CGI Inc (GIB) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI quarterly and annual 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, Joe, and good morning, everyone. With me to discuss the fourth quarter and fiscal 2007 are Michael Roach, our President and CEO, as well as David Anderson, Executive Vice President and Chief Financial Officer.

This call is being broadcast on CGI.com and recorded live at 9 AM on November 14, 2007. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our fiscal 2007 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 today 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 of these non-GAAP performance indicators used in our report. All of the figures expressed on this call are in Canadian dollars unless otherwise noted.

I will turn the call over to David first to review our Q4 and full-year results, and then to Mike, who will discuss strategic highlights and make a few concluding remarks before going to your questions. So with that, David?

Thank you, Lorne, and good morning. I am pleased to share the financial details of another very good quarter and a solid fiscal 2007. Q4 revenue was C$922.8 million compared with C$845.8 million in the same period a year ago, representing 9.1% growth year-over-year.

On a constant currency basis, the Company grew by 11.3%. On a sequential and constant currency basis, we continue to grow the topline. The next negative impact of foreign currency on our Q4 revenues was C$16.1 million due primarily to the weakening US dollar.

Taking this into account, as well as the sequential impact of vacations, we were still able to grow our business over the third quarter.

Our EBIT margin strengthened in Q4 to 11%, improving from 10.8% in the fourth quarter of 2006. Net earnings were C$65.6 million or 66% better than the C$39.5 million reported in Q4 of 2006.

Our net earnings margin continued to improve, reaching 7.1% in the fourth quarter. On this indicator, we continue to maintain the leadership position among our North American and European peers.

Both basic and diluted earnings per share in the fourth quarter were C$0.20. This compares with C$0.12 in the same period last year, or an increase of 67%.

We generated C$120.4 million in cash from operations in the fourth quarter. We bought 5.6 million shares of CGI and made net debt payments totaling C$31.5 million.

Now, let's turn our attention to the financial performance of fiscal 2007. Revenue was up by more than C$230 million from 2006 to C$3.7 billion or 7% on a constant currency basis. Our EBIT of C$408 million, representing an 11% margin, was up almost C$100 million or 31% from 2006.

Net earnings of C$236.4 million were 61% better than last year. Our net earnings margin went from 4.2% in fiscal 2006 to 6.4% in fiscal 2007.

Earnings per share were up almost 80% in fiscal 2007 to C$0.71 on a fully diluted basis from C$0.40 last year.

On the cash side, we generated C$550.2 million from operations. That is C$245 million or 80% better than last year. Our cash, we used our cash to invest in our business to better position ourselves for continued profitable growth.

In addition, throughout the course of the fiscal 2007, we invested C$126.4 million in shares of CGI, buying back 12.3 million shares as part of our Normal Course Issuer Bid. At year end, our share count, net of 5.5 million options exercised, had been reduced by approximately 2% over the last 12 months.

As well, we were able to reduce our long-term debt by more than C$340 million within the last 12 months. At the end of 2007 fiscal year, our net debt to capitalization ratio stood at 16.8%, a significant reduction from the 27.2% at the end of fiscal 2006.

During the fourth quarter, we renewed, expanded, and extended our credit facility for five years, raising it to C$1.5 billion with an additional C$250 accordion. The terms of the facility are more favorable, including a lower interest rate.

In light of current market conditions, I would like confirm that we have no exposure to asset-backed commercial paper. Instead, we continued investing in what we know best, our Company CGI.

Now given the continued and rapid rise of the Canadian dollar versus its US counterpart in Q4, I want to explain the effect these currency fluctuations have on our financials. As I said earlier, the net result of these fluctuations in Q4 was a sequential topline reduction of C$16.1 million. However, for the full year, the impact to the revenue was less significant, at C$13.9 million or 0.4% of revenue.

In respect to the bottom-line, the rapid move in the currency during the quarter negatively impacted our sequential net earnings by approximately C$1.3 million, with a total 2007 impact coming in at less than C$2 million.

Our strategy is to continue mitigating the currency impact on our US operations by using natural hedges. These hedges include cost inputs for such things as our insurance, maintenance, and sellthrough contracts, as well as interest payments when possible that are paid in US dollars.

Currency fluctuations have also impacted the value of our US dollar-denominated debt, which has come down by C$24 million year-over-year without making a single payment.

In summary, we delivered very strong and improving results through every quarter of 2007, and we're poised to continue strengthening our financial position in fiscal 2008 and beyond. Now I will turn the call over to Mike.

Thank you, David. Good morning, everyone. I am delighted with the way our teams have created and seized profitable growth opportunities throughout the entire fiscal year, including a very strong fourth quarter. Against our key indicators, quarter four was one of our best yet.

On top of 11.3% organic revenue growth, we delivered very strong margins -- EBIT margins of 11% and a net earnings margin of 7.1%. It's a great way to conclude fiscal 2007 and a great position to begin our new fiscal year.

I would like to share with you our perspective on the full fiscal 2007 year and conclude with a few comments on our positioning for fiscal 2008.

We entered fiscal 2007 with a laser focus and a commitment on returning CGI to a leadership position on key performance indicators relative to our North American and European peer group. We made significant and permanent enhancements to our business development model, including the introduction of our full offering strategy. The goal of this strategy is to systematically and with discipline review the Company's full transformational capabilities on an ongoing basis with new and existing clients.

We want to make sure our clients can continue to leverage CGI's growing and comprehensive end-to-end suite of services and solutions, while benefiting from our unique and competitive global delivery model. In doing so, we generated additional revenue growth through capturing a greater share of existing clients' IT and BPS investments, and through contract extensions and renewals.

In addition, our funnel of opportunities for both outsourcing and systems integration improved throughout the year, leading to new clients and additional profitable revenue. We booked C$3.3 billion of new business in fiscal 2007, or 0.9 times our revenue, which still is below our committed goal of greater than 1.

Our bookings reflect a mutual agreement CAE with not to pursue a binding MOU that had been signed and booked in quarter three. As a result, our 2007 bookings and backlog have been reduced by C$200 million. At the end of the year, our backlog stood at C$12 billion or 3.2 times annual revenue.

On the other hand, I am pleased to announce this morning that we have signed a significant contract with the government of Canada. The initial three-year contract is worth C$91.8 million but has the potential to exceed C$400 million when considering extension options and projected growth. This contract has been booked in quarter one and will be reflected in the backlog when we announce our quarter-one results.

We grew our revenue by 7.1% year-over-year on a constant currency basis. We build momentum in each quarter, as our year-over-year growth rate accelerated from 1.2% in quarter one to 11.3% in quarter four.

We experienced growth in all lines of business and geographies. For example, in quarter four, we grew year-over-year revenue by 12.2% in Canada; and on a constant currency basis we grew 10.8% in the US and 7% in Europe and Asia. On an annual basis, our Canadian operations grew at 5.5%; the US at 8.9%; and Europe and Asia grew 12.5%.

We expanded our EBIT by more than 30% during the year, our net earnings by more than 60%, and our earnings per share by almost 80%.

On the cash side, we generated C$550.2 million from operations in fiscal 2007, representing C$1.65 in cash per share. At 15% of revenue, we remain one of the highest cash generators of our peer group, a fact we don't believe is fully reflected in our current market valuation.

I would also like to remind investors that we have an ongoing Normal Course Issuer Bid under which we will remain active in buying back additional shares for cancellation.

In summary, we are building on a very solid and profitable revenue foundation made up of high-quality customers and long-term contracts. Our performance in fiscal 2007 clearly demonstrates our ability to produce solid and consistent results, ranking CGI among the industry leaders.

We remain committed to our strategic plan and confident in our ability to continue to execute our build-and-buy strategy.

The continued strength of the Canadian dollar does have a strategic advantage in that it provides us with a solid, advantageous M&A currency. This is an additional enabler for our build-and-buy strategy and, when taken together with our expanded credit facility, we continue to have ample flexibility and financial capacity to fully execute this strategy.

Overall, we're entering fiscal 2008 with an excellent foundation for continued strength. We have deep client relationships and have continued to retain and attract the best talent in the business while delivering superior returns to our shareholders. Despite what has been characterized by some as somewhat bumpy market conditions, we continue to see profitable growth opportunities in all lines of our business.

In addition, we have an excellent and unique mix of revenue and capabilities, which includes high-end consulting, a deep portfolio of transformational solutions, and an end-to-end management services offering. These are all areas where we continue to see strong client demand; and as a result, we're actively recruiting new professionals around the world.

Finally, our team looks forward to being able to review and discuss our strategy and performance with you in greater detail this Friday as part of our investor day in New York City, whether you're participating in person or via the webcast.

Again, thank you for your continued interest in CGI. Now let's go to the questions. Lorne?

Just a reminder that the replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the pass code 323-8404 until November 28. As well, a podcast of this call will be available for download either at CGI.com or through iTunes within a few hours. Follow-up questions can be directed to me at 514-841-3355. Joe, if we could now poll for questions from the investment community, please.

(OPERATOR INSTRUCTIONS) Jason Kupferberg of UBS Securities.

Thank you and good morning, guys. I know that you're not in the habit of giving guidance in terms of hard numbers. But on the back of the strong fiscal '07 performance that you have had, obviously that will generate much tougher year-over-year comparisons for you in fiscal '08.

So just thinking directionally here, is it logical to assume that there would be some amount of topline growth deceleration in fiscal '08 on both a reported and a constant currency basis? Or how are you guys thinking about that?

Well, again, we don't think in terms of decelerating, I guess, on any indicator. We are paid to improve the key indicators year-over-year. Essentially, Jason what I was trying to telegraph is that the things we did in 2007, we made some permanent changes to how we do business development that we think will continue to yield profitable growth rates that are more in line with CGI's tradition over the years.

Also, as you can seen, our margins continue to get stronger here and we continue to see opportunities to continue to improve our margins throughout fiscal 2008.

So we are feeling much better going into 2008 obviously than we were when we entered 2007. But hopefully you have seen that we have sticked to a plan here and we have delivered the bottom-line as we said we would.

We also telegraphed that we had to make some changes to how we do business development. We said it would take a little longer to see the impact of that. As I pointed out, we have accelerated the momentum here, going from under 2% year-over-year growth in the first quarter to exiting the year at 11%.

So we are feeling that the things we did put us in good stead to continue to profitably grow the business into 2008.

Okay, that color is helpful. Maybe if we can just spend a minute talking about the financial services vertical in particular. Obviously a lot of attention being paid there these days.

The last numbers I had suggested financial services was about a third of your revenue base. Maybe you can update us on the percentage there.

If you can maybe parse that out a little bit by geography and/or subsector breakdown, i.e. commercial bank, investment bank, insurance companies, just to give us a deeper flavor for what your exposure is there and whether or not you're seeing any softening around the edges in this macro environment. Thanks.

Thanks, Jason. It is a good opportunity to discuss that a little bit, because there is a lot of stuff flying around on that out there.

First, let me say that our financial vertical does include all of the above. You know, insurance companies, both life and P&C financial institutions, banks. We also operate within there in areas like wealth management. We offer solutions. We offer transformational activities helping financial institutions transform their CRM. All the type of services that, frankly, we believe will not be impacted by any kind of a downturn here in that vertical.

In fact, when we looked at this carefully, some of the areas that we operate we think will actually be seen as not only sticky, but actually continue to grow. I man, we are in the wealth management, which as you know in the business continues to accelerate, given demographics. In a number of these cases, we have long-term contracts that are recurring revenue.

We are focused in the credit collections area which, frankly, many of our clients are looking at investing heavily in, to automate and advance their ability to manage their cash and collect it more rapidly. So.

And also as I mentioned, we are into the life insurance companies Manulife, Hancock, which as you know is doing very well. You saw their results the other day.

So we are not anticipating any impact or negative impact as a result of the presence we have in the financials vertical. We believe we are well diversified there; and in the areas in which we operate, we see opportunities.

I would also say that just from experience, not speaking specifically to the financial vertical, but when things toughen up, the whole discussion around managed services also comes on the table more rapidly. So we will also be pursuing opportunities to see if there's ways we can help some of our clients or potential clients reduce their costs, and look at our global delivery model and the other services we provide in the managed services area.

How much of the financial services is US specifically, do you know?

Not off the top of my head. I think we can get that.

I will shoot you a note, Jason, after this call with the answer.

Okay, that would be helpful. Just one last question, the DSO at 44 looked like some really nice performance there. Sustainable? Or some working capital timing there worked your way? Any color there would be great.

I think, Jason, if you were to look at last quarter as an example, we were at 43 days. We are at 44 days right now. We don't see anything in the horizon that would cause us to expect that that number would change dramatically.

Okay. Thank you, guys.

Scott Penner of TD Newcrest.

Thanks, just further on the financial services, just to put those comments in context, Mike. The vertical did look like it was down about 7% sequentially and a bit year-over-year. So what were the impacts there?

Well, again, I am not seeing any change. I think it is more or less the seasonality factor, most likely. As you know, this quarter is very heavily impacted by vacations. Also there is FX that would impact certainly the work we do in the US, Scott.

Okay.

But there is no underlining change to -- we have not been notified by any of our clients that projects that we are working on are being canceled. We're not seeing customers saying they are not going to continue on through the processes.

As I say, we're actively involved in some cases where we have won the first piece of a contract, where we are helping redesign the architecture; and the follow-on pieces are worth significantly more money. So what I'm seeing is the start of some transformational initiatives with some of our banking clients that will actually lead to further downstream business for us.

Okay, that is helpful. Just on the US business, David, do you happen to have the constant currency growth sequentially?

Actually sequentially, no, I don't have that right with me at the moment.

We will dig that up as we go through here, Scott.

Okay. Mike, I noticed that the Canadian business had a very good result for the year, about 5% growth as you said. I'm sure that is chalking up to a lot of the organic growth initiatives. What -- can we look for similar growth there in 2008?

I know you are aware, looking back a few years, the business in Canada has been generally flat. So I am just trying to get an outlook there.

Well again, we have always said that even though we are the dominant player in Canada, we actually think there is still a lot of opportunity to grow our business, Scott.

Again, some of the areas is government. We announced that contract this morning with the federal government. We have other ones in the pipeline at both the provincial and federal level, where governments are looking, I would say, more actively now on some larger, more transformational-type projects.

Some of that has been driven by demographics. Some of it has been driven by just the pressures to continue to invest, to provide new services and get efficiencies.

On the other hand, in Canada as well, given the currency impact, I would expect more of our Canadian clients, existing and new, to frankly take another hard look at investing more in information technology to drive productivity and to help offset the impact of the dollar.

So. Then the final point is, we have very -- a very good portfolio of clients in Canada. One of the things that we have really been focusing more on with our full offering strategy is to actually focus on cross-selling and get a bigger share of wallet of our existing client base. Those three factors I think bode well for continued growth in Canada.

Okay. On the US business, I believe you made the comment last conference call you were fairly comfortable with an organic work -- or I should say currency-adjusted growth rate of about 10% there on an annual basis. Has anything changed on your outlook, or is that still a good assumption?

No, I think the US business is very solid. You will get a nice flavor of that through our investor day on Friday. So getting a shameless plug in there.

But we will certainly be talking more, even at the operating level you can see some of the solutions and some of the marketing strategies, business development strategies we're deploying in the US to gain a bigger share there.

So again, I think the way we phrased that, over time we would see the US growth rate be greater than the growth rate of the Company, given the positioning that we have and the market opportunity down there.

Right. Any -- I'm sure it is a sensitive issue, but any color you can give on the rationale for not going forward with the CAE agreement; I am sure that will be a bit topical. So any details there?

Well again, look -- I think you got to put it in perspective. When we announced the MOU, we did say that it was subject to due diligence. The due diligence period went on for an extended period of time. Both of our companies are fairly complex businesses, you can imagine.

Essentially I think it is fair to say that during that due diligence period the business strategy at CAE had kind of evolved to such an extent that it really altered the business case for both of us. We decided that, on a mutual basis, not to move to the contract phase.

We have very good relationships with CAE at the management leadership level. We think they are a fine company, a world-class company, and we look forward to working with them in the years ahead in different capacities. But both of us agreed that moving to a 10-year outsourcing contract at this time was not the right thing to do.

So we decided to move on, which happens. But there is no kind of no story other than that. That is it. Okay?

No, that is fair. David, just to be clear, the consolidation last quarter of the CIA business, did that have a material effect on revenue this quarter?

No, it did not. Not a significant effect on it.

Okay, great. Thank you.

And just to get back to your earlier question, the US had grown by 2.3% in constant currency.

Okay. Super. Thank you.

From last quarter, Scott.

Thanks.

Ralph Garcea of Haywood Securities.

Good morning, gentlemen. Just quickly focusing back on Canada, strong growth in Q4. You guys recently ran ads with regards to looking to 1,500 openings. Are most of those in Canada, or are you also looking at similar I guess headcount needs in the US also?

Yes, I think if we look at it, about half, Ralph, of the positions are located in Canada. Again, I would say a lot of them, if not most of them, are focused in our global delivery centers in Quebec City, Montreal. Some staffing up now required for that new contract we announced with the federal government in Ottawa.

Again, about 500 to 600 jobs in the US, and nearly a third of them in our centers down there in terms of Southwest Virginia, Fairfax area. The balance in Europe.

In addition, we didn't include that -- because obviously the coverage in India of the Globe and Mail is not as good -- but we continue to hire up in India. We have now opened, we are actually moving our people into our new building. It is a great building. We are pushing closer to 2,000 people in India. We have the capacity there to expand the 5,000.

So generally reflecting the need to add people across the IT supply chain. The high-end stuff where we are working with proximity to the client, doing SI consulting. Some of the work I talked earlier in the financial vertical, where we're helping banks look at CRM or customer segmentation, all the way through to the application maintenance and the global delivery type work.

Just, I mean, again, on Canada, what did you see from the Bell business? I know you guys are still on the minimums for calendar '07 and '08. But have you had any early discussions with them as they move to go private? What sort of business do you see beyond '08, if you can talk to that?

Well again, we are -- started those discussions. I'd just remind you that they are on a different fiscal year. So their fiscal year starts in January. The C$425 million commitment is against their fiscal year. Seem to be tracking to that.

We are -- they have not yet put their work program together for 2008. They are in the middle of doing that. We continue to have ongoing dialogue, not only at the client level but at the executive level.

As I mentioned before, we see this as an opportunity to put forward ideas here to assist the new management, the new owners, achieve their business objectives. And again, as I mentioned earlier, frankly, information technology is a huge enabler here at many levels to help companies improve their overall performance.

So again, we remain confident. We have a long-term contract with BCE. Our working relationship remains strong. We are going to the table there in the sense of being optimistic and confident in our ability to work with them.

Having said that, they're still business as usual over there. Their transaction is not yet complete, so we are still working under the current leadership team and direction.

Okay, thank you.

Richard Tse of National Bank Financial.

Hey guys. Given that you guys have been so aggressive in paying down your debt here, arguably you could probably take that down pretty significantly again this year. So I guess looking out, would you ever be in a position here of sort of increasing your buyback substantially or maybe considering a dividend after that time?

Well, on the dividend, Richard, as you know, we do with great discipline have a thorough review of that with our Board right before the AGM. Because as you can also appreciate, it always seems to be a question that comes up at the AGM.

As far as the cash, I mean, first, as I said before, it is a good position to be in -- to be one of the highest, if not the highest, cash generator in our industry. We really want to deploy our cash first and foremost back into the business to help position us, to increase our profitable growth, to execute our buy-and-build strategy.

After those requirements are met, we have been essentially paying down debt and buying back shares. Our view is to continue to do that. You know, we still believe our valuation has some upside here, especially with the pullback.

As I telegraphed here, we plan to continue to buy back our own stock and pay down debt. Now, we have some longer-term debt here that is in the US; but relative to our line of credit, there is still some debt that could be repaid here over the next number of quarters.

Okay. With respect to your pipeline, can you give us a bit of color here in terms of maybe the breakdown by vertical? Perhaps talk a bit more about the government segment which has been, I think, sort of your big push in the US over the course of the last year.

Yes, again, I think you wouldn't be surprised that our pipeline to a large degree follows the breakout of our revenue stream. I would say that our pipeline, as I mentioned, in the financial vertical is still very strong. In the sense that, as I say, it is nearly counterintuitive, but we are seeing financial institutions who I would say in previous years had to spend a lot of their IT spend on regulatory-driven initiatives.

You can imagine what some of those are in Canada. There was a lot of requirements to invest in regulatory initiatives. I think more now, with those behind, more of their IT investment will go into initiatives to improve their topline. Things like customer segmentation, wealth management, improved cash flow, credit and collections, all areas that we are in.

On the government side, as I mentioned, I know we talk a lot about the US business, but I would say that the investment levels in Canada are also very, very strong in a lot of our offices, kind of coast-to-coast.

We have also been focusing a little more on Ontario over the last number of years, and we expect some movements there. So the funnel in government is healthy, and we feel very well positioned in that vertical to continue to grow at a faster rate than we would in some of the other verticals.

Can you give us a sense of the, I guess, relative size of the pipeline this year over last year? Can you give us some hard numbers on sort of percentage change, increase, decrease?

Well, the pipeline is increasing. I think again as you go through the full offering strategy, we are surfacing new opportunities with existing clients and new opportunity with new clients.

As far as the absolute size, I don't think we provide a lot of detail, but I can tell you that it is a healthy pipeline. It is well balanced between the geographies, with a little heavier emphasis on the US. We are growing a pipeline at a faster rate in the US, which to me is not surprising, frankly, given the size of the market down there.

So pipeline is looking good. The issue, Richard, is to move it; you know, the velocity of moving it through the pipeline. Now that the vacation period is behind us, we do expect to see some acceleration in terms of some of these deals moving through the pipeline.

It is tough to negotiate some of this stuff over the summer, especially if you are in government, when you are working in the government phase, to be honest.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Paul Steep of Scotia Capital.

Great, thanks, just two quick ones. I guess the first one would be terms of the US and really the move. Over time, we have still seen the SI&C numbers stay relatively high. You have started to take it back down again.

Can you maybe talk, Michael, about any initiatives you have got to try to shift that back away? Because I'm just thinking, if we're back in a downturn situation, when we had not a great economy in the early 2000s, does that cause some challenges, and where we go there.

Yes, Paul, it is an excellent question. Again, it is a great lead-in, another plug for investor day. But one of the strategies we had, as you know, with the AMS acquisition was to turn what I termed kind of their onetime revenue into more recurring revenue.

We come at that two ways. One, the more traditional way that I think most of you know CGI is more around the full IT or managed services outsourcing. On that score, we always said that would take a little more time, especially given the footprint we had in government.

In a lot of governments, in fact, outsourcing is not a good word; managed services continues to be a better word. The impact is essentially the same for us; it is longer-term recurring revenue.

So, we are doing a lot of positioning work there. We believe that we can turn some outsourcing or managed services deals, the more traditional ones, in the period ahead.

The second area, though, where we have been making a lot of progress is around the solution set that we acquired with AMS. We will talk more about that, as I say, on Friday.

But to give you one statistic, essentially when we acquired those solutions there was a ratio of license-to-SI revenue of about 5-to-1. So for every licensings dollar there was C$5 of SI. We have now push that up to 7-to-1, and we have built a fairly significant recurring revenue base that includes managed services around those solutions and also, of course, solutions maintenance.

So that area is building momentum, which should help us re-establish a higher floor, if you want to use that term, in the event of any kind of softening of the SI&C business.

So that is a two-pronged strategy that we have. The second one is kind of a fresher paint in the sense that it's one that we really accelerated after the acquisition of AMS. But it is gaining nice momentum and will actually over time help us push up our recurring revenue, which is the goal.

We would like to get our recurring revenue above where we are now. Although at about -- what are we at, about 53%? -- is still one of the best in the industry. But again, to your point, our longer-term goal is to move that up, to make us more recession-proof from any kind of a downturn in individual verticals.

Okay, great. I guess the only other one I would have for you would just be in terms of the pipeline which Richard touched on. If we think in the US and Canada, we potentially are heading towards -- in the US, definitely -- but both countries heading towards election years.

How do you sort of position the pursuits that are out there right now, in just trying to close those deals before we end up in paralysis again, unfortunately?

Well, in Canada, I don't frankly -- I am not as concerned about that. I think the pipeline there -- and again we deal, as you know, not only federally but across a lot of provinces. So to some degree we are pretty balanced.

The Ontario election is behind us. Saskatchewan is behind us. There's a number of jurisdictions in the East behind us. So I am not expecting any big impact there.

In the US, it is such a big market and such a big spend that, given our relative size in that market and the type of work we do, I am not expecting any material impact caused by an election year. It will probably impact the bigger players more than it would impact us.

Perfect. Thanks, guys.

Scott Penner of TD Newcrest.

Thanks. David, I just wanted to look at the -- on the cash-flow statement, the investment in contract cost has been coming down, substantially over the past few years. Just wanted to get your comments on the context of this decline, whether it goes hand-in-hand with an increase in managed services and less Tier 1 outsourcing; or just I guess how to think about that investment line going forward.

I think right now, what I would suggest is that we look at that line to be relatively flat going forward. It does reflect the number of new contracts that we are bringing on. So in the last year, you saw that we brought on Royal & SunAlliance, Cirque du Soleil as an example, a few other contracts. So that will follow those new contracts as we come on.

We also take time and we take care to make sure that we are very effective when it comes to the transition of those accounts, so trying to manage those costs very closely. So that we're not picking up large balance sheet amounts and to ensure that the future drag on the P&L is going to be minimized as we go forward.

So I think as we continue to hone our game here, we are just looking for opportunities to be able to reduce that area and to make it a little bit more effective. So as new contracts come on, you will expect that will bump up a little bit. But then once we have those transitioned across, then those should start to come back down again.

Okay. Mike, one thing you haven't touched on, I guess, is the acquisition outlook and how it has changed, I guess, since the last conference call. What your perspective is on target areas, both geographically and vertically. I'm sure I just set you up for another plug for the investment day.

The tickets are in big demand there, Scott. Look, I think on that side it is safe to say that we have accelerated our review of opportunities. I mean, I don't want to get into predicting the currency, but as I mentioned it is a very strong currency for us to look at opportunities.

We are looking not only at public companies, but we have also accelerated our review of what we call private captives. In other words, companies that are focused on information technology, that are linked to companies whose core business is not IT. We see that as a very interesting area for us.

Again, given that some companies now are likely reviewing their overall strategic plans, given some of the financial pressures out there, that that could well open up a window here where they would reconsider whether these captives are essentially on-strategy.

So, we're aggressively looking at opportunities. Given our financial performance, the health of our balance sheet, our line of credit, our currency, we are well poised to do something. The issue has always been, as you know, is to find an acquisition that meets our criteria both from a business and financial perspective.

Having said that, as I mentioned, we haven't lost the appetite or the commitment to our build-and-buy strategy. We did spend a lot of time this year on the build piece for the reasons that I outlined. But we feel we are in a better position now to look at both those levers going into 2008.

As you look at your individual acquisition opportunities, do you see that the -- any competition on pricing from private equity players has disappeared?

I would say that like many other trends or fads, we have stayed to our discipline. We don't really see or frankly hear much from the private equity guys to the extent we did six months ago.

So no, we don't -- I am not sure that when you look at the valuations, our valuation has improved nicely. So from a valuation standpoint, I think there are some interesting opportunities out there. As I said before, we have got to find something that fits the strategic plan that is there financially.

And also something that -- where the opportunities, the synergy opportunities, are really based on operational issues as opposed to legal or accounting issues. We like to kind of focus on companies where the major opportunity for improvement is around the operations. So that does somewhat limit some of the targets.

Right. Thank you.

Steven Li of Raymond James.

Thank you. Mike, just looking at the BCE, it looks that the business is up about 45% year-over-year. Given the changes happening there, can you comment on the outlook? You're expecting some modest growth in '08?

I'm not -- I guess -- thanks, Steven. I guess on BCE, what I have decided to do for the last two years is not to put any color beyond the minimums. To me, candidly, we have been building and diversifying our business. I go back to day one, where BCE used to represent 50% of our revenue. They are now down to probably 11%.

Our strategy is to continue to expand and grow, to diversify. BCE at C$425 million in 2008 to me is kind of what I will have built into our planning perspective. As I say, their budgeting and planning cycle is a little out of phase with ours.

But we are engaged to -- over the next number of months here to kind of get a bead on their plan for 2008. So from a planning perspective, I'm assuming the minimum.

Okay, great. Then David, what was the reason for the spike in the other income? Was that an FX gain in Q4?

In the interest area, we had received in the payment for R&D claims that we made in the past. Because those went back to the 2001-2002 time frame, there was interest that was also due on those. That was treated on a cash basis. When we received it, we saw about C$2 million of that go through as a bit of a spike or a bit of an increase coming in.

Okay, so it's C$2 million?

Yes.

Okay, thanks.

We have time for a couple more, Joe.

Paul Lechem of CIBC World Markets.

Thank you. Good morning. Just back on the acquisition question again, and wondering, given that you have raised your borrowing facilities again and your debt is down again, what is your appetite here for another sizable deal?

Just a follow-on from that, what have you learned from the AMS experience? Is there anything you would do differently this time with a sizable acquisition?

Well, first off I would say we learned -- we verified a lot of things with the AMS acquisition. One of them was to be patient. I think Serge hunted AMS as a potential target for many years, and again that is -- a lot is about timing. It was a very good acquisition in terms of allowing us to increase our footprint in Europe and the US, and we got some very good people and solutions.

We, from our perspective, Paul, it is not the size that -- so our appetite is not necessarily built around the size. It is really built around the other criteria that we have reviewed before here. Given our footprint and our size, we can absorb a fairly large acquisition here, as long as it is attuned to the criteria. That it is synergetic from an operations standpoint; it is operating in the same verticals; got a good cultural fit; can make it accretive to earnings per share in the first 12 months.

So against that criteria, if it meets that, candidly, we are not as concerned about the size. So we are not putting a limit here on what we would look at based on absolute size. Having said that, we are not going to take out a C$20 billion corporation. But we could certainly do an acquisition significantly larger than the AMS acquisition.

Okay. Just on the contract you announced this morning with the Canadian government, I believe this was one that was contested by a competitor. With the announcement today, does that mean that all actions from that competitor have been dismissed and you can move -- that there's nothing overhanging this one from here on?

Well, I don't want to speak for the competitor. But we have signed the contract with the federal government. We are beginning the transition planning, and the work will move over time here to CGI.

There was an appeal made to the federal court, which has been rejected by the federal court. There has been a number of appeals through to the CITT, which have also been addressed. So from our perspective, we are focused and always have been focused not on legal procedures, but rather on the operations.

We are actually quite excited about this, because although we announced the C$91 million, as you know, because it was made public certainly also in the legal proceedings, that the actual opportunity here is an excess of C$400 million. The initial three years plus four option years plus anticipated growth pushes this contract up significantly.

So it is a fairly major contract that we feel is a great opportunity here for growth. So, we are in the operational phase from a CGI and a government accounting perspective.

Okay, great. Thank you very much.

Naser Iqbal of Salman Partners.

Thanks and congratulations on the quarter in a very tough environment. I just have two questions. Just going back to this whole CAE, can you just maybe provide a little bit more color on that, what just happened there?

No, I really can't. I mean, I think as I say, we -- I just reiterate the points I make. We have got great relationships over there. They are a great company. We signed an MOU. We went into the due diligence phase. During that period, circumstances and strategy evolved at CAE to the point where both of us decided it was not in the best interest to sign a long-term contract.

Having said that, we see them as a potential ongoing client, but there is nothing more there. In a businesslike ours, circumstances can change. But there is nothing more than that. I don't want to comment on CAE. As I say I can only (multiple speakers).

Sure. No, I appreciate that. I'm going for -- I mean, it was a great quarter considering this trend of the dollar. You have talked about how you have some natural hedges. But do you think that if the Canadian dollar continues to remain strong that this could accelerate maybe some of your offshore initiatives particularly, like increasing your India penetration?

Well again, I think on the dollar, I was thinking about this at breakfast this morning. I am not a great forecaster of currency. But I think if you look at it from our perspective -- and you guys will have your own -- is that at some point the exposure to the upside is more limited than the potential on the downside. In the sense that the dollar, one could make the argument, is closer to the top; any pullback from these levels will actually have the inverse impact where it will add it to our topline.

As Dave mentioned, we are fairly well hedged on the bottom-line. Can't really hedge on the topline. We just continue to sell out there.

We have been able to -- the model we have on the global delivery is fairly balanced here. We have won a contract in the US with a large US player, who looked at India and decided to move the work to Southwest Virginia. So again our diversified model in having home-shower sites in the US, the only viable large-scale near-shore offering in Canada, plus our positioning and growth in India.

Again, our strategy in India is different. It is not about quantity, it's about quality, it's about moving the right work to the right shore. When you look at our results, as you pointed out, even with the stronger currency our margins are still significantly better than our peers who are making the decision to move lots of jobs offshore.

So there is not a direct correlation here, in my view, to having lots of jobs in India to margins. You have to look at other factors, including the mix of the revenue, the type of the work that you are doing, and the margins that are associated with the work that is very tied to the proximity of the client. Things that cannot be offshored.

Those are areas where CGI is very well positioned. We are going to spend a little more time on that, trying to explain that, on Friday. We have a pretty ideal mix of revenue. We have a very unique footprint in terms of a lot of local presence coupled with unique global delivery model, which allows us to continue to generate, frankly, leading-edge margins in what you describe -- and quite correctly, frankly -- a very challenging environment out there.

Great, thanks a lot. Congratulations on the quarter.

Joe, we have time for one last one.

Ralph Garcea of Haywood Securities.

Thanks for taking this. I mean, you guys have done a great job, obviously. The environment has improved. Pricing has stabilized. Utilization rates are up.

What do you guys need to get to that 7% net margin level for the year? You hit it for Q4. But can you sort of do that for fiscal '08, or will an acquisition sort of keep us in this 6.5% level? How are you guys looking at a bottom-line target, I guess, going forward?

Well, I think on the -- thanks, Ralph, for the question. Again, I would reiterate, when you look at our whole strategy and you look at a build-and-buy strategy, a company like ours that is still continuing to build out through those two major pillars, what you need as the engine fuel to do that are high margins and high cash generation. So, we are very focused on those two indicators in the context of growing our business with profitable revenue.

So again, what we are finding here as we expand and we grow, we are getting increased economies. We are in -- even with the new hires to some degree we will have juniorized part of our force. So we have other levers here that we can continue to pull that we believe will allow us to continue to improve our bottom-line performance.

So, we have in the past delivered margins, as you may recall, Ralph, I think -- gee, Dave, you may know. I forget the number years ago. But we had two quarters there before we expensed options and took on debt of 7.1%. Then we had to kind of absorb the impact of expensing performance-based options, and interest rates. And even with those two factors, we have been able to restore the margins, absorbing those and taking them back up above 7%.

So we are a very, very focused company on managing our costs from an owner-type mentality. So I believe that we can continue to perform amongst the best when it comes to that indicator and cash generation, while being competitive on the growth side.

Okay, excellent. Thank you.

Thanks very much, Ralph, and thank you to everybody for tuning in today. We look forward to communicating with you again on Friday. Thanks very much. Have a good day.

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