CGI Inc (GIB) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI Third 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, Catherine, and good morning. With me to discuss CGI's third quarter fiscal 2011 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 9.00 AM on Tuesday, July 26, 2011. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q3 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 on 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 in Canadian dollars, unless otherwise noted.

I'll turn the call over to David first to review the financial results for the third 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'm pleased to share the financial details of another good quarter. In the third quarter, revenue was CAD1.04 billion, an increase of 15.1%, or CAD136.3 million, compared with the same period last year. Revenue on a constant currency basis was up 18.0% after adjusting for foreign exchange fluctuations that unfavorably impacted revenue in the quarter by CAD26.3 million, or 2.9% compared with the same period last year.

Currency shaved CAD87 million from our top line during the first 9 months of fiscal 2011 and, given the weakness of the US dollar, we expect our top line to continue being challenged by FX. As a reminder, we have been successfully hedging our bottom-line exposure for a number of years through natural hedges and financial instruments.

Adjusted EBIT in Q3 was CAD144.3 million, up 12.2% compared with last year, and our EBIT margin remained strong at 13.9%.

Net earnings were CAD118.4 million, or 37.9% better than the CAD85.9 million reported in Q3 of 2010. Our net earnings margin was 11.4% versus 9.5% in the same period last year.

Diluted earnings per share were CAD0.43 compared with CAD0.30 in the year-ago period, an improvement of 43.3%. Included in these results were favorable tax adjustments totaling CAD15.2 million, partially offset by CAD300,000 of acquisition related and integration costs net of tax.

With respect to the Stanley acquisition, we have incurred charges of CAD3.7 million during the first 9 months of fiscal 2011 and continue to track to plan, which calls for an additional CAD800,000 to be incurred in Q4.

On a comparable basis, excluding the adjustments I just mentioned, net earnings would have been CAD103.6 million, or 10.0% of revenue, compared with CAD86.5 million or 9.6% of revenue in the year-ago period. And diluted earnings per share would have been CAD0.38, up 26.7% compared with the CAD0.30 in the third quarter of 2010.

Our DSO increased to 52 days in Q3, up from 36 days in the year-ago period and 7 days from our 45-day target. This year-over-year increase was due to two impacts -- the addition of Stanley and its government client base, which was not in our Q3 2010 results, but is included in the 45-day target; and a postal strike in Canada which had a one-time impact and contributed to a five-day DSO increase in Canada. We remain committed to a DSO target of 45 days.

The factors which influence DSO had an impact on cash as well. We generated CAD90.1 million of cash from our operating activities, compared with CAD102.8 million in the same period last year. I would like to remind you that, on occasion, due to the fluctuations of certain working capital items, this amount can vary from quarter to quarter. The main items composing the fluctuations of the working capital are related to the management of our accounts receivables and work in process and the timing of tax installments, vendor payments and payroll-related disbursements, including an extra payroll worth approximately CAD30 million. That's why we continue to stress the importance of looking at cash trends the same as bookings over a trailing 12-month period.

Total long-term debt was down CAD65 million to CAD953.0 million, and net debt at the end of Q3 was CAD913.4 million, representing a net debt to capitalization ratio of 28.3%.

In the quarter, we continued buying back our stock, acquiring 2.8 million shares of CGI for CAD56.9 million at an average price of CAD20.51. Under the current Anti-IB Program, which expires in February, 2012, we can still purchase 16.6 million shares.

At the end of Q3 our return on equity was 20.3%, a 420 basis point jump from last year, while our return on invested capital was 15.8%.

Subsequent to the quarter, we announced that CGI entered into a US $475 million private placement with six large US investors. Comprised of three traunches, the private placement has a weighted average maturity of 8.2 years and a weighted average fixed coupon of 4.57%. We have until December 15, 2011 to draw down the proceeds and plan to execute interest rate swaps subject to favorable market conditions in order to reduce our financing costs and maximize flexibility. So, as of today, combining the remaining funds under the line of credit with this placement, we will have over CAD1 billion in liquidity available to pursue our build-and-buy profitable growth strategy.

Finally, a word on IFRS. We are tracking well to our plan for the transition to IFRS and don't expect any significant impacts when we report our first quarter of fiscal 2012. For those interested, the details have been set out in the MD&A.

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

Thank you, David, and good morning, everyone. I'll spend a few minutes this morning providing some color on each of our reporting segments and wrap up with some comments on the Company as a whole.

Beginning with the US. At constant currency we grew by CAD191.4 million, an increase of 63.5%, largely as a result of our Stanley acquisition and growth in the state and local business.

Our federal government business continues to reflect the ongoing uncertainty surrounding the resolution of the US government budget discussions.

EBIT margin in the US was 8.9% in the quarter and reflects three factors; the increased amortization associated with the Stanley acquisition, the front-loaded expense required for the next expansion phase of our Indian global delivery centers, and a temporary timing misalignment between our bidding and proposal costs versus the slower pace of awards and task orders associated with our US government business. In fact, we currently have more than 150 outstanding bids with the federal government worth over CAD1.5 billion. Given the transitional nature of these impacts, we remain confident that our top and bottom lines will continue to expand over time in this key market.

With respect to bookings, total contract awards in the US were over CAD1 billion in quarter three, or more than 200% of revenue. Our US operations continues to run above 125% book-to-bill on a trailing 12-month basis.

Our California and Alaska state wins indicate growth in strength in the state and local bookings and together added more than CAD600 million to our backlog.

We continue to proactively shape and create similar opportunities to help our clients meet their objectives. For example, our solution suites in mission critical areas such as cyber security, tax collection, or our comprehensive ERP systems' momentum and advantage are designed and built exclusively for the public sector.

We continue to believe that the depth and breadth of our government business provides us with a defensive position against any future economic downturn. It also provides us with growth opportunities, given our balanced diversity across all levels of government, federal as well as state and local jurisdictions. As a result, we remain optimistic about the growth potential of this key vertical.

We're also seeing signs of increased activity on the commercial side, both in SI&C and outsourcing. For example, we closed a five-year outsourcing deal in the financial services worth more than CAD125 million during the quarter. Much like California and Alaska wins, this deal adds recurring revenue to our backlog and is helping to generate additional organic revenue growth over time.

With respect to our Canadian operations, you will recall while we reported year-over-year growth of 4.5% in our Canadian operations during quarter two, we also indicated that we had made a number of decisions that would negatively impact our top line this quarter. These included our decisions to divest CIA and the run off of a body shop contract with the Canadian Revenue Agency. In addition, there was a small FX impact.

Revenue, as a result, decreased by 6.5% during the quarter but, excluding these factors, was essentially flat. We continue to see growth in our funnel and remain committed to working through these one-time headwinds and returning to a more consistent growth rate in Canada.

In addition, as I've said in the past, we continue taking proactive measures to improve the quality of our revenue stream and, in doing so, increase the profitability of our operations. The effectiveness of this strategy is very evident in our Canadian EBIT margins, which reached 23% in the quarter.

Although our book-to-bill ratio in Canada is trailing our overall global performance, we continue to have good visibility of growth opportunities both in the SI&C and long-term managed services contracts. For example, during the quarter we were able to sign a long-term contract around our Proponix 360 trade finance solutions with a Canadian-based global financial institution. This type of contract is very much aligned with our strategy to improve the quality of revenue while leveraging our IP, our data centers and our professionals, while offering our clients the ability to share technology costs with other leading financial institutions.

With respect to Europe, at constant currency we grew by 19.1%. We experienced growth across our major European markets, particularly in the telecom and financial services verticals. EBIT margins continued to gradually improve as our major markets in the UK and Germany ramp up new contracts. We continue to make investments in business development and are working to complete the restructuring of our European operations, made necessary by the challenging and persistent marketing conditions experienced in Europe over the past year.

We remain optimistic about our growth prospects as bookings continue to improve, with notably higher work volumes from new clients in the financial services vertical, as well as from various clients in the telecommunications and utilities verticals.

In addition, we're beginning to ramp up our government practice in Europe and Australia, where we have won projects with new clients during quarter three by leveraging our suite of software solutions and domain expertise.

Turing to our global infrastructure business, revenue was essentially flat when excluding the runoff of the previously announced Desjardins contract in the last two months of quarter three. Despite this pressure, EBIT margin increased by more than 400 basis points year-over-year to 14.6%, reflecting an ongoing disciplined focus by our management team to deliver service excellence at competitive prices.

We've been investing in the development of a multi-billion-dollar pipeline with some very strategic prospects around our cloud and managed service offerings. Specifically, we're seeing good traction with our cloud offering with such solutions as Advantage for state and local governments and expect activity to ramp up in the US federal government as their certification process is being finalized. As they start moving apps onto the cloud, we are well positioned as one of only 11 providers chosen by the federal government to provide cloud services.

On a company-wide basis, despite some top-line headwinds in the quarter, we continued to demonstrate the ability to focus on delivering quality and consistent earnings to our shareholders. Our ability to execute is evident in our EBIT margin, which reached 13.9% in the quarter, while earnings per share increased by 43.3% year-over-year.

In addition, we have generated CAD536.9 million in cash, or CAD1.93 per share, over the last 12 months. As a result, we continue to have ample flexibility to invest in organically growing our business while continuing to buy back our shares and gradually reduce our debt as we've done this quarter and year to date.

Finally, the US $475 million private placement we announced a couple of weeks ago is highly strategic, providing us with additional long-term liquidity at attractive rates. In addition, we're well positioned for the renewal of our existing line of credit when it comes due in August, 2012.

We remain focused on the fundamentals of delivering quality services to our clients, while proactively expanding our capabilities and offerings by investing in high-growth areas such as cloud computing, cyber security and other software solutions.

The strength of our quarter three bookings, totaling CAD1.4 billion, reinforced the relevance of our services and solutions to our client requirements and further demonstrates our commitment to increasing our competitive position in the global market. We remain in an excellent position to continue executing our build-and-buy profitable growth strategy.

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

Thanks, Mike. Just a reminder that a replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the passcode 6882277 until August 9th. As well, a podcast of this call will be available for download at either cgi.com or through iTunes within a few hours. Follow-up questions can be directed to me at 514-841-3355.

Catherine, if we can poll for questions from the investment community.

Certainly. (Operator instructions.) Tom Liston, Versant Partners.

Thank you and good morning. Michael, just on the US revenue, you explained a bit and -- including in the notes but, just on the margin. If you look sequentially or even year over year, the EBIT's down. There is some investment in India, as you know, but can you describe the environment in terms of -- you mentioned the number of bids out there. Is there a lot of discretionary projects getting held up? It seems like the mission critical projects are going ahead and you're getting some deals done there but, on the Stanley side, is there perhaps a bit of weakness in revenue? And what do you think unlocks that stoppage?

Right. Well, it's a good question, Tom. And again, if you -- that's one of the reasons I drew out in the remarks, obviously, we have the amortization. We do have some front-end loaded expense. When you ramp up global delivery centers you make an investment, then you staff up over time and eventually hit your next threshold and you've got to upscale the infrastructure and the buildings and associated ramp-up costs. So, that's what you see there.

What we're seeing on the other side is, basically a fundamental issue of we have to continue to ramp up business development, we have to continue to answer the proposals. So, we're getting that front-end cost, but the award -- the pace of awards has slowed down in the US federal government. As I mentioned, I've got 150 bids in there worth CAD1.5 billion and they're very slow at coming out in terms of awards.

My sense is, though, this is a very -- it's temporary; it'll clear. I'm not sure when it'll clear. I guess there's some milestones coming up on -- relative to settling or addressing the budget concerns there. My sense is that this may well carry on for another quarter and will become a lot clearer in fiscal 2012.

And just on a more specific segment, dealing with Stanley, we've always saw the Pentagon and tax, cyber tax, and certainly many other financial institutions and others. What you don't hear is what certainly clients are doing about it. They're not going to make those public. But, what do you -- how do you see that market developing? Certainly the pace is accelerating. What do you see the activity levels like?

I would say a couple things. And you'll see us continuing -- I drew out a number of times reference to cyber security because we really do see it as a growth area. We're bidding not only in the US on cyber security business. As you know, we've won one deal that we made public in cyber security with the EPA. We're also bidding work in Canada on that area. But, it's also now crossed in, Tom, into the commercial area. So, there are commercial entities, financial institutions, other companies who want to get ahead of this curve and avoid the type of problems that have been made public in other commercial entities.

So, we continue to ramp that practice up. You'll see us making announcements relative to some strategic hires around that. And it'll also form the basis of our push into the Canadian defense/intel space. It'll be a key part of our offering into that market which, as I mentioned before, is largely untapped for us. I mean, we have very little business right now in the defense/intel business in Canada, so it's a greenfield opportunity for us. But clearly, this is an area that's ramping up both in government and the commercial side.

Alright, thank you. I'll pass the line.

Thanos Moschopoulos, BMO Capital Markets.

Hi. Good morning. Mike, it looks like your US government revenues showed some sequential weakness. On the flip side, the bookings were obviously very strong. Going forward, should we expect the US government revenues to stabilize and pick up from the current levels, or is that difficult to say giving some of the moving parts in the current environment?

Well, it's difficult to say. I think what I was trying to telegraph, though, if you want to look at the sunny side of life for a few minutes, is even though we're seeing some of the same impacts our competitors are seeing on the federal business, we're seeing a pick up in the state and local business.

And I think one of the many strengths that we have is that we operate right across those various levels of government. So, even though the federal government may be temporarily a little slower than we'd like in terms of awarding business, the state and local business is picking up; the California deal, the Alaska deal. We have other deals in the pipeline with the state and local side. And our sense is we're well positioned to pick up growth in those jurisdictions as those governments kind of work through their fiscal challenges.

And again, a lot of the issues that they're dealing with, our solution set addresses that; things like collections or procurement, or new ERP systems like Advantage. We're also marketing Advantage in terms of a managed services, offering state governments an opportunity, a very accretive opportunity, to go into a long-term managed services contract with us for their embedded base of Advantage, bringing down their costs and providing us with an additional long-term revenue stream.

So, we're trying to create some win/wins in those spaces. So again, our view was -- our view is that we're very well positioned across the government jurisdictions in the US and we're picking up business in the local and state business.

Okay. And on the government side, you called out some pockets of strength like cyber security. But, in the federal government business, are there specific areas that are being held up? Is it pretty much across the board or, in terms of the outstanding bids that aren't being awarded, are there any common themes there?

I didn't see any common themes. I would say that we're still seeing a lot of activity in the healthcare area of the US government and we're very well positioned in there. But, it's a bit of a general impact across the business. As I said before, I suspect there'll be a little more activity on the task order side where they can release smaller portions of business while they're trying to get more certainty around their total funding envelop in the government space.

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

Scott Penner, TD Securities.

Thanks. Mike, I just wanted to ask you about, just in general, your -- the level of IP-related revenue. I think you've commented in the past, and I may get these numbers wrong, that it was about 10% to 15% of the overall revenue. I just wonder if you could update us on that and what you think that level could drive to over the next year or two.

Well, I would say it's probably closer to the 15%. And again, the goal over time would be to drive it higher. I think, clearly, this is a very, very accretive strategy for our company, Scott, in the sense that it's very sticky revenue. It drives increased utilization across all my assets, so from my professionals to my IP to my data centers. It adds recurring long-term revenue and backlog. And for the client, it brings some very interesting value opportunities to the client because they don't have the capital up front. And they're essentially, as I mentioned in my notes, they're actually sharing technology costs with other institutions. So, it's a win/win from a client and from a company standpoint.

So again, as part of our 2012 plan, we're going to continue to drive hard on increasing the mix that comes from IP. We're also looking to probably reopen our acquisition funnel on what I would call the niche acquisitions to try and identify and target smaller emerging IP-based companies that we could bring in, turn into either a cloud offering or software-as-a-service, or embed into some of our existing IP and drive towards increasing the mix of IP-related revenue in the Company.

So again, if I had to set a long-term target, which I'm looking at, 25% of our revenue coming from IP-based solutions would be a good near-term type of target.

Okay. That's helpful. Just looking at the Q4, typically the summer quarter is weaker for you guys as some projects slow down a bit. Just looking through the past couple of quarters, it looks like project starts have been somewhat delayed versus what you might have expected. Does this imply that perhaps the September quarter is a little bit more gentle as far as a quarter-over-quarter drop in revenue?

Well, again, I think -- and I tried to do it the last quarter, is to be very transparent on some of the headwinds and decisions we made that impacted revenue, including the CIA divestiture. As you know, we weren't able to go back and adjust history on that, so that's a straight CAD10 million roughly hit to the Canadian revenue number until we work through a year on that. So, there's certain factors like that that will obviously carry into the next quarter.

Normally, what you see -- our fourth quarter, as you know, for most of our clients is their third quarter. So, what you see is our first quarter is their year-end where they normally wrap up, everybody comes off vacation and they tend to try to close out their budgets and close out their projects.

So again, in our SI&C business, our clients will have a heavy vacation period and we will -- as a result, we'll obviously try to drive vacations to offset any softness from the SI&C business and protect the bottom line here. So, that's -- you're quite right. Normally, our summer quarter we have more vacation as our clients do the same.

Okay. And just lastly, maybe for David on the tax rate. I noticed it was 27.5% on a normalized basis and there seemed to be a bit of a gentle reduction in your stated range going forward. Is this just based on the geographical mix of revenue in any given quarter?

Yes, that's all it is because the Canadian tax rates are slightly lower than the US tax rates. So, as the profitability kind of shifts from one to the other, you can actually just see the math work.

Okay. Thanks, guys.

Eric Boyer, Wells Fargo.

Hi. Thanks. Could you just give us some additional commentary on the project startup delay that you talked about, I think in the Canadian market? I think I read something in the MD&A there.

Well, when we take a look at some of the projects, primarily in the vacation space, there has been some. There's been a little bit in the government space as well.

I think most of the delays, Eric, that we're talking about are really associated with the US federal government business. In Canada, we've -- even since we closed the quarter out, we announced an outsourcing deal within Canada. We had a delay where we had a renewal with Alberta Health, which took a long time to kind of work through the process. It's a fairly large, long-term deal. So, we've had some of those types of delays. But, I would say that we haven't had anything as pronounced as what we're seeing in the US federal government space.

And then the US commercial continues to be pretty strong for you guys as well?

Well, it's coming back. As I say, I think it's coming back and we're actually realigning our organization in the US. We're adding another business unit or two to get a lot closer to the client base there to try and pick up what we believe will be an uptick in the market. It's one of the reasons why we continue to investment heavily in the business development in the US, so that we actually get more bids out there, both in the government and commercial side. And as a result, we're seeing the expense and the revenue will be in the out quarters. So, it's really a bet on our behalf that the market is picking up and that we want to be positioned to ride the wave up as it continues.

But, I was encouraged in the commercial business. As I said, we did close an outsourcing deal in the financial services sector in the quarter and that's a good indicator that we're seeing not only more activity in the SI&C business, but also the managed services is coming back.

And then, can you just give us a rough idea on how much of an impact the delay in awards in the federal business compared to your bid activity had on the US EBIT margin?

I haven't isolated that, Eric, in the sense that it's hard to know until I actually see how many of those bids that we win. Because obviously, we're continuing to invest and answer bids in the belief that, eventually, the pipeline will move through to the awards stage. But, suffice to say if you look at the year-over-year delta in the EBIT, you can get a pretty good idea of what it's worth. It's certainly worth a couple -- yes.

It's probably in the area of 4% to 5% we're looking in the US market.

Okay, great. And then just the Stanley acquisition's about to anniversary in the next couple of quarters. Could you just revisit your growth goals maybe for the Company in the context of how you've talked about the longer-term framework you've talked about in the past?

Well, again, I think a lot of things have changed in the government market in the last nine months; clearly, since we did the Stanley acquisition. Having said that, I would tell you that I'm as enthusiastic today about the decision to enter the defense/intel space. We've got a great franchise US federal government. We're well positioned for the future.

As you know, we've looked at the Company in terms of a three- to five-year plan. If we looked at the base of the Company's revenue in fiscal 2010, it was about CAD3.6 billion. We said over a three- to five-year period, given certain market conditions, executing our buy-and-build strategy, we'd like to double the Company. If you keep the end date and you look at where we'll finish this year, the growth rates will go between -- is it 8 and 14 or so, depending of whether you do it in three years or four years. So, we really haven't backed off of that.

I think from a strategy standpoint, we like to keep our eye on the goal. And we continue to look not only on the buy side, but also on the build side to drive that type of growth over that period of time, not by quarter.

Okay.

By over a three- to four-year period.

And that 8 to 14, is that all-in? So, the organic is somewhere 4 to 7 probably because of the 50/50 split?

No, that's on the organic side. It'd be a little lighter, probably, on the buy side.

Okay, great.

So, we can give you some of that offline.

Alright. Well, thanks a lot.

Julio Quinteros, Goldman Sachs.

Great. Hey, Michael. Hey, Lorne. One quick question. I guess if you sort of think about the difference between some of the self-inflicted, if you will, revenue drags, plus maybe some of the contract losses there, and you kind of strip those out and sort of walk us through your thinking about the performance of the business sort of underneath the surface, if you will, is it performing on the commercial and the government side inline with your expectations, or how do you feel about that from a revenue growth perspective? Obviously, there's a lot of pieces, they're sort of parsed here, but I'm trying to get a feel for ex those factors, how are you feeling about the business.

Yes. No, that's actually a good question because, again, I think sometimes we get tied down trying to do the bridging schedules, Julio, in terms of making sure everybody understands the moving pieces.

Having said that, if I look at it from an overall Company perspective, my sense is, if I look at Europe, the growth is coming back. We're just about done the restructuring there. I'm expecting fiscal 2012 to be a much better balanced year, top line and bottom line in Europe.

In Canada, and if I throw in the GIS business, the infrastructure business, we're working through those headwinds of the Desjardins runoff, our decision to divest CIA, a body shop contract would we run off. Again, all consistent with our theme that quality revenue is where we want to be. It drives higher margins, it drives higher cash, allows us to better execute on our long-term growth strategy. Also, very much in align with us trying to move to a higher mix that are IP-based.

So, in Canada, if I look at the Canadian operation, we've got to work through the headwind of Desjardins coming off. On the rest of the business, we are seeing a healthy funnel, some good opportunities. Western Canada is really picking up with the oil price kind of stabilizing. We're seeing a lot more activity out there. Toronto, a big market for us. We're growing organically in the Quebec market. So, we're much more optimistic about Canada looking ahead than what we've seen this year because we've had to address the type of headwinds that we talked about.

In the US, I mean, a massive market for us. We doubled down on government, which I think is still the right thing to have done to get that franchise in the US federal government. Obviously, we're going through the first year of Stanley, so we're trying to get a good beat on what the seasonality or the impacts of that business is on a 12-month period; have a much better view of that in another quarter.

State and local business is coming back in the US. The commercial business is coming back in the US. This should lift revenue and should lift margins in the US as that business returns.

We're in a situation where we believe that the US market is coming back. We need to invest in it so that we can take a bigger share of a growing market. And we're seeing a bit of that offset in timing between the investments we're making and the uptick on the revenue. And the revenue should also come up on the federal government side once we get a little more clarity around the budget situation there. I think, unfortunately, when there's uncertainly, people tend to hit the pause button and that slows down the normal procurement supply chain, but we really don't have an alternative. We've got to continue to bid into there because, sooner or later, those bids will be awarded.

So, that's kind of how I see it. I think if you look at the Company in total, I mean, we continue to drive the best and most consistent margin performance. David explained the bit of impact we had this quarter on cash. We see that clearing going forward. We've got very -- we're well capitalized. We've locked down our long-term debt. We're in a good position to roll over and negotiate, I think, very favorable terms with our line of credit. And we continue to believe that our shares are attractive at these prices and we'll continue to buy them back.

Maybe just to dig into the financial services sector in the US, specifically. So, if you talk about the financial services, or if you could talk about, excuse me, about the financial services sector a little bit more specifically in terms of just deal activity, what you're seeing in the US and just your progress there it would be great. Thanks.

Well, financial service to us is our second largest vertical after government. And again, our strategy in there is really at a number of levels. First, we have a lot of IP that is in the existing base. We're looking to expand our IP into those clients and into new clients.

We also are trying to drive for a higher recurring revenue base. So, things like Proponix that I mentioned, where we can really stand up clients in a utility type or software-as-a-service environment. And we're seeing a lot more clients open to that discussion. I think the days where clients felt that everything that they had was proprietary is being muted now. I think people are much more open to sharing technology costs and differentiating themselves on the attributes of their products and solutions as opposed to the technology.

So, we see the US market as a very strong market. As I mentioned, we have added a business unit in the US to focus on the banking financial vertical in the Charlotte area where there's a lot of big US-based banks. And we're also continuing to drive hard in New York, an area where I think we're continuing to fight under our weight relative to the amount of business we can do with the financial institutions in the US

We're also looking at some of our IP that we have in Canada and have sold in the wealth management space, of making the investments and actually marketing some of that IP into the US market, which I think is another source of revenue growth going forward.

Great. Thank you, guys.

Michael Urlocker, GMP Securities.

Thank you. Michael, you did describe, I think, some of your ambitions and interest in expanding in the US financial services Sector. I wonder, first, if there's just any other catalysts you can see in terms of customer requirements that suggest CGI would be in a strong position to win some business there, some more business there.

Well, again, we certainly believe that in the cyber security space, Michael, that, as I mentioned, this is no longer the exclusive domain of governments. I think financial institutions, other corporations, international corporations, domestic corporations, anybody that's operating over the Internet these days, needs to be proactive in terms of protecting their assets and their information. We have an offering in there that's very robust, very proven, that we take to market. So, I think there's an opportunity there.

There's cloud work in terms of standing up applications on the cloud for clients. There's also work with partners, where we'll go into the financial institution supporting partners like Oracle or TIPCO, or other companies who have relationships in there and want to build out their solutions so that they're a cloud offering or software-as-a-service. So, I see many entry points in there.

I think what CGI brings that is still a very key differentiator is that we do deliver our projects on time, on budget and that's a very powerful calling card today. When companies are looking to compete, the last thing they need is to have a project delayed and their product miss the window of opportunity. So, one of our powerful calling cards is we do deliver. And in our industry today, that is clearly a differentiator.

It's a sad commentary on the industry, but I get your point.

Yes. Yes, it is.

Thank you. And I wonder if you could just expand on -- in Europe. I think you're doing some increased business in telecom. What's going on with the customers there?

The European market -- again, it's -- I always hesitate when I say the European market because it's a series of markets. But again, in areas like Germany and Poland, we continue to grow our business with the Polish telecom company. We won an outsourcing deal there a year or so ago and it continues to grow very rapidly.

Telcos, as you know, are continually restructuring their operations. They're driving hard for top-line growth. And we have a lot of capabilities in areas like e-commerce, web redesign, helping them really increase the ease of doing business with their end clients, bringing more visibility and cost reduction to their P&L.

So, we see that continuing. And also in the wireless base in Europe. We're very active in the wireless base which, as you know, is a growth engine of a lot of telcos. So, that activity is very prominent in Germany, in Poland, to some degree in Spain.

In the UK, again, we're seeing outsourcing opportunities coming forward there. We have used our IP to enter the UK government market, more as an entry point into that market. We don't -- haven't done any business in the UK government, but we're now looking at picking our spots, where to enter, and at this point we're -- our thinking is to use our IP in there. It's a safe way to enter; it's sticky and also positions us to bring a lot of value to the client. So, that's kind of how we see it.

In France, we continue to work with Societe Generale. We see opportunities to grow there. We've just about finished our restructuring, I would think, by the start of next fiscal year. For the most part, our restructuring in Europe will have been completed. So, when I look ahead, I see us continuing to grow in Europe, both on the top and bottom line.

Thank you. And looking at telecom, and specifically referring to your own intellectual property, do you see an opportunity for getting deeper into core billing systems, or is that something that's kind of -- that you don't want to get into?

Well, we have a very good billing system. We primarily use it, actually, to surround and give our clients options from some of the other traditional providers. We've all -- it also has the capability to bill cloud computing services, which is an emerging offering. So, we continue to work around the edge of that, but we're not positioning ourselves to be a head-to-head competitor with those companies that -- whose core business is essentially billing.

Stephanie Price, CIBC World Markets.

Good morning. And just on the Europe segment, do you see yourself investing more in the geography, or are you kind of happy with your current presence there?

Whatever happens, Stephanie. So, look, I think if you look at the history of this Company, we built it out by really staying disciplined on executing our buy-and-build strategy. We've essentially built out Canada. I think for most of the stuff we do in Canada now, we'd be looking to do it organically or very small niche IP-based type acquisitions.

In the US, given our current size down there and given the size of the market, we see opportunities to continue to bulk up in the US It's still the most accretive place for us to do an acquisition. So, from that perspective -- and it's a big, big market.

Europe is a place that we want to be and it's a place, frankly, we have to be because our clients straddle the ocean. We keep very close to our clients. We commit to our clients that we'll be there where and when they need us. And when we look at Europe, it fits that criteria.

So, we will continue to put the full force of our build-and-buy strategy in Europe. It's a matter of timing in terms of finding the right target that could accelerate our position there.

What we're looking for, again, in a place like Europe we're looking for companies that have deep, long-term relationships with clients so that we can pull through our IP or pull through our managed services offering. And we're looking, obviously, for companies that are in our verticals, that we can continue to lever our solutions and our outsourcing offering and our global delivery model.

But, it does take patience there. It's a much different market than North America and we've been going to school in that market. I think we've learned that it's not one market; it's a series of markets. So, we continue to refine our strategy there.

I think another area that we've looked at is to enter Europe through an IP-based acquisition instead of a more broader services type company. This, again, allows us to align to our strategy of moving to more change in mix, and it also allows us a little more time to kind of walk through and learn more about the European market if we go that way.

So, a long answer to say we're very committed to the European market. It's a matter of finding the right target at the right price and the right time.

You touched a bit on my second question here, it was more about your acquisition strategy. You talked earlier about niche acquisitions in sort of IP and cloud solutions. Could you elaborate just a bit on that?

Well, again, our sense is that if you look at our Company, we're one of the few players that really have an end-to-end capability. We have data centers, we have IP, and we've got a very nice mix between people that are located very close to the client and we've got a very broad-based global delivery strategy.

And again, what I'm looking for is to acquire IP and then turn it into software-as-a-service or as a utility service. And by doing that, I will end up driving up the utilization of my existing assets. So obviously, it's more profitable for our Company and it's also a very good offering for the clients in terms of the business case there.

So, we'll identify certain areas, healthcare would be one, insurance, financial services, aspects of government, maybe more around things like cyber security or biometrics, areas where we can acquire an emerging company, perhaps a company that's undercapitalized or is looking to expand more rapidly, bring them into the CGI family and really drive at a faster rate our strategy to constantly improve the quality of our revenue.

So, we had essentially shut down that approach on the niche acquisitions over the last number of years because we were really ensuring we had the firepower and the dry power to acquire a company like Stanley. We believe that we have the capability now to do both. And we also believe that, as far as driving our growth strategy, that some of these niche acquisitions will enable us to do that at a faster rate than just doing it organically.

Okay, great. Thank you.

Mike Abramsky, RBC Capital Markets.

Yes, thanks very much. Mike, could you perhaps give us a sense, both looking maybe near-term backward and forward on your investment at the federal level? Do you think that as this investment, which sounds like you started to make almost the minute that you acquired Stanley, been a little bit more slower in the payoff than you thought given the headwinds, or is it on track with that? And if it's a bit slower, do you think the payoff itself may also be a little bit more protracted? And then, at the state and local level, do you see any headwinds to the sustainability of your business there? Thank you.

Yes. Thanks, Mike. Good question. It's a good time to kind of remind investors that, when we do an acquisition here and we commit to the accretion rate, we never do that model including top-line revenue. So, our accretion is driven by actions that we control in terms of driving synergies, taking out costs and really focusing on our ability to operate more effectively using our model than the status quo.

So, from an accretion standpoint, Michael, and in terms of the business case that we put together here to buy Stanley, it's very much intact. We're seeing the accretion rate on the earnings per share. So, I don't have any issue there.

I think it reinforces, in fact, the wisdom of that approach because, you're quite right; obviously, market conditions have changed there relative to the speed at which the revenue push is being materialized given that it's not unique to Stanley, it's not unique to CGI. It's an industry-wide impact. So, we're feeling that impact. But, because we drove our modeling and our accretion rate on the bottom line, we're still delivering the value that we promised to shareholders.

When I look ahead, though, as I say, I really look and say that to have entered that market as a foreign firm operating in the US, I think it's a very exclusive place to be. I think it positions us very well when the overhang to that market is lifted. And we've got a great team, a great suite of offerings, and we're well integrated here in terms of addressing that market with new solutions and new capabilities.

So, I don't have any second thoughts on that. I also would remind folks that it's a very defensive place to be, that the governments continue to invest through good times and bad, and they do pay their bills, which is very key, especially in the economic downturn.

And I'd also remind you that it's a very defensive place relative to the Indian pure plays. We're not seeing competition in that area. The US federal government business is not susceptible to offshoring. So, I think from an investor standpoint, our position in government is very, very strong.

Relative to the state and local business, I think, again, if you look at the last couple years, the number of players that actually stayed focused on that state and local business is not as many as one would have thought. We're one that did. I mean, we have always, from the early days of AMS, have always been very active and very successful in the state and local business. Our people are very close to that market. They understand the state government. I mean, Advantage was built by and for state government, so it's very embedded in that sector and it's affording us a lot of opportunity to grow our business in tough times.

So, as I mentioned, one of the things we're looking at, we look at the embedded base of Advantage we have in there. First, Advantage is still very, very competitive and wins a lot of deals. We don't have markups on markups on our IP versus another SI who may have to use a third party's IP to compete in that area. Secondly, the customizations required to our system are relatively few in comparison to another commercial ERP system who's not designed specifically and by a government. So, we have a lot of advantages in that area.

We can also now move into the cloud, which we are, and we can also bring down the costs for a state by outsourcing that whole ERP system, our ERP system, back to CGI and we'll sell it back at a lower rate over a longer period of time.

So, I look at the state business and, as I say, it's actually helping us offset some of the short-term pressures we're seeing on the federal part of our government business.

So, we like that business. We've won a number of very strategic deals, California and Alaska. We've got others in the pipeline. And we continue to invest heavily in our state and local business.

Thanks, Mike.

Paul Steep, Scotia Capital.

Great, thanks. Hey, Mike, maybe since it's been quite a few quarters since we've gone over it, maybe you can just remind us about the diversification of the backlog and the book of business that's out there in terms of how we think about the timing of renewals on larger deals, or how that's sort of scaled across. I know it's a big question, but maybe just the US and Canada and we won't worry so much about Europe.

Yes. If I take US, you won't see a lot there. I mean, our backlog -- when we acquired AMS in 2004, the recurring revenue was very small. And now, about 50% of our revenue is recurring and most of that is a relatively young backlog. In other words, there's still many years remaining. We don't have a lot of big renewals, to my knowledge, in the US market.

In Canada we've kind of gone through one of the largest renewals, which was the Desjardins one, which we've made public. I don't believe we have any more this year. Fiscal 2012 I don't think we have any big ones in Canada. We'd probably be beyond that, Paul, in terms of 2013.

Okay, that helps.

Okay?

The other quick one, and it pains me to even think of IFRS, but David brought it up. David, the only thing in there, it did flag about the revenue rec in Canada. It talks about fixed fee deals, outsourcing on a straight line basis. And then, under IFRS, you're going to have to look at it more on a time build basis it sounds like. Should we read that that maybe quarter-to-quarter, once we get on this new accounting in December, we're going to see a little more volatility, or how much of the business really is even impacted by that? That's the only thing that jumped out at me.

Okay, Paul, it's a good question. And there's really not too much to get -- to fuss with here. We had been working with the business units over the last period of time because, frankly, we'd prefer to go to the type of rule that is envisioned within IFRS and have been working with the business units to try to structure deals in such a way that we could go that way. So, we actually did not have a lot of revenue that was on a straight line basis. So, doing the conversion for us is not going to have much of an impact.

Perfect. Thanks, guys.

Okay. Thanks, Paul.

Catherine, we'll have time for one last question.

Richard Tse, Cormark Securities.

Thanks. Mike, you talked about 150 pending bids in the US with, I think, CAD1.5 billion in terms of opportunity. What's that as a percentage of sort of the total bids outstanding, if you include some of the commercial side, as well as the Canadian side?

You mean of my total -- I would have to get back to you on that. I don't -- I didn't look at that in terms of bids as a percent, but I honestly wouldn't have an accurate answer on that and I would prefer to take a look at that and get back to you, Richard.

I'll circle back with you, Richard.

Okay.

And I think the reason, obviously, I called it out is that if -- it clearly demonstrates -- I think another relevant way of looking at this is relative to our normal course of business, what we're calling out, this is significantly higher in terms of the number of bids and the value of the bids that are -- have been submitted, but not yet awarded. And I would say it's significantly higher than what we've seen in the past and that's one of the reasons I called it about, Richard.

Right. Fair enough. And just if I could slip in a quick one here. With respect to your current sort of win rates, not withstanding the issues on the federal government side, what have they been lately relative to what they were let's say about a year ago? Pretty much the same balance?

Yes. One of the challenges that you're looking at in this business, I think when the economy was much softer we were very disciplined on what we bid and, therefore, our win ratios, I would say, were very high. As the economy starts to pick up, you want to bid more and you're prepared to take a lower win ratio to cover more of the market and that's kind of where we are in the cycle. And that's why I point out in the US we're clearly firing up more bids and we're seeing that expense. The bet we're making is that, as the economy picks up, those bids will transition into revenue and we'll be where we are.

So, without giving you the absolutes, because they do vary by country, they vary by vertical and they vary by offering because, if we're in the IP space, our win ratios would be higher. If we're in generic SI&C they're different. But, just to give you an idea, Richard, in terms of how we see it, we were driving very high win ratios through the downturn, and now we're coming up the other area and our strategy is to bid more. It could end up with lower win ratios but, in total, higher revenue.

Great. Thank you.

Thanks, Richard, and thank you everyone for joining us this morning. November 10th, full-year fiscal 2011 results and quarter four. Thank you.

Thank you.

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