CGI Inc (GIB) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI first quarter 2012 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.

Thank you, Wayne. Good morning. With me to discuss CGI's first quarter fiscal 2012 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 Wednesday, February 1, 2012. Supplemental slides, as well as the press release we issued earlier this morning, are available for download along with our Q1 MD&A financial statements and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

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

Beginning this quarter, we are reporting our financial results in accordance with the International Financial Reporting Standards, or IFRS. We have discussed this new GAAP in our MD&A. As before, we will discuss non-GAAP performance measures which should be viewed as supplement. The MD&A contains definitions of each one used in our report. All of the dollar figures expressed on this call are Canadian unless otherwise noted. I will turn the call over to David first to review the financial results, then he will pass it over to Mike who will discuss operations and segment highlights. We are going to limit the call to 45 minutes this morning in order to be ready for our AGM, which starts at 11.00 AM. With that, David.

Thank you, Lorne, and good morning. I'm pleased to share the financial details of another good quarter. Before I get into the details of the quarter, I would like to remind you that this is our first quarter where we are reporting under IFRS. We had provided our ongoing evolution and status in our MD&As last year. When we go through our results for this quarter, I want to reiterate that as part of the conversion to IFRS we adopted the equity accounting for joint ventures. So, the numbers presented today and provided in the MD&A issued this morning do not include any of the JV related revenues. The figures for the comparative period have also been adjusted accordingly. There were no other significant adjustments related to IFRS that I would like to highlight to you. However, I would point you to our note number 13 in our Q1 financial statement for a comprehensive description of the adjustments and reconciliations related to the transition to this new set of accounting principles.

In the first quarter, revenue was CAD1.03 billion, a decrease of 5.6% or CAD61.6 million, compared with the same period as last year. However, on a sequential basis, the revenue increased by 2.6%. On a comparable basis, the revenue for the year ago period contained four previously disclosed items including a license sale in the US, the revenue from our interest in Quebec based CIA, and the revenue associated with two previously announced contracts which were not renewed. Excluding these items, the year-over-year revenue growth was 1.9%.

Adjusted EBIT in Q1 was CAD139.9 million, and our EBIT margin remains strong at 13.6%. I would like to remind you that in our Q1, F-2011 was unusually strong as it included the benefits of the license sale noted above that did not have any associated costs, as well as recovery of a significant bad debt. Both of these items were pointed out last year to ensure that you had the appropriate visibility. Excluding the CAD16.7 million impact of these items, adjusted EBIT would of been CAD138.1 million, or 12.7% of revenue, thus providing for a year-over-year improvement of 0.9%.

Net earnings were CAD106.5 million, representing a net margin of 10.3%. Last year in Q1 you may recall that we recognized CAD18.7 million of tax benefits from the expiration of statutory limitation periods, as well as the last tranche of the acquisition and integration costs related to Stanley. Excluding these items, our net earnings margin of 10.3% is an improvement from 10.0% in Q1 2011 and diluted earnings per share of CAD0.40 compares favorably to 39% -- CAD0.39 in the year ago period.

Looking at the balance sheet, our DSO was 51 days in Q1, down 2 days from the 53 days we posted for the previous quarter. Our DSO is running above our 45 day target due mainly to the impact and timing of milestone based payments on some government projects. We generated CAD148.7 million in cash from our operating activities, compared with CAD97.8 million in the same period last year. The primary difference, along with the improvement in DSO, is a net improvement in other working capital items such as the timing of tax installments and payroll related disbursements.

We renewed our credit facility during the quarter. The CAD1.5 billion facility, which will expire in December 2016, offers attractive rates along with an accordion feature of CAD750 million. In addition, we drew down the USD475 million per the private placement agreement we announced in July. Including our current line of credit in place through fiscal 2016, we have approximately CAD1.3 billion in available liquidity to make accretive investments for shareholders. Our debt was reduced in the quarter by CAD47.2 million to CAD958.5 million, and our net debt stood at CAD879.5 million, representing a net debt to capitalization ratio of 26.6%.

In the quarter, we continued buying back our stock, acquiring 3.4 million shares of CGI for CAD63.4 million at an average price of CAD18.87. We will continue purchasing under the current NCIB program until February 8, then we will continue with the renewed program as announced this morning. Subject to TSX approval, we would be able to buy up to 22 million shares between February 9, 2012, and February the 8th, 2013, or 10% of the flow. At the end of Q1 our return on equity was 18.4%, a 120 basis point improvement from last year, while a return on invested capital was 12.8% reflecting the full year impact of the additional debt from the acquisition of Stanley. Now I will turn the call over to Mike.

Thank you, David. Good morning, everyone. We are off to a very good start to fiscal 2012 with this quarter's results. As David did a good job of explaining our strong first quarter performance compared to last year's excellent first quarter, I will keep my comments very brief ahead of our AGM this morning.

We are pleased with the 2.6% sequential revenue growth and the 1.9% year-over-year revenue growth, excluding specific items. This growth, coupled with continuing strong bookings, further reinforced our belief that organic growth will accelerate in the back half of the year. As previously announced, low margin contracts, disposition of CIA and the run off in the April/May time frame. In the quarter, bookings totaled CAD1.4 billion, representing a book to bill of 135%. And on a trailing 12 months, we have now booked CAD5.1 billion, or 122% of revenue. While 78% of our global bookings continue to come from our largest verticals, government and financial services, our health vertical showed the most significant year-over-year revenue growth at 18%. We continue to have good visibility of opportunities in our sales funnels, which we believe will be converted to bookings over the next couple of quarters.

Turning to our segments and beginning with the United States, excluding quarter 1, 2011 license sale, our revenue grew by 1.2% year-over-year and 2.8% sequentially. Bookings were strong across the US with a book to bill of 150% as we continue to take market share and to create and shape new growth opportunities. For example, in the health space, we announced a contract to build a health insurance exchange for the federal centers of Medicare and Medicaid. We have several -- we have several outstanding bids to state governments to support similar health insurance exchanges and are pursuing related opportunities with commercial insurance providers.

The discussions and actions around US government budget cuts are actually driving some short-term growth as initiatives are being positioned for future year savings. For example, we continue to experience success in securing work in areas focused on cost savings such as the recently announced cloud computing wins in Homeland Security, GSA and the Department of Labor. Consistent with our focus on bidding more, our pipeline now contains a higher percent of new net clients than in previous quarters. Excluding specific items, EBIT margin improved year-over-year from 8.9% to 9.8% as a result of our previously announced restructuring activities, a healthier mix of IP and the ongoing implementation of margin improvement initiatives associated with our Stanley integration. We continue to experience high demand from adding services based on our IP business solutions such as tax and advantage, which are expected to gradually contribute to our bottom line performance throughout the balance of the year.

Turning to Canada, the Canadian operations grew by approximately 3.4% sequentially and excluding specific items, grew approximately 2% year-over-year. Bookings were up 22% year-over-year, exceeding 100% of revenue. We continue to win new business with new clients while renewing long term relationships with such marquee clients as National Bank of Canada and Rio Tinto. Canada continues to deliver strong EBIT, 22.8% reflecting our ongoing drive towards the optimal revenue mix of solutions and services. We continue to see growth opportunity in our major markets across Canada, specifically Quebec, western Canada and the greater Toronto area. Our global infrastructure business continues to address top line and bottom line pressures, resulting from a previously announced contract run off and the impact of major investments relating to standing up our cloud offering and transitioning work to our global delivery centers. Excluding the contract run off, growth was 1.9%.

We continue to extend, renew and win new business in this sector, including work with Canada Post, Metro, Rio Tinto, as well as three US federal government cloud wins. Continue to see growth in our funnel and remain confident to working through these one-time headwinds. In addition, as I've said in the past, we remain focused on improving the quality of our revenue stream and in doing so, increase the profitability of these operations over time. We have also been investing in the development of a multi-billion dollar pipeline with some strategic prospects around our cloud and managed services offerings.

International growth of 5.7% was driven in part by increased work volumes in Europe, with particular strength in Poland and the UK. In addition, Australia has seen significant growth following wins in both the commercial and government verticals. We booked some additional government and financial services wins during the quarter and continue to see improving EBIT despite the challenges of the European economies. The pipeline of new business remains strong with some significant opportunities expected to close in this fiscal year.

In summary, we continue adhering to the fundamentals of running a sound business and remain focused on executing our long-term strategic plan and our fiscal 2012 business plan. We have CAD13.6 billion in committed long-term orders, an increase of CAD578 million from last year. This level of recurring predictable revenue is particularly attractive for long-term investors, allows CGI to stay focused on our strategic objectives. In addition to our renewed lines of credit, we have generated CAD621 million in cash, or CAD2.27 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 have done this quarter and year to date.

Consistent with these investments and our belief that CGI remains a very good investment, the Board of Directors approved this morning the extension of our normal course issuer bid. This will give us the flexibility to purchase approximately 22 million shares over the next 12 months. At today's price, this would represent an investment of more than CAD450 million. Thank you for your continued interest and confidence in CGI. I hope you will be able to join us for our AGM at 11.00. Let's now go to the questions, Lorne.

Just a reminder that a replay of the call will be available either through CGI.com or by dialing 1-800-408-3053 and using the pass code 4236308 until February 15. A podcast of the call will also be available for download at either CGI.com or through iTunes within a few hours. Follow-up questions, as usual, can be directed to me at 514-841-3355. Wayne, if we can poll the investment community for questions please.

(Operator Instructions) Richard Tse from Cormark Securities.

Mike, just want to ask you whether the expiration of those one off contracts, has that rebased the revenue? Should we take that as the revenue base forward here for this next year?

Well, I think, yes, most of those contracts, I believe, run off in the April, May time frame. So, that's why I'm saying, Richard, I think when you look at the year, and I tried to pull them out so that could you see them, that the Company is actually growing excluding those items. So, when they run off, you will have the rebaseline.

Okay. With respect to your bookings, it's actually been very strong the past few quarters. So, when do you think that we will see that uptick coming in with revenue. I know it takes some time to build these things out from an infrastructure perspective, but is that something that we can expect to see later on this year?

That's what I'm saying. I think some of that is going to come in the back end of the year. Bookings have been consistently strong. As I say, we have now booked CAD5.1 billion on a trailing 12-month. I think before that it was CAD4.5 billion on a trailing 12-month. We are seeing some momentum there. When I look at even this quarter, we have some very good visibility on deals. Of course, timing is always an issue. So, there seems to be some momentum building here on the bookings front. That was the first time in a while when all geographies exceeded 100% to a book-to-bill.

One final question, I was going through the MD&A on this Canada post sale, I guess of your interest in the JV, how is the CGI component of that going to work out? Is there going to be a renewed contract? Can you elaborate on that?

There is a JV that naturally winds -- wound up or winds up in the April time frame. We have advanced the conclusion of that. We have extended one contract on the infrastructure side with Canada Post company. Our existing infrastructure contract runs to December 2013 and it continues.

Okay. Great. Thank you.

Thanks, Richard.

Julio Quinteros from Goldman Sachs.

So, just in terms of the, the path to growth. Obviously, it's good to see the return back to positive organic here after making some of the adjustments. As we think about the next couple of quarters, I think we have been thinking about the back half versus the front half. Obviously, the back half should continue to see, I think, further acceleration. Can you just give us a sense on some of the puts and takes, the run offs, some of the things that we need to make sure we understand to get back to the further acceleration and the organic growth rate as we go into the back half of the current fiscal year?

I think, if you look at slide 5 in the deck, Julio, you can see some of those. We can go into more detail. Primarily in the GIS, it's a large contract that runs off in the end of April. Canada is the divesting of CIA, which was a small company which we owned a controlling position that we sold off, but because it was in the same line of business we couldn't remove it from the history. That is impacting Canada by about CAD10 million on average per quarter. And we had a low government body shop contract with the Canadian government that ran off roughly in the same period, I think, in the April, May time frame.

In the US, the only one we called out and was called out last year in the results, we had a large financial customer who sold off a piece of his business. The acquirer had to buy the license from us and it was -- it hit top line and bottom line on a positive note. So, when you draw those out -- those are the major puts and takes. They run off, coincidentally, all around the April, May time frame.

Great. Then on the international front, pretty good numbers there. I know international has been a focus for you guys. What would you attribute some of that strength to? At a quarter-over-quarter basis, looks like that segment was up quite a bit.

I think, again, last year, as you know, we invested heavily to restructure our European operations. As I mentioned at the time, we were investing not only in reducing costs and streamlining, moving to a shared services organization, and managing the bottom line; we were also investing in business development and that is starting to take hold there. Again, Europe is a very small piece of our business, but we are -- we believe that we have turned the corner there and Germany remains strong, Australia has picked up and the UK is also doing better. On the bottom line, we had issues, as I pointed out last year, in France on the bottom line, we've stabilized that and have returned to a much healthier position in France in comparison to last year.

Great. I'll go ahead and yield. Thank you.

Thank you.

Tom Liston from Versant Partners.

Michael, you talked about the robust numbers and helped vertical on the bookings numbers. Can you talk about the puts and takes within some of the government vertical, and certainly the pipeline as well? Obviously, there is a lot of activity on the ERP side, winning a few deals -- winning a big deal in fiscal coming up, but there is also a lot of cost recovery projects. On the flip side we see some puts and takes on military cutbacks, but then cyber security seems to be moving the other way. Can you consolidate some of that activity? There is some good positives and certainly maybe some cutbacks in certain areas, and what ultimately that means for the bookings quarter this number and some of the pipeline going forward?

Net-net, I have to say, Tom, if I come at the government sector, and again, when I talk government here I think most of us are really focusing on the situation in the US. I think our business in Canada remains stable. Our Quebec business is strong in government. Our Canadian business, we've significantly increased our pipeline there. Our pipeline has a lot more defense and intelligence type opportunities in the Canadian funnel than we have ever had by leveraging, as I said at the time, we would leverage the Stanley acquisition back into Canada. We see some opportunities to grow out our defense intell business in Canada.

If I look at the US, again, I have -- I point that out in my comments. In the short term here, there is deals closing that are really positioning for longer term cost savings. And I have specifically called out our cloud wins. We have now won approaching CAD100 million of cloud wins with some very significant branches of government. Homeland Security, the GSA and Department of Labor. These are -- the Army as well. So, these are very significant long-term contracts that have growth over time in them.

The second thing I would say, I'm not seeing the length of the contracts being shortened yet. Again, I see that as a bit of a canary in the mine shaft. If they start to go short, it tells me that you are going to see more and more cutbacks there. But our contracts are continuing to be three years, five years. So, it tells me that they are going to continue to invest in information technology. The book-to-bill in the government business continues to run ahead of the average of the US book-to-bill. So, that is a good sign.

Even in the defense space, as I mentioned, we are continuing to implement our strategy around the Stanley acquisition. We have now turned a contract that -- where we were a sub in the Stanley era to a prime in the new integrated company. We have run off a low margin contract there as well, which is norm for part of our strategy. On top of that, the state business with the wind in West Virginia, we now see more activity at the state level including these health exchanges. So, again, we remain very optimistic about the government business. Frankly, as I said many times, I always believe that government is a good place to be in good times and bad times because they continue to invest and we are clearly seeing that in our operations.

Very good. Just quickly, David -- probably can't answer it quickly. Certainly when you go back the last few quarters with IFRS, the adjusted EBITDA seems like more volatility to it -- and obviously there is probably a bit of restructuring last quarter and such. But, this new number in this quarter, is that the expense based on a baseline or can we expect a few more volatility in some of the elements and as we go through this, I guess we will find this out, but can you give us a little forward looking hints on that?

I think I would just like to -- I would focus you on, over the past few months or few quarters, the numbers have been relatively stable. I think we tried to, in the MD&A through the ex. item discussion, provide you with some insights to be able to let you see what is happening in the fundamental operations. There has been a little bit in the way of some gradual improvement that we have seen over the last few quarters. I think as just a general management philosophy, we are continuing to look at where we can find additional improvements and continue to invest to be able to continue to drive those improvements into the bottom line. I can't really give you a whole lot more specifically than that right now, Tom.

Very good. Thank you. I will pass the line.

Bryan Keane from Deutsche Bank.

Thanks. Thanks so much. David, I just wanted to follow-up on the accounting change. Is there a way to walk us through the exact impact to the revenue line, exactly how much if we were under the old reporting system, what the revenue would have been? So, we can get an apples to apples comparison there?

It is really just an adjustment of about CAD25 million per quarter. It's a down shift because we are taking the revenue from the joint venture out.

Okay.

Nothing much more glamorous than that.

Easy enough. Then on the head count side, head count has been about stable around 31,000. Do we see that increase as these bookings come on in the near future or is that probably a second half event? Or, how do we think about headcount growth?

This is Mike, Bryan. It's a good question because we have pockets now, where we are actually hiring aggressively around some of those government contracts, around some health care contracts. I have pockets where I need to hire, probably in the range of 300 to 500 people. On the other side, of course, I'm trying to drive higher productivity. As you know, we continuously are changing our mix. I don't have a correlation between growth and bodies like some of the pure plays. So, on one hand I'm growing in those pockets and other areas I'm trying to drive increased productivity and utilization of the operations to increase the margins.

Okay. That's helpful. Then finally, on the demand environment, it sounds like with the bookings that you are not seeing this, but we are hearing a lot of some of the other IT players talk about some delays in decision making and some push outs. I wanted to get your thoughts there, Mike.

We see some of that, Bryan. But, again, I have to tell you, given our mix of [IP], a lot of the time our IP decision is being made by the business person because he is the ultimate recipient of that. If you look at something like tax on the collection side, it's very seldom the IT guy, that's the buyer there, it's the business guy. He has the funds, and he's got the pressure of the business case in order to bring down receivables. Or, if you take some of the state business where they are trying to drive increased tax collections, they're are stood on business cases, those ones tend to move along a little faster than the more traditional IT business where the guy is really ringing it through procurement, trying to get out the last nickel permit-type of thing.

So, I think our mix is helping us a little bit here. Also, our -- about three quarters ago we made a decision to bid more to win more. As I've said, we have been aggressively increasing the number of bids and that is starting to pay off for us. I always knew it would bring down the win ratio somewhat, but it certainly is helping with the bookings that will eventually translate to the top line.

Okay. Finally, with those higher bookings, do we have to see a lower -- a little bit of pressure on the margin as the bookings ramp or how do we think about that?

I think, depending on the segments, you are going to see some of that. We are seeing that in our infrastructure business because the lead times are long there. But, in the other operations, I don't think so.

Super. Thanks so much.

Maher Yaghi from Desjardins Securities.

Thank you for taking my question. I wanted to ask you on the GIS segment, in the notes you mentioned that you made some restructuring activities in the third quarter and fourth quarter to reduce the variable cost to account for the lower revenue run rate. Can you maybe just tell us when these activities -- the restructuring activities are going to start showing on the margins? In Q1, they were still under pressure. Can we expect improvement in the second quarter or it is going to take a little bit longer?

It's going to take a little bit longer. That is an on going task in terms of working on the variable costs. We have to maintain a very good balance between service levels in that business and cost containment. So, that is going to take -- probably run through a good part of fiscal 2012.

Okay. Just a follow-up on the bookings. When I look back in 2010, you are trailing 12-months booking to billing, at the current run rate. I just wanted to ask, what is the difference? It seems like you guys are more optimistic right now that we will see an inflection point on the revenue growth rate. We didn't see it last year when the trailing book-to-bill was above 122%, which is about what it is about now. What gives you the confidence in terms of seeing that revenue growth inflection happening in the second half of this year?

I would have to go back. I wouldn't -- necessarily sure that we are running as high as 135% book-to-bill last year. I will check that, Maher. I think the issue, again, last year you were seeing the run offs of those contracts and I think we were still really getting our stride relative to the integration of Stanley, which is now behind us.

Okay.

Starting to see some of the -- remember as I said when you do an integration, the first thing we focus on is the cost elements. The revenue piece of that normally follows 12 to 24 months. So, some of the things that we put in relative to Stanley, the defense intell business, we are starting to see some of that lift.

Okay. Thank you.

Thank you, sir.

Thanos Moschopoulos from BMO Capital Markets.

David, in the MD&A you were guiding for a 27% to 30% tax rate. In recent quarters, you have been coming at the lower end of the range. Just going forward, is there a factor that should drive the tax rate higher or might it be safe to assume that you will continue to come in at the lower end of your guidance range?

The primary factors are the mix of where the profit happens to land. So, if the US is driving a little more in the way of revenue and we are able to maintain the margins or improve some of the margins a little bit more, there is actually going to be more taxable profit there. It actually is the highest tax jurisdiction that we have within the global environment. So, that is what ends up causing some of the shift in why we have such a range that we do on that number.

I guess as you look at your bookings and backlog, is there a reason to expect that profitability mix might start to shift a little bit more towards the US then?

It should be following the bookings that Mike talked about. So, we would see that happen.

Okay. Then on the DSO, can you provide a little bit more color on that dynamic and when we might start to see the DSO start to come down?

We have seen them come down a little bit already. With the large project that we have been able to announce, some of those come with, as a competitive requirement, certain types of payment milestones. So, if you don't wish to accept the milestones, and you shouldn't be bidding in the first place. It's very good revenue. It's good quality business. We do wish to participate in that activity. What we are looking to do there is to try to mitigate the build up in the work in process until we are able to hit that milestone. Right now, we have three major projects that are sitting out there that have some balances of whip. Within the next two quarters we should see that reversing around.

Okay.

To reiterate David's point, this is good quality business. This is not revenue at risk here. This is time based milestone payments.

Perfect. Finally, Mike, just as we look at the bookings, can you provide some color as the mix of SI&C versus outsourcing work in there, or the average contract duration? Just trying to get my head around how that converts into revenue and whether there is anything that would either cause those bookings to translate to revenue more quickly or more slowly than in the past.

The SI&C business is healthy. That is always a good lead sign in terms of outsourcing as well. We renewed a couple large outsourcing deals and extended them this quarter. We continue to have some visibility on some outsourcing deals that we consider promising. But I would say that what we are seeing is more activity in growth in the SI&C fund this time than the outsourcing. It's going to take a little longer to come onstream.

That's great. Thanks, Mike.

Thank you. Have a good day.

Michael Urlocker from GMP Securities.

I'm looking at the trend on the margin in the US business and certainly part of the rational for acquiring Stanley was there is an opportunity to improve margins there. We have talked to a large number of your state and municipal government customers. They like your software and they sound very stuck on using it, so I can see an opportunity to raise margins. Can you just help us understand why margins haven't been improving in the US and what there might be to do about that?

I think we are doing something about it. Again, Mike, I would point out that there is a significant mix difference here relative to Canada. There is not a comparable business. Much heavier in the government. The government including Stanley and most of the government pure plays, if you look at it, there is a greater assurance on earnings per share than there is on absolute margin. Most of these companies, I would tell you that our government business on a stand alone basis has the best margins in the government space.

We don't have the right mix totally in the US yet. Our commercial business needs to grow more. We need more software on that business in terms of mix. We are addressing that. We have got the accretion rate out of the Stanley acquisition that we promised investors. So, it's a combination of things relative to Stanley.

As I said, we've now converted a contract, where we were a sub to where we are a prime. We lead a low margin business that would be below our thresholds run off. So, we are doing the right thing there. We did see, when you exclude the one time items, we did see a pop, I think, from about 8.9% to 9.8% in terms of margins in the US. The other thing, remember, they carry about 2% amortization of intangibles in the US that are not elsewhere, relative to the AMS Stanley acquisitions.

Can you elaborate on the point you said about where you had an opportunity to move up to become the prime contractor? What is the dynamic that allows you to do that with the end customer and roughly speaking, what is the spread on margins achievable?

Again, I don't want to get into specifics of the margin spreads. But what that is demonstrating to me is, when I combine Stanley with our existing federal business -- the roots of which are with AMS, our scale now is larger. Therefore, when we are approaching renewals or rebids, we are going in there more in a prime role than a sub role in some cases. We continue to partner and value partnerships that we have out there. But in those cases, we have more room in the sense that we may be marking up a partner instead of a partner marking us up.

Thank you.

Thanks, Michael.

Ralph Garcea from Northland Capital.

As you see some of these cloud wins within Homeland Security, GSA, et cetera, what is the opportunity there to increase the scope of those contracts over time. So, it's not just a cost savings initiative on the client side but you are actually growing some of that business?

That is a good question, Ralph. In fact, that is exactly what is happening. In a lot of these cases, we are putting up on the cloud not services that we currently have. We are actually breaking into new business where the client may have the initial goal, one or two websites to put up in the cloud. But may have 400 to 500 more downstream that would be put up over time. So, we think these are very good lead indicators of future growth opportunities. Not only on the federal side but, again, this does help us address part of our issue on the data center side where it will start putting more volume into our US data center. Therefore, giving us a better balance between the fix and variable costs associated with running that operation.

Again, I point out we have also put our own services, we're moving more of our IP onto the cloud. Advantages, as ann example, we were primarily selling that to the larger jurisdictions, the New York cities, the LA counties, West Virginia and there is a down market -- down size market, I don't want to use that term because they are all valuable clients. But a smaller segment of the market that is still equal to CAD1 billion of opportunities where we couldn't really reach them given the size and the scale of that ERP software. But by putting it on the cloud, we believe that we can go into that market and compete with the Lawsons and such competitors, and pick up some of that market as well leveraging cloud and leveraging our IP.

As you look to the near-shore model in the US, you are in Belton, now Troy and Fairfax, are there other opportunities as you win more state business across the US to grow that near-shore leverage?

Yes, I think so. We are constantly in search for sites. We have three good ones. We've opened up one also -- about to open one, more associated with the military business that we have. So, these sites are good for the client. They are good for our shareholders. They are good for our people in terms of the quality of the service we provide, the quality of the earnings and the quality of life. So, they are a win-win and I think you will see us continue to expand that. We don't have a problem filling up demand in those centers.

Okay. Lastly, if you look at your outsourcing funnel, what is the split between US and Canada on the outsourcing side?

It is probably 60-40. I could check that. But, I would say at least 60-40 in the US. We made a couple large renewals in Canada that obviously come out of the funnel because they have been renewed, including the large one with National Bank. So, again, we are pushing hard to increase the outsourcing business in the US. It goes to part of the question that I think Mike asked about US margins. We need to get some more recurring revenue streams in the commercial side in the US.

Okay. Thank you.

Thanks, Ralph. Wayne, we're going to have time for one last question.

Stephanie Price from CIBC.

Good morning, gentlemen. Thanks for taking my call. Mike, you mentioned several times Stanley revenue synergies during the call. Can you talk about more about the pipeline that you are seeing there and when you think it will convert into bookings and revenue?

I think, Stephanie, it's already converting. That is the message. I think if I look to book-to-bill in the government, it's running well over the average of the company and over the US bookings. So, the integrated team are doing just an excellent job. They are working well together. Customers are seeing those synergies. We are taking share. Those bookings are not just renewals. We are actually taking share, which is exactly where we want to be. We are winning more business with our existing clients. We have opened up new clients like the Department of Labor, which is a new client for us. We weren't in there before. But we are in there now.

We're seeing those synergies play off. I would think cyber security is also another area where we are not only expanding our footprint in the US, we are also bringing that into the commercial sector and into Canada as an example. So, we are -- as I say, we are certainly pleased with not only the accretion rate but the talent, the commitment of the people that we got from the acquisition, and the top line synergies are starting to play out as we had predicted that it would be 12 to 24 months. There is still more of that ahead of us, but we like what we see.

Great. And in terms of Canadian operations, obviously it's been impacted by the position of the CIA, but can you talk a bit more about the overall market and what the major growth opportunities are that you are seeing right now?

That's a good question. Thank you for it, Stephanie. The US -- the Canadian markets have very strong positioning for us. Western Canada we are flat out, out there. There is a lot of growth in western Canada. We are hiring aggressively in Edmonton for health care contracts. We are doing a lot of work in Calgary around the oil and gas business. So, western Canada is strong.

Regina, Saskatchewan is strong. Quebec, our Quebec business is growing organically year-over-year here. We are seeing a lot more opportunities surface in the Montreal-Quebec city corridor. GTA, a big, big market for us. We continue to make headway there. We see more opportunities to grow in Toronto. So, if I had to highlight the three major ones, those are what's foremost.

I think ones that will -- are a little more trailing because, again, we are making the investment and we will get the benefit later on, as I mentioned. Our funnel in our Ottawa government business has got a nice mix change now where we are seeing a lot more opportunities in the defense intell space where we've entered just this past year. So, the funnel is starting to build and we will see how successful we are there. But the rewards and the award should be in the -- on the back end of the year as these bids move through the various approval stages. Those are the major areas in Canada that I think where we are seeing growth and some good opportunities.

Great. I just have one final question. In terms of Europe, obviously revenue and profitability is up nicely. Do you see yourself investing more in that geography or are you happy with your current presence there?

Well, again. I think I'm not unhappy with our current exposure to Europe. I'm pleased with the results there. I think, unlike a lot of companies over there, we are seeing some returns on the investments we made on restructuring. I don't see the need to do any major restructuring in Europe. When I look at the balance of the fiscal year, the pipeline looks strong. The wins look very favorably.

As far as an acquisition, we continue to look across our segments for opportunities to grow, as David mentioned and I reinforced. We are generating a significant amount of cash here, north of CAD600 million a year. We have our line of credit in place. We have our long-term debt secured. We are buying back shares and paying down debt. So, we have the -- and, by the way, investing, I would say, heavily into our organic business as I mentioned relative to GIS and our solution.

We are well positioned here. If we see something that meets the criteria of the right target, the right price and the right time, we are quite willing to pull the trigger. Our valuation relative to some of these targets are extremely strong and we continue to look. I would certainly view Europe as a good long-term market and somewhere where we, over time, would continue to look to build out our business.

Thank you very much.

Thank you everyone for listening. Hopefully you can tune into our AGM at 11.00 AM this morning. We will see you back here for our Q2 results in late April. Thank you.