Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

CGI Group, Inc. (NYSE:GIB)

F3Q09 (Qtr End 06/30/09) Earnings Call

July 29, 2009 09:00 am ET

Executives

Lorne Gorber - Vice President and Investor Relations

Michael Roach - President and Chief Executive Officer

David Anderson - Executive Vice President and Chief Financial Officer

Analyst

Jason Kupferberg - UBS

Tom Liston - Versant Partners

Steven Li - Raymond James

Richard Tse - National Bank Financial

Scott Penner - TD Newcrest

Mike Abramsky - RBC Capital Market

Paul Steep - Scotia Capital

Paul Lechem - CIBC World Markets

Eric Bernofsky - Desjardins Securities

Operator

All participants please standby, your conference is about to begin. Good morning ladies and gentlemen, welcome to the CGI third quarter 2009 results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Lorne Gorber, Vice President, Global Communications and Investor Relations. Please go ahead Mr. Gorber.

Lorne Gorber

Thank you, Valerie and good morning. With me to discuss the third quarter of fiscal 2009 are Michael Roach, our President and CEO and David Anderson, Executive Vice President and CFO. This call was being broadcast on cgi.com and recorded live at 9:00 am on July 29th, 2009.

Supplemental slides as well as the press release we issued earlier this morning are also available for download along with our Q3 MD&A, financial statements and accompanying notes, each of which are being filed with both SEDAR and Edgar. Please note that some statements made on the call maybe 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 statement, whether as a result of new information, future events or otherwise.

We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definition of each non-GAAP performance indicators used in our reporting. All of the figures expressed on this call are in Canadian dollar unless otherwise noted.

I will turn the call over to David first to review the quarter's results and then to Mike who will make a few remarks on the quarters strategic highlights, before going to Q&A.

David Anderson

Thank you, Lorne, and good morning.

I am pleased to share the financial details of another very good quarter. Quarterly revenue was 950.4 million, a sequential improvement of 2.7% at constant currency. Compared with the third quarter of 2008, revenue was essentially unchanged as foreign currency fluctuations positively impacted revenue by 4.5%. Despite current economic conditions, EBIT margins remained strong, improving to 11.9% compared with 11.7% in Q3 of 2008.

Net earnings in Q3 2009 were $76.5 million or 8.1% of revenue, generating diluted earnings per share of $0.25. This compares with an earnings margin from continuing operations of 7.5% and $0.22 in diluted earnings per share when excluding a one time tax benefit of $10.8 million recorded in the third quarter of 2008.

When adjusted for this one time item, we deliver significant bottom-line improvement year-over-year. Our Q3 effective tax rate was 31%, in line with our normalized tax rate of 31 to 33% compared with 23% in Q3 2008. Now let's turn our attention to the balance sheet. At the end of Q3, our DSO was 41 days, an improvement from 48 days in Q3 2008. The reduction of seven days serves as a good illustration of our effective and efficient credit collection processes as well as our clients continue satisfaction with CGI services.

We generated $170.9 million in cash from operations during Q3 or $0.55 in cash per share. This represents 18% of revenue and is a 61.4% increase year-over-year. Our net debt at the end of June was $15.9 million for net debt to capitalization ratio of 0.6% from the 15.6% one year ago. As you know, in February we renewed our normal course issuer bid through February 2010, which allows us to purchase 27 million shares over 12 months.

In Q3, we bought back and canceled 3.2 million shares as part of this program, investing $32.1 million. At the end of Q3, 2009, the company had access to liquidity of more than $1.6 billion, $272 million in cash and $1.35 billion available under our line of credit secured through 2012.

Our balance sheet combined with improved profitability has generated return on invested capital of 13.8%. All in all, we are pleased with the strength of our financial performance and health of our balance sheet as we continue pursuing profitable growth.

I will now turn the call over to Mike.

Michael Roach

Thank you, David, and good morning everyone. By any measure, quarter three was a very solid quarter and what we consider to be a strong and balanced year-to-date performance. We delivered excellent results through the first three quarters of fiscal 2009. Accordingly, I'd like to begin by highlighting our year-over-year performance after nine months. We have booked $3.5 billion in new contracts or 121% of revenue. In these booking we have secured some very strategic contracts with marquee clients representing global brand, each of which provides an opportunity to add on new follow on business.

Revenue was $2.9 billion, up 4.4%, net earnings improved to $234 million, up 6.5%, earnings per share of $0.75 up 12% and our net earnings margin of 8.1% remains the industry leader and demonstrates consistent execution of our business model. We generated $438 million in cash from operations, up 60.5%. Cash per share was a $1.41 up 68% and net debt went from $332 million to $15.9 million, a reduction of 95%. In addition and importantly, our clients satisfaction and client loyalty scores remain at record levels, our members accretion rate remains the lowest in the industry, while share ownership levels among our 26,000 members continues to grow. At approximately 85%, our members represents CGS single largest ownership block. We firmly believe this has positive ramifications for all stake holders.

Overall and despite the challenging market conditions, we continue to make significant progress towards the achievement of our business and strategic goals throughout the first three quarters of fiscal 2009. Now I would like to take and provide you a little more operational color on these quarter's results. I am pleased that we're able to grow revenue by 2.7% sequentially at constant currency. As I outlined last quarter in terms of year-over-year comparisons from a revenue standpoint, our Canadian operations have experienced the biggest impact from systems integration and consulting deferrals. However, quarter two may have been the bottom, as some of our large outsourcing clients have begun investing again albeit cautiously. In fact Canadian operations grew sequentially by 1.7%.

On a global basis our growing sales funnel, strong contract bookings and a gradual increase in our SI&C business provide continued optimism with respect to increasing growth opportunities in future quarters. While European revenue in Q3 was flat a year-over-year, bookings in Europe increased to a 175% of revenue in the quarter. The depth and breadth of our services and solutions continue to help us profitably grow our presence in the U.S. market. U.S. operations recorded revenue growth of 22.9% during the quarter after nine months U.S. revenue has grown by 30%.

A further demonstration of the continued strength of our U.S. operations can be seen in the book-to-bill-ratio, which was a 185% of revenue in the quarter. This includes the renewal of high-profile spend management initiative in Virginia called eVA, which was extended through 2016 and valued at US$73 million.

Also in the quarter we signed a five year, a US$123 million outsourcing deal with the Fortune 500 clients. We view this deal as transformational, as it will utilize our full suite of credit and collection solutions to assist the client in controlling the receivables and reduce the risk of loss. In addition, we have announced an expansion of a 100 positions at a global delivery center in Southwest Virginia to accommodate increasing federal government opportunities.

Our sales funnel is robust and from our point of view, the long-term prospects far out weigh the near term pressures, qualified outsourcing opportunities in the funnel have nearly doubled over the first nine months of fiscal 2009. We expect to see continued strong demand for our end-to-end outsourcing for managed services offering as evidenced by both the increased sales activity and the number of new clients coming on stream. In fact 54% of Q3 bookings is new work to be ramped up with new or existing clients in future quarters. In my view this is an excellent mix of mid and long term revenue.

Globally, we booked $1.06 billion in new contract wins for quarter three or 111% of revenue. We remained committed to maintaining or improving this ratio, as we continue to have good visibility on the number of significant opportunities. Similar to last quarter 73% of our bookings came from our two largest verticals. Government accounted for 49% of bookings and financial services made up the other 24%. We continue to have excellent visibility and new opportunities throughout both banking and insurance.

Overtime, we believe that our increase marketing activities will translate into contract wins and growth in our backlog. Currently have a $11.8 billion in long-term contracts to be delivered. As in the case with bookings this level of recurring and long-term revenue should be particularly attractive. Going forward, our primary focus remains on helping our clients through these challenging market conditions.

We firmly believe that CGI with our high level of recurring revenue embedded in long-term contracts is extremely well positioned to see this economic cycle through while continuing to profitably grow our business. Our ability to continue to generate cash and our secure access to $1.5 billion line of credit provides an additional layer of comfort to investors.

Let's go to the question Lorne.

Lorne Gorber

Just a quick reminder that a replay of the call will be available either by our website or by dialing 1800-408-3053 and using the pass code 3406147 until 12th August, as well a podcast of this call will be available for download at either cgi.com or through iTunes within a few hours. Follow up questions can be directed to me at 514-841-3355.

Valerie, if we could poll for questions from the investment community please.

Question-and-Answer Session

Operator

Thank you Mr. Gorber. (Operator Instructions). Our first question from Jason Kupferberg from UBS. Please go ahead.

Jason Kupferberg - UBS

Couple of questions for you, first I wanted to make sure I understand the dynamics that you guys are seeing in the project based part of the business in SI&C. Mike I think you mentioned that it may be true that the March quarter may prove to have been the bottom there. I guess the revenues in SI&C were down quarter-over-quarter in June versus March. So, just wanted to make sure, I am understanding what you guys are actually seeing in that market place, if you really are seeing some firming up and some stabilization and may be that some what reflective of intra quarter trends that you saw during June, any additional color that would be great?

Michael Roach

Okay. What I had said in the last quarter results that the projects were slow and starting up right from the get go with the business on the business side of the clients. When I see and I look at some of the major clients that we have, we saw some indications where they're gradually moving these projects now from the business side over to the systems analyst side that will eventually show up on our revenue line. We're seeing that in Canada and that's kind of where we were most impacted. As far as the SI&C I think it's pretty flat, isn't it?

David Anderson

Yes, 44% to 43%

Michael Roach

Yeah, so it's pretty, it's pretty flat, Jason, that's why I kind of called it a bottom, what I believe is the bottom. Now I should caution you and remind you that we are in our summer quarters. So normally our summer quarter is impacted by vacations in terms of our clients and our people. So when you look quarter, a quarter we normally see an impact of anywhere between $25 million and $30 million due to the vacation period. But notwithstanding that, we are seeing signs that clients are coming back and investing. Of course in Canada, the banking financial sector has not been hit as hard as in the U.S. and as you know the valuations have nicely returned there and there are opportunities to do project work in the financial institutions as well as in some of our other clients.

So, I don't think a quarter makes a trend, but I got the sense in looking at the numbers and talking to the account managers that we may have bottomed in the March quarter.

Jason Kupferberg - UBS

Okay, that's very helpful. If we turn to the verticals here I know telecom utilities continue to be the weak link here. Can you talk about how much of this weakness might be due to the BCE cutbacks versus what's happening with other clients in this space and are they earning other specific factors that you think you would call out here to explain the relative weakness versus some of the vertical group?

Michael Roach

Now, again I don't comment on individual clients there, but I think the telecom vertical in comparison obviously isn't as strong as the financial vertical and governments. I think telecoms are also watching their capital expenditures very, very carefully in these times. But, again I always go back to the longer term picture here that telecom companies have always invested a large percentage in information technology. It's necessary there in order to drive efficiencies, bring new product and solutions on, so again on the medium long term, I still remain very optimistic that that's good sector for CGI to be in. But, I wouldn't read a lot into the quarter-to-quarter comparisons amongst the verticals other then I say obviously that the government and financial vertical remained fairly robust here, obviously in comparison to other years and to the other verticals.

Jason Kupferberg - UBS

Okay. Just last one for me on the balance sheet, obviously you have been paying down debt pretty consistently, which is nice to see. Maybe you can give us an update on the M&A pipeline. Are there other cash deployment options that yourselves with the Board might be thinking about whether it's even bigger buybacks or something along the lines of dividend at some point in time, would love your current thinking there? Thanks.

Michael Roach

I wish I had more news other than to re-enforce the consistency and the discipline in which we think about cash deployment. First priority is, we invest in the business and with some of the deals that we are working on some of the deals we announced, we will be requiring some cash to re-invest in building out some of those solutions, continuing the strength in our organic growth base. We do look at acquisitions, but again we don't have anything else there. We're still working on the three criteria, the right target, right price, right time and with the debt as you say, our net debt is down the $15.9 million.

We still have the option of buying back additional shares. I think we still have about 23.5 million shares, if you look at the end of June that are still permitted to be bought back between now and February. As far as the dividend goes, we look at it on an annual basis and the next review of that policy is just prior to the AGM in January.

Operator

Thank you. Our next is from Tom Liston from Versant Partners. Please go ahead.

Tom Liston - Versant Partners

Just on with Virginia, and then governor Kaine, obviously seems like your big fan here. But, one of the releases and I think it came directly out of Virginia maybe, comments about other countries and states looking at what they are doing and looking at those large cost savings since and obviously trying to replicate some of that. I think he mentioned Canada, Portugal, Indonesia and may be a couple of others. Can you comment on how that might extend your pipeline as well, I assume that most of these other jurisdictions will want to bring over the technology vendors as well to try to achieve those same cost savings. Can you talk just over all about that type of situation?

Michael Roach

Yeah, for sure Tom and again I think the governor is rightfully very, very proud of how the state has worked with CGI to develop and implement a solution that has brought significant value to the state. I think the opportunity space there is that he was referring to is at a couple of levels. One, I think Virginia itself are constantly attempting to get other states surrounding Virginia to just jump on their platform, add more volume to it, which would be beneficial to the states and to Virginia and also obviously to CGI.

The reference to Canada is we have one similar deal announced it a while ago called OECM with the Ontario government, which is a similar, very similar using the expertise and the platform solution that we built in Virginia to work with a portion of the Ontario government and of course our goal will be overtime to expand that. I can tell you that the volumes that Ontario could put through that very, very significant in comparison to Virginia.

So that project is in the ramp up stage. Then I think the reference to other countries are either they get visits direct from other countries that want to look at this and or we bring clients from other jurisdictions in there and use Virginia as obviously a very marquee reference and they have been very generous and complimentary of their time to walk through the real value created by the platform.

Tom Liston - Versant Partners

Thanks and just on the bookings, obviously you gave us some color on new customers and what verticals are strong. Can you delve down a little bit down more into any changes in trends and in size of the contracts, length of contracts, any other specific underlying trends there for why they've been so strong last few quarters?

Michael Roach

I think more and more them are I would say long-term contracts. The outsourcing managed services side is stronger than the SI&C side clearly by comparison and clients are looking for business solutions. I referenced a five year $123 million deal that we weren't able to name the clients, unfortunately we couldn't do the announcement. But, it's good example of where the client is looking to improve their management of receivables, improve cash flow, reduce losses and our solution was to bring to that client our full suite of credit and collections products, wrap it around our broader integration skills with some elements of business process outsourcing and as a result bring significant value to that client addressing the business problem and for us to book a five year US$120 million deal and have the opportunity now to work with this client in other areas.

So these are the kind of deals that we are focusing on. In some cases they are new clients, in some cases where we get in there with an entry deal like the one I described and then obviously have the opportunity to hunt across the full account and help identify and introduce our full capabilities in other areas of the business. So this is why in my comments, I am kind of pleased that in the first nine months not only that we've won new clients and they have marquee and global brands but as per follow-on business opportunities there, which bodes well for future bookings and revenue.

Operator

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

Steven Li - Raymond James

Thank you. I might just want to drill down a bit more on your bottoming comments. The relative weakness in financial services booking through this quarter, was that just lumpiness and have you seen some recovery since quarter end.

Michael Roach

I keep reminding, you shouldn’t look at bookings by quarter. I mean, bookings are a 12 months phenomenon. So, I don't really have a comment quarter-to-quarter on bookings. I would tell you that the financial services business still represents a significant opportunity for us. We have a lot of opportunities in our funnel that relate to financial services. Either directly in terms of financial service, bank insurance company or in some cases where the client has a financial services arm, there is also opportunities in there. So no I wouldn't read a lot in to that Steven it's bookings by their nature and our business are lumpy.

Steven Li - Raymond James

Right. One of the headwinds in Canada has obviously been BCE. Now the deferred projects that you talk about in your MD&A, have these started to come back or is it to early to tell?

Michael Roach

I don't comment on individual clients. But as I said in Canada, if I look at quarter-to-quarter, we are seeing signs that the March quarter was the bottom and that were up a little bit in Canada from quarter-to-quarter. I think it was 1.7% sequentially, so some of that obviously is coming from the starting of these SI&C projects.

Steven Li - Raymond James

Okay, great and then just one question for Dave. Just want to make sure I'm not missing any of the one-time items. So you did expense during the quarter $2.8 million in severance and $1.5 million in real estate, but when you had a gain 2.1 from FX is that it?

David Anderson

That's correct.

Operator

Our next question is from Richard Tse - National Bank Financial. Please go ahead.

Richard Tse - National Bank Financial

Hey Mike, just I had question on to the recent strength in bookings. You guys have obviously done a good job of maintaining a hand on the cost side. So if you look at the bookings last quarter and this quarter, you're getting a higher percentage of that booking is coming from new deals, typically what are the time frame from the booking to when you're recognizing that in terms of revenue?

Michael Roach

Again it very much depends on the nature of the deal. If you talk about the one where we're we are looking at collections, you've to stand up those systems, you've to configure them so that's a matter, could be a matter of quarters. If it's an infrastructure deal, it also takes a long time, where its projects work it ramps up. So I would say, obviously the range could be from anywhere from a quarter to three quarters depending on the nature of the engagement in terms of how long it takes to ramp up to kind of a level that you would actually see on the top-line, Richard.

Richard Tse - National Bank Financial

Could you give us maybe some more color in terms of what you think of the current bookings, when that would come on stream, would that be sort of a back half calendar 2009 phenomenon we're looking at?

Michael Roach

I don't think this is unique to CGI. I think if in fact last quarter was the bottom, you're going to see a gradual improvement. I'd said that lot of the work programs in large clients would be pushed out to a number of quarters, and if you look at most of our clients they end their fiscal year in December, which is our first quarter to 2010, so the combination of that with the booking coming on, it is for us from a fiscal standpoint to see the combination of some of these bookings coming on stream and the gradual increase from the bottom on the SI&C business hitting as evidently in the early quarters of F 2010.

Richard Tse - National Bank Financial

Okay. Obviously again have done a good job in toeing the line on the cost side. Obviously it seems like government and financial services continues to be point of strength, but in the US is that sort of your vision here in terms of verticals that you are going to be focusing on going forward sort of solidifying that government base or do you have some intentions of branching out to other verticals?

Michael Roach

For sure, I mean we have five verticals. We intend to continue to operate and grow them all. I think what you are seeing here is just a market shift where the opportunities happen to be the greatest right now, and fortunately for us there are two verticals where we're very well positioned because of our relationships, experience and solution set. So we are focusing obviously very aggressively to be as opportunistic as we can. We capture as much business while that window is open.

Richard Tse - National Bank Financial

Right, and on to the point of government side with the sort of stimulus spending, I guess depending on who do you talk to sort of stalled in some respect, would you expect that government bookings to actually sort of ramp in terms of the opportunities in the back half of the year.

Michael Roach

Well, again we do have some very significant opportunities in the government space. Obviously, given the size of the US government and the size of the stimulus there, they are heavily weighted in to the U.S. So again, I think you are right depending on who you believe to there is a not a lot of the stimulus that has been that actually put through the system yet. So I think the opportunities going forward there are still fairly very interesting and exciting, and we feel that we're pretty well positioned.

Operator

Thank you. Our next question is from Scott Penner from TD Newcrest. Please go ahead.

Scott Penner - TD Newcrest

Thanks. Just wanted to get a sense of the margin upside for the quarter, specifically I guess in Canada where it's most notable. Is that mainly David, a function of the staff adjustment, and I guess if so was that consistent with a slower return for some of the project work then you may have expected last quarter?

David Anderson

Well personally it's not related to the adjustment, but Mike also knows, past call has gone through some of the various initiatives that we have been focused on. Whether it be looking at the lower performing businesses, looking at where there is profitably [piece] we have within the operations. Just looking at all of the fundamentals and just making sure that we have got the business tuned and not making any home runs on any particular point, just a lot of base hits, we just continue to work on little items on the treasury side, continue to work things like the interest expense and the interest income, operations. They are looking at the productivity, they are looking at the pricing, making sure that they are competitive and that they are in the game for each of the deals in the infrastructure.

We're looking at the cost and continue to go back and seeing if there's anyway that we can grind down cost, we work with their clients, as they are under the pressures to try to reduce their cost. We're looking to see if there are things that we can bring to the table in the way of value that we can reduce our cost, so we can pass on savings to them. It's a combination of many different items and every day, we feel like we are in a restructuring, because they continue to look at the cost that we incurre and look at opportunities for us to be able to bring better value for our clients as well as for our shareholders.

Scott Penner - TD Newcrest

Okay that's good to know. Just again David, the contract cost and investment over the last couple of quarters has kicked up a little bit and the numbers are still small, but as you bring some of the new bookings on line over the next couple of quarters, is that investment going to continue to increase?

David Anderson

I would expect to see that there should be some continuous activity there, because with those bookings, what we will see is that new transition cost will come on, but some of the ones that we've already started, will start to be moving into production therefore those costs will be coming down. So, rightat this stage, I don't see that number changing a whole lot from quarter-by-quarter but it will consistently continue to go forward.

Scott Penner - TD Newcrest

Okay, and then Mike, in the past couple of quarters you've mentioned some large opportunities that you’re tracking in specifically in Canada I think, now are those deals still on the table and do you consider that they are moving forward?

Michael Roach

Well, obviously we continue to attempt to advance all the deals we have. I think the number that we are looking at – of course they move with the pace that both parties can move them across the line Scott, but we're still obviously guardedly optimistic that we're going to be able to continue to book sales at a greater pace than we consume the revenue. So, we are still optimistic that we can get in the game on a numbers of the deals that we have in the funnel.

Operator

Thank you. Our next question is from a Mike Abramsky from RBC Capital Market. Please go ahead.

Mike Abramsky - RBC Capital Market

Thanks very much. So, Mike would it be fair to say that your characterizing visibility overall as starting to improve with regard to your pipeline, with regard to demand, with regard to execution against the demand and opportunities ahead, would that be kind of short summary of your sentence at this point?

Michael Roach

I think if you added the adjutative cautiously, I mean I don't read tea leaves, but from the ground, Mike, when I talked to the account manager, talked to clients, I think people are starting to reinvest now. It does take a while the ramp up, so that's relative to SI&C. On the outsourcing, I think as I said you know, the funnel has been growing and it's not surprising. I don't think we are the only company reporting that that the funnels are up because the outsourcing business is counter cyclical in many respects.

So this is kind of why Mike, I actually review the nine months, because again I don't think you can judge a company or the market on quarter. And, when I look at the nine months, my view is we're performing exceptionally well given the economic conditions and the general landscape that's out there. So we remain cautiously optimistic that the March quarter could have been the bottom and that we're seeing some nice signs this quarter that would tell us that in the out quarters if all things remain directionally the same that looking back two, three quarters from now we may well have seen the March quarter as the bottom.

Mike Abramsky - RBC Capital Market

When you look forward six months from now, if the economy as I think is sort of the general you slowly recovers, how does that change or add to some of the opportunities that are ahead of you, is there any specific opportunities or growth drivers that may firm up a little bit more, because of a slowly recovering economy for you.

Michael Roach

Well again, I think you got to watch always, always it look a little different between macro indicators and micro indicators. Of course, we sell on the micro level customer-to-customer, but obviously I think that the general tone of business and government when things pick-up is to be more optimistic to be less cautious about making long-term investments.

On the flip side, I'll tell you that when things get too well, Mike it's very difficult to get folks to the table to do an outsourcing deal, because they feel that everything is running well and why disrupt. I think we are ways from that day. I think a lot of people are still looking at realigning their cost structures going forward here. I don't think people will return to kind of pre meltdown cost structures. I think folks are going to take this opportunity to restructure their operations, look at taking on partners for their back room and look at changing their cost curves going forward. So from that perspective, I think the outlook is much brighter now than it was two quarters ago.

Mike Abramsky - RBC Capital Market

There is obviously seen some high profile headlines regarding how challenged the states are to paying the bills in the U.S. typically California and New York et cetera. Can you reconcile for us why that hasn't or why the risk may not be there in your receivables given some of those stories?

Michael Roach

Well again I think, if you look at where we operate in the various states, we operate in areas that are very much tide to what I call mission critical areas. So we do work in ERP, which is really brining better financial reporting, financial integrity to the states, and these areas are, if there is such a thing as being recession proof, they are essentially recession proof. We work in the child welfare area that thankfully continues on regardless of economic conditions.

If you look at eVA, these are things that gain more profile and bring more value in times like this. We work in areas of receivables, which again are very timely and you're quite correct. I mean, we do not have this point any exposure to payment issues relating to states. We're very careful in terms of how we structure our contracts and do business to ensure that we're looking at all aspects of the business deal, including our ability to get paid.

David Anderson

Mike, if I could add. A number of the program that we have especially some of the US states are what we call benefit funded. The advantage with those is that the state regulators or legislators do not have to go back and try to go on budget moneys to able to get the funds for those programs. Those programs are actually self funding. They are generating their own savings, and we're being paid out of those savings as we go forward. So it's one of the major reasons here, we haven't seen a big issue with some of the, especially in the Western states in any of the work that we are doing there.

Operator

Thank you. Our next question from Paul Steep from Scotia Capital. Please go ahead.

Paul Steep - Scotia Capital

Mike, maybe you could just talk little bit about what the average life has been within that backlog or maybe the trend in the bookings we've talked all around it here, as to what happen recently as the length of the contract shrink or grown and what the capital intensities are looks like over the last quarter or so?

Michael Roach

Yes. Paul, I will tell you that I think we are probably still averaging in the five to seven year period. If you look at the Fortune 500 client I mentioned that was a five year deal, some of them are still out to seven. We have ones in the pipeline, there are 11, we have some that are 13 years. In some of these cases, there is a build and then there is an operate period. The build period, Paul, to the comment I made earlier could require additional capital, but the cost to that capital is built into the length of the deal.

So, I would say that the tendency is still very much in terms of an average still seven years plus when I look at what's in the pipeline and what we've been booking here.

Paul Steep - Scotia Capital

Great. David just one housekeeping item on the OpEx hedges, what's the timing of those hedges sort of rolling off and I guess the view with the dollar moving up here.

David Anderson

Yeah, its three to five years is for most of those.

Paul Steep - Scotia Capital

Okay. Thanks guys.

Michael Roach

It gives us good protection for the next level up.

Operator

Thank you. Our next question is from Paul Lechem from CIBC. Please go ahead.

Paul Lechem - CIBC World Markets

Just wondering on the profitability of the business you're saying. Now especially is there any difference, well first of all between the deals today versus before the economic blow up, and secondly if there is any difference by vertical. So if the government vertical in particular has any different profitability expectations then private sector.

Michael Roach

No, I wouldn't say so far. I mean, I think when we get to ask the question why our margins are so high, as Dave said I've gone through a series of actions that we take. It always starts with qualifying the revenue you are bringing on. Again, when we do deal, we're trying to find the right balance between bringing the savings and commitments to the clients and preserving appropriate margins in cash for CGI. We also balance the margin against the risk associated with the project work in the contract we are engaging.

So, no I mean we are constantly trying to ensure that we are managing the dynamics of those considerations client by client. So no, we're not seeing any kind of a different profile. We're careful not to back in the deals that we are walking the deals that we're not satisfied that we sought a good balance. Again I want to reinforce, we still believe we're very competitive on these deals. So it's not a matter of not meeting the client's expectation, it's finding the right balance.

Paul Lechem - CIBC World Markets

Just on that last point, has the bidding process changed or the competitive nature of the deals changed in the last six to nine months, has pricing come down at all?

Michael Roach

There's always pricing pressures here, but for every pricing pressure, Paul, there's also war stories out there, where some of the folks haven't delivered on the other side of the deal, which is actually delivering the project on time and on budget. Again, when one looks at our industry, it's not only the price that's quoted, it's the price that paid by the client. Unfortunately they are not the same thing because when a project runs over or you know you have a scope creep going on, then clients see this.

We live through this. I mean, in a case where we would lose a deal, some cases I call the senior guy over there and tell them in my view, the competitor will not deliver that for the price that they've stated. I follow up six months or year later and find out that's exactly what happened. In that case, the client has kicked the competitor out and we come back to the table.

So there is credibility here that one wants to build overtime, and sometimes that means in the short term you don't get a deal, but in the long term you strengthen your reputation, and you end up building more business. So there is a bit of that in the market. I think clearly some folks are trying to find a balance of what they believe is pumping their front or the top line, but they also got a lot of pressures in terms of their bottom line and the cash. If you look at our situation, we are starting with a very strong balance sheet, very good cash generation, as I mentioned client and member satisfaction is solid and that gives us a lot of room here to look at every deal on an individual basis.

Paul Lechem - CIBC World Markets

Thank you. That's helpful. Just quick question for Dave if I may, I wonder if you can give us an update on the tax credit situation for your employees Quebec?

David Anderson

I am not quite sure what you are trying to address there, Paul.

Paul Lechem - CIBC World Markets

My understanding is that there are various tax credits specifically for your employees in Montreal, and I am just wondering if those programs are coming to an end, if there is some negotiation on going that what the timeline is and what we can expect to see in terms of tax credit situation.

David Anderson

Okay. Those programs have been renewed and they are going up to 2016, so I don't think there should be any issue or concerns with those in the short term.

Paul Lechem - CIBC World Markets

Have they been renewed on the same terms?

David Anderson

Actually they were enriched a little bit, because they're looking to try to broaden the scope to encourage more work to be brought to the provinces.

Paul Lechem - CIBC World Markets

How many employees do you have which will benefit from these programs right now?

Michael Roach

I think they fluctuate, Paul. Again I'd point out we are not the only guys participating in theses programs and we are in other programs as well. So I think relative to the Quebec program, we are obviously pleased that the program has been extended. Quebec is a great place to build a technology firm, we opened another center as you know up in Sherbrooke and we're going to continue to leverage our presence here and in other jurisdictions where they have this programs. But, today's point there hasn't been any kind of material change in the program that would move our numbers in any significant way.

Paul Lechem - CIBC World Markets

Thank you, very much.

David Anderson

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

Operator

Thank you certainly. Our last question is from Eric Bernofsky from Desjardins Securities. Please go ahead.

Eric Bernofsky - Desjardins Securities

Just a couple of questions here. Going to back to bookings, what can you say about the alliance pipeline down in the U.S. has any work order has been issued under that or when do you expect some more orders to ramp up there.

Michael Roach

No, we haven't seen a lot in that vehicle yet, Eric. I think we did a little review that the another day, it will take some time to bring that on as you know. That's a massive vehicle. So we haven't bid anything under that vehicle at this point. So that represents future opportunity.

Eric Bernofsky - Desjardins Securities

Okay. Then, just looking at the Canadian business, obviously, you outlined your book-to-bill for the consolidated business. Canada this quarter looks like it is around 25 times, what's your outlook there, without giving sort of guidance that's obviously an area of weakness for you, if we drill down for Canadian business. What's your outlook there in terms of the pipeline, in terms of getting that number back to for the one time range.

Michael Roach

I look at, just obviously to reinforce. I look at bookings corporate wide, I look them trailing 12 months, don't look at them by quarter. Having said that, we obviously have a very strong position in Canada. We see and are working on in number of opportunities in Canada that we feel good about. And, bookings in our business are lumpy, and so it can change very rapidly. So as I said, I you're at 0.6, 0.7 one quarter, the next quarter you could be two times depending on the deal.

But Eric, we still feel good about the opportunities in Canada. And Canada I don't think has been hit as hard as some of the other jurisdictions, so you don't have quite the valley, and on the other hand you don't have the peaks. But, you still have a lot of opportunities here. There is still lot of clients that we look to penetrate. Western Canada is still a good opportunity for us, Toronto is a big market, there are still opportunities here in Quebec.

So we're still pursuing a healthy funnel in Canada, and we intend to win our fair share of those opportunities. We're also shaping, I would say probably more opportunities in Canada just because of our presence here and our track record.

Eric Bernofsky - Desjardins Securities

Then just lastly, I wanted to push further, once again, into margins. Obviously, doing a great job, keeping margins up and improving, considering the demand environment out there, just want to get a sense of where you think margins could go, what kind of levers you have at your disposal with moving some work around between some of your cost centers? Then, I guess how do you offset that with some of the projects that are going to come on stream over the next few quarters? Just trying to get an indication of how much more upside there could be to margins or whether you think you're sort of in the mid 11% range over the next couple of quarters?

Michael Roach

Well, as I said Eric, I mean I guess it's all depends how you look at life. Margins in a business in my belief are primarily driven about your ability to execute against series of levers. So the way we think about business, we are constantly restructuring how we do business, where we do business, and attempting to execute better against those things that impact margins.

So as I said before it starts with making sure that the deal that you are signing is an accretive deal, because if you sign a bad deal on day one and it's a five year deal it will be a bad deal for five years, so it starts there. It starts with making sure you deliver your projects on time, on budget, if you don't, the overruns in many cases are eaten by the shareholders. It's a matter of looking at SG&A, taxes, procurement.

As Dave says it's not a home run, once you get your margins up to the levels we are at, it's a series of executing against series of levers, including looking at where works done, but again I think you know over the last three or four years I've constantly said that I don't see that as a transformational lever to drive margins. I mean I think it's where you put the work, depends on the type of work, and the original deal and risk profile.

So we have a series of lever utilization rates that are big one in an industry in a company like ours, so all of these things we are working on a basis. So I don't like to put on ceilings, because I think it doesn't send the right message internally, it doesn't send the right message to investors. I think our goal here is to find ways to continuously improve our business, top-line, bottom-line, balance sheet, cash generation, all the things that are fundamental to building a healthy strong business overtime.

Having said that we don't operate by quarter because and to your point in some cases we have to make some investments here that have returns over time. So in those areas, we're going to make those investments. We're going to explain where we made the investments and based on our track record one would hopefully see that our ability to harvest and get ROI of those investments will pay off in future quarters.

The other area obviously and that's why we're constantly looking at acquisitions to the extent that we can grow the company organically and through acquisitions, the right acquisitions we are going to take and change the ratio between variable or between revenue and fixed cost and bring on more scale here which in many cases should bring on incremental margin. So we're looking at all those things, and trying to execute daily against those levers.

Michael Roach

Thank you Eric and thank you everybody for joining us. We will see you on November 9th for our fourth quarter and fiscal 2009 results. Thank you.

Operator

Thank you. The conference now has ended. Please disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CGI Group, Inc. F3Q09 (Qtr End 06/30/09) Earnings Call Transcript
This Transcript
All Transcripts