May 1, 2019
Operator
Good morning, ladies and gentlemen. Welcome to the CGI Second Quarter Fiscal 2019 Conference Call.
I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Investor and Public Relations.
Please go ahead, Mr. Gorber.
Lorne Gorber
Thank you, Donna and good morning. With me to discuss CGI’s Second Quarter of Fiscal 2019 results are George Schindler, our President and CEO; and François Boulanger, Executive Vice President and CFO.
This call is being broadcast on cgi.com and recorded live at 9:00 AM, Eastern Time on Wednesday, May 1st, 2019. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q2 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 on both our MD&A and press release, as well as on cgi.com. We encourage our investors to read it in its entirety and to refer to the Risks and Uncertainties section of our MD&A for a description of the risks that could affect the Company.
We are reporting our financial results in accordance with the International Financial Reporting Standards, or IFRS. We will also discuss non-GAAP performance measures which should be viewed as supplemental.
The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are in Canadian dollars, unless otherwise noted.
I'll turn it over to François now to review our Q2 financials, and then George will comment on operational and strategic highlights as well as our outlook. François?
François Boulanger
Thank you, Lorne and good morning everyone. I'm pleased to share our results for Q2 fiscal 2019.
Revenue was $3.1 billion, an increase of $118 million or 4% compared with last year. On a constant currency basis, revenue grew 4.7% of which approximately 4% was organic.
Bookings in Q2 were $3.3 billion or 106% percent of revenue. Findings were driven in part by increases to the scope of services and outsourcing extensions and renewals.
In addition, new clients have been leveraging our IP including HSBC and the U.S. Navy.
Again, systems integration and consulting remains strong, accounting for 71% of bookings in Q2. Perhaps even more telling is that 42% of these SI&C signings for new business, ideally positioning us to introduce more of our end-to-end services including outsourcing over time.
Over the last twelve months, total bookings were $13.3 billion dollars or 113% of revenue up, $1.2 billion from the same period last year. IP bookings were strong, with book to bill of 118% and accounted for nearly 23% percent of revenue in Q2 compared to 21% last quarter.
With the addition of Kendall's portfolio of SI&C services, IP as a percentage of our revenue mix will reset downward in the coming quarters. Going forward, these additional channels provide us the opportunity to pull through our full suite of end-to-end services.
Adjusted EBIT was $454 million, representing a margin of 14.8% this compares with $424 million and a margin of 14.4% up 40 basis points from Q2 last year. Our effective income tax rate in Q2 was stable at 25.4% compared to 25.5% last year.
For the full fiscal year, we continue to expect the tax rate to be between 24.5% and 26.5%. Turning now to net earnings.
When adjusting for expenses of $6 million to complete the integration of CKC, net earnings grew to $324 million in the second quarter, up $21 million year-over-year. Earnings per share on the same basis expanded by 12.5% to $1.17 per diluted share and net margin was 10.6% top 30 basis points from the year ago period.
On a GAAP basis, net earnings were $318 million and EPS was $1.14, up 21% from $0.94 in Q2 last year. Our operations generated $462 million in cash during the quarter, up $36 million representing 15.1% of revenue compared with 14.4% in Q2 last year.
Over the last 12 months, we generated $1.5 billion or $5.34 in cash per share compared to $5 per share for the same period last year. We ended the quarter with a DSO of 49 days, down 5 days sequentially due mostly to the seasonality of clients paying annual maintenance at the beginning of the calendar year.
Compared with the second quarter last year, our return on invested capital improved by a 140 basis points to 14.9%. As such, we continued allocating capital in the quarter to the opportunities with the highest returns.
We invested $83 million back into our business including the development of our IP and the ramp up on new contracts. We reduce our debt by $11 million.
Net debt was $1.6 billion at the end of Q2 representing a net debt to capitalization ratio of 17.4%. We invested $160 million buying back 1.9 million CGI shares at an average price of $84.42.
Under the current buyback program, we can purchase and cancel an additional 19.7 million shares through next February. And we invested $62 million to acquire the first tranche of Kendall shares in Q2.
Since then, we completed the acquisition reaching over 92% of share standard and are now following the Swedish regulatory process to obtain the remaining shares. As we have realized with each acquisition, Kendall is expected to be accretive in year one including plan actions related to running off and or divesting non-core revenue.
After completing all CAS acquisition for a total of approximately $600 million, we'll still have over $1.5 billion in remaining liquidity and access to more as needed in order to continue to accelerate our build and buy strategy. Now I'll turn the call over to George.
George Schindler
Thank you, François and good morning. I'm pleased with our performance in the second quarter and throughout the first half of the fiscal year.
With organic growth accelerating to 4% in Q2 and continued strong bookings, we are well-positioned for the rest of the year and beyond. Our increased market momentum through the positioning of our end-to-end capabilities with clients has resulted in broad based organic growth in the quarter across every operating segment.
We continue to have a positive business outlook which reflects the tight alignment between our strategy and the priorities and budget plans of our clients. As François mentioned, our revenue and bookings next remains weighted towards consulting and systems integration work to meet today's client demand.
Overtime, this continues to represent an opportunity to convert more new business and a longer-term recurring revenue. We believe we are still in the early stages of a shift in the buying priorities and behaviors of our clients given two macro dynamics taking shape.
For one, the vast majority of our clients are only partway through their digital transformation and the latest results from the in-person voice of our clients discussions we completed last month. Only 8% of clients globally said they have an enterprise digital strategy in place that is implemented and producing results.
This is down slightly from last year indicating that much work remains to be done to create business value from digitization. The second dynamic is that our clients continue to adjust their overall spend given the impacts of slowing economies in each of our major operating geographies.
The need for clients to invest in I.T. to complete their digital transformation remains high.
As indicated by our latest voice of our clients results. Early analysis indicates that our clients annual I.T.
budgets are expected to increase at a rate steady compared to last year with three year outlooks continuing to show plans for increasing the size of I.T. investments.
However, clients are unable to fund these necessary investments entirely through business growth. This provides an opportunity for CGI’s intellectual property based business solutions to enable clients to accelerate value creation.
In addition to generate the savings critical to achieving their enterprise digital goals, clients are more receptive to new outsourcing approaches that rely on I.T. as a core mechanism to deliver on three outcomes.
First, gaining more business agility to meet rapidly changing market and customer dynamics. Second, realizing immediate financial savings through operational excellence and efficiencies that can be redirected to digital initiatives.
And lastly, seeding and enabling a more innovative culture focused on driving practical business innovation. Achieving these outcomes form the fundamental elements of CGI’s outsourcing value proposition, which is focused on enabling clients to create implement and benchmark continuous improvement roadmaps for their journey to world class technology capabilities.
As one of the few global and I.T. and business services firms, we remain well-positioned as a trusted enterprise partner to our clients in this changing environment.
Our pipeline is already reflecting strong positioning amid the market shifts as the total value of intellectual property deals increased 9% year-over-year and outsourcing opportunities now represents 60% of total pipeline value. Now I'll turn to the Q2 performance highlights across our global operations, starting in North America.
In the U.S. commercial and state governments segment, our expanded footprint combined with end-to-end capabilities is enable us to meet more of the growing market demand, notably among U.S.
commercial clients. Constant currency revenue growth was 6.2%, driven by the new client relationships and enhanced capabilities from recent mergers.
With a book-to-bill of over 110% in the commercial markets, we successfully extended or expanded strategic client relationships in the banking, communications and health industries where we will introduce more innovation in IP. In our state local government business is fortified by the increasing value of our market leading intellectual property, which continues to provide revenue growth at higher margins.
EBIT margin in the U.S. segment was 20.5%, a significant year-over-year improvement driven in part by new IP deals and the impact of fully implementing the CGI model and a growing number of metro markets.
In fact, our top 15 U.S. metro markets grew at a double-digit rate in Q2.
With an expanding pipeline driven by this increased footprint as well as the IP opportunities created by new relationships for mergers, we are optimistic about the build and buy prospects in this segment. U.S.
federal operations grew approximately 1% organically and delivered an EBIT margin of 12.6%. Bookings for the quarter were again strong at 134% of revenue of which 60% was for net new business.
Increased focus and investments in the last year on large strategic deals and security, health and IP are taking hold. But the trailing 12-month book-to-bill of 164%, we expect that margin will continue to expand with this richer business mix focused on the services and solutions that are most relevant to our U.S.
federal government clients. In Canada, our team delivered revenue growth of 3% driven by increased demand across the majority of metro markets.
In Ottawa, we were recently named AI partner for the Government of Canada. And in Montreal and Toronto, we continue to gain market share in financial services.
EBIT margin remained healthy at 20% and book-to-bill was just under 100% in Q2 supported by a strong backlog of almost four times annual revenue. We continue to see demand for emerging technology projects to meet business initiatives, including cybersecurity related consulting, AI engagement and end-to-end modernization including payments modernization where we are winning and delivering on engagements and continue to see significant future demand.
Turning to the performance of our European operations where our teams delivered 5.4% constant currency growth led by Central and Eastern Europe and the UK with 13% and 10% growth respectively. This revenue growth encompasses more IP, greater scale and deeper expertise in consulting IP monetization and emerging technologies all important elements of our broader outsourcing offering.
Across our combined European operations, Q2 EBIT margins were 11%. Our evolving revenue mix in Europe from both build and buy growth combined with the benefits of last year's restructuring program should drive margin expansion going forward.
Turning to highlights in western and southern Europe, revenue up by 2% in constant currency, driven by continued strength in our French operations particularly in the manufacturing, transportation and government sectors. EBIT margin was 12.6% impacted in part by the performance of our operations in Brazil.
Margins in France continue to be stable year-over-year. Book-to-bill for the quarter was strong at 120% driven by continued demand across France and now in Spain, notably in financial services, manufacturing and utilities.
In the UK, the continued ramping up of newer business contracts contributed to the region's strong organic growth in Q2 with clients like Glasgow, [indiscernible] and now HSBC. And importantly, given the long successful history of supporting space missions around the world, our UK team has taken the lead in marshalling our significant expertise in this highly specialized domain.
CGI’s positioning as a leader and an emerging partnership among several nations to support common interests in and throughout the space industry. In Central and Eastern Europe, growth remains strong at 13%, as previously mentioned but margin was impacted by two investments made in the quarter.
First, to enhance collaboration in space. The steps we have taken to transition some project work from the UK into Germany has had a temporary impact in our German margins this quarter.
And secondly, we were lagging restructuring investment in the Netherlands, which will provide a tailwind on margins in the coming quarters. Book-to-bill was 105% in the quarter and a strong 119% on a trailing 12-month basis.
And in Northern Europe, revenue grew 2% with particularly strengthening our Sweden and Finland operations, driven by demand across industries such as manufacturing, financial services and government. EBIT margin expanded to 11.2%, as the team completes the replacement of non-core low margin work from the effective merger with hire and consulting, systems integration and IP engagements.
Bookings for the quarter were 88% impacted by the protest of a government contract awarded to CGI in the quarter. We expect this to be resolved in the second half.
New outsourcing projects with clients such as YIT and expansions with others such as Volvo position as well for future growth. With the integration of Acando underway, new end-to-end opportunities are now being pursued with expanded portfolio business and network of client relationships.
I would like to warmly welcome the 2,000 new members joining CGI from Acando. Together, we strengthen CGI's presence and capabilities as a leading IT and business consulting services firm in Northern Europe and Germany.
Notably, in the major metro markets of Stockholm, Sweden, Oslo, Norway and Hamburg Germany. Turning to our Asia Pacific operations, our teams posted organic growth of 4% and an even margin of 25.2% in Q2.
Many recent outsourcing wins and new opportunities are benefiting from this significant automation DevOps and quality engineering expertise centered in this region. In summary, in the first half of 2019 as compared to the first half last year revenue increased by 4.6% in constant currency to $6 billion.
Adjusted EBIT increased by 7.5% to $893 million. EPS ex-items increased by 12.3% to $2.28.
Adjusted net earnings were up $48 million for a net margin of 10.6%. Cash from operations was up $18 million for a total of $854 million and bookings were up $1.2 billion on a trailing 12-months comparable basis.
In closing, let me re-emphasize our optimistic outlook for the second half of fiscal 2019 and beyond. We are now a team of 77,000 consultants and professionals worldwide with the capacity and geographic footprint to capitalize on the increasing and shifting demand for IT services.
With the current macro environment turning more defensive, we see an increasing opportunity to generate larger recurring revenue engagements for future growth higher utilization and a richer business mix resulting and expanding profitability. And we continue to advance our pipeline of buy opportunities across each of our operating regions and see increasing potential for large multi-metro market mergers like Acando.
In fact, with the recent completion of our client interviews, we're in the process of analyzing hundreds of new potentials buy candidates across each of our operating geographies. Thank you for your interest and support.
Let’s go to questions now, Lorne.
Lorne Gorber
Just a reminder that a replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the passcode 5301162 until June 1st. As well, a podcast of this call will be available for download within a few hours, and follow-up questions as usual could be directed to me at 514-841-3355.
Donna, if we could pull for questions, please.
Operator
Thank you. We will now take questions from the telephone line.
[Operator Instructions] Thank you for your patience. And the first question is from Thanos Moschopoulos from BMO Capital Markets.
Please go ahead.
Thanos Moschopoulos
Hi, good morning. George, I believe within your SI&C business you've had a growing component of higher end consulting work related to digital and to some of the tuck-ins you brought on.
Can you talk about whether and to what extent that's been a key contributor of some of the recent margin expansion and what regions in particular maybe benefiting from this dynamic?
George Schindler
Yes, thanks. Thanks for the question, Thanos.
The SI&C and the higher end consulting that we've been you're correct we've been adding that into the portfolio. It's not necessarily a driver of the expanding margin.
It's actually a driver of our growth because that's really the tip of the spear. It's a set of relationships we have with the business.
But in today's world business and IT are becoming closer and closer aligned. And it really allows us a channel to drive through the fuller end to end services and that's exactly what we see in the pipeline the bookings and the growth.
Overtime that does result in some of the higher margins. But the consulting business itself doesn't necessarily drive higher margin.
Higher gross margins because of the utilization doesn't necessarily to drive higher net margins.
Thanos Moschopoulos
Okay, that's helpful. With respect to the U.K., your revenue growth was obviously remarkably strong in the quarter due to the outsourcing ramps.
Can you elaborate on how Brexit uncertainty is impacting your pipeline in the region and on whether and to what extent your current backlogs can offset some of those potential headwinds?
George Schindler
Yes. No, it's a good question.
As you know Brexit has been pushed out yet again which shows that what we see from most of our commercial clients it's almost not to almost becoming business as usual and most of the commercial clients I've talked to much like ourselves has done a little Brexit proofing if you will. So over these now period of years as it continues extend out most companies have prepared themselves for either scenario and therefore commercial companies are -- we have a rich robust pipeline and you saw some of the even the bookings there.
On the government's side, there is a lot of analysis going on. Actually, there is some opportunities for us to help them on some of that analysis.
And regardless of what happens with Brexit regardless of how it's implemented if it's implemented there will be changes required by governments and we'll be there to help. So I would say we're well positioned for the future in the UK.
Thanos Moschopoulos
Great. Just a quick one for modeling purposes.
Would you be able to quantify how much of the Canada revenue needs to be run off?
George Schindler
Probably 5 to 10%.
Thanos Moschopoulos
Great. I’ll pass the line, thanks.
François Boulanger
Thanks, Thanos.
Operator
Thank you. The next question is from Steven Lee from Raymond James.
Please go ahead. Thank you.
Steven Lee
Hey, George. Follow-up on your SI&C comment, what has been the lag historically before it starts to drive outsourcing growth as well?
George Schindler
Yes. It's a very good question Steven.
And I wish I had that crystal ball. It's always -- it's different.
It differs by a region it differs by client it differs by economy but as I mentioned I think we're in a rather unique period of time where we have two drivers happening at the same time. The economies are slowing which is putting pressure on some of the ability for companies to invest but as we see in our voice of the client interviews everybody is continuing while over half of our clients are saying they're going to continue to increase their IT spending and so we see that as an opportunity if overall spending comes down.
I need to increase my IT spending. We see that as an opportunity to accelerate that SI&C into the outsourcing.
So I think we're moving into a new territory that should be faster than our historical. But it's hard to say.
And when you ask about historical it's different in every one of these economies almost every one of them is unique.
Steven Lee
Okay. Great.
And I had questions on margins. Several of your geos were down year-over-year from four to six months and it looks like we had those specific factors.
So my question is do you expect them to rebound in Q3 or some of these factors might last one two more quarters. Thank you.
George Schindler
Yes, you are correct in reading that. Most was from -- were from actual onetime events that occurred that are already past us.
The only one that I would say may continue into will continue into Q3 is in Canada where we had some of that overcapacity due to the rapid changing in our infrastructure business. And this is good news for our clients because as automation continues drives down revenue but obviously results in some overcapacity of the people and we have already taken those actions in the beginning of this quarter Q3 and that will pay back in the year but we'll probably have an impact on Q3 but other than that around the region you won't see you won't see that continuing into Q3.
Steven Lee
That’s great. Thank you.
François Boulanger
Thanks, Steve.
Operator
Thank you. The next question is from Richard Tse from National Bank Financial.
Please go ahead.
Richard Tse
Yes, thanks. On the acquisition side, should we think about you being more focused on metro markets going forward given your success to-date so far.
George Schindler
Yes. Hi, Richard.
Yes. And we will be focused on the metro markets, but as I mentioned Acando gave us multi-metro markets across countries.
And if I look at our pipeline right now we have about 20% of our pipeline of potential targets span metro markets and/or countries. And so if you think of the language of transformational buys in CGI's history a transformational buy for us now is really just a series of metro markets maybe across not just countries but across continents.
So the answer is yes. But with that maybe color commentary.
Richard Tse
Okay. And a question about your workforce.
I'm kind of curious to see or hear from you. What skill sets are sort of in most demand today.
What do you think that would be going for? And I guess relate to that.
How has that changed at CGI there over the past year?
George Schindler
Yes. No, that's -- it's good to point out.
We have changed -- taken some opportunities to build our skill sets differently. And as you know that started with the restructuring which allowed us to hire some of the higher and relevant skill sets and those skill sets are really focused on a series of technologies including analytics and some of the methodologies that are really being utilized today like agile.
So, it's individual skilled in those technology skills and methodologies but with a rooted capacity and capability in the business domains. And that's really as I talk about business in IT coming closer together.
So those are the more relevant skills. So it's not just technology is not just business.
It's really what we call some of our clients are calling and what we got a lot of with Acando is the two footed talented members. That's what we've been buying.
That's what restructuring allowed us to do in our hiring and we are well prepared for the future in that respect.
Richard Tse
Okay. Great.
Thank you.
George Schindler
Sure Richard.
François Boulanger
Thanks Richard.
Operator
Thank you. The next question is from Daniel Chan from TD Securities.
Please go ahead.
Daniel Chan
Hi, guys. Just a question on Brexit again.
Did you get any sense that any of this strength you saw in the quarter was a result of business stockpiling ahead of the original Brexit deadline?
George Schindler
That's a good question. Some of our clients that I talked to in the U.K.
have in fact seen exactly that but it's usually more when you're dealing with the good side of the equation rather than the services side. On the services side, no, I don't get -- I don't get an inclination this is kind of some of that run up and then that will fall off when Brexit happens.
I would see for us on the services side the exact opposite. Some of this is just the strength we've had over the past year and the ramping up of some of those outsourcing deals.
But if you look at our pipeline and even some of our bookings actually, I think those will accelerate as we get nearer or on the other side of what happens on Brexit. So that's where I see for from a services side.
Daniel Chan
Okay. Thanks that's helpful.
Yes. Then also the color you gave around the macro environment turn more defensive was very helpful.
It's just a question on the overall European environment it's been a strong region for the overall IT services segment over the last year. Seems like the economy may be improving there, is this something you're seeing as well and is it expected to accelerate the strength already seen there.
George Schindler
Yes. Well, I actually think that there could be some changes in the economy but I think the defensive nature is still there.
But what we see and some of the discussions I've had directly with CEOs, CFOs are there's now a lot of innovation happening across the European region that's been driving some of that that uptick but we're seeing our clients and you heard that also in my opening. We're seeing clients say "okay, that's good."
And I've actually had a CEO say this to me "George, I have a lot of innovation. I need some delivery right now," and that's what I'd like to hear about how you do that.
And so I think that's turning in a very interesting way. Of course, they still want innovation but that's what I mean by practical innovation that's driving results.
So, I think that's going to actually turn in the European market which for IT services will continue to be strong but maybe in a slightly different way.
Daniel Chan
Great. Thank you.
François Boulanger
Thanks, Dan.
Operator
Thank you. The next question is from Phillip Huang from Barclays.
Please go ahead.
Phillip Huang
Hi. Thanks.
Good morning. I wanted to follow up on the -- on the organic growth side.
Obviously, your comments have suggested pretty healthy environment. We obviously saw very encouraging SI&C booking this quarter as well.
I was just wondering what your visibility is to sustain and or further accelerate the growth that we're seeing.
George Schindler
Yes, well as I mentioned Phil and thanks for the -- thanks for the question. As I mentioned in the opening we see a lot of opportunity for us to continue for a richer business mix so all of that nice SI&C work that we have we've been building those skill sets as I mentioned but they're adding new channels for us or for really bringing the full suite of services and I think with companies may be getting a bit more defensive given the macro environment they're more receptive to some of those broader offerings.
And because they have the experience with us. We have the trust.
We have a relationship. We have a better understanding of their business.
We can bring more relevant broader offerings to them driving some of that business agility I was talking about the actual practical innovation and help them on their journey to world class technology which is something that every one of our clients needs because remember and I mentioned this on several earlier calls. The demand is still there from their clients.
Right now, all we've done on the demand side is a lot of that is kind of the table stakes of reaching the customers. That's kind of done now.
So we can reach customers digitally but now mining that data and actually driving business benefit for the companies and then ultimately their clients as well isn't really done yet. So that's the next wave of investment.
And that's a big that's a big opportunity for us.
Phillip Huang
That's very helpful. And I also want to follow up on Acando.
It's helpful to know that 5 to 10% is the expected runoffs. Like do you expect that liquid timing -- should we -- for modeling purposes should we sort of expect that sort of come through is it more front end loaded or pretty evenly you know through runoff.
Thanks.
George Schindler
It would be -- any of those runoffs we would try to do rather quickly in the next quarter or two to do that in a responsible way for our clients and our business relationships. But that should be done fairly quickly.
And mentioning the Acando, again we're getting really really good new relationships complimentary relationships and like previous mergers we're already seeing bids going in combined bids where bids are going into traditional relationships that Acando had CGI did not have, but the full offering of CGI that they could not have bid a month ago. So we're already seeing that in fact I talked to our leader in Sweden this morning and one went in today.
So that's good -- it's a good indicator of where that merger can bring us.
Phillip Huang
That's very helpful. Thanks, George.
George Schindler
Thanks Bill.
Operator
Thank you. The next question is from Paul Treiber from RBC Capital Markets.
Please go ahead.
Paul Treiber
Thanks very much, and good morning. Just hoping could you speak about that financial services segment.
You call that obviously the trade 360 deal with HSBC and then also I think IP was a contributor financial services growth in a number of regions. Now what's changed for the financial services segment that's driving stronger growth here.
George Schindler
Yes, I think financial services was a little bit behind and then became back to a leader in adopting technology but much like the other industries I think they're probably a little bit ahead of the curve in indicating that "hey, we need to get some business benefit from all of this innovation." As you know a lot of the financial services firms open up labs really got into the technology driven in part by the competition from FinTech.
Now they're looking and saying "okay, how do I reap the benefits from all these technology investments?" And that's good for a services firm like CGI with the end to end being able to do the consulting and deliver some of the glue around some of those core technologies like AI, Blockchain, et cetera.
And so I think that's what's driving that behavior by the banks. So some competition that got them into this but now looking at how they drive better business benefits and those better business benefits are there.
And our IP plays a nice role in that. And I mentioned trade but payments is a big one for us as well and even collections continues to sell worldwide.
Paul Treiber
And then IP is it promptly size or subscription or is it license revenue on the license rev. If it is license revenue -- I imagine there may be some lumpiness there, but what do you see as the sustainability of license rubbing on the IP side?
George Schindler
Yes, it's a -- it's a little above still it is a mix. We continue to see as you know virtually all of our IP now is enabled to be sold in a software-as-a-service basis.
But some clients are still in in the mode of buying with the traditional license it's really depends on where the client is and what their cash flow looks like and the capital spending. And so we see both flavors I talked to a client in Northern Europe who said if it wasn't offered George in a software as a service we could not have purchased your software and your competition didn't allow for that.
And so that's part of the reason we're here having this discussion. In other cases, clients are going "Hey, I want to have a different model.
I want the -- I want the traditional. I know this is this has a longer lifespan of maybe 10, 15, 20, 25 years.
And so it's better for me to just do the traditional license. And the nice thing about CGI and like pure software plays we can offer both and a lot of software plays when they made the switch, they said "Okay, now we're only going to offer in a software-as-a-service because of their business model because we're a services firm first and solutions and the IP is just a dimension of that.
It's still in our model to be able to offer both and that is a differentiator for us in the space.
Paul Treiber
And lastly, the NBA called about the re-evaluation of cost to complete some projects. Let give us a little bit of surprise for CGI just given your operational discipline.
Does what changed -- like what changed in the operations or assumptions like the re-evaluation and costs?
George Schindler
Yes. So, you might be talking about -- we mentioned I highlighted one was really part of our Brexit proofing where we moved a project from one country to another.
Just given what might happen with Brexit and sensitivities. When you do that you disrupt a project so that that drove that when that's not really disciplined, we kind of created that.
But it was the right thing to do which is why really talk about that one as an investment. In another situation I talked about clients getting more defensive and I've also mentioned before our intellectual property is typically built in conjunction with clients.
So we had a partner client that that partway through the project actually more than halfway through the project stopped the project. We still got paid but that caused the U.S.
to re-evaluate that piece of intellectual property. It's still viable.
But it's not on the same timeline. So we took the opportunity to immediately impair that asset and that's passed us and now it will be a viable asset going forward.
So those are the two -- the two a maybe the bigger ones and others were really historical lawsuits the one in the UK was something that wasn't a CGI thing it was really a UK wide item on pensions that affected every company in the UK. So I don't see any discipline issues in fact on operational excellence.
I'm pleased to report that our number of red projects is down and the time period that those projects stay red is shorter meaning that we're highlighting them earlier and that's a part of the CGI operational discipline. It's not just that a project goes red it's -- are you dealing with it appropriate and quickly.
And we're doing just that.
Paul Treiber
Fine. Thanks for taking my questions.
Operator
Thank you. The next question is from Robert Young from Canaccord Genuity.
Please go ahead.
Robert Young
Hi, good morning. Early in the call I think you said that 42% of SI&C is coming from new business.
I was wondering if you could talk about whether that's consistent with recent trends or are you calling that out as unusual. And then what's driving that?
Is it the acquisitions you been doing or would it be market factors?
George Schindler
Yes. Thanks for the question Robert.
It's not really -- it’s not really the acquisitions because when an acquisition comes in when we merge a company in, we consider all of their clients existing CGI clients. So they're not necessarily driving new clients.
They're driving expanded clients but not new clients or new work. So, the opportunity really is for us to generate new clients with our new offerings and I think it's more of that macro-economic environment.
And yes, the skill set upgrade that did come from mergers and also from our restructuring opportunities. I highlighted because it's just really an indicator especially on the SI&C side as an indicator of new relationships that then can be converted into those broader service offerings.
And so that's why I really highlighted it this quarter. Traditionally, we run in the 30 to 40%.
So, it's not it's not far out of line but it shows you that we're still have a lot ahead of us.
Robert Young
And is there a geographic trend to highlight there would you say that more that's coming out of Europe or would just say it's broad based?
George Schindler
Yes. So, here's what's nice and thank you for the opportunity to again highlight this.
This is the first time in a while that we've had organic growth, not inorganic growth but pure organic growth and every one of our operating segments. So the strength is broad-based.
And that's also nice not just from a build perspective and really our ability to consistently drive the growth that you've come to expect but also on the buy side because we'd like to buy and just rent and we actually qualified business units for whether they are able to do -- to buy because integration obviously is very important to us. We integrate immediately.
We wanted to be accretive immediately and so you have to buy into strength. And given the nature of this broad-based growth we now have the ability to target and buy into every operating region where we do have a robust pipeline.
Robert Young
Okay. Thanks a lot.
And then the two-pronged growth that you are highlighting related to one the digital digitization we've been highlighting for a couple of years now. But then I think last quarter you also start to talk about a slowing growth environment driving some IT efficiency work.
And so the way you're talking about this quarter it sounds as though you're highlighting that as an opportunity rather than a risk. So, these two factors are going to grow could drive a higher level of growth maybe if you could correct me if I'm wrong on that.
And then secondly, what does that do to the competitive position of CGI? Because I would assume that it would be stronger in the IT efficiency side but I may be wrong.
And then I'll pass one.
George Schindler
Yes. So, you are correct.
Having the two come together should drive higher growth because the deals get bigger and we're even seeing that in some of the voice of the client interviews and discussions we're having where the three-year outlook continues to look to bigger projects. Why?
Because they're combining those efficiency with those innovations and our offering brings the two together. We're saying we can drive savings on the efficiency side and help you quickly and maybe in a relevant practical way drive some of those innovations that drive outcome-based returns.
And that is to your competitive nature that does drive some competitive opportunities for CGI because we are playing have been playing both sides. We participated on the growth side on the digital, but have long legacy and history on the efficiency side.
And like I said I've had probably half a dozen clients kind of change the conversation over the last quarter where they want to hear more about our best practices on the efficiency side how are we able -- because remember we drive our own company the same way we're talking about our outsourcing offerings for our clients. We run our own company as a world class IT with the metrics the continuous improvement and the benchmarking.
And so more and more companies are interested in hearing how we're doing that and then how we can help them get there. So I think that's a competitive advantage for CGI.
Robert Young
Just to get into competitive side, is it fair to say that some of your larger competitors some of your end to end competitors had been deemphasizing that component of the business or would you say that you know at amongst your largest competitors you'd have the same they would have the same advantage as you would and this double pronged opportunity.
George Schindler
Yes, I mean you probably follow them more closely than I do. I'm focused on our clients and what we've been emphasizing but I think as you know I've had a lot of questions on the new and I've always talked about the end to end over these last couple of years and so I think we're positioned very well.
Robert Young
Okay. Thanks.
François Boulanger
Thanks, Rob.
Operator
Thank you. The next question is from Paul Steep from Scotia Capital.
Please go ahead.
Paul Steep
Great. Good morning.
George, could you talk a little bit about some of the initiatives to come out against over the last few quarters AI Analytics, Cyber Payment Solutions. What you've been doing or maybe any initiatives the team's got to further take some of those shorter-term SI&C deals into longer term engagements with clients maybe some of the success you've been having there.
Thanks.
George Schindler
Yes. No that's -- it's a great question and some of those do take some time, but we are seeing more and more interest in package solutions for example around analytics.
And so one of the things that we've been doing and this is something I've highlighted before. As we work with our clients and I call it innovation at the shop floor as we work with our clients and see how they are trying to use something like analytics.
Then we take that back to some of our innovation labs and create some intellectual property, that then is tested with the client that was we were innovating with and then ultimately comes IP and we're seeing that in some additional package solutions either to our existing solutions and particularly, in financial services and also in utilities but also others are solutions even in the government space around public safety. So not a lot of concrete examples today, but again this is where this is going and we're seeing clients more receptive to those types of opportunities whereas maybe even six months ago they said I will just build our own.
Now they're saying yes, we're very interested in maybe being a first mover with your package, but we're okay with that being your package because then we'll have the cost efficiencies of either a software-as-a-service or maintenance going forward. And that is what we're seeing in analytics, not one-offs anymore it's like how can you package that and make that more part of my business which also comes back to a consulting opportunity.
Paul Steep
Great. Thank you.
François Boulanger
Thanks, Paul.
Operator
Thank you. The next question is from James Schneider from Goldman Sachs.
Please go ahead.
James Schneider
Good morning. Thanks for taking my question.
What do you mean if you maybe talk about the composition of your bookings that you talked about 60% on the outsourcing side of things, directionally would you expect that to kind of tilt more toward the outsourcing type of work over the next few quarters as you see bookings coming on? And maybe specifically, you can talk about the profile of a mix of outsourcing business you're seeing in Europe right now and whether that's skewing more heavily towards outsourcing in that region?
George Schindler
Okay. Yes, thanks Jim.
Actually, just a small correction, on the bookings side, the composition of the bookings was actually still weighted heavily towards SI&C and the number I gave you some visibility into in my opening was really the composition of the pipeline which is 60% which is answers your question. Yes, we're seeing the demand shifting more to the outsourcing given the climate that I talked about and that really is pretty broad base so that's both in Europe and in the U.S., but probably more pronounced in Europe as you suggested.
So I can confirm kind of all the above, but just with that slight change on the on the bookings weren't there yet. It's more in the pipeline.
James Schneider
Okay. Yes, very good.
Sorry for the misunderstanding. And then maybe, just kind of a little one more follow-up on the federal business in the U.S., you kind of what do you see there from a forward perspective I apologize, if I missed the outlook on you -- from your commentary but maybe to kind of give us a sense about what that's more skewing towards a really nor or otherwise at this stage in anything you say about mix of federal versus state local?
George Schindler
Yes. So on the federal business, we had this shutdown blip, but we see the IT spending really mimicking a lot of what we see on the commercial side, which is more government agencies are focused on the monetization on IT, very focused on cyber security going with what's going on around the world and governments being under attack particularly our U.S.
federal segment is focused on that and that's exactly where we have been investing. Our health remains on the top list for domestic programs and we're well positioned there continue to win all were we compete in the health space.
So we see a pretty robust U.S. federal government area.
The areas that we have been kind of maybe deemphasizing over the last couple of years are the core defense areas. Our defense business is actually strong, but we moved into more of the IT, core IT, cyber security areas of that domain.
So both sides are pretty strong for us, but we have shifted our business. I would argue a richer shift in business, so that if something like sequestration which is a word that maybe many on the phone don't know, but it's essentially caps on the spending levels particularly in the Defense Department if that happens, we don't see that really affecting much of our IT business.
James Schneider
Thank you.
George Schindler
Yep.
François Boulanger
Thanks Jim.
Operator
Thank you. The next question is from Stephanie Price from CIBC.
Please go ahead.
Stephanie Price
Good morning.
George Schindler
Hi, Stephanie.
Stephanie Price
I wanted to circle back on Acando for a minute and just ask about the margin profile. Are you happy with where they are now or do you think there's opportunities to improve that margin profile?
George Schindler
Yes. No, thank you.
They do have strong margins but there's definitely an opportunity for us to in implementing the CGI model to raise those margins. There's some simple synergies some of the public company costs that are going on but there's a bigger opportunity for us to raise their utilization leverage the full suite of CGI products which helps them in services offerings helps them raise that utilization where we think that their margins can come to the CGI margins levels and beyond.
So great talented individuals as I mentioned very complimentary, but yes definite opportunities even in a strong business to increase that now that they have the end to end offerings, something they didn't have before.
Stephanie Price
Great. Thank you very much.
François Boulanger
Thanks, Stephanie. Donna, we have time for one last question.
Operator
Thank you. And the last question would be from Howard Leung from Veritas Investors.
Please go ahead.
Howard Leung
Thank you. Thanks for taking my question.
I just wanted to follow up on the question on the bookings mix. As George just mentioned as SI&C the bookings this quarter were pretty strong and that actually drive organic growth going forward for revenues.
Do you see any short term margin impact from how strong the bookings were as it flows into the revenues?
George Schindler
Thanks for the question. I don't see that impacting the margins at all.
We were very disciplined in how we bid these deals and both on the SI&C side and on the outsourcing side we have the models in place to drive not just sustain the margins but actually continuous improvement. And part of that's in the relevant offerings that we're bringing.
It's the value proposition that we're bringing to our clients. So both the SI&C and the outsourcing I see as expiry margins as I mentioned in many of the other geographies.
Howard Leung
Okay, great. That's helpful.
Thanks guys.
François Boulanger
Okay. Thank you, Howard.
Thanks everyone for joining us and we'll see you back on July 31 for our Q3 results call.
George Schindler
Thank you.
Operator
Thank you. The conference has now ended.
Please disconnect your lines at this time. And thank you for your participation.