CGI Group Inc. (NYSE: GIB; TSX: GIB.A), a leading provider of end-to-end information technology and business processing services, today reported unaudited results for its third quarter ended June 30, 2002. All figures are in Canadian dollars unless otherwise indicated.
Third Quarter Highlights
- Revenue of $553.4 million was 38.9% higher than the comparable period one year ago and 4.0% higher sequentially. Year-over-year organic growth was 9.0% in the third quarter.
- Net earnings of $36.5 million were 50.0% higher than last year’s third quarter comparable cash earnings. Net earnings per share increased to $0.10 from comparable cash net earnings per share of $0.08 in last year’s third quarter, notwithstanding a 31.0% increase in weighted average number of shares outstanding.
- The EBITDA margin improved to 14.4%; the EBIT margin improved to 11.3% and the net margin improved to 6.6%.
- Cash provided by operating activities totaled $69.8 million, compared with $101.9 million in the third quarter of fiscal 2001, and $28.6 million in the second quarter.
- The current backlog of signed contracts stands at $10.4 billion with a weighted average remaining contract term of 7.8 years.
- The current pipeline of bids for large outsourcing contracts being reviewed by potential clients remains robust at $5 billion.
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Note: In accordance with CICA recommendations, CGI stopped recording amortization of goodwill on October 1, 2001, rendering earnings before amortization of goodwill (cash net earnings) and net earnings equivalent starting FY02. Numbers reflect modified presentation based on EITF 01-9 of the Financial Accounting Standards Board. CDN$/ 1.56 =1 US$
“CGI achieved solid top and bottom line growth during the third quarter, despite a tough operating environment,” said Serge Godin, chairman and CEO. “Business was strong across all practices and across all verticals in Canada and the UK. Our leading position and the deep client partnerships that we have built over many years as our clients’ preferred IT services provider allowed us to secure a healthy combination of new contract wins, add-on projects, renewals and extensions.”
Mr. Godin added, “In the US and in France, the market for systems integration and consulting remains challenging. However, with a return to the SI&C business not expected before the second half of 2003 in these markets, we manage our situation very closely and expect a gradual increase in profitability, despite slow top line growth. Our IT and business process outsourcing contracts in the US are performing very well. Additionally, we have made steady inroads in growing our market presence. Contract bids and proposals we have initiated since the fall are progressing well and the elapsed time in signing new contracts in the US reflects the natural progression of CGI’s efforts to build a presence and brand as a full IT and business process outsourcer. With our focus on contracts between $20 million and $250 million per year, we still see a lot of interest and activity in IT and BPS outsourcing and remain optimistic about our prospects for growth.”
Preparation of Consolidated Financial Statements
In an ongoing review of new or more precise interpretation of various accounting pronouncements and to maintain its conservative accounting practices, CGI has made modifications or revisions to its financial statements and accompanying notes. As a result of these modifications or revisions, there was no impact on the net earnings or cash flow from operations of the Company.
Stock-based compensation and other stock-based payments
On April 1, 2002, the Company decided to early adopt the Canadian Institute of Chartered Accountants (“CICA”) Handbook section 3870 retroactively to October 1, 2001. The Company has chosen to use the new standard that requires pro forma disclosure relating to net earnings and earnings per share figures as if the fair value method of expensing options had been used. The Company's pro forma net earnings per share would have been reduced by $0.01 for the nine-month period ended June 30, 2002 on a weighted average share basis.
Amortization of incentives related to outsourcing contracts
During the three months ended June 30, 2002, CGI modified the presentation of the amortization related to incentives granted on outsourcing contracts based on EITF 01-9, “Accounting for consideration given by a vendor to a customer”, issued in January 2002 by the Financial Accounting Standards Board. The amortization is now presented as a reduction of revenue as opposed to being shown as amortization of contract costs and other long-term assets. This modification has no impact on net earnings of the Company. For comparative purposes, revenue for the three-month and nine-month periods ended June 30, 2001 was reduced by $5.6 million and $13.8 million respectively and amortization of contract costs has been reduced by the equivalent amount for both periods. For the three-month and nine-month periods ended June 30, 2002, revenue and amortization of contract costs were both reduced by $7.3 million and $22.8 million, respectively, or less than 1.4% of revenue. The current backlog reflects this change.
Accounts receivable and Deferred revenue
During the three months ended June 30, 2002, CGI changed the presentation related to Accounts receivable and Deferred revenue for the month-end advance billing on outsourcing contracts. Accordingly, Accounts receivable and Deferred revenue were both reduced by $43.8 million and $34.5 million as at June 30, 2002 and September 30, 2001 respectively to conform to the presentation adopted during the current quarter.
Goodwill and integration liability
Following a review of the interpretation of the accounting treatment for the integration liability related to business acquisitions, the Company revised its initial purchase price allocation of IMRglobal as of July 27, 2001. Original estimates for the effort and cost that would be required to integrate various support structures between IMRglobal and CGI were scaled back as a result of greater than expected synergies that existed. This revision resulted in a decrease of Goodwill of $17.0 million, a decrease of Accounts payable and accrued liabilities of $20.8 million and a decrease of Future income tax asset of $3.8 million for the period ended September 31, 2001.
Foreign currency translation adjustment
For the quarter ended December 31, 2001, CGI revised the calculation of the Foreign currency translation adjustment for the goodwill conversion of its self-sustained foreign subsidiaries in order to use the current exchange rate as opposed to the historical rate. This revision has been applied to the Currency translation adjustment for the year ended September 30, 2001 to be consistent with the method used as of December 31, 2001. This modification has no impact on net earnings of the Company. As such, Foreign currency translation adjustment and Goodwill were both increased by $21.2 million on the Consolidated Balance Sheet as at September 30, 2001.
Third Quarter Results
Third quarter results and all comparisons reflect the aforementioned modifications or revisions, which had no impact on the net earnings of the Company. Revenue for the third quarter ended June 30, 2002 increased 38.9% to $553.4 million, from $398.5 million in the same quarter last year, and was up 4.0% sequentially over second quarter revenue of $531.9 million. The year-over-year organic growth of 9.0% was driven by a combination of new client wins, renewals, and meaningful add-on projects from existing clients.
In the third quarter, revenue from long-term outsourcing contracts represented 71% of the Company’s total revenue, including 15% from business processing services, while project oriented consulting and systems integration work represented 29%. Geographically, contribution to revenue was similar to last quarter, with clients in Canada representing 74%; clients in the US representing 20%; and all other regions, 6%. Revenue from clients in the financial services sector remained strong, representing 41% of revenue; while telecom represented 26%; government, 16%; manufacturing, retail and distribution, 14%; utilities and services, 2%; and healthcare, 1%.
Earnings before Depreciation and amortization of fixed assets, and Amortization of contract costs and other long-term assets, Interest and Income taxes (EBITDA)1 for the third quarter
increased 43.6% to $79.7 million, compared with $55.5 million in the same quarter a year ago, and increased 9.3% on a sequential basis compared with $72.9 million reported in the second quarter. The EBITDA margin improved to 14.4% in the third quarter, compared with 13.9% in last year’s third quarter and 13.7% at the end of the second quarter. EBIT, Earnings Before Interest and Taxes, was $62.4 million in the third quarter, up 42.2% over last year’s third quarter EBIT of $43.9 million and up 9.3% over second quarter EBIT of $57.1 million. The EBIT margin improved to 11.3% for the quarter, compared with 10.7% in the second quarter and 11.0% in last year’s third quarter. EBIT is meaningful because it more accurately reflects earnings after operating costs, including costs related to the amortization and depreciation of fixed assets and amortization of contract costs and other long-term assets.
Net earnings in the third quarter increased 50.0% to $36.5 million, against comparable cash net earnings of $24.3 million in the same quarter a year ago, and were 9.9% higher sequentially, compared with $33.2 million reported in the second quarter. Net earnings per share of $0.10 for the quarter were up over cash net earnings per share of $0.08 reported in last year’s third quarter, and up over $0.09 reported in the second quarter of fiscal 2002. The net margin improved to 6.6%, compared with 6.2% in the second quarter and cash net margin of 6.1% in the third quarter of fiscal 2001. In accordance with recommendations of the Canadian Institute of Chartered Accountants (CICA), effective October 1, 2001 CGI stopped recording the amortization of goodwill. As such, net earnings and earnings before amortization of goodwill (cash net earnings) are equivalent. For purposes of clarity and ease of comparison, CGI compares net earnings results to cash net earnings figures provided in year-over-year comparisons.
CGI continues to maintain a strong balance sheet and cash position, which together with bank lines are sufficient to support the Company’s growth strategy and represent a competitive strength when proposing on outsourcing contracts. At June 30, 2002, the total credit facility available amounted to $218.4 million. As of June 30, 2002, CGI had cash and cash equivalents of $122.9 million, compared with $152.5 million as of March 31, 2002.
Cash provided by operating activities in the third quarter was $69.8 million, up $41.2 million from the previous quarter. The increase reflects an improvement in working capital items and the increased profitability of the company for the quarter. Working capital was driven by a six-day improvement in the days of sales outstanding (DSO), including the collection of the refundable tax credit on salaries, as well as an increase in the current income taxes payable resulting from this collection of the tax credit. Offsetting the improvement in working capital was cash used for purchasing the annual software licenses. Excluding the impact of the net change in working capital items, the cash provided by operations was relatively flat from the previous quarter.
Serge Godin said, “We are very proud of what our management team and members have achieved this quarter. Our continued focus on executing our business model has resulted in one of the highest growth rates and highest net margins in the industry. We realized more synergies from the ongoing integration of our outsourcing contracts and improved efficiencies in many business units. The adjustments made to our operational structure over the last three months are allowing us to take our BPO and IT operations in the US to a greater level of efficiency as well, by integrating them into our global delivery structure.”
1EBITDA is equal to operating earnings before depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company’s ability to service and incur debt. EBITDA should not be considered
Nine-month Highlights
For the first nine months of fiscal 2002 ended June 30, 2002, revenue increased 45.5% to $1,597.8 million, from $1,098.5 million in the corresponding period of 2001. For the first nine months of fiscal 2002, EBITDA increased 54.5% to $221.2 million, from $143.2 million in the same period one year ago. Net earnings in the first nine months increased 60.1% to $100.3 million, from comparable cash net earnings of $62.7 million in the same period one year ago. Basic net earnings per share of $0.27 in the period were up over $0.22 reported in the first nine months of 2001.
Operating Highlights
CGI’s growth prospects and solid backlog were improved during the quarter with $2.15 billion in new contract bookings, renewals and extensions, as well as several niche acquisitions made at the business level, which enhanced a vertical offering or geographical presence. Some of the highlights included:
- The signing of a shareholders’ agreement which finalized the terms and conditions of a new jointly-owned information technology (IT) services company, Innovapost, with Canada Post Corporation as the majority owner (51%) and CGI owning 49%. Innovapost will provide all IT services to The Canada Post Group as well as to other postal organizations worldwide. The company has retained 150 employees to date and expects to begin generating revenue by September and to achieve total revenue of $200 million in its first year, ending April 2003, $400.0 million by year three and approximately $3.5 billion over ten years. This contract added approximately $1.75 billion to CGI’s backlog over a ten-year period.
- A signed memorandum of understanding for a ten-year outsourcing agreement valued at $80 million with IT services provider League Data. CGI plans to manage League Data’s banking environment and build a new browser-based front-end solution. Shareholders of League Data are expected to vote on this agreement by September 1, 2002.
- The signing of an $11.5 million, three-year contract extension with Air Canada for enterprise resource planning support and maintenance.
- The acquisition of electronic solutions provider Myriap, which provides CGI with deeper knowledge in the transactional Web space. Myriap added approximately 60 Toronto and Montreal-based professionals to CGI.
- The acquisition of Netplex Systems’ Retail Division, which served over 240 retail customers including Macy’s, Toys “R” Us and Value City with retail solutions that focus on warehouse management, store system integration and distribution. Netplex added 40 professionals located in Oklahoma.
- The acquisition of Stewart & Stewart Consulting Inc., with revenues of approximately $4.0 million. The Edmonton-based company adds geographic information systems and resource-based systems knowledge with its 35 professionals supplying services primarily to the Alberta government, under an existing outsourcing contract.
- The signing of a five-year information technology contract with Domtar Inc. valued at $18.5 million whereby CGI will manage and support its mainframe and mid-range environment including hosting the infrastructure for some 42 servers, providing server management services as well as managing the hardware.
Initiatives and Outlook
Mr. Godin added, “CGI’s growth will continue to be driven by a disciplined financial approach to our four pillars of growth – niche acquisitions; large acquisitions; contracts, renewals and add-on projects; and large IT & BPO outsourcing contracts. Our pipeline of $5 billion in outstanding proposals represents large and mid-sized contracts, with at least a third of these opportunities from US-based clients. Our strong financial position, flexible client partnerships, unique global delivery model, and entrenched quality system give us confidence in the ability to turn this pipeline into backlog and deliver even stronger results going forward.”
Guidance
Based on information known today about current market conditions and demand, as well as seasonality typical of the summer quarter, the company has narrowed its guidance for the fiscal year ending September 30, 2002. Base revenue for the year is expected to be between $2.13 billion and $2.15 billion, representing between 36% and 38% growth over fiscal 2001 results. Net earnings per share should be in the range of $0.36 to $0.37.
Margin improvement remains among CGI’s most important financial objectives. Improvements during coming quarters will be driven by further synergies from large outsourcing contracts, ongoing integration of acquisitions and a gradual reduction in SG&A expenses.
CGI will provide guidance for fiscal 2003 when reporting its fourth quarter results. Although still in the planning process for its fiscal year 2003, CGI expects to achieve double-digit rates of growth in the next year. This growth objective is before the effect of potential large outsourcing contracts or large acquisitions.
Quarterly Conference Call
A conference call for the investment community will be held today, July 23, at 10:00 am (Eastern Daylight Time). Participants may access the call by dialing 888-799-1759 or through the Internet at www.cgi.com. Supporting slides for the call will also be available at www.cgi.com. For those unable to participate on the live call, a webcast and copy of the slides will be archived at www.cgi.com.
Forward-Looking Statements
All statements in this press release that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of that term in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. These statements represent CGI Group Inc.’s intentions, plans, expectations, and beliefs, and are subject to risks, uncertainties, and other factors, of which many are beyond the control of the Company. These factors could cause actual results to differ materially from such forward-looking statements.
These factors include and are not restricted to the timing and size of contracts, acquisitions and other corporate developments; the ability to attract and retain qualified employees; market competition in the rapidly-evolving information technology industry; general economic and business conditions, foreign exchange and other risks identified in the Management’s Discussion and Analysis (MD&A) in CGI Group Inc.’s Annual Report or Form 40-F filed with the SEC, the Company’s Annual Information Form filed with the Canadian securities authorities, as well as assumptions regarding the foregoing. The words “believe”, “estimate”, “expect”, “intend”, “anticipate”, “foresee”, “plan”, and similar expressions and variations thereof, identify certain of such forward-looking statements, which speak only as of the date on which they are made. In particular, statements relating to future growth are forward-looking statements. CGI disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements.
For more information:
CGI Investor Relations
Julie Creed
Vice-president, investor relations
(312) 201-4803 or (514) 841-3200
Ronald White
Director, investor relations
(514) 841-3230
CGI Media Relations
Eileen Murphy
Director, media relations
(514) 841-3430
There are 10 pages of financial tables and notes that accompany this release. Please call us at 514-841-3217 if you would like a faxed copy or visit our website at www.cgi.com.
