CGI Inc (GIB) 2008 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 of Communications and Investor Relations. Please go ahead, Mr. Gorber.

Thank you, Jenny, and good morning, everyone. With me to discuss the third 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 8 a.m. on July 29, 2008.

Supplemental slides, as well as the press release we issued early 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 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 financial results and then to Mike who will discuss strategic highlights of the quarter. David?

Thank you, Lorne, and good morning. We had another very good quarter as we continue executing to our business plan. As most of you are aware, last week we announced the divestiture of our Canadian P&C claims and risk management business. As such the financial results and impairment related to this particular business have been reflected in discontinued operations. In line with accounting requirements the historical figures have been adjusted to reflect the comparable results.

Excluding revenue of CAD19.8 million from discontinued operations, revenue was CAD950.5 million in Q3 2008 compared with CAD914.0 million in the same period a year ago. On a constant currency basis the Company grew by 6.5% year-over-year. Compared with the same period last year the net impact of foreign currency reduced our revenue by CAD23.3 million or 2.5% of revenue due primarily to the weakening US dollar.

The success of our natural hedging strategy, expenses like insurance, maintenance and software contracts being paid in US dollars, has continued to shield the bottom line. EBIT margins of 11.7% strengthened sequentially and year-over-year. Net earnings from continuing operations were CAD81.7 million or 28% better than the CAD64.0 million reported in Q3 of 2007.

Our net earnings margin from continuing operations significantly improved year-over-year to 8.6% in the third quarter. Earnings per share from continuing operations in the third quarter was CAD0.25 per share on a diluted basis; this is a significant improvement compared with CAD0.19 recorded in the same period last year. A portion of this improvement is related to a recovery of income tax expense totaling CAD10.8 million; this was due to various income tax provisions of previous years that were no longer required.

When we close tax audits or when the audit periods expire we settle the outstanding liabilities related to specific items and recognize any difference from the provision taken either as a recovery or as a loss. In this case, excluding recoveries, the net earnings margin from continuing operations in Q3 was 7.5% and diluted earnings per share from continuing operations was CAD0.22.

Now let's turn to the balance sheet and the generation of cash flow. Cash from continuing operating activities in Q3 was CAD106.3 million; this is an improvement of CAD60.6 million from Q2. Year-over-year the increase in DSO of six days to 48 days is mainly attributable to the ramping up of new contracts and milestone billings primarily in the government. We continue to generate a healthy cash flow and, more importantly, we are putting that cash to work for the benefit of our shareholders.

Under our normal course issuer's bid we are able to buy up to 10% of CGI's publicly traded stock or approximately 28.5 million shares over a 12 month period running to February 2009. To date against this period we have reached 54% of our maximum. During the quarter we purchased 9 million shares for CAD97.8 million while further reducing our long-term debt by CAD11.5 million. After nine months of fiscal 2008 we've invested CAD181.6 million in buying back and canceling nearly 17 million CGI shares while reducing our debt -- long-term debt by CAD35.7 million. As of July 22nd, we have approximately 310 million shares outstanding.

Taking into account cash and cash equivalents of CAD67.6 million our net debt was CAD370 million at the end of Q3 for a net debt to capitalization ratio of 15.6%. In summary, our Q3 results continue demonstrating CGI's ability to profitably grow the business. I'll now turn the call over to Mike.

Thank you, David. Good morning, everyone. Our team continues to deliver strong performance across all key business indicators, and in the process is generating significant value for all stakeholders. At constant currency quarter three marks our seventh consecutive quarter of profitable year-over-year revenue growth. Geographically growth was well balanced with Canada at 6.5%, the US at 6% and Europe at 9%.

The success of our business development initiatives, including the full offering strategy, is yielding concrete results. We continue securing new clients, renewing and extending contracts and earning additional services from existing clients. In turn this has led to another quarter of strong bookings, more than CAD1 billion in new contract wins, extensions and renewals equating to a book to bill ratio of 104%.

After nine months of fiscal 2008 the Company has reached booking levels of more than CAD3.2 billion, equivalent to the total bookings realized in fiscal 2007. Given all the attention being paid to the financial services sector, I'd like to share some additional insight into CGI booking activity in this vertical.

During the quarter we announced wins with Australia and New Zealand Bank, the Bank of Montreal, Delmar Financial and Van City to name a few. Our book to bill ratio in financial services was approximately 160% this quarter on a global basis.

In the US specifically financial services have driven a book to bill this quarter of approximately 300% as our services and solutions in the banking, investments and insurance spaces continue to be strong. Interesting to note is that our renewal rate in this vertical runs at nearly 100% and our win rates continue to strengthen.

In the government sector we also booked significant wins with Revenue Quebec, the Canadian Customs & Revenue Agency, the states of Oregon and California, as well as US federal agencies like EPA and FBI. We remain well positioned for future growth in this key sector.

In the telecom vertical we were very pleased to be named an outstanding supplier by AT&T and we also received a prestigious integrator award for our Vodafone e-commerce initiative. This recognition by global leaders will serve as an excellent reference for our telecom expertise around the world.

We remain committed to consistently delivering a book to bill ratio greater than 1 times revenue on a trailing 12 months basis. We continue running ahead of this commitment. At the end of the quarter our backlog totaled CAD12.03 billion representing 3.1 times our annual revenue. This backlog ensures a high level of recurring revenue and provides us with a steady foundation to continue profitably growing our business.

We continue to pursue all profitable growth opportunities and continue improving our margins. EBIT margins reached 11.7% in quarter three and our net earnings margin from continuing operations was 8.6%. We've now had five consecutive quarters of net earnings margin at 7% or greater. The margin improvement can be directly correlated with our ongoing ability to execute, improve efficiencies, improve productivity and continually investing in our operations to reduce costs across our global network.

A basic element of our business strategy and commitment to operational excellence is to drive towards ensuring on an ongoing basis we have the optimal mix of quality assets. As part of this normal course of business we are constantly reviewing our asset base to ensure tight alignment with our strategy and growth priorities while meeting desirable profitability hurdles.

Last week, following this ongoing review process, we announced the divestiture of a small Canadian business processing unit providing P&C claims and risk management. It is important to note that we've reinforced with our clients our commitment to the insurance industry, assuring them of our plans to continue investing in our core offerings and in the process delivering increased value to them.

In closing I'd like to summarize our performance after nine months of fiscal 2008. At constant currency our revenue is up 6.1%. Our bookings have improved by 32%. Our EBIT margin is running at 11.7%. Our net earnings and earnings per share from continuing operations are up 31% and 24%, respectively. We have invested nearly CAD182 million in CGI, buying back and canceling 17 million CGI shares over the last nine months.

Our net debt to capitalization ratio at the end of quarter three was 15.6%. And over the last 12 months our return on invested capital is 13.5% while return on equity stands at 15.4%, representing significant improvements relative to previous quarters and years. With a credit facility of CAD1.5 billion we have the flexibility to continue pursuing our build and buy profitable growth strategy.

In conclusion our diverse mix of vertical expertise, intellectual property and high-end consulting work continues to contribute to new bookings and a healthy funnel of opportunities. Going forward we'll continue to focus on the fundamentals of growing and operating a successful business which includes generating profitable revenue, strong margins and cash flow. Let's go to the questions, Lorne.

Thanks, Mike. 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 326-5924 until August 12th. As well, a podcast of this call will be available for download at either CGI.com or via iTunes within a few hours. Follow-up questions can be directed to me at 514-841-3355. Jenny, if we could poll for questions from the investment community, please.

(OPERATOR INSTRUCTIONS). Mike Abramsky, RBC Capital Markets.

Perhaps I'll start, Mike, with your comments on your progress in the -- specifically with your progress in financial services. You've been doing well there, clearly gaining momentum, which seems contradictory to obviously -- contradictory is perhaps not the right word -- but obviously -- despite may be a better word -- obviously what's going on in financial services, particularly the US highlighted by for example the Merrill write downs, etc. Could you just highlight for us why that is the case and how sustainable or at risk, given the difficult financial services environment, that progress in growth is?

Thank you, Michael, for the question. Again, that's why I chose to highlight it because I think what's happening out there, a lot of companies are getting kind of broad-based tainted. And what I wanted to kind of point out -- if you look at our mix of solutions, we have IP-based solutions, many that are very focused on what the financial institutions are actually spending their money on, things like improving collections, bring more visibility to cash flow. We also have solutions that allow our clients to avoid upfront capital investments where we actually will set up, run and operate over a five-, seven- or 10-year period for them.

I think what I was trying to telegraph, if you look at the solutions that we put forward that were in the sweet spot for any financial institution who's focusing again on the fundamentals -- generating cash, have more visibility on collections, looking to make investments to reduce costs or improve the operations, we offer them a pretty broad suite here of solutions and really options to address that.

The second thing is if you look at a number of our contracts, they're long term. So they're long-term contracts where you have the opportunity to expand them or extend them in times like this where clients are looking for more certainty, also where they're having difficulty justifying hiring new people into their company, they can use the vehicle that they've set up with CGI.

And then finally I would say -- I'd remind you, our financial vertical also includes insurance. And again, we're not seeing in the P&C insurance industry or even the life sector the same kind of pressures that we're seeing in the more standard investment banks or commercial banking entities in the US.

Thanks. Your BCE revenues are up a bit. Could you just talk about any visibility you have to what may occur in terms of contract review or otherwise given the changes that obviously are starting to come out of BCE post-privatization?

Again, I guess I get that question a lot and I can just kind of share with you and with the Street and I always have what I know. And again, I would remind everybody that we have a contract in place to 2016 with BCE. I would also remind you that they have a contractual minimum that is based on their fiscal year which is calendar year of 425. I haven't seen any indication that they wouldn't meet that. They've met the other milestones in previous years.

Having said that, there is a seasonality to our business and also that seasonality obviously would impact the work we do with BCE. When we're in the vacation period, obviously there's heavy vacations on both sides and therefore you don't necessarily see the same revenue flowing through in the summer period.

We know the new CIO is someone that we're familiar with, our teams have met with him; we're actively engaged to update him on our capabilities and our suggestions that could be helpful there. Clearly our client is busy implementing their 100-day plan. We're there to help them in any way we can achieve their business goals, as we are with any other clients.

I've not been informed by anybody that there's any change in our relationship. It continues to be strong. We deliver good service levels to Bell and I think are seen as a partner there to help them continue to profitably grow their business.

So you're not concerned about any renegotiation of the contract terms or otherwise in view of the changes that are going on there now?

I'm not aware of any discussions due that. Having said that, Mike, we're always willing to sit down with any of our clients and talk about how to help them and in the process create incremental value for their shareholders and ours. And that's certainly the case with Bell or, frankly, any other client.

So again, what we continue to do is continue to focus on delivering in terms of being flexible, in terms being a good partner and being helpful where we can. Now clearly there are changes over there and priorities can shift over there as they work through these, but at the ground level we're continuing to focus on the fundamentals.

Okay, thanks. And just very briefly, it's a nice rebound in the US organic growth, or constant currency growth, this quarter. How much of your growth is coming continued from your program to approach strategic accounts, upsell them or contract extensions versus new business or new wins within existing accounts? Can you give us a sense?

Well again, it continues to shift over time. When we first started the program, as I said, a lot of it, the majority of it was coming actually from farming in our existing clients, trying to be more perceptive, more proactive in bringing new solutions there. I would tell you over the last six or seven quarters it's been shifting a little more to new business.

You're seeing some of that in the press releases that we made. Delmar Financial is a new client as an example. Magnolia, a number of these are new clients. So I would say that originally it was probably nearly 90/10 and it's now swung around where I would say 30% or so is coming from -- 30 to 40% is actually coming from new clients, and I expect that to grow over time.

Thanks.

Richard Tse, National Bank Financial.

Mike, just in terms of Europe, with that market being so strong today does that sort of change your view on how you're looking at M&A and are you focusing a bit more on that area?

No, again, it doesn't change my view because my view has always been that the two areas we're looking for from the M&A side is in the United States and Western Europe. I think again, Richard, when we think about M&A we think about three things -- the right target at the right price at the right time and the challenge is to get all three. Certainly valuations, as I said before, are certainly much more interesting, shall I say, today than they were four or five years ago.

But to me that's only one of the ingredients. We've got to get all three lined up and, candidly, that's quite a challenge to get all three -- the right target, the right price and the right time. Clearly from a timing perspective, as I say, with valuations being what they are, given our financial strength and performance including the strength of the Canadian dollar, the timing is pretty good but we really have to get a match in the other two areas.

And have you done anything with the existing operations to capture that opportunity right now?

I'm not sure I understand --.

Just in terms of your operations over there, you sort of beefed up -- because it seems like that market is growing at a relatively rapid pace relative to the other markets. So have you deployed more investment capital into Europe?

Yes, I guess I would say, if you look at our growth rates, our growth rates have been stronger in Europe over the last number of quarters. Clearly what we're emphasizing in the absence of an acquisition there, we continue to focus on the organic side including beefing up our ability to do outsourcing contracts. Again, if you look at the Delmar one as a good example of that. So we clearly see opportunities to continue to grow there organically and push hard on that pillar of growth until or when we find something that could help us on the buy side.

And on the bookings, what percentage of the bookings this quarter were from the US?

Do you guys have bad top of hand? I'll tell you what we'll do there, Richard, we'll try and pick that up as we go through and provide that. I don't frankly have that right at the tip of my fingers right now.

Okay, great. Thank you.

Jason Kupferberg, UBS.

Good morning, guys. I wanted to delve into the cash flow trends a little bit, Dave, if we could. I know you made a little bit of a mention about the year-over-year increase in DSO, I'm just looking at some of the free cash flow trends through the first three quarters of the fiscal year on a year-over-year basis being down pretty significantly. And it looks like that's mostly due to working capital. So I'm sure some of this relates to the DSO conversation.

But can you just walk us through some of the moving parts of maybe where some things have moved against you guys a little bit? And whether or not that stuff should start to reverse over the next few quarters based on some contractual milestones or whatever else might be going on in the business?

Sure, I think the most important piece to understand when you go back through and you take a look at the specific numbers and the components of the working capital you'll notice that it's really in the receivables and the work in progress is where you're starting to see some of those -- a bit of a buildup.

We had also seen from a low of 39 days we're up to 48 days in the DSO. About a one day DSO equates to approximately CAD10 million. So there's quite a significant change just in the free cash flow that's coming from the buildup in the receivables. We have gone back through those receivables to understand exactly where it's coming from.

As we have described as some of the previous quarters, some of it is from the timing of some of our clients' payments. So when we are at the 39-day mark we happen to have about CAD30 million paid a little bit in advance. So that helped to bring down the number there, which generated excess cash flow in that particular period, but then -- as we are starting some of these new projects.

So has Mike had identified, with Daimler as they are coming on stream, with some of our government accounts as they are coming on stream, we are doing the work. We're getting the milestones billing set up so that there is a natural buildup that we see within the work in progress.

We've gone through those accounts to see if there is anything there that is something to be of any concern. We don't see anything there. Most of that work in progress is getting billed out now. So we expect that that should be getting converted into cash in the next month or two. So we should be in a pretty good shape by the time we get to the end of the quarter.

We still look to target in the mid-40s when it comes to the DSO number itself, so looking to maybe pick up another $30 million to $40 million just from the collection of some of that bubble that we have seen in the work in progress account.

On the other side, the days payables outstanding, because this is the other factor that sometimes has a bit of an implication, are we paying our accounts payable too fast? Our DPO is sitting at about 38 days right now. We are down a couple of days from the previous quarter. So as an indicator, we are pretty much on mark where we should be on that particular front.

Also, just to point out because of the success that we have had in being able to build the profitability of the enterprise or the Company up over the last few quarters, it has also caused us to have to increase the amount to tax installments that we have to pay. So there is a little bit of cash that goes out because of the success that we have had in being able to increase the margins.

Okay, that is helpful. So it sounds like what you are saying is that we should see the September quarter cash flow to pick up as some of those unbilleds get billed and perhaps even collected over the next couple of months here?

That is what the expectation would be.

Then if we think about in general kind of the free cash flow to net income ratio for the Company over time, I think generally, at least over the last few years, you have generally been comfortably north of 100%; this year running probably more like 80%, at least the way we define free cash flow.

How should we think about that relationship in kind of a normal year, understanding that certainly on a quarterly basis it can bounce around quite a bit?

I think the numbers that you had quoted are fair. We are looking to get close back to 100%, and continue to look for alternatives or other mechanisms that will allow us to be able to get there. So very tight management of the cash, and to help some of the business units focus on that, I charge them a small interest fee. And it is amazing what that does to be able to have their interest piqued in that area.

Right. Okay, that's helpful. And then just a follow-up here. I know historically you guys have been averse to providing formal financial guidance for a host of reasons. Now as we look ahead to next quarter and then people thinking about fiscal '09, is there any chance you might reconsider that policy for fiscal '09 to give people a sense of what to expect as you head into the new fiscal year, at least at a high level?

No, I don't think, Jason, that we'll revisit that. Our sense is that what we've tried to do here is describe how we manage the business. We've been very transparent in our financial reporting. I think we've articulated very clearly the business model and the principles, the fundamentals we're focusing on.

As I said before, one of the reasons was it's very difficult to manage any company quarter to quarter in my view. And it's even more difficult to manage a services company who has a large component of outsourcing to give reliability around long-term forecasts.

I think what we want to be able to do is ensure that our people are managing to create long-term shareholder value and are not artificially pressured within a quarter to try and meet some kind of a forecast that may not be in the long-term interest of the stakeholders.

So we're going to continue to be very transparent. We're considering holding another investor day to make sure that we give the community as much as ability into our plans and how we operate the Company. But at this point I don't think we're going to revisit that position.

Okay. And just a last housekeeping item. Did you guys give the breakdown of your total bookings between new and renewal?

No. Again, it's a good point because I know people are looking at how fast the rate of translation of those bookings could be into revenue. And again, I make that point that a healthy portion of our bookings do have a long-term or longer-term revenue stream associated.

Of course, that's the goal that we're driving on. We like five-year, 10-year deals. I think they are very helpful to us when the economy does tighten up frankly, because we have a stronger base of recurring revenue in which to continue to build the Company. But I can take a look at that, but it normally runs pretty close to 50%.

Thank you.

Scott Penner, TD Newcrest.

Mike, I just wanted to ask you about the Canadian business. You're obviously a very substantial player in the growth running at 6% to 7%. It would appear at least that you continue to be taking some IT -- share of IT, increased share of IT spending amongst your existing customers.

I just wanted to kind of get a sense of now that you're several quarters into this business development strategy, whether there continues to be, whether you're still surprised of big clients that don't know what you're all about and whether you can continue to grow at this kind of pace or whether there will be some natural pull back to more general IT spending levels?

I think, Scott, that's an excellent question. And again, I always like to have the opportunity to reemphasize our very positive feelings on Canada. The US market, the European market obviously really represent significant growth opportunities for us over time.

But you know we have a very, very strong embedded position in Canada and Canada as an economy is still doing much better than some of the other areas we operate in. We continue to see a lot of opportunities in Western Canada. We're flat out out there, I mean just from a bidding standpoint and a proposal standpoint. I mean we're flat out answering proposals, so we see a lot of growth opportunity.

We opened an office in British Columbia a couple years ago and that office has continued to grow. We've got some outsourcing deals there that continue to give us backlog in Western Canada. The oil and gas business, got some good solutions there. We partnered with three of the major integrated companies to really build a back-office capability on oil and gas royalties. That program continues to expand and we look to sell more of that across that market.

If I look more generally, the government market in Canada is strong. Governments in Canada continue to invest here and a lot of that investment is circled on IT. We have a very strong position in government with most of the major governments. We've made some investments over the years in the Ontario government, we expect that to start to pay dividends over the next number of quarters in terms of some business there. And again, we have some very good marquee clients in Canada.

So we still feel optimistic about Canada. We certainly don't set lighter goals for growth in Canada. In fact, we make the argument that we're a large player here and as a result we should be at the table for most of the deals that move in Canada. Again, as long as they're profitable deals we're normally at the table.

Okay, just one other point and that is just on capital allocation. If you were to continue to repurchase shares do you think the Board would be open to applying for another repurchase plan ahead of the February '09 deadline of this one?

Again, I would be interested in that. I'm not sure it's possible to be honest, Scott. The checking we've done would suggest that you have to wait until February. I'm not sure why that is, but we certainly would be interested in that.

And then just lastly, on the vertical side of your M&A strategy. Have you changed from the strategy mainly to bulk up in your existing verticals? Are there any others? You mentioned the energy vertical, are there any others which you feel are attractive?

No, I think we'd like to continue to bulk up in the verticals we operate in. Clearly we operate in other industries that have a correlation based on technology or something. But the major verticals is where we see the biggest opportunity for synergy in terms of bringing more value to our clients and more value to our shareholders.

Okay, thank you.

Pat Burton, Citi.

Good morning, this is Nathan Rozof on behalf of Pat Burton. Your bookings growth continues quite nicely, so congratulations for that. The question we have is are you seeing any change in the pace of transitions or new contract ramps that may alter the speed at which these bookings translate into new revenues?

Thanks for your question, Nathan. Look, I don't see it as a pattern. I mean, whenever you look at the verticals that we operate in, clearly again there's some seasonality again. In the summer obviously it's tougher in a number of the geographies to get clients to move stuff through. Government has its own pace depending on where they are in the fiscal year and what's happening.

But on the commercial side I'd say, no. I don't see any kind of material change. I think clearly clients are looking a lot more closely at their cost line which is something that we believe over time will be very helpful to us given the kinds of solutions that we bring. But no, I wouldn't say I'm seeing any general slowdown in decision-making.

Okay, good to hear. And then could you provide an update on any investments you're making to increase your offshore workforce?

Well again, we continue to build out our global delivery model. We opened our new facility in India. We've been working very hard, as we said before, to make sure that all our global delivery centers are very attuned to the CGI model and follow the CGI way of doing business, which includes having a high degree of employee ownership in the firm and also managing so that we're delivering quality at a competitive price and that includes bringing down attrition rates.

I think I mentioned before our attrition rates in India I believe have to be one of the lowest over there. We operate around 13% attrition. We're proud of that. We're proud of the fact that I think over 50% of our people in India are CGI shareholders. And so we have a very integrated global delivery model. And again, I would reinforce that we're primarily in the outsourcing business, not the out tasking business.

So our belief is the work that we do in our global delivery model is less susceptible to downturns in the client base or the economy in general. We're not selling bodies as a rule of thumb there. We're selling outcomes, service levels, predictable costs and therefore we have a lot of flexibility in terms of how we operate, how we restructure, how we drive quality and productivity.

And just a related housekeeping question. Do you have a view to the proportion of your current base that would be in lower-cost locations both onshore, throughout the US and Canada as well as offshore?

Yes, it's about 15% to 20%.

In total?

Yes.

And that includes --?

I think it's 15% to 20% of our people work in global delivery.

Work in a global deliver location.

And that includes lower-cost regions?

Yes, that includes -- would be what I would define as home shore like Southwest Virginia or Phoenix in the US or Atlantic Canada -- various centers here in Quebec, Spain. I think we actually have a slide in the deck there, Nathan, that addresses that.

The slide in the deck, Nathan, should show you all those global delivery locations.

Perfect. Thanks so much, guys.

Ralph Garcea, Haywood Securities.

Good morning, gentlemen. Just three or four questions here. In the US government business, if you look at -- a lot of the contracts you've announced to date have been advantage and momentum upgrades with the follow-on outsourcing deals. What percentage of that base in the US government business have you upgraded to date and can you sort of quantify the opportunity in the pipeline?

Thanks, Ralph, for the question. You're right, we're focusing very heavily on trying to continue to evolve short-term revenue into long-term by having long-term application, maintenance, run, operate, data center associated with momentum as an example. And while we've had a number of successes there and on a percentage basis the recurring revenue numbers are very impressive, again that market is just so large, Ralph, that I would say that we're more at the beginning than at anywhere near what capacity is in terms of growth opportunity there.

So to me there's a lot more to be had there and we're certainly pursuing those and bidding them. I'd also remind you that we not only take that approach to our own software, we will maintain and run Oracle or SAP. And again, we see that as an advantage because some of those pure software houses do not offer that as a stand-alone offering, they have to partner for some of those services. So we see a good opportunity there.

Have you seen sales cycles sort of accelerate here given the downturn in the US economy at the state, local and federal levels -- more of those entities come to you saying can you run this for me given --?

What we've actually done in the state and local side, Ralph, we've actually put a marketing campaign on right at the ground level. And I think we termed it Solutions for Tough Times. And we've gone right out to the state and local side and marketed directly some of the solutions that we have.

And again, these solutions are very much around trying to address the kind of challenges that the clients are facing, maybe dropping revenue from taxes. How can we ensure that you can collect more of the taxes that are due? Other things are how to address procurement. How do you procure your goods at a more cost effective rate? How do you increase the number of suppliers that you actually get access through the Web? Other things are, as you say, instead of the client outlaying all the cash to set this up in his datacenter we'll build it and operate it for them.

So we're very much targeted at those groups to help them actually deal with some of the more challenging times. At the federal level, again, my position is it's such a big market, Ralph, that candidly any kind of a spend level there is so enormous that for us it represents a huge opportunity. That's why we're glad on the Navy side, we were on that vehicle as a sub and we've now moved to a prime position. So that allows us to take on a bigger role of some of the procurements that could come downstream out of the Navy as an example.

Excellent. Impressed with your European growth at 9%. Given that business confidence has deteriorated over the last couple of months across the UK, Germany, France, Spain, was that 9% driven by any one of those countries or a particular geographic area? And how do you see Q4 shaping up in Europe given the seasonality and the business confidence indicators?

Well again, I think if you look at it, our growth in Germany and Poland and those areas are very, very strong. I would say, Ralph, we're probably running at a growth rate of about 25% year-over-year in Germany, Poland and that area. Very, very strong growth in that area. The UK is also a market where we see a greater opportunity. Certainly Spain, France, as you say, are a little tougher in comparison. But again, Germany, the UK are areas where we see continued opportunity for growth.

And just on BCE, I know there was a contractual level for calendar '08, the CAD425 million. Was there one for '09 or over the remaining years of the contract to '06, were there contractual minimums?

Let me switch to, again, because obviously when we did the deal we had no visibility in terms of what the out years -- we went to a percent of their investment. And what we tried to calculate at the time that the CAD425 million represented approximately 30% of their total spend in IT. That going forward after this calendar year we would revert to a 30% of their spend, and that number has to be validated on an annual basis by their CFO in writing to us. So we mutually agreed to move to a percent of spend.

And of coarse, percent of spend can work either way. If they increase their investment we can go up and if it goes the other way obviously we go with it. The other thing is we'd point out that's not a maximum, that's a minimum. So again, we still have the opportunity to gain a greater percent of their spend going forward.

Okay, thank you.

We just have time for a couple more questions. And I want to remind those people in the queue just -- we'll limit it to one question because we do only have a few minutes left.

Steven Li, Raymond James.

Mike, just on the financial services, excluding the discontinued assets, what was the growth on a constant currency basis?

In the financial services?

Right.

Steve, let me check that one and I'll circle back with you after the call.

Okay. So then maybe just another one. The strong book to bill in financial services in the US, are these mostly short-term or long-term in nature?

They're a mix of it. Some of them are related to longer-term deals, but I would say that, again, roughly half of them are shorter-term and the rest are longer-term deals.

So you would expect some of that to convert over in the next couple of quarters?

Yes, we are seeing it. We have seen the increased bookings convert this year on a constant currency basis. When you consider that if roughly 50% of those are longer-term bookings versus shorter-term I think there is a decent correlation here in terms of how they're converting into the in-year revenue.

Okay, great. Thanks.

Thanks, Steven. We have time for one last one, Jenny.

Eric Boyer, Wachovia.

Thanks. Going into the year one of the goals for US commercial business was to win a larger outsourcing deal to kind of jumpstart that business and raise the profile in that market. Just wondering if you can talk about the progress there and whether you're seeing more competition as some of the larger competitors are targeting smaller deals?

Haven't seen the latter. I don't really see, as you say, the larger players targeting the smaller deals. As I said before, that's a bit of a challenge given some of their cost structures to be nimble around those deals and actually make them accretive for them. We have a much lower cost structure and therefore I think can live well on those midsize deals and make them profitable over time.

We've certainly done some nice deals in the government space that have a recurring element. I'd say we're still actively, Eric, pursuing a similar deal in the commercial side. Haven't found the right accretive deal there yet. We've certainly done some in the insurance side. I think the Magnolia one was over CAD100 million. So we have some there, but as far as a marquee outsourcing relationship there, we're still actively pursuing that.

So with that I'll thank you all for joining us this morning and we'll see you in November for our fourth-quarter and fiscal 2008 results. Thank you.

Thank you, gentlemen. This concludes today's conference call. Please disconnect your lines and thank you for your participation.