CGI Inc (GIB) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI fourth-quarter 2015 and year end results conference call. I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Global Communications and Investors Relations. Please go ahead.

Thank you, Wayne, and good morning. With me to discuss CGI's fourth quarter and FY15 results are Michael Roach, our President and CEO, and Francois Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9 AM on Wednesday, November 11, 2015. Supporting slides, as well as the press release, financial statements, and MD&A issued earlier this morning are available on CGI.com, and will be filed with both SEDAR and EDGAR.

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 CGI.com and included in this morning's disclosures. We encourage our investors to read it in its entirety.

We are reporting our results in accordance with International Financial Reporting Standards or IFRS. However, 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 on this call are Canadian, unless otherwise noted.

I'll turn it over to Francois first, to review our Q4 financial performance, and then Mike will comment on the full-year, as well as our strategic and operational outlook. So with that, Francois?

Thank you, Lorne, and good morning, everyone. I'm pleased to share the results of another strong quarter. Revenue was CAD2.6 billion, up 4% compared with CAD2.5 billion last year. Currency fluctuations positively impacted revenue by CAD178 million or 7%. Accordingly, our negative growth rate of [3]% represents a 50% improvement from Q1 FY15, an additional proof point that we are moving towards positive growth.

The book-to-bill was 110% with CAD2.9 billion in contracts awarded, bringing the full-year book-to-bill to 113% compared to 97% last year. Adjusted EBIT was CAD[370] million (sic - see slide 5 "CAD379 million") compared to CAD[370] million last year. EBIT margin remain strong at 14.7%. When excluding amortization of customer relationships, all operating segments generated double-digit margins. Last quarter, we announced a CAD60 million restructuring to improve our competitive position. Against this program, CAD36 million were expensed in Q4. We expect the remainder to be taken in Q1, and the benefits to materialize throughout FY16.

The Company's tax rate continues to rise due to the profitability of the US operations. Our Q4 income tax rate increased to 27% from 24.5% last year. Net earnings were CAD260 million excluding restructuring charges, representing a margin of 10.1%, 70 basis points higher than last year.

The higher tax rate negatively impacted EPS by CAD0.01. As a result, earnings per share were CAD0.82 from CAD0.73 last year, up 12.3% and up 13.7% on a comparable tax rate basis from last year. Based on our current business mix and the continued momentum in our US operations, we expect our FY16 effective tax rate to be in the range of 26% to 28%. Excluded from this range is a CAD6 million one-time expense to be taken this quarter, related to a UK corporate tax rate change for which details are outlined in the MD&A. This is an additional headwind of approximately CAD0.02 to Q1 EPS.

Turning to cash, our operations generated a record CAD451 million or 17.5% of revenue. For the year, the operations generated CAD1.3 billion in cash or 12.5% of revenue. We ended FY15 with the DSO of 44 days, within our 45 day target.

In the quarter, we repaid CAD121 million of the long-term debt and repurchased 5.1 million shares at an average price of CAD47.23 for a total investment of CAD239 million. Under the current program, we can still buy back approximately 12.1 million shares before mid-February. We continue to see our shares as a strategic investment based on a compelling valuation relative to the peer group.

Net debt at the end of September was CAD1.8 billion or CAD334 million lower than last year, improving the net debt to capitalization ratio from 28% to under 22%. With the fully available revolving credit facility and CAD305 million in cash, we have CAD1.8 billion in readily available liquidity and access to more as needed to continue exhibiting possible growth strategy.

Before concluding, I would like to point out the most prominent change we have made to our reporting structure. To better reflect our proximity model, the Nordics is now a standalone [SU], and consists of Denmark, Finland, Norway and Sweden, each of which is led by a local leader. In order to compare year-over-year performance, we have published the historic revenue and adjusted EBIT of each new segment for all four quarters of FY15.

I'll turn the call over to Mike.

Thank you, Francois, and good morning, everyone. As Francois provided the details of quarter four, I will focus my comments on the full-year results, and then wrap up with an update with respect to our profitable growth strategy and outlook. Our team delivered very solid performance in FY15.

Revenue of CAD10.3 billion, bookings up 14% to CAD11.6 billion for a book-to-bill of 113%. Adjusted EBIT, up CAD100 million to CAD1.5 billion. EBIT margin, up 130 basis points to 14.2%. Net earnings up 12% to CAD1 billion. Earnings per share expanded by 13% to CAD3.04 per share. And finally, cash generated by operations was up CAD115 million to CAD1.3 billion or over CAD4 in cash per share.

We reinvested our cash in the most strategic and accretive opportunities. We invested over CAD250 million back into our operations. Specifically, we invested and will continue to invest in account management to support our proximity model, industry expertise to drive high-end consulting growth, solution development in line with our goal of IP30, and finally delivery automation in our global delivery centers to enable more efficient outsourcing options for our clients.

CAD900 million against the long-term debt which will not be a priority in FY16, as the short-term portion of our debt is essentially paid down. CAD333 million towards repurchasing 6.9 million shares at an average price of CAD48. Share buyback will continue to be priority, given our valuation and the low cost of capital. And in FY16, we have allocated, and have access to sufficient financial resources to continue to reinvest in our business, repurchase our shares, and complete an acquisition or a series of accretive acquisitions.

We enter the new fiscal year well-positioned from a strategic, operational and financial viewpoint. Our strategy of returning to positive growth is based on utilizing both the build and the buy pillars of our profitable growth strategy.

On the buy side, I would like to begin by reinforcing our commitment to continue being an active, aggressive, yet disciplined consolidator within our sector. We have the capacity necessary to execute large transformational deals, or a series of small niche acquisitions. And our funnel of potential targets is healthy, being constantly refreshed with additional opportunities.

With respect to our initial list of 85 targets, we continue to review and qualify each of them for the next step in our acquisition process. For example, we are currently engaging with a number of management teams to determine their interest and willingness to sell, and our ability to create incremental value by successfully integrating them into our operational model. We remain confident that 2016 is the right time, to find the right target, at the right price.

On the build side, the four operational investments I've previously highlight, will assist our clients in becoming customer-centric digital organizations, and will drive towards a return to growth in 2016. As we reflect on the markets and economic sectors in which we operate, certain previous headwinds are now being mitigated, and in some cases turning to tailwinds. For example, FX trends are now lifting revenue, and adding to the attractiveness of our Canadian nearshore offering, stability in our US government business recovering and trending towards profitable growth, consolidation activity across sectors and geographies providing growth opportunities for our consulting, systems integration and outsourcing offering.

And finally, all industries are facing a dual track challenge to run their operations and change their operations for growth. On the run side, there is significant opportunities to drive down technology costs, and to take those savings and reinvest it in change. On the change side, our investment in high-end consulting and IP enables us to assist our clients in their digital strategies. These pressures are most acute in the financial services sector, where regulatory requirements are overwhelming the run capacity budgets. At the same time, there is an increased demand from end customers for a total digital experience, both of which are increasing demand for our services.

In the United States, we continue to be confident in our ability to grow revenue, while incrementally improving profitability. On the commercial side, revenue was up 3% year-over-year, as clients continue to invest in IT modernization, digital transformation and IP, within the banking, communications and utilities sectors, all of which grew at double-digit rates. Our US federal government business, which represented a headwind to growth last year, is showing signs of gradual improvement.

The recent two-year budget deal now in place extends the US debt limit and raises spending caps. With this context, coupled with a fourth quarter book-to-bill of 144% in CGI Federal moves this business towards being neutral, and potentially a positive contributor to growth in FY16. As a reminder, we are well-positioned in this market, with 58 contract vehicles having a combined ceiling value of well over CAD500 [billion].

In Canada, there are three main market focuses driving change that represent growth opportunities for us, the new federal government, commodity pricing under pressure in Western Canada, and the banks facing the same global challenges to reduce their run costs, in order to advance strategic initiatives. We continue to invest significantly in the greater Toronto area, which represents over 50% of Canada's IT spend.

Our banking sector continues to ramp up. As a result, we are experiencing accelerated growth, with revenue up both sequentially and year-over-year. On the whole, our funnel continues to expand with high quality opportunities, including long-term IP-based solutions.

Turning to Europe, we see the same trends and positive opportunities as client's agendas are focused on transformation. Our teams continue to successfully execute our strategy of proactively engaging with clients, and capturing opportunities to earn new business. The book-to-bill in Europe was 107% in the quarter, and over 100% for the year.

Again, aligned with our strategy to improve the business mix, these awards are higher quality. For example, digitizing the city of Edinburgh is a seven-year engagement that positions us as a top contender for future digitization opportunities across all verticals, and on a global basis. Overall, clients around the world need to be customer-centric digital companies, with strategies based on achieving that goal.

Our high-end consulting helps clients design their digital strategy. Our data and analytics are driving value by providing actionable information. Our cybersecurity offering ensures protection at all levels for all stakeholders. And when taken together, our transformational outsourcing offering allows clients to successfully fund and sustain their long-term strategies.

In summary, we believe our consistent performance, improving market conditions, the relevance of our services and solutions, underpinned by our global reach will contribute to our ability to increase earnings per share through the return to growth, and maintaining operational excellence across the business. Thank you for your continued interest and support.

Let's go to the questions, 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 8806386 until December 12. As well, a podcast of the call will be available for download within a few hours. And as usual, follow-up questions can be directed to me at 514-841-3355.

Wayne, if we could poll for questions, please?

(Operator Instructions)

Richard Tse, Cormark Securities.

Yes, thank you.

Mike, I just wanted to get some perspective. In which vertical do you guys see the greatest opportunity for growth here over the next, call it 12 to 24 months?

Thank you for the question, Richard, and it's nearly a lay-up in the sense that the financial vertical, globally, as I mentioned are really in an investment phase. They are committed to transforming their business. They are dealing with the cost, as I mentioned, of an increasing run cost just to operate their businesses. This is being driven by regulatory requirements, competitive pressures for new products and new solutions. And on the other hand, they have to free up capital to invest in this transformation.

I think if you catch the Globe today, in Toronto, there's a whole article on Toronto Dominion Bank that really outlines exactly what I am speaking about here. I think a couple weeks ago you saw Scotia announce an investment in a digitization of a Center of Excellence. So we see this across the globe, and this is one of the reasons why not only in Toronto, but in the other big markets of London, New York, Paris, we're investing heavily in our banking financial business. And we're starting to see, as I mentioned, the return in Toronto. We're growing sequentially in our banking division and we are growing year over year; and our funnel is very healthy, made up of not only longer-term but some near-term opportunities that we expect to close here in the next 60 days or so.

So on that, would it be safe to say that when you are looking at M&A, that would be the type of transaction you would be interested in doing: a firm that would be more focused on financials?

I think if we could find something, financial is certainly at the top of the list. But again, also trying to look for IP that's horizontal, so I could leverage it beyond a single vertical. But if I look at it, certainly financials -- we have good portfolio there now. So to be able to add to that, or fill in any gaps would be very helpful. On the other hand, Richard, is, as I mentioned earlier, we want to help the customers actually design their digital strategy. So again, moving up the stack in terms of more consulting capabilities, getting closer to the customer strategy piece, and making that link between their business requirements and their IT requirements is also a very sweet spot for us.

Okay. And then, just a last question: I know you have like 85 potential deals that you are looking at, but would you say the environment for M&A today is more attractive than it's been in the past 12 months, maybe from a valuation perspective or other?

Well, again, I would say, our sense is there is a lot of companies looking here in terms of their own strategic plans. And with this shift in technology and where the customers are going, there's clearly some entrepreneurs and various companies looking at whether or not they want to go it alone, or do they want to be part of the larger consolidated market. So we are seeing both out there.

Valuations, they are still -- the issue that we run into over the years, especially around an entrepreneurial-based firm, we can never pay an entrepreneur for the sweat equity that they put into the company over 20 or 30 years, of course; and we have to base it on a solid valuation criteria. So you get some discussions around that area. But as I mentioned, as part of our process, we have met, and are meeting with management teams of potential targets, and having those discussions. And we're also adding to the list, which I wanted to mention. It's not a static list, because what happens as we start out there talking to companies and talking to customers on a daily basis, we are getting other suggestions, which we are also putting in the funnel.

So I think you should look at the acquisition funnel, much like we look at the sales funnel on the build side. It's fluid. It can go up. It can go down. Suffice to say that it's a healthy funnel, and it will take some time to go through it, but we are on it. And as I mentioned, we do have the financial capability not only to continue to invest in the business, buy back our shares, but also do a series or a large transformational acquisition in 2016.

That's great. Thank you, Mike.

Thanks, Richard.

Maher Yaghi, Desjardins Capital Markets.

Yes, thank you for taking my question, and good job on the quarter, guys.

I just wanted to talk a little bit about your expectations about margins from here. Because -- correct me, if I'm wrong -- but after correcting for some of the help that you got on some one-time items in Q4 last year, this is one of your highest-margin quarter ever. Where do you see those margins heading in 2016, given the funnel of business that you have signed, and the integration that's taking place?

And second one: when we look at these margins, some might argue that you might not be making enough investment in the business to continue to grow on an organic basis and grab market share. What would you say about that, Mike?

Well, I can take the last one first, and I don't know who would say that. It might be somebody who is trying to give some context around their own margins. This is not an either/or. I often say, in life you have to be able to run and chew gum at the same time. So when you look at our business, we are focused on EPS growth. EPS growth comes from being able to bring on a quality revenue, and if you bring on quality revenue, the margins will also expand.

So I'll give you a good example: if you sign a long-term SAS deal on IP, you are going to increase your revenue, and you're going to increase your margins. So I don't believe we're giving up anything in terms of having a higher margins, because if I look at where the margins are coming from, they are coming from operating the business more effectively. So instead of having a negative impact on our margins by having write-down on projects, by not delivering, we've addressed that. So we're not taking as much financial hit to bad projects or red projects, and therefore the margins are going up, utilization rates are climbing. The use of the global delivery model that we leverage so well in North America to get the margins up there, we are now extending that into our European operations, so that's another way of increasing margins.

So the real goal here is, to increase earnings per share. I continue to execute those levers on operational excellence, and I believe there are still other opportunities to do that. And then, bring on quality revenue that's aligned to the strategy here. So when we look at low-end end-user computing -- very low end. So you could get revenue there, but it's not going to be accretive to our margins, and not going to be helpful to our cash, and is not on strategy. On the other hand, if you spend our time closing a 15-year or 10-year collection 360 deal with a company, that's going to bring huge value to the customer. It's going to be very sticky, in terms of long-term revenue. You're going to have immediate cash, and you're going to have growing margins as more volumes come on.

So that's the mix, Maher, that we're attempting to do here. And that's why you see this thing gradually moving up, and you are also seeing the revenue and the margins, both moving a bit in [stoplight] in -- together. Now you won't see that every quarter, because in some cases you make the investment and down later you get the quarter. But that's the goal. It's not to sacrifice one for the other. Because at the end, you're driving for earnings per share and they come from both levers.

That's helpful. And in terms of your outlook for 2016, given the business that you signed, how do you see that trending?

Well, I think I covered that in the script. I went through some of the factors. If you take -- take the US for example: the team has done an excellent job down there. We've probably added nearly CAD150 million in increased margin there on the growth side. If you look at that market, the whole industry has been hit hard on the government side.

The government -- the federal government side is 50% of our revenue there. And as I mentioned, I don't expect that to flip like a switch. What I am saying as I go through those various headwinds that we had last year, some of them are mitigating. So if they were to follow through -- it depends at the rate they follow through -- we'll start to see the growth gradually come, quarter over quarter. And then, if you overlay an acquisition or series of acquisitions, it will accelerate that pace throughout the year. So that's -- at a holistic view, this is how we view the plan for the year.

Thank you, Mike.

Okay. Have a great day.

Thanks, Maher.

Rod Bourgeois, DeepDive Equity Research.

Hey, guys.

So I want to talk a little more about the acquisition strategy. The specific question here is, are you holding back somewhat on your plans to pursue a series of tuck-in acquisitions, in hopes that you might land a very large acquisition? Or are you continuing full steam ahead on tuck-ins, and then you will evaluate large deals as they potentially become available? How are you thinking about that on the continuum of a large deal versus tuck-ins?

Now that's an excellent question, and it's probably one that we used to struggle with more, Rod,10 years ago. Where we're at right now, as I mentioned on the call, is, we're generating over CAD1.3 billion, CAD1.4 billion in cash. We've got a line of credit sitting there for roughly the same amount, and we have access to much more, if we require it. So my view has always been, if you are a consolidator, you want to be in the market every day. Because whether it's a niche or transformational deal, when it comes along, if you are not ready to pull the trigger, you're going to miss it. So when we look at this, we do have the capability, the financial capability, the operational experience,, to actually do both.

Now if it was a large transformation deal in one geography, obviously we would gate a little more any niches going in there -- not from a financial standpoint, but more from an ability to successfully integrate. So the short answer is, no, we're not waiting; and we're not pulling back on our commitment to continue to buy our stock.

All right. And then just a follow-up on that.

Do you have a preference for doing a large acquisition, or for doing a series of tuck-ins? Is one path preferable versus the other, assuming you have the control over being able to go down either one of those paths?

Yes. Well, clearly, based on our experience over the years, with American Management Systems, Stanley, Logica, a larger transformational deal has a larger impact on the business. And depending on where it is, can also contribute to accelerating profitable growth. On the other side, a niche acquisition in the right space can also be a significant trigger to growth in a particular area.

So and I'll use the utility -- I keep coming back to the utility business in the United States, and I think that's a big market for us, we want to be in it more. So something there, as I say, would move us into another market, help us accelerate growth. Help us, in fact, leverage an existing line of solutions we have, through the Logica transaction. And some of the solutions we have here in Canada, that we are really selling on a point-to-point basis into United States utility businesses, without the wraparound of high-end consulting, and the SI and run business that's associated with that.

So a short answer: a transformational deal in the right place, right price would obviously move the meter more significantly than a number of niche acquisitions.

Got it. And then, finally, you've already given some commentary on the margin front. Could you just boil down -- if you have one main margin lever that remaining over the next year, what's the main positive margin lever? And then, what's the biggest challenge that you face on the margin front? Just so we can weigh the biggest lever versus the biggest challenge?

Yes. So the biggest -- and I think this is universal, by the way -- in a services companies like we are, the utilization is probably the biggest lever a company has. I mean, if you move your utilization a single point across a company as big as ours, you are going to move margins fairly significantly. So I would say that is a key indicator. And again, it plays well with the growth strategy here, because as we grow more land and expand, this enables us to drive up the utilization level.

Kind of a close second, in terms of -- because you said this year in terms of immediacy -- of course, the more long-term one is really more managed services. That could be standalone IP in terms of our goal of IP30, which is very active, and we are pushing extremely hard on that. And as I mentioned earlier, that would drive up both the top line, bottom line, and enable cash. Those would be the two buckets at the top.

On the other side is, we continue to transform the infrastructure business. So, as you know, the infrastructure business is exceptionally capital-intensive. And there is really an opportunity to be much more focused in that business. And some of the things that we are looking at, as I say, we're not going to run to the bottom of that business and chase low-end business there. So we're going to change the mix of that. And we're also attempting to move more to the [Accenture] model, where we would -- it would be less capital-intensive. So to the extent possible, move away from buying IP assets as part of a managed services deal, and go through management of customers' infrastructure, which is asset-light. Also ensure that we are focused on the higher-end part of the Tier 1, working on the Cloud, leveraging our IP into an SAS model -- those things that are on strategy.

So that's what we are trying to do, I would say at an executive level, at the top and the bottom of the margin scale.

Very helpful. Thanks.

Thanks, Rod.

Jason Kupferberg, Jefferies.

Good morning, guys.

I just wanted to follow up on the comments regarding a return to growth for FY16. Just so we are thinking about this right, are you saying that for all of FY16, on a year-over-year basis, you think will be positive constant currency revenue growth?

Well, again, I don't give guidance, but I've shared, Jason, that coming out of the large acquisition, that we are going to continue to drive earnings per share. I've said that our goal is to continue to drive double-digit EPS year over year, which we delivered, and as I mentioned in my opening comments in 2015. And to do that, we intend to generate a larger portion than last year, coming from growth with the context that I mentioned earlier. It's not growth at any cost, it's growth on strategy aligned to bringing on more quality revenues. Our plan does incorporate to grow in 2016, using both levers, the build and the buy.

Now I'm not going to predict by quarter, because there are fluctuations, and various things happen, and closures, and how long it takes to bring a booking on. But I think that's the context that you should think about our 2016 plan.

Okay. And just a follow-up question on the M&A pipeline -- and all that color was helpful. Is US commercial still really a top priority here, or is the aperture broader?

Now I think again, we're looking across the globe, but clearly US commercial, UK commercial -- very high up the list.

Okay. And then, just my last question.

I think you talked about extending your low-cost service delivery capabilities. And I wanted to get your view on the appetite among enterprises in Continental Europe for nearshoring and offshoring -- to what extent is that increasing? And then if we can just get an update on the percent of your staff that are currently offshore and nearshore, and perhaps where that percentage can go over time?

So if you take the European one, first, the answer is the Europeans are interested in securing -- using nearshore, if I take that one first. And if you look across Europe, there are geographies there, like Poland, where we have a center; in Prague, Portugal, Spain, Morocco. So we have a number of centers and geographies that can support a nearshore offering on an integrated basis, or as part of an individual customer request. That's also underpinned, beyond the mere economics of that, by legislation in Europe that says certain types of data may be able to move out of the country, but it can't move out of the Euro zone. So this is more of a -- and I would say more restrictive than what we see in North America in terms of legislation.

And then that goes to your second question, Jason, on the offshore capabilities. So on the offshore, I break it into a couple pieces. If you take the large international companies that are operating globally -- so they've got US operations, they've got maybe operations in Asia, and they've got operations in Europe -- at that level they are very open to offshore. So we would expect that the offshoring there would have both a headwind and tailwind if I look at it from a client standpoint.

First in some cases, companies that have gone very big over there are now thinking about whether they sent too much over. And when they look at their digitization strategy and the skills, they are thinking some of that should either reside in their operating territory or in nearshore centers -- the service being provided by us -- or their own centers. You've got other ones who have really come at us, by the functions, and they have looked at stuff like application maintenance, and say, I'm about 40% offshore, given the cost pressures I have. And you see this, as a good example, in the oil and gas businesses. They are pushing very hard, and rightfully so, to bring down their costs. So you may see more business in certain verticals going offshore, in response to individual business pressures that are in a company or in a sector.

So short answer is, all very active, all very relevant, but like everything else in life, you have to know when to use them. And when it comes to bidding or shaping a deal, you have to be very sensitive to the restrictions on information sharing. And then, you have to also layer over layer cybersecurity, which is another factor that customers look at. And then, on the nature of their business, they are more or less sensitive to where their services are provided.

As far as our footprint, we tend to look at wrapping both the nearshore and offshore. And again, we've picked up over the years and grown our Indian operation fairly significantly, not only in headcount, but in diversifying across various cities. So about a third of our people now are in the -- in what I call the global delivery centers. I always remind investors, when you do your calculations, you need to back out the significant portion of government business we have, because that for the most part does not travel certainly outside the country. It can go to some nearshore centers.

So again, I'm not unhappy with the mix. I've always said over the years it's how you use global delivery that differentiates you. It's not necessarily the number of people that you have over there. We have sufficient people to address any bidding opportunities that are out there.

Thank you.

Thanks, Jason.

Kris Thompson, National Bank Financial.

Great, thanks.

Mike, is the recent restructuring fully reflected in your Q4 EBIT margin?

No. I think what we said is, on the CAD60 million, we booked about --

CAD35 million.

CAD35 million, Kris. We're trying to get the rest of it in the first quarter.

Okay. So I guess it's reasonable to assume that you can actually improve your EBIT margin from the Q4 level, holding your revenue mix steady?

Yes, I think -- some of these restructuring are, obviously, Kris, have a more immediate payback. I guess we're getting feedback on the call (laughter). That payback than others. But yes, our investment in the restructuring is designed to help us continue to grow the top line, but also improve the bottom line. So yes, we expect improvement there. And Canada is one good example, where we see an opportunity here to continue to grow the margins in Canada. We had a little bit of an offset to last year, but still are at a huge number. But the plan this year would be that the team on the ground will deliver improvements as one example.

Okay. And I'm on speaker, hopefully you can hear me a bit better.

The headcount disclosure at 65,000 -- that's the first drop for almost two years. I'm just wondering what regions? And is that going to improve your margins as well going into 2016?

You have to look at the factors of that. There are three or four. First, we've done divestitures; and of course those headcounts need to come out. We did a number across South America, the Middle East, Switzerland; and in other geographies, we're still in those geographies but we have divested some body shop work that Logica had. In some cases, the headcount -- and one I can think of was about 150 people -- so a portion of it is that.

Another portion of it is really reflecting the change in the mix of our work. So if you look at the revenue being down, obviously the headcount should be down as well. And the key there, as I said, is that it needs to be down in the right areas. And if you look -- when I look at it, the headcounts are down in the infrastructure business, which makes sense because we got a dual headwind/tailwind going on there. We are purposefully trying to move up the value chain in there; and the lower end stuff is actually more labor-intensive. So if you take the end using computer -- the computing -- you've got a guy on the ground there. If you move up the stack to Cloud and that, you don't have the same labor mix. So part of the restructuring that we did, particularly in Canada, came at that very issue. And so that's what's going on there.

And then finally, the productivity that you mentioned -- in terms of improving productivity, if you look at the margins in the business and the changes in the mix, when you move to IP, again, you are going to get revenue, where, over the longer period of time, does not have the same labor component. You have the labor component when you are installing it, but when it's in run mode, it's essentially digitized. So as the customer adds more volume, there's not a lot of human intervention there. So the good news is, you end up getting growth and the margin expansion, with, obviously, with less labor, given the nature of the work. So those are some of the major factors, Kris, behind that change.

BPO revenue in the quarter looked really strong. Is there any particular vertical or solution where you're gaining traction outside of financial services?

Sorry, did you say BPO?

I did.

Okay. Sorry, just having a little trouble.

So the BPO does tend to fluctuate, depending on certain things that might be seasonal. So I'll give you an example: if we have BPO on the collection side, as the volumes increase for seasonal reasons, given the nature of the business it can pop up. We also have payroll businesses, Kris, as you well know; and they have a seasonality to them as well. Some of our insurance verticals do as well. If you take some of our work in the US federal government -- take visas: that's an area that is in BPO. And it fluctuates, again, of course, given the number of visas that the US generates. And of course, why are visa volumes going up? For all kinds of reasons.

So this is what happens. It's as volumes arise for -- and I'll give you three or four examples -- you will see that percent change. And some cases it will change quarterly, because if I look at the payroll business, there is a lot of activity in the January, February, when we have to issue G4s and the summaries with the annual compensation of the plans that we serve.

Okay. If I can sneak one last one in.

The new business in the quarter -- the bookings look really strong. What are the key reasons where you are winning new business against competitors?

That's a good question. And when I look at some of the competitors -- and I don't want to name them. But we're going head-to-head with other global players, and we're winning, I would say, on a lot of deals for different reasons. The one that, of course, that pleases me the most, where we're going head-to-head with, say a firm that may be more of a consulting slant in their business.

As customers, especially as we go around the world, get to know us better, they find out that we cannot only provide that deeper operational consulting. And we have a lot of processes to back up the consulting. So it's not that we can just go in and give advice. We actually have, as you know, the management foundation that outlines exactly how to manage a large-scale technology project, or a large-scale outsourcing. Or in some cases, help companies who are merging to do the due diligence to help them bring out what kind of synergies they should expect. Because again, if you look at us, we merged two big IT shops, and of course, when we do that we have to find the accretive savings. So I would say that, post Logica, more customers are understanding the depth of our operational knowledge, and are also very intrigued in our ability to do accretive acquisitions, and actually deliver the kind of returns that we have. So this is paying off significantly.

And on the other area is our proximity model, which I always believed was a huge advantage here, because we have people on the ground that live in the community. So it's not just a sales guy; it's a team. It's a business development, and a delivered capability that can be done locally and leveraged together. So I think those are two big areas. IP is another one, and I don't think anybody has got the depth of IP that we have, that's so universal. Those would be probably the top two or three that are helping us along the way here.

Thanks for taking my questions, and keep up the good work.

Thanks very much. I appreciate it.

James Schneider, Goldman Sachs.

Good morning. Thanks for taking my questions.

I'll be following up on the headcount question, if I could, for a second. Understand the reduction happening fiscal Q4; from here do you expect the headcount to start to uptick? And can you maybe talk about whether there is additional restructuring in Q1 from a headcount perspective? And then, a little bit longer term over the next three or four quarters, what are your hiring plans relative to historical trends?

That's a good question.

So you still get maybe a bit of a tail on the headcount reductions coming from the restructuring. In some areas, James, as you know, you have to give notice, especially in Europe. So the headcounts don't follow as immediately as they would, for example, in the United States. So you'll get a bit of a tail there. I don't think it's a material amount. On the other side, as we return to growth here, the headcounts will grow, and our hiring plans are well in place. We know the type of hiring we want to do -- and this is a key lever.

So if you look at where the customers are moving to and where they are investing, that's where we want to hire, that's where we are hiring. It's not only the number; it's who you're hiring, and where you're hiring, and when you are hiring them. So the short answer is, yes, we would expect that at the growth rate picks up, so will the headcount. It may not be a 1 to 1 ratio, back to the example I give you on a SAS product. You're going to get revenue there that has a lower proportional headcount. And relative to what I said on the infrastructure side, with the evolution of our strategy there, it wouldn't be as labor-intensive either. But yes, we would expect the headcount to move. We're hiring. We're looking for people that are very much aligned to those big demand areas that the customers are telling us.

That's helpful.

And then, maybe as a follow-up, can you maybe talk a little bit about the bookings environment in a little bit more detail? Clearly, some of your competitors have planned to a pretty significant deceleration of bookings, which seems (inaudible) factor trends appear to be significantly stronger than that. So can you maybe talk about any reasons why you think that might be the case? Is it purely share, or do you think there's also an element of geographical or vertical exposure that you have that's somewhat unique? And can you maybe talk about any changes in the bookings environment just in the last month and a half, since the quarter ended?

Good question.

And again, James, as you know, I don't drive my people to meet a particular quarter end on bookings, because bookings need to be looked at on a 12-month rolling basis. That's good for business; also very good for shareholders, because you don't end up taking a discount on a deal just to bring it in on a quarter. I think in our case, what you are seeing here is probably two things going on. One is, in our business, there is a number of deals that you have to invest in some cases two years. So if you take Edinburgh, that's a big investment, and that didn't turn in three months. So what you see is work that the team started two, maybe three, years ago. And all of a sudden, two, three years later, you get the booking. And therefore, you can see a pop-up in bookings, and in the follow-on revenue that goes with it.

In other cases what is happening here is that our proximity model that I mentioned is taking a better hold now, following all the integration and the run-off of unstrategic assets, and the closing of some offices in areas that are not strategic to our customers or to our offering. And the local teams are also getting much more effective in leveraging our global capabilities. And when that happens, of course, our value proposition to the customer goes up. And I think it differentiates us from a lot of the other players.

And again, my logic goes like this: first off, we are in the services business. The services business is about relationships, and if you want to have relationships, you have to live in the community where the decision is made relative to IT projects. And then if you look at what happens on larger deals now -- so if you take Finland, there's a meeting where they fly guys like me in, and there'd be a guy from IBM -- although it won't be the President or CEO; same with Accenture. And we talk about the capabilities and the differentiators we have between the global firms, And then, as I say, we all get on the plane and leave, and then the local teams all switch and talk Finnish. So there are two meetings going on. Our strategy is to be at both of them. And our strategy is to make it very clear that the guy in Finland, and the person in Sweden, or wherever the country is -- they own the total CGI promise regardless of where the work is delivered. I think that's a big differentiator.

Thank you, Mike.

You are welcome.

Thanks, Jim.

Ralph Garcea, Cantor Fitzgerald.

Hey, Mike. Thanks for taking my questions.

Just two quick ones. One on the IP30 -- what sort of tim line do you guys have to reach that percentage from the IP side? And is there two or three solutions that are driving most of the revenue there, whether it's cybersecurity or analytics collections, et cetera? Or do you have a broad offering that you can leverage the margins on those solutions?

Well, again, if I look at it, the financial services IP are a significant driver, and our embedded base in the government as well, with big ERP systems, are very key to continuing to grow that base. We are, as I mentioned, Ralph, we're making good progress on that. I mean, we are bumping up gradually on the percent of our revenue coming from there. And we're also making other investments in existing IP to make it more market-relevant and everything else.

I believe we're holding our first Investor Day in a number of years here in March, in Toronto. So I'm doing a promo ahead of time; and there we are going to dig in a little more deeper, and share with the Street what our strategy is there, what progress we are making. And we are also attempting to set up some demos, so that you can actually feel and touch and see this IP. But again, a key part of our strategy, Ralph -- we'll give an update on our progress there. We are still hanging in on the 30[%]; I'd like it to be 40[%], but we got to set a goal, and we set 30[%], and we're getting a better visibility on how to get there.

Do you think you can get there by the end of 2016 or it's --?

I'd like to get there by 2016, but 30% of a CAD10 billion company is a lot of money. But it doesn't -- I think we have the goal out there. It will take longer than 2016. But again, what you will see here -- you will see bookings and activity that this thing is continuing to take hold for the reasons I mentioned earlier, especially in the financial vertical and other verticals who are much more open now to having a shared environment, to get access to outcomes as opposed to actually owning the technology themselves.

The beauty there is, they get you from 14% to 16% EBITs in a heartbeat, if you can get to that percentage of revenue. But then, just curiously on the Nordics -- you guys have done a great job winning market share, post the Logica deal, and just working the contracts there. Now they've got their own SBU. Is the next step then to do a transformational deal there, to basically consolidate your market share? Or would you prefer going to Australia or southern Europe or some other geography, from the M&A standpoint?

Yes. Well, first let me say that the move to put a Nordic SBU is very much in line with our overall philosophy -- back to what I answered James' question in terms of having local people. So that is an integrated market at a lot of levels there. The leader, the president we appointed was our best performer up there running Finland for years. He's fluently bilingual in Finnish and Swedish and English, and so we have a lot of benefits of putting that together. We already have a very large share up there. So, not that we'd ever rule out an acquisition there. But I think -- if I go back to the priorities, Ralph, on which would be most accretive to us, again I circle back on the United States and on the UK. But we're looking everywhere. If you were to try and put it into context, I think that's the context that you need to think about.

Okay, thank you.

Thank you, Ralph.

Paul Steep, Scotia Capital.

Great, thanks.

Mike, maybe you can talk just a bit, your view on the portfolio overall as we enter FY16? Thankfully, on this call we hear very little about any red projects or things going poorly. But clearly, there is some opportunities to lift things within the business -- you've seen your reviews. I'd like to get your take on that?

Well, I think if you look globally here, there are some similarities in [units]; but there is also differences based on the market, and how customers buy, and what are the various economic conditions in some of these countries. So the thing that is common in the portfolio is the customer demands are very tightly aligned now between the business side and the technology side, probably the closest alignment that I have seen in years. And again, I think I explained why that is: when we went out and talked to customers, they are saying, look, we're having real pressure here to free up investment money, to do digitization, to address the regulatory concerns. And regulatory concerns are crossing virtually every vertical now. So that's a similar pressure. And this is why I said that's a good opportunity for us, because in a lot of cases our managed services or our IP strategy helps bring down the run costs. And in the case of IP, it actually helps them on the transformational side as well. So I would say that's very common across the world. Cyber is another one. There's no jurisdiction that we operate in where somebody is not very conscious of cyber. So would be two examples on that end.

On the other end, where you have something more local, is really the discussion around long-term contracts. So I would say the Nordics are much more open to long-term contracts. We continue to work with our French colleagues, and we've had a number of successes there in terms of getting a contract longer than two years. And we're going to continue to push that envelope, and open up that discussion, and explain to the customers why that is good for them, in terms of knowledge retention, savings, quality work -- all these type of things. So you've got the examples that I said are universal, and you've got other things that are much more localized.

Great. The second one we haven't talked about for a little while has been the US government business, and your outlook there in terms of how it is paced. You've came through a tough period there, and responded well. What is the thought in terms of 2016, in terms of that team and their business plan, and what the opportunity set looks like? Thanks.

No, and again, I tried to capture some of that in the comments by saying, something that has been really a headwind to our growth in the United States. I always like to reinforce here that we've got an excellent team on the ground there, I would say probably the best team operating in that sector. And they have executed very well in what I call a sector-wide headwind, because they have been able to maintain the quality of service. They have been able to continue to reduce costs, to bring more value to the customer, and keep us price-competitive, and contribute to that bottom-line growth that you've seen in the United States.

So what I'm looking at, that has been clearly a headwind to the growth in the United States. And I tried to be balanced there, because, again, I can't predict the future. But when I look at what the team did in the fourth quarter, going to the book-to-bill of 144%. That's the first time we went over 100% in a number of quarters, and that gives me the sense that in 2016 this could move to at least to neutral. And even moving to a neutral is positive, when you look at this. If the US government really ramps up, and the spending gets down through the departments, and gets materialized into project work, then we have the opportunity for it actually to be a tailwind, and help us lift the US growth rate.

So the team down there, I think have been very realistic and prudent. They've obviously built a plan to try and reflect the environment in which they work. And so it is a factor that we need to keep our eye on here, relative to the rate of growth in the United States.

Perfect. Thanks, Mike.

Thanks, Paul. We are going to have time for one last one.

Thanos Moschopoulos, BMO Capital Markets.

Good morning. Mike, the margins in the UK were exceptionally strong, so it's certainly kudos to Tim and his team. Were there any specific one-time factors? Or was that driven primarily by ongoing operational improvements and a better revenue mix?

No, we didn't have any one-times in the UK this year in the quarter. Again, the team over there really did a bang-up job, not only in improving the margins; they've had to work through some very tough large red projects, that was inherited through the acquisition. And at the same time, they've had to go out and win new long-term, better-quality revenue margin mix going forward, and they have done that. So I think this is a reflection of that work.

I'm not telling you that every quarter will be 17%, but we're on the right path and trend in the UK. And again, when I look at the big markets like the UK and France from a growth standpoint, they are going to be big engines over there for us in 2016. As will the US, and as will Canada, because the Canadian growth rate is -- the negative rate is heading in the right path very rapidly as well. So no one-times there; just good solid management execution by the team.

That's great. And on Canada, I thought your commentary was interesting about the Canadian nearshore opportunity, given the favorable FX rates. And so, is it early days on that front, or to what extent are you seeing interest from US and international customers for Canadian services? How meaningful of an opportunity could that be relative to the Canadian domestic opportunity?

Yes, I think it's one of a number of factors that can help us improve the growth rate in Canada. It takes a little time to do that, because you've got to convince the customer, of course, that you are going to be able not only to deliver to the scale he is looking at, but that you locked down on the price that we can hedge on the currency, to protect both the customer and ourselves.

The other interesting thing -- we're seeing really good cooperation between France and our Quebec centers here, where we are able to leverage again our proximity model in France, and offer delivery services here, and actually be able to move for various bids SMEs both ways. So that's coming along quite nicely. We also have for years -- and I think it's ramping up -- we actually hire a lot of people from France in Quebec. And so we have a good mobility opportunity here between our French operations and our Canadian operations, and I guess, vice versa.

So yes, I would say it's another lever. It's going to take some time to ramp that up, where I think our US customers believe that this is not a short-term opportunity, but more of a long-term opportunity, given where the currencies stand.

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

Thank you, Thanos. Thank you, everyone for joining us, and we will see you in January, hopefully at our AGM. If not, we will talk to you for our Q1 results.

Thank you.

Thank you. That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.