CGI Inc (GIB) 2008 Q1 法說會逐字稿

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

Thank you Mary Beth and good morning. With me to discuss the first quarter of fiscal 2008 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 9:30 AM on February 5. Supplemental slides as well as the press release we issued earlier this morning are also available for download along with our Q1 MD&A, financial statement 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 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 will 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 going to the Q&A.

Just before turning the call over to David, a reminder that our annual meeting is scheduled for 11 AM this morning, so our comments will be brief and leave as much time as possible for Q&A, but we will have to cap the call at about 45 minutes. So without further ado, David?

Thank you Lorne, and good morning. I'm pleased to share the financial details of another very good quarter. Revenue was C$914.7 million compared with C$904.1 million in the same period a year ago, representing 1.2% growth year-over-year. On a constant currency basis, the Company grew by 6.1% year-over-year. Compared with the same period last year, the net negative impact of foreign currency on our revenue was C$44.2 million due primarily to the weakening U.S. dollar.

EBIT margin strengthened Q1 to 11.6%, improving from 11% in the first quarter of 2007. Net earnings were C$72.6 million, or 66% better than the C$43.7 million reported in Q1 of 2007. Our net earnings margin continues to improve reaching 7.9% in the first quarter. We continued to maintain our leadership position within our North American and European peer groups. Earnings per share in the first quarter was C$0.22 per share. This compares with C$0.13 in the same period last year. Included in these results are onetime tax benefits of C$6.3 million largely related to the recently lowered Canadian tax rate. Excluding these onetime benefits, our net earnings margin was 7.24%.

Our Q1 effective tax rate was 27.7% taking into account the onetime benefit of a lower Canadian tax rate. However, excluding the impact of these onetime benefits and taking into account the ongoing impact of the rate reduction, our effective tax rate on a normalized basis should be in the 32% to 34% range.

Now let's turn our attention to the balance sheet and the generation of cash flow. We improved our DSO, reducing it to 41 days from 44 days in the year-ago period. This improvement contributed to our ability to generate C$118.7 million in cash from operating activities in the first quarter. Now let's look at how we invested some of our cash during the first quarter.

We used C$15.8 million to purchase an additional 1.4 million CGI shares during the quarter. This brings the total number of shares repurchased under the normal course issuer bid over the last 12 months to 11.8 million shares at an average price of C$10.73. As noted in this morning's press release, the Board approved the renewal of our normal course issuer bid. This will enable CGI to continue buying back our own stock over the next four quarters, up to 10% of the float, or approximately 28.5 million shares. Also in Q1 we repaid C$56.7 million of our debt, including cash and cash equivalents of C$107.1 million. Our net debt was C$328.6 million at the end of Q1 for a net debt to capitalization ratio of 14.2%, leaving us with expanding and significant financial flexibility.

Given the continued weakening of the U.S. dollar versus the Canadian counterpart in Q1 and the resulting C$44.2 million it shaved from our top line, I want to reiterate that our strategy of using natural hedges, like insurance, maintenance and software contracts has continued to shield our bottom line. As a reminder, the impact of currency goes beyond the P&L, extending to our balance sheet. For example, during the quarter we entered into forward exchange contracts to fix the Canadian dollar value related to the future principal repayments of our U.S. dollar denominated debt. Regardless of how the exchange rate fluctuates between now and the due date, we locked in a C$61.6 million foreign exchange on the notes issued in 2004.

I will now turn the call over to Mike.

Thank you, David, and good morning everyone. I'm delighted with the way our team continues to pursue and capture profitable growth opportunities. We had an excellent quarter. We delivered industry-leading margins in quarter 1, EBIT margins reached 11.6 and our net earnings margin was 7.9, or 7.24 before the onetime tax benefits, an all-time CGI record. This improvement can be directly correlated to our ongoing ability to excel at execution, improving efficiencies and continually reducing costs across our global operations.

It also highlights our ongoing ability to be disciplined and selective in the management of our sales funnel, always ensuring we are competitive while targeting profitable growth opportunities for CGI.

Accordingly, bookings and revenue grew across all geographies. On a constant currency basis, we grew our year-over-year revenue by 7% in Canada, 5% in the U.S. and by 6% in Europe and Asia. The success of our full offering strategy in securing new clients, renewing contract extensions and earning additional services from existing clients is working and is continuing to gain momentum. A further validation of our ability to execute our business development strategy can be seen in the improved bookings. We have increased our bookings from C$769 million in the year-ago period to C$1.5 billion in the first quarter of this year. This equates to a book-to-bill ratio of 1.3 times our quarter one revenue. We remain committed to consistently delivering a book-to-bill ratio at greater than one times revenue on an annual basis. Including quarter one, we've now reached that milestone on a lapped 12-month basis. CGI's revenue backlog of C$12 billion is 3.3 times our annual revenue. Our ratio is stronger than our peer group. We continue to create and pursue all profitable growth opportunities which will generate additional shareholder value over time.

Our first priority is to continue to invest in our business in terms of facilitating the extension and execution of our build and buy strategy. As part of this commitment, we'll continue to strengthen the balance sheet, reduce debt and buy back our shares as appropriate.

In light of our strong performance and in comparison to our peer group, we continue to feel our stock is undervalued and therefore represents significant potential appreciation for our shareholders. Consequently, as Dave mentioned, we have renewed our normal course issuer bid which gives us the ability to continue to buy back our stock. Looking forward, we believe that CGI is extremely well positioned for all and any economic conditions. We have a healthy funnel of opportunities built over the course of the last several quarters and moving through the pipeline at increasing speeds. We have a very high level of recurring revenue embedded in our long-term IT contracts with both government and commercial entities. We have a diverse mix of vertical expertise combined with a broad catalog of solutions and practices, including tax collection, spend management and BPO to support our clients' back rooms.

The countercyclical nature of outsourcing we believe will result in more companies and more governments to consider one or more of our managed services. CGI's outsourcing offering has been extremely well developed for more than 30 years and it is our experience that it is more interesting and enticing when the [CXOs] turn their focus on the P&L and cost reductions. In addition, we remain a leader among our peers and valuation drivers such as EBITDA, EBIT, earnings per share and net earnings margin, cash-flow generations and profitable revenue growth.

In conclusion, we remain committed to expanding our performance over time for the benefit of all our stakeholders. Lorne, let's go to the questions.

Just a quick reminder that a replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the passcode 322-8152 until February 15. As well, a Podcast of this call will be available for download at either CGI.com or through iTunes in a few hours. Please direct any follow-up questions to me at 514-841-3355. Mary Beth, if we could poll for questions from the investment community, please.

(OPERATOR INSTRUCTIONS) Scott Penner, TD Newcrest.

Thanks. Mike, I know you don't normally like to talk about the bookings in too much detail, but just because they were so strong this quarter, maybe you could just give us some color either by vertical or geography as to where are some of the areas of particular strength was and then maybe how much of the bookings is really shorter term systems integration consulting versus outsourcing?

Thank you for the question, Scott. Maybe just always to go back in context. As you know with the plan we've put in now a year ago, we were focused on improving our margins, restoring them to the levels that we're more traditionally comfortable with, which is in the leadership position. We put a plan around the full offering strategy around business development. We did point out it would take time for that plan to show benefits. I am pleased to again reinforce that we continue to see the benefits of the work that our team has done on business development. It is now reflecting in the bookings. As I said, if you look at trending 12 months, we're essentially at a book-to-bill of 1.

This quarter, we saw some really diversity in the bookings. We had increased bookings with some of our existing large outsourcing contracts. We had bookings on the government side, health and human services, in the revenue departments of various provinces and states. We also had a number of bookings in the any financial institutions in terms of our solutions, in terms of architectural work that could lead to further downstream work in helping our clients transform elements of the financial institution. We had some renewals and extensions from clients that we've done business with for a long time. So it was a very broad-based movement in terms of the bookings, and that is kind of what I was looking for as opposed to one or two big items that would be anomalies. It was pretty broad-based. For example, we also closed the ETS at Ottawa that was disputed. We booked that contract at its minimums in the quarter. So it was fairly broad-based across all the geographies and very much in line with our three largest verticals -- government, financial and telcom.

And maybe just one quick clarification, David, if I could. Given that book-to-bill, you would assume that the backlog would pick up a bit. Is this just a currency effect?

That is the primary single item that was there, yes.

Richard Tse, National Bank Financial.

Mike, I was wondering if you could elaborate a little bit on this comment that the funnel is moving at increasing speeds. Are you suggesting that the pipeline of deals is sort of nearing the end here on a number of these deals?

No, not nearing the end. I guess the best way you term that Richard, I'm only smiling because I -- we've been working so hard to build the funnel up, the next challenge is to get to move through the funnel. And I guess what I was suggesting was that a number of the things that we've been working on are starting to accelerate. Part of that I think is due to a number of our clients move to their new full-year. So things that they were talking about with us in their last fiscal year sometimes they don't kick it off until they actually get into the new budget cycle. So part of it is that. Part of it's also starting to reflect our view that I highlighted on the outsourcing side that outsourcing is in my view somewhat countercyclical. It does better in times when CEOs, CFOs are focused on improving their bottom lines. And we are engaging now I would say in more dialogues with clients, either in terms of extending the breadth of our outsourcing deals from perhaps one level to a full outsourcing deal, and in other cases we're entering dialogues about full on sourcing with new clients. So it was kind of trying to characterize that. We do see some deals that we have been working on for awhile, finally working their way through either the financial structure of our clients, in some cases with government working through the procurement cycles of government, and that is what I was telegraphing. You've seen some of that with the bookings this quarter being that strong and we expect if it continues, it will also the reflected in the bookings going forward.

Broadly speaking, with respect to the financial services vertical, have you seen any weakness in that? I know you said you have broad-based strength in your bookings this quarter, but what are those companies telling you at this point?

Again, I would remind you that in our financial verticals, we have a number of things in there that in my view are recession-proof from the sense is they're mission critical. There's not a lot of discretion around there. So where we have -- we do all of the support for Interact, as an example. The Interact network is going to continue to operate in good times and bad times. One could even say it may operate more in bad times. But things like that are recurring revenue. We have outsourcing deals. A lot of our outsourcing deals that are in -- related to financial institutions have a strong element of application maintenance. We have to continue to maintain those applications in good times and in bad. We also are solutions in terms of targeting things like collections, tax -- we're very active with our tax solution on a global basis. We are finding again more companies, be them in the telcom, government or financial, now are looking at tax in terms of a solution to help them get a better handle on their cash flow and their collections.

And we're also seeing, which I spoke about probably a year ago, that a lot of our financial institution clients are looking at using SOA architecture now to try and rejuvenate some of their legacy systems. So, there are financial institutions that are continuing to invest in things like commercial banking, in portals, to improve client accessing to their financial records. A lot of it I would say is targeted around the wealth management piece, trying to capture a bigger share of a growing wallet there. So we are not seeing any pullback there. I think you see the revenue was fairly strong in the financial vertical in the quarter and we would see that continuing over the foreseeable future.

Paul Steep, Scotia Capital.

Michael, maybe you could talk a little bit -- at the start of this decade, we saw a pretty rough hit to the SI&C market. I would love to get your thoughts on, now that you have AMS in there and the software is balancing that out, where you see that going layering on the comments that you just gave us about the outsourcing market?

I think you have a number of things going on. You have both supply and demand there, and I think to me, and we'll be highlighting this today at the AGM comment, is that technology is pervasive. It's embedded in everything and there's really not much of a choice in terms of clients who are operating globally or want to improve their service to their clients or citizens. They have to invest in technology. So to me, it represents a huge ongoing opportunity for us and other players in this space.

On the SI&C side you're also in North America the supply of talent there is also tightening up. I think that is good for us. We retain our talent better than our competitors. Our turnover rates are less. We have a lot of experienced people. So from the supply side I feel good. And on the demand side, again, I believe that as the economy tightens up, there will be more capital investments being made in systems, in modifying systems and looking at driving out productivity and efficiency, automating services that allow companies to remove labor perhaps in their own business. So I hope the worst of that is behind us. I think I commented before is that it's now been seven, eight years since Y2K (inaudible), probably 10 years when you look at the fact they made them in '98, '97 '99. We do see more customers needing to evergreen their environments. They are feeling their age, and there has to be investments made there. And I think some of that would drive the SI&C. In our case, we also have the spinoff of the work associated with our solutions that as I pointed out in the investor day are now driving a 7 to 1 ratio on SI&C work related to license fee.

So I think that market is starting to improve.

One quick follow-up for both you and David. Obviously you have done a great job on the working capital. Maybe, David, your piece of it I guess would be around targets around AR and AP. And then secondly, if there's any change from either of you in terms of the capital intensity of the products -- or the contracts. I guess I am just looking at can you sustain these low working cap levels, or are we going to see a shift back in the next quarter or two?

We would be looking to sustain the working capital roughly where it is at today. We're always going to some slight gyrations as we go through months or through quarters, sometimes with the tax payable account, sometimes they build up, sometimes you actually have to make a payment. So there would be a bit of a cash flow, depending on which particular month we are in there. But on the receivables side, the work in process just for the folks on the call, we do charge the business units a working capital charge and a bit of a joke internally around the amount that is being charged. But what it does is, and I know some of the folks are listening on the call here, it does give us the attention that we need to those particular line items so that the business units really take this stuff at heart. They work very closely with the client to make sure that the transactions that the delivery of services are at the best quality possible so that we don't have issues in trying to collect those receivables. And also, when it comes to the negotiation of the contracts, that they are putting in good terms to be able to follow our payment policies and our payment conditions and through that be able to continue to keep the trends that we've seen in the past. So we're looking to be able to try to hold pretty close to where we are today.

Jason Kupferberg, UBS.

I just wanted to take up on the SI and consulting business a little bit since it is 40%-plus of your revenue base and looking at the recent growth trends there, I understand certainly that the outsourcing business has some countercyclicality to it. But SI&C I think on an industry basis has proven to be more of a cyclical type of business and your growth rates have been negative there the last couple of quarters. I know currency is certainly hurting you there. But maybe if you can give some color on what the constant currency growth rates, what you think that business can do really from a growth perspective here over the next few quarters assuming that the economic environment, at least in the U.S. and possibly Canada, does continue to weaken a bit.

I think on a constant currency thing if we can, Jason, we would like to get back to you on that. The thing you have to remember that we also do application SI&C work within our outsourcing bucket as well. And a lot of that is what I call program work where it's built-in very much tied to the business plan of our clients. So while some of that is discretionary, as I said, my own feeling is that based on our larger clients we're seeing the need to continue to evergreen and invest there for other reasons, including productivity and cash generation, that the type of thing from, the client standpoint.

So I can't run it by a quarter, but our sense is when we look at our funnel, the SI&C funnel remains healthy and we're not seeing any kind of a pull-back back there. Again, we are seeing a nice match of opportunity there when I look at some of the solutions we sell and the drive that comes along there. So I think if you look at us to some of our competitors, we have more outsourcing at that high end. More of our outsourcing is in systems development, SI work and application maintenance, than it is in infrastructure. And then from a second perspective, we have SI work tied to solutions, which I think differentiate ourselves from our competitors. And the third area is, we have a lot of people that are schooled in ERP, like Oracle, SAP, those type of things that continue to be upgraded by clients in terms of new versions or installed by clients. So against that, I still feel fairly confident that a good portion of our growth will come from -- or steady growth, will come from the SI&C side.

So you don't think we will continue to see negative growth rates there?

No, I think we need to adjust those for currency, but also as I say, you have to understand we are doing some SI&C within that outsourcing bucket.

And turning to the margins for a minute, strong again here in the December quarter. Can you talk about some of the specific initiatives or levers you have with regards to margins that might be segregated at the gross margin line versus the operating margin line and give us maybe a deeper appreciation for some of the efforts you guys have in place and what still remains ahead of you if that's the case?

I guess I would answer it this way, and I guess it depends on how you view life. I view this as very positive. You know what? There isn't any one time rabbits in the hat. What we're essentially doing here is what Serge and Andre have done since the Company was formed, is focus on the fundamentals. If we deliver our projects on time and on budget, we're not getting margin leakage here in terms of write-offs and these type of things. Secondly, we're focusing on, which is a very key indicator, which is utilization rates. Drive up, manage our benches aggressively. Third, our people are also owners, so when we have periods like this quarter where there's a lot of vacation. A lot of our people take vacation, they eat down their vacation banks, which gives us a positive impact in the quarter because those expenses have been accrued. We continue to use our scale in terms of negotiating the supply inputs into our business model licenses, hardware, these types of things somebody mentioned on the capital side. The cash side, that we're trying to run the operation tightly. We're trying to also, which I pointed out in my comments, is to continue to be disciplined on the type of work we pursue relative to the funnel because there's a lot of work out there as I have said before that might improve your revenue growth line, but there is no margin attached to it. And so we are showing a lot of discipline. I'm proud of my people on how disciplined they are on that, because as you could imagine if you have a sales orientation, the pursuit of the top line is interesting. But in our Company, our culture and in our financial modeling that Dave spoke about, it's a very short leash between there and whether you can generate margins and cash flow.

So I think it's really a combination of all of that and it continues to allow us to perform at or at the best our amongst the best when it comes to key indicators like margins and cash flow.

Last question, M&A. Obviously valuations have come in quite a bit in general since your last earnings call. How does that change your view if at all on the near-term M&A pipeline?

I think what it does is make us look at our funnel harder, longer. Again, no secret there. We have been executing a build and buy strategy. On the buy side, it's always the matter of finding the right target at the right price and the right time. Clearly, valuations have come down and it is causing us to spend more time and focus on those opportunities. Again, we also need a willing seller and we also want to ensure it's something that the opportunity for us to go in and when we add it to our Company, we get something greater than [two]. We need to be able to ensure we can get synergies. So we continue to look very hard at that funnel.

Mike Abramsky, RBC Capital Markets.

Excuse me because I have a cold. The U.S. growth was a little light this quarter compared to past quarters, and you had been talking about double-digit, low double-digit U.S. growth for a couple of quarters here and market growth rates above market. Can you talk a little bit about what has gone this quarter in the U.S. to drive that and what kind of trend you think that we're going to see a recovery of that going forward?

That's a good question, Mike, and you have our empathy for the cold. I think it's going around everywhere, I'm hopefully on the last days of mine. I don't read a lot into a quarter there. We do believe that the U.S. will continue to drive growth rates ahead of the Company, and certainly double-digit growth rates are very possible in U.S. We have a great team there, they are committed to doing that. In the quarter again, when it comes to the mix of our work in the U.S., you'll find that we have a lot of government clients there. The amount of time they shut down during that Christmas period has a big impact on the revenue generation we could do in that Christmas quarter. So I'm not looking at that quarter as a trend. When we spoke about the U.S. being able to run at double-digits, we were talking on an annual basis. And so I am not reading anything overly concerning in the quarter.

So you would not change your stance that you been saying on this now at this point with regard to that outlook?

Not on the basis of a quarter.

Okay. In terms of what's feeding your backlog, are you seeing a change in revenues coming from the U.S. from different sectors, or again is that sort of steady-state? Have you seen any -- for example, in the U.S., your upsell program versus any macro or budget related as you say developments? Can you give us a bit of color as to what are some of the dynamics of your current U.S. growth?

Let's take the macro one first. We haven't seen in our clients any impact of the macro conditions that we're all reading about in the U.S. in terms of a recession or a slowdown. I would say that, again, the type of work in the areas we are in are areas that are close to mission-critical and nondiscretionary. There are deals, tax deals as an example, that we have announced where states are looking at trying to protect the tax revenue have and collect more of it. These types of solutions and opportunities are good, steady growth opportunities for us. On the commercial side, I guess, again, Mike what I am telegraphing there, the discussion around outsourcing is getting a much better open door type hearing now. People are trying to understand it, how it could help them, how immediately it could help them. So from that standpoint, we are seeing more dialogue around that element. The vertical lines I would say that in the U.S. citizens it's still very much targeted on the government financial vertical, some telecom manufacturing, insurance, these areas.

Okay. And then lastly, just a couple of housekeeping questions. You had a bit of a tax benefit this quarter. I also noticed there was a I think a higher than expected interest charge. And I'm just wondering is those are anomalies?

I will take the last one first, the higher than expected interest charge. Really last quarter, we had received in some -- a remittance for some R&D tax credits and because it had been outstanding for a number of years, on the settlement there was the [matrix] that came along with that, so there was actually some offsetting interest income. So that's what was kind causing a bit of the quarter over quarter swing there. And the tax benefit, primarily the driver to that was the reduction of the tax rate on the Canadian side. And I think in the MD&A, if you read through it, we have indicated that we expect to see the rates going forward on a normalized basis being between 32% and 34%.

(OPERATOR INSTRUCTIONS). Susan Chen, Merrill Lynch.

Good quarter, that's good booking. I just wanted to follow-up on the macro question [seriously]. We kept getting questions from people talking about a slowdown in the U.S. and Canada. You just addressed the U.S. side, don't seeing any slowdown in the U.S. Do you see any slowdown in your [pipeline] in Canada? And I guess what [kind of] macro assumptions do you have in your '08 plan?

Again, it's kind of interesting because we went through this cycle probably five or six years ago. I think if you go back there, you will find that the fact at that time even more of our revenue was in Canada than it is now. We fared out very, very well with respect to our competitors in terms of our financial performance.

In Canada, again, I want to reiterate, I don't really base our financial and revenue forecast on the macro economics. I certainly keep an eye on them. I think they are one of a series of indicators one needs to look at in terms of the health of the economy and ultimately our business. But I go back to the drivers of our business, which I firmly believe clearly have a discretionary element. But it's not as discretionary as one would see in other industries just by the fact that one needs to continue to invest in technology. You have to update it to evergreen it, to keep your company, your government running. And secondly, you need to continue to invest to ensure you're competitive.

So in Canada, we had very strong bookings, we had good revenue in the month, the growth rate was good. We have always said that we don't feel that we are anywhere limited in terms of growth prospects in Canada. Although we have a big footprint here, there are still a lot of opportunities to grow and we have invested heavily in that footprint and the return on that investment from my perspective is still out there in terms of capturing more business.

We have also, the number of competitors that we have globally and even in Canada are continuing to thin out, which to me is another opportunity for us to capture additional share. So from that perspective, Susan, I talk a bit about that in my comments. I think we're going into certainly a more intense economic period. But when we look back at the Company and how we have performed during those periods and how much stronger we are now in terms of client offerings, in terms of solutions, in terms of recurring revenue and our financial position, our sense is we are entering the period in very, very good shape and well positioned to do better than our competitors.

Mary Beth, I think we'll have time for one more question.

There are no further questions registered at this time, Mr. Gorber.

Thank you all very much for joining us. Please tune into our AGM at 11 AM this morning, and again, follow-up with me with any follow-up questions. Thanks very much.

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