CGI Earnings: Revenue and Profitability Exceed Our Estimates

We are raising our fair value estimate to CAD 130 from CAD 119 for narrow-moat CGI GIB.A after the firm reported strong financial results with its sales and profitability both exceeding our prior estimates. In a tough macro environment, CGI is seeing robust demand for its solutions as businesses seek to cut costs by outsourcing IT labor. We believe CGI’s ability to deliver strong financial results during this tough macro environment underscores the strong switching costs and intangible assets the firm has built up over time. We believe the shares, trading around CAD 135, are fairly valued.

CGI’s top line expanded 14% year over year (11% in constant currency terms), driven by broad-based strength as the firm saw robust demand for its solutions across all major geographies and verticals. With the vast majority of new revenue (around 77%) coming in from existing client extensions and renewals, we believe CGI’s customers are leveraging the firm’s business-know-how to cut costs by outsourcing IT projects.

CGI’s bookings, a forward-looking indicator, grew 16% year over year. While the firm’s book-to-bill ratio (the higher the better) decreased year over year, it remained above 100%, indicating the firm’s ability to bring in more new business relative to its billings over the same time period.

CGI’s adjusted operating margin of 16.2% is up 20 basis points from last year. As we think of the next few years, we believe that CGI will have the opportunity to expand its margins by capturing more revenue via its intellectual property, or IP, and improving its European profitability, and driving operating leverage through delivery via its global centers in low-cost geographies. We believe that the firm’s decision to focus on IP, via its IP30 goal, will not only be margin-accretive but also strengthen its switching costs and intangible assets, thereby making CGI’s economic moat more durable.