CGI Inc (GIB) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the CGI quarterly results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Lorne Gorber, Vice President, Corporate Communications and Investor Relations. Please go ahead, sir.

Thank you, Stephanie. Good morning. With me to discuss the third quarter of fiscal 2006 are Michael Roach, our President and CEO; Serge Godin, CGI's Founder and Executive Chairman; as well as our two new appointees, Andre Imbeau, Co-Founder of CGI and Executive Vice Chairman; as well as David Anderson, Executive Vice President and Chief Financial Officer of CGI.

This call is being broadcast on cgi.com. Supplemental slides, as well as the press release we issued earlier this morning, are also available for download. Additionally, our Q3 MD&A is posted on the web and is being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and 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 report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures, which should be viewed as supplemental. See the MD&A for definitions of each non-GAAP measure indicator used in our reporting.

All figures expressed on this call are in Canadian dollars unless otherwise noted.

Now I'll turn the call over to Andre, who will review the financial highlights of the third quarter and Mike will then comment on the operations and make some concluding remarks. We'll try and leave as much time as possible for Q&A, at which time our participants will be available to answer your questions. Andre?

Thank you, Lorne, and good morning. Early this morning we reported Q3 revenue of CDN$866.5 million, essentially unchanged on a sequential basis. Year-over-year, when you exclude the CDN$40.1 million in lower revenue from BCE and the CDN$38.2 million currency impact, growth was approximately 1%.

Sequentially, currency had a negative impact of CDN$7.9 million, but BCE revenue were up CDN$5.3 million. Net earnings from continuing operations before restructuring costs related to specific items in the third quarter of 2006 were CDN$46.4 million compared with CDN$34.8 million in Q2 2006, a sequential improvement of 33%. After these cuts, net earnings from continuing operations in the third quarter of 2006 were CDN$35.9 million compared with CDN$14.1 million in the previous quarter and CDN$56.6 million in the third quarter of 2005.

On a basic and fully diluted EPS basis, before restructuring costs related to specific items, the company earned CDN$0.14 per share compared with CDN$0.10 per share in the previous quarter, an increase of 40%, and CDN$0.13 per share compared with the third quarter of 2005. So EPS on a basic and fully diluted GAAP basis was CDN$0.11 per share in the third quarter compared with CDN$0.04 per share in the second quarter of 2006 and CDN$0.13 compared with the third quarter of 2005.

As part of the action plan we announced at the end of March, a pretax provision of CDN$15 million was taken in the third quarter for severance and other related items, such as real estate consolidation. A breakdown of these restructuring costs can be found in the MD&A we posted on cgi.com this morning.

We expect to incur approximately CDN$44 million in remaining charges over the course of this calendar year, bringing the total of approximately CDN$96 million, which is in line with the total program cost announced on March 29th and we continue to anticipate a one-year payback.

On the cash side, cash provided by continuing operating activities in the third quarter rose sequentially to CDN$108 million after paying out about CDN$31 million pretax in the restructuring costs, compared with CDN$82 million in Q2.

Our long-term debt decreased by CDN$150 million from CDN$962 million to CDN$811 million in Q3. At the end of June, our cash and cash equivalents stood at a healthy CDN$155 million for a net long-term debt of CDN$656 million.

Now our debt-to-capitalization ratio stands at 25.5%.

So, in summary, the balance sheet is very strong. We have more than ample flexibility to continue to-- to continue supporting the corporation's growth.

Finally, I want to take a minute to discuss the organizational change announced this morning. Effective immediately, I will be changing roles and moving to the office of the Executive Chairman and Executive Vice-Chairman. In this role, I will be active on highly strategic growth initiatives, financing and key clients relationship.

At the same time, David Anderson has become Executive Vice President and CFO, reporting to Mike and joining the Executive Committee with Serge, Mike, Paul and I. With his deep knowledge of CGI and his many years of industry experience, David will lead our financial team worldwide.

At this point, I would like to turn the call over to Mike to make some remarks and discuss the operating highlights.

Thank you, Andre, and good morning, everyone. With respect to the third quarter, I'm pleased with our progress on a number of fronts. First, we rapidly improved product-- profitability levels, due in part to the action plan we announced last quarter.

We continue to generate solid cash from operations. As Andre pointed out, we had more than CDN$150 million in cash at the end of the quarter after making a significant debt repayment. At the end of the quarter, our net debt was CDN$656 million, a good step from only three months ago.

Despite the hit that we've been taking and continue to take on the currency front, we managed to stabilize revenue and improve our EPS significantly. To put it in perspective, currency negative impacted us by CDN$7.9 million sequentially, CDN$38.2 million versus quarter three 2005 and CDN$83.5 million year-to-date. Bookings and backlogs were also negative impacted as a result of currency, while the translation of our U.S. dollar debt was positively impacted as a result of currency.

At this stage of our improvement plan, we're tracking to the targets that we announced. Going forward, we will continue to focus on two corporate-wide objectives. First, profitable growth using both levers of our build and buy strategy, buy referring to acquisitions and build referring to new business. And we continue-- and we will continue the gradual expansion of our margins.

On the buy side, we made a niche acquisition in France during the quarter to expand our global SAP practice and better serve our clients globally. The acquisition of Plaut Consulting added 120 new members during the quarter.

As Andre pointed out, looking forward we have the flexibility to continue to acquire, whether for niche acquisitions or larger strategic acquisitions, adding material scale and scope to our operations. Consistent with our strategic plan, we continue to be active in reviewing opportunities both in the U.S. and Western Europe.

With respect to organic growth and as we have seen with other players in our industry, this has been slow over the past few quarters. This is partly due to some delays in the outsourcing segment of our business, especially in Canada as corporations are focusing on such things as SOX compliance or the equivalent. We believe this situation is temporary.

To address the above, we have recently put in place a new business development program with an objective of accelerating our organic growth. This program is twofold. The first is the complete implementation of our business development visibility system in each of our business units around the world. This portion of the program is beginning to show results, witnessed by the bookings in quarter three.

We booked some CDN$787 million of new business during the quarter, including some very strategic contracts in the state and local space of U.S. government, as well as a full IT outsourcing win in Canada. Excluding the BCE extension booked in quarter two, our bookings were up 23% sequentially.

The second leg of the program is our full offering strategy. Across the company we have identified 600 accounts, including 400 existing clients, where the strategy is to ensure complete awareness of our full offering, obviously leading to additional work. The remaining 200 accounts are new pursuits.

Our intention here is to manage this program with the same discipline and dedicate we have demonstrated in executing other successful company-wide initiatives. We expect this approach, over time, to yield tangible results in the form of profitable growth.

In closing, I'd like to congratulate both Andre and Dave on their new roles. I look forward to continuing to work very closely with Andre in his new role. With respect to David, Dave and I have worked together for more than 10 years. His professional experience, his detailed knowledge of CGI and his industry background make him extremely well suited for this key leadership position.

With that, I suggest we go right to the questions.

Just a reminder before we do that that a replay of the call will be available, either via the web or by dialing 1-800-408-3053 and using the passcode 3190513 until August 9th. Any followup questions can be directed to me at 514-841-3355.

Stephanie, if we could poll for questions?

Thank you. [OPERATOR INSTRUCTIONS] The first question is from Paul Steep from Scotia Capital. Please go ahead.

Hi. If we could talk a little bit about the restructuring and the cost-cutting there and what the status is in terms of the remaining benefits to be captured, just how that's going to flow over the remainder of the year?

Well, again, Paul, two things. Essentially, I think on the-- relative to the cost side of it, we've-- we taken about half of the costs. We've reduced the targeted people component by about two-thirds of what we were looking for, so we do expect over the remaining two quarters to see further positive impact of the restructuring, which should, obviously, gradually improve our margins for the next-- for the next two quarters.

We're very pleased with the progress we made after one quarter. As you can tell here, we were very aggressive in getting the costs out and helping restore our utilization rates, especially in the BCE account, which is one of the factors that have helped to rapidly restore our level of profitability.

And then is the margin target still sort of the 17% level in terms of after options or are we thinking somewhere in the mid 15s, just to get an idea of where you think the leverage is here?

I'm-- about this number, we know-- we are not aware about your calculation exactly. I think if we look at the communication we did last quarter and also this quarter about the program itself, we said that we are spending around CDN$90 million on that program and we do expect that that program would be finished by this calendar year and we will recuperate the full aspect of the-- the full cost, okay, within the year from the announcement of the program. So we did announce the program at the end of March this year.

And the-- the benefit of the program is gradual, on a quarterly basis, and, as I said, we do expect to have recuperate by the end of March 2007, as we said, the full cost-- the full cost of that program.

Okay. And then the last one was just, what's the focus of priorities for the next several quarters in terms of whether you're evaluating the buy-back in relation to paying down the debt or in relation to maybe doing an acquisition?

Well, again, obviously that will depend on what we see there in terms of-- of opportunities. We were very aggressive in paying down the debt this quarter and, as Andre pointed out and I reinforced, we do have sufficient capacity to do-- to do either debt replacement or acquisitions or a combination of both, depending on the opportunities that we see there, Paul.

Okay. Thanks, guys.

Thanks, Paul.

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

Hi. I wanted to-- I wanted to talk about the state-- the U.S. state and local business for a minute. Obviously, it looks like the proportion of U.S. business is actually picking up a little despite-- despite currency and the government business seems to be becoming a slightly larger part of the pie. Given what you've seen about the AMS-- AMS business continuing to be strong on the Advantage side, what are some of the opportunities near term on the state and local that you're tracking and may be able to talk about?

Well, I think your observation is right. We're very pleased with the U.S. operations from a number of perspectives and I should point out that the opportunities we're winning there are not only related to Advantage. We're also winning stuff in the federal space. We're also winning work at the state level on-- on case management systems, for example, in the State of Florida.

So it's not only Advantage-related, it's essentially as a result of us taking existing long-term relations that AMS had and expanding those with other capabilities that CGI brought to the table, including turning some of these what were traditionally short-term missions into long-term outsourcing arrangements, taking Advantage or Momentum that used to be sold or were sold on a licensing basis and now offering to operate them on a 5 or 10-year period.

So you're seeing some of that in there that, again, should not only in the short term bookings, in fact, they have a bigger impact on the long-term recurring revenue streams that-- that we will obtain from the U.S. base.

And when does the Virginia contract start to-- start to really kick into the revenue line?

Well, they actually had some short-term challenges around getting their budget approved at the state level, which I think for many of you that follow that market, that's not unusual. But it has been approved now, so that ramp-up will start over the next number of quarters. We were, obviously, disappointed that it didn't happen sooner, but the budget has now been approved-- the government budget, which has this in it, has now been approved, so we do expect that ramp-up to pick up over the next number of quarters, probably-- probably more outside the summer quarter, to be honest.

Great. Thank you.

Thanks, Scott.

Thanks, Scott.

Thank you. The next question is from Mike Abramsky from RBC Capital Markets. Please go ahead.

Yes, thanks very much. Just a high level, the growth, can you just, perhaps, review what the drivers and catalysts to organic growth that you see over the next 12 months are, specifically in regard to U.S., also BCE, another other new contract opportunities and seasonality?

Well, I think on a macro level, despite the short-term impacts I've already mentioned relative to Canadian outsourcing opportunities, we are seeing a number of clients that we're working on who are telling us that they would sooner wait until they get their SOX or the Canadian equivalent certification. They're really in a freeze mode here in terms of getting their processes certified, so they would like to wait until after that-- that process. So that's slowing down a bit the Canadian opportunities on the outsourcing side.

In-- in the U.S., again the state and local government business continues to be strong. We're also seeing good opportunities in the financial vertical in the U.S.

Relative to BCE, BCE-- sequentially the amount of revenue we got from BCE was up about CDN$5 million quarter-over-quarter. BCE, though, is still tracking slightly below the CDN$400 million commitment with six months to go. We've sized the force and-- to the minimum, so from that perspective, we-- as long as they continue to track to the minimum, I think we've addressed a good piece of that concern.

So I think the market is still-- is still healthy out there, but there are certainly, as we said, there's a number of players -- I don't think we're the only one in the industry -- that are seeing some short-term pressures here in terms of growth.

And what gives you confidence that that momentum will recover? What signs can you point to? It sounds like you've seen some stall, but you haven't necessarily-- they haven't given you indications, some of these clients, as to when that might restart.

Well, I think there's a number of things. I mean, on the macro level, there's-- nothing gets done anymore in government and industry that isn't linked to information technology. So I think the second thing is that with globalization, companies need to continue to invest in information technology to become more competitive and increase their productivity.

I do think that after-- in Canada, after the SOX and the certifications are done through that process, companies have found that they do have to invest to streamline their operations, take out duplication, put in better automated tracking of their processes. So all those type of things.

I think in our industry one needs to be-- always be very aware of the short-term pressures but never lose sight of the long-term growth opportunities in the information technology business. You just can't run a government or a company without investing heavily in information technology. You might delay certain investments, but sooner or later you're going to have to invest to-- to improve your operations.

Okay. Last question, Mike. The backlog shrinkage or backlog reduction, slight backlog reduction, some of that, I think, is FX, but is some of it, perhaps, either contract-- you mentioned, for example, some of the renegotiation of contracts for the long term, but does that also, perhaps, cause revenue to be perhaps more over-- cause the backlog to go down?

And also, have there been other potential contract renegotiations? Is there something else there?

No. I think it's primarily FX and the book-to-bill in the quarter was a little under 1, therefore, kind of the combination of the two would be the two major factors.

Okay, the FX hit revenue 1%, I think, so 1% impact to backlog is about CDN$137 million, which I think you had about CDN$200 million shrinkage. Isn't that about a CDN$70 million gap?

Well, it's not only-- there's also-- the book-to-bill is-- we-- compared to the revenue. And so we've eaten into the backlog in the quarter.

Okay.

Okay?

All right. Thank you.

Thanks, Mike.

Thanks, Mike.

Thank you. The next question is from Peter Misek from Canaccord Adams. Please go ahead.

Good morning. Just a question around taxes. It appears your tax rate was a little lower than we had anticipated. What kind of tax rate do you think we should model going forward?

I think you have to stay on the 34% as the tax-- tax rate. This quarter I think we had to, then, pick up -- as we explained in the MD&A -- we had the benefit of some adjustment coming from the tax on the federal side. There is a-- the federal tax rate adjustment that we have the effect this quarter.

Okay. In terms of the bookings, do you disclose the percentage of new versus existing clients?

No.

Can you just talk about maybe, then, trends? Have you seen an acceleration in existing versus new? Or just to give us some idea of the underlying trends?

Peter, could I suggest that before we answer it you just put your phone on mute? Because there's a lot of-- a lot of feedback here. Thank you.

Thanks, Peter. We had a little difficulty hearing all that, but I think your question was relative to the bookings to give some color as to whether they're all renewals or all new. I think the short answer is they're a combination of both and just to kind of put that in perspective, both are very, very important in our industry. It's always very important to renew existing relationships and extend those because obviously there is no startup or transition costs associated with renewals.

So in some cases they're-- they're renewals and extensions. In other cases, in the case of the circus, it's a new win and, therefore, a new client and a new addition to the bookings and the backlog.

Okay, thank you.

But I would say to answer that, our backlog is still a very young backlog because we still have seven-- more than seven years to go beyond that backlog, so just to help you on that line.

Thank you. The next question is from Garrett Bekker from Merrill Lynch. Please go ahead.

Hi, good afternoon. This is actually for Ed Maguire. Good morning, I should say. I'm just wondering if you could give us-- I know you talked a little bit about the environment in Canada and the U.S. I'm wondering if you could maybe talk a little bit to Europe? Any-- any change in the environment over there?

No. I just did an office trip through there, actually visited a number of our offices over there. First, I'd point out, which I know I've mentioned a number of times, all of our business units globally are profitable. We're seeing a good balance now between our geographies, in fact, in terms of profitability.

Our European operations remain very healthy. The business climate in Spain is actually very good. The economy seems to be growing well there. Same with the UK. Our France operations are doing much, much better. The addition of Plaut there will help us.

I think I don't highlight them as much for Ed just because of the relative size in comparison to the Canadian operations and the U.S., but from an opportunity standpoint, as I say, we continue to look at Western Europe as an opportunity to grow, both organically and also from acquisitions.

Great. And just some thoughts on the-- on the Canadian dollar impact. Is there any steps that you could potentially take to maybe help mitigate that going forward?

Well, the problem on that -- and, again, I'm glad you highlighted that, because I think in the last fiscal year it had a negative impact of over CDN$100 million on our top line. We're on track this year for another CDN$100 million and I kind of try to point out again from an operations standpoint, this is-- this shrinkage due to FX. It's not the impact of what we have to sell or deliver. So we're still-- we're still out there selling and delivering this work. It's being melted somewhat by the-- by the currency.

We can't really hedge to the top line. On the bottom line, we're not being impacted as materially because of the amount of our licenses and labor that's in-- paid in Canadian dollars, but obviously it's something we've got to think about on a go-forward basis relative to the bottom line.

Great. Well, thanks very much.

Thanks.

Thanks a lot.

Thank you. The next question is from Wojtek Nowak Blackmont Capital. Please go ahead.

Thanks and good morning. My first question is on the restructuring so in your MD&A you mentioned that you had reduced staffing by 850 individuals. As I recall, your plan was to reduce by 1000 but offset that by hiring 400 in low-cost geographies. So can you-- can you clarify as to whether that 850 reduction was net and what's happening with the relocations?

Well, the relocations are progressing well. One of the larger ones was moving BCE work to Atlantic Canada. We've staffed up about half of that. We're over 100 hires out there over the-- just the last quarter. So I think from that perspective we're very pleased.

The headcount reductions we were looking for approximately 1000 headcount reductions, offset by some of the additional work that we have moved and additional staffing we're doing in our global delivery centers. So that's what I mentioned. We're well on our way in terms of taking the labor component of our restructuring costs out of the operations.

Sure. So I guess the question is, going forward would there be any more net reductions in the headcount?

Well, again, we've got to be careful because the total headcount in the company, as I mentioned, when you do an acquisition like Plaut we added people. So, again, we're talking relative to the size of the restructuring. There are other areas in the company where we continue to grow and add headcount. So I think our headcount, you can expect, will still be fairly stable in the-- in the 24.5 to 25.5 kind of range in terms of members.

Okay, thanks. Secondly, if I look at your revenues over the last few quarters, there's been a progressive shift away from outsourcing towards systems integration and consulting. What's behind that and how are you addressing that dynamic?

Well, again, I think there's two things. It's-- certainly in Canada, for the reasons I said, we have some opportunities that we're not able to close in the current environment where companies are really at this point kind of saying I want to focus on getting my-- my SOX or the Canadian equivalent and I guess it's Bill--

198.

--198 in Canada. So there's a bit of that going on that's impacting us in Canada. How we're addressing this, though, is as I mentioned we-- we have traditional did most of our marketing and business development at the local business unit level. What we've decided to do now is to build a more integrated approach, leveraging corporate people and local business unit people and focus with pursuit teams on about 600 accounts, 400 that are existing clients where we need to go in there and increase wallet share, and 200 which are new clients where we really have to break into the account at some level.

Obviously, the strategy there is to enter those accounts at the highest level possible to expose to the CXO level the benefits for them of entering into an outsourcing agreement. So that-- that is how we plan to continually put more pressure into the-- into the market in terms of getting more opportunities in the funnel on outsourcing and actually moving them through the funnel to a close.

Okay. Thanks very much for that. And just lastly, can you-- what was the organic growth in the quarter?

Well, I think if you adjust for currency, we said, and for the drop--

The revenue coming from Plaut during the quarter, from the acquisition, the total growth is--

Is it versus last year you're looking there, Wojtek?

Yes, I'm looking for organic growth, because you do disclose the growth ex the currency impact, but not excluding all acquisitions that happened in the latter part of last year, for example.

Yes, but one of the things on that, Wojtek, we-- we're going to talk about acquisitions and separate them only when they haven't been integrated. After they've been integrated, there's no way I could break out whether the growth is due to the acquisition or the other activities in the business unit.

So where we have a current acquisition that hasn't been fully integrated, we will disclose the-- the revenue coming from that, but after they've been integrated, we're not really able to break it out with any certainty.

Okay.

So we're going to talk about profitable growth.

Sounds good. Okay, thanks. That's it for me.

Thanks, Wojtek.

Thank you. The next question is from David Wright from BMO Capital Markets. Please go ahead.

Thank you very much. Good morning.

Good morning, David.

Hi, David.

Hi. I wonder if we could talk about Europe a little bit. You've said in the past that you're looking to, I think, triple your European operations. You've done this acquisition now and so on a number of fronts here, first of all, the acquisition was in France. Traditionally, you've sort of shied away from that country as a result of the labor laws there, yet you went ahead here. So maybe you could talk about why this opportunity and then secondly, what else should we be expecting from your European operations in the next couple of quarters?

Okay. That's a good question. Relative to France, our operation in France now is operating at a very good level in terms of their margins. They've got a good pipeline. The management team we have there is very well aligned to the CGI culture and business model.

Plaut -- we were looking for an SAP capability in Europe. SAP is, in our view, doing very, very well again in the ERP space and we have a very large SAP practice in Canada, but we wanted to add capabilities and reach into Europe and ultimately do more in that space in the U.S.

Plaut, when we looked at firms, Plaut actually offered-- offered the best value for money for us, independent of location, frankly, in Europe and also added more scale to our French operation, which was important to us when we look at the-- at the revenue versus the fixed cost of our French operation. It also was designed to help us serve, David, a number of our existing clients that have operations in Europe and that have SAP, especially in the manufacturing space.

As well, as we mentioned, we've always said that we're primarily looking for acquisition targets in Western Europe and in the U.S. One of the challenges in Europe, we have to be very diligent there to look at the valuations. In some cases, the valuations are much higher than what they are in North America and while that may be justified at one level, as you know, we only do acquisitions if they're accretive. So you have to be extra diligent in making sure that we find a target that meets our-- our acquisition criteria. So it means we have to look at more candidates, actually, in the-- in the European space than we would, for example, in North America.

So it does take a little more time to find the right acquisition at the right price and that's a bit of the issue that we find when we're looking at targets in Western Europe.

Okay. That's good. Would you-- what would you describe the environment like as far acquisition opportunities in Europe? Is there any more low-hanging fruit than normal or is it pretty much steady as she goes?

Yes. One of the areas that's a little bit more interesting to us in Europe is there seems to be more captives in Europe where large European companies have IT or shared services units, Volkswagen actually had one that they sold off that we took a look at.

Right.

So we're looking at that space, as well. The publicly traded ones, there may be some there that are of interest, but I would say that we're probably looking hard at the-- at the captives and very selective at kind of middle-sized players in Europe at this point.

Okay. Thanks on that. A question on restructuring. So it looks like, from what's left to spend, that roughly CDN$10 million of cost to CGI left to spend to complete the restructuring?

No.

No.

Did I--

It'd be about CDN$44 million left to spend.

Oh, okay. I thought that the total was going to be something like CDN$60 million to CGI and you've spent about roughly CDN$45, so--

No, it's CDN$90, David.

Okay, it is, to CGI?

Yes.

Okay. And then I think in the past you've disclosed percent of business from the top five accounts and I only see it for BCE. Do you have that number?

I can circle back with you, Dave, afterwards.

Okay. So my related question to that is could you talk about what's going on at the other accounts? Because it seems that BCE's business is going up. If I assume that your top five has been roughly stable, then that suggests that maybe there's some weakness in the other four. Are they any different than kind of what's going on in the overall market space?

No, and, again, I-- I wouldn't read a lot into that, David. I mean, these things will fluctuate quarter-to-quarter depending on whether a large project is starting or another one has stopped. So, no, I think we're highlighting BCE, obviously, for obvious reasons, but no, there's no-- there was nothing in the fact that we didn't highlight the other four. We highlighted BCE only because I know the market has an interest of where they're tracking relative to the minimum commitment.

Okay, that's very good. Oh, and one last question is, I guess Plaut you paid for with cash, is that right? As opposed to shares?

Yes.

Okay, great. Thank you very much.

Thanks, David.

Thank you.

Thank you. The next question is from David Shore from Desjardins Securities. Please go ahead.

Thanks. Mike, could you talk about the sales cycles for large-scale outsourcing deals in the U.S.?

Well, again, I think we covered off the last call that the sales cycle is definitely longer than what we would have seen, say, four or five years ago. We're-- it's anywhere from 12 to 24 months and I think in the U.S. relative to Canada it's a little longer for us. And the reason for that is, obviously, we're not as well known there. So there's a piece of the premarketing we have to do in the U.S. that we don't necessarily have to do to the same extent in Canada. So it's a little longer in the U.S., David, because of that.

It's not the same, obviously, if we're working in clients or government space where we are known. So when I talked about things like taking a Momentum contract and turning it into a 10-year outsourcing contract, we're not starting as an unknown there. The client knows the software. He knows that AMS installed it and he knows through-- through the last year now that CGI is a very reputable firm and has brought a lot of value when we put the two operations together. So depending on the client, the vertical, how well AMS was entrenched and how well we're known or not known impacts the-- the sales cycle, especially in an outsourcing deal.

But you haven't seen any change this quarter from last quarter?

No.

Okay. The other question is, has the board considered paying a dividend?

We review on an annual basis, normally before our AGM, things like share repurchasing or dividends, frankly all options to maximize shareholder value. So that topic is not on the table and will be reviewed as a regular item at our board meeting preceding the AGM.

Okay. Thanks.

Thank you.

Thanks, David.

Thank you. The next question is from Ralph Garcea from Credit Suisse. Please go ahead.

Good morning, gentlemen.

Hi, Ralph.

Hi, Ralph.

A couple of questions. On the flat revenue for this quarter, you guys mentioned there was no Virginia business there. Was there any Cirque du Soleil or Royal & Sun Alliance in the quarter?

There'll be some Royal & Sun Alliance, a little bit of the Cirque, but not the full impact of Cirque.

So both of those will be full impact in Q4?

Yes.

And then you only had one month of Plaut, right, in this quarter?

Yes.

Okay. And then on the Plaut side, I mean, do you see leverage here like you've gotten out of the AMS business, i.e., you've got all these SAP clients here, what are the possibilities, other than Alcan or Air Liquide that are customers already, of converting some of these guys into longer-term deals?

Yes, I think again we'd probably like to even get more SAP capability in Europe and the U.S., as I mentioned, Ralph, because we do think there's opportunities there. So, yes, I mean, I think we're also operating our SAP practice and leveraging more our Canadian capabilities. We really haven't fully leveraged all the people we had in Canada. We were, frankly, very focused on very large accounts that we were maintaining. What we're trying to do now is get more feet in the ground in Europe and the U.S. with SAP and then leverage those relationships back into what we've been able to do for a company like Bell Canada in terms of maintaining a very large and complex SAP environment.

So that's the strategy around the SAP play.

And then just lastly, on Bill 198, I mean do you see that delaying some of these Canadian outsourcing deals that you were expecting to sign until the end of the year or--?

Well, that depends when they're up for certification, Ralph. I mean, it goes by their fiscal year, so some of them would be by the end of the year. I think some of them could go into-- into next year, but-- so it'll be over the next number of quarters.

Okay. Thank you.

Thanks, Ralph.

Thanks, Ralph.

Thank you. The next question is from Richard Tse from National Bank Financial. Please go ahead.

Hey, Mike.

Hi, Richard.

Hi, how are you?

Good.

Just a quick question with respect to the industry. Something that we've been hearing a lot is that companies are actually poaching from SIs and outsourcers and I guess to that point, what level of attrition have you seen with respect to your senior producers there?

No, again, it's an excellent question, Richard, and, again, I'm often asked various questions on our competitive advantage and one of the things I came back to is that we have a very, very loyal team. We've got an excellent group of people who have been with us for a long time. The people that we've added with AMS and through these other acquisitions, Plaut, are just excellent, excellent people who really have bought in on the possibilities and the dreams that CGI has here. So we're not seeing any-- any significant or otherwise in terms of attrition of our best people.

Obviously, where we've done the right-sizing here it's meant that we've had to really reinforce our communication to our people that this is a temporary situation and it's one of the reasons we moved so aggressively in the last quarter to put most of these terminations behind us. But, no, we're not seeing that.

Relative to, obviously, a lot of companies in our space we're seen as a very stable, long-term employer who-- who has a vision and a dream here that we've been executing on for 30 years. So, no, we've been blessed that way. We haven't-- we haven't experienced that challenge.

Okay. And just a final question here, with respect to the repricing of existing contracts, has that, I guess, stabilized in terms of the industry and yourselves, in particular, or has that environment changed in any way over the last, call it, three to six months?

Well, as Andre mentioned, we have a relatively young backlog, so our contracts are pretty well established in terms of the next number of years from a repricing strategy. In the marketplace itself, of course, new bids are always going to see additional pressures in terms of how you can deliver more value for less price and that's one of the reasons why we continue to build out and expand our global delivery model to actually leverage and bring more levers to the table than the client itself can do to lower their IT costs and/or a competitor.

The other thing I'd say, though, which I think is another driver that you're going to hear more about is actually demographics hitting clients, especially governments. Their IT teams are aging. We are talking to more clients that are getting more concerned that a lot of their knowledge of their systems are embedded in people who are approaching retirement and, therefore, they're-- while they're always looking for cost savings, they're also looking to make sure they have a very stable partner that can do the knowledge transfer while the individuals are still employed there.

The other thing is the-- there could well be continuing pressures on the supply side of IT labor in North America. One of the unfortunate things that happens with the success of India, parents begin to direct their kids into other professions other than IT. There's some indications in North America that the number of kids actually going into the IT profession from a schooling standpoint is actually down and so that-- that kind of, to me, bodes well for a company like ours in a sense that we have a very large embedded base here. We're seen as a good employer and it gives us an opportunity to leverage our-- our near-shore footprint effectively on a go-forward basis.

Okay, great. Thank you.

Thank you.

Thanks, Richard.

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

Thank you. Mike, just a quick question regarding BCE. What are your expectations regarding the revenue stream for Q4? Do you expect them to hit at least the minimum level for fiscal '06?

I have tried to-- first, the-- their minimum is on their fiscal, which is calendar, okay? The 400 minimum is on their fiscal-- they're on a calendar year. So they're halfway through their-- their calendar and fiscal year and they're tracking slightly under as with two quarters to go.

So we're actually, as I say, sizing the force to the minimum level to ensure that we're not having abnormal utilization rates in the account. So that's all I can assume at this point.

Thanks.

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

Good morning, gentlemen. A couple of quick questions here. I just wanted to get your view on how you see the revenue split between business process type work and systems integration and consulting over the next couple of quarters. Do you see that trending towards more SI&C or would you see it staying roughly at the same levels it is at the moment?

Well, again, the next-- the quarter we're in now is actually a summer quarter, so it's normally a little less active in terms of clients starting new work, given the vacation period. Our vacation levels climb as well during this period. So, again, it's very difficult to talk about that kind of a split over the next two quarters.

Okay.

But I don't see any big, material change there, Paul.

Okay. You raised a-- I guess you've raised the issue, which was my next question. So clearly during Q4 but at any time going after that, utilization rates of consultants or your general overhead level is important. What sort of utilization rates are you getting at the moment?

Well, again, I don't think we've ever gone into detailed utilization rates. The point I would make on utilization was that we pointed out one of the challenges we had on the restructuring was that the amount of work that we were doing with BCE dropped abruptly.

Right.

Therefore, we were caught with people not fully utilized. What we've done over the last quarter and continue to do is to aggressively match-- a better match between the force and the load relative to BCE, which has helped now to return our utilization rates closer to what we would like to operate in an outsourcing contract and, therefore, that's helped improve our margins that you saw in quarter three.

Obviously, as I mentioned in the call-- last call, we drive for higher utilization rates on an outsourcing contract than we do in the pure SI&C business because the downtime between projects, in most cases, is much, much less in an outsourcing deal. So that's where I was coming from when I made the comments on utilization rates. It was very targeted.

Right. Just following through that logic, given the sort of shift in business then, you're right, higher utilization rates are achievable with a higher proportion of outsourcing business. Given that SI&C has come up, presumably managing that or probably-- I mean, utilization rate really is a proxy for the amount of overhead you're carrying to the revenue that you're generating. You were asked a question earlier about sort of headcount/headcount reduction. If I put that question slightly differently, are you still trying to take down employee cost at this point or have you completed that process?

I think it's an excellent clarification. We continue to work on overhead costs, always--

Okay.

--to improve margins. So no, we're looking at all costs and we always will continue to look at overhead costs, where the work can be done, how it can be done, whether more scale could be achieved through-- through pooling work. All these things we continue to look at in order to gradually improve our margins.

Okay and that presumably might materialize as more people leave the organization, but presumably you're not going to announce another thousand or some smaller number of people going in one fell swoop?

No, we-- at this point we don't anticipate any more large-scale adjustments on force adjustments.

Okay.

We made those in March. We're executing to them now.

Right. Thank you very much for that clarification.

Thank you.

Thank you, Paul, have a good day.

You, too.

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

Oh, I'm sorry. The question's been answered. Thanks.

Thanks, Scott.

I guess, Stephanie, we may have time for one more question.

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

Great. Thanks. Just a quick followup. With regards to BCE, can you maybe talk, since it's been an overhang of the stock as to if there's been any indication about their intentions regarding the remainder of their position in CGI to help provide some sort of clarity there? Thanks.

Yes. Thanks very much. Yes, I think relative to that it's our understanding at the BCE investor day in February, BCE did talk about a possible option of them moving substantially all or a portion of their CGI block to [Bimcorp] for the funding of their-- their pension plan and actually improving the asset base of the Bell Canada pension plan. It's our understanding that that decision has been made and that we'll actually-- the transfer will happen relatively soon, possibly over the next week or so.

So I think, when that happens that will essentially, hopefully, address that overhang problem that you talked about, the shares will no longer be held by BCE, they'll now be held by Bimcorp and Bimcorp has a long reputation of looking at buying and holding and maximizing value over a long time and I'm quite confident that they will recognize the good value that-- and the attractive valuation that CGI shares have.

So I appreciate that comment and I do hope that that does bring some closure, at least, to that chapter of the outstanding shares that have been held by BCE.

Thank you.

Thank you.

Thanks, Paul. Thank you, everyone, and we'll see you back here in November for fourth quarter and 2006 results.

Thank you.

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.