CGI Inc (GIB) 2006 Q4 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, Global Communications and Investor Relations.

Thank you, Jenny, and good morning, everybody. With me to discuss the fourth quarter and fiscal 2006 are Michael Roach, our President and CEO, and David Anderson, Executive Vice President and CFO. Also with us in the room this morning are co-founders Serge Goudin, Executive Chairman, and Andre Imbeau, Executive Vice Chairman.

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 fiscal 2006 MD&A, as well as audited financial statements and accompanying notes, are posted on our Website and 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. The 2006 MD&A contains definitions of each non-GAAP performance indicator used in our reporting. All the figures expressed on this call are in Canadian dollars unless otherwise noted.

Now I'll turn the call over to David, who will review selected financial highlights of Q4 and 2006. Mike will then comment on the year, as well as the outlook and priorities for 2007, in his concluding remarks. We will try and leave as much time as possible for Q&A, at which time our participants will be available to answer your questions. David?

Thank you, Lorne, and good morning. In reporting our audited results this morning, I would like to highlight that we have complied on schedule with Section 404 requirements of the Sarbanes-Oxley Act.

And as some of you are aware, the Canadian securities administrators recommended that Canadian reporting issuers assess their current policies, procedures, and controls for options grants and equity-based awards. In line with this recommendation, we engaged our external legal counsel to conduct such a review. The report was presented yesterday to our Audit and Risk Management Committee, and it concluded that there was no misstating of options.

So this morning, we filed our 2006 MD&A, as well as financial statements and notes. As a result of this information being available to you, I will focus my comments on a number of complementary points. Let me first briefly comment on Q4.

We reported fourth-quarter revenue of $845.8 million, compared with $904.8 million in the same quarter last year and $866.5 million in the third quarter. The year-over-year difference is explained by a $23 million negative impact from currency and $41 million in lower BCE work volumes. On a sequential basis, as in years past, the difference is largely seasonal due to vacations.

Our EBIT margins before restructuring costs finished the fourth quarter strongly, at 10.8%, after improving sequentially throughout the year, from 7.2% in Q2 and 9.0% in the third quarter of 2006.

On the cash side, we generated $54 million in cash from operations during the fourth quarter, compared with $108 million in the third quarter. The primary driver of this variation is the fluctuation in the working capital, driven by the impact of vacations of approximately $26 million, the third payroll in the month of September totaling approximately $29 million, and the timing of month-end payments from a client of roughly $15 million as the end of the quarter fell on a Saturday. Prior to these items, cash flow would have been approximately at the same level sequentially.

Overall, we improved our profitability throughout the year. In the fourth quarter of 2006, our net earnings margin before restructuring costs was 6.3%, even after higher year-over-year interest payments. This is up from 5.4% in Q3 and higher than Q2 [levels] of 4%. More importantly, when we compare the 6.2% in Q4 of 2005, it is that much more indicative of our performance when you consider the nearly $9 million in additional interest expense in Q4 this year. This is a key data point for many investors, as it is a comparable measure of profitability.

On an EPS basis from continuing operations before restructuring costs related to specific items, the Company earned $0.16 per share in the fourth quarter compared with $0.14 per share in the third, a sequential increase of 14%, and $0.13 per share compared with the fourth quarter of 2005, a year-over-year increase of 23%.

Now let's turn our attention to our fiscal 2006 results.

We reported revenue of $3.5 billion for the full year, which is approximately $200 million lower than last year. However, taking into account the $115 million in lower year-over-year BCE work volumes, as well as -- as well as a $106 million currency impact, the difference is more than made up. Going into 2007, our revenue base is solid, and sequentially, BCE work volumes were stable.

Net earnings from continuing operations prior to the restructuring costs in 2006 were $191.3 million, compared with $219.7 million in 2005. In addition to the reduction in the BCE work volumes, the difference is largely accounted for in increased interest expense year-over-year. EPS in fiscal 2006 before restructuring costs was, therefore, $0.53, or $0.03 higher than last year.

In addition, we invested more than $900 million in our own stock during the year, purchasing 100 million shares from BCE, and an additional 8.4 million shares in Q4 as part of our Normal Course Issuer Bid.

Our long-term debt was reduced by $174 million from its January peak, and at year-end stood at $813 million. Including cash and cash equivalents of $116 million, net debt was $698 million. So, our net debt to capitalization stands at 27.2%. So, when we look at Q4, before restructuring costs, we are entering fiscal 2007 with an annualized return on equity of roughly 12%.

In short, the balance sheet remains very strong and with the required flexibility to continue supporting the implementation of our strategic plan. I'll turn the call over to Mike now to comment on the operating highlights and market conditions.

Thank you, David, and good morning, everyone. Let me first walk through the highlights of 2006 before moving into our plans for fiscal 2007.

At the beginning of the year, we made the decision to remove the overhang created by the 30% BCE ownership position. We bought 100 million shares for cancellation and dissolved the shareholder agreement, leaving BCE with approximately 30 million shares. In the process we extended our commercial contract for an additional four years, through 2016, adding approximately $1 billion to our backlog. BCE has since disposed of its remaining interest and no longer has an ownership position in the Company, bringing clarity and certainty with respect to CGI's ownership structure.

The removal of the overhang, in our view, has resulted in proportionally larger ownership held by U.S.-based investors in our company. In turn, our stock liquidity has increased through the year, with an average daily volume -- trading volume in GIB almost double that of 2005, to approximately 1.2 million shares daily.

The second and third quarter brought two headwinds -- the continued strength of the Canadian dollar, and the sudden, unexpected drop in BCE volumes. In response, we moved swiftly, announcing our competitive position-strengthening program at the end of the second quarter.

We told you on March 29 that after reexamining our entire cost base, we identified $90 million in annual savings, primarily the result of headcount reductions, real estate consolidation, and utilization rate improvements. Our goal was to achieve these with (technical difficulty) months with the required investment of the same amount, or $90 million.

By the end of quarter four fiscal 2006, our margins had continued to gradually expand. EBIT margins reached 10.8%, and our net earnings margins finished at 6.3% before restructuring costs in the fourth quarter. Even after higher year-over-year interest expense, these are near-historical highs, and we continue to pursue other initiatives to further improve our bottom line.

Fiscal 2006 was a year in which we succeeded in preparing the foundation for the next wave of profitable growth. We continue to generate healthy cash flows. As Dave pointed out, the operations generated essentially the same level of cash flow in quarter four versus the third.

On balance, we have retained the flexibility to continue to pursue our buy and build strategy. In addition to the cash generated from our operations, which in 2006 was $310 million, after restructuring costs, we have approximately $400 million in availability from our $1 billion credit facility currently in place. As you know, given our financial strength, we could easily increase the size of this facility.

Our financial strength has also enabled us to buy 108.4 million shares in fiscal 2006, or nearly 25% of our total shares outstanding.

Operationally we accelerated the buildout of our global delivery platform to fuel growth and improve the bottom line, populating new delivery centers in (indiscernible), Rhode Island and Southwest Virginia, and adding new members in India, where we plan to move into a new facility this year.

Going forward, the focus is on stimulating profitable revenue growth. We believe that's the key to additional value creation. I'd like to spend a few moments to share with you and update you on our plans in this area.

In 2006 we began the [initiative of] implementing our full offering strategy to help stimulate profitable organic growth. Across the Company we have identified new and existing clients where the strategy is to ensure complete awareness of our full offering and transformational capabilities, allowing our clients to benefit from the state-of-the-art technology, practices and solutions.

Our intention is to manage this program with the same discipline and dedication we have demonstrated in managing our other successful initiatives. We expect this approach over time to yield tangible results and [form a] profitable growth. We have already seen the results witnessed by the number of recent renewals, many of which were signed ahead of schedule, such as Laurentian Bank announced yesterday, Virginia E-Procurement, Wyoming, and the General Service Administration of the U.S. federal government.

Now, looking ahead, in Canada, our opportunities lie in new systems integration and consulting, and outsourcing of contracts across all our verticals, as well as renewing and extending relationships to strengthen our backlog and increase our share of existing clients' back rooms. We'll also be looking to expand single-tier relationships into multi-tier, long-term outsourcing contracts.

In the U.S. we'll continue to focus on building our recurring revenue base through traditional outsourcing deals in the commercial and public sector spaces, as well as the continued conversion of onetime license revenue into long-term revenue streams, such as we demonstrated with Advantage in New York, and with Momentum in the U.S. courts. Additionally, we will continue to review M&A opportunities across the U.S., both niche and large acquisitions.

In Europe, we'll continue expanding our capital markets presence and growing relationships with our North American clients who are present overseas. As part of the same strategy, we will continue to build out our SAP practice in Europe in response to global demands from clients.

On the M&A front, as with the U.S., we will similarly pursue both niche and large acquisitions to better position us for outsourcing opportunities in Europe. And always, they must be accretive in year one.

And in BPS, we'll continue to expand our client -- expand to meet our clients' needs. The main growth opportunities here are in the financial services sector, where we have a very strong footprint, especially in the insurance space.

In summary, the measures taken over the last three quarters, which resulted in the gradual expansion of our margins, have set us on a steady course for fiscal 2007. We are building on a very solid and profitable revenue foundation, made up of high-quality customers and contracts. In fact, our customer satisfaction surveys continue to generate high scores, with the highest-scoring area being customer loyalty; in other words, clients who will continue to use and recommend CGI services to others. This is an essential ingredient in the services business. Several industry analysts have pointed out to the customer loyalty factor as a key differentiator of CGI among the six or so global end-to-end players.

Summary -- we have the financial flexibility to make accretive acquisitions, buy back shares or make debt repayments, and we continue to believe our stock is undervalued. We have continuity in leadership, and the organization adjustments announced during fiscal 2006 have transitioned smoothly, enabling both Serge and Andre to focus on client strategy and other value-creation initiatives. Overall we're entering fiscal 2007 in good shape. We have earned client loyalty; we have some of the best talent in the business, as well as the financial strength and leadership stability to meet our strategic goals.

Lorne, let's go to the questions. Thank you very much.

Just a reminder that a replay of the call will be available either via our Website or by dialing 1-800-408-3053 and using the pass code 320-121 until November 28. Any follow-up questions can be directed to me at 514-841-3355, and media can follow-up directly with Philippe Beauregard at 514-841-3218. Jenny, if we could poll for questions from the investment community, please.

(OPERATOR INSTRUCTIONS). Jason Kupferberg, UBS Securities.

I wanted to start with a question on the bookings, kind of what we've seen recently and what you guys expect going forward. I think everyone, clearly, understands the inherent quarterly lumpiness when it comes to this metric. Nonetheless, the September quarter will, obviously, jump out at some as being a bit soft. If you can maybe talk about some of the market dynamics. Would we blame this mostly on decision push-outs? Is it changes in the competitive landscape, or just some summer seasonality? Any factors you can call out there. And maybe give us a sense, going forward in fiscal '07, what sort of bookings you guys would like to see overall for the full year, based on the new go-to-market strategy that you're implementing? Thanks.

Thanks for the question. I would say that essentially, the bookings in the quarter were primarily impacted by seasonality. We do strive and believe that we can drive a book-to-bill of one or greater, and believe that we have the funnel and the strategy in place to see the bookings pick up throughout 2007, so that we can at least be a 1-to-1 or greater relative to that ratio.

Okay. That's helpful. EBIT margins you guys highlighted were strong in the quarter. Do you guys consider this level to be sustainable as we go through fiscal '07?

Again, I think our goal there has been to consistently improve our margins. And as we said, our margins now are returning very much to our more traditional levels. And in fact, at the 6.3 net, we're probably one of the highest in the industry. We believe the changes we made position us well relative to continuing to deliver strong margins. And as the revenue line comes on, we think that will even help us a little bit more there as we add more revenue against the fixed costs.

That's helpful. If I could just probe the M&A topic a little bit further, you guys, obviously, made some repeated references that you're going to continue with the build-and-buy approach. Can you give us a feel of kind of how the near-term pipeline of opportunities looks there? I know you guys were a little bit quiet in fiscal '06. Obviously you had the restructuring, particularly in the second half of the fiscal year. Now that you've gotten a lot of the cost base restructuring under way, should we interpret that as a sign that CGI is ready to return more actively to the M&A market?

I think your assessment is good. I think, in fiscal 2006, it was clearly a transition year, and that's why I kind of walked through the year. I think we had to address a lot of issues. We believe we addressed them successfully, and that we certainly have the financial flexibility and the profitable growth here to meet and enter that market again.

The key for us is we're a very patient buyer. We're looking for accretive acquisitions. We're looking for companies that will help increase the scale and capability of CGI. And we're also looking at companies that we can transition into the Company from an operational perspective. So, not to lose any momentum in terms of our ability to deliver to the clients and deliver to the shareholders. Against that backdrop, we're certainly in a position to do more acquisitions in fiscal 2007. But again, we're a very patient buyer, and we're going to look very carefully at the criteria that I outlined.

Scott Penner, TD Newcrest.

Mike, just wanted to ask about the organic growth. It looks flattish again. You kind of outlined the initiatives that you have in place, and did have in place as of the end of last quarter. Any comments you could give on -- what are the dynamics in organic growth that would lead you to believe things are set to improve, and when we should see that?

Thank you for the question. I think most people on the call would realize that you can move the bottomline a little faster through cost-cutting than you can move the topline through profitable growth. It takes a little more time.

I think what I was trying to telegraph there -- if you look at the discipline we have in this firm, how we implemented AMS, how we have tackled our restructuring program, we're bringing that same discipline to the revenue generation and profitable growth. Unfortunately it takes a little more time.

I think the second point I was trying to make is, candidly, we got hit very hard in 2006 by two factors that I hope will not impact us again this year. The currency seems to have flattened out a little bit. The BCE seems to be at a more consistent run rate now as we come out of the year. So, I think, from that perspective, we have a little more stability around those two items.

In addition, what we've been doing in the near-term here is also solidifying and expanding our backlog. We've been looking at our existing clients and looking to proactively extend those contracts where we can, to push out the length of the backlog and the age of the backlog, as a good proactive move with these clients. And also looking, as I mentioned, to actually look at where we have an existing relationship which may center around one area of their operations in their back room. So, where we're maybe the infrastructure player for a client, we're now talking to those clients about can we end up doing the application maintenance, and can we do the application development? Conversely, where we're doing application development, can we do the maintenance? So we're looking across our existing base, looking at expanding out our relationship, taking a bigger share of that back room.

The second area we're doing is -- and we were very preoccupied with the kind of restructuring initiatives we talked about in 2006, plus the market, I would say, itself, as I mentioned before, with Sarbanes and Bill 198; we're a little preoccupied with a lot of that. We've kind of gone back to some of the things that have really generated growth in the Company before. We have started to stimulate the growth with the clients. We [are] now going out much more proactively, and at the CEO level, really bringing and educating the benefits of outsourcing. So, we're not waiting on individual client demand; we're actually attempting to stimulate that demand by going out and really targeting CXOs. And we believe that's the right strategy.

We've had IDC do a study to look at the survey of the Fortune 2000 business line executives. And in that study they came back and said that 13% of them, which is a very big number, planned to outsource all of their IT within three years. So, when we see that kind of market data, couple that with our own instincts that more and more clients are facing problems where outsourcing can be an enabler, we think the combination of driving hard to gain bigger share with our existing clients, stimulating the market in response to what we believe is an excellent solution to help clients -- this will generate growth for us in 2007.

I appreciate your answer. Maybe lastly, on the restructuring, I would assume that all of the headcount reductions have been done. If you could, I guess, confirm that. And what is left to go for the charge in Q1?

We're essentially completed on the headcount. There's a few more pieces where we're actually moving some operations and consolidating them, and we have to do that on, obviously, a very planned basis, so that we don't end up disrupting our client operations. Relative to what's remaining, about $23 million would be what we would expect in this quarter, to finish the program and stay within the $90 million that we outlined on the 29th of March.

Paul Steep, Scotia Capital.

I guess, just -- we touched a little bit, Michael, on the other initiatives you were doing on the bottom line. Is there anything else beyond some of the staff shifts? Like the facilities closures; how have those been tracking in terms of cleaning that up at this point?

Actually, very good. Of course -- and it's a good question, Paul. Because as you know, on the facilities side you have to make certain arrangements with landlords and that type of thing. But actually, in some of the areas where we're consolidating real estate, retiring real estate, in areas like Toronto and other areas, the market is pretty good. So we've been actually doing pretty good in that score, and we expect again to see those benefits continue through the end of this quarter.

When I talk about other initiatives, as we build out these centers and we continue to look at adding new centers, those type of things -- our ability to move some of our internal work, client work to lower cost areas -- all of that, coupled with as we see the revenue come back and stability to the BCE operations, that should help us drive better margins, or certainly continue the gradual improvement of margins, throughout fiscal 2007.

Actually, just on BCE; I'll jump to that. What's the view for F07 in terms of making the -- or being near the $400 million run rate?

Again, we expect them to be at or very close to the 400 million for calendar '06. And we would expect that they would end this quarter on a run rate that will gradually increase throughout '07. Just to remind everybody, the commitment for calendar '07 is 425 million, which would imply growth in that account when compared to 2006.

So, it looks like stabilization there, and it looks -- reading into your earlier comments, it sounds like most of the work has transitioned to the East Coast at this point?

On the application maintenance, there's a bit more, but the bulk of it has been transitioned now to the East Coast, and is operating very well, by the way.

Perfect. The last two for me -- any major contract renewals that we need to sort of keep our eyes open for in '07 that (indiscernible)? I can't recall any, but --

No. We don't have any that are coming due that are major. And again, as I say, where we see opportunities or events, we will look to extend those contracts ahead of time.

The final one would be for David, I guess. Earlier during the end of Andre's tenure as CFO, we talked a little bit about debt targets and what the Firm had felt comfortable with. Maybe it's worth revisiting where yourself and Andre see the Company being in terms of debt levels going forward.

I think, to be fair on this one, Paul, that really depends on the opportunities that are in front of us. And we'll be looking to make those decisions as we go. Right now we're at the net debt to capitalization ratio of 27%. Naturally, we would like to be able to see that number work down, and as the cash flow continues that's one of the options that we have to pay it down.

But as Mike said in his earlier comments, that if there are some niche acquisitions or larger acquisitions that are out there that are accretive and are of interest to us, we could look at increasing the debt in the short term to be able to pick up that opportunity. But from a philosophy, we've always tried to stay below the industry average.

So, you're still -- long-term, excluding M&A, you'd see it ticking a little lower, but not -- the philosophy is still the same, that no leverage -- you're not looking to go to no leverage at this point.

No.

Susan Chen, Merrill Lynch.

Given the headcount reduction mostly relating to BCE is done, which vertical or geographic areas do you see the future headcount growth to support maybe a (technical difficulty) targets, or areas such as [like] application development or maintenance, or anything like that?

Thank you very much. Again, if you walk through our geographies, even though we're the largest player in Canada, we still believe that now, after we adjust for the downsizing of the BCE account, that there are still opportunities for us to grow our revenue and headcount in Canada. And that growth, as I mentioned, will come from us picking up additional share of existing clients, and also new outsourcing contracts in Canada. The second area that will impact headcount growth in Canada is the buildout and the expansions, and moving work from other geographic areas into our nearshore or onshore centers of excellence. Relative (multiple speakers)

(multiple speakers) from the U.S. to Canada?

From the U.S. to Canada, and we're also starting to look at whether we can backhaul. We've done some projects now out of the UK to Canada, and the economics look pretty good there. So we're also starting to look at whether we could do more from between the UK and Canada. Just the currency alone is a significant enabler when we look at those two geographies.

Relative to the U.S., again, we like the U.S. market. I have to tell you it was a very bright spot in our 2006 picture, in the sense that -- very, very strong team; very loyal clients; long-term clients. We've been able to start the transition that we spoke about when we acquired AMS. We're moving onetime license revenue into recurring revenue. The U.S. courts is a good example, where we have a 10-year, $100 million U.S. contract to actually run there and maintain the Momentum application. Prior to CGI, that would have been a one-off contract with a license and gone. We're doing the same on Advantage. We see the U.S. market as being strong. We've got our federal unit well-established with good leadership there. So, we see growth coming in the U.S. as well. Again, I wish I could predict the currency; I haven't been very successful on that. But if the currency were to stay stable or steady, I think we'll see some excellent growth coming out of the U.S. in 2007. So, I could go through each geography, but I think that those are the primary -- obviously, are two bigger operating areas. And I would say that's where the bulk of the growth will come.

Do you have any thoughts on offshore in other geographic locations, like [Eastern Europe] or India growth, headcount? (multiple speakers)

I think, again, one of the differentiators between some of us and some of our competitors -- of course, we have the Canadian footprint that many of them do not have to leverage. So if you look at us as an entity speaking to a U.S. client, where some of our competitors would push exclusively India, or India and a second location, that second location in most of their case would not be Canada because they don't have the footprint. In our case, we're promoting a choice here that has homeshore sites within the U.S., nearshore sites that are in Canada, and offshore sites that are in India.

Again, our view of the global delivery model is it's really about global delivery; it's not just about India. And it's also about quality and good processes. I think that we've always been more conservative in building out those areas because we want to be able to attract and retain our people. I think you'll find that our attrition rates in India are one of the lowest in the industry. And our quality is also very high, because we are building it out consistent with the culture and the model. Our people are over there, our shareholders. They're members; they're not subcontractors. And we're trying to build something to last, and leverage our full capabilities, including our on-site and local presence, which again is something that the Indian firms are trying hard to get in North America, and something that we already have.

So, what you mean is you don't -- in your competition, you don't usually see the Indian pure-play players? Is that 5% of chains, or 10%, or --?

We see them. But again, we're primarily seeing them in outtasking, not outsourcing.

(OPERATOR INSTRUCTIONS). Richard Tse, National Bank Financial.

Notwithstanding the improvements you've made here in the margins, can you talk a little bit about sort of the biggest point of resistance in terms of signing new contracts, and is that different in every geography?

Again, it's a good question. Again, it's not so much resistance. I think, as I pointed out in one of the earlier calls, we're certainly operating more globally now, and therefore, the complexity and the timelines to close these things do take longer. Because in some cases you're dealing with a local office and foreign office. And the due diligence in fact now expands across geographies.

I think as well, as I mentioned -- and certainly in Canada we saw some of our clients who wanted to slow down until they got their certifications, their Sarbanes-Oxley C198 certification. That's starting to lift, and the conversations have picked up again now in terms of looking at this.

I think the third thing is getting out there and actually helping stimulate and create the market, in terms of really talking to clients about the total value proposition associated with outsourcing, and leveraging the clients that we already have to help us promote that. So, I wouldn't say there's any resistance, any abnormal resistance. You always get resistance at the CIO level to some degree. But at the CEO, CFO level, outsourcing is actually getting to be better-understood as a permanent enabler to help companies and governments meet their needs of their stakeholders, and actually compete globally. So again, we remain optimistic that things will pick up as a result of those initiatives.

One final question. With respect to your base right now --

Sorry; with respect to what, Richard?

-- your existing base of clients, can you give us a sense of how many of them or what percentage have sort of increased the size of their contracts to you? I just want to get a sense of the opportunities (indiscernible), which is what you're suggesting (technical difficulty)

I think the way I look at that is that I start with the premise, as you know, that a company has a front room and a back room. The front room is where they -- they really seek to differentiate themselves from their competitors, looking at their sales strategy, their product differentiators, their back room (indiscernible) all those things that actually support it. What we're seeing is the back room is getting bigger, and therefore, it's affording more opportunity for CGI. And when I mean bigger is the information technology space is now the back room is also they're moving business processes into there, claims management, payroll, all these things, human resources -- all these things that are in support of the front line getting bigger.

What we're trying to do is then sit down with the clients and talk to them about us taking on a bigger share of that. And I would say we have quite a bit of leverage there. We have a number of full end-to-end outsourcing deals, but we have more single-tier outsourcing deals than we have end-to-end. And our goal now is to move some of those single-tiers to full end-to-end. So, I think there's quite a bit of leverage there for us, in terms of expanding our revenue base within the existing clients.

Steven Li, Raymond James.

Just a question on your margins. Should we not use the Q4 EBIT as the base for next year, with further improvements from revenue growth and the completion of the restructuring?

Again, we've got a little noise on the line, Steven, but I think you were saying should you use the last quarter as the base for (multiple speakers). Again, I think you need to make your own call there. I think what you've seen us do is execute to our plan and gradually improve the EBIT numbers. And again, we stay very disciplined around the financial management here, and looking at costs every day; it's kind of a nature of the business. So we, obviously, want to continue to perform at the upper-quartile of the peers in this area. So, we drive hard on that. But I think you're going to have to make the call on what EBIT numbers you use for '07.

And then just can you -- Mike, can you update us on the new facility in Bangalore.

It's progressing. What you find in India, things do not progress as fast as one would like, Steven. So, we're looking at an occupancy date of probably April of '07; maybe a little earlier, a little later, depending how things go there. But it does not constrain us there. We have access to temporary facilities that we can add people to prior to the conclusion of the establishment of the new building. So it's not a constraint.

Great. What is your headcount in India currently?

It bounces around 1200 or so, I think, at the end of September.

Scott Penner, TD Newcrest.

Mike, I think, in a couple of forums you've called out the impact of the U.S. elections on the environment in the U.S. Maybe you could just expand on that in this forum, and how long that lag effect may be.

Again, I think any impact of that will probably be seen further out. Most of the procurements and the dollars for -- that we're working on are secured. It does always have some impact at the local level. But at this point, I think, on government business -- Scott, I've always said that one of the reasons that we focus so heavily on government is they may have some minor ups and downs, but they're always continuing to invest at a fairly steady pace. So, when I look at the size of our government footprint in the U.S. and in Canada, I don't see anything in the short-term here, or the long-term for that matter, that would impact us.

We're still working on deals and renewals and extensions with our clients. Our Advantage and Momentum strategies, as I mentioned, are materializing nicely. More and more clients, government clients, are listening carefully to the additional scope of services and, really, options that we bring to the U.S. market. So, at this point, don't see anything that would impact us.

Just on the competitive front, if some of the pundits are right, and the value of the (technical difficulty) deals and the number of them is fewer now. Have you seen any of the -- your larger competitors really come down into your (indiscernible) bracket and into your core verticals and be more competitive then they have been?

No, I haven't. We still compete against them. So, I don't know [whether] they've come down, but they're still competing with us. But we haven't seen anything there that would be out of the norm.

Again, my own view of that is I would sooner talk about our strength than, obviously, the competitors. But we are very focused on clients. We don't have any other internal items here that were focused on. As David mentioned, we've filed our audit results, in fact, a month faster than we have in the past. We have met criteria under Sarbanes. We've had our lawyers go back and look at how we've handled options. All the things you read about elsewhere; we don't have those issues to preoccupy ourselves. We're preoccupied with clients.

We're also -- control of our quality; we haven't been taking any big hits or write-downs because of poor projects. So we're disciplined in our revenue. It's always a temptation you can take on a big project to get revenue. But if, in the final analysis, six months or a year later you take a big write-down because there's no margin, that is not how we want to build CGI. We want to keep our commitments to our clients, so we're as disciplined around large outsourcing deals as we are around acquisitions. We look for things to be accretive. We want to make sure that we can keep our promises.

So, everybody is out there competing. But again, our focus is primarily on our clients and explaining what we do and how we do it. And we're not seeing anything extraordinary [out of our] competitors.

Paul Bradley, Fraser Mackenzie.

Just a question, just looking at your business as of the end of fiscal 2006. Given the relative sizes of the U.S. and the Canadian market, I wondered how you would describe your degree of satisfaction with your relative position in those two markets, or at least the balance of business that you have between those two markets at the moment.

I think roughly 60% -- slightly less, I think, now -- around 58% or so come from Canada. The balance comes from primarily U.S. and Europe. Our view would be in the next three to five years that would flip around, that 60% would come from outside of Canada. Again, not shrinking Canada, but expanding in those areas. We're very conscious, obviously, of the size of the U.S. marketing comparison. So we would certainly like to turn that around as a minimum to be 60/40, and 70/30 to even be better.

Just to sort of maybe clarify that, and going back to a remark you made earlier, what's your definition, then, of the revenue generated in a particular market? I think you referred earlier to work that you're now doing in Canada for clients in the UK. Is that booked as Canadian business, or is that seen as UK business?

It's seen as UK business. So, even in U.S. -- so, where [we're] delivering some U.S. business out of Canada, [if] it's sold and billed out of the U.S., it's U.S. business.

So, given what you've just said about that effectively reversing over the next few years, that proportion, or at least having 60% or more outside, is that going to come from growth in headcount in those markets? Or do you see playing up the relative cost advantage of Canada, meaning that in fact any growth in billable staff will end up being in Canada rather than in those markets?

It comes from a combination. This is where I keep coming back. This is not outtasking, this is outsourcing. In a true global delivery model, you have to have all the ingredients. And part of that ingredient is having local presence. One of the biggest risks in global delivery is if the business requirements are not properly written, you're going to have a real problem when you ship this work to Canada or to India or anywhere else. And again, I think, I've used this phrase a number of times, and I think you're going to actually hear and see it more often, that unfortunately in our business, more value is lost because of poor project management then will ever be gained by labor arbitrage. And what I mean by that is in the absence of good project management, good people that are local working with the client. So, to answer your question, I see, obviously, we're going to continue to leverage wherever we can our centers of excellence to bring lower cost and higher value. But I -- I would see headcount growth happen across that procurement chain in the local areas and in the centers of excellence.

So, just trying to be clear there. Because clearly, [you've spoken on] the BCE project or the BCE work case, that is a bit of a labor arbitrage there by sending that work to Eastern Canada. And I'm assuming you must be seeing or trying to follow through on some of the same stuff in the work you're doing in Alberta, where maybe you can do it at lower cost, or at least parts of it at lower cost in other parts of Canada, but bill at higher rates in the Alberta market. So, I was just trying to understand over time, then, balanced growth in the different markets. But you definitely see the U.S. and the rest of the world growing to be a higher proportion of your business.

Absolutely. And again, as I said, doesn't mean we're shrinking Canada; quite the contrary. It means that we see higher growth coming from those larger markets, while continuing to solidify and build out our Canadian presence.

One last question, just to sort of understand the relative economics there. You've chosen to do work for UK customers in Canada. You've chosen that in preference to doing it in India because of the skills available or the relative costs?

Well, let's put it in perspective. I said that we are looking at seeing whether the economics work well between Canada and the UK, (multiple speakers) some projects there (multiple speakers) any long-term stuff. And our indications are that the currency alone makes that very, very interesting. Plus the domain knowledge that we have in Canada of some of these applications and lines of business are much deeper than what we believe a lot of people have in India. Again, I always go back to the point that, I think, the average age of an Indian IT worker is 24 years old, which means they don't have a lot of 34-year-old, 10 years experience in the domain. So, it's again -- for us it's not an either-or; it's a combination of to put the skills and the work together to bring the best value to the client and the shareholders of CGI.

There are no further questions registered. I would now like to turn the meeting back over to Mr. Gorber for closing comments.

Thank you, Jenny, and thank you, everyone, for being here this morning. We will see you back in January for our first quarter fiscal 2007 results conference call. Thank you all.

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