IT services firm CGI doubles profits in second quarter despite U.S. challenges

MONTREAL - Information technology services company CGI sees more opportunities to further improve profitability of its recently acquired European operations, whose strong performance in the second quarter offset pressure in the U.S. that was partially related to the winding down of its role in the Obamacare website.

"It will take time, but we're convinced that the actions we took in the first 12 months have laid the foundation for us to take the business into a more consistent, higher level of performance over time," president and CEO Michael Roach said Wednesday during a conference call.

The Montreal-based company beat expectations as its net earnings more than doubled to $230.9 million or 73 cents per share for the three months ended March 31. That compared with $114.2 million or 36 cents per share in the prior-year period.

Excluding one-time items, including integration costs resulting from its acquisition of Logica, CGI (TSX:GIB.A) earned $229.6 million, up more than 30 per cent from $175.9 million a year earlier. Earnings per share was 72 cents compared to 56 cents in the 2013 quarter.

Revenues were up seven per cent to $2.7 billion.

Analysts polled by Thomson Reuters had expected adjusted earnings of 69 cents per share in the second quarter on revenues of $2.64 billion.

The company generated $350.7 million of free cash from operations in the quarter, up from $66 million in the first quarter, as it completed the $525-million investment to integrate U.K.-based Logica into its operations. Over the last 12 months, it generated $949.1 million of cash excluding integration expenses.

Maher Yaghi of Desjardins Capital Markets said currency gains in several operating markets helped revenue growth while strong execution generated margin improvements and higher cash flow.

"The improvement in cash flow generation should go a long way to allay investor concerns regarding the cash production ability of Logica," he wrote in a report.

During the quarter, CGI booked $2.9 billion worth of contracts, 40 per cent of which was new business. Over the last 12 months, bookings totalled $10.9 billion, while the order backlog grew by $1.5 billion to $19.5 billion.

Net debt was cut eight per cent to nearly $2.7 billion from $2.9 billion a year ago.

The company's European operations — which account for 61 per cent of global revenues and EBIT earnings — have improved partially resulting from the ending of contracts for low or no-margin business. In the U.K., revenues adjusted for currency increased 2.5 per cent, but earnings were up 32 per cent.

Overall, CGI's adjusted EBIT was $341.5 million, for a margin of 12.6 per cent, up 30.5 per cent from the prior year.

U.S. margins fell to 6.2 per cent from 9.8 per cent in the first quarter but CGI said they should improve in the second half of the year. It attributed the temporary decline to the need to devote more resources for state health-care exchanges and wind down work on the federal affordable health-care project.

"Clearly some of the work around health exchanges have temporarily had an impact on the business, but again, much like the federal site, we're confident that we can work through this and put the customers and us in a better place," Roach said.

CGI has undergone intense scrutiny over its role in building online health insurance exchanges in the United States, including a federal website that faced technical problems.

The Obama administration decided not to renew CGI's contract and instead signed competitor Accenture to a one-year agreement valued at US$90 million.

But Roach repeatedly said CGI has never been fired from any health-care exchanges.

"We have not received a letter of terminations for cause or convenience from anybody, so the reality on the ground versus the perception in the press, there's a big gap there," he said.

While U.S. budget issues continue to delay the awarding of federal contracts, CGI expects growth in the commercial sector, especially financial services and manufacturing.

In Canada, CGI will continue to focus on the civilian side of federal government work because efforts to win defence contracts have failed to achieve anticipated revenues.

On the Toronto Stock Exchange, its shares closed at $39.52, up $1.44 or 3.78 per cent in Wednesday trading.

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