CGI Group's (GIB) CEO Michael Roach on Q1 2016 Results - Earnings Call Transcript

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CGI Group Inc. (NYSE:GIB)

Q1 2016 Earnings Conference Call

January 27, 2016 09:00 AM ET

Executives

Lorne Gorber - EVP, Global Communications and IR

Michael Roach - President and CEO

François Boulanger - EVP and CFO

Analysts

Steven Li - Raymond James

Thanos Moschopoulos - BMO Capital Markets

Mayer Yaghi - Desjardins Capital Management

Kris Thompson - National Bank

Jason Kupferberg - Jefferies

Richard Tse - Cormark Securities

Jim Schneider - Goldman Sachs

Stephanie Price - CIBC

Paul Treiber - RBC Capital Markets

Paul Steep - Scotia Capital

Operator

Good morning, ladies and gentlemen. Welcome to the CGI First Quarter 2016 Conference Call.

I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President, Global Communications and Investor Relations. Please go ahead, Mr. Gorber.

Lorne Gorber

Thank you, Melanie, and good morning, everyone. With me to discuss CGI's first quarter fiscal 2016 results are Michael Roach, our President and CEO; and François Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 A.M. on Wednesday, January 27, 2016.

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 as well as on cgi.com and we encourage our investors to read it in its entirety.

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

As many of you know, we’re hosting our AGM this morning, so we’ll keep our scripted comments brief, take as many questions as we can and try and wrap the call in about 45 minutes.

So I'll turn it over to François first to review our Q1 financials, and then Mike will comment on both strategic and operational highlights.

So with that, François?

François Boulanger

Thank you, Lorne and good morning, everyone. I’m pleased to share our results for Q1 fiscal 2016. Revenue was CAD2.7 billion, up CAD142 million compared with the same period last year and representing growth of 5.6%. Foreign exchange fluctuations favorably impacted revenue by CAD187 million. Constant currency growth of minus 1.8% represents a significant improvement from the minus 6% we posted in the year-ago period. Book-to-bill was 119% was CAD3.2 billion in contracts awarded during the first quarter. As a reminder and for a better comparable, book-to-bill was 91% without the large Bell renewal in Q1 of last year. For the last 12 months, book-to-bill is running at 101%. Adjusted EBIT was CAD384 million, up 12% while EBIT margin increased by 80 basis points to 14.3%. During the quarter, we completed the restructuring program announced in July. In Q1, CAD29 million was expensed to complete the program for a total of CAD65 million in line with expectations. The benefits will continue contributing to double-digit EPS growth throughout fiscal 2016.

For the quarter, the effective tax rate increased to 29% from 26% a year ago. This increase was mainly due to our one-time unfavorable tax adjustment of CAD5.9 million related to our UK tax rate change that we mentioned on our last call. Further details are outlined in the MD&A. Based on our current business mix and the continued earnings trends in our US operations, we expect our fiscal 2016 effective tax rate to be in the 26% to 28% range. Net earnings excluding these two specific items were CAD265 million, up 12% from last year, while the net margins increased by 60 basis points to 9.9%. EPS was CAD0.84 per diluted share compared with CAD0.74 last year representing an increase of 13.5%. On a GAAP basis, net earnings were CAD238 million or CAD0.75.

Turning to cash, our operations generated CAD328 million in the first quarter or 12.2% of revenue. Other results; cash from operations for the last 12 months is CAD1.3 billion. We ended the quarter with a DSO of 44 days, below our 45 day target. In the quarter, we invested CAD9 million to repurchase 193,000 shares on an average price of CAD47.44. As of December 31, under the current Normal Course Issuer Bid, we invested CAD342 million to repurchase 7.1 million shares. We continue to view share repurchase as an accretive use of cash. As such, the Board of Directors approved today, the extension of our NCIB until February 3, 2017. This will give us the flexibility to purchase approximately 21.4 million shares over the next 12 months. At today's price that would represent an investment of more than CAD1 billion.

Net debt at the end of Q1 was CAD1.6 billion or CAD351 million lower than last year. As a result, the net debt to capitalization ratio improved to 18% from 25% last year. Subsequent to the end of Q1, we repaid the remaining CAD130 million of the May 2016 term loan in advance and without penalty. With our revolving credit facility fully accessible and over CAD550 million in cash, we have more than CAD2 billion in readily available liquidity and access to more as needed.

Now, I’ll turn the call over to Mike.

Michael Roach

Thank you François, good morning everyone. I'm very pleased with the strength of our first-quarter results; we are off to a great start. We delivered revenue momentum, quality bookings, strong margins and cash generation in addition to record earnings and double-digit EPS expansion. As you are aware, over the past three years, we've been executing a strategy designed to run off non-core low margin businesses while exiting geographies that are not in strategy, while gradually adding higher quality revenue aligned to those capabilities that our client value the most. Our performance this quarter is a further demonstration of the benefits of this strategy.

Strong bookings of CAD3.2 billion were well distributed with all regions exceeding 100% book-to-bill in the first quarter. Perhaps more importantly, 58% of these bookings were new business with particular strength in the financial services globally. Demand for digital transformation services, fiber security, analytics and high end consulting were all strong components of contracts booked. In addition, transformational managed service opportunities continue moving through the pipeline and gaining momentum in the current environment.

We continue to see global businesses consolidate thousands of IT partners to a few, in some cases five or six most capable of delivering to their global needs. During the quarter, we were awarded framework agreements by a manufacturer and a financial services client both headquartered in Europe. While not an immediate booking, these awards position us for significant growth opportunities in the future and are another proof point that we are now recognized as a qualified partner by our global clients.

Turning to revenue, over the past 12 months revenue has steadily improved and is now approaching positive growth in constant currency. In fact several large segments delivered year-over-year constant currency growth in the quarter. Specially, France, revenue up 3%, EBIT margin up 60 basis points to 13.2% with a book-to-bill of 109%. New contract bookings are meeting our profitability standards and the duration of these engagements is becoming more long term, reaching even 10 years in some instances, gradually creating a recurring revenue stream.

In the UK, revenue up 4%, EBIT margin up 100 basis points to 12.3% with a book-to-bill of 122%. We continue to win new business in the financial services and public sectors as the key drivers to this growth.

Canada, revenue growth was stable, but up significantly from minus 9% last year, EBIT margins at 21% with a book-to-bill of 146%. We are seeing continued strength in the banking sector as well as oil and gas, both of which have been a focus area of investment over the past year. With an expanding pipeline, we expect further revenue momentum demonstrating that substantial growth opportunities remain in the Canadian market.

Asia Pacific, revenue up 9%, EBIT margin 16% with a book-to-bill of 142%. The strength of this segment is largely the result of increased utilization of our global delivery centers to win new business. In addition, we continue to move portions of our existing client business offshore which improves operating margins but results in a temporary headwind to a number of our business units, most notably the Nordics and to a less degree Eastern, Central and Southern Europe.

In the Nordics, revenue was down 3.7%, EBIT margin was up an impressive 230 basis points to 11.2% with a book-to-bill of – up to 11.2% with a book-to-bill of 102%. Our funnel of opportunities across the Nordics remains healthy, particularly in Sweden and Finland, our largest operating entity.

Eastern, Central and Southern Europe, revenue was down 4.8%, EBIT margin was up 70 basis points to 11% with a book-to-bill of 106%. Our German operation has moved to positive year-over-year growth with strength in its top-10 accounts supported by strong bookings and a healthy pipeline of opportunities. Our Netherlands operation, while meeting our profitability targets, remains challenged on the top line, due in part to the shift of more work to global delivery centers by major marquee accounts. We also continued to exit the remaining countries in South America and moving towards a single operation in Brazil.

Revenue in the US was down 7%, EBIT margin up 80 basis points to 15.3%, a very strong book-to-bill of 123%. We view the top line pressure in the quarter as a transitional event related to the ramp down and conclusion of a number of very large successful system integration engagements. Specifically, the Advantage engagement in California and Colorado are nearing completion. Additional IP sales in the state and local markets should more than offset this impact throughout the balance of the year.

In California, the highly successful Enterprise Data to Revenue or EDR project is ramping down, impacting our quarter one revenue by approximately CAD20 million year-over-year. Our ability to collect more than CAD2.5 billion for California over the past few years has attracted interests of other jurisdictions who are exploring similar projects.

Finally, in our federal government operations, we continue to experience industry-wide pressures on the topline. On an optimistic note, our civilian business remains strong with both year-over-year revenue growth and margin expansion. We expect positive revenue momentum as projects ramp up from the stronger new business bookings over the last couple of quarters.

The investments that we have originally made in bringing in additional expertise to meet current client demands in areas of digital transformation, analytics and cyber are driving pipeline growth across key industries in all geographies. Furthermore, our continued investments in automation and IP continue to drive improved outsourcing value proposition for our clients and margin expansion for CGI.

Before I wrap up, I would like to give you a brief update on our buy strategy, I’m sure we will talk a little bit more about it in the questions. We continue to work through our initial funnel of customer identified 85 targets and have identified an additional 5,000 companies, as possible targets both private and public with a combined revenue of US$200 billion across our existing geographies. We are currently in the qualification process to ensure they are in line with our strategy while we continue to engage with potential sellers at various stages of the buy cycle. Finally, we remain on track to double – to deliver double-digit EPS growth in this fiscal year.

Thank you for your continued interest and support. Let’s go to the questions line.

Lorne Gorber

Just beforehand a reminder, a replay of the call available either via our website or at 1-800-408-3053 and using the pass code 3471339 until February 27.

So Melanie, if we could poll for questions from the investment community. I’d ask to keep the questions brief and limit them to one so we can take as many as possible.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Steven Li of Raymond James. Please go ahead.

Steven Li

Thank you. Mike, it seems like you’re turning your corner in the US. The 1.3 book-to-bill, was every segment commercial, state and local and federal greater than 1?

Michael Roach

No, the federal was just under 1, but is our highest book-to-bill in a number of quarters, so we are seeing some momentum in the federal business as well on the booking side. Again, more prominent on the civilian side. Although the pipeline of opportunities on the military side is expanding rapidly.

Steven Li

And when we think of the market dynamics down there, can you talk about maybe which segments do you like to see the most improvement in 2016?

Michael Roach

I think, I can speak to not only US, but I would say, globally the financial institutions are really embracing the whole digital environment. There is a lot of ramp up there around the world in the financial institutions in terms of developing the digital strategy, picking the partner to help them implement it. On the other hand, they are also looking to cut costs feeling the pressure from increased investment in cyber and also regulatory pressures. And we’re on both sides of that in terms of an offering and a solution, and you’re seeing that strength in the UK, you’re seeing it in France, and in Canada and US, just to mention four big geographies.

Steven Li

Great. And Mike, you gave a metric, 58% of the bookings were new business. Would you have an average for this metric for the last year 2015?

Michael Roach

Franc?

François Boulanger

I don’t have it in front of me, maybe the guys can take a look at that Steven and give it to you after the call.

Michael Roach

We’ll come back to you on that.

Steven Li

All right. Great thanks.

Michael Roach

Thanks, Steven.

Operator

Thank you. The following question is from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.

Thanos Moschopoulos

Hi, good morning. Mike, as you highlighted, the Canadian business was stable year-over-year, which is certainly very encouraging to see. You alluded to it in your prepared remarks, but could you drill a bit more in terms of the dynamics you’re seeing there and what your near-term outlook would be for the Canadian business going forward?

Michael Roach

Sure. First, let me take the opportunity to congratulate the Canadian team, that's a big swing from -9 to even. Again, we’re seeing shrinks, as I mentioned, in the financial institutions as you know, Steven, a year or so ago, we opted to split our Toronto operation, so that we would have a focus on the banks. I think our timing was good, they are ramping up, and we’re ramping up with them. So we're working -- on the financial institution, we expect strong double-digit growth in the banks in Canada.

The other area was in oil and gas. I think you know the dynamics of that industry. We are helping clients manage the cost pressures in a dropping oil price environment. On the other side, if you look at it as I mentioned last quarter, the bit of the temporary downdraft that the Canadian guys are working with, we're running off from low margin contracts and using computing and we’re restructuring as we go there and accordingly you've seen that the margins in Canada now are again over 20%.

So we’re delivering on the margins. The growth is heading in the right direction. The pipeline and bookings are strong. So I think we are in good position there to continue to move forward and again I would take the opportunity, it's not quarter-by-quarter here, it's the overall year, where these kind of initiatives are going to take an impact as we grow. But I think my message is, I’ve put in the script and I’ve said that over the last number of years, you’ll thing there is some good growth opportunities for CGI in Canada.

Thanos Moschopoulos

Great. Thanks, Mike. I'll pass the line.

Operator

Thank you. The following question is from Mayer Yaghi of Desjardins Capital Management. Please go ahead.

Mayer Yaghi

Yes. Thank you for taking my question. And just wanted to say a good job on the quarter. We are definitely starting to see improvement in the constant currency growth rates. Can you maybe talk a little bit about your outlook? Previously, Mike, you talked about achieving -- getting back to organic growth in sometime in 2016, how confident or more confident or less confident are you in achieving that?

And my second question, just a follow-up question, in terms of cash, I mean, the company is producing a lot of cash, can you talk a little bit about -- you’re in an enviable position here with low debt rate and can you talk about use of cash and how you prioritize? Again, I mean this question comes back all the time, but it's important here to know what you're going to do with all those cash coming in.

Michael Roach

The good thing about the question coming all the time is that the answer is also very consistent. That hopefully gives us all some comfort. If you look at what our plan and I outlined this before for 2016, was to continue to drive double-digit EPS growth. We saw in the first quarter, we delivered 13.5%. I think I also said that its EPS growth will come from basically two large levers, continuing the operational excellence, looking at pulling more levers in terms of improving productivity and I call one out in Nordics and a few other geographies where we’re using our global delivery centers more to bring down our costs and increase our competitive position, but also increase our margins.

So we still believe we have a lot of opportunity to contribute to that double-digit growth from continuing to run the business more effectively. On the other hand, I said that we realize that we do need to start contributing to the EPS strength through earnings coming from profitable on strategy revenue. Therefore, the supplying back will be gradual because we want to make sure that we’re not bringing on revenue that is not profitable and not on strategy. And just to give you a proof point on that. I’m showing this at the AGM, I’m showing a little chat between fiscal ‘13 and ’15. If you look at the revenue with the company was essentially flat or down more likely but over that three-year period, our earnings increased by 114% or over CAD500 million and cash from operations increased by 92% or more than CAD600 million.

So I think the strategy is right, the execution of it has to be managed in such a way as I say that every dollar of revenue that we add is on strategy, it’s higher off the value chain and it's delivering the kind of margins and cash that our investors rightly expect. So, we’re still of the belief that we will deliver double-digit EPS growth and that we’ll start to see contribution coming from revenue in the fiscal ‘16 year. Use of cash, I guess the only thing really highlight there is you know the most accretive cash, use of cash is to reinvest it back in our company and certainly we’re doing that. When you look at those levers I mentioned in terms of role, ensuring that we are bringing on the people with the skill to help them to digitization as a step up to the strategy work that the financial institutions and other companies are looking at.

The second area would be in accretive acquisition. We continue to as I mentioned before be an aggressive and disciplined player in that space. And after that it's paying down debt or buying back shares on the debt side. As François mentioned post quarter we paid out the last bit of debt associated with our line of credit, for everything else now was long-term debt and it’s parceled out over a number of years or probably next eight years or so, 2024. So we don't have any immediate debt pressures and as you said, we are generating significant amount of cash.

So, the last one of course is the share buyback, I mentioned two calls ago that we believe our shares are undervalued, so we have been buying. We bought some last quarter and we've been buying them this quarter and we think they’re an excellent opportunity for us to acquire our own shares and it’s very accretive. So that's you know you should look for us to invest in the business. We have the cash as I mentioned before do to a series of niche acquisitions or transformational deals and also buyback our stock.

Lorne Gorber

Thank you. We’ll go to the next question.

Operator

Thank you. The following question is from Kris Thompson of National Bank. Please go ahead.

Kris Thompson

Great, thanks Mike. The new business bookings were 58% of your total bookings in the quarter as were systems integration and consulting. I'm just wondering, I mean this is very high compared to past performance, should we expect this next to remain similar over the near term and how do we think about capping your EBIT margin if that mix does stay that high?

Michael Roach

Well, first off, a lot of that is coming from that very phenomenon that we’re seeing in trend on digitization. As I’d say customers are ramping up there, so you're going to see more systems integration projects and strategy projects associated with that. Now, on the other hand, our goal is also to take on long-term engagements both related to IP and also managed services. I can tell you as I said earlier, if you look at a lot of our clients are feeling the pressure of the cost of operating and running their existing infrastructure and they need to find funds to invest in the digital world.

So we intend and are playing on both sides of that Kris, so we are working on managed services deals, transformational managed services deals that allow our customer to get there. By the nature, systems integration contract businesses not necessarily capping your EBIT, the turf there is to make sure you don't have a lot of utilization pressures between a project and as you saw, if you look at some of the big ones that we have in United States, we already have a SI&C project that goes three years or longer, you don't have much downtime, it's very much like an outsourcing contract, but without the minimums and some of other terms and additions. So in the short term, as those go on, I believe it will move the top line and the bottom line in various geographies. So I am not really concerned about that.

Kris Thompson

That’s great. If I could just follow up, Mike, on the organic revenue initiatives, would you say with these projects you're working on, are you focusing more on numerous smaller wins in renewals at existing customers or on larger long-term outsourcing contracts? Thanks.

Michael Roach

That’s good question. So Kris, what we’re doing on the embedded base as is our tradition, we will preempt the run off of the termination of the contract and we are trying to extend it ahead of time especially if it’s in our sweet spot, on strategy, high value that customers are looking for now and in the future. On the other side, when we see a contract that’s lower end and maybe has even been commoditized, in some cases it could be a hardware supplier who decided to wrap portions of end using computing with his hardware offerings, margins get squeezed there. It’s not seen as high value by the customer. So in those cases we would actually let those contracts lapse, causing a short term pressure, as I mentioned example in Canada.

But again very similar with our philosophy that we used for Logica. The idea here is not be in a situation where the company has to do a massive shift because they haven’t been doing this as opportunities present themselves. In other words, it hasn’t been embedded in their strategy. It’s always been embedded in our strategy, that’s why our margins are consistently growing our EPS and our cash. So that’s the dynamics that we would see. So, we obviously start with protecting our base. No one ever won a war by giving up the home turf, so we protect our base with an eye at growing within those accounts and then of course attracting new accounts that can bring on additional business in line with the strategy.

Kris Thompson

Thank you.

Michael Roach

Thanks, Chris.

Operator

Thank you. The following question is from Jason Kupferberg of Jefferies. Please go ahead.

Jason Kupferberg

Good morning, guys. Just wanted to ask as a follow-up on M&A. Obviously the way the market in general is looking at leverage has changed quite a bit in the last few months. So I know you always are open to potential transformational acquisitions, but given the current market backdrop, are you thinking any differently about where you would be comfortable kind of maxing out your leverage ratios?

Michael Roach

No, as I said before, Jason, we don’t really start with that. We started with more of the strategic operational fit, does it align with what the customers are buying and then we work back from there. So as I mentioned before even with Logica we never leveraged up to the maximum available to the company and when you are generating the kind of cash numbers, we have no problem raising additional capital should the right deal come our way. So, no, we would definitely look at a transformational deal if we found one that met that criteria. There are some that are floating out there that on the surface don’t appear to be necessarily on our strategy. They are more heavily weighted to the infrastructure side. And I think in some of those cases you can actually see that transformation going on. Within their infrastructure revenue stream it’s running off fairly rapidly.

So we are doing both, we continue to look at other opportunities. As I said, we did some, I think we work to identify - frankly there is 5,000 companies that are in our business, some of them fairly large, a lot of them are at prices that don’t normally come up from the investment banking community. So we are actively looking in there and again, it looks like it’s a pretty broad portfolio that would help us at least at a strategic level advance the growth scenarios.

Jason Kupferberg

Just a quick follow up. I know you mentioned two large global framework agreements over in Europe, so congrats on those. I mean any thoughts on just revenue potential and is this potentially a fiscal '17 kind of event when it becomes needle moving. I realize you’re going to have to win some individual engagements underneath the MSA here, but how are you thinking about converting this pipeline to bookings?

Michael Roach

Again, thank you for calling that out. I think that is important because I think one of the true points that clients and investors were looking at, are we truly a global player and a shootout where you’re up against hundreds of providers to land in the final 5 and 6 is very, very key. It’s very much like our federal government business, gives us a hunting license to be there, also allows us Jason to be much more focused on what we chase within the account because again – and these are big accounts, build into the dollars of IT spend. We can be very selective, go to our strengths and stay on strategy.

So I would say again, we are going to start seeing more opportunities now, probably in the back end with most of the revenue impact probably hitting in 2017. In terms of how fast they bring it out, a lot of these firms as well Jason are using a lot of freelancers, sub-contractors and I was just talking to a CEO last night and they are starting to realize that this is not good for their business. Most of these guys are mercenaries, they are paid higher than their own employees and knowledge across the street for CAD0.50 more an hour. So a lot of these large companies are also attempting to do something about these freelancers and that could be an area that will allow us to increase revenue faster as we replace them with our own employees.

Jason Kupferberg

Okay. Thank you for the comments.

Operator

Thank you. The following question is from Richard Tse of Cormark Securities. Please go ahead.

Richard Tse

Thanks, Mike. You guys had a pretty strong bookings quarter here, I was just kind of wondering if you could maybe elaborate a little bit or attribute it to whether it’s a strong market backdrop, if there is something you guys are doing from a product perspective or maybe a change in management structure?

Michael Roach

I don’t think we made a big change in management structure. Probably the most pronounced one was really the Nordics where we now have a President located in the Nordics, which is aligned to our overall strategy. I think what’s happening here is, there are drivers in the IT industry, a lot of times, they are not as pronounced, I think that’s been one of the issues in the tech industry. Post Y2K, we are always looking for a silver bullet on the technology side. Here I think the whole move to digitization, the digital world is driving a strong ramp up here in demand. In a lot of cases, the companies themselves don’t have those skills within their company. Most of their skills are attached to the current foundation or legacy environment. So as I said, they are dealing with trying to bring those costs down and also come up with a human capital strategy, not only to build and execute the strategy, but how to maintain it going forward and how much of that skill should reside within their company, how much should reside with companies like ours.

So that’s pretty broad-based I would say around the globe. Again, the financial institutions, while they are leaving that, I would tell you that very few of our segments are not talk about that. Government, it’s also very active. In government, they have got a lot of pressures, not only the normal one [Technical Difficulty] manage their financials, but their citizens are becoming much more demanding in terms of service. They are now making comparisons with other transactions they do with banks and other services firms and they see the inefficiencies and the opportunity for improvements in government as well.

So it’s pretty broad-based. I think as well as that our IP30 is starting to cut in as well, you can see that in some of the margins as well, I didn’t call out specifically, but it is helping our margins strengthen. So there is a number of factors like that, but pretty broad-based in terms of folks talking about digitization.

Also cyber, it’s a moving piece. It’s all about coming up with one step ahead of the cyber-attack or building greater defense internally. One of the areas that we are looking at, and you saw that, we are very fortunate to bring on a new Head of Cyber Security in globally with Stan Sims, and again, one of the areas that we're looking at is the ability to help our customers with insider threats. I think it was Stan or somebody who said behind every cyber-attack is a heartbeat, and some of the more pronounced cyber-attacks have actually originated within the business and not externally. So those type of things are now being more institutionalized in our customers’ business and accordingly we’re seeing the demand.

Richard Tse

What about the competitive environment, a number of your competitors are going through some notable changes here. Has that created an opportunity and how is that dynamic changing over the past 6 or 12 months?

Michael Roach

Yeah. Every time a competitor has to spend more time focused internally, it creates an opportunity for us to strengthen our relationships with our clients. And again, as I said many times, I never thought that one of my sales features would be when I shake hands with a customer, we’ll still be around in 10 years to deliver on the promise that we’re making today. Not a lot of competitors, I think, can say that with the same conviction that we do and therefore that's also being recognized by companies.

And I think even when you look at the kind of a pickup for a global partner, when you are whittling down from hundreds of firms, that is a criteria to make sure that the guy you are going to dance with is one of your five or six partners is committed to the business and committed to the customer's business, be it a manufacturer, government or a financial institution. We meet that criteria, we don't have anybody doubting our sincerity and our commitment to staying in the business and to continue to deliver value and positive outcomes for our clients.

Richard Tse

Okay. And just one last quick one here, does the strength of the US dollar in anyway soften your appetite for acquisitions here?

Michael Roach

No. I think if you look, when we bought IMRglobal, the currency was pretty ugly. I think we’re just in -- so I think it was 145 -- 153. So, I think again, we always take a long-term, we are not in the currency business, we’re in the information technology business. So as long as it meets our criteria, we are prepared to move on it. If I look back at IMRglobal, had we been stringent on the currency, we would never have ended up with our Indian operation, which today continues to be a very strong component of our offering.

Richard Tse

That's great. Thanks, Mike.

Michael Roach

Thanks, Richard.

Operator

Thank you. The following question is from Jim Schneider of Goldman Sachs. Please go ahead.

Jim Schneider

Good morning. Thanks for taking my question. Mike, earlier you commented that financial scenario where you’re seeing increasing opportunities, at some point, many of your competitors have talked about kind of banks and financial institutions more broadly, pulling back on discretionary spending. So can you maybe talk about what's different for you versus them? Is it the kind of work that you are engaging, which is the type of bank that you are engaging with or anything else you can point out?

Michael Roach

I think what they’re maybe trying to say is that if I go back to the kind of challenge that the financial institutions are facing is that the way their systems were built, they were built in silos. Their go-to market approach today is much more integrated, they’re trying to get there, but their back-office systems do not support that.

The second thing is not a lot of them are real-time, so you kind of got a simulation when the customer goes on with their mobile device. The actual systems do not deliver at the speed or the security that customers expect.

So, and the second thing in some cases, you see when they say discretionary, cyber is no longer discretionary, so that's becoming a cost of doing business. The regulatory changes are not discretionary, so I think some of it is actually the terminology that they are using what has become discretionary mandate and mandatory has shifted. On our side as I said, our capability in our routes are very much on both sides of that opportunity or challenge. We are known as a company who can execute very, very well on outsourcing contract, bring down the cost, increase the service and manage the risk. On the other side, as I say, we are well positioned on the growth areas in digitization, agile development and other levers like that. So, this is good fight for us, it’s not going to turn overnight but I like the momentum that we are seeing in the market now that really hasn't been there for probably last five or six years.

Jim Schneider

That's helpful, thanks. And then maybe as a follow-up, regarding headcount, post the restructuring actions you’ve taken, is this the trough quarter from headcount and should we expect headcount to kind of grind slowly upward from here and then from a regional basis, where are the areas we expect to add or shed headcount, is it kind of directionally up in the US, down in Europe and up in the offshore locations, or how should we think about that piece?

Michael Roach

Well, I’ll try to give a kind of forward answer. In the Central Europe of course, you'll see the run-off, convenient run-off with the headcount in South America and those countries that we’re exiting that would not be totally visible yet. We did a restructuring that's complete that was also a downward pressure on the headcount. On the upside, when you see revenue growing in France, it’s a time and material business again, so the headcount will fall back. In the United States and in Canada, as we ramp up the revenue and we’re working on that SI&C type of business, and we can turn a couple of outsourcing deals we end up bumping up the headcount there. I would expect the Indian headcount to go up as well.

So you got those headwinds and tailwinds Again, what we are very diligent on, a dropping headcount with a solid revenue base means we’re being more efficient than more productive in general terms. So we kept an eye on that. On the other hand, the headcount growth we want to make sure it’s associated with the type of higher value work that I've been outlining for the last number of years and on the call today. So, generally, as we return to organic growth, we’ll see both push and pull in there, net-net I would expect a headcount decline.

Jim Schneider

Thank you.

Michael Roach

You are welcome.

Lorne Gorber

Thanks Jim.

Operator

Thank you. The following question is from Stephanie Price of CIBC. Please go ahead.

Stephanie Price

You mentioned in your prepared remarks that the acquisition is now about 5000 companies. This is up obviously from the 85 companies that clients identified. Can you talk a bit about what you're seeing in the acquisition environment and whether those initially 85 companies have now been fully vetted?

Michael Roach

I thing on the 85, we’re whittling it down. We've actually done some face-to-face meetings even some very preliminary due diligence on a number of targets and we decided not to proceed based on further analysis. We decided to expand the list Stephanie because when we started to look at this very closely, we wanted to target more to specific areas, so for example, the United States commercial, the UK commercial, any acquisitions that would help us capture a bigger share of the ramp up going on in the financial institutions as an example.

So even though it's a larger pipeline, we’re still using a rifle [ph] here in terms of trying to identify those targets that would actually move us forward in the most strategic areas. It's a long process, so I have to tell you Stephanie, it takes us much time in some cases in an effort to qualify a small transaction as it does a transformational one, especially if the companies’ private takes a little more work to take a look at financials and really understand how they operate. So it's a work in progress, we will pick up in the journey here as smaller niche acquisitions that are on strategy while we keep an eye out for something that would move the needle much more significantly. I don’t have a view on that larger ones quite yet.

Stephanie Price

Okay, great. And then you cited IP30 as part of the organic growth trend here. Few quarters ago you mentioned a CAD10 billion sales funnel. You’ve talked about financial services and cyber, but maybe if you can give us an update on the areas that are seeing the fastest growth in that funnel?

Michael Roach

In that funnel, I would say certainly, we have a number – we mentioned the financials, I think in the financial sector, we have more, also utilities. As I mentioned before, we have IP here pre-Logica, but Logica has a lot of the experience and IP in the utility. As I mentioned, we are a major player in the smart metering in the UK. I think there are 70 million meters involved in that. There are other opportunities around the world in that area and we tend to want to pursue those.

Also the government ERP that we have, the advantage had momentum, while for the most part, they are in the United States. In the case of advantage, we continue to look for opportunities to take that into another country, UK, probably the mostly likely just given the market there in terms of big jurisdictions, outsourcing their [indiscernible] so that could be a potential target.

So I think we have a growing portfolio there, probably a good time for me to plug the Investor Day, as we will as part of that have a demo center that you can actually see and interact with our people on our IP and I invite you all to do that. I think frankly, you will be quite impressed with the sophistication and the depth of these solutions. They are mission-critical, really business accelerators to our clients.

So we are moving forward on that. As I said, it takes more time in some geographies to institutionalize the reflex to introduce this to customers. But our teams, well, they are very committed, they understand the value to the customer, they understand the value to their own businesses in terms of acquiring long-term revenue and relationships with customers around IP. So we still remain very optimistic around our opportunities and ability to execute through our IP30 strategy.

Stephanie Price

Great. Thank you.

Operator

The following question is from Paul Treiber of RBC Capital Markets. Please go ahead.

Paul Treiber

Thanks very much. You previously mentioned that a question comes up, if CGI is a global player. I was just hoping if you could speak to the thoughts and the gap that you have in the US commercial space relative to your other businesses? And then how much of a strategic priority, either organically or through acquisition it is to close that gap?

Michael Roach

So again, that’s a good question and I have been very transparent about that. If you look at our US commercial business, it is growing, has been growing right through the upturn in the US economy. The issue is that if you look at our mix in the US, half of our CAD3 billion is coming from the US federal government. Again, our team has done frankly a very good job of weathering that storm. Margins and cash continued to do well and we’ve been able to hold on to the very strategic clients that we have in there.

State and local is a little more volatile, but generally it’s also very positive. So the issue is we do not have enough commercial business in the US. I could also say, it is the same in the UK. We have got a very strong franchise and team on the ground in UK. But a lot of their work is Logica legacy stuff coming out of the government, which is good, and -- but they are now breaking inorganically into the financial institutions and in other sectors in the UK.

If you look at verticals, as I mentioned before, with Logica, we added a lot of depth on utility as an example, in United States prior to buying AMS. They sold their utility vertical to one of the Indian pure-plays. So we have business there, mostly in IP with a big marquee utility company in United States. Now, we are looking to grow into those accounts organically, but an acquisition in that place would accelerate our ability to really have an impact in the utility business.

So I think, if I look at the two biggest areas where we feel an acquisition would be - a transformational acquisition would be most impact that would be the United States commercial and UK commercial. Now, so don’t be surprised if you see an acquisition somewhere else because again in other areas we are looking to increase our depth and capability especially in the financial sector to gain bigger share of the opportunities that are there?

Paul Treiber

And then revenue related to buy strategy, how do you see your footprint in the US, how does that relate to the potential attractiveness as a software IP acquisition just in terms of the distribution in the US market?

Michael Roach

Yeah. I think again we have a metro model, so we are in a number of larger centers, mostly large centers in the United States. Again, under our metro model, when we look at acquisitions, we are looking to strengthen some of the ones we have that we are already in and we are also looking at the companies like CGI in the early days who had very strong local relationships and in cities we are not in and we would acquire them again with the mindset that the accelerating growth deepen our presence, but also coming to the point I think that you are making, every time we broaden our footprint, we strengthen our ability to pull through IP. That’s more, Paul, we’ve commented on the commercial side. On the government side, we are well covered where the decision-makers are at the state, local and federal levels. And then in the commercial side certainly where there is headquarters in the geography we are not in, the goal would be to build out that area so that we meet the customer needs both locally and globally and are able to pull through our IP.

Paul Treiber

Okay, thank you. I will pass the line.

Lorne Gorber

Yes. Thanks, Paul. Melanie, we are going to have time for one last question.

Operator

Certainly. The finally question is from Paul Steep of Scotia Capital. Please go ahead.

Paul Steep

Great. Thanks. One quick clarification if you’ve got it is, just the overall software mix from proprietary revenues, if we could grab that if you have it. Second one would be on your willingness to do niche tuck-unders, Mike, what would be required in terms of core areas that would force you to sort of put the management's time into smaller transactions? Obviously all your financial discipline is there, but I'm thinking what's the criteria that would drive you over the line to pick up a smaller deal? Thanks.

Michael Roach

I think on the first one and Lorne can valid it online. I think we are about 18% of our revenue now is coming from IP-based services and solutions and I always qualify that. It’s not an IP license alone, it includes the services and the outsourcing that it’s wrapped in, which is the overall strategy. To give you a good example of what I am talking about our niche, let’s take a very large financial institution. We could be generating revenue, have a long term relationship with a customer in an area like wealth management, while on the retail bank, in the same bank, we could have a very small or no position.

When we acquire somebody who – a company who has been working in the retail bank which has 10, 15 year relationships there, but has been capped by the customer in terms of the size of the deal or the volume of the work that it will give that company because of their size. So just common sense, if the company is generating CAD10 million revenue a year, and has 50 or 100 people or more, the bank is not about to award them a $100 million deal, wouldn’t get by the risk management and wouldn’t necessarily be aligned with their own procurement rules. So acquiring somebody like that allows us to step up to those larger deals and pull through the deeper more broader services that we have. That’s a good example of what I am talking about, Paul.

Paul Steep

Perfect, thanks guys.

Lorne Gorber

Thank you, Paul and thank you everyone for joining us this morning. Look forward to Q2 results that will be in April. Have a nice day. Hopefully you will join our AGM in one hour at 11 AM. Thanks.

Operator

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

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