CGI Inc (GIB) 2011 Q4 法說會逐字稿

Good morning ladies gentlemen and welcome to the CGI fourth quarter 2011 earnings results conference call. I would now like to turn the meeting over to Colin Brown, Manager of Investor Relations. Please go ahead.

Good morning. Thank you. With me to discuss CGI's fourth-quarter and fiscal 2011 results are Michael Roach, our President and CEO, and David Anderson, our Executive Vice President and CFO. The call is being broadcast on CGI.com and being recorded live at 9.00 am on Thursday November 10, 2011. Supplemental slides as well as the press release we issued this morning are available for download along with our 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 this call may be forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. The complete Safe Harbor Statement is available in both our MD&A and press release as well as on CGI.com. We encourage our investors to read it in its entirety, We report our financial results in accordance with Canadian GAAP but we do discuss non-GAAP performance measures which should be viewed as supplemental. The MD&A contains definitions of each of these non GAAP performance indicators used in our reporting. All of the figures expressed on this call are in Canadian dollars unless otherwise noted.

I will turn the call over to David first to review the financial results for the fourth quarter and then he will pass it over to Mike who will briefly run through the full fiscal year results and add some color on the last quarter for each of our reporting segments. With that, David?

Thank you Colin and good morning. I'm pleased to share the financial details of another good quarter. In the fourth quarter revenue was CAD1.03 billion, an increase of CAD24.5 million or 2.4% compared with Q4 2010. On a constant currency basis revenue grew by 5.3% after adjusting for foreign exchange fluctuations that unfavorably impacted revenue in the quarter by CAD29.2 million or 2.9% compared with the same period last year. As our earnings, I'm sorry -- as for our earnings they included a pretax charge of CAD45.4 million. Actions taken included CAD22.3 million primarily related to the acceleration of real estate consolidation plans as well as CAD11.4 million related to workforce adjustments. The remaining CAD11.7 million is a non-cash impairment charge related to business solutions that were impacted by clients delaying their investment decisions.

To give you a clearer comparison of property performance year-over-year, I have excluded the CAD45.4 million charge in the most recent quarter in the CAD26 million related primarily to the Stanley acquisition and integration related costs recorded in Q4 of fiscal 2010. Excluding these charges, net earnings were CAD104.8 million and our net earnings margin was 10.2% versus 10% in the same period last year. Diluted earnings per share were up CAD0.39 compared with CAD0.36 in the year ago period and represents an improvement of 8.3%. On a GAAP basis including the charges, we reported net earnings of CAD73.1 million and diluted earnings per share of CAD0.27 in the fourth quarter. This compares with CAD84.1 million or CAD0.30 per share in Q4 of fiscal 2010.

Turning to the balance sheet, our DSO was 53 days in Q4, up one day from Q3 and higher than the 47 days reported in the year ago period. This increase is primarily related to our growing government sector where a higher portion of that business is based on milestone billing. The size and duration of the milestones kept us from achieving our 45 day target in this period. As we continue managing our billings and collections closely as well as our other working capital items, as a result cash from continuing operating activities was very strong in the quarter. We generated CAD192.8 million in cash compared with CAD158.5 million in the same period last year. That is CAD0.71 per share in the three month period. Net debt at the end of Q4 was CAD897.4 million, down CAD113.4 million compared to last year representing a net debt to capitalization ratio of 26.8%.

As we closed the US CAD475 million private placement with six large US investors in Q4, the placement is comprised of three traunches that mature on average in 8.2 years and carries a fixed rate of 4.57%. In line with the terms of the placement, we will draw down the funds no later than December 15, 2011 and will execute interest rate swaps to reduce the financing costs to maximize flexibility.

In the quarter, we continued buying back our shares acquiring 3.3 million shares for CAD63.8 million at an average price of CAD19.13. Under the current NCIB program which expires in February 2012, we can still purchase up to 13.3 million shares. Looking ahead combining the remaining funds under the existing line of credit with the private placement, we have well over CAD1 billion in liquidity available to pursue profitable growth strategy. Finally a word on accounting for those interested. Going forward we are following (inaudible) and the details have been set out in the MD&A.

I will now turn the call over to Mike.

Thank you David and good morning everyone. We delivered very good results in fiscal 2011. In fact on many key performance indicators it was our best year yet and further solidified our industry-leading position. Briefly in fiscal 2011, we delivered revenue of CAD4.3 billion representing a 19% increase at constant currency. EBIT of CAD562 million was 10% higher, representing a 13% margin. CAD435 million in net earnings representing 20% growth with a net margin of more than 10%. Diluted earnings per share grew by 27% representing CAD1.58 per share. We generated more than CAD571 million in cash or CAD2.07 per share. We booked CAD4.9 billion representing a book to bill of 113%. At year-end, our backlog stood at a record high CAD13.5 billion. Our return on equity was 19.5% and our return on invested capital was 14.1%. And finally, our consistent performance was recognized by investors as our market cap increased by CAD1 billion.

Turning our attention to the quarter, we incurred a pretax charge of CAD45.4 million, half of which was related to real estate consolidation plans. As our professionals become increasingly mobile and office space becomes more virtual our need for real estate space diminishes. This is an industry wide phenomena and by advancing our plans we have reduced our go forward costs, increased the opportunity to sublease, and in doing so recouped a portion of the related cash flow.

Workforce adjustments in the quarter were spread across the Corporation. Reducing overheads, increasing utilization, and moving us towards our targeted management ratios. Finally, we took a non-cash impairment charge related to two financial sector business solutions. This was in recognition of current market conditions which have reduced customer take-up of these niche solutions beyond acceptable business parameters. In total these actions will be accretive to earnings per share in fiscal 2012.

I will now discuss our quarter 4 performance for each reporting segment excluding these charges and related market conditions. Let's begin with the US. We are now generating more than 45% of our global revenue. We grew revenue by CAD65.3 million in quarter 4 to CAD493 million, an increase of 22% of constant currency, largely the result of our ongoing growth in our government vertical. Our EBIT margin in the US was 10.6% for the quarter, up from 9.2% in quarter three. I am pleased with the sequential margin improvement and expect the restructuring charges taken coupled with additional profitable growth opportunities will increase profitability over time. Total US bookings were CAD1.2 billion or more than 230% of revenue.

As discussed last quarter, US government awards were temporarily delayed. However in quarter 4, CGI federal booked CAD834 million for a book to bill of 269% indicating a significant pickup from quarter 3. In line with our global priority to bid more to win more, we currently have more than CAD1 billion of new bids submitted to the US federal government. Our state and local business continues to expand as more and more states are looking to drive higher incremental revenue while lowering their costs. By moving our advantage ERP offering to the cloud, CGI can meet our clients expectations of greater scope and services for the same investment while preserving revenue and margins for our shareholders. We are also able to move our advantage cloud offering down market to smaller midsize clients who can now access the full benefits of our advantage suite of services.

Additionally, other state and local clients continue to choose our advantage solution to modernize their ERP systems. Recent wins include the states of Alaska, Maine, Wyoming, as well as Pima and Mesa counties in Arizona and Wake County North Carolina. Furthermore, we are pleased at Los Angeles County has recently renewed an expanded their commitment to advantage with a CAD65 million contract award. We have been working with Los Angeles County since 2004 and have now extended our relationship to 2018. In the commercial sector, our clients are showing strong interest around IP-based managed services as well. We are seeing signs that regional banks and captive financial companies and are still investing in IT and becoming increasingly interested in our onshore delivery capabilities including our newest center in Belton, Texas.

Our Canadian operations which now account for 30% of our global revenue excluding Canadian infrastructure revenue which is recorded in our GIS unit. Year over year revenue was essentially flat in quarter 4 reflecting previous decisions to divest our interest in a low-margin venture and the run off of a body shop contract. Excluding these two factors, our Canadian operations grew by approximately 5% year over year.

We continue to pursue opportunities across all verticals and Canada with increased funnel activity and health and financial services. For example during the quarter we were able to sign strategic contracts using our proprietary solutions. These software as a service contracts are aligned with our strategy to constantly improve the quality of our revenue mix. By leveraging all of our assets, our IP, our data centers, and most importantly our professionals, we can offer clients the ability to share IT costs while generating additional margin for our shareholders.

We also continued to invest in new growth areas such as the cloud, defense and intelligence including cyber security and biometrics, as well as a recently announced fraud solution which will help the PNC insurers stay well ahead of this growing and challenging problem by providing an access to a comprehensive, timely and reliable data. Our adjusted EBIT margin in Canada remains strong at 23.9% compared to 20.4% in quarter 4 2010 excluding the quarter 4 charges.

With respect to Europe which accounts for 5% of our global revenue, we grew by 10.3% at constant currency. We are experiencing growth across all major European geographies particularly within Germany and the UK markets. Our EBIT margin was 8.6%, up 610 basis points from last year reflecting the impact of ongoing restructuring efforts and the ramping up of previously booked contracts.

Global infrastructure now accounts for 19% of global revenue. In this business, revenue was essentially flat even up a little when excluding the previously announced run off of a financial services contract in quarter 3. EBIT margin for the segment was 9.6% which is healthy but was impacted by ongoing investments required to deepen our business development capabilities and transform our multi-billion dollar pipeline into bookings and ongoing revenue.

In addition, we continued to invest in standing up our cloud environment and pursue infrastructure as a services work focusing on clients like the US General Service Administration where we recently announced wins such as the Department of Homeland Security, and yesterday or I guess earlier today a win -- a cloud win associated with the Department of Labor. We are confident there will be additional follow on business with this client as both government and commercial clients continue to migrate towards our infrastructure as a service offering. Finally, we continue to take action including this quarter's restructuring to re-balance our fixed and variable costs in this line of business to reach our targeted management facility utilization ratios.

As a wrap up, I want to draw your attention to the announcement we made last week separating our health business into its own vertical segment. Rather than having it embedded within the government and financial services, our clients and investors will have greater visibility into our strong growth rate and broadening capabilities in this key sector. We have experienced a [cager] of 28% over the past three years in our health sector and today it generates approximately CAD350 million in annual revenue.

In fiscal 2011, this segment delivered a book to bill of 120% and at September 30 had an order backlog in excess of CAD1.2 billion. We continue to announce key wins in the health sector including our most recent contract with British Columbia Ministry of health. This action also brings additional clarity to our sector weighting and government excluding health which is now in the order of 39% down from 46% it was in quarter three.

In summary, we have begun fiscal 2012 in an excellent position strategically, operationally, and financially. We remain focused on executing our build and buy profitable growth strategy. We continue to believe that this model delivers superior returns to shareholders over time including throughout the most challenging of market conditions. Thank you for your continued interest and confidence in CGI. Colin 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 1158746 until November 24. As well, a pod cast 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 514-841-3634. ¶ Nelda, if we can now poll for questions from the investment community.

Thank you. We will now take questions from the telephone lines. (Operator Instructions) There will be a brief pause while participants register. Thank you for your patience. Bryan Keane from Deutsche Bank.

Good morning. I want to make sure I understood the impairment charge related to the business solutions. That was two clients in financial services, maybe you could just go through that again?

Yes, they weren't clients, Bryan, they were IP that we had made investments on. And when we looked at the market and the take-up rate of those solutions, they were not within our business parameters so we decided to write them down.

I got it. So then, therefore, was there any existing cost there that won't be there next year, I guess the development costs? Or how do we think about the savings for 2012 on that particular item?

The best way to think about it is the costs are not going to be in the future P&Ls so it actually an accelerated amortization that has come through, so that you will actually see some improved P&L performance as we go forward.

Okay. And then the bookings were actually pretty solid, although the revenue growth inside of the global infrastructure services was a little less than we thought. So, I guess, how much -- how do we think about filling that gap? I know there is some client runoffs there as we go forward, how quickly can the bookings ramp to fill that hole?

Well, again, I think the anniversary date of the runoff of that large contract is Quarter 3. So we probably have a couple more quarters until we get into a better year over year improvement. In the interim, as I said, I am wrapping up more of a direct sales in that infrastructure business because with the cloud and infrastructure as a service we are finding it is much more effective to have more direct sales people that know that business as opposed to pull it through the geographic areas solely. So I've got a couple things going. I'm wrapping up more of a direct sales team. And I've got to get through a couple more quarters in terms of getting a more apples to apples comparison on the base, so we're probably looking at a couple quarters here.

Okay. Just last question for me, Mike. Maybe you could help us think about the environment in general over the last couple of months. How has it changed and maybe by region looking at the US, Canada. Are you seeing different types of decision-making from the clients?

Yes, well again, if I take the US which is a growing piece of our business, obviously I was very pleased with what we experienced in the US Federal Government. The logjam seems to have been cleared. In fact, the bookings ran into October as well as you saw that we announced one this morning with US Department of Labor which is a new client for us and it is cloud based. So it means we're taking share and it also means that we are focusing on the leading edge solutions that our government clients are looking for.

The other area that I highlighted in the US is the state business. Our state business is picking up. We have done some work around advantage. Put it on the cloud. We are able to take a down market. A number of states are actually now looking at replacing their ERP solutions and we are really a category killer in there. We are doing exceptionally well on our win percentages when a state or local government looks at replacing an ERP system. So that piece of the business is also recovering nicely.

The commercial business a little slower but I like our pipeline there. We have a strategy. We're going to continue to try to use the strategy we have deployed so well in Canada to evolve that mix. Get more IP-based and outsourcing deals in the commercial sector in the US. So net-net, the US looks to me a little more favorably, obviously, than it did last quarter. Canada we've got a very solid franchise here. Margins are outstanding. The restructuring charges, in fact, that we did will help the margins in the US and Canada over time. In Canada, as you can see, our strategy there is obviously to protect our base but also introduce new solutions so our fraud detection service is again a service that leverages all of our capabilities. Our people, our IP, and our data centers. So that is selling data to a client base which is a very healthy business for us.

We continue to invest and ramp up our defense Intel. We have our leader in place. He is recruiting other folks that are experts in the defense Intel space including cyber security. So I think in Canada, it's a matter of us standing up and pulling some of those new solutions into the client base. And again, we're working off a couple more quarters of tough comp there, given our decision to divest CIA and the runoff of a body shop contract. Europe, a smaller piece for us but as you see in our results we are growing double digit on the top line and the margins have recovered from the actions that we took last year. Again, a much different market over there, but Germany is strong and the UK is strong and those are the two areas, in fact, where we have most of our people and most of our revenue. But right across our operating units in Europe we are in the black. We are making money and we're growing.

That's very helpful. Thanks so much.

Ralph Garcea from Northland Capital.

Good morning gentlemen, great quarter. Thanks for splitting out the healthcare business. And along those lines, do you have particular applications like you do in your other businesses that's driving that growth, either from a claims perspective or anything similar to what you have on the advantage or momentum side?

We don't have anything of that scale, Ralph, and there's really not a lot of that out there That's one of the reasons why I broke it out. I obviously broke it out for a couple reasons. One to make sure, as I say, both clients and investors have a greater visibility on what that growing piece is and how fast it is growing. It also allows us to really attract the attention of companies that may want to divest IP in that area. That would be an area where I'm looking for IP either to develop it or buy it or partner with the a client to do it. So it's -- we have solutions in there, but they are not of the category ilk of an ERP that we have with momentum and advantage and frankly, I don't believe they exist out there in the marketplace. This is why I think there is a real opportunity for us to use to actually our buy and build model to expand our footprint and grow -- and accelerate even though it is at 28% on a CAGR basis. We see a lot of opportunities to grow our health business.

I mean, again great numbers on the Fed side. I mean which contract vehicle, I guess if you had to name the top two on the US side, is driving a lot of that new business?

You know if I just took the lines of business, it is both on the defense Intel space and the civilian side. And again, what I'm really pleased about there is that we are taking share. So we are not standing still. We are actually gaining new customers. I mentioned the Department of Labor. I think that's the first time in our history even predating CGI with AMS that we've got business with the Department of Labor. And as I said, it is in our sweet spot exactly where we want to be, on the cloud -based leading edge technology and enablers the clients are looking for.

Okay. Thank you.

Julio Quinteros from Goldman Sachs.

Great, hello, Mike. I wanted to just sort of -- help us sort of juxtapose a little bit between the infrastructure outsourcing environment relative to the more discretionary consulting environment currently. So as we prepare for 2012, what are the puts and takes that should drive infrastructure outsourcing decisions versus what people are thinking about in terms of discretionary? I guess the point for us is kind of looking at consulting business systems integration-type decisions. Are you seeing any pressure on one type of decision-making versus the other at this point in time?

You know, normally if we are heading into an economic downturn, I would -- my kind of canary in the mine is the SI&C consulting business slowing down, but I don't see that. It remains fairly healthy as it -- if it continues to remain healthy it will help us drive utilization rates up, which is of course good for the bottom line. The infrastructure business -- it is interesting. Because normally when the economy tightens up, as you know, CIO's become under a lot of pressure to cut costs. One of the first things they look to put out is the infrastructure business because it is so capital intensive and to some degree a scale business. But with the introduction of the cloud and that type of thing, there's more talk about software-as-a-service as opposed to big blanket heavy iron outsourcing in that space. Is that what you were looking for?

Yes. Definitely.

As they say it's interesting to see the -- so you're getting more of a hybrid mix of the consulting, a heavier weighting is probably a better way of saying it, a heavier weighting on the consulting piece of the infrastructure business than you are in the full heavy big metal outsourcing that we would have seen. That doesn't mean those opportunities still are not out there, but I would tell you that the emphasis seems to be more on the cloud-based software-as-a-service, sharing costs more discretely with other clients through a company like ours.

So what it means, as I said, in our case though, we have got to kind of re-balance the fixed and variable costs in that business. So that's -- we are actually reclaiming space as I'm sure our competitors are in the data centers because the footprints are getting smaller and smaller. So you're carrying a higher fixed cost to a revenue number and part of that revenue number is becoming a little more variable as you go to software-as-a-service, or infrastructure service, or even cloud. So there is a constant re-calibration going on there. We did some of that with the restructuring charge this quarter, but it's something that's ongoing in that business. It is a very capital intensive business so one needs to be extremely diligent there in ensuring that the fixed costs don't get out of whack with the variable revenue stream.

Got it, and then maybe just last on the government side as we move into this new fiscal year with another continuing resolution. Assuming that this -- the current situation for the DoD continues for the rest of the fiscal year, how do you expect that to impact your bookings and your opportunity to win new deals from the federal government especially with the contained resolution the DoD side?

Yes I think I see them kind of separate in the sense that you could see another period where they could hit the pause button on the bookings. But again, I think what I learned through this last one was -- that reinforced my point that information technology is on the solution side of this problem so that sooner or later, as I said last quarter, these deals have to be released in order for the government to meet their budgeted requirements. So you could well see a pause button as certain events happen relative to the budget debate in the US, but ultimately I'm convinced that these deals will get approved. And in order to validate that premise, as I said, we continue to bid aggressively.

Our strategy is to bid more to win more. So go after more deals across the US government, so when this thing does open up or if it continues to flow as it has over the last 60 days that we will actually be able to pick up more long-term business. And a number of these contracts are multi-year awards which is exactly where we want to be in this type of environment. So again with you, I still believe that the US government business, state, local and federal is a very good spot to be, especially if we start to see a more broad-based recession in the US market.

Got it. Great, thanks guys. Good luck.

Thanos Moschopoulos from BMO Capital Markets.

Hello, good morning. Mike, just to drill a bit deeper on the federal side, if we look at the large base of business you signed in the quarter, is there anything in there that would change the margin mix appreciably from the margins you are currently experiencing? Be it a shift towards more prime work versus subcontract work, or more IP-driven solutions, would you expect any shift in that margin profile as you deliver on that business?

I wouldn't say a material shift but directionally it's going in the right direction. As we pick up new clients, as I say, as we're doing more work in the cloud, this is all positive for us. A number of these deals, as you mentioned, it is very clear that we are the prime so we are firing on those levers. I mentioned at the time of the Stanley acquisition to try to move to more prime work to pull through more kind of IP-based solutions. Solutions is where we are leveraging our three assets again; our IP, our data centers and our professionals. So directionally it is going the right way. And I am pleased with the margins that we currently have in our federal business but again in order to continue to drive earnings per share, I am looking for an increase in earnings in the US gradually over fiscal 2012 and, of course, the federal unit plays a role in that growth.

Okay. And now we have -- in the very near term, we have the super committee deadline approaching. You mentioned the potential risk of customers hitting the pause button at some point, but just in the current weeks leading up to this deadline, are you starting to see signs of that pause button being pushed, or not at this point?

No. Not at this point. As I say we continue to submit bids and get approvals. And we have enough vehicles and we have a lot of ongoing contracts there that we wouldn't see a short-term impact of such a pause. This is mostly a question of bookings and future revenue for us. We don't have a lot of large contracts running off here.

Okay. And then finally in the past you've talked about the growing pipeline of opportunities you are seeing and taking Stanley's capabilities in selling those, both into the private sector and in to the US -- I'm sorry the Canadian government sector and you have new leadership there. Can you comment in both those areas how that pipeline is looking and the traction you are getting with some of those deals?

Well again, I think when it comes to cyber security, you can understand I can't name the commercial clients that I am pursuing or working on just by the nature of it. But I can tell you we are leveraging the cyber-security capabilities that we have acquired and developed through our acquisition into the commercial entities in the US and Canada. As far as the defense Intel business in Canada, we are very proud that we were able to attract a quality of General Leslie to our company. We are building out the team there. And again the focus there is to develop a funnel that really is aligned to what our clients need in order to meet their goals and to align it to the emerging areas that I spoke about, including biometrics and cyber security.

So that is a ramp-up. We have a funnel. We have bids in there. I am expecting growth in the Canadian defense Intel space as the year progresses. So I'm happy with the progress we have made there. The first thing is to get the right talent, the right leadership in place, to understand what the client requires to be a success. And the Canadian government continues to invest in the defense Intel space with the latest announcement of the large shipbuilding contracts. That will also forward opportunities for information technology work and it's an area that we would plan to pursue.

That's great Mike. I'll pass the line.

Stephanie Price from CIBC.

Good morning. You've talked quite a bit about cloud at the state and local level. Can you give us a sense of how big that is in terms of state and local revenue at this point and how big you see it getting in the near term?

I don't have those at the ready, Stephanie, we can take a look at that. But I would -- I guess what I was trying to telegraph on the cloud is that the cloud has also enabled us to take our advantage ERP system and bring it down market. We have, traditionally, going back to the early days of AMS, we have been focusing on large jurisdictions, the state level, New York City, LA County, which are very big and important long-term clients with us, But some of the smaller jurisdictions who have the same requirements, we were not able to scale it down as readily for them, either from a price point or a functionality basis. And the cloud is enabling us to do that. So that is an area of growth and, again, we are starting to pull together. We have plans in those areas. We're starting to pull together our success level there.

The second area we are very optimistic is around the US Federal Government. As you know we won I believe it was the first award under the task order in terms of cloud. The award we won with the Department of Homeland Security. It was also, as you know, challenged in the US and thankfully the client was very generous in reinforcing the quality of our offering and the quality of our delivery. So we see good opportunity to follow on. Our experience is quality work equals more work so we are expecting more there.

I'd like to see a little more traction on the commercial side in contrast, or in comparison. It's not as rapid of a growth rate as we are seeing in government, but I believe that will follow and it's an area where we do see opportunities in the back end of the year here. So cloud is an enabler, both for the clients, but also for a company like ours, in terms to get our solutions out to more midsize clients around the US.

Great. And can you talk a bit about your use of the cash float withdrawal again in the quarter? Can you sort of rank it between buybacks and debt repayment and acquisitions?

Well, I guess, directionally, as you know, when our priorities invest back in the business and we are seeing more opportunities to do that. We are investing the cloud, we're are divesting in defense Intel and health. So but as far as the other areas we continue to believe our stock represents excellent long-term value so we continue to buy back the stock. I think in the quarter we bought back nearly I believe nearly was CAD91 million of stock. We bought back, sorry, 3.3 million shares for CAD63.8 million at an average price of CAD19 million. We can still purchase up to CAD13 million of stock between now and February 2012 under normal course issuer bid and we intend to continue to buy back our stock. And we are working down the debt. As you mentioned I think the amount of debt that was repaid in the quarter was about CAD113 million, Stephanie. So we stick pretty close to that pattern. We are working down the debt gradually. The cost of capital is extremely low there, under 1% and it is still very accretive to buy back our shares.

Great. Thank you very much.

Kris Thompson from National Bank Financial.

Great. Thanks. Good morning. Mike, maybe just on the vertical segments here in financial services, if my math is correct here it looks like, on a quarterly basis, is around CAD200 million this quarter down from last quarter at CAD270 million, and before that it was well over CAD300 million per quarter. What is happening in the financial services vertical there and do we expect those revenues to start to accelerate again or do you expect the deceleration to continue?

Well I think it's a good question, Kris. One thing, just to remind you, when we pulled the health vertical out, we pulled it out, it brought down our revenue in financial services as well as government, and while we took it out of both periods, of course the growth rate on health rate is much faster than other parts of the business. So part of it is that. Part of it could be FX and also the large runoff that we had in the infrastructure business was a financial services client. So those three factors would impact that.

But as far as the base business of financial services goes, we continued to grow our business, especially with the banks in Toronto which is a big growing market opportunity for us. We continued to use our software in there and expand our consulting capabilities. So I'm -- I see the banks and the financial services actually as an area of continued growth here in fiscal 2012 and beyond.

Okay, so you're hoping the CAD200 million quarterly rate might be the low watermark?

Yes. I think, again, it's subject to -- in some cases, as you know, we are selling a service in there that is volume driven so that it can be impacted by seasonal impacts but, again, we would look to grow our financial services verticals. It's part of our strategy to see growth there clearly in the government and health services as the three major ones.

Okay. And just on the margins so I understand this, the CAD11.7 million charge related to the write-down of those financial solutions, was that all in the GIS unit?

No, the majority of that was in the Canadian operations and a small piece of it was in the US operations.

Okay. And what about the CAD29.6 million charge? Where is that --

The real estate?

Yes, in real estate and I think headcount reduction.

Again, the majority of that was in Canada. If we look at the breakout here, in Canada on the impairment side that we just talked about, CAD9.5 million of that was in Canada. In terms of the impairment on the software about CAD2 million in the US. On the real estate there was CAD11 million of the CAD16 million was in Canada. And in the severances there was about -- between GIS and Canada there was about CAD7 million. So a good portion of the restructuring was in Canada.

Now again, my own philosophy on restructuring is companies should restructure when they are financially strong and we continue to be very strong financially. In fact, even with the restructuring charge, our net margins are still either first or second best in the industry. So these are things that we saw an opportunity here to act, to continue to strengthen our business go forward, and as I mentioned, they will be accretive to earnings per share in fiscal 2012.

Okay, that segmented data was very helpful. Just in your prepared remarks you did mention that your go forward costs would be reduced from that CAD29.6 million restructuring. Can you give an idea of the annual run rate savings there?

Well again, part of that will depend on some of the take-up rates. But the savings for the year could be north of CAD20 million. So it could be fairly significant in 2012. Now we have got other headwinds as you know. Year-over-year our debt costs are going to climb, given our new financing that we have in place, so there's headwinds and tailwinds here but clearly this one will be helpful to us as we go through fiscal 2012.

Okay. Just last for me. David, on the income tax rate, you guys keep outperforming our expectations. I think most of us are modeling 30%, how should we think about income taxes next year?

Well, I think again we're going to be close to that, and if you go to the MD&A, once again we have given you a bit of a range that you can use as you go forward.

Okay. Thanks a lot guys.

Paul Steep from Scotia Capital.

Mike, just one quick one. I guess the pace of deals obviously post-Stanley slowed down, but maybe give us your thoughts right now on M&A, either large M&A, maybe US federal type market. And then on a contrast, it's been a few years since you've done a number of small deals -- it looks like you ramped a lot more internal development. Maybe just the overall thoughts on how the capital gets used? Thanks.

Yes, Paul, I think just to -- I would think on the federal space that we would stay a little bit quiet there for a while because, again, we have a large enough platform right now and enough vehicles to actually drive organic growth there, which is the most accretive use, frankly, of our cash. So relative to the federal government space in the US, we love what we have. We've got a great team. Lots of vehicles. Great capabilities there. So we would look at the investment we made there with Stanley as giving us the platform for organic growth in the US and also leveraging, as I said, that back into Canada and eventually into the UK market. So I think that investment has been accretive for us and it's also very strategic.

If we do something in the US, we would be looking more on the commercial side and again we would be looking, where possible, to pick up IP. So software solutions, software-as-a-service, either already in place or the capability of taking software and turning it into a software-as-a-service.

Europe is an interesting market valuation. They are very, very attractive relatively speaking to the past and to our own valuation. So we continue to watch the developments in Europe daily, I guess, probably the same as the rest of you are. So we are keeping a close eye in Europe. There are some franchises there that are of interest, but again, we do our normal cautious wait and see. We are not in a hurry here.

As far as the small acquisitions, we have been picking up and looking at very small ones that are more IP-based that either are a niche, to help us fill out a portfolio or, again, something that we can turn up as a cloud offering. So you may see more of that on a go-forward basis.

As far as the use of cash, as I said, we are investing more of our cash into organic growth standing up new offerings. The cloud one, the insurance -- the PNC insurance fraud platform is another good example of that. We believe these are great annuity-based solutions that over time are very accretive to our bottom line. So we're going to stick to our knitting there. If we see something that, in terms of an acquisition that fits with our long-term strategy, and the price and the time is right, we will pull the trigger. If not, I think investors should expect us to continue to invest in our business, buy back our shares and gradually reduce our debt.

Okay. One quick clarification just on modeling, because that was fantastic. On CapEx -- out of that I would assume it's fair to comment that that would lead me to point to sort of a run rate type number into next year, David? Given that no big irons, no big data center investments coming. These are small, capitalized software developments?

That's correct, if there is going to be a large data center investment, it would be coming with an outsourcing contract so you would see an announcement in regards to that.

Got it. Thanks guys.

Steven Li from Raymond James.

Yes, hello. So Mike, just quickly on the US EBIT margins, so the restructuring actions does it take it back to a 13%,14% range and is that a good target for 2012?

It's a great target but it wouldn't take it back to that level. There's gradually, as I said over time, we would look at improving our margins there. Again, I remind you, Steven, we have a different mix in the US than we do in Canada. We are much heavier on the government side. And while I believe our margins in government are best in class, they still generate less margins than the commercial business. So over time we have to re-balance, hence my comments on any future acquisition target in the US being more commercially based. On the other hand you have greater certainty on earnings per share coming out of that government business. So it's six of one, a half dozen of the other.

But again, the restructuring charges will help us in the areas I mentioned, in terms of moving up utilization rates, reducing our overheads and really cleaning up some surplus real estate space. So it is a step towards gradually improving the margins. And again, I'll remind everyone that our US numbers do carry about the two percentage points for the amortization of intangibles associated with AMS and with Stanley. So you really have to, from an operating perspective, bump those numbers up by about 2%.

Okay. That's great, thanks.

Mike Abramsky from RBC Capital Markets.

Yes. Hello, Mike. Thanks very much. How are you? So just back on the upcoming developments at the federal level in the US. In terms of budget, I appreciate your thoughtful comments regarding what happened in the prior round, at the same time I think the concern is that the super committee will have to implement some fairly deep cuts, which is probably new to the process this time around, whereas last time it was really more of a stopgap spending challenge that affected bookings, as far as I understand it. So how do you see those potential cuts, perhaps more as presenting headwinds to your US federal business? What do you think -- how do you think that will play through?

Yes. It's a good question Mike. And I think you know, obviously, none of us have a definitive answer there. So I'm a pretty grounded common sense guy and I look at this thing the same as I'd look at a business or a large corporation. I break it into, as I said before, whether information technology is part of the problem or part of the solution. If you look at the size of the budget cuts that they are coming with, it would essentially, you could eliminate all spending on IT and you wouldn't come anywhere near the targets that they need to meet here.

And then the second reference point, I look at it, if you want to take out costs out, you want to drive greater efficiency, you have to invest in information technology. It's an enabler. It allows programs to be set up, it allows costs to be taken out. It allows cash to be preserved and in the case of using our cloud offering versus building it in their own centers. And finally if you look at the history of the US in the defense Intel space, as they run off from the various conflicts they are in, they are investing more in IP-based and software-based solutions. Not only from an armament standpoint, but also from an Intel standpoint in terms of cyber security.

So my view here is that you could have some short-term ongoing stop-and-go on the bookings, but if I look at the deals that have been awarded, they are not short-term deals. They are not six-month deals. These deals are four and five years out. So it tends to validate, at least in my mind, I don't know about yours, Mike, that in the ongoing business here, you have to invest, whether you're government, federal government, the points that I made on the states that are replacing ERP systems. Business has to go on. The business of government has to go on. And information technology is an enabler. It's part of the solution not part of the problem.

And it is against that premise that I look at my business and say the best thing I can do here is to bid. Bid. Bid. Bid. And put as many bids as I can in existing vehicles and on new clients and actually gain share as this thing goes through. Now, it does put a short-term pressure on margins and in some cases a short-term pressure on revenues. Because when you get a large group of bookings coming in a very short period of time in some cases -- in this case may be six weeks, it will take time for that to ramp up into new revenue. But what it does tell me is that the recurring revenue base of our US Federal Government is rising and that is exactly where I want to be in terms of any future uncertainty.

And given the point that you are at in the quarter right now, what visibility do you have to -- I think you said earlier that you don't see, right now, any abatement in demand, but do you have any visibility into how some of the departments that you are dealing with might react, or are preparing to react, to some of these budget shifts?

I couldn't generalize that, Mike. I think it's very much department by department and where they sit in terms of how the government sees them. We continue with the EPA is a good example, they continue to be a very valuable long-term client with us. As I mentioned, we won our first win with the Department of Labor, so it's very much department by department. But again at this point we are not seeing any blanketed macro decision making here, it's more department by department, need on need.

It's a point I always make even to our own people. While we have to live in the macro environment, we actually work customer by customer and we don't want to lose that focus. We do better. We win more when we focus on our clients as individuals and not as part of a macro environment. Europe is another good example. We had double-digit growth over there and our margins improved significantly in a very challenging market. And the way we do that is not look at what the Italian bonds are trading at today, but what does our client in France or Germany or UK need to win and grow. So that is the strategy. The issue is constant execution of that strategy and when we do that well, good things happen.

And then on the Canadian business, you talked about defending that business and it's rich margins and your share. Are there any potential headwinds to that business in terms of upcoming contracts? I think there was a postal contract for example, et cetera, that you know that are a focus for you right now?

Well again, we constantly have renewals. In some cases, as was the case with the large financial institution, they have evolved their own strategy in terms of how they want to evolve their own shared services and that type of thing. So we constantly look at that. But again, we have a very strong franchise in Canada. We still see opportunities here and, as I said, we have got to get by a couple more quarters so that the decisions we made half a year ago are out of our comps and when I stripped them out. As I mentioned in this quarter we grew about 5%. So that is not a bad spot to be. Bookings could be better in Canada and the team's working hard on doing that and I expect they will strengthen throughout the year.

Sorry. Just to clarify, any update on that particular contract that I mentioned on the postal side?

No.

All right. Thanks Mike.

Great. Thank you very much. Nelda. And thank you very much, everybody, for joining us. We will see you back on February 1 for our Q1 results, as well as our annual general meeting.

Thanks folks.

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