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CGI Group (NYSE:GIB)

Q2 2011 Earnings Call

April 28, 2011 9:00 am ET

Executives

Lorne Gorber - Senior Vice President of Global Communications & Investor Relations

Michael Roach - Chief Executive Officer, President, Director, Member of Management Committee and Member of Disclosure Policy Committee

R. Anderson - Chief Financial Officer, Executive Vice President, Member of Disclosure Policy Committee and Member of Management Committee

Analysts

Kris Thompson - National Bank Financial, Inc.

Maher Yaghi - Desjardins Securities Inc.

Mike Abramsky - RBC Capital Markets, LLC

Julio Quinteros - Goldman Sachs Group Inc.

Thanos Moschopoulos - BMO Capital Markets Canada

Richard Tse - Cormark Securities Inc.

Stephanie Price

Ralph Garcea - NCP Northland Capital Partners Inc.

Gabriel Leung - Paradigm Capital, Inc.

Michael Urlocker - GMP Securities L.P.

Scott Penner - TD Newcrest Capital Inc.

Tom Liston - Versant Partners Inc.

Question-and-Answer Session

Michael Roach

Yes, I'm glad to have an opportunity to address that because I think what's happened here is that we had some very unique circumstances in the U.S. government that impacted virtually all of the suppliers, whether in technology or other suppliers to the U.S. federal government. When we step away from that and we actually look at where we sit, we feel we're in very good position there. Just to give you a couple of things to consider. First off, again, as I've always said, we're interested in macroeconomic indicators, but we actually sell at the micro level customer to customer. So when we look at the U.S. federal government as a result of Stanley, if we look at where we are this year versus where we are last year, we have twice as many vehicles, contract vehicles to bid on. We are firing in 4x the amount of bids this year as we did last year. We have 7x the amount of wins as a result of our combination with Stanley. So we think from a go-to-market perspective, a vehicle perspective, we have a lot more opportunity here. We have also identified on the revenue synergies side a pipeline where we believe the combination of CGI and Stanley will increase our ability towin as a result of the synergies and I reviewed that list yesterday. If I look at the top 12, it represents $500 million in bookings and we've already closed 3 of the 12 since the 1st of April, which adds up to nearly $100 million. We expect these to be announced once we go through the procedures. But we booked just in those 3 synergy deals $100 million since the 1st of April. We've also, as I mentioned this before, I think because of the continuing pressure that the U.S. federal government is under, they're going to use task orders probably a little bit more here in order to get work done. And again, that fits very well to our strategy. As I mentioned before, Stanley had an excellent machine proposal center on task orders. We've combined that with our task order factory and again, our pipeline is big. We are firing in a lot of quality bids and we are partnering with other companies who need access to those vehicles. So there are pure software companies who want to do business in our various governments, not only U.S. government but the Canadian government as an example. And they need vehicles and we have vehicles. So we have existing partners. We have new partners. We mentioned the TEPPCO [ph] this morning. We have vehicles where we can partner with companies like these and actually win more deals. So I think, clearly, we were impacted in the quarter, but we are already seeing signs in April and our outlook, as I mentioned, for the balance of the year, that we will clearly be at or above the book to bill of one in the U.S. and in the U.S. federal government.

Julio Quinteros - Goldman Sachs Group Inc.

That's great. And just lastly, maybe a little bit color on the commercial side. Obviously, when we look at some of the L.A. U.S. IT guys, pretty strong results across the commercial landscape. Just help us characterize a little bit about what you're seeing on the U.S. commercial side and maybe how TEPPCO kind of falls into that flow that you guys pursue more commercial opportunity in the U.S.?

Michael Roach

Yes, I think, again, if you look at our business in the U.S., we do spend a lot of time talking about government, both state and local and you saw the California deal which was very a significant win for us. The commercial business in the U.S. is also coming back. And again, our strategy there has multiple facets to it. Obviously, we're focusing on a set of clients where we have existing business and we are pushing to gain increased share of wallet within that group. Secondly, as part of our overall growth strategy where we've invested, as I mentioned, it was one of the short-term impacts on the margin in the U.S. We are ramping up more business development so that we can bid more to win more. We want to ensure that we are participating in the upswing of the business in the commercial side. And then the third thing, as you mentioned, we're also leveraging partners, leveraging the sales force and the capabilities of partners to pull us in into accounts where they have relationships for us to pull them in and in the process, as I mentioned before, help continue to change the mix of our revenue where we are getting a higher portion of IP to services than we would traditionally. And again, the TEPPCO deal is one example. And we have others where we are looking to do that. So I would say that the Commercial business is coming back. It's coming back more gradual, though I never really expected a massive bounce back here in terms of the Commercial business. I think it'll take time to work through the budgets. But we are seeing more systems integration, consulting opportunities. And our outsourcing pipeline, as I mentioned, and our cloud activity is also picking up in the U.S. and in fact in Canada.

Operator

The next question is from Kris Thompson of National Bank Financial.

Kris Thompson - National Bank Financial, Inc.

Michael, just on the M&A front, it's been several years between major acquisitions like specifically I'm talking about Stanley and AMS. When can we expect another major acquisition, and what vertical or region might you guys be considering?

Michael Roach

Thank you, Kris, for your question. Again, just to remind you, what drives us on acquisitions is the right target, the right price and the right time. We need 3 out of 3, not 2 out of 3. So we continue to have a pipeline. We continue to talk to potential targets. What we are looking at or looking for is, we'd like to see something in the U.S. or Western Europe. I'd like to ideally get something if I could in the commercial sector that has IP, a backlog, again, back to the idea of continuing and improving the quality of revenue by working on the mix of the revenue. So there are candidates out there. Valuations have picked up a little, but it's all relative when you look at our current valuation as well. So we continue to be active there. I think as you heard David covered and if you look at our balance sheet, it's still very, very strong. We have our line of credit to August 2012. On our tax effective basis, we're paying under 1% there. We're generating very significant cash flows. So we certainly have the financial capability, with $1 to $1.05. It clearly makes acquisitions in the United States very appealing. But again, it's not 1 of the 3. We need to get the right targets, got to fit with the overall strategy and we continue to look for the right target.

Kris Thompson - National Bank Financial, Inc.

That's fantastic color, thanks. And maybe just another macro question here on wage inflation. We've seen some indication that the Indian service providers are experiencing some wage inflation which is not a major surprise, but I just want to get an idea of if that's providing more opportunities for you to compete more effectively.

Michael Roach

Well, again, I think every time, if you look at a business model that is more input-driven in order to drive margins in an input-driven where you're really charging per body, you need to increase your prices to recover the wage inflation. This is not how we operate. As you know, we are primarily selling outputs. So we sell a client an output and at a price, a very competitive price and with the service-level and it doesn't send us to drive out additional efficiencies that will more than offset any wage inflation. So we have other levers that we can use in that model that focus on productivity, optimizing other costs and therefore, it somewhat insulates us from passing on these costs to clients. And therefore, as you quite correctly point out, it does ensure that clients really get a better understanding of the certainty around our model that really takes out a lot of that wage inflation versus somebody who is selling an input and has to pass that on. So long answer to say, I'm not surprised that, that kind of inflation is creeping back in. The turnover rates of a lot of these companies are very high in India in comparison to our operation, and I suspect they're under pressure to increase salaries in an attempt to retain and attract some of their people.

Operator

The next question is from Tom Liston of Versant Partners.

Tom Liston - Versant Partners Inc.

To continue on that theme, you talked about how you're adjusting to the Indian outsourcers and wage inflation and how, as you expand, can you talk a little bit more about the expand of nature? There's obviously some talk around these issues and a number of elements as your sources tackle, the U.S. Can you talk about or is it one-way rate going up as people maybe left to near shore a little bit more but look to you as a little lower cost provider and such?

Michael Roach

Well, again, a good question, Tom. And as you know, our strategy has always been somewhat different. It's been called contrary and I'd like to think it's more unique than contrary. And in the sense that we really do start with a client, what their need is, what their appetite is for value, value for us has risk in it. It has price and it has service. And with that combination, we continue on a number of fronts. One of the short-term pressures on the margins in the U.S., as I mentioned, was a ramp up of pressures in India. We've added probably between 400 and 500 people, bringing them on, training them. We ramped up the real estate commitment over there and in fact, improved our facilities over there. So our Indian operation continues to grow at a very significant growth pace. In addition, we're complimenting that by continuing to expand and build out our global delivery centers. We've opened a new one in Canada. We're going to open another one in the United States. So we continue to expand that. And we are seeing clients who want to do more of their business in the U.S., so large commercial clients in the U.S. who want to make sure some of that work is done in the U.S. and of course our home shore offerings in these low-cost centers like Troy, Alabama or Southwest, Virginia offer them that alternative. So I think we are well-positioned there and I think the visa issue is not an issue for us. We haven't run into that. Again, being a Canadian firm, we also have the added benefit of moving people across the border between Canada and the U.S. at a much different pace than most of our competitors under the Free Trade Agreement. So, we like where we are there. We're expecting to see more activity and growth as the market picks up. And consistent with our bid more to win more, we are also tracking the amount of bids where we are including the global delivery center, either as part of the core offering or as the second bid alternative to the client.

Tom Liston - Versant Partners Inc.

And real quick, any update you can give us on the California fiscal project? It looks like presentations are made, but maybe the timeline is extended. And can you comment on if the L.A. County and situation like the California franchise tax board perhaps helped or they're a fairly independent decision?

Michael Roach

I think they're independent. But I think what you should take away there directionally, these type of deals are going to get done, various states, obviously, numerous states and provinces are under a lot of pressure on the fiscal side. The deal we announced, very much goes to a win-win here in terms of the government, the taxpayers and of course, our shareholders. So I think you'll see those other ones and as you quite rightly pointed out, we have a number of these in our funnel. And clearly, in California, that win continues to reinforce our position in the market as a significant serious player in these type of bids. So we are very pleased with that bid. That's a very strategic win for us. And as I mentioned, had that thing hit in the quarter as we expect it, the book to bill numbers would have clearly been well in line with our commitment to have a book to bill of greater than 1 on a trailing 12.

Operator

The next question is from Thanos Moschopoulos of BMO Capital Markets.

Thanos Moschopoulos - BMO Capital Markets Canada

The Infrastructure business was obviously very strong in the quarter. Can you talk about some of the drivers for that and whether that growth may be sustainable? And has cloud been a factor at this point? Or are there really other drivers that have been contributing to that growth?

Michael Roach

Yes, again, I have to tell you, I'm absolutely delighted with the performance, the margin performance, the growth performance of the Infrastructure business. As you know, it's probably the most complex capital-intensive business in our portfolio. And the team that I have there has been executing very, very well. We are ramping up, as I mentioned, on the business development side because as you may recall, we had this Infrastructure business embedded within the geographies and we've just recently, I guess, over the last 6 months, made a global function. So we're globalizing, if you will, starting at the front end of that, not only our offerings but ramping up a very specialized team to be able to sell things like cloud and to actually ensure that we are certified with the U.S. government. For our cloud offerings, we expect a lot of business coming out of the U.S. federal government where they've actually set some targets there. So I think the business is operating well there. I don't think we can expect to have 17% margins on an ongoing basis. I guess we can expect them, but whether or not we're going to see them on a consistent basis is probably the better question. But we are clearly operating that business very effectively from an operational perspective, and it's obviously a contributor here to the earnings. The cloud is actually -- we do have some business on the cloud. As I said, we are positioning the company to take advantage of that in North America primarily and expanding it into Europe. But I would say that our revenue numbers in there now do not reflect a large impact from the cloud. But I expect that to change as the U.S. government starts to actually award cloud business under the contract vehicle, of which CGI was one of only 12 companies that qualify. That's ahead of us.

Thanos Moschopoulos - BMO Capital Markets Canada

Okay, that's very helpful. You continue to generate a large amount of free cash. Obviously, you still look very aggressive on your buyback. Can you share your current thinking regarding potential dividend as far as the possible likelihood of that and as far as some of the key criteria you'd look at in terms of evaluating that position?

Michael Roach

Sure. Again, we review the question of dividend on an annual basis with the Board of Directors and we share that with our shareholders through our AGM in February each year. So that review was done February, the decision was not to issue a dividend this fiscal year. We do review it on an annual basis and that is essentially the timing that we do it. Again, we're still building out our company. As you know, we are executing a Build & Buy growth strategy. That means you have to have the financial capability to play when companies are in play and when opportunities are there. So again, we've been very disciplined around that. We believe that we can redeploy that cash as we did in the case of AMS, as we did in the case of Stanley, to bring on significant accretion to shareholders and you're seeing that not only in the cash numbers but in the margins and earnings per share growth. I think, on a 4-year CAGR basis, our earnings per share is over 30%. So we are returning value to shareholders through the Build & Buy strategy. We also, to validate that, we drive and produce an accretion model and as I shared that before, the most accretive use of our cash is the reinvested back into the company for organic growth. We're doing that in areas like infrastructure to build out the cloud, like building a defense/intel practice in Ottawa and investing in our products and moving them from a pure product IP sale to a rapt software as a service offering. So those are some of the areas we are investing our capital and driving out a very high return. I think our Return on Invested Capital is 16%, so that's a pretty healthy return. Beyond that, then we look at accretive acquisitions and as I say, the commitment we make to investors that they will be GAAP accretive to the earnings per share within the first 12 months. In the Stanley case, we released publicly that it will be 15% to 20% in the first 12 to 24 months. And as you can see by the results since the Stanley acquisition, we are delivering on that commitment. And then finally, as buyback shares and reduce debt, I did tell you that our debt costs all in are tax effective about 0.7% I think, so clearly under one. And on the shares, we started out with 444 million shares at year-end 2005. We are down to 264 million. We still think that our shares represent a very attractive valuation overtime. The accretion rate of our buyback program over that period has been north of 70%. The shareholders' dividends then fall beyond that. And our current thinking, as I mentioned to you, is that this would not be the ideal time relative to our Buy & Build strategy and marketing conditions to issue a dividend.

Thanos Moschopoulos - BMO Capital Markets Canada

Okay, that's very helpful.

Operator

The next question is from Scott Penner of TD Newcrest.

Scott Penner - TD Newcrest Capital Inc.

Just first of all, I guess I wanted to ask on the California deal, namely the business model, the benefits from this model. Is that a business model that you think is a real competitive differentiator for you at the various levels of government? And then how aggressive have you been in pitching that so far?

Michael Roach

Well, again, Scott, just to give you a little perspective, we have done this for a number of years with a number of states. Hawaii is one that I think was public. But if you go back 10 years, clearly, CGI and AMS before are recognized leader in this area. And when you look at the challenges that governments face, this falls into the solution side of the challenge because what we are essentially going to do is take a book of taxes, unrecovered taxes, at this point, and between using the improved business processes, analytics and technology, we are going to increase the collection rate there and as a result, the taxpayers will get a much significant return on this investment. And in our case, of course, we'll end up with a very strong incentive here to ensure that we deliver what we've committed. So yes, we believe we have something that's competitively unique here. We are obviously marketing it to other governments and feel that given the economic times that this is a very appealing solution to governments. And of course, California being one of the largest states in the union, that's a very powerful calling card here in terms of a reference for future business.

Scott Penner - TD Newcrest Capital Inc.

Great. On the EBIT margins, there are several references in the MD&A to underutilization associated with slower project startups. Does that continue as you said here today to be a bit of an issue in the Q3?

Michael Roach

Well, again, it will gradually return. Some of that is actually a result of, again, our mix of large outsourcing contracts where, as I've said before, normally, their budgets cycles are calendar. So in the first quarter, they're actually taking the budgets, turning it into business requirements and then start to hand them off to us. So we normally are always faced with a tough challenge, hold the staff until the projects come or restructure the staff and then find ourselves on the flip side of the supply-demand utilization curve. So in some cases, we've carried it, other cases, we've restructured or redeployed. But I don't think there's anything out of the norm there in terms of our normal patterns within those large contracts.

Scott Penner - TD Newcrest Capital Inc.

Lastly, I just wanted to ask David about the tax rate. It's kind of deep in the MD&A, but you make mention that you're now seeing a normal tax rate at 28.5% to 30%, 31%, down from the kind of 31% to 33% range prior. Did I read that right?

R. Anderson

That's correct.

Scott Penner - TD Newcrest Capital Inc.

Okay. Is there any -- let's say you have visibility, is there any more of the recurring, nonrecurring tax adjustments to come?

R. Anderson

That's kind of a difficult one to answer. Some of the items here, as you've read in the MD&A, is the result of being [indiscernible]. So there are different audits that are underway. There are different filings that are still open to audit. They're coming close. So hopefully, there's always going to be a little bit more something in the bank there. I don't want to say too much more on that.

Operator

The next question is from Ralph Garcea of Northland Capital Partners.

Ralph Garcea - NCP Northland Capital Partners Inc.

Just on the U.S. Army deal, was that also signed in April, I guess, is the first question?

Michael Roach

Yes.

Ralph Garcea - NCP Northland Capital Partners Inc.

And how do you -- what sort of value do you put against it towards your backlog given that it's a task order of $2.5 billion over a possible 10 years and you get a portion of that, what would you put in your backlog going forward?

Michael Roach

$1.

Ralph Garcea - NCP Northland Capital Partners Inc.

So until the task order is actually assigned, then you'll add that to the backlog?

Michael Roach

Yes. We just put in $1, Ralph, per vehicle and that's more just of the mechanics to make sure we keep it in the process and keep it visible. The only thing that go in the backlog are signed contracts.

Ralph Garcea - NCP Northland Capital Partners Inc.

And then on the California one, do you put the total amount or just the upfront amount and then the possibility of other benefits there?

Michael Roach

Yes. Our thinking right now is that the total amount would go in based on our experience on these deals, that's why we broke it out that both pieces are firm.

Ralph Garcea - NCP Northland Capital Partners Inc.

And normally, given the Hawaii one, I mean that's a conservative minimum number, right? Because I mean you've been able to exceed and be successful, I guess, on recovering revenues, et cetera, right?

Michael Roach

We are confident that the model that we've put together will yield the benefits to the state of California and to the shareholders of CGI.

Ralph Garcea - NCP Northland Capital Partners Inc.

Yes. Very good. On the European front, I think you're still 2, 3 quarters to get to that 10% EBIT level or how much more tinkering do you have to do, I guess, with the operations there?

Michael Roach

We've got a little bit -- as I say, what I like about the Polish operations, it's come back strong. The German operation, the U.K., Spain and France are still under pressure. In both those areas, though, we're seeing top line growth. It's just a matter of us continuing to get the right mix of work there. And as we address those areas, Ralph, the margins will continue to climb. But clearly, the worst is behind us in Europe.

Ralph Garcea - NCP Northland Capital Partners Inc.

And on the end front, what's the headcount now with the added 500 freshers?

Michael Roach

It's going to be pushing close to 4,000.

Ralph Garcea - NCP Northland Capital Partners Inc.

Okay. I mean, you got a great SAP business, great Oracle business and now you signed up TEPPCO. What sort of success rate do you have from doing systems integration projects on the SAP, Oracle side and converting that into longer-term deals like you've done and obviously shown with your AMS success?

Michael Roach

Yes, again, I think some of that is earlier days, Ralph. And as I mentioned before, I mean, the thinking I have is that there are pure play IP players who are running into an integrated offering by some of the companies who own IP services and hardware. And what we're attempted to do is level the playing fields so the client is left with picking the best technology and not be driven purely by financial engineering. So for us, when we partner with companies like TEPPCO, we would be able to offer, as I said in the press release, a more integrated offering where we would be able to offer software as a service, managed services. We could do the SI work and the rates on services rates associated with a lot of IP companies like the ones we are speaking about are much higher than our traditional basic SI&C rates. So we see it as a good part of our going forward growth strategy and very consistent with our ongoing strategy to constantly improve the quality of our revenue. In other words, move more of it upstream in terms of higher margins and more sticky revenue.

Ralph Garcea - NCP Northland Capital Partners Inc.

And then just lastly in Canada, I mean, where did you see the strength in the bookings? Was it government versus commercial and then on the government side, in any province standout, or was it the federal government?

Michael Roach

No. Again, the financial vertical in Canada is very strong vertical for us. As you know, we always believe we've been undersized relative to the potential in the Toronto-based banks. Our team in Toronto has done a lot of work to move that forward and it's a continuing area of focus for us in terms of expanding our business. On the provincial side, I mean, the provinces that are active are Alberta, Québec obviously, and Ontario. And again, healthcare, when I look behind the government numbers, our Healthcare business is very strong. And as I mentioned, we continue to ponder whether we should break healthcare out because I think relative to the growth rates and our position there, I think a lot of folks don't really, can't really see how strong that business is for us in North America. So we are pondering that. But our book to bill in healthcare is multiple hundreds. That's not a book to bill of one, much larger than that. So you're seeing some of that.

Operator

The next question is from Stephanie Price of CIBC.

Stephanie Price

Last quarter, you talked about the healthy pipeline in the SI&C business and how you view that as a leading indicator of the market. Are you seeing the same conditions this quarter?

Michael Roach

Well, again, I think it's just a continuation. I don't -- as I said, Stephanie, I think those are lead indicators, kind of like the canary in the mine. But it's not going to see, I don't expect to see a big snap back there. I think it's a gradual indicator. As the clients move through their fiscal year, which is normally calendar, they are going to put more of those programs out. And again, our strategy is to get more market coverage and bid on more of those opportunities to increase our growth rates. So I am seeing more of it, but I haven't seen an increase, if you will, in the velocity of that trend.

Stephanie Price

Okay. And just on the U.S. market X the federal government, you mentioned in the MD&A that some clients were deferring IT projects. Can you talk a bit more about that? Is that specifically government?

Michael Roach

It's primarily at the local government level. We deal with a lot of very large cities in the United States and again, which is kind of normal fare for government. You get tied up in procurement or political issues in terms of the speed at which budgets get approved and in these economic times, there's a lot of scrutiny around budgets. I would say, though, and I just want to reinforce that point because I think we can all get very wrapped up on the macro issues that we see on the news every night about government. But if you peel it back off and you look at the facts, the U.S. government and most governments are not cutting back. In fact, they are growing their investment in IT services. There's a very simple reason for that, and California is a good example. If you want to drive value, increase revenue or you want to drive costs, all of your operations, information technology is an enabler. As I mentioned earlier, you saw on the solution side, not on a problem side. And you look at cybersecurity, I mentioned that we are targeting a combined pipeline now where we are looking at the leverage between Stanley and our CGI Federal business. We've identified a pipeline. We're tracking at the senior levels 12 opportunities. And of those 12 opportunities, 3 or 4 of them are in the commercial side. They're not in government. So it's areas like cybersecurity, our biometrics that's jumping from the government side into the financial institutions in these areas. So again, the area that we're referencing in the MD&A is primarily a large metropolitan city in the U.S., and we expect that to move through in the back half of the year.

Operator

The next question is from Maher Yaghi of Desjardins Securities.

Maher Yaghi - Desjardins Securities Inc.

I just wanted to discuss maybe a little bit of your investment in India. You mentioned in your MD&A, it had some impact on your U.S. margins. Can you maybe discuss these investments? Are they one-time in nature in terms of their impact directly on margins or this impact might be extending a bit more until you start to capture revenues out there?

Michael Roach

Well, again, this is like other investments, you normally have a button help where you have to put basic investments that we used in this example. Our growth rate last year in India was about 40%. So at some point, you cap out in terms of your basic infrastructure. So you have to refresh that. So we've had to make a business decision to take on more real estate, to reinforce our information technology infrastructure. Some cases, we had to stand up new circuits and bandwidths for clients that are coming on stream, a number of them require specific dedicated links due to the proprietary or security nature of the services we are providing. And then of course, you've got to ramp up the hiring, the recruiting cost, the trading and bringing these folks on. So that -- we normally run into that curve probably in the past, maybe once every 4 years. But given the demand for the services, that investment timeframe has been tightening up. So we've had to replenish the infrastructure and the items I described to you in a much shorter timeframe than we would have in the past. I take that as good news, obviously, because it means that the demand for our services, in our integrated global delivery model is holding and we should see, over time again, this translating into improved margins and into actually more top line growth.

Maher Yaghi - Desjardins Securities Inc.

Okay, that's helpful. And maybe just to go back on -- you discussed at great length your views on what's happening with the U.S. government budgets and their impact on signings of contracts. Maybe can you talk about your discussions on the ground with people in the Defense industries? If the government is going to look into reducing budgets on the defense side, how quickly the investment -- or how quickly that repricing or review of contracts might take before we see contracts coming back in and signing? Because just in the planning phase of new budgets, if you have cuts happening around, could that delay the actual signings of IT contracts?

Michael Roach

Well, again, just to go back and reinforce the point I made.

Maher Yaghi - Desjardins Securities Inc.

Temporarily, I'm sorry.

Michael Roach

No, I understand. But let's go back to your first premise, budgets are going to get cut. Likely, budgets are going to get cut in a lot of governments around the world. What I'm trying to reinforce is that the areas that we operate in, information technology services will not be cut. If you look at the U.S. budget that the President puts forward as the stalking horse, if you will, for discussions. He actually had an increase in the IP services budget and on $100 billion budget in the increase is a significant amount of money. Secondly, I've got 1.3% share on $100 billion. So I see significant opportunity for us to grow our business. In the Defense business, I can't comment a lot because there are a lot of classified stuff there. And I think if you look and read what's out in the public, more and more of a lot of countries, Defense procurements are moving away from hardware and moving to software. And software needs services and we are in both.

Operator

The next question is from Michael Urlocker of GMP Securities.

Michael Urlocker - GMP Securities L.P.

So I just have 2 broader picture questions. One, if we look at Stanley, in a broad sense, it looks kind of like it was flattish from last quarter and that's fine. It seems there are good opportunities here for Stanley to be a prime contractor. When do you think those opportunities start to flow into the bottom line for Stanley?

Michael Roach

Yes, just maybe on your first comment, Michael. Again, and I think David mentioned it in his comments, until we get a full 12 months here, we're still going to school on any seasonality, normalized seasonality of that business. So we are still analyzing the business. We haven't owned it for a year yet so when we compare it quarter-to-quarter and that type of thing, we're still analyzing what the quarterly seasonality impacts would be. As I mentioned, on the areas that we've identified, where we see synergy deals is I guess what I'm calling them, where the combination of CGI and Stanley will help us increase our win rate, you'll see some of those, as I mentioned, the ones I track, there's 12, we've got 3 of them over the line that will be out in April here, totaling close to $100 million. So you will see on those deals, they are the type of deals that we're talking about here, that you're highlighting. And we expect to see that pipeline grow and our win ratio grow here in the back half of the year and into 2012. Any time you do an acquisition, frankly, the revenue synergy is the last piece that comes together because given the focus on retaining people, retaining clients and driving the financial synergies, they normally preoccupy the operations and that's one of the reasons why we attempt to do these integrations very, very rapidly so we can get that behind us and move to the revenue synergies. So I would say most of that is in the back half and you'll see more of it actually in 2012.

Michael Urlocker - GMP Securities L.P.

Okay, that makes sense. And my second question is on the concept of benefits funded programs with government agencies or quasi-government agencies. You had to win in California that you announced. Can you give me a description of how large this business seems to be today and what you think the prospects are for benefits funded programs?

Michael Roach

There's a bit of -- I know seasonality is not the right word, but if the nature and the demand for that really does track, if you will, to the financial situations and the challenges faced by the various governments, so you'll see more of these benefits funded, public, private partnerships at a time when fiscal pressures are on various governments. So clearly, we are in that environment now. California, as I say, is a great calling card for us. We do expect to see other type of deals, not likely identical to California. Each one is a little bit different, but the outcomes that the clients are looking for are similar. They want to be able to avoid some upfront investments here and they want to share the risk in terms of the outcomes. So we do, obviously, see this, as I mentioned, as being part of the solution to some of the challenges that governments face and we would expect to see more of these either being shaped by us or by government as they attempt to work through their fiscal challenges.

Michael Urlocker - GMP Securities L.P.

Okay. And then lastly, just looking even beyond strictly government business of your operations in the state of California, do you feel like you've got sufficient revenue or let's say, prospects for revenue near-term such that you've reached a critical mass in terms of the people you've got there and that we can see better margin improvement here?

Michael Roach

In California, I think on a GDP basis, it's probably one of the fifth largest governments on a global basis. They are a very big economy. We do a lot of government in the business, always have there. We see additional prospects there. And I think, again, when it comes to margins, there's many levers. And the ones we've been kind of talking about here today are primarily more on the mix side. And if you look at the type of deal that we won or announced in California, there's a nice mix there. There's more of a business consulting aspect to it, as well as the normal information technology piece that we would do. So it will help us increase our critical mass in California, but given the size of that market, Michael, we still have a lot of room to grow in California.

Operator

The next question is from Gabriel Leung of Paradigm Capital.

Gabriel Leung - Paradigm Capital, Inc.

I just got 2 quick questions. First, Mike, can you give us an update on where the Desjardins contracts currently stands in the current quarter, number one? And number 2, it sounds like in your pipeline of opportunities in the commercial side of your business seems to be improving. Can you talk about what sort of projects from your commercial customer is looking at? Are they more productivity driven or are you starting to see some revenue driving projects?

Michael Roach

Okay, let me see if I can take them. I can't say a lot of the Desjardins thing other than what I said in the script that the major piece of that infrastructure contract that we announced last year has rolled off in April. We do have continuing business there. I think last year at the same time we announced we had signed a 5 or 6-year SI&C business with Desjardins that had a value I think north of $120 million or so. So that continues on. We've transferred that business professionally and at a quality nature. And as I mentioned, the infrastructure grew, continued to work a funnel and developed business that will mitigate that impact over time. On the SI&C business, it's really a combination of things. Part of what we're seeing is clients now are reinvesting back on their own growth areas. They've got to grow their top line as well. Everybody's coming out of the downturn earnings in a lot of companies and cash are strong. It's the top line that companies now are investing in and of course once you start doing that, you do need information technology to stand up more products or to alter or modify your systems to identify where your best opportunities are to target growth. So we're seeing areas like that. You're going to see some of that in IP being added, and things like data warehousing or similar investments. In other areas, it's cost cutting. This is why, again, I firmly believe the managed service or outsourcing offering is still very, very valid in terms of creating long-term value for clients. And the third area we are seeing which really plays to one of our sweet spots is clients who are willing to go on to a shared environment. So where we own the software, we stand it up in our data centers. We operate it and they pay on a pay-per-use essentially basis. So clients moving away from feeling the need that they need to own the IP and the need to run it and stand it up in their own environment as opposed to sharing the environment and differentiating themselves in the basis of their brand or the uniqueness of their offer as opposed to the underlying technology that we provide.

Operator

The next question is from Richard Tse of Cormark Securities.

Richard Tse - Cormark Securities Inc.

With respect to the business longer-term, Mike, do you see that you're pretty comfortable with your exposure in the government market now or would you think that you have to try to balance the business a bit more, particularly in the U.S. with respect to acquisitions?

Michael Roach

Look, I love the government business. I think it's been a very good spot for us to be here. But as you said, our intent is not to be seen or valued on the basis of a government pure player. We're much more than a government pure play. You see that in our margins, frankly, and in our backlogs. So yes, I mean, we are also very opportunistic. If you go back to our Buy & Build strategy on the buy side, right target, right price, right time, and our view was over the last 5 years, that criteria was met in the government sector, primarily with AMS and with Stanley. And also it made our strategic imperative of growing our business more outside of Canada or expanding it more outside of Canada. And we are now generating more revenue from outside of Canada than inside, which is in line with our strategy. So the areas that, obviously, we would like to increase our play in the commercial side and again, consistent with where we are trying to move the company here. I like IP-based companies, whether they have a service offering or they have software as a service or they have IPs that I can turn into software as a service. These are through acquisition or through partnering. So that's where we're looking.

Richard Tse - Cormark Securities Inc.

Okay. And then just one final question here. You guys had a really nice turn in the European business and I know you mentioned some of the things that you've been doing. But what sort of specific actions have you made over the course of the last year that sort of allowed for that turnaround? Does any of that due to, I guess, in some of the Stanley assets? I'm just not really clear on that.

Michael Roach

Richard, again, I've been explaining in these calls now for 5 years of how we operate as a company. We understand that we have to create value for all 3 stakeholders. We move very quickly if we have a problem, including looking at leadership, looking at restructuring, looking at investing. And last year, when the whole European market was under pressure, we made it very clear in this call that we were going to restructure the operations and we were going to make investments to be positioned when the market returned. We did that and we've executed to that, and you can see that we have a very strong growth rate and increasing margins. Really haven't leveraged the Stanley asset into there. Our priority, relative to those assets, are to leverage it into Canada in the defense/intel space and in taking that cybersecurity offering and move it sideways, if you will, into the commercial sector, primarily in the financial institutions. So that's the immediate thrust in terms of expanding that capability.

Operator

The final question is from Mike Abramsky of RBC Capital.

Mike Abramsky - RBC Capital Markets, LLC

Mike, just in summary, are you cautiously optimistic regarding the pace of the bookings recovery in the U.S.? Just trying to get a -- I mean, I think it does sound like you're well-positioned and you've placed yourself intelligently against some of these opportunities, and you're continuing to make investments against them. Just trying to get a sense for what our expectations should be for bookings recovery and the trend.

Michael Roach

Again, I guess, again, I try to reinforce and not only what we're doing but why we're doing it. I really would ask that you consider bookings on a 12-month basis because as you know, if you look back, I think this is the lowest quarter we've had in 6 quarters. But if you look at what happened the last time, we had a low quarter booking. The next quarter, it snapped back and we're back to where I continue to guide the street. And the bookings need to be looked at a 12-month basis. If you look at headlines and the ink that's going to be written on our bookings this quarter, had that California deal just fall in 15 days later, earlier, the book to bill, as I mentioned, would be over one over one in the quarter and one over one [ph] on the trailing 12 months. So our business, especially these large deals, we worked on the California deal probably for 3 years. So these are long pursuits and captures and I cannot predict the quarter they are going to fall in and worse yet, I do not want to incent early closings at the expense of the long-term impact of the shareholders of CGI. So having said that, just to again reinforce that you should look at bookings at a trailing 12-month. I've told you, from an operating perspective, we believe on an ongoing trailing 12 months that we will be at or greater than one. And my early look at the back half of the year tells me that when I look at the prospects and my expectations on timing, that we see the bookings accelerating on the back half of the year. Now, again, might have to put that big qualifier over there. When you're dealing with large corporations and governments, the timing of these deals do not move at the same velocity of our desires here. But having said that, we've got good visibility. As I say, into April, I've already seen bookings starting to come through and it looks like the pace has picked up or returned in the federal space in which we operate.

Mike Abramsky - RBC Capital Markets, LLC

And just very quickly, that's helpful. And then on your U.S. margin which were also a bit down versus last year and last quarter, I just wondered and I think -- I do realize you mentioned this was interim. I just wondered how much of it was related to Stanley related integration and how much is of that is going to kind of go away maybe more quickly and then maybe some of the other recovery may take a bit of time.

Michael Roach

Yes, I think I mentioned 3 points on the Stanley piece. The biggest impact was the increased amortization which is about 1.5% on the margins. That's just the amortization of intangibles. On the integration side, we had $1 million which is not all that significant in terms of the course of the business. So I think we'll see a gradual improvement in the margins there. And again, there are differences, of course, between the 2 operations given the mix of government work that we have in the U.S. that it's time and materials and cost plus.

Lorne Gorber

Thank you, Mike, and thank you, everyone, for joining us. We will see you back in July for our quarter 3 results.

Operator

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

Operator

Good morning, ladies and gentlemen. Welcome to the CGI Second Quarter 2011 Results Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President, Global Communications and Investor Relations. Please go ahead, Mr. Gorber.

Lorne Gorber

Thank you, Alana, and good morning. With me to discuss CGI Second Quarter Fiscal 2011 Results are Michael Roach, our President and CEO; and Dave Anderson, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. on Thursday, April 28, 2011. Supplemental slides, as well as the press release we issued earlier this morning are available for download along with our Q2 MD&A, financial statements and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. The complete Safe Harbor statement is available on both our MD&A and press release, as well as on cgi.com. We encourage our investors to read it in its entirety. We report our results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each of these non-GAAP performance indicators used in our reporting. All of the figures expressed on this call are in Canadian dollars unless otherwise noted. I'll turn the call over to David first to review the financial results and then he'll pass it over to Mike, who will discuss some strategic highlights. David?

R. Anderson

Thank you, Lorne, and good morning. I'm pleased to share the financial details of a good quarter. In the second quarter, revenue was $1.13 billion, an increase of 24.5% or $222.6 million compared with the same period last year. Revenue on a constant-currency basis was up 27.9% after adjusting for foreign exchange fluctuations that negatively impacted revenue in the quarter by $31.3 million or 3.4% compared with the same period last year. Currency achieved more than $60 million from our top line in the first 6 months of fiscal 2011. And given the continued weakness of the U.S. dollar, we expect FX to continue being a headwind in the back half of the year as well. As a reminder, while we do not hedge revenue, we have successfully been hedging our bottom line exposure through natural hedges and financial instruments.

Adjusted EBIT in Q2 was $156.3 million, up 26.1% compared with last year. And our EBIT margins strengthened to 13.8% this year from 13.6% in the second quarter of 2010. Net earnings were $117 million or 43.4% better than the $81.6 million reported in Q2 of 2010. Net earnings margin remained strong at 10.3%. Diluted earnings per share were $0.42 compared with $0.28 in the same period last year, an improvement of 50%. Included in these results are favorable tax adjustments totaling $7.5 million, partially offset by $945,000 of Stanley acquisition related and integration costs. As we shared with you at the end of fiscal 2010, there was approximately $4.5 million in acquisition-related expenses remaining, of which $3.1 million has been incurred during the first half of fiscal 2011. We continue to track the plan.

On a comparable basis, excluding the adjustments I just mentioned, net earnings would have been $110.0 million or 9.7% of revenue compared with $81.6 million or 9.0% of revenue in the year ago period. The diluted earnings -- I'm sorry, and diluted earnings per share would have been $0.40, up 42.9% compared with $0.28 in the second quarter of 2010.

We generated $193.1 million of cash from our operating activities. This was up $68.1 million or 54.5% from Q2 of last year and up almost $100 million sequentially. You'll recall that when we bridged the working capital gap in Q1, we essentially got to this quarter's reported cash number. In regards to the management of our accounts receivable and work in progress, I am pleased that our DSO for the end of the quarter was 43 days, 2 days below our target and significantly lower than our peers operating in the public sector. As a reminder, this is the second full quarter of the former Stanley's operation being included in our results. Until we have these operations integrated for full year, we will continue to closely monitor and engage any seasonality associated with this business.

Total long-term debt was down $136.3 million during the first 6 months of 2011, including the repayment of USD $87 million of senior U.S. unsecured notes, which matured at the end of January. Net debt at the end of Q2 was $923.1 million, representing a net debt to capitalization ratio of 28.7%. In the quarter, we continued buying back our stock, acquiring 5.3 million shares of CGI for $103.3 million. At the end of Q2, our return on equity was 18.9%, a 340 basis point jump from last year and our return on invested capital wasn't changed at 16.0%.

Finally, subsequent to the quarter, as part of our ongoing strategy to optimize our revenue mix to drive higher margin, CGI concluded a transaction whereby we sold our shares in a small regional subsidiary called CIA, back to management for $11.5 million. As the activities of this disposed unit are similar to the SI&C services offered by CGI, this disposal will remain part of our historical results from continuing operations rather than being recast and treated as a discontinued operation. The sale is not expected to have a material impact on CGI's net earnings or financial position, but revenue in the Canadian segment will decrease by approximately $10 million per quarter beginning in Q3.

Now I'll turn the call over to Mike.

Michael Roach

Thank you, David, and good morning, everyone. I am very pleased with our strong, balanced and improving performance in quarter 2. After 6 months on a year-over-year basis, our revenue has grown by 27% at constant currency to $2.25 billion. Our EBIT increased by almost 30% to $314.8 million. Our net earnings have expanded by 26% to $243 million. Diluted earnings per share grew by 37.5% to $0.88 and we've generated more than $288 million in cash or $1.04 per share. We booked approximately $2 billion in high-quality future revenue and we bought back 10.3 million shares.

With respect to this quarter, I will spend a few minutes providing some color on each of our reporting segments, commenting on revenue, margins, bookings and outlook.

However, before doing so, I want to briefly comment on our quarter 2 bookings. Globally, we booked $771 million in quarter 2 for a book to bill of 68%. On a trailing 12-month basis, bookings of $3.9 billion or 93% on a book-to-bill basis. The bookings shortfall is isolated to the U.S. market, primarily due to delays in public sector awards.

For example, the $538 million California franchise tax board deal we announced on Tuesday, if this deal had closed when expected, our book to bill for the quarter would have been 114%, while on a trailing 12-month basis, it would be 106% of revenue, within our targets. Once again, I want to reiterate that bookings need to be looked at on a trailing 12-month basis and on that measure, we remain confident that we will continue to achieve a book to bill equal to or greater than 1x revenue.

Now let's review our segments, beginning in the U.S. Revenue at constant currency in the second quarter grew $207 million or 67.3%, demonstrating the effectiveness of our build and buy profitable growth strategy, including the acquisition of Stanley. Our EBIT in this segment was up more than 10%. However, as a percent of revenue, the margin was 8.8% compared with 12.7% last year. The year-over-year Delta was due mainly to 3 factors: Increased amortization from Stanley; the continuing expansion of our Indian delivery centers, including the ramp up of new hires known as freshers; as well as the increased investment in our bid and proposal activities. Bookings in the federal government's base experienced delays due to the uncertainty in the federal budget and distractions due to the potential government shutdown during the quarter. Despite this, our book to bill in the U.S. remains above 1 on a trailing 12-month basis. We are seeing early signs that the pace of awards in task orders is increasing and on this basis, we are confident that in the back half of fiscal 2011, we will see improved activity in this key sector.

In addition, we also continued to track opportunities that will yield incremental revenue synergies as a result of our merger with Stanley.

We firmly believe that IT spending continues to expand across the public sector, creating opportunities for us both federally and in the state and local space as our solutions help address some of the current challenges governments face whether it's healthcare, Cybersecurity, procurement or tax collection like the California deal, or in many cases, the move to standing up more and more applications onto our cloud offering.

In Canada, we grew revenue at constant currency by 4.3% year-over-year in quarter 2. As anticipated each quarter, gradual improvements continue to be seen in our long-term outsourcing clients as they begin to invest in systems integration consulting projects, and previous quarter bookings begin to translate into revenue, particularly in our financial services vertical. EBIT of $72 million or 19.7% of revenue remains very strong. On the back of this strength and as part of our overall strategy, we continue making additional investments in business and solutions development, while optimizing our cost base and our revenue mix to drive the efficiencies and offset the planned wind-down of less profitable contracts, as well as the divestiture of CIA that David mentioned.

We achieved a book to bill of 100% in Canada during quarter 2. As you know, we're focused on high-quality revenue where we can wrap IP with long-term managed services, either our own or with a software partner such as the typical announcement we made this morning.

In respect to our Global Infrastructure business, revenue grew by 10% year-over-year at constant currency. EBIT as a percent of revenue more than tripled for a margin of 17%, reflecting an ongoing disciplined focus by our management team to deliver service excellence at a competitive price. We've been investing in a global business development team specialized in infrastructure, that has already developed a multibillion-dollar pipeline and contains some very strategic prospects around our cloud and managed service offerings, all of which we are aggressively pursuing and over time, will mitigate the impact of the Desjardins contract runoff.

With respect to Europe, at constant currency, we grew 25.4%. During the quarter, we experienced growth across every European segment. Our book to bill reached 100% and margins continued to improve with notable higher work volumes from new telecom clients, as well as existing financial services clients. We continue concentrating our efforts on restructuring and optimizing these operations to take advantage of organic growth opportunities.

Across CGI, we continued generating significant cash from operations. Over the past 12 months, we've generated $549.6 million or $1.95 a share. We prioritized its deployment with a commitment to making the most accretive investments, including maintaining the flexibility to continue buying back shares and reduce debt as we've done this quarter and year-to-date.

In summary, we continue adhering to the fundamentals of running a sound business and remain focused on executing our long-term strategic plan and our fiscal 2011 business plan. We believe our consistent, best-in-class performance supports a higher valuation over time. Thank you for your continued interest and confidence in CGI. Now, Lorne, let's go to the questions.

Lorne Gorber

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 5347404 until May 12th. As well, a podcast of this call will be available for download within a few hours. Follow-up questions as usual can be directed to me at (514) 841-3355. Alana, if we can poll up the questions, please.

Operator

[Operator Instructions] The first question is from Julio Quinteros of Goldman Sachs.

Julio Quinteros - Goldman Sachs Group Inc.

So just real quickly, just to kind of get it over with in terms of understanding the bookings this quarter relative to your confidence going forward. Michael, if you wouldn't mind, just walk us through what you're seeing in the pace of awards. Clearly, the month of April is pretty strong. I think the total CTV that you're adding up right now is about $3 billion in the month of April alone. As you lay out the expectations from the government, what are you seeing right now that makes you feel confident that you guys can get back to that book-to-bill ratio of 100% or better?

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