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CGI inc (GIB) Q4 2021 Earnings Call Transcript

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GIB earnings call for the period ending September 30, 2021.

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CGI inc (GIB 0.25%)
Q4 2021 Earnings Call
Nov 10, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the CGI Fourth Quarter and Fiscal 2021 Conference Call. I would now like to turn the meeting over to Mr. Maher Yaghi, Vice President, Investor Relations. Please go ahead, Mr. Yaghi.

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Maher Yaghi -- Vice President, Investor Relations

Thank you, Julianne, and good morning, everyone. With me to discuss CGI's fourth quarter fiscal 2021 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 AM Eastern Time on Wednesday, November 10, 2021. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q4 MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete Safe Harbor statement is available in both our MD&A and press release as well as on cgi.com. We encourage our investors to read it in its entirety.

We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. And all of the dollar figures expressed on this call are Canadian, unless otherwise noted.

I'll turn it over now to Francois to review our Q4 financial results and then George will comment on our business and market outlook. Francois?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Thank you, Maher, and good morning, everyone. I am pleased with our Q4 performance as revenue growth and operational discipline contributed to double-digit EPS accretion and increased cash from operations. Our year-over-year constant currency revenue growth accelerated in Q4, as previously booked orders began to flow into revenues. We delivered 15% adjusted EPS growth.

We generated strong cash flow from operations, up 7.1% year-over-year in Q4, bringing the last 12-month total to over CAD2 billion, an increase of 9.1% year-over-year. And we strengthened our balance sheet by executing our first public debt issuance, both in the US and in Canada. This was supported by strong investment grade credit ratings from both Standard & Poor's and Moody's.

For Q4, we delivered revenue of CAD3 billion, up 6.4% year-over-year on a constant currency basis. This is an acceleration from the 3.5% growth in Q3. Double-digit growth in constant currency was achieved in the following geographies: Western and Southern Europe, up 13.6%; Asia Pacific, up 11.5%; US commercial and state government, up 11.1%; Canada, up 10.5%; and Central and Eastern Europe, up 10.1%. This was driven by strong demand in the following industries: healthcare grew 10.8%; MRD grew 9.9%; and Financial Services grew 6.4%.

Total bookings of CAD2.9 billion, representing a book-to-bill of 97.1% for the quarter, while our trailing 12-month book-to-bill stands at 114.2%, up 17% year-over-year. I would like to highlight a few reporting segments with strong bookings in the quarter: US commercial and state government with a book-to-bill of 117%; UK and Australia at 111%; and US Federal at 110%. New business in the quarter was 31% of bookings, an increase from the previous year's 22%. On a trailing 12-month basis, new business was 32% of bookings versus 25% for a year ago. Given the continued increase in demand for our services, as reflected by the strong bookings in the last 12 months, we expect continued positive growth trends in fiscal 2022.

We finished our 2021 fiscal year with a backlog of CAD23.1 billion. Adjusted EBIT in Q4 was CAD493 million, while EBIT margins increased to 16.4%, up 76 basis points compared to Q4 last year. The year-over-year increase was mainly due to higher utilization rates and lower non-recurring project adjustments.

We saw strong margin improvements in US federal with margins up 350 basis points, as well as US commercial and Scandinavia, both showing 170 basis point improvements. This was partially offset by lower margins in Canada due to lower tax credits this year, as well in the UK due to a non-recurring contract provision.

Our effective tax rate in Q4 was 25.5%. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%.

Net earnings were CAD346 million and diluted earnings per share were CAD1.39, representing an increase of 44.8% year-over-year. This improvement was mainly due to revenue growth, margin improvement and lower restructuring costs. Excluding integration and restructuring costs, net earnings were CAD347 million for a margin of 11.5%, and diluted earnings per share were CAD1.40, an accretion of 14.8% when compared to CAD1.22 in the same quarter last year.

In the quarter, DSO was 45 days, down from 47 days last year. Cash provided by operating activities was CAD527 million, an increase of 7.1% year-over-year. Net debt to capitalization declined quarter-over-quarter to 26.6% from 30.9% in Q3.

We are proud as an organization to have a new group of investors in our company through our integral bond offering, raising in the process CAD1.8 billion across the US and in Canada. We used a large portion of these funds to prepay the $1.25 billion loan facility that was due in 2023. More importantly with this debt raise, the weighted average maturity of our debt has increased from 1.6 years to 4.7 years with 91% being fixed interest debt versus floating interest there.

For the last 12 months, cash provided by operating activities was CAD2.1 billion, or 17.4% of revenue. This is an improvement of CAD177 million year-over-year.

In fiscal 2021, we invested CAD1.9 billion in our Build and Buy profitable growth strategy, comprised of CAD301 million back into our business, mainly in IP and managed services engagements; CAD99 million on business acquisitions; and CAD1.5 billion to buy back our stock. Buying back CGI stock has been an accretive and flexible way to return capital to our shareholders. In fiscal 2021, we bought back 15.3 million shares at an average price of CAD98.16. As of the end of Q4, the Company could purchase up to an additional 10 million shares under the current NCIB program.

Looking ahead, our cash allocation priority remains the same: investing in our business, pursuing accretive acquisitions and buying back our stock. With cash of CAD1.7 billion on hand and a CAD1.5 billion revolver that remains fully accessible, we have CAD3.2 billion readily available. In addition, we now have access to the public debt market to support our Build and Buy profitable growth strategy.

Now, I will turn the call over to George to provide perspectives on fiscal year 2021 and on our business for the year ahead. George?

George D. Schindler -- President and Chief Executive Officer

Thank you, Francois, and good morning, everyone. I am pleased with our team's performance in the fourth quarter and full fiscal year. I would like to recognize our now 80,000 consultants and professionals around the world for their tremendous commitment to delivering end-to-end digital value for our clients.

Through the expertise, insights and disciplined project delivery of our team and the continued trust of our clients, CGI returned to revenue growth for the second half and created incremental shareholder value. For fiscal 2021, we delivered double-digit GAAP and adjusted EPS accretion, a 9% increase in cash from operations and a nearly CAD2 billion increase in bookings.

This morning, I'll provide more context on the fundamental components of our business that contributed to the strong full year performance, specifically, our diverse presence across industry sectors and regions, and our proven delivery of end-to-end digital services.

Starting with revenue, we finished the year with revenue of CAD12.1 billion. And in line with our projections for growth in the second half of fiscal 2021, CGI grew 4.9% on a constant currency basis compared to the second half of last year. Growth was broad-based across every industry sector during the second half, with constant currency growth of 8.9% in manufacturing, retail and consumer services, driven by Western and Southern Europe with 18.5% growth; 8.4% in healthcare, led by Central and Eastern Europe with 44% growth; 6.1% in financial services with Scandinavia delivering just over 9% growth; and 4.2% in communications and utilities, led by US commercial and state government at 47% growth.

Our government business also grew in the second half at 1.4%, even as clients continue to reprioritize their IT investments in line with the changing public health and economic environment. We remain well positioned as a partner of choice to help governments address a wide range of domestic priorities, including infrastructure, environment and the climate, and cybersecurity.

We believe this strong second half performance demonstrates CGI's role as a leading digital services partner, positioning us well for future growth, as clients accelerate spending to capture the increased benefits of digitization for their customers and employees. This strong client demand environment drove our robust bookings on a full-year basis, with a book-to-bill of 114%.

We sustained our incumbency with enterprise clients and we're also awarded net new projects and expanded scope, growing our share of client spend. Recent new awards for digital transformation services in the fourth quarter included the following. A Canadian bank selected CGI to help with its business transformation journey. CGI will lead the modernization and migration of client interaction platforms to the cloud. Volkswagen Group UK awarded CGI a five-year managed services contract to implement enterprise automation to improve employee productivity, as well as support their sustainable mobility strategy. Valley Bank in the US awarded CGI new work to support the bank's omni-channel digital enablement, drawing on our capabilities in robotic process automation, machine learning and application modernization. And the US Centers for Medicare and Medicaid Services will leverage CGI's digital modernization services to move legacy platforms into the cloud.

In the year, bookings were strong across several industry sectors. In manufacturing, retail and consumer services, bookings were up 16% over last year with a book-to-bill of 115%. Bookings increased based on demand for omni-channel transformation, supply chain modernization and data analytics. Government and healthcare bookings were up nearly 13% with a 115% book-to-bill for the year, based on continued demand in citizen and patient services, application modernization and cloud. Financial services bookings were up 20%, with a book-to-bill of 111% for the year. This was led by strong demand in the insurance sector for transformational managed services to enhance customer and employee experience, while delivering cost efficiencies. And communications and utilities bookings were up 27% year-over-year, with a book-to-bill of 114%. This uptick was led by strong demand from utilities providers to help address climate risk and the energy transition.

Moving to our fiscal year 2021 profitability, adjusted EPS accretion of 11% was delivered through a combination of revenue growth, improved business mix, operational excellence and share buybacks. Our EBIT expanded to 16.1%, up 78 basis points year-over-year.

An important element of our improved business mix is business and strategic IT consulting, where demand accelerated in the second half of the year, notably for business model transformation, change management, customer experience design and digital advisory services. We continue to invest in talent, methods and accelerators to support our growth in high-end consulting services. CGI's proprietary industry-specific blueprints, as well as cross-industry ecosystem frameworks are designed to help our clients navigate the changing business models and evolving value chains.

Intellectual property revenue remained steady at 21% of our overall revenue mix, despite the volume headwinds in our transaction-based IP solutions, specifically those related to travel services. We saw significant growth in revenue from new solutions, including 50% year-over-year growth in IP acquired through recent mergers, demonstrating CGI's ability to leverage our global footprint to expand the reach of acquired services and solutions.

We also saw significant growth in our Open Grid 360 platform, which helps clients manage the energy transition. We expect continued strong demand for this solution as part of CGI's suite of sustainability offerings, which we are highlighting during COP26 in Glasgow through the end of this week. SaaS-based IP revenue was also up year-over-year, in line with overall increases in demand for cloud-based solutions.

Closing out the fiscal 2021 review and setting the stage for growth in fiscal 2022 was our strong cash generation. As we shared throughout the year, our financial strength anchors CGI's resilience and enables continued investment in our Build and Buy growth strategy.

Last quarter, I shared with you some of the findings from our proprietary research, notably the characteristics of leading digital organizations. I will now highlight a few of our delivery successes from the past year in helping clients realize the full potential of their digitization.

For one of the world's largest communication and media companies, we are delivering digital design studio as a service, which combines consulting and managed services to create a unified vision for customer experience across multiple commercial platforms, 30 products and more than 50 development teams. This is improving the company's agility and reducing their overall time to market.

For a leading global financial services company, we're helping to redesign, digitize and automate all business operation processes for their retail banking line of business. To deliver on this complex enterprise project, a multi-shore team has been established to join up our industry and technology experts across Canada, the Czech Republic, Germany, India, Poland and Spain.

We are supporting the French Agency for Ecological Transition in digitizing their ecosystem partner network to enhance public-private collaboration on the energy transition. Implementation of a new Salesforce-based customer relationship management platform is underway to provide them better visibility in to their partners and case management across functional teams.

Together with the Swedish traffic administration, we are pioneering the collection of driver-based friction data to provide a real-time view on current road conditions, hazards and potential road maintenance issues. Our solution uses sensor-based data and crowdsourcing to gather and analyze millions of data points to help the agency ensure driver safety.

CGI implemented a new cloud-based policy administration and agent portal system for a leading US insurer's commercial products business. By migrating them from a legacy solution to the cloud-based Guidewire platform, we have reduced their product time to market.

And for a leading interbank payments network, CGI is migrating its e-transfer compute capabilities to an on-premise cloud deployment in Microsoft Azure, with the aim to improve resiliency and performance of the national payment system.

These are just a few of the examples of how we are collaborating with clients to develop and drive their transformational strategies. You will have the opportunity to hear more about our digital capabilities at the upcoming Investor and Market Analyst Day on November 22. I'm pleased to host this event, along with Francois and Julie Godin, our Co-Chair of the Board.

Joining us on the virtual stage will be the presidents of our operating segments and our global executives responsible for talent, M&A, marketing and investor relations. Together, we will tell you more about our vision, growth agenda, industry expertise, global alliances and capital allocation strategy, as well as take live questions.

Importantly, the day will begin with an overview of CGI's talent strategy. As a leading professional services firm, we believe engaging our existing talent and attracting new candidates is always our most important investment. In fiscal 2021, we continue to increase our investments in learning and development programs, including virtual boot camps and online learning. During the year, we surpassed 380,000 courses completed in CGI's online university to deepen employee skills in key areas of client demand such as cloud, data science, AI, customer experience and business consulting. Our hiring continues to be on pace to surpass pre-pandemic levels.

Our ownership culture continues to be a key differentiator in attracting the best consultants and experts in our industry. In fact, our employees referred over 30% of our new hires to join them in working at CGI this past year.

We also continue to invest in industry-leading programs for diversity, equity and inclusion, and employee health and well-being. Over the past year, our programs were recognized by several external organizations, including: the Human Rights Campaign Foundation for our policies and practices promoting LGBTQ+ workplace equality in the US; entreprises en sante in Canada for our global network of mental health champions and certified mental health first aiders; JobsForHer for our diversity hiring and learning and development programs for women across Asia Pacific; Universum for being selected by female IT professionals as the best ideal employer in Finland; and the Diversity Charter in Germany for the creation of an innovative tool to ensure job advertisements are gender-neutral.

During the Investor and Market Analyst event, we will also provide a briefing on our plans to accelerate the buy side of our profitable growth strategy.

To start fiscal 2022, we received government approvals for and subsequently closed two new mergers in October: ARRAY, a digital services firm, primarily in the US federal market, which will expand our client relationships in the strategic markets of the US Air Force and the Space Command, while deepening our offerings in modernization and DevOps; and CMC, which is a leading technology and management consulting firm, primarily serving the Spanish market. This merger expands our client proximity footprint in key metro markets as Madrid and Barcelona, extends our global delivery network, deepens our capacity to deliver digital transformation in the region, and brings new relationships with enterprise clients in the IBEX 35. I would like to take this opportunity to warmly welcome the over 1,770 new consultants and technology experts joining CGI from these two firms.

As we enter fiscal year 2022, we are confident in our positioning to provide the best services and solutions to our prospective and current clients around the world, particularly given our industry and technology expertise, along with the ability to hire and build the necessary capacity to achieve our growth agenda. We remain committed to executing our growth strategy through both Build and Buy. Our capital allocation priorities are aligned to drive continued revenue growth and double-digit earnings per share accretion.

Thank you for your interest. Let's go to the questions now, Maher.

Maher Yaghi -- Vice President, Investor Relations

Thank you, George. And Julianne now will let you all know how you can queue up for Q&A. So Julianne?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Richard Tse from National Bank Financial. Please go ahead. Your line is open.

Richard Tse -- National Bank Financial -- Analyst

Yes, thanks. So your ability to sort of expand margins here in a fairly tight labor market is pretty impressive. Can you maybe walk through some of the levers that you may be pulling to not just preserve those margins, but expand them?

George D. Schindler -- President and Chief Executive Officer

Yeah, thanks Richard. As you know, we have a pretty robust model and measurement process here at CGI that we really stick to. It's called the CGI Management Foundation, and that's really built for a professional services firm. And so, we believe we can continue to grow and grow our margins at the same time. Of course, when you think about our margin some of that's coming from revenue growth and the scale that that provides us. Some of that's coming from the business mix. And I highlighted in the opening remarks both consulting and intellectual property. Some of it comes from our operational excellence, and that's a discipline that comes with the Management Foundation. And then of course some of that expansion is coming from the share buyback. So, it really is a combination of all of the above. And given the outlook and demand outlook, we expect that to continue.

Richard Tse -- National Bank Financial -- Analyst

Okay. And I think you touched briefly on sort of hiring in your comments here. Can you maybe give us some context in terms of the number of headcount -- open headcount positions versus what it may have been a year ago or two years ago?

George D. Schindler -- President and Chief Executive Officer

Yeah, well, the head count is up significantly. You're comparing -- if you compare over a year ago, that was the beginning of the pandemic, you almost have to go back to 2019 to look at it, but it's up against where we were pre-pandemic and rising in -- essentially in every strategic market that we're dealing in. And -- but it's interesting when you look at talent. It is more intense at the current place, given the heavy demand for technology and digitization services, but it is part of the business of CGI. So we're employing all the same tactics and strategies that we do throughout the years, and it's working very well.

Richard Tse -- National Bank Financial -- Analyst

Okay. And just one last quick one from me. The growth is clearly quite broad based geographically and by vertical here. How much do you think that is coming from the catch-up with the reopenings following the lockdowns of last year versus kind of a more normalized run rate? Or do you think this is the normalized run rate going forward? That's it. Thanks.

George D. Schindler -- President and Chief Executive Officer

Yeah, thanks for the question, Richard. A lot of this is -- and I mentioned this before, when we went through the pandemic, I think it put a spotlight on some of the weaknesses in various technology platforms. It also raised the expectations of employees and of customers for digitization. So I think you could argue that some of this is catch-up, but it's more of catch-up from some technology debt that they weren't even aware of. So it's not just catch-up of a delayed project. I think it's more broad based than that. And therefore, it's going to be longer- lived than that.

Richard Tse -- National Bank Financial -- Analyst

Great. Thank you.

Operator

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

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi, good morning. George, maybe just expanding on the hiring question, can you speak to retention, how that's been trending, and how you feel you're tracking relative to your industry peers?

George D. Schindler -- President and Chief Executive Officer

Yeah. So here's where we are with turnover, it's up, but it's still on a trailing 12-month basis, slightly less than our pre-pandemic levels. And speaking of catch-up, I think there was a little bit of catch-up that occurred more than a lot of movements going on right at the height of the pandemic, and we're seeing and experiencing that just like our peers. We continue to be at or below in all of our key markets. We do track that versus the industry average. And I think a lot of that is because of the culture of CGI and particularly our ownership model, which plays into that.

And if you look at why people want to leave, it's usually career development, and that's why we've doubled down and actually increasing our training programs by another 33% here in fiscal 2022. It's the compensation of benefits that come with that career development. And so, we're doing lots of promotions as a result of the training and then its purpose. And of course, in a culture like CGI ownership culture where we have the clear equilibrium between our three stakeholders and the strong support for the communities in which we live and work it really speaks to purpose.

So we believe we can continue to hold our own. Like I said, it's a more intense environment right now. So there is a lot of movements, but that's why I really focus on those employee referrals as well because that's the way we can tap into talent. And then the last part is really tapping into talent in those global delivery centers, not just offshore, but also those onshore near-shore centers, which are growing at twice the rate as the rest of the Company.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. And looking at the US federal business, I know that the book-to-bill was above 1, but year-over-year bookings were down a fair bit. I presume that's related to some of the budget delays in the US. If you could provide some color just in terms of when you [Indecipherable] resolve and what you're seeing as far as the pipeline and timing in that business?

George D. Schindler -- President and Chief Executive Officer

Yeah. Specific to the US market or just in general?

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

US federal specifically.

George D. Schindler -- President and Chief Executive Officer

Well, US federal, you saw the bookings are actually above 100% for the fourth quarter. So we're seeing some of that movement occurring. Government in general, including the US federal market, has been a bit sluggish. I call it the kind of COVID hangover fighting with various, do we do a mandate, do we not do a mandate on vaccines? Do we do a booster, do we not do a booster? There's a lot of that kind of dominating some of the agenda. But I would say, both in the US and around the world, there are a lot of domestic priorities that we're well positioned for.

Interestingly enough, if you look at the infrastructure bill that was passed by the House and looks like it will become real, a lot of that work actually comes to the state and local governments. And so, a lot of that's grants the state and local governments. So that will help our US commercial and state and government business. But the federal business really will be helped by a lot of the infrastructure is actually cybersecurity infrastructure, and Department of Homeland Security and other areas. So again, we're very well positioned for that. So we like where things are heading. But you're right, it's been a bit sluggish as of late and you see that.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. Thanks. I'll pass it on.

Operator

Your next question comes from Paul Steep from Scotiabank. Please go ahead. Your line is open.

Paul Steep -- Scotiabank -- Analyst

Great. Good morning, George. Could you speak a little bit more -- you commented about accelerating the investment in the business into 2022. Maybe talk about whether that's a larger magnitude that you and Francois want to talk to, or where that -- those investment dollars might be getting redirected, some of your comments earlier about robotic process, automation and maybe other areas of investment?

George D. Schindler -- President and Chief Executive Officer

Yeah. Well, part of that investment is on the training and development. I mentioned a 33% increase in our training budgets around the world, and that's really to make sure that we're keeping pace with the demand that's out there. One part is hiring. The other part is retaining your people and giving them the growth that they need as they pivot to the new opportunities. So that's one part of it. Of course, another part of it is, we are also increasing the investments in our intellectual property. I mentioned some of the opportunities we see with the changes we've made in the IP Group, the opportunities to spread our IP into broader markets also string the IP together, and then, also create some new IP for the sustainability opportunity. So that's another one. But then of course, we also have investments to grow our buy side.

So I don't know, Francois can add a little bit about that.

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Already, we started the year with the two acquisitions that we closed in October. So, versus last year, we finished with two for the full year. So it's a great start for 2022. And the expectation is that that will be accelerating in the future quarters. So, that's -- you can expect more.

Paul Steep -- Scotiabank -- Analyst

Great. One cleanup just on operations. How should we think what used to be Northern Europe, but I think it's mainly in Scandinavia, where we were running off some business that maybe wasn't a fit for you and the clients and you transitioned them. How close to the completion of that are we where we might see -- start to see hopefully an inflection in that region toward more growth in the future?

George D. Schindler -- President and Chief Executive Officer

Yeah. Thanks for the question. So we've now isolated the issues really in just two metro markets. Otherwise, we're strong both on bottom line and returning to growth. We made leadership changes in those metro markets. And our COO, Jean-Michel is now focused, and he can travel. He's been there half a dozen times since the summer. We're focused on margin first. And so you see the improvements going on margin, and then the revenue follow. But the good news is we've isolated now to just a couple of metro markets, and I think you will start to see a gradual improvement over the quarters to come.

Paul Steep -- Scotiabank -- Analyst

Great. Thanks.

Operator

Your next question comes from Paul Treiber from RBC Capital. Please go ahead. Your line is open.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much, and good morning. Just you commented that the structural organic growth is perhaps higher than historically. Does that change the prioritization of acquisitions here? In other words, with faster organic growth and also gaining a greater footprint with existing clients, is it as much of a necessity to accelerate the pace of acquisitions? How do you think about that here?

George D. Schindler -- President and Chief Executive Officer

Yeah, I actually think it's the perfect time to accelerate the pace of the M&Ab because, again, what the M&A does, we have a very different viewpoint. We're looking for quality client acquisitions. That's part of what we do. Of course, we get a lot of very strong capabilities that come with those type of acquisitions. But we're really looking for new clients to bring in. So given the fact that we are doing -- we're getting the organic growth of existing clients and achieving some new clients on the organic side, we want to accelerate that with the Buy. So we've got a very active pipeline. We've improved our sourcing. You see that we just did two in parallel. That's the idea as we increase that pace. And the investments we've made, and we didn't talk about this, but we did make investments in the capacity to drive more velocity, and you're starting to see that come through.

Paul Treiber -- RBC Capital Markets -- Analyst

And could you speak to the size of potential acquisitions. There was a news article, a media article in August. I think, they mentioned -- well, they quoted, maybe they misquoted, but they mentioned Francois said that you're looking at some pretty large acquisition targets. Can you just elaborate on that or clarify that?

George D. Schindler -- President and Chief Executive Officer

Yeah. We're always looking for some large ones. If you recall, we have the metro market acquisition policy, but we're also looking for the transformational ones. Given valuations that hasn't been as achievable as of late, and then of course, we paused during the pandemic for a while there, but that's always been -- we have the appetite for that. We have the -- we certainly have the balance sheet, which I'm sure one of the things that Francois was talking about. And that's kind of still on the docket. There are fewer of them and there are fewer of them that makes sense for CGI, but we'll always be looking at that. I also mentioned that we're also looking at larger metro market acquisitions. So you saw that in the CMC acquisition and even ARRAY larger than the average we've done over the last 24 months. You should expect to see more of that as well.

Paul Treiber -- RBC Capital Markets -- Analyst

And just on -- just elaborating on the quality versus valuation spectrum, are there areas where you're looking to flex on either of those? And with the digital transformation initiatives, would there be areas that you'd be willing to go into that are nontraditional IT services, so things may be more like in the BPO area, content moderation, things like that, that traditionally you haven't looked at?

George D. Schindler -- President and Chief Executive Officer

Yeah, I think there are some adjacencies that we are in fact looking at Paul, and I think it's a good question. As the market continues to -- digitization continues to converge some of these elements together. So that is strategically something that we're looking at and opening the aperture, if you will, for some of the acquisition targets that we wouldn't have necessarily qualified for in previous years. So, yes, that is something we're looking at.

Paul Treiber -- RBC Capital Markets -- Analyst

Thank you. I'll pass it on.

Operator

Your next question comes from Stephanie Price from CIBC. Please go ahead. Your line is open.

Stephanie Price -- CIBC World Markets -- Analyst

Hi, good morning.

George D. Schindler -- President and Chief Executive Officer

Hi, Stephanie.

Stephanie Price -- CIBC World Markets -- Analyst

Maybe you could talk a little bit about the pricing environment and maybe your ability to pass on some potential wage or cost inflation here.

George D. Schindler -- President and Chief Executive Officer

Yes. No, it's a good question because obviously, wages are being increased in and across many different industries and given the supply and demand situation. We look at it this way. The value proposition or the digitization services and the types of projects that I listed off just a few examples in my remarks, they have a real business case. And I even mentioned, when we look at it, there's -- the leaders are getting more out of these digital projects, and we're seeing everybody get sharper about what they want to do there. They're focused on the business outcome. They're not focused on the business inputs. And of course, our clients like everybody else realize what's going on in supply and demand and they want the best people on their projects. So that's a long way of saying, yes, we are able to achieve and pass on any wage increases in the rates. And that's not just for new projects. We have those clauses in most of our existing contracts tied to things like consumer price index and inflation rates. So, we're able to support that. And all you have to do is look at the margins that we're able to achieve as we continue to grow in this high demand market to see that that in fact is happening.

Stephanie Price -- CIBC World Markets -- Analyst

Okay, great. And then, obviously a very strong environment here. Just curious what you're hearing from clients in terms of spending priorities in 2022 budgeting?

George D. Schindler -- President and Chief Executive Officer

Yeah. Again, the priorities are many of the areas I rattled off around modernization about moving to a more agile environment, which includes elements of things like cloud. That's the technology. But it's really about moving to an agile environment and being more digitized on a holistic basis. So, those are the priorities we're looking at. And then, of course, how they can leverage the technologies -- the various technologies, whether it's machine learning, whether it's cloud, whether it's AI, etc., to help them achieve those goals.

The other one I would say, Stephanie, that we're hearing more and more, and, of course, with COP26, that's pretty loud is really around sustainability. And it comes up in every client meeting I have, whether it's a financial institution, whether it's manufacturing. Of course, for the energy companies, it's front and center. It is -- and even the retailers. It's a discussion that we have. And of course, with our IP centered on the all-important element of data, that's where we see a lot of demand and opportunity moving forward.

Stephanie Price -- CIBC World Markets -- Analyst

And then, maybe more broadly and maybe building on the answer to that last question, when you think about doubling the size of the business, can you talk a bit about where you see those major sources of incremental revenue coming from?

George D. Schindler -- President and Chief Executive Officer

Of the incremental revenue, well again, a lot of it's playing into the demand you see. I answered Paul's question, some of it. I think as you see some of this convergence, there is opportunities for us to add more to our IP around the business process side. There is opportunities for us to move into the convergence what we see on the Internet of Things for manufacturers and get into some of what previously might have been referred to as engineering services. So, I think those are some of the opportunities for us to grow. And, of course, we'll do that as a balanced build but also looking to buy.

Stephanie Price -- CIBC World Markets -- Analyst

Perfect. Thank you very much.

Operator

Your next question comes from Daniel Chan from TD Securities. Please go ahead, your line is open.

Daniel Chan -- TD Securities -- Analyst

Hi, good morning. With the increased wage environment, any thoughts on changing up your mix of staffing to potentially increase it more in low-cost areas or near-shore areas?

George D. Schindler -- President and Chief Executive Officer

Yeah, it's a great question and I kind of threw this into one of my previous answers, but yes, we are actually growing faster in our global delivery centers of excellence around the world, and we'll continue to do that. CMC comes with some global delivery centers in areas that we didn't have before. We are seeing uptake for that from our clients. And again, it's not just offshore. In fact, it really is -- I think the model that we have on global delivery is playing very well in tapping some talent in other locations but still closer to time zones and closer to clients, so kind of a mix between proximity and offshore. It's playing very well, and we expect to continue to grow there.

Daniel Chan -- TD Securities -- Analyst

Thanks. That's helpful. You've mentioned that you had some CPI adjustments built into your contracts. Can you just remind us of the mechanics around that? Does that usually happen around the renewals, or can you kind of go while the project is still running, if there are some thresholds that are met?

George D. Schindler -- President and Chief Executive Officer

Yeah. No, it's a good question. Typically they run on either a contract annual basis or sometimes a calendar annual basis, and other times the client's fiscal year annual basis. So, some combination. So, there's no -- you're not going to see one uptick, but we don't have to wait for the end of the contract renewal. Francois, anything?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

No, I totally agree. Most of our contract, if not the vast majority, we have co-loc [Phonetic] clause in the contract so that we can increase at least on an annual basis.

Daniel Chan -- TD Securities -- Analyst

Okay, that's good to hear. And then last one from me. I know bookings can be a very volatile metric, but can you kind of comment on the low bookings in this quarter relative to a strong market backdrop? Just wondering if there's anything there. Thank you.

George D. Schindler -- President and Chief Executive Officer

Yeah. And thanks for mentioning that the bookings are always lumpy in general, which is why we really focus on the trailing 12. But a few larger deals, one in particular did push out of the quarter. It's won but not signed. And of course we need to make sure that we dot the i's and cross the t's. And so, we're not too fussed about any one quarter. But certainly, we had strong IP bookings, strong consulting bookings and the new business is up. And some of that is, we did some of the big renewals in certain locations like Canada earlier in the year. That's good news because now you see the bookings are really going to be driving nearer-term growth. So, that's kind of how I look at the bookings right now. So, nothing to be too concerned about.

Operator

Your next question comes from Kevin Krishnaratne from Desjardins. Please go ahead. Your line is open.

Kevin Krishnaratne -- Desjardins Securities -- Analyst

Hey. Good morning, gentlemen. A question for -- you talked about how your SaaS-based IP revenue was up strong, and you alluded to cloud growth there as well. Is there a way you can give us perhaps the size of the cloud business right now for you? Or maybe another way, any thoughts on how penetrated you are in the cloud? What your customers are saying about where they are on the journey? Just any updated thoughts there on the cloud business.

George D. Schindler -- President and Chief Executive Officer

Yeah, thanks for the question. We don't break it out. That's why I gave some of the color commentary on some of the deals, and you see that probably two-thirds of the deals I mentioned, some element of the cloud involved there. I also mentioned I think last quarter that we've elevated the partnerships with each of the major cloud providers' direct report of mine owns each of those engagements. So -- because we see a lot of opportunity.

In general, from a market perspective, there's still a lot of applications, not on the cloud that could take advantage of the opportunities of the cloud. And of course, there's a lot of work between here and now. It's not just -- don't just look a switch in the cloud work. So, that's why the partnerships with the cloud providers, we see as a big opportunity. We don't break it out that way, but that's something that we have. And of course, we have, as I mentioned, the SaaS revenue for our own IP, is going up as well. That's now over. Half of our IP now is -- bookings are on a SaaS basis. I know that because that's our own IP.

Kevin Krishnaratne -- Desjardins Securities -- Analyst

Got you. Okay. That's helpful. It kind of goes to my next question on competition. I'm wondering if you could talk about if there's been any change, any material change how your win rates are progressing. You've talked about the consulting-based revenue has been doing well and accelerating. Just curious to know what you're doing, what you're seeing, how you're winning business, how you bring your IP into the table to win those deals?

George D. Schindler -- President and Chief Executive Officer

Yeah, well, it's interesting. We made some investments on the IP and I mentioned that better leveraging our global footprint as a channel for the IP. So that's that the highlight I gave on the 50% increase in acquired IP. But what I didn't say is that the deal size in the pipeline for our IP is going up and that's through -- partly through linking some of those IPs together, along with some of our other services, including consulting and BPO. And then the win rate is increasing. So, we're leveraging our global IP subject matter experts better across the company by bringing it into that global footprint. So, that's what -- so the win rate is actually increasing with our IP, and it's holding steady across the company.

Kevin Krishnaratne -- Desjardins Securities -- Analyst

Okay. That's great to hear. One last one. Look, on supply chain, I know that there's obviously no direct implications given your business software cloud-based. But just wondering if you're seeing any sort of indirect exposure, for example, if there might be a deployment for an IoT project or you're working on -- with the client on a deployment that requires a lot of devices on their end. Is there any sort of timing delay that you might be seeing or being impacted from anything?

George D. Schindler -- President and Chief Executive Officer

Yeah, it's a good question. You're right. There's no direct. But there is pockets of indirect, but it's pretty limited right now, but we do see it, so something that we continue to look at. A lot of our clients are enterprise clients, as you know, and they tend to have the power right now. And so, they've done -- they've actually managed it quite well, very impressed with how our clients have managed some of this. But we do see pockets of it popping up, and we're keeping an eye on that. It hasn't delayed any of our projects, maybe delayed some of our revenue in certain places, but again just pockets.

Kevin Krishnaratne -- Desjardins Securities -- Analyst

Great. Thanks a lot. I'll pass the line.

Operator

[Operator Instructions] Your next question comes from Rob Young from Canaccord Genuity. Please go ahead. Your line is open.

Robert Young -- Canaccord Genuity -- Analyst

Hi, good morning. You just said a little bit ago that consulting bookings were quite strong. And so, I was looking at the absolute dollar contribution from SI&C. It seems low going back a little ways. And so I'm just trying to reconcile that statement. Is that short-term signings? Any kind of color around what's going on there?

George D. Schindler -- President and Chief Executive Officer

Yeah. Well, I'm breaking out consulting from systems integration. And I had mentioned earlier that some of that systems integration work we're now embedding into those managed services contracts. So that continues to be a trend. In fact, it's part of the offering, the way we offer our managed services, how do I save some money on one side and then spend that money in traditional systems integration. So you're seeing that -- we're even seeing that in some of our local government work where we extend the managed services contract and then the system integration, which is near-term spend but it's under the umbrella of the managed services. So it shows in the managed services revenue. So that's -- I think that's what you're seeing. But discrete consulting projects are up both in bookings and in revenue. I mentioned some of that's in digital advisory. A lot of that's in change management. And again, this is really good, because it's a discrete consulting, which then may lead to that broader systems integration wrapped in managed services. So, that's why I highlighted that.

Robert Young -- Canaccord Genuity -- Analyst

Okay, thanks. That's great color. And then, a lot of comments on the call today about the hiring. And I think you earlier said that utilization was very high, very strong contributor to margins this quarter. And so maybe if you stand back and look at the business, are you seeing constraints related to capacity? Or would you say it's -- because it doesn't sound like there's demand constraints. And just -- I mean to better understand the business, are you able to ratchet up your consultants? Are you able to hire in lockstep with the demand that you're seeing out there? Or would you say capacity growth is a constraint?

George D. Schindler -- President and Chief Executive Officer

We have been -- thanks for the question. We have been able to keep up. But it is an intense environment, as I mentioned. Maybe just give you some color commentary. A third of our new hires come through those referrals that I mentioned, 30%. About a third come to us and actually inbound. So we advertise, and with the movement, actually people are looking to move to companies like CGI. And so, about a third of them are coming from -- coming in. And so, a third is coming from that outreach. And so, we've increased our recruiting twofold to ensure that we keep up with that. I'm not going to say that that's not still intense and we continue to increase that. That's a good news. But again that's also where we need to focus on the retention, which I mentioned earlier, and our high engagement, our culture, and what we're doing there on the training and development are helping us to keep up with that.

I'd also mention one other statistic. Our hiring has increased, but our acceptance [Phonetic] rate has held at above 80%, which is very positive, saying that we're able to not just attract but to get the acceptance from those that we choose to make offers to.

Robert Young -- Canaccord Genuity -- Analyst

Okay. That's great. And maybe last question. I use the term technology debt, I really like that term, sort of, leading [Phonetic] the tech lexicon here. Would you -- when you look at your customer mix, would you say that relative to other -- your peers in the space, would you say that your customers lean a little toward those that would have technology debt? Or would you say that your mix is less than some of your peers?

George D. Schindler -- President and Chief Executive Officer

No, I would say it's on par. I haven't -- every industry, every geography and most clients have some technology debt. And so, I think it's just a matter of, like I said, helping them work through that. And remember, the technology debt is increasing just by the very nature of what's going on in the marketplace. So, it might not be debt that's 30 years old. It might be debt that wasn't there five years ago, but now, as you move to more agile DevOps type environment, you got to make some of those changes. So we're seeing our clients move very quickly along with the marketplace.

Robert Young -- Canaccord Genuity -- Analyst

Are there any end markets where it's more pronounced?

George D. Schindler -- President and Chief Executive Officer

Well, there's always regional differences across this. Europe might be a little ahead in one area, whereas North America might be a little ahead in a different area. And so, this is the richness of bringing our global insights and being able to do that across regions, and also across industries. As one industry moves to more of a customer-facing environment that they weren't in before, they can learn from another industry. So, not a pronounced way but certainly an opportunity for a global consulting firm to help our clients across the board.

Robert Young -- Canaccord Genuity -- Analyst

All right. Thanks.

Operator

Your last question comes from Howard Leung from Veritas Investment Research. Please go ahead. Your line is open.

Howard Leung -- Veritas Investment Research Corp. -- Analyst

Great. Thanks for taking my questions. The first one I have is on the leases and just overall how you view workers going back to the office or staying remote. I saw that there was a gain on lease termination and also the lease liabilities. I think they were down something like 12% from last year. Is that -- is your plan to kind of continue winding down some of these leases? And with all the questions before about hiring workers, how does that fit in with your view about retaining or attracting talent?

George D. Schindler -- President and Chief Executive Officer

Yeah, maybe I'll let Francois talk a little bit about the leases. But just in general, when we look at our talent and what we are doing on behalf of our clients and working with our clients, we find it's important to spend some time working with your colleagues and some time working with your clients. And so, we do believe that there will be a return to the office. We're up to about 25%. If you take out India, probably 30% of our employees now spending some time in the office, more pronounced in Europe where it's 50%, in some cases higher. A little bit of a lag in North America, including in Canada, but we're beginning that return in Canada in November, and even beginning to return in India in January. We think that's important for innovation. We think that's important for mentoring, which is what people are looking for as far as growing their careers. Having said that, of course, we also recognize that people were very productive during the pandemic in some of the work that they're doing. And so, it really is we believe a hybrid at least for the current environment is one that we'll continue to look at. So to the leases, yeah, we're looking at hybrid, right?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Exactly. So that's why in the meantime, our renewal, what we're doing is that we're reducing the number of years. So -- and going a little bit more on short-term leases than signing seven or 10 or 15 years leases, just to understand also where the market is going. And like George was saying, since -- for now, we're to a certain hybrid model until we'll have a better visibility when people will come back on a full basis. For now, we're going with shorter lease and sometimes even not renewing some leases in the meantime.

Howard Leung -- Veritas Investment Research Corp. -- Analyst

Great. No, that's really helpful. And any -- I guess, maybe -- it may be too early to call out what kind of impact that could have on your adjusted EBIT or free cash flow margins going forward.

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Well, for the EBIT margin, like George alluded, I think, we had strong EBIT margin this quarter, this year over 16%. I think we still have some opportunity to increase it with example like we're seeing Scandinavia that the expectation is that we would see improvement on the EBIT margin in this area. But on the other hand, also with the return back, the fact that we're meeting clients more and more now present some of the travel and out-of-pocket expenses are coming back in. So that will be naturally a headwind, but again, compensated by improvement that we can still see in the operations.

Howard Leung -- Veritas Investment Research Corp. -- Analyst

That's great. And then, just one on M&A. George, you mentioned earlier that you're investing more in M&A now and you invest more in the capacity. Just wanted to see if there's any more color on that? Is that increasing the size of the M&A team, software for M&A, infrastructure or the process? Just wanted to find out how it's expanded.

George D. Schindler -- President and Chief Executive Officer

Yes. No, it's a very good question because, yes, everything you just said, it's increasing the team size, particularly across each of the markets, so not just centralized but adding individuals dedicated to M&A within each of the proximities closer to the sourcing. It's leveraging some infrastructure, some various software platforms to ensure that we're seeing all the deals. And then, it's also some changes to the process. So, it's really all of the above.

Howard Leung -- Veritas Investment Research Corp. -- Analyst

Okay. That's great. And just one final one for me. I saw that buyback in the quarter, I think, slowed down -- ticked down quite a bit from the previous quarter. Was that just -- does it have anything to do with the price or maybe just because you were going through the bond offering? Just want to know if there was anything to call out there.

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Yeah. No, nothing related to the price. We -- yes, we did work on the bond offering. But again, that was not necessarily having an impact of why we didn't go on the market, but also the fact that we had some good momentum on the acquisition and finally closed two new ones in October. It was close to even close them in September. So that was also part of the equation why we were slowing down some share buyback in the quarter. Again, just to reiterate, our priority is investing back in the business. And the second priority is M&A. The share buyback is the third one naturally. So, last year, we had only two acquisitions, but this year, the momentum is very good, starting with the two new one in October and hoping that we'll have more in the year.

Howard Leung -- Veritas Investment Research Corp. -- Analyst

Okay. Thanks so much. That probably makes sense. I'll turn it back.

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

We have no further questions in queue. I'd like to turn the call back over to Maher Yaghi for closing remarks.

Maher Yaghi -- Vice President, Investor Relations

Thank you, Julianne, and lots of great questions guys. Thank you everyone for participating on this call. We hope that you will join us for our Investor Day on November 22, just a reminder. And please put it in your calendar. We hope that you can join us then. And a reminder that a replay of the call will be available either via our website or by dialing 1-800-770-2030 and using the pass code 8986313. As well, a podcast of this call will be available for download within a few hours. And follow-up questions can be directed to me at 514-415-3651. Hope to see you soon. Thank you.

George D. Schindler -- President and Chief Executive Officer

Thank you.

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Maher Yaghi -- Vice President, Investor Relations

Francois Boulanger -- Executive Vice President and Chief Financial Officer

George D. Schindler -- President and Chief Executive Officer

Richard Tse -- National Bank Financial -- Analyst

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Paul Steep -- Scotiabank -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Stephanie Price -- CIBC World Markets -- Analyst

Daniel Chan -- TD Securities -- Analyst

Kevin Krishnaratne -- Desjardins Securities -- Analyst

Robert Young -- Canaccord Genuity -- Analyst

Howard Leung -- Veritas Investment Research Corp. -- Analyst

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