CGI Inc (GIB) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the CGI second-quarter 2009 results conference call.

Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr.

Lorne Gorber, Vice President, Global Communications and Investor Relations.

Please go ahead, Mr.

Gorber.

Thank you, Michael, and good morning.

With me to discuss the second quarter of fiscal 2009 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 9:00 AM on May the 6th.

Supplemental slides as well as the press release we issued earlier this morning are also available for download, along with our Q2 MD&A, financial statements, and accompanying notes, each of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking.

Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures, which should be viewed as supplemental.

The MD&A contains definitions of each non-GAAP performance indicator used in our reporting.

All of the figures expressed on this call are in Canadian dollars unless otherwise noted.

I will turn the call over to David first to review the quarter's results and then to Mike, who will make a few remarks on the strategic highlights before going to your questions and answers.

David?

Thank you, Lorne, and good morning.

I'm pleased to share the financial details of another very good quarter.

Quarterly revenue was CAD948.3 million, an increase of CAD18 million or 2% growth compared with the same period a year ago.

Foreign currency fluctuations positively impacted revenue by CAD69 million as we continued to expand our operations outside of Canada in line with our strategic plan.

EBIT margin remained strong at 11.3% compared with 11.6% in Q2 of 2008.

During the quarter we continued to take proactive restructuring measures, which more than offset the year-over-year delta.

Net earnings were CAD77.5 million or 12.7% better than the CAD68.8 million reported in Q2 of 2008.

Our net earnings margin continues to standout out among our North American and European peers having reached 8.2% in the second quarter.

EPS was CAD0.25 per share.

This compares with CAD0.21 in the same period last year representing an increase of 19%.

Our Q2 effective tax rate was 24.8% compared with 31.5% in Q2 2008, which takes into account a one-time tax benefit of CAD7.3 million this year stemming from the final determination of prior year's income tax liability.

Excluding this impact, our normalized effective tax rate going forward should be in the 31% to 33% range.

Now, let's turn our attention to the balance sheet.

During the quarter, we generated CAD187.3 million in cash from operation or CAD0.60 in cash per diluted share.

This represents 20% of revenue and it is a 308% increase year-over-year bringing our trailing 12-month figure back to 12% of revenue in line with our historical averages and ahead of our peer group.

As we shared with you in the last quarter, we have not been experiencing any pattern of deliberate slow pay amongst our clients.

At the end of Q2, our DSO was 42 days ahead of our 45-day target, an improvement of 10 days from last quarter.

At the end of January, we retired the first tranche of our US senior unsecured notes in the amount of $85 million.

You may recall last year we hedged our US notes while the currency was around par.

Thus we realized a positive cash flow impact of CAD18.3 million on the settlement of the related forward contract.

In addition, we paid back CAD107.1 million of a credit facility in the quarter.

As well, we activated our renewed normal course issuer bid buying back and canceling more than 267,000 shares during the second quarter.

So at the end of Q2 2009, we had CAD186.4 million in cash and cash equivalents.

Accordingly, our net debt at the end of March was CAD105.4 million, for a net debt-to-capitalization ratio of 4.0%, down from 15.2% one year ago, leaving us with expanding and significant financial flexibility.

All in all, we are pleased with the results as we continue strengthening the balance sheet while possibly growing our business.

I now turn the call over to Mike.

Thank you, David, and good morning everyone.

We had a strong second quarter and we have delivered very good results during the first half of fiscal 2009; continued revenue growth, strong profitability, excellent cash generation while significantly increasing contract bookings.

I would like to begin by summarizing our year-over-year performance at the mid-point of our fiscal 2009 year.

We have booked CAD2.5 billion in new contracts, up from CAD2.2 billion year-over-year.

Revenue was CAD1.95 billion, up 6.7%.

Net earnings improved to a CAD157.1 million, up 11.1%, and earnings per share grew by 16.3% to CAD0.50.

It's worth noting that over the last 12 months, we have generated CAD1 in earnings per share.

Our net earnings margin was 8.1% for the first half of the year.

Making quarter two the eighth consecutive quarter our net margin has exceeded 7%, leading the industry and demonstrating consistent execution of our business model.

In fact, excluding the one-time tax benefit, we delivered 7.4% net earnings this quarter matching our best quarter ever.

Cash from operations increased by CAD100 million reaching CAD266.9 million or 13.7% of revenue.

In this economic environment, our ability to continue generating cash provides an additional layer of comfort to our investors and will hopefully attract new ones.

As we enter the second-half of the year, we are nearly debt-free.

And we maintain an available credit facility of CAD1.5 billion in place to 2012, which currently carries an interest rate below 1.5%.

Overall, we have made significant progress towards the achievement of our business and strategic goals in the first half of fiscal 2009.

Now, I'd like to provide a little more operational color on the second quarter results.

We increased US and European revenue to 44% in quarter two, up from 36% in quarter two last year.

This is in line with our strategic plan, which calls for 60% of our revenue to be generated outside of Canada over the next three to five years.

The depth and breadth of our services and solutions continue to help us profitably grow our presence in the US market.

US operations recorded revenue growth of 30% during the quarter.

CGI Federal continues to gain momentum with more recent wins at the Centers for Medicare and the EPA.

We were also selected as one of 59 companies for the GSA aligned vehicle enabling us to compete for contracts valued at over $50 billion during the next five years.

Going forward, this represents a new and significant growth opportunity for our US federal government unit.

A further demonstration of the continuing strength of our US operations can be seen in the book-to-bill ratio, which was 283% of revenue in the quarter.

Financial services, government, and healthcare led to bookings, which included wins with healthcare benefits company CIGNA, as well as managed services agreement with a couple global investment banks and the state of Louisiana.

In fact, the CIGNA contract was especially strategic.

They are a new client.

They are in the expanding healthcare space.

The contract was a take-away from an Indian provider, and it was the trigger for opening our 13th global delivery center in Hyderabad, our third in India.

European revenue increased by 4% during the quarter and bookings in our European operations also reached a 107% of revenue in quarter two.

I was in Europe last week meeting with clients and reviewing operations.

I was impressed with the opportunities for growth and with the significant uptick in our European outsourcing funnel.

As expected, we've begun to see both the positive aspects and some areas of specific softness relating to current market conditions.

I would like to share with you how these impacts influenced our second quarter.

During the quarter, 36% of our revenue came from our consistent and fast-growing public sector practice.

This compares with 30% last year.

The other 64% of our business is work done with commercial clients and falls into two major categories.

First, performing mission-critical work for outsourcing clients such as managing data centers, financial platforms, collection systems, and ERPs to name a few.

It is a service revenue, which is stable among existing clients because it is the backbone of their operations.

In other words, we are providing essential or mandatory services.

The other area of our services is linked to systems integration projects or consulting work, which can be temporarily deferred.

Given that our second quarter is the first quarter of the calendar year and the first quarter for many of our outsourcing clients, we normally experience a slow startup.

However, this year we're experiencing a compounded delay driven by the current state of the economy.

This is the case in our Canadian operations as we experience some of these deferrals over the first half of the year as existing clients pushed out projects by 2 or 3 quarters in order to preserve cash.

We also continue focusing on improving the quality of our revenue stream, and as such we did not renew a contract which fell below our accepted margin threshold.

We are confident that this revenue can be replaced with more profitable growth in the coming quarters as there are significant opportunities in Canada.

Our funnels are robust and we recorded strong Canadian bookings during the quarter that reached a 116% of revenue, including the extension and expansion to a full IT outsourcing contract with Foresters.

From our point of view, at the end of the day, the long-term positives far outweigh the near term negatives.

We expect to see continued strong demand for our end-to-end outsourcing, our managed services offering, as evidence by both the increased sales activity and the number of new clients coming on stream.

In fact, excluding extensions and renewals, nearly CAD1.3 billion of our total bookings during quarter two is new business, which is now in the ramp up phase.

Globally, we booked CAD1.68 billion in new contract wins for a 3-month period or a 177% of revenue.

For the last 12 months, our book-to-bill ratio was 115%.

We remain committed to maintaining or improving this ratio as we continue to have good visibility on a number of significant opportunities.

Behind these signed contracts are a number of good data points, which validates our continued cautious optimism.

77% of the total bookings were multiyear with an average duration of all bookings in the quarter coming in at five years.

47% of the quarter's bookings came from new work with existing clients.

24% came from extensions and renewals with existing clients and in most cases they were for additional years.

29% was new business awarded by new clients.

In my view, this is an excellent mix of mid and long-term revenue.

Geographically, 59% of global bookings were in the US; 36% in Canada, and European bookings made up 5% of the total.

Again, a good balance.

89% of our bookings came from our two largest verticals; financial service is accounted for 50% of new contracts and we continue to have excellent visibility on new opportunities throughout both banking and insurance; government and healthcare made up the other 39%.

Current economic conditions continue to have a positive impact on the sales funnels of opportunities as clients seek to realign their cost base and strengthen their competitive position.

Qualified outsourcing opportunities in the funnel have increased by more than 50% over the first six months of fiscal 2009.

We believe that over time this increased activity would translate into contract wins and growth in our backlog.

We currently have more than CAD12 billion in signed long-term orders.

As with bookings, this level of recurring and long-term revenue is particularly attractive for investors during these times.

Looking forward, we remain focused on the execution of our plan and adhering to the fundamentals of operating a competitive financially strong business.

We firmly believe that CGI, with our high level of recurring revenue, embedded in long-term contracts, is extremely well-positioned to see this economic cycle through while continuing to profitably grow.

We are encouraged by the reception clients are giving us as we engage to help them through these challenging times.

Since targeting our market activities to the economic reality, we have increased awareness of our capabilities around managed services and our unique global delivery network of onshore, near-shore, offshore centers.

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 1103232 until May 20th.

As well, a podcast of the call will be available for download at either CGI.com or through iTunes within a few hours.

Follow-up questions can be directed to me at 514-841-3355.

Michael, if we could poll for questions from the investment community, please.

Certainly, Mr.

Gorber.

(Operator Instructions).

First question is from Mr.

Tom Liston at Versant Partners.

Please go ahead.

All right.

Thank you and good morning.

Michael, just on the bookings, obviously it's a very impressive number, but what -- is there a pattern, especially with the new clients?

Is there any common theme there?

Talk about how you're winning new business than some of your key competitors and some of the -- especially the new client wins?

Thanks, Tom, for the question.

And again, just made a couple comments on bookings.

Because a lot of our business is in managed services, bookings will be lumpy obviously throughout future quarters as they have been in the past.

I would say that what we've tried to do, Tom, is to really focus our offerings to address the business problems that the clients are facing, not the technology problems, the business challenges.

And again, those challenges are, as I mentioned, clients are looking to realign their cost base to be more competitive.

They are looking to gain scale and additional capabilities in their backroom.

I would also say you're seeing some rebalancing of work by North American clients who still believe India is a viable option, but their preference is to go through a North American provider who has capabilities in India as well as near shore and home shore capabilities which, as you know, is the strength and the differentiator in our model.

So again, we've attempted to target our solutions to the needs of the clients.

And I was particularly pleased with the high level of the bookings this quarter that are multiyear.

It means I don't have to hunt to eat on those same clients the next year, the year after, should these economic pressures continue multiple years.

So as I'm adding new clients and bookings, they're multiyear, including in the government.

One of the stats I didn't mention, if I look at my US federal government business, 87% of the opportunities in my funnel are multiyear.

And I've been around long time.

I would say that's the highest level I've ever seen in a government funnel that is multiyear.

So I see that as a very positive lead indicator in terms of building up recurring revenue and backlog over time.

Just on the opportunity with getting some share in India, is the new center opened up mainly just for CIGNA or do you see some expansion on that third facility there?

No, for sure we'll continue to expand it out.

As I mentioned, it was a trigger.

But again, we now have with it three centers in India.

Our Indian operation continues to run very smoothly.

Our turnover rates, as I said before, lowest I think in the industry.

We are about 9% or so.

And no, we'll continue to expand that, and we continue to see growth in our Indian operations in this fiscal year.

And just one final question on -- you probably don't want to comment on BCEs specifically, but the telecom utility is vertical.

Obviously it's down as a percentage quite materially quarter-over-quarter.

So it seems like that was much of the weakness in Canada.

Can you comment somewhat on that contract, or maybe comment if there is any other telecom utilities customers that fell off sequentially?

No, as I said the last time, I don't comment on individual clients.

We used to provide comment on BCE when they were over 10% of revenue.

They are no longer 10% of revenue.

So I don't plan to speak about specific clients.

I will say though that as I said in my comments that the way outsourcing contracts work, and most of our clients are on calendar year.

So our first quarter is their last quarter.

So they tend to make sure their budgets are all spent before the end of their fiscal year, which you see in our first quarter.

Our revenue was strong as they close that out.

What happens in the first quarter is they then take their business plan.

They begin to turn that into projects.

The business analysts have to put those projects together and eventually turn them over to us.

For all the years I've been here, there's always a lag there because the first quarter, for the most part, they are preparing the projects and turning them into IT initiatives that we can work on.

This year, we see that slowness.

But as I mentioned in my remarks, that has had a compounding effect here given the economy.

So a number of our clients are slow on the start this year, and appear to be pushing some of the SI&C or discretionary projects out.

I believe that they will return, but they're definitely being pushed out.

Okay, thank you.

Thanks, Tom.

Thank you.

Your next question comes is from Richard Tse at National Bank Financial.

Please go ahead.

Hey, Mike, just more on that discretionary side here.

So would you say that the level of deferrals are sort of at a peak of sort of accelerating -- I just want to get a sense of where we are there.

Well, again, in normal times, Richard, I would absolutely say that the worst is behind us on that because they say that normally when you go, get out of the client's first quarter, which is our second quarter, the projects start to turnover to us.

This year it's a little more difficult to be certain, that it will come on at the same rate.

I would say that if we are not at the bottom of it this quarter, we certainly will be over the next two or three months because again, you have to understand, sooner or later these projects have to come back on screen because the businesses normally have built in certain things in their business plan that need to be enabled by these projects.

So if you are a company and you want to put out new products or solutions as part of your business strategy to gain market share or protect market share, that is in your business plan or your revenue forecast.

If the IT piece doesn't get done, of course, the business impact doesn't get materialized in the year.

So I'm not certain that this is the rock bottom here.

But if it isn't, it can't be far off.

Okay.

And on the outsourcing side, can you give us a sense of -- you've been a month through the upcoming quarter now.

So the bookings last quarter are obviously stronger.

Are we sort of in and around that level here going into the next quarter?

And also I guess separately tied to that, when do you think the bulk of the currently signed new outsourcing deals are going to come on stream in terms of revenue?

Well, again, a number of them, as I mentioned, are in the ramp up stage now.

So we are starting to ramp that up.

So we should see some of that this quarter.

Some of it will be a little slower.

Some of the government contracts take a little more time to ramp up as they go through the various processes.

A number of them, you are always subject to somebody protesting them as well, which is becoming a little more common in this environment.

So -- but a number of them, for example, CIGNA were up and operating on it as we speak.

I don't like to give forward view of bookings.

What I have said is that obviously as a company we realize that we have to book, have a book-to-bill ratio greater than 1 in order to grow our backlog and expand.

We're operating on a 12-month basis now at a 115%.

And the last thing I'll say there, Richard, bookings are lumpy because if you look at this quarter where you signed a number of outsourcing deals, the bookings can be very, very lumpy.

The next quarter we happen to sign smaller SI&C deals.

It could have a different income -- outcome.

But we do have insight here, a number of strategic deals that could over time, should they materialize, continue to result in some very nice booking numbers for us going forward.

Okay, great, thank you.

Thanks, Richard.

Thank you.

The next question is from Mr.

Scott Penner at TD Newcrest.

Please go ahead.

Thanks.

Just, like, given the strength that we've seen in some of your core markets on the booking side and the strength of those platforms, does that change at all your priorities as far as doing acquisitions?

No, I think if you look at where we're interested in doing acquisitions, as I said before, we are very much interested in United States.

We love the public service business.

As I mentioned, our revenue in public service this quarter was up to 36% and growing.

There's a lot of stimulus money in the US that will eventually find its way to IT budgets.

So obviously, if I had more firepower there in terms of scale, I would be in a better opportunity perhaps to pick up even more business.

But no, I don't think it changes our view.

We've been fairly consistent.

We're looking for someone in the United States, Western Europe.

It's got to be accretive to GAAP earnings per share the first 12 months.

And I think we're still consistently looking at targets there.

Obviously, with the balance sheet we have, with the line of credit to 2012, we are approaching a debt-free status here fairly rapidly.

Financially, we are in good position to execute that part of our strategic plan, but we do need to find the right target at the right price.

And how do you view your, I guess, your brand recognition in the European market?

Is that a market that you can grow without doing a big platform type acquisition?

(Inaudible) world is you can always grow without an acquisition.

I think, having just come back from Europe, I would say there are some good opportunities there.

The one thing that's happening in our business, it comes on kind of slowly, but at the end of the day when you think about it, and it's one of the reasons why I remain very optimistic not only for CGI, but for the industry, that the growth, the steady growth in demand for IT services will continue to increase over time.

I mean there's very little you can do in government and commercial entities without IT.

As you go through a recession, people have to drive up their productivity.

It means they've got to invest in IT.

On the other side, the number of players are consolidating.

So on the long haul, as I see it, you got a big growing market with fewer players chasing it, and we intend to be one of them.

So, obviously our brand recognition is not as good as it is in other parts of the world and Europe, but I'll also tell you a strange thing that you ought to think about.

When I meet with some clients, the one thing I can say to them is we've never disappointed you.

And a lot of them say you are one of the few vendors who can say that.

So, again, a lot of guys have tried some of the larger firms and have had issues, some of which are well publicized in the papers.

And they are looking for alternatives.

And one of the things that I reiterate to clients is we are still small enough to care, but we are big enough to deliver.

And that has a good ring with a lot of clients.

And then just lastly -- thanks for that, Mike.

Just lastly, when you talk in the MD&A about continuing to run with higher staff levels, I assume this is not in reference to project work coming right back, this is in reference to the managed services deals ramping up?

Well, it's part of the ramping up.

But also, back to the comment I made earlier where you have slow starts in some of the project work, normally, as I said that ramp up would be a little sharper than what we are seeing here.

So the hard call I've got to make is that if the ramp up is delayed a quarter or so, I got to bring all those people back.

So I'm trying to find the right balance in terms of having the skills available to do the work and balancing any potential impact on the bottom line.

I appreciate it.

Thank you.

Thank you.

Thanks, Scott.

Thank you.

The next question is from Jason Kupferberg at UBS.

Please go ahead.

Thanks.

I had a question on the EBIT margins.

It looks like over the last few quarters they sort of eased off of the high-watermark of last year, not drastically, but are trending down a little bit.

I know you made some reference to a little bit of restructuring.

And I know that the SI&C work was particularly weak this quarter.

So are those the primary explanations for some of the softness in the margins?

And if so, can you parse out what some of the restructuring costs might have been, and just comment a little bit on where you see the EBIT margins settling out as it could be more low 11s, mid 11s, but what seems right from your perspective?

Yes, now good question, Jason.

Again, maybe a bit of context, and then I'll have Dave address some of the specific things in the quarter.

But again, how we're trying to operating the Company here is we have a business model that has certain levers and metrics that we follow.

As I mentioned, what we were trying to be able to do here is deliver at a consistent level of profitability, obviously with a range no upward limit because we are always trying to do better, but trying to over time establish a consistent, a little more consistent level in terms of a floor here.

So as I said, I think we are up to about eight quarters now.

Two years where we delivered 7% or greater.

This quarter, even when you back out the tax benefit, I think we delivered all in about 7.4% net earnings, which as I mentioned, is -- equals a lifetime record for this Company.

Relative to the EBIT.

Again, on -- as a matter of principle around here, we attempt to work as a team to say if you see an opportunity that will help improve the Company in the future, you should surface it and act on it because, again, we don't manage the Company by quarters.

We are in this thing for the long-haul.

So, again, what will happen periodically, and in times like this perhaps a little more regularly, people will identify opportunities to say, look, I've got extra real estate space here, I can densify my office space, I can use technology more, I can do office sharing, and I would like to shed two to three floors of real estate.

And while that may have a financial impact in the quarter, of course, the following quarter, the business starts to see the ROI.

So that is the kind of a normal course of business here.

When you see a bump up of 200 or 300 basis points on the EBIT, it's 20 or 30, I guess, points on the EBIT, this is within the margin of the implementation of that kind of activity.

So Dave, I guess in the quarter we had a couple of items.

Yes, there was about CAD2 million of real estate, about CAD1 million worth of resource or headcount activity that we had done.

Going back into the previous quarter, there is a little bit of headcount related restructuring that was done, and in Q4, there was about CAD10 million that we had done again, primarily headcount related.

We didn't do very much in the way of any restructuring in the Q3, Q2, and Q1 periods of the year before.

And those are the periods, I think, Jason, you are referring to that had 11.8%, 11.6%, and 11.7% of EBIT.

So we are not doing a lot of restructuring.

As Mike said, when the opportunities come up, we look at them, we evaluate them.

If the paybacks make a lot of sense, we encourage the business units to move forward on those.

And so each of the last two quarters, it's been maybe around CAD3 million, CAD4 million that we have done.

But again, we are very selective about how we do it, and we want to make sure we get good payback on those.

Okay.

And it's not just on the bottom-line, that's also in the cash flow.

Right.

So I guess it sounds like if in a given quarter you don't have any of these modest restructuring actions, we are probably talking, sort of, mid to upper 11s?

Well, I think the message you take away that -- back to the point I made, the model is fairly consistent, the operating model.

In driving out margins in cash, you're going to get these fluctuations.

And what we tried to do, Jason, is to try and highlight in the quarterly numbers that we did take some of those actions so that you can kind of track that pattern.

Okay.

And just to follow up, Dave, on the tax rate.

I know you talked about 31% to 33% going forward, but it looks like, at least, the numbers I have in my model, only I think once in the last six quarters has the rate actually been in that range.

And obviously, in any given quarter, that can always be these one-time settlements and so forth.

But is there something structurally changing here in your tax rate?

I'm just going back and looking historically.

And it's not like this quarter was anomaly in terms of being in the mid-20s.

This is what we've seen over the year-and-a-half.

Now, there's nothing structural that's really changed.

It's one of the impacts of operating in 16 different countries; we have a lot of different tax authorities that, at different times, are looking at the tax returns that we filed with them.

As you know, that they go back between five and seven years that they are able to do the reviews.

And just the scheduling of audits and their various reviews, there's just a long period of time that these things are open and subject to the discussion and negotiation with those tax authorities.

It just happened that over the last few months, the various tax authorities have been fairly vigilant in trying to close out before the periods become statute-barred.

And we have had some provisions that have been set aside in the books.

And once we've closed those out, we have been able to move forward.

Again, some of this relates to acquisitions that we have done in the past, again if you think back with AMS that was done in the 2004 timeframe, we are coming back.

We are getting close to when those are going to be expiring.

We did Cognicase in 2003.

So most of those have all expired now.

And so there's probably some more items in the future to come, but that's only subject to the results of these discussions we have with the tax authorities.

Right, right.

Okay, all right, thanks.

Thanks, Jason.

Thanks, Jason.

Thank you.

Your next question is from Mr.

Mike Abramsky at RBC.

Please go ahead.

Yes, thanks very much.

Going back to the bookings again, and the strong bookings, so are you -- so you're suggesting your steady booking should be -- your targeting, sorry, your 12-month historical range?

And when you talk about lumpy, so it's probably going to -- you're just trying to manage our expectations.

It's not going to kind of stay obviously at this level, but that's kind of the level that you're targeting?

Well, again, what I've said, Mike, is that we realize and we were obviously targeting to grow our backlog.

So we have to book greater than one.

What I said before is I don't think that quarterly measure on bookings is an effective measure.

One quarter is not a trend.

You look at 12 quarter -- 12 months or four quarters, we are at a 115% of bookings.

I think what this quarter demonstrated is that when you see the economic cycle turn around, where managed services and outsourcing becomes more relevant, you are going to see lumpy quarters because some of those deals we worked on for six months or nine months.

And they closed in this quarter.

We continue to work, obviously, on other deals like that.

One of the things that I always ask my people to do is not to discount business terms to close it in a quarter because I think that robs the shareholder and the investors of margins and cash.

So, again, I think what you should take away from there is that -- we are committed to increasing our backlog, driving up our book-to-bill ratio, and that we see some significant opportunities in the funnel here the timing of which I honestly can't control other than to assure you that we are flat out here.

We have, what we call, proof of concepts where we sit down with clients and we explain to them the managed services or outsourcing offering.

And then we're offered to go in and actually do a proof of concept, which is kind of like a mini due diligence.

Suffice to say we've got a lot of those going on now given the renewed interest in managed services.

So the timing of those, when they'll turn into a deal, or if they'll turn into a deal that you see in the bookings, I can't predict when that's going to be.

Okay.

And on the Canadian side, excluding BCE and the contract cancellation, next page, sort of in general because I know you're not talking about BCE specifically.

But the -- on the deferred projects, and you're talking about sort of two to three quarters potentially, can you just sort of characterize the visibility to that now?

You said its lower.

Is this just because the customers themselves are uncertain on their forward spending?

There's just kind of a lot of balls in the air when you talk about seasonality, BCE, the contract cancellation and the delayed project.

So how do we think about your Canadian kind of growth going forward with those factors?

Well, I think if you -- what you ought to think about is in the way I described it in my text.

I was basically saying if you look at this quarter, how our revenue was made up, the -- we have a significant piece that comes from the government, and it's growing.

We were -- 36% of our total revenue came from government up from 30%.

So --

Is that just for Canada or is that --

No, that's globally.

Okay.

But I'm kind of saying that if you look at that piece of the business, it's consistent, it's growing.

And as I said many times, we always view government as the equivalent of managed services in the SI&C business because they continue to spend.

Good news there is to say it turns out that more and more of that government business, especially in the US, is becoming multiyear.

Now, the other 64% of our business has two categories.

The first one, and it's the most significant, is where we're performing mission-critical work.

So running data centers.

Even in the worst economic times somebody needs to still have that data center run, managing the financial platforms.

And that's about -- I think, that's about two-thirds of the -- are sold at 64%.

The other piece, the other third is really linked to systems integration or consulting work.

Here the client, as I say, he has some discretion there in the sense that he can push that out a couple quarters or longer, but at some point he's got to make the decision because some of those projects, as I mentioned, are linked to the achievement of the business goals.

So what I was trying to explain is that -- and Canada is particularly impacted there because as a percent of revenue, of our total revenue, more of our revenue in Canada is coming from outsourcing.

So when you compare Canada to US and Europe, you are going to see a bigger impact of this deferral because of the percent of the revenue in Canada that comes from managed services.

And that's essentially what you are seeing here.

Okay.

And are you -- when you face two to three quarters, what's your conviction around improving visibility then or is it just generally lower now?

Well, again as I said earlier, I won't know that until I have another look at the quarter.

Okay.

Because the first quarter, my clients' first fiscal quarter was my second quarter.

It's always been slow for us.

And -- but this year it's been compounded, as I said, by the economic conditions.

I will have a better sense after next quarter of whether that was the bottom and we started back up or whether it's continued.

Okay.

And then on the client canceling the major -- or the cancellation of that -- the contract that doesn't generate your margin levels that you're looking for, cash flow benefits, are there other contracts under review in the Canadian market that could potentially fall below that bar?

Yes, just again maybe as a bit of context, how we manage the business here is we manage it, obviously, by geography and client.

But we also do a cut of the high performing business, the high performing margins, and try to drive maximum growth there.

On the other side, Mike, we segregate low margin, low growth, and we attempt to drive and improve that business.

And that is an ongoing process in this Company, has been since I've been here, and probably long before that.

And as these opportunities surface themselves, we see whether or not we can adjust the margins either through pricing increase using labor arbitrage or other means to get it up to our hurdle rate.

If it doesn't, we are left with essentially two alternatives.

We divest which, as you know, we've done.

In fact, we closed that one small divest here I guess this quarter.

Or when the contract comes up for renewal, we step aside.

And that's the normal course of business here.

I think when people ask how does -- how do you generate the margins, we do on a consistent basis, that is one component of it, is to ensure your mix, the quality of your revenue is consistent with your overall objectives.

Okay.

And I had sort of asked Mike as well, is there a risk to other contracts that could -- where that could be the case.

Well, again, none that I'm prepared to announce this quarter.

I think any that we had this quarter, we addressed.

If you go back over the last two or three years, Mike, I don't know if there's been two or three -- over the last two or three years where we've done this.

So we are not talking about anything material here.

We are talking about precision around driving up and maintaining the kind of EBIT and net earnings margins that we talked about earlier.

Okay, thank you very much, Mike.

I appreciate it.

Thanks, have a good day, Mike.

Thank you.

The next question is form Mr.

Paul Steep at Scotia Capital.

Please go ahead.

Great, one quick one.

I guess, Mike, you'd mentioned for the first time in a long time, Western Europe.

And if we go back to likely '02, we had the Portugal situation where we closed that down.

And then I guess that is really Cognicase with the French operation, which was likely some part of the base work for it.

What do you sort of take away from that in terms of how we are thinking forward if you go back to Europe in a bigger way or do a bigger deal in that area?

Yes, I would say just around that, Paul, that I think the other big piece that really gave us the footprint we have was the AMS acquisition actually tripled our presence in Europe.

So that gave us probably a more balanced scale there.

I think we take a couple of things away.

And it's a good question because from a strategic plan perspective we continue to think about Europe as a market.

And I think when you are in North America, you can falsely assume that it's one big, integrated European common market much like North America here.

But when you really get into that market, you find out it's really still a series of countries and cultures, some of which obviously crosses Pan European, but a lot of work is still done very locally there.

So I think what it tells us there is you got to be selective about the countries you operate in there.

It's not every country.

I think you want to also ensure that the countries that you operate in, that you can implement and execute the kind of business model we have, which I think is somewhat unique here.

And I think one needs to look at acquisition targets more by perhaps country by country as opposed to a Pan European play.

I look at some of the competitors over there and it's a challenging market if you are spread too thin.

That makes sense.

The last one from me would just be around this whole -- people have gotten, I guess caught up in the question around deal deferrals which makes sense.

Deal deferrals are a fact of live in this business.

Maybe you can just anecdotally say it's a little bit higher than normal or it's significantly higher, just to sort of clarify that as -

Well, again, it's a good question because I would say if you look at CGI as a company, it's more than normal; if you look at Canada because of the significant amount of our revenue that is recurring and is linked to an outsourcing deal, it is a little more severe that what we've seen before here.

But again, one of the things I'm trying to point out in the press release and in the script is that of course this has always been our strategy to globally diversify so that when you get a pressure in one area, we are not totally exposed here.

And again, hence the emphasis that our strategic plan that says in the next three to five years that 60% of our revenue will be coming from outside of Canada.

We are all well on our way to do that.

And the US market, I will remind you, is at least 10 times bigger than the Canadian market.

So we are working to obviously balance here.

Having said that, and I reiterated that we -- similar to what we are seeing in our other markets, we are having some much different types of conversation with new clients in Canada as a result of the economic pressures that we wouldn't have had a year and a half ago.

Thanks guys.

Thanks, Paul.

Thank you.

The next question is from Mr.

Eric Boyer at Wachovia.

Please go ahead.

Hi, thanks.

Yes, along the same lines, I just wondered if you were seeing any difference between where your Canadian and the US commercial clients were in terms of their -- I guess, their caution level of moving forward with projects considering Canada entered the recession a little bit later than the US?

Yes, that's a good observation.

And I think if you look at our bookings in that, the US market, at least what we are seeing on the IT side, is still very aggressive.

I mean I think again, and I think you guys know that relative to investment on information technology, the US market has always been higher than Canada.

When you look at productivity differences between the two countries as well you see that the US is much higher.

And therefore, you are going to see here, I think, continue to see the US clients investing more heavier in technology, working through this recession than Canada.

I think the second thing is the - when we look ahead, we compare it to the amount of stimulus money that will find its way into information technology in the US.

I believe it is going to be significantly higher than what we see in Canada.

And the good news is we are well positioned to capture a good share of that.

And I think finally to your point, my sense is the number of large companies in Canada here is a proportion of the total commercial base.

They -- there's fewer of them, and therefore, when they do slow down in terms of being a little more conservative it's a little more visible here than in the US market.

I just want the stimulus outline there.

What areas are you guys focusing as far as the help for IT; is that more on the government side or more the -- on behalf of the EHR function of the stimulus?

No, we are primarily in the provider side.

Okay, and just --

Sorry - on the payer side.

And let me, I want to correct that, payer side.

And just finally, I think I missed what vertical the terminating contract was on?

I didn't mention it.

Okay.

Could you?

No, I don't think it's particularly relevant.

Okay.

Thanks a lot.

Thanks, Eric.

Thank you.

The next question is from Mr.

Ralph Garcea at Haywood Securities.

Please go ahead.

Good morning, gentlemen.

I'll take another crack at the terminating contract.

Can you give the annual revenue value for that, that wasn't renewed?

Probably you have to take that offline because the thing was in kind of a run off mode.

So to try and take an annualize of that would be a little bit difficult -

Less than CAD5 million, less than CAD1 million.

No, no.

I think in the quarter it was little over CAD20 million.

It was CAD20 million.

Okay.

Okay, and then just the restructuring, the headcount side over the last couple of quarters, was that all in Canada?

And what sort of utilization rates have you seen on the SI&C business in Canada given the slowdown you've been going through.

I would say most of it is in Canada.

I think outside of Canada it's more trying to hit at those non-billable or overhead functions, more fine tuning.

In Canada, as I say, what we are really trying to balance is force the load here, trying to keep our benches at no greater than 5%.

And beyond that we attempt to use numerous force adjustment tools of which temporary layoffs is one.

Perhaps some cases layoffs or people taking their vacation, all the things Ralph, that we can to try to keep force the load balanced here so that it doesn't impact the bottom line.

The second thing obviously, we want to ensure that we retain our talent because we believe this market will come back, and I don't want to have to be going out there rehiring people when the market does return here.

I would tell you that if you look at our margins, our teams have done an excellent job here so far balancing that because with that kind of pressure on the SI&C business and still to put up 7.4% net earnings, all in is a very significant achievement.

And have you seen that slowdown on discretionary side on custom apps or on packaged apps?

I mean, you have probably the best SAP practice in Canada, and one of the better Oracle ones, et cetera.

But has it been more again the custom side or the SAP --

I think it's pretty broad there.

I think even the custom guys, Ralph, if you look are feeling the heat.

Those are big management decisions for a company to engage in doing a backroom ERP in times like these.

So those are ones where they may push those out because they can get by, maybe with their existing financial systems.

On the other side, just as a trigger though, if you look at the US government and state business, you continue to see and our funnel has a number of opportunities in the financial ERP space.

And some of that's being driven by the federal government in the US wanting to ensure that there's good financial reporting of the stimulus money as it gets distributed over the next period of time.

So our ERP systems, as you know in the US, Advantage and Momentum, are category killers.

They've been built in conjunction with government people over the last 25 years.

So again we feel that we're well positioned to pick up on that type of activity.

That was my next question.

On the percentage of your US government funnel, I mean, is a 100% tied to an AMS client, which means you'd have probably a 100% win rate there?

Well, again, it's not -- as you know what happened there, and the reason I pointed it out, you have to be on a contract vehicle.

So we're very deep in the number of verticals there, we're deep in the EPA, as an example.

An EPA, as you know, their funding is going up significantly with this new administration.

So we got a deep relationship there.

Medicaid, another area; veteran's affairs, another area.

So you walk through the areas we're in, but the real benefit of this alliance vehicle, which as I said is a -- it's a cross-department vehicle, $50 billion over five years means that we can approach a client that we're not currently working with; let's say, the Education Department, and say we have a solution here and we would like to bring that there.

Up until winning the alliance blanket contract vehicle, the Education Department would say to us, well, thanks very much, but I don't have a vehicle to contract with you.

You're not on a vehicle that I can contract with you.

This thing is government-wide, which now opens us up to being able to work with multi -- new clients, that we haven't been before.

And it's very strategic for us because as that money, the portion that is information technology linked to the stimulus package comes through those departments, we're now in a position to engage them.

And I think that's probably why there was as many companies qualified for that because the government themselves realized back to my premise of supply and demand, that you've got a growing demand here for IT providers and the supply of the providers is getting fewer.

Okay.

And just lastly, on the M&A side, I mean you've got $1.5 billion war chest.

And obviously valuations looked better five or six months ago.

What's been the delay here?

I guess you need a willing seller, but if you close any one of your larger strategic deals in the pipeline, would that preclude any M&A, or how do you see your capital being utilized?

Yes.

No, no, we -- our view, Ralph, we -- we're executing a build and buy strategy.

We can and intend to fire on both of those pillars, both build and buy.

You're quite correct.

I mean, essentially we can't really pay down a lot more debt.

Most of our existing debt is either long term, or Dave, it's to cover --

Hedges.

-- currency hedges.

So we're really left with continuing to invest in the organic side of growth.

And given the opportunity that we see, it's a good time to have the financial capability to do that.

We can do an accretive acquisition, and believe me, we're working hard there to find the right target.

Again, the number of players is not as large as it was, and the number of players willing to dance is not what it was.

But having said that, I think some of our targets, it's a matter of our timing or an event that could bring them to the table.

Beyond that, we can continue to pile up cash and/or buy back shares.

And as you know, we've renewed our normal course issuer bid.

We believe that there's still significant value in the stock, and we intend to use our normal course issuer bid here in the months to come in acquiring CGI stock as circumstances would dictate.

Okay, thank you.

Thanks, Ralph.

Thank you, the next question is from Steven Li at Raymond James; please go ahead.

Great, thanks.

My -- just a couple of questions on Canada again.

So your EBIT margin went down to 12.7 from 14.6 last year, and given that you've cancelled a low margin contract, is it fair to expect margin to go back even beyond the 14.6 last year?

I think the pressures on the margin in Canada though are to -- obviously always trying to improve the quality of the existing revenue, but the second thing, as I said, Steven, is to try and balance the bench here, the resources to the ramp back up here.

So we -- as the projects start to come back on screen, obviously, utilization rates will go up.

You have a higher revenue base over fixed cost.

The margins will go with that.

So there's two or three things impacting that.

And in order to get them back there, we need to see some gradual upturn of those projects.

In the interim, we'll continue to take selective action in terms of bringing down cost, which will improve margin over time.

So the example that Dave used on real estate this quarter was primarily in Canada.

And that kind of thing contributes in the out-quarters to bringing those margins back up.

Okay, great.

And Mike, on the capital question, you mentioned buy back, but would you consider paying a dividend, given there's not much more debt to be paid back?

I -- again, we review that annually with our board.

We just did that in February, and we'll do it again next year.

But again, in economic times like these, my preference today would be to maintain the financial flexibility that we have to really target the four areas that I mentioned.

Okay, great.

And then Dave, just want to confirm.

So BCE was less than 10% of your revenues right?

That's correct.

And the CAD3 million of charges, that was expense in your custom goods.

Yes, it was.

Okay, thanks.

Thanks, Steven.

Michael, I have time for one last one.

Very good, sir.

The last question will be from Mr.

Naser Iqbal, Salman Partners.

Please go ahead, sir.

Thank you, just two quick questions.

First one is for your backlog, since about 64% was from overseas.

How much did the foreign exchange benefit that, of the $1.7 billion in bookings?

The number that comes to mind is around between CAD20 million and CAD25 million when it comes to the valuation change.

Although I've to probably through Lorne, maybe just touch back with you just to make sure that that's the right range of numbers.

We'll double check Naser, and I'll circle back the --

Okay.

And then just a quick question.

Your core revenues were down 5.6%, yet your bookings were stellar.

May be if you could just explain like, how the business from a revenue standpoint was declining and yet bookings are solid.

I mean, it's just -- is that just one-offs for the quarter or they are just -- this is the dynamics of the industry right now?

No, no, bookings -- be clear, bookings are future revenue.

For most cases, they're not in-quarter revenue, right, Naser?

Right.

They're future revenues.

It -- the previous quarter, we had a book to bill of what 77%?

Right.

So I mean, it seems that your bookings are giving you a good indicator that the future business is going to be great Yet your current business is slowing, and is it just that the bookings are -- yes.

Well, it's a timing issue.

Again, you sign a contract; you've got to bring on the people and initiate the work.

So you have a time gap there, while you're ramping up.

Also, some of the bookings, and I think this quarter, I went through it in a lot more detail to give you an idea where the bookings were coming from, not only geographic but in terms of new clients and extensions.

Because where you have an extension, of course, you're not adding revenue in the quarter; you're building up and solidifying your backlog going forward.

Maybe, as an example Naser, there was a CMS contract that we had announced; it's called the RAC project, probably about three quarters ago.

And again, it's just a good example because it kind of -- it accentuates what can go on here.

We won that contract, we announced it; shortly after that, it was protested, we had to go through about a 100-day period to be able to resolve the protest.

It could have gone up to about a 180, but we were able to get that resolved before we got to the end of it.

There was a six-month transition that we would have to go through of setting up the activities because as they manage services over -- that would be delivered over a period of time.

The transition was planned to take six months.

During that six months we're not taking any revenue, but there's a very -- it's a good level of profitability and a good cash flow that we have with that contract.

So there's this upfront investment that we have to do to set it up, stand it up, and then will it be able set it up with the revenue stream.

So we didn't have -- did not have any revenue coming in last quarter forward.

And just from memory, I think it might be at the very end of this quarter or the start of next quarter is when the revenue will start to come on stream for that project, even though those bookings showed up about three quarters ago.

Okay, great.

Thank you very much, and congratulations on the quarter.

Thanks, Naser.

Thanks very much Naser, have a good day.

Thank you.

Ladies and gentlemen, that concludes the question and answer session.

I would now like to turn the conference back over to Mr.

Gorber.

A quick thank you, and we -- follow-up calls again can be directed to me, 514-841-3355.

Thanks, have a good day.

Thank you.

Ladies and gentlemen, your conference has now ended.

All participants are asked to hang up their lines at this time, and thank you for your participation.