CGI Inc (GIB) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the CGI third quarter results conference call. I would now like to turn the meeting over to Ms. Paule Dore, Executive Vice President and Chief Corporate Officer of CGI. Please go ahead Ms Dore.

Thank you operator. Good morning everyone. Thank you for joining our conference call to discuss our third quarter of fiscal 2004 financial results. With me today on the call are Serge Godin, CGI's Chairman and Chief Executive Officer; Andre Imbeau; Executive Vice-President and Chief Financial Officer; Michael Roach, President and Chief Operating Officer; Jacques Roy, Senior Vice-President, Finance and Treasury; and David Anderson, Senior Vice President & Corporate Controller.

This conference call is also being broadcasted on our website at www.cgi.com. Our third quarter release, and NDNA are also on the site. In our press release, and accordingly during the course of this conference call, we will make forward-looking statements regarding future events and the future financial performance of the company. We wish to caution that such statements are forward looking, and that actual event or results may differ materially. We refer you to our third quarter and the NDNA fiscal '03's annual report and other documents filed with Securities Commission in the US and Canada, which identify factors that could cause actual results to differ materially from forward-looking statements. CGI disclaims any intent or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We remind you that all of the values expressed during this conference call are in Canadian dollars unless, otherwise stated. Now, I'll turn the call over Andre, who will review the highlights of our third quarter.

Thank you Paule, and good morning everyone. We are pleased to be reporting the results of another solid quarter. First, we would start with revenue in slide number five. Our third quarter results, which include a two-month contribution from AMS, are clear indication of the value that this acquisition provides. Without interruption, we continue to sign new contracts with triumphs and prospects of the former AMS

as with other acquisition, we took the necessary steps to achieve synergy. Revenue in the third quarter increased 22.6% year-over-year to $867.1b as a result of our acquisition of AMS. On the sequential basis, revenue growth was 19.5% over the second quarter. Organic growth was slightly negative, compared with the same period a year ago, due to the termination of certain contracts that came through acquisition, and did not meet CGI profitability standard. And to the timing of new contracts, including the finding and commencement of some new large outsourcing contracts. However, bookings fine in the quarter in 3:1.2 billion dollars more than twice the previous quarter, and these new contracts will contribute to grow in coming quarters. Bookings in the quarter do nothing to do the MOU with manualized financial for which, the contract signing is not yet completed.

We are now on slide six. In the third quarter, we ( Indiscernible) earnings before interest, income taxes and it is subject to significant influence, and discontinued operation interest of $84.5m, up more than 5% from a year ago, and up 3% sequentially.The EBITD margin was 9.7%, which was slightly lower than a year ago, and last quarter mainly because of AMS productively higher level of operating expenses, and also the one-time expenses relative to the integration of AMS. As we realize efficiencies through the integration process, margins will improve as happened as with previous acquisition. At the time of the AMS transaction, we said, we would need from 6 to 9 months to achieve all of the synergy and cost efficiencies in our plan. The integration has been progressing well and we are well on track to meet the targeted 15%-20% EPS accretion rate resulting from the integration of AMS, as initially stated in the March 10, 2004 press release.

On slide seven, net earnings from continuing operations were $51.9m, up 11.2% over the last year and up 1.1% sequentially. Basic and diluted earnings per share from continuing operations remained the same as a year ago, at $0.12, based on the 6.9% increase in the number of weighted average shares outstanding and compared with $0.13, last quarter. Net earnings, including gains from the sale of discontinued operations, increased 29.4% from a year ago to $60.9m or $0.14 per share. Reflecting the AMS acquisition, the net earnings margin from continuing operations was 6% compared with 7.1% last quarter and 6.6% last year. Like the EBIT margin, it is expected to improve as efficiencies are realized through the AMS integration process. The net earnings margin including gains from the sale of discontinued operation was 7%.

Turning to slide eight, our balance sheet is solid. At June 30, 2004 cash and cash equivalents were $231m, up from $172m on March 31, 2004 and the total credit facility available at June 30, was $296.2m. DSO's or days sales outstanding increased temporarily to 61 days from 50 days in the second quarter of this year. This is mainly a result of our acquisition of AMS. We inherited from AMS all receivables at the time of the closing. Yet, we benefited from only two months of AMS revenue in the quarter. We continue to manage our receivables very closely and maintain our long-term DSO goal of 45 days. Long-term debt, short and long-term portion, increased to $523.6m in the third quarter following our acquisition of AMS, from $288.3m at March 31, 2004. At June 30, the long-term debt-to-capitalization ratio was 17.5%, compared to 12.2% at March 31, 2004. You will notice a new line item in the balance sheet, which represents a change in presentation of the CGI payroll services to be more in line with industry accounting practices for business process outsourcing. We used to show a net figure and not show funds held for clients as an asset and client funds obligations as a liability. The explanation is provided in note two to the financial statement.

On slide nine, cash provided by continuing operating activities remains healthy. It's amounted to $67.2m after a one-time disbursement totaling $52m related to the acquisition of AMS. Looking to the fourth quarter, we will have additional one-time disbursements related to the acquisition of AMS, mainly US income taxes related to selling AMS' defense and intelligence group.

Moving on to slide ten, our backlog of signed contracts continue to grow and at June 30, was $13.2b with an average duration of 7.3 years. This backlog is up from $12b last quarter. We are not

any of them. CGI is on trying to meet the guidance for fiscal 2004, that we provided when we issued the seven-quarter results on May 4, 2004. Revenue for fiscal 2004 is expected to be between $3.25b and $3.5b representing growth of 21 to 30% over revenue of $2.60b reported in fiscal 2003. Earnings per share from continuing operation are expected to be between $0.50 and $0.54 or 14 to 23% higher than comparable earnings per share $0.44 reported in fiscal 2003. This guidance is based on information now today about market condition and demand for CGI services as well as estimates and assumptions made with regard to the intimation of AMS. It is early for us to provide a view of 2005 as we are in the midst of our 2005 planning process. However as an early indication of the current outlook, the company is targeting revenues of more than $4b for 2005 with gradual improvement in our net earnings margin from continuing operation. At this point I would like to turn the call over to Serge to discuss some of the operational highlight. Serge.

Thank you Andre. Good morning everyone and good afternoon for our participants in Europe. So again this quarter we are pleased with CGI's performance, which is according to plan as shown on slide 13. We delivered strong revenue and we are now $1.2b in contract bookings, extensions and renewals. This is our highest booking level since the fourth quarter of the last year and it will contribute to our growth in coming quarters. Our pipeline of large outsourcing contracts and our sales follow up systematic return in consulting contracts remain vibrant in all our markets including Canada, US and Europe. In fact, I am very pleased to report that CGI again delivered the second best performance in terms of percentage of net earnings on revenue among comparable public companies in our domain in North America. We achieved it despite the temporary contraction in our net margin resulting from the acquisition of AMS. CGI is very well positioned to capitalize on the growing demand for IT and BPO services in all its markets. We have been fit from our financial performance, solid balance sheet and our greater footprints in to US and Europe following our acquisition of AMS. I am pleased to report that our transaction with AMS has been well received by our clients and that the transition to CGI, AMS has been virtually seamless as demonstrated by a number of CGI, AMS new engagements. For example, we are just a few contracts to where we are walking on which values or rendering from the $5m US to $25m US.

We have signed a contract with Mellon financial corporation the leading financial services company and one of the largest US providers of UN resources consulting and administration. This contract is to provide full life cycles system integration services to consolidate and upgrade Mellon's record keeping platforms. One of our large US telecom clients agreed to a project to develop and implement and another full true system for the provisioning of the toll free services. It also engaged us in a contract to enhance the customer billing relationship software that they had jointly developed with AMS in nine days. We signed a contract with their US department of Health and Human Services center for Medicare and Medicaid management for continued websites support services for a medicare.com, one of the largest public sector portals in the world. This was designed and built by us. The state of Utah selected our solution advantage in three year as their next generation statewide

system which brings the number of clients who have selected advantage to 38 since it begin a little and less than the two years ago. LA also selected advantage in the last quarter. As well, we were awarded a contract with the state of California to help improve the state's procurement processes. This contract positioned us favorably for future strategic sourcing with the state.

Looking ahead, we are very confident that CGI will achieve one of the key strategic objectives for the acquisition, which is to evolve over time AMS Solid as Inc client relationships also into pull IT outsourcing contracts. It is worth mentioning that in Canada, we had successfully completed the transition of Canada technology infrastructure to CGI this past April. This loop represented more than 18 months of planning and execution and it involved moving from a competitor. A very complex IT infrastructure that cost over 600 sites across Canada, and evolving it into a world class IT environment under CGI's management. For those of you interested this project included one of the largest SAP migrations in the world. From a new business perspective, we have recently achieved a highly strategic milestone in CGI's history. With our increased critical mass in each of our main markets, Canada, US, and Europe, and our global delivery model, we are now very well positioned to generate large outsourcing contracts in each of these markets. Demonstrating this enhanced positioning, we were able to announce new large outsourcing contracts in the third quarter for each of our three main markets and all of its brand names. We announced an MOU with Manulife Financial to set up an obligation, development, and maintenance center of excellence in all effects to support Manulife and North American operations following its merger with John Hancock earlier this year. This five-year agreement is valued at a minimum of $120m Canadian, we expect that contract will be signed later this quarter. We are excited about our agreement with Manulife. As part of this contract, we will be providing mission critical services to support the bank loan insurance obligations of the three brand names, namely, John Hancock,, and Manulife. We will be seamlessly serving parts of the clients operations in Toronto,

Boston, Tampa, and Atlantic Canada. We also announce a 10-year information technology outsourcing contract with Cott Corporation valued at approximately $155m US. CGI will manage all Cott's IT operations serving Canada, US, Mexico, and in the UK.

Responsibilities will include obligations, development, maintenance, and support, system integration and companies enterprise resource planning system implementation. And in the UK, we signed a 10-year full IT outsourcing contract valued at $338m with Cox Insurance Holdings Plc, one of the largest auto-insurance in the UK. CGI will capitalize upon its position as a global services company by providing Cott with more efficient, cost-effective services to through the use of its UK and offshore facilities in Canada and in India. In addition, in our BPO service business, we signed $55m US of contracts with the US Department of Housing and Urban Development. We signed a five-year business process services outsourcing contract with Oakland Housing authority and with the Columbus Metropolitan Housing Authority in Ohio. Overall, we remained very positive about CGI's outlook as we see continued signs of an improving market, increasing demand for system integration and consulting, and a robust pipeline of IT and BPS outsourcing opportunities. We firmly intend to remain one of this industries' top-performing companies. Thank you and at this point, I would like to turn the call to Michael Roach, CGI's President and COO to update you on our integration of AMS.

Thank you Serge, and good morning everyone. I know many of you on the call have expressed a keen interest in the various update on the CGI-AMS integration milestones achieved today. Through a dedicated team effort we've accomplished an enormous amount of integration work, since the closing of the transaction less than three months ago. As I mentioned on our last call, CGI is very skilled at integrating acquisitions, and this expertise enabled us to consistently realize the necessary synergies according to plan. We're currently now with the integration of AMS in the systematic manner simultaneously addressing client and member requirements, while aggressively harvesting significant business synergies both top and bottom line. To date, a number of steps have been taken to this end. We've integrated AMS into CGI's organizational structure in the US and Europe, while restructuring as necessary to best serve our clients, and to win new business in our expanded markets. We've added leadership, scale, and scope to our global operations. For example, in addition to our three business units in Boston, New York, and Cleveland, we now have four additional and expanded business units in the US responsible for Washington, Chicago, US West, and US South. These units now comprise a total network of some 42 offices coast-to-coast, We've also added dedicated business units in Europe and Asia, including Spain, Germany, and Australia. Our goal forward operating structure is based on CGI's metro market approach. Business units are now empowered to take the lead role in managing the client relationship in accordance with CGI's decentralized model. We've recently introduced CGI's sales final tracking process, and our new professionals are now focused on bringing the best of our new capabilities to existing and prospective client. We have now joined CGI-AMS business development meetings to identify vertical sector opportunities in telecom, financial services, and government.

As part of the integration process CGI-AMS business development people are undergoing sales training for IT outsourcing. And each business unit leader is in the process of identifying large IT outsourcing opportunities. To provide further insight in the progress made to date with the integration, we've already integrated the AMS network, data centers, and real estate infrastructure in the CGI's global infrastructure. These actions will result in lower operating cost, and will gradually increase our bottom line and competitive position. In addition, we've held more than 50 team harmonization sessions with former AMS employees to explain their role within CGI, and facilitate their smooth integration into the company. We've also held numerous internal road shows to explain CGI strategy and objectives in metro centers including New Jersey, New York, Sacramento, Cleveland, and Chicago, and three such meetings in Fairfax, Virginia. We are currently implementing the CGI management approach across all former AMS operations. By the end of calendar 2004, we'll have implemented the CGI management foundation throughout all of our new and expanded business units. In first six months of calendar 2005, we've planned to introduce ISO 9001quality certification throughout the former AMS operations. In addition to the infrastructure savings I mentioned earlier, a significant portion of the target synergies will come from reducing corporate overhead and duplications. In this regard, we've already eliminated more than 500 non-billable positions, which will again reduce our operating expense run rate in future quarters. Now we have implemented our decentralized model, and sized our operations to this model, we are now in a position to actively build the operation teams. In fact, we have hired 250 new members for billable positions in the US alone. Our ongoing integration of AMS is progressing well within our initial plan. I would now like to turn the call back to Serge. Serge?

Thank you, Mike. In summary, we are excited about the potential resulting from our increased leadership, scale and scope into US and Europe. We are now in a position to win new large system integration, and allows also I think attracting now we're at three main geographic markets again Canada, US, and Europe. Thank you for your time and at this point we would be happy to take any question you might have.

Thank you. We will now take questions from the telephone lines. If you have any question, please press star one on your telephone keypad. If you are using a speakerphone, please lift the handset and then press star one. If at anytime you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Mr. Paul Steep from Scotia Capital. Please go ahead.

Good morning. Serge or Michael, maybe you could talk a little bit the US, about the sentiment there, especially in the government. I know there has been some press I guess in this area about off shoring. What you are actually experiencing when you go in and talk to the clients, and how that's progressed over the quarter?

Thanks Paul and you are quite right. I think the whole questioning of off shoring remains very topical in North America, and across a lot other markets. I guess our position would be quite simply -- first this phenomenon has really been driven by the clients in the market. So our approach is frankly, we sit down with our clients; we work with them to find the best solution for them, and we work within the parameters given to us by the clients. In the case of governments, and in particular US governments, state and local, where they are not interested in using the global delivery model, this is not a problem for us. In fact, the one case that got blown up which was California, we bid that business competitively with US resources; we won that business competitively, and that contract will be delivered in California by US employees of CGI. So, again we are not seeing any impact on our business as result of this press, because again our approach is to take our lead from the client demand. If the client wants the work done on their site or on our site or in the state or in the US, we deliver there. So, again we are frankly paying attention to our clients, and not overly reacting to what we hear and read in the press.

Okay. And then secondly, I guess, maybe you could continue on the health of the assigned C market, particularly at the end of the quarter if you'd seen any turndown on utilization or billing rates? Obviously, vendors everyone know to fine edge these days, what you are seeing at least in your key markets?

I haven't really seen that. I mean I know you are probably referring -- I think some of the software players saw a bit of dip there in the quarter, but we didn't see that on our side. Our utilization rates remain healthy, and our billing rates are holding well, and in fact with AMS, their billing rates are little bit higher. So, we are getting some advantage to that. But no, we haven't seen that in our marketplace. Paul.

You have seen the new bookings last quarter for a total value -- for a value of $1.2b. So, and then looking at the evolution, our sales follow both in number of approximate days and in terms of value, it is growing. And again, it grew again compared to Q2.

Okay. Then either Serge or Andre, maybe you could talk a little bit, you've called the number of contracts head of the portfolio this quarter that weren't profitable. Maybe if you could talk about the size and the number of those deals that were there, and how much more trimming there might be if any that needs to sort of occur?

On a run rate basis, it was approximately yearly, I mean annual, it was approximately $40m, that contract we had to -- and it was contracts coming with acquisition.

Okay, and then finally I guess just on the AMS side of things, Michael alluded the one number, but 500 staff leavings in net, I guess we are looking at about 250 staff gone from AMS, how many more staff would you look to sort of redeploy at the organization, I guess?

A couple of points, just for clarification. What I said is, we eliminated over 500 non-billable positions Paul, and we hired 250 people for billable positions. So, what you should take from that is we've reduced our expense run rate, and on the other side we are seeing the demand on the billable side. So we've been hiring there. So relative to our plan on synergies, we are taking down the expense run rate, and we are also working on the revenue line. As far as any additional right sizing, I would say for the most part were done, we still may have some people who are in transition mode where we have some services and plans to consolidate with existing operations, but we are keeping those people in a transition mode. So there could be, there will be some going forward, but for the most part the bulk of it is done and again if you go back to the 500 positions we eliminated, they come form moving from a highly centralized operational model that AMS had to the more decentralized model that CGI has, and in addition they are obviously duplicate functions in two publicly traded companies that have been eliminated.

Great, thank you.

Thank you.

Thank you, the next question is from Scott Penner from TD Newcrest, please go ahead.

Thank you, just on the bookings this quarter, can you give us an idea of what percentage or dollar value was from new customers as opposed to extensions and renewal?

Well on the bookings, it's Mike. If look at, a good portion of those bookings came from the two outsourcing opportunities, Cox, and Cott, so for the most part obviously they are new outsourcing clients, but I would say roughly probably 60:40.

60:40 new?

Yes.

Okay. And just in terms of the renewals that you are getting, have you seen any sort of customers wanting to change the scope, either down or up or any pricing pressure?

No, again, every client situation is unique, but again we are not seeing any material trend there, each one is a case by case, and we are not seeing anything there that would be concerning.

Okay and I guess, lastly just sort of from a hypothetical stand point, Serge, you talked of a lot of AMS opportunities, many of them seem to be sort of related to either new systems or systems upgrades, how do you plan that transition that discussion into one of more of a full IT outsourcing?

Well, In fact, generally speaking, Scott, this is the same kind of -- the idea is to replicate what we have done with CGI over years here, and do the same thing with the new people coming from AMS there, they have very, very strong relationship with their clients and a very strong proportion of their clients are business people. And then here in the transforming that contractual relationship with the clients from the short-term contracts, which is system integration contract and consulting, to an outsourcing contract in all general thing, more value for the clients and at the same time recurring income for CGI. You know in ten years, for CGI, we went from a system integration kind of an

AMS was, to a system integration company, also but we had just before transaction with AMS, we had this more than 70% of our business coming from outsourcing contracts. This is exact same objective that we have in transforming at the AMS, right. If you know, I have talked about the hot contract, the US $55m, and for those who were there when we acquired IMR, we had -- it was the exact same objective, they had IMR, they had very good practice in this area, and then in announcing that we have signed those hot contract, so you see that we have transformed gradually at this practice in order to become not only a system integration business, but also a system integration business and an outsourcer. This is the exact same objective we had with the acquisition of AMS. This maybe a -- to add to that, I think, there is two other things there. One is, to do an outsourcing deal you need to have deep relationships and AMS has a lot of deep and long standing relationships. This company has been around in the US for a long time. So, we're starting from a good basis in terms of relationships and then secondly, if you looked at AMS's strategic plan, they had an obvious gap in their plan relative to been able to conduct outsourcing opportunity. So, they have a situation where the clients have been looking for this from AMS and we're able to fill that void. So, those are two other factors to add to Serge's point -- why we -- feel we have some great opportunities here.

All right. Thank you.

Thank you. The next question is from Dennis Dos Santos from First Associate Investment. Please go ahead.

Hi, good morning. Just on the organic growth, can we get some indication of where you think you're going to lineup on Q4's organic growth. Do you expect it to return positive here quarter-over-quarter?

Should be the case. Be careful, you know Dennis, we need to list the relative ways that of the AMS, which is rather a system integrator there is just a seasonality factor. When you compare with -- I would say that when you compare year-over-year should be very good -- should be good, sequentially, so we are still analyzing that. But, having lined that, we've confirmed the guidance for you.

Yes. Now, if I look at the guidance for the year and then just back out the nine-month numbers, we got a Q4 revenue rate between $970m and $1.2b. Is it more towards -- are you leaning more towards the low-end if we get no sequential growth organically?

No. So, I would like -- we just reiterated you know those guidance? And if you don't mind to know -- we're not going to comment anymore on that.

Okay. And do you expect any margin improvement in Q4? Based on AMS acquisition?

We said that and you've heard what we said, okay. So, look at in the past what we did with acquisition and we also said that we would come back with it to gradually improve our net margins. Look at what we've done there in the past and this is what we're targeting, add all improvement. -

But, do you expect with a -- AMS is a little bit different acquisition for some of the things you've done before. Do you expect the -- what I mean is in terms of just the -- of the US exposure and someone -- do you expect the progression of the margin to be similar with the AMS acquisition as it was in the others or is it going to be more of a step function where it goes a couple of quarters and then steps up and goes a couple of quarters?

We had announced that the transaction would be a six to nine-month period and we also said that we were well ahead on our plans. So, you should see the same kind of improvement you've seen with -- when we did the economy

.

Okay. That's terrific C apex

. Thank you very much.

That you for your congratulation.

Thank you. The next question is from Perry

from

Securities. Please go ahead.

Yes. Good mornings, and congratulation for your quarter, everybody.

Thank you

.

A couple of questions here. First of all, in the quarter in 3Q you disclosed about $729m of worth of contract signed. And your booking is standing close to $1.2b. So, there's a difference -- the roughly $459m in coming entirely from AMS or was there also some contact that you won and you couldn't announce?

It's a combination of contract that we've announced and contract that we cannot announce, that too is all under that.

Okay. And in that booking is there any booking coming from AMS and what would be the amount?

Like -- I was saying in the presentation. Yes, there is a booking coming from AMS, because we didn't -- some contract have not been announced, but I think certainly this presentation this morning refer to some contract that we've singed with the AMS client -- client base.

Okay. And if we look at the acceleration in booking in 3Q compared to 2Q and 3Q last year. Do you believe it's sustainable entering 4Q or is it going to cool of a little bit?

Well, again it's pretty much a timing thing, these outsourcing deals aren't product sales -- so we're -- they can slip over a quarter, but we're certainly, actively pursuing as we've said before. A number of healthy opportunities whether they all close in the quarter or not at this point. I'm not sure we want to confirm that till we actually have signings.

Okay.

It is important to mention though that the pipeline -- I use the word vibrant.

Okay.

Also sign contracts and system integrations. So, it's reflecting a much better market condition.

Okay. And just to go back on Paul's question about the churning of contracts, you mentioned it was worth $40m year-over-year, but does that include also some of the asset divestitures or it's only contract because your divested some of the companies you acquired through Cognicase so I wanted to know if it's --

Just contracts.

Just contracts. So, if we include some of the companies that are divested, what would be the entire revenue base that you divested year-over-year?

Over $100m.

Over $100m?

Yes.

Okay.

Now, as far as you know, Perry that is part of that ongoing process we have -- when we told you that we would constantly revise our operations in order to be sure that we would divest from underperforming assets and/or to be sure that the --

said there are between $40m and $60m revenue from some assets that they have and also it's excluding some contracts that we have -- certain things end up very well. And also, we did the divestment of StarQuote eventually this year.

Okay. I understand I just wanted to make sure that we had the right number here. And moving onto your MD&A on page seven, you talk about your organic growth. And you mentioned that year-over-year essentially it's flat and the external growth is coming from Cognicase, UAB, and AMS, but in Q3 of last year, you had already integrated UAB and Cognicase. So, if we only consider AMS as being the acquired company here in this quarter, what would have been your organic growth year-over-year?

I am not sure because --

In your Q3 of last year Andre, you already had UAB and Cognicase integrated into your result, as you started --

Yes. It was part of the acquisition.

Yes, but from the year-over-year standpoint --

It's still part of the acquisition.

Okay. So, even though --

We are working with excluding acquisitions.

Okay. So, even though you had it already in Q3 last year you still consider this as acquired growth.

Yes.

Okay. In the integration process of AMS, Mike can you tell or what did you find that was the most challenging portion of the acquisition of AMS?

No, I think -- actually given that we have done so many of these -- to be honest we have a very solid process here. In any of these time that's really your biggest challenge and of course there is always a very sensitivity around eliminating positions, but as I said in my comments frankly this acquisition is -- integration is going very well. I mean we have moved very rapidly here on the big cost drivers and on capturing the synergy. So, I haven't really seen anything that would be concerning or surprising on this one.

Okay. And just one last question, if you look at the backlog, what would be the breakdown between the backlog in the US and Canada?

It's not something that --

Maybe we could come back with that.

Yes, but at this point we don't -- because our backlog on the client base, we don't communicate that by country, because some contracts are signed with client base in US and we do the work in Canada. So, we don't provide that information at this point.

Okay. Thank you very much.

Thank you.

Thank you. The next question is from Paul Lechem from CIBC World Markets. Please go ahead.

Thank you.

Before you start just say about the backlog, I think when we do an announcement you can see where it's coming from, from the client base. In fact, we do announce -- we did announce contracts coming from US based clients. If you look at our

or so you can try that, but we don't provide an exact number by country or

Okay thanks. Could you talk a little bit about your BPO business is down year over year by 9%, I think you said in the notes. Can you talk about what's going on there and what the plans are for that business?

Well, the BPO business continues to be a very key focus for our company because we do see this as an extension of the information technology outsourcing. And so, again as we mentioned and Serge mentioned, you know, we're essentially in the -- in a number of aspects of BPO, we announced a number of deals here on the hard government side in the US. We're also in the insurance claims business, the P&C industry, as you may know, have had some challenges on a claim side. We're seeing a little bit of that ripple through on our volume side, but we're able to maintain our emergence quarter over quarter, as you've seen there. So, again, you know, it remains a key piece of our strategy. We think that the demand over time will continue there and we continue to look to build out our capabilities in that space.

As Andre said, you know, we are in the midst of our strategy planning for the coming year and you should see a focus on this division.

What was behind the year over year decline in that division?

It was that exercising of, examining, analyzing all the underperforming contracts.

Can you elaborate on that at all, was it just poor.

....

When we acquired, you know, a company for instance in US, was inspire, they had some contracts and there it was, if you recall there was a company which was under

. And so we've cancelled contracts, you know, which were not along with the CGI standards in terms of profitability.

It is, as I said, you know, and so this is an ongoing process we have in the company, when we acquire a company, one of the first things we got to do is to be sure that we're going to come back to you in telling you that we have improved our percentage in terms of net margin. So, that's why -- this is why we have started that program last year and the series of announcement we've got. It was to, when we are disposing those assets and when we've - let's see -- in negotiating also on the contract side with clients, but either I would have to terminate those contracts or to renew, but with better pricing conditions.

Okay. In the notes you also mentioned that you're going to start expensing stock options at the beginning of fiscal '05?

Yes. It would be, as you know, with the

GAAP, we have to do it. As of now, we have provided the information via an outlook in our financial statement.

So, it looks like there's about a $0.5 difference if you've been expensing in this year to date for the nine months. So, the guidance you're giving for next year is to say that the net margin has improved - expected to improve gradually over this year. Does that incorporate the stock option expensing for next year?

No, on the same basis.

Okay, so when we put that and we might actually expect the net margin to decline slightly next year?

Yes, we'll have to come back to you on that because we know that Ontario has GAAP because the disadvantage is not in US in terms of expensing the options.

Yes, but you know, on the comparable side, when we compare next year, okay, we'll use the same GAAP so the $0.5 expense this year okay, will be part of the comparable with next year. So, based on that, you will continue to see the improvement, okay, on the net earnings and net earnings margin.

Do you expect the same kind of differential between the - or the same kind of expense from the stock options next year as this year?

We'll see. You know, it's difficult to ensure exactly, but we would be around that level, you know, -- around the same level, if we don’t see any major increase there or beyond.

And do you anticipate breaking it out separately as the separate line items for next year?

It would be a - we well go with that, I think it's a separate line as I recall well, as on expense on the GAAP. So, we would follow the presentation.

Okay.

What I have to say here and as I said we are in the middle of our planning process. We are as I would we speak we are thinking about it. Okay, and so are we going to continue with the option plan, are we going to do what restricted units, please let us -- we need sometime to come back to you and we would like to take the time to analyze it very, very carefully if you don't mind. Okay. We will come back.

All right and it's one of the options you are contemplating switching to US GAAP for next year?

We are thinking about it. Let us the time to -- and we'll come back to you. No, we are not contemplating that, but let us come back to you on the option plan. Okay.

Okay. Thank you.

Thank you.

Thank you. The next question is from Steven Li from Raymond James. Please go ahead.

Thank you. In your MDA you mentioned the decrease in revenues from the government sector sequentially. Was that related to weakness in AMS state and local business or was it just contracts winding down?

No. It's not related to our US business. It's more related to the fact as you know in Canada we've had a number of elections including federally, where during that period there is not the same normal flow of business and contracts. So, we see that as a temporary situation, but again we've had a number of elections in some of our major client areas in Canada.

So, you would expect next quarter to be up sequentially?

Well, again whether it's next quarter, I mean I can't determine the speed at which governments move Steven.

Okay. Maybe a question for Andre, when you say AMS has not achieved all the synergies yet, does that mean within six to nine months your net margins could be at 7% again? Thank you.

It's a good question. As we told you, the margin would continue to improve gradually. Okay, and as we will get the benefit of that integration process and all of the efficiency, we can derive from that.

Okay. Thank you.

Okay. Thank you.

Thank you. The next question is from David Wright from BMO Nesbitt Burns. Please go ahead.

Thank you. Hi David.

Yes. Good morning. Thank you. Maybe I could just follow-up on that previous question is that you were running at 7% net margin. And, is it safe to assume that the business that you purchased with AMS should have an accretive margin period and therefore six to nine months down the road you should be running at a higher margin?

We announced already to you that we are well within the plan.

Right.

And that the accretion rate of between 15% and 20% on the EPS basis would be debt. And we announced that we had a transaction period between six to nine months, and we told you that we were well within the plan.

Right. Okay. The other question about backlog, which I -- not backlog, but your topline forecast, which I thought was a fair question. So, I just want to come back to it, which was you have given us the annual numbers and we have the nine months to date so if you subtract the two out it would seem that there is going to be a significant

to revenue in the September quarter. Now, realizing that you haven't finished the September quarter yet, but does that make sense that there should be at least $100m left in revenues that's what you are planning on in the September quarter because without it you are not going at the bottom end of your range.

Don't forget we had another month of AMS revenue. We didn't have in quarter three.

Right. So, it's reasonable to assume that that's what we should see.

As Serge said and Andre said, we are -- at this point staying to our guidance.

Okay. It sounds like you are hedging a bit. At the same time, we are all watching all these various software companies missing their numbers. So, it's creating kind of a nervous environment and yet the services companies seem to be doing well. You certainly had a number of announcements for the June quarter of all the contracts. So, it seems services guys are doing fairly well.

That's it.

Okay.

We told you that we were confident to meet the guidance.

Okay. Good. On the research expense line -- I was thinking the type of company that AMS is -- I mean it does have application so that there would be R&D and yet sequentially R&D fell in the quarter. Now what should I read into that?

I think that you should read into it, that it's very early in the integration process, two as we said in the last call and much of the product R&D related to products in AMS has just been refreshed previous to the acquisition, so as you see in David and some of the announcements that we made there, we are actually selling an upgrading product, so the R&D investments have been made, doesn't mean they are not ongoing R&D and there would be changes down the road, but that's essentially what you are seeing there.

Okay, so I guess with my model I have assumed that your R&D expense going forward with AMS would be higher than on average what has been in the past. Is that a relatively safe assumption?

Yes.

Okay, thank you and my last question is just on your balance sheet, kind of since you have covered off top line issues. On the balance sheet, though one number that changed more than I expected was the other intangibles and other long-term assets number up over $700m. I was just wondering the various elements that went into the changes in the quarter?

I would see the major element is the intangible volatility to the acquisition of AMS.

Okay.

As you know we have to allocate within the purchase

value relative to software guiding relationship and that type of things, so when it's a - it's the major if I would say 90% of the increase there.

Okay, and the other long-term assets what would that be?

Yes, it's what it does to the software and the client relationship does.

Okay, thank you very much for your answers.

So, we are looking at how we can provide that confirmation to be more specific or being related to that, but at the same time we managed to have our balance sheet which is not too large or to have too many items on this too. But we are trying to put that very clean.

Certainly you are very active on the corporate fund and acquisition, so it defeats complications. Thank you Dore.

Okay, thank you.

Thank you, the next question is from Richard See from National Bank Financial, please go ahead.

Yes, with respect to your purchase price equation here, you guys listed that I think $59.3m in a crude integration charges and deferred credits. How much of that is related to integration charges. And secondly, what is the associated operating cost that is going to be taken out as a result of this integration charge?

Sorry, could you repeat the first part of the question?

Yes, if you look at your, I think it's note 04, you basically have the purchase price equation adjustments, the AMS acquisition, and you look at the line and crude integration charges in the amount of $59.3m. There are other deferred credits and I just wanted to figure out now what piece of that is related to integration purely, and related to that when you take that charge, how much is going to be taken out in terms of operating cost?

The answer to the first part of the question, there is an excess of $30m and that's representing the provisions that we have to set up to access facilities that were rendered or controlled by AMS before.

Okay.

And

.

And obviously is this

there as well?

No, it just took, this is one, most of that long term.

Okay.

Because the...

So how much you are going to have in the saving as a result of this charging, in terms of the annual operating costs, it

to be that 39?

Might be selective. Well I think essentially if you look at the whole integration relative to what the total of provision would be, we will take over the operation, enough synergies to drive the 15% to 20% equation rate that we identified Richard, and I have mentioned that we are well on track to do that.

Okay, may be I will ask a question I find, just on your pricing environment they don't want to believe in the point that in terms of the three segments IPO, BPO, and system integration, can you give us a sense of which segment tends to be the strongest in terms of pricing and which one seems to be the weakest, and the worst thing I think the BPO side is being fairly weak and system integration is fairly strong, is that something you are seeing on your side as well?

Well, again we are certainly seeing a total relative to the year ago, I would think that the IT systems integration workers are starting to come back especially in the United States where I think the total market has improved. I wouldn't want to generalize about the BPO services, I did say that in the insurance claims related basis, there is a little softness in the number of claims, which is an industry wide phenomena

But it is again, as I mentioned we are concentrating on making sure that we have a healthy bottom line in that situation, Richard.

Okay. And finally, the run rate in the US seems to -- I guess anecdotally seems to be improving for you guys, versus last year. Is that the case I mean AMS contributed to that?

Again, we would expect that to continue to increase just because of having the scale and scope alone, I would relative to the AMS since its really early and meanwhile we are only into about 8 to 10 weeks. But again our expectation is, yes, it would and we did announce a number of wins in the quarter related to AMS, and they have also just by virtue of adding their funnel to our funnel has increased the number of opportunities and the value of those opportunities. So, it's been a very positive experience in terms of the lead indicators relative to adding AMS.

Okay, great. Thanks.

Thank you.

Thank you. The next question is from Cynthia Houlton from RBC Capital Markets. Please go ahead.

I just wanted to ask you a little bit about in terms of the offshore business. I know something that I've heard a lot of other companies and prior to your reporting talk about growth and demand in that for a kind of lower cost application services, what worry us is headcount at the end of the quarter in terms of what's your India operation?

And our headcounts stayed roughly around 650 number, but again I think we said in our earlier calls, we see that growing 2000 by year end and our pipeline would suggest that we are making progress towards that number.

Okay. And then, in terms of your -- as we look at your revenue segments of IT services, the VPS and then be, the system integration, how do we -- kind of think about those services in terms of where is the -- or maybe looking new opportunities in terms of the demand for lower cost or kind of multi delivery, I mean kind of what you are seeing in that marketplace?

Well, again I think, certainly in the outsourcing business having the ability to offer a global delivery model is advantageous. I mean if you look at some of the announcements we made this quarter, these are multinational corporations they are processing over numerous countries in geographic. We have the capability to follow our clients, from follow their operations internationally, which is a positive. So, I would say that clearly in the outsourcing business this is where you will see the bigger part of that. Also, in the application support area, yes, again and I think Serge has covered this off in the past. The India offshore is not a fantasy here, you cannot take a move high level job, you are needing a high onsite client facing capability and again I referenced back to a comment that we made we now have 42 offices across the US. So, we've got a large and growing footprint in the US and therefore, again we are able to offer, not only offshore but homeshore capabilities of moving work to lower cost areas in United States is an example or in the Canada is an example. So, I think on that side that we are pretty capable in terms of stepping up to client demands and market demands in those areas.

By the way--?

Halifax, Cynthia is a good example. I mean, 24 months ago in Halifax we had 13 people, from September here between a number of outsourcing deals we have won in Halifax area, plus the Manulife we are going to be over 500 people in Halifax. So, that's an other indicator of how fast that's had been broken.

You know, Cynthia just to complete likes - we have a kind of -- the way we have approached that with all our clients, we always offer four scenarios a kind of cafeteria approach. One is the -- and those scenarios are all the same. So, let us say in talking to our US clients we are going to offer them and it's going to be the client decision. We are going to offer them in order to do the work out of the let's say locally. Second scenario is going to be the near shore. So, it mean, when I see locally, if we have a client in New York and deployed that the work would be done out of New York.

Yes. Okay, the second scenario is going to be the offshore -- the scenario of off shoring to India for instance, okay? Then, everything which is non-customer facing -- that's non-customer facing, and so they are going to be done or they could be done out of India. The third scenario is going to be the near shore activities. So, then again the same client in New York is going to or a portion of the worker -- the non-customer facing work is going to be done out of Canada, Halifax, Montreal, Tornado, that's what we call near shoring. Then, the fourth option is what we call in shoring. I'll explain what we have in mind and also let's say -- and namely with government. And let's say in -- if you have a given job in New York again, maybe some of the people would like to get that work done out of a, lets see, more stable, data used

than New York, but it would be again in the state of New York. Follow me?

Yes. And then, just as a follow up in terms of -- I understand though the contract that was terminated it's a kind of performance, and if we look at the AMS acquisition and under the base of contracts, could we anticipate or should we anticipate any more either divestitures of AMS' business and/or under performing contracts kind of over the next couple of quarters, I mean in terms of your review of both AMS and the core business, are there other contracts you're reviewing?

In the case of AMS, if you look at -- generally speaking, their gross margin was much better than other companies we have recorded in the past, okay? So, it means that relatively speaking, there is -- it is much low work in terms of number of underperforming contracts. But there are some activities as we announced at the last quarter on the run rate of $100m per year, Canadian so, which could be identified.

Thank you.

Welcome.

Thank you. Then next question is from Paul Bradley from Fraser Mackenzie. Please go ahead.

Yes, good morning. You've given a number for the number of employees in India. I just wonder if you could fill out the roster and give the relative number of employees in Canada, US, and Europe?

We have 16,500 members in Canada, we have 7,500 members serving the US market including India, and we have 2,200 members in Europe and in Australia.

All right, including Australia. If you look across those people, what would be the average utilization rate for say Q3?

Again, it's very difficult to do because there's all different lines of business you got BPS, you got, you know, outsourcing agreements, you got systems integration consulting. So --

Well, let's pick the systems integration and consulting line is the one that maybe

assumed.

I don't have a very precise answer, but I would say that it is a same kind of, there is no change with the QA2 here.

Okay. And in terms of an absolute numbers, 70%?

That's more than that.

80 some thing?

Wait a minute Andy. [MULTIPLE SPEAKER]

Again, you got to -- but Paul, you got to look at again, you know, whether you include people that are in outsourcing. Could you do systems integration in outsourcing line as far as the higher utilization rates--

Yes. Outsourcing lies within our --

one that represent in the outsourcing business.

Okay. So, what would be if I wanted to understand I guess the relative number billable people to people who won't billable at the moment? What's the best way of look that in the terms you would use?

Paul, there is no short answer here unfortunately. It deals with the type -- the line of business in doing the outsourcing business, both in IT and BPO theoretically everybody there is billable, and it deals with the target ratio that we have in the -- so, obviously the management team in the outsourcing divisions, let's see, or instead outsourcing practice, it is in much, much lower than in the systems integration business because it is stable. The other target ratios, which are the admin cost and the operating cost, it is relatively speaking, it is the same

system integration. But then also, you will need to conduct a total analysis on that in each of the businesses, and then if you where at the last IR meeting.

We showed a slide, showing all those target ratios and what we target.

Okay, I can go back and read this about, and obviously you are holding another one. Just in terms of sort of turnover rate on employees, clearly you've got some involuntary turnover, you've got some voluntary turnover there, what will be the rough number there for the Q3?

The Q3 would be a little higher in the aggregate that we would have been in Q2 obviously because of the AMS integration, but we normally run, you know, in the 8 to 9% level as a company.

Okay.

Which is low by the industry standard.

Yes it is, and I just wanted, -- I had heard that a number of companies with the Indian operations find that turnover there is higher than the industry averages, that you have experienced or you still in a buildup phase and people just coming in?

We are not seeing as much of that, again I think one of the reason is, don't forget that a lot of these are actually our employees, they are members of the firm, they are not contract people who, so that fits pretty well with our overall rate again, with a decentralized model, you know, a lot of our people see themselves as being tired of a local smaller entity, so there is a higher degree of loyalty and long term perspective than in a lot of other companies.

Okay, I am just jumping back, I know you have been asked a lot of questions on this. Looking at the pipeline, or may be a little bit further out in the pipeline, the perspective type of business, how would you describe that in such -- a sort of terms of size and that type of business opportunities that are available to be bid on at the moment?

Well again I think, it is like -- I think you look at it, you know, you look at the size of the outsourcing deals we did this quarter, I mean, obviously we are well positioned and qualified to win those kind of deals, and I think the other point that Serge made which is significant, we are now well positioned and improving the ability to win them in our key geographic areas. The second point I would say is, given the added scale, that we have brought with AMS here, again, you know, we are up to 25,000 members, we would our sales now, to be also qualified for larger deals in the same geographies and that's the direction that we are obviously taking.

Okay, I guess my question is little more.

Yes just to be, a bit, to provide you with more color here. When you look at CGI in Canada with the critical math we have, so we are qualified for very very large initiatives in terms of IT outsourcing. You know, look at what we have announced over the last couple years, large IT outsourcing contract $1b, you know, $1.5b, when you look at that, these are our main Canada

and you see that size of that contract, obviously we were -- relatively speaking, we were much smaller in the US market. And so it was much tougher to qualify the company because it did matter of the critical math, you know, so when you give in market, So if you are the CEO of the company based in New York, you have one thousand IT professionals in your organization, and then if you look at CGI and we have, lets say just one hundred people in New York, so you are going to say the risk is too high, so with the new acquisition of AMS, so we now have that critical maths, so it means that we are going to be much more qualified to get those or to run after those larger outsourcing initiatives.

Right Okay. I can see that that you yield the appropriate scale now for the type of business out there, I guess I was trying to get more at, in terms of the type business you are actually seeing, I mean, the Cott still is obviously a large outsourcing deal, are there many of those out there at the movement or is there more business at smaller transaction sizes.

No, we kept, by blind size, and know that by blind as I said as we have already explained it in the past, the total in terms of value, the total value of all the opportunities, we are working on, so we apply a success rate on that, and so obviously we haven't adjusted that, you know, since the AMS acquisition, but I said that it was -- that that pipeline was a vibrant.

Okay, and one last question not to over delay about the point, clearly there are outsourcing advisory firms that are getting involved in the vendor selection process, are you seeing more of that, and is that a positive or negative development?

I think this probably a growth industry which I think is probably a test of the fact that others also see the growth opportunity in outsourcing. I don't again -- you can't really generalize on these things, as I mean that is case-by-case, but you know, Paul, I think it's part of the industry, we work with them all, we have got good recognition from them all, but it's kind of part of the business.

Okay, I just wonder whether it slows up the process because clearly somebody else is involved between you and the ultimate end customer.

Ideally, just for you to know we - this is one source of the obviously.

Okay.

And the ones we have announced, the three large ones in '02 were sole source.

Okay.

And we like those sole sources.

Right, one last question. Just want to clarify here, there isn't any BPO work being done out of your Indian operation at the moment, that's strictly application, maintenance, and development.

Yes, strictly.

Okay, thank you very much.

Better.

Operator, are there any more questions.

Yes, we still have questions.

Okay, I think we will take one more, before signing off.

So, the next question is from Martin

from UBS, please go ahead.

Thank you, just a couple of quick ones. Prior to your acquisition of the portions of AMS that you took over, we were seeing a pretty stagnant organic growth at those portions of AMS. Can you just tell me what you are doing to try to reverse that - I mean it is the outsourcing of the established customers of AMS or is there anything else there?

Again, it's Michael. I think again if you look at AMS and where they had potentially strategic gaps clearly, they weren't in the position to take a lot of the follow-on revenue associated with some of their existing clients. They didn't have a track record or an orientation around even taking maintenance contracts associated with some of their solutions. So, the bigger opportunity there, I should say with the existing base is to grow out the revenue stream to not only provide the solution but be the systems integrator or do the application, maintenance outsourcing associated with that. So, that would be one comment. The second thing is, that gross selling in terms of bringing in some of our existing capabilities and solutions with our clients and vice versa and then the third area I should say is the outsourcing is to be able to work and leverage their relationships into more longer term contracts.

Okay, and also on the overall environment, you say you are seeing signs of an improving market. Could you may be break that down by verticals or by geography and offer some signs that you are seeing that things are improving.

Well again, it's - I think again you have to look at that relative to a period of time. I think if we take the US market, this year over the last year clearly improving economic trends. Canada, I think, it remains very strong that was strong last year, it's relatively the same situation this year and in Europe, I would say it's difficult to say only in that we also have much more sale and presence over there. So, in our case when we look at market conditions, we can look at it in a macro level but also in the micro level. So, we were getting into more opportunity this year than we did last year. So, whether that's market or our capabilities, frankly the end result to us is still opportunities for growth. As far as the verticals themselves, if you look at the verticals we are in, we are in there for a reason because that's where the majority of the IT spend and from that perceptive the financial vertical to government vertical we feel this remains strong and given the maths we are actually now much deeper in the telecom vertical and we do see some opportunities there in terms of growing our share of clients that AMS has.

Okay, that's great. Thank you.

Thank you.

Thank you. So, Miss do you want other question.

No, no I think that's well, I conclude with this (multiple speakers)

Unfortunately, we have an other meeting, so. Okay, just to conclude here, again the highlight, so l would like to reiterate the new positioning we have such as demonstrated by the announcement of the contract and we now are in a position to generate large also obtain contract. You know our key markets, Canada, US, and Europe. The second highlight is that just doing the arithmetic here and also we have just integrated the AMS result reflects the integration of AMS and just doing the arithmetic and the contraction was to a level of 6%, we were at 7.1 the last quarter. We think that it was - when we said that it was well ahead of the plan, so this machine of integrating in intergrading companies is very, very sophisticated and so we are very, very confident. Thank you very much for your help and we look forward to talk to you again for the next quarter. Thank you.(multiple speakers)

Thank you. The conference has now ended, please disconnect your lines at this time. Thank you for your participation and have a nice day.