Jul 26, 2011
Executives
Lorne Gorber - Senior Vice President of Global Communications & Investor Relations Michael Roach - Chief Executive Officer, President, Director, Member of Management Committee and Member of Disclosure Policy Committee R. Anderson - Chief Financial Officer, Executive Vice President, Member of Disclosure Policy Committee and Member of Management Committee
Analysts
Paul Steep - Scotia Capital Inc. Mike Abramsky - RBC Capital Markets, LLC Julio Quinteros - Goldman Sachs Group Inc.
Thanos Moschopoulos - BMO Capital Markets Canada Richard Tse - Cormark Securities Inc. Stephanie Price Eric Boyer - Wells Fargo Securities, LLC Michael Urlocker - GMP Securities L.P.
Scott Penner - TD Newcrest Capital Inc. Tom Liston - Versant Partners Inc.
Operator
Good morning, ladies and gentlemen. Welcome to the CGI Third Quarter 2011 Results Conference Call.
I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President, Global Communications and Investor Relations.
Please go ahead come, Mr. Gorber.
Lorne Gorber
Thank you, Catherine, and good morning. With me to discuss CGI's third quarter fiscal 2011 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 Tuesday, July 26, 2011.
Supplemental slides, as well as the press release we issued earlier this morning, are available for download along with our Q3 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 on both our MD&A and press release, as well as on cgi.com.
We encourage our investors to read it in its entirety. We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures, which should be viewed as supplemental.
The MD&A contains definitions of each of these non-GAAP performance indicators used in our reporting. All of the figures expressed on this call are in Canadian dollars unless otherwise noted.
I'll turn the call over to David first to review the financial results for the third quarter. And then, he'll pass it over to Mike, who will discuss a few strategic highlights.
David?
R. Anderson
Thank you, Lorne, and good morning. I'm pleased to share the financial details of another good quarter.
In the third quarter, revenue was $1.04 billion, an increase of 15.1%, while $136.3 million compared with the same period last year. Revenue, on a constant currency basis, was up 18.0% after adjusting for foreign exchange fluctuations that unfavorably impacted revenue in the quarter by $26.3 million or 2.9% compared with the same period last year.
Currency shaped $87 million from our topline during the first 9 months of fiscal 2011. And given the weakness of the U.S.
dollar, we expect our top line to continue being challenged by FX. As a reminder, we have been successfully hedging our bottom-line exposure for a number of years through national hedges and financial instruments.
Adjusted EBIT in Q3 was $144.3 million, up 12.2% compared with last year, and our EBIT margin remained strong at 13.9%. Net earnings were $118.4 million or 37.9% better than the $85.9 million reported in Q3 of 2010, our net earnings margin was 11.4% versus 9.5% in the same period last year.
Diluted earnings per share were $0.43 compared with $0.30 in the year ago period, an improvement of 43.3%. Included in these results were favorable tax adjustments totaling $15.2 million, partially offset by $300,000 of acquisition-related and integration costs, net of tax.
With respect to the Stanley acquisition, we have incurred charges of $3.7 million during the first 9 months of fiscal 2011 and continue to track to plan, which calls for an additional $800,000 to be incurred in Q4. On a comparable basis, excluding the adjustment I just mentioned, net earnings would've been $103.6 million or 10.0% of revenue compared with $86.5 million or 9.6% of revenue in the year ago period.
And diluted earnings per share would've been $0.38, up 26.7% compared with the $0.30 in the third quarter of 2010. Our DSO increased to 52 days in Q3, up from 36 days in the year ago period and 7 days from our 45-day target.
This year-over-year increase was due to 2 impacts: the addition of Stanley and its government clients base, which was not in our Q3 2010 results, was included in the 45-day target; and a cost strike in Canada, which had a one-time impact and contributed to a 5-day DSO increase in Canada. We remain committed to a DSO target of 45 days.
The factors, which influence DSO, had an impact in cash as well. We generated $90.1 million of cash from our operating activities, compared with $102.8 million in the same period last year.
I would like to remind you that on occasion, due to the fluctuations of certain working capital items, this amount can vary from quarter-to-quarter. The main items composing the fluctuations of the working capital related to the management of our accounts receivables and work in process and the timing of tax installments, vendor payments and payroll-related disbursements, including an extra payroll worth approximately $30 million.
That's why we continue to stress the importance of looking at cash trends, the same as bookings over the trailing 12-month period. Total long-term debt was down $65 million, to $953.0 million.
And net debt at the end of Q3 was $913.4 million, representing a net debt to capitalization ratio of 28.3%. In the quarter, we continued buying back our stock, acquiring 2.8 million shares of CGI for $56.9 million at an average price of $20.51.
Under the current NCIB program, which expires in February 2012, we can still purchase 16.6 million shares. At the end of Q3, our return on equity was 20.3%, a 420 basis point jump from last year, while our return on invested capital was 15.8%.
Subsequent to the quarter, we announced that CGI entered into a USD $475 million private placement with 6 large U.S. investors.
Comprised of 3 tranches, the private placement has a weighted average maturity of 8.2 years and a weighted average fixed coupon of 4.57%. We have until December 15, 2011, to draw down the proceeds and plan to execute interest rate swaps subject to favorable market conditions in order to reduce our financing costs and maximize flexibility.
So as of today, combining the remaining funds under the line of credit with this placement, we will have over $1 billion in liquidity available to pursue our Build & Buy profitable growth strategy. Finally, a word on IFRS.
We're tracking well to our plan for the transition to IFRS and don't expect any significant impacts when we report our first quarter of fiscal 2012. For those interested, the details have been set out in the MD&A.
Now I'll turn the call over to Mike.
Michael Roach
Thank you, David, and good morning, everyone. I'll spend a few minutes this morning providing some color on each of our reporting segments and wrap up with some comments on the company as a whole.
Beginning with the U.S. At constant currency, we grew by $191.4 million, an increase of 63.5%, largely as a result of our Stanley acquisition and growth in the state and local business.
Our federal government business continues to reflect the ongoing uncertainty surrounding the resolution of the U.S. Government budget discussions.
EBIT margin in the U.S. was 8.9% in the quarter and reflects 3 factors: increased amortization associated with the Stanley acquisition; the front-loaded expense required for the next expansion phase of our Indian global delivery centers; and a temporary timing misalignment between our bidding and proposal costs versus the slower pace of awards and task orders associated with our U.S.
Government business. In fact, we currently have more than 150 outstanding bids with the federal government worth over $1.5 billion.
Given the transitional nature of these impacts, we remain confident that our top and bottom lines will continue to expand over time in this key market. With respect to bookings, total contract awards in the U.S.
were over $1 billion in quarter 3, or more than 200% of revenue. Our U.S.
operations continues to run above 125%, book-to-bill on a trailing 12-month basis. Our California and Alaska state wins indicate growing strength in the state and local bookings, and together added more than $600 million to our backlog.
We continue to proactively shape and create similar opportunities to help our clients meet their objectives. For example, our solution suites in mission-critical areas such as cyber security, tax collection or our comprehensive ERP systems.
Momentum and Advantage are designed and built exclusively for the public sector. We continue to believe that the depth and breadth of our government business provides us with a defensive position against any future economic downturn.
It also provides us with growth opportunities given our balanced diversity across all levels of government, federal, as well as state and local jurisdictions. As a result, we remain optimistic about the growth potential of this key vertical.
We're also seeing signs of increased activity on the commercial side, both in SI&C and outsourcing. For example, we closed the 5-year outsourcing deal in the financial services worth more than $125 million during the quarter.
Much like California and Alaska wins, this deal adds recurring revenue to our backlog, and is helping to generate additional organic revenue growth over time. With respect to our Canadian operations, you will recall, while we reported year-over-year growth of 4.5% in our Canadian operations during quarter 2, we also indicated that we had made a number of decisions that would negatively impact our top line this quarter.
These included our decisions to divest CIA and the run off of a body shop contract with the Canadian revenue agency. In addition, there was a small FX impact.
Revenue, as a result, decreased by 6.5% during the quarter. But excluding these factors, it was essentially flat.
We continue to see growth in our funnel and remain committed to working through these one-time headwinds and returning to a more consistent growth rate in Canada. In addition, as I've said in the past, we continue taking proactive measures to improve the quality of our revenue stream and in doing so, increase the profitability of our operations.
The effect of this strategy is very evident in our Canadian EBIT margins, which reached 23% in the quarter. Although our book-to-bill ratio in Canada is trailing our overall global performance, we continue to have good visibility of growth opportunities both in the SI&C and long-term managed services contracts.
For example, during the quarter, we're able to sign a long-term contract around our Proponix360 trade finance solution with a Canadian-based global financial institution. This type of contract is very much in line with our strategy to improve the quality of revenue while leveraging our IP, our data centers and our professionals, while offering our clients the ability to share technology cost with other leading financial institutions.
With respect to Europe. At constant currency, we grew by 19.1%.
We experienced growth across our major European markets, particularly in the telecom and financial services vertical. EBIT margins continued to gradually improve as our major markets in the U.K.
and Germany ramp up new contracts. We continue to make investments in business development, and are working to complete the restructuring of our European operations made necessary by the challenging and persistent marketing conditions, experienced in Europe over the past year.
We remain optimistic about our growth prospects as bookings continued to improve, with notably higher work volumes from new clients in the financial services vertical, as well as from various clients in the telecommunications and utility verticals. In addition, we're beginning to ramp up our government practice in Europe and Australia, where we won projects with new clients during quarter 3 by leveraging our suite of software solutions and domain expertise.
Turning to our Global Infrastructure business. Revenue was essentially flat when excluding the run off of the previously announced Desjardins contract in the last 2 months of quarter 3.
Despite this pressure, EBIT margin increased by more than 400 basis points year-over-year to 14.6%, reflecting an ongoing discipline focused by our management team to deliver service excellence at competitive prices. We have been investing in the development of a multibillion-dollar pipeline with some very strategic prospects around our cloud and managed service offerings.
Specifically, we're seeing good traction with our cloud offering with such solutions as Advantage, for state and local governments, and expect activity to ramp up in the U.S. Federal Government as their certification process is being finalized.
As they start moving apps onto the cloud, we are well-positioned as one of only 11 providers chosen by the federal government to provide cloud services. On a company-wide basis, despite some top line headwinds in the quarter, we continue to demonstrate the ability to focus on delivering quality and consistent earnings to our shareholders.
Our ability to execute is evident in our EBIT margin, which reached 13.9% in the quarter, while earnings per share increased by 43.3% year-over-year. In addition, we have generated $536.9 million in cash or $1.93 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 have done this quarter and year-to-date. Finally, the USD $475 million private placement, we announced a couple of weeks ago, is highly strategic providing us with additional long-term liquidity at attractive rates.
In addition, we are well-positioned for the renewal of our existing line of credit when it comes due in August 2012. We remain focused on the fundamentals of delivering quality services to our clients, while proactively expanding our capabilities and offerings by investing in high-growth areas such as cloud computing, cyber security and other software solutions.
The strength of our quarter 3 bookings, totaling $1.4 billion reinforce the relevance of our services and solutions to our client requirements and further demonstrates our commitment to increasing our competitive position in the global market. We remain in an excellent position to continue executing our Build & Buy profitable growth strategy.
Thank you for your continued interest and confidence in CGI. Now let's go to the questions.
Lorne?
Lorne Gorber
Thanks, Mike. Just a reminder that a replay of the call will be available either via our website or by dialing 1(800)408-3053 and using the passcode 6882277 until August 9.
As well, a podcast of this call will be available for download at either cgi.com or through iTunes within a few hours. Follow-up questions can be directed to me at (514)841-3355.
Catherine, if we can poll for questions from the investment community?
Operator
[Operator Instructions] Our first question is from Tom Liston of Versant Partners.
Tom Liston - Versant Partners Inc.
Michael, just on the U.S. revenue explained a bit and including in the notes, but just on the margin, they look sequentially, or even year-over-year, the EBIT is down.
There is some investments in India as you know. But can you describe the environment in terms of, you mentioned the number of bids out there, is there a lot of discretionary projects getting held up?
It seems like the mission-critical projects are going ahead and you're getting some deals done there? But on the Stanley side, is there perhaps a bit of weakness in revenue?
And what do you think unlocks that stoppage?
Michael Roach
Right. It's a good question, Tom.
And again, if you -- as one of the reasons I grew out in the remarks, obviously, we have the amortization. We do have some front-end-loaded expense.
When you ramp up global delivery centers, you make an investment. Then, you staff up over time and eventually hit your next threshold.
And you've got to upscale the infrastructure and the buildings and associated ramp-up costs. So that's what you see there.
What we're seeing on the other side is basically the fundamental issue of we have to continue to ramp up business development. We have to continue to answer the proposals.
So we're getting that front-end cost, but the award -- the pace of awards has slowed down in the U.S. Federal Government.
As I mentioned, we got 150 bids in there worth at $1.5 billion. And they're very slow at coming out in terms of awards.
My sense is, though this is a very -- if it's temporary, it will clear. I'm not sure when it will clear.
I guess there's some milestones coming up on relative to settling or addressing the budget concerns there. My sense is that this may well carry on for another quarter and will become a lot clearer in fiscal 2012.
Tom Liston - Versant Partners Inc.
And just on a more specific segment, your deal with Stanley, we obviously saw the Pentagon attacks, the cyber attacks and certainly, many other financial institutions and others, what you don't hear is what certainly clients are doing about it, they are not going to make those public. But how do you see that market developing?
Certainly, the pace is accelerating. What do you see the activity levels like?
Michael Roach
I would say a couple of things, and you'll see us continue and I drew out a number of times reference to cyber security because we really do see it as a growth area. We're bidding not only in the U.S.
on cyber security business. As you know, we've won one deal that we made public in cyber security with EPA.
We're also bidding work in Canada on that area. But it's also now crossed in, Tom, into the commercial areas.
So there are commercial entities, financial institutions, other companies who want to get ahead of this curve and avoid the type of problems that have been made public in other commercial entities. So we continue to ramp that practice up.
You'll see us making announcements relative to some strategic high arrears [ph] around that and it'll also form the basis of our push into the Canadian defense intel space. It'll be a key part of our offering into that market, which as I mentioned before, is largely untapped for us.
We have very little business right now in the defense intel business in Canada. So it's a greenfield opportunity for us.
But clearly, this is an area that's ramping up both in government and the commercial side.
Operator
Our next question is from Thanos Moschopoulos from BMO Capital Markets.
Thanos Moschopoulos - BMO Capital Markets Canada
Mike, it looks like your U.S. Government revenues showed some sequential weakness.
On the flipside, the bookings were obviously very strong. Going forward, should we expect the U.S.
Government revenues to stabilize and pick up from the current levels? Or is that difficult to say?
Given some of the moving parts in the current environment?
Michael Roach
Well, it's difficult to say. I think what I was trying to telegraph though, if you want to look at the sunny side of life for a few minutes is even though we're seeing some of the same impacts our competitors are seeing on the federal business, we're seeing a pickup in the state and local business.
I think one of the many strengths that we have is that we operate right across those various levels of government. So even though the federal government may be temporarily a little slower than we'd like in terms of awarding business, the state and local business is picking up.
The California deal, the Alaska deal, we have other deals in the pipeline with the state and local side. And our sense is we're well-positioned to pick up growth in those jurisdictions as those governments kind of work through their fiscal challenges.
And again, a lot of the issues that they're dealing with, our solutions set addresses that things like collections or procurement or new ERP systems like Advantage. We're also marketing Advantage in terms of the managed services, offering state governments an opportunity, a very accretive opportunity, to go into a long-term managed services contract with us for their embedded base of Advantage, bringing down their cost and providing us with an additional long-term revenue stream.
So we're trying to create some win-wins in those space. So again, our view was -- our view is that we're very well-positioned across the government jurisdictions in the U.S.
And we're picking up business in the local and state business.
Thanos Moschopoulos - BMO Capital Markets Canada
Okay. Now on the government side, you called out some pockets of strength like cyber security.
But in the federal government business, are there specific areas that are being held up? Is it pretty much across the board?
Or in terms of the outstanding bids that aren't being awarded, are there any common themes there?
Michael Roach
I didn't see any common themes. I would say that we're still seeing a lot of activity in the healthcare area of the U.S.
Government. We're very well-positioned in there.
It's a bit of a general impact across the business. As I said before, I suspect to be a little bit more activity on the task orders side where they can release smaller portions of business while they're trying to get more certainty around their total funding envelope in the government space.
Operator
Our next question is from Scott Penner of TD Securities.
Scott Penner - TD Newcrest Capital Inc.
Mike, I just wanted to ask you about, just in general, your -- the level of IP-related revenue, I think, you've commented in the past and I may get these numbers wrong, it was about 10% to 15% of the overall revenue. I'm just wondering if you could update us on that, and what do you think that level can drive to over the next year or 2?
Michael Roach
Well, I would say, it's probably closer to the 15%. And again, the goal over time would be to drive it higher.
I think clearly, this is a very, very accretive strategy for our company, Scott, in a sense that it's very sticky revenue. It drives increased utilization across all my assets, so from my professionals, to my IT, to my data centers, it adds recurring long-term revenue and backlog.
And for the client, it bring some very interesting value opportunities to the client because they don't have the capital upfront. And they're, essentially, as I mentioned in my notes, they're actually sharing technology costs with other institutions.
So it's a win-win from a client and from a company standpoint. So again, as part of our 2012 plan, we're going to continue to drive hard on increasing the mix that comes from IP.
We're also looking to probably reopen our acquisition funnel on the, what I would call, the niche acquisitions, to try and identify and target smaller emerging IP-based companies that we could bring in, turn into either a cloud offering or software-as-a-service or embed into some of our existing IP, and drive towards increasing the mix of IP-related revenue in the company. So again, if I had to set a long-term target, which I'm looking at, 25% of our revenue coming from IP-based solutions would be a good near-term type of target.
Scott Penner - TD Newcrest Capital Inc.
That's helpful. Just looking at Q4, typically, the summer quarter is weaker for you guys as some projects slow down a bit.
Just looking through the past couple of quarters, it looks like project starts have been somewhat delayed versus what you might have expected. Does this imply that perhaps the September quarter is a little bit more gentle as far as the quarter-over-quarter drop in revenue?
Michael Roach
Well, again, I think, and I tried to do the last quarter is to be very transparent on some of the headwinds and decisions we made that impact the revenue, including the CIA divestiture. As you know, we weren't able to go back and adjust history on that.
So that's a straight $10 million roughly hit to the Canadian revenue number until we work through a year on that. So there are certain factors like that, that will obviously carry into the next quarter.
Normally, what you see, our fourth quarter, as you know, for most of our clients is their third quarter. So what you see is our first quarter is their year end, were they normally ramp up, everybody comes off vacation, and they tend to try to close out their budgets and close out their projects.
So again, in our SI&C business, our clients will have a heavy vacation period. And we will, as a result, we'll obviously try to drive vacations to offset any softness from the SI&C business and protect the bottom line here.
So that's -- you're quite right. Normally, our summer quarter, we have more vacation as our clients do the same.
Scott Penner - TD Newcrest Capital Inc.
Okay. And just lastly, maybe for David on the tax rate, I noticed it was 27.5% on a normalized basis.
And there seemed to be a bit of gentle reduction in your stated range going forward. Is this just based on the geographical mix of revenue in any given quarter?
R. Anderson
Yes, that's all that is because the Canadian tax rates are slightly lower than the U.S. tax rates.
So as the profitability kind of shifts from one to the other, naturally, just see the math work.
Operator
Our next question is from Eric Boyer of Wells Fargo.
Eric Boyer - Wells Fargo Securities, LLC
Could you just give us some additional commentary on the project start up delays that you talked about, I think in the Canadian market? I think, I read something in the MD&A there.
R. Anderson
When we take a look at some of the projects primarily in the vacation space, there has been some -- sustained a little bit in the government space as well.
Michael Roach
I think most of the delays, Eric, that we're talking about are really associated with the U.S. Federal Government business.
In Canada, we've even -- since we closed the quarter out, we announced an unforeseen deal with EnCana. We had a delay where we had a renewal with Alberta Health, which took a long time to kind of work through the process.
It's a fairly large long-term deal. So we've had some of those type of delays.
But I would say that we haven't had anything as pronounced as what we are seeing in the U.S. Federal Government space.
Eric Boyer - Wells Fargo Securities, LLC
And then the U.S. commercial continues to be pretty strong for you guys as well?
Michael Roach
Well, it's coming back. As I say, it's coming back, and we're actually realigning our organization in the U.S.
We're adding another business unit or 2 to get a lot closer to the client base there to try and pick up what we believe will be an uptick in the market. It's one of the reasons why we continue to invest heavily in the business development in the U.S.
So that we actually get more bids out there both in the government and commercial side. And as a result, we're seeing the expense, and the revenue will be in the out quarters.
So it's really a bet on our behalf that the market is picking up, and that we want to be positioned to ride the wave up as it continues. But I was encouraged in the commercial business, as I said, we did close an outsourcing deal in the financial services sector in the quarter.
And that's a good indicator that we're seeing not only more activity in the SI&C business but also the managed services is coming back.
Eric Boyer - Wells Fargo Securities, LLC
And then, can you just give us a rough idea on how much of an impact the delay on awards in the federal business compared to your bid activity had on the U.S. EBIT margin?
Michael Roach
I haven't isolated that, Eric, in the sense that it's hard to know until I actually see how many of those bids we win. Because obviously, we're continuing to invest and answer bids in the belief that eventually, the pipeline will move through to the award stage.
But suffice to say, if you look at the year-over-year delta in the EBIT, you can get a pretty good idea of what it's worth. It's certainly worth a couple...yes.
R. Anderson
It's probably in the areas of 4% to 5%, we're looking in the U.S. market.
Eric Boyer - Wells Fargo Securities, LLC
Okay, great. And then just the Stanley acquisition is about to anniversary in the next couple of quarters.
Could you just revisit your growth goals, maybe for the company in the context of how you've talked about the long-term framework you've talked about in the past?
Michael Roach
Well, again, I think a lot of things have changed in the government market in the last 9 months, clearly, since we did the Stanley acquisition. Having said that, I would tell you that I'm as enthusiastic today about the decision to enter the defense intel space.
We got a great franchise in the U.S. Federal Government.
We're well-positioned for the future. As you know, we've looked at the company in terms of a 3- to 5-year plan.
If we looked at the base of the company's revenue in fiscal 2010, it was about $3.6 billion. We set over 3- to 5-year period, given certain market conditions, executing our Buy & Build strategy, we'd like to double the company.
If you keep the end date and you look at where we'll finish this year, the growth rates will fall between, is it 8 and 14 or so, depending of whether you do it in 3 years or 4 years. So we really haven't backed off for that.
I think from a strategy standpoint, we'd like to keep our eye on the goal. And we continue to look not only on the buy side but also on the build side to drive that type of growth over that period of time, not by quarter, by over a 3- to 4-year period.
Eric Boyer - Wells Fargo Securities, LLC
And that 8 to 14, is that all-in so the organic is somewhere 4 to 7, probably, because of the 50-50 split?
Michael Roach
That's on the organic side. It'd be a little lighter probably on the buy side.
So we can give you some of that off-lender.
Operator
Our next question is from Julio Quinteros of Goldman Sachs.
Julio Quinteros - Goldman Sachs Group Inc.
One quick question. I guess, if you sort of think about the difference between some of the self-inflicted, if you will, revenue drags plus maybe some of the contract losses there.
And you kind of stripped those out and sort of walk us through your thinking about the performance of the business, sort of underneath the surface, if you will. Is it performing on the commercial and the government side in line with your expectations, or how do you feel about that from a revenue growth perspective?
Obviously, there's a lot of pieces to sort of parse here but I'm just trying to get a feel for, x those factors, how you're feeling about the business?
Michael Roach
Yes, that's actually a good question because again, I think, sometimes a good tie down trying to do the bridging schedules, Julio, in terms of making sure everybody understands the moving pieces. Having said that, if I look at it from an overall company perspective, my sense is if I look at Europe, the growth is coming back.
We're just about done the restructuring there. I'm expecting fiscal 2012 to be a much better balanced year, top line and bottom line in Europe.
In Canada, and if I throw in the GIS business, the Infrastructure business, we're working through those headwinds of the Desjardins run off, our decision to divest CIA, a body shop contract which we ran off. Again, all consistent with our theme that quality revenue is where we want to be.
It drives higher margins, drives higher cash, allows us to better execute on our long-term growth strategy. Also very much in line with us trying to move to a higher mix that are IP based.
So in Canada, if I look at the Canadian operation, we've got to work through the headwind of Dejardins coming off. On the rest of the business, we are seeing a healthy funnel, some good opportunities.
Western Canada is really picking up with the oil price kind of stabilizing. We are seeing a lot more activity out there.
Toronto, big market for us. We're growing organically in the Québec market.
So we're much more optimistic about Canada, looking ahead than what we've seen this year because we have had to address the type of headwinds that we've talked about. In the U.S., I mean a massive market for us, we doubled down on government, which I think is still the right thing to have done -- to get that franchise in the U.S.
Federal Government. Obviously, we're going through the first year of Stanley so we're trying to get a good beat on what the seasonality or the impacts of that business is on a 12-month period, have a much better view of that in another quarter.
State and local business is coming back in the U.S. The commercial business is coming back in the U.S.
This should lift revenue and should lift margins in the U.S. as that business returns.
We're in a situation where we believe that the U.S. market is coming back.
We need to invest in it so that we can take a bigger share of a growing market. And we're seeing a bit of that offset in timing between the investments we're making and the uptick on the revenue.
And the revenue should also come up on the federal government side once we get a little more clarity around the budget situation there. I think unfortunately, when there's uncertainty, people tend to hit the pause button.
And that slows down the normal procurement supply chain. But we really don't have an alternative.
We've got to continue to bid into there because sooner or later, those bids will be awarded. So that's kind of how I see it.
I think if you look at the company in total, we continue to drive the best and most consistent margin performance. Dave explained the bit of impact we had this quarter on cash.
We see that clearing going forward. We got very -- we're well capitalized.
We've locked down our long-term debt. We're in good position to roll over and negotiate, I think, very favorable terms with our line of credit.
And we continue to believe that our shares are attractive at these prices, and we'll continue to buy them back.
Julio Quinteros - Goldman Sachs Group Inc.
Maybe just to dig into the financial services sector in the U.S., specifically. So if you talk about the financial services or if you could talk about the financial services sector a little bit more specifically in terms of just deal activity, what you're seeing in the U.S.
and just your progress there would be great.
Michael Roach
Well, financial services actually is our second largest vertical after government. And again, our strategy in there is really at a number of levels.
First, we have a lot of IP that is in the existing base. We're looking to expand our IP into those clients and into new clients.
We also are trying to drive for higher recurring revenue base so things like Proponix that I mentioned where we can really stand up clients in a utility type or software-as-a-service environment. And we're seeing a lot more clients open to that discussion.
I think the days where clients felt that everything that they had was proprietary is being muted now. I think people are much more open to sharing technology costs and differentiating themselves on the attributes of the products and solutions as opposed to the technology.
So we see the U.S. market as a very strong market.
As I mentioned, we have added a business unit in the U.S. to focus on the banking financial vertical in the Charlotte area, where there's a lot of big U.S.-based banks.
And we're also continuing to drive hard in New York, an area where I think were continue to fight under our weight relative to the amount of business we can do with the financial institutions in the U.S. We're also looking at some of our IP that we have in Canada, and have sold in the wealth management space of making the investments and actually marketing some of that IP into the U.S.
market, which I think is another source of revenue growth going forward.
Operator
Our next question is from Michael Urlocker of GMP Securities.
Michael Urlocker - GMP Securities L.P.
Michael, you did describe I think some of your ambitions and interest in expanding in the U.S. financial services sector.
I wonder, first, if there's just any other catalysts you can see in terms of customer requirements that suggest CGI would be in a strong position to win some more business there?
Michael Roach
Well, again, we certainly believe that in the cyber security space, Michael, that as I mentioned, this is no longer the exclusive domain of governments. I think financial institutions, other corporations, international corporations, domestic corporations, anybody that's operating over the Internet these days needs to be proactive in terms of protecting their assets and their information.
We have an offering in there that's very robust, very proven that will take the market. So I think there's an opportunity there.
There's cloud work in terms of standing up applications on the cloud for clients. There's also work with partners where we'll go into these financial institutions, supporting partners like Oracle or TEPCO or other companies who have relationships in there and want to build out their solutions so that they are a cloud offering or software as a service.
So I see many entry points in there. I think what CGI brings that is still a very key differentiator is that we do deliver our projects on-time on budget.
And that's a very powerful calling card today. When companies are looking to compete, the last thing they need is to have a project delayed and their product miss the window of opportunity.
So one of our powerful calling cards is we do deliver. And in our industry today, that is clearly a differentiator.
Michael Urlocker - GMP Securities L.P.
It's a sad commentary on the industry, but I take your point. And I wonder if you could just expand in Europe, I think you're doing some increased business in telecom.
What's going on with the customers there?
Michael Roach
European market, again, I always hesitate when I say European market because it's a series of markets. But again, in areas like Germany and Poland, we continue to grow our business with the Polish telecom company.
We won an outsourcing deal there a year or so ago. And it continues to grow very rapidly.
Telcos, as you know, are continually restructuring their operations. They're driving hard for top line growth.
And we have a lot of capabilities in areas like e-commerce, web redesign, helping them really increase the ease of doing business with their end clients, bringing more visibility and cost reduction to their P&L. So we see that continuing and also in the wireless space.
In Europe, we're very active in the wireless space, which as you know is the growth engine of a lot of telcos. So that activity is very prominent in Germany, in Poland, to some degree in Spain.
In the U.K., again, we're seeing outsourcing opportunities coming forward there. We have used our IP to enter the U.K.
Government market, more as an entry point into that market. We don't -- haven't done any business in the U.K.
Government, but we're now looking at picking our spots where to enter. And at this point, our thinking is to use our IP in there.
It's a safe way to enter. It's sticky, and also positions us to bring a lot of value to the client.
So that's kind of how we see it. In France, we continue to work with Societe Generale.
We see opportunities to growth there. We've just about finished our restructuring, I would think, by the start of next fiscal year.
For the most part, our restructuring in Europe will have been completed. So when I look ahead, I see us continuing to grow in Europe, both on the top and bottom lines.
Michael Urlocker - GMP Securities L.P.
And looking at telecom, and specifically referring to your own intellectual property, do you see an opportunity for getting deeper into core billing systems, or is that something that you don't want to get into?
Michael Roach
Well, we have a very good billing system. We primarily use it actually to surround and give our clients options from some of the other traditional providers.
It also has the capability to build cloud computing services, which is an emerging offering. So we continue to work around the edge of that.
But we're not positioning ourselves to be a head-to-head competitor with those companies whose core business is essentially billing.
Operator
Our next question is from Stephanie Price of CIBC World Markets.
Stephanie Price
Just on the Europe segment, do you see yourself investing more in the geography or are you kind of happy with your current presence there?
Michael Roach
We're never happy, Step. So look, I think if you look at the history of this company, we built it out by really staying disciplined on executing our Buy & Build strategy.
We've essentially built out Canada, I think for most of the stuff we do in Canada now, we'd be looking to do it organically or very small niche IP-base type acquisitions. In the U.S., given our current size down there and given the size of the market, we see opportunities to continue to bulk up in the U.S.
It's still the most accretive place for us to do an acquisition. So from that perspective, it's a big, big market.
Europe is a place that we want to be. It's a place frankly we have to be because our client straddle the ocean.
We keep very close to our clients. We commit to our clients that we'll be there, where and when they need us.
And when we look at Europe, it fits that criteria. So we will continue to put the full force of our Build & Buy strategy in Europe.
It's a matter of timing in terms of finding the right target that could accelerate our position there. What we're looking for again, in a place like Europe, we're looking for companies that have deep long-term relationships with clients so that we can pull through our IP or pull through our managed services offering.
And we're looking obviously for companies that are in our verticals that we can continue to lever our solutions and our outsourcing offering and our global delivery model. But it does take patience in there.
It's a much different market than North America. And we've been going to school on that market.
I think we've learned that it's not 1 market, it's a series of markets. So we continue to refine our strategy there.
I think another area that we've looked at is to enter Europe through an IP-based acquisition instead of a more broader services type company. This again allows us to align to our strategy of moving to more change in mix, and also allows us a little more time to kind of walk through and learn more about the European market if we go that way.
So a long answer to say, we're very committed to the European market. It's a matter of finding the right target at the right price and the right time.
Stephanie Price
You touched a bit on my second question here, with more about your acquisition strategy. You talked earlier about niche acquisition and sort of IP and cloud solutions.
Could you elaborate just a bit on that?
Michael Roach
Well, again, our sense is that if you look at our company, we're one of the few players that really have an end-to-end capability. We have data centers.
We have IP, and we've got a very nice mix between people that are located very close to the clients. And we've got a very broad-based global delivery strategy.
And again, what I'm looking for is to acquire IP, and then turn it into software-as-a-service or as a utility service. And by doing that, I will end up driving up the utilization of my existing assets.
So obviously, it's more profitable for our company, and it's also very good offering for the clients in terms of the business case there. So we identify certain areas.
Health care would be one, insurance, financial services, aspects of government, maybe more around things like cyber security or biometrics. Areas where we can acquire an emerging company, perhaps a company that's undercapitalized or is looking to expand more rapidly, bring them into the CGI family and really drive at a faster rate our strategy to constantly improve the quality of our revenue.
So we had essentially shut down that approach on the niche acquisitions over the last number of years because we were really ensuring we had the firepower and dry powder to acquire a company like Stanley. We believe that we have the capability now to do both.
And we also believe that as far as driving our growth strategy that some of these niche acquisitions will enable us to do that at a faster rate than just doing it organically.
Operator
Our next question is from Mike Abramsky of RBC Capital Markets.
Mike Abramsky - RBC Capital Markets, LLC
Mike, could you perhaps give us a sense about looking maybe near-term backward and forward on your investment at the federal level? Do you think, has this investment, which sounds like you started to make almost the minute that you acquired Stanley, been a little bit more slower in the payoff than you thought, given the headwinds?
Or is it on track with that? And if it's a bit slower, do you think the payoff itself may also be a little bit more protracted?
And then, at the state and local level, do you see any headwinds to the sustainability of your business there?
Michael Roach
Yes, Mike, good question. It's a good time to kind of remind investors that when we do an acquisition here and we commit to the accretion rate, we never do that model including topline revenue.
So our accretion is driven by actions that we control in terms of driving synergies, taking out costs and really focusing on our ability to operate more effectively using our model than the status quo. So from an accretion standpoint, Michael, and in terms of the business case that we put together here to buy Stanley, it's very much intact.
We're seeing the accretion rate on the earnings per share. So I don't have any issue there.
I think it reinforces, in fact, the wisdom of that approach because you're quite right. Obviously, market conditions have changed there relative to the speed at which the revenue push is being materialized, given that it's not unique to Stanley, it's not unique to CGI.
It's in industry-wide impact, so we're feeling that impact. But because we drove our modeling and our accretion rate on the bottom line, we're still delivering the value that we promised to shareholders.
When I look ahead though, as I say, I really look and say that to have entered that market, as a foreign firm operating in the U.S., I think it is a very exclusive place to be. I think it positions us very well when the overhang to that market is lifted.
And we've got a great team, a great suite of offerings. And we're well integrated here in terms of addressing that market with new solutions and new capabilities.
So I don't have any second thoughts on that. I also would remind folks that it's a very defensive place to be, that the governments continue to invest through good times and bad.
And they do pay their bills, which is very key especially in the economic downturn. I also remind you that it's a very defensive place relative to the union pure place.
We're not seeing competition in that area. The U.S.
Federal Government business is not susceptible to off shoring. So I think from an investor standpoint, our position in government is very, very strong.
Relative to the state and local business, I think again, if you look at the last couple of years, the number of players that are actually stayed focused on that state and local business is not as many as one would have thought. We're the one that did.
We have always, from the early days of AMS of always been very active and very successful in the state and local business. Our people are close to that market.
They understand the state governments. I mean Advantage was built by and for state government so it's very embedded in that sector.
And it's affording us a lot of opportunity to grow our business in tough times. So as I mentioned, one of the things we're looking at, we look at the embedded base of Advantage we have in there.
The first Advantage is still very, very competitive and wins a lot of deals. We don't have markups on markups on our IP versus another SI who may have to use a third-party's IP to compete in that area.
Secondly, the customizations required to our system are relatively few in comparison to another commercial ERP system who is not designed specifically and by governments. So we have a lot of advantages in that area.
We can also now move into the cloud, which we are. And we can also bring down the costs for state by outsourcing that whole ERP system, our ERP system back to CGI.
And we'll sell it back at a lower rate over a longer period of time. So I look at the state business, and as I say, it's actually helping us offset some of the short-term pressures we're seeing on the federal part of our government business.
So we like that business. We've won a number of very strategic deals, California and Alaska.
We've got others in the pipeline. And we continue to invest heavily in our state and local business.
Operator
Our next question is from Paul Steep of Scotia Capital.
Paul Steep - Scotia Capital Inc.
Mike, maybe since it's been quite a few quarters you've gone over, maybe you can just remind us about the diversification of the backlog and the book of business that is out there, in terms of how we think about the timing of renewals on larger deals or how that sort of scaled across? I know it's a big question but maybe just the U.S.
and Canada and we won't worry so much about Europe.
Michael Roach
Yes, if I take U.S., you won't see a lot there. I mean our backlog, when we acquired AMS in 2004, the recurring revenue was very small.
And now, about 50% of our revenue is occurring. And most of that is relatively young backlog.
In other words, there's still many years remaining. We don't have a lot of big renewals, to my knowledge, in the U.S.
market. In Canada, we kind of gone through one of the largest renewals, which was the Dejardins one, which we made public.
I don't believe we have any more this year, fiscal 2012. I don't think we have any big ones in Canada.
We'll probably be beyond that, Paul, in terms of 2013.
Paul Steep - Scotia Capital Inc.
Okay, that helps. The other quick one and it pains me to even think of IFRS but David brought it up.
David, the only thing in there did slag a bit the revenue rack. In Canada, it talks about fixed fee deals outsourcing on a straight line basis.
And then under IFRS, you're going to have to look at it more on a time-build basis. It sounds like, should we read that and maybe quarter-to-quarter once we get on this new accounting in December, we're going to see a little more volatility or how much of the businesses really is even impacted by that?
That's the only thing that jumped out at me.
R. Anderson
Paul, it's a good question and there's really not too much to get too flushed with here. We have been working with the business units over the last period of time because frankly, we would prefer to go to the type of rule that is envisioned within IFRS, and having working with the business units to try to structure deals in such a way that we could go that way.
So we actually did not have a lot of revenue that was on the straight line basis. So doing the conversion for us is not going to have much of an impact.
Operator
Our last question is from Richard Tse of Cormark Securities.
Richard Tse - Cormark Securities Inc.
Mike, you talked about the 150 outstanding bids in U.S., which I think $1.5 billion in terms of opportunity. What's that as a percentage of the sort of total bids outstanding?
Did you include some of the commercial side as well as the Canadian side?
Michael Roach
I would have to get back to you on that. I didn't look at that in terms of bids as a percent but -- I honestly wouldn't have an accurate answer on that, and I would prefer to take a look at that and get back to you, Richard.
R. Anderson
I'll circle back with you, Richard.
Michael Roach
I think the reason obviously I called it out is that it clearly demonstrates, I think, another relevant way of looking at this is relative to our normal course of business, what we're calling out, this is significantly higher in terms of the number of bids and the value of the bids that have been submitted but not yet awarded. And I would say it's significantly higher than what we've seen in the past.
And that's one of the reasons I called it out, Richard.
Richard Tse - Cormark Securities Inc.
Right. Fair enough.
And if I could slip in a quick one here. With respect to your current sort of win rates, notwithstanding the issues on the federal government side, what have they been lately relative to what they were, let's say about a year ago?
Pretty much...?
Michael Roach
One of the challenges that you look at this business, I think, when the economy was much softer, we were very disciplined on what we bid. And therefore, our win ratios, I would say, were very high.
As the economy starts to pick up, you want to bid more, and you're prepared to take a lower win ratio to cover more of the market. And that's kind of where we are in the cycle.
And that's why I point out in the U.S., we're clearly firing up more bids, and we're seeing that expense. The bet we're making is that as the economy picks up, those bids will transition into revenue.
And we'll be where we are. So without giving you the absolutes because they do vary by country, they vary by vertical, and they vary by offering because if we're in the IP space, our win ratios would be higher.
If we're in generic SI&C, they're different. But just to give you an idea, Richard, in terms of how we see it, we are driving very high win ratios through the downturn.
And now, we're coming up the other area and our strategy is to bid more. It could end up with lower win ratios but in total, higher revenue.
R. Anderson
Thanks, Richard, and thank you, everyone, for joining us this morning. November 10, full year fiscal 2011 results in quarter 4.
Michael Roach
Thank you.
Operator
Thank you. The conference has now ended.
Please disconnect your lines at this time, and we thank you for your participation.