Where Are We Now
Updated on: 11/13/2021
CGI is Canada’s own enabler of digital transformation through its professional services and IT consulting offerings. We think CGI is a great operator that has a solid global presence and grows with its clients. We think CGI has a fair valuation today but would much rather put our money in Accenture.
CGI booked over $14 billion of services over the last twelve months for projects expected to happen. 70% of these bookings are repeat customers while 30% is totally new business. Clients love CGI and the word is spreading.
Revenue growth at CGI appears to be weaker and more cyclical compared to its behemoth peer, Accenture, which has been reporting strong growth since the depths of the pandemic.
CGI is a global IT consulting, outsourcing, and system integration firm with large global office and employee networks. The company has over 40 years of constantly improving experience in the field that it uses to empower, transform, and propel its clients towards success in their niche.
CGI leverages long-term contracts, strong brand reputation, global presence and proximity to its clients, a vast partnership ecosystem, and intellectual property developed in-house to deliver value to clients through consulting and outsourcing engagements.
The company’s commitment to its four-pillar strategy that encompasses the Build and Buy model should lead CGI to double its business within five to seven years, in line with management’s plans. CGI seeks organic and inorganic growth opportunities to expand its global reach, enhance its value proposition, and capture more recurring revenues while it goes out to hunt for new clients and new business.
The business faces several risks: (1) client concentration as the US government makes up almost 15% of revenues (2) acquisition risks inherent in the Build and Buy model (3) cyclical revenue profile and (4) saturated competitive market.
CGI is expected to see more growth over the next several years as it aims to double its business in at least five years. Pandemic-induced digitalization efforts, a pick-up in spending as corporations recover from the broad global recession, verticals in blockchain, space, auto automation, and many others, and prudent capital allocation practices and fairer technology valuations produce opportunities for CGI to tap into new frontiers, expand its business, and boost shareholder value.
CGI Inc. was founded in Quebec City, Canada, by Serge Godin in June 1976. “CGI” stands for “Conseillers en gestion et informatique” which translates to “management and IT consultants” (the company is more prevalent in English-speaking regions today, which led CGI to adopt “Consultants to Government and Industry” as the accepted modern breakdown of the acronym).
IT service demand was nascent at the time CGI began operations – while CGI started as a consulting company, it was able to rapidly respond to the emerging market by adding system integration expertise to their client services.
Many clients near the end of the 1980s began to outsource their IT functions and CGI had the knowledge and skills to provide clients with strategies to make this happen in a smooth, agile, and effective manner.
CGI was a natural-born acquirer from the onset – it began merging with and acquiring companies as early as 1986. Its first merger with BST, an IT outsourcing company, placed CGI in a position to provide a wide spectrum of IT services, including systems integration, IT outsourcing, and consulting services. CGI put itself ahead of its competition with this acquisition as outsourcing and globalization were some of the most impactful secular trends of the 1990s.
As CGI grew to a company with over $120 million of annual revenue in 1996, it also became the first IT consulting firm in North America to qualify with ISO, the International Organization for Standardization.
In the late 1990s and early 2000s, right near the peak of the “Internet Bubble”, the IT industry approached maturity and growth rates began to slow. However, globalization and consolidation became a key focus for corporations in the IT industry, giving rise to CGI’s Build and Buy growth strategy:
Build – organic growth through new or expanding business from new and existing clients.
Buy – inorganic growth through acquisitions based on operational and financial synergies and strategic fit, which ultimately should lead to greater organic growth down the line.
After acquiring Bell Sygma, IMRGlobal, and American Management System during this period, CGI grew its annual revenue to $3.5 billion in 2006, 29 times greater than its revenues 10 years prior.
CGI’s first 30 years set the stage for the company it prides itself as today – one that pulls all stakeholders towards success and grows through intelligent acquisitions and deep management expertise. CGI combined these focal points and the Build and Buy strategy by formalizing a stringent four-pillar framework that must be abided by in every one of CGI’s strategic decisions:
Pillar 1: Win, renew, and extend contracts
Pillar 2: New large managed IT and business process services contracts
Pillar 3: Metro market acquisitions
Pillar 4: Large, transformational acquisitions
Today, CGI’s end-to-end (“E2E”) service portfolio spans across three main areas:
Strategic IT and Business Consulting and Systems Integration – CGI helps define and implement a client’s digital roadmap, “steering the wheel” until an organization attains its desired level of IT modernization.
Managed IT and Business Process Services – Full or partial IT and business function outsourcing services that deliver innovation, efficiency gains, and cost savings to a client.
Intellectual Property – 175 proprietary business solutions – methodologies, strategies, and frameworks – embedded within the core E2E service portfolio to help accelerate business process and IT efficiency in an organization.
CGI’s revenues are reported in two main segments – (1) Systems Integration & Consulting (“SI&C”) and (2) Outsourcing – which align with the first two points of the E2E service portfolio breakdown.
SI&C and Outsourcing revenues have grown at low double-digit rates over the last ten years. Although these are impressive figures, this growth is largely attributed to the Logica acquisition in August 2012, less than two months before the end of the 2012 fiscal year. The 2013 fiscal year was the first full year to include Logica’s impact on CGI’s consolidated financial statements, which drove most of the aforementioned ten-year CAGRs.
Since 2013, SI&C and Outsourcing revenues have risen at steady low single-digit rates.
CGI Revenue by Segment ($M) (Q4 2021)
Source: CGI Investor Relations
CGI’s profit profile closely tracked overall revenues over the last decade – absolute profit growth and profit margin expansion have been rather muted since the acquisition.
We believe this exemplifies the power (positive), management ability to make intelligent acquisitions (positive) and the heavy reliance (negative) on pursuing growth through acquisitions and mergers.
CGI mainly grows through acquisitions. In other words, inorganic growth trumps organic growth to a large extent at CGI.
CGI Net Income ($M) (Q4 2021)
CGI’s operations are highly diversified, tapping verticals from private sectors to governments.
Much of CGI's revenues are derived from government contracts, such as the $3.3 billion U.S. Department of State's Bureau of Consular Affairs “Global Support Strategy for Overseas Consular Support Services” contract signed in January 2021.
Manufacturing, retail, distribution, and financial services clients make most of CGI’s revenues while communications, utilities, and health clients comprise the balance.
CGI is also well-diversified across geographical regions, a key part of its growth and global reach strategy. Most sales are conducted in the US and Canada, with another sizable chunk coming from France, the UK, and Germany. Besides these regions, CGI has decent diversification across other regions around the world.
BCG estimates around 50% of organizational change projects are not delivered on time, and 75% of large transformational programs do not achieve all their objectives. CGI’s main competitive advantage stems from its long history of delivering 95% of customer contracts on time and on budget, well above BCG’s estimates of industry averages.
CGI’s strong reputation since 1976 allows it to win outsourcing contracts with clients that are typically five to ten years in length. CGI captures a recurring revenue stream while customers reap the benefits from CGI’s wide consultant base and proven expertise and frameworks to streamline business processes and IT modernization.
According to CGI, the company extends, renews, or adds on to existing contracts with customers more often than not (between 60 - 75%). Management attributes CGI’s success to strong core principles outlined in CGI’s Management Foundation, the company’s set of formal guiding principles and controls to provide best-in-class IT services and practices.
Home Turf Advantage
CGI serves over 5,500 E2E clients around the globe across 17 industry sectors. The company operates from 400 locations scattered around the world to maintain close proximity with its partners and clients.
CGI pulls a few benefits from its proximity model – CGI learns about variations and nuances of doing business in different regions through its diverse client base, it can pull upon learnings to create more adaptive intellectual property, models, and frameworks for its global network, and it allows CGI to remain close to its partners to provide the best possible services for its clients.
CGI’s president and CEO, George Schindler, alluded to the importance of the proximity model by mentioning that it is not going anywhere, despite the push for work-from-home and hybrid work models. Customers will ultimately benefit from
CGI’s growing reach around the world on clients' home turf unlocks several key resources. Learning from a wide range of clients across geographies with differing business practices and regulatory environments keeps CGI consultants on their feet. As the company's collective knowledge base grows, it can implement its learnings in an agile manner to other in-place contractual agreements.
CGI taps a wide partner ecosystem to help deliver a world-class consulting and outsourcing experience for all its clients. The company has leveraged its global reach to establish relationships with AWS, Google, Microsoft, Salesforce, ServiceNow, SAP, and over 140 others.
CGI uses a “partner-agnostic approach” to implement solutions that best suit the client and opportunity at hand. This partnership ecosystem allows CGI to have several advantages over competitors – it can collaborate with cloud providers, automation specialists, and other technology providers to understand what’s the next “big thing” in the world of technology, learn about it before it hits the mainstream market, and begin to implement its new processes into its consulting engagements and outsourcing services to ensure clients receive the latest-and-greatest solutions for their business to thrive.
CGI has taken a hit as digital transformation and modernization projects took a backseat in light of deep uncertainty around the timing and extent of the pandemic. However, CGI is seeing a resurgence of client bookings for transformation and modernization services.
In 2021, CGI met with 1,700 new and existing client executives across every geography and industry in which the company operates. The primary finding was that optimization of business operations is the number one priority, with culture and IT modernization services sought to address inefficient and ineffective processes. CGI’s recent financials portray these results – demand for new digital and modernization projects skyrocketed, raising bookings substantially vs. 2021.
CGI's book-to-bill ratio (booked contracts versus recognized revenues) is in record territory relative to the last five years.
CGI Client Bookings (Q4 2021)
Source: CGI Investor Relations
Investors can expect solid revenue growth over the coming quarters and an increased base of recurring revenue as it converts new customers into long-term clients and continues to serve existing clients with a high standard of care and diligence.
Demand for CGI’s services are strong – we believe CGI’s network effects, partner ecosystem, and global presence will prove to be important advantages that clients can leverage to improve their systems and processes and continue to return to CGI for more as the world continues to evolve.
The Sky’s the Limit?
CGI operates across many industries today, but that does not mean the business is stopping there.
Blockchain is one area in which CGI has already dipped its toes and it sees room for more growth.
CGI serves the trade, government, utilities, identity, energy, and financial services sectors to use the power of blockchain technology to reduce risk by eliminating fraud, increase operational efficiencies, and enhance security and trust. Blockchain solutions are offered to clients alongside start-ups and blockchain providers that possess the necessary expertise to bring these solutions to life – Microsoft, Bigchain DB, and Skuchain are a few of the companies CGI has partnered with to provide comprehensive blockchain solutions.
In April 2021, CGI noted it is working with a top bank to transform their digital operations, which includes the use of CGI’s Trade360 platform – CGI’s cash management software-as-a-service offering – to enable blockchain within the client’s trade finance operations.
CGI is also tapping into other verticals, such as manufacturing automation. In Germany, CGI has partnered with a top auto manufacturer on a robotic automation initiative as a response to nationwide shutdowns. CGI is seeking to implement smart factory automation solutions to enable massive cost savings and operational efficiencies to this manufacturer.
Lastly, you may need to grab a telescope to see this opportunity – CGI is looking to conquer space. A project with the European Space Agency (“ESA”) has kicked off to develop a service that uses space technologies to map and monitor wildfires and their impact on the planet. CGI and the ESA will utilize technological advances in Earth observation, machine learning, and cloud computing to develop a life-changing concept that will benefit all of humanity.
Consistent with some of our previous points, CGI is tapping into many business opportunities that are expanding its global reach, deep expertise, and future opportunities as the world becomes more digital.
CGI has maintained its capital allocation strategy for decades and it likely will not change anytime soon. The reason? It works.
CGI primarily seeks to allocate its capital through three methods:
Reinvesting into CGI’s operations
Pursuing accretive acquisitions
Shareholders can rest assured there is a management team in place that seeks opportunities to invest shareholder capital in the most effective way possible. CGI has made it abundantly clear that it seeks to acquire businesses as part of its Build and Buy model only when valuations are attractive. In a time of heightened asset valuations, it is important that management maintains prudence to engage only in accretive acquisitions such that the plan to double the size of the company within 5 – 7 years is not hindered.
CGI’s largest acquisition in recent history was the purchase of Logica in 2012, which helped propel revenues, earnings, and earnings-per-share (“EPS”) above levels previously sustained by the company. In April 2021, CGI announced the proposed acquisition of Sense Corp, a firm focused on digital systems integration and consulting services for state and local governments and some corporate clients.
This acquisition would add 300 consultants to CGI’s vast employee base and expand its cloud and digital solution footprint in Texas and Missouri.
CGI Diluted Earnings Per Share ($) (Q4 2021)
When CGI is not acquiring companies, it is fond of using share repurchases as an “accretive and flexible” way to return capital to shareholders. In fact, the company returned over $6 billion to shareholders between 2010 and 2020 via share repurchases.
The effect was profound – while earnings grew at low single-digit rates over the past five years, diluted EPS expanded at a more respectable high single-digit rate.
CGI Net Share Repurchases ($M) (Q4 2021)
CGI has tons of liquid firepower (i.e., cash) it can use to pull the trigger on any opportunity that arises. We believe CGI has the willpower and ability to pursue intelligent, yet large acquisitions if it chooses to do so at any time.
CGI serves the US government to a large extent with 10 - 20% of revenues derived from the US federal government and its countless constituents. There may be significant adverse revenue impact if the US government does not renew, or cancels its contracts with CGI in favour of another consulting firm, or if there are cuts to its budget for CGI-related consulting services.
CGI’s Build and Buy model and the company in its entirety rely heavily on acquisitions to fuel growth. The absence of fairly priced target companies and adequate strategic targets could result in underwhelming growth and stagnation. CGI also runs the risk of choosing a poor strategic partner or acquisition target that results in lacklustre accretion (and potentially profit dilution), weak or longer-than-expected realized synergies, and inadequate culture fit with the current CGI environment.
Cyclical Revenue Profile
Although CGI is generally viewed as a sticky and stable compounder, its revenue profile is subject to substantial swings during booms and busts. In times of economic hardship, many companies slash digital transformation and modernization budgets, directly and significantly impacting CGI. These large swings are likely to result in soured investor sentiment given the perceived speed of corporate consulting spend holdback.
Saturated Competitive Market
The consulting industry is saturated with a few top players making up the majority of market share in the industry. The “Big Four” accounting firms, McKinsey, Boston Consulting Group, Accenture, Microsoft, and a few others made up almost 60% of the market.
Their global reach, reputation, ability to attract top talent, and technological capacities enable them to win contract after contract with the world’s largest companies. Although CGI has plenty of room to grow, we believe there is a ceiling to its growth story unless it taps verticals outside the realm of these large incumbents.
CGI operates in a saturated market with many large players, however, it has been continuously growing and finding new opportunities to expand into new industries, new markets, and new regions. CGI has committed to the Build and Buy model and it has been paying dividends – the company has grown to be recognized as one of the Forbes top consulting firms in North America.
CGI benefits from many competitive advantages. It enters long-term contracts with its clients, securing business for the long run as clients reap the benefits from CGI’s expanding library of knowledge, skills, and expertise across many industries and reinvest into additional services with CGI.
It also forms partnerships with leading technology companies, such as AWS, Google, and Microsoft, to develop deep expertise in the services it offers to clients. Lastly, CGI maintains close proximity to its clients to provide convenient services while also being able to learn the nuances of doing business in a vast array of geographic regions.
CGI growth has been plentiful, but it is far from over. The company can tap into exciting and nascent verticals, such as space, blockchain, smart factories, and many others as the world shifts towards the digital paradigm. We are confident with management’s ability to allocate capital prudently and keep every shareholder’s best interests in mind while it navigates the ever-changing lens of the digital world.