CGI Inc (GIB) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the CGI conference call. I would now like to turn the conference over to the EVP and Chief Corporate Officer Paule Dore. Please, go ahead, Ms. Dore.

Thank you operator. Good morning everyone, thank you for joining our conference call to discuss our fourth quarter and year end fiscal 2004 financial results. With me today on the call are Serge Gordon, CGI's Chairman and CEO, Andre Imbeau EVP and CFO, and Michael Roach, President and COO, and Jacques Roy, SVP Finance and Treasury, and David Anderson, SVP and Corporate Controller. This conference call is also being broadcast on our website at www.cgi.com. Our fourth quarter release and MD&A are also on the side. We will have a more comprehensive MD&A for fiscal year '04 in the annual report. 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 events or results may differ materially. We refer you to our fourth quarter MD&A fiscal year '03 annual report and other documents filed with Securities's Commission in the U.S. and Canada, which identify factors that could cause actual results to differ materially from forward-looking statements. CGI disclaims any intent or obligation 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.

Respecting your time, we plan to keep this call to within an hour. Please, ask only one question at the time plus a follow-up if you wish and then we'll call on the next questioner. You may place another question when everyone wishes - - has had a turn. Now, I will turn the call over to Andre, who will review the highlights for the quarter and the year.

Thank you Paule and good morning, everyone. We discussed our revenue and net earnings for the fourth quarter and fiscal year on November 2nd. When we provided a primary release a day in advance of the results of BC, which include our revenue and earnings contribution in this release, we also provided guidance for fiscal 2005.

Today, I will recap highlights from the income statement, income statement and discuss the cash flow statement and balance sheet. First, a recap of the income statement. We have solid double digit revenue and earnings growth for both the year and quarter. For the year, revenue increased 20.8% to $3.24 billion from 2003. The foreign exchange rate had a negative impact of $60.1 million or 2.2% on revenue. Net earnings from continuing operation increased 20.7% to $210.8 million or 50 cents per share, while net earnings increased 23.8% to $219.6 million or 52 cents per share, compared with the year ago. The net earnings margin from continuing operation was 6.5%, the same as a year ago, despite five months of integrating AMS which had a lower margin.

The tax rate was 35%. Compared with 39.4% a year ago, the result of a more balance of distribution of earnings across our major geographic markets and a year-over-year decrease in the Canadian statutory tax rates. The tax rate is expected to be 35% in 2005. Including the expensing of stock options to begin in the first quarter of 2005. In Canada, stock options are not deductible for tax purposes. In the fourth quarter, revenue increased 39.9% to $959.2 million, and was up 10.6% sequentially over third quarter revenue of $867.1 million. The increase reflects new business and acquisition of AMS. In the quarter, on a constant dollar basis, organic growth was 5.8%, compared with a year ago and 3.4% sequentially. The sequential growth was despite seasonal cycles, mainly, reflecting summer vacations. Growth from acquisitions was 36.2% compared with a year ago, and 8.8% sequentially.

Turning to slide 6, in the fourth quarter, we delivered earnings before interest, income taxes and subject to significant influence and discontinue operations EBIT of $89.5 million. Up 8.6 million from the same quarter of last year and up $5 million from the third quarter. This was driven by the increase revenue from the acquisition of AMS and the start up from new outsourcing contracts. Sequentially,EBIT increased despite a 5.6 million impact due to seasonal factors. The EBIT margin for the fourth quarter was 9.3%, compared with 11.8% in last year fourth quarter, and 9.7% in this year, third quarter. The year-over-year reduction mainly reflects the integration of operation with AMS lower profitability and costs relative to start up of new contracts.

As you see in slide 7, net earnings from continuing operation in the quarter increased 22.1% to $58.5 million, compared with the same period of 2003, and 12.6% from net earnings in the third quarter. Meanwhile, the net earnings margin from continuing operation was 6.1%, compared with 6% in the third quarter. This increase was despite a $3.6 million after-tax impact due to seasonal factors on the sequential basis. We are very pleased with our growing net margin because it shows the success to date of our integration of AMS. Basic and dilutive earnings per share from continuing operation were 13 cents in the fourth quarter, compared with earnings per share of 12 cents in last year fourth quarter and in the fiscal 2004 third quarter.

Turning to the balance sheet, as you see on slide 8, we maintain a strong financial position while undertaking our larger acquisition to date. At year end, we had cash and cash equivalents of $206 million, compared with $83 million a year ago. And a low long-term debt to capitalization ratio of 16.6%. We place strong emphasis on cash management. During the quarter, we were able to reduce days sales outstanding or DSO to 53 days from 61 days in the previous quarter. This improvement in cash management reflects on other aspects of our successful integration of AMS. We see opportunities to improve this performance.

Turning to cash flow statement, slide 9, we are very pleased with the Company's ability to generate strong cash flow, even during the integration of a major acquisition. Operating cash flow for the year was $229.8 million, after one-time payment to U.S. tax authorities following the phase of AMS Defense and Intelligence Group as part of the AMS transaction. And the payment of integration costs while it refers to the acquisition. Without these payments, operating cash flow would have been close to $400 million, once again, the Company has demonstrated its ability to generate a good level of cash flow from operations. During the fourth quarter, CGI achieved $707.5 million of new contract wins, extensions and renewals less adjustments. As you see on slide 10, the backlog of signed contracts was $13 billion with a weighted average remaining contract term of 7.2 years, at September 30th, 2004.

Turning now to guidance, I would reiterate what we said last week. See slide 11, based on current market conditions and the opportunities we see in our markets, we provide the following guidance for fiscal year 2005. We expect to achieve growth in revenue of 20 to 28%, and growth in net earnings of 25 to 35%. After giving the (indiscernible - highly accented language) effect to expensing of stock options. This will represent revenue between $3.9 billion and $4.15 billion in earnings per share between 52 and 56 cents, after the expensings of stock options. Begins in the first quarter of fiscal year 2005, in accordance with Canadian's generally accounting accepted principal, GAAP, we will begin expensing stock options for comparison purposes with U.S. peers, which are not yet required to expense stock options under U.S. GAAP. We disclosed the effect of stock options expensing on our earnings per share, which is expected to be 5 cents in fiscal year 2005.

Serge will now address operations and markets.

Good morning. Thank you, Andre'. We are very pleased with the results for a year in the quarter. We continue to generate strong cash flow, maintaining a strong balance sheet and achieved an improving margin in the fourth quarter, while integrating our largest acquisition to date. This achievement further demonstrates the ability of our management team to integrate acquisitions as success very successfully. With the merger of AMS and CGI operations proceeding well, we can now plan to achieve 15 to 20% accretion, we have now shifted our focus completely to growth. And we have never been better positioned for growth. We have doubled our footprint in the U.S. and Europe, added a strong client relationships in the government, financial services and telecom verticals in U.S. and Europe, added leading business solutions, and strengthened our team of professionals which is now to 25,000 strong.

On a constant dollar basis, achieved 5.8% organic growth in the fourth quarter, compared with a year ago. And 3.4% on a sequential basis despite seasonal factors and while integrating a large acquisition. Over the last two quarters we generated over $1.9 billion of new bookings. For the year, bookings total $3 billion. Within the past week, we have announced significant contracts in the U.S.. We announced the signing of several contracts with centers for Medicare and Medicaid services, totaling over $100 million, U.S. Yesterday, we announced that we were one of 12 companies selected to bid on IT services potentially worth $980 million U.S, over 7 years under the U.S. Department of Justice services contract. This win reflects a new depth and breadth of CGI in the U.S..

Last week, we also announced the signing of a binding MOU for the purchase of their remaining 51% of AGTI. This further increases our capacity consulting in Quebec and western Canada, mainly in the government distribution and energy sectors. We, clearly, are seeing the effects of the strengthened market conditions. Our sales funnel (ph) of new operating days for system integration, consulting work, and work coming from existing outsourcing contracts, has been strengthening for a few quarters now. Our opportunities in terms of large outsourcing contracts, also increased significantly. Therefore, we have increased our pipeline of proposals on large outsourcing contracts to $7 billion from $5 billion adjusted for a success ratio. We anticipate a good level of organic growth in the future.

As Andre' noted earlier, we achieved operating cash flow of close to $400 million in 2004, before some one time items. This ability to generate strong cash flow supports the implementation of our growth strategy. With the AMS integration behind us, management is free to fully leverage each element of our growth strategy. As many of you know, our growth strategy has four pillars. Two pillars for organic growth and two pillars for growth through acquisition.

In closing, I want to reiterate that we are very pleased with our progress of the past year and are confident that we can continue to grow the market share through the execution of our growth strategy. The profitable growth strategy. Thank you for your attention and we would now be pleased to answer any questions. Operator?

(OPERATOR INSTRUCTIONS) The first question is from Scott Penner from TD Newcrest please, go ahead.

Thank you. Andre, just on the, the tax payment related to AMS, I see it was about $79 million. I was under the impression the original estimate was substantially higher than that, more like 170ish million Canadian. Am I right and what accounts for the difference?

You know, thank you for your question. You know, there is two payment that we have to do for - - related to that transaction. And the full evaluation of it was over $100 million of tax we have to pay. And we did a major part of it - - the fourth quarter and we'll have another payment to do in the first quarter of this fiscal year.

Okay. Maybe just to follow-up and clarify. The original estimate was about $250 million of quote-unquote, total integration expenses. It looks like there's been about $156 million or so spent so far. Has your original estimate changed or is that balance going to flow into the next couple of quarters?

Yes. But, you know, relative to the tax, the remaining amount that we have to pay is around $30 million Canadian, you know? For this quarter. And the rest would be relative - - the rest of the payments we would have to do would be related to the customer that would - - integration of process of payment and the corporation.

Okay. What is the remaining balance on just the pure integration part?

The remaining balance is actually identified in the footnotes in the financial statements. I don't have the--

Okay, that's fine, I can take a look. Thank you.

Thank you.

The next question is from Ed McGuire from Merrill Lynch. Please, go ahead.

Yes, good morning. Could you characterize your pipeline opportunities by vertical and whether you see any predominant trends either in the IT services or in outsourcing opportunities?

Thanks Ed it is Michael Roach. I'll take a crack at that. I think from the verticals it's pretty well spread across the major verticals although, I would say we're seeing a lot of activity in the U.S. Government market as witnessed I guess by those two announcements we just made. There seems to be increased opportunities for us in the U.S.. The kind of activity it's - - it seems to be picking up I should say in some of our major centers in Montreal and Washington, western Canada, we're actually hiring now to meet the demand and it's, again, coming from the major verticals that we operate the government and financial services being the two most prominent.

Okay. And just a follow-up on the DOJ opportunity. It looks like you were one of 12 companies selected to bid on this opportunity. What is the time line in terms of when contracts are expected to be awarded?

Yes, just again on that, there were about 46 firms bid on that. We were one of 12. Three of the firms that were chosen are relatively smaller firms and there were - - the remaining were large firms such as ourselves. It is the largest and most significant win of the G-wack (ph) in AMS history pre CGI and is really an indication from our perspective in listening to the client, that the added scale and scope of CGI is now qualifying us for these larger opportunities. It's over a six-year period and we would expect a number of those opportunities to be coming out in this fiscal year.

Okay. Thanks very much.

Thank you.

thank you, your next question is from Wojtek Nowak from Research Capital, please, go ahead.

Good morning. My first question is on bookings, could you give us a sense of what percentage of the full year bookings related to new contracts versus extensions or renewals please?

I will say most of the booking is relative to new contracts. I would say around 85% of the booking is relative to that.

Sorry was that 85%?

Yes. 85.

Thank you, second question is just on the BPS revenues. They appeared to have gone down sequentially. Can you give us color on that, please?

Yes, as I think you can see in the MD&A, half of that was due to currency. The other is half is a bit of a runoff business from the INspire acquisition of a couple of contracts that are timed there. I think what you're seeing is a bit of a seasonal impact. A good piece of the BPS is claims, insurance claims driven. They tend to frankly track with bad weather. So given that we have snow in Montreal today I'm expecting the claims to start to increase. They normally strengthen as we go through into the winter period. But claims generally in the insurance industry are down. But, again, I think we're seeing something of a seasonal impact and we expect it to strengthen again. I also take the opportunity to point out that a margins were very strong in the BPS group this year. And in the quarter. In fact, we had an EBIT margin of 17.5%. So I'm very pleased with that.

Great, thanks.

thank you. The next question is from Rajiv Das from Westwind Partners, please, go ahead.

Thank you, can you comment on the pricing and demand environment for system integration and consulting business, please, and what you're seeing in terms of utilization for the last couple of quarters and what your outlook is in that area?

In Canada, if I could break it out there Rajiv, given our size of our footprint in Canada, we have a lot of offers and a lot of coverage. Frankly, as the market increases there, we expect to get a bit of a disproportional share of that just because of our size and and scale in Canada. So as I said, we're seeing opportunities that are coming to the table now. And we're seeing that, as I say, in a number of our geographic areas which are causing us to actually go to the street and start to hire, as I mentioned in Montreal and western Canada, in Toronto and in Atlantic Canada, so we're seeing a sort of pretty good start of growth there. U.S, again, it's - - we have more system integration consulting now as a result of the AMS. We really haven't had a full 12 months to see what to expect there. But as I was pointing out, certainly, the wins that we've got over the last number of weeks I think is also an indication that there are growing opportunities in the U.S..

Okay. And then Andre, if you could just help us understand what happened with the Fireman's Fund contract. Just looking at the original contract it was worth about $380 million U.S. over 10 years, and the residual value of the contract after May of next year seems to be only $200 million Canadian. I'm trying to understand whether a lot of the work was front end loaded or did the contract end up being worked less then the 380 million originally estimated?

I'll answer that one. Rajiv, that contract as you know, when you just have to read the - - or to see the website of this company. It went from the reduced their cost significantly and then, so there was, first of all, there was a big currency impact, okay? And then we had adjusted the backlog accordingly over the last quarters. Which we do, you know, every quarter, obviously. In another sense, when we started that contract, the base line of their costs was 40 something - - 47 million, then when we got the contract, it was 38 million. We were at the level of 30 million, after all the cost reductions this is why we had put this contract under the list of underperforming assets and underperforming contracts. And then, for the wing, the request from our client, then we - - we were not able to lower the costs once more. So that's why the - - since we didn't match the cost reduction, our client was asking for, so we decided to and they decide to terminate the contract. As for the backlog, because of this situation with the client, we had reduced, you know, the total value of this contract on our backlog. And it has been done as we were negotiating and observing what was going on over there. So it means that the impact on our backlog, you know, when the decision was made to terminate the contract, it was at $200 million. .

Thanks.

Okay.

Yes.

The next question is from Richard Tse from National Bank Financial, go ahead.

Hey, guys, with respect to your, I guess, bookings or pipeline, you're saying that it's accelerating and you're moving the number up,but should we read this to mean that your actual deal assignings are going to accelerate over the coming - - let's call it year, given that these things typically take 6 to 18 months to close?

Well I think that's - - this is Mike, I think you're numbers are right. That's the duration it takes to close, so, again, we would expect over the year that those bookings would increase as a result of the larger backlog. If you look at the - - what's happened here, as we added the AMS now, we're adding more opportunities to the funnel. But they're at the early stages of the funnel. They have to move through the funnel, and that will take as you say, that will take 12 to 18 months.

So given that you've been saying recently that the pipeline has been strengthening, you are suggesting that the actual signs are going to accelerate here?

Yes. I think, again, when we look at relative to our guidance, we see that, you know, these opportunities will help us step up to the guidance that Andre provided.

Okay. And secondly, with respect to management, I think there's been some changes over the summer with some of your senior executives. I understand that Andre Nidote (ph) left. Could you maybe, elaborate on why he left? Was there a difference of opinion and strategy, given that he had a fairly senior position there?

No, no, you know not at all. We are growing the Company and so, we both, Andre and I, came to the conclusion that to pursue other interests, simply. And so nothing more then that, nothing more or less than that. It is Andre was the Chief Strategy Officer of CGI. It is a group of one guy by the way - - two guys. So then we realized over time so that I was heavily involved in the strategy planning of the deorganization, so, that myself. So, which means that we made the decision to pursue other interests or he made the decision to pursue other interests.

Great, thank you.

Pleasure.

Thank you. Your next question is from David Wright from BMO Nesbitt Burns, please, go ahead.

Thank you very much. Good morning.

Good morning.

I just wanted to go back to the BPS question. You were asked about the sequential change--

David could you speak up. We can hardly hear you.

Is that better?

That's better.

Okay. There we go. I was just wanted to come back to the BPS discussion on a sequential basis it would span a little bit. But I was just looking over a longer term, that business unit seems to have a lot of potential but I don't know if we're seeing significant growth out of that business unit. I just wondered if you could comment on the opportunity and what sort of growth you're expecting from that business unit over the coming year?

Well, again, we do believe, obviously, that there's significant growth opportunity there and I think you'll see those as we proceed through the year. We've been spending a lot of time on the acquisition of AMS in terms of focusing on that piece, David, and I think you will see that even out of that, we're seeing opportunities where we have IT relationships there that we're looking to extend into the BPS piece in areas like finance and accounting or human resources. So, we are looking to expand some of our reach there beyond what we have now in the pay roll and in the claims business. So, it's more of a timing issue for us. We think there's good opportunity there. We've been a little more cautious on the insurance side only because the market in the claims side has been pretty soft over the last 12 months or so. So we've been just seeing a little more cautious in that area until we see that turn up. So we've been focusing, as you can see, a lot on the bottom line in that business, it's generating good cash and good margins and we're taking a little more time to make sure sure we can find the right opportunities to grow that line of business. of business.

So is that the customers are demanding kind of better margins for them? So you're waiting for the economy to sort of turn in that business segment?

No. I think it's more in the case of claims, just more volume. The market itself is - - and you probably know - - people are not making a lot of insurance claims given the rates they are paying themselves. So the only claims being made are very large ones so the volume of claims are down and so, we're spending our time with this, as I say, you know, re-engineering the processes there and putting some automation in and driving our efficiency, looking for the right time, then, to add volume to that infrastructure and the right time will be when we see the volumes and the markets start to harden.

Okay. Thank you very much.

Thank you. The next question is from Ralph Garcia (ph) from Credit Suisse First Boston.

Good morning, everyone. I just wanted to focus on billing rates in North America. I mean a couple of your competitors have reported recently and you know they are seeing 5 to 10% reduction in billing rates in North America. So I understand you're Canadian argument given your coverage and your size here. Are you seeing billion rate pressure in the AMS operation and what gives you confidence that you can maintain rates over the next couple of years with some of those existing contracts?

I was going to say, I think the first thing in the U.S, Ralph you have to understand the AMS pre CGI billing rate was higher then ours so, they were actually billing at a higher rate then us. They were operating, you know, working on clientele and working a higher up the food chain then we were in the U.S.. And so, in fact, we're also trying to pull up the rest of our operations to closer to their bill rates as we go to market. And secondly, there - - our operations in the U.S. also have a good portion that's wrapped around business solutions. You know things like the Advantage IP, that's the ERP for State Government or Momentum for the Federal Government. So, you know, I think, again, while some of our competitors who may be operating in their large scales for a long period of time may be seeing that, again, when I look at our mix of our rates when we put it together, we're actually seeing our net rates when we combine the two entities actually increasing.

Okay. Just a follow-up on the underperforming assets. Are you done pruning that? Or what's the size of that asset base, going into fiscal year '05.

The of the termination of the - - Ralph, Serge, After the termination of Fireman's Fund, so if before we had between 50 and $100 million on a run rate basis of a combination of underperforming assets and underperforming contract, to date, evaluation we would have again, that between 40 and $70 million on a year run rate basis.

Thank you.

Okay?

Yup.

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

Hi, good morning. Just wanted to ask a little bit more detailed question on improving organic growth. Serge, you made some comments you are seeing better growth and better growth outlook. Over what period of time could we see a return to double digit growth? And if double digit isn't really a near term target, what organic growth targets are kind of what we should be thinking about over the next 12 to 18 months?

Thank you, Cynthia. I think this is - - I would say that the best news this industry got over the last four years as we have communicated to you, our sales followed in terms of both support and value of contract increased significantly, quarter over quarter - - I mean sequentially. And what we're seeing, what we saw in the fourth quarter and what we are seeing is we are specially our big business unit, are now in the recruiting mode, which is a very good sign in terms of - - for demonstrate or witnessing much better market conditions. Today, if we had and then I'm going to give you some precise numbers - - if we had 100 people more in New York, you know we would have contracts for them. It is the same thing for Boston. In the Washington area, we are recruiting 30 people a week as we speak. So, Toronto and Montreal, which are a big contributors, they are also in a hiring mode so - - and then, I would say globally, we would have today, let's say - - I'm going to try to be conservative here, between 750 and 1,000 people more and we would have contracts for them. The good news here is that market conditions are much better. So then you should see the - - in terms of the pillars of growth, the two first ones which are related to organic growth, we see quite a good organic growth coming from already existing contracts or existing clients through outsourcing contracts. We see the growth coming from there, as the clients in better market conditions invest more in IT. And we are also seeing very good opportunities as we had to increase our - - the size of our pipeline from 5 to 7 billion. So it means that the two pillars of growth in terms of organic growth are going to be, should contribute - - should have a good contribution on both topline and the bottom line. Does that answer your question?

Yes. So in terms of now any targets for reaching kind of that double digit growth rate is that something that something we should see over the next 12 months?

You have been seeing our guidance and so everything is reflected in our guidance.

Okay.

Okay?

And then, acquisitions aren't reflected in your guidance, obviously, right?

No. You're right.

And just as a follow-up on the 40 to 70 million you said in either underperforming assets or contracts, is there anything incremental that was added during the quarter or is this just the same number or the same contracts that were mentioned minus the Fireman's Fund?

Yes. That 40 to 70 million on the run rate basis. It is net of everything.

No. I guess my question is, were there any new contracts added during the quarter that are now considered underperforming?

No. No.

Great. Thank you.

Thank you.

Thank you. Your next question is from Blair Abernathy from Paradigm Capital, please, go ahead.

Hi. Just a couple of quick things following on the 40 to 70. How much of that would be in the business process outsourcing services side?

Nothing.

Zero? Okay.

Yeah. In the contracts, nothing. Assets, you know, so it would be a minimum.

Okay. Turning to the AGTI, picking up the second half of that business, could you just remind us how that's accounted for right now? Is it already consolidated or is it equity accounted?

Equity and - - it's a JV account, you know, we consolidate their net earnings on our - - (multiple speakers).

- - We do a proportionate consolidation right now.

You are doing a proportionate consolidation? Okay. So you are picking up half of the revenue now?

Exactly.

Okay. And just one last thing. On the - - I just want to get in a little further on the BPO side of the business. Looking out over the next three to five years, how fast do you think you can grow this business organically and how interested are you in making acquisitions on this side of the business?

Well, again, I don't want to predict the growth rate, I would say that relative to our strategy, BPO remains a very key piece of it and we would look to grow that business over the next three to five years by both organically and acquisitions. So, I would say that, you know, we haven't changed our position there from our earlier perspective on it. Again I think saying we're being a little more cautious in adding to some of the lines of business that we're in until the market firms up a little bit more.

Okay. Great, thank you.

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

Thanks. Just on the hiring specifically, in the U.S, just wondered, are these - - when you say you could hire people, would these be people geared to selling short-term contracts or would these be people that you would expect to go into AMS's core business and try to transition into long-term - - into long-term outsourcing contract? I'm trying to get a sense of how the education process is going within AMS, as to how the transition their business into more of an outsourcing model?

Well, again, to make sure I understand, Scott, it's relative to the education process, again, is part of the integration we've completed in our harmonization in terms of compensation, salary and that type of thing, we've conducted leadership - - numerous leadership sessions where we've brought in literally, hundreds of AMS leaders and put them through what we refer, internally as the CGI 101 sessions. We've also just finished the first round of actually training a number of their senior managers in the whole outsourcing track on how to move an account to an outsourcing discussion. We've added, as I said, to the funnel, the opportunities that we see coming out of AMS into the outsourcing funnel. We've got a series of BIP meetings now scheduled where we are going out, explaining the broader offerings of the new combined companies. So, all that is in play. And, you know, we're starting to see the combination of the market get a little stronger and the combination of us pushing harder in the market given our scale and scope. Driving increased opportunities.

And, Mike, in the rise from 5 billion to 7 billion, are there any opportunities within there that you would categorize as that? As AMS - - as large AMS opportunities to transition clients?

Yes. That's what I say. I think the - - we've added to the funnel, those opportunities that we've inherited from AMS inherited into from the funnel. Absolutely.

Thank you.

Thanks, Scott.

Thank you. The next question is from Paul Steep from Scotia Capital, please go ahead.

Thank you, Chris Thompson here for Paul Steep. Serge, on the operating expenses side, when do you expect to achieve full potential from the AMS integration, more specifically, do you expect to achieve that by the end of fiscal year '05 or can we anticipate a bit more expansion on the margin side in '06?

Well again, I think if you - - this is Mike. If you look at this quarter, what we've said is we bottomed out at 6%, net income. We've bounced up now to 6.1. We would see that steadily increasing throughout '05. Whether it will trickle over to '06, I think, it is a little hard to tell at this point. But, we're clearly seeing the economies of scale, the benefits of a larger company in some of our other offices. All our going geographies were profitable in the quarter so we're, again, very optimistic that we're starting to see the benefits of the integration and will continue to see throughout '05.

Great, thanks, Mike.

Okay, Chris.

Thank you. (Operator) The next question is from Rajiv Das form Westwind Partners, please go ahead. I'm sorry Mr. Das, your line is now opened.

Thank you very much. I had a follow-up question, Serge, on the backlog. You indicated that the backlog went from 13.2 billion in June to 13 billion in September. And that was net of the 300 million - - sorry, 200 million for Fireman's. And I see that the new contract wins are only $707 million for this quarter and I was just trying to, sort of, reconcile that. I would have expected that with revenues of $959 million, you would have had contract bookings of about the same level. Just curious how the numbers work there.

Okay, Andre?

You know the 700 million is net of the impact of the Fireman's Fund. The200 million, so, if we look at the full effect of new contracts, renewal and extension, okay, it's over $900 million during the quarter. Less 200 coming from Fireman's Fund, termination. So, with the net of it is 700 and we say, net of that.

Okay, so both numbers are net of the Fireman's Fund this quarter?

Exactly.

Okay. Great, thanks.

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

Thank you, good morning. You mentioned that the cancellation of the Fireman's Fund contract was by mutual agreement. Do you have penalty clauses in any of these contracts that if a customer cancels the contract early that you would get some payout for the costs involved?

Again, the - - the discussion as Serge mentioned, was certainly a mutual discussion. Ultimately, they have terminated for convenience and there is mechanisms for us to recover certain costs when the contract is actually wound up. And those are well documented in the contracts.

So in terms of your other major contracts, could you give us - - what would be the exposure of some of your contracts got cancelled from - - for convenience by your other customers? Is there a policy in place or is there some mechanism in place to recover costs from those as well?

There are. Under the (indiscernible - highly accented language) in each of the contracts so that when a client - - if it was to happen, so everything, which is net amortized is paid by the client.

So what recovery from the Fireman's Fund could you be receiving?

The negotiations are not concluded there, so we don't see any issue there.

So you're not expecting to recover any costs from Fireman's Fund?

(Multiple Speakers) - - We don't expect any exposure. We expect to recover the costs but not to have a exposure at the end it.

Okay. Just a couple of quick follow-ups. I notice on your amortization charges there was an impairment of contract costs of $4 million. Is that related to Fireman's Fund?

Andre?

We were talking about one contract, non-profitable and (indiscernible - highly accented language).

So that is the total amount of the impairment? The $4 million?

Yup.

Okay. That's it for me. Thank you.

Thank you.

The next question is from David Wright from BMO Nesbitt Burns, please, go ahead.

Thanks very much. I notice that you international operations have grown nicely in the last number of quarters. I was wondering what your employment level is, particularly, in India, I think you said that you have been planning to add people there and I wondered what your situation was?

Yes. It's Mike. I think we are about 675 and we are looking for over 100 people. Things are - - demand is increasing over there. So we're about 675, we're looking for 100, so, it's increasing, David. We also, as you know, have been very active promoting our nearshore model and we're also seeing increase interest in the nearshore model.

On that front, I was noticing that the Canadian revenue line hadn't grown that much obviously, there's a currency impact there, but, I was just wondering, you know, is that an indication that people aren't using your nearshore business or it hasn't been growing? Or has the actual Canadian accounts business been sort of tailing off?

No I think, again, you hit part of it as the currency. And I think if second part is, as I mentioned, in other quarters, we went through a series of elections in a number of our government targeted accounts, that slowed things down for a while. Federal Government is a prime example, Quebec government for a while, so, you know, we've had, you know, temporary delays in some of those areas but they seem to also start to be coming back now.

Thank you.

Thank you - -

We will take just maybe, one more question and then conclude the call for today.

Thank you. So the last question will be from Paul Bradley from Frasier McKenzie , please go ahead.

Oh, that's lucky I snuck in at the end there. Quick question for you on, Mike, you mentioned that with AMS a number of elements of the business are wrapped around software solutions. I'm wondering what proportion of revenues is accounted for by Advantage and similar products?

Are you asking of how much of the AMS revenue is associated with products?

Yes.

Less then 10%.

Oh, less then 10%?

Yes.

Okay.

In terms of product licenses, but the services are around that.

Yes, there's normally, about a 5 to $1 services wrap around that number, Paul.

So that - - (multiple speakers).

But if we look at licenses, it is less than 10%.

So licenses would be less than 10% but then can multiply that out to give me the services associated with those licenses?

Yes. And again, on that, that's under the past AMS model, which was primarily system integration associated with those licenses. What we're trying to do now is, of course, expand that out into the maintenance and the recurring stream, so you know, in their current model, they were 5: 1. And we were looking to expand that to make that more of a recurring revenue stream for us.

Okay and presumably, that's where those primary opportunities in terms of the pipeline business bumping up from 5 to 7 million lies then?

Yes, exactly.

Okay, perfect. Second question. Obviously, AMS is a substantial acquisition, different type of business and so on, how has that caused you to modify the management approach that you've taken in the past? I mean my observation is that CGI is a highly decentralized organization, have you had to modify that in managing the integration of AMS?

Just to say a couple things on that. That's a good question. If you look back at AMS for most of their history, so kind of pre three years ago, they were in a model very, very similar to ours and for most of the AMS leadership team, it's actually returning to a model that they're very familiar with. So, we haven't had to modify that. Other then, you know, you can see that in the integration we have stripped out a massive amount of dollars associated with central services and support services that are now streamlined and accountable in the business units. But other then that, you know, as I say, we've not had any kind of negative reaction from the leadership team. In fact, they are quite enjoying the autonomy and the accountability that comes with our model.

Okay.

You should see a smile on your face now.

Okay, I'll take this question up on the investor day because I suspect there's some more detail there. Thank you very much.

Thank you. I would now like to turn the meeting back over to Mr. Gordon.

So we thank you very much. I would like to remind you we'll be holding our analyst and investor day on November the 18th in Montreal. We invite all of you, all analysts, and institutional investors to attend. And look forward to seeing you. So we are very please with the results and, again, than you very much for your confidence.

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