CGI Inc (GIB) 2005 Q1 法說會逐字稿

[Operator Instructions] I would now like to turn the meeting over to Ms. Paule Dore, EVP and Chief Corporate Officer. Please go ahead.

Thank you operator. Good morning everyone, thank you for joining our conference call to discuss our first quarter of fiscal 2005 financial results. With me today on the call are Serge Godin, CGI's Chairman and CEO; Andre Imbeau EVP and CFO; and Michael Roach, President and COO; and Jacques Roy, SVP Finance; and David Anderson, SVP and Corporate Controller. This conference call and accompanying slides are also being broadcast on our website at www.cgi.com. If anyone has not yet seen a copy of today's releases issued earlier this morning, they can be viewed on our website as well. Additionally, we have published our Q1 MD&A, which was posted this morning on our website and is being filed with Sedar and Edgar.

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 first quarter MD&A fiscal '04 annual report and other documents filed with Securities 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.

Finally, our quarterly call has to end today at 10:30, because we will be hosting our annual general meeting here in Montreal at 11 a.m. It will be videocast on our website. Now I will turn the call over to Andre who will review the highlights of our first quarter.

Thank you, Paule, and good morning, everyone. We are very pleased to be reporting the results of another good quarter. First we'll start with revenue and slide number 5. Revenue in the first quarter increased 37.4% year-over-year to $950.3m. This was despite the continuing negative impact of currency fluctuation, which reveals revenue by $22.7m, or 3.3%. On a constant currency basis, year-over-year organic growth was 6.2%, and external growth was 34.5%. On a sequential basis, revenue will have been up, if not for currency fluctuation. On a sequential and constant dollar basis, internal growth was 1.3% compared with the previous quarter.

As for Canadian GAAP, CGI began expensing stock options in the first quarter of fiscal 2005. Earnings amount for fiscal 2004 have been adjusted accordingly for comparison purposes. On Slide 6, EBIT was $86.6m in the first quarter, up 18.1% over last year first quarter. The increase in EBIT was driven by the acquisition of AMS and new contracts. The EBIT margin was 9.1% compared with 10.6% in the last year first quarter and 8.8% in the previous quarter. The change from last year reflects our acquisition of AMS, whose operations temporarily have a lower profitability level. The sequential improvement in the EBIT margin reflects the profitability generated by new business and continuing synergies realized from the AMS integration.

We are now on Slide 7. We generated net earnings from continuing operation in the first quarter of $53.3m, up 25.4% over last year and up 0.8% sequentially. The year-over-year improvement in earnings reflects benefits from the acquisition of AMS and new contracts signed in that period, a direct result of the additional business gained through the acquisitions of AMS have been an improved balance of earnings outside of Canada resulting in a reduced overall tax rate. This quarter we continued to realize cost synergies from the integration of AMS that helped improve our net margin to 5.6% from 5.5% the previous quarter.

Basic and diluted earnings per share from continuing operations in the first quarter were 12 cents compared with net earnings per share of 11 cents a year ago, despite the 10.6% increase in average weighted shares outstanding and 12 cents in the previous quarter.

Turning to Slide 8, our balance sheet remained strong. At December 31, 2004, cash and cash equivalents were $229.6m, up $28.9m from September 30, 2004. Total long-term debt at December 31, 2004, was $444.3m, which is $45.5m lower than at September 30, 2004. At quarter-end, our long-term debt to capitalization ratio was 15.2%.

DSOs, our day sales outstanding, improved by three days from the previous quarter to 50 days. We will continue to manage our receivables very closely. In December we refinanced our credit facilities to achieve greater financial flexibility on more favorable terms. We increased our unsecured credit facilities to $800m through an international bank syndicate. As of December 31st, we have $621.7m of total credit facilities available for operating activities needs, working capital purposes, and the financing of acquisitions and also signed contracts.

Moving to Slide 9 -- during the first quarter CGI achieved close to $1b of new bookings. The backlog of signed contracts was $13b with an average duration of seven years compared with $12.2b a year ago. We continue to have good revenue visibility with these results and based on information known today about current market conditions, we maintain our guidance for fiscal 2005, which we provided in November 2004.

We also announced today that we will be carrying out a normal cost issuer bid whereby we have the right to buy back up to 27.8 million class A subordinate shares, which represent 10% of the public float for consolidation over the coming year. We are undertaking this initiative because, at the current share price, we believe this is an attractive investment opportunity for the company as we seek to build shareholder value. With our cash flow and credit capacity, we are able to undertake this initiative while carrying out our growth strategy.

At this point, I'd like to turn the call over to Serge to discuss some of the operational highlights. Serge?

Thank you, Andre, and good morning, everyone. Moving to Slide 11, our first quarter was solid with 37.5% revenue growth and 25.4% earnings growth compared with a year ago, strong cash flow provided by continuing operations activities, and a continuing strong balance sheet. Our year-over-year organic growth of 6.2% was from new systems integration and also signed contracts. We are continuing to see the positive effect of the strengthening market conditions that we noted last quarter and of our sales and marketing efforts. Our sales funnel of new [indiscernible - highly accented language] for system integration, consulting work, and work coming from existing contracts continue to strengthen. We are pleased with the $1b of bookings for the last quarter; meanwhile, our quarterly basis terms of outsourcing contracts remains strong as reflected in our $7b pipeline of outsourcing proposals adjusted for a success factor.

We are seeing new business proportionate days in all our geographies in the U.S. We are maintaining and further strengthening relationships with our clients and winning new business in each of our verticals.

Moving to Slide 12, you will see, for example, some of the federal government contracts that we signed since our merger with AMS -- after, in fact, the merger with AMS. In addition, going to Slide 13, you will see some of the contracts we signed at the U.S. state and local levels since closing the year of this transaction. For example, we continued to win new business based on our advantage business solution that already manages more than 500 volume dollars of state and local government budgets. It was U.S. dollars. Last month, we announced that the State of Utah, San Bernardino County in California, and the City of Austin, Texas, had decided to upgrade to the latest version of the Advantage solution. Just yesterday, we announced that the City of Dallas, Baltimore County, and Baltimore County Public Schools will implement Advantage to further streamline their business processes. This shows the high caliber of CGI AMS people and the degree of stickiness via the solutions.

Moving to Slide 14 -- in Canada we signed a series of contracts in the quarter to 51% of CGI we did not already own. We continue to have significant success in Canada on all fronts, and we see a lot of potential from the outsourcing market in Canada. Outside of North America our new business units are now established and performing very well across Europe and in Australia. Our marketing efforts have intensified, and we are better to compete as the result of our greater critical mass, new business relationships, and strong local presence. Our emphasis in this market is under financial services, telecommunication, and government sectors.

In business process services, where we focus on insurance, payroll, finance and accounting services, business is in line with our forecast. We also see important development of quarterly days in this segment of business.

Moving to Slide 15, CGI's main organic growth driver remains large outsourcing contract. Over time, we plan to increase also a percentage of revenue to 75% from 57% currently. Overall, despite the significant impact of currency fluctuations, we continue to achieve strong performance and are well positioned for another year of double-digit growth and strong cash generation.

As for the share buyback -- with the capacity of producing cash on a yearly basis, on a run-rate basis, of $500m per year. In addition to the [indiscernible - highly accented language] volume, we have a lot of room to grow our company. We've calculated that in addition to the share buyback, we would go between $2.5b and $3b of additional revenue per year. So we think that it is a good decision for us to buy back some of the shares.

Thank you very much for your time. At this point, we will be happy to take any questions you might have.

[Operator Instructions] The first question is from Scott Penner from TD Newcrest. Please go ahead.

Thank you, just on the AMS Advantage, it looks like there's a pretty good operating cycle going on right now, which would seem like a pretty unique opportunity to have a discussion about outsourcing the new services. I just wanted an update on how you're going at transitioning the AMS customers into outsourcing.

Scott, it's Mike. Thank you for the question, and you're quite right, there is a strong pattern here of clients looking to upgrade; continuing to stay with and enhance their capabilities through the Advantage program. Candidly, what we're doing is trying to get in front of as many of these clients as we can in terms of outlining what outsourcing is all about, educating them on the pros and cons of it, and offering alternatives to the existing way that they were buying these services from AMS. So we have the ability to turn some of these solutions into an ASP model, or standard outsourcing model. At this point we're reviewing that.

We have to also be cautious because, in some cases, especially in the government markets, they're not particularly interested in outsourcing, but in other areas they are. So we have to go at it to the client's pace. At this point, we're spending time really ensuring that our relationships are solid, winning these deals, and educating them here on a case-by-case basis of the benefits of looking at a different procurement model.

And, Mike, just to follow on that -- any idea when we can expect or look for announcements that you're having some material success with that?

Well, again, it may take some time. We have been short-listed, as you know, with the Commonwealth of Virginia on tier 2, tier 3 outsourcing. To me, that was a major demonstration of the comfort level that our clients have here, and I see that as a good example of things moving through the pipeline. But it does take some time, but there is a good example where a government is interested in looking at outsourcing, and we are short-listed. There's only two of us on the list, and we're working very hard on that. So it will take some time, but we're still very optimistic that we'll get there.

Okay, thank you.

Thank you, the following question is from Paul Steep from Scotia Capital. Please go ahead.

Thanks. Just on the BPS market, either Serge or Michael, maybe you could chat a little bit -- I noticed it seemed to have weakened off just slightly in this quarter. It seems to be familiar to what we've heard from other vendors. What's your sense of what's happening out there in the market? Is there something changing in the environment, or is it just taking a little bit longer than people would have expected?

The first part -- were you talking to BPS --

Yes, the BPO side of the business.

Okay. No, I think if you look at our numbers, as Serge said in his comments, we hit what our budgeted numbers were on that side of the business. Again, as I mentioned last call, anybody who is in Canada, I'm sure, can testify to this -- that the claims piece of the P&C insurance business is down. They're down significantly in Ontario, which is a very large market for us as a result of customers trying to find a balance between making a claim and seeing the premiums go up. So we are seeing some pressure on the volumes there and, as I mentioned in the last call, what we're concentrating in a time like that is to make sure that we're delivering efficiencies and driving maximum benefits of clients and margins. So our margins have held up well, even though we're under pressure there.

On the rest of the BPS side, I was saying this morning, I see actually more opportunities in the S&A BPS space. I would have thought for a while, with Sarbanes-Oxley, that would have pulled back, but in some cases we are seeing opportunities now where companies are looking at outsourcing their finances admin -- force the finance administration business, perhaps attempting to get access to standardized processes that are already in an outsourcer like ourselves as opposed to attempting to do them rapidly inside. So we do see some potential pickup in that space.

Maybe just a general comment on the bookings -- it looked like that turned positive in the quarter. Can you guide us as to which side of the business was driving the uptick in this quarter and maybe which geography? It looked like Canada ticked up slightly this quarter, but whether that's just timing-related?

Again, I think we are pleased with it. If you look at it, it's always dangerous to straight-line it, but it would take us on a run rate of $4b. We booked $3b last year. I think what was significant there, that a lot of bookings came from the SI and CE space, which shows and validates the point we've been making -- that market is starting to come back and that, given our larger footprint now, we're going to get a healthy piece of that as well as also reflecting the heavier presence we have in the United States and our SI and CE capabilities there in government, finance, and telecom. So we're seeing the benefit of that in large footprint in client relationships and service offerings. When we combine the solutions that AMS had with what we have, we have over 60 pretty extensive suites of intellectual proprietary property here -- everything from an ERP system for an insurance company to ERP systems for government, to a billing system in telecom. So we have quite a variety of intellectual property that we're leveraging here.

Just two last little housekeeping things -- one is on the EMS Advantage upgrade cycle, as I recall, I think there was a pipeline of about 300 customers teed up to eventually go forward. Where are you in that pipe? And then, secondly, just maybe if Andre could clarify it, but the comment around the bump in project reserves in operating expenses. Thank you.

I think, on the first one, I wouldn't really like to give a status on that. I think it's a very competitive business. We'd like to try and keep those numbers to ourselves at this point, and maybe Andre can answer the second question.

Yes, we'll ask David to give you that information.

Good morning. In regards to the project reserves, as everybody can appreciate, we do go through a very rigorous process every quarter, and what we've noticed this last quarter is that we have, in a couple of places, some smaller reserves over a number of projects, and we wanted to make sure we were doing the cautious and conservative item, which was to appropriately book all of the cases where we saw there were types of small issues, to make sure that we have those recorded, and then move forward. We didn't have any significant large project reserve. There was just a number of smaller ones over a number of geographies, and, I think, from my perspective, it just indicates that we're balancing the risk with the opportunities that we find in this, and we're not taking any incremental risk than what we should be.

Thank you.

Thank you, the following question is from Pierre Yves-Terrisse of Desjardins Securities. Please go ahead.

Thank you, good morning, everyone. Two questions -- first of all, just to go back on the question related to BPO -- your margin increased year-over-year. It's down sequentially. Can you explain a little bit what happened and what would be the ultimate goal? You are at roughly 14% in Q1. What would be the goal for your margin in BPO?

Well, thank you for the question. Again, I'm a little cautious to compare always quarter to quarter because, again, there are seasonal impacts here that go on in the business and in the marketplace. So, again, I would go to your first point -- in comparable quarter, year-over-year, we're up. Again, in the quarter, as I mentioned, you do see pressures on the claims side of the business that is, again, hopefully, somewhat seasonally and somewhat driven by the market conditions.

As far as the target there, again, we would see the BPS unit performing up to and, again, given certain market conditions, up to the levels, or slightly above in some cases, what we would see the normal ITS business do.

Okay, second question is that looking at 2004, your capex average between $13m and $14m in the quarter -- in this quarter you spent $8.6m. What should we be using in terms of forecast for the capex?

We'll say that we have -- it varies on a quarterly basis -- that spending -- and I would say if you work with -- if we took you on the annual basis, I think you will -- as we did last year, I think you have the right view at this point.

So are you saying, Andre, that it's going to be essentially flat with last year?

Yes, it would be comparable with last year, yes.

Okay, thank you very much.

Thank you. The next question is from Ed Maguire from Merrill Lynch. Please go ahead.

Yes, good morning. It looks like business -- the mix of business shifted in favor of Canada. The U.S. was down a bit sequentially. Could you comment on how much of that might have been attributable to currency; how much was seasonal factors, and the like?

The currency represents around 60% of the change. It's very significant, okay, for that part.

Yes, and on the other part, Ed, you're quite right. Again, we still don't have, as you would appreciate, a full year of AMS being integrated in. So from a profiling, budgeted standpoint, we're still working through that. And, clearly, given that Christmas fell on a weekend, as you probably know, a lot of the government agencies, there wasn't much going on there for about a week. So we've certainly seen some of the revenue impact as a result of that.

Okay. Moving on to the pipeline, I noticed just in terms of the vertical mix, financial services seemed to pick up some momentum this quarter. Could you talk about what you're seeing in your pipeline, particularly from a vertical perspective? And then maybe also address what you're seeing in Europe as well?

I think you're quite right. On the vertical side, financial services is very strong. I think it's driven by a number of things. Again, you see mergers and acquisitions going on in that area. That creates opportunity. We have Sarbanes-Oxley work that needs to be done, and that's driving opportunity, and I would also say that traditionally the financial sector has always invested heavier in information technology services, and it forms a very core piece of their whole business strategy. So those three factors are obviously driving work and opportunity in that space.

The government piece is always consistent. I would say that's true pretty well across our geographies. You may get situations because of elections, pre-election, post-election, that there are slowdowns in various jurisdictions but, generally, the spending, over time, is very consistent there, and we're seeing that.

The telcom sector, as you know, has been very quiet for a number of years. Again, though, I think a good lead indicator of change there is the merger and acquisition activity. That, to me, is a lead indicator that things are starting to pick up. They're starting to look at scale, they're starting to look at value and opportunity, and we believe that will result in opportunities for our company.

Relative to Europe, I'd say that we're very pleased with the acquisition impact in Europe. We've got much more scale in Europe than we had pre-AMS, and those business units performed very well in the first quarter, and we're also very pleased now with the performance of our UK operation in the quarter. We're gaining enough scale in the UK now, we're pushing up -- approaching 1,000 members in the UK, and that's opening up other larger opportunities for us. We've also opened up a second vertical focus now in government. We were primarily in the capital markets financial area there. But as a result of some of the work that we've exported from service in New Brunswick with Suffolk, we've expanded what we're doing in the UK in the government sector. We see that as an opportunity for further growth for the company over the coming years.

And just a follow-on -- on the competitive environment, there has been some talk that some of the Big Six have been seeing increasing competition from regional firms and Indian outsourcing. Could you comment on the competitive outlook in terms of what level of engagement you're having and successes against the Big Six?

Thank you very much -- again, Serge -- for your question. In fact, we have been among the companies to bring the pricing pressure on those big companies because of new ways in terms of delivery using offshore and near-shore capabilities. And then as a very good way to look at the performance we have in terms of pricing, let's look at the performance -- we are second-best in the industry in terms of percentage of the revenue in net earnings. So which means that it demonstrates that the delivery strategy we have is very, very competitive. So seeing from our point of view, we don't see any pricing pressure here. But, yes, we created a lot of pressure on our people because of new ways of doing business.

Okay, that's what I was looking for. Thanks.

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

Thank you, good morning. I just wanted to go back to the bookings for a second and just to try to understand again the breakdown between the different elements. I understand that the systems integration and consulting side was a bit stronger. Do you have any metrics about the breakdown between that versus outsourcing? And then, while you're on that, can you talk about anything you're seeing in the outsourcing market? And, finally, you're currently at about 57% outsourcing. You target 75%. Do you have a timeline in terms of when you expect to get there?

Well, again, I think on the 75, as we said before, we're really trying to get back to where we were a number of years ago in terms of having backlog above 5 times our annual revenue. It's a goal that we're focused on. Again, the timing, when we reach that, is obviously not in our hands, but solely it depends on the market conditions and the mix of the work. But I think it's a clear indicator that we have a plan and understand the value of growing the backlog and that level of visibility.

As far as the comment on the outsourcing market itself, as we said, we see it picking up. We talked about that on the last call. There are clearly more opportunities out there, and I'm also seeing them across other verticals -- retail, manufacturing, financial, government -- there seem to be a little more widespread than in previous years, and people are also very intrigued by our global delivery model. If we look at our position in Canada, as I mentioned, we have a fairly dominant position in the systems integration consultant application maintenance business in Canada. We have readily access to the largest market in the U.S. We've got a much larger footprint in the U.S. in terms of people on local centers being able to work with the clients, and we're now trying to leverage that by putting that global delivery model in front of more and more clients, and we're getting a very good reception of that. So I think it's driven by market conditions, the outsourcing uptick, and also there's more alternatives now to clients in terms of how to get the costs out. And Ed's point, I think you're right -- some of the larger players are feeling the pressure because the clients are looking for more value, and that's driving opportunity for CGI.

Did I get them all, Paul?

Okay, so you're not going to break down for us in terms of the books in the quarter between the consulting and outsourcing?

No, I say most of it was on the consulting, which I see as being positive. I think it's a good lead indicator that the market is coming back.

Okay. My second question was about the earnings accretion from AMS, and I see, in the press release today, it seems like you think you're on track for the earnings accretion from the integration program. I thought the original target was 15% to 20% EPS accretion from AMS. Is that still the target and, if not, can you maybe define -- how would you define success right now in terms of the cost savings from the acquisition?

We are still having the same objective in the 15% to 20%. As of now, because we said between the six to nine months from the acquisition time, and at this point we are in line. What we are seeing is really in line okay in our objective. So we are pretty sure to achieve that within that timeframe. And it's well in line at this point what we can look at it on [indiscernible - highly accented language] and we are very close with that low end of that 15 to 20.

So on an EPS basis, though, is that still the basis?

Yes.

Okay. My last question, just a quick one -- in terms of, I think comment was made in the first part about taxes are slightly down due to the international nature of revenues. Can you give us any new guidance on taxes, then, for the year?

I think the tax rate that you have seen in our quarter will -- and I think we made a comment on that, also, in our last conference call, would be around the level where we are at this point -- 34.5 to 35% for the full year. So we are very within -- it will be in that bracket.

Okay, that's it for me. Thank you very much.

Thank you. The following question is from Martin Cecchetto from UBS. Please go ahead.

Hi, good morning. I have a couple. I'll start with BC. I noticed that the revenue was up from BC. Can you just talk about the cost-cutting initiatives at Bell Canada and what you think the impact of those initiatives will be to CGI?

Yes, thank you, Martin. Yes, BCE is undergoing a review of their expenses and, clearly, looking at all aspects including information technology. Again, we're a much larger company now than we were in 1999, so any fluctuations there, we're in a much better position to manage in terms of impact.

Having said that, whenever any company, and I'll talk generically here, looks at reducing expenses, information technology is also an enabler to reduce the expenses, because, in some cases, you're going to improve processes, you're going to automate more, you're going to have more client self-serves. So that's one aspect, and I think we'll see some of that in BC.

And I think the second thing is we're also continuing to broaden our marketing scope with the BC family and looking at other services that aren't traditionally pure IT -- things like business process services, other areas where we can grow our business. So, at this point, we're not anticipating any material impact on the company as a result of any cost-cutting that BC may undertake.

Okay, thank you, that's helpful. On the DSOs, a good improvement there, to 50 days. Do you expect that to improve further? And just related to that, did I hear Serge say that you were looking at potentially $500m in cash flow from operations on an annual basis?

That's what I said.

Okay, great. And is that going to come --

And on the DSOs, you know, we continue to manage that, and we see -- if you recall, a few quarters ago we were more around 45 to 50, and we maintain that as a goal as a corporation to maintain our AR at that level.

Okay, and just finally, then, in the insurance segment, can you talk a little bit about IBM buying Liberty Mutual, and whether or not you see increased competition there and when you might expect it?

No impact, none at all -- zero impact on us.

Can you elaborate a little bit as to why?

Why? That's because we never saw them in DSO. So we very rarely met with them.

Okay, thank you.

Two companies against them, obviously.

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

Thank you very much, good morning. When I look at the numbers and how I had forecast, perhaps I was a bit aggressive, but I had expected a slightly better margin, and as I go through your MD&A, it looks like you've mentioned four items here. So I wonder if we could talk about the four. What it seems to indicate is AMS was, as you continue to do integration there, there is some cost that eventually you'll be able to take out. Then there was a transition on some large outsourcing contracts and some expense related to that. Then you mentioned the minor increase in project reserves and foreign exchange. So I wondered if you could, first of all, quantify the third item, the minor increase in project reserves. Is that under $1m, over $1m?

It would be just a little bit over $1m, David, order difference.

Right, so that is pretty minor. And then the transition on large outsourcing contracts -- I would have thought that was a cost of doing business, and so I wondered was there an extra expense in the quarter that we wouldn't see next quarter? Or what is that describing?

There's always a buttonhook, Dave, to these outsourcing deals. On one day, they're all on the client side, and the next day you've got to transition them over to our payroll, start the transformation, make investments in terms of to get the savings and value out. So that's what you're seeing there. And it's a good point, because when we talk about the AMS integration, there is also other factors. There's factors moving up, factors moving down in a company as large as ours, and so what normally happens is you get a bit of a button hook, and then those expenses get behind you. You're delivering the savings to the client, and you're generating margin.

Okay, and so is there a way you could comment on AMS in terms of where you are in the restructuring process? Obviously, people are involved, so you can't be too specific, but are you feeling like most of the work is done, and should we see direct margin improvement next quarter? Or is it still a number of quarters away?

I think we're pleased at where we are. I think, again, we've done a lot of the heavy lifting in terms of the cost-cutting. In fact, we're now investing on the sale of SG&A side to try and drive the sales that we talked about earlier throughout the call, and we're making those client calls, and we're accelerating our marketing activity.

Our business units are in place now. We're reporting via our new lines of business and geographic areas. The leadership is solid. We're pleased with the people we've got. As Serge mentioned, we're releasing deals down there on a steady basis -- new deals that we've launched since the integration. We've qualified and short-listed on deals since we bought the company. So from that perspective, we're very pleased. We still have some integration in the back room, in terms of really integrating our own systems with the AMS systems. This is more internal work, but it drives expense in terms of running duplicate systems for a period of time until we can integrate them in. That means we have to carry some people while we do that. But, overall, very pleased with the AMS integration on all fronts.

And as we look at it from a business evolvement point of view, so just to look [indiscernible - highly accented language] we announced over the last few months for a team, which have been just integrated recently, it is a very efficient team, because the deal would close it's quite significant. We're very pleased with the team over there. We're very proud of very, very highly talented people.

Great, so they're making headway on the contract front?

Exactly.

That's good to hear. Perhaps, because I can't see the direct margin line, I believe AMS was operating at a higher gross margin number than you were, so that's where I was expecting that we would see an improvement in the operating margin line.

Don't forget, they may have been operating at a high gross margin, but they weren't operating at a higher net margin.

Okay, so that's still to come out.

And also, not to take into consideration when we do an acquisition, we have to support the amortization of the intangibles to the acquisition. So it's something that does impact our bottom line amazingly.

Yes, I have modeled that. The operating margin seems to be a little weaker.

What I'm going to say is a non-GAAP comment, but when you look at the way we produce cash and what we produce in the performance we have been producing cash. So that is going to give you a very, very good indicator of the success we've got.

Two more quick things -- what's your assumption for the Canadian dollar for your year, for your forecast?

We're looking for the Bank of Montreal, Dave, to help us there.

Okay.

[laughter]

And what's your hiring situation? I would assume that you're regularly hiring, but have you got more openings than normal, or what's the situation there?

We're still hiring at a healthy pace and, again, in a number of our key locations. I mentioned Washington -- we've still got openings in Washington, Atlanta, Montreal. We're doing aggressive hiring in Toronto. So we're still seeing the need to take on people and also, which -- India, as well, but to point out that vertically not only are we hiring because we need people, but we're also attracting very high-caliber people. I think the company, the size and the success we're having, we're able to attract very good people in the market, Dave, including getting a lot of proactive advances from key people in our competitors' camps, who are looking to join our company. So it's exciting times on that front.

If you don't mind, we're going to take a last question, because we have to be --

Thank you. The following question is from Wojtek Nowak from Research Capital. Please go ahead.

Good morning. Just a couple of quick questions -- first of all, the research expense looks like it went down sequentially. I'm just wondering what the expectation is for that line. And, secondly, I was wondering if there were any changes to the composition of the pipeline? I know it stayed the same on a dollar value, but I'm just wondering if the U.S./Canadian composition or the type of project composition may have changed? Thank you.

I would say, on the research line, it went down. And I would say because it varied on a quarterly basis. And also it's mainly related to a tax credit on that line, that we plan to pay on the research, and it's mainly related to the research we do here in Canada. It's not related to any research we do on the development of new solutions. We do -- related to our business solution. We are looking to provide that line of information a little bit differently in the near future. But at this point that line just related to any claims we do as a tax reason for our research.

I'd just like to add to that is that within the MDA -- I don't know if you had a chance to take a look at it -- we've also highlighted the amount of development activities that we've done that we've capitalized, and what Andre was referring to is that we're looking to get our arms around and be able to report back to you what it is that we're doing in other developments that's actually flowing through the P&L that could be qualified within this definition of R&D.

Okay, thanks, and just the other part of the question was relating to the pipeline.

Fifty-fifty, U.S. and elsewhere, including Canada.

Okay, thank you.

So I thank you very much. I'd like to thank you again for your confidence, and I remind you that our annual meeting is at 11 this morning. It will be webcast simultaneously at www.cgi.com, and will be archived for a year. Those of you in Montreal, we will hope to see you at the meeting, which is being held at the Hilton Montreal Bonaventure. Thank you very much for your confidence. Thank you, bye.

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