- Earnings before amortization of goodwill up 128% from Q4 2000
- Net earnings up 331% from Q4 2000
- Revenue up 4.4% from Q4 2000
CGI Group Inc. (TSE: GIB.A; NYSE: GIB) today reported unaudited results for the first quarter of fiscal 2001, ended December 31, 2000. All figures are in Canadian dollars unless indicated otherwise.
Summary
Results for CGI for the first quarter ended December 31, 2000 were below the first quarter of fiscal 2000 when the demand for IT services was exceptionally strong, as organizations invested to make their IT systems Y2K compliant or to replace their existing systems altogether prior to the millennium. Sequential performance is representative of the Company's progress, as the industry resumes growth after the slowdown in 2000. On a sequential basis, performance improved significantly, reflecting acquisitions and increasing business activity.
Sequential Q1 2001 versus Q4 2000 growth
Strong sequential growth in the first quarter of fiscal 2001 resulted primarily from contributions from acquisitions made since August 2000, and general business strengthening. Revenue increased 4.4% from the previous quarter. Earnings before amortization of goodwill (or cash net earnings) increased by 128%, and net earnings increased by 331%. CGI considers cash net earnings to be the most accurate measurement of its profitability, as goodwill amortization has no impact on cash resources. The cash net earnings margin increased to 4.8% from 2.2% in the fourth quarter of fiscal 2000, and the net profit margin increased to 3.1% from less than 1% in the previous quarter.
Year-over-year Q1 comparisons
Revenue for the first quarter of fiscal 2001 declined 17.4% to $334.2 million, from $404.7 million in the same quarter a year ago. The year-over-year reduction reflected lower revenue from CGI's IT outsourcing contract with Bell Canada, as CGI supported Bell Canada's cost reduction program. The order backlog at December 31, 2000 was $7 billion.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were $41.9 million, 30.3 % below the $60.1 million reported a year ago. Cash net earnings declined 41.0% to $16.1 million ($0.06 per share), from $27.4 million ($0.10 per share) in the same quarter of fiscal 2000. Net earnings amounted to $10.4 million ($0.04 per share) compared with $23.0 million ($0.09 per share) in the first quarter of fiscal 2000. Contributing to the reduction in earnings was the Company's decision to maintain its professional staff during 2000 in readiness for the business upturn.
The balance sheet is strong, with working capital of $151.4 million and a bank debt to equity ratio of 0.07:1.
During the quarter, CGI won a $1 billion-plus, 10-year IT partnership agreement with Desjardins, which was one of the first major IT agreements in 2000. This agreement is expected to be finalized by May 2001. Since October 1, 2000, the Company has completed four acquisitions in Canada and the U.S. and two equity investments.
Message from the chairman, president and CEO
"We are pleased with CGI's strong improvement in performance in the first quarter of this year compared with the fourth quarter last year. The Y2K slowdown is behind us, and we are seeing a gradual business strengthening in all our markets in North America and Europe," said Serge Godin, chairman, president and chief executive officer of CGI. "Industry analysts generally expect the IT services sector to grow in the range of 7% to 10% in 2001, increasing to 12% to 14% in 2002.
"Based on the business CGI has won to date, we expect to achieve revenue of between $1.5 billion and $1.6 billion this fiscal year, and a gradual improvement in earnings margins as the year progresses. This forecast includes the Desjardins partnership agreement we announced in October, which is expected to contribute to revenue in May 2001. Any further acquisitions and large contracts we win this year would be additional. Bell Canada has indicated to us that revenue to CGI from our IT outsourcing contract with it in calendar 2001 will be the same as or higher than in calendar 2000.
"This past year, we refined our growth strategy, which now has four components: organic growth; large outsourcing contracts; acquisitions and equity investments in mid-sized companies and niche players; and large acquisitions.
"Regarding organic growth, our business units achieved a number of new contracts and renewals in recent months. Earlier this month, our U.K.-based subsidiary, CGI Group (Europe) won a $119 million, seven-year outsourcing contract with Sun Life Financial in the United Kingdom. Infrastructure acquired as part of this contract positions CGI also to propose on other full IT outsourcing contracts in Europe.
"Regarding large outsourcing contracts, our pipeline of proposals on large outsourcing contracts stands at $4 billion, adjusted conservatively for a success factor.
"We have increased our emphasis on acquisitions of mid-sized and niche players within CGI's three business units - Canada, the U.S. and International. We have set an objective of frequent, smaller acquisitions and, through detailed research, have identified niche players that are complementary to our various geographic and industry markets.
"Regarding large acquisitions, we seek to make at least one large acquisition in the U.S. This will strengthen CGI's position to provide end-to-end IT services and will increase our critical mass in this huge market. We are continually in discussions with a number of potential candidates. An acquisition must provide the right fit and the terms need to be accretive on a cash basis. CGI currently has 1,500 professionals in the U.S. who provide systems integration and business processing services to a solid client base."
Operating highlights
Contracts since fiscal 2000 include the following:
- A $1 billion, 10-year partnership agreement with Desjardins, a major Canadian financial services company, to manage its data processing operations. This agreement is expected to be finalized in May 2001.
- A three-year contract by Health Canada to provide strategic consulting on secure electronic service delivery.
- A $3 million, five-year outsourcing contract with AXA Canada, one of the country's leading property and casualty insurers, for AXA's PeopleSoft general ledger and accounts payable functions.
- Subsequent to quarter-end, in January, a $119 million, seven-year outsourcing contract with Sun Life Financial to manage and support the Canadian insurer's IT infrastructure and voice/data telecommunications for its U.K. branch network of more than 50 offices.
- Also in January 2001, a letter of intent for a $25 million, five-year applications maintenance outsourcing contract with the Alberta Ministry of Health and Wellness.
- In January, a 10-year contract with Interac Association to provide a new network, supporting infrastructure and a customer support service.
Acquisitions and equity investments since fiscal 2000 include the following:
- C.U. Processing, a U.S.-based information management systems provider, serving U.S. credit unions, with annual revenues of approximately $35 million.
- RSI Realtime Consulting Inc., a Canadian SAP implementation specialist.
- Groupe-conseil CDL Inc., a Canadian IT consulting firm specializing in ERP solution implementation.
- Star Data, a Canadian financial services information provider with annual revenues of approximately $80 million.
- CGI acquired a 49% interest in AGTI Consulting Services Inc., a mid-size Canadian strategic IT consulting firm, and increased its equity position in Conseillers en informatique d'affaires (CIA) from 35% to 49%.
Management's Discussion & Analysis of Results of Operations and Financial Position
First Quarter ended December 31, 2000
The following discussion and analysis should be read in conjunction with financial statements for the first quarter of fiscal 2001 and 2000; with the MD&A in the fiscal 2000 annual report, including the section on risks and uncertainties; and with the notes to the financial statements for the first quarter of fiscal 2001 and in the fiscal 2000 annual report. (All dollar amounts are in Canadian dollars unless otherwise indicated.)
Revenue
Revenue in the first quarter of fiscal 2001 declined 17.4% to $334.2 million, from $404.7 million in the quarter ended December 31, 1999. The reduction reflected lower revenue from CGI's outsourcing contract with Bell Canada, as CGI supported Bell's cost reduction program. Acquisitions made at the end of the 2000 fiscal year and during the latest quarter - mostly APG (September 1, 2000) and C.U. Processing (October 4, 2000) - and new business, notably CGI's joint venture with Loto-Québec, contributed to revenue. The first quarter of fiscal 2000 was a strong quarter, reflecting spending by clients to ensure their IT systems were Y2K compliant, and also reflecting a large international contract completed later in the year. The geographic revenue mix in the first quarter of fiscal 2001 was 74% from Canada (Q1 2000 - 71%), 17% from the U.S. (Q1 2000 - 13%) and 9% from international (Q1 2000 - 16%).
On a sequential basis, revenue increased by 4.4% from the fourth quarter of fiscal 2000, reflecting mostly recent acquisitions
Operating Expenses
The costs of services, selling and administrative expenses were 15.2% lower than the prior year, at $289.8 million compared with $341.8 million. Total operating expenses were 87.5% of revenue, an increase from 85.1% in the first quarter of fiscal 2000 but an improvement from the fourth quarter of fiscal 2000 when the expense ratio was 92.2%. The year-over-year increase in the expense ratio reflects the revenue decline and the Company's strategy to retain its professionals in readiness for an upturn in industry demand. First quarter fiscal 2001 expenses were reduced by $4.8 million, relating to provincial refundable tax credits on Quebec employees' salaries, from CGI's participation in the government's program to establish E-Commerce Place. Tax credits amount to a total of $10,000 per eligible employee.
Depreciation and Amortization
The year over year decrease in depreciation and amortization expenses is mostly due to fully amortized assets and contract costs. The marginal increase on a sequential basis results from acquisitions.
Income Taxes
The effective income tax rate was 44.8% in the first quarter of fiscal 2001 compared with 41.6% for the first quarter of fiscal 2000 and 48.0% for the fourth quarter of fiscal 2000. The increase is mostly due to the geographic distribution of earnings.
Earnings before Amortization of Goodwill
Earnings before amortization of goodwill (also referred to as cash net earnings) were $16.1 million ($0.06 per share) compared with $27.4 million ($0.10 per share) in the first quarter of fiscal 2000. The Company considers this to be the most accurate measurement of its profitability, as goodwill amortization has no impact on cash resources. The year-over-year decline in cash net earnings primarily reflected lower revenue and the higher expense ratio as the Company retained professionals in readiness for a business upturn which began on a gradual basis during the quarter. On a sequential basis, cash net earnings were 128% higher than in the fourth quarter of fiscal 2000, reflecting increased revenue and an improved expense ratio due to business strengthening and results of a cost reduction program.
Amortization of Goodwill, Net of Income Taxes
Goodwill related to C.U. Processing Inc., AGTI Consulting Services Inc. (AGTI) and RSI Realtime Inc. (RSI) is reflected in these numbers. (see note 3 of the Consolidated Financial Statements)
Net Earnings
Net earnings were $10.4 million ($0.04 per share) in the first quarter of fiscal 2001, compared with $23.0 million ($0.09 per share) in the same quarter the previous year. Factors affecting net earnings are outlined above. On a sequential basis, net earnings in the first quarter of fiscal 2001 increased 331% from the fourth quarter of fiscal 2000, reflecting increased revenue and an improved expense ratio due to business strengthening and the results of a cost reduction program.
Liquidity and Financial Resources
CGI maintains a strong balance sheet and cash position, which, together with bank lines, are sufficient to support the Company's growth strategy. The Company has a $250 million credit facility with four Canadian chartered banks available for acquisitions and general working capital purposes. At December 31, 2000, the total credit facility available amounted to $198.7 million.
Operating cash flow amounted to $30.9 million, compared with $43.7 million in the first quarter a year ago. The variation in operating cash flow reflects the variation in net earnings. Cash provided by operating activities amounted to $40.4 million, compared with a $40.2 million reduction in the first quarter of fiscal 2000, which was reflective of the increase in accounts receivable and work in progress related to increased business volumes and major systems integration contracts.
Long-term debt increased by $20 million, reflecting the financing of CGI's 49% interest taken in AGTI. Business acquisition investments amounting to $54.5 million include C.U. Processing Inc., AGTI and RSI.
The cash position at the end of the quarter amounted to $51.5 million, compared with a bank indebtedness of $2.3 million in the first quarter of fiscal 2000.
Accounting Changes
Effective the first quarter of fiscal 2001, the Company adopted recommendations of the CICA Handbook sections 1751, regarding interim financial statements, and 3500, regarding earnings per share.
Section 1751 establishes standards for interim financial statements. In accordance with this section, CGI has provided disclosure on new or changed accounting policies or methods (ie: the adoption of section 3500); disclosed events subsequent to the end of the quarterly period that have not been reflected in the accompanying interim financial statements (ie: the acquisition of Star Data Systems Inc); included disclosure required in annual financial statements concerning business combinations (ie: C.U. Processing Inc., RSI and AGTI), and provided a comparative balance sheet as of the end of the immediately preceding fiscal year instead of the same period of the previous year.
Section 3500 brings Canadian requirements in line with U.S. and international standards FASB Statement 128 and IAS 33. Presentation and disclosure requirements are aligned with those of FASB Statement 128. Under the revised standard, the treasury stock method is used instead of the current imputed earnings approach for determining the dilutive effect of options issued. Reconciliation of the numerator and denominator of both basic and diluted per share data is disclosed.
Quarterly Conference Call Notification
A conference call for the investment community will be held on Tuesday, January 23, 2001 at 4:00 p.m. (Eastern time). A live audio webcast of the conference call, with accompanying slides, will be available at CGI's website, www.cgi.ca.
About CGI
Founded in 1976, CGI is the largest independent Canadian information technology consulting firm and one of the largest in North America. CGI's order backlog totals approximately CDN$7.0 billion. CGI has 10,000 professionals and provides end-to-end IT services and business solutions to 2,500 clients in Canada, the United States and more than 20 countries around the world. CGI's shares are listed on the New York Stock Exchange (GIB), as well as on the Toronto Stock Exchange (GIB.A). They are included in the TSE 100 Index as well as the S&P/TSE Canadian Information Technology index. Web site: www.cgi.ca
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 the Private Securities Litigation Reform Act of 1995. 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; and other risks identified in Management's Discussion and Analysis (MD&A) in CGI Group Inc.'s annual report or Form 40F filed with the U.S. Securities & Exchange Commission and the Company's Annual Information Form filed with Canadian securities commissions. All of the risk factors included in these filed documents are included here by reference. CGI disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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For more information:
CGI
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Ronald White
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(514) 841-3230
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Eileen Murphy
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(514) 841-3430
