CGI Group's (GIB) CEO George Schindler on Q3 2018 Results - Earnings Call Transcript

CGI Group Inc. (NYSE:GIB) Q3 2018 Results Earnings Conference Call August 1, 2018 9:00 AM ET

Executives

Lorne Gorber - Executive Vice President, Global Communications and IR

George Schindler - President and CEO

François Boulanger - Executive Vice President and CFO

Analysts

Thanos Moschopoulos - BMO Capital Markets

Steven Li - Raymond James

Richard Tse - National Bank Financial

Maher Yaghi - Desjardins Securities

Stephanie Price - CIBC

Paul Treiber - RBC Capital Markets

Paul Steep - Scotia Capital

Robert Young - Canaccord Genuity

Howard Leung - Veritas Investment Research

Ralph Garcea - Echelon Wealth Partners

Operator

Good morning ladies and gentlemen, and welcome to the CGI Third Quarter Fiscal 2018 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.

Thank you, Julian, and good morning. With me to discuss CGI's third quarter fiscal 2018 results are George Schindler, our President and CEO; and François Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live from Montréal at 09:00 AM Eastern Time on Wednesday August 1, 2018.

The press release we issued earlier this morning, as well as our Q3 MD&A, financial statements, and accompanying notes, all of which have been filed with both SEDAR and EDGAR are available for download on our website along with supplemental slides. Please note that some statements made on the call maybe forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise except as required by applicable laws.

The complete Safe Harbor statement is available in both our MD&A and press release, as well as on cgi.com. We encourage our investors to read it in its entirety, and to refer to the risks and uncertainties section of our MD&A for a description of the risks that could affect the company. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS.

We will also discuss non-GAAP performance measures which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian unless otherwise noted.

I'll turn it over to François now to review our Q3 financials and then George will comment on our operational highlights and our strategic outlook. François?

François Boulanger

Thank you Lorne, and good morning everyone. I'm pleased to share our results for Q3 fiscal 2018.

Revenue was $2.9 billion, an increase of $104 million or 3.7% compared with Q3 last year. On a constant currency basis, revenue grew 3.8% of which 1% was organic. Bookings in Q3 were $3.5 billion or 118% of revenue of which 57% were new projects or new clients.

Over the last 12 months, total bookings were $12.9 billion or 114% of revenue bringing the total backlog to $22.4 billion up $358 million sequentially and $1.6 billion over the last 12 months. Adjusted EBIT was up into Q3 to $435 million compared with $399 million last year representing a year-over-year increase of 9%. Adjusted EBIT margin improved 70 basis points from 14.1% last year to 14.8%.

Regarding the restructuring program announced last year, we incurred expenses of $20 million in the quarter. To-date we have expensed $169 million or approximately 90% of the program and expect to complete all remaining actions before year-end. We incurred integration expenses of $8.5 million in Q3 as we fully implement the CGI model into the operations associated with our most recent acquisitions.

Turning to income tax, our effective rate in Q3 was 25.7% down from 27.1% last year largely the results of U.S. tax reform. We expect the fourth quarter tax rate to be between 25% and 26%. Adjusting for integration and restructuring expenses, net earnings grew to $310 million in the third quarter up $31 million year-over-year and resulting in a net margin of 10.5%, 70 basis points higher than last year.

EPS on the same basis expanded by 16.1% to $1.08 per diluted share. On a GAAP basis our Q3 net earnings improved to $288 million and EPS was $1 up from $0.92 in Q3 last year.

Our operations generated $317 million in cash during the quarter or 10.8% of revenue. This is inclusive of $22 million and restructuring payments. This compared to $291 million last year or 10.2% of revenue. And over the last 12 months, cash generated from our operations increased to over $1.5 billion or $5.16 per share representing 13.3% of revenue.

We ended the quarter with a DSO of 50 days compared to 46 in Q2 2018 primarily due to the timing of large SI&C milestone billing. With more SI&C revenue in Q3, they are less prepayments from outsourcing clients which temporarily impacted DSO. Our target remains at 45 days and we expect the mix to rebalance over the next several quarters.

In the third quarter, we continued making strategic investment that will advance our business goals. We invested $85 million back into our business including the development of our IP and ramping up of new engagements. We invested $43 million to acquire Facilité Informatique, an IT consulting services firm with a strong local presence of 350 consultants and digital specialists in Montréal and Québec City.

And we invested $347 million buying back 4.5 million shares at an average weighted price of $76.64 per share. Net debt was $1.7 billion at the end of June representing a net debt to capitalization ratio of 19.6%. The increase in net debt was primarily due to returning value to shareholders through our recent share buybacks. This level remains well within our comfort zone. With over $1.5 billion in readily available liquidity and access to more as needed, we remain very well positioned to continue executing our build and buy growth strategy.

Now I’ll turn the call over to George.

George Schindler

Thank you, François. Good morning.

I'm pleased with our team's execution in Q3 further strengthening our position as a leading end-to-end services partner for clients around the world. This quarter's results are once again underscored by the widespread demand for digital services by our clients and CGI's ability to continue bringing the right combination of local experts and global insights to help our clients implement their enterprise-wide strategies.

Last quarter I highlighted some early findings from the 1400 face-to-face meetings we held with business and IT executives around the world. These findings I shared with you included; addressing regulatory compliance and securing data and systems is now a higher priority. We continue to see an acceleration of digitization across industries to meet consumer and citizen expectations, and as a result over half of our clients are increasing their overall IT budgets.

One conclusion remains clear as we continue to slice and benchmark the data. All signs point to continued growth and demand for our consulting and IT services. As such, our business outlook remains optimistic this year and beyond. We are effectively meeting the demand for digital with a holistic integrated approach that expands our end-to-end portfolio of services.

In fact, our $3.5 billion in Q3 bookings were largely driven by engagements to support our clients drive to create better and more secured digital customer experiences, and those engagements to support the optimization of operation through the use of cyber, intelligent automation and emerging technologies.

It is quite common for our digital mandates to include CGI IP and other enablers such as analytics and cloud to support our clients strategies. Our investments in emerging technologies and IP support our ability to win full end-to-end enterprise engagements which in turn will evolve our balance of SI&C outsourcing and IP in line with our targeted business mix creating value for all three stakeholders.

With this strategic positioning as a backdrop, let's review the Q3 highlights of our global operations beginning in North America. In the U.S. commercial and state government segment, revenue grew 8.4% in constant currency driven by utilities, life sciences and manufacturing.

Following last year's metro market mergers, we are leveraging new and existing relationships to bring clients a full view of our end-to-end portfolio services and solutions. As a result, our U.S. commercial business experienced double digit growth in the quarter. EBIT margin was 17.8% and as we mature the CGI model within our latest metro market additions, we expect continued improvement in the growth, profitability and cash flow of this segment.

Bookings were very strong in Q3 at over 160% of revenue led by renewed activity and our state and local business. During the quarter, the California Department of Healthcare Services awarded CGI a seven-year mandate to implement case management, payments and other supporting services with a total value of over $350 million. This new award is also an example of expanding our services from SI&C and IP into broader and longer-term outsourcing arrangement

In U.S. Federal, we're seeing an increased pace of government award activity as evidenced by another strong booking quarter of over 150% of revenue. However, revenue contracted by 2.6% on a year-over-year basis as we had some positive upsides in Q3 last year including a large momentum license sale.

EBIT margin was impacted by the same factors though remains strong at 15.3% as we continue to improve the quality of our Federal revenue mix. Notably in the quarter, we were awarded our first two Social Security Administration task orders under the IDIQ announced earlier this year and have booked and started the initial transition phase. The full value of these task orders is expected to be greater than $150 million and will be booked in the coming quarters.

And we continued to gain traction in cybersecurity. As announced earlier this week, we were awarded a $420 million task order under the Department of Homeland Security's continuous diagnostics and mitigation contract program. We were also awarded one of the prime positions on the comprehensive agency-wide Department of Justice cybersecurity vehicle. We expect task orders to be completed over the coming quarters.

In Canada , revenue grew 4% lead by continued demand from the banks in all areas of digital including human centered systems design, intelligent automation, and cyber consulting. In addition, we continue to introduce new IP in areas such as open banking.

I'd like to recognize our recent metro market merger in Canada, Facilité Informatique and extend our warm welcome to these 350 professionals. EBIT margins remained strong at 21.5% of revenue and bookings came in at over 100% of revenue on the continued strength of the banking industry and with public sector wins in the West.

Turning to our European operations. In Northern Europe, revenue grew 8% driven by digital experience work for clients such as Finnair and OP Financial Group. EBIT margin for this segment was 11.9% now stabilize as the integration of Affecto into the CGI operations has been completed.

The alignment of the Affecto operations to the CGI model and the expected benefits of the restructuring program we yield increasing margins throughout the remainder of fiscal 2018 and beyond.

Bookings were 112% of revenue and in the quarter we were awarded a contract utilizing CGI IP for Fingrid which is supporting a next-generation information exchange DataHub to store and manage data from all of Fingrid's 3.5 million energy consumption locations.

In France, revenue grew 2.6% organically with strength across all vertical markets. EBIT margin was 11.2% as we continue to evolve the business mix. Our IP is now gaining traction. We had the first implementation of Retail Xp360 and systemu, the €20 billion retail cooperative. And we are implementing CGI Open Finance in a Western European bank which will enable open banking.

In the U.K. we returned a positive organic growth as planned, 1.5% in the quarter fueled by the strong bookings in previous quarters. These new engagements are contributing to improve margin as we posted EBIT of 14.6%.

Bookings for the quarter were just under 100%. As Brexit progresses, we expect to see a near-term slow down on procurement decisions due to a temporary focus on sovereign programs. Looking further ahead, we expect resolving upside opportunities in both public and commercial sectors due to these new programs.

In Eastern, Central and Southern Europe revenue grew 4% as Germany continues taking advantage of a robust market with strong double-digit growth year-over-year. Similar to other European segments, ECS's business mix continues to evolve with EBIT margin increasing 130 basis points to 7% in the quarter. Bookings were strong at 113% of revenue driven by vendor consolidation as we see more clients moving to enterprise-wide strategies with trusted global partners like CGI.

Turning to our Asia Pacific operations. Revenue grew 5.6% and EBIT margin was 22.8%. India continues to be an innovation incubator particularly for agile delivery models, hybrid cloud management, machine learning, and intelligent automation solutions. Their expertise is a key element in supporting bids, winning contracts and servicing clients around the world.

Across all operating segments and through the first nine months of fiscal 2018, revenue is up $471 million or 4.5% in constant currency. Adjusted EBIT is up 6% for a margin of 14.5%. Adjusted net earnings are up $70 million for a net margin of 10.3%. EPS ex items are up 13.6%. Cash from operations is up $147 million and bookings are up $1.6 billion or a 114% of revenue.

In summary, we remain committed to our aspiration to double the company through build and buy strategy. We will continue our Metro market acquisition approach of focusing on companies with annual revenue under $500 million and with deep client relationships in areas where CGI is currently undersized. We have opportunities in each of our operating segments with a particular focus on the U.S., France and Germany.

We continue to see the strategy as a short-term driver of inorganic growth and a catalyst for accelerating organic growth in the intermediate-term. In addition, we are in various stages of discussions regarding transformational opportunities with companies that have over $500 million in annual revenue. These transactions take patients and resolve to always ensure that we acquire the right company for the right price at the right time all three without exception.

And now we have 74,000 members a net increase of 4,000 professionals from the same period a year ago despite the impact of our restructuring program. We're successfully recruiting and developing in demand expertise in proximity to our clients in all geographies. This expanding talent base should enable us to accelerate organic growth. Thank you for your continued interest and support

Let’s go to the questions now Lorne.

Lorne Gorber

Just before the a question a reminder there will be a replay of the call available either via our website or by dialing 1-800-408-3053 and using the passcode 5462251 it will be available until September 1st. There’ll also be a podcast for download within a few hours and as usual follow-up questions could be directed to me at 514-841-3355.

Julian, perhaps you could pole for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today will be from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

Thanos Moschopoulos

With respect to the restructuring program you mentioned you incurred 90% of the total charges. What proportion of the savings would you say were captured in Q3 results? And ultimately was that the main factor in driving the margin expansion you saw relative to Q2 or is that more a function of other factors like utilization rates?

George Schindler

Yes, well thanks for the question Thanos. Really remember when we plan this out on the restructuring, we wanted to be at run rate savings by the end of the year. And so we’re on track to do that. So I would say close to 90% of the savings are in quarter and yes it is a driver and yes that part of the driver to do the restructuring was to increase the utilization. We are seeing the utilization come up, but I also want to remind you that the benefits of the restructuring were not just cost savings, it was really to position ourselves for profitable growth in the new demand areas.

And we’re seeing that and I highlighted that with the addition of the 4,000 professionals through the first nine months of the year and also we continue to automate and transform our infrastructure business to the asset light model. So we will see additional benefits through that organic growth and transformation as we move into the future and also then that the benefits from the mix of business which I’ve talked about before.

Thanos Moschopoulos

And then I think you kind of alluded to this in your prepared remarks, but could you update us in terms of the cross-selling opportunities you’ve been able to capture with some of the metro acquisitions still early days on that front or some of those coming to fruition and the bookings numbers?

George Schindler

No, a number of those are coming into fruition and you saw that the U.S. commercial and state government had very strong bookings in the quarter. It is a continuous process to drive the full breadth of offerings into those clients, but we are seeing growth had some recent success with some pharmaceutical firms from our Paragon acquisition in the Northeast.

We have some success in the West particularly around some of the digital skills around cloud native applications in the West from our ECS acquisition in Denver. So we're already seeing some of that and you're seeing them in the bookings, but having that full breadth of offerings I think we’re seeing the same thing across the world more SI&C right now but still an opportunity to drive more of that outsourcing.

Operator

The next question will be from Steven Li from Raymond James. Please go ahead.

Steven Li

George, couple of questions from me. Your comments on the U.S. Fed these tough comparisons does it continue next quarter or should we see your growth first come back?

George Schindler

No, it’s a great question. As you mentioned, the best predictor of future growth is the bookings we continue to have some strong bookings. And the reason I highlighted we see the pace of award decisions in Federal increasing. So that's certainly helping us. We see a more normalized end of the quarter than we have - in the recent past.

So what that means is the end of the government fiscal year when they actually have budgets they look to spend a little bit of increase in spending on those budgets and its twofold, it’s both in bookings but also in some of the revenue ramp up.

So even though we had a ramp up in revenue last year it's not those one-time licenses I mentioned. So I think we've got some nice tailwinds. I would also mention the SSA task orders those are ramping up. We expected that to happen a little bit earlier, but that's ramping up so between the bookings the end of year pick up, the Social Security task orders I see a federal having only increases in some of the momentum of the pace of revenue growth.

Steven Li

And then just one more question, your MD&A also called out the lower IP license especially in the U.S. which I believe is your largest IP market. So if you can update us how are you tracking relative to your IP30 target any regions that are - but might be offsetting the lower IP in the U.S.? Thank you.

George Schindler

And I'll break that down two ways first, actually the percentage of revenue and IP, remember we set that to 21% in the recent quarter due to the acquisitions. That's now up to 22% of revenue. So you see that momentum through the first nine months of the year we've actually grown IP at over 6%. So it's actually growth over our revenue run rate, so that's good news.

But the IP licenses that were called out really is a different nuance, is not the revenue it’s the type of revenue. So we’re introducing new IP that's a good thing, but all of that new IP is sold in more of a SaaS model. And so that doesn't have the same license fees, as some of the mature IP.

The mature IP we’re adding on services so I called out in Federal the large momentum license, that license is driving more SI&C revenue in Federal. And I've always said about seven to one in services dollars to a license dollars historically that number is much higher now particularly in some of our mature IP and particularly in an ERP like momentum.

So, we’re experiencing that, so more services. Another example of that is the big CMIPS win we had in California just announced this morning. That's actually on the back of our advantage IP, but we’re now expanding those services to more systems, surround systems, as well as BPO. But that's not license but it drives so that's sticky license sales is driving more revenue in the future.

And I’ll just remind you also on the SaaS, that margin is the - license margin is baked into there, so overall margins rise over time so you don't get those one-timers and that's the comparators that we’re going to have probably first couple quarters here as we transition through that.

Operator

The next question is from Richard Tse from National Bank Financial. Please go ahead.

Richard Tse

George, you no doubt have a great couple of years in terms of SI&C. I'm just curious to see when you think those engagements are going to accelerate when it comes to converting to larger outsourcing engagements. Does that sort of one year out or 18 months out? Just kind of give us an order magnitude on that?

George Schindler

Yes, it's a good question. I think Richard, I mentioned this before, I'm not sure. I want to will that happen too quickly because I want to keep building up that SI&C which is the tip of the spear, if you will. But if you do see in the bookings, this quarter actually did tip the other way. It's about 55% outsourcing and that's the first quarter and the bookings for a while that we've seen that. And that's on the back of bookings like the, like the one we announced this morning in California.

So, we are starting to see that. I think it's still the early phases of that. I think it will flip back and forth because still we're at about 55% revenue in SI&C overall. And so it will take a little bit more time, but I think it's coming and it will be a tailwind to our accelerating growth here in the future.

I also want to highlight that 57% of the bookings this quarter were net new business. And I think that's also an indicator, when you look at those outsourcing, that's the transition from the SI&C to new outsourcing as opposed to a renewal of outsourcing.

Richard Tse

I think it's related to that, you've talked recently about - well I think it's sort of considerable margin expansion opportunities we look ahead, given to some of the changes structurally. Can you sort of confirm that you're still thinking that way in terms of that potential expansion because obviously that'd be very helpful given the leverage in the business?

George Schindler

Yes, absolutely, Richard. And as I mentioned, the reason we did the restructuring really was strategic to capture the net new business. And as I mentioned is that mix of business converts from the SI&C, the outsourcing as we introduced the new IP and convert that to SaaS, there should be expansion in margins in every region and every geography in the world.

Richard Tse

And then I guess related to the margin expansion, what do you think today about headcount, ability to retain talents, clearly everything we read now is certainly a lot of lack of talent. I suppose out there, maybe I'm wrong but it's a lot of discussion around wage inflation, does that impact you in anyway and how do you bake that into sort of this process for margin expansion?

George Schindler

It's a good question because although we are obviously in the business solutions and IT services business, it's a people business. And so, that's why I highlighted the net new professionals that we added both organically and inorganically.

I would say we have a couple of benefits here on the talent side. We have an ownership culture of accountability. And 83 - we're actually up now, 83% of our professionals are owners of the CGI stock, but it just starts there. It's a mindset and it's a culture of ownership. It's very attractive particularly on the entry level hiring. And so we've had a very robust entry level hiring, this is the - this is where you're getting the new talent. I always say that talent is a renewable resource. It's not just about, there's not a finite set of people, there are number of entry level hires that are graduating every year.

And also our referrals are up, but because of that ownership culture and our focus in collaboration four and with our clients, which is what people really want to have is they want to have an impact. And you see that in our client satisfaction scores are up.

We have very high acceptance rates. So I would not say that acquiring and retaining talent isn't paramount for a services firm. But we like where we are, and we continue to be able to add to our member base in the right areas.

Operator

The next question is from Maher Yaghi from Desjardins [inaudible]. Please go ahead.

Maher Yaghi

George, I wanted to - congratulation on the strong booking in the quarter, actually the past couple of quarters. And I'm trying to just understand or square off the increase in the backlog year-on-year, which is close to 8%. How much of that increase came from acquisitions versus bookings that you guys did organically? And again, I'm trying to just square off that growth of 8% with the 1% organic growth rate that the business is generating right now. When should we start to see acceleration of that organic growth?

George Schindler

Thanks for pointing that out. Just to your specific question on the addition to the backlog were acquisitions, yes, some of that comes from the acquisitions, but a much smaller percentage, because most of these metro market acquisitions by their nature are shorter term, SI&C, consulting only offerings.

We obviously are converting that over to the full offerings suite, some outstanding talented members, but really focused on that front end of the SI&C. So, not a whole lot of that is - some of it goes into the backlog but not a whole lot of that.

So, most of that really is from those strong bookings that we've had over the last really several quarters in many - in really all areas of the business in which we operate. And so, yes, you will see that coming in, that's why I also highlighted the 57% new business.

It's a good indicator, I can't predict exactly when all that comes in, but that's why I'm very optimistic about accelerating growth in the future.

Maher Yaghi

Is there a part of the business that is acting to - as a counterbalancing that momentum and growth in the bookings, and so that organic growth rate is staying at the low single digit or it's just a matter of, as you said, just getting through those converting the backlog into revenues and that's when we should start to see the acceleration?

George Schindler

Well, I think it's a good question, because there have been over the last several quarters there have been some counterbalances. Obviously the U.K. and some of the initial fallout from just the shock of Brexit had an impact. You saw that was going down last - really over the last year. It's now returned to some measure of growth.

So that's gone. Federal in the quarter, and I explained that and in the broader context of some of the comparables on IP licenses. And then I have been highlighting for some time, Maher, as we continue to transition our infrastructure business, that is a counterbalance in some of the segments around the world.

Our SI&C, is up everywhere organically. But the infrastructure business by its very nature is down in virtually every place in the world. So, but we're getting through that. That's why we accelerated the asset light, it's less and less of a counterbalance, which is again is why in the future I see accelerating growth.

Maher Yaghi

And one last question to François. François, I ask you this question probably every quarter. But I'll ask it again. Any change in how you view capital allocation with the very increase in cash balance and your view on how dividend could fit into that capital model framework that you have?

François Boulanger

Like I did say in the past, we're reviewing this every year. We did it in January, and we'll relook it again in January timeframe. But just to say that we still like very much the flexibility of the share buyback. Specially like George was saying that, we're very active on the buy side. And for sure we have a lot of opportunity on the buy side. So, we'd like to have the opportunity of having the capital ready when it's time to trigger the next big acquisition.

Operator

And the next question is from Stephanie Price from CIBC. Please go ahead.

Stephanie Price

You mentioned in your prepared remarks that the restructuring is partially to position CGI for new technology. I was hoping if you can talk a bit about where you're investing and seeing growth?

George Schindler

Thanks Stephanie for the question. It's really in a lot of the areas as I mentioned, around digital customer experience. So we're investing in front of -- some of that frontend human machine design, intelligent design on the front end, some of that IP in that area. We've invested in some new IP that takes advantage of some of the digital technologies and provides them the value proposition to our clients.

We're also investing a lot in cyber, and we saw some nice strong bookings around the world. It's an area of obvious growth for us and need for our clients, and we saw that in the voice of the clients.

We're also investing a lot in the -- all areas of, what I call, intelligent automation. Everything from the RPA's straight through to some of the machine learning and other intelligent automation areas.

So, these are the areas that we freed up. But when I say invest, our big investment is in IP. And when I mention we invest in IP, even our new IP around open banking, our IP around central market systems, our IP in retail Xp360, always done in conjunction with our clients. So we know the markets there.

So that investment we already have on market in some cases presold sales that we have. The other investments are in some of the skill sets required for us to deliver those offerings to our clients. So, it's not really a drag on the margin but it is an opportunity to drive future margin expansion as we move to the higher end services. So just want to qualify and quantify when I talk about those investments.

Stephanie Price

And then in terms of recent tuck-ins over the past year. Can you talk about whether they're where you want them to be from a margin perspective or if there's more work to do there?

George Schindler

They actually are absolutely getting to where we want them to be from a margin perspective. However, there's still some work to be done to drive that full offering suite into those clients. As I mentioned, we're seeing some of the successes and you see that in the bookings. We don't see all that yet in the revenue and the growth.

Operator

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

Paul Treiber

I was hoping you can just clarify a comment on the U.S. business. You mentioned that the, that the license sales were a tough comp but then also in the MD&A, there was a comment about a favorable volume adjustment. Is that related to the license sales or is it independent? And then could you just quantify the dollar value or the percent value of those impacts?

George Schindler

Yes, that was -- no, that was relating to a BPO contract. So it's not -- it was unrelated to the license. It was a onetime related to the contract volume. So a lot of that drop to the both the top line but also the bottom line. So, and it was -- François, I don't have the quantified numbers maybe.

François Boulanger

I don't have it here, we can follow up after.

George Schindler

But if you take those out, Federal, would have been positive growth for sure.

Paul Treiber

And then just looking at European, it seems like you're having strong growth in Germany, even though it's one of your smaller regions in terms of footprint. What's been the go-to-market strategy there? And how do you source or how have you been sourcing the resources to execute in that market?

George Schindler

Yes, it's a great question. It's really -- the demand is across the board in all areas of digital customer experience but also those digital operations that I talked about. So it's leveraging new technologies, including RPA, as well as, some innovative work on the front end. So it's really been driven by this whole digitization demand by our clients around the world.

That's happening in space in Germany, especially with the strong economy there. And again, what we're seeing from clients is, they're moving more away from that short-term cost cutting into medium-term transformation, in order to grow.

And you're going to see that go fastest in the strongest economies, because that's where our clients are seeing the opportunities to grow themselves, which in turn drives growth for us through the digitization opportunities.

Sourcing, is really as I mentioned. We're hiring. We're gaining, we've hired, I think by the end of the year, we will have increased our member base in Germany by 20% plus. So that's a number of new hires and that gives you some idea of that double digit growth that I'm talking about in Germany.

What we have done recently, I think that you're aware is, we're changing the leadership in that part of the world. So, we're looking to use those same strategies in Germany and Netherlands. And I'm pleased to report that Netherlands actually is on the path to growth. And that's a significant element because it's been dragging down their margins has been utilization.

And so the combination of the restructuring program, and now the new bookings, we should see the improvements across the region just like we're now seeing in Germany.

Operator

The next question is from Paul Steep from Scotia Capital. Please go ahead.

Paul Steep

George, one question. Could you talk a little bit about M&A and the go-to-market for smaller metro and sort of regional deals to process there in terms of maybe -- as well the capacity to produce a much larger number of smaller deals. And then maybe compare year-on-year if you've ramped up that team dramatically? Thank you.

George Schindler

No, that's fine. So I'll just remind you the -- our approach, we've always done this on the due diligence side of the M&A process. But we moved the sourcing side of M&A also to the region.

So we are a decentralized model, and so each of the business unit leaders who are always responsible for the due diligence and working with our corporate M&A team. We've now moved a significant part of the sourcing, now, to those same business unit leaders.

So, each of our business unit leaders in each of our eight strategic business units around the globe have responsibility for sourcing. A lot of this comes from our voice of the clients, as I mentioned before. Some of this comes from existing partnerships, and cooptation opportunities. And so, they're in the markets, they know the firms that are out there.

We've also expanded that sourcing to make sure that we're not missing those regions that maybe were under undersized, and so we're also expanding the efforts. But the actual work of the due diligence, talking to the various companies, that's all sourced out to those business unit leaders. It's part of their responsibilities. We've changed the model there.

We added some to our corporate M&A team, but I would say that we could ramp up and do 60 of these at the same time, because we have 60 of those business unit leaders around the globe.

Paul Steep

So just to clarify, thank you, on the BU -- in the BUs, do you have a sense of how much they've been growing their capacity in their team to go hunt deals, I guess, is more where I was actually heading with it?

George Schindler

So, you were going to their operations. I don't have that, they all have that capacity. It's all part of the model. And what I can tell you, we have a very active list that I review on a weekly basis with the presidents and the business unit leaders. So, there is no shortage of opportunities.

Operator

The next question is from Robert Young from Canaccord Genuity. Please go ahead.

Robert Young

You highlighted the benefits of the metro market strategy in the U.S., and so I wanted to see if there are any areas where that strategy could be extended in the U.S. on the West Coast, perhaps, or other places? And do you have any plans to do that?

George Schindler

Yes we are. We are looking at. We have our own IP that we built with every city located on it, where there could be opportunities overlaid with CGI business, CGI professionals, and available IT services companies, and that becomes the source of that data.

And as you point out, there are a numerous set of areas in the West of the Mississippi, and quite frankly even in the Midwest, where we we're undersized. And there are opportunities to grow particularly in that Pacific Northwest.

Robert Young

And we think of you as a vendor with broad geographic footprint. But when you're thinking -- if you look at that IP as how much of the opportunity is unmet inside of the U.S. in the commercial space that you could address over the next several years?

George Schindler

Well, we're as -- it's the largest market in the world. So both from an IP perspective, and from a full offering suite, there's a lot of opportunity. As it's very highly fragmented market, particularly in the U.S.

Robert Young

And follow-on on one of Paul's earlier questions around Germany. I think you highlighted in the monologue that you're seeing vendor consolidation as companies are moving towards global end-to-end partners. And so, I've heard of that -- I've heard you mentioned that as a strategy or as a differentiator for CGI, but I haven't heard a lot of actual examples of that happening. And so, is Germany an early mover or is that something you're seeing across the entire footprint? Maybe if you can talk a little bit more about that?

George Schindler

Yes, I would say that it's been more pronounced in Germany. But it also starts from where you're -- it depends on where your starting point was. I would say, less, Germany, and early mover more. Germany had a lot of large clients that had a proliferation of IT services partners.

So, that's a pronounced -- I think that's what makes it more pronounced in Germany. But it's something we see around the -- it is something we see around the globe.

Robert Young

And last question from me, I think you mentioned the percentage of IP and the revenue. Can you provide the number in the bookings if you haven't already mentioned it and then I'll pass the line?

George Schindler

Yes. No, I did not mention the bookings. I think it's -- again, because of the license change it was about 16% of the bookings this quarter.

Operator

The next question is from Howard Leung from Veritas Investment Research. Please go ahead.

Howard Leung

I just want to touch upon a transformational acquisition. George, I think you've talked a bit about that. What you see is kind of the biggest hurdle to getting those -- when you're in negotiations, the right price, right time, right company?

George Schindler

No, it's -- I think right now it is the valuations that are out there. And therefore the expectations that has created or just the hurdles that creates, that's why it does take some time. And we're not going to overpay. And so -- especially for public companies, the valuations have to make sense. I would say that's the biggest hurdle point in time. But that changes, and so that's why you start the discussions.

I think it's less of what it had been. It was less about valuation, it's more about the mix of the business in some of these areas, particularly on the infrastructure side, and the undifferentiated BPO side. That's changed a bit. I think we see some stronger opportunities now, but the price has to be right.

Howard Leung

And then on the metro markets strategy with high end consulting firms, you talked about how you had to use -- find their own companies to acquire as well. Do you kind of feel -- is that throughout all of Europe and North America as well that's happening or is it more of a North American effort?

George Schindler

No, that's happening around the globe. I have those reviews weekly with every president around the globe.

Operator

Our last question will be from Ralph Garcea from Echelon Wealth Partners. Please go ahead.

Ralph Garcea

Just some quick questions on the advantage in momentum business, as you look at those renewals, what's really driving the growth in those contracts, is that a move to cloud and hybrid and some of those government areas and you're wrapping us cyber security layer around that or are they adding more modules to what they were using in the past?

George Schindler

Yes, no it's a great question. A lot of it has been driven by the introduction of more modern technologies not just cloud but some technologies that can change the way the users interact with the various modules. Data analytics is a big piece of that and then as I mentioned overlaying the BPO on top of it and even the interaction of our IP with other surround systems. So it's really a combination of all of those factors.

Ralph Garcea

And then on the commercial side, are you seeing more demand for Azure and AWS or where you seeing your clients sort of - moving from commercial cloud business?

George Schindler

Yes. As you know we're agnostic. I don't have the numbers on that but we really focus on making sure that we're taking advantage of the opportunities of the cloud and consulting with our clients to make sure that they're managing the hybrid cloud because we see more and more hybrid cloud, it might be one or both of those flavors or public cloud plus some private cloud and or in internal infrastructure, so it's all of the above.

Operator

Thank you. This concludes today's meeting. Please disconnect your lines at this time. And we thank you all for your participation.

George Schindler

Thank you.