CGI Inc (GIB) 2007 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, Global Communications and Investor Relations. Please go ahead, Mr. Gorber.

Thank you and good morning. With me to discuss the third quarter of fiscal 2007 are Michael Roach, our President and CEO, and David Anderson, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9 AM on August 1. Supplemental slides as well as the press release we issued earlier this morning are also available for download along with our Q3, MD&A, financial statements and accompanying notes, each of which are 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 MD&A contains definitions of each non-GAAP performance indicator used in our reporting. All of the figures expressed on this call are in Canadian dollars unless otherwise noted.

I'll turn the call over to David first to review the quarter's results and then to Mike, who will discuss strategic highlights of the quarter before making a few concluding remarks at the end of the Q&A. So with that, David?

Thank you, Lorne, and good morning. I'm very pleased to share the financial details of another very good quarter. Revenue was C$933.3 million compared with C$866.5 million in the same period a year ago, representing 7.7% growth year-over-year. On a constant currency basis, the Company grew by 8% year-over-year. On a sequential basis, the net negative impact of foreign currency on our revenue was C$22 million, due primarily to the weakening US dollar. Excluding this impact, we were able to grow our business slightly over the second quarter.

EBIT margins strengthened in Q3 to 11.2%, improving from 9.0% in the third quarter of 2006. Net earnings were C$64.4 million or 80% better than the C$35.9 million reported in Q3 of 2006. Our net earnings margins continue to improve, reaching 6.9% in the third quarter. We continue to maintain our leadership position within our North American and European peer groups.

Basic earnings per share in the third quarter was C$0.20 per share on a fully diluted basis -- sorry, it was C$0.20 per share and on a fully diluted basis, C$0.19. This compares with C$0.11 in the same period last year. The C$0.01 difference between the basic and fully diluted earnings per share reflects the 94% of the outstanding options that we are now in the money.

To summarize, the P&L after nine months of 2007, revenue has improved by 6%, EBIT by 40%, net earnings by 60% and our basic earnings per share has grown by 80%.

Now let's turn our attention to the balance sheet and the generation of cash flow. We improved our DSO, reducing it to 43 days from 48 days in the year-ago period. We are very pleased with our team's continued focus on cash management. This focus drove our ability to generate C$134.6 million in cash from operating activities in third quarter. That's C$27 million higher than the third quarter of last year. We used C$15 million to purchase an additional 1.3 million shares during the quarter. This brings the total number of shares repurchased during the first nine months of fiscal 2007 to 6.7 million shares at an average price of C$9.53 for a total investment of C$63.8 million.

In Q3, we also repaid C$70.9 million in debt. Over the last 12 months, our long-term debt is down by nearly C$300 million. Including cash and cash equivalents of C$96.7 million, our net debt was C$421.4 million at the end of Q3 for a net debt to capitalization ratio of 17.7%, a significant improvement from 25.5% at the end of the third quarter of 2006.

As you know, we report our results in Canadian dollars. Given the rapid rise of the Canadian dollar versus its US counterpart in Q3 and the number of related questions we are getting, I want to spend a few minutes on how currency fluctuations impact our financials.

First, in addition to the US dollar, we also contract business in various other currencies such as the euro, pound and the Australian dollar. As we experienced in Q3, the sequentially weaker US dollar was partially offset by the strengthening of most other currencies resulting in a topline reduction of a net C$22 million. However, on a year-to-date basis, the impact to our revenue was not significant at C$4.5 million.

With respect to the bottom line, our strategy is to mitigate the currency impact using natural hedges. Cost inputs such as insurance, maintenance and software contracts as well as interest payments where possible are paid in US dollars. Although currency negatively impacted our Q3 net earnings by C$2 million, the year-to-date impact has been less than C$500,000 through the execution of this strategy. The impact of currency goes beyond the P&L, extending to our balance sheet and backlog. As a result of the US dollar weakness, the goodwill on our balance sheet decreased by almost C$40 million over the last 12 months. Our US dollar denominated debt is also affected. The translated value of our US$192 million private placement issued in 2004 has decreased or declined by more than C$50 million without making a single principal payment.

Finally, the resulting strength of the Canadian dollar provides a solid M&A currency. This is an additional enabler to our build and buy strategy. In summary, we delivered very strong results in Q3 and continue to strengthen our financial position.

Now I will turn the call over to Mike.

Thank you, David, and good morning, everyone. I am delighted with the way our teams continue to create and seize profitable growth opportunities in the third quarter and in fact, throughout the first nine months of our fiscal year.

We had another very strong quarter. Against many key performance indicators, it was one of our best yet. We delivered very strong margins in Q3, EBITDA margins of 15.5%, EBIT margins of 11.2 and our net earnings margin was 6.9. These improvements in margins are directly correlated to our ongoing ability to excel at execution. In other words, delivering client projects on time and on budget; generate efficiency gains and increase resource utilization; continually reduce cost inputs across our global operations; and continue to reduce debt and lower our interest charges. Bookings, revenue and profitability grew across all geographies. On a cost incurring [C.] basis we grew our year-over-year revenue by 6% in Canada, 10% in the US and more than 15% in Europe and Asia.

As you will recall, the full offering strategy was put in place to stimulate profitable growth with new clients, contract extensions and additional services for existing clients. The profitable growth results this quarter and year-to-date support our strategy. It is working and it's continuing to gain momentum. Another clear validation of our strategy can be seen in the improved bookings. Over the last four quarters we've consistently improved our bookings. From C$462 million to C$769 million to C$860 million and to C$1 billion in the third quarter or 1.1 times revenue.

We remain committed to growing the backlog with a book to bill greater than one time on an annual basis. CGI's backlog to revenue ratio of more than 3.5 times annual revenue remains the strongest of the peer group at C$12.4 billion.

On the cash side, we have generated almost C$430 million from operating activities during the first nine months of 2007. Over the last 12 months we have generated C$1.45 in cash per share or more than C$480 million. And at 14.4% of revenue in Q3, we remain one of the highest cash generators of our peer group.

We continue to see improved demand for our services and accordingly we're expanding our recruiting efforts across CGI. Net additions to our workforce over the last 12 months stand at more than 1,000 new professionals and we're actively recruiting across our network including in our global delivery centers. As a reminder, we will be opening a new delivery center in India next month which will significantly increase our expansion capacity.

We continue to create and pursue all profitable growth opportunities which will generate additional shareholder value over time. As part of this commitment, we continue to strengthen the balance sheet, reducing debt and buying back our shares. And as we said last quarter, while we're pleased that the CGI value proposition continues to be recognized by investors, a valuation gap remains between CGI and the other top performers in the group.

Our PE over the last 12 months has appreciated to the peer group average, but our performance is stronger than the average of our peers. In fact, we believe our valuation should reflect the leadership position we hold, considering valuation drivers such as EBITDA, EBIT, earnings per share and net earnings margins as well as cash flow and profitable revenue growth. Therefore, we believe the opportunity for further appreciation also remains as we further differentiate and communicate our story to investors.

We are committed to closing this gap by focusing on the fundamentals of growing and operating a successful business. At the same time, we will aggressively continue to communicate our business strategy and competitive differentiators with a particular emphasis on the US market, which now accounts for almost 40% of our institutional shareholder base. In short, we are intensifying our investor relation activities by taking our value proposition directly to those investors who focus on strong fundamentals such as cash flow, and those who hold one or more of our peer group.

As part of these efforts, we are planning our first ever investor day in New York City this fall. Details and formal invitations will be forthcoming. Our team looks forward to having the opportunity to discuss our business strategy and performance with you in person.

Let's go to the questions now, Lorne.

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 322-8152 until August 15. As well, a Podcast of this call will be available for download at either CGI.com or through iTunes within a few hours. Follow-up questions can be directed to me at 514-841-3355 and media can follow-up directly with [Phillip Boragard] at 514-841-3218. Melanie, if we could poll for questions from the investment community, please.

(OPERATOR INSTRUCTIONS) Mike Abramsky, RBC Capital Markets.

Thanks very much. Could you give us a little bit more color on the weighting of the new contracts to extensions and upsell that drove your growth for both in Canada and US?

Thanks, Mike, for the question. I would say that directionally we're seeing more of a shift now to revenue being generated from new clients. The first couple of quarters we were kind of building out selling more to existing clients. That continues. Also we're extending some contracts. That also continues. But I would say this quarter when I look at some of the bookings directionally, more are starting to come from new clients where our full offering strategy is making some penetration and getting some attention of some clients. So I think it's starting to shift a little more to new clients and exactly where we wanted it and directing it to go.

And the US, I think, was about 12% constant currency last quarter versus 8% this quarter. I mean obviously both these growth numbers are positive relative to historic growth. At the same time, with last quarter -- why was last quarter perhaps a little bit stronger? Could you give us some sense of that as well as maybe what you might directionally see going forward on growth?

Well, again, our numbers would suggest that the -- on constant currency basis the growth in US was closer to 10 in this quarter than 8. And when I look at 12 to 10 I would say it is nothing more than seasonal fluctuations there. So I think the message to take away, Mike, when you look at the US is that it's -- the growth there is running ahead of the total growth in the Company. Our investment of AMS continues to pay off. We're making traction there. It's a big market and we do expect to continue to grow at a faster rate in the United States. We believe we've got the pieces in place there to continue to grow at a healthy rate and grow profitably, I would like to reinforce as well. We're very pleased with the margins in the United States as well as the growth. We remain very optimistic about our prospects in the US market.

My error, you're right. Sorry. I mean to say 10. So you see the 12 to 10 as sort of a range that you're sort of comfortable at as a sustainable range now for the US?

Well, again, I don't look at quarter to quarter. I think as I pointed out directionally given the size of our market, our positioning in it, the work that we've done on the full offering, the team we've got there, we will grow the US over time at a faster rate than the Company. And certainly we believe that 10% and above is certainly doable in the US market.

Okay. And the lastly, it looks like BCE was up from a year ago. Is it on tract for the contracted 400 minimum? And is there any risk to this revenue stream as a result of the private equity buyout?

The commitment, just to remind you, for 2007 calendar year is [425]. We have no reason and have had no indication from BC that they don't intend to meet that commitment. I believe they're on track to do so. As far as the private equity play at BC, just remind you that we have a contract in place with BC to 2016. There is no change of control provision in there on the BCE side in that contract. And we continue to look forward to working with management and the new owners to provide them with opportunities to increase value to their shareholders. And we believe IT will play and continues to play an important part of BCE's strategy and we believe we're well-positioned to continue to work with the new owners.

Okay, great. Thank you very much.

Scott Penner, TD Newcrest.

Thanks. Mike, just on the heels of a couple of pretty strong quarters on organic growth, I just wanted to get a sense of the focus on some of your inorganic activities. Have you picked up the look for larger acquisitions? And in what areas of your business either geographically or vertically do you think could most benefit?

I think it's a good question. Again, to be clear, we never stopped looking at that side of our strategy. I mean, as you know we have a build and buy strategy. This year obviously the emphasis and the results have demonstrated is clearly on the organic side. Having said that, we continue to look for acquisitions that fall within our overall criteria. And again, I'll remind you of some of the major components of the criteria.

On the financial side, it has to be accretive to earnings per share in the first year. From an operational perspective it's got to be something that we can integrate and retain the value of the client relationships and the employees. And from a strategic sense it has to be aligned to the verticals we operate in and we're also looking for companies that have deep long-term relationships that we can leverage ultimately into a discussion on managed services and help build our backlog. Primarily, we're looking for players in the US and western Europe.

When you look at the current state of the world, I guess, the Canadian currency is very strong. Our balance sheet continues to strengthen. Our valuation, while it's improving, as I said earlier, I don't believe it's at its right level quite yet. But the factors in terms of making an accretive acquisition, a number of them are falling in place. But it always still comes down to, Scott, to basic principles. You have to find the right target at the right price at the right time. We're very patient. We're in this thing for the long haul. I've often said the only thing worse than no deal is a bad deal. So, we're going to stick to the knitting, continue to look at targets and when we see something that meets the criteria, we're in a good position to move on it.

And just further on that, Mike, maybe you could just -- [I would be] interested on your perspective regarding the competition on these deals, whether you're seeing more of a -- more strategic players when you're in discussions or do you see private equity as a big influence on some pricing?

No, I don't see private equity as a big player on the pricing. I think in our business, they certainly have put a spotlight on the valuations, which I think supports my concluding remarks that if you look at some of the valuations being put on a number of the players out there, our stock remains against that measure significantly undervalued. When you look at what some of these companies are going out on an EBITDA kind of ratio. But having said that, you know, we bring something different to the table than a private equity player, and that's business synergies in terms of being able to drive incremental value out of these companies. And we also bring a very strong management team, which is something that I know the private equity guys are constantly looking for, especially in our industry. So no, I'm not overly concerned about that. I think on one side, as I say, it does put a spotlight on the valuations which I think is good for our firm. But I don't see private equity as far as a competitor in terms of bidding on the type of companies that we're looking at here.

Great. I will pass the line, but I wanted to ask David just one accounting question. And that is on the consolidation of the CIA business, you said in the statements that it was -- and I believe you were using proportionate consolidation or 60% of the results into your statements. Does f the changing control now assume that that other 40% is now recognized on your financials and what if any impact did that have on the quarter?

Yes, you're right, Scott. It is fully consolidated now so 100% of the revenue falls into the revenue line; 100% of the expenses roll in. And you'll notice on the balance sheet there's a small new line item which has about C$53,000 associated with it -- or sorry, it's on the income statement -- and it's the minority interest in regards to the 40% that we did not hold on that. From a revenue perspective it was not a very significant number in the quarter.

Jason Kupferberg, UBS.

I had a question on the operating margins where obviously following the restructuring last year you guys have done a real nice job of boosting that metric and it moved a little higher here this quarter at 11.2%. Can you just, guys, talk about any potential levers that you still have here to move that metric much higher? I mean from an industry perspective it would seem that you're perhaps close to being maxed out, but if you guys have a different perspective on that and can outline some of the drivers. I would love to get some color there.

I think it's a good question. And again, I think I have addressed this a number of times. We, as a philosophy -- and it's driven I would say largely from our long experience in the managed services or outsourcing business -- we basically approach the business from an ongoing restructuring mentality. And what I mean by that is we're never satisfied with the level of margins. And again, I tried to link that back to say if you look at a company that's executing a buy and build strategy, the fuel for a buy and build strategy are high margins and high cash flow. So, it's linked there. And David walked through our performance, improving performance on DSO which I think is one of the best, if not the best in the industry. So, I tried to give some color to that. And I really led with the first one, which I think is a very significant differentiator when you read a number of the competitors.

The number one thing a company can do to continue to drive EBIT is actually deliver its projects on time and on budget. The second thing is to make sure you qualify your business to make sure that it's actually profitable revenue. And I've hammered hard on that probably for four or five years. Because I'd like to reiterate; there is revenue out there to be had but it's not profitable revenue. So, our view is we qualify the revenue to make sure that there's profitable revenue there. Two, we try to manage our projects so that we deliver on time and on budget; therefore, we don't leave anything on the table there that could impair our shareholders.

As well, we are constantly looking at generating efficiency gains. For example, just in the more kind of mundane areas we have a capability that we sell to clients in terms of procurement, in terms of spend management. We've employed that service internally and we've constantly driving down and getting best prices on hotels, travel, air fare, what we buy downstream constantly driving cost down there. We're also increasing our utilization rates. And as we continue to move more work to our global delivery centers, the utilization rates of the Company actually continue to creep up.

And finally, as I said, we're -- in the absence of the right acquisition target, we're going to continue to pay down debt which is also helping us on the net margin side. So, I would say, Jason, it's block and tackling type of stuff, ensuring that we are managing the Company money as if it's our own. And our ownership model that we have, our business model, is very transparent, very visible. We know exactly in every country in every line of business what our profitability are. We're able to move very rapidly to make correction to improve margins.

So having said that, I think are margins are at the best in the industry. If not, certainly a number two or so depending on the metric. But having said that, we believe that we can continue over time and move our margins up.

Okay. So you still see some room for upside there? Based on all the factors that you talked about?

Yes, sir.

Okay. And just to switch gears here a little bit coming back to the bookings which obviously as you pointed out have improved. I'm curious to understand whether there's been any change in the competitive landscape that you've observed in terms of who you may be going up against on a day in, day out basis. And along with that any comments on your win rate, to what extent that has changed.

No, I would say we haven't really seen any kind of a material difference. Obviously [Keene] is now gone from the landscape. We don't run into them in their past form. But no, I would say that -- I wouldn't say there's been any kind of a material change in the competitive play. Our win ratios -- again, what we're doing here is increasing the size of our funnels. We continue to qualify the funnels again. It's always been our case to make sure that we're focusing on opportunities that drive profitable revenue. And but no, I would say that it's more of making sure that we're focused on the right clients, the right business opportunities. And that is helping us drive the kind of profitable growth that you've seen now for at least two quarters.

Okay, if I can just squeeze in a quick one on cash flow. You've had some really nice working capital improvements through the first three quarters of the fiscal year. I think historically from a seasonal perspective, working capital usually turns negative in the fiscal fourth quarter. Will that again happen this year? I mean has there anything structurally changed in the working capital profile here or is there just timing stuff that's been helping you year to date and some of that is going to reverse out in Q4?

I think if you were to go back and take a look at the Q4 MD&A of last year, you would have noted that the cash flow of the C$55 million that we had coming out for the quarter was unseasonably low or unnaturally low. It turned out that at the end of the quarter, the last day of the year happened to fall on a weekend. Payments that we were expecting to get from clients were -- what we thought were we were going to have the cash coming in on the Friday, showed up on the Monday, so there were a few little situations like that. So since then we had learned that we're making sure that we keep an eye on that particular focus. And if we have other weekends that are falling on -- or sorry, ends of months that are falling on weekends, then we're working with clients to make sure that the cash is getting settled in a little bit sooner. So I don't expect that we're going to see much of a negative impact as we go forward here.

Paul Steep, Scotia Capital.

Mike, maybe you could talk a little bit particularly in the US since it's hard to sort of pars out of the numbers as to which segment -- it looks like it's ITS that's sort of driving some of the growth down there. Maybe a little bit about the deal sizes and what's driving it. Is it strata type deals? Is it your software? Or is there some other dynamic there, given the weakness that TBI keeps citing?

It's certainly in the ITS side. You're quite right. You know, a piece of our growth in the US and also in Europe is coming from -- as part of the full offerings strategy, we are revisiting clients, past clients of AMS. And a lot of cases they had versions of AMS software that haven't really been upgraded or updated. And a good example would be CACS, which is around collections. And CACS, the collection solution, covers a number of industries. It crosses industries. It could be government, it could be telcom, it can be financial, it can be automotive even, and anybody that does collections.

We have been systematically calling on these clients looking to upgrade and expand our services there. And that's certainly generating some growth. It's also bringing back online relationships that have been dormant. So we're seeing some of that. We're also seeing some activity a bit in the telcom area where the telcom companies in the US are starting to get settled down after a lot of the mergers down there. And we're intensifying some of our activity into there.

And of course the government piece in the US remains fairly robust. We're very well-positioned in there from a relationship standpoint, from a solution standpoint and government continues to invest. We have some very good solutions in the child welfare side. Of course we have Advantage, we have Momentum. We have our data center in Phoenix now that is picking up steam as an excellent near-shore alternative to our clients in the US. So again, the investment and the work that we've made in the US is starting to pay dividends.

As well as I'll remind you, we made that point when we bought AMS is the solutions that AMS had down there are very sticky in terms of it's very difficult to move away from them once you have them. And secondly, they draw about a 5-to-1 ratio in terms of service to license fees under the AMS model. And our model, as you know, we're trying to pull those and push those out to managed services and that multiple of 5-to-1 will increase significantly as these turn into five and ten-year deals.

Just actually on that point. Have we had much progress in terms of I guess turning over a number of these clients to managed services deals? I know there was the original Washington State Advantage deal and that was sort of the flagship. Where have we gone since then?

Oh yes, I think we have -- certainly we have on Momentum, the federal one, I think the backlog on it is in excess of -- I think we had that, it's about 250 or something? It's over US$250 million in terms of backlog that has been generated and turning what would have been one time into multiple year revenue. This is the kind of thing that we want to bring directly to the investors at our investor day. I think it's a timely opportunity for us to really bring more clarity around the original strategy and how we're executing to it. And that's one of the reasons we want to hold the investor day. But yes, that piece is moving along and you know, we're working as I say on the financial side as well, the CACS solutions, the other solution there that are also getting very, very good traction.

And then I guess the last one for me. You'd mentioned earlier like prior to this call we'd talked on free cash that as we got the debt down, you were going to sort of leave it at a debt level of around 17% in that range to total cap. And you've just stated that you were going to take the debt down maybe a little further without an acquisition. Is there really a change here or are you just sort of thinking you're going to manage through that? What is the thought on shareholder value here?

Well, again, I think you've got to be careful on these type of metrics. They're signposts, they're not something that drives how we manage the business. As I said earlier, in the absence of an accretive target we're going to continue to focus on the fundamentals of running a good business. And as we generate the cash, we'll look to invest that cash in organic growth to grow our business. In the absence of that or after that, we continue to look at accretive acquisitions. And with the remaining cash we'll continue to pay down debt and we'll continue to buy back our shares. I mean we believe our shares are undervalued and accordingly, we're going to put our money where our mouth is. We've been buying shares now for 12, 18 months. I think we put the average price that we have been buying at in the press release. It's under -- it was [C$9.53], I think it was? Or --?

So far this year.

So far this year. Again, we feel the stock is undervalued. We think it's accretive and the right thing for our shareholders to continue to pay down debt and buy back shares and use our cash to drive value for all our shareholders. So that's what we're going to continue to do.

Fair enough. Thanks.

David Wright, BMO Capital Markets.

Thanks very much, good morning. You commented earlier on potential or your thoughts around acquisitions and that there's a company out there that has put itself up for sale, Maximum? I just wondered if you had any comments that you wished to make regarding that?

I'd say a couple of things, David. Maximum isn't the only company that's up for sale. I think in our industry, I think the term that's used is looking at our strategic alternatives. So there's number of companies that I think are looking at strategic alternatives. It's not prudent for us and it's not our style to comment on each company that's looking at this. I would just reinforce the criteria that I stated earlier. Any acquisition has to be accretive to earnings per share in the first year. It's got to be a strategic fit. It's got to be something that we can integrate operationally. So, again, the same criteria. But again, it's not prudent for us to comment on every acquisition that's out there, especially companies that are public.

That's fair enough, thank you. You mentioned in your press release regarding BCE and their contribution. How about your top five customers, what percent of business are they?

I don't think there's been any material change on that. 23% or so, David.

Okay, thanks. And so you talked about your India facilities and you plan to expand them. How many people do you currently have there? Is it still around the 1,000 mark? And is it that you have increased demand or are you trying to increase your capacity and hope the demand will come along?

No, no, what we're doing is as we continue to grow, our global delivery model will end up growing all our centers, so we are also experiencing growth in our Montreal Center. We're also experiencing growth in Southwest Virginia and we're also experiencing growth in India. What we wanted to do in India, we wanted to put a new facility in there to make sure that we're positioned for further growth. I think our headcount today is roughly about 1,300. We continue to add at a rate that balances quality and cost. With the new center, depending on how many floors we take, we could certainly scale up to India to 4 or 5,000 people over time. But again, that growth you have to put in proportion to the growth of the Company.

We continue to expand in our existing centers in North America and Europe but again, we continue to see demand for global delivery. And we are also in my own view seeing more and more demand for our type of global delivery. We're getting clients who would like to take a very close look at the alternative of balancing some of the work they're currently doing in India with our North American model here. So again, the India thing is another milestone in continuing to build out and expand our global delivery model. It's a positive one. I'll be going over for the opening and at the same time have an opportunity to meet directly with all our members as part of our annual tour. But it's another milestone but I would also reinforce that we continue to grow at our other centers here in North America.

And my last question is about your BPS business. There's very limited growth in this area and perhaps I started with the wrong expectations but I thought that this would be a higher growth deal for you. Considering you'd be able to sell the BPS facilities to your clients that are using your IT services. Any comment on the growth rate there and whether you expect it to change in the near future or whether you're just happy with the way it's kind of moving along?

Well, we're never happy but I would say a couple of things. I think you have to -- there's some adjustments to be made on currency on the BPS business coming out of the US. The second thing, the piece of business that we have in the insurance industry I mentioned before. I'm not sure it's a result of our better driving skills but there's fewer claims. I say that for guys living in Montreal.

It's Montreal, right?

But the reality is there's fewer claims. Therefore, the volumes on that claim piece is putting some growth pressure on the top line. Having said that, the margins, though, and the cash flow on this business are very strong and therefore are kind of an important ingredient here into the overall model that we have. So I'm certainly not discouraged there. I think there's a bit of a cyclical play there in that business. But the businesses that were in there are solid businesses that are generating good margins and good cash. And so from that perspective we remain pleased with our investments that we have in the BPS space.

Susan Chen, Merrill Lynch.

Thank you, another question on BPS. You mentioned a negative impact from client merger. Is that -- how big is the impact and when is that going to annualize?

Client merger, I think we were talking -- (multiple speakers) on the claims side?

Yes.

Yes, well, again, I don't know when it's going to end. I guess that industry like a lot of industries are continuing to consolidate. But again, what we do in those cases, we continue to change and restructure our operations to put us in a better position for that type of work. So I'm not -- you get a short-term impact on the long-term. I'm not sure it's a material impact. I think the claims business as I mentioned is down because of the industries are down industrywide. As they merge, of course they end up with two claim shops of their own; therefore, the amount of business they do with third parties go down on a temporary basis.

But over time, what normally happens is again, they look at what they should keep internally versus externally and when that exercise is done, the external option remains a very attractive option from a cost service perspective. So you have a short-term or medium-term impact when two companies merge. Obviously as I say, they've got two claim shops internally so they've got to do something. But over time that works its way out of the system.

Having said that in that business, we have a bit of a counter to that which is the underwriting business. And normally when the claims business is weak, the underwriting business has traditionally been stronger. So you get some offsets especially on the margin side, but proportionally it's not as large so you can't offset the downdraft on the revenue side.

Can you comment on your US federal business? I know that's probably 5, 6% of your overall revenue but can you comment on the funding environment and what's the impact on your business?

Again, the US federal business is a very, very good addition to CGI. As you may know, we created that after the merger with AMS; got a very strong team, a high security clearance. Again, very focused on that big federal budget which I think on the civilian side is close to US$100 billion. So it's also an area where we are implementing the strategy I spoke about earlier in terms of taking solutions and offerings and turning them into managed services, and we're certainly doing that in the momentum side. We've got a great team there, a good leadership group, good offerings. We're a relatively small player in comparison to the big defense players that play in there but we're getting a very good hearing from the clients. And we expect similar to what I said about the US growth rate, we expect our growth rate in the federal space to outstrip what we're doing companywide and should certainly be in excess of 10% growth over time.

Thank you, two more modeling questions. Going forward, what should we expect the tax rate should be?

The tax rate?

Yes. (inaudible) (multiple speakers) [3.6%] and how should we model the tax rate going forward?

I have a suggestion, just hold it pretty close to where it is right now.

Okay, about [33, 34] is the right rate?

I think that's what I just said, yes.

And the D&A side, you mentioned that some of the assets have been fully amortized. Should we expect the same level of D&A going forward because that portion go away? The amortization.

I understand. Yes I would think that you can because those assets are out of the base now.

Right. And that would give you a little operating margin left.

A little bit, yes.

Naser Iqbal, Salman Partners.

Thanks, congratulations, guys. I'll try and make it brief. Mike, just on the first question you talked awhile ago about your strategy of -- you identified 600 accounts and then harvesting existing accounts. Just how far would you say you're along that strategy and how much more legs do you think this can play out? It seems like a give me and an easy lay-up for your business.

I'd say we're probably about halfway through. And again I think some of you may have expected us to have been through further or less but I would tell you that to do it right it takes time. You've got to get to the right player in each company and we have to make sure we have the right players on our side there. So that's on the coverage side. And then there's going to be a lag, because in some cases what we're doing is really reeducating the base and in many cases new customers introducing CGI's full capabilities. In a number of cases it obviously doesn't generate an opportunity right away but it does keep us top of mind. And we're seeing cases -- and you'll see some of those and maybe on some of the subsequent calls I'll draw some of them out. But you'll see cases where I said AMS may have had a relationship years ago. It's been dormant, we've reignited it and you'll see a win coming out of that.

So you'll see there's -- we're going to continue to cover off of that base. In some cases we're adding to that. Some of the targeted clients, we have done a qualification and feel that we want to move to a -- sub that out and come to a new one. So it's not a static list from that standpoint. Beyond the existing base, the new clients, that list will continue at Evergreen. So I don't really expect the program to stop. I think it's more of an ongoing commitment to ensure that our clients are fully briefed and abreast of the capabilities that we can bring to help them win and grow, Naser.

Great. The other question would be just I guess Canadian dollar parity is maybe not blue sky any more but just in terms you've been doing great so far, the dollar hasn't affected you. But in terms of getting some kind of an advantage despite the rising dollar, what are you doing just to offset that? (multiple speakers)

It's one of the reasons Dave covered off quite a bit of that in the script. Our message I think was twofold there. One, on a year-to-date basis although we got hit hard on a net basis on the top line this quarter on a cumulative basis it's not a material number. It was C$4.5 million on the revenue side. You can't really hedge revenue. On the bottom line as Dave went through, while the rapid rise of the Canadian dollar or I guess depreciation of the US dollar in the quarter hit us for about C$2 million on net income. On a year-to-date basis it's less than C$500,000. As a result of those natural hedging that Dave talked about, the program we have in place, it's working. So we don't feel the need to do anything more there from that perspective.

Right. In terms of have you found that it's -- if it has any impact in terms of for new contracts and your pricing it though, so you have to move more offshore to like India say, to counteract that Canadian dollar than you would've had say, six months or nine months ago?

No. No.

And just last quick question, for the life of me I can't find what the BCE revenue was in the quarter. Can you just --

Yes. It should be in the MD&A. I think it's about --

11.4.

11.4%

Great, thanks a lot guys.

You have a good day now.

Richard Tse, National Bank Financial.

Just a couple of quick questions here. With respect to Virginia, what sort of status on that contract and sort of your ability to expand that? Because I believe there's I think an RP in the market or coming to the market which sounds pretty sizable here. Can you sort of give us some color around that?

I think there was two elements of our work in Virginia. One is our center of excellence which I said continues to grow at a very healthy rate and we're actually attracting additional brand-name clients to that center. So the growth rate there is very good. On our deal with the Commonwealth of Virginia, with the change of government there, that has slowed down somewhat but we do feel that it's still a very strategic relationship. And that over time our original feelings on what that will generate for CGI is still essentially intact.

On the specific RFP, I don't really like to comment on that. Maybe we can get a little bit off-line and come back on that because there are a lot of our RFP's out there and I want to make sure that we're giving you the situation there. But we don't really want to comment too much on specific RFP's as you can imagine. We just don't have friendly people listening to this call.

Yes, okay, I appreciate that. With respect to acquisitions you guys are obviously generating a lot of cash flow and paying down the debt aggressively. So it's sort of a follow up on a previous question but would you guys ever consider sort of rather than doing a buyback and without acquisitions considering paying out a dividend here, given that I guess over the course of the next year, you're pretty much going to have your debt paid down meaningfully?

Well, we have a policy of reviewing our dividend on an annual basis. It's normally done right before our AGM. We will continue with that policy. We look at every possible way to bring maximum valuation to our shareholders so dividends are always looked at. But I would also say that in times when money is starting to tighten up out there, it's a good position to be in to have a strong and strengthening balance sheet. And there's worse things in the world than holding a cash on your balance sheet. So we're not -- we don't feel a pressure to do that.

I think our strategy of focusing on the fundamentals, growing our business profitably, generating cash, paying down our balance sheet. Our shareholders are seeing that appreciation in our stock and we believe that if we continue to do this and get our message out directly to the buy side here, that we're going to get -- we're going to continue to bring increased valuation for all our shareholders. But we'll look at dividends on an annual basis.

Melanie, I think we'll have time for one more question from the investment community.

[Richard Garcea], Haywood Securities.

It's Ralph Garcea here. Just a couple of quick questions. On the Momentum and Advantage business, are most of those deals sort of sole sourced when you try to upgrade those guys or will they invite SAP Oracle and other vendors in there to try to keep you honest on pricing?

They know we're honest on pricing, Ralph. But on an upgrade, no. On a new installation but on an upgrade no, obviously the embedded cost of switching out is a big, big factor there. So what you were really getting at is the opportunity to open the discussion up. Have you considered managed services? And certainly on a new installation, a new opportunity, we do compete against the SAP, the Oracle'. But again, even there, one of the points I like to reinforce, most of those companies do not have a business model that in fact accommodates the managed service offering. So they tend to look for partners, an SI partner, that would actually make that offering. Because their business models are very much built on getting their software licenses and moving on. Our model is a combination of the both with a heavy emphasis on the managed services.

The second opportunity comes when there's an upgrade is to be able to open the dialog up to say since the acquisition of AMS by CGI, we now have a managed services offering. We can run this thing in the United States in our Phoenix data center. We can maintain it in the United States at a lower cost center in southwest Virginia if you would like. And we have people that are in Washington that are experts in this system at your disposal. Which is a pretty compelling offering. So we come at it that way. As far as the pricing again, because our model is built that way, our pricing is very competitive, Ralph, because again, our model is not built on maximizing the license revenue.

And unrelated to that, I mean on the Canadian public sector side, other than lets' say document management of some of the health-care solutions you've been rolling out, are there either other opportunities there to grow that pipeline the way you have in the US with Advantage, Momentum, the welfare package, et cetera?

Not specifically on those solutions but I would say that similarly in the Canadian market you'll see that we're very active in the health-care side, on the payor side, and we're very active there in terms of bidding on the work that Health Info Way is helping to fund across Canada. And we have a very good position there that also includes doing application maintenance for various governments from British Columbia, Alberta and onward.

But as well, I would say in a number of cases in Canada on the government side, they are looking at different models that have a recurring revenue element to it. And again, that's where we're very well-positioned. In fact, the contract that's under dispute to the EPS in Ottawa is actually an example of that. That contract would have a recurring revenue stream to it. And maybe to provide everybody with an update on that is the government and the vendor that's protesting have a day in court coming up here in September. We believe that the government's position will prevail and that contract will eventually be awarded to CGI. But that is another example of a recurring revenue element creeping into our government business north of the border as well as in the US.

Okay, thank you.

Thanks very much, Ralph. Okay, well thank you for your questions and interest. I'd just like to take a final moment to wrap up and emphasize a few key takeaways from our perspective.

First, we had a very strong third quarter and it was one of our best yet. We're on track. We're executing to our plan to consistently deliver profitable growth. And finally, we look forward to being able to review our business strategy and performance with you in person this fall at our investor day in New York. Again, thank you for your interest, thank you for your questions. Thank you for your support. Have a great day.

Thank you. The conferences has now ended. Please disconnect your lines at this time. Thank you for your participation and have a great day.