CGI Inc (GIB) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI third-quarter 2014 results conference call.

I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President Global Communications and Investor Relations. Please go ahead, Mr. Gorber

Thank you, Valerie, and good morning.

With me to discuss CGI's third-quarter fiscal 2014 results are Michael Roach, our President and CEO, and David Anderson, Executive Vice President and CFO. This call is being broadcast on www.CGI.com and recorded live at 9 AM Wednesday, July 30, 2014.

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 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 on both our MD&A and press release as well as on www.CGI.com. We encourage our investors to read it in its entirety.

We are reporting our financial results in accordance with international financial 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 dollar figures expressed on this call are Canadian unless otherwise noted.

So David will first review our Q3 financials, and then Mike will comment on strategic and operational highlights.

So with that, let's get started David.

Thank you Lorne, and good morning.

I'm pleased to share the financial details of another good quarter. Third-quarter revenue was CAD2.7 billion, up 4% from CAD2.6 billion in the year ago period. Foreign exchange fluctuations favorably impacted revenue by CAD201 million or 8%, compared with the same period last your. Sequentially, currency negatively impacted our top line by CAD22 million.

While the third and fourth quarters are impacted by holidays and vacation periods. For example, France had three fewer billable days in Q3 than Q2 due to statutory holidays, which negatively impacted the top and bottom lines by approximately CAD15 million. And I'll remind you that vacations negatively impact Q4 revenue last year by CAD146 million sequentially.

Adjusted EBIT was CAD342 million in Q3, up 18% versus last year, while EBIT margin of 12.8% increased by 150 basis points.

Net earnings were CAD225 million, or CAD0.71 per diluted share, compared with CAD178 million, or CAD0.56 in the year-ago period. Representing an improvement of 26%.

To provide better visibility into our operating performance, we have disclosed two specific items impacting our Q3 net earnings. First, integration expenses of CAD14.5 million, and partially offsetting this was a benefit in the amount of CAD8 million related to the resolution of acquisition related provisions. Excluding these items, net earnings were CAD230 million or CAD0.72 per diluted share. This compares with CAD200 million or CAD0.63 in Q3 last year. Representing an earnings improvement of 15%.

Relative to the Logica integration, we are on track to book the remainder of our CAD525 million constant currency investment in Q4, with annualized cost synergies that meet or exceed the CAD375 million target. More details can be found in the MD&A.

Cash generated by operating activities was CAD346 million, up CAD213 million year over year, and our DSL remained 47 days from last quarter, essentially in-line with our 45-day target. When you add back the CAD36 million of integration related cash disbursements made in Q3, the operations actually generated cash of CAD382 million. A detailed bridging schedule, showing the impact of all moving pieces, can be found in the MD&A, as well as the slide deck we posted earlier this morning.

As always, given normal fluctuations in the working capital elements from one quarter to the next, we encourage investors to analyze cash generation on a trailing 12-month basis. With that in mind, excluding integration related cash disbursements, we have generated more than CAD1.1 billion over the last 12 months.

Turning to the balance sheet, net debt was reduced by CAD289 million in the quarter, and CAD484 million over the last four quarters. As a result, net debt was CAD2.4 billion at the end of June, representing a net debt-to-capitalization ratio of 32.6%. This was reduced from 36% just last quarter, and 41% year over year.

Earlier this month we extended our revolving credit facility of CAD1.5 billion by an additional year to December 2018. We ended June with approximately CAD1.2 billion of liquidity available to continue possibly growing our business.

With that, I'll turn the call over to Mike.

Thank you, David. Good morning, everyone.

We delivered very solid performance in the quarter as we continue to execute to our plan. Including the capture and realization of the business and financial benefits related to our merger with Logica.

During the quarter, the company booked CAD2.5 billion in contract awards, and CAD10.6 billion over the last 12 months for a book-to-bill of 101%.

In Europe, book-to-bill was 108%, and is running at 113% on a trailing 12 month basis, demonstrating our increased focus on business development, and validating the gradual uplift we see in some of the European markets.

Our strategic focus remains on achieving operational stability, and sustainable profit growth in each of our operating entities, by adding high-quality, recurring revenue and in doing so, continue building a long-term backlog.

In North America, the most notable bookings strength was in the US commercial and local government segments, which earned a book-to-bill of 113% in the quarter and over the last 12 months. However, like all players operating in the federal government market, CGI Federal awards continue to be impacted by ongoing delays in procurement decisions.

Excluding these delays, our US book-to-bill remains stable. In fact, when excluding CGI, our Federal book-to-bill in North America was 100% on a trailing 12 month basis, and 107% globally, versus the 101% I mentioned earlier.

Global revenue of CAD2.7 billion in the third quarter was up 4% year over year, and stable sequentially. Adjusted EBIT grew 18% year over year to CAD342 million representing a strong 12.8% margin. EPS improved by 27% or 14% X items. And our operations generated CAD350 million in cash, and closer to CAD400 million when you exclude integration related disbursements. At 14% of revenue, or 11% on a trailing 12 month basis, this put CGI back in a leading position amongst the peers.

Over the last 12 months, we have generated CAD3.48 in cash per diluted share, and that's more than CAD1.1 billion. Our ability to increase margins and cash generation is in-line with our past acquisition experiences, and aligns with our integration model.

Adjusted EBIT across Europe was up CAD23 million year over year, to CAD153 million, representing margin of 10%, up from under 9% last year. We remain focused on addressing [red] projects, divesting non-core assets, and embedding both the productivity, as well as the margin levers necessary for profitable growth and operating stability.

We expect the remaining US operations to bottom out, and gradually move towards more profitable growth in fiscal 2015. The timing will vary by operating unit, reflecting the depth and speed of the restructuring associated with the merger.

Our UK operations illustrate this point, having been the first to restructure and the first to return to profitable organic growth. Its revenue mix is much higher quality, and continues to improve over time, while EBIT has improved significantly up 56% year over year.

The team in Europe continued signing high-quality bookings in the quarter, for example: Michelin, Post North, and the European Commission, Volvo, and EDP.

Increased innovation capability of the combined operations is being increasingly recognized by clients and partners. I would draw your attention to our work with the London underground, ProRail, and [Teskin Kruk], an example of collaborative thinking and expertise in areas of big data, predictive analysis, and mobility. Each has been recognized as transformational and transportable allowing clients in multiple industries to work smarter.

In summary, the diversity of our global platform, and the choices it offers clients, especially when combining the strength in market conditions I referenced earlier, we continue creating opportunities to improve our performance in Europe.

Turning to the US, as expected, our operations significantly strengthened during the quarter. Revenue was flat year over year, well adjusted EBIT increased by 26%, with a margin of 14.6%. Sequentially, revenue improved by 6.4%, while EBIT margins more than doubled, impacted positively by the benefits of reaching key project milestones.

We continue to see momentum within our commercial pipeline across the US, as clients increase their technology investments creating additional opportunities for our people and for our IP, particular within the financial and manufacturing sectors.

At the state level, while we complete our work related to the health care exchanges, we continue to see strong activities in bookings in this segment, and expect it to continue driving growth in the fiscal 2015. For example, the recent win in Michigan to modernize their back office with our Advantage ERP, further deepens our market leading position. In fact, out of the last seven states to RFP this type of work over the last two years, six chose CGI.

During the quarter, we successfully went live with two Advantage modernization clients; West Virginia and Colorado. In addition, our work in assisting governments with tax collections continues gain interest, both in and out of the United States. California, for example, announced during the quarter that its partnership with CGI has enabled it to uncover and collect over CAD1 billion in new revenue today.

In the Federal Government business, we still have CAD1.5 billion in bids submitting and awaiting award. Of which more than half are expected to be awarded in the current calendar year. In the meantime, we continue winning task orders to provide US [visas] around the world bringing our total to 68 countries where we provide this service. And we continue to qualify for prime positions on strategic contract vehicles such as EAGLE II, with a ceiling of CAD22 billion.

In closing, I want to reinforce our commitment to remain a well-managed and financially strong company delivering superior results over time. Consistent with this philosophy, we are focused on the fundamentals necessary to create and share wealth with our investors.

Thank you for your continued interest and support and let's go to the questions, Lorne.

Thank you. 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 5422197. And that's good until August 8. As well, a podcast of this call will available for download within a few hours, and any follow-up questions, as usual, can be directed to me at 1-514-841-3355.

So, Valerie if we could poll for questions please.

Thank you Mr. Gorber. We'll now take questions on the telephone lines.

(Operator Instructions)

Kris Thompson, National Bank

Great. Thanks.

Mike and Dave on the cash flow from operations very robust, all of CAD350 million. Should we be thinking about CAD300 million dollars as kind of low watermark going forward?

I think, Kris, on that as I mentioned in my remarks, I think you should now assume that we're back to a more normalized level of cash generation. And as I mentioned, the timing of this and the level is very much in-line with our past experiences with integrations, and also I would tell you it's in-line with our original integration model that we built around Logica.

So again, I think you should look at a more normalized level, and certainly as we roll off the remaining investments we had to make in the restructuring program, I think the cash will continue to be strong and on a trailing 12 months, I think you actually find a number of will rise over time. As you know, the first quarter in 2013 we had a very low cash generation of CAD66 million. That would drop in the quarter or two. I think again, you'll see that the trailing 12 months are very strong.

Okay, that's great to hear. And just my last question on the US margins at 14.6%. That is very robust, I mean, it really surprised me how high it was, and that's a record over a number of years. Is that sustainable, or other some unusual items in their that we should think, about versus going forward, maybe utilization rates or something related to the healthcare?

Well I think, as I mentioned on the last call, that we had tempted to box in any impact relating to the state HIX programs health exchange to the first half of the year. And said that the back-half would return to a more, what I called, normalized level, in terms of top and bottom line. And again, we saw that in the quarter, and we expect the US operations to continue to be strong in the back end of the year.

I think the only downward pressure is around the Federal business, but I would tell you that again, in comparison, our Federal team is operating at a very efficient level. Attempting to generate more top-line through task orders, in the meanwhile reducing cost and protecting our bottom line.

So now I'm feeling better about the US. I think the team is --as we close off these HIX exchanges, are able to put more attention on the rest of the business going forward.

Well fantastic gentlemen, thanks again and congratulations on a very strong quarter.

Thanks, Chris.

Justin Kew, Cantor Fitzgerald

Good morning. Hi Michael and David.

So just a question on --so Mike you talked about the UK being the first out, in terms of be restructured and the first to show growth and kind of increasing profitability. So when should we see the other European regions kind of following that trend? Is it a couple of quarters, or kind of well into 2015? How should we think about how the other regions are following suit?

Thank you for your question. Again, I think the point I'm trying to make here is if you look at the UK operations, the team there restructured very quickly, relative to speaking to some other countries, for France as an example or Sweden. Where the local regulations required a much more consulting period with the workers councils and other stakeholders there, so that the impact and the bottoming out there will actually take longer than the UK.

We'll get a better beat of that. As I said, our sense is that it will be in 2015. We're starting our budgeting process over the next number of weeks. We'll be reviewing in detail those plans, but clearly, the objective that we set is to start to bottom out there.

As these project runoff, as you can see in some of the jurisdictions, we're still running of revenue, and you can see it in the top line. On the other hand, were also seeing the benefits of the EBIT.

So were doing the country by country, and business by business. But again, when we build our 2015 plan, we expect to see the bottoming out there, and a gradual increase in growth throughout back-end, probably of 2015.

Okay. Great. And just in terms of --with very strong cash flow you're able to apply that to paying down debt. How does the debt repayment from your perspective look over the next couple of quarters?

Will again, I think just to give a little bit more context. We're carrying about CAD480 million in long-term debt. When we look at the interest rate curve, our sense is this is a very good time to lock down some more long-term monies. So were actively looking at that to increase the amount of long-term debt at very favorable interest rates.

The balance of debt we would have would be on the line of credit, and our senses will continue to work down that debt while we continue to look at the other accretive uses of cash. Of course, to continue to invest in our business. We think the IP that we have, we need to continue to invest in that because it pays very high return over time.

And also to look at accretive acquisitions and buyback our stock. I mean, I want to be clearly when I look at some of the evaluation methods that are applied, there's still a significant gap here between our valuation and some of the peer groups, and our intent over time, as the results continue to strengthen here to decrease that gap which will possibly impact the stock price.

So we think it's still a good buy here. And we're certainly, seriously looking at buying up our stock as we have done in other years.

Okay, great. And just last question for David, just in terms of the tax rates or your tax rate, it kind of has been bouncing around between --kind of 20 % to 25%. Should we think of it as a little higher in the next couple of quarters, or do you think it stays where we've seen it and the last couple of quarters?

It's probably pretty close to where we've seen in the last couple of quarters. We're a little bit at the high end of the range that we provided in the MD&A in the previous quarter, but we're still within that range, and we didn't change that range. So I don't really see anything coming forward that's going to change it.

Okay, great. Thank you very much.

Thanks, Justin.

Scott Penner, TD Securities

Thanks. Maybe Mike, first of all on the Federal business, if you could just comment on what your people are telling you about the timing, and your comfort in the timing of some of these bids that you have out there, relative to what you were saying last quarter. I think this quarter was expected to be pretty weak. But how do you feel about the next couple of quarters now?

Well again, I think Scott, unfortunately, where all the players here are being impacted by business moving right --to the right. And its hard to know when that will turn around, we still believe it will.

It's also interesting around the end of the US fiscal year, sometimes there is a move to spend allocated, but unused funds, which in previous years has actually been a trigger to release some of these bits. And in the meanwhile, I think it's important we continue to renew our business in there, and I think we're much more advantaged than a lot of the players because we have a high recurring level of revenue in there, and we're also very diversified between the various entities in there. And we're also very active in the areas where the spend is actually the greatest amongst the various departments.

So our sense in the meanwhile is to protect the top-line where we can. We're accelerating the number of task orders that we're answering in the simple concept, and we did a number of years ago, you've got to bid more to win more. And it's very difficult here in the current environment to take share, because what's happening is, they're rolling over the extension years. I think we saw one that was out the other day CAD100 million option year on one of our contracts in the Army, and that's happening also to our peer group.

So the best we can do is to focus on any renewals that come up. I'm sure that were very competitive there, and actually bid more under these vehicles such as the EAGLE II. Which again, I think demonstrates that we're on to a lot of significant vehicles there. I think the last time we looked it, was about 50, and there's a lot of room within there to chase the smaller, relatively smaller revenue associated with the task orders.

So I think were still under watch there. I think I'll take the opportunity to point out that if you --as I did in the script, I'm not sure everybody picked it up. But when I back out the weak bookings in the Federal business, which again is industry wide, our book-to-bill on a corporate basis, on a trailing 12 month, goes from 101% to 107%. So you can see the bookings in the rest of the company are still very robust, and in fact, North America goes to 100%.

So there certainly downward pressure, industry wide in that space. But again, when I reviewed it, and just reviewed recently at the Federal board meeting, we continue to out-perform the peer group. The issue is the peer group is not growing, and everybody is kind of focused on protecting margins, which we are doing as well, and I think our team's doing a very good job. We continue to drive double-digit margins in the CGI Federal business.

In the IP business overall, I noticed a CGI solution was highlighted on stage by Microsoft, and you mentioned in your script. I know that there's been some changes in the management of your global IP. Maybe just if you could spend a minute here, and just talk about your go-to-market on your IP, and really how you make all of your BU's available, have access to the some of the solutions that you have.

I think again, we're running about 16% post acquisition. 16% of our revenue are coming from IP. We're reviewing our three to five year outlook, and again, our sense is that we can push that up to 30%, which is a significant number, given the size of the revenue base. We've been building up pipelines in the new geographies of IP that's available to travel.

We've continued to invest in IP, both refreshing and in some cases, expanding the capabilities so that it'll travel more globally. And we've made a organizational change where in the corporate group, we have split out the focus on IP from the broader marketing organization, and we'll have people that are focused specifically on driving and assisting the line operations and moving that IP penetration up from 16% of revenue to 30%.

So I think all those things bode well as part of the overall strategy, as I said, every time we acquire, it does take more time to work that through for obvious reasons. You need to make an investment, you need to educate the people, how to sell that, and how to position that. But that's certainly embedded in our strategy for 2015 and beyond.

Great. Thank you.

Thanks, Scott.

Richard Tse, Cormark Securities

Thank you. Mike, now that you're well through the integration of Logica, can you maybe talk about how you looking at M&A? Are you guys in the position to move on something right now? How are you kind of looking at that today?

No, I think it's a very timely question. Obviously, as I mentioned in our previous calls, we're constantly looking because as opportunities arise, if you're not looking at them, they'll end up being closed and moved on. So we continue to look, and obviously with a cash generation now returning to our more traditional levels, we're in good shape financially to execute another transaction.

And our move to take on some more longer-term debt actually gives us much more visibility and stability in terms of our ability to take on an acquisition and to do it at a very accretive interest rate with that type of strategy. So we continue to look, and there are opportunities out there, and we would not hesitate to pull the trigger if we found the right acquisition here, at the right time, and the right price.

And I guess related to Scott's question on IP, you're targeting 30%. Is that sort of something you going to consider building to on your own, or is that going to be a certain acquisition approach to get to that number here?

It'll be a combination, Richard, of that. I think some of that we can definitely do organically. But again 30% of CAD10 billion is CAD3 billion.

Again, it'll really be a timing consideration. Over enough time, I think we could get there organically. But if an opportunity came that would accelerate that as I mentioned previously, we're very interested in companies that have IP, especially those that could be turned into a SaaS or utility model. And that is certainly embedded in our drive to reach the portion of our revenue and margins, and cash, that are coming from IP-based services and solutions.

And then one last question on the state of the Canadian market, can you really talk about that? Are there really opportunities for growth in Canada? The market as a whole, not just you specifically, seems like it's been a quite muted over the past few years. How do you see that going forward?

I still believe there are opportunities in Canada. I think in our case, as you can see what we've been doing really over the last three quarters, has been locking down extending, really the large foundation contracts that we have in Canada, which is protecting our backlog, protecting our recurring revenue, and allowing us to deliver some very healthy margins and cash generation.

On the other side, we have opportunities and are closing opportunities. The issue in Canada is very lumpy. And to your point, certainly not seeing the same level of growth opportunity in Canada from an economic standpoint.

But when I look at various markets again, I look at the oil patch, I look at the Toronto market. These are still areas where we're unrepresented --we're underrepresented. And again they remain a focus for us in terms of generating growth.

That's great. Thank you, Mike.

Thanks, Richard.

Steven Li, Raymond James

Yes. Thank you. Mike, just a quick one for me, can you comment a little bit on summer seasonality in Europe? How strong is the impact usually, so should we expect a margin paused for Europe next quarter, or just continued improvement? Thanks.

I'll make some comments and then I'll -- first thing you know, as we mentioned in France, you had three, what I call statutory holidays. Just to be clear, what happens in that obviously we're not booking top-line, it falls right to the bottom line because we do not take accruals on statutory holidays.

So unlike vacation time, where we take accruals throughout the year, when you have high vacations, it'll impact your top-line significantly. You know, I think Dave gave some guidance there, that last year our revenue was impacted to the tune of about CAD146 million, and one should expect that again into the fourth quarter. On the other hand, we do accrue for vacation periods, so you won't see that CAD146 million drop off the bottom line.

There's no doubt about it, that there's a very high seasonality impact. Much higher in Europe and the Nordics than we see in North America. And again, from an operational perspective, we're still working through that, and what that means and how one can mitigate some of the more negative impacts of that.

It's not only that we're taking vacations, our clients are taking vacations, so in some cases, you will have more extended periods between rolling over one engagement to the other, and therefore creating a short-term utilization problem. We saw some of that in France. And then business frankly, restarts and things pickup as the customers and our people return.

So we're still working through that. I think the second thing is on, again, if I look at some of the European areas, they have very low recurring revenue. Their primarily in the (inaudible) business, time and materials, SI&C and therefore, they're much more subject to fluctuations and utilization rates and ultimately revenue and margin.

We saw the same thing with AMS, because again, they were primarily an SI&C shop. And again as we go through it various budget approvals, we look at strategies to increase the recurring revenue which tends to bring over time, more stability in the financial performance.

That's why I mentioned in my remarks, it's something that we've done in other acquisitions, and it something that we're focused on in the various geographies across Europe, is to constantly work up that recurring revenue to provide more stability so we don't get the swings in some of the performance items quarter-to-quarter. That will take some time, but it's clearly doable. Something that we have embedded in our overall post acquisition strategy.

Great. Thanks.

Thanks, Steven.

Paul Treiber, RBC Capital Markets

Thanks very much. I just wanted to clarify just on the US margins, I do understand that there was a positive impact from the milestones that were achieved. But just in regards to any sort of unusuals, in terms of provisions, I think in the last quarter that was some provisions that were taken. Were any of those reversed this quarter?

It was a portion of it reversed. To be clear, I think there's some confusion out there, especially around Massachusetts.

The settlement we got there, we did not provision that whole amount. Essentially that settlement was really bringing on the cash associated with the work we had done up to that period. Going forward in Massachusetts, we're on time and material around the transitioning out, so I think again, some folks may have thought that we had a CAD35 million lift from quarter-to-quarter, that's the case.

I would say that the kind of provision we had there is certainly not material at a company level, and even in the US space, while it obviously, hurt us a little bit last quarter, it helped us a little bit this quarter. It's not the underlying reason why the US margins have increased there. I think it's more around us being able to really remove ourselves here over time, from milestones and changing requirements in a lot of these sections with a lot of pressure on our expenses. And we're migrating out of that, and as we do, we are able to get back to a much better alignment between our revenue, our costs, and our cash in the US.

Okay, that's really good to understand. Moving on to Europe, your bookings in Europe have been quite strong.

What's the typical -- I understand that the typical lag between the signings and the commencements of revenue. But at a high level are you seeing the bookings in Europe at a longer duration than may be what was historically done at Logica, and just of that building backlog, do you believe that's a sustainable growth in the bookings in the business in Europe?

First on the bookings in Europe, again, I am very please with the bookings in Europe. And again, I think if you look at some of the peer groups that are also starting to report higher bookings across Europe. Which I think for the most part, is linked to some of the economies coming off the floor there.

I think what you have to understand though when you compare us to Logica, remember Logica was very focused on top-line growth. And as a result, was less focused in our view, on generating bottom line margins and cash. So what you're seeing here is both the headwinds and the tailwinds. The stronger bookings are certainly contributing to revenue growth.

On the other hand, they're being offset by the run-offs that we have undertaken there. And the run-offs are fairly significant in some areas. I think if you look at the UK, I think it's about 10% of the revenue we run-off year-over-year.

So that's what's happening there, and I think, this is why I say when you look into 2015 and we tried and identify where the bottom on the revenue is on some of these jurisdictions, we'll bottom out and move on. But it will take some time.

But that's why you don't see the general increase in revenue aligning to the bookings number. It's being offset by the run-offs. And on that front, we've certainly made significant improvements in Europe on the number of projects that are red. They've come down, but in a number of these cases, as we resolved them, it means that the contract has run-off, or we're not going to renew it, which continues to put pressure on the top-line.

On the other hand, it's improving EBIT, margins, and cash.

Thanks for clarifying that, I'll pass the line.

Maher Yaghi, Desjardins

Yes, thank you. Just to be clear Mike, when you talking about this runoffs these are mainly the reasons why your backlog seems to be lighter than it should be given where your bookings were, and your sales were in the quarter?

The backlog is also impacted by FX and as Dave mentioned, quarter-over-quarter, the FX which was a tailwind, actually became a headwind. So it will fluctuate in some part, obviously due to currency on a quarterly basis, and currency this quarter, as I said, was a headwind not a tailwind.

Okay. But there are no cancellations of any size that impacted that number?

No.

Okay, and just to switch gears on cloud computing at cloud servicing, and we saw some transaction in the space recently. Can you maybe detail your strategy? What are some successes you've been able to achieve lately on cloud?

And do you require any kind of IP that you currently not have, maybe you need to go out and buy to be able to become more competitive in this space? And is there a way to break out some of the revenues you have right now to give us a sense of how much cloud is helping the Company right now?

Well certainly, we're very active in the cloud space. I don't believe we need to acquire any assets there in the sense that we have a very broad and deep data center capability or footprint.

On top of that, as I mentioned earlier, our initial entry in the cloud was very much focused on the government, the US government. We've now --as we announced, I think six months ago, we qualified on three of the four vehicles in the UK, and we have since won a number of cloud contracts in the UK. Same thing is happening up in the Nordics in Sweden and in Finland.

So I think we're making progress there, and again, while there's opportunities, relative to the data center revenue, frankly, for us, the big opportunity is actually doing the systems integration work required to take some of these applications in there current form to being cloud ready.

On the size of our Company, it's not a large amount, but it's a growing amount in terms of revenue. But again I always want to position that --don't believe that this is a silver bullet. There's other things in terms of mobility, large data analytics, transformation of the customer experience, the digitization of that.

And as was mentioned by one of the earlier questioners, we won and have been recognized for a lot of integration around that type of thing. And in some of those cases there is an element of cloud. So that's kind of how we see it.

We're certainly investing in it, in terms of setting up these environments. But we tend to do it with existing technology partners that have the components to construct this as opposed to feeling that we need to go out and buy companies to do that. Our strategy has been to work with partners, established partners, brand name partners, who have these components that we need to set up in our data centers.

Okay. Thank you.

You're welcome.

Jason Kupferberg, Jefferies

Thanks, guys. I just want to come back on the top-line and make sure that I'm kind of hearing the message accurately here. It sounds like some of the European geographies may not bottom out until second half of next fiscal year.

So should we be prepared for your overall constant currency year-over-year revenue growth to continue to decelerate a little bit more between now and then? Or is there enough of a positive offset in places like the US and the UK, such that, perhaps we've seen the bottom in terms of overall corporate constant currency year-over-year growth?

I think that's, Jason, that's summarized pretty well the perspective here. Clearly, in some of the jurisdictions we haven't hit the bottom. Clearly, there's an expected offset to that in the US as we move and try to capture and realize the revenue associated with the strong bookings that we are seeing in the business in the United States, excluding the Federal business.

One of the swing factors there though will be is, whether the Federal business starts back up. Because were also absorbing a lot of pressure on the top-line in the Federal space, so that's a bit of a wildcard there, Jason. And we've got to, kind of get another quarter or so to see which way that's going to go. So we're taking the expected run-off in the acquired operations, and we're dealing with a pressure in the Federal business. And our Federal business is fairly significant, especially in the US.

It's being offset by a very strong bookings in the rest of our US business. And as I say, we are continuing to look at opportunities once we finish our renewals in Canada --or as we finished the renewals in Canada, to pick up some growth in Canada. So, we're just trying to balance all those and work through the timing.

As I said, as we start to go through the budget reviews, as you know, our fiscal starts October 1. So we're off to Europe over the next two weeks to walk through each budget for next year. This is the kind of balancing we'll be determining as we go through there, but I think, Jason, you described it pretty well, I mean, those are the headwinds and tailwinds that we're dealing with.

So what's your guide over the next couple of quarters? Might we slow down overall a little bit more, or is it just very hard to tell?

I think clearly, our sense is that we're much closer to the bottom here.

Okay

I'm watching the UK very carefully. I've got some other countries that seem to be bottoming out. But again, as you know in this business, one quarter doesn't make a trend.

Right, right. And just on the free cash flow. It looked pretty clean overall to us, there's always some moving parts in working capital. But was there anything that you guys would kind of consider to be one-timeish or timing related items that we should be factoring into our thinking of how Q4 cash flow may play out?

No. I think the only thing that I've mentioned is that were still disbursing cash for the integration.

Of course.

Beyond that Jason, as I said, our sense is, we're back to a more normalized view as you know, post acquisition, I think we were converting our cash at a rate of about 15% of revenue. We'll continue to move that number up as we roll-off some of the earlier quarters, where clearly we had a much bigger impact of the integration. So no, I think the operations are working very hard to collect our cash, and as we clear up, in fact, some of the red projects as well, that's also taking some of the pressure off the cash. And we didn't have anything unique in the quarter that would make it an outlier.

Okay, and then last question for me. Picking up your comments on share buyback.

Mike, I think you guys have only done, maybe a little under CAD3 million of the CAD22 million or so that was authorized for this year. You did seem to be pretty bullish on your stock's valuation here. Should we interpret that more as a near-term common, as opposed to a longer-term common in terms of the appetite to buy back stock?

I think it's an ongoing common, Jason. But I think in the short run, what I think what I like to do is get more stability around the debt. So that's the immediate focus, and I think you'll see something coming out very soon where we've been able to really look at our capital structure in a much more predictable fashion.

As you know, this company, for years never took on any long-term debt, and when we look at the interest rate curve, we think this is a good time to take on some more. And then we'll look at what's left on the line of credit, and we'll find the right balance there.

But in the short-hall, my sense --absence an acquisition, we'll continue to chisel down on the debt. And remain very opportunistic around the buying opportunities to the stock because again, we clearly believe, as I mentioned, even if you look at the valuation on a cash EPS basis, we think there is significant upside here.

Understood. Thank you.

Thanks, Jason.

[Sanos Muscuspulos], BMO Capital Markets

Hi, good morning. Mike, you alluded to the fact that you're seeing some gradual improvement in the European backdrop, and so can you elaborate a bit, in terms of how the environment looking relative to maybe six months ago? And how that's varying from a geographic perspective within the region?

I'm sorry -- I didn't get you -- the margins?

No, sorry the spending environment in Europe.

Oh the spending environment. Again, everything's relevant, and as I said many times before, we tend to speak of Europe as one entity and when you really dissect it's a series of countries and there's clearly a difference in those economies.

But again, we were I think very fortunate, in the sense that Logica was much more heavily embedded in the Northern economies. So if we look at it, the Nordics continue to afford us an opportunity for growth. We still got some bottoming out to do, and a number of those economies up there. But that's more to do with the kind of contracts we inherited there, then the economies themselves.

The UK is coming along nicely as you can see. Germany continues to have very strong economy. Even the Netherlands, where Logica and a lot of the peers have been struggling, both top-line and bottom-line, I think we've been able to stabilize the margins in there. We're certainly significantly more profitable in the Netherlands, and we're working hard on the top-line.

Shell is a big impact there. We've done a lot of work around that, it's a very large client, we've made a lot of significant changes around the account management structure as we're doing on some other global accounts. And we see that as an opportunity to pick up growth in those large multinational's that may headquarter in the various European geographies.

So I'm kind of separating a bit, that you have the local economies. But you also have the economies, if you will, of very large multinational's that happen to reside there, and therefore the work, the growth opportunity in the short term may actually be more related to our ability to take share in accounts that we're in.

When I look back, two years when we did the acquisition, I would say that we're clearly a lot more bullish on Europe than we were then. My sense is that it will continue to gradually improve. And I think when I look across the peer group operating over there, you can see similar commentaries from them. And as I mentioned, I think a number of them are also reporting very strong bookings across Europe.

Great. And sort of a related question. Some of your peers have talked about the growing adoption of off-shoring in Europe. Is that the trend that you're seeing? Is your global delivery capability becoming more of a factor in your conversations, or maybe not as much in a specific geographies or verticals you're focused in?

I do. I've always believed that global delivery is a lever in terms of growing the business. On one hand, taking more share, and on the other hand, it's also a tool to increase margins over time.

And again, as I mentioned before, you have not only some language barriers, but to be transparent, we also have some cultural, internal cultural barriers that we need to work through. And we worked through those in North America.

In some cases, the work, especially on the IP front, other internal work that drops right to the expense line. We've been able over time, to migrate more of that offshore, which is bringing down our expense and increasing our margins. And that journey is underway in Europe, but it is a journey.

In the sense that folks need to understand that using global delivery doesn't cannibalize the revenue. It actually increases our opportunity to win more business, and improve our margins, and our cash flow over time. So kind of look at some of the big levers, obviously IP global delivery focused on utilization, focused on large accounts are all levers that we are working on, and embedding in our 2015 plan.

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

You're welcome.

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

Paul Steep, Scotiabank

Thanks. Mike, maybe just to be clear, maybe talk a little bit about leverage and how your thinking about leverage ratio longer-term. I hear you about terming out some of the debt or looking to do that. Just want to make sure there's not a more fundamental change here in terms of how your thinking about debt and the business, and your comfort with maybe carrying a little bit more leverage longer-term.

Paul, I may pick up on this one. Given where we were before, we came from a net-debt to -- sorry cash net debt-to-capitalization ration 46%, 47% down to 32.5% over seven quarters. So we're into this area now where we're very comfortable with the leverage that we have within the organization.

As Mike had said, if there is an opportunity in the M&A front that comes along, we're in a position to be able to look at it very seriously. We also, with the cash generation that is occurring, we also have the options now, do we continue to plow some of the cash back into the debt, or do we look at doing maybe some share buybacks, etcetera as we push forward.

So we're in a very nice position, and having a number of options that are open to us, and we can execute on any of those levers as we go forward. We also have, as Mike had said, was the opportunity to look at the lower interest rate structures that are out there today. US Treasuries are at pretty much an all-time low, and with the amount of de-leveraging that we've done over the last few quarters, when it comes to the risk of profile of this company, vis-a-vis some of the others, we should be able to go to the market and (inaudible). That something that we're seriously looking at.

We've also taken a look at --if you're looking at different sizes of companies, looking at what the long-term cost is on debt going forward, we have a number of about CAD1.3 billion that we've identified as being pretty much the sweet spot for long-term debt as we go forward. And were kind of looking at -- is this the right time to, kind of lock in on something like that, get the capital structure nailed down for the next generation as we move forward here. And as Mike had said, that's something we're considering pretty seriously at this stage.

Just to close off and then I'll pass off. On leverage, David, though is it fair to say that you'd be willing to give up if you were to consider some sort of public debt vehicle, not saying you are, but with there be sort of a trade-off there, a willingness to allow sort of, a pick feature? Or another feature that would allow you the flexibility to always bring that debt down? Is it, sort of safe to assume there's a willingness to pay off a little more interest on that front long-term?

Well it's an option we'll take a look at for sure. We have looked at a number of different vehicles.

At the end of the day, we want to make sure that we leave ourselves with lots of opportunity and flexibility. So to the extent that we don't have to lock ourselves in, and have the ability to make modifications going forward, depending on the market opportunities we have, that's really what we're looking at here.

Perfect. Thanks, guys.

Thank you, Paula, and thank you everyone for joining us, we will see you back for our, I guess it will be year-end results on November 13.

Have a nice day. Have a good summer.

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