CGI Inc (GIB) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI second quarter 2011 results conference call.

I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice-President Global Communications and Investor Relations. Please go ahead, Mr. Gorber.

Thank you, Alana, and good morning.

With me to discuss CGI's second quarter fiscal 2011 results are Michael Roach, our President and CEO, and Dave Anderson, Executive Vice-President and CFO.

This call is being broadcast on cgi.com and recorded live at 9.00 a.m. on Thursday, April 28th, 2011. 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 statement 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 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 in Canadian dollars unless otherwise noted.

I'll turn the call over to David first to review the financial results, and then he'll pass it over to Mike, who will discuss some strategic highlights. David?

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

In the second quarter, revenue was CAD1.13 billion, an increase of 24.5% or CAD222.6 million compared with the same period last year. Revenue on a constant currency basis was up 27.9% after adjusting for foreign exchange fluctuations that negatively impacted revenue in the quarter by CAD31.3 million or 3.4% compared with the same period last year. Currency has shaved more than CAD60 million from our top line in the first 6 months of fiscal 2011, and given the continued weakness of the US dollar, we expect FX to continue being a headwind in the back half of the year as well.

As a reminder, while we do not hedge revenue, we have successfully been hedging our bottom line exposure through natural hedges and financial instruments.

Adjusted EBIT in Q2 was CAD156.3 million, up 26.1% compared with last year, and our EBIT margin strengthened to 13.8% this year from 13.6% in the second quarter of 2010.

Net earnings were CAD117 million or 43.4% better than the CAD81.6 million reported in Q2 of 2010. Net earnings margins remain strong at 10.3%.

Diluted earnings per share were CAD0.42 compared with CAD0.28 in the same period last year, an improvement of 50%. Included in these results are favorable tax adjustments totaling CAD7.5 million, partially offset by CAD945,000 of Stanley acquisition-related and integration costs.

As we shared with you at the end of fiscal 2010, there was approximately CAD4.5 million in acquisition-related expenses remaining, of which CAD3.1 million has been incurred during the first half of fiscal 2011. We continue to track to plan.

On a comparable basis, excluding the adjustments I just mentioned, net earnings would have been CAD110.0 million or 9.7% of revenue compared with CAD81.6 million or 9.0% of revenue in the year-ago period. The diluted earnings -- I'm sorry, and diluted earnings per share would have been CAD0.40, up 42.9% compared with CAD0.28 in the second quarter of 2010.

We generated CAD193.1 million from cash -- of cash from our operating activities. This was up CAD68.1 million or 54.5% from Q2 of last year and up almost CAD100 million sequentially. You'll recall that when we bridged the working capital gap in Q1, we essentially got to this quarter's reported cash number.

In regards to the management of our accounts receivables and work in process, I'm pleased that our DSO for the end of the quarter was 43 days, 2 days below our target and significantly lower than our peers operating in the public sector.

As a reminder, this is the second full quarter of the former Stanley's operation being included in our results. Until we have these operations integrated for a full year, we will continue to closely monitor and gauge any seasonality associated with this business.

Our total long-term debt was down CAD136.2 million during the first 6 months of 2011, including the repayment of $87 million of senior US unsecured notes which matured at the end of January. Net debt at the end of Q2 was CAD923.1 million, representing a net debt to capitalization ratio of 28.7%.

In the quarter, we continued buying back our stock, acquiring 5.3 million shares of CGI for CAD103.3 million. At the end of Q2, our return on equity was 18.9%, a 340 basis point jump from last year, and our return on invested capital was unchanged at 16.0%.

Finally, subsequent to the quarter, as part of our ongoing strategy to optimize our revenue mix to drive higher margin, CGI concluded a transaction whereby we sold our shares in a small regional subsidiary called CIA back to management for CAD11.5 million. As the activities of the disposed unit are similar to the SI&C services offered by CGI, this disposal will remain part of our historical results from continuing operations rather than being recast and treated as a discontinued operation. The sale is not expected to have a material impact on CGI's net earnings or financial position, but revenue in the Canadian segment will decrease by approximately CAD10 million per quarter beginning in Q3.

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

Thank you, David, and good morning, everyone. I am very pleased with our strong, balanced and improving performance in quarter 2.

After 6 months on a year-over-year basis, our revenue has grown by 27% at constant currency to CAD2.25 billion. Our EBIT increased by almost 30% to CAD314.8 million. Our net earnings have expanded by 26% to CAD243 million. Diluted earnings per share grew by 37.5% to CAD0.88, and we've generated more than CAD288 million in cash or CAD1.04 per share. We booked approximately CAD2 billion in high-quality future revenue, and we bought back 10.3 million shares.

With respect to this quarter, I will spend a few minutes providing some color on each of our reporting segments, commenting on revenue, margins, bookings, and outlook. However, before doing so, I want to briefly comment on our quarter 2 bookings.

Globally, we booked CAD771 million in quarter 2 for a book-to-bill of 68%. On a trailing 12-month basis, bookings are CAD3.9 billion or 93% on a book-to-bill basis. The bookings shortfall is isolated to the US market, primarily due to delays in public sector awards.

For example, the CAD538 million California Franchise Tax Board deal we announced on Tuesday, if this deal had closed when expected, our book-to-bill for the quarter would have been 114%, while on a trailing 12-month basis, it would be 106% of revenue, within our targets.

Once again, I want to reiterate that bookings need to be looked at on a trailing 12-month basis, and on that measure, we remain confident that we'll continue to achieve a book-to-bill equal to or greater than 1 times revenue.

Now, let's review our segments, beginning in the US. Revenue at constant currency in the second quarter grew CAD207 million or 67.3% demonstrating the effectiveness of our build and buy profitable growth strategy, including the acquisition of Stanley.

Our EBIT in this segment was up more than 10%. However, as a percent of revenue, the margin was 8.8% compared with 12.7% last year. The year-over-year delta was due mainly to three factors; increased amortization from Stanley, the continued expansion of our Indian delivery centers, including the ramp up of new hires, known as Freshers, as well as the increased investment in our bid and proposal activities.

Bookings in the federal government space experienced delays due to the uncertainty in the federal budget and distractions due to the potential government shutdown during the quarter. Despite this, our book-to-bill in the US remains above 1 on a trailing 12-month basis. We are seeing early signs that the pace of awards and task orders is increasing, and on this basis, we are confident that in the back half of fiscal 2011 we will see improved activity in this key sector. In addition, we also continue to track opportunities that will yield incremental revenue synergies as a result of our merger with Stanley.

We firmly believe that IT spending continues to expand across the public sector, creating opportunities for us both federally and in the state and local space, as our solutions help address some of the current challenges governments face, whether it's healthcare, cyber security, procurement, or a tax collection, like the California, or, in many cases, the move to standing up more and more applications onto our cloud offering.

In Canada, we grew revenue at constant currency by 4.3% year over year in quarter 2. As anticipated, each quarter gradual improvements continue to be seen in our long-term outsourcing clients as they begin to invest in systems integration consulting projects and previous quarter bookings begin to translate into revenue, particularly in our financial services vertical.

EBIT of CAD72 million or 19.7% of revenue remains very strong. On the back of this strength and as part of our overall strategy, we continue making additional investments in business and solutions development, while optimizing our cost base and our revenue mix to drive efficiencies and offset the planned wind down of less profitable contracts, as well as the divestiture of CIA that David mentioned.

We achieved a book-to-bill of 100% in Canada during quarter 2. As you know, we're focused on high-quality revenue where we can wrap IP with long-term managed services, either our own or with a software partner, such as the TIBCO announcement we made this morning.

In respect to our global infrastructure business, revenue grew by 10% year over year at constant currency. EBIT as a percent of revenue more than tripled for a margin of 17%, reflecting an ongoing disciplined focus by our management team to deliver service excellence at a competitive price.

We've been investing in a global business development team specialized in infrastructure that has already developed a multibillion dollar pipeline and contains some very strategic prospects around our cloud and managed service offerings, all of which we are aggressively pursuing and, over time, will mitigate the impact of the Desjardins contract run off.

With respect to Europe, at constant currency we grew 25.4%. During the quarter, we experienced growth across every European segment. Our book-to-bill reached 100%, and margins continue to improve with notable higher work volumes from new telecom clients, as well as existing financial services clients. We continued concentrating our efforts on restructuring and optimizing these operations to take advantage of organic growth opportunities.

Across CGI, we continue generating significant cash from operations. Over the past 12 months, we've generated CAD549.6 million or CAD1.95 a share. We prioritize its deployment with a commitment to making the most accretive investments, including maintaining the flexibility to continue buying back shares and reduce debt, as we've done this quarter and year to date.

In summary, we continue adhering to the fundamentals of running a sound business and remain focused on executing our long-term strategic plan and our fiscal 2011 business plan. We believe our consistent best-in-class performance supports a higher valuation over time.

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

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 5347404 until May 12th. As well, a podcast of this call will be available for download within a few hours. Follow-up questions, as usual, can be directed to me at 514-841-3355.

Alana, if we can poll for questions, please.

Certainly, Mr. Gorber. We will now take questions from the telephone lines. (Operator Instructions)

Julio Quinteros, Goldman Sachs.

So, just real quickly just to get it over with in terms of understanding the bookings this quarter relative to your confidence going forward. Michael, if you wouldn't mind just -- just walk us through what you're seeing in the pace of awards. Clearly, the month of April was pretty strong. I think the total TCV that we're adding up right now is about CAD3 billion in the month of April alone. As you lay out the expectations from the government, what are you seeing right now that makes you feel confident that you guys can get back to that book-to-bill ratio of 100% or better?

Yes, I'm glad to have an opportunity to address that because I think what's happened here is that we had some very unique circumstances in the US government that impacted virtually all of the suppliers, whether in technology or other suppliers to the US federal government.

When we step away from that and we actually look at where we sit, we feel we're in very good position there. Just to give you a couple things to consider. First off, again, as I've always said, we're interested in macroeconomic indicators, but we actually sell, at the micro level, customer to customer.

So, when we look at the US federal government, as a result of Stanley, if we look at where we are this year versus where we are last year, we have twice as many vehicles, contract vehicles, to bid on. We're firing in 4 times the amount of bids this year as we did last year. We have 7 times the amount of wins as a result of our combination with Stanley. So, we think from a go-to-market perspective, a vehicle perspective, we have a lot more opportunity here.

We've also identified, on the revenue synergy side, a pipeline where we believe the combination of CGI and Stanley will increase our ability to win as a result of the synergies. And I reviewed that list yesterday, and we've -- if I look at the top 12, it represents CAD500 million in bookings, and we've already closed 3 of the 12 since the 1st of April, which adds up to nearly CAD100 million. We expect these to be announced once we go through the procedures, but we've booked, just in those 3 synergy deals, CAD100 million since the 1st of April.

We've also -- as I mentioned this before, I think because of the continuing pressure that the US federal government's under, they're going to use task orders probably a little bit more here in order to get work done. And again, that fits very well to our strategy, as I mentioned before. Stanley had an excellent machine proposal center on task orders. We've combined that with our task order factory.

And again, our pipeline is big. We're firing in a lot of quality bids, and we're partnering with other companies who need access to those vehicles. So, there are pure software companies who want to do business in our various governments, not only the US government, but the Canadian government, as an example, and they need vehicles, and we have vehicles. So, we have existing partners. We have new partners. We mentioned TIBCO this morning. We have vehicles where we can partner with companies like these and actually win more deals.

So, I think -- clearly, we were impacted in the quarter. But, we're already seeing signs in April, and our outlook, as I mentioned, for the balance of the year that we will clearly be at or above a book-to-bill of 1 in the US and in the US federal government.

That's great.

And just lastly, maybe a little bit of color on the commercial side. Obviously, when you look at some of the other US IT guys, pretty strong results across the commercial landscape. Just help us characterize a little bit about what you're seeing on the US commercial side and maybe how TIBCO falls into that goal as you guys pursue more commercial opportunity in the US.

Yes, I think, again, if you look at our business in the US, we do spend a lot of time talking about government, both state and local. And you saw the California deal, which was a very significant win for us.

The commercial business in the US is also coming back. And again, our strategy there is -- has multiple facets to it. Obviously, we're focusing on a set of clients where we have existing business, and we're pushing to gain increased share of wallet within that group.

Secondly, as part of our overall growth strategy, we're -- we've invested -- as I mentioned, it was one of the impacts on the -- short-term impacts on the margin in the US. We're ramping up more business development, so that we can bid more to win more. We want to ensure that we're participating in the upswing of the business in the commercial side.

And then, the third thing, as you mentioned, we're also leveraging partners, leveraging the sales force and the capabilities of partners to pull us in into accounts where they have relationships or us pull them in, and in the process, as I've mentioned before, help continue to change the mix of our revenue where we're getting a higher portion of IP to services than we would traditionally. And again, the TIBCO deal is one example, and we have others where we're looking to do that.

So, I would say that the commercial business is coming back; it's coming back more gradual, though. I never really expected a massive bounce back here in terms of the commercial business. I think it'll take time to work through the budgets, but we are seeing more systems integration and consulting opportunities. And our outsourcing pipeline, as I mentioned, and our cloud activity is also picking up in the US and, in fact, in Canada.

Thanks, guys. Good luck.

Kris Thompson, National Bank Financial.

Michael, just on the M&A front, it's been several years between major acquisitions, and specifically I'm talking about Stanley and AMS. When can we expect another major acquisition, and what vertical or region might you guys be considering?

Thank you, Kris, for your question. Again, just to remind you, what drives us on acquisitions is the right target, the right price and the right time. We need 3 out of 3, not 2 out of 3. So, we continue to have a pipeline. We continue to talk to potential targets.

What we're looking at or looking for is we'd like to see something in the US or Western Europe. I'd like to ideally get something, if I could, in the commercial sector that has IP, a backlog -- again, back to the idea of continuing and improving the quality of revenue by working on the mix of the revenue.

So, there are candidates out there. Valuations have picked up a little, but it's all relative when you look at our current valuation as well. So, we're -- we continue to be active there.

I think as you heard David cover, and if you look at our balance sheet, it's still very, very strong. We have our line of credit [dog] as 2012. On a tax-effected basis, we're paying under 1% there. We're generating very significant cash flows, so we certainly have the financial capability. With the dollar at CAD1.05, it clearly makes acquisitions in the United States very appealing, but, again, it's not 1 of the 3. We need to get the right target, it's got to fit with the overall strategy, and we continue to look for the right target.

That's fantastic color, thanks.

And maybe just another macro question here on wage inflation. We've seen some indication that the Indian service providers are experiencing some wage inflation, which is not a major surprise. But, I just want to get an idea of if that's providing more opportunities for you to compete more effectively.

Well, again, I think every time -- if you look at a business model that is more input-driven, in order to drive margins in an input-driven where you're really charging per body, you need to increase your prices to recover the wage inflation. This is not how we operate.

As you know, we're primarily selling outputs, so we sell a client an output and at a price, a very competitive price, and with a service level, and it does incent us to drive out additional efficiencies that will more than offset any wage inflation. So, we have other levers that we can use in that model that focus on productivity, optimizing other costs, and therefore it somewhat insulates us from passing on these costs to clients. And therefore, as you quite correctly point out, it does ensure that clients really get a better understanding of the certainty around our model that really takes out a lot of that wage inflation versus somebody who's selling an input and has to pass that on.

So, long answer to say I'm not surprised that that kind of inflation is creeping back in. The turnover rates of a lot of these companies are very high in India in comparison to our operation, and I suspect they're under pressure to increase salaries in an attempt to retain and attract some of their people.

Tom Liston, Versant Partners.

To continue on that theme, you talked about how you're adjusting to the Indian outsourcers and the wage inflation and how, as you expand, you adjust to that. But, can you talk a little bit more about the competitive nature? There's obviously been talk around these issues and a number of elements as the Indian outsourcers tackle the US. Can you talk about -- or is your competitive win rate going up as people maybe look to near shore a little bit more, but look to you as a little lower-cost provider and such?

Well, again, good question, Tom. And as you know, our strategy has always been somewhat different. It's been called contrarian. I'd like to think it's more unique than contrarian in the sense that we really do start with the client, what their need is, what their appetite is for value. Value for us has risk in it, it has price and it has service. And with that combination, we continue on a number of fronts.

One of the short-term pressures on the margins in the US, as I mentioned, was a ramp up of Freshers in India. We've added probably between 400 and 500 people, bringing them on, training them. We've ramped up the real estate commitment over there and, in fact, improved our facilities over there. So, our Indian operation continues to grow at a very significant growth pace.

In addition, we're complementing that by continuing to expand and build out our global delivery centers. We've opened a new one in Canada. We're going to open another one in the United States. So, we continue to expand that, and we are seeing clients who want to do more of their business in the US. So, large commercial clients in the US who want to make sure some of that work is done in the US. And of course, the -- our home shore offerings in these low-cost centers, like Troy, Alabama or Southwest Virginia, offer them that alternative.

So, I think we're well positioned there, and we -- I think the visa issue is not an issue for us. We haven't run into that. Again, being a Canadian firm, we also have the added benefit of moving people across the border between Canada and the US at a much different pace than most of our competitors under the Free Trade Agreement.

So, we like where we are there. We're expecting to see more activity and growth as the market picks up, and consistent with our bid more to win more, we're also tracking the amount of bids where we're including the global delivery center, either as part of the core offering or as a second bid alternative to the client.

Sure. Great, thanks.

And real quick, any update you can give us on the California fiscal project? It looks like presentations were made, but maybe the -- some of the timeline is extended. And can you comment on if the LA County and situations like the California Franchise Tax Board perhaps helps or are they a fairly independent decision?

I think they're independent, but I think what you should take away there directionally, these type of deals are going to get done. Various states -- obviously, numerous states and provinces are under a lot of pressure on the fiscal side. The deal we announced very much goes to a win-win here in terms of the government, the taxpayers and, of course, our shareholders.

So, I think you'll see those other ones. And as you quite rightly point out, we have a number of these in our funnel. And clearly, in California, that win continues to reinforce our position in the market as a significant serious player in these type of bids. So, we're very pleased with that bid. That's a very strategic win for us.

And as I mentioned, had that thing hit in the quarter as we expected, the book-to-bill numbers would have clearly been well in line with our commitment to have a book-to-bill of greater than 1 on a trailing 12.

Thanos Moschopoulos, BMO Capital Markets.

The infrastructure business was obviously very strong in the quarter. Can you talk about some of the drivers for that and whether that growth might be sustainable? And has cloud been a factor at this point or are there really other drivers that have been contributing to that growth?

Yes, again, I have to tell you, I'm absolutely delighted with the performance, the margin performance, the growth performance of the infrastructure business. As you know, it's probably the most complex capital-intensive business in our portfolio, and the team that I have there has been executing very, very well.

We are ramping up, as I mentioned, on the business development side because, as you may recall, we had this infrastructure business embedded within the geographies, and we've just recently, I guess over the last 6 months, made it a global function. So, we're globalizing, if you will, starting at the front end of that, not only our offerings, but ramping up a very specialized team to be able to sell things like cloud and to actually ensure that we're certified with the US government. We -- for cloud offerings, we expect a lot of business coming out of the US federal government where they've actually set some targets there.

So, I think the business is operating well there. I don't think we can expect to have 17% margins on an ongoing basis. I guess we can expect them, but whether or not we're going to see them on a consistent basis is probably the better question. But, we're clearly operating that business very effectively from an operational perspective, and it's obviously a contributor here to the earnings.

The cloud is actually -- we do have some business on the cloud. As I said, we are positioning the Company to take advantage of that in North America primarily and expanding it into Europe. But, I would say that our revenue numbers in there now do not reflect a large impact from the cloud. But, I expect that to change as the US government starts to actually award cloud business under the contract vehicle of which CGI was one of only 12 companies that qualified. That's ahead of us.

Okay, that's very helpful.

You continue to generate a large amount of free cash. Obviously, you're still very aggressive on your buyback. Can you share your current thinking regarding a potential dividend as far as the possible likelihood of that and as far as some of the key criteria you'd look at in terms of evaluating that decision?

Sure.

Again, we review the question of a dividend on an annual basis with the Board of Directors, and we share that with our shareholders through our AGM in February each year. So, the -- that review was done February. The decision was not to issue a dividend this fiscal year. We do review it on an annual basis, and that is essentially the timing that we do it.

Again, we're still building out our Company. As you know, we're executing a build-and-buy growth strategy. That means you have to have the financial capability to play when companies are in play and when opportunities are there. So, again, we've been very disciplined around that.

We believe that we can redeploy that cash, as we did in the case of AMS, as we did in the case of Stanley, to bring on a significant accretion to shareholders. And you're seeing that, not only in the cash numbers, but in the margins and earnings per share growth. I think on a 4-year CAGR basis, our earnings per share is over 30%, so we are returning value to shareholders through the build-and-buy strategy.

We also -- to validate that, we drive and produce an accretion model. And as I shared that before, the most accretive use of our cash is to reinvest it back into the Company for organic growth. We're doing that in areas, like infrastructure to build out the cloud, like building a defense intel practice in Ottawa and investing in our products and moving them from a pure product IP sale to a wrapped software-as-a-service offering.

So, those are some of the areas we're investing our capital and driving out a very high return. I think our return on invested capital is 16%, so that's a pretty healthy return.

Beyond that, then we look at accretive acquisitions. And as I say, the commitment we make to investors; that they will be GAAP accretive to the earnings per share within the first 12 months. In the Stanley case, we released publically that it would be 15% to 20% in the first 12 to 24 months. And as you can see by the results since the Stanley acquisition, we're delivering on that commitment.

And then, finally, it's buyback shares and reduce debt. I did tell you that our debt costs all in are tax effected of about 0.7, I think, so clearly under 1. And on the shares, we started out with 444 million shares at year-end 2005; we're down to 264 million. We still think that our shares represent a very attractive valuation over time. The accretion rate of our buyback program over that period has been north of 70% to shareholders.

Dividends, then, fall beyond that, and our current thinking, as I mentioned to you, is that this would not be the ideal time relative to our buy-and-build strategy and marketing conditions to issue a dividend.

Okay, that's very helpful.

Scott Penner, TD Newcrest.

Just a -- first of all, I guess, I wanted to ask on the California deal, mainly the business model, the benefits from that model. Is that a business model that you think is a real competitive differentiator for you in the -- at the various levels of government? And then, how aggressive have you been in pitching that so far?

Well, again, Scott. Just to give you a little perspective. We have done this for a number of years with a number of states. Hawaii is one that I think was public. But, go back 10 years; clearly, CGI, and AMS before us, are a recognized leader in this area.

And it's -- when you look at the challenges that governments face, this falls into the solutions side of the challenge because what we're essentially going to do is take a book of taxes, unrecovered taxes at this point, and between using improved business processes, analytics and technology, we're going to increase the collection rate there. And as a result, the taxpayers will get a much -- a significant return on this investment. And in our case, of course, we'll end up with a very strong incentive here to ensure that we deliver what we've committed.

So, yes, we believe we have something that's competitively unique here. We're obviously marketing it to other governments and feel that given the economic times that this is a very appealing solution to governments. And of course, California being one of the largest states in the union, it's a very powerful calling card here in terms of a reference for future business.

Right. On the EBIT margins, there's several references in the MD&A to underutilization associated with slower project startups. Does that continue, as you sit here today, to be a bit of an issue into Q3?

Well, again, it'll gradually return. Some of that is actually a result of, again, our mix of large outsourcing contracts where, as I've said before, normally their budget cycles are calendar. So, in the first quarter, they're actually taking the budgets, turning it into business requirements, and then start to hand them off to us. So, we normally are always faced with a tough challenge; hold the staff until the projects come or restructure the staff, and then find ourselves on the flip side of the supply-demand utilization curve.

So, in some cases, we've carried it. Other cases, we've restructured or redeployed. But, I don't think there's anything out of the norm there in terms of our normal pattern within those large contracts.

Okay.

Lastly, I just wanted to ask David about the tax rate. It's deep in the MD&A, but you make mention that you now see a normal tax rate at 28.5% to 30%, 31%, down from the 31% to 33% range prior. Is that -- did I read that right?

That's correct.

Okay.

Is there any -- actually, you say you have visibility. Is there any more of the recurring, nonrecurring tax adjustments to come?

That's kind of a difficult one to answer. Some of the items here, as you've read, in the MD&A is a result of being statute barred. So, there are different audits that are underway. There are different filings that are still open to audit. They're coming close, so hopefully there's always going to be a little bit more of something in the bank there. But, I don't really want to say too much more on that.

Ralph Garcea, Northland Capital Partners.

Just on the US Army deal, was that also signed in April, I guess, is the first question?

Yes.

And how do you -- what value do you put against it towards your backlog given that it's a task worth CAD2.5 billion over a possible 10 years and you'll get a portion of that? What would you put in your backlog going forward?

CAD1.

So, until the task order is actually assigned, then you'll add that to the backlog.

Yes, we just put in a CAD1, Ralph, for a vehicle, and that's more just of the mechanics to make sure we keep it in the process and keep it visible. The only things that go in the backlog are signed contracts.

And then, on the California one, do you put the total amount or just the upfront amount, and then the possibility of whatever benefits are there?

Our thinking right now is that the total amount would go in, based on our experience on these deals. That's why we broke it out that both pieces are firm.

And normally, given the Hawaii one, I mean, that's a conservative minimum number, right, because you've been able to exceed and be successful, I guess, on recovering revenues, etc., right?

We are confident that the model that we've put together will yield the benefits to the state of California and to the shareholders of CGI.

Yes, very good.

On the European front, will it take you still 2 to 3 quarters to get to that 10% EBIT level or how much more tinkering do you have to do, I guess, with the operations there?

We've got a little bit -- it's -- as I say, what I like about the Polish operation is it's come back strong, the German operation, the UK -- Spain and France are still under pressure. In both those areas, though, we're seeing top line growth. It's just a matter of us continuing to get the right mix of work there. And as we address those areas, Ralph, the margins will continue to climb. But, clearly, the worst is behind us in Europe.

And on the Indian front, what's the headcount now with the added 500 Freshers?

It's going to be pushing close to 4,000.

Okay.

I mean, you've guys have got a great SAP business, great Oracle business, and now you've signed up TIBCO. What sort of success rate do you have from doing systems integration projects on the SAP, Oracle side and converting that into longer-term deals, like you've done, and obviously shown, with your AMS success?

Yes, again, I think some of that is earlier days, Ralph. And as I mentioned before, I mean, the thinking I have is that there are pure play IP players who are running into an integrated offering by some of the companies who own IP services and hardware. And what we're attempting to do is level the playing field, so the client is left with picking the best technology and not be driven purely by financial engineering.

So, for us, when we partner with companies like TIBCO, we would be able to offer, as I've said in the press release, a more integrated offering where we would be able to offer software as a service, managed services, we could do the SI work, and the rates on -- services rates associated with a lot of IP companies, like the ones we're speaking about, are much higher than our traditional basic SI&C rates.

So, we see it as a good part of our going forward growth strategy and very consistent with our ongoing strategy to constantly improve the quality of our revenue; in other words, move more of it upstream in terms of higher margins and more sticky revenue.

And just lastly on Canada, I mean, where did you see it as the strength in the bookings? Was it government versus commercial? And then, on the government side, any province stand out or was it the federal government?

No. Again, the financial vertical in Canada is a very strong vertical for us. As you know, we always believe we've been undersized relative to the potential in the Toronto-based banks. Our team in Toronto has done a lot of work to move that forward, and it's a continuing area of focus for us in terms of expanding our business.

On the provincial side, I mean, the provinces that are active are Alberta, Quebec, obviously, and Ontario. And again, healthcare -- when I look in behind the government numbers, our healthcare business is very strong. And as I mentioned, we continue to ponder whether we should break healthcare out because I think relative to the growth rates and our position there, I think a lot of folks don't really -- can't really see how strong that business is for us in North America. So, we're pondering that, but our book-to-bill in healthcare is multiple hundreds. It's not a book-to-bill of 1; it's much larger than that. So, you're seeing some of that.

Stephanie Price, CIBC.

Last quarter, you talked about the healthy pipeline in the SI&C business and how you viewed it as a leading indicator of the market. Are you seeing the same conditions this quarter?

Well, again, I think there's just a continuation. I don't -- as I said, Stephanie, I think those are lead indicators, kind of like the canary in the mine, but it's not going to see -- I don't expect to see a big snapback there. I think it's a gradual indicator. As the clients move through their fiscal year, which is normally calendar, they're going to put more of those programs out. And again, our strategy is to get more market coverage and bid on more of those opportunities to increase our growth rates.

So, it -- I'm seeing more of it, but I haven't seen an increase, if you will, in the velocity of that trend.

Okay.

And just on the US market ex the federal government, you mentioned in the MD&A that some clients were deferring IT projects. Could you talk a bit more about that? Is that specifically government?

It's primarily at the local government level. We deal with a lot of very large cities in the United States. And again -- which is kind of normal fare for government. You get tied up in procurement or political issues in terms of the speed at which budgets get approved. And in these economic times, there's a lot of scrutiny around budgets.

I will say, though -- and I just want to reinforce that point because I think we can all get very wrapped up on the macro issues that we see on the news every night about governments. But, if you peel it back off and you look at the facts, the US governments and most governments are not cutting back. In fact, they're growing their investment in IT services.

There's a very simple reason for that, and California is a good example. If you want to drive value, increase revenue, or you want to drive costs out of your operations, information technology is an enabler. As I mentioned earlier, it's on the solution side, not on the problem side.

And you look at cyber security. I mentioned that we're targeting a combined pipeline now where we're looking at the leverage between Stanley and our CGI federal business. We've identified a pipeline. We're tracking at the senior level 12 opportunities, and of those 12 opportunities, 3 or 4 of them are in the commercial side, they're not in government. So, it's areas like cyber security or biometrics that's jumping from the government side into the financial institutions and these areas.

So, again, the area that we're referencing in the MD&A is primarily a large metropolitan city in the US, and we expect that to move through in the back half of the year.

Maher Yaghi, Desjardins Securities.

I just wanted to discuss maybe a little bit your investment in India. You mentioned in your MD&A it had some impact on your US margins. Can you maybe discuss this investment -- these investments? Are they one time in nature in terms of their impact directly on margins or this impact might be extending a bit more until you start to get your revenues up there?

Well, again, this is -- like other investments, you normally have a button hook where you have to put basic investments, and we use India as an example.

Our growth rate last year in India was about 40%, so at some point you cap out in terms of your basic infrastructure, so you have to refresh that. So, we have had to make a business decision to take on more real estate, to reinforce our information technology infrastructure. In some cases, we have to stand up new circuits and bandwidths for clients that are coming on stream. A number of them require specific dedicated links due to the proprietary or security nature of the services we're providing. So, what you -- and then, of course, you've got to ramp up the hiring, recruiting costs, the training and bringing these folks on.

So, that -- we normally run into that curve, probably, in the past, maybe once every 4 years, but given the demand for the services there, that investment timeframe has been tightening up. So, we've had to replenish the infrastructure and the items I described to you in a much shorter timeframe than we would have in the past.

I take that as good news, obviously, because it means that the demand for our services and our integrated global delivery model is holding. And we should see over time, again, this translating into improved margins and into actually more top line growth.

Okay, that's helpful.

And maybe just to go back on -- you discussed at great length your views on what's happening with the US government budgets and their impact on signings of contracts. But, maybe can you talk about your discussions on the ground with people in the defense industries? If the government is going to look into reducing budgets on the defense side, how quickly the investment -- or how quickly that re-pricing or review of contracts might take before we see contracts coming back in and signing? Just in the planning phase of new budgets, if you have cuts happening around, could that delay the actual signings of IT contracts?

Well, again, just to go back and reinforce the point I made --.

-- Temporarily, sorry, I mean.

Yes -- no, I understand. But, let's go back to your first premise; budgets are going to get cut. Likely budgets are going to get cut in a lot of governments around the world. What I'm trying to reinforce is that the areas that we operate in, information technology services, will not be cut.

If you look at the US budget that the President put forward as the stocking horse, if you will, for the discussions, he actually had an increase in the IT services budget. And on a [$100 billion] budget, any increase is a significant amount of money. Secondly, I've got 1.3% share on a [$100 billion], so I see significant opportunity for us to grow our business.

In the defense business, I can't comment a lot because there are a lot of classified stuff there. But, I think if you look and read what's out in the public, more and more of a lot of countries defense procurements are moving away from hardware and moving to software. And software needs services, and we're in both.

Michael Urlocker, GMP Securities.

So, I just have two broader picture questions. One, if we look at Stanley on a broad sense, it looks like it was flattish from last quarter and that's fine. It seems there are good opportunities here for Stanley to be a prime contractor. When do you think those opportunities start to flow into the bottom line for Stanley?

Yes, just to -- maybe on your first comment, Michael, again, and I think David mentioned it in his comments, until we get a full 12 months here, we're still going to school on any seasonality, normalized seasonality of that business. So, we're still analyzing the business. We haven't owned it for a year yet, so when we compare quarter to quarter and that type of thing, we're still analyzing what the quarterly seasonality impacts would be.

As I mentioned, on the areas that we've identified where we see synergy deals, is I guess what I'm calling them, where the combination of CGI and Stanley will help us increase our win rate, you'll see some of those, as I mentioned. The ones I track, there's 12. We've got 3 of them over the line that will be out in April here totaling close to CAD100 million.

So, you will see on those deals -- they are the type of deals that we're talking about here that you're highlighting. And we expect to see that pipeline grow and our win ratio grow here in the back half of the year and into 2012.

Anytime you do an acquisition, frankly, the revenue synergies is the last piece that comes together because given the focus on retaining people and retaining clients and driving the financial synergies, they normally preoccupy the operations. And it's one of the reasons why we attempt to do these integrations very, very rapidly, so we can get that behind us and move to the revenue synergies.

So, I would say most of that is in the back half, and you'll see more of it, actually, in 2012.

Okay, that makes sense. Thank you.

And my second question is on the concept of benefits-funded programs with government agencies or quasigovernment agencies. You had the win in California that you announced. Can you give me a description of how large this business seems to be today and what you think the prospects are for benefits-funded programs?

There's a bit of a -- I wouldn't -- I know seasonality is not the right word, it -- the nature and the demand for that really does track, if you will, to the financial situations and the challenges faced by the various governments. So, you'll see more of these benefit-funded public-private partnerships in a time when fiscal pressures are on the various governments.

So, clearly, we're in that environment now. California, as I say, is a great calling card for us. We do expect to see other type of deals, whether they're -- not likely identical to California. Each one has a little bit different, but the outcomes that the clients are looking for are similar. They want to be able to avoid some upfront investments here, and they want to share the risk in terms of the outcomes.

So, we do, obviously, see this, as I mentioned, as being part of the solution to some of the challenges that governments face, and we would expect to see more of these either being shaped by us or by governments as they attempt to work through their fiscal challenges.

Okay.

And then, lastly, just looking even beyond strictly government business, of your operations in the state of California, do you feel like you've got sufficient revenue or, let's say, prospects for revenue near term, such that you've reached a critical mass in terms of the people you've got there and that we can see better margin improvement here?

Yes, I mean, California, I think, on a GDP basis is probably one of the fifth largest governments on a global basis, so they're a very big economy. We do a lot of government business, always have there. We see additional prospects there.

And I think, again, when it comes to margins there's many levers, and the ones we've been talking about here today are primarily more on the mix side. And if you look at the -- on the type of deal that we've won or announced in California, there's a nice mix there. There's more of a business consulting aspect to it, as well as the normal information technology piece that we would do.

So, it will help us increase our critical mass in California, but given the size of that market, Michael, we still have a lot of room to grow in California.

Okay, and thanks very much. I appreciate the good progress here.

Gabriel Leung, Paradigm Capital.

I've just got two quick questions. First, Mike, can you give us an update on where the Desjardins contract currently stands in the current quarter, number one. And number two, it sounds like your pipeline of opportunities in the commercial side of your business seems to be improving. Can you talk about what projects some of your commercial customers are looking at? Are they more productivity-driven or are you starting to see some revenue-driving projects?

Okay, let me see if I can take them in order. I can't say a lot about the Desjardins thing, other than what I said in the script that the major piece of that infrastructure contract that we announced last year has rolled off in April. We do have continuing business there. I think last year at the same time, we announced we had signed a 5- or 6-year SI&C business with Desjardins that had a value -- I think it was north of CAD120 million or so, so that continues on.

We've transferred that business professionally and at a quality nature. And as I mentioned, the infrastructure group have continued to work a funnel and develop business that will mitigate that impact over time.

On the SI&C business, it's really a combination of things. Part of what we're seeing is clients now are reinvesting back on their own growth areas. They've got to grow their top line as well. Everybody's coming out of the downturn. Earnings in a lot of companies and cash are strong. It's the top line that companies now are investing in, and, of course, once you start doing that, you do need information technology to stand up more products or to alter or modify your systems to identify where your best opportunities are to target growth.

So, we're seeing areas like that. You're going to see some of that in IP being added in things like data warehousing or similar investments.

In other areas, it's cost cutting. This is why, again, I firmly believe the managed service or outsourcing offering is still very, very valid in terms of creating long-term value for clients.

And the third area we're seeing, which really plays to one of our sweet spots, is clients who are willing to go on to a shared environment. So, where we own the software, we stand it up in our data centers, we operate it, and they pay on a pay-per-use, essentially, basis. So, clients moving away from feeling the need that they need to own the IP and they need to run it and stand it up in their own environment as opposed to sharing the environment and differentiating themselves on the basis of their brand or the uniqueness of their offer as opposed to the underlying technology that we provide.

Richard Tse, Cormark Securities.

With respect to the business longer term, Mike, do you see that you're pretty comfortable with your exposure to the government market now or would you think that you have to try to balance the business a bit more, particularly in the US with respect to acquisitions?

Yes -- well, thanks for the question, Richard. Look, it -- I love the government business. I think it's been a very good spot for us to be here. But, as you said, our intent is not to be seen or valued on the basis of a government pure play. We're much more than a government pure play. You see that in our margins, frankly, and in our backlog.

So, yes, I mean, we're also very opportunistic. If you go back to our buy-and-build strategy, on the buy side, right target, right price, right time, and our view was over the last 5 years that criteria was met in the government sector, primarily with AMS and with Stanley. It also made our strategic imperative of growing our business more outside of Canada or expanding it more outside of Canada, and we're now generating more revenue from outside of Canada than inside, which is in line with our strategy.

So, the areas that -- obviously, we would like to increase our play in the commercial side and, again, consistent with where we're trying to move the Company here. I like IP-based companies, whether they have a service offering or they have software as a service or they have IP that I can turn into software as a service, either through an acquisition or through partnering.

So, that's where we're looking.

Okay.

And then, just one final question here. You guys had a really nice turn in the European business, and I know you mentioned some of the things that you've been doing. But, what specific actions have you made over the course of the last year to allow for that turn, and is any of that due to, I guess, some of the Stanley assets or -- I'm just not really clear on that.

Yes -- no, Richard, again, I've been explaining on these calls now for 5 years how we operate as a Company.

We understand that we have to create value for all three stakeholders. We move very quickly if we have a problem, including looking at leadership, looking at restructuring, looking at investing. And last year, when the whole European market was under pressure, we made it very clear in this call that we were going to restructure the operations, and we were going to make investments to be positioned when the market returned. We did that, we've executed to that, and you can see that the -- we have a very strong growth rate and increasing margins.

We really haven't leveraged the Stanley asset into there. Our priority relative to those assets are to leverage it into Canada in the defense intel space and in taking that cyber security offering and move it sideways, if you will, into the commercial sector, primarily into financial institutions. So, that's the immediate thrust in terms of expanding that capability.

Alana, we'll have time for one last question, please.

Mike Abramsky, RBC Capital.

Mike, just in summary, are you cautiously optimistic regarding the pace of the bookings recovery in the US? I'm just trying to get a sense -- I mean, I think it does sound like you're well positioned and you've placed yourself intelligently against some of these opportunities, and you're continuing to make investments against them. I'm just trying to get a sense for what our expectation should be for bookings recovery and the trend.

Yes. So, again -- and thanks for the question, Mike, and the comments. Again, I guess I -- I guess, again, I try to reinforce not only what we're doing, but why we're doing it. I really would ask that you consider bookings on a 12-month basis because, as you know, if you look back, I think this is the lowest quarter we've had in 6 quarters.

But, if you look at what happened the last time we had a low-quarter booking, the next quarter it snapped back. And we're back to where -- I continue to guide the Street in that bookings need to be looked at on a 12-month basis. If you look at the headlines and the ink that's going to be written on our bookings this quarter, had that California deal just fallen 15 days later -- or earlier, the book-to-bill, as I mentioned, would be over -- well over 1 in the quarter and well over 1 on a trailing 12 months.

So, our business, especially these large deals -- we worked on that California deal, probably, for 3 years. So, these are long pursuits and captures, and I cannot predict the quarter they're going to fall in. And worse yet, I do not want to incent early closings at the expense and the long-term impact to the shareholders of CGI.

So, having said that, just to, again, reinforce that you should look at bookings on a trailing 12 months. I've told you from an operating perspective we believe, on an ongoing trailing 12 months, that we will be at or greater than 1. And my early look at the back half of the year tells me that -- when I look at the prospects and my expectations on timing that we see the bookings accelerating on the back half of the year.

Now, I just, again, Mike, have to put that big qualifier over there. When you're dealing with large corporations and governments, the timing of these deals do not move at the same velocity of our desires here, but, having said that, we've got good visibility, as I say, into April. I've already seen bookings starting to come through, and it looks like the pace has picked up or returned in the federal space in which we operate.

Okay, thanks.

And just very quickly -- that's helpful. And then, on your US margin, which were also a bit down versus last year and last quarter, just wondered -- and I think -- I realize you mentioned that this was interim. I just wondered how much of it was related to Stanley-related integration and how much is -- of that's going to go away maybe more quickly and then maybe some of the other recovery may take a bit of time.

Yes, I think -- I mentioned 3 points on the Stanley piece. The biggest impact was the increased amortization, which is about 1.5% on the margins. On the -- that's just the amortization of intangibles. On the integration side, we had CAD1 million, which is not all that significant in terms of the course of the business.

So, I think we'll see a gradual improvement in the margins there. And again, there are differences, of course, between the two operations given the mix of government work that we have in the US that is time and materials and cost plus.

Thank you, Mike, and thank you, everyone, for joining us. We will see you back in July for our quarter 3 results.

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