CGI Inc (GIB) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the CGI second quarter 2012 results conference call. I would like now to turn to the meeting over to Mr. Lorne Gorber, Senior Vice President, Global Communications and Investor Relations. Please go ahead.

Thank you, Jesse, and good morning. With me to discuss CGI's second 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, April 25, 2012. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q2 MD&A, financial statements, and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The complete Safe Harbor statement is available in both our MD&A and press release, as well as on CGI.com. We encourage investors to read it in its entirety. We are reporting our financial results in accordance with the International Financing Reporting Standards, or IFRS. As before, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollars figures expressed in 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 second quarter, then he will pass it over to Mike, who will discuss operations and segment highlights before going to Q&A. David.

Thank you Lorne, and good morning. I am pleased to share the financial details of another good quarter. I would like to remind you that this is our second quarter reporting under IFRS. Other than the adoption of the equity method of accounting for joint ventures, which I described last quarter, there were no other significant adjustments related to IFRS. In second quarter, revenue was CAD$1.07 billion, up 3.3% from Q1, the second sequential quarterly revenue increase this fiscal year. On a year-over-year basis, revenue was 4.1% or CAD$45.9 millionlower, due to the previously disclosed items included in the year ago period. These are again detailed in the MD&A

On a comparable basis, excluding these items, the year-over-year revenue growth was 3.4%, or 2.6% on a constant currency basis. Adjusted EBIT was CAD$156.4 million, and our margin EBIT improved by 110 basis points sequentially to 14.7%. Net earnings were CAD$105.7 million, representing a net margin of 9.9%, and diluted earnings per share of CAD$0.40. For year-over-year comparison purposes,a favorable tax adjustments as well as other previously disclosed items have been removed from Q2 F2011. As a result, Q2 F2012 net earnings compares to CAD$111.8 million, or 10.1% in the year ago period, And diluted earnings per share was CAD$0.40.

Looking at the balance sheet, our DSO was 52 days in Q2 compared to the 43 days we posted for the year ago quarter. The increase is due mainly to the impact and timing of milestone based payments on some government projects. We generated CAD$104.2 million of cash from operating activities, compared with CAD$192.4 million in the same period last year. Over the last twelve months, we have generated CAD$533 million, or CAD$1.97 in cash per diluted share.

during the quarter, we booked CAD$787 million in new contract wins, bringing the total bookings over the last 12 months to CAD$5.1 billion, for a book to bill of 124%. As usual, we continue to stress the importance of considering our performance on cash and bookings trends over a trailing 12-month period. Including our current line of credit in place through fiscal 2014, we have approximately CAD$1.3 billion in available liquidity, plus an accordion feature of up to CAD$750 million. Our debt was reduced in the quarter by CAD$77.3 million to a net debt of CAD$795.3 million, representing a net debt to capitalization ratio of 24%. This compares to a peak of 31% following the Stanley acquisition in August 2010. In the quarter, we acquired 1.6 million shares for CAD$30 million at an average price of CAD$19.30. Under the current NCIB program, which expires in February 2013, we can still purchase more than 21 million shares.

At the end of Q2, our return on equity was 17.4%, while our return on invested capital was 12.5%. Now I will turn the call over to Mike.

Thank you David, and good morning everyone. I will spend a few minutes providing some color on each of our reporting segments, and wrap up with some brief comments on the Company as a whole. Starting with the US, our revenue grew by 7.9% at constant currency, up CAD$37.8 million year-over-year, as previously announced bookings came onstream across all of our key industries, especially in the health and government verticals.

Our EBIT was up 54%, while EBIT margin improved significantly from 9.1% to 12.7% as a result of previously announced restructuring activities, a healthier mix of profitable revenue, and the ongoing implementation of margin improvement initiatives. Specifically on the government side, CGI Federal continues to show positive trends and strong performance. Bookings were 30% higher than they were in quarter two of fiscal 2011, and for the first six months of fiscal 2012, federal bookings were 23% higher year-over-year, and continued to exceed the Company's book to bill average on a trailing 12-month basis.

In the US federal government market, as you know, contract vehicles drive future revenue opportunities. I am pleased to report that we have successfully qualified for 12 new contract vehicles, with a potential value of CAD$5.6 billion, giving us increasing access to new business across several departments and agencies. On the defense side, we continue to see a trend where there are more extensions and ceiling increases on existing contracts. As a result, nearly CAD$170 million in opportunities slipped out of quarter two and into the second half of the year.

Across the US state and local markets, new and existing clients continue to turn to CGI for help in addressing continued budget pressures, while they look to increase operating efficiencies without impacting major citizen services. Our tax and revenue collection business continues to grow, while we see some states and larger counties consolidating outdated systems. We continue to make the necessary investments to position us for sustainable growth, especially in key client demand areas. For example, over the past few years, we invested in key offerings like cloud, cyber security, and health IT.

In the US Health IT sector, we experienced revenue growth across both our commercial and public sector, as clients consolidate their application perspective for cost savings and increased efficiencies. Our cloud offering continues to win favor in the government market. We won more than CAD$100 million in government cloud work, and have a pipeline with $2 billion of identified federal cloud opportunities. Importantly, our cloud solutions are opening doors to new agencies, like the Department of Labor, the National Archives and Record Administration. Leveraging our cloud offering as a wedge into new agencies is a strategy that continues to position us well for the long-term.

Our global delivery model and more specifically the expansion of our Home Shore strategy, continues to be highly relevant for US clients. Two weeks ago, we broke ground on our newest onshore delivery center in Belton, Texas, where we already have 50 members with a plan to double by year-end. The center is already supporting our clients in both the commercial and government sectors. We are seeing increased interest from our commercial clients looking to rebalance their IT sourcing with more of an onshore near-shore mix versus a single geographic strategy.

I now like to briefly address the Canadian operations. Revenue in Canada was CAD$314 million, a sequential increase of 1.7% over first quarter 2012, but 11.4% lower versus the year ago period. As expected, a number of previously disclosed actions, our decision to divest CIA and the runoff of a body shop contract in the government vertical, continue to negatively impact the year-over-year revenue comparison, which was exceptionally strong in quarter two of 2011.

The effectiveness of our strategy to evolve to the most optimal mix of high-end consulting, IP based solutions and services with full outsourcing continues to be evident in our 23% Canadian EBIT margin. As a demonstration of the strong client relationships we nurture, we continue to expand and renew long-term contracts with visibility on several new opportunities in our major markets, particularly Quebec, western Canada, and the GTA. Our global infrastructure business continues to address top line and bottom line pressures, resulting from a previously announced contract runoff, and the impact of major investments relating to standing up our cloud offering, excluding the contract runoff, our revenue increased by 5.2% year-over-year.

As I have said in the past, we remain focused on improving the quality of our revenue stream, and in so, increasing the profitability of our operations. We have also been investing the in the development of a multi billion dollar pipeline with some very strategic prospects around our cloud and traditional managed service offerings. In addition new offerings such as virtual desktop or VDI, social business 360, and e-mail has a service provides significant value, and are generating major interest from the enterprise marketplace.

Revenue in our European segment was CAD$55.5 million, essentially flat. However, we continue to see an improving EBIT trend as restructuring activities initiated during fiscal 2011 continued to take hold. Year-over-year EBIT improved by 4.2%, and EBIT margin was 40 basis points higher. The pipeline of new business remains strong, with some significant opportunities expected to close in this fiscal year.

To summarize, we continue adhering to the fundamentals of running a sound business, and remain focused on executing long-term strategic plan, and our fiscal 2012 business plan. In support of these objectives, we continue to identify not only profitable growth opportunities, but actions that will reduce our cost base and create significant value for shareholders over the long-term. Thank you for your continued interest and confidence in CGI.

Let's go to the questions now, Lorne.

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 4236308 until May 9th. As well a pod cast of this call will be available for download at either CGI.com or through iTunes within a few hours. Any follow-up questions can be directed to me at 514-841-3355.

Jesse, if we can poll for questions?

Thank you. (Operator Instructions). The first question is from Tom Liston from Versant Partners. Please go ahead.

Thank you. Good morning. Just on the 12 new vehicles, obviously because they are new vehicles, none of that is in backlog. Can you describe the opportunity set as you see it, of what you think you can capture that CAD$5.6 billion?

Thank you for the question, Tom. It is a good point. Whenever we qualify for a vehicle we book only one dollar in the backlog, just so that we keep track of it, so there is nothing that has been added to the backlog. So about 92% of the vehicles that I mentioned represent inroads to new business with either new or existing clients. Only one of the vehicles was actually a renewal. We see this as a real important place maker, especially given the current situation there. It means that we have more opportunities to grow the business, more opportunities to fire in task orders, so from a strategic and tactical prospective, it is a very important key indicator for our federal business, Tom.

And it appears that publicly, do you have a weighed, rough weighed average timeline for those vehicles?

They normally range from three to five years, I would think. Some of them can go longer if they have one or two-year extensions on the back of them.

Okay. And just you described a bit of transition in the environment for more of a mix of near shore, offshore, et cetera. Certainly emphasis on Wipro had fairly tough quarters, Tata maybe a little bit better, but in some of the North American companies, maybe a little better. Can you just describe, maybe add some depth into that comment, and what you are seeing?

Yes. What we are hearing from our US customers in particular is that in many cases we are hearing I have reached my quota of work that I am prepared to give to the Indian suppliers, and I am looking at alternatives and CGI has the only real true home shore facilities, and again, when I say the only real true, I am talking about a structured offering that is located in located in low-cost jurisdictions, with proper methodologies to support productive delivery, quality delivery, and we are also hearing and seeing pressure building on a lot of US-based companies that are international, to bring some of that work home.

Again we are targeting our competitors, who are in some of those accounts, and making sure that the clients realize first and foremost they have a choice, and that again, they can move from out tasking to outsourcing, where we are selling an output that has not only has a very good price, but excellent quality, and we also address the question of operational risk in our operations. So we are starting to see that, we are picking up on that, we are targeting, have a campaign to target some of that business, and we expect to see some of those wins in the back end of the year.

Just one quick one. The change of segmentation, I don't think the US changes materially. It looks for me if I back it out, margins went from 10.3 last quarter to 12.7 this quarter, can you confirm if that is right, and certainly walk through on how you achieved that margin improvement?

Well again, I think very, very pleased with the margin improvement in the US. I had predicted that this was an area of focus for us this year, and that we did some restructuring last year that really centered on continuing to drive up our utilization of real estate, our utilization of force, constantly looking at balancing the utilization rates, and as the growth comes on, of course the utilization rates rise, so again, the EBIT was up in the US 54%, it went from about 9.1% to 12.7%. Again, also a good mix of revenue. We had some more IP business come through in the quarter, much like what we have in Canada, we are evolving the mix in the US to have more of the high-end IP-based services and solutions embedded in the business. Our commercial business was also strong in the quarter in the US, and that obviously is accretive to the EBIT margins. I would just remind again, investors, that you have to add about 2 points for that EBIT number due to the intangibles that we are incurring as a result of the Stanley and AMS acquisition.

Sure. Thank you. I will pass the line.

Thanks, Tom.

Thank you. The next question is from Thanos Moschopoulos with BMO Capital Markets. Please go ahead.

Good morning. Can you provide color on how the upcoming election cycle and the threat of defense sequestration cuts in the US may or may not affect the federal business in the upcoming months? Is it business as usual for now, or does it mean as we head into the second half that we might see more of the bookings come in the form of task orders rather than long-term contracts?

Our expectation, I know in some areas we might be somewhat contrary in there, but the area we are focusing on we believe that we not be believe we will not be materially impacted. We have already lined up a lot of bookings, we are expanding the contract vehicles, and the type of work we are doing is also very tied to keeping the government running, in terms of maintaining systems, operating systems, running systems, hosting systems, helping them reduce costs, doing Medicaid/Medicare audits, setting up these HIX exchanges, the RAC programs. So we are very much, I believe, in the area where investments will continue. They may well do more, more task orders.

As I mentioned in the defense side, we are seeing some movement towards really increasing the ceilings or taking advantage of short-term extension options to push some of this work out, and stay within the existing vehicle and existing provider, but again, we think that is a short-term measure that will actually timeout, and those contract also be out for bid and renewal in the back end of the year.

Okay, great. And just to maybe expand a little bit on the health care side. Obviously, a bright spot in the quarter. Can you provide some more color in terms of the type of work you are doing there? There is talk of the health care act potentially being repealed. Would that have an impact on the business, or is a lot more of it tied to areas like the Medicare and Medicaid claims processing that would be unaffected by that?

Again I don't want to predict that will happen at the Supreme Court in the US, but my sense is the bigger issue that the healthcare industry and governments are facing is really the cost of healthcare, and so regardless of what happens there, the cost of healthcare continues to rise and Information Technology is part of the solution. We are active on a lot of fronts. It is not only on the government side, but also the commercial side. I think you can see as you mentioned the growth that we are experiencing, we broke out the health vertical a couple of quarters ago and we continue to see I think now it represents about 11% of our revenue, and is growing at a double-digit rate. We are active, as I say, with health exchanges, with automating health records, auditing, Medicare, Medicaid claims. We are very active in setting up these and bidding on these HIX exchanges, health information exchanges across the US, and expect to continue to win business in there. So the outlook for health globally for us is very, very positive, and hence the reason we broke it out so that investors would have more visibility into what I consider to be a long-term, high-growth vertical.

Great. Thanks, Michael. I will pass the line.

Thank you.

Thank you. The next question is from Julio Quinteros with Goldman Sachs. Please go ahead.

That is the Montreal version of my name. Couple of quick ones here. When we think about the path of the reported revenues, obviously, it is important to get to that point. Is there anything in the results this time around in how you guys are trending as you begin to anniversary some of the drags for growth that we shouldn't expect to see the acceleration in the reported revenues into the back half of the current fiscal year?

No, I would say against that measure we are on track. The CIA and the low body shop business, their contracts in Canada have runoff now effective the 1st of April. The larger financial contract on the GIS, our infrastructure business, runs off early May, so when we look at those coming out of our comparables, and I think you see that when I look at the sequential growth and I also pull them out that we are actually experiencing real year-over-year growth with the existing results, and we expect that to continue in the balance of the year.

Okay. One of the guys commented on all of the results that we have seen from some of your peers, both within India and within the US, and I think the one area in particular that I wanted to sort of focus on was the financial services vertical in particular, where there seems to be a lot of weakness in terms of discretionary spending, in terms of pushing out work or delays. What is sort of your specific experience in terms of financial services? I know if you sort of neutralize out some of the noise in that vertical. What are you seeing and hearing on the ground from clients, and what is your expectation going forward for that vertical?

Again, that is a good question. I would remind investors, of course, we have the advantage of having a lot of opportunity and work with the Canadian banks, who continue to invest in terms of cost reduction, releasing new products, and in some cases actually expanding their businesses outside of Canada, so we have got a very strong foundations upon which to build. We are also seeing more globally, though, interest in our IP software where financial institutions are looking to upgrade their capabilities, or in some cases going to our SaaS model on things like Trade 360. I also expect to see some of the banks participating that rebalancing that I spoke about earlier, where they may well have quota out their appetite for offshore, and be looking to rebalance some work, either existing or more likely new work in North America. We also have very strong P&C segment that is very healthy for us that we include in the financial sector, and we continue to see good opportunities in that area. Some of these companies are actually looking at demutuallizing, and this is a good opportunity to help them bring down their costs before they do that.

Lastly, just hearing you talk about the increased efforts around home shore, nearshore, relative to offshore. This always goes back to one of the first conversations that we had about where the headcount growth is in your business, and just looking at the sets that you provided, it seems to never change in terms of headcount growth. Do you think that metric from a headcount growth prospective needs to actually move higher from here, especially as you continue to tap into some of these opportunities where folks actually do want to bring work, more towards the nearshore side? Should there be more headcount expansion in the model or not?

That is a good observation. One thing that actually helped hold our headcount last year was that we increased the working hours in Canada to 40 hours from 37.5 hours, so we picked up about 6% capacity in terms of hours without adding any headcount, that has worked through are the system now, and we certainly have pockets in Canada, and in the United States, especially in the United States as we bring on these bookings into revenue that we are actually hiring. We are also growing our Indian operations at a double-digit rate, but again in that case, as I said, I think earlier in the year or late last year we set that captain capacity up, so we are essentially filling it out now. We will see some pressure on the headcount, but again I think investors ought to expect that CGI's headcount to revenue ratio will remain fairly stable because again, a lot of our work is fixed price, or outcome based, and against that measure we are driving high productivity, and as a result we are able to do more work with the same or less people.

Thanks, guys. Good luck.

Thanks.

Thank you. The next question is from Richard Tse with Cormark Securities. Please go ahead.

Thank you. Mike, I wanted to touch on that question about the back half of the year. If you look forward to call it the next 12 months, do you see any potential contracts that could be up for renewal or at risk, or are we pretty much clear of that, and pretty much at the base level to start excelling that revenue again?

I don't think we have anything material. The Bell one is out until 2016, that is probably the more material one that you would be interested in, Richard, but we continue to do good business there, and have a very satisfied client. National Bank was the large one that was coming due, but we have rolled that one over and extended it, so no, we don't have anything of significance that comes to mind here over the next 12 to 24 months.

Okay. Then in regards to just some of the trends in the market. Can you sort of talk on pricing? There are some data points out there that would suggest that the market has become a little bit more price sensitive. I guess in a related question, clearly you guy have done a great job in terms of margins. How do you look at balancing margins and productivity improvement with winning new business, in light if the precedence is a factor these days?

Again, I think unfortunately in our industry a lot of time a project win is not really a win, because the project doesn't get delivered on time and on budget, customer is unhappy, the employees are unhappy and the supplier gets burnt. So we continue to hold to know our criteria first thing we want to make sure we are doing bringing on quality work that brings value to the customer in terms of price, quality, and risk, and then it delivers a fair return to our shareholders. Again, I would say that we feel that we are very price competitive when you consider all three stakeholders, including the need to give a return to our shareholders. We are going to continue to stick to that philosophy.

I think as I said numerous times, one can bring on low or no margin revenue rather readily in our business it is not accretive, and it is a cancer really in the industry. We don't think that we are disadvantaged with our pricing. In fact, I would tell you that we probably have some of the lowest overheads in the business. What we like do is get fixed price work where the customer has no or zero risks. We take on the risks, but for higher returns and you are seeing that in our business and our business model. But when I look and I do benchmarks of our pricing, our offshore pricing, our nearshore pricing, the kind of client intimacy work that we do, we are very competitive, especially when you compare us to some of the larger firms.

And I guess if you look at some of your competitors have been getting hit as a result of not being as focused on product profitability. Do you think that sort of increases the opportunity for M&A for you right now?

Well, I think first and foremost, I think it provides us with an opportunity for organic growth, because I think clients are tired. I was on a call with a large client who had chosen another supplier and had come back and reinforced the point that I have been make inning the IT services business. The biggest isn't the best. Simply put, the best is the best when it comes to delivery. Your scale doesn't guarantee that you will deliver on time and on budget. I think it does afford us opportunities. We do get callbacks. We get called in actually, much like a fireman sometimes when a project is on fire, and they ask us to come in and see if we can fix it, bring it around, so we do get opportunities there.

On the M&A side, obviously, valuations are low, but they are low for a reason. They are reflecting the performance of some of the competitors, and they are reflecting the markets in which they operate. So we continue to look there, but again, we would have to be satisfied that it was something that could significantly advance our overall strategy here, and again, we are very much focused on the quality of the revenue and what we can deliver in terms of consistent performance for shareholders. We continue to look. We have a funnel, but you need to find the right target, the right price, and the right time, and you also have to get a willing seller.

Right. Okay, thank you.

Thanks, Richard.

Thank you. The next question is from Scott Penner with TD Securities. Please go ahead.

Thanks. Mike, I just wanted to ask about the cloud actually. The 2 billion in identified opportunities that you talked about, what is the timing of these awards, 12, 24 months or so? Secondly, on the drive to move your own applications, advantage and such into the cloud, just any update on the level of progress there and the interest from clients?

Okay. So again, that backlog is in the US federal government. Again, just to give, remind investors that the outgoing CIOof the federal government had set some aspirations and targets that 25% of their applications would ride on the cloud, so there is certainly a driver that is impacting behavior, hence more and more of the departments are looking to stand their environments up on the cloud.

We are one of the few certified cloud providers to the US government, and as I said before, we made a bet, a big bet by really standing up sufficient capacity in there so that we won't be taken out by not being able to absorb what we saw was really a significant opportunity, and it is turned out to than way as I said we have already booked CAD$100 million of cloud work, that is really future revenue to us, and we are pursuing the 2 billion that we have identified. Normally that would take 12 months, maybe even slightly longer out to 24 months by the time they go through the entire process to an award.

Okay.

Our own front, we have advantage on the cloud. We are working that. It will take a little time because you are dealing with smaller jurisdictions, and momentum is also on the cloud and again, we are working opportunities with agencies who will look at not only momentum on the cloud, but maybe momentum under a more traditional model as well.

And could you just, Mike, maybe talk about qualitatively the availability of some of your IP solutions in the US? Do you have in Canada the type of solutions that are in part driving those sort of margins. Are they fully available in the US, and assuming that is not the case, what is the timeline for that?

Yes, there are some. We have IP solutions by vertical, then we have some that are horizontal. Things like tax, which is our collection platform is horizontal. Things like Trade360 are horizontal, that can cross geographies. We have some solutions in the wealth management space in Canada that up until recently have not been available in the US,we have identified those.

We are making the investments to make them US ready, and in fact invest, which is our big portfolio management system for funds is now available in the US, and we have already identified a first client there. We are staffing up the marketing communication strategy, so that is an example, Scott, where you would see some of that migrate into some the bigger US market. Now on a broader scale, we're also looking at all of our IP, in terms of identifying more of it, creating more of it, partnering for more of it, buying more of it, and making it more global so that we can contribute to our internal goal here of attempting to increase our IP from 20% of revenue to 40% over the next five years.

Great. Just one for David if somebody could elbow him and wake him up. Just the interest expense was higher than I had thought it would be, and I guess that stems from the activities late in the December quarter. If you could just talk about whether that in fact is the case, and whether this is a good level going forward?

At this particular point in time it is a good level going forward. We are watching Europe very closely because when we had taken out the note in December when we drew down about CAD$470 million, at that particular point in time, we had the intention to go into a swap program, but coming out of the summer with the issues that we saw in Europe, the rates were at such a level that it really didn't make a lot of sense for us to lock in over the 10 years under that vehicle, so every day we are watching the rates to see if they do come down, if it is the right time for to us move forward.

So it is your intention to kind of look at those swaps at the right time?

We have been watching them daily.

Alright, thanks, guys.

Thanks, Scott.

The next question is from Kris Thompson with National Bank Financial. Please go ahead.

Great, thanks. Good morning.

Good morning.

On the assigned fee revenue, it looks like it was up very strong in this quarter. Can you comment on your staff utilization in that segment, and maybe how we should think about that figure over the next couple of quarters?

I guess to quote some of my business unit leaders in the US, they are running red hot, their term when it comes to utilization rates. So utilization rates have gone up a lot in the US, driven by previous bookings coming onstream. We still have room to grow the utilization in Canada and in Europe, but the big move here in the past quarter was really the ramping up of our US business. On a corporation-wide, we still have some room to move up our utilization rates.

Okay. And on Stanley, it has been about 1.5 years since closing that deal, if I recall, they had more costs plus contracts than you traditionally had in the fixed cost area, have you had any traction converting any contracts as they come up for we newly renewal in Stanley? And should we think about that as an opportunity for you to increase your margins in the US going forward?

I think it is a long-term opportunity, Kris, it not going to be short-term. I think what has happened in the year, a lot of things have changed there, and I think to a large extent how they are procuring at the defense side is still more status quo than a marked change, so we will have to kind of see after all of the budget work is done, whether that drives a change there. As I mentioned, I think the opportunities for that are primarily on the infrastructure or on the IT side, as opposed to the BPO side, because a lot of time these people on the BPO side are doing specific functions that are more orientated to time and material or cost plus than they are to fixed price. We have been able to move a couple of contracts to a prime from a sub where we were before, but we haven't seen a marked change in fixed price work.

Okay. Earlier you gave some good examples of what you're doing to boost your software footprint from 20% to 40%. Do you have any examples from your partnership with Tibco? And are there any other kind of large infrastructure software vendor partnerships that we might thing about going forward?

We are constantly relooking at the list, if we just use Tibco as you mentioned, we acquired their social networking software internally, we call it Synergy, which is our internal name for it. We stood it up on the cloud, and we are reselling it, and remarketing it in North America to other clients as a cloud offering, so paid per opportunity.

It give does give you an opportunity, an example, a good example of how we can still reach our objectives of driving up the utilization of our assets by partnering with good quality companies that have good offerings, putting it together and delivering a unique proposition to our clients. That is just one example, but yes, we continue to identify partners and tend to look at them a couple of ways. Some cases, they are the big, large companies that you would know. In other cases, they are emerging IP-based companies who have a lot of potential but need more fire power or, in some cases, the assess to our data center facilities and our services business, which is not their core business nor in their strategic plan.

Okay. Just a last one for me. You talked a lit about M&A opportunities. Specifically in Europe where your revenues are still low. Is this a geographical area where you would expect to do some M&A in the future, or is that just too risky right now?

Again, you are mixing the future and right now. In the future, yes, we do believe that increasing our local presents in Europe so that we can ensure that we can follow our clients around the world, and actually capture a bigger wallet share of international clients is very, very important to us. In the long-term strategic plan, when we look at doubling the Company, clearly western Europe is in that plan. As far as immediate situation, as I say, there is a lot of uncertainty over there. We would have to find, as I mentioned previously, and I am sure you are getting tired of it, the right target at the right price, and at the right time. We are not looking for two out of three. We need all three. We are significant shareholders in the business here, and we want to make sure that whatever we do is something that we can actually execute to. So again, we continue to look. Europe is definitely an area that are committed to over the long haul as part of our strategic plan.

Thanks, that is helpful. Thank you for taking my question. Have a great day.

Okay. Thanks, Kris.

Thank you. The next question is from Bryan Keane with Deutsche Bank. Please go ahead.

Good morning, guys. Just want to talk about the Canadian business, I guess excluding items it was down 5%, I guess that was a little bit slower growth than what we would have expected. What else was inside of Canada that caused the drop-off, and then what does that, the Canadian business look like going forward as we get past the CIA contract, and the runoff with the government contract?

Good question, Bryan, first off, again, as I mentioned, if you look at second quarter 2011, we had the two things that we have mentioned. The divesture of CIA, the runoff of the body shop contract, but last year second quarter was a huge revenue quarter, in fact, it was about CAD$30 million higher than quarter one, and it was CAD$40 million higher than quarter three, so it was a bit of an anomaly in terms of the strength of the operation that quarter. So the year-over-year comparison was particularly difficult. The CIA and the body shop contract have runoff now in terms of the comps, so when we look at the upcoming quarter and back half of the year, we are actually looking to see the organic growth in Canada pick up.

The margins are exceedingly strong in Canada. We continue to look at opportunities even to improve those, so on balance, I am very optimistic about the Canadian operations. The economy here is running still very strong. All of the jobs lost during the recession have been more than recovered. Bank of Canada is even talking about maybe ticking up interest rates here, so the economy is much stronger here and we are seeing it in western Canada, the oil and gas business booming. Our Quebec market, particularly Montreal is strong, and again, Toronto is a big, big market where we are still underserved in terms of possibilities. I don't think you should read much into the Canadian results in quarter two, but the go-forward back end of the year I think we should see some improvements there.

Okay. That is helpful. Then switching to the USobviously, very strong EBIT margins. Is that something that is sustainable, or were there some one-time items that propped up that margin?

There were some one-time items but as I said in the business, given our size, we will have one-time items hopefully every quarter. I think what is more important there is directionally we have focused and targeted the team on improving margins as we grow, and they have done an excellent job of that, so we expect the US markets to continue to be strong, whether that be high as it was this quarter, but certainly on a year-over-year basis we expect EBIT and earnings to be up in the US.

Okay. Then just last, maybe a big picture question on the demand environment. Any change that you saw in clients willingness to spend in any of the regions, both positive or negative, over the last three months, or has it been about the same?

It has been, Bryan, probably been about the same. I would say obviously our bookings were a little light this quarter. A number of deals that we had in our sight have slipped to the back half. A lot of them have closed since the quarter closed. I am not sure that is a pattern yet, because as I said they haven't in fact closed, they haven't disappeared, just slow closing. I wouldn't say I have seen any big shift in demand. There is a lot of business out there, customers are looking for help, and if the economy stabilizes especially in the US, I think we could see some, finally some help from the market in terms of demand, but I haven't seen a lot of that so far.

Okay, great. Thanks for taking my questions.

My pleasure.

Thank you. The next question is from Paul Trieber with RBC Capital Markets.

Good morning. Thanks. I want to jump back to Q2 bookings again, could you quantify the amount of deals that have slipped and are now closed? Also, did the formalization of the US defense budget earlier this year have an impact on bookings in the quarter?

First on the defense budget, no, that doesn't have an impact on the quarter. The second quarter, our second quarter is always a slow quarter in the government space. It was last year. It is this year. Governments normally start to prepare and release their RFP for vehicles and for business. We spend the time answering them and we start to see the bookings come in the next 2 to 3 quarters. On the first question, no, I won't quantify that. I don't think it would be a material number after a week or so here. It is just a directional statement to say the number of deals that could have fallen in the second quarter have slipped into the first couple of weeks, and I think you will see that in the bookings for the back end of the year. We are still very strong on our bookings. We booked CAD$5.1 billion in trailing 12-months, and we should always look at bookings and cash on a last 12-month basis, and against both of those measures we are still optimistic that we are hitting the targets that we set for ourselves.

Okay. In regards to the new data center in Texas, should that have a material impact on CapEx next quarter or through the year? And then in addition to serving customers in the Texas area, do you see an opportunity to consolidate some of your other data centers into that new one?

First, a clarification. It is not a data center. It is a Center of Excellence. These are people doing application development, application maintenance, so it is not a new data center, so there is no impact on CapEx. It is not designed to do work only in Texas. In fact, we expect and are doing work from other points across the US in all three of our existing Centers of Excellence, nearshore centers in the US.

Okay, thanks for take my questions.

Pleasure.

Thank you. The next question is from Maher Yaghi with Desjardins Capital Markets. Please go ahead.

Yes, thank you for taking my questions. I wanted to ask you about your growth opportunities when we look at the other companies in your sector, they are noticing a very strong growth in developing countries, while some of the developed countries are trailing back. How do you view your positioning in the global market for outsourcing? Do you consider potentially getting into developing countries in terms of starting off from pockets of, products you can offer to clients based in developing countries to maybe boost your growth opportunities, or you are happy with what you have right now and you are focusing on gaining market share in the markets you are in?

That is a good question, and again the answer is really two-fold. First from a strategic standpoint. When we look down the road in our strategic plan, we do believe expanding into some of those developing nations is a very key part of our growth strategy. In the near-term though, we are focused in parts of the world where 70% of the IT spend is, so our view would be to continue to focus in the near-term here to gain bigger share, to expand our capability, and reach in the existing geographies we are in.

The second part of your comment though is a good one. We do, in fact, have some pockets in areas like Singapore, and this where we follow our clients. We are committed to follow our clients. We even follow the circ around the world into China and other spots, Japan, where they setup, but in the near-term, we would focus on North America and western Europe. We do sell some of our IP though into South America and into Asia, either directly or through resellers, so that in some cases our IP is entering markets that we are not in.

Okay, thank you. Just a follow up. In terms of your, maybe if you can give us an update on your buyback program, and your priorities in terms of allocating cash when we look at return on invested capital compared to last year, it was running in the 15% to 16%, now it is in the 12%. Do you still prioritize buying back shares as your first use of cash? Would you consider keeping that cash on the side until you see potentially an acquisition opening up, or you are still really hard on the pedal here in terms of the buyback?

Well again, you want to comment?

No, go ahead.

I was just going to say I think our priorities for use of cash are fairly clear. Reinvesting back in the business, and we are in things like the cloud, we talked about our cyber security, we are investing or setting up nearshore centers like Belton, Texas, so we continue to invest our money back into the business. Secondly, it would be an accretive acquisition. The third thing is buyback shares or pay down debt. We were a little heavier on the debt repayment this quarter. As one of the questions was asked, our debt costs are much greater than they were this time last year. We haven't been able to find the right window to do the swap, so we took a little more down on the debt side this quarter, a little less on the share side. But we are still committed to the share buyback, and we will continue to look at balancing our use of cash across both share buyback and debt repayment.

Okay. Thank you.

Okay. Thanks Maher.

The last question is from Michael Urlocker with GMP Securities, please go ahead.

Thank you. Mike, we had done a fair amount of work on the industry perception of the Fiscal project and we had a sense that you were well-positioned, it didn't work out, what is your analysis of that project, and is there any lesson to be learned here for your Company?

Well again first off I don't think that the award has been totally finalized yet there are still reviews under way, we eliminated a lot of global competition, I think it is public knowledge that the award was something very, very close, something like I could have it wrong there, I don't know if you have it available, but on 2000 points I think we were different by 30 points. So it is an extremely, extremely close award, and it is also I think public knowledge that against a technical criteria, in other words the fit to what the customer was looking at, we won against every item on that technical list, we were beat on price and so that is an interesting combination, so we will see what happens there, I don't personally think that it is over totally, I think that there are a lot of questions being asked about the balance between costs and technical fit, and from an operator's standpoint, those type of questions are the right questions to be asked. So California, they continue to look at it, we obviously value California as an important client, we are doing a lot of business in California. And we obviously will respect their final decision.

Okay. And then if we look at broadly the industry, there is a lot of action in terms of business opportunities for data, or big data or analytics, there is also a fair amount of consolidation going on of software companies. Do you feel like you have the right competitive tool set in that arena?

Well again I think again that you are right, there is some combination of consolidation going on in software companies, but then again there always has been. The issue really becomes this software needs to be connected to somewhere, the big data needs to be connected to somewhere, and this comes to services business, and we are first and foremost and IT services firm, and as I mentioned and used the example of Tibco, we can partner with independent and other software firms to actually incorporate their software into our offering, we can also do the services arms of companies like Oracle, we were recognized again this year, the second year I think in four as the ATG, which is an Oracle product, as the integrator of the year. So there is lots of room there for us to grow our business. You will always need services firms, and I think our model is unique that way, we have proximity to our clients, so we are right there in the locations where the decisions and the business is. And then we have a much more balanced global delivery offering, that as I mentioned for years was considered contrarian, and is now starting to I think demonstrate that in fact we may have got the model right there in terms of what customers are looking for, as they attempt to balance all of the elements of value, price, cost, and risk.

Okay. Thanks very much, I appreciate that.

You are welcome.

Thank you Michael. And thank you everyone for joining us. We look forward to seeing you all back here end of July for our third quarter results. Thank you.

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