MONTREAL — CGI Group Inc. will aide California in reducing its massive deficit after winning a US$399-million contract to help generate US$2.8 billion in additional tax revenues.
The Montreal-based information technology and business process company said it has received “an intent-to-award letter” for a 5.5-year contract, with a five-year option for maintenance and operation valued at an additional US$139 million.
Industry analysts said the large contract may help to assuage investor fears that public sector contracts are being hurt by government budget cutting.
CGI (TSX:GIB.A) will be paid from a percentage of increased revenues generated by the State of California’s Franchise Tax Board project, which aims to generate the additional funds by fiscal 2016-2017.
The most populous U.S. state is trying to reduce a US$15-billion budget shortfall.
A new online approach will modernize how taxpayers are able to request extensions, make payments and find information. The secure website will also have expanded email and online chat features.
CGI vice-president Josetta Bull said the company’s previous work with the California agency yielded US$784 million in additional revenue between 1994 and 2003.
The new contribution will deliver a faster and more efficient processing system for income tax returns for both individuals and businesses in California, accelerating collections while minimizing fraud.
CGI plans to promote the service to other U.S. states, which are also grappling with record-breaking deficits.
The company will release its fiscal second-quarter results on Thursday. Analysts expect adjusted earnings will increase to 37 cents per share on $1.13 billion of revenues.
Tom Liston of Versant Partners said the contract will give investors confidence that bookings will rebound next quarter from what was likely to have been weak public sector bookings in the second quarter.
It also demonstrates that CGI’s work with the U.S. public sector assists governments in improving their financial picture, he wrote in a report.
“Several investors are worried that CGI’s large exposure to the U.S. public sector will be a negative as governments reduce spending. Our argument is CGI will benefit as the company aids the government with its fiscal issues.”
Founded in 1976, CGI Group is one of the largest independent IT and business process services firms in the world with about C$4.5 billion in annual revenues.
It has some 31,000 employees in Canada, the United States, Europe and Asia Pacific.
On the Toronto Stock Exchange, its shares were down 30 cents at C$20.41 in afternoon trading Tuesday.