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CGI Group Inc (NYSE:GIB)
Q1 2020 Earnings Call
Jan 29, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the CGI First Quarter Fiscal 2020 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, Martha, and good morning. With me to discuss CGI's first quarter fiscal 2020 results are George Schindler, our President and CEO and Francois Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, January 29, 2020.

Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 MD&A, financial statements and accompanying notes, all of which are filed with both SEDAR and EDGAR, and are available for download on our website along with supplemental slides. 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 law. This 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 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 International Financial Reporting Standards or IFRS. As before, we'll also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted.

We're also hosting our AGM this morning, so we hope you will join us live or via the broadcast at 11:00 a.m. I'll turn it over to Francois now to review our Q1 financials, and then George will comment on our operational highlights and strategic outlook.

Francois?

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Thank you, Lorne, and good morning, everyone. I'm pleased to share our results for Q1 fiscal 2020. Revenue was CAD3.05 billion, an increase of CAD90.8 million or 3.1% compared with last year. On a constant currency basis, revenue grew 4.8%, of which approximately 1.2% was organic. Year-over-year IP-related revenue grew by CAD38 million and was 21% of total revenue. Bookings were CAD2.7 billion for book-to-bill of 90%, impacted by the general election in the U.K. and seasonality in U.S. Federal. Bookings across continental Europe were up sequentially, driven by managed services demand, including IP. Also our pipeline across North America continues to grow, notably due to managed services opportunities.

On a trailing 12 months basis, booking remained above 100% of revenue, totaling CAD12.4 billion. The backlog at the end of December stood at CAD22.3 billion or 1.8 times annual revenue, despite the negative currency impact of approximately CAD900 million year-over-year.

Beginning in Q1, we adopted IFRS 16. This new accounting standard relates to the recognition of lease agreements on to the balance sheet. This change lowers our cost of sales and increases our net finance costs, resulting in a non-material impact to net earnings. I will comment on these variations, including the impact on the cash flow statement and our capital structure. Further details are included in the MD&A.

Adjusted EBIT increased to CAD474.1 million, up CAD35 million or 8% from last year. EBIT margin was up 70 basis points to 15.5%, driven by revenue growth across several geographies, efficiency gains in our global delivery centers, the initial benefits of optimizing our infrastructure operation and a favorable CAD9.7 million impact from IFRS 16.

Our effective tax rate for the quarter was 26.7% compared to 25.9% last year. When excluding the impact on non-deductible restructuring expenses, our effective tax rate was 25.1%, within the expected range of 24.5% to 26.5%. As announced last November, we are investing up to CAD40 million to optimize and restructure our Swedish infrastructure operations to exit Brazil and to refocus Portugal, as our nearshore delivery center.

During the quarter, we incurred CAD28.2 million of related expenses, net of tax. We also expensed CAD16.5 million in Q1 related to the acquisitions and the integrations of Acando and SCISYS. When including these specific items, net earnings were CAD290 million in Q1 or a margin of 9.5%. Earnings per share on a GAAP basis were CAD1.06 per diluted share compared with CAD1.11 last year. However, when excluding these specific items, net earning in Q1 improved year-over-year to CAD335 million or 11% of revenue, up 40 basis points. Earnings per share on the same basis were CAD1.23 compared with CAD1.12 last year. This represents an improvement of 9.8%, despite the currency headwind of over CAD0.02.

We generated CAD465 million in cash during the quarter or 15.2% of revenue. This represents an improvement of CAD74 million compared with CAD392 million generated in Q1 last year. The year-over-year increase in cash includes CAD39 million related to the adoption of IFRS 16. Over the last 12 months, we have generated CAD1.7 billion or CAD6.20 in cash per share, a significant increase compared with CAD1.5 billion or CAD5.15 from a year ago. We ended the quarter with a DSO of 49 days, down from 50 days last quarter and 54 days last year, largely due to the evolving business mix.

During the quarter, we allocated cash across several strategic priorities. CAD67 million back into our business, a CAD156 million in acquisition, mainly SCISYS, which closed on December 18, CAD17 million repurchasing CGI shares and we repaid a CAD182 million of long-term debt. Buying back CGI stock has been an accretive and flexible way to return capital to shareholders. Under the current program, we have invested CAD675 million, repurchasing 7 million shares at a weighted average price of CAD97.13. This represents a return of over 16% based on yesterday's closing share price. As such, our Board of Directors approved the extension of the program until February 2021, allowing us to purchase up to 20.1 million shares over the next 12 months.

At the end of December, net debt stood at CAD2.8 billion, representing a net debt-to-capitalization ratio of 27.7%, up from 19.1% last year, largely due to IFRS 16. Excluding this impact, the net debt-to-capitalization ratio was 20.9%, slightly higher than last year, due to increased investments in metro market mergers. With our revolving credit facility and cash on hand, we have CAD1.6 billion in readily available liquidity and access to more as needed to continue pursuing our Build and Buy strategy.

Now, I'll turn the call over to George.

George D. Schindler -- President and Chief Executive Officer

Thank you, Francois, and good morning to everyone. I'm pleased with our team's performance in the first quarter as we continued to successfully execute on our Build and Buy profitable growth strategy. This quarter's results continue to reflect the shift in client buying behavior toward outcome-based engagement, as evidenced by a 70-basis point increase in managed services revenue as compared to last year. And our larger managed services offering is resonating. In fact, the managed IT and business process services pipeline is up 30% year-over-year. However, many of our commercial clients are employing a more deliberate approach to their IT buying decision, as they shift their internal organizational focus to prioritize both agility and operational excellence. This means that our clients are currently acting most rapidly on smaller, more focused outcome-based solutions.

For example, in the quarter, we were awarded a five-year engagement with a new U.S. client in the financial services sector to deliver selective managed application services, security, and infrastructure. This is designed to immediately address and improve the client's IT quality and security with larger future scope now under discussion. Technology remains core to our clients' business and we continue to be well positioned for these near-term spending trends with both new and existing clients. The investments we have made in our IT and business consulting capabilities and in IP, allow us to offer services and solutions that help clients realize incremental progress on their digital initiative.

For example, in the quarter, we were awarded new work with one of Europe's leading manufacturers to provide agile consulting and enterprise architecture, enabling their digital workforce initiatives over a 36-month time frame. Another example is a new engagement with a large U.S. utility to implement our Pragma workflow solution to digitize their enterprise workforce management over the next two years, generating immediate efficiencies.

We also see these types of engagements as an opportunity to build even deeper relationships and drive future growth and larger managed services deals, including for our managed IT. As planned, this evolving revenue mix, combined with our investments and operational excellence, are driving earnings growth. This is most pronounced in our global delivery centers of excellence, which are in high demand by our clients are yielding increasing margins due to our investments in talent, tooling, and methodology.

Turning now to the year-over-year regional highlights of the first quarter. I'll start in North America. In the U.S. Commercial and State Government segment, bookings were 107% of revenue on the strength of new managed services contracts, which accounted for 50% of bookings in Q1. Bookings were particularly strong in the financial services and utility sectors, both over 130% book-to-bill. Organic revenue growth was 2%, driven by scope expansions across some of our largest commercial clients and we continue to experience an improving state and local government market, receptive to our IP offering. EBIT margin remained stable at 15.1%.

In our U.S. Federal operations, revenue grew by 11.5%, as previous quarter's managed service bookings and task order wins ramped to their full revenue run rate. EBIT margin was 13.3%, slightly lower year-over-year due to larger -- lower volumes and transaction-based EPS contracts and bookings were 60% of revenue. With the federal fiscal year budget appropriations finalized at the end of December, we expect an active procurement cycle in advance of the U.S. election.

In Canada, despite bookings in the quarter of 60% of revenue, Canada's backlog remains very strong, at four times annual revenue. Our pipeline of opportunities continues to be robust, with a notable increase in the IP pipeline, which is up 40% over last quarter. Revenue declined in part due to lower infrastructure volumes year-over-year, while EBIT margin was strong at 22.8%, as we are now realizing the positive impact of previously announced actions to optimize our infrastructure operations.

Turning now to our European operation. In Scandinavia, revenue grew 25%, driven by the addition of Acando. This is net of the planned run-off of lower margin projects, which will total approximately 10% of acquired revenue and is at the high-end of the range previously communicated. EBIT margin was 7.8%, which we expect to continue improving throughout the year, as further benefits from the Acando integration and the restructuring of the infrastructure business in Sweden, are each fully realized. And bookings were strong at 130% of revenue, reflecting the improved ability of the merged operation to address client demand.

In Finland, Poland and the Baltics, revenue was stable with the year-ago period, with continued strength in financial services, particularly in the insurance space. EBIT margin expanded 90 basis points to 14.9%, as a result of an improving business mix and bookings were 108% of revenue, with increased demand for IP, which was 144% book-to-bill.

In Western and Southern Europe, revenue was essentially stable across the region, with organic growth in France and overall strength in government, but impacted by the strategic actions taken in Brazil and Portugal announced last quarter. EBIT margin was 14.9%, up 80 basis points, despite one less billable day in France, which is also reflective of an improving business mix. Bookings were 104% of revenue, with strong demand for managed IT services, which represented over half of the total bookings in the quarter. And last week, we completed the merger with Meti, a France-based IP solutions and consultings firm specialized in the retail sector. I want to take this opportunity to warmly welcome our 300 new members from Meti. Together, we will bring innovation through combined IP and consulting services to retail sector clients around the world.

In the U.K. and Australia, revenue grew 1% with IP services growth in the financial services sector. Our continued market leadership in space, defense and intelligence was further solidified at the end of the quarter with the close of the SCISYS merger. EBIT margin was 14.7% and book-to-bill was 69% of revenue, impacted by a slowdown in both commercial and government award decisions, largely due to uncertainties created by the U.K. general election. With the Brexit decision now made, we expect a very active period of government procurement to address the backlog of mission priority. Likewise, we expect to see more normalized purchasing activity in the commercial sectors going forward.

In Central and Eastern Europe, revenue growth was 9%, of which approximately 3% was organic and EBIT margin increased 10.5%, an improvement of 190 basis points. Bookings were 103% of revenue on the strength of scope expansions from large transportation and retail and consumer services clients in both Germany and the Netherlands.

And in Asia-Pacific, revenue growth was 10%. EBIT margin was strong again at 28%, driven in part by increased utilization and operational excellence. Our Asia-Pacific delivery centers are leading the way and realizing the return on CGI's innovation investments made in talent, tooling, and methodology.

In summary, we are off to a strong start and continue to position our talent and services to meet current and future client demand. We continue to see clear interest for managed services and intellectual property solutions in the pipeline. Given the longer decision cycles for these larger long-term opportunities, we are also well positioned to meet client demand for shorter term outcome-based engagements. These engagements will drive growth, albeit at a different pace in the near term. And the benefits from recent mergers as well as our restructuring initiatives will deliver earnings and margin improvement moving forward. We will also continue accelerating the pace of metro market-based mergers with three already closed in the fiscal year, and a healthy number of prospects in later stages of the M&A funnel. And of course, we will continue to consider all opportunities to be an active consolidator in the industry through transformational mergers. We remain focused on executing our strategic aspiration of doubling over the next five to seven years through continued Build and Buy.

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

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

Just a reminder that there'll be a replay of the call available either via our website or by dialing 1-800-408-3053 and using the passcode 6149639 until March 2. There will also be a podcast to the call available for download within a few hours. Follow-up questions, as usual, can be directed to me at 514-841-3355. Martha, if we could pull for questions please.

Questions and Answers:

Operator

Certainly. Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Steven Li from Raymond James. Please go ahead.

Steven Li -- Raymond James -- Analyst

Thank you. George, couple of questions on Canada. Your margins pushing 23%, was there any large IP in that number? Or do you view that as more sustainable going forward?

George D. Schindler -- President and Chief Executive Officer

Yeah. No, actually I didn't -- it didn't have as much IP in that number. Really, some of that benefit was from some of those initiatives I had mentioned in earlier quarters around our infrastructure rightsizing that. And obviously, that rundown -- that runs down at lower margin, which increases our margin elsewhere. Some of that uptick really was from those global delivery centers of excellence. We have a number of them here in Canada, and so that was -- those are in demand and utilization of those go up, and obviously those are profitable, both beneficial for our clients, but also profitable for CGI. That IP uptick is notable in Canada, and it's notable also in the fact that it's with those financial services company. So all in all, Canada, again that margin is strong.

Steven Li -- Raymond James -- Analyst

And repeatable?

George D. Schindler -- President and Chief Executive Officer

I believe it's -- is that the absolute run rate? Probably not. But it's, I believe, we will continue to have strong margins above that 20% mark.

Steven Li -- Raymond James -- Analyst

Okay, thanks. And George, the IP pipeline, I think you said was up 40%, which areas are these?

George D. Schindler -- President and Chief Executive Officer

Well, in Canada specifically it's in financial services, but IP is up across the Company in a number of areas, including utilities, including in government and also some of our newer IPs both in utilities with OpenGrid, which we announced but also emerging in the space industry. So IP is up across the board, which we predicted and planned for given the market that we're moving into.

Steven Li -- Raymond James -- Analyst

Okay, thank you. And just one question -- one more question for me. The organic growth was slower this quarter. Would you expect it to snap back or should we expect a couple of quarters of 1%, 2% growth. Thank you.

George D. Schindler -- President and Chief Executive Officer

Yeah, I think that in the near term, inorganic growth will outpace organic growth. So that pace of inorganic growth is going stronger, but in the near term, yeah, there's going to be some softness in the organic growth, but we have some tailwinds on our side there.

Steven Li -- Raymond James -- Analyst

Thank you.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Thank you.

Operator

Thank you. The following question is from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi, good morning. George, if you could maybe summarize the changes you're seeing now in the pipeline and demand environment versus three months ago. It sounds like you're saying customers are being maybe a bit more thoughtful in terms of the size of contract awards. Just make sure I got that correct. And has there been any change in terms of the typical duration of contracts or is that been persistent?

George D. Schindler -- President and Chief Executive Officer

Yeah, that's a -- it's a very good question and I tried to highlight that in the opening remarks. Yeah, the larger deals are still out there, but they are being broken into smaller deals first. And so it's almost a phased approach. And so, we see more of a selective scope and more of three to five year deals versus the seven to 10 year deals of full scope. Just to highlight that though and I highlighted one in my remarks, that example that we gave, that's a five-year deal, but it's CAD65 million, so they are still off size, but they are not of the couple of hundred million that those seven to 10 year deals would yield at a fuller scope.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Okay. And a lot of your commentary was focused on the managed services pipeline. If we think about the SI&C pipeline, are we -- you're still seeing a fair bit of interest in terms of digital initiatives or is that slowing down across a number of geographies in favor of managed services?

George D. Schindler -- President and Chief Executive Officer

Yeah, the digital initiatives are still out there. What's very interesting though is we see that digital initiatives, some of those are coming under the managed services opportunities and it really is kind of both ends of the spectrum, investing -- as we've been talking about, investing a little bit more right now in the operational efficiencies, so that they free up some of the funding for the digital initiatives, but certainly slowing the pace of the spending on the digital initiatives. But as I mentioned a number of times, we're only -- we see our clients are only about 10% what they say are actually completed with the digital initiatives and getting the returns. And so that's causing them to take a more deliberate approach, but it's not changing overall their go-forward landscape of IT is core to my growth in the future and digital is core to enabling that.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. And then finally, in Western and Southern Europe, you mentioned France had organic growth, but there was obviously the impact from the restructuring in Brazil and Portugal. Would you be able to quantify the revenue impact in the quarter from the restructuring?

George D. Schindler -- President and Chief Executive Officer

Do you have that number? We had one less day and we had the...

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Yeah. You're talking on the revenue side.

George D. Schindler -- President and Chief Executive Officer

On the revenue side.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

On the revenue side for Western and Southern Europe, yeah.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Yes. It's CAD3 million to CAD4 million.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

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

George D. Schindler -- President and Chief Executive Officer

Thanks, Thanos.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Thanks, Thanos.

Operator

Thank you. Our following question is from Maher Yaghi from Desjardins. Please go ahead.

Maher Yaghi -- Desjardins Group -- Analyst

Thanks for taking my question. I want to go back to maybe just a question on the pace of the organic revenue growth. On the last call, George, you said that you expected a pause in acceleration in revenue growth organically. But what in your view was the reason for the growth to come down from 4% to let's say 1.5% in one quarter. It's kind of -- it's a sizable change in the pace of growth, and I'm trying to figure out how is it going to get back into the 3%, 4% type range that we saw in the last couple of quarters?

And also second question I had is, when you look at the metric that I look at in terms of book-to-bill, which is the last 12 months book-to-bill, it's been declining since September, the quarter September 2018, and we're getting close to hitting the one point [Phonetic] here. And we've -- and management has always also said that this is a metric that you guys are care for -- care more for, because it's kind of -- it's a barometer for the health of the business that is coming into the pipeline. So, what is being done to improve that or are we -- should we expect that number to turn into lower than one in the next couple of quarters?

George D. Schindler -- President and Chief Executive Officer

Yeah. No, thanks -- thanks for the questions, Maher. So maybe I'll start with the second one first on the bookings and what you've seen over the last several quarters. You've seen an uptick in SI&C and SI&C comes in at lower bookings level than managed services, you've seen that, I've highlighted that, as you looked at our revenue kind of follow that trend, our bookings follow that trend. In SI&C, anything over a 100% is healthy. As you move to managed services, you drive a higher book-to-bill and a lot of other good qualities associated with that mix of business. We want a good mix of business. We are a little bit overweight on SI&C. We're moving more to our traditional managed services, which is where you will see that pipeline come up. However, and the reason I talked about the a pause in the acceleration of the growth, is they don't move with the exact perfect time. So the decision-making on SI&C is faster, decision-making on managed services takes a little bit -- little more deliberate as I highlighted, and we're filling that gap through a number of different tailwinds, right?

So the -- we're filling that gap and now moving into the growth part of the question, you're filling that gap, you see through the recent mergers, picking up the pace. We're excited about the opportunity to spread the IP and the media, the space, even the government ERP and the retail distribution side, spread that through the broader CGI channel. So that will be a nice tailwind for both the inorganic growth that comes on with those, but also organic growth as IP gets spread across the Company.

The spending bill approved in the U.S., government placed in U.K., that's a tailwind for growth because in fact government demand goes up and the climate that we're going into a lot more spending on domestic and social programs. And just to remind you, and I'm sure you're aware of this, but one-third of our total revenue does come from that government. That kind of comes in to a counter-cyclical. Government structurally move a little slower. And of course, when you don't have a government in place like we had in the U.K. or don't have a spending bill in the U.S., that kind of impacts that. That has a biggest impact on our book-to-bill. So the book-to-bill even in the quarter would have been a 100% without the downdraft of those two units alone, and we know why that happened in that short term.

We're playing into the more selective managed services opportunities, which is why I highlighted that. But that'll help fill the gap before they make some of those larger decisions. And -- but what you will see is inorganic growth outpace organic growth in the near term that will drive some of that organic growth in the future. So all in all, it's not unexpected. It's what I talked about last quarter. But we see the bookings following the pipeline, particularly given the tailwinds that I mentioned. I think bookings and growth in the intermediate term returned to where we want them to be.

It's a different spending pattern. This is why I also tout our end-to-end services and then also why we talk about the portfolio that we have across our 10 industries, because every industry doesn't buy at the same pace. So, that really gives us the confidence moving forward.

Maher Yaghi -- Desjardins Group -- Analyst

Just to follow-up. So, in terms of the organic revenue growth tailwinds that you talked about, how -- I know you're not into short-term guidance or even medium-term guidance, but how long should we wait to see those tailwinds start to help the organic revenue growth. And my second -- just a follow-up question on the buyback, when you start to see the return on invested capital or return on equity come down, and I know this is the first quarter that we see this happening, but it's the first time we see it happening since 2017, does that change how you view your stock buyback strategy?

George D. Schindler -- President and Chief Executive Officer

So on your first question, you're correct, we don't give guidance. Maybe, Francois, you can talk a little bit about the impact IFRS 16 also had.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Yeah. So, for sure, the IFRS 16 had a small impact on the return on equity and ROIC. So even if it went down, the majority is related to that. That said, we still think that our -- at least when you're comparing with some of our competitors that, it's still a very good value the share price of CGI. And like I indicated, we did some share buyback -- a lot of share buyback last year, close to 34%, 35% of our NCIB and that was with the return of close to 16% on the share price also, we still think that it's a good investment.

Maher Yaghi -- Desjardins Group -- Analyst

Okay, thank you.

Operator

Thank you. Our following question is from Richard Tse from National Bank Financial. Please go ahead.

George D. Schindler -- President and Chief Executive Officer

Hi, Richard.

Richard Tse -- National Bank Financial Markets -- Analyst

Hi. How are you? Just wanted to sort of go further on these -- the change in the nature of some of these deals on the smaller side. Is that because your clients don't necessarily understand the technology and due to the way of mitigating the risk or some other reason behind that?

George D. Schindler -- President and Chief Executive Officer

Yeah, I think some of it is, given all of the change that our clients are already going through. Many of our clients are doing M&A themselves in order to chase some of their growth that they need for their organizations, which obviously is an intermediate opportunity for us, but a different opportunity caused them to look internally, and that's -- that was some of my opening remarks on. I think it's more of that. They're going through a lot of change.

One of the biggest insights that we receive from our Voice of the Client, which I have outlined here is one of the barriers, the biggest barrier of not receiving the benefits from digitization efforts, it's not the technology, it's the people, it's the culture. And so as you take kind of a look at that, it causes them to be, as I mentioned, a little bit more deliberate, especially given all the change. So they actually get less overall savings to the client, but they enable themselves to kind of maybe digest the change in a different way. That's the discussion that we're having and that's why I also highlighted the discussion doesn't end there, right? The discussion still says, I want to do the bigger, longer deal. I got to get my organization under control first. It still gives CGI increased utilization and drives higher margins as we see the shift, and you're seeing that.

I mentioned, it gives us deeper relationships and proof points to gain those future larger scope. But they're not going wholesale over to that. And I think that's the -- maybe what's pronounced in this slowing economy versus dropping off the edge economy that we're in right now.

Richard Tse -- National Bank Financial Markets -- Analyst

Okay, thanks. And with respect to infrastructure, I was sort of reading through the MD&A and I noticed a bunch of sort of run-offs, you even commented about it earlier. No doubt that's probably a bit of a drag on the business as well. So when it comes to those run-offs, where you think we are right now in terms of when that will end? Are we kind of near the end of that process?

George D. Schindler -- President and Chief Executive Officer

Yeah, it's an interesting one, because it continues to evolve, and is still a very important part of our business. It's just an evolving part of our business. We're actually increasing the use of infrastructure as it relates to software-as-a-service for our own IP and our own IP private cloud, if you will. So we're increasing actually investments as we move toward that. We're doing more and more infrastructure advisory, maybe getting back to your opening question about clients really taking a look at where they do and don't want to use public cloud, private cloud and what their posture is when it comes to cyber security and data privacy, particularly in Europe.

So our infrastructure advisory is growing, but then of course, there is softness in the other parts of the infrastructure business. And so, as you kind of structurally have to address those changes, we're doing that on the fly, but you see some of the impacts of that. So that's what's going in the infrastructure business. And I say that we're through that. So we're through the first round. Now we're in a second round as that shifts again. There will probably be one more round. But just to remind you, and I don't want to misspeak Francois, percentage of current business that's infrastructure today.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Yeah. It's still 12%, 13% of revenue.

George D. Schindler -- President and Chief Executive Officer

But again, that's still down from the 15% to 20% it was not that long ago. I don't think it'll go below 10%.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

No.

George D. Schindler -- President and Chief Executive Officer

It's still important part of our business.

Richard Tse -- National Bank Financial Markets -- Analyst

Okay. And just one last one for me. With respect to your comments on inorganic growth, should we read that the main, it will outpace because pace of organic is slower? Or are you going to expect to pick up the pace of acquisition?

George D. Schindler -- President and Chief Executive Officer

Probably a little both. We're picking up the pace of acquisitions for sure. So that number should be go up to fill some of the gap. But as we discussed on all of the growth, there is just -- will take a little bit more time to get that organic growth back as the shift plays its way through. There will still be organic growth, I believe, but it won't be certainly accelerating even from here.

Richard Tse -- National Bank Financial Markets -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our following question is from Robert Young from Canaccord Genuity. Please go ahead.

Robert Young -- Canaccord Genuity -- Analyst

Hi. Maybe if I just pick up on the last line of question in there. There is any change that you see in the metro market strategy. First, would a pick up on M&A imply targeting larger acquisitions? And then, maybe a second piece to that would be around the valuation landscape, if that's -- if the consulting side of the business is little bit weaker, are you seeing pressure that is driving lower valuations?

George D. Schindler -- President and Chief Executive Officer

Yeah. No, it's a good question. Thanks, Robert. The metro market strategy is still what we believe we can pick the pace up on and bring some more of those into the business pipeline is up. As far as the pressure on the pricing, I'm not really seeing that and maybe part of that is because we're very disciplined in what we're looking for. You could see that two of the last three had intellectual property. You're going to see more of that moving forward. So when you're talking about IP, you don't necessarily see the pressure that I talk about on the systems integration and consulting side. But over time, we probably would see some of that, but we're going to be very disciplined even as we accelerate the pace. So you won't see any lack of discipline there as we do that. But given the growing pipeline and given the opportunities out there in general, we believe it's a good time to continue to consolidate.

On the larger deals, it does not -- that increase in the inorganic growth does not require any of the transformational deals. We continue to look at those opportunities, however, on the larger deals. The overall pressure probably does over time create some price pressures and opportunities for us on those larger deals.

Robert Young -- Canaccord Genuity -- Analyst

Okay, great. And then maybe just talking a bit more about the pipeline, you said it was up 30%. Maybe you can talk about -- is that a sudden jump here in the quarter or is that something you've seen over time? And if you can break that into cohorts, potentially you said that there are some longer deals, seven to 10 years, smaller deals, five to seven, and then there is the shorter term. Is there any way to break that sort of growth in the pipeline up into those certain cohorts to better describe the [Speech Overlap]?

George D. Schindler -- President and Chief Executive Officer

Yeah. So the pipeline increase I'm talking about is really year-over-year, and its most pronounced in those managed IT deals. So that's really what I'm referencing there. That the managed -- the pipeline for the SI&C is relatively flat, but the IP and the managed services deals are up. By the nature of those deals, given that they're longer deals tend to be larger deals, even those that aren't full scope are still CAD50 million to CAD100 million deals. So that's what drives that pipeline growth and of course the full deals are in the hundreds of millions. That pipeline is most pronounced actually in government and retail right now.

Robert Young -- Canaccord Genuity -- Analyst

And because, it seems like there is a little bit of a change happening in the way your customers are looking at these deals, does that imply a booking gap as some of these longer deals obviously can have longer sales cycle. And so, maybe you can talk about what you expect the bookings over maybe the next year? Is there any way to talk about a potential gap?

George D. Schindler -- President and Chief Executive Officer

Yeah. I don't necessarily see gap like I told you the -- and Francois actually pointed out, if you take U.K. and Federal out, we're at that 100% even in the quarter. And so we still believe we can get the bookings and demand should be picking up with some of those big uncertainties behind us in U.K. and U.S. Federal, which tends to be very lumpy, anyway. So that's why I highlighted, we're playing into the market and we're going after some of that selective scope, even as we present the full offering, which come with those very largest deals. So that's kind of what I see happening. I'm not necessarily seeing any big gap there.

Robert Young -- Canaccord Genuity -- Analyst

Okay, great. Thanks.

George D. Schindler -- President and Chief Executive Officer

Yep.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Thanks, Rob.

Operator

Thank you. The following question is from Ramsey El-Assal from Barclays. Please go ahead.

Ben Budish -- Barclays Investment Bank -- Analyst

Hey, guys. This is Ben Budish on for Ramsey. I wanted to circle back on the M&A expectation for the year and understanding you don't give guidance, in the last quarter you sort of talked about the longer-term trajectories being like 5% to 6% organic and 5% to 6% inorganic. So, with that in mind, we maybe -- would be reasonable to expect that for this year the revenue contribution from acquisitions might be above that range or the high-end of the range or is that perhaps asking too much?

George D. Schindler -- President and Chief Executive Officer

Well, yeah. When I talked about the 5% to 6% organic and inorganic, that's certainly the target to have that balanced growth, which is why we put out the aspiration to double in the five to seven years. So that's really where that comes from, that's the target. I think we would reach that target faster on the inorganic than the organic, given everything else we just discussed here. But that remains the target of where we are heading toward.

Ben Budish -- Barclays Investment Bank -- Analyst

Okay. And then in the U.S., just given you've been through a number of presidential elections, can you just give us an idea of the timing of like when you would expect revenues to kind of tick back up, as once the spending decisions are made and contracts are kind of signed or renegotiated? And what can we expect to see in the next couple of quarters, kind of the pacing of improvement there?

George D. Schindler -- President and Chief Executive Officer

Yeah. Well, actually revenues were extremely strong in U.S. Federal based on prior bookings and of course that will continue. What I was mentioning is the bookings were impacted by not having a federal budget. So what we see typically is, there will be a lot of spending in the run-up to the election and that's what I talked about, that spending is to get things in place, because when there is a presidential transition, there is different priorities and everything kind of stalls until the new -- if there is a presidential transition, I should say, then there is a -- until the new leadership gets in place. So what you usually see is run-up, then a bit of a pause and I'm talking about the bookings now, and then run up again as the new priorities if put in place. The run-up that happens now, and I'm talking about bookings, will allow us to continue to have the revenue growth and stability straight through that pause period. That's what we see typically in election cycle, which is why I highlighted it.

Ben Budish -- Barclays Investment Bank -- Analyst

That is very helpful. And if I could sneak one more. Can you give us some color on maybe just the expectations for the IFRS 16 impact on margin over the course of the year?

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Mostly the same EBIT when we said CAD9.7 million for the quarter, so it's 0.3% on the EBIT margin. So you can expect for the EBIT margin to continue like that. So CAD9.7 million to CAD10 million per quarter. As for the net earnings, like I was saying, it's marginal.

Ben Budish -- Barclays Investment Bank -- Analyst

Okay. Great.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Because again, we have more interest expense. So it's really in the geography of the P&L where it's changing.

Ben Budish -- Barclays Investment Bank -- Analyst

Okay, that's helpful. Thanks so much for taking my questions.

George D. Schindler -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our following question is from Paul Treiber from RBC Capital Markets. Please go ahead.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much and good morning. I just wanted to -- or hoping that you could elaborate on your comment about seeing more demand for global delivery centers. There was an article out a couple of weeks ago indicating that CGI plans to hire another 15,000 people in India. Can you just comment in terms of that strategy? I think previously in the past, you called it a nearshore strategy. Are you seeing more demand for offshore and particularly in terms of India as opposed to what you typically called in the past nearshore?

George D. Schindler -- President and Chief Executive Officer

So it's a great question and it -- a lot of this goes back to the mix of business and the evolving mix of business. As the business evolves from more SI&C and I've been highlighting that, we've been talking about, in fact, number of you asked me, maybe even you yourself, Paul, asked me, when are you going to see the shift and what does that mean? I said, well, I'm not rooting for the shift, because we're playing into this market, but when that shift happens, it will be very good for us.

So, as the shift plays out and of course, it's not happening as fast as any of us would like to see, but it is happening, as that shift plays out, the managed services deals allow us to leverage the global delivery centers in a different way than shorter-term SI&C projects allow us to leverage them. We still leverage them, but not in the same way. That's why they are in demand and of course that's exacerbated by the fact that in most of the major metro markets, obviously, there's still a talent shortage for IT and particularly for our clients in getting access to IT, and that's why they come to firms like CGI, they have a broader footprint to be able to access that talent. So that's what we're playing into.

So a lot of this is interrelated, we talk about the bookings, we talk about the revenue and we talk about the -- and certainly we'll get to this when we talk about the margin. Because as I've always talked about, the reason we wanted to get back to that 30% SI&C and 70% managed services recurring revenue is that comes at the optimal margin mix for us, and of course, we're now shifting toward that, but just barely, we're a little over 50%, whereas a year ago we were reversed and under 50% of our revenue. Does that help?

Paul Treiber -- RBC Capital Markets -- Analyst

Yeah. That's very helpful. I mean, just going a little bit further, so -- in order to clarify. The -- I mean, you're not selling it on an hourly rate, if it is managed services, you're delivering against a larger contract. And so in terms of like your offshore resources, I mean, what have you seen in terms of profitability or in terms of performance, in terms of delivering projects on time and on budget versus other regions?

George D. Schindler -- President and Chief Executive Officer

Yeah. Well, that's why I highlighted our Asia-Pacific delivery centers. It really is a combination of investments we made in talent, tooling and methodologies, because of course we're moving to agile methodologies ourselves with all of our own IP and the way we deliver these projects leveraging the tooling. So that all drives the higher margins. And of course the managed services deals, because we're not selling them on an hourly basis drives up utilization, which I highlighted. And you've seen that play out. You see it specifically in our Asia-Pacific delivery centers. But as I mentioned, some of that strength in Canada is the same way in the onshore delivery centers. Same thing happens in the U.S. and in other regions around the globe. So that phenomenon is playing out everywhere and we'll continue to play out as you drive more managed services. That's why I always say that optimal mix drives us a higher utilization and lower cost of sales, which ultimately comes with a higher margin, better price point for our clients, savings for our clients, but margin growth for us, which is why that specific offering is resonating with our clients in the current environment.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay. And then one last one for me. You mentioned earlier on the space market as an opportunity. Now that the SCISYS acquisition is closed, perhaps you can comment more directly on what you see, like what -- what are your capabilities in the space market prior to that acquisition? And what do you see as the long-term growth opportunity in profitability of that segment?

George D. Schindler -- President and Chief Executive Officer

Yeah. So there's actually not as much I can say about the current space work other than to say it is of size. So with SCISYS now, we have approximately a 1,000 people in the European space environment. We don't -- we're not as big in North America. But most of that right now is for government and therefore it comes with its own confidentiality, and because it's that kind of work. Having said that, we think the opportunity is as a lot of those technologies move over into more of the commercial world which they are. And particularly from a data perspective, our expertise, not directly, but certainly indirectly can be leveraged to expand it. And of course that U.S., from a government perspective is also investing in this. And of course we're already leveraging that from government, but we do see that that will bleed over into commercial in a bigger way. We're not just talking about [Indecipherable], we're talking in a more ubiquitous way.

Paul Treiber -- RBC Capital Markets -- Analyst

Thank you.

Operator

Thank you. Our following question is from Howard Leung from Veritas Investment Research. Please go ahead.

Howard Leung -- Veritas Investment Research -- Analyst

Thanks, and good morning.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Good morning, Leung.

George D. Schindler -- President and Chief Executive Officer

Good morning, Leung.

Howard Leung -- Veritas Investment Research -- Analyst

You gave some color earlier about how SI&C, the growth of that drives a little lower book-to-bill in the past few quarters. With managed services contracts also getting shorter, is that also a factor in lower book-to-bill?

George D. Schindler -- President and Chief Executive Officer

Yes. That plays into why it's not accelerating as fast as we see the pipeline. So that -- that's that you will see that transition over from pipeline to the bookings maybe a little bit slower because of that. But you will see it transition over and then we'll see some of those larger deals over time as we get the proof points as our clients get through the change that they're going through and we should see those accelerate in the future. So -- but again, in the specific quarter, the biggest downdraft really were the U.K. and U.S. Federal.

Howard Leung -- Veritas Investment Research -- Analyst

Right. So it's just lower orders from there?

George D. Schindler -- President and Chief Executive Officer

Yeah.

Howard Leung -- Veritas Investment Research -- Analyst

Specifically as opposed to long-term spend.

George D. Schindler -- President and Chief Executive Officer

Yeah.

Howard Leung -- Veritas Investment Research -- Analyst

And I guess just one on for Francois, maybe just in general on IFRS 16. With it impacting EBIT and I guess EBIT margins, when you're evaluating your business segments and their performance, how is that factored into how you evaluate their performance?

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Right. For sure we are taking that into account in the growth for -- the growth of the -- between the business units. So we're restating or at least relooking it versus their budget like if they would have IFRS 16. And again, also they need to understand the impact when they are negotiating a new lease in the future.

Howard Leung -- Veritas Investment Research -- Analyst

Okay, yeah. That makes sense. And then just maybe one more for Francois. I saw on the segment disclosure in the MD&A, there is now an elimination line in the revenue, in the geographic revenue by segment note. Is that just mainly from the offshoring like in elimination?

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Yeah. Offshoring and some of the activities at corporate, some corporate support that is done by the business unit, like you're saying like in India. So that's what we are listing.

Howard Leung -- Veritas Investment Research -- Analyst

Okay. So I think they serve each other and [Indecipherable] doesn't need it.

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

Yeah.

Howard Leung -- Veritas Investment Research -- Analyst

Okay. Great. Okay, thanks, I'll pass the line.

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

Thanks, Howard. And Martha, I guess we've time for one more question.

Operator

Thank you. Our last question is from Deepak Kaushal from Stifel GMP. Please go ahead.

Deepak Kaushal -- Stifel GMP -- Analyst

Hey, guys, good morning. Thanks for squeezing me in. I know it's AGM day. So I'll be -- I'll try to be quick.

George D. Schindler -- President and Chief Executive Officer

Yeah. Thank you.

Deepak Kaushal -- Stifel GMP -- Analyst

Just -- it's a quick follow up to Rob's question earlier on the gap. When we're thinking about these larger managed service deals, are you expecting a steady state of closing these starting now or do they start kind of six, 12, 24 months out from where we are today?

George D. Schindler -- President and Chief Executive Officer

Yeah, I think it's continuous. It's a phased approach. We've been having these discussions already for 12 months plus. And so we're seeing those resonate more as the economy plays out the way we expect it to. So it's not like we're starting now. We've already been doing that. Actually that's why I highlighted this quarter that given the change you're going through they're being even more deliberate. But we would expect to see those happening, really, continue moving forward.

Deepak Kaushal -- Stifel GMP -- Analyst

Okay. And when you talked about kind of the half scope three to five year pieces starting, but waiting on the six to 10 year portion of that, I mean, what kind of gives you confidence that they'll follow on within six to 10 year piece of that? Are they giving you visibility into the full scope of the 10-year project, but only contracting half of it? Are things changing so fast that they're still not sure what's going to happen in the outbound? How has that changed your probability of follow on?

George D. Schindler -- President and Chief Executive Officer

Yeah, so it's a little of all the above, but we do get the visibility. We are discussing, in many cases we'll do actually a proof-of-concept on the full scope and there'll be explicit we're going to start with this -- the smaller scope. So we've already done some of the leg work on that and we're gaining the proof points and of course that's part of my confidence is if you look at our delivery track record over the years, when you look at the client satisfaction scores and the loyalty scores, once we are in delivering for the client, that gives us the confidence that the bigger scope will be there. And quite frankly, this started with some of the SI&C work, which I have been talking about. It build a relationship through the systems integration and consulting, get the opportunity to have the bigger discussion. You lose some of that to managed services and over time you move the larger scope.

Deepak Kaushal -- Stifel GMP -- Analyst

Okay, excellent. Well, thanks again for taking my questions guys and...

George D. Schindler -- President and Chief Executive Officer

Okay, thank you.

Deepak Kaushal -- Stifel GMP -- Analyst

Have a good AGM.

George D. Schindler -- President and Chief Executive Officer

Thank you.

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

Thanks, Deepak, and thank you everyone for joining us. Hopefully, we'll see you at the AGM, and we'll see you back here for the next quarter April 29. Thank you.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

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

Francois Boulanger -- Executive Vice-President and Chief Financial Officer

George D. Schindler -- President and Chief Executive Officer

Steven Li -- Raymond James -- Analyst

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Maher Yaghi -- Desjardins Group -- Analyst

Richard Tse -- National Bank Financial Markets -- Analyst

Robert Young -- Canaccord Genuity -- Analyst

Ben Budish -- Barclays Investment Bank -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Howard Leung -- Veritas Investment Research -- Analyst

Deepak Kaushal -- Stifel GMP -- Analyst

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