Bookings weak, margins better, CGI Group says
MONTREAL • CGI Group Inc. was again weak on bookings as it reported third-quarter results on Wednesday, and analysts say this could continue to be a concern moving forward as the company shifts its global focus.
“It’s not one region that has been pushing down bookings for the firm, it’s most regions,” said Maher Yaghi, an analyst with Desjardins Capital Markets.
“To improve bookings across the whole firm you need to work on many areas.”
During the quarter, the global information technology company booked $2.227 billion in contract awards, bringing the total over the last 12 months to $10.8 billion. This is lower than the third quarter of 2014, when CGI reported $2.451 billion.
At the end of June 2015, the company’s backlog of signed orders stood at $19.7 billion, up $916.4 million compared with the same period last year.
CGI shares closed Wednesday in Toronto down 3.76 per cent to $48.34.
Yaghi said that although there was weak booking in the U.S. and U.K., the company did maintain strong margins helped by the U.S. and Canada.
And on Wednesday, the City of Edinburgh Council announced it was set to approve a report naming the company as its preferred bidder to deliver a new 186-million pounds ($374.96 million) contract, which CGI president and CEO Michael Roach says will also help collect other U.K. contracts.
CGI says it earned $257.2 million in its latest quarter, up from $225.1 million a year ago, with earnings per diluted share at 80 cents, compared to 71 cents in the third quarter of 2014. This was generally in line with both the 80-cent consensus, as well as Desjardins’ 82-cent estimate.
The company says it will be exiting certain low-margin markets, including the Middle East and all South American countries other than Brazil, while adding to higher value offerings such as the underserved U.S. utility sector.
“While this has created a certain headwind in pursuing organic growth, it has served to significantly increase our earnings and our cash flow,” said Roach during Wednesday’s investor call.
The company posted two consecutive quarters of -3.5 per cent organic growth. Roach says he expects it will turn around by 2016, later than earlier hopes of positive growth by the end of 2015.
“We believe we’ve bottomed out,” he said.
U. K . contracts we r e scarce ahead of the 2015 election. And in 2014, CGI lost the “Obamacare” Patient Protection and Affordable Care Act contract after a botched website rollout.
“Some would say the government contracting has been weak and so they’ve been affected by that,” said Yaghi in an interview.
“Some other people could insinuate that some issues regarding the (U.S.) health-care mishap has had an impact on them getting government contracts.”
But CGI has since pursued new federal and state government work in the U.S. to bolster sales in its biggest market.
The company says it still has 29 per cent of its business in the U.S., 15 per cent in the Canadian market, 40 per cent in Europe and 16 per cent elsewhere in the world.
In 2012 CGI acquired Logica for $2.7 billion, transforming it into the fifth-largest independent business processes and IT services provider in the world.
Roach said that CGI has identified a shortlist of 85 more possible acquisitions as part of its “buy and build” growth strategy, which he said has allowed the company to double every four years over the past two decades.
“With Logica we went wide, positioning ourselves for organic growth in coun- tries and verticals which represent over 80 per cent of IT services spent. Going forward our acquisition strategy is focused on going deeper into existing markets,” said Roach.
Yaghi says CGI will have to focus on smaller tuck-in acquisitions as the company is going up against larger firms for potential transformational targets.
He says CGI could help its organic growth by moving into emerging markets, including Asia, as both the Canadian and American markets are too mature for big gains.
“They have to go into areas where you see growth in IT spending that is above average industry norm,” said Yaghi.
The company also announced it will invest $60 million in restructuring over the next six months, which Desjardins says will impact the Nordic regions, in order to accelerate the regions’ IP service offering and to lower its operating costs.
Some would say the government contracting has been weak