CGI Inc (GIB) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI third 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, Valerie, and good morning. With me to discuss the third 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 July 29th, 2009.

Supplemental slides, as well as the press release we issued earlier this morning, are also available for download, along with our Q3 MD&A, financial statements and accompanying notes, each of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures which should be viewed as supplemental. The MD&A contains definitions of each non-GAAP performance indicator used in our reporting.

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

I'll turn the call over to David first to review the quarter's results, and then to Mike, who will make a few remarks on the quarter's strategic highlights before going to Q&A. David?

Thank you, Lorne, and good morning. I'm pleased to share the financial details of another very good quarter.

Quarterly revenue was CAD 950.4 million, a sequential improvement of 2.7% at constant currency. Compared with the third quarter of 2008, revenue was essentially unchanged as foreign currency fluctuations positively impacted revenue by 4.5%.

Despite the current economic conditions, EBIT margins remained strong, improving to 11.9% compared with the 11.7% in Q3 of 2008.

Net earnings in Q3 2009 were CAD 76.5 million or 8.1% of revenue, generating diluted earnings per share of CAD 0.25. This compares with an earnings margin from continuing operations of 7.5% and CAD 0.22 in diluted earnings per share when excluding a one-time tax benefit of CAD 10.8 million recorded in the third quarter of 2008. When adjusted for this one-time item, we delivered significant bottom-line improvement year-over-year.

Our Q3 effective tax rate was 31%, inline with our normalized tax rate of 31% to 33%, compared with 23% in Q3, 2008.

Now, let's turn our attention to the balance sheet. At the end of Q3, our DSO was 41 days, an improvement from 48 days in Q3, 2008. The reduction of 7 days serves as a good illustration of our effective and efficient credit and collections processes, as well as our clients' continued satisfaction with CGI's services.

We generated CAD 170.9 million in cash from operations during Q3, or CAD 0.55 in cash per share. This represents 18% of revenue and is a 61.4% increase year-over-year.

Our net debt at the end of June was CAD 15.9 million, for a net debt to capitalization ratio of 0.6%, from the 15.6% one year ago.

As you know, in February we renewed our normal course issuer bid through February, 2010, which allows us to purchase 27 million shares over 12 months. In Q3 we bought back and cancelled 3.2 million shares as part of this program, investing CAD 32.1 million. At the end of Q3, 2009 the Company had access to liquidity of more than CAD 1.6 billion; CAD 272 million in cash and CAD 1.35 billion available under our line of credit secured through 2012.

Our balance sheet, combined with improved profitability, has generated a return on invested capital of 13.8%. All in all, we are pleased with the strength of our financial performance and health of our balance sheet as we continue pursuing profitable growth.

I'll now turn the call over to Mike.

Thank you, David, and good morning, everyone. By any measure quarter three was a very solid quarter and what we consider to be a strong and balanced year-to-date performance. We delivered excellent results through the first three quarters of fiscal 2009. Accordingly, I would like to begin by highlighting our year-over-year performance after nine months.

We have booked CAD 3.5 billion in new contracts, or 121% of revenue. And in these bookings we have secured some very strategic contracts with marquee clients representing global brands, each of which provides an opportunity to add on new follow-on business.

Revenue was CAD 2.9 billion, up 4.4%. Net earnings improved to CAD 234 million, up 6.5%. Earnings per share of CAD 0.75, up 12%, and our net earnings margin of 8.1% remains the industry leaders and demonstrates consistent execution of our business model. We generated CAD 438 million in cash from operations, up 60.5%. Cash per share was CAD 1.41, up 68%. And net debt went from CAD 332 million to CAD 15.9 million, a reduction of 95%.

In addition and importantly, our client satisfaction and client loyalty scores remain at record levels. Our members' attrition rate remains the lowest in the industry, while share ownership levels among our 26,000 members continues to grow. At approximately 85% our members represent CGI's single largest ownership block. We firmly believe this has positive ramifications for all stakeholders.

Overall, and despite the challenging market conditions, we continue to make significant progress towards the achievement of our business and strategic goals throughout the first three quarters of fiscal 2009.

Now, I'd like to take and provide you with a little more operational color on this quarter's results.

I am pleased that we were able to grow revenue by 2.7% sequentially at constant currency. As I outlined last quarter, in terms of year-over-year comparisons, from a revenue standpoint our Canadian operations have experienced the biggest impact from systems integration and consulting deferrals. However, quarter two may have been the bottom as some of our large outsourcing clients have begun investing again, albeit cautiously. In fact, Canadian operations grew sequentially by 1.7%.

On a global basis, our growing sales funnel, strong contact bookings and a gradual increase in our SI&C business provide continued optimism with respect to increasing growth opportunities in future quarters. While European revenue in quarter three was flat year-over-year, bookings in Europe increased to 175% of revenue in the quarter.

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 22.9% during the quarter. After nine months, US revenue has grown by 30%.

A further demonstration of the continuing strength of our US operations can be seen in the book-to-bill ratio, which was 185% of revenue in the quarter. This includes the renewal of a high-profile spend management initiative in Virginia called eVA, which was extended through 2016 and valued at US $73 million.

Also in the quarter we signed a five-year, US $123 million outsourcing deal with a Fortune 500 client. We view this deal as transformational as it will utilize our full suite of credit and collection solutions to assist the client in controlling their receivables and reduce the risk of loss.

In addition, we've announced an expansion of 100 positions at a global delivery center in Southwest Virginia to accommodate increasing federal government opportunities.

Our sales funnel is robust. And from our point of view, the long-term prospects far outweigh the near-term pressures. Qualified outsourcing opportunities in the funnel have nearly doubled over the first nine months of fiscal 2009.

We expect to see continued strong demand for our end-to-end outsourcing, our managed services offering, as evidenced by both the increased sales activity and the number of new clients coming on stream. In fact, 54% of Q3 bookings is new work to be ramped up with new or existing clients in future quarters. In my view, this is an excellent mix of mid and long-term revenue.

Globally, we booked 1.60 -- sorry, CAD 1.06 billion in new contract wins for quarter three, or 111% of revenue. We remain committed to maintaining or improving this ratio as we continue to have good visibility on a number of significant opportunities.

Similar to last quarter, 73% of our bookings came from our two largest verticals. Government accounted for 49% of bookings and financial services made up the other 24%. We continue to have excellent visibility on new opportunities throughout both banking and insurance.

Over time, we believe that our increased marketing activity will translate into contract wins and growth in our backlog. We currently have CAD 11.8 billion in long-term contracts to be delivered. And as in the case with bookings, this level of recurring and long-term revenue should be particularly attractive.

Going forward, our primary focus remains on helping our clients through these challenging market conditions. 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 our business.

Our ability to continue to generate cash and our secure access to a CAD 1.5 billion line of credit provides an additional layer of comfort to investors.

Let's go to the questions, 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 3406147 until 12th of August. As well, a podcast of this 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.

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

Thank you, Mr. Gorber. (OPERATOR INSTRUCTIONS.) Our first question is from Jason Kupferberg from UBS. Please go ahead.

Thanks. Good morning, gentlemen.

Good morning, Jason.

Good morning, Jason.

A couple of questions for you. First, I wanted to make sure I understand the dynamics that you guys are seeing in the project base side of the business in SI&C. Mike, I think you mentioned that it may be true that the March quarter may prove to have been the bottom there. I guess the revenues in SI&C were down quarter-over-quarter in June versus March.

So, just wanted to make sure I'm understanding what you guys are actually seeing in that marketplace, if you really are seeing some firming up and some stabilization. And maybe that's somewhat reflective of intra-quarter trends that you saw during June. Any additional color there would be great.

Okay. Well, again, what I had said in the last quarter results that the projects were slow in starting up right from the get-go with the business -- on the business side of the clients. And when I see and I look at some of the major clients that we have, we saw some indications where they're gradually moving these projects now from the business over to the systems analyst side that will eventually show up on our revenue line. And we're seeing that in Canada and that's kind of where we were most impacted.

As far as the SI&C, I think it's pretty flat isn't it, Dave?

Yes, 44% to 43%.

Yes. So, it's pretty flat, Jason. That's why I kind of called it a bottom, what I believe is the bottom.

Now, I should caution you and remind you that we're in our summer quarter. So normally, our summer quarter is impacted by vacations in terms of our clients and our people. So, when you look quarter to quarter, we normally see an impact of anywhere between CAD 25 million and CAD 30 million due to the vacation period.

But notwithstanding that, we are seeing signs that clients are coming back and investing. And of course, in Canada, the banking and financial sector has not been hit as hard as in the US. And as you know, the valuations have nicely returned there and it's -- there are opportunities to do project work in the financial institutions, as well as in some of our other clients.

So, I don't think a quarter makes a trend, but I got the sense in looking at the numbers and talking to the account managers that we may have bottomed in the March quarter.

Okay. That's very helpful. And if we turn to the verticals here, I know telecom utilities continues to be the weak link here. Can you talk about how much of this weakness might be due to BCD cutbacks versus what's happening with other clients in this space? And are there any other specific factors that you would call out here to explain the relative weakness versus some of the other vertical groups?

No. Again, I don't comment on individual clients there, but I think the telecom vertical in comparison obviously isn't as strong as the financial vertical and governments. I think telecoms are also watching their capital expenditures very, very carefully in these times.

But again, I always go back to the longer-term picture here that telecom companies have always invested a large percentage in information technology. It's necessary there in order to drive efficiencies, bring new products and solutions on. So again, on the medium and long term, I still remain very optimistic that that's a good sector for CGI to be in.

But I wouldn't read a lot into the quarter-to-quarter comparisons amongst the verticals other than to say, obviously, that the government and financial vertical remain fairly robust here, obviously, in comparison to other years and to the other verticals.

Okay. Okay. And then just a last one from me on the balance sheet. Obviously, you've been paying down debt pretty consistently, which is nice to see. Maybe you can give us an update on the M&A pipeline. Are there other cash deployment options that yourselves or the board might be thinking about, whether it's even bigger buybacks or something along the lines of a dividend at some point in time? Would love your current thinking there. Thanks.

Well, again, I wish I had more news other than to reinforce the consistency and the discipline in which we think about cash deployment. First priority is reinvest in the business. And with some of the deals that we're working on and some of the deals we announced, we will be requiring some cash to reinvest in building out some of those solutions, continuing to strengthen our organic growth base.

We do look at acquisitions but, again, we don't have anything to announce there. We're still working on the three criteria, the right target, right price, right time.

And with the debt, as you say, our net debt's down to CAD 15.9 million. And we still have the option of buying back additional shares. I think we still have about 23.5 million shares, if you look at the end of June, that are still permitted to be bought back between now and February.

And as far as the dividend goes, we look at it on an annual basis. And the next review of that policy is just prior to the AGM in January.

Great. Thank you, guys.

Thanks, Jason.

Thank you. Our next question is from Tom Liston from Versant Partners. Please go ahead.

Hi. Thank you and good morning.

Good morning, Tom.

Just on -- with Virginia and Governor Kaine obviously seems like a big fan here. But one of the releases --and I think it came directly to Virginia maybe -- was comments about other countries and states looking at what they're doing and looking at those large cost savings and obviously trying to replicate some of that. And I think he'd mentioned Canada, Portugal, Indonesia and maybe a couple others.

Can you comment on how that might expand your pipeline as well? I assume that most of these other jurisdictions will want to see -- will want to bring over the technology vendor as well to try to achieve those same cost savings. Can you talk just overall about that type of situation?

Yes. For sure, Tom. And again, I think the Governor is rightfully very, very proud of how the state has worked with CGI to develop and implement a solution that has brought significant value to the state.

And I think the opportunity space there is -- that he was referring to is at a couple levels. One, I think Virginia itself are constantly attempting to get other states surrounding Virginia to just jump on their platform, add more volume to it, which would be beneficial to the states and to Virginia, and also obviously to CGI.

The reference to Canada is we have won a similar deal, announced it a while ago, called OECM with the Ontario government, which is a similar -- very similar, using the expertise and the platform solution that we built in Virginia to work with a portion of the Ontario government. And of course, our goal would be over time to expand that. And I can tell you that the volumes that Ontario could put through that are very, very significant in comparison to Virginia. And so, that project is in the ramp up stage.

And then I think the reference to the other countries are they're -- either they get visits direct from other countries that want to look at this and/or we bring clients from other jurisdictions in there and use Virginia as obviously a very marquee reference. And they've been very generous and complimentary of their time to walk through the real value created by the platform.

Okay, thanks. And just on the bookings. Obviously, you gave us some color on new customers and what verticals are strong. But can you delve down a little bit more into any changes in trends and size of the contracts, length of contracts? Any other specific underlying trends there for why they've been so strong the last few quarters?

Well, again, I think we're -- more and more of them are I would say long-term contracts. The outsourcing, managed services side is stronger than the SI&C side clearly by comparison. And clients are looking for business solutions.

I referenced a five-year US 123 million deal that we weren't able to name the client so, unfortunately, we couldn't do the announcement. But it's a good example of where the client is looking to improve their management of receivables, improve cash flow, reduce losses. And our solution was to bring to that client our full suite of credit and collections products, wrap it around our broader integration skills with some elements of business process outsourcing and, as a result, bring significant value to that client, addressing the business problem. And for us, to book a five-year US $120 million deal and have the opportunity now to work in this client in other areas.

So, these are the kind of deals that we're focusing on, cases where, in some cases, they're new clients. And some cases where we get in there with an entry deal, like the one I described, and then obviously have the opportunity to hunt across the full account and help identify and introduce our full capabilities in other areas of the business.

So, this is why in my comments I said I'm kind of pleased that in the first nine months, not only that we've won new clients and they have marquee and global brands, but that there's follow-on business opportunities there which bodes well for future bookings and revenue.

Great. Thank you. I'll pass the line.

Thanks, Tom.

Thanks, Tom.

Thank you. Our next question is from Steven Li from Raymond James. Please go ahead.

Thank you. Mike, just wanted to drill down a bit more on your bottoming comments. The relative weakness in financial services bookings this quarter, was that just lumpiness and have you seen some recovery since quarter end?

Well, again, I keep reminding you, I wouldn't book -- you shouldn't look at bookings by quarter. I mean, bookings are a 12-month phenomena. And so, I don't really have a comment quarter-to-quarter on bookings. I would tell you that the financial services business still represents a significant opportunity for us.

We have a lot of opportunities in our funnel that relate to financial services, either directly in terms of financial services bank, insurance company. Or in some cases, where the client has a financial services arm, there's also opportunities in there.

So, no, I wouldn't read a lot into that, Steven. It's -- bookings by their nature in our business are lumpy.

Right. And also, one of the headwinds in Canada has obviously been BCE. Now, the deferred projects that you talk about in your MD&A, have these started to come back or is it too early to tell?

Again, I don't comment on individual clients. But as I said, in Canada, if I look at quarter-to-quarter, we are seeing signs that the March quarter was the bottom and that we're up a little bit in Canada from quarter-to-quarter. I think it was 1.7% sequentially. So, some of that obviously is coming from the starting of these SI&C projects.

Okay, great. And then just one question for Dave. Just wanted to make sure I'm not missing any of the one-time items. So, you did expense during the quarter CAD 2.8 million in severance and CAD 1.5 million in real estate. But then you had a gain of CAD 2.1 million from FX. Is that it?

That's correct.

Okay. Thanks, guys.

Thanks, Steven.

Thank you. Our next question is from Richard Tse from National Bank Financial. Please go ahead.

Hey, Mike. Just had a question on sort of the recent strength in bookings. You guys obviously have done a good job at maintaining a handle on the cost side. So, if you look at the bookings last quarter and this quarter, you're getting a higher percentage of that bookings coming from new deals. Typically, what's sort of the timeframe from the booking to when you recognize that in terms of revenue?

Again, it very much depends on the nature of the deal. If you talk about the one where we're looking at collections, you've got to stand up those systems, you've got to configure them. So, that's a matter -- it could be a matter of quarters. If it's an infrastructure deal, it also takes a long time. Where it's project work it ramps up.

So, I would say obviously the range could be from anywhere from a quarter to three quarters, depending on the nature of the engagement, in terms of how long it takes to ramp up to kind of a level that you would actually see on the top line, Richard.

Yes. But could you give us maybe some more color in terms of what you think of the current bookings, when that would come on-stream, though? Like would that be sort of a back half calendar 2009 phenomenon, or we're looking at--?

Again, when I look at -- as I say, I think the -- and I don't think this is unique to CGI. I think if in fact last quarter was the bottom, you're going to see a gradual improvement. I had said that a lot of the work programs in large clients would be pushed out a number of quarters. And if you look at most of our clients, they end their fiscal year in December, which is our first quarter 2010.

So, a combination of that with the bookings coming on, for us from a fiscal standpoint, could see the combination of some of these bookings coming on-stream and the gradual increase from the bottom on the SI&C business hitting us out in the early quarters of F-2010.

Okay. And you obviously, again, have done a good job in toeing the line on the cost side. And obviously, looking forward, it seems like government, financial services continues to be a point of strength. But in the US, is that sort of your vision here in terms of verticals that you're going to be focusing on going forward, sort of solidifying that government base? Or do you have sort of intentions of branching out into other verticals?

Well, for sure. I mean, we have five verticals. We intend to continue to operate and grow them all. I think what you're seeing here is just a market shift of where the opportunities happen to be the greatest right now. And fortunately for us, they're two verticals where we're very well positioned because of our relationships, experience and solution set. So, we're focusing obviously very aggressively to be as opportunistic as we can to capture as much business while that's window's open.

Right. And to the point on the government side, with the sort of stimulus spending, I guess depending on who you talk to, it's sort of stalled in some respects. Would you expect that government bookings to actually sort of ramp in terms of the opportunities in the back half of the year?

Well, again, we do have some very significant opportunities in the government space. Obviously, given the size of the US government and the size of the stimulus there, they're heavily weighted into the US. And so, again, I think you're right. Depending on who you believe to, there's not a lot of the stimulus that has been actually put through the system yet. So, I think the opportunities going forward there are still fairly very interesting and exciting and we feel that we're pretty well positioned.

Okay, great. Thanks, Mike.

Thanks, Richard.

Thanks, Richard.

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

Thanks. Just wanted to get a sense of the margin upside for the quarter, specifically, I guess, in Canada where it was most notable. Is that mainly, David, a function of the staff adjustment? And I guess, if so, is that consistent with a slower return for some of the project work than you may have expected last quarter?

Well, partially it's related to the adjustment. But Mike has -- in the past calls has gone through some of the various initiatives that we have been focused on; whether it be looking at the lower performing businesses, looking at where there's profit leakage that we have within the operations. Just looking at all of the fundamentals and just making sure that we've got the business tuned and not making any -- I guess you could say homeruns on any particular point. It's just a lot of base hits.

We just continue to work on, like, little items. On the treasury side to work things like the interest expense and the interest income. Operations, they're looking at productivity, they're looking at the pricing, they're looking at making sure that they're competitive and that they're in the game for each of the deals. In the infrastructure we're looking at the cost and continue to go back and look at seeing if there's any way that we can grind down costs.

We work with our clients as they're under the pressures to try to reduce their costs. We're looking to see if there's things that we can bring to the table in the way of value that we can reduce our costs so we can pass along the savings to them.

It's a combination of many different items. And every day we feel like we're in a restructuring because we continue to look at the costs that we incur and look at opportunities for us to be able to bring better value for our clients, as well as for our shareholders.

Okay. No, that's good to know. And just again, David, the contract costs and investment over the last couple quarters has ticked up a little bit and the numbers are still small. But as you bring some of the new bookings online over the next couple of quarters, is that investment going to continue to increase?

I would expect to see that there should be some continuous activity there because, with those bookings, what we will see is that new transition costs will come on. But some of the ones that we've already started will start to be moving into production; therefore, those costs will be coming down. So, right at this stage, I don't see that number changing a whole lot quarter by quarter but it will consistently continue to go forward.

Okay. And then, Mike, you've -- in the past couple of quarters you've mentioned some large opportunities that you were tracking and specifically in Canada I think. Now, are those deals still on the table and do you consider that they are moving forward?

Well, obviously, we continue to attempt to advance all the deals we have. I think the number that we're looking at -- of course, they move at the pace that both parties can move them across the line, Scott. But we're still obviously guardedly optimistic that we're going to be able to continue to book sales at a greater pace than we consume the revenue. So, yes, we're still optimistic that we can get to end of game on a number of the deals that we have in the funnel.

Okay. That's all. Thank you.

Thanks, Scott.

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

Yes. Thanks very much. So, Mike, would it be fair to say that your characterizing visibility overall as starting to improve with regard to your pipeline, with regard to demand, with regard to execution against the demand and opportunities ahead? Would that be kind of a short summary of your senses at this point?

I think if you added the adjective "cautiously." I mean, I don't read tea leaves. But from the ground, Mike, when I talk to the account managers, talk to clients, I think people are starting to reinvest now. And it does take a while to ramp up. So, that's relative to the SI&C.

On the outsourcing, I think, as I said, the funnel has been growing and it's not surprising. I don't think we're the only company reporting that, that the funnels are up because the outsourcing business is countercyclical in many respects.

So, yes. I mean, this is kind of why, Mike, I actually reviewed the nine months. Because again, I don't think you can judge a company or the market on a quarter. And when I look at the nine months, my view is we're performing exceptionally well given the economic conditions and the general landscape that's out there.

So, we're -- we remain cautiously optimistic that the March quarter could have been the bottom and that we've seen some nice signs this quarter that would tell us that, in the out quarters, if all things remain directionally the same, that looking back two or three quarters from now we may well have seen the March quarter as the bottom.

And when you look forward six months from now, if the economy, as I think is sort of the general view, slowly recovers, what are the -- how does that change or add to some of the opportunities that are head of you? Are there any specific opportunities or growth drivers that may firm up a little bit more because of the slowly recovering economy for you?

Well, again, I think -- I've got to watch. I always look a little different between macro indicators and micro indicators. And of course, we sell on the micro level, customer to customer. But obviously, I think that the general tone of business and government when things pick up is to be more optimistic, to be less cautious about making long-term investments.

On the flip side, I'll tell you that when things get too well, Mike, it's very difficult to get folks to the table to do an outsourcing deal because they feel that everything is running well and why disrupt. I think we're a ways from that date. I think a lot of people are still looking at realigning their cost structures going forward here.

I don't think people will return to kind of pre-meltdown cost structures. I think folks are going to take this opportunity to restructure their operations, look at taking on partners for their back room and look at changing their cost curves going forward.

So, from that perspective, I think it's -- the outlook is much brighter now than it was two quarters ago.

And there's obviously been some high-profile headlines regarding the -- how challenged the states are to paying their bills in the US, particularly California, New York, etc. Can you reconcile for us why that hasn't -- or why the risks may not be there in your receivables given some of those stories?

Well, again, I think if you look at where we operate in the various states, we operate in areas that are very much tied to what I call the mission-critical area. So, we do work in ERP, which is really brining better financial reporting, financial integrity to the states. And these areas are -- if there is such a thing as being recession-proof, they're essentially recession-proof.

We work in the child welfare area. That thankfully continues on, regardless of economic conditions. If you look at eVA, these are things that gain more profile and bring more value in times like this. We work in areas of receivables, which again are very timely.

And you're quite correct. I mean, we do not have at this point any exposure to payment issues relating to states. And we're very careful in terms of how we structure our contracts and do business to ensure that we're looking at all aspects of the business deal, including out ability to get paid.

Mike if I could add, a number of the programs that we have, especially with some of the US states, are what we call benefits funded.

Yes.

And the advantage with those is that the state regulators -- or legislators -- do not have to go back and try to draw on budget monies to be able to get the funds for those programs. Those programs are actually self-funding. They're generating their own savings and we're being paid out of those savings as we go forward. So, it's one of the, I guess, major reasons here we haven't seen a big issue with some of the -- especially in the Western states, any of the work that we're doing there.

Okay. Thanks very much, guys.

Okay, Mike.

Thanks, Mike.

Thank you. Our next question is from Paul Steep from Scotia Capital. Please go ahead.

Great. Thanks. Mike, maybe you could just talk a little bit about what the average life has been within that backlog, or maybe the trend in the bookings -- we've talked all around it here -- as to what's happened recently, as the length of the contracts shrink or grown and what the capital intensity sort of looks like over the last quarter or so.

Yes. Paul, I'd tell you that I think we're probably still averaging in the five to seven-year period. If you look at the Fortune 500 client I mentioned, that was a five-year deal. Some of them are still out to seven. We have ones in the pipeline that are 11. We have some that are 13 years. In some of these cases, there's a build and then an operate period. The build period, Paul, to the comment I made earlier, could require additional capital but the cost of that capital is built into the length of the deal.

So, I would say that the tendency is still very much in terms of, in average, still seven years plus when I look at what's in the pipeline and what we've been booking here.

Great. And David, just one housekeeping item. On the FX hedges, what's the timing of those hedges sort of rolling off? And I guess the view with the dollar moving up here.

Yes. It's three to five years is for most of those.

Okay. Thanks, guys.

so, that's a -- it gives us good protection for the next little while.

Okay.

Thanks, Paul.

Thank you. Our next question is from Paul Lechem from CIBC. Please go ahead.

Thank you. Good morning.

Good morning, Paul.

Just wondering on the profitability of the business you're signing now, especially is there any difference -- well, first of all, between the deals today versus before the economic blowup. And secondly, if there's any difference by vertical. So, if the government vertical in particular has any different profitability expectations than private sector.

No, I wouldn't say so, Paul. I mean, I think when we get asked the question why our margins are so high, as Dave said, I've gone through a series of actions that we take and it always starts with qualifying the revenue you're brining on. And again, when we do a deal, we're trying to find the right balance between bringing the savings and commitments to the clients and preserving appropriate margins and cash for CGI. And we also balance the margin against the risk associated with the project work and the contract we're engaging.

So, no. I mean, we're constantly trying to ensure that we're managing the dynamics of those considerations client by client. So, no. We're not seeing any kind of a different profile and we're careful not to back in to deals that we -- or walk into deals that we're not satisfied that we've sought the good balance. And again, I want to reinforce we still believe we've very competitive on these deals. So, it's not a matter of not meeting the client's expectation, it's finding the right balance.

Just on that last point, has the competitive -- has the bidding process changed or the competitive nature of the deals changed in the last six to nine months? Has pricing come down at all?

There's always pricing pressures here. But for every pricing pressure, Paul, there's also war stories out there where some of the folks haven't delivered on the other side of the deal, which is actually delivering the project on time and on budget. And again, when one looks at our industry, it's not only the price that's quoted, it's a price that's paid by the client. And unfortunately, they're not the same thing. Because when a project runs over or you have a scope creep going on, then clients see this.

And you know, we live through this. I mean, in a case where we would lose a deal, some cases I call the senior guy over there and tell them in my view the competitor will not deliver that for the price that they've stated. And I follow up six months or a year later and find out that's exactly what happened. And in that case, the client has kicked the competitor out and we come back to the table.

So, there's a credibility here that one wants to build over time and sometimes that means in the short term you don't get a deal. But in the long term, you strengthen your reputation and you end up building more business. So, there's a bit of that in the market. I think clearly some folks are trying to find a balance of what they believe is pumping up their front -- or their top line, but they also got a lot of pressures in terms of their bottom line and their cash.

If you look at our situation, we're starting with a very strong balance sheet, very good cash generation. As I mentioned, client and member satisfaction is solid and that gives us a lot of room here to look at every deal on an individual basis.

Thank you. That's helpful. Just a quick question for Dave, if I may. I wondered if you can give us an update on the tax credit situation for your employees in Quebec.

I'm not quite sure what you're trying to address there, Paul.

My understanding is that there are various tax credits specifically for your employees in Montreal. And I was just wondering if those programs are coming to an end, if there's some --.

Okay --.

Negotiations ongoing there. What the timeline is and what we can expect to see in terms of the tax credit situation.

Okay. Those programs have been renewed and they're going up to 2016. So, I don't think there should be any issue or concern with those in the short term.

Have they been renewed on the same terms?

Actually, they were enriched a little bit because they were looking to try to broaden the scope to encourage more work to be brought to the Province.

How many employees do you have which -- who will benefit from these programs right now?

I think they fluctuate, Paul. And again, I would point out we're not the only guys that participate in these programs and we're in other programs as well. So, I think relative to the Quebec program, we're obviously pleased that the program has been extended.

Quebec is a great place to build a technology firm. We opened another center, as you know, up in Sherbrooke and we're going to continue to leverage our presence here and in other jurisdictions where they have these programs. But to Dave's point, there hasn't been any kind of material change in the program that would move our numbers in any significant way.

Thank you very much.

Thanks.

Thanks, Paul. Valerie, I think we'll have time for one last question.

Thank you. Certainly. Our question is from Eric Bernofsky from Desjardins Securities. Please go ahead.

Thanks very much. Good morning, guys.

Good morning, Eric.

Just had a couple questions here. Going back to bookings, what can you say about the Alliant pipeline down in the US? Have any work orders been issued under that or when do you expect some work orders to ramp up there?

No, we haven't seen a lot in that vehicle yet, Eric. I think we did a little review of that the other day. It'll take some time to bring that on. As you know, that's a massive vehicle. So, we haven't bid anything under that vehicle at this point. So, that represents future opportunity.

Okay. And then just looking at the Canadian business, obviously you outlined your book-to-bill for the consolidated business. Canada this quarter looks like it was around 0.5 times. What's your outlook there without giving sort of guidance? That's obviously an area of weakness for you if we drill down to the Canadian business. What's your outlook there in terms of the pipeline, in terms of getting that number back to sort of the 1 times range?

Well, again, I look at -- just always to reinforce, I look at bookings corporate wide. I look at them trailing 12 months. Don't look at them by quarter. Having said that, Canada, we obviously have a very strong position in Canada. We see and are working on a number of opportunities in Canada that we feel good about. And bookings in our business are lumpy and so it can change very rapidly. So, as I said, if you could -- if you're at 0.6, 0.7 one quarter, the next quarter you could be at 2 times, depending on the deal.

But Eric, we still feel good about the opportunities in Canada. And Canada, I don't think, has been hit as hard as some of the other jurisdictions so you don't have quite the valley. On the other hand, you don't have the peaks. But you still have a lot of opportunities here. There are still a lot of clients that we look to penetrate. Western Canada is still a big opportunity for us. Toronto is a big market. There's still opportunities here in Quebec. So, we're still pursuing a healthy funnel in Canada and we intend to win our fair share of those opportunities.

And we're also shaping, I would say, probably more opportunities in Canada just because of our presence here and our track record.

And then just lastly, wanted to push further once again into the margins. Obviously, you're doing a great job keeping margins up and improving considering the demand environment out there. Just want to get a sense of where you think margins could go, what kind of levers you have at your disposal with moving some work around between some of your cost centers.

And then, I guess, how do you offset that with some of the projects that are going to come on-stream over the next few quarters? Just trying to get an indication of how much more upside there could be to margins or whether you think you're sort of in the mid-11% range over the next couple quarters.

Well, as I said, Eric, I mean, I guess it all depends how you look at life. My belief is -- margins in a business, in my belief, are primarily driven about your ability to execute against a series of levers. So in our -- the way we think about business, we're constantly restructuring how we do business, where we do business and attempting to execute better against those things that impact margin.

So, as I said before, it starts with making sure that the deal that you're signing is an accretive deal. Because if you sign a bad deal on day one and it's a five-year deal, it'll be a bad deal for five years. So, it starts there. It starts with making sure you deliver your projects on time, on budget. If you don't, the overruns in many cases are eaten by the shareholders. It's a matter of looking at SG&A, at taxes, at procurement. As Dave says, it's not a homerun. Once you get your margins up to the levels we're at, it's a series of executing against a series of levers, including looking at where work's done.

But again, I think you know over the last three or four years I've constantly said that I don't see that as a transformational lever to drive margins. I mean, I think it's where you put the work depends on the type of work and the original deal and risk profile.

So, we have a series of lever utilization rates that are a big one in an industry, in a company like ours. So, all these things we're working on on a basis. So, I don't like to put on ceilings because I think it doesn't send the right message internally, it doesn't send the right message to investors. I think the idea is our goal here is to find ways to continuously improve our business, top line, bottom line, balance sheet, cash generation, all the things that are fundamental to building a healthy, strong business over time.

Having said that, we don't operate it by quarter because, to your point, in some cases we have to make some investments here that have returns over time. So, in those areas, we're going to make those investments. We're going to explain where we made the investments. And based on our track record, one would hopefully see that our ability to harvest and get the ROI of those investments will pay off in future quarters.

The other area, obviously -- and that's why we're constantly looking at acquisitions. To the extent that we can grow the Company organically and through acquisitions, the right acquisitions, we're going to take and change the ratio between variable -- or between revenue and fixed costs and bring on more scale here, which in many cases should bring on incremental margin.

So, we're looking at all those things and trying to execute daily against those levers.

Okay, thanks. I appreciate the comments.

Yes. I appreciate the question.

Thank you, Eric. And thank you, everybody, for joining us. We'll see you on November 9th for our fourth quarter and fiscal 2009 results. Thank you.

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