CGI Inc (GIB) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI fourth quarter and 2008 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. Please go ahead, Mr. Gorber.

Thank you, Theresa, and good morning. With me to discuss CGI's fourth quarter and fiscal 2008 results are Michael Roach, our President and CEO; as well as David Anderson, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. on Monday November 10, 2008.

Supplemental slides, as well as the press release we issued earlier this morning, are available for download along with our fiscal 2008 MD&A, audited financial statements and accompanying notes, all 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. The complete Safe Harbor statement is available on both our MD&A and press release as well as on cgi.com. We encourage our investors to read it in its entirety.

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 reporting. All of the figures expressed on this call are from continuing operations and in Canadian dollars unless otherwise noted.

I'll turn the call over to David first to review the results for the fourth quarter and to make a few comments on a number of items related to the full year's financial results. Then he'll pass it over to Mike, who will discuss the highlights of our fiscal 2008 performance and our strategic positioning for 2009 and beyond. David?

Thank you, Loren, and good morning. I'm pleased to share the financial details of another good quarter and a solid fiscal 2008. Before delving into the numbers, I would like to draw your attention to a couple of items. The operational performance we will discuss this morning reflects the removal of the Canadian BPS unit we divested in Q4. Accordingly, all of the figures we present including revenue, EBIT, EPS, head count, backlog and bookings reflect our continuing operations.

In addition and as a result of recent organizational changes designed to improve our effectiveness and reduce overhead, the previously reported business units making up the BPS line of business have been integrated into our IT services business units. As a result, we realigned our reporting segments to reflect this operating structure and to bring greater transparency to our investors. The new segments are Canada, U.S. and India, and Europe and Asia-Pacific. Both quarterly and annual figures are presented in the MD&A.

Now let's move onto the financial results of our fourth quarter. Revenue was $929.2 million compared with $903.7 million in the same period a year ago representing 2.8% growth year-over-year. On a constant currency basis, the Company grew by 2.6%. Sequentially, growth was lower by 2%, essentially attributable to the seasonal impacts of vacation.

When adjusted for this seasonality on a constant currency basis our growth rate is consistent with the annual run rate of 5% plus. Our EBIT margin strengthened in Q4 to 11.3% from 11.1% in the fourth quarter of 2007. This improvement was largely driven by the margin expansion of our U.S. operations.

During the quarter, a non-recurring income tax benefit of $9.5 million was recorded due to the final determination of prior years' income tax liabilities. Excluding this, the normalized effective income tax rate for the period was 32.8%. Earnings from continuing operations were $75.2 million, or 16% better than the $65.0 million reported in Q4 2007.

Our earnings margin was 8.1% in the fourth quarter. On this indicator, even when adjusted for the income tax benefit, we continue to maintain a leadership position among our North American and European peers. Diluted earnings per share in the fourth quarter was $0.24. This compares with $0.19 in the same period last year or an increase of 26%.

We generated $83.1million in cash from operations in the fourth quarter. The year-over-year changes was due to two factors: Higher income tax payments as a result of the improved profitability in fiscal 2007 and the increase in DSO to 50 days. In the quarter, we continued to deploy our surplus cash consistent with our strategy and bought 3.2 million shares of CGI for $31.9 million and made debt payments totaling $63.3 million during the final quarter of our fiscal year.

I want to now make a few additional points with respect to the full year financials. As you know, there are a lot of moving pieces when looking at income tax. Fiscal 2008 was a very active year on this front so I want it summarize our activities and reiterate a normalized go-forward planning rate of between 32% and 34%.

Our fiscal 2008 full year results included $26.6 million in income tax benefits or an effective income tax rate of 26.2% for the year, down from 32.9% in fiscal 2007. This change was largely the result of two non-recurring items; $6.3million derived from lower Canadian income tax rates and $20.3 million from the final determination of prior years' income tax liabilities. This comes about from a combination of income tax audits being concluded and the closing of audit periods.

Next with respect to our cash generation for fiscal 2008 CGI continues to generate a significant amount of cash from operations. I want to explain why there is no material change to this cash generating ability and how we continue to employ best practices in cash management.

The year-over-year variation in cash generated from operations was largely due to the following two items: First, an additional $100 million in income tax payments as a result of the increased profitability in fiscal 2007 and the timing of client payments. As we have shared with you before, fiscal 2006 ended on a weekend, consequently some client payments wound up benefiting our fiscal 2007 results and offsetting 2008 results. As for the year-over-year change in the DSO to 50 days, it accounted for a negative impact of some $80 million.

I would like to remind you that our year end DSO traditionally falls in the 50-day range. Looking at the past five years, we reported DSOs of 51 days in 2003, 54 days in 2004, 48 days in 2005, 50 days in 2006, and a much lower 42 days in fiscal 2007 due to the timing of payments, as I just mentioned. Internally, we maintain our 45-day DSO target.

In January, the first tranche of our senior U.S. unsecured notes is due. The amount is $85 million U.S. and was hedged last December at essentially par. We will generate sufficient cash from our operations to reimburse this amount on schedule and our credit facilities remain available to support attractive investment opportunities.

In summary, we delivered very strong results and improved margins in Q4 and fiscal 2008. We remain committed to strengthening our financial position in this fiscal year and beyond. Now I'll turn the call over to Mike.

Thank you, David. Good morning, everyone. During fiscal 2008, we remained focused on executing the fundamentals necessary to deliver profitable revenue growth while helping clients win and grow. I am pleased to report significant improvements on key performance indicators across all verticals and geographies in fiscal 2008.

New contract bookings increased by 30% reaching $4.15 billion, or 112% of revenue. Revenue improved to $3.71billion in fiscal 2008, growing 5.3% at constant currency. Growth was balanced across our geographies with Canada growing at 4% and the U.S. and Europe both growing at 7%. Our EBIT of $430 million was up more than 6% from fiscal 2007 and represents a strong 11.6% margin.

Earnings from continuing operations were $297.9 million, up $63 million, or 27% from last year. We saw earning improvements across all lines of businesses and all business units were profitable. Our earnings margin grew to 8% in fiscal 2008 from 6.5% in fiscal 2007. Earnings per share expanded by 31.4% in fiscal 2008, to $0.92 on the fully diluted basis, up from $0.70 last year.

On the cash side, we generated $355.9 million from operations in fiscal 2008, or $1.10 per share. We invested $213.5 million in acquiring CGI stock and made debt payments of $120.3 million over the last 12 months. Our net debt to capitalization was 13.9% at the end of the fiscal year, an improvement from 16.8% at the end of fiscal 2007. And we generated return on invested capital of 13.9%.

This is a 220-basis-point improvement over last year and 550 basis points stronger than two years ago. Our 2008 performance demonstrates that our operational adherence to fundamentals and our ability to execute our business plan continues to position CGI for long-term success. We are entering 2009 with a solid and profitable revenue base, 55% to 60% of which is recurring or repeatable.

It is comprised of high quality clients, long-term contracts, and a backlog totaling $11.65 billion or more than three times our annual revenue. In our ongoing dialog with investors, they have confirmed that in these more challenging times they are looking for companies like CGI who have demonstrated commitment to the fundamentals and as a result have a long track record of out performance.

Consistent with this feedback, I want to remind investors of our approach to business and our ability to execute, which we believe are key differentiators and reasons to own CGI stock. There is a tight and transparent alignment between the interest of shareholders and management; 83% of our members own CGI stock representing the single largest ownership block of CGI.

Our compensation system, including our stock option program, is performance based and directly linked to value and creation. And all investments, whether outsourcing engagements, acquisitions, business solutions, even share buybacks and debt payments are critically screened and prioritized to ensure strategic alignment and accretion in year one. Our day-to-day management is focused on ensuring maximum shareholder returns while balancing risk.

We do not own any asset-backed commercial paper. We proactively protect our cash flow from currency volatility. For example, we locked in our senior U.S. notes at par saving $60 million from the initial value. And we are careful not to take on long-term liabilities which could limit our future operating flexibility, such as pension obligations.

We manage our Company for the long-term to the benefit of not only investors, but for clients and our members for whom commitment is paramount to success. We target profitable, recurring revenue opportunities, which provide us additional time to bring incremental value to our clients, as well as strong earnings and cash flow to investors. In addition, we constantly review the quality of our assets and contracts and are committed to restructuring or divesting those which do not yield an acceptable return to shareholders or align to overall strategy.

We are deliberate in our efforts to retain an experienced and knowledgeable leadership team. While important all the time, it is critical in times like these. Our team has seen, operated and successfully maneuvered in all types of economic environments, good and bad.

We seek to secure long-term client relationships as evidenced by both our backlog and contract terms, which continuously reach seven to 10 years. We have secured our financial requirements for the long-term. Our mostly undrawn $1.5 billion credit line expires only in 2012. This is another example of taking a long-term view, providing important operating flexibility for CGI during a severe credit crunch.

In short, we simply haven't changed our course to suit the times. We have been operating under the same consistent fundamental beliefs and quality focus model for more than 30 years. In concluding, let me describe how we are approaching current economic challenges in our marketplace. CGI strategy is unchanged. We remain committed to our build and buy strategy.

In fact, we have opted to aggressively accelerate our marketing business development and sales efforts on both pillars of growth -- the build and the buy. There is little that can be done in most corporations and governments today without information technology. In times like this when clients are looking for increased value and lower costs, IT takes on added importance. In many cases, CIOs are being tasked with reducing IT costs beyond their capabilities of doing so alone.

The result is a significant opportunity for CGI. For example, we believe the counter cyclical nature of outsourcing will lead to more companies and governments to consider one or more of our managed service offerings. In our experience, our offering is even more enticing when clients are focused on improving their bottom line and we are seeing some early evidence of this in our funnel.

Our ERP system, such as Advantage and Momentum, our Credit and Collection Suite, our Tax Collection solutions are all designed for tough times, and all are experiencing considerable pickup in demand recently, particularly in government and financial services. This is evidenced by our book-to-bill ratio of 150% in 2008 in government, and 128% in financial services, significantly ahead of our 112% book-to-bill globally.

From governance to optimizing operations and enhancing performance, to improving customer service and increasing competitive advantage, our consulting capabilities help leading organizations transform business and technology processes while applying proven technologies to advance their business goals. From our perspective, out of great challenges come great opportunities and we are positioned not only to take advantage of these opportunities, but in many cases, to create them.

For example, our unique and diversified global delivery model. It is spread across home shore, near shore and offshore centers, making the offering to clients less dependent on any single geography. Our model is gaining traction, and has been validated through client success and, in fact, was highlighted by President-elect Obama in a recent visit to Russell County.

He met privately with CGI and then publicly he lent his support for a home shore buildout and praised our job creation efforts in southwest Virginia and cited it as a model to follow. Our focus is squarely on the fundamentals and we are committed to delivering superior results to our shareholders while helping our clients through these difficult times.

Thank you for your continued interest and confidence in CGI. So let's go to the questions now. Lorne?

Just a reminder that a replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the pass code 3273437 until November 24. As well, a podcast of this call will be available for download at either cgi.com or through iTunes within a few short hours. Follow-up questions can be directed to me at 514-841-3355. Theresa, if we could poll for questions from the investment community, please?

Certainly. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS). There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Richard Tse of National Bank Financial. Please go ahead.

Hey, Mike. With respect to the bookings, they've been fairly strong here still. Has the natureo f those engagements changed in any way? Is there more short term than long term? Can you maybe give some color on that?

Thank you, Richard. First, let me say again I'm very pleased with the year. Our book-to-bill, as I mentioned, was up about a billion dollars from previous year. As I mentioned before, because we book long-term contracts you'll see some of that growth come out in future quarters and future years. I primarily look at bookings, though, from an annual basis because within a quarter I don't think they are a good lead indicator.

Having said that, again,in the quarter we were pleased that our bookings in the government and financial sector remained very strong. Just in reviewing funnels in October here, we continue to see good strength in both of those verticals. Again, we are very large, as you know, in Canada and Canada, and fortunately, has not been hit quite as hard as the U.S. in the financial sector.

So we continue to see a good growth in Canada as well in that area. So I'm pleased with the bookings. I think the sales machine, the business development machine is very focused on sales. As I mentioned, we are even going to be more aggressive now in terms of getting outside there and seeing if we can help our clients through these more challenging times.

In your commentary, you sort of talked about pruning some of these unprofitable contracts. Has the level of divestitures increased over the past couple quarters or is it essentially sort of flat to what it was last year?

Again, my comment on looking at quality of revenues, very consistent with our operating model. As I mentioned numerous times we are interested in profitable revenue. Because we have done a lot of acquisitions over the years, you could find niche operations that are off-strategy or underperforming to our hurdle rates. In those cases we look at them.

If they are on-strategy we put a restructuring plan together. If they are off-strategy we look at divesting them. The only major divestiture that we concluded this year was the sale of a Canadian BPS unit. And we are looking at two other small ones. But the total revenue there, I think, is about $5 million or $6 million.

They have already been moved to discontinued operations and we expect to close those over the next 90 days.

And one final one. The status of BCE and your MDA you sort of talk about a little bit of the decline in the business there. What is sort of the status, given the transaction, looking at close still at the end of this year?

Yes, a couple observations there. One as you know in calendar 2008 there is the minimum of 425. We have not got any indication from BCE that they wouldn't meet that. In fact, they are tracking to it. Again, I would remind listeners that the fourth quarter, our fourth quarter is the summer quarter, and, therefore, you have seen our revenue come off sequentially. As Dave mentioned, it's probably worth two or three growth points.

Of course, BCE is a big client in there. They also slow down in the summer quarter as a normal course of business. They tend to pick up a little bit in our first quarter or their fourth quarter as they finish off their programs. And then the second factor around BCE, of course, is as they are implementing their own 100-day plan, they have a lot of focus on other things within their corporation and that, also, was another compounding factor in the quarter.

Having said that, as the process evolves over there, we are in good dialogues about opportunities in terms of helping them address some issues and some opportunities. So, again, we remain guardedly optimistic that we'll continue to maintain or grow our business with the Bell family.

Okay. Thank you.

Thanks, Richard.

Thank you. The next question is from Jason Kupferberg of UBS. Please go ahead.

Thanks. Good morning, guys. Wanted to pick up on the BCE topic a little bit since the minimums changed a little bit from a formula standpoint in '09.

I guess you go to 30% of their IT spend as opposed to a fixed amount we've seen in the last few years. How should we think about that in terms of how it might translate into BCE revenue for you guys in 2009? If the 30% figure had been applied to their '08 IT spend roughly where would you come out and do you expect some contraction in their IT spend once they go private and presumably have some very tight cost controls in place?

Thank you, Jason. Again, the logic is, the 425 was deemed to represent roughly 30% of their spend. So not knowing what their spend would be on those out years, we then move to a percent we felt would protect us in terms of growth or contraction that we would stay at least as a percent of their total spend. So again, the 30% was a proxy for the 425. Again, their budget cycling is different than ours. So they continue to work through their plans. We haven't got full visibility on their spend or investment rate for their fiscal 2009, which starts in January.

But again, as I say, we are engaged there, with them, in terms of looking at opportunities. And also the IT that is required to drive a large, integrated firm such as Bell. I would also remind you that these numbers are minimums. So we don't strive, obviously, for minimums. We are constantly looking at the total envelope and seeing whether we have opportunities to grow our business while helping the client.

So at this point, we are continuing with business as usual. Again, trying to connect where we can be helpful. But I have no outlook that would differ from what we have seen in other years at this point.

Okay. That's helpful. And understanding that you guys don't provide specific financial guidance, can you give us some sense of how we should think about CGI's ability to grow the top line relative to your competitors over the next year in the context of what is obviously a much tougher macroenvironment than what everyone observed this time last year?

Again, I can't comment whether my competitors might go. I think what investors ought to take away from, hopefully, the remarks I made that we have always pursued profitable revenue. And in this some cases that has resulted in our growth rate being lower than some of our peers, but our margins, our cash flow, our balance sheet all being much, much stronger.

This is what I refer to fundamentals. Hopefully, they are going to come into more favor in the environment we are in, where investors will look past revenue growth that has no margin. So, again, I think what you should expect from us is steady, solid profitable growth. In some cases, it may, in fact, Jason, result in some of our peer groups returning to those fundamentals and not pursuing revenue that is primarily pass through and has no margin.

And just last one on cash flow, Dave. I know, obviously, it was a very tough year-over-year comp if you look at fiscal '08 versus fiscal '07. But it did look like the build receivables spiked a bit quarter-over-quarter.

Presumably some of this is timing in terms of where you are on some contract implementations. But are there any operational issues on any of the outsourcing contracts? Missed milestones or anything like that that might be causing delayed payments? Or do you expect '09 to look more like a quote, unquote normal cash flow year that might be between fiscal '07 and fiscal '08 if we think about it, let's say, as a percentage of net income understanding that there was some one-time stuff in those two years?

And thank you, Jason, that is good question. I think the suggestion you have is looking at 2009 being between 2007 and 2008 is appropriate. We did not notice anything, from an operations perspective, anything that was really out of any significance. There was one payment, though, that we were expecting to see at the very end of September which the client had actually issued out of their bank account at the end of September.

As it went through the automated clearinghouse process a settlement date happened to be first of October on our side. We weren't, and the client had realized what was what was going to happen. There was $8 million there, almost one day DSO that got cut out there.

From an operations perspective that is about the only fly in the ointment that we saw. When we go back, we look at the nature of our accounts. We haven't really seen much in the way of degradation taking place there. We have been following the cash payments on a daily basis with our accounts. That information is going into the business unit so that everybody is staying right on top of that.

It continues today because of the, what we have seen within the October time frame, so it seemed to be a good practice we had during the summer so we have just continued on with that so we can stay on top of those receivables. We are also watching the work in process. And as you have made reference to, there are some projects we are starting up.

We had some work in process that was converting late in the quarter to receivables and we would be looking to get that converted into cash this quarter. Other than a few timing items, I don't really see anything there of concern.

Okay. Thanks for the comments, guys.

Thank you, Jason.

Thank you. The next question is from Scott Penner of TD Newcrest. Please go ahead.

Thanks. Just, Mike, in the financial services vertical it does look like revenue was down sequentially, and given this is kind of a sensitive perception topic can you review for us the areas of strength and weakness? And then given what you said about the strong bookings in that vertical, just any idea of how much of that is likely to impact revenue in the year ahead?

Yes. Again, thank you, Scott. Again, just to remind listeners that the divestiture that we did was, came out of the financial vertical. So again, this quarter, as you know, we have made adjustments to reflect the removal of that unit across many, many indicators. So again, having said that, though, Scott, I'm not hearing or seeing any kind of a slow down in that, in the financial vertical.

Again, we are pretty diversified there. Again, we have some business processes that are in the financial vertical. We have P&C insurance, we've got life and we've got financial institutions. None of the financial institutions that we are dealing with have gone down in the U.S. or Europe. We haven't had business lost due to bank failures or consolidations.

In some cases, in fact, where there are consolidations, we actually see some opportunities for our solutions to be expanded. And again, it is one of the reasons I highlighted that in my text is that our solutions are very much focused on things like cash generation, in terms of bringing more visibility and transparency to the banks or insurance companies. And our sense is these are areas which will take on added significance as the impact of this credit crunch kind of rolls through.

We are also pursuing and attempting because of our CGI federal capabilities, and knowledge of the U.S. financial institutions, attempting to work with some of the banks that have been chosen by the U.S. federal government to actually manage the bailout. So we have a lot of capabilities, obviously, in terms of bringing visibility to mortgages, this type of thing. So again, we feel we are well-positioned there.

I mean, obviously, we don't know, as others, what could be the long-term impact here of this credit crunch. But again, our strategy is to stick to the fundamentals. Make sure that the contracts that we are bringing on are profitable. Make sure the clients we are dealing with are financially sound. Make sure that the payment terms are in line with our procedures to ensure we are generating good cash.

This type of an approach has served us well and as I said, we are hearing from the buy side, where they are saying hey, you know, we like what, how you guys execute cash, balance sheet, margins, all this stuff is more and more relevant today than it was three months.

So do you have any idea, Mike, of the -- given the bookings how much of the bookings this year will translate into revenue next year?

I think most of our bookings, I think about 50% of them are long term, which you'll see coming through in the out years. But having said that, if you look at it, Scott, the fact that we are up a billion dollars '08 over '07, we are starting with the ability here to harvest some of the bookings that we took in '08 into '09. That, and we haven't talked about it yet today. I'm surprised it hasn't been raised.

What has been a tailwind or rather a headwind, which has been the currency for the last three years. In some years it shaved off $100 million to $200 million off our top line. At least for October and for part of September it's turned the other way. Again, should that continue, we'll obviously also get a lift on the top line from currency. It shouldn't impact the bottom line.

As I say our natural hedging that Dave's gone through numerous times essentially has protected our bottom line but on the top line we could get a lift from that. Also from a competitive standpoint, it adds incremental value to our Canadian near-shore offering that is a little more evident to, especially U.S. corporations today than it was say six months ago.

Thank you for that. Just David, do you have handy, by chance, the constant currency growth rates by vertical?

I do not have them with me right at the moment. I think if you were to check the MD&A you would actually see some of those in there as well.

Okay. I'll double check that. Just lastly, Mike, you mentioned in the MD&A as well the comment on acquisitions. Can you just expand a little bit on what has, I guess, whether your pipeline of opportunities is as robust now as you would expect and then what has been some of the sticking points in getting the deals done?

The point I was making there is we are executing a build and buy strategy. We have the focus, the financial wherewithal and the flexibility to execute on both those pillars. We see these challenging times, frankly, as an opportunity on both sides. We believe on the build side there would be more outsourcing opportunities. On the buy side, even though the currency has swung the other way, the valuations have gone down significantly.

I was just showing today to our Board of Directors the period of September 30 to October 24 there was a massive decrease in market caps of most of our competitors that is equal to or greater than any change in currency. So again, it's just to make the point, Scott, there are opportunities out there. One of the challenges you have even though you could find a good target you have to have a willing seller.

To some degree the credit crunch potentially tends to motivate a few more people to be willing sellers. And we continue, trying to find the right word, I guess it's to shape those opportunities and meet with some of the senior people in these targeted areas and attempt to interest them in a bigger opportunity here. So I wouldn't say the opportunities have dropped off.

I think, as I say, the opportunity to shape more deals now are on the table. I would remind you again though, we continue to look also at captives. We believe captives will also be on the table now where CEOs are looking at their core business and saying why do I have this BPS unit, why do I have this IT unit when my core business is financial or insurance or telecom?

Thank you.

Scott, just out to give you a couple quick numbers here. For the constant currency growth for our two largest verticals; financial services for last year for the year-over-year was 5.2% and for government and healthcare it was 6.4%.

Okay, Dave, thanks.

Thanks, Scott.

Thank you. The next question is from Mike Abramsky of RBC Capital Markets. Please go ahead.

Yes. Thanks very much. Mike, can you talk a little bit about the U.S. growth and the drivers of that? You had pretty strong constant currency growth in the quarter?

Thanks, Mike. Again, I think, I can talk about quarters. But I think it'smore relevant to talk about the execution plan that Donna and her team have been doing such a great job on. Since the merger, again, between AMS and CGI we have been working diligently to transform one-time revenue into recurring revenue. The team down there have done an excellent job of doing that.

We've got more long-term contracts now. We've got more recurring revenue in the U.S. than we have had in previous years. Therefore, to some degree, we are starting to create a floor of revenue much like I mentioned at the corporate level where 55% to 60% of our revenue is essentially recurring or repeatable. We have, since the AMS acquisition, constantly increased the floor and the recurring repeatable revenue in the U.S.

So it's a combination of the execution of that strategy, plus the relevance again of our solutions. We have solutions that address [span] management, procurement, we have been able, in fact, to leverage the solution that we put in Virginia on procurement into Ontario through a deal there that could grow over time to be very, very significant given the size of Ontario versus Virginia. But also the ERPs, the advantages, we continue to win business in that space.

Again our ERPs address supply chain. They address financials and all these areas are areas that don't go out of fashion just because times get tougher. In fact, the case we are making is that they are more relevant because people want better financial control. They want to look at claims to make sure they are accurate.

They want to look at their financial results to make sure they are timely, transparent and provide management with actionable items. Again, Mike, from that standpoint, I think it's a combination of adherence, good execution, and building out our marketing capabilities in the U.S.

And again, we, this time around, Mike, as I say, we have had three years where the currency has hit us right in the face and right now over 30% of our revenue is coming from the U.S. So it will be really the first time since the AMS acquisition that this thing will actually be a tailwind for us that we have had to battle for three years.

Thanks. The comments you made about seeing good strength in October, there were quite a lot of other technology businesses and service businesses that did see business drop very aggressively off October.

Could you talk a little bit more about the linearity of bookings in the month and how bookings are faring? And can perhaps you make any commentary on what you are seeing in terms of the tenure of sales cycles or decisions and any headwinds to that that you are seeing?

First, I don't want to comment October results. I don't have them all yet. I'm going to get them probably tonight or tomorrow.

What I was referring to is I go on sales calls and listen to the activity in the funnel and ask the various business unit leaders are they seeing a slowdown at this point, or not? Having said that, Mike, I think depending on the company or the government, some folks are obviously very focused on their own financial health and, therefore, in those cases, there may be a bit of a lapse there. They have got to make sure they have got their own financing lined up and their rollovers in his place.

I think on the other side of the coin that I mentioned in my script, in the last what's about about 10 years, I guess '92 was the last significant downturn, a little more than 10 years. There have been a lot of efficiencies and effectiveness brought to the IT organizations in a lot of companies and now in some cases the CIOs are being asked to take out another 15% or 20%. As I mentioned, in a lot of cases, they cannot do it alone. There are just not that many levers for them to pull in order to get that kind of cost out.

So this opens up a more natural discussion with suppliers and partners like us. When you sit across from a CIO and he says, "Hey, given the downturn, my boss has asked me to cut 15% to 20%," he doesn't have those levers. So this is what we bring. I think there will be a slower start to that conversation.

But from our perspective, we think that will accelerate as this thing works through and people start to take a more longer term view of how are they going to bring their cost structure down to reflect the new reality that they are facing.

And just on the BCE side, I know this has been asked a couple of times. But the absolute revenue was the lowest in six quarters and certainly goes a little bit beyond seasonality. And, of course, the quarter's normally seasonally strong at the end of your ramp. Do you see this?

I appreciate, Mike, you are saying, I understand that you are saying you know you don't really see any cause to change your view there. But what's kind of the worst case? Not for chicken little purposes. But is there a possibility you could see some of the transition-related extensions translate into a step down into revenue? Well, again, Mike, you are about the third guy to ask this question.

Where really know how to answer it any differently than I have. BCE represents on any given quarter 10% to 12% of our revenue. They used to be 50%. The issue is any one of our clients can step up or step down, depending on their economic conditions. The key for us is lead time. If we have lead time, of course, we can adjust up or down, and protect and/or grow our margins, depending on the lead time.

So again, with Bell, as I said, we deliver good service levels there. We are an important client of them. They are an important client of ours. We have a good business professional working relationship with the team over there. And they are going through a lot of changes internally.

And, again, our focus is to be there, to help them through it. And I don't think it's helpful for me to predict peaks or valleys here. As I said, the quarter is a summer quarter. It's obviously and has been always lower because it's a summer quarter and there was, as I mentioned, a compounding factor there that I think I'm only sharing what's in the newspapers. They are in the middle of implementing their 100-day plan.

But I have not got any indication from them nor have my people that we should expect a major downturn there. I think when we do, if we do, we'll have to evaluate it in terms of the impact of the total Company. But right now, we are going in there very optimistic. We view the 425 and the 30% as minimums, not maximums and that's about all we can do, Mike, at this time.

Okay. Lastly, on your, you talked about some related Canadian weakness, as well, on some decline in momentum in your oil and gas solutions. Can you give a sense of what exposure you have there? Is that a delay? Or is that also potential a step down obviously due to some potential decline in the economy of the West?

No that's a good question. Again, essentially, there, we have quite a few solutions that are very pinpointed at the oil and gas industry. Primarily all of our Calgary office. And while we can see periodically some softness in the license sales, in fact, we see right now the opportunity to, in fact, expand into the oil and gas industry.

When oil is $147 a barrel the oil companies are very much focused on production. When oil is down to $70 a barrel then the opportunity to look at information technology and improvements and bringing efficiencies become a lot more relevant. We are not foreseeing a negative trend there. I think it was an item in the quarter and in fact we are becoming a lot more aggressive in the oil patch in terms of trying to get in there and explain how we can help them.

Some of the things they are facing there is also a labor shortage and inflation in labor costs and in some cases we are actually moving some work from Alberta to Atlantic Canada to help soften that blow. So nothing, long term there. It is primarily a quarterly item.

Okay, was that the two primary sore of impacts in the Canadian revenue ex-vacation was BCE, and the oil and gas?

Yes, and, again, the BCE was part of the [vacation] in the sense that it was highlighted, again, only because of the interest people have. But BCE normally slows down in the summer because of the vacations much like other clients.

Okay, thanks a lot.

Thanks, Mike.

Thank you. The next question is from Ralph Garcea of Haywood Securities. Please go ahead.

Good morning, gentlemen. I guess first for David. How much of the backlog drop was due to the Canadian BPS sale? And how much of the revenue hit, I guess, in the quarter?

It was about $600 million.

In the backlog?

Yes.

And then the revenue hit approximately?

Well, the annual revenue for that unit was running between $75 million and $80 million per year.

Okay, I guess --

But, Ralph, what happens is while that's the annual, if you look at the quarters because that group was handling claims, normally this quarter or next quarter were the higher quarters. So I would say for the fourth quarter it would range anywhere from $15 million to $20 million, probably closer to the $20 million in the quarter.

Okay. Okay. Thank you. I guess for Mike, as you look through the pipeline in the funnel, I've got no problems with you guys hitting singles and doubles in the U.S. market and converting a lot of that AMS business to longer term deals.

Is there a reason why we are not seeing sort of these $200 million and $300 million five and seven-year deals out of your pipeline specifically? I know there is not many mega deals in general in the industry, given the environment, but I wouldn't mind seeing some of these $200 million and $300 million type deals out of your business?

Yes, and we are certainly on those. Again, Ralph, if you look at how -- what economic conditions were here kind of three months ago, versus today, as I say, there has been a real shift in motivators in terms of folks talking about this. And in many cases there has actually been changes at the top in some of the target companies and guys are revisiting outsourcing.

And I do think that that market of $100 million to $500 million deals will heat up again in these current economic conditions. Candidly, before that, very tough. There wasn't that motivation to push out cost savings on the bottom line and I think clearly, with these conditions, we are certainly getting an indication a lot more people want to understand the model.

Okay. Then I'll take my crack at a BCE question. The last time you didn't really get much lead time on sort of making head count reductions and transferring some of the work to Charlottetown, et cetera.

What sort of levers do you have between Atlantic Canada, Ontario and Quebec if you do get another 5% or 10% reduction in the BCE business to move head count around versus cutting head count?

Yes, again, I think what we would look at, the problem with any client if there is a rapid drop what happens is you are hit on the utilization rates so your bench goes up. There you have got to make a tough call because in some cases those skills can be redeployed. So you want to take the time to place that bench into other profitable deals. Of course, a short-term impact of that is you take a hit on your bottom line.

But again, I think as I mentioned BCE was 50%. They are now down to 10% or 12%. We have other accounts and businesses, not only in Canada to diversify into, but also globally. So again, we would work to have a combination there, obviously, where there was a skill mismatch we didn't think we could place those people we would have to take action.

But again, we are relatively confident that we could place a lot of these folks into other accounts, given the skills that they have. These are very talented people that understand the telecom and technology industry and we are also working now with other targets in terms of telecom business.

When BCE was a shareholder to be transparent, it was difficult if not impossible to penetrate some of Bell's competitors. But now that they are no longer a shareholder, we do have more opportunities to do business in Canada with some of their competitors.

Okay. Thank you.

Thanks, Ralph.

Theresa, I think we have time for one more question.

Thank you. The next question is -- the last question is from Dushan Batrovic of Canaccord Adams. Please go ahead.

Hi, thank you. First of all there has been a lot of talk of stimulus packages globally, trying to rejuvenate the economies. To what extent is CGI positioned to benefit potentially from any of that directly outside of just economies and macro conditions improving?

Again, I think stimulus packages, as you say, they have been talked about I guess primarily a lot of talk's been around the U.S. Again, it depends how those things are managed. Some of it will come out of government where government and with the change of administration in the U.S. things like healthcare, other areas could expand in terms of spending in the U.S. and in other jurisdictions.

We have a lot of local presence and that is very important I think in those areas, because these stimulus packages are not designed to stimulate work in other countries. They are designed to stimulate work in the country and our model, as I mentioned, I think is even more relevant in times like this because we have people that are located in key cities across North America and Europe and we can add jobs and have added jobs in those local communities.

In some of those communities, like the example we gave in Lebanon, Virginia that was cited by the President-elect is a model by which work can be moved in countries in North America and Europe to actually keep, retain and grow jobs in underdeveloped areas or areas that have been hit hard by other downdrafts in other verticals.

So our sense is that, again, taking a long-term view to operations in terms of how we operate, how we manage our global delivery model, that it's very relevant in terms of picking up benefits of any stimulus program. In fact, I think the President of the United States has also said he is looking at setting up a grant structure of, I think it was $3,000 for every job that was created.

And again, that is a model that we understand and have proven its viability with the work we have done in the United States, Canada and elsewhere.

Last question for me, you mentioned being more aggressive on sales and marketing over the next couple of quarters. Can you quantify that a little bit? Does that mean more hiring? Should we see the expense line increase a tad? How else do we interpret those comments?

I think the way we should interpret them is that what we are doing is, and picking up on a comment that Ralph and a number of other analysts have mentioned this morning, is that what we are trying to do now is to be more focused on going in at the CEO, CAXO level and seeing if we can accelerate discussions and reduce the sales cycle in terms of putting out the proposition and addressing the problem that companies have.

In some cases they have a short-term cash problem and in other cases they want to get the run rate of their costs down, and in other cases, they are looking for an improvement in quality, so that their core operations can continue uninterrupted here. In other cases, they are removing people to reduce their costs, and they have got to do something with the work.

And in a lot of cases, they are looking for scale. They may be built shared services organization and got good first-line efficiencies. But to get the next level of efficiencies they have got to take that shared services organization and bolt it to a larger entity like ours. So that's the kind of thing you should be seeing. We expect our outsourcing funnel to grow as a result of that effort.

All right. Thank you.

Thank you.

Thanks, Dushan. I want to thank everyone for joining us today. Our first quarter for fiscal 2009 and our annual general meeting is scheduled for January 27. Feel free, again, to follow-up with me at 514-841-3355. Have a great day.

Thank you. The conference has now ended. PLease disconnect your lines at this time. Thank you for your participation.