their supply chains. This center will be connected to the retail Center of Excellence in Lyon, providing an end-to-end virtual window into an integrated supply chain, retailer operations and the customer experience. In the U.K., revenue was down 2.2% as public sector activity slowed with initiation of Brexit negotiations. At the same time, EBIT grew to $40 million, expanding EBIT margin to 12.1%. In this evolving environment, our incumbency is a strength, particularly in the public sector, where we continue to renew and expand existing engagements, a proof point of our clients' loyalty.

Demand for our consulting services in IP, specifically in financial services are expanding our pipeline resulting in an improving booking strength.

Across the Nordics, revenue was down 1.3%, reflecting the ongoing shift from our traditional infrastructure model towards Software as a Service, including automation. We continue to see demand for higher-end digital, SI&C and IP. During the quarter, we saw strength in both Finland and Norway, posting 5% and 6% revenue growth, respectively. And in Sweden, we saw strength in bookings. For example, SEB Bank became the first EU-headquartered bank to choose CGI's Trade360 as its global platform. EBIT margin for this segment was 10.3%, down slightly from last year as we addressed isolated project issues in Denmark this quarter.

In eastern, central and southern Europe, revenue grew 3.7% as Germany, Belgium and Eastern Europe each delivered strong organic growth. We recently signed digital transformation consulting engagements for clients in telecommunications, manufacturing and financial services. Again, these high-end consulting wins position us well for future, large, long-term opportunities.

EBIT margin of 5.7% in Q3 was the result of deliberate actions taken in the Netherlands to better align talent with demand. We have appointed new leadership with a clear mandate to increase profitability while addressing market opportunities in areas like cyber, analytics and IP.

And in Asia Pacific, revenue grew 6.8% overall, and we are encouraged by strong year-over-year growth from our top 10 clients in Australia. Across the SBU, EBIT margin was 19.6%, as our India operations continue to partner with the proximity business units to deliver automation for all of our clients.

Now let me turn to our strategic planning context. Throughout our 41-year history, we have consistently made the necessary adjustments to set the stage for each subsequent step of our growth and in line with the expectations of our 3 stakeholders. Meaning, that we continuously make adjustments when the business is strong in order to make sure the business stays strong. We continue to innovate alongside our clients, and we are rapidly adapting to the changes they need. It's -- with this in mind that we approach the planning process, building on where we are and where we want to go.

I am pleased to share where we are after 9 months: our business is profitable and growing; revenue in constant currency is up 5%; adjusted EBIT is $1.2 billion, up $26 million; net earnings are $827 million, driving EPS of $2.71, that's up $0.18 or 7%; cash generated from operations is $1 billion, up 8% or $75 million; and trust from our clients and members is also up. We scored a 9 out of 10 globally from approximately 4,000 signed Client Satisfaction Assessments in particular year-over-year improvement on the rating of CGI's business domain and industry knowledge, technology expertise and the extent to which we deliver innovation. And member satisfaction scores are also up year-over-year on every dimension, based on more than 35,000 CGI member assessments completed so far this year. Most notably, our members gave us improving scores on their level of commitment to CGI, their career growth at CGI and the professional training opportunities provided to them by CGI. Against this backdrop of company strength, we continuously evaluate alternatives that can accelerate profitable growth, aided again this year with the input from more than 1,300 client executives, from our business leaders around world we met with in CGI's Voice of our Clients program.

Findings this year indicate a clear and accelerating need for our clients to become digital to meet their customer expectations. This was the top global trend, the top business priority and the top technology priority. As a result, nearly 80% of clients interviewed across every industry planned to increase or maintain their IT budgets, with significant increases for new applications and automation. Given the rising demand from our clients, given their need for our end-to-end services and given the organic growth we are now delivering, we will continue hiring and developing in-demand expertise, in proximity to our clients around the world and complimented by our global delivery centers. As such, we expect our billable headcount to continue growing. At the same time, as announced this morning, we will take proactive measures to retire stranded legacy assets and address underutilized resources, including SG&A. Unfortunately, this will impact some of our existing members. As always, we treat those impacted fairly and with respect.

In short, by taking action now, we'll be better positioned for future profitable growth. We will strengthen our role as a partner and expert of choice to meet client demand. We will free up capital to be allocated to the highest return on opportunities, and we will continue to improve our position as an active consolidator in the market, strengthening our ability to quickly act on niche and transformational acquisitions consistent with our Buy strategy. Accelerating these actions will contribute to delivering double-digit earnings accretion in fiscal 2018. I am confident in our team's ability to execute on our strategy, and in doing so, continue to create value for all 3 stakeholders as we pursue our aspiration to profitably double the size of CGI in 5 to 7 years.

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

Just a reminder, that a replay of the call will be available either via the website or by dialing 1 (800) 408-3053 and using the passcode 6223116 until September 2. A podcast of the call will also be available for download within a few hours. And as usual, follow-up questions, can be directed to me at (514) 841-3355.

Marge, if we could poll for questions from the investment community?

(Operator Instructions) Our first question is from Steven Li from Raymond James.

George, the $165 million initiative, how should we think about this in terms of payback? And François, the impact of this expense would be excluded from the adjusted EPS calculations, correct?

Yes. So thanks, Steve, for the question. Yes, $165 million, remember, there's 2 parts to that. There is the retirement of some legacy assets, the payback period for that on the asset period, given that we're amortizing that, is a little bit -- goes a little bit beyond a year given the time period that we amortize those assets. But on the other side, payback would be within a year period, in general. Obviously, they'll lag a little bit throughout the year as we take the appropriate actions. François?

And Steven, yes, the amount will be excluded from the earnings before -- we'll have earnings before integration. So that's how we will show it. And as I indicated, you can expect that close to half of it will be accounted for in this quarter or in Q4.

Right. And then just on Canada's margins, George, anything you can call out in terms of what's led to the lower margin? So last 2 years, 21%, 22% whereas the last 2 quarters it's been 19% to 20%.

Yes. As I mentioned the last few calls, we're seeing strong demand across the portfolio. I think the mix, as we continue to invest in meeting that demand, you see a little bit -- a drag on the margins. But again, that's why I called out the -- we continue to see not just strong interest in our services, given the shifting mix in demand but also selling the IP in there. So as I mentioned, both in Canada and around the world, some of those initial consulting engagements will drive some of that longer-term recurring revenue that we've seen in the past. So that's what we're seeing right now in Canada.

The following question is from Thanos Moschopoulos from BMO Capital Markets.

Clarifying the restructuring, is there any revenue impact associated with that? Or would that be fairly minimal?

No, this is really -- thank you, Thanos, but this is really just an extension of the path and strategy that we're already on. So no impact on our current revenue -- actually we're just accelerating some of the write down on the assets, for example. No impact on revenue at all.

Okay. Question for François. Would you be able to quantify the year-over-year impact that Easter had on the margins? Or is that math a little tricky to do?

I'll say to you that on the revenue, it's close to 0.8% or 1% on the revenue. And again, the fact that you still have the expense. It's just you don't have the revenue to cover that expense.

So in other words, you would've had margin expansion, most likely year-over-year if not for that?

Yes. Or -- yes, yes.

Okay. And then one last one for me. George, certainly a very nice uptick in U.S. Federal as you called out. Just to clarify, is that being driven more by the defense side? Or is it both defense and civilian as well?

It's both defense and civilian. As you're probably aware, we finally have a budget on the federal side, so that allows for some of these pent-up demand on both sides to be released. And it's also being driven by some of our intellectual property, which is -- which comes with the higher margins, which is what you see as well on the results.

Our following question is from Robert Small -- Young from Canaccord Genuity.

I was hoping you could give a little bit of insight on the mix of SI&C. It seems, though, it's high -- holding at high level. And if I heard correctly, the percentage driven by IP was flat. So is the delta there, would that be driven by higher-end consulting? Could you talk about some of the shift in mix there?

Yes, yes, and that's a -- it's a good question. Thank you for that. Yes, as we see more of the spending shifting to the new applications, what we are doing is rushing to meet that demand through our relationships, that's why I highlighted the higher scores we have with our clients, both existing and through our Voice of the Clients, some of the new clients were under or being introduced to, and the innovation score is going up. Those 2 start out as smaller SI&C, even consulting projects, but quickly expand, in fact, in our 2017 Voice of the Clients. When we look at the amount that's currently being spent on the new, broken down by total dollars of the engagement, we see a significant increase, right now about 18% of that in 2017, maybe even for 2018, are in projects that are at $50 million or I mean, that are above $150 million. We see that -- our clients are telling us that by 2020, that's going to be 33% or more of their projects are going to be over $150 million. So it is -- it does reflect the mix. Our volumes are up but the deal values are slightly lower right now in the SI&C. You also see that reflected in some of the book-to-bill. I think that's just a reflection of the shifting demand that we're currently undergoing in the marketplace, which is what we want to see accelerate over these next several quarters.

Okay. And then as a follow-up, just the -- you talked about shifting or cross selling into Europe, some of the IP and consulting core product that you have in North America. Some of the data points you shared in the monologue seem to suggest that that's moving along well. Can you give a little color around that?

Yes, it absolutely is. And we're seeing 3 areas of support right now for our IP, and we're focused on all 3. First is in -- is really driving, what I would call, the customer-centric digital transformation. That's what we're doing right now in the banking space. That was the example I gave on trade. We're also seeing that in a big way on our payments intellectual property. We do still see our clients, in order to free up the capital for the new and meet their customers demand, they're still looking to reduce run costs, automate processes so that they can reinvest, and so some of our IP plays very well there, both on the government side and on the commercial side. Our ProperPay application in health really which drives collections of -- or identification and ultimately collection of fraud, waste and abuse is playing very well. Also, some of the work we do in oil and gas through some of our IP there. But we're also seeing cross-sector opportunities, and I think that's what we're going to see more driving some of our ability to take some of our applications across the different regions. Our Unify360, which is really a product that sits in front of the infrastructure transformation that I talked about through the initiative that really as we move to the cloud, our Unify360 helps manage that effort. And then on the very front end, we have some intellectual property [Atlas] that is actually doing -- helping reduce the costs on the front end of the business process including the call centers. So a lot of exciting opportunities to expand this, and I think the shifting demand actually is playing very well for our intellectual property. Even though we started that journey a few years ago, I see it accelerating.

Okay. That's great color. One little clarification, I'm not sure if I'm the only one that didn't hear it, but on the IP30 mix of bookings and revenue, I caught 22% of revenue but I missed the bookings' number. And then I'll pass the line.

The bookings were very strong, 37%. So again, IP30 we're at 22%. We're booking at a higher rate, we should see that starting to flow through, and we've seen a couple of straight quarters of that. So even though the actual mix on revenue, good news is, we're growing our revenue, right? So that's the positive side. So you have to actually sell even more of the IP, but the fact that the bookings were higher than IP30 is I think a strong signal for the future.

Our following question is from Richard Tse from National Bank Financial.

Just curious, what percentage of your existing outsourcing customer base have engaged you for digital transformation projects here? And how would that compared to last year?

That's a very good question. I don't have that statistic. We'll have to get that back to you, but I'll give you the anecdotal evidence that we're really focused on, and it is that score that I gave you around innovation. And that innovation score is up most significantly of all of the scores that our clients rate us on, that's been a focus of ours. It's also up in every single segment, customers in each segment. And the reason I bring that up, given the large mix of our business around the world in outsourcing, a lot of that's coming from those outsourcing customers, which is what will lead to those digital transformation projects, not just on the run side but on the chain side. So that's the anecdotal evidence, but I can give you the -- with maybe on the off-line, Lorne, you can give him some of the...

Yes, absolutely. Our specifics.

Okay?

Yes. And I guess -- and just following up on that, are there sort of -- on the part of the customer, is there -- are there certain bottlenecks in terms of their own decision-making process that need to be addressed? What do they need to sort of get comfort on before they start making these moves here more aggressively?

Yes. Well, I think that's a good question. There is a cultural side to this, and I'm not necessarily going to talk about the government side but even the cultural side. And so what we see are some of those engagements are smaller on the business side. They do get larger and more longer-term and more company-wide, enterprise-wide when it links up, when the business links up with the IT. And so that's why those consulting projects are so important because those typically are directly with the business, combined with our legacy knowledge and our relationships on the CIO side. That's the perfect mix, Richard, to go ahead and generate that. But you're right. There are some cultural aspects to this because the change is pretty broad not just the technology itself but to the people themselves.

Right. So I guess, it's suffice to say that these digital transformation opportunities are sort of very incremental to the outsourcing engagements you have here today and that -- the addressable market there could be a lot more meaningful than the existing market with the base of customers you have today?

Great. Yes.

Okay. Last one for me. Can you update us on M&A here? Obviously, you seem to be, as a company, valuation conscious. Has the environment changed from that perspective lately? And how you're thinking about acquisitions? And that's it for me.

We have -- no, thanks for the question. We do have a very active pipeline. And in fact, it's active across each of our segments. Yes, we are discerning. It's about value as you've seen from our last several, and we will continue to be willing to pay for the right value. However, we see a lot of different companies out there that have a lot of different configurations, and we are focused on ensuring that we can make these acquisitions accretive, and that's not price, that is value. And -- but there are some aspects to some of those companies that we can't value because they're not something you can actually create value from. Having said that, it's a highly fragmented market. We have a number, I think the current number is 789, in our current active funnel and more coming in. And I'll maybe pause to give you this color. We just completed our Voice of the Client survey for 2017. That generates a whole new set of companies to look at because that's one of the direct questions we ask on the Voice of the Client, and so over 80% of our current funnel, and that we'll be adding to that funnel, over 80% of that current funnel was actually generated either from our clients or from of our business leaders, not from just the investment banking community. So I think that's a -- that just tells you something about how fragmented the industry is but also the interest and the need to continue to be a consolidator.

Our following question is from Edward Caso from Wells Fargo Securities.

Sort of an in a related question around visas, visa access, your traditional positioning close to the client? And then also your usage of your India-based assets? Is it still mostly for development? Or are you having them more into client engagements?

Yes, no. Thanks, Ed. Yes, our primary sort and for all the right reasons is proximity, and that, I believe, that particularly given the shift to digital transformation plays very well to both these consulting opportunities and the larger cultural aspects that we talked about a bit earlier on the call. Having said that, we've organized our India operations. We never organized that strictly as a labor arbitrage situation. We organized that actually by industry, where India operations and global delivery centers around the world are industry focused, they are working on projects. So I called out that they actually are a part of our automation proximity model. But we're not landing those resources. Our proximity is really our local resources that live and work in proximity to our clients and are part of the community. So that's a basic, maybe a difference in our model versus some others. So we think it plays very well to what we're doing here.

Could you talk a little bit about robotics process automation or RPA? And is that an opportunity or a threat to your model?

No, it's actually an opportunity, and we are implementing RPAs and integrating that into a number of our current outsourcing arrangements and that really allows those clients to drive some additional savings out of automation that allows our profitability to go up, allows their price point to go down, which then can be reinvested into this shift to the new. And I'll just add to that we're actually applying that to ourselves as well. And so some of the RPAs that we have been able to deliver for our clients, were applying modified -- in modified ways to our own internal operations. And in fact, we're going to reap some of the benefits as well, and that's part of what's in that special initiative that we talked about earlier.

Quick last question. Organic constant currency growth rate?

Yes. 3.7% if you strip out the acquisitions. Yes.

Our following question is from Daniel Chan from TD Securities.

Do you have a view or a target margin that you're trying to hit following the restructuring?

Yes, that's a -- as we always do, we're looking to embed that into our planning for next fiscal year and deliver the double-digit earnings accretion that I talked about. In general -- so that's the specific -- in general, we believe over time, and this has always been our goal, is that we can take the European margins and move them much closer to what you see in North America. You see the U.S. margins moving closer to the Canadian margins, and we believe there are opportunities to do that not just through this program but will be embedded then in our plans.

Okay. That's helpful. And then on Europe, we're seeing some strong growth out of Europe from many of your peers, and it looks like your European numbers ex U.K. also seem to be doing well. Can you point to anything that's driving that regional strength?

It really is just the, I think in many cases, the strength in economy is freeing up some of the spending by our clients. And yet having said that, if you look back to North America and even the U.S., this is a necessity. So whether the economy is or isn't strong, this is a necessity in North America as well. But certainly, the economy is helping in some of those European entities for sure.

Okay. And then one final one on the U.K. Looks like Brexit continues to impact the bookings there. Is that likely to continue over the short term? How long do you expect this to continue going forward?

Yes, I think it will continue for a little while. But that's why I kind of called out, I can see us stabilizing the revenue here over the next few quarters. We're probably not going to be in a high-growth area like we've been. You'll see some of that flow through in some of the comparables but that will work its way out. And then it's really a matter of staying close to your customer, keeping that incumbency because inevitably, when some of it becomes more clear, there will have to be spending both on the government side and on the commercial side. And that's pretty much been the strategy you've seen us play in the U.S. Federal and that's now starting to pay off for us.

Our following question is from Paul Steep from Scotia Capital.

On acquisitions. George, could you talk a little bit about collaborative in CTS and even ECS? Why they chose CGI and more importantly in that market segment, what the competitive dynamic was like in those deals? Then I've got a quick follow-up.

Yes, sure. So what each of those companies -- I think the reason we were able to link up together is we did have common clients in each of those 3 cases. And in fact, in each of those cases, our clients identified a potential for us to maybe come together. It plays right in line with what we see and what our client said in the Voice of the Client survey, which is they see their digital transformation projects getting bigger and becoming more enterprise-wide over time. That drives out some of the niche projects and then that the companies that can only do those niche projects, simply because of scale, not because of talent, but simply because they don't have the scale for an enterprise or trust them at an enterprise-wide project. And so that's what both companies get out of that. We get access to some really outstanding talent. We share common experiences with our clients and then we can go after bigger deals, and I can tell you that we're already seeing that both in the pipeline, but even in some of the bookings where each of those companies are now booking larger longer-term deals in their current clients that they wouldn't have been able to book if not -- if they weren't part of CGI. So it's a very -- it's a nice opportunity. And in each of those cases, this wasn't an auction-type situation.

Great. The quick follow-up would just be on the savings out of the plan that's going to be implemented starting this morning. Are you going to redeploy? Are we going to see the margin lift from all those savings? Or you're going to hold -- are you and François going to hold a little bit back to reinvest into some of these growth initiatives?

Some of this is an extension of our strategic plan. And so we have been investing, we will continue to invest and so you will see some continued investment to sustain the organic growth. Having said that, it's a profitable growth strategy and some of this will be focused on the profit side of profitable growth. So you'll see -- so the answer is yes, you'll see both.

Our following question is from James Schneider from Goldman Sachs.

I was wondering if you could maybe comment a little bit on the profile of headcount growth as you head through the next couple of quarters and through fiscal '18? Can you maybe give us a little bit of color on these positive investments and headcount plans in the new areas? And how that's going to be offset by some of the trimming in the staff tied to some legacy efforts as you mentioned before?

Yes. So at the high level, what we expect, and I think we mentioned this in the opening remarks, but the net headcount growth will continue. Well, it certainly won't go down. And overall, our billable headcount will go up throughout this period. Now we don't have every -- exactly when each are going to happen over the next quarter, but what we're talking here after a couple 3, maybe 4 quarters, our net headcount will be up and our billable headcount will be up significantly. And that really is across every one of our business segments, Jim. This is -- it's pretty widespread because the shift in demand is widespread. It's pretty widespread because automation is looked after in every industry across the geographies. Having said that, it's a little more focused in some of the areas that probably you could see from the margins.

And maybe as a follow-up, on the bookings, good to see the IP-led bookings up a lot in the quarter, but I think year-over-year, there was a decline. Can you maybe help us understand or unpack where the bookings might have been a little bit weaker? And where maybe the comps sort of have been tougher a year ago?

Yes, I can answer it this way first, and it really is something that you would see across each of the regions in a similar way. We talked about more of the bookings through SI&C, the SI&C in this current point in time, and it's just because as we're going through this inflection point, some of those deals tend to be shorter term. Therefore, smaller dollar value than the large outsourcing, but we believe that by engaging on more of those deals and over half of our deals were with new business. As we engage in new deals, that we'll see those bookings come back and our mix get closer to our optimal mix of 30% SI&C and 70% recurring revenue with a 30% target of IP overlay.

Our following question is from Robert Peters from Cormark.

George, just looking at the U.S. growth, I know you talked about kind of the strength you're seeing across the board there, but I was just wondering if you can kind of give a bit more of the commentary around what you're seeing on Defense side? Specifically I think, if we look at the U.S. Army contract that you announced in the quarter, that seems to be -- your kind of the first booking on that product for them in a while. So I was just kind of wondering kind of if you're seeing a change there? Or kind of what you see that the U.S. business kind of going to over the next couple of years?

Yes, no. That's a good observation and you are right. I'll just remind you, there is a period of time that we did not have the ability to sell Momentum into the Defense space and that really was part of when AMS was merged into CGI. The right to sell to Defense actually went to CACI. That was to extend that exclusivity, us for the CGI, for the civilian side and CACI for the defense side continued. That was extended once we came to a different resolution. And -- but you're right, really the defense side in that -- during that period of time didn't really do much. And in general, we're seeing renewed activity under this administration to reinvigorate some use of commercial practices, including our IP. And that was a very significant big win for the team in the U.S. Federal. So that was a long process. We beat all the major players on that, both IP and integrators. And I think it shows the strength of our solution and of our team in the U.S. So that's a good one to call out. Yes, I do see that the defense, particularly on the higher-end side, that there will be some additional spending that goes on there, particularly in the cyber areas, but really strengthening their systems in order to modernize and approach the future challenges that they may see.

Perfect. And maybe just one follow-up again. I saw -- you mentioned the IP bookings in the U.S. in the quarter were particularly strong. Just wondering, we -- you talked a long time about IP30 as a goal for the overall company. But maybe could you kind of talk about how it's doing particularly in the U.S? And given 70% of the bookings are from IP, do you see that upside at least on a regional basis to that target?

Yes. So regionally, most in general, our IP is where we want it to be in North America. That's why the push is really on exporting that IP and getting that to other areas. And of course, in North America, we want to grow all of our services, including the use of the IP. But that's where we kind of came up with that target. Our best mix business units have a 70% outsourcing, 30% SI&C, which reinvigorates and allows you to get more of those long-term deals. So they're too halves, it's -- the goal is not 100%, recurring revenue is the 30%, 70%, and then about a 30% IP, most business units in the -- or many business units in North America are already there.

Our following question is from Paul Treiber from RBC Capital Markets.

Just in regards to the headcount additions that you're making to your business. How do you find competing for talent? And then also related to that, it seems like some of your competitors in the U.S. are adopting more of a near-shore strategy. Will a -- how do you see that impacting your differentiation in the U.S?

That's a good question. On the headcount additions, first and foremost, it gives me the opportunity to say that we're also building talent. And so we're looking at our current headcount and also looking at partnering in the communities, using our proximity model to bring on interns and new talents, which has a different -- it's a different value proposition for CGI to bring them on, particularly in the near-shore centers, given our proximity. Others are playing catch up, we're already there, and that does make a difference from that perspective. We're also leveraging the high commitment we have from our current members and the fact that we're reinvesting in our business and reinvesting in our talent to drive up our referrals, which is really becoming a big way that we can win that competition for talent. So we are continuing to grow throughout this period, and right now, I would say that we like our positioning from that perspective.

And George, you've been -- you're coming up to nearly the first year in your role as CEO of the company. In what ways had the business progressed faster than you expected? And then what seems slower or more challenging than what you thought?

Well, that's a good question. I think obviously, this acceleration of the demand in the marketplace is something that we have been planning for and investing in but that certainly has accelerated. And so I like our positioning and that's a part of the reason I announced the initiative today to make sure that we are best positioned to take advantage of that. I don't see anything really moving too slowly.

Our following question is from Stephanie Price from CIBC.

When you look at over the next kind of 12 months and in relation to the strategic process that you've undertaken, can you give us some perspective on where you see the areas of momentum or opportunities, so by geography, by vertical, by IP?

Yes. Well, that's a lot. Let me really start this way, Stephanie. As I mentioned, there's really a high alignment cross industry, every industry is looking to invest in the new -- cross geography. As I go around to the leaders, our strong leaders around the world, they're all seeing the demand in different ways. I would say really it's more about in-demand skills that we're focused on across all of those regions. It's really making sure that we have the consultative skills in the business domain to help our clients. We talked a little bit earlier on the call about the cultural shift they're undergoing. Talking about how we help them unlock the value of data through data analytics, and so we're investing in the data analytics side. Cyber, still protecting the whole data privacy that's going on in Europe again across industry, but making sure that we'll protect that, making sure that we have the business and domain skills around CGI IP, it's certainly a focus of ours. And then lastly, it's really that agile developer, agile methodology and dev-ops shift in the marketplace. Getting those types of skills is really what we talked about is a big part of this program, making sure that we're able to invest in that to meet our clients’ needs around the world. But it's across all the industries, and it's across all the geographies that we see this opportunity. Different paces, but if you're looking at it, if you're saying, "What's it look like over 12 to 18 months?" It's more about those in-demand skills than it is about any one geography or any one industry.

Okay. Great. And then EBIT margins in the Nordics. Can you talk a bit about the project challenges in Denmark? And whether you see this is going -- impacting margins going forward?

Yes. Well, as you know, Denmark is a smaller entity of ours there with opportunity. And they really are isolated. As always, I don't like to talk about any individual client because of confidentiality reasons. So we have a practice where we don't do that. But they are isolated, and we do see the broader opportunities which are highlighted across the Nordic region. And in fact, I'll be there in a week in each of our Nordic countries meeting with the team and both leadership and all of our excellent members in the Nordics.

Our following question is from Ralph Garcea from Echelon Wealth Partners.

Just a couple of quick ones. On the high-end consulting side, when you're doing these digital projects, what sort of conversion and rates are you getting? One. And then two, is it sort of 6- to 12-month projects? Or are they taking longer before you get these guys to convert into a longer-term outsourcing deal?

We're still early days, Ralph. Most of them really are 6 to -- I would say, 6 to 9 months engagements. But as asked earlier, they don't -- those might extend a time or 2 as either in pilot implementations, prior to really converting into a broader initiative across the enterprise. So it's early days, though, for us in that respect.

Okay. And then on the U.K. side, I mean, you swing every other quarter with the EBIT margins under 10%, go back into the low teens and then back and forth over the last 5 or 6 quarters. Is that a function of sort of the government contracts rolling out, and then you get to the margin levels you like? And if so, how quickly can you grow the commercial business there to sort of stabilize the margins?

Yes. So there have been some isolated one-timers, and you are correct. It's bounced a bit. It's actually bounced above our normalized margins and it's bounced below. We see this as more of a stabilized, normalized margin, and then look to expand from there in the ways you talked about in continuing to diversify. That's why I highlighted some of the consulting efforts we have in the financial services space, for example.

Okay. And then just lastly on the (inaudible) side. I mean, you guys have a great internal program for developing this IP. Are you seeing sort of quicker rush to market from some of the stuff you've developed internally and then clients asking for these products as you sort of roll them out and trial them on-site?

Yes. So that's a great question. We don't build IP and then hope that somebody comes and buys it. That's why it's integrated into the operations. We typically do that. 85% of the IP that we have, including some of our most powerful IP and most entrenched IP, actually was developed in conjunction directly with the client or through a consortium model or maybe even developed for a client that then we modify to take into the broader marketplace. So there's always an automatic proof point. And -- but yes, that time to market, as we look at technologies evolution and automation and the methodologies today, there are opportunities for us to bring modules to market quicker. And in fact, that's exactly what we're doing with our new retail offering in -- that was about out of the -- of France, and again, directly in conjunction with our clients in those centers of excellence.

Marge, I think we'll have time for one last question.

Our last question is from Maher Yaghi from Desjardins Capital Markets.

If I can talk about an old, boring but important metric called the EPS. You have signaled and we've seen the relationship between the stock price and EPS growth over the many years of CGI's history. As you ramp up your revenue growth metrics and its improving EPS growth has come down, sitting now at 4% year-on-year. I mean, it's probably an important reason why you're initiating this new cost-cutting measure or improvement in your employee base to restructure the business, improve margins, et cetera. Can you talk about how should we look at EPS growth to drive on from where we are right now in terms of improvement in EPS growth over the next year? Have we seen the bottom? Or should we expect a bit more retrenchment before improvements in 2018?

Yes. So now that's a -- thanks for the question, Maher. And no, not boring at all. We are very focused on EPS. You are correct. It's why I highlighted the -- that profitable part of our profitable organic growth strategy and the two do have to go hand-in-hand. And that's why we initiated the program. That's why I recommitted our traditional effort to have double-digit margin accretion will be embedded into our 2018 fiscal year plans. I'm meeting with the teams right now. And that's why I gave you the strategic context of why we initiated the program. I don't know if François -- you want to add?

No, no. I totally agree. That's the goal for next year. And you're right, and we did indicate that we will see some bottom-line improvement related to this program. So we will continue to see some improvement next year. And again, we'll continue also to -- with the cash generation to use that cash for other acquisition and/or a share buyback that will again improve the EPS growth.

So the historic 10% EPS growth metric that you would like to achieve, so far this year, we're not there, but should we expect that to be your goal again for 2018?

Yes, we're not there. But don't forget also that on the year-to-date basis, just FX on the revenue is north of $200 million of revenue, that's just because of FX. And again, that has also an impact on EPS because of it. So if you're taking that just on account, you will be closer to 8% accretion on a year-to-date basis. So we need to take that in consideration, but yes, again, we are expecting to see double-digit growth next year.

Thank you, Maher, and thank you, everyone, for joining us. We'll see you in November for the year-end results.

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