Integration costs eat into CGI profit
MONTREAL - IT services company CGI Group says its integration of recently acquired U.K. provider Logica is running ahead of schedule while the company continues to benefit from strong growth in the United States.
The Montreal-based company said Wednesday that its integration costs, which mostly result from a reduction in staffing levels, have totalled $263 million to date.
That's two-thirds of CGI's $400-million budget to achieve $300 million in annual synergies after three years.
"We are in fact running ahead of our aggressive schedule," CEO Michael Roach said Wednesday during a conference call to discuss strong first-quarter results.
CGI (TSX:GIB.A) said its revenues increased 147.5 per cent to $2.53 billion, slightly above analyst estimates.
"We have established and embedded in our budget the restructuring and transformation necessary to put us on a solid competitive footing and deliver 25 to 30 per cent EPS accretion (growth) this fiscal year, excluding acquisition-related and integration costs."
About 75 per cent of its integration costs relate to severance and other employment-related expenses.
The company has shed a net 1,000 positions across its operations at the end of its first full quarter of incorporating Logica's business, even after adding jobs in the United States.
Roach wouldn't disclose how many jobs will be cut in Europe because he doesn't want to hurt employee morale, but he said additional reductions will come.
The explosive revenue growth in the quarter was due largely to the purchase of Logica PLC last August, in a deal valued at $2.7-billion.
CGI's year-over-year quarterly profits declined sharply, when the integration costs are included. However, Logica is seen as a long-term strategic acquisition building CGI's presence throughout Europe.
Roach told analysts that Logica's full impact on profits will gradually be seen in coming quarters.
"We continue to have the financial flexibility to go deeper as we uncover additional synergy opportunities or if market conditions require us to do so," Roach said.
CGI's net income was $22.4 million or seven cents per share, after including $153.4 million of costs related to the takeover. On an adjusted basis, CGI reported 44 cents per share of earnings for the quarter — a penny short of estimates compiled by Thomson Reuters.
A year earlier, CGI's net income was $106.5 million or 40 cents per share, with $1.03 billion of revenue. The company issued 47 million shares with the Logica acquisition raising the total share count to 315 million shares.
Overall U.S. revenue increased by 20 per cent from the prior year, or 15 per cent excluding the contribution from Logica. Roach said it is benefiting from the ramp-up of Obamacare along with commercial contracts in several U.S. states.
CGI is the world's fifth-largest independent provider of computer, communications and other information technology services for large organizations.
During the quarter, it booked $2.8 billion in new contract wins, extensions and renewals, bringing the last 12-month booking total to $6.6 billion, or 106 per cent of revenue.
At the end of December, CGI's backlog of signed orders stood at $18.3 billion, up $4.7 billion compared with the same period last year.
Maher Yaghi of Desjardins Capital Markets said CGI delivered very strong bookings which should underpin future quarterly results.
"Given the improving trends seen from the strong bookings in the quarter in addition to good organic revenue growth in the U.S. business, we continue to rate CGI a buy with a target price of $28," he wrote in a research note.
Besides its earnings report, CGI announced a renewed share buyback program. The company's board has authorized CGI to repurchased up to 10 per cent of its public float — although management isn't obliged to do so.
Last year, CGI spent an average of $20.68 per share for a total of $21.7 million to buy back about 1.1 million shares.
On the Toronto Stock Exchange, CGI's shares gained $1.23, or more than five per cent, at $25.52 in morning trading.
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