CGI Inc (GIB) 2005 Q2 法說會逐字稿

All participants, please stand by. Your conference is now ready to begin. Good morning, ladies and gentlemen. Welcome to the CGI conference call. I would now like to turn the meeting over to Ms. Paule Dore, Executive Vice President and Chief Corporate Officer.

Please go ahead, Ms. Dore.

Thank you, Operator. Good morning, everyone. Thank you for joining our conference call to discuss our second quarter of fiscal 2005 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 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 Q2 MD&A, which was posted this morning on our website and it being filed with SEDAR & 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 second quarter MD&A fiscal 2004 annual report and other documents filed with securities commissions 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.

I would like to remind participants that we wish them limit themselves to one question, plus a follow-up question as we would like to ensure that as many participants as possible have an opportunity to ask questions.

Since we know that the question period is important for participants on the call and because all the numbers are in our press release, which you have received and in our management discussion and analysis, which is accessible on the Internet, we have limited our prepared remarks to the financial operational highlights of the quarter.

Now, I'll turn this over to Andre, who will review the financial highlights of our second quarter.

Thank you, Paule, and good morning everyone. We are very pleased to be reporting the results of another good quarter of profitable growth. We'll start with revenue on slide number five. Revenue in the second quarter was up 29.9% year over year, to $929.7 million CAD. On a constant currency basis, year-over-year external growth was 33.7%. The currency exchange rate, mainly between the Canadian and U.S. dollars, add a negative impact on revenue of $24.6 million CAD or 3.4%.

On a sequential basis, revenue was 1.2% lower, mostly because of a temporary shift in revenue from our contract with the BCE family of companies, amounting to $19 million CAD. Despite the softness in the first quarter, we expect revenue from this client, in fiscal '05, to be consistent with last year.

On slide six, we have earnings before interest, income taxes, entities subject to significant influence, and discontinued operations, which we refer to as adjusted EBIT, the same measure as EBIT reported in previous quarters. Adjusted EBIT was $80.4 million CAD in the second quarter, up 5.1% over last year's second quarter. The increase in adjusted EBIT was driven by the acquisition of AMS, and the startup of recent contracts.

The adjusted EBIT margin was 8.6% compared with 10.7% in last year's second quarter and 9.2% in the previous quarter. On the year-over-year basis, the adjusted EBIT margin was largely impacted by the non-reoccurrence of our license sales that was completed last year and by the temporary shift in revenue noted earlier.

We are now on slide 7. In the second quarter, we generated net earnings from continuing operation of $53.6 million CAD, up 17.1% over last year and up 1% on a sequential basis. That year-over-year improvement in earnings reflects mostly the acquisition of AMS as well as new contracts signed recently. In addition, on a sequential basis, taxes were lower due to the capital gains tax treatment on the sale of our minority investment in Nexlinks (ph).

We are pleased with the cost synergies achieved through the integration of AMS, to provide a better visibility on operational effectiveness of this integration. We are also reporting net earnings before the amortization of intangibles. Using this measure, earnings amounted to $74.6 million CAD in the latest quarter, which was 31.7% higher than a year ago.

Furthermore, the net earnings from continuing operations margin improved sequentially for the first quarter since the acquisition of AMS to 5.8% from 5.6% in the previous quarter. I'm pleased to report that we have now reached the earnings per share accretiveness that we targeted when we acquired AMS.

In the second quarter, the earnings per share accretiveness for AMS was in line with our expectations. Namely, more than 16% after a nine-month integration period. This saves on the constant dollar run rate business.

Basic and diluted earnings per share from continuing operation in the second quarter were $0.12, compared with net earnings per share of $0.11 a year ago, despite a 10% increase in the number of average weighted share outstanding and $0.12 in the previous quarter.

We report net earnings as we acquire it and they're carried in GAAP. For comparison purposes, since most CGI peers are U.S. based companies, earnings per share from continuing operations under U.S. GAAP were $0.13 in the second quarter of fiscal 2005.

Turning to slide 8, cash provided by continuing operating activities was $77.9 million CAD in the second quarter of fiscal 2005 (inaudible) of $70.8 million CAD a year ago. At March 31, 2005, cash and cash equivalents were $142.9 million CAD and our long-term debt was $240.3 million for our long-term debt to capitalization ratio of 12%. I'm pleased to report that our balance sheet remains very strong, and is one of the strongest in the industry as we continue to generate same second levels of cash.

Since the acquisition of AMS, our debt was then reduced by $183.3 million CAD. We saved $175.3 million CAD in integration costs and associated cash taxes were referred to the acquisition. And, we invested $49.6 million CAD in our share buyback for a total of $408.2 million CAD.

The share buyback was under the normal cost issuer bid, which we announced on February 1 of this year. We bought back close to 6.9 million shares for a consideration of $54.5 million CAD. As you know, we have the right to buy back up to 27.8 million Class A shares, which represented 10% of the public flow for cancellation. We believe that, at the current and risen prices our shares represent and effective opportunity for a company to build shareholder value.

DSOs or day sales outstanding improved by 2 days from the previous quarter to 48 days, which further demonstrates our ability to manage our receivables very closely. As of March 31st, we have $729.2 million CAD of total credit facilities. These are available for operating activity needs, working capital purposes and the financing of our acquisition and outsourcing contracts. With our cash flow and credit capacity, we are able to maintain the share buyback initiative while carrying out our growth strategy.

Moving to slide 9, during the second quarter, CGI signed $844 million CAD in new contracts, renewals and extensions. So, total booking in the first six months of the year of $1.9 billion CAD, representing 63% more than booking in the same period a year ago.

As of March 31st, the backlog of signed contracts was $12.9 billion CAD with an average duration of 7 years, compared with $12 billion CAD a year ago. We continue to build our backlog to maintain good revenue visibility.

As for slide 10, regarding the outlook for fiscal 2005, we confirmed the revenue and earnings guidance that we provided on November 9, 2004, after adjusting revenue guidance to reflect the previously announced divestiture this past quarter. Thus, consequently, our revenue guidance is in the range of $3.85 billion CAD to $4.1 billion CAD in fiscal 2005. The earnings guidance of 52 to $0.56 per share is unchanged. The guidance is based on the assumption that market conditions remain the same and that we will not experience delays in signing large outsourcing contracts.

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. In the second quarter, we continue to achieve strong year-over-year revenue and earnings growth and to generate a healthy cash flow -- all of this in line with our expectations. Revenue increased significantly, mostly due to the acquisition of AMS.

CGI demonstrated once more that it is a very active and very efficient consolidator of its industry. Results state for themselves. We are now very well-positioned with sufficient critical mass and very, very deep expertise to win large IT outsourcing contracts in North America - namely, in North America, the largest IT market in the world.

Moving to slide 12, revenue increased solidly as the quarter advanced and we are satisfied with the progression of our proposal activity for new contracts as we move forward in the third quarter. We are confident that our $7 billion CAD pipeline of proposals for large outsourcing contracts is solid and its contribution to future results is a matter of timing. This pipeline is already discussed (ph) to take into account a win ratio.

Let me take a moment to explain in more detail the reasons for our confidence. Market conditions continue to improve, as evidenced by the increase of fortunate (ph) days that are available, both for systems integration contracts, and within our existing outsourcing contracts. This is a trend we have been seeing over the past few quarters and it is further demonstrated by the evolution of our net bookings, which are up significantly for the first half of fiscal 2005.

Obviously, our most important growth driver remains throughout outsourcing contracts, both for information technology and business process services. The sales cycle is from 6-18 months. While it may be difficult to predict exactly in which quarter CGI will sign such contracts, the impact is clear. For example, if we were to sign a $200 million CAD a year contract, this would represent the pro-option that would be 5% organic growth with just one contract.

The growth pattern related to large outsourcing contracts is based on large one-time increments, with an impact that extends over a period of 7-10 years. This means that when looking at CGI, and investors should look not only at the ongoing organic growth coming from existing operation, but also take into consideration the contribution that these larger contracts make periodically. We've proven that several times in the past.

During the quarter, as we had said we would do, and in order to improve our performance, we proceeded with the sale of business process services assets related to our U.S. credit union services business and to the investigated research services of our insurance division. These divestitures were a part of our ongoing review of operations to ensure that they are in line with our business strategy. At this point in time, we believe that the bulk of these divestitures under review is behind us.

As for slide 13, the revenue mix in the quarter was 53% from outsourcing, comprised of 41% in IT outsourcing and 12% in BPS and 47% from system integration consulting businesses. Geographically, 61% of revenue was from Canada, 31% from the U.S. and 8% from other regions, mainly Europe. As mentioned by Andre a moment ago, we maintain our strong emphasis on managing our balance sheet.

Since we manage 10-year contracts on behalf of our client, it is crucial to ensure that our balance sheet remains very solid. This is why we are so proud of the fact that we maintain one of the strongest balance sheets in the industry with the best balance ratios.

As you can see in the second quarter, we continue to deliver solid performance in this area. We are pleased with the progress we achieved in the quarter. We have reached our integration goals for AMS. We generated cash. We strengthened our balance sheet by paying down debt, and improved our credit capacity. We also bought back some of our shares.

In terms of building our revenue, we continue to get the CGI message across with potential clients and we get good response, very good response. We are winning new business in the U.S. Our bookings are very strong across our network and our funnel indicates - (inaudible) funnel indicates that we continue to build the momentum in our deal flow in system integration and consulting as well in outsourcing, including in business process services.

Some of our investors wanted us to demonstrate that we had the ability to win new contracts in the U.S. following the acquisition of AMS and that we could maintain the year and this client relationship.

Here again, we are very pleased to report that we have been very successful. Here are some examples.

We continue to build on the numerous announcements we made in the first quarter and we closed the following contracts in the second quarter.

On January 18th, we announced that our AMS Advantage enterprise resource planning, ERP Solutions, had been selected by 3 additional governments, the state of Utah, San Bernardino County, California, the largest geographic county in the U.S., and the city of Austin, Texas.

On January 31st, we announced that decision Dallas, Texas, Baltimore County and Baltimore County Public Schools will implement AMS Advantage 3 to further streamline their business processes.

AMS Advantage 3 is a web-based enterprise resource planning suite specifically designed for government and school systems.

I'm also very pleased to sit at our operations generated group profitability in our other 3 main geographic markets, mainly Canada, the U.S., and Europe. Our also operations in our 2 lines of business were profitable.

Looking ahead, we have identified the strong potential in all our markets. We focus on opportunities within our 5 verticals, where we have the greatest advantage through a combination of our business solutions, our end-to-end IT services capability, our unique global delivery model, and our client focus, which is supported by our metro market business model.

We believe that our outlook is very positive. Our growth strategy, based on our 4 colors of growth, has allowed CGI to be one of the very best in this industry, not only in North America -- in the world. We are therefore committed to following the same strategy.

In summary, we remain focused that on profitable long-term growth coming forth from lucrative acquisitions and organic growth. We have the continuing exalted year-over-year revenue and earnings growth. And cash flow in the second quarter and year-to-date and expect stronger growth in the second half of the year than in the first half. Bookings in the first 6 months were well ahead of the previous year.

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

Thank you. We will now take questions from the telephone lines.

[OPERATOR INSTRUCTIONS]

The first question is from Scott Penner of TD Newcrest. Please go ahead.

Oh, thanks. Maybe if we could start with just the internal growth, specifically on a sequential basis to make things easier.

I noticed from the MDA that the internal revenue was down about $18 million - so, basically, flat excluding the BCE shift. It seems to me at least it's a rather weak number given the bookings that we've seen, strong bookings that we've seen over the past 3 quarters.

I just wondered if you could touch on the give and take there.

Well, again, I think Scott, you're right when you make the adjustment for the one time kind of event with the BCE family. We were essentially flat there. It's very difficult to align within a quarter the bookings and the revenues, you can imagine.

So, I think this goes to the point that Serge made in his comments. We're still optimistic relative to our guidance for the year that the bookings that we're making will in fact show up in the internal revenue numbers as we go forward.

Maybe just to follow up with that quickly. Just on the bookings for this quarter, Mike, maybe you could just separate that out into the amount of new business versus the extensions of adjustments and then if you would the systems integration bookings versus that for outsourcing?

Yes. I think, again, to try and give you a little more color on that. Most of it is new business. We did extend as we said in the press announcement with the Yellow Pages. But beyond that it was primarily new, primarily systems integration.

One of the challenges we're having, Scott, is that a number of our clients and again, some of them are very marquee names. So -- I mean, I wish I could announce them. They, for some reason, we're seeing it maybe a little more in the U.S. than I do in Canada, don't do press releases on virtually any of their procurement.

So, a number of the deals are with good, solid clients. But, we're not able to get agreement to announce them. So, hence, probably 3 or 4 years ago you would see much better alignment between the press announcements and the bookings.

Since we acquired AMS the bookings are much larger than the press announcements. And, one of the reasons seems to be with a number of these, again, very large brand name companies in the U.S., they don't appear to permit press releases relative to supplier or partner contracts.

So, hence, a bit of the disconnect there.

And, Mike, if I could just very quickly. Does it concern you at all that the business at least the bookings shift toward possibly shorter-term systems integration work versus outsourcing?

No, again, I have to tell you I guess it's all from your vantage point. One, I'm very pleased that we're able to win systems integration business. Again, it shows me that the systems integration market is starting to come back, which is -- you always have to have a strong systems integration practice because it helps get the relationships you need in the outsourcing business, Scott.

And then when you get outsourcing, of course, there is systems integration business in there.

But, no, I think as George said -- the outsourcing deals are only a matter of timing. And, unfortunately, we don't drive the timing.

But, the pipeline is very healthy there and we have some great opportunities. But again, the timing is always the issue that we're working on here.

Thank you.

Thank you, Scott, for your question.

Thank you. The following question is from Paul Steep of Scotia Capital. Please go ahead.

Hi. Serge, maybe you can talk a little bit about shareholder returns. And Andre mentioned it in his comments just in terms of improving shareholder value.

One topic we talked about, I guess, over the past year has been the ongoing divestitures in the business. If you could just update us as to where that's at. And whether your focus is more on the acquisition now of your 4 pillars or is it more on shareholder value through sort of internal measures?

When we said that, the rule we have first and foremost no matter the deal we can assign no matter if it's an acquisition large or attractive. We have that rule of designing deals, which are always accretive.

So, then in looking at shareholder value in designing accretive deals. So that it has to be accretive, okay? It's a rule we have.

Okay. I guess the question is this then, are there more divestitures to come or are we basically at the end of that?

Provided the divestiture is most of them. Divestitures, if you look at it or where we were a couple of period, most of it came from acquisitions we did in the past.

If you do recall when we did Cognicase when we acquired Cognicase there were some activities in there, which were not in line with our strategies and were not core to CGI. Or, not meeting the criteria from a - it wasn't there performing. It was not as per our standards, namely, on contributions and market apportion initiatives.

So, the program we had in divesting it was a really good to those what we used to call under-performing assets or non-strategic assets. And, as I said and also the bulk of those divestitures has been done.

Okay. And then I guess just a follow up. In terms of your view or Michael's view on a stronger back half of the year, what's really driving that? Is that the assumption that we're going to see more new outsourcing contracts?

Or that we're going to convert from these SI bookings specifically maybe some of the Advantage deals that have historically been done towards more outsourcing or managed surface deals? Thanks.

Yes, thank you, in the, Paul, in the supporting Mike's argument or explanation.

So, when you look at the booking a good proportion in it is bookings related to system integration contracts. And, in terms of the revenue to recognize, for instance, there is a big difference between a system integration contract and an outsourcing contract.

An outsourcing contract -- you're going to recruit the people coming from the client. And when just the day following the closing you are going to recognize the revenue right away.

When you sign an outsourcing contract, so then you're going to have the ramp up period. So, it's a project. Then you're going to start to assign very few people at the beginning, the architects and the project managers. And then the ramp-up period is going to last probably between 3 to 6 months to really have a -- let's say a in terms of revenue recognition, when the people are going to be in place and working on that contract.

From -- in the case of a system integration contract there is a ramp up period when you look at also say contract. Boom, one date you recognize the revenue starting a given date.

That's what I tried to explain in saying that it is a kind of a one-time increment a given quarter. When it is an outsourcing contract.

So, a sense that we have the bookings has been higher by 62% when compared to last year's we are very confident.

Thanks.

Okay?

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

Hi. Could you just -- maybe Mike, could you just give us an update on kind of what's going on on the offshore part of the business in terms of customers especially maybe some of the commercial customers in the U.S. and their requirements? And how important that is as a part of either doing application work or outsourcing?

Thank you, Cynthia. As you may recall, Cynthia, and for anybody who was at the investor conference, what we're seeing in the marketplace now is more and more competitors including ourselves are really talking about a global delivery model.

So, the emphasis on pure offshore is I would say somewhat decreasing from a marketing and from a positioning in the marketplace.

In our case we see continuing demand for global delivery. Clients in the service side are still looking for enablers to drive down their costs. And again, from our perspective, we feel we're uniquely positioned here because of our really dominant position and footprint across Canada and our proximity to the U.S. market.

So we're, as you know, we're actively growing and promoting our various inner shore sites including Quebec City, Montreal, Jean-Pierre, Halifax, Regina, and steadily growing our India operations.

So, you know we're adding 40, 50 people a month in India? Our strategy there is to make sure that we continue to deliver excellent quality. A lot of our competitors are adding very large quantities of people.

And, our strategy has been to be very focused and steady to make sure we're bringing on experienced people and delivering high quality. So, I would say the demand is still there. It's being it's now more of a global delivery game as opposed to an offshore.

Okay, and then maybe just as a clarification. I think someone earlier asked just for a breakdown of the bookings in SI outsourcing. Can we, I'm sorry, I think I missed an actual number. I think you talked about it in a qualitative sense but if we could just split that out in terms of the percentages on both SI outsourcing? And then maybe a geographic split on bookings?

Well, again, I don't have the percentages readily available, but I would say that, geographically, I would say at least 50% came from United States. And, I would say that probably in excess of 70% was systems integration and consulting. But, again, those would be more directional than the absolute numbers, Cynthia.

All right, thank you.

Thank you.

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

Yes, could you comment on where you're -- in which verticals you're seeing the most promising activity in your pipeline?

Ed, it's Mike and thanks for the question.

Again, it's primarily in our 3 major ones. I mean government remains consistent. I mean, I don't think government ever really gets overly strong but they're consistent.

So, in the U.S. and Canada and even now in the U.K. where we've done an excellent project with Suffolk County, this is where we installed a Service New Brunswick E-government model. And the first phase of that's been done and there's some real opportunities for follow-on business there, went very well.

So, I would say government. The financial vertical is another one. We have a number, much deeper suite of capabilities as a result of the AMS acquisition. And we're seeing good growth opportunities in there.

And the third one, which to us is good news, the Telecom piece, especially in the U.S., we see opportunities coming there. The Telecom vertical, as you know, has been pretty soft for a while.

But, there is a lot of action down there in terms of even mergers and telephone companies expanding. They seem to be investing again now. And so we are seeing a little more strength in that vertical.

Great. And, as a follow up, could you comment or provide a bit more color on the decline in revenues from BCE? You made reference expecting to pick some of that business back up?

Yes. I think, again, if you look at the BCE fiscal year is a calendar year. So our second quarter is their first quarter. Our first quarter was their fourth quarter.

So the spend rate was very strong in the fourth quarter of last year, which was our first quarter. And, relative to our expectations, it was weak in the first, in this quarter, which is their first quarter.

Part of that came from Bell, as you know, had a very large retirement program. And a lot of those people left in that quarter and therefore some of the work program that we would normally start on got a little slower start.

But, as I said, we expect on the year that on our year that we would be in line with what the revenue stream was from Bell in comparison to last year as an example.

Okay. And just a quick question for Andre, just thoughts on issuance of shares and your thinking about how should we model in share count assumptions going forward?

Well, if you look at the MD&A you've got the number of shares that we have outstanding at this point, at the end of the quarter. And, we put an oath also to take into consideration the one that we can sell in Apri,l in which we're not cancel at the end of the quarter, the 3.9 million shares.

On the ongoing view, we'll, as we said there, that buyback program that we will continue to work with during this quarter and the next quarter during the year. And we have the ability to buy up to 27.9 million shares. And we have already bought 6.9.

So, we still have 21 million shares available on the market to buyback.

So, looking at it and making some your own expectation about the buyback program, and you can, I think, derive or surmise the number of shares outstanding at the end of the September 2005.

Okay.

Is it okay?

That's fine. Just you do have a bias towards buyback?

Yes, exactly.

Great. Thanks.

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

Yes, good morning everyone.

Good morning.

First question is related to your second half of if you prefer the guidance. Just like to make sure I understand correctly.

If I look at the low end of your guidance it appears that you've got to be doing at least a billion of revenue per quarter. Which would imply from the Q2 level of revenue base a 6%, a little bit more than 6% organic growth.

And in terms of EPS, if you want to be meeting your guidance you've got to be averaging between 0.14 and $0.15 cents per quarter. Which implies a net margin in the second half slightly above 6.5%.

So I'd just like for either Serge or Andre to comment on that and how comfortable you are with that.

We are, that's what we said, you know, so when I'm in my presentation, I said that our revenue during the quarter progressed well. So, your calculation is perfectly right. We went to the same kind of school.

That's what we expected to get and we think that we are going to, both on the top line and the bottom line, we should gradually improve ourselves in order to meet the guidance. Obviously, if the market conditions remain the same, no?

Okay. Now, in his comment said, we're maintaining guidance. Obviously, there's no slippage in contract being awarded. Have you experienced, since the beginning of the year, any slippage in contract where you thought you were going to be able to sign some contracts either in Q1 or in Q2 and they were not signed?

Well, I think we certainly had delays in the processes. I would say there were some outsourcing deals where we thought the proposals would have been out sooner and, therefore, the start of - the start of the process was delayed and therefore, of course, the end will likely be delayed.

And yes, I think it's a fair thing to say there were some deals that we thought might have closed in the front half that we're looking at that would impact the back half.

Okay, and on those deals, Mike, how long were you - had you been working on those deals that were pushed further toward the tail end of the year just to see in terms of ...

Let's say an average of one year, 12 months.

On average, 12 months?

Yes.

Okay. And what I wanted to know looking at your backlog, is there any significant outsourcing contract coming up for renewal?

For renewal, no.

Okay, perfect. And one last question here, ...

The average age is seven years.

Okay. One last question for Andre, in terms of margin, when we look at your margin by segment between Q1 and Q2, or maybe for Mike -- in your IT service, margins are slightly down to 10.6%, but your BPO margin has been hit sequentially from 13.9% to 12.3%.

What's the explanation behind that?

Well, first let me say a couple of things. Just first, all our business units in this company are profitable. All our geographies and lines of business are profitable, which I have to say from an operations perspective, I'm very, very happy with.

I don't think there are a lot of companies in our space that are generating as a consistent level and a balanced level of profitability across the piece. Relative to your specific questions, on the IT side, most of that, sequentially, came from the follow of the fact of the VCE revenue shifting because the drop was rather steep in January and therefore, it was very difficult to take the cost and get the same rate, so I would say most of that was there.

On the VPS space, I think, again, and I mentioned this last time -- the insurance industry is a very tight market right now and I'm sure everybody on the call buys insurance. Not a lot of people are actually putting claims in, so the claim counts are down and, you know, we're continuing to do a couple of things there.

One, we're looking to provide more services to non-insurance companies, so there are other companies like telephone companies, hydro companies, gas companies, that have claims, so we're trying to reduce our reliability on the pure insurance industry and get a little more diversification that will help us on the top line.

On the bottom line, obviously we're continuing to consolidate and reduce costs and automate to take out the margin impact of a soft claim business. So, that's what you're seeing in those numbers.

So, essentially, Mike, if I get it correctly, what you're saying is that in IT service, it's volume-related and it's a similar explanation for VPO in the sense that there's less claims and less volume you are absorbing in the cost structure?

Yes. I think though - I think the difference is on the VPO side, the claims piece has been happening for a while. You know, the insurance market goes in cycles, so we're on the cycle where claims are low. It will come back, but on the IT side, as I say, I think it's more isolated to the one event that impacted us on the top line and then proportionately on the bottom line.

Okay, great. Thank you very much.

All right. Thank you.

Thank you. The following question is from Peter Misek of Counter Court Capital. Please go ahead.

Good morning. I was wondering if you could provide an update on the Commonwealth of Virginia contract? Where is that in terms of the cycle? You spoke about it last quarter.

And also on the U.S. Department of Justice contract that you signed on November 8 -- we start seeing revenue being recognized in Q2 and was that part of the deferral that we saw that you mentioned in the MD&A?

Thanks Peter. Those are good questions. It gives me an opportunity to link it back to an earlier discussion. On the justice one, we're just starting to see some very small pieces coming out of there. Those GWAX in the U.S. are very large, as you know.

I think that one was in total of nearly $1 billion, so the ramp-up for that will take time, so we're just starting to see very small pieces of that. So, the good news is that's kind of front lock.

On the Commonwealth, and the Commonwealth is maybe a good example of the one we talked about earlier, the Commonwealth actually Virginia put out proposals for their data center, and there they chose two competitors, IBM and Northern Gummet (ph), and at the same time, on the application maintenance and development side, they chose CGI versus IBM.

We had expected those processes to run in parallel, but they chose to start with the tier one. So, our piece got moved out, so that's an example of what I was talking about earlier, you know, one doesn't control the shifts of these.

So, we're now - our piece of that, or our opportunity there is now active again and therefore, we're working on doing, you know, a review of due diligence and putting together our final proposal.

That's great. If I can just sneak in one last question, that free cash flow growth that you guys have seen over the last couple of quarters has been pretty impressive. Can you just give any kind of operational highlights as to why it has been accelerating like that? And that's it. Thanks.

Well, again, I guess we could say good operations, good management of cash. I think it's probably a combination of a whole lot of things. I think it goes back to the point that Andre and Serge made, I mean, we're seeing the value of our overall strategy of being a very efficient consolidator in the industry. We're generating consistent profitable operations.

We're managing our cash very tightly. As you saw, our DSO has dropped again. We're down to 48 days, which is - it's got to be one of the best in the industry.

You know, we're leveraging our scale when it comes to things like procurement. We're buying things at a much lower cost than we would have years ago, so I think it's a combination of all of that.

I think as well we have very solid clients. I mean, we don't - we have a very solid client base. We're not dealing with clients that have financial issues.

So, I think it's probably the combination of all of that and in addition, as I say, all our geographies are making money and all our lines of business are making money.

And also, (inaudible - heavy accent) in fact, as you know, when you compare us, the intangible, you know, we are supporting a lot of intangible (inaudible - heavy accent) acquisition, so our (inaudible - heavy accent) generating.

That's why we do (inaudible) to you today, the net earnings before the amortization of intangibles just to demonstrate, you know, our capacity to generate profitability as a corporation. and also it's the cash related to it. So I think we demonstrate that business.

Our business is a very good one and you know for sure when we look at our profitability level, you know, before amortization of intangible, it's really significant. I don't know if you ...

You know, that's cash protocol (ph), (inaudible - heavy accent), you know the DSOs should improve again as the proportion of our business coming from outsourcing contract will grow. You know, if we do recall, when we did AMS you know, the proportion of the business coming from AMS in system integration was much higher than that.

And then obviously, when you look at - if you look at the DSOs, (inaudible - heavy accent) before the acquisition. So, it was much higher than us, so we bring - we brought it down to a more CGI standard level, I would say, and as we are going to continue to win outsourcing contract, leveraging from their expertise, you know, that it should improve again. That's exactly what we have as a goal, okay?

And I would say our business has a very good gross margin and we do manage, as Mike said, out of the other expenses going after that gross margin, so it's - I think it's - we manage very closely the cash and the operations are generating very good cash.

Thank you.

Thank you.

Thank you. The following question is from Paul Bradley of Frasier McKenzie (ph). Please go ahead.

Yes, good morning, just a couple of quick questions. Serge, you highlighted a number of announcements that were made during January relating to the advantage, I just wondered in the current quarter, what proportion of revenues will be accounted for by license sales of software products?

Well, it's minimal. I think, let me give you what was - yes, less than 10 million (inaudible).

Less than 10 million. Okay. And, in terms of the multiplier effect of that 10 million then generating systems integration work for you? I mean, is there a number you could apply against that?

Probably between 3 and 5 times.

Okay. So, it's relatively small in the overall context of things. The second thing I just wanted to look at was you spoke about the funnel of new business opportunities. I think you mentioned $7 billion there.

Could you give a little bit more color on the mix of that business, maybe the largest sort of dollar value piece of business inside there and, you know, the kind of timeframes over which you think that stuff might come through?

I think it -- that pipeline, it is a pipeline, the $7 billion is the total - it is the number of the total of (inaudible) altogether, but it's strictly for larger outsourcing contracts we're presenting, more than $50 million per year.

Okay. And I mean, clearly, you don't want to give away competitive information there. But the largest single bid, would that be bigger than 500 million in there, or is that a - is there a billion dollar deal in there?

Oh yes.

Okay. So billion dollar deals are actually in there. And does that number strictly relate to outsourcing ...

... billion dollars deal.

Oh, okay. Good. Okay. And does it strictly relate to outsourcing or does that also include systems integration type work that you might be bidding on that's coming up in future quarters?

Most of it is a full IT outsourcing contract with a big emphasis on what is often the value chain, so it means system development and system maintenance, tier 2 and tier 3 activity.

Okay. Tier two and tier three, and I'm sorry. I think you may have answered this question already in relation to something else. The bulk of that, does that relate to bids being made on work in the U.S.?

It's half and half.

Okay. Fifty percent U.S. and the rest of the world. Okay. And one last question, just on head count, the number of employees that you have now working in the U.S. for you, sort of against this time last year?

7,500 I think, U.S. you mean?

Yes.

We essentially I think doubled our footprint in the U.S., Paul, with AMS (ph).

Okay. And you've spoken about the integration of AMS. I'm assuming that some of that integration resulted in staff productions in certain areas.

I mean, is there a percentage, where would that be say compared to when you took them over?

Well, I mean, I think we covered a lot of that in earlier calls. Essentially, I think, as Andre said, most of those integration costs are now behind us.

Okay. Good. That's all for me. Thank you.

Okay.

Thank you. The following question is from David Wright of BMO Nesbitt Burns (ph). Please go ahead.

Thank you very much. Good morning.

Good morning.

You've covered most of my questions, but a final one, just sitting back and looking at the numbers, it's not the easiest of environments out there, so I congratulate you on your numbers, but when I look at the BPO business, ...

Thank you very much.

Yes, okay, good. When I look at the BPO business, it seems that it hasn't grown maybe up to the expectations that you may have had and certainly IBM's results recently, they had very strong numbers come out of that part of the business.

So, I wondered if you could comment on actions that you're taking in that area to try and beef up the growth if you're still intending to do that?

Well, again I think the absolute margins on our business, our BPS business, are still very strong, frankly. I think as you noticed this quarter, we divested some assets in that space that were underperforming and not core to us.

On the other hand, we have strengthened our leadership team in the area of putting more emphasis on what we call our shared services business process ...

We have strengthened our leadership team in the area of putting more emphasis on what we call our shared services business process offering, and this is in the areas of F&A, Finance and Accounting, outsourcing, and in areas related to some of the transactional pieces of human resource area.

Our claims business, our insurance business, we believe, is a good long-term business, but, as I mentioned earlier, David, there is a cyclical impact to it.

So, I would say that's -- on top of that, you know we have services that we have acquired from AMS that we're looking at accelerating a little bit more into business process type services, but they are more in the development space, so we're still very committed to it. I think again, you know, I would look at our overall performance here as a total entity, but you know, frankly, I think, as I say, we're generating good cash and good margins in that piece of the business.

But when I look at -- I mean I can only see the surface numbers, so you know that you sold off pieces of business, but that division really has not grown in any sizable revenue amount over the past year. Now, certainly there is a foreign exchange issue in that, but then when, you know, IBM was talking about you know their growth was something like 90% in that area.

So, you know that they pitching in areas that you are not, like vertical industries that you are not in or you know is there a cost structure difference between your competitors? Have you done and assessment? Like are you missing opportunities, or just not able to compete on them?

No, I think we are not missing opportunities, and they're obviously -- in looking at -- when you -- the strategy we have here always -- it is always in line with the buyers you know within large corporations, so it is always up in the value chain, you know, when you think about our strategy.

Okay.

So, why? That's because very simple, we are -- it is also in addition to the very good business, and very strong business. We are also protecting the revenue coming from the IT side, you know, because when you have a business processing contract which is signed, it always goes you know with the IT portion of it, Okay?

So, this is -- and when you look at this GI strategy related to the business processing activity, it is in line with what I just said. So, what it said though, when we -- again, a big portion of the business processing actually is we now have, and as we said, you know, the divestiture, you know, it's behind us now.

What we have today is a pure core business for CGI, then building on it. So, we wanted to be sure that those operations were very well-managed, you know, that we had the management team there, and then as we announced you know a few quarters ago, we are still looking to grow that business relatively rapidly.

But you know, when I say relatively rapidly -- so it means that it's going to grow obviously always looking at -- from -- seeing from an execution point of view. So, with that again, not going to get you know a $300 million contract in there because you know from an execution point of view, would become risky. You should see how take growth rate in there, through -- coming here through acquisition from both acquisitions and also same contract.

Okay.

We needed you know to, let's say -- to be sure that everything was managed properly. And again, we have been quite successful as Mike said. That's why I said, you know, so the margins on that are pretty good.

Okay, thanks for the explanation. Just a quick question, your head count in India, Mike?

About 850 now, David.

Oh well, Okay, so it is moving up?

Yes, moving up, as I said, you know, 30 to 50 a month.

Great. Okay, thank you. My other questions were answered.

Okay, thank you.

Thank you, the following question is from Richard Tse, of National Bank Financial. Please go ahead.

Hi, thank you. Just a couple quick questions here. First, you guys talk about the sales cycle for these deals, about 6 to 18 months, but, you've been suggesting that the pipeline has been fairly active for the last, I think, it's three to arguably four quarters, so does that kind of imply or indicate that we are here on the cusp here of signing some of these deals?

Mike go.

Well ...

Loaded question, right?

Well, Richard , you know, I gave you the one example and I could share others, but I think you know really I can assure you on our side, you know, we push this stuff as much as we can, but there are a lot of factors, and you know, the Commonwealth of Virginia was a good one.

I mean, you know, by luck or chance they could have started the other way with the bid we're involved and the other team would have been talking about a delay, so yes I mean we're -- you know obviously we're very, you know, optimistic that, you know, we have a very deep funnel that's qualified, the deal flow appears to be picking up, and you know, against that backdrop, we're continuing to work hard to, one, make sure that we're at the table on these deals and that we win our fair share.

Okay, and on the pricing environment, have you guys had to re-price any of your existing contracts?

Nothing material. I mean again, in the outsourcing business one constantly is reducing costs to generate margins and stay competitive. I would say our renewal rate is extremely high, which I think is probably the key indicator there, Richard.

Okay, and finally, I guess this is for Surge, you know, given the lag in stock price and with all the free cash flow generation here, have you guys ever considered the possibility of you know turning this company into a Trust?

No comment.

Good question So, if we say yes, you know, the stock is going to double tomorrow. Richard, I just -- I think we have to take into consideration also that during the last 12 months, you know, we have generated revenue coming from the backlog close to $3.5 billion, so it does affect, you know -- we add to the backlog, and we use that backlog to deliver the revenue also.

So, I think you have to take that into consideration. And the backlog went up, and there's still over $900 million compared to last year for the same quarter.

So, during that period, we took from the backlog $3.5 billion that was billions we had, you know? And we add to that backlog Okay? So, we have $12.9 billion now. But, for sure, we haven't signed any contract where we have 3 billion-plus you know type of a situation. Do you understand what I mean?

Yes, I get you. Thank you very much.

OK, well, I guess we're going to take the last question please.

Thank you, the following question is from Robert Mana (ph), of Kramer Rosenthal. Please go ahead.

Yes, just a quick question. Can you give us some perspective on the VCE revenue? If that revenue had actually been there this quarter, can you give us some color on what margins would have been for the quarter?

It would have been higher, and for the reason I said, Richard -- or Robert. The challenge was really -- when you dissect that period January was a real tough month because the ramp-up started late and, you know, February was better than January. Much was much better than February, and by the time I'm into April, I'm kind of back up to where I need to be.

I don't have the quantification of it, but clearly, it had an impact both on the top and bottom lines.

So, if I think of it on a trend basis, are we trending to a level higher than we were in the December quarter?

Well, as you saw, we've been trending up now for three quarters.

That's right.

As we you know gain those synergies from AMS, and again, we're looking to keep that moving forward.

And, in terms of a net turning growth, so we reiterated the guidance. So, then you see an increase there.

Thank you.

Thank you.

Thank you very much.

Thank you.

Thank you.

Operator?

We thank you very much. We thank you very much, thank you very much for your confidence again. As we said, you know, we are very confident with our outlook and so we think that it is exciting days in this -- let's say turbulent environment.

You've seen what is going on with our competitors, which is sad for them, but you know, on the other side it's very good news for us, so we are very very -- there is a lot of opportunities.

I said at the last conference call that we have been in that business for the last 29 years, so -- and then we've never seen a so strong -- the market is really let's say vibrant. So, we thank you very much for your confidence.

Have a good day, bye-bye.

Thank you, the conference has now ended. Please disconnect your lines at this time. We thank you for your participation, and have a great day.