CGI Inc (GIB) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to CGI's fourth-quarter 2009 results conference call. Please be advised this conference is being recorded. I would now like to turn the meeting over to Mr. Lorne Gorger, Vice President, Global Communications and Investor Relations. Please go ahead, Mr. Gorger.

Thank you, Ruth and good morning. With me to discuss CGI's fourth-quarter and fiscal 2009 results are Michael Roach, our President and CEO, as well as David Anderson, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9 a.m. on Monday, November 9, 2009.

Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our fiscal 2009 MD&A, audited financial statements and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. The complete Safe Harbor statement is available on both our MD&A and press release, as well as on CGI.com. We encourage all investors to read it in its entirety.

We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each of these non-GAAP performance indicators used in our reporting. All of the figures expressed on this call are from continuing operations and in Canadian dollars unless otherwise noted.

I'll turn the call over to David first to review the results for the fourth quarter. Then he will pass it over to Mike who will discuss a few strategic highlights on both the quarter and the full year. Given that we will be discussing both, our scripted comments will be brief in order to maximize the time we have for Q&A. David?

Thank you, Lorne and good morning. I am pleased to share the financial details of another good quarter. Revenue was CAD926.1 million, essentially flat with the same period a year ago. Sequentially, revenue was lower by 2.6%, reflecting the seasonality of summer vacations and the unfavorable currency fluctuations. Without these impacts, our growth rate was approximately 2.2%.

Our EBIT margin strengthened in Q4 to 13.6% from 11.3% in the fourth quarter of 2008. This improvement was largely driven by previous and ongoing investments in productivity initiatives, including our restructuring efforts to better align both our workforce and real estate portfolio with the strategic and operational plans. As a result, net earnings in Q4 2009 were CAD82.6 million, or 10% better than the CAD75.3 million reported in Q4 of 2008.

Our earnings margin was 8.9% in the fourth quarter. Diluted earnings per share from continuing operations in the fourth quarter was CAD0.27 and this compares with CAD0.24 in the same period last year or an increase of 13%. However, when you remove last year's one-time tax benefit of CAD0.03 per share, the year-over-year improvement from continuing operations was 25%.

We generated CAD192.5 million in cash from operations in the fourth quarter, or 20.8% of revenue. This compares with CAD82.9 million or 8.9% of revenue in the year-ago period. Our DSO was 39 days, an improvement of 11 days versus last year and positively contributed to the increase in cash from operations. We have remained focused on improving the timing of payments and the DSO at year-end reflects these efforts.

In the quarter, we used a portion of the cash to acquire 6.1 million shares of CGI for CAD65.4 million. At year-end, we were in a net cash position of CAD66 million. I will turn the call over to Mike.

Thank you, David and good morning, everyone. We delivered very good results in fiscal 2009 despite the worst economic conditions in more than a generation. In fact, on some key performance indicators, it was our best year yet and further solidified our leadership position amongst our North American and European peers.

Revenue grew to CAD3.83 billion, up by 3.2%. EBIT was CAD461 million, up 7% and represents a strong 12% margin. Earnings from continuous operations was CAD315 million, up by CAD17 million, or 5.7%. Earnings margin grew to 8.2%. EPS expanded by 13.3% to CAD1.02 on a fully diluted basis. We generated CAD630 million in cash from operations, or 16.5% of revenue, up CAD275 million from fiscal 2008. This represents CAD2.03 per share.

We added some new global marquee clients during the year, booking CAD4.1 billion in new contract signings, or 106% of revenue. We invested CAD100 million in acquiring CGI stock and made debt payments of CAD131 million over the last 12 months. At year-end, we were in a net cash positive position of CAD66 million.

Before we take your questions, I would like to provide a little color on a few key items. With respect to bookings in the quarter, they are always lumpy. It is the nature of our business. As we have shared with you many times, that is why we look at bookings on a trailing 12-month basis.

Having said that, we remain committed to achieving a book-to-build greater than 1 and against this measure in fiscal 2009, we reached 1.1 times our revenue. Frankly, our bookings in the fourth quarter did not reflect some anticipated signings that have slipped into fiscal 2010.

With respect to revenue, a few quarters ago, we highlighted an industrywide slowdown in the SI&C business, which in our case impacted our Canadian operations. As clients regain confidence in their own business requirements, this spend is slowly returning with quarter four being the second consecutive positive reference point over the past six months. If this trend continues, we should see SI&C growth returning by the midpoint of fiscal 2010.

With respect to the balance sheet, our consistent ability to convert revenue into cash leaves us with significant flexibility. While we are pleased that the market has begun to recognize the strength of our operating model, we still believe that CGI stock is an attractive long-term investment. For example, if we look at valuation on a cash generation basis, we are trading on historical lows, less than our peer group and significantly below the highest valuations.

Accordingly, we continue to invest aggressively in our own share buyback program. Including October, we have now bought back approximately 14 million shares, or 52% of our total allotment under the current buyback program. Going forward, we can still acquire 13 million shares between now and February.

In addition to this accretive use of cash, we continue to also see significant opportunities in our funnel to invest in ramping up organic growth as we continue to look at accretive acquisition opportunities. Speaking of which, we have seen consolidation activity pick up once again this quarter. And for those of you who have been following CGI for a while, you know this activity is in line with our expectations. That is why our strategy has always included both build and buy. We believe that the most recent consolidation activity is a net positive for all CGI stakeholders as it opens up additional opportunities for us to attract new clients, talented professionals and new investors.

Finally, we have been operating under the same basic fundamental beliefs and quality focused model for more than 30 years. I want to reiterate that we continue to believe that our consistent ability to execute to this model delivers superior returns to shareholders over time, including through the most challenging market conditions as we have witnessed over the past 12 months. Accordingly, we remain committed to our strategic goals and our business model. Thank you for your continued interest and confidence in CGI. 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 passcode 6510622 until November 23. 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. Ruth, if we could pull for questions from the investment community, please.

(Operator Instructions). Scott Penner, TD Newcrest.

Thanks, just David mentioned in his text that the EBIT margins are partly a function of ongoing investments in productivity. But the Canadian EBIT was quite a step up from Q3. Maybe you could just discuss a little bit about how much of this increase may be permanent versus one-time cost actions?

Okay, thank you, Scott and let me begin answering that by saying I was very, very pleased with the bottom-line expansion in the quarter. If we look at Canada, a number of things going on. As Dave mentioned, we have constantly been taking opportunities throughout the year to restructure addressing things like real estate, surplus real estate. And also over the year, of course, we have been trying to get a better balance between [force and load]. And if you look at the Canadian operations, we had a significant impact resulting from a slowdown in the SI&C business. So it has taken us some time over the year to actually align force the load. So what you are seeing is a better alignment between force and load. It has had a positive impact on utilization, as has the summer vacation period. The heavy vacation period impacted the top line, but also on the bottom line, it helped drive better utilization.

And then finally in Canada what you are also seeing, you recall a couple, three quarters ago, we didn't renew a low-margin contract and what you are seeing in this quarter is an improvement in the mix of the revenue as a result of that contract not being in the quarter.

So all in all, a very strong quarter on EBIT, not only in Canada, but also in the US. And as I have said numerous times before, I don't believe we have a ceiling when it comes to margins. It is really a matter of continuing to execute to the levers that drive higher profitability across the business.

Now one devil's advocate I guess read into it would be that you're [still playing] the Canadian EBIT against ongoing reductions potentially in revenue. Maybe you could just speak to this a little bit.

Well, again, no, I think what we are seeing is that -- I pointed out in the script that we are now seeing a couple reference points where the revenue is actually coming back. If I just looked at the Company in total, the quarter two on a constant currency, we had negative growth of 5.6, quarter three was minus 4.5 and quarter four, it is 1.4. So not that I am making predictions here, Scott, but I am suggesting that we have a couple reference points, which tend to confirm what I said probably six months ago that we may have bottomed out in quarter two and the revenue and the SI&C is starting to return.

Now as that returns, in fact, it will also help us drive up utilization and give us more revenue over fixed costs that should continue to have a positive impact on margins.

Okay, thanks for that. And lastly, if I may, David, the impairment that was mentioned in the segment of US results for the quarter, is this, for instance, a capitalized system that was written off and whether the charge accounts for the decline, in what looks like the decline in the amortization for the quarter? Thanks.

Okay, in regards to the impairment, Scott, of course, every year, we have to go back to and we look at all the business solutions, we look at what the cash flows are that we are expecting to see generated from those. In this particular case, there were some enhancements that we had started about two years ago and that is when the market was relatively strong, especially in the financial services space. We had a systems-oriented architecture. We were working with clients as to what they saw toward the future for some of these products were going and there were enhancements that they wanted to have included in those products. So we started work early on to get things ready and get those in place.

Now that with the financial crisis, with the meltdown that took place, clients have refocused, they are not interested as much as they were before in some of these enhancements. Consequently, when I looked at what the cash flows were going to be for those particular little add-ons within those larger solutions, I didn't see any cash flow within the next two years coming in. And consequently then, we had to take the write-down.

Okay, so that is in the amortization for the quarter?

Yes, it is.

Okay, thanks very much.

Richard Tse, National Bank Financial.

Hey, Mike. Nice job on the profitability in the quarter here. Just a question on the bookings side. Can you give us a bit of color on the nature of some of the slippage? Does it have to do with pricing or something else that may be at hand here?

It has absolutely nothing to do with pricing. As I tried to emphasize, Richard and I have been probably CEO now coming up for four years and I have been like a broken record on this is that bookings are lumpy. It is the reason we don't look at them quarterly. Essentially in the summer period, as you can imagine, it is difficult to get some deals closed. And the other thing that is impacting a little bit, we are doing much more business now in the US federal government space. So the size and magnitude of some of those deals, it takes more time to get approvals of those.

I'm still very confident that on a 12-month basis our bookings will be greater than 1. We like the funnel we have. We like the opportunities. But as I mentioned before, I do not want to incent my people to artificial quarterly dates. I don't want to drive pricing concessions or people to accept terms and conditions that are not balanced and fair to the client and ourselves merely to make a quarter-end. So I would sooner take the route of explaining that these things are lumpy and I am quite confident that bookings on a 12-month basis will be greater than 1.

Thanks.

I think the second thing is, also, as we mentioned before, it is difficult sometimes to get clients to actually announce deals. I would say in the financial sector, it is getting tougher. Financial companies, as you know, are under a lot of scrutiny these days and competitive pressures are also strong. So in some cases, we are not able to announce the deals. We continue to look if there are ways and means of bundling these so that you get an idea. But I think we did identify that the vast majority of the bookings continue to come out of the government and financial sector. We still see good opportunities there in the year ahead. We have got some good visibility on some opportunities.

And on the M&A side, obviously the sectors have been very active lately. Can you maybe give us a bit of an update what is happening there in terms of valuations in the market and maybe some idea of the areas that you are focused on here?

Yes, well, it gives me the opportunity I guess to describe a little more. My own feeling is that, obviously, as I said in the script, this is not unlike what we have been predicting and working with for years. We always believed the industry would consolidate and hence, our strategy is to be a consolidator. My own view is this consolidation is good from a number of perspectives. I think for clients now, there is getting to be a very clear choice between having your work done by an independent technology agnostic pure play services player like CGI and there are fewer of us or having your work done by a firm that is bundling hardware, software and services. So I think the choices are getting much more clear and I think that is good news for us.

On the talent side, as I mentioned, we are already starting to attract some people who want to be in the services business, working with clients to bring solutions and are not interested in pulling through hardware. So we see the opportunity to attract people from companies like Perl and ACS as an example and in fact, EDS.

And finally, for investors, I think also they have a clearer choice and I think the valuations are now reflecting hopefully some of the fundamentals of the firm. I mentioned though in the comments just on a cash basis, I still feel that, amongst others, that we still represent good long-term value and hence, we continue to aggressively buy the shares.

As far as opportunities, we don't believe this restricts our ability to play. I think, in fact, also sellers have to make a choice of where they want their companies to go and they have a clearer choice. Do they want to take their services company and roll it into an integrated firm where services is an adjunct to the core business? Or do they want to partner and roll their firm and merge with a company whose mandate is services? So I think it is also stimulating a lot of discussions. We continue to work our target list and have discussions and remain optimistic that there is deals for us to do that are accretive to GAAP earnings per share in the first year.

Okay, great. Thank you.

Tom Liston, Versant Partners.

Thank you and good morning. Just on the last point, Michael, with Pro's multiple being reasonably high, has that extended any cycles, if you will, on the acquisition front? As you are coming to a head on valuations, perhaps they took a second look because of some of the activity out there?

Well, I think -- Tom, thanks for the question -- I think most potential sellers we talk to realize the Pro premium of, what was it, 68% is a Texas anomaly. That is not likely to set a benchmark for valuations and it was certainly a very high premium. So no, I don't think that has impacted discussions.

As I say, I think just the sense that the industry is going through another consolidation spurt is certainly causing potential buyers and sellers to look at their strategy and to look a lot closer at doing something, which is good news for us in terms of having more folks thinking about it given the activity that we have seen with ACS and Perl.

And in Europe, there was -- obviously the margins were among the lowest they have been in a bit and there was some commentary about some restructuring there. Where do we see those margins shaking out over the next few quarters?

Well, again, I think in Europe, we did some restructuring in the quarter. I think the European economies actually kind of went into this economic downturn a little later than North America and are probably trailing North America in terms of coming out of it. So we are seeing a bit of an impact there. We did some restructuring there in the quarter and we remain confident that, when I look at the funnel, we have got some good deals in Europe that will add to the top line and bottom line as we go forward.

Europe is an important piece of the overall puzzle. There is a lot of transatlantic business there between cities like London and countries like Germany and North America and particularly the US. And again, we are now organized to take advantage and have the ability to service some of our new global marquee clients much more seamless between the US and Europe.

Great. Thank you.

Paul Steep, Scotia Capital.

Great, good morning, guys. Mike, maybe you can talk a little bit about where you have been shifting staff to and what servicers actually have been getting higher levels of interest, recognizing it's a tough environment, but you've clearly been adding people in certain areas. Where are those?

Well, I think there are two things going on. In some cases, we are adding, Paul. In other areas, we are reducing in terms of we are getting I guess what is referred to as nonlinear growth. We are able to drive higher productivity and better efficiencies given the constant restructuring mentality we have. Clearly, the areas that still are seeing growth is the government business. The US government business continues to be strong and a number of the deals that we have won and the deals that we are working on will require additional staff in areas of our ERP systems, like momentum, some of the work on areas like HUD and healthcare. These are areas where we continue to staff up on.

We are also, as you know, may have seen -- I guess this quarter, we announced our 14th global delivery center, another one in the US in Troy, Alabama. These areas are -- and this strategy, we believe, is the right one. We have certainly met our targets in Southwest Virginia. In fact, blown right through there. We are out of space there, had to add a second building and decided to open another site in the US.

So I think it is a matter of the financial vertical, the government vertical, also looking to build more capability in some of the lower-cost geographies in North America, Europe and of course, to continue to expand our Indian operation. We have seen significant growth in India. This year, we opened a third center over there and probably have added, I don't know, 400 or 500 people plus in India in the last 12 months.

Great. Just one clarification, we have sort of danced around the adjusted EBIT number of little bit here. Maybe you could talk about the realignment, which is obviously ongoing, but in terms of the real estate process, are we basically done that and have all the savings sort of filtered into Q4, recognizing you guys always look to move the numbers higher?

Well, I don't think on -- I guess again I don't think you are ever done. I wish there was such a thing as being done, but I don't think there is because the business continues to change and because our roots are deep in the outsourcing managed services business, candidly what we have tried to instill here in our operations and our people is what we refer to a constant restructuring mentality. It is one of the reasons we very seldom, if ever, have a big bang restructuring, Paul. The idea is that when we see an opportunity, move on it and of course, we are constantly trying to think about how to do something better, add more value, lower costs, better quality. So our strategy here is to, when we see an opportunity to drive efficiencies, productivities, increase competitiveness, we move on it. And then over time, what you see is the compounding impact of that in the margins.

The second thing that we have attempted to do over the last two or three years, and I think you have seen that, is that our consistent -- our ability to consistently deliver superior EBIT numbers and net margin numbers is forming a nice consistent pattern here. I have kind of lost track, but we must be up to eight or nine plus quarters where our margins have not -- our net margins have not fallen below 7%. And as you know, we have peers whose two and three-year plan called for their goal to reach 7% at the peak.

So again, this is how we attempt to manage the business is to look for consistency, move where we see restructuring opportunities, continue to balance and look for improved quality and the mix of our revenue and then as a result, we are able to, as I mentioned earlier, is to make sure that we are generating significant cash flows that allow us to have great operating flexibility in terms of going after our strategy or in fact, taking these restructuring charges and moving on.

Okay, great. Thanks, guys.

Mike Abramsky, RBC Capital Markets.

Yes, thanks very much. Mike, can you just give us a little bit more color on the deferred or delayed deals that you referred to in your commentary? How do we sort of get to maybe give us -- if you can give us any perspective on how we can get a sense as to -- and we do I think all understand you have been very good about talking about lumpy bookings, so it is not really as much that issue as how do we sort of get a sense that this is not going to be protracted for several quarters or whether some of the positive indicators that you are seeing will play into not only the capture of those deferred deals, but also just to rebound perhaps in things like Canadian momentum?

Well, again, Mike, I am not sure what more I can give there other than say -- maybe the best way to help you is to look at some of the processes. In order to close a deal, obviously you need a buyer/seller. You look at the summer period, there are a lot of people on vacation that are required to close a deal. It could be from the business side to the legal side to the financial side.

You then overlayer the mix of our business and we are, in this downturn, we have a lot of business coming out of government and the financial vertical. So if you take the normal process that I described there, you overlay summer and you overlay government, you now see a series of compounding possibilities for delay.

On top of that, if you layer in the size, Mike, of some of the deals we are now working on in this Company -- I mean years ago, a CAD25 million, CAD50 million or CAD100 million deal would be a very significant booking. These days, we are working on much larger deals and therefore, you take the compounding factors that I have said, you overlay them in the summer period and then you overlay the economic times and the scrutiny that folks are putting on to get a deal through and you very easily get into a situation where bookings slip between quarters.

The best I can do is to say that I have tried to explain to the best of my ability over the last three or four years how bookings work. We have been clear on the targets in terms of saying we are committed to a book-to-build greater than 1. We have delivered a book-to-bill greater than 1 and my expectation is that, in the next quarter or so, you will see the bookings level out here or return to a trailing 12-month level that is greater than 1.

And were these deferred deals largely in Canada or in the US and were they concentrated among a few customers or a broader base than that?

They are spread, but obviously the US is a big area where the deals are just by the nature of the market larger and therefore, I would say it was a little more concentrated in the US.

Okay. But you were still able to achieve very strong constant currency growth despite therefore those US impacts. So what is off -- like where is the offset? Is it in your traditional business or in new business?

Are you talking bookings now or --?

The 8% constant currency growth, the US is very strong.

Well, sure.

So where is the offset I guess coming from?

Are you talking about -- you are now shifted to revenues, so if you look at --.

Yes, sorry.

Yes, I was talking bookings with you. So if you look at revenue, the offsets were primarily in Canada and as I said on Canada, we have constantly -- we have now two or three reference points where we have come off the bottom, Mike. So we are reducing the negative growth in Canada as the SI&C business returns, but we are still operating at a negative growth level in Canada, but it is slowly returning. And this is where I say hopefully by mid-2010 here, we are going to see this thing cross over into a positive territory, which then, combined with the growth we have in the US, should take us as a company above the line here.

And lastly, you have done a -- you obviously -- a strong emphasis on your buyback, so is this sort of an emphasis on your part that that is a better use of cash than kind of holding your fire for some of the M&A activity that you continue to pursue?

No, I think you should read it that we can do both. We have enough cash generation to continue to buy back our stock. We know it is accretive. We still believe that our stock, by many indicators, represents excellent long-term valuation and opportunity for shareholders. And then again, Mike, we do have our line of credit that is secured to 2012, CAD1.5 billion. And when you look at that, the cash generation, we feel confident that we can still do both.

Okay, thanks, Mike.

Okay. Have a good day.

Paul Lechem, CIBC.

Thank you very much. Good morning. On the Canadian contract, you mentioned the low-margin one, which was not renewed. Can you give us the vertical market that that was in? And also, when was it canceled? When is the sort of annual anniversary of the cancellation date coming up?

I think we disclosed that, what, three quarters --?

Q2.

Q2.

Yes. It was a January through December timeframe.

Okay. And what vertical was that in?

We had not disclosed that.

Okay. On another Canadian contract, Innovapost, in your filings, it seems that revenues were down a little bit in 2009, but deferred revenues are up. Can you talk a little bit about that?

Well, again, any given year, what happens, Paul, is clients -- depends where they are on the cycle in terms of investing in either modernization or new project work. So if you were to see the same display in any other large client, it is -- there is a cyclical view there. As well, in a lot of these clients where we have the infrastructure work in particular, of course, we are all always committed to driving down costs year-over-year, which then brings down revenue. On the deferred revenues question, I am not sure I got that at the tip of my fingers.

Maybe I can circle back with you, Paul, after I check with David and Francois after the call.

The Innovapost contract though, there is nothing unusual going on there, it is still as originally laid out?

Yes.

Lastly, just on the EPA announcement you made subsequent to quarter-end, the blanket purchase agreement, can you talk a little bit about this? That is just one of a few of these types of agreements you have in the US. There's the one with GSA Alliant and the [Navy] one, I believe, C4D. Can you talk about where you are at? Have you won any businesses under these blanket purchase agreements or how do you go about actually then leveraging the agreement?

So that's a good question, Paul. Again, the way one ought to look at these is as we -- of course, the goal we have is to constantly get ourselves on the right vehicles and to have more hunting licenses if I can respectfully use that term in terms of getting more opportunity and visibility here to bid on work coming out of the US federal government.

If you look at Alliant as an example, what is particularly interesting, sometimes these hunting licenses are by departments, so the EPA one is a good one. There was one incumbent, I believe, on that contract and now there are seven that are hunting for close to CAD1 billion. And if you look at -- but it is all within the scope of the EPA.

If you look at Alliant, it is a $50 billion US hunting license and it is a vehicle that crosses departments. So that was a very strategic win for us in terms of getting on that vehicle, it is a five-year vehicle.

Having said that, we are also very diligent on the mix of opportunities that come out of there because on a vehicle that large, there will be a lot of things that will come out of there and of course, you want to save your firepower in terms of bidding costs and capabilities to align to those ones where you have the greatest opportunity to win because, as I say on these vehicles, especially one that big, there would be a lot of opportunities come out of there.

So that is kind of where we are on those. As far as the process, we are right on schedule in terms of targeting and winning new vehicles. And at a high level, they are actually -- we are gaining share in the sense of getting on vehicles that we weren't on before or dislodging competitors that were on the vehicle alone. And what we will see over the next number of years now is, as the opportunities come out of there, we will bid them and presumably win our fair share, which will again grow the top line.

But again what we are doing there is we are strategically picking the vehicles, picking the areas we want to operate in. And then over time, that will continue to move up the bookings and the revenue.

Okay, but there is nothing specific out of any of these hunting licenses, as you say, which -- there is no specific jobs you have been awarded yet on the ones you have been (multiple speakers).

Not on those two. Not on those two yet.

That's it for me. Thank you.

(Operator Instructions). Eric Boyer, Wells Fargo.

Thanks. Just a quick question, a follow-up on the margins in the quarter. Could you just quantify the seasonal impact the vacations had on the strong performance?

Dave, did you quantify the bottom line? I guess we quantified the top line.

Yes, it was about a CAD23 million to CAD24 million impact on the top line.

I guess the best way maybe to express it, the utilization rates probably moved up a full point just given the impact on vacations, Eric, which is very significant on a company of our size.

Right. Yes, I am just trying to figure out, moving forward, how to look at the margins, how much of a seasonal impact there really is there in your fourth quarter.

Yes, I guess it was one of a number of factors, as I said. I think the other one, maybe even more significant, if you look at where we saw the rapid pullback in Canada of the SI&C business in the second quarter, our fiscal year. We have had to try and balance force to load and it has taken us a number of quarters to get the proper match. So I think that may, in fact, be a more significant impact than the seasonality of the vacations.

Right. Okay. And then could you I guess talk a little bit about any early client discussions you have had about 2010 IT budgets?

Yes, it is a bit of a moving feast, Eric. I would say that, depending on when you speak with clients, they are either a little more optimistic or a little more cautious in terms of their business. I guess the best way to describe it is I think they will keep the maximum flexibility as long as they can before they commit to investing here until they kind of, as I say, see how their own businesses are performing in position for next year.

Having said that, and I have said that before, sooner or later, you have to continue to grow and invest in your business. And when you do that, it does require technology and again, that is where the real opportunity lies for us. Our sense is that fiscal 2009 was the bottom and that fiscal 2010 should be obviously better than what we have seen this year.

Great. Thanks a lot.

Naser Iqbal, Salman Partners.

Thank you and congratulations on the quarter, guys. That was a very strong earnings quarter. Not to beat a dead horse, but I well anyways, just from the margin, -- so in terms of like going forward, is this a new paradigm or should we think somewhere back in like the 11.5% to maybe 13% adjusted EBIT range is kind of a go-forward level?

Well, not to be a dead horse, Naser, but I guess I have tried to explain again on margins and on margins, there is a series of levers. Every company has them. I don't think we are any different, but what is different about us is our ability to focus and execute against those. And again, margins will fluctuate by quarter, but again what we are trying to do over time is to deliver consistently high margins and obviously, following that significant cash flow, which are the two drivers that you need, the fuel you need to drive a build-and-buy strategy. And what you are seeing here on any given quarter is some of the impacts, if you take out any seasonality, some of the impact of that ongoing focus and restructuring on costs and productivity following through the P&L to the bottom line.

As I said to you before, we don't view margins from a prospect of having a cap. What we see is our ability every year to continue to get better. Again, one of the areas that I highlight is our ability to deliver projects on time and on budget. To the extent we have a margin leakage or we have overruns or write-downs, this obviously hits the P&L. And then fortunately, in our business, it is a lot more common than one would think. But over the years here because of our commitment to quality, we tend to do much better and we have a continuous mindset to try and catch any of these project issues sooner and get to them.

The other areas that we continue to focus on are mix of revenue. We have some areas of the business where the margins are better than other areas. We attempt to drive higher growth in those areas, which drives the mix up and those areas that are low performing, we are working diligently to improve them and we are pleased with the improvements we have seen this year. A number of the businesses that were underperforming have got better as the team has been able to invest and focus on it.

So I can't give you a definitive number going forward other then again share with you the philosophy and the economic business model that we drive to and again --.

That's great. That is very helpful. And I guess maybe just a second question is like, on the top line, I mean you mentioned that you are seeing some signs -- everywhere people are more encouraged. If we ex out the effects of the currency, going forward, do you think your revenue growth is going to be growing in line with GDP a little bit faster than that? Or how should we think -- you have this strong backlog, you are seeing the momentum and the trend going forward improving. I mean just how should we think of the growth in revenue?

Well, maybe a couple comments and it gives me an opportunity to speak to it a little bit. I think, first, currency has an impact on our top line, but not our bottom line. For the most part, as you know, we have natural hedges and then I think the MD&A is kind of clear. We have built in more overt hedging strategies to protect us on the bottom line.

On the top line though, if I just look at the first quarter that we are in now versus the first quarter last year, I think if you look at last year, the FX exchange day was probably 120 and we are tracking at 107. So that alone is CAD50 million downward pressure on the top line last year versus this first quarter. So currency has a big impact here in terms of the top line, but as I say on the bottom line, we have been able to address it.

As far as constant currency growth, as I have said I guess two or three quarters, the thing that we are watching here is we feel good about the US operations. European operations again, although it is smaller, we see opportunities there. In the Canadian operation, it is really tracking the return of the SI&C or more discretionary revenue coming back. And we like the trend, we have got now, as I say, two reference points. So as that crosses over, we should return to more traditional growth levels here in the mid-2010 timeframe.

Okay, great. And then just an admin question. David, for the amortization quarterly going forward, should we expect it to go back to the CAD45 million, CAD47 million a quarter?

That would be a very fair assumption.

Okay, great. Congratulations and thanks again, guys.

Ralph Garcea, Haywood Securities.

Good morning, guys. Just a couple questions. One for David I guess first, on the DSOs, what is really driving it? I guess you are down below 40 now for the first time. Are you delivering results quicker that governments are paying quicker or do you have processes in place that you are able to sort of bring it down below 40? And can you keep it here because I mean it added quite significantly to the cash flows?

Well, as a finance person, you can understand that I am really keen to try to keep it below 40. Whether or not we can, that is a slightly different matter. Some of the discipline, some of the actions that we have done are very simple. Things like when we have a large invoice going out the door, making a phone call a few days later to make sure that the invoice got to where it was supposed to go. If there is any approvals that are required or any special acceptances that have to be signed off to accompany that invoice, we can always inquire have we got all of those in place. If we don't, by inquiring early, we can find out if there is an issue, we can get on top of it.

So within 30 days when we are expecting to have the payment coming back, all of the administrative details behind supporting it are all in place. And we have noticed, even with our CGI federal friends, looking at the US government space, they have dramatically improved their DSO year-over-year, even quarter-over-quarter. And again, it is just following on little details like this, just making sure that the invoicing is going out when it should be going out, that it is going out clean and following up to make sure it doesn't fall on somebody's desk and stay there for any inordinate amount of time. And we have some good accounts receivable reporting. So we are able to watch it and if something looks like it is starting to slow down, we are able to make a phone call and get on top of it. So it is just some good discipline all around.

Okay, thank you. And then I guess for Mike, it has been two years in a row of CAD4 billion plus in bookings. How does the funnel look going into 2010 versus let's say 2009 or even 2008 when things started getting bleaker? Would you say it is 50% above or if you can just give some color on the funnel?

Yes, I guess the biggest positive growth in the funnels have been in the outsourcing side or what I call managed services and I now use managed services outsourcing kind of interchangeable because on the government side, it is considered probably more appropriate to talk managed services. So that funnel has clearly doubled if I look at the -- going into 2010 versus 2008 as an example and it is up probably 50% plus from 2009. So it continues to grow.

That is probably driven by two things. One is just the general market conditions. As you know, managed services or outsourcing is countercyclical. And the second area that is growing that is the ability of our former AMS colleagues or US operations that have now begun to aggressively and successfully embed managed services into the offerings that we have in the United States. So the combination of those two factors is moving up the opportunities primarily in the outsourcing funnel.

And given those relationships, are the sales cycles getting shorter now?

Well, part of the thing that balances that is also the size of the deals. They are bigger deals. And when they are in government, they do take longer because there is more checkpoints on authorization. But the good news is they will get there and hence, our continuing confidence that we can do a book-to-bill greater than 1.

Okay. Thank you.

Operator, I think we will have time for one last question.

Scott Penner, TD Newcrest.

Thanks, just, Mike, the bookings in Q2 were obviously well above trend and I think you've normally spoken about a two to four-quarter lag. Are you seeing some of those deals actually start to ramp up or are people delaying?

Scott, you ended up with the first and last question today, so congratulations. I think one of the things you -- again, there is probably three comments I would make there, Scott, without pulling back the actual bookings of that quarter to look at them, is again, remember, in some cases, our bookings, they are renewals. Therefore, what happens is that growth is spread over a period of time as it is with managed services.

The second thing, if it is Tier 1 infrastructure, it does take, in some cases, six months or so before you actually see the top line. And the third aspect is if it is SI&C, you do see it quicker. So yes, I think what is offsetting it so that we can see -- you are clearly seeing it in the US where the growth rates are very, very strong so that business is coming on. Where it is being masked at the company level is that we are still working our way through the downdraft that we experienced in Canada as a result of the cancellation and not renewal of the one contract there and then compounded by the temporary pullback of SI&C.

So when you adjust for those factors, we are seeing it come through and it would be much more visible at the company level as the Canadian numbers return to more traditional levels.

Thanks. Just lastly, one topic that wasn't touched on is the telecom vertical on a constant currency basis I think in the MD&A was down 29% year-over-year and certainly part of that is BCE, which you don't want to talk about. But is the general outlook in the telecom business now to -- we should start seeing growth in the coming year?

Well, the telecom sector generally I guess for you guys that cover it as well has been a challenging vertical. We have a lot of capabilities in telecom and we are still very confident in that vertical. I hope it has bottomed there. I think we are seeing signs where telecoms are continuing to invest more. Certainly a lot of activity in Canada now with the new network and areas that companies will invest in in terms of driving out differentiating products and that type of thing. So I am -- again, when I come back to say, in Canada, we hope that the SI&C business will start to return. That would certainly also apply to the telecom vertical in Canada and in fact, in the other geographies as well.

Great, thanks very much. Good luck.

Thank you.

Thanks, Scott. Thank you, everyone, for joining us today. We will see you at the end of January for our next quarter's results and our annual general meeting. Thank you.

Thank you. The conference call has now ended. Please disconnect your lines. Thanks for your participation.