MONTREAL — CGI Group says its acquisition of Stanley Inc. will help propel the Canadian information technology company to greater inroads in the large U.S. market as customers increase post-recessionary spending.
“The U.S. has really, at a macro level, taken an economic body blow there but if you strip away the macro picture and you take it down to customer by customer you can start to see that the U.S. is digging out of this,” CEO Michael Roach said Tuesday in a conference call.
While clients are “value sensitive” they are investing in technology as they did following past recessions. The United States remains the biggest market in the world for IT services, accounting for about half of global spending.
“So it’s a very, very big market for us and we’re largely an attacker in that market so the opportunities for us down there are huge over time here.”
CGI expects that in future quarters revenues from the United States will outpace those from Canada, which has suffered in the past year.
In CGI’s 2010 fiscal fourth quarter, U.S. revenues grew 44 cent to US$482.7 million, while Canadian revenues decreased 3.5 per cent to C$508.9 million. For the full year, U.S. revenues increased 16.7 per cent to US$1.59 billion while Canadian revenues were down 2.7 per cent to C$2.11 billion.
Roach said the US$1 billion acquisition of Stanley not only helps in gaining U.S. contracts, but also gives it more “scale and presence” in the country.
Overall, the Montreal-based IT company (TSX:GIB.A) said fourth-quarter earnings grew 1.7 per cent to $84.1 million for the three months ended Sept. 30, equivalent to 30 cents per share, and up from $82.6 million, or 27 cents per share, last year.
The results met analyst estimates of 30 cents a share, according to a survey by Thomson Reuters.
Revenues moved ahead 8.7 per cent to $1.01 billion in the quarter, which included six weeks of results from Stanley. The stronger Canadian dollar had a $46.8-million negative impact on revenues.
For the full year, CGI said that currency fluctuations negatively impacted revenue by 5.8 per cent, pulling it down to $3.73 billion. Earnings for the year were $362.8 million, up from $315.9 million.
Despite the challenges in the Canadian market, Roach said the pipeline of contract opportunities remains “robust” as it adds large clients and does more work for existing customers like Bell Canada parent BCE Inc. (TSX:BCE).
“I like the prospects that we have out in Canada. It’s going to take some time to actually take on the revenue from some of the wins that the team has put up there.”
CGI’s shares set a new 10-year high, gaining more than 10 per cent, or $1.59 to $17.13 in afternoon trading Tuesday on the Toronto Stock Exchange.
CGI said it booked $16.7 million of expenses tied to the acquisition of Stanley in the quarter, and $20.9 million for the year. It expects another $5.4 million of costs in 2011.
The low level of costs demonstrate the lack of overlap with CGI’s existing business, said Tom Liston of Versant Partners.
“The Stanley acquisition is progressing well (over 85 per cent integrated) and will be significantly accretive over the coming year,” he wrote in a report.
Liston raised his 12-month share price target to $20 from $19.25, noting CGI’s profitability was the highest in the industry.
New contract signings amounted to $1.1 billion in the quarter, mostly from the government, health-care and financial sectors.
The total backlog grew $1.9 billion to $13.3 billion with the addition of Stanley, whose purchase price CGI could be pay down in one-and-a-half years, added Liston.
Maher Yaghi of Desjardins Securities said the results were slightly better than expected and indicates potential upside from the Stanley acquisition.
“Overall, we continue to believe CGI’s relative valuation discount to peers represents an attractive opportunity. The fundamentals of the sector are gradually improving, and we believe this recovery will persist through 2011,” he wrote in a report.
Founded in 1976, CGI has grown to become Canada’s largest IT services firm. The company and its affiliated companies employ 31,000 people in more than 125 offices around the world.
CGI recently said it hopes to expand its presence in India by 45 per cent as it hires more than 1,500 people in the next year to target growing demand from the global telecom and financial services sectors.