DEBUG: PAGE=domain, TITLE=NelsonHall Blog,ID=1469,TEMPLATE=blog
toggle expanded view
  • NelsonHall Blog

    We publish lots of information and analyst insights on our blogs. Here you can find the aggregated posts across all NelsonHall program blogs and much more.

  • Events & Webinars

    Keep up to date regarding some of the many upcoming events that NelsonHall participates in and also runs.

    Take the opportunity to join/attend in order to meet and discover live what makes NelsonHall a leading analyst firm in the industry.


Subscribe to blogs & alerts:

manage email alerts using the form below, in order to be notified via email whenever we publish new content:

Search research content:

Access our analyst expertise:

Only NelsonHall clients who are logged in have access to our analysts and advisors for their expert advice and opinion.

To find out more about how NelsonHall's analysts and sourcing advisors can assist you with your strategy and engagements, please contact our sales department here.

CGI: Ready to Pull the Acquisition Trigger?

CGI's Q3 FY 15 results included:

  • Revenues of CDN$2.56bn, down 3.5% y/y in CC and flat sequentially
  • Adjusted EBIT margin of 14.5%, up 167 bps y/y

Full results are available here.

The y/y CC revenue decline (the same as in Q2) is attributed to the wind down of U.S. government healthcare projects, continued delays in U.S. federal procurement, and the slowdown in U.K. government spending as a result of the May general election. U.S. government sector continues to be soft. The U.S. was down 7.6% in CC, and the U.K. down 4.3%. Management highlighted growth in IP related services and solutions. Q4 FY15 is expected to be slightly better than Q3.

Margin benefited from a $27m client arbitration award and, to a lesser extent, more higher margin IP-related revenue

TTM bookings are $10.8bn a book to bill of106%. Q3 bookings were $2.2bn, a book-to-bill of 87%, again reflecting delays in U.S. federal and U.K. government. Q3 bookings were strong in France, the Nordics and the U.S. excluding federal.

So what should we expect to see in the near term at CGI?

Further margin improvement

CGI is taking a CDN$60m rebalancing charge over the next two quarters (~CDN$40m in Q4) and expects the payback to be a year. CGI is taking the charge to

  • Accelerate offshore utilization
  • Support productivity improvements
  • Align headcount to exit of non-core business and geos
  • Reduce SG&A and overhead expenses

Much of the restructuring is likely to take place in Central & Eastern Europe where revenues have been in decline for some time, and to a lesser extent in Canada, where CGI is looking to exit some lower margin business in the infrastructure helpdesk and desktop support areas.

CGI is also exiting some marginal geographies; in South America, for example, where it took a charge of ~$4m to restructure or close off various entities, it intends to focus on Brazil only.

Buy: as expected, the focus is the U.S.

Quality and mix of North American revenue fuels Q3 FY15 profitability”:

  • U.S. accounts for 28% of revenues and 36% of adjusted EBIT
  • Canada accounts for 15% of revenues and 29% of adjusted EBIT

It’s been three years since CGI acquired Logica, longer than the gap between Logica and AMS.

During the earnings call, CEO Mike Roach emphasized the success since it went public in 1998 of CGI’s ‘Buy and Build’ strategy, which has led to the company doubling in size every four years. Looking ahead, he referred to the leadership team’s commitment to double the business again over the next five to seven years. And in case anyone had missed the point, “we're positioned to pull (the) trigger on an acquisition”. He has even provided some clues. “With Logica we went wide …. Going forward, our acquisition strategy is focused on going deeper into existing markets and adding to our higher value offerings”. Areas of stated interest are

  • U.S. commercial sector, in particular utilities; this would help improve the sectorial mix of the U.S. business
  • Cyber-security
  • IP-based services.

So there we have it... one or perhaps several commercial sector acquisition in the U.S., possibly in utilities, ideally bringing in IP.

Build: where will we see organic growth?

CGI intends to use a portion of the cost savings from the restructuring program to hire more SMEs in cyber security and digital transformation

Three regions where it appears confident of delivering organic growth in FY16 are:

  • Canada: CGI Canada has a high proportion of recurring revenue and another long-term renewal that is “close to closing”. It is CGI’s most profitable region, delivering margins of >20% since Q1 FY14. A current focus area is banks and CGI Canada has formed a business unit focused on the banks.
  • U.K., reinforced with the announcement of being selected as preferred supplier by the City of Edinburgh in a £186m 7-year ITO deal (where CGI will be replacing BT). This is a significant local government win for CGI which has been looking to cross-fertilize its “Advantage” ERP suite from the U.S. The contract has usage-based pricing elements, and can also be used by ~50 other public sector organizations in Scotland
  • France, which returned to growth this quarter (up 3.9% in CC)

And areas of IP where CGI is seeing demand currently include collections and payments.

At group level, however, organic growth may be elusive for a while longer, partly a reflection of CGI’s dependence in several key geographies on the government sector. In the short term at least, CGI’s story is likely to continue to be one of executing well on inorganic growth.

No comments yet.

Post a comment to this article: