CGI Inc (GIB) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the CGI second quarter 2010 results conference call.

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, Theresa, and good morning.

With me to discuss CGI's second quarter fiscal 2010 results 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 a.m.

on Wednesday, April 28th, 2010.

Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q2 MD&A, 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 in both our MD&A and press release, as well as on CGI.com.

We encourage our investors to read it in its entirety.

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

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

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

I will turn the call over to David first to review the financial results for the second quarter, and then he'll pass it over to Mike, who will discuss a few strategic highlights.

David?

Thank you, Lorne, and good morning.

I am pleased to share the -- sorry.

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

Revenue was CAD 910.4 million.

Foreign exchange fluctuations negatively impacted revenue by CAD 70.9 million, or 7.5% compared with the same period last year.

When adjusted for this, year-over-year growth on a constant currency basis was 3.5%.

Our EBIT margin strengthened in Q2 to 13.6% from 11.3% in the second quarter of 2009.

Earnings from continuing operations in Q2 2010 were CAD 81.6 million, or 6.5% better than the CAD 76.6 million reported in Q2 of 2009.

On a comparable basis, the year-over-year improvement in earnings from continuing operations were CAD 12.3 million, or 17.8%, when excluding the benefit of a CAD 7.3 million positive tax adjustment in the second quarter of 2009.

Our earnings margin from continuing operations was 9%, up from 8.1% in Q2 of fiscal 2009.

As there were no activities related to discontinued operations in the quarter, our net earnings of CAD 81.6 million in Q2 were the same as our earnings from continuing operations.

Diluted earnings per share in the second quarter were CAD 0.28.

This compares with CAD 0.25 in the same period last year, or an increase of 12%.

Here again, when we exclude the -- I'm sorry -- when we exclude last year's positive tax benefit, the improvement was CAD 0.05 per share or 21.7%.

We generated CAD 125 million in cash from operations in the second quarter, or CAD 0.42 a share.

Against a target of 45 days or less, our DSO at the end of Q2 was 35 days, an improvement of 7 days versus last year.

We have remained focused on improving our DSO and our efforts over the last year continue to be seen in our cash management performance.

In the quarter we acquired 9 million shares of CGI for CAD 131.1 million at an average price of CAD 14.56 per share.

Under the normal course issuer bid renewed in February, 3 million shares were repurchased.

This leaves us with 22 million shares which can be purchased over the remainder of the program, which expires in February 2011.

At the end of March we were in a net cash position of CAD 35.3 million and still have a CAD 1.5 billion credit facility in place until August 2012.

And for the last 12 months our return on invested capital was 16% and our return on equity was 15.5%.

Now, I'll turn the call over to Mike.

Thank you, David, and good morning, everyone.

I am very pleased with our strong and improving performance in quarter two, as well as the positive trends and momentum achieved throughout the first half of our fiscal year.

In addition, our ability this quarter to grow our revenue by 3.5% on a constant currency basis is another significant milestone.

We continue to see a gradual return of our systems integration and consulting business, coupled with strong bookings which have started to translate into revenue.

This growth has been realized from our North American operations, which grew by 5.7% at a constant currency basis.

In the US, at constant currency we grew by 12.3%, demonstrating the ongoing strength of the government and healthcare vertical, as well as our ability to create and seize growth opportunities while increasing our recurring revenue and backlog in this key market.

In Canada we have returned to positive revenue growth, 1.3% in quarter two.

As anticipated, each quarter gradual improvements have been seen as our long-term outsourcing contracts begin to invest in systems integration and consulting projects.

We expect to continue seeing this gradual ramp up throughout the balance of the year.

With respect to Europe, the European economy is lagging the North American recovery by six to nine months.

As a result, and not dissimilar to our European domestic peers, we're experiencing a short-term impact in our operations.

To address these adverse market conditions, we continue taking proactive measures which will better position us to take full advantage of the economic recovery as it occurs.

Globally, quarter two bookings remained strong at CAD 1.13 billion, or 124% of revenue.

89% of this quarter's bookings came from our two largest verticals, the financial services sector, as well as government and healthcare.

As a reminder, we consider bookings on a trailing 12-month basis to be an effective proxy of future revenue.

And by that measure, our book-to-bill is 117%, or CAD 4.3 billion in bookings over the last year.

After six months we have reached CAD 2.7 billion in new contract bookings, or 149% of revenue, which contributes to our growing sense of optimism around a gradual business recovery, and reinforces our confidence in our profitable growth strategy.

We continue to have a healthy backlog of more than CAD 11.4 billion in long-term revenues, flat sequentially despite the ongoing and significant currency headwind.

Our consistent ability to execute the leverage necessary for margin improvement continues to be seen in EBIT, which reached 13.6% in quarter two; in our net earnings at 9%; and in earnings per share, which grew by 21.7% year over year.

As a reminder, some of the levers we focus on to improve our margins include maximizing utilization rates; optimizing the deployment of our global delivery model; minimizing margin leakage on projects; improving the quality of our revenue mix; and proactively restructuring our operations to improve productivity.

While our margins remain the most consistent and the best amongst our North American and European peers, we remain committed to better executing against these levers and, in the process, gradually improve our margins and earnings per share over time.

As we reported, we continue to generate very significant cash from our operating activities.

In fact, over the last 12 months we have generated CAD 654.5 million in cash from operations, or CAD 2.15 a share.

We continue to prioritize the deployment of our cash with a commitment to making the most accretive investments for shareholders, including maintaining the flexibility to continue buying back CGI shares.

This commitment to creating shareholder value is further reinforced by our return on invested capital which, over the last 12 months, is running at 16%, ahead of most of our peer group.

In summary, our confidence in the business recovery has been strengthened by our second quarter results, as well as the size of the opportunities currently moving through our funnel.

Let's go to the questions, Lorne.

Just a reminder that a replay of this call will be available either via our website, or by dialing 1-800-408-3053 and using the pass code 1215568 until May 12th.

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

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

Theresa, we're ready to take questions from the investment community, please.

Thank you.

(Operator Instructions.) The first question is from Scott Penner of TD Newcrest.

Please go ahead.

Thanks.

Mike, just on the organic growth, just on our last quarter you commented that you would expect to trend back to normal levels of growth and to trend towards positive organic growth.

Now that you've posted a relatively strong organic growth year over year, it sounds like you still think that there's upside for the next few quarters on a year-over-year basis.

So, I just wanted to ask about that.

Yes.

I think, Scott -- thank you for the question.

I certainly believe that in North America that we're seeing the recovery in the marketplace and it's showing up in our North American operations.

I'm not predicting that it'll be straight up growth here, but I do see a lot of promising signs.

And we actually posted organic growth one quarter ahead of what I had originally anticipated.

So, the signs are looking much more positive.

The funnel is healthy.

Deals are starting to move again, especially in North America.

So, I remain guardedly optimistic that the worst is behind us in North America.

And just -- you had mentioned the European peer trends.

There are -- it does seem to be stronger, or relatively strong bookings in Europe.

Can you give some idea of your bookings trend?

And then, I guess in general, does the weakness that you're seeing in Europe change your priorities as far as maybe moving a sizeable European acquisition up the list?

Well, I guess two questions there.

First, on Europe, I'd just remind you that it's about 7% of our revenue.

And what we're seeing in Europe, frankly, is maybe more severe than what we saw in North America a year ago, but it's -- beyond that, it's very comparable.

We've done a replan in Europe to get a bead on what the back half of the year looks like.

That replan would tell me, subject to other factors, that the back half of the year will be better than the first half, so that that could well mean that we're starting to bottom in Europe.

We did a little bit of restructuring in the quarter that, if you back that out, we would have had positive margins in Europe in the second quarter.

And we'll continue to take what action we need to do there to position ourselves to grow and to maintain our profitability.

Now, our bookings in Europe, again, we're feeling that they're coming back as well.

We announced a booking with the Polish telecom that was very significant to us.

They did a significant recalibration of the number of vendors and we ended up being one of very, very few, less than a handful, that they're going to work with going forward.

We got a nice piece of business there that is in the --in our sweet spot.

So, I see Europe gradually returning, much like North America.

But as I said, they're running about six months, nine months behind.

As far as an acquisition goes, no, I wouldn't say -- I mean, our priorities are still the United States and Europe.

We're very committed to both those markets.

They're big markets.

They're growing markets over time.

And again, my sense is, if we had a little more critical mass in Europe, we probably wouldn't be hit as hard in the sense that I'm trying to balance variable revenue against a fixed cost model in a number of countries over there.

So no, I would say it reinforces our build-and-buy strategy to say that those are the two key prime markets for us to grow in, both organically and through an acquisition.

Okay.

I appreciate it.

I'll pass the line.

Thanks.

Okay.

Thanks, Scott.

Thanks, Scott.

Thank you.

The next question is from Tom Liston of Versant Partners.

Please go ahead.

Hi.

Thank you and good morning.

Good morning, Tom.

Just on the acquisition theme, you obviously mentioned the relief to the Canadian dollar certainly helps you a lot.

Is the biggest area on the valuation side and perhaps a disconnect there, or is it just something else in the process that is taking some time to consummate that acquisition?

And does the Canadian dollar get you to a valuation point quicker such that maybe we can expect one in the near term?

Well, Tom, I guess there's a number of things.

First, the Canadian -- the currency, as I mentioned, is a two-edged sword for us.

It's put a lot of pressure on the top line.

It shaved CAD 70 million off this quarter alone.

But on the buy side, having a strong Canadian dollar is very significant in terms of a financial model when you're looking at an acquisition.

As well as low interest rates is another factor.

And of course, with our line of credit that's locked in to August 2012, we have some very good rates in there.

And that's another positive contributor here.

The issue, though, is not really financial.

As I said before, you've got to find the right target.

It's got to fit with the overall strategy.

It's got to be something where, when we make that investment, that we're clear that we can answer the basic question to the three stakeholders.

Why should this be a good deal for investors, why is it good for clients, and why is it good for the people in the firm and in our firm?

And so, that's kind of the acid test I use there when we look at that.

And we continue to look at various companies.

But again, we want to be as sure as we can that we can take on something that fits with the strategy, that can position us for the kind of growth and performance, frankly, that we've seen from the acquisition that we did with AMS.

I mean, I think if you look at our financials, it's been a very accretive acquisition for shareholders.

We've attracted and retained what I think is a world-class team of professionals.

And we've been able to bring to our clients many more capabilities as a result of the AMS acquisition, in terms of IP that we acquired through that merger.

But, on the other hand, we brought a managed service offering to the AMS client -- former AMS client base.

So, it takes some time.

You can only pick the peaches when they're ripe, Tom.

You don't want to get ahead of yourself there.

So, we're trying to be patient, but we're committed to our build-and-buy strategy.

We believe that we can deliver more value to clients, to all our stakeholders, if in fact we add capability and scale, especially in those big markets in the United States and in Europe.

If you look at our growth in the United States this quarter in constant currency, 12%, it's very significant.

So, if we had more firepower there I think we could actually do more.

Great.

And just on the bookings pipeline, I think the book-to-bill ratio was around 117% in the last 12 months or so.

And certainly, the last few quarters you've talked about a robust bookings pipeline and that's come to fruition.

Do we slow down a little bit here or do you still see a pretty robust pipeline over the next few quarters?

No, I see a good pipeline.

Again, I always give my disclaimer, Tom, is to say don't look at it by quarter, look at it a trailing 12 months.

But the reason I highlighted the six months is to say it's strong.

And I like the pipeline.

I like that things are starting to move a little faster than they have.

I think clients are kind of feeling a little more confident about their own financial situation.

As I had anticipated, they're trying to reinvest back in their own businesses to bring out new products, new capabilities to meet regulatory requirements, all of which thankfully require some information technology services.

So, I would say in North America it looks like we're on a good path here.

I believe last quarter you gave a year-over-year growth in the pipeline.

Can you give us a metric this quarter?

Well, I think I had said it was essentially doubled.

And we still see -- the pipeline hasn't backed off.

I mean, as we move things through obviously to a win, they move from the pipeline to the bookings.

But we're always refilling the funnel and I haven't seen a slowdown there, Tom.

Great.

Thanks.

I'll pass the line.

Okay.

Thanks, Tom.

Thank you.

The next question is from Richard Tse of National Bank Financial.

Please go ahead.

Thanks.

Mike, just a sort of a higher-level question on the strategy.

If you look at this company two years down the line, is there going to be sort of the equal contribution from all the geographies?

Is it going to be a government-focused IT services vendor?

Can you give us some color in terms of what Management and the Board is thinking on that front here, where you want to be?

Yes.

Well, first, we won't be a single pony here, Richard.

I mean, if you look at our strategy, we want to have capabilities to address the opportunities where they exist.

So again, our strategy is North America and in Europe is a vast majority of the IT spend.

If you look at the five verticals we're in, the vast majority, in excess of 80% or 90% of the spend is in those five verticals.

What you're -- so, you need to look at us not only short term, but long term.

We continue to build out the Company.

And one of the reasons we -- I think we're successful is, although we have a long-term strategy, we're very nimble and very opportunistic.

If you look at where we are today with the economy and the past pressures that the economy saw, we were well positioned because of our recurring revenue, because of our backlog, because of our long-term outsourcing arrangements, and because we're -- also we're over-weighted in both government and financial services, where the spend is either consistent, the most consistent, which is government, or in financial services where they spend more.

So again, I wouldn't be concerned to add more capabilities for example in the short term in financial services or government, even though that would make those -- either one of those verticals more dominant.

Because I don't look at it in the short haul.

I look at it in the long haul.

So, we're sticking to our original strategy.

When you talk about margins, margins will fluctuate by country, depending on a number of factors.

Some of them are macro.

But again, the general thing on margins that I keep reinforcing is that what we're -- we have a very good operating model.

I've made public the top five or six levers that we focus on to drive margins.

And I think we've demonstrated the ability to be very consistent.

I think we now have three years where our net margins are 7%.

We've now got five quarters where our net margins are 8%.

And remember, if I look back over the trailing 12 months, there may be one of our North American peers that has hit 7% once.

So, I think on margins, we understand.

We need high margins to generate significant cash flow, which is the fuel for the build-and-buy strategy.

So, when you look ahead, I think what you should expect from this company is a commitment to operational excellence, to go deep into areas where the return is the best for the shareholders, and to gradually and continuously improve our performance; top line, bottom line, and on the key metrics that are important to the three stakeholders.

Right.

So, I guess what you're saying is that you won't have a specific tie to a given vertical or region provided that it meets those underlying objectives.

Well, I think that's right.

Yes.

I mean, I think we -- you have to be opportunistic when opportunities present themselves.

And I think, again, even though we've become a larger company, the entrepreneurial spirit here is very much alive in terms of being -- moving quickly when opportunities present themselves.

So again, we keep our eye on the long-term strategy, but we're nimble enough in the short haul here to do what we need to do to be successful today and over the longer period of time.

And one final question.

In terms of the status of other contracts that may be coming up for renewal, can you give us a sense of where they are in terms of discussions, and whether there's any risk to the renewals of those contracts?

Thanks.

Our renewal rate is exceptionally high.

I would think it's probably one of the best in the industry.

Obviously, we don't discuss contract renewal discussions publicly.

We do that with our clients.

But I'm not aware or have anything on my radar screen that's coming up for renewal of any significance over the next year here.

Okay, great.

Thank you.

Thanks.

Thanks, Richard.

Thank you.

The next question is from Eric Boyer of Wells Fargo.

Please go ahead.

Hi.

Thanks.

Yes, Mike, you've had some great success with your initiatives to increase the existing contract profitability.

I think you call it capturing the margin leakage.

What inning do you think you're in in terms of achieving the EBIT benefits that you believe are possible?

You're switching to baseball, Eric, already.

The Canadians are still in.

We've got one more game here.

Look, I think it's a continuous effort.

I mean, it -- I would say, though, we had an update at our last meeting and the teams are making -- they're making some good progress on this.

And you are seeing it in the EBIT numbers.

I mean, Canada was at 18% this quarter.

And you're seeing it, but you'll see it gradually because two things happen there.

You work on the contracts you've already won, but of course you're always adding new contacts, Eric.

So, it's more of a journey than a destination.

But I would tell you my expectation is, over time, as we start to understand what are the factors, what are the variables that impact profitability of contracts, we continue to look at that very carefully.

We continue to put in new processes and new guidelines that will help us surface those issues more quickly and address them more efficiently.

So, it's not a program with a start and an end.

It's an ongoing component of a commitment to operational excellence.

It's part of the DNA here.

And what we did is put a real spotlight on this in terms of looking for ways to continue to drive up margins.

As I said earlier, when you're putting up the best margins in North America and Europe, you've got to look at everything to continually improve your business.

And this is an area where we continue to believe there's significant opportunity for margin expansion.

Alright.

Then you called out system integration and consulting, that type of business slowly coming back.

Could you give us a little bit more details around the type of the projects that you're seeing within that type of work?

Well, again, some of the projects, as I mentioned, you've got a number of things going on here.

You've got businesses who, as I said last year, kind of hit the pause button there and really deferred a lot of that SI&C work.

But some of the drivers there now, I mean, people are -- clients are saying, look, I've got to do something to bring down my costs so you have a number of them that are really driven at cost.

There's things in the government space, as an example, where we're going to see more work where they're looking to put in new processes, new systems that will help them manage costs.

There's also just changes to existing systems, where there are short-term SI projects where someone needs to make a change to add a new product line, new pricing, regulatory changes.

So, I would say there's a--.

Health.

Health is another area.

We're seeing a lot more activity in our healthcare vertical.

In fact, probably on one of the calls we'll try and feature a little bit more.

We kind of bundle that with government but, when you see some of the announcements that we've came out with recently, you can start to piece together that our healthcare business is ramping up, not only in Canada, but big time in the US.

And I would say that's even before you've seen any impact of the new healthcare initiative in the US.

So, there's no silver bullet out there in terms of people saying I need this tomorrow morning.

But I would say that there's more of a return to what I would say post-recession type behavior, to say we have to invest, we have to continually improve our operations, and we need IT services to do that.

Alright.

Thanks a lot.

Thank you.

Thanks, Eric.

Thank you.

The next question is from Jason Kupferberg of UBS.

Please go ahead.

Thanks.

Good morning, guys.

I just wanted to follow up a little bit on Europe, if I could.

Mike, I think you mentioned some proactive measures over there to help boost things a bit, and I wanted to get a sense of how much of that is on the cost side versus the revenue side.

I think you mentioned a little bit of a restructuring in fiscal 2Q, so I'd like to get a sense of the size of that and if we do have the potential for more of that in the back half of the year.

And then, also, kind of on the revenue side, are you making changes to the salesforce or any other personnel over there to help try and perhaps catch a little bit of a bigger piece of what seems to be kind of a shrinking pie for everyone in the current macro environment over in Europe?

Sure, Jason.

So again, let me just start with exactly what we've done and the major elements.

And again, remember we've been through this many times in our business career.

And the best thing to do is start with the "what is" situation.

So, the first thing we did is sat down with our team over there and we did a replan.

In other words, we recalibrated the outlook for the last half of the year, both in terms of pipeline, in terms of revenue, in terms of margin.

Against that, we identify initiatives that will position us to take advantage of the uptick in the economy when it comes.

And it will come.

So again, we're not going and cutting business development people.

In fact, we're adding business development people, which has a short-term impact on the bottom line, but the ROI over time is very significant there.

And part of that strategy on the business development is linked to the organization change that we announced earlier in the year, where Donna Morea has not only the US operations, but she's also got Europe.

And what we're focusing there is attempting to bring and gain a larger wallet share of existing clients that straddle both Europe and North America.

And to do that, we've had to invest, and will invest, in more account management capabilities to make sure there's no air gap between Europe and North America.

We're also putting a very concentrated push on bringing a different mix to Europe in terms of long-term contracts, and also more IP because, as you know, the margins are better on the IP and it's very sticky in terms of a recurring revenue stream.

And finally, you're seeing some of that in terms of, as I mentioned a number of the wins we announced, the Polish win, but we have other ones where we're being short listed as a vendor of record on some very significant global players in Europe.

Unfortunately, some of them don't want to make it public, but you'll start to see that over time as we start to get opportunities now to bid on those opportunities.

On the cost side.

Well, on the cost side, in the short term you end up with a bit of a capacity issue.

Your utilization rates drop.

As I mentioned, in the second quarter, if you look at the actions we take and you back them out, we're essentially slightly positive in terms of our margins in the quarter.

If you look at this quarter, we're still looking at it, but we'll likely take some other actions this quarter, quarter three, that will better position us on the cost side and the competitive side going forward.

But again, I'd put all that in perspective.

My sense is when I look at the data, we may well have bottomed in terms of the revenue line this quarter.

If not, it'll be next quarter.

And on the margin side, it'll gradually return to where, on the fourth quarter or last quarter of the year, you'll see an uptick here in terms of the margins coming out of Europe.

Again, if you look at our strategy as a company, part of our diversification strategy is to make sure that we have offsets when economies go different ways in the kind of economic cycle that we've been through.

Okay.

So it sounds like what you're saying is you'd expect Europe to be profitable in fiscal 3Q and 4Q?

Well, again, I'm not going to predict down to a line of business.

I'm saying that we're going to take what action we need there.

My sense is we'll take some more restructuring in quarter three and, by quarter four, it should be finished.

Okay.

And then--.

--To put it in perspective, Jason, it's not material on a company of this size.

Okay.

That is helpful.

And then, just to switch gears to the M&A front, I'm curious if you're seeing any more competition from private equity firms in your M&A pursuits?

And to the extent that you are, is that impacting expected and/or actual valuations on M&A deals that you're witnessing in the marketplace?

Well, again, I would say that the -- my feeling is the private equity guys are becoming much more active.

I think they're also realizing the unlocked value that are in technology firms in terms of cash on the balance sheet or cash generation.

So, you have seen a little bit of them putting their toe in there in the US.

I suspect you'll see more.

But again, we're coming at it from a different perspective.

I mean, what we offer to potential targets is a different proposition than a PE firm.

Valuations may move up a little bit as a result of that.

But my view of life is ours will move up as well because, if you look at some of the things I think that they're valuing in terms of margins, in terms of cash, in terms of backlog, we've got it all.

And in terms of ability to execute, which is a huge differentiator between what we bring to the table and what a PE firm brings.

So, I'm not seeing -- I'm not afraid that they're going to push things out of our price range.

I just think that you're going to see more -- continuing more activity in the technology M&A front over the next 12, 24 months.

Okay.

Thanks for all the color.

Yes.

And we intend to be in there.

I mean, we haven't lost our appetite here.

Good to hear.

Thank you.

The next question is from Paul Lechem of CIBC.

Please go ahead.

Thank you.

Good morning.

Hi, Paul.

On the margin side, we've seen some phenomenal results out of Canada, especially as you mentioned, Mike, almost 18% EBIT margins.

My question is, does that put you though -- your focus on driving the margins, does that put you at a competitive disadvantage to some of the lower-margin work, such as infrastructure management and does that have any implications for the Desjardins contract or anything else along those lines?

No, I don't think so.

I mean, again, we're very price competitive, but we're not in business to lose money.

So, we're very disciplined around ensuring that we can generate a return on invested capital for every dollar that we put out.

But no, I mean, if you look at our bookings and our revenue growth in constant currency, we're very competitive.

But margins -- again, margins are more -- in my view, more about execution than they are about prices.

I mean, life would be good if you could make all your margins on prices, but that's not really what's happening in the IT industry.

I don't think there's a lot of pricing power that's gone on in this industry for years.

So, our margins are not coming at the expense of our clients.

They're coming as a result of the execution of our team and that's a big difference.

And I think -- and that's the main difference when you look at us and a lot of our peer group.

Because we can grow and still drive high margins, as we demonstrated this quarter.

I have to tell you, I think this is a very, very solid quarter.

I mean, from top to bottom.

We put up I think probably one of our best quarters in years here in terms of balance from the top line to the EBIT line to the net margin line to the cash to the share buyback to the balance sheet.

This is a very strong quarter and I'm extremely proud of how our people continue to execute across the piece here.

So, I think you have to kind of -- this is how I look at margins, Paul.

And all those levers that I talk about, they're available to our peer group.

The difference is how you execute to them.

Right.

And does -- you talked -- one of the levers you talked about was the mix of business.

Yes.

Does that mean that you are shifting away from infrastructure management more, or how much of your outsourcing work currently is in the infrastructure management end of the spectrum, and how much would you like it to be?

Yes.

No, it hasn't changed much.

It's 18% to 20%.

And--.

--18% to 20% of your total outsourcing revenues?

Yes.

Yes.

Total revenue.

Oh, total revenue.

Total revenues.

Okay.

Oh, total revenues.

Yes.

So again, it's still a healthy piece.

And--.

--Are you still bidding on new work in that sector?

Oh, absolutely.

Absolutely.

And we're still winning business there.

So, absolutely.

Okay.

Yes.

Just one last quick question.

On the acquisition front, it seems whenever we've talked about acquisitions that there seems to be a focus on sort of a big acquisition to almost take you to another level.

Why not make a series of smaller ones, tuck-ins along the way?

Is there something in terms of your acquisition policy that you're looking at the larger ones primarily, or are you still looking at some smaller tuck-ins along the way here?

No, we look at both.

But as I explained before, my sense over the last four years has been that the market for acquisitions and the kind of acquisitions that would bring the most value, long-term value to our shareholders is more of a transformational deal.

Hence, we've tried to manage the capital structure, our access to cash, in a way that would position us to take advantage of those larger transformational deals.

The second thing is, Paul, there's not that many players left that are of the quality that we look for.

Having said that, as I telegraphed -- I think it was in the last call -- we have begun again to look at more niche acquisitions, but ideally ones where there's an IP component.

In other words, a tuck-in that would fill out a portfolio of IP that we could evolve to an ASP model in the market that we operate in that would, again, build another level of recurring revenue.

So, we continue to look there.

But again, my sense is, over the last number of years, you end up making those investments.

I don't think it moves the needle in terms of gaining opportunities to drive margins up significantly in the short haul.

So, I like where we are in the sense that we have the financial capability, both in our line of credit, in the cash that the Company's generating, to be very opportunistic here and to be a little choosy in terms of finding the one that fits the strategy, that can help us take the Company to the next level.

But having said that, we continue to look at certain niche acquisitions, but heavily weighted towards IP.

Got you.

Thank you, Mike.

Thanks, Paul.

Thank you.

The next question is from Ralph Garcea of Sandfire Securities.

Please go ahead.

Good morning, guys.

Hey, Ralph.

Hey, Ralph.

Just quickly on the utilization rates, I guess what sort of improvement did you see in the quarter and are you at a point that you need to hire now in the SI&C business?

Yes.

I would say that the utilization rates continue to move up.

We've taken a bit of that capacity, added capacity, Ralph, by moving the work week in Canada to 40 hours, okay?

So, we've created additional capacity here in the existing base.

So, we continue to -- that's gradually coming in.

It's also contributing to the margins as some of that goes to billable hours.

Some of it may go to price in terms of attempting to win more business.

So, the utilization rates are moving up.

Certain pockets, clearly, the United States with 12% growth, we're looking there.

India, we're constantly growing there as well.

And areas in Canada, especially Toronto, we're out on the street looking to hire a fairly significant number of people in that marketplace as our business activity in Toronto is picking up very significantly.

So, yes, we're kind of on that bubble.

Obviously, we're trying to drive productivity to the greatest extent we can with our existing base.

And part of that with the extended hours in Canada has given us a lot more capacity.

But certainly in some pockets, and in the United States in particular with the growth rate, we're adding people.

And I mean, on the growth on the SI&C project side, is it packaged aps?

Are they your own -- the Momentum, Advantage or SAP?

I mean, you've got a great Oracle business.

Or is it more custom aps and development that you're working on?

Some of it's packages, especially in some of the government spaces.

And also in the financial vertical, guys looking at cash management or mortgage systems, Ralph, or stuff around our mutual fund MPower type stuff.

Others are add-ons where we have an ASP model and guys are adding new products or new solutions to that base.

In the US government, of course, and the state and local, our Momentum and our Advantage back room ERP systems are still very strong.

We also continue to work both at the federal and state level to turn more of those Momentum and Advantage sales opportunities into long-term recurring revenue.

So, in the state environment where our Advantage ERP is in many, many states and localities, we're pressing hard to convince these jurisdictions that, in a time of tough economic pressures for state, various states, that they should look at outsourcing that to us.

So, we would take that over and maintain it.

So, these are the kinds of things that we're working on that you're starting to see a little bit in the SI&C now, but that should carry on as we turn and ramp up those deals.

And then, just on the US side, also, have you started to see revenues flow from some of the larger blanket agreements that you had signed, either the Alliant one or the Department of State or any of those multi-year blanket deals?

Yes.

So, Alliant is one that I keep an eye on.

And again, what we've done there, there are blanket agreements and then they actually come out in task orders.

And what we've done there, Ralph, is we've sectionalized which task orders we've an interest in.

And you can imagine some of the criteria would be things that are in our sweet spot in terms of best mix here, back to right mix.

We like the application maintenance, but we like multi-year contracts.

So, we've got a team that's focused on going through those task orders, targeting various ones.

And we have started to bid on those and we'll see what the return on that focus is.

But again, my sense is it's all upside in the sense that we weren't getting visibility in those task orders before we got on the Alliant vehicle.

So, we have a focus on that.

And these are, by Canadian standards, these are still -- they're not CAD 1 million task orders.

Some of them are CAD 20 million or CAD 40 million.

So, they go kind of big down there on these task orders.

So, we continue to focus on those and you'll probably see some of those hit in the back end of the year.

Okay.

And how about the Department of State one, the Momentum-based deal?

I mean, will we see sort of revenue ramp up through Q3 and 4 on that, or--?

I think that could be in the -- probably more Q4 than Q3.

Okay.

Thank you.

Okay?

Thanks, Ralph.

Thanks, Ralph.

Thank you.

The next question is from Eyal Ofir of Canaccord.

Please go ahead.

Thank you.

Hi, guys.

Good morning.

Good morning.

Good morning.

Can you guys just talk about your current pipeline in the US.

Obviously, bookings this quarter was fairly strong.

It seem like you're getting a lot of business in government healthcare and finance.

But are there any other areas that you guys are seeing strategic opportunities?

Well, again, the bookings in the US are strong and our expectation, they'll continue.

But they're going to be lumpy there as well because, if you look at that state deal, I mean, that -- like $395 million, it can drive a quarter and then if you skip a quarter you -- and hit another one, you can -- it can be lumpy.

But our team down there has a very good pipeline.

It's very visible.

Some of the investments that we've made there on focusing on long-term strategic clients is starting to pay off.

And we continue to be very optimistic that we'll have a very strong book-to-bill in the United States.

We're heavy in government down there which, as I said before, is a great place to be in these economic times.

So, I'm not unhappy about that.

We're also heavy in the financial vertical.

It's coming back nicely and we've got a lot of opportunities there.

Beyond that, we're really attempting to take some of our solutions across verticals.

So, our collection capabilities, it can be sold to telecoms, it could be sold to financial arms of companies whose core business is something else.

And we continue to focus on there.

Manufacturing is still -- and retail -- are still challenging areas out there.

Telecom, I don't spend a lot of time on telecom, but telecom is starting to show signs of life.

We have a very large telecom client that we see things improving there.

We won the deal in Poland.

We've been -- made the short list, are vendor of record on some large telecom players, international players, that is going to give us more visibility in the telecom sector.

But it's still not of the strength or the momentum of the first two.

So, I'm not unhappy about where we are there.

I think, again, as I said to -- I think it was Paul earlier, one needs to look at both the short term and the long term.

And to be heavy in those two verticals right now I think is a very, very good thing for us.

Okay, good.

Then just one final question for you.

You guys had a very strong bookings quarter last quarter in Canada in financial services.

When should we anticipate some of those contracts to come on-stream?

Is this a Q3, Q4 type of timeframe, or is it a little bit further out?

Well, some of it's going to be further out.

I think we said at the time a number of them were multi-year, but some of them were in the near term.

And they're starting to ramp up.

This goes to the comment that I was answering to Ralph that we're looking to do more hiring in Toronto to ramp up for a number of those deals that have been won.

So, it'll come on gradually, but you're seeing it -- you're certainly seeing it in the EBIT margins in Canada because, as I mentioned, as the utilization rates rise, of course, the margins are going with it.

And so, you're starting to see it a little bit in Canada, both on the revenue because, as I say, we've now crossed over and are in a positive organic growth in constant currency and the margins are very strong.

So, I kind of like where we are here.

As I said, I think this is a very, very strong balanced quarter that we've put up here.

So, I'm expecting that, over time, we're going to continue to move the Company forward against those kind of key indicators.

Okay.

Thank you very much.

I'll pass the line now.

Thanks, Eyal.

Thank you.

There are no further questions registered at this time.

I'd like to turn the meeting back over to Mr.

Gorber.

Thanks, Theresa.

And thank you, everyone, for joining us.

We'll see you back at the end of July for our Q3 results.

Have a nice day.

Thank you.

The conference is now ended.

Please disconnect your lines at this time.

Thank you for your participation.