CGI Targets Further Growth Through 'Very Active' M&A Pipeline

CGI, lighter and leaner after its completion of a $42.7 million restructuring program, is still seeking to expand its business through acquisitions.

The $7.8 billion Montreal-based company, No. 19 on the CRN Solution Provider 500, said it has more than 780 companies in its active funnel, much of which has come from the solution provider's annual "Voice of the Client" survey.

"That generates a whole new set of companies to look at, because that's one of the direct questions we ask on the survey," CGI CEO George Schindler (pictured) said on the company's earnings call on Wednesday. "Over 80 percent of that current funnel, and we'll be adding to that, is generated from clients and business leaders, not just from investment bankers. That tells you something about how fragmented the industry is, but also the interest in (CGI) and the need [for us] to continue to be a consolidator."

[Related: After Restructuring, CGI Targets More Recurring Revenue]

CGI has made three notable acquisitions within the past year: Boston-based Collaborative Consulting, Alabama-based software consulting firm CTS and Colorado-based ECS Team.

The common theme across those deals, Schindler said, was the inability for small but talent-rich companies – many focused exclusively on "niche" projects – to meet demand from enterprises seeking company-wide digital transformation. The two sides typically have overlapping clients lists, as well.

"We get access to outstanding talent. We share common experiences with clients. And we can go after bigger deals," Schindler said. "We're already seeing that in the pipeline and also in some of the bookings, where each of those companies is now booking larger, longer-term deals in their current clients."

CGI revenues climbed to $2.26 billion in the third fiscal quarter ended June 30, up 6.4 percent from last year's third-quarter mark of $2.12 billion, making it sixth straight quarters that CGI has experienced revenue growth.

CGI also saw revenue grow in the U.S. market by 12.5 percent, fueled by double-digit growth in the company's commercial and federal businesses, which experienced demand increase for bookings in the financial services, utilities and government sectors.

Schindler also noted demand increase among clients for business and technology consulting, adding that some of CGI's work with new clients begins as a consulting or systems integration and consulting (SI&C) project before expanding into a larger digital transformation endeavor.

"We're still (in the) early days," he said. "Most of them are six- to nine-month engagements. Those might extend a time or two either in pilot implementations prior to converting into a broader initiative across the enterprise."

CGI's quarterly net income was $219.8 million, or $0.73 per diluted share, up 1 percent from $217.6 million, or $0.71 per share, in the year-ago quarter.

Aiming to refine company cost structure, CGI plans to take "proactive measures" with regards to retiring stranded legacy assets and cutting SG&A expenses. While the company said this would affect its current head count, Schindler expects net head count will continue to grow.

"It certainly won't go down," Schindler said. "Our billable head count will go up throughout this period. We don't know where each will happen over the next quarter. Our net head count and our billable head count will be up significantly in coming quarters."