CGI expects to leverage Logica acquisition with Asia-Pacific expansion

MONTREAL - After more than doubling its size over the past five years, CGI Group expects to pursue new ways to leverage its acquisition of U.K.-based information technology provider Logica and expand its presence in the Asia-Pacific region.

The Montreal-based company will conduct planning sessions in June to map out its goals for the coming three years, but CEO Michael Roach said Wednesday that Asia will likely be a focus for expansion.

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"Our immediate focus in 2013 is the integration of Logica, but I think you can expect coming out of that planning session that we'll continue to execute our build and buy strategy," Roach said following CGI's annual shareholder meeting.

CGI (TSX:GIB.A) has historically looked closely at acquisitions after understanding the players in a certain market from within, he said in an interview.

Logica's purchase last year has not only dramatically boosted CGI's revenues, but also provided a strategic business unit that's a leader in the Asia-Pacific.

"In the longer term...Asia-Pacific is an area that would likely see more expansion in the future," Roach said.

"I think we will be looking to be more focused on niche areas where we want to build out more scale in a particular geography or adding intellectual property or capabilities that our clients are looking for."

Before the $2.7 billion deal that closed in August, CGI and Logica each relied on their home markets in North America and Europe respectively for 95 per cent of their business. Together, they have started to expand the relationship with clients in both geographies that operate internationally.

"We can follow them around the world now, which we couldn't before," Roach said, adding CGI retains the financial flexibility to fund an acquisition despite its heavy debt load — $2.96 billion, even after it was trimmed by $340 million.

He said the IT industry is consolidating very quickly as customers seek providers like CGI that can service their computer and communications infrastructure.

Earlier, Roach told analysts that the integration of Logica is running ahead of schedule while CGI continues to benefit from strong growth in the United States.

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.

CGI said its first-quarter 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," Roach said during a conference call with analysts.

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 about 500 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.

CGI's net income in the quarter 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.

While Canada represents a decreasing share of overall revenues and first-quarter revenues declined 3.9 per cent, Roach said it remains a very solid operation that can continue to grow. A corporate reorganization has made the head of CGI's operations also responsible for Canada.

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.

The strong results caused the company's shares to increase more than nine per cent, or $2.22, to $26.51 in afternoon trading on the Toronto Stock Exchange.

Tom Liston of Cantor Fitzgerald raised his target price for CGI to $30.25 after describing the first-quarter results as solid with "robust bookings", "healthy U.S. growth" and efforts by CGI that will likely result in improved Logica's margins.

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.

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