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CGI Group (NYSE:GIB)

Q1 2012 Earnings Call

February 01, 2012 9:00 am ET

Executives

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

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

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

Analysts

Richard Tse - Cormark Securities Inc., Research Division

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

Tom Liston - Versant Partners Inc., Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Maher Yaghi - Desjardins Securities Inc., Research Division

Thanos Moschopoulos - BMO Capital Markets Canada

Michael Urlocker - GMP Securities L.P., Research Division

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

Stephanie Price - CIBC World Markets Inc., Research Division

Operator

Good morning, ladies and gentlemen. Welcome to the CGI First Quarter 2012 Results Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President, Global Communications and Investor Relations.

Lorne Gorber

Thank you, Wayne, and good morning. With me to discuss CGI's first quarter fiscal 2012 results are Michael Roach, our President and CEO; and David Anderson, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9 a.m. on Wednesday, February 1, 2012. Supplemental slides, as well as the press release we issued earlier this morning, are available for download along with our Q1 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 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. We encourage our investors to read it in its entirety.

Beginning this quarter we are reporting our financial results in accordance with the International Financial Reporting Standards or IFRS. We have discussed this new GAAP in our MD&A. As before, we will discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed in this call are Canadian, unless otherwise noted.

I'll turn the call over to David first to review the financial results; then he'll pass it over to Mike, who will discuss operations and segment highlights. We're going to limit the call to 45 minutes this morning in order to be ready for our AGM, which starts at 11 a.m.

With that, David?

R. David Anderson

Thank you, Lorne, and good morning. I'm pleased to share the financial details of another good quarter. Before I get into the details of the quarter, I would like to remind you that this is our first quarter where we are reporting under IFRS. We have provided our ongoing evolution and status in our MD&As the last year. When we go through our results for this quarter, I want to reiterate that as part of the conversion to IFRS, we adopted the equity accounting for joint ventures. So the numbers presented today and provided in the MD&A issued this morning do not include any of the JV-related revenues.

The figures for the comparative period have also been adjusted accordingly. There were no other significant adjustments related to IFRS that I would like to highlight to you. However, I would point you to our note #13 in our Q1 financial statements for a comprehensive description of the adjustments and reconciliations related to the transition to this new set of accounting principles.

In the first quarter, revenue was $1.03 billion, a decrease of 5.6% or $61.6 million compared with the same period last year. However, on a sequential basis, the revenue increased by 2.6%. On a comparable basis, the revenue for the year-ago period contained 4 previously disclosed items, including a license sale in the U.S., the revenue from our interest in Québec-based CIA, and the revenue associated with 2 previously announced contracts, which were not renewed. Excluding these items, the year-over-year revenue growth was 1.9%. Adjusted EBIT in Q1 was $139.9 million, and our EBIT margin remains strong at 13.6%.

I would like to remind you that our Q1 F2011 was unusually strong, as it included the benefits of the license sale noted above that did not have any associated cost, as well as recovery of a significant bad debt. Both of these items were pointed out last year to ensure that you have the appropriate visibility. Excluding the $16.7 million impact of these items, adjusted EBIT would have been $138.1 million or 12.7% of revenue, thus providing for a year-over-year improvement of 0.9%. Net earnings were $106.5 million, representing a net margin of 10.3%. Last year, in Q1, you may recall that we recognized $18.7 million of tax benefits from the expiration of statutory limitation periods, as well as the last tranche of the acquisition and integration costs related to Stanley. Excluding these items, our net earnings margin of 10.3% is an improvement from 10.0% in Q1 2011, and diluted earnings per share of $0.40 compares favorably to 39% -- $0.39 in the year-ago period.

Looking at the balance sheet, our DSO was 51 days in Q1, down 2 days from the 53 days we posted for the previous quarter. Our DSO was running above our 45-day target due mainly to the impact and timing of milestone-based payments on some government projects. We generated $148.7 million in cash from our operating activities, compared with $97.8 million in the same period last year. The primary difference, along with the improvement in DSO, is a net improvement in other working capital items such as the timing of tax installments and payroll-related disbursement.

We renewed our credit facility during the quarter. The $1.5 billion facility, which will expire in December 2016, offers attractive rates along with an accordion feature of $750 million. In addition, we drew down the USD $475 million per the private placement agreement we announced in July. Including our current line of credit in place through fiscal 2016, we have approximately $1.3 billion in available liquidity to make accretive investments for shareholders.

Our debt was reduced in the quarter by $47.2 million to $958.5 million, and our net debt stood at $879.5 million, representing a net debt to capitalization ratio of 26.6%. In the quarter, we continued buying back our stock, acquiring 3.4 million shares of CGI for $63.4 million at an average price of $18.87. We will continue purchasing under the current NCIB program until February 8, then we'll continue with the renewed program as announced this morning. Subject to TSX approval, we would be able to buy up to 22 million shares between February 9, 2012, and February 8, 2013, or 10% of the float. At the end of Q1, our return on equity was 18.4%, a 120-basis-point improvement from last year, while our return on invested capital was 12.8%, reflecting the full year impact of the additional debt from the acquisition of Stanley.

Now I'll turn the call over to Mike.

Michael E. Roach

Thank you, David. Good morning, everyone. We're off to a very good start to fiscal 2012 with this quarter's results. As David did a good job of explaining our strong first quarter performance compared to last year's excellent first quarter, I'll keep my comments very brief ahead of our AGM this morning.

We are pleased with the 2.6% sequential revenue growth and the 1.9% year-over-year revenue growth, excluding specific items. This growth, coupled with continuing strong bookings further reinforce our belief that organic growth will accelerate in the back half of the year as previously announced low-margin contracts, disposition of CIA and the runoff in the April, May time frame.

In the quarter, bookings totaled $1.4 billion, representing a book-to-bill of 135% and on a trailing 12 months, we've now booked $5.1 billion or 122% of revenue. While 78% of our global bookings continue to come from our largest verticals, government and financial services, our health vertical showed the most significant year-over-year revenue growth at 18%. We continue to have good visibility of opportunities in our sales funnels, which we believe will be converted to bookings over the next couple of quarters.

Turning to our segments and beginning with the United States. Excluding quarter 1 2011 license sale, our revenue grew by 1.2% year-over-year and 2.8% sequentially. Bookings were strong across the U.S. with a book-to-bill of 150%, as we continue to take market share and to create and shape new growth opportunities. For example, in the health space, we announced a contract to build a health insurance exchange for the federal centers of Medicare and Medicaid. We have several outstanding bids to state governments to support similar health insurance exchanges and are pursuing related opportunities with commercial insurance providers.

The discussions and actions around U.S. government budget cuts are actually driving some short-term growth as initiatives are being positioned for future years' savings. For example, we continue to experience success in securing work in areas focused on cost saving such as the recently announced cloud computing wins at Homeland Security, GSA and the Department of Labor. Consistent with our focus on bidding more, our pipeline now contains a higher percent of new net clients than in previous quarters.

Excluding specific items, EBIT margin improved year-over-year from 8.9% to 9.8%, as a result of our previously announced restructuring activities, a healthier mix of IT and the ongoing implementation of margin improvement initiatives associated with our Stanley integration. We continue to experience high demand for managed services based on our IT business solutions, such as CACS and Advantage, which are expected to gradually contribute to our bottom line performance throughout the balance of the year.

Turning to Canada. The Canadian operations grew by approximately 3.4% sequentially and excluding specific items, grew approximately 2% year-over-year. Bookings were up 22% year-over-year, exceeding 100% of revenue. We continue to win new business with new clients, while renewing long-term relationships with such marquee clients as National Bank of Canada and Rio Tinto. Canada continues to deliver strong EBIT, 22.8%, reflecting our ongoing drive towards the optimal revenue mix of solutions and services. We continue to see growth opportunity in our major markets across Canada, specifically Québec, Western Canada and the Greater Toronto Area.

Our global infrastructure business continues to address top line and bottom line pressures resulting from a previously announced contract runoff, and the impact of major investments relating to standing up our cloud offering and transitioning work to our global delivery centers. Excluding the contract runoff, growth was 1.9%. We continue to extend, renew and win new business in this sector including work with Canada Post, Metro, Rio Tinto, as well as 3 U.S. federal government cloud wins.

We continue to see growth in our funnel and remain confident to working through these onetime headwinds. In addition, as I've said in the past, we remain focused on improving the quality of our revenue stream and in doing so, increase the profitability of these operations over time. We've also been investing in the development of a multibillion-dollar pipeline with some strategic prospects around our cloud and managed services offerings.

International growth of 5.7% was driven in part by increased work volumes in Europe, with particular strength in Poland and the U.K. In addition, Australia has seen significant growth following wins in both the commercial and government verticals. We booked some additional government and financial services wins during the quarter, and continue to see improving EBIT despite the challenges of the European economies. The pipeline of new business remains strong with some significant opportunities expected to close in this fiscal year.

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 2012 business plan. We have $13.6 billion in committed, long-term orders, an increase of $578 million from last year. This level of recurring, predictable revenue is particularly attractive for long-term investors and allows CGI to stay focused on our strategic objectives.

In addition to our renewed lines of credit, we have generated $621 million in cash or $2.27 per share over the last 12 months. As a result, we continue to have ample flexibility to invest in organically growing our business, while continuing to buy back our shares and gradually reduce our debt, as we've done this quarter and year-to-date.

Consistent with these investments and our belief that CGI remains a very good investment, the Board of Directors approved this morning the extension of our Normal Course Issuer Bid. This will give us the flexibility to purchase approximately 22 million shares over the next 12 months. At today's price, this would represent an investment of more than $450 million.

Thank you for your continued interest and confidence in CGI. I hope you'll be able to join us for our AGM at 11:00. Let's now go to the questions, Lorne.

Lorne Gorber

Just a reminder that a replay of the call will be available either through cgi.com or by dialing 1 (800) 408-3053 and using the passcode 4236308 until February 15. A podcast of the call will also be available for download at either cgi.com or through iTunes within a few hours. Follow-up questions as usual can be directed to me at (514) 841-3355.

Wayne, if we could poll the investment community for questions, please?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Richard Tse from Cormark Securities.

Richard Tse - Cormark Securities Inc., Research Division

Mike, just want to ask you whether the sort of expiration of those one-off contracts, does that rebase the revenue and should sort of, kind of take that as the revenue base going forward here for this next year?

Michael E. Roach

Well, I think, yes, most of those contracts I believe runoff in the April, May time frame. So that's why I'm saying, Richard, I think when you look at the year and I tried to pull them out so that you could see them that the company is actually growing excluding those items. So when they run off, you'll have the rebase line.

Richard Tse - Cormark Securities Inc., Research Division

Okay. And then with respect to your bookings, it's actually been very strong over the past few quarters. So when do you think that we'll see that uptake come into revenue? I know it takes some time to build these things out from an infrastructure perspective. But is that something that we could expect to see later on this year here?

Michael E. Roach

Yes. That's why I'm saying. I think some of that’s going to come on the back end of the year. Bookings have been consistently strong, as I say, we've now booked $5.1 billion on a trailing 12 month. I think before that it was $4.9 billion on a trailing 12 month. So we're seeing some momentum there. When I look at, even this quarter, we have some very good visibility on deals, of course, timing is always an issue. So there seems to be some momentum building here on the bookings front. That was the first time in a while when all geographies exceeded 100% to a book-to-bill.

Richard Tse - Cormark Securities Inc., Research Division

Okay, that's great. And just one final question. I was going through the MD&A on this Canada Post sale, I guess, of your interest in the JV. How's the sort of the CGI component of that work going to work out? Is there going to be a renewed contract, or can you sort of elaborate on that?

Michael E. Roach

Well, there's a JV that naturally wound up or winds up in the April time frame. We've advanced the conclusion of that. We've extended one contract on the infrastructure side with the Canada Post company. Our existing infrastructure contract runs to December 2013 and it continues.

Operator

The next question is from Julio Quinteros from Goldman Sachs.

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

So just in terms of the path to growth. Obviously, it's good to see the return back to positive organic here, after making some of the adjustments. Now as we think about the next couple of quarters, I think we've been thinking about the back half versus the front half and, obviously, the back half should continue to see, I think, further acceleration. Can you just give us a sense on some of the puts and takes, the runoffs, some of the things that we need to make sure we understand to get back to sort of the further acceleration of the organic growth rate as we go into the back half of the current fiscal year?

Michael E. Roach

Yes. I think if you look at Slide 5 in the deck, Julio, you'll see some of those and we can go into more detail. But primarily in the GIS, it's a large contract that runs off in April, end of April. In Canada, is the divesting of CIA, which was a small company, which we owned a controlling position that we sold off. But because it was in the same line of business, we couldn't remove it from the history. That's impacting Canada by about $10 million on average per quarter. And we had a low government body shop contract with the Canadian government that ran off roughly in the same period, I think, in the April, May time frame. In the U.S., the only one we called out and was called out last year in the results, we had a large financial customer, who sold off a piece of its business. The acquirer had to buy the license from us and it was -- it hit the top line and bottom line on a positive note. So when you draw those out, those are the major puts and takes and they run off coincidentally all around the April, May time frame.

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

Okay, great. And then just on the international front, some pretty good numbers there. I know international's been a focus for you guys. What would you guys attribute some of that strength to? At -- on a quarter-of-a-quarter basis, it looks like that segment was up quite a bit.

Michael E. Roach

Yes, I think again, last year as you know, we invested heavily to restructure our European operations. And as I mentioned at that time, we're investing not only in reducing costs and streamlining, moving to a shared services organization and managing the bottom line, we're also investing in business development and that’s starting to take hold there. And again, Europe is a very small piece of our business. But we believe that we've turned a corner there and that Germany remains strong, Australia's picked up and the U.K. is also doing better. On the bottom line, we had issues, as I pointed out last year, in France on the bottom line. We've stabilized that and have returned to a much healthier position in France, in comparison to last year.

Operator

The next question is from Tom Liston from Versant Partners.

Tom Liston - Versant Partners Inc., Research Division

Michael, just you talked about the robust numbers in health vertical on the bookings numbers. Can you talk about the puts and takes within some of the government vertical and certainly the pipeline as well? Obviously, there's lots of activity on the ERP side, winning a few deals and a big deal in FI$Cal coming up. But there's also a lot of cost recovery projects. In the flip side, we see some puts and takes on military cutbacks but then cyber security seems to be moving the other way. So can you kind of consolidate some of that activity, there's some good positives and certainly maybe some cutbacks in certain areas, and what ultimately that means for the bookings quarter this number and some of the pipeline going forward?

Michael E. Roach

Well, net-net, I have to say, Tom, if I come at the government sector, and again, when I talk government here, I think most of us are really focusing on the situation in the U.S. I think our business in Canada remains stable. Our Québec business is strong and government, our Canadian business, we've significantly increased our pipeline there. Our pipeline has a lot more defense and intelligence-type opportunities in the Canadian funnel than we've ever had by leveraging as I said at the time, we would leverage the Stanley acquisition back into Canada. So we see some opportunities to grow out our defense intel business in Canada. If I look at the U.S., again, I have -- and I point that out in my comments, in fact, in the short term here, there's deals closing that are really positioning for longer-term cost savings. And I specifically called out our cloud wins. We've now won approaching $100 million of cloud wins with some very significant branches of government, Homeland Security, the GSA and the Department of Labor. So these are -- and the Army as well. So these are very significant long-term contracts that have growth over time in them. And the second thing I would say that, I'm not seeing the length of the contracts being shortened yet. And again, I see that as a bit of a canary in the mineshaft. If they start to go short, it tells me that you're going to see more and more cutbacks there. But our contracts are continuing to be 3 years, 5 years. So it tells me that they're going to continue to invest in information technology. The book-to-bill in the government business continues to run ahead of the average of the U.S. book-to-bill, so that's a good sign. And even in the defense space, I mean, as I mentioned, we are continuing to implement our strategy around the Stanley acquisition. We've now turned a contract that where we were a sub in the Stanley era to a prime in the new integrated company. We've runoff a low-margin contract there as well, which is norm for part of our strategy, so. And then on top of that, the state business, with the win in West Virginia, we now see more activity at the state level, including these health exchanges. So again, we remain very optimistic about the government business. And frankly, as I've said many times, I always believe that government is a good place to be in good times and bad times because they continue to invest and we're clearly seeing that in our operations.

Tom Liston - Versant Partners Inc., Research Division

Very good. And just quickly, David, probably can't answer it quickly. But certainly when you go back last few quarters with IFRS, the adjusted EBITDA seems to have more volatility to it. And obviously, there's probably a bit of restructuring last quarter and such. But can -- this new number in this quarter, is that the expense base and whatever feel like more of a baseline or can we expect a few more volatility in some of the elements? And as we go through this, I guess we'll find this out. But can you give us a little forward-looking hints on that?

R. David Anderson

Well, I think I'd just like to just kind of focus you on, over the past few months or few quarters, the numbers have been relatively stable. And I think we tried to -- in the MD&A, through some of the x item discussion, provide you with some insights to be able to let you see what was happening in the fundamental operations. So there has been a little bit in the way of some gradual improvement that we've seen over the last few quarters. And I think as a -- just a general management philosophy, we're continuing to look at where we can find additional improvements and continue to invest to able to continue to drive those improvements into the bottom line. I can't really give you a whole lot more specifically than that right now, Tom.

Operator

The next question is from Bryan Keane from Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

Yes, David, I just wanted to follow up. Just on the accounting change, is there a way to kind of walk us through the exact impact to the revenue line, exactly how much, if we were under the old reporting system, what the revenue would have been just so we can get an apples-to-apples comparison there?

R. David Anderson

It's really just an adjustment of about $25 million per quarter. It's a downshift because we're taking the revenue from the joint venture out. There's nothing much more glamorous than that.

Bryan Keane - Deutsche Bank AG, Research Division

Easy enough. And then on the headcount side, headcount's been about stable around 31,000. Do we see that increase as these bookings come on in the near future? Or is that probably a second half event or how will we think about headcount growth?

Michael E. Roach

Yes. It's Mike, Bryan. It's a good question because we have pockets now, where we're actually hiring aggressively around some of those government contracts, around some healthcare contracts. So I've got pockets where I need to hire probably in the range of 300 to 500 people. On the other side, of course, I'm trying to drive higher productivity. As you know, we're continuously changing our mix, so I'm not -- I don't have a correlation between growth and bodies like some of the pure plays. So on one hand, I'm growing in those pockets. In other areas, I'm trying to drive increased productivity and utilization of the operations to increase the margins.

Bryan Keane - Deutsche Bank AG, Research Division

Okay, no, that's helpful. And then just finally, just on the demand environment. I mean, it sounds like, with the bookings that you're not seeing this, but we're hearing a lot of some of the other IT players talk about some delays in decision-making and some push-outs, just want to get your thoughts there, Mike.

Michael E. Roach

We see some of that, Bryan. But again, I have to tell you, given our mix of IP, a lot of the time, our IT decision is being made by the business person because he's the ultimate recipient of that. So if you look at something like CACS on the collection side, it's very seldom the IT guy that's the buyer there. It's the business guy and he's got the funds and he's got the pressure of the business case in order to bring down receivables. Or if you take some of the state business, where we're trying to drive increased tax collections, they're stood on business cases. Those wins that tend to move along a little faster than the more traditional IT business, where the guy is really ringing it through procurement, trying to get out the last nickel permit type of thing. So I think our mix is helping us a little bit here. And also our -- about 3 quarters ago, we made a decision to bid more to win more. So as I said, we've been aggressively increasing the number of bids and that's starting to pay off for us. I always knew it'd bring down the win ratio somewhat, but it's certainly helping with the bookings that’ll eventually translate to the top line.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. Just finally, with those higher bookings, do we have to see a lower -- or a little bit of pressure on the margin as the bookings ramp or how do we think about that?

Michael E. Roach

Well, I think, depending on the segments, you're going to see some of that. We're seeing that in our infrastructure business because the lead times are long there. But in the other operations, I don't think so.

Operator

The next question is from Maher Yaghi from Desjardins Securities.

Maher Yaghi - Desjardins Securities Inc., Research Division

I just wanted to ask you on the GIS segment. In the notes, you mentioned that you made some restructuring activities in the third quarter and fourth quarter to reduce the variable cost, to account for the lower revenue run rate. Can you maybe just tell us when these restructuring activities are going to start showing on the margins? In Q1, they were still under pressure, can we expect the improvement in the second quarter or it's going to take a little bit longer?

Michael E. Roach

It's going to take a little bit longer. That's an ongoing task in terms of working on the variable costs. We have to maintain a very good balance between service levels in that business and cost containment. So that's going to take -- probably run through a good part of fiscal 2012.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay. And just to follow up on the bookings. Now, when I look back in 2010, your trailing 12 months booking to billing was at the current run rate. And I just wanted to ask, what's the difference? It seems like you guys are more optimistic right now that we'll see an inflection point on the revenue growth rate. We didn't see it last year when the trailing book-to-bill was above 1.22, which was about what it is right now. What gives you the confidence in terms of seeing that revenue growth inflection happening in the second half of this year?

Michael E. Roach

Well, I'm going to have to go back. I don't -- I wouldn't necessarily sure that we're running as high as 135% book-to-bill last year. But I'll check that, Maher. But I think the issue again last year, you were seeing the runoffs of those contracts. And I think we were still really getting our stride relative to the integration of Stanley, which is now behind us. We're starting to see some of that. Remember, as I said, when you do an integration, the first thing we focus on is the cost elements, the revenue piece of that normally follows 12 to 24 months. So some of the things that we put in relative to Stanley, the defense intel business, we're starting to see some of that lift.

Operator

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

Thanos Moschopoulos - BMO Capital Markets Canada

David, in the MD&A, you were guiding for a 27% to 37% tax rates. And in recent quarters, you've been coming at the lower end of that range. Just going forward, is there a factor that should drive the tax rate higher? Or might it be safe to assume that you'll continue to come in at the lower end of your guidance range?

R. David Anderson

The primary factors are the mix of where the profit happens to land. So if the U.S. is driving a little bit more in the way of revenue and we're able to maintain the margins or improve some of the margins there a little bit more, there's going to be actually more tactical profit there. And it actually is the highest tax jurisdiction that we have within the kind of the global environment. So that's why it ends up causing some of the shift and it’s why we have such a range that we do on that number.

Thanos Moschopoulos - BMO Capital Markets Canada

So I guess as you look at your bookings and backlog, is there a reason to expect that, that profitability mix might start to shift a little bit more towards the U.S. then?

R. David Anderson

Well, it should be following the bookings that Mike had talked about, so we would see that happen.

Thanos Moschopoulos - BMO Capital Markets Canada

Okay. And then on the DSOs, can you provide a little a bit more color on that dynamic, and when we might start to see the DSOs start to come down again?

R. David Anderson

Well, we've seen them come down a little bit already. With the large project that we have been able to announce, some of those come with, as a competitive requirement, certain types of payments milestones. So if you don't wish to accept the milestone, then you shouldn't be bidding it in the first place. It's very good revenue, it's good quality business. So we do wish to participate in that activity. So what we're looking to do there is to try to mitigate the buildup in the work-in-process until we are able to hit that milestone. And right now, we've got about 3 major projects that are sitting out there that have some balances of work within the next, I'd say over the next 2 quarters, we should see that reversing around.

Michael E. Roach

Okay. To reiterate David's point, this is good quality business. It's not revenue at risk here. It's a time-based milestone payment.

Thanos Moschopoulos - BMO Capital Markets Canada

Okay, perfect. Then finally, Mike, just as we look at the bookings, can you provide some color as the mix of SI&C versus outsourcing work in there or the average contract duration. I’m just trying to get my head around how that converts into revenue and whether there's anything that would either cause those bookings to translate to revenue more quickly or more slowly than in the past.

Michael E. Roach

Yes. The SI&C business is very healthy, and that's always a good lead sign in terms of outsourcing as well. We renewed a couple large outsourcing deals and extended them this quarter. We continue to have some visibility on some outsourcing deals that we consider promising. But I would say that what we're seeing is more activity and growth in the SI&C funnel at this time than the outsourcing. It's going to take a little longer to come onstream.

Operator

The next question is from Michael Urlocker from GMP Securities.

Michael Urlocker - GMP Securities L.P., Research Division

I'm looking at the trend on the margin in the U.S. business, and certainly part of the rationale for acquiring Stanley was there's an opportunity to improve margins there. And we've talked to a large number of your state and municipal government customers, and they like your software and they sound very stuck on using it. So I can see an opportunity to raise margins. Can you just help us understand, why margins haven't been improving in the U.S. and what there might be to do about that.

Michael E. Roach

Well, I think we are doing something about it. Again, Mike, I'd point out there's a mix – a significant mix difference here relative to Canada, so there’s not a comparable business, much heavier in the government. The government including Stanley and most of the government pure plays, if you look at it, there's a greater assurance on earnings per share than there is on absolute margin. I mean, most of these companies, I would tell you that our government business on a standalone basis, has got the best margins in the government space. We don't have the right mix totally in the U.S. yet. Our commercial business needs to grow more. We need more software on that business in terms of mix, we're addressing that. We have got the accretion rate out of the Stanley acquisition that we promised investors. So it's a combination of things relative to Stanley. As I said, we've now converted a contract where we were a sub to where we're a prime. We let a low-margin business that would be below our thresholds run off. So we're doing the right thing there. And we did see -- when you exclude the onetime items, we did see a pop, I think, from about 8.9% to 9.8% in terms of margins in the U.S. The other thing is remember, they carry about 2% amortization of intangibles in the U.S. that are not elsewhere relative to the AMS Stanley acquisitions.

Michael Urlocker - GMP Securities L.P., Research Division

All right. Can you just elaborate on the point you said about where you had an opportunity to move up to become the prime contractor? What's the dynamic that allows you to do that with the end customer and roughly speaking, what's the spread on margins achievable?

Michael E. Roach

Well, again, I won't get into the specifics of the margin spreads. But again, what that’s demonstrating to me is that when I combine Stanley with our existing federal business, the really, roots of which were with AMS, our scale now is larger. And therefore, when we're approaching renewals or rebids, we're going in there more in a prime role than a sub role in some cases. We shall continue to partner, value partnerships that we have out there. But in those cases, we have more room in the sense that we may be marking up a partner instead of a partner marking us up.

Operator

The next question is from Ralph Garcea from Northland Capital.

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

As you see some of these cloud wins within Homeland Security, GSA, et cetera, what's the opportunity there to sort of increase the scope of those contracts over time, so it's not just a cost savings initiative on the client side but you're actually growing some of that business?

Michael E. Roach

Yes. That's a good question, Ralph. In fact, that's exactly what's happening. In a lot of these cases, we're putting up on the cloud, not services that we currently have. We're actually breaking into new business, where the client may have an initial goal of 1 or 2 websites, they're going to put up in the cloud but may have 400 to 500 more downstream that would be put up over time. So we think these are very good lead indicators of future growth opportunities. Not only on the federal side but again, this does help us address part of our issue on the data center side, where it will start putting more volume into our U.S. data center, therefore, giving us a better balance between the fixed and variable costs associated with running that operation. And again, I’d point out, we've also put our own services, we're moving more of our IP onto the cloud. Advantage is an example, we were primarily selling that to the larger jurisdictions, the New York Cities, the L.A. counties, West Virginia and there's a down market -- downsized market. I don't want to use that term because they're all very valuable clients. But a smaller segment of the market that still is equal to $1 billion of opportunities, where we couldn't really reach them given the size and the scale of that ERP software. But by putting it on the cloud, we believe that we can go into that market and compete with the Lawsons and such competitors and pick up some of that market as well, leveraging cloud and leveraging our IP.

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

And then, I mean, as you look to sort of the nearshore model in the U.S. I mean, you're in Belton now, Troy and Fairfax, are there other opportunities as you win more state business across the U.S. to grow that nearshore leverage?

Michael E. Roach

Yes, I think so. I mean, we're constantly in search for sites. We've got 3 good ones. We've opened up one also or are about to open one, more associated with the military business that we have. So these sites are good for the client, they're good for our shareholders, they're good for our people in terms of the quality of the service we provide, the quality of the earnings and the quality of life. So they're a win-win. And I think you'll see us continue to expand that. We don't have a problem filling up demand in those centers.

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

Okay. And then just lastly, if you look at your outsourcing funnel, I mean, what's the split between U.S. and Canada on the outsourcing side?

Michael E. Roach

It's probably 60-40. I could check that but I would say it's at least 60-40 in the U.S. We made a couple of large renewals in Canada, that obviously come out of the funnel because they've been renewed including the large one with the National Bank. So again, we're pushing hard to increase the outsourcing business in the U.S. It goes to the part of the question that, I think, Mike asked about U.S. margins. We need to get some more recurring revenue streams in the commercial side in the U.S.

Operator

The last question is from Stephanie Price from CIBC.

Stephanie Price - CIBC World Markets Inc., Research Division

Mike, you mentioned several times, Stanley revenue synergies during the call. Could you talk a bit more about the pipeline that you're seeing there and when you think it's going to convert into bookings and revenue?

Michael E. Roach

Well, I think, Stephanie, it's already converting. That's the message. I think if I look to book-to-bill in the government, it's running well over the average of the company and over the U.S. bookings. So the integrated team are doing just an excellent job, they're working well together. Customers are seeing those synergies. We're taking share. Those bookings are not just renewals, we're actually taking share, which is exactly where we want to be. We're winning more business with our existing clients. We've opened up new clients like the Department of Labor, which is a new client for us. We weren't in there before, but we're in there now. So we're seeing those synergies pay off. I would think cyber security is also another area, where we're not only expanding our footprint in the U.S., we're also bringing that into the commercial sector and into Canada, as an example. So we're -- as I say, we're certainly pleased with not only the accretion rate but the talent, the commitment that the people that we got from this -- from the acquisition and the top line synergies are starting to play out, as we had predicted that it would be 12 to 24 months. So there's still more of that ahead of us, but we like what we see.

Stephanie Price - CIBC World Markets Inc., Research Division

Great. And in terms of Canadian operations. Obviously, it’s going to be impacted by the decision of CIA. But can you talk a bit more about the overall market and what the major growth opportunities are that you're seeing right now?

Michael E. Roach

Yes. It's a good question and thank you for it, Stephanie. The U.S -- the Canadian market is a very strong positioning for us. Western Canada, we're flat-out out there. There's a lot of growth in Western Canada. We're hiring aggressively in Edmonton for healthcare contracts. We're doing a lot of work in Calgary, around the oil and gas business. So the Western Canada is strong, Regina, Saskatchewan is strong. Québec, our Québec business is growing organically year-over-year here. We're seeing a lot more opportunities that surface in the Montréal, Québec City corridor. GTA, a big, big market for us. We continue to make headway there. We see more opportunities to grow in Toronto. So if I had to highlight the 3 major ones, those are what's foremost. I think ones that are a little more trailing because, again, we're making the investment, we'll get the benefit later on as I mentioned. Our funnel in our Ottawa government business has got a nice mix change now, where we're seeing a lot more opportunities in the defense intel space, where we've entered just this past year. So the funnel is starting to build and we'll see how successful we are there. But the rewards and the awards should be on the back end of the year, as these bids move through the various approval stages. So those are the major areas in Canada that, I think, where we're seeing growth and some good opportunities.

Stephanie Price - CIBC World Markets Inc., Research Division

Great. I just have one final question. In terms of Europe, obviously, revenue and profitability is up nicely. Do you see yourself investing more in that geography? Are you happy with sort of your current presence there?

Michael E. Roach

Well, again, I think I'm not unhappy with our current exposure to Europe. I'm pleased with the results there. I think unlike a lot of companies over there, we're seeing some returns on the investments we made on the restructuring, I don't see the need to do any major restructuring in Europe. When I look at the balance of the fiscal year, the pipeline looks strong, the wins look very favorably. As far as an acquisition, we continue to look across our segments for opportunities to grow. As David mentioned and I reinforced, we're generating a significant amount of cash here, north of $600 million a year. We've got our line of credit in place, we've got our long-term debt secured, we're buying back shares and paying down debt. So we have the -- and by the way investing, I would say, heavily into our organic business as I mentioned, relative to GIS and our solutions. So we're well positioned here. If we see something that meets the criteria of the right target, the right price and the right time, we're quite willing to pull the trigger. Our valuation relative to some of these targets are extremely strong, and so we continue to look. I would certainly view Europe as a good long-term market and somewhere where we, over time, would continue to look to build out our business.

Lorne Gorber

Thank you, Stephanie, and thank you, everyone, for listening. Hopefully, you can tune in to our AGM at 11 a.m. this morning. And we'll see you back here for our Q2 results in late April. Thank you.

Operator

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

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