CGI Inc (GIB) 2012 Q3 法說會逐字稿

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

Thank you, Matt, and good morning. With me to discuss CGI's third quarter fiscal 2012 results are Michael Roach, our President and CEO, as well as David Anderson, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9.00 AM on Wednesday, July 25, 2012. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q3 MD&A, financial statements and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking 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 are reporting our financial results in accordance with 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 Canadian unless otherwise noted.

I'll turn the call over to David first to review the financial results for the quarter, and then Mike will discuss operations and segment highlights. David?

Thank you, Lorne, and good morning. I am pleased to share the financial details of another good quarter. In third quarter revenue was CAD$1.1 billion. On a year-over-year basis, revenue was 5.1% or CAD$52 million higher.

Adjusted EBIT was CAD$136.3 million and our EBIT margin remained strong at 12.8%.

Net earnings were CAD$87.2 million, representing a net margin of 8.2% and diluted earnings per share of CAD$0.33. This number includes CAD6.7 million in acquisition related costs, as well as CAD5.3 million in real estate optimization charges and CAD3.7 million in additional year-over-year financing costs associated with the fixed rate notes. As a result, the underlying net operations -- or net earnings were approximately CAD100 million, representing a net earnings margin of 9.4% or CAD0.37 per diluted share.

This quarter's earnings and EPS were in line with the same quarter last year, excluding a favorable tax adjustment, as well as the transition margin from the wind up of a financial services contract during Q3 fiscal 2011.

Regarding the charges incurred this quarter, I'd like to take a minute to expand upon them. With respect to the real estate initiative, the business case will yield CAD111 million in benefits over the next 10 years as we consolidate our Montreal real estate. Associated with this initiative, approximately CAD4 million of additional charges related to accelerated amortization will occur in Q4. On the charges related to the Logica transaction, we expect to see a growing level of charges in the upcoming quarters as we move beyond closing and into the integration period.

Looking at the balance sheet, our DSO was 49 days in Q3 compared to 52 days we posted for the year-ago quarter. The decrease is mainly due to the timing of payments. We generated a record CAD$251.0 million of cash from operating activities compared with CAD$93.2 million in the same period last year. This was the result of the improvements in the DSO from last quarter and the timing of payments related to other working capital items. Over the last twelve months we have generated CAD$690.5 million, or CAD$2.57 in cash per diluted share.

During the quarter we booked CAD$1.5 billion in contract wins, bringing the total bookings over the last 12 months to CAD$5.1 billion for a book-to-bill ratio of 123%. As usual, we continue to stress the importance of considering our performance on cash and bookings trends over a trailing 12-month period.

During the quarter we reduced our debt by CAD152.5 million for a net debt of CAD633.4 million. That's down almost CAD300 million from the year-ago period. And our net debt to capitalization ratio was 19.4%, having been reduced from a peak of 31% following the Stanley acquisition.

At the end of the quarter we had approximately CAD4.5 billion in committed liquidity.

In the quarter we acquired 453,000 shares of -- for CAD9.4 million at an average price of CAD20.82. Under the current buyback program, which expires in February, 2013, we can still purchase more than 21 million shares.

At the end of Q3 our return on equity was 15.4%, while our return on invested capital was 11.8%. The primary drivers of the year-over-year change was the reduction in our participation in our normal course issuer bid in anticipation of the closing of the Logica transaction, as well as the flow-through of the favorable impacts of the tax adjustments we benefited from last year.

Now, I'll 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, including an update on where things stand as we approach the expected closing of the Logica transaction.

With respect to our US operations, our momentum continues to build as previously announced bookings are now translating into profitable top-line growth. Revenue was up 18.4% in quarter three or CAD$82.8 million year over year as new revenue came on stream across all of our key sectors driven by continued strength in the health and government verticals.

Our EBIT was up 57.8% year over year, while EBIT margin improved significantly from 8.5% to 11.3% as a result of our previously announced restructuring activities, a healthier mix of profitable revenue and the ongoing implementation of margin improvement initiatives.

Bookings in the US were strong across all industries and reached a book-to-bill of approximately 160%. The US state and local market has been an area of strength for us as pent-up demand for systems modernization to enable core services and drive cost savings are getting funded at an increasingly rate. This was demonstrated with a significant CAD91.5 million win with the City of San Diego to manage more than 165 applications for up to 7 years. In addition, there are several advantage related and other long-term opportunities currently active in our pipeline.

In CGI federal bookings were once again strong, up significantly year over year and now are at 157% on a trailing 12-month book-to-bill. We have achieved these bookings despite ongoing uncertainty around the US federal budgets. Clearly, we continue to take market share, with 62% of these contracts being new business for new or existing clients such as health, Cloud and our Visa work for the US State Department. We also continued our success in gaining access to two new contract vehicles valued at nearly USD21 billion.

We remain well positioned, despite the overall concern of a reduction in government spend. Our portfolio of mission critical and emerging solutions, as well as back office systems, ensure that we are able to manage the short-term fluctuations and take advantage of the longer-term sustainable growth in emerging areas such as Cloud, cyber, mobile and analytics. We are seeing growth in our pipeline of these emerging solutions up nearly 150% in fiscal 2012, which will drive future bookings in fiscal 2013. It is worth mentioning that 95% of our federal business is not related to weapons systems.

We have seen both sequential and year-over-year growth in our US commercial business, driven primarily by growth in financial services and health. We also continue to see client interest in rebalancing their IT sourcing with more of an onshore/near-shore mix versus a single geography. We continue expanding our capacity in our near-shore delivery centers, staffing up for recent wins and to meet ongoing client demand.

I now would like to briefly address the Canadian operations. Revenue at CAD$310.3 million was essentially flat, both sequentially and year over year. We continue to see opportunities to grow our Canadian business in our major metro markets. For example, we are currently experiencing double-digit growth in Western Canada. Our Canadian operations continues renewing and extending critical long-term contracts with key clients, ensuring recurring revenue and a strong backlog upon which to continue to profitably grow our business.

Canadian EBIT margins remain at industry-leading levels at 20.5%, but we continue to take proactive measures, such as the additional real estate optimization mentioned earlier and expanded use of our global delivery model to improve our margins in Canada over time.

With respect to Europe, our revenues at CAD$53 million was down 2.1% at constant currency; however, our book-to-bill ratio was over 300% on the strength of a 7-year, GBP90 million outsourcing deal in the UK financial services sector. This deal further demonstrates our view that the market opportunity for long-term outsourcing contracts continues in Europe.

On the year-over-year basis we've added some 30 new clients across Europe and Asia, positioning us for future growth. Margins continue to show year-over-year improvement, up 350 basis points in the quarter. The continued improvement in our European operations over the last year positions us well for the integration with Logica.

Revenue for our Infrastructure business in the quarter was essentially flat, excluding the impact of a contract runoff in the same quarter last year. We continue to take proactive actions and make investments to address top-line and bottom-line pressures, the benefits of which will gradually come on stream throughout fiscal 2013.

Our pipeline of opportunities continues to grow in Managed Services and in the Cloud, as well as in new offerings such as Virtual Desktop.

On a global basis we delivered very -- a very strong quarter and are entering the Logica integration in excellent shape. We have booked CAD5.1 billion in new business over the last 12 months or 123% of revenue. We have returned a profitable organic growth. We have generated almost CAD700 million of cash from operations over the last 12 months and we have reduced our net debt by nearly CAD300 million.

We remain confident that our adherence to fundamentals, combined with the relevance of our solutions and offerings, will continue to create new opportunities which result in profitable revenue growth for our newly combined company.

Let me now provide you with a brief update on our proposed acquisition of Logica. Following our May 31st offer announcement, a general meeting of Logica shareholders was held in London on July 16th. More than 99.5% voted in favor of the combination and, more recently, on July 18th we received the required EU Commission approval. The final regulatory approvals needed to move forward and close the deal are expected to be received in the coming days.

This business combination will allow us to better serve our clients and provide new and exciting career opportunities for our professionals. Consistent with our acquisition history, we expect to create significant shareholder value with this combination by being immediately accretive to EPS in the range of 25% to 30% when excluding acquisition related and integration costs. We expect this to increase throughout the three-year integration period.

We have been diligently working on the integration plan since announcing the deal and believe that we have increasing visibility into the CAD200 million in annual cost synergies we are committed to realizing. We expect to be in a better position to share more information with our fourth quarter results.

As a reminder that following the expected closing of the Logica transition, our -- transaction, our net debt to capitalization will be approximately 45% and net debt to EBITDA will be approximately 2.7 times, a level at which we feel comfortable managing and reducing through our strong cash generation capabilities. We expect the net debt to capitalization to decrease to less than 25% and net debt to EBITDA to reduce to 1.5 times within the first two years.

In addition, at closing we expect to have liquidity exceeding CAD800 million to continue prioritizing the deployment of our cash with a commitment to making the most accretive investments for our shareholders. We remain on track for an expected closing on August 20, 2012.

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 6716199. It will be available until August 8th. There will also be a podcast of this call available for download either at CGI.com or through iTunes within a few hours. Any follow-up questions can be directed to me as usual at 514-841-3355.

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

Thank you. (Operator Instructions). The first question is from Richard Tse from Cormark Securities. Please go ahead.

Yes, thank you. With respect to the real estate costs, can you give us a bit of color on what parts of the operations it would relate to?

So, Dave, why don't you take that.

The activities that we're engaged in right now is looking more at a densification of the real estate that we have within the geography in Quebec, primarily within Montreal. There were some smaller pieces that were related to some activities or some spaces that we had in the US, as well as in the Toronto area. But, the more significant and where the CAD111 million of savings are coming from would be coming from the -- really, the Montreal space.

Okay, thank you. And then, if you look at the margin profile, going through your MD&A, you guys obviously are moving more of the business towards the US and the margin profile's a little bit lower than what it is in Canada. So, should we kind of view this as a sustained margin rate for the existing business going forward or how should we look at that?

No, I don't think so. I mean, I think if you look at the US Margins, they've improved significantly year over year. And again, just to remind you, Richard, you've go to add about 2% to those margins because of intangibles. So, if you look at the mix of the government business we have in the US and you add the other 2%, that operation is running at an EBIT of about 13%, I would say; 12% to 13%. So, it's a healthy business. But, as we take on more volume down there, utilization rates are strong so we continue to look for opportunities to improve margins in the US.

The Canada margins, even though they're at 20%, as I mentioned, we can higher margins to that. The real estate optimization benefits that Dave mentioned, a lot of that will flow through into the Canadian operations over the next 10 years is just one example. We continue to look at utilizing the global delivery center more. And the mix of the work in Canada continues to tilt more to the outsourcing and IP-based type work, which draws a higher gross and net margin. So, I continue to see opportunities there.

The UK, of course, with the integration now of Logica, I'm very pleased that our European operations have brought their EBIT margins up to the level that they are and they continue to strengthen there. So, we're entering that transaction from a position of strength. New logos, new business, new opportunities, nice 7-year outsourcing deal in place in the UK. And then, GIS is the area where we've been making investments this year; really, to position us for more of a recovery on the margins in 2013.

So, when I put all that together, I see opportunities for margin expansions and, of course EPS growth going forward.

Okay. And one last question. Honestly, it sounds like the US business is going quite well. I think in the past you've given a bit of color in terms of the order of magnitude of the pipeline. Could you give us something to that order or magnitude this quarter?

Well, again, I think the pipeline is growing rapidly. You're seeing it in the bookings, but it's a very, very strong pipeline. And I think the message I'm trying to drive through, really, on the US federal business is our team down there is extremely focused and is taking share. And this is always the point of view I had, is that's a big market. Even if there are reductions in the total spend, there's lots of room for us to grow there by being focused and out hustling the other companies and that's exactly what's going on. I'm extremely proud of what the team is doing down there and we continue to see great opportunities in the US generally, but our government -- especially in government vertical, which is running extremely well.

Okay, great. Thank you.

Thanks, Richard.

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

Hi. Good morning.

Good morning.

Mike, starting off on Europe, can you talk about how business conditions have evolved, if at all, in recent weeks since you first announced the acquisition of Logica? Are things getting any better or worse or has the environment been stable from your perspective?

Well, again, I think if you look at the day-to-day stuff, which I really don't look at. I mean, I look at things at the long term, we really didn't acquire Logica on the basis of a short-term bump up in the economic conditions. We looked at the long-term strategic fit. And when I look at it from a long-term, I have to tell you, every time I go to Europe and interact with people, and had an opportunity to interact with some very high-quality people at Logica, the solutions, the business we're in is absolutely essential to government and industry.

And so, I still feel very optimistic about the business opportunities in our industry in general and in Europe as well. The economies -- just to remind you, the economies that we're in in Europe and will be going into are the more northern larger countries and we still feel good about the opportunities to grow our business.

The reaction has been very positive on both sides of the ocean. I mean, we've had clients over here call us up wanting to get more exposure. We've had clients, existing clients in Europe who's telling us now that you're partnered up and combined with Logica, when that happens we're interested in exposing you to more work because we've addressed the issue of scale in some of those accounts and some of those geographies.

So again, I would tell you, despite the economic headwinds over there, there are some tailwinds to the business, including really putting the best of CGI and the best of Logica in front of new existing clients.

Great. And then, turning to the US, the margins in the quarter were obviously up very sharply year over year, as you pointed out, although they were down from the levels we saw in the March quarter. Is that just because you've had to do some new hiring giving that maybe the utilization rate was unsustainably high last quarter? Can you provide some color as to the reason for that margin differential?

Yes. And it's not much of a differential, if I recall quarter to quarter. So again, I don't think you should read anything into that. Obviously, when you start to ramp up to that level of growth, you've got some start-up costs associated with bringing on new staff, bringing on new contracts. And I wouldn't read much more than that.

Certainly, we're not taking on a different mix or lower mix of revenue margin type business, it's just the ramp up. When you're running at 18%, you've got to add more people and that's going to give you a bit of a short-term buttonhook. But again, if you look at year-over-year at the same quarter, a significant improvement in the US margins.

Okay. And then the last one for me. Looking at the very strong US government bookings, has there been any change at all in contract durations? Have they been getting shorter due to some of the longer-term budget uncertainty or has the contract durations there been pretty consistent in recent months?

No. We can -- in our business we continue to sign long-term contracts, which I would say, by my definition, are 5 to 7-year contracts. And we haven't seen any indication, any broad indication, that they're going to shorter duration. So, I think that that bodes well for us to continue on the track we're on.

Great. Thanks, Mike. I'll pass the line.

Thank you.

Thanks, Thanos.

Thank you. Your next question is from Ralph Garcea from Northland Capital Partners. Please go ahead.

Good morning, gentlemen.

Good morning, Ralph.

You guys -- I mean, historically you've done a great job taking, I guess, broken businesses from an EBIT side. If you look at what you did with AMS and Stanley, where you took those guys from mid-single-digit margins into the low teens and hopefully higher, do you think you can have the same impact with Logica given the different geographies and the, I guess, different lever points in getting these cost savings and leverage?

Well, again, Ralph, I think it's no surprise that obviously we announced that the deal would be accretive significantly, between 25% to 30% in the first 12 months and then growing after that that we believe that we can improve -- working with our Logica colleagues we can improve the bottom-line performance of the European operations. Again, as I mentioned before, our goal is to be the best company in the business that we're in. Part of that comes with delivering industry-leading EBIT performance. So, we would have set some targets there for Europe. I don't see any reason why, with our operating model, we cannot be amongst the best, if not the best EBIT performer in Europe.

Now, having said that, that's a different standard to North America and to what we're running as an integrated company. But, even reaching the top levels in Europe would add significant growth to our earnings per share and earnings profile. So, I believe we can do that. That'll certainly be the goal of myself and my team to put that kind of performance up consistently over time in the new operations.

Can you give us sort of one strategic area where you see the biggest opportunity? I mean, with AMS you had the advantage and momentum products, that you can go into that customer base and grow scope and grow size of projects. With Stanley you had the government relationships and some of the contract vehicles that they had already been involved with. I mean, what do you see in Logica where you can get that biggest opportunity within the first 6 to 12 months?

Well, the timing, of course, is a different question. I think, clearly, in Europe it should be generally that there are various regimes and regulatory considerations one needs to do when you're actually restructuring organizations. And we're not at the point yet of announcing the level of restructuring that we would have to do there, but I would say that, again, the levers are significant.

As you take on scale, certainly when you get into areas of procurement there's some significant savings there. We mentioned real estate optimization activity we took here in Montreal this quarter. When you combine our operations in Europe with Logica's, there's certainly room there for us to make some significant headways in terms of real estate optimization. Logica was already working on a plan there. We'll work with them to accelerate that going forward.

You've got duplications, obviously, in headquarter type functions. You've got automation opportunities. And, you've got the business model itself which, as you know, our model is a very simplified business-based model where accountability and visibility are the key ingredients that we put into our company, which allows people the freedom, really, to operate and run their business for optimal results. And that's exactly the formula and recipe that we used in AMS, and Stanley to some degree, and we see that same formula being applied here with similar success.

Yes. And then just lastly in Canada, I mean, with the (inaudible) land contract finally out of the way, I mean, do you see a return to mid to high-single-digit organic growth with some of the contracts you've announced as they sort of roll into revenue?

Yes. I think you'll remember the impact of the -- of that contract. We had one big month in that quarter. It was the wind-up quarter over last year and that is now behind us. So, in the GIS side, we won't have that drag on the year-over-year comparisons. Excluding it I think they were essentially flat on the top line. So, we should start to see the reflection of some of the bookings come on over time.

The only caution I give you, and that's why I mentioned 2013, is on an infrastructure contract, as you win those deals the transition time is much longer than the SI&C business. You've actually got to move the hardware and the software from their facilities to ours. There's an investment to be made there and there's a lead time. But, you're quite correct in that, from a comparable year-over-year purposes, that contract will no longer be in the history and, therefore, we'd be really looking at the opportunity -- or at the base operations on a like-for-like fashion.

Okay. Thank you.

Okay, Ralph.

Thanks, Ralph.

Thank you. The next question is from Steven Li from Raymond James. Please go ahead.

Thank you. Maybe a question for David. The 2% amortization of intangibles in the US, when does that run off? And when it does, does your US margins jump 2%? Thanks.

To answer the last question first, yes, it does because it's no longer in the base.

Some of the amortization was over a 3 to a 5-year period. It wasn't a lot of it, but some of that has already phased out of the P&L. But, most of it is closer to 8 to 10 years. Again, it depends on the nature of the asset. Some of it is IP, some of it's customer relations. And even with the customer relations it depends on how long we've actually been working with the client to establish kind of what is the right period that we should be then taking those charges.

And David, is it mostly AMS or both AMS and Stanley?

There's still a portion coming in from AMS; again, those client relationships. I would expect to see some of those run up until about 2013. And then, we've got Stanley coming on. So, it's really the two larger tranches.

Okay, great. Thanks.

Thanks, Steven.

Thank you. Your next question is from Maher Yaghi from Desjardins Capital. Please go ahead.

Yes, thank you for taking my questions. Good morning, guys. I wanted to ask you about your Cloud services investment that you made in the quarter. You mentioned it was a drag on your margins. Can you quantify it? And can you tell us, first, when do you expect to generate some revenue on those investments and is this an ongoing cost or -- I'm basically trying to figure out if we should see some similar investments later this year and next year.

Well, again, a lot of that Cloud -- thank you for your question. A lot of that Cloud investment, as I mentioned before, is very much targeted at the US federal business. We continue to win Cloud business there. There's an obvious time gap between the investment and the return on the investment there because it's data center orientated. Some of the first revenue really comes on in the federal groups that are actually taking the applications and making them Cloud ready. So, you're seeing some of that revenue already in the federal unit.

On the other hand, the costs, for the most part, are in the GIS organization where you're seeing the downdraft and the pressure on the margins; hence, I mentioned, that we should see the positive impact of that investment hitting the GIS organization in 2013.

As far as an absolute amount, I don't think that we've made that public. It's -- to some degree, there's a capital cost, I guess, associated with that, but it's -- we don't really make that public. It's something that, given the competitive nature of that business, really don't want to have our cost structure -- an element of our cost structure out there.

Okay, that's helpful. I just -- maybe without quantifying it, when we look at your GIS segment margins, can you say if the large portion of the margin drag is on -- is coming from excess capacity or from these investments that you've been making in the Cloud services?

It's a combination of a number of things. Both of those would be major factors.

Okay. And when I look at -- just in general at your business, have you seen any -- Thanos talked about the duration of contracts, the length of the contracts and you mentioned that they have -- you have not seen them change. Can you comment about general pricing in the marketplace? And when you look at the business market in general, do you still see it generating the same margins that you've seen it generate in the last few years or the marketplace has changed in terms of pricing that may be return on investment is getting smaller over time.

No, my view on margins is over time they will improve as we continue to use levers to -- that I mentioned a number of them, including change in the mix of the revenue, more judicious use of the global delivery centers, working hard on utilization rates, taking advantage of the scale, the new scale we have in terms of procurement and purchasing. So, in our case, again, we're going to continue to work hard to continue to expand our margins. All in the goal, of course, of increasing earnings per share.

To your question on the market in general, look, we're in a very competitive market. It's the nature of it. It's a global market. Everybody's competing fiercely here for business. I think, though, that one of the things that I believe is that, over time, a number of our competitors have to put some pricing discipline in their models in order to generate the margins and returns they need to satisfy their shareholders.

We have that in our company already. We continue to operate that way. We believe that's the right way. We don't and aren't interested in buying business. We're interested in revenue that has margin. And we have found that that is a viable go-to-market strategy as long as you're providing value to the client. And that's where it all starts and ends for us. We can provide significant value to our clients in terms of quality delivery, in terms of price of the service and in terms of risk management. And for that, we charge a fair competitive price, which also allows us to generate a good return for our investors over time.

So, I think that's the nature of the marketplace, but I would also tell you that technology companies, by their nature, have a lot of levers that we can pull to improve productivity and bring down our cost of operations over time and we intend to continue to do that. I think the example of the consolidation here in Montreal is a good example of that. For the charges that we're taking, we're going to return value to the shareholders here of CAD110 million or CAD111 million over 10 years. So, that's just one example of the kind of levers that are still out there for companies like us to action.

That's a great segue to my last question. And I noticed that you did not exclude those real estate costs from your adjusted EBIT numbers. Does -- do you plan to have other additional real estate costs in the future quarters and might not -- and might -- that might be the reason why you did not exclude them?

Well, the real estate costs are actually part of the cost of services. So, they're included in the EBIT numbers that we have for Canada. So, I'm not quite sure where you're coming up with that conclusion, but we can maybe speak out -- offline afterwards on that particular part.

In regards to future, because we're going to be consolidating some of the space between now and the end of December, there is an estimated amount of about another CAD4 million of charges that we will be incurring in the next quarter in regards to accelerated amortization. So, from a modeling perspective, you should be taking that into account. But, beyond that, all the charges related to it should be flushed through.

I was just referring to the CAD5 million one-time restructuring real estate costs.

Yes, there's the CAD5 million and then there's another CAD4 million that'll be coming in the next quarter.

Okay, thank you.

Okay. Thanks, Maher.

Thank you. The next question is from Paul Treiber from RBC Capital Markets. Please proceed.

Thanks. Last quarter you mentioned that about CAD170 million of contracts slipped out of the quarter. Did those contracts close this quarter? And then, did you see any contracts slip out of this quarter? Any new contracts slip out of this quarter? And then, related to that, how would you characterize a new deal environment in light of the macro conditions?

Are you speaking generally or to the US government business?

Generally.

Okay. Well, we have -- always have a number of contracts that slip over. Clearly, last quarter I was pointing out that it's normally a slow quarter for US government bookings. It has been for two years; hence, the total bookings of the Company were down in the same quarter both years. This quarter, obviously, was very strong. So, some of those that we'd hoped to book last quarter slipped into this quarter, including an outsourcing deal in Europe that came over a quarter. So, we picked some of those up, clearly, this quarter. And to the question, there is some slippage, but I wouldn't say to the same degree as what we saw last quarter.

General booking environment out there I think is still good. We still believe that we can continue on a trailing 12-month to exceed a book to bill of obviously great than 1 so that we can generate the type of growth that we put up this quarter.

Okay. And then, the Supreme Court upheld the Affordable Care Act in June and your healthcare revenue is quite strong this quarter. Was there any impact related to the ruling? Was there any sort of pause in new deals? And then, do you expect a -- an improvement or an acceleration going forward?

No, I don't think -- from our business standpoint, the Supreme Court ruling is very much a status quo decision for us. Business continues to move forward. I think you'll see more and more states setting up their health exchanges and we intend to bid and win a number of those, as we have in the past. So, I think from a business standpoint it has more positives than negatives in it for our business.

Okay. And then, lastly, could you share any direct or indirect feedback from Logica's customers or employees on the proposed acquisition? And then, how have your own customers reacted to the announcement?

I have to tell you transparently that feedback has been very positive from all the stakeholders. We have had comments from -- structured comments coming in from the organizations across Logica, the work councils. They've been very balanced, very open. They look forward to the opportunity to working with us. And the clients of both customers, both groups, have been very, very positive. So, I think there's a real openness here to entertain the new combined entity as a partner, both for employees and for customers.

So, we remain very excited and enthusiastic about actually getting past the 20th and starting to work together and getting the message out to clients of what we can bring to the table that is different than we could have brought to the table alone.

Alright, thanks for taking my questions.

A pleasure, Paul.

Thanks, Paul.

Thank you. The next question is from Kris Thompson from National Bank. Please proceed.

Great, thanks. Good morning.

Good morning.

Good morning.

Just on the financial services segment, it looks like the revenue is down sequentially on year over year. I recall that you were talking about investing in a New York office, maybe to boost that business. Can you just give us an update on there and when you think you might turn that segment around?

Well, it's a -- quarterly, quarterly are very tough. Again, this goes back to one of the earlier questions on where bookings can fall and where -- and the timing of bookings. We still see the financial vertical as a strong growing vertical. This quarter we really spent a lot of time kind of renewing and extending existing contracts we have in the financial services vertical. But, the pipeline is still strong. This is an area, back to the earlier question where, with our new colleagues at Logica, we see opportunities to actually grow and strengthen our position in the financial services.

So, I wouldn't read a lot into that, Kris. I think it's a quarterly aberration.

And are you expanding -- I mean, you're hiring some relationship managers or somewhere --?

Yes, we've made some changes in New York. And again, now with the added presence of Logica, we've got a real strong transatlantic type capability in the financial services in New York. Obviously, London and Toronto play a key part of that triangle. And we're -- we've made some changes in a number of those areas to better position us to take advantage of the new organization.

Okay. And last quarter you talked about the 12 new US government vehicles. You did talk a little bit about a win in your prepared remarks. Can you maybe just give us an update on -- of those 12 and how many have converted this quarter and how many are still hot?

Well, now, I think on the new ones, Kris, it takes a time for them to go from a contract vehicle to actual task orders. So, I don't believe we've seen anything in the past 90 days that would relate to the 12 new vehicles. They'll come on-stream. Many of these vehicles are multi-year vehicles, 5 years, some cases 10 years. So, they come over a long period of time. But, again, I was pleased to say that we picked up 2 more vehicles this quarter of CAD20 billion. And the reason I mention those, as I said before, they're -- I look at them as a good lead indicator for us of future opportunities. We're breaking in through those vehicles into new potential clients. We can now bid more to win more and we can take share, which is exactly what's been going on in our US federal business.

Okay, that's helpful. And just on bookings, you're really strong year to date, well over 100%. Investors really look at that number every quarter. Going into September, how should we think about bookings? Might they soften a bit? And then just, again, going into December and the first quarter of the US year, how do you think bookings might hash out for the last six months, I guess, of this calendar year?

Well, again, the -- to be consistent and to be direct, I don't look at bookings by quarter. I think, again, we look at them on trailing 12 months. So, the best I can tell you is that, on a trailing 12 months, we continue to run over 1 and that's clearly the goal and the objective that we're driving for. So, you're going to have fluctuations by quarter.

As you approach the yearend in the US government, it's hard to know whether that'll be a slowdown or an acceleration. So, I guess we'll have to wait and see there. But, I can tell you the activity level and the funnel level is very active, which tends to indicate that the government will make decisions, which will drive bookings here if we're successful in maintaining our win ratio in there. So, it's a little tough to call it by quarter but, on the year-to-date basis, you should continue to look for us to pursue aggressively our book to bill of over 1.

Okay, thanks. And just really quick for David. On that interest rate adjustment that you added back to your adjusted earnings, is that a one-time expense or is that something that you're going to have going forward?

It's something that we're going to have going forward. You'll see that over the next couple of quarters as well because we took out those notes in the December timeframe. So, we had financing that was on a variable rate before that. These are going to be fixed rate. But, let's not lose sight that, come the middle of August when we close this transaction, that the whole debt structure is going to be augmented with the new debt just for the Logica of transaction.

Okay. Thanks, guys. All the best.

Alright. Thanks, Kris.

Thanks, Kris.

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

Hi, guys. Good morning. It looks like Q3 EPS fell short of street expectations. And I know you guys don't give guidance so I was curious to know if EPS fell below your internal plan or did you expect it to come in where it did for the third quarter?

No, I think, Bryan, as -- and we built a bridging schedule to show what it looked like last year. We've had a lot of one-time activities. We made some decisions, continue to make decisions in the short period for the long haul. As I say, anytime you can, for CAD7 million or CAD8 million charge over two quarters drive CAD110 million benefits to your shareholders, frankly, it's a no-brainer. It has short-term impact, long-term benefits.

So, I -- clearly, I walked through each of the operating segments. Gave some indication that I feel across the various ones, where I see more margin opportunity and would look for that as we go forward. As David mentioned, obviously, now though, as we roll in the integration costs and the closing costs of Logica, earnings per share and net margins are going to come under some pressure here until we get through that. But, again, we're still operating at the best level or near best level amongst the peer group and we intend to continue to do that, X the various charges that we've announced.

Yes, because I'm just looking at excluding items is about CAD0.37 and it looks about flat year over year. So, yes, there's some puts and takes there, but I was just curious how that fell kind of exactly to where your plan was internally.

Yes, but if you look at it, that's about -- I think, excluding those, you're at 9.4% net margin, which in some cases is three times what the peer group's running.

Yes, no question. Speaking of peer group, a few of the peers are having trouble with a couple troubled contracts -- well, not a couple, but a series of troubled contracts. I just want to -- I'm curious to see if you guys are having that same issue. I don't know if that's showing up in the infrastructure business at all that it's dragging on the margin?

No, that's not an issue that's in the infrastructure business. The infrastructure business, as I mentioned, is primarily investments we're making in Cloud, particularly targeted at the US federal business where we have a very large pipeline of opportunities. They're moving, as you know, more and more of their business off to the Cloud, so we've made that investment. Capacity issues there as we continue to reduce the size of the footprint driven by new technologies, virtualization, this type of thing. And the third item is we're making investments into productivity and reengineering of some of the processes in our infrastructure business, all of which we believe will strengthen our margins in 2013.

Troubled contracts is something that I pay attention to personally, review personally and will continue to review personally. And on that score, we continued to deliver about 95% of our projects on time and on budget.

Okay, great. And two more questions. Manufacturing and retail, what is the outlook there? That business looked like there was a slowdown year over year.

Well, again, it's been our smallest vertical, but that complexity will change significantly when we merge with Logica. That'll be one of our largest -- one of the largest verticals when we put it all together. So, I would think, Bryan, the -- as I mentioned, the whole outlook and the mix of that business will change significantly here in the next 90 days.

Okay, super. And then, last question. You were able to grow head -- or revenue, but not grow headcount. Headcount looks flat at 31,000. So, that's a little bit unusual for a services company. So, are you just getting the appropriate leverage and operating efficiencies to be able to do that and what's the outlook for organic headcount?

So, part of that is us also squeezing the synergies out of our other businesses. Infrastructure is a good example of that, Bryan, where you've got offsets to the growth. And the second thing is, at some point, as I mentioned, the staffing is increasing in the US in particular when you've got that kind of a growth rate, bumping up against very high utilization rates. So, we will -- and our taking on new staff, it wasn't reflected in the quarter, though, and may see some of that actually come on stream in the headcount for the next quarter.

One of the other items, just to that, Bryan, is that, in India in our near-shore centers, we did staff up on those in earlier quarters. So, we have pressures that are there who are -- who have been in training programs, have been shadowing. So, as some of this new business comes on, they actually no longer are in somebody's shadow, they step out and they actually drive the revenue themselves.

Okay, super. Thanks for the color.

Thank you.

Thanks, Bryan.

Thank you. Your next question is from Michael Urlocker from GMP Securities. Please go ahead.

Good morning. Michael, I wonder if you might describe a little bit two parts of the business that seem to be strong. One is the UK contract that you won. If you could just elaborate a little bit on that one. And two, what are the driving factors here that are driving the healthcare business, because it was up significantly in the quarter?

Well, let's take the healthcare one. I think on healthcare, I wish I could give you something more scientific other than demographics and rising costs associated with the demographics. It's a major cost element of every government, whether it's a federal government, state, provincial, European, North American. Everywhere we go we're seeing rising health costs.

Information technology, as I said before, is part of the solution; it's not the problem. So, you've got various initiatives underway, including things like the health exchanges being set up in the states, which is driving some of that. The US government themselves have invested heavily, probably awarded somewhere between CAD800 million, CAD1 million -- $1 billion of federal contracts. There was a report out by Bloomberg that showed that CGI has actually got the biggest share of that. I think north of CAD154 million of that is coming -- has come and been awarded to CGI as an example. So, we're the leader in capturing share there.

So, it's all of the above. Electronic health records is another example. Auditing of insurance claims that are related to healthcare. Management and addressing fraud. All areas in which CGI is not only active, but also a leader. So, I think that's really where that's coming from. And I would expect to see the healthcare -- health vertical continue to grow over time as a result of that. And that's one of the reasons why, Michael, we broke it out as a separate sector. I think the CAGR in the last three years has been about 27%, so it's very, very significant there.

Thank you. And in the UK, the outsourcing contract?

Well, I think the -- what's very significant around the fact that, not only have we been chosen by the client to be their partner, but we've been chosen for a 7-year period, which goes back to one of the questions I had earlier, whether clients are going to shorter deals. But, it also shows you, again, similar to healthcare, that when businesses are looking to restructure or grow their businesses, they're looking for information technology as being part of the solution. We're very pleased to have been chosen by this client to be their partner for 7 years, help them transform and grow their business. And again, kudos to the UK team for shaping and winning that deal this quarter. So, again, it's in the backlog. It means future growth in the UK operations.

And this is a global bank?

I'm in the situation where we'll have, I think, an announcement out in three or four days. We couldn't get it out in time for this call, but you'll get a little more details in the upcoming week.

Okay, thank you. And then, lastly, if we step back a little bit and we look at the rationalization of Montreal real estate, what does that tell us or what does that demonstrate that's going on in terms of headcount or staffing in Montreal, whether people are being reduced there and grown somewhere else or redeployment? What's the trend here?

I think what you're -- all you're really seeing is us utilizing space coming from densification. So, more people in square footage and some movement of resources to lower-cost areas in Montreal than the existing premises.

Okay. Thanks very much.

Alright. Thanks, Mike.

Matt, I think we'll have time for one last question.

Understood. The final question is from George Price from BB&T Capital Markets. Please go ahead.

Hi. Thanks very much for taking my questions. A lot of them have been addressed, but just stepping back, kind of higher level, I wondered if you'd talk a little bit more about maybe how your large global US commercial clients are reacting to the current global macro uncertainly, and particularly what's happening in Europe in terms of their spending plans versus budgets and maybe what they thought about at the beginning of the year as they look into the second half of this calendar year.

I think that's a very fair question, George. And again, it's very hard to group all of those clients into a single bucket. I have to tell you, as you know and CGI thinks is a good example of that, there's a number of clients who are actually seeing this as an opportunity to position their companies for growth through acquisition, through expansion into various markets.

We're also seeing, as we say, some rebalancing of work, where onshore, near-shore sites are taking a bigger play than the single offshore option that many of them have followed in the past. There's certainly pressures to create more jobs in countries as opposed to offshoring given the unemployment rates and the economic conditions. And a number of the business leaders, I'm sure, are considering that.

But, as I said numerous times, and again, it's one of the reasons why I'm such a happy camper to be in the technology industry, is that there's very little government or business can do in their business without deploying information technology. So, we talked about healthcare, but that's the same for businesses. Where they're looking at reducing costs or driving increased productivity, they need to invest in information technology. A key part of that is the services component and that's what our core business is.

So, regardless of where budgets go, I think the opportunity of more of that work actually going out to providers with -- like us, where we have many more levers that we can pull in terms of brining those benefits and values to the customers resides, that that bodes well for the future here. Companies need to find growth; either growth in top line or growth in earnings and, to do either or both, they need information technology and that's what CGI brings.

Okay. Maybe asking a little bit more specifically into one key vertical for a number of players in the industry on the financial services side. Can you maybe disaggregate that --?

Yes.

Vertical apart a little bit in-between the capital markets portion of the business versus retailed banking versus other areas?

Well, I think a couple things. First, if you take the financial services as a sector, obviously under a lot of pressure. A good example of what I said, where they're looking to actually add growth. Some of their products and offerings have changed significantly. They're faced with low interest rates. So, they do need to do something different and are doing things differently to generate value for their shareholders.

I would say that a couple things that we see there that we're well positioned for, there's certainly more sharing of platforms. There's more platform-type vertical outsourcing going on in those institutions and more willingness to share a single platform, like our Proponix360, which is our trade finance. We have a number of international banks that are on there that are using the same system, but they're providing a different offering to their clients. So, they're differentiating on the basis of other attributes while getting the benefit of shared services on their backend information technology infrastructure.

So, I expect to see more of that going on in the future and that's exactly where we're targeted. Software as a service, Cloud, IP-related services and solutions, utility-based offerings, so that customers can share. Even though they're competitors in the morning, they can share their infrastructure throughout the day and night in a CGI data center with a CGI-based IP or a third party IP, which then we run, host and maintain for them over hopefully a 10 or 20-year period.

Okay. Now, maybe just switching over to the --back to the US federal a little bit. What are you seeing, I guess, from a -- I know you talked a little bit about pricing pressure, but I want to kind of dig in a little there given your presence in the market. What are you seeing from both customers and clients in time -- in terms of the type of discounting required to both defend existing work, as well as displace incumbents on the new work that you've talked about winning?

Well, I think it's a couple things. First off, I think a number of the clients there realize that if they want to get the out year cost reductions that are being anticipated in the budget, you've got to sign now and you sign a long-term deal and the cost reductions are built in over time.

Now, that's a normal course of business for us. The longer the term the better, I think, value that's put on the table for the client. And the better opportunity we have is to make investments to bring costs down and increase service levels in a longer-term deal. So, you're -- this is why, I think in a number of cases, I continue to point out that the customers are not going short, they're actually going longer -- or long because they want to get those cost points built into their out-year budgets.

As far as pricing and costing, in government bids it's one factor, but it's not the sole determinant in determining the winner because you also have to balance that with service levels, security issues, privacy issues and other criteria. And, again, our people are extremely experienced, both the team we acquired with Stanley and AMS. They know the rules. They know the bidding requirements. And we have a lot of levers to put in play there. We have our near-shore centers that bring the costs down of bids going forward, as just one example. And we also have intellectual property that we can put into the mix to help differentiate ourselves.

So, we have many levers there that I think put us in a good position to continue to address the customer concerns. But, government customers are like every other customers; they're looking for more value for less money. And the job of us and our industry is to figure out how to do that and, hence, the pressure we put on ourselves to reduce our costs. And why we take things like the restructuring of the real estate we did here this quarter is to ensure that we're always looking not only one quarter out, but in this case looking 10 years out by taking an action now that will bring our cost down over 10 years.

Okay, thank you.

Okay. Thank you, George, and thank you, everyone, for joining us. Look forward to having you back for our fourth quarter and year-end results on November 15th. Thanks very much.

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