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CGI Group (NYSE:GIB)

Q4 2011 Earnings Call

November 10, 2011 9:00 am ET

Executives

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

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

Colin Brown - Head of Roche Professional Diagnostics

Analysts

Bryan Keane - Deutsche Bank AG, Research Division

Paul Steep - Scotia Capital Inc., Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Steven Li - Raymond James Ltd., Research Division

Kris Thompson - National Bank Financial, Inc., Research Division

Thanos Moschopoulos - BMO Capital Markets Canada

Stephanie Price - CIBC World Markets Inc., Research Division

Mike Abramsky - RBC Capital Markets, LLC, Research Division

Ralph Garcea - NCP Northland Capital Partners Inc., Research Division

Operator

Good morning, ladies and gentlemen. Welcome to the CGI Fourth Quarter 2011 Results Conference Call. I would now like to turn the meeting over to Mr. Colin Brown, Manager, Investor Relations. Please go ahead, Mr. Brown.

Colin Brown

Thank you, Nelda, and good morning. With me to discuss CGI's fourth quarter and fiscal 2011 results are Michael Roach, our President and CEO; and David Anderson, our Executive Vice President and CFO. The call is being broadcast on cgi.com and recorded live at 9 a.m. on Thursday, November 10, 2011. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our 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 this call may be forward looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete Safe Harbor statement is available in both our MD&A and press release, as well as on cgi.com. We encourage our investors to read it in its entirety. We 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 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 for the fourth quarter, then he'll pass it over to Mike, who will briefly run through the full fiscal year results and add some color on the last quarter for each of our reporting segments.

With that, David?

R. David Anderson

Thank you, Colin, and good morning. I'm pleased to share the financial details of another good quarter.

In the fourth quarter, revenue was $1.03 billion, an increase of $24.5 million or 2.4% compared with Q4 2010. On a constant-currency basis, revenue grew by 5.3% after adjusting for foreign-exchange fluctuations that unfavorably impacted revenue in the quarter by $29.2 million or 2.9% compared with the same period last year. As our earnings -- I'm sorry, as for our earnings, we included a pretax charge of $45.4 million. Actions taken included $22.3 million, primarily related to the acceleration of real estate consolidation plans, as well as $11.4 million related to workforce adjustments. The remaining $11.7 million is a noncash impairment charge related to business solutions that were impacted by clients' delaying their investment decisions.

To give you a clear comparison of our operating performance year-over-year, I've excluded the $45.4 million charge in the most recent quarter and the $26 million related primarily to the Stanley acquisition and integration-related costs recorded in Q4 of fiscal 2010. Excluding these charges, net earnings were $104.8 million, and our net earnings margin was 10.2% versus 10% in the same period last year. Diluted earnings per share were up $0.39 compared to a $0.36 in the year-ago period and represents an improvement of 8.3%. On a GAAP basis, including the charges, we reported net earnings of $73.1 million and diluted earnings per share of $0.27 in the fourth quarter. This compares with $84.1 million or $0.30 per share in Q4 of fiscal 2010.

Turning to the balance sheet. Our DSO was 53 days in Q4, up 1 day from Q3 and higher than the 47 days reported in the year-ago period. This increase is primarily related to our growing government sector, where our higher proportion of that business is based on milestone billing. The size and duration of the milestones kept us from achieving our 45-day target in this period. As we continued managing our billings and collections closely, as well as our other working capital items, as a result, cash from continuing operating activities was very strong in the quarter. We generated $192.8 million in cash compared with $158.5 million in the same period last year. That's $0.71 per share in the 3 months period.

Net debt at the end of Q4 was $897.4 million, down $113.4 million compared to last year, representing a net debt to capitalization ratio of 26.8%. As we close the U.S. $475 million private placement with 6 large U.S. investors in Q4, the placement is comprised of 3 trancheks that mature on average in 8.2 years and carries a fixed rate of 4.57%. In line with the terms of the placement, we will draw down the funds no later than December 15, 2011. And we'll execute interest rate swaps to reduce the financing costs to maximize our flexibility.

In the quarter, we continue buying back our shares, acquiring 3.3 million shares for $63.8 million at an average price of $19.13. Under the current NCIB program, which expires in February 2012, we can still purchase up to 13.3 million shares. Looking ahead, combining the remaining funds under the existing line of credit with the private placements, we have well over $1 billion in liquidity available to pursue our profitable growth strategy. Finally, a word on accounting, for those interested, going forward, we are following IFRS, and the details have been set out in the MD&A.

I will now turn the call over to Mike.

Michael E. Roach

Thank you, David, and good morning, everyone. We delivered very good results in fiscal 2011. In fact, on many key performance indicators, it was our best year yet and further solidified our industry-leading position.

Briefly in fiscal 2011, we delivered revenue of $4.3 billion, representing a 19% increase at constant currency. EBIT of $562 million was 10% higher, representing a 13% margin. $435 million in net earnings, representing 20% growth, with a net margin of more than 10%. Diluted earnings per share grew by 27%, representing $1.58 per share. We generated more than $571 million in cash or $2.07 per share. We booked $4.9 billion, representing a book to bill of 113%. At year-end, our backlog stood at a record high, $13.5 billion. Our return on equity was 19.5%, and our return on invested capital was 14.1%. And finally, our consistent performance was recognized by investors as our market cap increased by $1 billion.

Turning our attention to the quarter. We incurred a pretax charge of $45.4 million, half of which was related to real estate consolidation plans. As our professionals become increasingly mobile and office space becomes more virtual, our need for real estate space diminishes. This is an industry-wide phenomena, and by advancing our plans, we have reduced our go-forward cost, increased the opportunity to sublease, and in doing so, recouped a portion of the related cash flow.

Workforce adjustments in the quarter were spread across the corporation, reducing overheads, increasing utilization and moving us towards our targeted management ratios. Finally, we took a noncash impairment charge related to 2 financial sector business solutions. This was in recognition of current market conditions, which have reduced customer take-up of these niche solutions beyond acceptable business parameters. In total, these actions will be accretive to earnings per share in fiscal 2012.

I will now discuss our quarter 4 performance for each reporting segment, excluding these charges and related market conditions. Let's begin with the U.S. We are now generating more than 45% of our global revenue. We grew revenue by $65.3 million in quarter 4 to $493 million, an increase of 22% at constant currency, largely the result of our ongoing growth in our government vertical. Our EBIT margin in the U.S. was 10.6% for the quarter, up from 9.2% in quarter 3. I'm pleased with this sequential margin improvement, and expect the restructuring charges taken, coupled with additional profitable growth opportunities, will increase profitability over time. Total U.S. bookings were $1.2 billion or more than 230% of revenue. As discussed last quarter, U.S. government awards were temporarily delayed. However, in quarter 4, CGI Federal booked $834 million for a book to bill of 269%, indicating a significant pickup from quarter 3.

In line with our global priority to bid more to win more, we currently have more than $1 billion of new bids submitted to the U.S. Federal Government. Our state and local business continues to expand, as more and more states are looking to drive higher incremental revenue while lowering their costs. By moving our Advantage ERP offering to the cloud, CGI can meet our clients' expectations of greater scope and services for the same investment, while preserving revenue and margins for our shareholders.

We are also able to move our Advantage cloud offering downmarket to small- or mid-sized clients, who can now access the full benefits of our Advantage suite of services. Additionally, other state and local clients continue to choose our Advantage solution to modernize their ERP systems. Recent wins include the states of Alaska, Maine, Wyoming, as well as Pima and Mesa counties in Arizona and Wake County, North Carolina. Furthermore, we are pleased that Los Angeles County has recently renewed and expanded their commitment to Advantage with a $65 million contract award. We've been working with Los Angeles County since 2004 and have now extended our relationship to 2018.

In the commercial sector, our clients are showing strong interest around IP-based managed services as well. We are seeing signs that regional banks and captive financial companies are still investing in IT and becoming increasingly interested in our onshore delivery capabilities, including our newest center in Belton, Texas.

Our Canadian operations, which now account for 30% of our global revenue, excluding Canadian infrastructure revenue, which is recorded in our GIS unit. Year-over-year revenue was essentially flat in quarter 4, reflecting previous decisions to divest our interest in a low margin venture and the runoff of a body shop contract. Excluding these 2 factors, our Canadian operations grew by approximately 5% year-over-year.

We continue to pursue opportunities across all verticals in Canada, with increased funnel activity in health and financial services. For example, during the quarter, we were able to sign strategic contracts using our proprietary solutions. These Software-as-a-Service contracts are in line with our strategy to constantly improve the quality of our revenue mix. By leveraging all of our assets, our IP, our data centers, and most importantly, our professionals, we can offer clients the ability to share IT costs, while generating additional margin for our shareholders.

We also continue to invest in new growth areas such as the cloud, defense and intelligence, including cyber security and biometrics, as well as a recently announced fraud solution, which will help the P&C insurers stay well ahead of this growing and challenging problem by providing an access to a comprehensive, timely and reliable data.

Our adjusted EBIT margin in Canada remains strong at 23.9% compared to 20.4% in quarter 4 2010, excluding the quarter 4 charges.

With respect to Europe, with accounts for 5% of our global revenue, we grew by 10.3% at constant currency. We are experiencing growth across all major European geographies, particularly within Germany and the U.K. markets. Our EBIT margin was 8.6%, up 610 basis points from last year, reflecting the impact of ongoing restructuring efforts and the ramping up of previously booked contracts.

Global infrastructure now accounts for 19% of global revenue. In this business, revenue was essentially flat, even up a little when excluding the previously announced runoff of a financial services contract in quarter 3. EBIT margin for this segment was 9.6%, which is healthy, but was impacted by ongoing investments required to deepen our business development capabilities and transform our multi-billion dollar pipeline into bookings and ongoing revenue.

In addition, we continue to invest in standing up our cloud environment and pursue infrastructure as a services work, focusing on clients like the U.S. General Service Administration, where we recently announced wins such as Department of Homeland Security, and yesterday, or I guess earlier today, a cloud win associated with the Department of Labor. We are confident that there will be additional follow-on business with this client, as both government and commercial clients continue to migrate towards our infrastructure as a service offering.

Finally, we continue to take action, including this quarter's restructuring, to rebalance our fixed and variable costs in this line of business to reach our targeted management and facility utilization ratios.

As a wrap-up, I want to draw your attention to the announcement we made last week separating our health business into its own vertical segment. Rather than having it embedded within the government and financial services, our clients and investors will now have greater visibility into our strong growth rate and broadening capabilities in this key sector.

We have experienced a CAGR of 28% over the past 3 years in our health sector, and today, it generates approximately $350 million in annual revenue. In fiscal 2011, this segment delivered a book to bill of 120%, and at September 30, had an order backlog in excess of $1.2 billion. We continue to announce key wins in the health sector, including our most recent contract with British Columbia Ministry of Health. This action also brings additional clarity to our sector waiting in government, excluding health, which is now in the order of 39%, down from 46% it was in quarter 3.

In summary, we have begun fiscal 2012 in an excellent position, strategically, operationally and financially. We remain focused on executing our Build and Buy profitable growth strategy. We continue to believe that this model delivers superior returns to shareholders over time, including throughout the most challenging of market conditions.

Thank you for your continued interest and confidence in CGI. Colin, let's go to the questions.

Colin Brown

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 1158746 until November 24. 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) 841-3634.

Nelda, if we can now poll for questions from the investment community.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Bryan Keane from Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

I just want to make sure I understood the impairment charge related to the business solutions. That was 2 clients in financial services. Maybe you can just go through that again.

Michael E. Roach

Yes, we're clients, Bryan. They were IP that we had made investments on, and when we looked at the market and the take-up rate of those solutions, they weren't within our business parameters. So we decided to write them down.

Bryan Keane - Deutsche Bank AG, Research Division

Oh, I got it. So then, therefore, was there any existing costs there that won't be there next year, I guess the development costs? Or how do we think about the savings for 2012 in that particular item?

Michael E. Roach

Dave?

R. David Anderson

The best way to think about it, Bryan, is the costs are not going to be in the future P&Ls. So it's actually an accelerated amortization that has come through, so that you will actually see some improved P&L performance as we go forward.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then the bookings were actually pretty solid, although the revenue growth inside of that Global Infrastructure Services was a little less than we thought. So I guess how much -- how do we think about filling that gap? I know there is some client runoffs there as we go forward. How quickly can the bookings ramp to fill that hole?

Michael E. Roach

Well, again, I think the anniversary date of the runoff of that large contract is quarter 3. So we probably have a couple of more quarters, Bryan, until we get into a better year-over-year improvement. In the interim, as I said, I'm wrapping up a more of a direct sales in that infrastructure business. Because with the cloud and new infrastructure as a service, we're finding it's much more effective to have more direct sales people that know that business as opposed to pull it through the geographic areas solely. So I got a couple of things going. I'm wrapping up more of a direct sales team, and I've got to get through a couple of more quarters in terms of getting a more apples-to-apples comparison on the base. So we're probably looking at a couple of quarters here.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. Just last question for me, Mike. Maybe you can just help us think about the environment in general over the last couple of months, how has it changed. And maybe by region, looking at the U.S., Canada, are you seeing different types of decision-making from the clients.

Michael E. Roach

Yes. Well, again, if I take the U.S., which is a growing piece of our business, obviously, I was very pleased with what we experienced in the U.S. Federal Government, the logjam seems to have been cleared. In fact, the bookings ran into October as well, as you saw that we announced one this morning with U.S. Department of Labor, which is a new client for us and it's cloud-based. So it means we're taking share, and it also means that we're focusing on the leading-edge solutions that our government clients are looking for. The other area that I highlighted in the U.S. is the state business. Our state business is picking up. We've done some work around Advantage, put it on the cloud. We're able to take it downmarket. A number of states are actually now looking at replacing their ERP solutions, and we're really a category killer in there. We're doing exceptionally well on our win percentages when a state or a local government looks at replacing an ERP system. So that piece of the business is also recovering nicely. The commercial business, a little slower, but I like our pipeline there. We have a strategy. We're going to continue to try and use the strategy that we've deployed so well in Canada to evolve that mix, get more IP-based and outsourcing deals in the commercial sector in the U.S. So net-net, U.S. looks, to me, a little more favorably, obviously, than it did last quarter. Canada, we got a very solid franchise here. Margins are outstanding. The restructuring charge is, in fact, that we did, will help the margins in the U.S. and Canada over time. In Canada, as you can see, our strategy there is obviously to protect our base, but also introduce new solutions. So our fraud detection service is, again, a service that leverages all our capabilities, our people, our IP and our data centers. So that selling data to a client base, which is a very healthy business for us, we continue to invest and ramp up our defense intel. We have our leader in place. He's recruiting other folks that are experts in the defense intel space, including cyber security. So I think in Canada, it's a matter of us standing up and pulling some of those new solutions into the client base. And, again, we're working off a couple of more quarters of a tough comp there, given our decision to divest CIA and the runoff of a body shop contract. Europe, a smaller piece for us. But as you see in our results, we're growing double-digit on the top line, and the margins have recovered from the actions that we took last year. Again, a much different market over there, but Germany is strong and the U.K. is strong. And those are the 2 areas, in fact, where we have most of our people and most of our revenue. But right across our operating units in Europe, we're in the black. We're making money, and we're growing.

Operator

The next question is from Ralph Garcea from Northland Capital.

Ralph Garcea - NCP Northland Capital Partners Inc., Research Division

Thanks for splitting out the healthcare business. And, I mean, along those lines, do you have particular applications like you do in your other businesses that's driving that growth, either from a claims perspective or anything sort of similar to what you have on the Advantage or momentum side?

Michael E. Roach

We don't have anything of that scale, Ralph, and there's really not a lot of that out there. It's one of the reasons why I broke it out. Obviously, I broke it out for a couple of reasons. One, to make sure that, as a say, both clients and investors have a greater visibility on what that growing piece is and how fast it's growing. It also allows us to really attract the attention of companies that may want to divest IP in that area. That would be an area where I'm looking for IP either to develop it or buy it or partner with a client to do it. So we have solutions in there, but they're not of the category ilk of an ERP that we have with momentum and Advantage. And frankly, I don't believe they exist out there in the marketplace. This is why I think there's a real opportunity for us to actually use our Buy and Build model to expand our footprint and grow -- and accelerate that growth. Even though it's at 28% on a CAGR basis, we see a lot of opportunities to grow our health business.

Ralph Garcea - NCP Northland Capital Partners Inc., Research Division

And, I mean, again, great numbers on the Fed side. I mean, which contract vehicle, I guess if you had to name the top 2 on the U.S. side, is driving a lot of that new business?

Michael E. Roach

If I just took the lines of business, it's both on the defense intel space and the civilian side. And, again, what I'm really pleased about there is that we're taking share. So we're not standing still. We're actually gaining new customers. I mentioned the Department of Labor. I think that's the first time in our history, even predating CGI with AMS, that we've got business with the Department of Labor. And as I said, it's in our sweet spot exactly where we want to be on the cloud-based, leading-edge technology and enablers that clients are looking for.

Operator

The next question is from Julio Quinteros from Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Mike, I wanted to just sort of help us juxtapose a little bit between the infrastructure outsourcing environment relative to the more discretionary of consulting environment currently. So as we prepare for 2012, what are the puts and takes that should drive infrastructure outsourcing decisions versus what people are thinking about in terms of discretionary? And I guess the point for us is kind of looking at consulting business systems integration type decisions. Are you seeing any pressure on 1 type of decision-making versus the other at this point in time?

Michael E. Roach

Normally, if we're heading into an economic downturn, I would -- my kind of canary in the mine is the SI&C consulting business slowing down, but I don't see that. It remains fairly healthy as it -- if it continues to remain healthy, it will help us drive utilization rates up, which is, of course, good for the bottom line. The infrastructure business, it's interesting because normally, when the economy tightens up, as you know, CIOs become under a lot of pressure to cut costs. One of the first things they look to put out is the infrastructure business because it's so capital-intensive, and to some degree, it's scale business. But with the introduction of the cloud and that type of thing, there's more talk about Software as a Service as opposed to a big blanket, heavy iron outsourcing in that space. Is that what you were looking for?

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Yes -- no, that -- yes, definitely. Definitely, [indiscernible].

Michael E. Roach

Yes. So I think, as I say, it's interesting to see the -- so you're getting more of a hybrid mix of the consulting. A heavier weighting is probably a better way of saying it, a heavier waiting on the consulting piece of the infrastructure business than you are in the full heavy big metal outsourcing that we would have seen. That doesn't mean those opportunities still aren't out there. But I would tell you that the emphasis seems to be more on the cloud-based Software as a Service, sharing costs more discreetly with other clients through a company like ours. So what it means, as I said, in our case, though, we've got to kind of rebalance the fixed and variable cost in that business. So that's -- we're actually reclaiming space as I'm sure our competitors are in the data centers because the footprints are getting smaller and smaller. But you're carrying a higher fixed cost to a revenue number, and part of that revenue number is becoming a little more variable as you go to Software as a Service or Infrastructure as a Service or even cloud. So there's a constant recalibration going on there. We did some of that with the restructuring charge this quarter, but it's something that's ongoing in that business. It's a very capital-intensive business. So one needs to be extremely diligent there in ensuring that the fixed costs don't get out of whack with the variable revenue stream.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Got it. And then just last on the government side as we move into this new fiscal year with another continued resolution. Assuming that this current situation for the DoD continues for the rest of the fiscal year, how do you expect that to impact your bookings and your opportunity to win new deals from the federal government, especially with the continued resolution on the DoD side?

Michael E. Roach

Yes, I think I see them kind of separate in the sense that you could see another period where they could hit the pause button on the bookings. But, again, I think what I learned through this last one was it really reinforced my point that information technology is on the solution side of this problem, so that sooner or later, as I said last quarter, these deals have to be released in order for the government to meet their budgeted requirements. So you could well see a pause button as certain events happen relative to the budget debate in the U.S. But ultimately, I'm convinced that these deals will get approved. And in order to validate that premise, as I said, we continue to bid aggressively. Our strategy is to bid more, to win more. So go after more deals across the U.S. government so that when this thing does open up or if it continues to flow as it has over the last kind of 60 days, that we will actually be able to pick up more long-term business. And a number of these contracts are multi-year awards, which is exactly where we want to be in this type of environment. So, again, I still believe that U.S. government business, state, local and federal, is a very good spot to be, especially if we start to see a more broad-based recession in the U.S. market.

Operator

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

Thanos Moschopoulos - BMO Capital Markets Canada

Mike, just to drill a bit deeper on the federal side. If we look at the large base of business you signed in the quarter, is there anything in there that would change the margin mix appreciably from the margins you're currently experiencing? Be it a shift towards more prime work versus subcontract work or more IP-driven solutions, would you expect any shift in that margin profile as you deliver on that business?

Michael E. Roach

I wouldn't say a material shift, but directionally, it's going in the right direction. As we pick up new clients, as I say, we're doing more work in the cloud. This is all positive for us. A number of these deals, as you mentioned, it's very clear that we are the prime. So we're firing on those levers I mentioned at the time of the Stanley acquisition to try and move to more prime work, to pull through more kind of IP-based solutions, solutions where we're leveraging our 3 assets again: our IP, our data centers and our professionals. So directionally, it's going the right way. And I'm pleased with the margins that we currently have in our federal business. But, again, in order to continue to drive earnings per share, I am looking for an increase in earnings in the U.S. gradually over fiscal 2012. And of course, the federal unit plays a role in that growth.

Thanos Moschopoulos - BMO Capital Markets Canada

Okay. And now we have -- in the very near term, we have this super committee deadline approaching. You mentioned the potential risk of customers hitting the pause button at some point. But just in the current weeks leading up to this deadline, are you starting to see signs of that pause button being pushed or not at this point?

Michael E. Roach

No, not at this point. As I say, we continue to submit bids and get approvals. And we have enough vehicles, and we have a lot of ongoing contracts there that we wouldn't see a short-term impact of such a pause. This is mostly a question of bookings in future revenue for us. We don't have a lot of large contracts running off here.

Thanos Moschopoulos - BMO Capital Markets Canada

Okay. And then finally, in the past, you've talked about the growing pipeline of opportunities you're seeing in taking Stanley's capabilities and selling those both into the private sector and into the U.S. -- sorry, the Canadian government sector. And you have new leadership there. Can you comment in both those areas how that pipeline is looking and the traction you're getting with some of those deals?

Michael E. Roach

Well, again, I think when it comes to cyber security, you can understand I can't name the commercial clients that I'm pursuing or working on despite the nature of it. But I can tell you that we're leveraging the cyber security capabilities that we've acquired and developed through our acquisition into the commercial entities in the U.S. and Canada. As far as the defense intel business in Canada, we're very proud that we're able to attract quality of general [indiscernible] to our company. We're building out a team there. And, again, the focus there is to develop a funnel that really is aligned to what our clients need in order to meet their goals and to align it to the emerging areas that I spoke about, including biometrics and cyber security. So that's a ramp-up. We have a funnel, we have bids in there. I'm expecting growth in the Canadian defense intel space as the year progresses. So I'm happy with the progress that we've made there. And the first thing is to get the right talent, the right leadership in place, to understand what the client requires to be a success. And the Canadian government continues to invest in the defense intel space, with the latest announcement of the large shipbuilding contracts that will also afford opportunities for information technology work. And that's an area that we would plan to pursue.

Operator

The next question is from Stephanie Price from CIBC.

Stephanie Price - CIBC World Markets Inc., Research Division

You talked quite a bit about cloud and -- at the state or local level. Can you give us a sense of how big that is in terms of state and local revenue at this point, and how big you see it getting in the near-term?

Michael E. Roach

I don't have those at the ready, Stephanie. We can take a look at that. But I would -- I guess what I was trying to telegraph on the cloud is that the cloud has also enabled us to take our Advantage ERP system and bring it downmarket. We've -- traditionally, going back to the early days of AMS, we've been focusing on large jurisdictions, the state level, New York City, L.A. County, which are very big and important long-term clients with us. But some of the smaller jurisdictions who have the same requirements, we weren't able to scale it down as readily for them, either from a price point or a functionality basis. And the cloud is enabling us to do that. So that's an area of growth. And, again, we're starting to pull together. We have plans in those areas. We're starting to put together our success level there. The second area where we're very optimistic is around the U.S. Federal Government. As you know, we won, I believe it was the first award under the task order in terms of cloud, the award we won with the Department of Homeland Security. It was also, as you know, challenged in the U.S. And thankfully, the client was very generous in reinforcing the quality of our offering, the quality of our delivery. So we see a good opportunity to follow on. Our experience is quality work equals more work, so we're expecting more there. I'd like to see a little more traction on the commercial side. In contrast or in comparison, it's not as rapid of a growth rate as we're seeing in government. But I believe that will follow. And it's an area where we do see opportunities in the back end of the year here. So cloud is an enabler both for the clients, but also for a company like ours in terms of if you get our solutions out to more mid-sized clients around the U.S.

Stephanie Price - CIBC World Markets Inc., Research Division

Great. And can you talk a bit about your use of the cash flow [indiscernible] again in the quarter? Can you put a blanket between buybacks and debt repayment and acquisitions?

Michael E. Roach

Well, I guess, directionally, as you know, one of our priorities is to invest back in the business, and we're seeing more opportunities to do that. We're investing in the cloud. We're divesting in defense intel and the health. So -- but as far as the other areas, we continue to believe our stock represents excellent long-term values. So we continue to buy back the stock. I think in the quarter, we bought back nearly $90 million -- it was a $91 million of stock. We bought back -- sorry, 3.3 million shares for $63.8 million and at an average price of $19 million. We can still purchase up to $13 million of stock between now and February 2012. Under a Normal Course Issuer Bid, we intend to continue to buy back our stock. And we're working down the debt. As you mentioned, I think the amount of debt that was repaid in the quarter was about $113 million, Stephanie. So we stick pretty close to that pattern. We are working down the debt gradually. The cost of capital is extremely low there, under 1%, and it's still very accretive to buy back our shares.

Operator

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

Kris Thompson - National Bank Financial, Inc., Research Division

Mike, maybe just on the vertical segments here and financial services. My math is correct here. It looks like, on a quarterly basis, it's around $200 million this quarter, down from last quarter at $270 million. Before that, it was well over $300 million per quarter. What's happening in the financial services vertical there? And do we expect those revenues to start to accelerate again? Or do you expect a deceleration to continue?

Michael E. Roach

Well, I think it's a good question, Kris. One thing, just to remind you, when we pulled the health vertical out, we pulled it out. It brought down our revenue in financial services, as well as government. And while we took it out of both periods, of course, the growth rate on health is much faster than other parts of the business. So part of that -- part of it could be FX. And also, the large runoff that we had in the infrastructure business was a financial services client. So those 3 factors would impact that. But as far as the base business of financial services goes, we continue to grow our business, especially with the banks in Toronto, which is a big, growing market opportunity for us. We continue to use our software in there and expand our consulting capabilities. So I see the banks -- the financial services, actually, as an area of continued growth here in fiscal 2012 and beyond.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. So you're hoping that $200 million quarterly rate might be the low watermark?

Michael E. Roach

Yes. I think, again, it's subject to -- in some cases, as you know, we are selling a service in there that's volume driven so that it can be impacted by seasonal impacts. But, again, we would look to grow our financial services verticals. Part of our strategy, to see growth there, clearly, in the government and health services as the 3 major ones.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. And just on the margins, so I understand this. The $11.7 million charge related to the write-down of those financial solutions, was that all in the GIS unit?

Michael E. Roach

No. The majority of that was in the Canadian operations and a small piece of it was in the U.S. operations.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. And what about the $29.6 million charge, where is that?

Michael E. Roach

The real estate?

Kris Thompson - National Bank Financial, Inc., Research Division

Yes, real estate and I think headcount reduction.

Michael E. Roach

Again, the majority of that was in Canada. If we look at the breakout here, in Canada, on the impairment side that we just talked about, $9.5 million of that was in Canada. In terms of the impairment on the software, about $2 million in the U.S. On the real estate, $11 million of the $16 million was in Canada. And in the severances, there was about -- between GIS and Canada, there was about $7 million. So a good portion of the restructuring was in Canada. Now, again, my own philosophy on restructuring is, company should restructure when they're financially strong, and we continue to be very strong financially. In fact, even with the restructuring charge, our net margins are still either first or second best in the industry. So these are things that we saw an opportunity here to act, to continue to strengthen our business go-forward. And as I mentioned, they will be accretive to earnings per share in fiscal 2012.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. That segment, it was very helpful. Just in your prepared remarks, you did mention that your go-forward costs would be reduced from that $29.6 million restructuring. Can you give us an idea of the annual run rate savings there?

Michael E. Roach

Well, again, prior to that, it will depend on some of the take-up rates. But the savings for the year could be north of $20 million. So it could be fairly significant in 2012. Now we've got other headwinds. As you know, year-over-year, our debt costs are going to climb, given our new financing that we have in place. So there's headwinds and tailwinds here. But clearly, this one will be helpful to us as we go through fiscal 2012.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. And just last for me. David, on the income tax rate, you guys keep, I think, outperforming our expectations. I think most of us are modeling 30%. How should we think about income taxes next year?

R. David Anderson

I think, again, it's going to be close to that. And if you look at the MD&A, once again, we've given you the range that you can use as you go forward.

Operator

The next question is from Paul Steep, Scotia Capital.

Paul Steep - Scotia Capital Inc., Research Division

Right. Mike, just one quick one. I guess the pace of deals obviously post Stanley slowed down. But maybe give us your thoughts right now on M&A, either large M&A, maybe U.S. federal type market. And then on a contrast, it's been a few years since you've done a number of small deals. But it looks like you've ramped up a lot more internal development. Maybe just the overall thoughts there on how the capital gets used.

Michael E. Roach

Yes, Paul, I think just to -- I would think on the federal space, we would stay a little bit quiet there for a while, because, again, we have a large-enough platform right now and enough vehicles to actually drive organic growth there, which is the most accretive use, frankly, of our cash. So relative to the federal government space in the U.S., we love what we have, we got a great team, lots of vehicles, great capabilities there. So we would look at the investment we made there with Stanley as giving us the platform for organic growth in the U.S. and also leveraging, as I said, that back into Canada and eventually into the U.K. market. So I think that investment has been accretive for us, and it's also very strategic. If we do something in the U.S., we'd be looking more on the commercial side. And, again, we'd be looking, where possible, to pick up IP. So software solutions, Software as a Service, either already in place or the capability of taking software and turning it into a Software as a Service. Europe is an interesting market valuation. They are very, very attractive, relatively speaking to the past and to our own valuation. So we continue to watch the developments in Europe daily, I guess. It's probably the same as the rest of you are. So we're keeping a close eye in Europe. There are some franchises there that are of interest. But, again, we do our normal cautious wait-and-see. We're not in a hurry here. As far as the small acquisitions, we have been picking up and looking at very small ones that are more IP-based, that either are a niche to help us fill out a portfolio or, again, something that we can turn up as a cloud offering. So you may see more of that on a go-forward basis. As far as the use of cash, as I said, we are investing more of our cash into organic growth, standing up new offerings, the Cloud 1, the insurance. The P&C insurance fraud platform is another good example of that. We believe these are great annuity-based solutions that, over time, are very accretive to our bottom line. So we're going to stick to our knitting there. If we see something that -- in terms of an acquisition that fits with our long-term strategy, and the price and the time is right, we'll pull the trigger. If not, I think investors should expect us to continue to invest in our business, buy back our shares and gradually reduce our debt.

Paul Steep - Scotia Capital Inc., Research Division

Okay. One quick clarification just on modeling because that was fantastic. On CapEx, out of that, I would assume it's fair to sort of comment that, that would lead me to point to sort of a run rate type number in the next year, David, given that no big iron, no big data center investment sort of coming. These are small capitalized software developments.

R. David Anderson

That's correct. If there's going to be a large data center investment, it would be coming with an outsourcing contract. So you would see an announcement in regards to that.

Operator

The next question is from Steven Li from Raymond James.

Steven Li - Raymond James Ltd., Research Division

So Mike, just quickly, on the U.S. EBIT margins, so the restructuring actions, does it take it back to a 13%, 14% range? And is that a good target for 2012?

Michael E. Roach

It's a great target, but it won't take it back to that level. There's gradually -- as I said, over time, we would look at improving our margins there. Again, I'll remind you, Steven, we have a different mix in the U.S. than we do in Canada. We are much heavier on the government side. And while I believe our margins in government are best-in-class, they still generate less margins than the commercial business. So over time, we have to rebalance, hence, my comments on any future acquisition target in the U.S. being more commercially based. On the other hand, you have greater certainty on earnings per share coming out of that government business. So it's 6 1/2 [indiscernible] the other. But, again, the restructuring charges will help us in the areas I mentioned, in terms of moving up utilization rates, reducing our overheads and really cleaning up some surplus real estate space. So it is a step towards gradually improving the margins. And, again, I'll remind everyone that our U.S. numbers do carry about 2 percentage points for the amortization of intangibles associated with AMS and with Stanley. So you really have to, from an operating perspective, bump those numbers up by about 2%.

Operator

The next question is from Mike Abramsky from RBC Capital Markets.

Mike Abramsky - RBC Capital Markets, LLC, Research Division

Mike, for you. So just back on the upcoming developments at the federal level in the U.S. in terms of budget, I appreciate your thoughtful comments regarding what happened sort of in the prior round. At the same time, I think the concern is that the super committee will have to implement some fairly deep cuts, which is probably new to the process this time around, whereas last time was really more of a stop gap spending challenge that affected bookings as far as I understand it. So how do you see those potential cuts perhaps more as presenting headwinds to your U.S. federal business? What do you think -- how do you think that will play through?

Michael E. Roach

Yes, it's a good question, Mike. And I think, obviously, none of us have a definitive answer there. So I'm a pretty grounded common sense guy. And I look at this thing the same as I look at a business or a large corporation. I break it into, as I said before, whether information technology is part of the problem or part of the solution. If you look at the size of the budget cuts that they're coming with, it would essentially -- you could eliminate all spending on IT, and you wouldn't come anywhere near the targets that they need to meet here. And then the second reference point I look at, if you want to take costs out, you want to drive greater efficiency, you have to invest in information technology. It's an enabler. It allows programs to be set up. It allows costs to be taken out. It allows cash to be preserved and in the case of using our cloud offering versus building it in their own centers. And finally, if you look at the history of the U.S., in the defense intel space, as they run off from the various conflicts they're in, they are investing more in IP-based and software-based solutions, not only from an armament standpoint, but also from an intel standpoint in terms of cyber security. So my view here is that you could have some short-term ongoing stop and go on the bookings. But if I look at the deals that have been awarded, they're not short-term deals, they're not 6-month deals. Some of these deals are 4 and 5 years out. So it tends to validate, at least in my mind, I don't know about yours, Mike, that in the ongoing business here, you have to invest whether you're a government -- federal government, the points I made on the states, they're replacing ERP systems. Business has to go on. The business of government has to go on, and information technology is an enabler. It's part of the solution, not part of the problem. And it's against that premise, Mike, that I look at my business and say, "The best thing I can do here is to bid, bid, bid, bid, and put as many bids as I can in existing vehicles and on new clients and actually gain share as this thing goes through." Now, it does put a short-term pressure on margins, and in some cases, a short-term pressure on revenues. Because when you get a large group of bookings coming in a very short period of time, in some cases, in this case, maybe 6 weeks, it will take time for that to ramp up into new revenue. But what it does tell me is that the recurring revenue base of our U.S. Federal Government is rising, and that's exactly where I want to be in terms of any future uncertainty.

Mike Abramsky - RBC Capital Markets, LLC, Research Division

And given the point that you're at in the quarter right now, what visibility do you have to -- I think you said earlier that you don't see kind of right now any abatements in demand. But do you have any visibility into how some of the departments that you're dealing with might react or are preparing to react to some of these budget shifts?

Michael E. Roach

I couldn't generalize that, Mike. I think it's very much department by department and where they sit in terms of how the government sees them. We continue with the EPAs. And a good example, there continue to be a very valuable long-term client with us. As I mentioned, we've won our first win with the Department of Labor. So it's very much department by department. But, again, at this point, we're not seeing any blanketed macro decision-making here. It's more department by department needs -- need. It's a point I always make even to our own people. While we have to live in the macro environment, we actually work customer by customer, and we don't want to lose that focus. We do better, we win more when we focus on our clients as individuals and not as part of a macro environment. Europe's another good example. We had double-digit growth over there, and our margins improved significantly in a very challenging market. And the way we do that is not look at what the Italian bonds are trading at today, but what does our client in France or Germany or U.K. need to win and grow. So that's the strategy. The issue is constant execution of that strategy. And when we do that well, good things happen.

Mike Abramsky - RBC Capital Markets, LLC, Research Division

And then on the Canadian business, you talked about defending that business and its rich margins and your share. Are there any potential headwinds to that business in terms of upcoming contracts? I think there was a postal contract, for example, et cetera, that are a focus to you right now.

Michael E. Roach

Well, again, we constantly have renewals. In some cases, as was the case with the large financial institution, they evolve their own strategy in terms of how they want to evolve their own shared services, that type of thing. So we constantly look at that. But, again, we have a very strong franchise in Canada. We still see opportunities here. And as I said, we've got to kind of get by a couple of more quarters, Mike, so that the decisions we made half a year ago are out of our comps. And when I strip them out, as I mentioned, in this quarter, we grew about 5%. So that's not a bad spot to be. Bookings could be better in Canada, and the team is working hard on doing that. And I expect that they'll strengthen throughout the year.

Mike Abramsky - RBC Capital Markets, LLC, Research Division

Sorry, just to clarify. Any update on that particular contract that I mentioned on the postal side?

Michael E. Roach

No.

Colin Brown

Great. Thank you very much, Nelda. Thank you very much. And thank you very much, everybody, for joining us. We'll see you back on February 1 for our Q1 results, as well as our Annual General Meeting.

Michael E. Roach

Thanks, folks. Thank you.

Operator

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

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