Prepared remarks
Good morning, ladies and gentlemen. Welcome to CGI's Third Quarter Fiscal 2026 Conference Call. I would now like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder.
Thank you, Joelle, and good morning. With me to discuss CGI's third quarter fiscal 2026 results are Tim Hurlebaus, our President and CEO; and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, July 29, 2026. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete safe harbor statement is available in both our MD&A and press release as well as on cgi.com.
We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. Now I'll turn the call over to Steve to review our Q3 financials, and then Tim will comment on our business and market outlook. Steve?
Thank you, Kevin, and good day, everyone. In our third quarter of fiscal 2026, we are pleased with our revenue growth, delivery of strong EPS accretion and cash generation. In the quarter, we delivered $4.2 billion of revenue, up 2.5% year-over-year or up 1.3% when excluding the impact of foreign exchange. Growth was primarily driven by our recent business acquisitions, representing approximately 2.5%. Our clients, particularly those in financial services within North America, continue to utilize our global delivery centers, contributing to organic growth in our APAC segment of 9.7% in the quarter. In our Western and Southern Europe segment, with our acquisition of Apside growth was 8.6%. And as expected, our U.S. Federal segment improved sequentially, reporting year-over-year organic growth of 2.5% in Q3. Bookings in the quarter were $4.2 billion for a book-to-bill ratio of 100% with U.S. Federal at 115%, followed by Germany at 114%.
On a trailing 12-month basis, bookings totaled $17.8 billion for a book-to-bill ratio of 108%. Managed Services had a book-to-bill ratio of 115% and the SI&C book-to-bill ratio was 100%. Our contracted backlog stands at $31.8 billion or 1.9x revenue. Of the $31.8 billion, we have just over $12 billion in already contracted revenue to be realized over the next 12 months. This is a 5% increase compared to Q2. Turning to profitability. Adjusted EBIT in the quarter was $682 million, up 2.3% year-over-year for a margin of 16.3%, consistent with the prior year. Earnings before income taxes were $634 million for a margin of 15.1%. Our effective tax rate in the quarter was 26.5%, an increase from the 26% in the prior year when excluding the tax impacts from acquisition and related integration costs. The increase is mainly explained by the new corporate tax surcharge in France, representing $3 million.
Based on enacted rates at the end of the quarter and our current profitability mix we expect our tax rate for future quarters to be in the range of 26% to 27%. On a GAAP basis, Net earnings were $465 million, up $57 million for a margin of 11.1%. Diluted EPS was $2.23, an accretion of 22.5% when compared to Q3 last year. Adjusted net earnings were $478 million, up $8 million for a margin of 11.4%. On the same basis, diluted EPS was $2.29, an accretion of 9% when compared to Q3 last year. Turning to cash. In Q3, we generated $605 million, representing 14.4% of total revenue. Our cash on a trailing 12-month basis was $2.6 billion, representing a very strong 15.8% of revenue. DSO was 43 days, unchanged when compared to the prior year. In Q3, we continued to deploy our capital and invested $105 million back into our business, which includes strategic investments in advanced AI, $50 million for business acquisitions, $413 million to buy back our stock.
And in addition, we returned $36 million to our shareholders under our dividend program. Yesterday, our Board of Directors approved a quarterly cash dividend of $0.17 per share. This dividend is payable on September 18, 2026, to shareholders of record as of the close of business on August 14, 2026. At quarter end, CGI had $3.2 billion in capital resources readily available and a net debt leverage ratio of just over 1. Our capital allocation priorities have remained consistent and focused on our value creation stream for our shareholders, investing back in the business to drive revenue growth through managed services, SI&C and IP, pursuing accretive acquisitions, share buybacks where we continue to be active in our share repurchase program and quarterly cash dividend distributions. Now I will turn the call over to Tim to further discuss insights on our performance and the outlook for our business. Tim?
Thank you, Steve, and good morning, everyone. CGI's results in the quarter continue to reflect our positioning to meet client demand as well as our operational excellence, both of which contributed to revenue growth, EPS accretion, strong cash generation and a rising opportunity pipeline. These outcomes reinforce our confidence in CGI's strategy and team. Thank you to our consultants around the world for earning the trust of our clients every day; your expertise, insights and commitment made these results possible. I'd like to take a moment to give a special message to our colleagues and clients in Northwest Spain and Southwest France, who have been dealing with the wildfires. We understand this morning that the government has given the okay to move back into the evacuated areas. And most importantly, as far as we're aware, there was no impact to human life, which is the thing that really matters.
But know that we are with you as you get back up and operational after this devastating event. Today, I will focus on performance highlights before turning to the business environment and growth outlook. For the first 3 quarters of fiscal 2026 revenue was up 4.4% or 2.1% on a constant currency basis to $12.4 billion. Adjusted EBIT was up 4% to $2 billion. Adjusted EPS was up 8% to $6.67. And on a trailing 12-month basis, cash from operations was up 18% totaling $2.6 billion, strengthening our financial capacity to execute our profitable growth strategy. Clients are turning to CGI for enterprise scale initiatives with advanced AI embedded. This client trust drove bookings of $17.8 billion over the past year, up by $1.2 billion compared to the previous year. On this same trailing 12-month basis, book-to-bill was 112%, backlog also remained strong, representing nearly 2 years of annual revenue, propelled by ongoing multiyear managed services and IP engagements.
Client demand for Managed Services remains high. Given the nature of these larger and longer-term engagements, we assess the health of Managed Services bookings on a trailing 12-month period, given the typical step growth nature of this business. On this basis, Managed Services wins reached $10.3 billion, up 5% over the previous period for a book-to-bill of 115%. Notably, the demand for our Managed Services, which integrate AI and IP is also evident in proposals already submitted. Compared to this time last year, the number of proposals pending client decision has more than doubled and the total contract value is more than 50% higher. Given the strength of our value proposition, our win rate on Managed Services engagement is high. These are positive indicators we expect to contribute to bookings and revenue momentum in the quarters ahead. In Q3, the renewed strength in systems integration and consulting continued with strong client awards across financial services, government and manufacturing, each with book-to-bill ratios of 103% or higher.
At the core of this improvement is demand for CGI's industry understanding and technical expertise, both of which are required to help clients operationalize AI. Specific to consulting services, client awards in the quarter were up 11% year-over-year. This uptick contributed to a rise in the trailing 12-month book-to-bill now at 108%. This increase was driven by offerings for change management, CIO advisory, Security and Risk Advisory as well as our proven consulting approach to help clients align their business strategy, operating model and transformation road map. In addition to driving shorter-term revenue, CGI's SI&C services often set the stage for future managed services engagements as clients shift from design and development into implementation. Representative Q3 bookings illustrate the breadth of CGI's full services portfolio. For example, the U.S. General Services Administration awarded CGI a USD 251 million modernization contract, which combines CGI's Momentum platform and a secure AWS environment with AI-powered automation to improve efficiency, reduce costs and advance the secure operations of their financial management environment.
SSAB, a global steel manufacturer, expanded its strategic partnership with CGI to modernize business critical IT operations in Finland and Sweden, strengthening business continuity, supply chain reliability and AI-enabled manufacturing transformation. The U.K. Ministry of Defence expanded its relationship with CGI to modernize and operate mission-critical electronic warfare and intelligence capabilities, reinforcing our role as a trusted partner for supporting national security and defense readiness. Orange, a leading global telco, named CGI a strategic partner for the first wave of its IT transformation with focus on application modernization, cloud adoption and enabling data and AI capabilities across critical business and network operations. The City of Munich selected CGI to advance digital government services, improve administrative efficiency, and strengthen technological sovereignty through services, including digital transformation consulting, system development and IT security.
Posti, a leading Nordic transportation and logistics company, awarded CGI an expanded agreement spanning the full communications value chain, extending our role in delivering integrated omnichannel communications with greater reach, delivery reliability and cost predictability. And CGI is one of two companies selected by the Polish Social Insurance Institution to support the continued development of one of the country's largest public sector IT systems using AI-enabled capabilities to improve software development efficiency and accelerate delivery of secure, citizen-focused digital services. As these new awards demonstrate, and as I've heard consistently from client executives over the past few months, AI is now changing what organizations want to accomplish. Clients want to grow their businesses, serve customers and citizens, improve productivity and manage risk. What has changed is how quickly they expect technology to help them achieve those objectives.
As was the case in previous technology cycles, AI is moving from experimentation into everyday operations just at a faster pace and with a higher expectation for return on investment. Client conversations are increasingly centered on how to deploy AI securely, operate it responsibly and cost effectively, and embed flexibility to evolve as technology advances. With this shift in mind, we see several demand trends reshaping how clients procure, partner and deliver IT services. Clients are increasingly seeking fewer strategic partners to help them navigate technology change over the long term. Their capacity to evolve becomes as important as the technology itself. This is where CGI has always had an advantage. We are not defined by a single platform product or service. Our teams help clients make the right decisions for their organization, implement those decisions successfully, and continue adapting in line with technology innovation.
We believe that independence is becoming increasingly important as innovation accelerates. We are seeing this advantage for CGI reflected in procurement initiatives. During the quarter, we were selected as a strategic partner through multiple vendor consolidation initiatives in the U.S. with clients in financial services, airline operations and retail. As advanced AI matures, clients are starting to move beyond the technology itself to focus more on how to scale successfully. Modern data, cybersecurity, engineering, organizational readiness, and cost management have become central to this discussion. Increasingly, clients want a partner to help govern and manage AI effectively and economically in order to drive sustainable value. These demand patterns are also driving some client organizations to more deeply embed external technology expertise. While this may now be described as being forward deployed, it is well aligned with CGI's model.
Our professionals work alongside clients as an extension of their teams, combining technical expertise with a deep understanding of how their organizations and industries operate. As AI becomes embedded in daily work, that proximity becomes even more valuable because successful adoption depends on continuous collaboration, not a onetime implementation. To deepen our client capabilities close to clients, we are expanding CGI's sovereign AI capabilities through new high security platforms and sovereign cloud partnerships. These investments help clients adopt AI, while maintaining control over sensitive data and addressing both regulatory compliance and national security requirements. Taken together, these trends reinforce a key observation. Enterprise AI success will increasingly be measured by what organizations can operationalize and sustain over time. That is how long-term business and mission value will be created.
This evolution aligns well with CGI's strategy and with the IT services investment patterns we see across industries. Clients are investing in four categories typically starting with improving their current operations. Then they modernize the technology foundation needed to scale advanced AI and other innovations. From there, they build new AI-first products, services and business capabilities that create competitive advantage or better serve their constituents. Across each of these categories, they also need strategic guidance to adapt their operating models as technology evolves. These four categories reflect where we continue to invest and where we see the greatest opportunities to drive future growth. This is demonstrated in the rising pipeline of opportunities that are expected to close over the next year. Specifically, our Managed Services opportunity pipeline is up by 20% compared to this time last year and SI&C opportunities are up by more than 30%.
The total pipeline of IP opportunities, which are embedded across these major lines of business, is up more than 30%. Across all four categories, demand is rising for CGI talent. Hiring is up more than 10% on a sequential quarter basis and 50% compared to Q3 last year. This is led by our U.S. segments where strong year-to-date bookings are being staffed as projects ramp up. In addition, we see an increase in year-over-year hiring in open billable positions in Asia Pacific based on our value proposition, which combines industry domain and technology expertise as well as proven global capability center models. As advanced AI continues to be increasingly embedded as part of our deals and offerings, CGI's overall pipeline of opportunities over the next 12 months is up by more than 10% year-over-year, as is the proportion of opportunities where AI is embedded in our services. Specifically, the segment of the total pipeline with AI-based services is now nearly $10 billion, double in size since last year.
One of CGI's enduring strengths is our capacity to invest through every business cycle. Our financial strength provides flexibility to continue investing in our business, pursuing strategic acquisitions and returning capital to shareholders, while maintaining a discipline that has consistently differentiated CGI. Our buy strategy remains critical to how we build and grow for the future. Our focus remains on deepening our industry expertise, strengthening our capabilities and expanding our metro market presence and client relationships. CGI's M&A pipeline remains active across both metro market and larger strategic opportunities. As always, we will remain disciplined in our approach. Every opportunity must strengthen CGI strategically, complement our culture, and create accretive value for all of our stakeholders. In closing, as AI and other emerging technologies continue to become part of how enterprises operate, client needs are naturally expanding.
Through more than 50 years of technology innovation, we learned that lasting value rarely comes from solely adopting new technology. It comes from evolving the organization as those technologies offer new ways to create business value. This is increasingly the role clients need their partners to play, and it is why CGI continues to be best positioned as a partner of choice. Thank you for your continued interest and support. Let's go to the questions now, Kevin.
Thanks, Tim. Joelle, we can now poll for questions.
Questions and answers
At this time, we will open the line for questions. And our first question comes from Jerome Dubreuil with Desjardins.
First of all, Tim, congrats on the new role. I wanted to ask about any strategic tweaks that we should be expecting going forward. In the recent past, CGI has been perceived externally as being a relatively prudent organization. Any strategic tweaks we should be expecting going forward?
Yes. Thanks for your question, Jerome, and thanks for the welcome. Much appreciate it. 'Prudent' is an interesting adjective. It's mostly positive, but has an element of conservatism, I suppose. And so when I think of how we operate and how that adjective is a fair perhaps description of the way we've approached the market, I think it means that when I think of 'ready, aim, fire,' we try to be thoughtful in the way we engage with clients. And so I'll give you maybe a really successful example of how we've engaged with a large telecom client — an international telecom client — in the last 2.5 years as they've entered the world of — and again, I call it advanced AI meaning generative and agentic AI because AI has been around for decades. I know the term of art is just AI. So there's my translation for you. As they've engaged in these generative and agentic tools, they've set up a master services agreement that we're a part of, where we run a number of use cases with their Chief Data Officer, apply these tools to the use cases.
And before we start, we define specific measures of return on investment. And then we run these exercises; sometimes they're a couple of months, sometimes they're four months, but they're of a specified duration with a specified expectation of return on investment. And the expectation is that some won't return on that investment and some will. But the ones that don't are stopped after three months, four months, and then the effort is redirected to those that are returning the return on investment. And that's been a great model for channeling the use of these tools versus just handing out thousands of licenses and letting everybody see what happens. And so if prudent means that we take a measured approach with our clients focused on business value, then that description fits. In terms of strategic priorities, I think our fundamental strategy remains the same in terms of what we do next; what's the next most important thing.
That's where we adapt, whether it's working with — in partnership with some of these frontier tools to deliver capabilities to our clients sooner or whether it's working with the hyperscalers to help somebody transform their environment. Those priorities, obviously, will continue to adapt as our client demands.
Great. A follow-up question for me is you've been putting a lot of emphasis on the pipeline in your prepared remarks. That kind of contrasts somewhat with the bookings we're seeing in the quarter. Are you seeing some sort of inflection in the conversations you're having with the clients?
Not particularly. I think we did have 100% bookings in the quarter, so they were there. We tend to look at bookings, especially on the Managed Services side, from a trailing 12 months perspective. But by the nature, I think we called it in the remarks, the step growth nature of those products, where there's a transition period or everything is on the balance sheet and then there's a ramp up after that. Oftentimes, when you get those bookings, it takes a while for them to show up in revenue growth. And so we think trailing 12 months is a better barometer, and you heard us outline those numbers, which are pretty healthy. And then the emphasis on the pipeline really just means there's more to come. And our pipeline is pipeline and bookings are booking and revenue is revenue, and that's the order they go in. And so I'm not telling you that everything in the pipeline will become a booking, but it certainly is promising to have a bigger pipeline than we've ever had before. And given our traditional observed win rates, we think that's a very positive sign for future revenue growth.
Your next question comes from Stephanie Price with CIBC.
Tim, I'll echo my congratulations on the role. As you kind of step into the seat here, wondering how you think about the opportunities you see for future growth at CGI? And what gets you the most excited? And maybe conversely, what are some of the risks that you're watching that maybe are a bit underappreciated by the market here?
Yes. Good question, Stephanie, and thanks again. Thanks also for the welcome. I think — you heard a bit of it in our remarks — what I'm most excited about because it's what I have experienced over several decades here as part of CGI is that it's becoming clear that the real power of these new technical tools, specifically generative and agentic AI. The power is real, but it relies on understanding details about a specific industry and even a specific domain within that industry. And so that's where we've lived forever — being close to our clients with our proximity model and then having industry expertise that is relevant to what they do, whether that's energy and utilities or government satellite or financial payments. Having that expertise allows us to understand what they're really trying to do, what their constraints are, whether they're regulatory or procedural or what they might be and how we can best apply these tools to actually accelerate them in the right direction.
Acceleration by itself just means you go faster. If you go faster in the wrong direction, then you just end up lost faster, to be colloquial about it. But I think helping people accelerate in the right direction and helping them do more faster is what I'm most excited about. And I'm seeing that acceleration happen. Our revenue trend is moving in the right direction because of that acceleration. So to your question, I'm very optimistic about that looking forward. In terms of risks, it's just — it's an ongoing life risk. We just need to stay close to our clients. And so that sometimes takes effort. If you think about having an old friend, the old friends stay old friends because you make the effort to keep in contact. And same with our clients, we need to make a constant effort to be with them, to be listening to them, to understand where they're trying to go and to bring them what we're learning from across the globe and across the industry, lessons learned that are relevant to them and provide insight that maybe our competitors aren't, and that's how we keep our competitive advantage. So it's really just incumbent upon all 94,000 of us to take that on every morning when we wake up and have that energy around and client focus.
And maybe a follow-up for me. Just on the demand environment. You mentioned strong hiring in the U.S. But I think last quarter, there was a bit of caution around delayed decision-making in Europe. Just curious how we should think about the overall demand environment here and any changes from last quarter?
Yes, good question. In the U.S., really, we've — like I've mentioned in the script, we've had some strong bookings and so we're really hiring to fill the needs, generate from those bookings, both in the federal market and in the private sector and state and local market. There's a few places in our private sector clients in the U.S. where we've been juniorizing our staff; they've been kind of remaking the services we're providing. And so that's created some kind of puffed up hiring need this quarter, in particular, that drove those stats a little bit. In Europe, there is demand in certain industries. It just depends on where. We did have a little bit of a delay in decision-making on a couple of deals up in the Nordics this quarter, but we're optimistic that those will come in in the current quarter. So there's nothing in particular about that that worries me at the moment other than just the normal course of business. Thanks for the question, Stephanie.
Your next question comes from Doug Taylor with National Bank.
Yes. I'll start with a question about the overall organic growth, a better comp this quarter than what we've seen in the last couple of quarters, better U.S. Federal as expected. You had also identified a couple of other specific customer situations that have been putting pressure on your growth over the last couple of quarters heading into this one. Any update generally on the status of some of these customer engagements as we think about further organic growth reacceleration into the second half of calendar '26, particularly with lapping some easier comparisons and with the improving pipeline that you've spoken to?
Yes. Thanks for pointing all that out, Doug. Everything you said is right on. And so there were a few. I think what you're referring to in previous quarters, we did reference some of our larger clients who were a little bit more deliberate in their transformations. I mentioned in the script there are three clients in the U.S. where we've been on the right side of vendor consolidation. And so we're just at the beginning of ramping that up. Maybe those are some that were a little bit slower to evolve than we thought but provide us with opportunities, as you say, to provide some good year-over-year growth in the next few quarters. So that's certainly a tailwind. It would have been nice for it to happen faster, for sure. But the fact that it's still there, and we're still selling into it and recruiting into it is a very positive sign for us.
One follow-up for me then. You referenced the trend in data sovereignty, combined with your local presence orientation in theory being an ongoing good leverage point for CGI, particularly in places like Europe. Can you speak a little bit about your infrastructure set up there and the level of investment in that? I know infrastructure has not been something you've emphasized as much in recent years, but remains part of the business and how that's factoring into your customer conversations and the competitive landscape?
That's a great question, Doug. Thanks for that. Sovereignty, we think, is a real opportunity where we have some unique differentiation because of our proximity in all of those countries. We do have some infrastructure capability in the EU and in the U.K. in particular, and we've got some advanced AI tools already in place. We've got something called CGI AIOps Nova in the U.K. that's helping us be efficient in the infrastructure services we provide for our clients there. We've got DigiOps, which is something that we're providing more broadly to many of our infrastructure and application managed services clients. So quite a few capabilities. In terms of sovereignty — so sorry, to your specific question — we are making the investments that are required to provide that capability. And we'll continue to do that if it includes having more physical capability within the EU; we have the financial wherewithal to do that.
And so we will absolutely make investments as are necessary to deliver into that need. A little more — one more thought about the unique situation relative to sovereignty. Sovereignty is really about specific sets of data and processes that need to be handled by people in country with certain levels of clearance. It's not everything, but it is some things. And so having good governance is really important to being able to deliver a sovereign solution, and we have always prided ourselves on diligent governance, and that's really the first part. The fact that we have people who are citizens of these countries and clearance holders in the case of government in these countries ready to do it is an advantage. We're very well represented across the countries we work in. We're not 95% residents of one country and importing everybody from there; we're well positioned. However, for the processes and data that are flexible — and in almost every sovereign operation, there are some things that can be supported in other places — we provide that flexibility as well. So we're well equipped to, I think, answer the bell on the demand for sovereign operations.
Your next question comes from David Kwan with TD Cowen.
Some of your peers had talked about being impacted by shifting IT priorities and a pullback in discretionary spending, particularly late in the quarter. Curious to see what you have seen as it relates to any changes in customer demand and activity throughout the quarter and maybe into this month?
Thanks, David, for the question. Just by happenstance in our portfolio, we did not see that this quarter. And I think it's reflected by our SI&C book-to-bill. We seem to have some pretty good velocity on that front. But I'm familiar with that phenomenon, as we have seen it in prior quarters. I think maybe what others might be referring to is with respect to advanced AI, as clients started understanding what the bills would be for token usage over the last three or four months, they've had to revisit their ROI calculations in terms of the investments they're making and the ROI it's providing. They invested in licenses for these new tools, but didn't necessarily factor in or fully understand the cost of the compute as represented in tokens. And so it actually provided opportunity for us, where we've executed several engagements already with clients where we've helped them design their processes with token usage in mind.
So we have helped them create things that we call domain-specific language models, DSLMs, as opposed to just a general large language model, which focuses in on the specific function they're doing and uses the data set or data sets that are necessary to support that function versus the whole broad data set and thereby being measured and thoughtful about token usage. It's not a new phenomenon in technology; it's a new detail in this world. But optimizing the language models they're executing reduces the cost of tokens and therefore the compute they're using. By the way, reducing token usage is also good for the environment because it uses less energy. So it addresses the number of goals that our client organizations and we jointly have. In this quarter it provided opportunity for us in consulting and architecture to help our clients rethink the way they're implementing these tools.
No, that makes sense and is similar to what we've been hearing. And then just on the SI&C side. It was down slightly this quarter. I don't know if that was related to maybe some more discretionary work getting pushed out. But can you kind of comment on that? And then as it relates to bookings, which were pretty solid, what's driving that performance? Is that primarily AI-driven, helping customers with their AI deployments and helping generate better returns? Or was that something else?
It's a combination of many things. The bookings are — SI&C bookings tend to turn into revenue more quickly. I think we highlighted that in the script. We see that quicker even in quarter. If you sign a contract at the end of April, you get two months of revenue on that booking as opposed to, as I described earlier, managed services, which can take sometimes months or even over a year to show up on the P&L as revenue. So in the quarter, we had SI&C bookings of 105%. That was positive for us and it gave us some of that growth in the quarter, and it also portends for positive growth going forward.
Our next question comes from Paul Treiber with RBC Capital Markets.
You mentioned a number of times hiring is a key priority. There's a general view out there that IT services at some point would decouple from employee growth due to AI. What in your perspective is that? Is that comment a misconception of the role of employees in IT services?
Thanks, Paul. That's a great question. Maybe to put a finer point on it, there's a perception that the IT services industry in its most simplified form was people times rates times hours, which drives revenue. In that simplified form the notion is that having an advanced AI tool that could reduce the amount of effort necessary to accomplish certain tasks would reduce the number of people you need to generate revenue — in other words, decoupling people from revenue. Now maybe you're charging for the agents you create to maintain your revenue. But that's, I think, what that theory is based on. What we're seeing is a couple of things. First of all, historically, we've had areas of our business where revenue was not directly coupled to headcount. Managed services, which is roughly 55%–56% of our revenue, is about outcomes and delivering to service levels. As you build it up based on needing a certain headcount to do all the functions necessary to deliver that service, over time, as we become more efficient in delivering that service and as we implement tools to help us deliver that service — to include advanced AI tools among others — then it can reduce the headcount necessary.
Historically, over decades, our model is to share those savings with our client and then hopefully use those savings to fund advanced scope. That's one example. Another example is intellectual property, where we've built solutions over time and we leverage them across clients and even industries. The revenue we derive from producing value with those solutions is not directly tied to headcount. That's been a phenomenon for a while. The other thing I'll say is people still need help with these AI tools. This technical evolution has become more accessible over the last two to three years. We can all turn on a phone or a machine and enter a prompt and interact with these tools. Previous generations of AI were more in the domain of systems programmers. Now we all are using them. But in the enterprise environment, it's occurring to everybody that we still have to be thoughtful about how we accelerate.
If you accelerate in the wrong direction, you end up lost faster. So we do need people — the people we're hiring who can understand industry, who can understand the nuances of technology — even though anybody can enter a prompt, knowing how to use the right prompts, how to focus your energy so you're using compute efficiently, how to anticipate complex industry requirements that aren't obvious to someone who hasn't done it before — those are critical. For example, payroll seems simple until you consider taxes, deductions, retroactive pay, regulatory changes and audit trails. These complexities are why systems integrators exist. Over decades we have helped clients understand how to best use technology to meet their needs. Perhaps we can do more with a certain level of effort than before, and that's good for everyone, but we'll still need IT services professionals to help be successful in this endeavor.
The second question: three years ago, CGI announced a plan to invest $1 billion in AI over three years. We're at the end of that period. What's been the results of that investment? And do you have plans to continue or expand that investment going forward?
Great question. The answer is yes, we always continue to invest in our capabilities. The first and biggest part of that investment is in our people and giving them access to the tools and giving them training on how to use those tools with clients. That's an important part. I mentioned a few capabilities and tools we've created. I mentioned AIOps Nova in the U.K., DigiOps for Managed Services, and we've integrated advanced AI into all of our IP platforms to help create agents to assist users of our IP across industries. Massive investments in solutions and in people will absolutely continue. That's why we highlight our financial strength. We have the ability — our first priority for use of cash is investing back into our business: developing solutions to propose to the market, training our people, and investing in alliances with global tech partners, hyperscalers and frontier AI tool providers. Those have been and will continue to be priorities for us.
Your next question comes from Surinder Thind with Jefferies.
Tim, just taking a step back and maybe following up on the very first question that was asked. Can you discuss what you plan on doing differently from your predecessor? And maybe elaborate on why?
Thanks, Surinder. I get that question a lot: what's going to be done differently? What I've figured out over the last 2.5 months in this role is that the fundamentals are strong. The way we approach the market and provide solutions is fine. It's really how we prioritize what we do within that structure. I've been talking a lot about putting our energy into the fewest most important things — making sure we have the right capability to bid into requirements around someone who has chosen a platform on a certain hyperscaler or that we have the right people with the right certifications to deliver into that demand. If we're seeing that demand across countries or in a particular industry, we must coordinate and prioritize how people spend their time. From an industry standpoint, making sure we're current on regulations and focused on the right priorities is where the change is. There's a huge amount of opportunity if you pick the right things and, just as importantly, stop doing the wrong things. If you've got 10 priorities, that's probably too many. One is ideal, maybe three is doable. The prioritization of our global alliance program has been different over the last couple of years and has been a big part of how we serve clients. There are more such prioritizations like that. It's about focus, not a radical change in strategy.
That's helpful. As a related follow-up, what is your view of how the competitive environment is evolving and how you intend to position yourself? It seems there are two mindsets: one is building more IP and platforms (a very tech-forward strategy), and the other is continuing with more custom work and services. How do you envision those two views and where CGI fits?
That's an interesting question. I'm not sure they're totally opposite. Many people call platforms 'accelerators,' and that's something we're doing. For example, we've created Pulse across some sectors, which sits on top of frontier products and provides a consistent way to integrate our IP. DigiOps is another platform example. So in that sense, we're behaving in the first way. But the business and client relationship answer is closer to the second: we still have to stay close to our clients and understand what really creates value for a bank in the payments process or for any industry. As we introduce platforms and technologies, we must focus on the things that must work and accelerate the things that truly provide competitive advantage. So it's a combination: building IP and platforms where appropriate, while maintaining deep client proximity and domain expertise.
Your next question comes from Thanos Moschopoulos with BMO Capital Markets.
Tim, can you give us an update on M&A, given all the disruption with AI valuations in the market and so forth? Any changes seen in recent months in terms of opportunity set, valuations, willingness to transact? And does your own stock valuation maybe put a higher hurdle rate for you on M&A, given the attractiveness of potentially buying back your stock as an alternative?
Thanks, Thanos. We've had a nice run of M&A over the last 2.5–3 years, given valuations of some traditional targets, and we've picked up complementary companies that helped across industries and regions. So it's been good. We continue to be very active and have as big an M&A pipeline as we ever have. It's a combination of large multi-region opportunities and smaller niche companies; for example, Stratfield in Atlanta, which helped strengthen our Atlanta metro presence and retail sector capabilities — terrific so far, though it's early days. We also have much bigger multibillion-dollar targets we are working on. We're disciplined and every opportunity must be strategically strengthening and accretive. In terms of cash, we are very well positioned. I'll hand it to Steve to provide a quick explanation on our balance sheet readiness.
As you know, our leverage ratio is quite low, so our balance sheet is really ready for any large M&A. Over the last couple of quarters, any excess cash, we've been repurchasing shares, but we did not use our balance sheet to repurchase shares; we planned it this way. We want to keep our balance sheet fully open for growth coming from M&A and for the opportunities that we see in our pipeline. We will remain disciplined. We need to do the right M&A at the right price, but as Tim mentioned, we have the capacity to execute on the M&A in our pipeline currently.
Your next question comes from Suthan Sukumar with Stifel.
Tim, congrats on taking the helm here. For my first question, I want to touch on IP. You talked about the pipeline being up and that there are higher Managed Services proposals with higher contract values. Just wondering how much the attach rate of IP has increased in these Managed Services engagements on a year-over-year basis?
Thanks, Suthan. Yes, we did talk about our IP pipeline being up and our Managed Services pipeline being up and that we have a high win rate with IP as part of Managed Services solutions. I mentioned DigiOps as something involved in many of our Managed Services proposals out now. The answer is that it's up — we probably have more IP in our Managed Services bids than a year or two ago. It's more often in the form of accelerators and platforms, which is what I would call DigiOps, versus sometimes a pure industry product, although our industry solution IP also has a healthy pipeline. In relation to Managed Services, it tends to be more platform- and accelerator-type IP in those bids.
Great. My second question: you talked about rising contract values. Is that more a function of pricing power or growing scope? And conversely, given rising AI utilization here, how has that been a factor on pricing overall?
A couple of points there. Total contract value is more a function of scope and duration. As an old colleague used to say, the difference between a $100 million contract and a $200 million contract is often five to ten years — it's scope and duration more than anything. Regarding AI and pricing pressure, it's like anything else: we need to be compelling in our offers and provide a fair and efficient price or the client won't buy. We are transparent in how we're using AI tools in our solution and the benefit it's providing to our clients. We try to show why we'll be able to deliver something faster and more efficiently, perhaps for a better price by integrating these tools. So absolutely it affects pricing insofar as it changes costs and outcomes, but it's not a singular force; it's part of the overall value proposition.
There are no further questions at this time. I will now turn the call over to Kevin Linder for closing remarks.
Thanks, Joelle, and thanks, everyone, for participating. As a reminder, a replay of this call will be available either via our website or by dialing 1 (888) 660-6264 and using the passcode 69190. As well, a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1 (905) 973-8363. Thanks again, everyone, and look forward to speaking soon.
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