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CGI, Inc. (NYSE:GIB)
Q3 2019 Earnings Call
July 31, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, all participants. Your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the CGI Third Quarter Fiscal 2019 Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Investor and Public Relations. Please go ahead, Mr. Gorber.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thank you, Eric, and good morning. With me to discuss CGI's third quarter fiscal 2019 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 from Montreal at 9:00 a.m. Eastern Time on July 31st, 2019. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q3 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, except as required by applicable laws.

The complete Safe Harbor statement is available in both our MD&A and press release, as well as on cgi.com. We encourage our investors to read it in its entirety and to refer to the Risks and Uncertainties section of our MD&A for a description of the risks that could affect the company.

We are reporting our financial results in accordance with the International Financial Reporting Standards, or IFRS. 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.

One final reminder. With the offer to acquire Scysis still outstanding, and per the Irish takeover rules, we cannot discuss any points or respond to any questions outside of the information that has been disclosed publicly. As such, our comments will be limited and any questions will refer back to previous communications.

With that, I'll turn it over to François now to review and provide context to our Q3 financial performance, and then George will comment on our operational highlights and update our strategic outlook. François?

François Boulanger -- Executive Vice President and Chief Financial Officer

Thank you, Lorne and good morning, everyone. I'm pleased to share our results for Q3 Fiscal 2019. Revenue was $3.1 billion in the quarter, up 6.1% year-over-year, or 6.6% at constant currency, over half of which was organic.

Bookings were just under $3 billion in the quarter, bringing the total signings over the last 12 months to $12.8 billion, or 107% percent of revenue. New business continues trending toward longer term end-to-end services, and our pipeline for these managed IT and modernization opportunities is growing up over 20% year-over-year. And, with respect to IP, we see ongoing demand for our business solutions and an increase is cross geographic IP revenue in multiple industries.

IP revenue in bookings rose year-over-year in dollar terms, but with the addition of Acando, IP as a percentage of revenue reset to 21%. At the end of June, our total backlog amounted to $22.4 billion, or approximately 2x annual revenue.

Adjusted EBIT was up in Q3 to $474 million, compared with $435 million last year, representing a year-over-year increase of 8.9%. Adjusted EBIT margin improved to 15.2% in Q3, up 40 basis points from both last year and last quarter, demonstrating our ability to grow organically while expanding margins to build and to profitably integrate acquired revenue to buy.

On a GAAP basis, net earnings were $309 million in the quarter, up $21 million from last year, and representing a 9.9% margin. Diluted earnings per share of $1.12 were 12% higher year-over-year.

During the quarter, we acquired a majority of Acando's remaining shares, reaching over 96% ownership and initiated the squeeze out process to our acquired remaining shares. As part of the integration process, we have initiated the divestiture and runoff of non-core revenue, which we still expect to total approximately 5-10% of Acando annual revenue. As such, we incurred integration related expenses of $28 million net of tax.

When excluding these specific items, net earnings grew to $337 million, representing a 10.8% margin, up 30 basis points from last year. We expect to incur an additional $32 million net of tax to complete the Acando integration, half of which we expect to be expensed in Q4. When excluding integration costs, diluted EPS expanded by 13% to $1.22.

On the cash side, our operations generated $375 million during the quarter, up over 18% compared with $317 million in Q3 last year. And over the last 12 months, cash generated from our operations increased to $1.6 billion, representing 13.1% of revenue, or $5.60 per diluted share. We ended the quarter with a DSO of 52 days, compared to 50 days last year, primarily due to the addition of Acando revenue, most of which is SINC.

In the quarter, we continue allocating capital to further advance our profitable growth strategy. We invested $84 million back into our business, including the development of our IP and the ramping up of new engagements. We invested $520 million to purchase shares of Acando toward the announced purchase price of $624 million. We invested $517 million to buy back 5.3 million shares at an average price of $96.98 per share.

At the end of June, net debt stood at $2.3 billion, representing a net debt to capitalization ratio of 25.2%, well within our comfort zone. We have over $1.3 billion in readily available liquidity and access to more as needed. As we evaluate potential metro market mergers and larger transformational ones, we are seeing more attractive valuations across our targeted geographies, specifically in Europe. At the same time, with low interest rates and CGI's current valuation, all options are available to successfully execute the buy part of our strategy. Now, I'll turn the call over to George.

George D. Schindler -- President and Chief Executive Officer

Thank you, François, and good morning. I am pleased with our team's results in Q3, further strengthening CGI's position as a global end-to-end IT and business consulting services partner. I highlighted some early findings last quarter from our latest in-person client executive interviews. As we dig deeper into this unique and rich dataset, a meaningful insight has emerged that reinforced our strategic direction. Once again, this year, becoming digital to meet customer and citizen expectations is a key business priority for our clients. At the same time, IT modernization gained importance this year, rejoining the list of top priorities. This reemphasis on IT modernization is influenced by the slower than anticipated delivery of tangible results from clients' early stage digital initiatives.

Even as clients continue to increase overall IT spending, they've started rebalancing their technology investments between new digital initiatives and fundamental modernization, with a sharper focus on generating business outcomes. Taking a more holistic enterprise view, clients will be better equipped to fully realize return on these technology investments. This shift is already occurring across industries and driving an increase in CGI's pipeline. In particular, for our unique combination of managed IT services and business consulting. Clients are increasingly receptive to this offering as it delivers business agility with innovation and immediate financial benefits.

For CGI, this client decision-making shift reinforces our end-to-end services strategy, a strategy that leverages the strength of our proximity based client relationships, world class delivery capabilities, and the operational excellence for which CGI is recognized.

With this strategic positioning as a backdrop, I will now turn to the operational highlights for the quarter. Revenue increased in all operating segments when accounting for a one-time contract adjustment in the UK and Australia segment. Furthermore, we grew across all of our targeted industry sectors, led by global demand in manufacturing, communications, insurance, and government.

Bookings in Q3 were generally lighter, reflecting the shift in demand I just described, which dictates longer sale cycles. Correspondingly, our pipeline increased again this quarter, most pronounced in opportunities for managed IT, including intellectual property. And margins expanded in the quarter as progressed toward CGI's target revenue mix of services.

Looking at Q3 operational performance by geography, beginning in North America, in the U.S. federal segment, revenue grew 8.7% organically in Q3 on the strength of our backlog in this segment, which is well over 2.5x annual revenue. While bookings in the quarter were low at 54% of revenue, on a trailing 12-month basis, they remain healthy at 136%. Strategic wins in the quarter continue to extend our reach in the federal market through emerging technology projects and through our selection on large multi award contract vehicles.

EBIT margin was over 17% as more of our current revenue mix includes IP and strategic IT services such as cyber security. We're actively bidding on over $5 billion in opportunities, most of which are for net new business. These opportunities will be adjudicated over the next few quarters.

In the U.S. commercial and state government segment, organic revenue growth of 1.4% was driven by ongoing strength of our commercial industry offerings, particularly in IP. And we are seeing renewed signs of growth in the state and local business, as evidenced by sequential revenue growth and strong Q3 bookings, also driven by our IP. EBIT margin was 21.9%. The continued development of new metro markets and higher value services are bringing us closer to our target mix of revenue and driving consistently strong margins.

Book-to-bill was over 100%, with half of these signings related to long-term managed IT services, demonstrating the demand for this offering and the strength of our solution. In Canada, revenue grew organically again this quarter, led by demand across insurance, banking, and government. We continue to automate our infrastructure business to provide the most cost effective and efficient services to our clients. As a result, our EBIT margin in the quarter was temporarily impacted by the corresponding costs of rightsizing our infrastructure business. Without the expenses associated with this effort, Canadian margins would've been in line with traditional levels of approximately 20%. These rightsizing actions will be completed in the fourth quarter and will drive improved services to our clients and margin expansion for CGI in the next fiscal year. Canada's pipeline grew over 10% year-over-year as we pursue a number of large, long-term managed IT deals.

Turning now to our European operations. In Northern Europe, revenue grew 17.9%, led by the addition of Acando as well as organic growth across the majority of metro markets in the region. EBIT margin was 10.5%, impacted as we integrate Acando, but beginning to improve as the CGI model is fully implemented. The combined revenue mix, along with the expected benefits of integration will yield increasing margins going forward. Strong bookings in Q3 were supported by our newly integrated advisory services from Acando, as well as data analytics capabilities from Affecto.

For example, Stockholm's public transportation administrator recently chose CGI to provide end-to-end services, combining management of its critical legacy operations with IT consulting and innovation support for new commuter services. And, with a major European bank, we were recently selected to design and pilot next generation analytics and digital customer activity platforms. In Western and Southern Europe, revenue grew 2.7% organically, with strength particularly in the French operations. EBIT margin increased to 12% as we continued to improve the business mix.

Bookings for the quarter were above 100% with strong public sector demand in France and Belgium, as well as new work for leading manufacturers across the region in the areas of supply chain optimization and in leveraging IOT for business benefits. In order to maximize our considerable retail sector expertise in this region, we continue to invest in our offerings and client relationships to drive future growth.

In the UK and Australia, we combined our UK and Australian operations during Q3 to benefit from the scale and the synergies associated with similar clients across industry sectors, including utilities, banking, and government. Due to the one-time impact of a project in Q3, revenue in the newly combined segment contracted temporarily by 1%. And EBIT margin was 12.1%. The stand-alone UK business continues to demonstrate strength with organic growth of 2% in the quarter and a strong EBIT margin of 16%.

As Brexit talks continue, UK government procurement decisions were again slow in Q3. Book-to-bill for the quarter was 91%. Looking ahead to Fiscal 2020, we continue to expect upside opportunities in both public and commercial sectors.

In Central and Eastern Europe, revenue grew 18.4%, with inorganic growth from Acando and CKC, combined with organic growth across every major country in the region. EBIT margin increased 130 basis points to 9% in the quarter. Similar to other European operations, our business in this segment continues to evolve toward CGI's target mix of services, which will drive further margin expansion.

We see ongoing vendor consolidation across the region as the contributing factor to Q3 bookings being slightly under 100% of revenue, as more procurements have a two-phased approach. CGI was recently selected as a preferred provider on phase one on new contract vehicles for clients in the transportation, communications, and automotive sectors. We are actively bidding on task orders under this agreement as the phase two.

Trailing 12-month book-to-bill in this region remains strong at 113%. Turning to our Asia-Pacific global delivery operations, revenue grew 8% across the region, and EBIT margin was 27.9% in the quarter. This region is the cornerstone of our global delivery network. Through the use of productivity tools, methodologies, and intelligent automation, into our software development and testing services, we are now delivering consistently high margins. In fact, our delivery capabilities were again assessed at Level 5 for development services, including for agile, under a new upgraded version of the CMMI Institute's Capability Maturity Model. CGI is one of only a dozen companies globally to have been assessed at Level 5 under this new version, and among the first for agile development services.

CGI also was named the first scaled agile global transformation partner, in large part due to the strength of our India delivery center and their connection across our full network of global delivery centers and metro market based proximity units.

Before taking your questions, I will close with a few perspectives on our strategic outlook. We will continue our metro market acquisition approach of focusing on companies with annual revenue under $500 million and with deep client relationships in areas where we see significant room for growth. We've identified opportunities in each of our operating geographies, with over 200 newly qualified candidates entering the funnel as part of our latest client global insights program. We continue to see this metro market-based strategy not just as a short-term driver of inorganic growth, but as a catalyst for accelerating future organic growth.

This is precisely why we are optimistic about our offer, announced in the quarter, to acquire UK-based Scysis. The deep and complementary expertise that the Scysis professionals will bring to CGI's space, defense, and media sectors in both Germany and the UK is expected to drive accelerated growth in the future. We plan to complete this transaction in the second half of 2019.

Additionally, we will continue to have discussions regarding transformational opportunities with companies generating over $500 million in annual revenue. As always, we will be disciplined to ensure that we merge with the right company, for the right price, at the right time -- all three without exception.

In summary, I'm pleased with the performance of our operations and am particularly encouraged by renewed client interest for our managed IT and business process services offering. We now number 77,500 members around the world and continue to successfully develop and recruit in demand expertise in proximity to our clients. We are well positioned for organic growth given our deep relationships, end-to-end services, and global antennae to rapidly adapt to industry trends and client priorities.

We are seeing more attractive valuations in the marketplace to drive continued growth from the buy side of our strategy, and we continue to evolve our business mix to drive margin expansion. IN short, we are well positioned to achieve our strategic aspiration of doubling the size of CGI over the next five to seven years. Thank you for your continued interest and support. Let's go to questions now, Lorne.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Just a reminder that a replay of the call is available either via our website or by dialing 1-800-408-3053 and using the passcode 7572208 until August 31st. There will also be a podcast of the call available for download within a few hours. And, as usual, follow-up questions can be directed to me at 514-841-3355.

...

Eric, if we could poll for questions, please.

Questions and Answers:

Operator

Thank you, Mr. Gorber. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press *1 on your telephone keypad. If at any time, you wish to cancel your question, please press the # sign. Please press *1 at this time if you have a question. And the first question is from Richard Tse from National Bank Financial. Please go ahead. Your line is open.

Richard Tse -- National Bank Financial Markets -- Analyst

Yes, thank you. George, not that we're at this point yet, but a lot of prognosticators are talking about if we enter -- it's an economic slowdown. If we were to do so, given the shift toward adoption of digital and everything you're doing there, do you think the revenue stream is quite resilient? And I ask that question because more of your revenue today is SINC versus outsourcing a number of years ago.

George D. Schindler -- President and Chief Executive Officer

Yeah. Thanks for the question, Richard. Yes, I definitely agree that the revenue stream should be far more resilient. It's really for a couple of different factors. First, the one important aspect is IT is far less of a discretionary spend and more of an obligatory spend given it's important in really every business across industry. So, that's an important change from the last time we had a downturn. But as you also pointed out, we do very well in a downturn. In fact, why I highlighted this shift that we see some of our clients now taking to get more of the business benefits, that plays really well to our end-to-end services.

As I've always said, SINC is the -- if you think the business consulting is the tip of the spear, the SINC is maybe the front of the spear. But the full backend of the spear is really providing those full IT managed services, which is why I highlight the increase in our pipeline -- not just savings for our clients but allows them to continue to invest in IT. And every client I speak to is making the point that they are going to continue investing in IT. And our voice to the client shows that.

Richard Tse -- National Bank Financial Markets -- Analyst

Okay. That's helpful. And you talked a little bit on the call about the infrastructure business in Canada in terms of rightsizing that business. Do you need to do any of that rightsizing in other regions? And on the infrastructure side, I'm curious to see -- are you at the point now where, on a global basis, the base of that revenue is sustainable going forward?

George D. Schindler -- President and Chief Executive Officer

Yes. So, on the infrastructure side maybe -- and with your last question -- yes, we believe that the infrastructure business is in fact sustainable. We're at that right level. It continues to be a central aspect, particularly for our own intellectual property but also important for how we deliver the end-to-end services. So, I think it's at a sustainable level. However, we continue to have ways of infrastructure automation to deliver those services with higher quality, more efficiently, and more cost effectively. That's ongoing throughout the infrastructure operations around the globe.

The reason I had to point it out here in Canada, we're doing some of that as we speak around the globe. But it's a bigger base of business in Canada, so it has a bigger impact. So, that's the reason I pointed that out. But it's ongoing. And again, it's part of the natural course of doing business.

Richard Tse -- National Bank Financial Markets -- Analyst

Great. And just a last one for me on the landscape. You've made a number of, I don't know, niche -- whatever you call it -- acquisitions, smaller than you have done in the past. From a competitive positioning standpoint, has that made an inroad relative to some of your big competitors in the marketplace?

George D. Schindler -- President and Chief Executive Officer

Yeah. So, we're very disciplined. We call them -- we refer to them as metro market-based mergers. And the reason for that is, they're bringing us local relationships that then allow us to sell through the full range of services. And that's why they're important. Yes, they come with very talented individuals. They come with expertise -- domain expertise and technology expertise. But they also bring with them deep relationships. And that's really our criteria. They bring with them deep relationships that allow us then to provide the full range of services. So, yes, it makes us far more competitive in each of the regions that we buy them. And we're seeing accelerated growth in those regions -- in every one of those regions around the world -- when we do one of those mergers.

Richard Tse -- National Bank Financial Markets -- Analyst

That's great. Thank you for taking my questions.

George D. Schindler -- President and Chief Executive Officer

Thanks, Richard.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Richard.

Operator

Thank you. The next question is from Thanos Moschopoulos from BMO Capital Markets. Please go ahead. Your line is open.

Thanos Moschopoulos -- BMO Capital Markets Corp -- Analyst

Hi. Good morning.

George D. Schindler -- President and Chief Executive Officer

Hi, Thanos.

Thanos Moschopoulos -- BMO Capital Markets Corp -- Analyst

George, is the constrained labor environment impeding your growth in any of the geographies, or is that something you're being able to manage through successfully?

George D. Schindler -- President and Chief Executive Officer

Yeah, you mean, the economic growth?

Thanos Moschopoulos -- BMO Capital Markets Corp -- Analyst

No, no. The constrained labor environment. The --

George D. Schindler -- President and Chief Executive Officer

Oh, the constrained labor environment. No, no, no. The constrained labor environment is not impacting our growth. We are doing very well at the hiring. There is certainly high demand for IT services -- or IT talent -- not just by us, but also by industry. So, there's high demand. But we have a great model with our ownership culture and model, which is unique. And because of that, we get a lot of our new hires through referrals. And that's up to nearly a third now in the current quarter. A third of our new hires are coming from referrals. So, we have a natural, built-in recruiting pipeline. Having said that, I'm not going to say that hiring isn't important and continues to be important. But I don't see it constraining our growth. And global delivery plays into that. It allows us to leverage the global delivery centers as well.

Thanos Moschopoulos -- BMO Capital Markets Corp -- Analyst

Okay. In your prepared remarks, I think you made the comment about longer sales cycles with respect to some kinds of bookings. And just to make sure I heard that correctly, I think what you were saying is that, as clients are looking at larger engagements, that might be contributing to that dynamic. But if you could expand on that point and just make sure we heard that properly?

George D. Schindler -- President and Chief Executive Officer

Yep. You got that exactly right, Thanos. It really is just a matter of as the opportunities get larger, and as the focus gets sharper on the business return -- which, by the way, we do very well. And those type of decision-making process, it does take a little bit longer. And I'll point out -- I think I made this point maybe last quarter, but when we look at the voice of our client results, what we see is out clients continue to say -- more than half our clients say the deals are getting bigger over the next three years. So, we're seeing that. This is the point where we're moving into some of the middle innings. We've been talking some about being in the early innings of this digital transformation. We're maybe moving into those middle innings, which again, I've been predicting we'll do very well in.

Thanos Moschopoulos -- BMO Capital Markets Corp -- Analyst

Great. And just one last one. On the IP side, is it primarily government and financial services driving that core strength or are there other verticals you would call out?

George D. Schindler -- President and Chief Executive Officer

No, I would say there's other verticals. There's also -- we're seeing that in utilities. We're seeing that in insurance. We're seeing even some of that in manufacturing. And, as I mentioned, we're continuing to invest in the retail side. So, as you know, we have IP in virtually every vertical.

Thanos Moschopoulos -- BMO Capital Markets Corp -- Analyst

Great. Thanks. I'll pass the line.

George D. Schindler -- President and Chief Executive Officer

Yep. Thanks.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Thanos.

Operator

Thank you. The next question is from Steven Lee with Raymond James. Please go ahead.

Steven Lee -- Raymond James & Associates, Inc. -- Analyst

Thank you, George and François. I missed part of your prepared remarks. Central Europe [audio cuts out] had strong growth from the M&A. Was there net organic growth in these regions? And if you can say, how significant? Thank you.

George D. Schindler -- President and Chief Executive Officer

Yes, we had -- again, with the exception of the one-time adjustment due to a contract in UK/Australia, we had organic growth in every one of the regions. And, of course, in -- particularly in the Central and Eastern Europe, and Northern Europe, we also had the inorganic growth. We had very little inorganic growth in any of the other regions.

Steven Lee -- Raymond James & Associates, Inc. -- Analyst

Okay, great. Thanks, George. And your comments on Canada, your margin income there, to excluding restructuring closer to 20%, now last year you were approaching 22%. What's changed from last year, or what was unusual last year?

George D. Schindler -- President and Chief Executive Officer

Yeah, I think it's just mix of business. We had some of those IP license bookings we'll continue to sell. And our IP does very well in Canada. In fact, we're doing very well, particularly in the banking space, around wealth -- our wealth product. But it really is just those licenses. As we move more of those licenses toward a software as a service, you can see some of that even out. So, that's really what's going on there in Canada.

Steven Lee -- Raymond James & Associates, Inc. -- Analyst

And, George, that 20% -- are we back to that level in the second half, or there'll be structuring --

George D. Schindler -- President and Chief Executive Officer

There will be -- there will continue to be some restructuring in the fourth quarter, but we'll hit the ground running in FY2020.

Steven Lee -- Raymond James & Associates, Inc. -- Analyst

FY20 -- perfect. And, a quick one for François. In your MD&A, you mentioned some tax credits in the EBIT for the US. How significant was that?

François Boulanger -- Executive Vice President and Chief Financial Officer

Not that much in the quarter, but enough to put some explanation. But we have tax credit year after year, so it's just the timing of it in the quarter.

Steven Lee -- Raymond James & Associates, Inc. -- Analyst

Okay. Very helpful. Thank you.

François Boulanger -- Executive Vice President and Chief Financial Officer

Thank you.

George D. Schindler -- President and Chief Executive Officer

Great. Thank you.

Operator

Thank you. The next question is from Robert Young with Canaccord Security. Please go ahead.

Robert Young -- Canaccord Genuity Group, Inc. -- Analyst

Hi. If you could talk a little bit about the UK -- lots of uncertainty about how that's going to roll out over the next couple quarters, if there's a hard Brexit. Are you comfortable sharing any kind of scenarios there that you're thinking about?

George D. Schindler -- President and Chief Executive Officer

Yeah, thanks, Robert. We do have, as I mentioned before -- we have a number of different scenarios. But what I would say now, in spending some time with our UK team -- on the commercial side, it's almost back to business as usual. IT services demand is high on the commercial side. A lot of the various industries and companies that we're working with had done some of their own Brexit proofing. As I had mentioned, we did some of ours where we split some of our work for the European Space Agency, given the potential for Brexit. So, most of the companies are through that. And quite frankly, being a services provider, our business pipeline and bookings look to be strong and continue to be strong straight through that process, because everybody's built some of that in.

On the government side, I would say our strong suit really is -- and has always been in the UK, around our really high-level work we do for the space -- in the space industry. And, from every indication, that would only increase on a potential Brexit. And then, of course, right now we're just in -- the government is really -- their attention is diverted toward their own scenario planning, if you will, and that just creates a temporary roadblock. But we believe that would -- that really is just creating a pentup demand, again, independent of any decision. That's why we look to have -- be strong in both commercial and public sector moving forward regardless.

Robert Young -- Canaccord Genuity Group, Inc. -- Analyst

Okay, great. Lots of color there. In Acando, I was wondering if you could talk about employee retention there, now that it's been around for a little bit. You said it's a bit of an SINC focus and so are you able to retain some of these higher value consulting related employees? What's going on there?

George D. Schindler -- President and Chief Executive Officer

Yeah, no, that's a good question. I wanted to talk a little bit about Acando. The integration is going actually very well. And, as you know, it's split across a number of countries. But I'll start with your question. Our advisory services continues to be strong, and that was really the high end consulting part of Acando. It's really presenting to be very strong across metro markets. We always have a spike in turnover, it's just the nature of a people business and change and how that impacts people. But, in fact, we're very pleased with our retention on the advisory services and, most importantly, with some of the joint opportunities that that's already driving. And I highlighted just one of those with a European bank in the -- in my prepared remarks. So, again, very good.

But I also want to highlight that, in Norway, where we actually doubled the business through the integration, that integration right now is ahead of schedule. It's generating both bottom line and top line synergy, so very pleased with that. And then, Germany is going right on plan and we did mention that the divestitures that I mentioned last quarter have begun exactly as planned. And it's working well. So, that's mainly low margin or staff augmentation work. And so, that only increases the bottom line synergy. So, very pleased with how the overall integration's going.

Robert Young -- Canaccord Genuity Group, Inc. -- Analyst

Okay. And last question for me -- you mentioned in the remarks that IT modernization is gaining priority this year, and I wanted to get at some color to that. How do you see that as different from digitization -- other drivers of the business? It seems as though that would be something that would be driven by larger customers, maybe more global customers, that speak better to CGI's end-to-end global footprint. And maybe I'll -- if you could add some color there and I'll pass the line.

George D. Schindler -- President and Chief Executive Officer

Yeah, you're exactly right. It really is the enterprise customers that have large legacy environments. And they've gotten some of the benefits from their digitization efforts, but really, there's a bit of a roadblock on some of their legacy in being able to connect that more holistically. And that's really where we see the opportunities for IT modernization, and maybe where our offering is a little bit different. We begin with a benchmarking exercise really to determine where the best in class IT attributes -- under best in class IT attributes, where a client is and -- regarding meeting the business needs. Then we really become an extension of their IT in order to bring in CGI best practices, global delivery, and IP to provide cost savings, which then is reinvested into -- in a cofounding approach to being them the innovation they're looking for.

So, it's really all three and it's bringing them together. And yes, you're right. It's the enterprise clients that are most interested in it.

Robert Young -- Canaccord Genuity Group, Inc. -- Analyst

Is there any risk at all that that might drive a growth in your infrastructure side of the business?

George D. Schindler -- President and Chief Executive Officer

No. I -- drive growth in infrastructure?

Robert Young -- Canaccord Genuity Group, Inc. -- Analyst

Yeah. The --

George D. Schindler -- President and Chief Executive Officer

It could as part of that end-to-end offering -- it should and will drive some growth in infrastructure business. But it will be connected to that end-to-end, which typically is a higher end offering for us. So, there's no concern there.

Robert Young -- Canaccord Genuity Group, Inc. -- Analyst

Okay, thanks. Pass the line.

George D. Schindler -- President and Chief Executive Officer

Okay?

Operator

Thank you. The next question is from Paul Treiber with RBC Capital Markets. Please go ahead.

Paul Treiber -- RBC Capital Markets LLC -- Analyst

Thanks very much and good morning. I just wanted to dig into the UK business a little bit more. Just wanted to understand the nature of the infrastructure -- the nonrenewal there. The MD&A last quarter also mentioned a nonrenewal. So, was it -- was that a partial quarter impact last quarter and you're seeing the full impact this quarter, or do you see an expansion of that nonrenewal to other customers? And then, more broadly speaking, how large is that infrastructure business in the UK and do you see the potential for more nonrenewals?

François Boulanger -- Executive Vice President and Chief Financial Officer

No. It's François. It's the continuing impact of last quarter, where we didn't have the full impact. So, since it's a contract that we'll have an annualized impact, it's just the same impact that we talked about last quarter. So, it's not more than that. As for the percentage, it's mostly the same percentage across the company, and so we're at the 15% of infrastructure in UK.

Paul Treiber -- RBC Capital Markets LLC -- Analyst

Okay. That's helpful. And then, just switching gears to the US commercial business. I assume the margins were helped quite a bit by the higher mix of IP revenue. The -- is that IP revenue recurring SAAS, or managed services, or is it one-time in nature? And do you see that mix or those margins as sustainable in the near-term?

George D. Schindler -- President and Chief Executive Officer

Yeah, so the IP is a mix of both. It's some software as a service. It's some more traditional license and maintenance. It is a little bit higher, so it's driving slightly higher margins. But we do believe we can continue to drive high margins through our mix of business. And again, if anything, I would say our IP demand in a slower growth market is actually higher because it can accelerate our clients' IT investments and business returns.

Paul Treiber -- RBC Capital Markets LLC -- Analyst

And then, just one last one. The -- a clarification on the bookings number for Q3. Last quarter you mentioned there was a contract under protest. Did that protest get resolved, and were you able to recognize that in bookings? Or is it not yet?

George D. Schindler -- President and Chief Executive Officer

Yes, that actually -- that was resolved. It was the one I was talking about in Northern Europe. It was resolved and that is in the bookings. And you saw the high bookings in Northern Europe this quarter.

Paul Treiber -- RBC Capital Markets LLC -- Analyst

Okay. Thank you. I'll pass the line.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Paul.

Operator

Thank you. The next question is from Maher Yaghi with Desjardins Securities. Please go ahead.

Maher Yaghi -- Desjardins Securities Inc. -- Analyst

Good morning, and thanks for taking my question. George, I want to go back to your comment about the importance of IT as it becomes a more fundamental component of operations. I want to -- the question I wanted to ask you is, as this -- sorry. As this becomes more important, do you think there's a risk that companies decide to in-house more of IT because it's becoming more sustainable, more -- the cost is more predictive? And I'm thinking about CN, which you guys know a lot of about given your leaders the board. They've began to in-house a lot of work that was done outside to save costs. So, can you talk a little bit about -- is this prevalent more and more in your territories, or you don't see it a lot?

George D. Schindler -- President and Chief Executive Officer

Yeah, thanks for the question, Maher. Here's what I see, and what we see around the globe as we engage with our various clients. There's really three aspects of what -- the way they're dealing with their IT. Some of it is in-house. Some of it is with external IT partners. And some of it is really freelanced, or subcontracted, out in not a very organized fashion. And not to speak to any one individual client, but we see that relatively common. And what we're seeing is some vendor consolidation, taking either some of those one-off individuals, or even smaller niche providers -- and this is part of that more focused business return approach -- and consolidating some of those to their strategic vendors. And that's that two-phase approach I talked about that's going on, particularly in central and Eastern Europe. But we're seeing that also in North America.

And then, taking some of those resources that were just contracted out and, if you will, insourcing those because those should be within the IT departments. And so, by doing that, what happens is our revenue grows, even if they get a little more of the skills in-house. Of course, that changes the dynamic in some of the freelancer community.

Maher Yaghi -- Desjardins Securities Inc. -- Analyst

So, when you look at it from a holistic point of view, you don't think the consolidation, or the in-housing of more IT work, is a detriment to your organic growth in some parts of the world? You --

George D. Schindler -- President and Chief Executive Officer

That's not what we're seeing right now. That's correct.

Maher Yaghi -- Desjardins Securities Inc. -- Analyst

Okay. Thank you.

George D. Schindler -- President and Chief Executive Officer

You are seeing some of it, but we're not seeing that as an impact to us.

Maher Yaghi -- Desjardins Securities Inc. -- Analyst

Okay. Great. Thank you very much.

George D. Schindler -- President and Chief Executive Officer

Thanks, Maher.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Maher.

Operator

Thank you. The next question is from Stephanie Price with CIBC. Please go ahead.

Stephanie Price -- CIBC World Markets, Inc. -- Analyst

Good morning.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Good morning.

George D. Schindler -- President and Chief Executive Officer

Hi, Stephanie.

Stephanie Price -- CIBC World Markets, Inc. -- Analyst

In your prepared remarks, you mentioned long-term end-to-end contract pipeline is trending up. I think you mentioned over 20% year-over-year. Can you talk a bit about the verticals that you're seeing the most demand in?

George D. Schindler -- President and Chief Executive Officer

Yeah. This is -- what's interesting is -- and I'm glad you asked the question. We're seeing two things. As we move into the middle innings of this digitization effort, there are some trailing -- there were some trailing industries. So, I would say utilities, government, manufacturing, insurance -- and we're seeing them just jump into the middle innings in doing some of this IT modernization very rapidly. But then, also introducing in that digitization on top of it. So, those are the industries we see as strongest. And I think I did highlight that in my opening remarks.

Stephanie Price -- CIBC World Markets, Inc. -- Analyst

Perfect. Thank you. And in terms of the contract adjustment in the UK and Australia, can you touch on that for a second? Is that going to be a one-time adjustment or how should we think about that going forward?

George D. Schindler -- President and Chief Executive Officer

Yeah, that was a one-time project adjustment. As you know, we don't talk about clients or project specifically, but that was -- it was just the one time, and it's past us.

Stephanie Price -- CIBC World Markets, Inc. -- Analyst

Okay, perfect. And then, just -- finally, for me, in terms of -- I think you mentioned more attractive valuations. Can you talk a bit about whether this is across the board or in certain regions and what you're seeing on the smaller versus larger deals?

George D. Schindler -- President and Chief Executive Officer

Yep. So, what we see is it's a little more across the board from the private company perspective. So, we're seeing that both in North America and in all the European geographies. From a public company perspective, I'm sure you can see this yourself -- more attractive valuations are down in most of the countries in Europe that we engage in -- not so much in North America. So, those valuations in North America are not becoming more attractive yet.

Stephanie Price -- CIBC World Markets, Inc. -- Analyst

Perfect. Thank you very much.

George D. Schindler -- President and Chief Executive Officer

Okay.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Stephanie.

Operator

Thank you. The next question is from Daniel Chan with TD Securities. Please go ahead.

Daniel Chan -- TD Securities -- Analyst

Oh, hi, thanks. Bookings in US federal were a bit light. Can you just provide a little more color on that? And just double-clicking into that, do you expect a new budget bill to help bookings in that segment recover?

George D. Schindler -- President and Chief Executive Officer

Yeah, the good news in federal is not really due to the budget. The budget is actually pretty normalized. In fact, we're probably not going to see the big bump that we normally do in Q4 because we actually had a more normalized Q1 this year. So, I don't think it's really -- has to do with the budget, and the budget particularly for IT continues to be strong. It's just really more of bookings tend to be lumpy, and that's why I highlighted the trailing 12 months. And it just so happens that the deals that we have our sights on -- and remember, we're pretty disciplined in CGI federal, in driving very high margins. We're very disciplined to go after deals that we can make bring value to the government customer and therefore drive higher margins for CGI. And some of that, obviously, is related to our intellectual property.

So, it just so happens that the deals that we have our sights on -- which I highlighted -- were about $5 billion worth of deals. I haven't been -- we're a little bit slower to come to fruition. And we're pretty disciplined to really go after the deals that we believe we have the highest probability of wining and can drive the margins that we're accustomed to.

Daniel Chan -- TD Securities -- Analyst

Thanks. That's very helpful. And the contract that was announced yesterday with the Navy And Marine Corps, was that booked in the quarter or was that after the quarter?

George D. Schindler -- President and Chief Executive Officer

No, that was actually last quarter. So, that was not in the quarter -- obviously, that would've been -- that would've driven a different book-to-bill. Came in at the end of last quarter. But the good news is, it's in and it's IP, and it's going to drive growth for us in the future -- both top and bottom line.

Daniel Chan -- TD Securities -- Analyst

Okay. Just switching gears a little bit, you've mentioned the metro markets acquisitions as an upsell opportunity. What metrics are you introducing and tracking as you execute on this strategy? And how are you doing to date?

George D. Schindler -- President and Chief Executive Officer

Yeah, so what we measure -- actually, when the new mergers come in, we look at all the customers where we had work with both sets of customers, and we track did we grow our wallet share within that customer. Not just one plus one equals two, but is it one plus one equals something greater than two. And then, we separately look at the customers that they're bringing and we track how many new services from CGI are we bringing to the table. And I highlighted one of those in my opening remarks. And then, of course, we're also looking at can we introduce -- and particularly for Acando, for example -- can we sell some advisory services into existing CGI customers that Acando did not have.

And so, we're measuring all three of those and we have a scoresheet, as you might imagine, as metric driven as we are. And I personally have a call with the integration team where we evaluate that.

Daniel Chan -- TD Securities -- Analyst

Great. Thank you very much.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Dan.

Operator

Thank you. The next question is from Jim Schneider with Goldman Sachs. Please go ahead.

James Schneider -- Goldman Sachs Group, Inc. -- Analyst

Good morning. Thanks for taking my question. Congratulations on the margin improvement in the quarter. I was wondering if you could maybe talk about how much incremental margin expansion you might expect over the next couple quarters and how much of that is from internal cost initiatives versus anything you would be doing on the Acando side specifically?

George D. Schindler -- President and Chief Executive Officer

Yeah. No, thanks, Jim. It's a mix of both. But the most important way that we believe -- and we're confident that we can continue to get margin expansion -- is really through this mix of business. When we have the proper mix of business, you see some of the margins we're driving now across North America, and we're able to drive those because we have that rich mix of long-term recurring revenue mixed with the SINC to make sure we're at the tip of the sphere connected with the business, and their business initiatives -- but then, also, complimented by the intellectual property across, and a healthy mix of software as a service as a traditional license and maintenance.

And so, when we get those -- that right combination, you see the kind of margins we drive in North America, and are consistently doing that. That opportunity still exists in most of the geographies we work in in Europe. So, that will continue. Yes, we do get some opportunities to ongoing restructure a business. I just mentioned what were' doing in Canada. That will drive higher margins. And yes, we're taking the opportunity, as we bring in Acando, to make sure that we have the best mix of business to drive forward. So, there's really two or three things that give me confidence that we can continue to drive margin expansion.

James Schneider -- Goldman Sachs Group, Inc. -- Analyst

That's helpful. Thanks. And then, that leads me to my second question, which is on your mix of business. You talked about the outsourcing business. Do you -- having better mix over time. Do you expect that your outsourcing mix will be materially higher in say two years relative to the SINC workloads? And --

George D. Schindler -- President and Chief Executive Officer

Yeah. That is the plan, Jim. That is the plan. And we do see a path to doing that, which is why I highlighted the pipeline is our best indicator that we're moving on that path.

James Schneider -- Goldman Sachs Group, Inc. -- Analyst

That's great. Thanks so much.

George D. Schindler -- President and Chief Executive Officer

Thanks, Jim.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Jim.

Operator

Thank you. The next question is from Howard Leung with Veritas Investment. Please go ahead.

Howard Leung -- Veritas Investment Research -- Analyst

Thanks. George, I just wanted to ask about -- touch on one of the comments that you brought up, which was the longer sales cycle for certain modernization contracts. Does that factor in your thinking at all in terms of your target revenue mix?

George D. Schindler -- President and Chief Executive Officer

Does that factor into the --

Howard Leung -- Veritas Investment Research -- Analyst

Yeah.

George D. Schindler -- President and Chief Executive Officer

It takes us a little bit longer to get to that revenue mix, but again, we're into that path. And as I maybe have mentioned before, Howard, the buying behaviors over the last few years has really been focused on these -- what I call digital interventions. As we now take those digital interventions and move them more holistically across the enterprise, the deals get larger -- good news. But actually, they take a little bit longer because they're a more complex opportunity. So, that's -- yes, that drives maybe some of the change in the mix because it takes a little bit longer to get there, but we're on that path.

Howard Leung -- Veritas Investment Research -- Analyst

Right. Right. That makes sense. And then, just maybe one for François. The DSO -- the increase to 52 days -- I think it was mentioned that part of it was driven by Acando having longer DSOs itself. Were there also any -- was it also driven maybe by some of the -- were there any fair value adjustments to the deferred revenues for Acando that drove that as well?

François Boulanger -- Executive Vice President and Chief Financial Officer

No, not all of -- they have a lot of short-term mandates, so it's more SINC and nothing on the outsourcing side. So, not much of deferred revenue on their side. And that's why DSO's a little bit higher than the average of CGI. But we will work on that to be -- to bring it back to our own standard.

George D. Schindler -- President and Chief Executive Officer

You can be sure of that.

Howard Leung -- Veritas Investment Research -- Analyst

All right. Sounds good. Thanks, guys. I'll pass the line.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Howard. Eric, I think we'll have time for one last question.

Operator

Great. Thank you. The next question is from Deepak Kaushal with GMP Securities. Please go ahead.

Deepak Kaushal -- GMP Securities LP -- Analyst

Oh, hey, guys. Good morning. Thanks for squeezing me in and taking my questions. It's been a while.

George D. Schindler -- President and Chief Executive Officer

Hey, Deepak.

Deepak Kaushal -- GMP Securities LP -- Analyst

So, I hear longer sales cycles, some normalization in budget in the US, and lower bookings. Are you guys signaling a slowdown in the US? And is this a one- or two-quarter phenomenon? How should we think about this?

George D. Schindler -- President and Chief Executive Officer

Yeah, I don't see that that way at all. I think it's more of just the nature of where our clients are right now. I think there's a slight pause that we're seeing, and I had been predicting some of that. So -- but I don't see anything more systemic there. I do think the systemic approach will be the shift to more of these IT modernization and given maybe even the specter of a slowdown. But I don't see it signaling anything other than that for us.

Deepak Kaushal -- GMP Securities LP -- Analyst

So, none of that is related to any macro or microeconomic factors? How are your customers --

George D. Schindler -- President and Chief Executive Officer

No, I think -- for this quarter, that's not what I see. I think, again, on the macroeconomic side, and the slowdown -- I've talked about this the last few quarters -- our clients are preparing for that. That's really driving some more of the vendor consolidation, more of the focus on the business returns, a little more focus on practical innovation -- all trends that play very well to the CGI story. So, we actually believe we can do very well in that environment.

Deepak Kaushal -- GMP Securities LP -- Analyst

Okay, thanks, George. That's helpful context. I do have one follow-up on -- it's a minor thing you mentioned in your prepared remarks. I think you said that valuation in some European markets on M&A targets was looking attractive. Can you talk about what regions those are in, or perhaps what's driving attractive valuations and where you --

George D. Schindler -- President and Chief Executive Officer

Yeah, well -- and on the public sector side, it's really just -- while our stock has done very well, some others haven't -- have been exposed to different elements in the -- macro elements in the European market. That's -- there's no more or less than that.

Deepak Kaushal -- GMP Securities LP -- Analyst

Okay. That's helpful. Thanks again.

George D. Schindler -- President and Chief Executive Officer

Yep. Okay.

Deepak Kaushal -- GMP Securities LP -- Analyst

I appreciate you taking my questions.

George D. Schindler -- President and Chief Executive Officer

Okay.

Lorne Gorber -- Executive Vice President, Investor and Public Relations

Thanks, Deepak. And thank you, everyone, for joining us. We'll see you back first week in November for our Q4 and fiscal year end results. Thank you.

George D. Schindler -- President and Chief Executive Officer

Thank you.

François Boulanger -- Executive Vice President and Chief Financial Officer

Thank you.

...

Duration: 58 minutes

Call participants:

Lorne Gorber -- Executive Vice President, Investor and Public Relations

François Boulanger -- Executive Vice President and Chief Financial Officer

George D. Schindler -- President and Chief Executive Officer

Thanos Moschopoulos -- BMO Capital Markets Corp -- Analyst

Steven Lee -- Raymond James & Associates, Inc. -- Analyst

Richard Tse -- National Bank Financial Markets -- Analyst

Daniel Chan -- TD Securities -- Analyst

Paul Treiber -- RBC Capital Markets LLC -- Analyst

Robert Young -- Canaccord Genuity Group, Inc. -- Analyst

James Schneider -- Goldman Sachs Group, Inc. -- Analyst

Stephanie Price -- CIBC World Markets, Inc. -- Analyst

Howard Leung -- Veritas Investment Research -- Analyst

Maher Yaghi -- Desjardins Securities Inc. -- Analyst

Deepak Kaushal -- GMP Securities LP -- Analyst

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