Remarks by Serge Godin at BCE Financial Executives Conference
September 3, 1998
Thank you, and good afternoon ladies and gentlemen. It is a pleasure to be here with you today. After
the presentation, I would be pleased to answer any questions.
For those of you not very familiar CGI, I'll begin with a brief overview. I'll then outline our growth
strategy, review our major initiatives and our performance and close with our priorities and outlook.
CGI is the largest Canadian independent IT services company and the only one with infrastructure
coast to coast in Canada. With the completion July 1 of our major transaction with BCE/Bell Canada,
we are the sixth largest IT services company in North America and the fastest growing among publicly
listed IT services companies.
We've grown from an order backlog of $175 million at September 30, 1996 to more $6.5 billion now.
Our revenue meanwhile has grown from $232 million in the year ended September 30, 1997 to a run
rate of $1.2 billion now.
CGI has increased revenue every year since its inception in 1976, the result of a strong team, many of
whom have been with the company for more than a decade. This applies to 80% of the top 110 senior
executives of the company. We are a growth company that has been 22 years in the making, and
growth has accelerated in the past two years, as the result of our decision to focus on full IT services
outsourcing.
Ten years ago, we recognized that there would be strong demand for IT outsourcing and large scale
systems integration, as corporations and governments worldwide realized the competitive imperative
of using IT services strategically.
Outsourcing and systems integration contracts differ primarily on the basis of the term and structure of
the contracts. Outsourcing contracts are typically for 5 to 10 years and renewable, and include a range
of services including systems development and maintenance, consulting and business solutions.
Systems integration contracts are shorter term, typically for up to 2 to 3 years, and are projects with a
clearly defined beginning and end.
Outsourcing has increased from 25% of revenue in 1996, to 40% in 1997, 60% recently and 75%
based on today's revenue run rate - 55% of this from systems development and 20% from facilities
management. The balance of our business will be systems integration, 15% and consulting, 10%.
What sets CGI apart from most large IT services companies is the high proportion of our business
represented by systems architecture and development, systems management, business planning and
business process engineering. As of July 1, approximately 80% of our business is represented by
these higher margin assignments which tie us closely to our clients, leading to a long term partnership
whereby the contract grows with the clients' evolving needs. The remaining 20% is facilities
management - data centres, help desks, call centres, et cetera. Facilities management is stable
business, and for several larger IT services companies, it represents a large part of their business.
With outsourcing contracts, clients delegate the entire responsibility for their information technology
functions in order to achieve substantial savings and access the best information technology, while
maintaining control over their strategic information functions.
For CGI, benefits of outsourcing contracts include:
guaranteed revenue for the life of the contract
relatively stable margins; and
the potential for additional IT services as we partner with our clients.
We mapped out a comprehensive strategy to win full IT services outsourcing business and to attract
and keep top quality people to manage the resulting growth. Implementation of this strategy has set us
on our course of strong long-term growth.
Let me tell you briefly about our strategy.
We established specialized knowledge in six niche markets with high growth potential - financial
services, telecommunications, manufacturing, distribution and retail, governments and public utilities.
CGI is a market driven company. Our industry knowledge in each of these areas, in addition to our IT
expertise, enables us to provide important added value and thereby helps us win new contracts and
renew existing ones.
You see here the current mix of business, with the telecommunications sector representing 39% and
financial services, 37%, based on the current revenue run rate.
Over time we will expand our presence in each of the six sectors, nationally and internationally.
We developed leading expertise in three complementary areas - information systems,
telecommunications and technology management.
We rapidly developed critical mass, and our increasing critical mass has qualified us to win much
larger contracts. In fact, the Bell Canada outsourcing contract, which amounts to at least $4.5 billion
over 10 years, is the largest ever in Canada, and one of the 10 largest in North America.
Another part of our strategy was to achieve end-to-end IT services capabilities - an important strategic
advantage, enabling us to provide full outsourcing. You can see here that we are the only Canadian IT
services company providing the entire spectrum of services, including telecommunications via our
strategic partnership with Bell Canada. We achieved this full range of services through acquisitions
and internal initiatives in addition to our business partnership with Bell Canada. In fact, we have
acquired almost all the IT services companies with private IT infrastructure in Canada, and we are in
the process of identifying and acquiring others. This infrastructure is an important advantage because
it constitutes a barrier to entry for others.
Our ability to provide end to end solutions means customers can co-ordinate their IT needs through
one supplier with a comprehensive understanding of their IT needs. This capability is very important
for winning major outsourcing contracts.
We achieved coast to coast infrastructure - enabling us to bid on major national contracts and to
diversify our client base geographically.
Twenty-five per cent of our business is international, about evenly divided as of mid-year between the
U.S. and elsewhere, primarily Europe.
We understood the importance of remaining independent of any hardware or software supplier. We
recommend what is in the client's best interests, and this contributes to our credibility and the success
of our projects.
We recognized the benefits that would come from setting the international benchmark for quality in our
business. We therefore became the first IT services company in Canada to achieve ISO 9001
certification for our project management framework. We achieved this in 1994, and are now extending
ISO certification to all aspects of our management, thereby ensuring that we regularly meet our
commitments to clients and other stakeholders. This approach has contributed to our 100% success
rate in renewing contracts.
A recent study by the Hawket Group showed that 80% of IT systems development was late or over
budget. Not so for CGI where that percentage currently is running at under 5%, largely because of our
ISO 9001 management framework.
This quality framework is transferred to new outsourcing clients, and to companies we acquire. It is an
important reason that we have been so successful in integrating the IT operations and employees of
new outsourcing clients and acquisitions.
To staff for rapid growth in markets where qualified people are in high demand, we have strived to be
the best employer in the industry. Ever since CGI's inception in 1976, we have placed tremendous
value on our people. We refer to our employees as members, as indeed they are all team members
contributing to the success of CGI.
We provide a challenging environment, support for career advancement, emphasis on member
satisfaction with management remuneration tied partly to it, and financial incentives including profit
sharing and an attractive share purchase plan. As a result, our member turnover is among the lowest
in the industry - 13% vs the industry average of 35%. This rate will decline with Bell Sygma which has
had a 4% turnover rate for the past six months.
Importantly, as an outsourcer, we hire the IT people of our clients and, usually after the transition
period, deploy 60% to 75% of them on the specific outsourcing project, and the rest elsewhere.
(BSTS is an exception, as virtually all employees will stay with the project.) Our clients' IT people
enthusiastically join CGI, where IT is the core business and there is tremendous opportunity to
advance.
We have balanced our growth between internal and external. We have built a solid base of highly
satisfied clients and, over the past 10 years, completed 13 successful acquisitions. Each of these
acquisitions had to fit with our strategic plan in each targeted sector, and as a result we have a good
mix of business.
We have more than 2,000 clients, many of them major corporations, and 7,500 members vs 4,500
members prior to July 1. Integration of Bell Sygma is progressing as planned. We plan completion of
the human resources transition at calendar year end, and phasing in of all operations over a two year
period.
Following two major acquisitions in the financial services sector in 1997, we are now the largest
independent IT services provider to the retail banking industry and the property and casualty
businesses in Canada, the third largest provider to the property and casualty business in North
America, and have a presence in the U.K. With Bell Sygma, we are positioned to be a world class IT
player in telecommunications.
Our growth strategy has produced very strong results. Over the past three fiscal years, revenue has
grown at a compound annual rate of 55%, net earnings 171%, net earnings per share 111%, and cash
flow per share, 90%. The net margin increased from 1.1% to 3.3% in the year ended September 30,
1997.
In the first nine months of fiscal 1998, ended June 30, 1998, we increased: Revenue by 161% to
$416.4 million Net earnings by 281% to $18.7 million or 17 cents per share vs. 6 cents per share a
year ago, even with a 48% increase in shares outstanding on a weighted average basis. And our net
profit margin increased to 4.5%, from 3.1% a year ago. Cash flow increased 259% to $45.8 million or
41 cents per share
Additionally, our balance sheet is strong. We have virtually no debt and $20 million cash.
On July 1, following shareholder approvals June 29, we completed a major transaction with BCE
and Bell Canada first announced in January.
As an important part of this transaction, Bell and CGI have agreed to extend our business partnership,
first entered into in November 1995, for an additional 10 years to the year 2008, and renewable.
There are three main components to this agreement.
First, CGI will manage Bell's IT systems development and maintenance, worth at least $4.5 billion over
10 years at commercial rates observed on contracts of similar size and nature in North America.
Second, CGI will continue to partner with Bell in IT services contracts for their respective clients and
will also partner with other companies in the BCE family. At the BCE annual meeting last spring,
President Jean Monty presented CGI as at the centre of the BCE family of companies for IT services.
And third, CGI has acquired Bell Sygma International, with annual worldwide systems integration and
outsourcing revenue of $80 million. Bell Sygma International supports Nortel and Bell Canada
International in their international ventures, providing IT services.
The acquisition of Bell Sygma and the strengthened relationship with BCE and Bell provides CGI with
the expertise, critical mass and resources to become a world class IT player in international
telecommunications markets.
Our growth has been equally driven internally, through 100% renewal of existing contracts, and
externally, with a virtually 100% win rate for new contracts.
In July, we renewed an outsourcing contract with Industrial Alliance Life Insurance which we inherited
through an acquisition - a $20 million contract over 5 years to operate and manage their IT
environment.
Some of our more recent new contracts include : A 5-year consulting contract with ING Canada valued
at $20 million, to help ING strengthen its competitive position in the Canadian insurance market. A
memorandum of understanding with Desjardins, Quebec's credit union network, for a $150 million
10-year contract to build a major pay services operation for Desjardins clients which include 7,000
businesses in Quebec
A five-year $100 million agreement with the Credit Union Central of Canada. As part of the
agreement, we will provide a range of financial switching and telecommunications services to support
Interac shared cash dispensing and point of sale direct payment services for Canada's 900 credit
unions, and
A 10-year, $250 million, full IT outsourcing contract with Westburne Inc., one of North America's largest
integrated distributors with revenue of $2.3 billion. Our mandate is to provide IT solutions that will
ensure Westburnes's continuing leadership in its five product groups in North America.
In the past two months, we have announced some strategic contracts.
Our $20-plus million, seven-year outsourcing contract with the National Research Council of Canada
to support the day to day operations of its enterprise resource planning system, or ERP, follows our
implementation of their ERP system over the past year and a half. This is the first ERP project in
Canada in which an IT services company has been awarded implementation and day to day support.
ERP assignments are a significant growth area, and we have signed an alliance with both major ERP
software companies, SAP and Peoplesoft, to implement and support their systems. We are
implementing Peoplesoft ERP software for Lotto Quebec.
While these major software companies typically require an exclusive agreement, we insisted on
maintaining our independence from any provider, and this independence is an important strength of
CGI.
Our $20 million five year contract with Laurentian Bank, announced in July, expands our banking
market beyond credit unions and schedule 2 banks to include a chartered bank, the 7th largest
financial institution in Canada. With this contract, we will strengthen our position as the largest
non-financial provider of shared cash dispensing and point of sale payment services through our
membership in Interac.
In the property and casualty insurance market, where we have become the third largest IT services
provider in North America, our contract with Interboro Mutual Indemnity Insurance Company is our first
US contract resulting from our acquisition of Teleglobe's US subsidiary, ISI Systems. This small but
strategic contract requires CGI to provide Interboro with a full range of business solutions and
outsourcing services.
Outlook
Looking ahead, we see excellent opportunities for continuing long term strong growth - both internal
and through acquisitions.
The overall Canadian IT services market is projected by IDC, an independent research firm, to have a
compound average annual growth rate of 12%, to reach $20 billion in 2001. In the U.S., the IT services
market is forecast to grow 11% annually to $174 billion in 2001.
IT outsourcing in Canada is projected to have a compound average annual growth rate to the year
2001 of 13%, reaching $6 billion. As one of three or four players in Canada qualified for full IT
outsourcing contracts, we stand to be a major beneficiary of this growth. In the US, IT outsourcing is
expected to grow 11% annually, to $71 billion. The US is projected to represent fully half of worldwide
growth.
North American outsourcing megacontracts, defined as those over US$100 million, have increased
from US$11 billion in 1994, to $15 billion in 1995, $26 billion in 1996 and $32 billion in 1997. This
rapidly growing market of large, long-term contracts, has been dominated by 7 or 8 players with the full
IT capability and critical mass to manage them. CGI has become one of these players.
The industry continues to consolidate due to an increasing demand worldwide for end-to-end solutions
from one supplier plus the need to achieve economies of scale. In the North American IT industry, in
1995 and 1996 there were nearly 3,500 mergers or acquisitions, totaling almost $250 billion dollars
US.
Yet the industry remains fragmented, with considerable opportunity for further consolidation. In
Canada, where consolidation is less advanced than in the US, the top 5 players account for only
approximately 15% of the IT services market.
Our strategy is to continue to strengthen our position in each of our targeted industry sectors, with
emphasis on large scale systems integration and outsourcing contracts.
Deregulation and consolidation in the financial services and telecommunications markets, and other
markets, means more business for the IT industry - and for CGI. For example, when two of Canada's
largest banks, the Royal Bank of Canada and Bank of Montreal, announced their plans to merge, they
estimated spending $7 billion on IT.
Our ISO 9001 process will continue to support our winning new contracts, renewal of existing
contracts, and the integration of large scale outsourcing contracts and acquisitions.
In Canada, we are steadily consolidating our position as the preferred provider in our targeted
markets and are currently one of only three end to end IT services players.
In the U.S., we will continue to build our base as a niche player, emphasizing IT business solutions for
financial services by partnering with our client base in the property and casualty insurance industry and
cross selling retail banking solutions leading to full IT outsourcing.
In the U.K. and eventually Europe, we will market our financial services business solutions to leverage
our full IT expertise in these deregulated markets.
Looking ahead, we conservatively target internal growth of about 20% annually. Major outsourcing
contracts, and acquisitions, can significantly augment this growth. Earnings should exceed revenue
growth as we gradually increase net profit margins.
As our critical mass continues to increase, so does the size of contracts for which we are qualified to
make proposals.
We remain acquisition oriented, and high on our priority list is an IT services company - preferably a
privately-owned one - with a good presence in the life insurance industry, quite likely in the US. This
would round out our offering of business solutions for financial services.
CGI shares have undergone a fundamental revaluation over the past two years, when they have been
top performer on the TSE and in January became part of the TSE 300 and 200 indexes. We split the
shares 2-for-1 in August and December 1997, and in May 1998, in order to increase trading liquidity.
With the current severe market correction, we have a market capitalization of $3 billion, which is down
from $4 billion just a month ago. Our fundamentals have not changed, and we remain very positive
about the company's outlook.
Our focus is on being a backlog generator - building our backlog to provide revenue growth and,
therefore, earnings growth and stability. Our full IT outsourcing backlog provides stability for two main
reasons. First, it comprises long term contracts - with many contacts for 10 years and thereby
providing a guaranteed revenue stream. Second, we partner with our clients and augment the
contracts as their needs evolve, thereby further increasing the backlog. I should add that the strong
outlook for the IT services industry also contributes to stability.
At CGI, we have the capabilities, the market presence, the strategy, the partnerships and the people
to successfully manage long term growth and in so doing continue to reward our shareholders.
Thank you for your attention. I would now be pleased to answer any questions.
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