CGI Inc (GIB) 2003 Q1 法說會逐字稿

Good afternoon and welcome to the American Management Systems FO first quarter earnings conference call.

Certain statements by AMS management during this call might constitute forward-looking statements within the meaning of the private securities litigation reform act of 1995.

Such statements are based on management's current expectations and are made in good faith by the company pursuant to the safe harbor provision of the act.

Forward-looking statements include financial projects, objectives of its management as well as management's views regarding industry economic conditions and trends.

These forward-looking statements involve known and unknown risks, uncertainties and changes in circumstances which may cause the company's actual results to differ materially from any future results expressed or implied by such forward-looking statements.

The company's annual report filed with the Securities and Exchange Commission on form 10K for the fiscal year ended December 31st 2002 provides a more detailed analysis of the factors that could cause the company's results to differ from those projected in forward-looking statements.

Any forward-looking statements should not be relied upon as representing the company's investments or views as of any subsequent date.

In addition the company assumes no obligation to update the information presented during the call.

Also during today's call management references certain non GAAP numbers which the company believes is useful to the investors.

The company will post reconciliations of those measures to GAAP on its investor relations page on AMS .com.

I now turn the call over to Ronald Schillereff, Senior Vice President and Director of Investor Relations.

Please go ahead, sir

Thank you Mike.

Good afternoon everyone and welcome to AMS's first quarter earnings conference call.

AMS chairman and Chief Executive Officer Alfred Mockett will begin the call with a broad overview of the company and our business operations.

John Brittain our Executive Vice President and Chief Financial Officer will discuss our financial performances.

Then we open the call for questions.

I turn the call over to Alfred Mockett, Chairman and CEO.

Thank you Ron.

Good afternoon and thank you for joining us for first quarter earnings conference call.

As we begin there are 3 key points I would like to emphasize.

First, AMS delivered a sound financial performance this quarter.

Second, we continue to manage our business with specific Emphasis on cost control.

Third, we are committed to using our strong cash position to grow our business both organically and through acquisitions to build shareholder value.

Now, despite challenging between macro economic conditions AMS delivered earnings per share results within guidance and consistent with first call consensus earnings estimate for the first quarter of 2003.

We were just shy of revenue guidance, principally due to delays in the start up of a few larger, previously awarded contracts, delays in contract extensions with add on efforts being deferred until second quarter, and inclement weather closures of some federal and State government offices.

However, over all I believe we delivered appear sound performance during what was a difficult quarter for the industry as a whole.

Let's turn to operational performance.

During the first quarter our operations continue to generate positive cash flow as measured by EBITDA and we remained debt free.

As a result, the balance sheet is strong, cash position is substantial even taking into account cash out flows.

Cash position also reflects stock repurchased during the quarter.

John will discuss our stock repurchase activities in a few minutes.

As the quarter progressed and the geopolitical situation became more uncertain, a pattern of delays emerged--on start dates for projects previously awarded, on final negotiations on initiatives already funded , and on bringing new discretionary IT projects to market.

While this is all indicative of potential pent up demand, a return to normal conditions is still some months away.

In our public sector markets, federal government revenue was down slightly from the fourth quarter.

While we did not experience any contract cancellations, several of our new contracts, especially in civilian agencies are were delayed due to a variety of short term budget challenges.

These included an inability of many agencies to resolve continuing resolutions within the current fiscal year appropriations process.

In the defense arena, the war has not helped, in fact, quite the opposite.

During the conflict there hasn't been much interest in investments in business processes, procurement of financial management systems.

We are positive on the opportunity as we see steady increasing demand for oral intelligence and security offerings.

State and local revenues were also slightly down.

Like everyone in this space we are experiencing the combined negative effects of severe budgets deficits in virtually all of the States, combined with program reassessments caused by extensive turn over in state administrations.

Twenty-four governors took office in January 30.

There are 30 new state CIO's.

As a result we are seeing delays in new and on going procurements and slower ramp up in discretionary work ups.

The financial services group continues to show strength in banking and credit segments.

This has been fueled by customers ready accept stands of our new credit collections.

We continue to focus on business process improvements and quality initiatives to increase our customer’s operating efficiency and lower their over all risk profile.

Also as a result of our launch of Proponix based ASP trade services solutions, we see longer term growth in our trade services segment.

Telecommunications spending across the industry continues to decline in both wire line and wireless segments.

However, our strategy to provide services and products around the risk and collections and customer intelligence applications needs of our chair one customers shields us from some of the shrinkage in this industry.

Our focus on risk and collections resonates with our over all customer base.

We continue to make progress in offering managed services around our billing, fulfillment management and collections applications as our pipeline grows in these areas.

All our efforts are directed to one goal--enhancing shareholder value.

Our financial strength provided us with several alternatives to build value.

We will continue to invest in areas of opportunity for organic growth.

Out sourcing remains especially attractive—particularly managed services for government and corporate clients.

Inorganic growth is also necessary to achieve our strategy and growth goals.

We are aggressively pursuing potential acquisition targets and have had exploratory discussions with a number of interested parties.

We remain committed to doing the right deals at the right price, seeking to supplement existing service lines and/or vertical sectors, with like businesses that are accreted to earnings from year one.

While the environment for transactions remain difficult due to wide gaps in valuations between buyers and sellers, we remain optimistic that growth supplemented by acquisitions is a viable and executable strategy for AMS.

A share repurchase program is also a focus.

However it is a secondary one.

In March, we announced that the AMS board of directors increase the company's share repurchase authorization by an additional 3 million shares.

The timing of and extent of any repurchases will depend on market conditions AMS stock value and other factors.

While we have taken this step, I want to reemphasize that our priority remains leveraging our cash position to invest in organic and inorganic growth opportunities.

We will repurchase shares periodically when our relative valuation and cash flow position allows.

Over all, although we are disappointed at the pace of growth, we remain confident in our direction.

We remain sharply focused on factors in our control, such as our cost base.

You recall that one of the most mission critical goals of restructuring efforts has been to lower the company's cost base.

We reduced our cost structure during the first quarter.

We have also created two task teams at the executive level, a cost reduction task force to address operational costs, and a team specifically to review the AMS total compensation structure, our most significant cost element.

We will continue to address our cost base and strategies for improvement with our forward view of the market dictates.

We believe that actions in hand will allow us to return to historic pretax margin levels of 7% to 8% towards year’s end.

Now let's put assessment of business conditions and the element of our strategy into perspective.

I said AMS was in turn around mode ,but that I was not yet ready to declare victory by declaring that the market had bottomed out.

Nor do I today.

Yet with much of the uncertainty of Iraq conflict behind us, it is logical to predict a modest post war recovery.

AMS now expects revenues to grow at a pace consistent with overall IT services market, in both the balance of 2003 and 2004.

This revenue expectation, which anticipates flat year end performance, is lower than we envisioned at the time of our year end conference call.

Our changing view is colored by the geopolitical and macro economic uncertainty.

It also recognizes that a number of larger contracts in the pipeline with a material growing object the growth rate of the company have been delayed by at least a quarter.

We are seeing an improved level of bids and proposal activity and our pipeline is growing.

Further, many of our bids in process are on a significantly larger scale.

They will produce more positive impact on revenue and profitability and ultimately shareholder value.

To summarize, AMS delivered a sound performance this quarter, continued to manage our business with specific emphasis on cost control in a protractedly adverse market.

We are committed to using our strong cash position to grow our business both organically and through acquisitions to build share holder value.

AMS has every element in place for a return to growth, and I look forward to reporting continued progress throughout the balance of 2003.

At this time I would like to turn the call over to John Brittain.

Thank you very much Alfred and good afternoon everyone.

I am pleased to report that a very difficult and challenging market conditions, AMS met its earnings guidance and reported earnings per share of 15 cents for the first quarter of 2003.

While revenues were slightly below first quarter revenue guidance, we controlled our cost in order to maintain profitability.

We continued to manage the balance of investing for future growth while delivering current profitability in difficult market conditions.

Total revenues for the three months ended March 31, were, $227m, compared with our public guidance of $230m to $235m, and $236.1m for the fourth quarter of 2002.

With the exception of our federal government and state and local government markets, all sectors performed within our revenue guidance range for first quarter.

The public sector remains our largest market sector, representing 65% of 1q revenues.

Our federal government target market generated revenues of $85.9m for the first quarter, which was down slightly from fourth quarter 2002 of $88.5 million.

Reduced over all spending as a result of the government's continuing budget resolution, as well as a significant distraction of war effort in the defense sector, slowed IT service contract activity and brought about this moderate decline.

State and local government revenues were $61.4m for the first quarter which were less than the four quarter of 2002 of $62.6m.

The performance of the sector reflects the continuing budgetary challenges being experienced by state local government agencies.

As a result, we see delays in new and on going procurements and a slower ramp up of new IT service contract activity.

Revenues for our financial services target market for first quarter, were $30.3m which is down modestly down from the fourth quarter 2002 revenues of $31.6m, and within our guidance range.

Our performance reflects growing stability in IT spending in markets we serve.

Banking and credit line products and collection and recovery solutions continue to drive growth in our financial services group.

In our Communications, Media, and Entertainment target market, our first quarter revenues were up, at $42.6 m, as compared with fourth quarter, 2002 revenues of $41.4m.

Our revenue performance is within the first quarter guidance provided in February.

While global IT spending continues to decline for wire line and wireless segments, AMS’s targeted offerings delivered strong value and efficiency to the customers we served in these markets.

First quarter earnings from other corporate clients were $6.8m in line with prior guidance.

The company's pretax operating cash flow from on going operations for the first quarter is measured by EBITDA, was $21.0m..

As we mentioned before we met earnings guidance and consensus forecast and reported net income of $6.3m or 15 cents per share for the first quarter of 2003, as compared to net income of $8.0m or 19 cents per share for the fourth quarter of 2002.

We continue to maintain excellent balance sheet with strong liquidity.

As of March 31st we had a $115m in cash and no debt.

Combined with our $160m bank credit facility, we have total available liquidity of approximately $275m.

During the first quarter, our receivable days sales outstanding, or DSOs, were 87 days as compared to 81 days in fourth quarter of 2002.

We already experienced improved receivable collections in April and anticipate a reduction in DSOs for the second quarter of 2003.

In March we commenced our share repurchase program and acquired approximately 240,000 shares, at a cost of $2.9m.

I would like to review AMS financial value matrix and financial guidance for the second quarter of 2003.

First, our revenue outlook.

Together with the expected value from our pipeline of $25m to $30m, and the company's current backlog of $205m, we expect second quarter revenues of $230m to $ 235m, comprised of the following market details.

Federal government agencies, $85m to $87m; state and local government, $64m to $65m;communications media and entertainment, $44m to $45m.

Financial services institutions, $30m to $31m; and other corporate clients at $7m.

Now let's turn to labor productivity.

During the first quarter the company’s total headcount was relatively flat, at 6,311 employees as compared to 6,288 employees at the end of 2002.

At the end of the first quarter our billable headcount was 4,134 or 66% of our total headcount of 6,311.

The utilization rate of billable staff was 84% for the first quarter as compared to 83% in the fourth quarter of last year.

The annualized voluntary turn over rate for a total staff was 8.7% during the first quarter, representing a modest increase for the fourth quarter of 8.1%.

Now, given our current revenue outlook for the second quarter of 2003, EBITDA profitability is projected to be $21.5m to $23m for the quarter.

Projected, pretax income is $10m to $11.5m .

Net income for the second quarter is targeted at $5.9m to $6.8m taking into account an effective tax rate of 41%.

These projections result in forecasted earnings per share of 14 to 16 cents per share for second quarter of 2003.

In summary, AMS met its earnings guidance for the first quarter of 2003 during a period of pour over all market conditions and weak revenue demand.

However, while we have controlled costs to maintained profitability, we are not satisfied with our current pretax profit margin of 4.7% for the first quarter of 2003.

Therefore, in order to improve profit margins on our current revenue base and market outlook, we will implement additional cost reduction to increase 7% to 8% by year end 2003.

Thank you and I would like to turn the call back over to Alfred.

Alfred Mockett Thank you John.

In summary I have 3 points to make.

One, we anticipate a stronger revenue performance in the second half, arising from large scale public sector in the pipeline leading to flat revenues year-on-year, adjusting for the sale of our global utilities business.

Two, we have taken and continue to take actions to aggressively address our costs.

These actions, coupled with moderate stop rating leverages as leverages recovery restore margins to historic 7% to 8% levels towards the end of the year.

Three, growth, supplemented by skills based acquisitions in our core service lines and vertical sectors remains a viable and executable strategy for AMS this year.

We will also put our cash to work, exercising our stock repurchase program as conditions avail themselves.

Thank you.

John and I will now take your questions.

Thank you.

If you would like to ask a question at this time please signal us by pressing star key followed by one on the touch tone telephone.

If you are on a speaker phone turn off the mute to allow your signal to reach our equipment.

Due to time restraints you are allowed to ask one question.

You may ask only one question, one part question at a time.

We pause just a moment to assemble our roster.

Yeah great.

Actually just a house keeping question.

John did you have the depreciation amortization for the quarter?

Yes, Tom.

The depreciation and amortization in aggregate was approximately $9.5m.

Within that amortization rating the capitalized software was approximately $8m.

Okay great, thanks very much.

Next question from George Price with Legg Mason (ph.).

Thanks, John.

Could you help me understand something on the balance sheet.

On the purchase and developed software it looks to me like there was a fairly significant change from the end of December to the end of this quarter, net basis of $90.8m up to a $109.6m and I guess on a gross basis about $27m increase.

Could you give a little color as to what that is?

Sure let me walk you through that.

We had certain reclassifications at year end that affect that number.

I think (inaudible) to that number were approximately $26m.

Within the $26m figure we had a reclassification of our Proponix which we had restructured, and that became a transfer from other assets into an addition to purchase software and that was approximately $16m.

And the balance of additions were approximately $10.5m, which were incremental new capitalized investment costs.

Offsetting those total additions of $26m, you had product amortization of approximately $8 million.

That should put you to the numbers going from year end to first quarter.

If I can make sure I have that straight.

From the total $16m of that is what came down from the other assets was reclassified?

We see the other assets going from 69 to 54 and change?

That's correct there is some net other differences but that's correct

Okay, and then $10.5m incremental new investment costs.

What was that for a Momentum or a particular product?

Could you elaborate?

In terms of investments it came from some of our ERP suites, it came from investments in our advantage, which was our suite for state and local services.

It did also come from investment in Momentum which is ERP solutions for the federal sector.

And then there were other various investments including in our collections systems, and then several other sundry, smaller investments.

So principally, it was public sector, European investment, Momentum and Advantage , followed by investments in our credit and collections recovery systems.

Okay.

Thank you.

Once again if you would like to ask a question at this time please signal us by pressing a star key followed by digit one on touch tone telephone.

Next question from Bill Loomis from Legg Mason (ph.).

Thank you.

On the DOD, you talked about the weakness due to the war distracting and civilian budget delays.

There was an article recently--on the DLA program--getting delayed.

How much revenue did you get from that last year and has that impacted your business this year in the first quarter?

The DOA contract is not material to current quarter revenues.

So the delay has not really a meaningful influence on the report of earnings or revenue.

Was it -- I know because you had a drop sequentially from December to March.

I am just saying would it have been more material if that contract was still going?

No, it wouldn't.

Okay and looking forward, are you expecting new contract award on the federal side now that civilian budget has been passed?

Your guidance is still not showing that big of sequential improvement in the second quarter.

We are guardedly optimistic.

Obviously there was a bit of a logjam there.

But it's still is relatively slow progress but I think we will see a pick up in the second half of the year.

And Telecoms (ph.)was strong.

Can you talk some more about that.

Elaborate further?

Yes, certainly

I know its within your guidance.

It looked pretty good.

I am very pleased with the performance of our Communications, entertainment and media unit.

It has been a tremendous turn around story.

We had a sharp refocus of the business.

Obviously Telecom, it's still a difficult mind field to negotiate but there are pockets of opportunity where money is being spent where customers are looking for cost control for sweating existing assets, leveraging previous investments.

Looking for very fast pay backs.

We have been able to successfully target in on those.

So we have shown a quarter on quarter growth in Telecom's revenues which is good given the current circumstances.

Do you expect that to accelerate in the second half of the year?

The guidance that we have given you shows a continuation of of that trend.

We take next question from Scott Shear (ph.) with Clovis Capital (ph.)

You mentioned that you were going to cut people to get to a 7 to 8 pretax margin by the end the year.

Can you clarify how many people, where that might be, whether or not you have started it and last part of that is--is the assumption that you will get to seven to eight pretax margin on existing revenue run rate, i.e., Q2 $230m to $235m or you would get to a, seven to eight on significantly higher revenue level?

Scott responding to that we are not being specific at this time indicating how we are going to achieve the cost reductions.

But the reality we have today is we have a cost structure that is not in line with current revenue run rate.

And also given our outlook for modest growth in the second half of the year..

Compensation represents over 60% of total costs.

So obviously we are taking a look at that.

We will be specific with details when we have them available to you but what we are looking at here is driving operating efficiency.

We are looking at all operating units that are support functions and looking at productivity measures.

And we are establishing bench marks against industry standards, and taking a look at our total SG&A cost structure and profit margins and within that creating task objectives into our operating grooms.

We will take appropriate action and obviously have more news to report on second quarter call when the second quarter is over in terms of some of those activities.

What we have to do is look at driving those higher profit margins more on a current revenue run rate.

Obviously we are expecting an up turn in revenues in the second half but we have got to be responsible in terms of driving strong profitability and competitive cost structure against current revenue run rates versus increased revenue, while maintaining the balance of investing for the growth to ensure that we achieve those higher revenues.

Okay.

On acquisitions, it sounds like you suggested you had multiple configurations with multiple parties.

Can you give a sense of size of acquisition you are looking at and whether or not you put a greater than 50% chance of anything happening in the second quarter?

I think its premature to put probability on closing. the sweet acquisitions we are looking at are skilled base acquisitions that deliver contract base backlog and customer base, are complementary within three by three matrix which are complementary to core service lines and core vertical sectors, which we could rapidly recognize synergies and improve profitability and cash flow.

Because I am determined that we will do the right deal at the right price..

We take next question from Gil Alexander (ph.) from Darfield Associate's (ph.)

What do you expect the IT growth to be for this year? what type of revenues do you hope to get in the second half?

If we do the math from the first quarter actuals and second quarter guidance, the uplift of second half from the first half is around about $40m or so of incremental revenue.

And we see getting that from the existing pipeline.

Thank you.

Once again if you would like to ask a question press star followed buyer one on the touch tone telephone.

Next question from George Price with Legg Mason.

George?

Yeah sorry, had my mute on.

Okay.

Want to do follow up.

I realize you don't want to go into much detail on obviously some of the aspects of expense cuts.

But it strikes me and I think I may have asked this question before, but the billable percentage of total headcount, it's fairly low compared to say other similar companies-- at about two-thirds.

Would that be an area that might be a particular target of opportunity?

That is a particular area of opportunity for us.

We are a hybrid model, we are a systems developer and systems integrator and that is core to the value proposition of the customers.

We carry about 800 people in non billable associated with product development and product enhancement.

So, you need to back those out first of all.

Secondly I would like to improve the ratio of billable to non billable.

In the non billable, in fact, we point a rigorous approach to this.

Anybody who is less than 20% billable is in fact non billable.

We have a high bench mark there.

So those people become billable over time.

As we recruiting people and getting a skills mix change and repositioning the business, people come in initially as non billable and become billable.

So a major drive in pushing non billable heads into billable and we are taking a hard look at non billable look at the operation and whether we should give them billability targets.

So yes, acute focus in that area.

The way we look at it from the total cost perspective.

We look from an operational standpoint.

What you are talking about is total labor utilization rates.

We are setting benchmarks for all of our operating groups.

We also take a look from operations in terms of what our gross profit margins are, what we can do in environment of increasing price pressure to help improve margins.

And we take a look at total cost structure in our operating groups.

And then we are bench marking our support services as a percent of revenues to support those functions.

If you drive on that sort of suite of operating matrix and with productivity measures that encompasses a good approach to the efficiency within your income statement.

Real quick I think I missed part of your comments, John, on the higher DSOs and the color on that.

Could you be any more specific in terms of where you think DSOs are going to end up in second quarter?

I was not pleased at all it went up to 87 days from 81.

There is no particular issue except increased activity for over all collections that we have to be focused on.

We haven't had 87 days DSOs since the first quarter of 2001.

We told you we need to get that figure down from the low 80's back into the 70's range.

I can tell you that there were a number of items, timing issues collected in April that would have had significant impact.

But we are looking to drive that receivables down.

Declining revenues we should have declining receivables.

I think we can felt that back down to at least where we were at the end of the year fairly quickly.

Thank you.

Once again press star one to ask a question at this time.

We take next question from Tom Maher from DBT.

John you mentioned that you were dent free yet I noticed you were getting hit with half million in interest expense.

What does that relate to?

Relates to our deferred comp plan.

We have weighted average balances of $30m in deferred comp that we had to pay interest on and that interest accrues at higher rate than short term funds, so results in a net interest expense

Looks like $20m delta in cash balance quarter-over-quarter, sequentially.

I think part of that was the share buy back you might have done.

But can you go into detail?

You have a summary cash flow.

If we generated EBITDA operating cash flow in the quarter of $20m, what I would take against that is, we had accrued compensation expenses we paid out, net cash of $16m, the cash flow shows $21m but the net cash flow was $16m in pay out.

We then had an in addition to that $3 million share repurchases.

We had $10 million of networking capital, increases driven by the receivables.

And then we had some other miscellaneous increases.

In total you had a reduction in cash of $42m against your opening cash balances.

So we went from a $136m to a $115m, driven largely by those items

Thanks very much I appreciate it.

Once again please press star one to ask a question.

Next question from Gil Alexander with Darfield Associates.

I wasn't clear on this purchase in developed computer software.

How is that being expensed?

The way we handle that is we capitalized those investments and they go to the balance sheet and then we amortize those over a three to five time period.

You see expenses with those investments through the amortization line item and our balances have increased from year end to the current levels we had first quarter end, given those net additions that we highlighted before.

I thank you.

There are no further questions at this time.

I turn the conference back to Alfred 340BG9 foreclosing comments.

Thank you Mike.

In closing I would like to thank you all for joining us this afternoon, and remind you of the three points I made earlier.

We anticipate a stronger revenue performance in the second half, arising from large scale publish sectors transactions in the pipeline leading to flat sales on year-over-year, adjusting for the sale of the global energy business.

We have taken and continue to take actions to aggressively address our costs.

These actions, coupled with modest stock rating leverages as revenues recovery will restore pretax margins to 7% to 8% levels over the end of the year.

Finally growth, supplemented by skills based acquisitions in our core services line and vertical sectors remains viable and executed strategy from AMS.

We will also put cash to work exercising stock repurchase program as conditions avail themselves.

Thank you very much for joining us and have a good day.

This concludes today's conference.

Thank you for your participation.

You may now disconnect. --- 0